mckinsey quarterly q3 2012

Leading in the 21st century

2012 Number 3

2012 Number 3

This Quarter

This issue of McKinsey Quarterly examines the changing

nature of leadership. Front and center are reflections

from six diverse global leaders—Josef Ackermann, formerly

of Deutsche Bank; Carlos Ghosn of Renault-Nissan;

Moya Greene of Royal Mail Group; Ellen Kullman of DuPont;

President Shimon Peres of Israel; and Daniel Vasella

of Novartis. They provide firsthand perspectives on how

different everything feels from just a decade ago: the

environment is more uncertain, the pace quicker and unre-

lenting, the forces at work more complex, and the scrutiny

of their actions more intense. The ways in which these leaders

confront today’s challenges are fascinating, and I have

tried, along with my colleagues Andrew Grant and Michelle

Horn, to amplify and extend their thinking about the

critical skills leaders need now.

One of the primary forces buffeting leaders today is the rapid

rebalancing of global economic activity from developed to emerging

markets—a tectonic shift that presents both leadership and

organizational challenges. In a series of articles, Martin Dewhurst,

Suzanne Heywood, and several of their colleagues in McKinsey’s

organization practice first frame the tensions facing global companies

as their footprints grow in emerging markets and then present

ideas for responding by improving the effectiveness of organizational

design and talent management. In addition, IESE Business School

professor Pankaj Ghemawat, an alumnus of McKinsey’s London

office, debunks some common myths about what it means to create

good global leaders.

Uncertain times place a premium on strategic leadership as

companies seek to stay ahead of emerging opportunities, respond

quickly to unexpected threats, and make timely decisions. In

“Managing the strategy journey,” my colleagues Chris Bradley,

Lowell Bryan, and Sven Smit suggest that companies can respond

more effectively to rapid change by boosting the frequency

of their strategic dialogue while broadening the group of senior

executives engaged in it. At many companies, expanding the

strategic-leadership team means some executives will need help

honing their skills as strategists. In “Becoming more strategic:

Three tips for any executive,” Michael Birshan and Jayanti Kar

offer some advice on how to do so. Harvard Business School

professor Cynthia Montgomery also weighs in, distilling more than

three decades of experience to describe the role of strategists as

true business leaders.

It should come as no surprise that we look for strong leadership

in uncertain times. We hope that the depth and breadth of content in

this issue of the Quarterly provide food for thought and actionable

advice as the need for leaders with the right mix of skills, character,

and courage continues to increase.

Dominic BartonGlobal managing director,

McKinsey & Company

On the cover

Leading in the 21st centuryDominic Barton, Andrew Grant, and Michelle Horn

Today’s volatile environment asks tough new questions of those at the top. Learn how six global leaders are confronting the personal and professional challenges, and read further reflections from McKinsey’s managing director. Featuring commentary by:

• JosefAckermann,formerCEOofDeutsche Bank

• CarlosGhosn,CEOofRenault-Nissan

• MoyaGreene,CEOofRoyalMailGroup

• EllenKullman,CEOofDuPont

• ShimonPeres,presidentofIsrael

• DanielVasella,chairmanofNovartis

30

50 Managing the strategy journey

Regular strategic dialogue involving a broad group of senior executives can help companies adapt to the unexpected. Here’s one company’s story, and some principles for everyone.

Features

Chris Bradley, Lowell Bryan, and Sven Smit

67 How strategists lead

A Harvard Business School professor reflects on what she has learned from senior executives about the unique value that strategic leaders can bring to their companies.

Cynthia A. Montgomery

60 Becoming more strategic: Three tips for any executive

You don’t need a formal strategy role to help shape your organization’s strategic direction. Start by moving beyond frameworks and communicating in a more engaging way.

Michael Birshan and Jayanti Kar

The age of the strategist

Extra PointWhat keeps marketers up at night

Idea ExchangeReaders mix it up with authors of articles from McKinsey Quarterly2012 Number 2

Departments

McKinsey on the WebHighlights from our digital offerings

7

1328

76 The global company’s challenge

As the economic spotlight shifts to developing markets, global companies need new ways to manage their strategies, people, costs, and risks.

Features

Martin Dewhurst, Jonathan Harris, and Suzanne Heywood

81 Organizing for an emerging world

The structures, processes, and communications approaches of many far-flung businesses have been stretched to the breaking point. Here are some ideas for relieving the strains.

Toby Gibbs, Suzanne Heywood, and Leigh Weiss

Lifting the effectiveness of global organizations

92 How multinationals can attract the talent they need

Competition for talent in emerging markets is heating up. Global companies should groom local highfliers—and actively encourage more managers to leave home.

Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan

100 Developing global leaders

Companies must cultivate leaders for global markets. Dispelling five common myths about globalization is a good place to start.

Pankaj Ghemawat

Picture ThisDiverse economies, common pain points

110

Spotlight on marketingParsing the growth advantage of emerging- market companies

Get ready for China’s mainstream consumers

Why bad multiples happen to good companies

Measuring marketing’s worth

Five ‘no regrets’ moves for superior customer engagement

Yuval Atsmon, Michael Kloss, and Sven Smit

Yuval Atsmon and Max Magni

Susan Nolen Foushee, Tim Koller, and Anand Mehta

Russell Hensley, John Newman, and Matt Rogers

David Court, Jonathan Gordon, and Jesko PerreySurprisingly little of their edge is

attributable to starting from a smaller revenue base. They also seem to invest more, allocate resources more fluidly, and spot fast-growing segments.

They will dominate the market by 2020—and hold the key to growth for many companies.

A premium multiple is hard to come by—and harder to keep. Executives should worry more about improving performance.

You can’t spend wisely unless you understand marketing’s full impact. Executives should ask five questions to help maximize the bang for their bucks.

Customers are demanding very different kinds of relationships with companies. Here are some ways to jump-start customer engagement across your organization.

10

15

23

Agile operations for volatile times

Mike Doheny, Venu Nagali, and Florian Weig

By improving how risk is measured—and managed—in global operations, companies can adapt to changing conditions faster than competitors.

126

113

119

Leading Edge Applied Insight

Battery technology charges ahead

New research suggests that the price of lithium-ion batteries could fall dramatically by 2020, creating conditions for the widespread adoption of electrified vehicles in some markets.

19

Tom French, Laura LaBerge, and Paul Magill

Industry focus

Selected research and analysis from leading sectors: financial services, consumer products, and information technology.

26

McKinsey Quarterly editorsLuke Collins, Senior editorFrank Comes, Senior editorTim Dickson, Senior editor Thomas Fleming, Senior editorAllen P. Webb, Editor in chief

Contributing editorsClay ChandlerCaitlin GallagherAllan GoldBob MertzMark StaplesDennis SwinfordMonica Toriello

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77

McKinsey on the WebHighlights from our digital offerings

mckinsey.com

In this video series, McKinsey partners show that by mapping social-media initiatives to different stages of the consumer decision journey, companies can prioritize investments and provide customers with exceptional brand experiences.

The solar-power industry is suffering from oversupply, weak margins, and fading support as governments scale back subsidies. But these growing pains will pass. Over the next few years, argues this article, companies that can manage costs and innovate will probably enjoy a period of stable and expansive growth.

Todd Park explains how he has partnered technology with open-data initiatives to tap into the many talented innovators and entrepreneurs across the government.

mckinseyquarterly.com

Unleashing government’s ‘innovation mojo’: An interview with the US chief technology officer

mckinsey.com

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Making sense of social media

Readers mix it up with authors of articles from McKinsey Quarterly 2012 Number 2

Idea Exchange8

Demystifying social mediaSenior leaders must learn to use the growing marketing power of social media to shape consumer decision making in predictable ways, wrote McKinsey’s Roxane Divol, David Edelman, and Hugo Sarrazin in our previous issue. Readers on mckinseyquarterly.com challenged the authors to take their argument one step further.

Hareesh TibrewalaJoint CEO, Social Wavelength, Mumbai

“This article looks at social media from a brand communication and sales

perspective. But social media can also be used for gathering real-

time research, as well as for creating solutions in HR, product develop-

ment, and investor management. It is no longer about how your CMO

uses social media. It is about: ‘Is your organization social-media ready?’”

Move beyond marketing

The authors respond:“Great push, Hareesh. The framework to monitor, respond, amplify, and lead need not be only about marketing, or even about customer life-cycle management—although those are the uses we illustrated in this article. In addition, social media need not be limited to those outside the institution. The use of enterprise social networks such as Chatter, for example, illustrates your point—for some types of employees, a well-implemented Chatter program can reduce internal e-mail traffic by 30 percent.”

What about B2B?

Jeff MarsicoExecutive vice president, Kafafian Group, Parsippany, NJ

“Most social-media analysis focuses on business-to-consumer

initiatives. What are companies’ experiences with business-to-

business initiatives?”

The authors respond:“Part of what makes B2B unique in the context of social media is that independent B2B communities—those comprising architects, construction managers, purchasing agents, or others—allow vendors to play a larger role in providing facts, answering questions, and pointing out useful content. While this surely drives sales leads for the vendors, it also increases pressure on B2B companies to be ‘out there’ with serious listening programs that scour relevant online discussions. We see deep social activity in B2B communities, and the B2B companies we’ve studied have found a receptive audience whenever they directly engage with social media.”

The executive’s guide to better listeningIn our previous issue, McKinsey alumnus Bernard Ferrari argued that listening is a critical part of informed decision making—but that executives often fail to cultivate it as a skill. The article sparked a lively discussion on mckinseyquarterly.com about leadership, listening, and organizational culture.

Ashish ChandraGaithersburg, Maryland

“Asking questions and challenging assumptions can sometimes

create more confusion than clarity. Is there a way to find the subtle

line between too many questions and too few?”

The author responds:“Ashish, you ask an important question. To define the line between too many questions and too few, I suggest you first strive to cross it. It is better for a management team—both in their interactions among themselves and with others—to ask more questions as opposed to fewer. In most of the situations I come across, there is far too little of this type of discourse. If you and your colleagues find yourselves not getting useful insights, it might be wise to back off a bit in an effort to find the right balance—without abandoning altogether the idea of asking questions and challenging assumptions.”

9

Pearl ZhuPresident, Brobay Corporation, Sunnyvale, CA

“In addition to leaders needing to cultivate self-awareness and listening

skills, I think most organizations need a better understanding of

how different people listen. Most leaders are extroverts, but introverts

are part of these organizations as well.”

Listen to the introverts

The author responds:“How managers listen very much shapes an organization’s culture. In healthy organizations, managers make a concerted effort to get input from the less talkative among them. In meetings with multiple participants, if I detect that someone seems quiet, I specifically ask that individual to comment. Everyone should have his or her say. There is another side to that contract—no matter how introverted a person is, no one gets a pass on contributing to the problem solving at hand.”

Finding a balance

10 2012 Number 3

Leaders of multinational companies

are by now well aware of the growth poten-

tial that emerging-market consumers

represent, an opportunity that we estimate

could exceed $20 trillion annually by

the end of this decade.1 Many multina-

tional players, however, don’t seem

to be capturing that growth as well as

their emerging-market counterparts

are. That came to light last year as part

of ongoing research that began more

than five years ago and was the founda-

tion for The Granularity of Growth.2 We

examined the growth rates of companies

headquartered in developed econo-

mies and compared them with those of

companies domiciled in emerging

markets, examining performance in both

developed and emerging markets.

One striking finding was that companies

headquartered in emerging markets

grew roughly twice as fast as those domi-

ciled in developed economies—and

two and a half times as fast when both

Yuval Atsmon, Michael Kloss, and Sven Smit

Surprisingly little of their edge is attributable to starting from a smaller revenue base. They also seem to invest more, allocate resources more fluidly, and spot fast-growing segments.

Parsing the growth advantage of emerging-market companies

Leading EdgeResearch, trends, and emerging thinking

10

15

26Parsing the growth

advantage of

emerging-market

companies

Get ready for

China’s mainstream

consumers

Industry focus:

Financial services

Consumer products

Information technology

19

23

Battery technology

charges ahead

Why bad multiples

happen to

good companies

11

however, to isolate the effects of size

on the performance gap. Specifically, we

compared the growth rates of $3 billion

and $8 billion firms within the developed-

market sample and found that $3 billion

companies grew at 10.7 percent annually

over the period we studied, while $8 bil-

lion companies grew by 7.3 percent. On

this basis, the smaller size of emerging-

market businesses, on average, accounts

for 3.4 percentage points of the growth

gap, or, at most, a quarter of the overall

13-percentage-point differential (Exhibit 1).

It is impossible to definitively disaggregate

the sources of the remaining growth

differential. However, the following three

were competing in emerging markets

that represented “neutral” turf, where

neither company was headquartered.

One potential explanation was that

the smaller size of emerging-market

business segments would explain a large

part of the outperformance. In essence,

emerging-market businesses were

growing faster from a smaller base. The

smaller base point was true: the

average revenue for business units of

emerging-economy companies in

our sample, at $3 billion, was less than

half of the $8 billion size for units

from developed-economy companies.

We’ve recently done further research,

Companies in emerging markets grew faster than those based in developed economies—and size explained only a fraction of the differential.

1 Based on growth decomposition analysis of 720 companies and their geographic business segments, analyzed on multiple time frames between 1999 and 2008.

2Based on difference in growth rate between 2 sets of developed-market companies that mirror the average segment size of emerging- and developed-market companies in our sample.

Growth rate advantage for companies with emerging-market headquarters, 1999–2008,1 percentage points

Doing business on neutral turf(emerging markets where company is not headquartered)

18.1

Overall (average across all segments)

13.2

Share attributable to company size2 3.4

Companies in emerging markets grew faster than those based in developed economies—and size explained only a fraction of the differential.

Q3 2012Emerging Markets Exhibit 1 of 3

Exhibit 1

12 2012 Number 3

factors appear to be materially different

for these two classes of companies:

Higher reinvestment rates. Emerging-

market companies paid dividends at a

lower rate than developed-market

companies, returning only 39 percent

of earnings to shareholders, while

developed-market companies returned

close to 80 percent. They also rein-

vested excess cash to grow fixed assets

at a higher rate: 12 percent annually

versus 7 percent for developed-market

companies (Exhibit 2). The company

in our sample with the highest rate of

growth in fixed assets—roughly 30 per-

cent annually over the last decade—

was South Africa’s Mobile Telephone

Networks (MTN). For most of that

period, rapid asset growth accompanied

aggressive expansion in the com-

pany’s Internet and cellular services in

Africa and the Middle East. More recently,

the company has been moving into

mobile-money services, especially in

African countries that lack financial

infrastructure. This, too, has required

significant investment—for example,

$784 million on recent network expan-

sion in Ghana, and $1 billion on its

Nigerian network.

Agile asset reallocation. Additionally, we

found that on average, emerging-

market companies have been reallocating

capital toward new business opportu-

nities more dynamically than those head-

quartered in developed economies.

Companies in India, for instance, consis-

tently redeployed investments across

business units at a higher rate than US

companies.3 India’s Kesoram Indus-

tries is a notable example, shifting 80 per-

cent of its capital across business

Low dividend payouts and high fixed-asset growth suggest emerging-market companies were reinvesting more aggressively.

Companies headquartered in:

Average dividend payout rate,1 %

Average cash as % of sales1

Fixed assets,1

compound annual growth rate, %

Developed economies, n = 303 80 7

Emerging economies, n = 41 39

14

17 12

Low dividend payouts and high fixed-asset growth suggestemerging-market companies were reinvesting more aggressively.


1Based on results for companies over multiple time frames between 1999 and 2008; fixed assets include net additions to assets from inorganic activities.

Exhibit 2

13Leading Edge

units over the seven years we studied.

Up until 2005, the company focused

most of its capital expenditures on rayon

and cement. Beginning in 2007, how-

ever, it moved the majority of new invest-

ments to the tire business to capture

the double-digit growth in India’s auto-

mobile sector, which has been spurred

by improving highway infrastructure.

This type of strategic reallocation, our

research has shown, is correlated

with higher total returns to shareholders

over time.4 Potentially contributing to

agility was the fact that majority share-

holders comprised a much more

influential bloc among emerging-market

companies than at developed-economy

companies.5 Although we aren’t sug-

gesting this is the ideal governance model

under all circumstances, it does create

conditions for more effective shareholder

alignment and more rapid decisions.

Growth-oriented business models.

Emerging-market companies generally

serve the needs of fast-growing emerging

middle classes around the world with

lower-cost products. Developed-economy

companies tend to rely more on brand

recognition while targeting higher-margin

segments, which are relatively smaller

and thus less likely to move the needle on

the companies’ overall growth rates.

We found that across a number of product

segments—such as soft drinks, tele-

com services, and mobile phones—

emerging-market companies’ price points

were 10 to 60 percent below those of

developed-market counterparts. Even in

business segments such as construc-

tion equipment, emerging-market players

offered more products at lower prices.

Consistent with that growth model has

been the focus of many emerging-market

players on R&D investments aimed at

lower-cost products that fit developing-

market conditions (and sometimes

fuel “reverse innovation,” which can make

a dent in developed markets). While in

aggregate, emerging-market companies

file significantly fewer patents than their

developed-market counterparts, they

are starting to catch up (Exhibit 3), and

a few innovation leaders are emerging.

Chinese manufacturer Huawei, for exam-

ple, was among the world’s top five

companies in terms of international pat-

ents filed from 2008 to 2010. Huawei

had 51,000 R&D employees in 2010,

representing a stunning 46 percent of

its total head count, and placed them in

20 research institutes in countries

such as Germany, India, Russia, Sweden,

and the United States. Efforts such as

these could boost the intensity of global

competition.

As the locus of future growth continues

to shift to emerging markets, compa-

nies across regions should be thinking

systematically about strategies for

pursuing it. For many companies, a clear

understanding of where to place their

bets will be key, and some will need to

grapple with ways to overcome organi-

zational inertia. Business unit leaders, for

example, may resist cutting costs in

home markets in order to invest more in

emerging markets. Many companies,

meantime, still find it difficult to convince

senior executives to relocate to unfamiliar

locations and they may be reluctant

14 2012 Number 3

to move teams en masse to emerging

areas. In the quest to direct resources

to regions with the greatest growth

potential, it might be time for global

players to start thinking more like

emerging-market companies.

The authors would like to acknowledge

the contribution of Eric Matson to the

development of this article.

Yuval Atsmon is a principal in McKinsey’s

Shanghai office, Michael Kloss is a

director in the Johannesburg office, and

Sven Smit is a director in the Amsterdam

office.

Copyright © 2012 McKinsey & Company. All rights reserved. We welcome your comments on this article. Please send them to [email protected].

1 See David Court and Laxman Narasimhan, “Capturing the world’s emerging middle class,” mckinseyquarterly.com, July 2010.

2 See Mehrdad Baghai, Sven Smit, and Patrick Viguerie, The Granularity of Growth: How to Identify the Sources of Growth and Drive Enduring Company Performance, Hoboken, NJ: Wiley, 2008; and Sumit Dora, Sven Smit, and Patrick Viguerie, “Drawing a new road map for growth,” mckinseyquarterly.com, April 2011.

3 Median index of capital expenditure reallocation of companies in India was 42 percent during the period from 2003 to 2010, versus 35 percent for companies in the United States from 1998 to 2005.

Developed-market companies have filed more patents, but emerging-market companies have been gaining ground rapidly.

1Compound annual growth rate; excludes domestic markets.

Source: World Intellectual Property Organization (WIPO); McKinsey analysis

Companies headquartered in:

Average number of patents filed in 2010

Growth rate of patents filed, 2000–10, CAGR,1 %

Developed economies

In emerging economies

In developed economies

In emerging economies

In developedeconomies

Overall

9 4153

Emerging economies

22 14

5

1618

547

71

Developed-market companies have filed more patents, but emerging-market companies have been gaining ground rapidly.


Exhibit 3

4 See Stephen Hall, Dan Lovallo, and Reinier Musters, “How to put your money where your strategy is,” mckinseyquarterly.com, March 2012.

5 In emerging-market companies, the median stake held by a majority shareholder was 40 percent, while at developed-market companies it was 10 percent.

15Leading Edge

It’s no easy task to understand the evo-

lution of Chinese consumer profiles

and spending patterns—growth is rapid;

so is change in the Chinese way of

life; and vast economic and demographic

differences pervade the country. New

McKinsey research suggests that these

differences are set to become more

pronounced, creating new opportunities

and fresh challenges for the many

global companies targeting China as a

source of growth in the years ahead.

Since 2005, we have conducted annual

consumer surveys in China, interviewing

more than 60,000 people in upward

of 60 cities and tracking their incomes

and buying behavior.1 This year, we

also looked forward and tried to paint a

picture of the Chinese consumer in

2020. The most important trend over the

next decade should be dramatic

growth in the number of households that

aren’t yet affluent but are significantly

better off than the value-oriented house-

holds that currently predominate in China.

The mainstream takes chargeToday, this not-quite-affluent segment

is small, representing only 6 percent

of the urban population. A surge in house-

hold incomes, though, should propel

the group’s numbers to 51 percent of it

by 2020 (exhibit)—so large, in fact,

that these households will be in the main-

stream. To be sure, the annual incomes

of mainstream Chinese households, from

$16,000 to $34,000 (106,000 to 229,000

renminbi), will seem low by the standards

of developed countries. In the United

States, more than half the population lives

in households with incomes greater

than $34,000 a year.

But this new buying class will have

enough disposable income and the sheer

numbers—nearly 400 million people

in 167 million households—to become

the standard setters for consumers

across China. Today, about 85 percent

of the households with mainstream

incomes live in China’s 100 wealthiest

cities; in the next 300 wealthiest, only

Yuval Atsmon and Max Magni

They will dominate the market by 2020—and hold the key to growth for many companies.

Get ready for China’s mainstream consumers

16 2012 Number 3

10 percent of consumers belong to this

group. That figure should triple, to

30 percent, by 2020. Many will be able

to afford the flat-screen televisions,

family cars, small luxury items, and over-

seas travel now confined largely to

people from the wealthiest locales, such

as Shanghai and Shenzhen.

The natural evolution of China’s elderly

segment (people 55 and over) should

reinforce the growth of the mainstream

and of spending on discretionary

items such as travel, leisure, and nice

clothes. By 2020, this older group

will include a growing number of people

whose life experience coincided with

the rapid economic growth that began

with market-oriented reforms in the

late 1970s and early 1980s. People 55 to

65 years old in tier-one cities currently

allocate only 7 percent of their spending

toward apparel. But that figure rises

to 13 percent among tomorrow’s elderly

(45- to 54-year-olds)—and they don’t

look terribly different from today’s 34- to

45-year-olds, who devote 14 percent

of their spending to apparel.

The ranks of China’s mainstream consumers will grow dramatically by 2020.

Share of urban households by annual household income,1 % Projected CAGR,2 2000–20, %

Affluent (>$34,000)

Mainstream ($16,000–$34,000)

Value ($6,000– $15,999)

Poor (<$6,000)

20.4

26.6

1.2

–3.8

The ranks of China’s mainstream consumers will grow dramatically by 2020.

Q3 2012China consumer Exhibit 1 of 1

2000

10

82

2010

7

36

51

20203

1 In real 2010 dollars; in 2010, $1 = 6.73 renminbi.2CAGR = compound annual growth rate.3Forecast.

36

$147 million

$226 million

$328 million

100% =Total = 4.1

63

10 2 66

Exhibit

17Leading Edge

Marketing unchained To date, most multinational companies

operating in China have chosen one

of two marketing approaches. The first,

targeting a relatively small universe

of mainstream and affluent consumers,

allows companies to sell many of

the same products they market globally

and to deploy the same business model.

The alternative is to focus on China’s

value segment, an approach that offers

companies access to many more

buyers today: greater than 80 percent

of urban households, which will prob-

ably fall by 2020 to a still-substantial

35 or so percent, representing more than

300 million people. Focusing on the

value segment requires companies to

adapt their global business models

so they can sell cheaper products at

lower margins.

The mainstream market’s rapid growth will

give companies another possibility: to

introduce higher-quality, higher-margin

products to a vast new group of con-

sumers. The mainstream segment’s expan-

sion will fuel increases in spending

on discretionary categories such as

personal items and recreation, which

according to our research will grow

by more than 13 percent annually in

the years ahead. As the incomes of

mainstream buyers rise, they will aspire

to improve themselves by trading up

to pricier versions of items they already

have or by acquiring even more branded

products—much as consumers in the

West do.

As larger numbers of people enter the

mainstream, their purchasing behav-

ior will become even more discerning and

individualistic. These consumers will

be able to afford higher-priced goods and,

with broader buying experience and

product knowledge, will become more in

touch with their needs and the prod-

ucts that can meet them. Changes in

social norms are already leading younger,

wealthier consumers to feel greater

confidence about expressing themselves

through their purchases. Combined,

these trends should strengthen the often-

weak Chinese sense of brand loyalty.

More important, they will wean main-

The full report on which this article is based, Meet the 2020 Chinese consumer, can be found on the McKinsey Greater China Web site, at mckinseychina.com.

Changes in social norms are already leading younger, wealthier consumers to feel greater confidence about expressing themselves through their purchases.

18 2012 Number 3

Yuval Atsmon is a principal in McKinsey’s

Shanghai office, and Max Magni

is a principal in the Hong Kong office.


1 The latest survey, carried out in 2011, gauged Chinese consumers’ attitudes and spending behavior for about 60 product types and 300 brands. The respondents—representing a wide range of incomes, ages, regions, and cities—accounted for 74 percent of China’s total GDP and 47 percent of the total population.

stream buyers off of broad-based brands

and lead them toward those tailored

to their own needs and emotions. The

danger for established brands is that

younger ones could leapfrog past them

with successful emotional appeals.

Incumbents will therefore face a critical

choice between investing at scale

behind their current brands or shifting

strategies soon enough to create a

portfolio of more differentiated offerings.

Ultimately, with the world’s largest group

of mainstream consumers, China could

become the leading test bed for new mar-

keting strategies. For global companies,

the challenge will be to build and sustain

a position to capture this ferment and

growth. To do so, some organizations will

have to shift resources and capabilities

to China for sharper insights on ground-

level trends. They may also have to vest

more decision-making authority in China-

based executives, who are closer to the

action and better able to respond to swift

changes in the marketplace.

For additional thinking on the relationship between organizational issues and emerging-market strategy, see “Lifting the effectiveness of global organizations,” on page 74.

19Leading Edge

Russell Hensley, John Newman, and Matt Rogers

Battery technology charges ahead

New research suggests that the price of lithium-ion batteries could fall dramatically by 2020, creating conditions for the widespread adoption of electrified vehicles in some markets.

