The context of business has changed so rapidly over the past few decades that it may be time for a new lexicon. At the very least, it’s time to challenge some of the established thinking about strategy and competition that used to drive business advantage – but no longer does.
In this episode, strategy expert and Columbia Business School professor Rita McGrath takes on one of most fundamental and recognised notions in strategy: that of sustainable competitive advantage. She argues this can no longer be the Holy Grail for companies because in a constantly changing environment, deeply ingrained structures and systems designed to extract value actually become a liability.
The new path to winning includes taking advantage of shorter term opportunities, as well as relying on new organisational talents like speed and decisiveness. Our guest defines the new transient life cycle of competitive advantage and shows how successful firms manage through it by using an updated philosophy.
She offers a bold new set of principles for competing in what we now understand is a continuously volatile and uncertain environment. Consider this your fresh strategy playbook for competing in an accelerating world.
Rita McGrath Innovation Show
[00:00:00] Steve Jobs: [00:00:00] Stay hungry, stay foolish.
[00:00:14] Aidan McCullen: [00:00:14] The context of business has changed so rapidly over the past few decades that it may be time for a new lexicon. At the very least it’s time to challenge some of the established thinking about strategy and competition that used to drive business advantage, but no longer does. In today’s episode strategy, expert and Columbia business school, professor Rita McGrath takes on one of the most fundamental and recognized notions and strategy that have sustainable competitive advantage.
[00:00:44] She argues this can no longer be the Holy grail for companies because in a constantly changing environment, deeply ingrained structures and systems designed to extract value actually become a liability. The new path to winning includes taking advantage [00:01:00] of shorter term opportunities, as well as relying on you.
[00:01:03] Organizational talents like speed and decisiveness. Our guests defines the new transient lifecycle of competitive advantage and shows how successful firms manage through it. By using an updated philosophy, she offers a bold new set of principles for competing in what we now understand is a continuously volatile and uncertain environment.
[00:01:25] Consider this your fresh strategy playbook for competing in an accelerating world. We welcome author of end of competitive advantage. How to keep your strategy moving as fast as your business. Rita McGrath. Welcome to the show. It’s great to have you on the show, Rita, and I want to highlight my thanks to you for covering your earlier work here.
[00:01:48] So this book is almost a decade old while of seeing around corners is your latest book and as an absolute knockout and one, I hope to cover in the near future, but I wanted to cover this [00:02:00] book for many reasons. One is I find it is a must read for anyone who works in innovation. Two is it’s been highly recommended by previous guests like Alex Osterwalder, Whitney Johnson, Mark Johnson, Scott D. Anthony, and many others. And a lot of people I’ve talked to read. I have not read this book, but know you from your current work. And again, I wanted greatly thank you for covering this earlier work. So we thought. Let’s start with the opening statement from this book, even though it was published almost a decade ago, unfortunately it’s still holds true and you open with virtually all strategy, frameworks and tools are based on a single dominant idea that the purpose of strategy is to achieve a sustainable competitive advantage.
[00:02:48] It’s every company’s Holy grail, but it’s no longer relevant. So in its place you offer a different concept. One of transient competing advantage where we win short lived [00:03:00] opportunities. I’d love if you’d take us on the journey of this Rita.
[00:03:03]Rita McGrath: [00:03:03] Oh, it’d be a pleasure. So any strategy, there were several dominant concepts that became integral to all the tools and frameworks we used in the field.
[00:03:12] And the first was this idea of industry. That your fate would be predicted by finding an attractive position in an attractive industry. And your goal then was to throw up entry barriers like crazy. And giggle your way into a happy life. So the first thing that I would argue is that the period of achieving what the competitive advantage, and I’m even beginning to wonder about the relevance of that term, but that period where we have something in place, we’ve got transactions with customers, we’ve got profits, we’ve got margins.
[00:03:48] That period is getting shorter and shorter. So if you look when these. Theories were developed. They were developed largely out of the U S largely in that policy, on post-war [00:04:00] environment where China was competitor in deal. Wasn’t a global competitor. We didn’t have technology as we know it now. And if you had something you were making you, if you may tires or refrigerators or whatever, as an American firm, and you.
[00:04:15] Game properly, you could achieve global advantage. And that would last for a long time. And so we have all these ideas and strategies from that central concept, which is that an advantage can last forever or for decades let’s say. And what I’ve argued is that increasingly what we need is. A set of theories that deal with each phase of the lifespan of a competitive advantage.
[00:04:40] So you have the innovation process, which leads you to the creation of new advantages. You indeed have the exploitation process where you get to enjoy the fruits of your labor changes in the world. Do you have a covert epidemic? It’s the revolution. You have something that’s different and your advantage goes into the [00:05:00] roof.
