The Entrepreneurial Mindset Part 1 with Rita McGrath

This book is an absolute playbook for how to not only start an organization, not only to run a startup, but to select the ideas in the first place. So you're not wasting your time. And in an organization to select and kill those ideas very intelligently. It's a masterpiece of a book. And today is the first in a series with one of my favorite people in innovation. I have the great pleasure to have met her on a couple of occasions recorded in person over the years.

And she's a friend of the show and a brilliant thinker. And it's a pleasure to bring you the author of The Entrepreneurial Mindset, Rita McGrath. We are very welcome.

And for example, in New York city, there's the primary vote, which is only people from your party, and then there's the general election where anybody can vote well in New York city, it's heavily democratic. So what you would do is you would go to the. Courthouses and pick up lists of people who were likely to vote in primaries and then target your mailings towards them. And so we did a lot of that back office work and then and it did really well.

And we made the kind of classic mistake though, that you make when you're in your early twenties and you start a business. We forgot elections don't happen every year. And so then year two, we're sitting there going, well, where is everybody? And so then the business morphed into a second business, which was we called it unworried words. And back in the day, this was the sort of 24 hour typing, copying word processing kind of thing dotted around college campuses. That was the, idea.

And again, those were very successful businesses back in the day. And then we had this moment of truth where someone offered us 100, 000 loan to scale it. And I just froze. I spent a horrible weekend, sort of dark night of the soul stuff. And I realized I got into this to do the politics, not to do the typing word processing stuff. So I ended up transferring my sold by part of the business to my partner. And then I went into government.

So I spent a chunk of time doing what we today would call digital transformation. We didn't know that term back then. We called it computerization. It was taking manual processes and systems and basically transforming them by making them digital. And that went on for a whole chunk of time. And then the thing about public service, which is fascinating to me is your career goes like this for the first chunk of time, and then it just goes like that for the rest of your life.

And I got to this turning point and I thought, well, is there a way I could perhaps have a bigger impact? And my husband and I were talking it over and he said, well, Why don't you apply to business school? At the time, business schools were a booming industry. As finance got to be more important in the economy, so too did business schools and the universities were under a lot of pressure to put people with PhDs in front of the class rather than, retired. Guys that sold tires or something.

And and it was becoming a really popular degree. So my husband basically said, look, if you get into a top five school, it's worth doing, if you don't, it's not. And so I got into Wharton, which is based in Philadelphia and I commuted South and he commuted North and that's that's how we got through our PhD and then when I graduated and took the role at Columbia, so that was the journey to there.

And he looked at everything through a resource allocation view and he and Clay wrote the original disruptive technologies piece that came out that same year. And Clay and I had very interesting kind of parallel careers. He fell in love with discovery driven planning. I fell in love with disruptive innovation. So we, we had many conversations over many years and our career went from there. Together in, in parallel in a lot of ways. So that was one.

Then I wrote an article about a concept I call the consumption chain, which basically says, if you think about your customer from the moment that they first become aware that they might have a need for something, you might be able to provide them all the way through to the moment that the need is satisfied or they renew their contract or whatever. There's all these sets of experiences. And very often the companies have these incredible blind spots when it comes to the complete.

Chain of consumption that a customer goes through and that can anytime either the chain breaks or something stops and the customer doesn't move through that's You know, you could lose them. That, that's the possibility of the sale ending. We also wrote about I want to say we, I'm talking about myself and my co author Ian McMillan. We wrote an article called Attribute Mapping about discovering new points of differentiation.

And there, what we said is, don't think that every customer segment that you serve feels the same way about what you're offering. rita-mcgrath_1_01-12-2024_091320: There are always going to be positives. There are always going to be things they don't like. There are always going to be things they could care less about. And so you need to understand that.

And so if you put those two ideas together, At each link in the consumption chain, there's a corresponding attribute map and you can really parse your offer into what those dimensions are.

We had him on for that Clay Christensen podcast. Tribute that you partook in but also joe did and i called it the hour of Bower but we're doing a series called the hours of Bower and it's going to cover all his book because i think that concept of resource allocation which you mentioned in this book as well is so valuable and you touch on that later in the book as well.

