2011 Number 2

How to grow again

 2011 Number 2

This Quarter

The global economy is growing again, but it sure

doesn’t feel like a normal recovery. Unemployment
rates have barely budged from recessionary lows
in many countries. The World Bank is forecasting that
growth will be slower in 2011 than it was in 2010.
And periodic sovereign-debt flare-ups are stark
reminders of how much uncertainty remains in the
post-financial-crisis era.

We recently got another reminder of that uncertainty when we

created, with our colleagues Lowell Bryan and John Horn, several
scenarios for the evolution of the global economy over the next decade.
Using a range of entirely plausible assumptions, we found that
by 2020, the GDP of Europe, Japan, the United States, and the four
BRIC countries (Brazil, Russia, India, and China) could be as
little as $55 trillion in today’s dollars or as large as $78 trillion. That
$23 trillion difference between these outcomes is about $5 trillion
more than the size of the combined Chinese and US economies today.

In a world where future prospects are so uncertain, senior executives

can’t count on “rising tide lifts all boats” growth of the sort that
powered performance for many organizations during more buoyant
economic times. That suggests the need for a more disciplined
approach, one with a laser-like focus that’s also bold in its openness
to new opportunities. As a starting point, we suggest executives
consider these four questions, which this issue of the Quarterly seeks
to address:

1. How much emphasis are you placing on emerging

markets?
New research from the McKinsey Global Institute (MGI) reveals
that nearly 40 percent of global growth over the next 15 years will take
place in midsize emerging-market cities, most of which you’ve never
heard of. Forget about your BRIC strategy or even your China strategy—
you’ll need a fresh approach for cities and microregions of the “new
growth frontier.” Learn from our colleagues Yuval Atsmon, Ari Kertesz,
and Ireena Vital how to formulate such an approach; from Portugal
Telecom CEO Zeinal Bava what his company’s strategy looks like
in Brazil; and from Manpower CEO Jeff Joerres how to develop the
talent you need to compete in the hinterlands of emerging markets.

2. How granular is your growth strategy?

Emerging markets aren’t the only place where you’ll need a fine-
grained strategy. Our 2007 book, The Granularity of Growth, made
the case, and our latest research (which encompasses the recent
downturn) confirms that companies growing in multiple ways—not
just by clawing out market share gains, for example, but also
through acquisitions—grow faster and achieve better returns. Related
research in this issue also shows that, depending on the growth
strategy you choose, whether it be M&A or organic growth, you’ll need
leaders with skills that match the mission.

3. How far are you pushing the boundaries of your

business model?
Growth also stems from breakthroughs. Two articles in this issue,
“Seven steps to better brainstorming” and “Sparking creativity in teams:
An executive’s guide,” should help you increase the odds of coming
up with big ideas—the kind that will stretch the boundaries of your
business. Rapid technological change will, of course, have a
dramatic impact on existing business models, as inventor Ray Kurzweil
reminds us and as McKinsey research on the competitive advantage
enjoyed by a new type of Web-intensive organization emphasizes.
Finally, the sales force itself can help companies identify disruptive
changes around the corner, according to our colleagues in
McKinsey’s sales and marketing practice.
4. How realistic is your growth strategy?
Growth is the lifeblood of companies, but it’s also hard to sustain
over time; leaders who don’t recognize the difficulty risk setting
unachievable targets. That message comes through loud and clear in
research from Tim Koller and his colleagues in McKinsey’s
corporate finance practice. And it will be increasingly relevant
in the years ahead, when, according to McKinsey Global Institute
research, capital scarcity may start boosting interest rates and
dampening global growth, while demographic trends place pressure
on growth in developed markets.

In “Starbucks’ quest for healthy growth,” CEO Howard Schultz

wrestles with all four of these questions. The granularity of his
company’s emerging-market approach is striking, as is his commitment
to pushing Starbucks’ business beyond its retail roots. But he also
expresses an intriguing ambivalence toward growth, describing it as
“not a strategy” but a “tactic” and explaining how overemphasizing
it led Starbucks astray. The long-term health Schultz seeks for
his company is the focus of Scott Keller and Colin Price’s article,
“Organizational health: The ultimate competitive advantage,”
which summarizes, from their forthcoming book, Beyond Performance,
important findings on the relationship between performance and
health, as well as advice on how to achieve both.

We hope this issue of the Quarterly stirs your thinking about what
it will take to grow in the years ahead and provides some concrete ideas
you can start acting on now.

Sven Smit Patrick Viguerie

Director, Amsterdam Office Director, Atlanta Office
 Features

34
Starbucks’ quest
for healthy growth:
An interview with
Howard Schultz
The company once grew fast. Now CEO Howard
Schultz wants it to grow with discipline—
in emerging and developed markets alike.

Pursuing growth in emerging markets

46 The world’s new 50 Is your emerging-

growth frontier: market strategy local
Midsize cities in enough?
emerging markets Yuval Atsmon, Ari Kertesz, and Ireena Vittal

Richard Dobbs, Jaana Remes, and Sven Smit
Over the next 15 years, 400 cities that
most executives have never heard of will
power global growth. Are you ready?
The diversity and dynamism of China, India,
and Brazil defy any one-size-fits-all approach.
But by targeting city clusters within them,
companies can seize growth opportunities.

62 Executive perspective:
Portugal Telecom CEO Zeinal Bava
describes his company’s approach in Brazil.
Bava’s conclusion: “There’s no such
thing as an effective countrywide strategy.”
 Generating the ideas you need to grow

66 Seven steps 74 Sparking creativity

to better in teams: An
brainstorming executive’s guide
Kevin P. Coyne and Shawn T. Coyne Marla M. Capozzi, Renée Dye, and Amy Howe

Most attempts at brainstorming are doomed. Senior managers can apply practical
To generate better ideas—and boost insights from neuroscience to make themselves—
the odds that your organization will act on and their teams—more creative.
them—start by asking better questions.

82 Growth in a 94 Organizational
capital-constrained health: The ultimate
world competitive advantage
Richard Dobbs, Alex Kim, and Susan Lund Scott Keller and Colin Price

Structural shifts in the global economy will To sustain high performance, organizations
make capital scarce, but savvy companies must build the capacity to learn and keep
that plan now can secure access to funding— changing over time.
and a competitive advantage.

Departments

8 McKinsey On 9 Idea Exchange 128 Extra Point

the Web Readers mix it up Growing through deals:
Highlights from with authors of articles A reality check
our digital offerings from McKinsey Quarterly
2011, Number 1
 Leading Edge
12 Drawing a new road map
for growth
Sumit Dora, Sven Smit, and
Patrick Viguerie
New findings show how large and small
companies grow—and reveal the startling
performance of emerging-market players.
17 How Web 2.0 pays off:
The growth dividend enjoyed by
networked enterprises
Jacques Bughin and Michael Chui
A new type of Web-intensive organization
built on social technologies is emerging
and gaining competitive advantage.
22 Do you have the right leaders
for your growth strategies?
Katharina Herrmann, Asmus Komm,
and Sven Smit
It takes a mix of leaders and talent to
pursue a variety of growth strategies
simultaneously. Few executives can do it all.
27 Sustaining top-line
growth: The real picture
Bing Cao, Bin Jiang, and Tim Koller
A historical view shows that beating markets
is tougher than most leaders believe.
30 Why productivity can
grow without killing jobs
James Manyika, Jaana Remes,
and Charles Roxburgh
Private-sector innovation and the spread of
best practices can raise growth rates and
spur employment in both the United States
and Europe.
Applied Insight
109 Beyond expats:
Better managers for emerging
markets
Jeffrey A. Joerres
The CEO of Manpower argues that
the era of the Western expatriate manager
is ending. It’s time for a local approach.
113 Using your sales force to
jump-start growth
Maryanne Hancock, Homayoun
Hatami, and Sunil Rayan
There’s a reason it’s called a sales force.
Here are four innovative ways companies
can use their sales reps to drive growth.
117 Question for your HR
chief: Are we using our ‘people
data’ to create value?
Nora Gardner, Devin McGranahan,
and William Wolf
By analyzing the links between people
practices and productivity, some companies
are improving their bottom line.
122 Playing war games to win
John Horn
They can be a powerful business tool—
but only if you get the design right.

Editorial
Board of Editors
Allan R. Gold
Bill Javetski
Allen P. Webb, Editor-in-Chief
Senior Editors
Frank Comes
Thomas Fleming
Lars Föyen
Josselyn Simpson
Dennis Swinford
Associate Editors
Luke Collins
Heather Ploog
Mary Reddy, Information Design
Editorial and Design Production
Veronica Belsuzarri, Senior Designer
Kelsey Bjelland, Editorial Assistant
Andrew Cha, Web Production Assistant
Elliot Cravitz, Design Director
Roger Draper, Copy Chief
Jake Godziejewicz, Design Intern
Daniella Grossman, Assistant Editor
Drew Holzfeind, Assistant Managing Editor
Delilah Zak, Associate Design Director
McKinsey Quarterly China
Gary Chen, Editor
Min Ma, Assistant Managing Editor
Melody Xie, Production Assistant
7
Business
Sammy Pau, Finance
Debra Petritsch, Logistics
Digital Media
Nicole Adams
Devin A. Brown
Jennifer Orme
Jim Santo
Web Sites
mckinseyquarterly.com
china.mckinseyquarterly.com
How to change your mailing address:
McKinsey clients via e-mail
updates@mckinseyquarterly.com
Members via Web site
mckinseyquarterly.com/my_profile.aspx
McKinsey alumni via e-mail
alumni_relations@mckinsey.com
How to contact the Quarterly:
E-mail customer service
info@mckinseyquarterly.com
To request permission to republish
an article
quarterly_reprints@mckinsey.com
To comment on an article
quarterly_comments@mckinsey.com
8
McKinsey On the Web
Highlights from our digital offerings
Download this issue for free from Zinio
Read this issue of McKinsey Quarterly on
your iPad, iPhone, or computer (PC or Mac).
http://bit.ly/mckinseydigitalissue
Video and audio podcasts on iTunes
Download conversations with executives and
authors in audio or video from iTunes.
audio: http://bit.ly/mckinseyitunesaudio
video: http://bit.ly/mckinseyitunesvideo
Join the McKinsey Quarterly
community on Facebook
facebook.com/mckinseyquarterly
Follow us on Twitter
Receive notification of new content by
following @McKQuarterly on Twitter.
Now available on
mckinseyquarterly.com
Five misconceptions
about productivity
As the US economy begins to recover,
addressing some of the myths
on productivity is more important
than ever.
Other features:
How CFOs can keep strategic
decisions on track
The finance chief is often well placed
to guard against common decision-
making biases.
Clay Shirky on managing net
generation workers
The professor, author, and social-
media expert talks about the
unique challenges of managing
millennial employees.
Video
Global cities of the future:
An interactive map
Explore the cities and emerging
urban clusters that will drive
dramatic growth and demographic
changes over the next generation.
Interactive
 Idea Exchange 9

Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly
2011, Number 1

Rethinking knowledge work:

A strategic approach
In one of the cover articles from our last issue, “Constructing your 2011
agenda,” Babson College professor Tom Davenport examined how to boost
the productivity of knowledge workers through more effective use of
technology. The conversation continued on mckinseyquarerly.com. Featured
here is a reader’s comment and Davenport’s response to it:

When workers game or resist structured

knowledge systems
Bill Proudfit
Principal, knowledge-management services, Hong Kong and Macau

“One problem I’ve encountered with structured knowledge systems is that,

at first, knowledge workers embrace them, but then they realize that the
system is giving the organization a way of measuring their productivity. Two
things may happen. First, knowledge workers game the system to increase
their measured productivity. Second, knowledge workers actively resist
the system, claiming it ‘can’t do their work.’ These are risks that need to be
recognized and addressed.”

Tom Davenport responds:

“Mr. Proudfit, your comment is quite valid, and it details one of the reasons
I recommended caution in implementing structured systems for ‘high
end’ knowledge workers. You are correct that in many cases, a structured
system does allow for easier and better measurement of productivity.
This is one of the reasons productivity often increases with such systems,
but it can also lead to rejection of the system. At other times, knowledge
workers will reject a system because it doesn’t fit the way the workers have
previously done the job. Doctors at Cedars-Sinai Medical Center, in Los
Angeles, for example, rejected an intelligent order entry system because
they complained it was unreliable and slow. This problem is particularly
acute when knowledge workers have a high degree of autonomy and power
within the organization; in such circumstances, change management is
extremely critical.”
10 2011 Number 2

Have you tested your strategy

lately?
Another cover story in our previous issue described “ten timeless tests”
for helping executives assess the strength of their strategies. Here, McKinsey
author Chris Bradley shares his thoughts on three readers’ perspectives.

Would these tests work in the public sector?

David Almond
Administrator, Office of Transformation, Oregon Department of
Administrative Services, Salem, Oregon

“I very much appreciated the insights and provocative questions in the

article. Obviously, this is directed at the private sector (as a former long-term
member of that sector, I appreciate the emphasis), but now that I am
working to drive similar thinking in state government, what would be an
equivalent set of questions? There must be some parallels that would
make sense in this environment.”

Chris Bradley responds:

“David, this is a question we have heard from quite a few clients now. The
yardstick for strategy in the not-for-profit sector is more complex, since
(a) the measure of success—policy objectives, missions—is more difficult to
ascertain; and (b) in many cases the environment is noncompetitive so
the concept of ‘winning’ is not as relevant. That said, most of the difference
is in the first two tests:

1. Rather than ‘Will your strategy beat the market?’ ask, ‘Is there a clear
definition of success?’ In my experience, the critical thing here is to
understand trade-offs, as most government organizations will set missions
that are full of tension—such as the quality of care versus cost and the
needs of different stakeholder groups, for example.

2. Rather than ‘Does your strategy tap a true source of advantage?’

ask, ‘Do we have the scarce resources and capabilities required to deliver
our mission?’ The concept of packaging together advantages into an
effective delivery system still applies. This may involve reaching outside
the traditional boundaries of the organization.

Then tests 3 through 10 can be applied fairly directly. Perhaps the only
major tweak I would make, in test 9 (‘Is there conviction to act on
your strategy?’), is to think about building a strong mandate from stake-
holders rather than more narrowly thinking about conviction in the
management team.”
 Idea Exchange 11

What’s really needed to ‘beat the market’

Thomas Doorley
CEO, Sage Partners, Boston, Massachusetts

“The ten tests are very helpful. But, I’d add one more arena: most strategies
are constrained by ‘in-close’ thinking. That is, when asked if the strategy will
‘beat the market,’ [executives] should make sure they focus on the relevant
market. For example, Nokia was building ever-greater mobile phones but
missed the shift to iPhone-type devices. I believe the underlying reason
this happens is lack of a first step in the process—namely, discovery. To design
a winning strategy (step two) requires a true understanding of what the
customer wants. As a long-term strategist, I often find the process is aimed in
the wrong direction, answering the wrong question. Giving time, energy,
and effort to discovery will improve the odds of finding that special insight
and setting up the strategy to beat the market.”

Chris Bradley responds:

“Thomas, thanks for your comment. We agree that ‘problem search’
is critical and often underemphasized in the rush for answers and results.
Great strategists know that an interesting new question can be just
as important as an answer in spurring strategic thinking. Your emphasis
on finding new insights is also spot-on, but our recent survey found a
disconnect—it is the test on which our respondents reported the weakest
results and is also seen as less important to driving market-beating
results. We think insight is central to strategy, and perhaps we as
practitioners need to raise our aspiration to generate new insights as the
currency of strategy.”

Crafting strategy in a high-speed economy

Steven Weiss
Chairman, Disregard Previous Instructions, Richmond Heights, Missouri

“The sequential approach to traditional strategies can no longer meet the

speed of change and waves of innovation. Bottom line: if there is
anything coming into focus, it is the realization that traditional approaches
to strategy are obsolete.”

Chris Bradley responds:

“Steven, in some ways I agree with you. Certainly life cycles appear to be
shortening, and disruptive change is becoming more the norm; therefore a
fresh look at how we do strategy is worthwhile. But I think we need to
be careful not to discount the basic premises of the traditional approach to
strategy. Better engineering does not render the laws of physics obsolete.
Perhaps the main issue is that what you call ‘traditional approaches’ have
become somewhat ‘unstrategic!’”

Visit mckinseyquarterly.com to share your

own comments or see more from our readers on these
and other topics.
12 2011 Number 2 Research, trends, and emerging thinking

Leading Edge
12 17 22
Drawing a How Web 2.0 Do you have
new road map pays off: The the right
for growth growth dividend leaders for
enjoyed your growth
by networked strategies?
enterprises

27 30
Sustaining top- Why productivity
line growth: can grow
The real picture without killing
jobs

Drawing a new road

map for growth
Sumit Dora, Sven Smit, and Patrick Viguerie

The authors of the 2007 book The Granularity of Growth share new findings on how
large and small companies grow—and on the startling outperformance by businesses from
emerging markets.

In The Granularity of Growth,1 faceted growers have withstood the

we used insights from a proprietary
database of large companies to
argue that executives need to pursue
growth in multiple ways. We disag-
gregated growth into three drivers:
portfolio momentum, or the
market growth of the segments in
a company’s portfolio; M&A; and
market share gains. The exercise
showed us that companies out-
performing their peers on two or
three of these drivers grow faster
and achieve better returns than those
that outperform on just one. Now,
three years later, we can reiterate our
advice with more assurance
because it’s clear that these multi-
test of the financial crisis and the
economic downturn—and continued
to outperform.
That’s the first of three findings we
share in this research update,
which reflects the growth of our
database from some 400 com-
panies in 2007 to more than 700
today, as well as the addition of
a significant set of smaller companies
with annual revenues of less
than $3 billion. The second finding
is that companies from emerging
markets are outgrowing competitors
from developed ones at a startling
pace. The third is that the smallest

companies in our database, with
revenues of less than $1 billion, are
growing by increasing their market
share to a much greater extent
than larger companies are. For
the latter, the role of share gain is
marginal or even negative.
Companies that fared
better in the downturn grew
in multiple ways
The downturn had a dramatic
effect on the global GDP growth rate,
which swung from 10 percent in
2007–08 to –5 percent in 2008–09.
The global corporations in our
database had an even gloomier
experience: their average top-
line growth nosedived from 15 per-
cent in 2007–08 to –11 percent
in 2008–09. Corporate growth was
harder hit than GDP growth, in
part because government spending
increased, dampening the effects
of falling private investment and
consumption on GDP.
Amid the gloom and doom, the
top-quartile companies in our data-
base on two or more of the three
drivers of growth—portfolio momen-
tum, M&A, and market share gain—
stood out as relative winners.
13
Before the downturn, they enjoyed a
24-percentage-point differential
in their compound annual growth
rate (CAGR) against the poor
performers. During the downturn,
outperformers boasted a more
than 3-point advantage.
For companies defining their growth
ambitions, this consistent outper-
formance underscores the impor-
tance of examining how they are
doing on all three sources of growth
and how they can raise their game.
Companies from emerging
markets are growing
much faster
Revenues are increasing much
more quickly for companies
that have their headquarters in
emerging economies than for
their counterparts from developed
economies—overall, at home,
in advanced economies, and in
other emerging markets. The
difference in growth rates is most
startling in emerging economies
where both categories of companies
are off their home turf—30.7 per-
cent growth for business units
of those based in emerging markets,
compared with 12.6 percent for
 14 2011 Number 2

Q2 2011
GoG
Exhibit 1 of 3

Having multiple avenues to growth pays off during

good times and bad.
Having multiple avenues to growth pays off during downturns.

Companies’ performance1 on 3 Revenue growth, compound annual growth rate (CAGR), %

drivers of growth (portfolio momentum,
M&A, and market share gain) 1999–2007 2007–08 2008–09

Executed well on 2 or 3 (n = 66) 30.7 20.3 2.9

Executed well on 1 (n = 135) 16.9 14.9 1.3

Did not execute well on any and/or

6.5 3.8 –0.2
executed poorly on 1 to 3 (n = 391)

Difference between +24.2 +16.5 +3.1

top and bottom performers,
percentage points

1Based on growth decomposition analysis of 592 companies. Analysis spanned different time frames for some companies between

1999 and 2007. Data for 2010 not yet available for majority of companies analyzed.
Source: Bloomberg; McKinsey analysis

their counterparts from the developed
world. This wide gap suggests that
its companies should ask themselves
whether they are paying enough
attention to emerging markets and
allocating sufficient financial and
human resources to them. Chances
are the answer is no.
It’s less surprising that companies
based in advanced economies are
being outgrown by those in devel-
oping economies in their own home
market segments. Growth is, after
all, stronger in emerging markets.
And in advanced economies—
where companies from emerging
markets are growing twice as
fast as those from the advanced
economies themselves—these are
often attackers starting from a
small base and taking market share.
Indeed, across segments, part
of the outperformance may well
reflect the fact that companies based
in emerging markets are starting
from a smaller base. In our database,
the average revenue of business
units from companies headquartered
in developed economies was
$5.9 billion, three times larger than
the units from emerging econ-
omies. This relative size difference
held true in emerging markets
where both categories of companies
 Leading Edge 15

Q2 2011
GoG
Exhibit 2 of 3

Across the board, emerging-market companies grow

faster than those from developed economies.
Across the board, emerging-market companies grow faster
than those from developed economies.
Revenue growth rates segmented by geographic market,1
compound annual growth rate (CAGR)

Overall growth Growth in home Growth in developed Growth in emerging

market markets (for developed, markets (for emerging,
By location of other than home) other than home)
company headquarters

Emerging-market
23.9% 17.9% 22.4% 30.7%
companies

–
Developed-economy
10.7% 7.5% 11.7% 12.6%
companies

=
Growth-rate advantage
13.2% 10.4% 10.7% 18.1%
in emerging markets

1 Based on growth-decomposition analysis of 2,229 market segments for 720 companies, spanning a number of time frames

between 1999 and 2008.

compete off their own turf. Still,
it’s clear in the numbers that players
from emerging markets are serious
competitors everywhere; their con-
tinued improvement will accentuate
the growth challenge for their rivals
from developed countries.
Smaller companies exhibit
different growth patterns
In The Granularity of Growth, we
emphasized that portfolio momentum,
coupled with M&A, was much
more important for corporate growth
than winning market share. This
advice still holds for large companies,
which usually have significant
share positions in reasonably mature
markets. For the smallest of
the new companies in our database
(those with less than $1 billion in
revenue), a different growth pattern
emerges. Share gain represents
almost four percentage points of
annual growth for them, compared
with a very small or negative role
for the growth of larger companies.
Intuitively, this should not come
as a big surprise. Smaller
companies usually grow faster
than their industries because they
are not constrained by size,
and their growth is often based on
a new business model they can
pursue without fear of cannibalizing
 16 2011 Number 2

Q2 2011
GoG
Exhibit 3 of 3

Smaller companies rely on market share gains and

momentum for growth.
Smaller companies rely on market share gains
and momentum for growth.
Average compound annual growth rate (CAGR),
1999–2008,1 %

Performance by
size of annual Revenue Inorganic Portfolio Organic market
revenues,2 $ billion growth3 growth momentum share gain

Smaller <1 (n = 133) 19.4 4.1 11.6 3.7

1–2.9 (n = 157) 13.2 4.8 8.3 0.2

3–4.9 (n = 75) 10.7 3.6 7.3 –0.2

5–9.9 (n = 109) 8.7 2.7 5.8 0.2

10–20 (n = 111) 7.6 2.7 5.4 –0.5

Larger >20 (n = 122) 8.4 2.1 6.2 0.1

1Includes companies analyzed between 1999 and 2008, spanning a number of time frames.
2Based on 2002 revenues in dollars.
3Based on 707 companies for which starting year of growth-decomposition analysis is 2002 or earlier.

1
revenues. Still, there may be a  ehrdad Baghai, Sven Smit, and Patrick
M
Viguerie, The Granularity of Growth,
lesson for large corporations: study
first published in 2007, by Cyan Books,
the action among smaller com- and in 2008, by Wiley.
panies and consider whether they
might be the right peer set for
benchmarking the growth drivers of Sumit Dora is an analyst in
your smaller divisions. Looking McKinsey’s Gurgaon Knowledge
through this new lens may help Center, Sven Smit is a director
leaders set targets that stretch their in the Amsterdam office, and
ambitions yet are still realistic. Patrick Viguerie is a director in
the Atlanta office.

Copyright © 2011 McKinsey & Company.

