Study: Businesses can benefit from failure

Businesses often ignore a strategic tool that can yield surprisingly good lessons on success: failure.

That idea comes from a study by Anne Miner of the School of Business and colleagues, who conducted a review of about 50 failures and near-failures in 33 industry histories. They assessed how these failures seemed to affect other organizations in the industry as well as practices in the industry as a whole. Most previous studies have focused on what predicts failure or how to avoid it, not what you can gain from it.

With Jay Kim, Ingo Holzinger and Pamela Haunschild, Miner found that individual organizations sometimes learn vicariously from other organizations’ failure. The team also found that failure can be a powerful engine of what Miner calls “population-level learning,” or learning within an industry. In other words, failure is harmful for the failed business, but can be beneficial to the industry as a whole.

Businesses can, for example:

• Look for and exploit practices incorrectly blamed for prior failure, which most competitors will avoid because of the poisoned-well effect.
• Draw correct inferences by carefully comparing failed with successful practices.
• Stay alert to the likelihood that other firms disguise failures.
• Avoid imitating popular practices that are not in fact producing good outcomes.
• Pool information with other allied firms to get more complete data on failed practices or firms.

Miner’s study highlights the difference between learning from success and learning from failure:

• Success of an organization encourages other firms in the industry to copy what they think are the reasons for that success. But that makes an industry more homogeneous and thereby more vulnerable to hostile environmental changes.
• Failure, in contrast, can promote a search for alternative practices to gain competitive advantage, increasing heterogeneity in the industry and enhancing its survival prospects.

“This means that industry association leaders face a trade-off between helping all members adopt perceived best practices and encouraging variation of practices that may generate some firm failures, but also better-insures the industry’s future,” says Miner.

Miner, fellow UW–Madison professor Craig Olson, and doctoral student Jay Kim are conducting further studies to test key ideas from this and related work, such as how certain barriers may hinder vicarious learning from failures of others.