Rita Gunther McGrath, Part 1: An Interview by Bob Morris

Posted on: February 26th, 2014 by bobmorris

McGrath 3Rita Gunther McGrath, a Professor at Columbia Business School, is regarded as one of the world’s top experts on strategy and innovation with particular emphasis on developing sound strategy in uncertain and volatile environments. Her ideas are widely used by leading organizations throughout the world, who describe her thinking as sometimes provocative, but unfailingly stimulating. She fosters a fresh approach to strategy amongst those with whom she works. Thinkers50 presented Rita with the #1 award for Strategy, the Distinguished Achievement Award, in 2013. She is also in their top ten global list of management thinkers overall. She has also been inducted into the Strategic Management Society “Fellows” in recognition of her impact on the field. She consistently appears in lists of the top professors to follow on Twitter. McGrath is the author of four books; the most recent being the best-selling The End of Competitive Advantage : How to Keep Your Strategy Moving as Fast as Your Business(Harvard Business Review Press), rated the #1 book of the year by Strategy+Business.

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Morris: Before discussing a few of your books, here are several general questions. First, to what extent (if any) have your students’ aspirations, issues, and concerns changed in recent years? What do you make of that?

McGrath: In our MBA programs, we’ve seen a big shift away from the heavy emphasis on consulting and finance toward entrepreneurship, social enterprise and management. In our Executive Programs, we’re seeing more concern about new technologies, short-lived advantages and what you might think of as “black swan” events. Digital marketing has been quite a growth area, as has our programs on innovation.

Morris: There has been significant criticism of business schools in recent years, even of – especially of — the most prestigious ones such as Columbia, Harvard, Kellogg, Michigan, and Wharton. In your opinion, what is the single area in which there is the greatest need for improvement in business school education?

McGrath: We need new models for developing and coaching students – so much about the way we work comes from the past. Just as an example, take the structure of academic departments – we’re set up by functions, such as finance, marketing, operations, management, and so on. Companies have learned years ago that operating in silos like that can create significant blind spots. I think we need to re-think what helps learners best come out of our institutions with skills that their employers will value, as well as with better analytical toolkits.

Morris: Given your response to the previous question, here’s a hypothetical question. Assume that you have total control and unlimited resources. How specifically would you respond to that need?

McGrath: It would depend on what kind of school I was running. If I were at a top-brand school like Columbia, I wouldn’t be too concerned that my franchise was going away, but I would probably redesign the MBA experience with the desired outcomes in mind. So we probably would do a lot more with entrepreneurship, design, technology and other elements that future technologists would need, and I’d try to design a really coherent student experience.

If I were at a mid-tier or lower-tier school, the question requires a complete rethink. I have a white paper on this if you are interested.

Morris: What was the original mission of Columbia’s Executive Education program and to what extent (if any) has it since changed? Please explain.

McGrath: I think the original idea was to provide more life-long learning opportunities for business people with more seasoning than our MBA-aged students. That is still in many ways our goal. We once had a tagline “learning that powers performance” and I think we still want to strive to do that. The main things that have changed are the topics and issues executives come to us with. Interestingly, we’re doing a review of our strategy for executive education, so there may be some new twists on the mission which come out of that.

Morris: To what extent (if any) have you changed your approach to classroom instruction?

McGrath: Now that has really changed for me. When I first started teaching in the MBA program, we used a ton of cases, printed our overheads on acetates and projected them with overhead projectors and did a fair amount of lecturing. Today, I use practically no canned Harvard-style cases as they just go out of date too soon. We use different technology in the classroom obviously, and the pedagogy is more discussion and debate oriented. I probably lecture less and discuss more.

Morris: Now please shift your attention to The Entrepreneurial Mindset. To what specifically does its title refer?

McGrath: How to think about innovation in corporations with insights informed by the way habitual entrepreneurs think.

