McKinsey Quarterly Q3 2012

2012 Number 3
Leading in the 21st century
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 leadersJosef 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 unrelenting, the forces at work more complex, and the scrutiny of their actions more intense. The ways in which these leaders confront todays 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 marketsa tectonic shift that presents both leadership and organizational challenges. In a series of articles, Martin Dewhurst, Suzanne Heywood, and several of their colleagues in McKinseys 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 McKinseys 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 Barton Global managing director, McKinsey & Company
On the cover
30

Dominic Barton, Andrew Grant, and Michelle Horn
Todays 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 McKinseys managing director. Featuring commentary by: Josef Ackermann, former CEO of Deutsche Bank Carlos Ghosn, CEO of Renault-Nissan Moya Greene, CEO of Royal Mail Group Ellen Kullman, CEO of DuPont Shimon Peres, president of Israel Daniel Vasella, chairman of Novartis
Features The age of the strategist

50
Managing the strategy journey

Chris Bradley, Lowell Bryan, and Sven Smit
Regular strategic dialogue involving a broad group of senior executives can help companies adapt to the unexpected. Heres one companys story, and some principles for everyone.
60
Becoming more strategic: Three tips for any executive

Michael Birshan and Jayanti Kar
You dont need a formal strategy role to help shape your organizations strategic direction. Start by moving beyond frameworks and communicating in a more engaging way.
67
How strategists lead

Cynthia A. Montgomery
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.
Features Lifting the effectiveness of global organizations

76
The global companys challenge

Martin Dewhurst, Jonathan Harris, and Suzanne Heywood
As the economic spotlight shifts to developing markets, global companies need new ways to manage their strategies, people, costs, and risks.
92
How multinationals can attract the talent they need

Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan
Competition for talent in emerging markets is heating up. Global companies should groom local highfliersand actively encourage more managers to leave home.
81
Organizing for an emerging world

Toby Gibbs, Suzanne Heywood, and Leigh Weiss
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.
100
Developing global leaders

Pankaj Ghemawat
Companies must cultivate leaders for global markets. Dispelling five common myths about globalization is a good place to start.
Departments
7 McKinsey on the Web
Highlights from our digital offerings
110 Picture This

Diverse economies, common pain points
8 Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly 2012 Number 2
132 Extra Point

What keeps marketers up at night
Leading Edge
Applied Insight
10 Parsing the growth
Spotlight on marketing
113 Measuring marketings
advantage of emergingmarket companies

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.
worth
David Court, Jonathan Gordon, and Jesko Perrey
You cant spend wisely unless you understand marketings full impact. Executives should ask five questions to help maximize the bang for their bucks.
15 Get ready for Chinas
mainstream consumers
Yuval Atsmon and Max Magni
They will dominate the market by 2020and hold the key to growth for many companies.
119 Five no regrets
moves for superior customer engagement

Tom French, Laura LaBerge, and Paul Magill
Customers are demanding very different kinds of relationships with companies. Here are some ways to jump-start customer engagement across your organization.
19 Battery technology
charges ahead
Russell Hensley, John Newman, and Matt Rogers
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.
126 Agile operations for
volatile times
Mike Doheny, Venu Nagali, and Florian Weig
By improving how risk is measured and managedin global operations, companies can adapt to changing conditions faster than competitors.
23 Why bad multiples happen
to good companies
Susan Nolen Foushee, Tim Koller, and Anand Mehta
A premium multiple is hard to come byand harder to keep. Executives should worry more about improving performance.
26 Industry focus
Selected research and analysis from leading sectors: financial services, consumer products, and information technology.
McKinsey Quarterly editors Luke Collins, Senior editor Frank Comes, Senior editor Tim Dickson, Senior editor Thomas Fleming, Senior editor Allen P. Webb, Editor in chief Contributing editors Clay Chandler Caitlin Gallagher Allan Gold Bob Mertz Mark Staples Dennis Swinford Monica Toriello Design and data visualization Elliot Cravitz, Design director Jake Godziejewicz, Designer Mary Reddy, Data visualization editor Delilah Zak, Associate design director Editorial operations Nicole Adams, Managing editor Kelsey Bjelland, Editorial assistant Andrew Cha, Web production assistant Roger Draper, Copy chief Drew Holzfeind, Assistant managing editor Distribution Devin A. Brown, Social media and syndication Debra Petritsch, Logistics mckinseyquarterly.com Bill Javetski, Editor McKinsey Quarterly China Glenn Leibowitz, Editor Lin Lin, Managing editor Rebecca Zhang, Assistant managing editor
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McKinsey on the Web

Highlights from our digital offerings
mckinsey.com
Making sense of social media

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.
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Unleashing governments innovation mojo: An interview with the US chief technology officer
Todd Park explains how he has partnered technology with open-data initiatives to tap into the many talented innovators and entrepreneurs across the government.
Solar powers next shining

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.
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Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly 2012 Number 2
Demystifying social media

Senior leaders must learn to use the growing marketing power of social media to shape consumer decision making in predictable ways, wrote McKinseys 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.
What about B2B?

Jeff Marsico Executive vice president, Kafafian Group, Parsippany, NJ Most social-media analysis focuses on business-to-consumer initiatives. What are companies experiences with business-tobusiness initiatives? The authors respond: Part of what makes B2B unique in the context of social media is that independent B2B communitiesthose comprising architects, construction managers, purchasing agents, or othersallow 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 weve studied have found a receptive audience whenever they directly engage with social media.
Move beyond marketing

Hareesh Tibrewala Joint 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 realtime research, as well as for creating solutions in HR, product development, and investor management. It is no longer about how your CMO uses social media. It is about: Is your organization social-media ready? 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 managementalthough 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 pointfor some types of employees, a well-implemented Chatter program can reduce internal e-mail traffic by 30 percent.
The executives guide to better listening

In our previous issue, McKinsey alumnus Bernard Ferrari argued that listening is a critical part of informed decision makingbut 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.
Finding a balance
Ashish Chandra Gaithersburg, 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 teamboth in their interactions among themselves and with othersto 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 balancewithout abandoning altogether the idea of asking questions and challenging assumptions.
Listen to the introverts

Pearl Zhu President, 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. The author responds: How managers listen very much shapes an organizations 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.
Leading Edge
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2012 Number 3
Research, trends, and emerging thinking
10 Parsing the growth advantage of emerging-market companies 15 Get ready for Chinas mainstream consumers
19 Battery technology charges ahead 23 Why bad multiples happen to good companies
26 Industry focus: Financial services Consumer products Information technology
Parsing the growth advantage of emergingmarket companies

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 fastgrowing segments.
Leaders of multinational companies are by now well aware of the growth potential that emerging-market consumers represent, an opportunity that we estimate could exceed $20 trillion annually by the end of this decade.1 Many multinational players, however, dont 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 economies 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 domiciled in developed economiesand two and a half times as fast when both
11
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. Weve recently done further research, Q3 2012
Emerging Markets Exhibit 1 of 3
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 developedmarket sample and found that $3 billion companies grew at 10.7 percent annually over the period we studied, while $8 billion companies grew by 7.3 percent. On this basis, the smaller size of emergingmarket 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
Exhibit 1
Companies emerging markets than those based Companies inin emerging markets grew grew faster faster than those based in economiesand size explained only a fraction of i n developed developed economiesand size explained only a fraction the differential. of the differential.
Growth rate advantage for companies with emerging-market headquarters, 19992008,1 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
1 Based on growth decomposition analysis of 720 companies and their geographic business segments, 2Based on difference in growth rate between 2 sets of developed-market companies that mirror the average
analyzed on multiple time frames between 1999 and 2008.
segment size of emerging- and developed-market companies in our sample.
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2012 Number 3
factors appear to be materially different for these two classes of companies: Higher reinvestment rates. Emergingmarket 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 reinvested 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 assetsroughly 30 percent annually over the last decade was South Africas Mobile Telephone Networks (MTN). For most of that period, rapid asset growth accompanied aggressive expansion in the companys 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 investmentfor example, $784 million on recent network expansion in Ghana, and $1 billion on its Nigerian network. Agile asset reallocation. Additionally, we found that on average, emergingmarket companies have been reallocating capital toward new business opportunities more dynamically than those headquartered in developed economies. Companies in India, for instance, consistently redeployed investments across business units at a higher rate than US companies.3 Indias Kesoram Industries is a notable example, shifting 80 percent of its capital across business
Q3 2012 Emerging Markets Exhibit 2 Exhibit 2 of 3
Low dividend payouts and high fixed-asset growth suggest emerging-market companies were reinvesting Low dividend payouts and high xed-asset growth suggest emerging-market companies were reinvesting more aggressively. more aggressively.
Companies headquartered in: Average dividend payout rate,1 % Average cash as % of sales1 Fixed assets,1 compound annual growth rate, % 7
Developed economies, n = 303 Emerging economies, n = 41 39
80
14
17
12
1Based on results for companies over multiple time frames between 1999 and 2008; fixed assets include net
additions to assets from inorganic activities.
Leading Edge
13
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, however, it moved the majority of new investments to the tire business to capture the double-digit growth in Indias automobile 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 shareholders comprised a much more influential bloc among emerging-market companies than at developed-economy companies.5 Although we arent suggesting 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 segmentssuch as soft drinks, telecom 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 construction 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 developingmarket 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 example, was among the worlds top five companies in terms of international patents 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, companies 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 organizational 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
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2012 Number 3
Q3 2012 Emerging Markets Exhibit 3 of 3
Exhibit 3
Developed-market companies have filed more patents, but Developed-market companies have led more patents, but emerging-market companies gaining emerging-market companies havehave been been gaining ground ground rapidly. rapidly.
Companies headquartered in: Average number of patents led in 2010 In emerging economies Developed economies Emerging economies 153 In developed economies 547 Growth rate of patents led, 200010, CAGR,1 % In emerging economies 9 In developed economies 4 Overall
18
71
22
14
16
1Compound annual growth rate; excludes domestic markets.
Source: World Intellectual Property Organization (WIPO); McKinsey analysis
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.
1 See David Court and Laxman Narasimhan,
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.
The authors would like to acknowledge the contribution of Eric Matson to the development of this article. Yuval Atsmon is a principal in McKinseys 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 quarterly_ comments@mckinsey.com.
Capturing the worlds 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.
Leading Edge
15
Get ready for Chinas mainstream consumers

