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Archive for March, 2008

Prediction Markets

Posted by iBlog on March 6, 2008

Every senior executive knows that business decisions are seldom better than the information behind them. Yet although it is usually lower-level employees who interact directly with the customer, decision makers rarely ask them how, for example, new products will fare. Leaders therefore deprive themselves of information that could enrich their analysis and reduce the risk of ivory tower decision making.

Some executives understand that valuable information lies scattered around the organization but don’t know how to retrieve it. Others don’t even try, perhaps for hierarchical reasons or because they suspect they might get answers colored by the desire to second their real or assumed viewpoint.

Prediction markets might solve these problems. Initially a field of research, true prediction markets in essence are small-scale electronic markets, frequently open to any employee, that tie payoffs to measurable future events, such as sales data for a computer workstation, the number of bugs in an application, or a product’s usage patterns.1 Some companies, particularly in the high-tech sector, have adopted them in earnest, and a few major companies elsewhere are experimenting with them.

These markets yield prices on prediction contracts—prices that can be interpreted as market-aggregated forecasts. Their “collective wisdom” is usually at least as accurate as expert opinion. Proponents say that prediction markets work by rapidly aggregating information dispersed across an organization while freeing participants from constraints: for instance, employees can share unwelcome information about a project’s launch date or a new product’s performance anonymously, without fear their careers might suffer. What’s more, advocates say, competition among colleagues and the prospect of winning a prize create incentives for seeking information and making the best-informed bets.

To assess the potential of prediction markets and the organizational and legal challenges they must surmount to become a more widely used business tool, a roundtable was convened at a recent McKinsey conference in Dubai. The panelists were Bo Cowgill, who manages Google’s prediction markets; Todd Henderson, an assistant professor at the University of Chicago Law School; Jeff Severts, general manager of Geek Squad, the services arm of US electronics retailer Best Buy; and James Surowiecki, author of The Wisdom of Crowds, a book about prediction markets and other forms of collective intelligence. Renée Dye, a consultant based in McKinsey’s Atlanta office, moderated the discussion. What follows is an edited and abridged version of it.


Posted in Strategic Organization | Leave a Comment »

Managing Talent

Posted by iBlog on March 6, 2008

Managing talent in a global organization is more complex and demanding than it is in a national business—and few major worldwide corporations have risen to the challenge.

A McKinsey survey of managers at some of the world’s best-known multinationals covered a range of sectors and all the main geographies. Our findings suggest that the movement of employees between countries is still surprisingly limited and that many people tempted to relocate fear that doing so will damage their career prospects. Yet companies that can satisfy their global talent needs and overcome cultural and other silo-based barriers tend to outperform those that don’t.

We’ve long observed that global corporations grapple with a more difficult talent agenda than their domestic counterparts—partly because they need to share resources and knowledge across a number of business units and countries, partly because of the especially demanding nature of global leadership. To find out more, we undertook in-depth interviews with executives at 11 major global corporations and separately invited senior managers at 22 global companies to participate in an online survey investigating how effectively they manage their talent. More than 450 people, ranging from CEOs and other directors to senior managers, including human-resources (HR) professionals, took part in the survey.

The responses confirmed impressions from the interviews that companies now struggle on a number of talent-management fronts, such as achieving greater cultural diversity, overcoming barriers to international mobility, and establishing consistent HR processes in different geographical units.

Despite the value companies claim to place on international management experience, the senior managers who took the survey had made, on average, only 1.5 cross-border moves during their careers, as against an average of 2 for managers at the top-performing companies. Interestingly, we found that the respondents had also moved, on average, 1.7 times between different divisions within the same geography but only 1.3 times between different functions—another sign that movement from silo to silo is still limited.

