Good Honest Dollar $$

(Image by U.S. Coast Guard via Wikipedia)

It’s a pity when an otherwise impressive management performance is ruined by a disaster.

But that is exactly what has happened at BP.

Prior to the oil spill in the Gulf of Mexico, Tony Hayward and his team had done a tremendous job of improving practices and restoring the reputation of the previously poor performing and accident-prone multi-national.

But now, his credibility has been (rightly) damaged. 

 
A huge rebuilding effort …
As described by Guy Chazan in the Wall Street Journal, prior to recent events, efforts on the part of Tony Hayward and his management team to restore the fortunes of the BP had been exemplary.

After taking the helm in 2007 (at a time when the company had been plagued by poor management, allegations of impropriety and an appalling safety record), Hayward immediately set about turning things around. Operations were simplified, costs were cut, production levels were boosted and worker injury rates were reduced.

These efforts paid off. Last October, the company announced a $4.7 billion third quarter profit – well above analyst expectations. And in January this year, BP’s market capitalisation overtook that of Royal Dutch Shell for the first time in three years.

 
… but Deepwater changes everything
Alas, much of that has now been undone, and the credibility of Hayward and his team has been severely damaged.

Rightly so, too. And rightly so for a number of reasons:

 
• Magnitude of the disaster.

Consider this: eleven workers missing (presumed dead); seventeen injured; more than four-hundred species under threat; and an estimated financial impact of $2.5 billion to the fishing industry and $3 billion in tourism along Florida’s pacific coast (refer Wikipedia) – that’s a catastrophe by any standards.

To be fair, it must be acknowledged: that we do not know the extent to which (if any) these events were preventable; that some accidents do occur even where reasonable precautions are taken; and that the company does seem to be doing everything they can to stop the leak.

Nevertheless, no management team can preside over a disaster of this magnitude with their reputation intact.

 
• Previous assurances.

In a 52 page document which BP submitted to the federal Minerals Management Service in 2009, the company gave assurances that:

“… it was unlikely that an accidental surface or subsurface oil spill would occur from the proposed activities…” 

and that even in the event that an accident occurred;

“.. due to the distance to shore (48 miles) and the response capabilities that would be implemented, no significant adverse impacts are expected.”

You can’t go giving assurances like that without significant consequences to your credibility when damage of this magnitude occurs.

 
• Pre spill precautions.

Related to that are issues associated with pre-spill precautions.

Specifically, although the rig had a blowout preventer installed, it was not fitted with remote control triggers in case of emergency.

Apparently, though these devices are mandatory for offshore drilling in countries such as Brazil and Norway, this is not the case in America. Nevertheless, the cost of having them (approx $500,000 – refer Wikipedia) looks pretty paltry against both impact of the spill, both in terms of the direct cost to shareholders and (more importantly) the social, environmental and economic cost from a broader perspective.

 
• Lack of preparedness.

Judging by responses in a Wall Street Journal online discussion forum, most folks seem pretty satisfied that the company is genuinely doing all it can to stop the leak.

Still, management don’t seem to have much idea what to do, and questions must surely be asked about why they did not have effective procedures in place to deal with events like this.

 
Credibility rightly affected:
Hayward has made a pretty good effort, and it’s a shame to see the reputation of his team destroyed.

But you can’t preside over anything like this without severe credibility damage.

After the events of the recent years, news of the SEC action against Goldman Sachs has not done much to help public perceptions of either the investment bank itself or of Wall Street in general.

(On April 16, the SEC announced its intention to charge the investment bank with ‘Fraud in Structuring and Marketing of CDO Tied to Subprime Mortgages.’ For a detailed background, read the SEC media release and Goldman’s response)

Here’s my two bob’s worth on all of this:

 
• Goldman are not (yet) guilty.

In the court of public opinion, it appears that some have made up their minds – guilty.

This viewpoint does have some logic. The SEC investigation ran for more than a year, and charges would not been have bought about in absence of a plausible case.

Nonetheless, these types of conclusions are pre-mature. For one thing, the SEC proceeded only reluctantly [apparently they were split three-two on whether to proceed (refer article)], inferring that the case is not watertight. Moreover, the case is genuinely in dispute, and only those close to the transaction in question have any idea what really went on.

Suspicion about the big end of town is natural. But by itself, it is a weak basis on which to infer guilt.

Goldman are only guilty if and when they are proven to be so in court.

 
• Goldman are not necessarily morally guilty.

Legally guilty or not, weren’t their actions immoral?

