Lessons in Innovation from a Legacy Firm

HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. Pencil-maker Faber-Castell has been in business since 1761. But even though the company is older than the United States of America, it is ­– after all – a company that aims to innovate and adopt new technology.  Today, we bring you a conversation with Harvard Business School associate professor Ryan Raffaelli, who studies technological transformation in established companies. In this episode, you’ll learn how to balance stewardship of beloved brands with innovation and evolution. You’ll also learn how to decide when and when not to adopt radical new technologies. And you’ll learn how to take a generational approach to strategy to build the business for the longer term. This episode originally aired on Cold Call in September 2017. Here it is.

BRIAN KENNY: Pencils down, two words that for decades have struck fear into the hearts of students. Even today in the digital age, the number two pencil remains the required writing implement for students taking standardized tests in the US. It’s a tool whose humble origin state back to the late 16th century when an upturned tree revealed an enormous deposit of what we came to know as graphite, local farmers broke off stick like pieces and used them to mark sheep. Fast-forward a few centuries and the basic technology underlying the pencil seems not to have changed very much, but appearances can be deceiving. Today we’ll hear from Professor Ryan Raffaelli about his case entitled Faber-Castell. I’m your host, BRIAN KENNY, and you’re listening to Cold Call.

SPEAKER 2: So, we’re all sitting there in the classroom.

SPEAKER 3: Professor walks in and-

SPEAKER 2: And they look up and you know what’s coming. Oh, the dreaded cold call.

BRIAN KENNY: Ryan Raffaelli studies how innovations transform industries including a concept he calls technology reemergence, whereby organizations and industries faced with technological change reinvent themselves. And boy, does that sound like a perfect lead in for this podcast. Thanks for joining us, Ryan.

RYAN RAFFAELLI: Oh, it’s great to be here.

BRIAN KENNY: You just don’t think about pencils and innovation as two words that necessarily go together, but that’s what this case is all about. So let me ask you to start just by… Set the case up for us. Who’s the protagonist and how do you pronounce his name and what’s his situation?

RYAN RAFFAELLI: So, we’re introduced to Anton-Wolfgang von Faber-Castell.

BRIAN KENNY: Thank you.

RYAN RAFFAELLI: He is the eighth generation CEO of this company, Faber-Castell based in Stein, Germany, Nuremberg. And the case starts with him at the top of their family castle, looking down on this 25 meter high courtyard, him standing at the top, throwing these pencils down on the courtyard to the press as a quality assurance check to make sure that they would withhold the durability of the fall is the same check that they did for eight or nine generations going back.

BRIAN KENNY: Sounds dangerous, but apparently it works.

RYAN RAFFAELLI: And so here, he is faced with ironically the same question. His great-grandfather is asked by the press and many other analysts and those around that are observing this company, which is can Faber-Castell strategy handle and endure in the modern era.

BRIAN KENNY: So, I’m curious as to… And I guess I shouldn’t be. I know some of the other cases you’ve written, but how do you find these examples? You find these terrific sort of gems that are hidden, that are classic brands. How’d you discover this?

RYAN RAFFAELLI: So, this company came to me through a colleague who was reading about this company. Faber-Castell is a company that I’ve used their products for many years. But a colleague came to me and said, “Ryan, this is so much an indicator of a company that continues to endure and survive even when faced with technological shock.” And so my research looks at in many cases, established companies or companies that produce established products that face these sort of technological shifts and are now faced with the situation of what do we do with them? Do we keep them going? Do we retire them off? Or potentially, is there an opportunity to spin them out to grow even in a new market?

BRIAN KENNY: Who are some of the other companies that you’ve written about?

RYAN RAFFAELLI: So, I’ve spent a lot of time studying, for example, the Swiss Watch industry, a case that I teach very closely with. This one is about the notebook manufacturer. Moleskine.

BRIAN KENNY: Very popular, yeah.

RYAN RAFFAELLI: So, Moleskine notebooks, right? Which is sort of interesting. The company really doesn’t hold any patents on the technology of making paper or these products. And yet over the last several years, they’ve been partnering with firms in Silicon Valley, ironically, that were set up to kill them. And so these cloud-based solutions of how you can now store your written notes into the cloud, Moleskine has gone about thinking about, well, can we partner with them? And so if you look at this next to the Faber-Castell case, you have two examples of paper and pencil and two companies that are trying to grow using very different innovation strategies.

BRIAN KENNY: Yeah. And of course, the predictions of their demise are greatly exaggerated, right?

RYAN RAFFAELLI: That’s right.

BRIAN KENNY: So, talk about the pencil industry. People don’t think about it, but there’s a huge industry here. What does it look like?