Most experts agree that prices for energy

storage will fall in coming years, but

disagree over how far and how quickly.

This is an important debate because

a significant drop in battery prices could

have wide-ranging effects across

industries and society itself. In particular,

cheaper batteries could enable the

broader adoption of electrified vehicles,

potentially disrupting the transpor-

tation, power, and petroleum sectors.

To inform the debate, we developed a

detailed, bottom-up “should cost” model

that estimates how automotive lithium-

ion battery prices could evolve through

2025. Our analysis indicates that the

price of a complete automotive lithium-

ion battery pack could fall from $500

to $600 per kilowatt hour (kWh) today to

about $200 per kWh by 2020 and

to about $160 per kWh by 2025.1 In the

United States, with gasoline prices

at or above $3.50 a gallon, automakers

that acquire batteries at prices below

$250 per kWh could offer electrified vehi-

cles competitively, on a total-cost-of-

ownership basis, with vehicles powered

by advanced internal-combustion

engines (exhibit).2

Of course, the pace of adoption will hinge

on a range of factors in addition to bat-

tery prices. Macroeconomic and regula-

tory conditions, the performance and

reliability of the vehicles, and customer

preferences are important. And the

rate at which automakers realize lower

battery prices could vary by three

to five years—the length of a product-

development cycle—depending on

the investment and power train–portfolio

strategies these companies pursue.

Moreover, the emergence of cheaper

batteries will probably spur further inno-

vation in other technologies, such

as internal-combustion engines. These

advances would increase the proba-

bility that the broader economics of trans-

portation will be reshaped over the

next decade—no matter which tech-

nology prevails.

The path to savingsThe model we developed, disaggregating

the price of automotive battery packs

into more than 40 underlying drivers,3

accounts for expected changes in

areas such as materials technology and

manufacturing, as well as overhead

20 2012 Number 3

costs and margins for various segments

of the value chain. This component-by-

component perspective on future battery

prices rests on a foundation of primary

research, including interviews with experts

in industry, academia, and government.

Our work suggests that three factors

could accelerate the day when electrified

vehicles become more compelling

alternatives—at least on a total-cost-of-

ownership basis—to vehicles powered

by internal-combustion engines.

• Manufacturing at scale. Scale

effects and manufacturing productivity

improvements, representing about

one-third of the potential price reduc-

tions through 2025, could mostly

be captured by 2015. Savings will come

largely from improving manufac-

turing processes, standardizing equip-

ment, and spreading fixed costs

over higher unit volumes. New plants

could therefore be significantly

more productive than those in opera-

tion before 2010–11.

The interaction of battery and fuel costs will determine the size of the market for electric vehicles.

6.00

5.50

5.00

4.50

4.00

3.50

2.50

3.00

2.00

Battery prices, $ per kilowatt hour (kWh)

Fuel price, $ per gallon

Battery-electric vehicles are competitive

2011 average

2011 average

150 200 250 300 350 400 450 500 550 600 650 700

Electrified vehicles’ projected competitiveness with internal-combustion-engine (ICE) vehicles, based on total cost of ownership1 (US example)

The interaction of battery and fuel costs will determine the size of the market for electric vehicles.

Q3 2012EV batteryExhibit 1 of 1

1Assumes 240 watt hours per mile (as may be achieved with lightweight, efficient air conditioning) compared with today’s 305–322 watt hours per mile.

2Plug-in hybrid-electric vehicles.

Source: US Energy Information Administration; McKinsey analysis

PHEVs2 are competitive

ICE vehicles are competitive

Hybrid-electric vehicles are competitive

Recent US conditions

Exhibit

21Leading Edge 21

• Lower components prices. Reductions

in materials and components prices,

representing about 25 percent of the

overall savings opportunity, could

mostly be captured by 2020. Under

competitive pressure, EBIT4 margins

could fall to half of today’s 20 to

40 percent. Component suppliers could

reduce their costs dramatically by

increasing manufacturing productivity

and moving operations to locations

where costs are optimal.

• Battery capacity-boosting

technologies. Technical advances

in cathodes, anodes, and electrolytes

could increase the capacity of

batteries by 80 to 110 percent by

2020–25. These efforts represent

40 to 45 percent of the identified price

reductions. New battery cathodes

that incorporate layered–layered struc-

tures5 eliminate dead zones and

could improve cell capacity by 40 per-

cent. Manufacturers are developing

high-capacity silicon anodes that could

increase cell capacity by 30 percent

over today’s graphite anodes. And

researchers are developing cathode–

electrolyte pairs that could increase

cell voltage to 4.2 volts, from 3.6 volts,

by 2025, thus increasing cell capac-

ities by 17 percent over present-

day standards—and potentially by

much more.

Many innovations that enable price reduc-

tions for automotive lithium-ion bat-

teries will actually be realized first in other

sectors, particularly consumer elec-

tronics, where global demand for cheaper

and better-performing batteries is intense.

Changing industry dynamics Automakers will need to balance their

evaluation of the pace and trajectory

of declining energy storage prices against

their views on how other power train

technologies will mature. Scenarios fea-

turing a relatively quick decline in bat-

tery prices and flat or rising petroleum

prices favor battery-electric-vehicle

(BEV) strategies, as the exhibit indicates.

Those anticipating slower declines

in battery prices, as well as increases in

petroleum prices, favor plug-in hybrid-

electric vehicles (PHEV) or, perhaps,

today’s hybrid-electric vehicles (HEV).

Given the length of product-development

Throughout this article, the term “electric

vehicle” actually describes the all-electric

sedan of the future. At present, vehicles using

electricity (electrified vehicles) come in

a variety of forms—battery-electric vehicles,

plug-in hybrid-electric vehicles, and hybrid-

electric vehicles.

We use the term “price” (that is, costs plus

margins) to reflect what automakers could

pay—in other words, we take into account

the margins needed to support reinvestment

economics to achieve the growth rates

assumed in our model. Exceptions include

some instances in which the term “cost”

is used colloquially (for instance, total cost of

ownership). Otherwise, the use of cost

(such as manufacturing cost) does not assume

any margins.

Electric-vehicle basics

22 2012 Number 3

cycles, automakers may hedge their risks

by investing in a range of technologies.

Other sectors could face disruptions as

well—particularly electric power and

petroleum, where the emergence of inex-

pensive energy storage could under-

mine the profitability of capital-intensive,

long-lived assets. Power companies,

for instance, could face challenges if low-

cost battery storage enables the wider

use of distributed generation or if the

adoption of electrified-vehicle charging

alters patterns of demand in some mar-

kets. Similarly, the race between elec-

trified vehicles and advanced internal-

combustion technology could accelerate

the reduction in demand for transport

fuels. Refiners of liquid fuels in developed

markets would have to rethink their prod-

uct and customer portfolios.

These, of course, are only early indicators

of possible market developments. But

given the path to substantially lower bat-

tery prices, which are now coming into

view, executives should be considering

bold actions to capitalize on one of

the biggest disruptions facing the trans-

portation, power, and petroleum sec-

tors over the next decade or more.

The authors would like to acknowledge the

significant contribution of Mark Shahinian to

the development of this article.

Russell Hensley is a principal in

McKinsey’s Detroit office; John Newman is

an associate principal in the San Francisco

office, where Matt Rogers is a director.


1 These figures represent the price per effective kWh, assuming batteries with 70 percent depth of discharge. The price of battery packs includes the price of battery cells, battery-management systems, and packaging. Unless otherwise noted, values here are reported in real dollars, indexed to 2011.

2 We used a five-year total-cost-of-ownership model that considers the prices of vehicles with advanced internal-combustion engines (in other words, vehicles that satisfy future US government fuel economy standards) and electrified vehicles adapted to make efficient use of on-board energy storage (using 150 watt hours of electricity per kilometer traveled). Note that electrified vehicles offer features, including better acceleration and noise levels, for which customers may be willing to pay more.

3 The model builds on work initially done by Argonne National Laboratory, a US Department of Energy laboratory. For more information, see www.cse.anl.gov/batpac.

4 Earnings before interest and taxes.

5 Layering manganese crystals using nanotechnology.

23Leading Edge

Susan Nolen Foushee, Tim Koller, and Anand Mehta

A premium multiple is hard to come by—and harder to keep. Executives should worry more about improving performance.

Why bad multiples happen to good companies

Earnings multiples—particularly price-

to-earnings ratios—are a common

shorthand for the way the stock market

values an enterprise. The media

often use these metrics to make quick

comparisons between companies.

Investors and analysts use them to talk

about how to value companies.

CEOs often worry that a low multiple

means that investors don’t understand

the true value of their companies.

“We have great growth plans,” these chief

executives say, or “We’re the best

company in the industry, so we should

have a substantially higher earnings

multiple.” Finance theory does suggest

that companies with higher expected

growth and returns should have higher

earnings multiples. And the theory

held true when we analyzed large samples

of companies across the US economy.

Within mature industries, however, our

analysis showed that multiples vary little

and are largely outside management’s

control. That’s probably because the rev-

enue growth of companies in the same

industry tends to converge and returns on

invested capital (ROIC) to decline

toward the cost of capital, regardless of

historical performance. Investors

therefore have difficulty, on average,

predicting which companies will

outperform their competitors.

Understanding the investor viewA closer look at the US consumer-

packaged-goods (CPG) industry bears

out these findings. For our analysis,

we used a multiple based on enterprise

value—EV/EBITA.1 It’s used by most

sophisticated investors and bankers who

compare companies with their peers

and avoids some distortions of the ubiq-

uitous P/E ratios.2

From 1965 to 2010, the difference in

EV/EBITA multiples between top-

and bottom-quartile CPG companies

was, for the most part,3 less than

four points, even though the fairly diverse

industry includes companies that

manufacture and sell everything from

household cleaners to soft drinks. When

we examined peers more closely

24 2012 Number 3

matched at a given moment, we found

even narrower ranges: in a sample

of branded-food companies, for instance,

EV/EBITA multiples ranged from

10.6 to 11.4. (Outside the CPG sector, we

see similar patterns—for example,

the range for medical-device companies

was 8.4 to 9.7.)

Again, one explanation for this narrow

range of multiples is the tendency

of investors to assume that all peers will

grow at roughly the same rate. Whether

or not executives think this idea is

reasonable, the evidence is on the side

of investors. Companies that are

now growing faster than their peers aren’t

likely to do so for the next five years.

Throughout the economy, we’ve found

that revenue growth across com-

panies generally converges (exhibit).

We also analyzed the CPG industry’s

ROIC. Here, too, finance theory predicts

that companies with higher returns on

capital than their peers should also have

higher multiples, but in fact they don’t.

As with revenue growth, investors may

assume that incremental returns on

capital across the industry will converge

or that competition will bring them

down toward the cost of capital.4 The

For most companies, sustaining stronger revenue growth than peers do is difficult.For most companies, sustaining stronger revenue growth than peers is difficult.

Q3 2012Multiples Exhibit 1 of 1

US nonfinancial companies1 grouped by comparable revenue growth at time of portfolio formation

>20%

15–20%

10–15%

5–10%

<5%

Median portfolio growth, %

Growth rate at portfolio formation

Years since inception of portfolio

1 Companies with inflation-adjusted revenue ≥$200 million that were publicly listed from 1963–2000. We divided companies into 5 portfolios based on their growth rates at the midpoint of each decade (1965, 1975, 1985, and 1995). We then aligned the portfolios chronologically from Year 0 to Year 15 and compared their median growth rates.

Source: Standard & Poor’s Capital IQ Compustat; McKinsey analysis

35

2 3 4 5 6 7 8 9 10 11 12 13 14 151

30

0

25

20

15

10

5

–5

0

Exhibit

25Leading Edge

experience of US household product

manufacturer Church & Dwight shows this

dynamic at work. Over 15 years, the

company grew, both organically and

through acquisitions, as it effected

a turnaround and reshaped its business

portfolio. Church & Dwight’s EBITA

margins grew by 13.9 percentage points,

compared with only 2.5 for the median

company in the sector. Its total returns to

shareholders beat the sector and the

S&P 500 handily—yet its earnings multiple

fell to 10, from 16. This likely happened

because its multiple had been high

at the outset, despite low earnings, sug-

gesting that investors had assumed

that earnings would gravitate toward the

sector’s median.

Managing beyond multiplesMany executives who worry that the

multiples of their companies are too low

compare them with the wrong peers.

The only relevant comparable companies,

for the purpose of multiples analysis,

are those that compete in the same mar-

kets, are subject to the same macro-

economic forces, and have similar levels

of growth and returns on capital.

Rather than fixating on multiples, exec-

utives would be better off focusing

on the levers they can influence—the

amount of value they create through

growth, margins, and capital productivity.

That approach will improve a com-

pany’s share price, even if it won’t neces-

sarily generate a higher earnings mul-

tiple, given the trends we have outlined.

Finally, executives should have realistic

expectations about how high investor

communications can raise share prices

above those of peers. Although the idea

that jawboning can help may seem

warranted—for example, in cases when

investors truly don’t seem to grasp

the value in a company’s product pipeline

or geographic-expansion plans—there are

limits to how much can be accom-

plished in this way. Eventually, investors

as a group will probably revert to their

perceptions of convergence. Not that com-

panies should abandon communica-

tions entirely; communicating with the

right investors so that they under-

stand the performance and strategies

of a company can at least keep its

share price aligned with that of its peers.

1 Enterprise value (EV) to earnings before interest, tax, and amortization (EBITA).

2 When one company is financed partly with debt and another only with equity, the one with the higher debt will have a lower P/E ratio, all else being equal, even if the two companies have the same ratio of enterprise value to earnings. For a further discussion of enterprise value multiples, see Richard Dobbs, Bill Huyett, and Tim Koller, Value: The Four Cornerstones of Corporate Finance, Hoboken, NJ: Wiley, 2010, pp. 241–44.

3 In the late 1990s, the multiples of the largest CPG companies rose during the overall valuation boom for big companies.

4 For a more complete discussion of the relationship between multiples and ROIC, see the extended version of this article, from McKinsey on Finance, Number 43, “Why bad multiples happen to good companies,” on mckinseyquarterly.com.

Susan Nolen Foushee is a consultant

in McKinsey’s New York office, where

Tim Koller is a principal and Anand

Mehta is a consultant.


26 2012 Number 32012 Number 3

Emerging markets are poised to account for

60 percent of global banking-revenue

growth over the next decade. To fully part-

icipate in this growth, banks will need

to reach micro-, small, and medium-sized

enterprises, which typically earn less

than $3.5 million in revenues, fall outside

traditional bank networks, face risks

that are difficult to analyze, and often are

under- or even unbanked.

Our research, however, suggests that

banking revenues from such businesses

could grow to $367 billion a year, from

$150 billion, as banks deploy innovative

ways of reaching them (such as mobile

Small enterprises offer large potential for global banks

Mutsa Chironga, Jacob Dahl, and Marnus Sonnekus

banking) and introduce advanced rating

techniques geared to small borrowers.

To identify the opportunities and challenges,

we clustered these markets along two

dimensions: credit bureau coverage and

bank branch density (which are proxies

for market access and the ease of assessing

risk). Four market types emerge, each

with different growth opportunities, chal-

lenges, and strategic options.

Mutsa Chironga is an associate principal

in McKinsey’s Johannesburg office,

where Jacob Dahl is a director and

Marnus Sonnekus is a consultant.

For a more complete discussion of this research, download the full report, Micro-, small and medium-sized enterprises in emerging markets: How banks can grasp a $350 billion opportunity, on mckinsey.com.

Financial services

Industry focusSelected research and analysis from leading sectors

27Leading Edge

100

90

80

70

60

50

40

30

20

10

00 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 30 31 32 33

Credit bureau coverage,1 % of adults

Bank branch coverage, number of branches per 100,000 adults

Cluster II

Cluster I

Cluster III

Cluster IV

Micro-, small, and medium-sized enterprises in emerging markets represent both opportunities and challenges for global banking.

Q3 Industry round-upMSMEExhibit 1 of 1

Circle size indicates relative volume of banks’ current revenues from small and medium-sized enterprises, 2010

Increase in share of population with access to financial services, 2006–10

<1.5%1.5–3%>3%

Cluster I: Micro-, small, and medium-sized enterprises are hard to reach and risk manage-ment is difficult. Radical solutions will be required.

Cluster II: Credit bureau coverage is good, but distribution is poor. Banks should exploit direct channels such as Internet and mobile banking.

Cluster III: Branch banking is good, but credit bureau coverage is sparse. Banks will need to innovate in risk management.

Cluster IV: Markets score well on both credit bureau and bank branch coverage.

1Some countries with smaller revenue pools are not shown here. For a full display of countries, see Micro-, small and medium-sized enterprises in emerging markets: How banks can grasp a $350 billion opportunity, available on mckinsey.com.

Source: International Monetary Fund (IMF) financial-access survey 2006–10; World Bank’s Doing Business database; McKinsey analysis

Egypt

China

India

South Africa

Vietnam

Peru

Russia

Thailand

Philippines

Indonesia

Brazil

ChileKuwait

Malaysia Argentina

Mexico

Colombia

South KoreaPoland

Czech Republic

Turkey

United Arab Emirates

Saudi Arabia

VenezuelaNigeria

Leading Edge

28 2012 Number 3

1 Centralized resources specializing in specific marketing subfunctions, such as promotions or consumer insights.

As companies venture into new global

markets for growth, they continually experi-

ment with organizational design. A peren-

nial question is how to deploy marketing

resources: whether it’s better to have “boots

on the ground” in local markets or to

centralize resources and gain the benefits

of scale. Our analysis of more than 40

of the world’s largest consumer-packaged-

goods companies indicates that those

with a locally deployed marketing function,

supported by a few larger-scale global

or regional centers of excellence,1 outper-

formed more centralized peers in both

effectiveness and efficiency (exhibit). Local

marketers benefit from a close-up view

of consumers and can respond quickly to

their changing needs and preferences.

Better performance from locally deployed marketing

Katya Fay, Carl-Martin Lindahl, and Monica Murarka

Fast-growing companies have more locally deployed marketing organizations.

% of marketing employees

Q3 2012Ind snapshot: CPG orgExhibit 1 of 1

Companies with large portion of locally deployed resources

Companies’ marketing resources

Companies with large portion of centrally deployedresources

89

Efficiency: revenue per marketing employee

Effectiveness: organic revenue growth vs underlying market growth rate

At country level

At regional or global level

11

51 49

+2.8%$14.5 million

$10.8 million

+0.6%

To be sure, a company’s organizational

design must support its specific strategy,

so locally focused marketing might not

be right for every company, and there’s no

single blueprint for marketing effective-

ness or efficiency. That said, companies

in other consumer-facing industries, such

as consumer electronics or financial

services, may want to investigate whether

these findings hold true for them.

Consumer products

Katya Fay and Monica Murarka are

consultants in McKinsey’s Chicago office,

where Carl-Martin Lindahl is a principal.

For additional research and insights, see Designing a winning consumer goods organization, on mckinsey.com.

29Leading Edge

The near ubiquity of smartphones and the

growing use of tablet devices are changing

the corporate IT landscape, as employees

increasingly use their own mobile devices

for workplace tasks. Many companies,

of course, have supported and even encour-

aged employees to work remotely and

have issued corporate smartphones and

enabled intranet access from home com-

puters. But tech-savvy workers are pushing

the boundaries. A McKinsey survey of

3,000 employees who use their own devices

for work shows they deploy them not

just for business calls and e-mail but also

to access employer IT applications

and corporate intranets and for other work-

related tasks (exhibit).

When company IT is ‘consumerized’

Lisa Ellis, Jeffrey Saret, and Peter Weed

Device owners who perform business tasks on personal tablet, size of word indicates relative %

Source: McKinsey 2012 survey on consumers’ use of mobile devices

Many employees use their personal tablet devices for a variety of business-related tasks.

Q3 2012Ind snapshot: BYODExhibit 1 of 1

This consumerization of corporate IT

seems likely to raise tensions: while many

employees gain access through password-

protected company Web sites and

applications, 50 percent of IT departments

restrict usage in some fashion, since

the devices increase security risks and

often do not mesh with the corporate

IT architecture. However, 88 percent of

employees believe the restrictions will

ease, and most prefer a single device that

integrates work and personal uses.

Information technology

Lisa Ellis is a principal in McKinsey’s

Stamford office, where Jeffrey Saret is

a consultant; Peter Weed is an associate

principal in the Boston office.


Artwork by Stefan Chinof

Six global leaders confront the personal

and professional challenges of a new era of

uncertainty.

Leading in the 21st century

Dominic Barton,

Andrew Grant, and

Michelle Horn

It is often said that the principles of great leadership are timeless, or based on immutable truths. But when we meet with the men and women who run the world’s largest organizations, what we hear with increasing frequency is how different everything feels from just a decade ago. Leaders tell us they are operating in a bewilder- ing new environment in which little is certain, the tempo is quicker, and the dynamics are more complex. They worry that it is impossible for chief executives to stay on top of all the things they need to know to do their job. Some admit they feel overwhelmed.

To understand the leadership challenge of our volatile, globalized, hyperconnected age more clearly, we recently initiated a series of structured interviews with the leaders of some of the world’s largest and most vibrant organizations. Excerpts from six of those conversations appear below. The leaders—Josef Ackermann, formerly of Deutsche Bank; Carlos Ghosn of Nissan and Renault; Moya Greene of Royal Mail Group; Ellen Kullman of DuPont; President Shimon Peres of Israel; and Daniel Vasella of Novartis—represent a diverse array of viewpoints. All are grappling with today’s environment in different ways. But the common themes that emerged from these conversations—what it means to lead in an

31

Leaders on leadership Meet the leaders

Josef Ackermann is the former CEO and chairman of the management board at Deutsche Bank. He recently retired after a decade as CEO and six years as chairman.

Carlos Ghosn is the CEO and chairman of the Renault- Nissan Alliance. He has been the CEO of Nissan since 2001 and the CEO of Renault since 2005. Together, the two companies produce more than one in ten cars sold worldwide.

32 2012 Number 3

age of upheaval, to master personal challenges, to be in the limelight continually, to make decisions under extreme uncertainty—offer a useful starting point for understanding today’s leadership landscape.

After presenting the ideas of these leaders on leadership, we offer a few additional reflections on the topic. They draw in part on the interviews, as well as on our experiences with clients; on conversations with dozens of experts in academia, government, and the private sector; and on our review of the extensive academic and popular literature on the subject. All reinforce our belief that today’s leaders face extraordinary new challenges and must learn to think differently about their role and how to fulfill it. Those who do may have an opportunity to change the world in ways their predecessors never imagined.

Daniel Vasella has been chairman of the Swiss pharmaceutical company Novartis AG since 1999. He served as the company’s CEO from 1996 to 2010.

Shimon Peres is the ninth and current president of Israel. In a political career spanning more than 65 years, he has served twice as Israel’s prime minister and has been a member of 12 cabinets.

Moya Greene was appointed CEO of the United Kingdom’s Royal Mail Group in 2010. From 2005 to 2010, she was CEO of Canada Post.

33Leading in the 21st century 33

Ellen Kullman has served as DuPont’s CEO and board chair since 2009. She joined the company from General Electric in 1988 and was ranked fourth on the Forbes 100 Most Powerful Women list in 2011.

34 2012 Number 3

Leading in an age of upheaval

A convergence of forces is reshaping the global economy: emerging regions, such as Africa, Brazil, China, and India, have over- taken economies in the West as engines of global growth; the pace of innovation is increasing exponentially; new technologies have created new industries, disrupted old ones, and spawned communication networks of astonishing speed; and global emergencies seem to erupt at ever-shorter intervals. Any one of these developments would have profound implications for organizations and the people who lead them. Taken together, these forces are creating a new context for leadership.

Josef Ackermann: We experienced a tremendous shift in

the global balance of power, which manifests itself in our business.

In the 1980s, over 80 percent of Deutsche Bank revenues were

generated in Germany. In the mid-1990s, they still accounted for

about 70 percent. Today, Germany, despite its continuing eco-

nomic strength, stands for 38 percent of global revenues. Over the

years, people in our headquarters, in Frankfurt, started comp-

laining to me, “We don’t see you much around here anymore.” Well,

there was a reason why: growth has moved elsewhere—to Asia,

Latin America, the Middle East—and this of course had consequen-

ces on the time spent in each region.

Managing risk also has become much more complex for banks.

It’s not only market risk; there is more and more political and social

risk. Increasingly, financial markets are becoming political

markets. That requires different skills—skills not all of us have

acquired at university; how to properly deal with society, for

example, a stakeholder that has immensely grown in importance

since the financial crisis.

Carlos Ghosn: I don’t think leadership shows unless it is high-

lighted by some kind of crisis. There are two kinds. There are

internal crises that arise because a company has not been managed

well. Then there are external crises, like the collapse of Lehman

Brothers or the earthquake in Japan or the flood in Thailand. In

35Leading in the 21st century 35

that case, you are managing your company, and all of a sudden

there is this thing falling on you.

Business schools may prepare people to deal with internal crises.

But I think we need to be more prepared for external crises,

where it’s not the strategy of the company that is in question; it’s the

ability of leaders to figure out how to adapt that strategy.

We are going to have a lot more of these external crises because

we are living in such a volatile world—an age where every-

thing is leveraged and technology moves so fast. You can be rocked

by something that originated completely outside your area.

I think one of the reasons Nissan has been able to cope with

external crises better than some of our competitors is that we have

a more diverse, multinational culture. We don’t just sit around

waiting for the solution to come from headquarters. We are accus-

tomed to always looking around, trying to find out who has the

best ideas. Our people in the US talk to our people in Japan on an

equal level. We have a lot more reference points.

Ellen Kullman: These days, there are things that just come

shooting across the bow—economic volatility and the impact of

natural events like the Japanese earthquake and tsunami—at

much greater frequency than we’ve ever seen. You have to be able to

react very quickly. And the world is so connected that the feed-

back loops are more intense. You’ve got population growth and the

world passing seven billion people last year, and the stresses that

causes, whether it’s feeding the world, creating enough energy, or

protecting the environment. We matched our focus, our research

and development, and our capital expenditures up against megatrends

like these over the last five years. This is the future, so we need to

understand how our science relates to it.

Shimon Peres: The last two decades have witnessed the greatest

revolution since Genesis. States have lost their importance and

strength. The old theories—from Adam Smith to Karl Marx—have

lost their value because they are based on things like land, labor,

and wealth. All of that has been replaced by science. Ideas are now

36 2012 Number 3

more important than materials. And ideas are unpredictable.

