Imagine a machinery manufacturer. Management decides that selling more machines is becoming a harder way to grow. It wants to develop a service that monitors customers' installed equipment remotely and identifies faults before they cause breakdowns. More recurring revenue, longer customer relationships, and a way to keep providing value after the sale. Everyone agrees with the presentation.

Then comes the budget meeting. Existing products need development work. Customers have been promised delivery dates. The sales team has targets to meet. The new service receives a small budget, but the engineers needed to build it remain assigned to existing projects. Its manager must deliver meaningful revenue next year while borrowing help whenever other teams have spare time.

This is an invented example. But it raises a concrete question for testing whether a strategy can be implemented: which activity moved down the queue to make room for the company's new priority?

Which resource did the new priority change?

That is the question I would ask before looking at the size of the budget. A new objective consumes people's time, customer commitments, and management attention as well as money. If all those resources remain committed to existing work, achieving the objective may depend on employees working faster or continually putting in extra hours.

The people preparing the budget do not have to oppose change for this problem to arise. Rules designed to sustain the existing operation can make it difficult to test a business that works differently. The strategy has been approved, but the ways of requesting resources, demonstrating success, and assigning people remain unchanged.

This is not an argument for giving every attractive idea more money. First, we need to establish whether the conditions for testing it actually exist. A service that fails because customers do not want it presents a different management problem from one that never gets started because its development team was never assembled.

The word “good” in the title has a limit, too. Neither a persuasive presentation nor senior management's approval establishes that a strategy is good. The question here is whether a plausible opportunity can receive an appropriate test. If the budget process prevents that test, the company also loses a chance to learn how good the idea is.

How last year's budget becomes an advantage

Return to our hypothetical manufacturer. The existing product line's costs already appear in last year's budget. The discussion concerns rising expenses, possible delivery delays, and customers that might be lost. The new service must explain why it should exist at all. Its team is asked to demonstrate that customers will buy something they have not yet bought.

Some of this difference is justified. The existing product has customers, revenue, and delivery obligations. The new service is more uncertain. But the comparison becomes distorted if the next increment of spending on the old business renews automatically while the new business must resolve all its uncertainty in advance. An idea may be rejected because it cannot justify the spending needed to learn, even when it has potential.

The relevant question is whether the next commitment to the existing business is worthwhile. Its past success has already happened. What will additional resources produce now? What could the same engineer, customer access, or money accomplish elsewhere? Historical performance informs that assessment; it does not automatically justify next year's allocation.

New spending deserves the same scrutiny. Calling a proposal “strategic” should not let its sponsor obscure weak economics. Both the existing operation and the new venture should face a common question: what do we expect in return for the next commitment, and what supports that expectation?

This does not require rebuilding the whole company's budget from scratch every year. Reconsidering every minor expense could consume the time available for useful decisions. A more practical approach is to focus on the scarce resources the strategy requires and the spending that can actually change. A binding contract and a development project that has not started offer different degrees of flexibility.

Approving the money does not assemble the team

Suppose the new service receives funding. Its manager might reasonably think the financing problem has been resolved. But if the engineers are still assessed against delivery dates for existing products, spending time on the service puts their established targets at risk.

Expected behavior and rewarded behavior now diverge. Supporting the new project may delay a target owned by an employee's current manager, turning each request for help into an internal negotiation. This is also the issue explored in how KPIs reshape behavior: a measure influences which work people do first.

Economists Bengt Holmström and Paul Milgrom's multitask model explains this tension: stronger incentives for one task can draw attention away from other tasks competing for the same time. This is a theoretical result under specified assumptions, not a prediction of an identical effect in every team. Paper (opens in a new tab)

I would put an actual work plan beside the budget. Which engineer starts, and when? Which existing responsibility moves to somebody else? How will that person's manager be held accountable for the change? When two competing requests block the team's progress, who makes the final decision?

Hiring does not always solve the problem immediately. Knowledge of customers' machines, legacy software, or service histories may take time to transfer. That transition and training work also need to be planned. Opening a position and making the required capability available are different events.

The cash cost therefore tells only part of the story. An apparently cheap experiment might occupy the company's scarcest specialist for months. Another option that looks more expensive could be tested with outside help. Ranking those proposals only by cash outlay could misrepresent their actual costs.

The sponsor's reputation is in the room, too

A study published in 2015 by finance researchers John Graham, Campbell Harvey, and Manju Puri reports that divisional managers' reputations and senior executives' intuition also influence capital allocation. These are survey findings. They do not, by themselves, establish favoritism or bad decisions. Research (opens in a new tab)

The distinction matters. Trusting a manager who has delivered on previous commitments can be reasonable. Execution ability may not be fully captured by a numerical model. But if familiarity replaces examination of a new team's proposal, having won resources in the past can make it easier to win them again.

