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Saving the Corvette: a Strategic Decision Case Study.

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Talk for Silicon Valley chapter of IEEE Technology and Engineering Management Society, April 6, 2017

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Saving the Corvette: a Strategic Decision Case Study.

  1. 1. Saving the Corvette: a Strategic Decision Case Study. Presented to the Silicon Valley Chapter of the IEEE Technology and Engineering Management Society April 6, 2017 Stephen Barrager, Ph.D. Baker Street Publishing, LLC steve.barrager@gmail.com
  2. 2. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Success in any enterprise consists of doing three things well. “Decision making is only one of the tasks of an executive. It usually takes but a small fraction of his time. But to make decisions is the specific executive task.” 
 Peter Drucker, The Effective Manager, 1966 Strategic Decision Making Leadership Operational Management (Execution)
  3. 3. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Expansion into new products, services or geographies Investment in existing products, services or geographies Building new infrastructure Mergers and acquisitions Maintenance of existing infrastructure Organizational change for other reasons 21 5 11 12 15 34 A McKinsey survey of 2,327 executives from the full range of industries, regions and functions revealed the following goals of strategic decision making. (In percentage of total decisions.) From “How companies make good decisions,” The McKinsey Quarterly, December 2008
  4. 4. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Eighty percent of project success is determined by the people involved. Core team Experts and stakeholders Decision makers
  5. 5. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. W. Edwards Deming If you can’t describe what you are doing as a process, you don’t know what you are doing. Deming was the inspiration for what has become known as the Japanese post-war economic miracle. Japan rose from the ashes of war to become the second most powerful economy in the world in less than a decade founded on the ideas Deming taught. Process is the second ingredient for success.
  6. 6. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Process is important for everything from crossing the street to strategic decision making. A friend was hit by a truck and killed in Kenya. In Kenya they drive on the left-hand side of the road. My friend, Lorita, spent her entire life in California where everyone drives on the right-hand side of the road. Lorita would be alive today if she had followed the process her parents taught her --- look both ways before you step off the curb.
  7. 7. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. The C5 Corvette case study illustrates the process and some of the tools used in strategic decision making.
  8. 8. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. In the early 1990’s GM was struggling to get product planning right. Oldsmobile Silhoutte Pontiac Trans AmChevrolet Lumina APV Who Killed the Electric Car? “The Dust Buster”
  9. 9. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. In 1988, General Motors decided to develop an all new, fifth-generation Corvette. The forth generation Corvette was flagging. Sales were way off. Quality was poor. Japanese competitors were closing in.
  10. 10. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Other people in the program had a different point of view. They thought customers might prefer a “kinder, gentler” Corvette. One with foot room and, god forbid, a trunk. Some of the Corvette guys wanted to build a car with “the Right Stuff.” They wanted a Corvette that would make the Bat Mobile look like a bus!!!
  11. 11. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Decision making is important because it is the bridge between thought and action. Decision Making The world of action The world of thought Source: Ron HowardThis is aVenn diagram.
  12. 12. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Policy Decisions -- things we will take as given for purposes of this project. Strategic Decisions -- decisions we will focus on in this project . Tactical Decisions -- decisions that can wait until the strategic direction is set. -There will be a fifth-generation Corvette - The Corvette will be sold by Chevrolet - It will be manufactured at Bowling Green - It will be introduced in 1993 - The budget limit is $200 million - It will target the High Sport Segment - Power train - Styling concept - Body material -Vehicle Technology - Manufacturing technology - Comfort and safety features - Color palette - Tire supplier - Etc. A Framing Hierarchy helps specify clearly which decisions we want to focus on. It shows how these decisions connect with “bigger” and “smaller” decisions.
  13. 13. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. A strategy table lays out the major decisions and the choices. Styling 350 HP 450 HP Mid-engine 450 HP, mid- engine with all wheel drive 450HP, mid- engine, all wheel drive and all- wheel steering. Major face lift Distinct but evolutionary Radical new Minor changes Lower door sill at least 3 inches Lower door sill 6 inches and add more foot room All the above plus a trunk. Strategy Theme Key decisions Performance Comfort and Convenience
  14. 14. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Styling 350 HP 450 HP Mid-engine 450 HP, mid- engine with all wheel drive 450HP, mid- engine, all wheel drive and all- wheel steering. Major face lift Distinct but evolutionary Radical new Minor changes Lower door sill at least 3 inches Lower door sill 6 inches and add more foot room All the above plus a trunk. Strategy Theme Key decisions Performance Comfort and Convenience The Right Stuff Some of the hard core “car guys” wanted to build a vehicle that would guarantee “bragging rights.” They wanted a Corvette with “the right stuff.”
  15. 15. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Styling 350 HP 450 HP Mid-engine 450 HP, mid- engine with all wheel drive 450HP, mid- engine, all wheel drive and all- wheel steering. Major face lift Distinct but evolutionary Radical new Minor changes Lower door sill at least 3 inches Lower door sill 6 inches and add more foot room All the above plus a trunk. Strategy Theme Key decisions Performance Comfort and Convenience Improved C4 The Finance Department didn’t think it was prudent to take money from mainstream programs to spend on the Corvette. They wanted a strategy that minimized investment.
  16. 16. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Styling 350 HP 450 HP Mid-engine 450 HP, mid- engine with all wheel drive 450HP, mid- engine, all wheel drive and all- wheel steering. Major face lift Distinct but evolutionary Radical new Minor changes Lower door sill at least 3 inches Lower door sill 6 inches and add more foot room All the above plus a trunk. Strategy Theme Key decisions Performance Comfort and Convenience Other people advised a “Kinder and Gentler” Corvette, a car that would appeal to successful, older men and women. Kinder and Gentler Corvette
