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
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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
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Agenda • Caterpillar Overview • Trough Planning • Business Risk Management • Scenario Planning • Final Thoughts
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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
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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
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versus
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Hard-wired
P&L PQVC Capex authority Hiring/firing authority Design control
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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
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Trough Planning
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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
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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
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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
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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
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DIVISION DIVISION ERM CHAMPIONS DIVISION ERM CHAMPIONS & COORDINATORS ERM CHAMPIONS DIVISION & COORDINATORS & COORDINATORS ERM CHAMPIONS DIVISION DIVISIONAL & COORDINATORS ERM CHAMPIONS ERM CHAMPIONS & COORDINATORS & COORDINATORS
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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”
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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”
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Identifying and Reporting of Emerging Risk • Risk Owners • Survey Process • Screening • Reporting
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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
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AUG
SEP
BOD Audit Committee Update
OCT
NOV
DEC
Annual Enterprise Risk Assessment
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BRM Processes
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BRM Process - Divisions
Review Strategy and Identify Risks
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Assessment with VP and Direct Reports
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Manage Risks with Assigned Owners
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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.
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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
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Hypothetical EXAMPLE - Divisional Key Risks Employee Development Environmental Compliance
Budgeting Political Competitor
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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
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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
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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
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Tax Planning, Strategy/Optimization
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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
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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
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Scenario Planning
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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)
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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
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Scenario Planning Project Objective
Alternative Future Scenario 2
Alternative Future Scenario 1
Base Case Future
Alternative Future Scenario 3
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Alternative Future Scenario (n)
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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
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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
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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
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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
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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
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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.
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“We see risk as something to be managed and as a potential opportunity.” Caterpillar Values in Action
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Thank you for your attention.
Eng Seng Loh Corporate Strategy & Business Risk Management Caterpillar Inc 309-636-1571
[email protected]
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