What matters most?

Eight priorities for

CEOs in 2024
Forming the right agenda is not getting easier.
Here’s our annual attempt to cut through the clutter
and zero in on things that matter to CEOs.

Compendium
December 2023
Cover image: © Wang Yukun/Getty Images
All interior images: © Getty Images

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Introduction

What matters most? It’s a question we’ve been How to outcompete with technology
investigating for a few years now (here are reports Gen AI grabs all the headlines, but let’s not forget
from 2022 and 2021). This year, we’re reminded the “digital revolution,” if we can so describe
that what matters most are family, friends, values, something that started 30 or 40 years ago.
principles, and commitments. Digitization might be on a slow boil, but given
enough time, all the frogs will still be cooked. And
One of our commitments is to CEOs. It’s a tough there’s a risk that paying too much attention to
job and getting tougher all the time. Just in the gen AI could set a company back on its digital
past few years, they’ve had to cope with a global transformation. How to escape the boiling pot? This
pandemic, busted supply chains, war, stubborn year, our colleagues published a best-selling book,
inflation, and many other disruptions. Any one Rewired: The McKinsey Guide to Outcompeting in
of these is enough to derail a CEO’s agenda. the Age of Digital and AI. It’s a collection of our best
Taken together, it’s the most difficult operating insights for digitizing the enterprise. Digital winners
environment we can remember. grow revenues and cut costs faster than others.

We talk to hundreds of CEOs every year, and

many of our colleagues do the same. We admire The biggest capital reallocation
how CEOs are leading their companies for the in our lifetime
benefit of all stakeholders. We’ve consolidated the
That’s what we said last year about the energy
views that have come out of these conversations
transition. The bill has only gone up since then, for
and are pleased to offer what we’ve heard
the simple reason that amid uncertainty, investors
about how companies can do better for society,
and companies have held back from committing
communities, and employees—and the prosaic
their capital, even as the Earth grows hotter. Let’s
business of how they can pay for it all and reward
be clear: what needs to happen is the creation of
investors too.
thousands of new green-technology businesses,
in every part of the emerging business system. We
Here are eight priorities for CEOs in 2024.
have ideas about where, how, and when companies
should invest.

Generative AI goes from proof

of concept to scale The road to growth
The biggest story of this year (or decade) was
It’s a funny thing: growth is always job one for
the arrival of generative AI (gen AI). This is the
CEOs, but the path to get there is never clear.
real deal, folks. Thousands of companies in
Sometimes it’s about seizing market share;
every industry and in every part of the world
sometimes it’s about expanding into new markets;
are already using a simple gen AI interface to
sometimes it’s about making a left turn into
radically transform every imaginable business
something completely new. The one constant is
activity. But while innovators dominate headlines,
the ten rules of growth. How will the rules play
it’s scalers that dominate markets. CEOs need to
out in 2024? For many, it will mean rule four:
figure out three things, posthaste: which parts of
turbocharge your core, by using technology to
the business can benefit, how to scale from one
power growth. For others, it might mean rule
application to many, and how the new tools will
six: grow where you know, by improving sales
reshape their industry.
productivity. And, as always, the most constant
of all is rule nine—acquire programmatically—as

What matters most? Eight priorities for CEOs in 2024 i

the latest installment of our 20-year research What comes next? One thing is for sure: events
effort demonstrates. have an uncanny way of defying the expectations of
experts. In the face of that, management teams and
boards should consider black swans and gray rhinos
What’s your superpower? in their scenarios and build geopolitical resilience
Think of any company you admire, and you can that will serve them well, no matter which side of the
likely rattle off one or two superpowers that make coin comes up.
it uniquely successful. Toyota and its Toyota
Production System. LVMH and its exquisite
craftsmanship and the entrepreneurship of A new lens on the macroeconomy
its brand leaders. Disney and imaginative Nearly four years after COVID-19 rewrote history,
customer experiences. A distinctive capability some CEOs are still waiting for macroeconomic
can lift a company out of the mire of clogged, certainty. That’s unlikely to happen—and that’s
commoditized markets and onto the high ground okay. Leading firms capitalize on uncertainty: they
of outperformance. Exceptional implementation is assess their risk appetite, then invest near the
part and parcel of building a new capability. bottom of cycles. Most rely on scenario planning,
not least because the exercise usually reveals the
core actions that companies need to take no matter
Learn to love your middle managers which way the economy trends. CEOs might want
Waffle House, an American restaurant chain, is to populate their models with the new scenarios
famous for never closing; some say its doors we’ve developed to look at the ways the global
have no locks. It should also be famous for its balance sheet might develop. Over the past two
management philosophy. The restaurant’s grill decades, assets on the global balance sheet grew
operators are the stars of the show; after years of much faster than GDP—the real economy. But the
training, the best get to be called “Elvis of the grill.” continuation of that trend is uncertain. Yet another
After that, they don’t get promoted; how do you curveball is the rapid shift of assets from the
top being King? But most other companies would banking system to private markets and what that
likely promote such people into senior management means for public companies.
roles that they don’t want and are not suited for.
Companies need to rethink their philosophy about
middle managers and recognize them for what they
actually are: the core of the company. CEOs need a broad range of contradictory
perspectives: outside in and inside out, a telescope
to see the world and a microscope to break it down,
Geopolitics: Beating the odds a snapshot view of the immediate issues and a time-
lapse series to see into the future. We hope this
As Niels Bohr once said, it’s very hard to make
article and the in-depth readings available within it
predictions, especially about the future. As
give CEOs and executives the clarity they seek.
CEOs watch the changes unfolding in the global
geopolitical order, all agree with the sentiment.

What matters most? Eight priorities for CEOs in 2024 ii

Contents
1 Gen AI: The start 4 Navigating the road to 7 Geopolitics: Beating
of something big courageous growth the odds
Innovators dominate All roads do not lead to Rome. A new world order might be
headlines. Scalers dominate Leaders need to find the path emerging from the current
markets. that works for them. upheaval. Leaders can
anticipate some shifts and
1 Technology’s generational 45 The ten rules of growth position their companies for
moment with generative AI: A CIO success.
57 Five paths to TSR outperformance
and CTO guide
76 Black swans, gray rhinos, and
silver linings: Anticipating
geopolitical risks (and openings)

2 Outcompeting 5 What’s your 8 A new lens on the

with technology superpower? macroeconomy
Most digital transformations Institutional capability Hard landing, soft landing, no
fail to deliver the expected building: sounds dull, right? landing at all? While analysts
impact. Our playbook has It’s anything but. Find out debate, smart leaders are
helped hundreds complete how distinctive companies get moving on to consider the
their reinvention and find the that way. bigger picture.
missing value.
63 What’s your superpower? 81 Why the path of global wealth
13 Rewired to outcompete How companies can build an and growth matters for strategy
(McKinsey Quarterly) institutional capability to achieve (McKinsey Quarterly)
competitive advantage

3 The energy transition: 6 Learn to love your

Time is short middle managers
Commitments are abundant; Stop thinking of middle
actions, not so much. Leaders management as a way station.
can make the next moves. Instead, make it a destination.

22 Full throttle on net zero: Creating 69 Middle managers are the

value in the face of uncertainty heart of your company
(McKinsey Quarterly)
28 Scaling green businesses: Next
moves for leaders
35 Decarbonize and create value:
How incumbents can tackle the
steep challenge

What matters most? Eight priorities for CEOs in 2024 iii

Technology’s
generational moment
with generative AI:
A CIO and CTO guide
CIOs and CTOs can take nine actions to reimagine business and
technology with generative AI.
This article is a collaborative effort by Aamer Baig, Sven Blumberg, Eva Li, Douglas Merrill,
Adi Pradhan, Megha Sinha, Alexander Sukharevsky, and Stephen Xu, representing views from
McKinsey Digital.

July 2023
 Hardly a day goes by without some new business- to apply those lessons to guide the C-suite in
busting development related to generative turning the promise of generative AI into sustainable
AI surfacing in the media. The excitement is value for the business.
well deserved—McKinsey research estimates
that generative AI could add the equivalent of Through conversations with dozens of tech leaders
$2.6 trillion to $4.4 trillion of value annually.¹ and an analysis of generative AI initiatives at more
than 50 companies (including our own), we have
CIOs and chief technology officers (CTOs) have a identified nine actions all technology leaders
critical role in capturing that value, but it’s worth can take to create value, orchestrate technology
remembering we’ve seen this movie before. New and data, scale solutions, and manage risk for
technologies emerged—the internet, mobile, social generative AI (see sidebar, “A quick primer on
media—that set off a melee of experiments and key terms”):
pilots, though significant business value often
proved harder to come by. Many of the lessons 1. Move quickly to determine the company’s
learned from those developments still apply, posture for the adoption of generative AI,
especially when it comes to getting past the pilot and develop practical communications to, and
stage to reach scale. For the CIO and CTO, the appropriate access for, employees.
generative AI boom presents a unique opportunity

A quick primer on key terms

Generative AI is a type of AI that can create new content (text, code, images, video) using patterns it has learned by training on exten-
sive (public) data with machine learning (ML) techniques.

Foundation models (FMs) are deep learning models trained on vast quantities of unstructured, unlabeled data that can be used for
a wide range of tasks out of the box or adapted to specific tasks through fine-tuning. Examples of these models are GPT-4, PaLM 2,
DALL·E 2, and Stable Diffusion.

Large language models (LLMs) make up a class of foundation models that can process massive amounts of unstructured text and
learn the relationships between words or portions of words, known as tokens. This enables LLMs to generate natural-language text,
performing tasks such as summarization or knowledge extraction. Cohere Command is one type of LLM; LaMDA is the LLM behind
Bard.

Fine-tuning is the process of adapting a pretrained foundation model to perform better in a specific task. This entails a relatively short
period of training on a labeled data set, which is much smaller than the data set the model was initially trained on. This additional training
allows the model to learn and adapt to the nuances, terminology, and specific patterns found in the smaller data set.

Prompt engineering refers to the process of designing, refining, and optimizing input prompts to guide a generative AI model toward
producing desired (that is, accurate) outputs.

Learn more about generative AI in our explainer “What is generative AI” on McKinsey.com.

1
“The economic potential of generative AI: The next productivity frontier,” McKinsey, June 14, 2023.

Technology’s generational moment with generative AI: A CIO and CTO guide 2
2. Reimagine the business and identify use 1. Determine the company’s posture
cases that build value through improved for the adoption of generative AI
productivity, growth, and new business As use of generative AI becomes increasingly
models. Develop a “financial AI” (FinAI) widespread, we have seen CIOs and CTOs respond
capability that can estimate the true costs and by blocking employee access to publicly available
returns of generative AI. applications to limit risk. In doing so, these
companies risk missing out on opportunities for
3. Reimagine the technology function, and focus innovation, with some employees even perceiving
on quickly building generative AI capabilities in these moves as limiting their ability to build
software development, accelerating technical important new skills.
debt reduction, and dramatically reducing
manual effort in IT operations. Instead, CIOs and CTOs should work with risk
leaders to balance the real need for risk mitigation
4. Take advantage of existing services or adapt with the importance of building generative AI
open-source generative AI models to develop skills in the business. This requires establishing
proprietary capabilities (building and operating the company’s posture regarding generative AI
your own generative AI models can cost tens by building consensus around the levels of risk
to hundreds of millions of dollars, at least in the with which the business is comfortable and how
near term). generative AI fits into the business’s overall strategy.
This step allows the business to quickly determine
5. Upgrade your enterprise technology company-wide policies and guidelines.
architecture to integrate and manage
generative AI models and orchestrate how Once policies are clearly defined, leaders should
they operate with each other and existing AI and communicate them to the business, with the CIO
machine learning (ML) models, applications, and and CTO providing the organization with appropriate
data sources. access and user-friendly guidelines. Some
companies have rolled out firmwide communications
6. Develop a data architecture to enable access about generative AI, provided broad access to
to quality data by processing both structured generative AI for specific user groups, created pop-
and unstructured data sources. ups that warn users any time they input internal
data into a model, and built a guidelines page that
7. Create a centralized, cross-functional appears each time users access a publicly available
generative AI platform team to provide generative AI service.
approved models to product and application
teams on demand.
2. Identify use cases that build value
8. Invest in upskilling key roles—software through improved productivity,
developers, data engineers, MLOps engineers, growth, and new business models
and security experts—as well as the broader
CIOs and CTOs should be the antidote to the “death
nontech workforce. But you need to tailor the
by use case” frenzy that we already see in many
training programs by roles and proficiency
companies. They can be most helpful by working
levels due to the varying impact of generative AI.
with the CEO, CFO, and other business leaders
to think through how generative AI challenges
9. Evaluate the new risk landscape and
existing business models, opens doors to new
establish ongoing mitigation practices to
ones, and creates new sources of value. With a
address models, data, and policies.
deep understanding of the technical possibilities,

