Most CEOs know that, in theory, their companies require resources (money, time, human capital, etc.) to be invested where they will generate the most significant return on that investment. Unfortunately, most companies do not follow this simple credo for their resource allocation. Instead, companies typically allocate their resources almost identically to how they did so the year before.
This inertia of following past investment decisions causes a significant and deleterious disconnect between a company’s aspirations to make sound allocation decisions and the reality of how these decisions are actually being made. Ideally, a company should evaluate the performance of each business unit, acquire and divest assets according to this performance, and adjust resource allocations based on the relative market opportunity of each unit.
Below are 4 imperatives for ensuring your company’s resource allocation is optimal:
- Have a target corporate portfolio. Identifying business opportunities where your company has strategically decided to increase its exposure can create a solid foundation for analyzing and revamping how you allocate resources.
- Use all available resource reallocation tools. Do not just invest in new ideas or opportunities. Be sure to cut off previous strategic investment initiatives that are not producing the desired results. Plant new seeds, nurture them as best you can, and prune them when they are no longer viable.
- Adopt simple rules to break the status quo. For example, if you decide to create a rule to dispose 3-5% of your company’s assets every year, this will force you to evaluate all of your business units. Business unit heads will have to defend their unit’s continued nurturing if they are under-performing, and your company will not be throwing good money after bad for failed initiatives.
- Implement processes to mitigate inertia. Analyze your business units or products as if you were a new investor. Would you, at this current point in time, be willing to invest in that product or unit? If not, you should reconsider its existence in your company.
Read More: How to put your money where your strategy is