McGrath

When something that used to be complex and expensive becomes convenient and cheaper, one result is often an explosion in demand. If we extrapolate from the statistic that only one in five people who could use help with their hearing have hearing aids today, the market size in short order could be five times greater—perhaps as big as $40 billion —after the inflection point that allows anybody to get a discreet, self-adjustable hearing device.

Academics who have studied this stage call it “capital market myopia.” In a famous 1987 case study, William Sahlman and Howard Stevenson showed how dozens of entrants into the then emerging Winchester disk drive industry blew through a mountain of investment, each hoping for a small share of a vast market. Such phenomena occur when players make decisions that are individually sensible but fail to take into account the collective consequences of everybody making the same decision.

If snow melts from the edges, it behooves you to have mechanisms in place to see what is going on there. This is a prescription widely made by futurists, such as Amy Webb in her brilliant book The Signals Are Talking. And yet, when I consider how many executives I work with spend their time, getting to the edges is one of the last things on their agenda.

Among the lab’s initiatives is the Digital Dozen competition, in which awards are given to people who have engaged in developing “innovative approaches to narrative.” Frank’s reason for creating the competition was his belief that each revolution in human communication takes about twenty years to assume its mature shape. He has observed, for example, that when moving pictures were first commercialized, nobody knew what a “movie” was. So what did they do? They filmed stage plays! I would make a similar observation about online education. We don’t know what it really is yet, so we film professors talking at the front of the classroom. This is highly unlikely to be where the new medium takes us, but we don’t yet know what that will look like, and so experimentation and trial and error are essential.

Eight practices can help you make sure you are seeing what is going on along the edges.

1. Ensure direct connection between the people at the edges of your company and the people making strategy. 

1. Go out of your way to include diverse perspectives in thinking about the implications of the future. 

1. Use deliberate decision-making processes for consequential and irreversible (type 1) decisions. Use small, agile, empowered teams for reversible (type 2) experimental decisions. 4. Foster little bets that are rich in learning, ideally distributed across the organization. 

1. Pursue direct contact with the environment—“get out of the building.” 

1. Make sure your people are incentivized to hear about reality, not the reverse. 

1. Realize when your people are in denial. 

1. Expose yourself and your organization to where the future is unfolding today.

The difficulty with such an emphasis on facts is that, unfortunately, facts are often a lagging indicator of what could potentially be important. By the time you are dealing with a fact on the ground, whatever led to it has already happened.

Hard numbers can be helpful if they can help you to identify a trend or discontinuity by looking at patterns over time. In and of themselves, however, they are not particularly helpful if your goal is to understand the future and to see around the corner.

Many studies suggest a powerful role for employee satisfaction and engagement. Employee engagement thus becomes a leading indicator of later customer propensity to defect, and something you can take action to influence.

As he [Satya Nadella] said in a 2015 interview, ‘We no longer talk about the lagging indicators of success, right, which is revenue, profit. What are the leading indicators of success? Customer love.

In the unfair way in which life operates, the moment at which you have the richest, most trustworthy information is often the moment at which you have the least power to change the story told by that information.

Having one person who is explicitly keeping an eye on a particular future event increases the likelihood that whatever knowledge is in the organization has somewhere to go and will be seen holistically. And remember to incorporate feedback from people who may not be sitting in the executive suite. Go back to the periphery for information and insights about these events.

The current state of higher education institutions today reminds me of the integrated steel mills that suffered a major disruption at the hands of minimills, particularly when I think of large research universities. Clayton Christensen has, of course, been talking about this issue for some time and published his ideas in the book Disrupting Class.

With the mind-numbing pace of change that seems to be all around us, it is also worthwhile to consider what is highly unlikely to change as you consider your strategy.

...human needs and preferences are remarkably stable, even as the technologies for meeting those needs change. From smoke signals to the written letter to the pony express to the telegraph to the landline phone to today’s smartphone, the “job” of conveying information over long distances has hardly changed at all, even as our abilities to get that job done have completely transformed.

In my book The End of Competitive Advantage, I suggest several early warning signs that an advantage is likely to be on the decline. How many of these do you think your organization’s leaders would be likely to agree with?

• I don’t buy my own company’s products or services. 

• We are investing at the same levels or even more but not getting margins or growth in return. 

• Customers are finding cheaper or simpler solutions that are “good enough.”

• Competition is emerging from places we didn’t expect. 

• Customers are no longer excited about what we have to offer. 

• We are not considered a top place to work by the people we would like to hire. 

• Some of our very best people are leaving. 

• Our stock is perpetually undervalued. 

• Our technical people (scientists and engineers, for instance) are predicting that a new technology will change our business. 

• We are not being targeted by headhunters for talent. 

• The growth trajectory has slowed or reversed. 

• Very few innovations have made it successfully to market in the last two years. 