[00:05:01] The core thesis of the book is that our theories of strategy needs to deal with each of those life cycles. Yeah. And I was thinking about the language you introduced reader because it’s so important. Updating our language helps us update our thinking and it reminded me of Einstein’s quote that we cannot solve our problems with the same level of thinking that created them.
[00:05:20] And in respect to your work, you suggest upgrading the tools that are. Decades old and were built for a different world and very much an American world that wasn’t globalized yet.
[00:05:30] These tools aren’t bad tools, but they have to be. Used in right boundary conditions. And I think that’s one of the things we misunderstand, which is the same tool in different boundary conditions.
[00:05:42] Does it work? So let me take an example of a brilliant tool, which was the BCG matrix and people today have forgotten where it came from and where it came from was the study of learning curve issue industry. And what researchers found was [00:06:00] that there was a. Predictable drop in costs, the more of whatever it was.
[00:06:07] And that was called the learning curve effect. And you can actually plot for dropping costs on a chart. And if you did it on a log scale and it was a straight line or decline. So if you made 10, it costs you a dollar, let’s say, and if you made a thousand, it costs you 50 cents. And if you made 10,000, it costs you a nickel.
[00:06:24] Awesome. and so what BCG worked out was this, if you are present in the early stages of a high growth industry, do you invest heavily, you can produce, and then your competitors in the industry, and that will allow you to get a cost advantage, which would be doable. And so what that suggested is they had agreed simple matrix, which had industry growth rate on one dimension and your market share on another dimension.
[00:06:55] And then we’re able to divide the world into four categories. So you had your shooting stars, which were your high [00:07:00] growth things that you’d invested. That was you had your cash cows, which is growth is now slowed. And ideally you’re exploding that you have a cost advantage. You’ve got your question marks and I’ve always wondered where a quarter of the potential cases have never been explained to me, which is you got a small share.
[00:07:23] In the right conditions framework, let’s say you’re in an industry where you don’t have heavy duty learning curve effect. So most services, businesses as an example, and that advice. So the advice from the BCG matrix was that’s heavily in your shooting stars, milk, your cows, get rid of your dogs and who knows what you’re doing with your question.
[00:07:43] But that advice doesn’t work in places where it’s a different boundary condition. What’s marketed. We, young people have forgotten. We make up architects, it’s a human constructed thing. God did not come down and say that have 30% market share. if I wanted to define market [00:08:00] share to might own it done.
[00:08:02] Only business school professor, in my block in Princeton, I could easily define myself as having 100% market share while a job done. So I think what we do is we take these BCG metrics and nominally successful and we put them into every situation. You don’t really look. Carefully at whether the explanatory variables that they found a hole in the situation we’re trying to understand.
[00:08:32] Aidan McCullen: [00:08:32] I loved your analogy of surfing the waves and how surfers don’t get embarrassed when they get knocked down. I think the conceptual image of that is so important when it comes to seeking an exploiting.
[00:08:44] Rita McGrath: [00:08:44] So I think one of the things to remember is if you accept the idea that advantages are temporary, what you want to be thinking about mentally is, imagine riding successive waves of competitive.
[00:09:00] [00:09:00] Able to see when one is beginning to form and then we need to get up on that surfboard and ride it. And then when the wave is over step off and you look for the next one and that’s really the imagery that I think we need to be adopting more when we’re thinking about competitive advantage and, culturally, I think it’s a big shift because it moves you from descending, defending what you’re doing and being I’m going to protect my.
[00:09:28] Castle, I’m going to put a moat around it and I’m going to defend it versus maybe this one is short lived, but the next one’s going to be great. And the one after that’s going to be even greater. And if one doesn’t work when I’ve got plenty more in the pipeline, and I think that’s the mentality that we want.
[00:09:41] So it brings innovation very much in the center of what we think about when we think of strategy. And when I think about my time in the field, when I first started doing strategy, All the cool kids were doing industry analysis, and it was all about this thing called the profit impact of market strategies, database, which was a [00:10:00] fabulous database that GE had put together.
[00:10:02] But it was a lot of industry. So it was things like how much does market share pay off for you? And does it make a difference, even a big R and D budget? Should you be a first mover or a later mover? And it was all great stuff, but it was really based on these boundary conditions of having a predictable industry, having a known number of players.
[00:10:22] And those of us doing innovation work, we were it’s harder for warps. it was bad. We were what went on inside company that we were studying the actions and decisions of individuals studying. We were studying that period before and industry exists. Before you have a customer before you have established market transactions, before you even know what the price is, you’re going to charge for something.
[00:10:44] And that’s what I was interested in. And what I would say is in the intervening years, That people have now become sensitized. Just the idea that innovation is essential. The vision is really important and it’s important because that’s [00:11:00] where the next wave comes from. And so now I think where we are, I think the state of the art at the moment is people understand that they know where the next wave is going to come from, but they still don’t know what to do about it.
