June 9, 2025 • 53 mins
Joseph L. Bower on Resource Allocation and Strategy
"Where you stand depends on where you sit."
In this exclusive episode of The Innovation Show, Harvard legend Joseph L. Bower shares the untold story behind his groundbreaking work on Resource Allocation to Strategy — a theory that has shaped generations of business leaders, strategists, and scholars.
Bower reveals:
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How real strategy emerges through the decisions of middle managers
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Why structure drives strategy more than PowerPoint slides do
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What we can learn from Lou Hughes at Opel, and the power of acting before HQ gives permission
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Insights into companies like GM, Timken, and even Tesla
This is a masterclass in how strategy really works — not in theory, but on the ground.
Revisit the origins of strategic thought that still matter today.
00:00 Introduction and Sponsor Announcement
00:42 Introducing the Guest: Joseph L. Bower
03:16 The Origins of Resource Allocation Theory
05:30 Insights from the Field: Case Studies and Key Learnings
17:26 The Role of Empathy and Perspective in Management
20:57 Case Study: Opel's Strategic Response to the Berlin Wall
35:38 Case Study: Timken's Bottom-Up Acquisition
38:04 The Importance of Learning and Adaptation in Strategy
52:59 Conclusion and Final Thoughts
53:25 Closing Remarks and Sponsor Acknowledgment
Thanks to our sponsor Kyndryl:
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
I am delighted to announce a brand newsponsor on the Innovation Show before we
(00:03):
get started with this brand new series.
These guys are a joy to work with.
They were the headline sponsor forthe recent Reinvention Summit here
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technology systems that drive advantagefor the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched
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Kyndryl helps leaders harness thepower of technology for smarter
decisions, faster innovation,and a lasting competitive edge.
You can find Kyndryl, that'sK-Y-N-D-R-Y - L at Kyndryl.com.
with that.
Good news.
Let's get started with some more.
Our guest today is a true pioneer in hisfield, a man whose groundbreaking work has
(00:48):
influenced generations of thought leaders,business executives, and scholars.
Back in 1970, he published Managingthe Resource Allocation Process,
a seminal work that highlighted afundamental but often overlooked truth.
Organizations are shaped byboth social and economic forces.
While economists focus on financialdecisions and sociologists on social
(01:12):
structures, too often these twoperspectives remain disconnected.
Yet in the real world, economic planning,budget cycles and even innovation are as
much social and decision making phenomenaas they are strategic and economic ones.
Over 35 years later, he wrote today'sbook, believing We Still Have Not
(01:33):
Made Enough Progress in understandinghow these social and economic forces
interact to shape organizations.
His work, including today's book,continues to bridge the critical
gap offering a deeper understandingof how resource allocation drives
strategy and decision making.
His intent in writingthis book is threefold.
(01:54):
to communicate the unique characterof the resource allocation process,
and its link to strategy throughthe development of a formal model.
Second, to show how this model has evolvedover 30 years of research development.
And third, to better connect theresearch on resource allocation to
the field of strategy as a whole,
(02:15):
it is an absolute honor to welcome thehit maker, a man who has inspired so
many of the world's greatest thoughtleaders, authors, and business leaders.
Welcome to this series on theresource allocation process, and
in particular on this book fromResource Allocation to Strategy.
Welcome to the hours ofBower, Joseph L. Bower.
(02:36):
Well, Aiden, it's a great pleasureto be here and I really have enjoyed
getting ready for this session andlooking at the book from resource
allocation to strategy thinking about35 years of work with, wonderful people.
I mentioned the hit maker, andlet's explain that because there's
(02:58):
so many great people in here.
And you worked with them intheir early careers as well.
So Clark Gilbert, who will haveon the show, Robert Bergman, Yves
Doz, there's so many of them thatyou worked with in the early days.
Let's just
tip the hat to those guys before weget into the origin of this book.
And it came from
your original work, the 1970 study of the
(03:18):
anonymized company national products.
Was so much fun.
I think the way to put it manyof them were doctoral candidates
and I supervised their thesis.
Bergman I think he was at Columbia, butI recommended that Stanford hire him.
And then the others that aren't in theHarvard Business School ecology if you
(03:43):
like I met over the years at a academicmeetings and some of them that you had,
I think of them as sort of grandchildren.
So Gary Hamel really worked with CKPrahalad, and Prahalad was a, doctoral
student . Anyway, it all goes back I wasa studying economics as an undergraduate
(04:05):
at, Harvard and then went on to getan MBA at Harvard Business School.
My father lawyer in New Yorkwould go to the Harvard Club for
lunch and met a man who was chiefeconomist of national products.
And they became frieKyndryly and.
This guy said, wow, you're,I'd like to meet your son.
(04:26):
And so I began talking with himabout how economics was used
for both long-term planning.
And then I, had gotten very interestedin the capital budgeting problem
and bless his soul, he said, fine.
And he started introducing meto staff at national products.
(04:50):
I still remember it.
I was sitting with my late wifeat the Boston Symphony and I was
thinking about this problem of capitalbudgeting and how I was gonna study it.
And it occurred to me the operating unitsare making requests for capital and that
(05:12):
constitutes a portfolio of requests andcorporation has to choose the best ones.
And those are two differentviews of the world.
And they weren't consistent.
on clay Christensen wouldcall that an anomaly.
so I wanted to study it I went to theDean of the business school at that
(05:37):
time, George Baker, and asked him ifhe would help me get access to the
chief executive of national productsso that I could do my study and he did.
And said, of course, the chiefexecutive and asked the chief
economist, who is this guy?
And so, but I had his recommendationand the Dean, so we said yes,
(06:01):
and they gave me complete access.
Then the question was how to useit and another of their top staff
that worked on the capital budgetingprocess he and I became intimate.
He was my seeing eye dog.
He helped me understand and that'show we picked four projects.
(06:22):
And what that meant was they letme literally talk to everybody,
sit in on any meeting that I could.
And they were very good about it.
'cause once they found that I wasn'tinterfering, but I just was curious.
In a funny way, they were flattered.
Most people go through lifewithout other people being really
(06:46):
interested in what they do.
But they thought that was great.
And so they
let me study.
I mean, I became so frieKyndrylythat after meetings at, places, I
remember in Ton one New York, I,there, I stayed up until two or
(07:06):
three playing poker with these guys.
So I felt pretty comfortable thatI understood what was going on.
And that led to four, if youlike, what I called field reports.
Each one was about a hundred pages.
And then the problem was tomake some sense of what it was.
(07:30):
that led to the model.
, But the basic finding was.
In a funny way, quite natural and obvious,these guys were working very hard to
do what they thought they were paid todo, what they thought their job was.
(07:50):
I shouldn't emphasize pay first.
They were doing what theythought their job was.
And it was in their job description.
It was in the definition of theirorganizational units and what
they were tasked with doing.
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And the first thing that I noticed,which was in its own way, not original,
but it was important, the forecasts werebeing made by the sales organization and.
costs were being estimated inmanufacturing and if it would involve
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new things, that analysis and costsand economics was provided by r and
d and they'd be in meetings and theyhad to reconcile real differences.
And the differences is I felt andI began to understand and then when
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I'd interview them, they would agree.
In manufacturing, when they're lookingout ahead, what they're worried
about is using up their capacity.
They do not wanna have emptyfactories, sales wants to grow,
and the last thing they wanna beis out of product and engineering
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wants to implement their new ideas.
And a little less concerned howlong it takes to implement than
either of the sales forces, andso they'd have to compromise and
being human beings it, it, varied.
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And the next thing it turned outthey worked for a general manager.
What we came later to callgeneral managers in the middle.
And the general manager running abusiness that he wanted to succeed.
because he was in a large corporation,one of his goal was to be promoted
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to rise in the organization andbecome a higher level general manager.
And eventually in the corporation.
They were very clear that the basison which they were being judged was,
on the one hand, the success of thecurrent success of the business,
(10:28):
but also their judgments aboutthe future of a business correct.
if they were given resources, theydeliver on what they had promised?
Until we get into the dotcom era,most people really understood
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what delivering on a promise was.
And it was really important to do that.
So that's how they made their judgements.
And in turn I, sat in on the meetingand I, would talk, to the chief
executive , and he would say, look,when we go into the planning process
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and, capital budgeting, I havedozens of these plans to look at.
So first of all, they tendto be aggregated by a group
manager or something like that.
I don't see everything.
of all, I don't really have thesubstantive knowledge to understand,
I remember one group, vice presidentsome parts of the business were
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Chemical and he would say, well,can this get under the pipe rack?
And so what he had was a visionof a, chemical operation where
new pipes would have to get under.
And that was a level of detail andnonsense was totally inappropriate.
Anyway.
this was nothing like what the theorysaid it was, it was quite reasonable.
