2011 Number 4

Big data
You have it, now use it.
 2011 Number 4

This Quarter

Quietly, the volume of data that companies generate

and collect has soared in recent years. While the only
outward sign may be growth in the number of
servers needed to process and store data, the business
implications are profound.

This issue of McKinsey Quarterly provides a state-of-the-art CEO’s

guide to navigating the era of “big data.” Building on McKinsey
Global Institute research released earlier this year, Brad Brown,
Michael Chui, and James Manyika present a series of questions
and thought-provoking examples intended to concentrate busy leaders’
minds on the implications of big data. Several intriguing thinkers
and practitioners—Massachusetts Institute of Technology professor
Erik Brynjolfsson, Cloudera cofounder Jeff Hammerbacher,
AstraZeneca senior executive Mark Lelinski, and Butler University
men’s basketball coach Brad Stevens—offer their perspectives on
competing through data. And for executives ready to start creating a
big data strategy, McKinsey’s Jacques Bughin, John Livingston, and
Sam Marwaha present a road map for action based on the experiences
of companies on the cutting edge.
Several other quiet but potent forces run through this issue. Santa Fe
Institute professor W. Brian Arthur describes how a “second
economy” of machine-to-machine interactions is imperceptibly taking
root beneath the surface of the physical world, potentially overtak-
ing it in economic importance within the next 20 years. McKinsey’s
Joanna Barsh and Lareina Yee present research about the silent
killer of women’s careers—rarely acknowledged but widely held mind-
sets that often block the path to the C-suite—and suggest some
robust antidotes for companies that are serious about boosting the
number of women in their senior ranks. At a personal level, we all
know that honest feedback from colleagues can help us stay in touch.
But a cone of silence surrounds many CEOs and their top teams,
says Harvard Business School professor Robert S. Kaplan, who has some
pointed advice for turning up the volume.

Finally, a coalition of experts from McKinsey’s oil and gas, automotive,

strategy, and operations practices explores the implications of
another quiet trend: the historic rise of oil consumption in emerging
markets. While good news in that it reflects economic improvement for
millions, steadily rising demand could strain global supply capacity
in the years ahead. Well-coordinated regulatory and behavioral
changes throughout the world may get us through the crunch, say Scott
Nyquist and his colleagues. But an unexpected oil price spike is
also possible. Presented here are some no-regrets moves companies
can make now to prepare strategically and operationally.

Easy as it is for issues like these to get drowned out by the din of daily
battle, staying ahead of them may well make all the difference in
the years ahead. We hope this issue of the Quarterly helps you keep your
organization focused today on what will matter most tomorrow.

Allen P. Webb
Editor-in-Chief
 On the cover
Big data
You have it, now use it

24 Are you ready

for the era
of ‘big data’?
Brad Brown, Michael Chui, and Features
James Manyika

Radical customization, constant

48 Changing
experimentation, and novel business
models will be new hallmarks
companies’ minds
of competition as companies capture about women
and analyze huge volumes of
data. Here’s what you should know. Joanna Barsh and Lareina Yee

Leaders who are serious about getting

36 Competing more women into senior management need
a hard-edged approach to overcome
through data: the invisible barriers holding them back.

Three experts offer

their game plans
MIT professor Erik Brynjolfsson,
60 Top executives
Cloudera cofounder Jeff Hammerbacher, need feedback—
and Butler University men’s basketball
coach Brad Stevens reflect on the power here’s how they
of data.
can get it
Robert S. Kaplan

As executives become more senior,

they are less likely to receive constructive
feedback on their performance or their
strategy. To get it, they should call on their
junior colleagues.
 Feature

90 The second
economy
Special report
W. Brian Arthur
72 Oil’s uncertain Digitization is creating a second
future economy that’s vast, automatic, and
invisible—thereby bringing the
What you need to know biggest change since the Industrial
Revolution.
It’s possible, though far from certain,
that oil prices will spike in the
years ahead. Here’s why—and how
you can prepare.
Picture This
74 Another oil shock?
Tom Janssens, Scott Nyquist, and
Occo Roelofsen
100 The changing
shape of
78 The automotive sector’s road
to greater fuel efficiency US recessions
Russell Hensley and Andreas Zielke
Byron Auguste, Susan Lund,
84 Anticipating economic and James Manyika
headwinds
Jonathan Ablett, Lowell Bryan, Recovery time for US employment
and Sven Smit after recessions has increased
dramatically over the last two decades.
87 Building a supply chain that
can withstand high oil prices
Knut Alicke and Tobias Meyer

Departments

7 McKinsey on 8 Idea Exchange 120 Extra Point

the Web Readers mix it up Big data for the CEO
Highlights from with authors of articles
our digital offerings from McKinsey Quarterly
2011 Number 3
 Leading Edge
10 Cybersecurity: A senior
executive’s guide
James Kaplan, Shantnu Sharma, and
Allen Weinberg
A changing corporate-technology
landscape and more aggressive
hackers make safeguarding valuable
corporate data a top-management
issue, not just an IT problem.
13 A new era for commodities
Richard Dobbs, Jeremy Oppenheim,
and Fraser Thompson
Cheap resources underpinned economic
growth for much of the 20th century.
The 21st will be different.
16 A quick chat with the world’s
biggest baker
Grupo Bimbo CEO Daniel Servitje
ref lects on his company’s growth
in developed and emerging markets.
18 Sizing the Internet’s
economic impact
Eric Hazan, James Manyika, and
Matthieu Pelissie du Rausas
New McKinsey research underscores the
magnitude of the Net’s impact on
global growth and corporate performance.
Applied Insight
103 Seizing the potential
of ‘big data’
Jacques Bughin, John Livingston,
and Sam Marwaha
Companies are learning to use large-
scale data gathering and analytics
to shape strategy. Their experiences
highlight the principles—and
potential—of big data.
Executive perspective
AstraZeneca’s ‘big data’
partnership
Mark Lelinski, an executive at the
global drugmaker, explains
how the company is using data to
build customer relationships
that focus on the total cost of care.
110 Freeing up the sales force
for selling
Olivia Nottebohm, Tom Stephenson,
and Jennifer Wickland
Most sales reps spend less than half
of their time actually selling. By
reshaping sales operations, companies
can help them focus on their real job.
115 How strategic is
our technology agenda?
Brad Brown and Johnson Sikes
CEOs should shake up the technology
debate to ensure that they capture
the upside of technology-driven threats.
Here’s how.
Editorial
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 7

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 8

Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly
2011 Number 3

We’re all marketers now

The cover package of our previous issue focused on the transform-
ational changes under way in marketing, including an explosion of
digital media, increasingly rich data, and organizational flux as companies
seek to engage customers more effectively. Authors Tom French,
Laura LaBerge, and Paul Magill of McKinsey continued exploring
these issues with readers on mckinseyquarterly.com:

Cross-functional challenges
Jo Moffatt
Managing director, Woodreed, United Kingdom

“The trouble with internal engagement—which wasn’t mentioned, even

though brands help develop employees who can ensure a consistent consumer
experience—is that HR and marketing tend to work in silos. They
should harness each other’s strengths, fusing HR’s people knowledge with
marketing’s brand and customer expertise.”

McKinsey’s Paul Magill responds:

“The HR–marketing disconnect is a tragedy at many companies, since the brand is central
to both, but we are seeing several create ‘pervasive’ strategies that bridge the internal–
external divide through ‘planned’ and ‘unplanned’ customer interactions. ‘Planned’ inter-
actions help identify top-priority touch points, and we increasingly see marketing
working with HR to find frontline employees who aren’t always marketers but can still
deliver a better customer experience. ‘Unplanned’ interactions lead to the employee
branding efforts you describe. A great example is when the two functions design, build,
and deploy the brand internally, while marketing embeds the execution in HR. Here, the
marketing function takes the kind of organization-wide, multistakeholder view of engage-
ment we recommend, then divides up responsibility for executing the strategy.”

Thinking small
Cy Heidari
President and CEO, ValueTelligence, New York, New York

“While the approach is sensible for large-capitalization companies, it

may not apply to small- and midcapitalization companies due to the added
operational costs, even if they outsource their marketing activities.”

McKinsey’s Laura LaBerge responds:

“You’re right to recognize the compressed challenge this environment presents to smaller
companies, yet these firms also have unique opportunities. With less hierarchy to
stifle cross-functional coordination, it’s easier for employees at smaller companies to
wear several hats and embed marketing thinking across the organization. It’s also
easier for employees to share experiences with customers, gain clearer insights, and
create a shared view of customer-engagement requirements. The need to prioritize
more means these companies pick their battlegrounds carefully and leverage close
customer relationships to better focus their efforts.”
 9

To centralize or not to centralize?

In our previous issue, McKinsey alumnus Andrew Campbell (now director
of the London-based Ashridge Strategic Management Centre), along with
Sven Kunisch and Günter Müller-Stewens of the University of St. Gallen
Institute of Management, suggested that executives use three questions to
focus internal debate about centralization proposals: (1) Is centralization
mandated? (2) Does it add 10 percent to market capitalization? (3) Are the
risks low? Below, McKinsey’s Suzanne Heywood suggests some
additional considerations, to which Campbell responds:

Suzanne Heywood
Principal, McKinsey & Company, London

“In our experience, companies need to first determine—based on their sector,

strategy, and growth history—whether they have an ingoing bias for or
against centralization. Companies should then weigh the potential benefits
and drawbacks that might arise from it. With a bias against centralization,
some functional activities will still need to be centralized, but the benefits
would have to outweigh the risks substantially; the opposite would be true
if the bias were for centralization.

“Second, it’s important to recognize that centralization may yield improve-

ments—such as enhancing knowledge sharing or minimizing operating
risk—that are difficult to quantify in terms of a market-capitalization bench-
mark. Finally, if companies do decide to centralize a function, they should
also consider alternatives to structural change. In many cases, making ‘softer’
changes (for example, standardizing processes, creating functional
networks to bring people together) can also result in centralization-related
benefits. It is wise to consider these mechanisms first and only implement
structural change if they will clearly not be effective.”

Andrew Campbell responds:

“You are right that benefits and drawbacks vary by business model and that many
are qualitative. But it’s because so much of this assessment is qualitative
that companies need to use a quantitative hurdle (such as the 10 percent market-
capitalization rule) and be confident in the potential gains from centralization
before assuming the risks. In my experience, qualitative assessments are too easily
unbalanced by subjective arguments, so there is real value in the quantitative
nature of question two.

“With the ‘softer’ changes, such as standardizing processes or bringing people

together, it’s implied that these actions are not ‘centralization’ and do not need to
be judged against the same criteria. However, these actions do involve some
degree of centralization. Who decides what the standard process should look like?
Who decides whom to bring together, how often, and when? We should still
bear in mind the three centralization questions and the hurdles this decision should
cross when implementing less structural changes.”
10 2011 Number 4 Research, trends, and emerging thinking

Leading Edge

10 13
Cybersecurity: A new era
A senior for commodities
executive’s guide

16 18
A quick Sizing
chat with the the Internet’s
world’s biggest economic
baker impact

Cybersecurity: A senior
executive’s guide
James Kaplan, Shantnu Sharma, and Allen Weinberg

A changing corporate-technology landscape and more aggressive hackers make safeguarding

valuable corporate data a top-management issue, not just an IT problem.

A rash of highly publicized IT ground against the hackers

security breaches that have
struck sophisticated companies in
recent months has led many senior
executives to worry about how
safe their own corporate environ-
ments really are. Despite these
concerns, executives often
lack a clear sense of how to combat
the growing threats. As a result,
they are placing more pressure on
CIOs and IT security executives
to raise their companies’ technology
ramparts. But from our experience
and interviews with IT security exec-
utives at 25 top global companies,
we believe that technology tactics
alone are insufficient. To gain
in protecting information assets
such as business plans and
intellectual property—without
constraining business growth and
flexibility—companies must
adopt cybersecurity approaches
that require much more engagement
from the CEO and other senior
executives.
Why IT environments are
harder to protect
Greater volumes of online
transactions are creating enormous
incentives for cybercriminals.
Companies that mine transaction
data and customer information,

for example, create new and
valuable stores of intellectual
property that are attractive targets.
Moreover, employees are demanding
access to corporate networks
from the same mobile devices they
use in their personal lives, creating
new crevices for hackers to exploit.
Another challenge: companies are
eager to optimize supply chains
by inducing vendors and customers
to join their corporate networks.
But in this way, they may be rendering
their own defenses more porous
and only as secure as those
of their weakest partner. One large
company, for example, barred its
employees from using peer-to-peer
software to share sensitive company
documents over the Web, only
to discover that on-site contractors
routinely used this software
to review the same documents.
Approaching security
differently
The threats will only rise in com-
plexity and virulence, painful as that
may be for leaders to contemplate.
Professional cybercrime organi-
zations, political “hacktivists,” and
state-sponsored groups are ever
more technologically advanced, in
some cases outstripping the skills
and resources of corporate security
teams. (One hacker group provides
“cybercrime as a service,” receiving
payment for each end-user
device it infects with malware.) To
make business-led strategies
work, companies must undertake
the following steps.
Engage at the top
Meeting these challenges requires
the involvement of senior executives
11
from outside the IT organization.
They will be vital to help identify and
then champion business practice
changes that create intelligent con-
straints for employees, customers,
and partners. Senior leaders also
may need to arbitrate competing
demands: some business
units naturally might favor lighter
safeguards that raise the risk
of critical-data loss, while overly
stringent controls advocated
by IT leaders will get in the way of
doing business.
At one company we surveyed,
the CEO is now directly involved with
senior security executives in
making key decisions. Elsewhere,
security officers are embedded
in business units to facilitate
dialogue at the most meaningful
level. Some security leaders
now report to the risk committees
of company boards.
Address cybersecurity ‘business
back,’ not technology forward
Many companies need to reverse
conventional thinking about security.
Rather than focus on vulnerable
technologies at the back end of
processes, they should first decide
which business assets must be
protected. Some large institutions
have launched multiyear programs
to classify their data troves and
better focus such efforts. Before
enhancing plans to collaborate,
other companies are scanning the
full value chain to clarify the
expectations of vendors about how
information will be exchanged.
Still others are starting with
customers—thinking through, for
example, how to collect enough
information to verify their identity
12 2011 Number 4
without forcing them to spend too
much time signing on. Getting
this balance right, a critical element
of meeting the cybersecurity
challenge, can serve as a competi-
tive differentiator.
Protect the data, not the perimeter
Motivated attackers will always find
ways to penetrate the most
sophisticated corporate defenses.
Some companies are embracing
this reality by redesigning how they
house and regulate access to
data. If customer credit card infor-
mation, for example, resides in
a single database, a cybercriminal
must breach security only once
to profit. Separating credit card
numbers and expiration dates vastly
complicates a hacker’s task. At
some companies, plugging a laptop
into the system allows employees
to access only publicly available data;
viewing customer files or working
with corporate applications requires
a more rigorous, multistage
authentication of identity. Since
malicious insiders often pose
the greatest threat of all, some com-
panies limit, by specific roles
and functions, the number of people
who can access core production
systems and data.
Refresh strategies to address
evolving business needs and threats
CEOs fervently want to “solve” the
security problem, but it would
be more fruitful to acknowledge that
it’s an ongoing battle, so security
tactics must change constantly.
Advanced companies conduct sim-
ulated cyberattacks to identify
unexpected vulnerabilities and to
build the muscles needed to
manage breaches. Some have built
massive analytic capabilities
to sift though data such as e-mail
headers or to identify unusual IP
traffic patterns that could be warning
signs of emerging threats. Finally,
to ensure that cybersecurity is
sustainable, leaders need to make
it part of their business case
for entering new regions or investing
in new products and other major
initiatives.
Clearly, we are in the early days of
what will be a long war between
cybercriminals and global institutions
of all shapes and sizes. As in any
prolonged struggle, the combatants
will continually react and adapt.
No matter how an organization’s
tactics evolve, leaders can boost the
odds of prevailing by developing
approaches that cut across commer-
cial strategy, operations, risk
management, and the legal and
technology functions—supported by
a mandate and active engagement
from the most senior level of
executives.
Allen Weinberg is a director in
McKinsey’s New York office, where
James Kaplan is a principal;
Shantnu Sharma is a consultant
in the Boston office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
 Leading Edge
A new era
for commodities
Richard Dobbs, Jeremy Oppenheim, and Fraser Thompson
Cheap resources underpinned economic growth for much of the 20th century.
The 21st will be different.
Has the global economy
entered an era of persistently high,
volatile commodity prices? Our
research shows that during the past
eight years alone, they have
undone the decline of the previous
century, rising to levels not seen
since the early 1900s (exhibit).
In addition, volatility is now greater
than at any time since the oil-
shocked 1970s because commodity
prices increasingly move in lock-
step. Our analysis suggests that they
will remain high and volatile for
at least the next 20 years if current
trends hold—barring a major
macroeconomic shock—as global
resource markets oscillate in
response to surging global demand
and inelastic supplies.
Demand for energy, food, metals,
and water should rise inexorably as
three billion new middle-class
consumers emerge in the next two
decades.1 The global car fleet,
for example, is expected almost to
double, to 1.7 billion, by 2030.
In India, we expect calorie intake per
person to rise by 20 percent during
that period, while per capita meat
consumption in China could
increase by 60 percent, to 80 kilo-
13
grams (176 pounds) a year. Demand
for urban infrastructure also
will soar. China, for example, could
annually add floor space totaling
2.5 times the entire residential and
commercial square footage of
the city of Chicago, while India could
add floor space equal to another
Chicago every year.
Such dramatic growth in demand
for commodities actually isn’t
unusual. Similar factors were at play
throughout the 20th century as
the planet’s population tripled
and demand for various resources
jumped anywhere from 600 to
2,000 percent. Had supply remained
constant, commodity prices
would have soared. Yet dramatic
improvements in exploration,
extraction, and cultivation techniques
kept supply ahead of ever-
increasing global needs, cutting the
real price of an equally weighted
index of key commodities by
almost half. This ability to access
progressively cheaper resources
underpinned a 20-fold expansion of
the world economy.
There are three differences today.
First, we are now aware of the
 14 2011 Number 4

Q4 2011
MGI commodities
Exhibit 1 of 1

In little more than a decade, commodity prices have

soared fromthan
In little more historic lowssoaring
a decade, to newcommodity
highs. prices have
erased a century of steady declines.
McKinsey Global Institute commodity price index (average of 1999–2001 = 100)1

260
240 World War I
220
200
180
World War II 1970s oil shock
160
140
120
100
Postwar
80 Great
depression
Depression
60
0
1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 20112

1 Based on arithmetic average of 4 commodity indexes: food, agricultural raw materials, metals, and energy. Each index was
weighted by total world export volumes from 1999 to 2001 at indexed prices (in real terms) over same time period. Energy index
excludes gas prices prior to 1922, for which data are unavailable.
2Based on average of first 4 months of 2011.

Source: FAOSTAT (Food and Agriculture Organization of the United Nations); Grilli and Yang commodity price index, 1988;
International Monetary Fund (IMF) primary commodity prices; Organisation for Economic Co-operation and Development; Stephan
Pfaffenzeller et al., “A short note on updating the Grilli and Yang commodity price index,” World Bank Economic Review,
2007, Volume 21, Number 1, pp. 151–63; World Bank commodity price data; UN Comtrade; McKinsey Global Institute analysis

