Risky Business: Part 2

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Yesterday (Part 1), we discussed why we need risk assessment- and alluded to why we fail this process.  We really do not understand risk, at all. The chance that a nuclear reactor will experience catastrophic failure in any given year is pretty low; but the probability of a nuclear accident happening anywhere is much higher.  The same is true when one considers a terrorist attack or even possibility of another BP oil spill.  And, the wild card in every calculation is human error (or stupidity).

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Risky Business: How we perceive risk- and how we must do MUCH better (part 1)

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I said I was going to discuss risk last week; today seems like the perfect day to do so. Yesterday was the anniversary of the (almost) Iranian Revolution. The younger generation (about ½ of all Iranian citizens) were dismayed at the election “results” (not likely to have been as advertised), and for a few weeks, took to the streets and tried to change the way the country was governed. It failed (at least as of today). Most of the leaders understood there was risk to this position; I am not sure they understood that risk meant that their government would callously kill them. Likewise, the Tiananmen revolution in China- it’s not likely that these folks expected 3000 to be killed. Or, to date things back further, the students from 1968 did not believe that the Chicago police would “billy-club” and beat them. These are political- not technological- risks.

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Our success may be due to luck- so we learn way more from failures.

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For the past 60 days or so, one of the prime topics of conversation has been the BP oil spill. This situation (fiasco? debacle?) is a great way to being discussion about our perceptions of risk (poor, at best). But, I will leave that concept for another day. Instead, I will discuss our ability to analyze our abilities to determine success.
Prior to 20 April, we thought we have solved the problem of deep-water drilling. After all, we were recovering billions of barrels of oil from the Gulf of Mexico for a long time. Had we written our history books on the 19th of April, they would all laud our ability to solve these problems.
Likewise, until 2009, Toyota was considered a technological marvel, a paragon of attention to customer needs. Books HAVE been written about its success. Alas and alack, they were a day early and way off the mark. (Actually, in Toyota’s case, they were not off the mark for most of the period. Instead, Toyota changed its business rules and concepts- to the detriment of its brand.)
This is exactly how we analyze most things. Those of us who start companies (or are hired to run them) all take great comfort in how well things run (generally). And, when they run well, we crow about how well we managed to design our business models. Unfortunately, many of these businesses are more lucky than well run. Moreover, because it is not clear how much luck played a part in the venture’s success, it is hard to assess “lessons learned”.
No, we learn far more from our failures than our successes. I admit, some of our failures could be due to luck. But, because we failed, we analyzed. We determined (assuming we were totally honest) what role everything played in our demise. And, then, we developed new systems to insure that a repeat performance was not among our future repertoire.
We may not all be guilty like BP/TransOcean/Halliburton. (I list all three because each one contributed to the disaster; the ultimate culpability will be determined later). To be honest, the biggest problem was overconfidence. We had been doing it forever; we were really smart and could start looking for ways to make more money by cutting corners. Oops- not true.
This is exactly what Toyota did. It’s what our mortgage bankers did. And, it’s what we could do just as easily. We need to take the time to analyze all potential failures- each time we change a process – business or production or technical.
As another example, many years ago, we hired an individual who was talented- and overqualified- for the position advertised (and for which he was ultimately hired). But, he was desperate for work (we were a technical firm in a small town; entities such as ours were not prevalent in the area, and he loved the area). So, we hired him.
As his experience with us (and ours with him) developed, we gave him more leeway and authority. He was working on our team to develop a new method to pasteurize (sans heat) apple cider. Our bench testing and our pilot plants all showed that our design was on the mark. We gave this individual the chance to scale up the process and oversee its installation at the actual facility.
It wasn’t a big project (as our projects went), but the next phase was worth about two to three times his salary. He was thrilled. And, he made a mistake- one that cost us about four times his salary to fix (and to vex us until we completed the redesign/reinstall).
He- and several of us- effected a complete post-mortem, after the client was satisfied. We determined where the errors were made, why the choice was incorrect, and what we could learn from this for all of our designs.
The key point is that individual managed to become the COO  of one of our operating companies. He knew the costs of failure, learned to examine “obvious” facts that are often wrong, and how to anticipate and correct deviations.
That never would have happened if his project management had proceeded without a hitch. And, from that error, we learned much and he learned much, so much so that he helped us generate more than 50 times his salary for the next decade.

