Rita McGrath: Inflection Points and the Future of Strategic Advantage

Guy Kawasaki:
I'm Guy Kawasaki. The remarkable person who is my guest today is Rita McGrath and she is one of the foremost thinkers in strategy and innovation. She's a professor at Columbia Business School and we have a mutual admiration for Clayton Christensen, The Innovator's Dilemma. So she's going to talk about strategy and inflection points and innovation and stupidity and all kinds of stuff like that. So welcome to the show, Rita.

Rita McGrath:
Such a pleasure to be here. Thank you for inviting me.

Guy Kawasaki:
First question for you is today, 2025, is there such a thing as a large, singular, semi-permanent at least, competitive advantage. Is there such a thing anymore?

Rita McGrath:
The closest to it would be what I'd call network effects which is when you're running a platform, and you have the two sides that are connected because each one is there for the other. So if you think about something like Google's business model, it's a virtuous circle in that they get the views, they get the searches, therefore they get the advertisers. But you can see storm clouds on the horizon even for that model which is a very powerful one.

Guy Kawasaki:
Yeah. Talking about that as a competitive advantage, I have now made a Chrome extension that makes whenever I search in the Chrome search bar it's actually searching ChatGPT. So now instead of getting a Google search with it's the paid stuff on top and then 250,000 links to YouTube videos, now I just get an answer, right, and the answers are much better than the search results. If you're saying that's a competitive advantage for Google, I would be worried if that's the best example.

Rita McGrath:
It's been a really good example for a long time. I don't know how long you would give a long-term competitive advantage, but certainly that one carried Google for many, many years.

Guy Kawasaki:
What do you think Apple's competitive advantages are?

Rita McGrath:
Well, Apple is a platform/product company. I've always thought that their competitive advantage was their focus on product rather than content, and they've built this whole platform around everything being connected to everything, but they're physical things and they're beautiful physical things, and people that are loyal to Apple are really, really, really loyal to Apple.
So I think it's that notion of design, the way the products just work together, you don't have to think about them, the design is intuitive. Which isn't to say Apple hasn't had missteps over the years, but I think the Apple that people really love is that one that produces these delightful experiences we didn't even know we wanted.

Guy Kawasaki:
Wow. That's what we call evangelism. I know a thing or two about this.

Rita McGrath:
I bet you do.

Guy Kawasaki:
I read your book Seeing Around Corners, and correct me if I'm wrong, but I got the impression, and this book is five, six years old now, I got impression that you were saying that there were big storm clouds on the horizon for Facebook, and you go into this list of everything they're doing wrong, and here we are 2025, and it seems like none of that bad stuff happened.

Rita McGrath:
Yeah, I was surprised.

Guy Kawasaki:
How do you explain that?

Rita McGrath:
I think they've been super smart in the acquisitions that they've done. They've taken real advantage of a lack of Department of Justice activity in terms of being allowed to acquire their competitors, certainly WhatsApp, certainly Instagram was a genius move. I have to hand it to Mark Zuckerberg.
He really saw that inflection point that Instagram was going through when they first opened up to Android phones and they had a million subscribers like day one, and he said, "Whoa, whoa, whoa, company in our space starting right at the beginning of that inflection point," and that's why he was willing to pay so much for that company.
But the thing about inflection points, and I'd be a super billionaire if I got this right, the thing about inflection points that's difficult is the timing. So if I think about our friend Paul Krugman, right? So in 2004 he said, "You know, there's a dangerous bubble building up in the housing market."
And then he said in 2005, he said, "You know, there's a really dangerous bubble go in the housing market." 2006, "You know, there's a dangerous bubble bursting up in the housing market." And everybody's like, "Paul, for God's sake, let it go." And then of course 2007, 2008 happened and he was right. But it's hard to tell about timing.

Guy Kawasaki:
Yeah. If you're saying that the lack of enforcement of the Department of Justice six years ago, it's open season now, right? There is no Department of Justice. They're so busy looking for terrorists attacking Tesla dealers, how can they address Meta? There're bigger fish to fry like Tesla dealerships. So what can I say? So listen, you draw a really great distinction I never thought of before which is what is the difference between an arena and a market.

Rita McGrath:
So an arena is basically surrounding the resources that you need to run your business effectively, and when you think about it, there's many, many, many other players that could potentially be in that arena. So as opposed to thinking about a market or an industry which is the way we normally think about things, you need to really broaden your aperture.
So I'll give an example. I'm working right now with a company that's very much in the logistics area, moving stuff from place to place, and they think of their arena as logistics or trucking or whatever. And yet I said to them, "I don't think so. I think your arena is really enabling consumption." And so anything that shifts consumption patterns, reduces consumption. This whole idea of dematerialization where we take songs, right?
We used to have to buy albums and then we had to buy CDs, and now we don't even buy songs. We rent them and they fly through the air and land on a device, all those trucks that used to ship CDs from ports to record stores and all that.
Dematerialization is going to be a real thing. So the concept behind arena is that your competition may not actually people or organizations that do similar things to yourself, they might be people that are just going after the resources that you're going after. So one of my favorite examples at the moment is weddings.

Guy Kawasaki:
Weddings.

Rita McGrath:
Weddings. So I don't know about your circles, but in my circles I have two kids who have literally spent just about two or three times a quarter at weddings since 2021. So in 2020, right, the pandemic, a lot of weddings got scaled back or didn't happen or whatever, and then come the end of the pandemic, all of a sudden the floodgates opened, and we had every other month there's a wedding.
But if you think about it, if you're trying to sell something to anybody between the ages of about twenty-two and call it forty, you're competing with weddings because every wedding is what? It's a trip, it's an outfit, it's a gift, it's expensive. And the people that that age often don't have a huge amount of wealth built up yet, so they're going to be cutting back their spending on other things.

