Its time for risk consultants to be players with the team on the line. Learn how to achieve innovative advantage using the case studies.
Saturday, September 29, 2007
The Game of Arbitrage - II
I could hear words like VBM (Value Based Management), EVA (Economic Value Added), Cost Reduction, Value Creation very loudly from the direction where I saw two business managers in stylish suits having a hot discussion. I heard the one in blue suit saying; all our future decisions about capital allocation have to be based on the value creation criteria. Thus, we should know how to add value to our businesses and how to shift our strategic focus to realize higher value.
The other one in the brown suit said we have already adopted various best practices like Total Productivity Management (TPM), Total Quality Management (TQM), Business Process Restructuring (BPR), Six Sigma, and several other global best practices. We have robust governance practices and disclosure standards. We know our customers' needs better. We are actively doing international M&A and investing in future technologies. We have adopted a hybrid approach which seems in coherence with today's dynamic environment.
The one in blue suit remained silent for a while and then said every person, every organization and even government nowadays is a product of a coalition and the forces that are always at war. The war is between the Trivial Many and the Vital Few. The Trivial Many comprise the prevalent inertia and ineffectiveness. The Vital Few are breakthrough procession of innovation and effectiveness. However, the war is difficult to observe as it is the same person, the same unit and the same organization which produces both the forces. All we can see is the over all result i.e. the net effect of both the forces at work.
At the most, we only remove businesses that are most unpleasantly unprofitable whereas we put only minor efforts to increase the extremely profitable business. This is a dreadful compromise, based on our misunderstanding. We all say small is beautiful but complexity too is our sponsored thing. Believe me or not as we sponsor complexity, it also sponsors us. And, therefore we are skewed towards larger and complex organization instead of most profitable ones.
Each value seeking organization can become very much more valuable, but the crux of value creation is a process of innovation and substitution. The entrepreneurs shift the economic resources from low productivity areas to higher productivity areas. This same act is called Arbitrage by the modern financiers.
International Financial Markets are very quick to correct anomalies in valuation. For e.g. Exchange Rates. But the business organizations and individuals are generally found to be very poor at this sort of entrepreneurship or arbitrage, at shifting resources from low productivity usage to higher productivity usage, or at cutting the low value resources and buying the high value resources.
At first there is confusion as to what is more valuable and then there is resistance to change. It is easier to learn out of box thinking using popular nine dot puzzle but when it comes to reality and putting out of box thinking in practice, it is damn difficult.
Other said I don't believe you as today's business managers are smarter and they know how to solve nine dot puzzle using four lines, three lines and even one line.
I went ahead with my pad and pencil and asked the guy in brown coat to solve the new trick mentioned in The Game of Arbitrage -I , which he could not solve for next 2 hours.
I knew he was the same guy who resisted giving me 2 hours of his for sharing a revolutionary idea which could have reduced cost of monitoring risks and controls significantly for his multi unit organization.
Morale of the Story: Learn the Game of Arbitrage not just know the best practices.
An automobile manufacturing company had stopped production of its X & Y models in three plants for three months during previous year after substantial faulty part incidences. The Company lost the opportunity to produce about 2000 cars each day once the production was stopped. The CEO had asked the Manager Plant Operations to increase the quality efforts for the next business cycle. The Manager Plant Operations was worried as the Company was already being incurring a huge cost on its quality review activities.
The quality problem had been reduced initially after the last year's incident, but the Company started having the same problems again during the current year. The Company was using various quality controls methods but possibly due to high number of input items, complex assembly line and larger supplier base for input items, the quality controlling was proving to be extremely difficult.
A new Management Accountant who joined the Company recently was of the view that cost of quality was being calculated incorrectly on the previous occasions. He started to include man hours spend by the assemblers on an adhoc basis in addition to man hours of quality inspectors to the quality cost. The Management Accountant's logic was 'the assemblers also inspects quality of their own work and do rework before passing it on to the next stage of assembly'.
