Project Initiation and Resource Allocation

2. Introduction:
Resource Allocation is generally done at two levels:
One, at the firm or corporate level – the distribution of
resources among various departments or business units;
and Two, at the department or business unit level. At this
level, how the department or unit should utilize the
resources allocated is to be decided.
2. Resource Allocation at the Corporate Level:
The pattern of allocation of resources generally depends on
two factors: the need for a change in the existing pattern
of allocation, in the perception of the management and how
centralized the decision making process is. It also depends
on whether the resources of the firm are growing or
declining and whether a change is called for in the overall
resources and their pattern of deployment.
How resource allocation takes place in various situations?
The same has been summarized as below:
 Need for Change
Low High

High Formula Imposed

Priorities

Extent of Central
Control
Free Open
Bargaining Competition
Low

There are three situations:

1. Growth in the Resources
2. Decline in Resources
3. Few Changes in Resources
3. Resources Allocation at the Business Unit Level:
If resources are allocated to different units of a firm based
on formula, then the units have to think of the best ways to
deploy them. Analysis of its strategic abilities may often
lead the unit to the identification of areas where it can
invest and where it should not. So, identifying investment
alternatives can be described in two steps:
1. Analysis of the environment
2. Analysis of the strategic capabilities
All ideas which arise outside the framework of these two
analyses will have to be tested to see whether they are
feasible considering these two.
Analysis of the Environment
Two most popular models namely
• The PEST model, and
• Michael Porter’s five force model
are discussed to analyze the various components
or factors in the environment.
PEST Analysis Model
It assumes that the environment consists four components.
1. Political / Legal factors
 Stability of the government
 Labor legislations
 Tax laws
 Foreign trade regulations
 Monopolies legislations
 Environment protection laws
2. Economic factors
 Interest rates
 Business cycles
 Trends in GNP
 Money supply
 Inflation
 Unemployment
 Disposable income levels
 Availability of fuel and its cost
3. Socio-cultural factors
 Changes in lifestyles
 Attitudes towards work and leisure time and changes
 Prevalence of consumerism
 Population of demographics
 Income distribution
 Social mobility
 Levels of education
4. Technological factors
 New discoveries and developments
 Levels of government spending on research
 Speed of technology transfer
 Rates of obsolescence
Analysis on these lines will generally throw light on
whether a firm should invest in a particular area, or not.
Michael Porter’s Model:

Potential
Entrants
Threat of
Entry

Suppliers COMPETITIVE Buyers

Supplier Power RIVALRY Buyer Power

Threat of
Substitutes

Substitute
Products
 The model is based on a set of five forces which according
to Michael Porter determine the competitive position.
Threat of Entry
It indicates how likely is the entry of more and more
competitors into the market, which can threaten the
position of the firm.
Factors:
 Economies of scale, advantage to larger players
 Minimum level of capital
 Access to channels of distribution
 Cost advantage due to technology
 Legislation governing entry into market
 Level of differentiation of the product
 Expected retaliation from the existing firms
All the factors may never be present in a single market.
But, looking out for all of them will provide
a comprehensive view of the likelihood of entry of the
new firm.
Bargaining Power of Buyers
If the bargaining power of the customers is strong, the
producer can never be sure of getting a fair price for his
product. The bargaining power of buyers will be high when:
 The buyers are few and volumes are high
 Alternative sources of supply are available
 The material cost makes up a substantial part of the cost
 Backward integration by buyers is not difficult
Bargaining Power of Suppliers
Factors
 The suppliers are few
 Alternative sources are not available
 Switching - one supplier to another is difficult/expensive
 Suppliers have strong brand image
 Forward integration by the suppliers is not difficult
The Threat of Substitutes
The availability of substitute products can almost act as a
ceiling on the price at which the product can be sold.
 Issues in evaluating the substitute products
 Whether the substitute product provide a higher value
than the product of the firm
 Ease or difficulty for the consumer in switching from the
original product to the substitute product
Extent of Rivalry
Competitive rivalry will be high in an industry where the
threat of entry is high, both buyers and suppliers exercise
tight control and substitute products abound.
Factors:
 The relative size of the players, If all are of equal size,
competition will be high.
 Stagnation, for a long time
 High fixed cost, leading to a scramble to sell the break
even quantity
 High exit barriers
ASSESSMEMT OF THE BALANCE OF RESOURCES
The firm should consider whether the resources as a whole
are well balanced or not. Study of this involves three factors
i. Whether the activities carried out by various business
units are complementary to each other or not
(called portfolio analysis)
ii. Whether the stock of skills is well balanced or not.
iii. Whether the resources are flexible and adaptable to
future needs or not.
Portfolio Analysis:
The BCG Matrix is one of the first models of portfolio
analysis. In this model, all the business units are classified
into four different categories based on two criteria:
 whether the market share is high or low.
 whether the growth of the market in which the unit
operates is high or low.
The following table shows the classification and the names
Given to each type of unit based on two criteria.
 Classification of Business Units
Market Share
High Low

Stars Question
High Marks

Market Growth

Low Cash Cows Dogs

Analysis of Balance of Skills:

It is essential for organization to make sure that they have
stock of the right skills in the right proportions. The skills
required for managing the production and marketing, as
well as finances and the personnel should be available
in the required quantities.
Flexibility Analysis:
The resources available with an organization should be
flexible enough to enable it to modify its strategy in the face
of any uncertainty. For analyzing an organization’s
position from this angle, it is necessary to identify the areas
which present uncertainty. Then, it is to be identified the
impact of an adverse happening in the area presenting
uncertainty. Further, it is required to design the tactical
and strategic changes the organization may have to
undertake to overcome the possible problems. Finally, the
study is needed to find out how far the resources available
at present permit the changes required to meet the situation.
Identification of Key Issues:
The above analysis should enable the firm to identify its
core competencies. A core competency is an ability of the
firm that gives it an edge over its competitors. The firm
should match its competencies with its strategy and arrive
at a conclusion on areas and activities for investment.
Identification of Opportunities:
o Study of the inputs and outputs of various industries
o Import substitution
o Report of studies conducted by institutions
o Revival of sick units
Generation of Ideas and Creativity
Creativity is the ability to create what does not already exit.
It is the ability to combine or synthesize the available
information and experience to see pattern and possibilities.
Hurdles to Creative Ideas:
 Creative ideas often calls for changing the way things are
being done at present. People are inherently averse to
change
 People in the higher positions of power hate to admit that
there is a better way of doing things than what they have
been doing all along
 Trying out new methods is risky- managers always want
to avoid risk
 But, in spite of all these, it is only the organizations that can
accept creative ideas, cope with change, and innovate their
business processes and products that will survive in the long
run.
Individual Creativity:
Steps:
 Believe that all the objects, procedures, and systems are
inadequate to meet our needs.
 Decide on the criteria or specifications that the new idea
we now want to generate should meet.
 Finally, go on generating ideas. The focus while
generating ideas should only be on the quantity and not
on quality.
Techniques:
• Attribute listing
• Checklist
• Black Box
• Directed Dreaming
Group Creativity
When it is felt that the knowledge or experience of one
person is not sufficient to solve problem, group techniques
are used.
1. Brainstorming
2. Delphi
3. Nominal Group Technique:
• Silent idea generation
• Round-robin presentation
• Idea classification
• Voting and ranking
• Discussion of results.
The ideas generated in the process are ranked and the best is
chosen. It may be conducted many times if the results obtained
obtained in the first round are not satisfactory.
All the techniques part, it is the management and recognition
given to creative thinkers that will bring in creative ideas. The
environment in the organization is also a significant factor.