Morris: The mindset you describe seems to be one that any executive should develop, whatever the size and nature or her or his organization, be it a start-up or a Fortune 50 company. Is that a fair assessment?

McGrath: It certainly can’t hurt – finding new opportunities, thinking in a fresh way about your competition, deeply understanding your customers, and planning with the right disciplines for the uncertainty you face are all pretty practical and important topics.

Morris: For those who have not as yet read the book, in it you recommend a process by which to identify, evaluate, and prioritize opportunities, then pursue them with appropriate strategies. Please explain this process.

McGrath: We walk our readers through a series of “lenses” they can use to identify potential opportunities to put in an inventory of opportunities. Then we talk about screening for the best ones, given the constraints you have. We describe how to test assumptions at minimal cost, and how to do ‘discovery driven’ planning in which the goal is to plan while recognizing that you don’t have enough knowledge to do a conventional plan. We also spend a little time on how to enter the market and assess competition. The Entrepreneurial Mindset was cited by famous entrepreneur Steve Blank as one of the foundational ideas behind the lean startup movement popularized by Eric Ries.

Morris: In your opinion, are the challenges of entrepreneurship more difficult, less difficult, or about the same today as they were when you wrote The Entrepreneurial Mindset more than a decade ago? How so?

McGrath: Less difficult. Today, you have access to unbelievable assets and talent that you can use to assemble the operations of your business with very low investment. You can get computing power from Amazon, office space from Regus, staff from Staff.com, programmers from oDesk, and the list goes on. It’s also true that companies today can operate in a very lean way which also reduces the investment required to innovate. I mean, Whatsapp, with only 55 employees was just valued by Facebook at $19 Billion! That’s with a B – with only 55 people, which is quite amazing.

Morris: Now please focus on MarketBusters, co-authored with Ian MacMillan. What are the dominant characteristics of a “MarketBuster”?

McGrath: It’s a move that created substantially more growth than comparison organizations were able to.

Morris: If you were writing the book today, to what extent (if any) would you add to, delete, or revise any of the “40 strategic moves that drive exceptional business growth”?

McGrath: I would probably go into more depth on the last few moves associated with customer tectonics. Our thinking on how to use this lens has advanced a lot since the book was published. For instance, we advise more establishing of a “time zero” future event that would influence opportunities or challenges today .

Morris: What are the five “lenses” through which you encourage your reader to view both perils and opportunities in the given marketplace?

McGrath: The first is changing the customer experience, and the tool that goes with that is called the customer consumption chain. The idea is that customers are always enmeshed in sets of experiences, but we are often blind to many of them. The second is to change the attributes in your products or services, and the tool we use to do that is called an attribute map. The idea is that customers always make tradeoffs and that sometimes you can find an opportunity by trading off things they want and will pay for against things they’d prefer to do without. The third lens is to change your business model – either your unit of business (what you sell) or your key metrics (how you deliver the business).

Sometimes, you can create advantages by better designing your business model around what’s good for your customer. The fourth lens we call “industry shifts” and it has to do with three strategies to follow when a change is going to affect everybody in your industry. The first, and most basic, is to anticipate. The second, a little more subtly, is to benefit from a change that will affect your primary customers. And the third is to provoke a disruption yourselves. The last lens is what we call benefitting from tectonic shifts – these are slow changes that when combined can create a dramatic change in either capabilities that are valued or needs that need to be met.

Morris: In Chapter 4, you explain how to redefine profit drivers. For those who have not as yet read the book, what does that process involve?

McGrath: Basically looking for ways of doing things differently by changing your unit of business, changing your key metrics, radically enhancing productivity, improving cash flow velocity, changing the way assets are used, and improving your customer’s key metrics.

Morris: What business lessons can be learned from the case study of Royal Insurance Italy in Chapter 8?

