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Building Business

Self-Taught MBA: The Solution to Recurring Crises

Do you find yourself enduring recurring problems? If so, your business may have a systemic glitch that requires a systemic solution.

By Fernando Pagés Ruiz
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The renowned strategical thinker John F. Dulles, secretary of state under President Dwight D. Eisenhower, once remarked, “The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.”

When we find ourselves in a fix, we often focus on solving the specific problem, ignoring that our business system caused it and may cause it again. Our world is made up of systems that surround and sustain us. From the natural ecosystem that provides us air and water, to the telecommunication system that has become a vital infrastructure for business and personal relations, to the financial system that allows us to access cash at the automatic teller machine, we live within systems so interconnected that they become invisible.

We know there’s a system at work the moment we have expectations about how things should perform, such as when we expect water when we turn on a faucet, or light when we flip a switch. There’s a system behind every output. And this applies to the “Here we go again!” situations that vex us at work and in our personal lives. Pain-points also represent the reliable output of a system, but in this case a dysfunctional one.

To repair a recurring problem, it’s important to focus on the system that created it, and not just on fixing the bad result again and again.

Spotting shrouded systems

We all create systems, including business system, either deliberately or haphazardly. We tap our own systems into existing systems without even noticing. Mostly, we take systems for granted, and derive benefit and detriment without realizing that the results are a by-product we can control.

From a business perspective, what is a system? Strategically, a system consists of people and processes that interact to form an integrated whole, producing a result. Systems have structure, behavior, and interdependence. Your business systems likely generate profits as well as other outputs, such as career satisfaction, rewarding relationships, and often unwanted problems.

Unless you generate problems on purpose, these undesirable outputs likely come because of subsystems within your business that you may not easily identify or control. John A. Warden III, the controversial commander who designed the Desert Storm air campaign over Baghdad and revolutionized air force strategy, also contributed to business strategy with his “Prometheus” plan. He wrote the bestseller Winning in FastTime: Harness the Competitive Advantage of Prometheus in Business and Life and designed a method to identify the system faults that create reoccurring problems.

He suggested that leaders look past specific problems to see how the whole system incentivizes the glitch in the first place, and how they can use intelligent system incentives to obtain the result they want. The trick is simply to ask “Why?” repeatedly. Usually three to five times is enough to get to the root cause of a systematic problem, and often the solution becomes obvious.

For example, “Why do we lose money on our remodeling jobs? Because our estimates are always too low. Why are our estimates too low? Because our estimators are incentivized to land jobs, rather than to bid profitability. How can we incentivize estimators to bid profitably? By giving them a commission from project profits, instead of sales.” You have solved a systemic problem.

Some solutions create systemic problems

John Lennon coined the phrase “There are no problems, only solutions.” But many of our most difficult systemic problems come from an erstwhile successful solution. The recent troubles facing the banking giant Wells Fargo come to mind, whereby an aggressive sales strategy, which made Wells Fargo one of the most profitable banks, also generated a humiliating bank-fraud scandal. Overly ambitious and unsustainable sales goals forced employees into deceptive practices. A bad case of systemic myopia.

IBM went through some rough patches in the early 1990s, and then, by focusing on its core, profitable businesses, the company worked its way back to an excellent financial position by 1999. Despite having excellent profits, an enviable cash balance, and the best brains in technology, IBM stagnated once more. Growth slowed, and the company missed opportunities, like the internet, which was snapped up by startups Amazon and Google. IBM seemed destined to become a has-been, an aging giant.

The problem came with IBM’s sharp focus on achieving short-term and reliable profitability. Managers weren’t incentivized to spot emerging growth opportunities, but instead, focused on sustaining and improving existing products. The company leadership realized that it needed a new management system that incentivized risk taking and creative thinking. IBM developed a program called “Emerging Business Opportunities” to change the incentive structure, and the company roared back into relevance.

What worked well during the last decade, or even last year, may become what’s holding you back today. For example, the focus on high-performance housing may no longer represent a reliable way to differentiate your home-building business. Now that the 2015 International Building Code is in its third printing, forcing all builders to construct superefficient homes by government fiat, the energy equation may no longer represent a distinguishing characteristic for your firm. You may discover that the strategy that represented your best growth since 2005 now represents complacent mediocrity. You may need to find a new strategy to distinguish your business from the rest.

Problems can also lead to solutions

To avoid systemic problems before they surface, it pays to evaluate your business systems and to ask whether they produce the results you want. Start by listing the systems you depend upon, such as sales, project management, job-site management, and accounting. In every case, your satisfaction with the output in terms of quality jobs, quality work, and useful information would signal good system function. If not entirely satisfactory, it pays to dig deep and find the points in your system that send processes in the wrong direction.

If your company faces a recurring crisis, such as resource conflicts or accounting confusion, consider using John Warden’s “why” series of questions to determine whether this cyclical snag might be a systemic problem, remedied by implementing a new set of systematic incentives.

When we begin to see systems and to study how they work, we can not only fix recurring problems, but we can take advantage of this invisible machinery of people, behaviors, and outputs to better design procedures that provide the results we want.

Hitching on societal systems

By studying existing social systems working all around us, we can also hitch our small businesses to these large economic trends for Promethean growth.

The British consumer-goods company Unilever was challenged with selling low-cost household cleaning products in India, a potential market of one billion consumers. At first it struggled, until its marketing department found the means to link the sales of low-cost soaps to the healthcare system. The company began a national campaign, supported by the Indian government, connecting hygiene with disease prevention. Unilever could market its products as the solution to a healthcare crises, and it sold a lot of soap, becoming the world’s second-largest household-goods company.

Unilever hitched its marketing system to an existing social system with deep roots in the Indian continent and an unimpeachable mission to improve public health. Many companies use similar system-hitchhiking strategies to connect with, and then grow within, a broad and established social structure.

One such structure that we have all come to rely on since the dawn of the internet age is the information system. Through awareness of the internet as an information system, we have become aware of other information structures that can provide reliable outputs.

For his book The Wisdom of Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, Economies, Societies and Nations, New Yorker business columnist James Surowiecki discovered that when it comes to predicting events, a diverse group of superficially informed individuals often has an advantage over a few “experts.” Companies such as Best Buy have tapped into this crowdsourcing approach, leveraging the wisdom of their sales associates — those guys and gals on the sales floor — to more accurately predict seasonal sales and consumer trends. While company experts predicted with 95% accuracy, the average crowd prediction of the sales clerks yielded projections with 99.5% accuracy.

You too have a group of individuals that may help you predict emerging sales trends, or rising tides within your community. It’s your list of employees, suppliers, and clients. You may want to set up a small incentive, such as free movie tickets, for those responding to a few questions about future remodeling projects, such as “If you were to remodel this year, would you build a new deck, update your kitchen, reside the house?” Once you have assembled a cluster of answers, create an average to determine the leading project categories. And then build your advertising and incentives on promoting these projects better than any other contractor in your market area. Chances are, your informal crowdsourced survey will yield a much more accurate and locally applicable result than national surveys such as Remodeling magazine’s vaunted “Cost vs. Value” report.

By system-spotting within your company and community, you can exploit this machinery of people, processes, and output to avoid systemic snags and to set sail – and your sales – onto the blue waters of society’s vast systemic seas.

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