Technology’s generational moment with generative AI: A CIO and CTO guide 3
the CIO and CTO should identify the most valuable — Software development: McKinsey research
opportunities and issues across the company shows generative AI coding support can
that can benefit from generative AI—and those help software engineers develop code
that can’t. In some cases, generative AI is not the 35 to 45 percent faster, refactor code 20
best option. to 30 percent faster, and perform code
documentation 45 to 50 percent faster.³
McKinsey research, for example, shows generative Generative AI can also automate the testing
AI can lift productivity for certain marketing use process and simulate edge cases, allowing
cases (for example, by analyzing unstructured teams to develop more-resilient software prior
and abstract data for customer preference) by to release, and accelerate the onboarding
roughly 10 percent and customer support (for of new developers (for example, by asking
example, through intelligent bots) by up to 40 generative AI questions about a code base).
percent.² The CIO and CTO can be particularly Capturing these benefits will require extensive
helpful in developing a perspective on how best training (see more in action 8) and automation
to cluster use cases either by domain (such as of integration and deployment pipelines
customer journey or business process) or use case through DevSecOps practices to manage the
type (such as creative content creation or virtual surge in code volume.
agents) so that generative AI will have the most
value. Identifying opportunities won’t be the most — Technical debt: Technical debt can account for
strategic task—there are many generative AI use 20 to 40 percent of technology budgets and
cases out there—but, given initial limitations of significantly slow the pace of development.⁴
talent and capabilities, the CIO and CTO will need CIOs and CTOs should review their tech-debt
to provide feasibility and resource estimates to balance sheets to determine how generative
help the business sequence generative AI priorities. AI capabilities such as code refactoring,
code translation, and automated test-case
Providing this level of counsel requires tech leaders generation can accelerate the reduction of
to work with the business to develop a FinAI technical debt.
capability to estimate the true costs and returns on
generative AI initiatives. Cost calculations can be — IT operations (ITOps): CIOs and CTOs will
particularly complex because the unit economics need to review their ITOps productivity efforts
must account for multiple model and vendor costs, to determine how generative AI can accelerate
model interactions (where a query might require processes. Generative AI’s capabilities are
input from multiple models, each with its own fee), particularly helpful in automating such tasks
ongoing usage fees, and human oversight costs. as password resets, status requests, or
basic diagnostics through self-serve agents;
accelerating triage and resolution through
3. Reimagine the technology function improved routing; surfacing useful context,
Generative AI has the potential to completely such as topic or priority, and generating
remake how the tech function works. CIOs and suggested responses; improving observability
CTOs need to make a comprehensive review of through analysis of vast streams of logs to
the potential impact of generative AI on all areas identify events that truly require attention; and
of tech, but it’s important to take action quickly to developing documentation, such as standard
build experience and expertise. There are three operating procedures, incident postmortems,
areas where they can focus their initial energies: or performance reports.

2
Ibid.
3
Begum Karaci Deniz, Martin Harrysson, Alharith Hussin, and Shivam Srivastava, “Unleashing developer productivity with generative AI,”
McKinsey, June 27, 2023.
4
Vishal Dalal, Krish Krishnakanthan, Björn Münstermann, and Rob Patenge, “Tech debt: Reclaiming tech equity,” McKinsey, October 6, 2020.

Technology’s generational moment with generative AI: A CIO and CTO guide 4
4. Take advantage of existing services infrastructure, reducing the need for data
or adapt open-source generative AI transfers. The other approach is to “bring
models data to the model,” where an organization
A variation of the classic “rent, buy, or build” decision can aggregate its data and deploy a copy of
exists when it comes to strategies for developing the large model on cloud infrastructure. Both
generative AI capabilities. The basic rule holds true: approaches achieve the goal of providing access
a company should invest in a generative AI capability to the foundation models, and choosing between
where it can create a proprietary advantage for the them will come down to the organization’s
business and access existing services for those that workload footprint.
are more like commodities.
— Maker—builds a foundation model to address
The CIO and CTO can think through the implications a discrete business case. Building a foundation
of these options as three archetypes: model is expensive and complex, requiring
huge volumes of data, deep expertise, and
— Taker—uses publicly available models through massive compute power. This option requires
a chat interface or an API, with little or no a substantial one-off investment—tens or
customization. Good examples include off- even hundreds of millions of dollars—to build
the-shelf solutions to generate code (such the model and train it. The cost depends on
as GitHub Copilot) or to assist designers with various factors, such as training infrastructure,
image generation and editing (such as Adobe model architecture choice, number of model
Firefly). This is the simplest archetype in terms of parameters, data size, and expert resources.
both engineering and infrastructure needs and
is generally the fastest to get up and running. Each archetype has its own costs that tech
These models are essentially commodities that leaders will need to consider (Exhibit 1). While new
rely on feeding data in the form of prompts to the developments, such as efficient model training
public model. approaches and lower graphics processing unit
(GPU) compute costs over time, are driving costs
— Shaper—integrates models with internal data down, the inherent complexity of the Maker
and systems to generate more customized archetype means that few organizations will adopt
results. One example is a model that supports it in the short term. Instead, most will turn to some
sales deals by connecting generative AI tools combination of Taker, to quickly access a commodity
to customer relationship management (CRM) service, and Shaper, to build a proprietary capability
and financial systems to incorporate customers’ on top of foundation models.
prior sales and engagement history. Another
is fine-tuning the model with internal company
documents and chat history to act as an 5. Upgrade your enterprise technology
assistant to a customer support agent. For architecture to integrate and
companies that are looking to scale generative manage generative AI models
AI capabilities, develop more proprietary Organizations will use many generative AI models
capabilities, or meet higher security or of varying size, complexity, and capability. To
compliance needs, the Shaper archetype generate value, these models need to be able to
is appropriate. work both together and with the business’s existing
systems or applications. For this reason, building a
There are two common approaches for separate tech stack for generative AI creates more
integrating data with generative AI models in complexities than it solves. As an example, we can
this archetype. One is to “bring the model to look at a consumer querying customer service at a
the data,” where the model is hosted on the travel company to resolve a booking issue (Exhibit 2).
organization’s infrastructure, either on-premises In interacting with the customer, the generative AI
or in the cloud environment. Cohere, for example, model needs to access multiple applications and
deploys foundation models on clients’ cloud data sources.

Technology’s generational moment with generative AI: A CIO and CTO guide 5
 Exhibit 1
Each archetype has its own costs.

Archetype Example use Estimated total cost of ownership

cases
— Off-the-shelf ~ $0.5 million to $2.0 million, one-time
coding assistant
— Off-the-shelf coding assistant: ~$0.5 million for integration. Costs include a team of 6 working for 3 to
for software
4 months.
developers
— General-purpose customer service chatbot: ~$2.0 million for building plug-in layer on top of 3rd-party
model API. Costs include a team of 8 working for 9 months.
— General-purpose
Taker customer ~ $0.5 million, recurring annually
service chatbot
— Model inference:
with prompt
engineering only • Off-the-shelf coding assistant: ~$0.2 million annually per 1,000 daily users
and text chat only
• General-purpose customer service chatbot: ~$0.2 million annually, assuming 1,000 customer chats
per day and 10,000 tokens per chat
— Plug-in-layer maintenance: up to ~$0.2 million annually, assuming 10% of development cost.

— Customer ~ $2.0 million to $10.0 million, one-time unless model is fine-tuned further
service chatbot
— Data and model pipeline building: ~$0.5 million. Costs include 5 to 6 machine learning engineers and
fine-tuned with
data engineers working for 16 to 20 weeks to collect and label data and perform data ETL.¹
sector-specific
knowledge and — Model fine-tuning²: ~$0.1 million to $6.0 million per training run³
chat history
• Lower end: costs include compute and 2 data scientists working for 2 months
Shaper • Upper end: compute based on public closed-source model fine-tuning cost
— Plug-in-layer building: ~$1.0 million to $3.0 million. Costs include a team of 6 to 8 working for 6 to 12
months.
~ 0.5 million to $1.0 million, recurring annually
— Model inference: up to ~$0.5 million recurring annually. Assume 1,000 chats daily with both audio and
texts.
— Model maintenance: ~$0.5 million. Assume $100,000 to $250,000 annually for MLOps platform⁴ and
1 machine learning engineer spending 50% to 100% of their time monitoring model performance.
— Plug-in-layer maintenance: up to ~$0.3 million recurring annually, assuming 10% of development cost.

— Foundation ~ $5.0 million to $200.0 million, one-time unless model is fine-tuned or retrained
model trained
— Model development: ~$0.5 million. Costs include 4 data scientists spending 3 to 4 months on model
for assisting in
design, development, and evaluation leveraging existing research.
patient diagnosis
— Data and model pipeline: ~$0.5 million to $1.0 million. Costs include 6 to 8 machine learning engineers
and data engineers working for ~12 weeks to collect data and perform data ETL.¹
Maker — Model training⁵: ~$4.0 million to $200.0 million per training run.³ Costs include compute and labor cost
of 4 to 6 data scientists working for 3 to 6 months.
— Plug-in-layer building: ~$1.0 million to $3.0 million. Costs include a team of 6 to 8 working 6 to 12
months.
~ $1.0 million to $5.0 million, recurring annually
— Model inference: ~$0.1 million to $1.0 million annually per 1,000 users. Assume each physician sees
20 to 25 patients per day and patient speaks for 6 to 25 minutes per visit.
— Model maintenance: ~$1.0 million to $4.0 million recurring annually. Assume $250,000 annually for
MLOps platform⁴ and 3 to 5 machine learning engineers to monitor model performance.
— Plug-in-layer maintenance: up to ~$0.3 million recurring annually, assuming 10% of development cost.

Note: Through engineering optimizations, the economics of generative AI are evolving rapidly, and these are high-level estimates based on total cost of ownership
(resources, model training, etc) as of mid-2023.
1
Extract, transform, and load.
² Model is fine-tuned on data set consisting of ~100,000 pages of sector-specific documents and 5 years of chat history from ~1,000 customer representatives, which is ~48
billion tokens. Lower end cost consists of 1% parameters retrained on open-source models (eg, LLaMA) and upper end on closed-source models. Chatbot can be accessed
via both text and audio.
³ Model is optimized after each training run based on use of hyperparameters, data set, and model architecture. Model may be refreshed periodically when needed (eg, with
fresh data).
⁴ Gilad Shaham, “Build or buy your MLOps platform: Main considerations,” LinkedIn, November 3, 2021.
5
Model is trained on 65 billion to 1 trillion parameters and data set of 1.2 to 2.4 trillion tokens. The tool can be accessed via both text and audio.

Technology’s generational moment with generative AI: A CIO and CTO guide 6
Exhibit 2
Generative
GenerativeAIAIisisintegrated
integratedat at
keykey
touchpoints to enable
touchpoints a tailored
to enable a tailored
customer journey.
customer journey.

Illustrative customer journey using travel agent bot API calls

Cus- Customer logs in and requests Customer reviews Customer requests Customer completes book-
tomer to change booking options live agent ing change and drops off

Disagrees
Inter- Chatbot Chatbot Chatbot Chatbot Agent Agent
action activated communi- re- pings picks up inputs
cates sponds cus- case new solu-
message tomer and tion for
and Selects support provides review/
options option new feedback
solution to model

Genera- Model Model Model Model Model

tive AI receives checks explains instructs instructs
model user booking issue and booking customer
request policy and gives system to support
and pulls sees cus- alternate complete system to
user info in tomer can- options task assign
prompt not make agent
change

Back- Log-in authentifi- Booking Workflow Workflow

end apps cation, model/cus- modification management management for
tomer info access policy for booking live agent
authorization management assignment

Data
source

Customer ID data Customer history Policy data Booking system Agent assignment
data data data

Infra-
structure Cloud/on-premises infrastructure and compute
and
compute

McKinsey & Company

Technology’s generational moment with generative AI: A CIO and CTO guide 7
For the Taker archetype, this level of coordination — Model hub, which contains trained and
isn’t necessary. But for companies looking to approved models that can be provisioned on
scale the advantages of generative AI as Shapers demand and acts as a repository for model
or Makers, CIOs and CTOs need to upgrade checkpoints, weights, and parameters.
their technology architecture. The prime goal is
to integrate generative AI models into internal — Prompt library, which contains optimized
systems and enterprise applications and to build instructions for the generative AI models,
pipelines to various data sources. Ultimately, including prompt versioning as models
it’s the maturity of the business’s enterprise are updated.
technology architecture that allows it to integrate
and scale its generative AI capabilities. — MLOps platform, including upgraded MLOps
capabilities, to account for the complexity of
Recent advances in integration and orchestration generative AI models. MLOps pipelines, for
frameworks, such as LangChain and LlamaIndex, example, will need to include instrumentation
have significantly reduced the effort required to to measure task-specific performance, such
connect different generative AI models with other as measuring a model’s ability to retrieve the
applications and data sources. Several integration right knowledge.
patterns are also emerging, including those that
enable models to call APIs when responding to In evolving the architecture, CIOs and CTOs will
a user query—GPT-4, for example, can invoke need to navigate a rapidly growing ecosystem
functions—and provide contextual data from an of generative AI providers and tooling. Cloud
external data set as part of a user query, a technique providers provide extensive access to at-scale
known as retrieval augmented generation. Tech hardware and foundation models, as well as a
leaders will need to define reference architectures proliferating set of services. MLOps and model
and standard integration patterns for their hub providers, meanwhile, offer the tools,
organization (such as standard API formats and technologies, and practices to adapt a foundation
parameters that identify the user and the model model and deploy it into production, while
invoking the API). other companies provide applications directly
accessed by users built on top of foundation
There are five key elements that need to be models to perform specific tasks. CIOs and CTOs
incorporated into the technology architecture to will need to assess how these various capabilities
integrate generative AI effectively (Exhibit 3): are assembled and integrated to deploy and
operate generative AI models.
— Context management and caching to
provide models with relevant information from
enterprise data sources. Access to relevant 6. Develop a data architecture to
data at the right time is what allows the model enable access to quality data
to understand the context and produce The ability of a business to generate and
compelling outputs. Caching stores results to scale value, including cost reductions and
frequently asked questions to enable faster improved data and knowledge protections, from
and cheaper responses. generative AI models will depend on how well it
takes advantage of its own data. Creating that
— Policy management to ensure appropriate advantage relies on a data architecture that
access to enterprise data assets. This control connects generative AI models to internal data
ensures that HR’s generative AI models that sources, which provide context or help fine-tune
include employee compensation details, for the models to create more relevant outputs.
example, cannot be accessed by the rest of
the organization.