I'd love to pull out that string as well, because it's such an important aspect, even as the entrepreneur with inside an organization, trying to sell that idea, but that serves as a perfect segue. We're still on the history here, because you do touch on the history at the start of this book. And you talk about the theories of strategic management under uncertainty, great title. And I have a little quote here that I'd love you to expand upon.

You wrote, "problems of planning and leading under uncertain conditions are pervasive in the life of any manager, but have not always been central to the theory of strategic management. Neoclassical economists, finesse the issue of disruptive change by focusing on seeking the conditions under which equilibrium will emerge.

Drawing from the neoclassical tradition, strategic management scholars in the forties and fifties Tried to identify the regular patterns that would be amenable to predictive theorizing. And this is the one, an early and still useful framework that you talk about in the book that , adopted this approach was known as the structure conduct performance paradigm, a great term. Maybe you'll share a little bit about this.

And so back in the twenties, thirties, forties a big preoccupation among many scholars was how do you deal with monopolistic competition? So if you go back to the. The big oil companies or, the big electricity providers or whatever. These are so called natural monopolies because they require economies of scale. You have to be a certain size to be able to deliver what you're delivering efficiently and effectively and. If you were a smaller scale player, you couldn't really compete.

And so it produced incredible entry barriers. And so there's all this work done on, well, how should these things be regulated? And economists were weighing in on one thing and another. And interestingly, Michael Porter, who's of course, five forces framework became a mainstay in strategy. He took that whole paradigm and flipped it on his head. And he said, wait a minute, what are the conditions under which a firm can deliberately create semi monopolistic conditions?

And that was the basis of his five forces model. So I think that structure conduct performance idea was that very positional idea, right, which was the in a certain set of economic structures. If a firm behaves in such a way, good or bad results won't occur.

Path dependent routines, but that these are difficult to change. I love this because you say here, uncertainty thus presents a major challenge to such theories.

Now, here's what's interesting with the idea of a routine, which is a predictable repeatable set of activities that produces an outcome. So what Nelson and Winter argue is that routines evolve, but they evolve in a path dependent way. Meaning, what I'm going to be doing six months from now is going to be related somehow to what I'm investing and learning to do today. Right?

So it's a kind of very intuitive idea on the one hand, but on the other, it was something that had never been talked about in economics before. Economics always assumes you start with a blank sheet of paper and go from there. But they also identified, and this came up later also in the work of Jim March a thing called a competence trap.

And a competence trap is a fascinating thing from the perspective of disruptive innovation, because what a competence trap does is it recognizes that when you introduce a new pattern or a new technology into a firm you, to use it, to benefit from it, you have to develop routines around it. So I'll just take typing as an example. So you introduce Touch typing into a firm and all of us, eventually at some level of skill or not develop a relationship with touch typing and to do that, right?

We have to internalize the way keyboards are laid out. So you've got the Q W E R T Y, the query keyboard. Well, we know from many years of research that QWERTY keyboard is actually really inefficient. And people have forgotten now, but the back in the day when typewriters were first invented, they consisted of mechanical arms that would create the letters. And a really fast typist would inadvertently jam the arms.

And so this engineer developed the K keyboard specifically to slow typing down so that the arms wouldn't jam. But we've all had developed this relationship with the K keyboard where that's the way we've developed skill at it. We're comfortable with it. And, we know that if there's other keyboard layouts that we, if we took the time to retrain ourselves, we would be much more efficient over the long run. And yet the cord keyboard.

Persists even on phones today where you're not even doing touch typing anymore, but that's the keyboard layout. So that's an example of a competence trap. It means you develop a level of capability with something which provides a disincentive for you to adopt a new Technology or a new capability, even if it would in the long run deliver much better results.

Is there some type of competence trap there that will make it very difficult to change behaviors inside a different market, like bringing in a DVORAK keyboard, for example, I tried by the way to do that, I tried to upgrade, but it's so difficult to actually find a keyboard. You can only find the actual keyboard for a QWERTY keyboard. So it's really difficult to change, even if you wanted to, which all brings us to.

Will there's a need for a new mindset and this is where you introduce the idea of the entrepreneur mindset you say the successful future strategist will exploit an entrepreneurial mindset melding the best of what all the models have to tell us with the ability to rapidly sense act and mobilize even under highly uncertain conditions and when you wrote that things have got even more uncertain since you wrote that book as well but this teases up to look at what is the

entrepreneurial mindset maybe you'll share what you meant by this when you wrote it.