Guy Kawasaki:
I got to ask you since I have such an academically respected person on the line. I've read the story of Kodak, and in 1975, Steve Sasson invented the digital camera, but obviously Kodak did not exactly penetrate the digital camera market.

Rita McGrath:
Oh, he did.

Guy Kawasaki:
And so was that a case of Kodak was looking at competition in terms of chemical companies putting chemicals on film, and really they were in the arena of preserving memories. So they got just absolutely slaughtered by something they didn't see even though they invented it.

Rita McGrath:
I think there's a few wrinkles on the Kodak story that often get overlooked. The first wrinkle is that they overlooked digital. They didn't. Kodak was for many years in the mid-2000s the number one selling digital cameras were Kodak cameras. The trouble is, Guy, that it was an awful business.
I think their CEO is quoted as saying, "This is a really crappy business," because the way that the digital images were captured was basically off-the-shelf parts, and this is why an eighteen-year-old surf boarder could start a company called GoPro and all of a sudden he's disrupting the electronic digital market.
But the bigger problem for Kodak to me was that politics. What happened was there was a gentleman called Antonio Pérez who was very famous for having built up the printer business at Hewlett-Packard, and he did not get selected as that company's CEO because they picked Carly Fiorina instead, and now Carly's got a problem and he's got a problem.
He's feeling nose out of joint that he should have gotten that job. She needs to do something with him, and so she sort of sends him off to do this joint venture with Kodak. He tried to talk HP into buying Kodak, the board said no, and then eventually when the CEO role opened up at Kodak he was given that job.
What he missed I think was that screens and pixels were getting so good that nobody needed to print anymore, and what he did was he aimed that company directly at the printing business, even as the need for printing was beginning to go into decline. I suspect observers at the time said this was a political move to try to reclaim his former glory as the guy who legitimately built up HP's printer business which was magnificent. So I think there's a piece of the Kodak story that we don't hear.
A really interesting counter example is what Fujifilm did, and Fuji was in the same business, the same problem, which is the need to print was getting less and less and less, demand was just dropping by leaps and bounds. But what Fuji did instead was they said, "Hey, wait a minute, we are a capability centered company. There's stuff we know how to do." And they created a special task force to go and find new markets where those capabilities would be relevant.
So they got into imaging in healthcare, they got into cosmetics because apparently if you are really good at putting goop on thin pieces of film to make a smart image, it also is relevant to things like your skin and your hair. And so Fuji today is a thriving company, Kodak, a shadow of what it once was. But I think it was a strategic decision. I don't think it was just sort of the standard thing is poor dumb stupid company that missed digital. I think what they missed was something quite different.

Guy Kawasaki:
So wait, are you saying that it's not as black and white as Kodak was just wanting to stick with film as much as they didn't understand that printing was not necessary at all because the quality of displays, people would just share pictures, they would never print pictures?

Rita McGrath:
Well, and they tried to get into that business if you remember. They bought a website called Ofoto, you may recall that, which was if you look at it through the lens of today, in its day it was the Instagram, the place you went to share photographs. But they never really succeeded at figuring out what the consumer use case was, and it didn't last that long. But they had a lot of ventures that were very forward-thinking, but they never figured out what the right user case was.

Guy Kawasaki:
It seems to me that depending on which book you last read, one book says focus on the customer, the other says don't focus on the customer, they can only describe better film as opposed to digital camera. Some people say you focus on your competition to see what they're doing. Other people say ignore your competition. So what are the dangers here? What are you supposed to do?

Rita McGrath:
I think one of the biggest strategic choices that company leaders have to make is what are you going to center your company on, and there's many different candidates for that. So some companies, George Stalk years ago wrote a book called Hardball about companies that were really centered on we are going to clean our competitors' clocks. Other companies, an Amazon in its original incarnations would be famous for its focus on the customer.
Fuji, very focused on what its capabilities are. Now I don't think you can apply equal focus to all those things. So I think one of the big strategic choices you have to make is what are we going to center this company on, what's our mission, how is that supported by what we do, by our brand, by our behavior. And so I think once you've made that choice, then a whole series of other consistent choices flow from that.
So if you're Fuji and you're focused on where are all the places where our technology is useful, you honestly don't care that much about the competition because what you're looking for is a technical buyer who's looking for a technical solution to a problem they haven't been able to solve yet, and that's a completely different conversation than, hey, what's Fujitsu or somebody doing.
If you're focused on the customer, everything you do goes through this lens of is this better for the customer, does it provide a better experience, is it going to lead to something. A framework I like to use to think about that is something that, in fact, it was Clay who used this a lot.
It was called the jobs to be done theory. He said, "If you think about it, any customer, any partner, any supplier does business with you because there's something they're trying to get accomplished in their lives. And honestly for many companies, if they could accomplish that thing they would prefer not to do business with you."
I had a conversation the other day with somebody, they make filters. This company makes filters. They're a very well-known maker of filters, and we're having this whole conversation about what the future of filters look like, and I said, "You do understand nobody wants your product." And they were like, "What? Of course they do. They want dah, dah, dah."
I said, "No. What they want is the impurities to be removed and they want the outcome, yes, absolutely. But if there was some different way of getting that outcome, you guys that are so anchored on selling filters, that could be a problem for you," right?

Guy Kawasaki:
So are you essentially saying that there is no single path to success? Sometimes you focus on the competitor, you want to clean their clock. Sometimes you want to make the customer happy. You're supposed to simplify things for my listeners and just say, "This is the way, the McGrath way." What is the McGrath way?