Science knows no customs, no borders. It doesn’t depend on distances

or stop at a given point.

Science creates a world where individuals can play the role of the

collective. Two boys create Google. One boy creates Facebook.

Another individual creates Apple. These gentlemen changed the

world without political parties or armies or fortunes. No one

anticipated this. And they themselves did not know what would

happen as a result of their thoughts. So we are all surprised.

It is a new world. You may have the strongest army—but it cannot

conquer ideas, it cannot conquer knowledge.

Mastering today’s personal challenges

The rigors of leadership have prompted many leaders to think of themselves as being in training, much like a professional athlete: continually striving to manage their energy and fortify their character. There is a growing recognition of the connection between physical health, emotional health, and judgment—and of how important it can be to have precise routines for diet, sleep, exercise, and staying centered.1

Moya Greene: The first criterion is: do you love it? It’s a seven-

day-a-week job. I think that’s true for anyone in these roles.

If you don’t love the company and the people—really love them—

you can’t do a job like this.

I’m pretty energetic. I start at five in the morning. I don’t even think

about it anymore; the alarm goes off and I’m up. I go for a 30-minute

run. I do weight training three mornings a week. I try to eat well,

but not too much. I’m a big walker—that’s my favorite thing. I try to

get a good walk every weekend. I go on walking vacations.

1 For more on centered leadership, see Joanna Barsh, Josephine Mogelof, and Caroline Webb, “How centered leaders achieve extraordinary results,” mckinseyquarterly.com, October 2010.

37Leading in the 21st century

I’ve usually got three or four books on the go. I’ve given up on novels.

I can’t get through them no matter how good they are; there’s

no way I’ll finish before there’s some kind of interruption. So I read

poetry now: the collected works of Ted Hughes, Emily Dickinson.

I’m working my way through Philip Larkin. You can take a Larkin

poem and read it on the bus in 15 minutes. The good ones stay

with you and will come back to you. That’s what I like about poetry:

you get a little shot of mental protein without a lot of time.

Josef Ackermann: Just to give you an idea of my calendar for

the next ten days: Berlin tomorrow, then Seoul, then Munich, then

Frankfurt, then Singapore, then the Middle East. I’m almost

constantly on a plane. With all this traveling, physical stamina has

become much more important.

I remember a time when after flying to Hong Kong you could take

a whole day off to recover. Today, right after landing you rush to

your first meeting. And maybe you already have a conference call in

the car on your way into town. You are lucky if you get enough

time to take a shower.

And of course, with all the new information technology, you are

constantly available, and the flow of information you have to manage

is huge; that has added to the pressure. You are much more exposed

to unforeseen shifts and negative surprises and you have to

make quick decisions and respond to or anticipate market movements

around the world. So you have to have a very stable psyche as well.

I see more and more people these days who just burn out.

I’m not a tech freak. I use my iPhone and send text messages, that’s

it. I still like to have paper in front of me and I do a lot in written-

memo form. I think people who constantly use their BlackBerry or

iPhone easily lose sight of the big picture.

It also helps me enormously that I can sleep anywhere, whether I

am in a car or an airplane. If you’re unable to relax quickly, I think

you can’t be a CEO for a considerable length of time. Some people

do meditation or yoga. I don’t do any such thing. I think you have it

in your DNA or you don’t.

38 2012 Number 3

Dan Vasella: I talk to my team about the seductions that come with

taking on a leadership role. There are many different forms:

sexual seduction, money, praise. You need to be aware of how you

can be seduced in order to be able to resist and keep your integrity.

Every CEO needs someone who can listen—a board member,

an adviser—someone to whom he can speak in total confidence,

to whom he can say, “I’ve had it; I’m about to resign.” Or, “I

really want to beat this guy up.” You need someone who understands

and can help you to find the balance. Leaders often forget the

importance of stable emotional relationships—especially outside

the company. It helps tremendously to manage stress. Your

partner will do a lot to help keep you in sync.

You have to be able to switch on and switch off. Are you entirely

present when you’re present? Can you be entirely away when you’re

away? The expectation is that your job is 24/7. But no one can be

the boss 24/7. You need to have a moment when you say, “I’m home

now,” and work is gone.

Carlos Ghosn: Leading takes a lot of stamina. I became CEO at

45. But I was working like a beast. You think, “So I work 15, 16 hours

a day; who cares?” But you can’t do that when you are 60 or 65.

And now companies are more global. So you have jet lag, you

are tired, the food is different. You have to be very disciplined about

schedules and about organizing everything. Physical discipline is

crucial, for food, exercise, sleep. I live like a monk—well, maybe not

a monk, but a Knight Templar. I wake at a certain hour, sleep at a

certain hour. There are certain things I won’t do past a certain time.

Ellen Kullman: I spend a lot more time on communication, more

time out at plant sites, in sales offices, with customers, in our

research laboratories. I’m bringing my board of directors to India in

a couple of weeks to help them really see the issues we’re facing.

That’s where I get my energy from. It’s contagious. I come away from

these engagements with ideas, energy, and a real sense of focus

on where we as a company need to go. That’s part of what drives me.


Shimon Peres: The mind of a leader must be free—a mind that

can dream and imagine. All new things were born in dreams.

A leader must have the courage to be a nonconformist, just like a

scientist. He must dream, even if he dreams alone or if people

laugh at him. He must not let his heart falter.

Today, the separation between generations is stronger than between

nations. Our children say, “Please don’t impose upon us your own

arrogance—the world you created, wounded by war, corrupted by

money, separated by hatred. And don’t try to build artificial walls

between us and other youngsters.” Because they were born in a new

age. For them, the modern equipment of communication is what

paper and pen are for us. They can communicate much more easily

and don’t feel all this hidden discrimination that we were born

with and find so difficult to get rid of.

The (now 24/7) public face of leadership

Nearly everyone we spoke with commented on the challenge of dealing with constant scrutiny and of acting as a connector in a complex ecosystem. As the face of the organization, leaders must be prepared to address the immediate, practical concerns of the job while also maintaining and articulating a long-term vision of the organization’s purpose and role in society—all against a backdrop of 24-hour financial coverage, ubiquitous blogs, and Twitter feeds. That means learning new modes of communicating across today’s far-flung networks and working harder to craft clear, simple messages that resonate across cultures.

Josef Ackermann: CEOs have become highly public figures.

And media scrutiny has become very personal. Particularly in our

home market, Germany, it’s always, “Ackermann says this” or

“Ackermann’s doing that”—even if I personally had nothing to do

with it. You are the institution you lead.

40 2012 Number 3

“”You’re a product. And the press will paint you as either a hero or a villain—whatever sells. If they paint you as a hero today, you should be prepared to be painted as a villain tomorrow.

After I became CEO, the former head of the Bundesbank one

day took me aside and gave me some valuable advice: “From now

on, you must remember that you are two people. You are the

person whom you and your friends know, but you are also a symbol

for something. Never confuse the two. Don’t take criticism of the

symbol as criticism of the person.” That advice has helped me a lot.

Dan Vasella: People have a legitimate demand for access to

the CEO. But you have to modulate that so you avoid overexposure.

You’re a product. And the press will paint you as either a hero

or a villain—whatever sells. If they paint you as a hero today, you

should be prepared to be painted as a villain tomorrow. Not

everything you do will work out every time, and you have to accept

that people will be unfair.

Moya Greene: A decade ago, I’d have said that it was harder

to be a public official than an executive in the private sector. But the

tables have turned. It’s tough these days to be the CEO of any

business—even a very successful one with a balanced view of the

corporation’s position in society.

My public-sector experience has helped me to understand how

easily sound policies can be derailed by small, symbolic things. It

—Dan Vasella

Leading in the 21st century 41

may not matter that the policy change you are advocating is

the product of fantastic analytics or years of brilliant stakeholder

management; the tiniest little spark can become a flash fire—

something that takes hold and transforms perceptions in ways

that don’t seem rational. If you work in the public sector, you

learn the value of developing antennae for popular perceptions

and keeping them finely tuned.

I spend about 15 percent of my time trying to help our own people

understand how good we are at what we do, which isn’t always

easy, because there is so much negativism in the press. I see good

internal communications as a way to punch through and get

our message out, to tell our people—who are the most powerful

ambassadors for our brand—“Stand up and be proud.”

Carlos Ghosn: In business, there are no more heroes. The media

has become a lot more negative about corporate leaders over

the past ten years. Small mistakes get blown up into huge things.

I cannot imagine myself today doing what I did in Japan in 1999,

when I stood up and said: “We’re going to get rid of the seniority

system. We’re going to shut down plants. We’re going to reduce

head count. We’re going to undo the keiretsu system.” I had a lot of

criticism. But there were also people who said, “Let’s give him

the benefit of the doubt.” Today, if I were to stand up and try to do

something like that, I would get massacred. I would need much

more emotional stability and certainty. Leaders of tomorrow are

going to have to be incredibly secure and sure of themselves.

Leaders of the future will also need to have a lot more empathy and

sensitivity—not just for people from their own countries but for

people from completely different countries and cultures. They are

going to need global empathy, which is a lot more difficult.

Shimon Peres: Words are the connection between leaders and

the public. They must be credible and clear and reflect a vision, not

just a position. The three greatest leaders of the 20th century

were Winston Churchill, Charles de Gaulle, and David Ben-Gurion.

Each had a brilliant mind and a brilliant pen. Their ability with

42 2012 Number 3

a pen demonstrated many things: curiosity, memory, courage.

They understood that you lead not with bayonets but with words.

A leader’s words must be precise and totally committed.

Decision making under uncertainty

A final theme is that leaders must increasingly resist the tempta- tion to cope with chaos and complexity by trusting their gut. At a time of extreme volatility, past experience is an unreliable guide to future outcomes. Leaders must create cultures of constructive skepticism and surround themselves with people who bring multiple perspectives and have no fear of challenging the boss.

Carlos Ghosn: It is a paradox: on the one hand, you have to

be more confident and secure, but on the other, you have

to be a lot more open and empathetic. You need to listen, but then

when you make a decision, that’s it—you must be a very hard

driver. Usually, these are not attributes you find in the same person.

Once you have done the analysis and made the decision, then you have

to learn to simplify the decision in communicating it to others.

Everything’s complex, but once you have decided, sometimes you

need to simplify so much it’s almost a caricature. You must say,

“Nothing matters beyond this.” You must reduce everything to zeros or

ones, black or white, go or no-go. You can’t have too much nuance.

In a crisis, you have to be able to do all of these things—listening,

deciding, and then simplifying—very quickly. That is what makes

leading in a crisis so interesting. And because you have to move so

fast, you have to empower people to make decisions themselves.

That’s the best way to restore calm.

Moya Greene: When I came here, we were running out of cash.

I was grappling with decisions that would determine whether or

not we could stay in business. But you cannot position your company


in the broader social and economic fabric of the nation if all you do

is look at the financial dimensions of performance. You have to

look at what your customers think, what your employees think, and

what you can do for your customers.

Dan Vasella: As a leader, to whom can you express your

doubts—and should you? In which situation is it appropriate and

when not? I believe that you have to be able to express doubt in

your team and with a board. If you don’t—and you pretend—then

you are playing a role, which eventually leads to an unhealthy

situation. That’s not to say you should act like you’re in a confes-

sional. At some point [in decision making], you have to take

the sword and cut through the Gordian knot and make a decision,

despite any uncertainties.

But the question is: are you being led by the context or do you lead?

Are you being led by your followers and are they choosing for

you? Or do you choose and do you lead? I think you have to be aware

of the context, and what people expect and hope for. But as a

leader, you’re not there to feed people with all the things they hope

for. Your job is to persuade people to do the things you believe

will be the right direction for the long term. People want you to lead.

And if you lead, you will hurt. You will satisfy sometimes. You

will celebrate and you will blame. That’s all part of your job.

Josef Ackermann: Problems have become so complex today

that you have to collect the expertise and opinions of a lot of people

before you can make a sound decision. Some people say, “Don’t

decide until you have to.” I have a completely different view. I hate

to be under time pressure. I think it is important that you aren’t

confronted with a situation where you haven’t heard anything on

a particular issue for half a year—and then suddenly you have

to make a quick decision on the basis of an executive summary.

I believe in personal leadership, but no CEO can do it all on his own.

You need the expertise, judgment, and buy-in of your team.

44 2012 Number 3

Preparing for a new era of leadership

It’s never been realistic to break leadership into a fixed set of essential competences, and that’s particularly the case in today’s complex, volatile environment. Still, the themes our interviewees sounded represent a rich set of opportunities for leaders to boost their effectiveness. To close, we’d like to amplify and extend those themes by emphasizing three skills that can help leaders thrive in today’s turbulent environment, which for many has prompted a reexamination of fundamental assumptions about how they do their jobs, while underscoring the importance of leading with a purpose. Resilient leaders, as Shimon Peres reminded us, are those who have “ambition for a cause greater than themselves.”

1. See with a microscope and a telescope

Over the next two decades, McKinsey research suggests, the conditions of the late 20th century—cheap capital, low interest rates, a global demographic dividend, and a gradual decline in commodity prices—will either be reversed or seesaw violently. Manag- ing the immediacy of these changes, while also staying alert for the inflection points that signal bigger, long-term “trend breaks,” will require leaders to see the world in multiple ways at once.

In different ways, many leaders have told us they’ve needed to develop a facility for viewing the world through two lenses: a telescope, to consider opportunities far into the future, and a microscope, to scrutinize challenges of the moment at intense magnification. Most of us are naturally more comfortable with one lens or the other; we are “farsighted” or “nearsighted,” but rarely both. In times of complexity, leaders must be able to see clearly through either lens and to manage the shift between the two with speed and ease.

Leaders must use the telescope to watch for long-term trends, dream big dreams, imagine where a company should be in five or ten years, and reallocate resources accordingly. The accelerating pace of technological innovation makes this aspect of a leader’s


role more important than ever. The microscope, too, affords a critical perspective. Leaders must force their organizations to challenge conventional wisdom; consider the implications of unlikely, “long-tail” scenarios; and focus on pressing issues in minute detail. As organizations grow larger and more complex, leaders must work harder to stay in touch with the front line and view themselves as “chief reality testers.”

2. Compete as a tri-sector athlete

Many of the forces buffeting leaders in the private sector—slow growth, unemployment, sovereign indebtedness—can be addressed only in concert with the public sector and are heavily influenced by the actions of groups that are neither commer- cial nor governmental entities. When governments play an ever more active role in regulating markets, and social movements can spring up in a matter of days, corporate leaders must be nimble

“tri-sector athletes,” to borrow a phrase from Harvard political scientist Joseph Nye: able to engage and collaborate across the private, public, and social sectors. Leaders of governments and nongovernmental organizations must likewise break out of their silos. Issues such as infrastructure, unemployment, education, or protecting the environment are too complex and interrelated to deal with in isolation. Many of the leaders with whom we spoke said they have learned the value of examining their business decisions in a social and political context. Even those wary of open-ended discussions about corporate social responsibility say

As organizations grow larger and more complex, leaders must work harder to stay in touch with the front line and view themselves as “chief reality testers.”

46 2012 Number 3

they find it useful to think about managing a “triple bottom line” that reflects their organizations’ performance in the public, private, and social spheres.

3. Stay grounded during a crisis

Everyone we interviewed agreed that modern leaders spend far more of their time firefighting than their predecessors did. Coping with externally generated crises, many argued, has become a key part of the modern leader’s role. In an age when crisis is the new normal, global organizations need leaders who are able to act quickly and calmly amid chaos. Many leaders highlighted the value of “stress-testing” members of the top team to gauge their ability to cope with crisis. We heard again and again that otherwise competent managers can’t always perform in moments of extraordinary pressure. The chief executive of one of the world’s largest companies marveled at how, in the face of a cash flow crisis following the collapse of Lehman Brothers, two of his top reports “shattered like glass.”

The emotional and physical stamina demanded of leaders today is extraordinary. Many of those we interviewed reserve crucial decisions for moments when they know they will be rested and free from distraction. They also talked about sequencing decisions to focus on key issues first, not after they have been depleted by lesser matters. We are intrigued by the growing body of research in psychology, sociology, and neuroscience that highlights the importance of “decision fatigue.” The implication of this research is that trying to make too many decisions at once diminishes the ability to make wise decisions at all.


If the burden of leadership in the modern age seems overwhelming, the potential benefits are overwhelming too. Large organizations— if led well—can do more for more people than they have at any other moment in history. That is the flip side of all the chaos, complexity, and pressure, and it makes leading through those challenges a noble endeavor.


Dominic Barton is McKinsey’s global managing director, Andrew Grant

is a director in McKinsey’s Singapore office, and Michelle Horn is a principal

in the Atlanta office.

Illustration by Michael Glenwood

50Managing the strategy journeyChris Bradley,

Lowell Bryan, and

Sven Smit

60Becoming more strategic: Three tips for any executiveMichael Birshan and

Jayanti Kar

67How strategists leadCynthia A.

Montgomery

49

The age of the

strategistUncertain times place a premium on

strategy—not just on having a good one

today but also on being able to adapt

it continuously. Learn from McKinsey

experts how some companies are

making their strategy-setting processes

more nimble and are getting more

senior executives to invest time and atten-

tion in the journey. Some members

of that expanded strategic-management

team may need to build new skills,

which are the topic of a second article.

Finally, Harvard Business School

professor Cynthia Montgomery describes

the breadth of leadership roles that

effective strategists can play.

50

Back in 2009, as the senior-management teams at many companies

were just beginning to emerge from the bunkers to which they’d

retreated during the peak of the financial crisis, we wrote an article1

whose premise was that pervasive, ongoing uncertainty meant

companies needed to get their senior-leadership teams working

together in a fundamentally different way. At the time, many

companies were undertaking experiments, such as shortening their

financial-planning cycles or dropping the pretense that they could

make reasonable assumptions about the future. But we suggested that

the only way to set strategy effectively during uncertain times was

to bring together, much more frequently, the members of the top team,

who were uniquely positioned to surface critical issues early, debate

their implications, and make timely decisions.

Since then, we have continued to evolve our thinking about how

companies should undertake strategy development in the 21st century.

For starters, we uncovered strong evidence that a great many com-

panies are generating strategies that, by their own admission, are sub-

standard. We reached that conclusion after surveying more than

2,000 executives about a set of ten strategic tests—timeless standards

that shed light on whether a particular strategy is likely to beat

the competition—and learning that only 35 percent of their strategies

Managing the strategy journey

Regular strategic dialogue involving a

broad group of senior executives can help

companies adapt to the unexpected.

Here’s one company’s story, and some

principles for everyone.

Chris Bradley, Lowell Bryan, and Sven Smit

1 Lowell Bryan, “Dynamic management: Better decisions in uncertain times,” mckinseyquarterly.com, December 2009.

5151

passed more than three of these.2 This unsettling statistic raised

additional questions about the effectiveness of companies’ annual

planning processes, which still were the most-cited triggers for

strategic decision making among survey respondents (Exhibit 1).

We also have been engaged with a number of companies (in industries

ranging from telecom to health care to mining to financial services)

as they’ve begun to embrace more frequent strategic dialogue involving

a focused group of senior executives. These companies, in effect,

have started on a journey—a journey to evolve how they set strategy

and make strategic decisions. Their journey isn’t complete, and

neither is ours, but we’ve learned more than enough to take stock

and pass on some ideas that we hope will be useful to leaders in

many more organizations.

In this article, we want to focus on the big things that top teams

need to do. The starting point is for them to increase the time they

spend on strategy together to at least match the time they spend

Our regular planning cycle

Issues as they arise

My company has no single trigger

Don’t know

%

What is the primary trigger, if any, for your company to make decisions about business unit strategies?

44

35

183

More frequent

About the same

Less frequent

Don’t know

Compared with five years ago, how frequent is your company’s decision making about business unit strategy?

5630

77

The annual planning process is frequently the primary trigger for strategic decision making.

Q3 2012Emerging MarketsExhibit 1 of 3

Source: Jan 2010 McKinsey survey of 2,135 executives around the world, representing the full range of industries, regions, tenures, functional specialties, and company sizes

Exhibit 1

2 For more on the tests, which we have discussed and refined with more than 1,400 senior strategists around the world in over 70 workshops, see Chris Bradley, Martin Hirt, and Sven Smit, “Have you tested your strategy lately?,” mckinseyquarterly.com, January 2011. For more on the survey results, see “Putting strategies to the test: McKinsey Global Survey results,” mckinseyquarterly.com, January 2011.

52 2012 Number 3

together on operating issues. Our experience suggests this probably

means meeting two to four hours, weekly or every two weeks,

throughout the year. Devoting regular attention to strategy in this

way makes it possible to:

• Involve the top team, and the board, in periodically revisiting

corporate aspirations and making any big, directional changes in

strategy required by changes in the global forces at work on

a company.

• Create a rigorous, ongoing management process for formulating

the specific strategic initiatives needed to close gaps between the

current trajectory of the company and its aspirations.

• Convert these initiatives into an operating reality by formally

integrating the strategic-management process with your financial-

planning processes (a change that usually requires also

moving to more continuous, rolling forecasting and budgeting

approaches).

To explain what this looks like in practice, we’ll ground our

discussion of these issues in the (disguised) experience of a global

bank that took some severe hits during the 2008 financial crisis.

Setting aspirations and direction

Like many banks, the institution had responded by writing off

most of its bad assets, raising capital, shrinking its balance sheet, and

slashing expenses. Sometime in 2010, in the midst of the annual

long-range financial-planning processes, the CEO and the board real-

ized that while the institution was recovering from its financial

losses, it didn’t know where its future growth would come from. Nor

was it clear what would be reasonable growth aspirations in an

era of regulatory constraints on the bank’s balance sheet.

The CEO decided, in concert with his board, to halt work on their

long-range plan and to launch a concentrated surge of activity

to refresh the bank’s strategy. To start the process, the CEO invited

the heads of his three major lines of business—the Global Invest-

ment Banking Group, the Global Asset Management Group, and the

Domestic Bank—to meet regularly on how they could create a

5353

strategy for growth within the constraints of the new era. Out of

necessity, given the issues being discussed, these biweekly meetings

were broadened over time to include the chief risk officer, the

chief technology officer, the CFO, and a new hire responsible for

moving the work of this new strategy council forward.

Changing the strategy of a large bank, or any large company for that

matter, is a bit like turning a supertanker. The momentum of the

institution is so strong that the ability to change direction quickly is

limited. After all, the focus of the senior- and top-management

teams of most corporations, most of the time, is on near-term operating

decisions—particularly on delivering earnings in accordance with

the financial plan. As a result, many, if not most, of the decisions that

shape the future of organizations are made unconsciously in the

flow of running the businesses or through annual planning processes

that suffer from trying to cover all businesses and issues simulta-

neously (or through one-off projects).

In a reasonable time period, though—say, 18 months to two years—it

is possible to change direction considerably. In our example bank,

a key moment came when the leadership team coalesced on a shared

understanding of the institution’s competitive position, its “business

as usual” financial trajectory, and a realistic set of future aspirations.

There was a significant gap between the bank’s trajectory and goals, and

an obvious set of “no regrets” moves to help close it. For example,

the first major strategic decision that emerged from this council was

to increase the bank’s focus on balance sheet optimization and

on risk-adjusted returns on equity. This would be critical in the new

era of balance sheet constraints, and it led to a second major deci-

sion: to ensure that the bank’s now-scarce balance sheet resources were

being devoted to serving (and earning better returns from) its best,

core customers.

After the top team committed itself to this direction, it quickly made

difficult related moves, such as exiting some noncore businesses

and reorganizing the bank along its core-customer group lines. That

meant refocusing the Global Investment Banking Group by cre-

ating a far stronger focus on cross-silo customer relationship building,

breaking up the Domestic Bank and Global Asset Management

Group, and then reformulating them as a Domestic Retail Banking

Group, a Domestic Corporate Banking Group, and a Global Private


54 2012 Number 3

Banking and Wealth Management Group. It also led to the departure

of the head of the Domestic Bank.

However, everyone also agreed that the answers to many of the spe-

cific choices the bank needed to make about where and how to

compete were not obvious and that many early ideas for expanding

the business were at best vague and at worst fraught with signifi-

cant risk. Also unclear was the right timing and sequencing for deci-

sions such as whether to scale up investments with a number of

global technology players supporting digital-banking partnerships or

whether the bank should consider an aggressive push into the

midsized-corporate and small-business markets as competitors were

pulling back to minimize risks. So the top team and the board

defined these choices as “issues to be resolved” and decided to go on

a journey to address them. In other words, the surge effort was

not the end of the process of formulating the corporate strategy but

rather had served only to jump-start it.

Installing a rigorous ongoing strategy process

Once the concentrated surge of activity was over, the senior-

management team’s focus shifted from changing direction to resolving

these outstanding issues. Addressing ambiguous critical issues

in the flow of running a large company is a challenge different from

making obvious directional changes in response to fundamental

environmental changes, such as responding to a shift in regulation.

The differences are largely in granularity and timing. In other

words, it was fine that out of the surge effort our global bank had

decided to emphasize balance sheet optimization and increase

its focus on core customers, but what did that really mean? Which

specific customers would be prioritized? What packages of ser-

vices would be offered to which customer groups, and at what target

returns? How would “deprioritized” customers be handled? What

specific investments were needed, and what returns could the bank

expect to earn on them?

These difficult questions benefited from serious top-management

attention. Their diversity and complexity also underscore

how important it is for the success of the journey model to have an

agreed-upon process for surfacing, framing, and prioritizing the

55

critical issues to be debated and addressed through the top-

management strategic forum. Even with extra commitment, the

amount of time the senior team has for meetings is quite finite.

Our experiences suggest some rules of thumb for keeping things

manageable:

• Set a practical limit to the number of issues that can be pursued

simultaneously at the corporate level; usually, given the time

needed for review and debate at the strategy forum, no more than

15 to 25 can be managed in parallel.

• Develop a pragmatic approach for prioritizing issues. One way

is to give each member of the forum a set number of slots on the

agenda to bring forth whichever issues for review he or she

thinks are most important. A few slots for critical issues—such as

how to improve capital budgeting, which affects many different

businesses—can be reserved for the corporate-wide perspective.

• Trade off quantity in favor of quality. If something deserves to

be discussed by the top-management strategy forum, the staff

work undertaken to address the issue should meet a high standard,

and any recommendation made should be “owned” by relevant

line managers.