[00:11:10] They’re all like this innovation thing is this huge question, Mark. So one of the things I think is fascinating.
[00:11:19] Those of us studying innovation. We’ve been in high uncertainty environments, our whole lives. whereas, it’s entirely possible to be a very senior executive in a large organization today, and you’ve never touched or run across or anything to do with innovation. And so there’s an awful lot of people that they’re hanging over their heads, really not knowing what to do.
[00:11:38] And the good thing is I think the tools that you’ve used in innovation, you’re running a show called the innovation show. So we’ll be very clear on this. The tools we’ve traditionally used for innovation are incredibly practical and meaningful. Now that we’re in the midst of this highly uncertain prices really has come up it’s time.
[00:11:58] And there’s a concern though, [00:12:00] in the same time, Rita it’s come up on several shows recently that. In times like this, and you talk about deafness and letting go of maybe business models or products or services that no longer serve the organization, but oftentimes in times of crisis, like this.
[00:12:18] Organizations see the innovation team as something they need to let go of because it’s an unnecessary cost. And it’s a real concern for me. And so many people who listened to the show at the moment. I’d love your thoughts on that. Oh, it’s very true. Very true. if you are being motivated by a quarter to quarter mindset and what you want to know is what’s the ROI on this going to be, your innovation teams are very hard to defend because by definition there.
[00:12:44] 18 months, 24 months, 36 months out before you start to get cash out of something. And so if you’re in a crisis, it becomes a justifiable thing to get rid of the counterbalance. I would say, you’re not going to get out of this [00:13:00] crisis by doing what you were doing before the crisis I’m really need a novel solution.
[00:13:05] You need a fresh way of looking at things if you’re going to thrive. And that’s where the tools. Structures that your innovation teams created are so helpful. So I think the, one of the big differences we’re going to see between companies that drive coming out of this and companies that just implode from me inside is how they think about the innovation process.
[00:13:28] The other thing that, we were talking about the concepts of the waves and getting knocked off is that. You talk about moving from industries to arenas, and this is a really core company. Yeah. And I think that’s something even today, the notion of industries really. The prize is being, industry to that industry conferences.
[00:13:52] You’ve got, trade associations, which REO I’m the middle services industry representative [00:14:00] blinds us to the fact that there are completely different ways of thinking about things. a great example of this is years ago when I was the CEO of. Coca-Cola he was really pissed off at his senior team, basically because they were
[00:14:25] just whining basically. And he several other senior leaders and he said something that I thought was fascinating. If you look the average human being made 64 ounces of fluid per day. And your job as leaders in the Coca Cola company is to increase the percentage of those ounces that are sold by the Coca Cola company.
[00:14:45] So the enemy is not Pepsi. The enemy is milk and tea and water, and you have different things. He really did. Was he redefined the industry from the fizzy drink business to the, how many fluid ounces business. [00:15:00] And that totally changed the strategy that got fermented water in a huge provider of bottled water.
[00:15:07] It got carbonated beverages, all kinds of stuff. And I think that redefinition of what our playing field is central to cook. Brilliant. And you highlight here and to the point about Coca-Cola that many of the waves are in motion and they’re in emotional different stages of the revolution. But all at the same time require a different mindset and different people and resources for those different stages.
[00:15:37] And therefore the job of senior leadership is not to manage or defend, but it’s to orchestrate the concurrent waves. Yeah. A friend of mine who’s a CEO. It had a wonderful analogy. He said, think about it as like being a chef in a high end kitchen. And all around you, you’ve got dishes in various States of preparedness and your job is to make [00:16:00] sure that right dishes get to the right plates to get to the right people in the right order at the right time.
[00:16:05] And that’s much more what being a CEO is like. Yup. Traditional metaphors we have for running a business. And I think that’s become particularly now when we’re surrounded by so much uncertainty that you don’t have time to be a hierarchical leader. You can’t tell people what to do because you don’t know what to do yourself.
[00:16:24] And I think that you have to create. The conditions under which the people that have the best information reveal, what the answer is rather than you having the answer and telling people what to do. that’s a very outdated vision of leadership while we’re on that. You’ve seen the value of this in your own work, where you’ve set up a tool, a diagnostic to.
[00:16:46] To help teams go beyond just the strategy to actually embedded within the company. I promise you we’ll share a little bit a bit about this before we go on with competitive advantage. This is a concept I’ve been working on for probably about four years. [00:17:00] Now. It began with this fundamental frustration, which is people read my work or kind of talk to a class or Columbia or whatever, and then get really inspired.
[00:17:09] And I think this is great. This is the only way. But they go back to their home organization. Is it a spreadsheet? Is it a PowerPoint? Is it a different kind of moving? I need them. I go, what is this? And so what Kurt to me was that in addition to that insight generation that I think professional work is there is also a concurrent need for a capability creation.
