Professional Documents
Culture Documents
The future of
marketing
What every executive needs to know
2011 Number 3
This Quarter
One thing I’ve heard over and over is that leaders today, especially
business executives, need insight about the political, economic,
social, and technological context in which they operate. To help provide
that context in Japan, our Tokyo office recently invited more than
80 contributors to write essays about the future of the country. They
appear in a new book, Reimagining Japan: The Quest for a Future
That Works. In this issue of McKinsey Quarterly, you’ll find several
articles from that collection—three by outspoken Japanese CEOs
and two by McKinsey colleagues—that shed light on the road ahead
for companies in the world’s third-largest economy.
Regulation, whose scope has increased in the wake of the financial
crisis, is another critical area of context that’s top of mind for many
leaders I meet. My colleagues Andre Dua, Robin Nuttall, and Jon
Wilkins describe in this issue how the cognitive biases studied by
behavioral economists may be undermining corporate regulatory
strategies—and what to do about that. And in an interview, University
of Chicago behavioral scientist Richard Thaler suggests that busi-
ness leaders need to get ready for a world where regulators push for
even more transparency and free-flowing data than companies are
already accustomed to.
Marketers are on the leading edge of the trend toward more openness
as social media and other forms of digital engagement grow in
importance. One implication, according to McKinsey’s Tom French,
Laura LaBerge, and Paul Magill, is that companies no longer can
count on the marketing organization to do all their marketing. Accom-
panying the authors’ thinking is commentary from a trio of
practitioners—American Express chief marketing officer John Hayes,
Virgin Atlantic Airways CEO Steve Ridgway, and Duncan Watts,
director of the Human Social Dynamics group at Yahoo! Research—
whose professional diversity indicates the range of minds that will
be needed to master the new environment.
Dominic Barton
Global managing director,
McKinsey & Company
On the cover
The future of marketing
What every executive needs to know
26 We’re all
marketers now
Tom French, Laura LaBerge,
and Paul Magill
56 Remapping your
strategic mind-set
Pankaj Ghemawat
68 Nudging the
world toward
smarter public
policy: Special report
An interview with
80 Rediscovering
Richard Thaler
Japan’s
Public and private data alike will
become more transparent, says competitive edge
behavioral scientist Richard Thaler.
Three Japanese CEOs and two teams
That’s an opportunity for some
of McKinsey experts offer perspectives on
companies and a threat for others.
the road ahead for Japanese business.
All are drawn from a new book,
Reimagining Japan: The Quest for a
Future That Works.
74 Why good
82 Introduction: Toward a lasting
companies create recovery
Yasuchika Hasegawa
bad regulatory
strategies 83 Rebooting Japan’s high-tech
sector
Andre Dua, Robin Nuttall, and Ingo Beyer von Morgenstern,
Jon Wilkins Peter Kenevan, and Ulrich Naeher
93 Dare to err
Tadashi Yanai
Departments
12 U
nderstanding your 97 To centralize or not
‘globalization penalty’ to centralize?
Martin Dewhurst, Jonathan Harris, Andrew Campbell, Sven Kunisch, and
and Suzanne Heywood Günter Müller-Stewens
Strong multinationals seem less healthy It’s a hard call made harder by power
than successful companies that struggles. CEOs can force a more
stick closer to home. How can that be? thoughtful debate by asking three
critical questions.
Now available on
mckinseyquarterly.com
Tapping China’s
luxury-goods market
By 2015, Chinese consumers will
account for more than 20 percent
of the global luxury market.
How is their behavior evolving?
© Gilles Sabrie
Other features:
Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly
2011 Number 2
“Some risks are easier for expatriate managers to mitigate than locals. Local
employees can be more susceptible to local pressures from suppliers and
customers. It’s easier for expats to stick to signed contracts than it is for local
managers, since nonbusiness pressures are more easily brought to bear on
local employees. Also, local managers may—regardless of the indicators
being used to measure them—focus more on what’s good for their country
than what’s good for their company, unwittingly or not. Currying political
favors and goodwill are typically the drivers behind this kind of behavior,
especially in emerging markets. These issues need to be addressed clearly
and openly when discussing whether or not to localize a given position.”
“Your article shows some great exercises teams can use to force thinking
outside the box. But how do you ensure that the company’s culture is one of
innovation and risk taking?”
“Leaders are critical to the equation. If leaders say, ‘We highly value innovation,’
but in practice value and promote the status quo, discourage risk taking,
and send a message ‘not to rock the boat,’ real creative dialogue goes under-
ground. And then it goes out the door to venues where people with ideas
and passion to explore them can do so.”
“The article does not mention the opportunities social media offer to take
brainstorming to the next level. My experiences with online tools have
been very positive: they allow for input from groups of all sizes, where partici-
pants can bring up ideas and discuss them in a very safe environment.
Since participants are anonymous, there is no distortion from rank or social
status, and they can contribute without having to travel to a single location.
It makes it very easy to involve participants from different backgrounds—for
example, different functional departments, ranks, regions, and beliefs—
which can improve the quality and quantity of the outcome enormously.”
“The real creative articulation really starts, in my opinion, just after the
[brainstorming] event has finished. Whoever picks up the output of the ideation
session should be a creative group capable of capturing all the little thoughts,
even if they’re on Post-its or scrap paper, and consolidate them into bigger
‘creative clumps.’ After that, the iteration process can start, where you build on
the proposed clumps and start to structure the ideas into clear propositions,
benefits, and payoffs.”
Deepak Seth
Business intelligence solutions architect, HealthNow New York,
Buffalo, New York
Leading Edge
12 16 20
Understanding Is there a Are your
your ‘globalization right way to customers
penalty’ pay back becoming
shareholders? digital junkies?
Understanding your
‘globalization penalty’
Martin Dewhurst, Jonathan Harris, and Suzanne Heywood
Strong multinationals seem less healthy than successful companies that stick closer
to home. How can that be?
Q3 2011
Globalization
Exhibit 1 of 1
62
Alignment Direction
53
70
Leadership
69
59
Culture and climate
51
67
Execution Accountability
66
64
Coordination and control
54
77
Capabilities
66
59
Motivation
66
60
Renewal Innovation and learning
47
72
External orientation
59
1 Companies were defined as global based on proportion of sales outside of home geography, proportion of employees outside
of home region, geographic diversity of top management team, and proportion of shareholders that are outside of home region.
Source: Organizational-health index database; McKinsey analysis
New research shows that the choice between paying dividends and buying back shares
doesn’t affect corporate value.
Payout mix: average share of dividends in Ratio of median enterprise value to EBITA multiple,
total payouts, 2002–07, % year-end 20072
0 5 10 15 20 25
>0 to 20%
>20 to 40%
>40 to 65%
>65 to 100%
1 Insufficient data for payout levels of 96–130% at payout mix of >65 to 100% dividends and for payout levels of >130% for all payout mixes.
Q3 2011
2For 279 nonfinancial companies that were in the S&P 500 at the end of 2009, were continuously in operation since 1999, and paid
dividends or repurchased shares. EBITA = earnings before interest, taxes, and amortization.
Payback
Exhibit 2 of 3
Payout mix: average share of dividends Median total returns to shareholders (TRS),
in total payouts, 2002–07, % CAGR, 2002–07,2 %
–5 0 5 10 15 20 25
>0 to 20%
>20 to 40%
>40 to 65%
>65 to 100%
1 Insufficient data for payout level of 66–95% at payout mix of zero dividends (100% share repurchase).
2For 293 nonfinancial companies that were in the S&P 500 at the end of 2009, were continuously in operation since
1999, and paid dividends or repurchased shares. CAGR = compound annual growth rate.
