Several weeks ago, when we last spoke to Rita Gunther McGrath, she was out in Seattle, where she was teaching a course in strategy and innovation at Microsoft and preparing for May’s CEO Summit, convened by Microsoft for 120 of its top clients. McGrath is a Columbia Business School professor who is also a consultant and the author of two best-selling business books. McGrath commands a five-figure sum for her keynote speeches, and so far this year she has taught in two cities in China, negotiated with Deutsche Telecom in Germany, and consulted for Swiss Re in Switzerland. This semester she has two more week-long courses for executives at Columbia.

But she also keeps her eye on the greater Princeton business community, where she has been living and raising her family for 18 years. She values her in-depth view of this community; it represents a microcosm of the “big picture” of nationwide business but has its own special qualities.

McGrath will share her views on the business community — the worldwide one and the Princeton microcosm — at a Princeton Chamber breakfast on Wednesday, April 19, at 7:30 a.m. at the Nassau Club, 6 Mercer Street in Princeton. Her topic, “Transforming the Customer Experience,” refers to her latest book, “Marketbusters: 40 Strategic Moves That Drive Exceptional Business Growth,” itself a market buster. Co-authored with Ian MacMillan of the Wharton School, it has 20,000 copies in print, has been translated into nine languages, and has been endorsed by no less a luminary than Bill Gates, who declared it one of the five best business books for 2005.

That same day, April 19, U.S. 1 will publish its annual business directory, and McGrath will take a special interest in it. “I’m struck by the variety of businesses here — however glum the news may be regarding pharmaceuticals, this area is not dominated by pharmaceuticals,” says McGrath. “And I am also surprised by the number of financial firms founded by Wall Street expats and hedge fund jockeys.”

The Princeton business community is strongly influenced by the universities, she believes. “Raw talent gets brought here, people bring their families, and when you think about that concentration of really smart people, there is a spillover effect.”

McGrath was so intrigued by the Princeton business community, as portrayed in the pages of U.S. 1 Newspaper, that in 1999 she made an unusual proposal: to buy the U.S. 1 databases — the lists of viable companies plus the lists of companies that have moved away or are out of business. The database is unusual, she concluded, because the information comes from reporters seeking stories and from a delivery team that goes from door to door, not from what the companies volunteer. The database not only gives a detailed record of firms that expand or downsize, but it also tells what happens when a company disappears from the directory — whether it moves out of town, gets bought, or just fades away.

McGrath rounded up some grant monies and U.S. 1 opened its files to her. Each year for six years, when U.S. 1 publishes a new directory, she receives the updated database and puts her analysts to work. She has written one academic paper, to be published in August, and plans to use the U.S. 1 records for a series of papers, perhaps even a book.

“With this database you can really see how the companies interrelate and get a deep picture of the whole region,” says McGrath. “Typically, researchers look at an industry or at an area dominated by one industry, but the U.S. 1 database has some diversity and is pretty comprehensive, so we can challenge the generally accepted assumptions about entrepreneurship.”

Academics like to lump all business failures together, but McGrath has a different view: “Young businesses tend to have high failure rates and that is seen as a bad thing. Public policies try to prevent that. But we see that when young businesses fail or move, other businesses come in, so the net effect is modest.” For instance, 905 of this year’s directory listings are brand new, yet the overall numbers stayed pretty much the same, with 5,545 listings last year and 5,656 this year.

McGrath also points out that many scholars do their research by taking a snapshot of a particular economic community, but long-term studies are hard to find. “To have this information go back as far as the U.S. 1 database is unusual. It shows how regional development plays out over time.”

Another unusual aspect of the database is how businesses are assigned to categories, with 32 major groups and 220 subcategories. “Because of the way U.S. 1 assigns business categories, you can actually see when industries start to appear and see when they declined,” says McGrath.

This year the average staff size of companies reporting information was 48. Does she find this surprising? “This reflects an interesting paradox,” says McGrath. “Although the huge multi-nationals get most of the high profile business press, business in America is much more about medium sized and small firms. In fact, David Birch began a famous line of research that suggests that such firms are where major growth comes from (about three percent of them are what he calls high-growth ‘gazelles’). Smaller firms provide much of the employment and a lot of the stability of the communities in which they are located.”

One method of tracking growth patterns is to compare the rosters of companies on top 10 lists. Three categories (environmental, law, and consulting) grew in the numbers of jobs reported by companies on those lists. The headcount in environmental firms went from 737 in 2001 to 844 in 2006. Law firms grew from 1,085 in 2001 to 1,233 in 2006. And consulting firms showed the biggest growth, from 896 to 1,294 in five years.

“In my view, this probably reflects the rise of the information/ service economy as well as increasing awareness of environmental issues,” says McGrath. “GE for instance, is making sustainability a key centerpiece of its strategy.”

On the flip side, the categories that declined in employment were architecture, engineering, market research, multimedia, and software. Software had the biggest percentage drop, going from 2,145 in 2001 (following the Y2K scare) to 1,422 in 2006. “I wouldn’t be surprised if this reflects major trends in consolidation in those industries, although you would have expected multimedia to grow,” says McGrath.

