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Put your
money where
your
strategy is
2012 Number 2
This Quarter
Leaders who can listen well are more likely to take on board new
insights generated by social technologies and to jump on opportunities
that require significant shifts in corporate resources. But listening
skills are seldom taught. Former McKinsey director Bernard Ferrari
tries to remedy that in “The executive’s guide to better listening,”
while Amgen CEO Kevin Sharer offers his own reflections on
the power of listening by recounting an epiphany that made him
start to hear what he’d been missing. We hope this issue of the
Quarterly strikes a similar chord with you.
David Court
Director, Dallas office
On the cover
Rethinking corporate strategy
42
Breaking
strategic inertia:
Tips from two
leaders
Rio Tinto’s Guy Elliott and
Honeywell’s Andreas Kramvis explain
how they overcome the barriers
that all too often separate capital,
talent, and other resources from
vital strategic goals.
Features
94 Collaborative strategic
61 Why I’m a listener: planning: Three observations
Amgen CEO Kevin Sharer
Olivier Sibony
The biotech giant’s chief executive
describes the epiphany that made him
Social-strategy tools can provide
a better listener and explains why
real value to a company whose
listening is a survival skill for leaders
executives know how to use them.
and organizations.
66 Demystifying
social media Departments
Roxane Divol, David Edelman,
and Hugo Sarrazin
Now available on
mckinseyquarterly.com
Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly
2012 Number 1
Share to win
Harold Lefkowitz
Regional director, DigitalDerm; New York City
Fostering ownership
Mitch McCrimmon
Managing partner, Self Renewal Group; Toronto
“A lot of companies would say they avoid these four traps. For me, a deeper
reason why executives disengage employees is the metaphor of the
organization as a person, which means that the ‘head’ thinks and the ‘hands’
do. A primary role of managers is to ask employees what they think, not
only about the problems they face but also about strategic issues in order to
engage them in the whole business and foster wider ownership for success.”
“I would suggest that one component of ‘How human is our service?’ [one
of the three design factors explored in the article] is asking whether or not the
service takes gender issues into account.”
“Determining if services are human, economic, and scalable are three great
filters; another one is understanding and acting on customers’ brand-
based expectations for service when seeking to transform service gaps into
brand-building opportunities.”
Leading Edge
10 13
16 20
A clearer-eyed view
of M&A
Werner Rehm, Robert Uhlaner, and Andy West
Companies that do many small deals can outperform their peers—if they have the right skills. But
they need more than skill to succeed in large deals.
The appeal of big deals is perennial: of the world’s top 1,000 nonbanking
they can be transformative in stra- companies, which completed
tegic terms, add asset heft for future more than 15,000 M&A deals over
competitive battles, and for large the past decade.1 We segmented
companies may be one of the clear- companies into five patterns of
est paths to achieve material growth deal making depending on the scope
rates. But leaders hoping to use of their M&A activities. A corre-
M&A to outperform their peers should lation of these patterns with long-
also be aware of the value that a term excess returns shows that
program of smaller, targeted deals companies achieved positive total
can create. On average, in fact, returns over the last decade while
our research suggests that more pursuing a range of approaches
programmatic M&A is likely to (exhibit), including programmatic deal
generate stronger returns than the making that involves frequent
occasional big deal. smaller targets, tactical acquisitions
aimed at procuring specific capa-
Our analysis focused on the excess bilities, and strategies driven primarily
total returns to shareholders (TRS) by organic growth. Even though
11
Programmatic 2.8 64 9
Selective 2.0 64 10
Organic 2.0 58 14
Tactical 1.3 61 8
1 TRS = total returns to shareholders; median excess TRS = outperformance against global industry index for each company.
Between 2008 and 2010, companies with more diverse top teams were also top financial
performers. That’s probably no coincidence.
Q2 2012
Diversity
Exhibit 1 of 1
Exhibit
Top quartile
Bottom quartile
Breakout by country
1 Comparison of top quartile vs bottom quartile of DAX 30 (Deutscher Aktienindex), CAC 40 (Euronext Paris), the top 30 by market
cap of the FTSE 100, and the 80 Fortune 500 companies with the highest and lowest diversity levels; diversity analysis based on women
and foreign nationals/ethnic minorities on companies’ executive boards; adjusted for statistical outliers.
2 Our multivariate regression analysis of diversity with country-specific fixed effects gives a coefficient of +9.89 (significant at 1% level)
or +4.71 (significant at 10% level).
Source: Bloomberg; Thomson Reuters Datastream; McKinsey analysis
Nominal GDP
growth rate, %
93
79
70 Developed nations 3.1 4.3
1
Includes cash and deposits, fixed-income securities, listed equities, and alternative investments; excludes commodities, derivatives,
nonlisted equities, and real estate.
Source: National sources; McKinsey Global Institute analysis
Leading Edge 17
0
Developed Asian households2 32 13 54 3.6
Latin American
households 14 24 54 8 3.5
0
Chinese households
14 5 81 6.5
Emerging Asian 0
households 10 13 77 1.8
0 0
Emerging-market
90 10 5.9
central banks
Equities, UK Equities, US
households and households and
pensions = 34% pensions = 47%
1
Figures may not sum to 100%, because of rounding.
2
Includes Hong Kong, Singapore, and Taiwan; excludes Japan, where households allocate 10% of their portfolio to equities.
Q2 2012
Equity gap
That could
Exhibit 3 of 4contributeto a shift away from equities in the
global asset allocation, which will be reinforced by
aging investors in developed nations whose retirement
needs dampen their appetite for equities.
2020 forecast
Equities
22
2010
Equities
28
Other
Other 78
investments1 72 investments1
2
Factors in the projected 6% decrease in global equities, share by percentage point
Rising wealth in
2.6
emerging markets
Growth of alternative
1.3
investments
Shifting pension
0.4
portfolios
% households
% after city name = % of after city name = % ofinhouseholds
investing investing
equities (also includes in equities
mutual (also includes mutual funds)
funds)
Jinan, 8% Jinan, 8%
Kaifeng, 8% Kaifeng, 8%
Mianyang, 7% Mianyang, 7%
Chengdu, 8% Chengdu, 8%
Shanghai,
Shanghai, 38%
Xiamen, 2
Xiamen, 21%
Guangzhou,Guangzhou,
19% 19%
Shenzhen, 19%
Shenzhen, 19%
Exhibit
Source:
Source: 2011 McKinsey survey sources:
of 2011 McKinsey
20,000 National
survey
consumers in 13 sources;
of Asian
20,000 2011
consumers
markets; inMcKinsey
13 Asian
McKinsey survey
markets;
Global of 20,000
McKinsey
Institute analysis Globalconsumers in
Institute analysis
13 Asian markets; McKinsey Global Institute analysis
Copyright © 2012 McKinsey & Company. All rights reserved. We welcome your comments
on this article. Please send them to quarterly_comments@mckinsey.com.
20 2012 Number 2
Few boards look at how the CEO’s total wealth invested in the company changes as stock
prices fluctuate. They could—and they should.
Q2 2012
Governance
Exhibit 1 of 2
Exhibit 1
−50
−100
−100 −50 0 50 100
Change in stock price, %
Source: Calculations by David F. Larcker and Brian Tayan, based on compensation data provided in each company’s 2011 Form DEF-14A
that these are both appropriate Similarly, we found that the CEO
arrangements, because the of one regulated public utility
two firms face different strategic has convexity in his compensation
opportunities and challenges. It of 1.00 (a 100 percent increase
could also be the unintended in stock price leads to a 100 percent
result of option grant timing and increase in wealth), while the CEO
market performance. Or it of another public utility has convexity
might be the case that the market of 1.51. Here, too, having a clear
opportunities for the companies picture of the two compensation
are similar and the boards of one or contours can help board members
both haven’t thought deeply about decide on whether risk levels are
whether incentives are appropriate. appropriate for regulated utilities.