Rita McGrath:
I like to talk about five Cs that I take into account when I'm trying to do a strategic situation analysis. And so the customer is the top one. Then your complementors, so who's in your ecosystem that makes what you do more valuable in terms of customer willingness to pay. Then obviously your competition, then your own company and its capabilities, and lastly the strategic context.
So what I try to do is I go through the five Cs, and I say, "What are the big patterns in each of those that we should be paying attention to?" What you find, Guy, when you pull them all together, there's a gestalt that starts to emerge. It says, "Wait a minute, this thing over here on customers connects to that thing over there on competition connects to this over here on our own company."
So I'll give you an example. I was working with a company that does a lot of software for college campuses. So they do behind-the-scenes learning management systems and stuff like that. I had them break into teams around each of these Cs, and the team that was studying the company said, "The average age of our user is between eighteen and twenty-two, and the median age of our employees is forty-eight," and the whole room went quiet.
It was like, what are we maybe missing, and that started a really fruitful conversation about what is changing among those twenty-two year-olds that we should be paying attention to.

Guy Kawasaki:
You're saying that the customer is on top of this heap, but what if you truly believe you are creating customers that don't exist yet?

Rita McGrath:
Mm-hmm.

Guy Kawasaki:
You could make that case, although AI is, I don't know, a hundred years old, but five years ago you would've said that ChatGPT created customers who never knew they wanted an LLM.

Rita McGrath:
That's true. Yeah, that's true.

Guy Kawasaki:
So how do you run a company when you're trying to create something out of thin air?

Rita McGrath:
I think what you're trying to do in that case is anticipate, and this is really an inflection point story. So what's the boundary condition that gets shifted, given shifts in the state of what's possible in technology? You remember back in 2011, 2012, everybody was all about, "Oh my god, the direct to consumer revolution." Do you remember that?
It was Harry's and it was Dollar Shave Club, and it was Glossier, and everybody was selling everything direct to consumer from mattresses to dog food to you name it, and this went on for about ten years. And then everybody figured out, well, wait a minute, there's something to be said for going direct to consumer, and consumers started to say, "Hang on, I want to be able to try on that pair of pants before I click buy."
And so what we came to realize was direct to consumer was great and had its advantages, but it wasn't going to be a long-lived advantage. One of the co-founders of Warby Parker said, "It's never been easier to start a company and it's never been hard to scale it," which I thought was a great quote.

Guy Kawasaki:
The bottom line is I love this concept of an inflection point, but, Rita, how do I spot this thing?

Rita McGrath:
Oh, that's a great question and one that I spent years mulling over. So you remember Andy Grove, right, and his fabulous book, Only the Paranoid Survive, back in the 1990s, and it was about Intel's journey through this inflection point.
So his book was the inflection point has happened and now here's all the things we had to do to navigate through it, and I was tortured by this because I thought, "Oh, it's such a powerful concept." If an inflection point comes out of nowhere and bops you on the side of the head and you didn't see it coming, what do you do with this as a strategist, right? And then a friend saved my life, sent me this wonderful article and it was called “What If You Changed the World and Nobody Noticed?”
The article, the central story in the article is about the Wright Brothers and their initial flight at Kitty Hawk, and you would think discovering manned flight, like if you'd said to somebody 150 years ago, "In the future, human beings are going to put themselves in metal tubes and hurdle through the air and you're going to be able to get from Australia to New Zealand or Australia to Alaska in a matter of hours," people would've looked at you as though you had two heads and said, "This person's delusional or possibly even dangerous."
And so you would think the Wright brothers, this breakthrough next day in the newspaper, nothing, following month, nothing, next year, nothing. It took five full years before any serious newspaper went out and started covering what the Wright brothers were doing. I think this is a fascinating innovation story because the smart money was on Langley who got his craft up in the Potomac and then it crashed like twenty seconds after takeoff. Who were the Wright brothers?
They were these bicycle repair guys out in the middle of nowhere in Akron, Ohio. So we're plugged into these social networks where the smart money was spending and all that kind of thing, and I think a lot of innovation happens like that. It happens when nobody's really looking and paying attention and it happens because people are tinkering, not just having great thoughts but tinkering.
Anyway, so what it made me realize was that the whole process of inflection points coming to be was a lot like the line in the old Hemingway book, The Sun Also Rises, when one character says to another, "How did you go bankrupt?" and the answer was, "Two ways, gradually and then suddenly."
So I think to answer your question more directly, all these things are burbling along for years, sometimes decades. Think about it, Guy, we had The Jetsons in 1962 and we're still sitting around waiting for robot servants and flying cars and stuff like that. And so it takes a really long time before these things matter, and then when they matter, they start mattering a lot.
So you could look at ChatGPT, for example, as a cumulative function of learning about human machine interaction that finally reached a tipping point. I mean, this clearly was not the marketing department. Who in the marketing department would released a product called ChatGPT, right? It was clearly just an experiment they were doing to see how human beings interacted with these large models and that opened the floodgates, and here we are now.

Guy Kawasaki:
Wow. In your book you talk about the initial hype and then the dismissal and then the emergence and then the maturity. We often mention cases where in the dismissal stage people will make fools of themselves because they dismiss something that became very true. But I got to also believe, Rita, that everything that people dismiss isn't going to be a success. So some people dismiss stuff and they are right. So what do you think the percentage is of a false positive dismissal or a false negative dismissal?

