Reference:

Bower, Joseph
Managing the Resource Allocation Process: A Study of Corporate Planning and Investment
Irwin, Homewood, Illinois, 1972 (Ch.1-3, 6, and 8-10)

Topic: The business and the investment planning systems.

Summary and citations:

Ch.1: Capital budgeting as a general management problem
o The corporate setting: The scope of the problem is relevant because clearly no one manager can be assumed to have the knowledge or the time to generate detailed programs to use these funds. – p9
o The value of quantitative measures: a project can be described as the net present value of all cash flows associated with a proposed investment.
o The kind of project: estimates of the benefits from cost reductions are far more accurate and less variable than those firm sales expansions, and these estimates in turn are more reliable than the estimates of the return from new products. –p12
o The Kind of Business: the objections to a quantitative summary extend beyond the kind of project to projects within a class, for it is certainly true that different businesses involve different levels of risk. – p13
o The Kind of manager
o The role of top management choice: the objective of management of a large corporation … are not in any way a sufficient description of the objectives which direct and motivate action at the critical, resource allocating levels of the organization. Hence, a model which prescribes procedure for resource allocation based on the maximization satisfaction of “management objectives” is not a complete picture. – p17
o The problem rephrased formally: 1) business planning process, 2) investment process; 3) these two processes as critical ; the principal observed change in a firm may be explained by a sequence of planning and investment decision. 4) a Business planning system; 5) An investment planning system; 6) Decentralization – p19
o New strategic ideas are developed at the business level. Such an idea is shaped as it proceeds up managerial levels until it emerges fully packaged as a request for capital or a business plan for consideration for corporate management. –p20

Ch 2: Findings
o The forms of specialization: raw material site/ Facility / Process / Product / Industry Market / Customer / Customer Location / The functions /
o The Business Plan is intended to present a condensed but critical review of the division’s current business position problems, and opportunities, its updated longer-term market and earnings objectives, and its plans for achieving them, the specific program and expected financial results for the ensuing year -1966:and a forecast for 1967
o Investment planning: Goals. 1) Plans should meet the demands for capacity, 2) Plant costs should not rise; 3) Product quality should be competitive or better
o Exhibit 2-2 p53
o The forces influencing definition –p54
o Impetus: the definer must get his project approved by his division general manager…. The source of a project’s impetus is the power of a general manager at the officer level of the division. The general manager must sponsor the project and shepherd it successfully
o The forces influencing Impetus. Quality of the project; …technical aspects are accepted to be technically qualified….during the definition process – p58
o Structural variables may be manipulated by top management – p59
o When managers that have taken the corporation into exciting new but unprofitable fields are promoted, it is clear that “creativity and imagination” are important bases for reward. – p59
o In short, both the group management committees and the executive provided a review of all CARs.

Ch 3: A process model of a project
o Definition: Definition is the process by which the basic technical and economic characteristics of a proposed investment project are determined. –p67
o The cycle of discrepancy, analysis, and choice, of course, is the basic format of all problems. -p67
o Impetus: Impetus, the force that moves project toward funding, has been defined as the willingness of a general manager at the division president’s level, or one level below, to commit himself to sponsor a project in the counsel of division officers and before the division general manager. In making the decision, he puts his reputation for good judgment on the line. – p68
o Context: Context has been defined as the set of organizational forces that influence the processes of definition and impetus… corporate structure; situational context; … structural context. –p71
o The purposive manager: … then is a manager to be pursuing corporate and personal goals guided by a structure that helps him relate the two. His personal goals are assumed to be: 1) economic wealth, and 2) power to influence affairs. –p73
o The phases of definition: … because the information requires for strategic planning is spread widely throughout a large organization, indeed because in some instances it cannot be comprehended centrally, the planning activity usually has to be delegated to product / market organized sub-units of the corporation. –p74
o Whereas financial planning implies measurement in terms of return on investment, strategic measurements may focus on market size and share, price, margins, operating efficiencies, technological competitiveness, and other qualitative as well as quantitative measures. – p75
o The phases of impetus: exhibit 3-2 p77
o The phases of determination of context –p78
o exhibit 3-4 p80 ; exhibit 3-6 p82

