April 2011

Strategies for Learning from Failure

Reprint: R1104B

Many executives believe that all failure is bad (although it usually provides lessons) and that learning from it is pretty straightforward. The author, a professor at Harvard Business School, thinks both beliefs are misguided. In organizational life, she says, some failures are inevitable and some are even good. And successful learning from failure is not simple: It requires context-specific strategies. But first leaders must understand how the blame game gets in the way and work to create an organizational culture in which employees feel safe admitting or reporting on failure.

Failures fall into three categories: preventable ones in predictable operations, which usually involve deviations from spec; unavoidable ones in complex systems, which may arise from unique combinations of needs, people, and problems; and intelligent ones at the frontier, where “good” failures occur quickly and on a small scale, providing the most valuable information.

Strong leadership can build a learning culture—one in which failures large and small are consistently reported and deeply analyzed, and opportunities to experiment are proactively sought. Executives commonly and understandably worry that taking a sympathetic stance toward failure will create an “anything goes” work environment. They should instead recognize that failure is inevitable in today’s complex work organizations.

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Ethical Breakdowns

Reprint: R1104C

Companies are spending a great deal of time and money to install codes of ethics, ethics training, compliance programs, and in-house watchdogs. If these efforts worked, the money would be well spent. But unethical behavior appears to be on the rise. The authors observe that even the best-intentioned executives may be unaware of their own or their employees’ unethical behavior. Drawing from extensive research on cognitive biases, they offer five reasons for this blindness and suggest what to do about them.

Ill-conceived goals may actually encourage negative behavior. Brainstorm unintended consequences when devising your targets.

Motivated blindness makes us overlook unethical behavior when remaining ignorant would benefit us. Root out conflicts of interest.

Indirect blindness softens our assessment of unethical behavior when it’s carried out by third parties. Take ownership of the implications when you outsource work.

The slippery slope mutes our awareness when unethical behavior develops gradually. Be alert for even trivial infractions and investigate them immediately.

Overvaluing outcomes may lead us to give a pass to unethical behavior. Examine good outcomes to ensure they’re not driven by unethical tactics.

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Why Leaders Don’t Learn from Success

Reprint: R1104D

What causes so many companies that once dominated their industries to slide into decline? In this article, two Harvard Business School professors argue that such firms lose their touch because success breeds failure by impeding learning at both the individual and organizational levels.

When we succeed, we assume that we know what we are doing, but it could be that we just got lucky. We make what psychologists call fundamental attribution errors, giving too much credit to our talents and strategy and too little to environmental factors and random events. We develop an overconfidence bias, becoming so self-assured that we think we don’t need to change anything. We also experience the failure-to-ask-why syndrome and neglect to investigate the causes of good performance.

To overcome these three learning impediments, executives should examine successes with the same scrutiny they apply to failures. Companies should implement systematic after-action reviews to understand all the factors that led to a win, and test their theories by conducting experiments even if “it ain’t broke.”

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Failing by Design

Reprint: R1104E

It’s hardly news that business leaders work in increasingly uncertain environments, where failures are bound to be more common than successes. Yet if you ask executives how well, on a scale of one to 10, their organizations learn from failure, you’ll often get a sheepish “Two—or maybe three” in response. Such organizations are missing a big opportunity: Failure may be inevitable but, if managed well, can be very useful. A certain amount of failure can help you keep your options open, find out what doesn’t work, create the conditions to attract resources and attention, make room for new leaders, and develop intuition and skill.

The key to reaping these benefits is to foster “intelligent failure” throughout your organization. McGrath describes several principles that can help you put intelligent failure to work. You should decide what success and failure would look like before you start a project. Document your initial assumptions, test and revise them as you go, and convert them into knowledge. Fail fast—the longer something takes, the less you’ll learn—and fail cheaply, to contain your downside risk. Limit the number of uncertainties in new projects, and build a culture that tolerates, and sometimes even celebrates, failure. Finally, codify and share what you learn.

