How Oticon Became Deaf
In the 1960s, Oticon was a small local hearing aid manufacturer serving primarily local and regional markets with Denmark as its home base. Denmark, however, had a unique combination of three factors that were found nowhere else in the world:
- Research within the field of sound had reached a world-leading level at the Technical University of Denmark.
- Ear, nose, and throat (ENT) doctors at Danish hospitals were highly focused on better hearing care to their patients in addition to cost-effective care. This was unlike doctors in other countries, such as the United Kingdom, that focused almost entirely on cost reduction within hearing care. In other words, Denmark’s doctors went for greater value, whereas most others went for cost reduction.
- The Danish government was willing to publicly subsidize treatment for hearing loss at Danish hospitals—unlike any other country in the world at that time.
The three small Danish hearing aid manufacturers were quick to take advantage of this situation and competed fiercely to develop higher performing and more reliable products to serve the needs of the Danish hearing care service, whereas hundreds of manufacturers in the rest of the world were mainly focused on cost reduction.
Within two decades, the three Danish manufacturers—and Oticon in particular—had won positions on the list of the 10 largest manufacturers in the world, enjoying a combined market share of more than 30 percent of the world market.
Oticon was the most successful of the three, and company sales and profits skyrocketed. The company grew to more than 1,000 employees in about 10 countries. The four directors were seen as gurus, and salaries, pension schemes, offices, and company cars reached a level that was perceived as suitable for a world-leading business. The first cycle was at its steep growing stage.
It was in this period that Oticon’s mental model emerged. Oticon’s mental model perceived hearing aids as standard hardware products to be manufactured in large series in their highly automated plants. It looked upon users as patients with little choice, which was the reality those days. The choice of hearing aid was a professional one, made by audiologists and hearing aid dispensers, not by consumers. Oticon’s mental model rightly perceived acoustical performance as the key criterion for choosing one hearing aid over the other.
Oticon was the master that took the lead in moving hearing aids from the pocket to behind the ear—a great achievement, marketing-wise and technologically. The behind-the-ear mental model of the 1970s was indeed a winning formula for Oticon.
But customers wanted to move to the next stage: They wanted hearing aids to move into the ear and the ear canal, a distance of less than an inch. However, this move was difficult from two points of view: Space in the ear was much smaller than behind the ear and worse, the shape of ear canals differed tremendously from person to person. That required the behind-the-ear mass-produced product to become a customized one. The market moved from mass production to mass customization.
Oticon stuck to its mental model despite the apparent change in the marketplace. Oticon honestly thought that consumers were wrong. Consumers didn’t understand what was good for them. And professionals seemed to be so hungry for business that they accepted the demand for inferior in-the-ear products.
Oticon started to lose business. In Oticon’s mental model, there was only one logical response: to develop even more superior behind-the-ear products so that the acoustical quality difference would be so obvious that nobody would choose an in-the-ear hearing aid any more. Oticon started to refine and improve its outdated mental and business model. It defended its current mental model by prescribing more of the same. More of what it was good at: high performance, behind-the-ear hearing aids.
More and more salespeople were unhappy. They reported back reactions from dissatisfied audiologists that threatened to stop doing business with Oticon if Oticon did not enter the in-the-ear segment. They perceived Oticon to be arrogant. Oticon management fought back by ordering the salespeople not to waste their time talking like competitors. They should instead go out and sell the Oticon advantage to audiologists.
Oticon continued to defend and improve its irrelevant mental model for almost 10 years. And when the headwind became too strong, Oticon’s entrance into in-the-ear hearing aids was only half-hearted.
Even at the time when custom-built in-the-ear products had captured half of the world market, Oticon maintained that the market was wrong and the whole thing would blow over.
Finally, Oticon’s response was to develop a mass-produced, standard, in-the-ear product that needed no customization—that is, a behind-the-ear product to be clicked directly on to the ear mold. Sound was fine, but it looked nothing but terrible and the market completely rejected it and bought the customized products instead.
Oticon lost market share, but continued to blame the competition and the customers. It was only when the company lost about half of its equity in one year (1987) that the board finally realized that something radical had to be done. The upward part of Oticon’s first lifecycle had lasted about 75 years. The downward part, or death cycle, had lasted almost 10 years. During the first eight or nine years of the death cycle, management still had the illusion that the company was on the upward trend. It had no idea that below the surface of success, Oticon was heading directly into bankruptcy and extinction.
The board of directors’ diagnosis was that the company needed a strong leader that could reduce costs and restore profitability. It prescribed more power and authority.
There is no question that Oticon needed power and authority, but the real issue was different: how to reinstall hearing into a deaf company. In other words, how to make a conservative company innovative and flexible, how to carry through a paradigm shift, and how to break the first cycle and build a platform for a possible second cycle.
Oticon was an extreme example. It should have been obvious to management that something was fundamentally wrong. But even in such an extreme case, Oticon management—then the dream team of the industry—did not realize that its mental model was becoming irrelevant.
Reflect for a moment. Could your organization be in the middle of exactly the same development without management having a clue? Hopefully, your organization has not progressed too far into the phases of decay so that you have time to take the necessary steps; and hopefully, this book can inspire you to find out where you are. Remember that it is not only managers of the hearing-aid businesses who lose their hearing; the mechanism is the same and the need to challenge your mental model is no less important for any industry.