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The Power of M3 and the Need to Understand Mistakes

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This chapter is from the book

"Anything worth doing is worth doing right."
—My dad and others of his era

Doing things right in business has gotten a lot of press in recent years. We seem to have finally discovered that just having ideas is not enough. Results are what really matter, and results come from both ideas and execution, but the biggest enemy of great execution is mistakes.

I learned many things while serving as an officer in U.S. Navy nuclear submarines in the late 1960s, but one of the things you heard from the beginning was the saying, "There's no partial credit in the fleet." Win or lose in battle—there is no in-between—something that is especially true in the unforgiving environment hundreds of feet below the surface of the ocean and thousands of miles from home.

The problem with mistakes is that they creep up on you—individuals do not get up in the morning and say, "Boy, this would be a great day to make some mistakes." They just find themselves in a place they do not want to be, fighting to survive a crisis and, if they do not survive the crisis, wondering how it all happened.

There are places, like the world of sports, where your mistakes are very visible. For baseball fans, and especially for Boston Red Sox fans, the seventh game of the 2003 American League Championship Series was a lesson in making mistakes.

Boston was ahead in the eighth inning with a two-run lead. The pitcher, Pedro Martinez, had pitched a very good game, and everyone thought this was the year that the "Curse of the Bambino"* would be broken. Martinez had thrown nearly 120 pitches (a lot) and was no longer pitching perfectly, resulting in runners at second and third. The manager, Grady Little, went to the mound and decided to leave his star pitcher in the game. Fans in the ballpark and watching on TV all over the world were saying, "This guy looks tired—are you crazy?" It was very late in the game, the tying run was at the plate, the game was on the line, the chance to go to the World Series was on the line, Martinez was looking weak, and Little decided to stick with the plan.

* Boston fans believe Boston has not won a World Series since 1918 because the legendary player, Babe Ruth, was traded to the New York Yankees.

The rest is history and is now part of the lore of "The Curse." A double by Jorge Posada drove in two runs to tie the game, which went to extra innings. The Yankees won in the eleventh inning. A series of small mistakes built up to cause a disaster (for Boston fans). There were chances to break the chain of mistakes, but Martinez was not able to do so, and Little, uncertain about the alternative path (replacing the pitcher), was unwilling to take any action, sticking with what most people watching the game considered to be a high-risk strategy.

There's no partial credit in the Fleet. There's no partial credit in championship sports—you win or lose. You may not die physically from a sports mistake, but your career might, as Grady Little found when he was fired within a week of his team's loss.

But isn't this true in business as well? Many people are uncomfortable with the stark reality of winning and losing. My wife always roots for the underdog in the World Series, the Superbowl, or the Academy Awards, but she has learned how to win in local politics and business. Especially in the United States, we would like to believe there "is enough to go around," whether it's food or market share. The reality in a globally competitive world is different, however—win or lose. Deliver value or be shunned. Grow or die.

We learned as kids to compete for grades, approval, awards, a spot in the school play, entrance to college, or a place on a team or in a club. As individuals, we compete for jobs. When there are enough, we compete for the best jobs. If there are not enough, we compete for any job. In groups, we compete as teams for causes or recognition. What makes the difference between winners and losers on a personal basis? Sometimes it is raw intelligence. But often it is mistakes: in choices we have made along the way, in how we present ourselves, or the way in which we view the world. We often rationalize personal failures by saying, "Everybody makes mistakes." While this may be true, it may also be a point of differentiation that changes lives—or businesses.

Most industries in developed countries have consolidated or will soon. Developing countries are becoming more competitive. In most industries, one or two top players emerge who will do better than others, at least for some period. True differentiation is hard to find. The top players look a lot like each other, and the real difference boils down to the ability to execute. Execution, according to one recent book on the subject, boils down to leadership, culture, and people.1

In my experience, the top players know that execution is important and are working hard on leadership, culture, and people. But some don't get it right, and then a winner and a loser emerges. Why don't they get it right? Mistakes—big ones, medium ones, and small ones.

Winners, whether in business, sports, or geopolitics, learn that getting near the top is really tough, but once you get near the top, mistakes are usually the difference between base camp and the peak. Winners learn this quickly and learn how to avoid mistakes—at least the big ones. Losers do not learn this as quickly, and in some cases, they make the same mistakes over and over.

The mistakes and mistake chains or sequences that we will discuss in subsequent chapters are primarily human mistakes. There are often mechanical failures, environmental circumstances (such as weather), technology changes, competitive moves, or other initiating actions that create a situation that requires response. It is in these situations that the ability of individuals to make decisions and cope with the circumstances is tested, and it is where mistakes do or do not occur.