Yuval Atsmon and Max Magni
They will dominate the market by 2020and hold the key to growth for many companies.
Its no easy task to understand the evolution of Chinese consumer profiles and spending patternsgrowth 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 arent yet affluent but are significantly better off than the value-oriented households that currently predominate in China.
The mainstream takes charge Today, this not-quite-affluent segment is small, representing only 6 percent of the urban population. A surge in household incomes, though, should propel the groups numbers to 51 percent of it by 2020 (exhibit)so large, in fact, that these households will be in the mainstream. 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 numbersnearly 400 million people in 167 million householdsto become the standard setters for consumers across China. Today, about 85 percent of the households with mainstream incomes live in Chinas 100 wealthiest cities; in the next 300 wealthiest, only
Q3 2012 China consumer Exhibit 1 of 1
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2012 Number 3
Exhibit
The ranks of Chinas mainstream consumers will grow The ranks of Chinas mainstream consumers will grow dramatically dramatically by 2020.
by 2020.
Share of urban households by annual household income,1 % 100% = 0 $147 million 1 $226 million 6 2 $328 million 6 Afuent (>$34,000) Projected CAGR,2 200020, % Total = 4.1 20.4
63 82
51
Mainstream ($16,000$34,000)
26.6
36 36 10 2000 2010 7 20203
Value ($6,000 $15,999) Poor (<$6,000)
1.2
3.8
2CAGR = compound annual growth rate. 3Forecast.
1 In real 2010 dollars; in 2010, $1 = 6.73 renminbi.
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 overseas travel now confined largely to people from the wealthiest locales, such as Shanghai and Shenzhen. The natural evolution of Chinas 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 tomorrows elderly (45- to 54-year-olds)and they dont look terribly different from todays 34- to 45-year-olds, who devote 14 percent of their spending to apparel.
Leading Edge
17
Changes in social norms are already leading younger, wealthier consumers to feel greater confidence about expressing themselves through their purchases.
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 Chinas value segment, an approach that offers companies access to many more buyers today: greater than 80 percent of urban households, which will probably 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 markets rapid growth will give companies another possibility: to introduce higher-quality, higher-margin products to a vast new group of consumers. The mainstream segments expansion 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 productsmuch as consumers in the West do. As larger numbers of people enter the mainstream, their purchasing behavior 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 products 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 oftenweak 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.
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2012 Number 3
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 worlds largest group of mainstream consumers, China could become the leading test bed for new marketing 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 groundlevel trends. They may also have to vest more decision-making authority in Chinabased executives, who are closer to the action and better able to respond to swift changes in the marketplace.
1 The latest survey, carried out in 2011, gauged
Chinese consumers attitudes and spending behavior for about 60 product types and 300 brands. The respondentsrepresenting a wide range of incomes, ages, regions, and cities accounted for 74 percent of Chinas total GDP and 47 percent of the total population.
Yuval Atsmon is a principal in McKinseys Shanghai office, and Max Magni is a principal in the Hong Kong office.
For additional thinking on the relationship between organizational issues and emerging-market strategy, see Lifting the effectiveness of global organizations, on page 74.
Leading Edge
19
Battery technology charges ahead

Russell Hensley, John Newman, and Matt Rogers
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 transportation, power, and petroleum sectors. To inform the debate, we developed a detailed, bottom-up should cost model that estimates how automotive lithiumion battery prices could evolve through 2025. Our analysis indicates that the price of a complete automotive lithiumion 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 vehicles competitively, on a total-cost-ofownership 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 battery prices. Macroeconomic and regulatory 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 yearsthe length of a productdevelopment cycledepending on the investment and power trainportfolio strategies these companies pursue. Moreover, the emergence of cheaper batteries will probably spur further innovation in other technologies, such as internal-combustion engines. These advances would increase the probability that the broader economics of transportation will be reshaped over the next decadeno matter which technology prevails. The path to savings The 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
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2012 Number 3
costs and margins for various segments of the value chain. This component-bycomponent 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 Q3 2012 alternativesat least on a total-cost-ofEV battery ownership basisto vehicles powered Exhibit 1 of 1 by internal-combustion engines.
Manufacturing at scale. Scale effects and manufacturing productivity improvements, representing about one-third of the potential price reductions through 2025, could mostly be captured by 2015. Savings will come largely from improving manufacturing processes, standardizing equipment, and spreading fixed costs over higher unit volumes. New plants could therefore be significantly more productive than those in operation before 201011.
Exhibit
The interaction of battery and fuel costs will determine the The interaction of battery and fuel costs will determine the size of size of thefor market for electric vehicles. the market electric vehicles.
Electried vehicles projected competitiveness with internal-combustion-engine (ICE) vehicles, based on total cost of ownership1 (US example) Fuel price, $ per gallon 6.00 5.50 5.00 4.50 2011 average 4.00 3.50 3.00 2.50 2.00 150 200 250 ICE vehicles are competitive Recent US conditions Battery-electric vehicles are competitive PHEVs2 are competitive 2011 average
Hybrid-electric vehicles are competitive
300
350
400
450
500
550
600
650
700
Battery prices, $ per kilowatt hour (kWh)
1Assumes 240 watt hours per mile (as may be achieved with lightweight, efficient air conditioning) 2Plug-in hybrid-electric vehicles.
compared with todays 305322 watt hours per mile. Source: US Energy Information Administration; McKinsey analysis
Leading Edge
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Electric-vehicle basics
T hroughout 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 formsbattery-electric vehicles, plug-in hybrid-electric vehicles, and hybridelectric vehicles. We use the term price (that is, costs plus margins) to reflect what automakers could payin 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.
202025. These efforts represent 40 to 45 percent of the identified price reductions. New battery cathodes that incorporate layeredlayered structures5 eliminate dead zones and could improve cell capacity by 40 percent. Manufacturers are developing high-capacity silicon anodes that could increase cell capacity by 30 percent over todays 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 capacities by 17 percent over presentday standardsand potentially by much more. Many innovations that enable price reductions for automotive lithium-ion batteries will actually be realized first in other sectors, particularly consumer electronics, 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 featuring a relatively quick decline in battery 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 hybridelectric vehicles (PHEV) or, perhaps, todays hybrid-electric vehicles (HEV). Given the length of product-development
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 todays 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
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2012 Number 3
cycles, automakers may hedge their risks by investing in a range of technologies. Other sectors could face disruptions as wellparticularly electric power and petroleum, where the emergence of inexpensive energy storage could undermine the profitability of capital-intensive, long-lived assets. Power companies, for instance, could face challenges if lowcost battery storage enables the wider use of distributed generation or if the adoption of electrified-vehicle charging alters patterns of demand in some markets. Similarly, the race between electrified vehicles and advanced internalcombustion technology could accelerate the reduction in demand for transport fuels. Refiners of liquid fuels in developed markets would have to rethink their product and customer portfolios. These, of course, are only early indicators of possible market developments. But given the path to substantially lower battery prices, which are now coming into view, executives should be considering bold actions to capitalize on one of the biggest disruptions facing the transportation, power, and petroleum sectors over the next decade or more.
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.
The authors would like to acknowledge the signicant contribution of Mark Shahinian to the development of this article. Russell Hensley is a principal in McKinseys Detroit office; John Newman is an associate principal in the San Francisco office, where Matt Rogers is a director.
Leading Edge
23
Why bad multiples happen to good companies

Susan Nolen Foushee, Tim Koller, and Anand Mehta
A premium multiple is hard to come byand harder to keep. Executives should worry more about improving performance.
Earnings multiplesparticularly priceto-earnings ratiosare 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 dont understand the true value of their companies. We have great growth plans, these chief executives say, or Were 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 managements control. Thats probably because the revenue 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 view A closer look at the US consumerpackaged-goods (CPG) industry bears out these findings. For our analysis, we used a multiple based on enterprise valueEV/EBITA.1 Its used by most sophisticated investors and bankers who compare companies with their peers and avoids some distortions of the ubiquitous P/E ratios.2 From 1965 to 2010, the difference in EV/EBITA multiples between topand 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
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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 patternsfor 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 Q3 2012 grow at roughly the same rate. Whether Multiples or not executives think this idea is Exhibit 1 of 1 evidence is on the side reasonable, the of investors. Companies that are
now growing faster than their peers arent likely to do so for the next five years. Throughout the economy, weve found that revenue growth across companies generally converges (exhibit). We also analyzed the CPG industrys 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 dont. 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
Exhibit For most companies, sustaining stronger revenue growth than peers than peers do is difficult. is difcult.
US nonnancial companies1 grouped by comparable revenue growth at time of portfolio formation Median portfolio growth, % >20% 35 30 25
Growth rate at portfolio formation
For most companies, sustaining stronger revenue growth
20 1520% 1015% 510% 15 10 5 0 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
<5%
Years since inception of portfolio

1Companies with ination-adjusted revenue $200 million that were publicly listed from 19632000. 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 & Poors Capital IQ Compustat; McKinsey analysis
Leading Edge
25
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 & Dwights 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 handilyyet its earnings multiple fell to 10, from 16. This likely happened because its multiple had been high at the outset, despite low earnings, suggesting that investors had assumed that earnings would gravitate toward the sectors median. Managing beyond multiples Many 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 markets, are subject to the same macroeconomic forces, and have similar levels of growth and returns on capital. Rather than fixating on multiples, executives would be better off focusing on the levers they can influencethe amount of value they create through growth, margins, and capital productivity. That approach will improve a companys share price, even if it wont necessarily generate a higher earnings multiple, 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 warrantedfor example, in cases when investors truly dont seem to grasp the value in a companys product pipeline or geographic-expansion plansthere are limits to how much can be accomplished in this way. Eventually, investors as a group will probably revert to their perceptions of convergence. Not that companies should abandon communications entirely; communicating with the right investors so that they understand 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. 24144.
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 McKinseys New York office, where Tim Koller is a principal and Anand Mehta is a consultant.
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2012 Number 2012 3 Number 3
Industry focus
Selected research and analysis from leading sectors
Financial services
Small enterprises offer large potential for global banks

