Conversation with Rita McGrath
Good day everyone, and welcome to another Momenta Podcast. This is Ed Maguire, Insights Partner at Momenta Partners, and our guest today is Rita McGrath, Professor at Columbia Business School, she’s got an incredible resume, she’s a top expert on innovation and growth, she’s one of the most regularly published authors in the Harvard Business Review, ranked amongst the Top 10 Management Thinkers in the world, ranked #1 for strategy by Thinkers 50, and she’s the author of four books I believe, with another that’s coming, and we’ll be talking about that in the conversation.
Rita, it’s a pleasure to have you join us.
Thank you for having me.
Let’s start with a bit of context, for our listeners who may be new to your work could you share a bit of the forces that have shaped your views on strategy, and what’s attracted you to the work that you do?
Well when I first started with my academic studies, the field of strategy was very much focused on industry analysis, and all the cool kids were doing ordered entry studies, market share impact, and that sort of thing. I was really much more interested in innovation and the creation of… you might think of it as the creation of new industries, and what became pretty clear to me was that a lot of those approaches to strategy, which presumed equilibrium, and which presumed stability, were just not a good fit for what most of the people I was talking to were dealing with on a regular basis. That really got me interested in strategy as much more of change and dynamism, than strategies of stability. So, I would say in the strategy sense that was where my thinking got started.
You wrote a really influential paper on discovery-driven planning, and you’re credited as the key innovator of that concept. Could you discuss the principles behind discovery-driven planning, and how that work has provided a foundation for the work that you’ve been doing subsequently?
Discovery-driven planning had its seeds in a real puzzle, which is that large established very well-run companies, like Disney for example, kept getting themselves into these just absolute disasters when they tried to get into areas that were new to them. We’re talking Disney, General Electric, EP&T, real icons of American industry, and yet when they got into new areas they ended up with these completely total disasters. When you study the case-studies that accompany these stories, what you find is this pattern which is a pattern of untested assumptions taken as facts, very few opportunities to test things, people just charging on full speed ahead down the torpedoes, all the funding up-front at once, big teams going after these things.
What my co-author and I realized was that what we were looking at was a fundamental disconnect, in how organizations need to be thinking about planning for the future, when the future was uncertain. The basic idea was that you can’t plan for an uncertain future the way you can plan if you’re basing your ideas on a strong platform of previous experience. The core idea was, how do you plan with discipline when your main challenge is learning, rather than execution, and that generated a whole body of work which I guess now has become part of the whole start-up rubric, a lot of people have taken it now; people have forgotten where it came from, and forgotten how radical it was at the time! At the time people looked at us as though we had two heads, and were like, ‘Wait a minute. You mean you can’t plan to the launch of the product?’ We were like, ‘No, you can plan, but you can plan to your next checkpoint or milestone, you really can’t do much more planning than that’.
The whole philosophy was to have a discipline, but make it a discipline that’s appropriate to learning, at low-cost, as fast as you possibly can, through iteration and testing. That’s now come to be taken for granted as the conventional way we do things, but back then it was pretty strange and pretty radical.
Were there certain industries that you studied that were particularly susceptible to failure, by implementing a traditional strategy process, or planning process?
No, I wish I could say yes, it was confined to heavy industrials or something; but no, it was across the board, it was everything from services as in Disney theme parks, to FedEx they had a thing called Zapmail, which by now everybody’s thankfully forgotten about, to media we had TV Cable Week, those were some of the early ventures that we studied. We had Bic trying to go into perfume! It just goes on and one, you had some real bloopers in the world, certainly of chemicals and heavy industry, things like Hewlett Packard’s Kittyhawk hard drive venture, so I can’t say its confined to one or another industry or sector, it’s much more across the board when you’re planning as though you knew what you were doing, when you really don’t.
Are there certain examples that have stood out of companies that have been successful in implementing this approach to avert disaster, or also to be willing to fail and then move on without being sidelined, or hobbled as it were?
Well, I think what you’ll find in the companies that have adopted discover driven planning, and there are many, that they don’t even talk about failure. They talk about, ‘Here’s our hypothesis, and we’re going to go out and test that hypothesis, and then depending on what we’ll find we’ll continue the course, we’ll redirect, we’ll re-plan, we’ll do something different. So, companies as varies as Maersk, as Citibank, certainly this is one of the ways that Disney/Pixar do things, there a lot of companies that have really embraced this way of thinking. I think the vocabulary is different, when you think about platform planning which is how I describe planning that is around things that are much more certain, being wrong is a big deal, you are not supposed to be wrong.
Whereas, in a discovery-driven plan you don’t even really have that concept of being wrong, okay it’s a useless concept, it doesn’t make any sense, because the reality is you don’t know, so you can’t be right or wrong, the data doesn’t exist yet. Your job is to create the data, and so if you don’t come up with a useful hypothesis, and you don’t test that hypothesis, that’s failing in a really stupid way. But if you have hypothesis and you test it, and its yes, your hypotheses were proven out, or no, that’s just a direction you don’t need to pursue anymore, well that’s not failure, it’s no more failing than a scientific experiment fails when a hypothesis is prove out; Scientists don’t beat themselves over the chest and say, ‘Oh my God, my hypothesis didn’t work’. What they test themselves on is, was it a reasonable hypothesis given what I knew at the time, and was it born out or not?
