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In Search of Success

August 3rd, 2010

One has to admit, the Chinese are an industrious society and culture. They’ve come a long way in a few short decades. They have shaped the world in numerous ways - for better and at times for the worst. They’re now the behemoth in the room to study, appreciate and quite often scrutinize, because their industriousness at times has been kown to create huge embarrassments.

Not surprisingly, another story has been surfacing in recent years, this time - academic fraud. The July 24th edition of The Economist delves into this topic. The articleReplicating success, Widespread academic fraud may hamper a drive for innovation states:

CHINA’S president, Hu Jintao, speaks often and forcefully of the need to foster innovation. He makes a strong case: sustaining economic growth and competitiveness requires China to get beyond mere labour-driven manufacturing and into the knowledge-based business of discoveries, inventions and other advances. 

Yet doing so will be hard, not least because of the country’s well-earned reputation for pervasive academic and scientific misconduct. Scholars, both Chinese and Western, say that fraud remains rampant and misconduct ranges from falsified data to fibs about degrees, cheating on tests and extensive plagiarism… 

The implications of widespread academic misconduct could be great. Denis Fred Simon of Penn State University argues that growing evidence of fraud “calls into question the overall credibility of the entire scientific enterprise in China-and unfortunately feeds negatively into the related concerns about the safety of Chinese products and the integrity of information coming out of China.” 

In practical terms foreign scientists may be deterred from China, as they worry about getting caught up in scandals. Early this year, after it was found that 70 papers on crystal structures submitted to an international journal by Chinese scientists had been fabricated, the Lancet medical journal called on China’s government to “assume stronger leadership in scientific integrity”. Measures taken so far, it suggested, had failed to get to the root of why some Chinese scientists lie. 

China’s drive to become a world-class competitor has created “The World Is Flat” phenomenon. Their huge access to human capitol has positioned them for success - including academic. However, being positioned for success and realizing success has become a challenge for many emergent economies. Simply because the world begins to expect more.  And the one thing the world expects more than anything else is excellence. This is the long-term challenge in front of China, and their ability to becoming a world-class player.

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Domestic Manufacturing’s Comeback?

July 29th, 2010

In the not too distant past, corporations were flocking to China in search of cheap labor, lax environmental regulations and cheap goods. For many, China was the only place to be. In fact, if a company was conducting business in China, it was a sign that the company was progressive and a world class competitor.

Is a reverse shift possibly underway?

From my perspective, the answer to this question is ”Yes.” In recent months, stories about how production is exiting China and reentering the US are beginning to surface. The reason for this shift is multifold. For instance, Chinese workers have been able to negotiate huge wage increases (greater than 20% in most instances) in factories producing goods as far ranging as automobiles (Honda, Toyota…), electronics (Foxconn, which produces the IPod…) and numerous other consumer products. Second, China has stated that it will allow the yuan to float relative to other world currencies. Third, China is focused on curbing its growth rate by reducing its money supply into the banking system. Each of these and numerous other factors will play a role in China’s export-based economy. And lets not forget, China’s quality is still a huge risk factor for many companies.

Yes, the early stages of a resurrgence of US based manufacturing is beginning to evolve. For instance, a recent article at MachineDesign.com in the article Backshoring Gains Momentum as More U.S. Companies Bring Production Home begins to address this issue. It states:

Ensuring a steady stream of low-cost, high-quality parts is a growing headache for U. S. manufacturers that source parts overseas. Governmental, economic, societal, and cultural factors are forcing U. S. OEMs to rethink the strategies that led them to outsourcing in the past decades, says Mitch Free, CEO of Atlanta-based MFG.com. “But tangible failures of suppliers, quality, training, and logistics have also forced these businesses to recognize and investigate the costs extended supply chains placed on their abilities to respond to customers, innovate, and compete effectively,” he says.

As evidence, he cites the most recent MFGWatch survey conducted by MFG.com, where a remarkable 44% of North American participants — from design engineers to purchasing professionals — say they have experienced a significant supply-chain disruption that forced them to find an alternative supplier. This is up from an already significant 35% figure last quarter, and strongly suggests that supply-chain contraction will be the trend well into 2012, says Free.

One consequence: “Backshoring — repatriating work to the U. S. after initially outsourcing it to low-cost countries — is becoming more prevalent as domestic manufacturers reassess the total costs of their products,” he explains.

I’m convinced this new trend will continue for numerous reasons.

  1. Most US based manufacturers have reduced their manufacturing costs significantly by investing in new automation assets and new manufacturing processes. Suddenly when all factors are weighted, the cost differential is minimal.
  2. Companies are doing a more effective job of analyzing their true cost of managing diverse supply-chains scattered around the globe. In many instances, their perceived cost wasn’t close to their true costs.
  3. “Made in China” in some circles raises many issues, especially relating to quality (one I’ve discuss many times here and here).

Yes, the next shift is underway and the unthinkable will emerge. Domestic manufacturing will likely become the next growth engine for the US economy in coming years.

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Silent Problems & Brand Valuations

July 21st, 2010

Market valuations and silent problems - are they correlated to each other?

24/7 Wall Street recently looked at the 10 Biggest Brand Disasters of 2010. Guess what? There is a close correlation to the exposure of silent problems and the loss of brand valuations. On the list:

1. BP: Need I say more.
2. Dell: This company has exposed numerous silent problems in recent years.
4. Sony: I’ve written about Sony and its silent problems numerous times.
5. Goldman Sachs: What can I say other than they’ve created a culture where silent problems are endemic to the organization.
8. Johnson & Johnson: J&J use to be squeeky clean when it came to their brand, now silent problems are eroding it.
10. Toyota: Toyota’s culture of silencing their problems was exposed in a big way in 2010.

