This Quarter
Today’s top executives, and the organizations they lead, need fresh skills and mind-sets to disrupt others before being disrupted themselves. This pocket edition of McKinsey Quarterly highlights three critical challenges that they must overcome: integrating a widening array of advanced technologies and analytics; encouraging organizations to take a user-centric view of design; and devising and delivering compelling digital strategies. The corporate organism is changing—and with it the roles of leaders.
Pocket Edition / 2018 Number 4
The new enterprise DNA
How advanced analytics, technologies, and design are redefining the capabilities you need
In this edition ...
THE NEW ENTERPRISE DNA
The business value of design
The cornerstones of large-scale technology transformation
ADDITIONAL FEATURES
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Flooring it
the five fifty
Even if you’re a market leader, it may be time to start doing things faster. Find out how to get ahead in this edition of the Five Fifty, the Quarterly’s timely dose of smart, delivered to your phone.
Accidentally agile: An interview with the Rijksmuseum’s Taco Dibbits
Making work meaningful: A leader’s guide
emerging insights
What it takes to get an edge in the Internet of Things
Closing the gender gap: A missed opportunity for new CEOs
I’m calling it the wheel … it might need a little more usability testing.”
last laugh
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Building the workforce of tomorrow, today
Blockchain beyond the hype: What is the strategic business value?
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Hugo Sarrazin Senior partner, Silicon Valley office McKinsey & Company
Digital strategy: The four fights you have to win
Bias Busters: Taking the ‘outside view’
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Article Summary
by Michael Bender, Nicolaus Henke, and Eric Lamarre
A clear playbook is emerging for how to integrate and capitalize on advanced technologies— across an entire company, and in any industry.
The problem
Two formidable obstacles often block efforts to transform an enterprise at scale through technology: the sheer number and breadth of solutions, often in the hundreds; and the difficulty of redesigning a company’s processes to capture the potential value.
Why it matters
New technologies (everything from analytics and automation to IoT and machine learning) support the creation of new, digitally enabled business models, improved customer satisfaction, and enhanced productivity. Digitally reinvented incumbents are twice as likely as traditional peers to achieve strong financial growth.
What to do about it
Adapt your own version of the playbook that successful companies are starting to follow:
•
Overhaul data strategy and governance to ensure that your data are reliable, accessible, and continuously enriched to make them more valuable.
Establish a modern technology environment to support rapid development of new solutions.
Train managers to recognize new opportunities and build in-house capabilities to deliver technologies.
Develop technology road maps that strategically focus on the investments needed to reinvent legacy businesses.
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Focus relentlessly on capturing strategic value by driving rapid changes in the operating model.
Levent Çakıroglu CEO of Koç Holding
›
To start, we needed a groupwide assessment to understand where we were in terms of our digital maturity. We needed to create tailored road maps for each business based on its own strategic targets and its specific industry dynamics and to be sure that we were all using the same language across the group to describe the effort. At the end of the first year, each company had a clear vision, a road map and yearly targets regarding the transformation initiatives.”
View from the top
Read or listen to the full Levent Çakıroglu interview
Understand and pursue the four cross-cutting design priorities described in the clickable exhibit below, which reflect both on-the-ground experience and an intensive research effort aimed at identifying clusters of design activity that differentiate top performers:
New McKinsey research shows a strong correlation between great design performance, above average revenue, and growth in total returns to shareholders. The opportunities are enormous.
The commercial benefits of designing great products and services might seem obvious. But as customers get more demanding, it’s becoming harder to stand out from the crowd—and design performance varies widely across companies.
How do the best design performers increase their revenues and shareholder returns at nearly twice the rate of their industry counterparts?
by Fabricio Dore, Garen Kouyoumjian, Hugo Sarrazin, and Benedict Sheppard
by Tanguy Catlin, Laura LaBerge, and Shannon Varney
Yesterday’s tentative approaches won’t deliver; you need absolute clarity about digital’s demands, galvanized leadership, unparalleled agility, and the resolve to bet boldly.
Formulating a response to digital threats exposes companies and leaders to intense variations on a perennial corporate theme: how to overcome the strategic inertia that’s often rooted in individual interests, group dynamics, and cognitive biases.
Digital disruption makes incrementalism costly; effective digital strategies emphasize rapid resource reallocation and big strategic moves.
Fight ignorance: Use experiential techniques such as “go-and-sees” and war gaming to break leaders out of old ways of thinking and into today’s digital realities. Look at things from a competitor’s point of view.
1.
Fight fear: Run top-team effectiveness programs that spur senior executives to action and uncover anxieties about their future roles.
2.
Fight guesswork: Enable leaders to drive change by building business-value scenarios grounded in digital reality and adopting a test-and-learn approach.
3.
Fight diffusion of effort: Pursue a portfolio of focused initiatives and make big, mutually reinforcing moves, reprioritizing frequently as conditions warrant.
4.
