Corporations Slow To Reallocate Assets To Higher Return Businesses, Even In Economic Downturns: McKinsey & Company

From McKinsey Quarterly, "Never let a good crisis go to waste: New research shows that actively reallocating corporate resources is even more important in a downturn than it is in good times." by Mladen Fruk, Stephen Hall, and Devesh Mittal:

The vast majority of organizations are surprisingly slow to reshuffle their resources. When we conducted a large-scale analysis of the reallocation patterns of multibusiness companies, for instance, we found that most of them awarded each business in their portfolio an unchanging percentage of total corporate capital year after year between 1990 and 2005. Yet the returns were higher and the volatility lower at organizations that reallocated more actively.

When we present these findings (which we highlighted in a previous McKinsey Quarterly article) to senior executives, they often ask us about the impact of the financial crisis and the downturn that followed. Surely, they argue, a tougher economic environment has led to more pronounced changes in resource-allocation patterns as companies were forced to look for new sources of value.

In fact, this proves not to be true. When we extended our analysis through 2010, thereby covering a full 20 years of performance by 1,500 companies, we found that the downturn had virtually zero impact on patterns of reallocation. There was apparently no greater aggregate corporate appetite for it in the tough recent years than there had been in the previous 15. [Footnotes omitted.]