The Manager Plant Operations became very unhappy with the conclusion as it would mean higher quality costs for him. He approached the CEO with his complaints. He argued that man hours of the assemblers were attributable to the manufacturing cost and quality was a free byproduct of the manufacturing process. Also, he argued against the adhoc method for determining time spent by the assemblers which was allocated to the quality cost.
The CEO was back supporting the Management Accountant's logic. He said that Quality is never an accident, it is always the result of intelligent effort. However, in order to measure the total quality cost correctly for each plant it was necessary to determine how much time the assemblers spent on inspection and repair. So, he instructed the new Management Accountant to send an email to all the assemblers asking them to record the timings henceforth. But, the assemblers were reluctant to reveal how much time they spent on inspection and repair because they were supposed to be able to perform the task properly in the first place, without rework.
The Management Accountant then invited all the Assemblers & Manager Plant Operations at a special meeting held at the head office where he told them to not to fear the facts as hiding from facts is a preparation for failure. He asked, do you all think that if you don't look, the nasty facts will go away. He told that we were also not fair in the last year to not to include cost of business lost of 2000 cars a day for three months to your quality costs. Then with a mild tone, he requested them to allow him for using an automatic stopwatch on the shop floor on an experimental basis for at least three month to do a fact based analysis of Cost of Quality (COQ). Everyone agreed to cooperate in presence of the CEO.
After quality cost of each assembling department had been collected, it become clear that few departments were incurring well-above-average quality cost. The facts provided the Manager Plant Operation the opportunity to achieve substantial quality cost reductions quickly and simply by concentrating efforts on the problem departments. It was realized that Supplier Selection Process was more influenced by price than quality & delivery dependability for many items. The Company also reduced the no. of suppliers and started procuring from single supplier out of the list of approved suppliers who could deliver defect free inputs on time at a reasonable cost.
Retail boom in India is a reality. And, every corporate retailer is eyeing a big pie. However, there is a fear among the retailers entering the next phase, a situation that led marketing consultant Geoffrey Moore to term the transition as 'Crossing the Chasm'. The difficulty of crossing the chasm in current context means many corporate retailers who were comfortable in initial years of organized retailing are now finding it difficult to expand to the mainstream of the market. The story line of this case study will throw some light.
First time when I met the king of India retail at a retail summit, he looked very aggressive seeking feedback of his fellow retailers on a recent happening in the industry. Just two days back, the biggest retail firm globally had announced its entry in India with a new tie up.
During the course of the day at the retail summit, I could see exchange of heat between the king of retail and the CEO of the Indian firm which had tied up with the biggest retail chain. The king of Indian retail was stressing on having consumption led growth for the Indian retail and thus preventing hasty market entry of the big conglomerates in the sector. I heard him saying the words 'who knows what matters' when some body asked this future oriented retail king about the success mantra of organized retailing in India in its next phase.
I am sure corporate retailers will see a cut throat competition once the industry moves on the S curve ahead. I am really not sure if Indian corporate retailers would be thinking in terms of Blue Ocean Strategy. Many are waiting for the year 2009 when stores and malls of many corporate retailers will be ready to open. However, it should be understood that 2009 will not be a decisive time for Indian retail as many retailers say but the 'now' when every one in the market are working on ideas of launching innovative retail formats to be started 2009 onwards and which will supposedly satisfy a real consumer need 'then'.
Mind well, in the next phase of Indian retailing, the consumer will be more demanding and corporate retailers have to show strong evidence of value and ethics. First mover advantage will not help alone as red queen effect on competition will be stronger. Moreover, the unorganized sector will be creating barriers to the entry of corporate retailers in the market.
Corporate retailers looked really concerned when strong agitation started against a chain of fresh stores of a corporate retailer recently. Chief of Retailers' Association suggested that there should be no distinction between organized and unorganized retailing and the industry shift towards organized retailing should be looked as a step toward modernization of the industry and the society. Although I am not very clear on this suggestion of his but one thing is very clear that he was not sure of a adaptation strategy for the next phase.
