Seeing Around Corners (#19)

Structural Shifts with Rita GUNTHER McGRATH, author of “The End of Competitive Advantage”

On this week’s Structural Shifts podcast, we talk to the brilliant Rita Gunther McGrath, author of “The End of Competitive Advantage”. In this bestseller, she talks about how the world is moving from one dominated by organizational systems and hierarchies to one of individual superstars where a stable career means a series of gigs. Hosted by Ben Robinson, they discuss strategy, the benefits / limitations of network effects, Facebook’s failures, and more.

Full transcript

I think the more confusing things are, the more you need a strategy because it orients you, it gives everybody the potential to be aligned around a common future. It pulls you into the future — Rita McGrath

[00:01:34.18] Ben: I wanted to start, Rita, talking about your book called, “Seeing Around Corners”. Probably the key concept in the book is this idea of an inflection point. I wanted to start by asking you, what is an inflection point?

Today, we’re living in the mother of all inflection points, and everybody’s assumptions have really changed.

Rita: So, an inflection point is some change, typically in the external environment, that creates what Andy Grove used to call a 10x shift in the circumstances under which your business operates. And what that does is it has the effect of changing the assumptions that you’ve been making about your business. So, of course, today, we’re living in the mother of all inflection points, and everybody’s assumptions have really changed. I mean, the idea that we would be comfortable in the company of strangers has been with humanity forever, and now that’s been abended.

[00:02:28.29] Ben: And in the book, you say that inflection points tend to materialize gradually, then suddenly. How does a leadership team stop itself from being taken by surprise by an inflection point?

Rita: Well, it’s really hard and you do need to devote some time to thinking about the possible future states that your business could be in — and that’s not always easy because you’re understandably busy keeping the wheels turning and making sure that the day-to-day operations go. So, what I run through in the book is a process which I call “Looking for early warnings”, where what you’re doing is establishing what I call “A time zero event” — which is something in the future that could have a big effect on your business — and then work backward. And so, as you’re working backward, you’ll think about what has to be true before that time zero event could happen. And I think that’s a really useful discipline for entities to follow.

Rita: As an example, General Electric just very famously made a huge bet in 2015–2016, on the dominance of fossil fuel as the primary source of energy. And what was interesting to me was, even then, you had the Paris Climate Accord being discussed, you had already an accelerating in dropping price of renewable energy as a source of energy and yet, they made a big bet on fossil fuels. And, as we know now, that proved to be not the most prescient of moves.

[00:04:08.02] Ben: I’m pleased you talked about time zero events. That’s actually one of the sections I most liked because you have this great diagram, where you show there’s an inverse relationship between signal strength and the degree of freedom to act, i.e. that the earlier you spot the signal, the more time you have to react but I suppose, conversely, the higher the risk that those efforts might actually be wasted versus when the change is upon you, you’ve got no time to act, and this is time zero. So, in the book, you have a whole bunch of recommendations around scenario planning and how to put in place the metrics that will help you spot these signals and signal strength early. Would you be able to talk us a bit through that approach?

Rita: Yeah. So, what I recommend is take two uncertainties, and these could be anything that you think is really critical — so I’ll take two that I’m using with respect to the current COVID crisis. So, the first one is the nature of our social compact, and are we going to continue to have an environment which is being driven by the typically short-term interests of shareholders, or are we going to have an environment which really presses for more shared prosperity? And the other uncertainty, of course, which all of us are wrestling with is, is the economy going to go into a long slump or are we going to potentially have more of a rebound?

Rita: So, if you take those two uncertainties, what they’ll give you is four future states. So, the state where we continue to reward shareholders above everybody else, and the economy remains in a slump, I kind of call that “Les Miserables”. I mean, the vast majority of people are going to be really unhappy and it’s going to be very unstable. That’s a very politically unstable future and I’m hoping we don’t end up there. If you take a case where we continue to have shareholder value dominate, but the economy kind of comes back, then we kind of have rinse and repeat of what we’ve been living with, for the last 20–30 years. In the case where we have a really renegotiated shareholder compact, and the economy remains grim, what I think we’ll have there is something like the world that Franklin Delano Roosevelt talked about when he talked about a rendezvous with destiny. And even though he came from the privileged classes, he was very fond of saying that the means of production should not be owned by private hands — they should be more broadly shared because it was tyranny otherwise. So he came out very bluntly about that. And that’s the case where we have more of a new social compact, and the economy remains in a slump. And, as it was in Roosevelt’s time, there was nothing you could do, but experiment — and nobody knew what the answers were, so there was a lot of social experimentation that took place. And then, in the case where we have a new social contract and the economy bounces back, that’s where I think we have the opportunity to create the Great Society 2.0 — would be what I think of. So, anyway, you’ve got your four scenarios now, and then what you can do is test your strategy against those four and say, “Well, how robust is it? Do I have a strategy that only works in one of those scenarios or do I have a strategy that’s robust across all of them?

Once you have credentialing based on a skill, rather than a degree, the whole edifice of higher education collapses. It’s a bit like when the music industry began selling songs by the song rather than the album — Rita McGrath

[00:07:34.14] Ben: And you also talk about the 6-months, the 12-month, and the 18-month metrics that would indicate which of these boxes, these quadrants we’re moving into. So, for example, if we were going to get to this new Great Society 2.0, what might be the sort of metrics that will indicate that? I suppose Joe Biden being nominated President might be one.

Rita: Yeah, well, you’d look at things like you’re already seeing: movements for labor — Amazon’s experiencing worker strikes, you’re already seeing workers at places like Instacart exerting their power, you’re seeing other politicians calling for a green new deal. I think at a public level, people are aware of just how afraid our social safety net is. And when you think about a public health crisis, such as this pandemic, the fact that you’ve got markets dictating who gets healthcare, I think people are starting to see the disadvantages of that.

