Strategic Planning and Risk Management
“I think there is a market for about 5 computers,”
-Thomas J Watson, Chairman IBM, 1943
“There is no reason for an individual to have a computer at home,” -Kenneth Olsen, President, Digital Equipment, 1977
“64K ought to be enough for anybody,”
-Bill Gates, CEO, Microsoft, 1981
Understanding the importance of strategic planning
The average life expectancy of a multinational corporation has been estimated by Arie De Geus, a former Shell executive, a scholar and an expert in strategic planning to be between 40 and 50 years. Most corporations are unable to survive long enough because they are unable to manage risks effectively.
De Geus’s research has revealed that enduring organizations excel simultaneously on various fronts. They are sensitive to their environment. They do not hesitate to move into uncharted areas when the situation so demands. They use money in an old fashioned way, keeping enough of it for a rainy day. In other words, long lasting companies manage the risks they face in a flexible way, backed by expertise across functions. As Collins and Porras (who have done some brilliant research on what creates lasting companies, in their book ‘Built to Last’) put it, “Visionary companies display a powerful drive for progress that enables them to change and adapt without compromising their cherished core ideals.”
All companies face threats in their environment-new competition, new technology, changes in consumer tastes but only a few of them manage these risks effectively. Those who do so are alert to changes in the environment and are willing to change internally to respond to them. The Swedish company Stora, for instance, has shown a remarkable ability to formulate strategies according to the needs of the hour. It has not hesitated to go outside its core business when the situation has demanded. Once it even fought the king of Sweden to retain its independence. To cope with the changing environment, the company has from time to time moved into new businesses - from copper to forest exploitation to iron smelting, to hydropower and later to paper, wood pulp and chemicals. In the process, the company mastered steam, internal combustion, electricity and ultimately, microchip technologies. Had Stora continued in one business line, it would not have survived. Consider Nokia, one of the most admired companies in the world today. Though Nokia has been in the limelight only in recent times, it is a fairly old company, having been around for more than 100 years. At one point of time, Nokia dealt in wood, pulp and paper. Today, it makes sleek cellular phones loaded with powerful software.
The lesson from Nokia and Stora is that strategic planning plays the crucial role of enabling a company to anticipate and deal with risks. In this chapter, we shall try to understand the link between strategic planning and risk management. Strategic planning is all about positioning an organisation to take full advantage of opportunities in the environment while simultaneously reducing the vulnerability to threats. Thus, good strategic planning implies the ability to digest what is happening in the environment and reshape the organisation accordingly. It becomes easier to do this if an organisation is prepared for various eventualities. Then, as events unfold in the environment, it is in a better position to decide which strategy would work best. Strait-jacketed thinking, on the other hand, makes the employees of an organisation impervious to external developments. When changes do occur, they are taken by surprise. A simple example from our daily lives illustrates this point. A man who travels by bus daily to office would not be unduly worried about a prolonged railway strike as it does not affect him. But a man who knows there could be an occasional bus strike which would necessitate travel by train, would follow the strike with great interest. A company which has...