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Defense offsets: From ‘contractual burden’ to competitive weapon

July 22, 2014 Comments off

Defense offsets: From ‘contractual burden’ to competitive weapon
Source: McKinsey & Company

Western defense companies now need to look outside their core markets for growth. In the aftermath of the global economic crisis and over a decade of engagement in southwest Asia, many Western countries have scaled back their defense budgets, favoring instead more targeted spending and austerity plans. In Europe, ministries of defense are downsizing their military operations and procurement programs, and in the United States, the effects of the Budget Control Act of 2011 and sequestration will restrict defense spending through 2021 absent congressional action. By contrast, many countries representing addressable markets in Asia, the Middle East, and South America are investing in defense-modernization programs and over the past few years have increased their defense spending at compound annual growth rates of between 5 and 10 percent.

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Healthcare’s digital future

July 8, 2014 Comments off

Healthcare’s digital future
Source: McKinsey & Company

The adoption of IT in healthcare systems has, in general, followed the same pattern as other industries. In the 1950s, when institutions began using new technology to automate highly standardized and repetitive tasks such as accounting and payroll, healthcare payors and other industry stakeholders also began using IT to process vast amounts of statistical data. Twenty years later, the second wave of IT adoption arrived. It did two things: it helped integrate different parts of core processes (manufacturing and HR, for example) within individual organizations, and it supported B2B processes such as supply-chain management for different institutions within and outside individual industries. As for its effects on the healthcare sector, this second wave of IT adoption helped bring about, for example, the electronic health card in Germany. It was also a catalyst for the Health Information Technology for Economic and Clinical Health Act in the United States—an effort to promote the adoption of health-information technology—and the National Programme for IT in the National Health Service in the United Kingdom. Regardless of their immediate impact, these programs helped create an important and powerful infrastructure that certainly will be useful in the future.

Many institutions in the private and public sector have already moved to the third wave of IT adoption—full digitization of their entire enterprise, including digital products, channels, and processes, as well as advanced analytics that enable entirely new operating models. No longer limited to helping organizations do a certain task better or more efficiently, digital technology has the potential to affect every aspect of business and private life, enabling smarter choices, allowing people to spend more time on tasks they deem valuable, and often fundamentally transforming the way value is created. What will this third wave of IT adoption look like for healthcare?

The digital tipping point: McKinsey Global Survey results

July 2, 2014 Comments off

The digital tipping point: McKinsey Global Survey results
Source: McKinsey & Company

After years of revving their engines, many companies are gaining momentum with their digital initiatives. Executives say their CEOs are more involved in digital efforts than ever before and that their enterprises are now investing enough to meet their overall digital goals. Yet McKinsey’s latest survey on digitization also finds that many respondents say their companies must address key organizational issues before digital can have a truly transformative impact on their business.

This year’s survey asked respondents how their companies spend on digital and organize their digital work, as well as the goals, challenges, and best practices they see across these initiatives. Many respondents agree that their companies’ digital programs are growth oriented, that future spending on digital will increase, and that a large portion of future company growth will be driven by digital efforts. But organizational challenges and a dearth of talent are common, significant hurdles that prevent companies from scaling up their digital efforts or seeing clear returns on their investments. So are limited accountability and a poor understanding of potential value. Less than 40 percent of executives say their companies have accountability measures in place, either through targets, incentives, or “owners” of digital programs, while only 7 percent say their organizations understand the exact value at stake from digital.

Individual market: Insights into consumer behavior at the end of open enrollment

July 1, 2014 Comments off

Individual market: Insights into consumer behavior at the end of open enrollment
Source: McKinsey & Company

This intelligence brief discusses the results of our April individual-market consumer survey, which confirm observations from the first open enrollment period and indicate possible future behavior.

As the Affordable Care Act’s (ACA’s) first individual market open enrollment period (OEP) came to a close in April, we conducted our fifth national online survey to discern insights into how the 2014 individual market has evolved. We conducted the first four surveys between November 2013 and February 2014 and the fifth survey between April 7 and April 16, 2014.