[00:08:38.05] Ben: Do you think the pandemic has brought forward some time zero moments for various industries? Healthcare being one.

Rita: Absolutely! We’ve been in this now long enough to have developed new habits. I think it was Charles Duhigg, who’s a reporter with The New York Times, he talks about the Power of Habit — and he said it takes between 30 and 60 days to form a new habit, and we’ve passed that point already. So, we’re now learning to navigate from home, we’ve now made the investment. And if you’d asked any of us six months ago, “Do you want to put all this investment in things like your new microphone or my headphones or whatever?”, we would’ve said, “Yeah, we’ll get to that when it becomes necessary.” And now, all of us have been pushed into a situation where we have to make those investments. Well, having made those investments, do you think we’re all just going to turn our backs on them when things get into a more predictable place? My guess is a lot of us are going to find that we kind of like how things are. And there are going to be things we don’t like about it, but there are going to be things that we do. And so, there will be some behaviors that will be permanently changed.

[00:09:43.16] Ben: If you were to bet which industries will be most affected, I guess healthcare is one. What about education — the industry in which you work?

Rita: I think it’s going to be huge.

[00:09:54.14] Ben: But more concretely, how do you think it will change? Do you think it would just be obviously more remote courses but do you think we’ll have more of a push towards skill acquisition versus general learning?

Rita: Well, I’ve said for some time that I think the big trend for education — and I think the pandemic may have sped this up, but I think it’s independent of the pandemic — we’ve gone way too far on assigning credentials at the level of the degree. So, one of the consequences of this has been just a ramp in degree inflation. And there’s been a fair amount of research on this, which is that jobs that technically don’t actually require a four-year bachelor’s degree are now posted requiring a four-year bachelor’s degree and I think the reason for that is it just makes life easier for the job.

[00:10:42.26] Ben: It’s like a shortcut for the recruiter.

Rita: Well, it is, yeah, because it’s a signal and it’s not really a credential that means anything. It means you showed up for four years, you paid your bills, you handed in your homework, but it doesn’t really have any meaning in terms of what you can actually do as a person. So, I’ve said for a long time now that once you have credentialing on the basis of a skill, rather than a degree, the whole edifice of higher education collapses. It’s a bit like when the music industry started to be able to sell songs by the song rather than the album. Why would you pay for 18 songs you don’t really care about when you want the one that you want, right? So if you had a credential you could get without paying for the whole stack of courses, why would you do that?

The whole notion that we compete in an industry is a bit narrow. And what we’ve seen certainly over the last 10–15 years is industries competing with industries. What industry is Facebook? Is it a media company? Is it a publisher? What is it? And yet, it’s soaking up much of the advertising revenue that provided the oxygen for many news businesses and entertainment businesses and so forth. So, in defining yourself very narrowly as an industry player, I think can create blind spots

Rita: And I think what a lot of people don’t understand is the inside higher ed — and I’ll just stick to higher ed for a minute because I think at lower levels it’s different than this. Inside higher education, the faculty all jockey to have their courses included as part of the required courses. Well, why do you do that? Is it because “Oh, the student must have this in their blood”? That’s the cover. But the real story is, if you have required courses, you have to deliver, and that means you have to hire faculty to teach those courses, and that means you get more faculty allocation than you would if you didn’t have a required course. So, a lot of the structure of what we’re teaching is designed for the faculty, it’s designed for the benefit of the institution, not for the benefit of the students. And so, to me, that’s very vulnerable. If you’re ultimately doing something that’s in your own interest and not in the interest of your customers, then, I think that puts you in a vulnerable place. Once we can have credentialing by the skill, once we can have credentials at a level lower than the degree, the whole kind of edifice of higher education really, is challenged.

Rita: So, that’s an old challenge that’s been around for a while. Now, the newer challenges are, of course, what happens if students can’t comfortably convene on campuses come the autumn? We saw what happened with the spring semester — the students were sent home. If you can’t be on campus in the fall, there’s no way parents and students are going into massive debt for an online experience. That’s not going to work.

[00:12:54.12] Ben: Yeah. If it is a time zero event, that would seem to suggest that many of the incumbent institutions don’t really have time to react. Is that fair to say?

Rita: I think they’re scrambling. I mean, the institutions that, to me, are most at risk, are the small liberal arts schools whose premise has been, “Oh, we’re going to give you this incredible personal development for your experience.” Well, if I can’t be there, that’s not what I’m getting. So, on higher education, the other thing that I think we don’t take into account enough is, for a lot mid-tier smaller schools, how much of their enrollment is international students? There are entire campuses right now that basically live on the Chinese market, and those students aren’t going to be coming. It’s too difficult.

[00:13:39.13] Ben: And how easy it is for institutions to change their cost base?

Rita: Oh, it’s very hard! It’s very hard! Well, let’s just start with the faculty. I mean, you’ve got a group of tenured faculty, so by definition, that means you can’t flex. You can flex a bit on the adjuncts, you can flex a bit on the admin staff, but it’s a very asset-intensive business in that you’ve got physical plants. So, to move that around for most of the established institutions is very hard.

[00:14:09.05] Ben: So, let’s change gears slightly, now. I wanted to talk a bit about your previous book, “The End of Competitive Advantage”, because one of the things that you take aim at in this book is some of the traditional strategic frameworks, which basically assume that firms can mobilize resources that they can either control or they can acquire, in pursuit of sustainable competitive advantage in their industry. And there are a lot of issues with that statement and the parameters that are assumed in those frameworks. And so, I wanted to maybe just address these, one by one. So, the first thing I wanted to ask you is, you suggested that the plain of competition has moved from industries to arenas. Can you explain what you mean by that, please?