The other companies on the list R.I.M. (Blackberry), Adobe, Nokia and Google. Interestingly, each of these are in the fast moving technology arena where a “what’s hot” and “what’s not” mentality can reside. Yet the 6-companies on the above list have direct ties to silent problems. Makes one wonder when the marketplace will finally look at exposure to silent problems in stock valuations.

Adobe:

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Silent Problems & Persistently Bad News

July 12th, 2010

One might wonder why Toyota has been consistently delivering bad news since the initial brake recall some 6-months ago? And how about the falterig economies in Europe like Greece and Spain. And what about all the stories related to the financial crisis like Lehman Brothers, Bear Stearns, Citi Group and others in recet years? Its almost as if there was pent up bad news once the initial story broke loose. Then once the floodgats opened, the torrent of bad news was overwhelming.

For instance, last week I was working with a client that had experienced a barrage of silent problems surfacing in recent months. To say the least, the many layers of bad news was taking its toll. On the surface, it felt as if the sky was falling. However in reality, there was a cleansing process underway. It was painful, yet necessary. An excellent story relating to this phenomenon is Toyota, who has experienced a multitude of quality related problems in 200. This past week they announced a 2nd recall in less than a month, this one for defective engine valve springs. A recent news story notes:

Toyota knew two years ago about the engine problem behind its latest Lexus recall, even changing the spring part to correct it, but did not think a recall was warranted until recently, a company official said Tuesday.

Toyota Motor Corp. started Monday a global recall over engine defects in its Lexus luxury models sold around the world, as well as the Crown sold in Japan, moving to repair some 270,000 vehicles to replace valve springs — crucial engine components that are flawed and could cause vehicles to stall.

In August 2008, Toyota changed that spring part, making it thicker, to prevent the problem, spokesman Hideaki Homma told The Associated Press. That is why the latest recall does not affect vehicles produced after August 2008.

What Toyota is experiencing today with the high volume of recalls is typical in many situations. What is really being exposed here is a system and culture oriented towards avoidance and neglect. And now that a new course has been set, the torrent of silent problems is being vetted all at once. However in the end, this will become positive if the problems aren’t too big to manage. Eventually this will lead to new systems, new degrees of accountability and most importantly, an integral part of their new culture.

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When Superstars Become A Problem

July 2nd, 2010

One of the most challenging decisions business leaders face is when their superstar becomes a problem. You know the person. Maybe its a sales manager that customers love, yet employees hate. Maybe it’s a V.P. that holds tremendous knowledge, yet disrupts every meeting at the last minute. Or maybe its an executive that believes corporate ethics and values don’t apply to them.

So how do most people cope when situations like these occur? Most people simply cope by getting out of the way or they leave  the organization. The impact on the organization - can be HUGE.

Yes, most of us have worked with one or reported to one of thse bigger than life characters in our careers. Unfortunately, it’s a problem that is often avoided or neglected, which pulls it under the umbrella of being a silent problem.

A couple of weeks ago the Rolling Stones published a riveting article titled The Runaway General. A story about General Stanley McCrystal, the former head of Afghan military operations. It’s a troubling story, because it’s a “when a superstar becomes a problem” story. Its a story about how an individual rose up through the ranks, yet what brought him down was his own weaknesses. For instance the story states,

By some accounts, McChrystal’s career should have been over at least two times by now. As Pentagon spokesman during the invasion of Iraq, the general seemed more like a White House mouthpiece than an up-and-coming commander with a reputation for speaking his mind. When Defense Secretary Donald Rumsfeld made his infamous “stuff happens” remark during the looting of Baghdad, McChrystal backed him up. A few days later, he echoed the president’s Mission Accomplished gaffe by insisting that major combat operations in Iraq were over. But it was during his next stint – overseeing the military’s most elite units, including the Rangers, Navy Seals and Delta Force – that McChrystal took part in a cover-up that would have destroyed the career of a lesser man. 

After Cpl. Pat Tillman, the former-NFL-star-turned-Ranger, was accidentally killed by his own troops in Afghanistan in April 2004, McChrystal took an active role in creating the impression that Tillman had died at the hands of Taliban fighters. He signed off on a falsified recommendation for a Silver Star that suggested Tillman had been killed by enemy fire. (McChrystal would later claim he didn’t read the recommendation closely enough – a strange excuse for a commander known for his laserlike attention to minute details.) A week later, McChrystal sent a memo up the chain of command, specifically warning that President Bush should avoid mentioning the cause of Tillman’s death. “If the circumstances of Corporal Tillman’s death become public,” he wrote, it could cause “public embarrassment” for the president.

Superstars create numerous challenges. First, they often believe they’re part of an elite group, which makes it difficult to hold them accountable. And its this status they believe provides them priveleges and unlimited “get out of jail” cards when a problem emerges. Second, they can hold the team and the organization hostage. At times, they view themselves as “untouchable.” Third and possibly most important, they can be very difficult to get rid of, because they have the connections and the knowledge that could put your organization in harms way.

So what are the lessons we should heed?

  1. Be careful when putting superstars in leadership positions. Do your homework up front.
  2. Realize no one is irreplaceable. Be prepared to cut the line sooner, rather than later.
  3. Remember, toxic superstars add to your bottom-line, but also take away from it through higher turnover and diminished performance.

At the end of the day, every organization is in search of superstars. However at the beginning of the day, make certain they’re the right fit.

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Toyota’s Ongoing Problems

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

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

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

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

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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