How to Avoid the Chain of Mistakes that Can Break Your Company

In 1980, one year after the Three Mile Island nuclear power plant disaster, Robert E. Mittelstaedt, Jr. served as a consultant to the Nuclear Regulatory Commission. In that capacity, he began thinking more and more about the fact that many physical accidents, such as the partial core meltdown at TMI’s Unit 2 plant, are caused by a whole chain of mistakes, or sequence of errors, that go unchecked for reasons usually related to an institution’s culture or the lack of processes in place to deal with failure.

“Over time, I realized that the same sequences of mistakes also occur in businesses,” says Mittelstaedt. “The big difference is that with the failure of physical systems – such as an airplane crash or nuclear power plant malfunction – the immediate reaction is to investigate the problem. Regulatory agencies, not to mention the public, step in to demand detailed analyses of exactly what went wrong and how the situation can be prevented from reoccurring. But in business, if mistakes are made and laws are not broken, you rarely see any formal investigation. Even when the companies themselves look into what happened, they don’t do it in a structured and rigorous way. They don’t learn anything from the process.”

Airline crashes or near-misses, says Mittlestaedt, who is a pilot in his spare time and the owner of a six-seater Cessna Centurion, are “so well-documented that you can see patterns behind the errors, and you can also see what the industry has done to dramatically improve its safety record through training, orientation, and the establishment of procedures and structures. I believe businesses can benefit from that same approach.”

This realization led Mittelstaedt, former director of executive education at Wharton and now dean of the W.P. Carey School of Business at Arizona State University, to write a book titled, Will Your Next Mistake Be Fatal? Avoiding the Chain of Mistakes that Can Destroy Your Organization (Wharton School Publishing). The book analyzes the common factors that underlie major failures ranging from disasters – like the sinking of the Titanic in 1912, the crash of Air Florida Flight 90 in 1982 and the fiery destruction of the Columbia space shuttle in 2003 – to serious, but not fatal, mistakes that occur in companies across all industries. Mittelstaedt dissects Coca Cola’s “New Coke” fiasco, Firestone’s tire debacle, Intel’s mishandling of its Pentium chip recall, American Express’s failed blue card Optima launch and Webvan’s ill-fated online grocery shopping experiment, in addition to missteps at companies such as Xerox, Motorola, Kodak, Enron and McDonalds, to name a few. He talks about Martha Stewart’s decision to sell stock apparently with inside information (an initial mistake which then mushroomed into several others) and he takes readers through the whole chain of events at Enron where a corporate culture based on arrogance and contempt for others eventually led to what was then one of the biggest bankruptcies in history.

The concept of Managing Multiple Mistakes, Mittelstaedt writes, “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 … until the situation is irreparable.” The Watergate scandal, he suggests, is perhaps one of the best illustrations of failing to manage multiple mistakes, “starting with the decision to burglarize Democratic party offices to obtain information that was of little value.” That mistake “was compounded severely by subsequent attempts to cover up” others, eventually leading to more and more unbelievable fabrications and finally, the resignation of the President. Business mistakes, too, have their own individual patterns and “sins of both omission and commission,” Mittelstaedt says, but most fall into the broad areas of strategy, execution and culture.

A recurring theme identified in Will Your Next Mistake Be Fatal? is the reluctance of many executives to acknowledge their failures. “In an era of shareholder litigation, admitting publicly that you messed up can put the company and shareholder value at risk,” Mittelstaedt says. “Also, with the focus always on performance, there is an attitude of, ‘Okay, we made a mistake. Let’s just straighten it out and get on with what we are doing.’ Managers don’t see any upside in analyzing and understanding the mistake chain.” He cites a story in the business press earlier this fall on Hewlett Packard’s recent decision to analyze why one of its divisions had not performed well and what could be learned from that experience. “It was the first time I had seen an announcement like that from a major company saying it was going to investigate itself.”

A Culture of Supremacy

The most disastrous sequence of business errors that Mittelstaedt describes in his book is the one that led to Enron’s collapse. “The chain of mistakes was so long, and in many cases purposeful in that [executives] were focused on trying to beat the system and drive up earnings,” says Mittelstaedt, who divides his book into mistakes that caused economic damage to the company but were not life-threatening, and those that threatened the entire viability of the firm. Enron was an example of the latter, and it is part of a chapter titled “Cultures that Create ‘Accidents,'” which includes analyses of what went wrong at American Medical International, Ford and Firestone in addition to Enron. “Culture is powerful,” Mittelstaedt says, “but what creates success may also kill you.” The cultures of companies can, especially in the early stages, help organizations see market trends before others, grow faster and weather competitive threats. And yet the same powerful force that binds an organization together for success “can also be a catalyst for, or even a cause of, failure.”

At Enron, Mittelstaedt says, all the mistakes made – including aggressive financial management and lack of oversight by the board and committees – “were the direct result of a culture of supremacy that was built consciously by CEO Jeffrey Skilling, CFO Andrew Fastow and others. They believed that the management team at Enron was simply more intelligent, insightful and skilled in all business matters than anyone else in the world.”