So my colleague and I said, well, what if we were to study people who've done this over and over, they started a business, they've scaled it, they've sold it or whatever, and then they go start something else. What practices do they. So what we found was a number of quite distinctive things. So continuously searching for new ideas. So they have almost, I think in the book, we called it an idea inventory.

Now there's a continuous flow of things that they got and they then go through very simple practices of validating whether there's actually demand for those ideas. So continuous flow of new ideas, continuous validation. When they see that there's an economic case, they can move it quickly. and put in place mechanisms to begin to capitalize on that idea. They are absolutely skilled and adroit networkers.

They have these vast networks of weak ties, again, which helps them with the idea part, but it also helps them with, pulling in other kinds of resources. And then when it comes time to make decisions, they're very good at stopping things. Because they've got hundreds of ideas, so it doesn't really matter if one of them goes forward or not. They've got many more to look, choose from. And they're also very good at decisively mobilizing resources when they think the time is right.

So there's these practices, and then that got us thinking, well, if you think about a corporation, the idea behind a corporation is it should be able to outlive the career of any particular leader in it. Right? That's why we have them. So, and back to Nelson, the winter, right? These corporations have incredibly valuable capabilities and routines and things that they do uniquely.

Well, so we were thinking, well, what if you draw from the playbook of the entrepreneur that who's habitual, who's done many startups and then applied that to what a corporation would need to do? And that was the genesis of the book.

What's worth going after what will you pursue also how much time you need to assign to this and Rita even goes into all this later on the book about assigning time corporate time to people this is resource allocation but how much time you will need in order to pursue a certain portfolio of opportunities as well. This is a lot of excel work there's a lot of work in this and the good news is i have to tell you now. Rita has software with her company Valize that will actually do this for you.

So we'll touch on that later and I'll share the links to release software as well. So this teases up beautifully for chapter two, which is framing the challenge. And this is creating the entrepreneurial frame. This is absolutely core to the book.

Okay. Rita tells us here the basic objective is to define in advance the criteria that would make a business opportunity worthwhile for you to pursue the way to do this is to articulate challenging objectives for how much value and opportunity should add to your piece of the business the idea is to improve not only profits but profitability as well. Your goal should be, in other words, to get into businesses with ever better margins and profits than those that you were in today.

The trick, you tell us, is to come up with realistic yet challenging targets. What you earn after is not just the probable. But a stretch to the probable, maybe you'll tell us about the first objective in creating an entrepreneurial mindset, which is to make sure that you have clearly established what your business needs to do to make the efforts worthwhile.

And I echo this again in discovery driven growth where I get very specific about it, but to align at a senior level on what are our ambitions? What's our growth gap? In other words what does the business need to be able to do in the future? Recognizing that your existing business of today is likely to experience either flat growth or to fade over time as competition catches up and you reach diminishing returns. And, you have that wave of competitive advantage that comes and goes.

So you need something new to replace it. And the inspiration for this chapter was really let's align as a senior team and let's do that first, because otherwise, you As you're running your corporate governance process, if you don't clearly define what criteria would make something more or less attractive, now you get into a who's pet project is that, and who's the most enthusiastic advocate, and oh, we said we were going to Brazil, Argentina looks pretty good.

And you just end up with this mess, right? So the idea was to, To take the discipline. And this is not easy. This is why companies don't do it to take the discipline of having the senior team align on what does good look like and for what part of the business. And what's the, what are the goals of the different parts

We have the war in Ukraine. We have inflation starting to rear its head and all that stuff gets shut down. And the code word for this is the year of efficiency or back to basics, or we're going to return to the core and all that crazy innovation stuff just gets slashed and the point is they didn't really mean it to begin with, it was all

Rita, I'd love you to take us through them. The first is you tell us you should be clear on the minimum amount of additional profits you need from a new venture, and second, you need to specify what increase in profitability your new opportunity needs to achieve as well.

Because the new businesses are where all the incremental increase in profitability is going to come from. And in fact, there's some great research that was done on this, looking at the returns over time to innovations. And what these researchers found, they were working with monitor at the time, was that the classic allocation of resources, right? It should be 70 percent to the core.

