by Rita McGrath
Contents
* * *
Title Page
Contents
Copyright
Author’s Note
Foreword
Introduction
Snow Melts from the Edges
Early Warnings
On the Lookout for Weak Signals: Defining Your Arena
Customers, Not Hostages
What Must Be True? Creating a Plan to Learn Fast
Galvanizing the Organization
How Innovation Proficiency Defangs the Organizational Antibodies
How Leadership Can and Must Learn to See Around Corners
Seeing Around Corners in Your Own Life
Acknowledgments
Notes
Index
About the Author
Connect with HMH
Copyright © 2019 by Rita McGrath
All rights reserved
For information about permission to reproduce selections from this book, write to [email protected] or to Permissions, Houghton Mifflin Harcourt Publishing Company, 3 Park Avenue, 19th Floor, New York, New York 10016.
hmhbooks.com
Library of Congress Cataloging-in-Publication Data is available.
ISBN 978-0-358-02233-6
ISBN 978-0-358-23707-5 (international edition)
Cover design by Michaela Sullivan
Cover photograph: iStock / Getty Images Plus
Author photograph © Evelyn Reinson
eISBN 978-0-358-01897-1
v1.0819
In one of my last conversations with my mother, Helge-Liane Gunther, she made a big effort to say something that was clearly important to her: “I’m proud of you.” It shouldn’t have mattered that much, but it did. A lot.
She was extraordinary. A scientist, when that was rare. A pathbreaking researcher whose work was cited for decades after she completed it. And the heart and soul of our family.
I’d like to pass her thought along.
To our daughter, Anne, and the amazing women coming into their own along with her: I’m proud of you.
Foreword
* * *
As hard as it may be to remember now, there was a time, not so long ago, when no one was talking about disruption. Innovation, back then, was a niche topic of interest to only a few. The consequences of digital transformation were only dimly anticipated. Thirty years ago, that was the world we lived in.
Even then, however, the early warnings were clear to a few of us. Rita McGrath and I were both pursuing our doctoral degrees in the late 1980s—she at Wharton and I at Harvard. Both of us intuited that the assumptions underlying theories of success in business at the time were on the brink of major challenge. In my case, the big idea was that assumptions about “good management” would lead to corporate disaster as leaders faced what I came to call the “innovator’s dilemma.” In her case, the big idea was that approaching highly uncertain projects as though they were business as usual was a trap. Both ideas were published in the Harvard Business Review in 1995.
We were challenging orthodoxy—in fact, we are still challenging orthodoxy.
This orthodoxy is based on assumptions that in today’s competitive environment are simply not correct. Big market share is good, for example. Rita and I would ask, Market share, meaning what? The very concept of “industry” is an artificial categorization. Often the most important competition any business will face is from entrants who are not hamstrung by assumptions about what their “industry” expects of them. Addressing this reality may be challenging, but it can be strategically navigated with a useful theory—a statement of what causes things to happen, and why.
The terms “theory” and “theoretical” often connote “impractical.” But theories are statements of cause and effect—which actions yield which results, and why. As such, a good theory is consummately practical. Every time a manager makes a plan or takes an action it is predicated on a belief that they will get an expected result. Managers, therefore, are voracious consumers of theory. The more we understand what causes things to happen, the more we can help managers understand that in these circumstances you should do this, but in those circumstances you should do that. These cause-and-effect relationships offer clarity and predictability to what otherwise might seem like a game of chance.
The first step toward developing any useful theory is getting the categories right. In my previous work, I realized that product or demographic segmentation were the wrong categories when trying to predict purchase behavior. As Peter Drucker famously said, “The customer rarely buys what the company thinks it’s selling him.” This led me to discover the theory of jobs to be done, which asserts that people buy products and services because they are trying to make progress in their lives. Once people realize they have a job to do, they reach out and “hire” (or fire) a product to get that job done.
Rita McGrath insightfully builds on that research to introduce a new category that basically rips apart decades of strategic thinking in which where you are in an industry determines your fate. Thinking in terms of an arena, rather than an industry, McGrath suggests, means that markets are no longer defined by product category but rather by the jobs that people are trying to get done in their lives. This concept offers a much more powerful categorization scheme for managers navigating disruptive change.
She then goes a step further to illuminate not just the what but the how of successful innovation. Her theory of discovery-driven planning helps managers discover the future while simultaneously containing risk. I’ve long been convinced of the power of this theory—it is required reading in my course at Harvard Business School and is used extensively in our strategy consulting work at Innosight.
Innovation doesn’t have to be a painful hit-and-miss effort. Though disruption is constantly on the horizon, managers don’t need to be blind when charting their course. Seeing Around Corners will help those of us who seek to better understand—and even anticipate—what innovation will bring us next.
