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The power of resource reallocation
Across the survey as a whole, both resource allocation (comprising all seven factors) and a second factor we created for the survey, related to customer trust, stood out as positive, statistically significant correlates with financial performance (For more on trust, see “Translating trust into business reality.”) Not surprisingly, headwinds in the survey, such as global threats, decarbonization pressures, and tax risks, were negatively correlated with profit margins.
We further dissected resource allocation by studying it on its own, against two control variables (industry and firm size) that typically dominate in industrial organization studies. Many variables simply don’t show up when set against industry and firm size, but resource allocation explained 28% of the model’s variance for profit margins, an unusually high explanatory level for a single factor.
At this point, it is worth mentioning that regressions of this sort measure correlation, not causation. In other words, high degrees of resource reallocation could cause strong performance, or strong performance could stimulate more frequent resource reallocation. That might be the case, for example, because a well-performing firm simply had more resources available to launch new initiatives. Because we asked about both starting and stopping projects and business-level initiatives, we are comfortable surmising that performance is unlikely to have prompted resource reallocation. It’s not uncommon for leaders to invest more when their success generates surplus resources, but it’s rare, in our experience, for extra resources to cause leaders to stop investing.
The fine-grained nature of our data enabled us to do something that has eluded academic researchers: assess the impact of project- versus business-level resource reallocation, as well as the impact of individual resource reallocation mechanisms. We learned that seemingly mundane activities like “seeding” (starting and boosting investments on projects) and “weeding” (killing projects) matter just as much as (actually a touch more than) their more prominent brethren (business-level moves, including mergers and divestitures). This is important and vital news for executives: small, everyday processes appear to matter just as much as the large ones that often command the most serious attention.