Leadership in a New Era (by McKinsey)

“Leadership in a New Era”:

a course at Tsinghua SEM

by McKinsey

2015 Fall Semester

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

McKinsey & Company | 1

Today’s discussion

Course overview 1

Winning in changing industry environments 2

Questions? 3




The objective of the course is to develop future business leaders among

top students at Tsinghua through McKinsey’s unique approach

2

› Provide an overview of key functions with leading practical ideas

› Topics include strategy, operations, organization, marketing, and

investment management

› Discuss topics on a global level rather than China-only specifics

› Providing global context for the next the 10-20 years

Cutting-edge functional thinking

Global perspectives

› To enable students to interact with distinguished business

leaders and build their leadership capabilities

› Emphasis on helping students to understand broad yet concrete

leadership concepts

Leadership development Soft skills

Hard skills


2015 Fall - The syllabus: lecturers and topics (1/2)

Dominic Barton McKinsey Global Managing Director

Class 1: Kickoff: Course Overview – Core Themes of Leadership Sept. 15th (Tues)

Class 2: Organization [October - Date to be confirmed]

Kevin Sneader McKinsey Director from Hong Kong office, leader of McKinsey Asia

Nicholas Leung McKinsey Director from Beijing office, leader of McKinsey Greater China

Class 3: Corporate Finance [Oct./Nov - Date to be confirmed]

Jeff Hsu Chief Innovation Officer FarEastern Group

Brad Brown McKinsey Director from New York office, leader of America Business Technology Office

Suja Chandrasekaran Chief Digital Officer of Walmart

Class 4: Technological Disruption Nov. 12th (Thurs)

To be confirmed


2015 Fall - The syllabus: lecturers and topics (2/2)

Dominic Barton McKinsey Global Managing Director

Wesley Walden McKinsey Director from Melbourne office, leader of McKinsey Asia RTS practice

Tan Sri Azman CEO of Khazanah

Mark Wiseman CEO of CPPIB

Conor Kehoe McKinsey Director from London office, leader of McKinsey Private Equity practice

Class 5: Corporate transformation / Restructuring [Nov/Dec - Date to be confirmed]

Class 7: Investor’s Perspective Dec. 17th (Thurs)

Class 8: Closing Jan. 14th (Thurs)

Class 6: Operations Nov. 26th (Thurs)

Karel Eloot McKinsey Director from Shanghai office, leader of McKinsey Asia Operations practice

Fredrick Spalcke EVP and CPO of Phillips Electronics

To be confirmed

McKinsey & Company | 5 5

2015 Fall - The course outlines

SOURCE: McKinsey and Tsinghua SEM

› 35% on individual learning journal (per class) : every student to hand in

learning journal (<500 Chinese characters) after each lecture on his/her key

learning

› 15% on interactions and exercises

› 50% on group project: assignment: teams of 5- 6 students should be formed;

each lecturer to leave an open question/topic to the class; every team

choose a question/topic to write an essay (3000-5000 Chinese characters)

and hand in by the end of semester

Grading

2 credit units Credits

We will create more exclusiveness hence more commitment and effectiveness

› Focused on 4 Masters programs, including MBA students

› Large size, ~150-200 students

› Pre-screen/interview process to select students outside of the 4 programs

with stronger commitment and capacity for the course

Class size and composition

2 hours per class with a 15-min break

› 1 hour lecture and 1 hour Q&A

› Pre-assigned student teams for each class to formalize interaction between

Adjunct Lecturers and students

› Offer “flipped classroom” for students who have conflict: combine online

video and in-class discussion

Format

8 classes in fall semester 2015 Schedule


The course will be run by the Lecture Review Board, consisting of

committed people from both McKinsey and Tsinghua SEM

McKinsey Team Tsinghua SEM Team

Responsibilities Responsibilities

› Structure the course by

business functions

› Set the themes with

individual lectures and

maintain the global

perspectives of the

course

› Invite and coordinate

schedule with lecturers

from both McKinsey

and other

organizations

› Facilitate in-class

interaction between

lecturers and students

› Approve course outline

and content

› Market the course on

campus

› Select suitable top

students for the course

› Handle academic

curriculum compliance

with the university

› Provide venue and

facilities for each class

› Facilitate class-related

activities

› Collect student and

faculty feedback

The Lecture Review Board

Joint responsibilities › Refine the scope and content to maximize students’ learning, focus on balancing

between practice and academic

› Review and grade students’ group assignments and class participation

› Improve the quality and impact of the course, constantly incorporating meaningful

student feedback

Dominic Barton, Global Managing Director

(Taking full accountability)

Prof. Yingyi Qian, Dean

Mei Ye, External Advisor

David Pan, Director

Arthur Wang, Partner

Prof. June Qian, Associate Dean

Qinzheng Tian Engagement Manager

Prof. Zhirong Duan Faculty Coordinator



Course overview 1

2

Questions? 3

Winning in changing industry environments

› Global forces › Implications for business

› Implications for leaders




We are living in historic times

~600

~1100 ~1500 ~1750-1850

The Great Transition

2000-40

› Columbus to

Americas

› Reformation

splits Europe

› Renaissance

and

innovation

(Gutenberg

printing

press, first

bank)