Not necessarily. At least not with regard to the transaction to which the SEC action relates.

It is true that Goldman did arrange a transaction whereby one of their clients (hedge fund Paulson & Co) would profit from a deterioration in the US housing market.  To many, this seems galling – Paulson stood to gain from the pain of ordinary Americans.

But there is nothing inherently wrong about this, nor are there any problems with Goldman facilitating the efforts of their client in this regard. Investors are well within their rights to bet for or against the market as they please. That’s simply part of the normal, healthy functioning of the market.

 
• The real problem is disclosure.

But there might be a problem in the area of disclosure.

Was information Goldman provided to ACA and IKB entirely truthful and accurate? If so, they have done nothing wrong. If not (as the SEC alleges), then their conduct was unprofessional, unethical and almost certainly illegal.

That’s what it boils down to – disclosure. Nothing more, nothing less.

(Along with Paulson and Goldman itself, ACA Capital Management and IKB were the other investors involved in the transaction to which the charges relate)

 
• Goldman will bounce back.

In spite of all its troubles, the $3.5 billion profit which they announced on April 20 provided a fair bit of comfort for management – profits of this magnitude tend to do that.

The announcement served to underscore an important point: for Goldman, problems associated with the allegations are manageable, serious though they are.

With around $73 billion in shareholder funds (refer article), Goldman should be able to handle any financial penalties associated with the case (investor losses totaled around $1 billion).

And damage associated with the ‘guilty’ verdict in the court of public opinion may be overstated. Provided Goldman continues to deliver the goods for clients, they won’t go away – nor will the firm’s top talent.

Therein lies the biggest danger: a loss of confidence in the firm on the part of clients themselves. But even this should be manageable and a mass exodus seems unlikely.

Goldman seems to have a history of being able to bounce back after the storms.

Though it may suffer a few bumps and scratches, it will almost certainly ride out this one pretty much intact.

In a recent discussion, I highlighted some of the underlying factors which contributed to the recent debacle surrounding Toyota and problems relating to unintended acceleration in some of its vehicles.

Today, I would like to focus on the company’s response – where it was lacking and why.

 
A tardy response
Toyota’s corporate response to the crisis fell short in three key areas:

 
1) Belated nature of apology.

Given the dates of the first two recalls (November 2, 2009 and January 27, 2010 – refer Wikipedia), consumers have every reason to wonder why they had to wait until February 5 this year to receive an apology.

This delay was unacceptable, and served as a clear indication of just how far behind the eight ball management was on this issue.

 
2) Mixed signals.

In September last year, the public were told that the problem related to floor mats, and that 3.8 million vehicles would be affected.

Then, on January 21, it was the sticky pedals – an embarrassing admission (which came only after it was proven that some crashes weren’t caused by floor mats) given previous denials that mechanical problems had anything to do with it. This affected an extra 2.3 million vehicles in the U.S.  (The next day, a further 1.8 million vehicles were recalled in Europe and 75,000 in China – refer Wikipedia).

Finally, as a separate issue, consumers were told on February 09 about problems with the anti-lock braking system in the Prius hybrid model – apparently the result of a software glitch.

The inconsistent nature of these signals does not inspire confidence on the part of consumers or the general public.

 
3) How far back does it go?

But worst of all are lingering questions about how far back the problems go, what the company knew and why action wasn’t taken sooner.

According to FairWarning, Toyota noticed sticky pedal problems in August last year – months before the recalls. Worse, though they have continually denied problems in this area through eight separate investigations, a CBS News report indicates that the company was aware of electronic problems causing some cars to ‘surge’ unexpectedly as far back as 2005. And finally, according to Wikipedia, there have been 21 deaths believed to be associated with the pedal problem since 2000.

Why, the public asks, is action being taken only now?

 
Why the poor response?
The reasons behind the deficiency of the response have been the subject of a significant degree of media discussion in recent months.

No doubt a range of factors were at play:

 
• Human error.

First and foremost, let’s not forget the role of basic human fallibility in all of this.

Belated as the response was, any ideas about foul intentions or the deliberate placing of driver safety in jeopardy are not credible. Instead, Toyota simply failed to grasp the significance of the problem – a basic error of judgment.

Toyota is not the first company to suffer from misjudgment of these proportions – nor will they be the last.

 
• Expectations and pressure.

Notwithstanding the above point, the momentum associated with expansion of the magnitude which the company experienced over the past decade (it replaced GM as the world’s top selling automaker in 2008) created a great deal of expectation regarding continued growth in sales volume.

