Mckinsey Quarterly Issue 42011

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 CEOs
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 practitionersMassachusetts Institute of Technology professor
Erik Brynjolfsson, Cloudera cofounder Jeff Hammerbacher,
AstraZeneca senior executive Mark Lelinski, and Butler University
mens basketball coach Brad Stevensoffer their perspectives on
competing through data. And for executives ready to start creating a
big data strategy, McKinseys 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 overtaking it in economic importance within the next 20 years. McKinseys
Joanna Barsh and Lareina Yee present research about the silent
killer of womens careersrarely acknowledged but widely held mindsets that often block the path to the C-suiteand 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 McKinseys 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?
Features
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. Heres what you should know.
36
48
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.
Competing
through data:
Three experts offer
their game plans
MIT professor Erik Brynjolfsson,
Cloudera cofounder Jeff Hammerbacher,
and Butler University mens basketball
coach Brad Stevens reflect on the power
of data.
Changing
companies minds
about women
60
Top executives
need feedback
heres 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.
Feature
90
Special report
The second
economy
W. Brian Arthur
72
Oils uncertain
future
Digitization is creating a second

economy thats vast, automatic, and
invisiblethereby bringing the
biggest change since the Industrial
Revolution.
What you need to know

Its possible, though far from certain,
that oil prices will spike in the
years ahead. Heres whyand how
you can prepare.
Picture This
74 Another oil shock?

Tom Janssens, Scott Nyquist, and
Occo Roelofsen
100
78 The automotive sectors road

to greater fuel efficiency
Russell Hensley and Andreas Zielke
The changing
shape of
US recessions
Byron Auguste, Susan Lund,
and James Manyika
84 Anticipating economic
headwinds
Jonathan Ablett, Lowell Bryan,
and Sven Smit
Recovery time for US employment

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
the Web
Highlights from
our digital offerings
8 Idea Exchange
Readers mix it up
with authors of articles
from McKinsey Quarterly
2011 Number 3
120 Extra Point

Big data for the CEO
Leading Edge
10 Cybersecurity: A senior
Applied Insight
103 Seizing the potential
executives guide
of big data
James Kaplan, Shantnu Sharma, and

Allen Weinberg
Jacques Bughin, John Livingston,

and Sam Marwaha
A changing corporate-technology
landscape and more aggressive
hackers make safeguarding valuable
corporate data a top-management
issue, not just an IT problem.
Companies are learning to use largescale data gathering and analytics

to shape strategy. Their experiences
highlight the principlesand
potentialof big data.
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 worlds
biggest baker
Grupo Bimbo CEO Daniel Servitje
ref lects on his companys growth
in developed and emerging markets.
18 Sizing the Internets
Executive perspective
AstraZenecas 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.
economic impact
Eric Hazan, James Manyika, and
Matthieu Pelissie du Rausas
New McKinsey research underscores the
magnitude of the Nets impact on
global growth and corporate performance.
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.
Heres how.
Editorial
Business
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Finding the courage

to shrink
Spinning off businesses can have
real advantages in creating value
if executives understand how.
Other features:
Measuring the value of search
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New McKinsey research estimates

the impact of Internet search in the global
economy, pinpointing the sources of
value and the beneficiaries.
What Chinas five-year plan

means for business
McKinsey analyzed the potential impact

on 33 industries. Two dimensions
stood out: the plans effect on profit pools
and on the competitive landscape.
An accompanying interactive exhibit
offers a detailed look at industries,
grouped by their common exposure to
the plans potential impact.
Boards: When best practice isnt enough
Many boards have improved their

structures and processes. But to
become truly effective stewards of their
companies, they must also instill the
right mind-set and boardroom dynamics.
Idea Exchange
Readers mix it up with authors of articles from McKinsey Quarterly
2011 Number 3
Were all marketers now

The cover package of our previous issue focused on the transformational 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 engagementwhich wasnt mentioned, even
though brands help develop employees who can ensure a consistent consumer
experienceis that HR and marketing tend to work in silos. They
should harness each others strengths, fusing HRs people knowledge with
marketings brand and customer expertise.
McKinseys Paul Magill responds:
The HRmarketing 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 interactions help identify top-priority touch points, and we increasingly see marketing
working with HR to find frontline employees who arent 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 engagement 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.
McKinseys Laura LaBerge responds:
Youre 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, its easier for employees at smaller companies to
wear several hats and embed marketing thinking across the organization. Its 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.
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 Gnter Mller-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, McKinseys Suzanne Heywood suggests some
additional considerations, to which Campbell responds:
Suzanne Heywood
Principal, McKinsey & Company, London
In our experience, companies need to first determinebased on their sector,
strategy, and growth historywhether 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, its important to recognize that centralization may yield improvementssuch as enhancing knowledge sharing or minimizing operating
riskthat are difficult to quantify in terms of a market-capitalization benchmark. 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 its because so much of this assessment is qualitative
that companies need to use a quantitative hurdle (such as the 10 percent marketcapitalization 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, its 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
Leading Edge
Research, trends, and emerging thinking
10
13
Cybersecurity:
A senior
executives guide
A new era
for commodities
16
18
A quick
chat with the
worlds biggest
baker
Sizing
the Internets
economic
impact
Cybersecurity: A senior
executives 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

security breaches that have
struck sophisticated companies in
recent months has led many senior
executives to worry about how
safe their own corporate environments 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 executives at 25 top global companies,
we believe that technology tactics
alone are insufficient. To gain
ground against the hackers

in protecting information assets
such as business plans and
intellectual propertywithout
constraining business growth and
flexibilitycompanies 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,
11
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 complexity and virulence, painful as that
may be for leaders to contemplate.
Professional cybercrime organizations, 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
from outside the IT organization.

They will be vital to help identify and
then champion business practice
changes that create intelligent constraints 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
customersthinking 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 competitive 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 information, 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 hackers 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 companies 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
its an ongoing battle, so security
tactics must change constantly.
Advanced companies conduct simulated 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 organizations
tactics evolve, leaders can boost the
odds of prevailing by developing
approaches that cut across commercial strategy, operations, risk
management, and the legal and
technology functionssupported by
a mandate and active engagement
from the most senior level of
executives.
Allen Weinberg is a director in
McKinseys 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
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.
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 oilshocked 1970s because commodity
prices increasingly move in lockstep. Our analysis suggests that they
will remain high and volatile for
at least the next 20 years if current
trends holdbarring a major
macroeconomic shockas 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-
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 isnt
unusual. Similar factors were at play
throughout the 20th century as
the planets 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 everincreasing 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

In little more
a decade,
soared
fromthan
historic
lowssoaring
to newcommodity
highs. prices have
erased a century of steady declines.
McKinsey Global Institute commodity price index (average of 19992001 = 100)1

260
240
World War I
220
200
180
World War II
160
1970s oil shock
140
120
100
80
Postwar
depression
Great
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. 15163; World Bank commodity price data; UN Comtrade; McKinsey Global Institute analysis
potential climatic impact of carbon

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 Celsiusthe threshold
identified as potentially catastrophic.2
Second, its 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 historically spurred efficiency-
enhancing innovationswe are

at a point where supply is
increasingly inelastic. Long-term
marginal costs are increasing
for many resources as depletion
rates accelerate and new investments 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
15
of course, and were not suggesting

that its easy; major policy, behavioral,
and institutional barriers must
be addressed. Yet as we enter a new
era for commodities, theres little
choice but to act.
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 balancebut 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 headwinds, 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 researchsummarized
in a forthcoming McKinsey Global
Institute report on the worlds
natural-resource needs in the 21st
centurysuggests that better
resource productivity could singlehandedly meet more than 20 percent 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,
See David Court and Laxman Narasimhan,

