DQ1

Interview

Rita McGrath: anticipating and exploiting strategic inflection points

Brian Leavy

E ffective strategy development in the face of uncertainly has never been more

challenging or pressing now as the digital revolution continues apace. The acronym

VUCA (volatile, uncertain, complex, ambiguous) has never seemed more apt, nor

discontinuous change more prevalent. In such a dynamic competitive context, trying to

anticipate the where and when of the next market disruption has never been more difficult.

Rita McGrath is a pioneer of “discovery-driven planning,” now widely recognized as one of the

most effective approaches for strategy development in the face of uncertainty. Her research and

experience interacting with executive teams positions her to offer

corporate leaders practical perspectives and advice on how to

approach strategically the great opportunities and dangers that lie

ahead in this VUCA environment. Which is what Professor McGrath

sets out to do in her latest book, Seeing Around Corners: How to

Spot Inflection Points in Business Before They Happen (Houghton

Mifflin Harcourt, 2019).

She is a globally recognized expert on innovation and growth

strategies at Columbia Business School and number five in the

2019 Thinkers 50 rankings. Her previous books on innovation

and strategy include Discovery-Driven Growth: A Breakthrough

Process to Reduce Risk and Seize Opportunity (co-authored

with Ian Macmillan, Harvard Business Review Press, 2009) and

The End of Competitive Advantage: How to Keep Your Strategy

Moving as Fast as Your Business (Harvard Business Review

Press, 2013). Her interviewer, Brian Leavy, is emeritus professor

of strategy at Dublin City University Business School and a

Strategy & Leadership contributing editor ([email protected]).

Strategy & Leadership: What inspired you to focus on inflection points in Seeing Around Corners, and how do you see this latest

book building on your previous work on innovation and strategy?

Rita McGrath: The best-known treatment of strategic inflection points is probably Andy Grove’s book from the 1990s, Only the

Paranoid Survive. I remember being very taken with that book at

the time and it stuck with me. Grove’s book, however, was

mostly about the period after an inflection point has washed

over the organization, with less of a focus on how you might see

Professor Rita McGrath Credit: Evelyn Reinson

DOI 10.1108/SL-12-2019-0181 VOL. 48 NO. 2 2020, pp. 3-9, © Emerald Publishing Limited, ISSN 1087-8572jSTRATEGY & LEADERSHIPj PAGE 3

them coming to begin with, so I thought a perspective on how you might anticipate or even

spark an inflection point might be useful.

The specific impetus for the book does very much come from my previous work on

innovation and strategy. In my last book, The End of Competitive Advantage I argued

that our longstanding obsession with defending existing advantages was in many

cases misplaced. Instead, leaders need to think in terms of transient advantages, in

which the period of “exploitation” of an existing advantage becomes shorter. This

implies that innovation needs to be more than a sideshow; it needs to be an actual

proficiency. The follow up question was, “how do you know when it’s time to start

looking for a new advantage, or how do you know when an existing advantage is

starting to show signs of erosion?” That got me thinking about timing and the way in

which inflection points unfold.

What crystallized the core theme of the book was when a colleague sent me the article

“When You Change the World and No One Notices.”[1] The author, Margaret Housel, noted

that the Wright brother’s successful manned flight at Kitty Hawk went largely ignored for

years. The first passing mention of their achievement in the New York Times came three

years after it happened. It was four and a half years afterward that serious reporters and

editors began to realize the significance.

What this suggested was that major inflection points that create real change unfold the

way Ernest Hemingway’s character Mike in his novel The Sun Also Rises responds when

he is asked how he went bankrupt. “Gradually,” he replied, “then suddenly.” The same is

true with inflection points, I realized. This led to the realization that if they do take a while

to unfold, an astute strategist who was paying attention to the signs could take

advantage of the inflection.

Understanding the nature of inflection points

S&L: As you define it an inflection point “happens when a 10X change alters the basic assumptions upon which a business is built.” Given that inflection points can happen

“gradually, then suddenly” how can they be prepared for and harnessed opportunistically?

McGrath: When an inflection point does indeed reach a tipping point, it can feel as though it came out of nowhere. My thesis is that if you are making a series of small

options-style investments that are at the “edges” of your mainstream activities, you are

likely to pick up on weak signals that allow you to, in an optimistic scenario, surf along an

inflection point so that when the opportunity presents itself, you can move with speed to

capture an advantage.

