Key Takeaways

  • Leaders often face pressure to deliver immediate results, which can overshadow necessary investments for future growth. They need to proactively invest time and resources for future growth while addressing current needs.
  • “Option value” refers to an investment made today that gives the right to make another investment later, but not the obligation. Option value investments may not involve rigorous calculations and can lead to learnings from failures or successes that drive growth.
  • The innovation process includes ideation (generating great ideas), incubation (testing these ideas), and acceleration (turning a successful idea into a robust, market-ready product).
  • The “two pizza teams” concept at Amazon allows small groups to explore new ideas. This aligns with the idea of a “permissionless organization,” where employees can experiment and innovate without explicit permission.
  • Successful companies exhibit paranoid survival (awareness of signals and growth possibilities), invest in workforce development, and show genuine respect for employees.

Executive Summary

Ladies and gentlemen welcome back to The Leader Show with Lou Carter. We have the privilege of hosting Rita McGrath as our esteemed guest. McGrath is a professor at Columbia Business School, an executive coach, a consultant, and the author of the book “Seeing Around Corners”. The book gives CEOs and leaders the insight they need to anticipate future changes and challenges in their respective industries. 

In this episode, the speakers discuss a wide range of topics, including the book. So, without further ado, let’s jump in.

The Art of Juggling Short-Term Pressures and Long-Term Growth in Leadership   

Lou and Rita start their discussion by talking about balance, specifically about how leaders can maintain equilibrium between short-term demands and long-term investments.

One of the significant challenges that senior leaders often face is that they are usually under intense pressure to deliver immediate results, which can easily overshadow the necessary investments for future growth. This becomes evident when considering their schedules and where they devote their time. 

McGrath mentions a scenario where leaders express interest in innovation and initiate programs to foster it in their company culture. But then neglect it due to lack of time or focus, they start to neglect innovation, leading those initiatives to lose momentum and potentially collapse.

Therefore, she stresses the importance of being deliberate about investing time and resources for future growth while also addressing current needs.

Understanding “Option Value” in Business Investments and Its Role in Shaping Future Growth

Next, the speakers discuss the concept of “option value” and its importance in business investments. According to Rita, the option value is the investment made today that gives the right, but not the obligation, to make another investment later. She uses the example of listeners investing time in their conversation, hoping they’ll find something valuable to use in the future. 

McGrath points out that, unlike common business investments, this process doesn’t involve rigorous calculations, emphasizing the notion of “option value.”

Lou further elaborates on “option value,” connecting it with learning, future possibilities, and opportunity costs. He points out that these options can result in failures from which we learn or in successes that can drive growth.

Rita adds that “option value” is an economic concept that existed long before. It was used in finance to value options, where you bet on the rise or fall of a stock without investing in the underlying assets. 

The Three-Step Approach to Reliable and Effective Innovation

The conversation then transitions to innovation. McGrath observes that it’s possible to become a senior executive in a multinational company without ever having to deal with innovation. She believes that successful, reliable innovation involves a set of practices and three key activities: ideation, incubation, and acceleration. 

Ideation is generating great ideas. Incubation involves testing these ideas. Finally, acceleration is taking a successful idea and turning it into a robust, market-ready product. Each of these stages, McGrath suggests, has associated best practices to be followed.

The Power of ‘Two Pizza Teams’ and ‘Permissionless Organizations’ in Fostering Creativity

Subsequently, Rita elaborates on the first stage of the innovation process – ideation. She highlights the importance of allowing people at all levels of the organization access to resources to experiment and test their ideas. McGrath cites examples of companies such as Adobe, 3M, and Nokia, which have successfully implemented this practice.

On that note, Lou brings up the concept of “two pizza teams” at Amazon, asking McGrath to explain it. McGrath explains that at Amazon, employees are expected to dedicate a significant portion of their time to small teams that are exploring new ideas. These teams are called “two pizza teams” because they should be no larger than what can be fed with two pizzas.

McGrath relates this concept to the idea of a “permissionless organization,” where employees do not need to ask for permission to experiment and innovate. The advantage of this structure is that it allows the organization to grow much faster. The science behind “two pizza teams” lies in minimizing communication and coordination paths. Smaller teams, focused on specific challenges, require less coordination and can get on with their work more efficiently, reducing waste in the organization.

