Mark Baker, FCMA, CGMA, has made it his mission to ensure that when colleagues throughout his business think about strategy or operational activities, they’re thinking about risk at the same time.
Baker most recently did that at Pentland Brands, where he was head of planning and risk at the sportswear manufacturer. He was responsible for the business-planning process, including strategic planning, as well as the risk portfolio and principal risk assessment. His role was unusual in that it combined responsibility for both planning and risk below the CFO level.
It was Baker’s objective to improve the decision-making behind strategy selection, which is one of the major risks for a business. Baker left the company earlier this year. Before he did, though, he explained how this has worked on two levels: deciding at the group level which strategic opportunities to pursue, and, at the brand level, deciding which designs to bring to market as part of a collection. The objective on both levels is to drive performance.
Pentland owns some of the world’s top sportswear brands, which clothe leading athletes, amateurs, and hobbyists throughout the world. Speedo products and designs are used by Olympic swimmers, and in this year’s Rugby World Cup, the England and Ireland teams wore kits from the Canterbury brand. Pentland is also responsible for outdoor wear brand Berghaus, which targets explorers and climbers.
One of the major risks is whether the business model is still relevant and whether it will continue to be relevant in the medium and longer term. That involves extrapolating some of the trends and changes that are happening and asking, “What is the world going to look like in a few years?” and “Will we still be geared up to succeed the way we are now in that environment?”
FUTURE-PROOFING THE BUSINESS MODEL
Trying to work out what the company needs to succeed at in the future is one of the methods the company has adopted to manage some of its longer-term risks, as well as to give Pentland a better chance of grasping opportunities that might have been missed in the past. Knowing which initiatives are going to be important to Pentland in the near future enables the company to put work into building the supply chains required and ensure they are working with the best partners to achieve those goals, Baker said.
Involving a wider group of people in this process — “visioneering,” as Baker called it — reaped rewards. Bringing younger members of the leadership team into the conversation helped the company realise that it needed better organisation to succeed in the future. Pentland has also sought to improve its ability to identify opportunities in its markets, creating attractive propositions for those markets and being ready to manage complex global extended supply chains.
As part of the transformation, Pentland made changes to its organisational structure in early 2015, creating new roles with oversight across the various brands to encourage best-practice sharing across the supply chain, product and marketing, and strategic customers.
The organisational changes prompted the creation of three new roles: a global marketing director, a global customer director, and a global supply-chain director. Each is to apply his or her functional expertise across Pentland’s 12 brands to ensure a consistently high standard is maintained across the whole portfolio.
Pentland’s visioneering identified two trends that make this move important. The first is that the way brands are positioned will change significantly over the next five years, becoming more about a relationship with the consumer.
The second is the volume of available data (about consumer preferences, their thoughts on a particular brand, and so on) that can guide strategy selection and the relationship the company has with its customers. Previously, the company was not equipped to use those data to the best advantage of the whole business. Improved alignment between the brands will make such data easier to interpret and act on.
Aligning the individual brands has enabled the company to become more responsive from the customer’s perspective, and it makes it easier to spot important opportunities with customers around the world.
The heads of each brand and the functional leads are now reviewing strategy and risk together. Rather than dealing with half a dozen representatives of the different lines, management can talk to the functional lead, who can see the picture across the whole business and can implement any changes fairly quickly across the organisation as a whole. The company expects to see the benefit of that approach in the next year or two.
One of the major risks facing any business involves strategy selection, and spreading resources too thin over too many different initiatives itself is a risk. Therefore, informed decision-making to ensure resources are directed to the most important value-creating strategies is vital to mitigating risk.
The heads of the various brands and the functional directors undertake a situational analysis as the first step in deciding where to focus planning efforts. This requires Pentland to spend more of its planning resources focusing on the key value-creating opportunities, rather than taking time on each of the options, regardless of the size of the potential benefit.
Entry into a new market, for instance, may involve developing a range of products that are specific to that market across a number of the businesses. That involves a co-ordinated approach. “You can’t do too many of those things, so you really want to find what the big winners are,” Baker said. “You’re trying to assess these opportunities, even put a value on them if you understand the market and where you’re trying to target.”
A key part of governance is ensuring that the information on which people are basing decisions is of high quality.
Evaluating an opportunity such as a new market or a new product category involves asking the practical risk questions at the same time, another advantage of having a combined risk and planning role. These include “What might get in the way of us achieving that?”, “If we were to pursue that strategy, could there be any unintended consequences we haven’t thought of yet?”, “Are we organised to deliver it?”, and “Do we have the talent to pull it off?”
As a result of building risk concerns into the strategic-planning process, Pentland has started to see greater transparency around why management teams selected a particular strategy, as well as about the risks associated with that particular strategy.
Baker observed a change in risk discourse and dialogue within the company. People know that they must think about risk when they are presenting their plans. In review meetings, “everybody’s expecting to see questions both on how you have evaluated the option and selected it against other choices, but also transparency about assessing the risk,” Baker said.
