Putting your money where your strategy is

McKinsey has found that most companies allocate the same resources to the same business units year after year, regardless of any declared changes in strategy or shifts in their environment. In the article “How to put your money where your strategy is” they describe a two year research activity looking at resource allocation patterns and the implications for strategy. The key finding is that companies that actively move capital and other resources from one business opportunity to another are more likely to provide higher shareholder returns and have lower risk of falling into bankruptcy or acquisition.

Inertia also has implications for CEOs, with active re-allocators more likely to keep their jobs in the longer term.

McKinsey explored the causes for this inertia, including cognitive biases (specifically anchoring and loss aversion, with the previous year’s plan providing the anchor); and politics, where the tight alignment between senior execs and their business units makes any change personal and hard-fought.

They provide the following recommendations:

  1. Have a target corporate portfolio
  2. Use all available resource reallocation tools
  3. Adopt simple rules to break the status quo (for example by setting a harvesting rule with a specific percentage of the portfolio being sold each year)
  4. Implement processes to mitigate inertia (including periodic systematic portfolio reviews)