As the population of a certain industry grows, the business categories get more refined. “You see the knowledge emerge,” she points out. In 1990 the directory had one computer category, for example. Now it has 18 subcategories, and the newest is financial software. A brand new category, not used five years ago, is business coaching, and the 2006 directory lists 15 business coaches.

McGrath also points to the Princeton community as a good example of how resources can be recycled. Princeton has 177 pharmaceutical firms including 49 companies that work on some kind of pharmaceutical communications, but it also has 535 communications companies — ad agencies, public relations, events, etc.— that work for general clients, including pharmaceutical. “That resource is available to the pharmaceutical companies,” McGrath says. “There can be much more sharing of resources than is generally accepted.”

McGrath hops nimbly back and forth over the line between pure academic research that is unintelligible to the average reader and shrewd observations that are based on research but that make a lot of sense to business people who need answers to knotty problems. In her earlier book, “The Entrepreneurial Mind,” McGrath helps those in big corporations figure out how to effect change. In “Marketbusters” she shows managers, strategic planners, and entrepreneurs how to dramatically improve their results.

Readers do not need to consume “Marketbuster” from cover to cover to get ideas. It is eminently “browsable,” laced with intriguing examples from more than 100 companies, including some from Princeton.

McGrath’s definition of a “marketbusting move” is an action taken by a firm that changes the game and helps it deliver markedly superior performance. She gives five ways to do this, starting with the easy ones. “They involve changing something often quite small about your customer’s experience that sets you apart in the customer’s mind in a very definitive way,” says McGrath.

“Transform Your Customer’s Experience” is the least difficult change to make and the one she will discuss on April 19. The others are “Transform Your Offerings and Their Attributes,” “Redefine Your Profit Drivers,” “Exploit Industry Shifts,” and “Exploit Emerging Opportunities.”

Here are just a few of her 40 strategies and hundreds of examples.

Eliminate the unpleasant characteristic that everyone in your business, including your competition, has. McGrath tells how Jet Blue dealt with the concept of safety after the terrorist attacks of 2001. It was the first national carrier to install bulletproof, deadbolted cockpit doors on all its aircraft and the first to match all checked bags to passengers on board.

From the pages of U.S. 1, McGrath drew the example of the founders of Petty Road-based Canterbury Tales hunter-jumper equestrian stable, featured on the cover of U.S. 1 on March 21, 2001, and now called Silver Dollar Stables. “In 1996 they started working on their dream by focusing on the negative aspects of existing offerings,” she writes. “One negative they identified was smell. To eliminate this negative they built a facility with cross-ventilating windows in the stalls.. . . a uniquely customer-friendly environment for the horsey set. Moreover, some see the stables as a leading provider with potentially marketbusting consequences at a national level.”

Eliminate time delays in the links of the consumption chain. Again McGrath cites a U.S. 1 cover subject, Rick Weiss, of Princeton Multimedia Technologies on Witherspoon Street (U.S. 1, January 3, 2001). “Sometimes, saving time can translate into substantial cost savings,” she writes. “Tiny Princeton Multimedia Technologies Corporation develops software that helps nutritionists rapidly analyze patients’ diets and develop better ones.” This software can save money for pharmaceutical firms which spend up to $1 million per day on a clinical trial. “Because an important control variable for a clinical trial consists of monitoring patients’ nutrition intake, delays in this process can end up delaying an entire trial.”

Reconstruct the consumption chain. Find something in your customers’ experience that could be moved and improve it. Coinstar is one of McGrath’s favorite examples; it converts loose change into paper cash, thus revolutionizing the world of loose change processing. To the amazement of Europeans, who can’t understand why Americans can’t sort and roll their coins for free, Coinstar customers feed their coins into machines that sort it, count it, and issue a coupon that can be used for groceries or redeemed for cash. For this, it charges nearly nine percent. “Who would have thought there is money to be made in helping people convert their own money into money,” she asks. Last year Coinstar converted $1.5 billion into loose change.

Add a compelling parallel offering. Victoria’s Secret stores has five of the top-selling classical music CDs. “As consumers shop, the music plays, and then right there at the checkout is the CD,” she writes. “If one is shopping for a special occasion, why not pick up the music that would . .. uh . .. enhance the experience? Further, unlike a classical music expert who might venture unafraid into a music megastore, lingerie shoppers can buy albums already put together by experts, with an assurance that the music will be appropriate.”

McGrath’s father is an organic chemist and her mother a microbiologist. Both were born in northern Germany and, after World War II, met in Great Britain and emigrated to the United States, where they worked at Yale University. McGrath and her younger brother spoke only German at home. When she was eight years old, the family moved to Webster, a suburb of Rochester, New York, where her father worked for Xerox and then for Kodak.

The dinner table talk changed from discussions based on science to discourses on the internal politics of big companies. “Sometimes company politics interrupted what my father thought was the right technical solution,” she remembers. “My dad is brilliant when he is working on his own and not necessarily brilliant at managing teams.”

