MAPI Miami, FL April 8, 2011

Integrating Risk Management & Strategy: A Caterpillar Perspective Presentation to Manufacturers’ Alliance/MAPI Miami, FL April 8, 2011 Brief Bio Wo...
Author: Allan Beasley
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Integrating Risk Management & Strategy: A Caterpillar Perspective

Presentation to Manufacturers’ Alliance/MAPI Miami, FL April 8, 2011

Brief Bio Work history • 13 years at Caterpillar • Regional economist for Asia Pacific • Chief economist for EAME • Group President Coordinator for Steve Wunning • Strategy manager

Education • PhD Economics

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Issues • Mitigating risks while keeping strategic agility • Understand harder-to-quantify risks (particularly in emerging markets & totally new markets) • Building more proactive and risk-sensitive scenario planning process • Members felt their scenario planning processes going into the recession were too reactive & not agile enough • Broad overview of what you do at Cat would be of great interest WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Agenda • Caterpillar Overview • Trough Planning • Business Risk Management • Scenario Planning • Final Thoughts

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Caterpillar: A Big, Complex Company • A Fortune 50 global enterprise – 2010 S&R of $42B • 225,000+ Caterpillar and Cat Dealer employees globally • Broad product offerings: – Machines – Engines – Services • Independent dealers • Products used in more than 180 countries • Multiple brands • Highly integrated

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Striving to Find the Right Balance Enterprise-Centric

Business Unit-Centric Entrepreneurial zeal Market focus

Technical/functional excellence Operational excellence Innovation

BRM Strategy Accountability culture

Principles

Policies Procedures Enterprise alignment Corporate metrics

WHEN THE BUSINESS WINS, WE WIN Corporate Services

versus

Caterpillar: Confidential Green

Hard-wired

P&L PQVC Capex authority Hiring/firing authority Design control

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Bus Risk Mgt, Trough Planning and Scenario Planning BRM and Scenario Planning are risk mitigation tools Scenario Planning Business Risk Mgt.

2011

2013

2015

2020

2025

2030

Trough…sometime in future.

Trough Planning mitigates the economic risks captured in BRM WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Trough Planning

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Surviving the Great Recession Annual Dividends Declared Per Share $1.74

$1.68 $1.74

$1.62 $1.62 $1.68 $1.38 $1.38 $1.15 $1.15 $0.96 $0.96

• Enterprise Trough Planning • Managed through a challenging environment in 2009 to emerge: – Profitable – Dividend intact – Investment grade credit rating

2005 2006 2005 2006 2007 2007 2008 2008 2009 2009 2010 2010

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Trough Planning was Integral to 2005 Strategy “We will establish a flexible cost structure that allows us to improve our earnings performance significantly in any cyclical downturn.”

Trough Planning Vision A rigorous, collaborative process for developing comprehensive … plans for responding to a severe downturn. These plans will be realistic, achievable Plans with detailed “Pre-Trough” Pro-Active Actions and “In-Trough” Reactive Actions … that meets corporate goals of EPS > $2.50 and ROA > 6%. These plans will be triggered by close monitoring of a set of early warning indicators. PEOPLE

VISION 2020 STRATEGIC PROFILE STRATEGIC GOALS Performance Product & Process

People

Profitable Growth

CRITICAL SUCCESS FACTORS QUALITY

PRODUCT

VELOCITY

DISTRIBUTION

CHINA

TROUGH

New Product Introduction

The Burning Platform !

ENTERPRISE STRATEGIC AREAS OF IMPROVEMENT

Order-to-Delivery Encoding 6 Sigma Sustainable Development Growth Beyond Core

Our Values in Action – INTEGRITY, EXCELLENCE, TEAMWORK, COMMITMENT WORLDWIDE CODE OF CONDUCT

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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6 Sigma Based Trough Planning Process for Business Units Collaboration and common goals across the organization

• Coordinated global scenarios Average and worst-case trough Trough assumed to occur in 2008

• Collaborative strategy development Enterprise Process Owners coordinated strategies across business units

• Rigorous/detailed planning Pro-active actions to prepare for trough Graduated response strategy, linked to severity of trough

• “Trigger point” monitoring being put into place

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Business Risk Management

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Structure and Organizational Responsibility Risk Management • We own the risk management process; we do not own the risks themselves. • But we work closely with the risk owners in business divisions

AUDIT COMMITTEE of the BOARD OF DIRECTORS

Chairman & CEO

Chief Legal Officer CFO & GP Corporate Services

Chief Auditing Officer Corporate Auditing

Director, Strategy & Business Development

Chief Ethics and Compliance Officer

Manager, Corporate Strategy & Competitive Analysis

Manager, Corporate Strategy & Business Risk Management Eng Seng Loh

2 Corporate BRM Consultants

2 Corporate Strategists

WHEN THE BUSINESS WINS, WE WIN Corporate Services

DIVISION DIVISION ERM CHAMPIONS DIVISION ERM CHAMPIONS & COORDINATORS ERM CHAMPIONS DIVISION & COORDINATORS & COORDINATORS ERM CHAMPIONS DIVISION DIVISIONAL & COORDINATORS ERM CHAMPIONS ERM CHAMPIONS & COORDINATORS & COORDINATORS

