Faber-Castell Doubles Down on the Pencil

Faber-Castell is a 255-year-old company that makes pencils. How does an old company with a, well, boring product think about innovation, particularly if and when to introduce new technology? Assistant Professor Ryan Raffaelli’s research looks at established companies with mature products and how they manage technological shifts in their industry and in the world. This case explores Faber-Castell’s “companion for life” strategy and its bet to double down on the pencil.

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This transcript has been edited for length and clarity.

Note: Since the research for this case was conducted, Count Anton Wolfgang von Faber-Castell passed away and Daniel Rogger has been appointed CEO.

Brian Kenny: Pencils down. Two words that for decades have struck fear into the hearts of students. Even today in the digital age, the No. 2 pencil remains the required writing implement for students taking standardized tests in the U.S.

It's a tool whose humble origins date back to the late sixteenth 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 pencils 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.

Ryan Raffaelli studies how innovations transform industries, including a concept he calls Technology Reemergence, whereby organizations and industries faced with technological change reinvent themselves. Boy, does that sound like a perfect lead-in for this podcast. Thanks for joining us, Ryan.

Ryan Raffaelli:It's great to be here.

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. Set the case up for us. Who is the protagonist, how do you pronounce his name, and what's his situation?

Raffaelli: We're introduced to Anton Wolfgang Von Faber-Castell.

Kenny: Thank you.

Raffaelli: He is the eighth-generation CEO of Faber-Castell based in Stein, Germany, near Nuremberg. 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 they would withhold the durability of the fall. It's the same check that they did for eight or nine generations going back.

Kenny: It sounds dangerous, but apparently it works.

Raffaelli: 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’s strategy handle and endure in the modern era?

Kenny: You find these terrific sort of gems that are hidden that are classic brands. How did you discover this one?

Raffaelli: A colleague was reading about the company. Faber-Castell is a company (whose) products I’ve used for many years, but a colleague came to me and said, "You know, Ryan this is so much an indicator of a company that continues to endure and survive even when faced with technological shock." 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?

Kenny:Who are some of the other companies that you've written about?

"One of the things about the industry is that there's quite a bit of capital investment that goes into manufacturing pencils"

Raffaelli: 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 Moleskin. 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. These cloud-based solutions of how you can now store your written notes into the cloud, Moleskin's gone about thinking about can we partner with them?

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.

Kenny:And of course the predictions of their demise are greatly exaggerated, right?

Raffaelli: That's right.

Kenny:Talk about the pencil industry. People don't think about it, but there's a huge industry here. What does it look like?

Raffaelli: One of the things about the industry is that there's quite a bit of capital investment that goes into manufacturing pencils because … think about not only what it takes to keep these things going but where the materials come from. One of the things that Faber-Castell did (over) the last decade was to start buying forest land in Brazil so that they could own the wood.

Now, this requires a very long-term view. Thinking about how to use that to source and control the entire supply chain. The industry as a whole is relatively consolidated. As you look across the entire industry, particularly global, pencil usage has remained relatively stable in terms of use in schoolhouses and other places.

Kenny: How did Faber-Castell get into the business?

Raffaelli: Faber-Castell joins the ranks of this industry in 1761, so this makes them a 255-year-old company. What we see is Kasper Faber enters this industry and starts producing pencils in Stein. Surprisingly, there's actually a couple of 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 the shift towards mechanical pencils and others.

What's been fascinating about Faber-Castell is that while they still maintain their corporate headquarters in Germany, they've been able to spread to 23 countries. They have 9,000 employees, 1,200 of them are based in Germany.

Kenny: You've talked in the case about the fact that German heritage matters a lot to their brand.

Raffaelli: It matters significantly to the notion of how they define quality. 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. That was one of the ways that they began to differentiate early on in the strategy.

Kenny: 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 in the company's history. What was the situation that he walked in to?

Raffaelli: Here we have a reluctant CEO. Count Anton Wolfgang worked in a law firm, an investment bank. His father dies. This is towards the end of the 1970s. The firm is really struggling with what to do because at the time pocket calculators are starting to make their rise, particularly Hewlett-Packard and others. This takes a significant impact on Faber-Castell's slide rule business. Almost 30-35 percent of their business was slide rules.

He walks into this situation and now is left to figure out, do we potentially start to produce calculators? Do we continue building pencils? What is the future of this company?

Kenny: What was the culture in the company like at that time?

Raffaelli: I think that one thing that you have to remember about, particularly a family-run company, is that many people in this organization have been there for many, many years. They see themselves, the Faber-Castell family, and employees as stewards of this long-held heritage and identity. There's such pride for the products they make. 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."

Kenny:Change is hard.

Raffaelli: Exactly. It's a threat to them and what they stand for. Anton Wolfgang, in the 70’s, begins to start thinking about how to expand the reach of this organization. One of the first shifts that he makes is to go into the cosmetics business.

Kenny: I found that really interesting.

Raffaelli: While many of his competitors start thinking about whether or not to go into calculators, in the 80s what we see is the rise of computerated design. 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. 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 innovation, 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 early 60s. He said, "We should be doing this as a business."

