Inger Hanne Vikshåland: Hello, and welcome to this session on industry shifts and inflection points. I’m Inger Hanne Vikshåland with Engage // Innovate and today I’m talking with Rita McGrath and Christian Rangen.
Rita McGrath is a globally-recognized expert on strategy, innovation, and growth with an emphasis on corporate entrepreneurship. Her best-selling book “The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business” was awarded the Strategy Book of the Year in 2013.
Today we’ll be discussing her upcoming book on strategic inflection points, a book that is especially relevant in a Norwegian context and will be one of the topics on her upcoming visit to Stavanger in Norway, May 12th.
By my side I also have Christian Rangen, co-founder and partner at Engage // Innovate. Christian is one of the leading strategy and innovation experts in highly uncertain environments. He has worked all over the world with big global brands and promising startups.
Christian is one of the creators of a series of new strategy tools called Strategy Tools for the Next Generation, which are used by companies all over the world. His latest research revolves around industry shifts and inflection points which we’ll discuss today.
Rita, why don’t you start with sharing what you’re working on at the moment?
Rita McGrath: I’m working on a new book, really looking at this issue of strategic inflection points and the basic idea is that when you dissect a strategic inflection point, you often observe that the roots of it began a long time before it actually happens. So the working title for the book is “Gradually, then Suddenly”, which is how you experience inflection points. But the good news for strategists is that if you’re paying attention early, you can often see them coming and make appropriate interventions ahead of time.
Inger Hanne Vikshåland: Interesting, can you tell us a little bit about the biggest trends you see in the field of strategy and innovation?
Rita McGrath: The biggest trends in strategy and innovation have really become almost integrated. So, you know when I first started in the field, the strategy people were all in one corner of the room looking at industry trends, who is going, what are order of entry, market shares, that kind of thing. And what we’re seeing today is that you can’t really have a conversation about strategy without giving as much time and emphasis to innovation as you do to more traditional strategy topics. So that’s one of the biggest trends that I see.
Christian Rangen: I think I’ll just echo what Rita just said. I think we see this a lot, especially with large organizations that it’s really a merging of minds between the strategy side and the innovation side. Very few organizations have built the tool and the practice for it, but it’s getting there.
Inger Hanne Vikshåland: So Rita, based on your recent work in Cali, what are the key takeaways for other companies looking to accelerate innovation programs?
Rita McGrath: I’ve developed something that I call the Innovation Maturity Scale where you start out at 1, which is almost actively hostile to innovation, and then move your way up to 8, where you really got an innovation proficiency, it’s baked into all your processes, it’s not this weird thing sitting on the side. And I would say my work in California leads me to believe that most organizations are at about a 2 or a 3 on that scale. They’ve got pockets of innovation, there are champions that kind of comes and goes. They take the big trip out to Silicon Valley, have a picture next to the Facebook sign, but they don’t really have it embedded as an actual proficiency in the organization. I see that unfortunately all over. So, one of the big challenges is how do we make innovation something as repeatable and reliable as say, quality, or those kinds of practices in organizations.
Inger Hanne Vikshåland: The average in California is about 2-3 on the Innovation Maturity Scale, what do you think about Norwegian companies, Chris?
Christian Rangen: You know Rita, you’ve done some work with Norwegian companies already, and I think I’ll again, echo you that a lot of people go out and they have their photo taken by the Facebook sign or by the Google sign, but you know, really, organizing for innovation as a repeatable process, those are far and few between. There’s a few, Telenor is a good example. I know Rita you have been writing about Schibsted as a good example. Kongsberg is a good example. But overall, there’s a lot of work to be done here.
Inger Hanne Vikshåland: Based on your research on industry shifts and portfolio thinking, what are your recommendations for Norwegian executives coming out of the oil and gas industry?
Rita McGrath: I think the first step is to recognize that what worked in the past is not going to be what works in the future. You really need to be thinking about getting into new areas. To me there are two vectors you can choose. So you can choose to operate from a capability platform, or you can choose to operate around a particular customer need that you’re serving. So I’ll pick Statoil as an example. Clearly, there’s a choice to be made about do we operate from deep capabilities in undersea operations, safety, you know, incredibly technically complex capabilities, or on the other hand, do we define ourselves in the energy space, and get into things that really have not been traditionally the capabilities that we’ve had. Things like renewable, solar, that kind of thing. I think companies need to make a choice about which route they’re going to follow going forward.