potential climatic impact of carbon enhancing innovations—we are

emissions associated with surging
resource use. Without major
changes, global carbon emissions
will remain significantly above
the level required to keep increases
in the global temperature below
2 degrees Celsius—the threshold
identified as potentially catastrophic.2
Second, it’s becoming increasingly
difficult to expand the supply
of commodities, especially in the
short run. While there may not
be absolute resource shortages—
the perceived risk of one has his-
torically spurred efficiency-
at a point where supply is
increasingly inelastic. Long-term
marginal costs are increasing
for many resources as depletion
rates accelerate and new invest-
ments are made in more complex,
less productive locations.
Third, the linkages among resources
are becoming increasingly
important. Consider, for example,
the potential ripple effects
of water shortfalls at a time when
roughly 70 percent of all water
is consumed by agriculture and
12 percent by energy production. In
Leading Edge
Uganda, water shortages have
led to escalating energy prices, which
led to the use of more wood
fuels, which led to deforestation and
soil degradation that threatened
the food supply.
Higher commodity prices are one
way of bringing supply and demand
nearer to balance—but not a
desirable means for most policy
makers and business leaders,
since lofty prices can drag down
profits and growth (for more,
see “Anticipating economic head-
winds,” on page 84). Another
approach is to squeeze greater
“productivity” from natural resources
by, for example, improving mining
recovery rates, making households
more energy efficient, and
capturing and reusing wastewater.
Our research—summarized
in a forthcoming McKinsey Global
Institute report on the world’s
natural-resource needs in the 21st
century—suggests that better
resource productivity could single-
handedly meet more than 20 per-
cent of forecast 2030 demand for
energy, steel, water, and land. In
addition, higher long-term resource
prices might create the necessary
incentive for breakthroughs,
especially around energy-related
technologies that could reduce
carbon emissions (for more on this
topic, see “Another oil shock?” on
page 74). More will need to be done,
15
of course, and we’re not suggesting
that it’s easy; major policy, behavioral,
and institutional barriers must
be addressed. Yet as we enter a new
era for commodities, there’s little
choice but to act.
1
See David Court and Laxman Narasimhan,
“Capturing the world’s emerging middle
class,” mckinseyquarterly.com, July 2010.
2
The Stern Review on the Economics
of Climate Change, released in 2006, and
the International Panel on Climate
Change (IPCC) claim that an increase in
temperatures of more than 2 degrees
Celsius (3.6 degrees Fahrenheit) above those
of preindustrial times could cut GDP by
up to 20 percent, force more than a billion
people to migrate, make many species
extinct, threaten major cities as a result of
rising seas, and decrease agricultural yields,
putting pressure on food (and fuel) supplies.
Major changes in energy production and
usage could lower carbon emissions to keep
temperatures below that threshold.
Richard Dobbs is a director of
the McKinsey Global Institute
(MGI) and a director in McKinsey’s
Seoul office; Jeremy Oppenheim
is a director in the London office;
Fraser Thompson is a senior
fellow at MGI and is based in the
London office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
16 2011 Number 4
A quick
chat with the
world’s
biggest baker
Grupo Bimbo CEO Daniel Servitje reflects
on his company’s growth in developed and
emerging markets.
What is the world’s largest
baker? Guess again if you didn’t
say Grupo Bimbo, the Mexican
packaged-goods company that has
become a global player in the
food marketplace. Grupo Bimbo has
its highest sales in Mexico and the
United States (penetrated primarily
through a few big acquisitions,
most recently of Sara Lee’s fresh-
baked-goods unit, for which it is
awaiting regulatory approval). It also
operates throughout Latin America
and in China.
Daniel Servitje, the 52-year-old
son of the company’s founder, has
served as CEO since 1997.
During that time, sales have more
than quintupled and profitability
has improved. In this excerpt
from an interview with McKinsey’s
Alejandro Diaz, Mr. Servitje
discussed Grupo Bimbo’s geo-
graphical expansion, the challenges
that engendered, and how
the company’s origins as a family
business aided its growth.
The Quarterly: How do
the company’s emerging-market
roots differentiate you from
other multinational companies?
Daniel Servitje: We’re probably
looking at things from a different
perspective, from the ground up—a
little bit more humble and more
focused on economic uncertainties.
We suffered a lot during the
devaluations and economic crises
in the 1980s and 1990s. That’s
still part of our baggage when we
analyze the situation in other
countries. Also, we have always
tried to understand the market
on a local and regional basis; it might
be just one or two cities. Bread
cannot travel for long distances,
which forces us to have a
very localized, fine-tuned view
of markets.
The Quarterly: Grupo Bimbo
is testing the waters in China. How
is it going?
Daniel Servitje: I’ve been
surprised. I thought it was going to
be much more complicated
for a Latin American company to
develop its business—to replicate
our business model—in China.
Surprisingly, it has not been
as difficult as I had expected, and
even less difficult than what we
would find in other Latin American
countries. The challenge in China
is to develop the bread market as a
category. That’s where we are
still doing a lot of work.
The Quarterly: Can you say a little
more about the challenges you
have experienced in Latin America?
 Leading Edge
Daniel Servitje
CEO of Grupo Bimbo
Daniel Servitje: When we entered
the market in Latin America,
we thought that there were a lot of
similarities to our culture and
our business system. Some things
worked out very well, and many
things were disasters. A few years
ago, we did an acquisition in
Central America that we thought was
a simple one. But it ended up
being very complex; we did not really
achieve the benefits that we had
hoped for. Even though we speak
Spanish and we understand
the culture, the labor rules and the
complexities of each market can
get us to a very different place. We
learned our lessons the hard way in
that case. From that circumstance,
we’ve tried to develop a more
thorough approach to our M&A due
diligence and to be more sensitive
to the complexities of labor.
Despite the hurdles, we have
become the leading baking player in
View the full Brazil. But our challenge there is
interview, “The to find the right model to penetrate
making of an
the traditional mom-and-pop
emerging-market
segment, which is quite different
champion,” on
mckinseyquarterly from what we find in other Latin
.com. American countries.
17
The Quarterly: Grupo Bimbo
has been a public company
for 30 years but still has a family
business orientation. How is
that an advantage?
Daniel Servitje: We see things
with a longer time perspective and
base our decisions on a larger
time horizon. That allows us to view
things with a perspective very
different from the ones that we see
in many multinationals. For
example, we lost money for more
than ten years in our Mexican
snack business. We kept on building
our base, gaining more knowledge
of the business, and scaling up our
company until we turned it around.
Now it’s a very viable business.
Our company has been growing
by about 10 percent compounded
annually for many years—four
to five times the GDP growth of
Mexico and the United States. We
have been blessed because
we’ve focused on a strict number
of categories and built a very
strong distribution network in many
countries. We also had a high aim
of becoming an international player
and the commitment of our
board to sustain this strategy for
many years. If we had not been
willing to reinvest in the businesses
in difficult times, certainly
this strategy wouldn’t have been
successful.
Alejandro Diaz is a director in
McKinsey’s Dallas office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
18 2011 Number 4
Sizing the Internet’s
economic impact
Eric Hazan, James Manyika, and Matthieu Pelissie du Rausas
New McKinsey research underscores the magnitude of the Net’s impact on global growth
and corporate performance.
The Internet has profoundly
changed the workings of
the global economy. Yet a precise
measure of the magnitude of the
Internet’s impact, whether at
the level of national economies or
of individual firms, has remained
elusive. In an effort to quantify
the Internet’s effect on economic
activity, McKinsey examined
national-account data of 13 nations
that account for 70 percent of
global GDP. We also surveyed 4,800
small and medium-sized enter-
prises in 12 countries on their use
of the Internet and its effect on
their performance. Econometric
analyses of both macro- and micro-
economic data provided rein-
forcing evidence of the Internet’s
sizable and expanding influence on
global and corporate growth.
The growth dividend for
countries . . .
At the highest level, we found that
the Internet now accounts for 3.4 per-
cent of GDP across the economies
we studied, ranging from highs of
5 to more than 6 percent in Sweden
and the United Kingdom, where
consumers and corporations alike
are heavy users, to less than
1.5 percent in Brazil and Russia,
where adoption is weaker.1
The sources of this activity include
private consumption (from
online commerce to smartphone
purchases); investment by
companies in software, servers,
and communications gear; and
public investments in areas such as
Internet infrastructure. If measured
as a global industry unto itself,
the Internet now contributes more to
GDP than education, agriculture,
or utilities do.
The magnitude of its impact is likely
to increase, because the Internet’s
contribution to global economic
growth is accelerating: from 2005 to
2009, it accounted for 21 percent
of the combined GDP growth of nine
developed economies we studied.
That was more than double the
growth contribution over a longer
(14-year) period from 1995 to 2009.
The Net is also propelling growth
in less mature economies, such as
China and India, though so far
at a more moderate pace (Exhibit 1).
 Leading Edge 19

Moreover, our study indicates that medium-sized enterprises

the Internet’s net impact on jobs we conducted in 12 countries.
has been positive: for every position
eliminated through productivity Finally, our study also shows that
gains associated with it, 2.6 are Internet maturity—measured
created. This finding is confirmed in by a variety of factors characterizing
Q4 2011
a detailed study of France, as a country’s Internet use, infra-
Internet growth
well as a survey of 4,800 small and structure, online expenditures, and
Exhibit 1 of 2

The Internet’s contribution to global economic growth

The Internet’s contribution to global economic
is accelerating.
growth is accelerating.
Internet’s contribution to
global GDP growth, %

Over 14 years, 1995–2009 Nominal GDP growth,1

Over more recent 5 years, 2004–09 1995–2009, %

15
Mature Sweden 3.9
33
countries
14
Germany 1.9
24

11
United Kingdom 4.7
23

10
France 3.4
18

7
South Korea 7.0
16

8
United States 4.7
15

4
Italy 3.4
12

6
Canada 4.6
10

Japan N/A2 –0.3

4
High-growth India 13.1
5
countries
3
China 9.5
3

2
Brazil 10.7
2

1
Russia 26.7
1

1In local currencies.

2 Negative growth due to inflation.

Source: Organisation for Economic Co-operation and Development national accounts; McKinsey Global Institute analysis
 20 2011 Number 4

Q4 2011
Internet growth
Exhibit 2 of 2

Small and medium-sized enterprises that use Web

technologies extensively are growing more quickly and
Small and medium-sized enterprises that use Web
exporting
technologiesmore widely.
extensively are growing more quickly
and exporting more widely.

Small and medium-sized enterprises

Enterprises grouped by degree of Annual growth over Export revenues as

Web-technology utilization1 last 3 years, % % of total sales

Low
6.2 2.5
(42% of respondents)

Medium
7.4 2.7
(31% of respondents)

High
13.0 5.3
(27% of respondents)

1 Based on number of technologies possessed by companies and number of employees, customers, and suppliers with access
to those technologies.
Source: May 2011 McKinsey survey of >4,800 small and medium-sized enterprises in 12 countries; McKinsey Global
Institute analysis

e-commerce—correlates with three years, twice the rate of

standard-of-living improvements,
measured in terms of GDP per
capita. We also found higher growth
rates for labor productivity in
nations such as the United States,
where Internet usage and infra-
structure were more mature, and
a correlation between highly
developed Internet ecosystems and
higher GDP growth rates.
. . . and for companies
Our global research on small and
medium-sized enterprises also
indicates that companies with two
characteristics—employing larger
numbers of Internet technologies
(such as blogs, social networks,
and e-commerce sites) and
enjoying high rates of adoption
among employees, customers, and
suppliers—recorded revenue
growth of 13 percent over the last
companies with lower levels of
Internet adoption. Furthermore, the
profit levels of these Internet-
intense companies were 10 percent
higher than those of less intense
Web users, and the rate at which
they added workers was twice as
high. While it’s impossible
to say definitively which way the
causation runs, our research
does suggest greater efficiency
at the more Internet-intense
companies (their cost of goods sold
and administrative costs were
lower) and, as Exhibit 2 shows,
a stronger ability to expand market
reach (export revenues were
markedly higher).
The 10 percent profitability advan-
tage enjoyed by heavy Internet
users represents a significant global
profit pool. Companies that supply
Leading Edge
hardware, software, and services to
the global Internet ecosystem claim
one-quarter of that pool. Leading
this Internet supply network of
250 firms are companies in Japan,
Sweden, and the United States.
Rising in influence are China and
India: as they develop more potent
export players, their Internet
supply sectors are growing at four
and five times, respectively, the
rate of the US industry.
Stoking future growth
As business leaders establish
strategic priorities amid rapid, Web-
related change, they should look
for opportunities to:
• reinvent business models
to capture productivity and perfor-
mance improvements unlocked
by the Internet
• exploit emerging Web trends,
such as the Internet of Things,2 in
which chips create highly
efficient networks from almost
any physical product
• embrace new, flexible organi-
zational structures enabled by
Web networks that link
employees, customers, and
business partners
Leaders also should focus on
emerging opportunities in countries
that are still getting up the Internet
growth curve. Those countries
can make big strides toward tapping
into more of the Internet economy’s
benefits, our research suggests.
We found that countries with four
characteristics—easy access to
start-up capital, a solid broadband
21
infrastructure, a business environ-
ment that combines moderate
regulation with protections for intel-
lectual capital, and strong
educational and training programs
that foster technical skills—have
more companies among the ranks
of global Internet suppliers.
Each of these four policy areas
offers plenty of space for committed
executives and policy makers to
collaborate for improvements.
1
 he size of the Internet economy represents
T
the sum of Internet consumption (of
which service, access, and e-commerce are
key elements), private investment, public
expenditure, and the trade balance in Web-
related goods and services.
2
For more see Michael Chui, Markus Löffler,
and Roger Roberts, “The Internet of Things,”
mckinseyquarterly.com, March 2010.
The authors would like to thank
Jacques Bughin, Michael Chui,
Vincent Luciani, and Remi Said for
their contributions to this research.
Eric Hazan is a principal in
McKinsey’s Paris office, where
Matthieu Pelissie du Rausas
is a director; James Manyika
is a director of the McKinsey Global
Institute and a director in the
San Francisco office.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.
22

Big data
You have it, now use it.
With data flooding into your company
as never before, information is no
longer just an IT issue; it’s yours as a
senior leader. Maybe your company
is sitting on powerful data assets that
could strengthen its ability to compete,
or perhaps there’s a competitor that’s
suddenly aiming a “big data” strategy
right at you. In our first story, find out
why mastering data and analytics is now
mission critical, and ask yourself five
questions that will help you understand
looming competitive challenges. Then
turn to a leading academic expert, a
data entrepreneur, and a top college
basketball coach who zero in on how you
can use data to compete.

24
Are you ready for the
era of ‘big data’?
Brad Brown, Michael Chui,
and James Manyika

36
Competing through
data: Three experts offer
their game plans
Artwork by Celia Johnson
23
24

Are you ready for the

era of ‘big data’?
Brad Brown, Michael Chui, and James Manyika

Radical customization, constant experimentation,

and novel business models will be new
hallmarks of competition as companies capture
and analyze huge volumes of data. Here’s
what you should know.

The top marketing executive at a sizable US retailer recently

found herself perplexed by the sales reports she was getting. A major
competitor was steadily gaining market share across a range of
profitable segments. Despite a counterpunch that combined online
promotions with merchandizing improvements, her company kept
losing ground.

When the executive convened a group of senior leaders to dig into the
competitor’s practices, they found that the challenge ran deeper than
they had imagined. The competitor had made massive investments in
its ability to collect, integrate, and analyze data from each store
and every sales unit and had used this ability to run myriad real-world
experiments. At the same time, it had linked this information to
suppliers’ databases, making it possible to adjust prices in real time, to
reorder hot-selling items automatically, and to shift items from
store to store easily. By constantly testing, bundling, synthesizing, and
making information instantly available across the organization—
from the store floor to the CFO’s office—the rival company had become
a different, far nimbler type of business.

What this executive team had witnessed first hand was the game-
changing effects of big data. Of course, data characterized the information
age from the start. It underpins processes that manage employees;
it helps to track purchases and sales; and it offers clues about how
customers will behave.
 25

But over the last few years, the volume of data has exploded. In 15 of
the US economy’s 17 sectors, companies with more than 1,000
employees store, on average, over 235 terabytes of data—more data
than is contained in the US Library of Congress. Reams of data
still flow from financial transactions and customer interactions but
also cascade in at unparalleled rates from new devices and multiple
points along the value chain. Just think about what could be hap-
pening at your own company right now: sensors embedded in process
machinery may be collecting operations data, while marketers scan
social media or use location data from smartphones to understand teens’
buying quirks. Data exchanges may be networking your supply
chain partners, and employees could be swapping best practices on
corporate wikis.

All of this new information is laden with implications for leaders and
their enterprises.1 Emerging academic research suggests that com-
panies that use data and business analytics to guide decision making
are more productive and experience higher returns on equity than
competitors that don’t.2 That’s consistent with research we’ve conducted
showing that “networked organizations” can gain an edge by opening
information conduits internally and by engaging customers and sup-
pliers strategically through Web-based exchanges of information.3

Over time, we believe big data may well become a new type of corporate
asset that will cut across business units and function much as a
powerful brand does, representing a key basis for competition. If that’s
right, companies need to start thinking in earnest about whether
they are organized to exploit big data’s potential and to manage the
threats it can pose. Success will demand not only new skills but also
new perspectives on how the era of big data could evolve—the widening
circle of management practices it may affect and the foundation it
represents for new, potentially disruptive business models.

1 For more, see the McKinsey Global Institute report Big data: The next frontier

for innovation, competition, and productivity, available free of charge online at

mckinsey.com/mgi.
2 See Erik Brynjolfsson, Lorin M. Hitt, and Heekyung Hellen Kim, “Strength in numbers:

How does data-driven decisionmaking affect firm performance?” Social Science

Research Network (SSRN), April 2011. In this study, the authors found that effective use
of data and analytics correlated with a 5 to 6 percent improvement in productivity,
as well as higher profitability and market value. For more, see the forthcoming e-book by
Brynjolfsson and coauthor Andrew McAfee, Race Against the Machine: How the
digital revolution accelerates innovation, drives productivity, and irreversibly transforms
employment and the economy (Digital Frontier Press, October 2011).
3 See Jacques Bughin and Michael Chui, “The rise of the networked enterprise: Web 2.0

finds its payday,” mckinseyquarterly.com, December 2010.

26 2011 Number 4

Five big questions about big data

In the remainder of this article, we outline important ways big data

could change competition: by transforming processes, altering
corporate ecosystems, and facilitating innovation. We’ve organized the
discussion around five questions we think all senior executives
should be asking themselves today.

At the outset, we’ll acknowledge that these are still early days for big
data, which is evolving as a business concept in tandem with the under-
lying technologies. Nonetheless, we can identify big data’s key ele-
ments. First, companies can now collect data across business units and,
increasingly, even from partners and customers (some of this is truly
big, some more granular and complex). Second, a flexible infrastructure
can integrate information and scale up effectively to meet the surge.
Finally, experiments, algorithms, and analytics can make sense of all
this information. We also can identify organizations that are making
data a core element of strategy. In the discussion that follows and else-
where in this issue, we have assembled case studies of early movers in
the big data realm (see “Seizing the potential of ‘big data’,” on page 103,
and the accompanying sidebar, “AstraZeneca’s ‘big data’ partnership,”
on page 104).

In addition, we’d suggest that executives look to history for clues about
what’s coming next. Earlier waves of technology adoption, for example,
show that productivity surges not only because companies adopt new
technologies but also, more critically, because they can adapt their man-
agement practices and change their organizations to maximize the
potential. We examined the possible impact of big data across a number
of industries and found that while it will be important in every sector
and function, some industries will realize benefits sooner because they
are more ready to capitalize on data or have strong market incentives
to do so (see sidebar, “Parsing the benefits: Not all industries are
created equal”).

The era of big data also could yield new management principles. In
the early days of professionalized corporate management, leaders dis-
covered that minimum efficient scale was a key determinant of
competitive success. Likewise, future competitive benefits may accrue
to companies that can not only capture more and better data but
also use that data effectively at scale. We hope that by ref lecting on
such issues and the five questions that follow, executives will be
 Are you ready for the era of ‘big data’? 27

better able to recognize how big data could upend assumptions

behind their strategies, as well as the speed and scope of the change
that’s now under way.

What happens in a world of radical transparency,

1 with data widely available?
As information becomes more readily accessible across sectors, it can
threaten companies that have relied on proprietary data as a com-
petitive asset. The real-estate industry, for example, trades on infor-
mation asymmetries such as privileged access to transaction data
and tightly held knowledge of the bid and ask behavior of buyers. Both
require significant expense and effort to acquire. In recent years,
however, online specialists in real-estate data and analytics have started
to bypass agents, permitting buyers and sellers to exchange perspec-
tives on the value of properties and creating parallel sources for real-
estate data.

Beyond real estate, cost and pricing data are becoming more accessible
across a spectrum of industries. Another swipe at proprietary infor-
mation is the assembly by some companies of readily available satellite
imagery that, when processed and analyzed, contains clues about
competitors’ physical facilities. These satellite sleuths glean insights
into expansion plans or business constraints as revealed by facility
capacity, shipping movements, and the like.

One big challenge is the fact that the mountains of data many companies
are amassing often lurk in departmental “silos,” such as R&D, engi-
neering, manufacturing, or service operations—impeding timely exploi-
tation. Information hoarding within business units also can be a
problem: many financial institutions, for example, suffer from their own
failure to share data among diverse lines of business, such as financial
markets, money management, and lending. Often, that prevents these
companies from forming a coherent view of individual customers or
understanding links among financial markets.

Some manufacturers are attempting to pry open these departmental

enclaves: they are integrating data from multiple systems, inviting
collaboration among formerly walled-off functional units, and even
seeking information from external suppliers and customers to
cocreate products. In advanced-manufacturing sectors such as auto-
motive, for example, suppliers from around the world make thou-

(continued on page 30)

28 2011 Number 4
Parsing the
benefits: Not all
industries are created
equal
Even as big data changes the
game for virtually every sector, it
also tilts the playing field, favoring
some companies and industries,
particularly in the early stages of
adoption. To understand those
dynamics, we examined 20 sectors
in the US economy, sized their
contributions to GDP, and devel-
oped two indexes that estimate
each sector’s potential for value
creation using big data, as well
as the ease of capturing that value.1
As the accompanying sector map
shows (exhibit), financial players
get the highest marks for value crea-
tion opportunities. Many of these
companies have invested deeply in
IT and have large data pools to
exploit. Information industries, not
surprisingly, are also in this league.
They are data intensive by nature,
and they use that data innovatively
to compete by adopting sophis-
ticated analytic techniques.
The public sector is the most fertile
terrain for change. Governments
collect huge amounts of data, trans-
act business with millions of
citizens, and, more often than not,
suffer from highly variable perform-
ance. While potential benefits are
large, governments face steep bar-
riers to making use of this trove:
few managers are pushed to exploit
the data they have, and govern-
ment departments often keep data
in siloes.
Fragmented industry structures
complicate the value creation poten-
tial of sectors such as health
care, manufacturing, and retailing.
The average company in them is
relatively small and can access only
limited amounts of data. Larger
players, however, usually swim in
bigger pools of data, which they
can more readily use to create value.
The US health care sector, for
example, is dotted by many small
companies and individual physi-
cians’ practices. Large hospital
chains, national insurers, and
drug manufacturers, by contrast,
stand to gain substantially through
the pooling and more effective
analysis of data. We expect this
trend to intensify with changing
regulatory and market conditions.
In manufacturing, too, larger
companies with access to much
internal and market data will be
able to mine new reservoirs of value.
Smaller players are likely to benefit
only if they discover innovative
ways to share data or grow through
industry consolidation. The same
goes for retailing, where—despite
a healthy strata of data-rich
chains and big-box stores on
the cutting edge of big data—
 Are you ready for the era of ‘big data’? 29

most players are smaller, local 1 The big data value potential index takes into

businesses with a limited ability to account a sector’s competitive conditions,

such as market turbulence and performance
gather and analyze information. variability; structural factors, such as
transaction intensity and the number of
potential customers and business partners;
A final note: this analysis is a snap-
and the quantity of data available. The ease-
shot in time for one large country. of-capture index takes stock of the number
As companies and organizations of employees with deep analytical talent
in an industry, baseline investments in IT,
sharpen their data skills, even the accessibility of data sources, and the
low-ranking sectors (by our gauges degree to which managers make data-driven
of value potential and data capture), decisions.
Q4 2011
Big data sidebar onassector
such construction and education,
productivity
could see their fortunes change.
Exhibit 1 of 1

The ease of capturing big data’s value, and the magnitude

of its potential, vary across sectors.

Example: US economy Size of bubble indicates relative

contribution to GDP

High
Utilities Health care Computers and other electronic products
Natural resources providers
Information
Manufacturing
Big data: ease-of-capture index1

Finance and
insurance

Professional services Transportation and warehousing

Real estate
Accommodation and food
Management of companies
Construction
Wholesale trade

Administrative
services Retail trade

Other services
Educational
services
Government
Arts and
Low entertainment High

Big data: value potential index1

1 For detailed explication of metrics, see appendix in McKinsey Global Institute full report Big data: The next frontier for
innovation, competition, and productivity, available free of charge online at mckinsey.com/mgi.
Source: US Bureau of Labor Statistics; McKinsey Global Institute analysis
30 2011 Number 4

sands of components. More integrated data platforms now allow com-

panies and their supply chain partners to collaborate during the
design phase—a crucial determinant of final manufacturing costs.

If you could test all of your decisions, how would

2 that change the way you compete?
Big data ushers in the possibility of a fundamentally different type
of decision making. Using controlled experiments, companies can
test hypotheses and analyze results to guide investment decisions
and operational changes. In effect, experimentation can help managers
distinguish causation from mere correlation, thus reducing the var-
iability of outcomes while improving financial and product performance.

Robust experimentation can take many forms. Leading online companies,

for example, are continuous testers. In some cases, they allocate a set
portion of their Web page views to conduct experiments that reveal what
factors drive higher user engagement or promote sales. Companies
selling physical goods also use experiments to aid decisions, but big data
can push this approach to a new level. McDonald’s, for example, has
equipped some stores with devices that gather operational data as they
track customer interactions, traffic in stores, and ordering patterns.
Researchers can model the impact of variations in menus, restaurant
designs, and training, among other things, on productivity and sales.

Where such controlled experiments aren’t feasible, companies can use

“natural” experiments to identify the sources of variability in perfor-
mance. One government organization, for instance, collected data on
multiple groups of employees doing similar work at different sites.
Simply making the data available spurred lagging workers to improve
their performance.

A next-generation retailer will be able

to track the behavior of individual
customers from Internet click streams,
update their preferences, and
model their likely behavior in real time.
 Are you ready for the era of ‘big data’? 31

Leading retailers, meanwhile, are monitoring the in-store movements

of customers, as well as how they interact with products. These retailers
combine such rich data feeds with transaction records and conduct
experiments to guide choices about which products to carry, where to
place them, and how and when to adjust prices. Methods such as
these helped one leading retailer to reduce the number of items it stocked
by 17 percent, while raising the mix of higher-margin private-label
goods—with no loss of market share.

How would your business change if you used big

3 data for widespread, real-time customization?
Customer-facing companies have long used data to segment and target
customers. Big data permits a major step beyond what until recently
was considered state of the art, by making real-time personalization pos-
sible. A next-generation retailer will be able to track the behavior of
individual customers from Internet click streams, update their preferences,
and model their likely behavior in real time. They will then be able
to recognize when customers are nearing a purchase decision and nudge
the transaction to completion by bundling preferred products, offered
with reward program savings. This real-time targeting, which would also
leverage data from the retailer’s multitier membership rewards pro-
gram, will increase purchases of higher-margin products by its most
valuable customers.

