categoryStrategy Management

Protecting Shareholder Value and Corporate Reputation

An organizations’ brand and reputation form part of the most valuable assets that need to be preserved for the business to continue enjoying its success. Building a much coveted brand name and a positive reputation within your industry or niche is not an easy task that is completed overnight. It takes years of hard work involving customer relationship management and offering a product ladder that meets your customer’s needs and wants. However, losing the fruits of all that hard work can happen overnight. As Warren Buffet puts it……” It takes a lifetime to build a reputation and only 15 minutes to destroy it.”

Many organizations have fallen victim of crises because they were caught unaware resulting in loss of shareholder value and a bad tarnish to their business image. Some have been forced completely out of business. Lessons can be learnt from the recent events in the Gulf of Mexico where an oil drill rig operated by British Petroleum (BP) Company exploded on April 20, 2010 killing 11 people, injuring 17 others and causing a massive oil spill which has become the largest accidental marine oil spill in the history of the petroleum industry.

There has been different estimates by various analysts of the final total costs to BP all of them amounting to billions of dollars. Between April 20, the date of the explosion and July 15, the date the spill was contained, investors saw their shareholding tumble by over 50%. Another case in point is that of Tiger Woods who saw his personal branding deteriorate in value after being exposed for extramarital affairs.Several organisations that had sponsored and endorsed him for years immediately severed ties with him. This whole affair has had a negative impact on his performance on the golf course as evidenced by his recent poor results. Whether Tiger Woods will be able to make a fully fledged come back or not, nobody really knows. Only time will tell.

Indeed, it is difficult to accurately predict when the next crisis will strike and its severity. However, this does not mean managers should take a nap and wait for one to come knocking at their doors to wake them up. Crisis Management is all about being proactive and not reactive.

So how can organizations identify their key risks, minimize the likelihood of them happening but also be best prepared to react effectively when things do go wrong?

In a white paper by Strategic Thought Group, the authors explain what risk management involves and the steps that organizations should follow. The authors argue that:

# Risk management is not a box-ticking process. It is about identifying and capturing the risks on a system that allows visibility from anywhere in the world, and evaluating those risks using both quantitative and qualitative measures. Evaluating the risks is key to establishing whether the probability of loss is high or low and also what is at stake.

# The organization should have clear sight of the risks which could severely damage or even stop the business operating. Managers should be asking questions like……“What is the worst that could happen……..”Are we prepared for the worst?” thereby allowing assumptions to be challenged all the time as the conditions change during the course of the business.

# A risk and opportunity awareness culture should be created. This is achieved by having risk champions within the organization who are responsible for communicating all the risk matters to employees. By doing so, it allows risks and opportunities to be recorded, assessed and dealt with accordingly.

# The risk appetite of the organisation should be clearly defined at board level and cascaded down to employees. The business and the shareholders also need to agree on the acceptable level of risks. As the global financial crisis has shown, there was no agreed acceptable levels of risk between the banks and their shareholders. As a result, banks took huge bets on investments using shareholders’ funds resulting in excessive losses on sub-prime mortgage investments.

# Decisions on risk management should be evidence-based backed by sound information hence the need to have an enterprise-wide single system where information can be stored at the same time allowing greater transparency and easier decision making.

To read the full document, please click here.

References:
Strategic Thought Group white paper: Protecting shareholder value and corporate reputation with effective risk management.

6 Reasons Why So Many Business Strategies Fail

So many books with numerous case studies have been published on the subject of strategic management with the goal of helping organisations implement winning strategies, yet still so many businesses fail to realise their goals and objectives because of horrendous strategic failures. A countless number of IT, new product development, mergers and acquisitions and new market entry projects have failed to live up to their expectations. For example look at the dismal failure of the acquisition of HBOS by Lloyds TSB and also that of ABN Amro, the Dutch bank by the Royal Bank of Scotland (RBS). In the UK, IT projects are among the government’s biggest failures and still, year after year businesses continue to lose millions and billions of money.

In today’s dynamic market environment, fast-paced technological advancements, new regulations, globalisation and constantly changing customer needs and wants are reshaping the future of a number of organisations. As a result, businesses need to step up their game and adapt quickly to the changing environment and circumstances in order to survive.