All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
 Leading Edge
How Web 2.0 pays off:
The growth dividend
enjoyed by networked
enterprises
Jacques Bughin and Michael Chui
A new type of Web-intensive organization built on social technologies is emerging and
gaining competitive advantage.
Is the intensive use of
social-Internet technologies,
commonly known as Web 2.0, a
passing fad? Or does it represent an
enduring trend that will underwrite
a new era of better corporate perfor-
mance led by an emerging class
of networked enterprises? For 1 in
12 companies among the more
than 2,100 that reported using Web
2.0 in their businesses,1 these
efforts appear to be yielding a growth
dividend in the form of market
share gains.
Networked companies fall into three
distinct clusters: those using the
Web effectively for interactions with
employees (internally networked
organizations, 13 percent of com-
panies using Web 2.0), those forging
links with customers and suppliers
(externally networked organizations,
5 percent of companies), and
those combining internal and external
linkages at high levels of effec-
17
tiveness (fully networked enter-
prises, 3 percent of companies).
Statistical analysis shows sig-
nificant correlations between market
share gains and the latter two
organizational types—those that
are fully or externally networked.
Internally networked companies,
meanwhile, are more likely to
be market leaders in their sectors.2
And companies that broadly
distribute decision-making authority
and have work teams stretching
across organizational boundaries
report higher operating margins
than competitors do.
These, of course, are the early
days of such growth effects, but
executives should see the emerging
trend as a call to arms. Consider
that once Web technologies such as
blogs, videos, and social networks
proved valuable to consumers, they
were swiftly and widely embraced.
Now, as these same technologies
 18 2011 Number 2
start to show promise among com-
panies, adoption and competitive
impact could swell rapidly.
Contributing to the market share
growth we observed are a number
of supporting benefits: internally
networked organizations report much
faster access to information among
their employees and to internal
experts. Externally networked com-
panies, meanwhile, benefit from
higher levels of marketing effective-
ness and customer satisfaction
and from better knowledge sharing
with partners and suppliers.
These benefits combine to lower
costs, speed up product develop-
ment, and foster innovation. All
in all, the three types of networked
enterprises we identified reported
benefit levels two to six times higher
Q2 2011 than did the remaining 80 per-
Web 2.0
Exhibit 1 of 2
Networked companies with high levels of Web 2.0
usage report benefit levels two to six times higher than
Networked companies with high levels of Web 2.0 usage report
those
benefitof less two
levels networked companies.
to six times higher than those of less networked
companies.
Organization type
Less networked, Internally networked, Externally networked,
n = 1,711 n = 287 n = 100
Benefits, mean % improvement from Web 2.0 usage
0 5 10
Among employees
With customers
With partners
cent of companies we surveyed
that used Web 2.0 but were less
networked.
What networked enterprises
do differently
As with earlier waves of technology
adoption—such as those that
began automating transactions and
other processes two decades
ago—the adoption of Web 2.0 tech-
nologies should be coupled with
management innovation to have a
truly transformational impact.
Networked companies not only have
high levels of Web 2.0 adoption
and usage but also change the way
they operate and their structure.
They build interaction and collabo-
ration into their employees’ day-
to-day activities rather than making
participation an additional duty.
Employees are much more likely
Fully networked,
n = 76
15 20 25 30 35
 Leading Edge 19

Q2 2011
Web 2.0
Exhibit 2 of 2

Networked companies also report higher levels of interaction

Networked companies also report higher levels of interaction and
and collaboration within their organizations.
collaboration within their organizations.

Organization type

Less networked, Internally networked, Externally networked, Fully networked,

n = 1,711 n = 287 n = 100 n = 76

Organizational impact, % of respondents1

0 10 20 30 40 50 60 70

Integration of Web 2.0 into

day-to-day work

Increased information
sharing

Less hierarchical
information flows

Collaboration across
organizational silos

Tasks tackled in
project-based way

Decisions made lower in

corporate hierarchy

Work performed by mix

of internal and external people

1 Specifically, respondents who strongly agreed that these characteristics applied to their companies.

to share information, while its flow customer, and supplier networks.

throughout the company is far less
likely to be hierarchical; decisions
are made at lower levels. Col-
laboration across organizational
boundaries, both internal and
external, is the norm. Notably, work
is much more likely to be done
by teams that combine internal
employees with people outside the
formal organization.
Senior executives can boost the
odds that their companies will be
among the leaders by encouraging
close collaboration within business
units and functions, as well as
between managers and IT leaders,
to ensure that the use of these
technologies becomes part of
the flow of everyday work and not
merely an add-on.

Making Web 2.0 part of Our research shows that in success-

Management 101 ful implementations, grassroots
The dynamics of many industries groups experiment with participatory
could change as competitors learn technologies to determine which
to exploit emerging employee, uses have the greatest impact, and
20 2011 Number 2

Best Buy’s Robert Stephens on

shaping the networked enterprise
Robert Stephens is chief technology officer of the
electronics retailer Best Buy and founder of the Geek Squad,
the company’s cadre of 20,000 tech and customer service
specialists. In this commentary, adapted from a conversation
with McKinsey’s Michael Chui, Stephens discusses the
future of the networked enterprise.

My vision of the Web 2.0 enterprise is one where people talk to people
and data with data. I do not consider e-mail relevant anymore as a central
communication tool. Our frontline retail employees need real-time tools
like instant messaging and social media. We are taking steps in this direction
with Twelpforce, which uses Twitter to respond to customers’ questions
and needs. We have 3,000 Twelpforce employees, who respond to customers
within two minutes and then, on average, interact four or five times with
them to help solve problems. If all of our Geek Squad agents, as well as our
160,000 Best Buy employees, had smartphones or tablets, they could
become part of an even more powerful social network and knowledge base.
When employees are networked in real time, that helps them find
answers as they work, removing barriers to customer service and allowing
employees to say, “I’ll find out” instead of “I don’t know.”

The day will come soon when enterprises will be able to create new customer
experiences as easily as a mobile app can be written for a smartphone.
That’s because, for the first time, consumers and employees will be using the
same hardware—four- to seven-inch screens, Web and wireless capabilities—
and our data will become more “social.” As that data can talk with other data
and flow across these devices and platforms, every search request, and
every customer question about a product, could be sent to our analytics team,
which would identify customer experience opportunities.

That also will help create what I call a “predictive” supply chain. Today, while
we do share data with suppliers, our databases aren’t connected. When
they are, that will allow our analytics team to find deviations from the norm
when products have problems and to alert teams in real time. The future
is not automation—it’s anticipation.
 Leading Edge
then leaders drive rapid adoption
across the company. Elsewhere, we
observe that externally networked
marketers are steadily expanding the
range of interactions with their
customers. Operations management
is another area where Web 2.0
technologies could improve perfor-
mance, according to our research.
When used effectively, information
flows more readily along supply
chains, improving coordination and
planning efforts with business part-
ners, lowering costs, and increasing
speed to market.
While many companies still face
challenges bringing customers,
suppliers, and other outsiders into
their value chains via the Web,
doing so should be a priority. That’s
because the benefits of Web 2.0
use are multiplicative. Skillful
collaboration among customers or
employees, for example, generates
insights on how to tap knowledge
among suppliers more effectively.
It is this constant feedback and
widening pool of experience, our
research has found, that help
accelerate growth and performance
improvement.
For more on Robert Stephens’s strategy and on how
Jim Smith, Wells Fargo’s executive vice president
and head of Internet services, is using the Web to create
high-value customers, listen to our podcast feature
in “The rise of the networked enterprise: Web 2.0 finds
its payday,” on mckinseyquarterly.com.
21
1
 he total number of executives surveyed was
T
3,249, and the number that reported
using Web 2.0 in their businesses was 2,174.
2
C ompanies were clustered by the degree
to which they achieved benefits from
their use of Web 2.0 technologies. Some
90 percent of companies that use
them report some level of benefit. Internally,
externally, and fully networked com-
panies experienced benefits two to six times
higher than less networked companies
have from using Web 2.0 to connect with
employees, external stakeholders (such
as customers and suppliers), or both. We
then analyzed the correlation between
membership in these clusters and gains in
market share and market leadership
(that is, having the highest market share
in an industry). Market share gains
were significantly correlated with externally
networked organizations (correlation
coefficient .427, p-value .001) or fully net-
worked ones (correlation coefficient .344,
p-value .019). Market leadership was
significantly correlated with internally
networked organizations (correlation
coefficient .182, p-value .038).
The authors would like to
acknowledge the contributions
of Angela Hung Byers and
Martin Rouse to the development
of this article.
Jacques Bughin is a director in
McKinsey’s Brussels office;
Michael Chui is a senior fellow at
the McKinsey Global Institute.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
22 2011 Number 2
Do you have the
right leaders for your
growth strategies?
Katharina Herrmann, Asmus Komm, and Sven Smit
It takes a mix of leaders and talent to pursue a variety of growth strategies simultaneously.
Few executives can do it all.
Is there a link between growth
and specific leadership traits?
We’ve tried to shed some light on
this question by integrating
two unique databases: McKinsey’s
granular-growth database, with
information on the growth perfor-
mance of more than 700 companies,
and a database created by the
executive search firm Egon Zehnder
International that contains per-
formance appraisals of more than
100,000 senior executives (see
sidebar, “Two unique performance
databases”). The overlap between
the two databases—a group of
5,560 executives1 at 47 companies
across a broad range of industries2—
allowed us to examine in detail
the relationship between leadership
competencies and revenue growth.
We found that leadership quality
is critical to growth, that most
companies don’t have enough high-
quality executives, and that certain
competencies are more important to
some growth strategies than to
others. Companies that know how
they want to grow can use these
insights to cultivate the right skills
in top executives.
Great leaders are hard to find
but vitally important
Excellent leaders are few and far
between. Only 1 percent of the
executives in our sample achieved
an average competency score of
6 or 7 out of 7 (although excellence
in a single competency was
more frequent). Just an additional
10 percent had an above-average
score of 5.
That’s a challenge for growth-oriented
corporations because leaders
with high competency scores appear
to make a difference: for every
competency we reviewed, executives
at companies in the top quartile
of revenue growth scored higher than
their counterparts at companies
in the bottom quartile (Exhibit 1).
Similarly, companies where the top
teams as a whole had excellent
scores (that is, 6 or 7) on the various
leadership competencies were
 Leading Edge 23

also those with strong corporate Customer focus first

revenue growth. On the other hand, If your company is seeking a
we found no measurable corre- launching pad to improve perfor-
lation between revenue growth and mance, the analysis shows
teams with solid but unexceptional that one competency drives the
leadership.3 greatest gains: delivering customer
impact (defined as the capacity
Since such a small percentage to understand customers’ evolving
of executives had above-average needs). Companies that had
scores across all competencies, a critical mass of executives who
trying to jump-start growth by looking got excellent (6 or 7) scores in
for great “all-rounders” is a risky this competency recorded superior
bet. An alternative approach is for growth consistently—both or-
companies to cultivate specific ganically and through acquisitions.
competencies correlated with growth
in their existing teams or to seek What constitutes critical mass?
Q2 2011 new talent with the needed skills. Companies where at least
Growth Talent
Exhibit 1 of 2
Exhibit 1
Executives in top-performing companies scored higher than
those in
Executiveslower-performing companies
in top-performing companies across
scored all competencies.
higher than those
in lower-performing companies across all competencies.

Egon Zehnder performance appraisal Difference in average score1 for executives

of executives on 8 leadership competencies at top-quartile companies (by revenue growth)
over those at bottom-quartile ones

Thought Market insight 0.9

leadership
Strategic orientation 0.5

People and  Change leadership 0.4

organizational
leadership Developing organizational capability 0.4

Team leadership 0.3

Collaboration and influencing 0.1

Business Customer impact 0.8

leadership
Results orientation 0.4

1 Differences are statistically significant at 0.05 level. Typically, improvement of scores by no more than +2 in one competency,

or +1 in two competencies, within 1 year (nonrepeatable) requires a significant investment in development and intensive coaching
for high-potential executives.
Source: “Return on leadership,” a joint study by Egon Zehnder International and McKinsey
 24 2011 Number 2

Q2 2011
Growth Talent
Exhibit 2 of 2

Exhibit 2
Pursuit of more than one growth strategy requires leaders
with higher
Pursuit skill
of more thanlevels.
one growth strategy requires leaders
with higher skill levels.
Egon Zehnder performance appraisal of top executive teams (C-level and 1 below)

Average skill level by company strategy1

on a scale from 1 to 7, where 1 is low and 7 is high

3 3.5 4 4.5 5 Leadership competencies2

x1.4 Customer impact

Continually takes action to add value for the customer

Market insight
Looks beyond current context

Results orientation
Drives uncompromisingly for higher performance

Single-growth- Dual-growth- Change leadership

strategy teams strategy teams Advocates change

Team leadership
Actively involves team

Collaboration and influencing

Motivates others to work with self

Strategic orientation
Defines strategy for own area

1 Single growth strategy = company performs in top quartile in 1 of the 3 strategies (portfolio momentum, stealing share from competitors,

or growth through acquisition); dual growth strategy = company performs in top quartile in 2 of the 3 strategies.
2 Difference was not statistically significant for the competency “Developing organizational capacity,” which is not shown.

Source: “Return on leadership,” a joint study by Egon Zehnder International and McKinsey

19 percent of the senior executives Tailor talent strategies to

excelled at customer impact
were also the most likely to achieve
above-average revenue growth (in
the top half of our database). For
a company to be highly likely to have
superior growth (the top quartile),
40 percent of its senior executives
needed to be highly skilled in
that area.4 So all of an organization’s
leaders don’t need to be top
flight at customer impact, but when
a substantial number are, the
impact on growth can be significant.
growth priorities
At most large companies, of
course, there isn’t just one growth
strategy. Rather, companies
rely on a diversity of approaches
that vary by business segment
and by circumstance: at times exec-
utives might place more weight
on acquisitions, while at others they
focus on stealing share from com-
petitors, for example. Our analysis
shows that high growth rates for
these different strategies are
 Leading Edge 25

associated with excellence in a range Senior managers at companies in

of leadership skills wielded by
managers at various levels of the
organization.
Consider portfolio momentum
growth, which flows from market
growth across a company’s
existing business segments. To drive
this type of growth, senior managers
beyond the top team typically
need to execute a strategy effectively
across often far-flung organizations.
the top quartile of this growth
category were highly rated in com-
petencies relating to dynamic
people and organizational leader-
ship: developing organizational
capability, change leadership, and
team leadership.
By contrast, companies in the top
quartile of M&A-driven revenue
growth had top-leadership teams
that excelled at a broad range

Two unique performance databases

McKinsey’s granular-growth database, which was the foundation for
The Granularity of Growth,1 contains continually updated performance
information, over five or more years, for upward of 700 large public
companies. The database disaggregates their growth performance into
share gains from competitors, inorganic growth (M&A), and portfolio
momentum (market growth of the segments represented in their portfolios).

Egon Zehnder’s management appraisals, based on in-depth interviews and

360-degree feedback, rank the strength of executives, from 1 (low) to 7
(high), in three major areas across eight competencies: thought leadership
(strategic orientation and market insight), people and organizational
leadership (collaboration and influencing, change leadership, team leader-
ship, and developing organizational capability), and business leadership
(customer impact and results orientation).

The interview-based methodology of the appraisals seeks to minimize

the “halo effect,” a widespread problem in management research:
individuals at high- or low-performing organizations rate their own per-
formance correspondingly high or low in other areas. In addition, the
fact that the growth and leadership databases were created independently,
that the growth database is based solely on publicly available financial
data, and that many of the findings rest on a disaggregation of growth per-
formance (as opposed to top-line results only) should reduce the halo
effect’s impact on these findings.

1
 ehrdad Baghai, Sven Smit, and Patrick Viquerie, The Granularity of Growth, first
M
published in 2007, by Cyan Books, and in 2008, by Wiley.
26 2011 Number 2
of skills. The first is market insight—
in other words, looking beyond
a company’s current business land-
scape to discern future growth
opportunities. That competency no
doubt supports the identification
of deals, while another competency
crucial for M&A-driven growth—
a well-honed orientation toward
achieving results—helps in
postmerger integration.
If your company pursues multiple
growth strategies, the talent bar
is even higher. Our study shows that
the average skill level of top teams
at companies with a dual-growth
strategy—defined as top-quartile
performance in two of the three
strategies (portfolio momentum,
stealing share from competitors,
or growth through acquisition)—was
almost one and a half times
that of their single-growth-strategy
counterparts on key competen-
cies (Exhibit 2).
In short, to achieve stronger
growth, companies must not only
assemble a critical mass of
talent, which will require attracting
and retaining an “unfair” share
of excellent leaders, but also align
these leaders’ roles and skills
with the companies’ growth strat-
egies. In our experience, the
best companies conduct detailed
assessments of the talent
required—across the organization
and by business unit and geography.
They then create clear leadership-
development targets for executives
and managers and incorporate
these targets into performance-
management, recruitment,
succession, and reward processes.
In this way, top companies sys-
tematically build excellent leaders
with the skills needed to drive
growth.
1
 e grouped the executives into top
W
executives (those at the C-level and one level
below that) and senior managers (at the
next two levels).
2
A ll of the companies studied are large
and public; no public-sector or nonprofit
organizations are included, nor are
family-owned or other privately owned
organizations. Some 70 percent of
companies in the sample are headquartered
in Europe, with the remainder spread
across Australasia and the United States.
The median number of employees at
these companies is 55,000.
3
The correlation coefficient for top executive
teams rated 6 or 7 and corporate
revenue growth is up to 0.74 for individual
competencies. For ratings of 5, the
correlations are around 0.5; they fall to
0.01 for appraisals at the 3 or 4 levels.
4
The critical mass varies among com-
petencies: in “collaboration and influencing,”
for example, having just 22 percent of
managers scoring 5 or above makes it likely
that the company is in the top quartile of
performers in portfolio momentum growth.
The authors would like to
acknowledge their collaboration
with Magnus Graf Lambsdorff
and Stephen P. Kelner of Egon
Zehnder International on the
research and writing of this article,
as well as the contributions of
Verena Renze-Westendorf, also of
Egon Zehnder International.
Katharina Herrmann is an
associate principal in McKinsey’s
Berlin office, Asmus Komm
is a principal in the Hamburg office,
and Sven Smit is a director in
the Amsterdam office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
 Leading Edge
Sustaining top-line
growth: The real picture
Bing Cao, Bin Jiang, and Tim Koller
A historical view shows that beating markets is tougher than most leaders believe.
Many leaders set unrealistic
growth targets. Often, they
don’t properly consider how fast
their underlying markets are
growing and thus how much market
share must be grabbed to meet
ambitious goals. Or they ignore the
likelihood that their competitors
are doing many of the same things to
This article has grow. They also underestimate the
been adapted ongoing need to find new products to
from Value: replace revenue declines from
The Four current offerings as they mature.
Cornerstones
of Corporate A historical look at corporate per-
Finance, by formance puts the growth challenge
Richard Dobbs, into perspective. The first exhibit
Bill Huyett,
shows the real revenue growth dis-
and Tim Koller
tribution for large nonfinancial
(Wiley, October
companies from 1997 to 2007. (We
2010).
ended the analysis in 2007 to
avoid distortion resulting from the
severity of the recession that began
that year.) The median revenue
growth rate was 5.9 percent. About
one-third of these companies
increased their revenues at rates
faster than 10 percent. But that one-
third figure probably overestimates
organic growth, since it includes the
effects of acquisitions.
27
Over a longer time horizon, other
difficulties come into view. The
second exhibit presents real 1965–
2008 revenue growth for the 500
largest nonfinancial companies in
the United States. The median
was 5.4 percent a year. Although
the rate fluctuated from 1 per-
cent to 9 percent according to the
economy’s health, there was
no upward or downward trend and
thus no rising tide to lift growth
over the longer haul.
During this same period (1965–
2008), median GDP growth in the
United States was 3.2 percent,
meaningfully lower than the cor-
porate revenue growth rate.
How did companies grow, in the
aggregate, faster than the
economy did? The biggest factor
is that US companies have
been globalizing, so their revenues
from countries outside the United
States—48 percent of the total
in 2008—have been growing much
faster than their US revenues.
Many companies are counting on
global growth, particularly in
emerging markets, to go on driving
 28 2011 Number 2

them forward. But a rising number
of companies around the world
are competing for a share of that
momentum.
Finally, it’s worth bearing in
mind just how many casualties the
growth game has. Beginning in
the mid-1970s, a quarter of all the
large companies we studied
actually shrank in real terms in a
given year. That’s sobering,
since most companies today are
publicly projecting healthy growth
over the next five years. In fact,
Q2 2011 many of these mature companies
Sustaining growth
Exhibit 1 of 2
will get smaller in real terms. In
related research, we find that
a startling 44 percent of all com-
panies that grew at rates faster
than 15 percent from 1994 to 1997
were growing at rates lower
than 5 percent ten years later.
Although the importance of growth
is undeniable, large companies
should have a realistic view of the
challenges they face and the
implications of aggressive targets.
Pursuing above-average growth
rates—8 percent, say, rather than the
5 percent gains of a company’s

During a ten-year span, about one-third of large

nonfinancial companies enjoyed revenue growth greater
During a ten-year span, about one-third of large
than 10 percent.
nonfinancial companies enjoyed revenue growth greater
than 10 percent.

Distribution of real revenue growth rate for US-based nonfinancial

companies with revenues >$500 million, 1997–2007

Companies,
% of total sample Median = 5.9
30

25

20

15

10

0
< –10 –10 –5 to 0 0–5 5–10 10–15 15–20 20–25 25–30 30–35 35–40 40–45 45–50 >50
to –5
Revenue growth, 1997–2007, CAGR,1 %

1 Compound annual growth rate.

Source: Standard & Poor’s Compustat; McKinsey analysis

 Leading Edge 29

Q2 2011
Sustaining growth
Exhibit 2 of 2

Over a longer period, the revenue growth rate

fluctuated with the health of the economy, exhibiting
Over a longer period, the revenue growth rate
no upward
fluctuated or the
with downward
health of trend.
the economy, exhibiting
no upward or downward trend.

Real revenue growth rate for top 500 nonfinancial

companies in United States, 3-year CAGR,1 %

25

20 Average Median
15
3rd-quartile 13.5 13.0
10 companies

5 Median 5.2 5.4

0
1st-quartile –0.7 –0.4
–5 companies

–10
1965 1970 1975 1980 1985 1990 1995 2000 2005 2008

1 Compound annual growth rate.

Source: Standard & Poor’s Compustat; McKinsey analysis

underlying markets—means that a Bing Cao and Bin Jiang are

$10 billion company must add consultants in McKinsey’s
$11.6 billion (rather than $6.3 billion) New York office, where Tim Koller
in revenue per year by the tenth is a principal.
year to meet its goal. While that is
undoubtedly realistic for some Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
companies in some industries at
comments on this article. Please send them
some times, the headlong to quarterly_comments@mckinsey.com.
pursuit of fast growth can also
yield bad decisions. Over the long
haul, it can overshadow the
benefits of patience and discipline:
patience to nurture new growth
platforms over many years
and discipline to uncover the types
of growth that will create the
most value.
30 2011 Number 2
Why productivity can
grow without killing jobs
James Manyika, Jaana Remes, and Charles Roxburgh
Private-sector innovation and the spread of best practices can raise growth rates and spur
employment in both the United States and Europe.
Does higher productivity
destroy jobs? Sometimes, but
only in the very short term. In
fact, every ten-year rolling period
but one since 1929 has seen
increases in US productivity and
employment. Even on a rolling
annual basis, both productivity and
job growth increased during
69 percent of these periods. Like-
wise, from 1995 to 2008, Europe
increased its productivity by
22 percent while adding 24 million
net new jobs. Over the long term,
apparently, it’s a fallacy to suggest
that there’s a trade-off between
unemployment and productivity.
The reason is that productivity
isn’t only about efficiency; it is as
much about expanding output
through innovations that improve
the performance, quality, or
value of goods and services. What’s
more, even productivity solely
from efficiency gains can, in the
aggregate, lead to higher employ-
ment if the savings are put back
to work elsewhere in the economy.
Companies can pass cost savings
on to customers in the form of
lower prices, leaving households
and businesses with more
money to spend elsewhere. They
can also reinvest the savings
from more efficient operations in
new, job-creating ones.
It’s a good thing that productivity
growth and employment growth can
go hand in hand, because all
developed economies need a surge
in the former to maintain robust,
historical economic growth rates. In
the United States, if GDP growth
is to regain the levels of the past two
decades, productivity growth
must accelerate by 34 percent, to
2.3 percent annually. In Europe
(the EU-15, to be precise), produc-
tivity growth must similarly accel-
erate by 30 percent to sustain past
growth rates, even after allowing
for a rising labor force participation
rate for women and older citizens.
In the United States, corporate-
level actions can power three-
quarters of those gains, without any
change to the current regulatory
 Leading Edge 31

environment. The sprawling US identification (RFID) tags, currently

health care sector, for example, has
only begun to implement the lean-
management principles that have
revolutionized manufacturing.
Even sectors such as retailing, where
US businesses have a strong
productivity record, could do more.
One way would be to take lean
practices from the stockroom to the
storefront, through simple changes
like adjusting employee shifts
to suit changing levels of customer
traffic. Innovations such as cloud
Q2 2011 computing and radio frequency
US-Euro productivity
Exhibit 1 of 2
gaining steam in retailing, could
improve the productivity of business
processes and supply chains
across a wide array of industries.
Europe has a similar growth dynamic.
As in the United States, a more
fervent embrace of innovation and
the diffusion of best practices
already evident in some companies,
sectors, and countries will create
opportunities for productivity gains.
In particular, Europe’s fragmented
and underperforming service sector

The trade-off between aggregate unemployment and

productivity
The levels isaggregate
trade-off between a short-term phenomenon.
unemployment and
productivity levels is a short-term phenomenon.
Aggregate US employment and productivity levels, 1929–2009, %

Employment up,
productivity down 100%

Employment down,
productivity up 80
Both employment and
productivity down
60

Both employment and 40

productivity up

20

0
Annual 3-year periods 5-year periods 10-year periods
Rolling average

Number of periods: 80 78 76 71

Source: US Bureau of Economic Analysis; McKinsey Global Institute analysis

 32 2011 Number 2

Q2 2011
US-Euro productivity
Exhibit 2 of 2

Services bolster Europe’s growth, but contributions vary

by region
Services and by
bolster type ofgrowth,
Europe's service.
but contributions vary by
region and by type of service.

