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Archive for June, 2010

Toyota’s Ongoing Problems

Monday, June 28th, 2010

By now, most analysts thought Toyota’s problems would be behind them, and nothing but open road in front. This is not the case, as many challenges continue to face the once mighty, Toyota. As I’ve discussed in previous blogs, Toyota’s silent problems are an endemic challenge they would face and one that would not go away easily. Therefore, it’s not surprising that fresh recalls are occuring, including the recent recall of 17,000 Lexus sedans with a fuel problem. Two, Toyota’s stock price is now at its lowest level in over a year. And in recent weeks, I’ve noticed an uptick in news reports where crashes involving Toyotas’ (outside the recall spectrum)  with unintended acceleration problems occurring. Plus, none of this even begins to address the multitude of legal challenges now on their plate. To say the least, Toyota is a company with many challenges, and an unpredictable future.

What is the reason for Toyota’s ongoing problems? On March 17  I addressed this issue head-on, and is worth repeating:

Today, cost estimates for Toyota’s silent problems are ranging from $2 Billion on the low side, to $5.5 Billion on the top side. My research suggests a factor of 2X to 4X is reasonable from these numbers, because none of these estimates factor in elements such as:

  • Reduced organizational focus
  • A shift from strategic to tactical activity
  • Negative impact on team and individual performance
  • Negative impact on accountability
  • Negative impact on innovation…

These factors and others can break a high performance organization. They can increase employee turnover. They can impact financial and organizational performance for years to come. This is why betting on Toyota’s return to dominance is such a risky bet. Simply because we don’t fully understand the full impact on Toyota. However if history proves itself, this event will impact Toyota many years. Just ask GM,Ford and others…

Today, Toyota is facing increasing competition from companies like Ford & GM, Hyundai & Kia, and of course VW, Audi, BMW and others. Each of these have picked up their game in recent years and are willing to take Toyota head-on. However what is killing Toyota slowly and quietly is not competion. To the contrary, Toyota’s brand and reputation have eroded in areas where it was prviously strong like quality, engineering, dependibility, value and safety. In essence, very few proudly state, “I drive a Toyota” today. From my perspective, Toyota will continue to be a company in turmoil, with an eroding value proposition.

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Underestimating a Silent Problem

Tuesday, June 22nd, 2010

Risk. Exposure. Liability. These are words that should be at the forefront of every conversation when a silent problem is identified ( a problem that has been avoided, neglected, gone unnoticed, or been intentionally silenced). The reason being, too often we underestimate the real impact a silent problem can have on an organization, and its share price. For instance, we need look no further than Bear Stearns, Lehman Brothers, Madoff, Toyota, and now BP. In each of these and 100s of other of instances, while the crisis on the surface appeared under control, in reality things were totally out of control. Such can be the impact of a silent problem.

 In a recent Reuters article titled Wall Street Said Buy, Buy, Buy BP Stock As Gulf Crisis Unfolded illustrates how analysts often underestimate the financial impact of disasters that eminate from silent problems. The story states:

As early word of BP’s Deepwater Horizon blowout began spreading, investors panicked. After closing above $60 before the April 20 disaster, the energy giant’s shares plunged almost 20 percent in New York, to below $50, in just two weeks.

It is not hard to understand why. Even then, the out-of-control oil spill in the midst of rich fishing grounds and nearby resort beaches raised the specter of horrific damages and untold potential liabilities.

Yet, nearly to a person, the dozens of securities analysts who followed the British oil giant were unfazed. As BP (BP.N: Quote, Profile, Research, Stock Buzz) (BP.L: Quote, Profile, Research, Stock Buzz) shares continued to drop, most were screaming the same message: buy, baby, buy.

Credit Suisse, which had a “buy” rating on the stock at the time, did not even mention the accident in an April 28 report. The firm upgraded earnings estimates after BP reported strong quarterly results the day before.

A day later, with BP’s shares then down 11 percent, Citigroup’s Mark Fletcher weighed in. He argued that the decline was “disproportionate to the likely costs to the company, even assuming damages can be claimed.” In the same report, he estimated BP’s total share of the cleanup at just $450 million — today, conservative guesses put the figure at $10 billion to $20 billion.

Around that time, Morgan Stanley was among the chorus citing the strong rebound of Exxon (XOM.N: Quote, Profile, Research, Stock Buzz) shares after the 1989 Valdez tanker spill in Prince William Sound, Alaska, as a reason to be bullish. “We think the sell-off presents an attractive buying opportunity for investors with medium-term investment horizons,” the firm wrote.

All told, 27 of 34 analysts tracked by Thomson Reuters rated the stock “buy” or “outperform” as recently as May 11. The other seven rated the shares “hold.” There was not a single rating of “sell” or “underperform” among those tracked.

The BP crisis is horriffic. It’s impact will be felt for years, and probably decades. And when we look at the evidence, it was a problem being intentionally silenced, and no one screamed Wolf!

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BP’s Silent Problems Now Being Exposed

Monday, June 14th, 2010

Business consultant Pat Murray proclaims, “You stand for what you tolerate. Define your intolerables.” Well in a recently authored letter by two house democrats that have been leading the BP oil spill investigation, the concept of “what you tolerate” applies. According to a recent Washington Post article, it states,

– BP saved $7 million to $10 million using a more risky option for the well casing, or steel tubing. The safer option, known as the liner-tieback option, would have provided more barriers to prevent the flow of natural gas up the space between the steel tubes and the well wall.