The surveys have focused on both the intentions consumers expressed and the actions they reported taking during the 2014 OEP (especially their reports about how they shopped for, and evaluated, various plans and whether they decided to enroll or go uninsured). The surveys also explored consumers’ awareness of the ACA’s requirements and provisions (including potential subsidies and penalties) and other factors influencing their actions. Each survey included consumers reporting that they enrolled in healthcare coverage for 2014 (either on or off an exchange or by renewing an existing plan), those reporting that they shopped but did not enroll, and those reporting that they did not shop for health insurance during OEP.

Global flows in a digital age

June 23, 2014 Comments off

Global flows in a digital age
Source: McKinsey & Company

Global flows have been a common thread in economic growth for centuries, since the days of the Silk Road, through the mercantilist and colonial periods and the Industrial Revolution. But today, the movement of goods, services, finance, and people has reached previously unimagined levels. Global flows are creating new degrees of connectedness among economies—and playing an ever-larger role in determining the fate of nations, companies, and individuals; to be unconnected is to fall behind.

Flows of goods, services, and finance reached $26 trillion in 2012, or 36 percent of global GDP, 1.5 times the level in 1990. Now, one in three goods crosses national borders, and more than one-third of financial investments are international transactions. In the next decade, global flows could triple, powered by rising prosperity and participation in the emerging world and by the spread of the Internet and digital technologies. Our scenarios show that global flows could reach $54 trillion to $85 trillion by 2025, more than double or triple their current scale.

A new McKinsey Global Institute (MGI) report, Global flows in a digital age: How trade, finance, people, and data connect the world economy, examines the inflows and outflows of goods, services, finance, and people, as well as the data and communication flows that underlie them all, for 195 countries around the world.

McKinsey Quarterly: Resource revolution: Gathering force

June 6, 2014 Comments off

Resource revolution: Gathering force
Source: McKinsey & Company

Explores how technological advances are revolutionizing resource productivity, the future of lean, why leaders of organizational change must examine their own behavior, how to manage shareholder activists, and the rising risk of cyberattacks.

Brazil’s path to inclusive growth

June 2, 2014 Comments off

Brazil’s path to inclusive growth
Source: McKinsey & Company

More than 25 years of democracy and political stability have allowed Brazil to make major strides in economic development, including cutting its official poverty rate by half. Yet the forces that provided much of the economy’s momentum during the past decade—an expanding labor force, credit-fueled consumption, and high commodity prices—are beginning to stall.

This recent slowdown has exposed the more fundamental issue of the country’s long-term weakness in income growth (exhibit). Although Brazil has become the world’s seventh-largest economy, it ranks 95th in the world for GDP per capita. Most households have experienced only modest income growth, while inefficiencies and extra layers of taxes and tariffs push the prices of many consumer goods beyond reach. Having successfully lifted millions out of extreme poverty, Brazil must now deliver on the promise of a middle-class life.

High-performing boards: What’s on their agenda?

May 15, 2014 Comments off

High-performing boards: What’s on their agenda?
Source: McKinsey & Company

Five or so years after the financial crisis, the pressure on boards and directors to raise their game remains acute. A recent survey of more than 770 directors from public and private companies across industries around the world and from nonprofit organizations suggests that some are responding more energetically than others.1 The survey revealed dramatic differences in how directors allocated their time among boardroom activities and, most tellingly, in the respondents’ view of the effectiveness of their boards. More than one in four of the directors assessed their impact as moderate or lower, while others reported having a high impact across board functions. So what marks the agenda of a high-performing board?

The hidden value of organizational health—and how to capture it

May 6, 2014 Comments off

The hidden value of organizational health—and how to capture it
Source: McKinsey & Company

For the past decade, we’ve been conducting research, writing, and working with companies on the topic of organizational health. Our work indicates that the health of an organization is based on the ability to align around a clear vision, strategy, and culture; to execute with excellence; and to renew the organization’s focus over time by responding to market trends. Health also has a hard edge: indeed, we’ve come to define it as the capacity to deliver—over the long term—superior financial and operating performance.

