2012 Number 3

Leading in the
21st century
 2012 Number 3

This Quarter

This issue of McKinsey Quarterly examines the changing

nature of leadership. Front and center are reflections
from six diverse global leaders—Josef Ackermann, formerly
of Deutsche Bank; Carlos Ghosn of Renault-Nissan;
Moya Greene of Royal Mail Group; Ellen Kullman of DuPont;
President Shimon Peres of Israel; and Daniel Vasella
of Novartis. They provide firsthand perspectives on how
different everything feels from just a decade ago: the
environment is more uncertain, the pace quicker and unre-
lenting, the forces at work more complex, and the scrutiny
of their actions more intense. The ways in which these leaders
confront today’s challenges are fascinating, and I have
tried, along with my colleagues Andrew Grant and Michelle
Horn, to amplify and extend their thinking about the
critical skills leaders need now.

One of the primary forces buffeting leaders today is the rapid

rebalancing of global economic activity from developed to emerging
markets—a tectonic shift that presents both leadership and
organizational challenges. In a series of articles, Martin Dewhurst,
Suzanne Heywood, and several of their colleagues in McKinsey’s
organization practice first frame the tensions facing global companies
as their footprints grow in emerging markets and then present
ideas for responding by improving the effectiveness of organizational
design and talent management. In addition, IESE Business School
professor Pankaj Ghemawat, an alumnus of McKinsey’s London
office, debunks some common myths about what it means to create
good global leaders.

Uncertain times place a premium on strategic leadership as

companies seek to stay ahead of emerging opportunities, respond
quickly to unexpected threats, and make timely decisions. In
“Managing the strategy journey,” my colleagues Chris Bradley,
Lowell Bryan, and Sven Smit suggest that companies can respond
more effectively to rapid change by boosting the frequency
of their strategic dialogue while broadening the group of senior
executives engaged in it. At many companies, expanding the
strategic-leadership team means some executives will need help
honing their skills as strategists. In “Becoming more strategic:
Three tips for any executive,” Michael Birshan and Jayanti Kar
offer some advice on how to do so. Harvard Business School
professor Cynthia Montgomery also weighs in, distilling more than
three decades of experience to describe the role of strategists as
true business leaders.

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

in uncertain times. We hope that the depth and breadth of content in
this issue of the Quarterly provide food for thought and actionable
advice as the need for leaders with the right mix of skills, character,
and courage continues to increase.

Dominic Barton
Global managing director,
McKinsey & Company
 On the cover
Features
The age of the strategist
50 Managing the
strategy journey
Chris Bradley, Lowell Bryan,
and Sven Smit
Regular strategic dialogue involv-
ing a broad group of senior executives
can help companies adapt to the
unexpected. Here’s one company’s story,
and some principles for everyone.
30 Leading in the
21st century
Dominic Barton, Andrew Grant,
and Michelle Horn
Today’s volatile environment asks
tough new questions of those at the top.
Learn how six global leaders are
confronting the personal and profes-
sional challenges, and read further
reflections from McKinsey’s managing
director. Featuring commentary by:
• Josef Ackermann, former CEO of
Deutsche Bank
• Carlos Ghosn, CEO of Renault-Nissan
• Moya Greene, CEO of Royal Mail
Group
• Ellen Kullman, CEO of DuPont
• Shimon Peres, president of Israel
• Daniel Vasella, chairman of Novartis
60 Becoming more
strategic: Three tips
for any executive
Michael Birshan and Jayanti Kar
You don’t need a formal strategy
role to help shape your organization’s
strategic direction. Start by moving
beyond frameworks and communica-
ting in a more engaging way.
67 How strategists
lead
Cynthia A. Montgomery
A Harvard Business School professor
reflects on what she has learned
from senior executives about the unique
value that strategic leaders can bring
to their companies.
 Features
Lifting the effectiveness of global organizations

76 The global 92 How

company’s multinationals can
challenge attract the
Martin Dewhurst, Jonathan Harris, talent they need
and Suzanne Heywood
Martin Dewhurst, Matthew Pettigrew,
As the economic spotlight shifts to and Ramesh Srinivasan
developing markets, global companies
need new ways to manage their Competition for talent in emerging
strategies, people, costs, and risks. markets is heating up. Global
companies should groom local
highfliers—and actively encourage
more managers to leave home.
81 Organizing
for an emerging
world
100 Developing
global leaders
Toby Gibbs, Suzanne Heywood,
and Leigh Weiss Pankaj Ghemawat

The structures, processes, and Companies must cultivate leaders for

communications approaches of global markets. Dispelling five
many far-flung businesses have been common myths about globalization
stretched to the breaking point. Here is a good place to start.
are some ideas for relieving the strains.

Departments

7 McKinsey on the Web 110 Picture This

Highlights from our digital Diverse economies, common
offerings pain points

8 Idea Exchange 132 Extra Point

Readers mix it up with authors What keeps marketers up
of articles from McKinsey Quarterly at night
2012 Number 2
 Leading Edge Applied Insight

10 Parsing the growth Spotlight on marketing

advantage of emerging-
market companies
113 Measuring marketing’s
Yuval Atsmon, Michael Kloss, worth
and Sven Smit
David Court, Jonathan Gordon,
Surprisingly little of their edge is
and Jesko Perrey
attributable to starting from a smaller
revenue base. They also seem to invest You can’t spend wisely unless you
more, allocate resources more fluidly, understand marketing’s full
and spot fast-growing segments. impact. Executives should ask five
questions to help maximize the
bang for their bucks.
15 Get ready for China’s
mainstream consumers
119 Five ‘no regrets’
Yuval Atsmon and Max Magni
moves for superior customer
They will dominate the market by engagement
2020—and hold the key to growth for
Tom French, Laura LaBerge,
many companies.
and Paul Magill
Customers are demanding very
19 Battery technology different kinds of relationships with
charges ahead companies. Here are some ways to
Russell Hensley, John Newman, jump-start customer engagement across
and Matt Rogers your organization.

New research suggests that the

price of lithium-ion batteries could
fall dramatically by 2020, creating 126 Agile operations for
conditions for the widespread adoption
volatile times
of electrified vehicles in some markets.
Mike Doheny, Venu Nagali,
and Florian Weig
23 Why bad multiples happen
By improving how risk is measured—
to good companies
and managed—in global operations,
Susan Nolen Foushee, Tim Koller, companies can adapt to changing
and Anand Mehta conditions faster than competitors.
A premium multiple is hard to come
by—and harder to keep. Executives
should worry more about improving
performance.

26 Industry focus
Selected research and analysis from
leading sectors: financial services,
consumer products, and information
technology.
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 8

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

Demystifying social media

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

What about B2B?

Jeff Marsico
Executive vice president, Kafafian Group, Parsippany, NJ

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

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

The authors respond:

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

Move beyond marketing

Hareesh Tibrewala
Joint CEO, Social Wavelength, Mumbai

“This article looks at social media from a brand communication and sales
perspective. But social media can also be used for gathering real-
time research, as well as for creating solutions in HR, product develop-
ment, and investor management. It is no longer about how your CMO
uses social media. It is about: ‘Is your organization social-media ready?’”

The authors respond:

“Great push, Hareesh. The framework to monitor, respond, amplify, and
lead need not be only about marketing, or even about customer life-cycle
management—although those are the uses we illustrated in this article.
In addition, social media need not be limited to those outside the institution.
The use of enterprise social networks such as Chatter, for example, illus-
trates your point—for some types of employees, a well-implemented Chatter
program can reduce internal e-mail traffic by 30 percent.”
 9

The executive’s guide to better listening

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

Finding a balance
Ashish Chandra
Gaithersburg, Maryland

“Asking questions and challenging assumptions can sometimes

create more confusion than clarity. Is there a way to find the subtle
line between too many questions and too few?”

The author responds:

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

Listen to the introverts

Pearl Zhu
President, Brobay Corporation, Sunnyvale, CA

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

skills, I think most organizations need a better understanding of
how different people listen. Most leaders are extroverts, but introverts
are part of these organizations as well.”

The author responds:

“How managers listen very much shapes an organization’s culture. In healthy
organizations, managers make a concerted effort to get input from the
less talkative among them. In meetings with multiple participants, if I detect
that someone seems quiet, I specifically ask that individual to comment.
Everyone should have his or her say. There is another side to that contract—
no matter how introverted a person is, no one gets a pass on contributing
to the problem solving at hand.”
10 2012 Number 3 Research, trends, and emerging thinking
Leading Edge

10 19 26
Parsing the growth Battery technology Industry focus:
advantage of charges ahead
Financial services
emerging-market
companies 23 Consumer products
Why bad multiples
15 happen to Information technology
Get ready for good companies
China’s mainstream
consumers

Parsing the growth

advantage of emerging-
market companies
Yuval Atsmon, Michael Kloss, and Sven Smit

Surprisingly little of their edge is attributable to starting from a smaller revenue

base. They also seem to invest more, allocate resources more fluidly, and spot fast-
growing segments.

Leaders of multinational companies tion for The Granularity of Growth.2 We

are by now well aware of the growth poten-
tial that emerging-market consumers
represent, an opportunity that we estimate
could exceed $20 trillion annually by
the end of this decade.1 Many multina-
tional players, however, don’t seem
to be capturing that growth as well as
their emerging-market counterparts
are. That came to light last year as part
of ongoing research that began more
than five years ago and was the founda-
examined the growth rates of companies
headquartered in developed econo-
mies and compared them with those of
companies domiciled in emerging
markets, examining performance in both
developed and emerging markets.
One striking finding was that companies
headquartered in emerging markets
grew roughly twice as fast as those domi-
ciled in developed economies—and
two and a half times as fast when both
 11

were competing in emerging markets however, to isolate the effects of size

that represented “neutral” turf, where
neither company was headquartered.
One potential explanation was that
the smaller size of emerging-market
business segments would explain a large
part of the outperformance. In essence,
emerging-market businesses were
growing faster from a smaller base. The
smaller base point was true: the
average revenue for business units of
emerging-economy companies in
our sample, at $3 billion, was less than
half of the $8 billion size for units
from developed-economy companies.
We’ve
Q3 2012
recently done further research,
Emerging Markets
Exhibit 1 of 3
on the performance gap. Specifically, we
compared the growth rates of $3 billion
and $8 billion firms within the developed-
market sample and found that $3 billion
companies grew at 10.7 percent annually
over the period we studied, while $8 bil-
lion companies grew by 7.3 percent. On
this basis, the smaller size of emerging-
market businesses, on average, accounts
for 3.4 percentage points of the growth
gap, or, at most, a quarter of the overall
13-percentage-point differential (Exhibit 1).
It is impossible to definitively disaggregate
the sources of the remaining growth
differential. However, the following three

Exhibit 1
Companies
Companies inin emerging
emerging markets
markets grew grew
faster faster thanbased
than those those based
iinn developed
developed economies—and
economies—and size explained
size explained only a fraction
only a fraction of
the differential.
of the differential.

Growth rate advantage for companies with emerging-market headquarters,

1999–2008,1 percentage points

Doing business on neutral turf

18.1
(emerging markets where company
is not headquartered)

Overall 13.2
(average across all segments)

Share attributable to company size2 3.4

1 Based on growth decomposition analysis of 720 companies and their geographic business segments,
analyzed on multiple time frames between 1999 and 2008.
2Based on difference in growth rate between 2 sets of developed-market companies that mirror the average
segment size of emerging- and developed-market companies in our sample.
 12 2012 Number 3

factors appear to be materially different
for these two classes of companies:
Higher reinvestment rates. Emerging-
market companies paid dividends at a
lower rate than developed-market
companies, returning only 39 percent
of earnings to shareholders, while
developed-market companies returned
close to 80 percent. They also rein-
vested excess cash to grow fixed assets
at a higher rate: 12 percent annually
versus 7 percent for developed-market
companies (Exhibit 2). The company
in our sample with the highest rate of
growth in fixed assets—roughly 30 per-
cent annually over the last decade—
was South Africa’s Mobile Telephone
Networks (MTN). For most of that
period, rapid asset growth accompanied
aggressive expansion in the com-
pany’s Internet and cellular services in
Africa and the Middle East. More recently,
the company has been moving into
mobile-money services, especially in
African countries that lack financial
infrastructure. This, too, has required
significant investment—for example,
$784 million on recent network expan-
sion in Ghana, and $1 billion on its
Nigerian network.
Agile asset reallocation. Additionally, we
found that on average, emerging-
market companies have been reallocating
capital toward new business opportu-
nities more dynamically than those head-
quartered in developed economies.
Companies in India, for instance, consis-
tently redeployed investments across
business units at a higher rate than US
companies.3 India’s Kesoram Indus-
tries is a notable example, shifting 80 per-
cent of its capital across business

Q3 2012
Emerging Markets
Exhibit 2 of 3
Exhibit 2

Low dividend payouts and high fixed-asset growth

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

Companies Average dividend Average cash as Fixed assets,1

headquartered in: payout rate,1 % % of sales1 compound annual
growth rate, %

Developed economies,
80 14 7
n = 303

Emerging economies,
39 17 12
n = 41

1Based on results for companies over multiple time frames between 1999 and 2008; fixed assets include net
additions to assets from inorganic activities.
 Leading Edge
units over the seven years we studied.
Up until 2005, the company focused
most of its capital expenditures on rayon
and cement. Beginning in 2007, how-
ever, it moved the majority of new invest-
ments to the tire business to capture
the double-digit growth in India’s auto-
mobile sector, which has been spurred
by improving highway infrastructure.
This type of strategic reallocation, our
research has shown, is correlated
with higher total returns to shareholders
over time.4 Potentially contributing to
agility was the fact that majority share-
holders comprised a much more
influential bloc among emerging-market
companies than at developed-economy
companies.5 Although we aren’t sug-
gesting this is the ideal governance model
under all circumstances, it does create
conditions for more effective shareholder
alignment and more rapid decisions.
Growth-oriented business models.
Emerging-market companies generally
serve the needs of fast-growing emerging
middle classes around the world with
lower-cost products. Developed-economy
companies tend to rely more on brand
recognition while targeting higher-margin
segments, which are relatively smaller
and thus less likely to move the needle on
the companies’ overall growth rates.
We found that across a number of product
segments—such as soft drinks, tele-
com services, and mobile phones—
emerging-market companies’ price points
were 10 to 60 percent below those of
developed-market counterparts. Even in
business segments such as construc-
tion equipment, emerging-market players
offered more products at lower prices.
13
Consistent with that growth model has
been the focus of many emerging-market
players on R&D investments aimed at
lower-cost products that fit developing-
market conditions (and sometimes
fuel “reverse innovation,” which can make
a dent in developed markets). While in
aggregate, emerging-market companies
file significantly fewer patents than their
developed-market counterparts, they
are starting to catch up (Exhibit 3), and
a few innovation leaders are emerging.
Chinese manufacturer Huawei, for exam-
ple, was among the world’s top five
companies in terms of international pat-
ents filed from 2008 to 2010. Huawei
had 51,000 R&D employees in 2010,
representing a stunning 46 percent of
its total head count, and placed them in
20 research institutes in countries
such as Germany, India, Russia, Sweden,
and the United States. Efforts such as
these could boost the intensity of global
competition.
As the locus of future growth continues
to shift to emerging markets, compa-
nies across regions should be thinking
systematically about strategies for
pursuing it. For many companies, a clear
understanding of where to place their
bets will be key, and some will need to
grapple with ways to overcome organi-
zational inertia. Business unit leaders, for
example, may resist cutting costs in
home markets in order to invest more in
emerging markets. Many companies,
meantime, still find it difficult to convince
senior executives to relocate to unfamiliar
locations and they may be reluctant
 14 2012 Number 3

Q3 2012
Emerging Markets
Exhibit 3 of 3

Exhibit 3

Developed-market companies have filed more patents, but

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

Companies Average number of patents Growth rate of patents filed,

headquartered in: filed in 2010 2000–10, CAGR,1 %

In emerging In developed In emerging In developed Overall

economies economies economies economies

Developed
153 547 9 4 5
economies

Emerging
18 71 22 14 16
economies

1Compound annual growth rate; excludes domestic markets.

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

4 See Stephen Hall, Dan Lovallo, and Reinier

to move teams en masse to emerging
areas. In the quest to direct resources
to regions with the greatest growth
potential, it might be time for global
players to start thinking more like
emerging-market companies.
Musters, “How to put your money where your
strategy is,” mckinseyquarterly.com, March 2012.
5 In emerging-market companies, the median
stake held by a majority shareholder was 40
percent, while at developed-market companies it
was 10 percent.

1 See David Court and Laxman Narasimhan,

The authors would like to acknowledge

“Capturing the world’s emerging middle class,”

the contribution of Eric Matson to the
mckinseyquarterly.com, July 2010. development of this article.
2 See Mehrdad Baghai, Sven Smit, and Patrick
Viguerie, The Granularity of Growth: How Yuval Atsmon is a principal in McKinsey’s
to Identify the Sources of Growth and Drive Shanghai office, Michael Kloss is a
Enduring Company Performance, Hoboken, NJ:
Wiley, 2008; and Sumit Dora, Sven Smit, and
director in the Johannesburg office, and
Patrick Viguerie, “Drawing a new road map for Sven Smit is a director in the Amsterdam
growth,” mckinseyquarterly.com, April 2011. office.
3 Median index of capital expenditure reallocation
of companies in India was 42 percent during
Copyright © 2012 McKinsey & Company. All
the period from 2003 to 2010, versus 35 percent
rights reserved. We welcome your comments
for companies in the United States from 1998
on this article. Please send them to quarterly_
to 2005.
comments@mckinsey.com.
 Leading Edge
Get ready for China’s
mainstream consumers
Yuval Atsmon and Max Magni
They will dominate the market by 2020—and hold the key to growth for
many companies.
It’s no easy task to understand the evo-
lution of Chinese consumer profiles
and spending patterns—growth is rapid;
so is change in the Chinese way of
life; and vast economic and demographic
differences pervade the country. New
McKinsey research suggests that these
differences are set to become more
pronounced, creating new opportunities
and fresh challenges for the many
global companies targeting China as a
source of growth in the years ahead.
Since 2005, we have conducted annual
consumer surveys in China, interviewing
more than 60,000 people in upward
of 60 cities and tracking their incomes
and buying behavior.1 This year, we
also looked forward and tried to paint a
picture of the Chinese consumer in
2020. The most important trend over the
next decade should be dramatic
growth in the number of households that
aren’t yet affluent but are significantly
better off than the value-oriented house-
holds that currently predominate in China.
15
The mainstream takes charge
Today, this not-quite-affluent segment
is small, representing only 6 percent
of the urban population. A surge in house-
hold incomes, though, should propel
the group’s numbers to 51 percent of it
by 2020 (exhibit)—so large, in fact,
that these households will be in the main-
stream. To be sure, the annual incomes
of mainstream Chinese households, from
$16,000 to $34,000 (106,000 to 229,000
renminbi), will seem low by the standards
of developed countries. In the United
States, more than half the population lives
in households with incomes greater
than $34,000 a year.
But this new buying class will have
enough disposable income and the sheer
numbers—nearly 400 million people
in 167 million households—to become
the standard setters for consumers
across China. Today, about 85 percent
of the households with mainstream
incomes live in China’s 100 wealthiest
cities; in the next 300 wealthiest, only
 16 2012 Number 3
Q3 2012
China consumer
Exhibit 1 of 1

Exhibit

The ranks of China’s mainstream consumers will grow

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

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

2000–20, %
100% = $147 $226 $328
million million million Total = 4.1

0 2
1 6 6 Affluent 20.4
(>$34,000)

63 51 Mainstream 26.6
($16,000–$34,000)

82

36 Value 1.2
36 ($6,000– $15,999)

10 7 Poor –3.8
2000 2010 20203 (<$6,000)

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

2CAGR = compound annual growth rate.
3Forecast.

10 percent of consumers belong to this clothes. By 2020, this older group

group. That figure should triple, to
30 percent, by 2020. Many will be able
to afford the flat-screen televisions,
family cars, small luxury items, and over-
seas travel now confined largely to
people from the wealthiest locales, such
as Shanghai and Shenzhen.
The natural evolution of China’s elderly
segment (people 55 and over) should
reinforce the growth of the mainstream
and of spending on discretionary
items such as travel, leisure, and nice
will include a growing number of people
whose life experience coincided with
the rapid economic growth that began
with market-oriented reforms in the
late 1970s and early 1980s. People 55 to
65 years old in tier-one cities currently
allocate only 7 percent of their spending
toward apparel. But that figure rises
to 13 percent among tomorrow’s elderly
(45- to 54-year-olds)—and they don’t
look terribly different from today’s 34- to
45-year-olds, who devote 14 percent
of their spending to apparel.
 Leading Edge
Changes in social norms are already leading
younger, wealthier consumers to feel
greater confidence about expressing themselves
through their purchases.
Marketing unchained
To date, most multinational companies
operating in China have chosen one
of two marketing approaches. The first,
targeting a relatively small universe
of mainstream and affluent consumers,
allows companies to sell many of
the same products they market globally
and to deploy the same business model.
The alternative is to focus on China’s
value segment, an approach that offers
companies access to many more
buyers today: greater than 80 percent
of urban households, which will prob-
ably fall by 2020 to a still-substantial
35 or so percent, representing more than
300 million people. Focusing on the
value segment requires companies to
adapt their global business models
so they can sell cheaper products at
lower margins.
The mainstream market’s rapid growth will
give companies another possibility: to
introduce higher-quality, higher-margin
products to a vast new group of con-
sumers. The mainstream segment’s expan-
sion will fuel increases in spending
The full report on which this article is based, Meet the 2020 Chinese consumer,
can be found on the McKinsey Greater China Web site, at mckinseychina.com.
17
on discretionary categories such as
personal items and recreation, which
according to our research will grow
by more than 13 percent annually in
the years ahead. As the incomes of
mainstream buyers rise, they will aspire
to improve themselves by trading up
to pricier versions of items they already
have or by acquiring even more branded
products—much as consumers in the
West do.
As larger numbers of people enter the
mainstream, their purchasing behav-
ior will become even more discerning and
individualistic. These consumers will
be able to afford higher-priced goods and,
with broader buying experience and
product knowledge, will become more in
touch with their needs and the prod-
ucts that can meet them. Changes in
social norms are already leading younger,
wealthier consumers to feel greater
confidence about expressing themselves
through their purchases. Combined,
these trends should strengthen the often-
weak Chinese sense of brand loyalty.
More important, they will wean main-
18 2012 Number 3

1 The latest survey, carried out in 2011, gauged

stream buyers off of broad-based brands
and lead them toward those tailored
to their own needs and emotions. The
danger for established brands is that
younger ones could leapfrog past them
with successful emotional appeals.
Incumbents will therefore face a critical
choice between investing at scale
behind their current brands or shifting
strategies soon enough to create a
portfolio of more differentiated offerings.
Ultimately, with the world’s largest group
of mainstream consumers, China could
become the leading test bed for new mar-
keting strategies. For global companies,
the challenge will be to build and sustain
a position to capture this ferment and
growth. To do so, some organizations will
have to shift resources and capabilities
to China for sharper insights on ground-
Chinese consumers’ attitudes and spending
behavior for about 60 product types and 300
brands. The respondents—representing a wide
range of incomes, ages, regions, and cities—
accounted for 74 percent of China’s total GDP and
47 percent of the total population.
Yuval Atsmon is a principal in McKinsey’s
Shanghai office, and Max Magni
is a principal in the Hong Kong office.
Copyright © 2012 McKinsey & Company. All
rights reserved. We welcome your comments
on this article. Please send them to quarterly_
comments@mckinsey.com.
For additional thinking on the relationship
between organizational issues and
emerging-market strategy, see “Lifting the
effectiveness of global organizations,”
on page 74.

level trends. They may also have to vest

more decision-making authority in China-
based executives, who are closer to the
action and better able to respond to swift
changes in the marketplace.
 Leading Edge
Battery technology
charges ahead
Russell Hensley, John Newman, and Matt Rogers
New research suggests that the price of lithium-ion batteries could fall dramatically
by 2020, creating conditions for the widespread adoption of electrified vehicles in
some markets.
Most experts agree that prices for energy
storage will fall in coming years, but
disagree over how far and how quickly.
This is an important debate because
a significant drop in battery prices could
have wide-ranging effects across
industries and society itself. In particular,
cheaper batteries could enable the
broader adoption of electrified vehicles,
potentially disrupting the transpor-
tation, power, and petroleum sectors.
To inform the debate, we developed a
detailed, bottom-up “should cost” model
that estimates how automotive lithium-
ion battery prices could evolve through
2025. Our analysis indicates that the
price of a complete automotive lithium-
ion battery pack could fall from $500
to $600 per kilowatt hour (kWh) today to
about $200 per kWh by 2020 and
to about $160 per kWh by 2025.1 In the
United States, with gasoline prices
at or above $3.50 a gallon, automakers
that acquire batteries at prices below
$250 per kWh could offer electrified vehi-
cles competitively, on a total-cost-of-
ownership basis, with vehicles powered
by advanced internal-combustion
engines (exhibit).2
19
Of course, the pace of adoption will hinge
on a range of factors in addition to bat-
tery prices. Macroeconomic and regula-
tory conditions, the performance and
reliability of the vehicles, and customer
preferences are important. And the
rate at which automakers realize lower
battery prices could vary by three
to five years—the length of a product-
development cycle—depending on
the investment and power train–portfolio
strategies these companies pursue.
Moreover, the emergence of cheaper
batteries will probably spur further inno-
vation in other technologies, such
as internal-combustion engines. These
advances would increase the proba-
bility that the broader economics of trans-
portation will be reshaped over the
next decade—no matter which tech-
nology prevails.
The path to savings
The model we developed, disaggregating
the price of automotive battery packs
into more than 40 underlying drivers, 3
accounts for expected changes in
areas such as materials technology and
manufacturing, as well as overhead
 20 2012 Number 3

costs and margins for various segments • Manufacturing at scale. Scale

of the value chain. This component-by-
component perspective on future battery
prices rests on a foundation of primary
research, including interviews with experts
in industry, academia, and government.
Our work suggests that three factors
could accelerate the day when electrified
vehicles become more compelling
Q3 2012
alternatives—at least on a total-cost-of-
EV batterybasis—to vehicles powered
ownership
Exhibit 1 of 1
by internal-combustion engines.
effects and manufacturing productivity
improvements, representing about
one-third of the potential price reduc-
tions through 2025, could mostly
be captured by 2015. Savings will come
largely from improving manufac-
turing processes, standardizing equip-
ment, and spreading fixed costs
over higher unit volumes. New plants
could therefore be significantly
more productive than those in opera-
tion before 2010–11.