20 percent to some kind of extension of the core and then 10 percent perhaps to these disrupted, far out kind of innovations and what they found out when you look at return on investment was the return is exactly inverse so that every dollar or pound or euro that you put into these more radical innovations returned more. 90 percent and started to return 70%.

The adjacencies were 20 percent and the core was just like, so you need to be, if you're really moving your organization toward the future, it's almost like you think about it as creating new fields, right? Even as the old ones might start to fade. And that's something that I think leaders don't talk about enough.

So there's a fascinating concept called the Parmenides fallacy, which I don't know if I mentioned in that book or not, but I have, Written about it later, which is the tendency when we're making a decision is we compare where we are today to some uncertain future. So I'm going to ask you to put 500, 000 Euro into an innovation fund. And you look at me and you go, well, what is that going to return me? And that's a big risk. And, I could put that same 500, 000 into the core business.

And this is what I get. Well, that's the Parmenides fallacy. You're comparing where you are today with some uncertain future. The right comparison is if I make choice a, this is what the future looks like. If I make choice B or I do nothing, that's what the future looks like. So let's compare future States to future States. And that's the mindset I'm encouraging people bring to this framing challenge.

And this is one of the big problems, but you actually show us how to kill the idea or not even pursue it in the first place. And this diagram for those who are joining us on YouTube. You'll be able to see exactly what we're talking about here. Rita shares in the book, a worksheet of making the entrepreneurial frame specific. Maybe you'll take us through this because this shows you the detail that's required.

rita-mcgrath_1_01-12-2024_091320: Yeah. So this is just a simple articulation of what a spreadsheet you could create was like, and we were trying to make it really practical. So it was take last year's profits, right. And last year's return on sales. And then by extrapolating, right. You can, you work backward into what would the new, business need to generate in terms of profits to generate an increase in profitability.

And then what do you think it's going to look like in terms of assets based on what you know about the existing business? So it's just really working backwards. That's the key concept, which is, I know what I'd like to achieve in the future. If I work backwards to today, what does that imply for action today? Once you've decided what to go after, you've done this hard work already, and this is already too much work for many people.

I know that myself, I'd be like, Oh, this is mind numbing work, but it's absolutely essential work to do next. You have to set up an opportunity register, and this is the next step in the entrepreneurial frame where you decide on the format of an opportunity register, the place where we inventory all the entrepreneurial ideas that emerge from applying techniques that you offer in the book. Maybe you'll share this at a high level, Rita.

And then there'll be a whole bunch that are in the middle range and then a whole bunch that are never going to see the light of day. So the more ideas that you have the better as a general rule. And the more you can keep them alive, right? Because some ideas aren't great, but they're just not ready yet. The ecosystem isn't ripe yet, or the technology hasn't yet hit the right stage. Some ideas are Just too small, but they may lead to idea.

Other ideas that are worth thinking about in a more constructive way. So what we find when we start to collect these idea inventories is that there are patterns that you can start to see for example, certain kinds of technologies beginning to emerge. And one of the fascinating things about technological development is these things. don't evolve the way we often think they do. What happens in many cases is simultaneous discovery.

So if you look at anything from medicine, medical discovery to calculus or whatever, there are multiple times these things get invented in different places. So what you want to be able to do is keep track of where your organization is with respect to these new things and then periodically go through them. And you can go through them in terms of opportunity size. You can go through them in terms of technology usage. You can go through them in terms of geography spread.

But the concept is you've got someplace to put them now.

Back when we wrote entrepreneurial mindset technology, it wasn't nearly as developed as it is today, but today, it would be child's play to have a common database and there are a lot of technologies you can use today. So technologies like Trello or Asana or Jiro boards, they can also be put to this purpose right.

Now, what I found though and one of the reasons that I did develop this software that we can talk about at some stage was there's all this stuff that helps you catalog and capture ideas. And then what? And that's where it then goes into individual spreadsheets or individual work groups. And God forbid, a senior leader says, what's the current status of our portfolios? Some poor intern is out there, 24 seven running from desk to desk, virtually saying, what's the status of this latest thing?