Even the situations that are the initiating events may have their origin in human mistakes. For example, not all mechanical failures of equipment are random. Some are the result of poor design, choice of materials, or manufacturing quality, each of which was likely a human mistake. Some actions by competitors occur because you allow them an opening or indirectly give them a clue as to how to compete more effectively.

Business books have enjoyed great popularity in the last 20 years. One of the biggest in 1994 was Built to Last2 in which the authors identified companies they considered "visionary" and used words like "icon" to describe these leaders. Just 10 years ago, among the 18 companies they classified as visionary were Boeing, Ford, HP, Merck, Motorola, Sony, and Walt Disney. Each of these has fallen on harder times since and, while highly respected for past contributions, is seeing questions raised about its future. Are these venerable names in American and global business just going through a rough patch, or have their positions changed in ways that will prevent them from ever achieving their former prominence in their industries? I have opinions about each, but I don't have a crystal ball for the future. What I can say definitively is that a number of these companies have made serious mistakes or a chain of mistakes that accelerated their fall from the pedestal of business admiration.

In many ways, these are the most challenging times for business in a generation. We have all been awakened to the need to look beyond the comfort of our day-to-day existence, to the need to synthesize the implications of external events, including heightened competition. That, in turn, leads to the need to focus not just on execution but on flawless execution. There is no partial credit in the Fleet.

Patterns of Mistakes and Exponential Growth

At some point in your secondary education, you learned about something called an "exponential." You may have thought this was an abstract mathematical concept, but the reality is that it has all sorts of real-world implications. At the simplest level, the most important thing to understand about anything that involves exponential movement is that it grows (or declines) really fast. Whether you are talking about an ant colony multiplying, the magic of compound interest, or the increase in the number of components possible per integrated circuit (Moore's Law), changes happen very rapidly and in a nonlinear fashion.

Exponential growth in severity of damage is often descriptive of a business crisis. The damage may be in the form of lost customers, lost sales, higher costs, liability costs, employee morale, or physical assets. If we make a mistake in business and brush it off, it probably was not too severe. If we start making estimates of what the cost was or will be, it was probably quite damaging financially, if not in other ways.

Whether it is physical, financial, or strategic, phrases such as "things went to hell in a hand basket" do not come close to describing what occurred. This can happen in any business. Geography, culture, and business size are irrelevant. Mistakes happen and businesses that were otherwise successful suddenly suffer a change of direction. This is rarely simply fate. In business, most things happen for a reason, not because a deity willed them to happen—and, aside from natural disasters, when bad things happen, people and their flawed judgment are usually involved.

The objective is to learn to recognize the patterns of mistakes that precede most business disasters and take actions to eliminate the threat or to reduce the incident to something that does not require full-scale crisis management. These patterns of mistakes and potential responses are surprisingly similar across physical and business disasters and across industries. This should make it easier to learn how to deal with dangerous situations, but we rarely take the time to see the parallels in what appear to be unrelated experiences. If we did take the time, it might help us learn and change our behavior. We can learn to see patterns, and patterns can help us anticipate, prevent, minimize, or control the potential exponential downside for most crisis, accident, or disaster scenarios.

Mistakes in business are pervasive, but we do not always witness them unfolding as visibly as we do in physical disasters. We see reports of a chemical plant disaster or an airplane crash on the news within minutes of its occurrence. For business disasters, we do not get blow-by-blow accounts of the decision-making process as we did during Three Mile Island. No, business mistakes, except for the very largest, are hidden from view. They are hidden for many reasons including protection of competitive information, protection of employees and management, potential legal exposure in a variety of ways, and finally, the desire to not upset "the street." Additionally, some "mistakes" are quite clear very quickly, but some may not be seen as mistakes in the eyes of all who examine a situation at a given point in time.

Strategic mistakes are rarely black and white until well after the fact, so there are times when the time frame is relevant for classifying an action or lack of action as a mistake in business. It is also common for some companies to have such a long string of explanations regarding one-time charges that it is hard to figure out if they are making mistakes or have just been hit by a string of bad luck. For years, AT&T booked restructuring and other "one-time" charges, giving the appearance that they were doing well when they were not.

But this is not about how you can become a more effective analyst of a company's mistakes from the outside. The real question is whether or not, as an insider, you are capable of recognizing that a chain of mistakes is underway and are willing to take action to prevent or mitigate damage.

The biggest reason you do not hear much about corporate mistakes, unless they are so colossal that some government entity forces an investigation, is that most companies do not put together blue-ribbon investigative committees to find causes of failures and recommend improvements. No one would accept a statement that an airliner "just crashed—we're not sure why, but we'll try not to do it again." Yet in business, we see all kinds of failures that are not investigated in any serious depth unless laws were violated or people were physically injured.

