Author: Sayan Chatterjee
Publisher: Wharton School Pub
ISBN: 9780131011113
Category : Business & Economics
Languages : en
Pages : 284

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Book Description
Introduction UnderstandingRisk: The Real Key to Competitive Strategy This book is aimed at practitioners andscholars of business strategy. Whether you are a CEO of an organization or afunctional level manager you need to understand not only how to take risks buthow to also navigate around the risks to capture the rewards that prompted therisk-taking in the first place. More importantly, you need to know your role inreducing these risks. You may argue that the responsibility of a strategy liesat the leadership suite but it is increasingly becoming apparent that thesuccess of a strategy is determined by how much the rank and file understandstheir role in the strategy. The risks in any strategy are not just in theexecution but also in the design. The genesis of the book comes from theextensive executive education and consulting that we have been involved in overthe past 15 years. Many of our session participants have asked us to develop abook based on the concepts developed in these sessions. These concepts havebeen field tested and refined over the years through our consultingengagements. Teaching strategy to experienced executives in one or a two-daysession is an extremely different challenge than teaching strategy to MBAstudents over an entire semester. Executives are extremely intolerant aboutacademic theories that they cannot apply immediately to their day-to-dayconcerns. Our challenge therefore was to develop bite sized examples that couldhelp these executives to internalize the concepts that we were developing inthe sessions at the same time make the concepts generalizable to a wide rangeof business situations. Our solution was to write numerous short cases that abusy executive could read but still have enough detail to illustrate key concepts.You will find these short cases throughout this book. We are hoping tore-create the same experience that participants in our executive sessionstypically get from studying these cases and from the interactions In theremainder of this Introduction, we will provide an overview of how the rest ofthe book is organized. The book has two broad sections and an appendix. Thefirst section develops concepts that will allow a firm to clearly understandthe nature of the risks in a given business. The second section expands thisframework to growth and diversification strategies. An appendix presents adetailed analysis of the rise and fall of Enron using the risk management lens. An overview of the book This bookdevelops a set of concepts that will allow you to design business models wherethe risks can be reduced to practical proportions. The risks in any businesscome from not knowing the demand, threat from competition and not having theappropriate capabilities1.The basic theme that will be repeated over and over again is that to reducerisk you need to have clarity regarding where the risks are and create choice,or options, in tackling the risk. We will use numerous examples of businessstrategies to illustrate the concepts. But more to the point we would like todemonstrate how the concepts developed in this book would have enabled you toquickly visualize the successful strategies as well avoid the mistakes.However, we are by no means claiming that the strategies that we use asexamples were developed using our frameworks. We are only too aware of muchacademic Ôafter the factÕ analysis of famous strategies that definitely do notportray the reality of how the strategies were developed. Notable examples areHonda, Wal-Mart and Southwest. Rather, we use these examples as ÔexercisesÕthat will help you internalize our framework and methodology. Section 1 Designing Strategies for Avoiding Risk Businessrisks can manifest at two different stages. There will always be risks in theexecution of a strategy. However, quite often the risk is not in the executionbut in the design of the strategy that predisposes it to failure. Ouroperations colleagues tell us that 80% of the life-cycle cost of a car islocked in at the design stage. A well-designed strategy is not immune toexecution risks but very few firms consider capability risks at the designstage and thus compound the risks during execution2.A major thrust of this section is to demonstrate that quite often firms missout on strategies that can avoid or minimize capability risks while designingthe strategy. This is precisely the debate surrounding the Iraq liberation. Theproponents point to the goal of a democratic Iraq as a high return venture.Very few people can argue with this objective if it can be attained. However,critics contend that the strategy did not think through the capability risksand the objective may have been attainable at much less cost. Chapter One How to see gold where others see risk:Identify more choices to get the gold In order to embraceventures that are considered to be too risky by others, you need to be moreproficient than your competitors in understanding the nature of the risksbefore you actually invest in a venture. In order to do this you need to have aframework that will allow you to understand the sources of risks at a highlevel and a methodology that will allow you to avoid, the risks that scaresyour competitors. The first step in this process is the ability toconceptualize multiple business models that can exploit the same marketopportunity. This chapter will give you a framework to identify options thatisolate your firm from key risks. We call this frameworkÔoutcome to objective.