[00:17:39] Predominance to do. He’s going to be to help firms build those muscles, to be able to do this stuff because a lot of our existing tools are based on older ideas that just. Don’t work. And when I look at how people are actually doing strategy and innovation,
[00:17:58]maybe it’s made it as far as a [00:18:00] Google sheet where there’s no kind of consistent architecture to how they do these things. And that’s one of the things Billy’s is really exploring and beginning to build. So we have three. What kinds of things that we do in relation to the first is I’ll call them point solutions.
[00:18:17] So there’s a team that diagnostic, for example, there’s a diagnostic where you can assess how, how oriented are you to the past? are you in a sustainable, competitive advantage mindset, or you look more oriented fanzine, and then we’ve got a platform that we’re building, which will help deal with the.
[00:18:37] Fundamental challenge of the innovation process, which is you think about innovation. And I looked at software to help with that, and there’s a mountain of applications and so forth that help with the idea generation process. So you can run an idea generation campaign, you can collect ideas, you have a hackathon, the oldest and there’s mountains of applications.
[00:18:57] That’ll be that simple. that’s been solved. [00:19:00] and then on the backend, there’s a mountain of stuff that does project management. So you finally decided you need to build a plant or you need to go overseas, or you need to orchestrate, this is the stuff that does that project. The tricky part is in the middle.
[00:19:14] How do you go from this idea to something that you can actually plug into your project management software? And so that’s the platform that we’re building. And then we have a little bit of capability building, meaning advisory to help people learn how to use those. So that’s the core of what the lasers.
[00:19:33] This is a core piece and you dedicate a whole chapter to leadership mindset in the end of competitive advantage. And I’d love to share a couple of examples here because there’s real great examples of leadership and then not so great examples as well, cautionary tales. So one of the great examples you gave was Alan Malali and when he started, he ran into some initial.
[00:19:55] Instances of resistance, but he soon sorted those out alleles. A [00:20:00] great example of what I think leadership today is all about. So he wasn’t voting. So Allen’s back stories that just, if you want it to be an astronaut. And it turns out he’s colorblind that disqualified him. So he decided to do the next best thing and get into the aerospace industry as an engineer.
[00:20:19] And he was at Boeing for many years and basically rescued their commercial airplanes division after the disaster. That was nine 11, and nobody was buying commercial airplanes. He was persuaded some years later. by, the Ford family to come and turn around and things at Ford. And when he was.
[00:20:42] First going there. He got mad at the airport and driven to the executive parking garage Ford motor company
[00:20:53] in the executive parking garage. That’s an interesting subtle indicator, right? These [00:21:00] people don’t believe in their own brand. And the culture of Ford leadership at the time was pretty tough. General motors. the guy down the hall was competing with you for drinks.
[00:21:14] So very internally competitive in your mistakes, trust each other. It was really so Alan’s leadership. Methodology is centered on a couple of things, but one of the key things is way houses, business plan, review meeting, which is a once a week meeting where each of his direct reports and their sports staff gathered together.
[00:21:40] And everybody’s got in front of them in PowerPoint, which has their five most important object for the week. And they’re color coded. So green is good. I’m on track. Yellow is, I’ve got some setbacks and problems, but I kinda knew what to do with them. And then red is already, I’ve got a problem.
[00:21:57] I have no idea what to do with it. And so [00:22:00] shortly before the first of these meetings, which none of the leaders wanted to come to,
[00:22:06] you forced them to Oh, you don’t want to come to my meeting. Oh, that’s okay. You can’t be part of the senior leadership team forward if you don’t come to my me. But it doesn’t mean you’re a bad person. that’s. Positive. But anyway, so the first of these meetings and a couple of days before he had a very serious sit down with board CFO, who basically said, look, this company’s on track.
[00:22:28] I think the 16.9 billion will cost a $17 billion that’s whether it be that year. So huge losses right there, staring bankruptcy is basically where it comes in. First of these business planners in meetings, they’re all there. And none of the senior leaders want to be there. They have people who do stuff with them.
[00:22:45] And so they actually got to present their own results. They’ve got to own their own activity. And Alan looks around the table. They’ve all got their papers in front of them. And it’s all green
[00:22:58] people. Is [00:23:00] it conceivably possible? It might be like one small problem here. And, He said something I thought was really profound. He said, you can’t manage a secret. if we can work together as a team, get these things resolved. We have the power in this room to fix it. But if we don’t work together, it’s never going to happen.
[00:23:17] And so some weeks later, Mark Fields, he subsequently became CEO after the Allen retired. Since tonight, I think I’ve got one of those red things. Alan is going on about, he said, I’m right on edge. Now the launch of the edge, which was a small SUV, was absolutely critical to Ford’s productivity. And the dealers have been the humped up.