Exhibit

The interaction of battery and fuel costs will determine the

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

Electrified vehicles’ projected competitiveness with internal-combustion-engine (ICE)

vehicles, based on total cost of ownership1 (US example)

Fuel price, $ per gallon 2011 average

6.00
Battery-electric PHEVs2 are
5.50 vehicles are competitive
competitive
5.00

4.50 Hybrid-electric vehicles

are competitive
4.00
2011 average
3.50
Recent US
3.00 conditions
ICE vehicles are competitive
2.50

2.00
150 200 250 300 350 400 450 500 550 600 650 700
Battery prices, $ per kilowatt hour (kWh)

1Assumes 240 watt hours per mile (as may be achieved with lightweight, efficient air conditioning)
compared with today’s 305–322 watt hours per mile.
2Plug-in hybrid-electric vehicles.

Source: US Energy Information Administration; McKinsey analysis

 Leading Edge
Electric-vehicle basics
T hroughout this article, the term “electric
vehicle” actually describes the all-electric
sedan of the future. At present, vehicles using
electricity (electrified vehicles) come in
a variety of forms—battery-electric vehicles,
plug-in hybrid-electric vehicles, and hybrid-
electric vehicles.
We use the term “price” (that is, costs plus
margins) to reflect what automakers could
pay—in other words, we take into account
the margins needed to support reinvestment
economics to achieve the growth rates
assumed in our model. Exceptions include
some instances in which the term “cost”
is used colloquially (for instance, total cost of
ownership). Otherwise, the use of cost
(such as manufacturing cost) does not assume
any margins.
• Lower components prices. Reductions
in materials and components prices,
representing about 25 percent of the
overall savings opportunity, could
mostly be captured by 2020. Under
competitive pressure, EBIT4 margins
could fall to half of today’s 20 to
40 percent. Component suppliers could
reduce their costs dramatically by
increasing manufacturing productivity
and moving operations to locations
where costs are optimal.
• Battery capacity-boosting
technologies. Technical advances
in cathodes, anodes, and electrolytes
could increase the capacity of
batteries by 80 to 110 percent by
21
2020–25. These efforts represent
40 to 45 percent of the identified price
reductions. New battery cathodes
that incorporate layered–layered struc-
tures5 eliminate dead zones and
could improve cell capacity by 40 per-
cent. Manufacturers are developing
high-capacity silicon anodes that could
increase cell capacity by 30 percent
over today’s graphite anodes. And
researchers are developing cathode–
electrolyte pairs that could increase
cell voltage to 4.2 volts, from 3.6 volts,
by 2025, thus increasing cell capac-
ities by 17 percent over present-
day standards—and potentially by
much more.
Many innovations that enable price reduc-
tions for automotive lithium-ion bat-
teries will actually be realized first in other
sectors, particularly consumer elec-
tronics, where global demand for cheaper
and better-performing batteries is intense.
Changing industry dynamics
Automakers will need to balance their
evaluation of the pace and trajectory
of declining energy storage prices against
their views on how other power train
technologies will mature. Scenarios fea-
turing a relatively quick decline in bat-
tery prices and flat or rising petroleum
prices favor battery-electric-vehicle
(BEV) strategies, as the exhibit indicates.
Those anticipating slower declines
in battery prices, as well as increases in
petroleum prices, favor plug-in hybrid-
electric vehicles (PHEV) or, perhaps,
today’s hybrid-electric vehicles (HEV).
Given the length of product-development
22 2012 Number 3
cycles, automakers may hedge their risks
by investing in a range of technologies.
Other sectors could face disruptions as
well—particularly electric power and
petroleum, where the emergence of inex-
pensive energy storage could under-
mine the profitability of capital-intensive,
long-lived assets. Power companies,
for instance, could face challenges if low-
cost battery storage enables the wider
use of distributed generation or if the
adoption of electrified-vehicle charging
alters patterns of demand in some mar-
kets. Similarly, the race between elec-
trified vehicles and advanced internal-
combustion technology could accelerate
the reduction in demand for transport
fuels. Refiners of liquid fuels in developed
markets would have to rethink their prod-
uct and customer portfolios.
These, of course, are only early indicators
of possible market developments. But
given the path to substantially lower bat-
tery prices, which are now coming into
view, executives should be considering
bold actions to capitalize on one of
the biggest disruptions facing the trans-
portation, power, and petroleum sec-
tors over the next decade or more.
1 These figures represent the price per effective
kWh, assuming batteries with 70 percent depth
of discharge. The price of battery packs includes
the price of battery cells, battery-management
systems, and packaging. Unless otherwise noted,
values here are reported in real dollars, indexed
to 2011.
2 We used a five-year total-cost-of-ownership
model that considers the prices of vehicles
with advanced internal-combustion engines
(in other words, vehicles that satisfy future
US government fuel economy standards) and
electrified vehicles adapted to make efficient
use of on-board energy storage (using 150 watt
hours of electricity per kilometer traveled). Note
that electrified vehicles offer features, including
better acceleration and noise levels, for which
customers may be willing to pay more.
3 The model builds on work initially done by
Argonne National Laboratory, a US Department
of Energy laboratory. For more information,
see www.cse.anl.gov/batpac.
4 Earnings before interest and taxes.
5 L ayering manganese crystals using
nanotechnology.
The authors would like to acknowledge the
significant contribution of Mark Shahinian to
the development of this article.
Russell Hensley is a principal in
McKinsey’s Detroit office; John Newman is
an associate principal in the San Francisco
office, where Matt Rogers is a director.
Copyright © 2012 McKinsey & Company. All
rights reserved. We welcome your comments
on this article. Please send them to quarterly_
comments@mckinsey.com.
 Leading Edge
Why bad multiples
happen to good
companies
Susan Nolen Foushee, Tim Koller, and Anand Mehta
A premium multiple is hard to come by—and harder to keep. Executives should
worry more about improving performance.
Earnings multiples—particularly price-
to-earnings ratios—are a common
shorthand for the way the stock market
values an enterprise. The media
often use these metrics to make quick
comparisons between companies.
Investors and analysts use them to talk
about how to value companies.
CEOs often worry that a low multiple
means that investors don’t understand
the true value of their companies.
“We have great growth plans,” these chief
executives say, or “We’re the best
company in the industry, so we should
have a substantially higher earnings
multiple.” Finance theory does suggest
that companies with higher expected
growth and returns should have higher
earnings multiples. And the theory
held true when we analyzed large samples
of companies across the US economy.
Within mature industries, however, our
analysis showed that multiples vary little
and are largely outside management’s
control. That’s probably because the rev-
enue growth of companies in the same
23
industry tends to converge and returns on
invested capital (ROIC) to decline
toward the cost of capital, regardless of
historical performance. Investors
therefore have difficulty, on average,
predicting which companies will
outperform their competitors.
Understanding the investor view
A closer look at the US consumer-
packaged-goods (CPG) industry bears
out these findings. For our analysis,
we used a multiple based on enterprise
value—EV/EBITA.1 It’s used by most
sophisticated investors and bankers who
compare companies with their peers
and avoids some distortions of the ubiq-
uitous P/E ratios.2
From 1965 to 2010, the difference in
EV/EBITA multiples between top-
and bottom-quartile CPG companies
was, for the most part,3 less than
four points, even though the fairly diverse
industry includes companies that
manufacture and sell everything from
household cleaners to soft drinks. When
we examined peers more closely
 24 2012 Number 3

matched at a given moment, we found
even narrower ranges: in a sample
of branded-food companies, for instance,
EV/EBITA multiples ranged from
10.6 to 11.4. (Outside the CPG sector, we
see similar patterns—for example,
the range for medical-device companies
was 8.4 to 9.7.)
Again, one explanation for this narrow
range of multiples is the tendency
of investors to assume that all peers will
Q3
grow 2012
at roughly the same rate. Whether
Multiples
or not executives think this idea is
Exhibit 1 ofthe
reasonable, 1 evidence is on the side
of investors. Companies that are
now growing faster than their peers aren’t
likely to do so for the next five years.
Throughout the economy, we’ve found
that revenue growth across com-
panies generally converges (exhibit).
We also analyzed the CPG industry’s
ROIC. Here, too, finance theory predicts
that companies with higher returns on
capital than their peers should also have
higher multiples, but in fact they don’t.
As with revenue growth, investors may
assume that incremental returns on
capital across the industry will converge
or that competition will bring them
down toward the cost of capital.4 The

Exhibit

For most companies, sustaining stronger revenue growth

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

US nonfinancial companies1 grouped by comparable revenue growth

at time of portfolio formation

Median portfolio growth, %

35
>20%
30

25

Growth 20
rate at 15–20%
portfolio 15
formation 10–15%
10
5–10%
5

0
<5%
–5
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Years since inception of portfolio

1Companies with inflation-adjusted revenue ≥$200 million that were publicly listed from 1963–2000. We divided
companies into 5 portfolios based on their growth rates at the midpoint of each decade (1965, 1975, 1985, and 1995).
We then aligned the portfolios chronologically from Year 0 to Year 15 and compared their median growth rates.
Source: Standard & Poor’s Capital IQ Compustat; McKinsey analysis
 Leading Edge
experience of US household product
manufacturer Church & Dwight shows this
dynamic at work. Over 15 years, the
company grew, both organically and
through acquisitions, as it effected
a turnaround and reshaped its business
portfolio. Church & Dwight’s EBITA
margins grew by 13.9 percentage points,
compared with only 2.5 for the median
company in the sector. Its total returns to
shareholders beat the sector and the
S&P 500 handily—yet its earnings multiple
fell to 10, from 16. This likely happened
because its multiple had been high
at the outset, despite low earnings, sug-
gesting that investors had assumed
that earnings would gravitate toward the
sector’s median.
Managing beyond multiples
Many executives who worry that the
multiples of their companies are too low
compare them with the wrong peers.
The only relevant comparable companies,
for the purpose of multiples analysis,
are those that compete in the same mar-
kets, are subject to the same macro-
economic forces, and have similar levels
of growth and returns on capital.
Rather than fixating on multiples, exec-
utives would be better off focusing
on the levers they can influence—the
amount of value they create through
growth, margins, and capital productivity.
That approach will improve a com-
pany’s share price, even if it won’t neces-
sarily generate a higher earnings mul-
tiple, given the trends we have outlined.
Finally, executives should have realistic
expectations about how high investor
communications can raise share prices
25
above those of peers. Although the idea
that jawboning can help may seem
warranted—for example, in cases when
investors truly don’t seem to grasp
the value in a company’s product pipeline
or geographic-expansion plans—there are
limits to how much can be accom-
plished in this way. Eventually, investors
as a group will probably revert to their
perceptions of convergence. Not that com-
panies should abandon communica-
tions entirely; communicating with the
right investors so that they under-
stand the performance and strategies
of a company can at least keep its
share price aligned with that of its peers.
1 Enterprise value (EV) to earnings before interest,
tax, and amortization (EBITA).
2 When one company is financed partly with debt
and another only with equity, the one with the
higher debt will have a lower P/E ratio, all else
being equal, even if the two companies have the
same ratio of enterprise value to earnings. For a
further discussion of enterprise value multiples,
see Richard Dobbs, Bill Huyett, and Tim Koller,
Value: The Four Cornerstones of Corporate
Finance, Hoboken, NJ: Wiley, 2010, pp. 241–44.
3 In the late 1990s, the multiples of the largest
CPG companies rose during the overall valuation
boom for big companies.
4 For a more complete discussion of the
relationship between multiples and ROIC, see
the extended version of this article, from
McKinsey on Finance, Number 43, “Why bad
multiples happen to good companies,” on
mckinseyquarterly.com.
Susan Nolen Foushee is a consultant
in McKinsey’s New York office, where
Tim Koller is a principal and Anand
Mehta is a consultant.
Copyright © 2012 McKinsey & Company. All
rights reserved. We welcome your comments
on this article. Please send them to quarterly_
comments@mckinsey.com.
26 2012 Number
2012
3 Number 3

Industry focus
Selected research and analysis from leading sectors

Financial services

Small enterprises offer large potential

for global banks
Mutsa Chironga, Jacob Dahl, and Marnus Sonnekus

Emerging markets are poised to account for
60 percent of global banking-revenue
growth over the next decade. To fully part-
icipate in this growth, banks will need
to reach micro-, small, and medium-sized
enterprises, which typically earn less
than $3.5 million in revenues, fall outside
traditional bank networks, face risks
that are difficult to analyze, and often are
under- or even unbanked.
banking) and introduce advanced rating
techniques geared to small borrowers.
To identify the opportunities and challenges,
we clustered these markets along two
dimensions: credit bureau coverage and
bank branch density (which are proxies
for market access and the ease of assessing
risk). Four market types emerge, each
with different growth opportunities, chal-
lenges, and strategic options.

Our research, however, suggests that Mutsa Chironga is an associate principal

banking revenues from such businesses in McKinsey’s Johannesburg office,
could grow to $367 billion a year, from where Jacob Dahl is a director and
$150 billion, as banks deploy innovative Marnus Sonnekus is a consultant.
ways of reaching them (such as mobile

For a more complete discussion of this research, download the full report,
Micro-, small and medium-sized enterprises in emerging markets: How banks
can grasp a $350 billion opportunity, on mckinsey.com.
Q3 Industry round-up
MSME Leading Edge 27
Exhibit 1 of 1

Micro-, small, and medium-sized enterprises in emerging markets

represent both opportunities and challenges for global banking.

Credit bureau coverage,1 % of adults

100
Malaysia Argentina
90 Poland
Cluster II South Korea
80 Cluster IV
Mexico Czech
70
China Republic
Colombia
60
Brazil
50
South Africa
40 Kuwait Turkey
Chile
Peru Thailand
30 Cluster III
Indonesia
20 Vietnam
India Saudi Arabia United Arab
Cluster I Russia Egypt
10 Emirates
Philippines Venezuela
Nigeria
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 30 31 32 33

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

Increase in share of population with access Circle size indicates relative

to financial services, 2006–10 volume of banks’ current revenues
from small and medium-sized
>3% 1.5–3% <1.5% enterprises, 2010

Cluster I: Micro-, small, and medium-sized Cluster III: Branch banking is good, but credit
enterprises are hard to reach and risk manage- bureau coverage is sparse. Banks will need to
ment is difficult. Radical solutions will be required. innovate in risk management.

Cluster II: Credit bureau coverage is good, but Cluster IV: Markets score well on both credit
distribution is poor. Banks should exploit direct bureau and bank branch coverage.
channels such as Internet and mobile banking.

1Some countries with smaller revenue pools are not shown here. For a full display of countries, see Micro-, small
and medium-sized enterprises in emerging markets: How banks can grasp a $350 billion opportunity, available
on mckinsey.com.
Source: International Monetary Fund (IMF) financial-access survey 2006–10; World Bank’s Doing Business
database; McKinsey analysis
28 2012 Number 3

Consumer products

Better performance from locally

deployed marketing
Katya Fay, Carl-Martin Lindahl, and Monica Murarka

As companies venture into new global To be sure, a company’s organizational

markets for growth, they continually experi- design must support its specific strategy,
ment with organizational design. A peren- so locally focused marketing might not
nial question is how to deploy marketing be right for every company, and there’s no
resources: whether it’s better to have “boots single blueprint for marketing effective-
on the ground” in local markets or to ness or efficiency. That said, companies
centralize resources and gain the benefits in other consumer-facing industries, such
of scale. Our analysis of more than 40 as consumer electronics or financial
Q3the2012
of world’s largest consumer-packaged- services, may want to investigate whether
Ind snapshot:
goods companiesCPG org that those
indicates these findings hold true for them.
Exhibit
with 1 ofdeployed
a locally 1 marketing function,
1 Centralized resources specializing in specific
supported by a few larger-scale global
marketing subfunctions, such as promotions or
or regional centers of excellence,1 outper-
consumer insights.
formed more centralized peers in both
effectiveness and efficiency (exhibit). Local
Katya Fay and Monica Murarka are
marketers benefit from a close-up view
consultants in McKinsey’s Chicago office,
of consumers andcompanies
Fast-growing can respondhave
quicklymore
to locally deployed Lindahl is a principal.
where Carl-Martin
their changingorganizations.
marketing needs and preferences.

% of marketing Companies’ marketing resources

employees

At country level Efficiency: Effectiveness:

revenue per marketing organic revenue growth
At regional or employee vs underlying
global level market growth rate

11
Companies with $14.5 +2.8%
large portion of million
locally deployed
resources 89

Companies with
large portion of $10.8 +0.6%
centrally deployed 49 51 million
resources

For additional research and insights, see Designing a winning consumer goods
organization, on mckinsey.com.
 Leading Edge 29

Information technology

When company IT is ‘consumerized’

Lisa Ellis, Jeffrey Saret, and Peter Weed

The near ubiquity of smartphones and the This consumerization of corporate IT

growing use of tablet devices are changing seems likely to raise tensions: while many
the corporate IT landscape, as employees employees gain access through password-
increasingly use their own mobile devices protected company Web sites and
for workplace tasks. Many companies, applications, 50 percent of IT departments
of course, have supported and even encour- restrict usage in some fashion, since
aged employees to work remotely and the devices increase security risks and
have2012
Q3 issued corporate smartphones and often do not mesh with the corporate
enabled intranet access from home com- IT architecture. However, 88 percent of
Ind snapshot: BYOD
puters. But tech-savvy workers are pushing employees believe the restrictions will
Exhibit 1 of 1
the boundaries. A McKinsey survey of ease, and most prefer a single device that
3,000 employees who use their own devices integrates work and personal uses.
for work shows they deploy them not
just for business calls and e-mail but also Lisa Ellis is a principal in McKinsey’s
to access employer IT applications Stamford office, where Jeffrey Saret is
and corporate intranets and for other work- a consultant; Peter Weed is an associate
Many employees use their personal tablet devices for a variety
related tasks (exhibit). principal in the Boston office.
of business-related tasks.

Device owners who perform business tasks on personal tablet,

size of word indicates relative %

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

Copyright © 2012 McKinsey & Company. All rights reserved. We welcome your comments on this
article. Please send them to quarterly_comments@mckinsey.com.
Artwork by Stefan Chinof
 31

Dominic Barton,
Andrew Grant, and
Michelle Horn

Leading
in the 21st century

Six global leaders confront the personal

and professional challenges of a new era of
uncertainty.

It is often said that the principles of great leadership are timeless,

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

To understand the leadership challenge of our volatile, globalized,

hyperconnected age more clearly, we recently initiated a series of
structured interviews with the leaders of some of the world’s
largest and most vibrant organizations. Excerpts from six of those
conversations appear below. The leaders—Josef Ackermann,
formerly of Deutsche Bank; Carlos Ghosn of Nissan and Renault;
Moya Greene of Royal Mail Group; Ellen Kullman of DuPont;
President Shimon Peres of Israel; and Daniel Vasella of Novartis—
represent a diverse array of viewpoints. All are grappling with
today’s environment in different ways. But the common themes that
emerged from these conversations—what it means to lead in an
32 2012 Number 3

age of upheaval, to master personal challenges, to be in the

limelight continually, to make decisions under extreme uncertainty—
offer a useful starting point for understanding today’s leader-
ship landscape.

After presenting the ideas of these leaders on leadership, we

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

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

Carlos Ghosn is the CEO and

chairman of the Renault-
Nissan Alliance. He has been the
CEO of Nissan since 2001
and the CEO of Renault since 2005.
Together, the two companies
produce more than one in ten cars
sold worldwide.
Leading in the 21st century 33

Moya Greene was appointed

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

Ellen Kullman has served as

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

Shimon Peres is the ninth and

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

Daniel Vasella has been chairman

of the Swiss pharmaceutical
company Novartis AG since 1999.
He served as the company’s
CEO from 1996 to 2010.
34 2012 Number 3

Leading in an age of upheaval

A convergence of forces is reshaping the global economy: emerging

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

Josef Ackermann: We experienced a tremendous shift in

the global balance of power, which manifests itself in our business.
In the 1980s, over 80 percent of Deutsche Bank revenues were
generated in Germany. In the mid-1990s, they still accounted for
about 70 percent. Today, Germany, despite its continuing eco-
nomic strength, stands for 38 percent of global revenues. Over the
years, people in our headquarters, in Frankfurt, started comp-
laining to me, “We don’t see you much around here anymore.” Well,
there was a reason why: growth has moved elsewhere—to Asia,
Latin America, the Middle East—and this of course had consequen-
ces on the time spent in each region.

Managing risk also has become much more complex for banks.
It’s not only market risk; there is more and more political and social
risk. Increasingly, financial markets are becoming political
markets. That requires different skills—skills not all of us have
acquired at university; how to properly deal with society, for
example, a stakeholder that has immensely grown in importance
since the financial crisis.

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

lighted by some kind of crisis. There are two kinds. There are
internal crises that arise because a company has not been managed
well. Then there are external crises, like the collapse of Lehman
Brothers or the earthquake in Japan or the flood in Thailand. In
Leading in the 21st century 35

that case, you are managing your company, and all of a sudden
there is this thing falling on you.

Business schools may prepare people to deal with internal crises.

But I think we need to be more prepared for external crises,
where it’s not the strategy of the company that is in question; it’s the
ability of leaders to figure out how to adapt that strategy.

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

we are living in such a volatile world—an age where every-
thing is leveraged and technology moves so fast. You can be rocked
by something that originated completely outside your area.

I think one of the reasons Nissan has been able to cope with
external crises better than some of our competitors is that we have
a more diverse, multinational culture. We don’t just sit around
waiting for the solution to come from headquarters. We are accus-
tomed to always looking around, trying to find out who has the
best ideas. Our people in the US talk to our people in Japan on an
equal level. We have a lot more reference points.

Ellen Kullman: These days, there are things that just come
shooting across the bow—economic volatility and the impact of
natural events like the Japanese earthquake and tsunami—at
much greater frequency than we’ve ever seen. You have to be able to
react very quickly. And the world is so connected that the feed-
back loops are more intense. You’ve got population growth and the
world passing seven billion people last year, and the stresses that
causes, whether it’s feeding the world, creating enough energy, or
protecting the environment. We matched our focus, our research
and development, and our capital expenditures up against megatrends
like these over the last five years. This is the future, so we need to
understand how our science relates to it.

Shimon Peres: The last two decades have witnessed the greatest
revolution since Genesis. States have lost their importance and
strength. The old theories—from Adam Smith to Karl Marx—have
lost their value because they are based on things like land, labor,
and wealth. All of that has been replaced by science. Ideas are now
36 2012 Number 3

more important than materials. And ideas are unpredictable.

Science knows no customs, no borders. It doesn’t depend on distances
or stop at a given point.

Science creates a world where individuals can play the role of the
collective. Two boys create Google. One boy creates Facebook.
Another individual creates Apple. These gentlemen changed the
world without political parties or armies or fortunes. No one
anticipated this. And they themselves did not know what would
happen as a result of their thoughts. So we are all surprised.
It is a new world. You may have the strongest army—but it cannot
conquer ideas, it cannot conquer knowledge.

Mastering today’s personal challenges

The rigors of leadership have prompted many leaders to think

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

Moya Greene: The first criterion is: do you love it? It’s a seven-
day-a-week job. I think that’s true for anyone in these roles.
If you don’t love the company and the people—really love them—
you can’t do a job like this.

I’m pretty energetic. I start at five in the morning. I don’t even think
about it anymore; the alarm goes off and I’m up. I go for a 30-minute
run. I do weight training three mornings a week. I try to eat well,
but not too much. I’m a big walker—that’s my favorite thing. I try to
get a good walk every weekend. I go on walking vacations.

1 For more on centered leadership, see Joanna Barsh, Josephine Mogelof, and Caroline
Webb, “How centered leaders achieve extraordinary results,” mckinseyquarterly.com,
October 2010.
Leading in the 21st century 37

I’ve usually got three or four books on the go. I’ve given up on novels.
I can’t get through them no matter how good they are; there’s
no way I’ll finish before there’s some kind of interruption. So I read
poetry now: the collected works of Ted Hughes, Emily Dickinson.
I’m working my way through Philip Larkin. You can take a Larkin
poem and read it on the bus in 15 minutes. The good ones stay
with you and will come back to you. That’s what I like about poetry:
you get a little shot of mental protein without a lot of time.

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

the next ten days: Berlin tomorrow, then Seoul, then Munich, then
Frankfurt, then Singapore, then the Middle East. I’m almost
constantly on a plane. With all this traveling, physical stamina has
become much more important.

