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Puncturing the headquarters myth

Study by Cambridge Judge Business School’s Yasemin Kor and Niklas Lindlbauer finds that on-the-ground actors at dispersed business units, rather than corporate headquarters, often drive critical resource-allocation decisions.

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One of the most critical tasks of any large company is the allocation of financial resources among its strategic business units: which segments to invest in, new markets to enter, firms to acquire, and divisions to sell off. Conventional wisdom assumes that corporate headquarters, due largely to “private information” not available to markets, drives such resource allocation with iron-clad control.

An ongoing research project at Cambridge Judge Business School paints a very different picture.

Based on detailed interviews at one of Europe’s largest multi-business corporations, the study finds that much resource-allocation decision making stems from dispersed actions by on-the-ground actors in many locations. While private information does play a role, the study finds that such inside facts and figures are known and acted upon in particular by middle-level managers in the field – not only by top headquarters executives.

“Our analysis shows that the deep and valuable intimate knowledge about necessary resource allocation changes actually resides with people at various levels and with closeness to the multi-business firm’s various product markets,” says the study. “We found that the corporate-level resource allocation process is characterised by a large number of organisational separations.”

The study – entitled “The microfoundations of the corporate-level resource allocation process” – is co-authored by Niklas Lindlbauer a PhD candidate in Strategic Management at Cambridge Judge Business School, and Professor Yasemin Kor, Beckwith Chair of Management Studies at Cambridge Judge. The study will be presented in August to the annual conference of the Academy of Management in Chicago.

The corporation studied, which is dubbed “Alpha Group” and not identified in the research paper, has 26 different business units and sales of over 40 billion euros. People interviewed for the study include strategy managers at Alpha Group headquarters, analysts and managers in the company’s different divisions, major competitors of the corporation’s business units, and outside consultants to the firm.

“For company management, there are important organisational implications of these findings,” says Professor Kor. “We found that ‘private information’ doesn’t only reside at corporate headquarters but is dispersed throughout a company’s on-the-ground actors. The study finds that headquarters has no monopoly on crucial information when it comes to resource allocation, and this on-the-ground information can help firms reach the best decisions rather than relying only on headquarters.”

The study addresses what it identifies as a “dearth” of research into the underlying processes and mechanisms through which multi-business companies make resource-allocation decisions, owing to the difficulty of obtaining data about such a “highly sensitive topic for many corporations”.

Among other findings, the study identified the crucial role played by on-the-ground actors and strategists through the crafting of resource-allocation proposals, often backed up by lengthy papers. In the interviews, such actors spoke of “thousands of super small decisions” made on a daily basis that, taken together, amount to major resource-allocation choices.

“The key information for resource allocation decisions actually doesn’t just reside centrally at the corporate headquarters, but rather exists spread out across the organisation’s on-the-ground actors,” says co-author Niklas Lindlbauer. “This observation casts doubt on the issue of how easy it is for the corporate headquarters to have substantial expertise in questioning in depth how resource allocation analysis reports are built and constructed.”

Similarly, the in-depth knowledge of on-the-ground actors about market demand means that they supplement headquarters with insight into any “discrepancy” between the company’s current business offerings and what it ought to be offering, based on its evolving competencies and market trends. Thus, a key implication of the study is that the proper channelling to corporate headquarters of the valuable knowledge of on-the-ground actors and middle managers drives the effectiveness of resource allocation changes, which in turn shape the corporation’s ongoing strategic renewal.