Linking the Strategy Execution System to Continuous Improvement and Risk Management

Transcription

1 Linking the Strategy Execution System to Continuous Improvement and Risk Management Robert S. Kaplan Marvin Bower Professor of Leadership Development, Emeritus Copyright President & Fellows of Harvard College

2 Stage 4 of the Management System: Plan Operations 2 TRANSLATE THE STRATEGY Strategy Map/Themes Measures / Targets Initiative Portfolios Funding / Stratex DEVELOP THE STRATEGY Mission, Values, Vision Strategy Formulation 1 3 ALIGN THE ORGANIZATION Business Units Support Units Employees TEST & ADAPT Profitability Analysis Strategy Correlations Emerging Strategies 6 4 PLAN OPERATIONS Establish priorities for process improvement initiatives Risk Management MONITOR & LEARN Strategy Reviews Operating Reviews 5 EXECUTION Process Initiative

3 Initiatives Are Short-Term Programs to Help Close the Performance Gap. OBJECTIVE Improve Order Fulfillment Objectives articulate the components of our strategy Measure Target MEASURE / TARGET Time from order to shipment 12 hours Time (hours) A gap INITIATIVE Implement automated order management system Actual Target Measures and targets track our progress toward achieving and communicating the intent of the objective. Initiatives help close the gap between our current and desired performance.

4 Link process improvement programs to strategic objectives Strategy Map Theme: Operating Excellence Objective Balanced Scorecard Measurement Target Financial Grow Revenues Profits & RONA Fewer Planes Profitability Grow revenues Fewer planes Market Value Seat Revenue Plane Lease Cost 30% CAGR 20% CAGR 5% CAGR Customer Attract & Retain More Customers Flight is on-time Lowest prices FAA On-Time Arrival Rating Customer Ranking #1 #1 Internal On-time Service Achieve Fast Ground Turnaround Lowest Prices Attract and retain more customers Achieve fast ground turnaround # Repeat Customers # Customers On Ground Time On-Time Departure 70% Increase 12% annual 30 Minutes 90% Learning Ground Crew Alignment Ground crew aligned with strategy % Ground Crew Stockholders Strategic Awareness 100% 100% Strategic Systems Crew Scheduling Strategic Job Ramp Agent Develop the necessary skills Develop the support system Strategic Job Readiness Info System Availability Yr 1-0% Yr 3-90% Yr 5-100% 100% 4

5 Can process improvements close the performance gap? Ground Turnaround Activities Turnaround time between flights Process improvements Current minutes per step Wait for airline door to open 3:16 Unload passengers 5:14 Wait for cleaning crew to board 0:24 Clean airplane 10:48 Wait for cabin crew to board 4:11 Wait for first passenger to board 4:06 Load passengers 17:32 Wait for passenger info list 1:58 Close aircraft door 0:57 Detach boarding ramp 1:39 Total cycle time 50:05 Best practice minutes per step 0:00 4:38 0:18 7:40 0:00 0:00 14:00 0:13 0:09 0:43 27:41 A. Agent anticipates plane arrival time; waiting at jetway for plane to dock B. Stricter controls on carry-on bags, fewer passengers moving back in aisle to find bags C. Cleaning crew in position ahead of time D. Standardized workflow, timing and methods, such as prearranged kits E. Visual signal from cabin crew to agent when plane is ready to board F. Active management of overhead storage bins by flight crew G. Passenger information list delivered by agent following last passenger on board H. Agent ready at aircraft to close door 5

6 Using the BSC and Quality Assessment Models (Baldrige, EFQM) Together Business Processes Balanced Scorecard Strategic (Competitive Advantage) Vital ( Hygiene ) Improve to levels of quality excellence Improve to minimum acceptable quality levels Maintain high quality levels Potential to cut back current investment Weak Strong Quality Assessment Model 6

7 Dashboards articulate the critical link between strategy management and operations management. Strategy Map Cause-and-Effect Model of Each Key Process Web-based Dashboard of metrics used to manage a Key Process THEME linked to PROCESS PROCESS supports THEME PROCESS linked to METRICS METRICS improve PROCESS Identify operational processes key to executing strategy and manage those processes with frequent feedback on dashboard KPIs

8 A dashboard for Discount Airline s ground turnaround process Task Task Time Open airline door 2:30 Unload passengers 5:10 Cleaning crew boards 0:20 Clean airplane 10:00 Cabin crew boards 4:00 First passenger boards 4:00 Boarding process complete 16:30 Passenger list confirmed 2:00 Close aircraft door 1:00 Detach boarding ramp 1:30 Total boarding time 47:00 8

