How to Spot Major Changes in Business Before They Happen — with guest Rita Gunther McGrath

Chris Curran: Growth Igniters Radio, with Pam Harper and Scott Harper, Episode 168: How To Spot Major Changes In Business Before They Happen.Chris Curran: This episode is brought to you by Business Advancement Incorporated - enabling successful leaders and companies to accelerate to their next level of success. On the web at businessadvance.com.

Chris Curran: And now, here's Pam and Scott.

Pam Harper: Thanks, Chris. I'm Pam Harper, Founding Partner and CEO of Business Advancement Incorporated, and sitting right across from me as always is my business partner and husband, Scott Harper. Hi Scott.

Scott Harper: Hi, Pam. It's great to join you again for another episode of Growth Igniters Radio. As always, our purpose is to spark new insights, inspiration, and immediately useful ideas for visionary leaders to accelerate themselves and their companies to their next level of game-changing innovation, growth, and success.

Scott Harper: Now, Pam, we're here at the beginning of 2020, and we're already seeing a lot of changes in the year to come and beyond. The question is which are going to stick, which are important, and which aren't?

Pam Harper: You have to be almost a fortune teller to know all of that. And yet, not. We've had so many leaders that have told us we want to be the disruptors, we don't want to be the disrupted.

Pam Harper: Of course, this hinges on seeing signals of emerging opportunities and potentially disruptive issues as early as possible. The challenge is separating out the real signals from the noise. I mean, think about AI for instance. It is everywhere. It impacts everybody from the largest corporations to the mom and pop. We don't know-how. We hear about it in so many ways. What's real? What isn't?

Scott Harper: To be the disruptor, you and your team out there have to decide how to pick up on early signals, which of them are most relevant to you and your business, and what to do about them.

Pam Harper: Exactly. So our guest today is going to share her insights with us about these issues. She is Dr. Rita Gunther McGrath, a world-renowned thought leader and a professor at Columbia Business School, where she directs the popular Leading Strategic Growth and Change program. She's widely recognized as a premier expert on leading innovation and growth during times of uncertainty. In her speeches and consulting, Rita works with Fortune 1000 companies, helping boards, CEOs and, senior executives act strategically in rapidly changing and volatile environments.

Pam Harper: She's received the #1 award for Strategy from the prestigious Thinkers50, and has been consistently named one of the world's top 10 management thinkers in its biannual ranking.

Pam Harper: Rita's the author of many scholarly articles and bestselling books, the latest of which is Seeing Around Corners: How To Spot Inflection Points In Business Before They Happen, which is what we're focusing on today.

Pam Harper: You can read more about Rita McGrath by going to Growth Igniters Radio, Episode 168, and scroll down to her bio.

Pam Harper: Rita, welcome to Growth Igniters Radio.

Rita McGrath: It's a pleasure to be here.

Pam Harper: Before we talk about the future, let's talk about the present. Tell us a little bit about what led you to conduct research specifically around seeing around corners?

Rita McGrath: Well, the seeds of this book were really rooted in my previous book, which was really about how strategy has changed. The previous book was called The End of Competitive Advantage. The main thesis was that this idea we've had in strategy for a long time, that competitive advantages are infinitely durable and last forever, really required a rethink.

Rita McGrath: That led us to the New Strategy Playbook, in which the argument was that strategies have a lifecycle, right? They have a time when they're sort of born, that's the innovation process. You have a time that you get to exploit them. Then there's the disengagement process, when a strategy goes into erosion. Out of that book, a lot of people kept saying to me, well, we love this idea, we really believe in it, but how do we know when? That got me thinking about timing.

Rita McGrath: Then I happened to run across Andy Grove's book from the '90s, called Only The Paranoid Survive, which was really the first, I'd say, book-length exploration of this whole idea of a strategic inflection point, a time when the assumptions under your business really change radically.

Rita McGrath: Then I guess the final piece that really crystallized this book was a friend who sent me an article that was written by a historian. The article was entitled something like, What if You Change the World and Nobody Notices?

Pam Harper: Oh, wow.

