Resource Allocation Capability and Routines in Multibusiness Firms

Abstract

Research suggests that multibusiness 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 tradeoffs 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.