Mutsa Chironga, Jacob Dahl, and Marnus Sonnekus Emerging markets are poised to account for 60 percent of global banking-revenue growth over the next decade. To fully participate 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 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, challenges, and strategic options.
Mutsa Chironga is an associate principal in McKinseys 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.
Q3 Industry round-up Leading Edge MSME Exhibit 1 of 1
27
Micro-, small, and medium-sized enterprises in emerging markets represent both opportunities and challenges for global banking.
Credit bureau coverage,1 % of adults 100 90 80 70 60 50 40 30 20 10 0 0 Vietnam Peru Indonesia Russia India Egypt Philippines 4 5 6 7 8 9 Saudi Arabia Venezuela 30 31 32 33 Thailand South Africa Kuwait Chile Turkey Malaysia Argentina South Korea Mexico Colombia Brazil Poland
Cluster II
Cluster IV
Czech Republic
China
Cluster III
United Arab Emirates
Cluster I
Nigeria 1 2 3
10 11 12 13 14 15 16 17
Bank branch coverage, number of branches per 100,000 adults
Increase in share of population with access to nancial services, 200610 >3% 1.53% <1.5%
Circle size indicates relative volume of banks current revenues from small and medium-sized enterprises, 2010
Cluster I: Micro-, small, and medium-sized enterprises are hard to reach and risk management is difcult. 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 200610; World Banks Doing Business database; McKinsey analysis
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2012 Number 3
Consumer products
Better performance from locally deployed marketing

Katya Fay, Carl-Martin Lindahl, and Monica Murarka As companies venture into new global markets for growth, they continually experiment with organizational design. A perennial question is how to deploy marketing resources: whether its 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 Q3 2012 of the worlds largest consumer-packagedgoods companiesCPG indicates Ind snapshot: org that those with a locally deployed marketing function, Exhibit 1 of 1 supported by a few larger-scale global To be sure, a companys organizational design must support its specific strategy, so locally focused marketing might not be right for every company, and theres no single blueprint for marketing effectiveness 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.
1 Centralized resources specializing in specific
or regional centers of excellence,1 outperconsumer insights. formed more centralized peers in both effectiveness and efficiency (exhibit). Local Katya Fay and Monica Murarka are marketers benefit from a close-up view consultants in McKinseys Chicago office, of consumers and can respondhave quickly to Fast-growing companies more locally deployed Lindahl is a principal. where Carl-Martin their changing needs and preferences. marketing organizations.
% of marketing employees At country level At regional or global level Companies marketing resources Efciency: revenue per marketing employee
marketing subfunctions, such as promotions or
Effectiveness: organic revenue growth vs underlying market growth rate
11
Companies with large portion of locally deployed resources $14.5 million +2.8%
89
Companies with large portion of centrally deployed resources
49
51
$10.8 million
+0.6%
For additional research and insights, see Designing a winning consumer goods organization, on mckinsey.com.
Leading Edge
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Information technology
When company IT is consumerized

Lisa Ellis, Jeffrey Saret, and Peter Weed The near ubiquity of smartphones and the This consumerization of corporate IT growing use of tablet devices are changing seems likely to raise tensions: while many the corporate IT landscape, as employees employees gain access through passwordincreasingly use their own mobile devices protected company Web sites and for workplace tasks. Many companies, applications, 50 percent of IT departments of course, have supported and even encour- restrict usage in some fashion, since aged employees to work remotely and the devices increase security risks and have2012 issued corporate smartphones and often do not mesh with the corporate Q3 enabled intranet access from home comIT architecture. However, 88 percent of Ind snapshot: BYOD puters. But tech-savvy workers are pushing employees believe the restrictions will Exhibit 1 of 1 the boundaries. A McKinsey survey of ease, and most prefer a single device that 3,000 employees who use their own devices integrates work and personal uses. for work shows they deploy them not just for business calls and e-mail but also Lisa Ellis is a principal in McKinseys to access employer IT applications Stamford office, where Jeffrey Saret is and corporate intranets and for other work- a consultant; Peter Weed is an associate Many employees use their personal tablet devices for a variety principal in the Boston office. related tasks (exhibit).
of business-related tasks.
Device owners who perform business tasks on personal tablet, size of word indicates relative %
Source: McKinsey 2012 survey on consumers use of mobile devices
Copyright 2012 McKinsey & Company. All rights reserved. We welcome your comments on this article. Please send them to quarterly_comments@mckinsey.com.
Artwork by Stefan Chinof
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Dominic Barton, Andrew Grant, and Michelle Horn
Leading
in the 21st century

Six global leaders confront the personal and professional challenges of a new era of uncertainty.
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 worlds 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 bewildering 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 worlds largest and most vibrant organizations. Excerpts from six of those conversations appear below. The leadersJosef 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 todays environment in different ways. But the common themes that emerged from these conversationswhat it means to lead in an
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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 todays 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 todays 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.
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 RenaultNissan 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.
33
Moya Greene was appointed CEO of the United Kingdoms Royal Mail Group in 2010. From 2005 to 2010, she was CEO of Canada Post.
Ellen Kullman has served as DuPonts 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.
Shimon Peres is the ninth and current president of Israel. In a political career spanning more than 65 years, he has served twice as Israels prime minister and has been a member of 12 cabinets.
Daniel Vasella has been chairman of the Swiss pharmaceutical company Novartis AG since 1999. He served as the companys CEO from 1996 to 2010.
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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 overtaken 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 economic strength, stands for 38 percent of global revenues. Over the years, people in our headquarters, in Frankfurt, started complaining to me, We dont see you much around here anymore. Well, there was a reason why: growth has moved elsewhereto Asia, Latin America, the Middle Eastand this of course had consequences on the time spent in each region.
Managing risk also has become much more complex for banks. Its not only market risk; there is more and more political and social risk. Increasingly, financial markets are becoming political markets. That requires different skillsskills 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 dont think leadership shows unless it is highlighted 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
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 its not the strategy of the company that is in question; its 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 worldan age where everything 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 dont just sit around waiting for the solution to come from headquarters. We are accustomed 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 boweconomic volatility and the impact of natural events like the Japanese earthquake and tsunamiat much greater frequency than weve ever seen. You have to be able to react very quickly. And the world is so connected that the feedback loops are more intense. Youve got population growth and the world passing seven billion people last year, and the stresses that causes, whether its 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 theoriesfrom Adam Smith to Karl Marxhave 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
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2012 Number 3
more important than materials. And ideas are unpredictable. Science knows no customs, no borders. It doesnt 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 armybut it cannot conquer ideas, it cannot conquer knowledge.
Mastering todays 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 judgmentand 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? Its a sevenday-a-week job. I think thats true for anyone in these roles. If you dont love the company and the peoplereally love them you cant do a job like this.
Im pretty energetic. I start at five in the morning. I dont even think about it anymore; the alarm goes off and Im 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. Im a big walkerthats 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.
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Ive usually got three or four books on the go. Ive given up on novels. I cant get through them no matter how good they are; theres no way Ill finish before theres some kind of interruption. So I read poetry now: the collected works of Ted Hughes, Emily Dickinson. Im 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. Thats 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. Im 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. Im not a tech freak. I use my iPhone and send text messages, thats it. I still like to have paper in front of me and I do a lot in writtenmemo 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 youre unable to relax quickly, I think you cant be a CEO for a considerable length of time. Some people do meditation or yoga. I dont do any such thing. I think you have it in your DNA or you dont.
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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 listena board member, an advisersomeone to whom he can speak in total confidence, to whom he can say, Ive had it; Im 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 relationshipsespecially 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 youre present? Can you be entirely away when youre 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, Im 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 cant 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 monkwell, maybe not a monk, but a Knight Templar. I wake at a certain hour, sleep at a certain hour. There are certain things I wont 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. Im bringing my board of directors to India in a couple of weeks to help them really see the issues were facing. Thats where I get my energy from. Its 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. Thats part of what drives me.
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Shimon Peres: The mind of a leader must be freea 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 dont impose upon us your own arrogancethe world you created, wounded by war, corrupted by money, separated by hatred. And dont 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 dont 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 organizations purpose and role in societyall against a backdrop of 24-hour financial coverage, ubiquitous blogs, and Twitter feeds. That means learning new modes of communicating across todays 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, its always, Ackermann says this or Ackermanns doing thateven if I personally had nothing to do with it. You are the institution you lead.

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Youre a product. And the press will paint you as either a hero or a villainwhatever sells. If they paint you as a hero today, you should be prepared to be painted as a villain tomorrow.
Dan Vasella
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. Dont 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. Youre a product. And the press will paint you as either a hero or a villainwhatever 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, Id have said that it was harder to be a public official than an executive in the private sector. But the tables have turned. Its tough these days to be the CEO of any businesseven a very successful one with a balanced view of the corporations position in society.
My public-sector experience has helped me to understand how easily sound policies can be derailed by small, symbolic things. It
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 dont 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 isnt 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 peoplewho are the most powerful ambassadors for our brandStand 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: Were going to get rid of the seniority system. Were going to shut down plants. Were going to reduce head count. Were going to undo the keiretsu system. I had a lot of criticism. But there were also people who said, Lets 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 sensitivitynot 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
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2012 Number 3
a pen demonstrated many things: curiosity, memory, courage. They understood that you lead not with bayonets but with words. A leaders words must be precise and totally committed.
Decision making under uncertainty

A nal theme is that leaders must increasingly resist the temptation 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, thats ityou 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. Everythings complex, but once you have decided, sometimes you need to simplify so much its 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 cant have too much nuance. In a crisis, you have to be able to do all of these thingslistening, deciding, and then simplifyingvery 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. Thats 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
43
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 doubtsand 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 dontand you pretendthen you are playing a role, which eventually leads to an unhealthy situation. Thats not to say you should act like youre in a confessional. 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, youre 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. Thats 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, Dont 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 arent confronted with a situation where you havent heard anything on a particular issue for half a yearand 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.
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Preparing for a new era of leadership

Its never been realistic to break leadership into a fixed set of essential competences, and thats particularly the case in todays complex, volatile environment. Still, the themes our interviewees sounded represent a rich set of opportunities for leaders to boost their effectiveness. To close, wed like to amplify and extend those themes by emphasizing three skills that can help leaders thrive in todays 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 centurycheap capital, low interest rates, a global demographic dividend, and a gradual decline in commodity priceswill either be reversed or seesaw violently. Managing 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 theyve 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 leaders
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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 sectorslow growth, unemployment, sovereign indebtednesscan be addressed only in concert with the public sector and are heavily influenced by the actions of groups that are neither commercial 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.
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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 leaders 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 cant always perform in moments of extraordinary pressure. The chief executive of one of the worlds 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.
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If the burden of leadership in the modern age seems overwhelming, the potential benefits are overwhelming too. Large organizations if led wellcan 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 McKinseys global managing director, Andrew Grant is a director in McKinseys Singapore office, and Michelle Horn is a principal in the Atlanta office.
50 Managing the strategy journey Chris Bradley, Lowell Bryan, and Sven Smit 60 Becoming more strategic: Three tips for any executive Michael Birshan and Jayanti Kar 67 How strategists lead Cynthia A. Montgomery
Illustration by Michael Glenwood
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The age of the
strategist
Uncertain times place a premium on strategynot 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 attention 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

