Innovation: A Risk Management Option

Risk management means exploiting opportunities and not just controlling the damaging impact of the risks. Risk management is not about mitigating every risk identified rather it is about achieving the optimum. Innovation can bring the greatest value to the business, but it is probably the least understood risk management option.

Now look at the risk map below for a global confectionery company named balbury's that manufactures chocolate and sells it through its company and franchised outlets around the world. Balbury's mission is to be first thought in minds of people for gifting and celebrating.

The management sees a loss of appetite for its product range to be the major risk to its business success. After that, they see breakdown in quality control at franchises to be a major risk. Balbury's loose product has to be maintained at a set temperature and hygiene is a crucial factor for customer confidence.

After the risk assessment, the companies have various options to manage a particular risk. However, a lot of companies simply think of what they will physically do to manage the risk, or else they allocate it to the risk owner to think it over. Thus, the marketing director of Balbury's might have been told to come back with a strategy for dealing with loss of appetite for the product.

Rather than the marketing director to think it over alone, the choices should be discussed openly in a strategy meeting. Choices can be as follows:

Avoid: get out of the business or get out of a line of business or out of a country. Outsource: transfer the operation to an expert in that field. Accept: live with it and do nothing. Monitor: keep a weather eye on the situation. Measure: work out a key performance indicator to track. Control: put a new or improved control in place. Insure: cover the potential loss with a policy. Hedge: reduce risk by covering several options. Innovate: grab opportunity out of consideration of risk.

One of the high risk issues for Balbury's is quality breakdown in the franchises. If risk realizes, then it could affect its global brand badly. The company could threaten to withdraw the franchise from any operator who does not meet the standards; in addition, it could send inspectors to tour the franchised operations. Or, it might get franchisees to complete regular quality self-assessments.

The other high risk issue is more difficult to address. Loss of appetite for the product initially seems something that the company may be unable to do anything about. Where risks are deemed "uncontrollable" in this or some other fashion, then there is usually scope for the "innovation" option. The simplest form of exercising innovation option is reversal. Instead of "loss of appetite for the product", the risk is restated as objective - "increased appetite for the product". The team then has to come up with a strategy that could make the new objective statement true.

Increased appetite could come from a high level of new product development leading to the launch of new products: they could produce ice-cream versions of their chocolate products, develop "Diwali ki Mithai" concept to support the "celebrate" concept, make chocolates with messages inside etc. The strategy could be articulated then as something like "achieve 25% of sales from new lines" and this could be measured and reported on.

Let us take some more examples of the innovation option of risk management:

The kirana retailers found "fresh stores" a major risk to their future business. Fresh stores came with strategy of rapid expansion offering better services at reduce prices. The solution could have been, to aggressively change the present state of affairs by integrating small kirana businesses or creating stores for readymade or homemade vegetables or food stuffs or coming up with new ways of making delivery etc. Instead of trying to defend against the apparent risk that "fresh stores will take business away from us", the reverse of this could have been proposed like "Fresh Store will bring business to us".

An agro chemical business looked at its risk map to its utter disappointed that the high risk issues were outside of their control as they were related to regulation of the sector they were in. "We are regulated" was then reversed to "we are not regulated" making expansion into unregulated, but related, sectors as their business priority.

A small web 2.0 consulting firm expressed one of its biggest issues as "business people might not take us seriously". This was the biggest risk to their securing greater business. Reversing the issue as "business people take us seriously" led to development of a balanced scorecard to express their strategy, how they would achieve it, and how they would measure it.

Aren't you ready yet to exercise the innovation option of risk management?

Global Positioning System

There is a definite link between Retail & Infrastructure sector but there is one more link, i.e. their customer strategy. Associating cement to supermarkets is about how a company can learn from the companies from other industries. In this era of high competition chance favors a prepared mind. Competition favors a prepared company. Therefore, those companies that can improve their relative position during hard times gain a clear edge. This is the time to stress differentiation over productivity. The focus is required on value-added differentiation and not just price competition as it is a business assumption than a strategy.

Mr. Sampat, Commercial Head with a cement company was performing data analysis on the customer data of his company using his newly learnt data analysis skills. He soon realized that customers kept on changing their orders most of the times. The price of cement is largely determined by the transportation costs involved in delivering the cement. Due to such frequent changes in the orders by the customers, the delivery time and transportation costs were higher.

On further analyzing customer behavior, he thought that if he could know the exact location of the trucks carrying the cement bags by any means he could resort to a redeployment strategy that can reduce the over all transportation cost and delivery time. He called up his friend who was working with a courier and freight company to know how his company tracked merchandising and how it predicted demands for picking deliveries from various locations.