18 2011 Number 3
Q3 2011
Payback
Exhibit 3 of 3
Dividends as share of
total net income
1 Sample includes nonfinancial US companies with real revenue >$100 million in any year between 1989 and 2009.
2Data for 1991–92, 2001–02 are excluded because of abnormally low net incomes.
1
cent today. Over that period, e also used statistical techniques and
W
found that the dividend or share repurchase
the total share of earnings returned
mix had no impact on the value of com-
to shareholders by US companies panies once we adjusted for differences in
in the form of dividends or share total payouts, growth, and returns on
invested capital.
repurchases has remained relatively 2
A fter adjusting for differences in total
constant, as it has since 1965. payouts.
3
See Marc H. Goedhart, Timothy Koller, and
Werner Rehm, “Making capital structure
In theory, companies could support strategy,” mckinseyquarterly.com,
repurchase undervalued shares February 2006.
4
The academic research on whether dividend
for the benefit of shareholders
increases or share repurchases send a
who hold onto them. We’ve seen stronger signal to investors is not conclusive.
few companies with a good
track record of repurchasing shares Bin Jiang is a consultant in
when they were undervalued, McKinsey’s New York office, where
however. Market timing is as hard Tim Koller is a principal.
for companies as it is for individuals.
If it weren’t, share repurchases
Copyright © 2011 McKinsey & Company.
surely would bring higher shareholder All rights reserved. We welcome your
returns than dividends, instead of comments on this article. Please send them
delivering the same results. to quarterly_comments@mckinsey.com.
Consumer behavior is shifting rapidly as more people use digital devices and
platforms intensively.
Q3 2011
iConsumer
Exhibit 1 of 1
Source: 2008, 2009, and 2010 McKinsey surveys of ~20,000 US Internet users, aged 13–64
1
packagers. Advertisers must his article focuses on recent results
T
from our US research, covering 20,000
refine marketing plans so that they
people since 2008. Respondents aged
reflect this new video-viewing 13 to 64 with Internet access were asked
behavior and get creative about about their digital behavior in areas
including social interactions, e-commerce,
targeting users who are time- video preferences, and device ownership.
2
shifting and dividing their attention The term 3G, or third generation, refers to
among platforms. a generation of multiple standards for
mobile phones and mobile telecommuni-
cations devices, while 4G is the fourth
We have seen similar digital generation of cellular wireless standards—
with higher speeds.
disruptions in other key platforms,
such as gaming, e-publishing,
and music. The digital revolution, Bert Chappuis is a director
still in its earliest days, will continue in McKinsey’s Silicon Valley office,
to upend how we interact, entertain Brendan Gaffey is a principal in
ourselves, buy, and work. the Dallas office, and Parviz
Parvizi is an associate principal
in the Boston office.
26
We’re all marketers now
Tom French, Laura LaBerge,
and Paul Magill
Artwork by Keith Negley
35
How we see it:
Three senior executives on the
future of marketing
25
26
For the past decade, marketers have been adjusting to a new era
of deep customer engagement. They’ve tacked on new functions,
such as social-media management; altered processes to better integrate
advertising campaigns online, on television, and in print; and added
staff with Web expertise to manage the explosion of digital customer
data. Yet in our experience, that’s not enough. To truly engage
customers for whom “push” advertising is increasingly irrelevant, com-
panies must do more outside the confines of the traditional marketing
organization. At the end of the day, customers no longer separate
marketing from the product—it is the product. They don’t separate
marketing from their in-store or online experience—it is the experi-
ence. In the era of engagement, marketing is the company.
“But who do you hold responsible when there are problems in quality?”
Sperlich pressed.
“Nobody.”
To avoid being “in for it,” companies of all stripes must not only recog-
nize that everyone is responsible for marketing but also impose
accountability by establishing a new set of relationships between the
function and the rest of the organization. In essence, companies
need to become marketing vehicles, and the marketing organization
itself needs to become the customer-engagement engine, responsible
for establishing priorities and stimulating dialogue throughout the
enterprise as it seeks to design, build, operate, and renew cutting-
edge customer-engagement approaches.
More than two years ago, our colleagues David Court, Dave Elzinga,
Susan Mulder, and Ole Jørgen Vetvik unveiled the results of a research
effort involving 20,000 customers across five industries and three
1 David Halberstam, The Reckoning, first edition, New York, NY: Avon Books, 1986.
In Halberstam’s telling of the tale, Sperlich used an expletive that rhymes with “hit.”
28 2011 Number 3
Over the past two years, that evolution has only accelerated. More
and more consumers are using digital video recorders to fast-forward
through TV commercials and are consuming video content on Web
sites such as YouTube and on mobile devices. Billboards alongside train
lines and bus routes struggle to capture the attention of people
absorbed by the screens of their smartphones. Meanwhile, today’s more
empowered, critical, demanding, and price-sensitive customers are
turning in ever-growing numbers to social networks, blogs, online review
forums, and other channels to quench their thirst for objective
advice about products and to identify brands that seem to care about
forming relationships with them. Individuals even are posting their
own commercials on YouTube. In short, the avenues (or touch points)
customers use to interact with companies have continued to multiply.
The problem for many companies is that the very things that make
push marketing effective—tight, relatively centralized operational con-
trol over a well-defined set of channels and touch points—hold it
back in the era of engagement. Many touch points, such as calls to cus-
tomer service centers and interactions between the sales force and
customers, sit outside the traditional marketing organization, which has
little or no permission to reach into other business functions or units.
Companies have traditionally divided responsibility for touch points
among functions. But a comprehensive strategy for engaging custom-
ers across them rarely emerges and, if one does, there’s often no system
for executing it or measuring its performance.
aren’t our focus, which instead is the kinds of actions everyone else
can take as they strive for world-class customer engagement.
Design
Designing a great customer-engagement strategy and experience depends
on understanding exactly how people interact with a company through-
out their decision journey. That interaction could be with the product
itself or with service, marketing, sales, public relations, or any other
element of the business.
Build
Once a company designs how it will engage with customers, it needs
the organizational capabilities to deliver: adding staff, building a social-
media network infrastructure, retooling customer care operations, or
altering reporting structures. Functions far removed from marketing
often have important roles to play, so one or more marketing teams
at the center may have to build skills in other parts of a company. A
global energy company took that approach and then largely dissolved
the group when those capabilities were in place.
3 For more on the marketing organization’s role as a publisher, see David C. Edelman’s articles
“Four ways to get more value from digital marketing,” mckinseyquarterly.com, March
2010; and “Branding in the digital age: You’re spending your money in all the wrong places,”
Harvard Business Review, December 2010, Volume 88, Number 12, pp. 62–69.
We’re all marketers now 31
Behind the scenes, that new reality creates a need for coordination and
conflict resolution mechanisms within and across functions, as well
as budget procedures that allow f lexibility and rapid action should the
need arise. PepsiCo, for example, has sought to provide a single point
of contact for its digital-marketing efforts by creating the role of chief
digital officer: an executive without line responsibility who drives
the application of best practices across the beverage group’s global
digital efforts.