Rita: Sure! Well, people have forgotten that industries are something we, as human beings, make up. I mean, God does not come down and say “Thou shalt be a steel industry.” I think a lot of that way of thinking came from, literally, Industrial Economics. So, it was economics based around the premise of an industry. And the premise of an industry says, it’s a set of competitors who exist. It’s a set of market interactions that exist. It’s a set of competitive repertoires that exist — so it’s all about what I would call, a fairly mature stage of competition, where people know who the competitors are, they know what the interchange is, they know what the products are, they know what their value is. So, it completely ignores cases where none of that’s true — a brand new industry, for instance. So, that’s the first problem. The second problem is that, as industry boundaries blur, the most important competition you face may have nothing to do with others in your industry. It may be somebody from outside your industry coming in and taking some portion of what you used to get paid for or what you used to sell and using it for themselves. So, I think the whole notion that we compete in an industry is a bit narrow. And what we’ve seen certainly over the last 10–15 years is industries competing with industries. What industry is Facebook? Is it a media company? Is it a publisher? What is it? And yet, it’s soaking up much of the advertising revenue that provided the oxygen for many news businesses and entertainment businesses and so forth. So, in defining yourself very narrowly as an industry player, I think can create blind spots.

[00:16:40.21] Ben: The example you used in the book, as I recall, is the fast-fashion industry. Do you mind just explaining how that’s an arena, not an industry?

Rita: Sure! So, if you think about a concept that Clayton Christensen very famously popularized, which is the job to be done, he says, “Don’t think about buying products and services. Think about yourself as hiring them to get jobs done in your life.” So, if you think about teenagers, just as an example, and you think about, “Well, what job is it that clothing does for teenagers?” Well, of course, the obvious it keeps them warm and so forth, but, for teenagers, especially, clothing communicates who you are, it communicates what tribe you’re part of, it communicates what tribe you’re not part of. I mean, there’s a lot of communication that happens with clothing. And beginning in about 2003–2004, we started to have the first cell phones that had cameras on them. And if you think about teenagers, cameras, cell phones, and clothing, well, what are teenagers doing with their cameras? They’re sending pictures of each other to one another. So, it’s a very communicative kind of experience. Well, you’re sending a picture and you’re in a blue outfit, and then you send a picture three days later, and you’re in the same blue outfit, then you’re at a party and you’re in the same blue outfit. I mean, how lame is that? So, what you want is you want clothing that exists long enough for the perfect selfie and then you want it to kind of self-destruct, like one of those Mission Impossible tapes. A writer talking about this topic, called it, “fashion bulimia”. She says, “What we do is we buy all this clothing, we wear it a few times, and then we send it off to the landfill”, which I thought was very interesting.

Rita: But the reality of it is it’s an ecological disaster! I mean, it’s very problematic in a lot of ways, but the companies that got on top of this have done very well — so, I’m thinking of H&M, and Zara, and companies like that. And the companies that insisted on the old model — the old model was four seasons, and you did your designs four times a year, you sent them off to Asia, the clothing got manufactured, they got put in trucks or shipping containers, they came back, and so forth, and so forth. Well, you know, you sold at high prices at the beginning of the season, and then you discounted what was leftover. Well, who wants that? So, the companies that have really been successful are the ones that have very, very rapid, very advanced supply chains, and I think that’s been a very interesting example. Now, we may be at the onset of an inflection point in the other direction, where people are saying, “Fast fashion is psychologically disastrous, we don’t want that”, and so now, it’ll be a point of pride to be in the same blue outfit every time you get a picture taken of yourself. So, I don’t know where that’s all going to end up.

if you take the sustainable competitive advantage world, you needed an innovation once every five years, and then the rest of it was all about execution. When you have shorter-lived competitive advantages, you really need innovation that’s more continuous because you need to be continually replacing your competitive advantages as the old ones expire.

[00:19:16.07] Ben: Also, I guess, that agility in supply chains might be harder to achieve post-pandemic?

Rita: Well, we’ve had a lot of revelations about how brittle our supply chains really are, and not enough investment in resilience. That’s true.

[00:19:29.12] Ben: The second reason why some of those strategic frames are flawed — I think you’ve touched on it by talking about Zara — which is they assume that a company can only mobilize the assets that it has under its control, but if you think about somebody like Zara, actually they’re coordinating a much bigger ecosystem of supplies. So, I suppose the question is, are we inevitably moving to a situation where firms become ecosystems? And is that something that wasn’t built into those previous models?

Rita: I think that’s absolutely true. So, there’s a couple of trends there that are fairly significant. The first is that as you start to be able to transact more readily in a digital context — so transaction costs have gone way down — you start to see market-based transactions where you used to have only firm-based transactions. So, to be theoretical for a minute, there’s an old theory saying, “When do you need a market? And when do you need a firm?” And you need a firm when the price is unclear, the risk of opportunism is substantial, the value being exchanged is not clear, and so forth. But if those things are straightforward — bond pricing — you can do things in a market. And so, what we’re seeing with the advent of the digital economy is more and more transactions can be conducted in markets than require a firm. I think that’s one big new thing. The second thing is, now we have many more assets that are available on markets. So, you can get access to talent on an as-needed basis, you can get access to space on an as-needed basis and certainly, companies like Uber would be illustrative of this. Now, I don’t think it’s without problems, because a lot of those transactions have been mispriced. And I can talk about that later, but the ability to contract for things that you used to have to actually purchase I think is new.