Contribution to regional1 value-added growth by

sector, 1995–2005, % of total

6
Business services 14 11 10
21 19
Local services 18 19

13 13 9
Professional 20
and financial services

60 62
57
Other sectors2 48

Northern Average Southern Continental

Europe for EU 15 Europe Europe

1 Northern Europe: Denmark, Finland, Ireland, Sweden, and United Kingdom; EU 15: Austria, Belgium, Denmark,

Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Luxembourg, Portugal, Spain, Sweden, and United Kingdom;
Southern Europe: Italy and Spain; continental Europe: Austria, Belgium, France, Germany, and Netherlands.
2 Health care, education, and public services; infrastructure (construction, utilities, and transport); manufacturing; primary

resources; and real estate.

Source: EU KLEMS; McKinsey Global Institute analysis

could, on its own, generate much
of the productivity growth needed
to regain historical economic-
performance levels. Today, produc-
tivity varies widely between
service sectors and across regions,
where different services make
markedly different contributions to
economic growth.
The private sector can’t solve the
productivity and growth challenge
alone; targeted government
policy changes are also critical. If
Europe is to boost the service
sector’s productivity, for example,
governments in many countries
must emulate the kind of smart
regulatory practices (for instance,
the liberalization of zoning regu-
lations and the easing of entry for
new players) that Sweden used in
its retail sector during the 1990s.
These reforms contributed to 4.6 per-
cent annual productivity growth
in retailing from 1995 to 2005—three
times the average for Europe’s
other national retail sectors.
In the United States, easing restric-
tions that keep older Americans
out of the workforce and refining
immigration rules would help
reduce the growth drag that aging
populations will naturally impose.
The same goes for Europe, where
again role models exist: the
Netherlands, for example, boosted
the participation of seniors in
the workforce by 24 percentage
points in less than 20 years
by creating incentives to work,
 Leading Edge 33

providing training, and combating James Manyika (based in

ageism among employers.
More broadly, Europeans should
rechannel public funds from low-
productivity sectors such as
agriculture to investments supporting
R&D, innovation, and entrepre-
neurship. The United States should
further invest in its skill base and
infrastructure. Both need better
tools to measure and reward public-
sector productivity. Such actions
will take political resolve. Perhaps a
clearer recognition that produc-
tivity is a job generator rather than
a job killer can help build it.
McKinsey’s San Francisco office)
and Charles Roxburgh (based
in the London office) are directors
of the McKinsey Global Institute,
where Jaana Remes (based in
the San Francisco office) is a senior
fellow.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.

For more on this topic, listen to a podcast with authors James

Manyika and Jaana Remes of the McKinsey Global Institute
on the US productivity challenge, on mckinseyquarterly.com.

Also, read “Why Europe lags behind the United States in

productivity,” on mckinseyquarterly.com, as well as two MGI
reports, Growth and renewal in the United States: Retooling
America’s economic engine and Beyond austerity: A path to
economic growth and renewal in Europe, on mckinsey.com/mgi.
34

Starbucks’ quest for

healthy growth:
An interview with Howard
Schultz

When Howard Schultz returned to Starbucks as CEO in

early 2008, after a hiatus of nearly eight years, he quickly con-
cluded that growth had become a “carcinogen” and that the
company needed a transformation in its culture and operating
approach. As he was leading that change process, Schultz also
chronicled it in his new book, Onward: How Starbucks Fought for
Its Life without Losing Its Soul (Rodale Books, March 2011). In
this edited conversation with McKinsey’s Allen Webb, Schultz
answers some of the questions raised in his book, describes
the insidious impact of breakneck growth on Starbucks, and
explains how he hopes to keep the company on a healthier
growth trajectory. Emerging markets have a significant role to play
in powering future growth. So does Starbucks’ transition into
what Schultz hopes will be the first company to excel as both a
retailer and a purveyor—in supermarkets and other mass-
market channels—of consumer packaged goods.
 35

Watch excerpts from the interview

on mckinseyquarterly.com.

The company once grew fast. Now CEO Howard

Schultz wants it to grow with discipline—in emerging
and developed markets alike.

The Quarterly: In your book, you say that growth became a

carcinogen at Starbucks. What do you mean by that?

Howard Schultz: Let me try and put growth in the context of the
last 15 or 20 years of Starbucks’ life, and then I’ll try and specifically
answer the question. You have to understand that in 1987, Starbucks
had 11 stores and 100 employees, and we had this dream to create
a national brand around coffee and a unique experience in our stores
that, hopefully, we would be able to extend from the West Coast to
around the country.

And from that point on, the dream started becoming a reality, and
it almost had a life of its own. What we were building seemed to work
wherever we opened stores. We had a little bit of luck and business
acumen and perhaps just the fortuitous opportunity that comes along
with perfect timing. For 15-plus years or so, almost everything we
did worked as we built this very unique brand around coffee and a
values-based organization.
36 2011 Number 2

When you look at growth as a strategy, it becomes somewhat seductive,

addictive. But growth should not be—and is not—a strategy; it’s a
tactic. The primary lesson I’ve learned over the years is that growth
and success can cover up a lot of mistakes. We’re going to make
more mistakes. But we’ve learned a great lesson. And as we return the
company to growth, it’ll be disciplined, profitable growth for the
right reasons—a different kind of growth.

The Quarterly: So turning the clock back to 2008, what were some of
the things you were seeing that seemed carcinogenic?

Howard Schultz: When we reviewed some of the underperforming

stores, I was horrified to learn that the stores that we ultimately
had to close had been open less than 18 months. When you look at that—
the money invested and the money that we had to write off—those
decisions were made with a lack of discipline. Also, I think there were
times, during that period when we were chasing growth, when we
were making decisions that were kind of complicit with the stock price.
That’s a very, very dangerous road to go down.

The Quarterly: One thing you did, soon after returning, was to stop
reporting same-store sales.

Howard Schultz: Correct.

The Quarterly: Why did you do that, and how did it work out?

Howard Schultz: Well, there’s a fine line between trying to manage

the company in the most appropriate fiduciary way—and at the
same time providing analysts with 100 percent transparency, which
they deserve. And I say “fine line” because you don’t want to start
making decisions that are based on a P/E or stock price. However,
when a P/E gets to a certain point and a stock price gets to a cer-
tain point, you begin to believe that the organization, the enterprise,
is worth that. And then you get to a point where you’re managing
to either uphold it or to increase it.

An albatross around the neck of most retailers and restaurant com-

panies is this metric that Wall Street created many, many years ago:
the calculation of the growth of stores open for more than one year.
Taking one unit and seeing whether or not that unit is growing, year
over year, is a solid case study of whether a company is healthy, but
Starbucks’ quest for healthy growth: An interview with Howard Schultz 37

not the only one. In any event, Wall Street became enamored with
this number. And as a result of that, most retailers and restaurants
report comp-store sales on a monthly basis. What that does is
produce tremendous f luctuation in stock prices on a monthly basis,
because God forbid you get a down month.

I thought, when I came back, that we had become linked internally

to the comp-store sales number, and we started making decisions that
were driving incremental revenue and perhaps were not consistent
with the equity of the brand. I wanted to remove that albatross from
the necks of the operators.

So I announced, one day when I came back, that we were going to stop
reporting monthly comps. And you would’ve thought the world came
to an end. It didn’t come to an end. Now, at the time, since we were not
performing, I was accused of not being transparent and trying to hide
things. But what I was trying to do was make sure that our people were
managing the business for the most appropriate constituent, which
is the customer.

Vital Stats Career highlights

Born July 19, 1953, in Starbucks
Brooklyn, New York (1982–85, 1987–present)
Married, with 2 children • Chairman, CEO, and
president (2008–present)
Education • Chairman (2000–08)
Graduated with a BA in
• Chairmanand CEO
communications in 1975
from Northern Michigan (1987–2000)
University • President (1987–94)
• Director
of retail
operations and marketing
(1982–85)

Il Giornale Coffee
(1986–87)
• Founder,chairman, CEO,
and president

Howard Schultz
38 2011 Number 2

The Quarterly: What is an example of the kind of decision making

that was concerning you?

Howard Schultz: I once walked into a Starbucks, and there was a

table of teddy bears in the store that had nothing to do with coffee
whatsoever. I asked the manager about this, and she said she was really
enthused and excited because it was adding to her comps. You know,
this doesn’t make any sense.

The Quarterly: You established an agenda when you came back—

a seven-point transformation agenda. And you didn’t abandon growth
as part of that. In fact, one of the planks was to “create innovative
growth platforms worthy of our coffee.” Why set a goal like that when
just fixing your core business was such a key priority for you?

Howard Schultz: You can’t attract and retain great people for a com-
pany that isn’t going to grow. No one wants to go home at night and
say, “I’m working for a company that’s getting transformed.” It’s not very
exciting. It’s so vitally important to give people hope, to provide aspi-
rations and a vision for the future. And I knew from day one that when
I returned, it wasn’t only going to be about restoring the company
back to its original form. We had to instill a deep sense of commitment
to growing the company.

The Quarterly: What did you mean, exactly, when you said you
hoped to figure out a different way of growth for Starbucks, a different
growth pattern?

Howard Schultz: This is a unique inflection point for Starbucks;

I think we’ve identified a very big opportunity to do something that
really has not been done before. And that is the following: there are
many, many companies, domestically and around the world, that have
built a domestic national footprint around retail stores, just like
Starbucks—the Gap, Costco, Wal-Mart, Coach, Zara. And there are many
consumer-packaged-goods companies—Pepsi, Coke, Kellogg’s,
Campbell’s. There hasn’t been one company I can identify that has been
able to build complementary channels of distribution by integrating
the retail footprint and the ubiquitous channels of distribution—in our
case, grocery stores and drug stores.

So the model is, Starbucks can seed and introduce new products and
new brands inside our stores. We introduced VIA instant coffee in
Starbucks’ quest for healthy growth: An interview with Howard Schultz 39

our stores. Instant coffee is a $24 billion global category that has not
had any innovation in over 50 years. And no growth. If we took VIA
and we put it into grocery stores and it sat on a shelf, it would have
died. But we can integrate VIA into the emotional connection we have
with our customers in our stores. We did that for six to eight months
and succeeded well beyond expectations in our stores. And as a result
of that, we had a very easy time convincing the trade, because they
wanted it so badly.

We can draft off of our stores into ubiquitous channels of distribution

and then integrate that into the capability and the discipline we have
around social and digital media. And this is not a pipe dream. This
will happen in 2011. Right now, one out of every five transactions in
our stores happens off the Starbucks card. And it’s growing rapidly.
Sometime in 2011, not only are you going to be rewarded for buying
something at a Starbucks store, but buying Starbucks-branded prod-
ucts in a grocery store is also going to give you a reward off your
Starbucks card. So we’re going to integrate the reward system, in
a way that has never been done before, between our retail stores and
the wholesale channel.

The Quarterly: Let’s shift gears and talk about Starbucks’ potential
in emerging markets.

Howard Schultz: The big opportunity, in terms of total stores, is

what’s happening in China; we’ve got 800 stores in greater China,
400 in the mainland. When all is said and done, we’ll have thousands.
We’re highly profitable there. We’ve been there 12 years, and I would
say that the hard work—in terms of building the foundation to get access
to real estate, design stores, and operate them—is well in place.

We started out, like most Western brands, going to the two major cit-
ies, Shanghai and Beijing. In the last couple of years, it is stunning to
see what we’ve been able to do in secondary and tertiary markets—these
markets have five to ten million people in them. This past month,
we opened up in two cities that people never heard of. One is Fuzhou,
which has a population north of five million people. In a rainstorm,
people were lined up in the morning waiting for the Starbucks door
to open.

I was in China last month, and a government official told me there are
now 140 cities in China with a population north of a million people.
40 2011 Number 2

We don’t have a rollout plan for 140 of those cities, but we strongly
believe that the discipline and the process are in place for us to execute
a very big growth plan in China, learning from the mistakes we
made in the US.

Every consumer brand imaginable is rushing to these emerging mar-

kets, with China being the number one. I wasn’t around for the gold
rush, but I suspect that’s what it’s like: everyone’s just throwing stuff
against the wall, hoping something’s going to stick. We want to be
very thoughtful and disciplined—not get carried away, not go to too
many cities. I don’t want to go so wide. I think success in China, for
us, is making sure we go deep in these markets before we spread out to
so many markets around the country. It can be seductive; we’ve got
to be very disciplined.

The Quarterly: So how do you choose?

Howard Schultz: There’s a whole team, a real-estate team—that

is, a local one—that is working with our people here in Seattle. As you
might imagine, we have built, over the last 40 years, a very refined
model in terms of demography and understanding where our stores
should be located. And based on the success we’ve had in China over
the last few years, we’re now mapping those statistics and metrics in a
way that gives us a very good understanding, with great predictability.

The Quarterly: What other emerging markets strike you as

particularly important?

Howard Schultz: I just came back from India, and we will open up
stores there, hopefully within the next 12 months. I think we’re sig-
nificantly understored in Brazil, where we’ve got 50 stores or so—with
a very big upside. We’re not in Vietnam yet; we’re looking at Vietnam
with a close eye. If we’re lucky, maybe we’ll get there by 2012.

The Quarterly: How do you think about prioritizing growth

opportunities in those countries?

Howard Schultz: It’s clear that the number-one growth opportunity

is China. We believe that we can build a major business in India, but
we’re not there yet. So our international team created a growth plan for
the next three years in terms of the number of stores, the number of
markets. The US team has done the same thing on a parallel track, and
 Starbucks’ quest for healthy growth: An interview with Howard Schultz 41

then we’ve laid onto that the investment that we’re making currently
in building a significant capability and business model around CPG,1
which is what I described earlier.

The Quarterly: You said in your book that you’re particularly

cognizant of not wanting the same things to happen in China
that happened in the United States. What are you doing to guard
against that?

Howard Schultz: All of the learning in the last two and a half years
of the transformation is now being layered onto every international
market in terms of how we operate the stores and how we enhance the
customer experience. Now, with regard to China, given the fact that
it is a big opportunity, we are providing the China team with resources
that, perhaps, other markets are not getting—senior people who are
managing big businesses at Starbucks are going over to China to ensure
that the China team has the benefit of all the things that we’ve learned,
as well as the benefit of the mistakes that we’ve made. I’m spending
a disproportionate amount of time there myself; maybe it’s my
own paranoia.

What we want to do as a company is put our feet in the shoes of our cus-
tomers. What does that mean, especially in China? It means that not
everything from Starbucks in China should be invented in Starbucks
in Seattle. Now, the Chinese customer, like many customers around
the world, does not want a watered-down Starbucks. But we want to be
highly respectful of the cultural differences in every market, especially
China, and appeal to the Chinese customer. So as an example, the food
for the Chinese stores is predominantly designed for the Chinese palate.

Now, this is not a company that did these kinds of things in the past. We
were fighting a war here between the people in Seattle who want a
blueberry muffin and the people in China who say, “You know what, I
think black sesame is probably an ingredient that they would rather
have than blueberry.” And I would say that goes back to the hubris of
the past, when we thought, we’re going to change behavior. Well, no,
we’re not going to change behavior. In fact, we’re going to appeal with
great respect to local tastes. So we have a list of core products, in
almost every country we’re now doing business in, that is right down the
center to appeal to the local consumer.

1 Consumer packaged goods.

42 2011 Number 2

What we’re trying to do is create a balance between this being a

Starbucks store with all the trappings and, at the same time, a very
deep level of sensitivity to local relevancy. That’s hard to do when
you’re all over the world in 55 countries. The reason it’s working is that
we’re decentralizing and, for the first time, trusting that the people
in the marketplace know better than the people in Seattle.

The Quarterly: What’s your biggest growth constraint?

Howard Schultz: It’s not financing. We’re sitting on about $2 billion

in cash. And what I’ve said publicly to the Street is that this probably
will be the first time in our history when we will be quite opportunistic
about potential acquisitions.

Rather, it’s human capital. We want to attract world-class people who

have values that are well aligned with the culture of the company.
And we want to make sure that the growth of Starbucks in the future
doesn’t in any way cover up the mistakes we’ve made in the past.

“
What we’re trying to do is create a balance
between this being a Starbucks store
with all the trappings and, at the same time,
a very deep level of sensitivity to local
relevancy. That’s hard to do when you’re all

”
over the world in 55 countries.

The Quarterly: How worried are you that growth could become
carcinogenic again?

Howard Schultz: I’m not worried about that at all. I can’t count on
one hand how many times the leadership team or the company has
celebrated over the last 18 months. And the truth is, we’ve had a lot to
celebrate. We’ve more than quadrupled the market value of the com-
pany. We had record revenue, record profit for the year, for the quarter.
 Starbucks’ quest for healthy growth: An interview with Howard Schultz 43

But we are actually turning over rocks and looking at the things that
perhaps we didn’t get right and constantly, I think, beating ourselves
up. If you walked into our Monday morning meeting, you would
think this is a company that is still trying to transform itself. I would
describe the team and I as spending as much time as we did then
looking in the rear-view mirror—at the things we’ve just done to ensure
that we’ve laid the right foundation and that the culture is preserved
as we grow the company. It’s quite a different discipline and mentality
than we had in the past.

There is a discipline of being very self-critical, with real quantitative

metrics to study the investments that we’re making across the board,
whatever they are—return on investment in stores, return on invest-
ment in advertising, return on investment in new-product introductions;
looking at the entry cost of new markets in a different light; looking
at the supply chain in a different way. This is a company that took $700
million of costs out of its operations in the last two years. And we’re
still looking for more.

Allen Webb is a member of McKinsey Publishing and is based in

McKinsey’s Seattle office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
Pursuing growth
in emerging markets
It’s hard to grow these days without an
effective emerging-market strategy.
And developing one is getting trickier all
the time because growth in these
markets is shifting from major urban
areas to cities that are smaller and
sometimes quite remote. Read here about
the magnitude of this shift, according
to new McKinsey Global Institute research.
Then learn why country strategies
don’t work in emerging markets and how
you should approach them instead.
Finally, read about Portugal Telecom’s
evolving approach in Brazil from
the company’s CEO, Zeinal Bava.
 46
The world’s new growth
frontier: Midsize cities in
emerging markets
Richard Dobbs, Jaana Remes,
and Sven Smit

50
Is your emerging-market
strategy local enough?
Yuval Atsmon, Ari Kertesz, and
Ireena Vittal

62
‘There’s no such thing as an
effective countrywide strategy’
Zeinal Bava
Artwork by Dan Page
46
The world’s new growth
frontier: Midsize cities in
emerging markets
Richard Dobbs, Jaana Remes, and Sven Smit
Senior executives searching
for growth face a stark new reality:
roughly 400 midsize cities in
emerging markets—cities they
mostly will have never heard
of—are posed to generate nearly
40 percent of global growth over
the next 15 years. That’s more
growth than the combined total of
all developed economies plus
the emerging markets’ megacities
(those with populations of more
than ten million, such as Mumbai,
São Paulo, and Shanghai), which
together have been the historic
focus of most multinationals.
Learning about consumer attitudes
in the emerging markets’ “middle-
weight” cities (three-quarters
of which have less than two
million people), figuring out market
entry strategies for them, and
deciding how to allocate resources
Richard Dobbs
is a director of the within and across them will all be
McKinsey Global
crucial priorities in the years ahead.
Institute (MGI)
and a director in
McKinsey’s Seoul New research from the McKinsey
office; Jaana
Global Institute (MGI) seeks to
Remes, based in
the San Francisco arm executives with the knowledge
office, is a senior they’ll need to tap into global
fellow of MGI; Sven
urban growth. Midsize cities in
Smit is a director
in the Amsterdam emerging markets are poised
office. not only to generate much of the
world’s growth in the years
ahead but also to become drama-
tically richer. By 2025, for
instance, more of the world’s
middle-class households
will be in emerging rather than
in developed markets. Com-
panies selling products for middle-
class children and retirees
alike will find many of their biggest
markets in emerging economies.
The same will be true for
infrastructure and basic-material
companies that are helping
to create these rapidly growing
cities. It all adds up to a brave
new world for the multinationals
targeting them—and a better
one for their inhabitants.
Note: Data for all exhibits are for the
top 600 global cities according to their
contribution to global GDP growth,
2007–25, grouped as follows: megacities:
population >10 million; large middleweights:
population 5 million–10 million; midsize
middleweights: population 2 million–5
million; small middleweights: population
150,000–2 million. GDP is measured in
dollars, using market exchange rates in 2007
and predicted real exchange rates in 2025.
The full report, Urban world: Mapping
the economic power of cities, is available
free of charge on mckinsey.com/mgi.
 47

Middleweight cities in GDP in 2007

100% = $55.5 trillion
Middleweight
cities in emerging
emerging markets markets
are poised to deliver more 11
growth than the entire Small cities and
16 rural areas in
developed world and emerging markets

emerging-market Developed
economies and
megacities combined. megacities 73
in emerging
markets
Contribution to GDP and GDP growth
by type of city, %

GDP growth, 2007–25

100% = $54.9 trillion

Developed
economies and Middleweight
megacities 34
in emerging
37 cities in emerging
markets
markets

29

Small cities and

rural areas in
emerging markets

Meet the middleweights

The 12 cities listed below are representative of the largest middleweight cities.
By 2025, the GDP of each will be ranked in the middle of the top 20 for its respective
country or region.
Middle East

Africa Sharjah
Huambo China

Brazil
Casablanca Chengdu
Fortaleza Foshan
Xi’an
India

Manaus Nagpur
Recife Vadodara
Visakhapatnam
 48 2011 Number 2

Today, the average GDP Developed

economies = 100%
per capita of emerging-
market cities is only about
15 percent of developed-
economy levels. By 2025, it
will be closer to 35 percent.
Per capita GDP in emerging-market
cities as % of that in developed-
economy cities

15 32 16 38

2007 2025 2007 2025

Megacities Middleweight cities

There will be more urban

households with income
above $20,000 in emerging
markets than in developed
economies by 2025, a reversal
from the situation today. 234
211
Urban households in the consuming and 45
global income brackets,1 millions 172
88
Global: >$70,000
Consuming: $20,000–$70,000 65
80
189
14
107 123
66

Emerging Developed Emerging Developed

markets economies markets economies

2007 2025

1 In 2005 dollars, adjusted for purchasing-power parity (PPP).

 The world’s new growth frontier: Midsize cities in emerging markets 49

By 2025, more than half

of the urban children and
nearly half of the urban
141 184 80 183
elderly with incomes above million million million million
$20,000 will live in
emerging-market cities.
54 43 51
Urban population in consuming and global
income brackets,2 %
74

Developed economies
57 49
Emerging markets 46
26

2007 2025 2007 2025

Children, aged 14 Elderly, aged 65

years or younger and older

2 Assumes population distribution across income segments is identical to household distribution across segments.

New housing construction

will surge in many emerging-
market cities during the
coming years.
Latin America example, number of new
or additional dwellings needed by 2025, millions For example, in
São Paulo
= 1 million dwellings
0.55 Current shortfall
2.90 New houses
São Paulo,
Brazil
3.7 0.29 Second houses

3.74

Mexico City,
Mexico
2.9

Rio de Janeiro,
Brazil 2.2

Bogotá,
Colombia 1.8

Monterrey,
Mexico
0.6
50

Is your emerging-market
strategy local enough?

Yuval Atsmon, Ari Kertesz, and Ireena Vittal

The diversity and dynamism of China, India,

and Brazil defy any one-size-fits-all approach.
But by targeting city clusters within them,
companies can seize growth opportunities.

