This Quarter
Kevin Sneader
Just as the makers of commercial sailing ships once vainly tried to fight off the challenge of steam, many of today’s companies strive to get better only at what they have always done. The latest Quarterly Pocket Edition is a clarion call for reinvention. It highlights the “high speed” practices of organizations that execute digital change, the tactics of businesses that rigorously reallocate resources, the strategies of M&A outperformers, and the secret of how to unblock negative mind-sets.
Summaries in this edition …
ON THE COVER
DRIVING CHANGE
All in: From recovery to agility at Spark New Zealand
Getting personal about change
Lost in translation
Hire as many data scientists as you can find—you’ll still be lost without translators to connect analytics with real business value. To learn how to help bridge the gap between data scientists and frontline managers, read this edition of the Five Fifty, the Quarterly’s timely dose of smart, delivered to your phone.
RESEARCH THAT MATTERS
Admit it, your investments are stuck in neutral
The Chinese luxury consumer
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The drumbeat of digital: How winning teams play
Global managing partner, Hong Kong office McKinsey & Company
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The public sector gets serious about customer experience
Confronting overconfidence in talent strategy, management, and development
The Five Fifty
Can artificial intelligence help society as much as it helps business?
CLOSING VIEW
How winning teams play
The drumbeat of digital
Pocket Edition / 2019 Number 3
The secret ingredient of successful big deals: Organizational health
Compound growth at MilliporeSigma
How lots of small M&A deals add up to big value
DEALING WITH M&A
Pocket Edition
Last Laugh
The need for speed
I admire the digital team’s commitment to speed, but I’m starting to get concerned.”
“
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Hire as many data scientists as you can find—you’ll still be lost without translators to connect analytics with real business value. Learn how to help bridge the gap between data scientists and frontline managers.
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Article summary
by Jacques Bughin, Tanguy Catlin, and Laura LaBerge
Pace and power go hand in hand for digital leaders, which typically run four times faster and pull critical strategic levers two times harder than other companies do.
The problem
Exhorting companies to “change at the speed of digital” generates more anxiety than answers. Leaders fret about how much and how fast to adapt their information-gathering systems, direction-setting approaches, and talent-management norms.
Why it matters
Digital is transferring value to consumers, while profits are bleeding across industry boundaries. Companies that are slow to change will be left behind.
Currently viewing
Start by recognizing that how your organization approaches its day-to-day actions will determine its digital destiny. As Gandhi said, “Your actions become your habits; your habits become your values; your values become your destiny.” Pay heed to McKinsey research showing that leading digital players may move as much as four times faster than the rest:
What to do about it
Exhibit
The top economic performers follow a faster rhythm in repeating critical practices.
Respondents at top-performing companies
4 of the 10 practices
They engage with customer data weekly rather than monthly.
•
Their critical learning processes shift from quarterly to monthly.
They reallocate talent quarterly instead of annually.
boosting the agility with which digital talent is deployed, and the flexibility with which resources are reallocated
dramatically speeding up the sharing of insights around the organization
creating opportunities for real-time digital learning
Focus on strategic moves. McKinsey research suggests that leading players pursue digital M&A and invest capital in digital-transformation efforts about twice as intensively as everyone else. Keep top management focused on the rhythm of the interrelated actions needed to support digital goals. These will vary according to the organization’s starting point and digital priorities. Typical ones in our experience include the following:
shifting the culture to make managers and employees less afraid of failure as they pursue digital initiatives
All other respondents
Annually or less often
Quarterly
Monthly
Weekly
Median frequency
1
Integrate customer-data sources
Share test-and-learn findings
Reallocate digital talent
Defund underperforming initiatives
Programmatic acquirers build up organizational infrastructures and establish best practices across all stages of the M&A process. They:
Recent research suggests that frequent and nimble deal making is even more important in today’s fast-moving and uncertain business environment. Alternative approaches, moreover, seem to underdeliver.
We’ve known for at least a decade that companies that pursue many small deals over many years create more value than those that rely on episodic “big bang” transactions—but switching to this “programmatic” model is a challenge.
New research confirms that companies that regularly and systematically pursue mergers and acquisitions deliver better returns to shareholders than companies that don’t.
by Jeff Rudnicki, Kate Siegel, and Andy West
Programmatic acquirers are well represented among the companies that remained in the Global 1,000 over ten years.
Distribution of 2007 Global 1,000 in 2017, %
Develop a blueprint that brings strategic goals into deal sourcing, identifying market trends, and addressing questions such as whether you are the best owner of the assets you are considering, and whether they are priced right.
