Int. J.

Production Economics 77 (2002) 63–70

Resource allocation in a few industries: Determinants

and trends$
. Segelod*
Esbjorn
.
Malardalens .
hogskola, .
Department of Business Studies and Informatics, Malardalens .
hogskola,
P.O. Box 325, S-631 05 Eskilstuna, Sweden

Received 15 January 2001; accepted 2 October 2001

Abstract

When the major corporations divisionalised their organisation after the Second World War, they devised a
performance measurement system to monitor the development of their business units, and a capital budgeting system to
control the direction of investments. The appraisal of investments was decentralised and capital budgeting became a
bottom-up process, standardised through written routines and supervised via a pre-approval control system. Since then,
investments in training, R&D, marketing, and information technology have come to comprise a steadily increasing
share of total investments. In consequence thereof companies have become flatter, and knowledge-intensive companies,
project-based. The importance of the capital budgeting process has declined; indeed it rarely exists in professional
service groups. Notwithstanding, the industry does not invest less but concentrates on intangible types of investments.
The purpose of this article is to describe and identify the factors which dictate the design of the resource allocation
system in a few industries, and thereby perceive the direction in which the development is heading. The analysis
identifies five factors which determine the design of the resource allocation system, and shows how this affects
the resource allocation system in six industries. It also discusses different means of control and the future trends,
and explains why the capital budgeting system becomes less important as industry becomes more knowledge-intensive.
r 2002 Elsevier Science B.V. All rights reserved.

Keywords: Capital budgeting; Investment planning and control; Knowledge-intensive industry; Organisational structure; Resource
allocation systems

1. Introduction tions and much has changed. The volume of

It is now 30 and 50 years, respectively, since
Bower [1] and Dean [2] described investment
planning and control in decentralised organisa-
$
This research was made possible by grants from the
Swedish Council for Research in the Humanities and Social
Sciences, and the Jan Wallander’s and Tom Hedelius Founda-
tion for Social Research.
*Corresponding author.
investment has shifted from investments in ma-
chinery and buildings – the type of investments
postulated by the methods and processes described
by Dean and Bower – towards investments in
markets and marketing, R&D, training, and the
development of new business concepts. Since 1986,
Statistics Sweden [3,4] has produced yearly esti-
mates of investments in R&D and markets in
companies with more than 500 employees. They
have found that investments in machinery, R&D,