Since some or perhaps many of a strategic-management forum’s

members won’t have significant experience as strategists, it’s worth

pausing for a moment to reflect on the skills they may need to

raise the right issues and discuss them effectively. Strategy capabilities

aren’t the focus of this article (for a related perspective, see

“Becoming more strategic: Three tips for any executive,” on page 60).

That said, after we made the unsettling discovery that a great

many leaders thought their strategies were failing the ten tests men-

tioned earlier, we began thinking about what specific things

companies must get right to build strategies sufficient to meet those

tests. We concluded that moving from idea to operating reality

requires seven distinct modes of activity, summarized in Exhibit 2.

At the bank, the entire top team, as well as the project teams its

members lead, has needed to employ many of these skills. One thing

we’ve seen is that the bank’s ability to manage uncertainty, which

cuts across at least four of the seven modes highlighted in Exhibit 2

(forecasting, searching, choosing, and evolving), is a work in


56 2012 Number 3

progress, as is the case at many firms. As a result, there is a tendency

to leap from diagnosis to commitment without doing enough work

on forecasting, exploring alternatives, and constructing packages of

choices—or, for that matter, thinking about how a strategy should

evolve as the passage of time resolves uncertainties embedded in the

assumptions underlying it. At the global bank, developing these

uncertainty-management skills is part of the journey that is still

under way.

Converting strategy into operating reality

At the end of the day, strategy is about the actions you take. There-

fore, one of the highest priorities of a top-management strategy

forum is to ensure disciplined implementation of key strategic ini-

tiatives. A big advantage of the journey approach is that the pro-

cess of debating and deciding on changes in strategic direction helps

top-management teams get behind the new direction, particularly

if the CEO holds the entire team collectively accountable for

accomplishing it.

But more is needed. In our experience, the key is to take a disciplined

approach to converting strategies into actions that can be incor-

porated in financial plans and operating budgets. One important capa-

bility that companies must develop to do this well is rolling fore-

Q3 2012Strategic journeyExhibit 2 of 3

Idea generation Development and selection Execution and refinement

Moving from ideas to execution requires seven distinct modes of activity.

• Define decisions to be considered

• Understand scope of potential solutions

• Clarify rules that will govern work

FrameWhat are our objectives and constraints?

• Understand sources of value and past performance

• Identify major changes in market and drivers

• Analyze available capabilities

BaselineWhat is the reality of our performance and capabilities?

• Identify emerging trends and implications

• Isolate critical uncertainties

• Develop realistic divergent scenarios

ForecastWhat do we expect of the future environment?

• Establish and refine option set

• Assess possible competitive responses

• Evaluate options in given scenarios

SearchWhat options do we have to create value?

• Decide where and how to compete

• Determine what, if any, hedging is needed

• Create coherent package

ChooseWhat packages of choices will de�ne our strategy?

• Develop action plans for selected options

• Reallocate resources to finance plans

• Determine how to communicate changes

• Delegate key jobs to pivotal roles

CommitHow will we deliver the changes required in the strategy?

• Execute agreed-upon action plans

• Track ongoing progress

• Determine revisions to be made

• Determine when to compete

EvolveHow will the strategy unfold and evolve over time? How do we manage strategic risks?

Exhibit 2


































57

casting and budgeting, so that needed investments can be made in a

timely manner rather than waiting for the next annual planning

cycle. In Exhibit 3, we show an example of the process of transforming

a critical question—what are the retail bank’s specific near-term

opportunities in “big data”?—from idea into operating budget.

Obviously, an initiative must be fairly advanced—and granular—to

justify putting the needed investments and expected returns into the

rolling forecast and, eventually, into the formal annual fiscal bud-

get and long-range plan. In our experience, it can easily take 18 months

or longer to go from introducing a raw idea to putting it in the bud-

get. When executives who have worthy ideas lack the budgets to pursue

them with a sufficient full-time staff, we’ve found that it’s valuable

to fund their exploration with a small “pot” of corporate seed capital,

to keep this spending separate from the operating budget (and safe

from being squeezed out by earnings pressure).

Although the journey is continuous, the board and the management

team itself need to take stock of progress periodically. Moreover,

companies still must produce and execute against annual financial

plans and budgets. For most public companies, this requirement

will mean continuing to have a formal board review of strategies, finan-

cial plans, and progress being made against them, every six months

or so. A board meeting in the spring might be dedicated to reviewing

the progress in agreed-upon changes in strategic direction; a late-fall




































































58 2012 Number 3

board meeting could be used to compare the financial plans for

the coming year (and for the next several years) with the company’s

aspirations. These formal reviews are important checkpoints.

Having said that, a journey approach should affect the way a

board works with management as well. The board should expect that

strategic issues will be raised and strategic initiatives launched

whenever top management feels that they are sufficiently important.

That launch may or may not coincide with the timing of formal

strategic reviews with the board. The board indeed should expect

that the strategy of the company will not be carved in stone but

rather that meetings of the board will be used as necessary to get it

involved in the debate on major issues and in the continual evo-


Year 1

Illustrative example of big-data initiative in a large retail bank

Year 2 Year 3

Jan MarFeb Apr May June July Aug Sep Oct Nov Dec Q1 Q2 Q1 Q2Q3 Q4

A rolling process of forecasting and budgeting transforms a critical strategic issue into an operational initiative.

A Corporate strategy forum identifies opportunities, finances with seed capital

Baseline, forecast, search, and choose

Framing

B Council steers strategy development, defines time frame, names sponsor and working team

C Forecast incorporates initiative’s projections/investments

D Budget accounts for investment required to implement initiative

E Implementation includes quarterly progress updates

A

B

C

D

E

Working team supports decisions

Long-range planning

Strategy-planning council

5-quarter rolling forecast

Annual budget

Implementation

Review budget (preliminary and final)

Deliver required Q1 investment

Commit

Plan execution (eg, milestones, investments)

Include initiative in retail bank’s 3-year plan

Exhibit 3

59

Chris Bradley is a principal in McKinsey’s Sydney office, Lowell Bryan is a director emeritus of the New York office and a senior adviser to the firm, and Sven Smit is a director in the Amsterdam office.

lution and refreshment of the enterprise’s strategic direction. Such

a dialogue should improve the board’s understanding of alternatives

to chosen strategies, and that can enhance the quality of decision

making and lend a valuable perspective down the road if things don’t

work out as planned.

The big difference between the journey model and others is that

when a company isn’t making sufficient progress, it doesn’t pretend

things are fine. Rather, these shortcomings are a call to action. If

actual results begin to diverge significantly from aspirations (and

related metrics of progress), that should trigger an in-depth review

to explore whether a midcourse correction in strategy is needed,

whether the company simply isn’t executing against its strategy, or,

as a last resort, whether it’s time to revisit its aspirations—and

make them more realistic.

As the global bank in our example entered 2012, it realized that the

aspirations it had set in early 2011 still exceeded its current tra-

jectory, particularly in the Global Investment Banking Group and the

Domestic Retail Banking Group. As a result, the global bank has

requested that not just these two groups but also the other two identify

new initiatives they could undertake to help close the gap. The jury

is still out on whether they will be able to do so or, instead, will need

to revise their aspirations downward.

To create shareholder wealth in our turbulent 21st century, companies

need to spend as much time on building and executing strategies

as on operating issues. Those that do will build institutional skills and

generate strategic ideas that evolve over time. Rather than fear

uncertainty and unfamiliarity, these strategic leaders can embrace

them, and make the passage of time an ally against competitors

that hold back when the future seems murky.


6060

We are entering the age of the strategist. As our colleagues Chris

Bradley, Lowell Bryan, and Sven Smit have explained in “Managing

the strategy journey” (see page 50), a powerful means of coping with

today’s more volatile environment is increasing the time a com

pany’s top team spends on strategy. Involving more senior leaders

in strategic dialogue makes it easier to stay ahead of emerging

opportunities, respond quickly to unexpected threats, and make

timely decisions.

This is a significant change. At a good number of companies, corporate

strategy has long represented the bland aggregation of strategies

that individual business unit heads put forward.1 At others, it’s been

the domain of a small coterie, perhaps led by a chief strategist who

is protective of his or her domain—or the exclusive territory of a CEO.

Rare is the company, though, where all members of the top team

have well-developed strategic muscles. Some executives reach

the C-suite because of functional expertise, while others, including

Becoming more strategic: Three tips for any executive

You don’t need a formal strategy role

to help shape your organization’s strategic

direction. Start by moving beyond

frameworks and communicating in a

more engaging way.

Michael Birshan and Jayanti Kar

1 In a McKinsey Global Survey of more than 2,000 global executives, only one-third agreed that their corporate strategy approach represented “a distinct exercise that specifically addresses corporate-level strategy, portfolio composition issues.” For details, see “Creating more value with corporate strategy: McKinsey Global Survey results,” mckinseyquarterly.com, January 2011.

61Becoming more strategic: Three tips for any executive

business unit heads and even some CEOs, are much stronger on

execution than on strategic thinking. In some companies, that very

issue has given rise to the position of chief strategy officer—yet

even a number of executives playing this role disclosed to us, in a series

of interviews we conducted over the past year, that they didn’t feel

adequately prepared for it.

This article draws on those interviews, as well as our own and our

colleagues’ experience working with numerous executives developing

strategies, adapting planning approaches, and running strategy

capability-building programs. We offer three tips that any executive

can act on to become more strategic. They may sound deceptively

simple, but our interviews and experience suggest that they represent

foundational skills for any strategist and that putting them into

practice requires real work. We’ve also tried, through examples, to

present practical ways of acting on each suggestion and to show

how doing so often means augmenting experience-based instincts

with fresh perspectives.

Understand what strategy really means in your industry

By the time executives have reached the upper echelons of a com-

pany, almost all of them have been exposed to a set of core strategy

frameworks, whether in an MBA or executive education program,

corporate training sessions, or on the job. Part of the power of these

frameworks is that they can be applied to any industry.

But that’s also part of the problem. General ideas can be misleading,

and as strategy becomes the domain of a broader group of execu-

tives, more will also need to learn to think strategically in their partic-

ular industry context. It is not enough to do so at the time of a

major strategy review. Because strategy is a journey, executives need

to study, understand, and internalize the economics, psychology,

and laws of their industries, so that context can guide them continually.

For example, being able to think strategically in the high-tech

industry involves a nuanced understanding of strategy topics such as

network effects, platforms, and standards. In the utilities

sector, it involves mastery of the economic implications of (and

1

62 2012 Number 3

room for strategic maneuvers afforded by) the regulatory regime.

In mining, leaders must understand the strategic implications of cost

curves, game theory, and real-options valuation; further, they

must know and be sensitive to the stakeholders in their regulatory and

societal environment, many of whom can directly influence their

opportunities to create value.

There is a rich and specialized literature on strategy in particular

industries that many executives will find helpful.2 Tailored executive

education courses can also be beneficial. We know organizations

that have taken management teams off-site to focus not on setting

strategy but on deepening their understanding of how to be a

strategist in their industries. For example, one raw-materials player

headquartered in Europe took its full leadership team to Asia

for a week, in hopes of shaking up the team’s thinking. Executives

explored in depth 20 trends that would shape the industry over

the next decade, discussing both the trends themselves and their impli-

cations for the supply of and demand for the organization’s products.3

They also looked across their industry’s full value chain to under-

stand who was making money and why—and how the trends would

change that. A number of the executives in the discussion were

surprised by how much value certain specialized intermediaries were

capturing and others by how the organization was losing out to

competitors that were financing retailers to hold their inventory. The

executive team emerged with a clearer appreciation of where the

opportunities were in its industry and with ideas to capture them.

Building this kind of industry understanding should be an ongoing

process not just because we live in an era of more dynamic

management4 but also because of the psychology of the individual.

Experience-based instincts about “the way things work” heavily

influence all of us, making it hard, without systematic effort, to take

advantage of emerging strategic insights or the real lessons of an

industry’s history. War games or other experiential exercises are one

2 See, for example, Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide to the Network Economy (Harvard Business Review Press, November 1998), which focuses on information businesses, such as software.

3 For more on trend analysis, see Peter Bisson, Elizabeth Stephenson, and S. Patrick Viguerie, “Global forces: An introduction,” mckinseyquarterly.com, June 2010; and Filipe Barbosa, Damian Hattingh, and Michael Kloss, “Applying global trends: A look at China’s auto industry,” mckinseyquarterly.com, July 2010.

4 See Lowell Bryan, “Dynamic management: Better decisions in uncertain times,” mckinseyquarterly.com, December 2010.

63Becoming more strategic: Three tips for any executive

way executives can help themselves to look at their industry

landscape from a new vantage point.5

Become expert at identifying potential disrupters

Expanding the group of executives engaged in strategic dialogue

should boost the odds of identifying company- or industry-disrupting

changes that are just over the horizon—the sorts of changes that

make or break companies.

But those insights don’t emerge magically. Consider, for example,

technological disruption. For many executives, the rise up the corpo-

rate ladder requires a deep understanding of industry-specific

technologies—those embedded in a company’s products, for example,

or in manufacturing techniques—but much less knowledge of

cross-cutting technology trends, such as the impact of sensors and

the burgeoning “Internet of Things.”6 Moreover, many senior exec-

utives are happy to delegate thinking about such technology issues to

their company’s chief information officer or chief technology officer.

Yet it’s exactly such cross-cutting trends that are most likely to upend

value chains, transform industries, and dramatically shift profit

pools and competitive advantage.

So what to do? Some executives choose to spend a week or two visiting

a technology hub, such as Silicon Valley, to meet companies,

investors, and academics. Others ask a more technophile member of

the team to keep abreast of the issues and brief them periodically.

We know a number of executives who have developed “reverse men-

toring” relationships with younger and more junior colleagues (or

even their children) that focus on technology and innovation. And of

course, there’s no substitute for seeing what your customers are

doing with technology: during several store visits, an executive at a

baby care retailer saw mothers compare the prices of products on

their smartphones at the store and leave if they could get a better deal

elsewhere. The store visits brought home how modern mothers

2

5See John Horn, “Playing war games to win,” mckinseyquarterly.com, March 2011.

6 See Michael Chui, Markus Löffler, and Roger Roberts, “The Internet of Things,” mckinseyquarterly.com, March 2010.

64 2012 Number 3

research their buying decisions, the interaction between mobile

technology and store visits, and the importance of advertising a

price-matching scheme to keep tech-savvy customers buying in stores.

Nascent competitors are another easy-to-overlook source of disruption.

Senior strategic thinkers are of course well aware of the need to

keep an eye on the competition, and many companies have roles or

teams focused on competitor intelligence. However, in our experi-

ence, often too many resources—including mental energy—are devoted

to following the activities of long-standing competitors rather

than less conventional ones that may pose an equivalent (or greater)

strategic threat.

For example, suppose you are an executive at an oil company with

assets in the UK Continental Shelf. It is natural for the competitors

that you meet regularly at board meetings of Oil & Gas UK, the regional

industry association, to be more top of mind than Asian players

that have only just acquired their first positions in the region. And

that’s exactly why many long-standing industry leaders were sur-

prised when Korea National Oil Corporation (KNOC), South Korea’s

national oil company, clinched a hostile takeover of Dana Petroleum

in late 2010, in what was to be the largest oil and gas transaction

in the United Kingdom in several years. The transaction was a har-

binger of future investments by less traditional players in the North

Sea oil and gas industry. Similar dynamics prevail in mining: developed-

world majors (such as Anglo American, BHP Billiton, and Rio Tinto),

which have long competed with one another globally, now must also

take into account players from Brazil, China, India, and elsewhere.

Picking up weak competitive signals is more often than not a result

of careful practice: a systematic updating of competitive insights

as an ongoing part of existing strategic processes.7 Executives with

diverse backgrounds can boost the quality of dialogue by contributing

to—and insisting on—issue-based competitive analyses. Who is

well-positioned to play in emerging business areas? If new technologies

are involved, what are they, and who else might master them? Who

seems poorly positioned, and what does that mean for competitive

balance in the industry or for acquisition opportunities? Focusing

competitive reviews on questions like these often yields insights of

significantly greater value than would be possible through the more

7 See Hugh Courtney, John T. Horn, and Jayanti Kar, “Getting into your competitor’s head,” mckinseyquarterly.com, February 2009.

65

common practice of periodically examining competitors’ financial

and operating results. It also helps push the senior team away from

linear, deterministic thinking and toward a more contingent,

scenario-based mind-set that’s better suited to today’s fast-moving

strategy environment.

Develop communications that can break through

A more adaptive strategy-development process places a premium on

effective communications from all the executives participating.

The strategy journey model described by our colleagues, for example,

involves meeting for two to four hours every week or two to discuss

strategy topics and requires each executive taking part to flag issues

and lead the discussion about them.

In such an environment, time spent looking for better, more inno-

vative ways to communicate strategy—to make strategic insights cut

through the day-to-day morass of information that any executive

receives—is rarely wasted. This requires discipline, as it is always

tempting to invest in further analysis so that the executive has a deeper

grasp of the issues rather than in communications design to ensure

that everybody has a good grasp of them. It also may require building

new skills; indeed, developing messages that can break through

the clutter is becoming a required skill for the modern strategist.8

Experiential exercises are one way of boosting the effectiveness of

strategic communications within a top team. A strategist we know at

a shoe manufacturer wanted to illustrate the point that many of

his company’s products were both unattractive and expensive. He

started with a two-by-two matrix. So far, so predictable. But his

matrix was built using masking tape on the floor of the executive

suite, and the shoes were real ones from the company and its com-

petitors. His colleagues had to classify the shoes right there and

then—and he made his point. Similarly, we know another strategist

3

Becoming more strategic: Three tips for any executive

8 Stanford University business school professor Chip Heath and his coauthor and brother, Dan Heath, describe such messages as “sticky ideas” that people understand and remember “and that change something about the way they think or act.” Sticky ideas have at least some of these six characteristics: simplicity, unexpectedness, concreteness, credibility, emotion, and the ability to tell a story. For more, see Lenny T. Mendonca and Matt Miller, “Crafting a message that sticks: An interview with Chip Heath,” mckinseyquarterly.com, November 2007; and Chip Heath and Dan Heath, Made to Stick: Why Some Ideas Survive and Others Die, New York, NY: Random House, January 2007.

66 2012 Number 3

who spent an afternoon cutting the labels off samples of men’s boxer

shorts. She wanted the board members to put them in order of

price so they could see how their perceptions of quality were driven

by brands and not manufacturing standards.

We would add that as strategy becomes more of a real-time journey,

it’s important to figure out ways to support discussions with data

that’s engaging and easy to manipulate. To the extent possible, exec-

utives need to be able to push on data and its implications “in the

moment,” instead of raising questions and then waiting two weeks

for a team of analysts to come back with answers. Ideally, in fact,

anyone in a room could drill into thoughtfully visualized data with

the flick of a finger on a tablet computer. The proliferation of tac-

tile mobile devices and new software tools that help make spreadsheets

more visual and interactive should facilitate more dynamic, data-

driven dialogue.

Executives hoping to become more strategic should look for oppor-

tunities to innovate in their communication of data, while prodding

their organizations to institutionalize such capabilities. Break-

throughs abound—look no further than the interactive visualizations

in the New York Times in the United States or the Guardian in

the United Kingdom; the 2006 TED.com video “Hans Rosling shows

the best stats you’ve ever seen”; Generation Grownup’s interactive

tool Name Voyager, which examines the popularity of baby names

over time (see babynamewizard.com/voyager); or Kiva.org’s

Intercontinental Ballistic Microfinance visualization of loan-funding

and repayment flows. But few companies have kept up.

It’s not enough to increase the number and diversity of executives

engaged in setting strategy. Many of those leaders also must enhance

their own strategic capabilities. We hope these three tips help them

get started.

The authors wish to thank Emma Parry for her contribution to the development of this article.

Michael Birshan is a principal in McKinsey’s London office, where Jayanti Kar is a consultant.

6767

Seven years ago, I changed the focus of my strategy teaching

at the Harvard Business School. After instructing MBAs for most of

the previous quarter-century, I began teaching the accomplished

executives and entrepreneurs who participate in Harvard’s flagship

programs for business owners and leaders.

Shifting the center of my teaching to executive education changed

the way I teach and write about strategy. I’ve been struck by how often

executives, even experienced ones, get tripped up: they become

so interested in the potential of new ventures, for example, that they

underestimate harsh competitive realities or overlook how inter-

related strategy and execution are. I’ve also learned, in conversations

between class sessions (as well as in my work as a board director

and corporate adviser) about the limits of analysis, the importance of

being ready to reinvent a business, and the ongoing responsibility

of leading strategy.

All of this learning speaks to the role of the strategist—as a meaning

maker for companies, as a voice of reason, and as an operator. The

richness of these roles, and their deep interconnections, underscore

the fact that strategy is much more than a detached analytical exer-

cise. Analysis has merit, to be sure, but it will never make strategy

the vibrant core that animates everything a company is and does.

How strategists lead

A Harvard Business School professor

reflects on what she has learned

from senior executives about the unique

value that strategic leaders can bring

to their companies.

Cynthia A. Montgomery

68 2012 Number 3

The strategist as meaning maker

I’ve taken to asking executives to list three words that come to mind

when they hear the word strategy. Collectively, they have pro-

duced 109 words, frequently giving top billing to plan, direction, and

competitive advantage. In more than 2,000 responses, only 2 had

anything to do with people: one said leadership, another visionary.

No one has ever mentioned strategist.

Downplaying the link between a leader and a strategy, or failing to

recognize it at all, is a dangerous oversight that I tried to start

remedying in a Harvard Business Review article four years ago and

in my new book, The Strategist, whose thinking this article extends.1

After all, defining what an organization will be, and why and to

whom that will matter, is at the heart of a leader’s role. Those who hope

to sustain a strategic perspective must be ready to confront this

basic challenge. It is perhaps easiest to see in single-business compa-

nies serving well-defined markets and building business models

suited to particular competitive contexts. I know from experience,

though, that the challenge is equally relevant at the top of diversified

multinationals.

What is it, after all, that makes the whole of a company greater than

the sum of its parts—and how do its systems and processes add

value to the businesses within the fold? Nobel laureate Ronald Coase

posed the problem this way: “The question which arises is whether

it is possible to study the forces which determine the size of the firm.

Why does the entrepreneur not organize one less transaction or

one more?”2 These are largely the same questions: are the extra layers

what justifies the existence of this complex firm? If so, why can’t

the market take care of such transactions on its own? If there’s more

to a company’s story, what is it, really?

In the last three decades, as strategy has moved to become a science,

we have allowed these fundamental questions to slip away. We need

to bring them back. It is the leader—the strategist as meaning maker—

who must make the vital choices that determine a company’s very

identity, who says, “This is our purpose, not that. This is who we will

1 For more, see Cynthia Montgomery, The Strategist: Be the Leader Your Business Needs, New York, NY: HarperCollins, 2012; and “Putting leadership back into strategy,” Harvard Business Review, January 2008, Volume 86, Number 1, pp. 54–60.

2 R. H. Coase, “The nature of the firm,” Economica, 1937, Volume 4, Number 16, pp. 386–405.

69

be. This is why our customers and clients will prefer a world with us

rather than without us.” Others, inside and outside a company,

will contribute in meaningful ways, but in the end it is the leader who

bears responsibility for the choices that are made and indeed for

the fact that choices are made at all.

The strategist as voice of reason

Bold, visionary leaders who have the confidence to take their com-

panies in exciting new directions are widely admired—and confidence

is a key part of strategy and leadership. But confidence can balloon

into overconfidence, which seems to come naturally to many successful

entrepreneurs and senior managers who see themselves as action-

oriented problem solvers.3

I see overconfidence in senior executives in class when I ask them

to weigh the pros and cons of entering the furniture-manufacturing

business. Over the years, a number of highly regarded, well-run

companies—including Beatrice Foods, Burlington Industries, Champion,

Consolidated Foods, General Housewares, Gulf + Western, Intermark,

Ludlow, Masco, Mead, and Scott Paper—have tried to find fortune

in the business, which traditionally has been characterized by high

transportation costs, low productivity, eroding prices, slow growth,

and low returns. It’s also been highly fragmented. In the mid-1980s,

for example, more than 2,500 manufacturers competed, with

80 percent of sales coming from the biggest 400 of them. Substitutes

abound, and there is a lot of competition for the customer’s dollar.

Competitors quickly knock off innovations and new designs, and the

industry is riddled with inefficiencies, extreme product variety,

and long lead times that frustrate customers. Consumer research shows

that many adults can’t name a single furniture brand. The industry

does little advertising.

By at least a two-to-one margin, the senior executives in my classes

typically are energized, not intimidated, by these challenges. Most

argue, in effect, that where there’s challenge there’s opportunity. If it

were an easy business, they say, someone else would already have


3 For more on managerial overconfidence, see John T. Horn, Dan Lovallo, and S. Patrick Viguerie, “Beating the odds in market entry,” mckinseyquarterly.com, November 2005; as well as Dan Lovallo and Olivier Sibony, “The case for behavioral strategy,” mckinseyquarterly.com, March 2010, and “Distortions and deceptions in strategic decisions,” mckinseyquarterly.com, February 2006.

70 2012 Number 3

seized the opportunity; this is a chance to bring money, sophisti-

cation, and discipline to a fragmented, unsophisticated, and chaotic

industry. As the list above shows, my students are far from alone:

with great expectations and high hopes of success, a number of well-

managed companies over the years have jumped in with the inten-

tion of reshaping the industry through the infusion of professional

management.

All those companies, though, have since left the business—providing

an important reminder that the competitive forces at work in your

industry determine some (and perhaps much) of your company’s per-

formance. These competitive forces are beyond the control of most

individual companies and their managers. They’re what you inherit, a

reality you have to deal with. It’s not that a company can never

change them, but in most cases that’s very difficult to do. The strategist

must understand such forces, how they affect the playing field

where competition takes place, and the likelihood that his or her plan

has what it takes to flourish in those circumstances. Crucial, of course,

is having a difference that matters in the industry. In furniture—

an industry ruled more by fashion than function—it’s extremely chal-

lenging to uncover an advantage strong enough to counter the

gravitational pull of the industry’s unattractive competitive forces.

IKEA did it, but not by disregarding industry forces; rather, the

company created a new niche for itself and brought a new economic

model to the furniture industry.

A leader must serve as a voice of reason when a bold strategy to reshape

an industry’s forces actually reflects indifference to them. Time

and again, I’ve seen division heads, group heads, and even chief exec-

utives dutifully acknowledge competitive forces, make a few high-

level comments, and then quickly move on to lay out their plans—

without ever squarely confronting the implications of the forces they’ve

just noted. Strategic planning has become more of a “check the box”

exercise than a brutally frank and open confrontation of the facts.

