Prof. Rita McGrath on The End of Competitive Advantage

Is sustainable competitive advantage dead? If so, who killed it? More importantly, how can entrepreneurial business owners benefit from an understanding of the new strategy playbook?

For years, sustainable competitive advantage has been a goal of large companies – locking in your advantage over your competitors using innovation or market mechanisms.

Prof Rita McGrath believes that things are about to change dramatically, that markets are about to get a whole lot more agile and dynamic and that this will produce enormous opportunities for entrepreneurs.

Watch this talk from BoS USA 2013 if you want to get some shrewd advice on how to thrive in the new fast moving environment, and why you need to look outside your industry sector to understand how your company should grow. Bonus points if your competition doesn’t have customers, they have ‘hostages’ Transcript below.

Find Rita’s talk slides, video, transcript, pre-talk interview with Rita, and more from Rita below.

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Video

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Professor Rita McGrath at business of software 2013 end of competitive advantage from Business of Software Conference

Transcript

Rita McGrath: Good morning, it’s a real pleasure to be here and I’m learning so much every minute that I’m here I feel so it opens a window for me on a new world and thank you Mark for your very kind invitation. The topic that Mark asks me to talk about is what’s featured in the book that you have all gotten in your packets and the book is called the ‘End of Competitive Advantage’. And it was motivated by a deep on ease that I was feeling about my colleagues in the field of strategy. And in strategy for years and years and years the holly grail and the thing that you want, the thing that everybody list after is a Sustainable Competitive Advantage and the concept is you do an innovation, you’ll get something in place in the market and then you got a huge long period of exploitation to follow. And that’s great, right, that’s a good thing. But what I’m finding in more and more parts of the economy and certainly the parts of the economy that you folks live in, that doesn’t exist, that what we have instead are transient or temporary advantages and that has pluses and it has minuses but it certainly provokes a different way of thinking than we’d have thought in traditional strategy. So, I thought to introduce the topic maybe I would just tell a story. The story involves two photography companies, a couple of oil & gas billionaires and events that unfolded over about to 20 years. So, the two chemical based photography companies were Fuji Film of Japan and Kodak of the United States. And they were both in say 1970 roughly equivalent players, and they both had great global brands, fantastic technology, lots of patterns, lots of things to their names and they were both competing head-to-head.

Rita McGrath: Well, in 1973 these two techs oil and gas billionaires the Hunt Brothers decided they try to hedge their positions in oil and gas by going into the purchasing of silver, they were literally buying bars of silver and when this all started in 1973, an ounce of silver cost about $0.50 by the time this plat came to light in 1979, the price of an ounce of silver had gone up to nearly $50 an ounce. And the Hunt Brothers reportedly controlled half the world’s supply. So, here an executive of a photography company imagine the consternation, right not only is this raw material you depend on so much more expensive than you’d expected but you may not even be able to get a hold of enough of it to keep your factories going. Well, the whole thing fell apart after about four months after it came to light in March of 1980. The price of silver dropped back to the normal and supplies freed up, the Hunt Brothers went bankrupt and all the photography company executives except one said, “They got that’s over back to business as usual.” The one that didn’t was a guy name Minoru Ohnishi he was fairly new in his role as the CEO of Fugifilm and this experience rattled him as you know, it happens once, it could happen again, we’re vulnerable to being at the mercy of forces beyond our control.

Rita McGrath: In 1984, an event occurred which crystallized his earnings and that was the introduction by Sony of the very first consumer facing all digital camera, the Movie Cam. A camera that could take pictures without film, no chemicals, no post production, all digital and Ohnishi was reported afterwards just having sit back, his result crystallized and he said, “We’re going to, we’ll change, we see the future and chemical based photography is not where the future lies for us.” So, what he begins to do is systematically extract from the company extracting resources out of chemical based photography, he put resources into digital, into other industry seem diversified beyond photography altogether and it was a big, big change over a long period of time. Today, Fugi employees over 80,000 people, its revenues last year were 27 billion dollars, its number 400 on Fortune’s list of the top 1000 firms. Kodak literally blowing up its factories because it can’t afford to pay the real estate taxes on them. Now, the reason I think this is such an interesting story is the two firms really were quite equivalent when they started. You know, they both have great technology, they both had great patterns, and they both had strong positions of intellectual property. What made the difference were leaders who were willing to see that the world had changed and make decisions accordingly. So, the end of competitive advantage the book is really written to try to provide some insight into how organizations that are thriving in this environment manage to do it. And I call it a new playbook for strategies, it’s really a different way of thinking about how we compete and how we engage? And anyone of the first departures of this way of thinking about strategy from conventional strategy is the whole concept of industry is kind of up for graphs. You know, when I started the field of strategy all the really you know, sophisticated people were doing very in-depth industry analysis, you did market share comparisons and who’s more aggressive and who had which position? Today, the most significant competition many of us will face doesn’t come from within our industry it’s some other industry coming in and gulfing and developing some space we want. For example, last year the Wallstreet journal published a study comparing American household spending over the five years since the introduction of the iPhone. And what did they find? Five years since the introduction of Android iPhone that whole ecosystem spending on telecommunications by the average American household up 11%, what went down spending on restaurants, spending on a parole, spending on travel, spending on cars. So, here a car maker and you are sort of benchmarking yourself against other car makers you miss the plot completely. And I think most industries are up against this, what I called ‘Oblique Competition’. So, you really have to be much broader in the way that you think about it and I have identified the concept I called ‘Competing in Arenas’ where an arena is a part of addressable resource that very many players from different industry segments might will be contesting and I think we need to think about arenas quite differently.

