Failure provides important lessons that can help enhance the future chances of success. Cultures, companies and individuals that allow themselves to learn from mistakes, and that see failure as setbacks along the way rather than as a final outcome, are much more likely to address problems, reduce imperfections and enable greater success
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The scientific prototyping process is perhaps the best example of how failure contains lessons for future success. By conducting multiple experiments, most of which will not work, scientists and engineers can slowly build up their knowledge and, by a process of elimination and incremental steps forward, perfect new products or innovations over a period of time.
“Success teaches us very little,” says Henry Petroski, an Engineer and the Author of To Forgive Design: Understanding Failure. “When something works, we
know very little about why. Failure, on the other hand, is full of information, because something clearly did not work. From that process, we can learn a lot about how to avoid future mistakes and increase the chances of success.”
Most of the respondents to our survey say that they found failure a valuable experience. But again, there are differences between entrepreneurs and those from other backgrounds. Among entrepreneurs, 56% say they learned a great deal from the failure they experienced in their business and/or career, compared with 41% of non-entrepreneurs. Entrepreneurs are more likely to say that the experience helped to strengthen their character, and to believe that past failure in entrepreneurial endeavours increases the change that a new business will succeed.
What makes these entrepreneurs seemingly more able to learn from adversity? Professor Dweck thinks that it comes down to whether an individual has a fixed mindset or a growth mindset. People who have a fixed mindset believe that their basic talents and intelligence are traits that they are born with and that cannot be changed. “These individuals avoid situations that make them look inadequate and they worry constantly about failure because they believe that it unmasks their deficiencies,” she explains.
By contrast, those individuals with a growth mindset believe that their basic abilities can be developed through hard work and training. “People with a growth mindset relish taking on challenges and do not view a setback as an indictment of their abilities,” says Professor Dweck. “Instead, they see it as information about what they need to do now and what they can learn.”
Those individuals who are willing to learn from failure may even be able to change the makeup of their brain. “The brain is malleable and able to grow and even reorganise itself with new learning,” says Professor Dweck. “Every time someone stretches out of their comfort zone to learn something new, their brains form new connections. So failures are not only inevitable but also fantastic opportunities to enhance your abilities.”
Even the most catastrophic setbacks can be a source of important lessons. Rachel Bridge, former Enterprise Editor for the Sunday Times and Author of How to Start a Business Without Any Money, describes how entrepreneurs who experience failure are sometimes said to have completed a “million dollar MBA.” “The argument is that, by losing a million dollars from a failed company, you’ve actually learned far more than you would have done by doing an MBA,” she says. “It’s a fairly expensive way of getting the knowledge you need but you ultimately reach the same conclusion.”
In the rest of this section, we look at how entrepreneurs and other business professionals can learn from major setbacks. Based on our research and interviews, we have identified four key steps that individuals can take to help them learn from failure and also use it positively as a source of future success.
At some stage, you are bound to take an unanticipated hit because that’s how the world is. The key is therefore to design your system so that it’s more resilient, so if one of these events comes along, you can bounce back more quickly
1. Accept that failure exists
We have seen throughout this report that failure is an inherent part of business and, indeed, any other aspect of life. Even evolution itself is essentially a story of failure — the process of natural selection means that an estimated 99.9% of all species that have ever existed are now extinct.
Yet, despite the prevalence of failure, many individuals go to extreme lengths to downplay its importance. A strong cultural bias against failure and a tendency to focus on narrow, often short-term measures of success creates a powerful fear of making mistakes that can percolate through an entire organisation. In turn, this deters individuals from taking the risks that are necessary for future success.
As an entrepreneurial venture grows, it is inevitable that there will be more layers of management interposed between the founder and the front line of the business. The danger then is that mistakes are concealed from the top because of a desire to avoid bringing bad news. “As the business leader of a really small company, making a mistake is like someone slapping you in the face with a wet fish,” says Will Butler-Adams, CEO of Brompton Bikes, a U.K.-based designer and manufacturer of folding bicycles. “But as the company grows, you can end up being shielded from mistakes if you’re not careful. It’s important that your management team have no concerns about bringing you bad news.”