I remember a time when after flying to Hong Kong you could take
a whole day off to recover. Today, right after landing you rush to
your first meeting. And maybe you already have a conference call in
the car on your way into town. You are lucky if you get enough
time to take a shower.

And of course, with all the new information technology, you are
constantly available, and the flow of information you have to manage
is huge; that has added to the pressure. You are much more exposed
to unforeseen shifts and negative surprises and you have to
make quick decisions and respond to or anticipate market movements
around the world. So you have to have a very stable psyche as well.
I see more and more people these days who just burn out.

I’m not a tech freak. I use my iPhone and send text messages, that’s
it. I still like to have paper in front of me and I do a lot in written-
memo form. I think people who constantly use their BlackBerry or
iPhone easily lose sight of the big picture.

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

am in a car or an airplane. If you’re unable to relax quickly, I think
you can’t be a CEO for a considerable length of time. Some people
do meditation or yoga. I don’t do any such thing. I think you have it
in your DNA or you don’t.
38 2012 Number 3

Dan Vasella: I talk to my team about the seductions that come with
taking on a leadership role. There are many different forms:
sexual seduction, money, praise. You need to be aware of how you
can be seduced in order to be able to resist and keep your integrity.

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

an adviser—someone to whom he can speak in total confidence,
to whom he can say, “I’ve had it; I’m about to resign.” Or, “I
really want to beat this guy up.” You need someone who understands
and can help you to find the balance. Leaders often forget the
importance of stable emotional relationships—especially outside
the company. It helps tremendously to manage stress. Your
partner will do a lot to help keep you in sync.

You have to be able to switch on and switch off. Are you entirely
present when you’re present? Can you be entirely away when you’re
away? The expectation is that your job is 24/7. But no one can be
the boss 24/7. You need to have a moment when you say, “I’m home
now,” and work is gone.

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

45. But I was working like a beast. You think, “So I work 15, 16 hours
a day; who cares?” But you can’t do that when you are 60 or 65.

And now companies are more global. So you have jet lag, you
are tired, the food is different. You have to be very disciplined about
schedules and about organizing everything. Physical discipline is
crucial, for food, exercise, sleep. I live like a monk—well, maybe not
a monk, but a Knight Templar. I wake at a certain hour, sleep at a
certain hour. There are certain things I won’t do past a certain time.

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

time out at plant sites, in sales offices, with customers, in our
research laboratories. I’m bringing my board of directors to India in
a couple of weeks to help them really see the issues we’re facing.
That’s where I get my energy from. It’s contagious. I come away from
these engagements with ideas, energy, and a real sense of focus
on where we as a company need to go. That’s part of what drives me.
Leading in the 21st century 39

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

can dream and imagine. All new things were born in dreams.
A leader must have the courage to be a nonconformist, just like a
scientist. He must dream, even if he dreams alone or if people
laugh at him. He must not let his heart falter.

Today, the separation between generations is stronger than between

nations. Our children say, “Please don’t impose upon us your own
arrogance—the world you created, wounded by war, corrupted by
money, separated by hatred. And don’t try to build artificial walls
between us and other youngsters.” Because they were born in a new
age. For them, the modern equipment of communication is what
paper and pen are for us. They can communicate much more easily
and don’t feel all this hidden discrimination that we were born
with and find so difficult to get rid of.

The (now 24/7) public face of leadership

Nearly everyone we spoke with commented on the challenge of

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

Josef Ackermann: CEOs have become highly public figures.

And media scrutiny has become very personal. Particularly in our
home market, Germany, it’s always, “Ackermann says this” or
“Ackermann’s doing that”—even if I personally had nothing to do
with it. You are the institution you lead.
“”
40 2012 Number 3

You’re a product. And the press will paint

you as either a hero or a villain—whatever sells.
If they paint you as a hero today, you
should be prepared to be painted as a villain
tomorrow.
—Dan Vasella

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

day took me aside and gave me some valuable advice: “From now
on, you must remember that you are two people. You are the
person whom you and your friends know, but you are also a symbol
for something. Never confuse the two. Don’t take criticism of the
symbol as criticism of the person.” That advice has helped me a lot.

Dan Vasella: People have a legitimate demand for access to

the CEO. But you have to modulate that so you avoid overexposure.
You’re a product. And the press will paint you as either a hero
or a villain—whatever sells. If they paint you as a hero today, you
should be prepared to be painted as a villain tomorrow. Not
everything you do will work out every time, and you have to accept
that people will be unfair.

Moya Greene: A decade ago, I’d have said that it was harder
to be a public official than an executive in the private sector. But the
tables have turned. It’s tough these days to be the CEO of any
business—even a very successful one with a balanced view of the
corporation’s position in society.

My public-sector experience has helped me to understand how

easily sound policies can be derailed by small, symbolic things. It
Leading in the 21st century 41

may not matter that the policy change you are advocating is
the product of fantastic analytics or years of brilliant stakeholder
management; the tiniest little spark can become a flash fire—
something that takes hold and transforms perceptions in ways
that don’t seem rational. If you work in the public sector, you
learn the value of developing antennae for popular perceptions
and keeping them finely tuned.

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

understand how good we are at what we do, which isn’t always
easy, because there is so much negativism in the press. I see good
internal communications as a way to punch through and get
our message out, to tell our people—who are the most powerful
ambassadors for our brand—“Stand up and be proud.”

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

has become a lot more negative about corporate leaders over
the past ten years. Small mistakes get blown up into huge things.

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

when I stood up and said: “We’re going to get rid of the seniority
system. We’re going to shut down plants. We’re going to reduce
head count. We’re going to undo the keiretsu system.” I had a lot of
criticism. But there were also people who said, “Let’s give him
the benefit of the doubt.” Today, if I were to stand up and try to do
something like that, I would get massacred. I would need much
more emotional stability and certainty. Leaders of tomorrow are
going to have to be incredibly secure and sure of themselves.

Leaders of the future will also need to have a lot more empathy and
sensitivity—not just for people from their own countries but for
people from completely different countries and cultures. They are
going to need global empathy, which is a lot more difficult.

Shimon Peres: Words are the connection between leaders and

the public. They must be credible and clear and reflect a vision, not
just a position. The three greatest leaders of the 20th century
were Winston Churchill, Charles de Gaulle, and David Ben-Gurion.
Each had a brilliant mind and a brilliant pen. Their ability with
42 2012 Number 3

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

They understood that you lead not with bayonets but with words.
A leader’s words must be precise and totally committed.

Decision making under uncertainty

A final theme is that leaders must increasingly resist the tempta-

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

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

be more confident and secure, but on the other, you have
to be a lot more open and empathetic. You need to listen, but then
when you make a decision, that’s it—you must be a very hard
driver. Usually, these are not attributes you find in the same person.

Once you have done the analysis and made the decision, then you have
to learn to simplify the decision in communicating it to others.
Everything’s complex, but once you have decided, sometimes you
need to simplify so much it’s almost a caricature. You must say,
“Nothing matters beyond this.” You must reduce everything to zeros or
ones, black or white, go or no-go. You can’t have too much nuance.

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

deciding, and then simplifying—very quickly. That is what makes
leading in a crisis so interesting. And because you have to move so
fast, you have to empower people to make decisions themselves.
That’s the best way to restore calm.

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

I was grappling with decisions that would determine whether or
not we could stay in business. But you cannot position your company
Leading in the 21st century 43

in the broader social and economic fabric of the nation if all you do
is look at the financial dimensions of performance. You have to
look at what your customers think, what your employees think, and
what you can do for your customers.

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

doubts—and should you? In which situation is it appropriate and
when not? I believe that you have to be able to express doubt in
your team and with a board. If you don’t—and you pretend—then
you are playing a role, which eventually leads to an unhealthy
situation. That’s not to say you should act like you’re in a confes-
sional. At some point [in decision making], you have to take
the sword and cut through the Gordian knot and make a decision,
despite any uncertainties.

But the question is: are you being led by the context or do you lead?
Are you being led by your followers and are they choosing for
you? Or do you choose and do you lead? I think you have to be aware
of the context, and what people expect and hope for. But as a
leader, you’re not there to feed people with all the things they hope
for. Your job is to persuade people to do the things you believe
will be the right direction for the long term. People want you to lead.
And if you lead, you will hurt. You will satisfy sometimes. You
will celebrate and you will blame. That’s all part of your job.

Josef Ackermann: Problems have become so complex today

that you have to collect the expertise and opinions of a lot of people
before you can make a sound decision. Some people say, “Don’t
decide until you have to.” I have a completely different view. I hate
to be under time pressure. I think it is important that you aren’t
confronted with a situation where you haven’t heard anything on
a particular issue for half a year—and then suddenly you have
to make a quick decision on the basis of an executive summary.

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

You need the expertise, judgment, and buy-in of your team.
44 2012 Number 3

Preparing for a new era of leadership

It’s never been realistic to break leadership into a fixed set of

essential competences, and that’s particularly the case in today’s
complex, volatile environment. Still, the themes our interviewees
sounded represent a rich set of opportunities for leaders to boost
their effectiveness. To close, we’d like to amplify and extend those
themes by emphasizing three skills that can help leaders thrive in
today’s turbulent environment, which for many has prompted
a reexamination of fundamental assumptions about how they do
their jobs, while underscoring the importance of leading with
a purpose. Resilient leaders, as Shimon Peres reminded us, are
those who have “ambition for a cause greater than themselves.”

1. See with a microscope and a telescope

Over the next two decades, McKinsey research suggests, the

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

In different ways, many leaders have told us they’ve needed to

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

Leaders must use the telescope to watch for long-term trends,

dream big dreams, imagine where a company should be in five or
ten years, and reallocate resources accordingly. The accelerating
pace of technological innovation makes this aspect of a leader’s
 Leading in the 21st century 45

role more important than ever. The microscope, too, affords

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

2. Compete as a tri-sector athlete

Many of the forces buffeting leaders in the private sector—slow

growth, unemployment, sovereign indebtedness—can be
addressed only in concert with the public sector and are heavily
influenced by the actions of groups that are neither commer-
cial nor governmental entities. When governments play an ever
more active role in regulating markets, and social movements
can spring up in a matter of days, corporate leaders must be nimble
“tri-sector athletes,” to borrow a phrase from Harvard political
scientist Joseph Nye: able to engage and collaborate across the
private, public, and social sectors. Leaders of governments
and nongovernmental organizations must likewise break out of
their silos. Issues such as infrastructure, unemployment, educa-
tion, or protecting the environment are too complex and interrelated
to deal with in isolation. Many of the leaders with whom we
spoke said they have learned the value of examining their business
decisions in a social and political context. Even those wary of
open-ended discussions about corporate social responsibility say

As organizations grow larger and more

complex, leaders must work harder
to stay in touch with the front line and view
themselves as “chief reality testers.”
46 2012 Number 3

they find it useful to think about managing a “triple bottom line”

that reflects their organizations’ performance in the public, private,
and social spheres.

3. Stay grounded during a crisis

Everyone we interviewed agreed that modern leaders spend far

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

The emotional and physical stamina demanded of leaders today is

extraordinary. Many of those we interviewed reserve crucial
decisions for moments when they know they will be rested and
free from distraction. They also talked about sequencing deci-
sions to focus on key issues first, not after they have been depleted
by lesser matters. We are intrigued by the growing body of
research in psychology, sociology, and neuroscience that high-
lights the importance of “decision fatigue.” The implication
of this research is that trying to make too many decisions at once
diminishes the ability to make wise decisions at all.
 Leading in the 21st century 47

If the burden of leadership in the modern age seems overwhelming,

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

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

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

Copyright © 2012 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
50
Managing the
strategy journey
Chris Bradley,
Lowell Bryan, and
Sven Smit

60
Becoming more
strategic:
Three tips for any
executive
Michael Birshan and
Jayanti Kar

67
How strategists
lead
Cynthia A.
Montgomery

Illustration by Michael Glenwood

 49

The age of the

strategist
Uncertain times place a premium on
strategy—not just on having a good one
today but also on being able to adapt
it continuously. Learn from McKinsey
experts how some companies are
making their strategy-setting processes
more nimble and are getting more
senior executives to invest time and atten-
tion in the journey. Some members
of that expanded strategic-management
team may need to build new skills,
which are the topic of a second article.
Finally, Harvard Business School
professor Cynthia Montgomery describes
the breadth of leadership roles that
effective strategists can play.
50

Managing the strategy

journey
Chris Bradley, Lowell Bryan, and Sven Smit

Regular strategic dialogue involving a

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

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

were just beginning to emerge from the bunkers to which they’d
retreated during the peak of the financial crisis, we wrote an article1
whose premise was that pervasive, ongoing uncertainty meant
companies needed to get their senior-leadership teams working
together in a fundamentally different way. At the time, many
companies were undertaking experiments, such as shortening their
financial-planning cycles or dropping the pretense that they could
make reasonable assumptions about the future. But we suggested that
the only way to set strategy effectively during uncertain times was
to bring together, much more frequently, the members of the top team,
who were uniquely positioned to surface critical issues early, debate
their implications, and make timely decisions.

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

companies should undertake strategy development in the 21st century.
For starters, we uncovered strong evidence that a great many com-
panies are generating strategies that, by their own admission, are sub-
standard. We reached that conclusion after surveying more than
2,000 executives about a set of ten strategic tests—timeless standards
that shed light on whether a particular strategy is likely to beat
the competition—and learning that only 35 percent of their strategies

1 Lowell Bryan, “Dynamic management: Better decisions in uncertain times,”

mckinseyquarterly.com, December 2009.
 51

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

additional questions about the effectiveness of companies’ annual
planning processes, which still were the most-cited triggers for
strategic decision making among survey respondents (Exhibit 1).

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

ranging from telecom to health care to mining to financial services)
as they’ve begun to embrace more frequent strategic dialogue involving
a focused group of senior executives. These companies, in effect,
have started on a journey—a journey to evolve how they set strategy
and make strategic decisions. Their journey isn’t complete, and
neither is ours, but we’ve learned more than enough to take stock
and pass on some ideas that we hope will be useful to leaders in
many more organizations.

In this article, we want to focus on the big things that top teams
need to do. The starting point is for them to increase the time they
Q3 2012
spend on strategy together to at least match the time they spend
Emerging Markets
Exhibit 1 of 23For
 more on the tests, which we have discussed and refined with more than 1,400 senior
strategists around the world in over 70 workshops, see Chris Bradley, Martin Hirt, and
Sven Smit, “Have you tested your strategy lately?,” mckinseyquarterly.com, January
2011. For more on the survey results, see “Putting strategies to the test: McKinsey Global
Survey results,” mckinseyquarterly.com, January 2011.

Exhibit 1
The annual planning process is frequently the primary trigger for
strategic decision making.

What is the primary trigger, if any, for Compared with five years ago, how
your company to make decisions about frequent is your company’s decision
business unit strategies? making about business unit strategy?

Don’t Don’t
My company know Less know
has no frequent
3 7
single trigger 18 7

44 Our regular
planning cycle 56 More
About 30
the same frequent
35
Issues as
they arise

Source: Jan 2010 McKinsey survey of 2,135 executives around the world, representing the full range of
industries, regions, tenures, functional specialties, and company sizes
52 2012 Number 3

together on operating issues. Our experience suggests this probably

means meeting two to four hours, weekly or every two weeks,
throughout the year. Devoting regular attention to strategy in this
way makes it possible to:

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

corporate aspirations and making any big, directional changes in
strategy required by changes in the global forces at work on
a company.

• Create a rigorous, ongoing management process for formulating

the specific strategic initiatives needed to close gaps between the
current trajectory of the company and its aspirations.

•C
 onvert these initiatives into an operating reality by formally
integrating the strategic-management process with your financial-
planning processes (a change that usually requires also
moving to more continuous, rolling forecasting and budgeting
approaches).

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

discussion of these issues in the (disguised) experience of a global
bank that took some severe hits during the 2008 financial crisis.

Setting aspirations and direction

Like many banks, the institution had responded by writing off

most of its bad assets, raising capital, shrinking its balance sheet, and
slashing expenses. Sometime in 2010, in the midst of the annual
long-range financial-planning processes, the CEO and the board real-
ized that while the institution was recovering from its financial
losses, it didn’t know where its future growth would come from. Nor
was it clear what would be reasonable growth aspirations in an
era of regulatory constraints on the bank’s balance sheet.

The CEO decided, in concert with his board, to halt work on their
long-range plan and to launch a concentrated surge of activity
to refresh the bank’s strategy. To start the process, the CEO invited
the heads of his three major lines of business—the Global Invest-
ment Banking Group, the Global Asset Management Group, and the
Domestic Bank—to meet regularly on how they could create a
Managing the strategy journey 53

strategy for growth within the constraints of the new era. Out of
necessity, given the issues being discussed, these biweekly meetings
were broadened over time to include the chief risk officer, the
chief technology officer, the CFO, and a new hire responsible for
moving the work of this new strategy council forward.

Changing the strategy of a large bank, or any large company for that
matter, is a bit like turning a supertanker. The momentum of the
institution is so strong that the ability to change direction quickly is
limited. After all, the focus of the senior- and top-management
teams of most corporations, most of the time, is on near-term operating
decisions—particularly on delivering earnings in accordance with
the financial plan. As a result, many, if not most, of the decisions that
shape the future of organizations are made unconsciously in the
flow of running the businesses or through annual planning processes
that suffer from trying to cover all businesses and issues simulta-
neously (or through one-off projects).

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

is possible to change direction considerably. In our example bank,
a key moment came when the leadership team coalesced on a shared
understanding of the institution’s competitive position, its “business
as usual” financial trajectory, and a realistic set of future aspirations.

There was a significant gap between the bank’s trajectory and goals, and
an obvious set of “no regrets” moves to help close it. For example,
the first major strategic decision that emerged from this council was
to increase the bank’s focus on balance sheet optimization and
on risk-adjusted returns on equity. This would be critical in the new
era of balance sheet constraints, and it led to a second major deci-
sion: to ensure that the bank’s now-scarce balance sheet resources were
being devoted to serving (and earning better returns from) its best,
core customers.

After the top team committed itself to this direction, it quickly made
difficult related moves, such as exiting some noncore businesses
and reorganizing the bank along its core-customer group lines. That
meant refocusing the Global Investment Banking Group by cre-
ating a far stronger focus on cross-silo customer relationship building,
breaking up the Domestic Bank and Global Asset Management
Group, and then reformulating them as a Domestic Retail Banking
Group, a Domestic Corporate Banking Group, and a Global Private
54 2012 Number 3

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

of the head of the Domestic Bank.

However, everyone also agreed that the answers to many of the spe-
cific choices the bank needed to make about where and how to
compete were not obvious and that many early ideas for expanding
the business were at best vague and at worst fraught with signifi-
cant risk. Also unclear was the right timing and sequencing for deci-
sions such as whether to scale up investments with a number of
global technology players supporting digital-banking partnerships or
whether the bank should consider an aggressive push into the
midsized-corporate and small-business markets as competitors were
pulling back to minimize risks. So the top team and the board
defined these choices as “issues to be resolved” and decided to go on
a journey to address them. In other words, the surge effort was
not the end of the process of formulating the corporate strategy but
rather had served only to jump-start it.

Installing a rigorous ongoing strategy

process

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

management team’s focus shifted from changing direction to resolving
these outstanding issues. Addressing ambiguous critical issues
in the flow of running a large company is a challenge different from
making obvious directional changes in response to fundamental
environmental changes, such as responding to a shift in regulation.
The differences are largely in granularity and timing. In other
words, it was fine that out of the surge effort our global bank had
decided to emphasize balance sheet optimization and increase
its focus on core customers, but what did that really mean? Which
specific customers would be prioritized? What packages of ser-
vices would be offered to which customer groups, and at what target
returns? How would “deprioritized” customers be handled? What
specific investments were needed, and what returns could the bank
expect to earn on them?

These difficult questions benefited from serious top-management

attention. Their diversity and complexity also underscore
how important it is for the success of the journey model to have an
agreed-upon process for surfacing, framing, and prioritizing the
Managing the strategy journey 55

critical issues to be debated and addressed through the top-

management strategic forum. Even with extra commitment, the
amount of time the senior team has for meetings is quite finite.
Our experiences suggest some rules of thumb for keeping things
manageable:

•S
 et a practical limit to the number of issues that can be pursued
simultaneously at the corporate level; usually, given the time
needed for review and debate at the strategy forum, no more than
15 to 25 can be managed in parallel.

 evelop a pragmatic approach for prioritizing issues. One way

•D
is to give each member of the forum a set number of slots on the
agenda to bring forth whichever issues for review he or she
thinks are most important. A few slots for critical issues—such as
how to improve capital budgeting, which affects many different
businesses—can be reserved for the corporate-wide perspective.

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

be discussed by the top-management strategy forum, the staff
work undertaken to address the issue should meet a high standard,
and any recommendation made should be “owned” by relevant
line managers.

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

members won’t have significant experience as strategists, it’s worth
pausing for a moment to reflect on the skills they may need to
raise the right issues and discuss them effectively. Strategy capabilities
aren’t the focus of this article (for a related perspective, see
“Becoming more strategic: Three tips for any executive,” on page 60).
That said, after we made the unsettling discovery that a great
many leaders thought their strategies were failing the ten tests men-
tioned earlier, we began thinking about what specific things
companies must get right to build strategies sufficient to meet those
tests. We concluded that moving from idea to operating reality
requires seven distinct modes of activity, summarized in Exhibit 2.

At the bank, the entire top team, as well as the project teams its
members lead, has needed to employ many of these skills. One thing
we’ve seen is that the bank’s ability to manage uncertainty, which
cuts across at least four of the seven modes highlighted in Exhibit 2
(forecasting, searching, choosing, and evolving), is a work in
 56 2012 Number 3

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

to leap from diagnosis to commitment without doing enough work
on forecasting, exploring alternatives, and constructing packages of
choices—or, for that matter, thinking about how a strategy should
evolve as the passage of time resolves uncertainties embedded in the
assumptions underlying it. At the global bank, developing these
uncertainty-management skills is part of the journey that is still
under way.

Converting strategy into operating reality

At the end of the day, strategy is about the actions you take. There-
fore, one of the highest priorities of a top-management strategy
forum is to ensure disciplined implementation of key strategic ini-
tiatives. A big advantage of the journey approach is that the pro-
cess of debating and deciding on changes in strategic direction helps
top-management teams get behind the new direction, particularly
if the CEO holds the entire team collectively accountable for
accomplishing it.

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

approach to converting strategies into actions that can be incor-
Q3 2012 Q3 2012
porated in financial plans and operating budgets. One important capa-
Strategic Strategic
journey journey
bility that companies must develop to do this well is rolling fore-
Exhibit 2 Exhibit
of 3 2 of 3

Exhibit 2
Moving from
Moving
ideasfrom
to execution
ideas to execution
requires seven
requires
distinct
sevenmodes
distinct
of modes
activity.of activity.

Idea generation
Idea generation DevelopmentDevelopment
and selectionand selection

Frame Frame Baseline Baseline Forecast Forecast Search Search

What are our What are our What is the reality What is the reality What do we expect
What do we expect What options doWhat options do
objectives objectives of our performance of the future
of our performance of the future we have to we have to
and constraints?and constraints?
and capabilities? environment? environment? create value? create value?
and capabilities?

• Define decisions• Define

to be decisions
• Understand
to be sources
• Understand sources
• Identify emerging• Identify emerging• Establish and refine
• Establish and refine
considered considered of value and pastof value and past trends and implications
trends and implications
option set option set
performance performance
• Understand scope• Understand
of scope of • Isolate critical • Isolate critical • Assess possible• Assess possible
potential solutions • Identify major • Identify major uncertainties
potential solutions uncertainties competitive responses competitive responses
changes in market changes in market
• Clarify rules that
• Clarify
will rules thatand will drivers and drivers • Develop realistic • Develop realistic• Evaluate options
• Evaluate
in options in
govern work govern work divergent scenariosdivergent scenariosgiven scenarios given scenarios
• Analyze available• Analyze available
capabilities capabilities
 Managing the strategy journey 57

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

timely manner rather than waiting for the next annual planning
cycle. In Exhibit 3, we show an example of the process of transforming
a critical question—what are the retail bank’s specific near-term
opportunities in “big data”?—from idea into operating budget.

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

justify putting the needed investments and expected returns into the
rolling forecast and, eventually, into the formal annual fiscal bud-
get and long-range plan. In our experience, it can easily take 18 months
or longer to go from introducing a raw idea to putting it in the bud-
get. When executives who have worthy ideas lack the budgets to pursue
them with a sufficient full-time staff, we’ve found that it’s valuable
to fund their exploration with a small “pot” of corporate seed capital,
to keep this spending separate from the operating budget (and safe
from being squeezed out by earnings pressure).