Then with computerated design, many of his colleagues go into this space, competitors, and it runs them into the ground. Instead, he starts seeing the potential 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.

Kenny: That’s clearly something that has paid big dividends in recent years for the firm.

Raffaelli: What the company has thought a lot about is how to become what they call a companion for life, the idea that if they can 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 loved one, they could create the tools and products that would allow them to do that with the Faber-Castell brand very close to them.

This has played out particularly in the last 24 months, this coloring trend. Here we have all these adult coloring books out there.

Kenny:It's therapy.

Raffaelli: You have all these professionals coloring at night in a stress-reducing sort of way, kind 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.

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

Raffaelli: Faber-Castell has thought about this notion of creating a generational approach to growth. 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 the 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?

They think very carefully about how that plays out from an innovation perspective because one of the challenges that they're faced with is when not to adopt new, radical technologies. In the classroom, that's one of the themes that we start to explore: when to and when not to adopt the next big thing, or the next big wave, when you're an incumbent firm.

Kenny: And that's getting harder and harder in a time when change happens so quickly and technology advances so fast. It's easy to get distracted by the latest thing. Sticking to your core is harder than it probably seems to be.

I became an instant fan of the Count's when I read about his ability to stay focused on the brand. It sounds like he is a real enforcer of brand standards and brand guidelines. Gets involved in all the minute details right down to packaging.

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. 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 market.

"Faber-Castell has thought very deeply about this notion that they want the time you spend when you're using one of their products to be time well spent"

Kenny:You've discussed this in class with students, yes? Recently, as a matter of fact. How did that go?

Raffaelli: We start this class with whether or not you would invest in Faber-Castell. 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. The paradox here, or the puzzle, is that if you look at where the pencil sits on the innovation or growth curve, many students I ask to plot where this thing sits, often they say, "It’s not even on the chalkboard; it's off the end."

I ask those students, "Then why, if the growth potential is off the chalkboard in terms of maturity, why are you investing in this?" 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.

Kenny: How much of that relies on the vision of the leader versus the market driving change? The coloring book thing sounds kind of serendipitous.

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. 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."

I think they understand that and what they've really tried to do—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. 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 product.

Faber-Castell has thought very deeply about this notion that they want the time you spend 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.

Kenny:One final question, did you get to go to the top of the castle?

Raffaelli: 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?”

Kenny:I'm glad he didn't. Thank you for joining us Ryan; this was great.

Raffaelli: Thanks for having me.

Kenny: You can find the Faber-Castell case along with thousands of others in the HBR case collection at hbr.org. I'm you host Brian Kenny and you've been listening to Cold Call, the official podcast of Harvard Business School.

 Read more

This transcript has been edited for length and clarity.

Note: Since the research for this case was conducted, Count Anton Wolfgang von Faber-Castell passed away and Daniel Rogger has been appointed CEO.

Brian Kenny: Pencils down. Two words that for decades have struck fear into the hearts of students. Even today in the digital age, the No. 2 pencil remains the required writing implement for students taking standardized tests in the U.S.

It's a tool whose humble origins date back to the late sixteenth 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 pencils 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.

Ryan Raffaelli studies how innovations transform industries, including a concept he calls Technology Reemergence, whereby organizations and industries faced with technological change reinvent themselves. Boy, does that sound like a perfect lead-in for this podcast. Thanks for joining us, Ryan.

Ryan Raffaelli:It's great to be here.

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. Set the case up for us. Who is the protagonist, how do you pronounce his name, and what's his situation?

Raffaelli: We're introduced to Anton Wolfgang Von Faber-Castell.

Kenny: Thank you.

Raffaelli: He is the eighth-generation CEO of Faber-Castell based in Stein, Germany, near Nuremberg. 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 they would withhold the durability of the fall. It's the same check that they did for eight or nine generations going back.

Kenny: It sounds dangerous, but apparently it works.

Raffaelli: 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’s strategy handle and endure in the modern era?

Kenny: You find these terrific sort of gems that are hidden that are classic brands. How did you discover this one?

Raffaelli: A colleague was reading about the company. Faber-Castell is a company (whose) products I’ve used for many years, but a colleague came to me and said, "You know, Ryan this is so much an indicator of a company that continues to endure and survive even when faced with technological shock." 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?

Kenny:Who are some of the other companies that you've written about?

"One of the things about the industry is that there's quite a bit of capital investment that goes into manufacturing pencils"

Raffaelli: 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 Moleskin. 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. These cloud-based solutions of how you can now store your written notes into the cloud, Moleskin's gone about thinking about can we partner with them?

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.

Kenny:And of course the predictions of their demise are greatly exaggerated, right?

Raffaelli: That's right.

Kenny:Talk about the pencil industry. People don't think about it, but there's a huge industry here. What does it look like?

Raffaelli: One of the things about the industry is that there's quite a bit of capital investment that goes into manufacturing pencils because … think about not only what it takes to keep these things going but where the materials come from. One of the things that Faber-Castell did (over) the last decade was to start buying forest land in Brazil so that they could own the wood.