Leading Edge 23
40
Pharma company B
30
20
10
0
Pharma company A
−10
−20
−30
−40
−50
−100 −50 0 50 100
Source: Calculations by David F. Larcker and Brian Tayan, based on compensation data provided in each company’s 2011 Form DEF-14A
24 2012 Number 2
A holds only direct stock investments back in line with objectives? Should
and restricted shares, so the exec- it reprice existing options to reduce
utive’s payout function is essentially convexity? If the CEO wants to
a flat line and is unaffected by a sell or hedge some of his or her
volatile stock price. The CEO of com- personal portfolio in order to reduce
pany B, by contrast, receives a personal-investment risk, how
significant share of compensation will this change the incentives
in stock options, so the exec- to perform?
utive’s payout rises dramatically with
greater volatility, as shown by the Boards should also be aware of how
upwardly sloping line. the effects of tenure may misalign
CEO incentives and strategy over the
Which is the better approach? The longer term. For long-standing
answer will depend on whether CEOs, convexity will often decline
the success of the company requires as options vest and wealth in the
innovation and risky investment or company shifts primarily to stock.
whether it requires the steady devel- The board in this case may want
opment of existing products. In to amplify convexity to discourage
the pharmaceutical industry, it is not risk aversion. In a less frequent
hard to imagine that the board occurrence, the time effects may
should encourage at least some level actually increase convexity,
of risk. Risky projects that fail when, for example, a company is
are sure to destroy value, but failure recovering from a long-term
to innovate at all is also sure to decline in share price and an exec-
destroy value. utive retains a substantial num-
ber of unexercised options that had
Evaluating your CEO’s payoff been deeply out of the money.
structure Here, appropriate action to dampen
Since this analysis is relatively new, convexity may be required.
and wealth effects aren’t routinely
calculated and reported, we suggest Finally, it is useful in another way for
boards do some benchmarking the board to understand the dollar
against peers to see if it raises ques- amount that the CEO can earn if “all
tions about the financial incentives the stars align” for the firm and its
they have created for their CEO. stock price rises sharply. Boards are
Is risk in line with industry peers, and, sometimes faced with the problem
more importantly, is it in line with of what to say to activist shareholders
the company’s strategic objectives? and media when the CEO receives
Have changes in the stock market very large payouts. The wrong
changed the convexity of the CEO’s answer is, “We never looked at that,
reward curve in a way that encour- because we did not think it would
ages excessive risk? If so, should the happen.” Many boards will likely find
board change the mix of future that the payout amounts for various
annual pay grants to get the curve levels of stock price targets are
Leading Edge 25
much different than they expected, David Larcker is the James Irvin
often encouraging too much or too Miller Professor of Accounting
little risk. That might also be true for at Stanford University, senior faculty
other senior executives, and boards member at Stanford’s Rock Center
could do well, as a second step, to for Corporate Governance, and
examine their payoff structures too. director of Stanford’s Corporate
Governance Research Program,
1 We define CEO wealth as the total value where Brian Tayan is a researcher.
and the expected value of stock options that They are coauthors of Corporate
an executive continues to hold at a company.
Governance Matters: A Closer Look
We exclude personal wealth outside company
stock (this is not typically disclosed). Stock at Organizational Choices and Their
options are valued using the Black–Scholes Consequences (FT Press, April 2011).
pricing model, with the remaining term
of the option reduced by 30 percent to com-
pensate for potential early exercise or Copyright © 2012 McKinsey & Company.
termination and volatility based on actual All rights reserved. We welcome your
results from the previous year.
2 For additional discussion of compensation comments on this article. Please send them
to quarterly_comments@mckinsey.com.
and wealth effects, see David F. Larcker and
Brian Tayan, Sensitivity of CEO Wealth to
Stock Price: A New Tool for Assessing Pay for
Performance, Stanford Graduate School of
Business, Closer Look Series Case No. CGRP-
10, September 2010.
On the cover
Rethinking corporate
strategy
The vast majority of companies provide their business
units with virtually the same amount of capital
and other scarce resources year after year. The lead
article in this package presents new McKinsey
research on the prevalence of strategic inertia, along
with its financial costs, causes, and potential
remedies. A strong, independent corporate center can
help counter the status quo, an idea we explore
in a companion piece. So can thoughtful processes and
decision rules. Learn here about approaches
that have worked for the CFO of Rio Tinto and for the
president of Honeywell’s Performance Materials
and Technologies business.
28 42
How to put your Breaking strategic
money where your inertia: Tips from
strategy is two leaders
Stephen Hall,
Guy Elliott
Dan Lovallo, and
Rio Tinto
Reinier Musters
Andreas C. Kramvis
Honeywell
39
The power of
an independent
corporate center
Stephen Hall,
Bill Huyett, and
Tim Koller
27
For the past two years, we’ve been systematically looking at corporate
resource allocation patterns, their relationship to performance, and the
implications for strategy. We found that while inertia reigns at most
How to put your money where your strategy is 29
companies, in those where capital and other resources flow more readily
from one business opportunity to another, returns to shareholders
are higher and the risk of falling into bankruptcy or the hands of an
acquirer lower.
We’ve also reviewed the causes of inertia (such as cognitive biases and
politics) and identified a number of steps companies can take to
overcome them. These include introducing new decision rules and
processes to ensure that the allocation of resources is a top-of-mind
issue for executives, and remaking the corporate center so it can provide
more independent counsel to the CEO and other key decision makers.
Every year for the past quarter century, US capital markets have issued
about $85 billion of equity and $536 billion in associated corporate
debt. During the same period, the amount of capital allocated or reallo-
cated within multibusiness companies was approximately $640 billion
annually—more than equity and corporate debt combined.1 While most
perceive markets as the primary means of directing capital and
recycling assets across industries, companies with multiple businesses
actually play a bigger role in allocating capital and other resources
across a spectrum of economic opportunities.
1 See Ilan Guedj, Jennifer Huang, and Johan Sulaeman, “Internal capital allocation and firm
performance,” working paper for the International Symposium on Risk Management and
Derivatives, October 2009 (revised in March 2010).
2 We used Compustat data on 1,616 US-listed companies with operations in a minimum of two
Exhibit 1
Capital allocations were essentially fixed for roughly one-third
of the business units in our sample.
0.9 Medium
0.8 High
0.7
The closer the correlation
0.6 index is to 1.0, the less the
year-over-year change in a
0.5 company’s capital allocation
across business units.
0
1991 1993 1995 1997 1999 2001 2003 2005
Exhibit 2
Companies with higher levels of capital reallocation
experienced higher average shareholder returns.
High 10.2
Medium 8.9
Low 7.8
32 2012 Number 2
For the most part, however, the failure to pursue a more active allocation
agenda is a result of organizational inertia that has multiple causes. We’ll
focus here on cognitive biases and corporate politics, but regardless of
source, inertia’s gravitational pull is strong—and overcoming it is critical
to creating an effective corporate strategy. As author and Kleiner Perkins
Caufield & Byers partner Randy Komisar told us, “If corporations don’t
approach rebalancing as fiduciaries for long-term corporate value,
their life span will decline as creative destruction gets the better of them.”