Technology’s generational moment with generative AI: A CIO and CTO guide 8
Exhibit 3
The tech stack for generative AI is emerging.
The tech stack for generative AI is emerging.

Illustrative generative AI tech stack

Users
Apps Models Data
Tooling Infrastructure

Apps-as-a- Data sources Experience layer Policy

service with Embeddings, DTC² or B2B applications (eg, Jasper) management
embedded unstructured
foundation Role-based
data, access
models analytical
API gateway control and
End-user- data, trans- content-
facing actional data based policies
applications to secure
and founda- Context management and caching enterprise
tion models data assets
accessed User and task context retrieved from enterprise data
through a sources to prompt generative AI models, cache for
browser common requests
interface as
SaaS¹ (eg,
Midjourney) Data Model hub Prompt
platforms Platforms that allow users to share library
Vector models and data sets (eg, Hugging Face)
databases,
data
warehouse,
data lake Closed-source Open-/closed-source
foundation foundation models
models Trained model that is made
API-based, pre- accessible (eg, BLOOM)
trained models
(eg, GPT-4)
MLOps platform

Existing enterprise platforms

(eg, ERP,³ CRM⁴)

Cloud or on-premises infrastructure QA and

and compute hardware observability
QA model
outputs (eg,
checks for bias)

1
Software as a service.
2
Direct to consumer.
3
Enterprise resource planning.
4
Customer relationship management.

McKinsey & Company

Technology’s generational moment with generative AI: A CIO and CTO guide 9
 In this context, CIOs, CTOs, and chief data officers application teams. The platform team also defines
need to work closely together to do the following: protocols for how generative AI models integrate
with internal systems, enterprise applications,
— Categorize and organize data so it can be used and tools, and also develops and implements
by generative AI models. Tech leaders will need standardized approaches to manage risk, such as
to develop a comprehensive data architecture responsible AI frameworks.
that encompasses both structured and
unstructured data sources. This requires putting CIOs and CTOs need to ensure that the platform
in place standards and guidelines to optimize team is staffed with people who have the right
data for generative AI use—for example, by skills. This team requires a senior technical leader
augmenting training data with synthetic samples who acts as the general manager. Key roles include
to improve diversity and size; converting media software engineers to integrate generative AI
types into standardized data formats; adding models into existing systems, applications, and
metadata to improve traceability and data tools; data engineers to build pipelines that
quality; and updating data. connect models to various systems of record and
data sources; data scientists to select models and
— Ensure existing infrastructure or cloud engineer prompts; MLOps engineers to manage
services can support the storage and handling deployment and monitoring of multiple models and
of the vast volumes of data needed for model versions; ML engineers to fine-tune models
generative AI applications. with new data sources; and risk experts to manage
security issues such as data leakage, access
— Prioritize the development of data pipelines to controls, output accuracy, and bias. The exact
connect generative AI models to relevant data composition of the platform team will depend on
sources that provide “contextual understanding.” the use cases being served across the enterprise. In
Emerging approaches include the use of vector some instances, such as creating a customer-facing
databases to store and retrieve embeddings chatbot, strong product management and user
(specially formatted knowledge) as input for experience (UX) resources will be required.
generative AI models as well as in-context
learning approaches, such as “few shot Realistically, the platform team will need to work
prompting,” where models are provided with initially on a narrow set of priority use cases,
examples of good answers. gradually expanding the scope of their work as they
build reusable capabilities and learn what works
best. Technology leaders should work closely with
7. Create a centralized, cross-functional business leads to evaluate which business cases to
generative AI platform team fund and support.
Most tech organizations are on a journey to a
product and platform operating model. CIOs and
CTOs need to integrate generative AI capabilities 8. Tailor upskilling programs
into this operating model to build on the existing by roles and proficiency levels
infrastructure and help to rapidly scale adoption Generative AI has the potential to massively
of generative AI. The first step is setting up a lift employees’ productivity and augment their
generative AI platform team whose core focus is capabilities. But the benefits are unevenly
developing and maintaining a platform service distributed depending on roles and skill levels,
where approved generative AI models can be requiring leaders to rethink how to build the actual
provisioned on demand for use by product and skills people need.

5
“Unleashing developer productivity with generative AI,” June 27, 2023.

Technology’s generational moment with generative AI: A CIO and CTO guide 10
Our latest empirical research using the generative differently when it comes to coding, by better
AI tool GitHub Copilot, for example, helped understanding user intent so they can create
software engineers write code 35 to 45 percent prompts and define contextual data that help
faster.⁵ The benefits, however, varied. Highly skilled generative AI tools provide better answers.
developers saw gains of up to 50 to 80 percent,
while junior developers experienced a 7 to Beyond training up tech talent, the CIO and
10 percent decline in speed. That’s because the CTO can play an important role in building
output of the generative AI tools requires engineers generative AI skills among nontech talent as well.
to critique, validate, and improve the code, which Besides understanding how to use generative
inexperienced software engineers struggle to AI tools for such basic tasks as email generation
do. Conversely, in less technical roles, such as and task management, people across the
customer service, generative AI helps low-skill business will need to become comfortable using
workers significantly, with productivity increasing an array of capabilities to improve performance
by 14 percent and staff turnover dropping as well, and outputs. The CIO and CTO can help adapt
according to one study.⁶ academy models to provide this training and
corresponding certifications.
These disparities underscore the need for
technology leaders, working with the chief human The decreasing value of inexperienced engineers
resources officer (CHRO), to rethink their talent should accelerate the move away from a classic
management strategy to build the workforce of talent pyramid, where the greatest number of
the future. Hiring a core set of top generative AI people are at a junior level, to a structure more
talent will be important, and, given the increasing like a diamond, where the bulk of the technical
scarcity and strategic importance of that talent, workforce is made up of experienced people.
tech leaders should put in place retention Practically speaking, that will mean building the
mechanisms, such as competitive salaries and skills of junior employees as quickly as possible
opportunities to be involved in important strategic while reducing roles dedicated to low-complexity
work for the business. manual tasks (such as writing unit tests).

Tech leaders, however, cannot stop at hiring.

Because nearly every existing role will be affected 9. Evaluate the new risk
by generative AI, a crucial focus should be on landscape and establish ongoing
upskilling people based on a clear view of what mitigation practices
skills are needed by role, proficiency level, and Generative AI presents a fresh set of ethical
business goals. Let’s look at software developers questions and risks, including “hallucinations,”
as an example. Training for novices needs to whereby the generative AI model presents
emphasize accelerating their path to become top an incorrect response based on the highest-
code reviewers in addition to code generators. probability response; the accidental release of
Similar to the difference between writing and confidential personally identifiable information;
editing, code review requires a different skill set. inherent bias in the large data sets the models
Software engineers will need to understand what use; and high degrees of uncertainty related
good code looks like; review the code created to intellectual property (IP). CIOs and CTOs will
by generative AI for functionality, complexity, need to become fluent in ethics, humanitarian,
quality, and readability; and scan for vulnerabilities and compliance issues to adhere not just to the
while ensuring they do not themselves introduce letter of the law (which will vary by country) but
quality or security issues in the code. Furthermore, also to the spirit of responsibly managing their
software developers will need to learn to think business’s reputation.

6
Erik Brynjolfsson, Danielle Li, and Lindsey R. Raymond, Generative AI at work, National Bureau of Economic Research (NBER) working paper,
number 31161, April 2023.

Technology’s generational moment with generative AI: A CIO and CTO guide 11
Addressing this new landscape requires a significant when data is used externally, and include privacy
review of cyber practices and updating the software safeguards. For example, to mitigate access
development process to evaluate risk and identify control risk, some organizations have set up a
mitigation actions before model development policy-management layer that restricts access
begins, which will both reduce issues and ensure the by role once a prompt is given to the model. To
process doesn’t slow down. Proven risk-mitigation mitigate risk to intellectual property, CIOs and
actions for hallucinations can include adjusting the CTOs should insist that providers of foundation
level of creativity (known as the “temperature”) of models maintain transparency regarding the IP
a model when it generates responses; augmenting (data sources, licensing, and ownership rights) of
the model with relevant internal data to provide the data sets used.
more context; using libraries that impose guardrails
on what can be generated; using “moderation”
models to check outputs; and adding clear
disclaimers. Early generative AI use cases should Generative AI is poised to be one of the fastest-
focus on areas where the cost of error is low, to allow growing technology categories we’ve ever seen.
the organization to work through inevitable setbacks Tech leaders cannot afford unnecessary delays
and incorporate learnings. in defining and shaping a generative AI strategy.
While the space will continue to evolve rapidly,
To protect data privacy, it will be critical to establish these nine actions can help CIOs and CTOs
and enforce sensitive data tagging protocols, set responsibly and effectively harness the power of
up data access controls in different domains (such generative AI at scale.
as HR compensation data), add extra protection

Aamer Baig is a senior partner in McKinsey’s Chicago office; Sven Blumberg is a senior partner in the Düsseldorf office; Eva
Li is a consultant in the Bay Area office, where Megha Sinha is a partner; Douglas Merrill is a partner in the Southern California
office; Adi Pradhan and Stephen Xu are associate partners in the Toronto office; and Alexander Sukharevsky is a senior
partner in the London office.

The authors wish to thank Stephanie Brauckmann, Anusha Dhasarathy, Martin Harrysson, Klemens Hjartar, Alharith Hussin,
Naufal Khan, Sam Nie, Chandrasekhar Panda, Henning Soller, Nikhil Srinidhi, Asin Tavakoli, Niels Van der Wildt, and Anna
Wiesinger for their contributions to this article.

Copyright © 2023 McKinsey & Company. All rights reserved.

Technology’s generational moment with generative AI: A CIO and CTO guide 12
Rewired to
outcompete
Six signature moves led by the C-suite can
build organizations that will outperform in the
age of digital and AI.
by Eric Lamarre, Kate Smaje, and Rodney Zemmel

June 2023
How companies navigate the technology world to sector, for example, where digital and
achieve sustainable competitive advantage is the AI transformations have been under way for
defining business challenge of our time. the past decade, compelling empirical data
shows that digitally transformed banks outperform
their peers. We leveraged a unique data set,
To be fair, this challenge isn’t new. But it’s an
Finalta by McKinsey, to analyze 20 digital leaders
increasingly pressing one, with deep implications
and 20 digital laggards in retail banking between
for how companies navigate a world where digital
2018 and 2022. The results were startling.
and AI are fundamentally reshaping how we work
Digital leaders improved their return on tangible
and live. Companies understand they need to meet
equity, their P/E ratio, and their total shareholder
the challenge, but most of them are struggling.
returns materially more than digital laggards
McKinsey research shows that while 90 percent
(Exhibit 1). Digital excellence is translating into
of companies have launched some flavor of digital
financial outperformance.
transformation, only a third of the expected revenue
benefits, on average, have been realized.1
This outperformance was propelled by a deeper
integration of technology across end-to-end
Yet it’s also a challenge with enormous potential
core business processes. This, in turn, drove
for the companies that get it right. In the banking
higher digital sales and lower costs in branches

Web 2023
McKQ-RewiredToOutcompete
Exhibit 1 of 2
Exhibit 1

Digital leaders are spurring more value for their shareholders.

Retail-banking example
Leaders1 Laggards2

P/E ratio TSR Return on tangible equity (ROTE)

Weighted peer group average Weighted peer group average Adjusted pretax ROTE, peer group
of P/E ratio, next 12 months of TSR, 2018–22, CAGR, % average, %

10.0 8.1
9.8 19.3

8.4
15.5 15.3
7.2
13.6
4.9

2018 2022 2018 2022

1
Top 20 retail banks between 2018 and 2022.
2
Bottom 20 retail banks between 2018 and 2022.
Source: S&P Global; Corporate Performance Analytics by McKinsey

McKinsey & Company

1
“ Three new mandates for capturing a digital transformation’s full value,” McKinsey, June 15, 2022.

