"The English Patient" part two
& Taking Risks Strategically

by Pat Craig 

From the Spring 2000 issue of the Complexity Management Chronicles 

The Rover Group misadventure has cost BMW billions of dollars in investments and billions more in red ink." This quote, from the Wall Street Journal’s front page on 3/17/00, concerns BMW’s purchase of Britain’s Rover Group Ltd., a group dubbed "The English Patient" by German media. With BMW’s "misadventure" in mind, we continue our risk series following the risk management framework developed by D. Lessard, MIT Sloan School, and R. Miller, Universite Quebec a Montreal. They propose a six step framework:

  1. Identify / understand risks,
  2. Shape risk,
  3. Create options / Build in flexibility,
  4. Take risks strategically,
  5. Transfer or hedge risk, and
  6. Diversify/pool the risk.

This newsletter focuses on step four of the framework. To take risks strategically, the firm needs a good understanding of strategy. Michael E. Porter wrote a landmark, yet extremely readable book on the subject called "Competitive Strategy". Porter says that there are three generic strategies cost leadership, differentiation, and focus. Let’s see how Porter’s ideas apply to two companies BMW, who did not understand how to take risks strategically, and a bank who did.

BMW bought Rover to broaden offerings by providing a down to earth product line and to achieve economies of scale, especially with suppliers. BMW’s historical position had been to focus on the luxury segment. What went wrong, aside from the strategic issues related to the purchase? Cultural issues existed; the British balked at German domination so BMW took a hands-off approach too long. The British pound appreciated in late 1996 making Rovers more expensive outside Britain which hurt sales. The British manufacturing plants were inefficient and BMW had no real experience with Rover’s front wheel drive. World class engineering was no match for strategically taking risks and savvy strategic planning.

On a more positive note, we worked with a major New England bank on new risk management software for their trading floor. Their trading activities, which differentiate them from other banks, contributed over $2 billion to their revenue in 1999. They traded extensively in somewhat risky investments such as high yield bonds, emerging markets, and derivatives. When the emerging markets lost value in 1998, this bank lost far less money, as a percentage of their trading volume, than many New York banks. Our client understood how to take risks strategically. They knew that their trading activities were lucrative but risky and they traded smartly by implementing a sophisticated risk management software system that helped them mitigate their losses.

Craig Goldman’s article in CIO Magazine on 1/15/99 called "Align Drive" applies these ideas to software. He says to first determine the drivers to business success, then determine the processes that support the drivers. Next determine how I.S. can support the processes. Finally, prioritize the drivers, processes, and I.S. projects.

We’ll continue with Lessard and Miller’s framework in our next issue. Our past risk newsletters are here at http://world.std.com/~pcraig

©2000 by Complexity Management
Somerville, Massachusetts, in Metropolitan Boston 

Complexity Management Chronicles, a newsletter for software quality assurance professionals, is published in print form four times a year. Send your name and snail-mail address to the e-mail address below if you would like to be on the mailing list - at no cost to USA mailing addresses. 


Go to Next Newsletter
Return to Complexity Management Home
Contact Pat Craig at patcraig@alum.mit.edu