Rita McGrath: Creating Early Warning Scenarios

Spotting inflection points, knowing what to do with them, and implementing those changes are all very different things.

Based on her amazing book ‘Seeing around corners’, Rita speaks about early warning scenarios and thinking about the future. In this talk Rita looks at leading indicators, strength of signals, time zero events, uncertainties, and rounds off the session talking directly to Violet – a 17 year old student who was adjusting to online learning at the start of the 2020 pandemic and the pitfalls that go with radical unforeseen changes.

Slides

Rita McGrath (Professor, Columbia Business School) – Creating Early Warnings Scenarios & Thinking About The Future from Business of Software Conference

Transcript

Rita McGrath  

The gameplan is I’ll talk for perhaps 20 to 25 minutes. And then we’ll be hearing from a guest speaker, and then we’ll come back and take some questions. So we’ll keep it lively and moving and be thinking of questions you have for me, I’ll be happy to answer them live.  So the overall theme that Mark asked me to address comes from my book, which is called “Seeing around corners”. And the topic of the book is really strategic inflection points. And so the book is: how do you see them? Once you’ve seen one, how do you decide what to do about it, which are two completely different activities? And once you’ve decided what to do about it, how do you bring the organisation with you, which is often the most difficult part.

So what I’m going to focus on here is one particular technique from the book, which I call the early warnings, exercise. And so mark, if you can do the next slide. And this is really about how you pick up those weak signals that things are in the process of changing. And so the first observation I would make is that when you’re thinking about the information that you use to make decisions, there are always these three different kinds of indicators that you could be looking at. Most unfortunately, indicators that we rely on in business, are what I call lagging indicators. They’re great information, but it’s about something that’s already happened.  So if you think about your financial indicators, if you think about statistics about last year sales or performance, or even as we’re looking at the current economic environment, even employment, you know, it’s a lagging indicator, it’s not telling you what’s coming.  Then we have the current indicators.

And you can think of those sort of like the speedometer in your automobile, they tell you where you are. And in business, that would be things like employee engagement, and Net Promoter scores, they’re giving you a temperature read of what’s happening right now. But the most important indicators from a future oriented point of view are also the most difficult. These are what I call leading indicators.  And a leading indicator, by definition is about something that hasn’t happened yet. And so it’s often qualitative. People can very reasonably disagree about what message a leading indicator is creating. And interestingly enough, the best metric for a leading indicator is not “did what it predicted to happen?”, but “did it evoke the right action in time?”  And I think, you know, we’re in the midst of this Coronavirus crisis. And a lot of the public health people will tell you, well, if what we’re doing is successful, the big answer will be nothing happened, life didn’t change, nothing took place. And once the crisis has passed us, everyone’s going to say if nothing happened, where you people overreacted, it was ridiculous, what you did was way out of proportion to the risk, blah, blah, blah.

And the public health people will tell you that, surprisingly, a measure of success, the fact that nothing happened meant we took effective action in time.  And so it’s a very tricky thing, these leading indicators, when you think about the sort of emotional response that human beings often have, because the most powerful of them – if they’re really powerful, and we act on them – result in absolutely nothing dangerous or, or otherwise happening. So they’re kind of tricky from a human point of view. So the early warnings model basically relates to a couple of activities that are different from one another.  So the first thing is, how good is the information that you have to work with overtime. And in the early early stages, when things are first starting to make themselves known, the signals are very, very weak. And they remain that way for quite a while. And then you have a period of inflection where the signals get stronger and stronger and stronger, until you finally have facts. So the signal is very, very strong. You’ve got facts, you can take photographs, you know what the answer is. The problem is that your ability to change those facts is inversely related to the strength of the signal that you have to work with. 