Creating a powerful emerging-market strategy has moved to

the top of the growth agendas of many multinational companies,
and for good reason: in 15 years’ time, 57 percent of the nearly one
billion households with earnings greater than $20,0001 a year will
live in the developing world. Seven emerging economies—China, India,
Brazil, Mexico, Russia, Turkey, and Indonesia—are expected to con-
tribute about 45 percent of global GDP growth in the coming decade.
Emerging markets will represent an even larger share of the growth
in product categories, such as automobiles, that are highly mature in
developed economies.

Figures like these create a real sense of urgency among many multina-
tionals, which recognize that they aren’t currently tapping into those
growth opportunities with sufficient speed or scale. Even China, fore-
cast to create over half of all GDP growth in those seven developing
economies, remains a relatively small market for most multinational
corporations—5 to 10 percent of global sales; often less in profits.

To accelerate growth in China, India, Brazil, and other large emerging

markets, it isn’t enough, as many multinationals do, to develop a
country-level strategy. Opportunities in these markets are also rapidly
moving beyond the largest cities, often the focus of many of these

1 
In terms of purchasing-power parity (PPP).
 51

companies. For sure, the top cities are important: by 2030, Mumbai’s
economy, for example, is expected to be larger than Malaysia’s is
today. Even so, Mumbai would in that year represent only 5 percent of
India’s economy and the country’s 14 largest cities, 24 percent.
China has roughly 150 cities with at least one million inhabitants. Their
population and income characteristics are so different and changing
so rapidly that our forecasts for their consumption of a given product
category, over the next five to ten years, can range from a drop in
sales to growth five times the national average.

Understanding such variability can help companies invest more shrewdly

and ahead of the competition rather than following others into the
fiercest battlefields. Consider Brazil’s São Paulo state, where the economy
is larger than all of Argentina’s, competitive intensity is high, and
retail prices are lower than elsewhere in the country. By contrast, in
Brazil’s northeast—the populous but historically poorest part of the
country—the economy is growing much faster, competition is lighter,
and prices are higher. Multinationals short on granular insights and
capabilities tended to flock to São Paulo and to miss the opportunities
in the northeast. It’s only recently that they’ve started investing
heavily there—trying to catch up with regional companies in what is
often described as Brazil’s “new growth frontier.”

As developing economies become increasingly diverse and competitive,

multinationals will need strategic approaches to understand such
variance within countries and to concentrate resources on the most
promising submarkets—perhaps 20, 30, or 40 different ones within
a country. Of course, most leading corporations have learned to address
different markets in Europe and the United States. But in the
emerging world, there is a compelling case for learning the ropes much
faster than most companies feel comfortable doing.
52 2011 Number 2

The appropriate strategic approach will depend on the character-

istics of a national market (including its stage of urbanization), as well
as a company’s size, position, and aspirations in it. In this article,
we explore in detail a “city cluster” approach, which targets groups of
relatively homogenous, fast-growing cities in China. In India,
where widespread urbanization is still gaining steam, we briefly look
at similar ways of gaining substantial market coverage in a cost-
effective way. Finally, in Brazil we quickly describe how growth is
becoming more geographically dispersed and what that means for
Q2 2011
growth strategies.
EM growth strategies
Exhibit 1a of 3

A recent analysis of China revealed 22 distinct urban clusters.

Urban clusters and their hub cities

Clusters are grouped by size, based on average 2015 urban

GDP as % of national urban GDP (in 2005 renminbi)

Small Large Mega

Harbin

Changchun
Beijing

Shijiazhuang Shenyang

Hohhot
Dalian
Tianjin

Taiyuan
Qingdao
Zhengzhou Jinan
Xi’an
Nanjing

Hefei
Shanghai
Wuhan
Chengdu Hangzhou

Nanchang
Chongqing
Fuzhou
Changsha
Xiamen
Kunming

Guangzhou

Shenzhen
Nanning
Q2 2011
Is your emerging-market strategy local enough?
EM growth strategies 53

Exhibit 1b of 3

Clusters vary considerably in their share of urban GDP and

in the relative importance of their hub cities.
Top two clusters in each size category, projected 2015 urban
GDP as % of national urban GDP (in 2005 renminbi)

Mega

Cluster: Shanghai 11.0

Hub city: Shanghai 5.4

Cluster: Jingjinji 10.4

Hub cities: Beijing, Tianjin 7.2

Large

Cluster: Nanjing 4.4

Hub city: Nanjing 1.5

Cluster: Xiamen–Fuzhou 4.1

Hub city: Xiamen–Fuzhou 1.3

Small

Cluster: Guanzhong 1.6

Hub city: Xi’an 0.9

Cluster: Hohhot 1.6

Hub city: Hohhot 0.4

Targeting the right city clusters in China

By segmenting Chinese cities according to such factors as industry

structure, demographics, scale, geographic proximity, and consumer
characteristics, we identified 22 city clusters, each homogenous
enough to be considered one market for strategic decision making.
Prioritizing several clusters or sequencing the order in which they
are targeted can help a company boost the effectiveness of its distri-
bution networks, supply chains, sales forces, and media and
marketing strategies.

More specifically, this approach can help companies to address oppor-

tunities in attractive smaller cities cost effectively and to spot
opportunities for, among other things, expanding within rather than
across clusters—a strategy that requires a less complex supply chain
and fewer partners. Companies that nonetheless want to expand across
clusters may find it easier to target 50 to 100 similar cities within
four or five big clusters than cities that theoretically offer the same
market opportunity but are dispersed widely across the country.
54 2011 Number 2

Another major benefit of concentrating resources on certain clusters

is the opportunity to exploit scale and network effects that stimulate
faster, more profitable growth. Because most brands still have a
relatively short history in China, for example, word of mouth plays a
much greater role there than it does in developed economies. By
focusing on attaining substantial market share in a cluster, a brand can
unleash a virtuous cycle: once it reaches a tipping point there—
usually at least a 10 to 15 percent market share—its reputation is quickly
boosted by word of mouth from additional users, helping it to win yet
more market share without necessarily spending more on marketing.

Here are four important tips to keep in mind when designing a city
cluster strategy for China.

Focus on cluster size, not city size

It’s easy to be dazzled by the size of the biggest cities, but trying to
cover all of them is less effective for the simple reason that they can be
very far from one another. Although Chengdu, Xi’an, and Wuhan,
for example, are among the ten largest cities in China, each of them is
about 1,000 kilometers away from any of the others. In Shandong
province, the biggest city is Jinan, which is barely in the top 20. Yet
Shandong has 21 cities among China’s 150 largest, which makes
the area one of the five most attractive city clusters. Its GDP is about
four times bigger than that of the cluster of cities around and
including Xi’an, as well as three times bigger than the cluster of cities
surrounding Chengdu.
 Is your emerging-market strategy local enough? 55

Look beyond historical growth rates

The growth of incomes and product categories is another variable that
must be treated in granular fashion. Extrapolating future trends
from historical patterns is particularly suspect—however detailed that
history may be—because consumer spending habits change so
rapidly once wealth rises.

In some clusters, many people are starting to buy their first low-end
domestic cars; in others, they are upgrading to imports or even to
luxury brands. We expect sales of SUVs to increase at a 20 percent
compound annual growth rate nationwide in the next four years,
for example, but to grow as quickly as 50 percent in several cities and,
potentially, even to decline in some where penetration is already
deep. Similar or even sharper variance held true in almost every service
or product category we analyzed, from face moisturizers to chicken
burgers to f lat-screen TVs. Yogurt sales in some cities are growing
eight times faster than the national average.

The Shenzhen cluster has the highest share (90 percent) of middle-
class households—those earning over $9,000 a year. In other clusters,
such as Nanchang and Changchun–Harbin, more than half of all
households are still poor. As a result, people in the Shenzhen cluster
are already active consumers of many categories, and the potential
for growth is fairly limited. In the poorer clusters, many categories are
just emerging, as larger numbers of people pass the threshold at
which more goods become affordable. From a strategic viewpoint, the
richer cluster could still be a major growth market for premium
goods but not for most mass-market ones.

Another major benefit of concentrating

resources on certain clusters is the opportunity
to exploit scale and network effects
that stimulate faster, more profitable growth.
56 2011 Number 2

Don’t be fooled by generalities

Talking about Chinese consumers and how they shop is a bit like
talking about European consumers. While some generalizations may
be fair, certain very strong differences, even within regions, go well
beyond the already significant economic variance. Guangzhou and
Shenzhen, for example, are both tier-one cities, located in the same
province and just two hours apart. But Guangzhou’s people mainly speak
Cantonese, are mostly locally born, and like to spend time at home
with family and friends. In contrast, more than 80 percent of Shenzhen’s
residents are young migrants, from all across the country, who
mainly speak Mandarin and spend most of their time away from their
homes. To be effective, marketers will probably have to differentiate
their campaigns and emphasize different channels when reaching out
to the people in these two cities. That’s why we suggest managing
them in different clusters, despite their proximity.

The need to localize marketing activities also results from the limited
reach of national media. China has over 3,000 TV channels, but
just a few are available across the country. In some areas, only around
5 percent of consumers watch national television. Other media, such
as newspapers and radio (and of course billboards), are even more local.

Very few companies can craft their entire strategy at the level of a cluster—
those that do are usually its regional champions. But with differences
such as the following common, some tailoring is critical:

• E
 very second consumer in Shandong believes that well-known brands
are always of higher quality, and 30 percent are willing to stretch
their budgets to pay a premium for the better product. In south Jiangsu,
only a quarter of consumers preferred the well-known brands, and
only 16 percent were willing to pay a premium for them.

• I n the Shenzhen cluster, 38 percent of food and beverage shoppers

found suggestions from in-store promoters to be a credible source of
information, compared with only 12 percent in Nanjing.

• In Shanghai, 58 percent of residents shop for apparel in department

stores, compared with only 27 percent of Beijing residents.

With such diversity common, even merely fine-tuning the marketing

mix and channel focus by cluster can pay enormous dividends.
Is your emerging-market strategy local enough? 57

Allow your clusters to be flexible

Some companies may want to merge or divide clusters for strategic-
management purposes. A company could, for instance, merge geograph-
ically nearby clusters, such as Guangzhou and Shenzhen or Chengdu
and Chongqing, if its supply chain was well positioned to manage these
proximate clusters as one. Other companies, highly driven by the
media market, would find it sensible to split the Shanghai cluster into
subclusters, because some markets within it are still quite different
in their TV habits and other choices. By contrast, people in certain clusters,
such as Chengdu or Guangzhou, watch similar TV shows across the
entire cluster, so intracluster expansion allows companies to make more
effective use of the media spending needed to attract consumers in
the big cities.

The actual number of submarkets a company opts for will depend in

practice on its needs. That number should be manageable—most likely,
20 to 40. Fewer wouldn’t be likely to produce the required degree of
granularity, though a company might have logistical reasons for taking
this approach. More would probably be too many to run effectively.

Cost-effective market coverage in India

Often, the challenges of accessing consumption growth cost effec-

tively are even greater in India than in China because India is less
urbanized and at an earlier stage of its economic development.
Companies would need to reach up to 3,500 towns and 334,000 villages,
for example, to pursue opportunities in the 10 (of 28) Indian states
that by 2030 will account for 73 percent of the country’s GDP and
62 percent of the urban population.

To allocate financial and human resources smartly and make things

more manageable, companies need to walk away from averages
and adopt more granular approaches. Some companies will be well
served by focusing on 12 clusters around India’s 14 largest cities.
Those clusters will provide access to as much as 60 percent of the
country’s urban GDP by 2030, when the 14 largest cities are likely
to account for 24 percent of GDP.

True, India’s major clusters won’t cover as much of the economy as

those in China, where they will encompass 92 percent of urban GDP by
Q2 2011
EM growth strategies
58 2011 Number 2
Exhibit 2 of 3

In India, focusing on city clusters helped one technology company

reduce its customer service costs dramatically.

Cost to serve as % of sales

11

Company’s target 5
threshold: 6%

200 cities 10 states 8 clusters (67 cities)

% of potential
market
addressed 70
81 75

2015. Yet a hub-and-spoke approach in India should provide similar

opportunities to optimize supply chains, as well as sales and marketing
networks. An established technology player formerly operated in
120 cities all over India, for example. Recently, it shifted to focusing on
eight clusters with a total of 67 cities, which still gave it access to
70 percent of its potential market. One benefit: customer service costs
fell from a rapidly growing 9 to 10 percent of sales to a more accept-
able 5 percent.

Alternatively, a company might improve the economics of its Indian

business by focusing on a handful of states, an approach recently
adopted by a retailer that had previously been pursuing a national
footprint. Another company, this one in the consumer goods
sector, recently decided to pursue opportunities in eight cities where
consumers earn over $2,500 a year—more than twice the average
for India—and the retail infrastructure suits its products nicely.
Without this more granular analysis, the multinational would have
stayed on the sidelines in the mistaken belief that Indian con-
sumers weren’t ready for its products. It would therefore have missed
the opportunity to challenge a competitor rapidly gaining the lead
in those markets.
 Is your emerging-market strategy local enough? 59

Seizing new regional opportunities in Brazil

In contrast to China and India, Brazil has been open to multinationals

for decades. But during much of that time, most large companies in
sectors such as consumer packaged goods focused on the southern (and
most affluent) parts of the country. With just over half of the national
population, this region includes São Paulo city and state, Brazil’s finan-
cial and industrial center.

As economic growth accelerated in recent years, many consumers

started upgrading to more sophisticated products. But growth has also
been moving beyond the south and a few large cities, becoming
more geographically dispersed. In the populous northeast, for example,
income per capita is only half of its level in São Paulo, but the econ-
omy is growing faster than it is elsewhere in Brazil. Succeeding in new
regions like the northeast requires a fresh approach for many com-
panies. Consider the following:

• Many global companies still make the mistake of doing their consumer
Q2 2011 research in São Paulo when they are designing new products
EM growth strategies
or national marketing campaigns for Brazil. They don’t realize that
Exhibit 3 of 3 cosmopolitan São Paulo probably has more in common culturally
with New York than with any other city in Brazil.

In Brazil, consumer preferences can vary dramatically

across regions.

Example: consumer preference for name-brand detergent’s pack sizes,1

pack size as % of total sales

Brazilian consumers overall Consumers in northeast Brazil

Large Small Medium 0 Large

5 15 4

80 96
Medium Small

1 Small = < 500 grams, medium = 1,000 grams, large = >1,000 grams.

Source: LatinPanel
60 2011 Number 2

There is no one-size-fits-all strategy

for capturing consumer growth in emerging
markets.

• Modern-format stores account for 70 percent of retailing in Brazil

overall, but for only 55 percent in the northeast. To reach thousands
of small (and often capital-constrained) outlets spread all over
the region, packaged-goods companies must develop third-party
networks specializing in frequent deliveries of goods and small
drop sizes. What’s more, in Brazil as a whole, many consumer goods
companies found that they had focused too much on hypermarkets
when designing assortments and promotions. One company, for
example, discovered that Brazil’s expanding drugstore chains were
the fastest-growing channel for personal-care and beauty
products. Some leading consumer goods companies have now
created specialized organizations that execute distinct channel
strategies in different regions and categories, with tailored product
portfolios and displays.

• Many packaged-goods companies see detergent powders as

a developed category in Brazil. But relatively aff luent consumers
there are upgrading to larger and more sophisticated washing
machines, and many consumers in the northeast are buying their
first fully automated machines. New detergent formulas
therefore have enormous potential—annual consumption in the
northeast is less than half of what it is in the south. Seizing this
opportunity requires an understanding of the regional consumer,
however, particularly pack size preferences. Consumers in the
northeast also want a strong perfume and great quantities of foam
but care less about whitening power.

Brazil is distinct from China and India in many respects. But as these
examples suggest, there too identifying growth opportunities increas-
ingly requires a detailed understanding of vast regional variations
in competition levels, income, product growth rates, consumer pref-
erences, and retail channels.
 Is your emerging-market strategy local enough? 61

There is no one-size-fits-all strategy for capturing consumer growth in

emerging markets. What’s clear, though, is that traditional country
strategies and other aggregated approaches will miss the mark because
they can’t account for the variability and rapid change in these mar-
kets. As the battle for the wallet of the emerging-market consumer shifts
into higher gear, companies that think about growth opportunities
at a more granular level have a better chance of winning.

Yuval Atsmon is a principal in McKinsey’s Shanghai office,

Ari Kertesz is a principal in the São Paulo office, and Ireena Vittal is
a principal in the Mumbai office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
62

‘ There’s no such thing

as an effective countrywide

’
strategy
Zeinal Bava

Zeinal Bava became Portugal Telecom’s

CEO in 2008, after the company
thwarted a hostile-takeover bid. He is
widely credited with turning around
PT’s domestic and Brazilian operations.
A former investment banker, in 2010
and 2011, Bava was named the European
telecom sector’s best CEO by
Institutional Investor.

Portugal Telecom CEO Zeinal Bava set an ambitious goal in early

2008: to raise the international share of PT’s revenues to 66 percent
by year-end 2011, from 45 percent in 2007, and almost to double
the customer base, to 100 million. These goals appeared more remote
in 2010, after Telefonica acquired PT’s half of Brazil’s top mobile
operator, Vivo. But PT, determined to revive its Brazil strategy, recently
started anew there by acquiring a stake in the country’s largest
telecom company, Oi. In the commentary below—adapted from a
recent interview with Jürgen Meffert, a director in McKinsey’s
Düsseldorf office—Bava discusses how to succeed in Brazil.

Portugal Telecom prioritized Brazil in the late 1990s because it has a

large and growing population that shares our language and culture.
The downside was perceived currency volatility and uneven distribution
of wealth. The addressable market was mostly atop the income pyramid.

During the later years of Lula’s presidency,1 up to 50 million more

people became consumers. Consumer demand now underpins Brazil’s
economic turnaround. People are leapfrogging in technology. For
example, wireless broadband has gone through the roof; today there are
more customers using mobile than fixed-line broadband. Pay-TV also
offers significant growth prospects, as penetration is low.

1 
Luiz Inácio Lula da Silva, president of Brazil from 2003 to 2011.
 63

A key imperative for development is to improve Brazil’s technological

infrastructure. Brazil is moving toward becoming one of the planet’s
seven largest economies. Still, the country ranks only 75th in high-
speed Internet. Correcting this imbalance implies fantastic growth
opportunities for mobile and for combined landline voice, broadband,
and television offers, while improving Brazil’s economic competi-
tiveness and its education and health care.

To me, there’s no such thing as an effective countrywide strategy. We

break the country down into customer segments and then look at
different geographies. São Paulo city is very different from São Paulo
state, for example; the whole country has around 200 million people.
Just the Amazon rainforest covers six million square kilometers.2 You
have to walk away from averages and map out the markets. If you
are the leader in a specific market, it might be sufficient to offer cus-
tomers one month for free. If you’re number four, you might have to
give three months. When we rolled out 3G, we started in areas where
the average revenue per user and spectrum availability supported
the business case and service quality underlying the investment.

We also found that you should allow room for pleasant surprises.
One state offered incentives for mobile operators to invest in coverage
in areas where we didn’t see demand. Yet the moment we put up
antennas, traffic was immediately well in excess of our estimates. Why?
Because lots of people with mobile handsets live in places where
there’s no coverage. They use their mobiles when they travel to places
where there is coverage. So I think we have to allow ourselves room
to imagine different solutions in areas where the numbers don’t stack
up at first sight. Mobility is a killer attribute for voice, video, or data.
In fact, 4G could dramatically change the game because it uses spectrum
more efficiently and has the advantage of being a single standard
worldwide, so prices will fall very fast. This will have a direct impact on
our ability to roll out 4G in places where three years ago we thought
the numbers didn’t stack up even for 3G.

Also, consider the pace of change in Brazil. Today, a significant

portion of the mobile-subscriber base receives but doesn’t make calls.
Read the full Yet buying power is increasing substantially, especially in the north-
interview, east. When you earn the minimum wage of roughly 550 reais a month
“Remaking
Portugal Telecom: and your income goes up by 100 reais, there’s a significant shift in
An interview spending patterns. So we may revisit our business model, rerun our
with CEO Zeinal numbers, and question our assumptions about penetration levels.
Bava,” on
mckinseyquarterly This is why we believe Brazil offers scale and growth and why it’s such
.com. a strategic market for PT.

2 
About 2.3 million square miles.
Generating
the ideas you need
to grow
Want to develop a killer idea? The
articles in this package can help. First,
scrap your company’s traditional
approach to brainstorming in favor of a
new, question-based technique (dubbed
“brainsteering”) that generates better
and more actionable ideas in groups.
Then discover four practical ways senior
executives are shaking up ingrained
thinking to make their teams—and them-
selves—more creative. Along the
way, inventor Ray Kurzweil reminds us
to account for the rapid pace of tech-
nological change when challenging deeply
held corporate beliefs. Seeing beyond
today’s technology can help seize tomor-
row’s growth opportunities.

66
Seven steps to better
brainstorming
Kevin P. Coyne
Artwork by Andrew Bannecker

and Shawn T. Coyne

74
Sparking creativity in teams:
An executive’s guide
Marla M. Capozzi, Renée Dye,
and Amy Howe
66

Seven steps to better

brainstorming
Kevin P. Coyne and Shawn T. Coyne

Most attempts at brainstorming are doomed.

To generate better ideas—and boost the
odds that your organization will act on them—
start by asking better questions.

Companies run on good ideas. From R&D groups seeking

pipelines of innovative new products to ops teams probing for time-
saving process improvements to CEOs searching for that next
growth opportunity—all senior managers want to generate better and
more creative ideas consistently in the teams they form, participate
in, and manage.

Yet all senior managers, at some point, experience the pain of pursuing
This article is new ideas by way of traditional brainstorming sessions—still the
adapted from
Kevin and Shawn
most common method of using groups to generate ideas at companies
Coyne’s around the world. The scene is familiar: a group of people, often
Brainsteering: chosen largely for political reasons, begins by listening passively as a
A Better
moderator (often an outsider who knows little about your business)
Approach To
Breakthrough urges you to “Get creative!” and “Think outside the box!” and cheerfully
Ideas reminds you that “There are no bad ideas!”
(HarperCollins,
March 2011).
The result? Some attendees remain stone-faced throughout the day,
others contribute sporadically, and a few loudly dominate the
session with their pet ideas. Ideas pop up randomly—some intriguing,
many preposterous—but because the session has no structure, little
momentum builds around any of them. At session’s end, the group
trundles off with a hazy idea of what, if anything, will happen next.
“Now we can get back to real work,” some whisper.
 67

It doesn’t have to be like this. We’ve led or observed 200 projects

over the past decade at more than 150 companies in industries ranging
from retailing and education to banking and communications. That
experience has helped us develop a practical approach that captures
the energy typically wasted in a traditional brainstorming session and
steers it in a more productive direction. The trick is to leverage the way
people actually think and work in creative problem-solving situations.

We call our approach “brainsteering,” and while it requires more prep-

aration than traditional brainstorming, the results are worthwhile:
better ideas in business situations as diverse as inventing new products
and services, attracting new customers, designing more efficient
business processes, or reducing costs, among others. The next time you
assign one of your people to lead an idea generation effort—or decide
to lead one yourself—you can significantly improve the odds of success
by following the seven steps below.

1
Know your organization’s decision-
making criteria

One reason good ideas hatched in corporate brainstorming sessions

often go nowhere is that they are beyond the scope of what the organi-
zation would ever be willing to consider. “Think outside the box!” is
an unhelpful exhortation if external circumstances or company policies
create boxes that the organization truly must live within.

Managers hoping to spark creative thinking in their teams should

therefore start by understanding (and in some cases shaping) the real
criteria the company will use to make decisions about the resulting
ideas. Are there any absolute restrictions or limitations, for example?
A bank we know wasted a full day’s worth of brainstorming because
the session’s best ideas all required changing IT systems. Yet senior
management—unbeknownst to the workshop planners—had recently
“locked down” the IT agenda for the next 18 months.

Likewise, what constitutes an acceptable idea? At a different, smarter

bank, workshop planners collaborated with senior managers on a
highly specific (and therefore highly valuable) definition tailored to meet
immediate needs. Good ideas would require no more than $5,000
per branch in investment and would generate incremental profits quickly.
68 2011 Number 2

Further, while three categories of ideas—new products, new sales

approaches, and pricing changes—were welcome, senior management
would balk at ideas that required new regulatory approvals. The result
was a far more productive session delivering exactly what the com-
pany wanted: a fistful of ideas, in all three target categories, that were
practical, affordable, and profitable within one fiscal year.

2
Ask the right questions

Decades of academic research shows that traditional, loosely structured

brainstorming techniques (“Go for quantity—the greater the number
of ideas, the greater the likelihood of winners!”) are inferior to approaches
that provide more structure.1 The best way we’ve found to provide it
is to use questions as the platform for idea generation.