India’s path from poverty to empowerment

May 5, 2014 Comments off

India’s path from poverty to empowerment
Source: McKinsey & Company

India has made encouraging progress by halving its official poverty rate, from 45 percent of the population in 1994 to 22 percent in 2012. This is an achievement to be celebrated—yet it also gives the nation an opportunity to set higher aspirations. While the official poverty line counts only those living in the most abject conditions, even a cursory scan of India’s human-development indicators suggests more widespread deprivation. Above and beyond the goal of eradicating extreme poverty, India can address these issues and create a new national vision for helping more than half a billion people attain a more economically empowered life.

Grow fast or die slow; Software and online-services companies can quickly become billion-dollar giants, but the recipe for sustained growth remains elusive

May 5, 2014 Comments off

Grow fast or die slow; Software and online-services companies can quickly become billion-dollar giants, but the recipe for sustained growth remains elusive
Source: McKinsey & Company

Software and online services are in a period of dizzying growth. Year-old companies are turning down billion-dollar buyouts in the hopes of multibillions in a few months. But we have seen similar industry phases before, and they have often ended with growth and valuations fizzling out. The industry’s booms and busts make growth, an essential ingredient in value creation, difficult to understand. To date, little empirical work has been done on the importance of revenue growth for software and Internet-services companies or how to find new sources of growth when old ones run out.

In our new research, we analyzed the life cycles of about 3,000 software and online-services companies from around the globe between 1980 and 2012. We also surveyed executives representing more than 70 companies and developed detailed case studies of companies that grew quickly and others whose growth stalled. The research produced three main findings.

Growth trumps all. Three pieces of evidence attest to the paramount importance of growth. First, growth yields greater returns. High-growth companies offer a return to shareholders five times greater than medium-growth companies. Second, growth predicts long-term success. “Supergrowers”—companies whose growth was greater than 60 percent when they reached $100 million in revenues—were eight times more likely to reach $1 billion in revenues than those growing less than 20 percent. Additionally, growth matters more than margin or cost structure. Increases in revenue growth rates drive twice as much market-capitalization gain as margin improvements for companies with less than $4 billion in revenues. Further, we observed no correlation between cost structure and growth rates.

Sustaining growth is really hard. Two facts emerged from the research. Companies have only a small probability of making it big. Just 28 percent of the software and Internet-services companies in our database reached $100 million in revenue, and 3 percent reached $1 billion. Of the approximately 3,000 companies we analyzed, only 17 achieved $4 billion in revenue as independent companies. Moreover, success is fleeting. Approximately 85 percent of supergrowers were unable to maintain their growth rates, and once lost, less than a quarter were able to recapture them. Those companies that did regain their historical growth rate had market capitalizations 53 percent lower than those that maintained supergrowth throughout.

There is a recipe for sustained growth. While every company’s circumstances are unique, the research found four principles that are essential to sustaining growth and from which every company can benefit. First, growth happens in phases: from start-up to billion-dollar giant, growth stories typically unfold as a prelude, act one, and act two. In act one, there are five critical enablers of growth: market, monetization model, rapid adoption, stealth, and incentives. A third principle is that the drivers for growth in act two are different. Successful strategies in act two include expanding the act-one offer to new geographies or channels, extending the act-one success to a new product market, or transforming the act-one offer into a platform. Finally, successful companies master the transition from one act to the next. Pitfalls include transitioning at the wrong time and selecting the wrong strategy for the next act.

The rising strategic risks of cyberattacks

May 2, 2014 Comments off

The rising strategic risks of cyberattacks
Source: McKinsey & Company

More and more business value and personal information worldwide are rapidly migrating into digital form on open and globally interconnected technology platforms. As that happens, the risks from cyberattacks become increasingly daunting. Criminals pursue financial gain through fraud and identity theft; competitors steal intellectual property or disrupt business to grab advantage; “hacktivists” pierce online firewalls to make political statements.