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And in a sense when you backed up andthought about it if all that effort
that I was observing going intoplanning did not result in anything.
That was a terriblewaste of managerial time.
So, in fact, what you wanted wasexactly what I was watching, and it
had to be efficient and well guided.
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Moving on a little bit, once my ideaswere out and I won the McKinsey Award
for the book and to give him credit,Bruce Henderson and his colleagues
at BCG had seen this and they haddone research on what made businesses
successful and it wasn't the five forces.
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It had to do with, in their view, in thelarge industries , it had a lot to do with
market share, so relative market share.
But then their idea was you can'thelp a company if you're giving money
to businesses that simply aren'tstrategically competitive . and this
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resonated as the head of nationalproducts said when I try to get out
of a business, because it seems tous that strategically it doesn't make
sense anymore . All I do when I askmanagement for a plan to get out a plan
to spend more money to fix the business.
(13:30):
And we saw a decade later, companiesbegin that whole process of selling
businesses, restructuring LBOs.
And so, but that's responsive tothis idea that there were large
corporations that were simply growing.
At one point each part ofthe business was growing.
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I never tested it, but I had ahypothesis that you could predict
the resource allocation based onthe size of the engineering staffs.
' cause they were the ones thatwere preparing proposals.
And I hope you get to talk with DonSull because when he was studying
in the tire industry and whatyou had was radial tires really
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growing and bias tires disappearing.
And there were companies investingin both at the same time.
it was just very hard to exit.
So that was the Origins of thestudy and what was involved.
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And then in putting the booktogether, , the question was data.
So I reduced these a hundred pagestudies to chapters and it worked.
and it still works.
Joe.
told you before we came on air.
It's one of the reasons I want to capturethis work because people tend to move on.
And what I found with the work withall these books is a lot of the
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more modern books are just summariesof stuff that's come before.
And I'm like, well, whynot go to the source?
yeah, when I was reading.
You may wanna drop this or not.
I was reading, I was thinking youknow, this really helps explain
why we're having such problems ingovernment, because government is
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also a multi-business operation.
And right now in the UnitedStates, behaving in ways that
no company would ever imagine.
absolute madness, you can pick it out.
On the other hand, the models alsoactually quite good for understanding why
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Elon Musk was so successful with Tesla andhe is really way out at the edge of some
of the new ideas at the end of the book.
What he's been able to do is takea process that was very slow.
And he gets involved in everything andhe's also changed the whole evaluation
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structure because literally on bigdecision says, look, this is mine.
If it goes wrong, it's on me.
And that changes the whole structure.
And I mean, later, it's not in thebook, but I, saw a group Vice presidents
fired because they had made decisionswhere they told their boss it's 50 50.
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boss said, well, what should we do?
And they said, we'll do a, later,they were fired for doing a, I mean,
you can't have a great company whenthat's the nature of the process.
your point on Musk I, wantedto share this 'cause I didn't
know about this law, Miles's law
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yeah.
Rufuss miles, and essentiallywhat it means your, stand
depends on where you sit.
I love that,
Where
you stand as a function of where you sit.
to simplify this before we start to givesome examples, let our audience, for those
of you just listening to us, which ismost of the audience, it's three people.
One of them is sales, one of 'emis r and d. One of them's finance.
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The sales person's going, we needmore funds for sales and marketing.
R and D persons, we shouldinvest more in innovation in r
and d and the finance persons.
We need to cost costs, and this isone of the core components of the
problem, is that nobody's a badguy or girl in this situation here.
They're actually doing what they thinkis best and I think that empathy Joe.
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Many of our audience are working inchange or heads of innovation and, we
often see the head of finance or thehead of sales as the enemy, but actually
they think they're doing what's bestfor the company and, I think that just
your view on that is so important.
If nobody gets anything else out,it's to have empathy for the other
person and to realize you need tosee it through their eyes as well.
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They are correct each one, even thoughthey completely disagree, but each one in
its from their own perspective is correct.
So that really helps you understandwhat a manager has to do.
Is take those inputs andget to one perspective
you mentioned Musk there, and I findthis Joe with, family owned businesses
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where the people in charge of thebusinesses are actually really care
but, because they're also across somuch, many parts of the business, their
view, that problem with Miles's law isreduced because they can see beyond silos
and they can have a more overall view.
And that idea of bottom upversus top down becomes closed.
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The, gap becomes more closed and itbecomes easier to make decisions.
it is.
It's one of my mentors.
John Lintner, a great economist talkedto me about the Cabot Corporation and
he said, what's interesting is Tom Cabotknows everything about that company.
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And , the point is it's afamily organization and it's a
very narrow range of products.
actually Bob Ackerman wrote athesis we drew on later, where he
compared single product organizationsto multi-product organizations.
And it was true that in single productorganization, the same three levels of
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activity were going on, but the layersof or of structure were compressed.
In effect, they worked as a team andlater on there's a wonderful, a Fortune
magazine study of IBM 360, whichrevolutionized the computer . And Tom
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Watson got something like 16 peopleoff to his ski lodge for a week.
And it included, Nobel Prizewinning scientists, unbelievably
powerful managers and thinkers,salespeople, and they worked on the
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development of the plans for the 360.
So yes that, where you have asingle product line and a family
power, can really get things.
Also, they are also often owners,so you don't get the pressure of the
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stock market for current earnings.
And you, they can, they are able toactually make the kind of decisions that
we think great co companies should make.
let's bring it on to the case studies ofOpel I, absolutely love this case study.
It was the first time I heardof it and I absolutely loved it.
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It really nails the challenge.
And then to your point about not only doyou have multiple products, but you're in
multiple countries with multiple brands,, the map is not the territory and if the
strategy's coming from the top pusheddown and locally, you have to obey that.
It's gonna be all wrong.
So I'll tee you up maybe Joe witha, an excerpt here the fall of the
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Berlin Wall on the 9th of November,1989 was a watershed event, although
400,000 Soviet troops remained in EastGermany and the economy was completely
cut off from the west by separatelaws and non-convertible currency.
It was clear that the economictectonic plates were going to shift.
The East German market would open.
How should a major multinationalmanufacturer of consumer goods
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respond to events that clearlyaffected their business in Europe?
Conventional thinking about corporatestrategy would lead one to imagine
the process of making strategy tobegin with the assembly of a corporate
level task force to study the demandand competitive conditions in the
market that would soon be opening.
Some assessment of strengthsand weaknesses and opportunities
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and threats would follow.
This analysis would provide thefoundation for plans to enter the
market in a way consistent with thecorporation's strategic thinking about
the global competitive situation.
On the basis of that analysis,the parts of the organization
responsible for business in Europe,or more specifically West Germany,
might be asked for proposals.
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To the extent that these proposalswould involve commitment of significant
amounts of capital, their projectedprofitability would be assessed by
financial star staff and compared withcorporate targets or hurdle rates,
strategic choices would be the resultof a managed process of analysis, but
considered what actually happened at Opel,the division of General Motors responsible
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for auto production and sales in Germany.
Joe, over to you.
Okay.
Well the key to this story is thatright about that time before the
wall came down the vice Chairmanof General Motors Jack Smith asked.
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one of his key people in thefinance group, and he asked.
Lou Hughes a very good guy, happenedto, have a case because Lou had
been at Harvard Business School togo over and run Opel bought, they
had bought it in the 1930s whenthey were expanding into Germany.
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And it was the number two companyin Germany to number one was
much bigger with Volkswagen.
And his job was basically.
get Opel to shape up.
And then the wall came down
and it's very interestinghow Jack haKyndryled this.
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He called up Lou Hughes and Isaid, Lou, what are you gonna do?
And in a certain sense hesaid, what are you going to do?
So he gave the ball to LouHughes and Lou took it and ran.
. First thing, okay, wellwhat is the situation?
Tell me about East Germany.
And so part of his market researchwas interviewing people who had come
(24:29):
across from the east into the west.
And
That provided him with someunderstanding of what the market
was, what the market wanted.
And then the second thing he did,he got in, German companies, you
have something called a Vorstand.
So each of these people who sits ina different chair, marketing, sales,
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whatever, manufacturing it sits aroundthe table and he asked them for a plan
and they gave him a plan that's typical,which was, here's how Opel can grow
using conventional thinking about Opel,which was to be number two in Germany.
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That's what they wereand they were gonna grow.
But Volkswagen had leaped ahead and theywere going to buy the entire East German
automobile industry, which in the Sovietmodel was just one company, the Combinant.
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And he said, no, I wantplans to have us, number one.
So the first thing is he understoodnormally, when they plan, they
project from the past and he wantedthem to think about the future and a
future where they were, number one.
And based on what they werelearning, they began to concede.
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it was very clear that what wasgoing to be important was to have a
distribution network in East Germanybecause they did not have one.
