If you are of a certain age (on the wrong side of 50), you probably remember the Facit calculator. It was a thing of beauty. It was adorned with all sorts of dials, buttons and switches that made it look fantastically futuristic by 1950s standards. If a Cadillac had somehow mated with a Royal typewriter, the Facit calculator would have been the result.
But underneath those spiffy looks, the Facit was a resolutely analogue device. And as such, it arguably had more in common with an abacus than any modern conception of the calculator. So when the digital calculator arrived on the scene, the Facit’s days were numbered.
Yet the company that produced it (Facit AB in Sweden) refused to address this existential threat.
In fact, engineers at Facit all walked around with cheap Japanese pocket calculators that they used to double-check the accuracy of the mechanical calculators rolling off their line.
Refusing to Change
A clearer sign that one’s product had become obsolete could scarcely be asked for. But when faced with this evidence, Facit did… nothing. It kept operating in exactly the same way as it had a decade earlier. Consequently, it went from being a market leader to largely irrelevant in a span of six months.
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At the other end of the spectrum, we find another Scandinavian brand: Lego. The Danish company has rebounded spectacularly, but for a while there, it was touch-and-go. In contrast to Facit, Lego very nearly innovated itself out of existence.
In the late 1990s, Lego was convinced that brightly-coloured bricks and square little Lego men were passé. Kids wanted TV shows, video games and action figures, didn’t they? So Lego did a silly thing — it decided to try and cater to the capricious whims of the most fickle demographic on the planet: ten-year-old boys.
The result can only be described as rampant and reckless innovation. Lego abandoned most of what it did well and tried to reinvent its offerings from the ground up.
It had some hits (such as Bionicle and Lego Star Wars) but it also had a plethora of failures — too many to handle. For a time, it genuinely seemed as if Lego might go under. It was only when the company figured out how to balance innovation with its inherent Lego-ness that it managed to reverse its fortunes.
Exploration and Exploitation
Striking this balance isn’t easy. According to Knut Haanaes, a strategist for the Boston Consulting Group, it is something most companies struggle with. The majority of businesses lean too heavily in one direction: They either innovate too much, or not enough.
“To me, the real solution to quality growth is figuring out the balance between two activities: Exploration and exploitation,” said Haanaes at a TED conference in 2015.
“Exploration is about coming up with what’s new. It’s about search, it’s about discovery, it’s about new products, it’s about new innovations. Exploitation is the opposite. Exploitation is taking the knowledge we have and making good, better. Exploitation is about making our trains run on time. It’s about making good products faster and cheaper.”
The Balancing Act
Both are necessary, but they need to be balanced carefully. You make money by finding an opportunity and exploiting it. In the short term, it is low-risk and lucrative. However, the goldmine will eventually run dry, which is why you need to search for new opportunities even while you’re exploiting an existing one.
The logic behind this is obvious — especially in an era where products become obsolete in about the same space of time that it takes Usain Bolt to complete the 100m dash — yet few companies manage it.
“Only about 2% of companies are able to effectively explore and exploit at the same time, in parallel. But when they do, the payoffs are huge. So we have lots of great examples. We have Nestlé creating Nespresso, we have Lego going into animated films, Toyota creating hybrids, Unilever pushing into sustainability — there are lots of examples, and the benefits are huge,” says Haanaes.
A big reason companies struggle, says Haanaes, is what he calls the ‘perpetual search trap.’ “We discover something, but we don’t have the patience or the persistence to get at it and make it work. So instead of staying with it, we create something new. We see this in the public sector as well. We all know that any kind of effective reform of education, research, health care, even defence, takes ten, 15, maybe 20 years to work. But still, we change much more often. We really don’t give them the chance.”
It’s a tendency that’s very prevalent amongst start-ups, but even large companies can make this mistake. Compared to exploration, exploitation can be boring, but it’s crucial if you want a business to grow.
The Success Trap
“Facit fell into the success trap,” says Haanaes. “They literally held the future in their hands, but they couldn’t see it. They were simply so good at making what they loved doing, that they wouldn’t change. We are like that, too. When we know something well, it’s difficult to change. Bill Gates has said: ‘Success is a lousy teacher. It seduces us into thinking we cannot fail.’ That’s the challenge with success.”
How do you prevent your company from falling into this trap? Haanaes suggests the following:
1. Get Ahead of the Crisis
If you see a storm brewing on the horizon, change course. Netflix used to deliver DVDs to people’s homes.
Today it is a streaming service. It realised that DVDs were going the way of the dinosaur, and decided to reinvent itself long before its existence came under threat.
2. Think in Multiple Time Scales
According to Haanaes, you need to simultaneously look at the long and short term.
“Taking a one-year perspective and looking at the valuation of a company, innovation typically accounts for only about 30%. So when we think one year, innovation isn’t really that important. Take a ten-year perspective on the same company — suddenly, innovation and the ability to renew accounts for 70%. But companies can’t choose. They need to fund the journey.”
3. Invite Talent
“I don’t think it’s possible for any of us to be able to balance exploration and exploitation by ourselves. I think it’s a team sport. I think we need to allow challenging. I think the mark of a great company is being open to be challenged, and the mark of a good corporate board is to constructively challenge,” says Haanaes.
4. Be Skeptical of Success
“It’s useful to look back at the old triumph marches in Rome, when the generals, after a big victory, were given their celebration,” says Haanaes.
“Riding into Rome on the carriage, they always had a companion whispering in their ear: ‘Remember, you’re only human.’”
When things are going really well, it’s all too easy to buy into your own PR. Don’t let success lull you into a false sense of security. No organisation is too big to fail. We live in an era of constant disruption, and no industry is off limits.
Knut Haanaes’s excellent talk, Two reasons companies fail — and how to avoid them can be found on the TED website.