Rita McGrath:
I think it depends on the nature of the inflection point. So I think things that are truly changing the boundary conditions of what's possible are going to be much less successful dismissing those. Things that are more like a manufacturer's wet dream are the things that I think are much more likely to be dismissed.
Remember when we were all going to be sitting watching television with 3D glasses on our faces, and that was supposed to be this major innovation, and a lot of people said, "No way," and the people that said no way were actually right.
But when you think about something that fundamentally changes almost the physics or the possibilities, if you think about the major advances in capitalism that we've had. So the original industrial revolution changed everything, right? It changed how we make a living, it changed agricultural patterns, it changed property rights. If you think about steel railroads that expanded the world, it really did change things.
So I think part of the skill of knowing when to be dismissive and not is really understanding how deep this transformation could be, and I'm in the camp that believes that we're just at the very, very earliest stages of figuring out what digital is going to create in our economy, in our society, and we have choices to make about how that rolls out. Technology is agnostic. It's human choices and human agency that determine what shape that takes.
So if you think about the post-World War II consensus between government, business, ordinary people then what we really wanted as a society was to create a rich, prosperous middle class, and tax rates at the time were upwards of 90 percent. You could support a family on a manufacturing job throughout much of that post-war period.
We had suburbs, we had highways, we had oil and plastic and all that stuff where we're kind of getting to the end of that era, and now what we're looking at is a real inflection point towards what does a truly digital, oil-free, non-petroleum-based, potentially even not free trade, what does that all look like. We're just beginning to figure that out.

Guy Kawasaki:
I would love to hear your analysis of the crypto arena. We have definitely gone through the hype stage. It seems we're in the dismissal stage, but is this going to be emerging or you think it's going to really crater? I am not a believer in crypto, so I may regret saying that, but I don't understand crypto. Do you understand crypto?

Rita McGrath:
I can't claim to understand it, not at all. But I think a lot of what you're seeing now is crazy capital went into that because it looked like one of those high, high, high upside opportunities, and it's a gambling thing. You can think of it as the casino economy stage. That hype stage is like a casino.
But here's the thing, I think if you think about money and you connect crypto to the idea of money, cash is pretty stupid, right? The cash you've got in your pocket doesn't know where it's been, doesn't know what it's been used for, can't report on who is doing good or badly with it, and it doesn't grow.
And so if you think about money as we've traditionally had it in terms of just cash, what you're seeing now is we're laying layers of intelligence on that original concept of gold coins or whatever. So now we've got, we can track transactions, you can pay for things seamlessly, your credit card knows a lot about you, your bank knows a lot about you.
And so if you think about crypto as being this distributed, smarter way of understanding what's being done with money and who's doing it, there could be some very interesting future applications for that, blockchain more broadly. I think we're, again, at the early stages of figuring out where that's going to fit into our lives as well.

Guy Kawasaki:
So how do we know when we're in the middle of this?

Rita McGrath:
I think you don't, but there are smart ways of not knowing and there's not so smart ways of not knowing, right? So I think the smart way of not knowing is to say, "What is my hypothesis?" So let's take a hypothesis about crypto, right? So crypto is going to represent, I'll call it 2 percent of the world's transactions in XYZ time.
Before that could be true, what would we have to see, right? We'd have to see regimes of trust around crypto. We'd have to see efficient trading with transparent rules around it so that people didn't fear getting ripped off. We'd have to see some kind of authority sign on and say, "Yes, this is legit."
Why does money work? Money works because governments have agreed that this is how we're going to do business and this is what its value is, and there's a lot of social and institutional things that have to be in place before that thing could be.
So what you can do then is start to do some experiments and you can say, "Okay, before I measure this whole global effective crypto, let me see if I can use crypto at a lemonade stand. If I can make that work, then maybe it's got some possible applications after that, right?" So I think the smart way of approaching these vast unknowns is to try to learn your way into them, but in small steps and with hypotheses that could be right, or you could be wrong.

Guy Kawasaki:
Wow. Let me tell you something. If crypto succeeds, you used to say you'll eat your hat, but that doesn't work anymore. I will start using Windows computers if crypto succeeds. How's that?

Rita McGrath:
Oh wow, that's a penance.

Guy Kawasaki:
That is hell, yes. I would love to hear, speaking of hell, what are the predictive and telltale signs that your company is too stuck on the market, it's not considering the arena, it's not noticing the snow melting around the edges. What are the signs that I'm setting myself for big failure?

Rita McGrath:
I think the first thing I would point to is that you don't have a reliable, repeatable innovation proficiency. I think that's the first thing.
And so one of the early questions I always ask companies is tell me what your innovation governance process is, and eight times out of ten I get what innovation governance process, there isn't one, and you've kicked around enough companies to know what happens over time is the real core innovators eventually get outnumbered by the operators and the people that keep the wheels turning, and to some extent that's unavoidable as you scale.
But what ends up happening is sometimes those folks just take the company and over-index it on just what's working today, and if you think about it that's where their library is, that's where their expertise is, that's what they're famous for, and the innovators often end up getting shut out.
The pleasures of having a reliable source of revenue today really outweigh the uncertainties of saying, "Maybe we should take some of that revenue and put it into something that's uncertain but might tend us toward the future." So I think the big uber theme is when you're looking so hard at the market that you got, and especially if things are going really well, what ends up happening is you end up like Blackberry.

Guy Kawasaki:
That's it. That's the sign. There's got to be more signs than that, Rita.