The Incubation Phase of Innovation and Its Emphasis on Market Feedback and Adaptability

Next, Rita talks about the second stage of the innovation process – incubation. This stage involves transitioning from a concept to a minimum viable product (MVP) that you can present to customers for feedback. She highlights the importance of observing customers’ behavior rather than relying on what they say they will do. This approach allows for real market feedback.

The primary goal during incubation is to search for market evidence of what will sell and what won’t. McGrath suggests that good innovators remain alert to surprises and expect that their initial idea may need adjustments based on feedback. She shares a personal experience where she and her tech team developed an iPad app for companies to identify growth gaps. 

However, they found that corporations were not comfortable putting sensitive information on an iPad app, indicating a misunderstanding of their security concerns. This is the type of learning that happens during incubation.

Lou highlights the resilience and adaptability required during incubation, given that entrepreneurs may need to pivot or shift their ideas based on customer feedback and market realities. He also points out the value of understanding customer behaviors at the point of market entry, as that’s when the most learning occurs.

Understanding the Acceleration Phase in Innovation and the Transition from Startup to Established Entity

After that, the conversation shifts toward the third and final stage of the innovation process – acceleration. Rita likens the main business to a highway, with innovation being the on-ramp. For a new idea to merge with the existing business, it needs to mature significantly. McGrath refers to this process as paying off “technical debt,” whereby early-stage prototypes must be refined and made robust for use in real systems.

She also brings up the concept of “organizational debt.” According to her, this is the need for the initially chaotic and creative startup environment to transition into a more structured organization with clear titles, pay scales, and reporting relationships. She advises CEOs not to be timid about investing in acceleration.

Additionally, Rita highlights a common pitfall – people often lose patience with innovations because they take time to mature. When they finally do take off, whoever is in charge often gets all the credit, leading to misattribution and misconceptions about the source of innovations. 

She implies that it’s important to remember all the players and processes involved in bringing innovation to life.

Recognizing the Lifecycle Stages of Competitive Advantage and the Importance of Continuous Transformation

Next, Rita discusses the lifecycle stages of competitive advantage in this segment. She divides it into three parts: innovation, exploitation, and transformation. She posits that when an advantage begins to erode, transformation is needed to sustain the competitive edge.

Rita provides a set of questions for senior leaders to assess the health of their current business. These include whether their employees use their products, if their organization is attractive to top talent, if current employees are leaving, and if they are losing sales to cheaper competitors. These signs serve as early indicators of the future health of their businesses.

She strongly believes the challenge is acting upon these signs in the present. McGrath shares a quote from David Cote, former CEO of Honeywell, stating, “The problem with the long term is eventually it becomes the short term.” This implies that companies must address these issues early on and constantly work on transforming their businesses to stay competitive.

The Mindsets Required for CEOs for Effective Business Management and Growth

Rita also highlights the importance of a certain mindset for CEOs to successfully navigate and lead their businesses. She underlines two critical elements for this mindset:

#1 Openness to Problems 

According to Rita, a CEO should be open to hearing about problems, even when there aren’t ready solutions. This openness allows them to stay informed about vital issues within their organizations. Shutting down discussions about problems might lead to missed critical information.

#2 Nurturing Helpful Cassandras 

Next, Rita introduces the concept of “Helpful Cassandras,” a term coined by Andy Grove. These people within the organization bring valuable insights into potential challenges or problems. Once a CEO encourages and listens to these individuals, they can better understand the real-time state of their business and address issues early.

Additionally, she stresses the significance of “getting out of the building,” in the words of Steve Blank, meaning CEOs should immerse themselves in the realities of their businesses rather than staying insulated in their offices. This involvement helps them to spot weak signals, cracks in the system, and potential issues. 

If a CEO doesn’t take the initiative to do this, no one else in the organization likely will. This proactive approach to understanding their business is crucial to maintain competitive advantage and drive growth.

The Importance of Paranoid Survival, Workforce Development, and Genuine Respect in Long-term Business Success

Lou and Rita continue exploring the mindset needed for CEOs and organizations to survive and thrive in the long haul. They cite real-life examples from the corporate world to illustrate their points.

#1 Paranoid Survival 

Emphasizing that only the paranoid survive, Lou notes the importance of being aware of signals and growth possibilities. They reference the failure of businesses like Blockbuster and Circuit City that didn’t adapt to changing market trends and the success of those like Netflix and Best Buy that did.

#2 The Power of a Trained Workforce 

Rita criticizes companies like Amazon for not developing their employees, arguing that promoting from within and investing in employee training and development can create a significant competitive advantage. In contrast, companies like Walmart allow for career progression even for entry-level employees.

