07 Apr 2003  Research & Ideas

Three Steps for Crisis Prevention

Can you predict a business disaster? In this Harvard Business Review excerpt, professors Michael D. Watkins and Max H. Bazerman outline the keys for disaster prevention: recognition, prioritization, and mobilization.

 

It's all too easy, of course, to play Monday-morning quarterback when things go terribly wrong. That's not our intent here. We readily admit that many surprises are unpredictable—that some bolts out of the blue really do come out of the blue—and in those cases leaders shouldn't be blamed for a lack of foresight. Nor should they be blamed if they've taken all reasonable preventive measures against a looming crisis. But if a damaging event happens that was foreseeable and preventable, no excuses should be brooked. The leaders' feet need to be held to the fire.

So how can you tell the difference between a true surprise and one that should have been predicted? Anticipating and avoiding business disasters isn't just a matter of doing better environmental scanning or contingency planning. It requires a number of steps, from recognizing the threat, to making it a priority in the organization, to actually mobilizing the resources required to stop it. We term this the "RPM process": recognition, prioritization, mobilization. Failure at any of these three stages will leave a company vulnerable to potentially devastating predictable surprises.

Lapses in recognition occur when leaders remain oblivious to an emerging threat or problem—a lack of attention that can plague even the most skilled executives. After European Commission regulators refused to approve General Electric's $42 billion acquisition of Honeywell in 2001, for example, Jack Welch was quoted as saying, "You are never too old to be surprised." Welch is a famously hard-nosed executive, and if anyone could have been expected to do his homework, it would have been him. But was Welch correct in viewing the decision as a true surprise, an event that couldn't have been foreseen? The evidence suggests he was not. The Economist reported at the time that there were many warning flags of the EC's intent to scuttle the deal. For some time, the magazine pointed out, a philosophical gap had been widening between Europe and America over the regulation of mergers. And Mario Monti, the recently appointed head of the European Commission's competition authority, was widely believed to be looking for an opportunity to assert Continental independence.

It seems the real reason Welch was surprised is that he just didn't pay enough attention. According to the Associated Press, when GE's CEO and his counterpart at Honeywell, Michael Bonsignore, were rushing to close the deal (United Technologies was also eager to acquire Honeywell), they "reportedly never held initial consultations with their Brussels lawyers who specialize in European competition concerns." Welch appeared to assume that the merger would sail through the antitrust review. But while it did pass easily through the U.S. review—no doubt further reinforcing his confidence—it smashed on the rocks in Europe. Had Welch recognized the potential for a negative decision ahead of time, he almost certainly would have managed the merger negotiations and antitrust consultations differently—and Honeywell might well be a part of GE today.

Lapses in recognition occur when leaders remain oblivious to an emerging threat or problem—a lack of attention that can plague even the most skilled executives.
—Michael D. Watkins and Max H. Bazerman

Failures of prioritization arise when potential threats are recognized by leaders but not deemed sufficiently serious to warrant immediate attention. Monsanto fell into this trap in late 1999 when CEO Robert Shapiro and his advisers failed to concentrate on winning public acceptance of genetically modified foods in Europe. Betting the company on a "life sciences" vision, Shapiro had sold or spun off Monsanto's traditional chemical businesses and moved aggressively to acquire seed companies. Dazzled by the seemingly vast commercial opportunities of genetically modified plants, the company pressed forward with launches of GMO food products in Europe, giving far too little weight to the fact that Europeans were still reeling from the mad cow disease crisis, reports of dioxin-contaminated chicken, and numerous other food-related concerns. By focusing on technical and strategic challenges, not on the hard work of winning hearts and minds, Shapiro ultimately lost his company. He was forced to sell Monsanto to Pharmacia-Upjohn, which bought it for its pharmaceutical division, valuing the agricultural biotechnology operations at essentially zero.

Breaks in the third link in the chain—failures of mobilization—occur when leaders recognize and give adequate priority to a looming problem but fail to respond effectively. When the Securities and Exchange Commission tried to reform the U.S. accounting system—well before the collapses of Enron and WorldCom—the Big Five accounting firms fiercely lobbied Congress to block new regulations that would have limited auditors' ability to provide consulting services. Appearing at congressional hearings in 2000, accounting firm CEOs assured legislators that no real problem existed. Joseph Berardino, then the managing partner of Arthur Andersen, stated in a written testimony that "the future of the [accounting] profession is bright and will remain bright —as long as the commission does not force us into an outdated role trapped in the old economy. Unfortunately, the proposed rule [on auditor independence] threatens to do exactly that." The Big Five also spent millions of dollars urging members of Congress to threaten the SEC leadership with budget cuts if it imposed limits on auditor services. The lobbying worked. The SEC backed off, and the all-too-predictable accounting scandals soon began to unfold.

It's important to note that the leadership failure here lies not just with the SEC but also with the accounting firms, which were well aware that their addiction to consulting fees was compromising their independence as auditors. Also culpable were political leaders—Republicans and Democrats, in the executive branch and in Congress—who lacked the courage to risk political damage and take a stand on the issue.

Sometimes, leaders actually set themselves up for predictable surprises. A classic example is the 1998 decision by a coalition of thirty-nine pharmaceutical companies to sue the government of South Africa over its attempt to reduce the cost of HIV drugs through parallel importation (buying pharmaceuticals in countries with lower prices and then importing them) and compulsory licensing (requiring patent holders to allow others to manufacture and sell their drugs at far lower cost). The companies feared that the precedent set by the South African move would undermine their control over valuable intellectual property in the developing world. But the suit sparked international outrage against the industry, prompting a very public and unflattering look at drug firms' profit margins and industry practices, which the press juxtaposed against the grim realities of AIDS in southern Africa. In response, governmental and nongovernmental organizations formed a coalition that ultimately won big public health exemptions on international intellectual property protection in developing countries. By mobilizing to win the narrow legal battle in South Africa, and not focusing on the broader context, the industry suffered a severe setback.

Excerpted with permission from "Predictable Surprises: The Disasters You Should Have Seen Coming," Harvard Business Review, Vol. 81, No. 3, March 2003.

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