So rather than buy.
Part of the commandant, he got a hold,essentially independent entrepreneurs
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had automobile shops or whatever forfixing cars that were no new cars for
like how many years under the East
german.
German.
And , they loved the ideaof becoming distributors.
So they were all excited.
And then , one of the guysin, the union was talking to
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a friend of his in Eisenach.
Eisenach is a town east rem,but it's where Bach was born.
And it turned out the Eisenachplant was the, ugly duckling
in the, big East German system.
So they began negotiations to buy itright out from under the commandant.
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And, how did that happen?
Well, partly Hughes had a,habit literally far as the top
management is going disappearing.
And if they wanted to find him,they'd find him on the factory
floor talking to workers.
So naturally the relationship betweenthe union and Hughes became much better
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because I. He talked to them, he thoughtthey were smart, they had ideas and so
he picked up on that and he said Go.
And they negotiated,they bought the factory.
He'd also developed arelationship with Helmut Kohl.
After all, he was the head of thenumber two company in West Germany.
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it was quite appropriate that the headof General Motors in Germany deal with.
Lou was a very charming guy and hemade a point of trying to speak only in
German, and Kohl thought that was great.
Hughes worked very hard at learningGerman, that also helped him
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when he was on the factory floortalking to union workers, and.
Anyway, to make a long story short, heintroduced a new Opel, faster than General
Motors, introduced a new card that was,it was introduced at the Berlin Auto Show.
The advert was totallyabout the environment with
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I'm trying to remember the, one of thegreat jazz singers it's, the song was
a, it's an, it's a beautiful world.
Armstrong is it?
Louis Armstrong.
Very good.
Thank you, Aiden.
And then another one was allabout high tech technology.
But you know, they didn'tshow beautiful cars.
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But that's what they'd learned in theirresearch, and it was a great success.
Now the key thing here.
It's the General Motors corporate wasfreaking out because they were not dumb.
They were thinking, how arewe going to compete globally?
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And they were focused on theidea that they would have a
network of low cost producers.
And Germany did not fit that idea.
they were really upset because investingin Eisenach meant going exactly again.
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So it was big fight.
And Jack Smith decided to back Lou Hughes.
From the perspective of 20 or 30years, it's not even clear if that was
a great decision for General Motor.
But that's what happened.
Because in a sense, Smith wassaying, look, if we're gonna have a
(30:11):
company there, it's gotta be a strongcompany, a good, the guy I sent
who's very good said This is whatwe should do, so I'm gonna back it.
And
that's what happened.
And I learned later, by the way, footnote,when I was interviewing at Toyota, had
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long, long, long ago felt bad if theywere gonna have a global business.
They had to have a local presence.
So they built Fremont and some alltheir plants in the United States, in a
funny way, had more American companiesthought like Toyota they'd have more of
a presence here in the United States thanthe, you wouldn't have this tariff issue
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that thing, Joe, you said about theother frontline managers getting fired
'cause they picked A instead of B.I often think about that idea that.
Like, like you have to back something.
And you know, Sven Smit, who'sbook strategy beyond the Hockey
Stick I had, him on the show.
He said, imagine you're a police chiefand you're trying to hunt a killer,
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and you send out four teams, andone of the teams finds the killer.
He goes, are the other three punished?
Because they didn't find 'em.
He said it's, kind ofa little bit like that.
It's it's, and this is the idea ofemerging versus deliberate, because.
What Lou Hughes did there was he was,feeling his way towards the success
based on the information he had at hand
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. But it's what we all do if we're smart.
When we're in a new situation,we don't sit there doing nothing.
We start acting.
But if we're clever, we plan step bystep and we learn from each step . And
that's in effect what he was doing.
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He, was running anexperiment and it succeeded.
And then so it, another way ofputting this is one of the managers
at national products said to me,you know, I always worry when I
give one of my good people $10,000.
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Now remember, this is 1960s, so.
Because with what they learn from$10,000, they then can get me
to give them a hundred thousand.
And with that I'm on my way and thenthe next thing I'm in that business.
So it's that, yes, incremental representslearning and testing, but you gotta be
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sure if you like where the endpoint is.
And in one of the four cases
it was the only one that didn'tget approved because in effect
they were taking national productsinto direct competition with
one of their major customers.
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And , that did not make sense.
They could have saved the team a yearor two if they had simply explained it.
, one of the things there, reallysubtle piece of the pie is I thought
about, say Hughes, he's on the ground.
He's there where's Hughes?
Why is he not in his office?
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And, I've seen this and I've been thisperson as an executive before where
I. You, you may spend a lot of time onrelationships or like the work he did
speaking German or building relationshipson the floor or with Helmut Kohl and,
that work, there's no metric for that.
And, so many times you see people inorganizations where new leadership comes
(33:56):
in, they go, Hey, what does Bower do?
And the, like, you're trying to struggleto go, oh, he, you know he's responsible
for innovation and new products.
And then we go, but what,has he delivered lately?
And, you can't put a metric on it.
And they're going, oh,let's get rid of Bower.
Yeah.
and it's only when you're gonethat you see the damage that was
caused 'cause of all these liaisons.
(34:17):
This kind of connective tissuethat you have across the
organization just gets taken away.
Well, absolutely, and this is today.
I mean, it was not as obvious atthe time we were writing the From
resource allocation to strategy.
But once CEOs became very, closelyassociated with earnings per share,
(34:43):
short term, their time horizon shrunk.
So it's, it, remember talking, I did workat GE and people said a afterward, the
one thing Jeff Emel said is, Jack changedthe time horizon of GE to two years.
(35:10):
We didn't invest in things that weren'tgoing to be paying off beyond two years.
You have no runway
. and GE had been a great technologically innovative company,
but he killed a lot of that.
a lot of what they did was buy their,much like the pharma companies that buy
(35:34):
their research in these small companies.
Speaking of buying Joe let'suse that as a, segue to Timken.
'cause when you buy, you can have.apleasant surprise or a bag of snakes.
Yeah.
In the case of Timken it, totally changedthe entire strategy was in a way, it was a
bottom up acquisition rather than top down
(35:59):
. They bought
it to block their competitor.
They didn't buy it because they wantedit , but they learned, I mean, that
what's so important in this is that.
It's not all bottom up.
It has to be top learning as well,because then top can adjust and
they can help the other group.
(36:20):
So it's really back and forth.
And it really helped Timken.
It gave themhem another 10,15 years because they adjusted
their strategy appropriately.
and that was a big deal.
Will, I give a little bit ofcontext for the Timken case to
just help our audience here?
(36:41):
Oh, sure.
Well, Timken was one of , thefounders of the roller bearing
industry and they had a major positionsupplying the big three in America.
They had very high standards of quality,I mean, above the ISO standards.
(37:02):
And, they moved overseas and theirbasic approach was to give the customer
exactly what the customer wanted.
So in a sense, they had a , portfolioof niche products and , they
bought a subsidiary in Polandto keep SKF from buying it.
(37:23):
And the product there was prettygood, but it only met ISO standards.
so back in Ohio, they thought it was crap.
but it turned out the peoplein the Polish subsidiary were
able to sell it to Peugeot.
so they began building thatbusiness and then the people back
(37:45):
in Ohio said, well, wait a minute.
This isn't all wrong.
but then they didn't just stopto their credit, they then
said, well, what does this mean?
And what it meant was that theycould begin to standardize products
at different levels of quality.
And rather than having a huge productline, they would have a much more
(38:08):
narrow product line, which gave themlower costs and they , were able to
deliver at the level of quality theircustomer wanted, which fast forward,
brings us towards the kind of research,particularly Clay Christensen discovered.
Clay came to Harvard Business Schoolfrom business, fascinated by the
(38:33):
fact that great companies failed.
Why would a great company fail, particularly when the competition
was inferior, the competitioncouldn't do what the big company did.
And what he discovered is whathappened was the new company couldn't
(38:54):
compete at those high levels.
it had a new technology.
Usually the feature was that it wassmaller or cheaper, and that meant it
could be used in a different applicationinstead of a mainframe computer.
It could be used in a telephone . Andwhat it meant was that You had
(39:16):
to have a resource allocationprocess that could develop that
new technology in a new market.
And then of course, over time it wouldimprove and improve, but coming in at
low, much lower cost than the existing,and it would disrupt to use Clay's word.
(39:42):
Clay and I were talking abouthis data, and he was just
really perplexed.
And I asked him if this was sortof like the resource allocation
process, because it sounded as ifthe forecast would not justify the.
(40:03):
The investment and he said,you got all excited left.
And, you know, build a, staggeringcareer on that basic observation
that essentially you can't let yourcustomers capture your process.
(40:25):
I love that.
And customer captivity.
Clark Gilbert will be on and there'sa chapter of the book that's written
between Clark and Clay as well.