Addressing this deeply embedded fear of failure requires entrepreneurs to take concrete steps to get mistakes out in the open. “If employees could admit that they had done something wrong more easily, and if it was more acceptable to say that something wasn’t working, then companies would learn a lot more and a lot more quickly,” says Economist Mr. Ormerod. “There are little things going wrong all the time, but no one wants to point them out. So the problems multiply and you get failures that are much worse as a result.”
One interesting approach taken by some companies is to institutionalise the celebration of failure. At the Indian conglomerate Tata, for example, Chairman Ratan Tata has established an award for the best failed idea. By getting mistakes out into the open, and figuring out how the company can learn from those mistakes, Mr. Tata hopes to communicate to employees the importance of trying and failing, and ultimately of drawing positive lessons from these failures. In addition, the information that emerges from this process can be extremely valuable. Mr. Tata has described his award for failure as “a goldmine” of good ideas13.
A bigger challenge for companies is to create an environment where more fundamental problems are identified and brought to the attention of management. Pointing out problems is rarely a popular task. Individuals who blow the whistle on perceived failures will typically face a lonely battle and, rather than being rewarded for their actions, are often excoriated. When Peter Gardiner, who owned a travel and concierge company, blew the whistle on fraudulent payments made by BAE Systems to Saudi officials in 2004, he was initially investigated himself, losing his career and marriage in the process. It took four years before he was vindicated, when the U.S. fined BAE USD$400m.
This highlights the importance of having entrepreneurs who are prepared to admit to mistakes, are able to tolerate dissenting views and who put in place contingency plans so that there is a plan B when problems do arise. “Business leaders need the confidence to admit when things are going wrong and must be willing to listen to people who bring us bad news,” says Mr. Butler-Adams. “Bosses who think they are always right never learn.”
2. Create a safe environment for failure
This willingness to experiment forms part of the entrepreneur’s “opportunity alert system.” Among our survey respondents, entrepreneurs are more likely than non-entrepreneurs to see opportunities as a result of the financial crisis (see chart 12, page 32-33). In order to increase their chances of success, entrepreneurs need to create a culture in which constant, small-scale experimentation is encouraged. By ensuring that these experiments are controlled, companies create a safe haven for experimentation, where employees can make mistakes without fear of reprisals.
Perhaps the best-known example of this is Google, which has a 20% time policy that allows engineers to spend up to one-fifth of their time on any project of their own choice. This bottom-up approach to innovation requires any engineer with a promising idea to convince their peers to work on it. In this way, good ideas gain traction and resources, and can ultimately be picked up at the corporate level. Equally, Google enables these experiments to be undertaken at very limited economic cost and risk to the company.
Writing in the New York Times, Bharat Mediratta, a Software Engineer at Google, described how the process works14. “If you have a great technical idea, you don’t have your V.P. send out a memo telling everybody to use it. Instead, you take it to your fellow engineers and convince them that it’s good. Good ideas spread fast, and this approach keeps us from making technical mistakes. But it also means that the burden falls upon you to spread your idea.”
This model is by no means unique to Silicon Valley. Mr. Butler-Adams uses a similar approach at Brompton Bikes and highlights the importance of giving employees in his business latitude to make mistakes in a controlled fashion. “We have our core operations, which consume 80% of our energy and resources, then we have 20% where we are willing to take risks and be innovative,” he explains. “As long as we ring-fence those experiments and understand what the worst-case scenario is, then we can afford it and no one is going to lose their job.”
By separating experiments in a way that makes them both controlled and encouraged, companies create an environment where failure is possible in such a way that it does not pose risks to the broader organisation. This creation of safe spaces for failure and moving forward in small steps is what Tim Harford, Author of Adapt: Why Success Always Starts with Failure, calls “the survivability principle.” “The trick is finding the right scale in which to experiment,” he writes. “Significant enough to make a difference, but not such a gamble
that you’re ruined if it fails.15”
Author Ms. Bridge makes a similar point and argues that failure becomes much more acceptable if the risks can be controlled. “It’s an important message to expect failure but to experience it in a way that doesn’t wreck your life,” she says.
