Does your organization keep allocating the same resources to the same business units year after year? Such inertia makes it difficult to realize strategic goals and ultimately undermines performance and profitability. The answer is to regularly adjust resource allocation, but, according to this Idea, failure to pursue active reallocation policies is due to multiple causes.
Companies that regularly evaluate the performance of business units, acquire and divest assets, and adjust resource allocations based on each division’s relative market opportunities have a significant edge over those that do not; according to Stephan Hall, Dan Lovallo and Reiner Musters, they will be worth an average of 40% more after 15 years. In an article published in McKinsey Quarterly, Hall, Lovallo and Musters propose that when capital and other resources flow more readily from one business opportunity to another, returns to shareholders are higher and the risk of economic failure is reduced and growth can be sustained.
However, they also suggest that most companies fail to do this effectively, and that enormous amounts of strategic planning too often result in only modest resource shifts. Through a review of the performance of more than 1,600 US companies from 1990–2005, they found that the failure to pursue a more active allocation agenda is a result of organizational inertia that has multiple causes, including cognitive biases and corporate politics.
Hall, Lovallo and Musters suggest four steps that can materially improve a company’s resource allocation and its connection to strategic priorities:
Putting in place a combination of the targets, rules, and processes outlines above may also require rethinking the roles of an organization’s strategic and financial-planning teams. This is acknowledged by Hall, Lovallo and Musters as far from a trivial endeavour; however, the long-term rewards of escaping the tyranny of inertia and creating more dynamic portfolios makes the effort worthwhile.
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