McGrath: It’s always great to capitalize on customer dissatisfaction with incumbent players, particularly if you can use technology to give you a cost or service advantage or ideally, both. The company used 6 of the marketbusting moves to design a strategy to take advantage of regulatory changes being made by the Italian government: Radically resegmenting the customer base; Radically changing the service delivered; developing new pricing models; changing distribution; using staffing and technology to increase awareness and using new platforms to completely change the key metrics then prevalent in the insurance business in Italy.

Morris: As markets change, should strategies to “bust” them also change?

McGrath: Sure – what was once a revolution pretty soon becomes the everyday, and you will need to introduce something new to keep your offers fresh. Some strategies that worked at one point will no longer be feasible or even legal.

Morris: Now please shift your attention to Discovery-Driven Growth, also co-authored with MacMillan. Once again as in your previous books, you recommend a specific process, in this instance one by which to “reduce risk and seize opportunity.” Precisely what does this process consist of?

McGrath: It’s a book-length explanation of discovery driven principles of planning and managing, which basically means thinking ahead only to the limit of your knowledge, stopping and re-planning, all the while keeping costs down and risk managed.

Morris: Having been retained by countless companies to help them simplify how they do what they do (e.g. reduce cycle time, improve first-pass yield), I really do understand how important “discovery” is. Here’s my question: How to help people to develop what I guess could be characterized as a “discovery-driven mindset”? That is, one that is not risk-adverse, one that embraces challenges and sees each “failure” as a precious learning opportunity?

McGrath: It’s a huge challenge for some firms. People have been beaten up so much with a “make your numbers” and “meet your targets” mentality that they don’t understand that these are the wrong objectives in a highly uncertain world. The key thing that often has a light bulb go off in people’s heads is that planning under uncertainty is not undisciplined, but it’s a different discipline than you use in businesses with relatively little uncertainty to them. I have an HBR article called ‘Failing by Design’ which introduces the concept of intelligent failure and how to make the most of it.

Morris: What are the major differences between conventional growth and discovery-driven growth?

McGrath: Conventional growth is more incremental. Line extensions, taking what you do to new geographies, adding new features, releasing the next update, and following up with a sequel to a previous success might all be examples. Discovery driven growth is intended for more uncertain endeavors. You’d use it when you are looking at new business models, strategic options, really new technologies or use cases and markets that you are not already serving. Neither one is better than another, by the way, but what does tend to happen in many industries is that just focusing on conventional growth eventually leads to your strategy becoming stale and other firms eroding your markets.

Morris: What is a “growth framework” and how best to formulate one?

McGrath: It’s a specification of where the executive team endorses looking for growth opportunities and where one should steer clear. Ideally, there is some quantification that goes with it, so that people have a sense of the desired scope and ambition level of the growth process.

Morris: What must be in proper alignment during discovery-driven growth initiatives? How best to sustain that alignment?

McGrath: Well, the senior team needs to be in agreement about the goals for the growth strategy. Ideally, this sets clear parameters for everyone to understand. Then you want to make it as simple as possible for people to understand the strategy that will be used to approach those goals. There should be a specification of the capabilities a firm needs to build up, and potentially clarity about those it wishes to disengage from. It’s important that this alignment extend to business leaders as well, as this is often where growth projects get bogged down because they are by definition uncertain and business leaders are focused on the here and now.

Morris: How to identify the most relevant key metrics?

McGrath: Key metrics usually reflect a constraint in the industry you are competing in. So for airlines, the reality of flying is that once the plane has taken off, you can’t add anyone to it! So a lot of key metrics in that industry reflect this – things like “cost per passenger seat mile flown”. In retail, it’s the use of floor space, so people look at same store sales over time, or compared to a previous period. In terms of where to look for them: here are some ideas:

o Industry benchmarks. Such metrics are sometimes relatively easy to obtain for mature industries, especially in the United States.
o Analyses of own company data to see which measures drive performance most.
o Analyst reports.
o Commercial bankers who specialize in loans to an industry.
o Industry associations and trade publications.
o Databases such as Value Line, Compustat and other online data services.
o Industry specific web sites.
o Reports from government agencies such as the OECD

Morris: What are “reversal financials”? Why are they important?

