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13 October 2009 • 7:00 am

Turning Sense into Dollars – Part IV (Conclusion)

In the previous posts, I introduced a case which offers a practical, real world example of how risk analysis can enrich the strategic planning process.  We learned of PrimeCorp (a disguised name), a large company with a national presence in the U.S., and met Jim and Curtis, PrimeCorp’s head of Strategic Planning and CEO, respectively. If you haven’t read Parts I through III of this series of posts, please do so now. It contains background needed to understand this post.

Outcomes at PrimeCorp

As a result of the risk-adjusted forecasts, both the baseline and with leadership expectation of the impact of the proposed strategic management system, PrimeCorp had satisfactorily completed its cost-benefit analysis and projected payback. Curtis (PrimeCorp’s CEO) soon thereafter approved the project as proposed, and our work was underway. Working closely with Jim (PrimeCorp’s head of strategic planning), we undertook to transform the way in which PrimeCorp managed its strategy. The transformation took about two years.

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9 October 2009 • 3:26 pm

Turning Sense into Dollars – Part III

In two previous posts, I introduced a case which offers a practical, real world example of how risk analysis can enrich the strategic planning process. We learned of PrimeCorp (a disguised name), a large company with a national presence in the U.S., and met Jim and Curtis, PrimeCorp’s head of Strategic Planning and CEO, respectively. If you haven’t read Parts I and II of this series of posts, please do so now. It contains background needed to understand this and the following post.

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6 October 2009 • 7:00 am

Turning Sense into Dollars – Part II

In the previous post, I introduced a case which offers a practical, real world example of how risk analysis can enrich the strategic planning process. We learned of PrimeCorp (a disguised name), a large company with a national presence in the U.S., and met Jim and Curtis, PrimeCorp’s head of Strategic Planning and CEO, respectively. If you haven’t read Part I of this series of posts, please do so now. It contains background needed to understand this and the following posts.

The Different Approach

We already knew that a key element of PrimeCorp’s existing strategic planning process was its financial forecasts. The annual planning book (hundreds of pages, highly confidential, and not shared beyond the executive team), contained page after page of spreadsheets describing past and expected future performance of each of PrimeCorp’s several divisions, as well as an enterprise-wide roll-up of the numbers. The executive team, which consisted of the heads of each division (as well as such corporate functions as HR Finance, and IT) annually created their individual division forecasts as a function of past performance, and their own expectations of the next five years of future results. This process was time-consuming and filled with understandable tension – between division leaders’ desire to soft-peddle the numbers, and CEO and board pressure to raise revenue and manage costs to achieve year-over-year improvement in profitability.

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5 October 2009 • 7:00 am

Turning Sense into Dollars – Part I

Continuing our introduction of the element of risk into strategic planning, your humble correspondent now endeavors to share a practical, real world example of how risk analysis can enrich the strategic planning process. A caution – some basic mathematics are involved, but I’ll try as best as possible to avoid the use of jargon. And at the end of the case, I’ll offer a tool and an hour of telephone-based guidance on how to apply this tool in your organization for FREE to the first five readers who respond to the offer – with no strings attached.

A few years ago, I was faced with a unprecedented challenge by a client, to attach a dollar value to the benefit of a proposed consulting engagement. The details of the organization are not important to the concepts in the case, but suffice to say I was hungry for the opportunity to consult to this large organization.

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1 October 2009 • 7:00 am

Risky Business

coin_flipAs promised a couple of weeks ago, I’ve now gotten a copy of Sam L. Savage’s The Flaw of Averages from my local library. Although I am still reading it, I can already say that it is an enjoyable read, accessible, and contains a wealth of valuable insights that I’ll be sharing with you. I’ll be buying my own copy soon, and encourage you to take a look at it as well. It has already gotten me thinking more about how much better we need to understand the concept of risk.

We have all grown up in an era in which computing technology has had an increasing influence on the way we think about pretty much everything. In my first year of high school, slide rules were required for those taking physics classes. By the time I took the physics class (in my senior year), we were able to instead share the one calculator the school had bought for each classroom in the physics department. I suspect that some of today’s technologies will someday be as outdated as slide rules are today. If you don’t even know what a slide rule is, don’t worry (but you can read more about it here).

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16 September 2009 • 7:00 am

Innumeracy and The Flaw of Averages

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A classic example of the Flaw of Averages involves the Statistician who drowned crossing a river that was on average 3 ft. deep.