So your degrees of strategic freedom, descend, even as the quality of the information that you have to work with improves. And this is one of the fundamental sort of challenges of strategy, which is by the time you have the information you would really like to have had to make the decisions you need to make. It’s too late. And so the question is, how do we go from that red line/how do we work backward in time now this is kind of a critical issue because you don’t want I’ll be making decisions too early, when the signal to noise ratio is too extreme, but you also don’t want to leave it too late. So somewhere in the middle of that chart is a period of what I’ll call optimal warning. Which is it’s not too early – so we’re not just acting on anything that’s in the atmosphere – but it’s also not too late. So the way that we do this, is we established what I call a time zero event, which you can almost think of it as a headline from the future. And it says, this is the thing that we’re thinking about happening in the future. And so these are some examples about artificial intelligent chatbots.

Many of you will be familiar with this where, you know, you call up a retail establishment and you’re not actually talking to a person, you’re talking to a robot who’s been trained very carefully to have it be almost like the person or augmented reality and retail or alternatives to screens for web encounters or algorithms in the workplace. And these are all sort of examples of something which if you catch it, right could take your business to new heights. If you miss it, it could take your business into irrelevancy.  So the question, of course, comes then. So what you do with a time zero event is you articulate it. And then what you do is work backward in time. And you ask the question, Well, before that could happen, what are the indicators we would have to be able to see, that would tell us this is becoming more or less likely? And what you then do is you appoint someone whose job it is to watch those indicators. So as the indicators pile up, you can see your time zero event either becoming more likely, or less likely. And I think it’s a very interesting way of saying, okay, rather than doing elaborate scenario planning or whatnot, how do we think about very simply gathering the information, we might want to tell us whether this is becoming more or less likely to happen? 

So the next question you’re going to ask me, of course, is, well, how do you go about establishing a time zero event?  So I have a very simple technique to do this and my hope is, after this session, everyone who is here will be able to do this for themselves. So it’s really a capability building kind of exercise. So what I suggest is pick two uncertainties, two things which are not yet known and assign different values to each of them. So a high or a low value, or maybe this will happen, or maybe it won’t value. And then you’re going to get a two by two matrix. So very simple four possible futures. And what I’m going to ask you to do then, is tell a story about each of those possible future situations. And what might that world look like? You know, and for this exercise, I’m gonna do this in real time. So this is absolutely terrifying, because I know you’re recording this Mark and two years from now people may look back and say, “Oh, boy, that McGrath, What an idiot”, you know, but bear with me, we’ll do it in real time. And we’ll see how well we do. And this is actually this is the very first time I’m presenting this, everybody because I just designed it last week. Bear with me. 

Mark Littlewood  

This is really the very first time we’ve done this too, so…

Rita McGrath  

So the uncertainties I’m going to pick Are you know, we’ve for many, many years now 40 years, been dealing with this so called maximising shareholder value premise as the underpinning of what should drive private corporations what to drive, especially publicly traded corporations in their decision making and in their behaviour. And it’s a line of reasoning that, I guess most famously began with Milton Friedman back in the 70s. It was cast into being in a policy sense, perhaps by the Reagan administration. And what we’ve seen is the rolling back of many of the post World War Two provisions that were put into place to basically try to create peaceful, prosperous times for everybody.

So very limited roles for banks, very strict rules about things like buybacks. companies were entrusted with leading for the long term, employers were wedded to their communities, you know, there was considered to be a really important community based workforce based role for corporations, and a whole, you know, that whole bundle of things which over the intervening years, has gradually been picked up and picked up and picked up mostly for profit motive.

So you’ve seen the financialization of most sectors of the economy, you’ve seen enormous wealth inequality, as the, you know, the folks at the top have been able to really maximise their returns, and everybody else has been struggling and and and and.  So the big first uncertainty that I think we’re up against, and I think we may be at a really interesting inflection point with this is Will this philosophy of maximising shareholder value continue to dominate the way corporate, especially corporate resource allocation decisions are made? Or are we going to see a pulling back from that, where to the point where we’ll have more of what’s called stakeholder capitalism takeover, where there’s kind of a return to this notion of corporations are, are meant to the value they create is meant to be shared more broadly. So more shared prosperity. So that’s the first uncertainty. 