New technology, especially the internet, is allowing vast amounts of useful information that could enhance the strategic position of the organisation to be exchanged across the markets at the click of a button. Getting hold of this information, carefully analysing it and obtaining meaningful insights from it to aid decision making should be one of the most important priorities for any business. The competitive environment has become so dependant on the availability of valuable information, without which, a business will not be able to compete at full potential.

Deciding on which product or service to offer, which markets to enter or exit, which business line to sell or maintain, which supplier to use and not to use, whether to offer a price discount or not, which delivery channel to use for product or service delivery etc. all require information in order to make sound judgements. It should also be noted that availability of information is not all that it needs to execute a successful business strategy, there are also other factors that contribute to the success or failure of your organisational business strategy and these are:

# Not knowing what to do with available information: As I have mentioned above, having the necessary information at your finger tips to aid decision making is crucial. However, the problem some organisations make is going on an information gathering spree. By all means, they try to get their hands on every piece of information out there, whether useful or not, and store it in their databases. That same information will remain under storage for months and months untouched and more will be getting added to the list.

It is crucial to make sure that before you go on an information gathering spree, you have assessed your organisational information needs. Only collect that which is useful to your organisation and meet your needs. Remember collecting information can be very timely and costly and you don’t want to create a heavy burden on your financial and human resources.

Once collected, that is not the end of the road. Information should not be let to expire in databases or storage files. For example, if you have collected data on previous quarter sales, you need to analyse that data to find insights for better decision making. Business Intelligence (BI) or business analytic tools can play an important role here by helping you sort and analyse your data.

# Poor execution of the strategy: One of the reasons why some strategies fail is not because they were wrong in the first place, but because of poor execution. Some managers spend hours and hours of time planning the direction and destination of their organisations and only to get it wrong at the implementation stage. Lack of leadership and direction from senior personnel to see the strategy through can actually influence the strategy implementation process. Constant monitoring is essential to ensure there is no or minimal diversion from the main route. Also, some employees require the support, guidance and encouragement of their managers to sail through.

# Lack of prioritisation of objectives: Success is not achieved overnight. The mistake some businesses make is having more goals than their resources can support. As a result, instead of being fully committed to one or two causes, resources are wasted trying to balance the efforts. It is better to prioritise and hit fewer targets than to fail a wide range of objectives. This also helps employees to become conscious of the most important goals at any particular time.

# The plans are too rigid: When managers make business plans, they are normally based on certain assumptions. However, the market environment changes from time to time, hence the need to alter the plans to suit the new environment. Problems arise when the plans are not flexible enough to be changed. If that is the case, the business will be bound to suffer at the expense of competitors who are able, quickly and not hesitant to make any meaningful strategic changes.

# The plans are too vague for employees to understand them: The organisational strategy needs to be clearer to everyone within the business. Everyone should feel at ease and comfortable when asked to describe the position of the organisation now, where it is heading and how it intends to get there.

# Cultural factors: Sometimes strategies fail because they are inconsistent with the current organisational culture. It might be that your competitors are really doing well and then you imagine that by implementing the same strategies you will reap the same or greater rewards. If there are cultural differences between the workforce of the organisations involved, the risk of the strategies succeeding are very low. It might also be that you are still using the same old tried-and-tested strategies that were useful in the past but are no longer valid in today’s market. You need to be updated on the new developments happening in your industry or your sector.

What else can cause business strategies to fail?

Comments and questions are welcome.

4 Keys To Having An Effective Crisis Management Strategy

Over the past decade or so, we have witnessed a number of organisations go under as a result of being struck by crises, both natural and man-made. For example, many small and large organisations fell victims of the recent global financial crisis which struck most economies worldwide in 2007. Big trading names went under, profitable businesses lost their economic value over night and small businesses alike were wiped off the map. Those organisations who did not have effective crisis management strategies were the most affected.

Improving an organisation’s crisis management capabilities is the key to ensuring that the organisation is in a position to survive when disaster strikes. Noone can accurately predict the future or when the next crisis is going to strike but that does not mean that organisations should just sit, relax and wait for the next unthinkable to happen and then react. During the strategic planning process, managers should take into consideration all the risk factors that have an influence on strategy execution and organisational value. This means carefully examining all the avenues and establishing what might go wrong and then have strategies and procedures in place to limit or combat the damage just in case something goes wrong.

