67
4
Strategic Risk
If there is one item that is the lifeblood of chocolate producers, it is cocoa.
And if there is one item that presents a strategic risk to chocolate produc-
ers, it is cocoa. Around 70% of the world’s cocoa crop is concentrated in ve
African countries, in a region that is not known as the most stable place to
obtain raw materials. Furthermore, several years ago, a handful of traders
took possession of almost all the cocoa beans in certied warehouses in
Europe, raising legitimate concerns about commodity manipulation.
Even on a good day cocoa can be risky to grow as yields are lower com-
pared with other crops, access to fertilizer is limited, and the cocoa crop
is highly susceptible to pests. Not surprisingly, cocoa growers are increas-
ingly shiing to more protable crops such as rubber while younger farm-
ers are reluctant to become cocoa farmers in the rst place. None of this is
good news to chocolate companies.
Major chocolate companies have come to the conclusion that they must
work directly with farmers to introduce trees that increase crop yield,
to eradicate pests and disease, to provide training and education, and to
make sure farmers have access to fertilizer.
1
ey are also working to make
the nancial model for growing cocoa beans more viable. ese compa-
nies are trying to be proactive in the face of a strategic risk that can aect
the success of a global industry.
is chapter addresses a specic category of risk called strategic risk.
While countless corporate- level actions, decisions, and random events
can create strategic risk, this chapter focuses on supply chain areas that
have clear strategic linkages when not managed or anticipated properly.
We will focus on strategic risk within three areas—strategic risk that
results from new product failures, the of intellectual property, and exter-
nal intelligence failures. We also provide advice about how to minimize
the strategic risk related to each area.
68 • Supply Chain Risk Management: An Emerging Discipline
WHAT IS STRATEGIC RISK?
Before discussing various supply chain areas that can elevate risk to the
strategic level, let’s be clear about what we mean here. A good place to
start is by understanding what is meant by strategic, a word that is one of
the most overused terms in business. In fact, it is so overused that it oen
becomes dicult to know when something truly is strategic.
Something is strategic if it is necessary to or important in the initia-
tion, conduct, or completion of a strategy or strategic plan.
2
Another per-
spective says that something is strategic if it relates to the identication of
long- term or overall aims and interests of an organization and the means
of achieving them.
3
However, all of the denitions tie into the notion that
something is strategic if it has the ability or potential to aect the inte-
grated whole, which means aecting an entire business or its continuity.
Now that we understand the word strategic, let’s understand strategic
risk. One perspective views strategic risks as those risks that are most
consequential to an organization’s ability to execute its strategy, achieve
its business objectives, and build and protect value.
4
Another perspective
views strategic risk as the current and prospective impact on earnings or
capital arising from adverse business decisions, improper implementation
of decisions, or a lack of responsiveness to industry changes or forces.
5
And
a third view denes strategic risk as an array of external events and trends
that can devastate a company’s growth trajectory and shareholder value.
is third view further categorizes strategic risks into seven major classes:
industry, technology, brand, competitor, customer, project, and stagna-
tion.
6
Consider the strategic risk to the producers of the lucrative Fast
and Furious franchise. When Paul Walker, a major star of this series, was
killed in an unrelated accident during the lming of Fast and Furious 7,
Universal decided to indenitely postpone the $200 million project, even
though the movie was well into lming. e death of a lm star during
production is perhaps the ultimate strategic risk for a movie company.
Strategic risks are those that capture the attention of the board of direc-
tors. And these are the risks that make their way onto the 10-K report as
enterprise risks. ese risks have the ability to aect business continu-
ity, erode a company’s brand image, and adversely impact market share.
As mentioned in Chapter1, supply chain risks are increasingly becoming
part of the enterprise risk listing, something that makes supply chain risk
management a growing concern to executive management. e following
Strategic Risk • 69
presents three supply chain– related areas that minimize strategic risk
when managed properly.
REDUCING STRATEGIC RISK THROUGH
BETTER PRODUCT DEVELOPMENT
It is widely accepted that the successful development of products and ser-
vices is an important part of what dierentiates one rm from the next. In
fact, a large body of literature has identied product development as a core
process playing a major role that supports global innovation and competi-
tiveness. e process of discovery, development, and commercialization
of products and services is a major source for innovation and growth. It is
also a process that when performed poorly has strategic risk implications,
particularly as it relates to a company’s reputation and brand equity.
is discussion is not about how to develop new products and processes.
Other sources address that topic well. Instead, we look at how to make
product development better from two perspectives. e rst perspective
presents a set of best practices during product development. e second
looks at the emerging process of integrating new product development and
risk management. Better product development means less business risk.
