Organization: Overview of Core Frameworks

1. Organization: Overview of Core Frameworks Local Training Module For First-year Associates Associate Handbook

2. FOREWORD AND OBJECTIVE This Organization Practice(OP) document provides an overview for use in local training sessions for first-year associates. It is part of a “series on functional areas.” The objective of the series is to introduce McKinsey practitioners to the basics in each of our functional areas of expertise. All the documents in the series are comprehensive in nature and describe the current tools and frameworks in that functional area At the end of this document, you can find a section describing a selection of the core documents and handbooks that can give you further details on some of the frameworks descried here. All of these documents are now on PDNet; and hard copies of them can be requested from PDNet Express, which will deliver them in 24 hours The contents of this document have been adapted for local training sessions through “Switching Tracks” — OP’s first-year module videotape, which communicates the basic concepts in a concise and visual way using an actual client — The Scandinavian Railroad Company. It is 40 minutes long and should be presented in 3 short segments. Between these segments, the faculty member runs the attached exercises, adds any commentary he/she considers necessary to clarify the concepts, and provides personal experience on selected topics. A copy of the videotape and moderator’s guide with exercises can be requested from the Firm

3. This document seeks to answer 4 questions SECTION 1 Why do associates need to consider organizational issues in every engagement? SECTION 2 What frameworks do we use to help our clients improve organizational performance? SECTION 3 What role does an associate play in organization work? SECTION 4 Where can an associate find out more?

4. McKinsey’s mission is to have lasting and substantial impact on our clients. To succeed, we need to work all three of the critical elements: choose the best strategy, develop world-class operations, align the organization. These three elements both reinforce and constrain each other. The best strategy is only relevant if it is operationally and organizationally feasible. The optimal organizational design depends upon the strategic requirement and the operational methods of the client. This document focuses on one vertex of this triangular relationship. It would be wrong, however, to believe that you can achieve the impact we seek by focusing on one vertex. We need to consider all three in every study.

5. CRITICAL ELEMENTS FOR IMPACT Successful strategy Efficient operations Effective organization

6. We only achieve impact when the organizations we serve are successful in implementing the strategies and operational methods we propose. However, a recent survey of engagements in which clients failed to implement proposed strategies found, in three cases out of four, that the client organization was not change-ready or even capable of implementing the strategy we proposed. To ensure that we have impact, we need to consider organizational issues as we devise strategies. We must choose strategies the clients are ready and able to implement or complement our strategy work with investment in building the organization’s skills so that the organization can step up to the challenge the superior strategy poses..

7. 3 OUT OF 4 STRATEGIES THAT FAIL DO SO BECAUSE OF THE ORGANIZATION’S INABILITY TO EXECUTE Percent 100%=340 responses Other McKinsey recommendations flawed Organization lacked the capabilities to execute strategy Client not change-ready or committed

8. The demand for organizational work is increasing. Trends in the marketplace and the evolving nature of our clients largely explain this increase in demand. The pace of change in the marketplace is accelerating . A strategic choice or an operational innovation evokes a rapid reaction from competitor. Rarely can a durable competitive advantage be found in these choices. Rather it is the development of a unique organizational capability with the inherent flexibility and commitment to sustain world-class performance that provides durable competitive advantage in these times of rapid change. The clients we serve are changing as well. They have increasingly hired in-house strategic capabilities. Most have built strategy shops close to the CEO. Few, however, have the in-house capability and objectivity to do the organizational work required to make change happen.

9. ORGANIZATIONAL WORK GROWING IN IMPORTANCE Crafting the answer Helping implement change 10 years ago Today McKinsey’s engagement mix Percent of time • Evolving marketplace • Quickening pace of strategic adaptation • Durable competitive advantage often rooted in unique organizational capabilities • Evolving players • Many businesses acquiring in-house strategic capability • Making change happen remains the “neglected art” Increasing demand for help with organization issues and change management Source: Survey of 23 MGMs across the Firm

10. The recent evolution in our clients has not been missed by our competitors. Each of our competitors has recently introduced a branded organizational element to their portfolio. Their organizational expertise figures prominently in their marketing campaigns.

11. COMPETITORS HAVE BRANDED ORGANIZATION TOOLS

12. McKinsey’s consulting approach must evolve as our clients evolve. These changes provoke a shift in the nature of our work and an evolution of the role of the associate on engagements. The increased demand for organizational work impacts associates directly. Associates are drawn into leadership roles on larger teams at an earlier point in their careers. This places greater emphasis on the need for associates to develop quite soon after joining McKinsey-superb team leadership skills.

13. EVOLUTION IN McKINSEY’S APPROACH *Survey of 23 MGMs across the Firm

14. Before we dive into the organization materials, we should announce one critical caveat: the frameworks you are about to see are only as good as the judgment and insight used to fill them out. The frameworks are often mere checklists, useful tools to ensure you do not overlook a key dimension. The OP can provide interview guides and questionnaires that you can use to flesh out the frameworks, as well as applied examples in a range of settings. However, almost all organizational issues are “situation dependent”, and almost all client settings are unique. Your judgment, insight, creativity, and organizational acumen will determine whether you add value in the client setting .