Chris Bradley, Lowell Bryan, and Sven Smit
Regular strategic dialogue involving a broad group of senior executives can help companies adapt to the unexpected. Heres one companys story, and some principles for everyone.
Back in 2009, as the senior-management teams at many companies were just beginning to emerge from the bunkers to which theyd 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 companies are generating strategies that, by their own admission, are substandard. We reached that conclusion after surveying more than 2,000 executives about a set of ten strategic teststimeless standards that shed light on whether a particular strategy is likely to beat the competitionand learning that only 35 percent of their strategies
1 Lowell Bryan, Dynamic management: Better decisions in uncertain times,
mckinseyquarterly.com, December 2009.
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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 theyve begun to embrace more frequent strategic dialogue involving a focused group of senior executives. These companies, in effect, have started on a journeya journey to evolve how they set strategy and make strategic decisions. Their journey isnt complete, and neither is ours, but weve 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
Q3 2012 Emerging Markets Exhibit 1 of 2 3For 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.
Exhibit 1 The annual planning process is frequently the primary trigger for strategic decision making.
% What is the primary trigger, if any, for your company to make decisions about business unit strategies? Dont know 18 3 44 Our regular planning cycle Compared with ve years ago, how frequent is your companys decision making about business unit strategy? Dont know 7 7
My company has no single trigger
Less frequent
35 Issues as they arise
About the same
30
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More frequent
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
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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. C onvert these initiatives into an operating reality by formally integrating the strategic-management process with your financialplanning processes (a change that usually requires also moving to more continuous, rolling forecasting and budgeting approaches). To explain what this looks like in practice, well 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 realized that while the institution was recovering from its financial losses, it didnt 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 banks 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 banks strategy. To start the process, the CEO invited the heads of his three major lines of businessthe Global Investment Banking Group, the Global Asset Management Group, and the Domestic Bankto meet regularly on how they could create a
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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 decisionsparticularly 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 simultaneously (or through one-off projects). In a reasonable time period, thoughsay, 18 months to two yearsit 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 institutions competitive position, its business as usual financial trajectory, and a realistic set of future aspirations. There was a significant gap between the banks 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 banks 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 decision: to ensure that the banks 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 creating 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
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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 specific 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 significant risk. Also unclear was the right timing and sequencing for decisions 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 seniormanagement teams 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 services 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
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critical issues to be debated and addressed through the topmanagement 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: S et 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. evelop a pragmatic approach for prioritizing issues. One way D 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 issuessuch as how to improve capital budgeting, which affects many different businessescan 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 forums members wont have significant experience as strategists, its worth pausing for a moment to reflect on the skills they may need to raise the right issues and discuss them effectively. Strategy capabilities arent 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 mentioned 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 weve seen is that the banks 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
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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 choicesor, 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. Therefore, one of the highest priorities of a top-management strategy forum is to ensure disciplined implementation of key strategic initiatives. A big advantage of the journey approach is that the process 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 incorQ3 2012 Q3 2012 porated in financial plans and operating budgets. One important capaStrategic Strategic journey journey bility that companies must develop to do this well is rolling foreExhibit 2 Exhibit of 3 2 of 3
Exhibit 2 Moving from Moving ideas from to execution ideas to execution requires seven requires distinct seven modes distinct of modes activity. of activity.
Idea generation Idea generation DevelopmentDevelopment and selection and selection
Forecast Search Search Forecast Frame Baseline Baseline Frame What do we expect What do we expect What options do What options do What are our What are our What is the reality What is the reality of the future we have to of the future we have to objectives of our performance of our performance objectives environment? environment? create value? create value? and constraints? and capabilities? and capabilities? and constraints?
Dene Understand Understand sources Identify emerging Identify emerging Establish and rene Establish and rene Dene decisions to be decisions to be sources considered considered of value and past of value and past trends and implications trends and implications option set option set performance performance Understand Isolate critical Isolate critical Assess possible Assess possible Understand scope of scope of Identify major Identify major uncertainties potential solutions potential solutions uncertainties competitive responses competitive responses changes in market changes in market Clarify Develop realistic Evaluate options Evaluate Clarify rules that will rules that will drivers in options in and and drivers Develop realistic govern work govern work divergent scenarios divergent scenarios given scenarios given scenarios Analyze available Analyze available capabilities capabilities
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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 questionwhat are the retail banks specific near-term opportunities in big data?from idea into operating budget. Obviously, an initiative must be fairly advancedand granularto justify putting the needed investments and expected returns into the rolling forecast and, eventually, into the formal annual fiscal budget 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 budget. When executives who have worthy ideas lack the budgets to pursue them with a sufficient full-time staff, weve found that its 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, financial 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
Execution and Execution renement and renement

Evolve Choose Choose Commit Evolve Commit How will the strategy packages of will we deliver What packages What of How will we deliver How will the strategy How unfold and evolve overand evolve over choices will define choices will define the changes required unfold the changes required time? How do we our strategy? our strategy? in the strategy? in the strategy? time? How do we manage strategic risks? strategic risks? manage
Decide Execute Execute agreed-upon Decide where and how whereand Develop how actionplans Develop action plans agreed-upon to compete to compete for selected options for selected options action plans action plans Determine Reallocate Reallocate resources Track ongoing Determine what, if any, what, if any, resources progress Track ongoing progress hedging is needed hedging is needed to nance plans to nance plans Determine revisions Determine revisions Create coherent Determine how Determine how to be made Create coherent to be made package package to communicateto communicate Determine when Determine when changes changes to compete to compete Delegate key jobs Delegate to key jobs to pivotal roles pivotal roles
Q3 58 2012 2012 Number 3 Strategic journey Exhibit 3 of 3

Exhibit 3
A rolling process of forecasting and budgeting transforms a critical strategic issue into an operational initiative.
Illustrative example of big-data initiative in a large retail bank Year 1 Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Long-range planning A Include initiative in retail banks 3-year plan B Baseline, forecast, search, and choose Framing Commit Working team supports decisions 5-quarter rolling forecast C Deliver required Q1 investment D Review budget (preliminary and nal) Implementation E Plan execution (eg, milestones, investments) Year 2 Q1 Q2 Q3 Q4 Year 3 Q1 Q2
Strategy-planning council
Annual budget
A Corporate strategy forum identies opportunities, nances with seed capital
B Council steers strategy development, denes time frame, names sponsor and working team
C Forecast incorporates initiatives projections/ investments
D Budget accounts for investment required to implement initiative
E Implementation includes quarterly progress updates
board meeting could be used to compare the financial plans for the coming year (and for the next several years) with the companys 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-
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lution and refreshment of the enterprises strategic direction. Such a dialogue should improve the boards 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 dont work out as planned. The big difference between the journey model and others is that when a company isnt making sufficient progress, it doesnt 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 isnt executing against its strategy, or, as a last resort, whether its time to revisit its aspirationsand 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 trajectory, 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.
Chris Bradley is a principal in McKinseys 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.
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Michael Birshan and Jayanti Kar
You dont need a formal strategy role to help shape your organizations strategic direction. Start by moving beyond frameworks and communicating in a more engaging way.
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 todays more volatile environment is increasing the time a com panys 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, its been the domain of a small coterie, perhaps led by a chief strategist who is protective of his or her domainor 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
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.
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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 officeryet even a number of executives playing this role disclosed to us, in a series of interviews we conducted over the past year, that they didnt 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. Weve 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 company, 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 thats also part of the problem. General ideas can be misleading, and as strategy becomes the domain of a broader group of executives, more will also need to learn to think strategically in their particular 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
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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 teams thinking. Executives explored in depth 20 trends that would shape the industry over the next decade, discussing both the trends themselves and their implications for the supply of and demand for the organizations products.3 They also looked across their industrys full value chain to understand who was making money and whyand 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 industrys 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 Chinas auto industry, mckinseyquarterly.com, July 2010.
4 See Lowell Bryan, Dynamic management: Better decisions in uncertain times,
mckinseyquarterly.com, December 2010.
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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 horizonthe sorts of changes that make or break companies. But those insights dont emerge magically. Consider, for example, technological disruption. For many executives, the rise up the corporate ladder requires a deep understanding of industry-specific technologiesthose embedded in a companys products, for example, or in manufacturing techniquesbut much less knowledge of cross-cutting technology trends, such as the impact of sensors and the burgeoning Internet of Things. 6 Moreover, many senior executives are happy to delegate thinking about such technology issues to their companys chief information officer or chief technology officer. Yet its 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 mentoring relationships with younger and more junior colleagues (or even their children) that focus on technology and innovation. And of course, theres 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
5See John Horn, Playing war games to win, mckinseyquarterly.com, March 2011. 6 See Michael Chui, Markus Lffler, and Roger Roberts, The Internet of Things,
mckinseyquarterly.com, March 2010.
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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 experience, often too many resourcesincluding mental energyare 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 thats exactly why many long-standing industry leaders were surprised when Korea National Oil Corporation (KNOC), South Koreas 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 harbinger of future investments by less traditional players in the North Sea oil and gas industry. Similar dynamics prevail in mining: developedworld 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 toand insisting onissue-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 competitors
head, mckinseyquarterly.com, February 2009.
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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 thats better suited to todays 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 innovative ways to communicate strategyto make strategic insights cut through the day-to-day morass of information that any executive receivesis 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 companys 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 competitors. His colleagues had to classify the shoes right there and thenand he made his point. Similarly, we know another strategist
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.
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who spent an afternoon cutting the labels off samples of mens 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, its important to figure out ways to support discussions with data thats engaging and easy to manipulate. To the extent possible, executives 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 tactile mobile devices and new software tools that help make spreadsheets more visual and interactive should facilitate more dynamic, datadriven dialogue. Executives hoping to become more strategic should look for opportunities to innovate in their communication of data, while prodding their organizations to institutionalize such capabilities. Breakthroughs aboundlook 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 youve ever seen; Generation Grownups interactive tool Name Voyager, which examines the popularity of baby names over time (see babynamewizard.com/voyager); or Kiva.orgs Intercontinental Ballistic Microfinance visualization of loan-funding and repayment flows. But few companies have kept up.
Its 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 McKinseys London office, where Jayanti Kar is a consultant.
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Cynthia A. Montgomery
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.
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 Harvards 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. Ive 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 interrelated strategy and execution are. Ive 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 strategistas 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 exercise. Analysis has merit, to be sure, but it will never make strategy the vibrant core that animates everything a company is and does.
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The strategist as meaning maker