Rita McGrath: So, other pieces of the…What I call the ‘New Playbook for Strategy’, the first one is ‘Continuous Reconfiguration’, ‘Continuous Reconfiguration’ or transformation. And I learned this by studying a small group, and very rare firms that were able to grow steadily over a whole 10 year period. So, out of nearly 5,000 firms I study they were 10 of them that managed to kind of achieve steady predictable growth in spite of massive swings in the market and so forth. And I torch it by graduate students for an entire summer I said, “Okay, I wanna see how these guys handles setbacks, I wanna see the layoffs, I wanna see the downsizing, show me the restructurings.” And they came back with like nothing, what these guys did was continually adjust and so overtime the change was substantial. But you know, each at any particular moment you didn’t see a big wrenching change. So, one from your industry is a company based in Connecticut called FactSet Systems and they started in the 1970s with literally selling documents they called the FactSet to institutional buyers with financial information.’ Today they’re in their own databases, they get stuff in the cloud, they get I mean an amazing amount of things that are different than when they started but you’d never see a huge major change, they are constantly moving resources in a very fluid way. And I think that’s something that we have to learn.

Rita McGrath: In the many, many organizations resources kind of get trapped and then you require change management to move them right. I always think about the time you need to change management you have probably left it too late. So, I think a big difference between traditional strategy and the newer ways of thinking about this notion of continual emotion.

Rita McGrath: Second thing is what I called ‘Healthy Disengagement’. So, if you think about the lifecycle of a competitive advantage you got getting started the innovation part, you got the exploitation part when you get to enjoy it but what happens when it goes away? Physical phonebooks, dialup internet, copper wires you know, you name it, eventually you gonna have to get resources out of those areas and get yourself into something new. So, in the companies who get this right disengagement is not seen as this horrific, “Oh, my god the world is ending kind of thing!” It’s seen as the natural evolution of your set of competitive advantage and the people deal with it very positively. So, healthy disengagement and not very many companies get this right. So, if I go to a corporate, the big one especially and I say things like “Tell me about your capital budgeting process? That will be a process you know, that’ll be forms you have to fill up and stuff.” If I go to that same company and I say, “Tell me about your disengagement process, I kind of get back huh, people don’t think about it.” So, how do we disengage from areas where the opportunities exhausted? A parallel idea to that is what I called, ‘Deft Resource Allocation’ and this is a big deal. So, imagine to yourself that you are the head of the walkman business at Sony in its prime you know, and what got you where you are, double A batteries, and little worrying gizmos that take albums with content and reproduce them with enormous fidelity and that’s what you know, got you where you are. And some break parts come along as guess what in the future no more double A batteries, no more worrying gizmos, no it’s all solid state in fact no more albums, it’s gonna be songs and they go through the air and I want you take money out of your marketing budget and your capital budget, and your development budget, and put it into this new stuff. What’s your reaction likely to be? [Chuckle] You know, it’s not career enhancing strategy for the young person promoting just like, “When resources are controlled by the people in the organization that have a lot of power that creates an enormous vulnerability because their instinct will be to defend and protect and preserve that advantage long perhaps past the time when it’s still healthy and when you can really rescue it.” A beautiful example that’s playing here right now is the people over to Blackberry. I mean how many millions have they put into trying desperately to sort of cling on to some kind of relevance in the market, when if they really wanna to do this new strategy of you know, providing security and software and back office stuff they would have been much farther ahead they disengaged from the handset business earlier or downsizing.

Rita McGrath: Innovation, if you buy the idea that increasingly organizations are going to be opportunistically looking for the next generation advantage their innovation process has to be an ongoing and systematic thing. In far too many organizations innovations kind of what it’ll called ‘Episodic’. So, some important guy gets up and says, “Dam it, we need more innovation around here. You, you, you go from here you know.” And this goes fine her 80 months or two years until that person moves on with the world changes and then it all goes away again only to reemerge from the ashes you know, some 12 months later it’s on again off again, it’s episodic. Instead what I believe is that the companies that get good at this rapidly changing competitive environment are going to have innovation as a systematic capability, there’s gonna be jobs for people to do, there’s gonna be a budget, there’s gonna be practices and processes for how do it? In other words, it’ll be as routine and systematic as your quality process, your design process you know anything else it’s really important. And I think that’s something we could stand to do a lot better at the other thing that drives me nuts about innovation, I have never understood that something is you know, you would never take someone who has never written a line of software code and ask them to do your quality testing. And you know, when it comes to innovation companies all the times are sort of invented from scratch you know, we know a lot about what allows this to work. So, my recommendation is people could get a lot smarter than they typically are.

Rita McGrath: Leadership, increasingly I think leadership is gonna go from proving you are right and making your numbers and targeting things to what I’ll call much more discovery driven and in your mindset. So, people are gonna be open to new ideas, they’re gonna be open to things that might surprise them, they’re gonna be open to new data and increasing strategies not about accomplishing what you setout to accomplish it’s going to be learning as you go, learning what you need to learn to the next milestone and then being prepared to redirect and move as you go. So, it’s a much more discovery driven approach than we classically thought about leadership. And finally I think, and I’m speaking to the quite here but all of our careers are gonna be much more entrepreneurial than perhaps we had been taught when we were in college. I think increasingly it’s going to be not just a career it’s gonna be a whole series of gigs and things that are different.