For managing the uncertainty, I suggest all corporate retailers to concentrate on a single niche of the market while making transition to sell to the mainstream of India. Don't spread your resources too thinly across many activities or formats. Cross the Chasm with right strategic positioning in the next phase. Start riding the S curve in small steps with increased market segmentation. Build on success stories. Promote innovation in agriculture, infrastructure and related technologies, Understand aspirations and needs of mainstream again with a new insight. Have a robust resource management and a risk management strategy to avoid waste of efforts, unnecessary expenditures and corporate failure.
As a leader if you are not ready to change, please bear in your mind that market shift will happen soon. Innovation is not just a buzzword used for seeking immediate attention of the business leaders. Innovation is connected to efficiency and value. It's a response to the dynamic business environment of today's time. If you are not bothered or concerned then there is high possibility of your missing the bus. Mr. Akshar, Manager with an innovative risk consulting outfit told to Mr. Ank, Senior Manager with one of the big risk consulting outfit.
Mr. Ank told him that we don't have enough time to reflect and innovate. It appears to me that Research and Development work has not been given more importance for long as we are more into serving our clients' immediate and primary risk management needs emanating from statutory enactments. More than 80% of our revenue is thus generated from financial risk assessment and process documentation work.
Mr. Ank told Mr. Akshar that we are part of a specialized group and our department does not deal with innovation. Possibly our strategic and technological risk department takes care of this service segment. Our major challenge is smooth administration of our 500 plus staff.
Mr. Ank asked Mr. Akshar how is your organization positioned and doing risk consulting business when business leaders seems to be very conservative and innovation in risk management has never been a priority with them.
Mr. Akshar exclaimed as to why Mr. Ank and his company are hiding their faces from innovation.
Mr. Akshar told him that Innovation is Innovation and it should not be a responsibility of one department alone. Boutique firm culture makes it possible to have a vivid picture of innovation. Remember that innovation is a hot topic among the business leaders nowadays. It a premium risk consulting segment and needs high customization while addressing demands of emerging organizations facing new challenges of new world economy. Innovation in Risk Consulting is all about knowing trick of the trade and applying new solutions for the desired results.
Smart CEOs and CFOs have come with new ideas of doing businesses and innovative risk consultants have come with idea of managing business risks in newer ways. Entrepreneurship drives the success of innovative organizations. Unlike many risk consulting outfits where quality is a big problem, our activities are mainly driven by the business results, quality and value that we seek for our clients.
Everyone nodded their heads to the idea of Managing Director who wanted to launch a new product within next six weeks. But when he sought views of everyone present at the meeting on worse case scenario of launching the new product in such a short stint, nobody responded fearing consequence of refuting the Managing Director's idea. Some one with a blank face suggested asking the audit committee directly about it. Hearing such a passive answer, the Managing Director moved on to the next agenda saying that he will ponder the idea one more time before it can be talked about at a greater length.
Two days later, the Managing Director received a call from a young colleague of his, who wanted to know more about the idea after knowing about it from the organizational grapevines. He also wanted to share a similar idea of his own with him.
The Managing Director responded to him that the idea needs to go through a reality check and he wants all those, who going to execute the project, to visualize and accept the worst case scenario. He had taken a back as he didn't intend to give the project in hands of those who didn't understand the risks involved. Ideas rigidly adopted can limit thinking and commitment. Focusing on incorrect end results increases chances of failure and encourages non-action. But by changing focus, one can influence performance. More you know about the end results and risks, better you are prepared. More you are prepared, more confident and assured you are. Outcome based thinking and result oriented actions are critical for effective risk management.
The Managing Director revealed that today he has been approached for first time after his announcing six month back, the policy of getting in touch with him directly for discussing any new ideas. He said that his vision is to create an organized decentralized firm which encourages participation. He wants to bring in young people with contagious passion and enthusiasm to inspire change and enter uncharted waters. He thanked the young guy for calling him and requested him to pay a visit next morning to discuss the prospects of his new idea and the new organization.