Research McKinsey conducted in partnership with the World Economic Forum suggests that companies are struggling with their capabilities in cyberrisk management. As highly visible breaches occur with growing regularity, most technology executives believe that they are losing ground to attackers. Organizations large and small lack the facts to make effective decisions, and traditional “protect the perimeter” technology strategies are proving insufficient. Most companies also have difficulty quantifying the impact of risks and mitigation plans. Much of the damage results from an inadequate response to a breach rather than the breach itself.

Complicating matters further for executives, mitigating the effect of attacks often requires making complicated trade-offs between reducing risk and keeping pace with business demands (see sidebar “Seizing the initiative on cybersecurity: A top-team checklist”). Only a few CEOs realize that the real cost of cybercrime stems from delayed or lost technological innovation—problems resulting in part from how thoroughly companies are screening technology investments for their potential impact on the cyberrisk profile.

When gas gets tight: Next steps for the Middle East petrochemical industry

May 1, 2014 Comments off

When gas gets tight: Next steps for the Middle East petrochemical industry
Source: McKinsey & Company

The Middle East petrochemical industry has seen spectacular growth over the past 30 years based on the availability of low-price gas feedstocks. But with advantaged new gas supply expected to end in most countries in the region over the next few years, petrochemical producers that want to expand domestically face major challenges. They can continue to build up their export industry using naphtha feedstock instead, but companies will have to find new ways to offset the handicap of their geographical location far from major growth markets. While obtaining naphtha at advantaged prices would help their position, the region’s petrochemical producers should become leaders in operating and functional efficiency. This will in turn require a broad mobilization to build the managerial and technical capabilities needed to develop and further grow their businesses.

Global flows in a digital age

April 24, 2014 Comments off

Global flows in a digital age
Source: McKinsey & Company

Global flows have been a common thread in economic growth for centuries, since the days of the Silk Road, through the mercantilist and colonial periods and the Industrial Revolution. But today, the movement of goods, services, finance, and people has reached previously unimagined levels. Global flows are creating new degrees of connectedness among economies—and playing an ever-larger role in determining the fate of nations, companies, and individuals; to be unconnected is to fall behind.

Flows of goods, services, and finance reached $26 trillion in 2012, or 36 percent of global GDP, 1.5 times the level in 1990. Now, one in three goods crosses national borders, and more than one-third of financial investments are international transactions. In the next decade, global flows could triple, powered by rising prosperity and participation in the emerging world and by the spread of the Internet and digital technologies. Our scenarios show that global flows could reach $54 trillion to $85 trillion by 2025, more than double or triple their current scale.

Next-generation IT infrastructure

April 23, 2014 Comments off

Next-generation IT infrastructure
Source: McKinsey & Company

The pressure on IT infrastructure leaders is unrelenting. They must deliver higher service levels and new IT-enabled capabilities, help accelerate application delivery, and do so while managing costs. As standard IT improvements near a breaking point, it’s no wonder that many IT infrastructure leaders have started to look for more transformative options, including next-generation IT infrastructure (NGI)—a highly automated platform for the delivery of IT infrastructure services built on top of new and open technologies such as cloud computing. NGI promises leaner organizations that rely more on cloud-provider-level hardware and software efficiencies. In addition, NGI facilitates better support of new business needs opened up by big data, digital customer outreach, and mobile applications.

To understand how senior executives view NGI, we canvassed opinions from invitees to our semiannual Chief Infrastructure Technology Executive Roundtable. The results were revealing: executives expressed strong interest in all key NGI technologies, from open-source infrastructure-management environments to software-defined networking, software-as-a-service offerings, cloud orchestration and management, and application-configuration management. Yet most have not yet fully taken advantage of the promise of NGI, largely because of the up-front investment required. The immaturity and complexity of the technology is also slowing adoption, as is concern about the security of the public cloud, particularly with respect to companies’ loss of control in the event of private litigation or inquiries from governmental agencies.