The dilemma is that often the big trends that go with inflection points are so vivid and scary,

companies often initially overreact. Retailers, for instance, faced with the prospect of

e-commerce poured millions, even billions into building out websites and the like. The

difficulty is that the ecosystem to support e-commerce – fast internet connections, the ability

to pay online, search engines – all of those were still to come in the AOL-Time Warner

merger days. The retailers then drew the conclusion that this Internet stuff was overblown

“The dilemma is that often the big trends that go with inflection points are so vivid and scary, companies often initially overreact.”

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and would never amount to anything. Today, of course, we are looking at traditional retailers

struggling, even as e-commerce operations seek to open brick-and-mortar presences.

A company that got it right is Kloeckner, a German metals services business that made

the shift to the digital inflection point a core initiative for the company. This shift has

enabled Kloeckner to pursue new business models that rely less on its commodity

products and more on its skilled workforce and to expand its footprint to additional

categories of commodities.

S&L: One of the major implications of the “gradually, then suddenly” nature of most inflection points is that it can often be as dangerous to move too early as too late in seeking

to take advantage of them.

McGrath: It is easy to get it wrong. Citibank, back in the 90s launched a venture it called the “POS” (for point of sale) business. It involved creating a loyalty card which customers would

use at the point of sale which would send information about what a customer was buying back

to the bank. Citibank hypothesized that this information would have incredible value to retailers

and consumer packaged goods companies because once companies knew what a shopper

was buying, they could promote other goods that shopper preferred. A bad idea? Not at all! It

was a spectacularly good idea, but the venture suffered from an incomplete ecosystem.

Today, many organizations are making billions by trading in exactly this kind of information.

Getting ahead of inflection through early detection

S&L: Early evidence of a coming inflection point “doesn’t come easily” and is most likely to appear first “at the edges.” What practices might a firm follow to enhance its capacity to

pick up on emerging signals that might well have inflection implications?

McGrath: Leaders need to make time to talk to customers, see what is really going on personally, touch base with the people in their organization who are actually at the coal face of

customer service delivery or technology, and so on. Specific practices for doing this, include

“talking to the future,” an approach inspired by science fiction writer William Gibson’s

observation that “The future is already here – it’s just not evenly distributed.”

So go to where the future is starting to appear – talk to today’s 10-year olds if you want to

learn something about what tomorrow’s 20 year olds are going to be like.

Unfortunately in many companies, the kind of time and modest resources it takes to get out

to the edges gets squeezed out in rounds of cost cutting or efficiency drives. A current

poster child would be KraftHeinz, which has legacy brands badly in need of reinvention, but

whose private equity owners are pushing for every possible dollar of cost savings to pay

down debt and increase EBITDA.

A nice example of someone who used insights from the edges to spark a positive inflection point

is Hubert Joly, the former CEO of Best Buy. He credits spending two weeks working in the store

as the single most important thing he did to figure out how to turn around the electronics retailer.

The main point here is that the future does not happen all at once. It begins to unfold

unevenly, and if you can “interview” where it is starting to take place now, you can begin to

develop an early point of view about it.

“The future doesn’t happen all at once. It begins to unfold unevenly, and if you can ‘interview’ where it is starting to take place now, you can begin to develop an early point of view about it.”

VOL. 48 NO. 2 2020 jSTRATEGY & LEADERSHIPj PAGE 5

S&L: Developing “leading indicators” and imagining “different future possibilities” are key to both spotting and scoping impending inflection points. How can executives effectively

address these related challenges?

McGrath: The answer ties to my earlier work on transient advantage. When a set of executives get very used to exploiting an existing advantage, they settle on a set of key

metrics that represent success and, often, get very accustomed to working with lagging

indicators. Profits, margins and sales, for instance, are all lagging indicators – they do not

tell you what is coming in the future. What you want are leading indicators – those things the

help you determine what may well be coming. So the first challenge I give to senior teams is

to develop a framework of what leading indicators are for the important outcomes in their

business and focus on driving those leading indicators.

For example, in a software-as-a-service business, the business model requires getting lots of

customers to sign up to pay for the offer in relatively small amounts each month. Before they

can sign up as customers, however, they have to demonstrate that they are interested. So a

set of leading indicators of potential future growth would involve engagement metrics, such

as frequency of visits, depth of exploration of content and sign-ups for things like

newsletters. These would be potential leading indicators of building a future relationship.