[00:21:32.17] Ben: The other thing I wanted to ask you is about the nature of strategy itself, which is very much the point you’re making in “The End of Competitive Advantage”, which is, in an era of transient competitive advantage, strategy becomes more aligned with innovation i.e. is less about making really well-judged large decisions based on historical information and much more about freeing up the organization to move faster, to engage in much more experimentation. So, do you think that’s a fair interpretation of your message, which is really, strategy and innovation have become much, much closer together?

The ease with which you can get into a digital business I think, actually, demonstrates the strength of one of the traditional concepts in strategy, which is you need to have entry barriers.

Rita: Well, I think what you see is when events move more quickly — if you think about the typical picture of a sustainable competitive advantage, it’s an advantage that goes on for a really long period — and if you have competitive advantages that last for shorter periods of time, that means you need innovation on an ongoing basis. So if you take the sustainable competitive advantage world, you needed an innovation once every five years, and then the rest of it was all about execution. When you have shorter-lived competitive advantages, you really need innovation that’s more continuous because you need to be continually replacing your competitive advantages as the old ones expire.

[00:22:50.10] Ben: How does a large organization move from a situation where it’s making these periodic large bets to a situation where it’s continuously making much smaller bets and experimenting much faster?

Rita: Well, it comes down to how you manage your portfolio of investments. And so, up until very recently, you had the core and that was predictable and stable, then you had the near field which is sort of the next-generation core, and then you had your investments in options, which are small investments you make today that buy you the right, but not the obligation to make a more substantial investment in the future. And what’s happened now with the COVID situation is everybody’s core business has now been shoved into this high uncertainty space. So, one of the things I think that’s going to be very interesting for a whole generation of leaders is we’re all going to have to learn what that’s like. And it is entirely possible to be in a fairly senior position in a large organization and never have had to deal with innovation. It’s entirely reasonable. What everybody’s going to learn now is that’s no longer the case, that everybody is going to have to see about filling out their managerial toolkit with some of the techniques that we’ve used in innovation for decades.

[00:24:07.23] Ben: One of the things I find quite positive when I read your books and your articles is that it would be easy to say that some of these Industrial Age giants are toast because they’re so not set up for a world of constant experimentation. But actually, you take a much more nuanced viewpoint, and instead, you say that actually, these guys have a lot of advantages that they can carry into the digital world and they can use them to compete very effectively against some of their digitally-native competitors. What do you think some of these advantages are? And can you also give us some examples of big companies, big industrialized companies that have made a successful transition into digital age business models?

Rita: We’ve been seduced into looking at all these digital-native firms — it’s like, you know, Dollar Shave Club and Casper and all those — and what we forget is a lot of those born-digital companies, yes, they’re brilliant, and I’m not taking anything away from them, but two things that I think are worth remembering is they’re very, very easy to set up. And so, take Casper just as an example. So these were the original Mattress In A Box people and I think they were probably the leaders in that for a while, but today, as Casper is desperately trying to go public, and the headwinds are really against it, you have literally 173 mattress-in-a-box companies. The thing is, they’re very easy to start, but they’re also really hard to defend. So the ease with which you can get into a digital business I think, actually, demonstrates the strength of one of the traditional concepts in strategy, which is you need to have entry barriers. If you don’t have entry barriers, and you demonstrate something works, you’re going to have everybody piling on top of you. So I think that’s the first thing.

Rita: Secondly, for established organizations, they have a lot of advantages. Typically, they’ve got cash flow, they’ve got loyal customers, they’ve got brand, they’ve got a lot of things that the new companies have to build. So, they’ve got a lot of inherent advantages. Now, they’ve got disadvantages too — they have legacy, they have old systems. So, a company that I talk about in “End of Advantage” that I thought really was remarkable was Fuji. Nearly identical to Kodak in its commitment to film, and yet Fuji was able to really pivot towards using their capabilities at imagery and imaging into many, many different fields. So, they got into medicine, they got into telehealth, they got into different kinds of power supplies — I mean, a really, really interesting redeployment of their capabilities. Whereas Kodak, kind of said, “We live and die by film” and could not get out of their own way. That’s an example of two very similar companies who responded very differently to the shifts.

[00:26:43.23] Ben: In your most recent article for the Harvard Business Review, you talk about discovery-driven digital transformation — I thought that was a brilliant article. The reason I liked it was, not only does it so practically show a large organization how it can move away from making big bets to making more incremental bets, and also how to, step by step, build its innovation proficiency, but it also addresses something which we come across every day in the work that we do, which is the body corporate has an immune system and the immune system tends to beat off many innovations and many new ideas. But, what you’re suggesting in the article is that, because these ideas start small, and they gradually get traction, come a bit under the radar, and then by the time they’re on the radar of the body corporate, they’ve got sufficient traction to overcome the immune system. But does that really happen in practice, or do you think that these endeavors are considered almost too small to matter a lot of the time?

Rita: A lot of it depends on your leadership. I think the mantra I would use would be start small but have a compelling vision. And in the article, we use the example of Klöckner — The German metals distribution business. Their CEO basically looked at his whole value chain and said, “My God! There’s Facebook, there’s Google, there’s Amazon, there’s all these trading platforms — if we don’t do something about getting digital, we’re going to be toast because somebody is going to figure it out, even if it isn’t us.” But I thought it was very interesting the way they started. So, one of the things they began with was very simply digitizing their ordering system. So, the first instruction to these two guys he set up in Berlin, in the middle of the tech center in Germany, the first thing he instructed them to do, he said, “Well, think of something, anything that’s digital, that makes us easier to do business with, as a company.” And one of the first things they tackled was getting rid of the fax in order system. So, instead of sending a fax, a customer could place an order digitally.