Capturing the worlds 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 McKinseys
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.
16
2011 Number 4
A quick
chat with the
worlds
biggest baker
Grupo Bimbo CEO Daniel Servitje reflects
on his companys growth in developed and
emerging markets.
What is the worlds largest

baker? Guess again if you didnt
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 Lees freshbaked-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 companys 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 McKinseys
Alejandro Diaz, Mr. Servitje
discussed Grupo Bimbos geographical expansion, the challenges
that engendered, and how
the companys origins as a family
business aided its growth.
The Quarterly: How do

the companys emerging-market
roots differentiate you from
other multinational companies?
Daniel Servitje: Were probably
looking at things from a different
perspective, from the ground upa
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. Thats
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: Ive been
surprised. I thought it was going to
be much more complicated
for a Latin American company to
develop its businessto replicate
our business modelin 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. Thats 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,
weve tried to develop a more
thorough approach to our M&A due
diligence and to be more sensitive
to the complexities of labor.
View the full

interview, The
making of an
emerging-market
champion, on
mckinseyquarterly
.com.
Despite the hurdles, we have

become the leading baking player in
Brazil. But our challenge there is
to find the right model to penetrate
the traditional mom-and-pop
segment, which is quite different
from what we find in other Latin
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 its a very viable business.
Our company has been growing
by about 10 percent compounded
annually for many yearsfour
to five times the GDP growth of
Mexico and the United States. We
have been blessed because
weve 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 wouldnt have been
successful.
Alejandro Diaz is a director in
McKinseys Dallas office.
18
2011 Number 4
Sizing the Internets

economic impact
Eric Hazan, James Manyika, and Matthieu Pelissie du Rausas
New McKinsey research underscores the magnitude of the Nets 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
Internets impact, whether at
the level of national economies or
of individual firms, has remained
elusive. In an effort to quantify
the Internets 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 enterprises in 12 countries on their use
of the Internet and its effect on
their performance. Econometric
analyses of both macro- and microeconomic data provided reinforcing evidence of the Internets
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 percent 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 Internets
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

the Internets net impact on jobs
has been positive: for every position
eliminated through productivity
gains associated with it, 2.6 are
created. This finding is confirmed in
Q4 2011
a detailed study of France, as
Internet growth
well as a survey of 4,800 small and
medium-sized enterprises
we conducted in 12 countries.
Finally, our study also shows that
Internet maturitymeasured
by a variety of factors characterizing
a countrys Internet use, infrastructure, online expenditures, and
Exhibit 1 of 2
The Internets contribution to global economic growth

The Internets contribution to global economic
is
accelerating.
growth is accelerating.
Internets contribution to
global GDP growth, %
Nominal GDP growth,1
19952009, %
Over 14 years, 19952009

Over more recent 5 years, 200409
Mature
countries
15
Sweden
14
Germany
South Korea
Italy
N/A2
3
3
China
Russia
2
2
1
1
10
3.9
1.9
4.7
3.4
7.0
4.7
3.4
4.6
0.3
4
5
India
15
12
Canada
18
16
United States
Brazil
23
10
France
High-growth
countries
24
11
United Kingdom
Japan
33
13.1
9.5
10.7
26.7
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
widely.
technologiesmore
extensively
are growing more quickly
and exporting more widely.
Small and medium-sized enterprises
Enterprises grouped by degree of
Web-technology utilization1
Low
(42% of respondents)
Medium
High
Annual growth over

last 3 years, %
6.2
Export revenues as
% of total sales
2.5
7.4
2.7
13.0
5.3
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-commercecorrelates with
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 infrastructure 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
characteristicsemploying larger
numbers of Internet technologies
(such as blogs, social networks,
and e-commerce sites) and
enjoying high rates of adoption
among employees, customers, and
suppliersrecorded revenue
growth of 13 percent over the last
three years, twice the rate of

companies with lower levels of
Internet adoption. Furthermore, the
profit levels of these Internetintense 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 its 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 advantage enjoyed by heavy Internet
users represents a significant global
profit pool. Companies that supply
Leading Edge
21
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, Webrelated change, they should look
for opportunities to:
reinvent business models
to capture productivity and performance 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 organizational 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 economys
benefits, our research suggests.
We found that countries with four
characteristicseasy access to
start-up capital, a solid broadband
infrastructure, a business environment that combines moderate

regulation with protections for intellectual capital, and strong
educational and training programs
that foster technical skillshave
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 Webrelated goods and services.
2
For more see Michael Chui, Markus Lffler,
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
McKinseys 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.

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; its yours as a
senior leader. Maybe your company
is sitting on powerful data assets that
could strengthen its ability to compete,
or perhaps theres a competitor thats
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. Heres
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
competitors 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 CFOs officethe rival company had become
a different, far nimbler type of business.
What this executive team had witnessed first hand was the gamechanging 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 economys 17 sectors, companies with more than 1,000
employees store, on average, over 235 terabytes of datamore 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 happening 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 companies that use data and business analytics to guide decision making
are more productive and experience higher returns on equity than
competitors that dont.2 Thats consistent with research weve conducted
showing that networked organizations can gain an edge by opening
information conduits internally and by engaging customers and suppliers 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 thats
right, companies need to start thinking in earnest about whether
they are organized to exploit big datas 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 evolvethe 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. Weve organized the
discussion around five questions we think all senior executives
should be asking themselves today.
At the outset, well acknowledge that these are still early days for big
data, which is evolving as a business concept in tandem with the underlying technologies. Nonetheless, we can identify big datas key elements. 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 elsewhere 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, AstraZenecas big data partnership,
on page 104).
In addition, wed suggest that executives look to history for clues about
whats 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 management 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 discovered 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
thats now under way.
What happens in a world of radical transparency,

with data widely available?
As information becomes more readily accessible across sectors, it can
threaten companies that have relied on proprietary data as a competitive asset. The real-estate industry, for example, trades on information 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 perspectives on the value of properties and creating parallel sources for realestate data.
Beyond real estate, cost and pricing data are becoming more accessible
across a spectrum of industries. Another swipe at proprietary information 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, engineering, manufacturing, or service operationsimpeding timely exploitation. 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 automotive, 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 developed two indexes that estimate
each sectors 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 creation 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 sophisticated analytic techniques.
The public sector is the most fertile
terrain for change. Governments
collect huge amounts of data, transact business with millions of
citizens, and, more often than not,
suffer from highly variable perform-
ance. While potential benefits are

large, governments face steep barriers to making use of this trove:
few managers are pushed to exploit
the data they have, and government departments often keep data
in siloes.
Fragmented industry structures
complicate the value creation potential 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 physicians 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, wheredespite
a healthy strata of data-rich
chains and big-box stores on
the cutting edge of big data
29
1 The big data value potential index takes into
most players are smaller, local

businesses with a limited ability to
gather and analyze information.
A final note: this analysis is a snapshot in time for one large country.
As companies and organizations
sharpen their data skills, even
low-ranking sectors (by our gauges
of
value potential and data capture),
Q4 2011
such
construction
and education,
Big data sidebar onassector
productivity
could see their fortunes change.
account a sectors competitive conditions,

such as market turbulence and performance
variability; structural factors, such as
transaction intensity and the number of
potential customers and business partners;
and the quantity of data available. The easeof-capture index takes stock of the number
of employees with deep analytical talent
in an industry, baseline investments in IT,
the accessibility of data sources, and the
degree to which managers make data-driven
decisions.
Exhibit 1 of 1
The ease of capturing big datas value, and the magnitude

of its potential, vary across sectors.
Size of bubble indicates relative
contribution to GDP
Example: US economy
High
Utilities
Natural resources
Health care Computers and other electronic products

providers
Information
Big data: ease-of-capture index1
Manufacturing
Finance and
insurance
Transportation and warehousing
Real estate
Management of companies
Professional services
Accommodation and food
Construction
Administrative
services
Other services
Low
Wholesale trade
Retail trade
Educational
services
Arts and
entertainment
Government
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 companies and their supply chain partners to collaborate during the
design phasea crucial determinant of final manufacturing costs.
If you could test all of your decisions, how would

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 variability 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. McDonalds, 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 arent feasible, companies can use
natural experiments to identify the sources of variability in performance. 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.
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
goodswith no loss of market share.
How would your business change if you used big