[00:23:42] Advertising funds have been set aside. Everybody’s been preparing for it. and Mark had done, which was his staff to production line because of the manufacturing quality. huge admission of things not going well,
[00:23:57] Alan does, [00:24:00] it’s going to determine the future, his career at Ford. And so what does he do? He stands up and applause. Great transparency, Mark. Anybody got any ideas? And stops the meeting for a minute. And it turns out in that room, there are two people that had experience with the manufacturing issue that Mark was dealing with and could help out.
[00:24:20] There was a person who had a great idea for how to deal with the dealers. There was another four minutes. They had probably 70% of that problem worked out. And to me, that’s just a brilliant example of how the leaders not telling them what, when you’re doing is creating the content.
[00:24:41] It doesn’t have to, it’s one of the reasons I mentioned believes, and I’m sure one of the reasons you’re great at valleys is because as Amy Edmondson says psychological safety is the soil in which innovation grows. We need it within organizations for that to happen. And there’s so many companies like Ford still in existence.
[00:24:59] And that’s one [00:25:00] of the reasons I wanted to share your book was. It’s not outdated in any sense, unfortunately it should be, but it’s not. And these concepts you talk about still haven’t taken root within organizations because of that fear. And maybe it’s an overheim from 2008, 2009 from the financial downturn.
[00:25:20] And people were afraid of losing their jobs bought until we shift that paradigm. We’re not going to see much change in organizations. so I have to tell you a funny, Thing that happens in my life, which is Phil. I published an article called discovery driven planning back in 1995 with my coauthor, Ian McMillan.
[00:25:39] And for years, That’s really interesting. That’s really hard for me to get my head around. And then Eric Reese published a work that well, Steve blank talked about it, a famous entrepreneur top taught it in Berkeley’s Eric, the students, he published it very well received book called the [00:26:00] lean startup, which echoes.
[00:26:03] And people started to really get it right. And so after I published end of the Danish, people were saying to me, your work on discovery and planning covered in book. I get that now I really understand it, but I’m not sure. I don’t know.
[00:26:22] That’s how I felt, but yeah, I think it’s just a set of ideas that are not yet mainstream, but we’d love. Yeah. and, Steve, Blank’s been on the show and his idea of explore and exploit Alex Osterwalder talks about it. it’s the same mental model. And it’s something that we still haven’t got our minds around is not about this diff building that advantage and then defending it because.
[00:26:46] Things are moving just too fast. And I’m saying that to tee us up for the whole idea of moving the mindset from ownership to access. Because again, this is a core concept. Yeah. So I think one of the things that, [00:27:00] and I’ll take it back to academia for a minute, which is a very long tradition.
[00:27:09] What do you need to manage with a hierarchy and what can you manage on an open market? And people like Oliver Williamson, the only way after Ronald Coase basically said, look there’s conditions under which markets function and conditions. So you need. Bureaucracy, when you can’t determine price, you have uncertainty as to the incentives.
[00:27:30] So there’s the incentive, when transactions are really difficult and expensive and blah, blah, blah. so that’s why you need things in organizations. Cause that’s why you lock assets and organization, because it’s just so difficult. If you think about. Any asset intensive activity, That used to happen.
[00:27:49] So what’s happened in the intervening years and I think digital has a huge role. The brain’s transaction costs, we’ve increased transparency by an order of nights, [00:28:00] and we’ve made it very easy to understand what value is. And so a lot of the conditions that used to say, Hey, you got to manage this thing in the bureaucracy have now evaporated to the point where you can manage more and more sets of activities as markets.
[00:28:13] And that has a couple of very interesting downstream implications. The first is you don’t need to own the asset tax. So you know, how many people really need to own a chainsaw, right? What you really need, unless you’re on it.
[00:28:29] Beginner, he needed a chainsaw, hopefully not more than two or three times a year here. So why should it be sitting in your garage, gathering dust the rest of time? What you really like to be able to do is use the chainsaw when you need it and hand it back to some central fool. When you don’t. And of course the so called sharing economy, Airbnb and the like have shown that things we used to think of as needing to be owned, like our homes can now actually be accessed by people who don’t own.
[00:28:54]so that’s one thing. second thing though, that we’re starting to see is another thing I don’t think that gets talked about [00:29:00] enough is because now we’re in this mode where we can. Freely trade assets in a pretty straightforward way. we are depending more on our ecosystems. And so what you’re seeing is ecosystems competing almost.