#3 Love Your Employees 

Next, Lou stresses the importance of genuinely respecting and caring for employees, asserting that “when you love your people, everything else falls into place.” He cites Alan Mulally from Ford as a CEO who successfully adopted this ethos.

Lastly, McGrath shares her upcoming work on tools to help companies put innovation concepts to work. She discusses a software spine, some education, and advisory work as components of these new developments, emphasizing how these tools can help companies kickstart or improve their innovation engines. 

Thank you for listening!


Lou Carter : Hey everybody, welcome today to another Lou Carter show. We're here with the great Rita McGrath. I am so excited to have her on today. She is a professor at one of the best business school, Columbia Business School. She's an awesome professor, extremely engaging, super bright and amazing teacher and professor. Also an amazing consultant executive coach. She wrote the book, now I've read many times, Seeing Around Corners and many other books. I love this book.

I love this book because it gives a CEO or other leaders the thought, the perception that they need to look everywhere and get different perspectives from stakeholders and see what's happening around the corner, see what needs to happen in the future, be able to build capability and really in that way, you know, balance kind of this building for future mindset. Which is perfect for our discussion today, ladies and gentlemen, the great Rita McGrath. Here she is. Hi Rita.!

Rita McGrath : Hey, it's a pleasure to be here, Lou.

LC : Great to have you. So today we're going to talk about these three different areas and remember, Seeing Around Corners, as well. So much to learn today. So let's start with your three. Let's go through them, the balance, the innovation, and then the attention to the future. Let's start with the first, and you could say all three of them, then we'll go to the first. Go ahead Rita. Yep. It's good stuff.

Balancing Short-Term Demands And Long-Term Investments (01:41)

RM : So, one of the big challenges I think that senior leaders have is they've got so much pressure to deliver in the here and now that it's really easy for that to overwhelm the investments they need to make for the future. So what I find is if you look at their calendars or you look at what they're actually spending their time on, you know, they say they want innovation and you know, an innovation program gets going and then the growth board doesn't meet. They can't get the time on the CEO's calendar and eventually it kind of withers away. So you really need to be very structured about making sure that you're investing for the future as well as keeping the wheels turning today.

LC : Well that's awesome. Investing in the future as well as the wheels turning today. You know, and that's such an important thing. So the investment in the future that it could be a lot of things, right? Developing leaders. it could be about the relationships that you have with external vendors. It could be the collaborations and partnerships that you have with other organizations. Cooperation if you will. Collaboration. So tell me more about what that looks like and what you've seen. Because there's so many ways to look at that investment, right?

The Power of Option Value In Future Investments (02:43)

RM : Yeah. So one of the things I think people don't understand well enough is the whole concept of option value. Where an option is something you're investing in today that buys you the right, but not the obligation to make a subsequent investment down the road. And it's a very intuitive concept, right? The fact that we're here talking, right, for your listeners, they're going to invest, you know, half an hour of their lives in the hope that they'll find something that they can use later on. Now they're not pulling out a slide rule and saying, I'm going to do a discounted cash flow analysis of the value of this conversation in my life. And yet somehow when we make investments in business, that's how we behave. We forget about option value.

LC : You know, option value. This is the option to do something that enhances our learning and possibilities for the future, right? Maybe it's an opportunity cost, right? Maybe we can do something else. However, we invest in it for the future, for what it can become and what we can do for it. And we may have a failure that we can learn from or we could have something that we could create great growth for the future. So it's called option value. And this is something you created Rita, right? Or there is option value. The MBA concept that I didn't learn

RM : Well in economics, option value was a concept that was created years ago. The way that they calculated functionally, that's what gave us the, you know, the various formulae that you use to value financial options. So you bet on a company, you either bet that the stock is going to go up or the stock is going to go down. And if you're bets right, you get to reap the proceeds without ever having to invest in the actual underlying assets. So a real option is something similar to that, except you're not making necessarily a financial commitment. You're making a small investment today, which is going to reveal something to you in the future.

Now, a couple of things about options that people often get wrong. Investing in an option does not mean you're making a commitment. So if I, you know, wanted to explore haptic enabled beer drinking you know, I have a couple of customer interviews and they look at me and they go, I don't want to do that. Then you know, you just stop, right? So I think one of the big mistakes people make is they think that because they've started that they have to continue. And so stopping is a really important part of option value.