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 possible. 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 retailers multitier membership rewards program, 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

management?
Big data expands the operational space for algorithms and machinemediated 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, pipelines, and mechanical systems. That information is analyzed by clusters 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 nextgeneration 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 arent 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 daythe 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 software continues to fall, more and more companies will be joining this
managerial revolution.
33
Could you create a new business model based

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 manufacturing customers and sells software tools to improve their
performance. This service business now outperforms the companys
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, entrepreneurs are offering price comparison services that automatically
compile information across millions of products. Such comparisons
can be a disruptive force from a retailers perspective but have created
substantial value for consumers. Studies show that those who use the
services save an average of 10 percenta 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 substantial 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 convenience. 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 lifestyle 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.
Thats true for data security as well. The trends weve described often
go hand in hand with more open access to information, new devices
for gathering it, and cloud computing to support big datas 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 executives guide,
on page 10.
Although corporate leaders will focus most of their attention on big

datas implications for their own organizations, the mosaic of companylevel opportunities we have surveyed also has broader economic
5 See Jacques Bughin, The Webs 100 billion surplus, mckinseyquarterly.com, January 2011.
35
implications. In health care, government services, retailing, and manufacturing, 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 policies, company leaders and their counterparts in government can capitalize on big data instead of being blindsided by it.
Brad Brown is a director in McKinseys 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
As big data creates new opportunities
Professor of management
and threats, it also demands new mind-sets from
science at the Massachusetts
senior executives about the role of information
Institute of Technologys
in business and even the nature of competitive
Sloan School of Management
advantage. The perspectives that follow may
Jeff Hammerbacher
frame of mind.
help shake up your thinking and forge that new

Cofounder and chief scientist
of Cloudera
Massachusetts Institute of Technology (MIT)
Brad Stevens
tions of intriguing new research about the
professor Erik Brynjolfsson explores the implicaButler University mens
relationship among data, analytics, productivity,
basketball coach
and profitability. Jeff Hammerbacher, cofounder 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 thats 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 McKinseys Michael Chui and Frank Comes.
37
The professor
Erik Brynjolfsson
Steve Dunwell
Too many managers are not opening

their eyes to this opportunity and
understanding what big data can do to
change the way they compete.
Erik Brynjolfsson is the Schussel Family

Professor of Management Science
at the Massachusetts Institute of Technologys
Sloan School of Management, director of
the MIT Center for Digital Business, and one
of the worlds leading researchers on
how IT affects productivity.
The data advantage

Most great revolutions in science are preceded by revolutions in measurement. 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 measurement 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, theyre 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
theyre using data, and you often see bar charts and pie charts and numbers 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, thats
an interesting problem, an interesting question. Lets 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, were
open to the data and not go in there saying, Hey, Im 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
didnt 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 problem. Theres 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, its the
marketing people and the people working with customerscustomer
relationship managementwho 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 whats happening in the business. I was talking to Gary
Lovemanthe CEO of Caesars Entertainment, formerly Harrahs,
and a PhD graduate of MIT. Hes used some of these techniques to
revolutionize whats 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 metrics 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
years 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. Its 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 dataan
ability to measure things much more precisely than in the past. You
can learn about the preferences of an individual customer and personalize 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 managementthose
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 were seeing is that three
to five years after installing one of these big enterprise systems, companies start saying, Hey, we need some business intelligence tools to
take advantage of all this data. Its up to managers now to seize that
opportunity and take advantage of this very fine-grained data that just
didnt exist previously.
The path ahead

Theres some good news and theres some not-so-good news. The good
news is that technologys not slowing down, and the pie is getting
bigger. Productivity is accelerating. And that should make us all better
off. However, its 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 dont have the skills to take full advantage of this technology.
And, unfortunately, I dont see that changing any time soon unless
we have a much bigger effort to change the kinds of skills that are available 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
venturessome of them, perhaps, huge hits like Facebook or Zynga
or Google. But also, perhaps equally important for the economy, hundreds 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 pieeach of the individualsbenefits
as well.
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 Facebooks first employees.
The open-source advantage

I was Facebooks 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 infra1 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 wasnt just Facebook that would be able to use this technology
but, really, any enterprise.
Data leaders
When we started Cloudera, we didnt 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 government surprised me. They really are the leaders in multimedia data
analysisworking with text, images, video. In the intelligence
agencies, Ive 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.
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 infrastructure for data collection and storage for whichever line of business
you perceive to be most critical to your company. If you dont have
that digital asset, then youre not even going to be able to play the game.
And then you can start layering on the complex analytics. Most companies go wrong when they start with the complex analytics.
When deciding how to incorporate analytics expertise into an organization, you have to be honest about what your organization looks
likeyour capacity to hire and your long-term vision for what that
organization is going to be. There isnt 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-toend 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 platforma 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 OReilly 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 its 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, its 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 statistics 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: OReilly, 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
Courtesy of Butler
University
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.
The coach
Brad Stevens
Brad Stevens is head coach of the Butler
University mens 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 teams game.
45
The Quarterly: How have things changed in basketball with regard

to the use of data and analytics?
Brad Stevens: You know, Im a bad person to ask about that because
Im 34. The datas always been an important part of my job. Ive
always looked at it through that lens, even when I was a young assistant.
This is how I work best. For me, its incredibly interesting. There are
complexities that you can really study using numbers. We dont have
access to the highest endwere 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 Id 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 theyre doing when theyre most effective, where they are on the
courtreally show players the exact way that they are most effective in
different areas of the game. Thats 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.
Ill 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 theres the ability to cut film on computers and to do so quickly.
We can watch all of somebodys moves off of a ball screen. All of a
persons 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,

Ill spend a lot more time asking, Whats
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 whats 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, Ill spend a lot more time asking, Whats 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 havebut I still have to
communicate it to our players. It has to get into their minds. And they
have to utilize it. So you cant inundate them. You cant take three
seconds to make a decision in basketball. Its a game that moves too
quickly for that. Theres no huddle in between plays; theres not a
moment in between every pitch. Youve got to have thoughts in your
mind about what the people that youre playing against like to do, and
what you do best, and at the same time you cant be inundated with
those thoughts or itll affect the way you play. That makes communicating 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: Youve 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 teams different,
each players 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, youre shooting 43 percent. Youre a better shooter than that. If
47
you make one more shot a game, youre probably at 48 or 49 percent.

How can we make it so youre 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. Theres not a game when
this wouldnt have played a major role. Were 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 thats unique. But more times than not, the score takes care
of itself, as Bill Walsh6 says.
6 Bill Walsh coached the US National Football Leagues 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 McKinseys San Francisco office; Frank Comes is a member of
McKinsey Publishing and is based in the New Jersey office.

