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To Your Battle Stations!
By Mark W. Sheffert
September 2001

"The aspect of the Pearl Harbor disaster which is really surprising is that so many people failed to do either the obvious or the sensible things."
—Washington Star, September 1, 1945

The recent movie "Pearl Harbor" and related media stories surrounding it have dusted off the history lessons of my youth and cause me to wonder again why the Japanese attack was such a complete surprise.

After the breakdown of peace negotiations in 1941 between the United States and Japan, the U.S. anticipated Japanese aggression of some sort. There were so many possible targets, but an attack on U.S. soil wasn’t considered a real danger. U.S. commanders also had some indication of an impending Japanese attack from Navy cryptanalysts intercepting Japanese diplomatic messages. But Navy communications intelligence was relatively new and unproven, and conclusions were based on Japanese communication patterns rather than actual decoded messages. So their warnings were met with skepticism and left unheeded.

The Japanese First Air Fleet began its journey toward Hawaii on November 26, but was undetected until the day before the attack at Pearl Harbor. A Royal Australian Air Force pilot saw the fleet on December 6, but U.S. Army intelligence concluded it was headed for Thailand.

Even up to an hour before the attack on December 7 there were signs that something was amiss. In the hours before dawn, U.S. Navy vessels spotted an unidentified submarine periscope near the entrance to Pearl Harbor. It was attacked and reported sunk, but the report was handled routinely. Then at 7:00 a.m., an Army radar operator at Opana spotted approaching attack planes, but passed it off as American planes due to arrive that morning.

Despite all these warning signs, Japanese aircrews achieved total surprise when they bombed American ships, warplanes, and military installations on Oahu shortly before 8:00 am. Though it lasted less than two hours, the attack on Pearl Harbor destroyed nearly all U.S. warplanes sitting on the ground and damaged or destroyed
seven of eight battleships sitting in "Battleship Row" in the harbor. When the attack ended, American dead numbered 2,403 and 1,178 military and civilian were wounded. The attack pushed the U.S. into a world war and changed the course of history forever. If warning signs before the attack had been heeded, maybe the U.S. could have dispersed its Pacific Naval Fleet and been in a position to defend itself and avoid annihilation. Or maybe war could have been avoided all together. Who knows, but it’s safe to guess there would have been a different outcome on that day.

Now I realize it’s not of the same magnitude, but the surprise at Pearl Harbor is oftentimes similar to the surprise when businesses sink. Poor planning, undercapitalization, and bad decisions produce early warning signs that, if left unheeded, will lead to crisis and failure. It’s like executives wake up one day and say, "Holy s---! My business is falling apart!" But if they had had their radar on, they would have recognized at least one of these early warning signs of trouble:

Winston Churchill Leadership: During a crisis, a powerful omnipotent leader like Winston Churchill is what a company needs. But during peace and prosperity, it’s not good for a company to depend too much on one person who does everything. A classic Type A personality, this person is an autocratic manager who controls every decision and can’t delegate authority or train new management. The result is over-extended management, unclear lines of authority, and a dictatorship (not necessarily benevolent).

Cryptographic Messages: Nobody knows what anybody else is doing and information is based on rumors rather than facts. Knowledge is perceived as power, so nobody wants to share it. Communication between departments, management, and employees are ineffective or non-existent; meetings are unnecessary or unproductive; and interdepartmental coordination is poor.

Excessive Troup Turnover: If management is spending a lot of time with "help wanted" ads, hiring and training new employees, and introducing a lot of new faces, the company probably has excessive employee turnover. And if turnover is caused by management’s neglect of employee morale issues and ineffective compensation / incentive programs, there’s a disaster waiting to happen. High employee turnover results in decreased productivity and, ultimately, lost business.

No Battle Plan: If the company is operating without a strategic and / or business plan or, if there is a plan, the corporate goals are not understood, achieved, or communicated to employees, there’s trouble waiting to erupt. When this happens, companies become reactionary to customer wishes and competitive factors, losing sight of their core business.Particularly if it is a family-owned business, the lack of a succession plan and careful grooming of a new president can be dangerous. And, the business plan should take into account the company’s financing needs at each stage of growth to ensure sufficient capitalization.

