Strategy series

Written on 27 April 2017
By George Tovstiga, PhD, Professor of Strategy, EDHEC Business School (Paris); it draws on insights gained from trategy practice, executive education and consulting..


90 percent of new businesses fail

 

Failure is inevitable. While firms obsess over success, they tend to forget that the far more probable outcome of their endeavour is failure. Not even the best companies are exempt from this reality – and the stakes are high. Yet, failing intelligently may be an opportunity for business – provided companies learn how to avoid preventable failure, while using every opportunity to extract learning from failure of the intelligent type, if and when they do fail. This requires companies to be clever about how they manage their failure.

Failure has many faces

Failure is ubiquitous:

► The average tenure of a company on the S&P 500 Index decreased from 33 years in 1965 to currently about 14 years.

► As many as 90 percent of new businesses fail.

► Venture companies consider themselves lucky if 20 percent of their investments pay off.

Consider also that failure is viewed very differently in different cultural contexts. While a bankruptcy in Europe may result in an end to a business career, it is often viewed a badge of honour in the US Silicon Valley.

Failure is not always failure

This suggests there might be something redeemable about failure. Indeed, success and failure are not polar opposites. Although typically stigmatized, failure may, in fact, be a precedent for success.

Several examples come to mind:

Champagne was invented by a monk named Dom Perignon when a bottle of wine inadvertently underwent a secondary fermentation.

3M invented an adhesive that failed. It didn’t stick well enough for its originally conceived purpose.  But it was ‘good enough’ to create 3M’s billion-dollar Post-It note business.

► Scientists at Pfizer were initially disappointed when their new drug Viagra failed to relieve high blood pressure.

Admittedly, these are the notable exceptions.  Far more often, failure translates to wasted time, money and effort with no recoverable benefit. We refer to truly wasteful failure as ‘failure of the preventable type’.

So, what is "failure"?

In a strategic business context we define failure as an outcome that does not deliver its ultimate strategic objective – that of enabling the firm to achieve competitive advantage. This definition invokes several important points: It links success and failure to the firm’s ability (or, as the case may be, inability) to achieve a competitive edge. Just as importantly, it does not rule out the possibility of failure as an intermediary to success. For this to be the case, however, failure must necessarily be of the intelligent type. We want to avoid ‘preventable’ failure while encouraging failure that allows extraction of valuable learning. We refer to this latter type as ‘intelligent failure’.

Failure is (still) poorly managed in firms

A number of managerial issues stand in the way of firms ‘failing intelligently’.  For one, the precise ‘measurement’ of success and failure may prove to be difficult. Many firms lack adequate metrics. Only 7 percent of innovation officers queried in a recent polling of senior innovation officers[1] reported that they had the means to unambiguously measure innovation failure in their firms. A lack of clarity in distinguishing between preventable and intelligent failure is another issue. Although failure per se is still widely stigmatized (59 percent of respondents confirmed this), only a third (34 percent) of respondents reported a clear distinction between preventable and intelligent failure in their firm. The Copenhagen survey findings also confirm that firms are not very good at learning from failure. 58 percent of innovation officers polled admitted that their firms do not perform well in this area.

Framing the challenge of failing ‘intelligently’

Failure is inevitable, especially when engaging in innovation. Some innovation effort will always end up in the waste bin. The challenge of managing failure intelligently thus prompts the following critical questions:

► If innovation failure is inevitable, what can firms do to minimise their preventable failure rate; if and when they do fail, how can firms ‘learn to fail intelligently’?

► Moreover, how can firms maximise the learning they extract from (intelligent) failure? 

Learning to ‘failing intelligently’

Failure is a mind-set thing. Fear of failing encourages “playing not to lose” rather than “playing to win”.  Organisational cultures that accept ‘trying and failing’ align with the latter. However, simply “embracing” failure is not enough. Companies must learn to purposefully manage it. There is no single right way to do this. Nonetheless, a few simple first steps can help firms start recapturing positive returns from failure:

  1. Distinguishing between preventable and intelligent failure. All failure is not created equal. A good understanding of the cause and context of failure can help firms minimize failure of the wasteful type.  Insightful analysis of failure requires discipline and demands both emotional and cognitive honesty. Interdisciplinary teams that bring multiple perspectives to the table can be effective to that end.    
  2. Destigmatizing “intelligent failure”. Setting an organizational context that encourages intelligent risk taking and doesn’t punish intelligent failure. This calls for a change in mind-set and requires unequivocal leadership commitment. This, however, is only a start. Intelligent failure encompasses systematic and purposeful capture, transfer and sharing of learning from each and every opportunity. Successful firms view intelligent ‘trying and failing’ as integral to their ‘strategy of small losses’.
  3. Assessing failure objectively and comprehensively.  Many firms shy away from any systematic effort to assess failure. Failure becomes undiscussable because career prospects are often at stake. Moreover, deep-seated biases often throw up barriers to objective assessment of outcomes. Performance metrics always present challenges, especially so when the potentially conflicting interpretation of failed outcomes is at stake. A clear delineation of what success and failure would look like before engaging in an innovation effort can help to circumvent such needless impasses.

In many ways, the ubiquity and inevitability of innovation failure tend to make it a playing-field leveller in today’s competitive business environment. No industry and no firm is immune to failure. Paradox though it may seem failure offers real opportunity for strategic advantage if managed intelligently. Relatively few firms are really good at dealing intelligently with failure. Those that do, stand to achieve a significant competitive edge.

 


[1] EDHEC research: Polling of 138 senior innovation officers representing a cross-section of European predominantly European companies across all sectors at the Innovation Summit 2016 / Copenhagen (DK) in November 2016.