9 VW do Brasil posts a dashboard of operational indicators on the wall of its assembly plant

10 A display of Top 500 dealer performance indicators is posted in the hall of VWB s senior executive office suite.

11 With advances in technology, next-generation dashboards can now fulfill the role of full-fledged performance management tools Advanced visualization methods, with ability to represent large, complex data sets, makes information actionable Alignment to strategy focused on processes that are key to overall strategy execution Pre-defined navigation paths to facilitate analysis and improve user experience, improved audit trails and data transparency Ability to display data from multiple sources, mix of quantitative and qualitative information 11

12 Integrating Risk Management into the Strategy Execution System

13 A emerging framework for risk management: Category I: Preventable Risks from Employees Undesirable and Unauthorized Actions; Breakdowns in Routine Operational Processes Enterprises should strive to avoid having Category I risks occur. The organization gets no benefits from allowing Category I risks to occur. They should strive, in cost-efficient manner, to reduce their likelihood to zero. Category II: Strategy Risks: Failing to Achieve the Enterprise s Strategic Objectives The risks that the enterprise accepts to generate superior returns The organization must identify the principal risk events from their strategy and estimate their likelihood and impact It can then reduce the likelihood and impact of Category II risks through use of key risk indicator scorecards and cost-effective initiatives Category III: External Risks from Uncertain, Uncontrollable Events Events that managers can neither predict nor influence; often managers don t know they don t know about such risk events Managers, however, can take prior actions to mitigate the impact of these events should they occur (e.g., build earthquake-proof structures; backup data centers in a distant region; insure; hedge) 13

14 A emerging framework for risk management: Category I Risks: Employees Unauthorized Behavior and Actions o theft of cash and information o unauthorized trading o failure to follow standard operating procedures o accounting irregularities o fraud o bribery and corruption o breakdowns in privacy and security o loss or destruction of information o discrimination and harassment o illegal and unethical behavior 14

15 Failures in Controlling Category I risks Siemens Bribery and Corruption Scandal: o Pay $1.6 billion in fines and profit returns to US and German authorities o Pay $850 million for internal investigations by outside lawyers and accountants. o Nine former members of Managing Board sued for $28.3 million for breaching fiduciary duties o Two former CEOs agree to pay more than $10 million to settle cases brought against them. Société Générale: The Jérôme Kerviel Affair o Upon discovery of Kerviel s unauthorized positions, the bank privately and quickly closes out the account, realizing losses of about 7 billion and books the loss against 2007 income. o Société Générale has to raise 5.5 billion in new capital to cover the losses. UBS: Kweku Adoboli arrested in an illegal trading scheme that loses $2.3 billion o UBS shares declined to the lowest level in two-and-a-half years; CEO, Oswald Gruber, resigns on Sept. 24, o the rogue trader incident is merely the tip of the casino mentality iceberg that has existed at UBS for years. 15

16 Managing Category I Risks: Events caused by employees deviating from desired, legal, and ethical behavior, or failing to use standardized operating procedures These are risks that companies want to complete avoid. The goal is to reduce the probability of their occurrence to ZERO! Clear and frequently communicated Beliefs and Boundary Systems Mission, Values, Codes of conduct Strong internal controls (e.g., segregation of duties), monitored by internal audit department, combined with standardized operating procedures, should drive the probability of compliance and businessas-usual risks essentially to zero 16

17 Category II Risks: Events that threaten the achievement of strategic objectives The risks the company accepts to execute its strategy and generate superior returns BP drills for oil and gas 3 miles below surface of Gulf of Mexico Boeing develops an entirely new aircraft, the Dreamliner: o Plane will be constructed with more than 50% composite materials (plastic) o Much of the design, engineering, fabrication and assembly shifted to Tier-1 suppliers Jet Propulsion Laboratory launches unmanned missions to explore for life on the surface of Mars 17

18 Companies accept Category II risks to execute their strategies and generate superior returns Building great things means taking risks. This can be scary and prevents most companies from doing the bold things they should. However, in a world that s changing so quickly, you re guaranteed to fail if you don t take any risks. We have another saying: The riskiest thing is to take no risks. We encourage everyone to make bold decisions, even if that means being wrong some of the time

19 Failures in controlling Category II Risks BP drills for oil and gas 3 miles below surface of Gulf of Mexico 19

20 One Post Mortem about the Explosion on the Deepwater Horizon rig An investigative panel recently concluded: The disaster can be attributed to an organizational culture and incentives that encourage cost cutting and cutting of corners that reward workers for doing it faster and cheaper, but not better 20

21 Boeing s Dreamliner: another strategy risk failure In January 2011, Boeing announced the seventh delay in the delivery schedule for its first 787 Dreamliner, pushing its initial delivery back at least three years later than originally planned. The causes can be traced back to two problems. First, Boeing decided to outsource both the design and the manufacturing of the 787 to shift the economic risk onto those suppliers. By outsourcing both the design and the manufacturing, Boeing lost control of the development process. Second, Boeing had never before built an aircraft with composite materials. It had previously used aluminum -- whose behavior in the real world is much better understood. Boeing admitted: "We made too many changes at the same time -- new technology, new design tools and a change in the supply chain; we outran our ability to manage the project effectively. 21

