Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen
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Inflection points can create growth opportunities and render entire industries obsolete. Foresee and take advantage of the next inflection point with Seeing Around Corners: How to Spot Inflection Points in Business Before They Happen by world-renowned expert on innovation Rita McGrath.
McGrath distills decades of consulting expertise to provide the lowdown on how to anticipate disruption, build organizational resilience, and thrive when competitors are caught off-guard.
Learn how to spot signals early, think beyond industries, and innovate for the future with risk management in place.
Top 20 insights
- An inflection point is a transformation of the business environment caused by factors like technological change, demographic shift, or new regulations. It changes the very fundamentals of business, destroys existing incumbents, and generates new opportunities. Being able to spot inflection points early can give an organization tremendous strategic advantage.
- Inflection points often follow a pattern of hype, dismissal, emergence, and maturity.
- Inflection points are often invisible to the boardroom. The earliest signs emerge from the edges of the organization, where it interfaces with the outside environment. It is therefore beneficial to create information flows from the edges to the top management.
- Employees shield leaders from unpleasant information to create a good impression. To overcome this, leaders must "get out of the building" and systematically expose themselves to the interfaces where customers engage with the organization.
- Delegate small teams at the front lines to make decisions that are low-risk and have high learning potential. Reserve high-risk and irreversible decisions for the management.
- Bureaucracy can strangle ideas. Empower employees at the edges to innovate. Adobe offered every employee a Kickbox, a small innovation kit with a $1000 grant. At the cost of a single $1 million innovation project, Adobe funded a thousand ideas from the frontlines.
- Leaders should expose themselves to contexts where the future is unfolding today. For example, attend seminars where cutting-edge R&D is presented, or engage with potential next-generation customers to understand behavioral shifts.
- Lagging Indicators, which measure results of past activities, and Current Indicators, which provide real-time business insights, are insufficient for inflection prediction. These metrics are based on assumptions about the business environment that may be disrupted. Leading Indicators, which give insights about the future, are often qualitative and emergent. Yet they are critical for those who want to stay ahead of inflection.
- There is an inverse relationship between signal strength and strategic degrees of freedom. Signals are weak during the initial stages of inflection. By the time they are clear, it is too late to act. To avoid this dilemma, organizations must build early-warning systems and use scenario planning to make strategic decisions at the optimal time.
- Incumbents can often accumulate negative features that customers are forced to tolerate. Leverage such obstacles to spark inflection points. Netflix leveraged the late fee charged by Blockbuster to spark an inflection.
- Netflix thinks through arenas and not traditional industry boundaries. Its investor message says, "We compete with all activities that consumers have at their disposal in their leisure time." Activities include social media, video games, and general socializing, etc. This approach prepares Netflix for potential competition across industries and widens its growth potential.
- As signals grow stronger, the organization must undertake a discovery-driven process to quickly explore different possibilities and find quick, cost-effective means to test them. To do this, break down each possible course of action into smaller checkpoints and best viability at each checkpoint. The aim is to convert assumptions into knowledge.
- It is easier to identify a key inflection point than its right timing. Reed Hastings, CEO of Netflix, predicted the rise of video streaming in the '90s. The inflection occurred over a decade later. A key challenge for leaders is to know when to make a move and bring the entire momentum of the organization to the task.
- When Nadella became the CEO, Microsoft had missed the mobile revolution and was in danger to miss the AI and Cloud inflections. To make Microsoft competitive again, Nadella created a culture of constant learning, bottom-up innovation, and a relentless focus on "customer love". He began executive meetings with presentations on the latest developments and leading indicators (such as product usage) from the research team.
- Inflection points require a critical mass within the organization to be convinced about the need for change. Instead of a command and control model, leaders must empower people at the edges to act on ideas and create consensus on a shared vision for the future. The shared vision of the future enables quick, decentralized action with minimum confusion and resource wastage.
- To create a resilient and adaptive organization, incentive structures that drive behavior need to be overhauled. Microsoft shifted focus from units sold to how much customers use a product. They divided metrics into Performance Metrics that emphasize current year performance, and Power Metrics that focus on leading indicators of future performance like customer satisfaction.
- An inflection point brings two simultaneous challenges: 1) to ensure efficiency and revenue generation in the core business, and 2) to invest in capabilities for the future. It is essential to focus on both challenges simultaneously. They require different teams, management approaches, key metrics, and incentive structures.
