WH AT I S IT AND WHA T DO I N EED TO K NOW?
Capital allocation is the choice of which projects to invest in and which to reject.
It is a phrase that implies you have capital rationing, so you can’t invest in every
Would it be wise to invest in every available profitable opportunity even if there
were no limitation on capital? I believe not, firstly because a bad investment can
suck you in and keep sucking the cash from you; secondly because companies
suffer another limitation on their resources, which is organisational capacity. This
comprises both the limited number of people with required skills to manage new
projects but also the processes and relationships that enable any organisation
to function effectively. On the people side of this balance, it can be argued that
new skills can be bought in, perhaps using consultants or interim managers in the
short term. There are, however, three major issues that arise:
1 Scarce skills – these do exist and are often technical skills but also those
relating to knowledge of specific specialist markets; and those that can be
bought in take time to induct into a new business.
2 Leadership – this is a special case of scarce skills. Where a business is
offered an investment in a new field, even if it’s one related to its current areas
of operation, there is an issue with understanding the market at the highest
level within the company. Few businesses will succeed if there is not a deep
understanding of their operations at the highest strategic level because
without this, control and oversight break down. The particular operation may
be starved of investment or over-invested, inappropriate strategies may be
pursued and wrong operational decisions may be taken.
3 Organisation culture – this is often a bigger problem even than specific
skills. All companies and even different activities within them have a distinctive
organisation culture that embraces a shared vision, shared values and ‘a way
we do things around here’. While these are sometimes hard to define precisely
and sound rather indistinct, they are nonetheless a critical aspect of that
organisation’s competitive advantage.
The issue of organisation culture leads on to organisational capacity – the two are
rganisational culture covers the formal and informal processes that
comprise the organisation and also the web of personal relationships
between the individuals working in a business, who all must cooperate and func-
tion effectively as a team.