[00:29:17] And the question of ecosystem, right? This is what I call it is a very interesting one from an entrepreneurial perspective, because you can have the best idea, the best product, the best, whatever, but if your ecosystem is right, it’s not going to be successful. So a great example of that. Fetish a duration of autonomous vehicles, and if you talk to some people and you honestly think the Jetsons is here, Come to your apartment, it’s going to too, we’ll see off to your office on the 52nd floor, drop you right off on the chairs outside, just going to go off and deal with the next customer and to listen to some people right around the corner, but the ecosystem. the technology is the least of our problems.
[00:29:58] The technology is actually [00:30:00] probably 95% of where it needs to be to get autonomous technology in place. What we don’t have is the ownership. We don’t have the risk region. We don’t know who to blame. If the car decides to hit the ground and not the day, we don’t know. there’s just so much that needs to be put in place before these.
[00:30:20] We don’t even know who’s going home. We don’t with the effect on traffic congestion, where are they going to live when they’re not picking you up or dropping you off? are we going to have like giant parking garages in the sky or there’s no demand, just all this stuff is not that true. And so this whole entrepreneurial spirit, but if we don’t understand all those things, we’re not going to have a mature ecosystem and it’s going to take off or eventually fall into place.
[00:30:48] Yeah. And social, I often think of that with drones either. the whole idea of drone delivery. It’s I don’t want a drone going over my house who owns that space above my house, et cetera on it. A paradigm, isn’t it. It’s the [00:31:00] Thomas Kuhn, the paradigm shifts. And it’s almost as I think it was max Planck said that the old regime need to die out before the new regime comes in and coming back to leadership, then coming back into organizations, this mindset.
[00:31:15] Takes a long time to change. It really does. And oftentimes it needs a crisis, but as you show in your work, the idea of deafness on letting go timely, letting go of things that aren’t working is absolutely core. And I’d love to bring it back to a couple of the examples that you give in the book, because one of them that has worked out magnificently and you.
[00:31:37] Pinpoint of the back then was Netflix because oftentimes we see Netflix is this great success today, but there was a key inflection point in Netflix when it changed from a DVD business to a string business on new cover this as a case within your absolutely. So the Netflix example is fascinating to me because most companies don’t see these [00:32:00] inflection points early.
[00:32:01] And so then they lag in how they respond to them. Whereas things that Netflix had always thought from the beginning that it would be a streaming business. And he’s been interviewed saying that he thought, we thought it was going to be 2002. Then we thought it was going to be 2004. Then we thought it was going to be, and yet this is another ecosystem story, right?
[00:32:19] Yeah, we did for Netflix, the streaming business to be successful. We need a critical mass of people to have high speed, always on one price, internet in their homes. And that took a long time to happen. I think it first started to be a reality right around 2000. And if you think about how you got on the internet for that right.
[00:32:37] Dial up modem.
[00:32:43] So very presciently said the DVD. This is a, we’re going to switch to all streaming and he did it very early and his solution was to split the company and the duty part was going to be called Quickster. And the Netflix [00:33:00] name would be born. part. And so he went to market with this thing. Okay.
[00:33:04] Customers, you want to be a Quickster customer, you get to keep your DVD shipments, but if you want to be a Netflix customer, you’re going to be, and he had two different prices. I think it was seven 99 for each service. So customers who’ve been getting both for some time, thought this was a massive price increases.
[00:33:22] That was the first upsetting thing. Secondly, the cues were different. So if you wanted to get a hot movie, you had to put it in. You wanted it from get it to me whenever I’ll take whatever comes first, right? You had to put it in both cubes, but we’re still, all the streaming selection was much more limited than the DVD silage.
[00:33:44] So customers into a fury. I was absolutely outraged about this. Basically reported me wrote back to his team. He said, I’m here at an investor conference. I think I’m going to need a food test. And [00:34:00] even in the book was that directionally, this was the right thing to do, but he didn’t look at it to be customers.
[00:34:06]and so they very famously walked back on that. And to me, like what he should have done was a much more, it was what he should have done to me. What he should have done was almost the reverse of when you enter a new market. when you enter a new market, you capture the early adopters.
[00:34:20] First, you make your modifications next generation, Jeff Morris famously called crossing the chasm. Then you hit your mainstream adopters and so forth. what they could have done was ease customers out of their dependence on the first traunch could have been okay. We’ll charge you less if you agree to go street only, and that would have picked up a few of the early adopters and then, Hey, we’ll give you more selection.
[00:34:44] In other words, sort of these customers out of the Dean divas was that shoving them out of it very rough way. anyway, what happened was they basically had to walk that back. They said, sorry. Nevermind. But he still left them with this problem. What do I do? [00:35:00] What they decided to do said, all right, we’re going to run it as a mature business operations guy to run it.
[00:35:09] They moved the headquarters of that business, about 40 miles away from Netflix’s. Main headquarters and they gave him the instructions. It says, keep this thing going, run it for efficiency, run it for cost. Cause the great thing about a business in decline is we’re not making investments to grow it.
