However, despite the immense opportunities these inflection points present, they often remain largely unperceived by many organizations until it's too late. This lack of foresight, otherwise termed as 'strategic blindsides,' is an issue Columbia Business School's esteemed Professor Rita McGrath and our founder and renowned business model innovator Alexander Osterwalder sought to address in this insightful webinar discussion. The conversation touched on eight practices that can help prevent businesses from being blindsided by market disruptions and explored real-world case studies, ranging from Airbnb's innovative business model to General Motors' management practices.
Understanding strategic inflection points
Rita McGrath started by explaining the concept of a strategic inflection point – a significant shift in the competitive landscape that requires an organization to adapt its strategy. This was a topic that Andy Grove was writing about back in the 90s — in his book “Only the paranoid survive” — thinking about Intel and the challenges it faced in its business model.
"My last book," McGrath began, "was called 'The End of Competitive Advantage' and the thesis of that book was that this idea that we've had in strategy for a long time of sustainable competitive advantage can actually be something of a trap." She notes that holding too tightly to this notion of sustainable competitive advantage can blind leaders to the real challenges their businesses face and prevent them from thinking proactively about their futures.
"In many cases, you're so obsessed with defending an existing advantage, then you're not really out there looking for new ones," McGrath explains. Instead of obsessing over defense, businesses need to be flexible and adapt. Innovation proficiency becomes a core pillar in this world where competitive advantages shift rapidly.
But how does a company know when to adapt? The answer lies in McGrath's exploration of strategic inflection points, a topic she admits hasn't been extensively covered since Grove's writings. McGrath elucidates, "These things don't happen overnight. If you look at most things that we feel as a dramatic strategic inflection point, either in business or in our lives, if you really go back and look, you can see that they've been brewing for quite some time." The key, then, is to detect these brewing changes early and respond proactively.
A strategic inflection point, according to Grove's definition, "represents a change in the assumptions that you make about your business." McGrath deepens this definition, "Every business has a set of constraints that it operates under, which are born basically of what was available to you at the time the business was founded... over time those come to represent reality in your mind."
An inflection point, McGrath continued, "is something that fundamentally shifts the constraints that your business operates under." This shift can be either positive, opening up new opportunities, or negative, potentially leading to a decline in business if not properly acknowledged and addressed.
She elaborated on how such a change often represents a 10x impact on some aspect of the business, which demands a strategic response. Here, she cited the example of the media industry's shift to digital platforms, which fundamentally changed how content was consumed and monetized.
Snow melts from the edges — How Skype disrupted the telecommunications industry and how the incumbents could have seen it coming
In the first chapter of her book, Rita McGrath introduces the intriguing concept of "Snow melts from the edges." It’s a phrase she uses to describe how strategic inflection points and early warnings don't present themselves neatly at the heart of the organization, but rather on the peripheries. They're often subtle shifts, like strange new technologies, odd comments about your company, or unexplained shifts in the market.
McGrath muses, "A lot of times executives miss them because they're so involved in the day-to-day." This sense of being 'too busy' to pay attention to the edges can lead to companies unknowingly driving their businesses off a cliff. Despite acknowledging the accelerating pace of change, many companies, and in particular, their leadership, often seem paralyzed or slow to act.
"It’s a minority of companies that are really prepared to face these challenges boldly," McGrath says. She points out a worrying trend where leadership often operates on the 'this won’t impact me within my tenure' mentality. The majority of the leaders seem to be prioritizing their short-term horizons over making investments that would create a solid future.
To illustrate how companies might better anticipate and react to these inflection points, McGrath uses the example of Skype and how it disrupted the telecommunications industry. Traditional telecom operators failed to believe that 'free' could be a viable business model because they were viewing Skype through the lens of their own business model.
In describing Skype's transformative approach, she noted, "It didn’t have any of the trappings of a traditional telecommunications company. It didn’t own any satellites. It didn’t own any telecoms equipment at all. And yet within six years, it was carrying 40% of the cross-border long-distance telephone calls in the world."