I think that whole language almost around failing, being wrong, all that stuff about we don’t want to try things because we might screw-up, that’s all part of the world of the certain, and the world of the noble. It really is pretty useless in the world where it’s all about discovery. That philosophy as well is really baked into a lot of the approaches of American technology companies, and venture capital, but it’s not inherent in many cultures, European cultures, some Asian cultures as well where there may be a different approach, or a different view of how to embrace and accept different ideas, or even the concept of failing at a venture.
How has the discovery-driven model been embraced in different ways across different cultures, in the globe?
Well, in an interesting way I think what attracts what I’ll call failure-resistant cultures to discovery-driven planning is it gives them a different way of framing it. For example, there are many German companies that I know of who have really adopted it, because it gives them the chance to apply their famous discipline and their famous structure around things to an uncertain environment, and say, ‘Okay, let’s learn from it’. One of the examples that I use in my new book is a German company called Klöckner which really wanted to go digital in a big way, but realized that trying to go digital all at once, these sort of all-in digital transformations you read so much about, which by the way is another shade of this! We’re going to go digital, but we haven’t got a clue how to do it, so we’re going to hire some big consulting firm and throw millions at it, until they just fix the problem! It’s the same thing we saw back in the nineties when people had all these failed ventures. But anyway, this German company Klöckner, basically started with a couple of engineers in an entrepreneurial hotspot of Berlin, and their mandate was very simple, ‘Try something, anything that we think could improve the customer experience with Klöckner’.
So, it was starting really on a small scale relative to the whole organization, starting with a specific but not specifically defined, ‘Here’s what we want you to do, but go figure how to do it’, was left pretty much up to the small team, and that’s exactly in the spirit of discover-driven planning.
That model has been certainly implemented, we see more and more the concept of Google X , or what companies like Cisco are doing with their accelerator programs, this concept of innovating from the edge. It appears to me that this concept has been broadly embraced.
I think it has, I think because people have had such dismal results with other approaches, I think that’s partly why! We’ve all been through the innovation theatre, and, ‘Let’s do a tourism visit to Silicon Valley, and get our picture taken next to the Facebook sign’, and all that stuff. I think the real heart and soul of all this is really how do you incubate in a way that is fast, in a way that is flexible, but that has discipline to it. This isn’t the license to go do whatever you want, this is a very specific prescriptive approach to, let’s study how you learn; and by the way, we are financially very disciplined when we do it. We actually track what that experiment cost us, and then the failure conversation gets completely different, it was, ‘Oh, we blew $10,000 on this thing, and it didn’t work’, instead it’s, ‘We spent $10,000 to learn x, y, z, about this particular set of target customers, and then the question is a completely different question, it’s, ‘Was it worth it to you to learn what you learnt?’ rather than, ‘Did you succeed or not?’ It’s a different kind of question.
Now, one of the really important concepts that you’ve focused on in your most recently published book is concept at the end of competitive advantage, and I’d love to understand a bit of what you mean by that, and what the implications are in terms of rethinking how businesses large and small approach their own strategic positioning, and competitive dynamics.
The end of competitive advantage was really a nod to the prescription and conventional strategy, I’ll call it, which said the Holy Grail what you want in all cases is to achieve a beautiful thing called a sustainable competitive advantage, when you achieve an attractive position in an attractive industry, and then you seek to erect entry barriers to prevent others from following you in, and to the extent that you can do that, and that there is attractiveness in the industry, in other words, there is demand; you can enjoy streams of profits for a long period of time, which are essentially monopoly profits. Not pure monopoly in the illegal sense, but monopoly in the sense that you’re the only game in town, and everybody’s got to come to you, and that’s the dominant thing.
Many-many of our tools of strategy and our logic of strategy and all that industry analysis, I was alluding to earlier, really had to do with this fundamental concept, that you have this attractive position, you erect moats about it, and your competitive advantages last therefore for a long-long time, because it’s hard for others to copy. And what I’ve observed over the intervening years since I’ve been in the field is that in more and more parts of our economy, that logic not only isn’t accurate, it is actually dangerous, in that people achieve an advantage and they think it’s going to last, and it doesn’t.
My core argument is, if you think about a lifecycle, you have a competitive advantage, there’s a period at which it gets conceived, there’s a period in which it gets built, and that’s really the different aspects of the innovation process; you think there’s something new, you incubate it, and eventually you grow it to be a meaningful part of your parent corporation. Then you have this lovely period of exploitation where you’re making money, customers are flocking to you, your offerings are more attractive, that’s great. But then in any market without a lot of entry barriers, there will be competition, they’ll come, they’ll copy, even if they don’t copy you exactly, they may be able to match what you can do.
Take Netflix as an example, it’s right now playing out, Netflix demonstrated to the world that streaming was a way that people liked to consume content, they didn’t like to be tied to a cable bundle, they didn’t like to have to but their boots on over their bunny slippers and go off to the video store! Streaming was a really attractive thing, well okay, very other capable players have now said, ‘Ah! You want streaming, we can do streaming’, and now you’ve got Webplay 10 major players! Plus, a whole lot of rats and mice competitors in the streaming business, it’s going to be a bloody war of attrition. But it wasn’t that Netflix wasn’t brilliant, or it wasn’t that Netflix didn’t build a truly remarkable competitive advantage for a while, it’s that it’s not going to last if others can enter.
The lifecycle of a competitive advantage is its born, it gets built, it gets exploited for a while, and then it comes under pressure, and now whether it erodes or not is a secondary question. Sometimes you can figure out ways of extending it, as Netflix has by the way through its previous two incarnations of life, so it started out as a DVD player, then it was moved to be a streaming player, and then it was an original content player, and now finally it’s been matched on a number of those different dimensions, so the big question mark is, what do they do next? And we’ll see.