Private equity: Changing perceptions and new realities

April 23, 2014 Comments off

Private equity: Changing perceptions and new realities
Source: McKinsey & Company

Private-equity performance has been misunderstood in some essential ways. It now seems that the private-equity industry decisively outperforms public equities with respect to risk-adjusted returns, which may prompt return-starved institutional investors to allocate even more capital to the asset class. But this good news comes with an asterisk: top private-equity firms now seem less able to produce consistently successful funds. That’s because success has become more democratic as the general level of investing skill has increased.

The new priority for success is differentiated capabilities. Limited partners (those who invest in the funds raised and managed by general partners) expect funds that exploit a general partner’s distinctive strengths will do well, while more generalist approaches may be falling from favor. Institutional investors will need to get better at identifying and assessing these skills, and private-equity firms will need to look inward to better understand and capitalize on the factors that truly drive their performance.

Are you ready for the resource revolution?

April 15, 2014 Comments off

Are you ready for the resource revolution?
Source: McKinsey & Company

Meeting increasing global demand requires dramatically improving resource productivity. Yet technological advances mean companies have an extraordinary opportunity not only to meet that challenge but to spark the next industrial revolution as well.

How government can promote open data

April 9, 2014 Comments off

How government can promote open data
Source: McKinsey & Company

Institutions and companies across the public and private sectors have begun to release and share vast amounts of information in recent years, and the trend is only accelerating. Yet while some information is easily accessible, some is still trapped in paper records. Data may be free or come at a cost. And there are tremendous differences in reuse and redistribution rights. In short, there are degrees when it comes to just how “open” data is and, as a result, how much value it can create.

While businesses and other private organizations can make more information public, we believe that government has a critical role in unleashing the economic potential of open data. A recent McKinsey report, Open data: Unlocking innovation and performance with liquid information,1 identified more than $3 trillion in economic value globally that could be generated each year in seven domains through increasingly “liquid” information that is machine readable, accessible to a broad audience at little or no cost, and capable of being shared and distributed. These sources of value include new or increased revenue, savings, and economic surplus that flow from the insights provided by data as diverse as census demographics, crop reports, and information on product recalls.

The disruptive potential of solar power

April 4, 2014 Comments off

The disruptive potential of solar power
Source: McKinsey & Company

The economics of solar power are improving. It is a far more cost-competitive power source today than it was in the mid-2000s, when installations and manufacturing were taking off, subsidies were generous, and investors were piling in. Consumption continued rising even as the MAC Global Solar Energy Index fell by 50 percent between 2011 and the end of 2013, a period when dozens of solar companies went bankrupt, shut down, or changed hands at fire-sale prices.

The bottom line: the financial crisis, cheap natural gas, subsidy cuts by cash-strapped governments, and a flood of imports from Chinese solar-panel manufacturers have profoundly challenged the industry’s short-term performance. But they haven’t undermined its potential; indeed, global installations have continued to rise—by over 50 percent a year, on average, since 2006. The industry is poised to assume a bigger role in global energy markets; as it evolves, its impact on businesses and consumers will be significant and widespread. Utilities will probably be the first, but far from the only, major sector to feel solar’s disruptive potential.

Preparing for bigger, bolder shareholder activists

April 3, 2014 Comments off

Preparing for bigger, bolder shareholder activists
Source: McKinsey & Company

Activist investors are getting ever more adventurous. Last year, according to our analysis, the US-listed companies that activists targeted had an average market capitalization of $10 billion—up from $8 billion just a year earlier and less than $2 billion at the end of the last decade. They’ve also been busier, launching an average of 240 campaigns in each of the past three years—more than double the number a decade ago. And even though activists are a relatively small group, with only $75 billion in combined assets under management compared with the $2.5 trillion hedge-fund industry overall, they’ve enjoyed a higher rate of asset growth than hedge funds and attracted new partnerships with traditional investors. As a result, they have both the capital and the leverage to continue engaging largecap companies.

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