15. A CRITICAL CAVEAT Garbage Garbage • Organizational practice frameworks • Checklists • Surveys, questionnaires • Applied examples Good judgment, keen insight, creativity, organizational acumen Client impact “Garbage in, garbage out”

16. A series of frameworks are available to help clients identify and address organizational limits on effectiveness or obstacles to change. They also point toward solutions. These frameworks help teams answer two fundamental questions: ¶ What change is needed? ¶ How should the client implement the change? The OP has derived a set of six attributes that characterize high-performing organizations(HPO). By assessing whether your client organization exhibits these six attributes, you can diagnose whether an organizational performance gap exists as well. Additionally, the 7-Ss will help you identify strengths and deficiencies in the organization. The 7-Ss focus teams on aligning structure, staff, systems, and style to promote behavioral change and build skills in pivotal jobholders. By contrasting the required skill set (at both the organization and the pivotal jobholder level) with the current skill set, you can often clarify the organizational gap that exists. You complete the diagnostic by filling out the change board. That exercise helps teams understand the organizational skill deficits or resistance to change so they can deliberately plan to build the necessary skills and willingness to change in the organization. Once the gaps have been identified, the team needs to lay out a change program to close the gaps. The transformation triangle highlights the three critical dimensions of any effective change program-top down, bottom up, cross-functional. The proper balance among these dimensions depends on the gap, the client setting, and the competitive context. Every change program contains some mix of six fundamental energizing elements. Each must be considered as we design change programs. This section of the handbook will discuss each framework in turn.

17. CORE FRAMEWORKS What change is needed? How should the client make change happen? What gaps in organizational performance exist? What organizational challenges exist? What initiatives comprise the change program? How do we create energy for the change program? Skills Vision People Simple CEO led Perfor-mance Performance management communication Strategy Skills Vision and leadership Organizational infrastructure VISION Shared values Problem solving process People development • High-performing organization attributes • 7-S framework • Transformation triangle • Energizing elements Agenda/platform Winning formula Pivotal jobs Design levers Organizational structure Staff Management systems • Direction setting • Structuring • Bottom-up energizing Leadership style • Change board

18. The OP undertook a study of 10 high-performing companies, true industry leaders, that we knew very well. The companies had sustained pace-setting performance in their respective industries over 2 decades. These 10 HPOs shared six management attributes, each of which focuses on performance. By comparing your client organization to these HPOs, you may identify opportunities to improve your client organization.

19. “HIGH-PERFORMANCE COMPANY” ATTRIBUTES How should the client make change happen? What change is needed? Organizational challenges Energizing elements Initiatives Gaps in performance Driven by leaders Built by relentless pursuit of before-the-fact strategies/vision Energized by an extraordinarily intense, performance-driven environment Aligned by simple structures and core processes Based on world-class skills Rejuvenated by well-developed people systems

20. The first three of the six common management attributes: ¶ Driven by leaders. The leaders of these companies had very high performance aspirations. For these leaders there was no such notion as “good enough”. At the center of these leadership groups, we consistently found demanding, unreasonable CEOs. ¶ Built by relentless before-the-fact strategies/visions. HPOs spend their time looking forward, not back. Their strategies drive relentlessly for both profitability and growth. ¶ Energized by an extraordinarily intense, performance-driven environment. HPOs have a demanding, occasionally punishing, work pace. There is real accountability, especially at the top. HPOs, while being very good places to work, are not always nice places to work.

21. ATTRIBUTES OF AN HPO

23. ATTRIBUTES OF AN HPO (CONTINUED)

24. The HPO research found something else common to the HPOs: all 10 were experimenting with self-governance. Self-governance in these HPOs means empowerment with accountability. The HPOs share the common characteristic of involving “a wide range of “or “broad cross-section of” employees in driving for improved performance. Their goal is to imbue every employee with an owner’s mind-set. Self –governance in these HPOs is different from that practiced in other “engaged and empowered” companies. In HPOs the single-minded objective of empowerment is performance. In the matrix below, the HPOs we studied were all in the top half of the matrix (high performance); many were reaching, in addition, for the right-hand side of the matrix(engaged and empowered).

25. PERFORMANCE AND EMPOWERMENT AT HPOs Performance High Performance-focused, top-down-driven organizations Performance-driven, empowered, and accountable organizations HPOs Average Hierarchical, command- and control-oriented, “entitled” organizations Activity-driven, “engaged and empowered” organizations Low Command and control Engage and empower Management approach

26. Most large companies start out in the lower left-hand corner of the matrix (low performance and command-and-control management approach). We discovered that HPOs that have successfully transitioned to the upper right-hand corner have first achieved high performance and then experimented with and adopted empowerment. Empowerment without first establishing a true performance ethic in the company tends to result in continued low performance. If your client falls in the lower left-hand corner of this matrix, it needs to concentrate first on building a true performance ethic. Empowerment, alone, is unlikely to yield performance improvement.

