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One of the challenges of credit allocation is that the needs and priorities of an organization may change over time. For example, a company may face new competitors, new market opportunities, new regulations, or new customer demands. These changes may require the organization to adjust its credit allocation strategy to optimize its performance and achieve its goals. In this section, we will discuss some of the factors that may influence the need for adjusting credit allocation, and some of the methods and best practices for doing so. We will also provide some examples of how different organizations have adapted their credit allocation to changing circumstances.
Some of the factors that may trigger the need for adjusting credit allocation are:
- Changes in the external environment: The external environment refers to the factors that are outside the control of the organization, such as the economy, the industry, the competitors, the customers, the regulators, the suppliers, and the social and political context. These factors may affect the demand for the organization's products or services, the availability and cost of credit, the risk and return of different investments, and the opportunities and threats that the organization faces. For example, a global pandemic may reduce the demand for travel and hospitality services, while increasing the demand for health care and e-commerce services. This may require the organization to reallocate its credit resources to the sectors that have higher potential or lower risk.
- Changes in the internal environment: The internal environment refers to the factors that are within the control of the organization, such as the vision, mission, goals, strategy, structure, culture, processes, systems, and people. These factors may affect the organization's capabilities, strengths, weaknesses, opportunities, and challenges. For example, a merger or acquisition may create synergies or conflicts among different units or functions, requiring the organization to integrate or separate its credit allocation. A new product launch or a new market entry may require the organization to invest more in research and development, marketing, or distribution, requiring the organization to allocate more credit to these activities.
- Changes in the performance and feedback: The performance and feedback refer to the results and outcomes that the organization achieves and the information and insights that the organization receives from its stakeholders, such as the shareholders, the customers, the employees, the regulators, and the society. These factors may indicate the effectiveness and efficiency of the organization's credit allocation, and the areas that need improvement or adjustment. For example, a decline in sales, profits, or market share may signal that the organization's credit allocation is not aligned with its competitive advantage or customer value proposition, requiring the organization to revise its credit allocation. A positive or negative feedback from the stakeholders may suggest that the organization's credit allocation is creating value or causing harm, requiring the organization to reinforce or correct its credit allocation.
Some of the methods and best practices for adjusting credit allocation are:
- Conduct a periodic review and evaluation: A periodic review and evaluation is a process of assessing the current state and performance of the organization's credit allocation, and identifying the gaps and opportunities for improvement or adjustment. The review and evaluation should be based on relevant and reliable data and information, and should involve the participation and input of the key stakeholders, such as the senior management, the credit managers, the business units, and the external experts. The review and evaluation should cover the following aspects: the objectives and criteria of the credit allocation, the methods and models of the credit allocation, the allocation and utilization of the credit resources, the risk and return of the credit portfolio, and the impact and value of the credit allocation.
- develop and implement a plan for adjustment: A plan for adjustment is a document that outlines the rationale, goals, actions, and measures for adjusting the organization's credit allocation. The plan should be based on the findings and recommendations of the review and evaluation, and should align with the organization's vision, mission, strategy, and goals. The plan should specify the following elements: the scope and scale of the adjustment, the timeline and milestones of the adjustment, the roles and responsibilities of the adjustment, the resources and budget of the adjustment, the risks and challenges of the adjustment, and the indicators and metrics of the adjustment.
- monitor and communicate the progress and results: Monitoring and communication are the activities of tracking and reporting the progress and results of the adjustment of the organization's credit allocation. The monitoring and communication should be done on a regular and timely basis, and should use clear and consistent methods and formats. The monitoring and communication should involve the feedback and input of the key stakeholders, such as the senior management, the credit managers, the business units, and the external experts. The monitoring and communication should focus on the following aspects: the achievements and challenges of the adjustment, the deviations and corrections of the adjustment, the benefits and costs of the adjustment, and the lessons and learnings of the adjustment.
Some of the examples of how different organizations have adjusted their credit allocation to changing needs are:
- Amazon: Amazon is an e-commerce giant that offers a wide range of products and services, such as online retail, cloud computing, digital streaming, artificial intelligence, and more. Amazon has adjusted its credit allocation to support its growth and innovation strategy, by allocating more credit to its high-potential and high-risk segments, such as amazon Web services, Amazon Prime, and Amazon Alexa. Amazon has also adjusted its credit allocation to respond to the changing customer needs and preferences, by allocating more credit to its customer-centric and value-added segments, such as Amazon Fresh, Amazon Music, and Amazon Pharmacy.
- Tesla: Tesla is an electric vehicle manufacturer that also produces battery energy storage, solar panels, and solar roof tiles. Tesla has adjusted its credit allocation to pursue its mission of accelerating the world's transition to sustainable energy, by allocating more credit to its core and competitive segments, such as Tesla Model 3, Tesla Model Y, and Tesla Cybertruck. Tesla has also adjusted its credit allocation to explore new market opportunities and challenges, by allocating more credit to its emerging and disruptive segments, such as Tesla Semi, Tesla Roadster, and Tesla Network.
- Starbucks: Starbucks is a coffeehouse chain that also sells tea, pastries, sandwiches, and merchandise. Starbucks has adjusted its credit allocation to adapt to the changing consumer behavior and demand, by allocating more credit to its digital and delivery segments, such as Starbucks Mobile App, Starbucks Rewards, and Starbucks Delivers. Starbucks has also adjusted its credit allocation to enhance its social and environmental responsibility, by allocating more credit to its ethical and sustainable segments, such as Starbucks C.A.F.E. Practices, Starbucks Community Stores, and Starbucks Greener Stores.