Friday, March 17, 2000. By all accounts it was a typical day. The week was winding down and preparations were being made for the weekend. There was a lot to talk about in the news. The US elections were heating up in the lead-up to what would prove to be one of the most contentious presidential elections in US history. Consumer prices were rising. Secretary of State Madeleine Albright was about to announce the easing of sanctions against Iran. And extreme volatility was expected on Wall Street after the biggest Dow Jones one-day point gain to-date just the day before. But none of these events would compare, in terms of global impact, to the thunderstorm that rolled through Albuquerque, New Mexico that evening. [1]
It was around 8pm that a lightning bolt hit a high-voltage line, causing a power surge throughout much of the state. As a result, a fire broke out at the Royal Philips Electronics chip manufacturing plant in Albuquerque. The fire lasted no more than ten minutes. An initial assessment by workers on the scene indicated that only minor damage had been incurred. However, further investigation revealed that millions of chips had been contaminated.
Philips management struggled to deal with the fire’s aftermath. Their two largest customers, Nokia and Ericsson, would likely suffer the greatest impact. Together they represented 40% of the Albuquerque plant’s shipments.
Monday, March 20, 2000. Philips engineers and managers concluded the disruption would last about a week and that when the plant returned to normal they would fill their two largest customers’ orders first. They placed calls to Nokia and Ericsson and told them as much.
Option A– Thousands of miles away, the two companies’ reactions to the news were in stark contrast to each other. In Helsinki, Nokia’s production planner and component purchasing manager, who had already identified a supply chain anomaly before the call, were skeptical, surmising that Philips had grossly underestimated the extent of the problem. They promptly notified their senior management, who took immediate and decisive steps to mitigate the impact of the supply chain disruption. They prevailed on Philips’ senior management to collaborate closely with Nokia by shifting production to facilities in other parts of the world. They quickly redesigned their chips so they could be produced by other Philips and non-Philips plants, and they identified and reached out to alternative manufacturers, who rose to the occasion by responding in short order to Nokia’s pressing need. Nokia’s decisive action and collaborative spirit paid off. In the third quarter of 2000 it realized 42% profit growth and a 30% increase in global market share.
Option B– Ericsson management, on the other hand, adopted a very different approach. Prior to the call from Philips, they had not detected a supply chain problem. And they took at face value the news from Philips that the disruption would be short-lived. Their “business as usual” reaction would prove to be disastrous for the company. It wasn’t until the end of March that Ericsson executives realized the extent of the problem, and by the following month it became evident that they had very few options at their disposal to deal with the situation. In July, the company reported that, largely as a result of the New Mexico fire, its mobile phone division had incurred a $200 million second-quarter operating loss. In January, Ericsson reported a division loss of $1.68 billion for the prior year and a 3% loss of market share. In October 2001 the company announced the formation of Sony Ericsson, a joint venture with Sony Corporation. Unbeknownst to the public, Ericsson had begun negotiations with Sony in the midst of the crisis from which it would take years for them to overcome. In fact, Ericsson’s corporate health was not restored until 2004, but with revenues of half what they had been in 2000.
So what’s your take about this story? The contrast between Nokia and Ericsson can teach us a lot about how successful companies react to crises after the fact. But successful companies can also take important steps to prepare for crises before they occur.
We have found over the years that the following four overarching principles, Awareness, Agility, Resilience and Redundancy, will help companies prepare for and respond effectively to unexpected events:
Awareness
- Enhanced knowledge of primary and adjacent areas that could impact your business
- Acceptance, awareness and anticipation that there are things you don’t know (known unknowns) and things you do not even realize you don’t know (unknown unknowns)
- Viewing each risk as one of many possible disruptions across the value chain and during the life of your organization – all of which interact as part of a whole system
- Expansive thinking about possibilities – pushing the knowledge frontier envelope and looking for asymmetries
- Enhanced business intelligence across broad, multidisciplinary networks and through diverse eyes
- Active use of decision analysis tools
Agility
- Development of multiple alternative strategic/action plans incorporating diversification
- Commitment of rapid deployment of any one of them – “just in time” – when unexpected events occur
- Regular deployment exercises to instill agility and rapidity in responding to unexpected “trigger events”
- Enhanced scenario analysis and “role playing”
- Open mindedness to different, even unorthodox, business models and structures
- Aversion to oversimplification
Resilience
- Streamlined and decentralized/distributed organizational structures to enable faster, “just in time” decision making and deployment
- Encourage of active debate and deliberation across vertical and horizontal lines – no groupthink
- Regular workshop-based learning exercises
- Expansion of thinking across various approaches
- Regular surfacing and “fleshing out” of critical issues before they occur
- Aggressive credit exposure management
Redundancy
- Establishment of multiple sources of critical raw materials
- Establishment of a redundant infrastructure that affords the ability to produce, deliver and distribute products and services in the event of unexpected disruptions
- Supply chain management that incorporates redundant inbound and outbound channels to defend against unexpected disruptions
- Building robust organizations with talent redundancy
- Establishment of alternative information systems
- Establishment of multiple organizational lines of decision making
We will address these overarching principles in more detail in future articles.
- Amit S. Mukherjee, “The Fire That Changed an Industry,” FT Press, October 1, 2008.
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