Tackle due diligence and integration planning simultaneously: discussing the redefinition of roles, the combining of processes, or the adoption of new technologies well before the deal closes. Corporate culture and organizational health are important concerns for those who execute well.
Treat M&A as an enduring capability rather than a project or occasional event. That could mean building an end-to-end M&A operating model with clear and detailed performance measures, incentives, and governance processes.
Global 1,000 comprises companies that are among the top 1,000 by market capitalization; excludes companies headquartered in Africa and Latin America. Figures may not sum to 100%, because of rounding. Source: Global 1,000 2017; Thomson Reuters; McKinsey analysis
Top 250 survivors
Top 100 survivors
Programmatic
All survivors
All dropouts
8
49
Organic
13
Selective
30
Large deal
14
9
48
28
6
38
5
60
CEO Udit Batra describes what it took to fuse two vibrant R&D organizations, as well as the business value realized from their integration.
Key takeaways from Merck’s $17 billion merger with Sigma-Aldrich:
And a few reflections on how his leadership style changed as a result:
“I think I have become much more deliberate about decisions. By that I mean, I ask myself if the decision is mine to make or someone else’s, if it’s the right time to make the decision, and what the second-order effects might be. I have also come to learn the difference between motivation and inspiration. Motivation can be fear based, or it can be financial. But inspiration has to come from a personal connection, a place of authenticity. To lead an integration, you need a little of both. You must also personally feel inspired by the possibilities in acquisition and integration—because these are difficult, demanding business transformations.”
Many of the critical building blocks underpinning the current mobility revolution, and their potential, are becoming clear. They are most easily remembered by the acronym ACES: autonomous driving, connectivity, the electrification of vehicles, and shared mobility.
“Build a personal connection to the culture. As a leader, you need to present a fact-based case for change, but you also need to appeal to employees’ desires to feel included in decision making and to be part of something bigger than themselves. When you walk around, people will know if you’re interested in the products or the company mission or not. You cannot fake it.”
4.
“Focus on the top line before you focus on costs. It can be tempting to quickly go after cost targets, but you run the risk of losing sight of what had made these companies so successful in the past.”
3.
2.
“Spend time listening and learning . . . you need to get a comprehensive understanding of the situation. You can conduct deep, fact-based analyses; or you can read through analysts’ reports or other literature; or you can just talk to people, colleagues. Probably, it’s best to do all of those things.”
1.
“Be the ‘simplifier in chief.’ Provide tools and processes people can use to guide them through the integration. We used learning maps, for instance, and introduced problem-solving frameworks to help focus the organization and remove some of the fear of change.”
Read the full interview
Major deals are on the rise—but most acquirers don’t match the substantial investments they make in due-diligence efforts, such as scanning their targets and crunching the numbers with sufficient self-diligence.
We know healthy businesses dramatically outperform their peers— and the same applies in an M&A context. Our research shows a strong correlation between the preclose organizational health of the acquirer and the postclose financial performance of the newly combined company.
Embrace three behaviors that are typical of healthy organizations and that strongly correlate with the creation of deal value:
by Becky Kaetzler, Kameron Kordestani, and Andy MacLean
Creating value from a merger is not easy. Acquirers that get it right start with an overlooked advantage: a healthy organization.
Talent management. Select the best candidates to deliver the new vision and strategy by searching across both companies, as well as externally. Track the balance of candidates for key roles and build in mechanisms to avoid unconscious bias in favor of candidates from the acquiring company.
External focus. Communicate early and often with customers, while seeking and acting on their feedback to the merger. Collaborate with external partners to enhance performance of the new entity. Use the merger as a catalyst for bringing in new, external ideas and methods to invigorate the organization and to spark innovation.
Internal discipline. Run a tight integration process, emphasizing role clarity and performance clarity, along with strong financial and consequence management. One merged entity addressed dramatic policy and process differences between acquirer and acquired by creating a “buddy” system that paired up personnel from the two companies and supported target-company employees as they adopted more rigorous practices.
Unhealthy acquirers destroy value, while healthy acquirers create value and tilt the odds toward success.
Median change in excess total returns to shareholders, %
Healthy companies
Unhealthy companies
Source: Organizational Health Index by McKinsey
All large deals
2 years after close of deal
–17
–6
+22
+11
The need to shift mind-sets is the biggest block to successful transformations. The key lies in making the shift both individual and institutional—at the same time.
by Scott Keller and Bill Schaninger
Make it personal. Help individuals to overcome bias and to commit to changing themselves, using off-site, workshop-based learning journeys of small groups of 20 to 30 employees.