Retailing is an obvious place for data-driven customization because

the volume and quality of data available from Internet purchases,
social-network conversations, and, more recently, location-specific
smartphone interactions have mushroomed. But other sectors,
too, can benefit from new applications of data, along with the growing
sophistication of analytical tools for dividing customers into more
revealing microsegments.

One personal-line insurer, for example, tailors insurance policies for

each customer, using fine-grained, constantly updated profiles of
customer risk, changes in wealth, home asset value, and other data inputs.
Utilities that harvest and analyze data on customer segments can
markedly change patterns of power usage. Finally, HR departments
that more finely segment employees by task and performance are
beginning to change work conditions and implement incentives that
improve both satisfaction and productivity.4

4 See Nora Gardner, Devin McGranahan, and William Wolf, “Question for your HR chief:

Are we using our ‘people data’ to create value?” mckinseyquarterly.com, March 2011.
32 2011 Number 4

How can big data augment or even replace

4 management?
Big data expands the operational space for algorithms and machine-
mediated analysis. At some manufacturers, for example, algorithms
analyze sensor data from production lines, creating self-regulating
processes that cut waste, avoid costly (and sometimes dangerous) human
interventions, and ultimately lift output. In advanced, “digital” oil
fields, instruments constantly read data on wellhead conditions, pipe-
lines, and mechanical systems. That information is analyzed by clus-
ters of computers, which feed their results to real-time operations centers
that adjust oil flows to optimize production and minimize downtimes.
One major oil company has cut operating and staffing costs by 10 to
25 percent while increasing production by 5 percent.

Products ranging from copiers to jet engines can now generate data
streams that track their usage. Manufacturers can analyze the incoming
data and, in some cases, automatically remedy software glitches or
dispatch service representatives for repairs. Some enterprise computer
hardware vendors are gathering and analyzing such data to schedule
preemptive repairs before failures disrupt customers’ operations. The
data can also be used to implement product changes that prevent
future problems or to provide customer use inputs that inform next-
generation offerings.

Some retailers are also at the forefront of using automated big data
analysis: they use “sentiment analysis” techniques to mine the huge
streams of data now generated by consumers using various types
of social media, gauge responses to new marketing campaigns in real
time, and adjust strategies accordingly. Sometimes these methods
cut weeks from the normal feedback and modification cycle.

But retailers aren’t alone. One global beverage company integrates

daily weather forecast data from an outside partner into its demand
and inventory-planning processes. By analyzing three data points—
temperatures, rainfall levels, and the number of hours of sunshine on
a given day—the company cut its inventory levels while improving
its forecasting accuracy by about 5 percent in a key European market.

The bottom line is improved performance, better risk management,

and the ability to unearth insights that would otherwise remain hidden.
As the price of sensors, communications devices, and analytic soft-
ware continues to fall, more and more companies will be joining this
managerial revolution.
 Are you ready for the era of ‘big data’? 33

Could you create a new business model based

5 on data?
Big data is spawning new categories of companies that embrace
information-driven business models. Many of these businesses play
intermediary roles in value chains where they find themselves
generating valuable “exhaust data” produced by business transactions.
One transport company, for example, recognized that in the course
of doing business, it was collecting vast amounts of information on
global product shipments. Sensing opportunity, it created a unit
that sells the data to supplement business and economic forecasts.

Another global company learned so much from analyzing its own

data as part of a manufacturing turnaround that it decided to create
a business to do similar work for other firms. Now the company
aggregates shop floor and supply chain data for a number of manu-
facturing customers and sells software tools to improve their
performance. This service business now outperforms the company’s
manufacturing one.

Big data also is turbocharging the ranks of data aggregators, which

combine and analyze information from multiple sources to generate
insights for clients. In health care, for example, a number of new
entrants are integrating clinical, payment, public-health, and behavioral
data to develop more robust illness profiles that help clients manage
costs and improve treatments.

And with pricing data proliferating on the Web and elsewhere, entre-
preneurs are offering price comparison services that automatically
compile information across millions of products. Such comparisons
can be a disruptive force from a retailer’s perspective but have created
substantial value for consumers. Studies show that those who use the
services save an average of 10 percent—a sizable shift in value.

Confronting complications

Up to this point, we have emphasized the strategic opportunities big

data presents, but leaders must also consider a set of complications.
Talent is one of them. In the United States alone, our research shows,
the demand for people with the deep analytical skills in big data
(including machine learning and advanced statistical analysis) could
outstrip current projections of supply by 50 to 60 percent. By 2018,
as many as 140,000 to 190,000 additional specialists may be required.
34 2011 Number 4

Also needed: an additional 1.5 million managers and analysts with a

sharp understanding of how big data can be applied. Companies must
step up their recruitment and retention programs, while making sub-
stantial investments in the education and training of key data personnel.

The greater access to personal information that big data often demands
will place a spotlight on another tension, between privacy and con-
venience. Our research, for example, shows that consumers capture a
large part of the economic surplus that big data generates: lower
prices, a better alignment of products with consumer needs, and life-
style improvements that range from better health to more fluid social
interactions.5 As a larger amount of data on the buying preferences,
health, and finances of individuals is collected, however, privacy
concerns will grow.

That’s true for data security as well. The trends we’ve described often
go hand in hand with more open access to information, new devices
for gathering it, and cloud computing to support big data’s weighty
storage and analytical needs. The implication is that IT architectures
will become more integrated and outward facing and will pose greater
risks to data security and intellectual property. For some ideas on how
leaders should respond, see “Cybersecurity: A senior executive’s guide,”
on page 10.

Although corporate leaders will focus most of their attention on big

data’s implications for their own organizations, the mosaic of company-
level opportunities we have surveyed also has broader economic

5 See Jacques Bughin, “The Web’s €100 billion surplus,” mckinseyquarterly.com, January 2011.
 Are you ready for the era of ‘big data’? 35

implications. In health care, government services, retailing, and manu-

facturing, our research suggests, big data could improve productivity
by 0.5 to 1 percent annually. In these sectors globally, it could produce
hundreds of billions of dollars and euros in new value.

In fact, big data may ultimately be a key factor in how nations, not just
companies, compete and prosper. Certainly, these techniques offer
glimmers of hope to a global economy struggling to find a path toward
more rapid growth. Through investments and forward-looking poli-
cies, company leaders and their counterparts in government can capi-
talize on big data instead of being blindsided by it.

Brad Brown is a director in McKinsey’s New York Office; Michael Chui

is a senior fellow with the McKinsey Global Institute (MGI) and is
based in the San Francisco office; James Manyika is a director of MGI
and a director in the San Francisco office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
36
Competing through
data: Three experts offer
their game plans
Erik Brynjolfsson
Professor of management
science at the Massachusetts
Institute of Technology’s
Sloan School of Management
Jeff Hammerbacher
Cofounder and chief scientist
of Cloudera
Brad Stevens
Butler University men’s
basketball coach
As big data creates new opportunities
and threats, it also demands new mind-sets from
senior executives about the role of information
in business and even the nature of competitive
advantage. The perspectives that follow may
help shake up your thinking and forge that new
frame of mind.
Massachusetts Institute of Technology (MIT)
professor Erik Brynjolfsson explores the implica-
tions of intriguing new research about the
relationship among data, analytics, productivity,
and profitability. Jeff Hammerbacher, co-
founder of the data-oriented start-up Cloudera,
provides a view from the front lines about
what it takes to harness the flood of data now at
companies’ collective fingertips. Finally, basketball
coach Brad Stevens describes how, on a tight
budget, he uses data that’s powerful (even if not
extraordinarily “big”) to help his Butler University
squad punch above its weight. Presented here are
edited versions of interviews with each, conducted
by McKinsey’s Michael Chui and Frank Comes.
 37

“Too many managers are not opening

their eyes to this opportunity and
understanding what big data can do to
change the way they compete.”

© Steve Dunwell
The professor
Erik Brynjolfsson
Erik Brynjolfsson is the Schussel Family
Professor of Management Science
at the Massachusetts Institute of Technology’s
Sloan School of Management, director of
the MIT Center for Digital Business, and one
of the world’s leading researchers on
how IT affects productivity.

The data advantage

Most great revolutions in science are preceded by revolutions in measure-
ment. We have had a revolution in measurement, over the past few
years, that has allowed businesses to understand in much more detail
what their customers are doing, what their processes are doing, what
their employees are doing. That tremendous improvement in measure-
ment is creating new opportunities to manage things differently.
38 2011 Number 4

Our research has found a shift from using intuition toward using data
and analytics in making decisions. This change has been accompanied
by measurable improvement in productivity and other performance
measures. Specifically, a one-standard-deviation increase toward data
and analytics was correlated with about a 5 to 6 percent improvement
in productivity and a slightly larger increase in profitability in those same
firms. The implication for companies is that by changing the way
they make decisions, they’re likely to be able to outperform competitors.

Becoming data driven

The prerequisite, of course, is the technological infrastructure: the ability
to measure things in more detail than you could before. The harder
thing is to get the set of skills. That includes not just some analytical
skills but also a set of attitudes and an understanding of the business.
Then the third thing, which is the subtlest but perhaps the most important,
is cultural change about how to use data. A lot of companies think
they’re using data, and you often see bar charts and pie charts and num-
bers in management presentations. But, historically, that kind of data
was used more to confirm and support decisions that had already been
made, rather than to learn new things and to discover the right answer.
The cultural change is for managers to be willing to say, “You know, that’s
an interesting problem, an interesting question. Let’s set up an
experiment to discover the answer.”

“I think this revolution in measurement,

starting with the switch from analog
to digital data, is as profound as, say, the
development of the microscope and
what it did for biology and medicine.”

Too many managers are not opening their eyes to this opportunity and
understanding what big data can do to change the way they compete.
They have to be ready to show some vulnerability and say, “Look, we’re
open to the data” and not go in there saying, “Hey, I’m gonna manage
from the gut. I have years of experience and I know the answers to this
going in.” I think, historically, a lot of managers have been implicitly
or explicitly rewarded for that kind of confidence. You have to have a
different kind of confidence to be willing to let the data speak.
Competing through data: Three experts offer their game plans 39

One CEO told me that when he pushed this attitude, he had to change
over 50 percent of his senior-management team because they just
didn’t get it. Obviously, that was a painful thing to have to do. But the
results have been very successful. And they require that level of
aggressiveness by top management, if it really wants to end up in that
group of leaders as opposed to the laggards.

Required skills
Having enough data to get a statistically significant result is not a prob-
lem. There’s plenty of data. So the skills often have more to do with
sampling methodologies, designing experiments, and working these
very, very large data sets without becoming overwhelmed. If you look
inside companies, you also see a transformation in the functions that
are using data. CIOs are discovering that, more and more, it’s the
marketing people and the people working with customers—customer
relationship management—who have the biggest data needs. These
are the people CIOs are working with most closely. This is part of a
broader revolution as we move from just financial numerical data
toward all sorts of nonfinancial metrics.

Often, the nonfinancial metrics give a quicker and more accurate

measure of what’s happening in the business. I was talking to Gary
Loveman—the CEO of Caesar’s Entertainment, formerly Harrah’s,
and a PhD graduate of MIT. He’s used some of these techniques to
revolutionize what’s happening in that industry. But, interestingly,
increasingly what he measures is customer satisfaction and a lot of
other intermediate metrics. He said that customer satisfaction met-
rics were much quicker and more precise metrics of what was happening
in response to some of the policy changes that he put in place.

Think of it this way. If customers end up satisfied or dissatisfied, that

will affect the probability of their coming back next year. Now, next
year’s financial results will be affected as a result. And you could, in
principle, try to match up the experience the customer had this
year with future years’ return rates. But a much quicker way of getting
feedback on which processes are working is to look at customer
satisfaction when you put process changes in place.

The new landscape

I think this revolution in measurement, starting with the switch from
analog to digital data, is as profound as, say, the development of the
microscope and what it did for biology and medicine. It’s not just big
data in the sense that we have lots of data. You can also think of it as
40 2011 Number 4

“nano” data, in the sense that we have very, very fine-grained data—an
ability to measure things much more precisely than in the past. You
can learn about the preferences of an individual customer and person-
alize your offerings for that particular customer.

One of the biggest revolutions has involved enterprise information

systems, like ERP, enterprise resource planning; CRM, customer
relationship management; or SCM, supply chain management—those
large enterprise systems that companies have spent hundreds of
millions of dollars on. You can use the data from them not just to manage
operations but to gain business intelligence and learn how they could
be managed differently. A common pattern that we’re seeing is that three
to five years after installing one of these big enterprise systems, com-
panies start saying, “Hey, we need some business intelligence tools to
take advantage of all this data.” It’s up to managers now to seize that
opportunity and take advantage of this very fine-grained data that just
didn’t exist previously.

The path ahead

There’s some good news and there’s some not-so-good news. The good
news is that technology’s not slowing down, and the pie is getting
bigger. Productivity is accelerating. And that should make us all better
off. However, it’s not making us all better off. Over the past 20 years
or so, median wages in the United States have stagnated because a lot
of people don’t have the skills to take full advantage of this technology.
And, unfortunately, I don’t see that changing any time soon unless
we have a much bigger effort to change the kinds of skills that are avail-
able in the workforce and have a set of technologies that people can
tap into more readily.

This flood of data and analytical opportunities creates more value for
people who can be creative in seeing patterns and for people who
can be entrepreneurial in creating new business opportunities that take
advantage of these patterns. My hope is that the technology will
create a platform that people can tap into to create new entrepreneurial
ventures—some of them, perhaps, huge hits like Facebook or Zynga
or Google. But also, perhaps equally important for the economy, hun-
dreds of thousands or millions of small entrepreneurial ventures,
eBay based or app based, would mean millions of ordinary people can
be creative in using technology and their entrepreneurial energies
to create value. That would be an economy where not only does the pie
get bigger but each part of the pie—each of the individuals—benefits
as well.
 Competing through data: Three experts offer their game plans 41

“ If you can understand consumer behavior

and get your hands around as much
behavioral data as possible to better guide
product decision making, then every
penny you can eke out is increasing your
margins and allowing you to invest more.”

The data
entrepreneur
Jeff Hammerbacher
Before cofounding Silicon Valley
software start-up Cloudera in 2009, at the
age of 26, Jeff Hammerbacher was a
quantitative analyst on Wall Street and one
of Facebook’s first employees.

The open-source advantage

I was Facebook’s first research scientist. The initial goal for that
position was to understand how changes to the site were impacting
user behavior. We had built our own infrastructure to allow us to do
some terabyte analytics, but we were going to have to scale it to up to
petabytes.1 We realized that instead of continuing to invest in infra-

1 Under the International System of Units, a terabyte equals one trillion bytes, or 1,000

gigabytes. A petabyte is equal to 1,000 terabytes.

42 2011 Number 4

structure, we could build a more powerful shared resource to facilitate

business analysis by working with the open-source community.

In founding Cloudera, I saw a path to a complete infrastructure for

doing analytical data management. It would be made up of existing
open-source projects as well as open-source versions of a lot of the
technologies that we had built out internally at Facebook. Cloudera
would be a corporate entity for pursuing those goals and ensuring
that it wasn’t just Facebook that would be able to use this technology
but, really, any enterprise.

Data leaders
When we started Cloudera, we didn’t have a core thesis around where
the technology would be adopted or what the market was going to
look like. Early adopters were clearly in the Web and digital-media
spaces. But in terms of traditional industries, the federal govern-
ment surprised me. They really are the leaders in multimedia data
analysis—working with text, images, video. In the intelligence
agencies, I’ve seen more sophistication than in commercial domains.

I was also surprised to see the retail space. Retailers had very large
volumes of data, and because many were branching out into e-commerce,
they had a lot of Web logs and Web data as well. There is an arms race
going on right now in retail. If you can understand consumer behavior
and get your hands around as much behavioral data as possible to
better guide product decision making, then every penny you can eke
out is increasing your margins and allowing you to invest more.

Financial services was one sector that I had hoped would be an early
adopter, but these companies tend not to look at their businesses as a
whole in the same way that retail does. Data management is thought
of as project specific, even to the point where individual trading desks
could have their own chief technology officers. Our technology tends
to work best as a shared infrastructure for multiple lines of business.

Where this is headed is learning how to point this new infrastructure

for storing and analyzing data at real business problems, as well
as growing the imagination of businesspeople about what they can do
when a variety of experts analyze the data. If you can digitize reality,
then you can move your world faster than before.
 Competing through data: Three experts offer their game plans 43

Building a big data function

You need to make a commitment to conceiving of data as a competitive
advantage. The next step is to build out a low-cost, reliable infra-
structure for data collection and storage for whichever line of business
you perceive to be most critical to your company. If you don’t have
that digital asset, then you’re not even going to be able to play the game.
And then you can start layering on the complex analytics. Most com-
panies go wrong when they start with the complex analytics.

When deciding how to incorporate analytics expertise into an organi-

zation, you have to be honest about what your organization looks
like—your capacity to hire and your long-term vision for what that
organization is going to be. There isn’t one right answer. Yahoo!
built a centralized group called Strategic Data Solutions to run the
entire gamut. Rather than just building a small group of people
primarily focused on marketing analytics, the company took an end-to-
end view, extending from data storage to the actual P&L. In our
group at Facebook, because we were a very fast-moving organization,
we were much more of a platform—a service organization for the
rest of the company.

The rise of the ‘data scientist’

I tried to articulate this title of data scientist in a book I put together
with O’Reilly Media.2 I now actually see people describing themselves
as data scientists in their job titles on LinkedIn and scientists talking
about themselves as data scientists. So it’s evolving. People realize that
there is a gap between the current role of statistician or data analyst
or business analyst and what they actually want. They are grappling
with the set of tools and the set of skills that they need. Across the
whole research cycle, it’s a combination of skills that social scientists
understand, plus additional programming skills, plus the ability to
do aggressive prioritization. And, of course, a good grounding in statis-
tics and machine learning.3 That collection of skills is difficult to find.

2 Jeff Hammerbacher and Toby Segaran, eds., Beautiful Data: The Stories Behind Elegant

Data Solutions, Sebastopol, CA: O’Reilly, 2009.

3 Machine learning is a form of artificial intelligence in which algorithms allow computers to

make decisions based on data streams.

44 2011 Number 4

“ I can have all the data I want to have—

but I still have to communicate it
to our players. It has to get into their
minds. And they have to utilize it. ”

© Courtesy of Butler
University
The coach
Brad Stevens
Brad Stevens is head coach of the Butler
University men’s basketball team.

Coach Stevens holds the National Collegiate Athletic Association

(NCAA) record for most games won in the first four years as a
Division I head basketball coach. Among those wins was a series of
thrilling NCAA tournament games that brought his Butler University
team to the championship final in 2010 and 2011.

Before joining Butler, which is located in Indianapolis, Indiana,

and has just 4,500 students, he was a marketing associate at the
global pharmaceutical group Eli Lilly. In the following interview,
Stevens explains how focusing on the numbers has helped improve
his team’s game.
 Competing through data: Three experts offer their game plans 45

The Quarterly: How have things changed in basketball with regard

to the use of data and analytics?

Brad Stevens: You know, I’m a bad person to ask about that because
I’m 34. The data’s always been an important part of my job. I’ve
always looked at it through that lens, even when I was a young assistant.
This is how I work best. For me, it’s incredibly interesting. There are
complexities that you can really study using numbers. We don’t have
access to the highest end—we’re not sitting here with NBA4 money to
invest in a numbers-and-research department. But I think you can speak
to your team with numbers and give your players pretty clear-cut
and defined examples of what they need to do to get better.

The Quarterly: If you had an infinite budget, what sorts of things

would you do?

Brad Stevens: The first thing is that I’d have one of the positions on
our staff, or maybe a whole group on our staff, working on statistics.
They would look at game planning and how players are most effective:
what they’re doing when they’re most effective, where they are on the
court—really show players the exact way that they are most effective in
different areas of the game. That’s an incredibly useful teaching tool.

The Quarterly: In the absence of those resources, that staff, what

do you do?

Brad Stevens: I first break down all of the statistics that I can on
opponents to try to get my mind wrapped around what their trends are.
I’ll look for how many three-point attempts per field goal attempt5—
that tells you what kind of team they are right away. You can look at
offensive-rebound percentages. Defensive- and offensive-turnover
percentages. How teams shoot against them. What they defend well.
What they try to defend well.

Then there’s the ability to cut film on computers and to do so quickly.

We can watch all of somebody’s moves off of a ball screen. All of a
person’s moves going left. All of the post moves, going to the middle or
going to the baseline. Whatever the case may be. And we can really

4 The US National Basketball Association.

5 For an explanation of basketball terminology, visit www.fiba.com/pages/eng/fc/baskBasi/

glos.asp.
 46 2011 Number 4

“ As we get to the latter part of the season,

I’ll spend a lot more time asking, ‘What’s
happened in the past five games? What are
they doing differently from a statistical
standpoint? What have they improved on?
What have they regressed in?’”

determine their effectiveness from that. We obviously hope that the

film validates the statistics and we can figure out what’s unique about
what players do.

One thing that you have to be careful of is not getting caught up in just
season statistics. Teams change. And as we get to the latter part of
the season, I’ll spend a lot more time asking, “What’s happened in the
past five games? What are they doing differently from a statistical
standpoint? What have they improved on? What have they regressed in?”

Of course, I can have all the data I want to have—but I still have to
communicate it to our players. It has to get into their minds. And they
have to utilize it. So you can’t inundate them. You can’t take three
seconds to make a decision in basketball. It’s a game that moves too
quickly for that. There’s no huddle in between plays; there’s not a
moment in between every pitch. You’ve got to have thoughts in your
mind about what the people that you’re playing against like to do, and
what you do best, and at the same time you can’t be inundated with
those thoughts or it’ll affect the way you play. That makes commu-
nicating data and simplifying it for the players incredibly important.

The Quarterly: Can you say more about how you simplify data,
how you engage your players?

Brad Stevens: You’ve got to figure out how they react, how they best
comprehend, how they best learn in a team setting, how they best
learn in an individual setting, and go from there. Each team’s different,
each player’s different. And, you know, it may mean bringing in a guy
who has a mind for numbers and saying, “The bottom line is that, right
now, you’re shooting 43 percent. You’re a better shooter than that. If
 Competing through data: Three experts offer their game plans 47

you make one more shot a game, you’re probably at 48 or 49 percent.

How can we make it so you’re one more shot effective for a game?”

The Quarterly: Was there one game or a couple of games where this
really played out and made a difference?

Brad Stevens: Every game we play in. There’s not a game when
this wouldn’t have played a major role. We’re not the most talented,
so we have to be good in these little areas. Sometimes, you know, the
numbers hurt you. You believe one thing, and then the other team has
a night that’s unique. But more times than not, the score takes care
of itself, as Bill Walsh6 says.

6 Bill Walsh coached the US National Football League’s San Francisco 49ers to three Super

Bowl titles (1982, 1985, and 1989). His book The Score Takes Care of Itself: My Philosophy of
Leadership (Portfolio, August 2009), published two years after his death, was coauthored
with his son, Craig, and with Steve Jamison.

Michael Chui is a senior fellow at the McKinsey Global Institute and is

based in McKinsey’s San Francisco office; Frank Comes is a member of
McKinsey Publishing and is based in the New Jersey office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
Changing
companies’ minds
about women
Joanna Barsh and Lareina Yee

Leaders who are serious about getting more women

into senior management need a hard-edged approach to
overcome the invisible barriers holding them back.