22 Risk management is hard. Experienced project manager (Gentry Lee) appointed as Chief Systems Engineer for all JPL missions Risk mitigation is painful; not a natural event for humans to perform. 22

23 Balancing Innovation and Risk: The Message from Janus JPL engineers graduate from top schools at the top of their class. They are used to being right in their design and engineering decisions. I have to get them comfortable thinking about all the things that can go wrong. Innovation, looking forward, is absolutely essential, but innovation needs to be balanced with reflecting backwards, learning from experience about what can go wrong. 23

24 Individual and Organizational Biases Prevent Companies from Thinking and Planning for Risk Events We are overconfident about the accuracy of our forecasts and assessments o Consistently under-estimate the variance of future events We anchor our estimates to readily available evidence (e.g., housing prices in US, until 2006, had not decreased in 40 years) We accept information that supports our initial position, the confirmation bias, and suppress information that contradicts it, cognitive dissonance: When our actions do not seem to be working, we escalate our commitment to the original course of action; we throw good money after bad, and fail to recognize sunk costs. Group Think: we go along with the flow, suppressing objections to actions that the leader and everyone else seems to endorse. We incubate more risk through the normalization of deviance as we learn to accept minor failures and defects as normal; false alarms, rather than alerts of imminent danger. 24

25 To overcome individual and organizational biases, effective risk management requires: Active and intrusive processes that: challenge existing assumptions about the world within and outside the organization communicate risk information with the use of distinct tools (risk maps, value-at-risk models, stress tests etc.) complement, but do not displace, existing management control practices 25

26 A Case Study in Risk Management: The Mars Explorer Project: Entry- Descent-Landing (EDL) Stage 26

27 Companies need highly interactive and intrusive risk management processes to overcome these individual and organizational biases Jet Propulsion Laboratory creates a 12 Person Risk Review Board for each project (G. Lee serves as chairman) o Consists of experienced, respected technical experts who are independent of the project o Conducts three full-scale 2 day reviews during the course of the project o Creates a culture of intellectual confrontation Legitimizes rigorous questioning of the intended design What bad things can happen to even good designs? Creative paranoia what can go wrong, what will you do if this component fails? Forces project team to view their work from a different perspective Canadian utility, Hydro One, holds dozens of Risk Review Workshops each year, facilitated by risk managers, at which employees identify and assess the risks they see in the organization. JP Morgan Chase embeds technically expert risk managers to help traders and investment managers understand the risk consequences from their decisions. 27

28 The risk meetings quantify the likelihood and impact of risk events Risk Map Value-at-Risk 5 Liklihood Consequence Probability of Gain or Loss 99% line 95% line Magnitude of loss (measured in standard deviation units) 28

29 Risk review meetings also recommend actions to reduce the likelihood or mitigate the consequences of significant risk events Establish cost and time reserves for product development projects Identify cost-effective actions that reduce the likelihood or impact of the risk event Assign an accountable manager to monitor each major risk 29

30 VW do Brasil uses its strategy map to identify risks to its strategy 91 risks in total 4 risks 7 risks 11 risks 11 risks 13 risks 24 risks 4 risks 5 risks 4 risks 2 risks 38 risks 9 risks 1 risk 13 risks 4 risks 4 risks 3 risks 7 risks 18 risks

31 Identify Risk Events for each Strategic Objective on the Strategy Map Strategic Objective Risk Event Outcomes Risk Indicators Likelihood/ Consequence Management Controls Accountable Manager Achieve Market Share Growth Industry sales below expectations due to political and economic uncertainty triggered by changes in laws, such as customs barriers and other sales restrictions Loss of unit sales Loss of revenues Daily tracking of industry volume and market share numbers (from registrations) Macroeconomic reports Market trend evaluations X Monthly meeting of Sales & Marketing, Finance, Governmental Affairs, Logistics, and Human Resources to consider alternative sales and production plans Mr. A. Gonzalez Director of Governmental Affairs

32 Identify Risk Events for each Strategic Objective on the Strategy Map Strategic Objective Risk Event Outcomes Risk Indicators Likelihood/ Consequence Management Controls Accountable Manager Guarantee Reliable and Competitive Supplier => Manufacturer Processes Deliveries interruption Overtime Emergency freight Quality problems Production losses Critical items report Late deliveries Incoming defects Incorrect component shipments X Daily supply chain meetings with Logistics, Purchasing, and Quality Assurance Monitor suppliers tooling to detect deterioration Risk mitigation initiative: upgrade supplier s tooling Risk mitigation initiative: identify and select key supply chain executive at each critical supplier Mr. O. Manuel Director of Manufacturing Logistics

33 Summary of Critical Strategic Risks at Volkswagen do Brasil Numbers in table are fictitious, for illustrative purposes only.

