Small Business Blog from Atlantic Canada

I am "CA" Atreya (PMP, MBA), the author of this blog. I help businesses in Atlantic Canada achieve their BHAG successfully. You may subscribe to this blog using a feed reader (RSS).

Note: For the first article in this series please go to Issues in Strategy Implementation.

It does seem intuitive that you need to allocate resources to the strategy you committed to, doesn’t it?. But how much do you need to allocate and to what project? Allocate too much and you are wasting it; allocate too little and your strategy implementation may fail. Organizations, especially small businesses, do not have large financial reserves and cannot afford to waste it. Hence, businesses need to exhibit good resource fit as well as a good strategic fit. Resource fit exits when an organization has the resources to adequately support its business without spreading itself too thin.

If your business sells multiple products, how do you determine the resources each of them get? If you are in rapidly growing industries, chances are your annual cash flows generated from operations aren’t enough to cover your annual capital requirements. You need to invest in technology to keep pace with the rapid growth – new facilities, equipment, product R&D and technology improvements, working capital to support inventory. Such businesses are called cash hogs. Your cash needs increase if you have a low market share and are pursuing strategies that aim at rapidly increasing your market share. If your businesses cannot generate enough cash flows from operations, then you need to seek alternate sources of funding.

On the other hand, if your business is in a mature industry, chances are your business generates sufficient cash flow from operations for reinvestment and marketing. In such an event your business is a cash cow. While not very attractive from a growth perspective, cash cows are essential from a financial resource perspective. Surplus funds from cash cows can be used to fund cash hogs.

It makes strategic sense to keep the cash cows healthy to preserve their cash-generating ability. If your business has a product portfolio it helps if you think of your mature products as cash cows and new products as cash hogs. Determining which areas are cash hogs and which are cash cows will enable you to prioritize your resource allocation. For example, you can use excess funds generated from cash cows to invest in promising cash hogs and turn them into stars. (Stars are businesses with strong market share, profitable with excellent growth and profit opportunities.) Stars are the cash cows of the future.

If however, one of your initiatives does not look promising and is a cash hog, it is an ideal candidate for the axe. Further investment into such initiatives is akin to throwing good money after bad. They are a bad resource fit. However, there is no hard and fast rule on resource allocation. Each business is different and you need to decide what projects get the resources.

Let us look at Intel in the 70s and 80s. Every month, production managers would meet and decide how to divide the capacity among different products. They based their decision on sales projections and gross margins of each product. Intel was a memory company in the 70s. When the Japanese organizations entered the US market, it put a tremendous pressure on Intel’s margins; and that was reflected in the sales projections and gross margins. It was then decided to allocate more resources to microprocessors (which did not receive much attention when it was designed in the 70s). This highlights the importance of resource allocation. However, it was only in the early 80s that Intel acknowledged that it was in the microprocessor business and not memory business.

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