In practice, this means building your workshop around a series of “right

questions” that your team will explore in small groups during a
series of idea generation sessions (more about these later). The trick is
to identify questions with two characteristics. First, they should
force your participants to take a new and unfamiliar perspective. Why?
Because whenever you look for new ways to attack an old problem—
whether it’s lowering your company’s operating costs or buying your
spouse a birthday gift—you naturally gravitate toward thinking
patterns and ideas that worked in the past. Research shows that, over
time, you’ll come up with fewer good ideas, despite increased effort.
Changing your participants’ perspective will shake up their thinking. (For
more on how to do this, see the accompanying article, “Sparking
creativity in teams: An executive’s guide.”) The second characteristic
of a right question is that it limits the conceptual space your team will
explore, without being so restrictive that it forces particular answers
or outcomes.

It’s easier to show such questions in practice than to describe them

in theory. A consumer electronics company looking to develop new prod-
ucts might start with questions such as “What’s the biggest avoidable
hassle our customers endure?” and “Who uses our product in ways we

1 For two particularly useful academic studies on the ineffectiveness and inefficiency of

traditional brainstorming, see Paul A. Mongeau, The Brainstorming Myth, annual

meeting of the Western States Communication Association, Albuquerque, New Mexico,
February 15, 1993; and Frederic M. Jablin and David R. Seibold, “Implications for problem
solving groups of empirical research on ‘brainstorming’: A critical review of the literature,”
Southern Speech Communication Journal, 1978, Volume 43, Number 4, pp. 327–56.
 Seven steps to better brainstorming 69

never expected?” By contrast, a health insurance provider looking to cut

costs might ask, “What complexity do we plan for daily that, if elimi-
nated, would change the way we operate?” and “In which areas is the
efficiency of a given department ‘trapped’ by outdated restrictions
placed on it by company policies?”2

In our experience, it’s best to come up with 15 to 20 such questions for

a typical workshop attended by about 20 people. Choose the ques-
tions carefully, as they will form the heart of your workshop—your partic-
ipants will be discussing them intensively in small subgroups during
a series of sessions.

3
Choose the right people

The rule here is simple: pick people who can answer the questions
you’re asking. As obvious as this sounds, it’s not what happens in many
traditional brainstorming sessions, where participants are often
chosen with less regard for their specific knowledge than for their prom-
inence on the org chart.

Instead, choose participants with firsthand, “in the trenches” know-

ledge, as a catalog retailer client of ours did for a brainsteering workshop
on improving bad-debt collections. (The company had extended
credit directly to some customers). During the workshop, when par-
ticipants were discussing the question “What’s changed in our oper-
ating environment since we last redesigned our processes?” a frontline
collections manager remarked, “Well, death has become the new
bankruptcy.”

A few people laughed knowingly, but the senior managers in the

room were perplexed. On further discussion, the story became clear.
In years past, some customers who fell behind on their payments
would falsely claim bankruptcy when speaking with a collections rep,
figuring that the company wouldn’t pursue the matter because of the
legal headaches involved. More recently, a better gambit had emerged:
unscrupulous borrowers instructed household members to tell the
agent they had died—a tactic that halted collections efforts quickly,
since reps were uncomfortable pressing the issue.

2 For a full discussion about identifying and using a portfolio of such right questions in the

generation of personal and institutional ideas, see Brainsteering, the book from
which this article is adapted, as well as Patricia Gorman Clifford, Kevin P. Coyne, and
Renée Dye, “Breakthrough thinking from inside the box,” Harvard Business Review,
December 2007, Volume 85, Number 12, pp. 70–78.
70 2011 Number 2

While this certainly wasn’t the largest problem the collectors faced,
the line manager’s presence in the workshop had uncovered an oppor-
tunity. A different line manager in the workshop proposed what
became the solution: instructing the reps to sensitively, but firmly, ques-
tion the recipient of the call for more specific information if the rep
suspected a ruse. Dishonest borrowers would invariably hang up if
asked to identify themselves or to provide other basic information,
and the collections efforts could continue.

4
Divide and conquer

To ensure fruitful discussions like the one the catalog retailer gene-
rated, don’t have your participants hold one continuous, rambling dis-
cussion among the entire group for several hours. Instead, have them
conduct multiple, discrete, highly focused idea generation sessions
among subgroups of three to five people—no fewer, no more. Each
subgroup should focus on a single question for a full 30 minutes. Why
three to five people? The social norm in groups of this size is to
speak up, whereas the norm in a larger group is to stay quiet.

When you assign people to subgroups, it’s important to isolate “idea

crushers” in their own subgroup. These people are otherwise suit-
able for the workshop but, intentionally or not, prevent others from
suggesting good ideas. They come in three varieties: bosses, “big
mouths,” and subject matter experts.

The boss’s presence, which often makes people hesitant to express

unproven ideas, is particularly damaging if participants span multiple
organizational levels. (“Speak up in front of my boss’s boss? No,
thanks!”) Big mouths take up air time, intimidate the less confident,
and give everyone else an excuse to be lazy. Subject matter experts
can squelch new ideas because everyone defers to their presumed supe-
rior wisdom, even if they are biased or have incomplete knowledge
of the issue at hand.

The boss’s presence, which often makes people

hesitant to express unproven ideas, is particularly
damaging if participants span multiple
organizational levels. (“Speak up in front of my
boss’s boss? No, thanks!”)
 Seven steps to better brainstorming 71

By quarantining the idea crushers—and violating the old brainstorming

adage that a melting pot of personalities is ideal—you’ll free the
other subgroups to think more creatively. Your idea crushers will still be
productive; after all, they won’t stop each other from speaking up.

Finally, take the 15 to 20 questions you prepared earlier and divide

them among the subgroups—about 5 questions each, since it’s unpro-
ductive and too time consuming to have all subgroups answer every
question. Whenever possible, assign a specific question to the subgroup
you consider best equipped to handle it.

5
On your mark, get set, go!

After your participants arrive, but before the division into subgroups,
orient them so that your expectations about what they will—and won’t—
accomplish are clear. Remember, your team is accustomed to tradi-
tional brainstorming, where the f low of ideas is fast, furious, and ulti-
mately shallow.

Today, however, each subgroup will thoughtfully consider and discuss

a single question for a half hour. No other idea from any source—no
matter how good—should be mentioned during a subgroup’s individual
session. Tell participants that if anyone thinks of a “silver bullet”
solution that’s outside the scope of discussion, they should write it down
and share it later.

Prepare your participants for the likelihood that when a subgroup attacks
a question, it might generate only two or three worthy ideas. Knowing
that probability in advance will prevent participants from becoming
discouraged as they build up the creative muscles necessary to think
in this new way. The going can feel slow at first, so reassure participants
that by the end of the day, after all the subgroups have met several
times, there will be no shortage of good ideas.

Also, whenever possible, share “signpost examples” before the start

of each session—real questions previous groups used, along with success
stories, to motivate participants and show them how a question-
based approach can help.

One last warning: no matter how clever your participants, no matter

how insightful your questions, the first five minutes of any subgroup’s
brainsteering session may feel like typical brainstorming as people
test their pet ideas or rattle off superficial new ones. But participants
72 2011 Number 2

should persevere. Better thinking soon emerges as the subgroups try

to improve shallow ideas while sticking to the assigned questions.

6
Wrap it up

By day’s end, a typical subgroup has produced perhaps 15 interesting

ideas for further exploration. You’ve been running multiple subgroups
simultaneously, so your 20-person team has collectively generated
up to 60 ideas. What now?

One thing not to do is have the full group choose the best ideas from
the pile, as is common in traditional brainstorming. In our experience,
your attendees won’t always have an executive-level understanding
of the criteria and considerations that must go into prioritizing ideas
for actual investment. The experience of picking winners can also
be demotivating, particularly if the real decision makers overrule the
group’s favorite choices later.

Instead, have each subgroup privately narrow its own list of ideas to
a top few and then share all the leading ideas with the full group to
motivate and inspire participants. But the full group shouldn’t pick a
winner. Rather, close the workshop on a high note that participants
won’t expect if they’re veterans of traditional brainstorming: describe
to them exactly what steps will be taken to choose the winning ideas
and how they will learn about the final decisions.

7
Follow up quickly

Decisions and other follow-up activities should be quick and thorough.

Of course, we’re not suggesting that uninformed or insufficiently
researched conclusions should be reached about ideas dreamed up only
hours earlier. But the odds that concrete action will result from an
idea generation exercise tend to decline quickly as time passes and
momentum fades.

The president, provost, and department heads of a US university, for

example, announced before a brainsteering workshop that a full
staff meeting would be held the morning after it to discuss the various
cost-savings ideas it had generated. At the meeting, the senior leaders
sorted ideas into four buckets: move immediately to implementation
planning, decide today to implement at the closest appropriate
time (say, the beginning of the next academic year), assign a group
 Seven steps to better brainstorming 73

to research the idea further, or reject right away. This process went
smoothly because the team that ran the idea generation workshop
had done the work up front to understand the criteria senior leaders
would use to judge its work. The university began moving ahead on
more than a dozen ideas that would ultimately save millions of dollars.

To close the loop with participants, the university made sure to

communicate the results of the decisions quickly to everyone involved,
even when an idea was rejected. While it might seem demoralizing
to share bad news with a team, we find that doing so actually has the
opposite effect. Participants are often desperate for feedback and
eager for indications that they have at least been heard. By respectfully
explaining why certain ideas were rejected, you can help team mem-
bers produce better ideas next time. In our experience, they will partic-
ipate next time, often more eagerly than ever.

Traditional brainstorming is fast, furious, and ultimately shallow.

By scrapping these traditional techniques for a more focused, question-
based approach, senior managers can consistently coax better ideas
from their teams.

Kevin Coyne and Shawn Coyne, both alumni of McKinsey’s Atlanta

office, are cofounders and managing directors of the Coyne Partnership,
a boutique strategy consulting firm.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
74

Sparking creativity in
teams: An executive’s guide
Marla M. Capozzi, Renée Dye, and Amy Howe

Senior managers can apply practical

insights from neuroscience to make themselves—
and their teams—more creative.

Although creativity is often considered a trait of the privileged

few, any individual or team can become more creative—better able to
generate the breakthroughs that stimulate growth and performance.
In fact, our experience with hundreds of corporate teams, ranging
from experienced C-level executives to entry-level customer service reps,
suggests that companies can use relatively simple techniques to boost
the creative output of employees at any level.

The key is to focus on perception, which leading neuroscientists,

such as Emory University’s Gregory Berns, find is intrinsically linked
to creativity in the human brain. To perceive things differently,
Berns maintains, we must bombard our brains with things it has never
encountered. This kind of novelty is vital because the brain has
evolved for efficiency and routinely takes perceptual shortcuts to save
energy; perceiving information in the usual way requires little of
it. Only by forcing our brains to recategorize information and move
beyond our habitual thinking patterns can we begin to imagine
truly novel alternatives.1

In this article, we’ll explore four practical ways for executives to

apply this thinking to shake up ingrained perceptions and enhance

1 
Berns also highlights two other important ways in which the brains of iconoclasts—people
who do things that others say can’t be done—differ from those of the rest of us: social
intelligence and the fear response. For more, see Gregory Berns, Iconoclast: A Neuroscientist
Reveals How to Think Differently, Cambridge, MA: Harvard Business School Press, 2008.
 75

creativity—both personally and with their direct reports and broader

work teams. While we don’t claim to have invented the individual
techniques, we have seen their collective power to help companies
generate new ways of tackling perennial problems—a useful capa-
bility for any business on the prowl for potential game-changing
growth opportunities.

Immerse yourself

Would-be innovators need to break free of preexisting views. Unfor-

tunately, the human mind is surprisingly adroit at supporting its
deep-seated ways of viewing the world while sifting out evidence to
the contrary. Indeed, academic research suggests that even when
presented with overwhelming facts, many people (including well-
educated ones) simply won’t abandon their deeply held opinions.2

The antidote is personal experience: seeing and experiencing some-

thing firsthand can shake people up in ways that abstract discussions
around conference room tables can’t. It’s therefore extremely valuable
to start creativity-building exercises or idea generation efforts outside
the office, by engineering personal experiences that directly con-
front the participants’ implicit or explicit assumptions.

Consider the experience of a North American specialty retailer that

sought to reinvent its store format while improving the experience of
its customers. To jump-start creativity in its people, the company
sent out several groups of three to four employees to experience retail
concepts very different from its own. Some went to Sephora, a beauty
product retailer that features more than 200 brands and a sales model
that encourages associates to offer honest product advice, without
a particular allegiance to any of them. Others went to the Blues Jean
Bar, an intimate boutique retailer that aspires to turn the imper-
sonal experience of digging through piles of jeans into a cozy occasion
reminiscent of a night at a neighborhood pub. Still others visited a
gourmet chocolate shop.

These experiences were transformative for the employees, who watched,

shopped, chatted with sales associates, took pictures, and later
shared observations with teammates in a more formal idea generation
session. By visiting the other retailers and seeing firsthand how they

2 
See Larry M. Bartels, Unequal Democracy: The Political Economy of the New Gilded Age,
Princeton, NJ: Princeton University Press, 2010.
76 2011 Number 2

operated, the retailer’s employees were able to relax their strongly held
views about their own company’s operations. This transformation,
in turn, led them to identify new retail concepts they hadn’t thought
of before, including organizing a key product by color (instead of by
manufacturer) and changing the design of stores to center the shopping
experience around advice from expert stylists.

Likewise, a team of senior executives from a global retail bank visited

branches of two competitors and a local Apple retail store to kick
off an innovation effort. After recording first impressions and paying
particular attention to how consumers were behaving, the bankers
soon found themselves challenging long-held views about their own
business. “As a consumer, I saw bank branches, including our own,

Ray Kurzweil
This commentary is adapted from a
recent interview with Kurzweil
conducted by McKinsey Publishing’s
Lars Föyen.
Watch the full interview on
mckinseyquarterly.com.
Challenging orthodoxies:
Don’t forget technology
One area of advice that I like to give is to take the
discipline of writing down what the underlying technol-
ogies that affect your business will be a year from
now, two years from now, three years from now—or even
every six months. When I read other people’s busi-
ness plans, much of the time they assume not much is
going to happen over the next three, four years; cell
phones will get a little smaller, but otherwise the world
will be the same as it is today. And we know that’s
not the case. You can look back three, four, five years
ago—most people didn’t use social networks, wikis,
blogs. The world was very different just a few years ago.
And it’s going to change even more, at an even quicker
pace, in the years ahead.

Information technology is growing exponentially. And

our intuition about the future is not exponential; it’s
linear. People think things will go at the current pace—
1, 2, 3, 4, 5, and 30 steps later, you’re at 30. The reality
of information technology, like computers, like biological
technologies now, is that it goes exponentially—2, 4, 8,
16. At step 30, you’re at a billion. This is not an idle spec-
ulation about the future. When I was a student at MIT,
we all shared a computer that cost tens of millions of dol-
lars. My cell phone is a million times cheaper, a thou-
sand times more powerful. And we’ll do it again in 25 years.
Sparking creativity in teams: An executive’s guide 77

differently,” said one of the executives. “Many of us in the industry

are trying to put lipstick on a pig—making old banking look new and
innovative with decorations but not really changing what’s under-
neath it all, the things that matter most to consumers.”

We’ve seen that by orchestrating personal encounters such as these,

companies predispose their employees to greater creativity. For
executives who want to start bolstering their own creative-thinking
abilities—or those of a group—we suggest activities such as:

Go through the process of purchasing your own product or service—

as a real consumer would—and record the experience. Include photos
if you can.

Visit the stores or operations of other companies (including

competitors) as a customer would and compare them with the same
experiences at your own company.

Conduct online research and gather information about one of your

products or services (or those of a competitor) as any ordinary
customer would. Try reaching out to your company with a specific
product- or service-related question.

Observe and talk to real consumers in the places where they purchase
and use your products to see what offerings accompany yours, what
alternatives consumers consider, and how long they take to decide.

Overcome orthodoxies

Exploring deep-rooted company (or even industry) orthodoxies is

another way to jolt your brain out of the familiar in an idea generation
session, a team meeting, or simply a contemplative moment alone at
your desk. All organizations have conventional wisdom about “the way
we do things,” unchallenged assumptions about what customers
want, or supposedly essential elements of strategy that are rarely if ever
questioned.

By identifying and then systematically challenging such core beliefs,

companies can not only improve their ability to embrace new ideas but
also get a jump on the competition. The rewards for success are big:
Best Buy’s $3 million acquisition of Geek Squad in 2002, for example,
78 2011 Number 2

went against the conventional wisdom that consumers wouldn’t pay

extra to have products installed in their homes. Today, Geek Squad
generates more than $1 billion in annual revenues.

Read more on this topic from Best Buy chief

technology officer Robert Stephens as he discusses the
future of the networked enterprise, on page 20.

A global credit card retailer looking for new-product ideas during the
2008 economic downturn turned to an orthodoxy-breaking exercise
to stir up its thinking. Company leaders knew that consumer attitudes
and behavior had changed—“credit” was now a dirty word—and that
they needed to try something different. To see which deeply held beliefs
might be holding the company back, a team of senior executives looked
for orthodoxies in the traditional segmentation used across financial
services: mass-market, mass-affluent, and affluent customers. Sev-
eral long-held assumptions quickly emerged. The team came to realize,
for example, that the company had always behaved as if only its
aff luent customers cared deeply about travel-related card programs,
that only mass-market customers ever lived paycheck to paycheck
(and that these customers didn’t have enough money to be interested in
financial-planning products), and that the more wealthy the custo-
mers were, the more likely they would be to understand complex finan-
cial offerings.

The process of challenging these beliefs helped the credit card retailer’s
executives identify intriguing opportunities to explore further. These
included simplifying products, creating new reward programs, and
working out novel attitudinal and behavioral segmentations to sup-
port new-product development (more about these later).

Executives looking to liberate their creative instincts by exploring

company orthodoxies can begin by asking questions about customers,
industry norms, and even business models—and then systematically
challenging the answers. For example:

What business are we in?

What level of customer service do people expect?

What would customers never be willing to pay for?

What channel strategy is essential to us?

 Sparking creativity in teams: An executive’s guide 79

Use analogies

In testing and observing 3,000 executives over a six-year period, profes-

sors Clayton Christensen, Jeffrey Dyer, and Hal Gregersen, in a
Harvard Business Review article, 3 noted five important “discovery”
skills for innovators: associating, questioning, observing, experi-
menting, and networking. The most powerful overall driver of inno-
vation was associating—making connections across “seemingly
unrelated questions, problems, or ideas.”

Our own experience confirms the power of associations. We’ve found a

straightforward, accessible way to begin harnessing it: using analo-
gies. As we’ve seen, by forcing comparisons between one company and
a second, seemingly unrelated one, teams make considerable creative
progress, particularly in situations requiring greenfield ideas. We’re
not suggesting that you emulate other organizations—a recipe for
disappointment. Rather, this approach is about using other companies
to stir your imagination.

We recently used this technique in a brainstorming session involving

the chief strategy officers (CSOs) of several North American companies,
including a sporting-goods retailer. The rules were simple: we pro-
vided each executive, in turn, with a straightforward analogy the whole
group would use to brainstorm new business model possibilities.
When it was the turn of this retailer’s CSO, we asked the group to con-
sider how Apple would design the company’s retail formats. The
resulting conversation sparked some intriguing ideas, including one the
retailer is considering for its stores: creating technology-assisted
spaces, within its retail outlets, where customers can use Nintendo Wii–
like technology to “try out” products.

Of course, most companies will use this tactic internally—say, in idea

generation sessions or problem-solving meetings. Executives at the
credit card retailer, for example, created analogies between their com-
pany and other leading brands to make further headway in the areas
the team wanted to explore. By comparing the organization to Starwood
Hotels, the executives imagined a new program that rewarded cus-
tomers for paying early or on time (good behavior) instead of merely
offering them bonus points for spending more (bad behavior). Sim-
ilarly, by comparing the company’s back-office systems to those of
Amazon.com and Google, the credit card retailer learned to think

3 
Clayton Christensen, Jeffrey Dyer, and Hal Gregersen, “The innovator’s DNA,” Harvard
Business Review, December 2009, Volume 87, Number 12, pp. 60–67.
80 2011 Number 2

differently about how to manage its data and information in ways that
would benefit consumers as they made product-related decisions
and would also give the company valuable proprietary data about their
behavior. Together, these insights led to several ideas that the com-
pany implemented within two months while also giving it a portfolio of
longer-term, higher-stakes ideas to develop.

Analogies such as those the credit card retailer used are quite
straightforward—just draft a list of questions such as the ones below
and use them as a starting point for discussion.

How would Google manage our data?

How might Disney engage with our consumers?

How could Southwest Airlines cut our costs?

How would Zara redesign our supply chain?

How would Starwood Hotels design our customer loyalty program?

Create constraints

Another simple tactic you can use to encourage creativity is to impose

artificial constraints on your business model. This move injects
some much-needed “stark necessity” into an otherwise low-risk exercise.

Imposing constraints to spark innovation may seem counterintuitive—

isn’t the idea to explore “white spaces” and “blue oceans”? Yet without
some old-fashioned forcing mechanisms, many would-be creative
thinkers spin their wheels aimlessly or never leave their intellectual
comfort zones.
 Sparking creativity in teams: An executive’s guide 81

The examples below highlight constraints we’ve used successfully

in idea generation sessions. Most managers can easily imagine other,
more tailored ones for their own circumstances. Start by asking
participants to imagine a world where they must function with severe
limits—for instance, these:

You can interact with your customers only online.

You can serve only one consumer segment.

You have to move from B2C to B2B or vice versa.

The price of your product is cut in half.

Your largest channel disappears overnight.

You must charge a fivefold price premium for your product.

You have to offer your value proposition with a partner company.

The credit card retailer tried this approach, tailoring its constraints
to include “We can’t talk to customers on the phone,” “We can’t make
money on interchange fees,” and “We can’t raise interest rates.” In
addition to helping company managers sharpen their thinking about
possible new products and services, the exercise had an unexpected
benefit—it better prepared them for subsequent regulatory legislation
that, among other provisions, constrained the ability of industry
players to raise interest rates on existing card members.

Creativity is not a trait reserved for the lucky few. By immersing

your people in unexpected environments, confronting ingrained ortho-
doxies, using analogies, and challenging your organization to over-
come difficult constraints, you can dramatically boost their creative
output—and your own.

Marla Capozzi is a senior expert in McKinsey’s Boston office,

Renée Dye is a senior expert in the Atlanta office, and Amy Howe is a
principal in the Los Angeles office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
Artwork by Francesco Bongiorni
 83

The problem
Demand for capital is surging, largely
as a result of rapid growth in
emerging economies, and global
savings supplies are unlikely to
keep up.

Why it matters
The mismatch between global capital
supply and demand is likely to push
long-term capital costs higher for the
first time in 30 years. Growth may
slow as a result.

What to do about it
Prepare for a less hospitable capital
and growth environment by
taking step such as: boosting
capital productivity, building strong
relationships with a diverse
group of potential capital suppliers,
securing more long-term funding,
rethinking your business model if it
is overly dependent on cheap
capital, and encouraging your gov-
ernment to get its fiscal house
in order while voicing concerns about
financial protectionism.

Growth in a
capital-constrained
world
Richard Dobbs, Alex Kim, and Susan Lund

Structural shifts in the global

economy will make capital
scarce, but savvy companies
that plan now can secure access
to funding—and a competitive
advantage.
84 2011 Number 2

For the past 30 years, the increasing availability of capital boosted

global growth. Falling interest rates drove up asset prices, including
real estate and equities, resulting in an unprecedented increase in per-
ceived wealth. Consumers borrowed against the security that these
assets provided, fueling a consumption boom that financial institutions,
awash with liquidity, were happy to support. Companies and govern-
ments also found it relatively easy to finance investments and spending
by issuing bonds. While this favorable capital environment penalized
savers and resulted in asset bubbles, including the most recent one, it
has provided a strong tailwind for global growth.

That wind is about to change direction. The 30-year era of progressively

cheaper capital is nearing an end, primarily as a result, ironically,
of rapid growth in emerging markets. Their expansion has kicked off a
major investment boom: new roads, ports, water and power sys-
tems, other kinds of public infrastructure, housing,
corporate plants, and machinery purchases will
require enormous sums of capital. The government
The full McKinsey Global Institute
deficits and aging populations of developed econ-
(MGI) report—Farewell to
cheap capital? The implications of omies will exacerbate the global demand for funding.
long-term shifts in global invest-
ment and saving—is available free The bottom line: McKinsey Global Institute (MGI)
of charge on mckinsey.com/mgi, analysis finds that by 2030, the world’s supply
where you can also download the
of capital—that is, its willingness to save—will fall
report as an e-book.
short of demand, or the desired level of invest-
ment. This gap will put upward pressure on real inter-
est rates to balance the supply of and demand
for investment. (Inflationary pressures could boost nominal rates higher
still.) And rising interest rates, in turn, could crowd out some invest-
ment and slow down consumption growth.