Ive taken to asking executives to list three words that come to mind when they hear the word strategy. Collectively, they have produced 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 leaders 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 companies 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 partsand 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 cant the market take care of such transactions on its own? If theres more to a companys 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 leaderthe strategist as meaning maker who must make the vital choices that determine a companys 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. 5460.
2 R. H. Coase, The nature of the firm, Economica, 1937, Volume 4, Number 16, pp. 386405.
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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 companies in exciting new directions are widely admiredand 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 actionoriented 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 companiesincluding Beatrice Foods, Burlington Industries, Champion, Consolidated Foods, General Housewares, Gulf + Western, Intermark, Ludlow, Masco, Mead, and Scott Paperhave 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. Its 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 customers 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 cant 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 theres challenge theres 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.
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seized the opportunity; this is a chance to bring money, sophistication, 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 wellmanaged companies over the years have jumped in with the intention of reshaping the industry through the infusion of professional management. All those companies, though, have since left the businessproviding an important reminder that the competitive forces at work in your industry determine some (and perhaps much) of your companys performance. These competitive forces are beyond the control of most individual companies and their managers. Theyre what you inherit, a reality you have to deal with. Its not that a company can never change them, but in most cases thats 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 functionits extremely challenging to uncover an advantage strong enough to counter the gravitational pull of the industrys 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 industrys forces actually reflects indifference to them. Time and again, Ive seen division heads, group heads, and even chief executives dutifully acknowledge competitive forces, make a few highlevel comments, and then quickly move on to lay out their plans without ever squarely confronting the implications of the forces theyve 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
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sensibility. Every year, early in the term, someone in class always wants to engage the group in a discussion about whats 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 Soles tenure at Italian fashion eminence Gucci Group.4 De Sole, a tax attorney, was tapped for the companys top job in 1995, following years of plummeting sales and mounting losses in the aftermath of unbridled licensing that had plastered Guccis name and distinctive red-and-green logo on everything from sneakers to packs of playing cards to whiskeyin fact, on 22,000 different productsmaking Gucci a cheapened and overexposed 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 wasnt. He wanted to tackle the question not by philosophy, but by databringing strategy in line with experience rather than relying on intuition. The data were eye opening. Some of Guccis 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 classic item she would buy once and keep for a lifetimehad 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 position the company in the upper middle of the designer market: luxury aimed at the masses. To complement its leather goods, Ford designed original, trendyand, above all, excitingready-to-wear clothing each year, not as the companys 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 highmargin 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.
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modernized stores, and upgraded customer support. Unseen but no less important to the strategys success was Guccis 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 didin design, product lineup, pricing, marketing, distribution, manufacturing, and logistics, not to mention organizational culture and managementwas tightly coordinated, 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 its constructed, but constructing it isnt 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 fashionforwardness, high quality, and good valueor 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 isnt a clear answerand thats 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 oneand if you dont, 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. Its a challenge that involves multiple choices over time and, on occasion, one or two big choices. Very rare is the leader who
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will not, at some point in his or her career, have to overhaul a companys strategy in perhaps dramatic ways. Sometimes, facing that inevitability brings moments of epiphany: eureka flashes of insight that ignite dazzling new ways of thinking about an enterprise, its purpose, its potential. I have witnessed some of these moments as managers reconceptualized what their organizations do and are capable of doing. These episodes are inspiringand 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 CEOmen and women coming to grips with what their organizations are and what they want them to becomehas described this challenge as an intense personal struggle, often the toughest thing theyve 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 dont 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, its changes like this that keep us fresh and keep me going. While it can be painful when it happens, in the long run I wouldnt want to lead a company that didnt reinvent itself.
Cynthia Montgomery is the Timken Professor of Business Administration at Harvard Business School, where shes been on the faculty for 20 years, and past chair of the schools Strategy Unit.
Elements of this article were adapted from Cynthia Montgomerys The Strategist: Be the Leader Your Business Needs (New York, NY: HarperCollins, 2012).
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 striving 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 experience with executives at leading global businesses, McKinsey authors discuss new ways to manage the tensions with a particular focus on organizational design and talent managementwhile a leading academic exposes key misconceptions about global-leadership development.
76 The global companys challenge Martin Dewhurst, Jonathan Harris, and Suzanne Heywood
81 Organizing for an emerging world Toby Gibbs, Suzanne Heywood, and Leigh Weiss
92 How multinationals can attract the talent they need Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan
100 Developing global leaders Pankaj Ghemawat
Illustrations by Francesco Bongiorni
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Martin Dewhurst, Jonathan Harris, and Suzanne Heywood
As the economic spotlight shifts to developing markets, global companies need new ways to manage their strategies, people, costs, and risks.
Managing global organizations has been a business challenge 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 emergingmarket 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 communications 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 conglomerate 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
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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 evidence from colleagues in McKinseys 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 markets where neither is based (see Parsing the growth advantage of emerging-market companies, on page 10). Over the past year, weve tried to understand more clearly the challenges facing global organizations, as well as approaches that are helping some to thrive. Our work has included surveys and structured interviews with more than 300 executives at 17 of the worlds 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 handling the realities of rapid growth in emerging markets and roundthe-clock global communications. Thats partly because the opportunities 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 integrate 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 imperatives to tailor their businesses to local needs while maintaining consistent global processes. Another reason no single model fits all global companies is that their individual histories are so different. Those that have grown organically 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.
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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 operating model, history, and global footprint. (For more on the implications 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 organizations 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 investmentssay, 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 customers 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
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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 lessons 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 emergingmarket leader in one global company told us that our current process 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 multinationals 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
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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 approachesto 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 McKinseys London office, where Suzanne Heywood is a principal; Jon Harris is a director in the New York office.
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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
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.
What to do about it Revisit the case for regional organizational 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 headquarters) 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.
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As global organizations expand, they get more complicated and difficult to manage. For evidence, look no further than the interviews 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, cumulative 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. Whats 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 isnt to provide a definitive blueprint for the global organization of the future (theres no such thing), but rather to offer multinationals fresh ideas on the critical organizationaldesign questions facing them today: how to adjust structure to support 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 otherand 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 country. 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
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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.
IBMs experience in Asia

IBMs 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 complete 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 regions 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 IBMs 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 geographically close to the relevant pool to meet the regions needs in each service. So now, for instance, IBMs growth market operations are served by HR specialists in Manila, accounts receivable are processed in Shanghai, accounting is done in Kuala Lumpur, procurement 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 business processes can take months. Changing a culture and the way employees adapt to new ways of working takes years.
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A complex calculus
To repeat, though, no companys 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 excellence 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 productinnovation efforts. On the other hand, weve seen companies conclude that the traditional role of their regional layersas span breakers helping distant corporate leaders to gather data and distill strategically important informationis becoming obsolescent as information technology makes analyzing, synthesizing, and exchanging information so much easier. Todays faster data exchanges, along with faster travel and video conferencing, make it feasible for some organizations 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?) Thats 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 settingfor example, spotting regional, country, and competitive risks and opportunities. Waferthin 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 pointers
As IBMs experience illustrates, executives evaluating the structure of their companies will often be drawn into considering which processes should be global or local. Thats sensible: in our survey of more than 300 executives at global companies, processes emerged as one of the 3 weakest aspects of organization, out of 12 we explored. Some companies have far too many processes
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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, dont know how many processes they have or what those processes are. And, most important, few can distinguish standard processes that create value from those that dont 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: ont standardize more than is necessary. For example, busi D 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. it technology to the process, not vice versa. Standard screen F based processes may ensure global compliance in an instant but can lock in globalized costs too. Before making huge investments in technology to standardize a process, businesses must be sure they can realize the expected return. refer standard principles to detailed rules for local processes. P 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. L isten to voices from all the functions that areor should be involved in making a process better and make sure those people can continue communicating with each other. Standard processes, by themselves, are not enough to capture all of the potential value from a companys global footprint: ongoing communication between people who influence and execute processes helps to capture more of it. mplement new processes from the top. Consultation on design I is important, but business leaders may eventually need to cut the talk and mandate a new process. Unfashionable commandand-control methods can be appropriate in this sphere because, as one executive explained, Locations arent nearly as different as they think they are.
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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 organizations values, developing
Technology as friend or foe?

Inexpensive electronic and voice communications, videoconferencing, technology-enabled workflows, and, most recently, social-networking technologies have transformed connectivity and knowledge sharing within complex global organizations. Aditya Birlas HR director, Santrupt Misra, says, Our use of ICT [information 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, IBMs internal Beehive Web site helps employees to connect with peers they meet on interdepartmental projects or meetings, to brainstorm for current and new projects, and to approach higher-ranking people they wouldnt 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 getting 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 companys central site in China says he regularly works a second shift on conference calls when he should be asleepnot good for him or the company in the long term. Jesse Wu, worldwide chairman of Johnson & Johnsons 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 weekend. However, thats Friday evening
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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 companys 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 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.
in Asia, thus unnecessarily affecting a colleagues 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 procedures, a change to the global IT system was involved, making such small but necessary changes very costly. Elevating issues indiscriminately. One leader of a global company based in an emerging market notes: With the growth of
ICT, we have become more headquarters-centric. This hasnt been a deliberate policy; its 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 organizational challenges. Rather, its creative deployment should reinforce and be supported bya companys organizational design.
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.
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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 cant or wont 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 business 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 centers constant flow of staff would then naturally reflect a companys international reach and strengths.
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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, twothirds 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 cant get their jobs done.
Taking stock
Understanding 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 companys major business, functional, and geographic units to find out why theyre 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 werent 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) didnt 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 sitesas when a group went from
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Angola to the Gulf of Mexicodid 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 structurefor 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 executives 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 Web 2012 be in place to make them work. For example, coaching or mentoring Org Design links transfer knowledge across an organization and build future Exhibit 1 of 1 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.
One oil company used a social-network analysis to target improved communication between eld workers and technical experts.
Social-network analysis at a major oil and gas company Before After
Angola
Brazil
Canada
Gulf of Mexico
Nigeria
Saudi Arabia
United Kingdom
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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 someone to keep in touch with peers working on related products across geographies were 20 percent more productive than teams whose managers 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: its easier to avoid duplication in organizational structures when a company gets the balance right among global, regional, and local processesand 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 stakeholders involved to work on those critical junctions, can release benefits that ripple across organizations.
2 Jacomo Corbo and Gary Pisano, The Impact of Information Networks on Productivity,
Circuits of Profit conference, Budapest, June 20, 2011.
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 McKinseys London office; Leigh Weiss is a senior expert in the Boston office.
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Competition for talent in emerging markets is heating up. Global companies should groom local highfliersand 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 cant attract, retain, and excite tomorrows 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 havent 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.
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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 countries, 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 managers have the managerial and English-language skills multinationals 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 yearfive 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 localsChina 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 Manpower 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 perhaps 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.
2Migration for Work Survey, ManpowerGroup, 2011.
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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 emerging 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 teams experience base?
Becoming more attractive to locals