So we're gonna cover.
And Clark's gonna cover that.
Okay,
A great friend of Clay as well.
But I, there was a little pieceI wanted to, pull that just as a
nice annex to the Timken story.
You say here how resources areactually allocated and used
(40:48):
determine strategic outcomes, notthe words on paper or policies.
Yours, 1970 study reports an incidentwhere a corporate comptroller
discovered that a factory hadbeen built by a division without
approval by the corporation.
Division management believed thatthe business required the facility.
That corporate would not approve it.
(41:09):
They used hundreds of small work orders tocircumvent the capital budgeting process.
Yeah.
here you talk about as well, the reallyimportant book, the Graham Allison's
account of the Cuban Missile Crisis.
That provides a dramaticexample of the same phenomenon.
Maybe we'll share that because this ideaof positive deviance is interesting.
(41:29):
The whole idea, and we talk aboutthis often on the show, that
sometimes it's easier to askfor forgiveness than permission.
It It doesn't alwayswork out in your favor.
Sometimes you get fired for that.
Well, Cuban Missile Crisis, youhad the US Navy playing a very,
important role.
(41:51):
And the US Navy just fast forward,never cooperated with McNamara.
did what they had to do to survivebureaucratically, but basically
they didn't do what he wanted.
So he had literally come into theNavy operation control room and
(42:15):
they asked him to please leavethey knew how to run a blockade.
And he said, I don't wanna knowhow John Paul Jones ran a blockade.
What are you doing?
Anyway, had my mine sweepers outdestroyers out bringing submarines up.
(42:39):
I mean, they were.
Essentially ignoring the fact thatwe were trying to get peace without
a war and they were doing followingtheir routines and which is bottom up.
All right.
But it could be a disaster.
It's
I mean you gotta change, Iwould say, and we've clay looked
(43:05):
at the field of education.
A lot, of the problem we have witheducation here, but also many countries
is we're teaching the same way theydid in Bologna in 13th century.
I mean, I've been at you, if yougo to the OR in Padua, you can
(43:25):
see where Galileo taught where, Imean, it's, nothing has changed.
Blackboards, amphitheater, theater.
so it's very important not tobe captured by the bottom up.
And tell us about the 1970, about the,factory that was built, because I'm not,
(43:47):
we're not, by the way, we're not condoningthat people go and build factories here.
Oh no.
Well that worked.
It was just, that's when it happened.
That was one of the early, before Istarted the national product story.
I heard that story and it was just,
what would you do if you were runningsomething and you had responsibility
(44:08):
and you knew the people upstairswere so stupid, they didn't even
know it would take two years to dosomething the competitors would get.
So you do it.
That's, you show entrepreneurshipand frankly, when you do that and
it works, you tend to get rewarded.
(44:30):
And they take credit up there.
That's also happens.
Yes.
There's a great quote by GeneralStanley McChrystal I, was, reminded
of it as I read this chapter.
He was talking about it here wherethey'd work to have the perfect plan,
and what he said was, the world hadoutpaced us in the time it took us to
(44:50):
move a play from creation to approval,the battlefield for which the plan
had been devised would've changedby the time it had been implemented.
The plan, however, ingenious inits structure was outta date.
So this is what he was saying.
But I thought this was so importantfor you, for what you said,
facts are always being created atoperating levels that enhance or
(45:12):
undermine corporate initiatives.
The opportunity to pursue Eisenach.
, The plant we talked about was developedby one of the leaders of Opel's
Union organization in a conversationwith a relative in East Germany.
Conversely, corporate initiatives oncelaunched often gain a momentum that
makes their implementers oblivious tonew developments and changing conditions
(45:33):
, that piece of, okay, strategies made upin the boardroom or with consultants.
But there's people on the groundthat have an opportunity, they have
a shot on goal and they have to takethat shot when they have the chance.
Like if you have a meeting with thechancellor, you take the meeting,
you don't wait for approval.
Otherwise you're gonna lose all theselittle nuances that happen the whole time.
(45:55):
I'd love to share that bit of a, mismatchbetween the timing of the corporate
strategy and the actions on the ground.
Well it, is particularly pernicious inthe military where you have military
specs and then by the time you have thenew weapon system, 10 years has passed.
(46:21):
in the extreme you have our airportcontrol system where we're using
very old stuff because we can'tget new stuff through Congress,
which is it's resource allocation.
There is no intention tohave a screwed up system.
But it doesn't matter what your plans onpaper are or what your, if you don't spend
(46:47):
the money and use it, well execute well.
have a disaster.
And I mean, a friend of mine, oneof the best top consultants of
McKinsey described, he had beenworking for the British Chemical
Company ICI for at least two decades.
(47:07):
And he, was Levi, he went in tosee Harvey Jones, who was, had
been the, a great chairman of, and
Harvey Jones reached in his setdesk drawer, pulled out, and he
said, Henry, here's your report.
He said, it was really brilliant.
(47:28):
We haven't done it.
It's hard.
It's hard.
And it could be insulting as well.
It.
Yeah, well, there's a, another aguy who Bobby Malpas was the head
of BP Chemical, and he wrote anarticle in Harvard Business Review
(47:51):
called Building the Plant After Next.
And his idea was that it is natural thatyou're, when you're planning the next
plant to put into it the improvementsthat you have, but it takes time to
build a plant and execute what you wantis the plant you would build after that.
(48:18):
And that captures this.
The, strategic problem is to uselearning to move fast, to make
quantum moves, not, and it's hard.
a lovely thing happened.
My, my son, my older son's, 15 and unfor.
(48:38):
Fortunately, I used to play Rugby Joeand he doesn't, he didn't choose rugby.
And I was like going, yes, no concussionsfor him like me, but instead he is
taken up MMA and I'm like oh, that.
Well, at least in rugby you gota bang in the head by accident.
But he, he said it, he, so he is only 15and he said to me a great thing recently,
he said he beat this guy in a fight.
(48:59):
And he said the differencebetween me and him was.
He was fighting to win andI was fighting to learn.
And I, thought of this chapterand that idea that it's, a,
chess move to get feedback.
It's an action, as you say.
You have to take the actionto get the feedback and
why we have chess on the cover.
nice.
I didn't get that, man.
(49:21):
Yeah, I love it.
But, maybe we'll finishon this last piece 'cause,
okay, because I have to go to,
Yeah, the structure piece, becauseyou say here the, because the reality
of strategy is the result of resourceallocation and because resource
allocation is substantially influencedby structural context, we learned
that structure drives strategy.
Throughout the book, we will see howthe structure of previous internal
(49:44):
commitments to reporting structuresto strategy statements, et cetera,
and external commitments to customersin capital markets, constrain
changes in resource allocation andconsequent changes in strategy.
That is such a key paragraph, and Ijust love you to expand on that as
our mic drop moment for this episode.
(50:05):
Well in the end of the day, goingback to one of the first things I
said, people try to do their job.
So
how their job is defined, how it'smeasured and how it's rewarded is
quite critical if people have to beheroes to do what they see to be right.
(50:30):
So what you need, and it's reallyhard, you need to be able to
keep an organization moving.
of the great things that happenedbetween 1970 and today is that what
used to be 10 layers between anoperating business and the top of
(50:52):
the corporation is now two or three.
And, that means informationreally can move., So then if you
have leadership that understands
the importance of adjustingas they're learning.
(51:18):
It, works.
I was gonna suggest earlier, if youwant, you should one of Tomo Noto's.
Great.
He did a study of the way the sevenoperating companies of the of bell
telephone phone dealt with theirmark at almost identical companies.
How did they deal with cell phones?
(51:41):
And in one of the most successful,they did the normal studies
and the results weren't that
And the CEO said, okay,change the assumptions.
Because he was quite persuaded.
He didn't know, but he was quitepersuaded it was gonna change.
(52:03):
And the easiest way of doing itwasn't to change the whole system,
just change the assumption.
of course, they ended up theleader in the cell phone field.
And so it's management it'sWhy is management difficult?
(52:24):
In part because you have to keep learning.
You have to give people the roomso they can operate and learn.
You have to keep it coherent.
It's like a team, you and even starathletes understand they can't win if they
(52:48):
aren't, if the team doesn't support them.
it's a very it's, a challenge and it'sfun and we're learning more and more.
and it's a pleasure to learn from you,man, and to revisit this brilliant book
from resource allocation to strategy.
Thank you for joining us for Part one.
Joe, I know you're gonnabe back onto this series.
(53:09):
We're gonna get through, we havesome of your guests on, some of
them you're gonna join as well.
Right.
And it's been an absolute pleasure,author of from Resource Allocation to
Strategy and creator of the RAP theory,Joe Bower, thank you for joining us.
Thank you, Aidan.
It's a pleasure.
