What’s Next for Strategy?

Author and Columbia Business School Professor Rita Gunther McGrath is a world-renowned expert on strategy, innovation, and growth. Her work has been a beacon for companies during times of uncertainty. She and Ian MacMillan created “discovery-driven planning,” a foundational idea for the lean startup methodology — and her bestselling book, The End of Competitive Advantage, is considered the definitive strategy playbook. McGrath joins the Outside In podcast to talk about how growth strategies and innovation have changed over the last few decades, how companies should be responding to these changes, and why spotting “strategic inflection points” can open a world of opportunities for businesses.

Listen to this podcast to learn:

• Why “arena thinking” is an imperative and should be prioritized over industry thinking
• What inspired the thinking behind “discovery-driven planning”
• Why aiming for a sustainable competitive advantage is actually a disadvantage for companies
• Why blockchain will change a lot less in the short run, and a lot more in the long run
• How technology has opened up the “marketization” of more business functions
• A preview of McGrath’s forthcoming book about strategic inflection points: how to spot them, what to do about them, and how to convince your organization to act on them

Some highlights from our conversation with Professor Rita McGrath:

This Q&A transcript from the Outside In podcast has been lightly edited and condensed for clarity.

One of the early things that you became very well known for was a concept called discovery driven planning. What did you mean by discovery driven planning?

One of the interesting anomalies that we saw with large companies going into new areas — and back in that day it was things like TV Cable Week, which tried to take out TV Guide, Bic perfume, the Iridium project — and what we saw was these just horrendous flops. And when we really studied them what we saw was a very common pattern — untested assumptions taken as facts; few opportunities for low commitment testing; leaders sort of saying, “damn the torpedoes, full speed ahead”; funding all at once without the opportunity to stop and take stock and replan. And so what my colleague Ian MacMillan and I realized was that these brand new things, which had a huge amount of uncertainty in them, were being planned and managed as though they were part of the established business.

You may remember back in the 90s even though it was considered a reasonably turbulent time — since then it looks like a like a cakewalk — but back in the day innovation wasn’t seen as the imperative that it is now. So the work originally got its major uptake in entrepreneurship curriculums. We’d get the odd enthusiasts who would come by and say, “I want to use this in my company!” But it was kind of out there, and didn’t really take off for some years. And then Eric Ries sort of discovered it. Steve Blank included it in his curriculum at business school in Berkeley, and Ries wrote a book called The Lean Startup. I guess the timing was right and the ideas really started to take off.

You then wrote a book called The End of Competitive Advantage in 2013. And that’s really when things took off for you. It became a well-known book. Competitive advantage was something that we all learned about at business school — it had been around for 40 or 50 years. You talked about the end of that, and people are still talking about your book.

The reason I thought this was an important thing, and a bit of a provocative title, was that not only was the idea of sustainable competitive advantage to me less and less representative of the way things were moving, but that it was actually quite dangerous. We were pushing people to learn techniques that would not lead them in a positive direction. We were trying to cling onto advantages long after it was obvious to everybody that they were going to disappear, and a series of other things that I thought were just really negative in the world of strategy. And so I reasoned that it made sense to basically try to lay out some of what the new strategy playbook should look like when the environment is much more dynamic.

I grew up with the idea of competitive positioning. You took a position then you defended it. If there are two or three things that are utterly wrong with that, what have you replaced those with?

I think the biggest thing that I would challenge in the conventional view of strategy is that industry is the most important determinant of your fate. If you go back to the traditional positioning school it would be: you have to find an attractive sector — an attractive segment that’s growing — then you position yourself in that sector; and then you throw up entry barriers like crazy and woo hoo Nirvana! What I’m replacing that with is a concept I call “arenas.” Arena-based thinking really gets at the idea that your most important competitors may not even be in your industry. The arena idea really says that if you want to understand where to play in strategy, you have to understand what pool of resources you’re contesting. So, who’s paying for whatever it is you’re selling. You have to understand who the players are and what the jobs are that they’re trying to get done in that arena. And then how you can deliver capabilities that appeal to the jobs to be done.