Cognitive biases
Biases such as anchoring and loss aversion, which are deeply rooted in the
workings of the human brain and have been much studied by behavioral
economists, are major contributors to the inertia that prevents more active
reallocation.3 Anchoring refers to the tendency to use any number, even
an irrelevant one, as an anchor for future choices. Judges asked to roll a
pair of dice before making a simulated sentencing decision, for example,
are influenced by the result of that roll, even though they deny they are.
March 2010.
How to put your money where your strategy is 33
Corporate politics
A second major source of inertia is political. There’s often a tight align-
ment between the interests of senior executives and those of their
divisions or business units, whose ability to attract capital can signifi-
cantly influence the personal credibility of a leader. Indeed, because
executives are competing for resources, anyone who wins less than he
or she did last year is invariably seen as weak. At the extreme, leaders
of business units and divisions see themselves as playing for their own
“teams” rather than for the corporation as a whole, making it challeng-
ing to reallocate resources significantly. Even if a reduction in resources
to their division benefits the company as a whole, ambitious leaders
are unlikely to agree without a fight. As one CEO told us: “If you’re asking
Q2 2012
me to play Robin Hood, that’s not going to work.”
Resource allocation
Exhibit 3 of 3
Exhibit 3
Correlation between each brand’s 2010 advertising budget and its average advertising
budget for previous 5 years at one consumer goods company (n = 40 brands)
5.0
r 2 = 0.87
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0
0 0.5 1.0 1.5 2.0 2.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0
Average advertising spending by brand in 2010, % of corporate total
Overcoming inertia
4 For more, see James Manyika, “Google’s CFO on growth, capital structure, and leadership,”
Our research found that there’s little overall difference between the
seeding and harvesting behavior of low and high reallocators. This should
come as little surprise: seeding involves giving money to new business
opportunities—something that’s rarely resisted. And while harvesting
is difficult, it most often occurs as a result of a business unit’s sus-
tained underperformance, which is difficult to ignore.
Consider, for example, the efforts of Google CEO Larry Page, over the
past 12 months, to cope with the flowering of ideas brought forth by
the company’s well-known “20 percent rule,” which allows engineers
to spend at least one-fifth of their time on personal projects and has
resulted in products such as AdSense, Gmail, and Google News. These
successes notwithstanding, the 20 percent rule also has yielded many
peripheral projects, which Page has recently been pruning.5
5 See Claire Cain Miller, “In a quest for focus, Google purges small projects,” nytimes.com,
Of course, the CEO and other senior leaders will need to reinforce
discipline around such simple allocation rules; it’s not easy to hold the
line in the face of special pleading from less-favored businesses.
Developing that level of clarity—not to mention the courage to fight
tough battles that arise as a result—often requires support in the
form of a strong corporate center or a strategic-planning group that’s
independent of competing business interests and can provide objec-
tive information (for more on the importance of the corporate center
to resource reallocation, see “The power of an independent corporate
center,” on page 39).
6 See three publications by Mehrdad Baghai, Sven Smit, and S. Patrick Viguerie: “The
The power of an
independent corporate
center
Stephen Hall, Bill Huyett, and Tim Koller
A corporate center does have the potential to cut through the tensions,
lobbying, and logrolling that often bedevil resource allocation discussions
and lead to inertia (for more on resource allocation challenges, see “How
to put your money where your strategy is,” on page 28). But few are well
organized to play this role. Some are little more than a collection of central
functions (such as treasury, legal, and human resources) that don’t fit
elsewhere in the organization. Some are more strategy focused but
primarily prepare board papers and support special initiatives for the CEO,
the chairman, or the board. At the opposite extreme, certain corporate
centers meddle in the tactics of business units. Others revolve around a
CFO who manages the balance sheet, aggregates financial report-
ing, courts investors, and provides tax and treasury services—but seldom
gets involved in strategy. Too often missing are the intense reviews,
debates, and challenges that lie at the core of value-creating corporate-
strategy decisions.
The right kind of ownership can be extremely powerful. Take the case of
the “two Bobs” at the mining company Rio Tinto, in the early 1990s. Rio’s
chairman, Bob Wilson, saw an opportunity to reshape its portfolio and
build a series of new growth platforms through a combination of bold organic
and inorganic moves. Bob Adams, the executive director for planning and
development, generated many of the ideas that underpinned the company’s
repositioning and supported the corporate agenda by building a world-
class capability to evaluate and develop businesses. Armed with independent
analyses, the two Bobs helped counteract the forces of inertia.
likely to uncover a need for wholesale shifts out of one business area and
into another. The corporate center is better positioned to wrestle with
questions on behalf of the organization as a whole—and to propose tough
solutions that business units would be unlikely to arrive at independently.
How does each business unit stack up against its traditional peers
and new attackers on performance measures such as product quality
and innovation, the effectiveness of distribution, and cost levels?
Could other companies extract more value from any of our businesses—
and acquire them for a premium that we could invest better elsewhere?
Which units absorb more than their fair share of senior management’s
time and attention relative to their potential for creating value?
Guy Elliott
has been the CFO of Rio Tinto—one of the world’s most diversified
mining companies, with operations on six continents and net assets
of roughly $60 billion—since 2002.
We start from the proposition that we are not strategic capital allocators;
we are bottom-up capital allocators. We invest not by choosing the
commodity in which to put money but by choosing the project in which
to put money. For example, we observed that 80 percent of the money
in the copper world is made by 20 percent or less of the world’s copper
mines. Our objective is for all of our mines in all of our products to be
in that 20 percent because we think we’re particularly good at running
large, long-life, low-cost mines.
The portfolio bias toward iron ore has been very beneficial, of course.
But it has unnerved investors a bit because they can’t believe the
good times are going to continue forever. So we are beginning to ask
ourselves questions about whether we should take action to “correct”
that portfolio bias. And it’s very difficult. We could stop further invest-
ments in iron ore. But if we did that, we would be turning our back
on some of the highest-return, lowest-risk investments we can make. So
that looks like a perverse course of action. We also could sell some
iron ore assets, but why would you sell some of your best businesses
unless you really were clever enough to know precisely when the
top of the cycle was? And even then, would you get the right price, given
present market conditions?
Andreas C. Kramvis
is the president and CEO of Honeywell Performance Materials and
Technologies, which has recorded double-digit margin improvements
for each of the past six years. He is the author of Transforming
the Corporation: Running a Successful Business in the 21st Century
(Randolph Publishing, September 2011).
When you are in a business unit, you are much closer to your markets
than the corporate entity is. Your knowledge of how to invest
should be much sharper as well. Through rapid reallocation of your
existing resources, you should be able to capitalize on opportunities
more quickly than if you needed to apply for funds through a corporate
capital process. The last thing you want to do is go hat in hand to
corporate asking for capital when your businesses are not running well.
a state-of-the-art plant that had better cycle times, less waste, lower
costs, and a greater ability to roll out innovative products. In other words,
we funded the new plant ourselves by using funds that were previously
being applied to areas without an upside.
Beyond capital
A company that fails to organize its people the right way is most likely
to require what you might call “hard reallocations,” such as divest-
ments or portfolio overhauls. Reorienting people is difficult, but that’s
what makes it so important to focus on. Moving your best managers,
researchers, salespeople, and so on from low-growth or failing busi-
nesses to areas with higher growth and profit potential can be one
of your most effective levers as a business leader.
its name seriously: decisions are actually made on the spot in real
time. Attendance is mandatory for my direct-leadership team. Confi-
dentiality limits the number of people who can be in attendance
at some sessions, but for others there is no reason not to have a large
number of managers listen in. The discussions are lively, and
listening in can be a great learning opportunity.