And thanks again to our sponsors, Kyndryl.
Delighted to say it.
(53:29):
they run and reimagine the technologysystems that drive advantage for
the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched
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You can find Kyndryl at www.Kyndryl.com.
I am delighted to announce a brand newsponsor on the Innovation Show before we
(00:03):
get started with this brand new series.
These guys are a joy to work with.
They were the headline sponsor forthe recent Reinvention Summit here
in Dublin, and they are Kyndryl,Kyndryl, runs and reimagines the
technology systems that drive advantagefor the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched
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You can find Kyndryl, that'sK-Y-N-D-R-Y - L at Kyndryl.com.
with that.
Good news.
Let's get started with some more.
Our guest today is a true pioneer in hisfield, a man whose groundbreaking work has
(00:48):
influenced generations of thought leaders,business executives, and scholars.
Back in 1970, he published Managingthe Resource Allocation Process,
a seminal work that highlighted afundamental but often overlooked truth.
Organizations are shaped byboth social and economic forces.
While economists focus on financialdecisions and sociologists on social
(01:12):
structures, too often these twoperspectives remain disconnected.
Yet in the real world, economic planning,budget cycles and even innovation are as
much social and decision making phenomenaas they are strategic and economic ones.
Over 35 years later, he wrote today'sbook, believing We Still Have Not
(01:33):
Made Enough Progress in understandinghow these social and economic forces
interact to shape organizations.
His work, including today's book,continues to bridge the critical
gap offering a deeper understandingof how resource allocation drives
strategy and decision making.
His intent in writingthis book is threefold.
(01:54):
to communicate the unique characterof the resource allocation process,
and its link to strategy throughthe development of a formal model.
Second, to show how this model has evolvedover 30 years of research development.
And third, to better connect theresearch on resource allocation to
the field of strategy as a whole,
(02:15):
it is an absolute honor to welcome thehit maker, a man who has inspired so
many of the world's greatest thoughtleaders, authors, and business leaders.
Welcome to this series on theresource allocation process, and
in particular on this book fromResource Allocation to Strategy.
Welcome to the hours ofBower, Joseph L. Bower.
(02:36):
Well, Aiden, it's a great pleasureto be here and I really have enjoyed
getting ready for this session andlooking at the book from resource
allocation to strategy thinking about35 years of work with, wonderful people.
I mentioned the hit maker, andlet's explain that because there's
(02:58):
so many great people in here.
And you worked with them intheir early careers as well.
So Clark Gilbert, who will haveon the show, Robert Bergman, Yves
Doz, there's so many of them thatyou worked with in the early days.
Let's just
tip the hat to those guys before weget into the origin of this book.
And it came from
your original work, the 1970 study of the
(03:18):
anonymized company national products.
Was so much fun.
I think the way to put it manyof them were doctoral candidates
and I supervised their thesis.
Bergman I think he was at Columbia, butI recommended that Stanford hire him.
And then the others that aren't in theHarvard Business School ecology if you
(03:43):
like I met over the years at a academicmeetings and some of them that you had,
I think of them as sort of grandchildren.
So Gary Hamel really worked with CKPrahalad, and Prahalad was a, doctoral
student . Anyway, it all goes back I wasa studying economics as an undergraduate
(04:05):
at, Harvard and then went on to getan MBA at Harvard Business School.
My father lawyer in New Yorkwould go to the Harvard Club for
lunch and met a man who was chiefeconomist of national products.
And they became frieKyndryly and.
This guy said, wow, you're,I'd like to meet your son.
(04:26):
And so I began talking with himabout how economics was used
for both long-term planning.
And then I, had gotten very interestedin the capital budgeting problem
and bless his soul, he said, fine.
And he started introducing meto staff at national products.
(04:50):
I still remember it.
I was sitting with my late wifeat the Boston Symphony and I was
thinking about this problem of capitalbudgeting and how I was gonna study it.
And it occurred to me the operating unitsare making requests for capital and that
(05:12):
constitutes a portfolio of requests andcorporation has to choose the best ones.
And those are two differentviews of the world.
And they weren't consistent.
on clay Christensen wouldcall that an anomaly.
so I wanted to study it I went to theDean of the business school at that
(05:37):
time, George Baker, and asked him ifhe would help me get access to the
chief executive of national productsso that I could do my study and he did.
And said, of course, the chiefexecutive and asked the chief
economist, who is this guy?
And so, but I had his recommendationand the Dean, so we said yes,
(06:01):
and they gave me complete access.
Then the question was how to useit and another of their top staff
that worked on the capital budgetingprocess he and I became intimate.
He was my seeing eye dog.
He helped me understand and that'show we picked four projects.
(06:22):
And what that meant was they letme literally talk to everybody,
sit in on any meeting that I could.
And they were very good about it.
'cause once they found that I wasn'tinterfering, but I just was curious.
In a funny way, they were flattered.
Most people go through lifewithout other people being really
(06:46):
interested in what they do.
But they thought that was great.
And so they
let me study.
I mean, I became so frieKyndrylythat after meetings at, places, I
remember in Ton one New York, I,there, I stayed up until two or
(07:06):
three playing poker with these guys.
So I felt pretty comfortable thatI understood what was going on.
And that led to four, if youlike, what I called field reports.
Each one was about a hundred pages.
And then the problem was tomake some sense of what it was.
(07:30):
that led to the model.
, But the basic finding was.
In a funny way, quite natural and obvious,these guys were working very hard to
do what they thought they were paid todo, what they thought their job was.
(07:50):
I shouldn't emphasize pay first.
They were doing what theythought their job was.
And it was in their job description.
It was in the definition of theirorganizational units and what
they were tasked with doing.
(08:12):
And the first thing that I noticed,which was in its own way, not original,
but it was important, the forecasts werebeing made by the sales organization and.
costs were being estimated inmanufacturing and if it would involve
(08:37):
new things, that analysis and costsand economics was provided by r and
d and they'd be in meetings and theyhad to reconcile real differences.
And the differences is I felt andI began to understand and then when
(08:57):
I'd interview them, they would agree.
In manufacturing, when they're lookingout ahead, what they're worried
about is using up their capacity.
They do not wanna have emptyfactories, sales wants to grow,
and the last thing they wanna beis out of product and engineering
(09:18):
wants to implement their new ideas.
And a little less concerned howlong it takes to implement than
either of the sales forces, andso they'd have to compromise and
being human beings it, it, varied.
(09:39):
And the next thing it turned outthey worked for a general manager.
What we came later to callgeneral managers in the middle.
And the general manager running abusiness that he wanted to succeed.
because he was in a large corporation,one of his goal was to be promoted
(10:05):
to rise in the organization andbecome a higher level general manager.
And eventually in the corporation.
They were very clear that the basison which they were being judged was,
on the one hand, the success of thecurrent success of the business,
(10:28):
but also their judgments aboutthe future of a business correct.
if they were given resources, theydeliver on what they had promised?
Until we get into the dotcom era,most people really understood
(10:48):
what delivering on a promise was.
And it was really important to do that.
So that's how they made their judgements.
And in turn I, sat in on the meetingand I, would talk, to the chief
executive , and he would say, look,when we go into the planning process
(11:09):
and, capital budgeting, I havedozens of these plans to look at.
So first of all, they tendto be aggregated by a group
manager or something like that.
I don't see everything.
of all, I don't really have thesubstantive knowledge to understand,
I remember one group, vice presidentsome parts of the business were
(11:33):
Chemical and he would say, well,can this get under the pipe rack?
And so what he had was a visionof a, chemical operation where
new pipes would have to get under.
And that was a level of detail andnonsense was totally inappropriate.
Anyway.
this was nothing like what the theorysaid it was, it was quite reasonable.
(11:57):
And in a sense when you backed up andthought about it if all that effort
that I was observing going intoplanning did not result in anything.
That was a terriblewaste of managerial time.
So, in fact, what you wanted wasexactly what I was watching, and it
had to be efficient and well guided.
(12:22):
Moving on a little bit, once my ideaswere out and I won the McKinsey Award
for the book and to give him credit,Bruce Henderson and his colleagues
at BCG had seen this and they haddone research on what made businesses
successful and it wasn't the five forces.
(12:45):
It had to do with, in their view, in thelarge industries , it had a lot to do with
market share, so relative market share.
But then their idea was you can'thelp a company if you're giving money
to businesses that simply aren'tstrategically competitive . and this
(13:09):
resonated as the head of nationalproducts said when I try to get out
of a business, because it seems tous that strategically it doesn't make
sense anymore . All I do when I askmanagement for a plan to get out a plan
to spend more money to fix the business.
(13:30):
And we saw a decade later, companiesbegin that whole process of selling
businesses, restructuring LBOs.
And so, but that's responsive tothis idea that there were large
corporations that were simply growing.