Caterpillar: Confidential Green

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Assessment Reach

Assessments are conducted for each division and for groups of divisions under a Group President

Board of Directors Chairman & CEO

Chief Legal Officer

Construction Industries & Growth Markets Group CFO

Resource Industries

Energy & Power Systems

Group CFO

Group CFO

Mining & Quarry Products (Solutions)

Industrial Power Systems & Growth Mkts

Excavation

Diversified Products

Large Power Systems & Growth Mkts

Integrated Mfg. Operations

Cat Japan Limited

Building Construction Products

Marine & Petroleum Power

Advanced Components & Systems

Prod Development & Global Technology

China India / ASEAN Country Manager

Asia Pacific Distribution

EAME Distribution

Americas Distribution

Finance & Accounting

Human Services

Global Information Services

Aftermarket Parts, Services & Marketing

Financial Products

Rail

Reman & Components

Purchasing

Solar

Parts Distribution & Logistics

Electric Power

Core Industries Caterpillar/Bucyrus Integration*

CFO & Corporate Services

Group CFO

Earthmoving

Integrated Mfg. Operations

Customer & Dealer Support

Investor Relations Strategy / M&A / 6 Sigma Shared Services

Caterpillar Production System (CPS)

Corporate Auditing

*Caterpillar/Bucyrus is not in the scope of BRM as the acquisition has not “closed”

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Assessment Reach Assessments are also conducted for each C-Suite and also for the Enterprise

Board of Directors Chairman & CEO

Chief Legal Officer

Construction Industries & Growth Markets Group CFO (Asia/Pacific P/L)

Resource Industries

Energy & Power Systems

Group CFO

Group CFO

(EAME P/L)

Earthmoving

Mining & Quarry Products (Solutions)

Industrial Power Systems & Growth Mkts

Excavation

Diversified Products

Large Power Systems & Growth Mkts

Integrated Mfg. Operations

Integrated Mfg. Operations

Cat Japan Limited

Building Construction Products

Marine & Petroleum Power

Advanced Components & Systems

Prod Development & Global Technology

China India / ASEAN Country Manager

Group CFO

CFO & Corporate Services

(Americas P/L)

Asia Pacific Distribution

EAME Distribution

Americas Distribution

Finance & Accounting

Human Services

Global Information Services

Aftermarket Parts, Services & Marketing

Financial Products

Rail

Reman & Components

Purchasing

Solar

Parts Distribution & Logistics

Electric Power

Core Industries Caterpillar/Bucyrus Integration*

Customer & Dealer Support

Investor Relations Strategy / M&A / 6 Sigma Shared Services

Caterpillar Production System (CPS)

Corporate Auditing

*Caterpillar/Bucyrus is not in the scope of BRM as the acquisition has not “closed”

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Identifying and Reporting of Emerging Risk • Risk Owners • Survey Process • Screening • Reporting

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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ERA Process Timeline

Business Unit Risk Assessments

JAN

FEB

MAR

APR

Group President Risk Assessments

MAY

JUN

JUL

Risks rolled into Strategy

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

AUG

SEP

BOD Audit Committee Update

OCT

NOV

DEC

Annual Enterprise Risk Assessment

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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BRM Processes

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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BRM Process - Divisions

Review Strategy and Identify Risks

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Assessment with VP and Direct Reports

Caterpillar: Confidential Green

Manage Risks with Assigned Owners

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WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Hypothetical Example: Risk Assessment slide Employee Development Inability to develop and enhance employee skills to ensure optimal achievement of organizational strategies, goals and objectives. •

We have a lot of new hirers and they need to be brought up to speed quickly.



15% of our current engineering department is eligible for retirement within the new 4 years…a knowledge transfer plan for our future “backfills” is critical.



We are looking to ensure all employees in the division understand our values and action, a plan for execution needs to be developed.



Every employee in the group needs to have a training plan for the next two years.



Job descriptions and desk duties need to be developed so all new people who come in the group are able to execute as soon as they arrive.



We need an on-boarding process and training for all future “new” employees to our division.

Note: These statements represent business unit commentary and have not been independently verified.

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Key Assessment Steps • In-depth discussion • Handheld voting tool • Voting dimensions – Significance – Likelihood – Velocity • Reach consensus or restart process WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Hypothetical EXAMPLE - Divisional Key Risks Employee Development Environmental Compliance

Budgeting Political Competitor

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Example: Division’s Mitigation Actions

 Risk assigned to Division Owner  Owner creates mitigation actions  Owner ensures mitigation actions are integrated into strategy plans  Risk descriptions, Owner and metrics submitted to Corporate BRM

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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BRM Process Steps -- Enterprise

BU input, identify risks one-on-one with Executive Office

Assessment with Executive Office

Manage Risks with Executive Office and Sponsors

Process steps for the Enterprise Risk Assessment are similar to those for the Divisions

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Hypothetical EXAMPLE of Enterprise Risk Map Operational Risks Accountable For Results Culture