So what we decided was a gap was a software program that would allow you to track what's in your portfolio, see how uncertain it is, see what you're learning, see how it's evolving that, that kind of problem. And so that's what we built. So it's in between the discovery of the idea to the actual scaling, because when you want to scale, you need something but in between there really wasn't anything. So that's why we built the software called Sparc Hub to deal with it.

So the way I would do it today is different, has evolved from the book, because technology has come much, so much farther.

And that's one of the things I'd love you to share is just how that actually happens, where it might be too soon. The technology might not be ripe, et cetera.

So, for example, in the military the robots aren't smart enough to take over a lot of the transport needs of military operations. So supplying the frontline, for example, But they are smart enough to play follow the leader. So out of the whole autonomous program comes a piece which can be commercialized early. I call these stepping stones. And so what you've got now is a front vehicle with human beings inside that say, does what only human beings can do.

But now you could use autonomous technology to daisy chain other vehicles behind them. So that's an opportunity that's really important. Ready, right? The technology is good enough. There is a clear use case. Somebody will pay you to do it. Autonomy will eventually come in some form. My personal belief is it'll come when we take the humans out of the equation.

So right now, what we're trying to do is create autonomous cars that kind of plug into a human created and very chaotic system of transport and automobiles and everything else. And that's a really hard problem. But if you were to take the humans out of the equation imagine a world where you didn't have humans driving cars. Well, guess what? You probably wouldn't need traffic lights. You wouldn't need road striping.

You wouldn't need, in fact, you probably wouldn't need roads as they're conventionally designed. What you'd have is more like a lattice of. Of patterns, right? The vehicles would know where each other were. They could avoid each other, right? They could work together. If you took the humans out of the equation, it simplifies the problem incredibly. And now you've got an actual working solution.

So you can even take it to a point of imagining a utopia where you built housing would be served by these autonomous vehicles that wouldn't need a lot of the home ownership. A lot of the ownership structures that we have right now. Most cars. Spend their time being parked. Very few of them are utilized 100 percent of the time and. So the point of the opportunity inventory is to have these conversations where you say, well, what's ready?

rita-mcgrath_1_01-12-2024_091320: What's changed since the last time we did this review? Is there some new development that's made something possible that wasn't possible before? And to have those very living conversations where people are routinely looking through what we're thinking as an organization might be attractive.

And the next chapter in the book is building blockbuster products and services. And you tell us here, the simplest way to change a business model is to redesign your offerings, your products or services, what you should be aiming for is a blockbuster design. One that so appeals to your target audience that they feel almost compelled to buy from you. And identifying opportunities for redesign is what the next chapter is about.

And this is where you introduce the idea of a simple mapping process that gives you a start on capturing how well your product or service is appealing to your customer's needs at the moment. This is one of the articles you wrote in HBR. This the idea of the attribute map.

And the way the technique works is you've got attributes or this is like product characteristics or service characteristics that are positive people like them, you've got attributes that are negative. People don't like them or you've got attributes that for a particular segment. They just don't care about. So the 1st, I think, important concept is to recognize that customers do come in different terms.

We all know this from, marketing 101, but the typical way that companies look at customers is not very productive. So the typical way companies look at customers is by what I'll call demographics. So how much money do they have? rita-mcgrath_1_01-12-2024_091320: Where do they live? What is their postal code? Do they, what tier do they live in? How old are they? That kind of thing. And I'm not saying it's bad to know those things. What I'm saying is those things are important.

Knowable by anybody that can do the research and they make the fundamental assumption that the way customers behave is consistent with those demographic attributes. And what we find is it often radically is not . I was working for a time with the boots corporation. And their head of marketing was desperately frustrated. He came into one meeting and he said, Oh, customers just don't behave in the stores the way they're supposed to. And I said, what do you mean?

And he said, I've got grannies in there with iPads, checking on prices. They shouldn't be doing that. I think sometimes as companies, we almost get offended when customers behave in a way that, that we didn't, it crosses our demographic assumptions. So the first key thing to think about is what is the key behavior? that you need to appeal to when you are thinking about what you're going to sell to someone. Who is that customer? And what is it that they most, most want from you?

