Error-Proof Management

You are a senior executive at a successful, major company. Your company's largest and best-run division has just made a presentation that scares you to death. The division's most profitable product is about to become unexpectedly obsolete, and there is a brief window of opportunity to do something about it. You do not want to lose this valuable market position and its profit contribution, but the risks involved in a helter-skelter, come-from-behind effort are large. In fact, the losses could cost you your job. What should you do?

Executives face similar hard decisions more and more frequently. Do I acquire another company that is almost our size at an enormous multiple to stay in the race to consolidate our industry? How can we quickly reduce our costs by 30% to stay competitive with dynamic, new competitors without destroying everything that makes us valuable to our customers? We now take five years to design a new product, but to stay in the market we need to reduce this to two years without making more errors than we do now -- how can we do that?

What these situations have in common is that the rewards are very large, but the price of failure is probably even higher. A conscientious executive cannot help but be torn by an internal conflict between wanting the reward and wishing to avoid the enormous risks involved. Mitchell and Company began tracking executives who were faced with these kinds of challenges to see what the best practices are. We were impressed to find a few cases where enormous odds were successfully overcome. These executives were approaching their issues much differently from those who usually experienced setbacks.

The No-Nos
From comparing both groups, we were able to isolate what most executives do that is frequently harmful in this kind of high risk, high reward situation:

(1) Put off making a decision, hoping that a better alternative shows itself. This can be very risky when a better alternative does not appear, because the passage of time often makes the potential reward smaller and the risk higher.

(2) Choose to avoid the bold step, hoping to off-set the risk by pursuing incremental progress in a variety of places. This approach can be effective in delaying the advent of a challenge to your position, but may not succeed in averting many of the eventual negative consequences.

(3) Take the plunge and address the problem directly, but go too slowly to meet the challenge. Alternatively, costly errors may occur that not only create delays, but reduce many of the benefits you had hoped to achieve. In either case, the problem is failing to think through in advance what needs to be done, and by when.

Examples of these mistakes can be found on pages four and five.

Some companies choose to alternate among the three approaches above. That direction generally seems to produce the worst results.

What makes these high risk-high reward tasks difficult is that you and your company will probably not have done the task before that you must now do flawlessly. How many difficult things did you do perfectly the first time? If you are like most people, very few seemed to go smoothly at the first attempt, until someone teaches you a good way to succeed. Some elements of the process Mitchell and Company has found valuable since our early days, but others were added more recently by drawing on case studies of those who produced outstanding results on the first try through mastering the organizing efforts.

A new management process, Error-Proof Management, allows you to rebalance this wrenching risk-reward challenge by removing great amounts of the risk when you have only one chance to get it right. Error-Proof Management helps you do this by learning from others facing similar issues, adding inexpensive redundancy that reduces substantial unnecessary risk, reducing the number of people involved in making the change, and creating checks that will allow you to catch errors soon after they occur.

Potential Benefits of Error-Proof Management

First, as the quality movement has shown, many of the costs we incur in doing anything come from correcting errors or redoing steps. If a first effort would normally have eight iterations to reach the right result, we can obviously reduce our costs by more than 50% by getting rid of many of those iterations. When Chrysler first reduced the cycle time to develop a new car, they saw their car development cost drop substantially. As valuable as that cost reduction was, the benefits of having the new cars in the market sooner were even greater. Chrysler's increased market share in the 1990s partially occurred because of this change.

Second, getting rid of the iterations should normally shorten the elapsed time involved in the process, which means that we get the benefits sooner. This earlier arrival (an opportunity cost in the language of economists) may be worth even more than the costs that we eliminate with fewer iterations. Because HBO had experience with developing its Home Box Office cable service, it was able to launch its second service, Cinemax, in a short period of time to accelerate its reaching the break-even point.

In many races to the market (especially for new products), the rewards are disproportionately greater for those who arrive earlier -- especially when there is a high rate of repurchase. This circumstance often occurs in markets where a standard will be set by whoever the first supplier is, so that it is expensive and difficult for the customer to switch. This benefit is frequently larger than the two above combined because it accrues over the life of whatever it is that you have accomplished. We have already seen this in the case of Chrysler. Intel also earns far more money from its new generations of microprocessors than do its clone competitors.

If the delay is too long, you may receive no benefits from your efforts. In many situations (like industry consolidation), this may mean that what you do today will also be less successful. TWA in the airline industry may be such an example. As stronger airlines aligned with foreign partners to help build an international traffic flow and ensure a source of cash infusions during industry downturns, TWA had to sell off many of its best routes and gate locations to survive.

Learning Error-Proof Management is quite inexpensive relative to the potential benefits. We would expect that those using the process would quickly earn more than 1000 times the cost of installing this management process. A primary reason for this high return is that the process can be learned and mastered quickly.

Perhaps the best example of these benefits is that after we began using Error-Proof Management on the work conducted by Twenty Times Progress (the project to help you achieve 20 times your normal rate of progress over 20 years), that project became remarkably more effective and successful. Creating parallel development and implementation programs was a very important part of this success, because it sped up development and linked more easily into other new management processes, how to communicate, and how to use the processes.

