Balanced Scorecard Report

A N A LY T I C S

Managing Operational Risk bottom up. The steps in the

process are as follows:
at Mars, Incorporated 1. Defining and prioritizing
initiatives
By Lauren Keller Johnson, Contributing Writer
2. Anticipating the risks to
Adapted from a presentation by Larry Warner, Staff Officer of Risk Management, those initiatives and developing
Mars, Incorporated, at the Palladium Group’s Strategic Risk Conference, April
risk “treatments”
2009, in New York
D E C I S I O N

3. Rating the probability of

A diversified consumer products giant with global operations
can’t afford to ignore risks to the strategic initiatives launched
by its business units. At Mars, Incorporated, executives set out
to foster a culture in which managers aren’t afraid to talk
about, wrestle with, and vanquish the perils that can prevent
crucial initiatives from generating desired business results.
Sumptuous chocolate. Savory
coffee drinks. Minty chewing
gum. Premium pet food. It’s all
so delicious that the notion that
Mars, Incorporated (maker of
these and other delights), worries
about risk might never cross a
happy consumer’s mind.
But like any company, especially
a global, diversified consumer
products firm, Mars faces risks to
its strategy, whether to growing
one of its chocolate brands in
China, constructing a new manu-
facturing plant, or introducing a
new line of dog food. An array
of perils threatens every initiative.
These risks cover the gamut:
lack of sufficient capacity to meet
demand, unexpected moves from
competitors, a spike in commodi-
ty prices, new regulations.
To manage these and other risks,
Mars has established a rigorous
process that makes savvy use of
decision analytics and information
technology (IT).
It all began in 2003, when senior
management sought to promote
a culture of risk-mindedness,
to allow business units to deter-
mine what was achievable in the
context of their annually defined
goals and objectives. The manage-
ment team developed a formal
enterprise risk management
(ERM) approach to provide Mars
with a proven, sustainable frame-
work for anticipating and mitigat-
ing complex business risks—
tangible and intangible, existing
and emerging—across the entire
organization.
After pilot-testing its ERM process
in 2003 and 2004, Mars refined
it and rolled it out to most of
its business units between 2005
and 2007. Starting in 2007, it pur-
chased a technology solution to fit
its ERM process needs, including
automating the reporting of risk
analytics. Today, approximately
40 of the company’s business
units and its six product segments
(such as chocolate, pet care,
and drinks) conduct annual ERM
(or risk assessment) workshops
and quarterly reviews, and pro-
vide quarterly dashboard updates
to company leaders.
The company’s ERM process aims
to manage two classes of risk.
Operational: risks to the short-
term initiatives developed by
the business units to execute the
company’s annual operating plan
Strategic: risks associated with
the long-term execution of a
unit’s strategy, such as long-range
manufacturing capacity needs.
The two risk classes are dealt
with differently through the
company’s ERM process. In this
article, we focus on the process
Mars has developed for managing
operational risks. This process is
strongly driven by unit managers,
revealing an organizational culture
that values engagement from the
successfully executing the
initiatives, given the risks
and treatments at hand
4. Analyzing risk data to
make business decisions
Defining and Prioritizing
Initiatives
During each unit’s annual planning
process, unit managers meet to
review the company’s operating
plan and develop a list of initia-
tives that their units must carry out
to help execute the annual plan.
Managers define their initiatives
according to strict rules that require
specificity and measurability. For
example, instead of describing an
initiative as “Drive core brands in
chocolate,” they would define it
as “Achieve chocolate’s growth
target of 5% by focusing on build-
ing the core brands.”
A T A G L A N C E
Mars, Incorporated
McLean, Virginia
Founded: 1911
Ownership: Family-owned,
privately held
Annual revenues: $30 billion-plus
Workforce: 65,000-plus employees
Operations: More than 230 sites,
including 135 factories, in 68
countries
Business segments: Chocolate,
Pet Care, Wrigley Gum and
Confections, Food, Drinks,
Symbioscience
Major global brands: M&Ms,
Snickers, and Dove; Pedigree,
Whiskas, and Sheba; Doublemint
and Orbit; Uncle Ben’s and Dolmio;
Klix and Flavia; and Wisdom Panel
and Cocoapro

14
Balanced Scorecard Report: The Strategy Execution Source, ©2009 Harvard Business Publishing and Palladium Group, Inc. and used by permission.