Physical disasters, things like plants blowing up, are usually investigated in depth because companies have visible and usually costly incentives to understand them. Big physical events can affect public safety, insurance costs, and liabilities related to injury or death. But management mistakes that do not "hurt anyone" except perhaps shareholders, employees, and communities are rarely investigated with the same fervor as physical disasters.

While not as visible, I would argue that strategic and management blunders are likely to be more costly to a corporation and its stakeholders than almost any physical disaster. They thus deserve the same level of inquiry, learning, and improvement to avoid repetition and future damage. I have also observed that many physical disasters have root causes that are similar to management blunders. The specifics are different, but the human behaviors, biases, and blind spots are similar. For this reason, we will examine both physical and management disasters as we explore the commonality of causes and the potential for learning one from the other. The word "accident" is often used to convey the impression that an undesirable event was unavoidable. This is rarely the case. Business accidents, blunders, incidents, crises, or disasters are usually no different than a child who has an "accident" spilling grape juice on a beige carpet, which is then cleaned with an incorrect cleaning compound that leaves a permanent spot.

The damage was avoidable if we had given the child water instead, had not let him go into the carpeted room, or had put a restrictive top on the cup. Mistakes are made in not thinking through situations ahead of time, in not anticipating the possible range of consequences, or through incorrect remedial actions. Regardless of what we call such an occurrence, the idea is to focus on the occurrence and what we can learn from the pattern of mistakes that led to the it and the resulting damage to prevent similar situations or to minimize damage in the future.

The concept of Managing Multiple Mistakes (M3) is based on the observation that nearly all serious accidents, whether physical or business, are the result of more than one mistake. If we do not "break the chain" of mistakes early, the damage that is done, and its cost will go up exponentially, as illustrated in Figure 1.1, until the situation is irreparable.

Figure 1.1Figure 1.1 Mistakes and costs.

This applies to all types of human endeavor: physical systems for transportation or manufacturing, business decisions from the front line to the boardroom, healthcare delivery, the structure or operation of our electricity grid (or lack thereof), personal relationships, and even politics.

In fact, the Watergate scandal may be one of the best illustrations of failing to manage multiple mistakes. It took some time to understand, but when it was all done, it became clear that this was a case where the initial mistake, the decision to burglarize Democratic Party offices to obtain information that was of little value, was compounded severely by subsequent attempts to cover up earlier mistakes. This is a classic case of what Joseph Grundfest, a Stanford law professor and former SEC Commissioner, calls "crimes of upholstery"—where the damage done by the cover-up was far worse than the original crime. Would Richard Nixon have finished his second term if he and his colleagues had admitted immediately that they had done something stupid and had not attempted to cover it up with unbelievable stories of accidental tape erasure and other fabrications? We will never know, but the pattern of multiple mistakes involves sins of both omission and commission in nearly all the stories you will read in this book.

Understanding accidents of one sort or another has become an organized activity of government and academic study, especially over the last century as industrial and transportation systems became more complex. Most countries have special boards to study accidents and incidents that affect public safety in transportation or potentially dangerous industries. The public visibility of investigations of one sort or another has changed with technology and society over time. Investigations of mine, maritime, and train disasters were in the public eye 50 to 100 years ago, but in the last two decades, we have heard more about nuclear power, airplane crashes, chemical plant problems, carcinogens left behind from industrial activity, failures in space, and Internet worms.

This shift in focus of the types of investigations that get public attention is not surprising given the growth and implementation of new technologies. Investigating agencies worldwide are formed and focus on improving public safety, usually with a goal of zero accidents. Yet there are some, such as Charles Perrow in his book Normal Accidents3, who believe that some level of very significant accidents is "normal" because today's systems are so complex that, as we attempt to build in more sophisticated safeguards, we actually create new categories of accidents that were previously unanticipated. In fact, as a sociologist, he questions what our reaction will be to accidents that we realize we cannot control with better management and training.

In some ways, recent corporate disasters, especially Enron, seem to support Perrow's hypothesis, namely that bigger, faster-acting, technology-driven businesses and systems simply have the opportunity to spawn larger disasters more rapidly. Enron was a man-made disaster, but the availability of systems for rapid and complicated energy trading, the complexity of financing vehicles, and a wide range of businesses all increased complexity beyond any individual's ability to completely comprehend and control the business.

While Perrow's hypothesis is understandable, there are many of us who believe that, while accidents in physical systems and businesses are inevitable, it is possible to understand them and find ways to reduce such events in both frequency and severity. In fact, even though accidents still occur, their incidence in a number of very visible areas (such as aviation) has been reduced over the years, something that we will discuss in later chapters.

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