The situation facing the CEO will be familiar to many senior executives.
Listening is the front end of decision making. It’s the surest, most
efficient route to informing the judgments we need to make, yet many
of us have heard, at one point or other in our careers, that we could
be better listeners. Indeed, many executives take listening skills for
granted and focus instead on learning how to articulate and present
their own views more effectively.
1 Show respect
One of the best listeners I have ever observed was the chief operating
officer (COO) of a large medical institution. He once told me that he
couldn’t run an operation as complex as a hospital without seeking
input from people at all levels of the staff—from the chief of surgery to
the custodial crew. Part of what made him so effective, and so appealing
as a manager, was that he let everyone around him know he believed
each of them had something unique to contribute. The respect he showed
them was reciprocated, and it helped fuel an environment where good
ideas routinely came from throughout the institution.
The COO recognized something that many executives miss: our conver-
sation partners often have the know-how to develop good solutions,
and part of being a good listener is simply helping them to draw out
critical information and put it in a new light. To harness the power
of those ideas, senior executives must fight the urge to “help” more junior
colleagues by providing immediate solutions. Leaders should also
respect a colleague’s potential to provide insights in areas far afield
from his or her job description.
After a few minutes, the CMO, who had been listening intently, prompted
the engineers with a respectful leading question: “But we haven’t
sold as many as you thought we would in the first three months, right?”
“Well, actually, we haven’t sold any!” the team leader said. “We think
this product is a game changer, but it hasn’t been selling. And we’re not
sure why.”
After a pause to make sure the engineer was finished, the CMO said,
“Well, you guys sure seem certain that this is a great product. And you’ve
convinced the two of us pretty well. It seems that customers should
be tripping over themselves to place orders. So assuming it’s not the
product’s quality that’s off, what else are your customers telling you
about the product?”
That engineer had hit the nail on the head. The device was fine. Custo-
mers were wary about switching to something untested, and they
hadn’t been convinced by the specs the company’s sales team touted.
As soon as the engineers began phoning their counterparts in the
customers’ organizations (an idea suggested by the engineers them-
selves), the company started receiving orders.
Had the CMO looked at the problem by herself, she might have sus-
pected a shortcoming with the product. But after some good listening
and targeted follow-up questions, she helped to extract a much
The executive’s guide to better listening 55
better solution from the engineers themselves. She didn’t cut the con-
versation short by lecturing them on good marketing techniques or
belittling their approach; she listened and asked pointed questions in
a respectful manner. The product ultimately ended up being a game
changer for the company.
Being respectful, it’s important to note, didn’t mean that the CMO
avoided asking tough questions—good listeners routinely ask them to
uncover the information they need to help make better decisions.
The goal is ensuring the free and open flow of information and ideas.
2 Keep quiet
1Once, after I had explained this formula in a university lecture, a clever MBA student asked,
I should know because I’ve fallen into these traps myself. One experience
in particular made me realize how counterproductive it is to focus
on your own ideas during a conversation. It was early in my career as
a consultant and I was meeting with an important client whom I was
eager to impress. My client was a no-nonsense, granite block of a man
from the American heartland, and he scrutinized me over the top of
his reading glasses before laying out the problem: “The budget for next
year just doesn’t work, and we are asking our employees to make some
tough changes.”
All I heard was his concern about the budget. Without missing a beat,
I responded to my client and his number-two man, who was seated
alongside him: “There are several ways to address your cost problem.”
I immediately began reeling off what I thought were excellent sug-
gestions for streamlining his business. My speech gained momentum
as I barreled ahead with my ideas. The executive listened silently—
and attentively, or so it seemed. Yet he didn’t even move, except to cock
his head from time to time. When he reached for a pen, I kept up
my oration but watched with some annoyance as he wrote on a small
notepad, tore off the sheet of paper, and handed it to his associate.
A smile flitted almost imperceptibly across that man’s face as he read
the note.
I was already becoming a bit peeved that the executive had displayed no
reaction to my ideas, but this little note, passed as though between
two schoolboys, was too much. I stopped talking and asked what was
written on the paper.
The man leaned across the table and handed me the note. My client
had written, “What the hell is this guy talking about?”
Fortunately, I was able to see the humor in the situation and to recognize
that I had been a fool. My ego had gotten in the way of listening. Had
I paid closer attention and probed more deeply, I would have learned
that the executive’s real concern was finding ways to keep his staff
motivated while his company was shrinking. I had failed to listen and
compounded the error by failing to keep quiet. Luckily for me, I was
able to get a second meeting with him.
It’s not easy to stif le your impulse to speak, but with patience and
practice you can learn to control the urge and improve the quality
The executive’s guide to better listening 57
As you improve your ability to stay quiet, you’ll probably begin to use
silence more effectively. The CEO of an industrial company, for
example, used thoughtful moments of silence during a meeting with
his sales team as an invitation for its junior members to speak up
and talk through details of a new incentive program that the team’s
leader was proposing. As the junior teammates filled in these
moments with new information, the ensuing rich discussion helped
the group (including the team leader) to realize that the program
needed significant retooling. The CEO’s silence encouraged a more
meritocratic—and ultimately superior—solution.
When we remain silent, we also improve the odds that we’ll spot non-
verbal cues we might have missed otherwise. The medical institution’s
COO, who was such a respectful listener, had a particular knack for
this. I remember watching him in a conversation with a nurse manager,
who was normally articulate but on this occasion kept doubling back
and repeating herself. The COO realized from these cues that something
unusual was going on. During a pause, he surprised her by asking
gently, “You don’t quite agree with me on this one, do you? Why is that?”
She sighed in relief and explained what had actually been bugging her.
58 2012 Number 2
3 Challenge assumptions
But now and then, Weaver would be brought up short; he’d hear some-
thing in the player’s explanation that made him stop and reconsider.
“I’ve seen that guy take a big wide turn several times but then come back
to the bag. I thought maybe if I got the ball to second really fast, we
could catch him.” Weaver knew that the move the player described was
the wrong one. But as ornery as he was, he apparently could absorb
new information that temporarily upended his assumptions. And, in
doing so, the vociferous Weaver became a listener.
Weaver called his autobiography It’s What You Learn After You
Know It All That Counts. That Zen-like philosophy may clash with the
Weaver people thought they knew. But the title stuck with me
because it perfectly states one of the cornerstones of good listening: to
get what we need from our conversations, we must be prepared
to challenge long-held and cherished assumptions.
conversations with respect for your discussion partner boosts the odds
of productive dialogue. But many executives will have to undergo a
deeper mind-set shift—toward an embrace of ambiguity and a quest to
uncover “what we both need to get from this interaction so that we
can come out smarter.” Too many good executives, even exceptional ones
who are highly respectful of their colleagues, inadvertently act as if
they know it all, or at least what’s most important, and subsequently
remain closed to anything that undermines their beliefs.
idea that your team doesn’t exist. What kind of M&A function would
we build for this corporation now? What would be the skills and
the strategy?”
The question shook up the team a bit initially. You have to be respectful
of the emotions you can trigger with this kind of speculation. None-
theless, the experiment started a discussion that ultimately produced
notable results. They included the addition of talented new team mem-
bers who could provide additional skills that the group would need as
it went on to complete a set of multibillion-dollar deals over the
ensuing year.