Companies also need a clear approach for monitoring touch points and
renewing them as needed. At one major hotel chain, for example,
a single group circumnavigates the globe acting as a “monitor and fix”
SWAT team. It meets with hotel licensees, educates them about
the company’s customer-engagement approach and management of key
touch points, demonstrates new behavior, and trains the staff in
new operational processes. Given the speed of information sharing today,
constant monitoring and adaptation—indeed, continuous improve-
ment of the sort that came to the operations world long ago—is bound to
infiltrate marketing and grow in importance.
As the chief marketing officer collaborates with the chief executive and
other senior-team members to nail down a shared approach for
designing, building, operating, and renewing customer touch points,
he or she also will require a new kind of marketing organization.
32 2011 Number 3
The chart will also show where marketing activities have been embedded
in other functions. One major logistics company, for example, puts
marketing resources within each sales district to adapt corporate-level
marketing initiatives to local circumstances. This approach mutes
complaints from sales reps who feel bombarded with marketing pushes
from the head office by giving them simple, customized ideas for
driving sales within their regions.
One implication is that the types of talent required to derive such insights
will change. A premium will be placed on problem-solving and
strategic-marketing skills, rather than on traditional market research
capabilities such as designing surveys and commissioning focus
groups. Some organizations also may need help from external partners,
a pattern that’s already apparent at several insurers and health care
payers that have neither the time nor the budgets to build the necessary
data-gathering and -analysis capabilities in-house and at scale.
4 See Brier Dudley, “Q&A: Zynga founder talks about Seattle hiring spree, Amazon,
The authors would like to offer special thanks to Roxane Divol and to
acknowledge the contributions of Whit Alexander, Jean-Baptiste
Coumau, Blair Crawford, Dave Edelman, Ben Fletcher, and Tariq Shaukat
to this article.
Steve Ridgway
CEO of Virgin
Atlantic Airways
John Hayes
CMO of American
Express
There is no quick path to success in the new
era of customer engagement. Progress is likely
Duncan Watts to come incrementally—by listening to customers,
Principal research making adjustments to engagement strategies,
scientist at Yahoo! and learning through trial and error. Since diverse
Research perspectives will be essential to mastering this
new landscape, McKinsey’s Luke Collins, Tom French,
and Paul Magill recently sought out three prac-
titioners with very different vantage points on mar-
keting’s future.
The CEO
“
Virgin Atlantic Airways’ Steve Ridgway
”
on to talk about it, that’s a huge
marketing tool for us.
Steve Ridgway has been the CEO of Virgin Atlantic Airways since
2001. A native of England, he joined Virgin in 1990. Previously,
he served as executive director of customer service and managed
the company’s frequent-flyer program. In 2006, Queen Elizabeth II
made Ridgway a Commander of the Order of the British Empire
(CBE) in recognition of his service to British industry.
I’m not sure that’s altogether right. Focused, laser-like efforts are
certainly very valuable, but I worry that we might get all the “micro”
things right and miss the bigger picture. I don’t want to lose sight
of how important it is to have all of our marketing efforts somehow
embodied in something bigger—something iconic, even.
That lesson was driven home for me by the recent success of two of
our, what would be considered traditional, “above the line” television
campaigns.1 The first was in 2009, when Virgin Atlantic Airways
was celebrating its 25th birthday. At the time, everyone was depressed
about the world economy, and we just wanted to put a smile on our
customers’ faces and on our own faces. The result was “Still red hot,”
a TV campaign 2 that started in the UK, went viral, and had an
1 “Above the line” refers to marketing campaigns that use paid channels such as television,
Heathrow Airport at the time of the airline’s launch, in June 1984. It featured a young busi-
nessman wearing suspenders and carrying a brick-sized mobile phone, who becomes
spellbound by a group of Virgin Atlantic flight attendants wearing flame-red uniforms. The
commercial is filled with other 1980s artifacts, including its soundtrack, Frankie Goes
to Hollywood’s “Relax.”
How we see it: Three senior executives on the future of marketing 37
absolutely massive effect in creating a positive halo for our brand not
only among our customers but among our staff and suppliers as well.
We’ve always focused heavily on brand and brand awareness, but this
campaign sparked something more—it energized and engaged a
whole new constituency out there before they’d even set foot on a plane.
It’s been really fun working with this group; they’re very fired up. Of
course, we could have spent a fortune on a glitzier version of all this, but
it wouldn’t have been better. What they’ve done is very good, and
when you consider the speed at which it was done and the infectious
enthusiasm they bring to the table—and the pride they take in the
work—it’s just fantastic. And it’s all possible because there was sufficient
motivation and engagement out there to convince these people to want
to do this for us.
38 2011 Number 3
But getting the tools right isn’t enough. We were the first airline to
put in-flight entertainment systems in our planes, for example, and now
everybody’s got them. And, frankly, there are some airlines out there
now—in the Middle East, for example—that have very deep pockets and
spend lots of money. So we need to go further.
The real key is people and developing the chemistry and the attitudes,
in our staff, that create the right experience for customers. We’re
constantly pushing this in our professional training because without
the human element, all the rest counts for nothing. There’s massive
complexity in doing this well because it extends from a customer’s first
phone call to saying, “Goodbye. Come back soon.”
When we get both things right—connecting the tools and the people—
then our staff can really engage customers with attitude and spirit.
They feel proud of what they’re doing; they like being winners. And at
the end of the day, that really matters. After all, we f ly exactly the
same planes as everybody else. We fly them under the same very strict
safety rules. Yet if you go on one of our planes and experience the
service, you’ll see it’s very different from many others.
How we see it: Three senior executives on the future of marketing 39
The CMO
“
American Express’s John Hayes
”
organization completely aligned
with this revolution.
A marketing revolution
We’re going through a revolution a whole lot like the Industrial
Revolution. The change is that profound. I had a conversation recently
with an employee about this new age of marketing. Basically, it went
like this: “As we try to go to market with your idea,” I said, “the world
is going to decide whether or not this has real value, talk about it,
and then position it pretty much how they want to position it.” The
person responded, “OK, so we really have lost control?” I said, “Yes,
that’s right. I don’t get to control everything that’s said about us.” Then
I said to the person, “But understand, you’re still 100 percent
accountable for the outcome.”
The reaction to me was, “That’s not fair.” And it’s not. But it’s the world
we live in. It’s more exciting because if you really do have a great
product or a great program, it can catch fire in the marketplace. That’s
exciting. But the challenge for most people who are marketers today
is, “How do you hold me accountable for the success of this when I can’t
control what somebody might say about it or what somebody else
might contribute to this conversation?”
40 2011 Number 3
We’ve done this now in a variety of areas, not just on a general marketing
basis but also, for example, in areas that have to do with digital
transformation. The result of some of this work is that we’re not just
marketing and selling on Twitter and Facebook today, we’re servic-
ing customers as well. When you bring these cross-functional teams
together, people start to say, “Well, if people are asking questions
on Facebook and Twitter about how to redeem Membership Rewards
points, shouldn’t we be there answering them? Wouldn’t that help
our marketing efforts?” When you start to see things come together
like this, that’s when the light bulb goes on.
tell you, “Oh, I’m a member since 1991.” I can’t think of too many brands
where people know their tenure as a customer.
When you understand that this is a group of people who really feel a
sense of belonging—that this brand matters to them—you start to
build your marketing plans around the sense of joining a community.
So if we find, based on your purchasing profile, that you love wine
or you love dining out or you love golf, we can further engage you in
the things you’ve already made clear are important to you as a person.