Rita McGrath: A good example of a company that started with the capability idea would be Fujifilm in Japan. They decided to say, “hey, you know we’re terrific at chemicals, we’re terrific at imaging, so let’s find other places where those capabilities come into play. And that got them into things like cosmetics, a service for the pharmaceutical industry, they have a whole variety of different activities they’re pursuing, but they have at their core this central capability idea. I think companies need to make a decision. If you’re going to go away from your core towards something that is new, which is going to be the driver for that?
Christian Rangen: From your previous book, Rita, you of course opened with the case study on Kodak and then the case study on Fuji. This week, of course Snapchat goes public on a valuation of 24 billion dollars – why did it take such a big shift in the industry to move from the old film to the new to create that kind of value? How on earth could something like that happen from within Kodak?
Rita McGrath: Well it could’ve, you know, I think the tragedy in a way of big companies is that they’re so enmeshed in their existing practices and processes they just don’t even see those opportunities. Kodak, they were wedded to chemical based processing and the whole Snapchat idea came out of fooling around almost, with “hey I wanna share an image, but I don’t wanna be tied to it forever. So I think you’re just starting from a really different place than where Kodak started.
Christian Rangen: When you frame it like that, it sounds like a really stupid idea, you know. Why would you want to share a photo that disappears?
Rita McGrath: (laughs) well, I think that’s also part of the current phrase that people are using a lot is the “jobs-to-be-done” theory. So traditional photography was all about preserving memories for all time, right? That’s how we thought of traditional photography. Whereas with Snapchat it’s much more about sharing an image as part of a conversation. And when the conversation finishes, you don’t necessarily want that image hanging around forever. So it’s more, you know, in the moment, fun, and maybe a little naughty, something we don’t want to have a permanent record for. So it’s really meeting a different need for a different job.
Christian Rangen: Let’s go back to the question at hand. Kind of zooming in on the oil & gas industry. As you know, the oil & gas industry represents by far the biggest value creation in the Norwegian GDP. It’s not only oil & gas, it’s the entire supply chain, the entire value chain behind it, up to technology development, helicopter transportation, research & development, and what we’re seeing now is a big pain running through this entire value chain as they’re trying to readjust to very different world. And hands-on experience is that most management teams, they’ve never had to look outside their own industry, they’ve always been serving a very fixed position, fixed value chain with profits everywhere.
Christian Rangen: What would be your how-to-get-started guide for management teams that’s always been just milking a cash cow and now they need to go find reinvention. How do you start?
Rita McGrath: I think the place to start is getting inspiration from outside your current operations. I really think you need to be looking outside that industry – find analogies, find different ways of sparking your imagination.
Rita McGrath: I guess the analogy I would use is you need to get, as a famous leadership book once said, imagine you’re going to a dance, and if you’re on the dance floor, you have one experience of that dance. Everybody in the industry has really been on that dance floor, we’re interacting, we have predictable profits, we know exactly what’s going to happen. But imagine the ballroom has a balcony, you need to get up on that balcony and get a different perspective on what’s going on. I think there’s a need to really immerse yourself outside your immediate context and get a sense of what’s going on in the world that may or may not have anything to do with what you’re looking at.
Rita McGrath: Pragmatically, how do you do this? There are a number of ways. Christian, as you and I both know, you can immerse yourself in an executive program, come to a seminar – like the one we’re planning, you could go to conferences from industries different from your own. I think the key thing is to make some time to get away from the emails and the day-to-day, to really get a big picture perspective of what could be going on.
Christian Rangen: You make it sound so easy.
Rita McGrath: (laughs) it really isn’t that hard, I mean I think this is one of the optimistic messages that I’d love your readers and listeners to take away. Which is, we have this fear almost of, oh my God we’ve always been the automotive industry, the healthcare industry, in this case, the oil & gas industry, every place else looks so scary and foreign and unfamiliar but you know, when you make the relatively small effort — take a couple of days, go to a non-related industry conference, or have conversations with people who don’t touch what you normally touch, and it’s surprising how quickly the insights begin to emerge.
Rita McGrath: The other company I worked with a lot that is an expert at giving people this kind of different perspective is the Mach49 people which you met with Christian, when you were out in California. They’re very good at creating situations where people can gain, pretty rapidly, some major insights about what they could be doing differently.
Christian Rangen: It’s true. I met them a few weeks ago in California. A very impressive leadership team they have in place. It’s a company we hope to engage more with in the year ahead. Absolutely.