Rita McGrath: I’ll tell a story that to me brings us to light. A friend of mine has a consulting firm, fairly large one. And they gave one of their younger analyst woman in her 20s this task to do, I think it was size of market and they knew from personal experience that this will probably gonna take her about two months, she comes back in a week and it’s done. And they’re stunned like, “How did you do this? What made you do this so efficiently?” And Jesus all well you know, I called my friend and he works for this other company and he’s really good at statistical analysis and I called my other friend and she’s really great at like differently markets, she had assembled this virtual team of 10 people across all kinds of different organizations and each of them prove their talent to get this task done. That network that she’s got is probably going to be more enduring than any firm should ever work for and that’s where her loyalty lies, that’s where she’s gonna be planning on getting the results that she needs. So, I think people are increasingly looking at their careers in a really different way than we have been taught or certainly than I was taught when I was in school. So, a new playbook for strategy and I said one of the big differences is what it means for individuals? If you look at the left hand side, right that’s the classical ___[14:22] world, right. So, you got a career that moves in letters and it’s stable and you do a lot of work in hierarchies versus increasingly what I’m saying is careers are being manage almost the way people who make movies manage, right. So, you wanna make a movie, you bring together the skills for the project, when the movie is done everybody moves on but they have learned a skill, they have something useful and that then helps them get the next gig, and the next gig, and the next gig. So, I think a lot part of our economy are going that way, we are gonna be really thinking about doing careers differently. And I think that has big implications for how you deal with your talent? How do you cent them? People often ask me, “Oh, you know, we’re having terrible time recruiting milliners.” And like, “Yeah, you know, if you want to recruit milliners they’re going to have believe that they are more employable when you are done with them then they were when they joint.” So, I think it’s a different mindset it really leads us to a different way of thinking. So, normally this is my corporate talk and you know, freak all these people from big companies out and then we talk a little bit about what you do. But given the audience here I thought it’d be a lot of fun to talk about the entrepreneurial side of this because I think a lot of this is really good news for smaller businesses, for people that want to be the disrupter. So, I thought it’s been a few minutes thinking about…If I were to take the other side of this, right I have to go after Blackberry or go after IBM, or go after you know, a firm like that what’d I do? So, I thought a recipe for disruption and then we’ll have time for some questions.

Rita McGrath: So, step one find an attractive target you know, rich they haven’t been challenged for a long, long time. There’s a lot of money there and the only thing that’s keeping them there is not that their customers are absolutely delighted because they don’t have customers they have hostages. [Laughter] That’s what you want, you wanna find an attractive target like that especially attractive if the people in charge haven’t been challenged for a longtime, if the business model has remained pretty much the same and if the management sort of uses these two phrases like, “Don’t bring me any surprises. Don’t bring me any surprises. Well, you know, if someone in a leadership position tells their people to not bring them surprises guess what nobody brings them surprises until it’s way too late.” Second phrase you wanna watch out for and that you wanna look at in your target is, “Don’t bring me a problem unless you have a solution. That virtually guarantees that nobody at a senior level is gonna really hear the most important difficulties facing your firmamental again it’s very, very late.” So, in an ideal world where target will be managed by people like this that’s what you want you kind of a sleep at the way alright. [Chuckle] Then you wanna think about, “Okay, what is it that these customers, hostages need and can we come up with a different way of getting that job met?” I know later today you’re gonna be hearing about jobs to be done so this is very complementary with that approach. But can you meet the same need that the income that needs but do it with a twist? Can you make what they provide unnecessary interesting thought? Can you do the same thing that at the fraction of the price? Can you meet the customer need that’s not being met in a cost effective way? Could the customer be cent to reward you for making their experience better? So, some questions you can ask yourself some trigger questions to think about when you are looking at this opportunity. So, in the case of payments here’s a prototypical customer/hostage, this is the woman who owns the small bookshop in New York City, she’s been addict for 35 years but as we have increasingly moved away from paying cash for things and started to put everything on either debit or credit cards her interchange fees are going through the roof and it’s actually causing a significant business problem for her. So, she’s caught, right because on the one hand she doesn’t wanna loose the business, she would loose it if she insisted her customers pay cash, on the other hand these interchange fees are starting to add up, it’s really creating some business difficulties for her. So, where did she turn for a solution? This is the last year I was able to get data for but in 2008 the US Banks were making 45.3 billion dollars in interchange fees and that’s a lot of money! Today, it’s closer to 55 billion dollars I mean it’s gone up a lot since 2008, that’s a lot of money and you have to ask yourself, “So, what exactly is the value that’s been created, hostage, right? I cannot do business with these guys and they’re frantically trying to predict their truth, alright.” So, you got target industry or sector, you have got an unsatisfied customer. Now, you gonna need a business model and that’s where I’m very found of the work of people like Alexander Osterwalder and Steve Blank putting together rather than these endless awful spreadsheets that bore you to death. Simple Business model canvas saying, “Here’s my business on one page and how do I think about the most important and sale, and elements of my business?” And it’s great especially in the early days because you know it’s wrong, you know it’s wrong when you start, you have to learn what the business really is? So, business model canvas that’s the next piece, so, here’s an example and there are many by the way, many smaller firms tackling this payment space and you probably are more aware of many than I’m but here’s one that I think is really kind of cool, it’s a company called, ‘Level Up’, have you heard of Level Up, anybody? Yeah, okay. They got a very cool business model, essentially what they do is you signup with them and you give them a credit card and you used your phone to make payments and what they do is they hold all those payments all day along from hopefully thousands of purchasers and then they hit the interchange system once. So, it basically takes all of those transactions that would be charged each time and turns them into a single transaction. So, great for the customers, great for the company because they take a small proportion from the merchants, they get paid by the merchants. You as the customer don’t pay anything for the service. And there are many, many others right. So, there’re Square, there’re other payment systems, there’s a lot of different ways have been tackled but this to me would be a very interesting example of a large attractive industry that could be very much disrupted.