Rita McGrath: It really focused on the lag between some kind of change in the environment taking place and it actually unfolding in its full fruition. So the Wright brothers invented manned flight, and if you look at the newspaper headlines for the next day, the next week, for months, nobody paid attention for a long, long time. That really brought to me the idea that strategic inflection points feel as though they happened instantly, but in reality, they've usually been underway for a really long time.

Scott Harper: So let's dig a little deeper into this inflection point. What makes them so challenging to spot? Even when you know they're there, how come they aren't always apparent in a meaningful way?

Rita McGrath: Well, I think it's because the way we look at the world is really colored by the past. By that I mean in business, any business has certain assumptions embedded in a business model and in the way that we work which come from the constraints that were impossible in the past.

Rita McGrath: So if I even just think about this podcast, right? 20 years ago we would have had to be in a recording studio, we would have had to have all kinds of equipment, there would have been 10 guys in the room monitoring sound levels and that kind of thing.

Pam Harper: Sure, sure.

Rita McGrath: Today, basically, two people in a garage with a certain amount of software and some fairly decent home equipment can manage that same thing.

Pam Harper: Well, that's true. We're actually not in a garage, just to be clear, but I think that what is true is that things have changed so profoundly in terms of what is possible no matter what size business you are. I just want to revisit quickly for those people who don't have the terminology, can you define what an inflection point is exactly?

Rita McGrath: Sure. So I define a strategic inflection point as a 10x change in some factor that has been true in the past, but isn't any longer, and that has the effect of radically changing the assumptions that color your business. So if you take an interesting category of offerings which would be the direct to consumer movement of the last few years, so this would be companies like Casper in mattresses, or Wayfair in furniture, or Dollar Shave Club.

Scott Harper: or Warby Parker...

Rita McGrath: Warby Parker. Yeah, exactly. So what those companies have done is really rewritten the taken for granted assumptions about retail by basically saying, hey, we can build our computer systems on Amazon Web Services or Microsoft's Azure. We can go directly to the consumer using social media and other channels. We don't really need a Rite Aid, or a retailer, or a shop. We can go directly to the end-user.

Pam Harper: Okay, so you talk about the inflection point, though. Is it almost, in your experience, that the top leadership says something has changed profoundly, we can't keep going the way we were? Or is it more of a slide?

Rita McGrath: There are three reactions to the emergence of an inflection point. The first is we miss it completely, we don't see it at all, and then we try to pretend it's not going to happen.

Pam Harper: Right.

Rita McGrath: The second is we see it, and completely overreact. A number of companies have done that where they've seen something happening and they just go, "Oh my God, the sky is falling. We've got to do something drastic." That usually doesn't end well. The third practice, kind of ironically, is to have been working in an experimental way with the things that could cause a potential inflection to occur, so that by the time it's arrived, you're already sort of working with it, working on it, and it doesn't come as a dramatic sudden shift or break.

Scott Harper: Okay. So what's critical then for top leadership to understand in order to be able for them and their companies to spot major changes that are going to be that inflection point before they happen, before everybody else is in on it?

Rita McGrath: Well, I think the most critical aspect is actually one of the least glamorous, which is how you manage your portfolio of investments.

Rita McGrath: I would argue that the companies that do this successfully are very disciplined about making sure that they have small experimental investments, I like to talk about, at the edges of their organizations. So you can think of these as options that you may or may not activate at some point down the road.

Pam Harper: Okay, so we're going to dig a little deeper into this in the next segment, and also look at more concrete examples of companies that have both missed and have gotten those inflection points. But first, we're going to take a quick break. Stay with us.

Scott Harper: This is Growth Igniters Radio with Pam Harper and Scott Harper. We're brought to you by Business Advancement Incorporated, where we focus on enabling visionary leaders to ignite, sustain, and boost the momentum it takes for game-changing results. We're on the web at businessadvance.com.

Pam Harper: To everyone listening, welcome. We're glad you joined us, whether it's because you're a subscriber or you've just found us wherever you pick up your podcasts. But there is a special reason to visit growthignitersradio.com. This is the only way you can access all of the previous podcast episodes from the past five years.