At one point each part ofthe business was growing.
(13:53):
I never tested it, but I had ahypothesis that you could predict
the resource allocation based onthe size of the engineering staffs.
' cause they were the ones thatwere preparing proposals.
And I hope you get to talk with DonSull because when he was studying
in the tire industry and whatyou had was radial tires really
(14:17):
growing and bias tires disappearing.
And there were companies investingin both at the same time.
it was just very hard to exit.
So that was the Origins of thestudy and what was involved.
(14:38):
And then in putting the booktogether, , the question was data.
So I reduced these a hundred pagestudies to chapters and it worked.
and it still works.
Joe.
told you before we came on air.
It's one of the reasons I want to capturethis work because people tend to move on.
And what I found with the work withall these books is a lot of the
(15:00):
more modern books are just summariesof stuff that's come before.
And I'm like, well, whynot go to the source?
yeah, when I was reading.
You may wanna drop this or not.
I was reading, I was thinking youknow, this really helps explain
why we're having such problems ingovernment, because government is
(15:23):
also a multi-business operation.
And right now in the UnitedStates, behaving in ways that
no company would ever imagine.
absolute madness, you can pick it out.
On the other hand, the models alsoactually quite good for understanding why
(15:46):
Elon Musk was so successful with Tesla andhe is really way out at the edge of some
of the new ideas at the end of the book.
What he's been able to do is takea process that was very slow.
And he gets involved in everything andhe's also changed the whole evaluation
(16:07):
structure because literally on bigdecision says, look, this is mine.
If it goes wrong, it's on me.
And that changes the whole structure.
And I mean, later, it's not in thebook, but I, saw a group Vice presidents
fired because they had made decisionswhere they told their boss it's 50 50.
(16:35):
boss said, well, what should we do?
And they said, we'll do a, later,they were fired for doing a, I mean,
you can't have a great company whenthat's the nature of the process.
your point on Musk I, wantedto share this 'cause I didn't
know about this law, Miles's law
(16:55):
yeah.
Rufuss miles, and essentiallywhat it means your, stand
depends on where you sit.
I love that,
Where
you stand as a function of where you sit.
to simplify this before we start to givesome examples, let our audience, for those
of you just listening to us, which ismost of the audience, it's three people.
One of them is sales, one of 'emis r and d. One of them's finance.
(17:17):
The sales person's going, we needmore funds for sales and marketing.
R and D persons, we shouldinvest more in innovation in r
and d and the finance persons.
We need to cost costs, and this isone of the core components of the
problem, is that nobody's a badguy or girl in this situation here.
They're actually doing what they thinkis best and I think that empathy Joe.
(17:41):
Many of our audience are working inchange or heads of innovation and, we
often see the head of finance or thehead of sales as the enemy, but actually
they think they're doing what's bestfor the company and, I think that just
your view on that is so important.
If nobody gets anything else out,it's to have empathy for the other
person and to realize you need tosee it through their eyes as well.
(18:04):
They are correct each one, even thoughthey completely disagree, but each one in
its from their own perspective is correct.
So that really helps you understandwhat a manager has to do.
Is take those inputs andget to one perspective
you mentioned Musk there, and I findthis Joe with, family owned businesses
(18:28):
where the people in charge of thebusinesses are actually really care
but, because they're also across somuch, many parts of the business, their
view, that problem with Miles's law isreduced because they can see beyond silos
and they can have a more overall view.
And that idea of bottom upversus top down becomes closed.
(18:49):
The, gap becomes more closed and itbecomes easier to make decisions.
it is.
It's one of my mentors.
John Lintner, a great economist talkedto me about the Cabot Corporation and
he said, what's interesting is Tom Cabotknows everything about that company.
(19:12):
And , the point is it's afamily organization and it's a
very narrow range of products.
actually Bob Ackerman wrote athesis we drew on later, where he
compared single product organizationsto multi-product organizations.
And it was true that in single productorganization, the same three levels of
(19:37):
activity were going on, but the layersof or of structure were compressed.
In effect, they worked as a team andlater on there's a wonderful, a Fortune
magazine study of IBM 360, whichrevolutionized the computer . And Tom
(19:58):
Watson got something like 16 peopleoff to his ski lodge for a week.
And it included, Nobel Prizewinning scientists, unbelievably
powerful managers and thinkers,salespeople, and they worked on the
(20:19):
development of the plans for the 360.
So yes that, where you have asingle product line and a family
power, can really get things.
Also, they are also often owners,so you don't get the pressure of the
(20:45):
stock market for current earnings.
And you, they can, they are able toactually make the kind of decisions that
we think great co companies should make.
let's bring it on to the case studies ofOpel I, absolutely love this case study.
It was the first time I heardof it and I absolutely loved it.
(21:05):
It really nails the challenge.
And then to your point about not only doyou have multiple products, but you're in
multiple countries with multiple brands,, the map is not the territory and if the
strategy's coming from the top pusheddown and locally, you have to obey that.
It's gonna be all wrong.
So I'll tee you up maybe Joe witha, an excerpt here the fall of the
(21:29):
Berlin Wall on the 9th of November,1989 was a watershed event, although
400,000 Soviet troops remained in EastGermany and the economy was completely
cut off from the west by separatelaws and non-convertible currency.
It was clear that the economictectonic plates were going to shift.
The East German market would open.
How should a major multinationalmanufacturer of consumer goods
(21:51):
respond to events that clearlyaffected their business in Europe?
Conventional thinking about corporatestrategy would lead one to imagine
the process of making strategy tobegin with the assembly of a corporate
level task force to study the demandand competitive conditions in the
market that would soon be opening.
Some assessment of strengthsand weaknesses and opportunities
(22:13):
and threats would follow.
This analysis would provide thefoundation for plans to enter the
market in a way consistent with thecorporation's strategic thinking about
the global competitive situation.
On the basis of that analysis,the parts of the organization
responsible for business in Europe,or more specifically West Germany,
might be asked for proposals.
(22:33):
To the extent that these proposalswould involve commitment of significant
amounts of capital, their projectedprofitability would be assessed by
financial star staff and compared withcorporate targets or hurdle rates,
strategic choices would be the resultof a managed process of analysis, but
considered what actually happened at Opel,the division of General Motors responsible
(22:56):
for auto production and sales in Germany.
Joe, over to you.
Okay.
Well the key to this story is thatright about that time before the
wall came down the vice Chairmanof General Motors Jack Smith asked.
(23:17):
one of his key people in thefinance group, and he asked.
Lou Hughes a very good guy, happenedto, have a case because Lou had
been at Harvard Business School togo over and run Opel bought, they
had bought it in the 1930s whenthey were expanding into Germany.
(23:41):
And it was the number two companyin Germany to number one was
much bigger with Volkswagen.
And his job was basically.
get Opel to shape up.
And then the wall came down
and it's very interestinghow Jack haKyndryled this.
(24:04):
He called up Lou Hughes and Isaid, Lou, what are you gonna do?
And in a certain sense hesaid, what are you going to do?
So he gave the ball to LouHughes and Lou took it and ran.
. First thing, okay, wellwhat is the situation?
Tell me about East Germany.
And so part of his market researchwas interviewing people who had come
(24:29):
across from the east into the west.
And
That provided him with someunderstanding of what the market
was, what the market wanted.
And then the second thing he did,he got in, German companies, you
have something called a Vorstand.
So each of these people who sits ina different chair, marketing, sales,
(24:55):
whatever, manufacturing it sits aroundthe table and he asked them for a plan
and they gave him a plan that's typical,which was, here's how Opel can grow
using conventional thinking about Opel,which was to be number two in Germany.
(25:17):
That's what they wereand they were gonna grow.
But Volkswagen had leaped ahead and theywere going to buy the entire East German
automobile industry, which in the Sovietmodel was just one company, the Combinant.
(25:38):
And he said, no, I wantplans to have us, number one.
So the first thing is he understoodnormally, when they plan, they
project from the past and he wantedthem to think about the future and a
future where they were, number one.
And based on what they werelearning, they began to concede.
(26:02):
it was very clear that what wasgoing to be important was to have a
distribution network in East Germanybecause they did not have one.
So rather than buy.
Part of the commandant, he got a hold,essentially independent entrepreneurs
(26:23):
had automobile shops or whatever forfixing cars that were no new cars for
like how many years under the East
german.
German.
And , they loved the ideaof becoming distributors.
So they were all excited.
And then , one of the guysin, the union was talking to
(26:46):
a friend of his in Eisenach.
Eisenach is a town east rem,but it's where Bach was born.
And it turned out the Eisenachplant was the, ugly duckling
in the, big East German system.
So they began negotiations to buy itright out from under the commandant.
(27:08):
And, how did that happen?
Well, partly Hughes had a,habit literally far as the top
management is going disappearing.