Christian Rangen: I want to bring up the point on the architecture behind the strategic inflection points. What are some typical weak signals that in advance can alert you, and how much gut feeling vs how much analysis do you see is required from management teams to act on these weak signals?
Rita McGrath: Well the weak signals are when something happens that creates a 10x shift in the envelope that contains your industry. If you think about any kind of sector or industry or company, they have certain constraints in their environment that are present when they’re born. Take the newspaper business for example, the main constraints in the newspaper business before the digital age were things like how many contracts do you have, how many trucks do you need, how many newsstands are you positioning, well, then along comes digitalization and all of those constraints at once are changed by a factor of 10 or 20. And so what happens in companies, those changes don’t happen instantly, those changes take a long time to unfold.
Rita McGrath: Let’s take retail.
Rita McGrath: Amazon sold its first book online back in 1995 and a reporter from Fortune that same year, pointed out that the internet could change all these different constraints that publishing, retail, distribution, all these different industries, this is back in 1995. The data were absolutely positively there, but nobody in retail was paying attention. And if you cast your mind back to 1995, that was before wide scale adoption of broadband, that was before we had always-on, instant internet, that was way before the mobile phone revolution.
Rita McGrath: So even though this information was out there, it wasn’t actually practically relevant at that time. I mean, in America, the way we got on the internet in those days was you dialed up to AOL, and this dial tone right, and that time you actually even paid for the time you spent on the internet. So even though the early warnings were there, it wasn’t really practical, it wasn’t a meaningful shift in the business.
Rita McGrath: However, had you been paying attention, you could’ve seen that as an early warning that something big might be coming your way. And I think that’s what I’m encouraging executives to sort of broaden their imagination about what could happen. If there’s a potential for a 10x shift, something that is a constraint on your industry, that’s where you really want to be paying attention, early on.
Rita McGrath: And in the early days, there aren’t any data, so it is a bit of intuition, it is a bit of imagination. It’s looking at what could shift, rather than saying, ok this is at my doorstep, we have to react to it now
Christian Rangen: If we bring this to our upcoming event in Norway, what do you think are the biggest takeaways for busy executives that will be taking time out of their fairly challenging workday at the moment to spend a day with us?
Rita McGrath: One of the takeaways is how do you think about early warnings, another is how do you set yourself up for innovation. And as you know, Christian, I am a big believer that you have to be investing your resources in three kinds of initiatives.
Rita McGrath: One is to keep your core business as healthy as you can, which is challenging if it’s in decline or flat. The second is to think about what you’re going to launch that is going to be part of your next core business. The third is how do you invest in strategic options which are early investments that give you the right, but not the obligation to make a significant investment going forward. And I also think we’ll be offering a sneak peek of some of the tools we’ll be using so we’re in the process of developing an innovation operating system which embeds in software and ways of working this innovation proficiency that I alluded to earlier.
Rita McGrath: How do you do work that is legitimate but also is friendly to the innovation practice.
Rita McGrath: There will be some very cutting edge ideas in the workshop.
Christian Rangen: I think we’re all looking forward to it. It’s interesting that you mentioned the Three Horizons. I think we share a passion for tool-ifying rather than complicating the field of strategy. We follow your work and we’re very much looking forward to seeing what new strategy tools that’s going to come out of it.
Rita McGrath: I think it’s going to be a very exciting day.
Inger Hanne Vikshåland: Great! Should we finish off with the final question? We have talked about the big picture, and globally, we are seeing more and more governments looking to accelerate national transformation, like Norway for instance. So what are your thoughts on this, Rita?
Rita McGrath: Well, government has some positive things that it can do and it also has some challenges. You know, the typical government program of sort of picking winners and losers and funding new kinds of innovation is often not that practical. They have a different set of motives, they have a different judgment criteria so I would advise governments to not get directly involved in supporting businesses and ventures.
Rita McGrath: Where I do see governments being incredibly helpful is where the market really fails. So providing support for initiatives that perhaps are too long-term or too challenging or difficult for individual investors to want to take a risk. That’s one way where governments can be really helpful.
Rita McGrath: Another way is to invest in capability creation. So rather than saying, we think x industry the place to go, we’re going to put all our resources there. Instead say, we can be part of building an innovation capability in our country. We could invest in training entrepreneurs, we could invest in training people how to build an ecosystem, we could invest in specific skill development, I think those are all very fruitful where governments can get involved in creating more innovative companies.