Participants cited several personal disincentives to global mobility, but one of the most significant was the expectation that employees would be demoted after repatriation to their home location. “Overseas experience is not taken seriously and not taken advantage of,” commented one senior manager. “Much valuable experience dissipates” because companies have a habit of “ignoring input from returnees, and many leave.” The quality of the support for mobility a company provides (for instance, assistance with housing and the logistical aspects of a move) also plays a decisive role in determining how positive or challenging an overseas assignment is for expatriates.

Perhaps the most provocative finding from the research was the relationship between financial performance, as measured by profit per employee,1 and ten dimensions of global talent management. Companies scoring in the top third of the survey (when all ten dimensions were combined) earned significantly higher profit per employee than those in the bottom third (Exhibit 1). The correlations were particularly striking in three areas: the creation of globally consistent talent evaluation processes, the management of cultural diversity, and the mobility of global leaders. Companies achieving scores in the top third in any of these three areas had a 70 percent chance of achieving top-third financial performance (Exhibit 2). Companies scoring in the bottom third of the survey in these three areas had a significantly lower probability of being top performers, particularly if the company had inconsistent global talent processes. Although providing no evidence of true causality and lacking a longitudinal perspective, the strong associations between company financial performance and these global-talent-management practices strengthen our belief that these are important areas on which businesses and HR leaders should focus their attention.

Posted in Organization | Leave a Comment »

Growing Markets

Posted by iBlog on March 6, 2008

It would be easy—but wrong—to conclude from recent events in the aerospace industry that its globalization efforts have gone too far. To be sure, both Boeing and Airbus have discovered, in developing their new aircraft, that involving suppliers from around the world creates complex management, coordination, and design integration challenges. Nonetheless, McKinsey research indicates that the industry’s globalization remains in its infancy. China, India, and Russia are likely to emerge as significant players over the next two decades, a development that will give Western companies major short-term cost-reduction opportunities that they must capture.

Over the longer term, however, these changes could promote the emergence of new players representing a novel form of competition for today’s incumbents. In addition, further specialization in design, manufacturing, and assembly is likely among both suppliers and existing original-equipment manufacturers (OEMs)—such as Airbus, Boeing, and Bombardier—in areas where they have unique value to add or a compelling cost edge. Specialization will go hand in hand with more extensive collaboration, placing a premium on an organization’s coordination and integration capabilities.

These conclusions are drawn from scenario-based modeling of the industry’s future. The modeling was rooted in an analysis of the current capabilities of about 120 suppliers in China, India, and Russia—as well as from interviews with senior executives at OEMs and suppliers in developed countries and from a historical perspective on the circumstances in which nascent aerospace industries thrive or struggle. The result is a road map for aerospace OEMs and suppliers, in both developed and emerging markets, that seek to navigate the changes ahead.

Surging demand and compelling cost advantages . . .

Demand for aircraft in emerging markets is surging. China, India, and Russia are expected to purchase more than 3,500 planes (roughly 15 percent of global demand) over the next two decades, according to consensus industry estimates. Naturally, those countries also want a piece of the action as suppliers of higher-value components—and eventually as assemblers of aircraft.

Currently, the chief attraction of these nations, especially China and India, as suppliers is lower labor costs. Our work with OEMs and suppliers indicates that even after accounting for transportation, the complexity associated with coordinating management and supply chains, and the expense of mitigating supply disruption risks, the cost of manufacturing typical aircraft structures (such as body panels or fuselage sections) can still be roughly 20 to 25 percent lower in these emerging markets than in more developed ones (Although Brazil also affords significant savings, this article doesn’t focus on it, because it already has a significant aerospace OEM—Embraer—in the regional-jet market.) The cost of labor, which on average is three to five times lower in these countries than it is in the developed world, also makes emerging markets attractive for labor-intensive maintenance and repair services (Exhibit 1).


Posted in Logistics, Supply Chain | Leave a Comment »

Product Development

Posted by iBlog on March 6, 2008

The process of product development could itself stand a bit of development. Studies indicate that nearly two out of three new products fail after launch. Compounding that, companies in many sectors are under continual pressure to speed up the pace of product development—even to adapt products that are still in the pipeline to the demands of a constantly changing marketplace. A new formula is needed.