Although the journey is continuous, the board and the management

team itself need to take stock of progress periodically. Moreover,
companies still must produce and execute against annual financial
plans and budgets. For most public companies, this requirement
will mean continuing to have a formal board review of strategies, finan-
cial plans, and progress being made against them, every six months
or so. A board meeting in the spring might be dedicated to reviewing
the progress in agreed-upon changes in strategic direction; a late-fall

Execution and
Execution
refinement
and refinement

Choose Choose Commit Commit Evolve Evolve

What packages What
of packagesHow of will we deliver How will the strategy
How will we deliver How will the strategy
choices will define
choices will define the changes required unfold and evolve
the changes required overand evolve over
unfold
our strategy? our strategy? in the strategy? in the strategy?time? How do we time? How do we
manage strategic risks? strategic risks?
manage

• Decide where and

• Decide
how where•and
Develop
how action•plans
Develop action• Execute
plans agreed-upon
• Execute agreed-upon
to compete to compete for selected options
for selected options
action plans action plans

• Determine what,
• Determine
if any, what,
• Reallocate
if any, resources
• Reallocate resources
• Track ongoing •progress
Track ongoing progress
hedging is needed
hedging is needed
to finance plans to finance plans
• Determine revisions
• Determine revisions
• Create coherent
• Create coherent
• Determine how• Determine how to be made to be made
package package to communicateto communicate
changes changes • Determine when• Determine when
to compete to compete
• Delegate key jobs
• Delegate
to key jobs to
pivotal roles pivotal roles
Q3
58 2012 2012 Number 3
Strategic journey
Exhibit 3 of 3

Exhibit 3

A rolling process of forecasting and budgeting transforms a critical

strategic issue into an operational initiative.
Illustrative example of big-data initiative in a large retail bank

Year 1 Year 2 Year 3

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Q1 Q2 Q3 Q4 Q1 Q2

Long-range
A
planning
Include initiative in retail
bank’s 3-year plan

Strategy-planning B Baseline, forecast, Plan execution (eg,

council search, and choose milestones, investments)
Framing

Commit

Working team supports decisions

5-quarter rolling C
forecast
Deliver required
Q1 investment

Annual budget D
Review budget
(preliminary and final)

Implementation E

A Corporate strategy B Council steers C Forecast D Budget accounts E Implementation

forum identifies strategy development, incorporates for investment includes quarterly
opportunities, defines time frame, initiative’s required to progress updates
finances with seed names sponsor and projections/ implement initiative
capital working team investments

board meeting could be used to compare the financial plans for

the coming year (and for the next several years) with the company’s
aspirations. These formal reviews are important checkpoints.

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

board works with management as well. The board should expect that
strategic issues will be raised and strategic initiatives launched
whenever top management feels that they are sufficiently important.
That launch may or may not coincide with the timing of formal
strategic reviews with the board. The board indeed should expect
that the strategy of the company will not be carved in stone but
rather that meetings of the board will be used as necessary to get it
involved in the debate on major issues and in the continual evo-
Managing the strategy journey 59

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

a dialogue should improve the board’s understanding of alternatives
to chosen strategies, and that can enhance the quality of decision
making and lend a valuable perspective down the road if things don’t
work out as planned.

The big difference between the journey model and others is that
when a company isn’t making sufficient progress, it doesn’t pretend
things are fine. Rather, these shortcomings are a call to action. If
actual results begin to diverge significantly from aspirations (and
related metrics of progress), that should trigger an in-depth review
to explore whether a midcourse correction in strategy is needed,
whether the company simply isn’t executing against its strategy, or,
as a last resort, whether it’s time to revisit its aspirations—and
make them more realistic.

As the global bank in our example entered 2012, it realized that the
aspirations it had set in early 2011 still exceeded its current tra-
jectory, particularly in the Global Investment Banking Group and the
Domestic Retail Banking Group. As a result, the global bank has
requested that not just these two groups but also the other two identify
new initiatives they could undertake to help close the gap. The jury
is still out on whether they will be able to do so or, instead, will need
to revise their aspirations downward.

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

need to spend as much time on building and executing strategies
as on operating issues. Those that do will build institutional skills and
generate strategic ideas that evolve over time. Rather than fear
uncertainty and unfamiliarity, these strategic leaders can embrace
them, and make the passage of time an ally against competitors
that hold back when the future seems murky.

Chris Bradley is a principal in McKinsey’s Sydney office, Lowell Bryan is

a director emeritus of the New York office and a senior adviser to the firm, and
Sven Smit is a director in the Amsterdam office.
60

Becoming more
strategic: Three tips for
any executive
Michael Birshan and Jayanti Kar

You don’t need a formal strategy role

to help shape your organization’s strategic
direction. Start by moving beyond
frameworks and communicating in a
more engaging way.

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

Bradley, Lowell Bryan, and Sven Smit have explained in “Managing
the strategy journey” (see page 50), a powerful means of coping with
today’s more volatile environment is increasing the time a com
pany’s top team spends on strategy. Involving more senior leaders
in strategic dialogue makes it easier to stay ahead of emerging
opportunities, respond quickly to unexpected threats, and make
timely decisions.

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

strategy has long represented the bland aggregation of strategies
that individual business unit heads put forward.1 At others, it’s been
the domain of a small coterie, perhaps led by a chief strategist who
is protective of his or her domain—or the exclusive territory of a CEO.

Rare is the company, though, where all members of the top team
have well-developed strategic muscles. Some executives reach
the C-suite because of functional expertise, while others, including

1 In a McKinsey Global Survey of more than 2,000 global executives, only one-third
agreed that their corporate strategy approach represented “a distinct exercise that
specifically addresses corporate-level strategy, portfolio composition issues.” For details,
see “Creating more value with corporate strategy: McKinsey Global Survey results,”
mckinseyquarterly.com, January 2011.
 Becoming more strategic: Three tips for any executive 61

business unit heads and even some CEOs, are much stronger on
execution than on strategic thinking. In some companies, that very
issue has given rise to the position of chief strategy officer—yet
even a number of executives playing this role disclosed to us, in a series
of interviews we conducted over the past year, that they didn’t feel
adequately prepared for it.

This article draws on those interviews, as well as our own and our
colleagues’ experience working with numerous executives developing
strategies, adapting planning approaches, and running strategy
capability-building programs. We offer three tips that any executive
can act on to become more strategic. They may sound deceptively
simple, but our interviews and experience suggest that they represent
foundational skills for any strategist and that putting them into
practice requires real work. We’ve also tried, through examples, to
present practical ways of acting on each suggestion and to show
how doing so often means augmenting experience-based instincts
with fresh perspectives.

1
Understand what strategy really means in
your industry

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

pany, almost all of them have been exposed to a set of core strategy
frameworks, whether in an MBA or executive education program,
corporate training sessions, or on the job. Part of the power of these
frameworks is that they can be applied to any industry.

But that’s also part of the problem. General ideas can be misleading,
and as strategy becomes the domain of a broader group of execu-
tives, more will also need to learn to think strategically in their partic-
ular industry context. It is not enough to do so at the time of a
major strategy review. Because strategy is a journey, executives need
to study, understand, and internalize the economics, psychology,
and laws of their industries, so that context can guide them continually.

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

industry involves a nuanced understanding of strategy topics such as
network effects, platforms, and standards. In the utilities
sector, it involves mastery of the economic implications of (and
62 2012 Number 3

room for strategic maneuvers afforded by) the regulatory regime.

In mining, leaders must understand the strategic implications of cost
curves, game theory, and real-options valuation; further, they
must know and be sensitive to the stakeholders in their regulatory and
societal environment, many of whom can directly influence their
opportunities to create value.

There is a rich and specialized literature on strategy in particular

industries that many executives will find helpful.2 Tailored executive
education courses can also be beneficial. We know organizations
that have taken management teams off-site to focus not on setting
strategy but on deepening their understanding of how to be a
strategist in their industries. For example, one raw-materials player
headquartered in Europe took its full leadership team to Asia
for a week, in hopes of shaking up the team’s thinking. Executives
explored in depth 20 trends that would shape the industry over
the next decade, discussing both the trends themselves and their impli-
cations for the supply of and demand for the organization’s products.3
They also looked across their industry’s full value chain to under-
stand who was making money and why—and how the trends would
change that. A number of the executives in the discussion were
surprised by how much value certain specialized intermediaries were
capturing and others by how the organization was losing out to
competitors that were financing retailers to hold their inventory. The
executive team emerged with a clearer appreciation of where the
opportunities were in its industry and with ideas to capture them.

Building this kind of industry understanding should be an ongoing

process not just because we live in an era of more dynamic
management4 but also because of the psychology of the individual.
Experience-based instincts about “the way things work” heavily
influence all of us, making it hard, without systematic effort, to take
advantage of emerging strategic insights or the real lessons of an
industry’s history. War games or other experiential exercises are one

2See, for example, Carl Shapiro and Hal R. Varian, Information Rules: A Strategic Guide
to the Network Economy (Harvard Business Review Press, November 1998), which
focuses on information businesses, such as software.
3For more on trend analysis, see Peter Bisson, Elizabeth Stephenson, and S. Patrick
Viguerie, “Global forces: An introduction,” mckinseyquarterly.com, June 2010; and
Filipe Barbosa, Damian Hattingh, and Michael Kloss, “Applying global trends: A look at
China’s auto industry,” mckinseyquarterly.com, July 2010.
4See Lowell Bryan, “Dynamic management: Better decisions in uncertain times,”
mckinseyquarterly.com, December 2010.
 Becoming more strategic: Three tips for any executive 63

way executives can help themselves to look at their industry

landscape from a new vantage point.5

2
Become expert at identifying potential
disrupters

Expanding the group of executives engaged in strategic dialogue

should boost the odds of identifying company- or industry-disrupting
changes that are just over the horizon—the sorts of changes that
make or break companies.

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

technological disruption. For many executives, the rise up the corpo-
rate ladder requires a deep understanding of industry-specific
technologies—those embedded in a company’s products, for example,
or in manufacturing techniques—but much less knowledge of
cross-cutting technology trends, such as the impact of sensors and
the burgeoning “Internet of Things.” 6 Moreover, many senior exec-
utives are happy to delegate thinking about such technology issues to
their company’s chief information officer or chief technology officer.
Yet it’s exactly such cross-cutting trends that are most likely to upend
value chains, transform industries, and dramatically shift profit
pools and competitive advantage.

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

a technology hub, such as Silicon Valley, to meet companies,
investors, and academics. Others ask a more technophile member of
the team to keep abreast of the issues and brief them periodically.
We know a number of executives who have developed “reverse men-
toring” relationships with younger and more junior colleagues (or
even their children) that focus on technology and innovation. And of
course, there’s no substitute for seeing what your customers are
doing with technology: during several store visits, an executive at a
baby care retailer saw mothers compare the prices of products on
their smartphones at the store and leave if they could get a better deal
elsewhere. The store visits brought home how modern mothers

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

6See Michael Chui, Markus Löffler, and Roger Roberts, “The Internet of Things,”
mckinseyquarterly.com, March 2010.
64 2012 Number 3

research their buying decisions, the interaction between mobile

technology and store visits, and the importance of advertising a
price-matching scheme to keep tech-savvy customers buying in stores.

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

Senior strategic thinkers are of course well aware of the need to
keep an eye on the competition, and many companies have roles or
teams focused on competitor intelligence. However, in our experi-
ence, often too many resources—including mental energy—are devoted
to following the activities of long-standing competitors rather
than less conventional ones that may pose an equivalent (or greater)
strategic threat.

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

assets in the UK Continental Shelf. It is natural for the competitors
that you meet regularly at board meetings of Oil & Gas UK, the regional
industry association, to be more top of mind than Asian players
that have only just acquired their first positions in the region. And
that’s exactly why many long-standing industry leaders were sur-
prised when Korea National Oil Corporation (KNOC), South Korea’s
national oil company, clinched a hostile takeover of Dana Petroleum
in late 2010, in what was to be the largest oil and gas transaction
in the United Kingdom in several years. The transaction was a har-
binger of future investments by less traditional players in the North
Sea oil and gas industry. Similar dynamics prevail in mining: developed-
world majors (such as Anglo American, BHP Billiton, and Rio Tinto),
which have long competed with one another globally, now must also
take into account players from Brazil, China, India, and elsewhere.

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

of careful practice: a systematic updating of competitive insights
as an ongoing part of existing strategic processes.7 Executives with
diverse backgrounds can boost the quality of dialogue by contributing
to—and insisting on—issue-based competitive analyses. Who is
well-positioned to play in emerging business areas? If new technologies
are involved, what are they, and who else might master them? Who
seems poorly positioned, and what does that mean for competitive
balance in the industry or for acquisition opportunities? Focusing
competitive reviews on questions like these often yields insights of
significantly greater value than would be possible through the more

7See Hugh Courtney, John T. Horn, and Jayanti Kar, “Getting into your competitor’s
head,” mckinseyquarterly.com, February 2009.
 Becoming more strategic: Three tips for any executive 65

common practice of periodically examining competitors’ financial

and operating results. It also helps push the senior team away from
linear, deterministic thinking and toward a more contingent,
scenario-based mind-set that’s better suited to today’s fast-moving
strategy environment.

3
Develop communications that can break
through

A more adaptive strategy-development process places a premium on

effective communications from all the executives participating.
The strategy journey model described by our colleagues, for example,
involves meeting for two to four hours every week or two to discuss
strategy topics and requires each executive taking part to flag issues
and lead the discussion about them.

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

vative ways to communicate strategy—to make strategic insights cut
through the day-to-day morass of information that any executive
receives—is rarely wasted. This requires discipline, as it is always
tempting to invest in further analysis so that the executive has a deeper
grasp of the issues rather than in communications design to ensure
that everybody has a good grasp of them. It also may require building
new skills; indeed, developing messages that can break through
the clutter is becoming a required skill for the modern strategist.8

Experiential exercises are one way of boosting the effectiveness of

strategic communications within a top team. A strategist we know at
a shoe manufacturer wanted to illustrate the point that many of
his company’s products were both unattractive and expensive. He
started with a two-by-two matrix. So far, so predictable. But his
matrix was built using masking tape on the floor of the executive
suite, and the shoes were real ones from the company and its com-
petitors. His colleagues had to classify the shoes right there and
then—and he made his point. Similarly, we know another strategist

8Stanford University business school professor Chip Heath and his coauthor and brother,
Dan Heath, describe such messages as “sticky ideas” that people understand and
remember “and that change something about the way they think or act.” Sticky ideas
have at least some of these six characteristics: simplicity, unexpectedness, concreteness,
credibility, emotion, and the ability to tell a story. For more, see Lenny T. Mendonca
and Matt Miller, “Crafting a message that sticks: An interview with Chip Heath,”
mckinseyquarterly.com, November 2007; and Chip Heath and Dan Heath, Made to Stick:
Why Some Ideas Survive and Others Die, New York, NY: Random House, January 2007.
66 2012 Number 3

who spent an afternoon cutting the labels off samples of men’s boxer
shorts. She wanted the board members to put them in order of
price so they could see how their perceptions of quality were driven
by brands and not manufacturing standards.

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

it’s important to figure out ways to support discussions with data
that’s engaging and easy to manipulate. To the extent possible, exec-
utives need to be able to push on data and its implications “in the
moment,” instead of raising questions and then waiting two weeks
for a team of analysts to come back with answers. Ideally, in fact,
anyone in a room could drill into thoughtfully visualized data with
the flick of a finger on a tablet computer. The proliferation of tac-
tile mobile devices and new software tools that help make spreadsheets
more visual and interactive should facilitate more dynamic, data-
driven dialogue.

Executives hoping to become more strategic should look for oppor-

tunities to innovate in their communication of data, while prodding
their organizations to institutionalize such capabilities. Break-
throughs abound—look no further than the interactive visualizations
in the New York Times in the United States or the Guardian in
the United Kingdom; the 2006 TED.com video “Hans Rosling shows
the best stats you’ve ever seen”; Generation Grownup’s interactive
tool Name Voyager, which examines the popularity of baby names
over time (see babynamewizard.com/voyager); or Kiva.org’s
Intercontinental Ballistic Microfinance visualization of loan-funding
and repayment flows. But few companies have kept up.

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

engaged in setting strategy. Many of those leaders also must enhance
their own strategic capabilities. We hope these three tips help them
get started.

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

Michael Birshan is a principal in McKinsey’s London office, where

Jayanti Kar is a consultant.
 67

How strategists lead

Cynthia A. Montgomery

A Harvard Business School professor

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

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

at the Harvard Business School. After instructing MBAs for most of
the previous quarter-century, I began teaching the accomplished
executives and entrepreneurs who participate in Harvard’s flagship
programs for business owners and leaders.

Shifting the center of my teaching to executive education changed

the way I teach and write about strategy. I’ve been struck by how often
executives, even experienced ones, get tripped up: they become
so interested in the potential of new ventures, for example, that they
underestimate harsh competitive realities or overlook how inter-
related strategy and execution are. I’ve also learned, in conversations
between class sessions (as well as in my work as a board director
and corporate adviser) about the limits of analysis, the importance of
being ready to reinvent a business, and the ongoing responsibility
of leading strategy.

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

maker for companies, as a voice of reason, and as an operator. The
richness of these roles, and their deep interconnections, underscore
the fact that strategy is much more than a detached analytical exer-
cise. Analysis has merit, to be sure, but it will never make strategy
the vibrant core that animates everything a company is and does.
68 2012 Number 3

The strategist as meaning maker

I’ve taken to asking executives to list three words that come to mind
when they hear the word strategy. Collectively, they have pro-
duced 109 words, frequently giving top billing to plan, direction, and
competitive advantage. In more than 2,000 responses, only 2 had
anything to do with people: one said leadership, another visionary.
No one has ever mentioned strategist.

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

recognize it at all, is a dangerous oversight that I tried to start
remedying in a Harvard Business Review article four years ago and
in my new book, The Strategist, whose thinking this article extends.1
After all, defining what an organization will be, and why and to
whom that will matter, is at the heart of a leader’s role. Those who hope
to sustain a strategic perspective must be ready to confront this
basic challenge. It is perhaps easiest to see in single-business compa-
nies serving well-defined markets and building business models
suited to particular competitive contexts. I know from experience,
though, that the challenge is equally relevant at the top of diversified
multinationals.

What is it, after all, that makes the whole of a company greater than
the sum of its parts—and how do its systems and processes add
value to the businesses within the fold? Nobel laureate Ronald Coase
posed the problem this way: “The question which arises is whether
it is possible to study the forces which determine the size of the firm.
Why does the entrepreneur not organize one less transaction or
one more?”2 These are largely the same questions: are the extra layers
what justifies the existence of this complex firm? If so, why can’t
the market take care of such transactions on its own? If there’s more
to a company’s story, what is it, really?

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

we have allowed these fundamental questions to slip away. We need
to bring them back. It is the leader—the strategist as meaning maker—
who must make the vital choices that determine a company’s very
identity, who says, “This is our purpose, not that. This is who we will

1For more, see Cynthia Montgomery, The Strategist: Be the Leader Your Business Needs,
New York, NY: HarperCollins, 2012; and “Putting leadership back into strategy,” Harvard
Business Review, January 2008, Volume 86, Number 1, pp. 54–60.
2R. H. Coase, “The nature of the firm,” Economica, 1937, Volume 4, Number 16, pp. 386–405.
 How strategists lead 69

be. This is why our customers and clients will prefer a world with us
rather than without us.” Others, inside and outside a company,
will contribute in meaningful ways, but in the end it is the leader who
bears responsibility for the choices that are made and indeed for
the fact that choices are made at all.

The strategist as voice of reason

Bold, visionary leaders who have the confidence to take their com-
panies in exciting new directions are widely admired—and confidence
is a key part of strategy and leadership. But confidence can balloon
into overconfidence, which seems to come naturally to many successful
entrepreneurs and senior managers who see themselves as action-
oriented problem solvers.3

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

to weigh the pros and cons of entering the furniture-manufacturing
business. Over the years, a number of highly regarded, well-run
companies—including Beatrice Foods, Burlington Industries, Champion,
Consolidated Foods, General Housewares, Gulf + Western, Intermark,
Ludlow, Masco, Mead, and Scott Paper—have tried to find fortune
in the business, which traditionally has been characterized by high
transportation costs, low productivity, eroding prices, slow growth,
and low returns. It’s also been highly fragmented. In the mid-1980s,
for example, more than 2,500 manufacturers competed, with
80 percent of sales coming from the biggest 400 of them. Substitutes
abound, and there is a lot of competition for the customer’s dollar.
Competitors quickly knock off innovations and new designs, and the
industry is riddled with inefficiencies, extreme product variety,
and long lead times that frustrate customers. Consumer research shows
that many adults can’t name a single furniture brand. The industry
does little advertising.

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

typically are energized, not intimidated, by these challenges. Most
argue, in effect, that where there’s challenge there’s opportunity. If it
were an easy business, they say, someone else would already have

3For more on managerial overconfidence, see John T. Horn, Dan Lovallo, and S. Patrick
Viguerie, “Beating the odds in market entry,” mckinseyquarterly.com, November
2005; as well as Dan Lovallo and Olivier Sibony, “The case for behavioral strategy,”
mckinseyquarterly.com, March 2010, and “Distortions and deceptions in strategic
decisions,” mckinseyquarterly.com, February 2006.
70 2012 Number 3

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

cation, and discipline to a fragmented, unsophisticated, and chaotic
industry. As the list above shows, my students are far from alone:
with great expectations and high hopes of success, a number of well-
managed companies over the years have jumped in with the inten-
tion of reshaping the industry through the infusion of professional
management.

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

an important reminder that the competitive forces at work in your
industry determine some (and perhaps much) of your company’s per-
formance. These competitive forces are beyond the control of most
individual companies and their managers. They’re what you inherit, a
reality you have to deal with. It’s not that a company can never
change them, but in most cases that’s very difficult to do. The strategist
must understand such forces, how they affect the playing field
where competition takes place, and the likelihood that his or her plan
has what it takes to flourish in those circumstances. Crucial, of course,
is having a difference that matters in the industry. In furniture—
an industry ruled more by fashion than function—it’s extremely chal-
lenging to uncover an advantage strong enough to counter the
gravitational pull of the industry’s unattractive competitive forces.
IKEA did it, but not by disregarding industry forces; rather, the
company created a new niche for itself and brought a new economic
model to the furniture industry.

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

an industry’s forces actually reflects indifference to them. Time
and again, I’ve seen division heads, group heads, and even chief exec-
utives dutifully acknowledge competitive forces, make a few high-
level comments, and then quickly move on to lay out their plans—
without ever squarely confronting the implications of the forces they’ve
just noted. Strategic planning has become more of a “check the box”
exercise than a brutally frank and open confrontation of the facts.

The strategist as operator

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

the bridge between the economics of a market, the ideas at the core
of a business, and action. To be sound, that bridge must rest on a
foundation of clarity and realism, and it also needs a real operating
 How strategists lead 71

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

wants to engage the group in a discussion about what’s more important:
strategy or execution. In my view, this is a false dichotomy and a
wrongheaded debate that the students themselves have to resolve, and
I let them have a go at it.

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

when we talk about Domenico De Sole’s tenure at Italian fashion emi-
nence Gucci Group.4 De Sole, a tax attorney, was tapped for the
company’s top job in 1995, following years of plummeting sales and
mounting losses in the aftermath of unbridled licensing that had
plastered Gucci’s name and distinctive red-and-green logo on everything
from sneakers to packs of playing cards to whiskey—in fact, on
22,000 different products—making Gucci a “cheapened and over-
exposed brand.”

De Sole started by summoning every Gucci manager worldwide to a

meeting in Florence. Instead of telling managers what he thought
Gucci should be, De Sole asked them to look closely at the business
and tell him what was selling and what wasn’t. He wanted to tackle
the question “not by philosophy, but by data”—bringing strategy in
line with experience rather than relying on intuition. The data were
eye opening. Some of Gucci’s greatest recent successes had come from
its few trendier, seasonal fashion items, and the traditional customer—
the woman who cherished style, not fashion, and who wanted a clas-
sic item she would buy once and keep for a lifetime—had not come
back to Gucci.

De Sole and his team, especially lead designer Tom Ford, weighed the
evidence and concluded that they would follow the data and posi-
tion the company in the upper middle of the designer market: luxury
aimed at the masses. To complement its leather goods, Ford designed
original, trendy—and, above all, exciting—ready-to-wear clothing
each year, not as the company’s mainstay, but as its draw. The increased
focus on fashion would help the world forget all those counterfeit
bags and the Gucci toilet paper. It would propel the company toward
a new brand identity, generating the kind of excitement that would
bring new customers into Gucci stores, where they would also buy high-
margin handbags and accessories. To support the new fashion and
brand strategies, De Sole and his team doubled advertising spending,

4For more detail on the Gucci case, see Mary Kwak and David Yoffie, “Gucci Group N.V.
(A),” Harvard Business Publishing, Boston, May 10, 2001.
72 2012 Number 3

modernized stores, and upgraded customer support. Unseen but

no less important to the strategy’s success was Gucci’s supply chain.
De Sole personally drove the back roads of Tuscany to pick the
best 25 suppliers, and the company provided them with financial and
technical support while simultaneously boosting the efficiency of
its logistics. Costs fell and flexibility rose.

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

pricing, marketing, distribution, manufacturing, and logistics, not
to mention organizational culture and management—was tightly coor-
dinated, internally consistent, and interlocking. This was a system
of resources and activities that worked together and reinforced each
other, all aimed at producing products that were fashion forward,
high quality, and good value.

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

it’s constructed, but constructing it isn’t often an easy or a beautiful
process. The decisions embedded in such systems are often gutsy
choices. For every moving part in the Gucci universe, De Sole faced
a strictly binary decision: either it advanced the cause of fashion-
forwardness, high quality, and good value—or it did not and was
rebuilt. Strategists call such choices identity-conferring commitments.
They are central to what an organization is or wants to be and
reflect what it stands for.

When I ask executives at the end of this class, “Where does strategy
end and execution begin?” there isn’t a clear answer—and that’s
as it should be. What could be more desirable than a well-conceived
strategy that flows without a ripple into execution? Yet I know from
working with thousands of organizations just how rare it is to find a
carefully honed system that really delivers. You and every leader of
a company must ask yourself whether you have one—and if you don’t,
take the responsibility to build it. The only way a company will deliver
on its promises, in short, is if its strategists can think like operators.

