Strategic disruption: An expert’s thoughts on moving forward

Rita McGrath, a professor of management at Columbia University’s Graduate School of Business, has written several books on business disruption. Her thoughts would be relevant anytime, but they are especially relevant in spring 2020, a time of unprecedented uncertainty and upheaval wrought by the global spread of the novel coronavirus.

McGrath shared insights on several topics in an April 1 interview with the JofA. Here are four of her observations on the future of business strategy.

THE END OF COMPETITIVE ADVANTAGE

In 2013, McGrath addressed strategy in turbulent times in her book The End of Competitive Advantage: How to Keep Your Strategy Moving as Fast as Your Business. It was about shattering the notion that companies could sustain a unique position or competitive advantage for many years. Instead, the companies that would succeed would be the ones that could recognize early on where they wanted to go in the future and what lines of business they should focus on or abandon.

She said that before the COVID-19 pandemic, company leaders’ level of buy-in on the concept of transient rather than enduring advantage fell into three buckets:

“The first bucket is, ‘No, doesn’t apply to me.’ As a private banker said to me, ‘You know, private banking hasn’t changed in 300 years. You give me money, I invest it, 10 years from now, you come back, and there should be more of it.’ That’s how he described it. I think the first group of people are basically in denial, and that group seems to be getting smaller and smaller.

“The second group would be characterized as kind of freaked out. They’re saying, ‘All the old rules don’t apply. I don’t know what the new rules are.’ And, unfortunately, they can get dysfunctional about that, so they start dashing off in all directions and doing all kinds of crazy things.

“The third group are actually the ones I work with the most, and they almost are relieved to have a language to talk about this new world and to have a set of principles they can follow to think more constructively about how they take action.”

THE NEW NORMAL

McGrath believes that the pandemic’s effects will absolutely lead to changes by businesses on numerous fronts. Take the simple notion of travel for in-person meetings, or a company building that has enough desks for every employee to work in the office all week.

“There will be a complete reevaluation of business models, of taken-for-granted assumptions in the business,” she said. “If it goes on as long as people seem to think it is, we’ll have adopted a lot of new habits by … whatever the next phase is. And you’ll see people questioning, ‘Why did we do it that way? And why was I getting on airplanes and sleeping in hotels four days a week?’

“There’s going to be an awful lot of rethinking some of these taken-for-granted assumptions about how we think about things and how we do business together. I think, almost without there being a conscious effort to do so, we’re all going to be in this transient advantage mindset going forward.”

NEAR-TERM CONCERNS AND SHORTER-TERM BUDGETING

Now may be the time for that innovative, entrepreneurial mindset to take root at organizations, but some ideas will have to wait. Many companies are focusing first on survival, which may include a pivot and/or spending money held in reserve to make up for a sharp downturn in revenue.

It won’t be like flipping a switch when concerns about the pandemic subside, McGrath said. Companies will have to spend time getting accustomed to their new, normal business environment before they can proceed with a transient advantage mindset.

“You can’t spend money you don’t have,” she said. “For some [businesses], they’re having to make some pretty tough choices. If they don’t have cash coming in the door and they can’t raise capital in some way, it’s hard to justify paying people when you just can’t afford it. On the other hand, the research suggests that the companies that somehow manage to retain more of their workforce through these dips and downturns tend to come out of it stronger than companies that ruthlessly cut themselves to the bone and moved on from there.”

Companies that use more of a rolling forecast than a static annual budget can be better positioned to emerge from the pandemic’s effect on their finances. McGrath cited the work of the Beyond Budgeting Round Table, a global member organization, as espousing the notion that standard budgeting can be a dysfunctional process. Sales targets and other metrics for the calendar year are likely unreachable, so it’s better for organizations to forecast in a shorter time range, updating scenarios as they get more clarity. (For more information, see “If the Coronavirus Outbreak Disrupts Your Budget,” FM magazine, March 11, 2020, and “Steering Your Budget Amid Coronavirus Uncertainty,” FM magazine, March 23, 2020.)

RETHINKING PROCESSES AND PRODUCTS

That short-term notion ties in with McGrath’s thinking that companies should be constantly testing, or as she calls it, “running experiments at the edges of your organization.”

For example, McGrath said, Columbia University is testing the appetite and willingness of consumers to pay for a virtual version of executive education classes by mocking up brochures and emailing them to see how people react to them before developing an entire course.

“We are facing probably the most uncertainty I’ve ever encountered in a business context, and it feels almost surreal,” McGrath said in early April. “And the reality is none of us know. The data don’t exist. What we’re going to have to do is create some data. Usually what that means is formulating some kind of hypothesis and then very rapidly testing it and validating or invalidating it.

“The more experiments and the more tests you can run, the faster you’re going to learn, and the clearer the picture is going to become. I think it’s almost like applying the scientific method to deciding what we’re going to do next.”

While it may be hard to summon the energy now for experimenting, McGrath is an advocate for keeping innovation warm. “I think the mistake is to crawl under a rock and forget about investing in innovation or improvement or anything like that. What you’ll find is the organizations that do figure out how to stay in the game are going to be that much more ahead of the game once we reach the other end of whatever this is.”

Rethinking products and processes might be a positive that emerges for businesses from the harrowing pandemic. Companies are figuring out how to do things in a new and cheaper way, and some of those practices will stick. McGrath said the digitization of tasks should be given a boost.

Among the questions company leaders are asking themselves: “With constrained resources, can we accomplish the same outcomes perhaps in a different way? Can we do things in a way that perhaps is more cost-effective, less resource intensive? Maybe there’s a completely new way to rethink and digitize what we’re doing.

“Start really looking critically at what is in your existing portfolio. You may find that there are products or lines of business which are there because they always have been, and this would be a really good time to decide to stop doing the things that aren’t really taking you toward your future.”

What to read in times like these

Author and strategist Rita McGrath recommends several books and authors that business leaders today should seek out:

The Invincible Company: How to Constantly Reinvent Your Organization With Inspiration From the World’s Best Business Models

One of the book’s authors, Alexander Osterwalder, is the inventor of a strategic management tool called the Business Model Canvas. “He’s done a very visually appealing, very fun kind of way of thinking about how you do two things: One is explore, and the other is exploit,” McGrath said. “The book offers very practical ways of thinking about, in the explorer space, what are some things to do to find new ideas and validate and test them? And the exploit space, what are some ways you could run the business like a business?”

Reimagining Capitalism in a World on Fire

McGrath said the book, by Harvard business professor Rebecca Henderson, “points out that the way we constructed a lot of our systems are just not sustainable, and offers some alternatives to what we can do differently.”

‘The Leader as Coach’

Author and London Business School professor Herminia Ibarra, a recent guest of McGrath’s for an online fireside chat, focuses her writing on leadership. “She talks about having leaders seen as coaches and how when you coach people, you can really mobilize them in a way that’s very different than if you sort of tell them what to do.” Ibarra recently co-authored an article in Harvard Business Review called “The Leader as Coach.”

About the author

Neil Amato is a JofA senior editor. To comment on this article or to suggest an idea for another article, contact him at Neil.Amato@aicpa-cima.com.