Start-Up or Stop: When Innovation Means Knowing How to Let Go

Excerpts from a conversation with Dan Levinthal professor of corporate management at Wharton, University of Pennsylvania and Phil Morle CEO of Pollenizer Global in Knowledge@AustralianSchool of Business July 23, 2013

To survive, companies need to innovate; they need to update their products, develop new ones and push their way into new markets. A strong research and development program is essential. But arguably equally important is the ability to cull those projects that aren’t working.

Letting projects go on for too long drains manpower and cash as well as management focus, and can erode a company’s profitability. Witness the Newton, a hand-held computer developed by Apple that was one of the factors that contributed to its loss of profitability in the 1990s. Despite strong indications it was not appealing to consumers, the company stuck with the project for more than a decade until founder Steve Jobs re-joined Apple and canned the project.

The Renewal Process
Levinthal argues that companies cannot rely on a sustained competitive advantage – the idea that a company will better its competition and continue to be profitable thanks to a single piece of technology it owns, or to its location, or to some other single factor. Rapid advances in technology and the dismantling of trade barriers mean that any competitive advantage a company has will likely last only five to 10 years.

“The world is changing, competitive contexts are changing, perhaps a different way to look at the question of competitive advantage is: how does the firm manage this renewal process?” Levinthal says.

“On the one hand you need the tough love of saying 'we’ll try these things and we’ll do the culling', but at the same time we can’t figuratively shoot the actors involved; failure has to become a little bit safe,” says Levinthal. “So it’s this difficult balance of being tough on resource allocation, but at the same time you can’t make it stigmatising and career-ending that you were ‘the guy who was in charge of that initiative in China that didn’t quite get any traction’.”

‘Failure’ as the way to success
Sillicon Valley does well with its mixture of high failure rate and occasional success and Levinthal says a challenge for strategic management is to try to replicate that renewal process within an individual organisation.

“There’s a high rate of failure, but the engineers and the money reassemble with the creation of a new entity,” he says. “So you’re getting a quite rapid cycle and occasionally you’re getting a dramatic Google or Facebook kind of success.”

Failure doesn’t attract the same sort of stigma in the tech sector as it does elsewhere in the corporate world. Indeed, when some investors in Silicon Valley assess the credentials of entrepreneurs they look for a couple of failures in the past, reasoning that they will have been informative experiences which better equip the entrepreneurs for future success.

Controlled Micro-Failures
The managers at Pollenizer have also tried to de-stigmatise failure, instead coining the word “flearning” – a combination of failure and learning.

“This term failure is just rubbish, because it does suggest something bad has happened,” says Morle, “and actually the learning that’s necessary to discover a sustainable business model comes through as many failures as possible. The process of creating a start-up is as many controlled micro-failures, or flearnings, as you can do in as short a period of time.”