A never-ending task

Achieving and maintaining strategic momentum is a challenge that

confronts an organization and its leader every day of their entwined
existence. It’s a challenge that involves multiple choices over time—
and, on occasion, one or two big choices. Very rare is the leader who
 How strategists lead 73

will not, at some point in his or her career, have to overhaul a com-
pany’s strategy in perhaps dramatic ways. Sometimes, facing that inev-
itability brings moments of epiphany: “eureka” flashes of insight
that ignite dazzling new ways of thinking about an enterprise, its pur-
pose, its potential. I have witnessed some of these moments as
managers reconceptualized what their organizations do and are capable
of doing. These episodes are inspiring—and can become catalytic.

At other times, facing an overhaul can be wrenching, particularly if a

company has a set of complex businesses that need to be taken
apart or a purpose that has run its course. More than one CEO—men
and women coming to grips with what their organizations are and
what they want them to become—has described this challenge as an
intense personal struggle, often the toughest thing they’ve done.

Yet those same people often say that the experience was one of the
most rewarding of their whole lives. It can be profoundly liberating as
a kind of corporate rebirth or creation. One CEO described his own
experience: “I love our business, our people, the challenges, the fact
that other people get deep benefits from what we sell,” he said.
“Even so, in the coming years I can see that we will need to go in a new
direction, and that will mean selling off parts of the business. The
market has gotten too competitive, and we don’t make the margins we
used to.” He winced as he admitted this. Then he lowered his voice
and added something surprising. “At a fundamental level, though, it’s
changes like this that keep us fresh and keep me going. While it can
be painful when it happens, in the long run I wouldn’t want to lead a
company that didn’t reinvent itself.”

Cynthia Montgomery is the Timken Professor of Business Administration at

Harvard Business School, where she’s been on the faculty for 20 years, and past
chair of the school’s Strategy Unit.

Elements of this article

were adapted from
Cynthia Montgomery’s
The Strategist: Be the
Leader Your Business
Needs (New York, NY:
HarperCollins, 2012).

Copyright © 2012 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
Lifting the effectiveness of
global
organizations
As economic activity shifts from the developed world
to fast-growing markets in Africa, Asia, and Latin America,
the organizations of international companies are striv-
ing to keep pace. Being global increasingly involves fresh
strategic challenges, new people headaches, unique
complexity costs, and risks on an unfamiliar scale. In this
package, based on surveys, interviews, and deep experi-
ence with executives at leading global businesses, McKinsey
authors discuss new ways to manage the tensions—
with a particular focus on organizational design and talent
management—while a leading academic exposes key
misconceptions about global-leadership development.

76 81 92 100
The global Organizing How Developing
company’s for an emerging multinationals global leaders
challenge world can attract the Pankaj
Martin Dewhurst, Toby Gibbs, talent they need Ghemawat
Jonathan Harris, Suzanne Martin Dewhurst,
and Suzanne Heywood, and Matthew Pettigrew,
Heywood Leigh Weiss and Ramesh
Srinivasan

Illustrations by Francesco Bongiorni

75
76

The global company’s

challenge
Martin Dewhurst, Jonathan Harris,
and Suzanne Heywood

As the economic spotlight shifts to

developing markets, global companies
need new ways to manage their
strategies, people, costs, and risks.

Managing global organizations has been a business chal-

lenge for centuries. But the nature of the task is changing with the
accelerating shift of economic activity from Europe and North
America to markets in Africa, Asia, and Latin America. McKinsey
Global Institute research suggests that 400 midsize emerging-
market cities, many unfamiliar in the West, will generate nearly
40 percent of global growth over the next 15 years. The International
Monetary Fund confirms that the ten fastest-growing economies
during the years ahead will all be in emerging markets. Against this
backdrop, continuing advances in information and communi-
cations technology have made possible new forms of international
coordination within global companies and potential new ways
for them to flourish in these fast-growing markets.

There are individual success stories. IBM expects to earn 30 percent

of its revenues in emerging markets by 2015, up from 17 percent
in 2009. At Unilever, emerging markets make up 56 percent of the
business already. And Aditya Birla Group, a multinational con-
glomerate based in India, now has operations in 40 countries and
earns more than half its revenue outside India.

But, overall, global organizations are struggling to adapt. A year ago,

we uncovered a “globalization penalty”: high-performing global
companies consistently scored lower than more locally focused ones
 77

on several dimensions of organizational health.1 For example, the

former were less effective at establishing a shared vision, encouraging
innovation, executing “on the ground,” and building relationships
with governments and business partners. Equally arresting was evi-
dence from colleagues in McKinsey’s strategy practice showing
that global companies headquartered in emerging markets have been
growing faster than counterparts headquartered in developed
ones, even when both are operating on “neutral turf”: emerging mar-
kets where neither is based (see “Parsing the growth advantage
of emerging-market companies,” on page 10).

Over the past year, we’ve tried to understand more clearly the chal-
lenges facing global organizations, as well as approaches that
are helping some to thrive. Our work has included surveys and struc-
tured interviews with more than 300 executives at 17 of the world’s
leading global organizations spanning a diverse range of sectors and
geographies, a broader survey of more than 4,600 executives,
and time spent working directly with the leaders of dozens of global
organizations trying to address these issues.2

Clearly, no single organizational model is best for all companies hand-

ling the realities of rapid growth in emerging markets and round-
the-clock global communications. That’s partly because the opportu-
nities and challenges facing companies vary, depending on their
business models. R&D-intensive companies, for example, are working
to staff new research centers in the emerging world and to inte-
grate them with existing operations. Firms focused on extracting
natural resources are adapting to regulatory regimes that are
evolving rapidly and sometimes becoming more interventionist.
Consumer-oriented firms are facing sometimes-conflicting imper-
atives to tailor their businesses to local needs while maintaining con-
sistent global processes.

Another reason no single model fits all global companies is that their
individual histories are so different. Those that have grown organ-
ically often operate relatively consistently across countries but find it
hard to adjust their products and services to local needs, given
their fairly standardized business models. Companies that have mainly
grown through M&A, in contrast, may find it easier to tailor

1 See Martin Dewhurst, Jonathan Harris, and Suzanne Heywood, “Understanding

your ‘globalization penalty’,” mckinseyquarterly.com, July 2011.
2See “Managing at global scale: McKinsey Global Survey results,” mckinseyquarterly.com,
June 2012.
78 2012 Number 3

operations to local markets but harder to integrate their various

parts so they can achieve the potential of scale and scope and align a
dispersed workforce behind a single set of strategies and values.

Although individual companies are necessarily responding differently

to the new opportunities abroad, our work suggests that most face
a common set of four tensions in managing strategy, people, costs, and
risk on a global scale. The importance of each of these four tensions
will vary from company to company, depending on its particular oper-
ating model, history, and global footprint. (For more on the impli-
cations of these uneven globalization efforts, see “Developing global
leaders,” on page 100.) Taking stock of the status of all four tensions
can be a useful starting point for a senior-management team aiming
to boost an organization’s global performance.

Strategic confidence and stretch

Being global brings clear strategic benefits: the ability to access new
customer markets, new suppliers, and new partners. These immediate
benefits can also create secondary ones. Building a customer base
in a new market, for example, provides familiarity and relationships
that may enable additional investments—say, in a research center.

But being global also brings strategic challenges. Many companies

find it increasingly difficult to be locally flexible and adaptable
as they broaden their global footprint. In particular, processes for
developing strategy and allocating resources can struggle to cope
with the increasing diversity of markets, customers, and channels.
These issues were clear in our research: fewer than 40 percent
of the 300 senior executives at global companies we interviewed and
surveyed believed that their employers were better than local
competitors at understanding the operating environment and cus-
tomers’ needs. And barely half of the respondents to our broader
survey thought that their companies communicated strategy clearly
to the workforce in all markets where they operate.

People as an asset and a challenge

Many of the executives we interviewed believed strongly that the

vast reserves of skills, knowledge, and experience within the global
The global company’s challenge 79

workforce of their companies represented an invaluable asset. But

making the most of that asset is difficult: for example, few surveyed
executives felt that their companies were good at transferring les-
sons learned in one emerging market to another.

At the same time, many companies find deploying and developing

talent in emerging markets to be a major challenge. Barely half
the executives at the 17 global companies we studied in depth thought
they were effective at tailoring recruiting, retention, training,
and development processes for different geographies. An emerging-
market leader in one global company told us that “our current pro-
cess favors candidates who have been to a US school, understand the
US culture, and can conduct themselves effectively on a call with
head office in the middle of the night. The process is not designed to
select for people who understand our market.”

One of our recent surveys showed how hard it is to develop talent for
emerging markets at a pace that matches their expected growth.
Executives reported that just 2 percent of their top 200 employees
were located in Asian emerging markets that would, in the years
ahead, account for more than one-third of total sales. Complicating
matters is the fact that local highfliers in some key markets
increasingly prefer to work for local employers (see “How multi-
nationals can attract the talent they need,” on page 92). Global
companies are conscious of this change. “Local competitors’ brands
are now stronger, and they can offer more senior roles in the
home market,” noted one multinational executive we interviewed.

Scale and scope benefits, complexity costs

Large global companies still enjoy economic leverage from being able
to invest in shared infrastructure ranging from R&D centers to
procurement functions. Economies of scale in shared services also
are significant, though no longer uniquely available to global
companies, as even very local ones can outsource business services
and manufacturing and avail themselves of cloud-based computing.

But as global companies grow bigger and more diverse, complexity

costs inevitably rise. Efforts to standardize the common elements
of essential functions, such as sales or legal services, can clash with
local needs. And emerging markets complicate matters, as
80 2012 Number 3

operations located there sometimes chafe at the costs they must bear
as part of a group centered in the developed world: their share of
the expense of distant (and perhaps not visibly helpful) corporate and
regional centers, the cost of complying with global standards and
of coordinating managers across far-flung geographies, and the loss
of market agility imposed by adhering to rigid global processes.

Risk diversification and the loss of familiarity

A global company benefits from a geographically diverse business

portfolio that provides a natural hedge against the volatility of local
growth, country risk, and currency risk. But pursuing so many
emerging-market opportunities is taking global companies deep into
areas with unfamiliar risks that many find difficult to evaluate.
Less than half of the respondents to our 2011 survey thought these
organizations had the right risk-management infrastructure and
skills to support the global scale and diversity of their operations.

Furthermore, globally standard, exhaustive risk-management

processes may not be the best way to deal with risk in markets where
global organizations must move fast to lock in early opportunities.
One executive in an emerging-market outpost of a global company
told us “a mind-set that ‘this is the way that we do things around
here’ is very strongly embedded in our risk process. When combined
with the fact that the organization does not fully understand
emerging markets, it means that our risk process might reject
opportunities that [the global] CEO would approve.”

Understanding these tensions is just a starting point. Capturing the

benefits and mitigating the challenges associated with each
will require global companies to explore new ways of organizing and
operating. The following two articles explore some of these new
approaches—to organizational design and to talent management in
global corporations, respectively.

The authors would like to acknowledge the contributions of Kate Aquila and Roni
Katz to the development of this article.

Martin Dewhurst is a director in McKinsey’s London office, where Suzanne

Heywood is a principal; Jon Harris is a director in the New York office.

Organizing for an
emerging world
The structures, processes, and communications approaches of
many far-flung businesses have been stretched to the breaking point.
Here are some ideas for relieving the strains.
Toby Gibbs, Suzanne Heywood, and Leigh Weiss
The problem
Rising complexity is making
global organizations more difficult
to manage.
Why it matters
Organizational friction can hamper
growth, especially in emerging
markets; undermine strategic decision
making; and make it harder to
manage costs, people, and risks.
81
What to do about it
Revisit the case for regional orga-
nizational layers and consider
grouping activities according to
nongeographic criteria, such
as growth goals.
Streamline processes without
standardizing more than is
necessary, force-fitting rigid
technology solutions, or creating
overly detailed rules.
Consider moving the corporate
center (or creating a “virtual head-
quarters”) closer to high-growth
markets, and ensure a constant flow
of talent between the business
units and the center.
Find out how and why people share
information, and then decide which
connections to drop, keep, or add.
82 2012 Number 3

As global organizations expand, they get more complicated

and difficult to manage. For evidence, look no further than the inter-
views and surveys we recently conducted with 300 executives at
17 major global companies. Fewer than half of the respondents believed
that their organizations’ structure created clear accountabilities,
and many suggested that globalization brings, as one put it, “cumula-
tive degrees of complexity.”

However, our research and experience in the field suggest that even
complex organizations can be improved to give employees around
the world the mix of control, support, and autonomy they need to do
their jobs well. What’s more, redesigning an organization to suit
its changing scale and scope can do much to address the challenges
of managing strategy, costs, people, and risk on a global basis.

Our goal in this article isn’t to provide a definitive blueprint for the
global organization of the future (there’s no such thing), but rather
to offer multinationals fresh ideas on the critical organizational-
design questions facing them today: how to adjust structure to sup-
port growth in emerging markets, how to find a productive balance
between standardized global and diverse local processes, where
to locate the corporate center and what to do there, and how to deploy
knowledge and skills effectively around the world by getting the
right people communicating with each other—and no one else.

Rethinking boundaries

Global organizations have long sought to realize scale benefits by

centralizing activities that are similar across locations and tailoring
to local markets any tasks that need to differ from country to coun-
try. Today, as more and more companies shift their weight to emerging
markets, boundaries between those activities are changing for
many organizations.

At some point, they will need to adapt their structures and processes
to acknowledge this boundary shift, whose nature will vary across
and within companies, depending on their industry, focus, and history.
In one recent case, an international publishing company created
global “verticals” comprising people who work on content and delivery
technology for similar publications around the world. But it was
Organizing for an emerging world 83

careful to leave all sales and marketing operations in the hands of

local country managers, because in publishing these activities
can succeed only if they are tailored to local markets. In the case of
IBM in Asia, the company has globalized its business services but
left the businesses local.

IBM’s experience in Asia

IBM’s vice president of global strategy for growth markets, Michael
Cannon-Brookes, described to us the structural redesign of the
company. Shortly after the start of the new millennium, its leaders
realized that having each country operation in Asia run a com-
plete suite of business services to support different product brands
no longer made sense; there was simply too much duplication of
effort. In each country market, these leaders identified 11 services
with common features in functional areas: supply chain, legal,
communications, marketing, sales management, HR, and finance.
Each function was assigned a global “owner” with the task of
consolidating and refining operations to support businesses in the
region’s different countries. The company then assessed which
essential elements of each function to keep and which redundant (or
potentially redundant) elements to eliminate.

From these assessments grew the “globally integrated enterprise

model,” which evolved into an entirely new structure for IBM’s global
operations. “Instead of taking people to where the work is, you take
work to where the people are,” says Cannon-Brookes. IBM sought out
pools of competitive talent with the skills required to perform each
service at different cost points. Then it built teams of specialists geo-
graphically close to the relevant pool to meet the region’s needs in
each service. So now, for instance, IBM’s growth market operations
are served by HR specialists in Manila, accounts receivable are
processed in Shanghai, accounting is done in Kuala Lumpur, procure-
ment in Shenzhen, and the customer service help desk is based in
Brisbane. Globalizing functions that were previously country based
has been a huge corporate-wide undertaking for IBM.

“This is a cultural transformation,” says Cannon-Brookes. “Changing

organization charts can take a few mouse clicks. Changing busi-
ness processes can take months. Changing a culture and the way
employees adapt to new ways of working takes years.”
84 2012 Number 3

A complex calculus
To repeat, though, no company’s restructuring should be viewed as a
blueprint for that of another. On the one hand, the importance of
regional layers seems to be growing for companies in sectors such as
pharmaceuticals and consumer goods. Regional centers of excel-
lence in these sectors often are cost effective (for more, see “Better
performance from locally deployed marketing,” on page 28). Brand
and product portfolios often differ significantly between regional
outposts and the traditional core, and greater regional muscle can
make it easier to pull local perspectives into global product-
innovation efforts.

On the other hand, we’ve seen companies conclude that the tradi-
tional role of their regional layers—as “span breakers” helping
distant corporate leaders to gather data and distill strategically
important information—is becoming obsolescent as information
technology makes analyzing, synthesizing, and exchanging informa-
tion so much easier. Today’s faster data exchanges, along with
faster travel and video conferencing, make it feasible for some organi-
zations to group their units by criteria other than physical proximity—
for example, similar growth rates or strategies. (For more on
the role of technology in managing global organizations, see sidebar,
“Technology as friend or foe?”)

That’s led some companies to reduce regional layers to teams of ten

or fewer members. Those teams might focus on managing people
strategy in a region or on gathering high-level business intelligence
that feeds into regional-strategy setting—for example, spotting
regional, country, and competitive risks and opportunities. Wafer-
thin regional layers have the added benefit of curbing “shadow”
functional structures (in HR, marketing, and so forth), which tend
to sprout unplanned in larger regional organizations. Although
these structures are not clearly visible to the corporate center, they
add considerable cost and complexity.

Process pointers
As IBM’s experience illustrates, executives evaluating the struc-
ture of their companies will often be drawn into considering
which processes should be global or local. That’s sensible: in our
survey of more than 300 executives at global companies, pro-
cesses emerged as one of the 3 weakest aspects of organization, out
of 12 we explored. Some companies have far too many processes—
Organizing for an emerging world 85

nearly a third of the surveyed executives said that their companies

would be more effective globally with fewer standard ones. Some
companies, especially if they grew by M&A, don’t know how many
processes they have or what those processes are. And, most impor-
tant, few can distinguish standard processes that create value from
those that don’t or can identify the value drivers of worthwhile
standard processes.

For managers grappling with these issues, here are some ideas that
have proved valuable in practice:

 on’t standardize more than is necessary. For example, busi-

•D
nesses and regions should be allowed to choose their own
locally relevant key performance indicators to track, on top of
the four or five KPIs used in the global process for setting
annual targets.

 it technology to the process, not vice versa. Standard screen-

•F
based processes may ensure global compliance in an instant but
can lock in globalized costs too. Before making huge invest-
ments in technology to standardize a process, businesses must
be sure they can realize the expected return.

 refer standard principles to detailed rules for local processes.

•P
For instance, to hire an assistant in a new location, managers
need only a set of global fair-hiring principles, not chapter and
verse on how to hire.

•L
 isten to voices from all the functions that are—or should be—
involved in making a process better and make sure those people
can continue communicating with each other. Standard pro-
cesses, by themselves, are not enough to capture all of the potential
value from a company’s global footprint: ongoing communi-
cation between people who influence and execute processes helps
to capture more of it.

• I mplement new processes from the top. Consultation on design

is important, but business leaders may eventually need to
cut the talk and mandate a new process. Unfashionable command-
and-control methods can be appropriate in this sphere because,
as one executive explained, “Locations aren’t nearly as different as
they think they are.”
86 2012 Number 3

Lightening the corporate heart

Over the past decade, corporate centers have been slimming down.
Many have shed their traditional roles of providing the business
units with shared backbone services. Similarly, some companies have
found locations other than the corporate headquarters for centers
of excellence on, among other things, innovation or customer insights
and sometimes host them within one business for the benefit of
all. This leaves slim corporate centers free to focus on their perennial
headquarters roles: upholding the organization’s values, developing

Technology as friend or foe?

Inexpensive electronic and voice
communications, video-
conferencing, technology-enabled
workflows, and, most recently,
social-networking technologies have
transformed connectivity and
knowledge sharing within complex
global organizations. Aditya
Birla’s HR director, Santrupt Misra,
says, “Our use of ICT [informa-
tion and communications technology]
has really helped us become
global. For example, we acquired
Colombian Chemicals six
months ago, and the first thing we
established is . . . connectivity
between them and our locations
elsewhere so they have access
to our portal, our knowledge, our
e-learning, and every other support.”
The company puts out regular
live webcasts aimed at all employees
and their families. It also makes
all internal vacancies visible to all
employees, to foster the sense
of belonging to a community that is
local and global at the same time.
Similarly, IBM’s internal Beehive Web
site helps employees to connect
with peers they meet on interdepart-
mental projects or meetings,
to brainstorm for current and new
projects, and to approach
higher-ranking people they wouldn’t
normally have contact with
to share ideas and ask for advice.1
Yet fewer than one-third of the more
than 300 global executives we
surveyed and interviewed believed
that their companies were get-
ting the most out of information and
communications technology. For
all its benefits, it sometimes creates
challenges such as the following.
Exacerbating pressure. A senior
executive at one company’s
central site in China says he regularly
works a “second shift” on con-
ference calls when he should be
asleep—not good for him or the
company in the long term. Jesse Wu,
worldwide chairman of Johnson &
Johnson’s consumer group,
observes, “Many people in New
York like to have global calls
on a Friday morning, so they can get
everything clear before the week-
end. However, that’s Friday evening
 Organizing for an emerging world 87

corporate strategy, and managing the portfolio of businesses and

their individual performance in line with those values and strategies.1

However, even a newly focused corporate center can struggle to

grasp just how diverse a company’s markets have become and how
fast they are changing: one group based in the United States
accepted 2 percent growth targets from its local managers in India

1 For more on the role of the corporate center in establishing strategic direction, see
Stephen Hall, Bill Huyett, and Tim Koller, “The power of an independent corporate
center,” mckinseyquarterly.com, March 2012.

in Asia, thus unnecessarily affecting ICT, we have become more

a colleague’s family life on the
other side of the world.” Company
leaders have to model the time
zone sensitivity on which a healthy
global organization depends.
headquarters-centric. This hasn’t
been a deliberate policy; it’s just
that people in the distant territories
have found ICT an easy way to
kick the ball upstairs.”

Locking in complexity. While these are avoidable problems,

Computerized forms can instantly
standardize a process around
the world, but once that process
is locked in, technology can
make changing it complicated and
expensive. One global retailer,
for example, generated significant
value by standardizing supply
chain processes in its home market
and then adapted and extended
the system to its operations overseas.
Whenever overseas operations
wanted to tweak their local proce-
dures, a change to the global IT
system was involved, making such
small but necessary changes
very costly.
they underscore the fact that
technology is not a panacea for
companies facing organiza-
tional challenges. Rather, its creative
deployment should reinforce—
and be supported by—a company’s
organizational design.
1 For more, see Joan M. DiMicco et al.,
Research on the Use of Social Software
in the Workplace, Conference on
Computer Supported Cooperative Work
(CSCW), San Diego, California,
November 2008; and Karl Moore and
Peter Neely, “From social networks
to collaboration networks: The next
evolution of social media for business,”
Forbes.com, September 15, 2011.

Elevating issues indiscrim-

inately. One leader of a global com-
pany based in an emerging
market notes: “With the growth of
88 2012 Number 3

because the US market was growing by only 1 percent a year. But

the Indian economy was growing much faster, so precious market
share was lost.

Corporate centers are likely to make better strategic calls if they move
closer to the action. Locating headquarters in a growth market
also sends a clear signal about company priorities to current and future
employees, as well as to investors, customers, and other external
stakeholders. However, a lot of corporate centers can’t or won’t move
in their entirety, for reasons of history, convenience, or legal
constraints. So we see a growing number of companies creating a
global “virtual headquarters,” in which vision-setting and -coordinating
activities and centers of excellence are placed in different areas
around the world: global procurement may be located in a geography
quite different from that of, say, global talent. Thus companies can
move headquarters activities closer to high-priority markets without
having to shut up the home headquarters.

For instance, ABB has shifted the global base of its robotics busi-
ness from Detroit to Shanghai, where it has built a robotics R&D center
and production line in response to expected demand for robots in
Asia. Other firms are going for a split center, with a site in a mature
market and another in an emerging one. US technology company
Dell, for instance, has set up a functional headquarters in Singapore
in pursuit of greater financial, operational, and tax efficiency. The
US oil and gas company Halliburton created a second headquarters,
in Dubai, to speed up decision making by putting it closer to
major customers.

Who should staff the lighter corporate center? To cross-pollinate

ideas and knowledge, a headquarters ideally needs to attract
but not retain talent. Picture it as the beating heart of the organization,
pumping high-potential staff to and from the business units
and replenishing each person with the oxygen of learning. Given the
right HR mechanisms, a headquarters could do without any
permanent staff except the CEO and his or her direct reports; other
executives could have fixed-term appointments and then return
to a business unit or function. The diversity of the corporate center’s
constant flow of staff would then naturally reflect a company’s
international reach and strengths.
Organizing for an emerging world 89

Coordinating communication

Having the right structures and processes to enable growth and

reduce complexity is a triumph in itself. But even the best-structured
organization with the most carefully designed processes may falter
without the right linkages between them. By the same token, two-
thirds of the executives at global companies we recently surveyed
said that their ability to create internal links was a source of strength.

To get the best from modern communications and a global network

of contacts, managers should focus their communications, both
regular and intermittent, on contacts that really matter to their jobs.
Leaders can help by making it easier for their people to forge the
kind of Web-based connections and communities of interest that
spread knowledge quickly. But they also must protect managers
from the need to spend a lot of time in conversations and meetings
where agendas and decision rights are so hazy that they can’t get
their jobs done.

Taking stock
Understanding the number and value of the communications that
managers participate in is a first step in finding the sweet spot.
A variety of tools are available to help. They include interviews with
employees; social-network analyses, which map the frequency
and effectiveness of communications; and employee surveys that
review connections among a company’s major business, func-
tional, and geographic units to find out why they’re sharing information,
the importance of the information they get to meeting their
performance or strategic goals, and how effectively they share it.

