The Economics of Delegation and Competitive Ability

What are the key components of competitive advantage? When many people think of competitive strengths, they think of talented teams, innovative products, cutting-edge technology, and financial resources. However, a less commonly discussed yet extremely powerful tool to increase competitive ability is delegation. Effective delegation optimizes a company’s use of its resources, allowing it to compete more effectively and build market share. This article explores how delegation strengthens competitive ability, outlines steps to create an effective delegation policy and discusses how to ensure that delegated tasks are carried out.

Understanding Competitive Advantage

A firm’s value-creation ability is based on its competitive strength. Firms that compete effectively can diversify and build their resources and use them to generate new opportunities, convert those opportunities into business results, increase their market share, and effectively manage risk.

Competitive strength is a key component of a firm’s value-creation ability.

Competitive ability is comprised of many interrelated factors.

Team. The skills, motivation, and experience of team members.
Location. The proximity of a firm to the key markets for its products and services.
Organizational DNA. A company’s unique culture, norms, processes, and problem-solving approach.
Products and services. The uniqueness of a company’s products and the depth and elasticity of product demand.
Intellectual property. The company’s proprietary technology and know-how.
Physical assets. Key assets of a company, such as real estate, facilities, infrastructure, and inventory.
Third-party relationships. The company’s joint venture partners, business suppliers, and general contacts.
Client base. The depth, dispersion, and loyalty of the company’s clients.
Reputation and brand value. The public’s perception of and trust in the company’s brand.
Market share. The company’s market position and market entry barriers in the company’s business segment.

A company’s competitive factors are all resources and the ability of a company to compete effectively is based on how efficiently these resources are used. Companies with few resources that use them effectively can outcompete much larger firms.

Companies with few resources that use them efficiently can outcompete larger firms.

To illustrate this, assume that there are two companies, Company A and Company B. Company A has resources comprised of people, technology, and contacts. The maximum value of these resources is 100. The maximum value of the resources of Company B, on the other hand, is 50. If Company A only uses a total of 40 of its resource potential, due to horizontocracy, inefficient processes and procedures, or poor workplace morale, and Company B makes full use of its resource potential, Company B can effectively outcompete Company B. If this is repeated over a significant period of time, it can have a large impact on a company’s competitive strength and value-creation ability.

The efficiency or inefficiency of resource use has a value-creation spiral effect.

The efficient or inefficient use of resources has a value-creation spiral effect. If resources are used efficiently, the company can increase its competitive ability, giving it access to additional resources. If a company does not use its resources effectively, the cost of those resources often starts to outweigh the return on those resources, which causes firm value to be lost.

The Economics of Delegation

Efficient resource use is based on several factors, including:

proper overall resource planning
resource management
how and when resources are matched to tasks
good resource conservation practices; and
creating follow-up loops so that resource use weak points can be quickly identified and resource use can be improved.

One organizational practice that can significantly impact resource use efficiency is delegation. While delegation is often viewed as a mere operational tool, it has much larger economic and value-creation ramifications. From an economic perspective, every person in a firm has the ability to create economic value, and it is in the firm’s interest to maximize that value-creation ability, subject, of course, to the firm’s values and concerns for employee growth, well-being, and work-life balance. If an employee has a task that does not take advantage of their value-creation potential, it should be delegated.

In addition to being a key resource management tool, delegation is an important economic driver.

Creating an Actionable Delegation Framework

Effective delegation starts with a strong firm delegation policy. The policy should have several components.

Clarify the why. Firms should not promote delegation for the sake of delegating but rather highlight the economic, competitive, and employee growth benefits of each person concentrating on higher-value work. This is important so delegation does not devolve into a mere self-serving work transfer process but rather as a tool for generating additional value for the entire firm.

Create a delegation culture. Delegation is a workplace and workflow habit that can only take root if it is part of the firm’s culture. Rather than just having a delegation policy that management and employees read once and then forget about it, the firm should repeatedly emphasize the importance of delegation, illustrate its connection to larger firm strategic, competitive, and value-creation objectives, and comment on positive delegation examples and instances where delegation did not work and why.

Use delegation as a larger value-creation tool. Delegation is not merely a value-creation solution for narrow workflow issues; it can also be used to drive broader strategic growth. For example, let’s say a firm wants to enter a new market but does not understand the market well. It could do the market analysis itself, but it may use a significant amount of firm internal resources, and the end result may not be optimal.

By delegating market analysis to an outside firm with expertise in this area, it will create two economic benefits: it will allow the firm to enter the new market faster, and it will allow the firm to concentrate on other tasks while the market analysis is being prepared. If the total cost of assigning the market analysis preparation work to an outside party is less than the economic benefits of the delegation (based on internal resource savings and having a stronger market entry strategy), the delegation will have created value. This economic reasoning should be a constant reference point for work allocation decisions.