But the bigger question I think for the end of competitive advantage as a concept, is I believe strategists stay need to be very aware of each of those lifecycle phases, and of the appropriate things to do in each, because what you do in each phase is completely different, and that’s hard to digest for the average bearer I think! This whole innovation process where it’s all uncertain, and this is where discovery-driven planning comes in, and, ‘Oh you know, learn a little – do a lot’, that’s a completely different logic than the exploitation phase, where indeed what you’re after there is efficiency, operate exactly, no glitches in the system, and no you shouldn’t be wrong because you should know what you’re doing. That again is different than managing a business or an operation that’s in decline, in a healthy and productive way, and they require quite different skillsets.
I think one of the challenges for strategists today is, having some familiarity with what’s necessary for success in each of those stages.
Now, would you agree with the proposition that the pace under which these cycles unfold, is accelerating? Would that be attributable to technology, or are there other forces at work that have resulted in this shifting ability for companies to hold onto their advantages?
I definitely think the pace has picked up, and if you look at any of the large-scale studies that have been done of adoption of major technology, it took something like 60 years for landline phones to be penetrated with the masses in the United States. It took 9 months for Apple’s IOS to be adopted by 60 million households, so, that’s pretty remarkable! I do think technology is a huge contributor to that, what digital is doing is reducing frictions and reducing costs and making things quicker and easier that used to be hard and difficult. Just take something like the direct to consumer phenomenon, and we always have had direct consumer companies [implementing? 17:56] LLB or even back in its day Sears, right? And yet the pace at which a company like Dollar Shave Club, or Casper in mattresses, or Wayfair in furniture, the pace at which they’ve been able to mimic an attractive offering that’s made by an incumbent, and in effect carve out whole customer segments from that original incumbent customer base, its breath-taking, I mean it’s months not years. That is something a lot of people are not yet comfortable with.
Technology is to me the underlying enabler, but what you also have on top of technology is really new business models, for something like a Dollar Shave Club, or a Wayfair, wouldn’t be possible if they couldn’t get huge amounts of their supply chain on an on-demand basis. Somebody like a Proctor & Gamble, when they got into some of these consumer businesses, they had to build it, they had to build it themselves, it didn’t exist on the open market. Today, if you wanted to put together a supply chain for, I don’t know… chocolate-covered widgets, you could make 10 phone-calls and spend a week, and you’d have a complete industrial global supply chain at your disposal, very-very quickly, and with incredible efficiency.
This really up-ends a lot of the taken for granted assumptions around what is possible in strategy. I would say digital and like technologies are enablers, but the thing that makes it real is the business model innovation that came on top of it.
Yes, you get everything is a service model, and the ability to have the subscriptions. I think you hit on a great point too, which is this ability to have these dynamic and really extensible supply chains, and value chains. Remarkable.
It’s stunning. When you look at, just to name one for example, what Amazon Web Services is just giving away, the amount of programming intelligence that is available for free! For any Tom, Dick, or Harry’s, because basically AWS don’t care what you’re doing on their service particularly, as long as it’s on their service. They will do whatever it takes to keep your loyalty, it’s fascinating. Microsoft similarly with their Azure programming. A lot of their motivations are, ‘We’re not particularly concerned if you’re taking up Proctor & Gamble, or taking aim at Colgate-Palmolive, or whatever it is you’re doing, as long as whatever it is, you’re doing involves our servers and not theirs, we’re happy! It’s a completely different logic.
What’s so interesting when you look at business models, or development models, that have evolved, for instance Open Source, which has really cannibalized the ability for some of the traditional server players for instance; IBM, HP, and of course the ill-fated Sun Microsystems, used to make very fat margins based on their being able to sell duplicate servers, and charge for operating systems, and when you introduce an opensource model for the operating system, and are able to virtualize and manage this under-utilized resource, and then be able to parcel it out to customers, and have them consume it on an ‘as needed’ basis; you watch these margins just collapse.
That brings up this point about the compression in profitability and margins that hits so many businesses right now, that’s technologically driven. What are some ways that companies that may not necessarily have technology in their DNA, can effectively analyze, and potentially anticipate some of the changes that are happening in the industry that could not necessarily be favorable to their ongoing business?
I would say there are probably three major barriers that they wrestle with. Being able to see it at all. The reason that is such an issue is, you’ve grown up in a business, and you’ve internalized all the things that make that business work in your mind, and in your operating practice. Let’s say I’m a mid-market furniture dealer, all of my metrics are all about things like stock-outs, time to shelf, inventory turns, and how well my sales people are doing; there’s all these metrics that have to do with, ‘I have a physical store, and that’s what I’m running’. And so to even see what a Wayfair is doing, or what a Casper is doing, that’s not even in your world, you know mattress sales are down, you’re thinking it’s Joe’s Furniture across the town, you’re not thinking it’s some internet guy dealing with customers through an online channel, delivering direct to them with trucks, without the customers ever even trying the mattress out. What?!
- The first problem I think is advantage, which is if you’re so used to the world the way it is, it’s really hard to get that 30,000 ft level and say, ‘Hang on, somebody’s eating my lunch…’ ‘Is Casper’s a mattress company? Is it a technology company? Is it an advertising company?’ A very interesting question when you think about what it is really. So, the first problem is the advantage problem.
