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 Robert Bradford

Every once in a while, I run across a company that is doing just fine, and has been pretty successful for a long time.

These companies scare me.  Nothing creates failure like success, and the temptation to rest on one’s laurels has heralded doom for many a fine organization.

These days, people at least accept the idea that old strategies don’t always work.  In the 1990’s, this was attributed to the “new economy”.  In 2009, it was attributed to the bad economy.  The reality is that old strategies almost always stop working, eventually.

There are three key reasons why your currently successful strategy is likely to break in the future:

1.  Technology

2.  Imitation

3.  Replacement

The first is a pretty obvious reason, if your strategy is built around technology.  Even if it isn’t, technology can do an end run around your product or service – just ask all the struggling tax service firms that are trying to replace low-end work lost to simple computer programs.  Even more insidious are technologies that suck the life out of your customers’ markets – it’s possible you won’t see those coming until it’s too late.

The second threat, imitation is a serious problem if your strategy becomes too successful.  Not surprisingly, competitors can sometimes see when your approach is akin to a license to print money, and you can bet they will want in on that action.  This doesn’t mean they will succeed – witness the ridiculous failure of most U.S. airlines who attempted to emulate Southwest Airlines in the 1990’s.  But even a failed attempt to imitate you will suck profits out of your market, and it will spoil your customers into thinking there will always be bargains waiting for them.  In the worst cases, everyone does get the basic idea behind your strategy, and the thing that originally set you apart becomes commoditized, which can be a nearly permanent problem.

The third threat, replacement, is sometimes – but not always – the result of technology, so it has a special status.  Anything that customers might use to replace the value you offer – not just your product – can cause a replacement problem for your strategy.  For example, hugely discounted airfares in the 80’s and 90’s replaced a main driver for need in the passenger rail and bus industries (price).

In each of these situations, playing the game as if it has not already changed can be a recipe for disaster.  Homing in on the issue – technology, competitors, or replacements – can give you the edge you need to keep going, but sometimes a complete re-thinking of your strategy is in order.

There is no question that this re-thinking can create a stressful time for an organization.  Not only that, but the re-thinking is not guaranteed to lead you to a suitable new strategy without some trial and error.  This is one reason why most of the really successful companies we have helped through this transition started while things were still going well.  Trial and error is much more affordable if your company isn’t on the ropes.  Even if you are on the ropes, a well-directed re-thinking of your strategy is likely to get you back on a positive track, so don’t delay the hard work that this calls for when you see the warning signs.

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

Strategic Planning Expert

Can success breed failure? This seems like an oxymoron doesn’t it? But world class companies continue to fall into this trap – Toyota is the latest example.  Toyota gained market share in the automotive market by focusing on quality – this was their strategic competency.  This single-minded concentration on quality built trust with consumers worldwide, wooing consumers away from other less conscientious manufacturers. But the recent recall of millions of Toyota vehicles over several model years shows how Toyota’s loss of focus on quality has severely damaged the trust that had been built up over decades.  The cost of the recall will be millions of dollars in the short-term, but the loss of future sales and its reputation is incalculable. 

Toyota – Culture of Quality 

How did Toyota institutionalize its quality culture?  One aspect of the “Toyota Way” is that newly hired engineers were mentored for 10 years to ensure that they are fully imbued with the values around which the culture is built. Another aspect of the quality culture was the concentration on analyzing consumer complaints and acting on the analysis quickly.  However, when Toyota set its goal to become the world’s largest automotive manufacturer, it lost sight of the key values that gave it its reputation in the first place.  In order to meet its growth targets Toyota had to hire many new engineers globally; however it did not have the senior engineers available to mentor the new team in the manner that it had in the past.  In addition, it no longer spent as much time analyzing consumer complaints – and in some cases it came up with low cost “fixes” (e.g. replacing floor mats in response to complaints of sticky accelerator pedals).  One final aspect of the decline was that Toyota did not share safety information worldwide, so problems that cropped up in Europe were not shared with the US.  Hence its “failure to connect the dots”, as stated by Akio Toyoda when commenting on the recent recall. 

What Should We Learn? 

Toyota’s early growth resulted from its relentless pursuit of quality – this was its strategic competency; however, it lost its way when growth took priority.  When you lose sight of your strategic competency, the very differentiator that gives you your competitive advantage, you will damage your reputation in the market. This reputation often takes decades to build.  So as you look to grow, make sure that the growth does not cause you to grow faster than you can grow your strategic competency. This means that you must have plans to ensure your intellectual capital (strategic competency) grows at the same pace as your sales growth.  This competency expansion is a critical consideration as you develop your strategy.

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