Õ This framework will expose the inherent risk of relyingon core competencies and how this perspective leads to an inside-out view ofstrategy. This chapter will also demonstrate why giving lip service to customerneeds is not enough and how the concept of desired outcomes allows you to breakthe inside-out mindset. Finally, this chapter will show you how to identifymultiplecompetitive objectives, the logic behind yourbusiness model, that can deliver the same desired outcome while capturing someof the value for your shareholders. When you begin to identify multiplecompetitive objectives you take the first step to put distance between you andyour competitors in your ability to profit from risky ventures. In summary,this framework will increase the odds of profits by enabling you to do twothings. First, it will allow you to consider opportunities that others wouldavoid because of the perceived risk and thus have the field to yourself.Second, you will be able to differentiate your firm from your competitors byreducing the likelihood of loss because you will have at your disposal manymore choices to avoid the risks than your competitors. ChapterTwo: Clarity in competitive objectives: threesteps to reduce risks InChapter One you will have been exposed to techniques for visualizing multiplepossibilities for exploiting the same risky profit opportunity - the choicedimension. Chapter Two will force you to come to grips with the constraints inexploiting these possibilities - the clarity dimension. Chapter Two will guideyou through three steps to crystallize the constraints and the risks ofovercoming these constraints as you design the business model. At the end ofthis process you will have complete clarity as to what youneedto deliver. This by no means suggests that youcandeliver what you need to but at least you will nowhave better clarity about the risk that you may not be able to acquire therequired capabilities in order to deliver what you need to. The firststep to develop this clarity is to understand the broad competitive objectiveby which a strategy will deliver value to the customerwhile capturing someof the value for the firmÕs shareholders.Hopefully, with the techniques developed in chapter one you will have many morebroad competitive objectives to choose from to profit from the same opportunitycompared to your competitors. Afterdeciding on the initial broad competitive objectives you have to take the mostcritical next step of developing core competitive objectives. We define coreobjectives as a set of specific and measurable deliverables for the businessmodel. Using short sidebar examples, this chapter will show how to preciselydefine a strategyÕs core competitive objectives. This precision will give you amuch better clarity on the nature of the risks that you will be facing. Thisprecision will allow you to track the risks in real-time so that you can pullthe plug in case you made a mistake in your assumptions or logic before thestrategy completely unravels. The examples will also illustrate how companieshave overlooked the true risks of a business model when they didn't take timefor this precision. Finally, this precision is critical to clearly understandthe constraints a firm will be facing to deliver its objectives - itscapability requirements. Basically, at this point you will have clear choicesabout what youcando. Many a strategyhas gone awry because of the lack of precision in defining the core objectives.With precise definitions you will be able to avoid the more risky options atthe design stage and not encounter the risks during execution. Chapter Three: Identifying multiple capabilityconfigurations Inthis chapter, we develop techniques of how to identify alternative capabilityconfigurations that allows you to learn from a successful strategy and apply itin a different context. We demonstrate this by contrasting the strategies ofJetBlue and Southwest and how JetBlueÕs strategy has developed with verydifferent inner workings even though most people think it is basically similarto Southwest. This example should be helpful in understanding how twosuccessful companies in the same business can have different core objectivesand supporting capabilities. Further, we will also demonstrate that the samecore objectives can be used as the business logic in totally different industries.Clearly, the capabilities to deliver these objectives would vary across firmsin different industries, but if you can understand the common theme that isobservable across such strategies, you may be able to apply the same principleto your own business. We use five short sidebar examples to illustrate thispoint.