- I think the second problem is that they’re so weighed down with the existing assets, and all the different accounting rules, depreciation schedules, and all the other stuff that goes with it, that it gets really scary to say, ‘Well, wait a minute, what if I suddenly acknowledge that all of my existing inventory needs to be marked down?’ or, ‘All the goodwill in my brand no longer applies’, or whatever. That’s really scary, so there’s a certain element of denial that I think is there.
- The third issue I see all the time, which we’ve alluded to before is, they see the issue, they freak-out completely, and they’re like, ‘Alright, this is going to take $50 million, we’re going to throw it at your consulting firm of choice, and they’re going to fix it for us’, without taking the time to really rethink, how do we retool our business for the next generation? The sad part to me is, that a lot of these incumbent businesses have beloved assets that could stand them in very good stead, but they have to be willing to sell to customers the way the customers want to be sold to, they can’t cling to ‘Well, this is the way we’ve always done it. You customer, have to do business with us the way we want, not the way you would now prefer to do it’.
I think the better of them have really gotten ahead of this, and they’re trying to say, ‘Okay, if our customers want to be dealt with, digital phones, stacks, in the store, we will be present and unified in the way that they choose to do business with us. We’ve got to really think about that.
An interesting case of a company really trying to do that right now is Walmart, in their digital divisions; trying to say, ‘Let’s capture the advantage of the fact that we’re no more than 50 miles from every person in the United States, so, let’s capture some of the benefits of that’, and there are benefits; if I need it today, the chances are I’m not going to get that kind of immediate gratification through a delivery service. There are some but, chances are if I need a cooler today is it really economically worth it to me to pay $75 for a same day shipment, or should I just get in the car and drive to Walmart, and pick it up? And yet at the same time, if I want to order it and have it waiting for me, that’s what I want.
There is an element of digital, even in that, ‘I’m gonna drive over to Walmart today’, kind of purchase. I think what Walmart is trying very much to do is leverage the smarts of digital with the heft of the physical footprint.
I think you bring up a great point around retail, and with Walmart, because one of the challenges that Walmart faced is it being a pure bricks and mortar retailer, was that it took them a few tries to get the digital thing right. I would love to get your perspective on what they missed initially. They ultimately bought Jet.com, and were able to bring some different DNA in, but how was what Walmart was doing reflecting an evolutionary model of looking at an industry that’s both being disrupted, but also transforming and embracing digital?
I think it’s important to understand the context in which digital started to touch a lot of these legacy businesses. Digital first made itself known in peripheral parts of the company, I don’t mean unimportant, I mean more peripheral to the core operation, so typically marketing or advertising, or how you reached out to customers, or how you designed an email campaign back in the early days. If you think about it, back in the day, take the New York Times as an example; they still had the paper, that was the core-core business, the paper, and they had the newsroom, and this digital stuff, well so what did they do? What most companies did was what the New York Times did, they created the digital division, and they said, ‘Okay, you guys in the digital division, you deal with this disruption that’s happening at the edges of our company but leave the core along’.
And so, a lot of companies, beginning with Toys R Us, the New York Times, Walmart, would all be in this category where you usually had a Chief Digital Officer, and that person usually reported up to the Head of Marketing, notice – they weren’t reporting to the Head of Operations, they weren’t reporting to the CEO. Then what happened over time was, the digital change began to spread from marketing, to now start to touch other parts of the company. The first place you started to see it was digital products; once you’ve got sales on Amazon, and once you’ve got Amazon reviews, and once you’ve got Yelp, and once you’ve got all these other digitally intermediated sources of information, like it or not, your project now has digital components to it. And whether it’s a product… you want to buy a hammer, you go to Lowes.com or Amazon.com and you look at the customer reviews, and your decision to buy that hammer is influenced by those customer reviews.
I think the next big wave of digital was really in products that were affected in some digital way. Bye the way, this is not my thinking, this is the thinking of Ryan McManus who has done a lot of work on this, beginning with some work he did at Accenture, and now he’s doing some independent work on his own; but he has this notion of how digital emerged and progressed, which I think is pretty profound. So, started in marketing, then you had digital products, then you started to have digital just beginning to rip its way into your actual operations. Examples today would be these B to C companies, so, Casper I’ve mentioned, Dollar Shave Club, Harry’s, there’s a huge long list of them.
The incumbent competitors, and Walmart would be a great example. A couple of first initiatives were, ‘Okay, create a bloody Digital Division, and you internet people go. Alright, you want to buy a plastic shelving through our internet, okay’, and so the Head is grudging, ‘Alright, we’ll supply the Internet Division with our stuff’, but the real core of the business was still core Walmart, the way it had always been. But once you started to have the internet be part of how people wanted to do business with Walmart, the existing solutions really weren’t good enough. And so they had maybe two tries at this digital thing before Doug McMillan finally said, ‘We’ve got to get serious about this, and as you’ve said, we need to bring in some new DNA’, and that’s when they did the big acquisition of Jet.com, and they acquired all these other internet properties, Bonobos and a bunch of other ugly sort of direct to consumer, very quietly a lot of their customers don’t know they’re owned by Walmart!
They’re really trying to infuse this centrality of digital into their business model, and I think that’s the part that’s just so hard if you’re an incumbent competitor to realize this is not just a marketing thing, this is not just an ‘Alright, we’ll throw a digital layer on top of an existing product’, this is a fundamental reshaping of your business model, and that’s where it gets scary and hard.
Well, not just a business model, but also the culture and the structure of an organization will have to evolve to manage these new approaches, and now businesses. From your perspective, are there effective steps or best practices that leadership can implement to help manage the transition of the business model, and how does structure the organization optimally to address changing channels and really go to market strategies?
