Editorials

We encourage our readers to submit relevant articles of interest to be published on this web site. Students, members, and companies are invited to take advantage of this opportunity! Please send your editorial to: Dick Forrest, CPIM dforrest@charter.net

Ira Smolowitz, Ph.D. Professor of Finance and Dean, Bureau of Business Research and Program Development at the American International College, Springfield, MA.

Some of Ira's past articles of interest:

• A View of Education From Both Sides: An Assessment of the American Education System
• Ramifications of the 24/7 Economy
• Work-place Gossip: A Reassessment
• The Disappearance of Courtesy in America: Implications for Business
• The Outlook for American Competitiveness
• Consumer Marketing: A Flawed Strategy
• A Healthy Workforce: The Driver of Corporate Financial Performance
• The Use and Misuse of Forecasts
• Decline in Ethics: Decline in National Competitiveness
• Promoting Prudent Corporate Growth
• The Dynamic of Successful Marketing
• The Monty Hall Paradox: Lessons for Management
• Improving American Competitiveness


Ira has provided two articles this month:


• Get to the Root Cause of Factory Failure: Ask the Five Ways
• The Halo Effect: Proceed with Caution

Frederick F. Reichheld in his Harvard Business Review article, “Learning From Customer Defections,” indicates:

Getting to the root causes of human behavior takes a lot of time, effort, and experience. In a factory setting, where root-cause failure analysis has been perfected over decades, the process is known as the five whys because you usually have to ask why something happened at least five times to get to the root of a failure. For example:

Why did the product get returned as defective?

The connector came loose.
Why did the connector come loose?
The plug was out of tolerance.
Why was the plug manufactured out of tolerance?
The intermediate stamping machine failed.
Why did the stamping machine fail?
Routine maintenance wasn’t done on schedule.
Why?
There is an attendance problem in the maintenance department.¹

EMS Consulting Group references the book, The Toyota Way, by Jeffrey Liker on their web-page. EMS Consulting Group indicates: “Toyota identifies root causes primarily using a very simple method called the “five whys.”

Here is the essence of the example provided:

There is a puddle of oil on the shop floor.
Why? – Because the machine is leaking oil.
Why? – Because the gasket has deteriorated.
Why? – Because we bought gaskets made of inferior material.
Why? – Because we got a good deal (price) on those gaskets.
Why? – Because the purchasing agent gets evaluated on short-term cost savings.²

The power of the five whys is obvious. To stop with the puddle on the floor is, in my opinion, the equivalent of giving a bandage to a patient who has hemorrhage. All the whys must be addressed to get to the root cause of the nominal problem. In the above example, in my opinion, a cultural mandate of cost savings has to be reviewed/assessed on a cost/benefit basis. Asking the “fifth why” brings the root cause of the puddle on the shop floor to the surface.

The five whys, it seems to me, traces cause-and-effect throughout the entire organization. The following real-world example has, in my opinion, comparable five whys manifestation.

Horst Schulze, the leader of the Ritz-Carlton Hotels, tells the story of how a manager identified and solved a recurring problem…room service breakfasts arriving late and cold…

The manager organized a team of his room-service employees and asked them to study the problem, find out why the meals were not getting to guests within a reasonable time, and suggest solutions. The team soon found that the cause was the unavailability of the elevators needed by the room-service people to get the meals quickly to guests. They had a room-service employee spend an entire morning in an elevator with a stopwatch to see where the elevators were, what they were being used for, and why they weren’t available when the room-service people needed them. What they found astonished Schulze and the manager. The whole problem could be traced to a management decision about how many bed sheets each floor was allowed to stock for the housekeepers. The decision frequently left some floors with too few sheets, and the housekeepers were using the elevators to hunt for extra sheets to finish cleaning the rooms on their floors. The elevators were therefore unavailable to the room-service delivery people when they needed them, meals were delivered late, and guests got angry. Because a manager trying to save on the cost of sheets had stocked too few, the rest of the system was disrupted. This “cost-saving” move drove up the overall costs of room service (because the hotel did not charge for meals when guests complained) and housekeeping labor (because housekeepers were spending their time in elevators instead of making beds). Trying to save money in one part of the service-delivery system created problems for another part. The total impact was to drive up costs and increase customer dissatisfaction. What manager would ever have thought to solve the late-breakfast problem by adding more bed sheets to the available supply on each floor? Simply putting out one small fire (“we are spending too much money on sheets”) without thinking about the entire system can cause big problems.³

Often the hotel management fad of today becomes another management fad of tomorrow. In my opinion, the “five whys” are so logically compelling that I doubt if it will be eventually relegated to fad status.