› India connects

trading between

Middle East and

China

› Division of Europe

and shift in focus

to land from sea

culture

› Islam – influence

to Persia, North

Africa, Spain

› “Medieval warm

period” improves

agriculture and

spurs massive

migration

› Crusades

expose Europe

to Far East

› Genghis Khan

and Mongol

Conquests close

northern trade

routes

› Transformation

from agrarian to

manufacturing

economy

› 2x growth in

GDP per capita,

U.S. and Europe

› Massive

population

growth and

urbanization

~200BC

› Qin Dynasty

begins –first

imperial

dynasty in

China

› Silk road

trade routes

begin during

Han dynasty


The rise of emerging markets 1

The power of disruptive

technologies 2

The aging of the global

population 3

The integrating world –

beyond trade and finance 4

The return of (geo)politics 5

Five forces are changing the world at an unprecedented pace and scale


The world’s economic centre of gravity is shifting back to Asia Locations weighted in 3D space by GDP

2000

1950

2010

2025

1940

1500

0

1. THE RISE OF EMERGING MARKETS


The number of Asian companies in the Fortune Global

500 has more than doubled in 5 years

24

94

29

36

130

+145%

2014 2007

53

Rest of Asia (excluding Japan)

China


There will be 2.2 billion new middle class consumers by 2030 Global middle class1

Billions of people

5.0

2.1

1.1

2025 2013

4.2

2.8

2030

2.8

McKinsey & Company | SOURCE: United Nations World Population Prospects; McKinsey Global Institute CityScope 2.55 (updated November,

2014)

1 Annual personal income between $3,600 and over


2.2 billion

US & Canada

Asia-Pacific

Europe

Latin America

Sub Saharan Africa

Middle East & North Africa


Urbanisation is driving rapid increases in individual wealth

Urban population (%)

30,000

10,000

3,000

1,000

300

0 10 20 30 40 50 60 70 80 90

1860

United Kingdom

2010

United States

2010

1820

Italy

2010

1950

1950

Germany

2010

1891

Japan

2010

1950

South Korea

2010

1930

Brazil

2010

1920

China

2010

1950

India

2010

Per capita GDP by urban density 1990 Purchasing Power Parity (log scale), Percent

SOURCE: McKinsey Global Institute



Shanghai in 1990 1. THE RISE OF EMERGING MARKETS






What will these cities look like in 10 years? 1. THE RISE OF EMERGING MARKETS

Anshun, Guizhou, China

Puducherry, India (Pondicherry)

Bogor, West Java, Indonesia


Africa is also a continent to be reckoned with

Significant global resources

69% of platinum group reserves

82% of phosphates

8% of oil reserves

60% of unused arable land

21% of the world's landmass

$2.4 trillion in GDP

~1.1 billion people

SOURCE: BP statistics; Metals economics Group; CIA world fact book; Global insights: World Market Monitor


Argentina

United States of America India

Western Europe

China

~$1 trillion Household consumption

64 cities with more than 1M people


Growth in population and the rise of the middle class will place significant

strain on global resources

SOURCE: The 2030 Water Resources Group, "Charting Our Waters Future," 2009; FAO, “World Agriculture towards

2030/2050”, 2012; Energy Insights


Natural gas production

will need to rise 50%

by 2030 to meet

expected demand

Global agricultural

production will have

to increase 38% by

2030 and 60% by 2050

Global demand for

water could rise as

much as 50% by 2030

Fo

od

E

nerg

y

Wate

r


Without action, this path will be unsustainable for the planet

1.5 planets

2.0 planets

2.9 planets

2007

2030

2050


In 2007, it took 1.5

years to fully

replenish our

annual resource

use

With current

consumption, it will

take 3 years to

replenish our

annual use in 2050

– we would need 3 earths to live sustainably


12 disruptive technologies will have enormous

economic impact by 2025 Range of sized potential

economic impact

Low High

X–Y

3.7–10.8

0.2–0.3 Renewable energy

0.2–0.6

1.7–6.2

0.1–0.5

0.2–0.5 Advanced materials

0.1–0.6

Autonomous and near-autonomous vehicles 0.2–1.9

Cloud technology

1.7–4.5

2.7–6.2

0.7–1.6 Next-generations genomics

Advanced oil and gas exploration and recovery

Energy storage

Advanced robotics

Automation of knowledge work

Internet of Things

3D printing

5.2–6.7

Mobile Internet

Economic impact of the 12 most significant disruptive technologies $ Trillions, annual

1

2

3

4

5

6

7

8

9

10

11

12


2. THE POWER OF DISRUPTIVE TECHNOLOGIES


Technological innovation have already driven immense

productivity improvements

SOURCE: Gartner; International Federation of Robotics; a16z


A modern washing machine has more computing power than

Apollo 11 did in 1969

Worldwide mobile phone sales totaled near 1 billion units in 2013,

with more than half of sales coming from smartphones

By 2020, 80% of the adults on the planet will own a smartphone

In 2013, industrial robot sales totaled ~180,000 units – a 300%

increase from 1995

In the 1950s, nearly all goods were shipped ‘loose’; today, nearly

100% of sea freight is packed in standardized shipping containers


The impact is affecting all industries

Healthcare

Worldwide healthcare

data will increase 50x by

2020

Retail

Half of US retail sales

are made online or

influenced by

the Web Manufacturing

Over a million industrial

robots are operating in

factories around

the world

Transportation

Proposed ‘hyperloop’ train

could travel 2x as fast as

high-speed rail, and near

the speed of sound Agriculture

Acreage with genetically-

modified crops has

increased 100x in

past 15 years

Energy

Over half of new

electricity generation

capacity added each year

is now renewable Banking

The number of people

using mobile banking will

double in the next two

years

Social sector

The One Fund Boston

launched online 7 hours

after the marathon

bombings, raising $20

million in one week

B



Digitization enlarges the risk of missing trends – and the upside from

predicting correctly

“Industrial companies are in the information business whether they want to be or not”

– Jeff Immelt

› Anticipated shift from hardware

to services, investing billions

from 2010 on to add sensors and

become a services company

› Incremental income from

digital-enabled services

(e.g., fuel efficiency

monitoring) >$1B p.a.