And the second uncertainty is, of course, what’s on everybody’s mind, which is what happens next, you know, what happens when the immediate crisis has washed over us? and business that’s been stopped in its tracks? Kind of restarts? Is that going to be, you know, bouncing back? Or are we going to be in a situation of, you know, recession, or worse, even depression. So those are the two uncertainties that I’m going to use just for this illustrative example.  So we’ve got shareholder value prevails stakeholder versus stakeholder capitalism, and on the left hand side, we’ve got a prolonged global slowdown versus the economy kind of bouncing back. So I’ll take each of these scenarios in turn, and you can see how, you know they’re, they’re different futures, right, so let’s start with the upper left side. So shareholder value continues to have its grip on the way decisions get made. And the world is just in a slow, slow growth or zero growth or deflationary sector, which is not happy and sort of named this scenario les miserables, you’re going to continue to have poverty and inequality pervasively distributed, most people are going to feel economically insecure, and will continue this trend we’ve been seeing in the last few years of political instability.

And I think we’re going to add to that a layer of competition for resources that we haven’t really seen before. So that’s that’s one scenario.  If I move sort of south on this chart here, let’s say the economy bounces back, but we still got this maximising shareholder value mindset. I think that’s kind of situation as was before, it’s going to be middle and lower classes continuing to struggle. High levels of inequality remain, we’re still going to see, you know, CEO to worker pay ratios that are very difficult to digest, and so forth.  Now, let’s say we use this crisis or the world uses this crisis to really reset the way incentives in the capitalist system are allocated, and we move to much more of a stakeholder capitalism. But the world is going to be in a tough place for a while. And what I think we’ll expect to see there is a lot more grassroots organising and activism as we’ve seen already, we’ll see calls across the board for extended safety net programmes. In fact, we’re already seeing evidence that that’s happening.

We will see greater taxation, we might even see appropriation of wealth as Nick Hanauer, who is a very wealthy guy, but also a pitchfork proponent. He’s a venture capitalist who basically says, Look, this wealth inequality thing is a terrible idea. He says, look, the money’s all there. It’s just sitting in offshore bank accounts, go get it. Now, let’s say we use this crisis or the world uses this crisis to really reset the way incentives in the capitalist system are allocated, and we move to much more of a stakeholder capitalism. But the world is going to be in a tough place for a while. And what I think we’ll expect to see there is a lot more grassroots organising and activism as we’ve seen already, we’ll see calls across the board for extended safety net programmes. In fact, we’re already seeing evidence that that’s happening. We will see greater taxation, we might even see appropriation of wealth as Nick Hanauer, who is a very wealthy guy, but also a pitchfork proponent. He’s a venture capitalist who basically says, Look, this wealth inequality thing is a terrible idea. He says, look, the money’s all there. It’s just sitting in offshore bank accounts, go get it. And that’s real Pitchfork, great thinking. We’ll see lots of alliances between NGOs, new government actors, and we’ll see definitely a renewed role for government in in the way the economy is managed.  And that’s real Pitchfork, great thinking. We’ll see lots of alliances between NGOs, new government actors, and we’ll see definitely a renewed role for government in in the way the economy is managed. And let’s say we have stakeholder capitalism, and the economy does come back, I think what we’ll see there is, with renewed prosperity, we’ll see a return to more of the post World War Two consensus on the distribution of societal wealth.

We’ll see, I think, a gradual narrowing of inequality, and we’ll see a lot of social goods that are made more affordable. So things like education, the health care, those kinds of things, you know, there’ll be a recognition that those those things are what allow people to have the hope of a more prosperous life, and that they’ll start to become more affordable.  So just to recap, so what you’re looking for here is this ability to say, Well, before the time zero is upon us, how would we make a decision? So we’ve articulated a couple of future scenarios, and what we’re hunting for now is the time zero event. What’s the headline? What’s the the thing that is a reality that we might want to be preparing for? 