McGrath: Reverse financials follow the thought process of the habitual entrepreneur. Instead of saying “Wow! If all we get is 5% of a really big market, we’ll be making tons of money!” a street smart entrepreneur will start off with “what would count as success?” Then they will work backward into the business plan to see what would have to be true to make that success happen. It’s a way of making sure an uncertain plan is grounded and practical.

Morris: What is a “low-cost, low-risk checkpoint”? How to devise one?

McGrath: It’s a learning event that gives you a lot of information with ideally very little spending. You devise one by prototyping, testing the easy parts of a business plan, putting mock-ups in customer’s hands or otherwise trying to get at essential information without spending a lot to do it.

Morris: What are typical checkpoint events and what can they reveal?

McGrath: Things like results of market studies, feedback from prototyping sessions, technical reviews – they are any event at which a bunch of assumptions can be tested. One of the things you’ll notice with initiatives that have not been planned in a discovery driven way is that a huge amount of investment goes into projects up-front only to often lead to disappointment later on. This is going on right now with MOOC’s in the educational space. Released with much fanfare and great expense, many of them are now being declared failures.

For instance, at San Jose State a MOOC was launched with enormous fanfare, only to be declared a flop when students performed poorly and many never completed the course. I would argue that rather than going to all the expense of designing a complete MOOC with all the investment that implies, a more gradual approach – perhaps using the technology to supplement other classes or offering a limited on-line course to select groups of pilot students – could have taught the developers of the course a lot before the big money was spent.

Morris: How best to disengage from initiatives that either fail or fall far short of expectations? What process do you recommend?

McGrath: Once you’ve decided? Then it’s a question of doing three things. First, making as many disappointed stakeholders as whole as possible – ideally you’d like to give them some benefits in addition to the disappointment. Secondly, do a thorough review of what was developed in the initiative and see where you might be able to recoup some value – perhaps you can transfer capabilities internally or spin off the technology. Finally, do a post-mortem or after-action review so that you understand what happened and can use this knowledge to drive the initiative in a more productive way going forward. It’s important to remember that initiatives that were very successful often had their roots in an earlier effort that didn’t work out. Amazon’s third-party sales strategy (which now represents something like 35% of the company’s revenue) followed on two strategies that didn’t work – Amazon auctions and Amazon Zshops.

Morris: What are the most common barriers to discovery-driven growth initiatives? How best to avoid or overcome them?

McGrath: The list is a long one. Innovation is no one’s job, it falls between the cracks, we don’t want to risk cannibalizing the existing business, it’s too risky, nobody likes failure, we don’t have the right kind of resources, it becomes a political football, and so on.

Morris: Please provide some guidelines for putting in place structures and practices to sustain as discovery-driven mindset.

McGrath: I’ve written about this in my new book The End of Competitive Advantage. You really need to build an innovation proficiency which has the following elements: A governance and funding structure; clear organizational structures; the right experimental and learning focus, funding released over time; planning to learn and then accelerating progress. One of the dilemmas is that it requires not just one capability but three – you have to find ideas, they have to be incubated and then they have to be ramped up to join in with the core business. Companies often find that they don’t have or can’t keep people with the skills to do these things in the organization.

Morris: What question had you hoped to be asked during this interview – but weren’t – and what is your response to it?

McGrath: Let’s talk about the new strategy playbook when we look at the new book.

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In Part 2, we will indeed discuss The End of Competitive Advantage.

Rita cordially invites you to check out the resources at these websites:

Here’s a link to her website.

Here’s a link to her HBR articles

Here’s a link to her Columbia University faculty page

Here’s a link to a recent video.

Here’s a link to the MarketBusting website.

Here’s a link to the Discovery-Driven Growth website.

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