Introduction to Breaking Failure: How to Break the Cycle of Business Failure and Underperformance Using Root Cause, Failure Mode and Effects Analysis, and an Early Warning System
- “The obscure we see eventually. The completely obvious, it seems, takes longer.”
- —Edward R. Murrow, American broadcast journalist
When Harry Markowitz, winner of the 1990 Nobel Prize in Economics for his portfolio management theory, was asked how he allocated his investments, he replied, “I should have computed the historical covariances of the asset classes and drawn an efficient frontier... Instead, I split my contributions 50/50 between bonds and equities.” Everyone has probably experienced this phenomenon whereby you analyze—maybe even use—sophisticated models to evaluate business challenges or opportunities but rarely apply the same amount of time, effort, or diligence to your personal finances or endeavors.
This paradoxical but common occurrence was described by Nassim Taleb, author of The Black Swan: The Impact of the Highly Improbable, as domain dependence or the inability to transfer a proven technique, process, or concept from one discipline or industry to another.
This book looks at why this blind spot occurs within different disciplines and professions. Identifying useful techniques from other domains and applying them to a different discipline is a simple yet transformational act that can yield a higher ROI than any of the incremental optimizations performed by companies. Also, it is not as if these domain transfers do not work; if challenged, everyone can think of highly beneficial knowledge or best practices adopted from other disciplines or industries. The origins of statistics, for example, began with the analysis of census data by governments many hundreds of years ago, evolving and improving over time. The adoption of statistics by other disciplines was accelerated by the development of probability theory first used by astronomers in the 19th century. Other disciplines soon followed, including business, which began using statistics in the early 20th century and which became the foundation for finance, operations management, and many areas in marketing. Another widely adopted domain transfer by business was the Stage-Gate system, which has become the de facto standard for new product development in many categories. The Stage-Gate concept originated with chemical engineering in the 1940s as a technique for developing new compounds. It was then adopted and refined by NASA in the 1960s for use in “phased project planning.” Dr. Robert Cooper is credited with formalizing and refining this concept for new product development in business in his 1994 blockbuster book, Winning at New Products. According to Cooper, he arrived at the Stage-Gate concept by observing what successful companies like DuPont were doing in this field. It is no small coincidence that DuPont was in the chemical industry, where the technique originated.
Domain transfers should not be confused with applying a different framework, sometimes incorrectly, to another industry or situation, as occurred during the short tenure of JCPenney’s CEO Ron Johnson. Johnson, the former Senior VP of Retail Operations at Apple, managed during his 16-month tenure at JCPenney to lose over a billion dollars in revenue and caused the company to suffer a 50 percent drop in its stock price. Johnson’s sin was to default to his usual framework—the Apple way—where consumer market testing, sales, and discounts were never used. Johnson believed that the Apple framework would work just as well in the nontech retail world of apparel, shoes, furniture, kitchenware, and knick-knacks. Addressing framework mistakes and how they can be prevented is the subject of Chapter 2, “Don’t Start Off on the Wrong Foot.”
State of Management
It is especially important to apply these failure mitigation and prevention techniques that we will cover in this book to areas like advertising, human resources, marketing, sales, strategy, and product management because despite the fact they are considered more “science” and less “art,” they still lack many of the standard protocols, continuing professional education requirements, and mandatory professional certifications found in other disciplines such as law, medicine, or accounting. Case in point: Even though the study of statistics is widely accepted by marketing and taught in most academic programs, it is used correctly and on a regular basis by probably fewer than 15 percent of marketing professionals. While there are some functional areas in marketing where statistics are less important (e.g., event management), there are still many areas where it should be used but isn’t. Most lead generation campaigns, for example, do not usually conduct split A/B tests, which is a related problem: the partial adoption of a domain transfer. Moreover, most business professionals have no grasp of statistical traps such as when correlations do not have a cause-and-effect relationship.
The premise of this book can be boiled down to three observations. Most failures and underperformance are due to the following:
- Error-prone thinking and decision making
- Voids in the domain transfer of proven techniques that would be useful to many areas of business (e.g., failure mode and effects analysis, root cause analysis, and an early warning system)
- A deficient and inconsistent knowledge base among many business professionals due to the lack of mandatory professional certifications and continuing education (finance and especially accounting being two notable exceptions)
This book proposes solutions to address the first two problems, but the third requires the collaborative effort of agencies, Fortune 1000 companies, academia, and professional organizations.