Digitization and analytics are driving massive improvements in efficiency

2322

Typical Digital-

enabled

1

Locomotive velocity

Average miles per hour per day › Data analytics – optimized scheduling and predictive maintenance reduce

downtime,

increasing

velocity

› 1 mile per hour increase

worth $250M in

annual profit



In healthcare, smartphones are enabling low-cost medical diagnostic tools

Benefits over conventional technology

SOURCE: EyeNetra.com; expert interviews; http://web.media.mit.edu/~pamplona/NETRA/; McKinsey Global Institute

analysis

› As accurate as $45,000 autorefractor

Accuracy

› Patient has results in less than 3 minutes

› No need for training

Ease of use

› Plastic lens attachment that costs about $2

Affordability

› Works wherever people have a smartphone

Anywhere

› Analytics software picks up patterns in

eyesight and suggests specific solutions

Analysis

› World’s first smartphone diagnostic

tool for the human eye – from MIT

› Can measure farsightedness,

nearsightedness, misshaped eye,

age-related blurriness, and pupillary

distance

› Almost 20,000 tests conducted

worldwide; commercial launch

expected

Netra example



The global population is aging: by 2050 … 3. THE AGING OF THE GLOBAL POPULATION

In Italy, Japan and Spain, one in three people is expected to be 65 or older

80 percent of people 65 or older will live in

low or middle-income countries

For the first time in history, there will be more

people over the age of 65 than under the age of 14

The number of people worldwide aged 80 or older will quadruple to 400 million

The proportion of world’s population over age 65 will double


This is taking place in both developed and developing markets

2010 14%

2030 22%

40% of expected retirees will be in

advanced economies and China

Globally... …and in the emerging world

will increase to 31%

Share of older workers in China

of the workforce in 2030

For the first time in history, there will be more people over the age of 65

than under the age of 14

Share of workers over the age of 55

3. THE AGING OF THE GLOBAL POPULATION


200%

260%

100%

Net government debt Percent of GDP

2050

216%

2010 2025

59%

71%

Without policy changes, age-related spending could increase median net government debt in advanced economies from 59% in 2010 to 216% in 2050

Aging will place massive strains on governments

SOURCE: Standard and Poor’s

3. THE AGING OF THE GLOBAL POPULATION

Global government

debt will be larger than

world GDP ~2030


6% $4.0T 10% $4.4T

The world will is more interconnected than ever and the intensity of flows

has increased greatly in the last decade

Goods Services Financial

2% 194M people

People1

Data and communication2

Value (2012) and growth of cross-border flows, 2000-2012

SOURCE: Comtrade; IHS Economics & Country Risk; World Bank; Bank for International Settlements; IMF Balance of Payments; Telegeography; Web of Science, Thomson Innovation; Global flows in a digital age: How trade, finance, people, and data connect the world economy, McKinsey Global Institute, April 2014

1 Measured by cross-border migrants; values from 2000 and 2010.

2 Measured by cross-border Internet stock traffic; values from 2005 and 2013.

2012 value

Compound annual growth rate,

2002–12

11% $17.5T

21.2M megabits/second

52%

4. THE INTEGRATING WORLD


+$250-$450B Annual increase in world GDP from flows –

about 15% - 25% of world’s total GDP growth

These various flows help generate global GDP growth

SOURCE: McKinsey Global Institute analysis; DHL Globalization Index

+40% Difference in impact of flows on GDP growth for countries at

the center of the network compared with ones at the periphery


A growing share of all economic activity is cross-border

32

51%

+29%

+40%

25%

Financial Data & Comms

42%

35%

3%

0%

3%

7%

Services

+114%

15%

+88%

People

3%

Goods

44%

35%

19%

5%

11%

7% 0%

+26%

+61%

+20%

+240%

Share of total flows that cross international borders Percent (%)

* Note: Future growth rate modeled on historical trend; in practice, it might well diverge from this trend

1995 2010 2025*

X%

X%

Change 2010-2025

Change 1995-2010


Goods trade among emerging markets (“South-South”) has quadrupled its

share of goods trade since 1990

SOURCE: The Direction of Trade, IMF; McKinsey Global Institute analysis

Goods trade among countries %; $ trillion

33

3438

42 44 46 46

6056 48 41

32 31

6 610

1522 23 24

45

31

2011

17.4

1995

4.9

1990

3.3

2010

6.5

2005 2000

10.4 14.7

Between developed markets

(North-North)

North-South

100% =

Between emerging markets

(South-South)

2012

17.5


Total value of flows Trillion USD

8.5 R&D intensive manufacturing

All other flows

Foreign direct investment

25.9

2.1

1.8

Biz., financial and Legal services

13.5 5.5%

10.9%

7.9%

7.0%

Growth rate 2002-12, %

SOURCE: Comtrade; World Development Indicators, World Bank; International Monetary Fund Balance of Payments;

Telegography; McKinsey Global Institute analysis

Knowledge-intensive flows are half of total flows, and are

growing faster than other types

34

Knowledge-

intensive


The number of global refugees is at its highest level since World War II

Refugees, internally displaced people, and asylum

seekers worldwide

Millions

60

51

43

36353436

343232

201916

201920

01 2000 02 2015 11 10 09 14 13 12 08 06 05 07 04 03

ISIS emerges

as an

autonomous

entity

Intensification of

sectarian violence in

Iraq (Iraqi ‘Civil War’)