In short, for the first time in 30 years, business leaders will face
the headwind of rising, long-term capital costs. As a result, executives
should start rethinking their sources of capital, the efficiency with
which they deploy it, and in some cases even their business models.

Surging demand for capital

A drop in global investment, more than the “savings glut” that is often
cited, contributed to falling interest rates during the 1990s and
early 2000s.1 Investment fell from a peak of 26.1 percent of global
GDP in the 1970s to a recent low of 20.8 percent in 2002 (Exhibit 1).
1 Throughout this article, “investment” refers to spending on physical assets but not to invest-

ment in stocks, bonds, or other financial assets. “Savings” refers to after-tax income
minus consumption, so any type of borrowing that increases consumption also reduces savings.
 MGI Global capital
Exhibit 1 of 3

Growth in a capital-constrained world 85

Exhibit 1
Global investment, which fell from a peak in the 1970s, is forecast
to rebound within the next 20 years.

Global investment rate, 1970–2030, % of global GDP

27
Historical trend1 Projection2
26

25
24

23
22

21
20

0
1970 1980 1990 2000 2010 2020 2030

1 Historical trend shown in nominal terms (based on actual prices and exchange rates) for 1970Ω2005; and in real terms (using

2005 prices and exchange rates) for 2006Ω09.

2Projection shown in real terms (using 2005 prices and exchange rates); assumes the price of capital goods increases at the same

rate as other goods and no other changes in inventory occur.

Source: McKinsey Global Institute analysis

This decline’s impact on global liquidity was about five times larger
than that of the growth in the money supply in excess of GDP or of the
cumulative Asian current-account surpluses.

We are now at the beginning of a global investment boom, similar

to earlier periods in economic history (such as the industrial revolution
and the post–World War II reconstruction of Europe and Japan),
and it will require massive investment in physical assets. The global
investment rate began increasing after 2002, rising nearly three per-
centage points, to 23.7 percent in 2008, before dipping again during the
global recession of 2008–09. While the increase from 2002 through
2008 resulted primarily from very high investment rates in China and
India, it also reflected higher rates in other Asian emerging markets,
as well as those in Africa and Latin America, where demand for new
homes, transportation and water systems, factories, offices, hospi-
tals, schools, and shopping centers is surging. Given the very low levels
of physical-capital stock in these economies, our analysis suggests
that high investment rates could continue for decades (Exhibit 2).

By 2030, the global investment needed to support consensus estimates

for economic growth could exceed 25 percent of GDP, or around
$24 trillion, up from about $11 trillion in 2008.2 Our analysis indicates
that the increase will be smaller if global GDP growth is slower.
2 At constant 2005 prices and exchange rates. The consensus GDP forecast is an average of

forecasts by the Economist Intelligence Unit, Global Insight, and Oxford Economics.
 MGI Global capital
Exhibit 2 of 3

86 2011 Number 2

Exhibit 2
Low levels of capital stock in emerging economies such as China and
India suggest that high investment rates could continue for decades.

Capital stock vs GDP per capita for selected countries,1 1980–2008, $ thousand

Capital stock per capita2

140
Japan
120

100 Germany
Italy
80

South Korea United States

60

40
Urban China United Kingdom
Rural China
20
India
0
0 5 10 15 20 25 30 35 40 45

Real GDP per capita

1 At constant 2005 prices and exchange rates.

2Net fixed assets at end of year, assuming 5% depreciation rate for all assets.

Source: McKinsey Global Institute analysis

However, investment could increase beyond the levels we analyzed

if building costs rise faster than general inflation because of rising
commodity prices. It could also increase more if additional investment
is required to reduce greenhouse gas emissions to sustainable levels
or to counteract the effects of global warming—for example, through
the construction of coastal defenses against rising sea levels.

A declining appetite to save

The capital to finance this growing need for investment comes from
the world’s savings. Over the three decades or so ending in 2002, the
global saving rate (savings as a share of GDP) fell, driven mainly by
a sharp decline in household savings (or at least additional borrowing)
of mature countries. The global rate has increased since then, from
20.5 percent of GDP in 2002 to 24 percent in 2008, as many of the devel-
oping countries with the highest saving rates—particularly China—
have come to account for a growing share of world GDP. Our analysis
suggests, however, that the global saving rate is not likely to rise
in the decades ahead, because of several structural shifts in the
world economy.
 Growth in a capital-constrained world 87

First, China’s extraordinarily high saving rate will probably decline

as it rebalances its economy to promote domestic consumption. China,
with a national saving rate that topped 50 percent of its GDP in
2008, surpassed the United States as the world’s largest saver. But if
China follows the historical experience of other countries such as
Japan, South Korea, and Taiwan, its saving rate will decline over time
as the country grows richer (Exhibit 3). The country’s leaders have
already started to adopt policies that will increase consumption and
reduce very high rates of corporate and government saving. 3 If
China’s strategy succeeds, it will save nearly $2 trillion less in 2030
than it would have at current rates. The impact on the global saving
rate would be significant: a drop of around two percentage points com-
pared with 2007 levels.

Expenditures related to aging populations will further depress global

savings. By 2030, the proportion of the population over the age of
Q2 2011 60 will reach record levels around the world. Recent research by the
MGI Global capital
Exhibit 3 of 3 3 Officials of China’s government have said publicly that increasing consumption, and hence
reducing the current-account surplus, will be a goal in the country’s 12th five-year plan.
See also the MGI report If you’ve got it, spend it: Unleashing the Chinese consumer, available
free of charge on mckinsey.com/mgi.

Exhibit 3
Historically, as countries grow wealthier their household-
saving rates decline.

Household-saving rate and GDP per capita for selected countries, 1960–2008

Saving rate, % of disposable personal income

40
China
35
Taiwan
30

25
India Japan
20

15
Germany
10

5
South Korea United States
0

–5
0 5 10 15 20 25 30 35 40 45

Real GDP per capita,1

$ thousand

1 At constant 2005 prices and exchange rates.

Source: Bank of Japan; Bank of Korea; Directorate-General Budget Accounting and Statistics, Republic of China;
Global Insight; Reserve Bank of India; US Bureau of Economic Analysis; World Development Indicators, World Bank;
McKinsey Global Institute analysis
88 2011 Number 2

History shows that real interest rates rise

when investors—who always demand a premium
to compensate for the risk of faster-than-
expected inflation—become concerned about the
potential for inflation spikes.

International Monetary Fund (IMF) and Standard & Poor’s suggests

that government spending on health care, pensions, and other services
for retirees could increase by three to five percentage points of global
GDP by 2030.4 This additional consumption will lower global savings,
either through larger government deficits or lower household and
corporate saving.

Skeptics may point out that since the 2008 financial crisis, US and
UK households have been saving at higher rates, especially through
paying down debt. In the United States, household savings rose to
more than 6 percent of GDP in 2010, from a low of 2.8 percent in the
third quarter of 2005. In the United Kingdom, savings increased
from 1.8 percent of GDP in 2008 to around 4.5 percent in the second
quarter of 2010. But even if these rates persist for two decades, they
would raise the global saving rate just one percentage point in 2030—
not enough to offset the impact of increased consumption in China
and of an aging global population.

Slower growth, higher capital costs?

Together, these trends mean that if the consensus forecasts of GDP

growth are accurate, the global supply of savings will be around
23 percent of GDP by 2030, falling short of global investment demand
by $2.4 trillion. This gap could slow global GDP growth by around
one percentage point a year. What’s more, our analysis of several sce-
narios suggests that a similar gap occurs even if the GDP growth
of China and India slows, the world economy recovers more slowly than

4See Fiscal Monitor: Navigating the fiscal challenges ahead, International Monetary

Fund (IMF), Fiscal Affairs Department, 2010; and Global aging 2010: An irreversible truth,
Standard & Poor’s, 2010.
Growth in a capital-constrained world 89

expected from the global financial crisis, or other plausible possibil-

ities transpire, such as the appreciation of exchange rates in emerging
markets or significant global investment to combat and adapt to
climate change.

The gap means real interest rates, which are currently at 30-year
lows, are likely to rise in coming years. If real long-term interest rates
returned to their 40-year average, they would rise by about 170 basis
points from the levels seen in early 2011. The growing imbalance between
the supply of savings and the demand for investment capital will
be significant by 2020. However, real long-term rates—such as the real
yield on a ten-year US Treasury bond—could start rising within the
next five years as investors anticipate this structural shift. Furthermore,
the move upward isn’t likely to be a onetime adjustment, since the
gap between the demand for capital and its supply is projected to widen
continually from 2020 through 2030.

Capital costs could go even higher because of inflation. History shows

that real interest rates rise when investors—who always demand a
premium to compensate for the risk of faster-than-expected inflation—
become concerned about the potential for inf lation spikes. The
emergence of an additional one billion middle-class consumers in
emerging markets and massive investment programs in those
countries are boosting demand for commodities, from food and water
to energy and materials, resulting in inflationary pressures. Also
raising investor worries are the expansive monetary policies that major
governments have pursued—and the fear that heavily indebted
governments will be tempted to reduce the real value of their debt by
managing inflation less aggressively than in the past. If these fears
are borne out, nominal rates, which reflect real rates plus inflation and
determine the interest that companies must pay on their debt, could
jump further.

Growing in the new environment

A company’s growth prospects and competitiveness within industries

and across countries could change significantly in a world of higher
capital costs. Just as in the 1980s, when Japanese companies with
access to cheap capital held an edge over their Western peers, com-
panies today that can secure inexpensive capital—say, those based in
high-saving countries, such as China—will have a new source of
competitive advantage.
90 2011 Number 2

How executives respond to more expensive capital will depend on

their industry and strategy. In the accompanying sidebar, our colleagues
describe several steps that companies in a capital-intensive indus-
try might take. For any company unable to finance its growth inter-
nally through retained earnings, however, there are some clear
no-regrets moves:

Manage capital productivity. Companies that achieve higher capital

productivity—output per dollar invested—will need less capital for
growth and consequently will enjoy greater strategic flexibility. Capital
productivity must therefore become an increasingly important prior-
ity for top management. In particular, senior-management teams need
to focus with renewed intensity on the returns their investments

How can you prepare? Some likely

How industrial companies
should prepare for the end
of cheap capital
Matthieu Pelissie du Rausas and
Guillaume de Roquemaurel
Imagine you are running an aircraft
manufacturer, a utility, or any other
capital-intensive industrial company.
Currently, you receive financial
benefits from the interest-rate float
on your customers’ down payments,
relatively low interest rates on
your borrowing, and your ability to
finance operations with short-term
obligations in the capital market.
In a more capital-constrained
environment, however, our analysis
suggests that you and many other
industrial companies could see
returns on equity decline up to
two percentage points through the
combined effects of increasing
market debt rates, pressure from
customers to limit advances, and
lengthening debt maturities.1
moves are similar to those sug-
gested by our colleagues at the
McKinsey Global Institute. For
example, you might want to seek
strategic partnerships with insti-
tutions that have easy access to
capital and liquidity, such as
sovereign-wealth funds. Certainly,
you’ll want to boost your capital
productivity, perhaps by redesigning
your supply chain to require less
working capital and by becoming
ruthless about the efficiency of
major capital expenditures. And
you’re likely to be the kind of
company that seriously examines
the viability of your business
model, based on its need for cash
and the resulting risks. Here are
some specific steps you should con-
sider that executives in less
capital-intensive industries won’t.
Be prepared to finance demand.
Customers might not have the cash
or access to financing to buy your
equipment. One response: develop
and offer sophisticated credit
solutions for your customers, as GE
does in aircraft leasing. In extreme
Growth in a capital-constrained world 91

generate, which too often were overlooked during the recent boom, and
use returns on invested capital (ROIC) as a key performance metric
for business unit and company-wide investments. They must also apply
to capital expenditures the same discipline they apply to managing
other costs.

Build relationships with the future suppliers of capital. Compa-

nies with direct and privileged sources of financing will have a clear
competitive advantage. For example, in countries with high saving
rates and limits on capital outflows, domestic companies may gain access
to funding more easily than will their competitors elsewhere. We
can see this dynamic today in China, where low-cost capital from the
country’s banks helps finance business expansion domestically and

cases, you might even consider
taking a stake in a proprietary bank,
which would give you better
access to market liquidity (including
that provided by central banks)
and enable you to build a more robust
sales finance arm.
Identify suppliers who can also
provide funding. Don’t forget the
potential of your suppliers—some
of whom have access to domestic
savings pools in certain countries—
to be a source of capital. A Chinese
steel manufacturer, for example,
could provide access to China’s
export bank. To prepare for a
capital-constrained world, corpora-
tions should immediately start
identifying suppliers with funding
capacity.
1 To understand how returns on equity could
that might otherwise endanger their
operations.
Prepare for a liquidity crunch.
In a capital-constrained world, the
odds of a severe liquidity shortage
rise. Now is the time for corporations
to think through which assets they
will divest to raise cash in a time of
need, to create innovative finan-
cial vehicles, to diversify the geogra-
phies of the banks with which they
work, and to renegotiate contracts
with suppliers and customers.
Matthieu Pelissie du Rausas is
a director in McKinsey’s
Paris office, where Guillaume de
Roquemaurel is a consultant.

decline by 2 percentage points, imagine

Monitor liquidity risks at critical
suppliers. Since many suppliers
will suffer in the new capital environ-
ment, you should think hard now
about the “industrial ecosystem”
whose survival is necessary to serve
your customers. For the most
critical suppliers, build a joint plan to
help them cope with liquidity crises
a company with €10 billion of revenue and
€7 billion on each side of its balance sheet,
including €3 billion of equity and €2 billion
of debt. Around 1.5 percentage points of
the 2-percentage-point decline in returns on
equity could result from down payments
dropping from 30 percent to 15 percent of
revenue. The other 0.5 percentage points
could result from increasing debt costs: say,
85 basis points because of longer maturities
and a 150-basis-point increase in long-term
interest rates.
92 2011 Number 2

abroad. For companies in capital-intensive industries, it will be even

more critical to develop links to large sources of capital. Traditionally,
this effort involved nurturing relationships with major banks in
financial hubs such as London, New York, and Tokyo. But going forward,
it might also mean building ties with sovereign-wealth funds, pension
funds, and other financial institutions from high-saving countries with
large pools of capital.

Rethink business models. For companies whose business models are

based on cheap capital, the increase in real long-term interest rates
may significantly reduce profits and undermine the ability to grow. The
financing and leasing arms of consumer-durables companies, for
example, may find it increasingly difficult to achieve the high returns
of the recent past as their cost of funding increases. Growth will
be harder for companies whose sales were dependent on consumer credit.
For executives who think the new capital environment could com-
promise the viability of their business model, now is the time to start
exploring alternative operational approaches or even revisiting their
portfolio of businesses.

Ensure funding is long term. In a capital-constrained world, short-

term capital may not be readily available. Companies should seek
more stable (though also more expensive) sources of funding, reversing
the trend toward the increased use of short-term debt seen over the
past two decades. The portion of all debt issued for maturities of less
than one year rose from 23 percent in the first half of the 1990s to
47 percent in the second half of the 2000s. In the coming years, financing
long-term corporate investments through short-term funding,
instead of equity and longer-term funding, will be riskier. To align incen-
tives more closely, boards should revisit some of their inadvertent
 Growth in a capital-constrained world 93

debt-oriented biases, such as using earnings per share (EPS) as a

performance metric.

Encourage governments to get their budgets in order and prevent

‘financial protectionism.’ The fiscal deficits made possible by recent
low interest rates will not be as easily financed in the future and
could crowd out private investment or even result in a government bond
crisis. Governments should anticipate higher costs of debt and act
now to improve their public finances. Yet even with governments that
exercise fiscal restraint, there is still a very real danger that they
will resort to regulatory forms of financial protectionism to insulate
their economies, or themselves as borrowers, from rising capital
costs.5 Business leaders should get off the sidelines and call for fiscal
prudence and for keeping global capital flows open.

For three decades, the world has grown on the back of cheaper capital.
The next few decades will be different, so companies need to prepare
for an era in which scarce capital places new brakes on growth.

5Examples of financial protectionism include rules to stop state-insured banks or domestic

pension funds from lending and investing abroad, to direct national pension funds and
sovereign-wealth funds to make only domestic investments, or to require certain financial
institutions to hold a proportion of their debt in their domestic government bonds.

The authors wish to acknowledge the contributions of Riccardo Boin,

Rohit Chopra, Megan McDonald, and Andreas Schreiner to the
development of this article, as well as Jean-Christophe Mieszala and
Olivier Plantefève to the development of the accompanying sidebar.

Richard Dobbs is a director of the McKinsey Global Institute (MGI)

and a director in McKinsey’s Seoul office, where Alex Kim is a
consultant; Susan Lund, director of research at MGI, is based in the
Washington, DC, office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
 Organizational health: The ultimate competitive advantage 95

Organizational health:
The ultimate competitive
advantage
Scott Keller and Colin Price

The problem
Only a third of excellent companies
remain excellent over the long
term. An even smaller percentage
of organizational-change pro-
grams succeed.

Why it matters
For-profit, nonprofit, or public-sector
organizations that beat the odds
not only thrive but are also the most
meaningful and rewarding organi-
zations to lead.

What to do about it
Embrace the reality that organizational
health propels performance. Then
transform both simultaneously, with
an eye to creating a capacity for
continuous improvement. Start the
process by determining, given your
unique circumstances, where you
want to go and how ready you are to
go there.

To sustain high performance,

organizations must build
the capacity to learn and keep
changing over time.
Artwork by Ken Orvidas
96 2011 Number 2

If you’re like most senior executives, you want your organiza-

tion to be exemplary. But if you’re honest with yourself, you also know
that it’s not and that, in fact, you’re not even sure what exemplary means
or how you’ll ever get there. Most management writing won’t help:
despite the multitude of volumes written on organizational excellence,
nothing we’re aware of combines a view on the “steady state” of high,
sustainable organizational performance with a dynamic perspective on
how companies can transform themselves to achieve it.
This article is
adapted from
Scott Keller and We’ve tried to fill that gap with our forthcoming book, from which this
Colin Price’s article is adapted. Our central message is that focusing on organizational
Beyond
health—the ability of your organization to align, execute, and renew
Performance:
How Organiza- itself faster than your competitors can—is just as important as focusing
tional Health on the traditional drivers of business performance. Organizational
Delivers Ultimate health is about adapting to the present and shaping the future faster and
Competitive
Advantage, to be
better than the competition. Healthy organizations don’t merely learn
published in to adjust themselves to their current context or to challenges that lie just
June 2011 ahead; they create a capacity to learn and keep changing over time.
by Wiley & Sons.
This, we believe, is where ultimate competitive advantage lies.

Getting and staying healthy involves tending to the people-oriented

aspects of leading an organization, so it may sound “fluffy” to hard-nosed
executives raised on managing by the numbers. But make no mistake:
cultivating health is hard work. And it shouldn’t be confused with other
people-related management concepts, such as employee satisfaction
or employee engagement.

Nor should you study what other companies do and then apply their
approach. While you can always learn helpful things from others,
we have found that the recipe for excellence in a particular organization
is specific to its history, external environment, and aspirations, as
well as the passions and capabilities of its people. Creating and sustaining
your own recipe—one uniquely suited to these factors—delivers results
in a way that your competitors simply can’t copy.

Why health?

The case for health starts with an understanding of how it relates to

performance. Performance is what an enterprise delivers to stakeholders
in financial and operational terms. It is evaluated through such
measures as net operating profit, return on capital employed, total
 Organizational health: The ultimate competitive advantage 97

returns to shareholders, net operating costs, and

We have identified nine elements
that contribute to organizational
health: accountability, capabilities,
coordination and control, culture
and climate, direction, external
orientation, innovation and learning,
leadership, and motivation.
For more on health, see “The link
between profits and organiza-
tional performance” and “Anatomy
of a healthy corporation,”
on mckinseyquarterly.com.
stock turns. Health is the ability of an organization
to align, execute, and renew itself faster than
the competition to sustain exceptional performance
over time. It comprises core organizational skills
and capabilities, such as leadership, coordination,
or external orientation, that traditional metrics
don’t capture.
More than a decade of research and even more of
experience have led us to believe strongly that health
propels performance—and that, in fact, at least
50 percent of any organization’s long-term success
is driven by its health.1

Statistical evidence
We have developed a survey to measure organizational health and
administered it to over 600,000 employees at more than 500 organiza-
tions across the globe. The survey’s immediate purpose has been
helping organizations to measure their health and then to improve
in areas of weakness.

But the data we’ve collected over the years have also enabled us to study
the relationship between organizational health and performance.
And there’s a strong positive correlation. Companies in the top quartile
of organizational health are 2.2 times more likely than lower-quartile
companies to have an above-median EBITDA 2 margin, 2.0 times more
likely to have above-median growth in enterprise value to book value,
and 1.5 times more likely to have above-median growth in net income
to sales (Exhibit 1).

The results within individual organizations mirror the results from

our large sample of companies. At a multinational oil corporation, for
example, we analyzed correlations between performance and orga-
nizational health across 16 refineries. We found that health accounted
for 54 percent of the variation in performance (Exhibit 2).

‘Experimental’ evidence
We’d be the first to admit that correlations should be treated with
caution. But the case for health doesn’t rely solely on them. We’ve also
tested our hypotheses at real organizations trying to improve the
way they work.
1 In addition to the evidence presented in this article, we reviewed the existing literature,

including more than 900 books and articles from academic journals. We also talked to more
than 30 CEOs and to a group of leading scholars.
2 Earnings before interest, taxes, depreciation, and amortization.
 98 2011 Number 2

At a large financial-services institution, for example, we selected

Q2 2011 an experimental and a control group that were comparable and
Beyond performance
representative of the wider organization by criteria such as net profit
Exhibit 1 of 4 [[4th
beforeexhibit is in Word
taxes, customer doc: and
economics, sidebar
branchformat]]
staff characteristics.
The two groups then implemented a sales stimulation program over
an 18-month period—one using fairly traditional performance-focused

Exhibit 1
Healthy companies perform more successfully.
Likelihood that companies with strong organizational-health profiles have above-median financial performance, %

Company performance by quartile

Bottom Middle1 Top
68
48
×2.2
EBITDA2 margin 31

62
52
Growth in ratio of enterprise value to book value 31 ×2.0

53 58
Growth in ratio of net income to sales 38 ×1.5

Q2 2011
1 Beyond performance
Comprising 2nd and 3rd quartiles.
2 Earnings before interest, taxes, depreciation, and amortization.
Exhibit 2 of 4 [[4th exhibit is in Word doc: sidebar format]]

Exhibit 2
At one oil company, organizational health accounted for 54 percent
of the variation in the performance of a group of refineries.
Correlation between organizational health and performance at business unit level;
example: 16 refineries at an oil company

r2 = 0.54

High

Performance1

Low

Weak Strong

Health2

r2 is the proportion of variance explained by a regression.

1 Dollar cost of units produced against industry benchmark.
2 Relative to the average of the organizational-health database index.
Q2 2011 Organizational health: The ultimate competitive advantage 99
Beyond performance
Exhibit 3 of 4 [[4th exhibit is in Word doc: sidebar format]]

Exhibit 3
A focus on both performance and health produced higher
returns for a variety of initiatives.
Comparison between traditional and experimental change efforts over an 18- to 24-month period

Business bank 8 Control group using

Profit per business banker, % 19 traditional performance-
focused approaches
Coal mine 15 Experimental group
Increase in tonnage, % 25 using performance- and
health-focused approach
Retail bank 7
Profit per retail banker, % 12

Retailer 34
Sales-to-labor ratio, % 51

Telecom call center 35

Customer churn reduction, % 65

methods, the other following a more balanced approach emphasizing

performance and health.3

The results were striking. In business banking, the traditional approach

yielded improvements in value of 8 percent, the more balanced
approach 19 percent. In retail banking, the traditional approach delivered
a 7 percent improvement, compared with 12 percent for one empha-
sizing performance and health. Similar studies in other industries
yielded similar results (Exhibit 3).

Evidence from transformation efforts

Finally, we’ve surveyed thousands of executives who have been through
organizational-change programs.4 Data from one survey, on why
change programs fail, showed that what we might see as “the usual
suspects”—inadequate resources, poor planning, bad ideas, unfore-
seen external events—account for less than a third of the failures. More
than 70 percent resulted from poor organizational health, manifested
in symptoms such as negative employee attitudes and unproductive
management behavior. Furthermore, our 2010 survey of executives at
companies undergoing transformations revealed that organizations
focusing on both performance and health rated themselves as nearly
twice as successful as those focusing on health alone and nearly three
times as successful as those focusing on performance alone.