Leaders of a global oil and gas company, for example, understood

that operations personnel weren’t sharing best practices well, because
a quick review showed that the company had dozens of ways to
operate a given rig. Managers also knew that workers facing problems
in the field (such as equipment breakages or uncertainty about the
local terrain) didn’t know how to get expert help quickly and effectively.
A social-network analysis of how information flowed between field
workers and technical experts identified three problems. First, field
workers tended to reach out only to those technical experts with
whom they had strong personal relationships. Also, experts did not
reach out unasked to field workers to share best practices. Finally,
only when staff moved between sites—as when a group went from
90 2012 Number 3

Angola to the Gulf of Mexico—did field workers from different sites

share best practices among themselves.

Strengthening the right connections

Once people understand the number and nature of their connections
and communications, they can decide which to drop, keep, or
add. In companies where a lot of people seem to lose time on too many
linkages, the leaders’ reflex response is often to clarify links by
changing the structure—for example, adding reporting lines or new
dimensions to the organizational matrix. But these make the
organization more complex and costly to manage; dual reporting
lines will almost certainly double an executive’s administrative
burden, to take only the most obvious example.

Better solutions can come from considering a wider range of linkage

mechanisms, their different strategic purposes, and what must
Web 2012
be in place to make them work. For example, coaching or mentoring
Org Design
links transfer knowledge across an organization and build future
Exhibit 1 of 1
leaders. They require strong, personal, and frequent interactions based
on trust. Other knowledge transfer connections, such as those for
sharing documents, can be weaker, impersonal, and less frequent.

One oil company used a social-network analysis to target improved

communication between field workers and technical experts.

Social-network analysis at a major oil and gas company

Before After

Angola Brazil Canada Gulf of Mexico Nigeria Saudi Arabia United Kingdom
Organizing for an emerging world 91

Although these kinds of relationships deliver important gains, they

do not have to be formally enshrined in a structure or process.

If people have too few contacts (as at the oil company) or contacts
in the wrong places, managers with a particular area of responsibility
will have to identify who needs knowledge in that area, who has it,
and how best to connect them. One way companies can foster strong
personal ties is to designate someone to nurture them until they
flourish unaided. When researchers analyzed social networks and
e-mails among teams developing aerodynamic components for
Formula 1 racing cars, they found that teams that designated some-
one to keep in touch with peers working on related products across
geographies were 20 percent more productive than teams whose man-
agers interacted less often.2

The oil company above transferred some field workers to peer teams
elsewhere. That move forged global connections and expanded
the collective expertise on which each field worker could draw. New
networks blossomed (exhibit) and quickly showed results: within
a year, productivity rose by 10 percent, while costs related to poor
quality fell by two-thirds.

Structure, processes, and linkages are interrelated: it’s easier to avoid

duplication in organizational structures when a company gets the
balance right among global, regional, and local processes—and
vice versa. Clear structures and processes also clarify roles, helping
to focus communications, while structure and process problems
can undermine the effectiveness of managers’ global networks and
communications. Focusing on some of the points where structure,
processes, and communications intersect, and engaging all the stake-
holders involved to work on those critical junctions, can release
benefits that ripple across organizations.

2Jacomo Corbo and Gary Pisano, The Impact of Information Networks on Productivity,
Circuits of Profit conference, Budapest, June 20, 2011.

The authors would like to acknowledge the contributions of Gregor Jost and
Roni Katz to the development of this article.

Toby Gibbs and Suzanne Heywood are principals in McKinsey’s London

office; Leigh Weiss is a senior expert in the Boston office.
92

How multinationals
can attract the talent
they need
Competition for talent in emerging markets is heating up. Global
companies should groom local highfliers—and actively encourage more
managers to leave home.

Martin Dewhurst, Matthew Pettigrew, and Ramesh Srinivasan

The problem What to do about it

Talent is getting scarcer and pricier
in emerging markets as fleet-footed
local businesses grab the best
people. Home-based executives
seem reluctant to fill the gap.
Create opportunities for highfliers
in emerging markets to lead,
even if they haven’t served long
apprenticeships in a developed
economy.

Why it matters Launch programs to improve

Companies that can’t attract,
retain, and excite tomorrow’s leaders
will find it harder to achieve global
ambitions.
understanding, generate trust, and
break down cultural barriers.
Actively manage your brand as an
employer, which may require
building a relationship with employees’
families or tapping into broader
causes that workers embrace.

Help managers posted abroad

familiarize themselves with new
markets while maintaining their
connections and influence back home.
 93

Global organizations appear to be well armed in the war for

talent. They can tap sources of suitably qualified people around the
world and attract them with stimulating jobs in different coun-
tries, the promise of powerful positions early on, and a share of the
rewards earned by deploying world-class people to build global
businesses. However, these traditional sources of strength are coming
under pressure from intensifying competition for talent in
emerging markets.

• Talent in emerging economies is scarce, expensive, and hard to

retain. In China, for example, barely two million local man-
agers have the managerial and English-language skills multi-
nationals need.1 One leading bank reports paying top people
in Brazil, China, and India almost double what it pays their peers
in the United Kingdom. And a recent McKinsey survey in
China found that senior managers in global organizations switch
companies at a rate of 30 to 40 percent a year—five times the
global average.

• Fast-moving, ambitious local companies are competing more

strongly: in 2006, the top-ten ideal employers in China included
only two locals—China Mobile and Bank of China (BOC)—
among the well-known global names. By 2010, seven of the top
ten were Chinese companies. As one executive told us, “local
competitors’ brands are now stronger, and they can offer more
senior roles.”

• Executives from developed markets, by no means eagerly seizing

plum jobs abroad, appear disinclined to move: a recent Man-
power report suggests that in Canada, France, Germany, the
United Kingdom, and the United States, the proportion of
staff ready to relocate for a job has declined substantially,2 per-
haps partly because people prefer to stay close to home in
uncertain times.

How can global organizations best renew and redeploy their strengths
to address these challenges? Our experience suggests they should
start by getting their business and talent strategies better aligned as

1 China and German Statistical Yearbook 2005; McKinsey Global Institute; University of
Frankfurt survey.
2Migration for Work Survey, ManpowerGroup, 2011.
94 2012 Number 3

they rebalance toward emerging markets. This is a perennial

challenge, made more acute by extending farther afield. But the core
principles for estimating the skills a company will need in each
location to achieve its business goals, and for planning ahead to
meet those needs, are similar enough across geographies not
to be our focus here. Rather, we focus on two additional questions.
How can global organizations attract, retain, and excite the kinds
of people required to execute a winning business strategy in emerg-
ing markets? And what can these companies do to persuade
more executives trained in home markets to develop businesses in
emerging ones, thereby broadening the senior-leadership team’s
experience base?

Becoming more attractive to locals

A big historic advantage global companies have over local competi-

tors is the ability to offer recruits opportunities to work elsewhere
in the world. A small number of executives, in fact, have moved from
leading positions in emerging markets to a global-leadership role,
including Ajay Banga, president and CEO of MasterCard Worldwide;
Indra Nooyi, chairman and CEO of PepsiCo; and Harish Manwani,
COO of Unilever.

But big global companies need a lot more role models like these if
they are to persuade highly talented local people to join and stay.
A recent McKinsey survey of senior multinational executives from
India found that few companies were providing opportunities
overseas in line with the aspirations and capabilities of ambitious
managers.3 We’ve also heard this concern voiced in many inter-
views. A senior executive at a global company in Asia told us, “In
our top-100-executive meetings, we spend more than half of our
time speaking about Asia. But if I look around the room I hardly see
anybody with an Asian background.” Another put the problem
more bluntly: “Leaders tend to promote and hire in their own image.”

The makeup of most multinational boards provides further

evidence: in the United States, less than 10 percent of directors of

3A February 2012 McKinsey survey, with 118 respondents, of 17 multinational companies’
operations in India.
 How multinationals can attract the talent they need 95

the largest 200 companies are non-US nationals, up from 6 percent

in 2005 but still low considering the global interests of such
companies. Western ones can start working on these numbers by
refining their approach to developing top talent in emerging
markets. Many also need to rethink their brands to win in a fast-
changing talent marketplace.

Prepare your highfliers for top roles

There’s no silver bullet for developing or retaining emerging-
market talent. Examples such as the ones below present different
paths, but each company will need to find its own.

Global-development experiences at Bertelsmann. The German

media giant tries to develop—and retain—top managers through
specialized training programs. In India, for example, its high-
potential employees can apply for an INSEAD Global Executive
MBA; over the three years this benefit has been available,
motivation and retention rates among alumni of the program have
sharply increased for less than it would have cost to give them
salary hikes. In addition, Bertelsmann’s CEO program brings local-
market employees to the corporate center, where they gain
exposure to the range of functional and geographical issues they
can expect to encounter as leaders. Having spent a couple of
years at the center, recruits then compete for senior roles in local or
regional markets. They return with a solid understanding of the
organization and its strategy, as well as an extended network based
on trust gained from working intensively with leaders across
the company.

Breaking cultural barriers at Goldman Sachs. The global bank

is one of many firms that have designed special programs to tackle
cultural and linguistic barriers impeding local executives from
taking jobs at the global level. In 2009, for example, Goldman Sachs
launched a program in Japan to help local employees interact
more comfortably and effectively with their counterparts around
the world, with a focus on improving cross-cultural communi-
cation skills. The firm has extended this “culture dojo,” named after
Japan’s martial-arts training halls, to China and South Korea and
plans to launch programs in Bangalore and Singapore. 4

4Michiyo Nakamoto, “Cross-cultural conversations,” Financial Times, January 11, 2012.

96 2012 Number 3

Local-leadership development at Diageo. Nick Blazquez, the

drinks company Diageo’s president for Africa, questions whether
leadership training today must include experience in a developed
economy. “I used to think that to optimize the impact, a general
manager should work in a developed market for a period of time,
because that’s where you see well-developed competencies. But I’m
just not seeing that now. If I think about marketing competencies,
for example, some of Diageo’s most innovative marketing solutions
are in Africa.” In fact, he notes, “we in Africa have developed
some of Diageo’s leading digital-marketing programs. So I don’t
think that there’s a need anymore for somebody to have worked
in a developed market for them to be a really good manager. That
said, I do feel that a good leader of a global organization would
be better equipped having experienced both developed and
developing markets.” For global companies in a similar position,
acknowledging that local highfliers can drive global innovation
without first serving a long apprenticeship in a developed economy
could unlock massive reserves of creative energy.

Enhance your brand as an employer

While there’s no substitute for development programs that will help
emerging-market recruits rise, global organizations need to
strengthen other aspects of their employer brands to succeed in the
talent marketplace in these countries. Historically, globally
recognized companies have enjoyed significant advantages: they
knew they were more attractive to potential local employees
than any local competitor. “We still have the attitude that someone
is lucky to be hired by us,” one executive told us. But today, many
local fast-growing and ambitious companies have more pulling power.
And multinationals based in emerging markets are conscious
of the work they must do to sustain their levels of recruitment. As
Santrupt Misra, Aditya Birla’s HR director, says: “We are grow-
ing as a company more rapidly than people grow, so we need to
develop more peer leaders. Simultaneously, we need to [maintain]
a very strong employer brand so that if we do not manage to
develop enough people, we can hire.”

Established global companies should consider the same strategy.

In any market, the basic ingredients of a strong employer brand will
be competitive compensation; attractive working conditions;
How multinationals can attract the talent they need 97

managers who develop, engage, and support their staff; and good
communication. One challenge for global companies is to manage
the tension between being globally consistent and, at the same time,
responsive to very diverse local needs. Some degree of local tailor-
ing is often necessary—for example, to accommodate the preference
for near- over long-term rewards in Russia. However, any tailoring
must sit within a broadly applied set of employment principles. Tata
sets out to “make it a point to understand employees’ wants, not
just in India, but wherever Tata operates,” according to its group vice
president of HR. It has a tailored employee value proposition
for each of its major markets; for example, it stresses its managers’
quality to employees in India, development opportunities in
China, and interesting jobs in the United States.

In some markets, particularly in Asia, global organizations are

extending awareness of their brands as employers by building a rela-
tionship between themselves and their employees’ families. For
example, Motorola and Nestlé have tried to strengthen these links
in China through their family visits and family day initiatives.
Aditya Birla webcasts its annual employee award ceremony to all
employees and their families around their world. And in all markets,
companies are likely to find that many young, aspiring managers
view being part of a broader cause and contributing to their countries’
overall economic development as increasingly important. Arti-
culating a company’s contribution to that development is likewise
an increasingly important component of any employer brand.

Encouraging homebodies to venture abroad

Even if a global company can find, keep, and develop all the local
leaders it wants, it still may need more executives from its home
market to work at length in diverse emerging ones so they learn how
these markets function and forge networks to support the com-
pany’s future growth. To that end, some leading firms are replacing
fixed short-term expatriate jobs with open-ended international
roles. This not only deepens the expertise of the executives who hold
them but also eliminates a problem cited by a European car
executive we interviewed in South America: expat leaders become
98 2012 Number 3

Global organizations’ growing need for

managers willing to work for long
stretches overseas is coinciding with a
decrease in their willingness to go.

lame ducks toward the end of their overseas terms, progressively

ignored by local managers.5

Developed-country operations have much to gain from executives

versed in emerging-market management. “Leaders’ mind-sets
are very different,” says Johnson & Johnson’s worldwide consumer
group chairman Jesse Wu. “When you’re running an emerging
market, you always operate under an austerity model. When you’ve
been operating in emerging markets and come to the United
States, you become aware of the little things, like how much people
use color printers for internal documents. All these little things
add up. Everybody’s happy with emerging-market growth,” but he
adds that it “necessitates a lot of changes worldwide, not only in
emerging markets.”

Global organizations’ growing need for managers willing to work for

long stretches overseas is coinciding with a decrease in their
willingness to go. “US talent over time seems to have become less
mobile than executives from Europe, Asia, or Latin America,”
says Wu. “We need this to change.”

Reversing the trend will take time. In firms where long-term success
depends on moving across businesses, functions, and regions,
that expectation should be crystal clear to all managers. Schlumberger
requires managers to rotate jobs every two to three years across
business units and corporate functions: the company expects that
executives will spend 70 percent of their total careers working
outside their home countries. Similarly, a leading mining company
expects its people to have experience in at least two different
geographic regions, two different businesses or functions, and even
two different economic environments (high and low growth, say)

5For more on the challenges facing expat managers, see Jeffrey A. Joerres, “Beyond expats:
Better managers for emerging markets,” mckinseyquarterly.com, May 2011.
How multinationals can attract the talent they need 99

before they can move into senior-leadership roles. Of course,

it’s crucial to help managers abroad maintain their connections and
influence back home and to provide close senior-executive
mentorship—as HSBC does for participants in its International
Management program, who are sent to an initial location, far
from home, and can expect to rotate again after 18 to 24 months.

Making sure that new executives can contribute strongly and

avoid mistakes when they arrive in new markets also is important.
In 2010, IBM began sending executives to emerging markets as
consultants, with the goal of investing time helping long-standing
customers and other stakeholders. This way, the executives
not only developed business in new geographies but also got to know
the new markets and developed their personal skills. Dow
Corning and FedEx have realized similar benefits by providing free
services in emerging markets.

We have presented some snapshots here of how companies are

getting better at attracting talent and developing leaders in emerging
markets and of what it takes to cross-fertilize talent between
different geographies. As the world’s economic center of gravity con-
tinues to shift from developed to emerging markets, more
companies will wrestle with these issues, and some definitive best
practices may well appear. For now, though, the global talent
market is in flux, just like the global economy.

The authors would like to acknowledge the contributions of Vimal Choudhary

and Alok Kshirsagar to the development of this article.

Martin Dewhurst is a director in McKinsey’s London office, where Matthew

Pettigrew is an associate principal; Ramesh Srinivasan is a director in the
New York office.
100

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

Pankaj Ghemawat

As firms reach across borders, global-leadership capacity is

surfacing more and more often as a binding constraint. According
to one survey of senior executives, 76 percent believe their orga-
nizations need to develop global-leadership capabilities, but only
7 percent think they are currently doing so very effectively.1 And
some 30 percent of US companies admit that they have failed to
exploit fully their international business opportunities because
of insufficient internationally competent personnel.2

Most of the prevailing ideas in business and academia about global

leadership reflect efforts by leadership experts to adapt the
insights of their field to the global arena. I come at this topic from
the opposite perspective, having focused for nearly two decades
on studying globalization and thinking through its implications for
business and public policy.

1 Developing the Global Leader of Tomorrow, a joint project of Ashridge Business School
as part of the European Academy of Business in Society (EABIS) and the United
Nations Global Compact Principles for Responsible Management Education (PRME),
based on a survey conducted in 2008.
2Shirley Daniel and Ben L. Kedia, US Business Needs for Employees with International
Expertise, Conference on Global Challenges and US Higher Education at Duke University,
Durham, NC, January 23–25, 2003.
 101

At the core of my work lies the reality that, while globalization

is indeed a powerful force, the extent of international integration
varies widely across countries and companies and generally
remains more limited than is commonly supposed. To be sure,
rapid growth in emerging markets, combined with a long-term
outlook of lower growth in most developed economies, is pushing
companies to globalize faster. But metrics on the globaliza-
tion of markets indicate that only 10 to 25 percent of trade, capital,
information, and people flows actually cross national borders.
And international flows are generally dampened significantly by
geographic distance as well as cross-country differences. US
trade with Chile, for example, is only 6 percent of its likely extent
if Chile were as close to the United States as Canada is. Further-
more, if two countries don’t share a common language, that alone
slashes the trade volume between them by 30 percent.

An appreciation of how distances and differences influence inter-

national ties helps explain some of the organizational and
other stresses that established multinationals are encountering as
they accelerate their expansion to emerging markets, as described
in this issue of McKinsey Quarterly. Emerging Asia is farther
away—and more different, along multiple dimensions—than more
familiar markets in Europe and North America. Japanese multi-
nationals face a distinctive set of cultural, political, and economic
issues that complicate their efforts to expand abroad.

Exaggerated notions of what globalization means—what I call

“globaloney”—are also apparent in prevailing ideas about global
leadership. Some training centers aim to develop “transcultural”
leaders who can manage effectively anywhere in the world
as soon as they step off the plane. Yet scholars of cross-cultural
management suggest that objectives like this are unrealistic.

While global leadership is still a nascent field, common concep-

tions of it already incorporate myths or half-truths that rest
on misconceptions about globalization. Correcting these myths
should help the efforts of companies to increase their global-
leadership capacity.
102 2012 Number 3

Myth #1
My company, at least, is global.

When I present data on the limited extent of international inter-

actions to executives in large multinational corporations, a typical
reaction is that even if markets are not that integrated, their firm
certainly is. Such claims, however, seldom hold up to scrutiny. Less
than 2 percent of firms on Fortune’s Global 500 list of the world’s
largest companies, for example, derive more than 20 percent of their
revenues from three distinct regions.3 Most firms also remain
quite domestically rooted in other aspects of their business, such as
where they do their production or R&D or where their shareholders
live. BMW, for instance, derived 51 percent of its sales revenue from
outside of Europe in 2011, but still maintained roughly 64 per-
cent of its production and 73 percent of its workforce in Germany. 4

An accurate read on the extent of globalization in one’s firm and

industry is certainly a crucial requirement for global leadership.
Also invaluable is an appreciation of the extent to which the people
within your company are far from completely globalized. Con-
sider just a few pertinent facts. Trust, which some have called the
currency of leadership, declines sharply with distance. Research
conducted in Western Europe suggests that people trust citizens of
their own country twice as much as they trust people from
neighboring countries and that they place even less trust in people
farther away. Turning to information flows—also central to
leadership—people get as much as 95 percent of their news from
domestic sources,5 which devote most of their coverage to
domestic stories. Similarly, 98 percent of telephone-calling minutes
and 85 percent of Facebook friends are domestic.

The persistent rootedness of both firms and employees has the

surprising implication that global leaders should not seek to sever
or hide their own roots to become global citizens. Rather, they
should embrace “rooted cosmopolitanism” by nurturing their own

3Alan M. Rugman and Alain Verbeke, “A perspective on regional and global strategies of
multinational enterprises,” Journal of International Business Studies, 2004, Volume 35,
Number 1, pp. 3–18.
4Revenue and workforce figures from BMW Group, Annual Report 2011; production
figures represent 2010 car production as reported by the International Organization of
Motor Vehicle Manufacturers (OICA).
5Calculations by Ethan Zuckerman, as reported in “A cyber-house divided,” Economist,
September 2, 2010, p. 58.
Developing global leaders 103

roots and branching out beyond them to connect with counter-

parts elsewhere who, like themselves, are deeply rooted in distinct
places and cultures. Indeed, studies of expatriate performance
confirm that expats who identify strongly with both their home and
host cultures perform better than those who identify only with
one or with neither.6

This rooted-cosmopolitan approach also accords better with research

showing that people can become “biculturals,” with a truly deep
understanding of two cultures,7 but probably can’t entirely internalize
three, which implies that four is out of the question. Facing such limit-
ations, attempts to become global by breaking free from one’s roots
seem more likely to lead to symmetric detachment—a lack of meaning-
ful ties to any place—than to symmetric attachment everywhere.

Myth #2
Global leadership is developed through
experience.

Leadership scholars have argued that experience contributes some

80 percent to learning about global leadership.8 My own investi-
gations of senior executives’ perceptions of globalization, however,
indicate that experience, while required, is not sufficient for the
development of an accurate global mind-set.

To illustrate, in a survey I asked readers of Harvard Business

Review to estimate a set of basic values about the international-
ization of product, capital, information, and people flows. The res-
pondents overestimated these values, on average, by a factor
of three. And, more interesting from the standpoint of leadership
development, the magnitude of the readers’ errors increased with
their years of experience and the seniority of their titles. The CEOs
in the sample overestimated the values by a factor of four!

6Yih-teen Lee, “Home versus host—identifying with either, both, or neither? The rela-
tionship between dual cultural identities and intercultural effectiveness,” International
Journal of Cross Cultural Management, 2010, Volume 10, Number 1, pp. 55–76.
7See, for instance, Mary Yoko Brannen and David C. Thomas, “Bicultural individuals in
organizations: Implications and opportunity,” International Journal of Cross Cultural
Management, 2010, Volume 10, Number 1, pp. 5–16.
8Bruce Dodge, “Empowerment and the evolution of learning: Part one,” Education +
Training, 1993, Volume 35, Number 1, pp. 3–10.
104 2012 Number 3

Senior executives and CEOs tend to lead far

more global lives than most of the world’s
population, often touching several continents
in any given month.

Why might experience correlate with less rather than more accurate
perceptions about globalization? One possibility is projection bias.
Senior executives and CEOs tend to lead far more global lives than
most of the world’s population, often touching several continents in
any given month. Ninety percent of the people on this planet will never
venture beyond the borders of the countries where they were born.

If experience alone is insufficient to develop accurate perspectives

about globalization, what do executives need to learn off the job?
A starting point is an accurate read on the magnitude and patterns of
international interactions within their industries and companies.
Rooted maps, described in my 2011 McKinsey Quarterly article,9 can
help executives to visualize and interpret these patterns.

Global leaders also need to understand the factors that shape inter-
national interactions in their businesses, by undertaking a structured
examination of cross-country differences and their effects. That is
what a survey of academic thought leaders recently concluded should
be the focus of the globalization of business school curricula.10

Conceptual learning of this sort is a complement to—one might even

say a precondition of, though certainly not a substitute for —
experiential learning. When executives can fit their personal
experiences into an accurate global perspective defined by
conceptual frameworks11 and hard data, they can gain more from
their typically limited time abroad and avoid costly mistakes.

9“Remapping your strategic mind-set,” mckinseyquarterly.com, August 2011.

10Pankaj Ghemawat, “Responses to forces of change: A focus on curricular content,”

chapter 4 in AACSB International’s Globalization of Management Education: Changing
International Structures, Adaptive Strategies, and the Impact on Institutions, Bingley,
UK: Emerald Group Publishing Limited, 2011.
11 My “CAGE” distance framework, one way to structure thinking about cross-country
differences, places those differences into cultural, administrative/political, geographic,
and economic categories. For more, see my article “Distance still matters: The hard reality
of global expansion,” Harvard Business Review, 2001, Volume 79, Number 8, pp. 137–47.
 Developing global leaders 105

Myth #3
Development is all about building standard
global-leadership competencies.

Many lists of global-leadership competencies have been developed in

business and in academia, but these provide only a starting point
for thinking through the right competency model to apply within a
particular company. Customization and focus are essential. In
part, that’s because even though literally hundreds of competencies
have been proposed, a lot of these lists have important gaps or
fail to go far enough toward incorporating unique requirements for
global leadership. That isn’t surprising, since the lists often grow
out of research on domestic leadership.

One large review of the literature summarizes it in three core

competencies (self-awareness, engagement in personal transforma-
tion, and inquisitiveness), seven mental characteristics (optimism,
self-regulation, social-judgment skills, empathy, motivation to work
in an international environment, cognitive skills, and acceptance
of complexity and its contradictions), and three behavioral compe-
tencies (social skills, networking skills, and knowledge).12 To my
mind, most of these would also be useful for domestic leadership.
Only the motivational point seems distinctively international,
although one or two more (such as acceptance of complexity and its
contradictions) clearly seem more important in the international
domain than domestically.

