Strategic Planning Expert

Strategic planning and risk assessment – yes, you must look at what would happen if…If you fail to assess and mitigate risk during strategic planning you could end up with a BP-like disaster.  While the exact causes of the Macondo rig disaster are not yet known, it is nonetheless fair to ask: “Was this a Threat or did BP shoot themselves in the foot?” Well, probably both actually. 

THREATS

Threats are events that occur due to external forces outside of your control and which significantly impact your business.  Examples include recessions, hurricanes, the death of a key employee, and/or competitors merging (to name a few).  In BP’s case, the drilling team seemingly did not adequately prepare for the oil reservoir pressure exceeding the well’s engineered capacity, and the resulting blow-out. What should they have done to mitigate the risk? Here are five suggestions: your strategic planning should examine each and select the best mix. 

Prevent

BP first and foremost should have considered how they could prevent a blowout from happening:  this well was an exceptionally deep well, so engineering standards should have been set high.  Cutting costs or speeding up the timeframe for the well to come on line should have been weighed against the high-risk nature of a deep-water well.  High risk?  The depth of the well makes adjustments difficult because everything needs to be adjusted by remotely-controlled tools and vehicles in conditions where the significant water pressure adds complexity to any operation. 

Reduce Exposure

Plans should have been in place for a well blowout, as well as plans for evacuation and spill containment.  Evaluation:  all but eleven people were able to evacuate the drilling rig.  But the disaster far exceeded what happened on the rig platform.  The disaster on the surface was the first hint of the catastrophe that was happening beneath the surface.  As has become apparent, BP did not have adequate plans in place to mitigate the massive amounts of oil that began spewing from the well.  

Early Warning

Yes, there apparently were early warning signs – and these should have been signals to slow down the well completion process; not pour the mud and the cement until the pressure was understood, slowing down so that adjustments could be made that would insure the integrity of the well.  If early warning signs had been heeded and appropriate procedures been in place, the drilling team might have taken the time to truly assess what was really happening a mile beneath the water’s surface. 

Contingency

There are also questions with regard to the ill-fated blowout preventer: were all the checks done completely; were some shortcuts taken; were any and all changes to the design fully tested before the blow-out preventer was installed?  Was the effectiveness of redundancy exploited fully? 

Hedge

Typically, we look at ways to hedge when mitigating risk, but there are not necessarily ways to hedge every threat.  In this case, drilling could have been stopped and other wells could have provided oil.  Also, relief wells could have been drilled when the integrity of the well was suspect. 

Had BP really examined their threats, they would have had better plans in place and might have prevented the disaster which will render the well useless and cost BP billions of dollars in funds for clean up.  It is important when developing threats that people understand what the implications of the threat could really look like – so scenario planning might be in order.    For instance, a threat could be a hurricane, but you might have different scenarios for a category 1 hurricane, a category 3 hurricane, and a category 5 hurricane.  I was working with one team which identified hurricanes as a threat and the team came up with mitigating strategies for category 1 and 3 hurricanes – however, they decided that mitigating the risk of a category 5 was not possible, so a contingency plan was developed:  Evacuate and take care of the people; lock down the production facility as suggested in the plans for a 1 and 3, but understand that the people’s safety came first.  In addition, they developed a clean-up plan for after the devastation of a category 5 hurricane.                        

NOW, SHOOTING YOURSELF IN THE FOOT

Shooting Yourself in the Foot involves a self-inflicted blunder. Apparently BP did not have robust plans to mitigate the risk of the well blowout Threat.   Besides having a poor risk mitigation strategy, they also shot themselves in the foot by having only a short-term mindset which prevented them from properly investing (both time and money) in this high-risk, deep water well.  This short-term focus caused them to spend less, increasing the risk and increasing the downside consequences of the higher risk. Not only will the well be shutdown for good and the upfront investment costs of designing and drilling the well lost, but the resulting environmental disaster will also require significant spending to clean up the mess they made.  Additionally, their reputation will be tarnished forever.  Short-term thinking did not only lower this well’s future returns; it obliterated all future returns from this well, as well as cutting into BP’s future earnings and market value. 

Lessons Learned

It is important during strategic planning to think about growth and about profitable growth, but don’t put blinders on and simply chase growth and profit. Taking the time and spending the money to mitigate risk and protecting yourself from downside exposure will save you money in the long-run.  It may well spell the difference between profitable growth and unmitigated disaster.  As you develop your strategic planning, spend time on risk assessment and mitigation of Threats posed by external forces.  In addition, be sure that you take some time and identify ways that you could Shoot Yourself in the Foot, and discuss options which you might pursue to avoid losing your toes.