Take the time and use the tools available (for example, laddering, focus groups, and qualitative data analysis) to identify the unconscious and limiting mind-sets. It’s not enough just to recognize the behavioral changes required.
When employees become open to new ways of looking at what’s possible for them and their organization, they can never return to a state of not having that broader perspective. Leaders must follow a three-step process to achieve this outcome:
Failure to shift mind-sets can often frustrate or even block large-scale change efforts. Executives who take the time and trouble to address mind-sets are four times more likely than those who don’t to rate their change programs as “successful.”
The negative or obstructive mind-sets of leaders and employees ingrained by past management practices all too easily remain ingrained after new management practices have been put in place.
Reframe these beliefs and expand the range of reasonable behavioral choices for employees. Use practical, relatable terms that reflect a change in worldview, making it insightful, memorable, and meaningful (specific to the organization and evoking a “that’s so us!” response).
More broadly, reshape the work environment. When you’re at the opera, you clap. At a sporting event, you yell and jump up and down. Organizational context is similarly powerful. If you want to change that context, and the related mind-sets of employees, you need to operate on multiple levels at once. The four levers of our “influence” model offer a proven, practical guide.
“I will change my mind-set and behavior if …”
The “influence model” is a practical and proven guide for changing the mind-sets and behavior of employees.
I see my leaders, colleagues, and staff behaving differently.”
Role modeling
I understand what is being asked of me, and it makes sense.”
Understanding and conviction
I have the skills and opportunities to behave in the new way.”
Confidence and skill building
I see that our structures, processes, and systems support the changes I am being asked to make.”
Reinforcement mechanisms
Spark New Zealand made the bold decision to go agile in 2017, moving 40 percent of its employees into cross-functional teams (or tribes), comprising people from IT, networks, products, marketing, and digital. Here are selected insights from former managing director Simon Moutter, CEO Jolie Hodson (the company’s former customer director, who succeeded Moutter in July), and HR director Joe McCollum.
Corporate leaders of three relative newcomers—Byton, Lyft, and WiTricity— describe their companies’ ambitions in the emerging mobility ecosystem. Here are three excerpts from interviews conducted by McKinsey Quarterly.
Joe McCollum: “Drawn on a chart, it looked like a hairy spider leg—the result of all the business plans saying that performance would go one way when the actual performance of the company is going the other way. Yet here we were, happily writing business plans that purportedly solved the problem” [see exhibit].
Missing targets
Key members of the telco’s top team describe the challenges and rewards of going agile rapidly—and the power of a “no plan B” approach to change.
by Aaron De Smet, Gregor Jost, and Leigh Weiss
Simon Moutter: “Our leadership team visited a range of agile companies—some born agile, others that had built agile units, and one or two that had tried large-scale transformations. . . . I thought ING’s model was structured, performance driven, and very applicable in our context . . . less about beanbags and foosball tables and more about real delivery.”
Seeking inspiration
Hitting reset: In 2013, Telecom New Zealand looked back on a trail of missed targets.
Jolie Hodson: “There isn’t a halfway ground with agile, certainly not going agile at this scale—because the old way of working would absolutely rub up against the new way of working. To be clear, we were doing this for improved customer experience, speed to market, and to empower our people. If we had two models clashing, it would be like being in molasses.”
No turning back
Simon Moutter: “The risk of getting caught in no-man’s-land—with one foot in the old world and one foot in the new—felt much higher to us than the risk of jumping across the line with both feet and using the agile ways of working to get better at agile itself.”
Joe McCollum: “In our pre-agile world, we would have had seven or eight layers between the top and bottom of the company. Now, across much of the company, we have three. The result is that things are massively faster. . . . When you have a multidisciplinary team already working together around a table, why bother getting up and de-camping to a meeting room in another part of the building when they could simply stay where they are and solve the problem in real time?”
Going at speed
Jolie Hodson: “It’s changed the way we work with the customer. They didn’t come to the squads to observe—they were coming to be part of the change, to have tasks and responsibilities like any other squad member. It helps them refine their own thinking and helps us build a much stronger working relationship.”
Working with the customer
Jolie Hodson: “Because squads are limited to no more than ten people and have a clear mission and purpose, everyone has to have a voice. There isn’t a place for anyone to just cruise along.”
Speaking up
Joe McCollum: “On the agile maturity scale of one to five, in most parts of the company we’re really only at a two or three. We’re less than halfway through the journey, and we’re already seeing significant benefits.”