The strategist as operator

A great strategy, in short, is not a dream or a lofty idea, but rather

the bridge between the economics of a market, the ideas at the core

of a business, and action. To be sound, that bridge must rest on a

foundation of clarity and realism, and it also needs a real operating

71

sensibility. Every year, early in the term, someone in class always

wants to engage the group in a discussion about what’s more important:

strategy or execution. In my view, this is a false dichotomy and a

wrongheaded debate that the students themselves have to resolve, and

I let them have a go at it.

I always bring that discussion up again at the end of the course,

when we talk about Domenico De Sole’s tenure at Italian fashion emi-

nence Gucci Group.4 De Sole, a tax attorney, was tapped for the

company’s top job in 1995, following years of plummeting sales and

mounting losses in the aftermath of unbridled licensing that had

plastered Gucci’s name and distinctive red-and-green logo on everything

from sneakers to packs of playing cards to whiskey—in fact, on

22,000 different products—making Gucci a “cheapened and over-

exposed brand.”

De Sole started by summoning every Gucci manager worldwide to a

meeting in Florence. Instead of telling managers what he thought

Gucci should be, De Sole asked them to look closely at the business

and tell him what was selling and what wasn’t. He wanted to tackle

the question “not by philosophy, but by data”—bringing strategy in

line with experience rather than relying on intuition. The data were

eye opening. Some of Gucci’s greatest recent successes had come from

its few trendier, seasonal fashion items, and the traditional customer—

the woman who cherished style, not fashion, and who wanted a clas-

sic item she would buy once and keep for a lifetime—had not come

back to Gucci.

De Sole and his team, especially lead designer Tom Ford, weighed the

evidence and concluded that they would follow the data and posi-

tion the company in the upper middle of the designer market: luxury

aimed at the masses. To complement its leather goods, Ford designed

original, trendy—and, above all, exciting—ready-to-wear clothing

each year, not as the company’s mainstay, but as its draw. The increased

focus on fashion would help the world forget all those counterfeit

bags and the Gucci toilet paper. It would propel the company toward

a new brand identity, generating the kind of excitement that would

bring new customers into Gucci stores, where they would also buy high-

margin handbags and accessories. To support the new fashion and

brand strategies, De Sole and his team doubled advertising spending,


4 For more detail on the Gucci case, see Mary Kwak and David Yoffie, “Gucci Group N.V. (A),” Harvard Business Publishing, Boston, May 10, 2001.

72 2012 Number 3

modernized stores, and upgraded customer support. Unseen but

no less important to the strategy’s success was Gucci’s supply chain.

De Sole personally drove the back roads of Tuscany to pick the

best 25 suppliers, and the company provided them with financial and

technical support while simultaneously boosting the efficiency of

its logistics. Costs fell and flexibility rose.

In effect, everything De Sole and Ford did—in design, product lineup,

pricing, marketing, distribution, manufacturing, and logistics, not

to mention organizational culture and management—was tightly coor-

dinated, internally consistent, and interlocking. This was a system

of resources and activities that worked together and reinforced each

other, all aimed at producing products that were fashion forward,

high quality, and good value.

It is easy to see the beauty of such a system of value creation once

it’s constructed, but constructing it isn’t often an easy or a beautiful

process. The decisions embedded in such systems are often gutsy

choices. For every moving part in the Gucci universe, De Sole faced

a strictly binary decision: either it advanced the cause of fashion-

forwardness, high quality, and good value—or it did not and was

rebuilt. Strategists call such choices identity-conferring commitments.

They are central to what an organization is or wants to be and

reflect what it stands for.

When I ask executives at the end of this class, “Where does strategy

end and execution begin?” there isn’t a clear answer—and that’s

as it should be. What could be more desirable than a well-conceived

strategy that flows without a ripple into execution? Yet I know from

working with thousands of organizations just how rare it is to find a

carefully honed system that really delivers. You and every leader of

a company must ask yourself whether you have one—and if you don’t,

take the responsibility to build it. The only way a company will deliver

on its promises, in short, is if its strategists can think like operators.

A never-ending task

Achieving and maintaining strategic momentum is a challenge that

confronts an organization and its leader every day of their entwined

existence. It’s a challenge that involves multiple choices over time—

and, on occasion, one or two big choices. Very rare is the leader who

73

will not, at some point in his or her career, have to overhaul a com-

pany’s strategy in perhaps dramatic ways. Sometimes, facing that inev-

itability brings moments of epiphany: “eureka” flashes of insight

that ignite dazzling new ways of thinking about an enterprise, its pur-

pose, its potential. I have witnessed some of these moments as

managers reconceptualized what their organizations do and are capable

of doing. These episodes are inspiring—and can become catalytic.

At other times, facing an overhaul can be wrenching, particularly if a

company has a set of complex businesses that need to be taken

apart or a purpose that has run its course. More than one CEO—men

and women coming to grips with what their organizations are and

what they want them to become—has described this challenge as an

intense personal struggle, often the toughest thing they’ve done.

Yet those same people often say that the experience was one of the

most rewarding of their whole lives. It can be profoundly liberating as

a kind of corporate rebirth or creation. One CEO described his own

experience: “I love our business, our people, the challenges, the fact

that other people get deep benefits from what we sell,” he said.

“Even so, in the coming years I can see that we will need to go in a new

direction, and that will mean selling off parts of the business. The

market has gotten too competitive, and we don’t make the margins we

used to.” He winced as he admitted this. Then he lowered his voice

and added something surprising. “At a fundamental level, though, it’s

changes like this that keep us fresh and keep me going. While it can

be painful when it happens, in the long run I wouldn’t want to lead a

company that didn’t reinvent itself.”


Elements of this article

were adapted from

Cynthia Montgomery’s

The Strategist: Be the

Leader Your Business

Needs (New York, NY:

HarperCollins, 2012).

Cynthia Montgomery is the Timken Professor of Business Administration at Harvard Business School, where she’s been on the faculty for 20 years, and past chair of the school’s Strategy Unit.


Illustrations by Francesco Bongiorni

Lifting the effectiveness of

global organizations

As economic activity shifts from the developed world

to fast-growing markets in Africa, Asia, and Latin America,

the organizations of international companies are striv-

ing to keep pace. Being global increasingly involves fresh

strategic challenges, new people headaches, unique

complexity costs, and risks on an unfamiliar scale. In this

package, based on surveys, interviews, and deep experi-

ence with executives at leading global businesses, McKinsey

authors discuss new ways to manage the tensions—

with a particular focus on organizational design and talent

management—while a leading academic exposes key

misconceptions about global-leadership development.

76The global company’s challengeMartin Dewhurst,

Jonathan Harris,

and Suzanne

Heywood

81Organizing for an emerging worldToby Gibbs,

Suzanne

Heywood, and

Leigh Weiss

92How multinationals can attract the talent they need Martin Dewhurst,

Matthew Pettigrew,

and Ramesh

Srinivasan

100Developing global leadersPankaj

Ghemawat

76

Managing global organizations has been a business chal-

lenge for centuries. But the nature of the task is changing with the

accelerating shift of economic activity from Europe and North

America to markets in Africa, Asia, and Latin America. McKinsey

Global Institute research suggests that 400 midsize emerging-

market cities, many unfamiliar in the West, will generate nearly

40 percent of global growth over the next 15 years. The International

Monetary Fund confirms that the ten fastest-growing economies

during the years ahead will all be in emerging markets. Against this

backdrop, continuing advances in information and communi-

cations technology have made possible new forms of international

coordination within global companies and potential new ways

for them to flourish in these fast-growing markets.

There are individual success stories. IBM expects to earn 30 percent

of its revenues in emerging markets by 2015, up from 17 percent

in 2009. At Unilever, emerging markets make up 56 percent of the

business already. And Aditya Birla Group, a multinational con-

glomerate based in India, now has operations in 40 countries and

earns more than half its revenue outside India.

But, overall, global organizations are struggling to adapt. A year ago,

we uncovered a “globalization penalty”: high-performing global

companies consistently scored lower than more locally focused ones

The global company’s challenge

As the economic spotlight shifts to

developing markets, global companies

need new ways to manage their

strategies, people, costs, and risks.

Martin Dewhurst, Jonathan Harris,

and Suzanne Heywood

7777

on several dimensions of organizational health.1 For example, the

former were less effective at establishing a shared vision, encouraging

innovation, executing “on the ground,” and building relationships

with governments and business partners. Equally arresting was evi-

dence from colleagues in McKinsey’s strategy practice showing

that global companies headquartered in emerging markets have been

growing faster than counterparts headquartered in developed

ones, even when both are operating on “neutral turf”: emerging mar-

kets where neither is based (see “Parsing the growth advantage

of emerging-market companies,” on page 10).

Over the past year, we’ve tried to understand more clearly the chal-

lenges facing global organizations, as well as approaches that

are helping some to thrive. Our work has included surveys and struc-

tured interviews with more than 300 executives at 17 of the world’s

leading global organizations spanning a diverse range of sectors and

geographies, a broader survey of more than 4,600 executives,

and time spent working directly with the leaders of dozens of global

organizations trying to address these issues.2

Clearly, no single organizational model is best for all companies hand-

ling the realities of rapid growth in emerging markets and round-

the-clock global communications. That’s partly because the opportu-

nities and challenges facing companies vary, depending on their

business models. R&D-intensive companies, for example, are working

to staff new research centers in the emerging world and to inte-

grate them with existing operations. Firms focused on extracting

natural resources are adapting to regulatory regimes that are

evolving rapidly and sometimes becoming more interventionist.

Consumer-oriented firms are facing sometimes-conflicting imper-

atives to tailor their businesses to local needs while maintaining con-

sistent global processes.

Another reason no single model fits all global companies is that their

individual histories are so different. Those that have grown organ-

ically often operate relatively consistently across countries but find it

hard to adjust their products and services to local needs, given

their fairly standardized business models. Companies that have mainly

grown through M&A, in contrast, may find it easier to tailor

1 See Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “Understanding your ‘globalization penalty’,” mckinseyquarterly.com, July 2011.

2 See “Managing at global scale: McKinsey Global Survey results,” mckinseyquarterly.com, June 2012.

78 2012 Number 3

operations to local markets but harder to integrate their various

parts so they can achieve the potential of scale and scope and align a

dispersed workforce behind a single set of strategies and values.

Although individual companies are necessarily responding differently

to the new opportunities abroad, our work suggests that most face

a common set of four tensions in managing strategy, people, costs, and

risk on a global scale. The importance of each of these four tensions

will vary from company to company, depending on its particular oper-

ating model, history, and global footprint. (For more on the impli-

cations of these uneven globalization efforts, see “Developing global

leaders,” on page 100.) Taking stock of the status of all four tensions

can be a useful starting point for a senior-management team aiming

to boost an organization’s global performance.

Strategic confidence and stretch

Being global brings clear strategic benefits: the ability to access new

customer markets, new suppliers, and new partners. These immediate

benefits can also create secondary ones. Building a customer base

in a new market, for example, provides familiarity and relationships

that may enable additional investments—say, in a research center.

But being global also brings strategic challenges. Many companies

find it increasingly difficult to be locally flexible and adaptable

as they broaden their global footprint. In particular, processes for

developing strategy and allocating resources can struggle to cope

with the increasing diversity of markets, customers, and channels.

These issues were clear in our research: fewer than 40 percent

of the 300 senior executives at global companies we interviewed and

surveyed believed that their employers were better than local

competitors at understanding the operating environment and cus-

tomers’ needs. And barely half of the respondents to our broader

survey thought that their companies communicated strategy clearly

to the workforce in all markets where they operate.

People as an asset and a challenge

Many of the executives we interviewed believed strongly that the

vast reserves of skills, knowledge, and experience within the global

7979

workforce of their companies represented an invaluable asset. But

making the most of that asset is difficult: for example, few surveyed

executives felt that their companies were good at transferring les-

sons learned in one emerging market to another.

At the same time, many companies find deploying and developing

talent in emerging markets to be a major challenge. Barely half

the executives at the 17 global companies we studied in depth thought

they were effective at tailoring recruiting, retention, training,

and development processes for different geographies. An emerging-

market leader in one global company told us that “our current pro-

cess favors candidates who have been to a US school, understand the

US culture, and can conduct themselves effectively on a call with

head office in the middle of the night. The process is not designed to

select for people who understand our market.”

One of our recent surveys showed how hard it is to develop talent for

emerging markets at a pace that matches their expected growth.

Executives reported that just 2 percent of their top 200 employees

were located in Asian emerging markets that would, in the years

ahead, account for more than one-third of total sales. Complicating

matters is the fact that local highfliers in some key markets

increasingly prefer to work for local employers (see “How multi-

nationals can attract the talent they need,” on page 92). Global

companies are conscious of this change. “Local competitors’ brands

are now stronger, and they can offer more senior roles in the

home market,” noted one multinational executive we interviewed.

Scale and scope benefits, complexity costs

Large global companies still enjoy economic leverage from being able

to invest in shared infrastructure ranging from R&D centers to

procurement functions. Economies of scale in shared services also

are significant, though no longer uniquely available to global

companies, as even very local ones can outsource business services

and manufacturing and avail themselves of cloud-based computing.

But as global companies grow bigger and more diverse, complexity

costs inevitably rise. Efforts to standardize the common elements

of essential functions, such as sales or legal services, can clash with

local needs. And emerging markets complicate matters, as

The global company’s challenge

80 2012 Number 3

operations located there sometimes chafe at the costs they must bear

as part of a group centered in the developed world: their share of

the expense of distant (and perhaps not visibly helpful) corporate and

regional centers, the cost of complying with global standards and

of coordinating managers across far-flung geographies, and the loss

of market agility imposed by adhering to rigid global processes.

Risk diversification and the loss of familiarity

A global company benefits from a geographically diverse business

portfolio that provides a natural hedge against the volatility of local

growth, country risk, and currency risk. But pursuing so many

emerging-market opportunities is taking global companies deep into

areas with unfamiliar risks that many find difficult to evaluate.

Less than half of the respondents to our 2011 survey thought these

organizations had the right risk-management infrastructure and

skills to support the global scale and diversity of their operations.

Furthermore, globally standard, exhaustive risk-management

processes may not be the best way to deal with risk in markets where

global organizations must move fast to lock in early opportunities.

One executive in an emerging-market outpost of a global company

told us “a mind-set that ‘this is the way that we do things around

here’ is very strongly embedded in our risk process. When combined

with the fact that the organization does not fully understand

emerging markets, it means that our risk process might reject

opportunities that [the global] CEO would approve.”

Understanding these tensions is just a starting point. Capturing the

benefits and mitigating the challenges associated with each

will require global companies to explore new ways of organizing and

operating. The following two articles explore some of these new

approaches—to organizational design and to talent management in

global corporations, respectively.

The authors would like to acknowledge the contributions of Kate Aquila and Roni Katz to the development of this article.

Martin Dewhurst is a director in McKinsey’s London office, where Suzanne

Heywood is a principal; Jon Harris is a director in the New York office.

81

Organizing for an emerging worldThe structures, processes, and communications approaches of

many far-flung businesses have been stretched to the breaking point.

Here are some ideas for relieving the strains.

The problem

Rising complexity is making

global organizations more difficult

to manage.

Why it matters

Organizational friction can hamper

growth, especially in emerging

markets; undermine strategic decision

making; and make it harder to

manage costs, people, and risks.

Toby Gibbs, Suzanne Heywood, and Leigh Weiss

What to do about it

Revisit the case for regional orga-

nizational layers and consider

grouping activities according to

nongeographic criteria, such

as growth goals.

Streamline processes without

standardizing more than is

necessary, force-fitting rigid

technology solutions, or creating

overly detailed rules.

Consider moving the corporate

center (or creating a “virtual head-

quarters”) closer to high-growth

markets, and ensure a constant flow

of talent between the business

units and the center.

Find out how and why people share

information, and then decide which

connections to drop, keep, or add.

82 2012 Number 3

As global organizations expand, they get more complicated

and difficult to manage. For evidence, look no further than the inter-

views and surveys we recently conducted with 300 executives at

17 major global companies. Fewer than half of the respondents believed

that their organizations’ structure created clear accountabilities,

and many suggested that globalization brings, as one put it, “cumula-

tive degrees of complexity.”

However, our research and experience in the field suggest that even

complex organizations can be improved to give employees around

the world the mix of control, support, and autonomy they need to do

their jobs well. What’s more, redesigning an organization to suit

its changing scale and scope can do much to address the challenges

of managing strategy, costs, people, and risk on a global basis.

Our goal in this article isn’t to provide a definitive blueprint for the

global organization of the future (there’s no such thing), but rather

to offer multinationals fresh ideas on the critical organizational-

design questions facing them today: how to adjust structure to sup-

port growth in emerging markets, how to find a productive balance

between standardized global and diverse local processes, where

to locate the corporate center and what to do there, and how to deploy

knowledge and skills effectively around the world by getting the

right people communicating with each other—and no one else.

Rethinking boundaries

Global organizations have long sought to realize scale benefits by

centralizing activities that are similar across locations and tailoring

to local markets any tasks that need to differ from country to coun-

try. Today, as more and more companies shift their weight to emerging

markets, boundaries between those activities are changing for

many organizations.

At some point, they will need to adapt their structures and processes

to acknowledge this boundary shift, whose nature will vary across

and within companies, depending on their industry, focus, and history.

In one recent case, an international publishing company created

global “verticals” comprising people who work on content and delivery

technology for similar publications around the world. But it was

83Organizing for an emerging world

careful to leave all sales and marketing operations in the hands of

local country managers, because in publishing these activities

can succeed only if they are tailored to local markets. In the case of

IBM in Asia, the company has globalized its business services but

left the businesses local.

IBM’s experience in AsiaIBM’s vice president of global strategy for growth markets, Michael

Cannon-Brookes, described to us the structural redesign of the

company. Shortly after the start of the new millennium, its leaders

realized that having each country operation in Asia run a com-

plete suite of business services to support different product brands

no longer made sense; there was simply too much duplication of

effort. In each country market, these leaders identified 11 services

with common features in functional areas: supply chain, legal,

communications, marketing, sales management, HR, and finance.

Each function was assigned a global “owner” with the task of

consolidating and refining operations to support businesses in the

region’s different countries. The company then assessed which

essential elements of each function to keep and which redundant (or

potentially redundant) elements to eliminate.

From these assessments grew the “globally integrated enterprise

model,” which evolved into an entirely new structure for IBM’s global

operations. “Instead of taking people to where the work is, you take

work to where the people are,” says Cannon-Brookes. IBM sought out

pools of competitive talent with the skills required to perform each

service at different cost points. Then it built teams of specialists geo-

graphically close to the relevant pool to meet the region’s needs in

each service. So now, for instance, IBM’s growth market operations

are served by HR specialists in Manila, accounts receivable are

processed in Shanghai, accounting is done in Kuala Lumpur, procure-

ment in Shenzhen, and the customer service help desk is based in

Brisbane. Globalizing functions that were previously country based

has been a huge corporate-wide undertaking for IBM.

“This is a cultural transformation,” says Cannon-Brookes. “Changing

organization charts can take a few mouse clicks. Changing busi-

ness processes can take months. Changing a culture and the way

employees adapt to new ways of working takes years.”

84 2012 Number 3

A complex calculusTo repeat, though, no company’s restructuring should be viewed as a

blueprint for that of another. On the one hand, the importance of

regional layers seems to be growing for companies in sectors such as

pharmaceuticals and consumer goods. Regional centers of excel-

lence in these sectors often are cost effective (for more, see “Better

performance from locally deployed marketing,” on page 28). Brand

and product portfolios often differ significantly between regional

outposts and the traditional core, and greater regional muscle can

make it easier to pull local perspectives into global product-

innovation efforts.

On the other hand, we’ve seen companies conclude that the tradi-

tional role of their regional layers—as “span breakers” helping

distant corporate leaders to gather data and distill strategically

important information—is becoming obsolescent as information

technology makes analyzing, synthesizing, and exchanging informa-

tion so much easier. Today’s faster data exchanges, along with

faster travel and video conferencing, make it feasible for some organi-

zations to group their units by criteria other than physical proximity—

for example, similar growth rates or strategies. (For more on

the role of technology in managing global organizations, see sidebar,

“Technology as friend or foe?”)

That’s led some companies to reduce regional layers to teams of ten

or fewer members. Those teams might focus on managing people

strategy in a region or on gathering high-level business intelligence

that feeds into regional-strategy setting—for example, spotting

regional, country, and competitive risks and opportunities. Wafer-

thin regional layers have the added benefit of curbing “shadow”

functional structures (in HR, marketing, and so forth), which tend

to sprout unplanned in larger regional organizations. Although

these structures are not clearly visible to the corporate center, they

add considerable cost and complexity.

Process pointersAs IBM’s experience illustrates, executives evaluating the struc-

ture of their companies will often be drawn into considering

which processes should be global or local. That’s sensible: in our

survey of more than 300 executives at global companies, pro-

cesses emerged as one of the 3 weakest aspects of organization, out

of 12 we explored. Some companies have far too many processes—


nearly a third of the surveyed executives said that their companies

would be more effective globally with fewer standard ones. Some

companies, especially if they grew by M&A, don’t know how many

processes they have or what those processes are. And, most impor-

tant, few can distinguish standard processes that create value from

those that don’t or can identify the value drivers of worthwhile

standard processes.

For managers grappling with these issues, here are some ideas that

have proved valuable in practice:

• Don’t standardize more than is necessary. For example, busi-

nesses and regions should be allowed to choose their own

locally relevant key performance indicators to track, on top of

the four or five KPIs used in the global process for setting

annual targets.

• Fit technology to the process, not vice versa. Standard screen-

based processes may ensure global compliance in an instant but

can lock in globalized costs too. Before making huge invest-

ments in technology to standardize a process, businesses must

be sure they can realize the expected return.

• Prefer standard principles to detailed rules for local processes.

For instance, to hire an assistant in a new location, managers

need only a set of global fair-hiring principles, not chapter and

verse on how to hire.

• Listen to voices from all the functions that are—or should be—

involved in making a process better and make sure those people

can continue communicating with each other. Standard pro-

cesses, by themselves, are not enough to capture all of the potential

value from a company’s global footprint: ongoing communi-

cation between people who influence and execute processes helps

to capture more of it.

• Implement new processes from the top. Consultation on design

is important, but business leaders may eventually need to

cut the talk and mandate a new process. Unfashionable command-

and-control methods can be appropriate in this sphere because,

as one executive explained, “Locations aren’t nearly as different as

they think they are.”

86 2012 Number 3

Inexpensive electronic and voice

communications, video-

conferencing, technology-enabled

workflows, and, most recently,

social-networking technologies have

transformed connectivity and

knowledge sharing within complex

global organizations. Aditya

Birla’s HR director, Santrupt Misra,

says, “Our use of ICT [informa-

tion and communications technology]

has really helped us become

global. For example, we acquired

Colombian Chemicals six

months ago, and the first thing we

established is . . . connectivity

between them and our locations

elsewhere so they have access

to our portal, our knowledge, our

e-learning, and every other support.”

The company puts out regular

live webcasts aimed at all employees

and their families. It also makes

all internal vacancies visible to all

employees, to foster the sense

of belonging to a community that is

local and global at the same time.

Similarly, IBM’s internal Beehive Web

site helps employees to connect

with peers they meet on interdepart-

mental projects or meetings,

to brainstorm for current and new

projects, and to approach

higher-ranking people they wouldn’t

normally have contact with

to share ideas and ask for advice.1

Yet fewer than one-third of the more

than 300 global executives we

surveyed and interviewed believed

that their companies were get-

ting the most out of information and

communications technology. For

all its benefits, it sometimes creates

challenges such as the following.

Exacerbating pressure. A senior

executive at one company’s

central site in China says he regularly

works a “second shift” on con-

ference calls when he should be

asleep—not good for him or the

company in the long term. Jesse Wu,

worldwide chairman of Johnson &

Johnson’s consumer group,

observes, “Many people in New

York like to have global calls

on a Friday morning, so they can get

everything clear before the week-

end. However, that’s Friday evening

Technology as friend or foe?

Lightening the corporate heart

Over the past decade, corporate centers have been slimming down.

Many have shed their traditional roles of providing the business

units with shared backbone services. Similarly, some companies have

found locations other than the corporate headquarters for centers

of excellence on, among other things, innovation or customer insights

and sometimes host them within one business for the benefit of

all. This leaves slim corporate centers free to focus on their perennial

headquarters roles: upholding the organization’s values, developing


in Asia, thus unnecessarily affecting

a colleague’s family life on the

other side of the world.” Company

leaders have to model the time

zone sensitivity on which a healthy

global organization depends.

Locking in complexity.

Computerized forms can instantly

standardize a process around

the world, but once that process

is locked in, technology can

make changing it complicated and

expensive. One global retailer,

for example, generated significant

value by standardizing supply

chain processes in its home market

and then adapted and extended

the system to its operations overseas.

Whenever overseas operations

wanted to tweak their local proce-

dures, a change to the global IT

system was involved, making such

small but necessary changes

very costly.

Elevating issues indiscrim-

inately. One leader of a global com-

pany based in an emerging

market notes: “With the growth of

ICT, we have become more

headquarters-centric. This hasn’t

been a deliberate policy; it’s just

that people in the distant territories

have found ICT an easy way to

kick the ball upstairs.”

While these are avoidable problems,

they underscore the fact that

technology is not a panacea for

companies facing organiza-

tional challenges. Rather, its creative

deployment should reinforce—

and be supported by—a company’s

organizational design.

corporate strategy, and managing the portfolio of businesses and

their individual performance in line with those values and strategies.1

However, even a newly focused corporate center can struggle to

grasp just how diverse a company’s markets have become and how

fast they are changing: one group based in the United States

accepted 2 percent growth targets from its local managers in India

1 For more, see Joan M. DiMicco et al., Research on the Use of Social Software in the Workplace, Conference on Computer Supported Cooperative Work (CSCW), San Diego, California, November 2008; and Karl Moore and Peter Neely, “From social networks to collaboration networks: The next evolution of social media for business,” Forbes.com, September 15, 2011.

1 For more on the role of the corporate center in establishing strategic direction, see Stephen Hall, Bill Huyett, and Tim Koller, “The power of an independent corporate center,” mckinseyquarterly.com, March 2012.

88 2012 Number 3

because the US market was growing by only 1 percent a year. But

the Indian economy was growing much faster, so precious market

share was lost.

