Reallocating resources is a vital leadership skill to have, yet many organisations are failing to adequately shuffle their assets when required.
This is according to Stephen Hall and Conor Kehoe, directors at management consultancy firm McKinsey and Company, who claimed swift reallocation of resources is useful at the best of times, but even more so in economic downturns.
The pair noted that even new chief executive officers (CEO) can be hesitant to upset the status quo, but they risk inertia if they fail to address the issue aggressively.
Barriers to a new strategy
Hall and Kehoe said making strategy happen is vital for CEO success, although they could face internal and external challenges when trying to effect change.
Kehoe stated: “There may be people who frankly do not want their best people reallocated to some new task in a promising market or alternatively, may want to hang onto the capital they have and not have it reallocated to a new market.”
Other obstacles may come in the form of stocks and shares behaviour, he stated, with financial markets reacting negatively in the short term to resources reallocation because it often depresses profits for the first few years.
The director emphasised the importance of not only formulating a strategy, but also effectively implementing it, which he claimed is the hardest part for many businesses.
“We’re finding companies do far too little of it,” he added.
The bottom line benefits of swift action
McKinsey and Company’s research revealed there are immediate and obvious benefits for those with the leadership skills to quickly reallocate resources.
Hall said there is typically a four percentage point improvement on investment returns for shareholders year on year for organisations that are in the top one-third of reallocators compared with the bottom third.
“When we looked at the data through time, we expected that we would find that, in periods of economic turmoil, companies would be more activist in the way that they reallocated their resources,” he said.
“Those are the times when investors get nervous, when markets put pressure on CEOs, when performance starts to slip below the promises that have been made.”
However, Hall said the opposite was actually true, with businesses being more inactive when in the throes of an economic downturn.
He claimed this shows how much internal conflict CEOs experience when trying to achieve what they know they need to do and being pressured to follow a different path.
Taking the plunge
Both Kehoe and Hall say the McKinsey research has a clear message of quickly reallocating resources to take advantage of capital growth opportunities, particularly new CEOs.
Kehoe said: “You’re in your honeymoon period. Do the reallocation, take the short-term hit, because you’ll benefit from the long term.
“And don’t worry about overdoing it. We haven’t found anybody who’s overdone reallocation.”
Hall agreed, stating that while the temptation may be to take your time and make changes slowly, CEOs are far better off being bold from the outset.
Getting to know people, learning the company culture and approaching resources in a more deliberate fashion have been shown by the statistics to clearly be a less successful approach, he added.
According to Kehoe, the fact that businesses can’t really overdo resource reallocation has created some interesting strategies within various organisations.
“We came across [a] company where the CEO allocates ten per cent of capital within his own discretion,” he said.
“That is a pretty arbitrary number. But it does mean that things get shaken up.”
This kind of an approach is pretty crude, he admitted, but it acts as a useful starting point to overcome the internal inertia of a company.