Looking ahead
Joe McCollum: “It’s the squad—the team—that looks at it and says, ‘Well, Bob’s a good presenter, but Bob doesn’t do very much in terms of delivery. Whereas Mary, who’s very quiet, gets a lot of stuff done. If we have a choice, we’d rather put Mary on the team than Bob.’”
It’s all about delivery
Telecom EBITDA
Actual
Projected
EBITDA = earnings before interest, taxes, depreciation, and amortization. Source: Spark New Zealand Telecom
+
–
2002
2004
2006
2008
2010
2012
China is our number-two market now, bigger even than the US. Also, Chinese consumers are traveling. More than 130 million people went out of China [in 2017], and ten million of them came to Japan.”
What the experts say
How to grasp it
China’s luxury spending will nearly double between now and 2025, fuelled by the affluent post-1980s generation and emerging post-1990s millennials. There are four distinct clusters of buyers:
The opportunity
If you’re in luxury goods and services, China is the story.
by Anna Güntner, Konstantin Lucks, and Julia Sperling-Magro
Across two generations, four distinct clusters of consumers emerge.
Invest beyond the brand. Younger generations are not as loyal as their elders; there’s a premium on renewed and refreshed product lines and marketing that creates an aura of novelty.
Target the influencers. Digitally savvy younger consumers navigate across channels, research intensively before they buy, and are heavily influenced by opinion leaders—often global or Chinese celebrities—on social media.
Close the sale. Nine out of ten young Chinese consumers favor in-person experiences with sales staff in brick-and-mortar stores. They want to feel different and valued.
—Masahiko Uotani, CEO of Shiseido
How a cosmetics giant reaches Chinese consumers
The most expensive tour we’ve sold costs about $200,000 per person per trip, and it only took us about 17 seconds to sell these packages.”
—Jane Sun, CEO of Ctrip
How China’s largest online travel agency connects the world
Even with [an internet-entrepreneur] background, people still come into Christie’s looking to buy a vase, perhaps from the Qing Dynasty. They could be buying a Chinese painting by Zhang Daqian or a painting by a contemporary artist like Zao Wou-Ki.”
—Rebecca Wei, chairman of Christie’s Asia
Navigating Asia’s booming art market
% of luxury spending
Post-’80s and post-’90s luxury shoppers in China
% of luxury-buying population
Luxury newcomers
35
Status surfers
56
33
Luxury connoisseurs
15
17
Fearless young spenders
by Massimo Garbuio, Tim Koller, and Zane Williams
New research shows that companies that know how to shift critical resources where and when they’re needed share common traits. Rigor is the first one.
Cognitive biases and inconsistent decision making often hamper efforts to reallocate resources. Executives are most flat-footed when opportunities crop up outside the traditional budgeting cycle.
Studies consistently show that companies that actively reallocate resources outperform those that don’t.
Companies with higher levels of capital reallocation experienced higher average shareholder returns.
Having the right processes and incentives in place is critical. Based on the findings of a survey of 500 companies and conversations with executives, three traits distinguish the winners:
Agility. Adding to (or subtracting from) investment budgets during the year allows managers to allocate extra cash to fund new projects as they arise, or to expand the scale of projects that are doing better than expected.
Project discipline. Most active reallocators have specific metrics in place that everyone understands. They consider a range of potential outcomes for a given project and welcome input from all organizational functions.
Risk tolerance and clear incentives. It’s important that employees feel safe to explore different types of projects—identifying new ways of serving existing customers, for instance, or new customers and new geographies. Rewards include both financial incentives and job promotions.
Also critical: knowing when to stop throwing good money after bad. One global food producer designated a full-time “project killer” to rein in project creep and help cull its portfolio. For more on that company’s experience, see “Bias busters: Knowing when to kill a project.”
“Bias busters: Knowing when
to kill a project.”
Companies with …
Total returns to shareholders, compound annual growth rate, 1990–2005, %
High capital reallocation
10.2
Medium capital reallocation
8.9
Low capital reallocation
7.8
Companies that manage their talent effectively enjoy higher total returns to shareholders than competitors that are less effective at this.
Senior executives appear to take a rose-tinted view of people management. In a recent survey about how many generally accepted people practices companies have adopted, executives expressed greater optimism than other employees did. But leaders can often be the biggest impediment to change.
Best practices are well understood. But are companies following them as closely as their leaders claim?
by Tera Allas, Louis Chambers, and Tom Welchman
Here are three ideas to act on based on the experiences of a UK-based multinational:
CEOs are more upbeat than others in assessing the adoption of talent best practices.