An example that I use is clothing for teenagers. If you ask yourself what is it teenagers buy clothing to accomplish — aside from the obvious — it’s to communicate status. It’s to communicate belonging. It’s to communicate edginess. But if you think about what does a much better job of communicating, isn’t that what Facebook was created to do? So you’ve actually got these technology platforms competing with other kinds of goods. If you’re an apparel maker, you’re thinking, It’s going to be four seasons. I design my orders. I ship them off to Asia. I get them three months later. That’s what goes on the shelves. They stay there for three or four months. At the end of the season if it doesn’t sell, I sell it off. In a world of teenagers connecting on social platforms like Facebook, if you’re wearing the same clothes in more than about two pictures…I mean how lame is that?! So what they want is disposable fashion. They want something they can put on and not wear too often because they want to always be looking as though they have the latest new thing. If you were looking at that through an arena lens, what you’d realize is the idea of traditional apparel competing with traditional apparel (which would be the industry view) is actually very limiting and can create a real blind spot.

This podcast is called Outside In, and it’s about looking at the outside world and understanding its has more influence. So it sounds like you’re saying that arena thinking, rather than sector or asset thinking, is more important now.

Very much. In fact, I would almost argue if you don’t understand what job the customer is trying to get done is, you’re just starting from the wrong place completely.

Why do organizations still spend so little time with their customers?

It baffles me. It really baffles me. I was at an executive program just earlier today and I had three leaders that were in that program say to me, “How can I find out what’s really going on in the field?” One of them was saying, “My people are covering up” — meaning, “When I go on a visit to the store, they tidy it up. They make it look nice.” Another one was saying, “I’ve got this guy who gives me all the facts and statistics, but he’s not giving me what’s really going on.” I’m thinking, Well get out of your office and go and talk to them. Customers are not hard to find, and they’ll be happy to share their opinions. No shortage at all.

I think part of it is the incentive system. For a lot of people involved in technical and operational roles, being customer centric is not something they get rewarded for. So there’s a huge blind spot there. For the leaders that are in decision-making roles, customer centricity is not necessarily something they get rewarded for, either. Moreover, it’s just more comfortable for them to stay in their little bubbles and not have to deal with irate customers. And if you think about it, how vulnerable does that make you?

What do you think could be the change within business to be more in line with your thinking? It’s not just about customer centricity. There are many things that need to change. But where are the big icebergs inside organizations that we have to break down, so that organizations become more agile and more able to respond to the changes that are happening on the outside?

I think the first issue is that companies are built in a certain place and time, and things are possible in that place and time that create constraints. And as their business models become perfected and as they get really good at what they do, they drive to the metrics that represent those constraints. Take the airline industry. Once an airplane has taken off, every measure of how well you’re doing is going to be a function of that reality. Once it’s taken off you can’t put anything else on it. So you have metrics like cost per passenger seat mile flown, or yield, or you name it. But they’re all driven by that one point of scarcity. Now if there was some way of removing or eliminating that scarcity, you would have and want a totally different business model. I think part of what gets in companies’ ways is that they reify — or they make real in their own minds that these metrics actually represent truth handed down from heaven. They don’t go back and revisit them. So over time that’s what they drive. The reward system fits into it. The compensation fits into it. All the news is it, and that’s what we study. That’s what gets reported. So there’s this whole hairball of stuff built around conditions that may have changed.

So, how do leaders in organizations pick up on these warning signs, or tremors, of things that are coming at them from the future? We all hear of organizations going off track. Why don’t they pick up the tremors earlier?