Rita McGrath:
That's the big one. That's the one I look for and maybe I'm just biased by that. I think others are that there's too many layers and that the senior folks are not connected to what's really going on in the markets. I have this image of them all looking at each other, they're all talking to each other in their corner offices, and they're not getting that input from what's going on at the front lines.
So if you look at what's happening at Bayer right now, an eighteen-layer bureaucracy that their CEO is now trying to hack his way through to get at least a little bit more decision rights and a little bit more what's going on.
The other thing that I look at is when you look at the sort of percentage of time people are spending at work, how much of that is externally focused and how much of that is internally focused. Because if, again, over time companies accumulate these layers of stuff just to keep the wheels turning in the company, it doesn't keep them focused on the external environment.
One of the things that's a consequence of that, and I'm sure you'll have seen this in your career, is the messages from outside get turned down and the messages from the hierarchy kind of get turned up. So more and more people in the company are doing what important people in the company think is valuable, and they're not really as clued into what's going on at the edges as I talk about in the book, and so that sort of sense of serving itself.
When Lou Gerstner very famously came into IBM in one of its near-death experience moments, he said what he found was a whole circle of decision-makers with their face pointed to the office of the CEO, and one of his famous sayings was if your face is pointed to the office of the CEO, which part of your anatomy is pointed at the customer. Of all Gerstner's quotes, that's one of the most memorable to me.

Guy Kawasaki:
Okay, maybe you're not Lou Gerstner, and I hope people are old enough to know who Lou Gerstner is. Maybe it's only me and you. I bet you Madisun has no idea who Lou Gerstner is. We did interview Ginni Rometty on this show, the first female Lou Gerstner. But let's say I am running a 10,000-person organization.
You've convinced me, I got to think of the arena, I got to watch the snow melt, and I watch my competition. I got that. I tick that whole checklist. But, Rita, what do I do? I got thirty senior VPs and executives around me. What do you want me to do? You want me to like go to Coachella Music Festival? What am I doing actually if I buy into your concept?

Rita McGrath:
I think one of the things I'm observing with a lot of these digitally oriented leadership teams that is different than you might've seen in a more industrial era is they're quite broad spans of control. They're not even called spans of control, but quite broad connections among people.
So if you look at, for example, the way NVIDIA is run or the way Airbnb is being run by Brian Chesky, they'll have leadership groups that could be thirty, forty people, and they spend a lot of time together and they spend a lot of time looking at issues that are coming up at what I would call the edges.
So Airbnb very famously recently broke apart their product management function. And so what they've gotten now is one set of people whose job is by quarter to three this has to be delivered and shipped, and it's got to be good quality and it's got to be compliant. So that's what the product management job is.
But there's another parallel track which is what's going on in the outside world and how do we think about it plugging into our ecosystem, and how do we think about doing that. So what I'm seeing these leaders doing is spending a lot of time sense-making with the groups of people around them, and it's not micromanaging.
I think this is where a lot of people get this wrong. It's asking questions together, it's sense-making together. It's getting to a good decision not by telling people what to do, but by saying, "Hey, if this is our objective, what are our options? What are the best ways we could go there, and how do we now collectively bring the organization along with us to do that?" So I think it's a different kind of leadership.
If you imagine a railroad or something, the classical mass market production company, those are run as hierarchies because the dominant competitive advantage in many of those sectors was you do mass market stuff incredibly well, really cheaply, and with levels of quality. So what you're trying to do is you're trying to drive out variability in the system as a leader.
So that's where command and control is very useful. That's where having a well-run bureaucracy is great and if you've got a stable growing market that you can count on. So again, go back to my post-World War II example. If you were an appliance maker in 1955 in the US, you were going to sell every refrigerator that you could produce.
And so the operating principle was do that very well, do it precisely, do it with quality, clean out all the human variation, and so forth. Digital companies are really different. Every day is different, every day is changing, and what you need is almost a company that can adapt and morph as stimuli come from the environment. So it's a different kind of leadership.
So to come back, short answer, you need to make time to really align your senior leadership team around your thought processes. You need to be very clear on what your purpose is, what your objectives are. The greater clarity you can bring to things, the more decisions can be made without you having to make them. I think that's one big thing. I think you'd need to leave space and time to take in information that may not seem at first to be important but might well be.
So one of my CEOs that I really admire is a guy named David Cote who ran Honeywell for many years, seventeen years, and what he used to do is he had X time, he called it. He would have a paper calendar and he would put a big X in his calendar proactively, and that time was for visiting plants, for talking to customers, for just thinking. He made sure to put, I think he said 25 percent of his personal time as a leader. It was in that kind of moment where he was making sense of things, not doing stuff.

Guy Kawasaki:
So I want to know, Rita, what is in the Rita McGrath Hall of Fame of leading indicators at a very tactical level? What are the leading indicators I should be watching for?

Rita McGrath:
I think change in customer behavior or preferences is one that is very important. So if I take Estée Lauder just as an example. Three years ago I was talking to them about the younger generation is looking at this whole idea of makeup very differently. They think differently about brands, they're looking for authentic voices, the lady in the department store that chases you around with a perfume, and it's not the experience they want.
And so you really need to be thinking about what are those customer segments and how are they changing. So if you look at Estée Lauder, they're in deep dark trouble right now, and yet who's on the upswing? It's companies like e.l.f., it's companies, Ulta Makeup.
And so the leading indicator is once you start to see small behavioral changes in what your customers are looking to accomplish with you, that to me is always a big kind of blaring, whoa, whoa, whoa, pay attention to this, and a lot of companies have set themselves up so that they miss those signals. They don't see them. So a change in customer behavior would be a really uber one.
Second one is a change in the fundamental basics of what holds your business together. So if I take a company like Gillette, and you are asking about durable competitive advantages. These guys had a seventy years, 70 percent market share, dominant position because making razors at scale is really hard.
They had a lot of patents, they invested a lot of R&D into it, and other companies that kind of looked at it went, "Ugh, too difficult. We'll just leave Gillette there." So they had this great business model. It was invest in R&D allows us to make better products. We can then use our armies of people to get those products into the retail channels, and it worked like a clockwork for decades and decades.
But just as an idea of proportion, when Procter & Gamble bought Gillette in 2005, they paid fifty-seven billion dollars for it. When the Unilever bought Dollar Shave Club in 2016, so not that long later, they paid a billion for it. The Dollar Shave Club, what was it? It was razors made by a Korean manufacturer.
But what they did was they took all the infrastructure that Gillette had built around mass market advertising and brand building and all that stuff, and they said, "No, we can use YouTube for that. We can use Facebook for that. We don't have to buy servers. We'll just run our stuff on the cloud."
At the time they started, which was in 2012 I believe, you could buy off the shelf e-commerce software at that point. There was no need to hire programmers and do all that stuff. So another big sort of inflection point is when the cost of doing the same thing shifts by an order of magnitude because of what's now possible. My ears perk up when I see something like that happening.

