550  Strategic Management: Analytics for a business unit will continuously change over time if its underlying seg- ments have different growth rates and returns on capital, even if these are stable for each segment. Unless you analyze performance at the segment level, it will be very difficult to understand and forecast the business unit performance. Finally, a granular approach offers executives better information for direct and radical interventions at the level of individual units or projects, should stepping in become necessary. This can occur when a division-based struc- ture leads to misaligned management incentives.3 For example, in one global industrial company, whenever one of the business units needed to achieve its overall profit target it would cut its research investments in breakthrough renewable-energy technology, although the technology had excellent potential to create long-term value. To remedy the situation, management separated out the renewable-energy project as an independent unit reporting directly to the executive team. Detached from the original business unit’s profit goals, the new unit increased and stabilized these value-creating research investments. Taking the Enterprise View In addition to taking a granular view of strategic management, companies need to examine all resource allocation decisions (including capital expen- ditures, research and development, talent, and sales and marketing) in the context of the entire enterprise, not as single, stand-alone decisions and not as a part of a division or business unit.4 Taking the enterprise view means evaluating resource investments from the perspective of how they affect the company as a whole. This approach provides several benefits: • It ensures that resources are allocated to where they will create the great- est value for the company as a whole, regardless of which division or business unit receives the resources. • It helps overcome the inertia that leads to resources being allocated to the same units from year to year. Research shows that the best predictor of how companies typically allocate resources is last year’s allocation. Yet companies that more actively reallocate resources create more value, translating into 30 percent higher total shareholder returns, on average.5 • It mitigates the negative effects of loss aversion—the tendency to pass on high-risk, high-reward investments because individuals tend to 4 This section draws on D. Lovallo, T. Koller, R. Uhlaner, and D. Kahneman, “Your Company Is Too Risk-Averse,” Harvard Business Review (March/April 2020), hbr.org. 5 S. Hall, D. Lovallo, and R. Musters, “How to Put Your Money Where Your Strategy Is,” McKinsey Quarterly (March 2012), www.mckinsey.com. 3 Giordano and Wenger, “Organizing for Value.” Taking the Enterprise View  551 weight losses more heavily than gains. Mid- and lower-level manag- ers are typically too risk averse, attaching much more importance to potential losses than gains from investments (see Chapter 4). This ap- plies even when the amounts at stake are small and any losses could be easily absorbed by the organization as a whole.6 Combining investment opportunities from different business units and segments typically gen- erates diversification benefits, reducing the risk per dollar invested.7 Effective strategic management should aim to make allocation decisions for the entire company all at once or at least in groups, using some form of project ranking and prioritization across the company. Ideally, a company would apply a portfolio optimization model that incorporates risk correlations across potential investment projects. In Chapter 4 we discussed the example of a technology company that adopted this approach. Regardless of which division or business unit individual projects belong to, they are combined in alternative portfolios, and the portfolios are ranked by their aggregate return and risk.8 With this approach, a company can find the portfolio of projects that would provide the best balance between risk and return. For example, it can derive what would be the least risky portfolio that achieves an overall target rate of return. A Simpler Alternative Following the same underlying logic, a less technical approach can generate similar insights without explicit estimates of project risk correlations. Con- sider the example of a company that operates three business units, each with ten projects seeking investment. In this approach, the business units submit all their project proposals to the teams responsible for overseeing financial planning and analysis, corporate strategy, and other functions. Each proposal includes a range of possible present-value outcomes and an assessment of the associated risks. The corporate staff then simply ranks all 30 projects across the company based on their expected return, ignoring risk for the moment. Given a certain investment budget and based on this ranking, the staff deter- mines which projects should be selected to maximize overall value creation, regardless of which business they belong to (see Exhibit 29.2). For this preliminary selection, the corporate staff assesses whether the overall risk profile is acceptable for the company as a whole. If the projects are largely uncorrelated, the aggregate risk per dollar invested for the selected 6 See T. Koller, D. Lovallo, and Z. Williams, “Overcoming a Bias against Risk,” McKinsey & Company, August 2012, www.mckinsey.com. 7 As noted in Chapter 4, this does not mean that the company’s cost of capital is lower. By definition, diversification cannot reduce a project’s beta and cost of capital. 8 We measure return as expected PV/I (that is, present value divided by investment) and risk as the standard deviation of return.