Number of

migrants

surpasses

WWII level


Growth in the number of Internet users and per capita Internet use has led

to a surge in cross-border traffic

SOURCE: Telegeography; McKinsey Global Institute analysis

45

40

35

30

25

20

15

10

5

0

2012 2005

2.5

2.0

1.5

1.0

0.5

0

2012 2005

20

15

10

5

0

2012 2005

Growth of Internet population Billion Internet users

Average cross-border Internet usage Kilobits per second per person

+144%

+1,769%

+665%

Growth of cross-border Internet traffic Million megabits per second

36

McKinsey & Company | 37 SOURCE: iResearch, Telegeography, OCED, Bureau of Economic Analysis

Digital is enabling flows that were previously entirely ‘analog’ – and

helping pass more surplus to consumers

51.0

3.0

3.0

63.0

39.0

12.1

Services

(Digitally-enabled share of

total services trade)

Goods

(E-commerce share of

total goods trade)

Calls

(Skype share of international calls)

Flow

Category (digital component)

Services

Goods

Data and communication

2005

2013 Share of selected cross-border flows that are digital %

37

Skype has massively

increased consumer

surplus by offering

free service


Micro-services

Micro-work

Micro-finance

Micro-goods

Almost a third of Coursera visitors are from BRICs

% share of site visitors by country

Digitization allows SMEs to become global players, a space previously

dominated by large multinationals and governments

SOURCE: McKinsey Global Institute analysis

1

2

6

1

32

1

1

1

2

3

3

3

4

4

15

22

Nigeria

Portugal

Other

Greece

Chile

Ukraine

Colombia

Canada

United Kingdom

Mexico

Spain

China

Russia

Brazil

India

United States

More than $500 million in

loans from 190 countries

More than $30 million

of contracts per month

300,000 registered solvers

in nearly 200 countries

30 million buyers

and sellers

600+ courses offered free

online in 12 languages

Micro-education

38


Geopolitical uncertainty is again at the center of daily life 5. THE RETURN OF (GEO)POLITICS


1 Out of 12 risks that were presented as answer choices in the question

22

20

39

34

7460

9

31

10

22

New asset bubbles

One or more defaults on sovereign debt

Increased economic volatility

Increased economic volatility

Geopolitical instability

SOURCE: McKinsey Global Survey, Economic Conditions Snapshot (September 2014)

And executives now say geopolitical instability is the

single biggest risk to global economic growth

Sep. 2014, n = 1,367

Jul. 2015, n = 1,202

Top 5 potential risks to global economic growth,1 next 12 months % of respondents

5. THE RETURN OF (GEO)POLITICS


Variety in the regulatory and political framework is as diverse as consumer

tastes


In November 2013, Mexico taxed ‘junk foods’ (e.g., food high in saturated fat, sugars, and salts) by 8% – with an additional tax on sodas

– The Guardian, November 2013

In May 2014, France enacted legislation requiring the Minister of Economy’s approval for foreign investment in the energy, transport, water, public health and telecommunications sectors

– Latham and Watkins (top US Law Firm), May 2014

Argentina now requires that car importers have to match their imports with exports of equal value. To comply, BMW’s Argentinian subsidiary has resorted to exporting rice, and Porsche has exported olives and Malbec wine

– Bloomberg, November 2012


In an increasingly volatile world businesses must ask if they are ready for

the shocks

What if….

An Icelandic volcano shuts

down air traffic over large parts

of Europe for several years

A natural disaster debilitates a

major global economic focal

point

Terrorists (state-controlled or

insurgents) release a WMD with

global impact

Geopolitics cuts off cross border

energy flows

An epidemic goes global (SARs,

MERs, Ebola)

A popular uprising over-throws

a major state government

A major currency collapses (the

Euro tried, is the Yen next?)

The Internet breaks down (can

business run without it for an

hour?)




Course overview 1

2

Questions? 3


› Global forces

› Implications for business › Implications for leaders




These global forces are creating a ‘new normal’ for the business world –

and result in several imperatives for businesses

New state of the business world Implications for businesses

› Workforces will be smaller due to automation and aging

› New technical skills – with a shorter ‘shelf life’ – are required

Invest in talent and Human Resources

› Constant innovation is paramount to success

› Industry distinctions will be less firm

Design a flexible organisation

› Geopolitical risk is revived

› Cyber presents a new type of risk

Know the risks and test your resilience

Digitise – and learn to innovate

› Every industry will be digitised – those companies that don’t

will be left behind

› Consumers in emerging markets – especially cities – are

the primary drivers of global growth

Think about demand in granular terms

› Competition is intensified

› Companies are operating in more markets than ever before Foster agility


Implications for business

Invest in talent and Human Resources 2

Design a flexible organisation 3

Foster agility 4

Know the risks and text your resilience 5

Digitise 6

Think about growth in granular terms 1


424 cities in emerging markets will fuel nearly half of the growth in

global GDP through 2025

28

25

631

Latin America Developed

countries

Global growth

0

China

region

Eastern

Europe &

Central Asia

4

Middle East

& Africa

Other

emerging

regions

100

4

GRANULAR GROWTH

SOURCE: McKinsey Global Institute Cityscope 2.55 (updated November, 2014) ; note: does not sum due to rounding

Percent contribution to global GDP growth, 2012–2025

100% = $42.5 trillion

In China, 15 MM people move to a city each year – equal to adding New York City proper twice

