In Conversation: Rita McGrath

The End of Competitive Advantage was a hugely successful book, and a real breakthrough book for you, but it’s been a few years now, so what have you worked on since? What are you working on now?

Lots of different projects. I have a new book in the works which is about strategic inflection points. One of the interesting things in doing the research for this new book is that between the time an inflection point gets going and the time it actually shows up on your doorstep, typically you have time to act. That was the most interesting thing to me, which was that people always think inflection points come out of the ether and eat us alive, but usually they’ve been brewing for some time.

So, let me give an example. Back in two thousand and something, YouTube was created and it was created by a bunch of guys who were fed up with how difficult it was to share videos with one another. And in the beginning, nobody really took it seriously, because what was it? It was cat videos. Who could take that seriously? But if you think about it, with YouTube, for the very first time, any individual, anywhere, with a smart phone or recording device, could share video with millions of people. Before that invention you would have had to own a movie studio – you would have had to be Universal Talent or something – to do that. So, it relaxed a constraint for everybody.

At the same time you had, around then, the invention of Facebook. If you wanted to send a message to a billion people, before Facebook, you would have had to own printing presses. You would have had to own multiple media stations. After Facebook, you could send it instantly, and again, nobody took it seriously in the beginning, because what was it? College kids sending beer bong pictures around to each other. Nobody really thought it was a big deal.

And at the same time, around 2006, you had the invention of Amazon Webservices, and again, for the first time, two guys in a garage could harness the computing power that you would have had to be IBM to use years before that. So, you put those three things together, and what you’ve got now is this absolutely potent mix of being able to share a video, share content, and do it all in a flexible computer backbone, which had never been possible before. One of the companies that really took advantage of this is a company called Dollar Shave Club.

Mike Dubin, who started Dollar Shave Club, was basically ticked off at how difficult it was to supply his shaving needs. In America, for example, you have to go to a drug store, and because shaving razors are so expensive they’re like catnip for shoplifters. And so, what they do is they keep them behind lock and key, inside a cabinet called “the shaving fortress.”

You had to go find a helpful shop floor clerk and get them to unlock the shaving fortress and get your razors, and the last time I looked, a six pack of Gillette razors was something like $18.96. I mean they’re really expensive.

And so, Mike Dubin said, why does it have to be that way? We can make high quality razors. We can source them from Korea, and we can send them to you, on your doorstep, once a month. So, that was a good idea, but what made it really take off, past the inflection point, was he made this hilarious two-minute video about how his razors were going to change the world, and then broadcast it. It went viral almost instantly.

People on Facebook became brand ambassadors. So, people at Procter and Gamble, for example, would have paid sales force to do it, but all of a sudden, Dollar Shave Club has all this free publicity, with hundreds of hits, 20,000 blades sold on the very first day this thing went live. Dollar Shave Club’s now five years old and it is a very big, sustainable business. Unilever bought the company last July for $1billion, so they had a very successful exit.

Procter and Gamble, their share of the men’s cartridge market in the United States, went from about 71 per cent in 2010, to just under 60 per cent. It’s about 59 per cent today, and totally took them by surprise. But this is my point about inflection points, which is, have you been paying attention? What constraint is being relaxed in the environment that I’m used to competing in? They could have possibly seen that, and they could have mounted a response earlier, rather than getting whacked by something that took them by surprise.

How do you define a strategic inflection point?

Any industry, any company, when you’re operating within an envelope of constraints, which are dictated by the technology of the time, by what’s possible at the time, and you grow up with that as part of your DNA. So years ago, all of publishing, for instance, was constrained by what’s the cost of paper and ink? What are the union contracts around how we deliver and what we do? What are the constraints that limit how much reach we have? How much advertising we have? And yet, when something comes along that changes those constraints that has the seed of an inflection point, and because you’re used to dwelling within this envelope of constraints, you don’t even see it coming.

What’s surprised you about the research?

Well, the surprising thing was how obvious it all is in hindsight. You look back and you say well of course, duh, we didn’t see that. But in the moment, it’s very hard, and I think part of it is what I call, the problem of the dance floor versus the balcony. If you go to a dance, and you’re on the dance floor, and you’re in the action and you’re dancing and you’re moving, and somebody were to ask you afterwards, what was it like? You would have said, it was fantastic. People wore great dresses and the music was loud, and I got to meet all these fascinating people. But if you had stopped the dance and gone up to the balcony, and looked down on the dance floor, you would have seen a completely different picture of what was going on that evening.

So, I think part of the message of the book is, we need to be able to do both. We can’t just stay on the balcony. If you just stay on the balcony, you’re not going to make anything happen, but if you’re so enmeshed, and this is where I see so many executives today, being completely enmeshed in what’s going on, what’s the next email, what’s the next meeting, what’s the next airplane flight? And they really don’t take that balcony perspective and step back and say, what’s the bigger picture here?

And what’s stopping them from doing that? Just the fascination with, or the obsession with action and doing things in the short term, or short-term financial pressures?

A lot of it is the way our financial system is set up – that’s a whole other conversation. But there aren’t a lot of incentives to take that balcony perspective in your ordinary executive’s life. Their world is scheduled out for months sometimes. I’ve had people try to schedule meetings with chief executives, and they try to set up a meeting for when he’s on a plane, but that meeting’s already scheduled with six people. So, I think they’re just so busy they don’t realise that it takes time to step back and reflect, and see what the bigger picture really is.

And when you talk to CEOs and people in the C-suite, how do they respond to these ideas?

Three responses, one is, don’t be ridiculous, that’s not me. Two is, oh, I never thought about it that way, maybe I should think about it, and three is, yes, we have processes in place to regularly do this.

Do attitudes change? You travel a lot. Are there different attitudes in different countries?

Yes, I would say countries that are more stable, where there’s less open competition tend to be less fluid. There’s fewer of these inflection points coming and kicking you, because there is less opportunity for them to do that. But countries where the markets are more open are more likely to be affected. And if I think about the United States, one of the things that is very interesting is that you’ve got this juxtaposition of some industries, some sectors, which are becoming actually more oligopolistic. So, airlines, cable television, internet services, contrasted with some that are just wildly competitive, and it’s fascinating to me that you’ve got this juxtaposition of the two in one economy.

Where will that go though? Is that sustainable?

I don’t think oligopolies are. We were just talking about airlines earlier, and they’re going to end up getting their levels of customer service regulated,  if they’re not careful, because the public is so annoyed at them.

But the other extreme, the wild west of competition, is that viable in the long-term?

It can be if competitors do it properly, but it is difficult. It shaves margins, it gets people thinking very much in terms of the next move, rather than the next strategy. So, that has its own problems.

You spend your time travelling the world, talking about these ideas, what do you enjoy about it? You need to spend an awful lot of time in airports.

You do. I love the people. I love hearing what they’re thinking about, what they’re worried about. I love learning from different environments. That’s very rewarding to me. I think one of the things that myself, as well as the other thinkers that you work with, one of our great advantages is we get to talk to lots of different companies, and we actually get paid to think, which is astonishing. So, when you talk to people from different environments and say, hey, have you thought about this, have you thought about that? And their eyes light up and a light bulb goes on, that’s very rewarding.

This is an excerpt from Strategy@Work, a Brightline and Thinkers50 collaboration bringing together the very best thinking and insights in the field of strategy and beyond.