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, arent helping enough;
they do little to address the invisible
but powerful beliefs, held by many managers, that subtly, and unintentionally,
hamper womens careers.
What to do about it
There are no sure answers yet. But
the experience of companies making
progress suggests that injecting greater
rigor into people processesmore
data, thoughtful targets that push
women into the consideration set for
key roles, a company-specific business
case for women, better sponsorship
approachescan make a difference.
Artwork by Gwenda Kaczor
Why it matters
A bevy of research highlights strong
statistical correlations among large numbers of senior women, financial performance, and organizational health. The
bottom line: companies gain hard
business benefits from a more diverse
senior team.
49
50
2011 Number 4
Despite significant corporate commitment to the advancement of womens 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 innovationspolicies to support
women with young children, networks to help women navigate
their careers, formal sponsorship programs to ensure professional
developmentbroke 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 itbut 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 indicated 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 theyre 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
weve 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 illustrate 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 corporations, our research shows.1 But according to Catalyst, a leading advocacy 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 Statesfrom 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 whats going on, look to the words that appeared
most frequently in open-ended responses to our recent survey as explanations for poor retention and promotion of women: politics,
management, the company, people, and the organization. These
forces manifest themselves in myriad ways. Weve all heard endless
variations on the mind-sets that set women up for failure:
Shes too aggressive (or too passive). Whether a woman is perceived
as aggressive or passive, thats 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
& Companys 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 normswhich, 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 doesnt receive the coaching a man would to
help her assimilate into the companys culture.
I dont want to tell Bob he didnt get that job. Theres a limited pool
of senior positions, and leaders are not comfortable telling protgs
they have groomed for years that someone else is getting the spot.
I dont 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, itll set back all women.
Mind-sets like this one inadvertently treat men as individuals and
women as representative of their whole gender.
A woman isnt 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, its little wonder the careers
of many promising women die on the vine. Slowly but surelydespite
the best intentions of HR departments and individual executivesthe
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
Exhibit 1 of 1
53
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
men
Young
women
98
Women of all ages
92
Aged 2434
79
83
In early stage
of career1
In early to middle
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 professionalservices 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. Thats 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 cant
just be add-on programs. They must be integrated into the organizations
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 companys approach. If youre not paying much attention to
the issue of womens advancement, youre ensuring that things wont
change. As Shells executive vice president of global supply and
distribution, Peggy Montana, says, When you look at corporate mindsets, change starts at the top. I havent seen change in diversity start
from middle management.
And if youre personally committed, you can catalyze change that will
improve not only your companys 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 schoolteachers. 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 convictiona practice that, further inquiry
revealed, seemed to be driving sales.
According to Pitney Bowes executive vice president Johnna Torsone,
Harveys 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 hadnt had
a true opportunity on a level playing field. They would be motivated,
he reasoned, and their success would increase the competitive environment 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.
55
Make no mistake: as a senior executive,

you are already influencing your companys
approach. If youre not paying attention
to the issue of womens advancement, youre
ensuring that things wont 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. Harveys 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

Its one thing for executives to commit themselves to change. Its 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 arent 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, theyre 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 CEOs
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 percent 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 companys senior executives worldwide. 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 overall 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 promotion slate for its top layers of management. The CEO and the HR chief
review the plans and slates every year for diversity, among other criteria. This review also includes specific discussions about how individual
women are being prepared for their next role, including rotation
among the companys divisions and between staff and line roles. For
more than a decade, a noticeable part of each divisional CEOs bonus
has depended on meeting the companys 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 alienating 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 development, 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.
57
And what about women? Shells Montana says her response to fears from
women that theyre getting jobs just because of their gender is, Get
over it. Ive never seen a selection panel pick somebody on the basis of,
Shes not really qualified, but we need a female in this job. It just
doesnt happen. Were running a business, and were not taking undue
risks. Its 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 whats going on in their own departments or business units and
how their mind-sets may be contributing. Furthermore, many companies 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 talentnot just the senior ranks,
which are much harder to influence rapidlyis highly visible.
When the findings are impossible to overlook, leaders can use them to
make the invisible mind-sets visible and then manage these mindsets to remove their influence. Pitney Bowes carefully rates and scores
each divisions diversity plan and, like Time Warner, includes in
its bonus decisions an executives success in promoting diversity. Furthermore, Torsone says, from the time this process was started, during
the 1980s, the CEO would talk about it at every operating and management 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 mens and womens experiences
shrinka positive trend. Theres still the question of whether genderbased attitudes influence responses to surveys like these. In our experience and in Shells, 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 financialservices firm, The head of the business offered me a big promotion
that entailed a move, but then he said, Were going to make 100 percent
sure that you dont 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. Shells
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 didnt
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 dont know how to be effective sponsors for women. Take
one common kind of sponsor weve met in dozens of workshopsthe
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 doesnt work well for many women, especially 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 devils advocate. We all value being challenged 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 individual and situation at hand.
Effective sponsors are deeply, personally engaged, down to the level
of small details, whose importance adds up. Time Warners Quiroz
describes true sponsorship as someone being planful about what you
59
do, who youre exposed to, what development programs you go to, who
you have lunch with, whether youre getting feedback or being assigned
a coach. At her company, leaders work hard to make womens careers
intentional. One key: making sure that sponsorees attend Time Warner
womens 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 Warners program for senior women, 22 percent have been promoted, 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 youre 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 executive leaves or enters an organization, its culture canand doesshift.
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 McKinseys New York office, and Lareina
Yee is a principal in the San Francisco office.

61
Top executives need

feedbackheres 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 dont 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.
Artwork by Gianpaolo Pagni
What to do about it
Cultivate a network of junior coaches
who are willing to tell you the things you
dont 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.
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
adapted from
Robert S. Kaplans
What to Ask the
Person in the
Mirror: Critical
Questions for
Becoming a More
Effective Leader
and Reaching
Your Potential
(Harvard Business
School Press,
August 2011).
At this stage in your career, most (if not all) of your colleagues are
probably subordinates. While you may be overseen by a board of directors or a very senior boss, your superiors probably no longer closely
observe your daily behavior. Instead, they now form their opinions of
you based on your presentations in relatively formal settings or on
secondhand reports from your subordinates.
As a result of this, many executives find that as they become more senior,
they receive less coaching and become more confused about their
performance and developmental needs. They may also become increasingly isolated from constructive criticismsubordinates do not want
to offend the boss and may believe that constructive suggestions are
unwelcome and unwise. Many senior executives also unwittingly
send off a vibe that while they claim to encourage constructive criticism, they really dont 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 interpersonal 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 feedbackheres how they can get it
63
constructive criticism and strategic advicesometimes 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 materially 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 doesnt
adjust for blind spots or the mentors lack of professional familiarity
with the executive.
My follow-up questionWho actually observes your behavior on a
regular basis and will tell you things you dont want to hear?is often
met with silence.
This was the case with the CEO of a medium-sized pharmaceutical company. 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; theyre the subordinatesit would be
awkward for me to ask them for coaching. Im 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 wasnt 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 appreciate 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 subordinates. Some of his direct reports admitted that they had assumed he
didnt 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 guardednot revealing much about what
he believed were the key issues facing the business and what worried
him. People commented that they werent sure how to read him and
didnt know where he was coming from. He realized that his subordinates 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
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 hadnt 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 CEOs vision for the
business. Through open debate and discussion, the team members developed 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 thoughtsas 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 facilitatorframing two or three issues, forcing himself to sit
quietly and actively listen, ask probing follow-up questions as appropriate, 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 companys new drugdevelopment projects.
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 aspirations and concerns. Indeed, this had the impact of stabilizing his seniorleadership 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 businesses 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 strategicplanning 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 companys competitive 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 products 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
companys 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 customersmight
damage the organizations culture and morale.
Four ways to get better feedback
Write down a realistic assessment

of your specific strengths and
weaknesses. List five subordinates
who could give you specific
feedbackparticularly about your
weaknesses.
Write down one or two fundamental facts about yourself that

would, if disclosed, help subordinates 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.
Cultivate junior
coaches
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.
Encourage your direct reports
to do this same exercise with their
direct reports.
Practice
self-disclosure
69
This CEOs 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 companys 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 issuesthey 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
Improve your
ability to frame
and discuss
key questions
Assess your
business with
a clean
sheet of paper
Identify a handful of key

questions that your team should
debate and discuss.
Select a small team comprising

your next generation of leaders.
Ask them to examine a specific
issue or assess your enterprise as
if they could start from scratch.
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.
Select team members based

on your companys succession
planincluding 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 findings. He also explained that, while he might not adopt all of their proposals, 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 companys compensation incentives.
The CEO was astounded by the audacity of the adviceand 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 immediately 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 companys future and the strength of his leadership
team. Further, he decided to launch a strategically focused cleansheet-of-paper task force every one to two years to complement the
companys regular strategic processes. He and his leadership team
believed this new approach would allow them to create a fresh intervention capability that wasnt subject to the potential inertia and
political pressures of the regular strategic processes. Further, this
71
exercise created an opportunity to challenge up-and-coming executives and see them in action, while providing participants with a highly
motivating learning experience.
This approach builds on efforts to create an upward coaching environment 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.