Guy Kawasaki:
I'm so glad that I'm the podcaster, not the CEO. It's so hard to be a CEO these days.

Rita McGrath:
You know what's interesting too is there's this whole new trend about Gen Z people not wanting to take managerial jobs. I think that's fascinating.

Guy Kawasaki:
Well, I'm a baby boomer and I don't want to take a managerial job. In a sense, the bigger picture you were talking about is, Rita, how do I keep my company agile. Good news, bad news. Good news, we're successful, we're growing, we have lots of cash, blah, blah, blah. Bad news is we're growing, we're successful, we have lots of cash. What's the Rita McGrath agility plan?

Rita McGrath:
I think it really starts with the agenda of the CEO, and it's almost that simple. It's like if you don't have innovation in the future as item number one, two, or three literally on your agenda which is what do you talk about in meetings, what meetings do you go to, who do you meet with, if it's not in that top bucket of priorities, then you're very much at risk of eventually the success formula runs out and you become obsolete.
So you think about Goodnight that founded the SAS Institute. They were big data before big data was big data. Every Tuesday, he and his senior team got together to talk about what the next innovation was going to be. Now a lot of other stuff happened behind the scenes at that company, consistently ranked best place to work, incredibly high employee retention, beautiful campus, great lifestyle.
It was a lot of other supporting stuff, but every Tuesday, without fail and everybody in the company knew it. So it was literally on the agenda. With a lot of companies, I find CEOs come in and they're just all about exploiting.

Guy Kawasaki:
And I want to really shift gears on you, Rita. So let's pretend that the United States is an organization, and I want to know from your kind of perspective, is the United States focusing too much on its competition if you consider that Russia or China, or is it not looking at its customers enough. If you were to do an assessment of the United States, what would you say to this company called the United States about what it's doing right now?

Rita McGrath:
I think, and we're back to how do you center an organization, and really since the end of World War II the US made a very conscious decision that it was going to be Pax Americana, that it would pay to have other countries within our sphere of influence, and if that meant supporting Europe militarily, if that meant forging these very tight trade bonds, whatever that was, there was a very clear idea that America was going to take over.
If you think about the economy prior to, call it prior to the Second World War, America was up there, but a lot of other countries were very, very influential as well. I mean, China was really nowhere, India was nowhere. So you had really European countries that were quite dominant.
After World War II, America made a very conscious decision that we are going to be at the center of this fulcrum and the Marshall Plan, we're going to spend money to rebuild our competition. Imagine that, right? We're going to spend money in Japan to not only help them recover, but we're going to create a whole new governmental system which is a democracy.
That was unheard of before. So the decision was very consciously to be at the center of an ecosystem and with the financial and other burdens that meant, that implied because we'd said, "Look, if we do this well, we're going to generate a lot of wealth, and some of that wealth is going to have to go into creating the ecosystem, protecting the ecosystem."
Where I think we are now is a couple of things. The old ecosystem, petroleum, highways, suburbs, appliances, all that stuff is starting to lose its power. It's starting to not be able to deliver the same productivity gains that we've gotten accustomed to, and the new ecosystem, we're not sure what that looks like.
Where I think America's been really smart is having a fairly light regulatory touch relative to say Europe in things like digital. There's a reason so many of the tech giants come from America. So I think it's done a good job kind of supporting entrepreneurship, entrepreneurialism. People come from all over the world to go to our schools and start our businesses.
Now where that goes at risk is if we're not continuing to make investments in the universities, if we mess up the entrepreneurial ecosystems that have emerged because of inconsistent policies, make it very hard to have confidence in what the next set of business decisions you're going to make, that could be very dangerous.
So I think we're on the brink of seeing is you certainly got China wanting to supplant the US as that sort of dominant player. You've got the US not really wanting to give up its position. You've got the other large countries rattling their chains about protectionism, and this free trade assumption that we've been operating under for quite a long time is now being up for grabs.
So if I were, and I'm not a particularly political person, but I would be inclined to say, "Let's understand what are the incentives we're creating." I'll draw here on the work of a wonderful late economist called William Baumol, and what Baumol said is if you think about the structure of incentives that you're creating in your society, and that could be your society, that could be your company, that could be your team, there are three kinds, right?
There's productive incentives where you're rewarding productive entrepreneurship. People can win big. People who seek to better themselves start a company. It succeeds. That's what they're driven to do. That's productive entrepreneurship. It's creating value.
Then you've got what you can think of as unproductive entrepreneurship. So if I were to compare Bill Gates and Warren Buffett as an example, you could make the argument that Warren Buffett just moves value around. He's a brilliant investor, but he's not inventing the next generation of software that's going to put a computer on every desk. That's a different thing. That's not bad if it doesn't create new value.
Then you've got destructive entrepreneurship, and destructive entrepreneurship happens when you have a set of incentives that reward things like gangs, that reward drug smuggling, that reward cybercrime, that reward scams.
If you imagine that the level of entrepreneurial talent you have in any society is about the same, your structure of incentives is going to determine where that talent gets applied. So why is it we have so many scammers from Eastern Europe? Because there's no place for them to use those skills except in illicit activities.
So if I were to think about doing a real analysis of the US, I'd really want to be thinking through for the different sectors of the society we're trying to create, what in fact is the structure of incentives. Because historically where the US has really excelled is individualism, entrepreneurship, being willing to start stuff, being willing to take risks, being to some extent tolerant to failure.
We love a comeback story, and we love it when somebody screwed up and then gets rescued and then eventually triumphs. In a lot of parts of the world, that would never happen. That would not be possible. So I think there's a lot that we have that's really strong. I just don't think we've been clear-headed enough about what it is we're trying to drive here.