The resulting pressure undoubtedly made it difficult to be open with the general public about safety issues and mechanical problems, less an overly candid approach in this regard jeopardise sales momentum.

 
• PR Strategy.

Another factor, according to PR Week, may be a general lack of awareness on the part of many Japanese firms, including Toyota, about the whole concept public relations.

I don’t think this is particularly significant. Whilst it is true that the company’s handling of this whole affair has been less than exemplary, any problems relating to PR management are merely scratching the surface.

The real issues and underlying problems go deeper – much, much deeper.

 
• Cultural issues

As they did with the cause of the problems (refer previous discussion), cultural issues no doubt played a part in the company’s poor response.

Traditional Japanese culture places a lot of emphasis on the concept of ‘face’, whereby any loss of public face strikes at the heart one’s identity and must be avoided at all costs, especially for those in a position of seniority or authority. For senior management of such a revered organisation, the embarrassment associated with public acknowledgement of mistakes or problems of this magnitude (which would be bad enough for anyone) cannot be underestimated.

Reluctance to speak openly about these kinds of problems extends to middle and lower level employees as well – lest they cause embarrassment to their seniors (not to mention their corporate identity, to which their own personal identity is so closely tied).

Moreover, deep down, it may have been difficult for Toyota management to acknowledge that they really had a problem. Problems associated with denial in this regard are not limited to Toyota or Japan in particular, but the Japanese do seem to experience a particular degree of difficulty in this regard.

Perhaps this is partly a function of the Japanese obsession with craftsmanship and quality (and the subsequent embarrassment when things are not up to scratch). Or possibly it could spring from their drive to avoid confrontational situations – with a resulting temptation for uncomfortable matters to be swept under the carpet.

Whatever the reason, this sense of deep-down denial could well go some way toward explaining why Toyota management failed to grasp the magnitude of the situation.

.

Kraft’s recent takeover of Cadbury represents a historic moment for the world’s second largest food and beverage company.

But the contempt which the company has shown toward British workers and lawmakers regarding broken promises about the future of Cadbury’s Somerdale plant is shocking.

Workers deserve the truth. Those employed at target companies should at least be entitled to expect prospective acquiring firms to act in good faith when making pledges regarding continued employment.

This did not happen, and Kraft’s resulting loss of reputation is well deserved

 
The broken promise
Assurances regarding the future of Cadbury’s Somerdale plant in Keynsham represented a key plank of Kraft’s pitch to British lawmakers during the course of the protracted four month battle to gain control of the confectionery manufacturer.

The plant had been due to close in spring, but Kraft had consistently promised to keep it open – a pledge repeated on the day the merger was approved.

But shamefully, the company changed its tune almost immediately after, announcing just one week later that the factory would indeed close after all, and that all four-hundred workers would be made redundant as a result.

 
Contempt for law-makers
Making matters worse are management’s feeble efforts to pass the blame and the contempt which the company has shown to British lawmakers.

Rather than bothering to show up before British MPs at a hearing of the Commons Business Select Committee (which is investigating whether or not Kraft mislead unions, workers and politicians), chief executive Irene Rosenfeld merely dispatched three middle ranking deputies.

Even more abysmally, one of these, Executive Vice President Marc Firestone, sought to transfer the blame to onto former Cadbury management. Whilst Mr. Firestone did provide a “sincere personal” apology, he went on to claim that Cadbury had failed to share information due to the hostile nature of the bid. Kraft, he said, had acted in ‘good faith’, had been forced to rely on limited information (such as Google images of the factory exterior) and did not realise that Cadbury had invested tens of millions of pounds into a new Polish factory.

 
Pathetic
Where do we even begin?

To be fair, the difficulties which the company would have faced in gaining approval for the merger in absence of the pledge must be acknowledged. It must also be acknowledged that Kraft could not have been expected to continue to operate an unviable plant, particularly in light of the extent of investment in the new factory.

But this is no excuse.

Let’s start with the broken promise itself. The company changed its tune mighty fast once U.K lawmakers could no longer stop the merger – surely we can’t seriously be expected to believe that they ever had any real intention of sticking to their pledge.

(The problem is not the factory closure itself – unfortunate though they are, factory closures and job losses are essential from time to time. The problem is in the way this was done, and the contempt with which workers were treated during the takeover process)

Equally poor were their buck passing efforts. Kraft can complain all they like about how Cadbury management played hard ball and they were forced to act on limited information. But it was Kraft who made the pledge, not Cadbury management. Kraft must therefore acknowledge sole responsibility for this debacle. 