Financial investors can apply a similar lesson by creating a safe environment for their portfolio. This has three components. First, investors need a diversified portfolio16, which may provide some protection against adverse events. Second, they need to ensure that they have sufficient liquidity to prevent them from selling at the bottom and this means being extremely careful about the use of leverage. Third, they need to have in place appropriate insurance against large, unforeseen events that could unexpectedly force them to draw on their assets.
A brand too far
In 2001, Will King, the founder of King of Shaves, signed a major licensing deal to distribute shampoo that licensed swimwear manufacturer Speedo’s brand.
Confident of the brand’s potential, Mr. King decided to focus exclusively on selling it in the four big retailers in the U.K. But it quickly became apparent that all was not well. “It didn’t sell at all,” he explains. “We learned the hard way that Speedo just isn’t a brand that people want when buying shampoo. I think I got carried away as to how far a brand could stretch.”
Within nine months, Mr. King had to buy himself out of the deal even though it still had two years left to run. Aside from the direct financial fallout, Mr. King believes that his Speedo adventures had taken the company away from its core competency: to develop the world’s best shaving products. “The Speedo failure helped change the way I saw the business,” he says. “We had lots of really nice brands, but it became crystal clear that King of Shaves, a global challenger brand, was the most important part of our business. And I saw that, in order to succeed, I would need to focus exclusively on it.”
Months later, Mr. King decided to spin King of Shaves out of the main holding company. “The Speedo experience taught us that we need to focus on our core brand,” he says. “It has taken us a long time, with lots of patience and focus, to get the business to where we are today. And I am very happy with what we have achieved.”
3. Refine and adapt your approach
A high proportion of companies will fail and, among those that do ultimately succeed, most will need to radically alter their business model over time.
Twitter started life as a podcast delivery service before transforming into a real-time information network. Tiffany & Co. was originally a stationer before moving into jewellery. Samsung started out as a trading company, exporting fish and vegetables to China before it moved into consumer electronics.
Despite the high likelihood that a company will need to adapt, business plans are typically developed in such a way that change is very challenging. Most companies will not succeed with Plan A, but with Plan B or C, and yet investors will often apply a lot of pressure on early-stage businesses to stick to a plan, despite huge volumes of data and information that suggest a refinement to that plan is required.
Rather than sticking rigorously to a plan, entrepreneurs should refine their business model constantly, be open to new ways of achieving their goals and learn from mistakes along the way. Critically, they also need to put in place systems that enable them to learn from these failures as they happen. This means conducting postmortems on why mistakes occurred, and doing so in a way that avoids the placement of blame. Companies need to embed a culture of reporting failures, however small, analyse them and ensure that the lessons learned are disseminated throughout the organisation.
This can be easier said than done. When he took over as CEO of Ford, Alan Mulally introduced a colour coding scheme for managers to report on different aspects of performance, running from green for good, yellow for caution and red for problems. At the first few management meetings, managers provided cards that were completely green. Frustrated by this, Mr. Mulally reminded executives of Ford’s perilous financial position. After this, managers tentatively started to highlight issues as yellow and red. By showing managers that it was acceptable to fail, Mulally changed the culture and enabled a much more open discussion of how and why things had gone wrong17.
Success, then, is as much about learning from what goes wrong as it is about repeating what went right. “If you want to be really good at what you do, whether you are an entrepreneur or an Olympic athlete, you need to be constantly looking for errors,” says Mr. Dormandy. “When you start something, it may be 80% wrong, so you fix what you can, then you keep on working until the problems get smaller and smaller. For me, this constant fixing is at the heart of being successful in any environment.”
“Will it make the boat go faster?”