Staff have seen the approach translate to greater profit and are motivated to want more informed decision-making, he said.
Another way of managing risk in the business is through improved planning capability.
In fashion and footwear, new product development and selection is crucial given large collections and short life cycles. Baker equipped design colleagues with skills and data to make more informed choices about which products make the collections.
Before the project, the brands were producing a number of items that were underperforming and therefore not adding value. Baker realised that the quality of the controls being applied to product selection was not consistent across the business, and he came up with a framework to address this, carefully. “It’s all about balancing control and creativity,” he said. “You don’t want to stifle entrepreneurship, but you still want to have control.
“It’s actually counterintuitive,” Baker explained.
One might think that in a fashion collection, the more choice the consumer has, the better a range will do. “In today’s world, given a lot of macroeconomic changes, such as the continued retail price deflation in footwear and apparel, and the reduction in Asian manufacturing capacity since 2008, you can’t really afford to do that,” Baker said. “… You could quite easily choose a lot of products that don’t perform, but you’ve lost a lot of resources and cash out of the business.”
With better controls in place, Pentland has been able to remove superfluous products from its collections and generate greater profit as the design and development effort is better targeted.
The approach instituted by Baker involves forecasting the volume of each product that can be sold by looking at factors such as market size and where the growth is coming from. If you calculate, for example, that you can sell 100,000 pairs of shoes, and each style will sell about 1,000 units, you only need to design and develop 100 styles. Previously, teams may have been designing up to 200 pairs, but now that they have guidance from the data, they look at collections with a much sharper lens and eliminate products that do similar things for the same target customer.
The key is encouraging staff to anticipate the outcome of their decisions, constantly projecting the performance of the portfolio as it is being designed. That involves forecasting, planning, scenario planning, and incorporating risk in decision- making.
One of the initial changes brought about was to stop brands producing any items that the analysis indicated had a high likelihood of being a loser.
“There is much more forecasting done about the likely volume of business that will be done by selecting one product compared to another and then looking at the whole portfolio and asking, ‘Does that stack up?’ ” Baker said. This has worked in reducing the amount of cannibalisation, which dilutes financial returns for the amount of development effort, enabling teams to select what they believe is the optimum portfolio of products to launch into the market.
Designers are now using more “feed forward” information: As the project goes on, designers also get to see feedback, including productivity information, so they can track how good they are at deciding which designs should go into a collection, all of which helps motivate them to implement higher-quality controls in their decision-making.
To help colleagues improve the quality of a risk assessment, Baker put it in practical terms, asking questions such as “How have you made this decision?”, “What information have you used, and what thresholds are acceptable?”, and “What should you be doing that you’re not?”
The way you present performance information is also crucial. “A lot of the effort ... is thinking through how we can get the information across in the simplest, most powerful way to our very broad bunch of stakeholders,” Baker said.
“... Simple tools like risk heat maps have been useful to help people who aren’t normally thinking about risk to start getting engaged with it.”
Spreadsheets appeal more to the accountants and the technical side, whereas graphics, such as heat maps, are a more effective way of reaching commercial and design colleagues, Baker added.
Waterfall charts give the company a graphical way of representing the progression from one profit measure to another, breaking it down to show where the change came from. For example, a block in the chart could represent $1 million that came from cost savings. Another could represent $2 million from a new venture, and so on.
Communicating performance information quickly and effectively allows a business to adapt and respond when something is not working, another part of managing risk. The sooner you can get people to realise what is and isn’t working, the sooner they can take action to rectify it.
Baker and his team helped to provide frameworks and approaches to incorporate risk considerations into the day-today work of other teams.
And he was able “to show that where you improve risk management … you can improve performance,” he said. That motivates people to engage with risk and look for better ways of doing what they are doing.
Now, Baker said, people are saying, “I can see why forward-looking at risk is so important for our long-term success.”
Improving performance is the reason Baker promoted more informed decision-making. “When that is your driver,” he said, “you then get focused on the real risk, and that engages everybody, from the board all the way through the business.”
Example of market assessment: China
Looking at market trends in China, the Pentland team observed that there had been a boom in the construction of 50-metre swimming pools, which suggested participation in swimming would increase. This presented an opportunity for the Speedo swimwear line. The team assessed the potential market growth and the specifics of the market, asking questions such as “How do consumers make purchasing decisions?”, “Which channels do they use to make their purchase?”, and “Does the product need to be customised or adapted for the market?”
The Speedo brand has now had a presence in China for more than seven years. The growing success of the Chinese national team at the Olympic Games (including five gold medals in swimming in London in 2012) inspired more people to get involved in the sport. There is also a greater awareness across the country of the health benefits of swimming, all contributing to increased participation over the past eight years. In contrast, in a mature market such as the UK, swimming participation has decreased in recent years, making China a golden opportunity for Pentland.