RYAN RAFFAELLI: One of the things about the industry is that there’s quite a bit of capital investment that goes into manufacturing pencils. Because if you think about not only what it takes to keep these things going, but where the materials come from. So one of the things that Faber-Castell did last decade is started actually buying forest land in Brazil so that they could own the wood. Now this requires a very long-term view, right? Thinking about how would we then use that to then source and control the entire supply chain? But the industry as a whole is relatively consolidated. People are concerned about… Well, with digitalization, what’s happening to the pencil? But as you look across the entire industry, particularly global pencil usage has remained relatively stable in terms of use in schoolhouses and other places.

BRIAN KENNY: Yeah. So how did Faber-Castell get into the business?

RYAN RAFFAELLI: So, Faber-Castell joins the ranks of this industry in 1761. So this makes them a 255-year-old company. And what we see is Kaspar Faber enters this industry and starts producing these pencils in Stein, surprisingly, there’s actually a couple pencil producers in this area of Germany. They face competition from then Americans, other Europeans, and then particularly from Japanese as you start to see this shift towards mechanical pencils and others. So what’s been fascinating about Faber-Castell is while they still maintain their corporate headquarters in Germany, they’ve been able to spread now over to 23 different countries and they have 9,000 employees, 1200 of them are based in Germany.

BRIAN KENNY: Wow. And you’ve talked in the case about the fact that that German heritage matters a lot to their brand.

RYAN RAFFAELLI: It matters significantly to the notion of how they define quality. And so quality for Faber-Castell has been something that really extends back to the very beginning. One of the ways that Faber-Castell originally started differentiating was around thinking about pencils not only in terms of their durability, but also the aesthetic quality and the ornamentation that could be attached to these pencils. And so that was one of the ways that they began to differentiate early on in the strategy.

BRIAN KENNY: Okay. And so they’d been around for a long time, but Count Anton Wolfgang… I’m not going to use the full name, that’s his short version, I guess. He came into his leadership role relatively recently within the company’s history. What was the situation that he walked into?

RYAN RAFFAELLI: So here we have a reluctant CEO, Count Anton-Wolfgang, worked in a law firm investment bank, and his father dies. This is towards the end of the ’70s. And the firm is really struggling with what to do because at the time in the ’70s, as many of you recall, pocket calculators are starting to make their rise, particularly Hewlett Packard and others. Well, this takes a significant impact on Faber-Castell’s slide rule business, almost 30, 35% of their business was slide rules. And so he walks into this situation and now is left to figure out, do we potentially start to produce calculators? Do we continue building our pencils? What is the future of this company?

BRIAN KENNY: Yeah. What was the culture in the company like at that time?

RYAN RAFFAELLI: I think that one thing that you have to remember about particularly a family run company is that many people in this firm, in this organization have been there for many, many years. And so they see themselves not only the Faber-Castell family, but employees as stewards of this long held heritage and identity. And so there’s such pride for the products that they make. And what’s fascinating for me as someone who studies technological shock, is often this creates a real challenge for companies to innovate and to then adopt new products and innovations because those that are inside the firm often say, “We shouldn’t be doing this.”

BRIAN KENNY: Yeah, change is hard, right?

RYAN RAFFAELLI: Exactly. And so it’s a threat to them and what they stand for. So Anton-Wolfgang in the ’70s begins to start thinking about how to expand the reach of this organization. And one of the first shifts that he makes is he goes into the cosmetics business.

BRIAN KENNY: I found that really interesting.

RYAN RAFFAELLI: So, where many of his competitors start thinking about whether or not to go into calculators. And then in the ’80s what we see is the rise of computer rated design. So a big part of Faber-Castell’s business was based on creating drafting equipment. In both of these cases, the Count makes this decision to not follow many of his competitors into these spaces, but rather double down on the old technology. So by going into cosmetics, a lot of the same manufacturing capabilities that you can use to make a writing pencil could eventually be applied to making cosmetic pencils. Now this also requires a significant amount of innovations, because there’s much more that goes into getting regulatory approval and so on. Because now you’re using the pencils. They saw people were actually using graphite pencils on their faces back in the ’70s and the early ’60s and said, “We should be doing this as a business.” So here they are, they’re moving into this space. And then with computer aided design, many of his colleagues go into this space, competitors and it runs them into the ground. And so instead he starts seeing potentials to move into places where potentially geographic diversification can help. He starts moving into new countries and he also opens up a whole new space by innovating around the notion of colored pencils.

BRIAN KENNY: Yeah. Talk about that a little bit because that’s clearly something that has paid big dividends in recent years for the firm.

RYAN RAFFAELLI: What the company has thought a lot about, is how to become what they call a companion for life. And the idea that if they could create pencils and other types of products that could… As an individual goes through different stages of life, whether it be in the schoolhouse or as they move up in an organization, or even wanting to write a special letter to a close loved one, that they could create the tools and products that would allow them to do that with the Faber-Castell brand very close to them. And so this has played out particularly in the last 24 months on this fad of the coloring trend. Here, we have all these adult coloring books out there.