Rita McGrath: So, when I think about the transient and advantage economy people often ask me you know, “Is there any good news in this, right? Because companies Kodak, Rim, Nokia, Sony you know, you name it, these very famous companies all kind of falling on hard times.” Doesn’t this sound kind of like the recipe for bad news? And I’d like to close my former remarks with some observations that I hope will give you a sense of optimism.

Rita McGrath: The first thing is, “Yes, those large organizations struggle to hold to on their positions but that opens up incredible opportunities for smaller firms, for the firms that once wouldn’t have been able to effectively compete because one of the other things were seen now in this transient advantage economy is increasingly it’s access to assets not ownership of assets which people are using to create competitive business models.” So, you know, you can get your computing power from Amazon, you can get your programmers from Odesk, you can get your office base from Regus, you can startup much more cheaply at scale than you ever have been able to do before. And a bit like Mark’s comment about the greeting card, right. You can do things now as a small firm that you’d have to be a ginormous firm even 20 years ago to be able to accomplish. So, I think that’s a huge place where entrepreneurs can thrive. The other thing that I think is really hopeful is, and I don’t think we are here yet, but I think we are getting there, is an economic context in which people can take different paths to their careers. So, let’s see you need to step out for a while you wanna go climb not Everest or look after a family or do something that you are passionate about like study Art.

Rita McGrath: As long as you keep your skills upgraded, as long as you maintain the networks you build at conferences like this one, I think we’re moving towards a world where you’ll be able to step out and you’ll be able to come back in. And I think that’s gonna create a lot more flexibility in our workforce with potentially really rewarding context for how we spend our lives?

Rita McGrath: So, that’s really all I had prepared in terms of formal market and I can go on all day but I thought it might been has to get some interaction as we begin our conference. So, questions, do you wanna mike, do you need mike?

Speaker 1: I do but first of all…

[Applause]

Rita McGrath: Thank you.

[Applause]

Rita McGrath: Thank you, thank you very much.

Speaker 1: My question here…

Rita McGrath: This is where your staff gets their exercise, right.

Speaker 1: I know, really let’s…

[Applause]

Speaker 2: Thank so much Raider, at the beginning you talked about the idea of Oblique Competition, your examples where all companies who made things, do you think it equally applies to services based companies as well?

Rita McGrath: Oh, absolutely, absolutely.

Speaker 2: Yeah.

Rita McGrath: In fact services are even more vulnerable because if you think about it how many ways can you fulfill a need in a service? You know, you think about your pricing models, right. You could sell what you do by time, you could sell what you do by subscription, you could sell what you do by seeds, and you could sell what you do by output? So, as you start to multiply that kind of business models that are economically feasible, which is even more likely in a service business, are you start to get into these oblique competitors in a much bigger way?

Speaker 2: Mm-hmm.

Rita McGrath: So, absolutely.

Speaker 2: Yep. How can you scale a gig economy?

Rita McGrath: How can you scale…?

Speaker 2: A gig…If we’re transitioning basically during the series of gigs as part of our career grows in that scale, what is that mean basically depth of growth?

Rita McGrath: Well, so, I don’t think everybody is gonna be doing gigs. I think what you’ll find are there will be companies that create kind of a two track system. So, there’ll be the core participants in the organization that are gonna be the permanent employees, that are going to be the glue that holds it altogether and in fact it’s quite interesting the companies that I studied the ones I told you about the 10 out of nearly 5,000 that had managed steady growth. What you find there is very interesting if there’re stable things. So, very stable values, huge investments in training and development, huge investments in culture, in their belief systems, in training & development, and that kind of thing, at the same time huge dynamism in people’s roles, where they move? How they compete? And I think the companies will get this right increasingly what you’re gonna see is this combination of stability on the one hand dynamism on the other. And they’re able to figure out how to put them together but this is 10 out of nearly 5,000. So, I think we still have a lot to learn about how do we understand what stay stable and how do we understand where it is more gigs and more projects? Now, if you take a big step back and think about companies that operate this way as a matter of course look at the big consultant firms you know, look at Accenture, look at Infosys, look at Cognizant, look at some of those big firms they’re doing it at scale but everybody in company is essentially doing gigs you know, they get a project, they do the project, they role off that project, they get the next project. So, what you have is you have this core team that provides the glue and keep things together and a lot of flexibility in the rest of the firm. So, I think it’s a fascinating question and one that a lot of companies haven’t figured out yet.

Speaker 3: I just like to understand something, I’m right here.

Rita McGrath: Oh, hello.

Speaker 3: Evidently, I love your framework.

Rita McGrath: Okay.

Speaker 3: Evidently what you are talking about is the sustainable competitive advantage comes not through products but from the ability to learn and adapt.

Rita McGrath: Oh, yes very much so.

Speaker 3: So, the question is what happens to these dinosauric firms that are in the fortune 500? It seems that they have all the characteristics that you are talking about and they sowed the seeds for failure.

Rita McGrath: Mm-hmm.

Speaker 3: But at the same time you have this other force at work, ‘The Gig Economy’ which I think is a great term. And that basically destroys worldwide economies which are based on huge scale, large companies coordinated actions or stuff. What’s the future of the big companies?