And how is that different from the behavior that other customers might exhibit? So I think that's the first big principle. And then for that behavioral segment, if you look at the positive features, they come in three flavors. So the first is what I call a So it's a positive feature, but I won't even don't, if if you don't offer it, I'm not even going to consider your offering. So just take something really simple, like a hotel room. Right?

So what do I just flat out expect when I go into a hotel? Well, I expect a smooth check in process. I expect the key to only open my door. I expect to be able to have a conversation. Clean room. I expect a really good bed. I expect the sheets to be clean. I expect the bathroom to function. Well, I expect the desk light to work. I expect to be able to access. I could go on all day naming the things that I simply expect when I go into a hotel room. And that's the problem with the non negotiables.

They're often very expensive. They're often very difficult to do, but they offer zero competitive differentiation because just to be in the category at all, you've got to be able to offer those things. What we call discriminators. These are differentiators, right? So I buy A BMW as opposed to a Mercedes because, maybe I bought their thing about BMW being better for the driver and Mercedes being better for a family, whatever.

But you're not wildly excited about the difference there, there are established product categories, you know what the differences are and and can plan accordingly. And to create a competitive advantage you have to find what we call exciter features. These are things that a customer looks at and goes, Whoa, that is amazing. I need that. if you give me a trip down memory lane opportunity in the book, we talk about the cup holder in cars. That's an example of this.

So Honda at back in the day would do this very interesting thing with their new car designs. They actually sent automotive engineers to participate. Okay. In the sales process and, automotive engineers are not necessarily great salespeople, but what they would do is they would be on the ground and they would look at customers. They'd look at their unmet needs. They'd look at what things, we're working for them. What didn't work for them.

And so they came over from Japan to America, and what they noticed was that Americans being Americans, we eat and drink and, do stuff all day long in our cars are like a second living room. And so there's coffee and there's donuts and there's stuff in the car and there's no place to put the coffee cup. Right? So either you balance it somewhere or you put it between your knees with sometimes very unfortunate consequences or whatever, but there's no place to put it. Right?

And nobody was complaining about that, but there was no thought that this was a necessary innovation. This was something these guys observed was a behavior that they wanted to hone in on. And so they invented this cup holder. Now, the early cup holders, you may remember very primitive, right? You folded the thing down, you put your coffee cup in it. It was a little plastic thing. Not very evolved, right? But let's think about this.

So we have a young couple, they're out buying a car and their list of non negotiables is, as long as my arm, it's got to be good quality. It's got to get great gas mileage. It's got to be very durable. It's got to have a great repair record, blah, blah, blah, blah, blah. And so we look at the Toyota, right? And the Toyota, It's great. It checks all those boxes, but let's just keep looking. So we get to the Nissan, right? And that's great. You know what I mean? Checks all those boxes.

And then we get to the Honda. Honey says one to the other, look at this. It has a cup holder. What a great idea. Let's buy the Honda. This kind of consumer decision making is the despair of automotive design engineers, right? These guys want to think about torque and wind flow and energy efficiency and all that stuff. And what do customers want to buy? They want to buy the car with a cupholder because that gets a job done that is important to their daily life that nobody had solved elsewhere.

Now, of course, that year, you could not buy a Honda in the United States that year. They had them backlogged. People were on waiting lists to get these Hondas. That's how popular this was. Now, part of the thing about Exciter features is everybody else, unless you got an entry barrier or something, everybody else is going to copy. So the next year, does Toyota have cupholders? And you betcha! Does Nissan have cupholders? Absolutely! Two years later, even Ford gets around to cupholders, right?

So, this illustrates a fundamental dynamic of this map, which is that things that start off as exciters As customers come to demand them, they come to be differentiators. And then eventually they end up as non negotiables. And by the time they have gotten there, you really want to be in a low cost position because sometimes with the heady days of having an exciter where people will pay basically anything to get it, you get sloppy, right? You get sloppy about operations. You hire too many people.

You do stuff that doesn't allow you to be cost effective when the things become a non-negotiable. So the negative line goes the other way. So if it's basic which is the sort of basic stance, if it's negative, I'll tolerate it. I'll put up with it. And if you think about it, most products have vast numbers of things we put up with. We'd prefer to do without them, but right now we don't think of any. legitimate competitor being able to help us escape. So we'll tolerate them.