It’s a big transition. As with any other large scale organization change, if you don’t have absolute steely-eyed commitment from the very top of the house, the CDO and the senior team, it’s not going to work, because any opportunity the organization has it will slip back into its more comfortable way of operating. So, unless you have someone who is just being relentless about, ‘This is the way we have to do things’, it’s not going to work, so that’s with any major change, I’m not saying anything your listeners don’t know already! So that’s step one.
I think step two is, you need to be very thoughtful about how you bring digital into the operation, it’s usually a mistake to run around saying, ‘The future is digital! And anybody that’s not digital can get off the bus’, because the thing that people forget is, what gives it incumbent any claim to superiority over a new entrant is they got this rich history, this deep knowledge, this insight, this judgement that comes from decades of experience, and so let’s not lose that, there’s still huge value there. One of the things I kind of get upset about with a lot of these so-called digital experts is, ‘Oh well, the old company should be thrown on the rubbish heap, it’s not worth anything’, and that’s just not true. What differentiates any old startup from a really skillful, knowledgeable deeply appreciative incumbent is that body of expertise that they’ve built up, so let’s not lose that, but let’s try to mold it with something that is new, that is a different way of working.
At Walmart for example, there was this quite serious effort to say let’s line-up incentives. A great example of a company that did this really-really well is Schibsted, you may have heard of them in publishing, they were basically a whole motley collection of Nordics, beginning with Aftenposten in Norway, newspapers, ads, and giveaways, blah-blah-blah. Back in the nineties they were at this yearsago, they said, ‘Oh my God, classified ads, if the internet can start classified ads, they’re going to do it better than any newspaper ever could. Their EVP at the time was quoted as saying the internet was made for classifieds, and classifieds were made for the internet, and they said, ‘Well, okay, if that’s the case, why should we make our customer care about whether they get our advertising through print, or whether they get it through digital? We don’t care’.
What they did, interestingly, was they took the head of the physical print production, and the head of the digital advertising group, they gave them joint incentives and said, ‘Look, what we care about is whether our advertising customer…’ and this would be the big advertisers, the BMWs of the world, ‘… we don’t care whether they come through digital, whether they come through our conventional channels, whether they come in riding on a scooter and standing on their head. What we care about is how successful were you, the two of you, or three of you, or four of you, at keeping that customer as part of Schibsted. So, our metric for you is, what proportion of that customer’s advertising by is with Schibsted, wherever it takes us we don’t care, and we’re going to measure all of you on it, so get your act together and figure out how to work together, because we don’t care, you’re all going to get rewarded on the basis of that customer’s experience with Schibsted’.
Well, think about how different that is than in the normal corporate setup, where you’ve got, ‘You’re going to get rewarded on what happens in your region, or your store, or your footfall, and these digital people are going to get rewarded for what comes through their channels’, but obviously that’s going to setup internecine warfare, and that’s what happened at Walmart for years, the store people were like, ‘No, no, no, no, you’re not taking my customer’, whereas the Schibsted approach was, ‘That’s a stupid distinction! What we care about is, at the corporate level did you all working together come up with a great way of keeping that client related to Schibsted?’
I think step one is figuring out some way to keep your eye on the bigger prize, which is, do you really care whether its digital, analogue, footfall, or riding on horses, or whatever it is? What you care about ultimately as a corporate level is, did that customer stay with you? And that forces a whole different view of how you approach your customer, because now instead of saying, ‘Well, between you and me, those digital guys really don’t have their act together’, now it’s, ‘Hey, kumbaya, Hail Mary, we’re all going to go in there as a joint force’. So, I think that was one big breakthrough that Schibsted accomplished.
The second thing they started to do was, they started to really expand into, and acquire, internet properties, and this was before people realized internet properties were valuable. They bought right, left, and center, teeny little websites all over Europe, all over the Nordics, and did the same model; so in all the different markets they went into, they basically said, ‘Let’s understand what our customer arena is, and let’s see how we can most attractively position ourselves to them’, and they’ve help up pretty much as the poster child for how traditional media can win in an advertising model, even against behemoths like Google, Facebook and so-forth, because they took that very holistic approach right from the beginning.
Yes, I want to come back to the internet giants in a second, but you had hit on a topic that I think is really interesting, which is the concept of internecine warfare in large organizations; that’s been a problem with companies, I can think of Microsoft was notorious for warfare amongst itself, and I think one of the big changes that Satya Nadella has been able to implement is a much more collaborative, and innovative culture, where there’s a lot more cross-pollination. I’ve heard you speaking about some of the work that Alan Mulally had done at Ford, and would love to get your perspective on some of the examples of companies that have been able to really lead a culture out of that non-productive, or counter-productive mindset, and effectively harness people to be working for common goals in creative ways.
I think that’s critical, and I think with digital, the more digital you are, the more important it is, because digital doesn’t respect organisational structural boxes and arrows! Digital has absolutely no idea what those are. A second thing is, digital doesn’t respect industry, digital leaps gaily across industry lines, you feel these people kind of, bop-bop-bop.
Back to the leadership challenges, I’ll start with Nadella, because he’s a real hero of mine. A couple of policy things he put in place right at the beginning of Microsoft, he said, ‘Look, profits, revenues, and all those things we look at, those are all great, and those are all important, but they are lagging indicators, they do not tell us anything about the future, they are today’s outcomes of yesterday’s actions. What I want this entire company to be refocused on is leading indicators, and in the case of the online, and in the case of the world they’re moving into, which is really the world of the cloud, leading indicators all have to do with customer engagement, and you don’t get customer engagement unless they love our products. It literally talks about customer love!