The problem
Your company has trouble retaining
promising women or promoting them
into top jobs. Structural changes,
such as “flextime,” aren’t helping enough;
they do little to address the invisible
but powerful beliefs, held by many man-
agers, that subtly, and unintentionally,
hamper women’s careers.

Why it matters
A bevy of research highlights strong
statistical correlations among large num-
bers of senior women, financial per-
formance, and organizational health. The
bottom line: companies gain hard
business benefits from a more diverse
senior team.

What to do about it
There are no sure answers yet. But
the experience of companies making
Artwork by Gwenda Kaczor

progress suggests that injecting greater

rigor into people processes—more
data, thoughtful targets that push
women into the consideration set for
key roles, a company-specific business
case for women, better sponsorship
approaches—can make a difference.
49
50 2011 Number 4

Despite significant corporate commitment to the advance-

ment of women’s careers, progress appears to have stalled. The
percentage of women on boards and senior-executive teams remains
stuck at around 15 percent in many countries, and just 3 percent
of Fortune 500 CEOs are women.

The last generation of workplace innovations—policies to support

women with young children, networks to help women navigate
their careers, formal sponsorship programs to ensure professional
development—broke down structural barriers holding women back.
The next frontier is toppling invisible barriers: mind-sets widely held
by managers, men and women alike, that are rarely acknowledged
but block the way.

When senior leaders commit themselves to gender diversity, they really

mean it—but in the heat of the moment, deeply entrenched beliefs
cause old forms of behavior to resurface. All too often in our experience,
executives perceive women as a greater risk for senior positions, fail
to give women tough feedback that would help them grow, or hesitate
to offer working mothers opportunities that come with more travel
and stress. Not surprisingly, a survey we conducted earlier this year indi-
cated that although a majority of women who make it to senior roles
have a real desire to lead, few think they have meaningful support to
do so, and even fewer think they’re in line to move up.

Our ideas for breaking this cycle are directional, not definitive. They
rest on our experience in the trenches with senior executives, on
discussions with 30 diversity experts, and on the reflections of leaders
we’ve interviewed at companies that have been on this journey for
years. These companies include Pitney Bowes, 38 percent of whose vice
presidents are women; Shell, where more than a quarter of all
supervisors and professional staff worldwide are women; and Time
Warner, where more than 40 percent of the senior executives in its
operating divisions are women and where the share of women in senior
roles has jumped 30 percent in the past six years. Great progress,
but even these three companies are the first to admit how much further
they have to go.

Their collective experience suggests to us that real progress requires

systemwide change driven by a hard-edged approach, including targets
ensuring that women are at least considered for advancement, the
rigorous application of data in performance dialogues to overcome prob-
 Changing companies’ minds about women 51

lematic mind-sets, and genuine sponsorship. Committed senior

leaders are of course central to such efforts, which can take many
years. We hope our suggestions, and the real-life examples that illus-
trate them, will stir up your thinking about how to confront the
silent but potent beliefs that probably are undermining women in your
organization right now.

Invisible, unconscious, and in the way

For evidence of the problem, look no further than the blocked, leaky
corporate-talent pipeline: women account for roughly 53 percent
of entry-level professional employees in the largest US industrial corpo-
rations, our research shows.1 But according to Catalyst, a leading advo-
cacy group for women, they hold only 37 percent of middle-management
positions, 28 percent of vice-president and senior-managerial roles,
and 14 percent of seats on executive committees. McKinsey research
shows similar numbers for women on executive committees outside
the United States—from a high of 17 percent in Sweden to just 2 percent
in Germany and India.2 Our analysis further reveals that at every
step along the US pipeline, the odds of advancement for men are about
twice those for women. And nearly four times as many men as women
at large companies make the jump from the executive committee
to CEO.3

To understand what’s going on, look to the words that appeared

most frequently in open-ended responses to our recent survey as expla-
nations for poor retention and promotion of women: “politics,”
“management,” “the company,” “people,” and “the organization.” These
forces manifest themselves in myriad ways. We’ve all heard endless
variations on the mind-sets that set women up for failure:

“She’s too aggressive” (or “too passive”). Whether a woman is perceived

as aggressive or passive, that’s different from the judgment a man

1 The entry-level figure is from our April 2011 report, Unlocking the full potential of women

in the US economy. Read an executive summary or download the full report on the
McKinsey & Company Web site.
2 The full report, Women at the top of corporations: Making it happen, part of McKinsey

& Company’s Women Matter 2010 series, is available on the McKinsey & Company
Web site. The differences among countries reflect significant variance in their starting
points and cultural norms—which, for example, can make it difficult for a woman to
outearn her husband.
3 Part of the reason is that almost twice as many executive-level women as men (60 percent

versus 35 percent) occupy staff roles that are less likely to lead to the top job.
52 2011 Number 4

would face, and she often doesn’t receive the coaching a man would to
help her assimilate into the company’s culture.

“I don’t want to tell Bob he didn’t get that job.” There’s a limited pool
of senior positions, and leaders are not comfortable telling protégés
they have groomed for years that someone else is getting the spot.

“I don’t know how to talk to or mentor her.” Men tend to sponsor other
men, find it harder to build relationships with people when they share
fewer common interests, and sometimes are nervous about forging
a close relationship that could seem inappropriate.

“If I put a woman in that role and she fails, it’ll set back all women.”
Mind-sets like this one inadvertently treat men as individuals and
women as representative of their whole gender.

“A woman isn’t right for that role.” Long-held stereotypes about the
relative strengths of men and women survive, at least in vestigial form.

In the face of these silent but potent forces, it’s little wonder the careers
of many promising women die on the vine. Slowly but surely—despite
the best intentions of HR departments and individual executives—the
experience of women starts to diverge from that of their male peers:
Less opportunity for professional growth. Unintended performance bias
and softer feedback. Fewer sponsors offering fewer opportunities and
less advocacy. Lowered ambition. Greater satisfaction with staying put.
Attrition and a fresh start at a different company.4

A word about the role women play in this vicious cycle: they start out
ambitious. Most young women, like young men, hope to move to the next
level, and women who reach more senior levels retain that ambition
(exhibit). That said, women also turn down advancement opportunities
for varied reasons, ranging from commitments outside work to risk
aversion for positions that demand new skills to a desire to stay put in
roles that provide personal meaning. In addition, mothers with more
than one child are much more satisfied with staying put, our survey
shows, though they remain highly confident about their performance
and abilities.

Subtle changes in these attitudes toward advancement are another

powerful benefit of changing how companies “think about women

4Our data show that like the men we surveyed, most women who leave a job move to another

rather than exit the workforce.

 Q4 2011
Mind-sets
Changing companies’ minds about women 53
Exhibit 1 of 1

Like their male counterparts, most young women want to move up.
Many of those who advance retain that ambition.

Desire to move to the next level, % who agree or strongly agree

Young Young Women of all ages

men women
98
92
79 83

Aged 24–34 In early stage In early to middle

of career1 management

1 Entry-level, nonmanagement roles; excludes administrative, maintenance, or other support services.

Source: Feb 2011 McKinsey survey of 1,000 women and 525 men currently working in large corporations or professional-
services firms; McKinsey analysis

around here.” By addressing the mind-sets holding women back,

corporate leaders can reshape the talent pipeline and its odds, increasing
the number of women role models at the top and, in turn, making
it likelier that more women will retain their ambition.

Changing companies’ minds

No program or initiative can be the “silver bullet” to advance women into

senior roles. Rather, the whole organization must change. That’s hard
work; it will take years and, potentially, even a generational transition.
This goal requires a serious commitment from busy leaders, whose
natural tendency is to discuss the issue, create a plan, and hand it off
to HR. And it requires real engagement up and down the line,
including engagement from women.

To make these changes, corporate leaders need to see them as no less

important than a major strategic or operational challenge, such as
falling market share or changing the corporate cost structure. And like
efforts to address those challenges, efforts to advance women can’t
just be add-on programs. They must be integrated into the organization’s
daily work through goals, performance monitoring, processes that
force tough conversations, and serious skill building.
54 2011 Number 4

Undertaking such a transformation in difficult economic times, when

there are fewer opportunities to go around, may seem like a recipe
for failure. But the fact is that these changes never will be easy and that
a few companies, including those we focus on below (Pitney Bowes,
Shell, and Time Warner), have managed to stay on course through both
good times and bad.

Make it personal
Make no mistake: as a senior executive, you are already inf luencing
your company’s approach. If you’re not paying much attention to
the issue of women’s advancement, you’re ensuring that things won’t
change. As Shell’s executive vice president of global supply and
distribution, Peggy Montana, says, “When you look at corporate mind-
sets, change starts at the top. I haven’t seen change in diversity start
from middle management.”

And if you’re personally committed, you can catalyze change that will
improve not only your company’s treatment of women but also, in
all likelihood, its business results. 5 In the early 1980s, Pitney Bowes
CEO George Harvey learned that the most productive newly hired
salespeople were women, many of whom had previously been school-
teachers. Curious to know the explanation, he visited sales offices
late in the day and discovered women “writing personal notes to their
customers with a lot of conviction”—a practice that, further inquiry
revealed, seemed to be driving sales.

According to Pitney Bowes executive vice president Johnna Torsone,

Harvey’s recognition of the value of these committed women touched
off a wave of change. Torsone says Harvey became “determined to
open up an environment that allowed people to come in who hadn’t had
a true opportunity on a level playing field.” They would be motivated,
he reasoned, and their success would “increase the competitive environ-
ment for the men and for everybody else in the organization.” The
end result, Torsone explains, “was an HR strategy based on business.”

5For evidence of the strong correlation between women at the top and stronger financial

performance, see Georges Desvaux, Sandrine Devillard-Hoellinger, and Mary C. Meaney, “A

business case for women,” mckinseyquarterly.com, September 2008.
 Changing companies’ minds about women 55

Make no mistake: as a senior executive,

you are already influencing your company’s
approach. If you’re not paying attention
to the issue of women’s advancement, you’re
ensuring that things won’t change.

This is a powerful idea that resonates with our experience: strong as

the general business case for women is, companies are more likely to
transform mind-sets if they build their own case. That case should
be grounded in the impact women are having at your own organization—
whether hard business results or indirect benefits, such as building
better teams. Harvey’s commitment also highlights the importance of
having leaders start this journey by changing their own mind-sets:
all transformations start with the self; leaders influence everyone else
in the organization through their attitudes and actions.6

Change the conversation

It’s one thing for executives to commit themselves to change. It’s another
to actually make progress. A starting point is making sure enough
women are being considered for advancement, to boost the odds that
some will get through. Broadening the conversation ensures that
high-talent women aren’t “underexposed,” compared with men, as senior
executives talk through promotion possibilities. While putting one
woman on the promotion slate will not change the discussion, focusing
on metrics will. And though most companies are loath to consider
quotas, they’re far from the only way to introduce a hard edge to the
ongoing talent dialogue.

6For more on the role of senior leaders in catalyzing change, see Joanna Barsh, Josephine

Mogelof, and Caroline Webb, “How centered leaders achieve extraordinary results,”
mckinseyquarterly.com, October 2008; and Carolyn B. Aiken and Scott P. Keller, “The CEO’s
role in leading transformation,” mckinseyquarterly.com, February 2007.
56 2011 Number 4

Pitney Bowes, for example, focused on the front end. For a number of
years, every list of candidates for promotion there had to include 35 per-
cent women and 15 percent minorities, equal to their representation
in the workforce at the time. Harvey chose this approach because “he
felt that white men had been disproportionately advantaged and had
gotten complacent,” Torsone explains.

Shell focused on outcomes, setting a long-term target for women at the

top: currently, 20 percent of the company’s senior executives world-
wide. So far, women hold just over 15 percent of those positions, up from
10 percent in 2005. The company includes an assessment of progress
against this target in all senior executives’ reviews and presents the over-
all results in its annual report.

At Time Warner, chief diversity officer Lisa Quiroz explains that each
division is required to have a succession plan and a robust promo-
tion slate for its top layers of management. The CEO and the HR chief
review the plans and slates every year for diversity, among other cri-
teria. This review also includes specific discussions about how individual
women are being prepared for their next role, including rotation
among the company’s divisions and between staff and line roles. For
more than a decade, a noticeable part of each divisional CEO’s bonus
has depended on meeting the company’s expectations for diversity.

Will men raise concerns? Maybe. They did early on at Pitney Bowes,
despite support for diversity from the top. “George [Harvey],” Torsone
explains, “brought challenge and passion to the focus, but it felt alien-
ating to the men. That was not the intention, and so it had to evolve.
When I came in, we broadened our efforts to upgrade talent devel-
opment, making it better for everyone. We still see resistance from men
occasionally, but the overall culture changed, and those attitudes are
really disappearing.”

Any top-down talent review process

conducted primarily by senior men can
unintentionally reinforce the status
quo. Bottom-up survey data can help shake
things up.
Changing companies’ minds about women 57

And what about women? Shell’s Montana says her response to fears from
women that they’re getting jobs just because of their gender is, “Get
over it. I’ve never seen a selection panel pick somebody on the basis of,
‘She’s not really qualified, but we need a female in this job.’ It just
doesn’t happen. We’re running a business, and we’re not taking undue
risks. It’s never going to be a risk-free exercise. But neither is it for
the rest of the population.”

Use data to create transparency and challenge

entrenched mind-sets
Most companies collect some data on diversity. Yet few track the
results in enough detail to help executives gain a real understanding
of what’s going on in their own departments or business units and
how their mind-sets may be contributing. Furthermore, many compa-
nies track data only at the executive level, not down to the front line.
They therefore have no idea what their pipeline really looks like, let alone
how to improve it. PepsiCo, by contrast, tracks the progress of women
at all levels and shares the results throughout its talent review processes.
As a result, the full pipeline of female talent—not just the senior ranks,
which are much harder to influence rapidly—is highly visible.

When the findings are impossible to overlook, leaders can use them to
make the invisible mind-sets visible and then manage these mind-
sets to remove their influence. Pitney Bowes carefully rates and scores
each division’s diversity plan and, like Time Warner, includes in
its bonus decisions an executive’s success in promoting diversity. Further-
more, Torsone says, from the time this process was started, during
the 1980s, the CEO “would talk about it at every operating and manage-
ment review.”

Of course, any top-down talent review process conducted primarily

by senior men can unintentionally reinforce the status quo. Bottom-up
survey data can help shake things up, however. Each year, Shell asks
all employees to answer a survey with 61 questions, ranging from how
they like working at the company to whether they feel able to speak
up freely. The company uses the results from five of these questions to
measure the inclusiveness of the work culture and how it changes
year to year. Shell also analyzes the responses of groups such as men and
women, different nationalities, and different tenures to see whether
their experiences diverge.

One way the company uses the results is to measure the effectiveness of
supervisors in creating an environment where everyone feels engaged
58 2011 Number 4

and able to excel. The results flag outliers: parts of the organization
where everyone can thrive and those areas where some or all employees
feel stymied (those are addressed by specific follow-up plans). Over
the years, Shell has seen the gap between men’s and women’s experiences
shrink—a positive trend. There’s still the question of whether gender-
based attitudes influence responses to surveys like these. In our experi-
ence and in Shell’s, though, they are much better than nothing.

Rethink genuine sponsorship for women

For men and women alike, effective sponsors can make careers through
ongoing, in-the-moment support. Sometimes that means supporting
women in stretch roles. In the words of a female executive at a financial-
services firm, “The head of the business offered me a big promotion
that entailed a move, but then he said, ‘We’re going to make 100 percent
sure that you don’t fail. We have your back, so take this promotion.’
He called the executive who would become my new boss to extract that
commitment, and that made it a lot easier for me to take on this
scary, big step.”

At other times, the best thing a sponsor can do is offer tough love. Shell’s
Montana says she has “held some people back from the next level
until they had more of an operational P&L role. I felt that if they didn’t
have it, at least in a reasonably early time in their career, it would
hold them back once they had the opportunity for more senior levels.”

Clear as the benefits are, so are the challenges of sponsorship for

women: many male executives feel more comfortable sponsoring men
or simply don’t know how to be effective sponsors for women. Take
one common kind of sponsor we’ve met in dozens of workshops—the
“relentless coach” who pushes the sponsoree to the breaking point.
While many men recall this grueling experience with gratitude and even
affection for the sponsor, it doesn’t work well for many women, espe-
cially those who carry the burden of responsibility at home in addition
to their work. Another valuable, but often controversial, kind of
sponsor is what we call the “devil’s advocate.” We all value being chal-
lenged to make our work better, but many women find that constant
questioning drains their confidence and energy. With self-awareness
and training, sponsors can learn to adapt their styles to the individ-
ual and situation at hand.

Effective sponsors are deeply, personally engaged, down to the level

of small details, whose importance adds up. Time Warner’s Quiroz
describes true sponsorship as “someone being planful about what you
 Changing companies’ minds about women 59

do, who you’re exposed to, what development programs you go to, who
you have lunch with, whether you’re getting feedback or being assigned
a coach.” At her company, leaders work hard to make women’s careers
“intentional.” One key: making sure that sponsorees attend Time Warner
women’s leadership programs, where participants interact with top
management and learn to overcome their own limiting mind-sets and
behavior. So far, among the more than 300 leaders who have attended
Time Warner’s program for senior women, 22 percent have been pro-
moted, compared with only 11.8 percent of all women at a similar level
in the company.

We hope you draw inspiration from these examples. If you’re ready

to start challenging the broadly held mind-sets holding women back
in your organization, first become conscious of your own beliefs
and how they affect your behavior and decisions. Then, as you help your
company move forward, remain vigilant: every time a senior exec-
utive leaves or enters an organization, its culture can—and does—shift.
It is up to the senior team to help new executives become active
participants in this journey and to make regular efforts to inject the
energy that the organization as a whole will need to change its mind
about women.

The authors wish to acknowledge the contribution of Heather Sumner

to the research behind this article.

Joanna Barsh is a director in McKinsey’s New York office, and Lareina

Yee is a principal in the San Francisco office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
 61

Top executives need

feedback—here’s how
they can get it
Robert S. Kaplan

As executives become more senior, they are less

likely to receive constructive feedback on
their performance or their strategy. To get it, they
should call on their junior colleagues.

The problem
Subordinates don’t want to offend the
boss. Therefore, as executives
become more senior, they tend to get
less feedback.

Why it matters
Over time, senior leaders can become
confused about their development
needs and isolated from criticism they
should hear about themselves and
their strategies.

What to do about it
Cultivate a network of junior coaches
who are willing to tell you the things you
don’t want to hear. And seek input on key
strategic decisions by empowering junior
colleagues to look at your business with
a “clean sheet of paper.”
Artwork by Gianpaolo Pagni
62 2011 Number 4

By the time you become a senior executive, you have no

doubt honed a set of skills and talents that enable you to be effective
in your job. To help you get to this point, you likely had coaches and
mentors who closely monitored your progress, prodded you to develop
your talents, and, when necessary, confronted you with criticisms
that you may not have wanted to hear but needed to hear in order to
continue your upward path.

Elements of
this article were At this stage in your career, most (if not all) of your colleagues are
adapted from probably subordinates. While you may be “overseen” by a board of direc-
Robert S. Kaplan’s tors or a very senior boss, your superiors probably no longer closely
What to Ask the observe your daily behavior. Instead, they now form their opinions of
Person in the
you based on your presentations in relatively formal settings or on
Mirror: Critical
secondhand reports from your subordinates.
Questions for
Becoming a More
Effective Leader As a result of this, many executives find that as they become more senior,
and Reaching they receive less coaching and become more confused about their
Your Potential performance and developmental needs. They may also become increas-
(Harvard Business
ingly isolated from constructive criticism—subordinates do not want
School Press,
to offend the boss and may believe that constructive suggestions are
August 2011).
unwelcome and unwise. Many senior executives also unwittingly
send off a “vibe” that while they claim to encourage constructive criti-
cism, they really don’t want to hear it. At this stage of their careers,
they may not have focused sufficiently on developing mutually trusting
subordinate relationships that would make getting feedback and
advice a lot easier.

Too frequently, when these executives ultimately do receive feedback

in their year-end reviews (often as part of a 360-degree-feedback
program), they are surprised to be confronted with specific criticisms
of their leadership style, communication approach, and interper-
sonal skills. Worse, they may also hear broad concerns raised about
their strategy, key tactical decisions, and operating priorities for
the business. These leaders may even learn, often too late, that the
various criticisms and concerns have been widely discussed among
their subordinates for an extended period of time without them
being aware.

I have certainly experienced and observed this phenomenon over the

past 25 years in my own executive career and also in working with
numerous executives since coming to Harvard Business School. I have
seen the tendency for senior executives to become more isolated from
Top executives need feedback—here’s how they can get it 63

constructive criticism and strategic advice—sometimes without their

full awareness. As a result, over the past several years, I have worked
intensively with my own direct reports and advised many other senior
executives to develop specific approaches for getting the essential
feedback they need.

The purpose of this article is to distill these approaches into specific and
actionable advice. In doing so, I hope to make you more aware of
the tendency to become isolated and suggest approaches to getting better
feedback, particularly from subordinates, that will help you to materi-
ally improve your performance. I will also discuss further steps you
can take to get dramatically better strategic advice regarding your
business or nonprofit organization. By taking these actions, you should
be able to take greater ownership of the feedback process and improve
your ability to build your organization, capabilities, and career.

Cultivate a network of junior coaches

One of the first questions I ask senior executives is, “Who is your coach?”
Many respond with a list of mentors who are outside the company or
perhaps on the board of directors. These are “mentors” (versus coaches)
because they do not directly observe the executive. Unfortunately,
their advice is only as good as the narrative provided and often doesn’t
adjust for blind spots or the mentor’s lack of professional familiarity
with the executive.

My follow-up question—“Who actually observes your behavior on a

regular basis and will tell you things you don’t want to hear?”—is often
met with silence.

This was the case with the CEO of a medium-sized pharmaceutical com-
pany. He complained of having a difficult time getting consensus
among his senior-leadership team on several key strategic decisions.
These included which early-stage drug compounds to develop and
whether to develop them through joint ventures or by going it alone.
Such decisions were enormously consequential due to the substantial
capital required to develop and get FDA approval for a new drug. The
CEO believed these issues required a high level of consensus, as they
had an impact on every department of the company. He thought highly
of his senior-leadership team but was becoming quite frustrated. He
asked whether there might be a problem with his leadership style or,
64 2011 Number 4

alternatively, if he should consider replacing one or more of his

senior executives. Some of his close friends and outside advisers had
suggested that a senior-team shake-up might help the situation.

I asked him whether he sought coaching from his subordinates.

He responded, “Of course not; they’re the subordinates—it would be
awkward for me to ask them for coaching. I’m the coach!” When
I asked him what was wrong with seeking coaching from subordinates,
he thought long and hard and explained that, during his career,
he seldom had observed his bosses and senior-executive role models
make themselves vulnerable enough to seek feedback from their
direct reports. He also wasn’t sure how he would do it and believed
that this would make his subordinates (and him) uncomfortable
and possibly disturb the boss/subordinate hierarchy.

Despite his reluctance, I urged him to go out and individually “interview”

at least five of his direct reports. He need ask only one question:
“What advice would you offer to help me improve my effectiveness? Please
give me one or two specific and actionable suggestions. I would appre-
ciate your advice.” Although hesitant, he agreed to try it.