Guy Kawasaki:
If we love a comeback story, we're certainly setting ourselves up for the necessity of a comeback story, let's just say. I wish we wouldn't have to come back so far. So let's say it's twenty years, let's say it's a hundred years from now. What will historians say? Wow, the United States was just blindsided. It was like digital cameras blindsided Kodak, but the US could have been Kodak or could have been Fuji, but it stayed Kodak. What ended the American century? If you can put yourself in a place to look back.

Rita McGrath:
So let's say there are different scenarios, right? So one scenario would be American century ends and what caused that, but there are other scenarios I'd want to think about. What ended it? I would say not making fundamental investments in the core human capital that we depend on for innovation and growth, and here I'm thinking of public education, healthcare, housing.
If you look at inflation in those sectors, they're all much more expensive and much less quality than they have been historically. So if we were to blow it, I would say we did not really build that human capital that we would need to be successful in the future. That's where I would start.
So an interesting counter-example would be a country like Ireland. So you think about Ireland, what does Ireland have? Nothing. It's got people, that's about it. It's this tiny little country. After the second World War, they made very conscious decisions about providing really high quality education to a very large young population of young people, and they made a very clear decision to be an open country and to attract foreign direct investment. So they were very strategic about that.
So I think part of our issue if you think of us as an organization, first of all, we think always of the federal government. We keep forgetting it's the United States. So we have fifty flavors of everything here.
So the good news about that is it fosters experimentation, and it can be good for innovation, but the bad news is it's very hard to get everybody moving in the same direction. And so that's where the federal government perhaps can provide some leadership. But I'd say education, human capital, if you start ignoring those things, that's really the beginning of the end.

Guy Kawasaki:
Well, I cannot make the case that I believe that the United States is investing in education when it closes the Department of Education. How do you put two and two together there?

Rita McGrath:
I think part of what is constructive, I mean, I have a lot of New York, right? So I have a lot of friends that are liberal leaning, and yet if you get them in a quiet corner and say, "So what do you think of what's going on?" I literally had a very, very oat crunchy, barefoot, left, the Department of Education did need reform.
So part of what I struggle with is clearly we need to rethink how we're educating young people, and I think one of the promising things about AI is we now have a platform which perhaps could help us open some really interesting ways of helping people gain skill and knowledge. But I think we need a way of looking that isn't wedded to our current system.
So what's our current system built on? Our current system was built in the 1800s to basically create a knowledgeable enough society to work in factories, to work agrarian models, and stuff like that. And so the idea of basic literacy was that was what we were trying to achieve.
So our goals for education today are quite different. We need people who have soft skills. We need people who can reason. We need people who can think through prompts. We need people who can not just do calculations but actually become the directors and guides of the future. It was a really interesting study I ran across just a couple of days ago, and the researchers were looking at the career prospects of people studying STEM, so science, technology, engineering, and math as opposed to liberal arts.
What they found was in terms of earnings, the first few years the STEM people nailed it. They were great. But then at about five to ten years in, the liberal arts people started to overtake them. The hypothesis behind this research which validated that point was that in the early years of your career you're rewarded and promoted for what you can do. But if you just do a STEM education, those skills go obsolete. Technology changes all the time.
So unless you're continually bringing yourself to the cutting edge of whatever it is you're in, you're going to get obsolete. Whereas the liberal arts folks, okay, so they spend their first three years standing by the copy machine, but it's the soft skills, the political skills, the ability to influence people, sensing what's going on in the organization, that as you get more senior you become more rewarded. I think that's an interesting thing to reflect on when we think about what are we educating kids for.

Guy Kawasaki:
I've heard this theory, and it's hard to argue against a really robust STEM education system, but it is also hard to argue against a system of empathy and a system of social psychology and behavioral economics and all that. Ultimately, that's what it comes down to, right?

Rita McGrath:
If you think about what's going to get automated, and I'm not an AI expert, but it's pretty astonishing some of the things that are being automated right now. But the people that are really taking great leaps forward are people who are already experts.
So they're using the technology to enhance their capability, and I think we have some big questions about where do the younger people get their training. If the AI is writing all the press releases, where does the intern get their training in how to do that. So I think we've got some really interesting skill questions coming up.

Guy Kawasaki:
So you must get this question quite often from CEOs you're talking to which is, Rita, how do I prepare my organization for an AI world?

Rita McGrath:
Mm, yeah. I think the way to do it is to do it. You have to get people using the technology. You have to have them experimenting. AI right now to me is just such an interesting, go back to inflection points. We definitely have been through like hype, hype, hype, hype, and then a whole bunch of people saying, "Ugh, AI, it's never going to be anything," people saying, "Oh, it's going to save me costs, it's going to save me this." A lot of that just hasn't come true yet because we're still at the early stages of doing it.
So my advice would be set up some experimental time, encourage people to try stuff out, share what they're learning, give people time to experiment. The thing that I think prevents people from picking up new skills or picking up new capabilities is that they're under such time pressure in many roles that they just don't feel they have the time or the permission to learn.
What I think we need to embed in companies is this learning provision. One of the projects I worked with was with Fidelity, private insurance, private investment, and they decided to go to a really different way of working. We would think of that as lean, agile, however you want to call that.
But they really reformatted their organization, formatted around the customer rather than their products, and broke people into these small teams where every team had everything it needed to accomplish say an update to the website or whatever, and started working in shorter chunks. So breaking down the bureaucracy, doing things very differently.
But one of the things they did as well as all this was they said, "Every Tuesday it's a learning day." So that could be book learning. It could be an online course. It could be you go off and get yourself educated at a place like Columbia. It could be spending a day doing a ride-by-ride with the customer. But you block off that time. That is not time to be doing your job. That is time to be learning something new. I think that's a model that we're going to see more and more forward-thinking companies adopt.