Scott Harper: It's also where you can find unique show notes, biographies, and resource links specifically related to each of our podcasts. We feature award-winning CEOs, thought leaders, and bestselling authors. You can explore more by going to growthignitersradio.com today.

Pam Harper: Welcome back to Growth Igniters Radio with Pam Harper, that's me, and Scott Harper. Today we've been speaking with Dr. Rita McGrath, professor at Columbia Business School and author of Seeing Around Corners, about the strategic inflection points, seeing around corners, and what you specifically can do to stay ahead of the game.

Pam Harper: Rita, how can people find out more about your work?

Rita McGrath: Well, you can visit my website, which is ritamcgrath.com. I'm a professor at Columbia Business School. I'm also delighted to say that we are building some software which we hope will make it easier for companies to manage these portfolios of innovation projects and options. That's going to be at a company called Tectonic. So if you look up techtonic.io, that's where you'll find out about that.

Pam Harper: Excellent. As far as buying your book, how can people do that?

Rita McGrath: Oh, anywhere books are sold. It's available in audiobook, ebook, and of course hard copy.

Pam Harper: Again, you can look at resources for this episode by going to Growth Igniters Radio, Episode 168.

Pam Harper: So back to our conversation. We were talking in the last segment about assumptions. We all make them. We don't think about them necessarily unless somebody is working to say what are your assumptions about this? But you talk specifically about taken for granted assumptions about success and the fact that they can be dangerous. We agree with you, but let's talk a little bit about that. Why can they be dangerous?

Rita McGrath: Well, what happens as a strategic inflection point picks up steam is that the gap between reality and the world of your assumptions gets larger and larger, so your understanding of cause and effect becomes less and less valid as that gap widens. So the dangerous part of assumptions is that you basically are making decisions about a world that doesn't exist anymore.

Pam Harper: So can you share a specific example of two companies where one got caught up in their taken for granted assumptions about success and the other didn't?

Rita McGrath: Oh yeah, there are lots of examples. I mean one of my favorites at the moment is the case of Best Buy, which was basically left for dead 10 years ago. I mean people were like, okay, Amazon and e-commerce is going to wipe out. Why would anybody need a bricks and mortar retailer when you can just go on your computer and get this tech at a rock bottom price and so forth. What Hubert Joly, the CEO who really turned around Best Buy, realized was that firstly they had to match price. He said, look, if I don't match the price somebody's going to get for the same product online, they're my customers to lose. Because they're already in my store, you know? So if they look on their phones and there's a better price available online, then that's my problem, not theirs.

Rita McGrath: I thought that was a really enlightened way of looking at things. Because the assumption at the time, if you remember, in retail was that, because you had to have a physical store and keep the lights on and have staff, that you could never match the cost structure of the online players. So that was the assumption at the time.

Pam Harper: Exactly.

Rita McGrath: So he basically announced price matching. The second thing was he realized that for many consumers, yes, of course, they want the TV, but they don't actually just want the TV. They want the TV on the wall connected to the internet with a remote control that works, and they want to know which TV for what purpose, and, and, and, and. So he realized that a bricks and mortar store with highly trained service people could actually help consumers with that journey much better than just an e-commerce player could. He really used that insight to engineer what has to be one of the most remarkable turnarounds of a retailer.

Rita McGrath: If you go into a Best Buy today it's no pressure selling, the store is nice and bright, you've got very well trained, very knowledgeable staff to help you make a smart technology choice. It's a really pleasant experience, which you couldn't have said some years back.

Pam Harper: Is Best Buy sort of an outlier, or is that more of a trend now?

Rita McGrath: Well, I think Best Buy's unusual in retail. I think they made a lot of very courageous decisions to emphasize growth and change rather than just trying to shrink their way to greatness, right? Which a lot of, unfortunately, retail companies do.

Rita McGrath: It's a mixed bag. I think it's rare for senior leaders to have the courage to acknowledge that the fundamentals of their business have changed and that they really need to be making different decisions today than perhaps they made in the past. I mean to me, a really cautionary tale at the moment is Boeing and what happened with their cluster of decisions around the 737 MAX.

Pam Harper: Oh, absolutely.