So what I pulled in this is, as I said, we’re kind of working in real time here. What I’ve pulled is actual headlines from possible different scenarios, where the first is a headline that economic inequality leads to collapse, which is the likely outcome of this first scenario that maximising shareholder value but global slowdown.  The second one, you know, the economy comes back but the share the gains to that that growth are privately held in a few hands. There. I think what you’re going to have is extreme poverty returns to American, and it’s something most of us in most of our lifetimes have not experienced. You know, it was the depression in the Second World War really helped to eliminate a lot of the desperate poverty that had been there before. But you know, it could be that, in the right hand side, we’ve got, you know, I call on Frankland Elenor Roosevelt, who made a very famous speech in 1938, talking about governmental experimentation, saying, you know, we have a rendezvous with destiny, we’re going to have to learn about how all this is working in a brand new way. And they he talked about, very explicitly about taking control of the economy away from what he called tyranny, that the private sector and a few wealthy people were controlling so much of the means of production, that it was depriving ordinary people of the means for wellbeing.  And he was very explicit about it even back in the 30s.

And then, you know, if things are good, and we have this more broadly shared prosperity, we might see a return to the Great Society, you have version 2.0. So with those things in front of us what what we can then do is say, Well, what would be some indicators that these scenarios are coming more or less likely? So I’ll pick the one I think is most likely, which is a prolonged global slowdown, if not a shrinkage. And I think we’re kind of at the end of maximising shareholder value, I think we are maybe at the brink of a return to stakeholder capitalism.  And we can start to then think about what are some of those future oriented states? And by the way, I don’t think that’s an awful scenario, I think we could be discovering and learning an awful lot. So given that, I think there are a lot of bright notes, you know, if you think about, what are some of the good things that can come out of this change? I mean, I’m looking at things like oh, my god, they’re they’re clean canals in Venice, there’s dolphins swimming around in Venice, you can noticeably tell the the quality of the air and the water in the lander are, are improving. And things like men are learning what it’s like to try to do anything with your children at home. So as we look into the future, and as we think about, let’s be optimistic, and let’s think about the people that are going to be creating the future for us, I’m going to borrow a line from William Henry Gibson, many of you will be familiar with him. He’s a science fiction writer. And he was famous for saying, you know, the future is already here. It just hasn’t been evenly distributed yet. And so here’s an interesting thing, if you want to know what the 20 year olds of 10 years from now are going to be doing, and thinking and learning, guess what, they’re all alive and well, and they’re all 10 years old today. And so, I’d love to hear Mark from someone coming to visit us from the future. He’s going to share with us some of her ideas.

Mark Littlewood  

I wish I wish she was only 10. She’s a little bit older now. But this is I’d like you to to meet Violet, who came to Boston when she was 10 has always been a big fan of Business of Software and all the things that go around it apart from me. She is working at home at the moment. So do you want to say hello, Violet?  Hello, everybody. Hello, Violet. So Rita, I would love you to just say hi to Violet. And she has been at home for pretty much a week and has been getting up to speed on online learning. So I think he’s got some really interesting observations about how that’s going. It goes pretty much without saying that in today’s environment, there isn’t a hugely well funded education system. So I really really sympathise with schools who are having to manage children have them in for lessons every day and also thinking about the implications of things going online but I think we can learn a few things maybe about the the experience there but also then maybe even think about some of the opportunities that people might have to make that experience better. But tell us about what you’re doing.

Violet  

Well, so far the different lessons all of the different teachers have a different way of doing things. Which is kind of frustrating. With the school my school specifically chosen to use Microsoft Teams as the main place where they’re coordinating things because we use Microsoft And SharePoint and those kind of sites. But along with that there’s loads and loads of other websites that are specific to each of the teachers. So there’s not a sort of standardised way that they’ve done it yet.  I’ve had a few video call lessons which have been disastrous really released so far that the teacher I had one this morning with my psychology teacher and his keyboard started randomly typing different symbols and letters and stuff. So he had to cancel the call. And he had to go and take another call during it, and then he had to go and take care of his kids. So it was, it was a little bit disjointed.

Mark Littlewood  

So can you just decide because you were talking to me about this last last week a little bit. Some of the lessons that you’ve got, you have a teacher who’s giving classes and they’re broadcast out and you will have to follow along. Tell us how you’re watching them. And how you as pupils are consuming those lessons?