Desperately casting around for a topic to write about today, I was grateful to see a link to an interview in the San Jose Mercury News with Stanford professor Sam L. Savage about his book, The Flaw of Averages (great title!). I’ve not read the book yet, but the review has certainly piqued my interest:

How does General Motors, Sam L. Savage wonders, explain the pathetic performance of its crystal ball? When Americans started driving hybrids, GM was still pushing Hummers. Executives at the giant carmaker — fully aware of union contracts, presumably prepared for rising gasoline prices and economic uncertainty — drove straight into the ditch of bankruptcy.

“Probability management” is often mismanaged by business leaders, says Savage, a consulting professor of management science and engineering at Stanford University and a fellow at the Judge Business School at the University of Cambridge. Savage, who has performed probability studies for Royal Dutch Shell, set out to right statistical wrongs in his book “The Flaw of Averages.”

The Information Age has transformed statistics into a vital field of study, yet Savage says many habits and practices have been slow to change from the “steam era statistics” of the Industrial Age.

Written for a business audience, “The Flaw of Averages” leavens the math with levity, even the occasional cartoon.

Well alright then. Working with business executives and their measures for so many years, I continue to be amazed at how easily decisions are made on the basis of numbers with little consideration for the risks and consequences of those decisions. I’ve been meaning to write at some length about the need for the discipline of risk management in change programs, but before doing so, we all need to take a deep breath and consider the magnitude of our collective innumeracy.

The topic has been covered before. I just pulled Innumeracy: Mathematical Illiteracy and its Consequencesby John Allen Paulos from my bookshelf, and thumbing through it, I remember how much I appreciated the book, but that is wasn’t the easiest read. From the back cover description:

Why do even well-educated people understand so little about mathematics? And what are the costs of our innumeracy? John Allen Paulos, in his celebrated bestseller first published in 1988, argues that our inability to deal rationally with very large numbers and the probabilities associated with them results in misinformed governmental policies, confused personal decisions, and an increased susceptibility to pseudoscience of all kinds. Innumeracy lets us know what we’re missing, and how we can do something about it.

Sprinkling his discussion of numbers and probabilities with quirky stories and anecdotes, Paulos ranges freely over many aspects of modern life, from contested elections to sports stats, from stock scams and newspaper psychics to diet and medical claims, sex discrimination, insurance, lotteries, and drug testing. Readers of Innumeracy will be rewarded with scores of astonishing facts, a fistful of powerful ideas, and, most important, a clearer, more quantitative way of looking at their world.

SinceI found that Innumeracy was not especially accessible, I haven’t yet found occasion to use examples from it. Perhaps The Flaw of Averages will be better. It looks promising. From the interview with Savage:

Q. What are the most common ways people foolishly apply the law of averages? Is it the faith placed in “average returns” on retirement portfolio?

A. Plenty of people have been caught off base by the Flaw of Averages in investing, but here is an example that is closer to home. Imagine that both you and your wife are right on time for appointments, on average.

When you go somewhere together, however, you will be late, on average. Why? If we model being early or late for each of you by flipping a coin (heads is early, tails is late), then the only way you will not be late as a couple, is if neither of you is late. This is like flipping two heads in a row, or one chance in four. Now expand this to a big industrial project with thousands of tasks, and you can imagine the implications.

We don’t have to imagine the implications – we live with them every day. More to come (soon, I hope), on the topics of innumeracy and strategic risk management.

30 July 2009 • 7:00 am

Hunkering Down, or Seizing the Day?

Newborn gazelle hunkering down for safety, Serengeti, Tanzania

Newborn gazelle hunkering down for safety, Serengeti, Tanzania (© Erika Bloom)

Reading blogs, scanning headlines, and staying in touch with old friends, it seems to me that right now there is a lot of hunkering down going on. Hunkering down, like dodging bullets and any port in the storm are vivid metaphors for the actions of people when there is danger about. During a global recession, individuals naturally think about protecting themselves and their families from the risk of unemployment, investment failure, and other threatening stuff.

Organizational behavior is a ‘soft’ science that begins with the premise that organizations exhibit collective behaviors. This too is natural. Fish and birds move in unison. Bees, ants, and other insects live in highly-ordered societies that act in concert. Wolves hunt in packs. Evolutionary biologists explain these behaviors as adaptations not just for the survival of the group, but the survival of the species.

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