If you think about the relationship between employees and employers, back in the day the unspoken negotiation was, you gave me stability and security — and I gave you loyalty. But what that meant was that you had people who were prepared to invest literally decades in your organization. What we’ve got now is what many people have called “the tour of duty” economy. And so, you’ve got people who are migrants from company to company to company, and they are essentially free market operators. It therefore doesn’t give you any advantage that lasts because they’re always open to the next bidder when their contracts come up.

Rita: Now, why I think that’s so interesting is, it was much user-friendlier on the part of the customer, but when that digital request hit the company, there was no change required. You just responded to the digital request the same way you would have responded to a faxed request. So, the thing I think is interesting is you digitized something without perturbing the incumbent organization at the time. And then, once you’ve got that going, then you say, “Well if we’re sending digital orders, wouldn’t it be easier if we digitized the inventory? And that way, the incoming order would know what it was looking for, without a person having to go and look it up. Okay, that makes sense.” So you talk about antibodies — if he’d gone in there guns blazing and said, “We’re going to take this whole thing and digitize it all”, you would have come smack into the antibodies, and things would have gotten screwed up; I mean, things always get screwed up in a digital implementation and then it would have been, “See? It doesn’t work! I told you it wouldn’t work! The orders are all messed up, the inventory is all wrong.” Instead, what they did was they took it piece by piece and they said, “Let’s fix the fax problem. And then, once we’ve got the fax problem fixed, let’s fix the inventory-naming problem, and then once we’ve got that fixed, let’s maybe make an online store where we take out the need of a person to go pick this inventory — a customer can just pick it themselves.” But I think it’s that step by step solving of consecutive problems rather than announcing you’re going to turn the whole organization inside out — I think that’s really where it makes a difference.

[00:30:19.14] Ben: But in the Klöckner example, did the CEO have a grand vision, even though he achieved it through these very small steps?

Rita: Yes, I think he did. Which was, if we don’t do Amazon for ourselves, somebody else is going to do it. Now, he wasn’t exactly clear in the beginning, what that exactly looked like, but he felt, directionally, that that was absolutely where they needed to go.

[00:30:42.00] Ben: I suppose that’s the one constant with strategy, which is, almost, even more, you’ve got to set a clear direction of where the organization is headed even though you can be less precise about exactly how you’re going to get there. The North Star becomes even more important from a strategy point of view.

Rita: Yeah. I think the more confusing things are, the more you need a strategy because it orients you, it gives everybody the potential to be aligned around a common future. It pulls you into the future.

[00:31:15.28] Ben: I just wanted to revisit something you said about Casper and a lot of these D2C entrance, which is, they are cheap to start up, and therefore, they’re difficult to defend. What is the new barrier to entry in the digital age? Is it network effects or is it just constant innovation?

Rita: Well, network effects is a big one. And just so your listeners understand what we mean by that — so, network effects refer to the fact that the value of a product or a service increases with the number of other people using that product or service. This is not very well understood, I think, in many cases. So, imagine you’re the only person on a dating site. I mean, unless you’re a complete narcissist, that’s not going to be very valuable. So, the value of the dating site goes up as additional members join. But people forget that network effects sometimes reach a limit. So, I’ll take Uber as an example. So, Uber benefits from network effects to the extent that you have more drivers — that means you have more availability — that makes you more attractive to riders. But, that only takes you to a certain point. So, the fact that I have 24/7 totally available drivers in New York City doesn’t help me much if I’m in Munich. So there’s a sort of localization of network effect which you’ve drawn in there.

if everybody you interact with is just like you, there’s a lot of overlap. So, they may be very comfortable, it may be very fun, but you’re not going to learn a whole lot

Rita: The second thing to worry about with network effects is they can increase but they can also fall away. So, a network can peel away even if it holds users in. I think Facebook is a super interesting example of that. So, what you’ve seen up until the recent pandemic is for younger people, they’ve been leaving the core Facebook product in droves. Now, they’ve been going to Instagram and other networks to do their exchanging — Tik Tok is the latest one — but you’ve got a diminished network effect, almost, there. So I think that’s the first thing.

Rita: You asked what is a source of sustainable competitive advantage: certainly, network effects are a big new one. I actually think people and capabilities have come back on the radar. And the reason I think that’s kind of interesting is if you think about the relationship between employees and employers, back in the day — the gray flannel suit days — the unspoken negotiation was, you gave me stability — job stability and security — and I gave you loyalty. But what that meant was that you had people who were prepared to invest literally decades in your organization. So, they got to know its idiosyncrasies, they knew what it could do, they knew what it didn’t do. And because they were lifetime employees, they were very committed. What we’ve got now is what many people have called “the tour of duty” economy. And so, you’ve almost got people who are migrants from company to company to company, which I don’t think there’s anything wrong with. But if you think about what’s going to build something that can’t be traded on a market — which is essentially what you’re looking for if you’re looking for an entry barrier — and you’ve got these people who are essentially free market operators, it doesn’t give you any advantage that lasts or you’re going to have to pay a lot to keep them — kind of like professional sports stars: while you’ve got them, they can give you an advantage, but they’re always open to the next bidder when their contracts come up.

[00:34:32.13] Ben: What about those companies — I guess Amazon would be an excellent example — that are able to continue to innovate? So, notwithstanding the fact they’re very large, they’re still able to continue to deliver innovation after innovation. Is that a competitive advantage?

Rita: It can be. Yeah, absolutely! It’s a way of being in the world that is very hard for others to copy. A great example that isn’t a tech company would be — well, they are a tech company I suppose — but something like Corning.

Ben: Every company is a tech company these days.

Rita: Yeah, right! But a company like Corning, where they’re profess strategy is “we need to be 10 years ahead of our customers in terms of advanced materials” — their core offering is really about being innovative in the products and services they sell.