I would ask what information the reputation contains. Did the manager complete previous projects on time? How accurate were the forecasts? When conditions changed, did the manager report problems early? Running a large division does not, on its own, make the next proposal better.

Trying to remove reputation from the decision altogether would be unnecessary. But the economics of the proposal and confidence in its sponsor can be discussed separately. That helps distinguish a strong manager's weak project from a reasonable experiment proposed by a team that has not yet established a track record.

At Intel, allocation moved before the stated strategy

Resource allocation can also help an organization change. In the historical Intel example described by strategy researchers Joseph Bower and Clark Gilbert, a manufacturing rule based on gross margin per unit of silicon area directed capacity toward microprocessors. Operational decisions were establishing a different direction while the corporate strategic conception remained attached to memory. Bower and Gilbert's account (opens in a new tab)

This account does not establish that decisions made lower in the organization are always right. It does show why a gap between the central plan and actual resource use deserves examination: the gap may contain useful learning. Simply tightening compliance with the plan could suppress that information.

Management needs to ask two questions together. Why are people departing from the stated priority, and what do their choices reveal about customers or the economics of the business? One team might have stopped developing a feature that customers will not pay for. Another might be delaying a necessary transition to protect its short-term targets. From a distance, both can look like the same budget deviation.

The strongest counterargument: Keeping the budget can be right

An attractive new activity does not cancel existing obligations. Our manufacturer could lose customers by missing deliveries. If collections are delayed, funding a service expected to produce future revenue could strain its ability to pay today's bills. Moving slowly in those circumstances cannot simply be attributed to fear of change.

Research by Gregor Matvos and Amit Seru on U.S. diversified firms also finds that internal resource allocation can help counter external financing stress. That does not mean every transfer within a company is efficient. Research abstract (opens in a new tab)

Good management therefore cannot be measured by the size of changes to the budget. The existing business may offer a stronger opportunity. The new activity may not yet be ready for investment. To criticize an unchanged allocation, we also need to establish the cost, feasibility, and expected contribution of the alternative being passed over.

Nor does every activity need to be removed from the annual budget cycle. Some investments require sustained commitments. If frequent review becomes repeated changes of direction, the team may never have time to learn. Review timing should reflect when information capable of changing the decision is likely to arrive.

The next-commitment test

I call the framework I would bring to the meeting the next-commitment test. Its purpose is to make today's decision feasible and open to later evaluation, rather than trying to know the outcome of the entire strategy years in advance. I am proposing a management diagnostic, not claiming an experimentally validated method that guarantees success.

The approach shares the concern with learning in strategy researchers Rita McGrath and Ian MacMillan's discovery-driven planning, which makes implicit assumptions in uncertain ventures explicit. Here, I bring that concern together with questions about displaced work and available people. Research abstract (opens in a new tab)

The first question is what will be given up. Unless resources are idle, the proposal should identify the activity that will be delayed or stopped. If the budget is genuinely expanding through additional financing, its cost should be explicit too. The new activity's expected benefit can then be considered alongside the contribution of the work it displaces.

The second question is who can do the work. Funding alone does not show that a project can start when people's time and authority remain unresolved. Our hypothetical manufacturer might choose a trial limited to a few customers' machines. Its scope should fit what the assigned people can actually complete, including the work needed to support those customers.

The third question is what finding will change the next decision. Will customers pay for the service? Does delivering it require more human time than expected? Does the technical result adequately solve the customer's problem? These are different tests. If demand is encouraging but service costs are high, the price or product might need to change. If demand is absent, building a larger team may not solve the problem.

Those questions should be discussed before spending begins. If everyone redefines success at the end of the trial, the basis for another funding request becomes unclear. If new information changes the original assumption, the decision's rationale can be updated explicitly. The next step might be expansion, another test, or stopping.

What would change my mind?

If a company provides an available team, sufficient time for a test, and clear decision authority, but customers still do not want the product, I would look beyond budget design for the explanation. Keeping the existing allocation is also reasonable when additional resources create more value in the established business.

Unchanged budget categories are not sufficient evidence of inertia, either. People may have moved to different work within the same division. Earlier investments may already have created the capacity the new priority requires. I would look at the work actually being done, rather than relying on accounting headings.

At the next strategy meeting, I would ask which resources the new priority will use and which work it will replace. If there is no answer, that gap needs to be resolved first. If there is an answer, the company can test a more meaningful question: is this opportunity worth the resources we are committing to it?

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