[00:35:24]You’re making investments basically to become more efficient. So you can be insanely profitable as a declining business, even as you’re not rolling. And that’s in fact what’s happened. So they’ve since rebranded it as ddb.com. If you look up db.com, you’ll see it on their website. And that’s what it’s like.
[00:35:46] And so they’ve got about three or 4 million die hard customers, which is nothing Netflix’s main customer base, those people don’t have great internet access or they just prefer DVDs or whatever it is. They like their good envelopes. [00:36:00] Thanks, sir. That’s a great story. And it was, you pegged it so early, which is great.
[00:36:07]it’s so validating when they work for you as well. But in other one you mentioned, and this is a different consideration is Reed Hastings was the major shareholder. So he made those decisions and saw the direction of the company. But then you look at big companies or what multiple shareholders.
[00:36:26] One such company was Verizon and they made very brave decisions. Early on selling off assets that were still turning off very healthy profits, but they did it very cleverly. And this idea that you talk about healthy disengagement. Yeah. So what I think I’ve inside in Burke, who was the CEO at the time, and gentlemen, I greatly admire what he was trying to do was really say I’m going to run my portfolio and this is something I think.
[00:36:54] That even today, companies are not very good at. And then by the way, one of the things belief is really [00:37:00] centered on, which is how do you look across your entire portfolio of investments and decide where you’re placing your bets. And where you should honestly be exiting and very few organizations of any size, have a clear eyed view across their whole portfolio of what they’re actually doing and what say or did.
[00:37:18] We said, look, I want to get decent prices for those assets with that don’t think are going to grow. And I want to get us into growth areas for the future. So among the many things he did during his tenure was he sold off the phone book, business, the physical phone book business. The time was basically cringing my comments about business decline.
[00:37:38] It’s not a growth business, but it was very profitable. And we sold it out to a couple of hedge fund people, how they were like, how can you give up such steady invested in this? How can you possibly do that? And his position was look, I’m investing for the future. Anchored by these old [00:38:00] physical phone books are going to go away pretty quick.
[00:38:02]and we are, we don’t want to be in that business for the long term. We do want to be in businesses going direct to people’s homes and at the time.
[00:38:16] I think it was this venture in defiance that changed the whole equation, tuned Verizon. We mentioned Netflix and these kinds of successful companies and there’s 10 exemplars, 10 outliers. You mentioned in the book at you highlight in the book, which are well worth reading for anybody, but let’s share a failure story reader because when we encounter innovators dilemmas in real time, They all always make absolute sense in retrospect, but you shared one in some of your talks and in the book where you talk about Sony, for example, and you say, imagine, for example, we’re making a fortune with this thing we created called the Walkman and somebody from the R and D team walks in and gives a presentation.
[00:38:58] And they’re like in the [00:39:00] future, These connected devices, won’t be wired and you won’t need to connect them to anything, et cetera. And they’re like, get out of my office. We’re making a fortune. And that’s the reality of what the future looks like. But you share how Sony played this out and how they became blind to what the future held for them.
[00:39:18] It’s a wonderful article that I believe was published. I think as long ago, as 1984. And it was talking about the civil war inside Sony and what Sony leadership did not do was forced the warring divisions to come together. And so if you think about it, Sony had the hardware people, so they made PCs, they made Walkman.
[00:39:40] Let me have the content people. So they owned movie studios and sound studios. And they had the software, people who did the plumbing that went into all these things. We think about what it would take to create back in the day. It was an iPod, it was the integration of the hardware, the software, the content to [00:40:00] create this superior customer experience.
[00:40:02] And Sony just was never able to get the heads of its divisions to cooperate. And so it ended up being this internal civil war and they ended up losing the whole category. How much Saturday example is Nakia. And I worked with Nokia beginning 1999 through 2006. So I had a really long opportunity to witness what was going on at the company.
[00:40:24] And, they fell into this trap of just milking the existing business. So they put it. And I remember getting, would’ve been about 2004, a memo from a friend of mine. And I had written about Nike is new venture organization forward thinking it was really an exemplar for how people needed to do these things.
[00:40:47] And it really worked well for quite a long time. And then basically as I came in his mandate, he thought was generate as much free cash flow as possible. And again, insisted that the R and D department produces ROI. [00:41:00] Definitely. That is what was it?
[00:41:06] So in 2007, this CDO pickup, I was seated on the front page of Forbes and the headline next to his name. So this is November of 2007. The headline next to his name was a billion customers. Can anyone catch the telephone
[00:41:25] when you start drinking? You were lucky. I make a case of Nokia in my own book. And I know it’s very old for you, but I found an article where one of the engineers in 2004 actually presented this idea of an app store and that switch screen, et cetera. How’d you heard about that? I held it in my hands. I was, as I was doing the project at their R and D and in my hands, I held something that was about the size of an iPad.
