Creating strategic advancement through planning
For many companies, strategic planning has become a regulatory “one night stand.” It HAS to be done, let’s get it over with. An outside consultant is brought in and you engage in a painstaking planning marathon. Unfortunately, the dedicated planning resource is uncommon in most companies. Rather than helping companies design a meaningful, ongoing planning process, most consultants are looking for the engagement. Ultimately, this is damaging to the company as they will likely be unable to derive maximum value from the direction created.
Ask yourself this: What does our company do with the strategic direction created at the executive / board level? How is it cascaded to “the people?” Canada’s top companies are those whose employees feel connected to the strategy, and understand how their job contributes to the success of the organization.
How can you make this a reality? It begins with creating an ongoing planning process that makes strategy an ongoing conversation, and not a one night stand.
I get the sense that during strategic planning sessions, people often get uncomfortable with the concept of “making stuff up.” So much of our business, especially in the financial industry, is driven by information having to “add up.” We don’t ask people to be creative often enough for it to feel natural. It’s OK to make stuff up when it comes to building strategic direction, because it’s about designing your future. Regardless of how knowledgable you are about your business, there will always be a measure of the unknown given the fact that you will never have a sustained and significant degree of control over the market or macro environment.
The second part of strategic direction development that makes people uncomfortable is that they don’t know whether they can actually deliver on it, or whether they have created direction that is safe, from a risk perspective. How do you know whether your direction is good or not, if we’re just “making this up?” This is where Enterprise Risk Management (ERM) comes in.
Where does ERM fit into strategy?
While earlier ERM models focused on managing risk as individual hazards, todayâ€™s ERM tools are used to optimize risk in the context of the business strategy, which increases ERMâ€™s relevance to the organization as a whole. Organizations, from small to large, are recognizing the critical nature of building the “right” strategy. The ERM framework is the tool by which the strategic direction is assessed to ensure the correct level of risk is taken. In other cases, the strategy may not be aggressive enough.
The idea behind the ERM tools of today is not to isolate risk in the context of what we know today, but determining the risk associated with the proposed direction for tomorrow. A particular strategy may create risks that could significantly damage the business in the future, or it could decrease them.
In other words, strategy and ERM are intrinsically linked. By focusing ERM on business strategy, you are focusing on tomorrowâ€™s risk, as strategy is future minded. Older ERM models, embracing existing risks, often omitted emerging trends and the impact of the decisions being made for the future.
For many of us, the word risk conjures up a negative response. However, as we will come to understand, risk is nothing more than a factor in decision making. In fact, effective risk management can give your company a competitive advantage.
Businesses are starting to realize that rather than avoiding risk or mitigating it completely, that maintaining a certain level of risk is often more efficient and profitable than trying to remove it completely. It can be compared to the analogy of the investor. Every wise person that invests in financial markets is aware of the potential risks associated with each move they make. Their tolerance for risk is a critical factor in the decisions they make, their financial goals are another, and the amount relative to their total net worth is often another deciding factor. Knowledge of the potential risks and rewards allows them to build strategies from which they can live with the resulting successes and failures.
People must not take a regulatory compliance approach to ERM, converting a strategic business tool into a rigid task. Educating decision makers to understand the value and concepts behind ERM will extend their decision making thought process beyond direction and into potential repercussions, in any of the risk categories.
If you prescribe to older planning and management methods, such as TQM (total quality management), you might think that eliminating risk completely is the optimal method of handling it. Over the past number of years some management methodologies were designed around zero tolerance for failure. Modern ERM maintains that a defined number of failures can be tolerated if the cost of guarding against them is more costly than the risks they impose.
Consider the example of product development. To what level of cost should a company incur, in designing manufacturing computer chips (example), to guard against potential failure? It depends on whether theyâ€™re being designed for use in the pentagon or for childrens toys. While both customers expect a high quality product, the tolerance and consequences of failure greatly differs between the two. In the case of the toy, the manufacturer doesnâ€™t need to test every chip, because it can tolerate a few failures without any significant ramifications to itâ€™s brand & image. If the electronics on a national defense system failed, the results could cost lives, reputation or even war.
Understanding your risk appetite, and considering the inherant risks associated with your proposed stategy is a critical step in validating your direciton. Once you have done this, you can proceed confidently.