Clayton M. Christensen
Spring 2019
Introduction
* * *
Some years ago, Andy Grove introduced the concept of strategic inflection points in his landmark book Only the Paranoid Survive. A “strategic inflection point,” he observed, “is a time in the life of a business when its fundamentals are about to change.” And that is how many of us experience inflection points—as a single moment in time when everything changes irrevocably.
When you look at the true nature of strategic inflection points, you see a different story. It is similar to the way in which Hemingway’s character Mike Campbell in The Sun Also Rises responds to being asked how he went bankrupt. “Gradually,” he says, “then suddenly.”
An inflection point is a change in the business environment that dramatically shifts some element of your activities, throwing certain taken-for-granted assumptions into question. Someone, somewhere, sees the implications, but all too often they are not heard. That someone might be you!
This book will help you see the opportunities represented by strategic inflection points and help you, your team, and your organization take advantage of them. There are three major ideas to grab hold of here.
What you experience as a big, dramatic inflection point has almost always been gestating for a while.
This creates opportunity: if you see it early—or even better, spark it—an inflection point can be a strategic boon.
You can use tools from the discovery-driven growth playbook to maximize your opportunities.
Let’s take a concrete example.
Imagine a sector that effectively serves only one in five potential customers. Now imagine a massive change that would allow competitors to capture al
l that unmet demand in a highly profitable way and without taking on a lot of risk. Imagine that the sector as it is generates about $8 billion in revenue annually. The post–inflection point sector could be five times that size, meaning that some $40 billion or so in revenue could potentially be unlocked for those competitors adroit and farsighted enough to be at the right place when the inflection point does its work.
Though they are often depicted as disruptive destroyers of existing businesses, inflection points create vast new spaces even as they destroy outdated technologies and models. Famed economist Joseph Schumpeter said it decades ago—incumbents in a sector are always vulnerable to the “perennial gale of creative destruction,” which sweeps away the old and outdated, and introduces the new and more desirable.
Can You Hear Me Now?
The sector I just described actually exists. It is the business of manufacturing, prescribing, and fitting hearing aids. Judged by the standard of making sure people who need the help get it, the sector is doing a terrible job. According to researchers, 80 percent of adults between the ages of fifty-five and seventy-four who might benefit from a hearing aid don’t have one, and many who do have one don’t use it. Anyone who has ever tried to persuade an older person whom they care about to get help with their hearing (and who hasn’t?) is all too familiar with the negative aspects of how this corner of the healthcare market is organized.
For starters, hearing aids are expensive. In 2017, the New York Times reported prices ranging from $1,500 to $2,000 or more per ear. Medicare does not cover hearing aids. Barbara Kelley, executive director of the Hearing Loss Association of America, reports that “the number one complaint we get in phone calls every day is, ‘I need help, I can’t afford hearing aids.’”
But that isn’t the only problem. The traditional hearing aid business is regulated by the US Food and Drug Administration (FDA), and access to the technology is tightly controlled by incumbents. Audiologists, their lobbying associations, and the few (six—actually, soon to be five) companies that manufacture hearing aids have strictly limited the options available to patients. The incumbents insist that what all patients want is the “gold standard.” As one observer described it, this involves buying a hearing aid only after a thorough diagnostic evaluation that includes otoscopy and bone conduction testing, speech-in-noise testing, real-ear measurement/speech mapping, aural rehabilitation, and hands-on hearing aid fitting. Even if they have the means, for many people this seems like overkill.
Finally, we have the social stigma factor. People don’t want to wear aids for fear of looking “old.” Despite strong evidence that they could use the audible help, admitting it is tough. The often ugly, obvious, and occasionally noisy traditional hearing aids are whatever is the opposite of cool.
I know this firsthand. When I asked my mother-in-law about a whistling noise I heard at a family gathering, I didn’t realize that she had finally started to use her hearing aid and that it was the source of the unfamiliar noise. She yanked it out of her ear, stuck it back in a drawer, and didn’t use it for the rest of our visit. Sadly for her (and distressingly for me), the benefit of using an aid to fully participate in the conversations she craved was no match for the “embarrassment” of wearing the device. Had I only known that this was a common feature of hearing aids, I would have kept my mouth shut!
This is serious stuff. A study by Frank Lin of Johns Hopkins found that hearing loss is associated with an increased risk of developing dementia, of social isolation, and even of an increased risk of falling. Uncorrected hearing loss makes it even harder for eventual treatment to be successful and increases the cognitive load on the brains of people struggling to make out what others are saying. Clearly, this is a social and health problem of epidemic proportions.
