Strategic Resource Allocation: Top-Down, Bottom-Up, and the Value of Strategic Buckets

When senior managers make the critical decision of whether to assign resources to a strategic initiative, they have less precise initiative-specific information than project managers who execute such initiatives. Senior management chooses between a decision process that dictates the resource level (top-down) and one that delegates the resource decision and gives up control in favor of more precise information (bottom-up). We investigate this choice and vary the amount of information asymmetry between stakeholders, the “penalty for failure” imposed upon project managers, and how challenging the initiative is for the firm. We find that no single decision process is the “best.” Bottom-up processes are beneficial for more challenging initiatives. Increased organizational penalties may prompt the firm to choose a narrower scope and deter the approval of profitable initiatives. Such penalties, however, enable an effective decision process known as “strategic buckets” that holds the potential to achieve first-best resource allocation levels. This paper was accepted by Kamalini Ramdas, entrepreneurship and innovation.