Ch. 6: Fireguard

Ch. 8: The projects compared
o The development of a proposal for a new facility:
o Exhibit 8-1: The four cases compared –p245
o In a world where uncertainty is great and men are judged by results rather than plans, a definer is in a better position to elicit impetus when the pressure of the market reinforces whatever problem he perceives from a technical point of view. – p254
o The process of developing impetus: the willingness of a general manager, performing the integrating level task, to provide impetus for a project was described as depending upon the measure which that manager perceived were being applied to his judgment and management skills. –p254
o The role of context. In discussing the way in which projects were defined and acquired impetus, it has already been necessary to consider the influence of the organization, the measurement and information systems, and the reward and punishment system – what has been called structural context. – p261
o Exhibit 8-3 p 262: It is evident that context often has negative effects on the projects. What does it mean? –p262
o One of the most significant aspects of structural context observed was the provision –or lack of provision. It made for interaction across levels of hierarchy and thereby for the bringing to bear on the capital budgeting problem of well-developed generalist skills. –p264
o A critical aspect of the information and control system, the capital appropriations procedure, seems to have had a minimum degree of influence. – p264
o Where systems of measurement and reward are not integrated with the planning and investment process, problems result: projects serve the needs of functions rather than businesses; their timing reflects politics rather than the market; and coordination among projects is lost. – p269
o The business planning and investment planning processes are closely interrelated. The degree to which they are coordinated in their delegation is critical to their usefulness. Where traditional financial techniques focuses attention on individual project plans separate from the businesses they are meant to serve, severe distortions in focus and timing can result, and coordination of business sub-units with the corporation is often list. The Planning and investment process are continuing and are substantially affected by a range of structural phenomena, two which are planning and capital budgeting procedures. – p279
o There are two components to the investment process: 1) definition, having to do with how the content of projects is determined, and 2) impetus, involving which projects are funded. – p280

Ch. 9: Implications for researchers
o The goal is to help management improve resource allocation by identifying components of the process – p281
o Two approaches…. One is to observe, in a clinical setting….A second approach, generally less successful, though potentially more powerful, is to begin with the construction of an abstract version of the problem which in turn permits one to prescribe the route to improved performance. – p281
o The financial model and the corporate phases of resource allocation: in almost all financial theory, the firm is considered to be a unitary monolith managed in the interests of its ownership – p282
o In the face of real-world uncertainties, there are difficulties in estimating both returns and costs. – p283
o The strategic model and the initiating phases of resource allocation: the concept conceives the task of general management to be a problem-solving process involving the direction of corporate competence toward opportunity in the environment by the vehicles of organization, measurement, and reward. – p285
o “What is the planning unit in the large decentralized company?”….most important idea. It is the notion that strategy should be developed in increasing detail at descending levels of organizational hierarchy…. Deductive cascade. –p286
o Moreover, the lines of today’s structural form also determine the rules by which managers will compete. – p287
o The integrating phases of resource allocation: It is the responsibility of those managers performing the task of “man in the middle” to use their understanding of the qualitative elements of product-market strategic considerations to evaluate long-range programs in a way that will ensure consistency between the initial definitions by product-market sub-units and the objectives of the corporate whole along the multiple dimensions of strategy. – p288
o The choice of organization, measurement, and reward play a role of central importance in the development of corporate strategy by shaping both the allocation of corporate resources through their influence on definition and impetus – and the future perceptions of those who initiate new business plans and projects. –p289
o Exhibit 9.1. p291
o The integrated company: … all three phases of task are preformed in the president’s office: this implies that the same individuals are responsible for perceiving environmental trends and defining responses in product-market terms, and for measuring their own performance critically in financial terms. – p291
o Exhibit 9.2. p295
o Structural shifts can be used to broaden the concept of the opportunity for useful influence among managers at the division and process levels of the company. –p296
o The manager in the middle must be sensitive to the inevitable imperfections in the strategy. –p297
o In a sense, life in the large organization has aspects of a “zero-sum” game….”winner” and ….”losers”
o “bureaucratic politics” by Graham Allison (Cuban missile crisis): Bureaucratic politics is the explanation or the content of the process of impetus. –p303
o …The two interrelated systems involved in the organizational process of resource allocation in these terms: the process of definition is technical-economic in content; impetus is political. – p303
o In a systematic attempt to have resource allocation serve strategy, top management should d use structure to influence those organizational forces that shape the technical and political processes at lower levels of the organization. – p304
o “Politics” is not a pathology, it is a fact of large organization. Top management must manage its influence on “political” processes and then monitor the results of its performance. – p305
o The integrating level must have the information necessary to transform strategic measures into financial ones. It must have and be able to use strategic measurements to qualify potentially misleading financial summaries. –p307
o Exhibit 9-6 p308; Exhibit 9-7 p311
o The problem is that virtually all measurement systems compare a process’s or product’s attributes against historical or other kinds of internal standards, Instead, what is needed is an external measure of the present and potential quality of an internal capability. –p315
o Use of context: There must be enough stability… but…rotation across functional and divisional lines helps to build a cooperative climate and contributes to the development of a generalist viewpoint. – p317
o Using structure to influence behaviour. … The hypothesis is that managements can manipulate those same structural forces in order to influence behaviour in desired directions. – p318
o While rotation prepares a manager to accept a generalist viewpoint, it does not directly train him for general management. –p319