Violet  

Well, the general format that they seem to be following what some of them seem to be forming it. Following is there’s a PowerPoint and the teacher was screen recording and share the screen, and then they’ll talk over it with voice and then we’re all muted, no video chat. And we’re supposed to be following along as if it’s a normal lesson. But what I’ve noticed is, the class sizes have halved, basically, and they don’t. And that’s not because of illness. Because we have we have separate group chats, without the teachers on social media, Snapchat, Instagram, all of those, so people are saying, I’m just not going to come in. And so I’ve noticed that a lot of people, I think, have just decided not to come in because it doesn’t count against your attendance. And they’ve just, I think it comes down to motivation and discipline, and they’re just not, they’re just deciding not to take part anymore. Which I think is the kind of the the dangerous thing about the online learning is that it really comes down to whether you’re motivated enough. And if you care enough to keep up with your lessons, otherwise, it can really easily get on top of you. And then you just won’t have the motivation to continue, then in your education is going to suffer.

Mark Littlewood  

So I agree, and I think that’s something that we’ve touched on in a few of the talks today around remote working and how you control people, manage people, build trust, ecetera, ecetera. Tell me a little bit about the different channels that you’ve got going on whilst the lesson is happening?

Violet  

Well, in my English lesson, for example, today, what we have is on Microsoft Teams, there’s like three or four different chat channels. And  the teachers will post on all of them, same time, different things to do at the same lesson, and you sort of have to switch between. and then they have a shared class notebook, which nobody could figure out how to use, let alone the teacher.  But at the same time, what’s been helpful actually is using FaceTime, separate of the teacher and facetiming, some of the people that are in my class and then we’ve kind of it’s it’s sort of helpful, because you can figure out what’s happening together, and you can discuss ideas, but it’s at the same time, distracting, obviously, because they are friends. But I think it would be really, really quite difficult to navigate the new, the new software that we’re using, because it’s all it’s not very polished. I don’t think at the moment, especially with the teachers, the way they’re using it?

Mark Littlewood  

I would say that’s from my observations. That’s, that would be fair. But one thing I have noticed, though, is that in a traditional classroom, people are very tied to a particular speed of learning. So you have a teacher at the front, and they’re talking and stuff goes in and they say things and if one or two people don’t get a concept. The teacher then if they’re a good teacher has to go back and help those people through it. But what I was observing with observing with you and your sister was actually some of those explanations going on as a back channel while the class is going on, so some of the people that have got those things are actually explaining ideas to people who are struggling with them. And maybe that’s maybe that’s a kind of a positive piece to that.

Violet  

Yeah, I mean, definitely when we’re video chatting with people in my class, it’s helpful to talk through things that people don’t understand them; and like you said, it’s when you when you, I think when when you self teach yourself something with certain subjects and a certain concept, it’s much easier to teach yourself then when you’re in a class with other people who are learning at different rates, so I found in some classes, some lessons, it’s been so much faster, and I’ve been able to do an hour lesson 25-30 minutes and retain the same amount of information if not more than a normal lesson. But with some, some lessons, I just don’t think that they translate as well, especially with biology. There’s a lot of practicals that we should be doing right now this week. And next week, and all of that those required practicals that we have to do that are really difficult to teach virtually, and there’s a lot of concepts that are difficult to teach yourself. So I found certain lessons, it’s, it’s so much easier and so much more helpful to be online and teach yourself that but with other lessons, it’s really damaging almost to understanding.

Mark Littlewood  

what so what subjects are you doing just briefly?

Violet  

So I’m doing a levels, I’m doing English literature, maths, psychology, and biology.

