Tag Archive: Capital Allocation

The Dangers Of Over-Reliance On High-Level Metrics To Manage A Company

“It is not enough to be busy. So are the ants. The question is: What are we busy about?” Henry David Thoreau – Letters to Harrison Blake (1848-1861) 


– The Mechanics Of Identifying ‘Pockets of Value Creation’

The title of this post was borrowed from an article i came across published on McKinsey website  “Unearthing the sources of value hiding in your corporate portfolio.”

The article provides interesting facts about the dangers of being too focused on specific financial metrics which could hinder company executives from spotting potential sources of Value creation. As an example, the article highlights a common case scenario where a large number of top managers pay much attention to  averages of top-line growth,” economic profit,” and “return on invested capital (ROIC)” and focus less on other important indicators  of growth and returns.  The article points out that even though a company may be experiencing a top-line growth, it is also important to also take a closer look at the market share and how well the company is competing. To achieve that, the authors state:

“…successful intervention requires executives to understand the more important leading indicators of growth and returns that are often overlooked. These include the growth of the relevant market, in size as well as in market share; changes in pricing and gross margin; and R&D and sales, general, and administrative expenses…” (Read on- Source: McKinsey)

–  Show Me The Money- The Money Is In The Strategy

A separate McKinsey quartely article (‘How to put your money where your strategy is’), highlights some common mistakes companies make when it comes to allocating resources. So what’s the deal? Is there a right or wrong when it comes to company resource allocations? There is no straight answer. It’s all abouth the right strategy. From the article, keeping an eye on how resources are allocated could help a company it’s performance. In the article, an interesting discussion about why companies should try and avoid allocating their resources to the same business units on a prolonged level of years,  is best described using the following scenario:

“..picture two global companies, each operating a range of different businesses. Company A allocates capital, talent, and research dollars consistently every year, making small changes but always following the same broad investment pattern. Company B continually evaluates the performance of business units, acquires and divests assets, and adjusts resource allocations based on each division’s relative market opportunities. Over time, which company will be worth more?…”  (Read on- Source: McKinsey)

–  The Relationship Between Resource Allocation Decisions And Higher Returns For Shareholders

I came across a variety of published studies and articles highlighting the importance of  companies’ senior executives consistently reevaluating how, why, how much and where their companies’ resources are allocated. Regular reevaluation of resource allocations not only helps  create more value to a company but also helps a company to strategically deliver higher returns to shareholders. Below are 3 + 1  further readings suggested to give you valuable insight about the importance of resource allocation-