• The company is cutting back on benefits or pushing more risk to employees.

• Management is denying the importance of potential bad news.

Tim Brown and Roger Martin provide a really nice description of how you might do this in their article “Design for Action.” In particular, the idea of throwing out multiple possible strategies and consciously debating them rather than incrementally working from strategies that are already in place is excellent.

Consider whether the assumptions you are making about your business might need a fresh look. Review the warning signs of fading advantage.

Antioco’s initiatives, however, were going to cost the firm serious money, and also depress short-term profitability, as is often the case when a business needs to go through a strategic inflection point. Carl Icahn, an activist investor, entered the fray, putting members of his own preference on the board and eventually easing Antioco out. Under his successor, Jim Keyes, Antioco’s changes were reversed, and Blockbuster stubbornly tried to hold off the inflection point. The company went bankrupt in 2010.

As always, it’s smart to begin with the limiting pot of resources for which an organization is contesting. In this case, that pot is household spending on entertainment. Given that, the situation (who, what, where) might well evolve from predominantly the living room at home to anywhere people would like to consume content, especially in light of the advent of greater mobility and faster cellular service.

Netflix has very deliberately not defined its arena in terms of traditional television. Instead, it has framed its challenge in terms of increasing the percentage of their leisure time its members spend on the service. As their investor messaging says:

We compete with all the activities that consumers have at their disposal in their leisure time. This includes watching content on other streaming services, linear TV, DVD or TVOD but also reading a book, surfing YouTube, playing video games, socializing on Facebook, going out to dinner with friends or enjoying a glass of wine with their partner, just to name a few. We earn a tiny fraction of consumers’ time and money, and have lots of opportunity to win more share of leisure time, if we can keep improving.

Back to our analytical approach. The issue you need to focus on in your analysis of arenas is whether a change in the daily constraints that your business operates under might allow a competitor to address customer pain points differently or better than you do.

Customers will only remain hostages for so long. Eventually, the model that imprisons them is bound to collapse.

Deeply understanding the situations customers are in, the jobs they are trying to get done in those situations, and the outcomes they are seeking is vital to anticipating how those situations might change.

We’ve explored the idea of an arena, rather than an industry, as being a crucial level of analysis. We’ve looked at how irritants and blockers in key stakeholders’ paths to getting jobs done can open the door to an inflection sparked by an organization that removes those attributes. We’re now on the brink of considering what actions should be taken next.

They are about generating possibilities and opening your mind to what might happen, so that as evidence gets stronger, you are ready to take action. For any future state, there are many variables that can lead to one outcome or another. What is valuable in complex systems is to be able to keep multiple possible futures in mind so that if and when they unfold, the landscape is more recognizable.

Seeing around corners is about broadening the range of possibilities you consider paying attention to. Your ability to look into the future is only as well developed as the set of possibilities you are prepared to entertain.

Similar to the weak signals exercise first discussed in Chapter 2, this process differs from the risk-averse, failure-avoidant nature of many corporate planning processes.

A checkpoint is simply a point in time at which you will learn something. At each checkpoint, you want to be asking two questions. The first is whether what you are learning is worth the cost (or risk, or time) required to achieve it. Elsewhere, I’ve referred to an organization’s “appetite,” which is the determination, in advance, of what we think we will learn and how much that learning is worth to us. The second is whether, given what you are learning, it still makes sense to continue with the plan or whether a shift of some kind is warranted.

Arguing about being “right” or having a detailed plan going eighteen months out is just wasting your breath. Instead, articulate and pinpoint the major uncertainties and how you might gain some insight about them.

Launching aggressively into an approach with all the funding given up front is a recipe for disaster. Even if a project works out, the organization is unlikely to have developed the new workflows and practices that will allow it to benefit.

Nat Turner and his longtime business partner, Zach Weinberg, were not your ordinary twentysomethings when they cofounded Flatiron Health in 2012. Turner was twenty-four when he sold his first company, Invite Media, to Google for a reported $81 million in 2010. He was thirty-two when he sold his second, Flatiron Health, to Roche, for nearly $2 billion in 2018.

Although both Turner and Weinberg had been involved in the startup world prior to meeting at the Wharton School at the University of Pennsylvania, the entrepreneurship program there gave them a head start on the business that would eventually pay off in a major way. The discovery driven growth methodology is part of the core entrepreneurship curriculum at Wharton (with credit to my coauthor and longtime entrepreneurship center director, Ian MacMillan).

My colleague Ian MacMillan calls this “webbing”: habitual entrepreneurs are tireless in connecting with others, particularly those who do not overlap with their own knowledge.