Rita McGrath: What’s the future of big companies? Well, I think the smart ones are going to figure this out. So, my study, the 10 companies I was telling you about there, I call them the ‘Growth Outliers’ and let me say a word about how that study was done just so you get in context. So, what I did was I took every publicly traded firm on the planet. So, every exchange so not just US, all over the world with the market capitalization of billion dollars or more and I ask the simple question, “How many of them were able to grow revenue or not net income by 5% a year steadily, year over year in the five years ending in 2009?” And I found that 8% of the companies were able to do it for revenue, 4% for net income. So, flipping that around, 92% of the firms were not able to grow steadily during that period and not at well maybe I’m not being fair at the period ending in 2009 was the result of massive global trauma and you know, all that. So, I said, “Let’s take at the previous five years, numbers are little better, and serves me 11% and 7% but the vast minority of firms were able to do this things that Wallstreet says at once, right and steady predictable quarter-by-quarter growth. It’s a myth, it doesn’t really exist.” So, then I took whole 10 year period and I said, “Let see if any firm is able to grow steadily a pick net income is my metric over the whole 10 year period.” And that’s where I found the 10 firms that I mentioned. And what’s interesting about them is that many of them are quite big. So, ACS of Spain, Infosys, Cognizant, Indra Systems of Spain, HDFC Bank and these are big, big companies but they figured out this combination of stability and dynamism. So, I don’t think this is wide spread yet and one of the reasons I don’t think it’s wide spread yet is the companies are still being managed with very traditional ways of thinking about strategy. So, they have an annual budgeting process and they have a five year planning cycle, and people are rewarded for making their numbers in the quarter-by-quarter predictabilities what we want and change something we do yet episodically, right. So, things go crazy than they are right now, then we have a long period of stability and then things go crazy. I think is quest for sustainable advantage puts all the wrong reflexes. So, when you ask what the future is for big companies I think we are gonna see maybe three different outcomes. One is gonna be a company that has to go through a crisis before it makes the necessary changes. Second there are gonna be companies like these that figured it out and adjust all along so they don’t have the crisis. And the third are gonna be companies that really proactively go out and make the necessary changes that they need to make in an ongoing way. And I think we’ll start to see those things beginning to take place. I think we’re really early days yet in this recognition that the transient advantage economy is going to require very different strategy frameworks, very different ways of planning, different metrics for success you know, in a transient advantage context I could see trying four or five different projects only one of which can succeed because you don’t know when you start off and which one it’s gonna be, you’d never do that with conventional discounted cash flow type analysis, right. You do something completely different. So, I think that’s what, I think we are early days, I think if we were having this conference 10 years from now, we have a lot more example of companies who are getting this right. And I think that’s optimistic. Okay, where am I going? Over there, okay.

Speaker 4: I guess I don’t…My question is about the example of Fugi and Kodak. Are there counter examples that illustrate that perhaps doubling down or what you actually do is the right thing to do and then I guess along with that are there attributes you could look for in large industries that’d say, “Do not like, do not go against this you know, in trench to competitor.” Like counter examples to what you mentioned?

Rita McGrath: Sure, sure. Well, the most famous counter example to the Fugi case would probably be the Xerox, right. I mean their leadership team had this passionate belief in the office of the future and they seeded the baseline for what is a lot of what we work within technology today in the Palo Alto Research Center that organizations bond you know, the dozens of new companies you can add but Xerox is the company could not get out of it’s own way. So, there’s a case where I think they got themselves into deep dark trouble and then they did double done and what they do well just workflows and work processes, and that’s what ultimately dug the matter that whole. We’ll see how long that last but there’d be an example of the company that had a vision but just could not get it through the organization. And then your other question was, how do you decide that this is just not a fight worth winning or this is not a fight you’re gonna be able to win. Anytime you are up against the situation where a government has to do something, do not count on government is doing anything to free you up. [Chuckle] Anytime you are in a situation where you are tackling someone that’s part of a really entrenched system you know, where this perhaps first mover advantages or network effects where you gonna have to dislodge the whole ecosystem to get the till hold that’s usually not very good. You also wanna be very careful of situations in which there’re lots of advocacy groups or where your success requires that someone actually get off their duff and do something differently, I think those are all warning signs to me that you’re gonna have a much harder time winning in those kinds of environments. So, ideally what you want is a place where people either aren’t paying attention or it’s a problem that hasn’t been solved yet, or you got a small group of customers that aren’t really relevant to a large organization but that’s your till hold and that’s where you get going and then you can work your way into something that’s rich. So, you know, there’re things I’d look forward to say you know, you don’t wanna be burning through cash waiting for certain kinds of changes to take place. Is there another question over here?

Speaker 5: Okay.

Rita McGrath: Okay, hello.

Speaker 5: Hello, I was wondering if you think your numbers would have been different if you looked at privately owned corporations versus public corporations in terms of their ability to innovate much quicker because they don’t have the demand of reporting to the marketplace.

Rita McGrath: Yeah.

Speaker 5: Just some comments around that are better to have a private or public organization for that?