- Since an inflection point changes the entire business environment, it demands changes in the very structure of the organization to adapt. It could require the core business to downsize in order to focus on emerging growth drivers, or to find an entirely new growth vector. The task of leadership is to orchestrate the inflection within the organization to make it future-ready.
- Improvement on innovation proficiency involves changes in culture, organizational practices, and procedures. It is a gradual process that takes time. Progress can be measured by the Innovation Proficiency Scale and the necessary steps to take to move onto the next level on this scale.
- Identify inflection points early can be transformational for personal careers as well. Be ahead of changes in the area you work in to open up new career pathways. Expand your network beyond your peers to see around corners.
A strategic inflection point is a change in the environment that shifts the very fundamentals of business. Inflection points can be caused by factors like technological change, regulation, and demographic change. They destroy existing businesses and outdated technologies while creating vast new entrepreneurial opportunities. While inflections may appear sudden, they have been gestating for a while. Read on to learn how to spot inflections early and create strategic advantage for your organization.
The four stages of inflection
Inflection points follow a predictable pattern.
- Hype: After some early promise, there is a sudden buzz about how a paradigm shift is imminent. Believers invest heavily, hoping for massive growth. It inevitably ends up in disaster.
- Dismissal: At this stage, few of the initial entrants who survived would have begun to find viable business models and customer needs. This is the time to make small investments to explore opportunities.
- Emergence: At this stage, it becomes clear to industry watchers how the inflection may change things. This is the time to deepen investments to generate multiple future options.
- Maturity: The inflection has happened, and its implications are quite clear. The organizations that are not prepared by now face decline. This is the stage to take advantage of growth opportunities.
Listening to the edges
Inflection points are not easily visible to the corporate boardroom. The alarm is usually first sounded by people at the "edges" of the organization, like scientists working on R&D projects or salespeople talking to customers. Executives must create mechanisms to receive feedback from the edges.
Create information flows from office corner to street corner
It is vital to develop systematic and safe ways for leaders to understand what is changing at the front lines of business. This can be done through level-skipping conversations where leaders invite employees for breakfast or asking leaders to report one insight they learned directly from the customer that month.
Inability to see how others with different lived experience may perceive a situation can be a leadership blind spot. It is essential to balance this by welcoming diverse views and people whose life experiences differ from the leadership.
Agility and balance
According to Jeff Bezos, there are two types of decisions. Type 1 decisions are high risk, irreversible, and have considerable consequences to the organization. Type 2 decisions, in contrast, are low-risk, reversible, and rich in learning potential. Empower small, trusted teams with authority to make Type 2 decisions.
Instrument the edges
Creative ideas are strangled by corporate bureaucracy. When Adobe was transitioning from on-premise software to a cloud offering, Chief Strategist Mark Randall introduced the Kickbox. This small innovation kit comes with a $1000 grant that any employee can request. For the price of funding a $1million innovation project, Adobe fostered a thousand ideas from the edges.
Get outside the building
Leaders must find systematic ways to expose themselves to the interfaces where the customer interacts with their organization.
Create incentives to reveal awkward information
Business incentives can reduce the willingness to absorb uncomfortable information. Leaders have to counter this by creating incentives for employees to offer uncomfortable but crucial information.
Leaders can deliberately turn a blind eye to uncomfortable news about change. They have to take care to guard against this blind spot systematically.
Talk to the future
Leaders need to identify places where the future is unfolding to get an early vantage point. This could mean attending conferences to understand cutting edge developments or even talking to a younger generation who will become customers in five years.
Establish early warning systems
An inflection point is preceded by a period of ambiguity with multiple conflicting weak signals. Catching the right signals early helps the organization take advantage of the coming inflection. To do this, we need to understand the types of indicators.
Three types of indicators
- Lagging Indicators: Lagging indicators measure what has happened before. This includes business metrics like profits, return on investment, and earnings per share. Relying exclusively on lagging indicators for strategic decision making can blind leaders to inflection points.
- Current Indicators: Current indicators provide real-time data on the state of things. They are devised based on past conditions for success. Since inflection points change the basic assumptions underlying key metrics, these indicators cannot help you prepare for the future.