Guy Kawasaki:
That's great. So this is my last question.

Rita McGrath:
Oh no. We're done.

Guy Kawasaki:
How do we solve the problems for the United States, and we solve the problems for all these large companies? Let's say that I'm listening to this, and I want to know how do I, a person, not a company, not a CEO, for my own personal career, my own personal benefit, my own personal development, how do I as a person see around corners?

Rita McGrath:
Great question. You need to make the time for it, and I think that's the first watchword. Even if it's just a couple of hours a week, stop with the treadmill, stop with the to-do lists. Take a step back and say, "What are some things I should be paying attention to for me personally, that might matter to me?"
So that's one. Second is I think people struggle with feeling powerless and feeling like they couldn't possibly make a difference, and yet, if you think about it, there are things in your community, in your surroundings, in your world that you can elect to make a difference in.
There was a great story about a retired couple that retired to a community which was not a retirement community, and when they got there they noticed that there were no real walking trails where the area was beautiful and full of woods and everything. And so they decided to start a walking trail club, and people that were interested, they had regular meetings.
And then what started to happen was people who were artisans who had skills that were able to make these trails happen, people who were carpenters, people who were gardeners, and they started this little mini-movement, and today there are walking trails where there weren't any before.
And so I think giving yourself a sense of agency with whatever it is you care about, first of all, it's an antidote to despair. I think all of us sometimes feel like we're just too insignificant to make a difference, but finding something that you care about and that you think you can make an impact in with the people that are fellow travelers, that are like you.
Guy, you talk about planting oak trees, right? You're not doing that alone, right? There's people that are interested in this for the long term. And so I think thinking about how you can create some agency and some ownership with yourself and with the people who you draw into your community, I think that's a really super way of helping yourself feel that you've got connection to something that matters.

Guy Kawasaki:
You mentioned in your book what I thought was a really clever idea which is to write the article. So I promise you, this the last question.

Rita McGrath:
Oh, I'm loving it.

Guy Kawasaki:
Tell me why writing an article about yourself is a good idea.

Rita McGrath:
Yeah. So what that idea is to say, and it was put in a business context, but you could do it in a personal context too. You say, okay, it's five years from now, or ten years from now, you pick, but sometime in the future, and there's an article being written about you. So if it's a business context, it's like cover of Fortune Magazine.
If it's a more personal context, maybe it's USA Today. But somebody's writing about you and what they are writing with great admiration about is what did you accomplish, what were the critical decisions you made along the way, who did you bring with you, what happened to your family while you were doing all these great things, and what are the lessons the rest of us could learn.
If you really force yourself to do that and take it seriously, what you uncover in that process is what really are your values, what is it that you care about, what is the impact you want to have in the world, how do you want to think about that, and who should be in that picture. For example, are you ignoring your family? Are you not paying attention to what is the useful thing?
In a way, it's very similar, and I'll come back to Clay again, he had a wonderful speech, book, series of articles called How Will You Measure Your Life? and the way he kicks off that book is by talking about coming back to successive Harvard MBA reunions. In the fifth reunion, everybody's doing great. They're all masters of the universe. Tenth reunion, some cracks are starting to show.
Twentieth reunion, we've got divorces, we've got people estranged from their kids, and he said, "Was that their strategy to get divorced and be estranged from their kids?" No, but they never took that time, which is what I'm recommending you do in the article, to really think through what would be satisfying for me. I'm not saying make me happy necessarily, but what do I think would be fulfilling and satisfying and meaningful in that period going forward.

Guy Kawasaki:
Not to be morbid or anything, but I think every day about what people will say in my obituary or eulogy.

Rita McGrath:
Oh, do you?

Guy Kawasaki:
Seriously, I want people to say that I empowered people with my podcasting, my writing, my speaking, my investing, my advising. Alrighty. Rita McGrath, thank you very much for a most remarkable interview, and we're going to just have a little sign-off here and then we're going to let you go. Thank you very much.

Rita McGrath:
Thank you for having me.

Guy Kawasaki:
And please come visit us in San Francisco.

Rita McGrath:
I'd love to. I'm going to be out there with a very large tech company that we both know and love a couple of times, so perhaps I'll give you a ring.

Guy Kawasaki:
Please do. All right, so this is the end of this episode of Remarkable People, and as you've heard we've had the remarkable Rita McGrath and now you learned about strategy and implementation and inflection and all these I-words. What a wonderful episode. Thank you very much. I'm going to go write an article about myself right now and see what results.

Rita McGrath:
Wonderful. I'd be happy to get it.

Guy Kawasaki:
I just want to thank Madisun Nuismer, and the future titan of industry, her sister, Tessa Nuismer, Jeff Sieh, and Shannon Hernandez, and just the Remarkable People team. We're on a mission to make you remarkable, and someday you look back and you say, "I heard Guy and Rita and that was a turning point in my life." Yeah, that would be very satisfying. Thank you, Rita. Take care.

Rita McGrath:
You too. Thanks very much.