GEORGE E. DANNER, President, Business Laboratory LLC
There is a parallel track of things we want to remove: risk, vulnerability to business cycles and coupling to industry downturns -- in other words, "de-risking," "de-cycling" and "de-coupling." These are complex endeavors, worthy of rigorous analytical treatment, which can have just as powerful an effect as all of the new layering of features described before.
De-risk
The corollary to risk is uncertainty. Remove uncertainty and you have an excellent chance to simultaneously remove risk. But how can you predict uncertainty? You can't, but many firms think they can by summoning the best minds in their field to best-guess the future. Prediction has never proven to be a reliable corporate function and, in fact, has led to anecdotes of failure.
Rather than attempting to predict the future, let us think about plausible futures where competition is strong or weak and everywhere in between. Company experts can work through thousands of plausible futures by considering the variables that drive their business and then allowing for a reasonable range of variables to be considered. It is then a straightforward process to model the impact of certain decisions across these futures. What we are looking for is the most robust decision -- one that works reasonably well in 800 of 1,000 futures, rather than one that works spectacularly well in, say, two of 1,000 futures. This is the concept of "robustness," which insulates from future variability.
De-cycle
Investors know that the best businesses are those that prevail through industry downturns while also making performance gains on peers during upturns. If forecasting models inform us of an upcoming spike in a feedstock, we can take action -- build inventory, pace production -- to offset the effects of this expected event. The problem I see is few companies configure their firms for the duality of forecasting coupled with nimble action. Instead, they try to be the best firefighters in the industry (often rewarded for putting out the latest fire).
De-couple
Even without the presence of external shocks, firms create their own self-inflicted chaos. If you have never had the experience of role-playing the famous corporate game called "The Beer Game," I urge you to do so with your colleagues. The live-action game truly brings home the idea of self-induced volatility, which is harmful to the business and cannot be blamed on fickle customers or unreliable suppliers.
The antidote to this chaos is feedback loops. Think of these as self-governing mechanisms that we can place in just the right spots along our value chains to ensure carefully controlled actions. For example, I recently worked with a firm that identified a "convenient capacity" in its manufacturing process to allow for a product to be made more cost-effectively. The firm asked its sales team to place an emphasis on selling the product, and it generated outsized profits for the firm. If we can introduce multiple feedback mechanisms into our companies, we build self-governing mechanisms that are constantly righting the ship in large ways and small.
To "de" or not to "de" is no longer a question.
George E. Danner is president of Business Laboratory LLC, a specialty firm that builds simulation and analytical models to solve complex problems for businesses worldwide. He is the author of two books, "Profit From Science" and "The Executive's How-to Guide to Automation."
For more information, visit www.georgedanner.com.