McGrath notes, "the starting point for all of this is you really have to go to the customer and ask yourself, what's the job that customer is trying to get done?" The demand for free, or at least affordable long-distance connectivity, was huge. Yet, telecom operators, operating under monopoly conditions, were holding their customers hostage to their exorbitant rates.
The starting point for all of this is you really have to go to the customer and ask yourself, what's the job that customer is trying to get done?”
McGrath argues that if these telecom operators had prioritized customer needs, they could have adapted their offerings to align better with customer demand, thereby making the field less attractive for new players like Skype. They could have developed packages that leveraged their technology, creating a suite of services that Skype couldn't easily replicate.
She concludes, "my big encouragement would be, stop looking at your business model... as something that you're gonna maximize to the distrust and dislike of your customers, and start to think of yourself as being allied with the interests of your customers." Unfortunately, many of the decision-makers within these telecom companies, ingrained in a history of monopoly, failed to consider this customer-centric viewpoint.
The story of Skype's disruption serves as a stark reminder of the dangers of being 'too busy' to pay attention to the signs on the edges. It underscores the importance of not just focusing on protecting the existing business model, but also prioritizing customer needs and aligning with their interests to create a robust, adaptable future..
CEOs and the culture of relentless curiosity
Our conversation continued with Rita McGrath emphasizing the role of culture in innovation. Culture, as it's often said, starts at the top, and the same holds true for fostering a culture of relentless curiosity within a corporation. McGrath stated that CEOs play an instrumental role in shaping an environment that values continuous learning, exploration, and adaptation. This becomes critical, particularly in the face of rapid industry shifts and emergence of inflection points.
McGrath puts it succinctly, "The better CEOs... are institutionalizing practices that make sure they don't get out of touch and make sure they don't go into defensiveness. It becomes a culture of curiosity, a culture of "let's really understand what's going on out there." This emphasis on cultivating an organization-wide culture of curiosity implies more than mere lip service to innovation. It requires leaders who model this approach, backed by a robust infrastructure that promotes learning, dialogue, and iterative improvement.
Redefining the role of innovation is crucial in this context. McGrath made a pertinent observation that while everyone in the organization should be encouraged to innovate, it doesn't necessarily mean that innovation is everyone's full-time job. It can manifest in many forms, such as a procurement officer redesigning a customer form to simplify business processes - this too is innovation. However, it is equally essential that the organization doesn't impose the burden of implementation on those who first spot these opportunities. These individuals might not be in a position to act on these insights due to various constraints, but what they can do is bring these observations into wider conversation within the organization.
Reflecting on how organizations can strike a balance between execution and innovation, McGrath mentioned the concept of an "ambidextrous organization", a term coined by Michael Tushman and Charles O'Reilly. This concept implies that organizations should strive to be world-class at both execution and innovation, an ideal that's easier said than achieved.
To illustrate this principle in action, McGrath cited the example of W.L. Gore. The company, known for its flat decision-making structure, actively acknowledges that established practices suitable for existing business may not necessarily work for new ventures. "They are very empowering of their leadership in terms of being able to bring in new ideas and do new things," McGrath noted. This spirit of empowerment and flexibility in approach makes W.L. Gore a unique case of an ambidextrous organization that fosters a culture of relentless curiosity.
In addition to W.L. Gore, McGrath also pointed to the success story of Spanx, a company that has consistently demonstrated its innovative mindset by understanding and addressing the evolving needs of women.
Indeed, CEOs are positioned at the helm to shape such a culture, but it's not a one-person task. A true culture of curiosity permeates the entire organization, fostering an environment of shared understanding, collective effort, and mutual empowerment. As McGrath highlighted, "Don't bring the information that's uncomfortable for me to hear" should not be the mindset. Rather, organizations should appreciate the bearers of such information as they help illuminate blind spots and uncover hidden opportunities. This is the essence of cultivating a culture of relentless curiosity.