Mark Littlewood  

And those subjects, which are the ones that lend themselves best,

Violet  

I think psychology is the easiest to do online. Plus, since for about a month, since half term, one of my teachers has been self isolating because she returned from Italy. So we’ve been having to teach ourselves lessons. And I’ve just, it’s a lot easier. It’s a lot quicker than normal lessons. So psychology is translated well, because they have a really good system in place already I found so the subjects which has had the best systems the most, with the fewest extra websites, I found it translates so much better. Maths, I found is okay, because it’s just all centred around this one textbook. But I think English has suffered quite a lot, because the whole thing of English, the lessons that they teach, or they’re very organic and it happens in the class discussion, that’s really difficult because to replicate in Microsoft Teams, because the school hasn’t allowed the teachers to allow us to turn on microphones or turn video calls on. So we can’t have that same discussion. So I think things like that more. I think more art space, subjects are going to suffer a lot. I have friends who are doing art and drama. And especially my friends were doing drama, they’re really really suffering because you really you can’t really do drama, through video chat. But stem base subjects I think they’ve translated really well, because it’s a lot of just facts that you have to learn, especially with biology. It’s just a lot of memorization.

Mark Littlewood  

Yeah, thank you. Is there anything that you’ve observed today? Casue I know you’ve been at school and you’ve been doing classes, but you’ve also been sneaking into this. And taking part are there any things that we’ve been doing today or any, any of the any of the things that are things that would help or be useful in a in an educational environment.

Violet  

And I think in terms of the format of the conference that you’ve got, how you have the whole room, and then the hallway, and then the auditorium in the hallways more for socialising what from what I’ve gathered, I think that could be kind of an interesting thing that the school could bring in. Because I think one of the dangers to the fact that my school that all schools and the college has gone online is not only the danger it poses to education, but the danger to your your well being because a lot of people that I know, the only way that they interrupt people through school. And the danger is that a lot of people I know are becoming quite isolated and not talking to anybody. So I think if the school could some way, in some way use Microsoft Teams or the the school website or something to introduce a more social aspects that the people can get a bit more connection with others. And that would be good, just like you’ve been doing in the hallway in the breakout rooms.

Mark Littlewood  

Good. It’s not like you’re expecting any pocket money this week. So free to write you love the idea that learning can be made more democratic. What do you mean by that? You talk a little bit

Rita McGrath  

it? Sure. So in many Western societies, and I think in others as well. The degree the credential that you receive from a course of learning has come to be a critically important gating factor in access to opportunities and all kinds of other things. Well, if you could imagine the kind of the A system that we’re beginning to experiment with now, because we have no choice, you’ve now got the ability to say to to tell because it’s online, and it’s digitally intermediated, to tell what people know, what experience they’ve had, what they’ve learned what their capability is. And so you’ve now for real got the potential to have a skill assessment that’s not represented by a degree. Because right now, you know, a lot of jobs. And this has been researched as well. A lot of jobs require some kind of college degree or or university degree. And the reality is, the degree isn’t necessary to do those jobs. The degree simply means you showed up somewhere for three or four years, you handed in your coursework, you didn’t fall asleep at your desk every day. You know, it’s it’s a symbol for other things that employers care about. So if we could move toward a world where you can actually tell what a person knows and what they’re capable of doing, it vastly expands the pool of human talent that we can begin to tap into. And it vastly democratises the idea of learning and capability development. So I think that’s really good news. I really do. I mean, a lot of people are getting degrees that are basically not very useful enough that I think, you know, learning has to always be tied to usefulness. But you know, a lot of people are being cut off from opportunities that they if they didn’t, if they had more money, if they had more time, if they were born into the right social setting, they could perfectly well take advantage of but because of the way we structured our system credentialing right now that they can.

Mark Littlewood  

Yes, thank you. Right. Violet, thank you very much for coming out. I know you’re not going to run away. But