A second thing is that they think they've gotta make this big important, major investment before you get any evidence from the market at all. And what we're realizing is that smart innovators can contest these things really fast and really quickly and you don't have to commit yourself to a huge big program.

LC : This is interesting. So smart innovators can invest and this is a cost benefit analysis, really what we're talking about here, right? We're saying, well, it could be a high cost, we don't know what the benefit is, we have to try it anyway.

Option Value In Innovation: Learning Without Commitment (05:17)

RM : Or we have to try some variant of it, right? I mean, people don't understand in many cases that you can learn a lot without actually having to bet the wrench, right? So I'll give you an example that my buddy, Alberto Savoia uses, because it's just so graphic, it's very clear. He was teaching a class at Stanford and one of the students had this great idea like, would students buy sushi that was safe to eat, but maybe a little older than the same day sushi. So they had this concept for second day sushi. And so to test the concept, what they did was they spend about a hundred bucks buying, you know, regular sushi made that day. Sushi, they put a bunch of sticky labels on them calling second day sushi, half price. And then they stepped back and waited to see if anybody would buy it. [laugh], nobody bought it.

LC : Nobody bought it. Exactly.

RM : And so rather than, you know, going through all the marketing and packaging and supply chain and all that stuff, you can test that basic concept right at the time of consumption.

LC : I like that at the time of consumption. That's important, isn't it? You know? So at that very time of consumption is when we can gather the most value from the purchase. Yes. So we had all these assumptions about whether or not people would value it doing a cost benefit, right? We're like, will people value it? Then time of consumption, they eat it. How do they experience it, right? What's their intrinsic value? What's their price sensitivity? What's the potential for it becoming even more in volume, right? All those assumptions come into place, right? So it's so important. I love that. So you've applied option value as an economic principle to innovation, which is brilliant. So let's go a little bit more into the second now, because we were talking about innovation. Let's go to your second point. Okay? So the second was around actually good segue, innovation. So tell me more about how we must at this point innovate.

RM : So one of the realizations I've had is that it's entirely possible to become a very senior executive in a large multinational company without ever having encountered innovation in any way, shape or form. You know, you've been promoted for being an operator and there's nothing wrong with that. But what people often don't realize is there's a whole set of practices that are associated with repeatable, reliable innovation. And so it requires three activities. So everybody thinks it's about getting great ideas. I mean, sure that's part of it. We call that ideation. But all too often, you know, it's innovation theater, right? We have the bootcamp and we set up the accelerator and thousands of post, post-it notes die a horrible death while we ideate. And the ideas have nowhere to go. So once you've got an idea, you need to take it through an incubation process to get that idea tested.

So second day sushi, right? Will anybody buy it? Right? We have to kind of do those tests and then when you've got something that you find works and you want to get it into the market, you need to accelerate it, which means it needs to grow up. So it has to go from being, you know, a collection of weird prototypes to actually now being something that's robust enough, you would not feel embarrassed selling it to a customer. So ideation, incubation, acceleration. And there are practices associated with each of those.

LC : Ideation, incubation, acceleration. Outstanding. And so we're really bringing this to the next level. Again, economic concept, applying innovation principles. Let's talk about these three areas. So you're ready? Sure. These are wonderful. So ideation, let's start with ideation.

Ideation And Nurturing Creativity Through Focused Teams (08:36)

RM : So there's lots of ideas in the world. People are remarkably ingenious. So the critical thing about ideation is you need to make it possible for people right at the edges of the organization, to have access to small amounts of resources, to test things out, to try things out. And we've seen this in companies like Adobe and 3M and many others where they have practices where somebody that's got an idea that they're passionate about can actually get small amounts of resources to take it to the next level. Nokia back in its heyday used to do this and I think a lot of companies put barriers between people and the ideas. And so the model I go for, I call it a permissionless organization.

So you know, at Amazon for example, they have what they call two pizza teams. If you are an employee at Amazon, you're expected to devote a big chunk of your time to being on a two pizza team, which is exploring some exciting new area.

LC : I like that. Two pizza teams. Tell me more about that, two pizza. How does that relate really in the process of ideation? Incubation. Acceleration. Tell me like, how that practice actually evolves.