A big historic advantage global companies have over local competitors 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 Weve also heard this concern voiced in many interviews. 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
3A February 2012 McKinsey survey, with 118 respondents, of 17 multinational companies
operations in India.
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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 fastchanging talent marketplace.
Prepare your highfliers for top roles

Theres no silver bullet for developing or retaining emergingmarket 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 developand retaintop managers through specialized training programs. In India, for example, its highpotential 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, Bertelsmanns CEO program brings localmarket 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 communication skills. The firm has extended this culture dojo, named after Japans 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.
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Local-leadership development at Diageo. Nick Blazquez, the drinks company Diageos 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 thats where you see well-developed competencies. But Im just not seeing that now. If I think about marketing competencies, for example, some of Diageos most innovative marketing solutions are in Africa. In fact, he notes, we in Africa have developed some of Diageos leading digital-marketing programs. So I dont think that theres 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 employer

While theres 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 Birlas HR director, says: We are growing 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;
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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 tailoring is often necessaryfor 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 relationship between themselves and their employees families. For example, Motorola and Nestl 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. Articulating a companys 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 companys 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
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Global organizations growing need for managers willing to work for long stretches overseas is coinciding with a decrease in their willingness to go.
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 & Johnsons worldwide consumer group chairman Jesse Wu. When youre running an emerging market, you always operate under an austerity model. When youve 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. Everybodys 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)
5 For more on the challenges facing expat managers, see Jeffrey A. Joerres, Beyond expats:
Better managers for emerging markets, mckinseyquarterly.com, May 2011.
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before they can move into senior-leadership roles. Of course, its crucial to help managers abroad maintain their connections and influence back home and to provide close senior-executive mentorshipas 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 worlds economic center of gravity continues 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.
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 McKinseys London office, where Matthew Pettigrew is an associate principal; Ramesh Srinivasan is a director in the New York office.
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Companies must cultivate leaders for global markets. Dispelling five common myths about globalization is a good place to start. Pankaj Ghemawat
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 organizations 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 2325, 2003.
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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 globalization 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. Furthermore, if two countries dont share a common language, that alone slashes the trade volume between them by 30 percent. An appreciation of how distances and differences influence international 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 awayand more different, along multiple dimensionsthan more familiar markets in Europe and North America. Japanese multinationals face a distinctive set of cultural, political, and economic issues that complicate their efforts to expand abroad. Exaggerated notions of what globalization meanswhat I call globaloneyare 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 conceptions 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 globalleadership capacity.
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Myth #1 My company, at least, is global.

When I present data on the limited extent of international interactions 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 Fortunes Global 500 list of the worlds 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 percent of its production and 73 percent of its workforce in Germany. 4 An accurate read on the extent of globalization in ones 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. Consider 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 flowsalso central to leadershippeople 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
3Alan 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. 318.
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.
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roots and branching out beyond them to connect with counterparts 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 cant entirely internalize three, which implies that four is out of the question. Facing such limitations, attempts to become global by breaking free from ones roots seem more likely to lead to symmetric detachmenta lack of meaningful ties to any placethan 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 investigations 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 internationalization of product, capital, information, and people flows. The respondents 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 hostidentifying with either, both, or neither? The rela-
tionship between dual cultural identities and intercultural effectiveness, International Journal of Cross Cultural Management, 2010, Volume 10, Number 1, pp. 5576.
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. 516.
8 Bruce Dodge, Empowerment and the evolution of learning: Part one, Education +
Training, 1993, Volume 35, Number 1, pp. 310.
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Senior executives and CEOs tend to lead far more global lives than most of the worlds population, often touching several continents in any given month.
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 worlds 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 international 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 toone 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.
9Remapping 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 Internationals 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. 13747.
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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, thats 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 isnt 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 transformation, 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 competencies (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. 199216.
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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 origindestination pairs. For example, a Japanese executive 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 intraregional 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 onesize-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.
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According to one study, the proportion of expatriates in seniormanagement 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 beand, in some instances, clearly has beentaken 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 doesnt produce these benefits.16 Long stays abroad are costly: traditional expatriation typically costs three times an employees 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 percent 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. 4449.

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. 104761.
17 Emerging Trends in Global Mobility: Policy & Practices Survey, Cartus (now Credant
Mobility), 2004.
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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 experiencenot just travelessential to the development of global leaders. And dont make the mistake of viewing expatriation as being solely about sending people from headquarters to emerging markets. The same requirement for immersion outside of ones 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 globalleadership 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, dont 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. 84362.
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.
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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 Indias IT firms is their ability to convert such not quite fully prepared talent into effective performers on a large scale. It is indeed in todays 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 McKinseys 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.
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Picture This
Diverse economies, common pain points

Over the last 15 years, many mature economies have experienced trade deficits in primary resources. Over the last 15have years, many mature economies have experienced These deficits canceled out trade surpluses from trade decits in primary resources that have canceled out knowledge-intensive goods and services.
trade surpluses from knowledge-intensive goods and services.
Net exports of mature economies,1 latest available data, % of GDP 2.0 1.5 1.0 0.5 0 0.5 1.0 Decit 1.5 2.0 2.5 3.0 3.5 1994 1996 1998 2000 2002 2004 2006 2008 2009 Knowledge-intensive services Labor-intensive services Capital-intensive services2 Capital-intensive manufacturing Health, education, public services3 Labor-intensive manufacturing Primary resources
Web 2012 MGI trade teaser Exhibit 2 of 2
Knowledge-intensive manufacturing
1United States, Japan, and EU-15 countries excluding Luxembourg; services exports do not include Belgium and 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-
Surplus
Denmark, because historical data are unavailable.
intensive services. Source: Organisation for Economic Co-Operation and Development (OECD); McKinsey Global Institute analysis
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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 20112 PicThis: Common pain Since the mid-1980s, Exhibit 2 of 2
incomes have been growing faster for the richest citizens in many developed countries than for the poorest ones.
Since the mid-1980s, incomes have been growing faster for the richest citizens in many developed countries than for the poorest ones.
Average annual change in real household income by income group, mid 1980slate 2000s 4.5 4.0 3.5 3.0 Income growth for top income decile, % 2.5 2.0 Germany 1.5 1.0 0.5 Japan 0 0.5 0.5 Netherlands Italy New Zealand United Kingdom Sweden
Norway Finland
Ireland Spain Portugal
United States Canada Denmark Austria France Belgium
Greece
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
Income growth for bottom income decile, % 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%)
Source: Organisation for Economic Co-Operation and Development (OECD)
Applied Insight
Tools, techniques, and frameworks for managers
Spotlight on marketing
113 Measuring marketings worth 119 Five no regrets moves for superior customer engagement
126 Agile operations for volatile times
Photograph by France Malate
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Measuring marketings worth
David Court, Jonathan Gordon, and Jesko Perrey
You cant spend wisely unless you understand marketings full impact. Executives should ask five questions to help maximize the bang for their bucks.
Its 8 AM, and the chief marketing officer is wading through his inbox. A board member has e-mailed him about an opportunity to invest in an emerging digital platform. It looks cool, but its speculative and not cheap. Minutes later, the chief financial officer appears in the doorway: The boss wants to sign a big sponsorship 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 TVan aggressive rival grabbed market sharewhen his assistant interrupts. The CEO is calling. Whats 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 hes 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 advertising 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 organizations tackle the difficult issue of how to improve marketings return on investment (ROI). Over that period, as new kinds of media have grown in importance and mobile communications have created new opportunities to reach consumers, the ROI challenge has become more intense. In the face of growing complexity, relentless financial pressure, and a stillchallenging economic environment, marketers 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,
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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 decision 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 companies have access to terabytes of data about these behavioral changes, many still cant answer the fundamental question: how exactly are our customers 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 company 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 companys message and driving potential buyers to consider its products. Yet salespeople, once critical to actually closing deals, had declined in importance 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 consumer 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 importance of touch points such as earned media but dont understand the true magnitude of their effects or how to influence them. The solution is usually to commission research that gets at the heart of understanding the consumers decision journey. Such foundational work must shine a light on the touch points and messages that actually influence consumer behavior. Marketers must be ready to use the findings to debunk accepted wisdom and legacy rules of thumb. In todays 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.
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make more cost-effective marketing investments that truly influence purchase decisions.2
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 relationship between marketing spending and business results. Thats when the internal dialogue shifted from should we be spending on marketing at all? to whats the optimum marketing spending needed to hit our targets?
How well informed (really) is our marketing judgment?
Marketing has always combined facts and judgment: after all, theres 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 mattered, most senior marketers justifiably had great confidence in their judgment on spending and messaging. Today, many privately confess to being less certain. Thats 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 publicly that your judgment is incomplete or out-of-date. And given the money We are excited by the possibilities that required, its hard both to make a ratiobig data and advanced analytics create nal investment case for additional market- no question. But data remain only as ing spending andin the same breath useful as the expertise you bring to bear, to admit that you are really making a and good judgment will remain a hallpassionate guess. mark of the best marketers. Marketers often hear that the answer to improving their judgment in this rapidly changing environment is data, and some companies have sophisticated analytical tools. Yet its 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-
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
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failure through years of trial and error about what makes great advertising. Thats not the case with todays new media. Influence can shift rapidly, and there is little accumulated experience about which messages work, when marketers should apply them, how they can be scaled, or even whom they influence. Looking to external agencies is little help; theyre 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, its a bet companies feel compelled to make. So the question becomes how much risk is too muchor, for that matter, too little. Weve 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. Weve 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 marketing spending, executives didnt 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 example, as well as limits on annual spending reductions in some channels or increases in others. This simple allocation model
ensured a gradual move to emerging media, mitigating risk while providing breathing room for piloting, testing, and learning. That approach also can help with scenario planning: one media provider developed a straightforward decision support tool for precisely that purpose. Geared to brand managers, not postdoctoral researchers, the tool used simple response curves that allowed the marketer to simulate different scenarios of marketing 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 tradeoffs and help to manage expectations across business units and functions whose cooperation is often critical when companies change the broader commercial mix. Managing risk is critical, and marketers shouldnt be shy about putting this issue squarely on the table. With thoughtful scenario planning and crossfunctional participation, such discussions can be extremely rich and rewarding.
How are we coping with added complexity in the marketing organization?