In developing their organisational crisis management strategies or policies, managers need to know and understand the essentials of a good crisis management framework. Understanding the principles behind this framework will help during crisis preparations and also when developing the capabilities essential for survival during a major crisis. The key to having an effective crisis management strategy is:

# Understanding crisis types: Crises fall into different categories, for example, natural disasters, economic, reputational, human resources, physical, informational, fire, product etc. Various research has shown that, most organisations only plan for natural disasters such as earthquakes, floods etc and fail to consider other man-made disasters. Managers need to move beyond planning only for natural disasters and also consider other disasters specific to the industry. The aim is to view crises not in isolation, but as related to all the others. This is because most crises have a cause-and-effect relationship, thus, any type of crisis is capable of sparking another type and in turn being caused by it.

# Being proactive as opposed to reactive: Effective crisis management is not about responding or reacting to a major crisis after it has occured. It is about being proactive, not reactive. Managers should be able to plan ahead and anticipate the likelihood of any disaster striking then formulate effective procedures for handling the disaster. With human-made crises, it is possible to trace and pick up any warning signals before the crisis occurs. Having the ability to pick up and act on these warning signals will help minimise or reduce the damage or the entire crisis from occurring.

# Training and educating employees: Employees and other internal stakeholders of the organisation should be made participate in crisis training programs. This is essential for equipping them with the knowledge and procedures they need to follow in the event of a major crisis.

# Nurturing important stakeholder relationships: When a company is faced with a major crisis, it will need the help of other external stakeholders to weather through the storm. For example, it could be relationships with the media, fire departments, police departments and other emergency departments, the governement, providers of finance etc all of whom may be called on to help in a major crisis.

For crisis management to succeed, it must be embedded in the overall strategy of the business. It must be part of the integral design of the organisation.

Surviving in a Volatile Environment

The Global Financial Crisis of 2007 and the resulting recession in a host of economies worldwide caught many businesses off guard. The impact was so bad that quite a number of businesses were forced to shut down, abandon some capital expenditure projects, withdraw operations from certain geographical locations hard hit by the crisis and lay off employees. Prior to the recession, risk management was not regarded by many as a driver of organisational value, and some still make the same mistake even now. However, the aftermath of the recession proved otherwise. It showed how proper risk management can create and help preserve organisational value.

In today’s volatile business environment, uncertainty has become the norm. When economic catastrophic events hit, they hit without warning. However, by implementing proper risk control measures within the organisation, the impact can be reduced. Globalisation and technological advancements still present both opportunities and threats to the business.

Opportunities in the the form of access to new markets, sectors, channels of distribution, customers and products. Threats in the form of political risk, financial risk due to currency fluctuations, operational risks; inflexible suppliers, customer and employee defection and etc. But, to remain competitive, organisations need not only focus on the downside of risk, but also the upside of it. They need to perform a cost-benefit analysis and weigh the opportunity costs of their decisions before embarking on any project. Any strategic choice has its potential reward and, if it fails, potential costs.

Research has shown that, during times of economic hardships, customers become more risk averse and cautious than normal. Fear of the unknown makes them cut on their spending and this has a negative bearing on businesses which are already trying to survive and weather the storm. It is a fact that businesses need to sell more to make profits. If they don’t sell, they don’t make money.

In order to survive in a harsh economic environment, managers need to:

# Understand today’s market and its new behaviours: This involves identifying the changes in the present market and examining these changes closely for new insights. For example, by conducting a thorough analysis of the micro-economic and macro-economic trends in today’s climate, the organisation is able to identify those customers, sectors, segments or products and services at risk to the organisation.

Studying periods of previous economic decline is also key to identifying early indicators or warnings of trend changes. An analysis and understanding of key competitors is also key to identifying their vulnerabilities, which the organisation can then take advantage of. Thus a sign in one channel may be an early warning of change elsewhere.

# Challenge existing assumptions: In times of uncertainty, managers are not sure of which customers are going to stay or which ones are going to leave. As a result, there is the need to identify the essential accounts. This can be achieved by ranking customers or suppliers in terms of size, profitability, strategic importance and loyalty. This helps identify those areas of your business which will be able to remain resilient and also which customers need to be retained. Some of the questions that managers need to be asking include: Based on our market knowledge, macro-economic and micro-economic forecasts, are our products and services competitive enough to retain loyal customers? What is our selling point? If we lose customer X, how will this affect the overall business revenue? If our customers defect, where else can they buy the product or service from?