Elements of
this article
were adapted
from Bernard
Ferrari’s book,
Power Listening:
Mastering the
Most Critical
Business Skill
of All (Penguin,
March 2012).
61
1President and CEO of IBM from 2002 to 2011, and now chairman of the board.
62 2012 Number 2
Strategic listening
You’ve got to seek out these signals actively and use every possible
means to receive them. I imagine the individual signals as mosaic tiles
of information. No single tile paints the picture—and you never get
all the tiles—but by assembling them you get a good idea of what the pic-
ture is. My method of gathering the tiles involves regularly visiting
with, and listening to, people in the company who don’t necessarily report
to me. I also read as much as I possibly can: surveys, operating data,
analyst reports, regulatory reports, outside analyses, and so on. I meet
with our top ten investors twice a year to listen, and at shareholder
conferences I consider the Q&As very important. The key is making
yourself open to the possibility that information can and will come
from almost anywhere.
I also try to teach and model this behavior within our company. Often,
when I’m with an executive, I say, “Hey, tell me about your ecosystem.
Whose opinion matters to you? Let’s make a list of those people. How
do you hear from them, and how often? Where are you now with a
particular constituent? When’s the last time you got a particular piece
of data? And don’t tell me that no news is good news.”
Listen or fail
who don’t listen lose the support of their teams and colleagues. And
once you’ve lost that support, it’s almost impossible to get it back. You
can’t be effective as an executive, and you’re going to get fired.
Similarly, organizations that don’t listen will fail, because they won’t
sense a changing environment or requirements or know whether their
customers or employees are happy. In an incredibly information-
intensive, dynamic environment, you have to listen or else—to mix
metaphors—you’re blind.
Changing behavior
That was hard because arrogance would lead me to think, “I’m smarter
than you and I know what you’re going to tell me, so let’s make this
really efficient for both of us. I won’t have to listen, and we can get to the
really important part of the conversation: me telling you what to do.”
It hit me hard that I had to stop this. What was I doing? Saving three
minutes? We’ve all got three minutes to spare. There has to be a
certain humility to listen well.
Demystifying
social media
Roxane Divol, David Edelman, and Hugo Sarrazin
The problem
Companies invest millions of dollars
in social media, with little understanding
of how it influences consumers to
favor their brands or buy their products.
Why it matters
Without knowing how social media
affects consumer behavior, companies
run the risk of aiming it at the wrong
targets, wasting time and money
on ineffective efforts, and generally
failing to harness its potential.
What to do about it
Understand social media’s core
functions: to monitor, respond, amplify,
and lead consumer behavior. Then
look for the best opportunities to carry
out those functions along the journey
that consumers embark upon when they
make purchasing decisions.
For insight into the world’s
largest social-media market,
see “Understanding social
media in China,” on page 78.
68 2012 Number 2
We believe there are two interrelated reasons why social media remains
an enigma wrapped in a riddle for many executives, particularly
nonmarketers. The first is its seemingly nebulous nature. It’s no secret
that consumers increasingly go online to discuss products and
brands, seek advice, and offer guidance. Yet it’s often difficult to see
where and how to influence these conversations, which take place
across an ever-growing variety of platforms, among diverse and
dispersed communities, and may occur either with lightning speed or
over the course of months. Second, there’s no single measure of
social media’s financial impact, and many companies find that it’s
difficult to justify devoting significant resources—financial
or human—to an activity whose precise effect remains unclear.
1 See “What marketers say about working online: McKinsey Global Survey results,”
Exhibit 1
Marketers can tailor their use of social media for each stage of the
consumer decision journey.
Advocate Experience
The fact that social media can influence customers at every stage
of the journey doesn’t mean that it should. Depending on the company
and industry, some touch points are more important to competitive
2 See David Court, Dave Elzinga, Susan Mulder, and Ole Jørgen Vetvik, “The consumer
1. Monitor
Gatorade, a sports drink manufactured by PepsiCo, has been diligently
working toward its goal of becoming the “largest participatory
brand in the world.”4 It has created a Chicago-based “war room” within
its marketing department to monitor the brand in real time across
social media. There are seats where team members can track custom-
built data visualizations and dashboards (including terms related
to the brand, sponsored athletes, and competitors) and run sentiment
analyses around product and campaign launches. Every day, all of
this feedback is integrated into products and marketing—for example,
by helping to optimize the landing page on the company’s Web site.
Since the war room’s creation, the average traffic to Gatorade’s online
properties, the length of visitor interactions, and viral sharing from
campaigns have all more than doubled.
3Readers interested in a detailed approach for understanding which touch points matter—based
on research techniques that reveal what consumers are seeing, saying, and doing—should
read David Edelman, “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.
4 Comment by Carla Hassan, Gatorade’s senior marketing director, consumer and shopper
engagement. For more, see Adam Ostrow, “Inside Gatorade’s social media command center,”
mashable.com, June 15, 2010.
Q2
72 2012 2012 Number 2
Social media (CDJ)
Exhibit 2 of 2
Exhibit 2
Bond
2. Respond
Valuable though it is to learn how you are doing and what to improve,
broad and passive monitoring is only a start. Pinpointing conversations
for responding at a personal level is another form of social-media
engagement. This kind of response can certainly be positive if it’s done
to provide customer service or to uncover sales leads. Most often,
though, responding is a part of crisis management.
Last year, for example, a hoax photograph posted online claimed that
McDonald’s was charging African-Americans an additional service
fee. The hoax first appeared on Twitter, where the image rapidly went
viral just before the weekend as was retweeted with the hashtag
#seriouslymcdonalds. It turned out to be a working weekend for the
McDonald’s social-media team. On Saturday, the company’s director
of social media released a statement through Twitter declaring the
photograph to be a hoax and asking key influencers to “please let your
Demystifying social media 73
3. Amplify
“Amplification” involves designing your marketing activities to have an
inherently social motivator that spurs broader engagement and sharing.
This approach means more than merely reaching the end of planning
a marketing campaign and then thinking that “we should do something
social”—say, uploading a television commercial to YouTube. It means
that the core concepts for campaigns must invite customers into an
experience that they can choose to extend by joining a conversation
with the brand, product, fellow users, and other enthusiasts. It means
having ongoing programs that share new content with customers and
provide opportunities for sharing back. It means offering experiences
that customers will feel great about sharing, because they gain a
badge of honor by publicizing content that piques the interest of others.
that the company had placed in six major US cities, providing winners
with a $20 gift card. This social-media brand advocacy effort
delivered a marketing punch that significantly outweighed its budget.
Starbucks said that the effort was “the difference between launching
with millions of dollars versus millions of fans.”5
4. Lead
Social media can be used most proactively to lead consumers toward
long-term behavioral changes. In the early stages of the consumer
decision journey, this may involve boosting brand awareness by driving
Web traffic to content about existing products and services. When
grooming-products group Old Spice introduced its Old Spice Man
character to viewers, during the US National Football League’s 2010
Super Bowl, for example, the company’s ambition was to increase its
reach and relevance to both men and women. The commercial became
a phenomenon: starring former player Isaiah Mustafa, it got more
than 19 million hits across all platforms, and year-on-year sales for the
company’s products jumped by 27 percent within six months.