To keep people development top of mind, the executive committee spends four to six hours a quarter examining the development of the company’s top 150 leaders, stress-testing roles and geographic priorities and benchmarking the company’s talent against the market. This “bottom up” process—maintained during a recent external “crisis” when the company might have been tempted to deprioritize it—signals to employees that the company takes the issue seriously.
To encourage long-term thinking, the company adopted a rule requiring all senior leaders to spend three years in their role before becoming eligible for promotion to another part of the business. This rule ensures that leaders are aware of—and own—the consequences of their decisions.
To encourage new behavior, the company made 20 percent of every manager’s annual bonus contingent on scores from direct reports on a variety of leadership practices. This upward feedback made managers more fluent in the practices and improved their own leadership skills.
High adopters deploy 16 or more of 21 generally accepted talent practices; low adopters deploy 5 or fewer. Source: Confederation of British Industry (CBI)–McKinsey survey of 501 UK managers, 2018
CEOs
% of respondents who believe that their organization is a high adopter of best practices
Other managers
42
64
As public expectations rise, government agencies are doubling down on improving service delivery to delight their customers.
Citizens are increasingly accustomed to the sort of experiences offered by companies from Amazon to Zillow—they now want the same from the public sector.
Many governments are making progress on customer experience but still lag well behind private-sector organizations. Monopolistic mind-sets, demanding missions, a lack of analytics capabilities, and incomplete data are among the challenges.
Most governments underperform in customer satisfaction.
Bear in mind that while speed is important, our research across countries shows that simplicity and reliability are the most critical drivers of service satisfaction.
Focus on customer journeys, with their many touchpoints, and cross over between digital and physical channels, measuring satisfaction. Journeys are the most powerful lever agencies have to reshape experiences.
Put the customer at the core of every improvement initiative. Good customer experience reinforces other outcomes, such as staying within budget, mitigating risk, and improving employee morale.
Articulate a clear statement of purpose and shared values. Leaders should be integrators and communicators and should look outside for inspiration.
—Graham Farrant, CEO of HM Land Registry
Transforming a 150-year-old government agency: A CEO story
In the first few months, there were loads of negative comments [about my blog]. . . . But that has evened out as people have had more opportunity to articulate their thoughts and share them directly with me.”
We’ve started making a concerted effort to gather feedback directly from employees and contractors so we can start to build a view of what preferences our customers have in their experience.”
—Aileen Smith, former head of operations for the US Department of State’s Passport Services Directorate
Using data to improve customer experience in passport services
Customers … can’t go to a competitor if we are not performing well, so we have an even greater responsibility than does the private sector to provide a great experience for our customers.”
—Carolyn Colvin, former acting commissioner of the US Social Security Administration
Building a long-term customer-experience vision at the Social Security Administration
10
Customer-satisfaction score on a scale from 1 (very dissatisfied) to 10 (very satisfied)
Top-performing industry
Government
Source: 2018 Public Sector Journey Benchmark Survey
United Kingdom
United States
Germany
The answer is yes—but only if leaders start embracing technological social responsibility (TSR) as a new business imperative for the AI era.
Why it’s important
The debate will shape behavior. For example, what if workers fear the future so much that it crimps consumer spending, or labor productivity suffers in the wake of workplace stress? A balanced and informed perspective is essential.
For decades, skeptics have argued about the extent to which business interests and those of society are aligned. Earlier concerns, however, are currently dwarfed by artificial intelligence (AI) and workplace automation, and the attendant risks of unemployment, privacy violations, and threats to our security.
Business leaders across sectors need to embed technological social responsibility (TSR), a new imperative that emphasizes innovation-led growth and the active management of labor transitions (exhibit).
Two dimensions will be decisive in aligning business and societal interests with the adoption of new technology.
Three priorities are essential:
Embrace farsighted partnerships for social good with multiple stakeholders, notably the public sector, in areas such as education, R&D, and healthcare.
Put a thoughtful, proactive workforce-management strategy at the heart of digital reinvention plans. At the moment, “reskilling” remains an afterthought in many companies.
Understand that proactive management of technology transitions is not only in the interest of society at large but also in the more narrowly focused financial interest of companies themselves.
Proactive management of transition
Low growth, managed transition
Tech for better lives (high growth, managed transition)
Low growth, low economic welfare
High growth, low economic welfare
Reactive management of transition
Focus on cost reduction and labor substitution
Focus on innovation and augmentation