In 1998, morale in the British rowing eight was low. The crew was regularly coming in 7th or 8th place in important races and having difficulty making any improvements in their performance. After a poor showing in the 1998 World Championships, the team realised it needed a new approach. “It was a burning platform situation,” says Ben Hunt-Davis, British Rower, Olympic Champion and Author of Will it Make the Boat Go Faster? “If we didn’t change, we knew we probably couldn’t qualify for the Olympics. If we did change and we still didn’t qualify then we hadn’t really lost anything.”
So began a period of profound reflection. Rather than focusing on results, the team became very process-driven, examining in detail every aspect of their performance to determine what went well and what went poorly. “We came up with this one question: ‘Will it make the boat go faster?’ The idea was to challenge everything we did in relation to that question,” says Mr. Hunt-Davis.
After the team began focusing on the process, rather than the outcome, they no longer saw themselves as failing. “We lost races, but we didn’t view that as failure but as part of the process,” he says. “We didn’t worry about making a mistake, as long as we didn’t make the same mistake twice.”
At the 2000 Summer Olympics, this new approach delivered its most impressive result to date. Having underperformed in the British eight at the two previous Olympics, Ben Hunt-Davis won a gold medal in Sydney as part of the first British crew to win this event since 1912. “At the beginning, when we were losing all the time, I definitely classed myself as failing,” says Mr. Hunt-Davis. “And I didn’t learn very much from failure: I thought that the answer was just to work harder. But by focusing on the process, rather than the results, we were able to start learning and our performance began to improve dramatically.”
This story has applications far beyond the sports world. In financial investment, a similar focus on process, rather than outcomes is important. The key is not to fixate on where the portfolio is at in a particular point of time because what matters is how it will perform over the long term. Far more important is to put in place the right structures and decision-making protocols which will matter much more in the future.
“In investing, like much else in life, the future is uncertain and the world is complex,” says Dr. Davies. “We cannot improve performance reliably by pretending that we have a crystal ball. We don’t. We can, however, improve performance by ensuring that our decisions are aligned to our long-term objectives, and that we have a robust process enabling us to evaluate the risk of the options before us.”
4. Create a system that is resilient rather than trying to predict what might go wrong
Governments, regulators and companies spend an increasing amount of time trying to put in place safeguards against things going wrong. But as the world becomes more complex, dynamic and fast moving, it becomes increasingly difficult for them to keep up. Risk mitigation efforts can become byzantine in their complexity.
Mr. Ormerod believes that society’s approach to dealing with risk and failure is well-meaning but misguided. “The general approach is to try to predict possible negative future outcomes and then put plans in place to mitigate them,” he says. “But you cannot avoid failure. You’ll never get around this fundamental problem, no matter how smart you are. It’s inherent to all evolving systems.”
Rather than trying to predict failure, Mr. Ormerod says that companies and regulators should place more emphasis on designing resilient systems that can respond to a range of different problems. “At some stage, you are bound to take an unanticipated hit because that’s how the world is,” he explains. “The key is therefore to design your system so that it’s more resilient, so if one of these events comes along, you can bounce back more quickly.”
Global supply chains are a good example of this. Through the use of common standards, technology and the constant sharing of information, large global retailers such as Wal-Mart have been able to increase significantly the reliability resilience of their supply chain, despite its huge complexity and scale. In the pharmaceutical sector, individual packets of drugs are now given a unique serial number which enables the location of any single batch to be logged at any point in time. If there are problems with a defective batch, the company knows instantly which packets are affected and where they are, so that they can be quickly and efficiently located rather than engaging in an expensive and risky mass recall. These efforts increase resilience because problems can be localised rather than having systemic effects18.
This extends to the process of learning from mistakes. A company that puts in place measures to address a very specific problem that it has experienced may be marginally more resilient, but it may never experience that same issue again. Because failure is so dependent on context and a highly complex set of internal and external factors, a more general approach to learning is required. As such, it is important to react strategically to failure, and spend time understanding the real underlying factors and how an individual may have participated in the failure.
15 Adapt: Why Success Always Starts with Failure, p224
16 Diversification does not protect a profit or guarantee against a loss
18 Towards a common financial language, Paper by Robleh D. Ali, Andrew G. Haldane and Paul Nahai-Williamson