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