In the fields of observation, chance favors only the mind that is prepared.”

Louis Pasteur (1822-1895)

Strategic blunders

What is the source of the greatest loss of shareholder value in the last five years: fraud or bad management? Booz Allen Hamilton studied this question by surveying 1200 firms with market capitalizations of at least $1B for the five-year period from 1999 through 2003. The research revealed that for the 360 financially worst performing firms, management ineffectiveness in reacting to competitive pressures or forecasting customer demand were the dominant sources of shareholder loss. These strategic mistakes were far worse than operational failures such as cost overruns. With the new awareness of risk facing businesses these days, it becomes essential for senior managers to anticipate and manage a much wider range of risks than previously. It’s especially important to manage “strategic surprises”: they are special events: we don’t know we don’t know about them. They cause very adverse effects on the company, and seem to come “out of left field”. Conscious and formal attention to risk management must be part of every firm’s process of maximizing its value. As a quick check on your readiness, ask yourself this question:

Are we immune to strategic blunders?

Firms that should know better make huge, avoidable strategic blunders. For example, many very large telecom equipment vendors failed to see the huge impact on their sales due to the consolidation in the telecom services industry-their customer base. According to the Wall Street Journal on 11 FEB 2005:

“Having survived a three-year bust, the suppliers of the gear used in the world’s communications networks are facing a new challenge: the sudden and rapid consolidation of their customers.”

Note that the idea of customer consolidation is not some risk falling in the “exotic” category. The possibility had been discussed at length in the financial press for the preceding year, with the goal of finding M&A stock plays. Consolidation was not a strategic surprise. (A strategic surprise was, e.g., the huge fire in a small Sumitomo plastic factory in Japan that shut down the chip business about 10 years ago—turns out most IC packages depended on that plant.)

To learn more about the vast array of risks facing high tech firms, read our white paper on a Risk Taxonomy.

Strategic Scenario Generation

We work with clients to create actionable strategic scenarios to help leverage their innovations and manage their risks. Some of the most important and pervasive risks to manage are:

• Surprise moves by competitors
• Failures to perform by parties to an agreement
• Failure of suppliers to deliver as agreed
• Market surprises.
• Inability of the firm to keep certain sales commitments

We capitalize on innovation and attack these and other risks with a variety of tools. One of the most valuable tools is the Strategic Scenario Generation (SSG) process. We employ SSG to

• Devise strategies to exploit innovations and intellectual property
• Identify risks and create effective risk-management plans to avoid, hedge or mitigate the risks.

The SSG process inherently works to build consensus. These plans may include specially structured contract terms.

Learn more about SSG.