McKinsey:: strategy for the turbulent world of complexity and uncertainty


Click on image for report link

Globalization and technology are sweeping away the market and industry structures that have historically defined the nature of competition. Although the pace of change continues to accelerate, the fundamental transformations under way in the global economy have only just started. The variables that can profoundly influence success and failure are too numerous to count. That makes it impossible to predict, with any confidence, which markets a company will be serving or how its industry will be structured—even a few years hence.

The result is an economic environment that is rich in opportunity but also marked by a substantial increase in awareness of risk and aversion to it— a phenomenon reflected in the rise of risk premiums throughout the world even while the risk-free cost of capital remains low.

This is a very interesting report and, although more in-depth and from slightly different perspective, carries a broadly similar message to that, contained in a report from Boston Consulting Group, that I wrote about recently:

Adaptability: The New Competitive Advantage

Of course it is much easier to glibly talk about managing complexity and building resilience than it is to “do it”…especially without tools from Ontonix! We can also assist with identifying areas of weakness and strength within the organisation and its ecosystem.

It is vital that the operational and financial structure; IT; commitment, capacity and capabilities are aligned; sufficiently robust to underpin “sustainable transformation” and a resilient strategy, capable of creating opportunities from threats.

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Banking: “culture” a greater threat to ROE than Basel


When the obvious conclusion is “politically sensitive” it is best for firms such as McKinsey to talk in terms of what returns investors want from the future banking model. But isn’t this part of the problem?

(McKinsey)…estimates show that if banks maintain their existing business models, their average return on equity (ROE) would fall to 7 percent by 2015, from its current level of 11 percent, against a cost of equity projected to be more than 9 percent.

Investors want to see the management teams of banks propose credible, far-reaching plans to close this gap. The message that investors are now sending—shares of banks will be valued at levels implying that they will not earn their cost of equity—has profound implications for a US economy dependent on a healthy banking system to support recovery and fuel growth.

Of the three threats, the most significant comes from the Basel III requirements, proposed by the Basel Committee on Banking Supervision. Without mitigating actions, they could reduce the ROE of some banks by as much as five percentage points. While the details are still being determined, we estimate that the US banking system will need an additional $500 billion in retained earnings or new equity to meet the new capital adequacy standards (assuming the current asset level and mix).

The second threat is the continuing deleveraging of consumers. The history of the past 100 years suggests that when excessive borrowing is a principal cause of a recession, consumers and businesses spend the next seven to eight years rebuilding their balance sheets…

“Big Data”: Competing through data [McKinsey Quarterly]


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.

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The second economy: McKinsey Quarterly – Strategy – Growth


If you haven’t read any of my previous blogs or the rapidly growing catalogue of articles and reports on the subject, this article from McKinsey illustrates the sheer scale and pace with which complexity features in much of what, already, underpins life in modernity.

Every so often—every 60 years or so—a 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 transformation—deep and slow and silent—be happening today?

via The second economy – McKinsey Quarterly – Strategy – Growth.

Quite apart from a couple of "everyday" examples, one involving air travel and the other Global Supply Chain, I think that this extract really conveys the message:

If I were to look for adjectives to describe this second economy, I’d 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 concurrent—a great computer expression—which means that everything happens in parallel. It is self-configuring, meaning it constantly reconfigures itself on the fly, and increasingly it is also self-organizing, self-architecting, and self-healing.

These last descriptors sound biological—and they are. In fact, I’m 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, there’s about ten miles of roots underneath, all interconnected with one another, “communicating” with each other.

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Strategy under uncertainty: McKinsey Quarterly – Strategic Thinking


Revisiting a McKinsey article from 2000. If business leaders haven’t realised that we are facing, at least, Level 3 uncertainty they may just be stupid or lucky enough to “muddle through”…not much of a strategy though!

Whilst I agree wholeheartedly with the sentiment behind this article it is worth remembering: whilst we have a single history, we have multiple futures

Chart: The four levels of residual uncertaintyAt the heart of the traditional approach to strategy lies the assumption that executives, by applying a set of powerful analytic tools, can predict the future of any business accurately enough to choose a clear strategic direction for it. The process often involves underestimating uncertainty in order to lay out a vision of future events sufficiently precise to be captured in a discounted-cash-flow (DCF) analysis. When the future is truly uncertain, this approach is at best marginally helpful and at worst downright dangerous: underestimating uncertainty can lead to strategies that neither defend a company against the threats nor take advantage of the opportunities that higher levels of uncertainty provide. Another danger lies at the other extreme: if managers can’t find a strategy that works under traditional analysis, they may abandon the analytical rigor of their planning process altogether and base their decisions on gut instinct.

via Strategy under uncertainty – McKinsey Quarterly – Strategy – Strategic Thinking.