0925-5273/02/$ - see front matter r 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 5 - 5 2 7 3 ( 0 1 ) 0 0 2 1 7 - 1
64 Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70
and markets, amounts to about one third each.
In addition, investments in training are growing.
Partly as a consequence hereof organisations
have became flatter, the staff units which were
important to the control of investments have
been decentralised or have disappeared, and
more and more of the co-ordination of, and
knowledge transfer on investments, now occurs
between companies and individuals at the business
level.
In consequence of traditional industry becoming
more knowledge-intensive, the importance of the
capital budgeting system has diminished, and in
knowledge-intensive service groups there is in fact
no such system [5]. Major consultant groups may
invest 10% or more in training and the develop-
ment of new business concepts, but only rarely
does this give rise to investment appraisals and
formal investment requests. The difficulties of
measuring and deciding the investment parameters
make it necessary for corporate managers to rely
on other means of influencing the direction of
investments. The formal capital budgeting system
which works well for traditional investments in
machinery, has proven unsuitable for the manage-
ment of intangible investments.
Investments are made in all industries, but
their volume and composition varies, as do
corporate means of control. The purpose of
this article is to describe and identify the factors
which determine the design of the resource
allocation system in a few industries, and
then use this knowledge to perceive the direction
of the development. The investigation is based
on the author’s earlier empirical studies in
Swedish manufacturing and service groups, sup-
plemented by analysis to present an overall
picture. See Appendix A in which earlier studies
are described.
The article commences by describing the re-
source allocation system in six different industries
and the factors which determine its design. Then
follows a more detailed description of the resource
allocation system found in knowledge-intensive
service groups, and how this differs from manu-
facturing groups. It concludes with a discussion of
different means of control and trends in the
development resource allocation.
2. Resource allocation in six industries
It will be argued that the character of the
resource allocation system is determined by such
factors as the size and composition of investments,
the time horizon, the measurability of investments,
the need to co-ordinate investments, and the
visibility of strategic investments. We shall use
these five concepts to describe the resource
allocation systems of six different industries
(see Table 1).
Pharmaceutical companies often have a func-
tional or semi-functional structure, viz. they have
one unit for R&D, one for production, and one for
marketing. Investments in R&D are very large and
long term. Strategic investments in R&D are easy
to identify, and are monitored project by project
from the head office. The visibility is good as
linkages are few. The R&D perhaps proceeds in
co-operation with hospitals and universities, but
the linkages between the strategic investments in
R&D, suppliers, customers, and production and
marketing are weak. The situation may be similar
in other R&D-intensive companies where the
linkages between strategic R&D, production,
suppliers, and customers, are few and the R&D
driven more by technical innovation, than market
pull.
It may be far more difficult to identify strategic
investments in the engineering industry. Major
engineering companies produce different products
which combine a growing number of technologies,
and the structure is divisionalised. Investments in
capital goods, market investments, and product
development, are of similar magnitude, and inter-
related, and the size of individual investments
varies. Investments are usually initiated through
market contacts, and top management supports
strategic initiatives from time to time. There are
linkages between companies inasmuch as products
and services in one company are used in others in
the same group, which involves a need for co-
ordination. R&D consists mostly of product
development, and much of the development work
is done in co-operation with customers, sometimes
also with suppliers. The decentralisation of R&D,
its fragmentation among many small product
development projects with external linkages, and
 Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70 65

Table 1
Determinants of the resource allocation systems of six types of companies

Determinants Pharmaceutical Forest Engineering Knowledge- Standardised Professional

and types companies companies companies intensive service service
of companies engineering companies companies
companies

The character of Very large Recurrent large A mixture of As in Total Large

investments investments in investments in large and small engineering investments investments in
R&D (approximately production investments in groups, but small training and
15–20%) the equipment R&D, larger compared with the
results of (approximately production investments in the other types development
which drive 10%); small equipment, and R&D, training of companies of new
investments in investments in marketing and business concepts
production and R&D and competence (approximately
marketing marketing development 10%) predominate
The time Long Long Medium Medium Short Short
horizon

The Medium High High Medium Medium Low

measurability
of important
investments
The visibility High High Medium Low Medium Low
of strategic
investments