S&L: The period before the signals of an inflection point “become obvious and strong” is typically a “confusing” one when “people legitimately have major differences of opinion” on

what the weak signals mean and how to respond. What tools and insights can help

executives navigate this challenge?

McGrath: I lead executive teams through a very simple scenario planning exercise in which I ask them to posit two potentially important future uncertainties, with different values for

each. This yields four possible future states for their business. For instance, if I were

considering the future of business schools, one major uncertainty is whether the degree

itself continues to have value for the majority of potential students or whether students

perceive the value of the degree has diminished. Another uncertainty is whether employers

are eager to hire students because of the MBA or because of other factors. Putting these

two together, you get a table like this:

The next step is to create a short “story” about the future state each scenario represents, as

summarized in this table:

Then, I ask the team to come up with what I call a “time zero” event for each scenario – in

other words something that might be in a newspaper headline that represents either

positive or negative signal of an inflection point:

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Then we do an exercise in which we work backward from the time zero events to identify

indicators which would tell us whether that outcome is more or less likely to be happening.

When teams worked through this together, it is likely that common themes and shared

perspectives emerge.

S&L: The timely identification of important shifts in a business’ “arena” is crucial to the early detection of impending inflection. How does your concept of “arena” most differ from

“industry,” and how should executives carry out an “arena-based analysis” to better detect

inflection early?

McGrath: An industry is basically a made-up construct that economists have used for years to try to simplify economic analysis and policymaking. From a customer point of view, what

industry a firm belongs to has very little relevance. What customers want, as Clayton

Christensen famously observed, is to get jobs done in their lives, whoever does it for them.

Netflix, for example, says that it is competing for disposable time. Not that it is in the TV,

movie, or even entertainment business, but that it is in the business of being so relevant to

you that you will give it your attention as opposed to doing whatever else might occupy that

time.

To look at your arena, you really need to start with the pot of resource you are contesting –

Money? Time? Space? Information? Then look at the customers who control those

resources and ask, what jobs are they trying to get done? Then you can start to look at

the alternative ways they could get the job done and begin to use that insight to inform

your strategy. As an example, Hubert Joly, CEO at Best Buy, realized that while

customers might buy a flat-screen TV, what they really want is a home theatre experience

that few of them have the knowledge to set up. He used that insight to make service a

core part of the Best Buy offering, by creating complete technology experiences that

customers could buy into.

S&L: The potential for an inflection in any arena is often to be found in the pain points or negative attributes associated with conventional offerings. How should executives go about

uncovering the current pain points most likely to lead to inflection and figuring out how they

might be changed to advantage?.

McGrath: There is no substitute for watching how customers interact with your product or service and listening to their conversations about their experience. In today’s social media

world, moreover, there is plenty of rich feedback about what customers like and do not like.

Kara Swisher recently, for instance, posted a story of how Amazon did better than FedEx on

a recent delivery task, which prompted literally hundreds of comments on people’s

experiences with both companies. Sitting in on call center calls, talking to people who work

directly with customers and taking on unfamiliar customer roles are also ways of getting

inspiration.

Planning and action in the face of inflection

S&L: When it comes to planning and action, the key requirements are being “able to keep multiple futures in mind” and “create a plan for fast learning.” How can executives

effectively meet these requirements?

“So the first challenge I give to senior teams is to develop a framework of what leading indicators are for the important outcomes in their business.”

VOL. 48 NO. 2 2020 jSTRATEGY & LEADERSHIPj PAGE 7

McGrath: Since it really is not possible to predict the future, you need to be able to view it through the lens of possible scenarios. The fast learning part is important because you want

to get as much new information as you can as quickly and inexpensively as you can. As an

inflection point progresses, you would like to be able to detect what is shifting, so continuous

small experiments are useful. For example, today we are looking at the emerging potential of

conversational commerce – when people interact with technology by speaking to it rather

than by typing. While I would not advise abandoning your keyboard just yet, it would make

sense to see how customers react to different ways that they might be able to “talk” to your

company using technology to make things happen.

S&L: You warn that it “isn’t enough to see an inflection point coming. Many people in the organization need to align around a common point of view in order to respond effectively.”