Rita McGrath: Which was a decision that they claim was forced on them because Airbus came up with a product that met customer's needs at a lower price point. Boeing, for whatever reasons, and many blame the financial pressure the company was under from its investors, that they did not redesign a new airframe. They also spent maybe twice, or even three times, as much on stock buybacks as they'd been spending on new plane R&D. So I think there is a case where the company was so driven by sort of giving returns to their shareholders that they really didn't think about how do we make sure we invest in the future of our core business?

Scott Harper: So what is it that top leadership can do so that they and their companies can pick up on signs of early warnings in a meaningful way? What's the key distinguishing between real signals that are significant and noise that's just passing?

Rita McGrath: Well, there's two questions there, right? So the first thing is what leaders can do, and I think there's a couple of principles. The first principle is they have to create an environment of candor and psychological safety so that when somebody runs across a piece of information that's disconfirming or that isn't consistent with the prevailing beliefs, that they're allowed, even encouraged, to bring that to the attention of decision-makers.

Rita McGrath: Andy Grove used to call these people Helpful Cassandras. What happens in a lot of companies is that the leader kind of gets walled off from the reality of the company. They travel in special cars and planes, the rooms are chilled to the exact temperature their body likes, their favorite brand of diet soda is sitting right where they want it to be, and they get kind of coddled and they forget that that's not reality.

Rita McGrath: So I think that that leads me to the second point about how leaders can see them, which is they really need to have practices that get them out to what I call the edges of the organization, because that's what these changes start. If they presented themselves in binders at corporate headquarters, it'd be easy, right?

Rita McGrath: They don't. They get started out there in the edges of the organization where things aren't completely clear yet. So leaders need regular practices to get out to those edges and see what's going on.

Rita McGrath: [crosstalk 00:17:41] when is it just a sudden shift versus the sustainable inflection point? I think there what you want to be looking at is how strong are the signals? In the early stages, the signals are very weak. Reasonable people could conclude different things. As the signals get stronger, you start to see a consistent pattern coalesce around them, and that's when you can start to have more confidence that decisions you're making fit those circumstances.

Pam Harper: Timing is a big deal, too. In your book, you talk about the period of optimum warning. Tell us a little more about that.

Rita McGrath: So if you think about the strength of a signal, which we were talking about. So that's the evidence, if you will, that something's about to change.

Rita McGrath: In the early phases of an inflection point, they're very messy. They're very weak. Then they pick up strength and vigor, and by the time they're really, really strong, you've got facts, right? You can take photographs, you can poke the thing in the eye, and so forth. The trouble with it is that you've got an inverse relationship between what I call your degrees of strategic freedom and the strength of the signal. So ironically, your ability to change the reality is at its greatest when the information is at its lowest point.

Rita McGrath: You don't want to make decisions too early, because the signal to noise ratio is just too high.

Rita McGrath: But you obviously don't want to leave it too late, because then you can't do anything about it. So that period of optimum warning is where you've got enough information to go on that reasonable people can conclude there's an opportunity to take action, but it's not so far gone that everybody's seen it, it's too late, and you really can't change the answer.

Pam Harper: We're going to take another quick break, and when we come back, Scott and I will speak more with Dr. Rita McGrath, author of Seeing Around Corners, about three immediately useful ideas a top leadership team can use to see around corners in their own business. Stay with us.

Scott Harper: You are listening to Growth Igniters Radio with Pam Harper and Scott Harper. We're brought to you by Business Advancement Incorporated, and we're on the web at businessadvance.com. Since you're listening to this episode about seeing around corners, be sure to listen to additional episodes about the type of visionary leadership it takes to stay first, fast, and foremost in a constantly changing world.

Pam Harper: For instance, in Episode 152, we have a conversation with Peter Gleason, CEO of the National Association of Corporate Directors, about the new keys for leadership success in a disruptive world. Based upon NACD's recent blue-ribbon commission report on adaptive governance, Peter shares with us the critical new leadership traits and behaviors more boards are looking for from CEOs, C-suite, and senior executives, and why.