# Develop new strategies for new circumstances: Having challenged the existing assumptions and agreed that change is needed, there is need to alter the product and services range. This might involve simplifying the product range, altering the features, quality, pricing and distribution. To avoid customers defecting to your competitiors, it is essential that there is increased communication with your customers. This helps restore confidence in your business. They need to be reminded of the good news relative to the past.

The same applies in trying to avoid your employees defecting to your competitors. Their abilities, level of understanding, morale and motivation create organisational competencies. Thus they should be reminded, other than financial, of the non-financial benefits of working with your organisation such as, certainty, career enhancement, development experiences, challenges and recognition. Managers need to ensure that there is a dialog between management and employees, as opposed to one way communication. This ensures that employees concerns are heard and dealt with thereby reducing the risk of employee turnover.

As times of harsh economic conditions are not meant to last forever, managers need to have a strategy in place for the upturn. They should be able to identify early indicators of better times to come. This will help craft strategies necessary to win back lost business and customers.

Remember, managing risks during periods of harsh economic realities helps build a better business all round. Change is an opportunity, every time the economy changes pace, opportunities arise for new products and strategies.

Integrating Sustainability, Ethics and Business Strategy

In simple terms, Ethics are the processes, procedures and behaviours that a business adheres to in its daily dealings with its various stakeholders.

What is accepatable as moral behaviour in one country might not be accepted in another jurisdiction but nevertheless, a line should be drawn between what is wrong and what is not and a balance established.

During the last decade, we witnessed a host of multinational corporations crumble to their feet due to unethical business practices. The famously known ones are Enron, WorldCom and the accounting firm Arthur Andersen.

Recent casualties of unethical behaviour include Lehman Brothers and Bear Stearns, both former US Investment banks. These two financial institutions focused on short-term gains at the expense of their long-term survival.

With most businesses driven by profit motive, the manner in which those profits are obtained becomes a topical issue. Falsifying records and accepting a bribe has serious consequences and in most cases resulting in prolonged jail sentences.

A case in point is that of four Rio Tinto Executives who admitted to a Chinese Court that they accepted bribes.

Another example would be that of the disgraced Bernard Madoff, a former stock broker, who is serving 150 years imprisonment for defrauding investors.

With sustainability issues now on the main agenda of many Political leaders, businesses are under more scrutiny than before. They have to constantly monitor the level of their CO2 emissions and the impact their business activities has on society and the environment.

Lessons can be learnt from the recent BP oil spills in the Gulf of Mexico. According to the BBC, the cost per day to BP of containing the spill and securing the original well is approximately $6m (£3.9m).

Although BP refuses to accept responsibility and puts the blame on Transocean, the owner and operator of the failed equipment which caused the explosion, I strongly believe that the BP engineering team failed on their risk management.

They should have routinely assessed the nature and condition of the equipment to see if there were any problems. To me its like hiring a vehicle from Rent-A-Car and you as the driver you still expect Rent-A-Car to come and check the oil and petrol level for you.

Yesterday, Wal-Mart Stores Inc agreed to $27.6 million settlement in California harzadous-waste complaint.

From the above cases, it can be seen that there is need for integration between sustainability, ethics and strategy when it comes to business planning.

Failure to do that, the costs can be unbearable in the future. Sustainability & ethical issues should not be viewed as either compliance-driven activities or be regarded as a cost, but rather as part of how the business generates value. They are drivers of business performance.

As a leader, questions that you should be asking include:

  • Where do we draw the line between ethical and unethical behaviour.
  • The strategies we are pursuing today, what impact do they have, socially and environmentally?
  • Is our sustainability strategy aligned to the overall business strategy?
  • Is our sustainability reporting integrated with financial reporting?
  • Are we investing enough in activities associated with ethical and sustainability issues?
  • Are we only focusing on the short-term financial gains and ignoring long-term sustainability?
  • How knowledgeable and skilled are our employees when it comes to ethics and sustainability? Do they need further education & training?
  • How ethical is the nature in which we win contracts or business projects?

Answering these questions should provide a starting platform for your organisation to build a long-term sustainable and ethical business model.

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