How can leaders foster such commonality of purpose?”

McGrath: Leaders need to help people understand their role in the future organization. A textbook case of this was Adobe’s decision to abandon shrink-wrapped software and move

to a cloud-based subscription model – the senior team spent an enormous amount of time

and energy making their rationale for doing this clear to employees and an equally

challenging amount of time and attention making sure that the right skills and capabilities

were in place for the transition.

An interesting take on cultures that are built for resilience is described in MIT professor

Zeynep Ton’s[2] work on good jobs. She points out that a company that simultaneously

invests in world class operations plus good jobs can outperform those that do not, even in

thin-margin businesses. Part of the good jobs approach is cross-training and keeping

everyone in the communication loop, which creates far greater resilience than when

everyone is working in a silo.

S&L: In order to enhance their ability to orchestrate “an inflection inside the organization” so as to “create a better fit with the inflection happening outside it,” companies should be aiming to

systematically increase their “innovation proficiency.” What guidance can you offer?

McGrath: Having an innovation proficiency means that you have achieved an ongoing practice of finding new opportunities and moving resources to capture them without

depending on a single leadership champion. In other words, it is as robust as any other

ongoing process in the organization. This requires a governance system, the right metrics,

deftness with respect to how people and talent are assigned to projects and a culture that

embraces discovering new opportunities. At MetLife, for instance, the innovation office is a

catalyst to accelerate ideas that are moved forward by business unit heads who commit to

allocating people and budget to the ideas that appear attractive.

Leading in ambiguous, inflection-prone environments

S&L: What is the right leadership approach for building an inflection-ready organization and how does it differ from the traditional hierarchical one?

McGrath: The trouble with traditional leadership models is that they assume that the “top” of an organization is the only place that information all comes together. In reality, by the time a

“From a customer point of view, what industry a firm belongs to has very little relevance.”

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piece of information gets to the “top” of most complex organizations it has shed much of its

nuance and meaning. Even worse, disconfirming or uncomfortable information may never

make it to the “top.” Instead, what leaders should be thinking about is pushing decision

rights to the part of the organization that has the most information, regardless of formal rank.

Leaders still have the job of creating the context, setting goals and establishing the

guardrails or swim lanes, but they need to give the authority to summon adaptive responses

to the part of the organization most able to respond.

A fascinating example of this is the Dutch nursing operation Buurtzorg which means,

“neighbourhood care.” Jos de Blok, a nurse, is the CEO and founder of an organization to

provide support to self-governing teams of nurses who are responsible for care in given areas.

De Blok identifies the role of the center as providing technology enablement to the teams of

nurses via state of the art IT. Instead of managers, the nurses have “coaches” who help them

solve problems rather than managing them. The approach keeps administration and

traditional “leadership” activities very simple. The organization has grown very rapidly and is

being held up by some as a model for leveraging the skills of highly trained professionals.

S&L: Finally, how can executives apply the insights from Seeing Around Corners in their own career development?

McGrath: The first implication is that the skills that got you to wherever your current job is are unlikely to be sufficient to get you through an inflection point. So being personally curious,

investing in your own self-development and opening your mind to activities that might teach

you something even if they are not strictly speaking part of your “job” are all valuable.

Secondly, there is increasing evidence that career ladders are starting to give way to career

zigzags. As Reid Hoffman outlined in his book The Alliance,[3] we are increasingly in a “tour

of duty” environment, so consider using your next tour of duty as an opportunity to stretch

into new areas.

Finally, inflection points are personal as well. We all know that major turning points in our

lives leave us with unique experiences, lessons learned and values. In the book, I

recommend that executives take some time to occasionally reflect on their values and

aspirations and use that insight to guide their future career choices.

Notes

1. Morgan Housel, “When You Change the World and No One Notices,” Collaborative Fund, Sep 3,

2016, www.collaborativefund.com/blog/when-you-change-the-world-and-no-one-notices/

2. Zeynep Ton, The Good Jobs Strategy: How the Smartest Companies Invest in Employees to Lower

Costs and Boost Profits (New Harvest, 2014).

3. Reid Hoffman, Ben Casnocha, Chris Yeh. The Alliance: Managing Talent in the Networked Age,

(Harvard Business Review Press, 2014).

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“There’s no substitute for watching how customers interact with your product or service and listening to their conversations about their experience.”

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