It’s really a dialogue, which isn’t just us sending out an e-mail and some-
body sending something back to us. The dialogue has to do with us
guarding your privacy at all times but doing appropriate things to under-
stand what interests you and then serving you better. That’s part of
the dialogue; that’s how we listen.
We also benefit from seeing what people are writing about us in blogs,
what’s being said in the social space, and understanding the buzz
out there. We’re at the point where we can actually monitor this pretty
carefully by just reading what people are saying on the Web, under-
standing whether there’s a positive or negative sentiment, and how it
compares with the buzz around our competitors. It’s become very
useful because we learn, for example, not to overreact to something that
is likely to dissipate very quickly. It has really helped to calibrate how
we respond in different circumstances.
The Scientist
“
Yahoo! Research’s Duncan Watts
”
need a different model for learning
about the world.
The study of social networks, for example, has long been something
that sociologists and marketers have thought was important. But
there really wasn’t much we could do, because a lot of the data simply
was not available to us. Prior to a few years ago, you couldn’t have
observed the ties that existed between hundreds of millions of individ-
uals. Now we have Web services that provide exactly that kind
of data.
have, however self-evident it may seem, when you test it against the
data, it’s wrong—not every time, but very often.
we’ve got a million clicks that we can use to tell us which articles are
getting clicked on more.
We can do the same thing for the display of advertisements, for the
design of pages. All sorts of design parameters and choices that were
once within the purview of intuition, of experts, are now tasks that
can be distributed to the user population and learned empirically in
real time.
But if you have data on billions of mouse clicks per day by hundreds
of millions of users, there are empirical regularities. They can be modeled.
They can be predicted—not deterministically, with 100 percent
accuracy, but that’s not the point. The point is that you can do better
than guessing. There are some things that are predictable. And we
should learn how to predict them.
How we see it: Three senior executives on the future of marketing 45
So by all means, make predictions. But record them. Nobody ever keeps
track of the predictions they make. Our enthusiasm for making
predictions is matched only by our reluctance to be held accountable
for them. There’s a tremendous amount that can be learned—both
about your own ability and about your organization’s collective
ability to predict things—simply by measuring the track record over
time. This is something that is difficult to do. But it would have a
transformative effect on the way people think about their ability to
predict and plan.
The problem
A new Web standard known as HTML5
will allow the mobile Web to perform
much like the PC-based Internet, with
browsers—rather than applications—
doing the heavy lifting. That represents
a major departure from the situation
today, in which users must commit to a
particular technology or device.
Why it matters
As the range of content and services
provided by the mobile Web broadens
and the user experience improves,
companies that don’t have a mobile-Web
strategy will lose out to competitors
that do. Simultaneously, the economics
and competitive dynamics of mobile
devices, software, services, content
providers, and advertising markets will
shift dramatically.
Artwork by Lloyd Miller
What to do about it
Elevate the importance of mobile
customer engagement in overall business
strategy. Tailor marketing and adver-
tising approaches accordingly. Deter-
Read the accompanying mine how a more Web-centric mobile
article, “Winning the environment could change the way you
Web standards battle,” engage with employees. And be
on page 54. prepared for strategic investments in
supporting IT infrastructure.
48 2011 Number 3
Web-centricity
Of course, not all programs are suited to running through browsers, nor
is HTML5 the first would-be universal platform to emerge: Sun
Microsystems (purchased by Oracle in 2010) promised that with its Java
language, programmers could “write once, run anywhere.” Things haven’t
worked out that way. And there’s never a guarantee that one kind of
standard will prevail. (For more on platform competition, see “Winning
the Web standards battle,” on page 54.) The rate at which developers
are writing apps and consumers buying them is dizzying, and ingrained
behavior can be hard to change. Web-centricity may raise security fears
among users because programs are no longer installed on specific devices
and because data are stored remotely. And there could be fragmentation
issues with both the standard and the browsers—after all, existing ones,
such as Google’s Chrome, Microsoft’s Internet Explorer, and Mozilla’s
Firefox, don’t all treat the current standard, HTML4, the same way.2
2 Various plug-in programs written for HTML4, such as those that run audio or video files,
often require multiple versions customized to specific browsers. As the complexity of Web
programs accelerates, those mismatches are increasing. To read more about how HTML5
may help the Web keep up with the pace of change, see Bobbie Johnson, “The Web is reborn,”
Technology Review, November/December 2010, Volume 113, Number 6, pp. 46–53.
50 2011 Number 3
Consumer impact
Consider a simple task many consumers currently use mobile
devices for: reading news headlines. Today, that requires accessing
a specific Web site—often a sluggish exercise in frustration—or
separately installing an application on every device used and, for those
that charge a fee, paying each time. With Web-centricity, a single
application can theoretically be accessed from any device through a
browser—pay once and you’re done. And because all content is
stored in the cloud, billing information and preferences can be seam-
lessly shared and accessed, and all devices remain in sync. A con-
sumer can start reading an article on a tablet and then switch to a
laptop, picking up where she left off. In a more advanced example,
she could start an instant-messaging or video-chat conversation on
her desktop computer and continue it on her smartphone. The
bottom line for consumers: Web-centricity represents a major step
toward genuinely “smart” devices that offer the same simple,
relevant, and personalized experience everywhere.
Industry impact
These changes to consumer behavior may affect the economics of
industries ranging from telecommunications and media to technology
and even advertising. As Web stores selling applications that can
be used across devices proliferate, for example, cutthroat competition
may leave ad agencies reminiscing wistfully about the days when
they could claim up to 40 percent of every dollar of mobile-advertising
revenue. Consider, briefly, the implications for the following players
in a world where content is everywhere and the relative importance of
operating systems and Web browsers for creating and distributing
programs and applications is shifting.
all devices but anyone can set up a Web store and sell directly to
users. Google, for instance, is already charging application developers
a distribution fee of about 5 percent through its Chrome Web
store.3 In addition, the emergence of an open platform will probably
motivate bigger enterprise software companies to introduce—and
quickly—mobile-based programs for managing customer relationships,
marketing, and supply chains.
3 See http://code.google.com/chrome/webstore/docs/index.html#builtin.
52 2011 Number 3
The CMO
The emergence of the “m-dot revolution”4—the increasingly strong
tendency of consumers to use mobile devices to access company and
product information—will have its greatest impact on chief marketing
officers. Many companies are already experimenting with innova-
tive smartphone applications; Volkswagen, for instance, has released a
popular racing game for the iPhone. Companies will be able to take
advantage of the power of mobile Web browsers to create compelling
experiences for users. In addition, CMOs will need to push their
teams to develop compelling mobile-advertising strategies that go well
beyond merely inserting ads into applications, as many do today.
HTML5 should create opportunities to use video advertising more often,
for example, and the development of robust mobile capabilities
may spur the evolution of marketing tactics such as the monitoring of
shopping activity to deliver real-time, location-specific coupons.
The CIO
Web-centricity puts additional pressure on organizations to invest
in corporate cloud infrastructure. Chief information officers should,
for example, prepare for the day when consumers, employees,
and suppliers all communicate and interact through the use of mobile
devices that run Web applications. This phenomenon will not
only extend the reach of the enterprise but also place a premium on
4 “M-dot” refers to the URL of a Web site that is optimized for mobile phones. Many
of these sites include an “m.” at the beginning of the URL, such as “m.usatoday.com” or
“m.facebook.com.”
