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TED@BCG London

Knut Haanaes: Two reasons companies fail -- and how to avoid them

June 30, 2015

Is it possible to run a company and reinvent it at the same time? For business strategist Knut Haanaes, the ability to innovate after becoming successful is the mark of a great organization. He shares insights on how to strike a balance between perfecting what we already know and exploring totally new ideas -- and lays out how to avoid two major strategy traps.

Knut Haanaes - Strategist
IMD's Knut Haanaes believes that the secret to creating lasting, impactful companies is to find a balance between doing what you're good at and looking for new challenges to take on. Full bio

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Double-click the English subtitles below to play the video.
Here are two reasons companies fail:
00:13
they only do more of the same,
00:17
or they only do what's new.
00:20
To me the real, real
solution to quality growth
00:23
is figuring out the balance
between two activities:
00:28
exploration and exploitation.
00:31
Both are necessary,
00:34
but it can be too much of a good thing.
00:36
Consider Facit.
00:40
I'm actually old enough to remember them.
00:42
Facit was a fantastic company.
00:45
They were born deep in the Swedish forest,
00:47
and they made the best
mechanical calculators in the world.
00:50
Everybody used them.
00:54
And what did Facit do when
the electronic calculator came along?
00:56
They continued doing exactly the same.
01:01
In six months, they went
from maximum revenue ...
01:04
and they were gone.
01:08
Gone.
01:10
To me, the irony about the Facit story
01:11
is hearing about the Facit engineers,
01:15
who had bought cheap, small
electronic calculators in Japan
01:18
that they used to double-check
their calculators.
01:23
(Laughter)
01:27
Facit did too much exploitation.
01:29
But exploration can go wild, too.
01:32
A few years back,
01:34
I worked closely alongside
a European biotech company.
01:35
Let's call them OncoSearch.
01:40
The company was brilliant.
01:42
They had applications that promised
to diagnose, even cure,
01:44
certain forms of blood cancer.
01:48
Every day was about
creating something new.
01:52
They were extremely innovative,
01:55
and the mantra was,
"When we only get it right,"
01:58
or even, "We want it perfect."
02:00
The sad thing is,
02:04
before they became perfect --
02:06
even good enough --
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they became obsolete.
02:10
OncoSearch did too much exploration.
02:13
I first heard about exploration
and exploitation about 15 years ago,
02:17
when I worked as a visiting
scholar at Stanford University.
02:23
The founder of the idea is Jim March.
02:27
And to me the power of the idea
is its practicality.
02:29
Exploration.
02:34
Exploration is about
coming up with what's new.
02:36
It's about search,
02:40
it's about discovery,
02:41
it's about new products,
02:43
it's about new innovations.
02:44
It's about changing our frontiers.
02:47
Our heroes are people
who have done exploration:
02:51
Madame Curie,
02:54
Picasso,
02:56
Neil Armstrong,
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Sir Edmund Hillary, etc.
02:58
I come from Norway;
03:01
all our heroes are explorers,
and they deserve to be.
03:03
We all know that exploration is risky.
03:09
We don't know the answers,
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we don't know if we're going to find them,
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and we know that the risks are high.
03:16
Exploitation is the opposite.
03:18
Exploitation is taking
the knowledge we have
03:20
and making good, better.
03:23
Exploitation is about making
our trains run on time.
03:26
It's about making good products
faster and cheaper.
03:29
Exploitation is not risky --
03:34
in the short term.
03:37
But if we only exploit,
03:39
it's very risky in the long term.
03:41
And I think we all have memories
of the famous pop groups
03:44
who keep singing the same songs
again and again,
03:48
until they become obsolete
or even pathetic.
03:51
That's the risk of exploitation.
03:56
So if we take a long-term
perspective, we explore.
04:00
If we take a short-term
perspective, we exploit.
04:05
Small children, they explore all day.
04:09
All day it's about exploration.
04:12
As we grow older,
04:15
we explore less because we have
more knowledge to exploit on.
04:16
The same goes for companies.
04:21
Companies become,
by nature, less innovative
04:24
as they become more competent.
04:28
And this is, of course,
a big worry to CEOs.
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And I hear very often questions
phrased in different ways.
04:35
For example,
04:39
"How can I both effectively run
and reinvent my company?"
04:40
Or, "How can I make sure
04:46
that our company changes
before we become obsolete
04:48
or are hit by a crisis?"
04:52
So, doing one well is difficult.
04:55
Doing both well as the same time is art --
04:57
pushing both exploration and exploitation.
05:01
So one thing we've found
05:04
is only about two percent of companies
are able to effectively explore
05:06
and exploit at the same time, in parallel.
05:13
But when they do,
05:17
the payoffs are huge.
05:19
So we have lots of great examples.
05:22
We have Nestlé creating Nespresso,
05:24
we have Lego going into animated films,
05:27
Toyota creating the hybrids,
05:30
Unilever pushing into sustainability --
05:32
there are lots of examples,
and the benefits are huge.
05:35