Rita McGrath: Sure. So, couple of things that I think really, really matter in thinking about what it means to be a public organization? You know, I talked about the lifecycle of a competitive advantage. So, you have the beginning part, the innovation part if you will, then you have this long period hopefully, the exploitation, and then you got the disengagement. The innovation part tends to be funded by either a cooperate venture capital arms, venture capitalist you know, R&D people seed money kind of things. The exploitation part that period of stability in between the creation of new advantages, the public markets are pretty good at that, that’s the quarter-by-quarter, that’s that analysts, I know what your key metrics are. So, if you are an airline it’s cost per passenger seat mile flown, if you are a retail it’s how much did you get in your square foot, and we are very careful about understanding all those metrics. Now, once you have a business that in, that’s where the advantages going away, it is murder to be a publicly traded firm. Look at Michael Dough, I mean he’s desperately trying to take his firm out of those spotlights so that he can make the tough changes he needs to make to get that baby back on its feet. One of my clients, it’s a company called, ‘Alliance Boots’ and those if you from UK will know Boots. Well, they got merged with Alliance UniChem about four years ago, five years ago and the billionaire who runs this enterprise kind of take a look what was going on he said, “I can’t do what I need to do, it’s a public company.” So, he partnered with KKR took them private and they are busy now doing the restructuring to get them back up to help again. So, the first observation I’d make is anytime you got a do really big changes or where you got to have a different business model and you have to retrain all your analysts. It’s murdered being a public company. It really is it’s very hard to do. So, I think private companies win their run well, I have the luxury of longer time horizons, they have the luxury of more flexibility, they can choose whether this year is not gonna be such a profitable year because we are putting the money into something that’s new. They can manage those things with much less public attention and glare than a public firm can. So, I think when they run well they have the potential to be run for the long term in a more effective way. Now, a lot of private companies are not run very well. [Chuckle] Those of you who worked in some little know what I mean, right? Every decision is you know, just to call ‘Mr. Smith’, Mr. Smith wants in this way and that’s how it’s gonna go. So, I’m not saying being private is like the ultimate goal for large organizations, I do think it gives you some attractive alternatives to the way public company sort of force their leadership to behave. Where we are going? Over here, is someone there?

Speaker 6: Hi, my question is, if you are in a company where you think that you are reaching that end.

Rita McGrath: Okay.

Speaker 6: What are the warning signs, if you are too close to the force to see the trees what are you looking for?

Rita McGrath: There’s actually a couple of diagnosis in the book which I know you got. So, you can look at that afterwards but a couple of very distinct early warnings, okay. I’m putting more money in or I’m putting the same amount and I’m not getting back. Sales are sluggish, slow, you know, not dropping off the feet, the thing you wanna watch out for is and it hasn’t really turned around for 18 months but success is just around the corner you know, we can talk our own people aren’t buying our product. Customers are saying, “You know, something that simpler or cheaper, or not quite as good quality but you know, it’s good enough. And therefore, I’m not gonna pay as much for it.” And then the obvious things you know, pressure on your margins, pressure on your penetration, competitors starting to take away share. And the more of those you see the more urgent the notion to really take a good hard look at it. One of the things that I think is hard when you really close to it. It’s really hard to sort of…You know, because I mean it’s a human thing too, right. I mean if this is the project you really believe at the one point and you said to your friends, “You are good coworkers, your colleagues, come with me and change the world.” You know, and now you gotta go back to them and say, “Well, you know, that was a fun try but the world doesn’t wanna be change. It’s hard at the human level.” So, I think it’s really helpful sometimes to have a third party come in and have a look at it. So, that’s where you could use your peers here in this network to help you with it. And have a look at it and give me your honest opinion what you think? The other thing that I think is really difficult is you know, you guys are all really busy you know, there’s nobody in this room who couldn’t usefully used 24 hours everyday of every week, of every year, right. So, when you are that busy what’s your advantage point? When do you take the step back and say, “I really need to do something different about my business.” So, let me share with you a short story about a guy who I think sort of exemplifies what we need to be thinking about as leaders? The guy is Alan Mulally, who’s the CEO of Ford, just a big company, he had the __[37:45], Ford begged him to come and take the rains at Ford in 2006 and that year they were on track to loose six billion dollars with AB, that’s a lot of money. That’d pay for a lot of tax, six billion dollars. So, Ford comes in, parks his in the executive parking garage, looks around and beholds no Fords in the executive parking garage at the Ford Motor Company. This is not a good sign. [Laughter] Your own people are not buying your product. Now, Mulally is a famously detailed oriented manager and he likes to take all his people and he gives them metrics so they have to met and their all color. So, there’s green you know, which is good, there’s yellow which is, “Maybe we need to pay some attention here.” And there’s red, which is, “My God! This is a huge problem.” So, he comes in day one on the job, his management team is all there, they got the reports in front of them and it’s all green and he says to his guys, “Guys, how can we be on track to loose six billion dollars and everything is green, how is that possible?” [Laughter] And this goes on for another couple of meetings and he used a phrase which I thought was just so wonderful he says, “You can’t manage a secret. You can’t manage a secret. If we can find it, if we can put our names on it, we can fix it. But you can’t manage a secret if you are holding back we can’t get that done.” So, meetings go by and finally Mike feels and I think his name, the guys actually are apparent to Mulally now. He lays down his…”Alright, alright I’m red on the launch of some SUV.” And the whole room goes totally wild. They all kind of look at him and going, “So, Mike it’s really great knowing you know, because the culture in that company up to that point was you did reveal your problems, you didn’t let your cards on the table.” And kind of back to this notion of how do you know when something is going wrong, if you don’t even have the data what’d allow you to contemplate the idea, you are not gonna be able to make the decisions because you can’t manage your secret. So, Mulally gets up applause, applause the whole room kind of relaxes a little and then what they started to do was work on the problem. So, one of the colleagues as you know, I know you are gonna need a couple of this kind of engineer because I had a problem like that three years ago and another guy says, “Well, I have got some spare capacity here I could help you with.” They started to solve the problems. And I interviewed him and he’s telling about this and he comes back and he says, “Well, the next meeting it was real breakthrough, it was great, the next meeting was terrifying, it was like a bloody rainbow in there.” [Laughter] And there are just all kinds of problems but they fixed it. They were able to fix it. And by 2008, when the rather unfortunate spectacle of car companies flying to Washington to look for bailers was reveal to the world, Ford went along to save their industry, to save their supply chain. They didn’t need the bail they had successfully turned the ship around in that two years. So, I think that’s an exemplary story of how leaders can make such a difference, right. If you are not even allowed to discuss what the problems really are they were likely to stay hidden somewhere in the far crevices of your organization until they become so big and ugly that you have to pay attention to them. So, I think having the conversation, having an ability to make those kinds of judgments is really important to get that data. Here okay.