- Leading Indicators: Leading Indicators are conjectures that have the potential to become facts in your business. They are usually qualitative. While this might make executives wary of taking them seriously, these indicators are central to understanding the future. When Satya Nadella replaced Steve Ballmer as Microsoft CEO, he shifted his focus from lagging indicators like revenue to leading indicators like customer usage.
The strategist's dilemma
At the initial stages of an inflection point, the signal strength is low, and it would be a mistake to commit to a big strategic move. However, if an organization waits too long for clarity, the inflection would have become mainstream, making it too late to act. Simple scenario planning exercises can help organizations identify significant inflection points early enough to enable strategic action. For each scenario, identify specific outcomes that represent the inflection point. Identify early warning indicators for each of these outcomes and track them systematically.
Consider the scenario of a shift from conventional energy sources to renewables. One specific outcome that represents the inflection point could be when 75% of all energy investments are made in renewables. Early warning indicators to track would be battery prices becoming cost-effective at least six months before the inflection and capital budget allocations shifting from conventional to renewable technology at least twelve months before.
What does not change
While technologies and market conditions shift rapidly, human needs are remarkably stable. The human need for communication has been stable while the modes have evolved from letters to landlines and now instant messaging. Therefore it is essential to think in terms of "job to be done" to understand the customer needs.
Define your arena
It is essential to think in terms of arenas and not industries because disruptions may occur due to shifts in other industries as well. Define your arena by looking at the job to be done, pool of resources your business relies on and what players target the same resources, even if they don't make products similar to yours.
The shifts that can lead to an inflection point include:
- Change in resources contested
- Change in parties competing for the resources
- Change in situations where competition occurs
- Change in the consumption experience
- Change in the kind of capabilities embedded in the value chain
Create an Arena Map by analyzing what are today's assumptions for each of these factors, what potential shifts could appen, and what are Future Possibilities that could emerge because of these shifts. An Arena is ready for inflection when a change in any of these factors changes a key metric or creates an entirely new category with different key metrics.
American teens and apparel
Can mobile phones change the apparel industry? In 2007, the spending power of American teens was estimated at $80 billion, with an additional $110 billion spent by parents. Retailers built business models based on the "back to school season". This was embedded in metrics like sales per square foot and store sales compared across periods. These metrics failed to capture the shift in consumption experience caused by mobile phones and social media. By 2014, mobiles had strongly shifted teen attitudes to clothing. Teens cared little for brands. There was also a need to be seen in fresh attire in every social post. By the time a product hit the stores, teens had seen it online for months and felt it was dated.
These trends have shifted the arena with customers seeking faster online purchases and frequent outfit changes. This inflection point has led to the rise of a new breed of fast-fashion companies. Brands like Zara make designing a continuous process informed by customer inputs. Some companies even use social media to pick up new trends and use local sourcing to make them available within hours.
Jobs to be done
Consider the jobs that customers are trying to get done in their lives and consider what obstacles get in their way. A barrier in the customer job to be done, the frictions and barriers that interrupt customer experience can be leveraged to create powerful inflection points.
Never enrage your customer
Customers will tolerate negative features as long as they don't have alternatives. When an inflection point allows them to complete their job to be done without the negative feature, customers "escape" and begin doing business with a new player. When Netflix was launched, Blockbuster had millions of customers, stores across America, and a revenue of $6 billion at its peak. However, its "late fee" was a negative feature that Netflix took advantage of to transform the entire industry.
Moving too soon on inflection points
According to Jeff Bezos, it's not very hard to identify key trends, but what's more important is for leaders to decide when to make a move and ensure the organization puts its weight behind the move. Reed Hastings saw the arrival of video streaming in the late 90's. However, he did not anticipate that it would take over a decade to become a reality.
Practice discovery-driven planning
As signals grow stronger, the organization must begin to explore possibilities. This is a stage of decision making under uncertainty, and it is impossible to guarantee their correctness. Instead of making a big bet on an inflection point, organizations can adopt a discovery-driven approach to test multiple possibilities and convert assumptions into knowledge quickly.
The first step in discovery-driven planning is to articulate why the initiative could be worthwhile. Next, specify benchmarks to check viability and explicitly write down the assumptions involved. Break monolithic plans into smaller checkpoints that can test critical assumptions. At each checkpoint, check if the new learning is worth the cost and if it makes sense to continue or shift approaches. Thus value is created at every stage of the development process.