  17. 17. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Together the options were all compelling and they spanned a wide range of possibilities. Styling 350 HP 450 HP Mid-engine 450 HP, mid- engine with all wheel drive 450HP, mid- engine, all wheel drive and all- wheel steering. Major face lift Distinct but evolutionary Radical new Minor changes Lower door sill at least 3 inches Lower door sill 6 inches and add more foot room All the above plus a trunk. Strategy Theme Key decisions Performance Comfort and Convenience Kinder and Gentler Corvette Improved C4 The Right Stuff
  18. 18. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. New Improved C4 Corvette with the Right Stuff Kinder, Gentler Corvette 17 Finding value in a complicated situation is like searching for water in a desert. The alternatives designed by the stakeholders are metaphorically like test wells. Their purpose is to locate areas of potential value.
  19. 19. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Setting up for success in any decision begins with getting the appropriate basis. Frame Adapted from Ron Howard What we want What we can do What we know Action Information Values Alternatives Action
  20. 20. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Value Decision Uncertainty Influence Net Present Value A decision diagram captures our understanding of the relationship between decisions and profit. Our view of the problem is articulated -- decisions, outcomes, and the information that connects them. C5 Corvette Product Strategy Pricing Strategy Market Share Quality Warranty Costs Investment Unit Costs Performance Styling Comfort and Convenience Competition High Sport Market Size Pricing Strategy
  21. 21. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. INPUT TABLE - EXOGENOUS VARIABLES Description Units Low (10/90) Median (50/50)High (90/10) Miles driven Miles per year 7000 14000 18000 Gasoline price $/gallon LOW MEDIAN HIGH Electricity price $/KwH LOW MEDIAN HIGH Interest rate .% 0.02 0.05 0.08 CO2 Offsets $/metric ton 2 30 50 Volt Prius Description Units Low (10/90)Median (50/50)High (90/10)Low (10/90)Median (50/50)High (90/10) Initial cost $ 35000 40000 42000 20000 21200 23000 Tax Credit $ 0 9500 9500 0 0 0 Sale Price (after 7 years) $ 18000 21300 25000 9000 11900 13000 Routine Maintenance $/year 0 0 0 0 0 0 Mileage miles/gallon 20 30 40 45 50 55 Daily charge Kwh/day 4 5 6 Battery efficiency Kwh(out)/Kwh(in) 0.8 0.9 0.92 Electic mileage Kwh/mile 0.16 0.2 0.24 Usually a spread sheet model is appropriate. Sometimes we have to use more computing power to connect data bases and/or collections of models. • A model helps us organize what we know. • The objective is critical thinking, communication, learning and understanding. • We use the model to identify the uncertainties that could change our strategy. This guides our information gathering efforts.
  22. 22. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. We use precise definitions for “high,” “low,” and “best guess.” 90% 10% Higher than Lower than 50% 50% 10% 90% “High” “Low”“best guess” Probability is only10 percent that the variable is higher than this. The median, the 50/50 value. Probability is only 10 percent that the value is lower than this.
  23. 23. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. 0 Change in NPV— “Right Stuff” Strategy High Sport Segment Size Low High Market share HighLow Other A Other B Unit cost High Low Development Costs Other C Low High Other D Low High Competition High Low Once a good business model is built then we can do sensitivity analysis to prioritize the uncertainties that affect the value of each strategy.
  24. 24. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Strategy New Improved C4 Kinder & Gentler Right Stuff Competition Intense Fair Corvette Market Share High Base Low High Sport Segment size in 1994 Other A High Base Low Other B High Low Strong Good High Base Low Base A decision tree captures hundreds of scenarios and the probability associated with each.
  25. 25. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. CumulativeProbability 1.0 .9 .8 .7 .6 .5 .4 .3 .2 .1 0 –2 Net Present Value Improved C4 –1 0 1 2 3 4 5 Kinder and GentlerRight Stuff Once we have the profit and the probability associated with each scenario it is straight forward to calculate the probability distribution on profit for each option.
  26. 26. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Flying bars and e-values are a good way to compare options and show profit uncertainty. Net Present Value 0 Key 10% 90% e -Value Strategy Theme Improved C4 Kinder and Gentler Right Stuff
  27. 27. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. NRDC Alternative Corvette with the Right Stuff Kinder, Gentler Corvette Hybrid Strategy 18 New Improved C4 The “hybrid” strategy captures what we learn from studying the “test wells.” It is a synthesis of what is good about each.
  28. 28. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Hydro formed tube frame drops sill way down for easy entry Transm ission here creates m ore foot room in cockpit Once the “car guys” understood there was significant value in comfort and convenience, they figured out how to get more of it at lower cost.
  29. 29. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Net Present Value 0 Key 10% 90% e -Value The Corvette team developed a “hybrid” strategy that had better profitability and lower downside than any of the strategies initially advocated by the stakeholders. Strategy Theme Improved C4 Kinder and Gentler Right Stuff “Hybrid”
  30. 30. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Time,April 14, 1997 “An almost perfect car,” says Automobile magazine editor. “A big boy’s toy that First Wives’ club may co-opt.”
  31. 31. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Without an effective process GM would have had an expensive marketing disaster. Instead, they had mutual learning, a good strategy …. and a good outcome. The Bowling Green manufacturing plant is sold out. In March, 2000, the Society of Automotive Engineers selected the C5 Corvette “the best engineered car of the 20th Century.”
  32. 32. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Net Present Value 0 Key 10% 90% e -Value Strategy Theme Improved C4 Kinder and Gentler Right Stuff “Hybrid” Studies of scores of corporate decisions reveal that typically a “Hybrid” strategy is worth 30 to 60 percent more than the best “test” strategy. Sometimes it’s worth twice as much.
  33. 33. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Stakeholders and ExpertsFraming Alternative Generation Analysis Synthesis ACT Decision Makers Stakeholders and experts There are four phases to designing a strategy.
  34. 34. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Framing is a key element of any design process. Inappropriate framing is the root cause of most bad strategic decisions. Framing SynthesisAnalysis Alternative Generation Do we have the right people involved? 
 Have we set our boundaries too narrowly? 
 What systems are we considering?
 What assumptions are we making about reality? 
 Are we using the appropriate values? 
 