The need to Low Low Medium High Medium High

co-ordinate
investments

the need for co-ordination of production, makes it
difficult to identify all investments of strategic
significance and to refer these upwards. Perhaps in
consequence thereof major engineering groups
have a sophisticated system of pre-approval
control of capital investment requests. Investment
requests are scrutinised, approved and signed as a
token of commitment, by several specialists on
their way upwards in the hierarchy.
The visibility of strategic investments is still
lower in the more knowledge-intensive engineering
companies, where much of the co-ordination is
decentralised and handled through, e.g. a project
organisation, informal network, and Intranet.
The major forest groups too are divisionalised,
but the companies are few and large. These large
projects take several years to plan, and are
designed, evaluated and implemented by a team
of managers who are sometimes seconded from the
operation of the company. There is no pre-
approval control system of the type found in
engineering companies. Instead, much of the
feedback which such a system provides seems to
be integrated in the procedures for implementing
the projects, and there are also direct contacts
between the project management, the company
management, and the board of directors. A similar
situation can exist in other companies with
recurrent large-scale capital projects, e.g. steel,
power, haulage, and railway companies. When
manufacturing companies implement major pro-
jects such as a new car model, these may also be
controlled in a similar way.
Standardised service companies, i.e. companies
selling fast food, catering, security, cleaning,
tickets, etc., resemble engineering companies
insofar as the services are standardised, planned
and co-ordinated by managers. However, the fixed
investments are small, the market changes fast,
and the time horizon is short.
66 Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70
The visibility is distinctly lower in professional
service companies, i.e. in management consul-
tancy, software consultancy, and accountancy
firms. Such firms have very small staffs. Only
about 10% of the employees are not billable.
There is no marketing department, as marketing is
a part of the job of the consultants. Performance
measurement systems, executive teams, and the
socialisation of especially the management, are
important means of control. Co-ordination is
handled centrally through executive teams and
managers responsible for specific functions such as
IT, and decentralised through, e.g. Intranet, cross-
unit teams, various meetings and informal con-
tacts. Investments in personnel and business
concepts may amount to 10%, and the need for
such investments arises from experience gained in
market contacts. No traditional capital budgeting
system exists. Investment requests are channelled
through a system of executive teams.
We have defined six different types of compa-
nies, all of which try to identify strategic invest-
ments and refer them upwards, but, as explained,
the visibility of, and precondition for, discerning
strategic investments differ. The task is easier in
pharmaceutical and forest companies, than in
knowledge-intensive engineering and professional
service companies. Traditional engineering and
standardised service companies fall somewhere in
between. Differences in the visibility, in the need
for co-ordination, and in the character of invest-
ments, determine the importance and design of the
resource allocation system.
3. Manufacturing versus professional service
industry
Professional service companies are in some
respects the opposite to traditional manufacturing
companies for which Bower’s type of resource
allocation system was once designed. This makes
it interesting to compare the resource allocation
systems of these two types of companies in
greater detail (see Table 2). The description draws
on Segelod [5,6]. See Appendix A on research
method.
In professional service companies, there is no
formal capital budgeting process in which invest-
ment requests are discussed and approved, al-
though the principles whereby investments are
initiated and processed are much the same.
Investments are initiated from below, through
customer contacts. There are exceptions. Acquisi-
tions can be initiated at all levels of the company.
A corporate manager may impose limits for how
much should be allocated to a certain type of
investment, decide on a certain IT standard, or on
courses which certain categories of employees
must take, promote investments in certain mar-
kets, and the development of certain new business
concepts. The need for training, which is the
largest single type of investment, is mapped thro-
ugh career planning talks, i.e. from below. Then, if
a certain type of training is in great demand, it is
usually organised and purchased centrally.
Corporate managers rarely intervene concerning
which investments lower units may make, and with
what amounts as long as they meet their profit-
ability targets; and if they choose to interfere, they
are more interested in the direction than the
volume of investments.
Professional service groups put more emphasis
than do manufacturing companies on monitoring
the result, i.e. the performance measurement
system, relative to the investment system. Since
most of the activities are organised as projects,
there is a system for implementing and monitoring
projects. There is also a system for documenting
experience from completed projects and mediating
this knowledge to all in the group for re-use in new
projects.
The investment routines are very simple. In
manufacturing companies an investment request is
needed for approval of the investment, but such
requests are handled informally through the
system of executive teams which exist on all levels
of professional groups. Similarly, these groups try
to separate strategic investments and refer such
decisions upwards and make them precede the
operative investments. They also endeavour to
define the needs in the business plan, before
individual investment projects are budgeted
and frames set. However, as investments are not
systematically defined and requested, no follow-up