Compensation & Benefits

Customer Focus

Distribution Channel

Employee Communication

Employee Development

Hazards

IT Availability/ Continuity

IT Enabled Channels

IT Infrastructure

IT Integrity

IT Investment

IT Management

IT Security/Access

Labor Relations

Leadership Development

Leadership Succession Planning

Long Term Capacity

Manufacturing Execution

Marketing

Product Forecasting

Product/Service Pricing

Quality

Recruiting

Research & Development

Retention

Short Term Capacity

Social Responsibility initiatives

Supplier Coll, Proc, Inv Mgt

Terror & Malicious Acts

Transportation & Logistics

Strategic Risks

Compliance Risks

Alignment

Brand Portfolio

Competitor

Anti - Corruption

Employent Rights/ Working Conditions

Information Security

Corp. Sustainable Development

Developed Market Requirements

Growth Market Requirements

Antitrust/ Unfair Competition

Environmental Compliance

Product Regulatory

Intelligence Management

Measurement & Monitoring

Political

Conflicts of Interest

Export Controls

Secrity of People & Property

Product/Service Portfolio

Resource Allocation

Strategic Planning

Data Protection & Privacy

Financial/Regulatory Reporting

Technical Information

Employee Health/ Safety/Security

Government Contracts

Trade Compliance

Technology Comp. Advantage

Technology Implementations

Legend

Financial Risks Budgeting

Cash Flow Performance

Competitive Cost Structure

Credit & Collection

Economic Volatility

Financial Forecasting

Investment Eval/ Monitoring

Liquidity

2010 ERA Key Risk

2011 Emerging Risk

2011 Dormant Risk

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Tax Planning, Strategy/Optimization

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Hypothetical EXAMPLE Enterprise Action Plan/Update

 Group Presidents own specific enterprise key risks  They are responsible for creating and implementing the mitigation actions WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Enterprise Risk Monitoring

 Update enterprise risk mitigation plans 6 months later  Assess for emerging risks as observed by Risk Owners

 New emerging risks, if necessary, would be added to the list of Key Risks being mitigated

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Scenario Planning

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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What is Scenario Planning

“A tool for ordering one’s perceptions about alternative future environments in which one’s decisions might be played out.” (Peter Schwartz) “An internally consistent view of what the future might turn out to be – not a forecast, but one possible future outcome.” (Michael Porter)

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

31

Scenario Planning in Caterpillar • Still a new capability to Caterpillar – Traditionally not a part of the strategy tool kit

• Major exercise underway using scenario planning to stress-test Cat’s China strategies – Significant ramp up in China investment – Rapidly changing market environment – Emerging risks hard to quantify and not easily analyzed with standard econometric tools – Mental models of managers not keeping up with pace of change – Increased risks of black swan events

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

32

Scenario Planning Project Objective

Alternative Future Scenario 2

Alternative Future Scenario 1

Base Case Future

Alternative Future Scenario 3

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Alternative Future Scenario (n)

Caterpillar: Confidential Green

Objective: • Find ways to improve the robustness of the “Win in China” strategy to different future scenarios and competitive responses Scenario Planning Process: • Identify key uncertainties built into the base case future • Use key uncertainties to build scenarios of alternative futures • Identify strategy improvements that are robust in alternative futures

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Project Phases and Deliverables Jan

Feb

Pre-Work

Jan 2

Mar

Apr

Interviews

Feb 7

Level-set all participants on project parameters

Complete advance planning and logistics

Gather list of critical assumptions from interviews

Jun

Create Scenarios

Mar 5

Define project scope and deliverables

WHEN THE BUSINESS WINS, WE WIN Corporate Services

May

Jul

Aug

Stress-Test

Jun 1

Jul 22

Identify key uncertainties

Identify scenario implications

Select candidate scenario frameworks and end states

Identify strategy improvements

Preliminary scenario drafts

Refine improvements

Final scenario narratives

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Other Strategy Initiatives • Develop a sensing capability for long-term strategic issues – Scanning for risks and opportunities impacting enterprise Vision 2020 goals – Leveraging scenario planning processes • Develop a thought leadership capability – Analyses of emerging risks and opportunities identified through sensing process

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

35

Integrating Risk Management with Strategy Summary • BRM and Scenario Planning are risk mitigation tools used in Caterpillar • Key risks identified in the BRM assessment exercises are rolled into the divisional and enterprise strategies • Scenario planning tool used to stress-test existing strategies – identify unexpected risks and opportunities – Strategy improvements identified and implemented – Could be used to choose strategies in the future

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Final Thought • Developing and implementing any strategy automatically involves an opportunity cost – you choose a course of action by giving up other opportunities you could have pursued

• A robust risk mitigation framework preserves the greatest degree of freedom within the course of action you have chosen.

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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“We see risk as something to be managed and as a potential opportunity.” Caterpillar Values in Action

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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Thank you for your attention.

Eng Seng Loh Corporate Strategy & Business Risk Management Caterpillar Inc 309-636-1571 [email protected]

WHEN THE BUSINESS WINS, WE WIN Corporate Services

Caterpillar: Confidential Green

STRATEGY & BUSINESS DEVELOPMENT Corporate Strategy & Business Risk Management

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