The Gathering Inflection Point
Problematic as it is, the hearing aid business model has remained more or less the same since the FDA classified hearing aids as medical devices in 1977. Before then, hearing aids were generally treated as a consumer product, with some hilariously bad and misleading advertising and celebrity endorsements to go along with that positioning. Meanwhile, in-ear hearing aids—which needed to be fitted to individuals’ ears—were often sold by audiologists, and that became the norm. Due in part to misleading claims and some shoddy practices, interest groups began to raise alarms about hearing aids, prompting the FDA to classify them as medical devices with extremely strict protocols for their manufacture and dispensing.
The current inflection point for the highly regulated (and profitable) hearing aid business had its roots in two citizen petitions filed with the FDA in 2003. An FDA citizen petition is a process that was originally intended to allow individuals and community organizations to make requests for changes to healthcare policy. While the petitions themselves had no immediate impact on the way hearing aids were regulated, they were early markers of a shift in sentiment that would move these devices toward the same over-the-counter access currently available for “reading glasses”—corrective lenses that can be sold without a prescription.
The incumbents aren’t eager to back down. No less than the American Academy of Audiology suggests that any device that amplifies sound should be subject to FDA regulation. Taken literally, this position could be seen as requiring such regulation for everything from earbuds to headsets.
The academy aside, the cost to consumers and the intransigence of incumbents have led to an odd coalition of bedfellows determined to change the system. In 2017, for the first time, the regulatory structure that the academy has been trying so hard to preserve began to be dismantled. In a classic Clay Christensen–style disruption, new technologies are proving to be “good enough” and are expanding the pool of consumers who might benefit from an improved ability to hear. This is what Christensen has often described as “competing with non-use.”
The Disrupters Edging into Hearing Assistance Territory
Although they are not—heavens no, absolutely not—selling hearing aids, there is no shortage of companies offering what in the industry are called “personal sound amplification products,” or PSAPs. These products are not regulated by the FDA and are readily available over the counter to anyone who wants them. And even more worrisome to the conventional hearing aid manufacturers, in many hearing assistance applications, PSAPs do just as well—or even better.
For instance, Bose, the iconic manufacturer of speakers and noise-canceling headphones, is making a product it calls Hearphones that sell for around $500. Despite advertising that makes it sound an awful lot like the product is directed at people suffering from hearing loss (“We want to help you hear every word of your conversations”), at one point, Bose was emphatic that these devices were most definitely not hearing aids, thus avoiding FDA oversight. In 2018, however, the company received approval for an over-the-counter version of a self-fitting hearing aid. Other heavyweight players are crowding into the market, including Samsung with its Gear IconX earbuds and Apple with its AirPods—wireless earphones that can allow you to listen to music, time exercises, and, incidentally, connect to hearing aid apps on a phone or other device. In addition, dozens of new companies are piling into the aid space, with aids like Fennex, Petralex, and Here One. And on the startup side of things, a product called Eargo took its inspiration from fly fishing to create an actual hearing aid that you fit yourself, buy over the Internet, and charge the way you might charge one of your more familiar electronic devices.
You Thought $8 Billion Was a Big Number?
But, really, all this excitement and energy about a market that hasn’t historically been seen as all that interesting? Well . . .
Experts have projected that even under the existing regulatory regime, the hearing aid business could be an $8 billion business by 2019. Some say that by 2023 it could be in excess of $9 billion. This is an interesting aspect of strategic inflection points. 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.
Moreover, you might even see quite dramatic changes in the use case for hearing devices, along the lines of how the smartphone changed the way people use mobile phones. People might find themselves purchasing more than one device, as they now do with glasses. Perhaps one look and functionality for a Friday dinner out, something completely different for the Sunday afternoon sports game, and maybe even something else for watching TV at home. Once something becomes inexpensive enough, the possibilities are endless.
As you will see throughout this book, weak signals of an impending shift—when recognized early enough—can give you a head start to prepare to take advantage of it. Right now is exactly the moment when companies interested in entering the over-the-counter hearing aid business should begin preparing and making plans. Not investing in a huge big bang, mind you, but investing in preparations.
An inflection point occurs when a change—what some people call a 10X change—upends the assumptions that a business is built on. When the moment of crystal clarity arrives, that is the moment to mobilize the troops, bring focus, and bear down hard on preparing the organization for the post-inflection world, just as Bose, Samsung, and others are doing in the over-the counter hearing aid (sorry, not hearing aid) space.
Gradually, Then Suddenly
Inflection points can take a surprisingly long time to unfold. Wilbur and Orville Wright made their first twelve-second historic flight near Kitty Hawk, North Carolina, on December 17, 1903. The first mention of their accomplishment in the New York Times appeared three years later. In fact, it wasn’t until May of 1908 that serious reporters began to pay attention and the public realized that manned flight was not (as an expert predicted in 1902) too far in the future, but that it had actually arrived. In short order, industries as varied as passenger travel, consulting, logistics, and even defense were fundamentally altered forever.