Companies have stepped up to such challenges in the past. Some market leaders can rightly boast that they have reduced, by a third or more, the time needed to develop and launch new products, while squeezing costs and quality problems out of the process. But recent efforts have yielded largely incremental performance gains: progress in speeding up development cycles is faltering, and even products pumped to market in a heartbeat fail to win customers far too often.

The problem is the process, which in most companies has become an inflexible sequence of activities, like a production line. Because it is inflexible, it is disconnected from marketplace changes that may determine the fate of new products. The solution is to inject more customer-related information into the process and to make it flow better. By transforming a rigid process into a more dynamic and information-based one, companies can quicken the pace of development and improve a product’s odds of success.

But to do so, they will have to implement basic changes in the way they make and time product-development decisions, as Richard Holman, Hans-Werner Kaas, and David Keeling show in “The future of product development.” By improving the quality, timing, and synthesis of information throughout the development cycle, companies can free themselves from prescheduled project time lines and formalized process steps and manage their resources and work flows more flexibly. They can keep their product options open longer, act on market information later, and reduce the delays, bottlenecks, rework, and wasted effort inherent in today’s assembly-line product-development process.

Many companies should also change the way they price new products. Although most markets exert intense pressure to keep prices low, a wide range of new offerings could actually command higher ones. Companies are particularly prone to underprice revolutionary products, since it is all too easy to underestimate the value to customers of new features and attributes. In “Pricing new products,” Michael V. Marn, Eric V. Roegner, and Craig C. Zawada provide a way out of this trap. They demonstrate how a company can systematically determine the full range of possible prices for a new offering and then assess the factors that could justify setting its price high.

More broadly, companies need to rethink their processes for choosing growth options—including which new products they should pursue. For the past 20 years, they have survived tough times by squeezing costs to improve their operating performance, but companies also must not forget to foster more creative, growth-oriented initiatives to get revenues rising again. In “Managing for improved corporate performance,” Lowell L. Bryan and Ron Hulme explain how large companies can establish a process that allows line managers and senior executives to identify, review, and choose promising longer-term, growth-oriented corporate initiatives collaboratively—while maintaining tight control over operating performance.

Finally, this issue of The McKinsey Quarterly features a timely look at the US defense industry. In a post-cold war world, the nature of the threat is changing while technology is transforming the way war is conducted—upending the strategies and structure of the US defense industry, to say nothing of how buyers and sellers interact. In “What transformation means for the defense industry,” Douglas S. Harned and Jerrold T. Lundquist explain the forces for and against change and show how the future may shape up for large and small contractors alike.

About the Author

Liz Lempres is a director in McKinsey’s Boston office.

Posted in Product Development | Leave a Comment »


Posted by iBlog on March 6, 2008

India, having captured 46 percent of the global business-process-offshoring (BPO) market, is the leading offshore destination and will probably remain so for some time. But competition is intensifying there (and in other popular offshore destinations) as more companies compete to supply such services. This crowded field is driving down billing rates, while the rising demand for talent is boosting the labor costs of India’s BPO sector by up to 15 percent annually. Both factors are combining to threaten profit margins. At the same time, clients are now more demanding: having captured the benefits of lower labor costs, they want better quality and higher productivity. If offshore service providers—captives as well as third-party ones—are to remain cost competitive while meeting these rising expectations, they will need to innovate and to measure and improve their performance.

Until recently, there was no methodology to benchmark the performance of remote-delivery centers. To address this need, in late 2005 McKinsey and India’s National Association of Software and Service Companies (Nasscom) launched a Web-based benchmarking survey to research the performance of the BPO providers. The effort, which we call Process 360: Operational Excellence, classifies operational processes into five key categories: costs, quality, speed and flexibility, productivity and innovation, and risk management. The survey gathered input from four groups of stakeholders—clients, operations managers, senior managers, and frontline delivery agents (Exhibit 1)—to gauge the degree of alignment across these groups about the relative importance of the five operational factors. The benchmarks, which are equally applicable to the captive back-end operations of multinational companies and to independent third-party providers, also examine the maturity level of 12 key operational practices, including recruitment, training, and work flow management.


