How to Diagnose a Sick Organization

Deseret Morning News (Salt Lake City)

October 17, 2012

Timothy R. Clark is the founder of TRClark LLC, a management consulting and leadership development organization. His newest book, The Employee Engagement Mindset, has just been released from McGraw-Hill.

Toyota is sick again. In 2009, the company issued a recall for cars that had a defective accelerator. Recently, it announced another recall—this time the biggest in history—due to power windows that pose a fire hazard.

This new debacle will likely cost the automaker billions of dollars and deal a major blow to its reputation. But could this self-inflicted wound kill the company? That depends on whether the Japanese giant can get the diagnosis and the treatment right.

Organizations are a lot like people. They have vital signs, such as a pulse and blood pressure. And, like people, the vital signs are symptoms—or lag indicators—rather than root causes. Diagnosing is the process of identifying symptoms and then tracing them back to underlying problems. So how do you diagnose a sick organization?

The bottom line

First, start with the vital signs or financial results. If revenues and profits are declining or negative, if cash flow is lumpy or drying up, if the balance sheet is overburdened with debt, you have symptoms of an underlying problem.

But of course these examples are just that—symptoms. You know you’re sick, but you don’t know why. Most organizational afflictions fall into one of three categories: strategy, execution or culture. If you misdiagnose the problem, you won’t find the right cure.

A sudden problem in operating performance is normally evidence that something is broken in execution. You may have a broken process, system or tool. Using the proverbial lemonade stand as an example, this would be like having a bad batch of lemons, no ice or running out of cups.

On the other hand, if a problem develops slowly, it often signals something amiss with strategy. For example, your market positioning, distinctiveness or cost structure is no longer delivering the value it once did. The cost of lemons has gradually risen. Traffic volume has slowed on your street corner. A competitor has introduced carbonated lemonade.

Sudden problems are almost always related to a hiccup in execution. Gradual problems are almost always related to a loss of competitive advantage. It’s a matter of breaking something versus losing something.

Think about the consequences of misdiagnosing the root problem. If the lemonade stand is suffering from execution problems, providing a strategic fix won’t cure it. If we get all the cups we need, if we locate to a new corner with higher traffic, we’re no better off.

Similarly, if we mistake a strategic problem for an execution lapse, we face a similar fate. If we source good lemons, get adequate ice and cups, those measures won’t compensate for a loss in competitive advantage.

If our business model is becoming obsolete, we may get a little extra time and profit out of flawless execution—what is known as “last gas theory”—but we still face inevitable decline unless we apply a strategic cure to a strategic problem. That’s the first level of analysis: Did the problem develop quickly or gradually? Is it, therefore, an execution problem or a strategic one?

Narrowing it down

The Toyota example doesn’t fit the description of either an execution or a strategy problem. The problem is not execution because Toyota can execute as well as any company in the world. The automaker is the source of the principles of lean manufacturing and the virtues of the Toyota production system.

Toyota’s is not a strategy problem either. The company has an outstanding global strategy in terms of product and positioning. It recently surpassed GM to become the No. 1 carmaker in the world. That brings us to the third and tougher category: culture. What Toyota has is a cultural problem.

The evidence of smoking power windows goes all the way back to 2007, which means the company has been sitting on accumulating evidence for several years. It’s an execution problem if a massive product recall happens once, as it did in 2009. It’s a cultural problem if it happens again. Toyota lacks a solid system of internal accountability. That’s half the problem. The other half is it refuses to confront reality until outside forces demand it.

Prescription without diagnosis is malpractice. But in the world of business, you must diagnose and cure yourself. No one can do it for you.