3 During the trial, we took care to minimize any distortions—operational restructuring,

changes in leadership, significant staff turnover, or other corporate initiatives—that might

have a disproportionate effect on one group.
4 These McKinsey Global surveys, available on mckinseyquarterly.com, are “Building a

nimble organization” (July 2006), “Organizing for successful change management” (July
2006), “Creating organizational transformations” (August 2008), and “What successful
transformations share” (March 2010). All subsequent survey data cited in this article come
from one of the four surveys.
100 2011 Number 2

Working toward ‘and’

The link between health and performance is good news. Unlike many
of the key factors that influence performance—changes in customer
behavior, competitors’ moves, government actions—your health is some-
thing you can control. It’s a bit like our personal lives. We may not
be able to avoid being hit by a car speeding around a bend, but by eating
properly and exercising regularly we are far more likely to live a
longer, fuller life.

Of course, that doesn’t make the pursuit of performance and health any
easier. Most companies know how to keep a close eye on performance,
but health often suffers from neglect. We asked more than 2,000 execu-
tives to name the areas where they wished they had better infor-
mation to help them design and lead transformation programs, for
example. Only 16 percent chose near-term performance. More than
65 percent chose the company’s health for the longer term.

What’s more, even when companies do understand both performance

and health, many pursue them separately. The result can be HR-led
“people programs” that bear little relationship to a company’s strategic
and operational imperatives, performance-improvement initiatives
that cut more muscle than fat, or both.

In our experience, building health and achieving its accompanying

performance benefits generally require transformational change. The
approach we’ve found most effective for pursuing it consists of five
stages, which we refer to as the five frames of performance and health.
For each stage, you must answer a basic question that applies to
both performance and health and then address a related performance-
or health-specific imperative (Exhibit 4).

While no two change programs are alike, we believe that the five frames
contain the key ingredients for an organization-wide transformation
that delivers performance and health in almost all circumstances. In
what follows, we offer examples from companies that have excelled
in one stage or another to highlight what’s required to tackle both
aspects of a transformation—with an emphasis on health, since pursuing
it as an explicit goal is less familiar to most organizations. Although
we firmly believe that each organization must find its own way through
the five frames, these examples of companies that have made signifi-
cant and lasting improvements in both performance and health offer
some inspiration, as well as guidance on tactics we’ve seen work well.
 Organizational health: The ultimate competitive advantage 101

Exhibit 4
Performance and health can be viewed through five frames.

Performance imperative Health imperative

Aspire: Develop a change vision and Determine what “healthy” looks

Where do we targets that are deeply meaningful like for the organization in view of
want to go? to employees. your change vision.

Assess: Identify and diagnose your Uncover the root causes of

How ready are organization’s ability to achieve mind-sets that support or under-
we to go there? its vision and targets. mine organizational health.

Architect: Develop a concrete, balanced Reshape the work environment

What must we do set of performance-improvement to create healthy mind-sets.
to get there? initiatives.

Act: Determine and execute the Ensure that energy for change is
How do we right scaling-up approach for each continually infused and unleashed.
manage initiative in the portfolio.
the journey?

Advance: Put in place a continuous- Equip leaders to lead from a core

How do we improvement infrastructure to of self-mastery.
keep moving take the company forward beyond
forward? one-time change.

Aspire
The importance of setting aspirations that emphasize health as well
as performance came through loud and clear in one of our surveys:
change programs with well-defined aspirations for both, we found,
were 4.4 times more likely to be rated extremely successful than those
with clear aspirations for performance alone.

Wells Fargo offers an example of how to pursue both: setting strategic

objectives and then defining related health essentials. When current
CEO John Stumpf became president, in August 2005, he brought his
top team together in a two-day offsite session to debate Wells Fargo’s
aspirations for its next era. The performance goal that emerged was to
102 2011 Number 2

maintain the company’s track record of double-digit compound

annual growth in earnings per share and revenue. To that end, the team
doubled down on the bank’s long-term cross-sell aspiration of “going
for gr-eight” (eight products per customer), with the medium-term goal
of adding at least one product on average to its already industry-
leading cross-sell rates. The bank’s leaders also set performance targets
related to customer loyalty and customer attrition in all key businesses.

But a broader aspiration also emerged, which the team summed up in

the phrase “One Wells Fargo.” This idea grew out of the realization
that a huge amount of the value the team sought to create lay in what it
called “mining the seams” of the organization: working together more
effectively across the company’s lines of business to break down “silo
thinking” and give customers a better experience that fulfilled more
of their financial needs.

Thinking about the bank as One Wells Fargo helped the senior team
focus on changes that would be needed to make the organization
healthier: management practices related to customer focus, strategic
clarity, and collaborating to share ideas and information were all
strong within the lines of business but had to be distinctive across
them as well. If One Wells Fargo was the strategy, organizational
changes would be needed to support and enable it.

Assess
Before you move from goals to actions, it pays to take a hard look in the
mirror to understand your company’s readiness to achieve its aspi-
rations. What capabilities matter most to meeting your performance
goals, and how strong are they in your company today? What mind-
sets about “the way things get done around here” could undermine your
quest for health, and what are their root causes? The value of such
assessments of a company’s readiness to change can’t be overstated: in
our 2010 survey, respondents at companies that diagnosed problem-
atic mind-sets were four times more likely than those that didn’t to rate
their transformations as successful.

When Pierre Beaudoin took over the aerospace division at Bombardier,

in 2001, for example, he knew that it needed a performance boost
to ride out the industry’s post-9/11 downturn. He also wanted the com-
pany to become a healthy, self-improving organization. The aspira-
tions he set—Can$500 million in bottom-line savings, along with a
continuous improvement in service and products for customers—
required lean capabilities that Bombardier lacked at the time, as well
as a significant change in mind-sets.
 Organizational health: The ultimate competitive advantage 103

Probing cultural issues wasn’t something that came naturally to a

company that prided itself on technical expertise. In Beaudoin’s words,
“It was a challenge for me and for my leadership team to explain why
we were spending so much time on the ‘soft stuff ’ when we could be fixing
factories, hardware, airplanes. We had lots of conversations explain-
ing that if we did the soft stuff right, our employees, with our help, would
be more able to do what they’re supposed to do, like make our factories
efficient and work on engineering problems.”

These conversations and a more formal organizational self-assessment

yielded a shortlist of beliefs that limited the value placed on individuals,
the role of teamwork, efforts for continuous improvement, and the
drive for results. One area where the company urgently needed to change
was attitudes toward handling problems. As Beaudoin explains,
“Suppose I come to a meeting and hear about four problems, and I slam
my fists on the table and say, ‘I don’t want to hear about problems
any more; you guys are there to fix them.’ Well, guess what—I’m not
going to hear about problems. And that’s how you get yourself in
deep trouble.”5

Architect
Once a company knows where it wants to go and how ready it is to
go there, it must work out the way from here to there. Countless leaders
have told us that this is the hardest part of changing their organi-
zations. But it’s also the stage in a company’s journey when efforts to
improve performance and health start to fuse: they interlock and
reinforce one another as a focused portfolio of performance-improvement
priorities becomes a vehicle for shifting mind-sets toward health.

To understand what this symbiotic relationship looks like in practice,

consider the turnaround A. G. Laf ley famously engineered at
Procter & Gamble after taking the helm, in June 2000. Lafley established
some explicit priorities for P&G: focusing on 10 out of 100 countries,
for example, and on four core businesses. Emphasizing these priorities
was critical to P&G’s performance improvement. It also built a plat-
form for one of Laf ley’s deeper goals: to make P&G a more consumer-
driven and externally focused company—a healthier one, in short.

As Lafley was setting priorities, he decided to draw up a not-to-do

list. One item on it was P&G’s “skunk works”: experimental technology
projects outside the company’s mainstream businesses. These

5 For an interview with Pierre Beaudoin on Bombardier’s transformation, see Bruce

Simpson, “‘Flying people, not planes’: The CEO of Bombardier on building a world-class
culture,” mckinseyquarterly.com, March 2011.
104 2011 Number 2

Lasting, healthy change also requires an

organization motivated to go the extra mile over
and over again as employees carry out their
routine, day-to-day tasks while fundamentally
rethinking many of them.

endeavors—which had an annual budget as high as $200 million—

reflected technological goals rather than customer needs and culminated
in products and services that had to be “pushed” to the market
in the hope they would be taken up. All this worked against Laf ley’s
customer-focused aspiration. And so the not-to-do list was rigor-
ously enforced: “If we caught people doing stuff that we said we were
not going to do, we would pull the budget and the people, and we’d
get them refocused on what we said we were going to do.”

Often, shifting mind-sets means changing formal systems, struc-

tures, processes, and incentives. At P&G, Lafley made sure that planning
processes started with an understanding of consumer trends and
reframed the organizational structure to give it a stronger consumer
orientation. Finally, role modeling, storytelling, and skill develop-
ment can also play a vital role in shifting mind-sets. Lafley, for instance,
set up an in-house college for managers and dedicated a substantial
part of his own time to coaching. Although this soft stuff is often over-
looked, it’s vital. Senior executives who told us, in one of our sur-
veys, that they’d implemented initiatives to change their employees’
mind-sets and behavior during a transformation were twice as likely
as others to report that it had succeeded.

Act
When it’s time to get moving, pilot programs are almost always the
right way to start working on performance. If things go well, successes
can be replicated elsewhere; if they go awry, you can confine mis-
takes to a small area. Early results also help to build your employees’
motivation and appetite for change. One key to successful pilots,
we’ve found, is conducting them in two stages: first, a standard proof
of concept and, second, a proof of feasibility, which will ensure that
you have a replicable means of capturing the value you’ve identified
 Organizational health: The ultimate competitive advantage 105

across your organization. Too many companies don’t take the second
step and find that they can’t build on their initial success.

But even the most carefully constructed pilots aren’t enough. Lasting,
healthy change also requires an organization motivated to go the extra
mile over and over again as employees carry out their routine, day-
to-day tasks while fundamentally rethinking many of them. The whole
process can feel like trying to change the wheels of a bike while you’re
riding it. Not surprising, most companies find this difficult: one of
our surveys found that only some 30 percent of all executives who
had been through a transformation thought their companies had been
completely or mostly successful at mobilizing energy in it.

CEO Julio Linares took the reins of Spain’s incumbent telecom operator,
Telefónica de España, in January 2000, as earnings and cash f low
were sliding. He used three methods to create a powerful engine for
change as he transformed the company. The first was to help people
“understand how the project they were working on would contribute to
that year’s targets and, therefore, to the overall transformation pro-
gram.” With that goal in mind, Linares and his team emphasized growth,
competitiveness, and commitment as critical themes. Developing
new distribution models and improving customer segmentation came
under the heading of growth; adopting lean work processes and
enabling online transactions, of competitiveness; and embedding a new
set of company values and reorganizing business units, of commitment.

Second, Linares ensured that the whole company felt ownership of

the changes. He and his senior team brought the telco’s top 500 exec-
utives together every January, for example, to help design the pro-
gram for the year to come. Beyond this core group, Linares sought to
“give relevant people at different levels of the organization an oppor-
tunity to participate” in the redesign of the transformation program
“and then to complement that with a strong communication pro-
gram.” Sometimes, companies need to reach out even further to create
a shared sense of ownership. When structuring the transformation
of India’s Larsen & Toubro, CEO A. M. Naik explained, “We involved
one in four employees, about 7,000 people. I visited 38 locations of
the company.” He added, “When the vision was finalized” in a document,
“everyone could say, ‘That word was mine,’ you know? Maybe that
word was in the minds of a thousand people. But the process created a
shared vision everyone could believe in.” 6
6 For an interview with A. M. Naik, see Ramesh Mangaleswaren and Adil Zainulbhai,

“Reinvigorating a corporate giant: An interview with the chairman of India’s largest

infrastructure company,” mckinseyquarterly.com, March 2011.
106 2011 Number 2

Finally, Linares used progress evaluations, which are

always important, as a third tactic for maintaining
One way to support personal
energy. Linares explained the need for them in this
development of this sort is
way: “The market is going to change constantly,
to expose managers to centered
leadership—a group of five and because of that you need to make a constant
interrelated capabilities that effort to adapt your company. Some parts of
research by our colleague Joanna the program will end, but new ones will come up.” 7
Barsh, a director in McKinsey’s
New York office, has shown
generate higher performance and
Advance
greater satisfaction at work The final stage is to make the transition from the
and in life when used together. intensive work and constant upheaval of a transfor-
mation to a period of continuous improvement.
These capabilities are find-
According to one survey, companies that build a
ing meaning in work, converting
emotions such as fear or capacity for it into their organizations are 2.6 times
stress into opportunities, leverag- more likely to consider their transformation
ing connections and commun- programs a success over the long term.
ity, acting in the face of risk, and
sustaining the energy that is
Continuous improvement can be cultivated during
the life force of change.
a major transformation effort by building an infra-
To read more, see “How centered structure, as you go, that includes knowledge
leaders achieve extraordinary sharing, learning methods, and expertise to help the
results,” on mckinseyquarterly.com.
company continue to improve. For these to be
embraced after the initial transformation effort is
complete, the right leadership skills and mind-
sets must be in place. After the formal end of a trans-
formation program at ANZ Bank, for example, the company trained
more than 6,000 leaders in areas such as self-awareness, resilience, and
the ability to energize oneself and others. The response was tre-
mendous: participants spoke of the program’s “profound impact” and
described the experience as “life changing.” ANZ also held other
personal-leadership workshops to develop its employees’ ability to
improve continuously, cascading the workshops right through
the organization in a process that eventually touched more than
26,000 employees.

These efforts helped ANZ usher in an era of nonstop progress, which

included grassroots business initiatives, organizational de-layering,
bureaucracy busting, internal job markets, and greater diversity.
Supporting these endeavors were some 180 “champions” who worked,
on top of their regular jobs, to foster continuous improvement in
the businesses.

7 For an interview with Julio Linares, see Josep Isern and Julie Shearn, “Leading change: An

interview with the executive chairman of Telefónica de España,” mckinseyquarterly.com,

August 2005.
 Organizational health: The ultimate competitive advantage 107

ANZ’s strong financial performance, in the years after its transformation,

was accompanied by striking evidence of organizational health:
it had the highest level of staff engagement of all peer organizations in
Australia and New Zealand, and the share of employees who agreed
that “we live our values” and “are earning the trust of the community”
was 85 percent and 81 percent, respectively.

If you want to change your organization for the better and to make the
changes stick, you must focus on its long-term health even as you
push for higher performance now. We hope our research has convinced
you that this sensible-sounding but often-ignored maxim is true.
And we hope you see, from the examples earlier in this article, that
practical insights and tried-and-true tools will let you tackle per-
formance and health simultaneously. We fervently believe that business,
and even society as a whole, will improve when organizations begin to
report—and be judged—on their health just as frequently and rigorously
as they are on their performance.

Scott Keller is a director in McKinsey’s Southern California office, and

Colin Price is a director in the London office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
Applied Insight
Tools, techniques, and frameworks for managers

109 117
Beyond expats: Better managers Question for your HR chief:
for emerging markets Are we using our ‘people data’ to
create value?
113
Using your sales force to 122
jump-start growth Playing war games to win

Cinema verité: Smart companies say

good-bye to the Western expat and
hello to the talented local manager in
their developing-market operations.

Outsourced © 2006 ShadowCatcher Entertainment. All rights reserved. Outsourcedthemovie.com


Beyond expats:
Better managers for emerging
markets
Jeffrey A. Joerres
The CEO of Manpower argues that the era of the Western expatriate
manager is ending. It’s time for a local approach.
Five years ago, the independent
film Outsourced won over critics with
its comic portrayal of “Todd,” a
manager who is transplanted from
Seattle to India to improve the
performance of his company’s call
center. In the film, Todd survives
numerous cultural misunderstandings,
including being pelted with colored
powders and water balloons by
villagers during a religious festival—
all while helping the underper-
forming unit boost its productivity
by 50 percent.
As amusing a movie as Outsourced
is, in the years ahead the joke
will be on companies that think they
can rely on Western expatriates
such as Todd to manage and lead
operations in emerging markets.
Expat managers are notoriously bad
at adapting to local culture. What’s
more, the presence of these
foreigners often fuels a belief among
local employees that there is
a ceiling on their own potential in
the company.
These perennial challenges are
becoming more and more acute: as
companies in emerging markets
grow in number and in strength, they
109
become tougher competitors for
multinational companies, for which
a dearth of intimate local knowl-
edge is increasingly costly. Further-
more, the war for managerial
talent is heating up in the developing
world. (One data point: my com-
pany’s latest global talent survey
finds that the most severe talent
gap in China occurs among the ranks
of senior management.1) Com-
panies with reputations for develop-
ing local leaders are far more
likely to attract the talent they need
to pursue attractive growth oppor-
tunities. These opportunities, in turn,
will increasingly be found outside
of major cities, further heightening
the talent challenge, since the
practice of attracting expats to—and
sourcing local talent from—the
hinterlands is uncharted territory for
many multinationals.
There is a better way, one which
I call pursuing a “reverse expat”
strategy. A reverse expat is a local
manager who is placed at the
helm of a Western-based company’s
emerging-market business and
then rotated through some of
the company’s more mature opera-
tions outside of that market.
110 2011 Number 2
Reverse expats spend a pre-
determined amount of time (often a
month, though it could be more,
depending on their experience level
and the complexity of the busi-
ness challenges involved) immersed
in the company’s established
operations.
Typically, this involves exposure to
major functional areas such as
finance, HR, and marketing, as well
as experience with different
business units that together can
provide a robust understand-
ing of diverse customer needs. The
reverse expat shadows and role-
plays with the local leaders there
intensely; observes and absorbs
protocols, processes, and practices;
and develops a plan for quickly
adapting any relevant developed-
“
Any multinational that really wants
to grow in emerging markets
should think hard about implementing
a reverse-expat strategy of its own.
Jeffrey A. Joerres
CEO of Manpower
market practices to the developing
country. When executed effec-
tively, this approach dramatically
accelerates the development
of local managers and ultimately
creates a more competitive and
sustainable organization. Although
not yet widespread, this practice
is beginning to take hold.
• One century-old manufacturer
headquartered in the United States,
for example, used a reverse-
expat strategy to strengthen its
leadership team in China and
now enjoys a market position there
more lucrative than that of its
core US operations.
•A
 multinational services company
recently hired a local manager
to lead its business in Vietnam and
”
Applied Insight
then sent her on rotations to
shadow the company’s managers
in China, Sweden, and the
United States. The experience
helped her identify, and then adapt,
a branch-management reporting
process she could use back
in Vietnam to get better and faster
feedback from colleagues
in other markets. Moreover, she
returned to Vietnam more
confident in her ability to present
complex service solutions to
clients and prospects— a direct
result of working closely with
the company’s more seasoned
managers.
• And even India-based support
centers, such as the one portrayed
in Outsourced, are seeing fewer
expats: more and more multi-
nationals are tapping locals to run
such facilities, after sending
the managers to the company’s
developed-market operations
for necessary training.
These early examples are just the tip
of the iceberg. Any multinational
that really wants to grow in emerging
markets should think hard about
implementing a reverse-expat
strategy of its own. Here are three
suggestions for maximizing the
chances of success:
Clarify expectations
and objectives
To achieve the full potential of
a reverse-expat program, senior
executives need to make sure
everyone involved understands the
111
purpose and takes it seriously.
The immersion process isn’t intended
to be a pleasant field trip for the
participant or simply an act of good
corporate citizenship on the part of
the established-market coach.
It’s a crucial step toward helping to
prepare for a future in which
emerging markets may become a
company’s most important
growth engine. Companies should
establish clear objectives for
the program, including an action
plan for the emerging-market
manager upon his or her return
home, checklists of issues that
Western managers can use to
help the effort, and performance-
improvement targets that seem
realistic to all parties after their time
together—and that can be tracked
to verify progress.
Focus on coaching
The right learning environment
requires a mind-set of empathy, col-
laboration, and dialogue. Simply
imparting functional skills is not
enough. Coaches need to schedule
significant chunks of time for
development discussions and two-
way feedback—including oppor-
tunities to listen to feedback from
the visitors about what they
are (and aren’t) learning so that the
program can be adjusted accord-
ingly. Also, whenever possible,
managers of reverse expats should
spend time talking with one
another; their collective coaching
experiences will almost cer-
tainly help enhance everyone’s
effectiveness.
112 2011 Number 2
Adapt, don’t transplant
Senior executives must impress
upon coaches and the visiting
managers they are working with that
the goal isn’t simply to trans-
plant mature-market practices into
emerging markets—these prac-
tices are just as likely to fail at the
hands of a local or a traditional
expatriate manager. Although visit-
ing managers will often intuitively
know this, they still need the freedom
and encouragement from their
home office to adapt new strategies
and practices that they can take
back with them. The trick, of course,
is to establish ground rules that
balance innovation, risk taking, and
the economic fundamentals of
the business. The nature of those
guidelines will differ by company;
thinking them through in advance is
the responsibility of the senior team.
These suggestions are merely start-
ing points; every company
embarking on a reverse-expat
strategy will obviously need to tailor
its approach. And they should
begin now. I firmly believe we are
nearing the end of the line for
Todd and his fellow Western expa-
triate managers. Only by taking
a long-term approach of cultivating
local leaders can organizations
unleash the potential of their work-
forces in emerging markets,
accelerate growth, and steal a
march on their competitors.
1 
For more, see Winning in China: Building
Talent Competitiveness (November 2010),
available on the Manpower Web site at
manpower.com/research.
Jeffrey Joerres is chairman,
president, and CEO of Manpower,
a leading global provider of
employment services.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
 113
Mark Allen Miller

Using your sales force to

jump-start growth
Maryanne Hancock, Homayoun Hatami, and Sunil Rayan

There’s a reason it’s called a sales force. Here are four innovative ways
companies can use their sales reps to drive growth.

There’s no escaping the impact of elements that distinguish true

the sales force on your company’s
growth trajectory. This is the
frontline group best placed to gain
an intimate understanding of
existing customers, to observe the
forces at work in an industry, and
to identify potential new business.
During the past year, we inter-
viewed about 100 sales executives
around the world, across a range
of industries, to identify the critical
sales leaders from also-rans. This
article highlights four intriguing
ideas the executives described for
leveraging the sales force to
jump-start growth. Together, these
suggestions offer practical
insights for sales groups, as well as
a starting point for discussions
among CEOs and other senior man-
agers hoping to get more from
sales and marketing investments.
114 2011 Number 2
Look over the horizon
The sudden arrival of a truly
disruptive technology—one that
upends markets in ways few
anticipate—presents obvious chal-
lenges to industry incumbents.
Yet it’s also a huge growth oppor-
tunity. One supplier of parts to
high-tech manufacturers has created
a team of “speculative market
analysts” to better identify the emer-
gence of disruptive technologies
and to predict their business implica-
tions. The team helps the company
to position itself as a supplier that’s
ahead of the curve and to enjoy
superior sales growth while competi-
tors scramble to catch up.
The full-time team cuts across all
business units and draws on
a variety of internal and external
sources: the sales force provides
insights into the technology
initiatives of the company’s cus-
tomers while continually pressing
them for feedback about its
shortcomings and the efforts of
competitors. In addition, the
team closely scrutinizes all reports
from competitors and customers—
easier said than done, given the
sheer volume of market information
emanating from countries such
as China. It even fosters close ties
with venture capital firms and
provides up-and-coming companies
with funding and “sweat equity”
to convert innovative concepts into
realities. Together, these efforts
have helped the company’s sales
force to get ahead of recent
major disruptive trends, including
the boom in tablet devices and
e-readers, as well as the growing
fields of LED lighting and solar
technology. What’s more, the team’s
efforts are generating an estimated
annual return on investment that
exceeds 12 percent.
Hunt and farm
It’s easy for organizations to fall
into the habit of seeking sales
growth only through existing cus-
tomers. Even though the sales
force is typically best placed to find
and approach potential clients,
individual reps may shun the uncom-
fortable task of cold-calling in
favor of selling to customers they
know well. Yet there’s only so
much each customer can buy, so
finding new business is critical
for growth.
One large distributor of auto parts
tried tackling this problem by
separating these activities. Its sales
leader designated some reps as
“hunters,” who focused exclusively
on finding new prospects, while
“farmer” reps concentrated on exist-
ing customers. The model suc-
ceeded initially but later foundered
as hunters became discouraged
by the time and effort required for
their relatively scant wins, as
well as the perception that they were
second-class citizens compared
with farmers.
As attrition rates among hunter
reps grew, the sales leader changed
tack. To demonstrate the impor-
tance of finding new customers, he
designated one day a month as
a “hunting day,” when all reps would
exclusively chase new prospects.
The rest of the time, they could
focus largely on existing customers.
The result was astounding: in a
single day, the company signed up
as many new customers as it
normally did in two months. Setting
aside one day a month for hunt-
ing new business is now an
ingrained part of the company’s
sales practices.
 Applied Insight 115

To demonstrate the importance of finding new

customers, the sales leader designated one
day a month as a “hunting day,” when all reps
would exclusively chase new prospects.

