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Identifying and Leveraging Inflection Points to Gain Competitive Advantages: Rita McGrath Explains

August 23, 2021

The term “thought leader” is often used to describe Rita McGrath. An innovative analyst and educator, McGrath has dedicated her work to anticipating business opportunities, bolstering innovation, and cultivating the leadership skills required to exploit both. Thinkers50 describes McGrath as a “globally recognized expert on strategy, innovation, and entrepreneurship” and recently ranked her a top management thinker in their strategy category.

For nearly 30 years, McGrath has been a beloved faculty member of Columbia Business School Executive Education. She’s also written five books, including the New York Times bestseller The End of Competitive Advantage and her most recent work, Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen.

We recently sat down with McGrath to discuss her research and the benefits participants gain through the Advanced Management Program by Columbia Business School Executive Education.

You’ve argued that the era of sustainable competitive advantages is over. If that’s true, what’s the new Holy Grail of strategy?

I think it’s possible to build a series of competitive advantages. The metaphor I use is the metaphor of waves, where you master each phase of creating an advantage:

  • The innovation and growth phase, which is where advantages start
  • The exploitation phase, which is where we’re most comfortable
  • The transformation phase, where an old advantage is beginning to decline, and a new advantage needs to take its place

Rather than the traditional sources of competitive advantage — vast amounts of assets, barriers to entry, brand building via mass-market advertising — the new form of competitive advantage gets to the leadership agenda. You find that in your people, your processes, how you manage your budgets, and the way you balance the need to execute today with investing for the future. The winners will have all that. But if you think of the specific thing that gave you an advantage at any one point in time, that’s likely to be temporary.

So, agility is more important now than ever before. Does that favor smaller upstart companies, or is there still an advantage in size and persistence?

There’s still a lot to be said for the power large organizations have to leverage resources against opportunities. Little organizations are great in many ways, but they’re often strapped for resources — except when the VC market goes bananas. If they make one mistake, that could be the end of them.

In contrast, large companies have more room for error. They can experiment and take on more projects at once. If you think there’s a fantastic opportunity in 3D printed haptic-enabled joysticks, you could have six projects pursuing them. That’s what they do at Amazon. When they see an opportunity, they have 12 or 15 teams on it.

I want to emphasize this: that’s very different from the bureaucratic model, where the presumption is that the top of the organization knows everything and makes all the decisions about where to invest. We need to flip that entirely on its head. In many ways, innovation is a numbers game. If you have six attempts at something, that’s terrific — as long as you keep them small and kill them quickly when it’s evident that a particular approach isn’t going to work.

That’s the way that the really good competitors today operate. Look at Facebook, Amazon, or Netflix. They operate in what I call a “permissionless” environment. People at the operating level have permission to take action without waiting to be approved or told what to do.

Now, eventually, you have to make a commitment. For example, when Amazon got into Amazon Web Services (AWS), its cloud-based service business, it had to make a commitment. I go to you, and I want to sell you my cloud-based service; I say, “Throw out all your servers and get rid of all your developers. Come to me and enter the promised land.” And you look at me, and you want to know, “How long exactly are you going to be in this business? Because Amazon is known for getting into things and getting out of things.” If you’re going to entrust your digital soul to me, you have to believe I’ll be there in the long run.

Your most recent book discusses inflection points and how to spot them early. How do companies create early warning systems for impending inflection points?

Three things:

  • You need to have some mechanism for seeing them
  • You need to have some mechanism for taking them seriously and deciding what to do about them once you have seen them
  • You need the mechanism to move the organization so that it can reconfigure to greet the impending inflection point

Let’s start with seeing them. As a leader, you need to be out at the edges of your organization where customers are saying things that you’ve never heard before, where a competitor you never thought about is suddenly in your space. A lot of leaders make the principal mistake of cutting themselves off from that information. You need to have these sensing mechanisms at the edges to pick up the signals.

The overwhelming majority of business people I work with deal either with current indicators or, worse still, lagging indicators. If you think of most of the stuff we look at in business — earnings per share, return on investment — all those things are great data, but they represent something that’s already happened. They’re not a good guide to the future. You need leading indicators.

The trouble is, the good leading indicators have properties that make them tricky. First, they’re often qualitative, so if you’re a numbers-oriented person who takes great comfort in spreadsheets, that can make you a little nervous. Second, they’re about stuff that hasn’t happened yet, so reasonable people can disagree about what a leading indicator is telling us. Finally, the measure of a good leading indicator is not, “Was it predictive?” It’s “Did it help us prepare?”

Can you provide a good example of a leading indicator?

