Monthly Archives: March 2017

Gaming to support strategic decisions

One of the most difficult aspects of making consequential strategic decisions is gauging how competitors and other stakeholders might react. Scenario planning is a start, but a fact-based approach to war gaming can better help executives prepare for the real-life pressure and uncertainty they’ll face in the moment. In this podcast from McKinsey on Finance, partner Werner Rehm joins partner Jay Scanlan and associate partner Thomas Meakin from McKinsey’s London office to explore war gaming from a CFO’s perspective. An edited transcript of their conversation follows.

Podcast transcript

Werner Rehm: Tom, Jay, thanks for joining me today on the podcast. Let’s talk about how CFOs and the finance function in general can use war gaming to help companies improve their strategic process. What do we actually mean when we say “war gaming”?

Jay Scanlan: “War gaming” is a realistic simulation of the type of market environment the CFO and executive teams face as they make really big and consequential decisions. Whether they be go-to-market decisions or capital planning and infrastructure decisions, war gaming allows you to have a real-life experience of them under pressure with incomplete information and uncertain reactions from competitors and new entrants.

We often ground the war game against several different future scenarios in order to test how robust and effective different strategies are in terms of economic growth, the entrance of new competitors, or changes in consumer or business customer preferences. That allows executives to see what that future might look like in the real world, as it were, rather than just on a spreadsheet.

Werner Rehm: Would I assign various people on my team to be competitors and then play out various potential actions and reactions in the future?

Thomas Meakin: That’s exactly it. You gain a deeper appreciation of what the different actors are going to do in the market based on a close analysis of their own P&L and financial positions, but also their track history in taking particular strategic moves. You get a better sense of where your own business model can stretch, where you can’t, what moves make sense, and which don’t. Quite often we find management teams and boards, who sometimes go through this process together, leave with a deeper appreciation and understanding of how they work together and how they make decisions under stress.

Werner Rehm: When is this most useful in the life of a CFO? Should I do this annually? Or during my strategic process?

Thomas Meakin: There are two situations in which conducting a war game makes sense. The first is as part of an ongoing strategic planning process. A war game can be done right at the beginning or right at the end—or even at two points within that process in order to get a sense of the business model dynamics and how they will relate to the underlying market trends.

The second situation is when there is a disruption. I define disruption broadly, so anything from a regulatory change, to a market entry, either by your own company or by a competitor, and anything in between.

What executives think about the economy

This continually updated interactive tracks how executives around the world have viewed economic conditions and the economic prospects of their companies, and how those views have differed over time and across industries, regions, and types of company.

Every quarter since early 2004, McKinsey has asked executives from around the world about their expectations for the global economy, national economies, and their own organizations. Since September 2008, as these topics have grown in urgency, we have added additional questions, including some on customer demand and company profits.

This interactive feature will allow you to explore how different regions, industries, and types of companies have been affected by recent changes in economic conditions, and what executives expect to see in the future.

Contribute the ‘outside view’ to strategy. McKinsey’s recent board survey shows that strategy is, on average, the area boards give most of their attention. Yet directors still want to increase time spent on strategy (Exhibit 1). The board member’s role in strategy is to provide the overall strategic framework, to contribute an outside view that challenges the strategic alternatives presented by management,1and, ultimately, to approve the chosen strategy. CEOs should help make sure their own boards are playing this valuable role.

CEO guide to boards

Greater responsibilities require increased commitments of time and energy.

Building a strong board of directors never seems to get easier. High-profile board failures, the boom in activist investing, and the disruptive forces of technology are only a few of the reasons effective board governance is becoming more important.

Start with oversight, a role of the board that, most directors would agree, is no longer its sole function. Directors are now required to engage more deeply on strategy, digital, M&A, risk, talent, IT, and even marketing. Factor in complexities relating to board composition, culture, and time spent—not to mention social, ethical, and environmental responsibilities—and the degree of difficulty continues to rise.

To help CEOs and board chairs, as well as executives and directors, build strong boards, this CEO guide synthesizes multiple sources to make quick sense of complex issues in corporate governance, while focusing on four areas that are essential for building a better board. (For a quick read of these topics, see the summary infographic, “Four essentials for building a stronger board of directors.”)

McKinsey Global Surveys indicate the best boards go beyond fiduciary responsibilities to take a more active role in constructively challenging and providing input on a broader range of matters. Since some of these are also the province of executives, finding the right place to draw the line between governance and management is as important for senior executives as it is for directors. Strong collaboration between the CEO and board chair can help define a broad and forward-looking board agenda, one that, rather than pressuring management to maximize short-term shareholder value, instead helps the company thrive for years.

Contribute the ‘outside view’ to strategy. McKinsey’s recent board survey shows that strategy is, on average, the area boards give most of their attention. Yet directors still want to increase time spent on strategy (Exhibit 1). The board member’s role in strategy is to provide the overall strategic framework, to contribute an outside view that challenges the strategic alternatives presented by management,1and, ultimately, to approve the chosen strategy. CEOs should help make sure their own boards are playing this valuable role.

Reinventing the core with bold business strategy

Going digital is now a core strategy for many organizations around the world. Our new research sheds light on how digital is slicing across industries and the potential approaches companies can take to integrate digital where it makes the most sense for their business. In this episode of the McKinsey Podcast, McKinsey senior partner Paul Willmott and senior expert Laura LaBerge speak with McKinsey Publishing’s David Schwartz about ways companies can think about digitization within their sector and the potential impact of their digital strategies on the bottom line.

David Schwartz: Hello, and welcome to this edition of the McKinsey Podcast. I’m David Schwartz of McKinsey Publishing. Today we’re going to be talking about digital reinvention, starting with some new research that illuminates how far digital technologies have penetrated different industries and what companies can do to avoid being left behind. Joining me to discuss the issues are Laura LaBerge, a senior expert in our Stamford office, and Paul Willmott, a senior partner in our London office. Laura and Paul, thank you for joining us today.

Laura LaBerge: Thanks for having us.

Paul Willmott: You’re welcome.

David Schwartz: Paul, I’d like to start with definitions. People tend to use “digital” and “digitization” interchangeably. Do these terms mean the same thing?

Paul Willmott: For some people, the word “digital” tends to refer to a channel. So I interact with my bank digitally, meaning, I use an app or a website. We tend to use a much broader definition. And as we think about digital or digitization, we think about it in a number of different frames.

So firstly is the digitization of marketing and distribution, which is the channel but also all of the marketing around it. Secondly, products and services: so, for example, that would be taking a product and adding a digital service to it. Digitization of ecosystems—which is what we’re seeing going on with the likes of Amazon and Alibaba—aggregating many other businesses and creating ecosystems.

Digitization of processes—so replacing labor with software. There’s supply chains, which is thinking about different places to hitch your supply chain to. And in aggregate, these things lead to a complete picture of digitization. And we think it’s important to look at all of them.

David Schwartz: Laura, what other findings are people finding surprising?

Laura LaBerge: The first was just the size of the economic hit of digitization—you know, the fact that there was this tremendous overall decrease in EBIT and revenue growth. Despite the fact that digital does create a lot of pockets of high growth, on average it was going down. And that really, more than 75 percent of companies surveyed were not currently on a viable path to ride this through economically.