Ch. 10: Implications for management
o In a large organization the same force that led the decentralization of product-market strategic planning – primarily the dispersion of specialized knowledge –in principal ought to lead to a similar decentralization do the investment planning that results in capital commitments in product-market sub-units. – p321
o Exhibit 10-1 p323
o There seemed to be important lessons to be learned concerning 1) the timing of the different phases of the processes; 2) the role of procedure in the processes; 3) the design of the structure, and 4) the use of the elements of structure by the several managers observed. –p323
o Diagnosis: general manager must look at a resource allocation in his company in the same way a doctor looks at circulation in a patient – as part of a complex system interacting in a whole variety of ways with an even more complex environment. – p324
o Like the body, an organization is a constantly changing mechanism…. The manager must constantly act is if he were a research scientists, testing his understanding of how the system operates. – p325
o The question of location: The first diagnostic question is “where in the organization are the initiating, integrating, and corporate phases of definition, impetus, determination of context, and measurement, being carried out?” – p236
o The question of quality: Standards are often lacking –p327. It is hard to evaluate anything that is not well understood. – p327
o The question of coordination: 1) The linkages across functions and levels; 2) the consistency of focus among those performing parts of the process, and 3) the timing of different phases. – p331
o The quality and timing of the planning processes: the use of formal procedure: … attacking the usefulness of traditional, formal procedure as a way of improving the content and pace of the resource allocation process. – p335
o Bottom-up is not enough… “bottom-up” is not necessarily correct. – p336
o But procedure is not the only useful tool for improving the quality, coordination, and timing of the definition process. It can also improve the relationship between the planning of investment projects and the planning of businesses. – p338
o The purpose of capital budgeting procedure is not a “go, no-go” decision on a project, bust instead 1) a review of the strategic assumptions on which a business is being conducted, and 2) an early scanning of the corporate information network to provide all relevant inputs for the project definition. – p 339
o The relationship between planning and the measurement of managerial performance emerges as soon as the issue of “results” is introduced. – p341
o Problems of rotation: 1) …boss wants a talented specialist, not a developing manager; 2) no one of whom really knows the details knows the details of the business; 3) … if a man is rotated every two or three years, he never has to live with the consequences of his own action…..On the other hand, without rotation, men become narrow and parochial in terms of product, division and function. – p343
o The general manager… must be able to diagnose complex systems of markets, facilities, and men….also able to use tools of the complex firm-the formal organization, the information system, and the reward system- to influence organizational behaviour. … balancing short and long-run opportunity, … and must take into account … requirements of the individuals….-p345

Personal comments, interesting issues and findings:

o “The principal observed change in a firm may be explained by a sequence of planning and investment decision” and also Bower underlines the trend towards decentralisation (p19): Bower might be referring to firms that base their activity by managing projects. There is a relatively new field of management called “management by projects” (see article “Management by projects’: the management approach for the future » R Gareis, (2002)). It seems a very interesting approach, mixing networks theory and project management.
o “New strategic ideas are developed at the business level” (p20): my experience in the industry (automotive sector suppliers) is that strategic ideas and new projects were mainly driven by actors external to the company, mainly by the customer (automobile brands) or by competitive pressure. It was not an idea from the business level.
o Can the definition / impetus / approval model be generalised? Many times, impetus come from the upper level (i.e. M&A), sometimes, from lower levels (i.e. projects to improve work conditions).
o Impetus is to take risk. If the project is not beneficial for the manager (see Bower’s “purposive manager”), he might be reluctant to promote it. Impetus will be reinforced in companies fostering creativity, as creativity and innovation is related to experimenting and experimenting involves a high risk of failure.
o I believe in the concepts expressed by Bower as “man in the middle” and integrated company. I think that if the project is initiated by the top management team or very near it (trust plays a major role), the approval will be easier and quicker. Initiatives from low levels of the structure will be difficult to reach top management. This case needs 1) a “man in the middle” able to coordinate all the process or 2) a very perseverant impetus (that is difficult to have).
o As Bower says, “bottom-up is not enough”. I think that each project has different origins and definition and impetus come from different sub-units, depending on the project, not the organization.
o Interesting video from Bower about the concept of “inside outsider” as a CEO that has learned inside the company but still has maintained his objectivity: http://www.youtube.com/watch?v=6taNjZCzQ1I