315 cities

in Asia

= 424 largest emerging market cities

45% of global growth


Emerging market cities, especially in China, will become the largest

consumer markets in many categories

SOURCE: McKinsey Global Growth Compass

Other emerging regions Developed regions China

2025 Sales Rank Sports & Energy Drinks Facial Moisturizers Spirits

Tokyo 2 Beijing Shanghai

3 Beijing Moscow Beijing

4 New York Guangzhou Chongqing

5 Shanghai Tianjin Osaka

6 Haerbin Chongqing Tianjin

7 Tianjin Shenzhen Guangzhou

8 Wuhan Tokyo Shenzhen

9 Nanjing London Wuhan

10 Bangkok Wuhan Chengdu

11 Xian Rhein-Ruhr Dongguan

12 Chengdu Foshan Nanjing

13 Los Angeles Hangzhou Hong Kong

14 Shenyang Chengdu Foshan

15 London Nanjing Seoul

1 Chongqing Shanghai Tokyo

GRANULAR GROWTH





Foster agility 4


Digitise 6



A radically evolved future will mean that workforces are smaller and

more technical – requiring new skills

Talent is the

next great competitive

‘battlefield’ for organisations

TALENT AND HR


A radically evolved future will mean that workforces are smaller and more

technical – requiring new skills

38% Of global employers

can not find the talent they need

SOURCE: Manpower survey; McKinsey Global Institute

Competition for talent will intensify

Digital tools like LinkedIn give employees more mobility and options – and competitors a tool for ‘poaching’

Aging population means fewer available workers

Concerns over inequality are putting upward pressure on wages

INVESTING IN TALENT AND HR

38m – 40m Shortage of workers

with higher education degrees by 2020

#1 Concern among CEOs in 2015 survey was human capital


AT&T is reinvigorating its talent management by partnering with a

university to provide low-cost worker training

Telecom being

disrupted – 2.6B will

use smartphones by 2018

AT&T’s challenge: 230,000 employees, with

skills becoming obsolete

83% faster than just a

few years ago

AT&T’s response: partnering to provide online

MSc in Computer Science to

2,200 employees at

$200/month

TALENT AND HR


Advanced data analytics is opening up new ways

of predicting successful hires

Reduced attrition to 4% per annum, and was able to

decrease hiring timeline to

under 2 months

Uses an online test and sorts

applicants using an algorithm

identifying traits associated with retention, giving

candidates a 0-100 score

Realized substantial savings

from 68% decrease in worker’s compensation claims

Supplements selection process

with screening for traits correlated with abusing worker’s compensation (e.g.,

driving record)

Saw 20% reduction in call center attrition, significantly

reducing training costs and

improving quality

Screens applicants based on

data points associated with retention (e.g., having a

short commute)

TALENT AND HR


The ‘new HR’ is one of the hottest topics for managers today TALENT AND HR


Applying the rigor of Finance practices to HR can significantly

improve talent management

Predicting outcomes

Diagnosing problems

Prescribing actions

› Anticipating whether candidates will be a fit

› Identifying the strategic skills that will be most in

demand 2-3 years forward – which 2% of jobs will

drive 98% of your impact?

› Discovering the people problems that are below the

surface of business failures

› Monitor and maintain the ‘social engine’ of

organisations – ensure that communication lines are

open and robust

› Approach the reallocation of human capital between

projects with the same rigor as investment

› Recognize ‘value creators’ both inside and outside

the organisation – and find ways to bring them into

high-impact roles

TALENT AND HR

Advanced people analytics will support each of these goals

Integrating digital HR tools can increase productivity 9%






Foster agility 4


Digitise 6



FLEXIBLE ORGANISATION

The organisation of the future has:

› Fewer layers

› Decentralised

decision-making

› More

partnerships

› Powerful data

and digital tools

› Extreme fluidity

› Collaborative

external

partnerships

The organisation of the future is a flatter, more decentralised model

Traditional hierarchy Organisation of the future


Apple exemplifies a modernising organisational structure

Tim Cook, CEO

to Tim Cook

17 direct reports

VPs in charge of

critical pieces of work

will temporarily

report to CEO



Haier is restructuring to become an ‘organization of the future’

Most valuable brand in China for the past 13 years

Market cap tripled from 2011-2014

Reorganized 80,000-person workforce into 2,000 independent units

Each unit manages its own P&L

Employees paid on performance



New entrants are using flatter structures to increase

transparency, speed, and innovation

› Highly decentralized model –offices in each

city have only a few dozen employees at most

› Drivers interact directly with customers, using

the Uber app

› Follows a “self-organisation” model, without

traditional managers

› Employees organized by cluster, not

traditional linear hierarchy

› Employees are their own managers

› Allows fluid movement between

individual and group contribution roles

Online shoe retailer

Gaming company






Foster agility 4


Digitise 6



1 Each year’s proportion of company CapEx in each business unit was correlated to previous year’s figure

SOURCE: McKinsey Corporate Strategy Service Line; Compustat

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1992 1998 2004 1996 2002 1994 2008 2000 2010 2006

Year

This year’s allocation is highly correlated with last year’s allocation of CapEx

In the private sector, resource allocation is generally inherently

conservative

AGILITY

1 Each year’s proportion of company CapEx in each business unit was correlated to previous year’s figure


0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1992 1998 2004 1996 2002 1994 2008 2000 2010 2006

Year

1 Each year’s proportion of company CapEx in each business unit was correlated to previous year’s figure 1 Each year’s proportion of company CapEx in each business unit was correlated to previous year’s figure