He thought for a Global Positioning System and then contacted a telecom company to put Global Positioning System (GPS) in their trucks. He then devised a central tracking and redeployment system. And, with this new system even if the order changed, the company could deliver more quickly than its competitor. It reduced its delivery cycle from 120 hours to 15 Hours, reduced its truck fleet by 4% and improved reliability from 24% to 78%.

The company thus learnt to correctly identify its crucial IT and business priorities. The analysis was typical of most businesses in that it learnt that, left to their own resources, projects would multiply and profits would decline. Instead the company analyzed its 30+ current IT projects in terms of value to the customer, resource utilization and possible productivity improvements. The company stopped 25 projects, slowed down 8, maintained 5, accelerated 3 and added 2.

Similarly, the winners in the supermarket industry will be those that will use new digital tools to create a customer-responsive way of doing business. Retailers, distributors and manufacturers will have to share data efficiently and effectively in a manner so that they communicate fully. Transactional data is just a subset of what you really want to know.

Cost Reduction Stories

Grow faster than revenue. Don't hire management consultants for the entire year as their charge is three to four times of the human cost. Hiring them make sense only when the consulting assignments are shorter in duration and highly focused requiring consulting skills. The message is - the process of reducing overhead costs on a sustainable basis is more subtle than the most companies think. The short-term margin improvement tactics to fill gap in one-off quarterly earnings may not bring about change as these ambitious cost reduction programs often lose momentum after some time.

Cost-cutting measures that hinder a company's growth objectives will probably be reversed, while those that sharpen its strategic focus and clearly add value are likely to be retained. Companies that truly transform their approach to overhead cost reduction align their cost reduction efforts with their strategic objectives with a strong commitment. Their hiring of consultants is driven accordingly and hence a higher ROI is achieved in all the consulting projects as they meet the strategic objectives.

A pharmaceutical company wanted to reduce its overhead costs by 30 percent and it made its Line Managers accountable for achieving the same. Although the targets were met, the company lost much more in the process. Managers failed to understand the rationale of reducing costs. There was too little analysis of what made costs balloon in the first place. Also, Managers were not given tools and training to help them target and eliminate waste. The net result was fewer people doing more work in the same old way, leading to a vicious circle of declining morale, quality, and productivity. Two years later, costs were on their way back up. Now it is difficult for the company to commit to any cost cut drive in the future.

An entertainment company into exhibition business found that it turns huge amount of data into managerial reports that had little impact on the direction and development of the business. Most companies can find similar waste especially in areas like finance, human resources, and IT.

Companies in the same industry can have sharply different overhead profiles if their strategies are different and thus one should not simply cut cost copying its competitor without a detailed analysis. Take example of two competing food retail chains. One likes to be first in any market and thus pays a premium to its real-estate professionals. The other's strategy is to reduce its market-entry risk by locating stores only where other retailers have already proved successful. It regards its real-estate staff as an important, but mainly a transactional group.

In some cases, capability reviews and organizational restructuring can highlight opportunities to reduce overhead costs. One chemical company reduced the number of staff in its marketing function to 40, from 140. Because the company also sharpened its focus on exactly what it required to drive revenue, however, its overall performance rose rather than fell. This company was aware that without making its employee visualise the underlying goals that are linked to overall corporate strategy, its cost program can deteriorate into a "race for the numbers" and, in the process, lose the support of the workforce.

A leading hospitality company boosted its performance by redesigning its strategic-planning process and business unit plans were reduced to 6 pages, from 70, and the strategic-planning cycle was reduced to six weeks, from four months. Shorter documents generated more dialogue, and a shorter planning cycle produced a strategy more responsive to the market. Planning teams could focus solely on the core elements essential to performance.

A technology company started to close their books quarterly rather than monthly, and a broad range of financial summaries was reshaped, greatly reducing the resources they used. Eliminating reports that were no longer critical to business activities or were duplicated unnecessarily for different parts of the organization offered similar opportunities.

An automotive company found that it had many more staff members employed in support functions than its rivals did. It turned out that a large number were spending a good deal of time fielding questions from the CEO and that each function was building capabilities to meet his expectations. Once the CEO understood the ramifications of his inquisitiveness, he evaluated his requests more carefully, which made it possible to redeploy a number of skilled people. Furthermore, the CEO's willingness to change his own ways sent a strong signal to employees.

The CFO and CEO of one large media company agreed on the magnitude of the change needed but not on how to accomplish it. Their differences ultimately eroded commitment to the program and its sustainability.

Conclusion: To reduce cost on a sustainable basis requires shifting not just how Managers behave but also how they think. It is not about rocket science but streamlining principle of aerodynamics.