Table 2
Investment planning and control processes in traditional manufacturing versus professional service groups
Important means of
control in groups of
companies
Planning processes
Definition of
investments
The identification of
strategic investments
Pre-approval control
Written capital
budgeting routines
Investment criteria for
tangible investments
The PBP as a measure
of the time horizon
Co-ordination of
investments
Investment review
is possible. Consequently, there are systems for
monitoring administrative units and projects, but
none for monitoring investments.
Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70
Traditional manufacturing groups
Administrative control (the capital
budgeting system) and market control
(the performance measurement system
uses financial performance indicators).
A business planning system and a
budgeting control system.
Most investments are initiated and
defined by engineers on business level.
Corporate level managers from
time to time may sponsor strategic initiatives.
Strategic investments are separated and
referred upwards for approval.
A well-developed system of pre-
approval review exists. The requests
have to be approved by a large number
of executives and staff representatives
on the way upwards in the hierarchy.
Relatively important for the control of
investments and to create a common
language to discuss investment issues.
The PBP criterion and a DCF criterion
such as the NPV or IRR
1.5–3 years for ordinary investments;
3–7 years for strategic investments in
new areas.
Handled centrally by middle-managers
and corporate staff.
Investments requests are reviewed
through a pre-approval review system,
investments are monitored during
implementation, and larger investments
also post-audited. The monitoring and
post-auditing of investments are today
usually decentralised to the company
making the investment. Corporate level
occasionally reviews strategies.
Executive teams play a more significant role
in professional service companies, than in manu-
facturing companies. They exist on corporate,
67
Professional service groups
Market control (the performance
measurement system uses both financial
and non-financial performance
indicators) and social control (the
executive team system).
Varies widely from group to group, but
there is some form of business planning
system and a budgeting control system.
Most investments are initiated and
defined by consultants on a business
level. Corporate level managers may
from time to time sponsor
strategic initiatives.
Strategic investments are separated and
referred upwards for approval.
There are no staff units scrutinising the
requests. All requests pass through, and
are discussed and approved by, the
executive team system.
Does not exist.
The PBP criterion.
Mostly not more than 1 year for
ordinary investments; 2–4 years for
strategic investments in new areas.
Handled both centrally by executive
teams, and decentralised through both
formal (Intranet, cross-unit groups) and
informal (personal networks) means of
knowledge transfer.
There is no formal administrative
system to review investments. Such a
system exists only for projects and
business units. There is a project
management system, and projects are
monitored, and documented, and the
data disseminated throughout the
organisation. Corporate level
occasionally reviews strategies.
68 Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70
company, and lower levels. They may comprise
seven to ten members, and usually meet once a
month; sub-groups more often. On corporate level,
they include representatives of group executives,
and of the divisions, or of major companies.
Corporate executives are often responsible for
both a division or company, and a specific
function pertaining to, e.g. information technol-
ogy; moreover, they are usually also mentors to
three to four executive team members on the next
lower level of the hierarchy. The executive team
often forms sub-groups to prepare decisions, and
thereby partly replace the staff units found in
manufacturing companies.
A comparison of the two types of organisations
shows that service companies do not necessarily
invest less than manufacturing companies. The
total volume of investments is comparable, but
service companies invest mainly in training and the
development of new competence. If a capital
budgeting system exists in service groups it is of
minor significance. The performance measurement
system is well developed and sub-units are
monitored and often also benchmarked monthly,
using both financial and non-financial perfor-
mance measures. The time horizon is shorter,
and the management team system plays a more
important role, executing certain assignments
which in manufacturing companies are entrusted
to staff. Co-ordination is to a great extent
decentralised, without the involvement of corpo-
rate and divisional managers and staff. The
administrative superstructure, which in manufac-
Table 3
Control in four different types of companies
Type of company Groups of
and control independent
companies
Administrative
Market
Social Important
Decentralised
decision-making
through
independent actors
turing groups co-ordinates investments, reviews
investment requests, monitors investments, and
supplies service to investors, does not exist in
professional service groups.
4. A few lines of development
There are three main forms of control [7,8]:
bureaucratic, market, and social. Bureaucratic or
administrative control involves control of how a
task is performed and presupposes both knowl-
edge of the work process, and ability to measure
the final result. The capital budgeting system, with
its manual stipulating who is responsible for what,
and how an investment should be appraised,
requested, controlled, and implemented, is an
example of a bureaucratic means of control. The
divisionalised group uses market control when it