Delegation can be used to drive broader strategic growth.

Information transparency. Delegation and task-related information transparency go hand in hand. If delegatees do not have all the information they need to carry out a delegated task, they may spend a great deal of time asking the original task owner for information, which can stretch out the timetable, create other types of workflow gridlock, and reduce delegation value. Accordingly, firms should strive to create centralized, easily accessible and continuously updated information storage systems to facilitate relaying work from one person to another.

Continuous delegation process improvement. To further delegation, firms should ensure that there are training materials. Delegation is a business process, and as with all business processes, with training, it can be carried out more effectively.

Types of Delegation

Delegation is often viewed as the process of transferring a product to a more junior person. However, there are several types of delegation that can all contribute to firm value creation. These types can be broadly divided into internal and external forms of delegation.

Internal delegation. Three types of internal delegation are upward, horizontal and downward delegation. With upward delegation, a person gives a task to a more senior person who may be able to handle the task more efficiently or in a way that adds greater value. With horizontal delegation, a task is provided to a person at a similar level in an organization, which can free the delegating person up to handle other tasks that are more important at the moment. With downward delegation, tasks are provided to a more junior person in the firm.

Three types of internal delegation are upward, horizontal, and downward delegation.

External delegation. With external delegation, tasks are delegated to an outside firm.

Task Delegation Considerations

Several factors must be considered when determining if a task should be delegated. These factors include:

Task importance. Tasks of high importance to the firm should not be delegated unless there is a high certainty that they will be carried out properly.
Task urgency. If tasks are extremely urgent, it can make sense for the task owner to carry them out because setting up and overseeing the delegation process may be too time-consuming.
Task value. The value of the task compared to another task that can be performed by a department or person.

The key economic rule should be that every person should create as much value as possible without causing a depletion of value in other parts of the firm. For example, assume that a person’s time is worth $1,000 per hour. If a person has a task that will only generate $200 of value, the task should be delegated, because keeping the task will effectively cause the firm to lose $800 of potential value. On the other hand, if the person delegates the task to a person whose time is worth $1,200 per hour, it should not be delegated as that will cause the firm to lose $1,000 of value.

An economic comparison is also relevant for delegating tasks externally. If a task can be delegated to a third party and the cost for the third party doing the work is less than the value that can be created by the internal team if the work is delegated, it should be transferred to the third party.

On many occasions, tasks are not delegated, even though it is very beneficial to do so, because of the tendency of people to undervalue items whose economic significance is not easy to see. A person may view retaining a task that effectively costs the firm $100 an hour as a wiser economic choice than paying an outside party $50 an hour to complete the task, simply because the $50 payment to an outside party seems economically more tangible.

Keys to Successful Delegation

Once the determination to delegate a task has been made, the delegation must be structured properly so it will create value. Delegation can cause value to be lost if:

the task is not carried out properly and it needs to done over again
poor task execution damages the relationship of the firm with clients or firm partners
it requires excessive going back and forth between the person who delegates the task and the delegatee, resulting in a form of “sticky delegation” or “elastic delegation” where the person who delegates the task never really extricates themselves from it; or
delegation leads to endless delegation chains where the work is constantly transferred but never actually done.

Here are steps firms can take to increase the chances that the delegation will be effective.

Create a clear description of the task or tasks to be done and the implementation time frame.
Provide all relevant information to the delegatee that is necessary for the delegation to be successful. This means information about the context of the task, any relevant history regarding the task (such as prior conversations with clients or other third parties) and any known issues or potential barriers that might prevent the task from being completed.
Focus on outcomes rather than methods and give the delegatee the flexibility to use their own methods to complete the objective.
Ensure that the delegatee has sufficient support to carry out the task effectively.
Make clear when the delegatee’s responsibility with respect to the task will end.

Delegation in the Broader Economic Context

Delegation is a very powerful economic and competitive driver, but it should also be balanced against other firm work realities and dynamics that are economically consequential. For example, even though it might make economic sense for a junior person to delegate a task to a more senior person who can add greater task value, the junior person’s work on the task may help them build their skills or increase their confidence, which will generate more value for the firm over the long term. Delegation should always be viewed as a part of a firm’s overall value-generating components.

Key Article Points

Effective resource use is an important component of firm competitive ability.
A key element of effective resource use is delegation.
Delegation can be internal or external. Internal delegation includes upward, horizontal or downward delegation. External delegation involves the transfer of tasks to outside firms.
By designing and implementing a delegation policy, firms can strengthen their competitive ability. This can allow firms to compete against companies with much greater resources.
A broad view of the economic impact of delegation should be taken, as, at times, short-term, task-specific economic value losses can lead to long-term economic value gains.

The source for the photo that was used in this article is here.