At the beginning of an ERM
workshop, managers rank their
initiatives in order of importance
for the next operating year.
For instance, if a business unit
manager listed 15 initiatives,
she would then rank them from
1 (most important) to 15 (least
important).
During the workshop, managers
discuss and debate the initiative
definitions and rankings, ultimately
arriving at agreement on both.
This process establishes alignment
with and accountability for the
initiatives.
Anticipating Risks and
Developing Treatments
During each workshop, facilitators
also have business unit managers
draw on their knowledge and
expertise to list the risks that
could hamper their ability to
achieve the initiative’s objectives.
This information is entered into
a template for the workshop. For
example, leaders in a particular
food unit might define the follow-
ing initiative: “Aggressively grow
and build the ready-to-heat rice
business by expanding the product
line to generate 5% net sales
growth and maintain share above
25%, while increasing product
availability to 50% distribution.”
The risks to this initiative could
include possible aggressive coun-
termoves from competitors and
potential spikes in commodity
prices.
Managers next develop risk “treat-
ments”—activities designed to
mitigate or leverage the specific
risks they’ve identified. These,
too, are entered into the work-
shop template. For instance, to
combat the risk of competitor
countermoves, the management
team may define treatments
centering on accelerating product
innovation and conducting a
competitor analysis.
Again, managers discuss and
debate, achieving consensus
Balanced Scorecard Report: The Strategy Execution Source, ©2009 Harvard Business Publishing and Palladium Group, Inc. and used by permission.
on both the risks and their
treatments—further strengthening
alignment and accountability.
Rating Initiatives’ Probability
of Success
For each initiative, unit managers
highlight the three to four most
critical risks and risk treatments
in the template. Using anonymous
voting technology, the manage-
ment team votes on the probability
of successfully achieving the ini-
tiative during the upcoming year,
given the risks and risk treatments
listed in the template.
They use a scale from 1 to 9 to
indicate the probability of success-
fully achieving the initiative’s
objectives. A 9 indicates a 90%
or greater probability of success;
a 1 represents a 10% or less
probability.
The initial votes often show some
type of distribution. To build
alignment, team members discuss
the range of scores, challenge
one another’s assumptions, and
reconsider their scores based
on their peers’ positions. For
example, if one manager believes
(based on his experience) that
a proposed risk treatment won’t
be effective, he might argue for
a score of 5 instead of the 7
advocated by his peers.
The debate is open, honest, and
collegial. That’s because everyone
involved knows that the goal is to
understand one another’s positions
and arrive at the best-informed
assessments possible. Managers
then rate each initiative from 1
to 9 again; usually, a smaller
distribution results. The final vote
results in a risk profile for the
initiative that gets color-coded:
below 5.0 is red; 5.0–5.9, orange;
6.0–6.9, yellow; 7.0–7.4, blue; and
7.5 or greater, green. If consensus
is still lacking after the second
vote, managers gather additional
information outside the workshop
and reconvene to share it and
get aligned.
November–December 2009
Figure 1: Hypothetical Example
of Initiative Risk Assessment
9
8 8.5
7
6.6
Probability of Success
6
5
4 4.5
3
2
1
0
Cat
food
Bar
chocolate
Product
relaunch
(2) (1) (3)
Initiative (Rank)
Initiatives are ranked by the probability
of success in achieving objectives,
given their risks and mitigation activities.
The numeric ranking in parentheses
reflects the initiative’s importance.
The risk assessment ranking can
reveal important information. In
Figure 1, the ranking for a cat
food initiative (8.5) may actually
suggest that too many resources
are being applied to the initiative,
or that managers are underesti-
mating their capabilities. It may
even imply that sales generated
as a result may be beyond the
company’s capacity to produce.
The product relaunch initiative,
with a priority ranking of 3 and a
risk score of 4.5, may need to be
postponed so that its resources
are redeployed more effectively.
Finally, business unit heads submit
a summary report to their seg-
ment leaders and to corporate
headquarters showing the final
agreed-upon risk profile for each
operating plan initiative. Senior
executives have access to the
templates the unit managers have
filled out, so they can drill down
into greater detail.
Analyzing Risk Data and
Making Decisions
After initiatives are put into
action, unit leaders review each
initiative’s progress on a quarterly
basis—reassessing the risks
and treatments and deciding
15
 Balanced Scorecard Report

