Now Live : 2025 Global Most Loved Workplaces® — See the Top 100 Companies
The 2025 America’s Top 100 is live. See the list →
The 2025 America’s Top 100 is live. See the list →
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.
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.
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 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.
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.
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.
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.
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.
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.
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!
