Don Sull's blog

Executives, according to the conventional wisdom, are decision makers. Their job consists of laying out alternatives, calculating the relative merits of each using tools such as net present value, and making the hard choices on which deserve resources and which do not. Like a Roman emperor turning a thumb up or down in the coliseum, they make decisions and their choices have consequences.

In reality, most managers, most of the time avoid tough calls like the plague.  Instead, they spread resources evenly across projects, priorities, markets, and business units.  In a memo leaked to the Wall Street Journal in 2006, a senior vice president at Yahoo compared this process to spreading a thin layer of peanut butter across a slice of bread:

I’ve heard our strategy described as spreading peanut butter across the myriad opportunities that continue to evolve in the online world. The result: a thin layer of investment spread across everything we do and thus we focus on nothing in particular. I hate peanut butter. We all should.

Managers employ this peanut butter approach to resource allocation for several reasons, most of them bad. A socialist approach to resource allocation minimizes conflict, maintains the perception of fairness, and skirts the difficult process of weighing alternatives against one another. An economic boom provides ample resources which blunt the need to make hard choices.

Even during a boom, spreading resources like peanut butter is suboptimal, rewarding bad alternatives with more cash than they deserve, and starving the most promising opportunities of the resources they require to win big. In a downturn, this approach is even worse, because it dissipates scarce resources. Unfortunately, in a downturn, managers often try to spread the pain evenly, demanding the same percentage headcount reduction of all units, for example, regardless of their future promise.

Fortunately, a downturn provides the ideal opportunity to force hard choices that managers should be making anyway. An economic crisis marks a clean break with the past, so employees and investors recognize that what worked before won’t do going forward.  Scarce credit and an external crisis provide a ready-made rationale to justify hard choices that might have seemed too extreme in a more benign market.  My next several posts will explore portfolio opportunities, or chances to drive difficult choices among alternatives–decisions that are made easier by the current economic crisis.