RM : Well it connects back to this idea of not requiring permission as Jeff Bezos will tell you, even well-meaning gatekeepers, slow things down, right? So if you could create a structure where people didn't feel they have to ask permission, then your whole organization can move much faster. So let's get into the science behind two pizza teams. What he means metaphorically is no team should be bigger than can be adequately fed on two pizzas. No, it's a symbol. It's not a real, you know, it's not a real law, right?

But the idea is that if you've got three people, let's say working on something, they only have to have like nine paths of communication. If you've got 12 people, 15 people, 25 people, your amount of coordination, communication you have to have yet increases exponentially. And so the rule is if you have these small teams that are very, very focused on a specific challenge, they don't need to coordinate a lot, they can just go get on with the work. And so it just cuts off a whole lot of waste in your organization because you're not spending all this time coordinating.

LC : Absolutely. I know Jeff Bezos, even when he's in that first sort of level in innovation, he has this great quote, which is the ‘keys to success, our patients' persistence and obsessive attention to detail’. So I think of that and how important resources are as well. He says life's too short to be with people who don't have resources, which is the truth, right? Because we need the resources. We need the resources, we need this attention to detail when we're at that point of inflection that you're talking about. And that two pizza team. And to have that kind of permission list, here's a sort of article on that, on Amazon, how they did that. If you look up Amazon leadership principles or this URL you click on now, you'll see it. And so life's too short to be people with help resources, Because at that first date.

Let's go to the second one. Ideation, incubation, acceleration. So we ideated two pizza team, let's go to incubation, here we go.

Incubation: Unveiling The Minimum Viable Product (11:26)

RM : So incubation involves going from a concept to something that you could actually show to a customer and have them respond. Some people call these a minimum viable product. And what you're trying to get is feedback from the market by looking at potential customers, actual behavior. So a big mistake people make is they say, oh well they told me they would love it. Well of course I told you that you would love it. I'm a nice person, you know, I'm not going to tell you I think your baby's ugly. But if you hand me the baby and ask me to play with it and I sort of say, nah, I'm too busy, then you know, you don't have a fit with the market.

So, what good innovators will do is they're relentless about looking for evidence from the market of what's going to sell, what isn't, what's attracting people, what's not. And they're very alert to surprises. That's another thing I think that good innovators do.

So, in the incubation process, you know, no idea survives incubation, intact. So you're going to find, well, you know, I didn't have that idea, didn't really work out, but it's opened up a whole new venue for this other idea. So I'll give you an example from my own world. So I was working with the tech team and we built this great iPad app that would help companies figure out what their growth gaps were. Like how much innovation did you actually need? And then I went to my first large corporation, I said, isn't this cool? And they looked at us and they said, surely you just we're not putting sensitive corporate information on an iPad app. So, you know, the concept wasn't a bad one, but I didn't understand their security concerns. And so that's the kind of thing you learn when you're incubating.

LC : Cool. So we see issues, we see what, or is it around corners that we didn't realize where we have to pivot, we have to shift, we have to remain resilient and recreate. Because what I see today is a lot of entrepreneurial coaches who say, I have one myself who's told me before, Lou, you have a lot of ideas, stick to one. So stick to one idea. And we kind of were wrapping on this you and I before, is how to create an idea, right? That you have that you bring to market and test to see if it's like, right, even us, even we do that right?

So, what's so important at that point of inflection really is inflection to see what are the behaviors of your customers at that moment, right? Because at that moment is when you learn the most.

RM : And how have they changed, right? So I'll give you one that I'm looking at right now, which I think is going to be a huge inflection point in the world of software development, which is the increasing power of the low-code and no-code movement. So the analogy I would draw would be, if you go back to the early days of the web, right? Everybody had to have a webpage. But you know, building a webpage was like a quarter million dollars because you had to have somebody hand code the HTML. Today, you know, you can go on Wix or Squarespace or you know, any of those places and within 45 minutes you can have a beautiful website. And I think the same thing is going to happen to specifically designed code.

LC : Yeah. The Git is great for that. You know, GitHub is wonderful in that way. You can create public code or private code because open source code was so beneficial back in the early 2000s, late 1990s. And then we became sort of closed a little bit, which kind of stunted innovation a little. So GitHub made it larger for us so that people could have, you know, a more low-code environment. We could grab code, we could add it on easily to a software product. The issue is around engineering and our architecture. Now we're geeking out. So this is good that I've seen in engineering and architecture. We could talk about this. There's so many different places globally that have various types of architecture. So we have this global environment, things are changing. We work with either it's Middle East, Europe, APAC, or the US and various schools of engineering and architecture and they all code different, right?

