Risk can take many forms from individual to companywide (enterprise). Regardless of the level there is always a tendency to underestimate the level of risk. Soldiers in combat almost never believe that they will end up a casualty. In fact, people performing jobs considered dangerous regularly underestimate the risk to health and welfare. This same mentality carries forward when dealing with enterprise risk. Ken Olsen, the founder of Digital Equipment Corporation (DEC), stated, “There is no reason why anyone would want a computer in their home.” (1) Personal Computers are now ubiquitous. DEC is out of business. Another famous incident is when Andrew Grove and Intel CEO Gordon Moore decided to exit the memory chip business. It took Intel management two years of churning and emotional trauma before the exit was complete. When one customer was told of the exit, the response was, “What took you so long?”
These examples represent two very real problems. First, it is difficult to identify when a strategic decision bets the company’s future. This is particularly the case when the company has been successful. Ken Olsen could not see the threat personal computers posed to his company. Then, it may take several years to readjust operations. While the shift is taking place, competitors continue to execute their plans to gain market share.
The U.S. Postal Service’s problems provide a current example and demonstrate that governments also face strategic risks. Despite news reports, the $5.5 billion annual advanced funding of retirees’ health benefits is not the strategic problem. The prefunding can be viewed as a tax, shifting money from USPS to the general fund. Congress can eliminate or modify this tax at any time. The strategic risk is the assumptions upon which USPS has based its current strategic plan. The assumption is that business class mail (junk mail) is the future engine of growth. There are two major problems. First, it takes three pieces of junk mail to equal the revenue generated by one piece of first class letters. With first class mail declining at 10% annually, to make a profit, junk mail has to grow at roughly 40% a year, an unlikely prospect. The second is that the “Medium is the Message”. Electronic communication is ubiquitous. If you want to reach people with your message, you use the medium they are using. Thus, not only is the strategic foundation built on an improbable assumption, it has limited growth potential.
In August 2012, the Post Master General indicated to employees at the Portland Oregon Processing Plant, Parcel Post is growing. The implication is that parcels are now a major strategic component. While this is a sound strategic move, it creates confusion as to the major elements of the strategic plan and whether the plan is being determined by the numbers. If so, it violates Edwards Deming’s basic principle, consistency of purpose.
Footnotes
- Serial Innovators: Firms That Change The World, Claudio Feser, John Wiely & Sons Inc. McKinsey and Company, Hopoken New Jersey2012
BIO: James Kline is completing his Ph.D. The emphasis is the impact of innovation and destructive technology on local economies and organizations. He has written numerous articles on quality in government, and conducted economic, policy and risk analysis studies for local and state government.