72
Special report
Oils 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
sectors 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
Its possible, though far from certain,

that oil prices will spike in the years ahead.
Heres whyand how you can prepare.
Its 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 shouldnt 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 collidegently 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 stringent regulation, such as the abolition of fuel subsidies in oil-producing
countries, Asia, and elsewhere, as well as widespread consumer behavior 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 scenarioone thats sufficiently plausible
and underappreciated that we think its worth exploring: the prospect 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 colleagues suggests that by 2020, global GDP would be about $1.5 trillion
smaller than expected, if oil prices spiked and stayed high for several years.
But like any difficult transition, this one also would create major
opportunitiesfor consumers of energy to differentiate their cost structures from competitors that arent 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 themand how to prepare nowwe 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 McKinseys
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 McKinseys 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 McKinseys 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 earths
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 risesometimes dramatically. Thats
what happened prior to the 200809 financial crisis as surging emergingmarket 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

McKinseys global energy perspective 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 conventional oil to include 34 different
types of fuel.
The gentle collision and violent
adjustment scenarios described
here arent 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 Libyas 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 underscores the strength of the pre-2008 fundamentals.
Going forward, barring prolonged economic stagnation, 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 improvements 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 analysts and our own supply model suggest that it wont 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 timeconsuming 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 wont 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 todays
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 accelerate the adoption of measures that reduce demand. Indeed, a common
denominator of current forecasts by industry analysts (including ourselves) 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 sectors road to greater fuel efficiency). Policy
makers in several developing countries would need to abolish fuel subsidies so that consumers felt the real price of oil. Around the world, wed
need to see deeper reductions in the use of oil for heating, power generation, 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. Whats 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: its 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 weve 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 exceptionally 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 behavioral 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
The automotive
sectors road to greater
fuel efficiency
Russell Hensley and Andreas Zielke
Regulatory standards already in place

should dramatically enhance the
efficiency of autos around the world.
The European Unions carbon emissions 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 ambitious rates of improvement, albeit from
different starting points. US fuel
economy levels in 2020at around
40 miles a gallonwould lag behind
Chinas in that year and simply match
Europes 2010 levels.
The automotive industry, boxed in by
fierce global competition and flat
prices, has responded in the past by

pushing design improvements and
productivity gains that make room for
costly new content, including technology required for meeting regulatory
standards. Heres 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 consumers had actually dropped by
$2,500 in real termsalthough the
2010 Camry was better equipped and
10 percent more fuel efficient. As
automakers work hard to meet new
and tougher fuel economy standards, 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 antefor
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 responsesaccelerating 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 vehiclesand speed a broader

adoption of tougher standards in
developing economies, which will represent most of the new demand
for transportation fuel going forward.
This would create additional momentum for change.
Still, for a major shift in the global automotive stock to occur within the
decade, consumer behavior or technology 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 consumer 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
dont take many years of ownership
to realize. Comparing Europe and the
United States highlights the magnitude of the challenge: although gasoline prices are twice as high in the
former, the share of autos running on

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 electricvehicle 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 McKinseys 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 infrastructure 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. Whats more, very high oil prices would intensify 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 investments 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 pursue some of the available opportunitiesand the danger that they could
quickly become uneconomic once oil prices fellthe 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 eventuallyperhaps by 2020,
perhaps laterprices fell below the $80 to $100 range. Until then,
however, given how slowly many of the demand changes would unfold,
its 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?
Exhibit 1 of 1
81
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)
Light vehicles
Mid2011
20
Marine
Medium/heavy
Air traffic
Power
Chemicals Buildings
vehicles
17
11
Other industries
19
~8889
Business-as-usual scenario
22
2020
20
14
1719
1517
12.513.0
20
100
2.53.0
Scenario with conservation measures

2020
7.5
8.5
4.5 ~4.5
5.5
Examining the difference between business as

usual in 2020 and a scenario with conservation measures,
reduction in liquids1 demand in million barrels a day (mbd)
1719
~8090
Relative contribution to reduction in consumption

Immediate reduction caused by slower GDP
growth and other factors as noted
Structural reduction, requiring investment by
consumers or industry
Medium/
heavy vehicles
Light vehicles
Total reduction
of
3.05.0
mbd
Immediate: less discretionary travel

Structural: permanent shifts in
consumer behavior and accelerated
technology development (eg, gas
mileage improvements and penetration
by alternative power trains)
Chemicals
Total reduction
of
1.01.5
mbd
Some substitution away from certain end

products (eg, plastic packaging, polyester
fiber) and toward different feedstocks (eg,
palm oil, natural rubber, gas)
Immediate: decrease in passenger

travel, shifting of some freight to other
modes (eg, to maritime shipping)
mbd
Structural: moving production

processes closer to consumption
markets, increasing rail infrastructure
in countries such as China
Power
generation
1.01.5
mbd
mbd
Structural: increasing truck sizes,

accelerating improvements in fleet
efficiency, powering vehicles with natural
gas, and transporting more goods by rail
3.05.0
Total reduction
of
0.51.5
Increasing efforts by governments to

encourage consumers and industries to
move away from use of oil in heating
mbd
Marine
Total reduction
of
Total reduction
of
Immediate: no-regret, low-investment

moves (eg, truck-route optimization,
smarter driving)
Buildings
Air traffic
0.51.5
Total reduction
of
Total reduction
of
~0.5
mbd
Immediate: no-regret moves such as

reducing vessel speed
Structural: using natural gas as a fuel
(particularly in coastal waters) and
moving production processes closer to
consumption markets
Other
industries
Accelerating efforts to move away
from use of oil in power generation,
especially in the Middle East
Total reduction
of
1.03.0
mbd
Immediate: reduction in oil-refining

demand due to lower production
Structural: potential for fuel efficiency
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. However, high prices also could create opportunities for companies to differentiate 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 manufacturerswould 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 interesting 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 todays prices. If prices got high enough,
they would concentrate the attention of consumers, businesses, and governments sufficiently to promote many positive-return investments that
havent been implemented so far, because of behavioral inertia. This development 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 internalcombustion 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 thiseven 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 worldresulting 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 McKinseys 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 enoughfor years, not monthsglobal 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 different 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 Spains or Italys 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 McKinseys strategy practice conducted using the firms 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
Oil and growth sidebar
Exhibit 1 of 1
85
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
Industrial sectors share

of GDP, 2010
$125 a barrel
China
South
Africa
Germany,
India, Japan
France,
United Kingdom,
United States
50%
28%
~30%
~21%
0.6
0.6
0.4
1.0
0.6
1.0
$150 a barrel
0.9
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 economies. 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 crisissuch as shorter financial-planning cycles or
even moving away from calendar-based approaches to budgeting and
planningmay be important.2
When you combine the likelihood of oil price volatility with related
uncertaintiessuch 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 marketsyou 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,
Globalizations 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 McKinseys Waltham Knowledge

Center, Lowell Bryan is a director in McKinseys 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 dont need to look very hard for a live case study of what happens 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 companies 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 beginning 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 capacitymore than twice that of todays standard
vessel on the most important trade routesto 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
potential fuel
savings = 38%
Increase value density2
Reduce packing volume
Reduce average
transportation distance
Redesign geography of production

and sourcing to reduce distance that
products travel
Change the mix of

transportation modes
Shift from air freight or trucking to

shipping or rail
Levers for transport assets

20
12
Address asset technology

(eg, rail, tanker, trucking)
Increase scale, reduce relative

drag, increase payload ratio,3 improve
efficiency of propulsion systems
Assess usage of individual

assets
Address factors such as speed,

load factor, maintenance regime, and
route planning
Assess usage of
collective assets
Find ways to avoid congestion,