Why is balancing so difficult?
05:39
I think it's difficult
because there are so many traps
05:42
that keep us where we are.
05:45
So I'll talk about two,
but there are many.
05:47
So let's talk about
the perpetual search trap.
05:50
We discover something,
05:54
but we don't have the patience
or the persistence
05:56
to get at it and make it work.
05:59
So instead of staying with it,
we create something new.
06:01
But the same goes for that,
06:04
then we're in the vicious circle
06:05
of actually coming up with ideas
but being frustrated.
06:07
OncoSearch was a good example.
06:12
A famous example is, of course, Xerox.
06:14
But we don't only see this in companies.
06:18
We see this in the public sector as well.
06:20
We all know that any kind
of effective reform of education,
06:23
research, health care, even defense,
06:29
takes 10, 15, maybe 20 years to work.
06:31
But still, we change much more often.
06:35
We really don't give them the chance.
06:38
Another trap is the success trap.
06:42
Facit fell into the success trap.
06:46
They literally held
the future in their hands,
06:50
but they couldn't see it.
06:53
They were simply so good
at making what they loved doing,
06:54
that they wouldn't change.
06:58
We are like that, too.
07:01
When we know something well,
it's difficult to change.
07:02
Bill Gates has said:
07:06
"Success is a lousy teacher.
07:08
It seduces us into thinking
we cannot fail."
07:11
That's the challenge with success.
07:16
So I think there are some lessons,
and I think they apply to us.
07:19
And they apply to our companies.
07:23
The first lesson is:
get ahead of the crisis.
07:25
And any company that's able to innovate
07:29
is actually able to also buy
an insurance in the future.
07:32
Netflix -- they could so easily
have been content
07:36
with earlier generations of distribution,
07:39
but they always -- and I think
they will always --
07:42
keep pushing for the next battle.
07:44
I see other companies that say,
07:47
"I'll win the next innovation cycle,
whatever it takes."
07:49
Second one: think in multiple time scales.
07:55
I'll share a chart with you,
07:58
and I think it's a wonderful one.
08:00
Any company we look at,
08:02
taking a one-year perspective
08:04
and looking at the valuation
of the company,
08:05
innovation typically accounts
for only about 30 percent.
08:08
So when we think one year,
08:12
innovation isn't really that important.
08:13
Move ahead, take a 10-year perspective
on the same company --
08:16
suddenly, innovation and ability
to renew account for 70 percent.
08:19
But companies can't choose.
08:26
They need to fund the journey
and lead the long term.
08:27
Third:
08:32
invite talent.
08:34
I don't think it's possible for any of us
08:35
to be able to balance exploration
and exploitation by ourselves.
08:38
I think it's a team sport.
08:42
I think we need to allow challenging.
08:44
I think the mark of a great company
is being open to be challenged,
08:48
and the mark of a good corporate board
is to constructively challenge.
08:53
I think that's also what
good parenting is about.
08:58
Last one: be skeptical of success.
09:02
Maybe it's useful to think back
at the old triumph marches in Rome,
09:05
when the generals, after a big victory,
09:12
were given their celebration.
09:15
Riding into Rome on the carriage,
09:18
they always had a companion
whispering in their ear,
09:21
"Remember, you're only human."
09:25
So I hope I made the point:
09:29
balancing exploration and exploitation
09:32
has a huge payoff.
09:35
But it's difficult,
and we need to be conscious.
09:37
I want to just point out two questions
that I think are useful.
09:40
First question is,
looking at your own company:
09:45
In which areas do you see
that the company is at the risk
09:49
of falling into success traps,
09:53
of just going on autopilot?
09:55
And what can you do to challenge?
09:58
Second question is:
10:03
When did I explore something new last,
10:06
and what kind of effect did it have on me?
10:09
Is that something I should do more of?
10:12
In my case, yes.
10:15
So let me leave you with this.
10:18
Whether you're an explorer by nature
10:20
or whether you tend to exploit
what you already know,
10:23
don't forget: the beauty
is in the balance.
10:27
Thank you.
10:33
(Applause)
10:34

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Knut Haanaes - Strategist
IMD's Knut Haanaes believes that the secret to creating lasting, impactful companies is to find a balance between doing what you're good at and looking for new challenges to take on.

Why you should listen

What strategy traps repeatedly entice well-meaning companies? Sweet words that lure with a sense of promise and growth, but ultimately fail to deliver again and again? How do we balance exploration and exploitation without falling fully into either ditch?

Knut Haanaes is a professor of strategy and international management at IMD, formerly senior partner and global leader of BCG's strategy practice – where he is still a BCG Fellow. Through his work with clients, Knut has accumulated extensive experience in a number of industries on issues of strategy. He holds a Master’s Degree in Economics from the Norwegian School of Economics, a PhD in Strategy from the Copenhagen Business School, and has been a visiting scholar at Scancor, Stanford University.

In 2015, together with Martin Reeves and Janmejaya Sinha from BCG, Haanaes published the book Your Strategy Needs a Strategy. The book is already translated into a number of languages.

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