Rita McGrath  

Thank you. Nice, nice to hear. Right. Right, from the sources as it were

Mark Littlewood  

Yeah. So there were a couple of comments, Mills, you were saying that least here in Germany, schools are closed. And teachers have been asked to provide online resources. Same here, they’re just not geared up for it. And I think there’s a whole what happens in theory, and what happens in practice, are two very different things. I think we’ve been struggling, the education system has been struggling, because this is one of those things that people know have been coming. Maybe one of the reasons that it’s been we’ve been so slow to close schools here is that now there’s just this clear understanding that we can’t teach online in a way that we’d we’d like to say, I’d love nails or any of the other people from other countries to sort of share any thoughts on their different  ways of doing I know Peldi. You were saying earlier that pretty much all of your coursework is online in Italy, so be very, very interesting to, to hear about that. Shall we go back to your, your talk and have conclusion? Because what are the other thing I’d love to do here is just to ramp this up? And is let’s finish that. And then I think there are some, there are some very interesting opportunities that kind of come out of what’s going on. I think the opportunities for online education for all sorts of things around that are huge, and there are probably companies who are here today are watching that. And again, okay, those are those are things that we can we can help with. But I’d also love to kind of just have a think about some of the other positive things that have come out of where we are and what’s been going on over the last few weeks. And that’s maybe a good way to finish up the day. So do I need to share my screen again? There we are. That looks like a cute and compliant child? 

Rita McGrath  

Well, the reason I know about her is that she’s British. She lives in a single parent home with her with her father. And her particular hobby is she’s called Trinity and her hobby is playing with these loom bands, you know, you can see them in the picture. And what she would do is every day after school, she’d come home and presumably do her homework and then she would spend the rest of her time or free time on her phone, exchanging information with other loom band aficionados. And they would learn from each other. She’d play the videos, she’d stop them, she start them until now why would I know about this person?  Well, the Wi Fi at her home went out and so there she was hours and hours and hours of video. And we all know what bandwidth that takes, but doing it on the cellular network. So imagine her father’s astonishment at the end of the month when he got a bill from Vodafone for something like £1600. And, you know, it was a bit of a bit of a calamity for them. And I think they came to an agreement eventually.

But why I thought this was so interesting was if you think about Trinity, and she’s 10, right? You know, what’s her world going to look like? I mean, and, you know, you think about how she can learn? Well, it’s going to be real time online, peer, peer to peer, you know, from other people that know. And you’ve already alluded to that in the idea that the students that are falling behind can be helped by the students that are grasping the material, sort of, in parallel with whatever’s going on, that the teacher is driving.  She expects to be connected, like it wouldn’t have occurred to her to check the Wi Fi. And she’s doing a lot of participating herself in the learning. So she’s creating videos to share with other people, even as she’s learning from the videos created for her. So if you think about the world Trinity is going to be in 10 years from now, when she’s 20, right? That’s a completely different world than the one that many of us grew up with, you know, it’s not going to be some expert mediating, it’s going to be very much distributed and peer to peer, it’s not going to be something that depends on a credential again, it’s going to be Show me what you can do, right. So a very different world than the one that we are living in today. So I think she’s an interesting little example of visiting the future. 

So I’ll conclude my formal remarks by saying that, you know, when I first started in the field of strategy, we had a number of fundamental assumptions. So one was the industries were what mattered. And so we had a mountain of research on things like, you know, industry positioning in order of entry analysis, five forces and all that stuff. And innovation, those of us studying innovation, we were kind of huddled in the corner for warm, it’s not very pleasant. And what I think is happening today, as competitive advantages have gotten shorter, is that you can’t really talk about strategy today without talking about innovation.  And equally, you can’t really talk about innovation without some reference to digital with what the conference here is doing. And I’ve said this before about Boston, I’ll say it again, one of the reasons I’m so fascinated by this conference, and by the people that come to it is it’s my little version of where’s the future being created, so that we could go visit it today. And I think that’s what we’re really seeing. So these three things really coming together in a in a very remarkable way. So that concludes my formal remarks, I’m willing to answer questions, and you can easily reach me, RitaMcGrath.com I publish a monthly newsletter, which is like what you heard about with the, the two by two, you know that then I do it every month for a different sector. So you’re welcome to sign up, it’s free.

So I guess final thoughts here:

Inflection points don’t happen instantly. They they take a while, right?  Your past success can actually create blind spots. So that’s one of the reasons I like the two by two to sort of expand your aperture of what you’re looking at. Most of us work with lagging indicators, it’s much harder to get those leading indicators to try to see what’s coming. I mean, who predicted this, you know, even even three months ago, life was going on as normal, right? who predicted this? 