Corporate centers are likely to make better strategic calls if they move

closer to the action. Locating headquarters in a growth market

also sends a clear signal about company priorities to current and future

employees, as well as to investors, customers, and other external

stakeholders. However, a lot of corporate centers can’t or won’t move

in their entirety, for reasons of history, convenience, or legal

constraints. So we see a growing number of companies creating a

global “virtual headquarters,” in which vision-setting and -coordinating

activities and centers of excellence are placed in different areas

around the world: global procurement may be located in a geography

quite different from that of, say, global talent. Thus companies can

move headquarters activities closer to high-priority markets without

having to shut up the home headquarters.

For instance, ABB has shifted the global base of its robotics busi-

ness from Detroit to Shanghai, where it has built a robotics R&D center

and production line in response to expected demand for robots in

Asia. Other firms are going for a split center, with a site in a mature

market and another in an emerging one. US technology company

Dell, for instance, has set up a functional headquarters in Singapore

in pursuit of greater financial, operational, and tax efficiency. The

US oil and gas company Halliburton created a second headquarters,

in Dubai, to speed up decision making by putting it closer to

major customers.

Who should staff the lighter corporate center? To cross-pollinate

ideas and knowledge, a headquarters ideally needs to attract

but not retain talent. Picture it as the beating heart of the organization,

pumping high-potential staff to and from the business units

and replenishing each person with the oxygen of learning. Given the

right HR mechanisms, a headquarters could do without any

permanent staff except the CEO and his or her direct reports; other

executives could have fixed-term appointments and then return

to a business unit or function. The diversity of the corporate center’s

constant flow of staff would then naturally reflect a company’s

international reach and strengths.


Coordinating communication

Having the right structures and processes to enable growth and

reduce complexity is a triumph in itself. But even the best-structured

organization with the most carefully designed processes may falter

without the right linkages between them. By the same token, two-

thirds of the executives at global companies we recently surveyed

said that their ability to create internal links was a source of strength.

To get the best from modern communications and a global network

of contacts, managers should focus their communications, both

regular and intermittent, on contacts that really matter to their jobs.

Leaders can help by making it easier for their people to forge the

kind of Web-based connections and communities of interest that

spread knowledge quickly. But they also must protect managers

from the need to spend a lot of time in conversations and meetings

where agendas and decision rights are so hazy that they can’t get

their jobs done.

Taking stockUnderstanding the number and value of the communications that

managers participate in is a first step in finding the sweet spot.

A variety of tools are available to help. They include interviews with

employees; social-network analyses, which map the frequency

and effectiveness of communications; and employee surveys that

review connections among a company’s major business, func-

tional, and geographic units to find out why they’re sharing information,

the importance of the information they get to meeting their

performance or strategic goals, and how effectively they share it.

Leaders of a global oil and gas company, for example, understood

that operations personnel weren’t sharing best practices well, because

a quick review showed that the company had dozens of ways to

operate a given rig. Managers also knew that workers facing problems

in the field (such as equipment breakages or uncertainty about the

local terrain) didn’t know how to get expert help quickly and effectively.

A social-network analysis of how information flowed between field

workers and technical experts identified three problems. First, field

workers tended to reach out only to those technical experts with

whom they had strong personal relationships. Also, experts did not

reach out unasked to field workers to share best practices. Finally,

only when staff moved between sites—as when a group went from

90 2012 Number 3

Angola to the Gulf of Mexico—did field workers from different sites

share best practices among themselves.

Strengthening the right connections Once people understand the number and nature of their connections

and communications, they can decide which to drop, keep, or

add. In companies where a lot of people seem to lose time on too many

linkages, the leaders’ reflex response is often to clarify links by

changing the structure—for example, adding reporting lines or new

dimensions to the organizational matrix. But these make the

organization more complex and costly to manage; dual reporting

lines will almost certainly double an executive’s administrative

burden, to take only the most obvious example.

Better solutions can come from considering a wider range of linkage

mechanisms, their different strategic purposes, and what must

be in place to make them work. For example, coaching or mentoring

links transfer knowledge across an organization and build future

leaders. They require strong, personal, and frequent interactions based

on trust. Other knowledge transfer connections, such as those for

sharing documents, can be weaker, impersonal, and less frequent.

Social-network analysis at a major oil and gas company

Before After

Gulf of Mexico NigeriaBrazil Saudi ArabiaAngola Canada United Kingdom

One oil company used a social-network analysis to target improved communication between field workers and technical experts.

Web 2012Org DesignExhibit 1 of 1

91

Although these kinds of relationships deliver important gains, they

do not have to be formally enshrined in a structure or process.

If people have too few contacts (as at the oil company) or contacts

in the wrong places, managers with a particular area of responsibility

will have to identify who needs knowledge in that area, who has it,

and how best to connect them. One way companies can foster strong

personal ties is to designate someone to nurture them until they

flourish unaided. When researchers analyzed social networks and

e-mails among teams developing aerodynamic components for

Formula 1 racing cars, they found that teams that designated some-

one to keep in touch with peers working on related products across

geographies were 20 percent more productive than teams whose man-

agers interacted less often.2

The oil company above transferred some field workers to peer teams

elsewhere. That move forged global connections and expanded

the collective expertise on which each field worker could draw. New

networks blossomed (exhibit) and quickly showed results: within

a year, productivity rose by 10 percent, while costs related to poor

quality fell by two-thirds.

Structure, processes, and linkages are interrelated: it’s easier to avoid

duplication in organizational structures when a company gets the

balance right among global, regional, and local processes—and

vice versa. Clear structures and processes also clarify roles, helping

to focus communications, while structure and process problems

can undermine the effectiveness of managers’ global networks and

communications. Focusing on some of the points where structure,

processes, and communications intersect, and engaging all the stake-

holders involved to work on those critical junctions, can release

benefits that ripple across organizations.

The authors would like to acknowledge the contributions of Gregor Jost and Roni Katz to the development of this article.

Toby Gibbs and Suzanne Heywood are principals in McKinsey’s London office; Leigh Weiss is a senior expert in the Boston office.

Organizing for an emerging world

2 Jacomo Corbo and Gary Pisano, The Impact of Information Networks on Productivity, Circuits of Profit conference, Budapest, June 20, 2011.

92

How multinationals can attract the talent they need Competition for talent in emerging markets is heating up. Global

companies should groom local highfliers—and actively encourage more

managers to leave home.

Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan

The problem

Talent is getting scarcer and pricier

in emerging markets as fleet-footed

local businesses grab the best

people. Home-based executives

seem reluctant to fill the gap.

Why it matters

Companies that can’t attract,

retain, and excite tomorrow’s leaders

will find it harder to achieve global

ambitions.

What to do about it

Create opportunities for highfliers

in emerging markets to lead,

even if they haven’t served long

apprenticeships in a developed

economy.

Launch programs to improve

understanding, generate trust, and

break down cultural barriers.

Actively manage your brand as an

employer, which may require

building a relationship with employees’

families or tapping into broader

causes that workers embrace.

Help managers posted abroad

familiarize themselves with new

markets while maintaining their

connections and influence back home.

93

Global organizations appear to be well armed in the war for

talent. They can tap sources of suitably qualified people around the

world and attract them with stimulating jobs in different coun-

tries, the promise of powerful positions early on, and a share of the

rewards earned by deploying world-class people to build global

businesses. However, these traditional sources of strength are coming

under pressure from intensifying competition for talent in

emerging markets.

• Talent in emerging economies is scarce, expensive, and hard to

retain. In China, for example, barely two million local man-

agers have the managerial and English-language skills multi-

nationals need.1 One leading bank reports paying top people

in Brazil, China, and India almost double what it pays their peers

in the United Kingdom. And a recent McKinsey survey in

China found that senior managers in global organizations switch

companies at a rate of 30 to 40 percent a year—five times the

global average.

• Fast-moving, ambitious local companies are competing more

strongly: in 2006, the top-ten ideal employers in China included

only two locals—China Mobile and Bank of China (BOC)—

among the well-known global names. By 2010, seven of the top

ten were Chinese companies. As one executive told us, “local

competitors’ brands are now stronger, and they can offer more

senior roles.”

• Executives from developed markets, by no means eagerly seizing

plum jobs abroad, appear disinclined to move: a recent Man-

power report suggests that in Canada, France, Germany, the

United Kingdom, and the United States, the proportion of

staff ready to relocate for a job has declined substantially,2 per-

haps partly because people prefer to stay close to home in

uncertain times.

How can global organizations best renew and redeploy their strengths

to address these challenges? Our experience suggests they should

start by getting their business and talent strategies better aligned as

1 China and German Statistical Yearbook 2005; McKinsey Global Institute; University of Frankfurt survey.

2 Migration for Work Survey, ManpowerGroup, 2011.

94 2012 Number 3

they rebalance toward emerging markets. This is a perennial

challenge, made more acute by extending farther afield. But the core

principles for estimating the skills a company will need in each

location to achieve its business goals, and for planning ahead to

meet those needs, are similar enough across geographies not

to be our focus here. Rather, we focus on two additional questions.

How can global organizations attract, retain, and excite the kinds

of people required to execute a winning business strategy in emerg-

ing markets? And what can these companies do to persuade

more executives trained in home markets to develop businesses in

emerging ones, thereby broadening the senior-leadership team’s

experience base?

Becoming more attractive to locals

A big historic advantage global companies have over local competi-

tors is the ability to offer recruits opportunities to work elsewhere

in the world. A small number of executives, in fact, have moved from

leading positions in emerging markets to a global-leadership role,

including Ajay Banga, president and CEO of MasterCard Worldwide;

Indra Nooyi, chairman and CEO of PepsiCo; and Harish Manwani,

COO of Unilever.

But big global companies need a lot more role models like these if

they are to persuade highly talented local people to join and stay.

A recent McKinsey survey of senior multinational executives from

India found that few companies were providing opportunities

overseas in line with the aspirations and capabilities of ambitious

managers.3 We’ve also heard this concern voiced in many inter-

views. A senior executive at a global company in Asia told us, “In

our top-100-executive meetings, we spend more than half of our

time speaking about Asia. But if I look around the room I hardly see

anybody with an Asian background.” Another put the problem

more bluntly: “Leaders tend to promote and hire in their own image.”

The makeup of most multinational boards provides further

evidence: in the United States, less than 10 percent of directors of

3 A February 2012 McKinsey survey, with 118 respondents, of 17 multinational companies’ operations in India.

95How multinationals can attract the talent they need

the largest 200 companies are non-US nationals, up from 6 percent

in 2005 but still low considering the global interests of such

companies. Western ones can start working on these numbers by

refining their approach to developing top talent in emerging

markets. Many also need to rethink their brands to win in a fast-

changing talent marketplace.

Prepare your highfliers for top rolesThere’s no silver bullet for developing or retaining emerging-

market talent. Examples such as the ones below present different

paths, but each company will need to find its own.

Global-development experiences at Bertelsmann. The German

media giant tries to develop—and retain—top managers through

specialized training programs. In India, for example, its high-

potential employees can apply for an INSEAD Global Executive

MBA; over the three years this benefit has been available,

motivation and retention rates among alumni of the program have

sharply increased for less than it would have cost to give them

salary hikes. In addition, Bertelsmann’s CEO program brings local-

market employees to the corporate center, where they gain

exposure to the range of functional and geographical issues they

can expect to encounter as leaders. Having spent a couple of

years at the center, recruits then compete for senior roles in local or

regional markets. They return with a solid understanding of the

organization and its strategy, as well as an extended network based

on trust gained from working intensively with leaders across

the company.

Breaking cultural barriers at Goldman Sachs. The global bank

is one of many firms that have designed special programs to tackle

cultural and linguistic barriers impeding local executives from

taking jobs at the global level. In 2009, for example, Goldman Sachs

launched a program in Japan to help local employees interact

more comfortably and effectively with their counterparts around

the world, with a focus on improving cross-cultural communi-

cation skills. The firm has extended this “culture dojo,” named after

Japan’s martial-arts training halls, to China and South Korea and

plans to launch programs in Bangalore and Singapore.4

4 Michiyo Nakamoto, “Cross-cultural conversations,” Financial Times, January 11, 2012.

96 2012 Number 3

Local-leadership development at Diageo. Nick Blazquez, the

drinks company Diageo’s president for Africa, questions whether

leadership training today must include experience in a developed

economy. “I used to think that to optimize the impact, a general

manager should work in a developed market for a period of time,

because that’s where you see well-developed competencies. But I’m

just not seeing that now. If I think about marketing competencies,

for example, some of Diageo’s most innovative marketing solutions

are in Africa.” In fact, he notes, “we in Africa have developed

some of Diageo’s leading digital-marketing programs. So I don’t

think that there’s a need anymore for somebody to have worked

in a developed market for them to be a really good manager. That

said, I do feel that a good leader of a global organization would

be better equipped having experienced both developed and

developing markets.” For global companies in a similar position,

acknowledging that local highfliers can drive global innovation

without first serving a long apprenticeship in a developed economy

could unlock massive reserves of creative energy.

Enhance your brand as an employerWhile there’s no substitute for development programs that will help

emerging-market recruits rise, global organizations need to

strengthen other aspects of their employer brands to succeed in the

talent marketplace in these countries. Historically, globally

recognized companies have enjoyed significant advantages: they

knew they were more attractive to potential local employees

than any local competitor. “We still have the attitude that someone

is lucky to be hired by us,” one executive told us. But today, many

local fast-growing and ambitious companies have more pulling power.

And multinationals based in emerging markets are conscious

of the work they must do to sustain their levels of recruitment. As

Santrupt Misra, Aditya Birla’s HR director, says: “We are grow-

ing as a company more rapidly than people grow, so we need to

develop more peer leaders. Simultaneously, we need to [maintain]

a very strong employer brand so that if we do not manage to

develop enough people, we can hire.”

Established global companies should consider the same strategy.

In any market, the basic ingredients of a strong employer brand will

be competitive compensation; attractive working conditions;

97

managers who develop, engage, and support their staff; and good

communication. One challenge for global companies is to manage

the tension between being globally consistent and, at the same time,

responsive to very diverse local needs. Some degree of local tailor-

ing is often necessary—for example, to accommodate the preference

for near- over long-term rewards in Russia. However, any tailoring

must sit within a broadly applied set of employment principles. Tata

sets out to “make it a point to understand employees’ wants, not

just in India, but wherever Tata operates,” according to its group vice

president of HR. It has a tailored employee value proposition

for each of its major markets; for example, it stresses its managers’

quality to employees in India, development opportunities in

China, and interesting jobs in the United States.

In some markets, particularly in Asia, global organizations are

extending awareness of their brands as employers by building a rela-

tionship between themselves and their employees’ families. For

example, Motorola and Nestlé have tried to strengthen these links

in China through their family visits and family day initiatives.

Aditya Birla webcasts its annual employee award ceremony to all

employees and their families around their world. And in all markets,

companies are likely to find that many young, aspiring managers

view being part of a broader cause and contributing to their countries’

overall economic development as increasingly important. Arti-

culating a company’s contribution to that development is likewise

an increasingly important component of any employer brand.

Encouraging homebodies to venture abroad

Even if a global company can find, keep, and develop all the local

leaders it wants, it still may need more executives from its home

market to work at length in diverse emerging ones so they learn how

these markets function and forge networks to support the com-

pany’s future growth. To that end, some leading firms are replacing

fixed short-term expatriate jobs with open-ended international

roles. This not only deepens the expertise of the executives who hold

them but also eliminates a problem cited by a European car

executive we interviewed in South America: expat leaders become

How multinationals can attract the talent they need

98 2012 Number 3

lame ducks toward the end of their overseas terms, progressively

ignored by local managers.5

Developed-country operations have much to gain from executives

versed in emerging-market management. “Leaders’ mind-sets

are very different,” says Johnson & Johnson’s worldwide consumer

group chairman Jesse Wu. “When you’re running an emerging

market, you always operate under an austerity model. When you’ve

been operating in emerging markets and come to the United

States, you become aware of the little things, like how much people

use color printers for internal documents. All these little things

add up. Everybody’s happy with emerging-market growth,” but he

adds that it “necessitates a lot of changes worldwide, not only in

emerging markets.”

Global organizations’ growing need for managers willing to work for

long stretches overseas is coinciding with a decrease in their

willingness to go. “US talent over time seems to have become less

mobile than executives from Europe, Asia, or Latin America,”

says Wu. “We need this to change.”

Reversing the trend will take time. In firms where long-term success

depends on moving across businesses, functions, and regions,

that expectation should be crystal clear to all managers. Schlumberger

requires managers to rotate jobs every two to three years across

business units and corporate functions: the company expects that

executives will spend 70 percent of their total careers working

outside their home countries. Similarly, a leading mining company

expects its people to have experience in at least two different

geographic regions, two different businesses or functions, and even

two different economic environments (high and low growth, say)

Global organizations’ growing need for managers willing to work for long stretches overseas is coinciding with a decrease in their willingness to go.

5 For more on the challenges facing expat managers, see Jeffrey A. Joerres, “Beyond expats: Better managers for emerging markets,” mckinseyquarterly.com, May 2011.

99

before they can move into senior-leadership roles. Of course,

it’s crucial to help managers abroad maintain their connections and

influence back home and to provide close senior-executive

mentorship—as HSBC does for participants in its International

Management program, who are sent to an initial location, far

from home, and can expect to rotate again after 18 to 24 months.

Making sure that new executives can contribute strongly and

avoid mistakes when they arrive in new markets also is important.

In 2010, IBM began sending executives to emerging markets as

consultants, with the goal of investing time helping long-standing

customers and other stakeholders. This way, the executives

not only developed business in new geographies but also got to know

the new markets and developed their personal skills. Dow

Corning and FedEx have realized similar benefits by providing free

services in emerging markets.

We have presented some snapshots here of how companies are

getting better at attracting talent and developing leaders in emerging

markets and of what it takes to cross-fertilize talent between

different geographies. As the world’s economic center of gravity con-

tinues to shift from developed to emerging markets, more

companies will wrestle with these issues, and some definitive best

practices may well appear. For now, though, the global talent

market is in flux, just like the global economy.

How multinationals can attract the talent they need

The authors would like to acknowledge the contributions of Vimal Choudhary and Alok Kshirsagar to the development of this article.

Martin Dewhurst is a director in McKinsey’s London office, where Matthew Pettigrew is an associate principal; Ramesh Srinivasan is a director in the New York office.

100

As firms reach across borders, global-leadership capacity is

surfacing more and more often as a binding constraint. According

to one survey of senior executives, 76 percent believe their orga-

nizations need to develop global-leadership capabilities, but only

7 percent think they are currently doing so very effectively.1 And

some 30 percent of US companies admit that they have failed to

exploit fully their international business opportunities because

of insufficient internationally competent personnel.2

Most of the prevailing ideas in business and academia about global

leadership reflect efforts by leadership experts to adapt the

insights of their field to the global arena. I come at this topic from

the opposite perspective, having focused for nearly two decades

on studying globalization and thinking through its implications for

business and public policy.

1 Developing the Global Leader of Tomorrow, a joint project of Ashridge Business School as part of the European Academy of Business in Society (EABIS) and the United Nations Global Compact Principles for Responsible Management Education (PRME), based on a survey conducted in 2008.

2 Shirley Daniel and Ben L. Kedia, US Business Needs for Employees with International Expertise, Conference on Global Challenges and US Higher Education at Duke University, Durham, NC, January 23–25, 2003.

Developing global leadersCompanies must cultivate leaders for global markets. Dispelling five

common myths about globalization is a good place to start.

Pankaj Ghemawat

101

At the core of my work lies the reality that, while globalization

is indeed a powerful force, the extent of international integration

varies widely across countries and companies and generally

remains more limited than is commonly supposed. To be sure,

rapid growth in emerging markets, combined with a long-term

outlook of lower growth in most developed economies, is pushing

companies to globalize faster. But metrics on the globaliza-

tion of markets indicate that only 10 to 25 percent of trade, capital,

information, and people flows actually cross national borders.

And international flows are generally dampened significantly by

geographic distance as well as cross-country differences. US

trade with Chile, for example, is only 6 percent of its likely extent

if Chile were as close to the United States as Canada is. Further-

more, if two countries don’t share a common language, that alone

slashes the trade volume between them by 30 percent.

An appreciation of how distances and differences influence inter-

national ties helps explain some of the organizational and

other stresses that established multinationals are encountering as

they accelerate their expansion to emerging markets, as described

in this issue of McKinsey Quarterly. Emerging Asia is farther

away—and more different, along multiple dimensions—than more

familiar markets in Europe and North America. Japanese multi-

nationals face a distinctive set of cultural, political, and economic

issues that complicate their efforts to expand abroad.

Exaggerated notions of what globalization means—what I call

“globaloney”—are also apparent in prevailing ideas about global

leadership. Some training centers aim to develop “transcultural”

leaders who can manage effectively anywhere in the world

as soon as they step off the plane. Yet scholars of cross-cultural

management suggest that objectives like this are unrealistic.

While global leadership is still a nascent field, common concep-

tions of it already incorporate myths or half-truths that rest

on misconceptions about globalization. Correcting these myths

should help the efforts of companies to increase their global-

leadership capacity.

102 2012 Number 3

Myth #1 My company, at least, is global.

When I present data on the limited extent of international inter-

actions to executives in large multinational corporations, a typical

reaction is that even if markets are not that integrated, their firm

certainly is. Such claims, however, seldom hold up to scrutiny. Less

than 2 percent of firms on Fortune’s Global 500 list of the world’s

largest companies, for example, derive more than 20 percent of their

revenues from three distinct regions.3 Most firms also remain

quite domestically rooted in other aspects of their business, such as

where they do their production or R&D or where their shareholders

live. BMW, for instance, derived 51 percent of its sales revenue from

outside of Europe in 2011, but still maintained roughly 64 per-

cent of its production and 73 percent of its workforce in Germany.4

An accurate read on the extent of globalization in one’s firm and

industry is certainly a crucial requirement for global leadership.

Also invaluable is an appreciation of the extent to which the people

within your company are far from completely globalized. Con-

sider just a few pertinent facts. Trust, which some have called the

currency of leadership, declines sharply with distance. Research

conducted in Western Europe suggests that people trust citizens of

their own country twice as much as they trust people from

neighboring countries and that they place even less trust in people

farther away. Turning to information flows—also central to

leadership—people get as much as 95 percent of their news from

domestic sources,5 which devote most of their coverage to

domestic stories. Similarly, 98 percent of telephone-calling minutes

and 85 percent of Facebook friends are domestic.

The persistent rootedness of both firms and employees has the

surprising implication that global leaders should not seek to sever

or hide their own roots to become global citizens. Rather, they

should embrace “rooted cosmopolitanism” by nurturing their own

3 Alan M. Rugman and Alain Verbeke, “A perspective on regional and global strategies of multinational enterprises,” Journal of International Business Studies, 2004, Volume 35, Number 1, pp. 3–18.

4 Revenue and workforce figures from BMW Group, Annual Report 2011; production figures represent 2010 car production as reported by the International Organization of Motor Vehicle Manufacturers (OICA).

5 Calculations by Ethan Zuckerman, as reported in “A cyber-house divided,” Economist, September 2, 2010, p. 58.

103

roots and branching out beyond them to connect with counter-

parts elsewhere who, like themselves, are deeply rooted in distinct

places and cultures. Indeed, studies of expatriate performance

confirm that expats who identify strongly with both their home and

host cultures perform better than those who identify only with

one or with neither.6

This rooted-cosmopolitan approach also accords better with research

showing that people can become “biculturals,” with a truly deep

understanding of two cultures,7 but probably can’t entirely internalize

three, which implies that four is out of the question. Facing such limit-

ations, attempts to become global by breaking free from one’s roots

seem more likely to lead to symmetric detachment—a lack of meaning-

ful ties to any place—than to symmetric attachment everywhere.

Myth #2 Global leadership is developed through experience.

Leadership scholars have argued that experience contributes some

80 percent to learning about global leadership.8 My own investi-

gations of senior executives’ perceptions of globalization, however,

indicate that experience, while required, is not sufficient for the

development of an accurate global mind-set.

To illustrate, in a survey I asked readers of Harvard Business

Review to estimate a set of basic values about the international-

ization of product, capital, information, and people flows. The res-

pondents overestimated these values, on average, by a factor

of three. And, more interesting from the standpoint of leadership

development, the magnitude of the readers’ errors increased with

their years of experience and the seniority of their titles. The CEOs

in the sample overestimated the values by a factor of four!

6 Yih-teen Lee, “Home versus host—identifying with either, both, or neither? The relationship between dual cultural identities and intercultural effectiveness,” International Journal of Cross Cultural Management, 2010, Volume 10, Number 1, pp. 55–76.

7 See, for instance, Mary Yoko Brannen and David C. Thomas, “Bicultural individuals in organizations: Implications and opportunity,” International Journal of Cross Cultural Management, 2010, Volume 10, Number 1, pp. 5–16.

8 Bruce Dodge, “Empowerment and the evolution of learning: Part one,” Education + Training, 1993, Volume 35, Number 1, pp. 3–10.

Developing global leaders

104 2012 Number 3

Why might experience correlate with less rather than more accurate

perceptions about globalization? One possibility is projection bias.

Senior executives and CEOs tend to lead far more global lives than

most of the world’s population, often touching several continents in

any given month. Ninety percent of the people on this planet will never

venture beyond the borders of the countries where they were born.

If experience alone is insufficient to develop accurate perspectives

about globalization, what do executives need to learn off the job?

A starting point is an accurate read on the magnitude and patterns of

international interactions within their industries and companies.

Rooted maps, described in my 2011 McKinsey Quarterly article,9 can

help executives to visualize and interpret these patterns.

Global leaders also need to understand the factors that shape inter-

national interactions in their businesses, by undertaking a structured

examination of cross-country differences and their effects. That is

what a survey of academic thought leaders recently concluded should

be the focus of the globalization of business school curricula.10

Conceptual learning of this sort is a complement to—one might even

say a precondition of, though certainly not a substitute for —

experiential learning. When executives can fit their personal

experiences into an accurate global perspective defined by

conceptual frameworks11 and hard data, they can gain more from

their typically limited time abroad and avoid costly mistakes.

Senior executives and CEOs tend to lead far more global lives than most of the world’s population, often touching several continents in any given month.

9“Remapping your strategic mind-set,” mckinseyquarterly.com, August 2011.

10 Pankaj Ghemawat, “Responses to forces of change: A focus on curricular content,” chapter 4 in AACSB International’s Globalization of Management Education: Changing International Structures, Adaptive Strategies, and the Impact on Institutions, Bingley, UK: Emerald Group Publishing Limited, 2011.