In a chapter subsection called “Enron – Living on the Edge and Loving It,” Mittelstaedt describes Enron as “one of the most complex mistake chains imaginable … a case of Multiple Failures to Manage Multiple Mistakes.” Once arrogance “became the dominant behavior for senior management at Enron, another very dangerous effect took place that had to do with pushing boundaries. Enron got so used to believing it could change the rules of the game … that it used structures so convoluted that the only conceivable purpose was to give the appearance of improved performance while obfuscating the truth … The entrepreneurial visionary spark and culture that had created early success …was smothered by the actions of senior executives who took risks to support their egocentric needs.”

Corporate culture, Mittelstaedt says, is clearly a critical part of any company. But “if an organization’s culture is one that discourages the delivery of bad news, then people will be afraid to speak up about problems they see.” Why, he asks, do we still talk about the Johnson & Johnson Tylenol crisis from 1982 – when seven people in the Chicago area died from Tylenol laced with cyanide – whenever there is a discussion of corporate culture? “Because it’s an extraordinary example of a company where people didn’t have to be told to do the right thing. It was ingrained in their blood, in their DNA. A plan came together very quickly and the product was recalled. The company didn’t say it was not going to do a recall because the deaths happened only in the Chicago area. The company understood that it could never know that for certain.”

Most of the examples in Will Your Next mistake Be Fatal? do not involve massive fraud (Enron) or death (airline crashes); they are more the result of a series of bad judgment calls that mushroom into a series of interrelated and harmful consequences for the company. The book, for example, analyzes Xerox’s failure to commercialize technologies developed in its famous Palo Alto Research Center (PARC) where some of the most important innovations in personal computing, networking and printing had taken place. It looks at recent missteps by Motorola which has lost market share to Nokia’s smaller, more stylish cell phones, was slow to make the shift from analog to digital cell phone technology, and in 2003 failed to anticipate demand for color-screen phones with cameras, among other mistakes. McDonald’s is studied for its failure to change a culture that emphasized standardization and sticking to tried-and-true menus at a time when consumers wanted more food choices. While other fast food restaurants began to introduce product innovations for baby boomers who had eaten one too many Big Mac, McDonald’s just kept discounting the goods it already had. Although McDonald’s “culture of operational excellence was intact, the growth and diversification efforts got off track,” wrote Mittelstaedt, adding, however, that the past year has brought strategic change and vast improvements in the company’s performance.

The Tipping Point

The goal in avoiding costly chains of mistakes is not for companies to be mistake-free, Mittelstaedt says. “If you do not make any mistakes, you may not be taking enough risks, and failing to take any risks at all may be the most dangerous type of mistake a business can make.” The objective instead is to “find ways to stop mistakes quickly once they are made, and to learn from them in the process.”

Mittelstaedt cites a book that came out in 1994 whose authors identified 18 companies as “visionary,” including Boeing, Ford, Hewlett Packard, Merck, Motorola, Sony and Walt Disney. Yet in the last decade, all of these companies “have fallen on harder times … and are seeing questions raised about their futures,” he says. “All have made serious mistakes or initiated a chain of mistakes that accelerated their fall from the pedestal of business admiration.”

Perhaps the one common theme in their difficulties is that they “hung on to what made them great too long. Once you recognize that the world has changed and there is nothing you can do about that, then you have to change your strategy.” Kodak, for example, didn’t act quickly enough to commercialize digital technologies. “The problem is money,” Mittelstaedt says. “Kodak was making so much money under the old model. It’s tough to get the timing right. A company lulls itself into thinking it can wait and suddenly, the market has passed it by.

“So there is a tipping point that usually comes from the external market. In the cases of Motorola, IBM and Kodak, the tipping point was created in the marketplace, and the companies ignored the data longer than they should have.” In IBM’s case, however, the company made some huge mistakes “but also kept rising above them, the most recent example being its turnaround in the 1990s under Louis Gerstner,” Mittelstaedt says.

He wants corporate managers to recognize that there is a chain of events that leads to the visible mistake that finally catches people’s attention. “Many executives don’t acknowledge the chain. They see the final mistake and think there wasn’t an early warning that they could have noticed. The point my book makes is that there are many places you can intervene, especially if you have designed both processes and structures whose function in internal governance is to catch and investigate mistakes.” The process can range from a standardization of operating procedures to a focus on customer service. “Customers may be your most important external sensors in the market. Yet a company’s marketing/customer service division is often isolated from strategy and finance functions. Consequently, much of that valuable customer data is lost.”

Will Your Last Mistake Be Fatal? includes, among its chapters, one on the sequence, and consequences of, mistakes made by small businesses, and a chapter on mistake scenarios in entire industries, including the auto, airline and personal computer industries. At the end is a summary of 38 insights associated with “accidents, incidents and successes” that can be used as a guide for managers when examining their own organizations.

“No Partial Credit in the Fleet”

Doing things right in business “has gotten a lot of press in recent years,” Mittelstaedt writes in this book. “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.”

While serving as an office in U.S. Navy nuclear submarines in the late 1960s, Mittelstaedt says he learned one thing right from the beginning: “There is no partial credit in the fleet. You 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.”