Well, a big reason is because it’s not to their advantage to do so. I forget who it was that said, “It’s very difficult to convince someone of a fact when his livelihood depends on him not being convinced of it.” I do think, especially for the middle management ranks, there’s a fair amount of “I really don’t want this to be true. It may be yelling at me very loudly, but I just don’t want to hear it.” A current example would be Facebook. They’re basically doing the same thing that they’ve done since their inception, which is saying all these privacy concerns are overblown. All you people are worried about it when you shouldn’t be. We’ve got it all under control. Yet, the signals are so loud that they’re screaming that this is not a sustainable situation. That’s an example of a company that I believe is smart enough to see it but just has no interest in doing so. The second thing that I think happens a lot is something Andy Grove said in his fantastic work on strategic inflection points back in the 90s. He said, if you want to know where spring is appearing go to the periphery because that’s where it’s most exposed. So the way I would phrase that is: snow melts from the edges. A lot of the executives don’t spend a lot of time at the edges of their organizations. Or they put together teams that are homogenous, that don’t have diverse perspectives.

The conclusion I’ve come to is that what businesses want and what customers want are totally different and we don’t seem to be able to reconcile that. Businesses want to make profit and customers want value. Businesses seem to kind of revert back to looking after the shareholder and not looking after the customer regularly enough.

You also have to look at the level of competitiveness of a business. A lot of businesses don’t have customers at all. They have hostages. In that situation you’re not going to see high levels of customer service. If you’re in a monopoly or a pseudo monopoly position you get away with an awful lot. Customers put up with it because they have no choice. But if you know let them come up with something that gives them an out, they’re gone. If you look at the whole cable TV situation, the amount of money people have to spend on these cable bundles is ridiculous. And there’s a lot of pressure to find a way around it.

One of the things I believe is that customers are creative; have customers do the co-creation work with companies. But that seems slow to take off. It’s happening on the edges rather than in the center of organizations.

Well, digital is starting to really have that effect. In a lot of businesses you can’t avoid customers being right in the middle of your operations because they will force their way in. One of the things that digital has done is it’s tilted the traditional distinction between markets and hierarchies. So, the traditional answer to “why do we need firms” is because there are certain kinds of transactions that are difficult to handle on a market. The value on either side is unclear. There might be temptations to cheat. How do you enforce? How do you agree to a price? How do you make sure that what was promised was delivered? And on and on and on… When those things are hard to figure out and are opaque, then you’re better off managing it within some kind of hierarchy. You organize it through a company and you go from there. Now once you create a market, which digital does beautifully…So, you want to know about cost and quality? You go to Amazon. You want to know about how reputable the seller is? There are reviews for that. You want to know how well other customers were served? Well, there’s ways of doing that. And then there’s ways of creating sanctions when things aren’t delivered or when things aren’t done perfectly. What you’re seeing in many organizations is what are called the “marketization” of more and more functions. So what you’re basically doing is inviting customers into many of what used to be regarded as core operations.

Do you think we’re going see very different business models in the future? For example, is blockchain going to change everything about those old hierarchical business models? Or is that a lot of hype?

Blockchain is one of those technologies that’s going to change a lot less in the short run than we think and a lot more in the long term than we think. So one of the more interesting ideas about blockchain is you’ve actually got the ability to create self-enacting contracts. If you’ve got a whole contract on a blockchain and it says, “If there are three records sold in your record store in Akron, Artist Y gets 2 cents per record,” that can be a self-executing contract. And once you’ve designed the blockchain to do that, there’s not a lawyer that has to interpret it. There’s not enforcement action that has to deal with it. Now the machine knows: send two cents, send two cents, send two cents. That dramatically shifts things. We’re making markets now because it can be done cost effectively.

But you think it’s going to take longer because of the barriers that are already in place to stop that happening?

Well, it’s not really barriers so much as it’s immature from an institutional sense. We don’t have commonly recognized standards around it. We don’t have legitimate interaction protocol. We don’t have legitimacy about what can be blockchained. There’s a whole series of institutional things that have to fall into place. The analogy I would use is Internet commerce in the 1990s. You may remember the hype back then? But the breakthrough came when we could finally have secure credit card payments. Because before you had that, yes, you could possibly buy things on the Internet. But it was really difficult. It wasn’t until we had really secure internet payment programs — companies like PayPal — that filled that gap, you really saw Internet commerce explode. And I think some of those institutional things have to happen with blockchain.