Relative business unit year-to-year CapEx correlations1

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1992 1998 2004 1996 2002 1994 2008 2000 2010 2006

Year

Correlation index over years 1990-2010


Median TRS CAGR of companies by degree of reallocation

Degree of reallocation

A company growing at 10.0% CAGR vs. 6.1% would be worth twice as much in 20 years

Percent, 1,508 companies, 1990-2010

10.0

8.5

6.1

Dynamic (>49%)

Drowsy (31-49%)

Dormant (0-30%)

SOURCE: McKinsey corporate strategy research program

But top performing companies tend to be those that reallocate resources

most frequently

AGILITY


Several companies have moved agility levers to the top of their agenda in

order to make sure they can adapt quickly to external conditions

Example lever Description Agile capabilities

Preparation

Detection

Fast response

Forecast demand › Updates forecasts real time with

product performance, external

factors, and live stock levels

› Uses market prediction approach

for forecasting

Develop playbooks for critical processes

› Used pre-planned disaster strategy

during 2011 tsunami

− Moved production to other sites

− Returned damaged sites to

production within 1 month

Develop modularization approach

› Increased modularity in design and

production

Back-up sites › Redundant sourcing of supplies

› Flexible plants to take volume from

others

AGILITY

http://www.driversvillage.com/vw logo low res.jpg

McKinsey & Company | 64 64 SOURCE: Volkswagen strategy 2018 publication

VW standardized several components of its cars – 65-70% of parts can be shared among models – while still allowing individual brands to control the ‘face’ of the vehicles

This modularization effort is expected to reduce:

Unit cost by 20%

One-off expenses by

20%

Engineering hours per

vehicle by 20%

Weight and emissions

Volkswagen’s modular ‘toolkit’ between its brands reduces

engineering time, product development speed and cost

AGILITY


Toyota has introduced ‘factories-in-a-box’ that create greater

operational flexibility

Smaller, simpler factories give Toyota agility to move production to emerging markets

The factories are small format – producing only 250 units per day vs. up to 2,500 at some

Factories can be built quickly and ‘stacked,’ allowing supply to be built up rapidly, anywhere

Up-front investment is up to 40% less than traditional plants

Capital can be saved and used to quickly take advantage of future opportunities

The factories can function with low automation

Allows for opex-capex adjustment and reduces need for technical expertise in young markets

AGILITY


Nutella global value chain

250,000 tons of

product are

produced in 9

global factories

Packaging and

some ingredients

(e.g., skim milk)

sourced locally;

others e.g., sugar,

cocoa, vanillin, palm

oil, hazelnut)

sourced globally

Headquarters

Main international suppliers

Factories

Nutella’s global sourcing and production means that it can withstand

shocks such as local supply shortages or currency fluctuations

Agile supply chain

AGILITY


Leveraging assets – rather than owning them – converts capex into

opex and has allowed companies like Airbnb to rapidly scale

Airbnb leverages public assets – people’s private homes – to build a

hotel business

Number of Guests

15M

10M

5M

17M

2010 2011 2012 2013 2014 2015

Despite owning -0- properties and having only 1,600 employees, Airbnb has grown 353x in five years

AGILITY






Digitise 6


Foster agility 4


As global growth has diverged, volatility has become the norm –

everything is a variable

Range of outcomes

RISK AND RESILIENCE

Probability of outcomes

Range of outcomes

Probability of outcomes

From a relatively narrow set of possibilities … to ‘edge cases’ becoming normal

This volatility manifests across the global economic system:

Oil prices

Equity markets

Commodity prices

Exchange rates

1990s & 2000s 2010s - ?


Encourages complete transparency

on potential risks and delays, even if

they would be costly to address

Encourages “out of order”

communication – between anyone,

at any time, outside of the normal

“chain of command”

“Communication needs to be

between anybody at any time”

– President Ed Catmull

Other companies are encouraging transparency

to surface risks before crises

Ford Edge team admitted pre-launch

issues, delaying launch, and was

praised by former CEO Alan Mullaly

Transparency and freedom of communication are key to ensuring that risks are raised early and can be managed

proactively

RISK AND RESILIENCE


Digital also creates new risks

“This was an unparalleled and well-planned crime,

carried out by an

organized group, for

which neither Sony

nor other companies

could have been fully

prepared”

– Investigations Team

Cybersecurity incidents have increased 1,100% over the last 5 years

2010

2015 11x

RISK AND RESILIENCE


Cyber threats require fundamentally new defense systems


Poor cybersecurity could cost $3T in lost economic value in 2020

Need to…

Prioritize business risks and information assets – align with

top ~50 executives on most important data to protect

Enlist front-line users – create a “Top 100+” program for staff

dealing with most sensitive information (e.g., deal data)

Build cybersecurity into business processes – create a

“secure path” to handle most sensitive data

Test ability to respond to breaches – create a team tasked

with trying to penetrate critical systems

Use active defense – create a counterterrorism-style “fusion

center” combining intelligence, analytics, and operations

4

1

3

5

2

RISK AND RESILIENCE






Digitise 6


Foster agility 4


Digitisation is upending the “fundamental truths” of business

Disrupting companies What we used to believe

DIGITISATION

1 Need to own assets to leverage their value

2 Marginal costs > 0

3 Core services need to be delivered by own employees

4 Competitors take years to emerge and scale

v. 5 Disruption comes from within your industry


Disruptors are attacking all aspects of traditional businesses

(banking ex.)