The idea that the strength of a signal is inversely related to the ability to change it, that we’ve got, you know, it’s not really so much about prediction, like the best predictions often predict something that doesn’t happen, and that’s success.  And then finally, the last one would be that if you if you have a systematic approach, you can often pick up these early warnings sooner than if, if you don’t.

Well, I’ll make one observation while people are thinking, which is that, you know, I think what we’re seeing right now is in outcome of new decades, really, of building supply chains and our other vital infrastructure systems without really real regard to how resilient they are. So we’ve optimised, optimised, optimised, and each individual player has maximised their individual utility. And no one’s really taken the system’s orientation to it. And I’ve written a lot about this over the years. But when we’re trying to create resilient systems, there are a few key design principles that we’ve been basically ignoring. So the first one is redundancy, you know, if one part of a system goes down, you don’t want the entire system to be crippled, you want multiple opportunities to something to take over when something else goes down. The second is what I’ll call trip wires or blockages, right you you want, you want to find out something’s going wrong as early as you possibly can, and alert the response capability that you have. And the third thing that you want is Slack, you need slack in the system, and you need to be able to close off part of the system without the whole system imploding.

And these are just very basic design principles or building resilient systems. And we know this, you know, we know this from the military, we know this from our space programmes. We know this from, you know, the way that the systems that have to work, you know, life life threatening systems are built. And yet, when we look at the way our supply chains have been constructed, we look at how companies are understanding what’s happening. I was talking to a firm just the other day, and they had done what they thought was a very rigorous supply chain audit to see you know, how vulnerable they were to gaps. And they went down about six layers. And what they’re now learning is they would have needed to go down something like 30 layers, to really get down to the guy that’s producing the stuff that comes out of the dirt. That’s like 1.111% of the end product. But it’s absolutely critical if that commodity isn’t available, the entire rest of the changes work. And I think we’re starting to see now a real appreciation for you know, the need to budget for resiliency, which we haven’t done, you know, our, our our incentive systems don’t really reward that.

Mark Littlewood  

Yeah. So great, great question from Steven Keller: How does capitalism prioritise resilience when there’s no obvious ROI?

Rita McGrath  

Well, I think it’s well, no, I think the problem is pricing right? And my really good friend Rebecca Henderson has a wonderful book coming out which I’m going to encourage everybody to preorder preorder it, that’s what she’s looking for at the moment, and it’s called reimagining capitalism in a world on fire. And what she argues is that part of the problem the way we’ve constructed capitalist systems is that we don’t adequately price for social externalities, so we don’t water for example, the world over is not priced relative to its importance or its its its criticality. We don’t price for air. We don’t price for pollution. We don’t price for carbon, we don’t price it So you’ve got individuals who are able to take what are essentially public goods, convert them into their own benefit, and exploit those resources, when really, it’s all of us that are bearing that that cost. You can think of the same thing in terms of societies in the form of what some people call social pollution. So, you know, for example, right now, you’ve got companies that don’t offer their workers paid sick leave. And there’s a report that just came out in the US that says, you know, one in four, food service workers in the United States have gone to work. When they have been so ill, they’ve been either vomiting or exhibiting other pretty disgusting bodily symptoms, because they can’t afford to miss the paycheck. Well, that’s a form of social pollution, right? You know, you have an externality that all of us are bearing, it’s a risk, all of us are going there, because this one company doesn’t want to pay one person for one day off, you know, and, and I just think we don’t price those things appropriately. Now, interestingly, if you go back to America in, I’ll say, the 60s and 70s, when the first wave of real environmental legislation came in, right, how did they How did they make that stick? They made it stick by adding a pricing mechanism. So you had government regulation, about about how much particulate matter you could have an automobile exhaust, and voila, the karmic makers figured it out. So capitalism is based on markets and markets only work if there’s a pricing mechanism. So we have to figure out the pricing. And if you adequately reflect reflected the price of having non resilient systems into the way things were built, I guarantee you’d have much more resilient systems. I’m actually a real optimist. I think this is going to be a tremendous unfreezing, it’s going to be a real wake up call for a lot of people. And I think it’s going to start making connections in people’s minds to things that they never saw as connected before.

---

---