And if they wanted to find him,they'd find him on the factory
floor talking to workers.
So naturally the relationship betweenthe union and Hughes became much better
(27:33):
because I. He talked to them, he thoughtthey were smart, they had ideas and so
he picked up on that and he said Go.
And they negotiated,they bought the factory.
He'd also developed arelationship with Helmut Kohl.
After all, he was the head of thenumber two company in West Germany.
(27:53):
it was quite appropriate that the headof General Motors in Germany deal with.
Lou was a very charming guy and hemade a point of trying to speak only in
German, and Kohl thought that was great.
Hughes worked very hard at learningGerman, that also helped him
(28:15):
when he was on the factory floortalking to union workers, and.
Anyway, to make a long story short, heintroduced a new Opel, faster than General
Motors, introduced a new card that was,it was introduced at the Berlin Auto Show.
The advert was totallyabout the environment with
(28:42):
I'm trying to remember the, one of thegreat jazz singers it's, the song was
a, it's an, it's a beautiful world.
Armstrong is it?
Louis Armstrong.
Very good.
Thank you, Aiden.
And then another one was allabout high tech technology.
But you know, they didn'tshow beautiful cars.
(29:05):
But that's what they'd learned in theirresearch, and it was a great success.
Now the key thing here.
It's the General Motors corporate wasfreaking out because they were not dumb.
They were thinking, how arewe going to compete globally?
(29:25):
And they were focused on theidea that they would have a
network of low cost producers.
And Germany did not fit that idea.
they were really upset because investingin Eisenach meant going exactly again.
(29:46):
So it was big fight.
And Jack Smith decided to back Lou Hughes.
From the perspective of 20 or 30years, it's not even clear if that was
a great decision for General Motor.
But that's what happened.
Because in a sense, Smith wassaying, look, if we're gonna have a
(30:11):
company there, it's gotta be a strongcompany, a good, the guy I sent
who's very good said This is whatwe should do, so I'm gonna back it.
And
that's what happened.
And I learned later, by the way, footnote,when I was interviewing at Toyota, had
(30:32):
long, long, long ago felt bad if theywere gonna have a global business.
They had to have a local presence.
So they built Fremont and some alltheir plants in the United States, in a
funny way, had more American companiesthought like Toyota they'd have more of
a presence here in the United States thanthe, you wouldn't have this tariff issue
(30:57):
that thing, Joe, you said about theother frontline managers getting fired
'cause they picked A instead of B.I often think about that idea that.
Like, like you have to back something.
And you know, Sven Smit, who'sbook strategy beyond the Hockey
Stick I had, him on the show.
He said, imagine you're a police chiefand you're trying to hunt a killer,
(31:21):
and you send out four teams, andone of the teams finds the killer.
He goes, are the other three punished?
Because they didn't find 'em.
He said it's, kind ofa little bit like that.
It's it's, and this is the idea ofemerging versus deliberate, because.
What Lou Hughes did there was he was,feeling his way towards the success
based on the information he had at hand
(31:42):
. But it's what we all do if we're smart.
When we're in a new situation,we don't sit there doing nothing.
We start acting.
But if we're clever, we plan step bystep and we learn from each step . And
that's in effect what he was doing.
(32:03):
He, was running anexperiment and it succeeded.
And then so it, another way ofputting this is one of the managers
at national products said to me,you know, I always worry when I
give one of my good people $10,000.
(32:25):
Now remember, this is 1960s, so.
Because with what they learn from$10,000, they then can get me
to give them a hundred thousand.
And with that I'm on my way and thenthe next thing I'm in that business.
So it's that, yes, incremental representslearning and testing, but you gotta be
(32:54):
sure if you like where the endpoint is.
And in one of the four cases
it was the only one that didn'tget approved because in effect
they were taking national productsinto direct competition with
one of their major customers.
(33:14):
And , that did not make sense.
They could have saved the team a yearor two if they had simply explained it.
, one of the things there, reallysubtle piece of the pie is I thought
about, say Hughes, he's on the ground.
He's there where's Hughes?
Why is he not in his office?
(33:35):
And, I've seen this and I've been thisperson as an executive before where
I. You, you may spend a lot of time onrelationships or like the work he did
speaking German or building relationshipson the floor or with Helmut Kohl and,
that work, there's no metric for that.
And, so many times you see people inorganizations where new leadership comes
(33:56):
in, they go, Hey, what does Bower do?
And the, like, you're trying to struggleto go, oh, he, you know he's responsible
for innovation and new products.
And then we go, but what,has he delivered lately?
And, you can't put a metric on it.
And they're going, oh,let's get rid of Bower.
Yeah.
and it's only when you're gonethat you see the damage that was
caused 'cause of all these liaisons.
(34:17):
This kind of connective tissuethat you have across the
organization just gets taken away.
Well, absolutely, and this is today.
I mean, it was not as obvious atthe time we were writing the From
resource allocation to strategy.
But once CEOs became very, closelyassociated with earnings per share,
(34:43):
short term, their time horizon shrunk.
So it's, it, remember talking, I did workat GE and people said a afterward, the
one thing Jeff Emel said is, Jack changedthe time horizon of GE to two years.
(35:10):
We didn't invest in things that weren'tgoing to be paying off beyond two years.
You have no runway
. and GE had been a great technologically innovative company,
but he killed a lot of that.
a lot of what they did was buy their,much like the pharma companies that buy
(35:34):
their research in these small companies.
Speaking of buying Joe let'suse that as a, segue to Timken.
'cause when you buy, you can have.apleasant surprise or a bag of snakes.
Yeah.
In the case of Timken it, totally changedthe entire strategy was in a way, it was a
bottom up acquisition rather than top down
(35:59):
. They bought
it to block their competitor.
They didn't buy it because they wantedit , but they learned, I mean, that
what's so important in this is that.
It's not all bottom up.
It has to be top learning as well,because then top can adjust and
they can help the other group.
(36:20):
So it's really back and forth.
And it really helped Timken.
It gave themhem another 10,15 years because they adjusted
their strategy appropriately.
and that was a big deal.
Will, I give a little bit ofcontext for the Timken case to
just help our audience here?
(36:41):
Oh, sure.
Well, Timken was one of , thefounders of the roller bearing
industry and they had a major positionsupplying the big three in America.
They had very high standards of quality,I mean, above the ISO standards.
(37:02):
And, they moved overseas and theirbasic approach was to give the customer
exactly what the customer wanted.
So in a sense, they had a , portfolioof niche products and , they
bought a subsidiary in Polandto keep SKF from buying it.
(37:23):
And the product there was prettygood, but it only met ISO standards.
so back in Ohio, they thought it was crap.
but it turned out the peoplein the Polish subsidiary were
able to sell it to Peugeot.
so they began building thatbusiness and then the people back
(37:45):
in Ohio said, well, wait a minute.
This isn't all wrong.
but then they didn't just stopto their credit, they then
said, well, what does this mean?
And what it meant was that theycould begin to standardize products
at different levels of quality.
And rather than having a huge productline, they would have a much more
(38:08):
narrow product line, which gave themlower costs and they , were able to
deliver at the level of quality theircustomer wanted, which fast forward,
brings us towards the kind of research,particularly Clay Christensen discovered.
Clay came to Harvard Business Schoolfrom business, fascinated by the
(38:33):
fact that great companies failed.
Why would a great company fail, particularly when the competition
was inferior, the competitioncouldn't do what the big company did.
And what he discovered is whathappened was the new company couldn't
(38:54):
compete at those high levels.
it had a new technology.
Usually the feature was that it wassmaller or cheaper, and that meant it
could be used in a different applicationinstead of a mainframe computer.
It could be used in a telephone . Andwhat it meant was that You had
(39:16):
to have a resource allocationprocess that could develop that
new technology in a new market.
And then of course, over time it wouldimprove and improve, but coming in at
low, much lower cost than the existing,and it would disrupt to use Clay's word.
(39:42):
Clay and I were talking abouthis data, and he was just
really perplexed.
And I asked him if this was sortof like the resource allocation
process, because it sounded as ifthe forecast would not justify the.
(40:03):
The investment and he said,you got all excited left.
And, you know, build a, staggeringcareer on that basic observation
that essentially you can't let yourcustomers capture your process.
(40:25):
I love that.
And customer captivity.
Clark Gilbert will be on and there'sa chapter of the book that's written
between Clark and Clay as well.
So we're gonna cover.
And Clark's gonna cover that.
Okay,
A great friend of Clay as well.
But I, there was a little pieceI wanted to, pull that just as a
nice annex to the Timken story.
You say here how resources areactually allocated and used
(40:48):
determine strategic outcomes, notthe words on paper or policies.
Yours, 1970 study reports an incidentwhere a corporate comptroller
discovered that a factory hadbeen built by a division without
approval by the corporation.