SOURCE: CB Insights

Software is

cheap and easily

scalable,

providing

incentive to try

to disrupt all

aspects of

business

Not all of these

start-ups will

survive, but the

bank will have to

respond to these

disruptions

Financial technology example – the unbundling of Wells Fargo

DIGITISATION

McKinsey & Company | 76 SOURCE: Digital Enterprise modeling

Digital sales

from out-

performance

Digitize

Production

and

Servicing

Reshape

distribution

model

Reduce

material

cost

Total

impact

20%

3% 56%

13%

14%

6%

Majority of

impact from

digital is cost

(36% cost vs.

20% revenue)

Cost

Streamline

overhead

functions

To capture the digital opportunity, companies will need to understand

the value at stake in their particular businesses

P&L impact of digital % of total

DIGITISATION


Companies will also need to assess their “Digital Quotient” –

does digital run through everything they do?

DIGITISATION

Connectivity

Automation

Data-driven decision-making

Content and digital marketing

Customer Experience

IT architecture

Capabilities

Risk appetite

Test and learn

Speed / Agility

Internal collaboration

External orientation

Culture

Linked to business strategy

Bold, long-term orientation

Centered around customer needs

Strategy

TM

Organization

Roles and responsibilities

Talent and leadership

Digital investment

Governance / KPIs

Scored out of 90 Based on 1,000s of benchmarks


Companies that are directly facing disruption will need to respond

swiftly and decisively

Reaction Description Examples

Fund and/or acquire potential disruptors

› Google Ventures funds companies that could

disrupt its businesses, and provides design,

marketing, recruiting, and engineering teams 4

Improve current business using digital tools

› Dominoes Pizza shifted their entire pizza order

process from the phone to its apps and website 1

Shift into adjacent digital business

› Nike launched the ‘Nike+’ line of wearable

technology (e.g., shoes that track your

distance) and build social apps to share results 3

Disown traditional business, engage in digitally aligned one

› Starbucks is introducing a mobile ordering

service where customers can ‘order ahead’ and

pick up or even have coffee delivered 5

2 Build a complementary digital channel

› Topman, a UK men’s clothes retailer, launched a

service where customers can videoconference

with a ‘personal shopper’

DIGITISATION

McKinsey & Company | 79 SOURCE: Gartner, CDO Club Network

1,000

500

2,000

2015 (est.) 2014 2013

Number of companies with CDOs Examples

Appointing a Chief Data (or Digital) Officer is a way

for companies to make digitisation a priority

CDOs are increasingly a part of the top team at major multinationals

DIGITISATION



Course overview 1

2

Questions? 3


› Global forces

› Implications for business

› Implications for leaders




Leadership in a new era

How

leaders

interact

What

leaders do

Who

leaders

are

Telescope

and a

microscope

Ready for “trend

breaks”

Tri-sector

athlete

Receptor and

connector

Strong sense

of purpose

Calm in the eye of

the hurricane

Influence

without

authority

Unlocking

drive

Perception

and judgment

Network

Marathon

and a sprint

Set ambition


Ready for trend breaks

“Modern leaders must live in 2-3 realities

simultaneously” (e.g., oil $35/barrel or

$200/barrel)

› Value insight over experience - force

your team to challenge and plan for “tail

scenarios”

› Ready to connect and scale innovation

from everywhere

› Willing to shift resources massively year

to year (winner takes all)

› Personally champion the next

opportunity – or else the organization will

naturally kill it

› Nurture cross industry connections –

personally and as a model for others

› Connect to understand “growth pockets”

– even if very distant


Ready for trend breaks

Jeff Immelt

“Industrial companies are in the information business whether they want to be or not … we want to treat analytics like it’s as core to the company the next 20 years as material science has been over the last 50 years”

Has overseen major investments into the

industrial internet and analytics spaces –

hiring thousands of new people with new

skills, launching new products and services,

experimenting with business and innovation

models

Made an fundamental, bold decision in 2010

to ‘make’ rather than ‘buy’ digital capabilities

within GE, entirely from scratch


Receptor and connector

“Chief reality tester: continuously calibrating the organization with the external world to ensure relevance”

› Provide purpose and meaning that

helps workers thrive and make

decisions

› Find a few profoundly simple

messages that provide clarity globally

› Run a boundary-less organizations:

suppliers, customers, front line,

public are all your stakeholders

› Find ways to spend time with front

line to receive and connect ideas

(e.g., retail CEO – 1 day a week in

stores; bank CEO – top 20 required

to listen to call center complaints

each month


Lead with a telescope and a microscope

“You are much more

exposed to major

unforeseen shifts in

trends – often more

negative surprises

than positive”

…but next 5-7 years bring huge volatility and risk (telescope not enough)

› Prices

› Capital flows

› Trade

› Geopolitics

› New markets

› New consumers

› New business

models

Time of significant opportunity to build for future…

How some manage

› Use calendar,

e.g., 3 days a

quarter only

on long-term

strategy

› Stress test

the

organization

– and team

(scenarios)


Randall Stephenson AT&T

Lead with a telescope and a microscope

“We need to be ahead of the curve…if we see ourselves falling behind global trends, we know we are in trouble”

Anticipated the industry trend of mobile

media consumption and completed

merger with television provider DirecTV

Recognized that shifts will be required

at individual employee level and

developed plan to reskill 90,000

employees through higher education

partnerships and ‘gamification’ of HR

development system


Public sector

Social sector A 'tri-sector athlete'

Private sector

Networks and contextual understanding: Tri-sector

leaders are adept at

building and maintaining

networks outside of their

fields and understanding

the relationships between

sectors

Balanced motivation: “A

hybrid engine of self-

interest and concern for

others serves a much

wider circle of people

than can be reached by

self-interest or caring

alone”