Continue reading Our success may be due to luck- so we learn way more from failures.

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Our success may be due to luck- so we learn way more from failures.

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For the past 60 days or so, one of the prime topics of conversation has been the BP oil spill. This situation (fiasco? debacle?) is a great way to being discussion about our perceptions of risk (poor, at best). But, I will leave that concept for another day. Instead, I will discuss our ability to analyze our abilities to determine success.
Prior to 20 April, we thought we have solved the problem of deep-water drilling. After all, we were recovering billions of barrels of oil from the Gulf of Mexico for a long time. Had we written our history books on the 19th of April, they would all laud our ability to solve these problems.
Likewise, until 2009, Toyota was considered a technological marvel, a paragon of attention to customer needs. Books HAVE been written about its success. Alas and alack, they were a day early and way off the mark. (Actually, in Toyota’s case, they were not off the mark for most of the period. Instead, Toyota changed its business rules and concepts- to the detriment of its brand.)
This is exactly how we analyze most things. Those of us who start companies (or are hired to run them) all take great comfort in how well things run (generally). And, when they run well, we crow about how well we managed to design our business models. Unfortunately, many of these businesses are more lucky than well run. Moreover, because it is not clear how much luck played a part in the venture’s success, it is hard to assess “lessons learned”.
No, we learn far more from our failures than our successes. I admit, some of our failures could be due to luck. But, because we failed, we analyzed. We determined (assuming we were totally honest) what role everything played in our demise. And, then, we developed new systems to insure that a repeat performance was not among our future repertoire.
We may not all be guilty like BP/TransOcean/Halliburton. (I list all three because each one contributed to the disaster; the ultimate culpability will be determined later). To be honest, the biggest problem was overconfidence. We had been doing it forever; we were really smart and could start looking for ways to make more money by cutting corners. Oops- not true.
This is exactly what Toyota did. It’s what our mortgage bankers did. And, it’s what we could do just as easily. We need to take the time to analyze all potential failures- each time we change a process- business or production or technical.
As another example, many years ago, we hired an individual who was talented- and overqualified- for the position advertised (and for which he was ultimately hired). But, he was desperate for work (we were a technical firm in a small town; entities such as ours were not prevalent in the area, and he loved the area). So, we hired him.
As his experience with us (and ours with him) developed, we gave him more leeway and authority. He was working on our team to develop a new method to pasteurize (sans heat) apple cider. Our bench testing and our pilot plants all showed that our design was on the mark. We gave this individual the chance to scale up the process and oversee its installation at the actual facility.
It wasn’t a big project (as our projects went), but the next phase was worth about two to three times his salary. He was thrilled. And, he made a mistake- one that cost us about four times his salary to fix (and to vex us until we completed the redesign/reinstall).
He- and several of us- effected a complete post-mortem, after the client was satisfied. We determined where the errors were made, why the choice was incorrect, and what we could learn from this for all of our designs.
The key point is that individual managed to become the COO  of one of our operating companies. He knew the costs of failure, learned to examine “obvious” facts that are often wrong, and how to anticipate and correct deviations.
That never would have happened if his project management had proceeded without a hitch. And, from that error, we learned much and he learned much, so much so that he helped us generate more than 50 times his salary for the next decade.

Continue reading Our success may be due to luck- so we learn way more from failures.

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Let’s re-evaluate our basis for healthcare!

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Many of you know that I have been writing (and some of you may have termed it ‘ranting’) about health care reform in America for several years. But, that’s because we have allowed ourselves to develop a system of reimbursement that is biased for testing and against outcomes. We also have a system that (in my humble opinion) provides an incentive to those lacking insurance to employ the services of a hospital emergency room.