27. TRANSFORMATION PATH Path followed by high-performance companies Path experienced by companies that fail to instill performance ethic first Performance High • 3M • GE • Hallmark • Johnson&Johnson • Many high perfor-mers” on the journey” • Emerson • Pepsico • Sonoco • Sun Trust • VF Average • Most companies • BP • FP&L • Wallace Low Command and control Engage and empower Management approach

29. How should the client make change happen? What change is needed? Gaps in performance Organizational challenges Organizational challenges Energizing elements initiatives Winning formula Pivotal jobs Design levers Organizational structure Staff Strategy Skills VISION Management systems Shared values Leadership style • 7-S FRAMEWORK

31. McDONALD’S WINNING FORMULA Vision : to become the leading restaurant chain in the world • Convenient • Good quality • Consistent • Family-oriented environment • Fair value • Quality control over all aspects of business • Superior site selection • Continuous new product development • Strong promotion of products and McDonald’s image Strategy Skills Shared values • Quality • Service • Cleanliness • price

32. Organizations usually change in response to discontinuities – either external shocks (such as deregulation ) or internal changes (such as new leadership) that make it clear that the old , “grooved” way of doing things is no longer winning. The successful ones will create a new winning formula that is based on changes in strategy, newer or stronger skills, and/or shared values. Contrasting the new winning formula to the old formula identifies and gauges the change that the organization is considering and defines the vision for the change program. A change vision is a creed that summarizes what an organization is trying to become and why. As such, it guides organizational priorities by redefining and recombining business objectives, required institutional skills ,and corporate values about what is important around here. A change vision is at the heart of top management’s role in improving performance and is often the first step. It provides the vital bridge between the initial dissatisfaction with the status quo and the first practical steps taken in a change program – the articulation of a clear target that represents something better that is both logically sound and emotionally appealing.

33. IMPROVING ORGANIZATIONAL PERFORMANCE Strategy Skills VISION Shared values Grooved Unfrozen Redirected Discontinuities • External shocks • New competitors, economics • New technologies • Deregulation • Internal changes • New aspirations • New leader New or stronger skills New strategy CHANGE VISION Shared values Major change through people

34. Certain key people in the organization hold positions that determine success or failure in instituting a new strategy, skill, or shared value. These people fill what we call pivotal jobs. We will only succeed in implementing the change vision if we succeed in changing the behavior of pivotal jobholders. At McDonald’s, for example, pivotal jobs include the centralized purchasers of all raw materials for all stores, the store managers, and the hourly employees who take and assemble orders.

35. PIVOTAL JOBSWhat people must do • What are they ? • Positions that have direct impact on delivery of value to the customer. • Typically they • -Design the product • -Make the product • -Sell the product • Positions that must capably master new skills • Where are they? • Close to the front line

36. In a recent study at a chain store retailer, the change vision included a significant improvement in in-store convenience. Two positions were identified as pivotal jobs – the store manager and the area operations manager. This study employed a contrast analysis in two forms. The first considered each element of behavior and defined how the new behavior would need to differ from current practices. A behavior contrast analysis often proves helpful in defining precisely how the pivotal job- holders need to change.

37. CONTRAST ANALYSISPivotal jobs: store manager, chain retailer

38. The second analysis contrasted the percentage of time spent on critical tasks under current practices and envisioned in the future.

39. CONTRAST ANALYSIS BY PERCENTAGE OF TIME SPENTPivotal job: area operations manager Current Proposed 100% Merchant/owner Coach Player Admini-straor

41. ORGANIZATIONAL DESIGN LEVERS AT McDONALD’S Strategy Skills VISION Shared values Winning formula Pivotal jobs Design levers Organizational structure Staff Management systems Leadership style

43. ORGANIZATIONAL DESIGN LEVERS AT McDONALD’S Strategy Skills VISION Shared values Winning formula Pivotal jobs Design levers Organizational structure Staff Management systems Leadership style

45. STRUCTURAL OPTIONS

47. CHANGE BOARD How should the client make change happen? What change is needed? Gaps in performance Organizational challenges Organizational challenges Energizing elements initiatives Commitment Capability to leverage the commitment Conviction Courage Individual ability Organization supports/obstacle Chief executive (or equivalent) Leadership group of area to be changed Down-the-line staff affected* External Constituencies** Skill to be built * Modified as appropriate for company ** E.g., customers, suppliers, trade unions

49. CHANGE BOARD – CHAIN RETAILER EXAMPLE Commitment Capability Conviction Courage Individual ability Organization supports/obstacle Delivering in-store convenience