[00:41:49]he’s a stylist and it connected to the internet. It could bring up what page is it did get all the stuff. I actually physically held it in my own hands. It really saddens me. And one of the reasons I [00:42:00] do the show and I have great people on like you week is hopefully somebody somewhere is listening and it might change the fate of the organization because there’s so many people reliant on organizations in the world.
[00:42:12] And that brings me to the next point on your concluding chapter of the book, which is what does this mean? If we’re in a transient advantage economy and. More and more people are working as consultants, as temporary workers, as shift workers, et cetera. What does that mean for the individual? I know this is a core concept in your work as well on something that you really want to communicate to everyone out there.
[00:42:35]I think the reality is. you can’t give responsibility for your life and career entirely to other entities. at one point, the company designed your career path and HR told you what development experiences moved up. And that has advantages. I’m not saying that was bad because theory of growth of the firm is basically that you have these people who [00:43:00] are longterm committed to exploiting the idiosyncratic resources of the firm.
[00:43:05] But if you were in fewer places are like that these days. So among the implications are, you really need to make sure your networks are up to date. Your deals are up to date that you were in contact with people that you’re not letting yourself get stale, and you’re not letting yourself get sidelined.
[00:43:21] And I think it’s just very important to be prepared for that. I wrote an article last week and I said, don’t be plankton and plankton. Is there a Greek word and it means to wander or float and it’s those little organisms in the sea. And oftentimes we wonder if we flow through either careers expecting somebody in sector seven G of the organization to be scripting.
[00:43:43] What does the future hold for Aden Mercola? That’s certainly shifted. This is something I think that really people really need to wake up to. This is going to be a reality in the future and that we’re not going to work in one organization for the rest of our lives. What advice [00:44:00] do you give for those type of people, those people who are coming into this new transient advantage economy?
[00:44:05]I think interestingly, a lot of them are already living in that world. So if you think about a typical 24 year old, let’s say the people that person is friends with and the network that they have is actually more. Representative of where they feel they belong than any particular organization that they happen to be working for at any particular time.
[00:44:28] So we would call it a story of a young consultant who got her MBA at Columbia and, went to work and she was given a project by her superiors at this consulting firm figured would take her couple of months. And so from back in two weeks, And they were absolutely, cops back. They were like, what, how did you do that?
[00:44:50] Oh, I have a friend who’s a really great graphic designer and he helped me with the graphics and I have another friend. And what was fascinating was assembled this virtual team [00:45:00] of about 10 people. And they all work in different companies. Many of whom were competitors. Was to each other, not to, Oh, I happened to be working for XYZ from this week, but, XYZ for maybe just loyal to me and let me go to this network of friends.
[00:45:18] And I think they look at the world very differently. That’s first. And then that is so core and very much a listener to this show, the innovation worker or the change maker themselves in this economy. And we’ve mentioned about the threat of. The current situation, the covert situation on an impending recession or whatever we’re going to go through.
[00:45:35] But what advice have you got for those people? Because I’ve been one of those people and you try and change. Business models and you can’t do that. You need to attack it a different way. It depends on where you are. So if you’re very junior, that’s a different situation than if you’re somewhat more senior.
[00:45:52] I think you really need to understand the motivations of others in the organization, and you need to get [00:46:00] back to what the incentives are, and then you need to try to tip them in your favor in some way. And that requires a very keen political. Sensibility. And so I think, coming in and saying the right move rule that I have, the right answer is not going to be very helpful for you.
[00:46:16] I think what you really need to do is say, my CEO cares an awful lot about free cash flow. So I’m going to float an idea that will help him with free cash flow and, build some credibility with those kinds of projects first. And then maybe you get the green light to do something more ambitious.
[00:46:30] Or for people who want to find out more about your work, you’ve so much out there I’ll link to the books, et cetera, but for people that want to find out what we’re by, Valley’s about your consulting work, where can they find you? I have a website, very imaginatively called Rita mcgrath.com, all kinds of stuff on it.
[00:46:46] It’s got my newsletters. I publish a monthly newsletter, which you can subscribe to it’s free. And then Billy’s is just VA, L I C e.com. And we’re just getting going. So it’s early stages yet, but you’re certainly welcome to do [00:47:00] that. That’s a great place. I’m also on all of them, the social media channels,
[00:47:08] two wonderful summer interns helping me with my Instagram. And of course, LinkedIn and Twitter, I’m pretty easy to good news for our audience. If you sign up to the innovation show that I own newsletter, I have a fantastic copy of end of competitive advantage, how to keep your strategy moving as fast as your business.
[00:47:28] And I wanted to thank sincerely author of that book, which is just a fantastic read. One of my favorite reads in innovation, Rita McGrath. Thank you so much for joining us.