Denise Harrison is Vice President of the Center for Simplified Strategic Planning, Inc.  She can be reached at harrison@cssp.com

Strategic Planning Expert

As we get further into 2010, the time has come to start planning for the uptick in the economy.  No, it likely will not be a “V” shaped recovery.  And, if the government and the Federal Reserve get it wrong, we could have a “W” shaped double dip rather than a recovery.  But, sooner or later, the economy will recover, and you would do well to plan for it and to be ready when the indicators turn positive essentially across the board.  

So, what is involved in this planning for the recovery?  To be ready, there are a number of areas you should check out and be ready for.  First: will your customers after the recovery begins be the same customers you were selling before and during the recession?  Have you serviced them well enough that they will continue to want to do business with you?  Do you have the relationships deeply enough established that you will continue to enjoy their business in the future? 

Second: What will you be selling in the future, as compared with what you sold prior to the slowdown, and with what you actually were selling during the slow period we are just beginning to emerge from now? 

Third: What do you want to sell going forward?  Are there any lessons you have learned about your business, your products and services, that can translate forward into more business, more profits and better products and services for your customers, present and future?  What did you do well for your customers during the slowdown, and what did you learn about yourself, your products and services, and your customers that will make your future better and more profitable? 

Fourth: Why were you able to sustain your business during the recession?  What was it that your customers valued that kept your business viable?  What did you stop doing during the recession that impacted your bottom line, either positively or negatively?  What did you learn from the changes you made in order to get through the tough times?  How can these lessons be applied toward ensuring success as business improves? 

We have posed a lot of questions above, and getting the answers will involve considerable effort and introspection.  The challenges of the future must be analyzed objectively and systematically in order to learn from the events so we may prosper as the economic activity improves.  At the same time, we must be objective about making changes to support increased activities, so we do not lag behind the curve and miss opportunities, and so we don’t leap too far, burdening our companies with increased costs and commitments. 

This is where a formal, well-structured, objective strategic planning process comes into play.  In order to be properly prepared, with milestones for making changes, and contingency plans for various scenarios, a thorough planning process is key to steering toward success.  Without an objective analysis of the past, along with a realistic set of goals, objectives and strategies to follow for the future, you may not be able to take advantage of the opportunities which will come along as the economic atmosphere improves.  Planning is essential for success, and this planning should likely start soon so you are prepared when the tide changes.

M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at baldwin@cssp.com.

© Copyright 2010 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution. 

Strategic Planning Expert

In a recent issue of The Wall Street Journal, an article forecasts the end of Strategic Planning – again.  In the article, the efficacy of strategic planning is questioned in some depth.  Instead of utilizing strategic planning properly, the article suggests that flexibility and responsiveness will be enhanced by reacting to the market place because of the fast moving nature of today’s market place. 

In reality, if a company follows the Simplified Strategic Planning process that we have espoused for nearly 30 years, the company actually enhances the flexibility and responsiveness that the article implies can only be achieved with these “new” processes. 

Let’s examine the elements of strategic planning to be sure we fully understand the implications of the process.  First: In order to start effectively, a company must know where it currently is positioned in the market place.  We will examine our markets – customers and products/services they buy.  We will analyze our competition to see where they are strong and where they are weak.  We will look at the technologies involved in making or providing our products and services, those involved in the internal processes within our company, like IT, and where applicable, the technologies utilized in our actual products or services themselves.  We will look into our suppliers, both people and materials or services which we buy.  We will analyze the effects of the parts of the economy which affect our business and we will determine what role regulations, both governmental and industry-approved, play in our business.  All of this is done looking at today’s situation and at the recent history of the company in order to have a good understanding of where we are starting our planning from. 

We will look inside the company to be sure we have strong financial reporting systems and processes, and we will seek to track the metrics of our performance.  The goal of this tracking of metrics is to help us determine trends in the areas of finance, customers, internal measures, and innovation and learning.  We will also look at our strengths and weaknesses to learn what we should emphasize and what we should avoid or change.  Finally, we will determine our Strategic Competency – our sustainable competitive advantage — to verify what we must do to build our business (rework) most effectively.  Having done all this, we will understand where we stand in our markets relative to what customers want and need, and relative to our competition.  We will understand how we compete and the basis for that competitive advantage we will seek to exploit. 

