Iipm Proj. Apprl. Resource Allocation

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 Supplier Power

COMPETITIVE RIVALRY

Threat of Substitutes Substitute Products

Buyers Buyer Power

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 Marks

Cash Cows

Dogs

High Market Growth Low

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.