Understanding Failure Types, Impacts and Mitigation Strategies

A sophisticated understanding of failure’s causes and contexts will help to avoid the blame game and institute an effective strategy for learning from failure. Although an infinite number of things can go wrong in organizations, mistakes fall into three broad categories: preventable, complexity-related, and intelligent .

From the statement provided by ?rsted , it appears that the company experienced a significant impairment loss, particularly in relation to their US offshore projects, primarily Ocean Wind 1. Analyzing the situation, it seems to align with a mix of complex system failures and potentially preventable failures.

1. Complex system failures: The challenges stemming from supply chain delays, increased interest rates, and the absence of an OREC (Offshore Renewable Energy Credit) adjustment indicate the impact of external, complex factors. These factors often create unpredictable situations that are hard to foresee or control. Complex systems, especially in industries like energy where numerous variables intersect, are prone to unforeseen circumstances.
2. Potentially preventable failures: While certain external factors might be beyond their control, there might have been aspects within the organization's operations that could have been better managed to mitigate the impact. For instance, the decision-making process regarding Ocean Wind 1 and Ocean Wind 2 might have lacked a comprehensive risk assessment that could have anticipated or mitigated some of the challenges faced.

Mitigating such failures can involve:

• Risk management and scenario planning: To anticipate and prepare for external factors such as supply chain disruptions and changes in interest rates. Conducting thorough risk assessments and having contingency plans can help minimize the impact of such challenges.
• Improving decision-making processes: Ensuring that decisions regarding major projects are made with a comprehensive understanding of potential risks and contingencies. This could involve more rigorous evaluations, scenario analyses, and risk assessments before committing to large-scale investments.
• Learning from failures: Regardless of the type of failure experienced, it's crucial for ?rsted to systematically analyze what went wrong and incorporate these learnings into their future strategies. Creating a culture that encourages open discussion about failures, their causes, and potential solutions is imperative for continuous improvement.
• Adapting to market conditions: Given the dynamic nature of markets, especially in the energy sector, ?rsted could continuously monitor market conditions and adapt its strategies accordingly. Flexibility and agility in responding to changing market dynamics can mitigate potential losses.
• Diversification and hedging strategies: Considering the interconnectedness of various factors affecting the industry, ?rsted could explore diversification strategies and hedging mechanisms to mitigate risks associated with individual projects or market-specific challenges.

In summary, ?rsted appears to have encountered a mix of complex system failures influenced by external factors and potentially preventable failures related to decision-making or risk assessment processes. To mitigate these, they could focus on robust risk management, learning from failures , improving decision-making processes, and staying adaptable in responding to market conditions.

In the next chapter we explore what type of risks within the supply chain that demand our attention now.

Risks in Supply Chain Management: Navigating a Fragile System

The past couple of years have unveiled the fragility of our supply chains , dispelling the myth of their robustness. What once appeared as a streamlined and efficient system has revealed its fragility in the face of unprecedented disruptions. Here are some critical risks within the supply chain that demand attention and proactive measures:

1. Efficiency Overload: The Myth of Lean Inventory

The pursuit of extreme efficiency has left supply chains vulnerable. Lean inventory strategies have been effective under ideal conditions, but in times of disruption, the lack of buffer can spell disaster within 24 hours. A balance between efficiency and resilience is crucial for enduring unforeseen shocks.

2. Resilience: Embracing 'What If' Scenarios

Resilience isn’t about avoiding failure but bouncing back swiftly. Implementing frequent sales and operations planning (S&OP) two or three times a week, and scenario-based cultures can better equip companies to handle unforeseen disruptions, enabling faster recovery.

3. Automation: Balancing Human Decision-Making

Leveraging automation for routine tasks allows humans to focus on critical decision-making. Implementing a "Machine-first" optimizes efficiency unless tasks require human intervention. However, time constraints often hinder reflection on insights amidst fire-fighting. We should be focusing on the top 10% of disruptions, but we can’t because the other 90% takes up our time.

4. Collaboration & Trust: Beyond Technological Solutions

While technology aids collaboration, trust among supply chain players remains vital. A lack of transparency due to concerns about exploitation inhibits true collaboration. We all know the importance of connecting with tier-1 and tier-2 suppliers. Unfortunately, each player in the external value chain often worries that providing information such as capacity, inventory, or internal operational efficiency metrics could lead to someone else taking advantage of them. Establishing relationships beyond transactional interactions fosters a stronger, supportive ecosystem.

5. Tech Evolution & Complex Challenges

Technological advancements have revolutionized supply chain management, empowering predictive analytics, scenario planning, and enhanced visibility. These tools equip businesses to handle increasing complexities and prevent failures.

6. Global Dynamics & Geopolitical Factors

Conflicts like the Russia-Ukraine tension have disrupted global supply chain flows. The geopolitical challenges, have strained logistics, causing delays and imbalances in supply and demand globally. They contributed to a reduction in freight and significant reductions in ocean freight, too. Geopolitical challenges are adding significant lead time for most products shipped via ocean freight. We’ve seen the US and EU invest heavily in infrastructure projects to help rebuild their respective economies. This has led to a run on manufacturing goods from China, causing shipping prices to rise at astronomical rates and leading to containers getting backed up in major global ports. Domestic supply chains were also disrupted for nations across the globe and reduced the availability of local workforces needed to move goods within countries. Ultimately we’ve experienced a period of unbelievable growth in the demand for goods, yet limited supply of logistics, both globally and locally.

