Resource Allocation Capability and Routines in Multi-Business Firms
Authors:
Catherine Maritan, Whitman School, Syracuse Univerity and Constance Helfat, Tuck School of Business, Dartmouth College
Journal:
Organization Science (2023)
Summary:
Although prior research has suggested that firms often misallocate resources, our study shows that this is not necessarily true and firms can and do use routines to allocate resources effectively.
Research Questions:
1. How do firms differ in how they go about allocating financial capital and non-financial resources?
2. Why do some firms allocate their resources more effectively than others?
What We Know:
Firms differ in how they search for opportunities to allocate resources – financial, human, physical, technological – to projects, strategic initiatives, and businesses, and how they select which opportunities to pursue. These differences, which stem from routines and capabilities for resource allocation, result in some firms being better able than others to deal with impediments to effective allocation of their resources, which ultimately leads to differences in the ability of firms to adapt and change.
Novel Findings:
We move the conversation about corporate resource allocation from whether firms do it well or poorly to consider how differences in firms’ organizational routines helps us understand variation across firms in how effectively they allocate resources. Thus, not all firms misallocate resources in the ways that prior research has suggested.
Implications for Practice:
Firms differ substantially in their ability to allocate resources effectively, and therefore in their ability to adapt and innovate. Our analysis offers a framing for managers to consider as they seek to better manage their resource allocation activities.
Full Citation:
Helfat, C.E., & Maritan, C.A. (2023). Resource allocation capability and routines in multi-business firms. Organization Science (forthcoming).
Abstract:
Research suggests that multi-business firms often misallocate financial resources. However, research also suggests that firms differ in how effectively they allocate a range of resources. We argue that some firms have a resource allocation capability that enables them to more effectively determine the allocation of resources than often portrayed in the literature. We identify key search and selection routines that form the building blocks of a resource allocation capability and explain how these routines facilitate critical activities at different levels of the management hierarchy that are involved in the determination of resource allocations, including for related and vertically-linked businesses. We further explain how a resource allocation capability, and the routines that make up the capability, help firms allocate resources effectively to meet their strategic and financial objectives. Part of the improved effectiveness of resource allocation arises because the routines help to mitigate the factors that prior research has identified as leading to resource misallocation, namely information asymmetry and distortion, internal politics, and cognitive biases and backward-looking aspirations. Finally, we move beyond research on whether firms effectively allocate resources to explain why resource allocation capabilities are likely be heterogeneous among firms due to differences in their routines and the ways that firms structure their use of routines. This heterogeneity stems in part from trade-offs that firms face when choosing among resource allocation routines. As a result, firms are likely to vary in how effectively they allocate resources, leading to heterogeneity in firm adaptation and change and ultimately in firm performance.
URL for the Article:
https://doi.org/10.1287/orsc.2022.16778