Fixed assets are long-term physical resources that are used in a business to produce goods or services. They are also known as tangible assets or property, plant, and equipment (PP&E). Fixed assets are typically expected to have a useful life of more than one year and are not intended for resale. Fixed assets are long-lived assets that cannot be easily converted into cash.

Examples of fixed assets include land, buildings, machinery, and vehicles. They are generally acquired for the purpose of producing goods or providing services to customers, and are not typically consumed or sold in the normal course of business.

Fixed assets are important for businesses because they can be used to generate revenue and profits over a long period of time. They are also a key source of collateral for borrowing and financing, and can be used as security for loans and other types of debt.

However, fixed assets also come with costs, including acquisition costs, maintenance costs, and depreciation expenses. It is important for businesses to carefully manage their fixed assets and to ensure that they are being used effectively and efficiently. This may involve tracking the condition and performance of fixed assets, conducting regular maintenance and repairs, and disposing of assets that are no longer useful.

An industry, organization, or activity that is capital intensive requires a large amount of fixed capital, such as buildings and machinery, in comparison to labor and other factors of production. This means that a significant portion of the resources used in these industries is invested in capital assets rather than in labor. Capital intensive industries tend to be more automated and rely on technology and machinery to produce goods or services, rather than relying on a large workforce. Examples of capital intensive industries include manufacturing, construction, and energy production.

Capital Intensive Industry

Capital intensive industries are industries that require significant fixed capital such as property, plant and equipment relative to their revenue level to be competitive. For example, airlines are capital intensive because aircraft are expensive.

Labor

It is common to measure capital intensity in terms of fixed capital per employee. For example, a consulting business that has $200,000 in fixed capital per employee versus a real estate investment firm that has $140,000,000 in fixed capital per employee with the latter being more capital intensive.

Productivity

Generally speaking, capital intensive businesses tend to have higher labor productivity. This is certainly true on a historical basis but is occasionally changed by new business models that are knowledge intensive. For example, a farm with $2 million in equipment and three workers would tend to have higher productivity than a farm with $200,000 in equipment and three hundred workers.

Capital Efficiency

Capital efficiency is the amount of net profit that is generated by a dollar of capital. Everything else being equal, businesses with less fixed capital are generally more attractive. For example, two restaurants have net income of $300,000 per year but one represents a fixed investment of $2 million whereas the other represents an fixed investment of $1 million. The $1 million dollar restaurant is less capital intensive and is probably a better investment unless revenues are about to collapse because the business isn’t sustainable for some reason.

Debt

Generally speaking, capital intensive businesses tend to take on significant debt. This makes a business less attractive because debt payments do not go away when business is slow. Debt can also leave a business exposed to interest rate risk, refinancing risk and exchange rate risk. A firm with a large debt may be profitable in an environment of high economic growth and low interest rates but then suddenly turn unprofitable in a recession or when interest rates go up. If debt is in a foreign currency, the business may be highly sensitive to changes in exchange rates.

Capital Spending

Capital needs to be continually maintained, repaired and replaced. This is another problem with capital intensive industries that can complicate investing. For example, an airline may look profitable until it suddenly announces that it needs to replace half of its fleet in the next three years.

Competitive Advantage

All else being equal, a business with less capital is more efficient than a business with more capital if they are achieving the same results in the same industry. However, there are nuances to this that are significant. It is common for companies to outsource virtually everything to reduce their capital. At some point this introduces competitive disadvantages that may render a business completely worthless. For example, a fashion brand that outsources marketing, manufacturing, logistics and customer service will have a difficult time controlling its customer experience such that it may simply fail on the market.

Knowledge Intensive Industry

A knowledge intensive industry is an industry that primarily relies on human capital, also known as talent. Such industries may have few fixed assets. For example, a law office that has relatively high revenue as compared to its meager physical assets such as furniture, fixtures and computers.

Labor Intensive Industry

A labor intensive industry is an industry with low productivity such that it requires a great deal of labor relative to revenue. This can be due to a lack of automation such as an agricultural crop that must be harvested by hand. It is also common for some service industries to be labor intensive because customers value service from employees that is time consuming. For example, full service restaurants are labor intensive.

Business scale refers to the impact that a company’s size has on its competitive advantage. A scalable business is one that becomes more competitive as it grows larger, while a non-scalable business may face disadvantages as it expands. Scale is an important factor to consider when planning a business, developing strategy, and evaluating the competition. A company’s scale can affect its ability to compete in the market, as well as its potential for growth and profitability. The following are the common types of business scale.

Unit Cost
A company that is scalable experiences declining unit costs as it grows. For example, producing one million bicycles is typically cheaper per unit than producing one thousand. As such, it is often impossible for small firms to directly compete on price with larger producers. Smaller companies may avoid direct price competition by producing a niche product that the larger producer doesn’t offer.

Value
In some cases, the value of a product or service grows as sales increase. A nightclub that is filled with people may be more valuable to customers than a nightclub that is empty. It is easier to find support and complementary products for a popular product as opposed to an obscure one.

Service
A scalable business can drive down the costs of providing a service as it grows. For example, a large cloud infrastructure company can build more efficient data centers and push suppliers for cheaper prices due to its scale.

Brand Awareness
Customers are more likely to purchase a product that they know. Beyond that, customers are more likely to purchase a product simply because its brand name sounds familiar. This allows your sales to increase as your brand gains recognition and awareness in the market. Brand awareness is often one of the benefits of achieving scale.

Operations
Operational costs typically decline as a percentage of revenue as you grow. In some cases, large firms have operational issues due to factors such as legacy systems, excessively complicated processes and resistance to change.

Innovation
Innovation can be difficult to maintain as you scale. There is something about large companies that seems to inhibit creativity, risk taking and divergent thinking.

Organizational Culture
Large firms are more likely to have negative office politics that interfere with productivity, innovation and strategy implementation.

A cost advantage refers to the ability of a company to produce a product or offer a service at a lower cost than its competitors. This can be achieved through a variety of factors, such as the use of advanced technology, automation, efficient processes, high productivity, and low resource costs. By having a cost advantage, a company is able to offer its products or services at a lower price, which can make it more competitive in the market and attract more customers.

Cost advantage is typically calculated for comparable items and doesn’t apply when there is a large difference in quality. For example, an economy car with poor build quality can’t have a cost advantage over a luxury car with superior build quality. For this reason, the term cost advantage is typically applied to commodity products and services where customers usually choose the lowest price item. A cost advantage doesn’t necessarily mean that a firm offers the lowest price. For example, a firm with a cost advantage may be a dominant competitor that sets a price umbrella. Firms with a significant cost disadvantage are more vulnerable to price declines due to factors such as supply and demand issues.

Here are a few examples of cost advantages:

1. Automation: Automating certain processes can help a company reduce labor costs and increase efficiency, leading to a cost advantage.
2. Technology: Using advanced technology or more efficient production methods can also lead to a cost advantage.
3. Economies of scale: A company that produces on a large scale can often benefit from economies of scale, which can lower production costs and give it a cost advantage.
4. Resource costs: A company that has access to low-cost raw materials or resources may have a cost advantage over its competitors.
5. Efficient processes: Implementing lean manufacturing or other efficiency-enhancing processes can help a company reduce waste and lower costs, leading to a cost advantage.
6. Productivity: A company that has high levels of productivity can produce more output with the same amount of resources, leading to a cost advantage.
7. Outsourcing: Outsourcing certain processes or activities to low-cost countries can also give a company a cost advantage.