You can get started by working on some small issues after receiving the training so that you will be very good at this process the next time a critical path of success is required. These issues can be pursued at any level of your organization.

Key Problems with Traditional Ways of Pursuing Critical Paths of Progress

There are many problems with traditional ways of pursuing critical paths to progress. Here are a few.

Misdiagnosis of the issue is a typical problem. An executive described an excellent example recently. His company is the world leader of a certain type of electronic product, and had a weak position in one end market. As part of a strategy process to strengthen their world-wide position, they decided to gain share in end markets where their position was weak. As a result, they made an expensive acquisition in the military market place (their weak end market) just before the Cold War ended. The investment turned into a disaster, and the funds and attention could have been much better focused on the company's best end markets if better questions had been asked and appropriate objectives were set.

Failing to explore alternative ways of accomplishing the result is another common problem. Many organizations only consider internal development, as an example. Apple Computer decided that it needed to greatly upgrade its operating system to keep up with what Microsoft makes available for personal computers, and then failed to deliver the needed upgrade on time. Well after the operating system should have been almost complete, Apple decided to purchase Next (a personal computer company with an outstanding operating system led by Steven Jobs, an Apple co-founder) to get their help in developing the new operating system. This acquisition could have been done much earlier at lower cost, creating the likelihood of being done sooner with the operating system with less risk to Apple's precarious market and financial position.

Pursuing only one path at a time is a third common problem. AT&T first decided to expand into computing off of its UNIX operating system. When that approach faltered, the company began competing based on low-cost hardware. When that continued to falter, the company bought NCR and merged the two operations together. That direction also flopped, and the combined operations were eventually spun-off. One might expect to hear that they have reentered the computer market with an IBM clone strategy at any minute, since that is about the only approach AT&T has not yet used and failed at.

Creating complicated human organizations to pursue the opportunity is another frequent problem. The more people, the slower the progress and the less the results because of all the bureaucratic problems that typically occur in these situations. ITT tried to grow its stock price for many years by providing steady earnings-per-share growth, aided by purchases of dozens of companies using high multiple stock. The result was to become the most complicated company ever constructed. The earnings-per-share growth and the stock price both languished after Harold Geneen retired. Since the company began to break itself into smaller and more easily managed units under Rand Araskog, the combined stock value of the units soared prior to being taken over in 1998.

Underestimating the importance of setting the right timeframe to accomplish the key tasks may also trip up others. Set the time at too long, and Parkinson's Law (tasks expand to fill the time available) takes over. Set the time too short and important steps are skipped (for example, some of the diet drugs that had to be withdrawn did not have adequate testing).

How Does Error-Proof Management Work?

Here are a few of the principles we apply in the process:

(1) Be sure that you study the errors and successes of others facing similar tasks before deciding how to proceed. Apple could have learned a lot from Microsoft about how to develop value from an operating system, from Dell about how to produce and deliver hardware, and from AT&T about how not to proceed.

(2) Locate parts of the key tasks where redundancy would greatly reduce risks from which you cannot easily recover, and evaluate their cost. Intel has three microprocessor teams working simultaneously on its next three generations of microprocessors. If they have problems or are late with one generation, they are still in the ball game with the other two teams and generations. As a result, they are unlikely to permanently lose position in microprocessors. This perspective of considering how much redundancy you can afford versus the costs and the benefits of the alternative may permit you to simultaneously pursue different solutions, with different teams, and at different speeds for the same opportunity. Microsoft has been doing this with each of its end markets, using combinations of ventures, new software, and different technologies to attack the same issues.

(3) Implement your direction with a minimum of hand-offs. Make each step as simple as possible. Coca-Cola's very successful revitalization of its bottling network over the last 15 years was accomplished by the focused attention of a small number of senior executives to make the key decisions. PepsiCo's more fragmented process led to much slower results in the same area.

(4) Create a solution process that has a great ability to self-correct its own errors near the time that they occur. This means testing your decisions whenever they are crucial before moving forward very far. Quaker Oats has been reeling from the effects of its failed acquisition of Snapple. Almost 5 years passed before effective corrective action occurred. Further testing of the implementation concept before the acquisition occurred might have led to a different result.

These principles and others are combined into a process that can be applied to any situation, no matter how large or small, important or unimportant. Imagine how much better off you would be if fewer errors occurred in the first place, and your progress could be speeded up. Error-Proof Management gives you a safe way to remove lots of risk when it is very valuable to be right the first time. The process does this by drawing on key experiences of others, creating parallel efforts where the risk-reward is attractive, simplifying the organization pursuing the choices, and creating timely checks.

Next Steps

If you would like to learn more about Error-Proof Management, please email Don Mitchell at askdonmitchell@yahoo.com or donmitch@fastforward400.com, and you will receive a series of questions tailored to your use on existing challenges where your room for error is limited, in order to help you test your potential to benefit from this exciting and valuable process.

© 1999 Mitchell and Company