Speaker 7: Hi, I appreciate the talk. I was wondering if you could comment for a minute about data and I don’t exactly mean big data but I’m thinking of companies like Facebook with the social graph, Google with their webpage index. And you know, these companies seemed to hit an escape philosophy where the idea of competing directly with them or even disrupting them on those dimensions as absurd. So, now company startups go from saying, “We’re gonna be the next Facebook to say, we’re gonna be acquired by Facebook.”

Rita McGrath: [Chuckle]

Speaker 7: And when language changes like that you know, Facebook knows they want and they can just gobble up you know, acquire all the companies and would even think of doing such things. So, would you say that those data advantages were also transient?

Rita McGrath: Well, what happened to Bibble, what happened to Myspace, what happened to Airwell? I’m not gonna say that I think you need to distinguish between data effect and network effects, and network effects are very hard to break though, I mean once you got that ecosystem emerging, it’s very hard to unseat one member of it. But you know, if you go back beyond data, right. If you look at television networks, look at cable networks. I mean those have a lot of embedded network effects that tie them to each other and yet today they were loosing ground to all kinds of other things. So, I think if were advising the people at Facebook I wouldn’t be freaked out I think I like the hand and I’ll be dealt, right. But I also wouldn’t you know, be too confident and the things can change and they often change in ways that are a little bit unexpected even I were in Facebook, I’d be very worried about the fact that you know, people of my kids age like the grannies hangout on Facebook you know, I’m not so sure I wanna hangout on Facebook. So, if you could figure out a way to take that data and that network and sort of reporting somewhere else you know, that’d be an interesting challenge to the growth of Facebook and we’ll see you know, I’d say probably a good position for the time being but you always wanna be watching out for what the next iterations gonna be.

Speaker 8: Yeah, at the beginning of the talk you talked about Oblique Competition and you mentioned iPhone, telecom sales being going up at the same time restaurants, cars, etcetera being going down.

Rita McGrath: Mm-hmm.

Speaker 8: How can you come on that, can you give some examples of what you do if you are restaurant or a car company or one of those things?

Rita McGrath: Okay. So, when you are thinking about arenas, and this is actually some work I’m doing just at the moment. You need to be thinking about what’s the part of addressable resource that I wanna contest you know, what is that? And who else is trying to contest that resource? So, let me tell me historical story and then I’ll try to bring it to the present. So, back in the day when Roberto Goizueta, who was the CEO of Coca-Cola, he had a management meeting and all of his guys were winding you know, basically but the market for flavored sugar water is flat then we penetrated every place that we can penetrate and Pepsi and you know, wine, wine and he finally stands up and he says, “Guys, this is ridiculous. The average human being requires 64 fluid ounces of some kind of liquid to stay alive everyday. What I want you doing are increasing the proportion of those ounces that’s sold by the Coca-Cola Company and go out and do it.” [Laughter] So, they went from framing their arena as the soda arena do not saying wait a minute it’s a much bigger place that we are contesting. So, there’s a number of different ways you can do this, you can reframe what it is you are doing. You can figure out, are you competing to solve some kind of needs base, right? So, here’s another example I have a friend that owns a chain of candy stores and he said the kids used to get their allowance and they come in on Friday or whatever and they buy candy. He says, “Today, they are their allowances and putting it into cell phone minutes.” So, he’s gonna have to come up something that needs that indeed for connection or reward or treat or whatever the candies to represent but I think this is probably good for obesity. But you know, he’s gonna have to figure that out, right. So, I think when you are thinking about arenas you wanna be thinking about how do you reframe the place you are competing in an interesting way. If you would like to, I have got a presentation on this which I don’t have on this particular stick but if you wanna email me I’ll send it to you and it’s just a really different way of thinking about what are my metrics, what am I competing for? And you can often time make great business by reframe. Here’s another example, you all know Zippo Liters, Zippo Liters you know, they’re very durable, they’re refillable, they come in all kinds of models and sizes, and if you thought what’s the competition for a Zippo Liter, all the obvious answers, “Bick Matches, Anti-Smoking Campaigns.” I had an undergraduate one who said, “Magnifying glass.” I said, “Excuse me.” He said, “Yeah, yeah, yeah, it’ll make a little pile of twigs and sticks.” [Laughter] Great, great for creativity, right.

Speaker 9: Who’s the engineer?

Rita McGrath: __[46:05] he was an engineer. Imagine to yourself though how differently you would behave if you said, “No, no, no the major competitor for Zippo Liter is a man’s wallet.” Think about that, purchaser you know, you actually go and look at the purchase act in progress and you have got someone standing there man’s wallet in one hand, Zippo Liter in the other, one of them is going to become a gift. And the Zippo people for years defined what they were doing not as competing the liter business but competing in the gift business. You know, if you think about that’s why they have so many different kinds of Zippos, you can collect them you know, just because you have one, it doesn’t mean you don’t need another because it’s a collectible, it’s a gift. If you are traveling in the airport, pay attention now, when you see where the Zippos are positioned in the airport shops, you don’t see them back with the smoking stuff and the tobacco, no, no, no they are upfront, they are right next to the belts, the ties you know, whatever. And if you go into a department store the same thing they are competing to be a gift. And if you figure that out before your competition does it can give you a powerful set of advantages because you are competing for a different kind of space, you are not competing in liters you are competing to be a gift.