Scott Harper: For links to this and several other related episodes on visionary leadership, go to growthignitersradio.com, select Episode 168, and scroll down to resources. To schedule a brief call to discuss your specific questions and challenges about leadership for accelerating momentum to your company's next level of success. Contact us today at businessadvance.com.

Pam Harper: Welcome back to Growth Igniters Radio, with Pam Harper and Scott Harper. Over the last two segments, Scott and I have been speaking with Dr. Rita McGrath, professor at Columbia Business School and author of many books, including her latest Seeing Around Corners, about how to see around corners in your business.

Pam Harper: Rita, how can people find out more about your work?

Rita McGrath: Well, one easy way to do that is to go to my website, which is ritamcgrath.com. The book also has its own website, which is seeingaroundcornersbook.com. If people visit there, they can see a little one-minute book trailer, which basically summarizes the themes from the book. So that's a resource I would recommend.

Pam Harper: That's great. We highly recommend this book. So many of your stories get to the heart of this complex issue.

Pam Harper: So now we've come to the point, Rita, where we talk about three immediately useful ideas that a top leadership team could use to anticipate inflection points and see around corners in their own business. So what would be an immediately useful idea for building bridges between people at the edges and people making strategy?

Rita McGrath: So one thought that is used by one of the companies I feature in the book, it's called Kloeckner, is they implemented what they call a non-hierarchical communication system as they were going through their digital transformation. It was Gisbert Ruhl, who's their CEO, it was his way of signaling to the company that hierarchy should not be an obstacle to the sharing of information. In their case, they use Yammer, but there are all kinds of these things. There's Slack, there's a bunch of others. So one sort of principle is to have some way in which you can hear what people who are actually at the front lines of the organization are chattering about, whether that's technology, or whether that's a meeting.

Rita McGrath: I have a colleague who has a computer-generated program that randomly selects a list of, I think it's 12 people from all over the organization, and he flies them to corporate headquarters and has lunch with that group of 12 in a month, and then the next month a different group of 12. These breakfasts are really just to help him have honest conversations with people he might never encounter on a regular basis. So practices like that allow people to communicate with the strategy parts of the organization, even if that doesn't happen to be where they live.

Scott Harper: Now building on that, because it's really important to do that, that means that people actually have be willing to communicate. You spoke about that earlier, psychological safety. What's an immediately useful idea for promoting the openness of the organization so that there is communication about new and potentially disruptive ideas and information?

Rita McGrath: Well, I think the greatest authority on psychological safety is Amy Edmondson. She just published a book called The Fearless Organization, and so I would refer people to that for a really in depth view.

Rita McGrath: I think, pragmatically, the first thing you can do as a leader is try to not signal in advance what you want the answer to be, because if you're in a position of power, people are going to feel influenced. So just listen. I mean, just stop talking and listen and encourage people to come to you with new evidence.

Rita McGrath: I think it's also super important not to punish those who come in with disconfirming or bad news. You really need to make people feel that they're not going to be punished in some way for telling you something they're suspicious you don't want to hear.

Scott Harper: So you don't want to do what the Wicked Witch and the Wiz did. Don't nobody tell me no bad news -- or **boom**!. Right?

Rita McGrath: Right.

Pam Harper: That's really true. I've seen situations where people will try to clean things up before anybody from the top leadership comes out and says something. They'll say, well, I don't want to say that.

Rita McGrath: Yeah. I mean, how many hours of human effort or pay are wasted on the perfect PowerPoint slide, or, oh, we had this real problem with the third quarter, but we're going to try to make it up. When it's left unchecked, it can descend into illegal behavior. We've seen companies that were so twisted by this set of incentives they were trying to create that they actually descended into illegality.

Pam Harper: So it's so important to be able to see the link between saying, sure, I want to hear what you have to say, and then looking at how you promote people, how you reward people, how you reinforce people, so they can see that there's actually a tangible incentive for sharing in a real candid way.

Scott Harper: And that means, building on what Rita said earlier, getting your head out into the organization and not staying locked up.

Pam Harper: What about an immediately useful idea for what you call experimental decisions? So talk to us a little bit about what that could be like.