As companies work the negative line, they start to get rid of tolerables. So you may remember a few years ago, there was a big campaign by Apple to get people who were using Microsoft products to switch and they said, Hey, We're making switching super easy. And if you come over to the Apple ecosystem, no more blue screen of death, no more bugs, no more clunkiness, no more, it's all a beautifully designed ecosystem. And a lot of people convert at that.

So once somebody has demonstrated that a tolerable can be avoided, now it becomes a dissatisfier. , it gives your customers a reason not to buy from you. It dissatisfies them. And if it goes on long enough, it becomes what we call an enrager, which means it's so bad. It's so dreadful. I just, I'm going to turn my back on that product and never come back again. And so you lose your customers in droves when you get it enragered there.

And the negative line kind of works in many ways opposite to the positive line, things that are once tolerable become less and less tolerable. Eventually, people get dissatisfied with them, and eventually they can end up as enragers. And basically give up on that customer segment or get rid of that feature if it's an enrager for your customers.

And then lastly, we have the neutral line, which just basically acknowledges that not everything is important to every customer segment that you might deal with. So back to my example of hotel rooms. When I travel, I almost never turn on the television in the hotel room. I just, it just, for whatever reason, if I'm traveling, I'm usually super busy and it's just not what I spend time on. So you could, if you were catering to the customer segment of Rita, think of the cost you could save.

You could take every television out of every hotel room in the world. But here's the problem. It's neutral for me, but it's not neutral for many other people. It's a non negotiable for them. So you need to understand when a customer really cares and when you don't. And then sometimes you have this fascinating set of things I call parallel features, which are not the functionality of the offer itself, but something that happens in parallel with it.

It goes along with it, even if it isn't the actual product. functionality of the specific product. So it allows you to add more value or create a better environment or do something that's more fun because it's offered in parallel with the main offers. So back in the day, our canonical example was compact discs. So I'm dating myself, right? Compact discs that were sold in Victoria's secret stores.

So you may remember Victoria's Secret, sexy women's lingerie, and you think to yourself, why would Victoria's Secret be one of the largest, at the time, largest sellers of compact discs? Well, you're not in a Victoria's Secret store buying the sensible, the sensible, non sexy undergarments. You're there for a reason then. Wouldn't it be nice to have music that went with that? So that's an example of a parallel offer.

So what would happen would be you'd go into the store now again This is back in the day back around the time. The book was written. You'd go into the store And the first thing you do is they give you this lovely black bag, right? And then so you could discreetly put your purchases in there while you were shopping in the store And then when you've you know made your selections you did whatever and you got to the checkout there'd be one Compact disc.

And it would be the disc that had been chosen to accompany, ideally, the disc underwear was being purchased to go with. And what was fascinating to me about it was they were very deliberate about it. It wasn't walls of CDs. It was one. And then you would be able to pick that one up and then they change them monthly. rita-mcgrath_1_01-12-2024_091320: So each month will be a different CD. And eventually I got to the stage, you could order them online. And then of course everybody piled on.

So you had Starbucks selling CDs and others, and then CDs went away. And now we don't have that anymore, but back in the day, it was a very interesting example of a parallel.

A good framework to employ here is, as you mentioned earlier on Porter's five forces. What are the major factors that could have an impact on buyer power, supplier power, potential substitution, potential entry and exits, and competitive rivalry. Maybe you'll share some ideas on this, keeping abreast of trends.

So to make that very concrete if you look at men's shaving and you think about Gillette, right, the dominant force in men's shaving Procter Gamble bought Gillette for 57 billion dollars in 2005. And they've been the dominant player in men's shaving forever, right? So, very good business model. So they had a lot of R and D that allows them to create better products that allows them to charge higher prices. And they got their armies of employees that send all these things into retail stores.

And it's like a clockwork, it just turns and turns, generates enormous profits, massive market share. I think that's it. At their peak, they had some 70 percent global market share. And the entry barrier was all this advertising, all this protective R and D, all these patents that they had, and in the manufacturing razors, it's actually hard, it's not an easy thing to do.