[00:35:17.27] Ben: Let’s talk a bit about human adaptation then, to this new world of transient competitive advantage. Maybe let’s start with individuals themselves because, as you just said, we’re moving to this tour of duties and there’s this great table I absolutely love — is table 7.1 in your book, “The End of Competitive Advantage” — and I just love it because it’s so succinct in explaining how the world’s changing. We’re moving from a world which was dominated by organizational systems to one of individual skills, stable career path through a series of gigs, hierarchies and teams to individual superstars, and so on. In this world where we are switching jobs more often and where, I suppose, the responsibility for career management falls to us as individuals and where the return on investment of the skills we have is higher, how should we prepare ourselves for this shift? And how do we stay ahead of this shift?

don’t judge the quality of a strategy only by whether it delivered the results that you were looking for because that’s not always a predictable metric

Rita: Well, I think you continually have to be thinking about learning. One of the things I do at Columbia Business School is I direct a number of our executive education programs, and they’re very much about, your business education doesn’t stop at the age of 28. So, even if you have an advanced degree, even if you have a Master’s or an equivalent, I think it’s really important to keep coming back to get refreshed, to add some new tools to the toolkit, make new friends, make new network connections — all of those things are really important. And so, in the book — I think it’s the last chapter in “End of Advantage” — I really spend a lot of time on that. So, there’s a one-page quiz you can take which says, “How prepared are you?” It’s things like, “I’ve learned a new skill even if it wasn’t directly relevant to my job”, or “If I lost my job, suddenly, I know 10 people I could call that would help me find the next one.” It’s those kinds of things I think we need to be thinking about.

[00:37:11.04] Ben: What about putting ourselves in uncomfortable situations and forcing ourselves to learn new things or forcing ourselves to hang out with people who aren’t like us?

we have this cultural myth, almost, of the hero CEO who is going to come down and tell you what to do, and everything’s going to be fine, rather than the organization having to figure it out. I think we’re slowly realizing that the organization figuring it out is actually more of the norm.

Rita: I think it’s crucial. If you think about it, if everybody you interact with is just like you, there’s a lot of overlap. So, they may be very comfortable, it may be very fun, but you’re not going to learn a whole lot. It’s different than what you already knew.

[00:37:38.10] Ben: Do you think that most leaders have the necessary learnings to cope with the kind of crisis we’re going through now? Or do you think there is a very different skill set for wartime CEO versus a peacetime CEO?

Rita: People talk about that. I mean, Tom says this very nicely. He says, “People will put up with awful terrible incompetence, stupid leadership when times are good, but when times are harder, they really look for competence. And so, I think a lot of leaders in peacetime, in good times, who aren’t actually great leaders, they get away with a lot. But Tom will also tell you that the raw material, if you will — the trust, the courage — that you need for wartime is actually built up during peacetime. And that’s when people know they can rely on you and trust you. So, it’s an interesting nuance there, I think.

[00:38:33.19] Ben: So, in other words, wartime just highlights deficiencies in leaders, and also, potentially the lack of goodwill that they built up when times were good?

crescive leaders are much more about discovering the organization’s capabilities, shaping decision-making, shaping decision premises, and a lot of those practices are actually much more closely associated with women’s styles of leading, for whatever reason, than they have typically been with men’s. And so, I think it’s very interesting now, as we look across the world, which countries have done well, in the midst of this pandemic? And overwhelmingly, they’ve been countries that have had female leaders.

Rita: One of the things that I find super frustrating as a person who studies organizations is you can make stupid, ill-informed, poorly advised, really dumb decisions and have a great outcome because you happened to be in the right place at the right time, you got lucky, whatever. And you can make well-considerate, very smart, strategically substantive decisions and end up with a bad outcome. So, take a company like Disney — here they are, launching their streaming service and hitting success on every possible dimension, and COVID-19 comes along, and now nobody’s going to theme parks. Well, that wasn’t their fault. And so, I think one of the things I really encourage people, really, to differentiate is don’t judge the quality of a strategy only by whether it delivered the results that you were looking for because that’s not always a predictable metric.

[00:39:39.21] Ben: Do you think the qualities of what made a good CEO 30 or 40 years ago are different from the qualities you need now to be a successful CEO?

Rita: I don’t think they’re different. I think you could, in the Jack Welch — Lee Iacocca era, you had the hero CEO who stood boldly upon the plains and cast commands and all that stuff — I think even then, and certainly today, we’re really looking for CEOs to be much more connectors, collaborators, bringing out the best in their organizations, much less of the command and control kind of CEO. And at the same time, we have this cultural myth, almost, of the hero CEO who is going to come down and tell you what to do, and everything’s going to be fine, rather than the organization having to figure it out. I think we’re slowly realizing that the organization figuring it out is actually more of the norm.

[00:40:33.27] Ben: What is Crescive Leadership? And do you think it’s now the time to have more women in leadership roles? Is that what the new post competitive advantage era calls for?

when your fundamental business model relies on your customers being ignorant of what you’re doing, I just think that’s a fundamental weakness

Rita: I think so. So the word “crescive leadership” was actually coined in the 1980s by my friend, Jay Bourgeois, and a co-author of his. They were cataloging leadership styles and they had four that they felt pretty comfortable with: so there was the command and control leader, and then there was the coalition builder — so four archetypal leadership. And then they ran across this fifth style, they could not figure out what to do with it. And finally, they said, “Alright, we’ll make it its own category.” And they didn’t spend much time on it, but they called it crescive, which I think is Latin for growth leader. And, you know, crescive leaders are much more about discovering the organization’s capabilities, shaping decision-making, shaping decision premises, and a lot of those practices are actually much more closely associated with women’s styles of leading, for whatever reason, than they have typically been with men’s. And so, I think it’s very interesting now, as we look across the world, which countries have done well, in the midst of this pandemic? And overwhelmingly, they’ve been countries that have had female leaders. I mean, if you look at Angela Merkel or the Prime Minister of New Zealand — calm, factual, not fear-mongering, but just matter of fact, and “Here’s what we need to do. Let’s take it step by step. And here’s why. And this is what I know, and this is what I don’t know — and I’m going to be very transparent about those things.” And it engenders trust, it engenders a willingness to cooperate, it engenders a feeling that someone capable is manning the helm — unlike the rather chaotic response of a lot of other countries.

