Posts Tagged ‘financial risk’

Strategy Analysis: Expand

Monday, August 16th, 2010

by M. Dana Baldwin, Senior Consultant

Strategic Planning Expert

In strategic planning, there are five basic strategies one may pursue: Expand, Maintain, Contract, Milk or Withdraw.  The most aggressive strategy is Expand.  What does an Expand strategy encompass?

First, let’s define the Expand strategy so we have a basis on which to base discussion.  The dictionary defines expand as: to increase the extent, number, volume, or scope of, to enlarge. We further define an expand strategy as one in which we are growing significantly faster than the market or market segment is growing overall.

To follow an expand strategy, a company must decide to provide the resources which will support the targeted growth rate.  It implies that the company’s growth will absorb much of the real growth of the markets in which the company is competing.  It also implies that the company is willing to take on competitors in order to take market share from them, in addition to absorbing the growth in the market place itself.

Before we select the expand strategy, we need to look in depth at each market segment to see whether it will qualify for an expand strategy.  What are the requirements that a market segment should have in order to be eligible for an expand strategy?

First, we need to be able to have sufficient resources, both people and money, to properly support the strategy to expand our sales volume in each affected market segment.  An expansion strategy can be quite expensive, and will likely absorb a lot of time of some key people in your company.

Second, it should be in a relatively attractive market.  We use a 3 x 3 matrix to demonstrate how attractive a market segment is, and also how strong a competitor we are relative to our own competition.

When you look at the matrix above, you can readily see that the market attractiveness for the suggested strategy of expand is high.  Notice too, that the competitive strength (vertical axis) may range from being a weak competitor/new entry to being a strong, dominant competitor.  Our goal over time is to move our competitive position up the axis to the strongest possible competitive position.

Often it won’t make a lot of sense to expand in a less attractive market segment.  The one exception for this is in a moderately attractive market in which you are the dominant player.  If the potential for a good long term reward is present in a moderately attractive segment where you are a strong number one, then expand should certainly be considered.

Many companies simply do not have the depth of resources – usually people resources – to support too many expand strategies.  Companies need to select the few markets where they want to expend the resources to significantly gain market share.  Focusing resources is paramount to any plan’s success – so your team should not try to expand in all markets.  Rather, we suggest pick the 2-3 that, given the effort, will deliver the most bang for your buck.  We find that if you force the team to pick only 2-3 expand strategies immediately, a few “winners” will be chosen.  This selection of only a few “expands” helps ensure that a team will be successful on the chosen markets.

In conclusion, an expand strategy is a strong bet on your company’s ability to grab market share at a rate higher than the market is expanding, with the goal of increasing your return on investment over time.  This means you will aim to increase your top line sales and bottom line profits at a rate higher than the additional costs you will be incurring in your expansion efforts.

For detailed directions for using the expand strategy in your Simplified Strategic Planning process go to Simplified Strategic Planning book.

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.

Drowning in Strategic Initiatives? Here is a powerful tool for screening them out.

Tuesday, February 16th, 2010

By Robert W. Bradford, President/CEO

Strategic Planning Expert Robert Bradford
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

Lessons Learned from Boeing’s Stumble:Risk assessment is Key to a Successful Strategy

Wednesday, December 2nd, 2009

By Denise Harrison

Strategic Planning Expert

Strategic Planning Expert

Boeing’s 787 Dreamliner has not hit its development milestones, causing Boeing to take a $2.5 billion charge against earnings.  What happened?  Key to Boeing’s past success has been its ability to achieve its “big hairy audacious goals or BHAGs” (from Built to Last by Jim Collins and Jerry Porras).  In the 1950s Boeing bet 25% of its net worth on developing the 707 jetliner competing directly with McDonald Douglas the premier manufacturer of commercial aircraft at the time.  The Dreamliner, the world’s most high tech passenger jet, is another big bet – but what went wrong with its strategy?

The 787 Dreamliner is not only a bet on a large new aircraft, but also a bet on the composite materials that are being used in the design and manufacture of this new jetliner.  In order to keep development costs low and please Wall St., Boeing decided to outsource not only the manufacturing of components but also the design.  This way, its contractors would be taking on some of the financial risk of the project.  While this may have spread the financial risk, it increased the execution risk. 

  • Many of the contractors were used to building parts and systems to Boeing’s design specifications. But now responsible for the design, they found they did not have the quality assurance systems in place to ensure the quality of the design and to ensure that it would work with the other systems that would eventually become part of the jetliner.
  • By taking on more financial risk many of the suppliers are facing financial challenges during this recent global economic downturn – some may even have to file for bankruptcy protection.
  • In addition, the contractors did not have any experience getting FAA approvals: this requirement slowed the process down considerably.
  • The number of sub-contractors increased the complexity of the project as parts and systems were being designed and manufactured by people speaking 28 different languages.

The coordination tasks were and still are daunting – leading to this $2.5 billion charge.  What should Boeing have done?  Before a company embarks on a large new project it should assess what unexpected outcomes might occur.  For example: 

  • Does it make sense to spread the financial risk among so many companies – does this increase the execution risk? Should we go back to our model in the 1950s and take more of the financial risk ourselves and take the hit on Wall St.?
  • How are we going to manage all of these contractors in all of these countries with the different languages and time zones?
  • What issues will arise from outsourcing design? What skills do we have in-house that may not be present in our contractors? How can we help them in this area?

If Boeing had taken a step back and thoroughly assessed the risks they could have taken a number of steps: 

  • They could have kept more of the design in-house.
  • They could have provided better support for design in terms of quality assurance and FAA approval.
  • They could have consolidated the number of companies to which they outsourced this program.
  • They could have developed more advanced communication tools earlier. For example technology allows you to video conference and share designs so that there is clarity around the issues being discussed – simple emails often do not communicate the full complexity of a specific issue.

Lessons Learned

As your company ramps up a significant new development effort, take the time to assess the risks.  Take a look at threats – things that can impact you from the outside.  Look for ways you can prevent the threats or reduce exposure.  What are some early warning signs?  Set up contingency plans and hedge your risk if you can.  These are the traditional risk assessment and mitigation steps.  However, often these steps are not enough.

In addition – you must also look for ways you could avoid shooting yourself in the foot – as Boeing ended up doing. Boeing’s problems did not just come from the outside; they were a direct result of actions taken by Boeing.  Talk about the good ideas that you have, but also about the possible unexpected outcomes.  For example, it was a good idea to mitigate the financial risk, but the unexpected outcome was to increase the execution risk.  Identifying this upfront would have allowed Boeing to mitigate some of the execution risk or decide to keep more of the financial risk.

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