Rita Gunther McGrath is an associate professor at Columbia Business School. She, along with coauthor Ian C. MacMillan, has a new book out, Discovery-Driven Growth: A Breakthrough Process to Reduce Risk and Seize Opportunity (Harvard Business Press, 2009). McGrath took the time to speak with us about the need for businesses to explore new opportunities, as well as ways to think pragmatically about those ventures.
How can you get a company that feels healthy to begin thinking about new opportunities?
You have to look for early warnings. Unfortunately, when things are going well, it's very difficult to find the motivation to change. But consider some of these scenarios: if your customers are less loyal, if you've suffered price erosion at all or if your competitors have created a better product. While your customers are still loyal to you now, that can erode very quickly. These are all indications that it's a good time to rethink what you're doing.
Here's an interesting example of a possible early warning that's in the news for banks. Banks take in an astonishing amount of revenue from fees and overdraft charges. I read in the Wall Street Journal that in America, banks generate $38 billion a year in revenue from fees and charges. These practices, I think, will produce a backlash.
Consider one of the ways in which banks maximize their fees: Say you bounce five checks, but you have money in your account for all but the biggest one. Say you've made five payments totaling $600. The largest one, say a car payment, is for $500, which is the current account balance. The bank will clear the $500 payment first, causing the other four to bounce and generate individual transaction fees for the other four checks! They charge you an overdraft fee four times. That is just going to enrage customers. I think banks should consider this an early warning. A lot of disgruntled customers are going to want to go to an institution that will treat them more fairly.
You mention that companies should look more to the way entrepreneurs handle their businesses. Could you elaborate on that?
Entrepreneurs tend to plan and think about business in more grounded and realistic ways than big companies do. So say that the Gartner Group predicts a certain market will experience rapid growth to generate $3 billion in a year. A company will use a logic that says “It only needs 5% of the market” and then try to expand into that market. An entrepreneur would look at the same opportunity and ask, “What amount can I capture and would that be enough for me to meet my goals?”
Good entrepreneurs are specific. They will minimize their outlay, their risk, how much they'll spend. Big companies will spend a lot upfront even on risky things. They assume that their ventures into new markets can be managed the same way they handle their core businesses. Very often, they'll get a pile of money and then treat a plan for a new business like a commitment, feeling like they must execute the plan. An entrepreneur will begin the venture by getting just to the next milestone and then pausing to reassess. They replan after they've learned. They don't see the new venture plan as a contract, but as a guide to learning.
You've written about Du Pont realizing it was having problems with revenue growth and taking steps to expand its core business. Can you tell me about another company that has succeeded doing that?
Many companies have redirected themselves. IBM rethought its approaches and became more centered in software and services. Apple reimagined itself not just as a computer company, but as one providing unique experiences to its customers, through music and other things. Nokia is going through it right now, re-creating itself as an Internet company and not just involved with mobile phones. Verizon really got out of slow-growth businesses like land lines and paper directories and got into high-growth industries like wireless. The marvelous thing is that they weren't in trouble. They didn't have to go through a near-death experience to get those changes under way.
Can you tell me about a company that should have recognized its problems but didn't do so in time?
The poster child would be Kodak, which couldn't get out of its own way, in spite of investing in a lot of the digital technologies that cameras are using today. Revlon started its Vital Radiance campaign in 2006. It was designed to be cosmetics for women of a certain age, but women don't like to be reminded of that. Circuit City didn't keep up with the times, which they should've realized but didn't. America Online had the fundamental technology change underneath it, and it's taken it years to catch up. In fact, it may be too late.
Companies that want to reinvigorate their core need to figure out which initiatives will help drive their growth. How can they best go about doing that?
The first thing I recommend is that you look at what you're already doing and then structure a visual portfolio of what you're spending money on today. Chart it against the external market uncertainties as well as the technological uncertainties and capabilities that are needed to get stuff into market. The stuff closest in is your core, the next is your platforms or adjacencies, and those furthest out are your strategic options. Map it out visually and consider if the things you're spending money on today are going to help you achieve your future goals. Often it's this huge “aha!”