[00:42:22.10] Ben: Mark Zuckerberg once had designs on top of this, on running for president. How do you think Mark Zuckerberg would have fared in the pandemic?

Rita: Well, there’s sort of an angel-and-a-devil quality about Zuckerberg. So, on the angel side, I think he’s brilliant at seeing systems, thinking systemically seeing how parts interconnect. I mean, you couldn’t run a thing like Facebook without having that skill. So I think in terms of fitting together how the whole system would need to respond to something… You know, the thing about the COVID-19 is it’s a systemic threat. It’s not an isolated one part of the economy falters while others are fine. Everybody’s affected. So I think he would have been really good at figuring that out and seeing down into the details of that. What I don’t think he’s very good at is he’s not relatable. He’s not an empathic sort of person, he is kind of cold. So, I’m not sure he would have been great at bringing people along with that vision. Don’t forget that since the age of 21 he’s used to calling all the shots in every way. I mean, he doesn’t get challenged, and in a political environment, you’re constantly dealing with people challenging your judgment — you don’t have all the authority, you can’t just make a decision and have 2000 people, if you say, “Turn right” they all do it. So, I think he would have gotten himself into a lot of trouble with politics. And, a lot of brilliant business people go into politics and they’re used to being able to say, “Well, this is what we’re going to do.” And everybody says, “Okay”. Politics isn’t like that.

[00:43:50.22] Ben: Yeah, the electorate can be a bit more prickly, right?

Rita: Well, by definition, most of the Western democracies anyway are designed with a balance of powers, and that means there’s a BALANCE of powers.

[00:44:01.00] Ben: The reason I asked the Mark Zuckerberg question — it might seem a bit random — it’s just that you take aim at Facebook in the book and you suggest that they may be on the cusp of an inflection point. It’s not something we’ve discussed so far, so I just wanted to introduce that idea and why you think that might be the case?

Rita: Well, my issues with Facebook are when your fundamental business model relies on your customers being ignorant of what you’re doing, I just think that’s a fundamental weakness. And until very recently, even today, I don’t think customers understand that when you post that baby picture to Facebook, it is no longer yours, it’s theirs; when you tell Facebook, or Google or any of the other big ones — I happened to pick on Facebook — if you tell them “I’m going to buy gas at the post office and visit the post office and whatever”, they own that data and there is super scary tracking information. There was at one point The Library Act that authorized libraries — at least in the United States. It basically said it was the solemn duty of a librarian to keep private what people were looking up in the library because if you were to reveal that, it would be such a breach of privacy. Oh my god, the fact that I was looking up baby care books meant maybe I was pregnant — Oh, my God! And yet, here we are, gaily handing over the most intimate details of every moment of our waking lives to these companies. They’re not accountable to anyone; Zuckerberg has almost complete power over that company due to the way its stock structure is designed. It’s another case of business practice getting ahead of institutional ability to regulate it.

it’s very hard to have multiple visionaries in one company. I mean, the only way I’ve ever seen that work is if you’ve got a strong divisional structure — so each visionary has their own swim lane, as it were — but at the top of the company, it’s really hard because by definition, if you talk about culture, visionaries are people who believe in let’s create the future, and if I’ve got two visionaries with two different dreams of what the future could be, it’s going to be really, really hard.

Rita: So, I have no personal vendetta against Facebook; I just think when your business model requires that your customers are basically ignorant and you contribute to that — you’re not transparent, you’re not honest about what you’re doing with the data. And then, Cambridge analytic was just this bit of the surface. And if you look at the way bad actors are using the platform, if you look at how they’re sort of washing their hands, “Oh, no, we’re not publishers. But yet, we derive a huge percentage of our revenue from the ability to reproduce news that’s created by other organizations that have to get paid for it somehow.” I don’t think their outcome in a political social sense is very positive and I think we haven’t yet quite accounted for the imbalances they’ve created in our system of interacting with each other, getting news, advertising, getting paid — that’s all kind of not come together yet. So, the reason I think they may be up for an inflection point now — it could be five years from now could be 10 years from now, but at some point, people are going to say, “This is not legitimate” and businesses, in the long run, that are regarded as not legitimate, fate has not been kind to them. So, take tobacco companies as a case in point. Once you begin to be seen as a provider of something dangerous — and in the case of Facebook, I think a lot of what Facebook is creating is social pollution. It’s just disinformation — and it’s sucked all the revenue out of legitimate news organizations. So I think at some point there’s going to be a rebalancing.

[00:47:07.25] Ben: What you highlight in the book is, I think you call it Type One and Type Two decisions — and how the fact they haven’t really adequately distinguished between the two. So, if I attempt to describe that concept, is this idea that when you’re innovating, you can move fast and break things much more comfortably, if you know they’re not going to have a big impact on society or the economy or whatever, versus the ones where you need to be much, much more careful because of the ramifications of those decisions. And one of the arguments you make is that there hasn’t been an adequate sort of differentiation between type one and type two decisions at Facebook.