A classic example of this occurred in the 90s. Computer scientists all over the world realized that to save on expensive storage space, all computer systems were programmed with two-digit dates. As far as most computer systems were concerned, the world was born in 1900 and would end in 1999. Come the year 2000, computers would think it’s 1900 again. As you may recall, the predictions were dire. Airplanes were going to drop out of the sky, and nuclear plants were going to become unstable. Then the big moment came: the year 2000 arrived. What happened? Nothing happened. Why did nothing happen? We took that early warning very seriously.

To create an effective warning system, you conceive of one or more of what I call time-zero events. These are “the inflection point is here” moments; they’ve arrived, and we can point at them. Then you work backward. Before that could happen, which leading indicators told us whether the situation was more or less likely to evolve?

Let’s say that you’re concerned about the advent of a new kind of global competitor. There’s stuff that has to happen before that competitor could turn up in your backyard. They would have to source people; they would have to take out patents; they would have to get certain export licenses. Now you can begin to watch for that stuff. When you start getting more of these signals, that’s what I call a tripwire.

As a leader, you need to plan. You say, “If we see the following 10 things, we are going to take the following action. We’re not going to debate about it, we’re not going to have a big argument about it, we’re not going to dispute whether the signals are true or not. We all agree in advance that when we see these 10 things, we’re going to take the following action.” There are lots of ways of making this real and interesting, and fun for people. For example, at Best Buy, they used to require managers to write an article about the demise of Best Buy. Ten years from now, Best Buy is gone: what killed it? This is not a natural exercise, but it moves you out of your comfort zone and forces you to say, “Well, if I really had to take that other side of the coin, and if I was going to upend a company like Best Buy, how would that happen?” The challenge for the leadership team is to identify clear and present dangers and plan for them.

With these big jobs and big companies, the day-to-day is all-consuming. Still, someone has to focus on the future; it’s out there! As David Cote of Honeywell famously said, “You know the problem with the long term is that it eventually becomes the short term.” Here’s another one I love, attributed to Jim Rogers, the late CEO of Duke Energy. He said, “I want people who think like cathedral builders.” When the people in the Middle Ages set out to create a cathedral, they knew they would never live to see it completed, but they knew it was worth doing anyway.

You identify four inflection stages: hype, dismissive, emergent, and maturity. How would you define those stages, and which one is most critical?

I define an inflection point as some force that causes a factor-of-ten change in your business. It could be technology, but it could be many other things.

With most inflection points, there’s usually a long period when they’re simmering along, and nobody’s paying them any attention at all. Then, when somebody finally recognizes that it could change the world, it goes into this massive hype cycle, and everybody’s talking about it. Back in the dot-com era, you had vast amounts of finance pouring into these companies that could be unicorns. Everybody’s running around saying, “I have to have a dot-com behind my name.” You had AOL using its inflated stock to take over Time Warner. It was all symptomatic of a system promising a lot more than it could deliver.

People realize the potential of a shift in the environment. It’s often technological, but not always. Everyone goes pouring into it, but it’s usually too early. The ecosystem isn’t ready, the infrastructure isn’t built, the use case isn’t really demonstrated beyond the initial few early adopters. Potential hasn’t caught up to reality yet.

That’s when you have the dismissive stage. Everybody says, “See, I told you that was never going to amount to anything.” All the doubters come out of the woodwork. Meanwhile, the companies that got in early, with what I call a stepping-stone strategy, survive the shake-up. They survive with a vengeance. Most of the original dot-coms went bankrupt. Remember But those that survived — Amazon, eBay, Yahoo, and so forth — survived with a vengeance.

In the next stage, you start to see the emergence of new business models, new ways of competing, new possibilities. Think about the whole direct-to-consumer thing. Lots of folks jumped in. They figured, “I don’t have to pay for TV advertising. I don’t have to pay for servers. I can run my tech stack on Amazon Web Services and I can get to people on YouTube.” It starts to become the fabric of people’s lives; it reaches maturity. Consider Dollar Shave Club. It was founded in 2010 and went to market in 2011. Unilever bought them for a billion dollars in 2016. It’s gone from an upstart business model to business as usual. That’s when an inflection point gets absorbed back into the economy.

You’ve said executives need to fall in love with a problem faced by their customers. What do you mean by that?

Executives can fall into the trap of defining the world by what their company does rather than by what the customer wants — a concept Tony Ulwick and Clayton Christensen developed. I don’t buy a book or a candy bar or a TV or a car because I want to. I buy it because there’s a job in my life that I want to get done and I’m hiring it for that job. I buy a car because I need to get from point A to point B. If I could magically teleport from A to B, why would I bother with a car? It’s a pain in the neck, it needs to be maintained, and it consumes gas. If I could just magically be there, why would I need a car? But I can’t, so I need to buy a car.