Rewired to outcompete 14
and operations. How did the digital leaders value. But creating, managing, and evolving these
accomplish this? By bringing business, technology, solutions at enterprise scale requires a fundamental
and operations more closely together to digitally rewiring of how a company operates. That means
innovate; by upskilling their organizations; and getting thousands of people across different units
by building a distributed technology and data of the organization working together and working
environment to empower hundreds if not thousands differently to digitally innovate, constantly.
of teams to digitally innovate, day in, day out. This
gets at the nub of why digital and AI transformations
The lessons learned from our work with more than
are so difficult—companies need to get a lot of
200 large companies across multiple industries
things right.
show that capturing this kind of value from digital
and AI requires building six critical enterprise
Clearly, for digital and AI to deliver on their business capabilities (Exhibit 2). These allow rewired
transformation potential, the top team needs to be companies to integrate new technologies, such
ready and willing to undertake the organizational as generative AI, and harness them to create
“surgery” required to become a digitally capable value. While companies may understand this at a
enterprise. There are no quick fixes. You can’t high level, they struggle with how to build these
simply implement a system or a technology and be capabilities successfully and ensure that they work
done. Instead, success means having hundreds of together across the enterprise.
technology-driven solutions (proprietary and off
the shelf) working together that you continually
Our new book, Rewired: The McKinsey Guide to
improve to create great customer and employee
Outcompeting in the Age of Digital and AI, is all
experiences, lower unit costs, and generate

Web 2023
McKQ-RewiredToOutcompete
Exhibit 2 of 2
Exhibit 2

Six enterprise capabilities are critical for successful digital and AI transformations.

Transformational value comes from careful and coordinated execution across all areas of focus

Alignment 1. Business-led digital road map

on value Align senior leadership team on the vision, value, and road map for the transformation;
reimagine business domains to deliver outstanding customer experiences and to lower unit costs.

Delivery 2. Talent 3. Operating model 4. Technology 5. Data

capabilities Ensure that you Increase the Make technology Continually enrich data
have the right skills metabolic rate of easier for teams to and make it easily
and capabilities to the organization by use so they can accessible across the
innovate and execute. bringing business, innovate at pace. organization to help
operations, and improve customer
technology together. experience and
business performance.

Change 6. Adoption and scaling

management Maximize value capture by ensuring the adoption and enterprise scaling of
digital solutions and by tightly managing the transformation progress and risks.

McKinsey & Company

Rewired to outcompete 15
about the how. This article is adapted from that other companies that are further along the journey,
book and delineates the core aspects of what it develop a shared vision among the C-suite, and
takes for leaders to spur transformation across all explicitly agree on a set of commitments that
six capabilities. match your ambitions. Consider the example of
DBS Bank, one of the world’s most successful
digitally transformed banks. CEO Piyush Gupta
Before we go into detail, it’s worth highlighting two
and his top leaders visited and learned from top
key findings. First, no digital and AI transformation
tech companies around the globe and used those
can be successful without building a baseline of
lessons to shape a vision around “Making Banking
competence across all six capabilities. Second,
Joyful” and to commit to making DBS a tech leader.
these elements are interconnected and need to
This kind of leadership alignment is crucial to
be managed that way: a good operating model,
ensuring a successful digital and AI transformation.
for example, can’t work without the right talent.
Similarly, great technology won’t make much of an
impact if users don’t adopt it. Get the “bite” size right: business domains. Some
companies struggle from the start of their digital
and AI transformation by getting the scope of the
You do not have to be a tech company to achieve
change wrong. They start too small—believing that
excellence in digital and AI. Large, established
implementing a few use cases will lower risk—or
companies can outcompete and capture value, but
they spread bets and resources too thinly across an
only when they are willing to commit to the hard
uncoordinated set of initiatives. Both approaches
work of rewiring their enterprise. This is a job for
typically produce little value. Successful companies,
the entire C-suite, not just the CEO or the chief
on the other hand, focus their efforts on a few
information officer (CIO). The cross-functional
important business domains, such as a production
nature of a digital and AI transformation requires
process or the customer journey, and transform
an unparalleled level of collaboration across the
them from end to end. As many as 80 percent of
C-suite, with everyone having an important part
successful interventions in struggling digital and
to play in building these enterprise capabilities.
AI transformations are based on reanchoring the
Rewiring the business is an ongoing journey of
scope to spur a concerted effort against a few well-
improvement, not a destination. Let’s dig into the
defined domains.
details of that journey.

Commit to a contract with the C-suite.

Align the C-suite around a Effective rewiring requires companies to tie the
business-led road map transformation outcomes of each business domain
to specific improvements in operational KPIs, such
When evaluating stalled digital and AI
as reduction in customer churn or improvements
transformations, we find that many of the issues
in process yield. The team builds a road map
that impede a program’s success can be traced
where the digital solutions that underpin these
back to insufficient planning and alignment.
KPI improvements are sequenced in a way to
Misunderstanding among leadership at the
produce meaningful value in the short term (say,
strategic-planning stage will invariably lead to
12 to 18 months) and transformational value in the
muddled execution in a company’s transformation.
medium term (three to five years, for example).
Because digital and AI transformations affect so
The plan explicitly accounts for the buildout of
many parts of the business, investing the necessary
enterprise capabilities, such as hiring digital talent
time to help make the transformation a success
or modernizing data architecture. C-suite leaders
pays significant dividends in terms of clarity and
commit to these KPI improvements, and the
unified action. The best companies make sure to get
expected benefits are baked into their business
these three early moves right:
objectives. Our rule of thumb is that a robust digital
road map should deliver EBIT improvement of
Inspire and align the top team. Take the time to 20 percent or more.
establish a common digital language, learn from

Rewired to outcompete 16
When business leaders define an ambitious yet Build the team that will build your digital bench.
realistic transformation of their business domains Many HR organizations are hampered by slow
with technology, they set in motion the flywheel of recruiting and onboarding processes, rigid
digital change. The resulting digital road map is their compensation frameworks, and outdated learning
signature move and effectively acts as a contract and development programs for digital talent.
that they commit to implementing. But transforming your entire HR organization
and underlying HR processes to make them
digital ready may not be practical. Setting up
Build your talent bench a special team focused on adapting current
HR processes to win digital talent is the most
No company can outsource its way to digital
pragmatic—and successful—way forward. We
excellence. Being digital means having your own
call this designated team the Talent Win Room
bench of digital talent—product owners, experience
(TWR). The primary mission of a TWR is to find
designers, cloud engineers, software developers,
technologists with the right skills and to build and
and so on—working side by side with your business
continually improve all facets of both the candidate
colleagues. Digital transformations are, first and
and employee experience.
foremost, people transformations. Here are three
actions that digital leaders take:
These shifts in talent practices are not simple,
but they are fundamental to becoming rewired
Create a cleansheet for your talent. Most
with the right talent. While every C-suite executive
companies have digital technologists, but many still
will have a part to play in this talent reinvention,
face the hard work of reskilling their technology
this is often the chief human resources officer’s
and IT organization. The aspiration should be to have
signature contribution to the enterprise’s
70 to 80 percent of your digital talent in-house, with
digital transformation.
20 to 30 percent coming from outside the company
and focused on specialized skills, flexibility, or both.
Your talent pyramid should shift to a diamond shape,
Adopt a new operating
with more competent technologists and fewer
model that can scale
novices. That’s because there is a step change in
productivity from more experienced technologists. Most companies have succeeded in standing up
You should also have a healthy ratio of hands-on- a handful of cross-functional agile teams. But
keyboard technologists versus managerial roles. scaling up so that hundreds or even thousands of
Rewired leaders target a 4:1 ratio (or better) of teams work that way, as rewired businesses do, is a
engineers to managers, versus the 1:1 found at daunting challenge. Developing the right operating
many companies. model to bring business, technology, and operations
closer together is perhaps the most complex aspect
of a digital and AI transformation because it touches
Get religion about skills. Rewired companies
the core of the organization and how people work.
develop very granular skill progression grids
supported by credentials. For example, Big Tech
companies have up to ten levels of data engineers, Three leading models have emerged: digital factory,
each with different skill levels and compensation product and platform, and enterprise-wide agile.
ranges. Without a precise calibration of skills, Each of these models is built on two core ideas.
it becomes difficult to recognize distinctive The first is that small, multidisciplinary agile teams,
technologists and compensate them accordingly. or pods, are the most effective and efficient way
Skill progression also gets built into expert-based to develop software. Second, pods work together
career tracks and in learning and development most effectively when some are focused on
programs. In short, the whole digital-talent model directly improving a customer or user experience
revolves around fostering excellence in people (generally called product pods, although they
devoted to their craft. can also be called experience or journey pods)

Rewired to outcompete 17
while others focus on creating reusable services flexible resource deployment are key performance
to accelerate the work of all pods (called platform differentiators across the entire enterprise. ING and
pods). Examples of such services could include a Spark New Zealand have successfully implemented
customer-360 data set or an easy way for teams to this model.
provision compute and storage capacity.

Professionalize product management. A crucial

The implementation of a new operating model is, difference between tech companies and their
in our opinion, one of the most significant pivots a peers in other sectors is the degree to which they
company can make to become a rewired enterprise. have embedded product management capabilities
There are two key moves to getting this right: in their operating models. This capability, in our
opinion, makes or breaks the implementation
of a new operating model. Some 75 percent of
Select an operating model that supports
business leaders in a McKinsey survey responded
your strategy. The digital factory is a separate
that product management best practices aren’t
organizational unit where people work together
being adopted at their companies, that product
to build digital solutions for the business units or
management is a nascent function within their
functions that fund the digital factory. Companies
organizations, or that it doesn’t exist at all.2 That’s
often initially select the digital-factory model
a problem. It’s also hard to recruit great product
because it is a self-contained operating unit and
managers because understanding the industry and
can be implemented relatively quickly (typically
the company context matters. Most companies end
12 to 18 months before it’s fully operational, though
up reskilling and building new career tracks for this
it can get started in a matter of weeks). BHP
rare talent, but this requires substantial investments
and Scotiabank, for example, have implemented
to ensure good results.
this model.

The shift to a new operating model is the

The product and platform model is a more evolved
signature move of CEOs in rewiring the company.
version of the digital factory. While the digital
Only they can catalyze such large-scale
factory might contain 20 to 50 pods, the product
organizational change.
and platform model will typically have a few hundred
pods, sometimes thousands for large companies.
When companies move to a product and platform
Technology for speed and
model, they are making a major strategic decision
distributed innovation
to realign large parts of the organization to better
exploit technology in their core business. Amazon, The main purpose of technology within a rewired
Google, Itaú Unibanco, and JPMorgan Chase have company is to make it easy for hundreds, if
all implemented this model. not thousands, of pods to constantly develop
and release digital innovations. This requires a
distributed technology environment where every
Finally, the enterprise-wide agile model builds
pod can access the software development tools,
on the product and platform model and extends
data, and applications they need. While leaders
the benefit of agile to the entire business, not just
hoping to create that environment have a raft of
the technology-intensive areas. For example,
decisions to make, three priorities stand out:
key account sales and R&D can also benefit
from working in small, cross-functional teams.
Companies adopt this model when they believe Kit out a technology toolbox. Just like
that customer centricity, collaboration, and woodworkers, surgeons, or plumbers, software

2
Chandra Gnanasambandam, Martin Harrysson, Jeremy Schneider, and Rikki Singh, “What separates top product managers from the rest of
the pack,” McKinsey, January 20, 2023.

Rewired to outcompete 18
developers need the proper tools to do their work. are like living organisms—they need to be constantly
As an organization scales from five agile pods to recalibrated as new data accumulate and then
100, or even more than 1,000, it doesn’t make sense monitored in real time for drift and biases. When this
for pod members to be calling IT every time they doesn’t happen, AI/ML models fail to transition to
have a basic request, such as additional storage full-scale production. Solving for this has required
capacity or access to a collaboration tool. Leading a specialized type of automation called machine
companies build a developer platform: a self-service learning operations (MLOps). For example, Vistra, a
portal that makes it easy to access and use all the leading energy company, built MLOps automation to
standardized and company-approved tools. support more than 400 AI/ML models deployed to
optimize different parts of its power plant operations.

