Project Risk
Adrian Slywotzky discusses the case of Toyota Motor; how it turned strategic threats into a growth breakthrough

Volatility haunts the business world today, as strategic risk events grow more frequent and obvious. Strategic risks take many forms: A big project fails. Customers change their preferences and defect to competitors. Profit margins shrivel across an industry. A new technology makes a firm’s offerings obsolete. Whatever their form, strategic risks can destroy a business.

That’s why more and more business leaders are identifying strategic risk management as the crucial discipline for the first decade of the 21st century. Thankfully, there are proven techniques for reducing your business’s vulnerability to strategic risks – and even transforming them into opportunities for fresh growth. Take Japanese automaker Toyota, an early exemplar of strategic risk management. Before 2000, the firm had worked to reduce fixed costs, inventory and cycle times on everything from manufacturing to development. It created flexible factories, where different vehicles rolled off the same assembly line. These moves let the company respond agilely to market and other changes.

Pre-empting risks
Toyota then focused on the “untameable” dragon of project risk – the daunting challenges inherent in turning a new-car concept from a long shot into a runaway success. Board members envisioned a car that was comfortable, safe, pleasant to drive, appealing to female motorists, low-polluting and highly fuel-efficient – ideas that eventually took shape as the Prius. An engineer named Takeshi Uchiyamada was assigned to head the project. Toyota used several techniques to anticipate and counter risks inherent in the effort. For example, to develop a hybrid engine faster than competitors, Uchiyamada needed to identify and solve problems quickly. He augmented the project team's dedicated physical space with a virtual space – an electronic mailing list that encouraged team members to disseminate key issues as they arose. Of course, e-mail wasn't new at Toyota, but the way it was used on the project was innovative for this relatively hierarchical, formal company.

Uchiyamada introduced other innovations to preempt predictable problems. For example, when a new vehicle is ready to go on line, Toyota usually sends resident engineers to work at the manufacturing plants so they'll be available for problems that arise during production. For the Prius project, engineers from the plants participated in design development to prevent manufacturing glitches in the blueprint stage.

The project team also made a practice of creating excess options from which to identify the most powerful solutions. To illustrate, it narrowed some 80 different types of hybrid engine designs down to 20 and then reworked an off-the-shelf computer simulation oftware package to meet the unprecedented demands of the new hybrid technology. Through simulation, the team eventually whittled engine-design possibilities down to an efficient and relatively simple option. The team used the same narrowing-down process for the car's other systems.

For body styling, Toyota maintains seven styling studios around the world, each normally working on a different vehicle category. But for the Prius, it asked all seven studios to submit designs for judging by a panel.

Technology aspects
The company further reduced project risk by moving outside its comfort zones. For instance, the Prius required a new battery one-tenth the size of existing batteries for electric vehicles and far more impervious to heat and cold. Though Toyota dislikes relying on external expertise, it decided to partner with Matsushita Electric to design and produce the battery, and then to sell it to other automakers. This step helped mitigate financial risk by providing another revenue stream to pay for the Prius’ development. And Toyota maintained control of the key technology.

To manage the flow of electricity between the battery and electric motor for a quiet but powerful ride, the Prius also needed more controls than a conventional internal combustion engine. That meant new computer chips. But the advanced chips were not readily available. So Toyota built its own factory to fabricate self-designed power controller chips. It hired a team of semiconductor engineers, then educated them about the car business and new hybrid technology. Though costly and time-consuming, the move raised the odds of success a little further.

When the Prius was launched in the US market in 2000, word of mouth was overwhelmingly positive. Across most of the country, avid customers had waited months for the vehicle. The Prius’ runaway success in terms of sales and profit margins allowed Toyota to roll out its hybrid technology to other vehicles as well. Consider how Toyota managers make a conscious effort to continually ask: What are this project’s major risks? What steps should we take to address those risks? And how can we enhance the odds of success?

In this age of intensifying volatility, competition, and risk, the new discipline of strategic risk management is a set of attitudes and practices that no manager can afford to ignore.

(Adrian Slywotzky is a director of Oliver Wyman and author of a new book, “The Upside,” published by Crown Business Books.) From Oliver Wyman © 2007 Oliver Wyman (Distributed by The New York Times Syndicate.) .

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