When companies go out to look for new growth opportunities, they too often anchor what they’re trying to achieve, to what they know how to do and how they make money. I’ll give you a couple of really fun examples. Evian, the dominant player in the purified water business, decided to expand with… the water bra. It was a bra filled with water, presumably to keep women cooler in the summer. Someone must have said: “We do stuff with water. Why not put water in underwear?” What were they thinking?

A more serious example is when Sony saw the advent of digital music wiping out a huge source of their profits. The company made mountains of money selling CDs, for which consumers paid $18 even though they only wanted one or two songs on the disc. What digital did was unbundle the CD. Rather than say, “This is where music is going, so let’s position ourselves to take advantage of that,” Sony tried to fight it. Sony led a consortium that tried to put a digital wrapper around the music, opening up people’s computers to very harmful rootkit issues. Then they launched and spent billions on this thing called the minidisc player. MP3 players killed the minidisc in the late 1990s.

Instead, companies need to figure out what problem the customer is trying to solve. They need to ask themselves, “What are some alternative ways we might be relevant to that problem?” That’s where they need to start. I’ll give an example. Let’s take teenagers and clothing. Think about the job teenagers want clothing to do for them. Clothes serve to communicate: “How cool am I? What tribe am I in? What tribe am I not part of?” Fast fashion arose to fill young people’s need to constantly look fresh and new and different, not boring and stuffy. You need to get into that customer’s mindset and understand the job they want done. Often, it’s not obvious.

You describe our current business landscape as a high velocity, high uncertainty environment full of potential inflection points. What qualities are essential for an effective leader in today’s business world?

At one point, we saw leaders as critical decision-makers. A leader looked at the landscape and came to conclusions and told people what to do, and then everybody executed. That was the traditional model. Today, that’s almost flipped on its head. Leaders use their pivotal position as a point of convening as much data as they can. They listen very intently. They need to create a safe space, a context in which people can bring them information that’s difficult to hear.

Overconfidence ranks high among the biggest mistakes leaders make. There’s a mountain of scholarly research indicating that people confuse confidence with competence when selecting leaders. It’s important to be quiet, to be humble, to listen, and to be empowering of others, particularly those who are closest to what’s going on.

When Stan McChrystal was fighting Al Qaeda, he faced an enemy that shapeshifted on the ground under him. He could never get ahead of them because the decision-making process had to go up and down the hierarchy. By the time they were ready to mount a response, the battle was done. In his special forces and the special operations team, he held a daily call with up to 7,000 people to make it easier to share information. He sought to create a collective consciousness so they could respond quickly on the ground.

That’s what leaders of the future need to start doing now. It’s not that they’re abdicating responsibility or being indecisive. It’s recognizing the limits of your ability to process the information quickly.

What should participants expect from the Advanced Management Program?

One of the things that we’ve learned as we moved through the pandemic and beyond is the effectiveness of learning in your role. You don’t have to go someplace and get a firehose of information pointed at you. You learn in context so you can apply what you learn, learn some more, apply some more.

Participants in this program will benefit from tapping into the consciousness of the community of teachers and learners. We’re very careful about constructing a community around our Advanced Management Program. So you have a community to connect to, but you’re not away from your role. You can ask questions, you can pose a problem, you can offer solutions to other people. You’re in this lengthy experience where you are forging genuine relationships.

These are not transactional relationships. People open up and give honest feedback. They give each other advice. Most of our participants are pretty senior people. Those are lonely roles because everybody’s watching you and your suggestions are orders. Your slightest speculation is received genius. That makes it much harder to get decent feedback. Having this community that can be honest with you, that you can go to for clear-headed support without spilling back into your organization or without it being a political issue — that’s such a gift. So I think the first thing is that you join a great community, and it’s built around you as you’re working.

Also, our formats are very interactive. It’s not like you’re just staring at a computer screen. You’re dealing with other human beings, but you’re doing it in a way that we’ve learned can be very effective.

Finally, because the program runs for an extended period, it has the potential to be truly life-changing. You’ll also have the opportunity to gather in person for a truly immersive experience in New York City, where you’ll strengthen your relationship with fellow business leaders and explore parts of NYC as a learning lab. You’ll join an immersive community — while remaining on the job — over a long enough period to forge relationships.

Columbia Business School Executive Education’s Advanced Management Program employs a singular 22-week structure that promotes experiential learning. Participants engage with faculty and peers in immersive virtual classrooms, then take their lessons back to their executive suites and teams before returning to reflect upon and refine their learning. One-on-one coaching sessions, access to a world-class alumni network, and engagement with faculty leaders in leadership, strategy, marketing, finance, and operations distinguish this program situated in the world’s financial capital. Join elite business peers in this rich learning experience. Apply today.

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