So kind of have to pick one and go with it or something that resonates with you, then you change your mental models or thinking with that particular way of being. And if the culture isn't the same for that month or thinking, there has to be either a breaking away or a reconnection. Because if you're going to remain resilient and agile and see around corners, your team has to be very cohesive. I think that's where you're going at. Because low-code, there's no codes easier to do it than it ever has before.

My recommendation to everybody is be sure you get with the right team who has the right architecture and engineering so that you can make it scalable in the future rather than making it really easy in the present. Because we do that, we can prototype with really cheap software and prototype a really important product with cheap software.

But in the end we're going to have problem with that. So we have to be sure that that code is super, super tight. That's very important. I I think for our all entrepreneurs to hear that because I just don't want to make the same mistakes I've made and then had to reevaluate. Cause around the corners were really about the engineering code and school that they've come from. Columbia Business School is different than Stanford is different than Kellogg, right? You're going to get different ways of looking at things and at Columbia you'll be able to do things like Rita, which is apply option value to innovation, which is super cool.

So all different really neat things. Okay, we're going to third one now. You ready? You're going to get this in. We've done the permissionless organization. Put it in one more time. I want to make sure it's coded. Literally coded for us for people. So the third one, why don't you bring us through Rita, the three, ideation, incubation and acceleration. Now that we have it and we've incubated it, we've talked about it. It's easy to archetype and prototype and get it out there. Acceleration, ready, acceleration.

From Incubation To Acceleration: Navigating The Transition (16:55)

RM : So, you can think of your main business like a big highway, you know like the New Jersey turnpike and all your existing processes are running on that highway and your innovation is on the on-ramp. And for it to be able to join with those existing businesses, it's got to become much more mature. So you've gotta pay off what's called technical debt. And you were just talking about this, right? So in the early stages, I'm just prototyping, I'm slapping stuff together. It's, you know, do you like it? I'm testing the UX and that kind of thing. If you're going to actually run real systems on it now it needs to grow up. It needs to be really robust. You probably need to replatform it. You have organizational debt too, you know, so in the beginning it's great fun and we give ourselves crazy titles like you know, Code Ninja.

But by the time you kind of have to join the ranks of the vice presidents and senior vice presidents and directors of the world, you have to straighten out your titles. You have to straighten out your pay scales, you have to figure out what some kind of reporting relationship looks like. And so there are all these things that have to be brought to a mature level before you can launch. Now, the thing I would say about acceleration for CEOs for your listeners is don't be timid. You know, if you are timid about the investment needed, when something needs to accelerate, you're dooming it before it's even got a chance to start.

So, take an example of Amazon web services, right? Now they knew they could do it because they built it for themselves. What they didn't know was whether it was an offering that was fit for the market, but they had to go to market in a really convincing way. So Lou, if I go to you and say, please put your software up on my system, and you said to me, well how long are you going to be around? And oh at least a year. I mean, there's no way you're going to want to sign on for that. So by the time you get to acceleration, you need to be pretty clear that you need to make a commitment.

LC : That's right. The commitment. And that's where you need a new CEO, largely. It really is. Hey, I made an assumption, let me actually ask you, at that point after incubation, right? And we get to acceleration, is it important to reevaluate who's on your management team? Who can take you to the next level?

RM : Yeah. So if you think about it, acceleration tasks are very much operational tasks, right? So I need to straighten out my supply chain, I need to make sure my warehouse is running. I need to provide customer service and support. I need to do promotion, I need to get the word out. Very operational kinds of things. Now your ideation blank sheet of paper people may not be into that. That may not be what they want. So one of the things to be aware of is that you need different skillsets at these different parts of the process. So idea people, give me a blank piece of paper and tell me what the future of food is going to look like. Okay. You know, incubation is really curious, testing, and prototyping and let's put this out there. And design thinking, right? Acceleration starts to get a lot closer to what many executives are a lot more comfortable with, which is okay, we've got it, we know what the price is, we know that it works. Now what we want to do is grow the thing.

And that's a much more operational set of tasks. So you may find you need to transition the team. Now one thing I will say that is to me a real shame is, you know, innovations take time. They take, you know, three years maybe. And so what often happens is people lose patience before the thing’s really launched. Then once it has the time to take off and it's in the market and it's doing really well, whoever happens to be standing there in charge gets all the credit for it. Now it's not fair if that's fine. What I think is dangerous about that is the company now builds up this myth about where their innovations came from. And so they learn the wrong lessons. And so we don't remember, you know, why it took three years or five years, however long it took. And we've forgotten about who the players were that were involved in the process. And so we have all this misattribution and this memory that goes on when it comes to successful innovations.