These conversations were awkward at first. The initial responses

indicated that he was doing “fine” or even “very well.” It took time,
prodding, and waiting out some uncomfortable silences to convince
his subordinates that he was sincere, truly wanted feedback,
and was serious about acting on it. In the course of this first round
of conversations, the CEO received some surprising, jarring, but
very useful advice. He learned that:

• He was perceived as someone who seldom asked questions of subor-

dinates. Some of his direct reports admitted that they had assumed he
didn’t care what they thought.

• He was widely seen as a poor listener. When subordinates came to

speak with him, he usually did most of the talking.

• He was viewed as quite “guarded”—not revealing much about what

he believed were the key issues facing the business and what worried
him. People commented that they weren’t sure how to read him and
“didn’t know where he was coming from.” He realized that his subordi-
nates often misinterpreted his actions.

• Lastly, his leadership meetings were procedural and reporting meetings

rather than sessions in which issues were framed and debated. As a
Top executives need feedback—here’s how they can get it 65

result, his senior leaders seldom had the opportunity to debate and
discuss issues with each other (unless they initiated meetings on their
own). This made it difficult for the group to agree on which drugs
to develop or to decide how best to develop them.

While the CEO was widely perceived as a brilliant strategist and creative
thinker, he was not yet seen as an effective manager and leader. Much
of this was surprising to the executive, who said he hadn’t previously
heard these observations from any of his mentors or bosses.

He began to act immediately on a number of the criticisms. In particular,

he arranged to reach out to each of his direct reports on a regular
basis for specific advice (and encouraged them to do the same with their
direct reports). He also established monthly leadership team dinners
where the senior-executive group could candidly discuss and debate
key issues.

After three months, the CEO was able to break the group stalemate on
several important issues, including getting agreement on two new
drug targets and specific approaches to developing each drug. During
this time, the CEO had led several sessions where the members of
the group wrestled with these tough questions and, importantly, came
to better understand each other, as well as the CEO’s vision for the
business. Through open debate and discussion, the team members devel-
oped a greater respect for the challenges that each of them faced in
their individual areas of responsibility. As a result, they began operating
as a more cohesive unit.

In the course of these steps, the CEO also focused diligently on

strengthening his own “soft” relationship-building skills, including self-
66 2011 Number 4

Employees at various levels become more

motivated to give upward feedback
when they see that it has a direct and positive
influence on both senior-leader behavior
and company actions.

disclosure, inquiry, and listening. He had long believed that a strong

leader needed to be a bit guarded and a strong advocate. Now, he
realized, it was time for him to revise this view and recognize that an
outstanding leader is willing to reveal information about his or
her values, background, and thoughts—as well as to ask good questions
and be a skilled listener. While advocacy had its place, the CEO
observed that his team responded much more constructively when he
explained his own uncertainties and concerns, asked well-framed
questions for debate, and actively listened to the discussion. He learned
that these “soft” approaches were critical to getting better feedback
and becoming a better manager.

He put these skills to use at his senior-team dinners, where he played

the role of facilitator—framing two or three issues, forcing himself to sit
quietly and actively listen, ask probing follow-up questions as appro-
priate, and generally ensure that team members expressed their candid
views. This took considerable practice, but the CEO ultimately became
a very effective discussion leader of the group.

In individual meetings, he worked hard to ask more questions, listen

more (talk less), and disclose more about what was keeping him up
at night. For example, he revealed his growing concerns about the high
cost and uncertainty of the US Food and Drug Administration (FDA)
drug approval process. By framing questions about how the company
could avoid “betting the ranch” in developing individual drugs, the
CEO helped his team better understand why he had been pushing the
concept of joint venturing and ultimately crafted a consensus on
the need for this approach on at least one of the company’s new drug-
development projects.
Top executives need feedback—here’s how they can get it 67

Above all, this CEO learned that asking for advice and coaching was a
sign of strength rather than weakness. Using these techniques,
he now found that he could rely more heavily on his subordinates for
advice and as an early-warning system for his own performance.
Furthermore, as he and his senior managers began to understand and
trust one another, many shared with him their own career aspira-
tions and concerns. Indeed, this had the impact of stabilizing his senior-
leadership group, helping the CEO retain members of the team and
generally improving morale. As a result of all these efforts, he now
reported feeling far less alone and isolated. While he regretted not
having taken this approach sooner, he was optimistic that he was now
on the right track.

Push feedback further:

The ‘clean sheet of paper’ exercise

As CEOs and other senior leaders strengthen their networks of junior

coaches and build better relationships with subordinates, a broader
culture of coaching and learning can take root in an organization.
Employees at various levels become more motivated to give upward
feedback when they see that it has a direct and positive influence
on both senior-leader behavior and company actions.

Building on this progress, CEOs can take further steps to getting

valuable input on key strategic questions. This is essential in a constantly
changing world where industries and customers evolve and busi-
nesses can easily get out of alignment. In many cases, external shifts
may be difficult for senior leadership to recognize, and otherwise
vocal employees at the “point of attack” may not feel sufficiently informed
or empowered to voice their views. In addition, existing strategic-
planning and business review processes may not surface and confront
these issues in a sufficiently timely and effective fashion.

Consider the experience of the CEO of an industrial-products company

who was worried about the potential erosion of his company’s com-
petitive position. This CEO was widely respected in his company and
industry and had done an excellent job of developing strong upward
coaching relationships with subordinates.

The company had been built around a group of high-value-added pro-

ducts and several follow-on innovations, and had built very strong
customer relationships over many years. However, the CEO was growing
68 2011 Number 4

increasingly concerned that key competitors had taken specific

actions that would strengthen their value propositions to his customers.
He was also concerned about the commoditization of some of his
company’s legacy products. He believed that dramatic changes might
be needed to meet these threats but feared that potential remedies—
shutting down product lines, selling businesses, and restructuring how
sales and product development interacted to serve customers—might
damage the organization’s culture and morale.

Four ways to get better feedback

1 2
Cultivate junior Practice
coaches self-disclosure

Write down a realistic assessment Write down one or two funda-

of your specific strengths and
weaknesses. List five subordinates
who could give you specific
feedback—particularly about your
weaknesses.
Meet with each person individually
and explain that you need his
or her advice. Ask each to identify
at least one or two specific
tasks or skills they believe you could
improve upon. Ask follow-up
questions. Afterward, thank them
for their help.
mental facts about yourself that
would, if disclosed, help sub-
ordinates understand you better.
This might include a bit about
your personal story, upbringing,
likes, passions, pet peeves,
aspirations, or worries. Find
opportunities to share this
information.

Encourage your direct reports

to do this same exercise with their
direct reports.
Top executives need feedback—here’s how they can get it 69

This CEO’s concerns raised questions that went beyond typical

coaching. Further, he believed that the issues were too substantial and
even controversial to be adequately handled by the company’s regular
strategic-review discussions and processes. Because his leadership
team was closely knit, he sensed that senior leaders were walking on
eggshells when they debated these issues—they were hesitant to be
perceived as criticizing colleagues or unintentionally offending the CEO.
He admitted that his senior team might be “too close” to the issues

3 4
Improve your Assess your
ability to frame business with
and discuss a ‘clean
key questions sheet of paper’

Identify a handful of key Select a small team comprising

questions that your team should
debate and discuss.
Make a habit of writing down
one or two such questions
before leading team meetings
and engaging in one-on-one
discussions.
When facilitating group discussions,
take care to frame key questions,
actively listen to the responses, and
foster debate.
Immediately afterward, write
down what you learned and identify
appropriate next steps.
your next generation of leaders.
Ask them to examine a specific
issue or assess your enterprise as
if they could start from scratch.
Select team members based
on your company’s succession
plan—including potential
successors for your own job as
well as for your direct reports.
Frame the issues and ground
rules for this group up-front, and
make sure it is allowed to
operate independently (without
your influence) until it reports
its findings.

Encourage subordinates to try

this exercise in their own areas of
responsibility.
70 2011 Number 4

to recognize and propose appropriate actions. He even wondered whether

it was too emotionally difficult for them to face what needed to be done.

The CEO decided to take an unorthodox step. He created a task force

of six senior and midlevel up-and-coming executives and challenged
them to look at the business with a clean sheet of paper, asking: “If
you had to start this enterprise from scratch today, are these the markets
we would serve? Are these the products we would offer? Are these
the people we would hire? Is this the way we would organize, pay, and
promote our people? What changes do we need to make, given our
distinctive competencies and strategic aspirations?” He gave them six
weeks to complete the assignment (in addition to their day jobs) and
impressed upon them that there should be no “sacred cows” and that
they should not worry about being “politically correct” in their find-
ings. He also explained that, while he might not adopt all of their pro-
posals, he wanted to hear each of their recommendations and ideas.

Six weeks later, the team came back with several bold recommendations.
The team suggested divestiture of two aging product lines that,
up until then, had been considered off-limits by the senior leadership
because they had once been run by the CEO and were seen as part
of his legacy. They also suggested a number of organizational changes,
including building out the sales and customer service functions,
developing (or acquiring) an upgraded emerging-market distribution
capability, and realigning the company’s compensation incentives.

The CEO was astounded by the audacity of the advice—and surprised

that he completely agreed with it. He realized that he might have
been too close to the business to recognize what needed to be done and
felt liberated to get these specific proposals. As a next step, the
CEO had the task force present its findings to his senior-leadership team,
which agreed unanimously with the recommendations and immedi-
ately began working on plans to implement them.

One year later, the CEO reported that the changes were difficult but
had substantially strengthened the company. He felt much more
confident about the company’s future and the strength of his leadership
team. Further, he decided to launch a strategically focused “clean-
sheet-of-paper” task force every one to two years to complement the
company’s regular strategic processes. He and his leadership team
believed this new approach would allow them to create a fresh inter-
vention capability that wasn’t subject to the potential inertia and
political pressures of the regular strategic processes. Further, this
 Top executives need feedback—here’s how they can get it 71

exercise created an opportunity to challenge up-and-coming execu-

tives and see them in action, while providing participants with a highly
motivating learning experience.

This approach builds on efforts to create an upward coaching environ-

ment for senior leaders. It allows you to get coaching that is grounded
in the strategic needs of the business and is also an excellent way to take
a fresh look at your company. It reinforces the need for leaders to
have the courage to frame the right questions and ask for help from their
people. This type of approach, combined with strong individual
coaching processes, can help build a powerful competitive advantage
for your organization.

The approaches in this article are intended to help you take greater
ownership of getting feedback and should complement the 360-degree
feedback process or board review processes that your company
already uses. While 360-degree feedback is very valuable, it typically
occurs at the end of a year and therefore often lags in highlighting
key issues. In a fast-changing world, you need a more active approach
for getting coaching and real-time advice. Some of the activities
suggested in this article (see sidebar, “Four ways to get better feedback”)
may feel awkward at first. But I would encourage you to overcome
some initial discomfort in order to take greater ownership of getting
feedback. By developing this mind-set, you will improve your
ability to ask the right questions, as well as dramatically upgrade your
effectiveness and the performance of your organization.

Robert S. Kaplan is a professor of management practice at Harvard

Business School and cochairman of Draper Richards Kaplan
Foundation, a global venture philanthropy firm. He was previously vice
chairman of Goldman Sachs.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
72

Special report

Oil’s uncertain
future
What you need to know
Over the past six months, oil prices
have dropped sharply, amid concerns
about a double-dip recession, and
approached $120 a barrel as supply
disruptions in Libya roiled global
markets. Hang onto your hats because
we may just be getting started. Read
in this package about long-term
supply-and-demand trends that could,
if not mitigated through coordinated
global action, cause a price shock.
Then explore the strategic implications
of high, volatile oil prices and the
actions some supply chain leaders are
already taking to prepare.

74
Another oil shock?
Tom Janssens, Scott Nyquist,
and Occo Roelofsen
78
The automotive
sector’s road to greater
fuel efficiency
Russell Hensley and
Andreas Zielke
84
Anticipating economic
headwinds
Jonathan Ablett, Lowell
Bryan, and Sven Smit
87
Building a supply
chain that can withstand
high oil prices
Knut Alicke and Tobias
Meyer
73

Artwork by Raymond Biesinger

74

Another oil shock?

Tom Janssens, Scott Nyquist, and
Occo Roelofsen

It’s possible, though far from certain,

that oil prices will spike in the years ahead.
Here’s why—and how you can prepare.

It’s been a while since the world has been truly preoccupied with
the threat of sustained high oil prices. The global economic recovery has
been muted, and a double-dip recession remains possible.

But that dour prospect shouldn’t make executives sanguine about the
risk of another oil shock. Emerging markets are still in the midst of a
historic transition toward greater energy consumption. When global
economic performance becomes more robust, oil demand is likely to
grow faster than supply capacity can. As that happens, at some point
before too long supply and demand could collide—gently or ferociously.

The case for the benign scenario rests on a steady evolution away from
oil consumption in areas such as transportation, chemical production,
power, and home heating. Moves by many major economies to impose
tougher automotive fuel efficiency standards are a step in this direction.
However, fully achieving the needed transition will take more strin-
gent regulation, such as the abolition of fuel subsidies in oil-producing
countries, Asia, and elsewhere, as well as widespread consumer behav-
ior changes. And historically, governments, companies, and consumers
have been disinclined to tackle tough policy choices or make big
changes until their backs are against the wall.

This inertia suggests another scenario—one that’s sufficiently plausible

and underappreciated that we think it’s worth exploring: the pros-
pect that within this decade, the world could experience a period of
significant volatility, with oil prices leaping upward and oscillating
 75

between $125 and $175 a barrel (or higher) for some time. The resulting
economic pain would be significant. Economic modeling by our col-
leagues suggests that by 2020, global GDP would be about $1.5 trillion
smaller than expected, if oil prices spiked and stayed high for sev-
eral years.

But like any difficult transition, this one also would create major
opportunities—for consumers of energy to differentiate their cost struc-
tures from competitors that aren’t prepared and for a host of energy
innovators to create substitutes for oil and tap into new sources of supply.
Furthermore, if we endured a period of high and volatile prices that
lasted for two or three years, by 2020 or so oil could face real competition
from other energy sources.

To paint a clearer picture for senior executives of what such a world would
mean for them—and how to prepare now—we asked several colleagues
to join us in a thought experiment about the impact of a prolonged oil
price spike. Russell Hensley and Andreas Zielke, from McKinsey’s
automotive practice, explain how intensified regulation already is leading
a transition toward greater fuel economy, as well as the potential for
higher oil prices to reinforce that momentum. Jonathan Ablett, Lowell
Bryan, and Sven Smit, from McKinsey’s strategy practice, assess the
global economic impact of an oil price spike and the strategic implications
of a slower-growth environment. Finally, Knut Alicke and Tobias
Meyer, from McKinsey’s operations practice, describe energy-efficient
supply chain strategies that some companies are already undertaking.

A delicate balance

The world is very far from running out of oil. By most estimates, at
least a trillion barrels of conventional oil still reside beneath the earth’s
surface, not to mention several trillion more barrels of oil or gas that
could be extracted through unconventional sources, such as oil sands.

More relevant for prices, though, is how much spare oil production
capacity exists in the world. Three million or four million barrels a day
typically represents a comfortable buffer when the global economy
is healthy. If that buffer shrinks, and markets expect strong demand
growth to continue, prices can rise—sometimes dramatically. That’s
what happened prior to the 2008–09 financial crisis as surging emerging-
market demand strained production capacity and prices approached
$150 a barrel. This fly-up was short lived because the ensuing deep reces-
76 2011 Number 4

About the research
McKinsey’s global energy perspec-
tive rests on detailed modeling of
a variety of scenarios for economic
growth, for energy demand across
15 industries in 20 regions, and
for the evolution of energy supplies
extending well beyond conven-
tional oil to include 34 different
types of fuel.
The “gentle collision” and “violent
adjustment” scenarios described
here aren’t the only possibilities,
of course. Others include a period
of prolonged economic stagnation
and an intermediate scenario in
which prices remained high (say,
between $100 and $125 a barrel),
slowing demand growth enough to
avert an oil price fly-up unless a
major supply disruption took place.
sion wiped out between three million and four
million barrels a day of demand, sending oil prices
sharply down.
During the sluggish recovery that followed, the
global supply cushion shrank again, punctuated in
the first half of 2011 by Libya’s civil war, which
disrupted supplies from that country and knocked
off a million barrels a day of global capacity. That
tightness set the stage for price fly-ups to $120 a
barrel in the first half of this year and under-
scores the strength of the pre-2008 fundamentals.
Going forward, barring prolonged economic stag-
nation, demand growth for liquids1 is likely to
chug ahead at around 1.5 percent a year. The pace
would be even faster without the steady improve-
ments in energy efficiency that we and other energy
analysts foresee, particularly for cars and trucks
as a result of technology improvements and stiffening
regulatory standards that are already on the books.

Could supply growth accelerate to keep pace? Many industry ana-

lysts and our own supply model suggest that it won’t be easy. Despite
high oil prices for much of the past decade and surging investment
outlays by many major private and national oil companies alike, capacity
has risen by only slightly more than 1 percent a year during that
time. The logistics, supply systems, and political alignment needed to
extract new oil supplies make that a complex, expensive, and time-
consuming business. And coaxing more output out of existing oil fields,
which typically have high production-decline rates, also is costly
and challenging.

Our current projections suggest that in a “business as usual” scenario,2

the world could reach a realistic supply capacity of around 100 million
barrels a day by 2020, up from 91 million or 92 million today. That,
however, would barely suffice to meet the roughly 100 million barrels of
liquids the world would consume each day in such a scenario, up from
88 million or 89 million today.

1 For the sake of simplicity, in most of this article we use the term “oil” as short-hand for

“liquids,” which comprise all liquid fuels derived from crude oil, as well as liquid fuels from
natural-gas liquids (NGLs), biofuels, gas to liquids (GTLs), and coal to liquids (CTLs).
2 Our business-as-usual scenario assumes that between 2010 and 2020, the world economy

will grow at the rate currently anticipated by many analysts (3.0 to 3.5 percent) and that oil
prices won’t significantly exceed $100 a barrel during this period.
Another oil shock? 77

When supply and demand collide

Simple math suggests that at some point, something has to give. And
when it does, the world will have to start taking steps away from today’s
oil dependence. The question is how rapid and volatile that transition
will be.

The case for a gentle collision

This critical shift could happen in an orderly fashion, without price spikes,
if governments, companies, and consumers worked together to acceler-
ate the adoption of measures that reduce demand. Indeed, a common
denominator of current forecasts by industry analysts (including our-
selves) is a gradual transition in most regions toward lower oil intensity
in transportation, power, and residential heating. But according to
our analysis, it would take more than current trends in oil conservation
(spurred by existing legislation) for supply to meet demand if robust
economic growth returned.

A few examples illustrate the scale and scope of the task facing the world
if we are to realize a gentle transition. Governments would need to
raise auto fuel efficiency standards further, and consumers would need to
place greater emphasis on fuel economy when they bought new cars
(see sidebar, “The automotive sector’s road to greater fuel efficiency”). Policy
makers in several developing countries would need to abolish fuel sub-
sidies so that consumers felt the real price of oil. Around the world, we’d
need to see deeper reductions in the use of oil for heating, power gen-
eration, and chemical manufacturing. Some transport by ships and heavy
trucks would need to start shifting toward more reliance on natural
gas as a fuel.

Changes like these could push oil supply and demand roughly into balance.
However, they would require new policies and significant changes in
how consumers and businesses behave. What’s more, they would need to
start now because it will take years before the changes required to
constrain oil consumption begin to take effect. If we do not succeed in
implementing these changes in a farsighted way, the system faces a
risk of falling out of balance.

Why the adjustment could be violent

That brings us to a second scenario: it’s possible to imagine global supply
and demand for oil colliding faster, and more ferociously, resulting
in a price spike as the global capacity buffer melted away. As we’ve said,
anticipated economic growth alone could cause demand to expand
faster than supply. Another possible trigger: supply disruption, which
78 2011 Number 4

does happen from time to time. The possibilities include an exception-

ally severe hurricane in the Gulf of Mexico, violence in the Niger Delta,
instability in Venezuela, and further tension in the Middle East.

If this new price spike took place, it could have a more significant impact
on global consumption patterns than most executives expect. For
starters, it would hit global growth, which in turn would immediately
knock down oil demand. In addition, there would be some rapid behav-
ioral effects, such as a reduction in car, air, and sea travel. If the spike
lasted longer, it could cause several more structural shifts, such as
prompting individuals to use different modes of transport or even to look
for work closer to home, encouraging companies to reverse offshoring

prices, has responded in the past by

The automotive pushing design improvements and
sector’s road to greater productivity gains that make room for

fuel efficiency costly new content, including tech-

Russell Hensley and Andreas Zielke
Regulatory standards already in place
should dramatically enhance the
efficiency of autos around the world.
The European Union’s carbon emis-
sions rules, for example, require
annual improvements of 6 percent a
year between 2015 and 2020. This
implies, according to our analysis, that
new cars driving on European roads
will consume 40 to 50 percent less
fuel in 2020 than they did in 2010.
Regulators in China, Japan, and the
United States are also eyeing ambi-
tious rates of improvement, albeit from
different starting points. US fuel
economy levels in 2020—at around
40 miles a gallon—would lag behind
China’s in that year and simply match
Europe’s 2010 levels.
The automotive industry, boxed in by
fierce global competition and flat
nology required for meeting regulatory
standards. Here’s one example: if
you adjust for inflation the cost of a
2001 Toyota Camry, you see that
by 2010, the price of the car to US con-
sumers had actually dropped by
$2,500 in real terms—although the
2010 Camry was better equipped and
10 percent more fuel efficient. As
automakers work hard to meet new
and tougher fuel economy stan-
dards, they are likely to follow the
same playbook. The starting point:
improving internal-combustion
engines, which still offer significant
opportunities to enhance efficiency
and emissions performance. On
the other hand, high battery costs
would be likely to require automakers
to raise prices, making a sweeping
shift to electric vehicles more difficult
between now and, say, 2020.
A sustained oil price spike could
well prompt regulators in mature
economies to up the ante—for
example, by increasing support for
Another oil shock? 79

trends and bring supply chains closer to home, accelerating the

substitution of videoconferences for air travel, and pushing the freight
transport industry to adopt less oil-intensive modes.

Because such shifts would take time, a high-price environment could last
for years, not months, accelerating several other ongoing trends that,
when combined, could lead to even further demand reductions. In other
words, a sustained price spike could scare consumers, companies, and
governments into more drastic responses—accelerating the transition to
a less oil-dependent economy. A price spike of one to three years could
be long enough to make governments raise standards for fuel efficiency at
an accelerated pace and prompt automakers, reacting to regulatory

electric vehicles—and speed a broader former, the share of autos running on

adoption of tougher standards in
developing economies, which will rep-
resent most of the new demand
for transportation fuel going forward.
This would create additional momen-
tum for change.
Still, for a major shift in the global auto-
motive stock to occur within the
decade, consumer behavior or tech-
nology would need to change in
dramatic and currently unforeseen
ways. One possibility would be for
a higher proportion of car buyers to
begin prioritizing fuel economy.
While the importance of this factor
varies around the world, our con-
sumer research suggests that in two
major car markets, Germany and
the United States, car buyers rank this
attribute outside the top ten they
consider when buying a new car.1
Significant consumer change is likely
to require compelling economics that
don’t take many years of ownership
to realize. Comparing Europe and the
United States highlights the mag-
nitude of the challenge: although gas-
oline prices are twice as high in the
oil-based derivatives (gasoline and
diesel) and alternative fuels is roughly
the same in both. For the economics
to become more appealing, advanced
technology, especially electric-
vehicle batteries, would need to come
down the cost curve faster than
expected while oil and gasoline prices
crossed some new threshold of pain.
1We conducted online interviews with
2,200 new-vehicle buyers in Germany and
the United States. The sample included
purchasers of cars, trucks, flex-fuel vehicles,
and diesel vehicles, weighted to match
the demographic characteristics and
brand and power train preferences of each
national market. Consumer rankings of
attributes, derived through conjoint analysis,
represented the implied importance attached
to them by buyers. Implied importance often
differs from stated importance but can be
more accurate because it is less likely to
reflect respondents’ beliefs about the answers
they are “expected” to provide.
Russell Hensley is a principal
in McKinsey’s Detroit office, and
Andreas Zielke is a director in the
Berlin office.
80 2011 Number 4

changes, to modify their product-development road maps. Ultimately,

all this would lead to more rapid efficiency gains and potentially to faster
electric-vehicle penetration.