monitors the output of its divisions, companies,
and business units, as if these were actors on a
market. Social forms of control are used when the
output cannot be measured, nor the work process
preplanned.
The traditional divisionalised manufacturing
group combines administrative means of control,
such as, e.g. the capital budgeting system, and
market types of control of divisions and other
units (see Table 3). The more knowledge-intensive
the firms are, the more they stress market and
social means of control. Knowledge-intensive
groups focus on social and market based control.
Administrative means of control are weakly
Functionally Divisionalised Knowledge-
organised groups intensive
companies groups
Important Important
Important Important
Important
Centralised Partly Decentralised
hierarchal decentralised decision-making
decision- decision-making in a network of
making co-operating units
 Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70
developed. This may be seen in the weight they
attach to, on the one hand, performance measure-
ment, and on the other, socialisation and the
executive team system. Consultant groups do not
have a capital budgeting system. It is not a matter
of one type of control or another, but where the
main emphasis lies. The major consultant groups
also have certain elements of bureaucratic control
depending on their size.
The development has gone from small indepen-
dent companies, zealously responsible for their
own investments, to large centralised functionally
organised companies where investment decisions
are prepared by corporate staff and executed by
the manufacturing department. This development
is attributed to new information technologies such
as the telegraph, telephone, and railroad, which
made long-range communication possible, and the
typewriter, carbon paper, duplicators, and filing
systems, which improved internal communication
and data storage. These innovations made it
possible to achieve cost advantages by co-ordinat-
ing production over large geographical distances
[9–11] from a central staff unit. These faster,
cheaper ways of internal communication have
been adduced as an important factor behind the
wave of acquisitions and mergers which swept
through American industry and the growth of
large companies starting in the 1880s.
The functional structure worked well as long as
the company had a homogeneous product portfo-
lio. However, as companies grew, entered new
business areas and geographical markets, and
therefore had to manufacture and co-ordinate
more and more diverse products and markets, it
became difficult to manage production and sales
from a central staff unit. Major heterogeneous
groups solved this by decentralisation. The busi-
ness was split up into divisions with regard to
products or geographical markets, and procedures
were developed to evaluate the progress of
divisions and lower units. Market-based control
became an important supplement to administra-
tive control.
Since then, the need to decentralise decisions has
gradually increased as products and services have
become more knowledge-intensive and complex.
This has made it still more difficult to plan work
69
centrally, as non-codified knowledge of the work
process cannot be transferred to planners in
writing. One way of solving this problem is to
decentralise decisions to those who possess non-
codified information [12]. This reduces the need for
codification and co-ordination. The possibility of
doing so has increased as the level of education has
risen and the cost of making information available
has diminished. For professional service groups
this has meant that they focus on market based
control and social control, and for knowledge-
intensive manufacturing companies that they have
come to rely less on administrative means of
control.
Professional service companies have never tried
to control investments in intangible assets through
capital budgeting. They were not burdened by old
administrative systems of control. They were
decentralised and focused on controlling projects
and business units by means of sophisticated
performance measurement and executive team
systems. The focus is on market and social means
of control. Administrative control plays a far less
important role than in manufacturing companies.
Acknowledgements
The first two studies mentioned in Appendix A
were financed by the Swedish Council for Re-
search in the Humanities and Social Sciences; the
latter one by the Jan Wallander’s and Tom
Hedelius, Foundation for Social Research.
Appendix A. The research method
This article draws on several empirical investi-
gations of capital budgeting procedures, as well as
theoretical analyses of these and other studies
mentioned here.
The description of capital budgeting in manu-
facturing companies is based on a study of
capital budgeting in 29 of the major groups listed
on the Stockholm Stock Exchange reported in
Segelod [6]. Comparisons were made with earlier
studies of capital budgeting manuals [13,14], and
the analysis of written routines was supplemented
70 Esbjo. Segelod / Int. J. Production Economics 77 (2002) 63–70
by interviews with 47 managers in 34 groups.
Fifteen of these groups were in industries which
normally lack a capital budgeting manual, such as
banks, shipping, trading, software, consulting
groups, and smaller groups listed on the over-
the-counter list. The interviews were held between
1990 to 1993.
The description of professional service groups is
based on 21 interviews in 13 major Swedish service
groups held between 1997 and 1999. The study as
such is reported in Segelod [4].
The article also draws on a questionnaire sent
to named corporate managers in 130 of the
largest Swedish groups of companies. The survey
gave 59 useful responses and the parts which
pertained to short-termism are reported in Segelod
[15].
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