11 My “CAGE” distance framework, one way to structure thinking about cross-country differences, places those differences into cultural, administrative/political, geographic, and economic categories. For more, see my article “Distance still matters: The hard reality of global expansion,” Harvard Business Review, 2001, Volume 79, Number 8, pp. 137–47.

105

Myth #3 Development is all about building standard global-leadership competencies.

Many lists of global-leadership competencies have been developed in

business and in academia, but these provide only a starting point

for thinking through the right competency model to apply within a

particular company. Customization and focus are essential. In

part, that’s because even though literally hundreds of competencies

have been proposed, a lot of these lists have important gaps or

fail to go far enough toward incorporating unique requirements for

global leadership. That isn’t surprising, since the lists often grow

out of research on domestic leadership.

One large review of the literature summarizes it in three core

competencies (self-awareness, engagement in personal transforma-

tion, and inquisitiveness), seven mental characteristics (optimism,

self-regulation, social-judgment skills, empathy, motivation to work

in an international environment, cognitive skills, and acceptance

of complexity and its contradictions), and three behavioral compe-

tencies (social skills, networking skills, and knowledge).12 To my

mind, most of these would also be useful for domestic leadership.

Only the motivational point seems distinctively international,

although one or two more (such as acceptance of complexity and its

contradictions) clearly seem more important in the international

domain than domestically.

Typical competency lists also tend to focus on cultural differences,

missing other components critical to global leadership. Economic

differences (such as the challenges of fast- versus slow-growth

markets) and administrative and political differences (including the

extent of state intervention) are among the other factors that can

cause leaders to stumble in unfamiliar contexts.

Perhaps most important, standard lists of global-leadership

competencies reinforce a one-size-fits-all view of global leadership

that is inconsistent with the reality of globalization and the mix

of work global leaders do. A company may find it useful to recruit

for and develop a small set of key competencies across all of its

12 Tiina Joniken, “Global leadership competencies: A review and discussion,” 2005, Journal of European Industrial Training, Volume 29, Number 3, pp. 199–216.


106 2012 Number 3

global leaders. Yet the diversity of roles that fall under the broad

category of global leadership argues for substantial customization

around that common base. At the corporate level, this implies

developing a portfolio of competencies rather than an interchangeable

set of global leaders who have all met a single set of requirements.

Operationally, an ideal training program would therefore include

a geographic dimension and prepare people for dealing with

particular origin–destination pairs. For example, a Japanese execu-

tive going to work in the United States would probably benefit from

preparing for the higher level of individualism there. One preparing

for China would in all likelihood benefit more from understanding

that “uncertainty avoidance” is less pronounced there, so executives

must be ready for faster-paced change and greater levels of

experimentation.

Customizing training-and-development efforts at the level of

individual country pairs is likely to run up quickly against resource

constraints. However, the fact that 50 to 60 percent of trade,

foreign direct investment, telephone calls, and migration are intra-

regional suggests that, in many cases, customizing at the regional

level is sufficient. Firms will need a mix of regional and global leaders.

Regional leadership is presumably less difficult and costly to

develop than global leadership.

At a more granular level, competencies can also be customized

to the requirements of specific executives’ roles. The dimensions to

consider include depth in particular markets versus breadth

across markets, the frequency and duration of physical presence

abroad, and a focus on internal versus external interactions.13

Myth #4 Localization is the key.

Some firms, rather than trying to fulfill the requirements of one-

size-fits-all lists of global-leadership competencies, have embraced

the opposite extreme of localization. Significant localization

has taken place in the management teams of foreign subsidiaries.

13 For a more systematic treatment, see Mark E. Mendenhall et al., “Defining the ‘global’ in global leadership,” Journal of World Business, February 2012.

107

According to one study, the proportion of expatriates in senior-

management roles in multinationals in the BRIC countries (Brazil,

Russia, India, and China) and in the Middle East declined from

56 percent to 12 percent from the late 1990s to the late 2000s.14

Within this broad trend, some firms still rely too much on expatriates

and need to localize more, but localization can be—and, in some

instances, clearly has been—taken too far. Giving up on expatriation

implies giving up on building the diverse bench of global leaders

that CEOs say they require. Persistent distance effects, particularly

those associated with information flows, do confirm the general

wisdom: global leaders need experience working for extended periods

in foreign locations because living abroad creates permanent

knowledge and ties that bind. Extreme localization leaves no room

for the development of leaders of this sort.

Executives report that “it takes at least three months to become

immersed in a geographical location and appreciate how the culture,

politics, and history of a region affect business there.”15 This

judgment accords with the finding that living abroad expands your

mental horizons and increases your creativity. However, merely

traveling abroad doesn’t produce these benefits.16

Long stays abroad are costly: traditional expatriation typically costs

three times an employee’s salary at home. Nonetheless, firms that

really wish to prioritize global-leadership development will need to

allocate the required resources. Better metrics to track the returns

on such investments may help. One survey indicates that just 14 per-

cent of companies have any mechanisms in place to track returns

on international assignments. Most of these companies use metrics

tracking only business generated from an assignment.17

Better career management could help capture and measure returns

on investments in developing global leaders. Evidence indicates

that in European and US multinationals, expatriates still take longer,

14 William J. Holstein, “The decline of the expat executive,” Strategy + Business, July 2008.

15 Gail Naughton, as quoted in Tricia Bisoux, “Global immersion,” BizEd, 2007, Volume 6, Number 4, pp. 44–49.

16 Adam D. Galinsky and William W. Maddux, “Cultural borders and mental barriers: The relationship between living abroad and creativity,” Journal of Personality and Social Psychology, 2009, Volume 96, Number 5, pp. 1047–61.

17 Emerging Trends in Global Mobility: Policy & Practices Survey, Cartus (now Credant Mobility), 2004.


108 2012 Number 3

on average, to ascend the corporate ladder than managers who

continue to work within their home countries. That indicates a

deficiency in this area, as well as an incentive problem.18

Rather than pure localization, firms should embrace the practice of

rotation, which provides the foreign work experience—not just

travel—essential to the development of global leaders. And don’t

make the mistake of viewing expatriation as being solely about

sending people from headquarters to emerging markets. The same

requirement for immersion outside of one’s home market also

applies to the cultivation of global leaders recruited in emerging

markets. For these executives, time spent in more established

markets can, on the return home, reinforce both local- and global-

leadership capacity.19

Myth #5 We can attract the best talent.

Nationals from key growth markets are underrepresented in the

leadership ranks of many Western companies, so hiring future

global leaders from these areas is critical. Yet recruiting top talent

there is becoming increasingly difficult, as described in “How

multinationals can attract the talent they need,” on page 92. I recall

from my own youth in India how foreign multinationals used to

be unequivocally the preferred employers, prized for their superior

professionalism, brands, technologies, scale, and so on. Now I

see that Indian companies have raised their game, putting pressure

on multinationals in local talent markets.

The implications for global-leadership development are threefold.

First, shifting to the rooted-cosmopolitan ideal described here

is critical to attracting and developing executives from emerging

markets. This approach makes it clear that ambitious young

Indians, for example, proud of their country, don’t have to refashion

themselves as Westerners to succeed in Western multinationals.

18 Monika Hamori and Burak Koyuncu, “Career advancement in large organizations in Europe and the United States: Do international assignments add value?,” The International Journal of Human Resource Management, 2011, Volume 22, Number 4, pp. 843–62.

19 Manpower CEO Jeffrey A. Joerres suggests that outbound rotation programs for managers are crucial to developing emerging-market talent. For more, see “Beyond expats: Better managers for emerging markets,” mckinseyquarterly.com, May 2011.

109


Second, escalating competition for talent in growth markets implies

that it is even more urgent for multinationals to diversify their

leadership teams quickly. One of the main advantages of local firms

is the fact that young recruits often can see, in the faces of the

current leadership, that if they excel they have a clear shot at rising

to the top. In many multinationals, such promises will require a

leap of faith until diversity is significantly expanded. And the local

competitors’ ongoing international expansion gradually diminishes

another advantage of foreign multinationals: the ability to offer a

wide range of global opportunities.

Third, incorporating more local talent will require a greater emphasis

on developing people. Tight talent markets and overstretched

education systems imply, frankly, that firms hire some people who

are not up to the standards they would prefer to uphold. Among

the great strengths of India’s IT firms is their ability to convert such

not quite fully prepared talent into effective performers on a

large scale.

It is indeed in today’s large emerging markets that the war for talent,

identified by McKinsey back in 1997, has become most acute.

Addressing the global-leadership gap must be an urgent priority

for companies expanding their geographic reach. Predictable

biases rooted in widespread misperceptions about globalization are

hampering their efforts to develop capable global leaders.

The author would like to thank Steven A. Altman and Joel Bevin for their help researching and writing this article.

Pankaj Ghemawat, an alumnus of McKinsey’s London office, is a professor of strategic management and the Anselmo Rubiralta Chair of Global Strategy at the IESE Business School, in Barcelona. He is also the author of World 3.0: Global Prosperity and How to Achieve It (Harvard Business Publishing, May 2011), the source of the approach to global-leadership development discussed in this article.


110

Diverse economies, common pain points

Over the last 15 years, many mature economies have experienced trade deficits in primary resources. These deficits have canceled out trade surpluses from knowledge-intensive goods and services.

Picture This

Web 2012MGI trade teaserExhibit 2 of 2

Over the last 15 years, many mature economies have experienced trade deficits in primary resources that have canceled out trade surpluses from knowledge-intensive goods and services.

1United States, Japan, and EU-15 countries excluding Luxembourg; services exports do not include Belgium and Denmark, because historical data are unavailable.

2Excludes trade in utilities for Japan.3Majority of trade for health and education services is accounted for as travel and therefore is included in labor-intensive services.

Source: Organisation for Economic Co-Operation and Development (OECD); McKinsey Global Institute analysis

2.0

1.0

1.5

0

–1.5

–1.0

–0.5

0.5

–2.0

–3.0

–3.5

200920082004 20062002200019961994 1998

Net exports of mature economies,1 latest available data, % of GDP

Knowledge-intensive manufacturing

Knowledge-intensive services

Primary resources

–2.5

Sur

plu

sD

efici

t

Labor-intensive services

Capital-intensive services2

Capital-intensive manufacturing

Health, education, public services3

Labor-intensive manufacturing

111

Since the mid-1980s, incomes have been growing faster for the richest citizens in many developed countries than for the poorest ones.

Many developed economies share knotty structural problems, according

to research drawn from two recent McKinsey Global Institute reports:

Help wanted: The future of work in advanced economies and Trading myths:

Addressing misconceptions about trade, jobs, and competitiveness,

available on mckinsey.com.

Q3 20112PicThis: Common painExhibit 2 of 2

Average annual change in real household income by income group, mid 1980s–late 2000s

4.5

3.5

4.0

3.0

2.0

2.5

1.5

0

–0.5

0.5

Source: Organisation for Economic Co-Operation and Development (OECD)

Since the mid-1980s, incomes have been growing faster for the richest citizens in many developed countries than for the poorest ones.

4.53.5 4.03.02.0 2.51.51.00–0.5 0.5

Ireland

Spain

Greece

Portugal

FranceBelgium

NorwayFinland

United States

Denmark

Canada

New Zealand

Income growth for top income decile, %

Income growth for bottom income decile, %

Austria1.0

United Kingdom

Netherlands

Germany

Sweden

Japan

Italy

Countries where high earners (top 10%) experienced income gains greater than low earners (bottom 10%)

Countries where low earners (bottom 10%) experienced income gains greater than high earners (top 10%)

Applied InsightTools, techniques, and

frameworks for managers

126

Agile operations for

volatile times

Spotlight on marketing

113

Measuring

marketing’s worth

119

Five ‘no regrets’ moves

for superior customer

engagement

Photograph by France Malate

113

You can’t spend wisely unless you understand marketing’s full impact. Executives

should ask five questions to help maximize the bang for their bucks.

It’s 8 AM, and the chief marketing officer

is wading through his inbox. A board

member has e-mailed him about an oppor-

tunity to invest in an emerging digital

platform. It looks cool, but it’s speculative

and not cheap. Minutes later, the chief

financial officer appears in the doorway:

“The boss wants to sign a big sponsor-

ship deal. Can we drop out of TV for a

couple of months to pay for it?” The

CMO has barely started to explain what

happened the last time the company

went dark on TV—an aggressive rival

grabbed market share—when his assis-

tant interrupts. The CEO is calling.

“What’s going on with our brand image?”

she asks. “The latest monitor report

looks bad.” The CMO promises a full

debriefing later in the day, but he’s

not looking forward to the conversation.

Brand scores are down, and the reasons

are tough to manage: factors such

as bad experiences with intermediary

retailers and mediocre word of mouth.

The number and strength of such

competing pressures has been growing.

Seven years ago, when digital

advertising was still in its infancy and

long before social media had become a

marketing force, we described in

an issue of McKinsey Quarterly how many

traditional mass-marketing adver-

tising models were under attack and

suggested some approaches to

make marketing investments count in an

increasingly complex environment.1

Since then, we have been fortunate

enough to see more than 200 organiza-

tions tackle the difficult issue of how

to improve marketing’s return on invest-

ment (ROI). Over that period, as new

kinds of media have grown in importance

and mobile communications have

created new opportunities to reach con-

sumers, the ROI challenge has become

more intense.

In the face of growing complexity, relent-

less financial pressure, and a still-

challenging economic environment, mar-

keters are striving to exploit new-media

vehicles and to measure their impact

through new analytic approaches and

tools. Most are making progress. Yet

we are consistently struck by the power

of asking five seemingly basic questions.

These questions, detailed in this article,

Measuring marketing’s worth

David Court, Jonathan Gordon, and Jesko Perrey

2012 Number 3114

cut to the heart of the quest to drive

returns on marketing spending. Coming

to grips with them, and gaining alignment

across the C-suite, is critical for making

real progress rather than becoming

bogged down by excessive firefighting

and ultimately futile debates about the

precision and certainty of measurement.

What exactly influences our consumers today?

The digital revolution and the explosion

of social media have profoundly

changed what influences consumers as

they undertake their purchasing deci-

sion journey. When considering products,

they read online reviews and compare

prices. Once in stores, they search for

deals with mobile devices and drive

hard bargains. And after the purchase,

they become reviewers themselves

and demand ongoing relationships with

products and brands. Although com-

panies have access to terabytes of data

about these behavioral changes,

many still can’t answer the fundamental

question: how exactly are our custom-

ers influenced?

One global consumer products company,

for example, had for years relied

heavily on traditional marketing, such as

television and print ads. Concerned

about the growth of new media, the com-

pany decided to research just what was

influencing the choices of consumers—

and found that only 30 percent of

them cited traditional advertising. In fact,

in-store interactions with consumers

were more important in communicating

the company’s message and driving

potential buyers to consider its products.

Yet salespeople, once critical to actu-

ally closing deals, had declined in impor-

tance because consumers regarded

Internet reviews as more objective. In

addition, these trends were not universal.

While the influence of advertising

had declined for existing products,

the impact of TV remained strong for

some new products, especially in

emerging markets. Armed with insights

such as these, the company was

able to construct a marketing allocation

model that factored in both the con-

sumer importance and cost-effectiveness

of different points of interaction. This

enabled much sharper decisions about

its marketing mix, both by geography

and in relation to specific product

situations.

Time and time again, we find that com

panies are aware of the growing impor-

tance of touch points such as earned

media but don’t understand the true mag-

nitude of their effects or how to influ-

ence them. The solution is usually to com-

mission research that gets at the heart

of understanding the consumer’s decision

journey. Such foundational work must

shine a light on the touch points and mes-

sages that actually influence consumer

behavior. Marketers must be ready to use

the findings to debunk accepted wisdom

and legacy rules of thumb. In today’s

fragmented media world, only by knowing

how consumers’ interactions with your

company have evolved can you begin to For more on purchasing decisions, see “The consumer decision journey,” on mckinseyquarterly.com.

115Applied Insight

make more cost-effective marketing

investments that truly influence purchase

decisions.2

How well informed (really) is our marketing judgment?

Marketing has always combined facts

and judgment: after all, there’s no analytic

approach that can single-handedly

tell you when you have a great piece of

creative work. A decade ago, when

traditional advertising was all that mat-

tered, most senior marketers justifi-

ably had great confidence in their judg-

ment on spending and messaging.

Today, many privately confess to being

less certain. That’s hardly surprising:

marketers have been perfecting the TV

playbook for decades, while some

of the newest marketing platforms have

been around for months or even

weeks. But it can be tough to admit pub-

licly that your judgment is incom-

plete or out-of-date. And given the money

required, it’s hard both to make a ratio-

nal investment case for additional market-

ing spending and—in the same breath—

to admit that you are really making a

passionate guess.

Marketers often hear that the answer

to improving their judgment in this rapidly

changing environment is data, and

some companies have sophisticated ana-

lytical tools. Yet it’s difficult to integrate

all of this information in a way that not only

provides answers that you trust but

can also inform smart marketing changes.

We counsel a return to what creates

great marketing judgment: start by form-

ulating hypotheses about the impact

of changes to your marketing mix and

then seek analytical evidence.

One insurance company, for example,

spent a year working on a complex

demand model to try to understand the

impact of its growing marketing

spending in light of declining sales. Yet

output from the model “felt wrong,”

and the analytics were too complicated

for business leaders to understand.

It was only when the company articulated

specific questions it was trying to

answer, and designed targeted modeling

exercises to prove or disprove them,

that it was able to eliminate a lot of “noise”

in the data and uncover a clear relation-

ship between marketing spending and

business results. That’s when the internal

dialogue shifted from “should we be

spending on marketing at all?” to “what’s

the optimum marketing spending needed

to hit our targets?”

We are excited by the possibilities that

“big data” and advanced analytics create—

no question. But data remain only as

useful as the expertise you bring to bear,

and good judgment will remain a hall-

mark of the best marketers.

How are we managing financial risk in our marketing plans?

Successful communication requires

hitting the right audience with the right

message at the right time: a small,

moving target. With traditional media,

marketers have mitigated the risk of

2012 Number 3116

ensured a gradual move to emerging

media, mitigating risk while providing

breathing room for piloting, testing,

and learning.

That approach also can help with sce-

nario planning: one media provider

developed a straightforward decision sup-

port tool for precisely that purpose.

Geared to brand managers, not postdoc-

toral researchers, the tool used simple

response curves that allowed the marketer

to simulate different scenarios of mar-

keting spending. The tool was embedded

in an easily used PowerPoint slide

and proved invaluable for settling on

marketing approaches that hit the

sweet spot for a number of variables,

from cost to effectiveness to risk.

Such decision tools do more than provide

marketers with valuable information.

They stimulate dialogue about real trade-

offs and help to manage expectations

across business units and functions

whose cooperation is often critical when

companies change the broader com-

mercial mix. Managing risk is critical, and

marketers shouldn’t be shy about putting

this issue squarely on the table. With

thoughtful scenario planning and cross-

functional participation, such discussions

can be extremely rich and rewarding.

How are we coping with added complexity in the marketing organization?

As the external marketing environ-

ment becomes more complex, so must

the internal environment. Marketers

historically had a handful of communi-

cation vehicles; now they have dozens

failure through years of trial and

error about what makes great advertising.

That’s not the case with today’s new

media. Influence can shift rapidly, and

there is little accumulated experience

about which messages work, when mar-

keters should apply them, how they

can be scaled, or even whom they influ-

ence. Looking to external agencies is

little help; they’re in the same boat. At a

basic level, the degree of ROI risk—

getting the sales results you want from a

given amount of marketing spending—

has increased.

Yet while spending on new media

is a risky bet, it’s a bet companies feel

compelled to make. So the question

becomes how much risk is too much—or,

for that matter, too little. We’ve seen

efforts that result in short-term sales dips:

a retailer moving too quickly away

from circulars and a consumer-goods

player reducing TV spending too fast.

We’ve also seen companies feel the heat

from investors for rapidly ramping

up spending on digital channels without

cutting it elsewhere.

The global consumer products company

we mentioned earlier offers an alternative

approach. While its customer research

suggested that significant changes were

required in the way it allocated market-

ing spending, executives didn’t want to

choose an excessively risky path. They

therefore set risk parameters that enabled

some changes in the marketing mix

but limited the total shift in any given year.

There was a maximum percentage for

spending on unproven vehicles, for exam-

ple, as well as limits on annual spending

reductions in some channels or increases

in others. This simple allocation model

117Applied Insight

of them, and the number is growing

rapidly. This proliferation has led to

the emergence of both external and

internal specialists, with accumulated

experience not only in media chan-

nels (such as social media) but even in

individual vehicles (such as Facebook).

The exponential growth in marketing

complexity seems unending and needs

to be managed.

We’ve found three things that are always

true in managing complexity within

the marketing organization. First, you’ll

require a number of specialists. You

just will. You can’t get the skills and knowl-

edge you need in just one person,

and you’re not likely to get everything you

need internally. Second, you’ll need

somebody who both integrates marketing

efforts across channels and com-

munications vehicles and focuses on

the bottom line. In packaged-goods

companies, this was—and may still be—

the role of brand managers, but the

basic requirement is that it must be done

by someone. Finally, you’ll need

absolute clarity in processes, roles, and

responsibilities not only within the

marketing organization but also through-

out your company (across functions

and business units) and externally (with

agencies and external vendors). The

trust-based relationship between com-

panies and agencies isn’t at risk, but

everyone will have to accept that roles

are changing. (For more on organiza-

tional moves companies should make in

a world of more pervasive marketing,

see “Five ‘no regrets’ moves for superior

customer engagement,” on page 119.)

Addressing complexity in a compre-

hensive way requires a dedicated effort.

Senior executives at one North American

consumer-packaged-goods company,

for example, tried to sketch out their own

“future of marketing” with an eye to

how they would need to work differently

over the coming five years, given the

company’s growth priorities. No one pre-

tended to have a crystal ball, but exam-

ining the implications of several generally

accepted trends in consumer behavior

and media consumption habits made

some bold forecasting possible. The com-

pany then debated the future of brand

managers and specialist centers of excel-

lence and what that future implied

for resources required centrally and in

business units. Finally, it asked what

should be stopped or dramatically deprior-

itized. By undertaking this exercise,

the consumer-packaged-goods company

saw how it could keep its marketing

head count and budget relatively flat, while

massively shifting senior leadership’s

role, the culture of marketing, and

the capabilities of specialist and gener-

alist resources.

What metrics should we track given our (imperfect) options?

In an ideal world, the financial returns

and the ability of all forms of communica-

tion to influence consumers would

be precisely calculated, and deciding the

marketing mix would be simple. In

reality, there are multiple, and usually

imperfect, ways to measure most

established forms of marketing. Nothing

approaches a definitive metric for

social media and other emerging commu-

nication channels, and no single

metric can evaluate the effectiveness of

all spending. Yet you must have a way

2012 Number 3118

to track progress and hold marketers

accountable. That’s nonnegotiable. How

do you do it?

Even in the absence of a single way of

measuring ROI for different channels,

marketers should move toward an apples-

to-apples way of comparing returns

across a range of media. One international

logistics company, for example, faced

this necessity after committing more than

$200 million to rebrand itself following

a series of acquisitions. Senior executives

wanted proof that the effort was working—

and in a form they could readily under-

stand, not marketing jargon.

So the company adopted a simple three-

step approach: measuring the impact

of advertising on consumer recall, on the

public’s perceptions of the business,

and on sales leads and revenue. With

these data in hand—and proof that

the rebranding effort was ultimately

improving performance—members

of the C-suite had the assurance they

needed to reaffirm the investment

and to commit themselves to more com-

plex measurements, such as marketing-

mix modeling. Because the metrics

were developed internally, members

of the company’s board were simi-

larly reassured.

Likewise, one consumer-packaged-

goods company uses econometric ana-

lysis and frequent brand tracking to

assemble a scorecard of returns in the

short term (average and marginal

marketing ROIs within 12 months) and

the longer term (progress on brand

equity and brand loyalty for periods of

more than 12 months). The company

is tantalizingly close to its ultimate goal

of truly being able to make decisions

about short- versus long-term trade-

offs and to deliver complete answers to

“show me the money” requests.

Metrics are rarely perfect. Yet the volume

of data available today should make

it possible to find metrics and analytic

opportunities that take advantage of

your unique insights, are understood and

trusted by your top team, provide

proof of progress, and lay a foundation

for more sophisticated approaches

to tracking marketing ROI in the future.

The marketing environment continues to

change rapidly and often feels like a

moving target that’s impossible to hit. It’s

genuinely difficult to overemphasize

the magnitude of the change or the chal-

lenge. Yet time and time again, we find

that marketers who have good answers

to the five basic questions are better

equipped to do battle for the effective-

ness of marketing and to win the war

for growth.


1 See David Court, Jonathan Gordon, and Jesko Perrey, “Boosting returns on marketing investment,” mckinseyquarterly.com, May 2005.

2 See Roxane Divol, David Edelman, and Hugo Sarrazin, “Demystifying social media,” mckinseyquarterly.com, April 2012.

David Court is a director in McKinsey’s

Dallas office, Jonathan Gordon

is a principal in the New York office, and

Jesko Perrey is a director in the

Düsseldorf office.

Customers are demanding very different kinds of relationships with companies.

Here are some ways to jump-start customer engagement across your organization.

No organization can avoid coming to

grips with the rapidly evolving behavior

of consumers and business customers.

They check prices at a keystroke and are

increasingly selective about which

brands share their lives. They form impres-

sions from every encounter and post

withering online reviews. As we noted in

a McKinsey Quarterly article last year,

these changes present significant organi-

zational challenges, as well as oppor-

tunities. The biggest is that all of us have

become marketers: the critical moments

of interaction, or touch points, between

companies and customers are increas-

ingly spread across different parts of

the organization, so customer engage-

ment is now everyone’s responsibility.1

In many companies, the marketing

function is best placed to orchestrate

customer engagement for the entire

organization. To do so, the function must

be pervasive—able to influence touch

points it doesn’t directly control. Over the

past year, we’ve seen a wide range

of companies try to address customer

engagement in more integrated ways,

but many executives have told us they

simply don’t know where to begin.

The spectrum of organizational choices

is broader than ever, and companies

Five ‘no regrets’ moves for superior customer engagement

Tom French, Laura LaBerge, and Paul Magill

119

2012 Number 3120

are struggling to determine the appropri-

ate role of marketing for their business.