Investing in innovation: the power of small bets and experimentation — The example of Adobe kickbox
When asked by Alex about how she would invest $1,000,000 into fostering innovation, Rita McGrath provided a compelling response that underscores the importance of diversified risk and the power of small bets. "I would say figure out 10 to 15 small bets that you would like to seed and then figure out a way of getting people to work on those," she suggested.
She further elaborated on this approach by citing the example of Adobe's innovative kickbox program. Adobe, according to McGrath, is part of a select group of companies that consistently reinvent themselves. The kickbox program encapsulates this ethos by democratizing the process of innovation within the company. Each kickbox contains a Starbucks gift card, a candy bar (since "all good innovation is fueled with caffeine and sugar"), a workbook of instructions, and, most importantly, a gift card worth $1,000. This gift card enables Adobe employees to pursue their ideas with minimal constraints and bureaucratic hurdles.
The beauty of this initiative, as McGrath points out, lies in its decentralized approach. "For that million, you've now got a thousand ideas right at the edges... most of which are going to be dumb ideas, right? Most of which are not going to work, but you don't need them all to work. You need a small fraction of them." The program celebrates failure as a necessary step in the innovation process, encouraging employees to share their learnings and insights from their experiences with the wider organization.
This culture of experimentation and exploration aligns with the venture capital-style approach promoted by Strategyzer, where many ideas are seeded with a small amount of funding, and then additional investments are made based on their progress and potential. "You can't actually pick the winners. So you need to seed many ideas, give a little bit of money, and then do follow-up investments based on what works," Osterwalder echoed.
While this approach to investment in innovation has been gaining more awareness, McGrath admitted that its understanding and adoption are still patchy, particularly among leaders of large organizations. Many of them climbed the corporate ladder by excelling in executing well-established business models rather than pioneering new ones. "I think we're not really going to get to Nirvana on this front unless having at some point had a personal lived experience of innovation becomes a requirement to get to this C-suite," she noted.
McGrath believes that the growing interest in innovation comes from the rapid obsolescence of competitive advantages in today's fast-paced, globalized world. The stability and predictability of the past are giving way to disruption and uncertainty, making innovation an increasingly critical business competency.
She opined, "As advantages have become shorter, the pace of things has gotten faster. And I think people are beginning to realize that they've got nothing to offer... So the toolkit is bare, the cupboard is empty, and you know, oh my god, what are we going to do if this isn't our core business?"
McGrath concluded by highlighting the shift in the business world's understanding of innovation, explaining, "We know things have changed, we know things are different, we know the old rules don't work anymore, but we really don't know what's replacing them. And that I think has created a real interest in, you might call it innovation, but certainly what's next in terms of strategy."
Are you embracing the edges? — The risks looming over Airbnb's successful business model
In the continuation of the conversation between Alex Osterwalder and Rita McGrath the discussion centered around the value of 'learning from the edges' of an organization. This idea is elaborated on through two compelling examples — GAP, a conventional retail organization, and Airbnb, a trailblazer in the hospitality sector.
McGrath discusses the importance of senior leaders making an effort to stay in direct contact with the "edges" of their organizations, where employees and customers directly interact. As she puts it, "Are you prepared to learn from the edges? Are you positioning yourself to come into direct contact with the edges of your organization?" The challenges of doing this increase with seniority, but the value is irreplaceable. A case in point here is the GAP, where the difficulties faced by store workers in providing stable hours were essentially a result of corporate decisions and requirements. The store manager highlighted two main issues - store promotions and executive visits, both of which disrupted regular operations and strained employee hours. McGrath argues that "the store that you and I are in is not the store that executive is seeing. The store the executive is seeing is a store with, you know, three times the labor hours in it."
In the context of established companies, Osterwalder builds on this, noting that senior leaders often distance themselves from the edges, leading to decision-making disconnects. He asserts, "Well, you better roll up your sleeves because you are the people who are making decisions." It seems trivial, yet many established companies struggle to connect with the realities unfolding at the edges of their operations.