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Continuously Re-evaluate Your Basis

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As a chemical engineer (ok, among other specialties, but this is my first love and it affects how I approach almost everything in my life – business and personal), one of the first things we learn is material balances. This formula:
Input-Output + Generation – Consumption =Accumulation
applies to almost anything. But, the key consideration that I want to discuss here is that you have to determine the system boundaries. If we had a factory making widgets, we could define the system boundary (called the basis) as the entire plant. Then, all the raw materials coming into the plant would be the inputs to the system and all the products coming out would be the outputs; any waste stream would also be an output. Assuming that we are not building inventory explosions occur, our material balance would then be: Raw materials In- Products Out- Waste Streams Out = 0. But, if we were to analyze the mixing chamber alone, we would have a completely different material balance. And, by analyzing this factory on a component basis (and the combining all these components together to provide the full factory system), we would develop a great deal more information about what was going on in our factory. We should be able to determine what any potential changes would have on our ability to make production goals. If we pick the wrong basis, we may not learn anything of use about the facility.
In medicine, our augmented knowledge is forcing us to re-evaluate our bases, the ideas upon which we provide proper patient care. In dialysis, this has meant that, over the decades, we stopped looking at the ability of the dialyzer to remove a (theoretical) middle molecule, to what we thought was a more scientific one of providing the patient a Kt/V of 1.5 or so (where K was the clearance (the removal of toxins by the dialyzer), t was the time of dialysis, and V was the volume of fluid in the patient). In treating cholesterol, we now are learning that it’s not just “good” (high density lipoprotein, HDL) and “bad” (low density lipoprotein, LDL) cholesterol, but that “bad” cholesterol is what we could measure before; it’s a specific component of LDL (small density lipoproteins) for which new testing has been developed, that is the true culprit. So, you see that we continually must reevaluate how the concepts upon which we base our decisions to provide patient care.
We need to do the same things when addressing how we run a company. Our basis, the fundamentals by which we run the enterprise may no longer apply. Ten years ago, we based upon business on certain market conditions. But, when the recession came, the market dynamics shifted. We need to reevaluate our assumptions, our bases to insure that our enterprise can compete and grow- at the current market conditions.
Or, we may have been making a specific product that provides a wonderful profit potential. But, our distribution system is not happy that we only provide one product; it wants to “rationalize” the number of vendors. To survive, we either have to develop (or sell) a wider range of products (some with small profit potential), align with other vendors in marketing coop so mutual product lines would be bigger, or some other creative solution.
The key take-away here is that we need to take the time- at least once a year- to evaluate our bases, the assumptions we use to manage and grow our ventures.

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First they ignore you, then they laugh at you, then they fight you, then you win…

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I heard this quote (Mohandas Ghandi) earlier this week and it reminded me that this was how many of the new products/ventures with which we have been involved progressed. It is something to take to heart- and use as you grow your venture or introduce a new product.
I will provide an example, with certain information omitted. A few years ago (ok, let’s not get TOO accurate) we developed this household consumer product . It was a pretty novel idea (if I say so myself). But, no one really paid attention to the venture OR the product. After we got a little publicity, a few consumer firms actually called to say that we were crazy. I admit, we were (are?) a cocky bunch, so it did not faze us much, but it was hard to take as it kept coming, even from some of the large chains where we were hoping to have the product shelved and sold.
By the end of the first year, the product (we were managing this for our client) was generating about the sales volume we had projected (we were a month behind in our projections. And, all of a sudden- we found that one of the companies that told us we were nuts- was coming out with a competing product.
The good news is that ours was better. Our tests showed that our product (a cleaning item) provided about a 10% increase in whiteness, compared to theirs. We used that as part of our campaign. We even made an improvement in the packaging (which increased the shelf life of the product), which helped us out. But, our competitor actually matched this change. (Our product was not patented; it was very hard to reverse engineer.)
By then end of the second year (when our involvement was scheduled to terminate), our client had 80% of the market share- and exceeded its goals for sales, as well.
The lesson is you should use the time when the marketplace ignores you to insure that all your ducks are in a row, the testing matches your goals, and you are developing your organization. You will need this to bolster your egos when you are being derided. But, this lead time (especially if you are small entity) gives the time to fine-tune your business processes for the coming battle, when you do have competitors. And, as you refine and calibrate your processes for the changes in the market place, you can insure your ultimate win.

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