These principles won’t give you a means of avoiding all failures down the road—that’s simply not realistic. They will help you use small losses to attain bigger wins over time.

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“I Think of My Failures as a Gift”

Reprint: R1104F

Lafley, the former CEO of Procter & Gamble, is regarded as one of the most successful chief executives in recent history. But like everyone else, he’s had his share of mistakes. Politicians and winning sports teams draw their biggest lessons from their toughest losses, he says, and the same has been true for him.

P&G learned more from its failed new brands and products than from its successes. Among Lafley’s favorite examples is the color-safe, low-temperature bleach that the company test-launched in the 1980s under the brand name Vibrant. P&G chose Portland, Maine, as the test market, hoping to escape notice from Clorox, which was headquartered in Oakland, California. But Clorox got wind of the plan in time to distribute free gallons of Clorox bleach to every household in Portland, making all P&G’s advertising dollars, sampling, and couponing irrelevant. “Game, set, match to Clorox,” Lafley says. But the good technology behind Vibrant remained, and when Clorox tried to enter the laundry detergent business a few years later, P&G modified that technology to create Tide with Bleach, which grew into a business worth more than half a billion dollars.

Lafley also talks about systematically analyzing 30 years’ worth of failed acquisitions to uncover five root causes for their lack of success: no winning strategic reason for the acquisition; integrating poorly or too slowly; expecting synergies that didn’t materialize; incompatible cultures; and company leaders who “couldn’t play together in the same sandbox.” That analysis led to changes that informed P&G’s highly successful acquisition of Gillette in 2005.

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How to Avoid Catastrophe

Reprint: R1104G

Most business failures—such as engineering disasters, product malfunctions, and PR crises—are foreshadowed by near misses, close calls that, had luck not intervened, would have had far worse consequences. The space shuttle Columbia’s fatal reentry, BP’s Gulf oil rig disaster, Toyota’s stuck accelerators, even the iPhone 4’s antenna failures—all were preceded by near-miss events that should have tipped off managers to impending crises. The problem is that near misses are often overlooked—or, perversely, viewed as a sign that systems are resilient and working well. That’s because managers are blinded by cognitive biases, argue Georgetown professors Tinsley and Dillon, and Brigham Young University’s Madsen.

Seven strategies can help managers recognize and learn from near misses: They should be on increased alert when time or cost pressures are high; watch for deviations in operations from the norm and uncover their root causes; make decision makers accountable for near misses; envision worst-case scenarios; be on the lookout for near-misses masquerading as successes; and reward individuals for exposing near misses.

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Building Resilience

Reprint: R1104H

Failure is a familiar trauma in life, but its effects on people differ widely. Some reel, recover, and move on with their lives; others get bogged down by anxiety, depression, and fear of the future. Seligman, who is known as the father of positive psychology, has spent three decades researching failure, helplessness, and optimism. He created a program at the University of Pennsylvania to help young adults and children overcome anxiety and depression, and has worked with colleagues from around the world to develop a program for teaching resilience. That program is being tested by the U.S. Army, an organization of 1.1 million people where trauma is more common and more severe than in any corporate setting. Nevertheless, businesspeople can draw lessons from resilience training, particularly in times of failure and stagnation.

The program is called Comprehensive Soldier Fitness, and it has three components: the Global Assessment Tool, a test for psychological fitness (administered to more than 900,000 soldiers to date); self-improvement courses following the test; and “master resilience training” (MRT) for drill sergeants. MRT focuses on enhancing mental toughness, highlighting and honing strengths, and fostering strong relationships—core competencies for any successful manager.

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Failure Chronicles

Reprint: R1104J

Seven CEOs, entrepreneurs, and venture capitalists tell stories of personal failures—and what they learned from them.

Doug Rauch, a former president of Trader Joe’s, admits to being a “control-aholic” and recounts how his micromanagement hindered the chain’s East Coast expansion.