I remember I was hired to give a talk at a Microsoft Leadership Conference, and fly all the way out to Bellevue, Washington, I’m in this big hotel where the conference is being held. I race into the ballroom because my flight was a little late, open the door, and on this big screen in the back of the room taller than me, is this word ‘Empathy’! I’m thinking to myself, ‘Damn, I’m in the wrong conference room!’ because if you thought of historical Microsoft, you could not think of a word too much farther from the heart and soul of the way that company used to operate.
But Nadella’s point is, if you don’t have empathy for your customers, you can’t understand enough about them to gain customer love, and if you really believe that’s important, you’re going to have to really work on that. So, that’s been a principle, and I think the principle I would extract from that is, everybody in the company is thinking about what leading indicators are, and that’s what he’s paying attention to.
Mulally is a an amazing-amazing leader, and what’s fascinating to me about his time at Ford just as an example, was he took this company that was famous for being internally competitive, and sat all these folks down in a room once a week, and forced them to work as a team, and forced them to come clean with their problems, and forced them to work together to solve problems. What was interesting to me was the social engineering of it was he let them lead, in other words he provided the structure, the guidance, and the strategic main points. But within that, he trusted the team, he said, ‘I don’t know about design of front bumpers the way you guys do, so I’m not going to get involved with that. What I do know is, I need a front bumper that doesn’t take too much fuel, that has these properties, and that we can manufacture within 8 months. Under that, you guys are the deep expertise’. So, he was very disciplined about enforcing that teamwork.
A couple of other things that I think are important but often neglected; Mulally had the courage to insist on what he calls good behavior in meetings, no side conversations, not technology, you do not take your phone, your phone does not go off. You are focused on the moment, you are paying attention to each other, you are there, you are actually present in the meeting’.
I was at a public speech he gave once in a completely different venue, he wasn’t the leader he was simply a speaker; and yet several other people who were in the room were also people who had worked with him at one point or another, they were talking about their experiences of turning around Commercial Airlines Division at Boeing, and then later at Ford. Somebody’s phone went off, and the three guys who were there, who had worked with Mulally before, they froze in their seats, their faces went as white as could be, and they’re all looking at Mulally going, ‘What’s he going to do – what’s he going to do?’ because if that happened in one of his meetings, you would be asked to leave, you would literally be kicked out of the meeting, if you were dumb enough to do that.
It was a public meeting; he wasn’t in charge, so he swallowed hard and glared at the person! The most telling reaction to me was not Mulally, it was the guys who had been working with him, because he does not mess around with that stuff! I thought that was symbolic, but it is real; if your boss says there is nothing you can be doing right now that is more important than being here, and there is no more of a disrespectful thing that you can do than pretend there’s something more important to be doing. It sets in place a whole cascade of behavior that is very different than what you see in a lot of these companies, and I’ve seen them, oh my God. You have 12 people in a meeting, 10 are on their cell phones, the other two are thinking about something else, except for the one guy that’s up there with his PowerPoints thinking he’s got them all enthralled, and it’s like what a waste of human time! Why are we all there? If you want to be somewhere else, be somewhere else, if you’re going to be present, be present.
It’s true, and digital technologies have really played a great role in the decreasing the collective attention span in society.
Just to finish on that, I think as leader – and back to your question about how do you get this common commitment, if you walk into a meeting with the feeling that this is themost important place you could be, at this particular moment in historical time, because these people who are with you are essential to your future success, and there is nothing more important you can be doing, that is a completely different mindset than the one I see at normal meetings, which is, ‘Oh, Christ, I’ve got to go to the Thursday update meeting. Joe Bloggs is going to drone on, and on, and on. What can I do to keep myself from dying of boredom?’ It's a totally different sense of urgency that you have in the one case, versus the other.
Yes, it’s being present, it’s a very different approach. I want to ask about your view on the competitive dynamics of the internet giants, and there’s been a lot of discussion recently about the outsized power that the social media giants, Facebook, Google, Twitter to a lesser extent, but also Amazon and other very large technology companies that have really established dominant market share, if not monopolistic market share in some markets. We’re starting to hear a lot of concerns that we might need to have intervention on the anti-trust from to break these companies up, but if you look over the past five decades, the top 10 companies in the SNP 500, all have gone through an enormous amount of churn. I think one could point to the fact that you do have now the majority of the Top 10 companies in market cap worldwide, are technology companies. But if you look forward, the reality is that people are looking at these companies as having again this sustainable competitive advantage that can’t be overcome, but I think history might tell us different.
I’d love to get your take on whether there are some differences in the competitive advantages that the internet giants have.
A couple of observations, I think the first observation is that our theory of monopoly has not kept up with the reality of what internet competition makes possible. Our whole theory of monopoly is premised on the basis of customer harm, when customer harm is regarded very crudely, very bluntly as price competition, so, if you are not raising prices under our traditional way of dealing with monopoly conditions, if you’re not raising prices there’s no customer harm, so what’s the problem?
What our theory of monopoly does not do very well is deal with what are called monopsonies, and what a monopsony is, is a competitor, and I’ll use Amazon as the poster child here; a competitor who has so much market power that they keep prices so low, that they deter entry. Therefore, they’re anti-competitive, but they’re not anti-competitive in the sense of Standard Oil which bought up all the assets, and then proceeded to raise prices because they had a strangle hold on the market, and nobody else could enter. Instead, what Amazon was doing is keeping prices so low that nobody else who doesn’t have their scale, their warehousing, their accumulated decades of computer experience, nobody could hope to compete with them on price.