How new Internet standards will finally deliver a mobile revolution 53
CIOs will have to decide whether costs can be cut and productivity
increased by introducing rich applications both horizontally, across
industries (for example, enterprise customer-relationship-management
systems such as Salesforce.com), and vertically, within industries
(say, mobile electronic medical records or smartphone-based claims
processing in insurance). Web-centricity also promises smaller
productivity improvements, such as allowing users to store content
locally for later uploading. Employees will therefore be able to
work without being connected to the Internet—for instance, when
they’re on airplanes.
The CEO
From the perspective of the chief executive officer, Web-centricity
should be part of a broader imperative to elevate the importance
of mobile marketing in corporate strategy. CEOs will need a response
when, as must inevitably happen, they are asked how their com-
panies are dealing with the m-dot revolution, which introduces a mobile
element into everything from commerce to advertising to public
relations. What’s needed is not just the coordination of mobile initia-
tives from functional offices, however. CEOs must take a big-picture
approach to the collective implications of Web-centricity, the way it
redefines a company’s interactions with employees and customers,
and the challenges and opportunities it presents.
The Quarterly: What’s your sense of how the Nudge Unit came about
in the first place?
Artwork by Sandra Dionisi
1 David Cameron and George Osborne have been, respectively, the prime minister and
not to be just a campaign gimmick. When they got in office they said,
“Let’s try to do something.”
People in Downing Street call it the Nudge Unit, but the official term
is the Behavioural Insight Team. A bunch of bright civil servants on the
team are going around trying to get agencies to think about how they
incorporate this tool kit into the things they do. It’s hard to know whether
this is early days of a new administration or people being polite to me.
But I’ve been very pleasantly surprised with the openness—almost the
eagerness—of people to talk to us. I’m sure that there are skeptics.
But they are keeping that skepticism to themselves, at least initially.
One general principle is that lots of good things can happen if the govern-
ment just releases data it already has in machine-readable, download-
able format. A good example of this is in San Francisco, where the Bay
Area Rapid Transit system has for years had GPS locators in all their
buses and trains. There was some big control room someplace where you
could see all these things moving around. They took that data that
they already had and put it online in real time in a format that app
designers could tap into. Now there’s an iPhone app that knows where
you are and will tell you when the next bus is coming.
So that’s one part: government releasing data. The second part is getting
firms to release data. One goal there is to get complete price transpar-
ency. Another initiative is getting companies that are collecting data on
your usage to share that data with you. When it comes time to renew
my smartphone calling plan, I’d like to be able to get a file that I could
upload to some Web site that would tell the search engine the way I
use the phone and, so, what features I should be looking for. It might even
be able to tell me, if I’m about to switch to some new model, how much
more my data usage is likely to jump based on past experiences.
The Quarterly: What are the business implications of the data policies
that the Nudge Unit advocates?
Right now, it’s very easy to find what the best airfare is from Chicago to
San Francisco. It’s not so easy to find all the charges that might
come associated with that, especially if you have a big suitcase. And
there are plenty of stories of credit card companies that are making
all their money on late fees and increases in interest rates, and debit card
companies that will stick a big charge that puts you over the limit at
the head of the queue, so that the next six times you swipe your card for
a coffee, you get charged 25 bucks each time.
Many firms view this with fear and trepidation, and some of them should.
But others should view this as an opportunity. There’s an opportunity
for firms that want to compete on the basis of fair dealing. If we really
succeeded with all these initiatives about transparency and making
it easier to shop, then we’re going to make it possible to compete on
a completely different level. Firms that honestly can say to themselves,
“We succeed by having the best products and treating our customers
fairly, and we’re getting screwed by the unscrupulous guys”—they
should welcome this initiative. The ones who are doing the opposite
should fight me tooth and nail.
3 See www.saferproducts.gov.
Nudging the world toward smarter public policy 73
Now, there are companies that are fighting this because, they say, some
of the information that will be posted will be malicious. While of
course it is true that some people may post bad reviews of products—
and even the greatest products have some detractors—a good prod-
uct will manage to overcome some bad-mouthing in the social media.
If you’re really proud of your product, then you won’t mind a complete
airing of people’s opinions.
We’re all going to make some mistakes, and nobody builds a crib that’s
intended to strangle toddlers. But sometimes they’ll build a crib
that human parents will set up wrong. A crib’s got to be designed in a
way that nobody can possibly set it up wrong. And if somebody fig-
ures out how to set it up wrong so that it’s dangerous to kids, the manu-
facturer should want to know.
The strategy of dealing with these things by settling lawsuits with the
unlucky consumers, subject to nondisclosure, is not one that’s good
for the world. Strategies that are based on obscuring the consumer’s
choice are not good long-term strategies. And I would encourage
firms that are making their money that way to think long term and think
about how they can survive in a world where everything is trans-
parent and obvious.
1 “Managing government relations for the future: McKinsey Global Survey results,”
Q3 2011
Biases in action
Regulatory strategy
Exhibit 1 of 1
The inflated view many executives hold of their companies’ reputations
with regulators is consistent with the well-known cognitive bias of
excessive optimism, which tracks with actions we see companies take
Customers 74
Government
Investors 28 Regulators
Increase 64%
Suppliers 17
Stay the same 25%
Media 9 Decrease 9%
Nongovernmental
3
organizations (NGOs)
Organized labor 2
all the time. For example, until recently most leading smartphone
software players seemed to be taking a “less said, best said” approach
to the thorny issue of tracking user locations over mobile networks.
They have adopted a posture similar to that of Internet companies,
which have remained confident that their services’ value to users
more than offsets privacy concerns. Observing positions like these,
it’s been natural for us to reflect on the experience of several European
airport operators, which were so convinced they would never
be broken up that they simply didn’t entertain the possibility—until
it happened.
Countering biases
A good question to ask during sessions like these is, “Why would anyone
listen to us?” Leadership teams should subject themselves to this
question on a regular basis—perhaps by conducting war games in which
they explicitly put themselves in the shoes of other stakeholders or
“voice of the stakeholder” exercises in which they interview (and figure
out what is most important to) regulators, political actors, and the
public at large. Such initiatives boost the odds of taking positions that
are well received. Several companies we know used approaches like
these to frame their proposals for contracts related to the US stimulus
package, and they won five times the funding of counterparts that
did not.
There also are steps companies can take to ensure that regulatory
strategy is not ignored. One large European telecommunications com-
pany has a monthly “reg-watch,” led by the CEO, in which senior
managers review emerging issues and a wide range of plausible scenarios,
including their financial implications. Getting regulatory strategy
on a board’s agenda also helps. And to strengthen organizational muscle,
companies should build an exposure to government relations into
talent development and job rotation for high-potential managers.
Special report
Rediscovering Japan’s
competitive edge
Even before the massive earthquake
that shook Japan on March 11, 2011,
Japanese companies faced daunt-
ing competitive challenges. This pack-
age offers perspectives from three
Japanese CEOs and two teams of
McKinsey experts on the road
ahead for Japanese business—which
matters for executives everywhere.
Japan remains the world’s third- 82
Introduction:
largest economy and the country
Toward a lasting recovery
that revolutionized mass production Yasuchika Hasegawa
through lean manufacturing. A
new book, Reimagining Japan: The
83
Quest for a Future That Works Rebooting Japan’s high-tech
(Shogakukan, July 2011), is the source sector
Ingo Beyer von Morgenstern,
of these voices, and many more,
Peter Kenevan, and Ulrich Naeher
on the country’s future.