What’s more, senior executives often view

any internal effort by the marketing fun-

ction as a “land grab.” Given the absence

of solid return-on-investment data (see

“Measuring marketing’s worth,” on page

113), they may express skepticism about

marketing’s place in the new environment.

Although these challenges are difficult to

overcome, companies need not be fro-

zen in place while they wait for a complete

picture of the answer to emerge. The

five “no regrets” moves described below

help senior executives to move beyond

their function-by-function view of custo-

mer engagement and to improve the

coordination of activities across the broad

range of touch points they must care

about. By widening the lens companies

use to view customer-engagement

needs, enabling more rapid responses,

and building internal lines of commu-

nication, these steps create nimbler orga-

nizations with more pervasive marketing.

1Hold a customer-engagement summit

Almost all companies have annual or semi-

annual business-planning processes

that bring senior managers together from

units and functions to discuss strate-

gies and objectives. Yet few undertake a

similar process to discuss how to

engage with the lifeblood of all companies:

customers. We recommend holding

such a summit, with a participant list that

starts right at the top and cuts across

units and functions. At one US health

insurer, for example, the CEO’s direct

involvement sparked a company-wide

dialogue about how dramatically customer

behavior had changed and the breadth

and speed of the tactics required to

keep up.

The focus of such a summit is customer

engagement, which should not be

confused with the customer experience;

engagement goes beyond managing

the experience at touch points to include

all the ways companies motivate cus-

tomers to invest in an ongoing relationship

with a product or brand. The summit

must address three things. First, line and

staff managers have to align on the

vision for engagement: what relationship

do you want with your customers?

Examining their decision journey helps

you to compare your level of engagement

with what you believe it should be.

After Starbucks investigated customer

engagement in France and Italy, for

example, it concluded that consumers in

those countries preferred traditional

local café formats. As a result, it invested

in distinctive store layouts and furnish-

ings and adjusted its beverages and ser-

vice techniques.2

Second, the summit’s participants should

coordinate the activities required to

reach and engage customers across the

full range of touch points. When one

multichannel retailer held its summit, the

company, like many others, discov-

ered that recent trends had left it with an

anachronism: a set of touch points that

should be coordinated but were instead

managed independently within func-

tional silos. A customer-engagement sum-

mit allows the senior-management

121Applied Insight

team to create a coordinated plan span-

ning them—so that, for example, the

customer experience in a call center can

be coordinated with the behavior

of frontline employees, or the online-

registration experience with product

development.

Finally, a company ought to agree on the

elements of the customer-engagement

ecosystem that should be undertaken in-

house and those that will involve out-

side partners. Internal resources probably

won’t be able to deliver all of the require-

ments imposed by a world with many

touch points: for instance, content and

communications; data analytics and

insights; product and service innovation;

customer experience design and delivery;

and managing brand, reputation, and

corporate citizenship. Senior leaders need

to decide how to carry out these activ-

ities and design the mix of in-house capa-

bilities and external partners that will

deliver them. These customer-engagement

planning sessions, in addition to informing

and motivating the organization as a

whole around customer engagement, can

help avoid spreading scarce resources

too thinly.

2Create a customer-engagement council

One of the first outcomes of a customer-

engagement summit will probably be

the realization that an ongoing forum for

focusing management’s attention on

engagement is needed. This doesn’t have

to be yet another marketing committee.

In fact, your customer-engagement coun-

cil may already exist under another

name, such as the strategic-planning or

brand council. The purpose is to bring

together all primary forms of engagement—

marketing, communications, service,

sales, product management, and so on—

to coordinate tactics across touch

points in a more timely manner.

This council, which should be an oper-

ational and decision-making body, must

translate the findings of the customer-

engagement summit into specific actions

at individual touch points. To accom-

plish this goal, the council’s membership

needs to be large enough to ensure

that all key players are represented but

small enough to make decisions

Almost all companies have business-planning processes that bring senior managers together to discuss strategies and objectives. Yet few undertake a similar process to engage with the lifeblood of all companies: customers.

2012 Number 3122

“owners.” Marketing, for example, might

design and renew scripts for a call center,

which sales or operations would build

and operate. In addition, the process of

developing a charter is useful to force

a dialogue about who owns and does

what. More specifically, what does

marketing do in customer engagement?

What does it not do?

When conceived, constructed, and

operated correctly, these customer-

engagement councils play a critical role

in breaking the “silo” mind-set that

diminishes the effectiveness of customer

engagement in many organizations.

Such a council often serves as a mediator

and decision maker in conflicts between

functions and business units and as

a filter for what must be elevated to the

level of the CEO or other senior leaders.

3Appoint a ‘chief content officer’

A decade ago, when the extent of

the digital revolution—the massive

proliferation of media and devices

and the empowerment of consumers via

social networks and other channels—

became clear, many companies quickly

appointed “digital officers” to oversee

these emerging touch points. It’s now evi-

dent that the challenge is not just

understanding digital channels but also

coping with the volume, nature, and

velocity of the content needed to use

them effectively. Companies need

to create a supply chain of increasingly

sophisticated and interactive content

to feed consumer demand for information

efficiently. One high-technology company,

for example, included 17 people on

the engagement council. Because it is

difficult to make it function efficiently

with more than a dozen or so members,

decision making in practice rested

with a core group comprising the chief

marketing officer and the heads of

the company’s three primary divisions;

subteams of the council coordinated

its decisions with the company’s other

entities when necessary. These coun-

cils are most effective when chaired by

the same person who leads the customer-

engagement summit, such as the CMO

or the head of communications, strategy,

sales, or service.

The second consideration is how regularly

the council should meet. The customer-

engagement council of one retail bank

meets weekly, for example; a similar

council at a social-services organization,

monthly. The frequency of such meetings

generally is based on what key engage-

ment activities the group is driving and

their cycle time. The third consideration

involves inputs and support: the council

must make fact-based decisions, so

it needs information on everything from

priority touch points to customer

behavior and the moves of competitors.

Finally, such a council must have a

customer-engagement charter. To reduce

the risk of gaps, rework, and turf wars,

everyone in the organization needs

clarity about decision rights over touch

points and the key processes that

affect them. As we explained last year, it’s

useful to allocate the design, build,

operate, and renew rights for specific

touch points explicitly to functional

123Applied Insight

and engagement, not to mention a

mechanism for managing the content

consumers themselves generate. The

emergence of companies-as-publishers

demands the appointment of a chief

content officer (CCO).

Companies across industries—from

luxury goods to retailing, financial services,

automotive, and even professional

sports—are creating versions of this role.

All are adopting a journalistic approach

to recognize hot issues and shaping

emerging sentiment by delivering com-

pelling content that forges stronger

emotional bonds with consumers. The

CCO role is designed to provide the

on-brand, topical, and provocative con-

tent needed to engage customers.

The CCO must develop and manage all

aspects of the supply chain for con-

tent, ranging from deciding where and

how it’s sourced to overseeing the

external agencies and in-house creative

talent generating it.

Companies shouldn’t forget that even

with a CCO in place, designing and

executing a content strategy still requires

coordination with several key business

areas. The group responsible for gathering

and analyzing customer insights, for

example, may need a new mandate to sup-

port the CCO by providing research

on what customers and segments require,

as well as where, when, and how that

content can most effectively be delivered.

The CCO may need help from human

resources to find, attract, manage, moti-

vate, and develop the in-house creative

talent often required to fulfill a content

vision. The CCO will have to work closely

with the team responsible for shaping

brand perceptions to understand the com-

pany’s character deeply—its heritage,

purpose, and values—and with areas

such as corporate social responsibility,

investor relations, and government

affairs to gain a full perspective on how

the company interacts with external

stakeholders.

4Create a ‘listening center’

Engagement is a conversation, yet com-

panies are increasingly excluded from

many of the most important discussions.

More social and other media are avail-

able to mobilize your fans and opponents

than ever before, and any interaction

between a customer and your company

could be the match that starts a viral

fire. In this environment, companies should

establish listening centers that monitor

what is being said about their organiza-

tions, products, and services on social

media, blogs, and other online forums.3

Such monitoring should be hardwired

into the business to shorten response

times during real and potential crises,

complement internal metrics and tradi-

tional tracking research on brand

performance, feed consumer feedback

into the product-development pro-

cess, and serve as a platform for testing

customer reactions. We’re already

seeing listening centers established across

a broad swath of sectors from financial

services to hospitality to consumer goods.

A French telecommunications company

not only monitors online activity but also

has a tool kit of prepared responses.

“I can’t predict what crisis will hit,” a senior

2012 Number 3124

executive at the company said. “But

depending on the magnitude of it, I know

the people I need to get in the room and

what to discuss.”

5Challenge your total customer-engagement budget

Many companies struggle to figure

out how they can afford all the new tactics,

vehicles, and content types required

to engage with customers effectively. We

propose a different mind-set: recog-

nizing that there’s plenty of money, but in

the wrong places. Companies can

now communicate with customers much

more productively: digital and social

channels, for example, are radically

cheaper (and sometimes more effective)

than traditional media communica-

tions or face-to-face sales visits. When

you make trade-offs across functions,

you can free large amounts of money to

invest elsewhere; if the experience

of customers is so positive that they vol-

untarily serve as advocates for your

brand, for example, can you reduce adver-

tising expenditures? The moves your

customer service center makes to resolve

a crisis—say, a lost credit card on a

honeymoon or a major machine failure

on a critical production run—may

build more lifetime loyalty than years of

traditional loyalty campaigns.

What prevents many companies from

realizing these productivity gains

and cross-function trade-offs is a failure

to look at total spending on customer

engagement. They don’t see the opportu-

nities to make trade-offs across func-

tions and optimize the impact of invest-

ments across the entire set of touch

points. Most budget on a function-by-

function basis, and measure impact

the same way. When you look at these

expenditures and investments that

way, there is almost never enough money,

because each function seeks increased

funding to improve the customer inter-

actions for which it is accountable. That’s

a losing game.

Instead, add up what you spend on cus-

tomer engagement—in areas such as

sales, service, operations, and product

management, as well as in marketing.

Then identify all the radically cheaper

approaches you could take and ask,

for example, how you would take them

if your budget was 15 percent of its

current size or how a competitor in an

emerging market would approach

this problem. Such exercises help to

break the ingrained assumptions

and conventional wisdom that creep into

organizations and to highlight overlooked

opportunities.

Finally, look at trade-offs across

functions—for example, among invest-

ments in store renovations, revamped

e-commerce sites, higher ad spending,

changes in your model of sales force

coverage, or improved operations in cus-

tomer service centers. Which of these For more on fostering innovative thinking, see “Sparking creativity in teams: An executive’s guide,” on mckinseyquarterly.com.

125Applied Insight

have the advantage; the others will lose

ground. We have no doubt that com-

panies will one day evolve the full set of

processes and structures needed to

manage customer engagement across

the whole organization. Until then,

these five steps can get you moving in

the right direction.

should be prioritized and in what order?

Such decisions should be made not just

on the projected financial returns but

also on a strategic assessment of how

customer expectations are evolving,

how competitors are changing their meth-

ods of customer engagement, and

where your company may have distinc-

tive capabilities that could help it win

through superior customer engagement.

One major Asian retailer did exactly

this. Faced with ever-rising costs, it looked

at its entire customer-engagement

budget and identified where it was under-

performing or missing out on new

approaches to engagement. With that

baseline, it cut 25 percent off its tra-

ditional marketing budget, invested in

customer service, and reallocated

other marketing expenditures to focus on

digital, social, and mobile channels.

By reducing in-store operations costs, the

retailer financed new investments in

a major loyalty program to improve its

engagement with customers. As a result,

70 percent of the company’s sales now

are to members of its loyalty program—

about three times the rate of its competi-

tors. Total costs are lower and mar-

gins higher, despite a challenging retail

environment.

More customer interactions across more

touch points are shaping the degree

of engagement a customer feels with

your company. The critical barrier to

harnessing the potential value in this shift

is organizational—companies that

learn to design and execute effective

customer-engagement strategies will

1 See Tom French, Laura LaBerge, and Paul Magill, “We’re all marketers now,” mckinseyquarterly.com, July 2011.

2 See Liz Alderman, “In Europe, Starbucks adjusts to a café culture,” New York Times, March 30, 2012.

3For more about the importance of monitoring social networks and responding to consumers, see Roxane Divol, David Edelman, and Hugo Sarrazin, “Demystifying social media,” mckinseyquarterly.com, April 2012. For some real- life examples of how companies are using social media to drive engagement, see “How we see it: Three senior executives on the future of marketing,” mckinseyquarterly.com, July 2011.


Tom French is a director in McKinsey’s

Boston office; Laura LaBerge and

Paul Magill are senior experts in the

Stamford office.

126

persistent, sources of disruption, such

as fluctuating demand, labor rates,

or commodity prices that together chip

away at profits, increase costs,

and force organizations to miss market

opportunities.

All of these issues have become more

acute in recent years as rising volatility,

uncertainty, and business complexity

have made reacting to—and planning for—

changing market conditions more diffi-

By improving how risk is measured—and managed—in global operations,

companies can adapt to changing conditions faster than competitors.

The specter of a catastrophic failure in one

or more links of a company’s global

supply chain haunts senior executives

in many industries: for example, the

overnight flood or fire that disrupts a key

supplier and quickly grinds production

to a halt half a world away. Well founded

as such worries are, given the increas-

ingly globalized and interconnected oper-

ations of large organizations, they are

hardly the only risks facing supply chains.

No less significant are subtler, and more

Agile operations for volatile timesMike Doheny, Venu Nagali, and Florian Weig

Illustration by Daniel Bejar

127Applied Insight

cult than ever. The addition of some

three billion consumers to the global

middle class over the coming two

decades, and the strains they will place

on global resource supplies, all

but guarantee that such pressures

will continue.

Against this backdrop, some companies

in industries as varied as automotive,

building products, chemicals, high tech,

and pharmaceuticals are refocusing

global operations to make them more

agile. Notably, these companies aren’t

just spotting and mitigating supply

chain risks. They are also seeking ways

to use volatility to gain advantages

over rivals.

In this article, we’ll examine three com-

panies that are seeking advantages

from greater operational agility. While

each is benefiting in different ways, all are

developing similar skills that should

position their organizations well for years

to come.

Mitigate downside risks

A globally diversified pharma company

faced daunting operational challenges:

not only were upstream supply shortfalls

causing downstream production delays

(and headaches for customers) but the

company was also about to initiate quality-

related product recalls. Together, these

problems threatened to damage its profits

and reputation seriously. What’s more,

as senior leaders began to address the

problems, they concluded that the

organization’s existing processes weren’t

sufficient to identify—let alone mitigate—

potential sources of supply chain risk.

In response, a small team of executives

investigated a set of high-priority

products—those with great potential to

influence the company’s financial

results and public-health outcomes. The

team also catalogued the risks asso-

ciated with these products at major points

along the supply chain, from product

development to distribution. This

approach allowed the team to visualize

more clearly what problems might

occur and where: for example, the risk

that raw materials from suppliers might

be rejected for quality reasons early

in the process or that process disrup-

tions could, later on, delay production

in plants operated by the pharma com-

pany or a supplier.

In parallel, the team assessed the impact

of each of these risks on three of the

company’s major supply chain objectives:

meeting customer demand in a timely

way, as well as achieving cost and quality

targets. By creating a scoring system

that converted the assessments into

simple numerical scores, the team could

compare risk exposures and discuss

the company’s appetite for risk in an

“apples to apples” way at the corporate

level and across divisional and func-

tional boundaries.

The results were eye opening. Products

representing more than 20 percent

of the company’s revenues depended, at

some point in their life cycles, entirely

on a single manufacturing location. That

was a much higher proportion than

senior executives had assumed, given

the company’s large global network

of plants. Similarly, fully three-quarters of

the several dozen products that one

business division made contained mate-

2012 Number 3128

rials or components from single suppliers—

a finding that had big implications

for public health and the health of the

company’s reputation should a sup-

plier have problems. The exercise also

highlighted where the company was

likely to miss sales because of factors

such as poor demand forecasting

or capacity constraints (Exhibit 1).

In addition to suggesting some immediate

changes (measures to improve prod-

uct quality, for instance), these findings

helped executives create new risk

thresholds to serve as operating “guard-

rails.” For example, the company

no longer allows any particular plant to

account for more than a certain per-

centage of corporate revenues. It also

embarked on a far-reaching dual-

sourcing program to increase its operating

flexibility by guaranteeing better access

to supply. Thus far, the company reckons

it has lowered its risk exposure by

more than 50 percent and almost com-

pletely eliminated the most catastrophic

risks it faced, at a cost equivalent to

less than 1 percent of annual revenues.

Finally, company leaders established

a new, full-time team of managers

with expertise in supply chains, marketing,

finance, and other disciplines to work

with the business units to track and report

on risk-related issues regularly. The

“risk dashboards” the team creates have

given the company a common lan-

guage to use when discussing risk and

help prompt the kinds of timely con-

versations among functional leaders that

should help identify potential problems

before they occur.

Spot upside potential

Of course, the benefits of increased oper-

ational agility extend beyond iden-

tifying and protecting against downside

risks. Indeed, when companies enable

their operations to respond more quickly,

they often unlock the ability to seize

an upside potential that was previously

unreachable.

Consider, for example, the experience

of a global automaker whose leadership

team was concerned about the industry’s

multiyear development and investment

cycles. Recently, they asked a team

of supply chain executives to determine

the company’s degree of flexibility

and ability to react to potential swings in

demand, both negative and positive,

depending on how the fast-developing

global debt crisis played out.

The company’s models had long been

much better at predicting demand in

stable macroeconomic conditions than

in more volatile ones. The team there-

fore also took a broader look at the

primary causes of demand swings facing

the industry. Ultimately, it worked its

way through two dozen or so sources of

volatility until it arrived at the four it

believed mattered most: growth in two

key emerging markets, unpredictable

regulation in those markets, regionalized

downturn scenarios in established

markets, and volatility associated with

new market segments for which the

company didn’t have enough historical

baseline data to guide planning

decisions. As the team discussed how

various scenarios might play out, it

realized that the existing system of linear

129Applied Insight

extrapolation combined with best- and

worst-case scenarios was too limited.

The “aha moment” came when the team

decided to view the future as a dis-

tribution of outcomes and not a single,

forecasted point. The team members

knew they couldn’t build a system to man-

ufacture all cars required in every

possible scenario in which demand was

higher than expected (such a system

would have required investment levels

that could not be economically justi-

fied in the majority of situations). Yet they

did have the analytical capacity to model

these scenarios, using Monte Carlo

simulation and other traditional techniques.

This approach led the group to gene-

rate a probability distribution of demand

(by geography and by product) that

together included some 15,000 scenarios.

To this bell curve, the team mapped

the ability of the company’s production

network to meet potential demand

profitably in each scenario.

Happily, the executives saw that their

planning group’s original estimates

were broadly consistent with what the

new approach predicted as the most

likely outcome. Less happily, they could

now also assess how much upside

potential they had foregone in previous

years and clearly see how much they

Single manufacturing site

Type of risk Number of risks

Process-equipment failure

Production process robustness

Commodity costs

Single supplier source

Quality and regulatory

Capacity constraints

Uncertain demand forecast

IT related

Supply and commodity shortfall

Moderate level of risk High level of risk

Sample assessment of corporate-level risks

An ‘apples to apples’ analysis of risk was eye opening for executives at a pharmaceutical company.

Q3 2012Op AgilityExhibit 1 of 2

0 10 20 30 40 50 60 70

An ‘apples to apples’ analysis of risk was eye opening for executives at a pharmaceutical company.

Exhibit 1

2012 Number 3130

might forgo in the coming ones if some

of the more positive demand scenarios

played out (Exhibit 2). In aggregate, they

estimated this future upside potential

represented a significant share of the

company’s annual profits.

Certainly, much of this amount was impos-

sible to capture and always would

be—only one demand scenario would

prove correct, after all, and produc-

tion resources are finite. Nonetheless,

armed with this information, the

executives could now begin to look for

ways to increase the company’s

operational flexibility on the margins to

capture more of the upside if demand

proved higher than expected. By running

some of the scenarios at the level

of individual production plants, the team

spotted bottlenecks it could begin

to unclog immediately. Some are being

tackled through straightforward oper-

ating improvements at the line level;

others will require modest tooling changes.

Adapt to changing conditions

Changing competitive dynamics are

pressuring companies to introduce more

and more product variations to chase

new customers in new markets. In such

circumstances, operational agility

will increasingly represent a competitive

edge. Consider the case of a global

medical-device manufacturer that spe-

cializes in high-volume business-to-

business products with relatively low

margins. Over the years, the company

has honed its operations to maximize effi-

ciency and maintain advantages over

High

High

Probability distribution of 15,000 scenarios

Number of cars sold

LowLow

Gap indicates lack of operational flexibility

Disguised example

A global automaker’s demand–supply simulations revealed inflexibility.

Q3 2012Op AgilityExhibit 2 of 2

Average buildable supply Average market demand

Scenarios with lost revenue

Buildable scenarios

Demand scenarios

A global automaker’s demand–supply simulations revealed inflexibility.

Exhibit 2

131Applied Insight

competitors through a combination of

high quality and large scale. In fact,

many of the company’s operational

capabilities in these respects are

world class.

Those scale-oriented skills, though,

were most effective in relatively stable

markets—and the company had

recently recognized that some of its core

businesses were entering a phase of

rapid flux. New technology was providing

attackers with openings to introduce

products that had the potential to redefine

entire categories. Reacting to the

changes, the company’s leaders realized,

would require more flexibility not only

on the shop floor but also upstream,

during product development. Indeed, the

two needs were interrelated. Only by

increasing the proportion of shared com-

ponents and designs in some products

(and product families) could the company

economically produce its own new

offerings on the same machines and

production lines.

Implicit in these changes was a belief

that demand for several of the new prod-

ucts would grow. That wasn’t a fore-

gone conclusion, though, and if the com-

pany moved too quickly toward more

flexible production approaches, it might

wind up with too much capacity and

could even put at risk the economics of

some of its traditional products. To

mitigate this risk, the company carefully

phased in the evolution of its manu-

facturing approach to ensure that the dif-

ferent stages of the work preserved the

maximum option value of stopping early

should the expected demand not mate-

rialize. Today, as the company continues

to expand the new approaches across

its production platform, its leaders esti-

mate that these moves have already

lowered capital costs for the targeted

products by 40 percent as com-

pared with the traditional approach, while

reducing the ramp-up time for

new product variations by 75 percent.

In parallel, the company is revisiting the

skills it requires in product developers

and operations staff to ensure that new

hires have both the “hard” technical

skills and the “softer” ones necessary to

identify and prioritize uncertainties.

In our experience, such forward-looking

organizational moves are wise. Com-

panies that can make the ability to pre-

empt, detect, and respond to risk a

part of the institutional mind-set will hold

a big edge in an increasingly volatile world.

Across many industries, a rising tide of

volatility, uncertainty, and business

complexity is roiling markets and changing

the nature of competition. Companies

that can sense, assess, and respond to

these pressures faster than rivals will

be better at capturing the opportunities

and mitigating the downside risks.


The authors wish to thank Christophe

François, Isabel Hartung, and Alex

Niemeyer for their contributions to the

research underlying this article.

Mike Doheny is a principal in

McKinsey’s Atlanta office, Venu Nagali is a consultant in the New York

office, and Florian Weig is a principal

in the Munich office.

132132

Copyright © 2012 McKinsey & Company. All rights reserved.

What keeps marketers up at night

Extra Point

Hardly a day goes by without news of yet another marketing coup, from companies releasing

television commercials that go viral to new approaches for using digital technology to forge

deeper engagement with customers. Leaps in digital technology have made such breakthroughs

possible, but they’ve also created a host of new challenges. Last year, we surveyed almost

800 leading practitioners worldwide about digital marketing. The chart below, drawn from that

research, identifies the ten most difficult challenges that digital marketers face, as well as

their companies’ progress—or lack thereof—in tackling them.

Q3 2012Extra point: Digital challengesExhibit 1 of 1

High

Low

Well prepared Unprepared

Diffi

cult

y to

res

olv

e

Companies’ ability to address challenges1

1 For “well prepared,” ~70% of surveyed marketers have developed plans to address challenges; for “unprepared,” only ~30% have plans in place.

Digital revolution’s threat to business models

Mining customer insights

Recognizing online opportunity in all age groups

Online tools increasing price transparencyAutomated interactions

increasing customer dissatisfaction

Structuring organization to make marketing pervasive

Overreliance on data stifling breakthrough innovation

Navigating social-media phenomenon

Moderate challenges, modest gap in plans

Sizable challenges, not yet fully addressed

Biggest challenges, but most developed plans

Moderate challenges, not yet addressed

Lack of social-media metrics

Marketing-talent gap, especially analytics

For the research underpinning the exhibit, see “What marketers say about working online,” on mckinseyquarterly.com.

Peter Dahlström is a director in McKinsey’s London office, Chris Davis is an associate principal in the Toronto office, and Tjark Freundt is a principal in the Hamburg office.

Peter Dahlström, Chris Davis, and Tjark Freundt

For more about some of marketing’s thorniest challenges—how to structure a marketing organization in a digital era and finding the right metrics to measure

“marketing ROI”—see “Five ‘no regrets’ moves for superior customer engagement” and “Measuring marketing’s worth,” on pages 119 and 113, respectively.

Copyright © 2012 McKinsey & Company. All rights reserved.

Published since 1964 by McKinsey & Company, 55 East 52nd Street, New York, New York 10022.

ISSN: 0047-5394ISBN: 978-0-9829260-4-8

Cover artwork by Stefan Chinof

McKinsey Quarterly meets the Forest Steward- ship Council (FSC) chain of custody standards.

The paper used in the Quarterly is certified as being produced in an environ- mentally responsible, socially beneficial, and economically viable way.

Printed in the United States of America.

ISBN: 978-0-9829260-4-8 mckinseyquarterly.com • china.mckinseyquarterly.com

Highlights:

Josef Ackermann, Carlos Ghosn,

Moya Greene, Ellen Kullman,

Shimon Peres, and Daniel Vasella

on the changing nature of leadership

Get ready for China’s mainstream

consumers

Inside the growth advantage of

emerging-market companies

Lifting the effectiveness of global

organizations—including how

to attract talent in emerging markets,

and Pankaj Ghemawat on developing

global leaders

Why bad multiples happen to good

companies

Agile operations for volatile times

The age of the strategist: enhancing

strategic dialogue, building strategy

capabilities, and Harvard Business

School professor Cynthia Montgomery

on strategists as leaders

mckinsey quarterly q3 2012

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