Rita McGrath is a professor at Columbia Business School who studies how companies innovate and grow during times of uncertainty, topics that are of critical importance to today’s banking industry. She also works with companies to help boards, CEOs and senior executives act strategically in rapidly-changing and volatile environments. Dr. McGrath leads a five-day executive education program at Columbia that focuses on how to revitalize an organization by finding new opportunities, launching new ventures and leading organizations. She is the author of “The End of Competitive Advantage,” which was published by Harvard Business Review Press in 2013. Her latest book, “Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen,” was published this month.
She recently sat down with The Novantas Review to talk about the challenges companies face in recognizing business disruptions.
Q: Why have so many companies underestimated digital’s impact on the future of their business?
A: If you look at the evolution of digital technology, you will find that it first took root in a commercial sense within the marketing department of most organizations. There were digital books and music and everyone had to have a website. The next big transition was when every product and service began to have a digital dimension. People don’t buy hammers today without looking at a review. We’re starting to see digital make entirely new business models possible, like analyzing credit risk. During the first phase, it was very easy for people running the core business to roll their eyes and think “it is never going to be important to us.” A lot of those incumbents didn’t understand that a lot of the things they hold up as assets are not helping them anymore and are actually becoming liabilities.
Q: What is the best way to approach a digital transformation?
A: You have to start somewhere with something that is small and tangible. In my book, I write about a German metal services company that started replacing fax orders with orders over the Internet as their first step. A lot of companies completely freak out, so they develop big giant projects with an attitude of “damn the torpedoes, full speed ahead” and a lot of times things come to grief. Start with something that has near-term returns. It may seem incremental, but it teaches you. Then you can ramp up fairly aggressively.
Q: Why do companies often seem taken by surprise by new entrants and disrupters?
A: They’re so blinded by the industry that they’re in — financial services is a great example of this. If the only world I see is the world of banking and banking regulations, an inflection point makes those industry-based assumptions less valid. Think about Apple Pay and Venmo. Look at alternative ways customers can get their needs met even if it’s not from your industry. Look at mattress companies. The overriding assumption was people had to try it before they buy it. But now people are buying mattresses in a box without having ever tried them.
Q: Most bank executives consider themselves as part of an industry. You say that companies need to think of their universe as an arena, not an industry. What is the difference?
A: Think about hearing aids. They were not considered to be medical devices, they weren’t covered by insurance and losing your hearing was considered a normal part of old age. There were abusive practices, bad products and misleading claims. Then it became regulated. Now there is a sea change that has taken all the pain points of the hearing-aid system and whacked away at it. Companies from outside the industry are offering products that aren’t hearing aids, but will help you hear. What you have is the classic unfolding of an inflection point that can be triggered by technology or regulation — wherever there is a change in the constraints that allow a business model to be successful.
Q: Are there typical signs of an inflection point that bank executives should be on the lookout for?
A: Not a lot has changed in banking aside from mergers. The same kinds of companies are still the dominant ones. On one hand, banking has enjoyed a fairly-privileged position, mainly because of regulation. It has kept a lot of entrepreneurial efforts from being successful. But bits and pieces of banking’s revenue structure are getting nibbled away. You have SoFi doing personal finance. You have a branchless bank like Varo with a completely reimagined bank offering. Expect disruption to show up in less apparent places.
Q: How do you know when an inflection point is really upon you or if it’s just hype? At what point should you think about taking action?
A: Inflection points are upon you when the old metrics stop being usable and when a new way of business starts to peel off sets of customers. We are seeing this in direct-to-consumer companies from mattresses to shaving equipment. These upstarts are up-ending the taken-for-granted assumption about how you do business. Gillette always thought their technology created better razors and that would be enough. But Harry’s and Dollar Shave Club are saying, “we can have it shipped to you every month.” They are building a direct relationship with the consumer. Incumbents need to look at the customer pain points. A lot of incumbents are aware of these pain points, but they’re just not watching when someone else comes along and eliminates them. The incumbent will say “Oh, that’s not our target customer.” But if you have something in your model that is negative or inconvenient or expensive, your customer will get out the minute they can. There’s only so long that you can hold your customer hostage.
Q: You write that corporate leaders often miss inflection points because they don’t know what their customers want. How can that be?
A: They don’t spend a lot of time on it. It’s very easy to develop blind spots when you’re not engaged with normal people.
Q: You refer in your books to “tolerable attributes,” which seem to apply to many industries, including banking. Can you explain what they are?
A: A tolerable attribute is when there’s something that a customer doesn’t like, but will put up with it to get an ultimate benefit or because no one is offering a credible alternative. Because it’s heavily regulated and because it’s hard, you don’t see many start-ups mimicking everything a bank does. A lot of what you see in banking is like what you saw in hearing aids. Banks don’t offer a terrific experience. But then ING Direct came along. It was easy in, easy out and a great rate. If what you wanted. Look at Microsoft Office. A competitor came along and said, “you do have a choice” and then all bets were off. When Netflix first started, people excited by the queue of movies that came in the mail automatically and it beat going to Blockbuster. New things that are exciting come in and change the market. And then features that were once exciting become non-negotiable.
Q: You also write about how Netflix initially stumbled as it tried to navigate the transition between physical DVDs and streaming services. Banks are faced with the same conundrum as they invest in digital services, but also must maintain legacy systems and networks. Any tips on the best way to approach this?
A: Netflix made the decision to split the two businesses of DVDs and streaming. You can make a lot of money in a declining business if you manage it efficiently. The big place people get confused is when they are trying to run the new thing with the same metrics, rewards and incentives as the old thing. That is usually a mistake.
Q: Tell us a little bit about your banking habits. When is the last time you went to a branch?
A: I go into the branch for business. There are some things that are just easier to do in a branch. Most of my interactions with my bank are to pay vendors electronically, businesses like Zoom and Dropbox. I still have a fair number of expenses I handle by check, which I think is crazy. But some private vendors don’t want to take credit cards anymore because of interchange fees.
Director, New York