86
Staying in the game
Keiji Inafune
Artwork by Yuko Shimizu
90
Japan’s globalization
imperative
Naoyuki Iwatani, Gordon Orr, and
Brian Salsberg
93
Dare to err
Tadashi Yanai
81
82
Introduction:
Toward a lasting recovery
Rebooting Japan’s
high-tech sector
Ingo Beyer von Morgenstern, Peter Kenevan,
and Ulrich Naeher
300
260
Industry high
performers1
220
180
140
100
Japanese high-tech
companies2
60
0
2000 2002 2004 2006 2008 2009
11
10
9
Industry high
performers1
8
5
Japanese high-tech
companies2
4
0
2000 2002 2004 2006 2008 2009
1 Average of revenues for Acer, Apple, Cisco, HP, Lenovo, LG, and Samsung.
2Average of revenues for Canon, Fujitsu, NEC, Panasonic, Sharp, Sony, and Toshiba.
Breaking out of their current inertia will require the senior managers of
Japan’s high-tech giants to take bold steps. Some should pursue cross-
border deals—a form of shock therapy—or capability-building alliances.
Others will need to sharpen their focus by divesting underperforming
noncore assets such as white goods or semiconductors. The growing impor-
tance of emerging markets will make it imperative to become insiders
there by building up local distribution capabilities while improving local
R&D and product design to better address the preferences and eco-
nomic needs of local customers. In some cases, Japanese companies should
even consider offshoring the headquarters of business units to shorten
decision-making processes and expose senior managers to local mar-
ket conditions.
Ten years ago, the Japanese game industry was number one in the
world: Japanese companies created over half of the 50 best-selling game
titles. In 2002, we claimed about a 50 percent share of global revenues.
Not any more. Nintendo continues to be wildly successful; otherwise,
there are now only a few Japanese games in the top 50, and Japan’s
share of the $60 billion global game industry has fallen to 10 percent.
Look at Dragon Quest, which was Japan’s best-selling game in 2009. The
content hasn’t changed that much from when it was introduced, in
1986; it even uses the same characters. Now compare Call of Duty, devel-
oped by California-based Activision and currently the world’s most
popular video game. The look and design are completely different from
the original version, released in 2003. The technology has raced ahead
and gives the player a real feeling of being in the middle of a battlefield.
In the West, game creators are often independent. They get evaluated
and rewarded according to their results. In-house game creators change
companies regularly. The model is similar to that of Hollywood, where
people jump from project to project depending on what talent is needed
where. A director will work with one set of actors or a certain team
of special-effects experts for one film and with a completely different
group for his next film. Japan’s game industry is more like the old
Hollywood system, where players were under exclusive contract to a par-
ticular studio. What’s interesting is that over time, the Japanese movie
industry is becoming more like the Hollywood of today. I believe the eco-
nomics of Japan’s game industry will eventually force it to follow that
pattern. But for now, we’re stuck in the past.
In the past, Japanese game makers could get away with ignoring
overseas competition because of the size of the domestic market and
because Japanese players weren’t all that interested in games from over-
seas. But now the Japanese market is shrinking. And the smaller
Japan’s home market, the less Japanese companies have to invest in games
that might be competitive outside Japan. In South Korea, where the
domestic market is smaller, the game industry recognized from the start
that it would have to go global to survive. Now they’re ahead of us in
many ways. So what first looked like an advantage for Japan’s game
industry—a large domestic market—has proved a handicap.
Of course, Americans still buy some Japanese games. There are many
fans of, say, Super Mario, guys in their 30s and 40s who like it
because they’ve been playing it since they were ten and it gives them a
feeling of nostalgia. But for young kids, who are just discovering
games, Japanese titles don’t have much to offer.
For the most part, games created for the Japanese market aren’t successful
outside Japan. There is a different sensibility between gamers in the
two countries. If you look at US games, the lead character is often non-
typical. He might be bald or some bearded old guy. In Japan, we would
never have a nonstandard lead character; we have a kind of cliché image
of a hero or heroine. Also, overseas games are often more aggressive,
with lots more violence and blood, than Japanese games.
involving battling gladiators. It was the right idea, but we went too far.
There was a lot of hacking off of limbs; it was just too bloody. What
we learned was that just adding a lot of violence is not enough to make
a successful game.
Japan’s globalization
imperative
Naoyuki Iwatani, Gordon Orr, and Brian Salsberg
Q <_> <_> Build a global marketing function. In 2010, only five Japanese companies
<Article slug> made the WPP BrandZ Top 100, an annual ranking of global brands.
One reason: less than 1 percent of Japanese companies with revenue
Exhibit <_> of <_>
above $1 billion have a chief marketing officer (CMO), the executive
Japanese companies are less global than peers from other countries.
For the top 10 public companies by revenues across 16 selected industries,1 n=160
33 152
Revenues
52 131
24 160
Ownership
47 60
17 134
Assets
44 52
Management, top six 2 937
positions 9 829
1 Specifically, for Japan, the top 10 Japanese companies in each industry; for all others, the 10 largest non-Japanese companies by
revenues. To ensure a representative analysis, we categorized Japan’s public companies into the following 16 industries;
automobiles and parts, basic materials, construction and materials, consumer electronics and leisure goods, durable house
products, financial services, food and beverages, health care, industrial goods and services, media and telecommunications, oil
and gas, personal goods, retail, technology, travel and leisure, utilities.
Source: Bloomberg; McKinsey analysis
92 2011 Number 3
who, for many global companies, makes the final call on the balance
between global and local marketing, on trade-offs among distribution
channels, and on how much to invest in new advertising media. A crucial
step for many Japanese companies, as they consider the creation of
such a position, will be deciding which powers accrue to it and where it
should be in the organizational structure. At least until global brand-
equity thinking becomes second nature in a company, CMOs will need
disproportionate air time at key decision-making forums.
Dare to err
We’ve lost that spirit, maybe because we are under the illusion that we
are rich and superior. But many countries are just as rich, and in
Japan income has stagnated for many people for a decade or more. Japan
is still very comfortable to live in, if you are Japanese. But there’s a
difference between being comfortable and being viable. We are gradually
losing our viability.
One thing Japan has to get rid of is the idea that things are one way here
and different everywhere else. The Japanese are really strong at
home and incredibly weak away from home. We need Japanese who are
strong away or who don’t distinguish between home and away. We’re
trying to build this idea into Uniqlo’s culture. For example, English is
spoken at business meetings with foreigners, and we want all e-mails
to be in English in a few years.
My advice for young Japanese is simple: get out of Japan. One of our
weaknesses as Japanese is our ineptness at communicating with other
cultures. Even people who speak English well are closed off psy-
chologically. They don’t speak frankly like I do. There’s this uniquely
Japanese standoffishness, this hesitancy to become too involved.
And it’s detrimental to globalization.
All this sounds pessimistic, but I don’t see this as the counsel of despair.
Japan has everything—people, goods, money, technology, information.
As a nation, we are honest, hard working, and serious. So why are we so
weak? Why don’t we use these strengths to take on the world?
If we give it everything we’ve got and start to move in the right direction,
I’m confident that we will succeed. Even if we experience failure, we can
pick ourselves up and try again. That’s what Uniqlo did—and that is
what Japan can do.