A prolonged price spike also could prompt investments in infrastruc-

ture needed to support the use of electric vehicles or other alternatives
(such as natural gas and hydrogen) to traditional fuel sources. Such
investments could have an impact on oil demand for trucking, light
vehicles, and shipping. What’s more, very high oil prices would inten-
sify energy efficiency efforts up and down the supply chain and reduce
the amount of plastics used in packaging, thus shrinking demand for
oil in chemicals. Additional government action, in the form of either
more stringent regulation on the use of plastics or subsidized financing
that reduced the up-front cost to consumers of switching away from fuel
oil in residential heating, could play an important role in this transition.

All along the way, of course, these reactions, plus slower global growth,
would do their part to exert some downward pressure on oil prices.
Expanded supply would also play a role. From now to 2020, OPEC3
could increase its capacity by, say, two million barrels a day above
currently assumed increases, and new investments in mature assets
could slow decline rates, leading to an additional one million to
two million barrels of daily production. Furthermore, additional invest-
ments in unconventional oil sources, such as oil sands, could increase
supply by, say, one million to two million barrels a day. Biofuels, too,
would have room to grow. But given the time it would take to pur-
sue some of the available opportunities—and the danger that they could
quickly become uneconomic once oil prices fell—the supply response
is likely to be slower and more muted than that of demand.

In the end, once all the efficiency gains and supply expansions described
above kicked in (exhibit), the world could again wind up in balance
and with significant excess capacity, so that eventually—perhaps by 2020,
perhaps later—prices fell below the $80 to $100 range. Until then,
however, given how slowly many of the demand changes would unfold,
it’s only prudent to imagine the possibility that the world could
experience a prolonged period of both significant volatility and generally
much higher prices.

3 Organization of the Petroleum Exporting Countries.

 Q4 2011
Oil price spikes
Another oil shock? 81
Exhibit 1 of 1

If a sustained oil price shock took place in the years ahead,

conservation measures could reduce oil demand by 10 million
to 20 million barrels a day.

Demand for liquids,1 million barrels a day (rounded estimates)

Marine
Light vehicles Medium/heavy Air traffic Power
vehicles Chemicals Buildings Other industries

Mid-
20 17 11 8 5 4 5 19 ~88–89
2011

Business-as-usual scenario

2020 22 20 14 9 6 5 4 20 100

Scenario with conservation measures 2.5–3.0

7.5– 4.5– ~4.5

2020 17–19 15–17 12.5–13.0 5.5 17–19 ~80–90
8.5

Examining the difference between business as Relative contribution to reduction in consumption

usual in 2020 and a scenario with conservation measures,
Immediate reduction caused by slower GDP
reduction in liquids1 demand in million barrels a day (mbd) growth and other factors as noted

Structural reduction, requiring investment by

consumers or industry

Light vehicles Medium/

heavy vehicles

Total reduction Immediate: less discretionary travel
of
Structural: permanent shifts in
3.0–5.0 consumer behavior and accelerated
mbd
technology development (eg, gas
mileage improvements and penetration
by alternative power trains)
Total reduction Immediate: no-regret, low-investment
of moves (eg, truck-route optimization,
3.0–5.0 smarter driving)
mbd
Structural: increasing truck sizes,
accelerating improvements in fleet
efficiency, powering vehicles with natural
gas, and transporting more goods by rail

Chemicals Buildings

Total reduction Some substitution away from certain end Total reduction Increasing efforts by governments to
of products (eg, plastic packaging, polyester of encourage consumers and industries to
1.0–1.5 fiber) and toward different feedstocks (eg, 0.5–1.5 move away from use of oil in heating
mbd palm oil, natural rubber, gas) mbd

Air traffic Marine

Total reduction Immediate: decrease in passenger Total reduction Immediate: no-regret moves such as
of travel, shifting of some freight to other of reducing vessel speed
0.5–1.5 modes (eg, to maritime shipping) ~0.5 Structural: using natural gas as a fuel
mbd Structural: moving production mbd (particularly in coastal waters) and
processes closer to consumption moving production processes closer to
markets, increasing rail infrastructure consumption markets
in countries such as China

Power Other
generation industries

Total reduction Accelerating efforts to move away Total reduction Immediate: reduction in oil-refining
of from use of oil in power generation, of demand due to lower production
1.0–1.5 especially in the Middle East 1.0–3.0 Structural: potential for fuel efficiency
mbd mbd improvements or substitution away
from oil-based inputs (eg, in agriculture,
construction, oil refining, and rail
transport)

1 All liquid fuels derived from crude oil, natural-gas liquids (NGLs), biofuels, gas to liquids (GTLs), and coal to liquids (CTLs).
82 2011 Number 4

Preparing for the unexpected

If the shock scenario outlined above unfolded, sustained high oil prices
would challenge the top and bottom lines of many companies. How-
ever, high prices also could create opportunities for companies to differen-
tiate themselves from competitors whose cost structures and operating
approaches were ill suited to the new environment. And for companies on
the front lines of the resource productivity revolution, a prolonged oil
price increase would be beneficial. Providers of a range of new technologies—
from car batteries for electric vehicles, to horizontal drilling and other
tools for unconventional oil extraction, to biofuel production techniques,
to electricity cogeneration equipment for manufacturers—would see
their businesses grow, faster, than they would in a world of lower oil prices.

In many cases, these companies would be supplying or partnering with

more established firms: oil companies in need of unconventional extraction
technologies, auto manufacturers trying to create the winning vehicle
of the future, and chemical companies hoping to take advantage of new
feedstock sources, for example. From a strategic perspective, the inter-
esting question is who would grab the most profitable positions in the new
energy ecosystem.

No less fascinating are the managerial implications of the second-order

and feedback effects that would occur as this ferocious collision played
itself out. For example, our analysis suggests that even if prices subsequently
fell, companies that pursued strategies for reducing their dependence
on oil would be unlikely to regret it. One reason is that many strategies
are already “in the money” at today’s prices. If prices got high enough,
they would concentrate the attention of consumers, businesses, and govern-
ments sufficiently to promote many positive-return investments that
haven’t been implemented so far, because of behavioral inertia. This devel-
opment would accelerate the changes in our capital stock, while
leaving them economically viable even if prices fell again.

If the shock scenario unfolded, sustained

high oil prices would challenge the top
and bottom lines of many companies. However,
high prices also could create opportunities.
Another oil shock? 83

Furthermore, many technologies could become significantly cheaper as

demand for them increased and their providers went down learning
curves. Examples include batteries for vehicles, highly efficient internal-
combustion engines, and certain biofuel technologies, such as those
that are cellulosic or perhaps even based on algae. In a high-price
environment, more capital would flow into these technologies, enabling
them to scale up. The time needed for them to become economically
attractive would fall by five or even ten years compared with the time
frame if oil prices stayed at lower levels, potentially making these
technologies economically viable even if oil prices subsequently fell.

Indeed, a striking and often-underestimated feature of energy price shocks

is the nonlinearity of their impact. Take electric vehicles. The market
for car batteries would likely be about five or ten times larger if oil prices
stayed for a considerable period at $150 a barrel than it would be at
$100 a barrel. Few corporate-planning processes, however, place sufficient
emphasis on extremes like this—even though these are precisely the
scenarios that produce many of the most interesting opportunities and
powerful threats for a business. Building corporate processes and
skills that enable thoughtful reflection on a wider, more volatile range of
outcomes could be a significant competitive differentiator in the years
to come.

In the long run, these structural changes could well be a positive

development for the world—resulting in more predictable and sustainable
energy supplies and prices. But navigating the transition would be
challenging and would reward the well prepared. The time is now for
companies to start planning for the possibility of another price shock
and a powerful market response.

The authors wish to acknowledge the contributions of

Tim Fitzgibbon, Pedro Haas, Yousuf Habib, Matt Rogers, Valerie Tann,
and Koen Vermeltfoort to the development of this article.

Tom Janssens is a principal in McKinsey’s Houston office,

where Scott Nyquist is a director; Occo Roelofsen is a principal in
the Amsterdam office.
84

Anticipating economic
headwinds
Jonathan Ablett, Lowell Bryan, and Sven Smit

High, volatile oil prices would place a

premium on fine-grained growth approaches
and dynamic management processes.

If crude-oil prices rose to $125 or $150 a barrel and stayed there

long enough—for years, not months—global growth would undoubtedly
suffer. Indeed, we estimate that this type of shock would drive down
global growth by 0.6 to 0.9 percentage points in the first year.1 Over time,
as economies adjusted to the new higher prices (and shifted to differ-
ent types of fuel, technologies, and production techniques) the impact
would diminish. But the rate of global GDP growth would be affected
for years. By 2020, the global economy would be between $1.1 trillion
and $1.7 trillion smaller than the baseline outlook: the equivalent of
losing Spain’s or Italy’s output for a year.

A sustained growth drag of that magnitude would be serious, particularly

for Europe and the United States, which are already suffering from
sluggish recoveries and lingering unemployment. It could contribute to
a double-dip recession in those markets and to trouble in the global
economy as a whole, which also is fragile and faces other potential shocks,
including sovereign-debt defaults, inflation in emerging markets, and
problems in the Chinese financial sector.

Senior executives can reduce the odds of getting whip-sawed by the

impact of an oil price spike if they push their planning teams to evaluate,
at a fairly granular level, the likely growth impact of surging energy

1 All GDP and growth estimates in this article are the result of economic analysis we and our

colleagues in McKinsey’s strategy practice conducted using the firm’s global-growth model,
a tool for long-term scenario planning. The model links energy and capital markets to output
and highlights relationships between growth and structural factors such as urbanization,
education, and industry structure shifts. It can generate globally consistent scenarios for 20
countries, nine regions, and the world as a whole.
Q4 2011
85
Oil and growth sidebar
Exhibit 1 of 1

Highly industrialized, export-oriented economies are more

vulnerable to oil price shocks.

Potential reduction in GDP growth in first year of high oil prices,

percentage points

China South Germany, France,

Africa India, Japan United Kingdom,
United States
Industrial sector’s share
50% 28% ~30% ~21%
of GDP, 2010

0.4
0.6 0.6
$125 a barrel 1.0
0.6

0.9
1.0

$150 a barrel 1.5

prices. Where are customers most vulnerable to energy cost increases,

and where would they be less significant? In fact, our modeling suggests
that the country-level impact of spiking oil prices would be quite uneven—
and not just because of differences in the energy efficiency of various econ-
omies. Even more important, our analysis indicates, are variations in
the relative size of the industrial sector in different countries. That means
export-oriented advanced manufacturing economies, such as Germany
and Japan, are more vulnerable than their relative energy efficiency might
indicate (exhibit).

In addition, business leaders should be preparing for a world in which

energy-related growth slowdowns could occur in an oscillating and
unpredictable manner. For example, oil prices might fly up to a point
(far in excess of $125 a barrel) where global GDP growth completely
stalled and new sources of energy supply rapidly became economic. That,
in turn, might drive prices down somewhat, leading to a resumption
of economic growth and a repetition of the cycle. In a world like that,
management approaches that some companies experimented with
during the financial crisis—such as shorter financial-planning cycles or
even moving away from calendar-based approaches to budgeting and
planning—may be important.2

When you combine the likelihood of oil price volatility with related
uncertainties—such as the potential for swings in the dollar versus other

2 For more on principles for managing in extreme uncertainty, see Lowell Bryan, “Dynamic

management: Better decisions in uncertain times,” mckinseyquarterly.com, December 2009.

86 2011 Number 4

currencies and commodities as global economic activity rebalances from

the developed world toward emerging markets—you may want to
abandon any presumption that you can predict medium-term oil prices.3
Indeed, it may be more fruitful to stress-test your financial plans
and strategies for different oil (and currency) prices, see what happens
to the plans at the extremes, and then prepare for contingencies.
One example: if oil prices rose significantly, that would accelerate the
accumulation of capital by sovereign-wealth funds in oil-producing
countries, complicating financing decisions and raising the importance
of building strong relationships with a diverse group of capital suppliers.4
In general, using multiple scenarios for even base-case planning, and
developing a portfolio of responses to each scenario, will enable you to
act swiftly when you can see where prices are moving.

3 For more on uncertainties related to global economic rebalancing, see Lowell Bryan,

“Globalization’s critical imbalances,” mckinseyquarterly.com, June 2010.

4 For more on diversifying sources of financing, see Richard Dobbs, Susan Lund, and

Andreas Schreiner, “How the growth of emerging markets will strain global finance,”
mckinseyquarterly.com, December 2010.

Jonathan Ablett is a consultant in McKinsey’s Waltham Knowledge

Center, Lowell Bryan is a director in McKinsey’s New York office, and
Sven Smit is a director in the Amsterdam office.
 87

Building a supply chain

that can withstand high
oil prices
Knut Alicke and Tobias Meyer

Opportunities abound to boost supply chain

efficiency. Most are in the money today,
and will become even more attractive if oil
prices rise.

We don’t need to look very hard for a live case study of what hap-
pens to global supply chains when oil prices spike. Just three years ago,
when they shot up to $125 and beyond, it became painfully obvious to
many companies that their supply chains were not viable at those levels.

Research we conducted at that time indicated that even if oil prices were
as low as $40 a barrel, it would still make economic sense for compa-
nies to take a variety of actions that collectively would reduce the energy
intensity of global supply chains by almost one-fourth. Energy intensity
could be reduced by more than one-third if oil prices stayed above $100 a
barrel for a prolonged period (exhibit). The potential would be even
greater at higher prices.

Here are some of the opportunities that far-sighted companies are begin-
ning to act on:

Utilizing space-saving packages. A retailer and a wholesaler partnered

to create a new, stackable format for milk containers. As a result, they
no longer need traditional shipping crates for truck transport, thus freeing
up additional space for other cargo and avoiding the need to haul back
the empty crates.

Operating larger ships and trucks. Vale, the Brazil-based miner, took
delivery this year of its first new ultralarge ore carrier, with 400,000
deadweight tons of capacity—more than twice that of today’s standard
vessel on the most important trade routes—to ship iron ore from Brazil to
China. Scale is important because doubling the capacity of a transport
 Q4 2011
Supply chain sidebar
88
Exhibit 1 of 1 2011 Number 4

If oil is priced at $100 a barrel, a number of activities to reduce the

energy intensity of global supply chains become economically feasible.

Potential reduction in energy intensity (fuel consumption per gross output) from 2007 baseline,1 %

Levers for supply chain setup

Overall –3 Increase value density2 Reduce packing volume

potential fuel
savings = 38%
–4 Reduce average Redesign geography of production
transportation distance and sourcing to reduce distance that
products travel

–4 Change the mix of Shift from air freight or trucking to

transportation modes shipping or rail

Levers for transport assets

Address asset technology Increase scale, reduce relative

–20 (eg, rail, tanker, trucking) drag, increase payload ratio,3 improve
efficiency of propulsion systems

–12 Assess usage of individual Address factors such as speed,

assets load factor, maintenance regime, and
route planning

Assess usage of Find ways to avoid congestion,

–2
collective assets upgrade infrastructure, or engage
in “smart traffic management”

1 Assumes informed behavior by shippers, providers, investors, and government, over 10-year period; figures for first 3 levers are based
on fuel consumption after other 3 levers have been implemented. When used in combination, multiple levers do not yield the sum of
their individual potential, because each successive lever addresses an already reduced base.
2Value density is measure of product’s economic value against its weight or volume.
3Relative drag is energy needed for propulsion of a unit of given size at given speed; payload ratio is cargo-carrying capacity of transport
asset relative to its total weight when fully loaded.

asset typically increases its energy efficiency by one-fourth. The same goes
for trucks too. In emerging markets, where average truck size is less than
half that in OECD1 countries, partly because of poorer infrastructure and
smaller retail outlets, every percentage point of average truck size would
reduce fuel consumption per unit of capacity by about 0.4 to 0.6 points.

Combining new technologies. Maersk, the Danish container liner, used

most of the available technological advances when it placed orders for its
new 400-meter-long vessels, each with space for 18,000 20-foot container
units. These vessels set a new benchmark in maritime energy efficiency
by virtue of their size, slower speed, design improvements, and a waste
heat–recovery system that reduces the engine’s fuel consumption.

Switching to alternative fuels. A road transport company recently esti-

mated that it would save €15,000 a year per truck by converting its small
fleet to run on vegetable oil rather than traditional diesel fuel. Because
of North America’s recent flood of supply of natural gas, companies could
also convert fleets to run on liquified natural gas (LNG) instead of diesel.
1 Organisation for Economic Co-operation and Development.
 Building a supply chain that can withstand high oil prices 89

Practicing smarter driving. Examining data collected by onboard com-

puters, a logistics company found significant differences in the driving
patterns and fuel consumption of drivers. Shifting to best practice could
shave 10 percent off its $4 million annual fuel bill, with onboard com-
puters helping employees drive more economically.

Regulators also have a role to play. In the United States, the fuel efficiency
gain of lowering the cap on truck speeds on highways could be 7 to 10 per-
cent. Truck speeds are already capped to lower levels in Europe. But
there are still opportunities—for instance, allowing longer (and potentially
heavier) truck/trailer combinations in Europe’s road transport market
could reduce its use of diesel by around 15 percent.

These examples are just the tip of the iceberg. Further existing technological
opportunities—such as trucks with better aerodynamics and ocean
vessels with new, friction-reducing hull coatings—are economical at the
$100-a-barrel prices that have prevailed recently. High prices also
should induce companies to cut the distance products travel. Moving final
assembly into regions of demand would make it sensible to manufac-
ture less valuable components there, such as primary packaging, manuals,
or power cables for electric goods. An alternative is to ship products with
low value density by slow and more energy efficient modes of transport.

Optimizing the energy efficiency of a supply chain’s production process,

location footprint, transportation, and inventory is a complex task made
harder by inevitable tensions between the supply chain group and
functions such as sales, service, and product development. There are thorny
trade-offs—for example, between service levels and the lower speed of
energy-efficient transport

Part of the answer will be creating nimbler supply chains—for example,

by using slower, more energy-efficient modes (such as ocean freight)
for the base load and reserving the faster, less energy-efficient modes
(such as air freight) for peak demand. CEOs also will need to facilitate
meaningful discussion of important cross-functional supply chain issues
so that executives can collaborate to uphold a company’s best interests.

Knut Alicke is a consultant in McKinsey’s Stuttgart office, and

Tobias Meyer is a principal in the Frankfurt office.

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
Artwork by Patrick Hruby
 91

The second
economy
W. Brian Arthur

Digitization is creating a second economy

that’s vast, automatic, and invisible—
thereby bringing the biggest change since
the Industrial Revolution.

In 1850, a decade before the Civil War, the United States’ economy
was small—it wasn’t much bigger than Italy’s. Forty years later, it was
the largest economy in the world. What happened in between was
the railroads. They linked the east of the country to the west, and the
interior to both. They gave access to the east’s industrial goods;
they made possible economies of scale; they stimulated steel and
manufacturing—and the economy was never the same.

Deep changes like this are not unusual. Every so often—every 60 years
or so—a body of technology comes along and over several decades,
quietly, almost unnoticeably, transforms the economy: it brings new social
classes to the fore and creates a different world for business. Can such
a transformation—deep and slow and silent—be happening today?
92 2011 Number 4

We could look for one in the genetic technologies, or in nanotech, but

their time hasn’t fully come. But I want to argue that something
deep is going on with information technology, something that goes well
beyond the use of computers, social media, and commerce on the
Internet. Business processes that once took place among human beings
are now being executed electronically. They are taking place in an
unseen domain that is strictly digital. On the surface, this shift doesn’t
seem particularly consequential—it’s almost something we take for
granted. But I believe it is causing a revolution no less important and
dramatic than that of the railroads. It is quietly creating a second
economy, a digital one.

Let me begin with two examples. Twenty years ago, if you went into an
airport you would walk up to a counter and present paper tickets to
a human being. That person would register you on a computer, notify the
flight you’d arrived, and check your luggage in. All this was done by
humans. Today, you walk into an airport and look for a machine. You
put in a frequent-flier card or credit card, and it takes just three or
four seconds to get back a boarding pass, receipt, and luggage tag. What
interests me is what happens in those three or four seconds. The
moment the card goes in, you are starting a huge conversation conducted
entirely among machines. Once your name is recognized, computers
are checking your flight status with the airlines, your past travel history,
your name with the TSA1 (and possibly also with the National Security
Agency). They are checking your seat choice, your frequent-flier status,
and your access to lounges. This unseen, underground conversation
is happening among multiple servers talking to other servers, talking
to satellites that are talking to computers (possibly in London, where
you’re going), and checking with passport control, with foreign immi-
gration, with ongoing connecting flights. And to make sure the air-
craft’s weight distribution is fine, the machines are also starting to adjust
the passenger count and seating according to whether the fuselage is
loaded more heavily at the front or back.

These large and fairly complicated conversations that you’ve triggered

occur entirely among things remotely talking to other things: servers,
switches, routers, and other Internet and telecommunications devices,
updating and shuttling information back and forth. All of this occurs
in the few seconds it takes to get your boarding pass back. And even after
that happens, if you could see these conversations as flashing lights,

1 Transportation Security Administration.

 The second economy 93

they’d still be flashing all over the country for some time, perhaps talking
to the flight controllers—starting to say that the flight’s getting ready
for departure and to prepare for that.

Now consider a second example, from supply chain management.

Twenty years ago, if you were shipping freight through Rotterdam into
the center of Europe, people with clipboards would be registering
arrival, checking manifests, filling out paperwork, and telephoning for-
ward destinations to let other people know. Now such shipments go
through an RFID2 portal where they are scanned, digitally captured,
and automatically dispatched. The RFID portal is in conversation
digitally with the originating shipper, other depots, other suppliers,
and destinations along the route, all keeping track, keeping control,
and reconfiguring routing if necessary to optimize things along the
way. What used to be done by humans is now executed as a series of
conversations among remotely located servers.

In both these examples, and all across economies in the developed world,
processes in the physical economy are being entered into the digital
economy, where they are “speaking to” other processes in the digital
economy, in a constant conversation among multiple servers and
multiple semi-intelligent nodes that are updating things, querying things,
checking things off, readjusting things, and eventually connecting
back with processes and humans in the physical economy.

So we can say that another economy—a second economy—of all of

these digitized business processes conversing, executing, and triggering
further actions is silently forming alongside the physical economy.