BRIAN KENNY: It’s therapy.

RYAN RAFFAELLI: Yeah. And so here you have all these professionals that are coloring at night is stress reducing way of coping with the day and unplugging from the digital world. As a result, colored pencils has helped the company see almost its two fastest and most profitable years in its company history.

BRIAN KENNY: The companion for life strategy I found really interesting because here they are already with a long history, a long past, taking a very long view forward and trying to reinvent themselves really as something bigger than the actual product, a relationship brand.

RYAN RAFFAELLI: So, Faber-Castell has thought about this notion of we create a generational approach to growth. And so when you’re working in a family company like this, when you ask them about, how do you think about the long view? They’re not thinking about next year or even two years from now. They’re thinking about when my great-grandson runs the program, what does it look like? What does my great-granddaughter look like when she’s the CEO of this company? And they think very carefully about how does that play out from an innovation perspective, because one of the challenges that they’re faced with is, when not to adopt these new radical technologies that come out. And so in the classroom, that’s one of the themes that we start to explore is when to and when not to adopt the next big thing or the next big wave when you’re an incumbent firm.

BRIAN KENNY: Yeah. And that’s getting harder and harder in a time when change happens so quickly in technology advances so fast, it’s easy to get distracted by the latest thing. So sticking to your core is harder than it probably seems to be. I became an instant fan of the Counts when I read about his ability to stay focused on the brand. And it sounds like he’s a real enforcer of brand standards and brand guidelines, gets involved in all the minute details right down to packaging.

RYAN RAFFAELLI: He’s sort of a paradoxical leader in the way that his style plays out because on one end he has such a strong grasp and keeps his hands so close on what this company should look like. And yet, one of the secrets to his growth strategy is that he gave each of his country managers quite a lot of autonomy to grow in their own local markets.

BRIAN KENNY: Yeah. It’s a huge challenge that any multinational brand faces where they have to figure out how to be uniform but local at the same time. Right? You’ve discussed this in class with students. Yes, recently, as a matter of fact.

RYAN RAFFAELLI: That’s right, yes.

BRIAN KENNY: How did that go?

RYAN RAFFAELLI: So, we start this class with whether or not you would invest in Faber-Castell, and the question really triggers a lot of the intricacies of this case because what it brings out is this debate about… If we think about investments, they’re really about betting on future earnings. And the paradox here, or the puzzle is that if you look at where the pencil sits on sort of the innovation or growth curve, many students I ask them to plot, where is this thing? And often they say, “It’s not even on the chalkboard, it’s off the end.” And so I ask those students, “Well then, if the growth potential is off the chalkboard in terms of maturity, why are you investing in this?” And it helps us begin to understand in the classroom how you begin to see a market for a mature product and the ways in which leaders can manage through these technological shocks that create value.

BRIAN KENNY: Yeah. How much of that relies on the vision of the leader versus the market driving change? I mean, the coloring book thing sounds kind of serendipitous.

RYAN RAFFAELLI: I think that one of the things that they’re very aware of is that in some ways, the coloring book thing was fortuitous, right? I mean, they were sort of surprised by it. Countess Mary, the Count’s wife who actually started the cosmetic business said, “We had no idea that this was coming.” And so I think that they understand that. And what they’ve really tried to do, and what I find remarkable about this company particularly, is they’ve thought very deeply about when we start moving into new areas, how do we preserve the notion of this is who we are as an organization, this is how the customer identifies with us. And in some cases it may be about the product, but in other ways it may be how they’re using… Or how they’re experiencing the products. So Faber-Castell has thought very deeply about this notion of they want the time that you use when you’re using one of their products to be time well spent, whether it be those memories from the classroom or the letters that you’re writing home to a loved one.

BRIAN KENNY: Again, getting back to that whole idea of companion for life.

RYAN RAFFAELLI: That’s right.

BRIAN KENNY: Yeah. So one final question. Did you get to go to the top of the castle?

RYAN RAFFAELLI: So, I was at the top of the castle looking down, hoping that the Count wouldn’t throw me off the top of it as I was asking him all these difficult questions about, should this company be around, why should the pencil survive?

BRIAN KENNY: Wow. I’m glad he didn’t. Thank you for joining us, Ryan. This was great.

RYAN RAFFAELLI: Thanks for having me.

HANNAH BATES: That was Harvard Business School associate professor Ryan Raffaelli in conversation with Brian Kenny on Cold Call. We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review. If  you want more articles, case studies, books, and videos like this, find it all at HBR.org. This episode was produced by Anne Saini and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.