As the external marketing environment becomes more complex, so must the internal environment. Marketers historically had a handful of communication vehicles; now they have dozens
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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 channels (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.
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 companys growth priorities. No one pretended to have a crystal ball, but examining the implications of several generally accepted trends in consumer behavior and media consumption habits made Weve found three things that are always some bold forecasting possible. The comtrue in managing complexity within pany then debated the future of brand the marketing organization. First, youll managers and specialist centers of excelrequire a number of specialists. You lence and what that future implied just will. You cant get the skills and knowl- for resources required centrally and in edge you need in just one person, business units. Finally, it asked what and youre not likely to get everything you should be stopped or dramatically depriorneed internally. Second, youll need itized. By undertaking this exercise, somebody who both integrates marketing the consumer-packaged-goods company efforts across channels and comsaw how it could keep its marketing munications vehicles and focuses on head count and budget relatively flat, while the bottom line. In packaged-goods massively shifting senior leaderships companies, this wasand may still be role, the culture of marketing, and the role of brand managers, but the the capabilities of specialist and generbasic requirement is that it must be done alist resources. by someone. Finally, youll need absolute clarity in processes, roles, and What metrics should we track responsibilities not only within the given our (imperfect) options? marketing organization but also throughout your company (across functions In an ideal world, the financial returns and business units) and externally (with and the ability of all forms of communicaagencies and external vendors). The tion to influence consumers would trust-based relationship between combe precisely calculated, and deciding the panies and agencies isnt at risk, but marketing mix would be simple. In everyone will have to accept that roles reality, there are multiple, and usually are changing. (For more on organizaimperfect, ways to measure most tional moves companies should make in established forms of marketing. Nothing a world of more pervasive marketing, approaches a definitive metric for see Five no regrets moves for superior social media and other emerging commucustomer engagement, on page 119.) nication channels, and no single metric can evaluate the effectiveness of Addressing complexity in a compreall spending. Yet you must have a way hensive way requires a dedicated effort.
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to track progress and hold marketers accountable. Thats 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 applesto-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 understand, not marketing jargon. So the company adopted a simple threestep approach: measuring the impact of advertising on consumer recall, on the publics perceptions of the business, and on sales leads and revenue. With these data in handand proof that the rebranding effort was ultimately improving performancemembers of the C-suite had the assurance they needed to reaffirm the investment and to commit themselves to more complex measurements, such as marketingmix modeling. Because the metrics were developed internally, members of the companys board were similarly reassured. Likewise, one consumer-packagedgoods company uses econometric analysis 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 tradeoffs 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 thats impossible to hit. Its genuinely difficult to overemphasize the magnitude of the change or the challenge. 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 effectiveness 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. Roxane Divol, David Edelman, and Hugo Sarrazin, Demystifying social media, mckinseyquarterly.com, April 2012.
2 See
David Court is a director in McKinseys Dallas office, Jonathan Gordon is a principal in the New York office, and Jesko Perrey is a director in the Dsseldorf office.
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Five no regrets moves for superior customer engagement

Tom French, Laura LaBerge, and Paul Magill
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 the organization, so customer engagegrips with the rapidly evolving behavior ment is now everyones responsibility.1 of consumers and business customers. In many companies, the marketing They check prices at a keystroke and are function is best placed to orchestrate increasingly selective about which brands share their lives. They form impres- customer engagement for the entire organization. To do so, the function must sions from every encounter and post be pervasiveable to influence touch withering online reviews. As we noted in points it doesnt directly control. Over the a McKinsey Quarterly article last year, these changes present significant organi- past year, weve seen a wide range of companies try to address customer zational challenges, as well as opporengagement in more integrated ways, tunities. The biggest is that all of us have but many executives have told us they become marketers: the critical moments simply dont know where to begin. of interaction, or touch points, between The spectrum of organizational choices companies and customers are increasis broader than ever, and companies ingly spread across different parts of
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are struggling to determine the appropriate role of marketing for their business. Whats more, senior executives often view any internal effort by the marketing function as a land grab. Given the absence of solid return-on-investment data (see Measuring marketings worth, on page 113), they may express skepticism about marketings place in the new environment. Although these challenges are difficult to overcome, companies need not be frozen 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 customer 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 communication, these steps create nimbler organizations with more pervasive marketing.
insurer, for example, the CEOs 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 customers 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 caf formats. As a result, it invested in distinctive store layouts and furnishings and adjusted its beverages and service techniques.2 Second, the summits 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, discovered that recent trends had left it with an anachronism: a set of touch points that should be coordinated but were instead managed independently within functional silos. A customer-engagement summit allows the senior-management
Hold a customer-engagement summit
Almost all companies have annual or semiannual business-planning processes that bring senior managers together from units and functions to discuss strategies 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
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team to create a coordinated plan spanning themso that, for example, the customer experience in a call center can be coordinated with the behavior of frontline employees, or the onlineregistration experience with product development. Finally, a company ought to agree on the elements of the customer-engagement ecosystem that should be undertaken inhouse and those that will involve outside partners. Internal resources probably wont be able to deliver all of the requirements 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 activities and design the mix of in-house capabilities 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.
Create a customerengagement council

One of the first outcomes of a customerengagement summit will probably be the realization that an ongoing forum for focusing managements attention on engagement is needed. This doesnt have to be yet another marketing committee. In fact, your customer-engagement council 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 operational and decision-making body, must translate the findings of the customerengagement summit into specific actions at individual touch points. To accomplish this goal, the councils 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.
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efficiently. One high-technology company, owners. Marketing, for example, might for example, included 17 people on design and renew scripts for a call center, the engagement council. Because it is which sales or operations would build difficult to make it function efficiently and operate. In addition, the process of with more than a dozen or so members, developing a charter is useful to force decision making in practice rested a dialogue about who owns and does with a core group comprising the chief what. More specifically, what does marketing officer and the heads of marketing do in customer engagement? the companys three primary divisions; What does it not do? subteams of the council coordinated When conceived, constructed, and its decisions with the companys other operated correctly, these customerentities when necessary. These counengagement councils play a critical role cils are most effective when chaired by the same person who leads the customer- in breaking the silo mind-set that diminishes the effectiveness of customer engagement summit, such as the CMO or the head of communications, strategy, engagement in many organizations. Such a council often serves as a mediator sales, or service. and decision maker in conflicts between The second consideration is how regularly functions and business units and as the council should meet. The customera filter for what must be elevated to the engagement council of one retail bank level of the CEO or other senior leaders. meets weekly, for example; a similar council at a social-services organization, monthly. The frequency of such meetings Appoint a chief content generally is based on what key engageofficer ment activities the group is driving and their cycle time. The third consideration A decade ago, when the extent of involves inputs and support: the council the digital revolutionthe massive must make fact-based decisions, so proliferation of media and devices it needs information on everything from and the empowerment of consumers via priority touch points to customer social networks and other channels behavior and the moves of competitors. became clear, many companies quickly appointed digital officers to oversee Finally, such a council must have a these emerging touch points. Its now evicustomer-engagement charter. To reduce dent that the challenge is not just the risk of gaps, rework, and turf wars, understanding digital channels but also everyone in the organization needs coping with the volume, nature, and clarity about decision rights over touch velocity of the content needed to use points and the key processes that affect them. As we explained last year, its them effectively. Companies need to create a supply chain of increasingly useful to allocate the design, build, sophisticated and interactive content operate, and renew rights for specific to feed consumer demand for information touch points explicitly to functional
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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 industriesfrom luxury goods to retailing, financial services, automotive, and even professional sportsare creating versions of this role. All are adopting a journalistic approach to recognize hot issues and shaping emerging sentiment by delivering compelling content that forges stronger emotional bonds with consumers. The CCO role is designed to provide the on-brand, topical, and provocative content needed to engage customers. The CCO must develop and manage all aspects of the supply chain for content, ranging from deciding where and how its sourced to overseeing the external agencies and in-house creative talent generating it.
brand perceptions to understand the companys character deeplyits heritage, purpose, and valuesand 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.
Create a listening center
Engagement is a conversation, yet companies are increasingly excluded from many of the most important discussions. More social and other media are available 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 organizations, products, and services on social media, blogs, and other online forums.3
Companies shouldnt forget that even Such monitoring should be hardwired with a CCO in place, designing and executing a content strategy still requires into the business to shorten response times during real and potential crises, coordination with several key business areas. The group responsible for gathering complement internal metrics and traditional tracking research on brand and analyzing customer insights, for example, may need a new mandate to sup- performance, feed consumer feedback into the product-development proport the CCO by providing research on what customers and segments require, cess, and serve as a platform for testing customer reactions. Were already as well as where, when, and how that content can most effectively be delivered. seeing listening centers established across a broad swath of sectors from financial The CCO may need help from human services to hospitality to consumer goods. resources to find, attract, manage, motiA French telecommunications company vate, and develop the in-house creative not only monitors online activity but also talent often required to fulfill a content vision. The CCO will have to work closely has a tool kit of prepared responses. I cant predict what crisis will hit, a senior with the team responsible for shaping
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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.
Challenge 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: recognizing that theres 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 communications 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 voluntarily serve as advocates for your brand, for example, can you reduce advertising expenditures? The moves your customer service center makes to resolve a crisissay, a lost credit card on a honeymoon or a major machine failure on a critical production runmay 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 dont see the opportunities to make trade-offs across functions and optimize the impact of investments across the entire set of touch points. Most budget on a function-byfunction 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 interactions for which it is accountable. Thats a losing game. Instead, add up what you spend on customer engagementin 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 functionsfor example, among investments in store renovations, revamped e-commerce sites, higher ad spending, changes in your model of sales force coverage, or improved operations in customer service centers. Which of these
For more on fostering innovative thinking, see Sparking creativity in teams: An executives guide, on mckinseyquarterly.com.
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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 methods of customer engagement, and where your company may have distinctive 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 underperforming or missing out on new approaches to engagement. With that baseline, it cut 25 percent off its traditional 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 companys sales now are to members of its loyalty program about three times the rate of its competitors. Total costs are lower and margins higher, despite a challenging retail environment.
have the advantage; the others will lose ground. We have no doubt that companies 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.
Tom French, Laura LaBerge, and Paul Magill, Were all marketers now, mckinseyquarterly.com, July 2011.
2 See 1 See
Liz Alderman, In Europe, Starbucks adjusts to a caf 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 McKinseys Boston office; Laura LaBerge and Paul Magill are senior experts in the Stamford office.
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 organizationalcompanies that learn to design and execute effective customer-engagement strategies will
126
Illustration by Daniel Bejar
Agile operations for volatile times