Rita McGrath: I think what people don’t understand is, given our current administration in the US which i think is a really important topic, is that if government was business, it would be business right? Government has different things – so just as a specific example, you know, businesses seek out points of differentiation, so if you are a business what you wanna do is appeal very very strongly to a given and select set of customers. Government is all about creating broadly, the biggest set of benefits for the largest number of constituents even if nobody is particularly 100% pleased with the outcome. You know, it’s a completely different set of criteria that you’re working with when you’re the government, so we really need to understand what government can and can’t do.
Rita McGrath: I’m a huge believer though in capability building.
Christian Rangen: It’s um, you know, not to touch on your current administration, I think there are a lot governments around the world that are looking for ways to, you know, much like Singapore probably, really really put a strong effort behind growing new growth industries. I think this discussion in the US between should we take care of the coal industry or should we accelerate our efforts in the solar industry is a perfect point on that conflict. Because there’s one that you’re familiar with, and then there’s one where data’s seeping in that solar is actually employing more people today than coal yet the discussion very much revolves around past profits and past traditions.
Rita McGrath: I’ll jump in there. I think that’s a battle Norway is going to have to be grappling with. There’ll be an awful lot of nostalgia for the way things used to be. In any big disruption, in any big technological change, there is going to be people that benefit and people that suffer.
Rita McGrath: And I think we don’t talk enough about how do we responsibly attend to the losses experienced by those suffering. And me personally, I think one of the difficulties with the way our economy is set up right now is that we don’t require for-profit organizations to do very much about the social costs of the dislocation that they create and as a consequence, if you’re running the company, and it does something that is economically sensible but socially costly, right now, society at large bears the cost, the US companies don’t bear the cost. A friend of mine has a great phrase, he calls it “social pollution”, which is the way we structured our system in many ways. We don’t require companies to take responsibility for some of the things they do that really do create social complications.
Christian Rangen: I think that’s a big topic to dive into. I think across western governments we’ll see a lot of challenges in that field in the next couple of years starting probably with France later this year.
Christian Rangen: Rita, it’s really good chatting with you and I think I speak on behalf of everyone here when we say we’re very excited to welcome you to Norway, again.
Rita McGrath: I’m really looking forward to it!
Christian Rangen: And I’m very excited to be spending time with you on your latest work and see how we can help shed some light to a large group of executives that will absolutely benefit from getting a better understanding of your work.
Inger Hanne Vikshåland: Thank you so much Rita for your insights and your great responses.
Work on your strategy with Rita McGrath on her upcoming visit to Stavanger. Join us for the full-day senior executive strategy Masterclass on May 12, 2017.
This is an invite-only Masterclass. Fill in the short form below to request your invite:
Engage // Innovate co-founder Christian Rangen recently had the pleasure to sit down for a conversation with Columbia Business School professor and globally-recognized expert on strategy, innovation and growth Rita McGrath, to discuss her latest work on strategic inflection points.
As a long-time member of Engage // Innovate’s informal Advisory Board, Rita’s thinking has long been an influential and inspirational force.
In the short, but very interesting conversation, the two strategy experts delved into innovation as a repeatable process, how companies should react to the early warning signs of impending industry shifts, as well as Rita’s upcoming Executive Strategy Masterclass happening in Stavanger on May 12.
You can listen to the talk in the podcast below or read the full transcript here.
Five key takeaways:
1. How companies can think about getting into new areas
Rita’s latest research deals with industry shifts and portfolio thinking, a subject highly relevant to the declining oil and gas industry in Norway. As Norwegian executives struggle to move beyond the oil and gas industry, the first step is to recognize that what worked in the past might not be what works in the future.
Companies need to be thinking about getting into new areas.
“To me, there are two vectors you can choose. You can choose to operate from a capability platform, or you can choose to operate around a particular customer need that you’re serving.” said Rita.
Statoil, for example, could choose to operate from deep capabilities in undersea operations and other complex technical capabilities they’ve built over the last decades, or make the bolder move of defining themselves in the energy space and explore options they’ve never traditionally had the capabilities in.
Rita pointed out that Fujifilm was a good example of a company that started expanding their portfolio by operating from the capability platform.
“They decided to say, ‘hey, you know we’re terrific at chemicals, we’re terrific at imaging, so let’s find places where those capabilities come into play.'”