Use APIs without exception. Once developers

have their tools, they need access to data and Most CIOs have started their companies’ journey
existing app functionalities to build their solutions. to build a robust developer platform, decouple the
Application programming interfaces (APIs) do that components of the architecture from one another
by systematically minimizing dependencies in the through APIs, and automate their software delivery
architecture by making application functionalities pipeline. But we know very few companies that
and data easily accessible. Without it, pods will have scaled this across their enterprise. The change
constantly find themselves depending on other management efforts are significant, and the software
pods. Amazon’s Jeff Bezos was so adamant about engineering talent required is in short supply.
using APIs that he wrote a famous memo about Creating a technology environment that enables
it, which fundamentally changed Amazon and the distributed digital and AI innovations is a cornerstone
world of software. The memo essentially said that capability of rewired enterprises and a signature
all teams were expected to expose their data and contribution by the CIO, the chief data officer (CDO),
functionality through service interfaces (that is, APIs) or both.
and to communicate with one another through only
these interfaces. No other form of inter-process
communication would be allowed. No exceptions. Embed data everywhere
In established companies, data is often a source
Automate software delivery. Have you ever of frustration. As much as 70 percent of the effort
wondered how an app on your phone can involved in developing AI-based solutions can
be upgraded so frequently? That seamless be attributed to wrangling and harmonizing data.
functionality is made possible by software delivery Unless data is thoughtfully sorted and organized for
automation, also known as CI/CD: continuous easy consumption and reuse, scaling solutions can
integration and continuous delivery. This is the be a big challenge. The ability to constantly improve
method for systematically automating all steps, customer experience and drive down unit cost
including quality checks, testing, packaging (that depends on giving each digital and AI team (near)
is, containerization), and staged deployment of the real-time access to data. Companies can focus on
solution to the user. With CI/CD, updates that used three areas to achieve this:
to take weeks or months can now be completed
in minutes, allowing pods to release incremental
Turn to reusable building blocks: data products.
improvements weekly or even daily and thus
Data products are the secret sauce for scaling AI.
unleash much faster innovation cycles. You won’t be
They help deliver data-intensive applications as
able to achieve distributed digital and AI innovation
much as 90 percent faster, at 30 percent lower
if pods aren’t able to release code to a production
cost, and with a reduced risk and data governance
environment quickly and easily.
burden. A data product delivers a high-quality,
ready-to-use set of data in a way that people and
This fixation on automation needs to carry over to AI applications across the organization can easily
and machine-learning (ML) models. These models access and consume. For example, a data product

Rewired to outcompete 19
could provide a 360-degree view of an important the enterprise are often the biggest challenges.
entity, such as customers, employees, product lines, Successful companies concentrate on the following
or stores. Companies can prioritize building data three moves:
products that have the broadest application, that
are critical for teams developing priority solutions,
Focus equally on adoption and development. User
and that are unique. Building data products requires
adoption starts with developing great technology
dedicated teams and investments.
solutions that offer an excellent customer
experience. But companies often underestimate
Install the data architecture “plumbing.” Data all the additional elements of the business model
architecture is the system of “pipes” that deliver that need to be changed to secure adoption. For
data from where it is stored to where it is used. instance, an insurance company that developed
When implemented well, data architecture hastens analytic solutions to help agents upsell customers
a company’s ability to build reusable and high- on policies also needed to make changes to pricing
quality data products and to put data within reach algorithms, sales force incentives, distribution and
of any team in the organization. We have seen customer engagement models, and metrics and
very rapid technological progress in this field. The performance indicators. That end-to-end system
emergence of new architectural patterns such as approach, with a focus on the people side of the
the “data lakehouse” (an innovation that combines equation, is what differentiates digital leaders.
the capabilities of a data lake and a data warehouse They achieve this by making the business
into a single, integrated platform) makes it easier accountable for the end-to-end transformation
for companies to solve for both their business of the domain. As a rule, for every $1 spent on
intelligence and their AI needs. developing digital and AI solutions, plan to spend
at least another $1 to ensure full user adoption and
scaling across the enterprise.
Federate data governance. Data touches all aspects
of an organization, so its governance needs to
account for that complexity. Rewired companies Scale with “assetizing.” Replicating the adoption
deploy a federated model where a central function of a solution in different environments, such as
(that is, a data management office) sets policies a network of plants, or in different geographic
and standards and provides support and oversight, markets, customer segments, or organizational
while business units and functions manage activities groups is challenging. Companies often find
such as developing data products and building data themselves redoing a lot of work and struggling
pipelines to enable consumption. to tailor solutions to local environments. All this
extra work is a scale killer, and that’s why 72 percent
of companies stall at this stage. Digital leaders solve
A data environment that allows for easy data
this by “assetizing” solutions, which typically allows
consumption by hundreds of distributed teams is
60 to 90 percent of a digital and AI solution to be
another signature move of the CIO in collaboration
reused, leaving just 10 to 40 percent in need of
with the CDO. It enables data-driven decisions,
local customization.
feeds real-time decision-making systems, and
propels faster continuous-improvement loops.
Track what matters. No one will debate the need to
measure the progress of a digital transformation.
Unlocking adoption and scaling But the question is what to measure and how.
Performance tracking that is poorly designed
Developing a good digital solution can be complex
and lacking the right supporting tools can quickly
and difficult. But getting customers or business
crumble under its own weight. Rewired companies
users to adopt that solution as part of their day-to-
take the pods responsible for objectives and key
day activities and then scaling that solution across
results and link them to operational KPIs, tracking

Rewired to outcompete 20
the progression of each pod in a disciplined stage The capabilities we have laid out for a successful
gate review process. digital and AI transformation present a rich “how to”
agenda. You may be wondering where to start your
rewiring journey. Why not start where we began this
The ability to capture the full economic potential
article: by bringing the top team together and having
of digital innovations is a core differentiator
them reflect on your journey thus far? A digital
between digital leaders and laggards. Building this
and AI transformation is ultimately an exercise in
capability is the signature move of business unit
constant evolution and improvement. If you accept
and function leaders.
this premise, it will change your perspective on how
you approach this critical challenge. To borrow Jeff
Bezos’s expression to Amazon shareholders about
the importance of operating like a digital native: it’s
always day one for digital and AI transformation.

Eric Lamarre is a senior partner in McKinsey’s Boston office, Kate Smaje is a senior partner in the London office, and
Rodney Zemmel is a senior partner in the New York office.

Copyright © 2023 McKinsey & Company. All rights reserved.

Rewired to outcompete 21
Full throttle on
net zero: Creating
value in the face
of uncertainty
To thrive amid shocks to the net-zero economy,
leaders are shifting strategies to position themselves
to win when the skies clear up.
by Laura Corb, Anna Granskog, Tomas Nauclér, and Daniel Pacthod

September 2023
No question, navigating the net-zero economy — integrate cost and carbon reductions
has become more complicated over the past 12
months amid higher energy prices, supply chain — create customer partnerships to be an early
pressures, increased interest rates, higher input winner in the market
costs, and lackluster economic growth. Companies
are experiencing long lead times, supply shortages, — update the portfolio to secure profitable growth
or price spikes for goods, from transformers
to bio-based feedstocks, and services such as — build and scale new green businesses
engineering, procurement, and construction, that
could otherwise accelerate decarbonization. Many — execute at digital speed to create
leaders feel that creating a clear picture of where competitive distance
the economy is headed has never been as difficult.
For some, the current pressures are creating In this article, we illustrate how companies can
tension between near-term financial performance still play offense in the net-zero transition despite
and commitments toward a net-zero world. uncertainty. The rewards for pushing ahead on
green growth could be significant: our analysis
However, our research and experience suggest shows that growing demand for net-zero offerings
that there are bold moves leaders can make to could generate $9 trillion to $12 trillion of annual
create value in the net-zero transition, despite sales by 2030.
the headwinds. Companies that take disciplined
and courageous action on both resilience and
sustainability have a unique opportunity: they can Push ahead on value creation
reposition themselves ahead of organizations with vision and ambition
that focus on just the short-term shocks, or The volatile economic environment in many regions
organizations that might even step back from their makes it even more important for companies to
sustainability commitments. We are seeing that orient their sustainability agendas around value
some companies are steadfast in their conviction of creation in nascent or fast-growing markets.
pursuing green growth opportunities, while others The advantage of being an early mover in these
are questioning whether now is the right time. Some new markets is that companies can solidify pole
leaders are pursuing a robust strategy for a range of position for offering low-carbon goods and build out
future scenarios.1 production capacity before latecomers enter the
market. But being early to segments with growth
McKinsey research on the 2007–08 financial crisis potential often requires vision and ambition.
shows that outperforming companies tended to
take a few courses of action to create an earnings Consider a tier-one automotive supplier that set out
advantage, including proactively cutting costs and to be a first-choice supplier for leading automotive
identifying areas of growth. For navigating the OEMs looking to decarbonize. To do so, the supplier
current moment of uncertainty—with an eye toward needed to offer a set of zero-carbon products at
net zero—we have developed a set of priorities that a competitive cost. Executing on this agenda has
combine the tactics of outperforming companies required the company to build leading capabilities
in the 2007–08 crisis with moves made by early in tracking and verifying the carbon content of the
sustainability leaders. These actions can be applied materials and components it procures, finding new
widely across industries and geographies: suppliers, and utilizing carbon as a new element
in product design. By investing in these areas, the
— push ahead on value creation with vision company now has industry-leading capabilities in
and ambition enabling Scope 3 emissions reductions. (Scope 3

1
For more, see “Leading through uncertainty in the energy and materials sectors,” McKinsey, July 31, 2023.

Full throttle on net zero: Creating value in the face of uncertainty 23

emissions are indirect emissions that arise across a looking to combine cost and carbon reductions in
company’s value chain.) a systematic and highly aspirational sustainable
raw-material program. The company has identified
a pathway to reduce more than half of its emissions
Integrate cost and carbon reductions by 2050 while reducing up to hundreds of millions in
Our research shows that the companies that fared costs annually.
well coming out of the 2007–08 financial crisis
systematically invested in improving the cost Such approaches can come with added benefits
competitiveness of their core offerings. In many down the line. Companies that build carbon
cases, that means driving down the cost of goods reduction competencies across the organization or
sold (COGS). To date, lowering COGS has often lock up scarce supply of low-carbon raw materials
been considered at odds with reducing a product’s and components can gain a longer-term edge in
carbon footprint. However, through our work with the marketplace.
leading companies across sectors, we are now
seeing that a trade-off between cost and carbon
reductions is often not required. Create customer partnerships to
be an early winner in the market
Companies in chemicals, pulp and paper, oil and In the current economic cycle, companies in
gas, metals, and other process industries are going competitive markets may feel a slowdown in their
after the dual benefit of cost and carbon reductions order books and tougher competition for deals. In
by improving energy efficiency and process yields, turn, sales organizations work harder to fill the order
as well as by shifting to lower-carbon raw materials pipelines, and pricing decisions become difficult.
and feedstocks where possible. Manufacturing
companies are addressing the same challenge by Meanwhile, for companies that have unique, zero-
making changes in design, material specifications, carbon product offerings, there are opportunities to
and supply chain choices. Energy efficiency and gain market share. One way to do this is by signing
yield improvements are not new strategies, but with up partners through offtake agreements—that
higher energy prices, the value of investing in these is, agreements for customers to purchase all or a
areas has increased. In addition, sophisticated substantial part of output. Offtake agreements can
analytics tools have unlocked even more potential help solidify an early and disproportionate share of
for dual savings. demand in more nascent markets, and the income
can be invested into scaling further capacity. In
In one example, a leading paper and packaging some cases, partnerships can also help companies
player set out to reduce energy costs and direct earn a price premium. Such steps may require some
emissions at its largest mill. The company deployed market shaping to maximize impact.
engineering solutions such as heat integration and
steam optimization to reduce energy consumption, In our experience, calls for offtake commitments
as well as advanced analytics to track it. The are often made at the very top, through CEO-
paper player found an opportunity to reduce its to-CEO dialogue. Offtake agreements can be a
energy costs by 10 to 16 percent and reduce direct strategic advantage for the customer, too, as the
emissions by 12 percent. With many industrial customer can lock in supply of early-to-market
players still facing relatively high energy prices, goods and services ahead of the competition. Once
such energy efficiency opportunities are abundant. partnerships with offtakers are born, partners can
In Europe, for example, we estimate that energy- build business ecosystems for the value chain that
intense industries could create anywhere from will allow the category to grow (bringing together
€3 billion to €12 billion in value by deploying energy raw-material suppliers, technology partners, or
efficiency measures such as advanced analytics. regulators, for example). Players that create top-
In a different case, a specialty chemicals player is level relationships with their potential customer and

Full throttle on net zero: Creating value in the face of uncertainty 24

partner base ahead of others could have a head carbon emissions, and adding businesses that are
start on capturing value from their green offerings. propelled by sustainability tailwinds, there may be
no reason to hold back.
As we have discussed in prior articles, companies
that produce sustainable goods can also earn green For instance, over the past two decades, NextEra
price premiums through product differentiation.2 Energy moved out of its thermal-generation
What we have learned recently is that green portfolio and became a leader in renewable
premiums can vary based on a product’s carbon power (in 2020, the company closed its last coal
credentials—that is, a zero-carbon offering may plant in Florida). NextEra is also investing in clean
earn a higher premium than a lower-carbon one. fuels, hydrogen, and battery storage—forms
We have seen this play out in metals: lower-carbon of on-demand, dispatchable generation that
aluminum has been on the market for some time, but can support wind and solar power, which are
the price delta compared with traditional aluminum nondispatchable.5 NextEra’s subsidiary, Florida
has been negligible. Zero-carbon or green steel, on Power & Light, plans to convert all of its remaining
the other hand, has earned a clear price premium 16 gigawatts of thermal generation to clean fuels or
compared with any other type of steel.3 hydrogen generation while driving value to investors
and leading the industry in returns and market cap.6

Update the portfolio to secure The potential value of gearing portfolios toward
profitable growth low-carbon businesses can also be seen at the
Companies that are generating profits with sector level. A McKinsey review of chemicals
legacy, higher-emissions businesses could face companies, for example, revealed that green
a conundrum: Should they hold on to the legacy leaders—companies with both greener product
business to help finance greener investments or pull portfolios and exposure to end markets associated
out of the legacy business proactively? with sustainability, including electric vehicles and
energy storage—see two to three times higher total
Our analysis shows that companies that came out shareholder returns compared with laggards.7
the strongest from the 2007–08 financial crisis
were the ones that divested early and then acquired Additionally, in light of higher interest rates, capital
businesses ahead of others.4 With this in mind, our cost is becoming an increasingly important factor.
perspective is that now is the time for companies For example, research by the University of Oxford
to take stock of their portfolios with a focus on suggests that low-carbon electric utilities in Europe
the long-term outlook of each business. If there have a lower cost of capital than peers with higher-
is an opportunity to improve the overall growth emission portfolios.8 As the net-zero transition
of the portfolio by rotating out some businesses continues, executives can look for opportunities in
that are facing diminishing returns due to their industries where capital costs are evolving.