Only after establishing where we are and our strengths, can we begin to develop strategies to effectively compete.  By skipping this first part of a good strategic planning process, a company could well miss what the true basis for competing effectively is – for that particular company – and could misconstrue what strategies will be effective in the markets they are competing in.  Without going through the basics, which really do not take all that much time, considering the good that can arise from doing them, the choices the company may make could lead them astray, and could make them less competitive or, even worse, headed in the wrong direction.  There is no substitute for pursuing an effective strategic planning process which will lead to good strategies for penetrating and exploiting the market places in which you are competing.  The process does not have to be lengthy, it can be done quickly enough to be responsive to the changes that are happening in our rapidly evolving markets, and once done, can be revised very quickly should the need arise.

M. Dana Baldwin is a Senior Consultant with Center for Simplified Strategic Planning, Inc. and can be reached at baldwin@cssp.com.

© Copyright 2010 by Center for Simplified Strategic Planning, Inc., Ann Arbor, MI — Reprint permission granted with full attribution. 

Strategic Planning Expert Robert Bradford

When assessing strategic opportunities, we have for years examined four variables in the Simplified Strategic Planning process – value, probability, management effort and financial risk.  Recently, I have taken to including a secondary analysis of opportunities, undertaken when reviewing opportunity screening worksheets in meeting number two.  This screening is particularly useful when you are evaluating far more opportunities than your team can realistically handle (in my experience, from three to ten strategic opportunities, depending on the team and its resources). 

The purpose of this screen is to enable your team to quickly sort out the opportunities with the greatest strategic potential for your organization.  When reviewing opportunity screening worksheets, you simply ask the team to rate each opportunity on two dimensions – resource requirements and strategic impact on the organization.  For resource requirements, you may want to anchor the rating on a one to five scale.  In a medium sized company, a one might indicate resources commensurate with an individual employee’s initiative – requiring little management of either manpower or money.  A two could correspond with departmental level resources, a three with two or more departments, and a five would indicate a need for co-ordination of resources across the entire company.  For strategic impact, we used one for “nice to do”, three for “important” and five for “critical to our future”.  Note that we do NOT rate on a purely financial basis, and in practice, opportunities with a strictly financial payoff were generally given a three impact rating – that is, a simple boost to profit is not enough to earn an opportunity high marks on strategic impact.

Some interesting insights arise when using this assessment tool.  Your team will doubtless agree that priority should be given to high impact, low resource opportunities – I call these “no brainers”.  Equally obvious should be the automatic disqualification of low impact, high resource opportunities – though, in many organizations, these grind up a lot of recourse as individual employees take on pet projects as personal initiatives.  The most difficult discussions – and often the most strategically dangerous issues – occur in the middle zone – opportunities with moderate impact and/or moderate resource requirements.  Each presents a different danger to a well crafted strategic plan – the moderate resource requirement opportunities can choke middle management as senior executives delegate a growing number of “just do it” initiatives to the next layer of the organization.  The medium impact opportunities may actually receive top-level commitment in strategic planning – after all, how can you deny an opportunity that increases your profitability?  These opportunities can mire your strategic level resources in initiatives that produce only incremental improvements in your organization’s performance, while more fundamental, truly strategic opportunities are starved for resources because they are “too difficult”. 

If your organization is plagued by a surplus of incremental projects or “just do it” items that are overwhelming mid-level management, this approach to opportunity screening may give you one more way to rationally say “no” to things that will impede your strategic progress.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com. 

Strategic Planning Expert

“First, the bad news, the market for buggy-whips has disappeared; but the good news is, that we have cornered the market for 8-Track tape players.” 

Who makes the screens that go into electronic readers – you know the screens on Amazon’s Kindle^TM and Sony’s Reader^TM?  Prime View dominates this market; how did Prime View become the leader?  Is this a new company?  Well yes and no. Prime View was started by a Taiwanese paper company who saw that paper was being replaced by other media, in this case liquid crystal display (LCD) screens.  Prime View was born from this view of the future.[1] 

The Importance of Market Analysis 

The senior management team of the paper company correctly identified what the market really needed; the market did not need paper, the market needed something to display the written word.  Correctly identifying the true market need enabled the company to see electronic readers (e.g., Kindle^TM) as a substitute for using paper to publish books and other media.  Once this alternative technology was identified, the team developed a strategy to enter into the electronic reader market.  The electronic reader market is a very small segment of the overall LCD display market.  The larger segments of the LCD display market are dominated by large electronics companies, which are often competing on price.  Prime View selected the electronic reader market, a market that was still being driven by technological advances rather than lower cost. 

