‘Dynamic resource reallocation’ is a mouthful, but its meaning is simple: shifting money, talent, and management attention to where they will deliver the most value to your company. The usefulness of doing so effectively is self-apparent but the forces of inertia are remarkably strong.
Accordance to research my colleagues and I have conducted, senior executives understand the importance of strategically shifting resources: 83 per cent identify it as the top management lever for spurring growth, above operational excellence and M&A. And yet a third of the companies reallocate a measly 1 per cent of their capital from year to year; the average is 8 per cent.
This is a huge missed opportunity because the value creation gap between dynamic and drowsy reallocators is staggering. A company that actively reallocates delivers, on average, a 10 per cent return to shareholders versus 6 per cent for a sluggish reallocator. Within 20 years, the dynamic reallocator will be worth twice as much as its less agile counterpart—a divide that is increasing as accelerating digital disruptions and growing geopolitical uncertainty boost the importance of nimble reallocation.
Why do companies fail to follow through and reallocate?
Some of the challenges are in what I broadly consider the analytical domain. Companies struggle to establish a rigorous, objective fact base for facilitating a fair, clear-eyed debate around where to allocate and how much they should reallocate. Faced with difficult choices about how to protect profitability in segments they want to allocate less to and finding breakthrough growth in segments they want to allocate more to, they stand still.
The other set of challenges are more organizational and social. It can be difficult for executives to reach a consensus on the fact base and figure out how to execute successful reallocation.
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