2
“Playing offense to create value in the net-zero transition,” McKinsey, April 13, 2022.
3
There is not yet a universally set definition for green steel. In one example, the German Steel Association has proposed an approach where
steel with emissions below 350 to 450 tons of CO2e per ton of steel (depending on the share of scrap contents) would qualify as A-labeled
green steel.
4
“Something’s coming: How US companies can build resilience, survive a downturn, and thrive in the next cycle,” McKinsey, September 16,
2022.
5
Wind and solar are considered to be nondispatchable because they rely on external variables (wind or sun).
6
“NextEra Energy sets industry-leading Real Zero™ goal to eliminate carbon emissions from its operations, leverage low-cost renewables to
drive energy affordability for customers,” NextEra Energy news release, June 14, 2022.
7
Measuring the “greenness” of a chemical company (or any company) is not straightforward. To better understand how sustainability in
chemicals is actively driving valuation, we segmented our sample of chemical companies along two dimensions: those with “greener” product
portfolios—defined as more than 25 percent of revenues in biologic, recyclable, or low-carbon product portfolios—and those with exposure
to end markets supporting sustainability tailwinds, such as electric vehicles, energy storage, water reduction, energy efficiency, natural
ingredients, or circular packaging. For more, see “Chemicals and capital markets: Growing sustainably,” McKinsey, April 22, 2022.
8
Xiaoyan Zhou et al., Energy transition and the changing cost of capital: 2023 review, Oxford Sustainable Finance Group and the University of
Oxford, March 2023.

Full throttle on net zero: Creating value in the face of uncertainty 25

Build and scale new green businesses group has announced that by 2030, new climate
Our research suggests that companies that technology areas such as hydrogen electrolyzers
built new businesses in the last economic will account for 70 percent of its business. In Asia,
downturn outperformed peers by 10 percent an Indonesian mining company is planning to cut
during the crisis and 30 percent through the income from coal by 50 percent, while investing
cycle.9 These companies took out their magnifying hundreds of millions in renewable energy, and build
glasses, identified pockets of growth, and an electric-vehicle ecosystem in the country.
positioned themselves to take advantage. They
anticipated market needs and allocated money to In taking on green business building, incumbents
accelerate innovation. are still challenged by start-ups with a DNA of
innovation and ambition. To scale at the pace that’s
It should not come as a surprise that the net-zero often required to reach competitive cost levels,
transition is creating several pockets of growth. incumbents will likely need to push themselves
The growing demand for low-emission products, beyond their comfort zone.11 When getting started,
in part propelled by corporate emission reduction companies should avoid fragmentation of efforts
commitments,10 is creating opportunities for and investments and resist the tendency to
commercial scaling of a wide range of climate maximize cost synergies between the core and
technologies and related services. This demand is growth businesses. For some, a way to steer clear
further supported by major regulatory initiatives. of these pitfalls has been to bring in external
Last year’s Inflation Reduction Act in the United investors to the growth ventures. This type of setup
States, for example, allocates about $370 billion provides scaling experience that many incumbents
for climate and energy spending. Multiple policy lack, and forces governance that’s arm’s length
packages under the umbrella of the European Green from the core business.12
Deal, including the recent Green Deal Industrial
Plan, promise to further accelerate the region’s shift
toward a net-zero economy by facilitating faster Execute at digital speed to create
access to funding. Similar to previous regulatory competitive distance
programs—such as early offshore wind auctions As discussed above, there are advantages to being
in the United Kingdom, the German feed-in tariff first or early to market with low-carbon offerings.
scheme for renewables, and California’s Low Companies that execute quickly and effectively can
Carbon Fuel Standard—these policy packages are capture the largest green premiums, bring costs
setting the stage for companies looking to scale down faster to earn higher margins, and reap the
a wide range of zero-carbon technologies and capital expenditure benefits from getting projects
processes, as well as drive down costs. done faster.

While the climate technology space has largely Executing at high speeds is often more familiar to
been known for its start-ups, such as Northvolt, digital players. Commercializing green technologies
we are already seeing encouraging examples of typically requires significant investments in
incumbents tapping into green business building. physical assets, which isn’t required for software
A German multibillion-dollar revenue technology development or digital engineering. Still, green

9
Matt Banholzer, Ralf Dreischmeier, Laura LaBerge, and Ari Libarikian, “Business building: The path to resilience in uncertain times,”
McKinsey, December 19, 2022.
10
More than 5,000 companies have made or are in the process of making emission reduction commitments through the Science Based
Targets initiative.
11
For more, see Rob Bland, Anna Granskog, and Tomas Nauclér, “Accelerating toward net zero: The green business building opportunity,”
McKinsey, June 14, 2022.
12
For more, see Tomas Beerthuis, Ralf Dreischmeier, Tomas Laboutka, and Nimal Manuel, “A practical guide to new-business building for
incumbents,” McKinsey, June 21, 2023.

Full throttle on net zero: Creating value in the face of uncertainty 26

business builders can learn lessons from successful the decision making related to each deal can
digital scale-ups. focus on the specifics of the transaction at
hand, rather than a comprehensive debate on
Executing the actions we’ve laid out in this article whether it is beneficial to exit or enter a certain
at digital speed takes both the right mindset and business or what the true market potential of
the right capabilities. Companies can consider a that business is.
few approaches:
— In our experience, companies that have built
— Reducing costs and carbon at speed first and scaled green businesses successfully—and
requires an honest analysis of the trajectory of quickly—tend to take a series of key actions.
current emission reduction activities compared They lead with game-changing ambition, sign
with the trajectory required to meet customer up captive demand before scaling, and often
demands or net-zero commitments. Companies build capacity with parallel scaling.13 For digital
can then move with urgency to collaborate start-ups, the funding dynamics often force
with suppliers and partners that can help the leaders to challenge conventional wisdom
company meet both their cost and carbon about how quickly an investment project
reduction goals. can be planned, engineered, and executed,
or how quickly a new concept can be turned
— Being fast in forging partnerships to gain market into a product available for customers. Green
share is first and foremost about being in the business builders, whether start-ups or
right executive-level discussions with potential incumbents, could start with such a mentality.
partners in the early stages of business building.
The early dialogues provide an opportunity
to shape the value proposition before all
parameters on the product side have been Despite the economic uncertainty, there are
locked in. opportunities for companies to play offense and
accelerate value creation in the net-zero transition.
— The speed of portfolio rotation is, of course, Building a set of strategic moves now could set
contingent on the availability of buyers and up early movers for cost and carbon reductions,
sellers and converging views on valuations. That green premiums, strong market positions, and new
said, players with a well-anchored portfolio capabilities. Players that choose to slow down could
strategy and serial M&A capabilities are likely find themselves lagging behind.
to find it easier to execute at pace. For them,

13
For more, see Rob Bland, Anna Granskog, and Tomas Nauclér, “Accelerating toward net zero: The green business building opportunity,”
McKinsey, June 14, 2022; and “Scaling green businesses: Next moves for leaders,” McKinsey, March 10, 2023.

Laura Corb and Daniel Pacthod are senior partners in McKinsey’s New York office, Anna Granskog is a partner in
McKinsey’s Helsinki office, and Tomas Nauclér is a senior partner in the Stockholm office.

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

Full throttle on net zero: Creating value in the face of uncertainty 27

Scaling green
businesses: Next
moves for leaders
New challenges—and opportunities—have emerged
for green business builders. A set of actions could help
companies scale during these uncertain times.
This article is a collaborative effort by Rob Bland, Laura Corb, Anna Granskog,
Tomas Nauclér, and Giulia Siccardo, representing views from McKinsey’s
Sustainability Practice.

March 2023
The transition to net zero is well underway, but it exploring different avenues for financing
is not happening fast enough. Growth in key climate and investments.
technologies, including wind and solar power
and electric vehicles (EVs), has helped accelerate Many of the unique challenges to scaling green
decarbonization efforts worldwide. Solutions such businesses remain—high capital expenditures
as green hydrogen and long-duration energy on physical assets (compared with building
storage (LDES) are becoming available and, if digital businesses), higher short-term costs, and
scaled, could reduce global emissions even further. customer education and adoption barriers for
But the pace of scaling these technologies has many sustainable products. However, the urgency
not kept up with projections for a warming planet. to reach net-zero targets has only grown in many
Governments and companies have done an markets, and the industrial economy is now being
admirable job developing and deploying climate reinvented around a lower-carbon energy system,
technologies to date, but a significant acceleration circular-economy practices, and other emerging
is required to meet net-zero targets—and stave off models. Companies that can innovate and scale
the most dire effects of climate change. during these fast-moving, uncertain times could set
themselves up for exponential growth. Our analysis
Last year, we released a framework for launching shows that growing demand for net-zero offerings
and scaling green businesses, based on our work could generate $9 trillion to $12 trillion of annual
with both incumbents and start-ups.1 A few of the sales by 2030 across 11 value pools, including
key actions include leading with game-changing transport, power, and consumer goods.
ambition, signing up captive demand before
scaling, and building capacity with parallel scaling. In this article, we lay out the evolving landscape for
In the interim, as the economic and geopolitical scaling climate technologies and explore three areas
backdrop has changed, market dynamics for green of potential action for green business builders.
business builders have shifted in both nuanced
and fundamental ways. On the one hand, capital
markets and public-sector institutions have started A significant scaling gap
to galvanize behind green investments. Policy, More than 4,000 companies have set or are in the
including the Green Deal Industrial Plan in Europe process of committing to emissions reductions2
and the Inflation Reduction Act (IRA) in the United and 70-plus countries have set net-zero targets.3
States, promises to support companies looking How quickly would key climate technologies need to
to scale climate technologies. At the same time, scale to help meet such goals?
inflation, economic uncertainty, and the invasion of
Ukraine have all complicated the path to net zero. To arrive at projections, we conducted an analysis
of the current growth trajectory for climate tech
Three areas have emerged that should now be relative to current net-zero commitments. Based on
priorities for those navigating the challenges our analysis, even mature technologies—including
and seeking opportunities: building up supply wind and solar power—would need to scale by a
chains (often through cross-sector partnerships), factor of six to 14 times faster to remain on track for
proactively addressing an emerging skills gap, and a 1.5° pathway by 2030 (exhibit).4

1
See Rob Bland, Anna Granskog, and Tomas Nauclér, “Accelerating toward net zero: The green business building opportunity,” McKinsey,
June 14, 2022.
2
“Companies taking action,” Science Based Targets, accessed February 22, 2023.
3
“For a livable climate: Net-zero commitments must be backed by credible action,” United Nations, accessed February 22, 2023.
4
Based on the McKinsey 1.5°C achieved commitments scenario, which represents existing commitments from companies and policies from
countries. To conduct this analysis, we estimated the current trajectory of supply of key climate technologies (based on current activity) across
four categories of maturity: mature, early adoption, demonstrated at industrial scale, precommercial; factored in current emissions-reductions
commitments from countries and governments; and assessed the supply of these technologies that would be required by 2030 to stay on
track for a 1.5° pathway.

Scaling green businesses: Next moves for leaders 29

Web <2023>
<ScalingGreen>
Exhibit
Exhibit <1> of <1>

To reach net-zero targets, a set of existing climate technologies would need to

scale exponentially by 2030.

Annual deployment of climate technologies needed,1 Mature Early adoption

multiples of current supply
Wind power Solar power Battery electric Green hydrogen Carbon capture,
capacity, capacity, car sales, electrolyzer utilization, and storage,
gigawatts gigawatts million capacity, gigawatts megatons of CO₂
600 2,000 70 50 100

6× 14× 60
14× 200× 100×
500
40 80
1,500
50
400
30 60
40
300 1,000
30
20 40
200
20
500
10 20
100
10

0 0 0 0 0
2015 2021 2030 2015 2021 2030 2015 2021 2030 2015 2021 2030 2015 2021 2030

¹Based on the McKinsey 1.5°C achieved commitments scenario, which represents existing commitments from companies and policies from countries. To con-
duct this analysis, we estimated the current trajectory of supply of key climate technologies (based on historic and current activity), factored in current emis-
sions-reductions commitments from countries and governments, and assessed the supply of these technologies that would be required by 2030 to stay on
track for a 1.5° pathway.
Source: EV-Volumes; IEA; International Renewable Energy Agency; McKinsey analysis

McKinsey & Company

Historically, growth in solar and wind has often analysis indicates that supply of green hydrogen,
outpaced projections, and new players entering which is produced with renewables, would need to
the market (oil and gas companies, private equity grow by a factor of 200 times.
players, and institutional investors, for example)
show signs that the current pace of deployment
could speed up.5 Nevertheless, the potential gap for Next moves for green business builders
renewables to meet net-zero targets looks steep. Scaling climate technologies often requires
companies to think and act in bold and innovative
Climate technologies that are high-potential but ways. While our seven actions for scaling green
relatively less advanced in their commercialization businesses hold true, they continue to evolve (for
(compared with renewables) would need to scale a summary of the original framework, see sidebar,
at an even greater rate. Consider hydrogen. Our “Seven actions for scaling green businesses”).

5
“Renewable-energy development in a net-zero world,” McKinsey, October 28, 2022.