Once they identified the electronic reader market, they decided that it would be easier to buy/partner to obtain the technology required, rather than develop it in-house.  They acquired several companies including Philip Electronics, NV’s e-reader division who was providing screens for Sony’s Reader^TM.  They licensed E-Ink’s technology to further enhance the product and subsequently became Amazon’s e-screen supplier for the Kindle^TM product.  Finally, in order to control the technology the company purchased E-Ink.  Now they dominate the e-reader screen market, and all the key providers (Amazon, Barnes & Noble, and Sony) of e-readers use Prime View screens in their products. 

Keys to Success 

1. Truly understand what the market needs – this is not necessarily what the market is already buying from you.  If you correctly identify what the market really wants, you will be able to see indirect competition and substitutes on the horizon.  Prime View realized that the market did not need paper, but an alternative medium to display the written word.  They realized that LCD screens would be used in place of paper. 
2. Select a market where your company will be successful and develop a strategy to enter that new market.  Prime View selected the electronic reader market where technology was key to market differentiation, rather than lower cost. 
3. When entering a new market, make the “make/buy” decision early; can you grow the competencies needed to compete in this market in-house or is it faster and more cost-effective to buy a company with the required competencies? 

What is next for Prime View? 

Now that Prime View has the dominate position in this market, it cannot rest on its laurels.  The good news is that the market is growing quickly; the bad news is that this market growth has attracted many competitors.  How long will this market be technology driven? What does Prime View need to do in order to continue to be the market leader?  When will the transition come that will move this market from a specialty market to a commodity market where low cost defines the winner?  How does it go about looking for the next emerging segment in the LCD industry – a new segment where technology is driving success rather than low cost?  As the market- dominate player, you cannot kick back and enjoy success, you must plot the next move on the chess board so that you are positioned for success for years to come.

Denise Harrison is Vice President of the Center for Simplified Strategic Planning, Inc.  She can be reached at harrison@cssp.com.

One of the hardest things to get right, strategically, is the true value of your product or service.  This is understandable, since the only true measure of value is what an individual customer will pay at a specific point in time.  Most of us look at our costs- commodity based – or competitors’ prices- also commodity based – when thinking about pricing.  This is silly when pursuing a specialty strategy, since the customer is your best source of value information. 

Some companies, realizing this, will ask their customers directly what the value of a product or service would be.  While this can give you decent guidelines for pricing, we should be aware that customers won’t verbally answer this question the same way they would if they were actually reaching into their wallets to buy your product or service.  Indeed, in many situations, customers will consistently under-report the prices they would be willing to pay, because they expect their answers will cost them in the future.  Fortunately, there are a few other clues we can look at to help us with our thinking on prices. 

1.           Substitutes 

Substitutes are a rich source of information about value.  There are three key substitutes you should be aware of in pricing:  (1) Directly competing products, (2) Indirectly competing or combination products, and (3) the ultimate substitute, not buying anything at all. 

2.           Measured changes 

This source of value information relies upon the impact of purchasing your product or service.  Sometimes, this is very direct – using a product or service may save your customer money that they would have spent on something else.  A super simple example would be drinking cheap beer instead of expensive champagne – you know the value is no more than the price of the champagne, since the customer will save that much by switching to another (if inferior) product.  Another example would be consulting services – if working with a sales trainer, for example, is guaranteed to increase your sales by a certain amount, you would expect the cost to be less than or equal to that net value. 

3.           Actual buying behavior 

Without question, this is the best data on value.  When a customer buys, you know that the value – to that customer – is greater than or equal to the price.  Conversely, when the customer does not buy, you know the customer’s perception of value is less than or equal to the price.  If you have many, many pricing opportunities (such as in retail sales), you may want to rely very heavily on this data, as long as you have a good means of tracking buyer behavior. 

How do you set your pricing?  Given that 90% of pricing errors are under-pricing, what do you do on a routine basis to evaluate how your pricing fits with your company’s overall strategy?  We’d love to hear any stories you have about what is – and isn’t – working.

Robert Bradford is President/CEO of the Center for Simplified Strategic Planning, Inc.  He can be reached at rbradford@cssp.com.