Today, Fujifilm’s efforts in diversification has brought them into cosmetics, medical imaging, and even services for the pharmaceutical industry. The company is pursuing a variety of different activities all linked at its core to their central capabilities.
2. Look outside your industry to get started with reinvention
When asked for a beginner’s guide for management teams that need to find reinvention, Rita advised companies not to stay within their own little bubble.
“I think there’s a need to really immerse yourself outside of your immediate context and get a sense of what’s going on in the world that may or may not have anything to do with what you’re looking at”.
How does one do this? There are a number of ways.
“You can immerse yourself in an executive program, come to a seminar — like the one we’re planning, you could go to conferences from industries different from your own.”
Rita believes that the key is to get away from the daily grind, your emails and the day-to-day, so you can really get a big picture perspective of what could be going on.
“When you make the relatively small effort — take a couple of days, go to a non-related industry conference or have conversations with people who don’t touch what you normally touch, it’s surprising how quickly the insights begin to emerge,” she mused.
3. Pay attention to the early warning signs of industry shifts
When Rita looked into the architecture behind strategic inflection points, the typical weak signals that could’ve alerted businesses in advance often go unnoticed.
“The weak signals are when something happens that creates a 10x shift in the envelope that contains your industry. If you think about any kind of sector or industry or company, they have certain constraints in their environment that are present when they’re born.” said Rita.
We’ll take the newspaper industry as an example.
Back in the day, the main constraints in the newspaper industry were things like how many contracts they had, how many trucks they needed, how many newsstands they had, etc.
Digitalization came along and transformed all these existing constraints by a factor of 10 or 20.
The changes don’t happen instantly, and they take a long time to unfold, but only the companies that prepare for them in that time can come out of the 10x shift triumphant.
Rita then pointed out Amazon as an example.
Amazon sold its first book online back in 1995. That same year, a reporter from Fortune pointed out that the internet could potentially change all the different constraints across several industries like publishing, retail and distribution.
The data were there. But nobody in retail was paying attention.
Rita believes that businesses should look out for possible industry shifts and plan ahead instead of reacting when it’s upon their doorstep.
“When you see something way off in the distance when you’re driving, you can adjust your trajectory with a relatively small shift of the steering wheel, but if you wait until it’s right upon you, you’re nearly at it. You’ll have to make that steering wheel jerk significantly to avoid the obstacle. And that’s the way to think about early warning signs.”
4. Stepping up on the Innovation Maturity Scale
Rita has developed a tool called the Innovation Maturity Scale to help companies see where they are in terms of innovation proficiency.
The scale goes from 1, where companies are hostile towards innovation, up to 8, where the leadership is committed to innovation at all levels.
Compared to the innovation maturity Rita sees during her work in California, she believes that most organizations are at a 2 or a 3 on the Innovation Maturity Scale — meaning that they have the desire to improve and innovate, but have no full-on support.
“They’ve got pockets of innovation, there are champions that kind of comes and goes. They take the big trip out to Silicon Valley, have a picture taken next to the Facebook sign, but they don’t really have it embedded as an actual proficiency in the organization,”Rita revealed.
Norwegian companies are not that different, Christian mused.
They are great at initiating innovation, but when it comes to really organizing for innovation as a repeatable process, most Norwegian companies fall short, save for a few.
“Telenor is a good example, I know Rita you have been writing about Schibsted as a good example. Kongsberg is a good example. But overall, there’s a lot of work to be done here,” Christian explained.
5. Businesses should invest resources across Three Horizons
Mature companies often face declining growth as innovation slows down. Companies that want to keep growing must not only focus on their existing business models, but also potential growth areas in the future.
“I’m a big believer that you have to be investing your resources in three kinds of initiatives. One is to keep your core business as healthy as you can, which is challenging if it’s in decline or flat. The second is to think about what you’re going to launch that is going to be part of your next core business. The third is how do you invest in strategic options, or early investments that give you the right, but not the obligation to make a significant investment going forward,” Rita said.
Both Rita McGrath and Christian Rangen will be unveiling new strategy tools at the upcoming Rita McGrath Strategy Masterclass in Stavanger. Request your invite by filling in the form below.
Work on your strategy with Rita McGrath on her upcoming visit to Stavanger. Join us for the full-day senior executive strategy Masterclass on May 12, 2017.
This is an invite-only Masterclass. Fill in the short form below to request your invite:
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