At Kodak McGrath’s father joined an in-company start-up pharmaceutical business. It was his daughter’s first encounter with a big company encouraging its own staff to be entrepreneurial. McGrath would later write a book about that, “The Entrepreneurial Mind,” and dedicate a chapter of “Marketbusters” on entrepreneurial activities within big companies.

Meanwhile McGrath’s mother went into small town politics. She had quit working as a microbiologist and did technical translations from home, but she also ran for school board, taking her children with her as she went from door to door to meet constituents. When her mother objected to the plans for a bandstand in front of a school, she made a scale model of what it would look like, how it would be ugly and dominate the scene. “Reporters called, and she had her picture in the paper,” says McGrath. “You could really could see the difference one person could make.”

“Both parents totally encouraged me to do whatever it was I wanted to do. That there was a world of opportunities, that I needed to be open minded to what they are.” When McGrath enrolled at Barnard, the women’s college of Columbia University (Class of 1980), she majored in political science and earned her master’s degree in public policy, later getting her MBA from Wharton.

As a young graduate she started her first business, a political consulting firm that combed voter registration lists for “frequent voters” and sold the lists to political candidates. Even then she was on the cutting edge of technology. She bought one of the first computers, a KPro, and took it to the elections office to copy the names. She also used an Apple computer to desktop publish brochures.

“The problem with that business, which we didn’t realize when we started, is that elections don’t happen every year,” she says. The four full-time employees morphed the business into a word processing shop, Unworried Words, to do 24-hour word processing and copying around college campuses. “I got an offer of $100,000 from the Small Business Association to grow the business. I spent one of the worst weekends of my life, agonizing over whether I should take the money. I decided I didn’t want to be in that line of work. I let my partner take it and found a real job in the purchasing operation for the City.”

Technology played a big role here too. McGrath helped design the first city-wide automated purchasing system, which converted the manual system to an online system. By the time she left she was running a team of 24 people. Along the way she met and married her husband, an actuary in Manhattan with Bucks Consultants, who has high profile clients like the United Nations. They have a teenaged son and daughter, both attending the Hun School.

This week McGrath is teaching in New York, a four-day Columbia Executive Education course, “Executing Breakthrough Strategy,” for mid-level executives who are responsible for strategic planning. Next month she will participate in Microsoft’s CEO design team conference, when 120 of Microsoft’s top customers share their wisdom. Also in May she teaches another Columbia course, “Leading Strategic Growth and Change,” six days for $7,750 including board and room, for upper to senior-level executives.

Whether as a consultant, a speaker, or a teacher, McGrath has learned that change within a company will not necessarily be welcome. The manager of the slow growth division will be threatened, she warns. Who has control of the sales force, who gets the best people, who gets mentioned first in the annual report — all will be contentious resource questions.

Identity problems could also cause trouble. “It’s a subtle thing. If you always made tires and have an opportunity to move into related services such rust proofing, the people who have their identity in the tire business are not going to feel you are legitimate. It will seem like a rejection of the culture, and this needs to be managed very carefully.”

External challenges include dealing with investors, who have to be taught to think about your firm in a different way. “Analysts will have to figure out a new matrix, and that is difficult; it will cost them money.” Customer acceptance can also be a problem. “Even the Ipod, the iconic product of the moment, has been around for three or four years and experienced slow growth. It didn’t burst on the scene,” says McGrath. “The more your product or service requires customer to change the less likely they are to adopt quickly.”

Of all the problems with marketbusting, McGrath says, timing is one of the hardest things to get right. “Companies get swept up in hype. Changes tend to be slow but we perceive them happening quickly. Take smart phones. Everyone has been talking about digital conversion but my guess is that the mobile phone we use three years from now will have a lot in common with what we use today. Companies tend to overreact.”

She speaks of a new state-of-the-art panty hose manufacturing plant. Shortly after construction, it had to be shut down. “Within two or three years women went from wearing panty hose two or three times a week to nearly not at all, thanks to the change in dress at work. It had a ripple effect.”

One of McGrath’s specialties is strategic planning, and she sees that market diminishing. With downsizings, strategic planning departments of major corporations have been decimated.”People are running so flat out it leaves no time to think. We find time to fix something after a crisis occurs, but no one can take time to see the bigger picture.”

McGrath says that many companies have descended to the level of amoeba management — stimulus/response, stimulus/response — all day long.

But that leaves the way open for individuals within big corporations to seize the moment and do some of their own strategic planning. “In today’s flat organizations, your own career advancement depends on what you can create — creating business and adding value versus executing tasks.” Instead of being absorbed by your E-mail, take the initiative to find your company’s marketbusting opportunity, something that if you don’t do it and another company does, you are doubly disadvantaged, something that would make the typical person go ‘Wow!’”

“The challenge is persuading a critical mass of people that some change will move the performance of the company in a positive direction or alleviate a risk. You must make it absolutely clear what benefits would be there if the recommendation is followed, or what would happen if it is not followed. Good companies go bad when they get complacent and don’t initiate change before a crisis.”

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