The conversation then shifts to a more disruptive, yet equally relevant example — Airbnb. It’s highlighted as a company that spotted a strategic inflection point and dramatically reshaped the hospitality industry. However, McGrath raises a crucial point about the potential risks that may threaten Airbnb’s business model. She notes that "this sort of cute Airbnb model, which was supposed to be, you know, Aunt Minnie in her spare bedroom is now been replaced by actual operators who are capitalizing on the fact that this is, you know, that regulations haven't caught up with this model."
Furthermore, Airbnb is now contending with the entry of existing providers like Booking.com into their turf, which is also listing private homes alongside traditional accommodations. "So if you think about it from the point of view of the customer," she says, "I am highly likely to go to the one site where I'll get as much information as I need, make the decision, make it more conveniently and move on."
Alex echoes this sentiment, pointing out that disruptors like Airbnb also need to be wary of future waves of disruption. "They're at the same risk, right?" he notes. Once a business model works, it's tempting to focus on it exclusively, but this can create blind spots.
Ultimately, this conversation invites leaders to reflect on their proximity to the edges of their organizations, emphasizing the importance of direct, frontline experience in both understanding and shaping business strategies."
Diversity of opinions: enriching decision-making processes with diverse perspectives
The conversation between Alex Osterwalder and Rita McGrath carried on with a highlight on the importance of diversifying perspectives within organizations. According to McGrath, "making sure that as you're making decisions, that you want to encourage, you want to obligate diversity of perspectives" is key. McGrath underscores that diversity of perspectives is not about adhering to the politically correct, but about including people with varied experiences and backgrounds who approach problems from distinct angles.
The potential pitfalls of homogeneous perspectives are vividly illustrated by the example of Link NYC, a well-intentioned project in New York City. A talented young team sought to transform disused payphone booths into communication kiosks, providing unlimited internet access, charging facilities, and local information. However, this seemingly excellent idea led to unintended consequences, including homeless people setting up camps around the kiosks. McGrath points out, "Had they had someone on that design team who actually understood what goes on on the streets of the city of New York, they would have done this whole thing really differently."
This example points to a crucial issue: the failure to question assumptions. It emphasizes the need for diversity to help question assumptions, and the fact that when doing something new, there is inherent uncertainty. The need to empower small, diverse teams is underscored as a third key practice.
McGrath shares a corporate example wherein teams were encouraged to look at company problems that hadn't been considered before. The teams would then present their findings and the ideas receiving the most votes would be implemented. This strategy encourages an entrepreneurial mindset within the company and allows fresh perspectives and innovative ideas to surface.
Another anecdote shared was about the CTO of eBay and a significant proposed change to the website. Instead of taking the traditional route of creating extensive reports and PowerPoint slides, the CTO selected a small team of the best developers, took them to Australia for two weeks to work intensively, and returned with a built prototype. This approach exemplifies the empowerment and efficiency of small teams, especially in uncertain or uncharted territories.
However, it is noted that not all companies trust smaller teams to make significant decisions, and many still stick with the "marching army approach," which is seen as a mistake when faced with high levels of uncertainty. McGrath suggests that under such conditions, taking a page out of NASA's book might be a wise choice. When the audacious goal of putting a man on the moon was announced, NASA didn't treat it as a giant project with known answers. They broke it down into smaller, manageable steps, each handled by a small team.
Diversity in perspectives and empowering small teams to explore and experiment are crucial practices for organizations. They promote a broader understanding of issues and encourage innovation, which ultimately can lead to more successful and sustainable solutions.
There are no answers in the building: The value of stepping out
As part of their insightful conversation, Alex Osterwalder and Rita McGrath delve into the concept famously propagated by Steve Blank, "there are no answers in the building." As McGrath expresses it, it involves getting out of the building and venturing beyond the familiar spaces. This extends beyond merely having direct contact with customers to a more holistic exposure to trends, experiences, and insights outside of your own sphere.