There are five steps leaders can take:
Over time, our hit rate on innovation has gotten better, because what you learn is that often your original instinct— about why you need to make a certain move and the untapped potential that you see—is correct, but your first idea of how to actually execute it might be wrong. But if you keep trying, understandably making a few missteps as you make your way on an unpaved path, you’ll eventually get there.”
Jessica Tan deputy CEO of Ping An
Read or listen to the full Jessica Tan interview
People who find meaning in their work are happier, more productive, and more engaged. Four practical interventions can help make the search more likely to succeed.
It’s now well known that employees are more productive when they feel their job has a greater purpose—the evidence, however, suggests that the vast majority of us don’t feel excited about our work.
As companies seek to become more agile, more digitally enabled, and more competitive, it’s more important than ever for them to provide fresh sources of meaning. People need new reasons to believe in their work as traditional reward systems and career ladders disappear.
by Dan Cable and Freek Vermeulen
Read or listen to the full article, “Making work meaningful: A leader’s guide”
Read or listen to the full article, “The link between meaning and organizational health”
Reduce anonymity: Talk with your employees about who their customers are and encourage each employee to connect with one.
Help people grasp the impact of their work: Invite customers to come and talk about their experiences (good and bad) in person.
Recognize and reward good work: Note one good thing done by each team member and express your appreciation. Encourage colleagues and customers to do likewise.
Connect work to a higher meaning: Encourage your employees to ask why their most important job-related tasks matter.
Four simple practices can help to create an environment where organizational change is personal.
When the Rijksmuseum, the national art museum of the Netherlands, underwent a physical transformation, it also experienced an organizational one that contains lessons for anyone trying to develop great teams, inspire creative solutions, and get people out of their comfort zones. Here are four reflections from the museum’s director, Taco Dibbits.
On the dangers of consensus
“We encouraged the chairs [of century-focused working groups] to behave, to some degree, like enlightened despots, because we knew that otherwise, the groups would have tended not to make rigorous choices. We Dutch are all about consensus. But that kind of approach would have created a result that was too homogenous. We needed people in each group who could make their mark and say, ‘Well, the 18th century is the century of decorative arts. So that’s how we’re going to organize it.’”
“As we began to apply this [agile] thinking, we initially considered changing how our departments were organized by specialty— painting, glassware, for example—but we decided not to do it. First of all, in our surrounding field, the universities and museums are not organized in that way, so our staff would not be able to talk to peers. . . . We ultimately decided to create four new agile working groups, one for each aspect of our new vision: exhibitions, personal stories, the customer journey, and digital innovation. . . . Since we no longer had the luxury of working inside a museum that was closed to the public, speed was of the essence—so we set a goal for these groups to come up with results within three months.”
On agile thinking
“One great decision that we made was to open up the groups to the entire organization, from curators to marketing. . . . For example, a curator knows the collection and has an antenna out for what’s currently important in the academic community. Meanwhile, a security guard has everyday contact with the public and sees how visitors move around in the museum. And somebody from the social-media team can argue, ‘Just because we’re doing this exhibition on slavery doesn’t necessarily mean that people from the Caribbean will visit. In fact, we aren’t currently reaching them; we need to engage those groups on other platforms.’”
On empowerment and diversity
“In Dutch, we say, ‘Let everybody fly.’ But as leaders, we also have to let our teams know where they are flying to; otherwise there’s a risk they will become frustrated and deflated. I think agile leaders need to understand that for teams to self-organize and self-direct, they need to have a very clear and thoughtfully constrained task. However, this doesn’t mean going so far as to tell teams how to work toward the goal, because that will actually hamper them. And then they’ll think, ‘Why should we do it that way, just because he or she says so?’ It is better that leaders restrain themselves even though they may already think they know what the result will likely be. After all, the team’s results might be surprising in a positive way.”
On freedom vs direction
Read or listen to the full interview
Blockchain is an immature technology. Corporate leaders, struggling to assess its strategic value, are still not sure if it is a fad or a disruptive threat.
Uncertainty today may cause companies to miss out on future opportunities, or to rush toward the development of solutions to problems that don’t exist.
Be prepared to coordinate with other industry players to establish market standards. How you proceed should be heavily influenced by whether you are a leader with existing strengths to build on, a convener with the ability to shape standards, a follower who must stay informed and move fast, or an attacker.
Scrutinize your likely market position, understand how it could impact your target use case, and assess the implications of network effects and interoperability.
Identify and skeptically assess a specific use case that can create value. Avoid launching a project if it does not meet a minimum level of feasibility and potential return.
Understand the nature and timing of the opportunity: Blockchain’s short-term value lies predominantly in reducing costs. Commercially viable blockchain solutions, deployed at scale, are three to five years away.
Take a structured approach to blockchain through actions such as the following:
Blockchain can generate meaningful value for many companies. The key is figuring out what strategy makes sense, given your customers’ pain points and your company’s market position.
by Brant Carson, Giulio Romanelli, Patricia Walsh, and Askhat Zhumaev
Read the full article
How can companies retrain, or “reskill,” their talent in an era of advanced technologies? While there’s no pat answer, the experiences of leaders in SAP’s digital-business-services (DBS) division are instructive.