Division management believed thatthe business required the facility.
That corporate would not approve it.
(41:09):
They used hundreds of small work orders tocircumvent the capital budgeting process.
Yeah.
here you talk about as well, the reallyimportant book, the Graham Allison's
account of the Cuban Missile Crisis.
That provides a dramaticexample of the same phenomenon.
Maybe we'll share that because this ideaof positive deviance is interesting.
(41:29):
The whole idea, and we talk aboutthis often on the show, that
sometimes it's easier to askfor forgiveness than permission.
It It doesn't alwayswork out in your favor.
Sometimes you get fired for that.
Well, Cuban Missile Crisis, youhad the US Navy playing a very,
important role.
(41:51):
And the US Navy just fast forward,never cooperated with McNamara.
did what they had to do to survivebureaucratically, but basically
they didn't do what he wanted.
So he had literally come into theNavy operation control room and
(42:15):
they asked him to please leavethey knew how to run a blockade.
And he said, I don't wanna knowhow John Paul Jones ran a blockade.
What are you doing?
Anyway, had my mine sweepers outdestroyers out bringing submarines up.
(42:39):
I mean, they were.
Essentially ignoring the fact thatwe were trying to get peace without
a war and they were doing followingtheir routines and which is bottom up.
All right.
But it could be a disaster.
It's
I mean you gotta change, Iwould say, and we've clay looked
(43:05):
at the field of education.
A lot, of the problem we have witheducation here, but also many countries
is we're teaching the same way theydid in Bologna in 13th century.
I mean, I've been at you, if yougo to the OR in Padua, you can
(43:25):
see where Galileo taught where, Imean, it's, nothing has changed.
Blackboards, amphitheater, theater.
so it's very important not tobe captured by the bottom up.
And tell us about the 1970, about the,factory that was built, because I'm not,
(43:47):
we're not, by the way, we're not condoningthat people go and build factories here.
Oh no.
Well that worked.
It was just, that's when it happened.
That was one of the early, before Istarted the national product story.
I heard that story and it was just,
what would you do if you were runningsomething and you had responsibility
(44:08):
and you knew the people upstairswere so stupid, they didn't even
know it would take two years to dosomething the competitors would get.
So you do it.
That's, you show entrepreneurshipand frankly, when you do that and
it works, you tend to get rewarded.
(44:30):
And they take credit up there.
That's also happens.
Yes.
There's a great quote by GeneralStanley McChrystal I, was, reminded
of it as I read this chapter.
He was talking about it here wherethey'd work to have the perfect plan,
and what he said was, the world hadoutpaced us in the time it took us to
(44:50):
move a play from creation to approval,the battlefield for which the plan
had been devised would've changedby the time it had been implemented.
The plan, however, ingenious inits structure was outta date.
So this is what he was saying.
But I thought this was so importantfor you, for what you said,
facts are always being created atoperating levels that enhance or
(45:12):
undermine corporate initiatives.
The opportunity to pursue Eisenach.
, The plant we talked about was developedby one of the leaders of Opel's
Union organization in a conversationwith a relative in East Germany.
Conversely, corporate initiatives oncelaunched often gain a momentum that
makes their implementers oblivious tonew developments and changing conditions
(45:33):
, that piece of, okay, strategies made upin the boardroom or with consultants.
But there's people on the groundthat have an opportunity, they have
a shot on goal and they have to takethat shot when they have the chance.
Like if you have a meeting with thechancellor, you take the meeting,
you don't wait for approval.
Otherwise you're gonna lose all theselittle nuances that happen the whole time.
(45:55):
I'd love to share that bit of a, mismatchbetween the timing of the corporate
strategy and the actions on the ground.
Well it, is particularly pernicious inthe military where you have military
specs and then by the time you have thenew weapon system, 10 years has passed.
(46:21):
in the extreme you have our airportcontrol system where we're using
very old stuff because we can'tget new stuff through Congress,
which is it's resource allocation.
There is no intention tohave a screwed up system.
But it doesn't matter what your plans onpaper are or what your, if you don't spend
(46:47):
the money and use it, well execute well.
have a disaster.
And I mean, a friend of mine, oneof the best top consultants of
McKinsey described, he had beenworking for the British Chemical
Company ICI for at least two decades.
(47:07):
And he, was Levi, he went in tosee Harvey Jones, who was, had
been the, a great chairman of, and
Harvey Jones reached in his setdesk drawer, pulled out, and he
said, Henry, here's your report.
He said, it was really brilliant.
(47:28):
We haven't done it.
It's hard.
It's hard.
And it could be insulting as well.
It.
Yeah, well, there's a, another aguy who Bobby Malpas was the head
of BP Chemical, and he wrote anarticle in Harvard Business Review
(47:51):
called Building the Plant After Next.
And his idea was that it is natural thatyou're, when you're planning the next
plant to put into it the improvementsthat you have, but it takes time to
build a plant and execute what you wantis the plant you would build after that.
(48:18):
And that captures this.
The, strategic problem is to uselearning to move fast, to make
quantum moves, not, and it's hard.
a lovely thing happened.
My, my son, my older son's, 15 and unfor.
(48:38):
Fortunately, I used to play Rugby Joeand he doesn't, he didn't choose rugby.
And I was like going, yes, no concussionsfor him like me, but instead he is
taken up MMA and I'm like oh, that.
Well, at least in rugby you gota bang in the head by accident.
But he, he said it, he, so he is only 15and he said to me a great thing recently,
he said he beat this guy in a fight.
(48:59):
And he said the differencebetween me and him was.
He was fighting to win andI was fighting to learn.
And I, thought of this chapterand that idea that it's, a,
chess move to get feedback.
It's an action, as you say.
You have to take the actionto get the feedback and
why we have chess on the cover.
nice.
I didn't get that, man.
(49:21):
Yeah, I love it.
But, maybe we'll finishon this last piece 'cause,
okay, because I have to go to,
Yeah, the structure piece, becauseyou say here the, because the reality
of strategy is the result of resourceallocation and because resource
allocation is substantially influencedby structural context, we learned
that structure drives strategy.
Throughout the book, we will see howthe structure of previous internal
(49:44):
commitments to reporting structuresto strategy statements, et cetera,
and external commitments to customersin capital markets, constrain
changes in resource allocation andconsequent changes in strategy.
That is such a key paragraph, and Ijust love you to expand on that as
our mic drop moment for this episode.
(50:05):
Well in the end of the day, goingback to one of the first things I
said, people try to do their job.
So
how their job is defined, how it'smeasured and how it's rewarded is
quite critical if people have to beheroes to do what they see to be right.
(50:30):
So what you need, and it's reallyhard, you need to be able to
keep an organization moving.
of the great things that happenedbetween 1970 and today is that what
used to be 10 layers between anoperating business and the top of
(50:52):
the corporation is now two or three.
And, that means informationreally can move., So then if you
have leadership that understands
the importance of adjustingas they're learning.
(51:18):
It, works.
I was gonna suggest earlier, if youwant, you should one of Tomo Noto's.
Great.
He did a study of the way the sevenoperating companies of the of bell
telephone phone dealt with theirmark at almost identical companies.
How did they deal with cell phones?
(51:41):
And in one of the most successful,they did the normal studies
and the results weren't that
And the CEO said, okay,change the assumptions.
Because he was quite persuaded.
He didn't know, but he was quitepersuaded it was gonna change.
(52:03):
And the easiest way of doing itwasn't to change the whole system,
just change the assumption.
of course, they ended up theleader in the cell phone field.
And so it's management it'sWhy is management difficult?
(52:24):
In part because you have to keep learning.
You have to give people the roomso they can operate and learn.
You have to keep it coherent.
It's like a team, you and even starathletes understand they can't win if they
(52:48):
aren't, if the team doesn't support them.
it's a very it's, a challenge and it'sfun and we're learning more and more.
and it's a pleasure to learn from you,man, and to revisit this brilliant book
from resource allocation to strategy.
Thank you for joining us for Part one.
Joe, I know you're gonnabe back onto this series.
(53:09):
We're gonna get through, we havesome of your guests on, some of
them you're gonna join as well.
Right.
And it's been an absolute pleasure,author of from Resource Allocation to
Strategy and creator of the RAP theory,Joe Bower, thank you for joining us.
Thank you, Aidan.
It's a pleasure.
And thanks again to our sponsors, Kyndryl.
Delighted to say it.
(53:29):
they run and reimagine the technologysystems that drive advantage for
the world's leading businesses.
With a unique blend of AI poweredconsulting, built on unmatched
managed service capability, Kyndrylhelps leaders harness the power of
technology for smarter decisions.
Faster innovation and alasting competitive edge.
You can find Kyndryl at www.Kyndryl.com.
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