I believe that any organization, factory, hotel, hospital, etc., would benefit from the application of the five whys to bring the root cause of failure to the surface.

Given its logic and applicability, it is an extremely useful problem solving tool.

References

1. Harvard Business Review 96210, downloaded 2/8/07 from: www.profitmatters.ca/articles/HB_Customer_Defections. PDF p. 7.

2. EMS Consulting Group – “Toyota’s Learning Organization,” downloaded 2/8/07 from: http://www.emsstrategies.com/dd080104article2.html, p. 1.

3. Ford, Robert C., Heaton, Cherrill P., Brown, Stephen W. “Delivering Excellent Service: Lessons From The Best Firms,” California Management Review, vol. 44, no. 1, Fall 2001, pp 42-43.

The halo effect is found in such diverse disciplines as psychology, marketing/advertising, finance, and management. Despite its
pervasiveness, it may lead to poor decisions.

What is the halo effect? The halo effect is a psychological mind-set where the presence of one desirable attribute causes one to believe that other desirable attributes are also present. For example – “attractive people are often judged as having a more desirable personality and more skills than someone of average appearance. Celebrities are used to endorse products that they have no expertise in evaluating.”¹

Phil Rosenzweig has written a book: The Halo Effect.

Consider the following:

In Rosenzweig’s usage, the halo effect refers to the glow that financial performance casts on a company – a glow frequently reflected in business articles, he maintains. Has Standard Widget’s stock price outpaced the S&P 500 for the past few years? Journalists readily assume that it must have a brilliant strategy or superior leadership. Or terrific execution. Or an intense focus on customers, or happy employees, or a strong corporate culture.

The effect also works in reverse. If a company’s stock is a laggard, depend on business writers to deride its strategy as misguided, its managers as shortsighted, its execution as sloppy, and so on, says Rosenzweig. Or perhaps the company “strayed from its core.”

Rosenzweig devotes a chapter to how the halo effect shaped press coverage of Cisco Systems, positively and negatively. When Cisco was the darling of the New Economy, it could do no wrong. Its strategy was brilliant; its CEO, John Chambers, was a visionary leader; its devotion to its customers was exemplary. But when the Internet bubble burst and Cisco’s stock swooned, the press pounced on the company for its alleged shortcomings in all of the above respects. Had the company really changed so dramatically in a short time, between 2000 and 2001? Or had the overall perception of Cisco changed?²

I am particularly concerned about the presence of the halo effect in personnel management. Consider the following:

…Good looks can have a real impact on workers’ bank accounts, according to research by Daniel Hamermesh and Jeff Biddle published in the Journal of Labor Economics. Attractive people earn about 5 percent more in hourly pay than their average-looking colleagues, who in turn earn 9 percent more per hour than the plainest-looking workers.

This means if an average-looking person earned $40,000, their prettiest co-workers would make $42,000 while their least attractive colleagues brought home just $36,400.

Plain-looking workers may also receive fewer promotions than those awarded to their more striking contemporaries.

…Richard St. John, author of “Stupid, Ugly, Unlucky, and RICH,” says he’s so unconvinced of the connection between good looks and competence, he often chooses to hire the “visual underdog.”

“I’m not saying looks won’t help you be successful at getting a date,” St. John said. “I’m saying looks won’t help you be successful in other areas of life.”³

It seems to me that the halo effect is a natural, pervasive impulse. Unfortunately, it frequently results in erroneous judgments. The decision maker should review the rationale behind his/her judgment. Failure to do so will impair the performance of the decision maker. The ensuing negative organizational impact may have serious implications. It has been said – a predictable error is a preventable error.

The halo effect is, in my opinion, a form of the settled point of view. In the words of the American drama critic, Brooks Atkinson: “the most fatal illusion is the settled point of view. Since life is growth and motion, a fixed point of view kills anybody who has one.”⁴

References

1. “Halo Effect” downloaded from Wikipedia, the free encyclopedia (http://en.wikipedia.org/wiki/halo-effect) 1/22/07, p. 1

2. Teach, Edward “Blinded By the Light,” CFO, January 2007, p. 21

3. Morsch, Laura “Do Pretty People Earn More?” downloaded from http://www.careerbuilder.com Custom/MSN/CareerAdvice/View Article. aspx?articleid=29) 1/22/07, pp1-2

4. Thought for Today, The Hartford Courant, January 24, 2007, p D9

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Articles printed with the permission of Dr. Ira Smolowitz, Professor of Finance and Dean, Bureau of Business Research and Program Development at American International College, Springfield, MA.