Marketers also can use social media to generate buzz through product
launches, as Ford did in launching its Fiesta vehicle in the United
States. For example, social media played an integral role in the success
of “Small Business Saturday,” the US shopping promotion created
by American Express for the weekend immediately following Thanks-
giving (for American Express CMO John Hayes’s perspective on
that launch, see “How we see it: Three senior executives on the future
of marketing,” on mckinseyquarterly.com). In addition, when
consumers are ready to buy, companies can promote time-sensitive
targeted deals and offers through social media to generate traffic and
sales. Online menswear company Bonobos, for example, provided
an incentive for its Twitter followers by unlocking a discount code after
its messages were resent a certain number of times. As a result of
5 See Claire Cain Miller, “New Starbucks ads seek to recruit online fans,” nytimes.com,
this effort, almost 100 consumers bought products from the site
for the first time. The campaign delivered a 1,200 percent return on
investment in just 24 hours.
Finally, social media can solicit consumer input after the purchase.
This ability to gain product-development insights from customers in a
relatively inexpensive way is emerging as one of social media’s most
significant advantages. Intuit, for example, has its community forums.
Starbucks uses MyStarbucksIdea.com to collect its customers’
views about improving the company’s products and services and then
aggregates submitted ideas and prominently displays them on a
dedicated Web site. That site groups ideas by product, experience, and
involvement; ranks user participation; and shows ideas actively under
consideration by the company and those that have been implemented.
Without a clear sense of the value social media creates, it’s perhaps
not surprising that so many CEOs and other senior executives don’t
feel comfortable when their companies go beyond mere “experiments”
with social-media strategy. Yet we can measure the impact of social
media well beyond straight volume and consumer-sentiment metrics;
in fact, we can precisely determine the buzz surrounding a product
or brand and then calculate how social media drives purchasing
behavior. To do so—and then ensure that social media complements
broader marketing strategies—companies must obviously coordinate
data, tools, technology, and talent across multiple functions. In
many cases, senior business leaders must open up their agendas and
recognize the importance of supporting and even undertaking
initiatives that may traditionally have been left to the chief marketing
officer. As our colleagues noted last year, “we’re all marketers now.”6
6 See Tom French, Laura LaBerge, and Paul Magill, “We’re all marketers now,”
The company then tested its options. At various times, it spent less
money on conventional advertising, especially as social-media activity
ramped up, and it modeled the rising positive sentiment and higher
search positions just as it would using traditional metrics. The company
concluded that social-media activity not only boosted sales but also
had higher ROIs than traditional marketing did. Thus, while the company
took a risk by shifting emphasis toward social-media efforts before it
had data confirming that this was the correct course, the bet paid off.
What’s more, the analytic baseline now in place has given the company
confidence to continue exploring a growing role for social media.
In other cases, social media may have a more specific role, such as
helping to launch a new product or to mitigate negative word of mouth.
Similar types of analyses can focus on mixing the impact of buzz,
search, and traffic; correlating that with sales or renewals (or whatever
7 There’s no shortage of methods purporting to measure social media’s presence and impact.
The company in this example used BuzzMetrics, a suite of tools developed by NM Incite
(a joint venture between Nielsen and McKinsey).
8 Gross rating points measure the size of the audience a specific media vehicle reaches. To
calculate them, multiply the percentage of the target audience an advertisement reaches by
the number of times it airs.
Demystifying social media 77
the key metric may be); and then gauging the result against total
costs. This approach can give executives the confidence and focus they
need to invest more money, time, and resources in social media.
Understanding social
media in China
The world’s largest social-media market is vastly different from its counter-
part in the West. Yet the ingredients of a winning strategy are familiar.
This appetite for all things social has spawned a dizzying array
of companies, many with tools more advanced than those in the West:
for example, Chinese users were able to embed multimedia content
1 These figures are sourced from Internet World Stats data, as of December 2011 (US figures
users in Tier 1 to Tier 3 cities use social media. Tier 1 cities include Beijing, Guangzhou,
Shanghai, and Shenzhen. Tier 2 comprises about 40 cities, Tier 3 about 170. The tiers are
defined by urban population and by economic factors, such as GDP and GDP per capita.
Understanding social media in China 79
Consumers
China’s social-media users not only are more active than those of any
other country but also, in more than 80 percent of all cases, have
multiple social-media accounts, primarily with local players (compared
with just 39 percent in Japan).3 The use of mobile technologies to
access social media is also increasingly popular in China: there were
more than 100 million mobile social users in 2010, a number that is
forecast to grow by about 30 percent annually.4 Finally, because many
Chinese are somewhat skeptical of formal institutions and authority,
users disproportionately value the advice of opinion leaders in social
networks. An independent survey of moisturizer purchasers, for
example, observed that 66 percent of Chinese consumers relied on
recommendations from friends and family, compared with 38 per-
cent of their US counterparts.
Content
The competition for consumers is fierce in China’s social-media space.
Many companies regularly employ “artificial writers” to seed positive
content about themselves online and attack competitors with negative
news they hope will go viral. In several instances, negative publicity
about companies—such as allegations of product contamination—has
prompted waves of microblog posts from competitors and disguised
users. Businesses trying to manage social-media crises should carefully
identify the source of negative posts and base countermeasures on
whether they came from competitors or real consumers. Companies
must also factor in the impact of artificial writers when mining for
Platforms
China’s social-media sector is very fragmented and local. Each social-
media and e-commerce platform has at least two major local players:
in microblogging (or weibo), for example, Sina Weibo and Tencent
Weibo; in social networking, a number of companies, including Renren
and Kaixin001. These players have different strengths, areas of focus,
and, often, geographic priorities. For marketers, this fragmentation
increases the complexity of the social-media landscape in China
and requires significant resources and expertise, including a network
of partners to help guide the way. Competition is evolving quickly—
marketers looking for partners should closely monitor development of
the sector’s platforms and players.
by Wudi and live online chats. The effort generated millions of searches
and blog entries, increased uptake of Dove body wash by 21 percent
year over year after the show’s first season, and increased unaided
awareness of Dove’s Real Beauty by 44 percent among target consumers.
The estimated return on investment from this social-media campaign
was four times that of a traditional TV media investment.
The sheer number of the more than 300 million social-media users
in China creates unique challenges for effective consumer engagement.
People expect responses to each and every post, for example, so
companies must develop new models and processes for effectively
engaging individuals in a way that communicates brand identity
and values, satisfies consumer concerns, and doesn’t lead to a negative
viral spiral. Another problem is the difficulty of developing and
tracking reliable metrics to gauge a social-media strategy’s performance,
given the size of the user base, a lack of analytical tools (such as
those offered by Facebook and Google in other markets), and limited
transparency into leading platforms. Yet these challenges should
not deter companies. The similarity between the ingredients of success
in China and in other markets makes it easier—and well worth the
trouble—to cope with the country’s many peculiarities.
The problem
Strategy setting sometimes suffers
from insufficient diversity and expertise,
with leaders far removed from the
implications of their decisions and
hampered by experience-based biases.
Why it matters
Strategies developed by leaders
in isolation can be flawed and
sometimes aren’t embraced by the
people who must implement them.
Such misalignment can compromise
organizational health and financial
performance.
What to do about it
Pull in overlooked frontline perspectives
through the use of social technologies
such as wikis and internal idea markets.
Work overtime to bring on board
executives and middle managers.
Transparency, radical inclusion, and
peer review are powerful tools but
can be uncomfortable for leaders up
and down the line.
Our objective in this article isn’t to present a definitive road map for
opening up the strategy process; it’s simply too early for one to exist.