Rita: Well, Facebook is all about ‘move fast and break things’. And to me, that’s fine when you’re experimenting with an app and you want to see if people like people talking in suits or talking in hoodies, better. Fine. Move fast. Go ahead and do it. When you’re experimenting with democratic institutions that are ill-prepared to defend themselves against the actions of bad actors, that’s not so risk-free.

[00:48:08.12] Ben: Just to talk on a more positive note — so, you think about Satya Nadella very differently, right? He’s somebody who took over from Steve Ballmer, who was maybe a bit more of a command control type CEO, and I suppose was a good time for shareholders at Microsoft, but not such a good time in terms of innovation, for example. And you think that Satya Nadella’s leadership style is much, much more akin to this digital age, this age of transient competitive advantage. Why do you think that?

Rita: For a whole number of reasons, but one of the most, I think, important is he’s got the whole company focused on what I call “leading indicators” rather than “lagging indicators”. So, Ballmer was all about profits, margins, revenues, and Nadella, is not that he doesn’t care about those things, but what he’s after is, let’s look at what drives profits, margins, revenues; let’s look at the behaviors that precede our acquisition of those wonderful things. And those behaviors are things like usage. And what drives usage? Well, customer love. What drives customer love? Empathy. So, he took a Microsoft that was really like the Velociraptor of the tech world, and really did a cultural transformation, looking at, let’s stop just talking smart, let’s stop trying to be the smartest people in the room — let’s really focus on what the customer wants. And they talk a lot about a growth mindset. Let’s talk about how do we really learn what the customer needs and what’s going to drive their behavior.

[00:49:31.23] Ben: How does a CEO like Satya Nadella continue to grow and acquire new skills and new leadership qualities himself? And then, secondly, do you think that’s the single most important difference or the single most important catalyst for change in an organization to have the right leader in charge?

Rita: Well, I think leadership is very difficult. If your leader is not forward-looking or if your leader has different priorities, it’s super difficult to work around that. I mean, I’ve seen it happen where you’ll have a stealth move by people in the middle of the organization sort of working around the senior team, but it’s very effortful, and it’s not easy. With Nadella, I think his whole stance towards leadership — I mean, you have to remember he’s a Microsoft lifer, so this is not a guy who came in for some cuddly kind organization and decided to turn Microsoft around — he’s been there his whole life. So, the advantage of that, going back to what I said earlier, the secret sauce stuff is he really knows the organization, he’s trusted, he’s been seen as an effective leader there for years. And I think he’s just made it a personal commitment of his own to keep learning and to keep his people learning and to make sure that they felt supported.

Rita: It sounds very grandiose, but it comes down to a lot of relatively simple actions. So for example, every week, they have a senior leadership team meeting and they devote a chunk of time at that meeting to creative imagination stories from around the world, and what they’ll do is they’ll virtually beam a small team that’s working on something way far away from headquarters and they get 20–25 minutes at the senior teams time to talk about something cool they’re working on. Well, that would never have happened under Ballmer, I suspect.

Rita: Things like that keep people’s minds on the idea that it’s all about the new, it’s all about the next, we want to be open to hearing from people who are maybe not at our hierarchical level, but maybe have great ideas. And if you watch the video of Nadella when he goes on business trips, when he travels, he always makes time to meet with children, always makes time to meet with younger people, he’s got a huge emphasis on people who are differently-abled — so people with physical impairments of some kind — a huge effort on that to make sure that the products are inclusive, that those people’s ideas can be included. And I think it comes from, in many cases, having a son who is quite severely disabled, and the realization that these are still human beings with innate value, they just happen to have different capabilities.

[00:52:11.23] Ben: Fairly fascinating company, because it’s one that a lot of people were sort of starting to write off and then, it has made not just a shift, but a massively successful shift, and it’s now a leader in cloud computing. And it’s a question about succession planning because your colleague, Steve Blank, wrote a really wonderful article, where he talked about succession planning in tech companies. And his thesis was basically, where you have a leader that’s very visionary, he or she tends to surround themselves with people who just execute on the vision. And therefore, when the succession comes, you then tend to be succeeded by somebody who’s good at executing and doesn’t have the vision. And then it takes the next generation to then have somebody who’s, once again, a visionary. And you could superimpose that narrative on Microsoft, you could do the same thing on Apple. Do you buy into that?

Rita: I think it makes a lot of sense. I mean, it’s very hard to have multiple visionaries in one company. I mean, the only way I’ve ever seen that work is if you’ve got a strong divisional structure — so each visionary has their own swim lane, as it were — but at the top of the company, it’s really hard because by definition, if you talk about culture, visionaries are people who believe in let’s create the future, and if I’ve got two visionaries with two different dreams of what the future could be, it’s going to be really, really hard.

[00:53:34.24] Ben: The last question on the subject of a visionary: Clayton Christensen, he wrote the foreword to your book, “Seeing Around Corners”, he was a contemporary of yours, a friend, a colleague. How big a legacy do you think Clayton Christensen will leave on the strategy and management profession?

Rita: Oh, huge! Absolutely huge! I mean, Clay introduced the whole notion of disruptive technologies, which challenged a lot of the prevailing assumptions at the time — the sort of David versus Goliath narrative and how did that work and the whole mechanic of disruption. Unfortunately, the word has gotten quite abused because now disruption means anything that’s a big change — but he was very specific about what disruption was. And he was very specific about a lot of things — the whole jobs to be done idea came from him. So, I think he’s had a huge influence on the way business leaders think. So, absolutely major!

Ben: Rita, thank you so much for taking part in this podcast. It’s been a great conversation and I very much appreciate you taking the time and dialing in from your home. Thank you very much, indeed.

Rita: It’s a pleasure! Thank you for having me!