The need for urgency
“I had to build a sense of urgency. Sometimes you look too much at your short-term numbers and cut back on education or training investment. But this is a fatal error. The numbers were too good. The temptation was to say, ‘please do it in the next quarter.’ I said no—I will not lead an organization without the right investment to do this reskilling.”
“We saw the first signals in the market that if we don’t change we will be successful maybe for the next two or three years, but then there will be a cliff, and at that point it will be too late.”
“One of the key success elements was the repetitive momentum. There was not a single speech of our executive board where the skills transformation was not mentioned. That was seconded by another message by the executive-leadership team, one by one.”
“The success of a skills transformation in the current environment is to make people understand that changes are required. It’s the customer that asked for it—but none of what you did in the past is, per se, wrong. People also need to see and touch the investment: ‘Is there a learning framework? Are there opportunities for me? Where can I grow?’”
Communication
“Nietzsche said that whoever has a life purpose can bear any pain. You need to communicate the ‘why.’ If employees understand what the ‘why’ is and why it is important, then they will be more understanding when something doesn’t go exactly according to plan.”
Meaning
“If you look at the technological changes that will happen in the next five years, they will be greater than what has happened over the past 20 and maybe even 30 years. The question, ‘What is the skill set of tomorrow?’ becomes a permanent one.
Looking ahead
—Michael Kleinemeier, DBS head
—Stefan Ries, chief human-resources officer
—Heike Laube, chief learning officer, DBS
—Walter Kern, coleader of works council team
Bias busters: Taking the ‘outside view’
Compare your bottom-up forecast and expected rate of return by looking at the group of similar projects, studying factors such as relative quality of investment and average return for an investment category. As with the case for the private-equity group featured in the exhibit, there may be a sizeable gap between the two.
Remember that you can find a reference class even for ground-breaking innovations, provided you stick to the philosophy that “there is nothing new under the sun.”
Adopt the “outside view,” which means building a statistical view of your project based on a reference class of similar projects.
Doing so can result in making bad decisions. Lacking sufficient data, companies overestimate potential revenues, while underestimating costs and risks.
Executives too often fall into the trap of taking an “inside view,” looking at the specifics of a new project rather than at analogous cases and other external sources of information.
In a new series, we highlight the cognitive and organizational biases that sometimes trip up executives and undermine good decision making. This quarter’s busted bias: the tyranny of inward focus.
by Tim Koller and Dan Lovallo
Exhibit
Private-equity teams built a more accurate forecast using the outside view.
Estimated rate of return, %
50
19
The team’s estimated rate of return for the targeted project was more than double that of the most similar projects.
Forecast for an ongoing investment based on specifics of case at hand.
1
Comparison of ongoing investment with 2 categories of similar investments based on analogous cases and external sources of information.
2
Inside view
Outside view
by Michael Birshan, Carolyn Dewar, Thomas Meakin, and Kurt Strovink
Many new CEOs reshuffle their top teams, but surprisingly few make them more diverse. Can we do better?
New CEOs often replace as many as half of their top team within two years—yet research shows only a small number take advantage of this window to boost diversity.
Transitions are a great time to change the strategic and organizational mix, and to signal that gender issues really matter.
How are we communicating the economic and strategic imperative of creating a diverse top team and making it a shared goal?
What specific measures do we have in place to improve gender diversity, and how are we ensuring that they take effect lower down the ladder?
Are we preparing women for broader executive leadership by moving them into roles with profit-and-loss responsibility, as well as into roles overseeing support functions?
What are we doing to accelerate the pipeline of female talent and how are we ensuring that fast-tracked women are supported and helped to succeed?
Use management reshuffles to catalyze early progress on diversity. And don’t wait to start cultivating an inclusive culture, which often starts with the asking, and answering, of difficult questions such as these:
IoT’s strategic importance is on the rise. As costs continue to fall for communications technologies, the potential to manage objects in the physical world, along with IoT’s ability to add value in a wide range of business settings, is growing.
Many companies struggle to target and manage IoT applications effectively and find themselves unable to move beyond pilot projects.
Three practices appear to differentiate successful companies from those that struggle to gain traction.
by Michael Chui, Brett May, and Subu Narayanan
They play to their strengths, adding IoT connectivity to existing products rather than betting on new ones or on unfamiliar markets.
They “go big,” using multiple use cases rather than a single one, thereby driving cultural change, stoking organizational energy, and promoting the benefits of IoT adoption (see exhibit).
They go beyond the technical-implementation challenge, finding opportunities to derive real business gains by changing business processes. Managing business-process change is one of their top capabilities.
Our research shows that three “habits” distinguish IoT leaders from the IoT laggards:
Implementing a greater number of IoT use cases correlates with financial success, with the effect leveling off at around 30.
Financial-impact score (higher = better)
0
10
40
r = 0.55
Number of use cases
Financial-impact score: a metric synthesized from several cost, revenue, and/or margin-impact metrics, as measured on a per-use-case basis.
