The Rover Group misadventure has cost BMW billions of dollars in
investments and billions more in red ink." This quote, from the Wall Street
Journal’s front page on 3/17/00, concerns BMW’s purchase of Britain’s Rover
Group Ltd., a group dubbed "The English Patient" by German media. With
BMW’s "misadventure" in mind, we continue our risk series following the
risk management framework developed by D. Lessard, MIT Sloan School, and R. Miller,
Universite Quebec a Montreal. They propose a six step framework:
- Identify / understand risks,
- Shape risk,
- Create options / Build in flexibility,
- Take risks strategically,
- Transfer or hedge risk, and
- Diversify/pool the risk.
This newsletter focuses on step four of the framework. To take risks
strategically, the firm needs a good understanding of strategy. Michael E. Porter wrote a
landmark, yet extremely readable book on the subject called "Competitive
Strategy". Porter says that there are three generic strategies cost leadership,
differentiation, and focus. Let’s see how Porter’s ideas apply to two companies
BMW, who did not understand how to take risks strategically, and a bank who did.
BMW bought Rover to broaden offerings by providing a down to earth
product line and to achieve economies of scale, especially with suppliers. BMW’s
historical position had been to focus on the luxury segment. What went wrong, aside from
the strategic issues related to the purchase? Cultural issues existed; the British balked
at German domination so BMW took a hands-off approach too long. The British pound
appreciated in late 1996 making Rovers more expensive outside Britain which hurt sales.
The British manufacturing plants were inefficient and BMW had no real experience with
Rover’s front wheel drive. World class engineering was no match for strategically
taking risks and savvy strategic planning.
On a more positive note, we worked with a major New England bank on new
risk management software for their trading floor. Their trading activities, which
differentiate them from other banks, contributed over $2 billion to their revenue in 1999.
They traded extensively in somewhat risky investments such as high yield bonds, emerging
markets, and derivatives. When the emerging markets lost value in 1998, this bank lost far
less money, as a percentage of their trading volume, than many New York banks. Our client
understood how to take risks strategically. They knew that their trading activities were
lucrative but risky and they traded smartly by implementing a sophisticated risk
management software system that helped them mitigate their losses.
Craig Goldman’s article in CIO Magazine on 1/15/99 called "Align Drive"
applies these ideas to software. He says to first determine the drivers to business
success, then determine the processes that support the drivers. Next determine how I.S.
can support the processes. Finally, prioritize the drivers, processes, and I.S. projects.
We’ll continue with Lessard and Miller’s framework in our
next issue. Our past risk newsletters are here at http://world.std.com/~pcraig
©2000 by Complexity Management
Somerville, Massachusetts, in Metropolitan Boston
Complexity Management Chronicles, a newsletter for software quality assurance
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