So, it’s not causing customer harm in a price sense, but it is causing customer harm to me in a choice sense, that there is no-one in many of these markets who can credibly compete with Amazon. I say this with mixed feelings, because I genuinely do believe that Amazon has at its core a centeredness around the customer, serving the customer, and putting the customer first in everything they do. I think that’s real, I do not think that’s B.F. I think they really-really live that. In that sense I have a very soft spot for them!
But on the other hand, is it anti-competitive? Absolutely. Are they for example if I’m a conventional book retailer, take Barnes & Nobel, how on earth do I possibly compete with that, and yet at a societal point of view, does it matter there’s a Barnes & Nobel? Yes. Would we be a worse-off society if that went away, would the whole publishing industry be impoverished, would we as consumers have much less choice? Would new authors ever get a seeing from a publisher who has to take a big risk? Well no. There’s all these knock-on effects that I think are really important.
I think the first dilemma is we have this outdated definition of what we should be concerned about when companies behave in an anti-competitive way. We are concerned about price competition; we don’t quite have the mechanisms to think about monopsonist competition.
The second thing is, a lot of these big players take advantage of these network effects, which are they become more valuable the more people use them, so obvious the more people are on it – the more advisers want to be there, and therefore that makes them very entrenched, and it’s very hard for anybody else to break into that, up to a point, and I’ll come back to that in a minute. But I think again, our regulatory mechanisms haven’t caught up to how to deal with network effects, in a way that is fair to everybody. Years ago, we had what we called natural monopolies, so AT&T was considered to be a natural monopoly, and the reason that was, was because investing to provide infrastructure to broad expanses of the American geography was very-very expensive. The theory at the time was you had to make it possible for these companies to make those big-big investments in infrastructure, or nobody would do it. Therefore, you had to guarantee them to some extent monopoly profits. We see the same argument in cable tv, pharmaceuticals, any place where there’s a huge investment required, and an uncertain profit to be derived, and what governments have said is, if we want investment to happen in these places, we need to guarantee monopoly profits for a while.
Now, with network effects that’s different, you don’t need massive investments in infrastructure to have a network effect happen. In effect what you’re getting is the benefit that used to happen when people invested in bricks and mortar without necessarily having to create the investment, if you follow what I mean? It’s as though Facebook had a network of telephone poles back in the thirties! And instead of telephone poles they are internet nodes, so I’ve got the network effect, but I don’t have to invest in the infrastructure, I’ve got all the benefit of it without having to bear the costs. So, there’s a kind of question mark in my mind about has our regulatory regime really picked up on that? That’s the second big question.
The third big question with the way things are regulated right now is, a lot of what these companies are trading in, and of course this is talked about a lot, but are regulations around what information is fair game, just completely have not kept up with what these companies are trading in. So, the fact that I have essentially created the equivalent of Marbelle in the thirties as Facebook but for free, means that I’m getting my money from somewhere else, and we let this happen without really paying attention to it. Back in the early days before the cat was out of the bag there were rules you could have had around what you’re allowed to use, whose data belongs to whom, and property rights around it, and that whole thing has just gone completely haywire.
I think the third reason our regulatory regimes have not caught up with these monopolies is that. So, you’ve got monopsony, you’ve got this monopoly without having to have the infrastructure, and then you’ve got this lack of clarity around who owns data, and who’s allowed to use it, for what, and sell it to whom under what privacy conditions. It’s a complete quagmire. That’s what’s keeping them in place. How could they lose it? Networks do unravel, and network effects are not always as persistent as theory would have us believe. So, maybe not so quickly but you can see scenarios – and it’s happening already with the core Facebook platform, younger people aren’t signing on, if you look at the younger demographic, and I’m talking teenagers and under, they are somuch more reluctant to give their data to Facebook, than the previous couple of cohorts before them. You read now about children; 14-15-year olds horrified at all the personal information that’s been put on Facebook since their birth by their parents!
The reluctance of people to freely give that kind of information is one thing that could start to get in the way. Trust, clearly Facebooks lost an enormous amount of trust, that’s the second thing. And we could see regulation come down on them… the trouble with regulation is there are always unintended consequences, so I’m not an advocate, I’m just saying you could see that dismembering a lot of what they’re currently allowed to do. I could see some really interesting attempts to defend them, and then they could just lose their cool; the one piece of regulation that would really undermine Facebook, and it’s been talked about is, if you require Facebook to do what LinkedIn has already implemented, and say you can download all your Facebook data and port it anywhere you want, if you could do that, that would be a huge existential threat to that company.
It certainly would be, and when you build a business model based on using people’s data, really is the fuel for different business models. I’ve read Shoshana Zuboff’s book Surveillance Capitalism earlier this year, and listened to Roger McNamee when he was coming around and talking about his new book; yes, I think there’s a lot of awareness, it doesn’t seem that there are any easy solutions at hand, but certainly if one had assumed that Microsoft would be invincible in the nineties, just as they were battling the anti-trust authorities, and if you look at Apple and Android a decade and a half later, you can just anticipate a decade or two from now that the landscape will be different.