What’s next on your agenda? You’re working on a new book, right?

You’re right. The new book is going to be called Seeing Around Corners: How to Spot Inflection Points Before They Happen. The book is really in three major parts. The first part is: how do you spot them? The second part is, having spotted them, how do you decide what to do about them? And the third part is how do you bring the organization along with you? I see them as three quite distinct problems because you could do any one of those well and still get overwhelmed by an inflection point. But the book has been a lot of fun to research. One of the good things about the core idea is that if you’re paying attention, you can see the early warnings of an inflection point way ahead of time, way before it arrives. That means you can turn it into an opportunity.

Can you give an example of someone who’s done that well?

Going back to my teen clothing example, if you think of who’s really benefited from fast fashion, it would be Zara, which is the sub of parent company Inditex, Forever 21 here in the U.S., Ross Stores, H&M. They all kind of jumped into the market for fast fashion, and they’ve grown just terrifically. The traditional companies — Macy’s, J.C. Penney, etc. — and their supply chains really haven’t.

Let’s finish on the idea of Women in Leadership, which is something you teach at Columbia. You’re a very busy person already, but you’ve taken this on. What enjoyment do you get out of this?

I guess I’m old enough now where people are saying to me, “You have a responsibility to be a role model.” So, that’s part of it. I guess you get enough wrinkles and that’s what happens to you. But the other part is really showing women that it is possible not to be taken by surprise by some of the reactions that they get. It’s a fine line between what gets very heavily criticized, which is fixing the women. You know, why do women have to change to adapt to a male world? I’m much more pragmatic. It’s like, if you’re going to be a minority in a majority world and if we were on an Amazon island where all the dominant party was women, you would be giving completely different advice to the men, right? So I think there’s a practical navigation that can be taught, and it can be learned, and that’s really important.

I’ll give you a trivial example. One of the things that you will find with low-power groups — and this is some work that’s been done by my colleague Adam Galinsky — is they have a narrower range of acceptable behavior than high-power groups. So if you’re a member of the dominant power, you can sit back, you can throw your legs around, you can raise your voice, you can be sort of gruff. There’s a lot of behaviors you can engage in that you don’t get socially punished for. Whereas if you’re in a low-power group, if you’re too friendly and nice, you’re a lightweight. And if you’re too aggressive, you get called abrasive. So one of the things to learn to navigate is how you can be effective while dealing with this reality. Some of the what I’ve enjoyed about the course is helping women see that and helping them work through it. And there are some women who really resent it. They say, “Why should I have to change because some guy’s attitude?” And I say, “Let’s focus on what we’re trying to accomplish here.”

It’s been a learning journey for me, too. And the research gets you really angry sometimes. I’ll give an example of that. There was a Harvard PhD student who had done work on the likeliness of economists getting tenure. And she discovered that the contribution to the likeliness of getting tenure for each additional paper for a man was identical if he wrote alone, wrote with a man, or wrote with a woman — identical improvement in chances of getting tenure. For a woman economist, it was identical if she wrote alone, or wrote with another woman. If the woman wrote with a man: zero credit, zero impact, zero benefit. There was no additional impact on her chances of getting tenure because the prevailing assumption (probably unconscious) is that it was his work, not hers. And that’s the kind of thing I try to inform these women about. I don’t want to tell you what to do, but be aware these are some of the considerations you need to have in how you choose to move your career forward. Protip for your listeners who happen to be female: the penalty for advocating for yourself completely disappears when you’re advocating for others. It’s called the “Mama Bear Effect.” If you go in and say, “We have to have a raise because we are totally passionate and this whole group has outperformed and if I don’t get it for my people, I’m not able to keep them…” You can be as acerbic as you like in those situations. But if you’re seen as advocating for yourself, that’s seen more negatively.