LC : It reminds me of something important while you were talking. This is a picture I'm going to share of Jeff Bezos in a small office just there in the middle of nowhere, you know, with Amazon on the side and you know, it is just him and he was selling books. You could easily say at this moment that it's just Jeff, Jeff's the one who created it all. But at the same time, if you ask Jeff what do you think about the future of Amazon? He'd say, we innovated it, but it's going to die one day. Somebody else is going to do better. So he stepped down and he realized he needed to exactly what you said before, which was, you know, to really reevaluate leadership. different skill sets at each parts of the process. And he's ready. He's ready to move on and he is ready to give other people that opportunities. And as you said, the companies built up this myth of where it came from. Jeff was in that office. However, there's a lot of other people who developed that time who could take ownership for it and move it to the next level.

RM : Yep. Absolutely.

LC : For incubation. Okay, where are we now? Okay, 24. So we did all three of those processes and now we're going to go to your third. Okay. Which is around the future. So the third is about CEOs looking to the future and becoming kind of aware of what's around the corner, right? And this could be, I think across all industries, this understanding of, you know, now we've innovated, now we've created, we've developed, we're out to market, our customers are coming in, steady flow, monthly recurring revenue. Life is good. Now what? Is it okay, right?

Erosion And Transformation: Sustaining Competitive Advantage In Changing Markets (22:02)

RM : Yeah. Well so the way to think about competitive advantage to me is that you have three lifecycle stages. So you have the innovation part where your advantage gets created, right? And we've just talked about that. You have the exploitation part where you have something in market and it's going great, but all advantages also have a erosion part. And when you have an advantage that's beginning to erode, what you need to be doing is transformation. So you know, innovation, right? Exploitation, but then transformation. Because if the world outside your organization is looking very much like these waves of competitive advantage, you need to be looking forward too.

So I have a set of questions I always ask senior leaders when they're talking about the health of their current business, right? And I say, well, do your own people buy your products? Are you a desirable place for people to work? Like is the best talent in your sector coming to your door? Are good people that you already have, are they leaving? Right? Are your salespeople saying, you know, I just lost a sale to a cheaper competitor because the customer said it was good enough. And in other words, there are all these early warning signs you can look at to determine the future health of your existing business. And what I think is hard is taking action on it in the here and now. So one of my favorite quotes of all time is David Cote who just stepped down recently as CEO of Honeywell. And he was there for 17 years. I mean amazing turnaround, right? And what he said is, you know, ‘the problem with the long term is eventually it becomes the short term’

LC : The long term becomes the short term. Exactly. Because we're there, the three years have brought us there and we're now working it and we're transforming. Like you said, we have to see these warning signs. And sometimes they're just right in front of you. It's funny, we were ideating on next levels for businesses and we were talking about 500 things at once and all of a sudden on my desk there was a card that I had written probably about a month ago and the card had the exact pricing and new innovation and idea on it that turned out to be exactly what we need to do, right? So, you know, you've probably heard things about this before, us seeing signs. They're in front of us, sometimes they come from customer input, sometimes they come from the top talent leaving, or from customers not using your product. Yet sometimes they're just right in front of you literally. And they figuratively of course. So it's really interesting how we see how we open up our minds to see. Yes. So would you say, have you seen that kind of thing too with CEOs? How we open our minds to, there's a growth mindset, right? We all say that. To growth mindset. So we don't just see problems, we see possibilities of this long has now come into short and we're here now to grow

The CEO Mindset: Embracing Problems And Seeking Truth (24:43)

RM : To grasp them, absolutely. So I do think there's a CEO mindset that involves a couple of necessary things. So the first thing is if you tell people, don't bring me a problem that you don't have a solution to, guess what you're going to miss vitally important information. Secondly, they need to nurture what Andy Grove very famously called ‘Helpful Cassandra's’, meaning people who are out at the edges of your organization who can bring you the truth. And you know, Intel under Brian Krzanich abandoned that philosophy and they got into big trouble because they didn't catch the transition to low energy consumption that was taking the world by storm.

have happened. So I think one of the things that CEOs need to really question themselves on is, you know, am I really getting out of the building as Steve Blank would say, am I directly immersing myself in the realities of my business or am I kind of hanging out in my cushy office where nice people bring me coffee and everybody tells me how smart I am all day long, right?

