Many of us subscribe to the “cockroach theory,” the idea that earnings shortfalls and other problems are like cockroaches: there’s never just one. As a result, stocks commonly sell off more than an earnings miss seemingly warrants. The cockroach theory works because business executives rarely take the vigorous steps necessary to ensure that bad news reaches them. All too often, problems get stuck in the metaphoric roach motel, where they fester. The conventional wisdom that leaders will undermine confidence if they acknowledge mistakes creates an environment where bad news is swept under the carpet, rather than addressed.
Problems don’t age well. Raytheon, the $23-billion manufacturer of defense and aerospace systems, has thrived because it has built a disciplined process, its Integrated Product Development System (IPDS), to expose and root out bad news in the early stages of projects, when the fixes are easier. The IPDS gives project managers incentives to identify problems early on (and assesses penalties for not doing so), thereby counteracting the natural tendency to postpone addressing problems. Raytheon further supports this effort with its Company Evaluation Team, a swat team that reports directly to CEO William (Bill) Swanson and conducts spot evaluations of projects, aggressively seeking out problems before they fester. These dedicated efforts link employees’ economic self-interest to their effectiveness in keeping problems from getting trapped in roach motels. They have enabled Raytheon to continue to deliver strong results for its customers, employees and shareholders.
Source: Beyond Buy or Sell: What a Business Leader Really Can Learn from an Analyst Report
Original Publication: Ivey Business Journal
Subjects: Management, Organizational Behavior
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