Motivate with more advisers to develop specific goals

that would help the advisers
than money
feel they had genuinely helped
customers. Maybe it was prioritizing
The basic remuneration model for
quality over quantity by working
sales reps is simple: a base salary
more intensely with fewer clients.
offers security; commissions
Perhaps advisers needed a
and bonuses provide incentives to
wider range of financial products
perform. Most companies work
to ensure that they had all possible
endlessly to optimize the balance.
options to meet their clients’
Yet what if money isn’t the thing
investment goals. At the same time,
that actually matters most? One
the company identified and laid
financial-services company tried
out steps for overcoming potential
all manner of compensation plans
bottlenecks, such as a lack of
before determining that while
coaching, training, financial-
carrots and sticks did influence the
management tools, or appropriate
sales performance of its financial
products.
advisers and sales managers, the
results were short-lived.
The company knows that money
remains critical to its sales team but
As the company explored alterna-
now recognizes the benefits of
tives, its sales leader observed
identifying other, deeper motivations.
something important: the most suc-
The attrition rate among financial
cessful advisers often spoke
advisers has fallen sharply, and they
passionately about the sense of
not only have become more
fulfillment that came from helping
successful at winning business but
clients realize their dreams.
also have found that clients are
Fundamentally, that was why these
entrusting more of their wealth with
men and women had become
the company. These goals have
financial advisers. The realization
been met with no increase in the
that money was just one of the
compensation of advisers.
factors driving performance
prompted the sales leader to work
with managers and individual

For more about the power of

nonfinancial incentives, see “Retaining
key employees in times of
change,” on mckinseyquarterly.com.
116 2011 Number 2

Boost sales without This granular view of each sales

territory led to new sales approaches.
slashing prices
In higher-growth markets with
limited competition, sales reps
Companies experiencing flat or
aggressively sought new business
declining sales often elect to cut
and raised prices where possible.
prices to spur demand. Yet
In declining markets with stiffer
sometimes, averages lie: a decline
competition, reps were authorized to
across a market doesn’t mean
cut prices to prevent customers
that all market segments are weaken-
from defecting. This market-by-
ing. A North American logistics
market roadmap allowed the
company learned this lesson the
company not only to reverse several
hard way when it empowered
years of declining market share
sales reps to lower prices to meet
but also to secure an overall average
management’s goal of boosting
price increase of 3 percent.
volumes. Because the price
guidelines were set without taking
into account the competitive The authors would like to
dynamics of each specific market acknowledge the contributions of
segment, only some reps recouped Maria Valdivieso de Uster and Jon
the cost of the price cuts with Vander Ark to the development of
higher volumes. The company’s this article.
overall competitive position Maryanne Hancock is a principal
deteriorated. in McKinsey’s Atlanta office,
Homayoun Hatami is a principal
Top management decided to in the Paris office, and Sunil
recalibrate its approach. The charac- Rayan is an associate principal in
teristics of each of the company’s the New York office.
various market segments varied
wildly. Some were growing fast in
Copyright © 2011 McKinsey & Company.
the wake of continuing property All rights reserved. We welcome your
construction, population influxes, comments on this article. Please send them
and investment; others were flat- to quarterly_comments@mckinsey.com.
lining. The sales reps got new price
and volume targets based on
each segment’s characteristics.
These targets incorporated metrics
such as the economic growth
rate in geographies where particular
industries were heavy users of the
company’s services, the strength of
the company’s operational assets
relative to those of its competitors,
and whether the company was
losing or gaining customers at
accelerating or decelerating rates.
 117

Keith Negley
Question for your HR chief:
Are we using our ‘people data’
to create value?
Nora Gardner, Devin McGranahan, and William Wolf

By analyzing the links between people practices and productivity,

some companies are improving their bottom line.

Human-resources executives have best motivate performance?” have

aspired to be strategic advisers to
business leaders for at least a
generation. But it’s been a struggle
for many because it’s so difficult to
measure the business value of
HR approaches. Questions such as
“What is the ROI1 of training?” and
“Which screening techniques yield
the best performing recruits?”
or “What target-setting approach will
been met with imprecise answers.
Today, however, new tools and
methods for analyzing data enable
HR to define the link between
“people practices” and performance
more effectively. This couldn’t
have happened at a better time,
since CEOs are hunting for value
anywhere they can find it. The
118 2011 Number 2
upshot: if you and your head of HR
haven’t recently discussed ideas
for using data to generate a talent
strategy that’s more closely linked
to business results, it’s time to start.
Why now? For starters, the wide-
spread adoption of enterprise
resource planning and HR informa-
tion systems has made data on
business operations, performance,
and personnel more accessible and
standardized. Furthermore, the
rise of HR information systems has
generated a community of soft-
ware and technology intermediaries
that can help HR and business
executives use data to find links
between talent management
and labor productivity. Finally, the
consolidation and outsourcing of
transactional HR work has compel-
led many leaders of the function
to take a first step toward quantify-
ing and reporting HR costs and
performance.
These trends, coupled with the
universal imperative to get more for
less, have led some companies
to discover new ways of using HR
analytics to create value. The
Bon-Ton chain of more than 280
The Bon-Ton chain of more than
280 department stores in the United
States leveraged its data to
identify attributes that made cosmetics
sales reps successful.
department stores in the United
States, for example, leveraged its
data to identify attributes that
made cosmetics sales reps success-
ful. Now it screens potential
reps using a test of cognitive ability,
situational judgment, initiative
taking, and other relevant traits.
Those who score in the top half tend
to sell 10 percent more product
than the others and tend to like their
work more. Since 2008, the chain
has seen an increase of $1,400 in
sales per representative and 25 per-
cent lower turnover among them.
Other pioneers are emerging, par-
ticularly in industries where
people are central to value creation
(notably banking, health care,
and retailing) and where scarce
technical expertise governs growth
(such as technology and upstream
oil exploration). While the specific
people-related practices that
add value will differ by company—
industry dynamics, talent scar-
city, growth rates, and corporate
cultures all influence the answers—
the organizations that we’ve
seen get the most value from invest-
ing in HR analytics all use some
variation of these four steps.
 Applied Insight
1. Focus HR on business priorities
Most HR teams view, organize, and
measure their activities through
the traditional employee life cycle:
starting with recruiting, hiring,
and “on-boarding” and proceeding
to evaluation, training, and develop-
ment. For HR analytics efforts
to work, however, the function’s
leaders must view problems—
and value creation opportunities—
as business leaders do.
Executives at Pittsburgh-based
PNC Financial Services, for example,
suspected that their tendency
to pick experienced outsiders over
internal candidates in hiring
decisions might be hurting the bank:
once hired, the outsiders were
too often viewed as lukewarm per-
formers. So in 2009, PNC’s HR team
partnered with colleagues from
the company’s marketing-analytics
group to analyze the sales per-
formance, over several years, of
external hires versus people
promoted from inside. What the
team found confirmed the
suspicions: in a number of key job
categories, internal candidates
were significantly more productive in
their first year than experienced
external hires. In subsequent years,
the outsiders narrowed—but
never closed—the gap. Millions of
dollars in value were at stake.
It’s unusual for business or HR
leaders to spot pain points such as
these on their own. Typically,
a strong partnership is crucial for
identifying and prioritizing issues
that intertwine people challenges
Listen to a podcast with Google’s Hal Varian—
where he describes how companies can convert
data into knowledge—in “Clouds, big data,
and smart assets: Ten tech-enabled business
trends to watch,” on mckinseyquarterly.com.
119
and business results. PNC’s team,
for example, asked line execu-
tives what they saw as the highest-
value opportunities for improving
talent management. From these dis-
cussions, the analytics team
distilled a top-20 list of business
questions and hypotheses to
test, such as “What is the business
impact of training investment?”
and “Is there an optimal distribution
of performance ratings?” The
PNC team then ranked the resulting
list of issues by their expected
business impact and the feasibility
of conducting meaningful analysis.
“This is where HR has the chance
to prove itself,” says Jay Wilkinson,
PNC’s new HR vice president of
analytics. “Better than coming
to [business leaders] with tired best
practices, we’re asking them
how they define success specific
to their business, and that provides
the context for our analysis and
recommendations.”
Google is another company with
an HR team that partners with
business leaders seeking analytic
insights. According to Prasad
Setty, head of Google’s people
analytics group, “We are looking to
inform decision makers with data
so they can be as objective and bias
free as possible.” Setty’s team
has, for example, provided business
executives with a systematic
approach to reassessing provision-
ally rejected candidates. The
team’s analysis of profiles that lead
to success at Google helps it
identify potential false negatives
and to revisit these candidates. This
technique has helped the company
“save” many hires it would otherwise
have missed.
120 2011 Number 2
2. Start with what you have
Quantitative problem-solving
skills may be hard to come by in the
HR department. Therefore,
senior executives who are eager to
begin should push their HR leaders
to draw in analytical resources
wherever they exist. All that’s
required is the ability to engage
business leaders in efforts to identify
issues and structure problems
in a nuanced way and then to follow
through with advanced data
gathering and statistical analysis.
Retailers, for example, typically
entrust analytics to store operations
analysts who understand the
high priority the business places on
containing labor costs. PNC’s capa-
bility emerged from its marketing-
3. Go beyond traditional HR solutions
New insights often require additional
problem solving to go from theory
to practical solutions. HR analytics
succeeds when human-resources
and business leaders work together
to address the root causes of
problems and to pilot new ways of
solving them.
Google, for example, did a study
to examine whether good man-
agers matter—and, if so, how—within
Google’s specific culture. Setty
explains that “through various
methods, we found positive relation-
ships between good management
and retention and the performance
analytics group. Other companies
lean on finance or strategic
planning. Most pull the necessary
people into the HR function over
time, as PNC did in the course
of a year when it decided to build
a specialized HR analytics
department.
And remember: many analyses can
be conducted using existing
data and systems. Some work may
be needed to match payroll data
or training-attendance rosters with
sales performance results, for
example, but creative, persistent
analysts can answer most busi-
ness questions without new, sophis-
ticated, or costly tools.
of teams. We then conducted
double-blind interviews to identify
the key behaviors exhibited by
our best managers. We found eight
behaviors that make a good
manager and five pitfalls to avoid.
These are now incorporated into
our manager-training programs and
coaching sessions, and teams
provide feedback to managers on
these behaviors to help them
understand where they’re doing well
and where they can get better.
The vast majority of our lower-rated
managers have improved as
a result.”
 Applied Insight
4. Make it stick
Once a company has a few suc-
cesses with HR analytics, it can build
a lasting source of value creation
by integrating analytics practitioners
into its day-to-day business and
HR rhythms. Several companies,
for example, have established
a routine of having HR or other
“people strategy” staff join business
reviews to identify priorities for
analysis. This practice helps senior
line executives conduct problem-
solving discussions around
HR-related issues and to plan for
action as findings emerge.
HR analytics practitioners must
also commit themselves to the habit
of measuring and reporting on
Advances in technology are creating
opportunities for senior business
and HR leaders to start a new kind
of dialogue about the link between
people and performance. That
dialogue will help HR executives
demonstrate the impact of
their work and achieve their goal of
strategic partnership with other
members of the senior-management
team—and, of course, it will create
value for the enterprise.
1 
Return on investment.
121
success. At financial-services giant
ING, for example, business units
and HR share a comprehensive dash-
board, supplemented by regular
reports, to show progress on key
metrics. Similarly, a global oil
giant’s people-strategy group reports
progress at four stages of a
project’s development: data gather-
ing, analysis, developing solutions,
and piloting. This approach helps
HR and business leaders under-
stand that progress is happening
even when stages may take
weeks or months to complete. It also
provides a clearer understand-
ing, in both directions, of changing
priorities and emerging findings
from the work.
Nora Gardner is an associate
principal in McKinsey’s Washington,
DC, office, of which William Wolf
is an alumnus; Devin
McGranahan is a director in the
Pittsburgh office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
122
Playing war games to win
John Horn
They can be a powerful business tool—but only if you get the
design right.
As the global downturn kicked in,
a high-tech company’s senior
executives decided to run a war
game to prepare themselves
for the uncertainties of the post-
crisis landscape. After two
days of simulations—when teams
representing competitors and
stakeholders role-played against a
“company” team—the executives
understood that a strong competitor
on the sidelines was likely to
enter the market aggressively. The
executives also realized that the
Bill Butcher
low end of the product range would
face more price pressure than
they had been anticipating. More-
over, while there would probably
be industry mergers and acquisi-
tions, as the company had expected,
the deals were unlikely to kick
off a wave of M&A or to have a
material impact on the company’s
share of any market.
These insights made a difference.
When actual deal making began and
the player on the sidelines
Applied Insight
announced its intention to become
a market leader, the high-tech
company didn’t leap into the M&A
fray or otherwise lose focus. Instead,
it concentrated on protecting its
core business, minimizing low-end
losses, and investing in a major
growth opportunity that required new
technology and a long incuba-
tion period—and has since proved
valuable.
For a variety of reasons, many
companies don’t learn as much from
war games. Some misjudge when
they are appropriate. Others foul up
the game’s design by not includ-
ing the right participants. Still others
take a cookie-cutter approach
and rely on standardized game
design software or apply to opera-
tional problems the same approach
they previously used for strategic
or organizational ones.
To avoid these pitfalls—and
the wasted time, money, and poor
strategic decisions that go with
them—CEOs and other senior
executives should ask tough ques-
tions when contemplating war
games or answering proposals to
use them. Four questions, drawn
from our experience with more than
100 war games at scores of
companies around the world, can
greatly increase the chances
that your managers will use war
gaming to make better decisions
in the real world.
Can a war game help
with our problem?
The sweet spot for games is some
moderate level of uncertainty.1
If the uncertainty is too great—say,
123
the impact of robotic nanotech-
nology on manufacturing industries—
game planners can’t offer enough
guidance for the players to make
reasoned decisions. More suit-
able is an industry environment
where, say, two or three outcomes
seem plausible along each
of several dimensions. When no
amount of analysis will provide
the right answer, the results of
gaming can shed valuable light on
the range of possibilities that
executives should be considering.
In addition, there must be some
meaningful competitive dynamics
between the company and various
stakeholders—a game to be played,
in other words—and a clear way
of representing the most relevant
players. Often this presents little
challenge: the high-tech company,
for example, ran its game against
current and potential competitors
and included consumer teams in
some rounds. But it can be tricky to
portray certain stakeholders, such
as the US Congress, which one
aerospace and defense contractor
realized it had to include for
its game to yield valuable insights.
Consider other approaches if the
level of uncertainty, competitive
dynamics, or stakeholder realities
seem problematic. Scenario
planning can help with decision
making if there is too much
uncertainty. Cost curves, profit pool
analyses, or other standard
frameworks are effective when
complex competitive dynamics
are absent.2
A final word of caution: be wary
of the argument that war games are
primarily about generating new
124 2011 Number 2
ideas. Companies following this
approach often find participants
taking an “I’m going to prove how
clever I am” posture, leading
to unrealistic, impractical ideas. We
suggest conducting idea
generation workshops instead.
For more on brainstorming and creativity,
see our feature package “Generating the ideas
you need to grow,” on page 64.
What kind of game
should we play?
Let’s say a consumer goods com-
pany is considering a narrow
problem—raise prices 5 percent or
keep them constant—and wants
to know how its biggest competitor
might respond. Given the tacti-
cal objective, the consumer goods
maker might run two separate
games: one in which it raised prices
and one in which it didn’t.
Alternatively, the company could
run a game in which it raised
prices by 5 percent but made other
adjustments, sometimes boost-
ing marketing expenditures and
sometimes offering retailers
concessions. It could then compare
the result with the outcome of
the game in which it didn’t change
prices. The key is running the
gamut of potential choices to make
sure each is tested. Such games
are most valuable when a company
has very few but discrete choices
to test, as well as a similarly
small set of possible responses by
competitors.
Tactical games aren’t always practi-
cal, though. The aerospace and
defense company mentioned above
originally considered running a
tactical game to better understand
shifts in the US defense budget
and their impact on the business.
But the benefit of testing a
very large number of scenarios
for individual weapon systems—
scenarios involving, for example,
levels of funding, moves by
competitors, and outcomes of
technology investments—would not
have justified the executive time
spent on the exercise.
Instead, the company designed a
game to answer the more strategic
question: how can we win market
share given the budget pressures on
the Department of Defense
and the moves of competitors? The
game tested levers such as
pricing, contracting, operational
improvements, and partner-
ships. The outcome wasn’t a tactical
playbook—a list of things to execute
and monitor—but rather strategic
guidance on the industry’s direction,
the most promising types of
moves, the company’s competitive
strengths and weaknesses,
and where to focus further analysis.
Who will design and
play the game?
You have big personnel choices to
make or approve—who designs the
game and who plays. In both cases,
deciding exactly how wide to cast
the net depends on whether the
game’s objective is primarily tactical
or strategic or the creation of
organizational alignment.
Tactical games, with their detailed
moves and evaluation criteria, are
relatively straightforward: leaders
with deep expertise about and
 Applied Insight
responsibility for implementing the
decisions are critical sources of
input. The design of a strategic war
game requires much broader
interaction. To ensure that the
defense contractor’s game wasn’t
unduly influenced by the hypo-
theses of its designers, for example,
they asked all 40 executives who
would play it which trends,
scenarios, and decisions should
be tested.
The selection of players is also
critical. A tactical exercise, such as
a pricing game, can have a rela-
tively small set of participants. You
should cast a wider net in a
strategic game and a much wider
one in an organizational game in
which the objective is to get people
on board for a strategic move.
In a game in which the goal is
organizational alignment around a
strategic decision, for example,
you should include leaders of all
functions that will be involved in
its execution. Often, it’s also worth
including frontline managers,
product designers, and account
reps, since they can raise different
viewpoints during the game
and disseminate the lessons to
colleagues afterward.
A more diverse set of participants
also creates valuable opportunities
to broaden their understanding of
“Having played the customer, I now
understand what the sales force means when
they say we get push-back on price.
I am going to make sure we give you the
support you need.”
125
the industry—for instance, by
assigning them to stakeholder teams
with roles that are less familiar
to them. In the debriefing session
after the high-tech company’s
game, the leader of a business unit,
who had paired up with a sales-
person on a customer team,
remarked, “Having played the cus-
tomer, I now understand what
the sales force means when they
say we get push-back on price.
I am going to make sure we give you
the support you need to make
the value-based argument to the
customers.” This shared experience,
which would have been impos-
sible with a smaller or more
homogenous group of participants,
has continued to stimulate
discussions across the company
as market conditions evolve.
How often should
we play?
The one-off games described so
far are the most common type; it’s
usually pointless to run a game
repeatedly to test the same uncer-
tainties with the same partici-
pants. It’s often beneficial, however,
to repeat a game for the sake of
organizational alignment when you
want to bring along people who
didn’t experience the first game—
usually, the wider group of
employees who will implement the
126 2011 Number 2

decision. Most people learn better
by doing, and when they have
shared experiences, they are more
likely to embrace change.
Repeating games also can be useful
when conditions are changing.
If competitors or technologies have
evolved, for example, it may
be time to rerun a strategic game.
Tactical games like those for pricing
negotiations may bear repeating
as frequently as every three or four
months, with the same set of
players and slight modifications to
reflect changes in the market.
That helps salespeople refine their
pitches as customer needs,
competitive offerings, regulations,
and other factors shift.
You may, however, want to run
the same set of players through a
game repeatedly and rapidly to
practice for a critical upcoming test.
The negotiation team of a health
insurer, for example, was entering
into a renegotiation with its key
provider partner and felt it had little
room to maneuver. To explore
its options, the team played a war
game in which it chose a negoti-
ating approach, negotiated with the
provider team, huddled up to
reformulate its strategy and tactics,
and then reentered negotiations—
all in several quick rounds.
The participants replayed the game
several times in one day (starting
again with new tactics when they got
bogged down), reflected on the

More on war games from our readers

“Another value of games/simulations is the development of

business acumen and influencing skills among up-and-coming
leaders. You could ask, ‘Who in the leadership pipeline is
going to be making these tactical or strategic decisions for our
company five or ten years from now?’ and then invite those
individuals to participate in the gaming as a developmental
experience. Alternatively, it may be feasible to reuse a game as
the basis for a strictly developmental experience for emerging
leaders (provided you could get enough subject-matter experts
to participate along with the developing leaders).”
Leslie Goldenberg
Talent management, IBM, Los Angeles, California
 Applied Insight 127

1 
results, and repeated the exercise See the descriptions of Level 2 and Level
the following week. The improve- 3 uncertainty in Hugh G. Courtney, Jane
Kirkland, and S. Patrick Viguerie, “Strategy
ment between the first and the last under uncertainty,” mckinseyquarterly.com,
sessions was enormous: the players June 2000.
2 
Kevin P. Coyne and John Horn, “Predicting
uncovered areas where they could
your competitor’s reaction,” Harvard
stand firm and learned how to craft Business Review, April 2009, Volume 87,
their message more adroitly to Number 4, pp. 90–97.

regain control of the situation. They

also became more confident and
ready to flex their muscles in real
negotiations with the provider.
Well-designed war games, though
not a panacea, can be powerful
learning experiences that allow man-
agers to make better decisions.
By asking a few tough questions,
executives can help their orga-
nizations be smarter about when
and how to play.
The author wishes to acknowledge
the contributions of Kevin Coyne, an
alumnus of McKinsey’s Atlanta
office, to the thinking behind this
article.
John Horn is a consultant in
McKinsey’s Washington, DC, office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.

To read other letters from our readers about

this article, visit mckinseyquarterly.com.

“While war gaming is an amazing tool, the idea of running the

gamut of potential choices to make sure each is tested
is a very costly and wasteful effort: effective war games should
focus on the most probable scenarios, and not ‘cover
one’s behind’ by exploring all possible choices; in reality, few
options are likely to happen.”
Eyal Weiss
General manager, The Firm, Israel

“War games help an organization redefine the threat and

opportunity levels created by a potential competitive
activity, but [they] need to be sustained using strong tracking
and engaging mechanisms with the team after a war
game event is over.”
Srikanth Srinivasamadhavan
Media director—South Asia, Hindustan Unilever, Mumbai
128

Extra Point

Growing through deals:

A realityQ2check
2011
Extra Point: Deal discipline
Exhibit 1 of 1
It’s hard for big companies to keep up with investors’ expectations
for growth. Mergers and acquisitions are essential, but a deal large enough
to double the market capitalization of a small company will scarcely
register for a large one. So many big companies pursue ever-larger deals—
or a whole lot of smaller ones.

Top 1,000 companies globally by market capitalization, 1999–2009

35
30
% of companies

25
20
15
10
5
0
≤–30 –25 –20 –15 –10 –5 0 5 10 15 20 25 30 35 40 >40

Performance: Excess total returns to shareholders (TRS) over industry index, %

Acquired more than 18% of market Acquired less than 18% of market
capitalization with . . . capitalization with . . .

. . . fewer than . . . more than . . . fewer than . . . more than

15 deals 15 deals 15 deals 15 deals

For all companies

18% = median acquired market capitalization and 15 = median number of deals.

Neither strategy leads more often to success. Patterns of deal size and
frequency have made little difference in performance among the
world’s top companies. It seems not to matter much whether companies
completed one large deal, many small deals, or few deals. In statistical
parlance, the distribution of samples reflecting different combinations of
deal sizes and market caps was both widely distributed and overlapping.
For another
From a value-creation perspective, this finding means that the size and
financially oriented
number of deals matter less than the discipline with which they are
perspective on
identified, priced, integrated, and managed.
growth, see
“Sustaining top-line
growth: The Andres Cottin is a consultant in McKinsey’s New York office, where
real picture,” on Werner Rehm is a senior expert; Robert Uhlaner is a director in the San
page 27. Francisco office.

Copyright © 2011 McKinsey & Company. All rights reserved.

Copyright © 2011
McKinsey & Company.
All rights reserved.

Published since 1964

by McKinsey & Company,
55 East 52nd Street,
New York, New York 10022.

ISSN: 0047-5394
ISBN: 978-0-9822524-9-9

Cover artwork by Daniel Bejar

McKinsey Quarterly meets

the Forest Steward-
ship Council (FSC) chain
of custody standards.

The paper used in the

Quarterly is certified as being
produced in an environ-
mentally responsible, socially
beneficial, and economi-
cally viable way.

Printed in the United States

of America.
 Highlights:
New McKinsey research that updates
The Granularity of Growth
and shows how leadership lifts the
top line

Starbucks CEO Howard Schultz on

the perils of growing too fast

Why country strategies don’t work

in emerging markets

Portugal Telecom CEO Zeinal Bava

on thriving in Brazil

Generating the ideas you need

to grow

Why Web 2.0–savvy organizations

outpace the rest

Manpower CEO Jeffrey Joerres on

the end of the expat era

Building the healthy organization

mckinseyquarterly.com • china.mckinseyquarterly.com

New McKinsey Global Institute

research on the world’s changing
urban landscape

ISBN: 978-0-9822524-9-9