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 products 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
heatrecovery system that reduces the engines 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 Americas 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 computers 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 percent. Truck speeds are already capped to lower levels in Europe. But
there are still opportunitiesfor instance, allowing longer (and potentially
heavier) truck/trailer combinations in Europes 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
opportunitiessuch as trucks with better aerodynamics and ocean
vessels with new, friction-reducing hull coatingsare 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 manufacture 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 chains 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-offsfor example, between service levels and the lower speed of
energy-efficient transport
Part of the answer will be creating nimbler supply chainsfor 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 companys best interests.
Knut Alicke is a consultant in McKinseys Stuttgart office, and
Tobias Meyer is a principal in the Frankfurt office.
Artwork by Patrick Hruby
91
The second
economy
W. Brian Arthur
Digitization is creating a second economy

thats 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 smallit wasnt much bigger than Italys. 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 easts industrial goods;
they made possible economies of scale; they stimulated steel and
manufacturingand the economy was never the same.
Deep changes like this are not unusual. Every so oftenevery 60 years
or soa 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 transformationdeep and slow and silentbe happening today?
92
2011 Number 4
We could look for one in the genetic technologies, or in nanotech, but

their time hasnt 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 doesnt
seem particularly consequentialits 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 youd 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
youre going), and checking with passport control, with foreign immigration, with ongoing connecting flights. And to make sure the aircrafts 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 youve 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
theyd still be flashing all over the country for some time, perhaps talking
to the flight controllersstarting to say that the flights 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 forward 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 economya second economyof 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, Id 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 configurable. It is concurrenta great computer expressionwhich 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 biologicaland they are. In fact, Im

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, theres about ten miles of roots underneath, all
interconnected with one another, communicating with each other.
The metaphor isnt perfect: this emerging second-economy root system
is more complicated than any aspen system, since its also making
new connections and new configurations on the fly. But the aspen metaphor 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. Its as if there will
be another American economy anchored off San Francisco (or, more in
keeping with my metaphor, slipped in underneath the original economy) and growing all the while.
How fast is the second

economy growing?
Heres 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 measurements underestimate this);
but pretty good studies assign some
65 to 100 percent of productivity 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 percent 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. Whats important is that the
second economy is not a small
add-on to the physical economy. In
two to three decades, it will surpass the physical economy in size.
The second economy
95
This second, digital economy isnt

producing anything tangible.
Its 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 isnt producing anything tangible. Its
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. Its helping architects design buildings, its 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.
Theres a parallel in this with how biologists think of intelligence. Im
not talking about human intelligence or anything that would qualify
as conscious intelligence. Biologists tell us that an organism is intelligent if it senses something, changes its internal state, and reacts
appropriately. If you put an E. coli bacterium into an uneven concentration 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 something (although we may not know exactly how), and returns an appropriate response.
No brain need be involved. A primitive jellyfish doesnt 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. Im arguing that all these
aspen rootsthis vast global digital network that is sensing, computing, and reacting appropriatelyare 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 Watts steam engine appeared, through
around 1850 and beyondthe 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
serversare like neurons, and the axons and synapses are the communication pathways and linkages that enable them to be in conversation 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 economy. Theres no upper limit to this, no place where it has to end. Now,
Im 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 Im driving
in Los Angeles in 15 years time, likely itll be a driverless car in a flow of
traffic where my cars in a conversation with the cars around it that are
in conversation with general traffic and with my car. The second economy is creating for usslowly, quietly, and steadilya 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 overall 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 physicalsomeone still has to take your luggage and put it
on the beltbut 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 disappearing 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 processesmany
in the service sectorare becoming mechanized and fewer people
are needed, and this is exerting systematic downward pressure on jobs.
We dont 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 theres a need for human judgment and human interaction, we
still have that. But the primary cause of all of the downsizing weve
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, its not surprising we are still working our way
out of the bad 200809 recession with a great deal of joblessness.
Theres 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 prosperity 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 apportioned 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 shrinkingfewer of us
in the future may have white-collar business process jobsand we face
a problem.
The system will adjust of course, though I cant 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 technological unemployment, but dares to surmise that the economic problem [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 formingvast, interconnected,

and extraordinarily productiveis 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).

100
Picture This
The changing shape

of US recessions
Byron Auguste, Susan Lund, and James Manyika
From the end of World War II
hand, have been a time for tough
until the collapse of the Soviet
decisions about which activities
Union, US recessions and
are essential and which are
recoveries followed a predictable
not and about the footprint a
pattern: when demand recovered
company needs to be globally
and GDP growth resumed,
competitive. More layoffs than in
employers hired again. But for
the past have been permanent;
the past two decades, recessions
firms are relying more on
have become periods of
temporary, contract workers;
accelerated structural change
and technology is changing the
longer jobless recoveries that
nature of work by helping to
result in years, not months, of
disaggregate jobs into smaller
unemployment. At the recent rate
tasks that can be performed
of net job creation, it will take
by combinations of people and
more than 60 months to replace
increasingly intelligent machines,
the jobs lost in the 200809
sometimes in far-flung locations.
recession.
The evolution of these forces

will shape the future of US job
The impact on employment is

also getting deeper. In the 2008
recession, employment declined
by 6.34 percenttwice as
much as in all previous postwar
recessionswith 8.4 million jobs
lost from peak to trough.
creation.
Byron Auguste is a director
in McKinseys 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
These developments are
a director in the San Francisco
symptoms of deeper changes.
office. Copyright 2011 McKinsey &
In earlier recessions, companies
Company. All rights reserved.
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
101
This analysis comes from the McKinsey

Global Institute report An economy
that works: Job creation and Americas
future (June 2011), available free
of charge online at mckinsey.com/mgi.
Recovery time for US employment after recessions has
increased dramatically
1990, and
therecessions
employment
drop
Recovery
time for US since
employment
after
has
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
6
1948
. . . and deeper
% decline in employment from prerecession peak,
in months since recession began2
1953
1957
1970
1974
1960
1957
1981 1990
1953
1948
2001
1
2
1960
3
4
1969
2008 recession
Lowest point: 6.34%
5
1973
7
0
1981
1990
2001
12
24
36
48
15
39
2008
>60 months
Projection, based on recent
rates of job creation
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
Seizing the potential
of big data
110
Freeing up the sales force
for selling
104
Executive perspective
partnership
115
How strategic is our technology
agenda?
Artwork by Daniel Hertzberg
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
principlesand potentialof big data.
Large-scale data gathering and

analytics are quickly becoming
a new frontier of competitive differentiation. While the moves of
companies such as Amazon.com,
Google, and Netflix grab the headlines 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 activities of those companies illustrate
novel strategic approaches to big
data and shed light on the challenges CEOs and other senior executives 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.
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 industrys
value pools. At AstraZeneca, for
example, executives recognized
the power that real-world data (such
as medical claims) gave the pharmaceutical companys customers
in evaluating the cost effectiveness
of its products (for more, see
sidebar, AstraZenecas 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 companys
strategy had long been predicated
on matching the moves of an efficient big-box rival, yet now a different online player was draining the
retailers revenues and denting its
margins. At the heart of the threat
was the competitors ability to gather
104
2011 Number 4
and analyze consumer sentiment and

generate recommendations across
millions of customersa capability
that was neutralizing the retailers
sales force. Meanwhile, the competitor 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 discounts the vendors could offer to
customers. The retailers board
asked whether it could leverage its
own information resources to
counter these challenges.
Data-related threats and opportunities can also be more subtle.
After using an innovative productbundling approach to improve
Executive perspective:

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 itwhether
thats a patient, health plan, pharmacy benefit manager, employer, or
the government. We werent asking, 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 companys 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 customers to see what factors motivated 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 informationshared by
consumers across social networks
and other Web-based channels
about the companys products
and services.
But willingness to pay has obviously

become extremely important in
recent yearsto 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 realworld 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 conversations, as the dialogue became
more transactionalmore about
unit cost and more about the data
that our customers were bringing
to the table. And from our perspective, few of the comparative
studies that payers were conducting focused on health outcomes.
So we decided that we needed to
Applied Insight
Mark Lelinski
is vice president
of managed
markets at the
pharmaceuticals
manufacturer
AstraZeneca.
105
Identify big data

resources . . . and gaps
value of creating the right kind

of partnership.
Framing the basics of a big data

strategy naturally leads to discussions 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
companys capabilities and needs
but can also spark aha moments
for example, as executives identify data gems cloistered inside their
business units or recognize the
The retailers audit focused on

internal data the company gathered
but wasnt using to potential.
This informationabout product
returns, warranties, and customer
complaintstogether 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 couldnt be marshaled to assist
sales reps in customer interactions
get beyond our single focus on

the controlled environment of the
randomized clinical trial and
see the business from the other side
as well.
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.
The focus, we realized, needed

to be on the total cost of care. Dont
just talk about the unit cost of a
drug, but learn about the total cost
that it takes to manage, say,
a diabetic patientincluding the
diagnostics, the outpatient
visits, the emergency room visits.
This led to an aha moment:
if we could combine medical-claims
data with clinical data collected
in an electronic-medical-record
system for a defined patient
population, we might actually discover ways to improve health
outcomes and manage the total
cost of care at the same time. And
why not collaborate with customers? Prescription drugs represent
So we took this idea to potential

partners. From the beginning,
this was about true collaboration
and strategic fit, not an Im
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 everyones 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.
companys relative lack of econometric and analytical skills to manage

itthe telcos CEO helped recruit
an outside analyst with the necessary
stature to lead a new collective
insights team.
For the European telco, the discussions centered around how it might
tap into the rising tide of online
conversations about individual companies and their productsthe
millions of relevant microblog posts,
social-media conversations, search
term keywords, head-to-head brand
comparisons, and customer feedback postings that were now available
on the Web. Recognizing the
importance of the effortand the
Align on strategic
choices
Once companies identify an opportunity and the resources needed to

capitalize on it, many rush immediately 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
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 were 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
wont 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 doubleedged sword: if the collaboration
helps us get new evidence that
supports a price point we set, thats
extremely valuable. But sometimes
it goes against us too.
are today has been the senior-level

involvement and support weve
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 growing pains. One example was the
way we brought together top-notch
biostatisticians, epidemiologists,
health economists, and programmers 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.
The key to turning around the

resistance and getting to where we
While this partnership is still in the

early stages, HealthCore and
Applied Insight
107
key data vendors, replace a strategy 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 industrys backyard,
but until I consolidate five acquisitions and deal with major revenue
shortfalls from products coming
off patent, well 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 strategicpriority list, ask whether youve
thought hard enough about its longterm strategic potential and
about what your competitors may
be doing while you wait.
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 talent to create a first-mover advantage.
Its 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 companys sales and marketing
function, he discovered that it
would be necessary to acquire some
AstraZeneca personnel are operationally aligned and set up, and

working together very well. We have
a number of joint studies under
way and are in the throes of completing the first one, which will
be ready for discussion with payers
soon. Still, both sides see this as
the first phase of a broader, industrywide collaboration. Eventually, we
expect this will include other health
insurers, pharmacy benefit managers, providers, employers, other
pharmaceutical manufacturers,
and even federal and state governments. It wont be just about
pharmaceuticals but about much
more: Which diagnostics make
sense and which dont? Which medical 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
can learn things about health care

that we could never get at before.
And thats really what were setting
out to do.
1
A research subsidiary of US-based health

insurance company WellPoint.
This commentary is adapted from

an interview with Sam Marwaha,
a director in McKinseys New York
office.
108
2011 Number 4
As for the retailer, its executives determined 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 retailers 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 unitsan effort that
ultimately surfaced 80 potential
big data projects. Each was then
ranked by its net present value
and mapped against the companys
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 example, is exploring the use of tablet
devices by salespeople, in hopes that
easier access to inventory data,
customer profiles, and product information 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 market prices, and predetermined discounts to link the storefronts to
the inventory systems of the retailer
and its vendors, the initiative is
helping it counter its competitors
third-party sales strategywhile
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
companys strategy. The committee
focused the teams efforts on
answering two questions: How competitive are our brands in the
minds of users when they make purchase 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 insightsfor instance,
sports and other premium TV programming was a key differentiator in
purchasing decisions, and customers would be more inclined to
purchase a triple play service
offering (television, high-speed Internet, and voice telephony) if the
company deemphasized voice telephony in its marketing messages.
This was the opposite of what consumers indicated in traditional market research interviews. Whats 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, its important to note that

the threats and opportunities associated with big data often have organizational implications that only concerted senior-executive attention
Applied Insight
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 market share. But that knowledge also
represented a threatan internal
onethat 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.
Similarly, the European telecoms
collective-insights team learned that
two things led to the most rapid
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 network. Yet the marketing and network
organizations, rather than cooperate, 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 capitalize on the information, by tailoring marketing messages to better
explain new-product rollouts and
network upgrades.
109
Too few leaders fully understand

big datas potential in their businesses, the data assets and liabilities
of those businesses, or the strategic 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

McKinseys Brussels office,
John Livingston is a director in
the Chicago office, and Sam
Marwaha is a director in the New
York office.
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.
Heres a situation that may sound

familiar. Inside sales reps1 at a
global manufacturer spent 75 percent of their time away from the
phonespushing 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 percent of their time on internal sales
support and tracking the progress
of deals. Developing a standard

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 inefficiency culminated when the company fumbled a new-product launch
because it failed to meet the
deadline for proposals to secure
initial orders.
111
That was the wake-up call the company needed. For two years, it
worked to streamline its global sales
operation by creating sales factories comprising specialized sales
support staff with clear responsibilities and deal coordinators to
shepherd sales through the system on behalf of reps. Internal processes were standardized and
simplified, and a comprehensive performance-management system
was implemented. While not all companies can successfully achieve
these difficult and time-consuming
transformations, the rewards are
worthwhile for those that rise to the
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.
Tuning sales operations

for growth
work directly with sales but are

not tied to specific transactions, such
as help desks, finance, IT support, and human resources. In addition, 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 calculated: 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.
The guiding principle of all sales

operations makeovers is to maximize
time for selling and relationship
building. That sounds obvious, but
its 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 operations 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, endto-end view recognizes that the
functions supporting sales are interdependent. Sales operations
begin with transactional support
activities critical to processing
dealsbut also involve groups that
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.
Gaining this comprehensive view

of sales operations is critical to
identifying opportunities to free up
the time of reps so they can concentrate 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 completion from their point of inception
as far back as the qualified lead.
Once this sales path has been
mapped, solutions can be developed and standardized, with careful consideration to how actions
in one area affect others.
We find that companies often
struggle with the results of this analysis, which reveals just how inefficient their sales operations really
are. When one logistics company
plotted its comeback from the recent
recession, for example, it discovered 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, its
critical to implement comprehensive
solutions. Consider what happened 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 several 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 completed 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 discovered that deals worth just
20 percent of its revenue consumed
80 percent of the work in sales
operations. The solution was to segment deals along three tracks,
based on the value and complexity
of orderssimple, medium, and
high. Each tracks process was tailored 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, largevalue ones that required extensive
customization and hand-holding.
The advisory board provided feedback at every step. Although the
new model required customers to
change their own internal processes, they did so quickly once
the benefits became apparent.
This new system cut the time
required to complete deals by
months, weeks, and days, respectively, for simple, somewhat
complex, and highly complex ones
all the while delivering consistently strong service quality. The
elimination of unnecessary
steps cut the cost of sales operations by 15 percent. One customer was able to reduce by
25 percent the resources dedicated to interacting with the
service provider.
Applied Insight
113
Companies have a natural aversion

to tinkering with the sales forcesenior
executives must overcome the
common fear that disrupting it will
jeopardize revenue.
Making it happen
Transforming sales operations isnt
easy. First, companies have a
natural aversion to tinkering with the
sales forcesenior 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, successful 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 whats not working.
A top leader must override internal
politics, see the big picture, and
focus on the best solution regardless of past practices.
In addition, new capabilities and
talent may be required because
successful transformations fundamentally change business processes and the ways multiple stakeholder groups interact, from customers to both the front and back
offices. When one consumerpackaged-goods company redesigned its Latin American sales
operations, for example, it central-
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-tobusiness and business-to-consumer
worlds continually reinject nonselling activities into a sales reps
day. In addition, old habits chip away
at selling time: a reps reflexive
response when a customer demands
a quick answer is to drop everything 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 customers 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 isnt easy, nor
is implementing changes that affect
the entire sales process. Yet the
more sales operations can be streamlined and back-office overlaps
reduced, the more likely customer
satisfaction will improve as deals
close quickly and disputes are
resolved promptly. At major companies, the result can often be hundreds of millions of dollars in higher
revenues and lower costs. Such
benefits speak for themselves.
1
Salespeople who engage with customers

remotelyby telephone and e-mailrather
than face to face.
The authors would like to