Mobilizing your organization
It can be hard to galvanize the entire organization to act on a strategic inflection point. This requires a critical mass of employees to believe that this is an inflection point that needs immediate action. The role of leadership is to listen to insights from the edges, empower them to act on their ideas, and create a shared point of view about the future. The shared vision enables the organization to act without confusion, resource wastage, and flip-flops on critical decisions.
Orchestrating Microsoft's turnaround
When Satya Nadella took over as the CEO of Microsoft in 2014, the company was infamous for its infighting and had missed the mobile revolution. Microsoft needed a rapid turnaround to remain competitive and leverage the Cloud and AI inflections. Nadella placed a key emphasis on culture and building products that customers love. He focused on a shift in culture from a "fixed mindset," which valued knowing things, to a "growth mindset" where keeping an open mind to information and willingness to learn are emphasized. He put in place formal mechanisms to ensure that employee voices are taken seriously. Every leadership meeting began with a research team presenting their work to the entire executive team. Even when projects like an AI-powered chatbot failed, he was quick to provide "air cover" and encourage the team to continue taking risks. Microsoft shifted from metrics that rewarded the number of units sold to metrics measured how much users use the product. These moves paid off, and Microsoft created a presence in Cloud and AI.
Building innovation proficiency
Since an inflection point changes the critical constraints that an organization operates within, it may require a change in the very structure of the organization and how it functions. The key challenge for leadership is to orchestrate an inflection within the organization to take advantage of the inflection outside. This might mean shifting resources from the central business to support next-gen enterprises or creating new growth vectors.
Eight levels of innovation mastery
The Innovation Proficiency Scale measures the ability of an organization to innovate in response to an emergent inflection point. Building innovation proficiency is an organizational endeavor and takes time.
Level 1: bias toward exploitation
Organizations have a strong bias towards sustaining existing advantages. The challenge for an innovation champion is to create a sense of urgency and convince decision-makers that the status quo cannot work.
Level 2: innovation theater
The desire to innovate exists in some pockets and may lead to measures like innovation workshops. But there is no sustained effort. Small initiatives like the Adobe Kickbox program can get more people involved in innovation with minimal resources.
Level 3: localized innovation
Innovation activity happens sporadically and is often entirely dependent on critical sponsors. A change of executive can derail the entire effort. Empower small teams to secretively work on new projects without attracting undue scrutiny.
Level 4: opportunistic innovation
As initial efforts pay off, there is a recognition that innovation is essential. Some processes are put in place with resource allocation to go after growth opportunities. But the core focus remains on the traditional business. At this stage, promising ideas must be incubated- prototyped, tested, and customer-validated. If favorable, the idea must be accelerated by mainstreaming both the product and integrating the team into the formal governance structure.
Level 5: emergent proficiency
There are clear processes and governance to manage innovation, along with dedicated resources for the same. Innovation-related metrics are used. Employees receive training in innovation practices.
Level 6: maturing proficiency
There is strong organizational commitment and resource allocation. Teams have clear processes for innovation. Innovation metrics become a crucial part of executive compensation and promotion. The best people begin to focus their attention on innovation projects.
Level 7: strategic innovation
Innovation is now a part of the organization's central strategic vision. There is robust measurement, governance, and funding. Employees feel empowered to innovate. At this stage, there should be a pipeline of innovations, clear funding processes, and sound governance of the same.
Level 8: innovation mastery
The organizational commitment to innovation results in wins and highly skilled practitioners. The organization is cited as an example of best practices for innovation. The challenge is to preserve this culture and prevent going back to short-termism.
Enabling decentralized innovation
Robots and Pencils helps clients navigate technological inflection points. The company has FunLabs, which encourages decentralized, collaborative innovation. Each FunLabs cycle begins with a report identifying three technologies or themes. Employees make project proposals, and the entire organization votes the top three ideas. The winning idea is developed for 16 weeks. The team shares learnings through demonstrations reports. This is a classic example of reaching to the edges of the organization to gain insights and enable a culture of bottom-up innovation.
Seeing around corners applies not just to organizations but to our own lives as well. Recognizing inflection points early can lead to positive career outcomes. Identifying changes in arenas that you work in can open up new pathways and preempt new risks. Ultimately, it helps you anticipate inflection points and thrive when others are caught off guard.