Rita McGrath: So the concept is you want to empower small teams to be able to take some kind of learning action which isn't too expensive and can be done quickly and can teach you something. So a great prototype for this is Adobe's Kickbox program. The Kickbox, it's been around now since 2015, and they've now got a consortium going of companies that use the Kickbox.

Rita McGrath: What the Kickbox is is it's literally a red box and inside it is some instructions, a candy bar, a Starbucks card. But the most important thing inside is a $1,000 gift card. Someone who wants to run an organizational experiment to try out one of their ideas can use that thousand dollars to create a prototype, or to run a focus group, or to otherwise try something out that maybe wouldn't be used if it had to rely on corporate approval or the CFO had to sign off on it.

Rita McGrath: The way that the CEO of Adobe talks about it is he said, look, we've probably spent $1 million on this, but think about it. Not only do I have that thousand people that got these Kickboxes, do I have their ideas, and are they energized from all over the organization, but I've also trained them. If you think about it as training money rather than venture investment, you can look at it through a completely different lens. Now I've got a thousand people who are just much smarter about what we have to do to be innovative as a company. So that's [crosstalk 00:27:53].

Pam Harper: Exactly. So you're talking about learning from something no matter what happens, and that's the win in that decision, as opposed to necessarily success, maybe it does, maybe it doesn't, but we've always learned something.

Scott Harper: Oh, that didn't work.

Rita McGrath: This is also something super important for your listeners. One of the biggest barriers to being innovative is people are chronically afraid of failure. They're afraid of looking bad, they're afraid of it not working out, or that didn't work. But if you describe it instead in terms of tuition, right? So we're going to spend $500 to learn X, Y, Z. Then the conversation is, well, was that worth learning? Was that learning worth $500? Not, oh, I suspect it's going to be blue, and it turns out to be green. Well, it's just not a useful conversation to have when you really don't know.

Rita McGrath: So I think we're starting to see more acceptance of this idea of experimentation, AB testing, those kinds of things, than we had in the past.

Pam Harper: That's what it takes to start being able to see what's going to work and what's not.

Pam Harper: Rita, can you share with us some final thoughts about seeing around corners in 2020 and beyond?

Rita McGrath: Sure. So I think the most significant thing is often not seeing the trends. Jeff Bezos says this all the time, he says the big trends get talked about and written about and everything, the harder thing is to bring the organization with you. So I think this is where storytelling and painting a picture of the future and really thinking broadly about what future scenarios might occur comes in.

Rita McGrath: I recommend a really simple technique that anybody can use. You basically take two uncertainties that are facing your future, and they can be any ones that you really think of, and you have two different values of the uncertainty, and that'll give you a little two by two matrix. Then just create a story about that future with a headline, and the headline then becomes your time zero event.

Rita McGrath: What this allows you to do is a couple of things. First of all, if you do it as a group, the senior leadership group, you're now all working on what future possibilities could be. Secondly, it sets up the conditions in which you can test your strategy against all those scenarios. So if you've got a strategy that really only works in one of them, that's a signal that there's a weakness there, there's a vulnerability there.

Rita McGrath: The last thing it allows you to do is establish what I call times zero events, which are good things or bad things that can happen in the future. Now you can begin to say, well, what would the evidence be that this is either becoming more likely or becoming less likely? Then you can set up your early warning system around that.

Rita McGrath: So it's pretty practical. It doesn't have to be expensive. You do not need high priced consultants to make this happen. I find that's a really useful approach that senior leaders can take.

Pam Harper: Rita, thank you so much for being our guest on Growth Igniters Radio.

Rita McGrath: It's a pleasure.

Scott Harper: Thanks, Rita. And thanks to you out there for listening to Growth Igniters Radio with Pam Harper and Scott Harper. To get show notes and resource links for this week's episode, go to growthignitersradio.com, select Episode 168.

Pam Harper: Until next time, this is Pam Harper…

Scott Harper: And Scott Harper…

Pam Harper: Wishing you continued success and leaving you with these questions to discuss with your top leadership team.

Scott Harper: What can we start doing differently or better to see around corners so we can stay ahead of the game in the coming year for our business, and what are we going to do to reinforce that?