The Reason Your Employees Are Always Putting Out

images-53Company leaders, consider the following questions: How many surprises have you dealt with this week? How many customer relationships have had to be rescued or late orders escalated? How many apologies delivered, numbers explained, or presentations redone?

Every leader I know wrestles with these and other crises as a matter of routine. Yet leaders also recognize that running a business through constant firefighting puts them at risk of stressed-out employees, customer defections, a damaged brand, and safety or ethics catastrophes.

On closer inspection, the vast majority of fires are preventable. They are essentially “rework” — the added effort and cost required because something was not done right the first time. Unfortunately, firms can get stuck in a vicious cycle of rework, shortcuts, and more rework. I once worked with a workers compensation firm that discovered they could cut costly disputes and attorney involvement by contacting injured workers within 24 hours. Still, new claims would languish for a full five to seven days, because employees were dealing with all the prior claims that had gone to court. Unfortunately, this meant 80 percent of those new claims would also involve attorneys and disputes. In aggregate, rework costs can be huge. The Juran Institute estimated in 2010 that 15 to 20 percent of revenues for manufacturing companies went to rework; for service businesses, it estimated 30 to 35 percent.

How did we get to this point, where firefighting is standard operating procedure? And how do we get out? Thirty years ago, the godfather of quality, W. Edwards Deming, addressed a similar situation with his book, Out of the Crisis (MIT, 1982). Japan had begun making products with high conformance quality at lower cost than poorer quality products made elsewhere. Many U.S. executives assumed Japanese exporters must be dumping products at a loss, and responded with price wars, cost cutting, and blame for American workers. In his book, Deming focused on how leaders could shift their organizations from a short-term focus on manipulating numbers to more ongoing, sustained success. Although his work is generally applied to manufacturing or routine services, many of Deming’s “14 points for management” can be adapted to help managers in knowledge-driven, professional businesses to dig their teams out of constant crisis. Here are just a few:

“Create constancy of purpose.” Without a sense of the bigger picture — what you are trying to accomplish and why it matters — people naturally default to fixing problems. Unfortunately, this approach never creates the level of delight or innovation that wins you customers for life. Deming encouraged managers to focus explicitly on a mission and longer-term goals to counter-balance the pull of immediate issues. This means defining clearly what you are promising to your customers, so employees know what they should strive to deliver. Even in highly dynamic environments, such a meaningful mission can provide constancy while tactics and strategies shift.

Government bond yields touch

Treasuries tumbled along with European government bonds as a gauge of US manufacturing demand surged, while the European Central Bank was said to be considering lending more bonds to prevent a freeze in the repo market.

Demand for durable goods – items meant to last at least three years – jumped 4.8 per cent on a surge in orders for commercial aircraft, compared to forecasts for a 1.7 per cent advance, Commerce Department data showed. Treasuries pared losses after a $US28 billion auction of seven-year notes drew higher-than-average demand, and remained steady after minutes from the Federal Reserve’s November meeting showed officials saw a strengthening case to raise interest rates in the near term, in line with market expectations.

Selling “was triggered by the uptrend in durable goods, one segment of GDP that has persistently held the headline numbers down”, Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee, wrote in a note to clients. “The initial selling triggered enough technical warnings to bring in several more rounds of liquidation, partly on the concern that next week’s more important numbers could surprise to the high side as well.”

The yield on the benchmark 10-year Treasury note climbed four basis points, or 0.04 percentage point, to 2.35 per cent as of 2.26pm in New York, according to Bloomberg Bond Trader Data. The yield reached 2.41 per cent, the highest level since July 2015. The 2 per cent security due in November 2026 fell 11/32, or $US3.44 per $US1000 face amount, to 96 28/32. The US bond market is closed Thursday for the Thanksgiving holiday.

The seven-year note auction Wednesday drew a yield of 2.215 per cent. The bid-to-cover ratio, a gauge of demand, was 2.68, the highest since February 2014 and compared with the average of 2.5 at the last 10 sales. Indirect bidders, a class of investors that includes foreign central banks and mutual funds, bought 72.7 per cent, the highest share since at least 2009 and compared with a 62.1 per cent average.

“This was a remarkably strong auction, but we have also had a remarkable shift in the market over the past month,” said Tom Simons, a senior economist at Jefferies Group LLC, of the auction. “Fifty-five basis points of cheapening since last month looked attractive to the buyside.”

German bonds dropped with peers across the euro area as the European Central Bank was said to be considering lending out the securities to avert a market freeze. The ECB is looking for ways to make it easier for banks to borrow bonds it has bought, so that they can be used as collateral for repo loans, Reuters reported, citing unidentified people familiar with the central bank.