7. Continuous Disruptions & Unpredictability

Expect ongoing disruptions in transport logistics and geopolitical challenges in the foreseeable future. The supply chain pressure index suggests prolonged stress, with unresolved conflicts and high demand continuing to challenge normalcy. Even if we can get all the container ships we need into the ocean, we don’t always have the crews available, so you’ll continue to have an imbalance of supply and demand. We also don’t know how long the Russia-Ukraine conflict will last or what other geopolitical issues could erupt in ways that cause more disruptions. You just need one more issue to flare up and another major shipping lane might close down. The good news is that the global supply chain pressure index, which measures supply chain stressors, indicates that the problem has already peaked. How fast supply chain pressures come down and stays down is an open question—new or current geopolitical conflicts not being resolved could make new disruptions.

Global Supply Chain Pressure Index

8. Adaptability & Sustainable Strategies

Companies adapting by reevaluating inventory strategies and sourcing methods exhibit resilience. Right-sizing supply chains and seeking closer suppliers reduce lead times, fostering agility amidst supply uncertainties.

9. Environmental Considerations & Scope 3 Emissions

Companies must now focus on scope 3 emissions throughout their supply chains. Digitization offers transparency into carbon, energy, and waste flows, aiding in strategizing to reduce environmental impacts.

10. Manufacturing Shifts & Workforce Training

Investments in manufacturing hubs outside China and the evolving workforce landscape demand attention. As digital transformations continue, focusing on workforce training and technical expertise becomes imperative.

Navigating the complexities and risks within the supply chain demands a multifaceted approach. Striking a balance between efficiency and resilience while fostering collaboration , leveraging technology, and considering environmental impacts is essential to build robust supply chains resilient to future disruptions.

In the next chapter we will explore how ?rsted can be more adoptable and respond ad act quickly to disruptive challenges

How can Scaled Agile Framework (SAFe) contribute and improve ?rsted adaptability to challenges?

1. Adaptability and Flexibility: SAFe emphasizes adaptability and flexibility in responding to market changes. ?rsted, facing challenges like supply chain delays and market conditions impacting their offshore wind projects, can benefit from SAFe's principles of adaptability by fostering a more responsive and flexible approach to changing market dynamics.
2. Lean-Agile Principles for Operations: SAFe incorporates lean-agile principles that encourage efficient and effective operations. By applying lean principles to their processes, ?rsted can potentially streamline their operations, reduce waste, and enhance productivity, helping to mitigate losses and improve project delivery timelines.
3. Continuous Improvement: SAFe promotes a culture of continuous improvement. ?rsted can leverage this aspect to encourage teams to identify root causes of their challenges, learn from failures, and implement iterative improvements in their project management and development processes.
4. Improved Collaboration and Communication: SAFe emphasizes collaboration across teams and effective communication. ?rsted, operating in a complex environment with multiple projects and stakeholders, can benefit from improved collaboration and communication practices to address challenges more efficiently.
5. Value Stream Mapping and Optimization: SAFe offers value stream mapping techniques that can help ?rsted visualize their processes, identify bottlenecks, and optimize their value streams. This approach can assist in streamlining their project development and delivery processes to improve efficiency.
6. Agile Release Trains (ARTs): Implementing ARTs in SAFe allows for alignment, collaboration, and delivery across multiple teams. ?rsted can benefit from ARTs by synchronizing work across their offshore wind projects, enhancing coordination, and potentially minimizing delays caused by disparate or uncoordinated efforts.
7. Improved Risk Management: SAFe incorporates risk management practices. ?rsted can enhance its risk management strategies by leveraging SAFe's risk identification and mitigation approaches to address challenges related to interest rate fluctuations, supply chain disruptions, and other market uncertainties.

However, it's crucial to note that while SAFe offers a structured framework for managing large-scale Agile projects, its successful implementation requires commitment, cultural change, and leadership support. Adopting SAFe should be a carefully planned and executed process tailored to ?rsted's specific organizational needs and context. Agile Organisation and management empowers teams to adapt to change with increased speed and flexibility. Agile Leaders aim is to deliver business value early. Together they main goal is to improve the project’s product and process continuously, emphasising scope flexibility, team input, and delivery of a well-tested product that reflects customer and stakeholder needs.

How can COSO Risk Management Framework contribute to address, identify and mitigate ?rsted losses and challenges?

To address and mitigate such losses, ?rsted can benefit from implementing the COSO Enterprise Risk Management framework.