I mean, it's a lovely place to be as a human being. But as a CEO, if you are not out there looking for the weak signals, the cracks in the system, what could go wrong? Nobody else is either.

LC : It’s true. I always say the paranoid survive, right? Only paranoid survive. This is such an important concept of knowing that, you know, you have these signals around you and possibilities for growing out there, right? And I thought of when you were saying about, I thought of Circuit City, I thought of Blockbuster, you know how Blockbuster thought they were the model that would always stay. The long was here in the short. Netflix came in, Reed Hastings said, I can make a subscription model, it's all going to change. He did it. Circuit City didn't know that most consumer goods, other companies were showcases. So Hubert Joly said, I can change that at Best Buy, we'll make a better way for us to become friends to our customers. And our customers kept coming back because he taught them, he educated them, he made them part of their ecosystem. So that's forward thinking mentality. Bernie Marcus from Home Depot, same thing. He said, “I'm going to help consumers, I'm going to help my community, I'm going to help my vendors, I'm going to help everybody so that we're bulletproof and change the whole system.” How do you become bulletproof? You help everybody [laugh]. Right. It's not that hard, right? You're going to say, go ahead. That's the mindset, the different mindset show.

RM : Absolutely.

LC : And be willing to do it. Some people just don't want to do it.

Building A Competitive Advantage: The Power Of A Trained And Developed Workforce (27:05)

RM : Well, and I think one of the things you alluded to, and this is something I think is a huge issue we have here in the States, which is we have this proliferation of terrible jobs, you know, where people are basically treated like badly performing robots. You know, they're not given steady schedules, they're not developed, they're not in a role where they can learn. And Amazon, by the way, I think is guilty of this, they don't promote from within for their warehouse workers. I mean, they pay a decent enough wage, but you know, Bezos would rather get some MBA who's 22, you know, in a management role than actually building people up from within. Which is different to say a Walmart. I mean, you can actually have a career if you start, you know, on the shop floor at Walmart, you can actually have a career with a professional trajectory. And I think more companies are going to start to realize that one of the few competitive advantages you can really count on is a trained, developed, loyal workforce.

LC : Absolutely. When you train and develop and you really respect employees, truly, then everything will fall into place. It all falls into place. It's that simple. [laugh] The first line in my book ‘In great company’ says that, when you love your people, everything else falls into place. And people have shown that Alan Mulally from Ford, he has one statement, love 'em up, he skyrocketed Ford's stock price more than any other CEO and the Fords included [laugh] maybe because he had that one page plan. And he said, love 'em up. He put love in the actual ethos of the company.

You don't need the unions when there's love for your employees. You don't need them [laugh], they're not necessary, like you said. So love your employees, good things will happen, right? That's at the competitive advantage, I think. And you said train them up, develop them. Right. And then you'll have a great workforce like you said at Walmart with succession planning. Such a good lesson. You so you're such a good professor and coach and executive coach. You're awesome. You really are. I want to talk to you. I learn from you, talk about all the different businesses after that. We have to do that. Who doesn't want to? I mean, Rita McGrath, this is Rita's website. It's and she has some new things too coming out. Rita, tell us about the new things that are coming out.

RM : So one of the things I'm working on is tools that help companies really put these innovation concepts to work. So briefly, it's a software spine, it's a bit of education and it's some advisory work. But if you wanted to know how to get started, right, that's where we can really help you. If you feel your innovation engine is not doing what it should, that's something I'd love to have a conversation with your listeners about [laughs].

LC : That's excellent. So the innovation engine and then you have software products and tools and a process for people to go through that is better than second day sushi.

RM : Definitely better than second day sushi [laugh].

LC : Outstanding. So, Her books I highly recommend, as you can see, there's a wealth of information and the way that it's formed and presented, it's really very fine. It's very fine. And I really appreciate that about you. You know, everything's going to be better than second day sushi, everything so that, so alright, so good. Here it is. Rita, what a wonderful conversation. I know there's so much more. And we did have that 30 minute window for LinkedIn. I usually keep it at, I really look forward to future conversations. I could see a lot of things emerging here with help for especially new products and existing products to shift so that they can become competitive and be sustained in this really difficult, challenging time. Thank you, Rita.

RM : Thanks Lou.