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 McKinseys Silicon Valley office,
where Tom Stephenson is a
director and Jennifer Wickland is
a consultant.
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.
Heres how.
The CEO of a leading consumer

goods company was unhappy
with his CIO. An important competitor was gaining market share
at a disquieting pace by using social
media and data analysis to target
customers more effectively.
When asked about these developments, the CIO outlined some
potential responses, but he didnt
follow through on them. Instead,

according to the CEO, the CIO
remained preoccupied with keep
the lights on IT projects and
was therefore unable to gain traction with the business leaders
and others within the company
who would be critical in helping
to address the new competitive challenge.
116
2011 Number 4
This type of disconnectbetween

whats top of mind for CEOs
and the attitudes and abilities of IT
leadersis 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 knowledge 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.
Whats more, the CEOs engagement 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 lowcost 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 trendsthe 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 Thingsshape
strategy and disrupt business models in unprecedented ways.
CEOs who arent continually asking
themselves and their organizations 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 beand
insisting that meaningful conversations take place.
As part of our work with McKinseys
Center for Business Technology,
which researches the role of technology in changing business
models, we have identified several
ways to provoke these discussions. One good way is to ask executives 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 arent the only
ways of framing the conversation,
of course (for ideas on how
senior executives can stir up organizational 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, well focus
on the experience of executives at
an insurance company and a
grocery retailer. These companies
began using technology more
strategically to reinvigorate themselves 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 companys business technology capabilitiesthe combination of business processes and
their supporting systemsstack
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 sluggish times to market for new products were an important factor
behind its eroding market share.
They also believed that poor IT
systemsspecifically, the software
that supported pricing and helped
adapt insurance products to local
regulatory requirementswere
responsible for the lagging productdevelopment performance.
To get a reality check on these views,
the insurers CEO and a business
unit president tasked a team of business and IT managers to undertake a more rigorous benchmarking
of the companys business technology performance relative to competitors. The results were eye
opening. The insurer learned that the
initial concerns about its productdevelopment capabilities were misplaced 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 challenges the company actually faced:
a lagging ability to handle straightthrough 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 processes to facilitate more standardized pricing across business lines.
The competitors systems did just
about everythingfrom assessing
risk to running online channelsmore
quickly and cheaply than the companys systems could. Worse, the
CEO learned that his investment
budget was being consumed by
ongoing maintenance and enhancements 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 companys
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 companys core IT platform
and processes.
The lessons for the business leaders
were clear: while they didnt need
to know the ground-level details of
the companys 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 strategy sessions. The review includes
operational basics, market intelligence on competitors use of technology, and an analysis of the
competitive gaps that might affect
the companys 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 reliable processes for developing
such intelligence.
A European grocery chains CEO
was eager to discover a way to
break through his industrys revenue
growth and margin boundaries.
Grocers traditionally use a combination of traditional market research
and gut instinct to shape their commercial strategies: the set of
coordinated decisionsmade around
prices, promotion, communication,
and product assortmentsthat 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 executives guide
revenues and sales volumes. When

properly calibrated, these factors can
swing margins by 1 to 2 percent, a
huge amount given the industrys
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 example of digital-media companies, airlines, 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 CEOs goal
was to go even further and develop
the ability to anticipate competitive
reactions to various commercial
strategies. He began by having managers, and even board members,
visit and observe players in other
industries to understand the current state of the art.
To emulate these practices, the company 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 strategyone that
allowed the grocer to model the
way a range of variables (such as
pricing, shelf displays, and advertising) 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 investments and close support from
Applied Insight
119
the companys marketers, sales

operations professionals, and
store managers.
The authors would like to

acknowledge the contributions of
Sam Marwaha and Seth Schuler.
The company started with 100 variables and back-tested them to

select the 12 most important, which
eventually formed the backbone
of the new strategy-setting tool. So
far, this approach has helped the
grocer boost sales by 2 percent
increasing its market share without sacrificing profitability. Whats
more, the test and learn methodology has allowed the company
to decentralize some of its decision making, so that regional executives and managers, who tend
to have the clearest view of fastchanging market conditions,
are now empowered to make commercial decisions.
Brad Brown is a director in

McKinseys New York office, where
Johnson Sikes is a consultant.
The swift and radical changes

taking place today in the technology
landscape create opportunities
that extend far beyond ITs traditional ambit. To seize them, CEOs
should elevate the debate by asking
targeted questions that push technology beyond its lights-on status
and toward the core of a companys 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 companys IT or marketing departmentsthe
functional groups where large-scale data sets are most often gathered,
analyzed, and applied.
Bad idea. In our experience, big data projects need concerted seniormanagement attention to succeed. To improve the odds, CEOs should push
themselves and their senior teams to answer questions like these:
1. Whats the prize?

Opportunities may range from improving core operations to creating new
lines of businesseven 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 boundariesyet 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 implementation modes.

All rights reserved.
For more, see Are you ready for the

era of big data? on page 24, and
Seizing the potential of big data, on
page 103.
Copyright 2011
McKinsey & Company.
All rights reserved.
Published since 1964
by McKinsey & Company,
55 East 52nd Street,
New York, New York 10022.
ISSN: 0047-5394
ISBN: 978-0-9829260-1-7
Cover artwork by Celia Johnson
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Mckinsey Quarterly Issue 42011

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2011 Number 4

Quietly, the volume of data that companies generate

Are you ready

Brad Brown, Michael Chui, and

Joanna Barsh and Lareina Yee

Digitization is creating a second

What you need to know

74 Another oil shock?

78 The automotive sectors road

Recovery time for US employment

87 Building a supply chain that

120 Extra Point

103 Seizing the potential

James Kaplan, Shantnu Sharma, and

Jacques Bughin, John Livingston,

Companies are learning to use largescale data gathering and analytics

13 A new era for commodities

16 A quick chat with the worlds

18 Sizing the Internets

110 Freeing up the sales force

115 How strategic is

our technology agenda?

Sammy Pau, Finance

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Editorial and Design Production

Members via Web site

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Highlights from our digital offerings

Finding the courage

Download this issue free of charge

Audio and video podcasts on iTunes

New McKinsey research estimates

What Chinas five-year plan

McKinsey analyzed the potential impact

Boards: When best practice isnt enough

Many boards have improved their

Were all marketers now

To centralize or not to centralize?

Research, trends, and emerging thinking

A rash of highly publicized IT

ground against the hackers

for example, create new and

from outside the IT organization.

without forcing them to spend too

massive analytic capabilities

Clearly, we are in the early days of

Has the global economy

grams (176 pounds) a year. Demand

In little more than a decade, commodity prices have

McKinsey Global Institute commodity price index (average of 19992001 = 100)1

1970s oil shock

2Based on average of first 4 months of 2011.

potential climatic impact of carbon

enhancing innovationswe are

of course, and were not suggesting

Uganda, water shortages have

See David Court and Laxman Narasimhan,

Richard Dobbs is a director of

What is the worlds largest

The Quarterly: How do

Daniel Servitje: When we entered

View the full

See David Court and Laxman Narasimhan,

he size of the Internet economy represents

1 The big data value potential index takes into