Typical competency lists also tend to focus on cultural differences,

missing other components critical to global leadership. Economic
differences (such as the challenges of fast- versus slow-growth
markets) and administrative and political differences (including the
extent of state intervention) are among the other factors that can
cause leaders to stumble in unfamiliar contexts.

Perhaps most important, standard lists of global-leadership

competencies reinforce a one-size-fits-all view of global leadership
that is inconsistent with the reality of globalization and the mix
of work global leaders do. A company may find it useful to recruit
for and develop a small set of key competencies across all of its

12Tiina Joniken, “Global leadership competencies: A review and discussion,” 2005, Journal
of European Industrial Training, Volume 29, Number 3, pp. 199–216.
106 2012 Number 3

global leaders. Yet the diversity of roles that fall under the broad
category of global leadership argues for substantial customization
around that common base. At the corporate level, this implies
developing a portfolio of competencies rather than an interchangeable
set of global leaders who have all met a single set of requirements.

Operationally, an ideal training program would therefore include

a geographic dimension and prepare people for dealing with
particular origin–destination pairs. For example, a Japanese execu-
tive going to work in the United States would probably benefit from
preparing for the higher level of individualism there. One preparing
for China would in all likelihood benefit more from understanding
that “uncertainty avoidance” is less pronounced there, so executives
must be ready for faster-paced change and greater levels of
experimentation.

Customizing training-and-development efforts at the level of

individual country pairs is likely to run up quickly against resource
constraints. However, the fact that 50 to 60 percent of trade,
foreign direct investment, telephone calls, and migration are intra-
regional suggests that, in many cases, customizing at the regional
level is sufficient. Firms will need a mix of regional and global leaders.
Regional leadership is presumably less difficult and costly to
develop than global leadership.

At a more granular level, competencies can also be customized

to the requirements of specific executives’ roles. The dimensions to
consider include depth in particular markets versus breadth
across markets, the frequency and duration of physical presence
abroad, and a focus on internal versus external interactions.13

Myth #4
Localization is the key.

Some firms, rather than trying to fulfill the requirements of one-

size-fits-all lists of global-leadership competencies, have embraced
the opposite extreme of localization. Significant localization
has taken place in the management teams of foreign subsidiaries.

13For a more systematic treatment, see Mark E. Mendenhall et al., “Defining the ‘global’ in
global leadership,” Journal of World Business, February 2012.
 Developing global leaders 107

According to one study, the proportion of expatriates in senior-

management roles in multinationals in the BRIC countries (Brazil,
Russia, India, and China) and in the Middle East declined from
56 percent to 12 percent from the late 1990s to the late 2000s.14

Within this broad trend, some firms still rely too much on expatriates
and need to localize more, but localization can be—and, in some
instances, clearly has been—taken too far. Giving up on expatriation
implies giving up on building the diverse bench of global leaders
that CEOs say they require. Persistent distance effects, particularly
those associated with information flows, do confirm the general
wisdom: global leaders need experience working for extended periods
in foreign locations because living abroad creates permanent
knowledge and ties that bind. Extreme localization leaves no room
for the development of leaders of this sort.

Executives report that “it takes at least three months to become

immersed in a geographical location and appreciate how the culture,
politics, and history of a region affect business there.”15 This
judgment accords with the finding that living abroad expands your
mental horizons and increases your creativity. However, merely
traveling abroad doesn’t produce these benefits.16

Long stays abroad are costly: traditional expatriation typically costs

three times an employee’s salary at home. Nonetheless, firms that
really wish to prioritize global-leadership development will need to
allocate the required resources. Better metrics to track the returns
on such investments may help. One survey indicates that just 14 per-
cent of companies have any mechanisms in place to track returns
on international assignments. Most of these companies use metrics
tracking only business generated from an assignment.17

Better career management could help capture and measure returns

on investments in developing global leaders. Evidence indicates
that in European and US multinationals, expatriates still take longer,

14William J. Holstein, “The decline of the expat executive,” Strategy + Business, July 2008.

15Gail Naughton, as quoted in Tricia Bisoux, “Global immersion,” BizEd, 2007, Volume 6,
Number 4, pp. 44–49.
16Adam D. Galinsky and William W. Maddux, “Cultural borders and mental barriers: The
relationship between living abroad and creativity,” Journal of Personality and Social
Psychology, 2009, Volume 96, Number 5, pp. 1047–61.
17Emerging Trends in Global Mobility: Policy & Practices Survey, Cartus (now Credant
Mobility), 2004.
108 2012 Number 3

on average, to ascend the corporate ladder than managers who

continue to work within their home countries. That indicates a
deficiency in this area, as well as an incentive problem.18

Rather than pure localization, firms should embrace the practice of

rotation, which provides the foreign work experience—not just
travel—essential to the development of global leaders. And don’t
make the mistake of viewing expatriation as being solely about
sending people from headquarters to emerging markets. The same
requirement for immersion outside of one’s home market also
applies to the cultivation of global leaders recruited in emerging
markets. For these executives, time spent in more established
markets can, on the return home, reinforce both local- and global-
leadership capacity.19

Myth #5
We can attract the best talent.

Nationals from key growth markets are underrepresented in the

leadership ranks of many Western companies, so hiring future
global leaders from these areas is critical. Yet recruiting top talent
there is becoming increasingly difficult, as described in “How
multinationals can attract the talent they need,” on page 92. I recall
from my own youth in India how foreign multinationals used to
be unequivocally the preferred employers, prized for their superior
professionalism, brands, technologies, scale, and so on. Now I
see that Indian companies have raised their game, putting pressure
on multinationals in local talent markets.

The implications for global-leadership development are threefold.

First, shifting to the rooted-cosmopolitan ideal described here
is critical to attracting and developing executives from emerging
markets. This approach makes it clear that ambitious young
Indians, for example, proud of their country, don’t have to refashion
themselves as Westerners to succeed in Western multinationals.

18Monika Hamori and Burak Koyuncu, “Career advancement in large organizations

in Europe and the United States: Do international assignments add value?,” The
International Journal of Human Resource Management, 2011, Volume 22, Number 4,
pp. 843–62.
19Manpower CEO Jeffrey A. Joerres suggests that outbound rotation programs for
managers are crucial to developing emerging-market talent. For more, see “Beyond
expats: Better managers for emerging markets,” mckinseyquarterly.com, May 2011.
 Developing global leaders 109

Second, escalating competition for talent in growth markets implies

that it is even more urgent for multinationals to diversify their
leadership teams quickly. One of the main advantages of local firms
is the fact that young recruits often can see, in the faces of the
current leadership, that if they excel they have a clear shot at rising
to the top. In many multinationals, such promises will require a
leap of faith until diversity is significantly expanded. And the local
competitors’ ongoing international expansion gradually diminishes
another advantage of foreign multinationals: the ability to offer a
wide range of global opportunities.

Third, incorporating more local talent will require a greater emphasis

on developing people. Tight talent markets and overstretched
education systems imply, frankly, that firms hire some people who
are not up to the standards they would prefer to uphold. Among
the great strengths of India’s IT firms is their ability to convert such
not quite fully prepared talent into effective performers on a
large scale.

It is indeed in today’s large emerging markets that the war for talent,
identified by McKinsey back in 1997, has become most acute.

Addressing the global-leadership gap must be an urgent priority

for companies expanding their geographic reach. Predictable
biases rooted in widespread misperceptions about globalization are
hampering their efforts to develop capable global leaders.

The author would like to thank Steven A. Altman and Joel Bevin for their help
researching and writing this article.

Pankaj Ghemawat, an alumnus of McKinsey’s London office, is a professor

of strategic management and the Anselmo Rubiralta Chair of Global
Strategy at the IESE Business School, in Barcelona. He is also the author of
World 3.0: Global Prosperity and How to Achieve It (Harvard Business
Publishing, May 2011), the source of the approach to global-leadership develop-
ment discussed in this article.

Copyright © 2012 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
110

Picture This

Diverse economies,
common pain points
Web 2012
MGI trade teaser
Exhibit 2 of 2
Over the last 15 years, many mature economies have
experienced trade deficits in primary resources.
These deficits
Over the last 15have
years,canceled out trade
many mature surpluses
economies from
have experienced
trade deficits in primary resources that have canceled out
knowledge-intensive goods and services.
trade surpluses from knowledge-intensive goods and services.

Net exports of mature economies,1 latest available data, % of GDP

2.0
Knowledge-intensive manufacturing
1.5
Surplus

1.0
Labor-intensive
services
0.5 Knowledge-intensive services
Capital-intensive
services2
0
Capital-intensive
manufacturing
–0.5
Health, education,
public services3
–1.0
Labor-intensive
manufacturing
Deficit

–1.5
Primary resources
–2.0

–2.5

–3.0

–3.5
1994 1996 1998 2000 2002 2004 2006 2008 2009

1United States, Japan, and EU-15 countries excluding Luxembourg; services exports do not include Belgium and
Denmark, because historical data are unavailable.
2Excludes trade in utilities for Japan.
3Majority of trade for health and education services is accounted for as travel and therefore is included in labor-
intensive services.
Source: Organisation for Economic Co-Operation and Development (OECD); McKinsey Global Institute analysis
 111

Many developed economies share knotty structural problems, according

to research drawn from two recent McKinsey Global Institute reports:
Help wanted: The future of work in advanced economies and Trading myths:
Addressing misconceptions about trade, jobs, and competitiveness,
available on mckinsey.com.

Q3 20112
PicThis: Common pain
Since the mid-1980s,
Exhibit 2 of 2
incomes have been growing faster
for the richest citizens in many developed countries than for
the poorest ones.
Since the mid-1980s, incomes have been growing faster for the richest
citizens in many developed countries than for the poorest ones.

Average annual change in real household income by income group, mid 1980s–late 2000s

4.5

4.0

3.5

3.0 New Zealand

United Kingdom Norway Ireland
Income growth 2.5 Sweden Finland
for top income Spain
decile, %
2.0
United States
Germany Portugal
Canada
1.5
Netherlands Denmark France
Italy Belgium Greece
Austria
1.0

0.5
Japan
0

–0.5
–0.5 0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5

Income growth for bottom income decile, %

Countries where high Countries where low

earners (top 10%) earners (bottom 10%)
experienced income gains experienced income gains
greater than low earners greater than high earners
(bottom 10%) (top 10%)

Source: Organisation for Economic Co-Operation and Development (OECD)

Applied Insight
Tools, techniques, and
frameworks for managers

Spotlight on marketing

113 126
Measuring Agile operations for
marketing’s worth volatile times

119
Five ‘no regrets’ moves
for superior customer
engagement

Photograph by France Malate


Measuring marketing’s worth
David Court, Jonathan Gordon, and Jesko Perrey
You can’t spend wisely unless you understand marketing’s full impact. Executives
should ask five questions to help maximize the bang for their bucks.
It’s 8 AM, and the chief marketing officer
is wading through his inbox. A board
member has e-mailed him about an oppor-
tunity to invest in an emerging digital
platform. It looks cool, but it’s speculative
and not cheap. Minutes later, the chief
financial officer appears in the doorway:
“The boss wants to sign a big sponsor-
ship deal. Can we drop out of TV for a
couple of months to pay for it?” The
CMO has barely started to explain what
happened the last time the company
went dark on TV—an aggressive rival
grabbed market share—when his assis-
tant interrupts. The CEO is calling.
“What’s going on with our brand image?”
she asks. “The latest monitor report
looks bad.” The CMO promises a full
debriefing later in the day, but he’s
not looking forward to the conversation.
Brand scores are down, and the reasons
are tough to manage: factors such
as bad experiences with intermediary
retailers and mediocre word of mouth.
The number and strength of such
competing pressures has been growing.
Seven years ago, when digital
advertising was still in its infancy and
113
long before social media had become a
marketing force, we described in
an issue of McKinsey Quarterly how many
traditional mass-marketing adver-
tising models were under attack and
suggested some approaches to
make marketing investments count in an
increasingly complex environment.1
Since then, we have been fortunate
enough to see more than 200 organiza-
tions tackle the difficult issue of how
to improve marketing’s return on invest-
ment (ROI). Over that period, as new
kinds of media have grown in importance
and mobile communications have
created new opportunities to reach con-
sumers, the ROI challenge has become
more intense.
In the face of growing complexity, relent-
less financial pressure, and a still-
challenging economic environment, mar-
keters are striving to exploit new-media
vehicles and to measure their impact
through new analytic approaches and
tools. Most are making progress. Yet
we are consistently struck by the power
of asking five seemingly basic questions.
These questions, detailed in this article,
114 2012 Number 3
cut to the heart of the quest to drive
returns on marketing spending. Coming
to grips with them, and gaining alignment
across the C-suite, is critical for making
real progress rather than becoming
bogged down by excessive firefighting
and ultimately futile debates about the
precision and certainty of measurement.
What exactly influences our
consumers today?
The digital revolution and the explosion
of social media have profoundly
changed what influences consumers as
they undertake their purchasing deci-
sion journey. When considering products,
they read online reviews and compare
prices. Once in stores, they search for
deals with mobile devices and drive
hard bargains. And after the purchase,
they become reviewers themselves
and demand ongoing relationships with
products and brands. Although com-
panies have access to terabytes of data
about these behavioral changes,
many still can’t answer the fundamental
question: how exactly are our custom-
ers influenced?
One global consumer products company,
for example, had for years relied
heavily on traditional marketing, such as
television and print ads. Concerned
about the growth of new media, the com-
pany decided to research just what was
influencing the choices of consumers—
and found that only 30 percent of
For more on purchasing decisions,
see “The consumer decision journey,” on
mckinseyquarterly.com.
them cited traditional advertising. In fact,
in-store interactions with consumers
were more important in communicating
the company’s message and driving
potential buyers to consider its products.
Yet salespeople, once critical to actu-
ally closing deals, had declined in impor-
tance because consumers regarded
Internet reviews as more objective. In
addition, these trends were not universal.
While the influence of advertising
had declined for existing products,
the impact of TV remained strong for
some new products, especially in
emerging markets. Armed with insights
such as these, the company was
able to construct a marketing allocation
model that factored in both the con-
sumer importance and cost-effectiveness
of different points of interaction. This
enabled much sharper decisions about
its marketing mix, both by geography
and in relation to specific product
situations.
Time and time again, we find that com
panies are aware of the growing impor-
tance of touch points such as earned
media but don’t understand the true mag-
nitude of their effects or how to influ-
ence them. The solution is usually to com-
mission research that gets at the heart
of understanding the consumer’s decision
journey. Such foundational work must
shine a light on the touch points and mes-
sages that actually influence consumer
behavior. Marketers must be ready to use
the findings to debunk accepted wisdom
and legacy rules of thumb. In today’s
fragmented media world, only by knowing
how consumers’ interactions with your
company have evolved can you begin to
 Applied Insight
make more cost-effective marketing
investments that truly influence purchase
decisions.2
How well informed (really) is
our marketing judgment?
Marketing has always combined facts
and judgment: after all, there’s no analytic
approach that can single-handedly
tell you when you have a great piece of
creative work. A decade ago, when
traditional advertising was all that mat-
tered, most senior marketers justifi-
ably had great confidence in their judg-
ment on spending and messaging.
Today, many privately confess to being
less certain. That’s hardly surprising:
marketers have been perfecting the TV
playbook for decades, while some
of the newest marketing platforms have
been around for months or even
weeks. But it can be tough to admit pub-
licly that your judgment is incom-
plete or out-of-date. And given the money We are excited by the possibilities that
required, it’s hard both to make a ratio-
nal investment case for additional market- no question. But data remain only as
ing spending and—in the same breath—
to admit that you are really making a
passionate guess.
Marketers often hear that the answer
to improving their judgment in this rapidly
changing environment is data, and
some companies have sophisticated ana-
lytical tools. Yet it’s difficult to integrate
all of this information in a way that not only
provides answers that you trust but
can also inform smart marketing changes.
We counsel a return to what creates
great marketing judgment: start by form-
115
ulating hypotheses about the impact
of changes to your marketing mix and
then seek analytical evidence.
One insurance company, for example,
spent a year working on a complex
demand model to try to understand the
impact of its growing marketing
spending in light of declining sales. Yet
output from the model “felt wrong,”
and the analytics were too complicated
for business leaders to understand.
It was only when the company articulated
specific questions it was trying to
answer, and designed targeted modeling
exercises to prove or disprove them,
that it was able to eliminate a lot of “noise”
in the data and uncover a clear relation-
ship between marketing spending and
business results. That’s when the internal
dialogue shifted from “should we be
spending on marketing at all?” to “what’s
the optimum marketing spending needed
to hit our targets?”
“big data” and advanced analytics create—
useful as the expertise you bring to bear,
and good judgment will remain a hall-
mark of the best marketers.
How are we managing
financial risk in our marketing
plans?
Successful communication requires
hitting the right audience with the right
message at the right time: a small,
moving target. With traditional media,
marketers have mitigated the risk of
116 2012 Number 3
failure through years of trial and
error about what makes great advertising.
That’s not the case with today’s new
media. Influence can shift rapidly, and
there is little accumulated experience
about which messages work, when mar-
keters should apply them, how they
can be scaled, or even whom they influ-
ence. Looking to external agencies is
little help; they’re in the same boat. At a
basic level, the degree of ROI risk—
getting the sales results you want from a
given amount of marketing spending—
has increased.
Yet while spending on new media
is a risky bet, it’s a bet companies feel
compelled to make. So the question
becomes how much risk is too much—or,
for that matter, too little. We’ve seen
efforts that result in short-term sales dips:
a retailer moving too quickly away
from circulars and a consumer-goods
player reducing TV spending too fast.
We’ve also seen companies feel the heat
from investors for rapidly ramping
up spending on digital channels without
cutting it elsewhere.
The global consumer products company
we mentioned earlier offers an alternative
approach. While its customer research
suggested that significant changes were
required in the way it allocated market-
ing spending, executives didn’t want to
choose an excessively risky path. They
therefore set risk parameters that enabled
some changes in the marketing mix
but limited the total shift in any given year.
There was a maximum percentage for
spending on unproven vehicles, for exam-
ple, as well as limits on annual spending
reductions in some channels or increases
in others. This simple allocation model
ensured a gradual move to emerging
media, mitigating risk while providing
breathing room for piloting, testing,
and learning.
That approach also can help with sce-
nario planning: one media provider
developed a straightforward decision sup-
port tool for precisely that purpose.
Geared to brand managers, not postdoc-
toral researchers, the tool used simple
response curves that allowed the marketer
to simulate different scenarios of mar-
keting spending. The tool was embedded
in an easily used PowerPoint slide
and proved invaluable for settling on
marketing approaches that hit the
sweet spot for a number of variables,
from cost to effectiveness to risk.
Such decision tools do more than provide
marketers with valuable information.
They stimulate dialogue about real trade-
offs and help to manage expectations
across business units and functions
whose cooperation is often critical when
companies change the broader com-
mercial mix. Managing risk is critical, and
marketers shouldn’t be shy about putting
this issue squarely on the table. With
thoughtful scenario planning and cross-
functional participation, such discussions
can be extremely rich and rewarding.
How are we coping with
added complexity in the
marketing organization?
As the external marketing environ-
ment becomes more complex, so must
the internal environment. Marketers
historically had a handful of communi-
cation vehicles; now they have dozens
 Applied Insight
of them, and the number is growing
rapidly. This proliferation has led to
the emergence of both external and
internal specialists, with accumulated
experience not only in media chan-
nels (such as social media) but even in
individual vehicles (such as Facebook).
The exponential growth in marketing
complexity seems unending and needs
to be managed.
We’ve found three things that are always
true in managing complexity within
the marketing organization. First, you’ll
require a number of specialists. You
just will. You can’t get the skills and knowl- for resources required centrally and in
edge you need in just one person,
and you’re not likely to get everything you
need internally. Second, you’ll need
somebody who both integrates marketing
efforts across channels and com-
munications vehicles and focuses on
the bottom line. In packaged-goods
companies, this was—and may still be—
the role of brand managers, but the
basic requirement is that it must be done
by someone. Finally, you’ll need
absolute clarity in processes, roles, and
responsibilities not only within the
marketing organization but also through-
out your company (across functions
and business units) and externally (with
agencies and external vendors). The
trust-based relationship between com-
panies and agencies isn’t at risk, but
everyone will have to accept that roles
are changing. (For more on organiza-
tional moves companies should make in
a world of more pervasive marketing,
see “Five ‘no regrets’ moves for superior
customer engagement,” on page 119.)
Addressing complexity in a compre-
hensive way requires a dedicated effort.
117
Senior executives at one North American
consumer-packaged-goods company,
for example, tried to sketch out their own
“future of marketing” with an eye to
how they would need to work differently
over the coming five years, given the
company’s growth priorities. No one pre-
tended to have a crystal ball, but exam-
ining the implications of several generally
accepted trends in consumer behavior
and media consumption habits made
some bold forecasting possible. The com-
pany then debated the future of brand
managers and specialist centers of excel-
lence and what that future implied
business units. Finally, it asked what
should be stopped or dramatically deprior-
itized. By undertaking this exercise,
the consumer-packaged-goods company
saw how it could keep its marketing
head count and budget relatively flat, while
massively shifting senior leadership’s
role, the culture of marketing, and
the capabilities of specialist and gener-
alist resources.
What metrics should we track
given our (imperfect) options?
In an ideal world, the financial returns
and the ability of all forms of communica-
tion to influence consumers would
be precisely calculated, and deciding the
marketing mix would be simple. In
reality, there are multiple, and usually
imperfect, ways to measure most
established forms of marketing. Nothing
approaches a definitive metric for
social media and other emerging commu-
nication channels, and no single
metric can evaluate the effectiveness of
all spending. Yet you must have a way
118 2012 Number 3
to track progress and hold marketers
accountable. That’s nonnegotiable. How
do you do it?
Even in the absence of a single way of
measuring ROI for different channels,
marketers should move toward an apples-
to-apples way of comparing returns
across a range of media. One international
logistics company, for example, faced
this necessity after committing more than
$200 million to rebrand itself following
a series of acquisitions. Senior executives
wanted proof that the effort was working—
and in a form they could readily under-
stand, not marketing jargon.
So the company adopted a simple three-
step approach: measuring the impact
of advertising on consumer recall, on the
public’s perceptions of the business,
and on sales leads and revenue. With
these data in hand—and proof that
the rebranding effort was ultimately
improving performance—members
of the C-suite had the assurance they
needed to reaffirm the investment
and to commit themselves to more com-
plex measurements, such as marketing-
mix modeling. Because the metrics
were developed internally, members
of the company’s board were simi-
larly reassured.
Likewise, one consumer-packaged-
goods company uses econometric ana-
lysis and frequent brand tracking to
assemble a scorecard of returns in the
short term (average and marginal
marketing ROIs within 12 months) and
the longer term (progress on brand
equity and brand loyalty for periods of
more than 12 months). The company
is tantalizingly close to its ultimate goal
of truly being able to make decisions
about short- versus long-term trade-
offs and to deliver complete answers to
“show me the money” requests.
Metrics are rarely perfect. Yet the volume
of data available today should make
it possible to find metrics and analytic
opportunities that take advantage of
your unique insights, are understood and
trusted by your top team, provide
proof of progress, and lay a foundation
for more sophisticated approaches
to tracking marketing ROI in the future.
The marketing environment continues to
change rapidly and often feels like a
moving target that’s impossible to hit. It’s
genuinely difficult to overemphasize
the magnitude of the change or the chal-
lenge. Yet time and time again, we find
that marketers who have good answers
to the five basic questions are better
equipped to do battle for the effective-
ness of marketing and to win the war
for growth.
1 See
David Court, Jonathan Gordon, and Jesko
Perrey, “Boosting returns on marketing investment,”
mckinseyquarterly.com, May 2005.
2See
Roxane Divol, David Edelman, and
Hugo Sarrazin, “Demystifying social media,”
mckinseyquarterly.com, April 2012.
David Court is a director in McKinsey’s
Dallas office, Jonathan Gordon
is a principal in the New York office, and
Jesko Perrey is a director in the
Düsseldorf office.
Copyright © 2012 McKinsey & Company. All
rights reserved. We welcome your comments
on this article. Please send them to quarterly_
comments@mckinsey.com.
 119

Five ‘no
regrets’ moves
for superior
customer
engagement
Tom French, Laura LaBerge, and Paul Magill

Customers are demanding very different kinds of relationships with companies.

Here are some ways to jump-start customer engagement across your organization.