Aspen root systems

If I were to look for adjectives to describe this second economy, I’d say
it is vast, silent, connected, unseen, and autonomous (meaning that
human beings may design it but are not directly involved in running it).
It is remotely executing and global, always on, and endlessly config-
urable. It is concurrent—a great computer expression—which means
that everything happens in parallel. It is self-configuring, meaning
it constantly reconfigures itself on the f ly, and increasingly it is also
self-organizing, self-architecting, and self-healing.

2 Radio-frequency identification.
94 2011 Number 4

These last descriptors sound biological—and they are. In fact, I’m

beginning to think of this second economy, which is under the surface
of the physical economy, as a huge interconnected root system, very
much like the root system for aspen trees. For every acre of aspen trees
above the ground, there’s about ten miles of roots underneath, all
interconnected with one another, “communicating” with each other.

The metaphor isn’t perfect: this emerging second-economy root system

is more complicated than any aspen system, since it’s also making
new connections and new configurations on the fly. But the aspen meta-
phor is useful for capturing the reality that the observable physical
world of aspen trees hides an unseen underground root system just as
large or even larger. How large is the unseen second economy? By a
rough back-of-the-envelope calculation (see sidebar, “How fast is the
second economy growing?”), in about two decades the digital economy
will reach the same size as the physical economy. It’s as if there will
be another American economy anchored off San Francisco (or, more in
keeping with my metaphor, slipped in underneath the original econ-
omy) and growing all the while.

How fast is the second

economy growing?

Here’s a very rough estimate. Since
1995, when digitization really
started to kick in, labor productivity
(output per hours worked) in the
United States has grown at some
2.5 to 3 percent annually, with
ups and downs along the way. No
one knows precisely how much
of this growth is a result of the uses
of information technology (some
economists think that standard mea-
surements underestimate this);
but pretty good studies assign some
65 to 100 percent of produc-
tivity growth to digitization. Assume,
then, that in the long term the
second economy will be responsible
for roughly a 2.4 percent annual
increase in the productivity of
the overall economy. If we hold the
labor force constant, this means
output grows at this rate, too. An
economy that grows at 2.4 per-
cent doubles every 30 years; so
if things continue, in 2025 the
second economy will be as large
as the 1995 physical economy.
The precise figures here can be
disputed, but that misses the
point. What’s important is that the
second economy is not a small
add-on to the physical economy. In
two to three decades, it will sur-
pass the physical economy in size.
 The second economy 95

This second, digital economy isn’t

producing anything tangible.
It’s not making my bed in a hotel,
or bringing me orange juice in
the morning. But it is running an
awful lot of the economy.

Now this second, digital economy isn’t producing anything tangible. It’s
not making my bed in a hotel, or bringing me orange juice in the
morning. But it is running an awful lot of the economy. It’s helping archi-
tects design buildings, it’s tracking sales and inventory, getting goods
from here to there, executing trades and banking operations, controlling
manufacturing equipment, making design calculations, billing clients,
navigating aircraft, helping diagnose patients, and guiding laparoscopic
surgeries. Such operations grow slowly and take time to form. In any
deep transformation, industries do not so much adopt the new body of
technology as encounter it, and as they do so they create new ways to
profit from its possibilities.

The deep transformation I am describing is happening not just in the

United States but in all advanced economies, especially in Europe
and Japan. And its revolutionary scale can only be grasped if we go
beyond my aspen metaphor to another analogy.

A neural system for the economy

Recall that in the digital conversations I was describing, something that

occurs in the physical economy is sensed by the second economy—
which then gives back an appropriate response. A truck passes its load
through an RFID sensor or you check in at the airport, a lot of
recomputation takes place, and appropriate physical actions are triggered.

There’s a parallel in this with how biologists think of intelligence. I’m

not talking about human intelligence or anything that would qualify
as conscious intelligence. Biologists tell us that an organism is intel-
ligent if it senses something, changes its internal state, and reacts
appropriately. If you put an E. coli bacterium into an uneven concen-
tration of glucose, it does the appropriate thing by swimming toward
where the glucose is more concentrated. Biologists would call this intel-
96 2011 Number 4

ligent behavior. The bacterium senses something, “computes” some-

thing (although we may not know exactly how), and returns an appro-
priate response.

No brain need be involved. A primitive jellyfish doesn’t have a central

nervous system or brain. What it has is a kind of neural layer or nerve
net that lets it sense and react appropriately. I’m arguing that all these
aspen roots—this vast global digital network that is sensing, “com-
puting,” and reacting appropriately—are starting to constitute a neural
layer for the economy. The second economy constitutes a neural layer
for the physical economy. Just what sort of change is this qualitatively?

Think of it this way. With the coming of the Industrial Revolution—

roughly from the 1760s, when Watt’s steam engine appeared, through
around 1850 and beyond—the economy developed a muscular system
in the form of machine power. Now it is developing a neural system.
This may sound grandiose, but actually I think the metaphor is valid.
Around 1990, computers started seriously to talk to each other, and
all these connections started to happen. The individual machines—
servers—are like neurons, and the axons and synapses are the com-
munication pathways and linkages that enable them to be in conversa-
tion with each other and to take appropriate action.

Is this the biggest change since the Industrial Revolution? Well, without
sticking my neck out too much, I believe so. In fact, I think it may
well be the biggest change ever in the economy. It is a deep qualitative
change that is bringing intelligent, automatic response to the econ-
omy. There’s no upper limit to this, no place where it has to end. Now,
I’m not interested in science fiction, or predicting the singularity, or
talking about cyborgs. None of that interests me. What I am saying is
that it would be easy to underestimate the degree to which this is
going to make a difference.

I think that for the rest of this century, barring wars and pestilence, a
lot of the story will be the building out of this second economy, an
unseen underground economy that basically is giving us intelligent
reactions to what we do above the ground. For example, if I’m driving
in Los Angeles in 15 years’ time, likely it’ll be a driverless car in a flow of
traffic where my car’s in a conversation with the cars around it that are
in conversation with general traffic and with my car. The second econ-
omy is creating for us—slowly, quietly, and steadily—a different world.
The second economy 97

A downside

Of course, as with most changes, there is a downside. I am concerned

that there is an adverse impact on jobs. Productivity increasing, say,
at 2.4 percent in a given year means either that the same number of
people can produce 2.4 percent more output or that we can get the
same output with 2.4 percent fewer people. Both of these are happening.
We are getting more output for each person in the economy, but over-
all output, nationally, requires fewer people to produce it. Nowadays,
fewer people are required behind the desk of an airline. Much of the
work is still physical—someone still has to take your luggage and put it
on the belt—but much has vanished into the digital world of sensing,
digital communication, and intelligent response.

Physical jobs are disappearing into the second economy, and I believe
this effect is dwarfing the much more publicized effect of jobs disap-
pearing to places like India and China.

There are parallels with what has happened before. In the early 20th
century, farm jobs became mechanized and there was less need for farm
labor, and some decades later manufacturing jobs became mechanized
and there was less need for factory labor. Now business processes—many
in the service sector—are becoming “mechanized” and fewer people
are needed, and this is exerting systematic downward pressure on jobs.
We don’t have paralegals in the numbers we used to. Or draftsmen,
telephone operators, typists, or bookkeeping people. A lot of that work
is now done digitally. We do have police and teachers and doctors;
where there’s a need for human judgment and human interaction, we
still have that. But the primary cause of all of the downsizing we’ve
had since the mid-1990s is that a lot of human jobs are disappearing
into the second economy. Not to reappear.

Seeing things this way, it’s not surprising we are still working our way
out of the bad 2008–09 recession with a great deal of joblessness.

There’s a larger lesson to be drawn from this. The second economy will
certainly be the engine of growth and the provider of prosperity for
the rest of this century and beyond, but it may not provide jobs, so there
may be prosperity without full access for many. This suggests to me
that the main challenge of the economy is shifting from producing pros-
perity to distributing prosperity. The second economy will produce
98 2011 Number 4

wealth no matter what we do; distributing that wealth has become the
main problem. For centuries, wealth has traditionally been appor-
tioned in the West through jobs, and jobs have always been forthcoming.
When farm jobs disappeared, we still had manufacturing jobs, and
when these disappeared we migrated to service jobs. With this digital
transformation, this last repository of jobs is shrinking—fewer of us
in the future may have white-collar business process jobs—and we face
a problem.

The system will adjust of course, though I can’t yet say exactly how.
Perhaps some new part of the economy will come forward and generate
a whole new set of jobs. Perhaps we will have short workweeks and
long vacations so there will be more jobs to go around. Perhaps we will
have to subsidize job creation. Perhaps the very idea of a job and of
being productive will change over the next two or three decades. The
problem is by no means insoluble. The good news is that if we do solve
it, we may at last have the freedom to invest our energies in creative acts.

Economic possibilities for our

grandchildren

In 1930, Keynes wrote a famous essay, “Economic possibilities for our

grandchildren.” Reading it now, in the era of those grandchildren, I am
surprised just how accurate it is. Keynes predicts that “the standard
of life in progressive countries one hundred years hence will be between
four and eight times as high as it is to-day.” He rightly warns of “tech-
nological unemployment,” but dares to surmise that “the economic prob-
lem [of producing enough goods] may be solved.” If we had asked him
and his contemporaries how all this might come about, they might have
imagined lots of factories with lots of machines, possibly even with
robots, with the workers in these factories gradually being replaced by
machines and by individual robots.

That is not quite how things have developed. We do have sophisticated

machines, but in the place of personal automation (robots) we have
a collective automation. Underneath the physical economy, with its
physical people and physical tasks, lies a second economy that is
automatic and neurally intelligent, with no upper limit to its buildout.
The prosperity we enjoy and the difficulties with jobs would not
have surprised Keynes, but the means of achieving that prosperity
would have.
 The second economy 99

This second economy that is silently forming—vast, interconnected,

and extraordinarily productive—is creating for us a new economic
world. How we will fare in this world, how we will adapt to it, how we
will profit from it and share its benefits, is very much up to us.

W. Brian Arthur is a visiting researcher with the Intelligent Systems

Lab at the Palo Alto Research Center (PARC) and an external professor
at the Santa Fe Institute. He is an economist and technology thinker
and a pioneer in the science of complexity. His 1994 book, Increasing
Returns and Path Dependence in the Economy (University of Michigan
Press, December 1994), contains several of his seminal papers. More
recently, Arthur was the author of The Nature of Technology: What It
Is and How It Evolves (Free Press, August 2009).

Copyright © 2011 McKinsey & Company. All rights reserved.

We welcome your comments on this article. Please send them to
quarterly_comments@mckinsey.com.
100
Picture This
The changing shape
of US recessions
Byron Auguste, Susan Lund, and James Manyika
From the end of World War II
until the collapse of the Soviet
Union, US recessions and
recoveries followed a predictable
pattern: when demand recovered
and GDP growth resumed,
employers hired again. But for
the past two decades, recessions
have become periods of
accelerated structural change—
longer “jobless recoveries” that
result in years, not months, of
unemployment. At the recent rate
of net job creation, it will take
more than 60 months to replace
the jobs lost in the 2008–09
recession.
The impact on employment is
also getting deeper. In the 2008
recession, employment declined
by 6.34 percent—twice as
much as in all previous postwar
recessions—with 8.4 million jobs
lost from peak to trough.
These developments are
symptoms of deeper changes.
In earlier recessions, companies
kept more workers on the payroll
than they needed, trading some
productivity and profitability
for the ability to meet demand
quickly when it bounced back.
Recent downturns, on the other
hand, have been a time for tough
decisions about which activities
are essential and which are
not and about the footprint a
company needs to be globally
competitive. More layoffs than in
the past have been permanent;
firms are relying more on
temporary, contract workers;
and technology is changing the
nature of work by helping to
disaggregate jobs into smaller
tasks that can be performed
by combinations of people and
increasingly intelligent machines,
sometimes in far-flung locations.
The evolution of these forces
will shape the future of US job
creation.
Byron Auguste is a director
in McKinsey’s Washington, DC,
office; Susan Lund is director of
research at the McKinsey Global
Institute (MGI) and a principal in the
Washington, DC, office; James
Manyika is a director of MGI and
a director in the San Francisco
office. Copyright © 2011 McKinsey &
Company. All rights reserved.
 101

This analysis comes from the McKinsey

Global Institute report An economy
that works: Job creation and America’s
future (June 2011), available free
of charge online at mckinsey.com/mgi.

Recovery time for US employment after recessions has

Recovery time for US since
increased dramatically employment after
1990, and therecessions
employmenthas
drop
since 2008 is unprecedented in postwar history.
increased dramatically since 1990, and the employment drop
since 2008 is unprecedented in postwar history.

Longer . . .
Months elapsed between return of real GDP to prerecession peak
and return of employment to prerecession peak1

1948 6
. . . and deeper
% decline in employment from prerecession peak,
1953 7 in months since recession began2

1974
1960
1970 1957 1981 1990 2001
0 1953
1957 6 1948
–1

–2
1960 6
–3

1969 8 –4
2008 recession
–5 Lowest point: 6.34%

1973 3 –6

–7
0 12 24 36 48
1981 6

1990 15

2001 39

2008 >60 months

Projection, based on recent

rates of job creation

1
Returns to prerecession peaks are established by start of more than 1 quarter above prerecession levels; US recessions
are labeled by beginning year, with the exception of the most recent. The National Bureau of Economic Research
estimates that the current recession began in Dec 2007. GDP returned to its prerecession peak in Dec 2010.
2
Based on unemployment data as of Q1 2011; future revisions may change numbers slightly.
Source: US Bureau of Economic Analysis; US Bureau of Labor Statistics; McKinsey Global Institute analysis
Applied Insight
Tools, techniques, and frameworks for managers

103 110
Seizing the potential Freeing up the sales force
of ‘big data’ for selling

104 115
Executive perspective How strategic is our technology
AstraZeneca’s ‘big data’ agenda?
partnership

Artwork by Daniel Hertzberg


Seizing the potential
of ‘big data’
Jacques Bughin, John Livingston, and Sam Marwaha
Companies are learning to use large-scale data gathering
and analytics to shape strategy. Their experiences highlight the
principles—and potential—of big data.
Large-scale data gathering and
analytics are quickly becoming
1
a new frontier of competitive differ-
entiation. While the moves of
companies such as Amazon.com,
Google, and Netflix grab the head-
lines in this space, other companies
are quietly making progress.
In fact, companies in industries
ranging from pharmaceuticals to
retailing to telecommunications
to insurance have begun moving
forward with big data strategies
in recent months. Together, the activ-
ities of those companies illustrate
novel strategic approaches to big
data and shed light on the chal-
lenges CEOs and other senior exec-
utives face as they work to shatter
the organizational inertia that can
prevent big data initiatives from
taking root. From these experiences,
we have distilled four principles
that we hope will help CEOs and
other corporate leaders as they
try to seize the potential of big data.
103
Size the opportunities
and threats
Many big data strategies arise when
executives feel an urgent need to
respond to a threat or see a chance
to attack and disrupt an industry’s
value pools. At AstraZeneca, for
example, executives recognized
the power that real-world data (such
as medical claims) gave the phar-
maceutical company’s customers
in evaluating the cost effectiveness
of its products (for more, see
sidebar, “AstraZeneca’s ‘big data’
partnership,” on page 104).
In the case of a retailer we studied,
big data was part of a difficult battle
for market share. The company’s
strategy had long been predicated
on matching the moves of an effi-
cient big-box rival, yet now a differ-
ent online player was draining the
retailer’s revenues and denting its
margins. At the heart of the threat
was the competitor’s ability to gather
104 2011 Number 4
and analyze consumer sentiment and
generate recommendations across
millions of customers—a capability
that was neutralizing the retailer’s
sales force. Meanwhile, the compet-
itor was becoming a platform where
vendors could sell excess inventory
by using publicly available price
data aggregated across the industry
to help pinpoint the size of dis-
counts the vendors could offer to
customers. The retailer’s board
asked whether it could leverage its
own information resources to
counter these challenges.
Data-related threats and opportu-
nities can also be more subtle.
After using an innovative product-
bundling approach to improve
Executive perspective:
AstraZeneca’s ‘big data’
partnership
Mark Lelinski, an executive at the global
drugmaker, explains how the company is using
data to build customer relationships that
focus on the total cost of care.
We have always designed and
manufactured our products with the
mind-set of “make it effective,
make it safe, and make sure it meets
regulatory approval.” Historically,
at the early prelaunch stage, we were
not thinking about the willingness
of payers to pay for it—whether
that’s a patient, health plan, phar-
macy benefit manager, employer, or
the government. We weren’t ask-
ing, “How do customers perceive our
products relative to alternatives?”
market share, for example, a
European telecom company saw
large-scale data analysis as a way
to boost momentum. The com-
pany’s executives believed it could
press its newfound advantage by
pinpointing exactly where its sales
approach could make further gains
and by studying the behavior of cus-
tomers to see what factors moti-
vated them to choose one brand
or product over another. Doing
so would require interpreting two
massive and growing volumes of
information: online search data and
real-time information—shared by
consumers across social networks
and other Web-based channels—
about the company’s products
and services.
But willingness to pay has obviously
become extremely important in
recent years—to the extent that
more and more of our customers
began complementing our
clinical-trials data with their own
proprietary data to conduct
comparative-effectiveness studies.
They were asking, “In a real-
world setting, product X performs
at this level and costs me this
much. And product Y performs at
this level and costs me this
much. How do they compare?”
Eventually, this practice created
an imbalance in our payer con-
versations, as the dialogue became
more transactional—more about
unit cost and more about the data
that our customers were bringing
to the table. And from our perspec-
tive, few of the comparative
studies that payers were conduct-
ing focused on health outcomes.
So we decided that we needed to
 Applied Insight
2
Identify big data
resources . . . and gaps
Framing the basics of a big data
strategy naturally leads to discus-
sions about the kinds of information
and capabilities required. At this
point, executives should conduct a
thorough review of all relevant
internal and external data. The audit
should also consider access to
analytical talent as well as potential
partnerships that might help fill
gaps. Such an audit will not only
create a more realistic view of a
company’s capabilities and needs
but can also spark “aha” moments—
for example, as executives iden-
tify “data gems” cloistered inside their
business units or recognize the
get beyond our single focus on
the controlled environment of the
randomized clinical trial and
see the business from the other side
as well.
The focus, we realized, needed
to be on the total cost of care. Don’t
just talk about the unit cost of a
drug, but learn about the total cost
Mark Lelinski that it takes to manage, say,
is vice president a diabetic patient—including the
of managed diagnostics, the outpatient
markets at the visits, the emergency room visits.
pharmaceuticals This led to an “aha” moment:
manufacturer if we could combine medical-claims
AstraZeneca. data with clinical data collected
in an electronic-medical-record
system for a defined patient
population, we might actually dis-
cover ways to improve health
outcomes and manage the total
cost of care at the same time. And
why not collaborate with cus-
tomers? Prescription drugs represent
105
value of creating the right kind
of partnership.
The retailer’s audit focused on
internal data the company gathered
but wasn’t using to potential.
This information—about product
returns, warranties, and customer
complaints—together contained a
wealth of information on consumer
habits and preferences. The audit
also revealed an obstacle: none
of the information was integrated
with customer identification data
or sufficiently standardized to share
within or outside the company.
Therefore, the information was rarely
analyzed for marketing insights
and couldn’t be marshaled to assist
sales reps in customer interactions
about 11 percent of total health
care spending in the United States.
For the other 89 percent, our
interests are completely aligned.
By working together, we all
get access to a broader, richer data
environment, and we can work
together on creating state-of-the-art
access tools and real-world
methodologies.
So we took this idea to potential
partners. From the beginning,
this was about true collaboration
and strategic fit, not an “I’m
gonna win more than you win”
mentality. When we presented our
vision to HealthCore1 and its
parent company, WellPoint, we
quickly realized that their views on
all of these things were so similar
to ours that everyone’s jaws kind of
dropped. It was a quick connect.
We announced our collaboration in
February 2011.
(continued on next page)
106 2011 Number 4
or supply chain executives in serving
vendors. Happily, the audit also
helped identify a team that could
help solve these problems: in-house
data analysts whose siloed efforts
were underused.
3
For the European telco, the discus-
sions centered around how it might
tap into the rising tide of online
conversations about individual com-
panies and their products—the
millions of relevant microblog posts,
social-media conversations, search
term keywords, head-to-head brand
comparisons, and customer feed-
back postings that were now available
on the Web. Recognizing the
importance of the effort—and the
Certainly, there was some internal
resistance at first. In some cases,
we were asking our people to
think in dramatically different ways
than they had for the bulk of
their careers. This is especially true
in R&D, where we’re now bringing in
the voice of the payer much earlier
in the development process so
we can “lose the losers” quickly and
not take products to market that
won’t be valued by the people
paying for them. And of course we
still negotiate with WellPoint on
individual drugs, so the increased
transparency acts as a double-
edged sword: if the collaboration
helps us get new evidence that
supports a price point we set, that’s
extremely valuable. But sometimes
it goes against us too.
The key to turning around the
resistance and getting to where we
company’s relative lack of econo-
metric and analytical skills to manage
it—the telco’s CEO helped recruit
an outside analyst with the necessary
stature to lead a new “collective
insights” team.
Align on strategic
choices
Once companies identify an oppor-
tunity and the resources needed to
capitalize on it, many rush imme-
diately into action-planning mode.
This is a mistake. Data strategies
are likely to be deeply intertwined
with overall strategy and therefore
require thoughtful planning when a
are today has been the senior-level
involvement and support we’ve
received from the start. Our leaders
recognized that this approach
is a long-term play: there may be
quick wins and short-term gains
for the company, but to really have
a broad impact on the company
and the industry, we have to
manage the complexity and grow-
ing pains. One example was the
way we brought together top-notch
biostatisticians, epidemiologists,
health economists, and program-
mers working throughout the
company and created a new group
focused on real-world evidence.
Without the support of engaged and
interested leadership, making
that happen would have been like
pushing a rock uphill.
While this partnership is still in the
early stages, HealthCore and
Applied Insight
company decides how its resources
should be concentrated to achieve
the desired results.
In some cases, that could mean
putting powerful data analysis tools
in the hands of frontline workers.
In others, it might mean amassing
data and ramping up analytical tal-
ent to create a first-mover advantage.
It’s also important to view big
data in the context of competing
strategic priorities. When one
CEO looked closely at what it would
take to boost the data orientation
of his company’s sales and marketing
function, he discovered that it
would be necessary to acquire some
AstraZeneca personnel are opera-
tionally aligned and set up, and
working together very well. We have
a number of joint studies under
way and are in the throes of com-
1 
pleting the first one, which will
be ready for discussion with payers
soon. Still, both sides see this as
the first phase of a broader, industry-
wide collaboration. Eventually, we
expect this will include other health
insurers, pharmacy benefit man-
agers, providers, employers, other
pharmaceutical manufacturers,
and even federal and state govern-
ments. It won’t be just about
pharmaceuticals but about much
more: Which diagnostics make
sense and which don’t? Which medi-
cal devices? What leads to errors
or high readmission rates in hospital
settings? What key health issues
need to be addressed in a given local
community? Through big data, we
107
key data vendors, replace a strat-
egy leader, and invest heavily in
analytical talent. In the end,
deciding not to pull the trigger, he
said, “I can see how this has
moved to our industry’s backyard,
but until I consolidate five acqui-
sitions and deal with major revenue
shortfalls from products coming
off patent, we’ll need to think small.”
While backing off was the right
answer for this company at that time,
it clearly carried risk. Before
demoting big data on your strategic-
priority list, ask whether you’ve
thought hard enough about its long-
term strategic potential and
about what your competitors may
be doing while you wait.
can learn things about health care
that we could never get at before.
And that’s really what we’re setting
out to do.
A research subsidiary of US-based health
insurance company WellPoint.
This commentary is adapted from
an interview with Sam Marwaha,
a director in McKinsey’s New York
office.
108 2011 Number 4
As for the retailer, its executives deter-
mined that the goal was to create
an information grid that would
provide for a range of data-sharing
and -analysis activities across
the company. However, the leaders
decided against a company-wide
initiative, since the retailer’s culture
generally favored innovation at
the business unit level. Therefore,
the retailer tapped an executive with
technology and entrepreneurial
experience to launch a study across
key business units—an effort that
ultimately surfaced 80 potential
big data projects. Each was then
ranked by its net present value
and mapped against the company’s
strategic objectives.
The first project the retailer pursued
was a revamp of its fragmented
customer-relationship-management
(CRM) system and the creation
of a single data pool that company
executives plan to use in multiple
ways. One pilot project, for exam-
ple, is exploring the use of tablet
devices by salespeople, in hopes that
easier access to inventory data,
customer profiles, and product infor-
mation will help them close more
sales. A second initiative enlisted
online developers to create virtual
storefronts for third-party Web sites.
By using algorithms, survey mar-
4
ket prices, and predetermined dis-
counts to link the storefronts to
the inventory systems of the retailer
and its vendors, the initiative is
helping it counter its competitor’s
third-party sales strategy—while
also improving the commissions of
its sales force and vendors.
In the case of the telecom provider,
a cross-functional executive com-
mittee was created to oversee the
analytics team and ensure that its
efforts were aligned with the
company’s strategy. The committee
focused the team’s efforts on
answering two questions: “How com-
petitive are our brands in the
minds of users when they make pur-
chase decisions?” and “What key
buying factors matter for users, and
how well positioned are we to
communicate with customers about
these factors?”
The team then created targeted
data “mash ups” 1 of customer data
that it could analyze quickly to
gain actionable insights—for instance,
sports and other premium TV pro-
gramming was a key differentiator in
purchasing decisions, and cus-
tomers would be more inclined to
purchase a “triple play” service
offering (television, high-speed Inter-
net, and voice telephony) if the
company deemphasized voice tele-
phony in its marketing messages.
This was the opposite of what consu-
mers indicated in traditional mar-
ket research interviews. What’s more,
the analysis underscored, and
helped quantify for executives, the
importance of a bigger strategic
imperative: the need to add mobile
telephony as a fourth service
to complete a “quadruple play.”
Understand
the organizational
implications
Finally, it’s important to note that
the threats and opportunities associ-
ated with big data often have orga-
nizational implications that only con-
certed senior-executive attention
Applied Insight 109