– BP failed to install enough devices to center the pipe in the hole, which increased the danger of cracks in the cement surrounding the pipe. The American Petroleum Institute’s recommended practices warn that if the pipe, or casing, is not centered “it is difficult, if not impossible” for the cement to displace the drilling mud on the narrow side of the opening.

– BP decided against a nine- to 12-hour procedure known as a “cement bond log” that would have tested the integrity of the cement. Although BP had a team from Schlumberger, a leading oil services firm, on board the rig, BP sent the team home and told them their services were not needed.

– BP did not fully circulate drilling mud, which would have taken as long as 12 hours. That would have helped detect any pockets of gas, which later shot up the well and exploded on the deck of the drilling rig.

– BP did not secure the connections, or casing hangers, between pipes of different diameters.

The letter says that many of these decisions contradict the advice contained in other BP internal documents, which warned against the dangers of using certain types of pipe. And it reveals that even before the accident, BP engineers were struggling with unusual difficulties. On April 14, BP drilling engineer Brian Morel e-mailed a colleague, Richard Miller, saying “this has been [a] nightmare well which has everyone all over the place.”

In the book Without Warning, it states, “Silent problems absolutely define what you tolerate.” Quite simply, individuals inside BP were willing to “tolerate” actions and activities that did not pass internal standards. Instead of thoroughness, corners were cut. To achieve what? A deadline? A budget? An incentive clause? Whatever the reason, billions of dollars are now lost and thousands of lives are caught in the crosshairs. This at times is the tragic outcome associated with silent problems.

Bottomline: The BP oil spill was avoidable if they had taken the precautions necessary to ensure a safe well. Now they will pay the price for their neglect.

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Frustration

Tuesday, June 8th, 2010

The BP oil spill is ongoing. The pictures are becoming more vivid. The eventual outcome more dire. The ecological impact growing.

Yes, the BP oil spill is a disaster in every sense of the word. And because BP and the various response teams appear to always be playing a “too little, too later” scenario, a sense of frustration is setting in. Frustration with government’s response. Frustration with BP and its ever changing story. Frustration with the lack of progress. Frustration relative to what the future could look like.

Frustration is terribly debilitating. And yes, the BP oil spill is quickly becoming Obama’s Katrina.

Yes, there appears to be a lot of FRUSTRATION left in this story.

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Anatomy Of A Catastrophe

Friday, June 4th, 2010

Michael Roberto profiled the anatomy of a catastrophe over at his blog, and I found it to be insightful and definitely worth promoting. Here it is:

1. Catastrophic failures generally do not have a single root cause. They are typically the result of a chain of errors, mistakes, and small failures.

2. People and organizations often downplay ambiguous threats, i.e. warning signs, that crop out in the days, weeks, and months prior to the catastrophe. (Yes, we too often overlook weak signals starring us in the face.) 

3. Organizations often have cultures that don’t promote sufficient candor and open dialogue. Thus, people with knowledge about critical risks may not speak up about their concerns regarding a potential failure. (This is an area that organizations could easily correct through training and other easily implementable processes.)

4. People with intuitive concerns about certain risks sometimes are dismissed because they lack extensive data to support their concerns.  (It’s easy to dismiss someone under the guise of “You don’t know what you’re talking about.” Most of the time this is correct, however on occassion their wisdom can save the day.)

5. Organizations often overestimate how human and system redundancy they have in place to protect them from catastrophe. (Oftentimes, systems were adequate yesterday, yet insufficient for today’s needs. Finding the time and resources to examine the adequacy of systems and processes is difficult, yet important in a cash-strapped organization.)

6. People often underestimate the probability of what they perceive to be extremely low probability events. (This is where scenario planning can provide insights into the “What Ifs” of your world.)

7. Cognitive biases often distort managerial judgments, contributing to catastrophe. (I would also add that the emotional connection to judgements and decision-making often distort the outcome.)

If and when the BP Story slows and investigations into “What Really Happened” begin to emerge, the storyline will resemble that of Toyota, the financial crisis and numerous other stories. And the conclusion will be, “This too was preventable.” The technology to prevent it was present. The warning signs were present to take precautionary steps. The resources and conviction  to move forward is what was missing. Hopefully, some day we will learn the lessons of Silent Problems.

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Everything Is Illuminated

Thursday, June 3rd, 2010

I watched a neat movie last night, “Everything is Illuminated.”  The story is about Alex, a young American jewish man that goes on a quest to find the woman who saved his grandfather during the Holocaust. If you haven’t seen it, it’s a wonderful story. The quirkiness of the characters make it come to life. It was at the very end that caught my attention though when Alex is reflecting on his journey on his return trip when he reflects,  

I have reflected many times upon our rigid search. It has shown me that everything is illuminated in the light of the past. Alex

When I look into silent problems as far ranging as Madoff, to Toyota, to the financial crisis and countless others, its amazing how everything is eventually illuminated in the light of the past. Or in plain terms - the truth is eventually exposed. And what gets exposed is the numerous warning signs along the way. There was discontent amongst employees. There was a conflict of interest present. There was a bully in the mix that did everything in their power to keep the problem silent. 

I’ve thought of and examined the context of these scenarios many times, and I realize there is a question we should be asking.

How can we illuminate problems in the present - so they can be acted upon?

This is the question we need to pursue, and one I focus on in the book Without Warning and on this blog. Because when we illuminate from the present, we can take action and hopefully avoid or at least mitigate the fallout from silent problems. And more importantly, many of the world’s problems could have been mitigated.

Your thoughts?

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