97 109
To centralize or not Preparing your organization
to centralize? for growth
103 114
When big acquisitions Managing crises and shaping
pay off the future of Chile: An interview
with Sebastián Piñera
To centralize or not
to centralize?
It’s a hard call made harder by power struggles. CEOs can force a more
thoughtful debate by asking three critical questions.
Three questions
Each question defines a hurdle that proposal to appoint a head of group
a centralization proposal must meet. health and safety would get a no
A decision to centralize requires a for this question and would need a
yes to at least one of them. While the yes from question two or three.
2
questions set a high bar for central-
ization, they do not produce formu-
laic answers; considerable judg- Does centralization
ment is still required. They benefit
add significant
companies by allowing advocates
and opponents of centralization to
value—10 percent?
If centralization is not mandated,
conduct a debate in a way that
it should be adopted only if it adds
helps CEOs and their senior teams
significant value. The problem,
make wiser choices. The questions
however, as illustrated by the product-
can be asked in any order, but the
management example, is how to
one presented here is often natural
judge whether it will do so. This point
to follow.
1
is particularly difficult because
corporate strategies rarely provide
clarity about the major sources
Is centralization of additional value that underpin the
mandated? argument for bringing different
The first step is to ask whether the business activities together in a
company has a choice. A corpo- group. The solution, we find, is to set
ration’s annual report and consoli- a hurdle high enough so that the
dated accounts, for example, are benefits of centralization will probably
required by law and must be signed far outweigh the disadvantages,
by the CEO, so it is impossible to making the risks worth taking.
delegate this task to the business
divisions. In this case, the answer Specifically, we suggest asking:
is yes to centralization. “Does the proposed initiative add
10 percent to the market capital-
By contrast, centralization is not ization or profits of the corporation?”
essential for compliance with health This hurdle is sufficiently high to
and safety laws; each division can make it difficult for advocates of
manage its own compliance. So a centralization to “game” the analy-
Applied Insight 99
sis, and thus saves the top team’s go forward only if the risks of these
time by quickly eliminating small negative side effects are low.
opportunities from discussion. Start
by considering whether the activity An initiative to centralize payroll is
meets the 10 percent hurdle on its likely to get a yes on this hurdle.
own. If not, which is most often the Costs can clearly be saved through
case, you should assess whether it economies of scale, and the risks
is a necessary part of some larger of negative side effects are low. Pay-
initiative that will meet the 10 percent roll operations are not important
hurdle. In practice, the answer to to the commercial flexibility of individ-
the 10 percent question does not ual business units, nor are their
require fine-grained calculations. managers likely to feel less motivated
What is required are judgments about by losing control of payroll. More-
the significance of the activity, over, the risks of bureaucratic ineffi-
either on its own or as part of a ciency and distraction can be
larger initiative. reduced to a minimum if the payroll
3
unit is led by a competent expert
who reports to the head of shared
Are the risks low? services and doesn’t take up the
Most centralization proposals will time of finance or HR leaders.
not pass either of the two previous
hurdles: they will not be mandated Any centralization proposal that does
and will not represent major sources not survive at least one of our three
of additional value. More often, the questions should be abandoned or
prize will be smaller improvements in redesigned. To see how our approach
costs or quality. In these cases, the works in practice, let’s look at two
risks associated with centralization— companies that recently applied it—
business rigidity, reduced motiva- starting with the automated cutting-
tion, bureaucracy, and distraction— and welding-equipment manufacturer,
are often greater than the value which we’ll call European Automation.
created. Hence, the proposals should
In practice:
European Automation’s product-management problem
Since centralized product manage- ity over an activity they considered
ment was clearly not mandated, the important. And if done badly, central-
centralization proposal failed the ized product management could
first test. The CEO then skipped to lead to delays, additional costs, and
the third test—is the risk of nega- uncompetitive products.
tive side effects low?—and quickly
concluded that it wasn’t. Central- So the proposal would succeed or
ization would reduce commercial flex- fail on the second question—the
ibility. Moreover, it could make 10 percent hurdle. The CEO sat down
managers in the businesses less moti- with the heads of the technical
vated, since they would lose author- function and the two businesses
100 2011 Number 3
(cutting and welding) to assess responded: “Well, all the more reason
whether centralized product manage- for us to work together to get it right.
ment could reasonably deliver an At our next meeting, let’s have a
additional 10 percent in value through plan for how you are going to do this.”
increased sales, higher prices, or
some combination of both. (It was Nearly two years later, European
unlikely, in anyone’s estimation, to Automation’s centralization of prod-
yield major cost savings.) uct management has been largely
successful: market share is up, and
After considerable discussion based the product offerings of the cutting
on estimates of likely profit margins and welding units are better aligned.
and on additional sales volumes from But this example also illustrates the
customers who might be influenced hard work and real risks involved. The
by an integrated product range, the company had to replace some of its
group judged that if the central- original product managers because
ized product-management function they did not have the skills to under-
was properly managed it could stand both cutting and welding prod-
add 10 percent to the company’s per- ucts. Also, with product managers
formance. In other words, the oppor- reporting to the technical function
tunity was big enough to surmount rather than to business units, some
the 10 percent hurdle. new products have been technically
strong but less tailored to market
Yet the business heads still resisted. needs, and some product launches
The downside of getting it wrong, have been delayed. To solve these
they argued, could make things worse problems, the executive committee
rather than better. But the CEO, is reviewing product-development
emboldened because the proposal plans in more detail and asking for
passed the 10 percent hurdle, regular progress reports.
In practice:
Extreme Logistics’ performance-management issue
Sometimes, addressing the three sions. Historically, each had its
questions can spark meaningful own. The CEO felt that a common
conversations that take managers one might enable him to have
in unexpected—and beneficial— closer control of costs and manage-
directions. This happened at a com- ment quality.
pany we’ll call Extreme Logistics,
a global provider of food services The head of HR proposed a cen-
to drilling, mining, and other oper- tralized system that would link a bal-
ations in out-of-the-way locations. anced scorecard of metrics to
incentives. Knowing that the CEO
Anticipating slower growth and lower supported the initiative, skeptical
margins from increased competition, division heads nodded the proposal
the company’s CEO asked the HR through the concept stage. Once
leader to consider imposing a single HR began to work out the details,
performance-management system however, vocal resistance emerged.
on all of the five geographical divi- One division head said he was
Applied Insight 101
idents thought it would make their field for building a case, these
managers less motivated. Moreover, questions help companies to strike
the head of HR, the CEO, and the the right balance between cen-
CFO all lacked experience running tralization and decentralization
a system of the type proposed. today and to evolve their organiza-
Hence, it might become bureaucratic tions successfully as conditions
and distract the corporate center change over time.
from the four areas that had previ-
1
ously been identified as places For more on the evolution of Sloan’s
where it could add value, and from philosophy of decentralization and the
multidivisional structure, see Alfred Sloan,
the two new initiatives—cost My Years with General Motors, New York,
reduction and management-quality NY: Crown Business, 1990. For excerpts
from some of Sloan’s memorable internal
improvements—both of which
memoranda, see chapter 3, “Concept of the
are currently being evaluated to see organization.”
if they meet the 10 percent hurdle.