can address (see “Big data for
the CEO,” on page 120). To be useful,
data must cut across internal
boundaries, yet this often goes
against the grain of an organization
and creates friction.
At one insurer, for example, a senior
leader observed that crunching the
numbers on highly detailed aspects
of customer behavior would allow
the company to price risk more finely
and probably help to increase mar-
ket share. But that knowledge also
represented a threat—an internal
one—that impeded action: sales
agents worried that their bonuses,
which were tied to profitability, would
suffer if the market share increases
came at the expense of margins.
Too few leaders fully understand
big data’s potential in their busi-
nesses, the data assets and liabilities
of those businesses, or the stra-
tegic choices they must make to start
exploiting big data. By focusing
on these issues, senior executives
can help their organizations build
a data-driven competitive edge.
1 
A mash up is a Web application that
combines multiple sources of data into a
single tool.
Jacques Bughin is a director in
McKinsey’s Brussels office,
John Livingston is a director in
the Chicago office, and Sam
Marwaha is a director in the New
York office.

Similarly, the European telecom’s Copyright © 2011 McKinsey & Company.

All rights reserved. We welcome your
collective-insights team learned that
comments on this article. Please send them
two things led to the most rapid to quarterly_comments@mckinsey.com.
dissemination of negative word of
mouth about the company on
social-media and microblogging
sites: network outages and any
perception by customers that the
company had made false advertising
claims about its products or net-
work. Yet the marketing and network
organizations, rather than cooper-
ate, initially blamed one another for
the findings. Only when senior
executives forced the two sides to
work more closely together and
build trust could the company capital-
ize on the information, by tailor-
ing marketing messages to better
explain new-product rollouts and
network upgrades.
110

Angus Grieg

Freeing up the sales force

for selling
Olivia Nottebohm, Tom Stephenson, and Jennifer Wickland

Most sales reps spend less than half of their time actually selling.
By reshaping sales operations, companies can help them focus on
their real job.

Here’s a situation that may sound of deals. Developing a standard

familiar. “Inside” sales reps1 at a
global manufacturer spent 75 per-
cent of their time away from the
phones—pushing through stalled
deals, scurrying for data to answer
questions from customers, and
cobbling together one-off proposals
for even the simplest requests.
Highly paid field reps spent 45 per-
cent of their time on internal sales
support and tracking the progress
proposal required meetings with as
many as seven people, and field
reps had to spend up to three weeks
of constant effort to get a special
price approved. This model of ineffi-
ciency culminated when the com-
pany fumbled a new-product launch
because it failed to meet the
deadline for proposals to secure
initial orders.

That was the wake-up call the com-
pany needed. For two years, it
worked to streamline its global sales
operation by creating “sales fac-
tories” comprising specialized sales
support staff with clear respon-
sibilities and deal coordinators to
shepherd sales through the sys-
tem on behalf of reps. Internal pro-
cesses were standardized and
simplified, and a comprehensive per-
formance-management system
was implemented. While not all com-
panies can successfully achieve
these difficult and time-consuming
transformations, the rewards are
worthwhile for those that rise to the
Tuning sales operations
for growth
The guiding principle of all sales
operations makeovers is to maximize
time for selling and relationship
building. That sounds obvious, but
it’s critical to remember as the
drive for effectiveness collides with
the forces of rising complexity.
Companies must understand the
scope and scale of their sales oper-
ations and then promote efficiency
throughout the sales process.
Identify problems and
opportunities
Companies typically restrict their
definition of sales operations to
transactional activities such as deal
configuration, quote generation,
and credit checks. A broader, end-
to-end view recognizes that the
functions supporting sales are inter-
dependent. Sales operations
begin with transactional support—
activities critical to processing
deals—but also involve groups that
111
challenge. When the program was
rolled out country by country, in some
cases the impact was felt in just
four months: reps gained an average
of 15 percent more time for selling,
conversions of proposals to sales
rose by 5 percent, and the cycle time
for internal sales processes shrank by
20 percent.
We find these results to be typical at
large companies, yet few tackle
the problem: sales operations remain
a great unmanaged cost center in
many organizations and a woefully
underleveraged source of growth
and differentiation.
work directly with sales but are
not tied to specific transactions, such
as help desks, finance, IT sup-
port, and human resources. In addi-
tion, there are projects to enable
sales, as well as strategy and
reporting activities including sales
compensation, coverage analysis,
and territory planning. All of this
consumes the time not only of the
employees directly involved but
also (when not executed effectively
and efficiently) of sales reps. In
fact, many senior executives suffer
from sticker shock when the true
extent of sales operations is cal-
culated: more than 5,000 people
spending upward of $1 billion
a year at one technology company,
for example. Even in the best-run
organizations, sales operations tend
to be scattered and costs tucked
into hidden budgets.
Gaining this comprehensive view
of sales operations is critical to
identifying opportunities to free up
the time of reps so they can con-
centrate on actually selling, as well
112 2011 Number 4
as to eliminate the duplication of
activities. One approach is to find
out where the process breaks
down by following orders to comple-
tion from their point of inception—
as far back as the qualified lead.
Once this sales path has been
mapped, solutions can be devel-
oped and standardized, with care-
ful consideration to how actions
in one area affect others.
We find that companies often
struggle with the results of this analy-
sis, which reveals just how ineffi-
cient their sales operations really
are. When one logistics company
plotted its comeback from the recent
recession, for example, it discov-
ered that reps spent just 35 percent
of their day actively selling, because
they were consumed by nonsales
activities such as billing-system
updates, firefighting, and internal
communications.
Optimize the entire sales
process
Once opportunities to improve the
sales process are identified, it’s
critical to implement comprehensive
solutions. Consider what hap-
pened at one company that worked
hard to reduce the time needed
for the steps in its sales process.
Although it diligently improved
each of them over the course of sev-
eral years, the total cycle time
worsened significantly, and frustrated
customers began threatening to
switch. Although the company had
optimized the individual stages,
the lack of end-to-end management
led to enormous lags between
them. Employees were measured on
turnaround time, for example, and
in an effort to speed things up began
handing off work with incomplete
information, which led to rework and
delays. The cycle time doubled,
even though each step was com-
pleted more quickly.
The company set out to transform
its back office before it lost any major
customers. For starters, it asked
a few of them to serve on an advisory
board for process redesign and
followed a sample of orders through
every step to see where delays
occurred. The company soon dis-
covered that deals worth just
20 percent of its revenue consumed
80 percent of the work in sales
operations. The solution was to seg-
ment deals along three tracks,
based on the value and complexity
of orders—simple, medium, and
high. Each track’s process was tai-
lored to remove unnecessary
steps; for instance, the company
eliminated the need to go back
through the full process when minor
price changes occurred. Resources
freed from simpler deals were
reallocated to highly complex, large-
value ones that required extensive
customization and hand-holding.
The advisory board provided feed-
back at every step. Although the
new model required customers to
change their own internal pro-
cesses, they did so quickly once
the benefits became apparent.
This new system cut the time
required to complete deals by
months, weeks, and days, respec-
tively, for simple, somewhat
complex, and highly complex ones—
all the while delivering consis-
tently strong service quality. The
elimination of unnecessary
steps cut the cost of sales oper-
ations by 15 percent. One cus-
tomer was able to reduce by
25 percent the resources dedi-
cated to interacting with the
service provider.
 Applied Insight
Companies have a natural aversion
to tinkering with the sales force—senior
executives must overcome the
common fear that disrupting it will
jeopardize revenue.
Making it happen
Transforming sales operations isn’t
easy. First, companies have a
natural aversion to tinkering with the
sales force—senior executives
must overcome the common fear
that disrupting it will jeopardize
revenue. Second, executives from
not only sales and sales support
but other functions, such as finance,
must work together to recognize
and pursue opportunities. Third, suc-
cessful transformations require
steadfast support from the very top:
someone must compel executives
from across the organization to sit
down, share data, and be willing
to talk about what’s not working.
A top leader must override internal
politics, see the big picture, and
focus on the best solution regard-
less of past practices.
In addition, new capabilities and
talent may be required because
successful transformations funda-
mentally change business pro-
cesses and the ways multiple stake-
holder groups interact, from cus-
tomers to both the front and back
offices. When one consumer-
packaged-goods company rede-
signed its Latin American sales
operations, for example, it central-
113
ized and streamlined many tasks
(for instance, credit checks and the
ordering of services) that had
previously been carried out by sales
support at the country level. This
move freed support staff to pursue
higher-value activities such as
pricing strategy and postpromotion
analysis and boosted the impact
of the time returned to the sales team.
Finally, winning back and protecting
selling time requires vigilance.
The growth and proliferation of sales
channels in the business-to-
business and business-to-consumer
worlds continually reinject non-
selling activities into a sales rep’s
day. In addition, old habits chip away
at selling time: a rep’s reflexive
response when a customer demands
a quick answer is to drop every-
thing and dive in, even when a
modern sales support mechanism is
in place to handle any issue faster
and better. “It is key to stop reps from
bypassing the new system, even
if reps think they are more effective,”
says one top sales executive at a
high-tech company. “Their time is
better used to sell.”
One company decided to address
the problem by setting aggressive
targets for metrics such as the
114 2011 Number 4

number of meetings with new cus- The authors would like to

tomers per week. Giving reps
goals they could not meet without
changing their behavior forced
them to trust the process. Success
became self-reinforcing: the more
they stayed out of the support realm,
the better they performed.
Viewing sales operations across
an organization isn’t easy, nor
is implementing changes that affect
the entire sales process. Yet the
more sales operations can be stream-
lined and back-office overlaps
reduced, the more likely customer
satisfaction will improve as deals
close quickly and disputes are
resolved promptly. At major compa-
nies, the result can often be hun-
dreds of millions of dollars in higher
revenues and lower costs. Such
benefits speak for themselves.
acknowledge the contributions
of Philipp Barmettler, Bob Dvorak,
Philipp Landauer, Abhijit
Mahindroo, Ari Schmorak, Vats
Srivatsan, and Jacob Staun.
Olivia Nottebohm is a principal
in McKinsey’s Silicon Valley office,
where Tom Stephenson is a
director and Jennifer Wickland is
a consultant.
Copyright © 2011 McKinsey & Company.
All rights reserved. We welcome your
comments on this article. Please send them
to quarterly_comments@mckinsey.com.

1 
Salespeople who engage with customers
remotely—by telephone and e-mail—rather
than face to face.
 115

Bill Butcher

How strategic is
our technology agenda?
Brad Brown and Johnson Sikes

CEOs should shake up the technology debate to ensure

that they capture the upside of technology-driven threats.
Here’s how.

The CEO of a leading consumer follow through on them. Instead,

goods company was unhappy
with his CIO. An important compet-
itor was gaining market share
at a disquieting pace by using social
media and data analysis to target
customers more effectively.
When asked about these develop-
ments, the CIO outlined some
potential responses, but he didn’t
according to the CEO, the CIO
remained preoccupied with “keep
the lights on” IT projects and
was therefore unable to gain trac-
tion with the business leaders
and others within the company
who would be critical in helping
to address the new competi-
tive challenge.
 116 2011 Number 4
This type of disconnect—between
what’s top of mind for CEOs
and the attitudes and abilities of IT
leaders—is all too common.
The symptoms will be recognizable
to many executives. IT leaders
are often trapped in the status quo,
their principal focus being to
keep a company running in the face
of sharply increasing demands
and tight budgets. A lot have the
desire but lack the capacity to
deliver beyond basic IT needs.
Meanwhile, many CEOs we know
confess they have little knowl-
edge of where IT money is spent,
how that spending squares with
technology opportunities and threats,
or how to improve the fit between
dollars and strategic priorities.
What’s more, the CEO’s engage-
ment with the IT organization
is fleeting, occurring primarily at
budget time and thus reinforcing
the idea that IT is a support
function that should focus on low-
cost service. That engagement
can also be frustrating, as when
delays and cost overruns plague
big projects.
Dealing with this disconnect
has acquired new urgency as the
financial stakes rise1 and new
technology trends—the growth of
big data, the proliferation of
smartphones, cloud computing,
For more about new tech trends, see the following
articles on mckinseyquarterly.com:
“Clouds, big data, and smart assets: Ten tech-enabled
business trends to watch”
“The Internet of Things”
“How new Internet standards will finally deliver a
mobile revolution”
heightened levels of automation
enabled by embedded sensors and
the “Internet of Things”—shape
strategy and disrupt business mod-
els in unprecedented ways.
CEOs who aren’t continually asking
themselves and their organiza-
tions how they can harness trends
such as these to change the game
are likely to get blindsided. To avoid
that outcome, they need to shake
things up by inserting themselves
into the technology debate—
difficult though that may be—and
insisting that meaningful con-
versations take place.
As part of our work with McKinsey’s
Center for Business Technology,
which researches the role of tech-
nology in changing business
models, we have identified several
ways to provoke these discus-
sions. One good way is to ask execu-
tives throughout the company
whether (or how) competitors could
be using technology to leave it
behind. Another is to push leaders
to broaden their line of vision to
include technology shifts in other
industries. These aren’t the only
ways of framing the conversation,
of course (for ideas on how
senior executives can stir up organi-
zational thinking about big data,
see “Seizing the potential of ‘big
data’,” on page 103). But they
are often a good starting point. To
illustrate the benefits, we’ll focus
on the experience of executives at
an insurance company and a
grocery retailer. These companies
began using technology more
strategically to reinvigorate them-
selves after their executives asked
some tough questions.
Applied Insight
Are we getting left
behind?
In our experience, few leadership
teams have clear visibility into
how a company’s business tech-
nology capabilities—the combi-
nation of business processes and
their supporting systems—stack
up against those of competitors.
Instead, top teams often rely on
anecdotes and suppositions about
perceived weaknesses or strengths
as seen by business unit executives.
These views can be erroneous
or incomplete, and the murkiness
often envelopes cutting-edge
technologies and more traditional
ones alike.
Vocal business unit leaders at a
North American insurance company,
for example, insisted that slug-
gish times to market for new prod-
ucts were an important factor
behind its eroding market share.
They also believed that poor IT
systems—specifically, the software
that supported pricing and helped
adapt insurance products to local
regulatory requirements—were
responsible for the lagging product-
development performance.
To get a reality check on these views,
the insurer’s CEO and a business
unit president tasked a team of busi-
ness and IT managers to under-
take a more rigorous benchmarking
of the company’s business tech-
nology performance relative to com-
petitors. The results were eye
opening. The insurer learned that the
initial concerns about its product-
development capabilities were mis-
placed and that its performance
in product introductions was on par
with that of competitors.
117
In fact, the loudest voices at the table
had distracted the leadership from
the most important technology chal-
lenges the company actually faced:
a lagging ability to handle straight-
through underwriting and policy
administration in the online channel.
These systems were siloed by line
of business, whereas top-performing
competitors had redesigned their
IT architecture and business pro-
cesses to facilitate more standard-
ized pricing across business lines.
The competitors’ systems did just
about everything—from assessing
risk to running online channels—more
quickly and cheaply than the com-
pany’s systems could. Worse, the
CEO learned that his investment
budget was being consumed by
ongoing maintenance and enhance-
ments to sustain the status quo
rather than by efforts to support
new functionality.
Armed with this knowledge, the
business unit president started a
debate among his colleagues
in the top team. The discussions
ultimately forced a critical series
of trade-offs among the competing
demands for the company’s
technology-investment budget. In
the end, he brought his team,
the CEO, and eventually the board
of directors together to support
a major investment in renewing
the company’s core IT platform
and processes.
The lessons for the business leaders
were clear: while they didn’t need
to know the ground-level details of
the company’s IT practices, a
“hands off” policy had led to a poor
view of the risks accumulating
across the business units and thus
to serious competitive blind
 118 2011 Number 4
spots. Going forward, the insurer
established an IT capability review
as part of its annual business strat-
egy sessions. The review includes
operational basics, market intelli-
gence on competitors’ use of tech-
nology, and an analysis of the
competitive gaps that might affect
the company’s market share and
financial performance.
What can we learn from
other industries?
Looking beyond your industry to
proven technology leaders is a
good way to shake up your thinking.
This seems simple, yet in our
experience few leaders consistently
look beyond their own industries
for new technological insights and
opportunities; instead, many
cite time constraints or a lack of reli-
able processes for developing
such intelligence.
A European grocery chain’s CEO
was eager to discover a way to
break through his industry’s revenue
growth and margin boundaries.
Grocers traditionally use a combina-
tion of traditional market research
and gut instinct to shape their com-
mercial strategies: the set of
coordinated decisions—made around
prices, promotion, communication,
and product assortments—that drive
For more about learning from other industries,
see the following articles on mckinseyquarterly.com:
“Seven steps to better brainstorming”
“Sparking creativity in teams: An executive’s guide”
revenues and sales volumes. When
properly calibrated, these factors can
swing margins by 1 to 2 percent, a
huge amount given the industry’s
slim margins.
The CEO had long watched retail
and grocery industry pioneers that
used data to better understand
consumer behavior. Now he wanted
to go further, spurred by the exam-
ple of digital-media companies, air-
lines, and financial-services firms
that change promotions and prices
in real time by taking account of
customer demand, supply constraints,
and seasonal or regional factors,
among other things. The CEO’s goal
was to go even further and develop
the ability to anticipate competitive
reactions to various commercial
strategies. He began by having man-
agers, and even board members,
visit and observe players in other
industries to understand the cur-
rent state of the art.
To emulate these practices, the com-
pany would need to start from
scratch. While some vendors offered
targeted research aids to help
retailers position certain products,
there were no software systems
or standard approaches for creating
the broad-based tools the CEO
envisioned. The new tools would
require an experimental approach
to commercial strategy—one that
allowed the grocer to model the
way a range of variables (such as
pricing, shelf displays, and adver-
tising) affected performance in the
past and then to see how useful
those models would have been at
predicting the future. The project
would demand substantial IT invest-
ments and close support from
 Applied Insight 119

the company’s marketers, sales The authors would like to

operations professionals, and acknowledge the contributions of
store managers. Sam Marwaha and Seth Schuler.

The company started with 100 vari- Brad Brown is a director in

ables and back-tested them to McKinsey’s New York office, where
select the 12 most important, which Johnson Sikes is a consultant.
eventually formed the backbone
of the new strategy-setting tool. So Copyright © 2011 McKinsey & Company.
far, this approach has helped the All rights reserved. We welcome your
comments on this article. Please send them
grocer boost sales by 2 percent—
to quarterly_comments@mckinsey.com.
increasing its market share with-
out sacrificing profitability. What’s
more, the “test and learn” method-
ology has allowed the company
to decentralize some of its deci-
sion making, so that regional execu-
tives and managers, who tend
to have the clearest view of fast-
changing market conditions,
are now empowered to make com-
mercial decisions.

The swift and radical changes

taking place today in the technology
landscape create opportunities
that extend far beyond IT’s tradi-
tional ambit. To seize them, CEOs
should elevate the debate by asking
targeted questions that push tech-
nology beyond its lights-on status
and toward the core of a com-
pany’s ongoing strategy.

1 
For example, in the United States, 47 percent
of capital spending goes toward technology
investments, double the proportion in the
1980s.
120

Extra Point

Big data for the CEO

Because the means of securing competitive advantage from big data
are still evolving, some CEOs believe that big data initiatives should be the
sole responsibility of a company’s IT or marketing departments—the
functional groups where large-scale data sets are most often gathered,
analyzed, and applied.

Bad idea. In our experience, big data projects need concerted senior-
management attention to succeed. To improve the odds, CEOs should push
themselves and their senior teams to answer questions like these:

1. What’s the prize?

Opportunities may range from improving core operations to creating new
lines of business—even in the same industry. Insurance companies, for
example, can use big data to improve underwriting performance now, while
over the longer term use it to serve formerly unprofitable customers and
ultimately even develop entirely new risk-based businesses. Companies that
keep a clear-eyed view of their goals at each stage will have the edge.

2. How do I build a skill base?

By 2018, the United States alone will face a shortage of up to 190,000 workers
with deep analytical skills and will need an additional 1.5 million managers
and analysts to interpret big data and make decisions based on their findings.
CEOs should be thinking now of the critical hires that will help jump-start
a big data initiative.

3. How do I get the organization behind me?

To be useful, data must cut across organizational boundaries—yet this
often causes friction. Only a dedicated and focused senior team can dispel
the various “not for us” objections that will inevitably arise as employees
are challenged to work in new ways.

4. How do I scale this up?

Whether a company is planning a single, large initiative or multiple
smaller ones, its senior team should be actively planning to take advantage
of the resulting opportunities at scale. Stay mindful of the resources
required (technological and otherwise) to shift quickly from pilot to imple-
mentation modes.

For more, see “Are you ready for the

era of ‘big data’?” on page 24, and
Copyright © 2011 McKinsey & Company. “Seizing the potential of ‘big data’,” on
All rights reserved. page 103.
Copyright © 2011
McKinsey & Company.
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