Scaling green businesses: Next moves for leaders 30

Economic uncertainty, inflation, new public company, to boost the supply of low-carbon battery
funding, technological risks, and supply chain materials. The collaborators aim to scale capacity
considerations have altered the landscape for to meet demand for 2.2 million EVs per year. Such
green business building. a partnership could not only help fortify the supply
chain for battery recycling, it could also help solidify
Actions that have become particularly important demand for players across the EV and energy
for organizations during these volatile times include storage value chains (charging infrastructure, grid
creatively developing supply chains (including storage markets) and help reduce commercial risk
through partnerships), proactively addressing for investors. In another example of a large-scale
emerging skills gaps in the workforce, and exploring upstream partnership, Dow Chemical and Mura
new avenues for financing and investment. Technology, an advanced-recycling company,
announced they will pair up to construct multiple
Build up the supply chain through recycling facilities for plastics that could add up to
cross-sector partnerships 600 kilotons of capacity by 2030.8
Green business building efforts are often supply
chain building efforts. For hydrogen-powered Downstream partnerships are demand-based
vehicles to scale and help decarbonize long-haul partnerships that drive vertical integration. They
freight transport, for example, a supply of hydrogen occur when a company uses a demand commitment
and hydrogen infrastructure also needs to scale. from a purchaser to help stabilize or enable their
We are increasingly seeing green business builders financing. As an example, advanced-market
develop their supply chains by forging partnerships commitments are one tool for helping to guarantee
across sectors and, in some cases, creating a future demand for technologies. Take Frontier, a
growth strategy with complementary players as joint effort among organizations including Alphabet,
collaborators. These partnerships are getting a Meta, Shopify, and Stripe.9 These organizations
boost from major climate legislation packages in have collectively made a $925 million commitment
the United States and the European Union. For to purchase carbon removal, enabling carbon
example, the IRA in the United States allocates removal suppliers to have a line of sight to their end
$369 billion for climate and energy spending,6 with customers while they are still scaling operations.
a focus on ventures that address critical gaps in the
North American supply chain. These collaborations Horizontal partnerships are ecosystem partnerships
happen upstream, downstream, or horizontally in that bring together a cross-section of organizations
the value chain. along the value chain. For example, the Center
for Houston’s Future and the Greater Houston
Upstream partnerships are operational partnerships Partnership have laid the groundwork for a clean-
that propel vertical integration. They occur when a hydrogen hub in the Gulf Coast region by bringing
company partners far upstream to secure critical together both public and private entities that
supply of a product or service. In one example, span production, infrastructure, and electrolyzer
the Volkswagen Group announced a joint venture capacity.10 Another example is the LDES Council,
with Umicore,7 a circular-materials technology a group of more than 60 member institutions that

6
Inflation Reduction Act of 2022, H.R. 5376, 117th Congr. (2022).
7
“PowerCo and Umicore establish joint venture for European battery materials production,” Volkswagen Group, September 26, 2022.
8
“Dow and Mura Technology announce largest commitment of its kind to scale advanced recycling of plastics,” Dow Chemical, July 21, 2022.
9
McKinsey Sustainability is a partner in Frontier. For more, see New at McKinsey Blog, “McKinsey partners with Stripe, Alphabet, Shopify, and
Meta on $925 million carbon removal commitment,” blog post, April 13, 2022.
10
McKinsey’s Houston office has been working in collaboration with the Greater Houston Partnership’s Houston Energy Transition Initiative and
Center for Houston’s Future. Over the past two years, McKinsey has supported these initiatives through a variety of efforts, including a pro
bono study, Houston leading the energy transition - strategy report, Greater Houston Partnership, June 2021, and a report, Houston as the
epicenter of a global clean hydrogen hub, Center for Houston’s Future and the Greater Houston Partnership, May 2022.

Scaling green businesses: Next moves for leaders 31

has committed to accelerating the scale of LDES skills gap. For example, Shell is a founding partner
technologies.11 Members include technology of the Energy Transition Institute at the University
providers, customers, and investors. of Houston, where students work with Shell
scientists across three core areas: hydrogen, carbon
Get ahead on the skills gap management, and circular plastics.14 Governments
The net-zero transition has created a shift in can support such talent-building efforts at
needed job skills, as markets are reshaped and universities. The US Department of Energy, for
organizations institute new operational practices example, has funded a new research center at the
and processes. The range of skills is broad: from University of Michigan for EV battery technology.15
honing technical skills in manufacturing EVs, solar Private and public entities will both need to
panels, and wind turbines to engaging with low- contribute to workforce development going forward.
emissions suppliers to having executive expertise
in carbon accounting and project finance. Green Explore different avenues for
business building opportunities have encouraged financing and investments
many entrepreneurs, but the available talent to Financing the scale-up of climate technologies can
scale operations—in infrastructure, engineering come with challenges, as many technologies rely on
for capital projects, and in process engineering, for significant up-front investments in physical assets,
example—has not quite caught up. including large-scale facilities and infrastructure.
Technologies that haven’t yet reached technical
Looking into the next decade, skills shortages12 maturity or commercialization can come with a
could loom for certain sectors, particularly as more higher risk profile for investors. As we have written
companies concurrently scale up manufacturing about before, securing purchase agreements and
and operations in the United States to access the inviting customers to invest in the business up front
incentives offered by the IRA and the Bipartisan are some ways that green business builders have
Infrastructure Law. For example, McKinsey analysis successfully addressed these challenges.
shows that bursts of factory building in Michigan
could strain labor supply by close to 200 percent Project finance is an increasingly common approach
and manifest differently across skill categories for green business builders that can help mitigate
of workers, with growing needs for architectural, the risks for capital-intensive infrastructure
equipment, and electrical work. To address these projects. Project finance is a nonrecourse or
potential shortages, companies must not only acquire limited-recourse structure in which the project
the right talent, they also need to figure out how to company shareholders’ liability is limited to their
upskill and reskill labor for future opportunities. In equity investment and the project lenders rely
the United Kingdom, for example, Octopus Energy primarily on the project’s cash flow for repayment—
has opened a heat pump R&D and training facility to meaning principal repayment usually begins after
help accelerate adoption of the technology.13 the project is operational. Northvolt, a Swedish
battery maker, quickly turned to project financing
Building up the talent pipeline at academic and has plans for at least a third gigafactory
institutions is another way for companies to fill the manufacturing plant.16

11
McKinsey has collaborated with the LDES Council as a knowledge partner, including on the reports Net-zero power: Long duration energy
storage for a renewable grid, LDES Council and McKinsey, November 22, 2021; A path towards full grid decarbonization with 24/7 clean
Power Purchase Agreements, LDES Council and McKinsey, May 2022; and Net-zero heat: Long Duration Energy Storage to accelerate energy
system decarbonization, LDES Council and McKinsey, November 2022.
12
Christopher Boone and Karen C. Seto, “With green jobs booming, here’s how to plug the sustainability skills gap,” World Economic Forum,
January 9, 2023.
13
Octopus Energy Blog, “How Octopus Energy is revolutionising heat pumps,” blog entry by Aimee Clark, October 29, 2021.
14
Chris Stipes, “Leading energy,” University of Houston, accessed February 22, 2023.
15
“$11M DOE center for next-gen battery technology,” University of Michigan, August 30, 2022.
16
“Northvolt announces its third gigafactory will be established in Germany’s clean energy valley,” Northvolt, March 15, 2022.

Scaling green businesses: Next moves for leaders 32

Seven actions for scaling green businesses

Through our work with organizations that plan prior to expanding, to reduce risk. Lead on sustainable operations,
have built and scaled green businesses One way of accomplishing this is through through ambitious targets, innovation,
successfully, we have identified seven purchase agreements. For example, and partnerships. Successful green
key principles. This framework is a way for Swedish battery manufacturer Northvolt business builders are leaders in how their
leaders to navigate both the opportunities signed a supply agreement with BMW.1 operations minimize carbon emissions and
and risks involved in scaling climate other environmental impacts. Sustainable
Build capacity with parallel scaling. To
technologies—and potentially set their operations start from the beginning—
reach scale-up goals, the ability to
companies up for significant growth. designing with low-carbon inputs (green
drive several investments or market
There is no one right combination of these materials), implementing low-emissions
introductions in a limited time frame is key.
factors, and most existing players have processes (circularity), and controlling for
We’ve seen leaders “parallelize the scaling”
combined several of these elements. emissions through the value chain. Supply
from the start—that is, initiate additional
chains for some key materials (lithium,
Lead with game-changing ambition. growth waves before they complete the
for example) could be in high demand.
Effective green business builders tend first one. One approach is scaling through
Solidifying a sustainable, resilient, and
to set their sights on creating something partnerships in the value chain. For
cost-effective supply chain is therefore
significant from the start. Game-changing example, investing in production capacity
important.
ambition may mean aspiring to produce in a company’s home region while finding
a zero-carbon product at a competitive a partner to deploy the same technology Dedicate recruiting resources early in the
cost (which enables a competitive in another. Or coinvesting in expanding process. As we cover in the accompanying
price), compared with a less sustainable manufacturing capacity with suppliers. article, the range of skills required to
alternative, and scaling new capacity fast. scale successful green businesses can
Proactively create business ecosystems.
be wide—and in an especially tight labor
Accelerate to the point of cost advantage. As we explore in the accompanying article,
market, scarce. Green business builders
Building a business around a clean scaling most climate technologies won’t
can invest early in building their talent
technology may require analyzing different happen by companies “going it alone.”
base, project the needed skill sets for the
technological pathways, including some Achieving scale requires coordination
future workforce, dedicate resources to
technology options that are not yet among governments and regulatory
upskilling and new capabilities, and create
commercialized. When analyzing a new bodies, investment and financing
the technical infrastructure to enable
technology, leaders must understand the institutions, incumbent players, and
superior talent performance.
scale break point for cost competitiveness, disruptive innovators. Finding the right
to reach lower unit costs faster and scaling partners along the value chain—
potentially be competitive on price from partners that have a similar strategic
the start. interest—is key. And coalitions dedicated
to scaling access, cost-effectiveness, and
Sign up captive demand before scaling.
supply across green ecosystems are a
Successful green business builders often
must for transitioning to a green future.
set up demand with a strong commercial

1
“BMW Group signs long-term supply agreement for battery cells with Northvolt,” Northvolt, July 13, 2020.

Scaling green businesses: Next moves for leaders 33

Many green business builders look to blended When it comes to purchase agreements, inflation
finance models, which rely on a mix of private capital could be a top concern for suppliers and buyers.
and public or philanthropic funding. Public-funding In response, we’re seeing green business builders
pools utilize grants as a means of reducing debt offer agreements to customers that have inflation-
and mitigating risk, for example, and multilateral adjustable price formulas.
climate funds, such as the Green Climate Fund, have
factored into these blended finance models.

Financing partnerships are also playing a larger role, Scaling new, green businesses may seem more
from joint ventures between local start-ups and challenging than it did a year ago, but we see
global technology companies to multistakeholder- many companies addressing the complications
funded research, development, and demonstration with determination and foresight. Organizations
(RD&D) programs that provide early-stage and that evolve with the times and embrace a new set
growth-stage equity capital for high-risk first of actions could set themselves up for significant
deployment projects. These RD&D programs are growth opportunities—and help the climate get
particularly showing up in developing countries, to back on track.
help increase private investments into businesses
that serve underrepresented communities most
affected by climate change.

Rob Bland is a senior partner in McKinsey’s Bay Area office; Laura Corb is a senior partner in the New York office, where
Giulia Siccardo is a partner; Anna Granskog is a partner in the Helsinki office; and Tomas Nauclér is a senior partner in the
Stockholm office.

The authors wish to thank Sarah Abebe, Jennifer Barnes, Francesco Cuomo, Fredrik Dahlqvist, Jonas DeMuri-Siliunas, Dani
Ebersole, Lisa Leinert, Mark Patel, Anastasia Perez Ternent, and Megan Routbort for their contributions to this article.

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

Scaling green businesses: Next moves for leaders 34

Decarbonize and
create value: How
incumbents can tackle
the steep challenge
While the task is not easy, incumbents—including those in
hard-to-abate sectors—can decarbonize and generate value
through a series of key actions.
This article is a collaborative effort by Peter Crispeels, Dieuwert Inia, Henry Legge,
Tomas Nauclér, and Philipp Radtke, representing views from McKinsey’s Sustainability,
Global Energy & Materials, and Advanced Industries practices.