 

  35. 35. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. The process combines advocacy and inquiry with analysis and synthesis. Framing SynthesisAnalysis System modeling and information gathering are the focus here. Here’s where we put it all together. Alternative Generation Creativity and Advocacy have a strong role here.
  36. 36. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. The process facilitates a balance of analysis and synthesis. It is about learning where the value is and figuring out how to get more of it. Framing SynthesisAnalysis Alternative Generation Hybrid Generating alternatives and analyzing them is like drilling test wells. Synthesis is about taking what we learn from the test wells and deciding where to drill the production well.
  37. 37. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Strategy Competition Market Share Comfort and Convenience Styling Unit Costs Investment High Sport Market Size Performance Quality Warranty Costs Pricing Strategy Net Present Value Decision and Framing hierarchies --- Which decisions 
 are we working on? How do they fit with other decisions? What are the givens. Strategy tables --- How do alternative strategies differ? Do they cover the range of possibilities? Decision Diagrams --- What issues are relevant to the strategy? How do issues influence each other? Dynamic System Simulation and Optimization Models --- Have we captured the complexities and dynamics logically? Sensitivity Analysis --- What are the important uncertainties? Where should we focus our attention? Probability assessment techniques --- How do we express what we don’t know? How do we deal with cognitive biases? Bayesian updating of information --- How do probabilities change as we learn more? What is the value of better information? Policy Strategy Tactics A B C 1 2 3 4 5 Decision engineers rely on a rich tool kit.
  38. 38. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. The Collaborative Design process brings together the important ways of thinking about strategic decisions. Decision Theory Probability Theory Systems Analysis Framing Design Mutual Learning
  39. 39. © 2017 Baker Street Publishing, LLC.  All Rights Reserved. Check these places for more information about decision engineering and collaborative design. • A New Engineering Profession is Emerging: Decision Coach
 Most strategic decisions are made by teams.Teams need coaches.This article from IEEE Engineering Management Review focuses on the new coaching role. • Coach’s Guide to the Collaborative Design Process
 This slidedoc provides an overview of this powerful, common sense process for team decision making. • Coach’s Guide to the Decision Analysis Process
 This tutorial uses the choice between two energy efficient cars (Volt or Prius) to illustrate the phases of the Decision Analysis Process. This is decision analysis as performed by professional decision engineers. • Baker Street Publishing Blog 
 Regular posts of interest to decision coaches and strategy professionals. • Foundations of Decision Analysis, Ron Howard and Ali Abbas, Pearson Publishing
 This is the text for Professor Howard’s renowned Stanford class in decision engineering.

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