Mike Doheny, Venu Nagali, and Florian Weig
By improving how risk is measuredand managedin global operations, companies can adapt to changing conditions faster than competitors.
The specter of a catastrophic failure in one or more links of a companys 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 increasingly globalized and interconnected operations of large organizations, they are hardly the only risks facing supply chains. No less significant are subtler, and more
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 toand planning for changing market conditions more diffi-
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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 arent just spotting and mitigating supply chain risks. They are also seeking ways to use volatility to gain advantages over rivals. In this article, well examine three companies 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.
In response, a small team of executives investigated a set of high-priority productsthose with great potential to influence the companys financial results and public-health outcomes. The team also catalogued the risks associated 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 disruptions could, later on, delay production in plants operated by the pharma company or a supplier. In parallel, the team assessed the impact of each of these risks on three of the companys 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 companys appetite for risk in an apples to apples way at the corporate level and across divisional and functional boundaries.
Mitigate downside risks
A globally diversified pharma company faced daunting operational challenges: not only were upstream supply shortfalls causing downstream production delays The results were eye opening. Products (and headaches for customers) but the representing more than 20 percent company was also about to initiate quality- of the companys revenues depended, at related product recalls. Together, these some point in their life cycles, entirely problems threatened to damage its profits on a single manufacturing location. That and reputation seriously. Whats more, was a much higher proportion than as senior leaders began to address the senior executives had assumed, given problems, they concluded that the the companys large global network organizations existing processes werent of plants. Similarly, fully three-quarters of sufficient to identifylet alone mitigate the several dozen products that one potential sources of supply chain risk. business division made contained mate-
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rials or components from single suppliers a finding that had big implications for public health and the health of the companys reputation should a supplier 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 product quality, for instance), these findings helped executives create new risk thresholds to serve as operating guardrails. For example, the company no longer allows any particular plant to account for more than a certain percentage of corporate revenues. It also embarked on a far-reaching dualsourcing 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 completely 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 language to use when discussing risk and help prompt the kinds of timely conversations among functional leaders that should help identify potential problems before they occur.
Spot upside potential

Of course, the benefits of increased operational agility extend beyond identifying 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 industrys multiyear development and investment cycles. Recently, they asked a team of supply chain executives to determine the companys 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 companys models had long been much better at predicting demand in stable macroeconomic conditions than in more volatile ones. The team therefore 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 didnt 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
Q3 2012 Op Agility Applied Insight Exhibit 1 of 2
129
Exhibit 1
An apples to apples analysis of risk was eye opening An apples to apples analysis of risk was eye opening for executives for at acompany. pharmaceutical company. at a executives pharmaceutical
Sample assessment of corporate-level risks
Type of risk
Number of risks Moderate level of risk 0 10 20 30 High level of risk 40 50 60 70
Single manufacturing site Single supplier source Quality and regulatory Capacity constraints Uncertain demand forecast Supply and commodity shortfall Process-equipment failure Production process robustness IT related Commodity costs
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 distribution of outcomes and not a single, forecasted point. The team members knew they couldnt build a system to manufacture 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 justified 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 generate 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 companys production network to meet potential demand profitably in each scenario. Happily, the executives saw that their planning groups 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
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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 companys annual profits. Certainly, much of this amount was impossible to capture and always would beonly one demand scenario would prove correct, after all, and production resources are finite. Nonetheless, armed with this information, the executives could now begin to look for ways to increase the companys operational flexibility on the margins to capture more of the upside if demand Q3 2012higher than expected. By running proved Op Agility some of the scenarios at the level Exhibit 2 of 2 of individual production plants, the team spotted bottlenecks it could begin
to unclog immediately. Some are being tackled through straightforward operating 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 specializes in high-volume business-tobusiness products with relatively low margins. Over the years, the company has honed its operations to maximize efficiency and maintain advantages over
Exhibit 2
A global automakers demandsupply simulations A global automakers demandsupply simulations revealed inexibility. revealed inflexibility.
Disguised example Gap indicates lack of operational exibility Average buildable supply High Average market demand
Probability distribution of 15,000 scenarios
Demand scenarios
Scenarios with lost revenue
Buildable scenarios
Low Low Number of cars sold High
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competitors through a combination of high quality and large scale. In fact, many of the companys operational capabilities in these respects are world class. Those scale-oriented skills, though, were most effective in relatively stable marketsand 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 companys 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 components 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 products would grow. That wasnt a foregone conclusion, though, and if the company 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 manufacturing approach to ensure that the different stages of the work preserved the maximum option value of stopping early should the expected demand not materialize. 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 compared 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. Companies that can make the ability to preempt, 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 Franois, Isabel Hartung, and Alex Niemeyer for their contributions to the research underlying this article. Mike Doheny is a principal in McKinseys Atlanta office, Venu Nagali is a consultant in the New York office, and Florian Weig is a principal in the Munich office.
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Extra Point
For the research underpinning the exhibit, see What marketers say about working online, on mckinseyquarterly.com.
What keeps marketers up at night

Peter Dahlstrm, Chris Davis, and Tjark Freundt Q3 2012 Hardly a day goes by without news of yet another marketing coup, from companies releasing Exhibit 1 of 1 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 theyve 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 progressor lack thereofin tackling them.
Extra point: Digital challenges
High
Mining customer insights Navigating social-media phenomenon
Biggest challenges, but most developed plans
Sizable challenges, not yet fully addressed

Lack of social-media metrics Marketing-talent gap, especially analytics Structuring organization to make marketing pervasive
Difculty to resolve
Digital revolutions threat to business models
Recognizing online opportunity in all age groups
Moderate challenges, modest gap in plans

Automated interactions increasing customer dissatisfaction Low Well prepared
Online tools increasing price transparency
Moderate challenges, not yet addressed
Overreliance on data stiing breakthrough innovation
Unprepared 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.
Peter Dahlstrm is a director in McKinseys London office, Chris Davis is an associate principal in the Toronto office, and Tjark Freundt is a principal in the Hamburg office.
For more about some of marketings thorniest challengeshow to structure a marketing organization in a digital era and finding the right metrics to measure marketing ROIsee Five no regrets moves for superior customer engagement and Measuring marketings worth, on pages 119 and 113, respectively.
Copyright 2012 McKinsey & Company. All rights reserved.
Copyright 2012 McKinsey & Company. All rights reserved. Published since 1964 by McKinsey & Company, 55 East 52nd Street, New York, New York 10022. ISSN: 0047-5394 ISBN: 978-0-9829260-4-8 Cover artwork by Stefan Chinof McKinsey Quarterly meets the Forest Stewardship Council (FSC) chain of custody standards. The paper used in the Quarterly is certified as being produced in an environmentally responsible, socially beneficial, and economically viable way. Printed in the United States of America.
Highlights: Josef Ackermann, Carlos Ghosn, Moya Greene, Ellen Kullman, Shimon Peres, and Daniel Vasella on the changing nature of leadership Get ready for Chinas mainstream consumers Inside the growth advantage of emerging-market companies Lifting the effectiveness of global organizationsincluding 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
ISBN: 978-0-9829260-4-8
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2012 Number 3

Leading in the 21st century

Dominic Barton Global managing director, McKinsey & Company

Leading in the 21st century

Features The age of the strategist

Managing the strategy journey

Becoming more strategic: Three tips for any executive

How strategists lead

Features Lifting the effectiveness of global organizations

The global companys challenge

How multinationals can attract the talent they need

Organizing for an emerging world

Developing global leaders

110 Picture This

132 Extra Point

10 Parsing the growth

advantage of emergingmarket companies

15 Get ready for Chinas

119 Five no regrets

moves for superior customer engagement

126 Agile operations for

23 Why bad multiples happen

McKinsey on the Web

Making sense of social media

Solar powers next shining

Download this issue free of charge from Zinio http://bit.ly/mckinseydigitalissue

Join the McKinsey Quarterly community on Facebook facebook.com/mckinseyquarterly

Demystifying social media

What about B2B?

Move beyond marketing

The executives guide to better listening

Listen to the introverts

Research, trends, and emerging thinking

26 Industry focus: Financial services Consumer products Information technology

Parsing the growth advantage of emergingmarket companies

Overall (average across all segments)

Share attributable to company size2

analyzed on multiple time frames between 1999 and 2008.

segment size of emerging- and developed-market companies in our sample.

Q3 2012 Emerging Markets Exhibit 2 Exhibit 2 of 3

Developed economies, n = 303 Emerging economies, n = 41 39

additions to assets from inorganic activities.

Q3 2012 Emerging Markets Exhibit 3 of 3

1Compound annual growth rate; excludes domestic markets.

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

4 See Stephen Hall, Dan Lovallo, and Reinier

Capturing the worlds emerging middle class, mckinseyquarterly.com, July 2010.

Get ready for Chinas mainstream consumers

Q3 2012 China consumer Exhibit 1 of 1

36 36 10 2000 2010 7 20203

Value ($6,000 $15,999) Poor (<$6,000)

2CAGR = compound annual growth rate. 3Forecast.

1 In real 2010 dollars; in 2010, $1 = 6.73 renminbi.

1 The latest survey, carried out in 2011, gauged

Battery technology charges ahead

Hybrid-electric vehicles are competitive

Battery prices, $ per kilowatt hour (kWh)

1 These figures represent the price per effective

Why bad multiples happen to good companies

For most companies, sustaining stronger revenue growth

20 1520% 1015% 510% 15 10 5 0 5 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Years since inception of portfolio

tax, and amortization (EBITA).

2012 Number 2012 3 Number 3

4 See Stephen Hall, Dan Lovallo, and Reinier

1 The latest survey, carried out in 2011, gauged

1 These figures represent the price per effective