One key practice that McGrath emphasizes is to regularly position oneself in unfamiliar environments and contexts. She suggests activities such as "attending conferences that are not part of your own industry," and "having conversations regularly with people who have absolutely no idea what you do." This opens up opportunities for cross-pollination of ideas and fosters a culture of curiosity. McGrath also advocates for broadening your reading beyond industry-specific publications and investing time in continual learning, perhaps through an executive education course or other avenues of knowledge acquisition.
This 'get out of the building' approach feeds personal and professional development and shifts focus beyond the traditional reward structures of simply getting the job done. It nurtures a passion for excellence and fosters a "culture of curiosity" that enhances both individual performance and the overall innovation capabilities of the organization. As McGrath puts it, it's about "going that extra length to want to be world class."
Despite the simplicity and clear benefits of these practices, Alex and Rita note the surprising lack of their adoption in many organizations. McGrath remarks, "Nothing I'm saying here should come as a complete and total shock to anyone. (laughs) And they're very simple practices, and yet we don't do them. It's astonishing."
This observation is reinforced by Marshall Goldsmith's assertion, as noted by Osterwalder, that often what is common sense is not common practice. Therefore, the conversation ultimately circles back to the necessity of leaders to repeatedly highlight and implement these simple but transformative practices into their organizational structures. As Osterwalder concludes, "This is all about getting to start doing this." This sentiment echoes the shared conviction that stepping beyond the confines of the familiar – both physical and intellectual – is an essential catalyst for innovation and growth.
Are you creating incentives for people to tell you the truth?
Creating a culture that encourages honesty is critical in an organization, especially when it comes to innovation and growth. People need to feel safe enough to express their ideas, to tell the truth about what's happening in the company, and to suggest changes without fear of punishment or reprisal. It's the responsibility of the leaders to create incentives that promote truth-telling and authenticity.
A sobering example that demonstrates the pitfalls of not doing this is the corporate tragedy of Kraft Heinz. The merger of these two American iconic companies, Kraft and Heinz, initially seemed promising. However, when the Brazilian hedge fund, 3G, took over with its strict policy of zero-based budgeting, the culture began to change drastically. The entire focus shifted to cost-cutting, to the detriment of investing in their people, innovation, and advertising.
As Rita McGrath eloquently states, "They started to cut corners...they didn't invest in innovation. They didn't invest in their people." It became clear that the company's direction was causing discontent among its employees. A survey conducted by Glassdoor showed that "only 29% of the employees at Kraft Heinz would say they would recommend working there versus 70% at Nestle, 75% at General Mills which are quite comparable companies."
This reduction in employee morale and satisfaction wasn't just a mere statistic; it translated into tangible financial losses. Kraft Heinz missed their sales targets significantly, causing one of Warren Buffet's biggest single-day losses. McGrath argued that this failure was "completely traceable to the fact that you're not being incentivised to tell the truth."
This highlights the importance of incentive structures in fostering an open, innovative environment. If employees are not incentivized to share their ideas, or if they fear retribution for speaking out, the best ideas will never come to the fore. A culture that suppresses truth-telling and innovation will ultimately hinder growth and success.
Ray Dalio, founder of Bridgewater Associates, often emphasizes this in his philosophy about running organizations. He promotes the idea that for the best ideas to emerge, people must be encouraged and rewarded for speaking up.
As leaders, it's crucial to reflect on the incentives we're creating. Are they encouraging employees to share their ideas, to point out the issues, and to be part of the solution? Or are they merely incentivizing cost-cutting and suppressing innovation? A culture of truth-telling can make the difference between a thriving, innovative organization and one that misses the mark.
You can't manage a secret – How Ford embraced radical transparency
The ability to confront problems head-on is a critical skill for any leadership team, but it requires the cultivation of a particular kind of organizational culture. Denial and avoidance of problems is not just unproductive but harmful to a company's overall performance. As Alex Osterwalder and Rita McGrath discuss, this point was made evident through the case of Alan Mulally, former CEO of Ford.
When Mulally took over Ford, the company was set to lose about $17 billion that year. He convened a meeting with the senior leadership team where each leader was asked to present their performance numbers. These numbers were color-coded: green signifying good performance, yellow for issues that were manageable, and red for serious problems. Despite the grim financial outlook, Mulally was met with a sea of green indicators on his first day.
