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Leadership

Hitting ‘factory reset:’ How a willingness to recognize error and initiate systemic change can save your business

Published 2 February 2024 in Leadership • 6 min read

Too few businesses are learning from their mistakes, warn Carlos Cordon and Sameh Abadir of IMD, leaving their organizations underperforming and vulnerable.

C-suite executives often talk about learning from experience. But time and again, businesses fail to do so, repeating mistakes until disaster strikes. Consistent failure to absorb experiential learnings can lead to systemic failure. The challenge, then, is to reset the organization to recognize early warning signals and rectify issues based on past failure and success.

The ability of a business to adjust once it has recognized missed opportunities, failure and underperformance is integral to an ethos of continuous improvement. When organizations acknowledge failure and recalibrate accordingly, the benefits will quickly add up.

When the flaws align

However, as stated above, not all businesses take this sensible, productive approach. British academic James Reason has characterized what happens in many organizations as the Swiss Cheese Model. When slices of Swiss cheese are placed on top of one another, most of the holes won’t line up. Observers looking at the whole block will not realize that, beneath the surface, it is riddled with fissures; moreover, where the holes do align, the weakness permeates the whole structure.

In organizational terms, think of each slice of cheese as a step in a production process or a link in a supply chain. From the top of the company, many underlying weaknesses will be obscured; the crunch point occurs when the weaknesses overlap but, by then, leaders will have had multiple opportunities to intervene (assuming they are alert to the issues and are looking to do so).

Sometimes, that crunch point has devastating consequences. In 2005, an explosion at oil company BP’s Texas City Refinery killed 15 workers, injured a further 180, and cost the company billions of dollars. The US Chemical Safety and Hazard Investigation Board would subsequently trace the disaster to a series of mistakes and decisions made long before the accident, from technical errors to cultural issues. Each time, the warning signals were ignored.

Other failures are less costly in terms of human life, but result in major problems for the business in question. When fast-food chain KFC switched UK suppliers in 2018, for example, it ignored all the lessons about diversification, disruption and process that it had learned over many years of operation. Swapping a supplier with six warehouses spread out across the country for one with just a single warehouse – and, moreover, one that is sited by a motorway exchange with a history of traffic accidents and delays – might have saved money in the short term but, in the long term, it jeopardized the business. Almost immediately, a particularly bad accident closed the motorway exchange in question. As a consequence, four days later, three-quarters of KFC’s UK restaurants had run out of chicken.

Closing the gaps

Organizations that act on these red flags, even when the issue is comparatively small (in our cheesy metaphor, plugging the holes in each slice, rather than simply covering them with another) avoid such serious situations. Sometimes, this will require tough – even apparently disproportionate – action. But the most important response is to develop a culture in which that is the last time that this particular issue is permitted to affect the business.

unpopular
Translating common sense into common practice is harder than it sounds, often requiring leaders to take unpopular decisions and confront deep-seated behaviors and attitudes

Zero tolerance can be uncomfortable. There’s a famous story about a new head of operations at a leading consumer goods manufacturer who visited a factory for the first time to see how it operated. As the executive left the airport, he observed the factory manager (who had come to pick him up) cross the road without looking out for oncoming traffic. His response was to tell the manager that the visit was cancelled. If he had so little regard for his personal safety, the executive said, the manager couldn’t possibly be running the factory safely either.

The story went round the company quickly and each factory manager took note and adjusted their behavior accordingly. While harsh, it turned out to be a remarkably effective way to reset the company’s attitudes.

Towards competitive advantage

Learning organizations get it. Automotive manufacturer Toyota is a good example. The Japanese company famously pioneered just-in-time manufacturing: that is, producing exactly the amount of product required to fulfil customer demand for that period, rather than producing excess inventory in advance and supplying demand from stock. However, Toyota did not turn away from the lessons of the past.

In 2011, when Toyota’s supply chains were severed by the Fukushima nuclear disaster, the business began to insist that key suppliers maintain inventories of a minimum two months’ worth of the microchips used in its vehicles. Lean manufacturing was all well and good, it recognized, but the lead time for semiconductors was far too long to cope with another unexpected shock.

Fast forward a decade and Toyota was the only large automotive company in the world not to be hit by the global shortage of semiconductors caused by the Covid-19 pandemic. Even as its rivals were forced to suspend production, cars continued to roll off Toyota’s assembly lines.

How, though, to instill this far-sightedness across the business? After all, not every executive will be comfortable with humiliating an individual manager to make a point to everyone.

At aluminum giant Alcoa, CEO Paul O’Neill’s strategy was to create a crisis. His first speech to investors in the company focused on employee safety. It went down like a lead balloon with shareholders, who pointed out that, while Alcoa had a pretty good safety record, O’Neill hadn’t even mentioned the company’s high costs and low profits.

However, O’Neill saw safety as a galvanizing issue. He was determined to bear down on high costs and inefficiencies by inculcating a much deeper focus on process throughout the company. But he knew that this message would fail to inspire, while his commitment to zero worker injuries would win hearts and minds. To deliver on that commitment, he also recognized Alcoa would have to think in minute detail about every step of its process. It was the reset that the business needed.

Confronting the norms

Translating common sense into common practice is harder than it sounds, often requiring leaders to take unpopular decisions and confront deep-seated behaviors and attitudes.

In such cases, delivering a reset may require a different approach. It won’t be sufficient simply to order people to change their behavior: they need to be persuaded to do so. Advertising agencies, for example, have become adept at recasting risky behaviors, from driving without a seatbelt to smoking, as having terrible consequences. Those campaigns have worked.

The bottom line, however, is that someone has to say enough is enough. There may not be an obvious tipping point for that intervention, but the most effective leaders will seize the initiative. Recognizing that the methods employed in the past are inherently flawed and taking a radically new approach may require courage, but it is also often the most effective way to get people’s attention. More simply put: what got us here won’t necessarily be what gets us there.

Authors

Supply chain

Carlos Cordon

Professor of Strategy and Supply Chain Management

Carlos Cordon is a Professor of Strategy and Supply Chain Management. Professor Cordon’s areas of interest are digital value chains, supply and demand chain management, digital lean, and process management.

Sameh Abadir

Adjunct Professor of Leadership and Negotiation at IMD

Sameh Abadir is Adjunct Professor of Leadership and Negotiation at IMD. He advises companies on negotiations and runs negotiation workshops in English, French and Arabic. He has recently directed custom programs for Emirates Nuclear Energy Corporation, Jerónimo Martins, ArcelorMittal, and Merck, and he is Director of IMD’s Crisis Management online program. He was Co-Director of IMD’s signature program Orchestrating Winning Performance (OWP) and Co-Director of IMD’s Negotiating for Value Creation (NVC) open programs.

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