This is the post that I link to most often in my current writing. I do this because I find myself regularly in the position of urging people to take on more risk, not to take a wait-and-see attitude. The reason for this is that the competitive environment moves swiftly and is heartless: in a networked world, most situations are winner-takes-all. So often the outcome for a safe choice is no different from a decision to try something new and fail. Some readers will be able to identify the names of the company and some of the personalities. I have chosen not to identify them, in part to avoid being dragged into another operating review.
A Parable of Innovation in Publishing — A Mostly True Story (2011)
My professional time is pretty much evenly divided between representatives of established organizations in the publishing world and upstarts who are looking to create something new, often at the expense of the established companies. (And within these two broad categories, there are both for-profit and not-for-profit entities.) This post is addressed to the legacy publishers, for-profit and not-for-profit alike, who perhaps take too much pleasure when a new company or a new (perhaps outlandish) initiative of an established company fails. I have thought about addressing a different post to the upstarts, but they never listen, ever.
Many years ago, I was working for a corporate conglomerate that just happened to own a big portfolio of publishing companies. Now, you might ask, why would a pillar of capitalism invest scarce dollars in an industry that is backward, cramped, and not likely to grow? The answer was that the conglomerate, which had originally been built by buying up manufacturing concerns, presciently understood that the US was going to lose its manufacturing base, so it diversified rapidly into intellectual property businesses. There was a CEO of the combined publishing businesses, whom I will simply characterize as “colorful,” though some people would undoubtedly have offered adjectives that were stronger. He offered this parable at a meeting that I was invited to attend and at which some of my colleagues were hung by their heels for missing their numbers that quarter.
Let’s imagine (the colorful CEO said) an industry in which there are 10 competitors. Although they differ somewhat in size and strategy, all of them have meaningful pieces of the market they serve. One day, a new technology or business process comes on the horizon. All of the competitors study this carefully. It’s a big deal, the kind of thing that could transform an industry. But there are questions about it. It might not work. It will be very expensive to implement. The implementation process itself will distract the management from the core business. And the core business ain’t bad: it continues to grow steadily in the single digits every year, is profitable, and has good characteristics for cash flow.
Why fix what isn’t broken?
The arguments against using the new technique are strong enough that five of the 10 competitors decide to sit it out. They will stay focused on their businesses, attempt to get closer to their customers, and continue to work hard on execution, improving their products and services year by year. And they make this decision because they are very good at what they do. Their customers like them; their brand is highly regarded.
The other five companies, however, choose to pursue the new opportunity. Their reasons for doing so are not necessarily identical. Some of these companies are a bit smaller than the others in the overall category and are thus motivated to take on more risk. Perhaps one or two have began to believe that the market will undergo consolidation in the coming years and that the 10 competitors could be reduced to three or four; they don’t want to be among the acquired. Or perhaps one of these companies has a new CEO who simply has something to prove — to the industry, to the Board, to him or herself. Whatever the reasons, five companies decline to pursue the opportunity and five companies decide to run after it.
Several years pass. The new technique has now been tested, and the market has spoken. It comes as no surprise that many of the companies that chose to explore the new technology failed miserably at it. One suffered from cost overruns, another found that its technical capability was not up to the task of implementing the new procedures, another got so distracted with the problems of launching the new process that it took its eye off the ball and began to lose existing customers to its rivals. In the end, four of the five competitors failed in their attempts and either went out of business or had to be sold to a competitor.
The lesson for these four was clear: innovation is a difficult task and few who take it on are successful.
As the unsuccessful management teams dusted off their resumes and began to look for new jobs, they were met with predictable homilies:
- If it ain’t broke, don’t fix it.
- A bird in the hand is worth two in the bush.
The wisdom of the ages never felt more tangible to them than at the time that they failed.
But how about company #5? This company pursued the new opportunity and got it to work for them. It wasn’t easy, and they made many mistakes along the way, causing them to doubt their decision many times; but in the end they prevailed, perhaps as much by luck as by talent. Now they were the one company in the market with a new way of doing business. They acquired some of their competitors and saw their market share grow. Most importantly, the new innovation enabled the overall market to grow, thus company #5 had a bigger slice of a bigger pie. They too were met with homilies:
- To the victor belongs the spoils.
- Nothing ventured nothing gained.
There appears to be a wise old saying for every possible occurrence, making wisdom a contradictory and unreliable pilot.
But what of the other five companies? They were prudent and passed on the new technology. For a time, they continued to grow, in part at the expense of their rivals who were struggling unsuccessfully to implement the new technique. But after a while, the one company that had succeeded with the new technology began to take away the customers of the more conservative firms. The new technology drove down costs, bringing new customers into the industry, which only the successful innovator could serve. And the new technology improved service, which helped to pry away customers who had worked for years with the innovator’s rivals.
In the end, the five prudent companies began to see their growth stalled. Customer defections put pressure on revenue, which triggered rounds of cost-cutting. Cost-cutting made it harder to invest in new technology, making it increasingly difficult for these competitors to compete with the industry’s one successful innovator. In time, these five companies found themselves to be marginalized in the marketplace. Some were sold to the successful innovator, others developed a more limited strategy servicing a small niche.
The moral of the story (the colorful CEO said) is that the outcome is the same for companies that take risks and fail as it is for companies that don’t take risks. There is no place for prudence in business, no place for holding a pat hand.
I offer this parable to those who criticized Microsoft for the unsuccessful launch of the “Bob” user interface; to those who ridicule Google for the once much-ballyhooed Wave project, now aborted; for critics of the many unsuccessful attempts (and still counting) at harnessing social media to STM publishing; and for people everywhere who confuse skepticism with foresight.
Great companies have the ability to fail well. If we want to be critics, let’s focus our attention on companies that have not made a mistake in the past 10 years.
A few weeks after the CEO delivered his parable, he fired my boss. Soon after, I joined my colleagues in being hung by the heels at an operating review.