Transferrable skills: leveraged public sector

experience with the

Foreign Service, the

Senate and USAID to

help Coca-Cola reduce its

water usage per liter of

Coke from 3 liters to 2

Bill Gates Jeff Seabright Unilever Michael Bloomberg


Strong sense of purpose

“Character is a muscle a leader

must constantly improve and build”

› Invest time in developing your

personal purpose and values framework

› Purpose and core beliefs are

needed to guide “right versus right” decisions

› Exert self-control in decision-making to avoid decision fatigue

and exhausting finite willpower

› Keep trusted advisors and seek

multiple viewpoints

› Connect to your “roots” (e.g.,

people or places to ground you)


Strong sense of purpose – the importance of perseverance

After Dashrath Manjhi’s wife died due to lack of medical treatment (the nearest town

with a doctor was 70 km away), he spent the next 22 years working day and night to

build a road through the mountains – reducing the distance between towns to 15 km


Calm in the eye of the hurricane

“Never share your doubts, but be looking for reasons you are wrong”

Intensely focused/outwardly calm

› Shrinking interval between

major shocks, national

crises become global

› Leader must dampen

volatility and panic

› Importance of

compartmentalization

› Test the team – avoid

panic-prone individuals


Pole vaulting

› Set ambition

independent of others

› Celebrate success, but

always aim higher

› A single failure does not mean the bar is too high

Renaud Lavillenie broke

the world pole vault record

that had stood for over 20

years in February 2014 –

then immediately

attempted to break it again


Pole Vaulting

Larry Page

“Over time companies tend to get comfortable doing the same thing, just making incremental changes. But in the technology industry, where revolutionary ideas drive the next big growth areas, you need to be a bit uncomfortable to stay relevant”

Decided to undertake a complete

restructuring of the 2nd largest company in

the world in order to stay innovative

Gave up his role as CEO of Google to

cultivate more ambitious and – in his own

words – ‘crazy’ ventures outside of the core

business


Marathon and a sprint

“My biggest challenge is now managing energy, not time”

Know yourself and manage personal energy › Your schedule and

travel – no more “rest

days”– so how do you

rest?

› Best times of day

(decision making)

Have the personal disciplines of an athlete (nutrition, health)

Be authentic – exhausting not to be


Influencing without authority

› Invest time to

understand others’

motivations and pain

points

› Be deliberate in use of

language and choice of

communication (e.g.,

email vs. phone vs. in-

person)

› Honesty breeds trust


Unlocking drive

Move away from basic “carrot

and stick” models of motivation

(e.g., compensation, promotions)

and unlock drive through:

▪ Autonomy – e.g., Google 20%

time generates half of its

innovations

▪ Mastery – tap into desire for

self-improvement and calibrate

responsibilities to motivate (not

bore or discourage)

▪ Purpose – e.g., stonemasons

working, one says “I am

hammering a rock,” one says “I

am shaping a block,” one says

“I am building a cathedral”

“Control leads to compliance, autonomy leads to engagement”

Daniel Pink, Drive (2009)

Move away from basic “carrot and

stick” models of motivation (e.g.,

compensation, promotions) and unlock drive through:

› Autonomy – e.g., Google 20%

time generates half of its

innovations

› Mastery – tap into desire for self-

improvement and calibrate

responsibilities to motivate (not

bore or discourage)

› Purpose – e.g., stonemasons

working, one says “I am

hammering a rock,” one says “I am shaping a block,” one says “I am building a cathedral”


Perception and judgment

“When the temperature goes to 1,400 degrees, some people crack like glass”

› Difficult to assess people’s leadership

potential, strengths and

weaknesses without

getting to know them

very well

› Invest time finding the

people who can make

the right decisions, not

in making more

decisions

› Challenge people to

reach their full potential

› Move quickly and

decisively on people


Network

Build networks inside

your organization, within

your industry, across

industries and across

sectors in order to:

› Broaden horizons and

extend influence

› Understand and

anticipate potential

disruptions from

different directions


Shimon Peres State of Israel

Networking

“Leaders have lost their way … Leadership is about being a servant, not a ruler”

3 time Prime Minster and recent

President of Israel, Nobel Peace

prize recipient

Is working to bring together

businesses with the public sector to

solve the world’s most pressing

issues – especially human

development and early childhood

well-being


Always on

“As a CEO, 10 years ago no one

would recognize me, now they do

– at home, in China, in Russia”

› 24/7 visibility – living in

a reality TV show

through Twitter,

Youtube

› CEOs as face and

name of the company

Must create a mental refuge from the spotlight

› Radical transparency

and open data



Course overview 1

Winning in changing industry environments 2

Questions? 3




Questions

Topic for group assignment Questions for classroom

Which of the 6 implications for business

is most important to China and why? Do

you see other implications other than

the six mentioned?

1

2 In your view, what are the business

challenges and opportunities facing

Chinese companies? Which Chinese

companies do you think are best

positioned to address those challenges

and opportunities? Why?

3 What steps can you take to adopt the

characteristics of successful leaders in

the new era?

Please write an essay (3000-5000

Chinese characters or 2000-3000 English

words) on one of the below questions:

What are the business opportunities

and challenges for Chinese companies

in light of key global forces and their

implications?

1

Imagine you are a CEO of a leading

Chinese company in a chosen industry

(you can choose any sector). How

would you lead your organization to

address opportunities and challenges

in the next 10 years? Please use

concrete data, case examples and

logical inference to support your

argument.

2

Documents

Leadership in a New Era (by McKinsey)