(Seriously, what company of any integrity makes ‘good faith’ promises about keeping factories open without any of its staff having actually seen the factory in question?

Besides, the factory had been slated for closure – did Kraft really have no inkling that it might not be viable?)

Added to this is their blatant lack of respect for the House of Commons. For any chief executive of such a large multinational not to appear before a ministerial committee despite requests for her presence is unprofessional. Rosenfelt’s conduct in this regard shows distain for British law-makers and the people they serve.

Nor was her reason for being absent overly impressive (she had to attend a board meeting). According to Peter Luff, chairman of the committee, the date for the meeting had been set at Kraft’s behest – couldn’t they have chosen a date when she was available? Alternatively, could they not have rescheduled the board meeting? And for that matter, is a company board meeting really more important than showing up before a British ministerial committee?

The way in which Kraft has conducted itself throughout this whole affair has been unprofessional and reprehensible. Their resulting loss of respect is thoroughly deserved.

Respect should be reserved for companies who conduct themselves in a manner of professional integrity.

.

(Image provided by Mytho88 via Wikipedia)

Just a year or two ago, Toyota was a model case study in business management.

Recognised as a leader for quality, safety and reliability, and modeled by rivals for its ‘lean production’ system, the Japanese giant was arguably the most respected car maker in the world.

Nowadays, the company still features in case studies – but for all the wrong reasons.

In this series, I would like to look at what exactly went wrong.  In the next post, I will talk about what lay behind the company’s poor response to the crisis.

 
Where did it all go wrong?
Problems associated with unintended acceleration are well documented, as is Toyota’s sluggish and poor response.

But to attribute the current crisis to any one singular cause is over-simplistic. More likely, a combination of contributing factors was at play:

 
• Expanding too fast.

Back in 2002, the company set a goal to expand its global market share from 11% to 15% (refer article).

Sensible and manageable though that may sound, commentators such as James Womack, one of the authors of “The Machine that Changed the World”, a prominent book about Toyota’s innovations in manufacturing, believe that this almost certainly contributed to current problems.

For one thing, management focus became consumed with the relentless push for growth, causing traditional considerations such as safety and customer satisfaction to take a back seat.

In addition, a by-product of this was a massive expansion within Toyota’s supply chain, with the company being forced to place increasing reliance on newer suppliers outside of Japan. Reports suggest that unlike traditional Japanese suppliers, who share an intimate working relationship with the automaker, many of these new suppliers were not familiar with Toyota’s methods, nor was expansion of the supply chain itself matched by sufficient effort to integrate new suppliers into the production process or to ensure that quality control was not compromised in the process.

 
• Complexity.

Coupled with growth came increasing complexity, both of the cars themselves and of Toyotas rapidly expanding production system.

As the Taiwan News puts it:

“In an average Toyota, there are about 24,000 inputs and outputs, with as many as 70 computer chips processing information and sending it on to other chips to operate the engine control units. It is a very complex system.”

Added to this are the company’s sprawling global operations – it now has more than 50 plants outside Japan and more models on the road than any other carmaker (same article). To manage all of this effectively would require an almost superhuman effort. The associated complexity almost certainly contributed toward current problems.

 
• Focus on the parts, but forgetting the whole

Another contributing factor, believes Kenichi Ohmae from The Christian Science Monitor, relates to the company’s excessive focus on minute detail and a loss of the bigger picture in terms of the overall workings of the engine as a whole.

A large aspect of the world renowned Toyota Production System (TPS) revolves around the Japanese concept of Kaizen, which focuses on continuous improvement in the manufacturing process. These improvements, in turn, tend to be smaller and incremental, and to stem from a bottom-up type of focus upon individual aspects of the production process.

Whilst there is nothing inherently wrong with this concept as such, problems arise where it is taken to extremes and management loses focus on the bigger picture of the vehicle as a system and how all of the parts work together as a whole.

 
• Cultural issues.

Cultural issues no doubt played a part as well, as did management style.

As I understand it, Japanese culture is characterised by strict hierarchies and an emphasis on maintaining group harmony at all costs. Questioning a senior is virtually taboo, as is causing a senior to ‘lose face.’ In this environment, lower level workers are expected to tow the line and problems at an operational level are rarely reported to senior management.

Combine this with a management style which was said to be highly centralised and largely disengaged from operations on the factory floor, and one could understand the scope for serious problems to go undetected.

 
Conclusion
It is likely that Toyota’s current problems stem not from a singular cause but from a combination of contributory factors.