1. Risk Identification and Assessment: Utilize the COSO framework to identify and assess risks comprehensively. ?rsted can analyze their projects and operations, considering various factors such as supply chain vulnerabilities, interest rate fluctuations, regulatory changes, and market conditions. This step involves evaluating both internal and external risks that might impact the business.
2. Risk Response and Mitigation: Based on the identified risks, ?rsted can develop strategies to mitigate and manage these risks effectively. For instance, they might explore diversification of suppliers to reduce dependency on a single supply chain, employ hedging strategies to manage interest rate risks, and engage in lobbying or advocacy efforts to influence regulatory decisions affecting the industry.
3. Internal Control Systems: Strengthen internal control systems to enhance oversight and prevent similar losses in the future. This involves implementing robust financial controls, enhancing project management protocols, and reinforcing governance structures to improve decision-making and oversight.
4. Monitoring and Reporting: Establish mechanisms to continuously monitor risks and performance indicators. This includes regular reporting to management and the board about potential risks, ongoing mitigation efforts, and the effectiveness of implemented strategies. This helps in early identification of emerging risks and allows for timely intervention.
5. Learning from Failures: Foster a culture of learning from failures, aligning with the earlier discussion on types of failures. By acknowledging and analyzing failures without assigning blame, ?rsted can extract valuable insights from their experiences, leading to better decision-making and risk management in the future.
6. Adaptive Response to Market Conditions: Given the challenges highlighted in the statement, ?rsted can also focus on adaptive strategies, enabling the company to respond swiftly to changing market conditions. This may involve scenario planning, stress testing, and agility in adjusting operational plans in response to dynamic market factors.

By incorporating the COSO Enterprise Risk Management framework, ?rsted can better identify, assess, respond to, and monitor risks, thus reducing the likelihood of similar losses in the future and enhancing the company's ability to navigate challenging market conditions.

Many organisations have been applying and used different risk models for a while, and the problems and challenges haven’t changed that much. What happened is that we have developed "new words" to describe "the same problems". It's all about the people.

"We are still looking to find a new problem, but we have all-ready found new words to describe them."

Emerging Leaders

A report by the Center for Creative Leadership notes that today’s VUCA business environment requires leaders to possess more complex and adaptive thinking abilities. It also notes that the methods used to develop these new skill requirements (like training, coaching, and mentoring) have not changed much, and as a result, leaders are not developing fast enough or in the right ways to keep up with the “new normal” for business.

HR and talent management professionals must position their organizations to succeed in today’s turbulent business environment by developing Agile leaders. Applying the VUCA model as a framework to re-tool leadership development models may enable HR and talent management professionals to identify and foster the leaders their organizations need now and in the future.

Navigating the VUCA World: Understanding Volatility, Uncertainty, Complexity, and Ambiguity in Business

In today's fast-paced and interconnected business landscape, leaders face a multitude of challenges that require a new perspective and approach. The VUCA acronym—standing for volatility, uncertainty, complexity, and ambiguity—perfectly encapsulates the unpredictable nature of the modern business environment. Understanding these elements is crucial for leaders striving to steer their organizations towards success amidst constant change and disruption.

Volatility, the 'V' in VUCA, refers to the erratic and unpredictable nature of change. It encompasses the speed, magnitude, and frequency of fluctuations that defy traditional patterns. A study by the Boston Consulting Group highlighted the intensification of financial turbulence since the early 2000s, attributing this trend to various factors like digitization, globalization, and rapid innovation in business models. Volatility has become more frequent and persistent, challenging leaders to adapt swiftly to dynamic conditions.

Uncertainty, represented by the 'U' in VUCA, characterizes the lack of predictability in today's issues and events. The rapid pace of change makes it increasingly difficult for leaders to rely on historical data or past experiences as reliable predictors for future outcomes. This unpredictability complicates forecasting and decision-making processes, demanding agility and flexibility in leadership approaches.

Complexity, denoted by the 'C' in VUCA, signifies the intricate web of interrelated factors contributing to the challenges organizations face. HR thought leader John Sullivan emphasizes the multifaceted nature of problems, both internal and external to an organization. This complexity compounds the difficulties posed by volatility and uncertainty, making decision-making a daunting task.

Ambiguity, the final aspect of VUCA, refers to the lack of clarity surrounding events or situations. It represents the elusive 'who, what, where, how, and why' behind occurrences, rendering them unclear and challenging to decipher. Col. Eric G. Kail expands on ambiguity as the inability to foresee threats and opportunities before they become critical. Organizational ambiguity can lead to fragmented accomplishments that fail to contribute to enduring success, causing frustration among stakeholders.

Addressing VUCA requires a strategic shift in leadership mindset and organizational culture. Leaders must embrace adaptability, fostering a culture that values innovation, flexibility, and rapid response to change. Collaborative decision-making, leveraging diverse perspectives, and investing in continuous learning and development become imperative to navigate through uncertainty and complexity.

Moreover, embracing technology and data-driven insights can empower organizations to anticipate shifts, identify patterns, and make informed decisions in volatile and ambiguous environments.

In conclusion, the VUCA framework serves as a compass for leaders navigating the turbulent seas of today's business environment. By acknowledging and understanding volatility, uncertainty, complexity, and ambiguity, leaders can proactively adapt strategies, foster resilience, and lead their organizations toward success in an ever-evolving landscape. Embracing change as a constant and fostering an agile and innovative mindset will be key in thriving amidst VUCA's challenges.

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