But if you look at the period of time, through the O's, through the emergence of e commerce, through the emergence of direct to consumer, what you could have seen where you paid attention was the vast drop in The expense of acquiring digital capability. So by the time you get to 2010, you've already got Amazon Web Services in place. You've got Microsoft Azure in place. You've got these cloud based providers to build an e commerce site. All that's already done.

Somebody's you can buy that off the shelf, right? So you don't need to hire expensive developers. Maybe you hire a designer to put a fancy front end on it, but the hard. The hard program is already built for you. And so what's happened now is entering into a startup can be done at a fraction of the cost that it would take to recreate what Gillette had built.

And so that's an example of the kind of big trend where you say to yourself, Hey, wait a minute, I'm counting on the fact that I've got billions and millions tied up in factories and doing this intense manufacturing to protect me, but if now that's readily available off the shelf, that's no longer going to be the case.

But with globalization, with the entry of China into the WTO, which happened in 2001 what started to happen was all those capabilities began to be outsourced. Now that sounds great in the short term, but what happens now is you're leaking your know how. You're leaking your tech. You're teaching other people how to do this stuff that never used to do it before in service of getting a slightly better price for what you're doing today.

And I happen to think a lot of companies are now regretting that those decisions were made because once the genie's out of the bottle, once you've trained your supplier, how to do this stuff, all of a sudden they can become a potential rival.

A year, maybe a year and a half before the government has actually funded a firm to compete head to head with their patented drug with a locally grown biologic. And she knows she's got 18 months to make the money that they're making in China. Now, the trade off is, it's a really big market. Do you want to go there at all? But then you're going to lose your IP. So how do you play that game?

And she was very frustrated because her senior leadership doesn't seem to understand that unlike other nations, the patent is meaningless after a period of time, once they've taught a local company.

And this is the idea of quizzing, which I absolutely loved.

And so you just ask a whole series of questions that integrity interrogate what the customer's experience is at a moment in time. So let me bring this to life a little bit. One of the companies we worked with back in the day was this Campbell

So there's a first date, right? And you'd want to, or the first date, in your home or something where you want to make a nice impression, you might have a candle that's bespoke for that. There's a candle that maybe it's just setting the mood. It's an air freshener or whatever. You've got maybe you have a breakup candle. But we started to think about all these occasions for the use of candles. And what ended up happening was Yankee Candle was able to really use these.

Of candle usage to create very differentiated products. And one of my favorite stories about this is actually my mother, my mother and at the time my dad lived by themselves, the kids had flown. So they were on their own and they were, German and frugal. And my mother would flip coupons and look at the prices of things. And she was very, very careful shopper and and under normal circumstances. Right. But then.

Then Thanksgiving, which is a big American holiday, is coming up and her kids are coming home and the fact that we're coming home is fine, but her grandchildren are coming home, right? And so it's a completely different emotional experience. And normally she buzzes through the store and she doesn't even glance at the sort of place where they have like the fancy candles with all this stuff on them and, the extra price. So she sees She passes by, happens to be a tuner.

Now, by the way, you have to remember in her shopping cart, which normally has a few necessary things for a couple of older people who like to cook at home, now it's full of things that she would never in her life dream of buying like Go Gurts and chocolate cereal and stuff like that. And so she's already mentally spent four or five hundred dollars on the stuff that's in this cart. She sees the perfect candle for the centerpiece of the Thanksgiving table.

Does she even think twice about putting it in the cart? Absolutely not. And again, now you think about a candle, there is margin there. It costs nothing practically to make these things. And so to package them differently for the different needs that the different kinds of consumers have became the way that this particular company went to market and it was very successful.

So Rita, I think maybe we'll blow out the candle on this episode, and then we'll go on to, is the game worth the candle, which is what we're going to cover next when we look at consumption chain analysis and many more of the brilliant aspects that you talk in the book, but for now, we'll close part one on this brilliant book, the entrepreneurial mindset, and I'm very grateful for you joining us, Rita, before we close this episode, where can people find out more about your work?

Your Fireside Chats, Spark Hub, etc.

It'll show you things that are coming up in the future. And then my sister company, Valize is the sort of companion to the Rita McGrath ideas because what Valize exists to do is make this stuff implementable in your organization. So that's V A L I Z E. And if you go on that website, you'll be able to see demonstrations of the software. You'll be able to access learning guides. There's a lot of material there.