New Product Development Best Practices
A well- designed product development process can lead to many ben-
ets, including reduced market risk, shorter development times, and rst
mover advantages that capture market share or create barriers to entry.
An analysis conducted by Industry Week revealed hundreds of ways to
develop products and services faster, better, and smarter. Our experi-
ence with leading companies suggests that the biggest improvements in
product development are the result of a well- dened set of practices that
requires a closer look.
Concurrency. Concurrency during product development is dened by
two dimensions. e rst is the simultaneous development of products
along with the physical processes required to produce them. e second
dimension involves the simultaneous rather than sequential involve-
ment of functional groups during development. Sequential development
(or what some refer to as linear development) features a “handing o”
70 • Supply Chain Risk Management: An Emerging Discipline
of work from one functional group to another, something that requires a
time- consuming learning period aer each hand- o. It also results in far
too much work being handed back for revision when a later group nds a
design to be unworkable.
What is it about a concurrent approach with cross- functional teams that
is attractive? A concurrent approach requires cross- functional agreement
throughout the development process, which minimizes time- consuming
and costly design changes at later development stages. is approach also
supports the interaction of competent professionals, something that usu-
ally leads to better decisions. Furthermore, concurrency oers opportuni-
ties for early customer and supplier involvement, accelerated learning as
cross- functional team members learn simultaneously rather than sequen-
tially, and the establishment of organizational rather than more limited
functional goals. Some good reasons exist to pursue a concurrent approach
to product and process development.
Early Involvement. Most executive leaders now appreciate the value of
external involvement during product development, and they further rec-
ognize the need to involve suppliers and customers earlier rather than later
in the process. Recently, a leading maker of appliances relied on a supplier
to act as a system integrator for a complex module. e integrator assumed
design leader ship, selected the component suppliers, and managed those
suppliers during development and production. For the rst time this orig-
inal equipment manufacturer (OEM) did not suer product launch delays
or cost overruns related to this module. Launch delays and cost overruns
are key risks that are part of every product development project.
A meaningful relationship exists between supplier involvement on
teams, including product development teams, and a variety of desirable
outcomes. Teams that involve suppliers, formally or informally, are gen-
erally more satised with the exchange of information with suppliers
compared with teams that do not include suppliers. ese teams also note
fewer problems coordinating external work activity with a higher reliance
on suppliers to support a team’s goals. Perhaps most importantly, external
evaluators rate teams that involve suppliers as more eective with greater
eort put forth toward their assignments or projects compared with teams
where supplier involvement was lacking.
While early involvement with suppliers sounds easy, the process does
bring with it some issues. Condentiality of information continues to be
a major concern when involving external organizations in something as
strategically important as product development. Other concerns include
Strategic Risk • 71
not knowing how to pursue early involvement, maintaining too many
suppliers for a given requirement, or external relationships that are adver-
sarial rather than cooperative. Given the expected growth in product
teams that includes suppliers and customers, overcoming any barriers to
early involvement, each of which presents a clear risk to the success of the
process, must become a priority. Fortunately, none of these barriers vio-
lates the laws of physics.
Use of Information Technology. Successful product development
groups rely extensively on soware to accelerate and improve the devel-
opment process, another best- practice characteristic. Soware is avail-
able that supports product and process development through design of
experiments, quality function deployment (i.e., translating customer
wants and requirements into design specications), and the methodical
assessment of design for manufacturability or assembly, something that
is essential when taking a concurrent product and process development
approach. And let’s not forget about the importance of computer- aided
design (CAD), computer- aided manufacturing (CAM), and rapid proto-
typing applications. Keeping with the soware theme, failure mode eects
analysis (FMEA) tools support the assessment of potential failures in a
design or process, while TRIZ soware supports a disciplined approach to
complex problems that are encountered during development.
Without question we must include here additive manufacturing through
3-D printing. is rapidly evolving technology is expected to be a disrup-
tive technology, especially during product development. Product design-
ers at Ford, an early adopter of 3-D printing, are now creating prototype
parts for testing in days rather than months. Besides saving time, which
is the holy grail of product development, Ford is saving millions of dol-
lars during development. On a new engine program, Ford will 3-D print
most of the major components on the engine. According to a Ford execu-
tive, “When you learn about some of the ways additive manufacturing has
positively impacted, and even in some cases saved product launches, you
begin to understand its value. Our team is allowed so much more time to
innovate and improve products because they have more opportunities to
utilize multiple variations more eciently.”
7
Linking R&D and New Product Development. e fourth element
characterizing leading product development involves a direct linkage
between R&D and product development. Far too oen worthwhile inno-
vations from the laboratory are not commercialized. Best- in- class compa-
nies have in place a process to develop and validate new technology and
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