Linda Rottenberg talks about her mantra, “Go big, or go home,” and how she made the call to close her business in India.

Anthony Tjan describes the ups and downs of his start-up when the irrationally exuberant dot-com boom went bust.

Roger McNamee frankly discusses his failed bid to change the world.

Wayne Pacelle, head of the Humane Society, talks about the importance of closing the deal.

Peter Guber recounts a life-changing experience with Muhammad Ali.

Whitney Johnson looks back on her first venture: investing in a friend’s dream.

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The Globe: How China Reset Its Global Acquisition Agenda

Reprint: R1104K

China’s economic progress has been so dazzling that people often forget that China Inc. has seen its share of failures too. Just look at the first cross-border acquisitions that Chinese companies made. Many of those high-profile deals—including TCL’s acquisition of France’s Thomson, SAIC’s takeover of South Korea’s Ssangyong Motor Company, and the D’Long Group’s purchase of America’s Murray, Inc.—ended badly. But for the Chinese, failure is not about falling down; it’s about refusing to get up. They quietly changed course, altering the kinds of targets they pursued and their rationale for M&A.

Chinese acquirers have learned to steer clear of deals that involve costly turnarounds or tricky integration. Instead of buying brands, sales networks, and goodwill, they now look for hard assets, like mineral deposits and oil reserves, or state-of-the-art technology and R&D. And where they once tried to buy market share abroad, today they focus on acquisitions that will help them strengthen their share in China. Most telling of all, they’re more willing to walk away—perhaps one of the surest signs of M&A sophistication.

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Managing Yourself: Can You Handle Failure?

Reprint: R1104L

Handling failure and blame is key to managerial success. But roughly 70% of Americans have a personality type that tends to react inappropriately when things go wrong. Some people are extrapunitive, always pointing a finger at someone else. Others are impunitive, denying there’s a problem or that they played any role. And still others are intrapunitive, heaping too much blame on themselves and seeing disasters where none exist.

Fortunately, there are ways to fix such flawed responses. The first step is to cultivate self-awareness; several personality tests can help you assess your interaction style. Next, deepen your political awareness to better understand what messages others are receiving.

Once you’ve identified your bad habits, you can move toward more-adaptive responses. Dattner and Hogan describe several strategies that can benefit any of the personality types. You should make sure to listen and communicate well, reflect on the situation and the people involved, think carefully before acting, and look for lessons when mistakes do happen.

Using detailed examples, the authors illustrate how people with the various personality types are apt to react to specific failures and explain what they might do differently. They also offer insights to help you recognize when your bosses, peers, or subordinates fit into one of the problematic categories and suggest ways to influence their behavior. The taxonomy and tactics they present will help you approach failure with an open mind and react in a balanced, constructive way.

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How I Did It: Blockbuster’s Former CEO on Sparring with an Activist Shareholder

Reprint: R1104A

When Antioco joined Blockbuster, in 1997, outsiders were predicting that the bricks-and-mortar video rental business would be killed off by market shifts and technological advances. But he believed the company could remain relevant.

First he needed to revise Blockbuster’s business model, which was built on buying individual VHS cassettes at a hefty price and then struggling to rent each one about 30 times to make back the money. Antioco’s team persuaded the movie studios to shift to a revenue-sharing system. Then the company jumped into the online business and eliminated its late fees, which had been a major customer irritant. Five years into Antioco’s tenure, Blockbuster’s revenues had nearly doubled.

Enter Carl Icahn, activist shareholder, who had his own ideas about how Blockbuster should be managed and particularly about Antioco’s compensation package. Icahn launched a successful proxy fight and secured seats on the board for himself and two others, putting Antioco on the defensive over his strategies for growth. The situation finally came to a head in a boardroom dispute over his bonus—resolved by his departure six months later. Three years after that, Blockbuster filed for bankruptcy.

Icahn offers his version of events in a sidebar to the article.

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