Speaker 10: Hi. So, I’m wondering if you done any work looking at what this means for the public sector and we sell at the public sector and it’s just few moments ago it sounded like you said employed it all cost but we can’t, right?

Rita McGrath: Mm-hmm.

Speaker 10: There’s clearly a need for a huge transition to take place. Are you doing any research in that area? Do you have any recommendation?

Rita McGrath: Well, here’s the problem with a public sector and other things is that they really don’t have competition you know, and in many cases they are the monopoly. So, the pressure on them to do this really hard work of changing and so forth really comes down to almost, “Do you have independently motivated people within the organization who prepared to do that work and I used to do this, I mean I ran information systems for the City of New York for about eight years and we were doing the very first automation what had been a paper procurement system.” And it was really hard because you don’t have you know, in a company eventually if you don’t please your customers you go out of business and government doesn’t have that pressure. So, I think you need to use different levers and I think the more transparent the metrics are the better I think if you can create these pockets of people who really believe in the change that you are trying to make that can really help. But I’m very concerned that I don’t think government, I don’t think our institutions have caught up with this yet. I think a lot of our institutions are still premised on the assumption that jobs, careers, and things are relatively enduring and therefore, the way that they are regulated, they way that they are taxed, the way that they are managed are premised on this idea that things are gonna be there for a long time. And I think you need to build different institutions if you said, “Well, competitive advantages are coming and going and people’s careers are gonna be different.” I think you would really need to build different institutions. I didn’t need to employ by the way that don’t work for government. What I meant was if the government has to change a regulation for your business to become successful that’s highly risky. And I wouldn’t necessarily count on that and some of you will be doing things like healthcare, pensions, retirements, financial services, those sectors are all up for grabs and there may will be great opportunities there. But I wouldn’t make a bet on a government ruling your way, I guess what I would say, does that help? Because it’s tough, I mean it’s really, really hard.

Speaker 10: That’s right. Yeah, thanks.

Rita McGrath: I think we have time for couple of more.

Moderator: Yeah, let’s do one more.

Rita McGrath: One more, okay.

Speaker 11: Last question, no pressure.

Rita McGrath: Okay. [Laughter]

Speaker 11: So, I really like to point about innovation proficiency and how you can’t expect an engineer to switch over to QA.

Rita McGrath: Mm-hmm.

Speaker 11: So, I’m curious do you have some practical examples of how you can bring in innovation and make it sustainable?

Rita McGrath: Sure, sure. That’s just kind of where I live my life, yeah there’re some great examples. One of my favorite is a company called, ‘Brambles’ have you ever heard of Brambles? They are an Australian based company and they make very exciting things called, ‘Palettes’ literally wooden palettes that you use to ship stuff around. And you talk about an undifferentiated product and it’s about an undifferentiated as you can get. But what Brambles did there’s a new CEO who actually came over from Ford so this kind of a connection there but he said, “I wanna build innovation proficiency.” So, he hired a Director of Innovation, he created a governance process with funding. They created a screening and wedding process which involved getting the ideas, training people and how to incubate them? Teaching them how to do things like discovery driven planning and consumption chain analysis, and they have created now a rigorous process for how ideas go from being just something that people think of to now they go before the innovation board, it gets the younger people a lot of visibility and they have been really smart about counteracting some of the barriers to growth. So, in a typical large organization one of the reasons my managers don’t want to accept something new is that it may not pay off in the near term and so that looks bad on their numbers. So, what the CEO of Brambles basically says, “You know, if it goes wrong on me, on me corporate takes the hit, your numbers are untouched. If it goes right, you get all the credit.” So, not align guys like bring it on, bring it on, bring more there’s no downside, no downside. So, all the typical barriers kind of get removed. Another great example of a company that I think has done a magnificent job and this is John Deer, they literally have all of their executives test with specific roles and activities relevant to innovation and then they take it very seriously, it’s part of their performance evaluation, it’s not something that gets, that’s dealt with this, “Oh, yeah well, this is my real job and that’s innovation, it’s considered part of their jobs.” So, if the other companies that I think are worth looking at Cognizant has more and more new world who has an actual software system that they used to drive and manage innovation, and they find that it supports the innovation efforts that they make with their clients. So, Cognizant need to look at FactSet in Connecticut but another one really good to look at. So, I think there’re examples of companies that have gotten a lot of this right. And there’s a lot we can learn from them. Alright, I think that brings me to just about the end of my time. I wanna thank you all so much. I’ll be here this morning, thank you Mark.

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Prof. Rita McGrath

Rita McGrath is a longtime professor at Columbia Business School and one of the world’s top experts on innovation and growth. She is also one of the most regularly published authors in the Harvard Business Review.

Her work and ideas help CEOs and senior executives chart a pathway to success in today’s rapidly changing and volatile environments. McGrath is highly valued for her rare ability to connect research to business problems and in 2016 received the “Theory to Practice” award at the Vienna Strategy Forum.

Recognized as one of the top 10 management thinkers by global management award Thinkers50 in 2015 and 2013, McGrath also received the award for outstanding achievement in the Strategy category. McGrath has also been inducted into the Strategic Management Society “Fellows” in recognition of her impact on the field. This will be the second time she takes part in Business of Software Conference USA – she discussed how entrepreneurial business owners benefit from an understanding of the new strategy playbook back in 2013.

More From Rita.