Yes, and I do think the privacy thing is… and I’m not sure what form it’s going to take, but there are rules around this. Let me give you an example that comes out of the new book which if you think, where did you used to get information? One place you used to go to get information was the library, and the library was presided over by a librarian. There’s this thing called The Librarian’s Code of Conduct. The Librarian’s Code of Conduct, which is part of congressional legislation around Librarians, basically said as a Librarian you are forbidden to disclose or capture any information about what resources somebody was researching, what books they took out, who they consulted, what references you were asked to help them with, what research you were asked to help them with, because it was considered to be, to know what someone was interested in looking at, and this would be more Google’s model than Facebook, but it was considered to be illegitimate for anybody to know what anybody else was researching, because of the danger that it would be disclosed what their deeper insights were was so great.
Now think about that, that was enshrined in law for decades. We’ve just kind of la-di-da, la-di-da! Google says it’s alright, so it must be! So, there’s almost this huge existential question we have, and I’m not blaming anyone, all this stuff took everybody by surprise. I think it took Google by surprise.
And it’s all free too, so they weren’t taking money from people. Yes, it’s become a very different model.
It’s interesting though isn’t it, that for the Librarians those were the rules.
If there was a way to implement similar principles at least that would protect people’s privacy, I think that would be a step in the right direction.
Before we run out of time I really want to get to your new book, Seeing Around Corners, and would love for you to share a thesis and some of the key points, and I see that it will be out in September. I would love to get your thoughts on the book.
Delightful. The book is called, “Seeing Around Corners – How to Spot Inflection Points in Business Before they Happen”, and the core thesis is that inflection points which represent a moment when the rules of the game change. An example would be the advent of these direct to consumer companies, on top of a conventional retailer, the rules changed, it didn’t used to be it was safe or economical to reach a million customers all by yourself, without going through a third-party retail outlet; today it’s possible. That’s an example of an inflection point, it changes the assumptions that your business is based on.
The book is about three things, how do you spot them? The first part of the book is, how do you put yourself in a position to see where they’re coming. The middle point of the book is how do you decide what to do about them. And the whole discovery-driven idea comes back into its own, right then and there, because a lot of this is really new, so we don’t know the answer, we have to go find it out. The third part of the book is, having decided what you’re going to do, how do you now bring the organization with you? Because it’s not enough to know that it’s coming, and it’s not enough to say, ‘This is where we should go’, it’s a whole group of people that have to agree and be brought along, and mourn what used to be, and prepare themselves for what is to come. There’s a whole lot to it.
So, the book really proceeds in those modules. Now the thing about an inflection point that I find particularly fascinating is, it’s neither good nor bad, if you see it and you mobilize your organization to capitalize on it appropriately, it can take your business to new heights. If you avoid it, miss it, or are in denial that it’s happening, it can cause your organization to flounder. So, it’s not good or bad, it’s how you play it, which is why as a strategist that strikes me as so interesting.
The other thing I think is important about the book is that these things don’t happen overnight, they feel as though they do when they finally make themselves known, but usually they’ve been brewing for a long-long time before they show up on your doorstep fully formed.
I was on a panel the other day, by the way you mentioned Scott Anthony, I was on a panel at InterSites CEO Summit with Marie White who is the Head of IBMs Blockchain Division, a small division of IBM that does blockchain stuff, and she pointed out, the first blockchain transaction was 10 years ago, and we’ve forgotten that, we’ve forgotten this thing has been around for a decade, and we’re only now beginning to see the commercial applications, beyond cryptocurrency, the actual business-to-business ecosystem applications that are going to make this thing a real force in our lives.
The overarching theme of the book is, if you see it in time and are prepared to act in time, you can benefit from these inflection points, it doesn’t happen overnight. Sure, there are tsunamis, there are things you can’t anticipate, but most of the stuff in business you can get a sense for well before it turns up on your doorstep.
It sounds fascinating, I’ve pre-ordered it, and we’ll put the link to your book in the show notes. For our listeners, are there any resources that you can direct us to if they want to learn more about your work, and your thinking?
Absolutely, I have a monthly newsletter that everyone can subscribe to, it’s free. What I do each month is, I take a different sector of the economy and look at what the inflection’s points might be that it needs to think about. I’ve done construction, packaging, consulting, a whole variety of different things, we had one newsletter that looked at the direct to consumer model. You can subscribe to the coming one, go to ritamcgrath.com/newsletters and put your name in, I will send you the newsletter. We do not use that list for anything else, so your email is safe with me, you’re not going to get spammed by all kinds of things, because that would really be bad for my reputation, so I’m not going to do that!
You get the monthly newsletter, there also is an archive of all the past newsletters, and I’ve been writing them now for four or five years, that’s at ritamcgrath.com which is my website, and you can browse the topics I’ve dealt with in the past, things like big food, power business, all kinds of different sectors. So, if you have a sector interest, it might be worth browsing around there.
The book is as I’ve said coming out September 3rd, and there’s going to be all kinds of newsletters, and other bits of information that come out with it. It has its own website which is seeingaroundcornersbook.com, and there will be more resources we’ll be putting up, we’ll be putting up interviews. So, lots of other things to come as the book comes into the world.
Terrific, I’m excited to read it, and really thrilled that you were able to take this time to speak with us, it’s been fascinating, and I realize we’ve barely even scratched the surface of a lot of these topics. These are incredible times, and I really appreciate the work that you’re doing, and the insights that you are providing which are helping people navigate.
Thank you so much, that’s really great to hear.
This has been another Momenta Podcast, and our guest has been Rita McGrath who is a Professor at Columbia Business School. This again is Ed Maguire, Insights Partner at Momenta Partners. Please look for any of the links that were mentioned here, in the show notes, and please contact us if you have any further questions.
Thanks again Rita.
Thanks so much.