Lack of Military Intelligence: The military relies daily on intelligence reports about its enemies, and so should business executives. If the company is experiencing declining business from established customers or the company’s core market, it is out of touch with its customers and its marketplace. This problem is worsened if the company is dependent on a single customer that accounts for more than 70 percent of the company’s business. Also watch for an increase in returned goods and customer complaints and late or slow delivery of products.

Unaware of Battle Results: Lack of timely and accurate financial information results in poor decision-making. Managers must have timely financials (and not just a monthly profit and loss statement). Oftentimes my firm sees companies that don’t get their financial results from their financial department for 60 to 90 days. By the time they get the results, they could be broke and not even know it! If management doesn’t operate from up-to-date cash flow and P&L statements, they’re not aware of their battle results … and the attack planes could already be headed their way.

Momentum of Defeat: After the devastating attack on Pearl Harbor, President Roosevelt understood the need for a wholehearted commitment to the U.S. war effort to turn the momentum from defeat to victory. Similarly, if a company has a history of defeat through failed growth strategies due to lack of cash, management expertise, or
poor market analysis, this is a sign of trouble. These defeats will have drained the company’s cash, wasted time, and bruised employee morale, which often create reluctance for employees to embark on new expansion plans. Don’t allow defeat to become a habit.

Not Deploying Entire Military: Instead of using multi-dimensional management, uncontrolled growth in one area of the business (usually sales) can cause management to focus only on that aspect of their business and neglect other supporting functions such as quality control or operations. Or, a company growing out of control can quickly become unmanageable with existing (inadequate) information systems and management skills.

Officers Club Management: Profits aren’t put back into the business, but are spent on luxuries or deposited into the owner’s retirement portfolio. It’s tempting to enjoy quick profits, but dangerous to the long-term health of the company’s business if machines and technologies aren’t at least keeping pace with competition. An autopilot
management style will cause the company to fail to adapt to new technologies or change with market changes and conditions.

Not Knowing Your Ammo Supplier: Executives tend to avoid meetings with their banker, especially if trouble is brewing. And although it’s natural to clam up when there’s bad news to report, the result is only an adversarial relationship. Realize that it is in a banker’s best interest to work with his or her customers. Bankers usually will
extend loan terms if the customer can show they have a clear plan to overcome their problems.

Blindfolded Generals and Politicians: Too many boards operate routinely, just going through the motions, as opposed to focusing on the fact that a company is in trouble. Failure of the board of directors to diligently oversee the company’s strategies means people wearing blindfolds are running the company. If board meetings have become routine and boring, it’s time to shake things up. Don’t just give reports about how great management is doing; engage board members into serious discussions about the company’s operations and its future. Believe it or not, conflict at board meetings can be good.

Navigating the Payables Minefield: When the financial manager starts to hop through the payables minefield, robbing Peter to pay Paul, there’s trouble brewing. Soon, accounts payables are dragging out 90 to 120 days or more and the only vendors who get paid are the ones who scream the loudest. That’s a sign that the company’s cash has been getting tighter, resulting in increased trade credit difficulties and restrictions. If the company is on C.O.D. with its vendors, the death spiral may have begun.

Denoidance: For my last warning sign, I made up a new word: denoidance … that sort of sounds like a military term, doesn’t it? Denoidance is the combination of denial and avoidance; a business executive’s state of mind when his / her company is beginning to face trouble. If a company’s president avoids returning phone calls and meeting with important people like bankers, major suppliers, and key customers, that’s a sure sign of trouble. He / she is too far into denial and depression to handle simple things like returning phone calls and doing routine reports.

As we’ve learned from the lesson of Pearl Harbor, for whatever reason it’s easy to rationalize or ignore telltale signs of trouble. But to avoid an attack on the future stability of your company and having to tell your managers and employees "To your battle stations!" when the attack planes are already overhead, pay attention to these
early warning signs of trouble.


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