South-Western - Management  
Watch Your Back: As Companies Map Their Growth Strategies,
They Should Pay More Attention to the Hazards They Entail
Topic Planning
Key Words Planning, Risk, Strategy
InfoTrac Reference A120459956
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News Story

Enterprise Risk Management, or ERM, a concept introduced in the 1990s, sought to integrate risks into strategic planning, but was often limited to credit and market risks. The terrorist attacks on September 11, 2001, coupled with new governance rules enacted after that year's corporate scandals, have sparked renewed interest in ERM and its application to business success. New ERM programs seek to get involved with the planning process from the start.

Most companies already use the SWOT (strengths, weaknesses, opportunities, and threats) analysis when making their plans. However, many executives tend to focus on the strengths and opportunities and gloss over the weaknesses and threats. This tendency can set their innovative plans on a course for failure. Ford Motor's experience with the Explorer SUV is an example of this tendency in action. What started as a technical problem with the tires on the vehicle became a safety problem when the SUVs began rolling over on highways. This problem brought Ford public relations problems, government relations issues, and difficulties with their tire provider Bridgestone/Firestone. If Ford's planners had thought through the risk involved with the technical weakness that started the bigger failures, the problem might have been avoided, or at least minimized.

Companies are linking risk assessment and strategic planning in two ways: either by sharing plans and capital expenditures with risk management after the plans have been drafted, or by doing a formal risk assessment during the formulation of the plans. Some companies are going further to include risk assessment earlier in the process. The goal of risk assessment is to help the business understand what things could go wrong before they even begin.

The danger in focusing on risk assessment is that a company's culture could become too risk-averse and good or innovative ideas could get habitually shot down by risk assessment managers. The ideas is not to avoid risk altogether, but to undertake risks in an understood and managed way. By bringing strategic planning and execution closer together, companies should start to see things go the way they planned.

Questions
1.

Executives tend to focus on strengths and opportunities rather than weaknesses and threats when they are strategic planning. Why do you think this is true?

2.

This article advocates planning carefully and looking as closely at potential risks as potential successes. Read further about risk strategies in your textbook. When might it make sense for a company to be more risk-averse in its planning? Give an example of a company that should have been more risk averse and what the results of their strategy were. Conversely, when would it make sense for a company to embrace a higher margin of risk? Give an example of a company that has done this and been successful.

Source "Watch Your Back: As Companies Map Their Growth Strategies, They Should Pay More Attention to the Hazards They Entail," CFO, The Magazine for Senior Financial Executives August 2004, v20 i10 p61(2).
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