McGrath recounts the story, "He comes in on day-one and it's all green... And so he says, well, you know, people, is it our plan to lose $17 billion? Because if it is, we're right on track." Mulally's message to his team was clear and concise, captured in a phrase that McGrath believes should be ubiquitous in the offices of leaders: "You can't manage a secret."
If problems aren't acknowledged, they cannot be managed. For a company to improve, it must first be honest about the issues it faces. Once these problems are out in the open, they can be addressed. As McGrath notes, "If we can get the data out there and we can understand what's going on, we can do something about it."
Notably, Mulally believed that if the problems were openly acknowledged, the collective intelligence in the room would likely be enough to solve them. The challenge is to create a culture where people are not afraid to bring up uncomfortable facts for fear of punishment. If a culture of honesty and openness is fostered, the collective intelligence of the organization can be harnessed.
Alex Osterwalder adds, "It's all this about psychological safety and it does require a type of leadership, right? Alan Mulally...got everybody to speak up because it's not this kind of violent top-down management, right?" Mulally's approach highlights the need for humility and an atmosphere of respect and "loving up" your team, a phrase Mulally is known to use, which fosters psychological safety and encourages truth-telling.
In conclusion, managing a secret is impossible. Leaders must strive to create an environment where issues can be openly acknowledged, which then allows for collective problem-solving and improvement.
The future is already here
The last insight Alex Osterwalder and Rita McGrath explore in their discussion pertains to our ability to anticipate and prepare for the future. Drawing on a quote by science fiction writer William Gibson — "The future is already here, it's just not evenly distributed yet" — McGrath encourages us to actively seek out and study those parts of society where the future is beginning to emerge.
She elaborates, "How often do people really think about where is the future showing up that's not mainstream yet?" In order to glean an understanding of future trends and behaviors, McGrath suggests looking at today's youth. She presents a compelling argument: "If you want to understand how 20 year olds are going to be behaving in 10 years, you actually have the entire population people who will be 20 in 10 years alive and working today. They are today's 10 year olds." Engaging with this demographic can offer valuable insights into how they consume information, who they trust, and how they interact with the world around them.
McGrath also highlights the value of attending conferences and events that focus on cutting-edge technologies and ideas. Referencing an experience she had at the Digital Dozen Awards at Columbia University, she discusses how any new communication technology can take around 20 years before it's fully understood and exploited, using the evolution of film as an example.
In order to stay abreast of potential future trends and disruptions, McGrath recommends immersing oneself in environments where "bits and pieces of the future are already showing up." This proactive stance not only prepares leaders for potential future developments, but it also equips them with the foresight to steer their organizations in the right direction.
One striking example of the impact of these insights occurred when McGrath shared these principles with a group from the Young Presidents Organization (YPO). They were asked to evaluate their practices against these concepts, and one participant was left pale and shocked upon realizing he wasn't practicing any of them. McGrath recounts, "there was one guy who was absolutely ashen and he said, 'Oh my god, I'm not doing any of this.' And I could see this would be a big problem."
This moment underscores the importance of being proactive about understanding and preparing for the future. As McGrath and Osterwalder's discussion reveals, leaders who are not actively seeking to understand the future and incorporate that understanding into their strategies risk being blindsided by rapid and unpredictable change. As McGrath eloquently puts it, "go talk to the future."
In an era characterized by exponential technological advancement and rapid societal change, leaders must stay ever-vigilant to avoid strategic blindsides. By implementing the practices suggested by Rita McGrath, organizations can not only protect themselves from these blindsides but also capitalize on the opportunities that strategic inflection points present.
The conversation between McGrath and Osterwalder, provided invaluable insights into how leaders can avoid strategic blindsides. The takeaway is clear: organizations must integrate these practices into their culture to stay ahead of the curve. As McGrath stated in closing, "The future is already here; it’s just not evenly distributed."
So, are you prepared to navigate your strategic inflection points?