Category Archives: Business

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.

Inspiring a new narrative of progress

Growth is shifting, disruption is accelerating, and societal tensions are rising. Confronting these dynamics will help you craft a better strategy, and forge a brighter future.

“The trend is your friend.” It’s the oldest adage in investing, and it applies to corporate performance, too. We’ve found through our work on the empirics of strategy that capturing tailwinds created by industry and geographic trends is a pivotal contributor to business results: a company benefiting from such tailwinds is four to eight times more likely to rise to the top of the economic-profit performance charts than one that is facing headwinds.

It’s easy, however, to lose sight of long-term trends amid short-term gyrations, and there are moments when the nature and direction of those trends become less clear. Today, for example, technology is delivering astounding advances, and more people are healthy, reading, and entering the global middle class than at any period in human history. At the same time, the post–Cold War narrative of progress fueled by competitive markets, globalization, and innovation has lost some luster.

Those contradictions are showing up in politics, and the long-term trends underlying them are reshaping the business environment. Corporate leaders today need to rethink where and how they compete, and also must cooperate in the crafting of a new societal deal that helps individuals cope with disruptive technological change.

That broad narrative of intensifying competition, as well as the growing need for cooperation, contains challenges, but also great opportunity. We hear about the challenges every day in our conversations with global business leaders: How long can their traditional sources of competitive advantage survive in the face of technological shifts? How will changing consumer and societal expectations affect their business models? What does it mean to be a global company when the benefits of international integration are under intense scrutiny?

All good questions. But they should not distract from the extraordinary opportunities available to leaders who understand the changes under way and who convert them into positive momentum for their businesses. Our hope in this article is to help leaders spot those opportunities by clarifying nine major global forces and their interactions. Significant tension runs through each of them, so much that we’d characterize them as “crucibles,” or spaces in which concentrated forces interact and where the direction of the reactions under way is unclear. These crucibles, therefore, are spaces to watch, in which innovation “temperature” is high.

  • The first three crucibles reflect today’s global growth shifts. The globalization of digital products and services is surging, but traditional trade and financial flows have stalled, moving us beyond globalization. We’re also seeing new growth dynamics, with the mental model of BRIC (Brazil, Russia, India, and China) countries giving way to a regional emphasis on ICASA (India, China, Africa, and Southeast Asia). Finally, the world’s natural-resource equation is changing as technology boosts resource productivity, new bottlenecks emerge, and fresh questions arise about “resources (un)limited?”
  • The next three tensions highlight accelerating industry disruption. Digitization, machine learning, and the life sciences are advancing and combining with one another to redefine what companies do and where industry boundaries lie. We’re not just being invaded by a few technologies, in other words, but rather are experiencing a combinatorial technology explosion. Customers are reaping some of the rewards, and our notions of value delivery are changing. In the words of Alibaba’s Jack Ma, B2C is becoming “C2B,” as customers enjoy “free” goods and services, personalization, and variety. And the terms of competition are changing: as interconnected networks of partners, platforms, customers, and suppliers become more important, we are experiencing a business ecosystem revolution.
  • The final three forces underscore the need for cooperation to strike a new societal deal in many countries. We must cooperate to safeguard ourselves against a “dark side” of malevolent actors, including cybercriminals and terrorists. Collaboration between business and government also will be critical to spur middle-class progress and to undertake the economic experiments needed to accelerate growth. This is not just a developed-market issue; many countries must strive for a “next deal” to sustain progress.

How to makes a CEO exceptional

New CEOs face enormous challenges as they start assembling a management team and setting a strategic direction in today’s volatile environment. To provide some guidance for transitioning CEOs, we looked at the experiences of exceptional CEOs, those defined as the very top performers in our data set of roughly 600 chief executives at S&P 500 companies between 2004 and 2014.

Competing in a data driven world

Is big data all hype? To the contrary: earlier research may have given only a partial view of the ultimate impact. A new report from the McKinsey Global Institute (MGI), The age of analytics: Competing in a data-driven world, suggests that the range of applications and opportunities has grown and will continue to expand. Given rapid technological advances, the question for companies now is how to integrate new capabilities into their operations and strategies—and position themselves in a world where analytics can upend entire industries.

A 2011 MGI report highlighted the transformational potential of big data. Five years later, we remain convinced that this potential has not been oversold. In fact, the convergence of several technology trends is accelerating progress. The volume of data continues to double every three years as information pours in from digital platforms, wireless sensors, virtual-reality applications, and billions of mobile phones. Data-storage capacity has increased, while its cost has plummeted. Data scientists now have unprecedented computing power at their disposal, and they are devising algorithms that are ever more sophisticated.

Earlier, we estimated the potential for big data and analytics to create value in five specific domains. Revisiting them today shows uneven progress and a great deal of that value still on the table (exhibit). The greatest advances have occurred in location-based services and in US retail, both areas with competitors that are digital natives. In contrast, manufacturing, the EU public sector, and healthcare have captured less than 30 percent of the potential value we highlighted five years ago. And new opportunities have arisen since 2011, further widening the gap between the leaders and laggards.

The tempo of transactions at first

More than half of new CEOs of S&P 500 companies launch some form of transaction during their first two years in office. Whether acquisition, merger, or divestiture, deal making is the second most likely strategic action for a new CEO to undertake, we’ve found. Few are able to maintain the pace of deals over the course of their tenure, though, and this appears to be a missed opportunity.