Set to test Elon Musk

Tesla Motors and SolarCity shareholders have approved the electric-car maker’s purchase of the solar installer in a deal that’s poised to test their shared chairman Elon Musk’s vision for a viable one-stop shop for clean energy consumers.

More than 85 per cent of Tesla shareholders voted in favour of the deal, according to a company statement Thursday, which said SolarCity shareholders also approved the acquisition.

The deal, valued at about $US2 billion ($2.7 billion), integrates the maker of Model S and upcoming Model 3 sedans with the installer of rooftop solar panels.

Shareholders are signing off on Musk’s plan to combine and more efficiently run two companies that have a track record for fleeting profits and frequent fundraising needs.

Tesla has lost about $US4.8 billion in market capitalisation since its initial offer to buy SolarCity on June 21, while the latter company’s value declined by about $US86 million.

Tesla has forecast SolarCity will add $US1 billion in revenue to the combined company next year and $US500 million in cash to its balance sheet over the next three years.

Joining Tesla’s retail network with SolarCity’s installers and consolidating the two companies’ supply chains may result in an estimated $US150 million in cost synergies within a year.

Musk owns 21 per cent of Tesla and 22 per cent of SolarCity, making him the largest shareholder of both companies. He and Antonio Gracias, who also serves as director at both companies, recused themselves from a board vote on the takeover July 30.

The all-stock deal is worth $US20.23 per share, a premium of 2 per cent based on SolarCity’s closing price Wednesday. The premium was about 35 per cent when first announced.

Tesla rose 2.6 per cent to $US188.66 at the close on Thursday US time, while SolarCity gained 2.9 per cent to $US20.40.

Approvers need ‘to have their head examined’

The quarterly profit Tesla reported last month was the first for the Palo Alto, California-based company in eight quarters. SolarCity has recorded losses in six of the last eight quarters.

The two companies have conducted five separate equity offerings since the San Mateo, California-based solar company first sold shares to the public in December 2012.

Investor Jim Chanos, whose firm Kynikos Associates saw weakness in Enron before its collapse, has been highly critical of the merger in part because of the $US2.89 billion in SolarCity debt Tesla will be taking on.

While any shareholder who votes for the deal “needs to have their head examined”, Chanos told Bloomberg Television in an interview on Wednesday, he expected the merger would be approved.

The deal drew mixed recommendations by proxy advisory firms, with Institutional Shareholder Services giving its blessing and Glass Lewis & Co  rejecting it as a “thinly veiled bailout plan”.

ISS said Tesla would be able to bridge cash-burning SolarCity’s funding gap and called the deal a “necessary step” in the electric-car maker’s push to become an integrated sustainable energy company.

The combined company’s attention will now look forward to the aftermath of America having elected Donald Trump as its next president. The real-estate mogul has vowed to relax environmental regulations and tapped Myron Ebell, a climate-change sceptic, to head of his Environmental Protection Agency transition team.

Gordon Johnson, an analyst at Axiom Capital Management, downgraded seven solar companies on Tuesday, citing his expectation for less favourable renewable energy policies from Trump’s administration.

Musk, a South African-born immigrant, has come under fire from conservative activists who would like to roll back subsidies for clean energy. The advocacy group Citizens for the Republic has called for Congress to end federal subsidies for “all Elon Musk companies”, including solar investment tax credits.

Fans of Musk and his vision, meanwhile, doubled down heading into Tesla and SolarCity’s vote on Thursday. Austen Allred, an executive at San Francisco-based startup LendUp, wrote to Musk on Twitter to say he “put 100 per cent of his net worth” into Tesla, adding: “Don’t even care if I lose it all. Thank you for what you’re doing and have done.”

“Wow, thanks,” Musk wrote back Wednesday. “We won’t let you down.”

What happen with japanese manufacturers

In the aftermath of the United Kingdom’s June 23 vote to leave the European Union (the British exit, or “Brexit”), one critical uncertainty has been overlooked. How will companies around the world change their approach to Europe’s consumer and industrial market? This is a more important question than many people realize, because those changes will affect patterns of investment and supply chain flows everywhere. From my own vantage point, as a long-term advisor to Japanese manufacturers helping them strengthen their positions around the world, I see a major reorientation coming.

Many Japanese business leaders — and many of their counterparts in North America, East Asia, Australia, and elsewhere — have come to regard the United Kingdom as their primary gateway into the European Union. After the referendum’s unexpected outcome, they hoped at first that the leaders of the U.K. government would find some way to undo the decision, perhaps through a reversal by Parliament. But even though the U.K. high court ruled that Parliament must be involved, a full reversal is unlikely. Japanese business leaders have been forced out of their comfort zone. As they seek new ways to establish a presence in the European market, global companies will change the footprints of their global activity.