We’d also be the first to acknowledge that for most organizations, “social”
strategy setting represents a significant departure from the status
quo and should be experimented with carefully—whether that means
trying it out in a few areas or creating meaningful opportunities
for participation in the context of a more traditional strategy process.
(For more on intelligent experimentation, see “Collaborative stra-
tegic planning: Three observations,” on page 94.) Nonetheless, we hope
that by sketching a picture of some management innovations under
1 Wikimedia is the nonprofit foundation that operates Wikipedia, the Web-based encyclopedia
way, we will stir the thinking of senior executives eager to benefit from
experimenting with such approaches. If you’ve ever wondered how
to inject more diversity and expertise into your strategy process, to get
leaders closer to the operational implications of their decisions, or
to avoid the experience-based biases and orthodoxies that inevitably
creep into small groups at the top, it may be time to try shaking
things up.
This exercise quickly began yielding business results. One HCL exec-
utive we spoke with credited the new process with a fivefold increase
in sales to an important client over two years. The key, the executive
explained, was the detailed comments—from more than 25 colleagues,
ranging from junior finance professionals to software engineers—
that together highlighted the need to reframe the business plan away
from an emphasis on commoditized application support and toward
a handful of new services where HCL had the edge over larger com-
petitors. The employees provided more than good ideas: several even
helped assemble the materials the executive needed to deliver the
successful proposal.
The teams used wikis and other online tools to generate and orga-
nize ideas and made these “open” so that any Red Hat employee could
respond with comments or suggestions. The idea generation phase
lasted five months and included company-wide updates and online chats
with the CEO. Over that period, the best ideas coalesced into nine
strategic priorities.
2 For more on the My Blueprint process and HCL’s management philosophy, see Vineet Nayar,
This effort has reshaped the way Red Hat conducts strategic plan-
ning. Instead of refreshing strategy yearly on a fixed calendar, the com-
pany now updates and evaluates strategy on an ongoing basis. Ini-
tiative leaders use customized mailing lists and other tools to receive
input continuously from employees and communicate back to them
via town hall–style meetings, Internet chat sessions, and frequent blog
posts. The company maintains its annual budget process, which is
informed by the evolving funding needs of the initiatives.
Closer to home
Some leaders may wonder about borrowing approaches from Red Hat,
Wikimedia, or other companies that consider crowdsourcing a part
of their institutional DNA (and for which confidentiality issues may be
less pressing than they are for many organizations). For these exec-
utives, we would note the experiments of more traditional companies,
such as 3M, AEGON, and Rite-Solutions. A look at how these
organizations are introducing a social side to strategy can help senior
executives determine how much further they want to go in their
own companies.
3 To read more about Red Hat’s open approach to strategy development, see Jackie Yeaney,
Budge-It list that articulates the short-term steps needed to move the
idea forward. Each new stock debuts at $10, and every employee
gets $10,000 in play money to invest in the virtual idea market and
thereby establish a personal intellectual portfolio. The money flows
to ideas that are attracting volunteer effort and moving steadily from
germination toward commercialization. A value algorithm revalues
each stock, based on the number of Budge-It items completed, inflows
and outflows of employee money, and opinions about the stocks
expressed in an online discussion board. When an IPO gains momentum
and breaks into the company’s Top 20, the initiative is funded with
seed money; more is awarded depending on the ability to meet various
stage gate milestones. What’s more, when ideas help Rite-Solutions
make or save money, those who have invested intellectual capital and
contributed to the idea’s realization receive a share of the benefits
through bonuses or real stock options.
The internal market for ideas has bolstered the company’s pipeline of
new products, and the 15 ideas the company has thus far launched
as a result now account for one-fifth of Rite-Solutions’ revenues. Some
of the blockbusters were generated in unexpected places—including
Win/Play/Learn, a Web-based educational tool licensed by toy maker
Hasbro. The source of the idea: an administrative assistant.4
4To read more about Rite-Solutions’ internal market for ideas, see Jim Lavoie, “Nobody’s
Spend a few minutes talking with the senior executives involved in any
of the initiatives described earlier, and it’s immediately apparent
how powerful it is when thousands of people are deeply engaged with a
company’s strategy. Those employees not only understand the strat-
egy better but are also more motivated to help execute it effectively and
more likely to spot emerging opportunities or threats that require
quick adjustments.
Similarly, we’ve found that the actions companies can take that are
most helpful in aligning individuals with the organization’s direction
are moves like “making the vision meaningful to employees at
a personal level” and “soliciting employee involvement in setting the
company’s direction.” If that’s right, it suggests that making more
6 For more, see Scott Keller and Colin Price, Beyond Performance: How Great Organizations
Build Ultimate Competitive Advantage, Hoboken, NJ: Wiley, June 2011; Scott Keller
and Colin Price, “Organizational health: The ultimate competitive advantage,”
mckinseyquarterly.com, June 2011; and Aaron De Smet, Mark Loch, and Bill Schaninger,
“Anatomy of a healthy corporation,” mckinseyquarterly.com, May 2007.
The social side of strategy 91
One airline saw its efforts to mobilize the workforce impaired by the
silent noncooperation of middle management in several departments.
Closer inspection revealed that middle managers didn’t disagree with
the discussion that was under way but felt they deserved a bigger voice
in it—and should have been included earlier. They also felt uneasy
with the level of transparency in a dialogue involving some 2,000 people,
accustomed as they were to managing on a need-to-know basis.
It takes courage to bring more people and ideas into strategic direction
setting. Senior executives who launch such initiatives are essentially
92 2012 Number 2
7For more about the changing role of senior leaders, see Gary Hamel, What Matters Now,
Consider how a prediction market might have helped the mutual insurer.
The opening market quotation for the new life insurance product
would probably have taken a steep dive, revealing the negative assess-
ment of the internal market. This would have immediately alerted
managers to potential weaknesses, without exposing the employees
who had the courage to reveal the problems.
While these are still early days for social strategy, its potential to
enhance the quality of dialogue, improve decision making, and boost
organizational alignment is alluring. Realizing that potential will
require strategic leaders to flex new muscles and display real courage.
8 Users of a Web site—Facebook, for example—click on a button to say that they “like” something
The authors would like to offer special thanks to Raul Lansink for his advice
on and contributions to this article.
Collaborative strategic
planning: Three observations
Olivier Sibony
One of the main gripes people have with strategic plans is that they are
not strategic enough. In the words of one chief strategy officer I know,
Collaborative strategic planning: Three observations 95
“Our strategic sessions are budget meetings with the word ‘strategic’
thrown in here and there to add emphasis.” There are also significant
confidentiality issues around strategy—most companies believe that
keeping a plan shrouded in secrecy until it gets implemented is critical
to its success. Consider the implications these two issues have for
social-strategy tools: leaders concerned about confidentiality might well
limit the use of these tools to more operational planning—which in
turn could reduce the likelihood of their leading to real strategic break-
throughs and breed disenchantment with them. The wise leader
will look for steps in the strategic-planning process that can be tackled
in unconventional ways, without pretending that taking those steps
implies wholesale replacement of the process or that it will magically
transform their strategy.
The old brainstorming adage “There are no bad ideas” does not
apply to strategy. Terrible ideas abound for new markets to explore,
acquisitions to make, products to invest in, and the like. Prediction
markets and other similar mechanisms hold the alluring promise of
pinpointing bad ideas before companies invest too much in them.