 

The case for programmatic M&A

Our work has shown the strategic value of sustained transactions. We looked at different approaches to M&A activity and assessed the success of each in delivering shareholder returns. In “programmatic” deal making, for example, CEOs use M&A regularly (typically three to four deals per year) and meaningfully (with an average of 20 percent of companies’ market capitalization acquired over ten years). That contrasts with a “large deal” approach, where companies transform themselves with one deal valued at more than 30 percent of their market capitalization. The research found that companies that pursue a programmatic M&A agenda outperformed their peers, achieving an average of 3 percent excess total returns to shareholders. “Large deal” strategies, on average, destroyed value.

 

An early burst

How does CEO behavior stack up against the programmatic M&A model? Fairly well during the initial years of many CEOs, according to our research. A review of all mergers, acquisitions, and divestitures by the nearly 600 CEOs who left S&P 500 companies between 2004 and 2014 showed that CEOs conducted significantly more M&A activity early in their tenures. On average, the number of deals (regardless of deal size) completed by year two of their tenure was 50 percent higher than the average number of deals done in the five years before they took the helm (Exhibit 1).

Fully compliant from a legal

One of your main priorities as a business owner is to oversee your company’s accounting and tax obligations. A good Accountant is worth their weight in gold, and can take a huge burden off your shoulders. They can take care of your company’s annual returns, payroll, VAT returns, CT returns and statutory annual accounts. It is vital that you choose a dependable Accountant to carry out these tasks as mistakes can be costly.

 

Ensure your company secretary is capable and keep your statutory registers up to date

By law, every Irish company is required to appoint a company secretary. The main duties of a company secretary are to ensure that the company complies with the law, manage the company’s daily administration and any additional duties that company directors may delegate. Whilst there is no qualification requirement for this role, it is important that your company secretary possesses the skillset and knowledge required to keep your company compliant.

The secretary will generally maintain the statutory company registers, which are required to be maintained under the Companies Act. The statutory registers include the register of directors and secretary, members, beneficial owners, transfers, directors and secretary’s interests and debenture holders.

 

Know your dates and put your company on a ‘watch list’

Once your company has been incorporated, it is good practice to add your company to a ‘watch list’.  A watch list will remind you via email that your company’s Annual Return Date is approaching and it will alert you should any changes be made to the company at the Companies Registration Office. Core.ie provides this service free of charge once you register with them.

 

Understand your role as a director

Company directors’ have a wide range of responsibilities which can be quite diverse. Company directors have to comply with the Companies Act 2014 and have duties under Common law. If a director is found to have breached company law, he or she can be liable to penalties that can range from a fine up to €500,000 or a maximum jail sentence of 10 years. There are different categories of offences ranging from 1-4 under the Companies Act.

To avoid such circumstances, company directors should become familiar with the responsibilities and duties of the role. Information can be found on both the CRO and ODCE websites.

Business Grade with Tutor

Are you a student in need of grinds? Perhaps you’re not getting the one-on-one attention that you need at school or college and you want to find someone to help you fast, but someone who is highly qualified and living in your area? It was the recognition of a need for tutors and the idea to make them easily and quickly accessible that lead 27-year-old Orla McCallion from Celbridge in Kildare to set up TutorHQ this year, alongside her business partner 28-year-old Sean Judge from Santry in Dublin.

“We used to give grinds to other students while we were in college,” says Orla, explaining how the idea for their first business venture came about. “Sean graduated before me and found that he was inundated with requests for grinds. At first, he taught the students himself,” she explains, “but after a while he started hiring other tutors to do the work and taking a cut of their earnings.” It was at this point that the two came together and decided that this had the basis of a good business idea.

Taking the leap

Leaving their business consulting positions, they approached the student union bodies in Trinity College, University College Dublin and Dublin City University with the idea. They all agreed to partner with Orla and Sean and provide a service offering grinds to students in need. “It’s often the case that a certain percentage of students in one class need one-on-one attention from a tutor and it can’t be provided,” explains Orla. “Most lecturers are aware of this and happy for students to take grinds as a result. And that’s where we come in.”

The company launched last year, and since then Sean and Orla have branched out into providing grinds for Junior and Leaving Certificate students due to demand. “We decided that we’d set up a separate site for school grinds and started a new company called TutorHQ,” explains Orla. “It officially launched last September and has been doing incredibly well since.”

A unique offering

Challenges the business initially faced included the recruitment of tutors, not only in Dublin but in other parts of the country like Limerick, Cork and Galway. It’s also been a challenge to make students aware of the service and most of their marketing has concentrated on online ads. “Our ultimate aim is to provide a tutor for students, no matter where they are in the country,” Orla says. “But we also have to make students aware that we exist.”

At the moment, the company’s main competitors are grind schools. However, TutorHQ differs in that it offers one-on-one tutoring in the student’s own home. All tutors are vetted by the company and Orla stresses that they only take on those with a Leaving Certificate ‘A’ in the subject or a qualified teacher. What’s more, many of the grind schools do not allow online booking.

“We make it really easy for people to find the very best tutors in a short period of time wherever they are in the country,” adds Orla. “We’re like no other grind school. Our service is unique.”

Two months after it launched, TutorHQ already has over 700 tutors located throughout Ireland. What’s more, it’s being used by hundreds of students. Orla and Sean have now set their sights on the UK and are hoping to expand their business there soon.