To understand the potential consequences, one must recognize the subtle dynamics of the Japan–U.K. relationship, going back to the 1992 Maastricht Treaty, which launched the European Union and included the United Kingdom among its signatories. Before then, creating a business presence in Europe was a daunting proposition, because there was no obvious place to build regional headquarters and factories. In West Germany, and all of Germany after reunification, labor was relatively expensive. It was easier to hire people in Spain, Italy, and France, but few global companies did well in those countries, in part because of the inconsistent labor laws and ever-changing government guidance. Nissan, for example, dissolved its short-lived joint venture with Alfa Romeo in Italy in 1989. Other countries, like the Netherlands and Belgium, were too small or were simply not oriented to the kinds of logistics and labor training that robust manufacturing requires.

But Maastricht solved all that. Even before 1992, Japanese companies had settled into England and Wales. There was a natural affinity between the regions; both had launched global manufacturing empires from island nations. The British workforce was particularly good at learning the disciplines of quality control and productivity improvement, which were critically important to Japanese companies. Nissan’s operation in Sunderland came to be as good as its best factories in Japan, and it became the net exporter of top executives to the entire Renault/Nissan group of companies. This and other early success stories — including Panasonic in Cardiff and Sony in Bridgend — prompted more Japanese companies to venture onto British soil and to regard the U.K. as their primary European base.

By the late 1990s, with the U.K. as their base, Japanese and other global companies enjoyed full access to all the E.U. member countries — in effect, to most of Europe — without having to adapt to local labor regulations or other differences. During the next two decades, this allowed Europe, including Eastern Europe, Russia, and Turkey, to become a viable market for Japanese products. Today, Japanese investment in the U.K. is higher than it is in any other country except the United States; higher, even, than in China. There are 1,370 Japanese companies with a significant presence in the United Kingdom. Japanese goods, made in the U.K., flow seamlessly throughout continental Europe; managers from Japan and Europe move easily to the U.K. to work for Japanese companies; and Japanese facilities across Europe are closely connected with their U.K. counterparts. These business relationships are so entrenched and habitual that it is fair to say that even after the Brexit vote, many Japanese business leaders are still tempted to take them for granted.

Since Brexit, I know more than one Japanese company that has put its U.K. investments on hold. Company leaders will decide over the next two years how to proceed, basing their decision in part on how wide a gap opens between the U.K. and Europe. This will be a very difficult two years. These companies cannot return their operations to Japan. Not only would the cost of transporting finished goods be onerous, but also Japan lacks the workforce to populate its own companies’ factories. Thus, they will remain in Europe. But where?

More than 70 percent of the Japanese investments in the U.K. are currently in Wales and England. Those companies may seek to remain on the west side of the English Channel. For example, Ireland’s full E.U. membership and its proximity to the U.K. would make it a natural new home. If Scotland pursues and gains independence from the United Kingdom, it might become another appealing alternative to England.

Overlooked Principles Shaping

The most important changes are often the least obvious. That’s especially true in business, where changes are taking place on a greater scale than ever before. The advent of digital technology has brought a number of these dynamics to the forefront. They can be thought of as principles. Like Moore’s law or Murphy’s law, they explain the way the world works.

If you’re in business in the 2010s, an understanding of these five principles is crucial, because digital disruption is quickly becoming the new normal. Many growth strategies that may have worked well in the past no longer pack a punch. The principles help explain not just what will happen to your company next, but why.

Turing’s theory of computability: Machines can calculate any of the ever-growing number of problems that are possible to calculate. In the 1930s and 1940s, the English mathematician Alan Turing (whose life was dramatized in the 2014 thriller The Imitation Game), made some pathbreaking observations about computability and its ramifications. He identified what he called “computable” activities: any task that a theoretical machine (in this case, a mathematical model with a process similar to a computer) can address. Having determined that computability can be identified mathematically, Turing then postulated that machines have the capacity to perform computable tasks as well as human beings can. In his e-book Introduction to Computing: Explorations in Language, Logic, and Machines, University of Virginia professor David Evans devotes a chapter to computability. “A problem is computable if it can be solved by some algorithm,” he explains. “A problem that is noncomputable cannot be solved by any algorithm.”

In 1950, Alan Turing provided a demonstration of computability that is still remembered today as the “Turing test.” He set up an experiment in which he asked his subjects to exchange typed messages with an entity in another room. Many onlookers could not guess correctly whether there was a person or a computer generating the responses. This demonstrated that a computer program could make a convincing representation of human intelligence, good enough to function as well as a person on that task. Or, as Turing put it in a paper (pdf) at the time, the program could “play the imitation game satisfactorily” for any computable task. He predicted that in 50 years machines would, for five minutes, be able to fool a human questioner 30 percent of the time. His prediction came true in 2014.