Posted in Outsourcing | Leave a Comment »

The New Chinese Consumer

Posted by iBlog on March 6, 2008

China emerged on the world’s economic stage, in the 1990s, as a gargantuan manufacturer, sending auto parts, shoes, and plastic dolls to buyers everywhere. Low-cost labor and a newfound openness to foreign investment unleashed enviable levels of economic growth, recently hovering at around 10 percent. No global corporation dares strategize without taking the country into consideration. Yet the impact of China the producer could pale in comparison with that of China the consumer.

Although there is a growing realization that the country is emerging as an important market for consumer goods, many multinationals still underestimate how large it will become, and how quickly. In 2004 about 36 million urban Chinese households had a disposable income of at least 25,000 renminbi (about $3,000) a year—by local standards, a reasonable threshold for entering the consumer class. By 2009 the number could almost triple, to 105 million urban households. While some segments of the populace are quickly becoming experienced shoppers, a massive influx of new consumers is now reaching the cash registers. Every year about 20 million Chinese (a population about the size of Australia’s) turn 18 years old. Prosperity is lifting the incomes of tens of millions more.

China’s consumers won’t become more and more like their Western counterparts, as some might expect. Similarities will surface as shoppers gain experience, but our research suggests that Chinese consumers—particularly the younger generation—will continue to embrace the traditional values of family and community. A hybrid global consumer is likely to emerge: one eager for modern products but with distinctly Chinese tastes and behavior. The impact of these consumers is already being felt beyond the country’s borders: for example, the high-end clothier Shanghai Tang, heralded as China’s first global luxury brand, is a rising star in fashion. As the country’s manufacturers, immersed in the tastes of domestic consumers, continue their evolution from copiers to innovators, Chinese style could become a major global influence in many industries.

In this special edition of The McKinsey Quarterly we examine these developments. For example, three articles drawn from research across cities of all sizes look at the way fickle Chinese attitudes toward big labels make building strong brands difficult and probe two relatively unknown but important groups: shoppers in towns and small cities and teenage consumers. “The value of China’s emerging middle class,” from the McKinsey Global Institute, follows the likely trajectory of hundreds of millions of urbanites. Even with only modest economic growth, this group could include a staggering 520 million upper-middle-class consumers by 2025.

But as the issue also shows, China’s rapid rise as a manufacturer and a consumer hasn’t come without costs. Social inequalities have arisen in the wake of economic growth concentrated along the coast, as well as policy changes eliminating the cradle-to-grave safety net. The environment too is worrisome as more cars hit the streets, more factories begin production, and more coal is burned to meet the country’s energy needs. If left unchecked, these and other issues could threaten the stability of China and make multinationals wary of overinvesting in it.

In “The road ahead for capitalism in China,” one of the country’s leading economists, Wu Jinglian, argues that today’s policy decisions will determine whether the economy develops under the rule of law or becomes muddled in crony capitalism. “Checking China’s vital signs: The social challenge” considers the progress made in addressing these problems and the arduous journey that remains. Exceptional economic growth has also sparked concerns about how the country will satisfy its appetite for oil. “Meeting China’s energy needs through liberalization” presents the case for opening up the energy sector to increased investment by foreign and domestic private companies.

Furthermore, rising wages in some regions and an increasingly crowded market mean that global manufacturers can no longer rely on low-cost Chinese labor as a competitive advantage. “Applying lean manufacturing in China” shows how they can overcome the rigid hierarchies and the absence of needed skills in Chinese factories to implement international best practices.

As China’s economy matures, the strategies that global companies pursue there must mature as well. We hope to provide them with guidance on the changes at hand and a clear view of some of the challenges ahead.

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