Consider serial entrepreneur Steve Blank, a colleague of mine at Columbia and a legend in the startup world. He’s guided four companies to IPO status and mentored many more. To find opportunities, Steve says, an entrepreneur has to be endlessly curious and to recognize patterns that no one else does, by, as he puts it, ‘showing up.’ To validate ideas, he advocates ‘getting out of the building’ and learning how a potential innovation might change a customer’s life. He calls this ‘customer development.

As we saw with the Flatiron Health founders, they were looking for a large problem that had not yet been adequately solved, essentially following Nassim Nicholas Taleb’s guidance that when uncertainty increases the upside of an opportunity, it can create valuable opportunities.

The senior leadership role is often more about providing a space for those insights to be heard, recognizing the ones that are significant, and empowering those with the most knowledge to do something about them.

There is something only a CEO uniquely can do, which is set that tone, which can then capture the soul of the collective. And its culture.’ - Satya Nadella

A classic tension in any successful organization is the tension between exploiting a repeatable business model and identifying a new one.

The dilemma is that when the challenges facing an organization are not about repeatable execution, but about innovation or responding to complexity, the idea of breaking things down into well-understood parts is not only unhelpful, it can also be a dangerous trap.

Such practices [fluidly entering situations, allocate resources, obtain information] are associated with a culture that is built for resilience in the face of complexity, not for execution.

What does a CEO get to do?’ he [Nadella] asked in 2016. ‘You’ve got to pass judgment on an uncertain future and curate culture. For both, I feel, I learn a lot from these trips.

In a complex situation, when you want to empower the entire organization to be able to act without direction from the top, having a shared view of what the purpose is and how each participant fits into it is absolutely critical. It is only with a basis of a shared understanding of what we’re all trying to achieve here that distributed action is possible.

Our mission is to empower every person and every organization on the planet to achieve more.’ - Nadella

Nadella also makes sure that he is exposed to experiences that can challenge his worldview and potentially offer fresh insights. Spurred on in part by his son Zain’s severe cerebral palsy, he takes an active interest in Microsoft’s community group for people with disabilities. He meets with them regularly—again, an opportunity for groups with experiences that are different from the norm to communicate up and down the organization.

Big changes are often signaled by seemingly small and incremental shifts that nonetheless release a constraint in an existing model, opening it up to an inflection point.

Empowering individuals to take action broadens the amount of experimentation an organization can undertake, increasing its odds of seeing the early warnings of an inflection point in a timely way.

At the core of these platforms’ [Airbnb, Youtube, Facebook] success was that they all freed up and leveraged trapped capacity and then very efficiently matched supply to demand.

Building innovation proficiency is an organizational learning endeavor, and learning and mastering do not happen instantly.

...One of your key responsibilities is making sure your team is a team. They don’t tell you that in the CEO handbook, but it is, and it takes time to do that.’ - Gail Goodman

Kolditz wrote his 2007 book, In Extremis Leadership, with a different goal in mind than that of most case studies about leadership in crisis. As he has said, most of the time as a leadership expert, ‘you’re studying people in ordinary companies who never really wanted to be in a crisis but found themselves there and either fixed it or didn’t. The problem with that is you’re essentially studying crisis amateurs, and what I wanted to do was study crisis professionals—people who are in dangerous places all the time, and look at their techniques, their approaches to leadership, how they were different.

The first requirement in a precarious situation, he found, is that leaders need to be able to keep people calm. They need someone ‘who can establish the vision for the way ahead —even if there is no detail to it.

Lövgren asked the foundry managers who’d said they had the problem to invest their cash in the prototype. I confess I was a little nonplussed by this approach: ‘What would you have done if you couldn’t raise the funding?’ I asked when I saw him at a conference we were attending. Lövgren looked at me, rolled his eyes, and said, ‘Then I would have known it wasn’t a big enough problem for them to solve, and I’d have moved on to another business.’ Eventually, the business of making ‘robust robots’ specifically for foundries and other technically challenging environments took off.

Your coach then interviews these people [people important to your life and wellbeing] and asks for open feedback on what they think could be holding you back or could become an obstacle to your success. For instance, as Goodman learned with respect to her own leadership, cutting people off in their presentations was inhibiting the free flow of information and, even worse, preventing her from hearing from her own high-potential employees.

Your coach then synthesizes this information for you. As Goldsmith’s clients will tell you, that initial, honest conversation can be tough, as it often challenges your own perceptions, and not necessarily in a pleasant way. Together, you and your coach decide what actions you would like to take to start working on the implications of the feedback and what evidence would suggest that you have been successful in addressing them.

One of the big turning points for this project came when he asked me to do the whole book as a PowerPoint presentation. (I think he was a little fed up with wading through my prose—one of the downsides of being a really fast typist.) The requirement to boil everything down into short presentation snippets was incredibly powerful. We got into a rhythm in which he would give me “assignments” and I would do my best to complete them, and eventually after more than a year, we had something he felt comfortable moving forward with.