34 Infosys uses its strategy map to identify strategy risks Values /Ethics Nurture Infosys Values Conduct Business Legally & Ethically Be A Responsible Corporate Citizen Financial Performance Achieve Revenue Growth Increase Revenue Productivity Enhance Shareholder Value Improve Profits and Profitability Optimize Onsite Offshore Mix Reduce Operational Cost Improve Return On Capital Investment Client / Market Focus Grow Key / Large Accounts Acquire & Manage Large Deals Leverage Solutions & Alliances Strengthen Brand Position Enhance Client Satisfaction Improve Rate Realization Broaden Business Footprint Operational Excellence Innovation Client Management Execution Excellence Risk Management Identify & Incubate New Business Ideas Leverage & Reuse Intellectual Property Strengthen Client Facing Processes Strengthen Internal Collaboration Improve Quality & Productivity Improve Resource Utilization Reduce & Manage Operational Risk Improve BEF and Unit Scalability Talent Management Improve Quality Of Talent Recruited Develop & Retain Competencies Improve Workforce Motivation Strengthen Performance Ethic Develop Multiple Tiers Of Leadership Develop Diversity in Workforce Scale Infra Scale State-Of-The-Art Technology Infrastructure Scale State-Of-The-Art Physical Infrastructure 34

35 Identifying Strategic Risk Factors at Infosys (Illustrative only) Business Objectives External Risk Factors Internal Risk Factors Financial performance 1. Achieve revenue growth 2. Sustain profitability 3. Increase revenue productivity Client and market focus 4. Grow client relationships 5. Differentiate client offerings 6. Broaden geographical footprint Execution excellence 7. Leverage Global Delivery Model 8. Control operational costs 9. Improve quality & productivity Organizational development 10. Develop and retain competencies 11. Develop global workforce 12. Develop 3 tiers of leadership Macro economic factors Exchange rate fluctuations Political environment Competitive environment Concentration of revenues Inflation and cost structure Immigration regulations Security & business continuity Technology obsolescence Financial reporting risks Liquidity and leverage Contractual compliance Compliance with local laws Intellectual property management Engagement execution Integration of subsidiaries Human resource management Culture, values and leadership

36 Partial Key Risk Indicator Scorecard at Infosys Risk Factor Risk Event Key Risk Indicator Concentration of Revenues Immigration Regulations Major Customer Default Protectionism Leads to Denial of Work Permits and Work Visas Key Customer Credit Default Swap Rate % of employees with dual citizenship # of employees that can legally work in countries outside India

37 Identifying, Mitigating and Managing Category II Risks What can cause us not to achieve the strategic objectives on our strategy map? For each objective, identify the key risk events and risk indicators for each strategy map objective Aggregate risk indicators into a Key Risk Indicator (KRI) scorecard Set priorities for initiatives to mitigate the major risk events 37

38 Category III: The risk from non-controllable external events What are the non-controllable external events that can cause the strategy or the entire enterprise to fail? Often these are risks that we don t know we don t know Need for risk envisionment o Scenario planning, War-gaming, Stress tests, and Tail risk meetings 38

39 What can a company learn from conducting a War Game? Divide senior management into 3-4 teams, each representing a major competitive firm in the industry Establish a base line scenario, including the strategy-of-record for own company o Teams attempt to answer the question, How would you attack our company s strategy if you were our competitor? Designed to identify the holes in the company s strategy? Helps to overcome confirmation bias; tendency to find evidence that supports current beliefs and desires and to ignore evidence that could contradict them. 39

40 Scenario Planning: Why? Provide a rational process for defining the plausible boundaries of future states of the world. Strategy workshops help us choose which game should we play in the current environment? What should be the value proposition we offer to targeted customers to position ourselves for competitive advantage? Scenario Analysis reveals that many possible future environments can exist. How will our current strategy perform in the various possible futures? 40

41 Risk Management and the CEO When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you ve got to get up and dance. We re still dancing. Chuck Prince, CEO of Citigroup Financial Times (July 9, 2007) Jamie Dimon is the Chief Risk Officer of J P Morgan Chase. He sets the tone at the top. Barry Zubrow, CRO of J P Morgan Chase Everyone does risk management in bad times. The strong test of risk management is whether it works in good times. Will top management stand behind the risk managers, avoiding temptation, and saying no to things that put the enterprise at risk? M.D. Ranganath, Chief Risk Officer, Infosys 41