No organization can avoid coming to the organization, so customer engage-

grips with the rapidly evolving behavior ment is now everyone’s responsibility.1
of consumers and business customers.
They check prices at a keystroke and are In many companies, the marketing
increasingly selective about which function is best placed to orchestrate
brands share their lives. They form impres- customer engagement for the entire
sions from every encounter and post organization. To do so, the function must
withering online reviews. As we noted in be pervasive—able to influence touch
a McKinsey Quarterly article last year, points it doesn’t directly control. Over the
these changes present significant organi- past year, we’ve seen a wide range
zational challenges, as well as oppor- of companies try to address customer
tunities. The biggest is that all of us have engagement in more integrated ways,
become marketers: the critical moments but many executives have told us they
of interaction, or touch points, between simply don’t know where to begin.
companies and customers are increas- The spectrum of organizational choices
ingly spread across different parts of is broader than ever, and companies
120 2012 Number 3
are struggling to determine the appropri-
ate role of marketing for their business.
What’s more, senior executives often view
any internal effort by the marketing fun-
ction as a “land grab.” Given the absence
of solid return-on-investment data (see
“Measuring marketing’s worth,” on page
113), they may express skepticism about
marketing’s place in the new environment.
Although these challenges are difficult to
overcome, companies need not be fro-
zen in place while they wait for a complete
picture of the answer to emerge. The
five “no regrets” moves described below
help senior executives to move beyond
their function-by-function view of custo-
mer engagement and to improve the
coordination of activities across the broad
range of touch points they must care
about. By widening the lens companies
use to view customer-engagement
needs, enabling more rapid responses,
and building internal lines of commu-
nication, these steps create nimbler orga-
nizations with more pervasive marketing.
1
Hold a customer-engagement
summit
Almost all companies have annual or semi-
annual business-planning processes
that bring senior managers together from
units and functions to discuss strate-
gies and objectives. Yet few undertake a
similar process to discuss how to
engage with the lifeblood of all companies:
customers. We recommend holding
such a summit, with a participant list that
starts right at the top and cuts across
units and functions. At one US health
insurer, for example, the CEO’s direct
involvement sparked a company-wide
dialogue about how dramatically customer
behavior had changed and the breadth
and speed of the tactics required to
keep up.
The focus of such a summit is customer
engagement, which should not be
confused with the customer experience;
engagement goes beyond managing
the experience at touch points to include
all the ways companies motivate cus-
tomers to invest in an ongoing relationship
with a product or brand. The summit
must address three things. First, line and
staff managers have to align on the
vision for engagement: what relationship
do you want with your customers?
Examining their decision journey helps
you to compare your level of engagement
with what you believe it should be.
After Starbucks investigated customer
engagement in France and Italy, for
example, it concluded that consumers in
those countries preferred traditional
local café formats. As a result, it invested
in distinctive store layouts and furnish-
ings and adjusted its beverages and ser-
vice techniques.2
Second, the summit’s participants should
coordinate the activities required to
reach and engage customers across the
full range of touch points. When one
multichannel retailer held its summit, the
company, like many others, discov-
ered that recent trends had left it with an
anachronism: a set of touch points that
should be coordinated but were instead
managed independently within func-
tional silos. A customer-engagement sum-
mit allows the senior-management
 Applied Insight
team to create a coordinated plan span-
ning them—so that, for example, the
customer experience in a call center can
be coordinated with the behavior
of frontline employees, or the online-
registration experience with product
development.
Finally, a company ought to agree on the
elements of the customer-engagement
ecosystem that should be undertaken in-
house and those that will involve out-
side partners. Internal resources probably
won’t be able to deliver all of the require-
ments imposed by a world with many
touch points: for instance, content and
communications; data analytics and
insights; product and service innovation;
customer experience design and delivery;
and managing brand, reputation, and
corporate citizenship. Senior leaders need
to decide how to carry out these activ-
ities and design the mix of in-house capa-
bilities and external partners that will
deliver them. These customer-engagement
planning sessions, in addition to informing
and motivating the organization as a
whole around customer engagement, can
help avoid spreading scarce resources
too thinly.
Almost all companies have business-planning
processes that bring senior managers together
to discuss strategies and objectives. Yet few
undertake a similar process to engage with the
lifeblood of all companies: customers.
121
2
Create a customer-
engagement council
One of the first outcomes of a customer-
engagement summit will probably be
the realization that an ongoing forum for
focusing management’s attention on
engagement is needed. This doesn’t have
to be yet another marketing committee.
In fact, your customer-engagement coun-
cil may already exist under another
name, such as the strategic-planning or
brand council. The purpose is to bring
together all primary forms of engagement—
marketing, communications, service,
sales, product management, and so on—
to coordinate tactics across touch
points in a more timely manner.
This council, which should be an oper-
ational and decision-making body, must
translate the findings of the customer-
engagement summit into specific actions
at individual touch points. To accom-
plish this goal, the council’s membership
needs to be large enough to ensure
that all key players are represented but
small enough to make decisions
122 2012 Number 3

efficiently. One high-technology company, “owners.” Marketing, for example, might

for example, included 17 people on
the engagement council. Because it is
difficult to make it function efficiently
with more than a dozen or so members,
decision making in practice rested
with a core group comprising the chief
marketing officer and the heads of
the company’s three primary divisions;
subteams of the council coordinated
its decisions with the company’s other
entities when necessary. These coun-
cils are most effective when chaired by
the same person who leads the customer- in breaking the “silo” mind-set that
engagement summit, such as the CMO
or the head of communications, strategy, engagement in many organizations.
sales, or service.
The second consideration is how regularly functions and business units and as
the council should meet. The customer-
engagement council of one retail bank
meets weekly, for example; a similar
council at a social-services organization,
monthly. The frequency of such meetings
generally is based on what key engage-
ment activities the group is driving and
their cycle time. The third consideration
involves inputs and support: the council
must make fact-based decisions, so
it needs information on everything from
priority touch points to customer
behavior and the moves of competitors.
Finally, such a council must have a
customer-engagement charter. To reduce
the risk of gaps, rework, and turf wars,
everyone in the organization needs
clarity about decision rights over touch
points and the key processes that
affect them. As we explained last year, it’s them effectively. Companies need
useful to allocate the design, build,
operate, and renew rights for specific
touch points explicitly to functional
design and renew scripts for a call center,
which sales or operations would build
and operate. In addition, the process of
developing a charter is useful to force
a dialogue about who owns and does
what. More specifically, what does
marketing do in customer engagement?
What does it not do?
When conceived, constructed, and
operated correctly, these customer-
engagement councils play a critical role
diminishes the effectiveness of customer
Such a council often serves as a mediator
and decision maker in conflicts between
a filter for what must be elevated to the
level of the CEO or other senior leaders.
3
Appoint a ‘chief content
officer’
A decade ago, when the extent of
the digital revolution—the massive
proliferation of media and devices
and the empowerment of consumers via
social networks and other channels—
became clear, many companies quickly
appointed “digital officers” to oversee
these emerging touch points. It’s now evi-
dent that the challenge is not just
understanding digital channels but also
coping with the volume, nature, and
velocity of the content needed to use
to create a supply chain of increasingly
sophisticated and interactive content
to feed consumer demand for information
 Applied Insight 123

and engagement, not to mention a brand perceptions to understand the com-

mechanism for managing the content pany’s character deeply—its heritage,
consumers themselves generate. The purpose, and values—and with areas
emergence of companies-as-publishers such as corporate social responsibility,
demands the appointment of a chief investor relations, and government
content officer (CCO). affairs to gain a full perspective on how
the company interacts with external
Companies across industries—from stakeholders.
luxury goods to retailing, financial services,
automotive, and even professional
sports—are creating versions of this role.
All are adopting a journalistic approach
4
Create a ‘listening center’
to recognize hot issues and shaping
emerging sentiment by delivering com- Engagement is a conversation, yet com-
pelling content that forges stronger panies are increasingly excluded from
emotional bonds with consumers. The many of the most important discussions.
CCO role is designed to provide the More social and other media are avail-
on-brand, topical, and provocative con- able to mobilize your fans and opponents
tent needed to engage customers. than ever before, and any interaction
The CCO must develop and manage all between a customer and your company
aspects of the supply chain for con- could be the match that starts a viral
tent, ranging from deciding where and fire. In this environment, companies should
how it’s sourced to overseeing the establish listening centers that monitor
external agencies and in-house creative what is being said about their organiza-
talent generating it. tions, products, and services on social
media, blogs, and other online forums.3
Companies shouldn’t forget that even
with a CCO in place, designing and Such monitoring should be hardwired
executing a content strategy still requires into the business to shorten response
coordination with several key business times during real and potential crises,
areas. The group responsible for gathering complement internal metrics and tradi-
and analyzing customer insights, for tional tracking research on brand
example, may need a new mandate to sup- performance, feed consumer feedback
port the CCO by providing research into the product-development pro-
on what customers and segments require, cess, and serve as a platform for testing
as well as where, when, and how that customer reactions. We’re already
content can most effectively be delivered. seeing listening centers established across
The CCO may need help from human a broad swath of sectors from financial
resources to find, attract, manage, moti- services to hospitality to consumer goods.
vate, and develop the in-house creative A French telecommunications company
talent often required to fulfill a content not only monitors online activity but also
vision. The CCO will have to work closely has a tool kit of prepared responses.
with the team responsible for shaping “I can’t predict what crisis will hit,” a senior
124 2012 Number 3
executive at the company said. “But
depending on the magnitude of it, I know
the people I need to get in the room and
what to discuss.”
5
Challenge your total
customer-engagement budget
Many companies struggle to figure
out how they can afford all the new tactics,
vehicles, and content types required
to engage with customers effectively. We
propose a different mind-set: recog-
nizing that there’s plenty of money, but in
the wrong places. Companies can
now communicate with customers much
more productively: digital and social
channels, for example, are radically
cheaper (and sometimes more effective)
than traditional media communica-
tions or face-to-face sales visits. When
you make trade-offs across functions,
you can free large amounts of money to
invest elsewhere; if the experience
of customers is so positive that they vol-
untarily serve as advocates for your
brand, for example, can you reduce adver-
tising expenditures? The moves your
customer service center makes to resolve
a crisis—say, a lost credit card on a
honeymoon or a major machine failure
on a critical production run—may
build more lifetime loyalty than years of
traditional loyalty campaigns.
For more on fostering innovative thinking,
see “Sparking creativity in teams: An executive’s
guide,” on mckinseyquarterly.com.
What prevents many companies from
realizing these productivity gains
and cross-function trade-offs is a failure
to look at total spending on customer
engagement. They don’t see the opportu-
nities to make trade-offs across func-
tions and optimize the impact of invest-
ments across the entire set of touch
points. Most budget on a function-by-
function basis, and measure impact
the same way. When you look at these
expenditures and investments that
way, there is almost never enough money,
because each function seeks increased
funding to improve the customer inter-
actions for which it is accountable. That’s
a losing game.
Instead, add up what you spend on cus-
tomer engagement—in areas such as
sales, service, operations, and product
management, as well as in marketing.
Then identify all the radically cheaper
approaches you could take and ask,
for example, how you would take them
if your budget was 15 percent of its
current size or how a competitor in an
emerging market would approach
this problem. Such exercises help to
break the ingrained assumptions
and conventional wisdom that creep into
organizations and to highlight overlooked
opportunities.
Finally, look at trade-offs across
functions—for example, among invest-
ments in store renovations, revamped
e-commerce sites, higher ad spending,
changes in your model of sales force
coverage, or improved operations in cus-
tomer service centers. Which of these
 Applied Insight
should be prioritized and in what order?
Such decisions should be made not just
on the projected financial returns but
also on a strategic assessment of how
customer expectations are evolving,
how competitors are changing their meth-
ods of customer engagement, and
where your company may have distinc-
tive capabilities that could help it win
through superior customer engagement.
One major Asian retailer did exactly
this. Faced with ever-rising costs, it looked
at its entire customer-engagement
budget and identified where it was under-
performing or missing out on new
approaches to engagement. With that
baseline, it cut 25 percent off its tra-
ditional marketing budget, invested in
customer service, and reallocated
other marketing expenditures to focus on
digital, social, and mobile channels.
By reducing in-store operations costs, the
retailer financed new investments in
a major loyalty program to improve its
engagement with customers. As a result,
70 percent of the company’s sales now
are to members of its loyalty program—
about three times the rate of its competi-
tors. Total costs are lower and mar-
gins higher, despite a challenging retail
environment.
More customer interactions across more
touch points are shaping the degree
of engagement a customer feels with
your company. The critical barrier to
harnessing the potential value in this shift
is organizational—companies that
learn to design and execute effective
customer-engagement strategies will
125
have the advantage; the others will lose
ground. We have no doubt that com-
panies will one day evolve the full set of
processes and structures needed to
manage customer engagement across
the whole organization. Until then,
these five steps can get you moving in
the right direction.
1 See Tom French, Laura LaBerge, and Paul Magill,
“We’re all marketers now,” mckinseyquarterly.com,
July 2011.
2SeeLiz Alderman, “In Europe, Starbucks adjusts to
a café culture,” New York Times, March 30, 2012.
3For more about the importance of monitoring
social networks and responding to consumers, see
Roxane Divol, David Edelman, and Hugo
Sarrazin, “Demystifying social media,”
mckinseyquarterly.com, April 2012. For some real-
life examples of how companies are using social
media to drive engagement, see “How we see it:
Three senior executives on the future of marketing,”
mckinseyquarterly.com, July 2011.
Tom French is a director in McKinsey’s
Boston office; Laura LaBerge and
Paul Magill are senior experts in the
Stamford office.
Copyright © 2012 McKinsey & Company. All
rights reserved. We welcome your comments
on this article. Please send them to quarterly_
comments@mckinsey.com.
126

Illustration by Daniel Bejar

Agile operations for

volatile times
Mike Doheny, Venu Nagali, and Florian Weig

By improving how risk is measured—and managed—in global operations,

companies can adapt to changing conditions faster than competitors.

The specter of a catastrophic failure in one persistent, sources of disruption, such

or more links of a company’s global
supply chain haunts senior executives
in many industries: for example, the
overnight flood or fire that disrupts a key
supplier and quickly grinds production
to a halt half a world away. Well founded
as such worries are, given the increas-
ingly globalized and interconnected oper-
ations of large organizations, they are
hardly the only risks facing supply chains.
No less significant are subtler, and more
as fluctuating demand, labor rates,
or commodity prices that together chip
away at profits, increase costs,
and force organizations to miss market
opportunities.
All of these issues have become more
acute in recent years as rising volatility,
uncertainty, and business complexity
have made reacting to—and planning for—
changing market conditions more diffi-
 Applied Insight 127

cult than ever. The addition of some
three billion consumers to the global
middle class over the coming two
decades, and the strains they will place
on global resource supplies, all
but guarantee that such pressures
will continue.
Against this backdrop, some companies
in industries as varied as automotive,
building products, chemicals, high tech,
and pharmaceuticals are refocusing
global operations to make them more
agile. Notably, these companies aren’t
just spotting and mitigating supply
chain risks. They are also seeking ways
to use volatility to gain advantages
over rivals.
In response, a small team of executives
investigated a set of high-priority
products—those with great potential to
influence the company’s financial
results and public-health outcomes. The
team also catalogued the risks asso-
ciated with these products at major points
along the supply chain, from product
development to distribution. This
approach allowed the team to visualize
more clearly what problems might
occur and where: for example, the risk
that raw materials from suppliers might
be rejected for quality reasons early
in the process or that process disrup-
tions could, later on, delay production
in plants operated by the pharma com-
pany or a supplier.

In this article, we’ll examine three com- In parallel, the team assessed the impact
panies that are seeking advantages of each of these risks on three of the
from greater operational agility. While company’s major supply chain objectives:
each is benefiting in different ways, all are meeting customer demand in a timely
developing similar skills that should way, as well as achieving cost and quality
position their organizations well for years targets. By creating a scoring system
to come. that converted the assessments into
simple numerical scores, the team could
compare risk exposures and discuss
Mitigate downside risks the company’s appetite for risk in an
“apples to apples” way at the corporate
A globally diversified pharma company level and across divisional and func-
faced daunting operational challenges: tional boundaries.
not only were upstream supply shortfalls
causing downstream production delays The results were eye opening. Products
(and headaches for customers) but the representing more than 20 percent
company was also about to initiate quality- of the company’s revenues depended, at
related product recalls. Together, these some point in their life cycles, entirely
problems threatened to damage its profits on a single manufacturing location. That
and reputation seriously. What’s more, was a much higher proportion than
as senior leaders began to address the senior executives had assumed, given
problems, they concluded that the the company’s large global network
organization’s existing processes weren’t of plants. Similarly, fully three-quarters of
sufficient to identify—let alone mitigate— the several dozen products that one
potential sources of supply chain risk. business division made contained mate-
128 2012 Number 3
rials or components from single suppliers—
a finding that had big implications
for public health and the health of the
company’s reputation should a sup-
plier have problems. The exercise also
highlighted where the company was
likely to miss sales because of factors
such as poor demand forecasting
or capacity constraints (Exhibit 1).
In addition to suggesting some immediate
changes (measures to improve prod-
uct quality, for instance), these findings
helped executives create new risk
thresholds to serve as operating “guard-
rails.” For example, the company
no longer allows any particular plant to
account for more than a certain per-
centage of corporate revenues. It also
embarked on a far-reaching dual-
sourcing program to increase its operating
flexibility by guaranteeing better access
to supply. Thus far, the company reckons
it has lowered its risk exposure by
more than 50 percent and almost com-
pletely eliminated the most catastrophic
risks it faced, at a cost equivalent to
less than 1 percent of annual revenues.
Finally, company leaders established
a new, full-time team of managers
with expertise in supply chains, marketing,
finance, and other disciplines to work
with the business units to track and report
on risk-related issues regularly. The
“risk dashboards” the team creates have
given the company a common lan-
guage to use when discussing risk and
help prompt the kinds of timely con-
versations among functional leaders that
should help identify potential problems
before they occur.
Spot upside potential
Of course, the benefits of increased oper-
ational agility extend beyond iden-
tifying and protecting against downside
risks. Indeed, when companies enable
their operations to respond more quickly,
they often unlock the ability to seize
an upside potential that was previously
unreachable.
Consider, for example, the experience
of a global automaker whose leadership
team was concerned about the industry’s
multiyear development and investment
cycles. Recently, they asked a team
of supply chain executives to determine
the company’s degree of flexibility
and ability to react to potential swings in
demand, both negative and positive,
depending on how the fast-developing
global debt crisis played out.
The company’s models had long been
much better at predicting demand in
stable macroeconomic conditions than
in more volatile ones. The team there-
fore also took a broader look at the
primary causes of demand swings facing
the industry. Ultimately, it worked its
way through two dozen or so sources of
volatility until it arrived at the four it
believed mattered most: growth in two
key emerging markets, unpredictable
regulation in those markets, regionalized
downturn scenarios in established
markets, and volatility associated with
new market segments for which the
company didn’t have enough historical
baseline data to guide planning
decisions. As the team discussed how
various scenarios might play out, it
realized that the existing system of linear
Q3 2012
Op Agility
Exhibit 1 ofApplied
2 Insight 129

Exhibit 1
An ‘apples to apples’ analysis of risk was eye opening
An ‘apples to apples’ analysis of risk was eye opening for executives
for
at a executives at acompany.
pharmaceutical pharmaceutical company.
Sample assessment of corporate-level risks

Type of risk Number of risks

Moderate level of risk High level of risk

0 10 20 30 40 50 60 70

Single manufacturing site

Single supplier source

Quality and regulatory

Capacity constraints

Uncertain demand forecast

Supply and commodity shortfall

Process-equipment failure

Production process robustness

IT related

Commodity costs

extrapolation combined with best- and
worst-case scenarios was too limited.
The “aha moment” came when the team
decided to view the future as a dis-
tribution of outcomes and not a single,
forecasted point. The team members
knew they couldn’t build a system to man-
ufacture all cars required in every
possible scenario in which demand was
higher than expected (such a system
would have required investment levels
that could not be economically justi-
fied in the majority of situations). Yet they
did have the analytical capacity to model
these scenarios, using Monte Carlo
simulation and other traditional techniques.
This approach led the group to gene-
rate a probability distribution of demand
(by geography and by product) that
together included some 15,000 scenarios.
To this bell curve, the team mapped
the ability of the company’s production
network to meet potential demand
profitably in each scenario.
Happily, the executives saw that their
planning group’s original estimates
were broadly consistent with what the
new approach predicted as the most
likely outcome. Less happily, they could
now also assess how much upside
potential they had foregone in previous
years and clearly see how much they
130 2012 Number 3

might forgo in the coming ones if some
of the more positive demand scenarios
played out (Exhibit 2). In aggregate, they
estimated this future upside potential
represented a significant share of the
company’s annual profits.
Certainly, much of this amount was impos-
sible to capture and always would
be—only one demand scenario would
prove correct, after all, and produc-
tion resources are finite. Nonetheless,
armed with this information, the
executives could now begin to look for
ways to increase the company’s
operational flexibility on the margins to
capture more of the upside if demand
Q3 2012higher than expected. By running
proved
Op Agility
some of the scenarios at the level
Exhibit 2 of 2
of individual production plants, the team
spotted bottlenecks it could begin
to unclog immediately. Some are being
tackled through straightforward oper-
ating improvements at the line level;
others will require modest tooling changes.
Adapt to changing conditions
Changing competitive dynamics are
pressuring companies to introduce more
and more product variations to chase
new customers in new markets. In such
circumstances, operational agility
will increasingly represent a competitive
edge. Consider the case of a global
medical-device manufacturer that spe-
cializes in high-volume business-to-
business products with relatively low
margins. Over the years, the company
has honed its operations to maximize effi-
ciency and maintain advantages over

Exhibit 2

A global automaker’s demand–supply simulations

revealed inflexibility.
A global automaker’s demand–supply simulations revealed inflexibility.

Disguised example

Gap indicates lack of

operational flexibility

Average buildable supply Average market demand

High

Scenarios with
Demand lost revenue
Probability scenarios
distribution of
15,000 scenarios
Buildable
scenarios

Low
Low High
Number of cars sold
 Applied Insight
competitors through a combination of
high quality and large scale. In fact,
many of the company’s operational
capabilities in these respects are
world class.
Those scale-oriented skills, though,
were most effective in relatively stable
markets—and the company had
recently recognized that some of its core
businesses were entering a phase of
rapid flux. New technology was providing
attackers with openings to introduce
products that had the potential to redefine
entire categories. Reacting to the
changes, the company’s leaders realized,
would require more flexibility not only
on the shop floor but also upstream,
during product development. Indeed, the
two needs were interrelated. Only by
increasing the proportion of shared com-
ponents and designs in some products
(and product families) could the company
economically produce its own new
offerings on the same machines and
production lines.
Implicit in these changes was a belief
that demand for several of the new prod-
ucts would grow. That wasn’t a fore-
gone conclusion, though, and if the com-
pany moved too quickly toward more
flexible production approaches, it might
wind up with too much capacity and
could even put at risk the economics of
some of its traditional products. To
mitigate this risk, the company carefully
phased in the evolution of its manu-
facturing approach to ensure that the dif-
ferent stages of the work preserved the
maximum option value of stopping early
should the expected demand not mate-
rialize. Today, as the company continues
to expand the new approaches across
its production platform, its leaders esti-
131
mate that these moves have already
lowered capital costs for the targeted
products by 40 percent as com-
pared with the traditional approach, while
reducing the ramp-up time for
new product variations by 75 percent.
In parallel, the company is revisiting the
skills it requires in product developers
and operations staff to ensure that new
hires have both the “hard” technical
skills and the “softer” ones necessary to
identify and prioritize uncertainties.
In our experience, such forward-looking
organizational moves are wise. Com-
panies that can make the ability to pre-
empt, detect, and respond to risk a
part of the institutional mind-set will hold
a big edge in an increasingly volatile world.
Across many industries, a rising tide of
volatility, uncertainty, and business
complexity is roiling markets and changing
the nature of competition. Companies
that can sense, assess, and respond to
these pressures faster than rivals will
be better at capturing the opportunities
and mitigating the downside risks.
The authors wish to thank Christophe
François, Isabel Hartung, and Alex
Niemeyer for their contributions to the
research underlying this article.
Mike Doheny is a principal in
McKinsey’s Atlanta office, Venu Nagali
is a consultant in the New York
office, and Florian Weig is a principal
in the Munich office.
Copyright © 2012 McKinsey & Company. All
rights reserved. We welcome your comments
on this article. Please send them to quarterly_
comments@mckinsey.com.
 For the research underpinning
132
the exhibit, see “What marketers
say about working online,”
on mckinseyquarterly.com.
Extra Point

What keeps marketers up

at night
Peter Dahlström, Chris Davis, and Tjark Freundt
Q3 2012
Extra point: Digital challenges
Hardly a day goes by without news of yet another marketing coup, from companies releasing
Exhibit 1 of 1
television commercials that go viral to new approaches for using digital technology to forge
deeper engagement with customers. Leaps in digital technology have made such breakthroughs
possible, but they’ve also created a host of new challenges. Last year, we surveyed almost
800 leading practitioners worldwide about digital marketing. The chart below, drawn from that
research, identifies the ten most difficult challenges that digital marketers face, as well as
their companies’ progress—or lack thereof—in tackling them.

High Mining customer insights

Navigating social-media
phenomenon

Biggest challenges, but

most developed plans
Sizable challenges, not
yet fully addressed
Lack of social-media metrics
Difficulty to resolve

Marketing-talent gap,
Digital revolution’s threat especially analytics
to business models
Structuring
organization to make Recognizing online
marketing pervasive opportunity in all age
groups

Moderate challenges,
modest gap in plans Online tools increasing Overreliance
price transparency on data stifling
Automated interactions
breakthrough
increasing customer
innovation
dissatisfaction Moderate challenges,
not yet addressed
Low
Well prepared Unprepared

Companies’ ability to address challenges1

1 For “well prepared,” ~70% of surveyed marketers have developed plans to address challenges; for “unprepared,”
only ~30% have plans in place.

Peter Dahlström is a director in McKinsey’s London office, Chris Davis is an associate principal
in the Toronto office, and Tjark Freundt is a principal in the Hamburg office.

For more about some of marketing’s thorniest challenges—how to structure a

marketing organization in a digital era and finding the right metrics to measure
“marketing ROI”—see “Five ‘no regrets’ moves for superior customer engagement”
and “Measuring marketing’s worth,” on pages 119 and 113, respectively.

Copyright © 2012 McKinsey & Company. All rights reserved.

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McKinsey & Company.
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