Andrew Campbell, an alumnus
of McKinsey’s London and Los
Angeles offices, is a director of the
Is centralization mandated? Can it London-based Ashridge
add 10 percent to a corporation’s Strategic Management Centre of
value? Can it be implemented with- Ashridge Business School;
out negative side effects? A pro- Sven Kunisch is a PhD student
posal to centralize only needs a yes at the University of St. Gallen
to one of these three questions. Institute of Management and a
Yet they provide a high hurdle that visiting fellow at Harvard
helps managers avoid too much Business School; Günter Müller-
centralization. Moreover, they stim- Stewens is professor of strategic
ulate open and rational debate in management at the University
this highly politicized area. By giving of St. Gallen.
those in favor of centralization and
those opposed to it a level playing Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
103
Some deals are quietly creating value that doesn’t make the headlines.
Here’s how.
actions that CEOs and their senior acquirers reset their aspirations by
teams can take before, and after, con- identifying opportunities to trans-
summating big acquisitions in form the business and then building
order to ensure a greater likelihood a fact base to support those
of long-term success. opportunities. Sometimes they came
from fundamental changes to
operations or from providing cus-
Aim higher than due tomers with new products or ser-
diligence vices that hadn’t come up in due dili-
In the hectic pace of integration after gence or weren’t investigated,
a deal closes, many integration as a result of limited time or informa-
managers adopt the synergy esti- tion access.
mates calculated by the pre-
deal due-diligence team as perform- After a merger between two global
ance targets. mining companies, for example,
the acquirer had more access to
Yet how much a company pays for a details on the overlap between
deal isn’t necessarily the same as its own and the target’s customer
what it’s worth. Even the best due- base and suppliers. Access to
diligence efforts can be only so previously confidential information
good. They’re often constrained by on the terms and conditions of
time and access to data and typi- sales agreements—and the needs
cally focus on whether expected cost and expectations of customers—
synergies alone can justify a deal, led to unexpectedly high levels of
placing more emphasis on how much cross-selling and bundling between
could be saved by eliminating the target’s and acquirer’s prod-
redundant functions, facilities, people, ucts, as well as unexpectedly lower
or products and much less on how input costs, thanks to improved
much can be gained through growth. supply chain management. While
To compound the error, as indi- these considerations were not a
vidual managers weigh the uncer- large part of the original investment
tainty of due-diligence estimates thesis, they were a major part of
against their own performance risk, the deal’s success, improving the
they often translate synergy esti- combined company’s earnings
mates into even more conservative— before interest, taxes, depreciation,
and easily achievable—cost and and amortization (EBITDA) by
revenue targets. more than 20 percent.
was of utter importance in the res- first losing a very close race for
cuing of the miners. Contrast president to Michelle Bachelet4 and
that with the case of the Russian then winning four years later.
submarine, the Kursk,3 where
the Russian government didn’t ask The Quarterly: Did that back-
for help until it was too late. The ground influence the way
British and the Americans had the you shaped your team as you
technology to rescue them alive, started governing?
but the Russians didn’t ask for it.
President Piñera: We brought in
The Quarterly: Could you speak a lot of people from the private
a little about your career and how sector and from universities. To some
you wound up in this office? extent, that was because our
party5 had been in opposition for
President Piñera: In my life, I 20 years, so our most experi-
have had three vocations. My first enced people were already in Con-
was academic. I went to Harvard, gress, and we don’t have a par-
got a PhD in economics, and was a liamentary system, where members
professor in universities in Chile of the House or Senate can easily
and abroad for many years. become ministers. In any event, just
about all our cabinet members
One day in the late 1970s, I remem- have PhDs from very well-known
ber saying, “Enough is enough,” universities or were extremely
and decided to become an entre- successful in the private sector. Most
preneur. I created a number of didn’t have much experience
companies, including one that intro- in the public sector, so they had to
duced credit cards to Chile. That learn rapidly.
was extremely successful and it gave
me the resources to invest in Our foreign-affairs minister, Alfredo
other businesses—in construction, Moreno, is an interesting case
in airlines, in TV, for example. in point; basically, he was an entre-
preneur with strong interests in
Finally, in the late 1980s, as we recov- international relations. He’s learning
ered our democratic system, rapidly, and he’s reforming our
I decided to enter public service. I Ministry of Foreign Affairs, which
ran as an independent and was was a very traditional one. He’s
elected to be the senator representing asking tough questions about the
Santiago. After eight years, I role of his office in advancing
didn’t want to run again. For a time, Chile’s interests and suggesting that
I focused on some foundations— “old diplomacy” doesn’t work now.
one that helps educate young women One example would be saying, “Our
with low incomes, one oriented exports have been stagnant for
toward the environment, one seeking the last two or three years. We want
to promote Chile’s embrace of our exports to grow by 10 or
freedom and democracy—that I had 15 percent this year. How do we sup-
created along the way. It wasn’t port the process of looking for
until 2005 that I got back into politics, new markets?”
Applied Insight 117
Chile president
Sebastián Piñera
greets Florencio
Avalos, the
first of 33 miners
to be rescued
from a mine that
collapsed in
early August 2010.
© AFP/Getty Images
also created what we call the ethical them, which helped us outperform
family income, which is something some of our neighbors.
similar to what has been known as a
negative income tax. Basically, But I don’t think that’s enough for
we will transfer enough income to what’s coming now. In the society of
families to bring them up to the knowledge and information, we
extreme poverty line. In order to not need at least four new pillars: to give
create perverse incentives, we a quality education to everyone,
will ask something from those fami- to invest in technology, to promote
lies: their kids have to go to school; innovation and entrepreneurship,
if they are working age, they have and to have a very flexible society
to be working or training—things and economy. This last one is
like that, to help our people to important because the only constant,
help themselves. these days, is that the world is
changing, and we have to be ready
The Quarterly: You’ve also set to adapt ourselves—to take advan-
aggressive goals for creating jobs. tage of the opportunities and
to adjust to the changes that come
President Piñera: Yes. We need from abroad.
those jobs—because they will help
us defeat poverty, because we have Basically, our government’s pro-
a very high unemployment rate, gram is designed to strengthen the
and because we are expecting a huge three traditional pillars while
influx of women into the labor force. creating these four new pillars. So
Labor force participation by women we are undertaking a huge edu-
is currently very low, and it’s grow- cational reform—trying to fix a system
ing rapidly. So we have to create that hasn’t worked because it
jobs for them—as many as one was caught up by all kinds of inter-
million over the next four years, to est groups. We have a plan to
help us equal the level of female triple our investment in technology
labor force participation in other as a percentage of GDP. We are
OECD countries. promoting innovation and entrepre-
neurship everywhere, including
The Quarterly: How are you going within the public sector. And of
to do that? course we are trying to have a
more flexible and adaptive economy
President Piñera: To answer that, and society. All of these things
I need to say a little more about should help with job creation over
my view of the role of government. time. In the shorter term, boosting
For a long time, I thought there exports also will be a critical factor.
were three basic pillars for the govern-
ment: to have a stable, legitimate, It’s challenging because we are
democratic system; to have a free, doing all this while facing the
open market economy, unencum- huge costs of rebuilding what was
bered by fiscal imbalances; and to destroyed by the February 2010
have a state that works. Those earthquake and the tsunami that
pillars were very scarce during the came after. The earthquake
20th century in Latin America. devastated us. We lost more than
Chile was among the first to achieve 500 lives. We also lost one-
Applied Insight 119
Extra Point
Three questions can help senior executives focus the debate and
reduce political posturing. Each question sets a high bar for centralization,
with at least one yes answer needed to overcome the presumption of
decentralization. The questions can be asked in any order, but the sequence
presented here is often the natural one to follow.
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