Now, this requires a very long-term view. Thinking about how to use that to source and control the entire supply chain. The industry as a whole is relatively consolidated. As you look across the entire industry, particularly global, pencil usage has remained relatively stable in terms of use in schoolhouses and other places.

Kenny: How did Faber-Castell get into the business?

Raffaelli: Faber-Castell joins the ranks of this industry in 1761, so this makes them a 255-year-old company. What we see is Kasper Faber enters this industry and starts producing pencils in Stein. Surprisingly, there's actually a couple of 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 the shift towards mechanical pencils and others.

What's been fascinating about Faber-Castell is that while they still maintain their corporate headquarters in Germany, they've been able to spread to 23 countries. They have 9,000 employees, 1,200 of them are based in Germany.

Kenny: You've talked in the case about the fact that German heritage matters a lot to their brand.

Raffaelli: It matters significantly to the notion of how they define quality. 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. That was one of the ways that they began to differentiate early on in the strategy.

Kenny: 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 in the company's history. What was the situation that he walked in to?

Raffaelli: Here we have a reluctant CEO. Count Anton Wolfgang worked in a law firm, an investment bank. His father dies. This is towards the end of the 1970s. The firm is really struggling with what to do because at the time pocket calculators are starting to make their rise, particularly Hewlett-Packard and others. This takes a significant impact on Faber-Castell's slide rule business. Almost 30-35 percent of their business was slide rules.

He walks into this situation and now is left to figure out, do we potentially start to produce calculators? Do we continue building pencils? What is the future of this company?

Kenny: What was the culture in the company like at that time?

Raffaelli: I think that one thing that you have to remember about, particularly a family-run company, is that many people in this organization have been there for many, many years. They see themselves, the Faber-Castell family, and employees as stewards of this long-held heritage and identity. There's such pride for the products they make. 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."

Kenny:Change is hard.

Raffaelli: Exactly. It's a threat to them and what they stand for. Anton Wolfgang, in the 70’s, begins to start thinking about how to expand the reach of this organization. One of the first shifts that he makes is to go into the cosmetics business.

Kenny: I found that really interesting.

Raffaelli: While many of his competitors start thinking about whether or not to go into calculators, in the 80s what we see is the rise of computerated design. 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. 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 innovation, 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 early 60s. He said, "We should be doing this as a business."

Then with computerated design, many of his colleagues go into this space, competitors, and it runs them into the ground. Instead, he starts seeing the potential 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.

Kenny: That’s clearly something that has paid big dividends in recent years for the firm.

Raffaelli: What the company has thought a lot about is how to become what they call a companion for life, the idea that if they can 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 loved one, they could create the tools and products that would allow them to do that with the Faber-Castell brand very close to them.

This has played out particularly in the last 24 months, this coloring trend. Here we have all these adult coloring books out there.

Kenny:It's therapy.

Raffaelli: You have all these professionals coloring at night in a stress-reducing sort of way, kind 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.

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

Raffaelli: Faber-Castell has thought about this notion of creating a generational approach to growth. 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 the 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?

They think very carefully about how that plays out from an innovation perspective because one of the challenges that they're faced with is when not to adopt new, radical technologies. In the classroom, that's one of the themes that we start to explore: when to and when not to adopt the next big thing, or the next big wave, when you're an incumbent firm.

Kenny: And that's getting harder and harder in a time when change happens so quickly and technology advances so fast. It's easy to get distracted by the latest thing. Sticking to your core is harder than it probably seems to be.

I became an instant fan of the Count's when I read about his ability to stay focused on the brand. It sounds like he is a real enforcer of brand standards and brand guidelines. Gets involved in all the minute details right down to packaging.

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. 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 market.

"Faber-Castell has thought very deeply about this notion that they want the time you spend when you're using one of their products to be time well spent"

Kenny:You've discussed this in class with students, yes? Recently, as a matter of fact. How did that go?

Raffaelli: We start this class with whether or not you would invest in Faber-Castell. 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. The paradox here, or the puzzle, is that if you look at where the pencil sits on the innovation or growth curve, many students I ask to plot where this thing sits, often they say, "It’s not even on the chalkboard; it's off the end."

I ask those students, "Then why, if the growth potential is off the chalkboard in terms of maturity, why are you investing in this?" 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.

Kenny: How much of that relies on the vision of the leader versus the market driving change? The coloring book thing sounds kind of serendipitous.

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. 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."

I think they understand that and what they've really tried to do—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. 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 product.

Faber-Castell has thought very deeply about this notion that they want the time you spend 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.

Kenny:One final question, did you get to go to the top of the castle?

Raffaelli: 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?”

Kenny:I'm glad he didn't. Thank you for joining us Ryan; this was great.

Raffaelli: Thanks for having me.

Kenny: You can find the Faber-Castell case along with thousands of others in the HBR case collection at hbr.org. I'm you host Brian Kenny and you've been listening to Cold Call, the official podcast of Harvard Business School.

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