The objection I have heard most often to prediction markets is that they
place sponsoring executives in a very difficult position. Asking large
numbers of employees for their input on strategy ideas already requires
a healthy measure of humility. Doing so by asking them to vote
through a public mechanism that will price ideas and make transparent—
perhaps even amplify—collective sentiment about them calls for extra-
ordinary courage. Simply put, it is extremely embarrassing to float the
stock of an idea (a new product launch, for instance) and see its price
fall to zero. One company I know had exactly this experience and sub-
sequently recognized that prediction markets were the best pre-
diction mechanism they had—but decided to drop them for that reason!
But one could also argue that crowd-based mechanisms are a powerful
engine to produce groupthink on a grand scale, encouraging people
to stick to predefined anchors that become more and more powerful as
other contributors appear to confirm them. Consider, for instance, a
couple of the most common crowd-based feedback mechanisms: reader
comments on online articles and product reviews on e-commerce Web
sites. Empirically, some turn into heated debates, while others result in
massive agreement. The explanation for this could simply lie with the
facts of each case: some articles and products are universally liked or
hated; others are polarizing. But the outcome could also be influenced
by the way you orchestrate the debate. Amazon.com, for instance,
Collaborative strategic planning: Three observations 97
1For more on behavioral economics, decision making, and strategic planning, see Daniel
Kahneman, Dan Lovallo, and Olivier Sibony, “Before you make that big decision,” Harvard
Business Review, June 2011, Volume 89, Number 6, pp. 50–60; Dan Lovallo and Olivier
Sibony, “The case for behavioral strategy,” mckinseyquarterly.com, March 2010; and Renée
Dye and Olivier Sibony, “How to improve strategic planning,” mckinseyquarterly.com,
August 2007.
Spotlight on India
99 105
Developing better How multinationals can
change leaders win in India
110
How Tata Group is
raising its game
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Developing better
change leaders
Aaron De Smet, Johanne Lavoie, and
Elizabeth Schwartz Hioe
his formal job responsibilities, thus months, including two week-long off-site
training programs, along with ongoing
sending an important signal that coaching on the application of what they
these changes were important. had learned to the workplace.
Spotlight on India
How multinationals
can win in India
Vimal Choudhary, Alok Kshirsagar, and Ananth Narayanan
The bar is now rising for multi- Given the many opportunities
nationals, whose long-term success available and the relative shortage
will depend on building country- of skilled and experienced
specific operations and management managers in India, multinationals
systems. Some are rethinking their have had to revise their talent
organizational models, making India models significantly to compete with
a business unit in its own right domestic players. The most
instead of managing it along the axis progressive global companies are
of global products or functional moving in three directions:
areas. The benefits include the
sharper development and execution • Local roles with global
of strategy and a more accountable visibility. Such roles for local
on-the-ground leadership. managers may include represen-
tation on corporate executive
A global conglomerate faced with committees and will emphasize
declining sales in India recently entrepreneurialism, confer more
consolidated its business units there authority than most managers
under one country head with direct enjoy, and typically offer higher
P&L responsibilities. That executive compensation.
makes all major decisions (including
headcounts, pricing, and product • Meritocratic culture. Leading
customization), and all heads of local companies offer accelerated
business units now report to him career tracks to high performers,
rather than to their global business fair and transparent advancement
unit leaders, as they did before. processes, the absence of
This new approach has helped the a “glass ceiling” for locals, a
company to concentrate its performance-based system
resources and to speed up decision that motivates self-starters, and
making, so it can now serve local differentiated incentives for
customers more effectively and high performers.
achieve faster growth.
• Mobility and tailored
Moves like this create a serious leadership programs.
talent imperative: the head of the Structured global rotations for
local unit must be experienced strong performers and leadership-
and knowledgeable about India’s development courses (especially
market and culture; able to make those offering certification) are
decisions on capital spending, proving to be effective recruiting
products, and pricing; and ready to and retention tools.
manage a direct line of communi-
cation with the global company’s Approaches like these are satis-
CEO. The talent imperative extends fying the multinationals’ need for
to lower-level managers, whose strong local leaders and the desire
empowerment can likewise stimulate of Indian managers for autonomy
innovation and entrepreneurialism and career growth.
on the ground, while decreasing
times to market for new products.
108 2012 Number 2
Spotlight on India
coal blends. Today, the furnaces 1,000 local people and trained them
burn Indian high-ash coal much to assemble the Nano car. The move
more efficiently than they did earlier. also helped ameliorate concerns
about displacing residents to build
Significant organizational changes the plant.
support the operational moves. The
steel unit reduced the number of For multinationals, Tata’s experiences
management layers from 13 to 5, for in India should reinforce the
instance, to increase employee importance of tailoring operations in
accountability. To ensure access to emerging markets to local con-
scarce talent, Tata Steel has ditions. Such adaptations will be
invested heavily to create a group of increasingly important as demand
frontline managers and staff who for manufactured goods from
have both analytical skills and low-cost countries more than
interpersonal ones. The company’s doubles, to nearly $8 trillion a year,
Shavak Nanavati Technical Institute by 2015. China will capture a sizable
trains more than 2,000 employees a share, but up to $5 trillion annually
year. These moves helped Tata will be up for grabs as companies
Steel to focus more on continuous look to diversify production to
improvement (it won the coveted include other low-cost countries.
Deming Prize in 2008 for its pro-
cesses and quality). Similarly, multinationals that can
adapt to local conditions in
Similarly, Tata Power has lowered its developing markets will have an
capital expenditures to identify advantage in capturing their
relatively inexpensive designs and demand as incomes rise. For India,
specifications for big projects. the opportunity is huge.1 Our
During the planning stages of a new research finds that many of India’s
4,000-megawatt facility, for example, consumption sectors—including
the company brought together apparel, automotive, electrical equip-
customers, suppliers, and Tata ment and machinery, and food and
engineers to make Indianized design beverages—are poised to grow from
decisions. These included using 12 to 20 percent annually over the
cheaper welded tubes instead of next 15 years.
seamless ones in feedwater heaters
1 Of course, local companies will play an
and redesigning the layout of the
important role. Our analysis finds that the
turbine-generator building to make it
combination of rising demand in India and
more compact. Trade-offs of this the desire of multinationals to diversify
kind saved the company more than their global production could help India’s
manufacturing sector grow sixfold by
$100 million in capital outlays while
decade’s end, to $1 trillion, while creating
preserving the plant’s core capa- up to 90 million domestic jobs.
bilities and meeting standards for
safety and reliability. Rajat Dhawan is a director in,
and Gautam Swaroop is an
For the full version Tata Motors borrowed from the suc- alumnus of, McKinsey’s Delhi office;
of this article, see cessful public–private training Adil Zainulbhai is a director
“Fulfilling the model of India’s IT service industry. in the Mumbai office.
promise of India’s
Requiring an ample supply of skilled
manufacturing Copyright © 2012 McKinsey & Company.
sector,” on workers for an advanced auto-
All rights reserved. We welcome your
mckinseyquarterly motive plant, Tata partnered with comments on this article. Please send them
.com. Gujarat State to hire more than to quarterly_comments@mckinsey.com.
112
Extra Point
Are you a bad listener? To help improve your skills, read “The executive’s guide to
better listening,” on page 50.
Artwork by Serge Bloch. Copyright © 2012 McKinsey & Company. All rights reserved.
Copyright © 2012
McKinsey & Company.
All rights reserved.
ISSN: 0047-5394
ISBN: 978-0-9829260-3-1