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Smart Chances - Smart ChoicesDealing with Risk
"You're just lucky!" One of the most successful race car drivers in history, Mario Andreti, responded, "Luck is when preparation and circumstance come together." While other drivers were crashing in flames, he was riding to victory lane on the shoulders of his well-prepared team. He and his team reduced the risk of crashing, set the stage for victory with a hot car, and Mario drove the car to the checkered flag…time after time. Winning business managers manage their financial, people, market, and operating risks. They use effective management tools to prepare to win. Now the safest thing for Mario would have been to not enter the race…he would never lose. But, at the same time, he would never win. You have to be in the race to win. In the end, however, it's not just how much risk you take but how well you prepare so you can win even in risky situations. The business race today is won or lost based on how well you manage risk. Here are examples of how manage four of the most common business risks. (*Names changed to protect confidentiality) Financial Risk: Cash is your fuel so use it wisely. Even big companies occasionally collide with a cash crunch but small and middle-size companies are injured or die all too often in that crunch. When faced with inadequate cash to support necessary growth, Beta Co.* needed ways to build their P&L and balance sheet to attract financing. New management and systems were brought in to make better decisions, increase efficiency, maximize sales efforts, reduce costs, train personnel, and thus improve the P&L. A focus on balance sheet management included new inventory management goals and systems, debt restructuring, new cash management tools, and efficiency improvements that reduced the need for capital investments. High-risk business choices were either not taken or were managed (delayed, information gathered, or negotiated) to reduce risk and maximize success. The net result was they needed less cash and were able to attract higher quality (e.g. less expensive) financing to stabilize the company, enable growth, and thus reduce the risk of financial failure. People Risk: Turnover was high, morale was not, training couldn't keep up, and quality and efficiency suffered at Gammatron*. With all the competition, they just couldn't seem to be able to recruit enough qualified people and when they did, they couldn't keep them. They raced as fast as they could and still fell behind. The secret weapon in their turn-around to success was a root-cause analysis. The root-cause analysis found that they needed to make specific changes to fix the problems not just treat the symptoms. They revised hiring specifications to recruit the right people. They adjusted compensation to be competitive. A new training program was faster and more effective. Management training improved interpersonal relationships and morale. And an efficiency program increased productivity so fewer people were needed. The net result was that turnover was reduced, quality increased, morale went up, and the customers felt better appreciated so business improved. Gammatron was back in the race. Market Risk: It seemed that they were now in the wrong race! The rules changed and Apex, Inc.* was now sliding off track with declining margins in a market where they used to win. Customers were shifting to the competition in droves and profits were in the pits. When they looked back, they found they could have seen it coming. The race (market) was changing and they were focused on keeping their old car (business methods) in shape while the competition was building new cars (business methods). Apex got back in the race by doing a thorough strategic market analysis. The analysis clarified the current risks and illuminated strategies for reducing that future risk while maximizing the chance of winning. They set new strategic goals, trained and reorganized the employees to achieve the goals, change supplier relationships and terms, rationalized the customer base to focus on service and profitability, improved margins with an aggressive cost reduction program, put in systems to give them a clear view of the market road ahead, and created new systems to stay on course. They started winning again. Operating or Manufacturing Risk: In the early 1990's the Jones Company*, was desperate for new business. They sent their salesmen out into the field with new products to win new business. Well, they landed some big ones and set about filling the orders. Unfortunately, the manufacturing process had too much chance (risk) of producing off-quality material and they couldn't meet demand. It was as though they had entered the race with a car that wasn't reliable enough to go the distance. Instead of winning new business they wasted vitally needed cash and resources spinning their wheels in an effort that ended up alienating customers. Operating risk is also market risk. It turned out that manufacturing and the quality department were more concerned with measuring quality at the end of process steps than during. Several of the process steps were not in statistical process control. The efforts had been doomed from the beginning. Waking up to the real issues, management brought in new personnel who initiated a coordinated efficiency, cost reduction, and quality improvement programs. Significant improvements came within weeks. By the mid-1990's that product line had grown by over 200% on the basis of high quality product from a highly efficient manufacturing operation. Summary: Winning business managers manage their financial, people, market, and operating risks. They use effective management tools to prepare to win. The critical obligation of management, subordinate only to the welfare of their people and conformance to law, is to maximize the probability that the results of the process will conform to the quality, financial, and capacity needs of the company and its customers. Effective management has little tolerance for uncertainty, knows how to measure progress, and uses procedures and processes that will guarantee results. If you have significant risk, maybe it's time for a business risk analysis. Reduce risk with Root Cause Analysis We can help you succeed in spite of risk.
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Cost Reduction & Profit Improvement
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