Figure 2. Comparing Risks by Region: Hypothetical Example (dummy data)
Asia-Pacific
Segment
KEY Organization/HR
* CIS = Commonwealth of Independent States—the confederation of former Soviet Republics
Mars can break down risk into corporate function categories by region. In this hypothetical
illustration, the biggest risk to the CIS segment is commercial. Sales and marketing risk is
the biggest risk category for the Asia-Pacific and Western Europe segments. The latter two might
confer with peers in the North America and CIS segments for solutions.
whether to change an initiative’s
risk profile score. They update
a one-page dashboard depicting
execution performance for all
initiatives and documenting any
changes in risk profiles, adding
comments on why specific
changes were made. The updates
are submitted to both the seg-
ment and corporate headquarters.
For example, suppose the profile
for the initiative “Relaunch Pedigree
brand to achieve a 10% growth
target” improved from yellow to
green over the past two quarters
of the year. The initiative owner’s
dashboard comments may be
something along these lines:
“Shipments started in period 2 to
meet advertising schedule. Adver-
tising on air. Massive presentation
to all customers was executed
during period 1, with excellent
customer participation.”
These dashboards are a potent
communication and decision-
making tool. If an initiative
shows a decreasing probability
of success, managers discuss
the situation and decide how
to address the problem—for
example, by redirecting marketing
or other resources toward the
troubled initiative. The dash-
boards are so simple and concise
that they’ve eliminated a lot of
reporting that managers used to
Western Europe CIS* North America
Segment Segment
Sales/Marketing Finance Manufacturing/Distribution
Since automating its ERM process,
Mars has compiled enormous
volumes of risk-related data. To
date, the system contains 500
operating-plan initiatives with risk
profiles, 3,800 risks coded by type
(e.g., legal, financial, and sales
and marketing), and 4,200 risk
treatments—all generated by the
company’s business units in multi-
ple geographies. It also contains
three operating-plan cycles’
worth of data.
Thanks to these volumes of data
and the system’s power, Mars
can now slice the data in various
ways and customize how they
are presented—gaining valuable
insights for business decisions.
For example, executives can
examine pie charts showing how
risks are distributed across cate-
gories for a particular business
unit, the entire company, a prod-
uct line, or a geography; and how
risks are changing over time for
each area of interest. Consider
these hypothetical examples.
Product insights. Suppose a
large percentage of the risks doc-
umented for a particular product
fell within the sales and marketing
category. By getting a global view
of common risks, the company
can identify common risk treat-
ments for that product across a
region or the world—for example,
Segment insights. The system
allows segment management
Segment teams to compare units or regions
to identify common problems.
The analysis might show, for
example, that one business unit’s
risks were clustering increasingly
within manufacturing/distribution.
It also enables teams to spot
trends early.
Commercial Geography insights. The system
allows for identification of com-
mon issues across regions or
problems within a given region.
(See Figure 2 for a hypothetical
example.)
Finally, managers can use ERM
software to review other units’
initiatives—and gain insights into
how to address common chal-
lenges. This creates a learning
environment within the business,
enabling one unit to learn from
and build on the success of others.
Managing risks to a company’s
strategy is never easy. But by
establishing a disciplined ERM
process, companies can make risk
management as routine as other
business responsibilities. A rigor-
ous process can also help man-
agers adopt the mindset needed
to openly discuss and mitigate the
dangers to their business strategy.
Mars, Incorporated, has excelled
at ERM—not only encouraging
bottom-up engagement in risk
management among unit heads,
but also using IT to support the
gathering and analysis of risk-
related data. Whether unit heads
are seeking to introduce new
products, expand into new geog-
raphies, or beef up manufacturing
capacity, the process Mars has
developed positions them to
anticipate, prioritize, and mitigate
the risks, as well as share effective
risk management tactics across
units. Result? The company has
sweetened the odds that each
strategic initiative will produce
the business results everyone’s
looking for. I
Product #B09110

do. And they create transparency increasing the number of sales-

for each unit. people for that product.
Reprint #B0911E

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Balanced Scorecard Report: The Strategy Execution Source, ©2009 Harvard Business Publishing and Palladium Group, Inc. and used by permission.