October 2023
The net-zero transition could lead to the largest ability to operate at faster speeds with agility. But a
transformation of the industrial sector since the set of incumbents has emerged as market leaders,
beginning of the Industrial Revolution. To reach too. These incumbents, including many in hard-
net zero by 2050, about $275 trillion in cumulative to-abate sectors (such as chemicals and steel),
spending on low-emissions assets will be have leveraged a few of their advantages, including
required over the next 30 years—or approximately long-term customer relationships and access
7.5 percent of global GDP every year for 30 years.1 to capital, talent, industry insights, and supplier
Decarbonizing operations and product offerings networks. These established players, from industrial
presents many companies with the most significant companies to logistics and consumer goods
opportunity in a generation: a potential $9 trillion organizations, have been willing to take bold action
to $12 trillion in annual sales by 2030 as capital and play offense to get ahead of their competitors.
and customer demand shift toward a low-carbon
economy. On the flip side, failure to decarbonize How can more incumbents decarbonize and create
could, on average, risk up to 20 percent in economic value? Based on our experience, companies that are
profit for companies by 2030, based on factors a step ahead in their decarbonization transformation
including stranded assets, increasing cost of tend to take action in three key areas. In this article,
capital, and loss of market share.2 we explore the three key areas, a new tool that can
help leaders build the business case for net-zero
In any case, decarbonization is a difficult offerings, and reasons to move quickly.
transformation for most companies. The costs
for scaling climate technologies and building new
capabilities can be high. Access to financing can Decarbonize and create value:
be challenging for businesses entering nascent, Three moves for incumbents
untested markets. Timelines for decarbonization In our experience, incumbents that have created
can conflict with performance objectives and often value through decarbonization have focused on
stretch beyond the expected tenure of the current three key areas of action:
company executives. Meanwhile, entire supply
chains are still being rewired from fossil fuel–based — Decarbonize and improve cost
energy and feedstock to renewable sources, which competitiveness. Companies that reduce costs
could lead to major shifts in energy costs and the and emissions simultaneously can gain market
viability of current assets. In the current moment, share and finance further decarbonization
leaders are also navigating the added complexity efforts through the additional cash generated.
of inflation, disruptions to energy markets, supply Leading companies typically go after the first
shortages, and increased interest rates. To 20 to 40 percent of decarbonization while
survive—and, ideally, create value—companies also reducing costs, leading to an improvement
will need to think through their decarbonization in EBITDA.3
strategy, keep up with a shifting landscape of
market opportunities and policy (from subsidies — Launch net-zero offerings. Companies that are
and regulatory schemes to the organization’s quick to offer zero-carbon offerings can leverage
geographical footprint), and make swift decisions. inherent supply–demand gaps in nascent
markets and create value through value-based
In some markets, start-ups have become early pricing strategies and price premiums.
leaders in decarbonization (renewable energy,
electric vehicles, and steel, for example). Start-ups — Enter new value pools. Companies that build
often have a higher tolerance for risk-taking and the new businesses along the current value

1
“The economic transformation: What would change in the net-zero transition,” McKinsey, January 25, 2022.
2
“Playing offense to create value in the net-zero transition,” McKinsey Quarterly, April 13, 2022.
3
Based on net present value.

Decarbonize and create value: How incumbents can tackle the steep challenge 36
 chain—and tap adjacent value pools—have an assumed there is a financial trade-off for reducing
opportunity to secure early demand for net-zero emissions in operations, and for good reason:
offerings and benefit from low-cost financing. decarbonizing operations can be complex and
capital intensive. We’ve also seen companies try
Decarbonize and improve cost competitiveness to decarbonize operations through a stand-alone
In the past two to three years, we’ve seen an program that isn’t fully integrated with the core
increasing number of companies set ambitious business, which can limit both the potential for
decarbonization commitments. To date, more emissions reductions and a healthy balance sheet.
than 6,000 companies have signed up through
the Science Based Targets initiative to achieve an Now, however, we see leading organizations
average reduction of 49 percent in Scope 1 and integrate cost and carbon reductions
2 emissions and 28 percent in Scope 3 emissions by simultaneously. Our analysis shows that companies
2030.4 Now companies face the steep challenge of are already seeing results: up to 40 percent
making the reductions a reality. reductions in emissions and up to a 15 percent
improvement in financial performance (Exhibit 1).
Many organizations have begun their By 2030, incumbents can, on average, abate
decarbonization journey by looking to cut emissions 20 to 40 percent of emissions while also reducing
from operations. Traditionally, some leaders have their production costs (Exhibit 2). A reduction

Web <2023>
<Pub-IncumbentDecarb-rj>
Exhibit 1
Exhibit <1> of <3>

Companies across industries can reduce carbon emissions and improve

financial performance at the same time.
Illustrative financial improvement and CO₂ reduction, %
Advanced industries: Global energy Travel and logistics: Other industries:
Automotive player and materials: Logistics player Healthcare provider
Chemical player
30–35

Production cost
improvement
10–15
5–10 5–10

5–10 5–10
CO₂ emissions
reduction 10–20

30–40

McKinsey & Company

4
Scope 1 emissions are direct emissions that occur from sources that are controlled or owned by an organization; Scope 2 emissions are indirect
emissions associated with purchased energy; and Scope 3 emissions are indirect emissions resulting from activities along an organization’s
value chain. Science Based Targets initiative dashboard, accessed September 26, 2023; US Environmental Protection Agency.

Decarbonize and create value: How incumbents can tackle the steep challenge 37
Web <2023>
<Pub-IncumbentDecarb-rj>
Exhibit 2
Exhibit <2> of <3>

Incumbent companies can, on average, abate 20 to 40 percent of carbon

emissions by 2030 while also reducing costs.
Cost-effective emission abatement by 2030, by sector,1 %
Advanced industries
Average 20–40
OEMs, aerospace, industrial machinery 50–60

Batteries, semiconductors 20–30

Global energy and materials

Mining, oil, and gas 40–50

Chemicals and agriculture 45

Metals and materials 15

Travel and logistics

Logistics 60–80

Travel 30–40

Other industries

Consumer 30–40

Life sciences and healthcare 15–25

100%

Includes Scope 1, 2, and 3 emissions. Based on net present value.

1

Source: McKinsey Catalyst Zero

McKinsey & Company

in production costs could be driven by energy on sustainability, organizations that are ahead on
efficiency, sourcing green energy, and variable decarbonization could be positioned to earn early
cost reduction (yield and throughput increase, contracts in growing markets and generate revenue
for example) of the manufacturing footprint. The faster than competitors. This advantage for early
potential for dual cost and carbon savings varies movers will likely fade as competitors catch up.
by industry. However, in some sectors, we see However, as more market players decarbonize,
the potential to reduce emissions by as much as global emissions should go down—a societal
60 to 80 percent while still having a favorable benefit—and end customers should experience
business case based on net present value. more competitive pricing.
Reducing costs and carbon simultaneously can also
free up cash to invest in new business opportunities The dual task of cutting costs and carbon
that emerge from the ongoing net-zero transition. emissions is not easy. Decarbonizing operations
often requires a transformation of processes and
Integrating cost and carbon reductions can also capabilities. There needs to be clear buy-in and
help companies gain market share. As both the accountability from leadership, as well as the
public and private sectors increasingly set demands ability for leaders to continuously reevaluate the

Decarbonize and create value: How incumbents can tackle the steep challenge 38
decarbonization strategy as input costs change will have different areas of focus, based on their
(energy prices, for example) and new technologies sector and where they are in the value chain.
become commercially available. However, many Metals, chemicals, and mining companies
incumbents—including those in harder-to-abate might focus on plant design and related
sectors—have advantages, such as the ability capital expenditures, whereas technology
to engineer large-scale production processes, and component companies might emphasize
technological know-how, and investment flexibility. product design and embedded emissions.
In our experience, companies successfully For example, a large industrial-equipment
integrate cost and carbon reductions through a manufacturer has set various decarbonization
few approaches, from assessing carbon emissions KPIs across all areas of the organization, from
on a granular level to embedding decarbonization embedded emissions in procurement to share
in all processes: of recycled material in product design. Moving
quickly to embed decarbonization objectives
— Make fact-based decisions through full carbon in all processes, in some cases, can help
transparency on an asset and product level. companies achieve cost efficiency faster and
Leading companies look for carbon and cost give the organization a head start on building
reductions on a granular level, down to all new capabilities.
assets and product offerings, and operate with
full carbon transparency for stakeholders and — Stay agile in decision making and capital
customers. For example, a leading chemicals reallocation. By 2050, about 90 percent of
player calculates detailed product carbon total global emissions can be reduced with
footprints for approximately 45,000 products, existing climate technologies—however, many
which enables the company to create viable of these technologies are not currently cost
decarbonization pathways and offer their competitive, and only 10 to 15 percent are
customers a better understanding of a product’s considered commercially mature.7 As markets
carbon footprint. Based on our analysis, such evolve and new climate technologies become
a granular approach can save companies an commercialized, leaders should remain flexible
additional 10 to 20 percent in costs on average.5 in their decarbonization plans and capital
allocation, with an eye toward cost savings and
— Focus on capturing the first 20 to 40 percent of value creation.
emissions. We are seeing companies integrate
cost and carbon reductions in several ways, from — Use supply chain partnerships to accelerate
improving energy efficiency to reducing waste to the next wave of emissions reductions.
designing products more efficiently.6 However, Companies can also build long-term strategic
companies often struggle to understand which partnerships with technology providers to help
measures will yield the most savings and how them grow and capture economies of scale,
to focus engineering resources and financing. which can, over time, lead to cost reductions on
In our experience, leading companies focus emerging climate technologies for the buyers.
on capturing an initial 20 to 40 percent of For example, electrolyzers, which are key to
emissions while also reducing costs. producing clean hydrogen, are increasingly in
demand. Proactive companies are partnering
— Embed decarbonization in all processes. with electrolyzer providers to secure long-term
Eventually, decarbonization should be supply at competitive prices.
embedded in all critical processes. Incumbents

5
Based on net present value.
6
For more, see Laura Corb, Anna Granskog, Tomas Nauclér, and Daniel Pacthod, “Full throttle on net zero: Creating value in the face of
uncertainty,” McKinsey, September 20, 2023; and Peter Crispeels, Mikael Robertson, Ken Somers, and Eric Wiebes, “Outsprinting the energy
crisis,” McKinsey, April 21, 2022.
7
International Energy Agency; McKinsey Sustainability Insights.

Decarbonize and create value: How incumbents can tackle the steep challenge 39
Launch net-zero offerings Launching net-zero offerings successfully is
Demand for net-zero offerings is surging—so not a given. A thorough market analysis and
much so that there could be shortages in certain strategy is needed to identify the markets
sectors. According to our analysis, in steel, where net-zero products could generate green
cement, and chemicals, for example, there could premiums, particularly if leaders set ambitious
be up to a 60 percent supply–demand gap in carbon abatement goals or foresee large capital
2030 for net-zero products. While such shortages expenditures. Companies often need to move
could temporarily slow the net-zero transition, quickly in markets where there are supply
there is an opportunity for fast-moving players to shortages, creating new markets and product
capture the value of full decarbonization through categories, and working with partners across
value-based pricing strategies (moving away the value chain to maximize carbon reductions.
from a “cost plus” approach to one that factors However, incumbents that have existing production
in the value of decarbonization, for example) or models, familiarity with a customer base, and
earning a price premium on green goods and experience with supply chains should have a leg up.
services. In some sectors, we’re already seeing The following are specific actions companies can
green premiums of 15 to 30 percent. In many take to help ensure a successful product launch:
markets, particularly in Europe, the ability to sell
excess carbon allowances further strengthens the — Identify high-potential net-zero markets.
business case for green offerings. According to Leading companies start with a key question:
our analysis of green steel, for instance, producers What net-zero offerings can we provide in
in Europe that combine a green premium with the markets where there will be structural supply
sale of excess carbon allowances could earn a shortages for the foreseeable future?
30 percent return on capital employed by 2035.
Similar opportunities exist for many other products — Create new markets and rethink pricing
and services. strategies. Many players who have successfully
launched net-zero products have created and
Another way to build the business case for net-zero shaped new markets. They have achieved this in
offerings could be to use a marginal abatement part through CEO-to-CEO sales (versus selling
revenue and cost curve (MARCC) on a product through the procurement organization). In these
level. A MARCC, a new concept we have developed, CEO-level conversations, leaders can secure
shifts the discussion of offering net-zero goods early production offtakes and earn a price
and services from only cost to the total value of the premium. For example, leadership at SSAB,
opportunity. To create a MARCC, we start with the which is developing fossil fuel–free steel made
cost to decarbonize a product and then add the with hydrogen, has partnered with automotive
green premiums that we anticipate the net-zero incumbents to gain early sales. Companies that
version of the product can earn. Looking at just have identified new opportunities for greener
the costs of net-zero products, for example, shows products, like SSAB, have been able to capture a
that, on average, net-zero products incur an overall 20 to 30 percent premium.
cost that is 10 to 30 percent higher than their more
carbon-intensive counterparts.8 These figures — Secure green supplier partnerships for Scope
suggest that creating net-zero offerings would 2 and 3 emissions. Producing net-zero goods
erode margins and destroy value for companies. requires reducing emissions across the supply
However, a cross-sector MARCC for net-zero chain (Scope 2 and 3 emissions). Developing
offerings, which captures the potential revenue long-term partnerships with suppliers to derisk
upside of green premiums, reveals that incumbents procurement and substitute high-emissions
can reduce emissions by up to 80 percent and inputs with low-emissions inputs is key, as
create value (Exhibit 3). well as ensuring carbon transparency across

8
The net-zero transition: What it would cost, what it could bring, McKinsey Global Institute, January 2022.

Decarbonize and create value: How incumbents can tackle the steep challenge 40
Web <2023>
<Pub-IncumbentDecarb-rj>
Exhibit 3
Exhibit <3a> of <3>

Companies can build the business case for net-zero offerings by factoring
a green premium into costs curves.
Illustrative marginal abatement revenue and cost curve for net-zero offerings

300 Not profitable

Without green premium
200

Abatement cost, 100

€ per ton of
CO₂ equivalent 0

–100

–200
Profitable
0 20 40 60 80 100

Abatement, % of total carbon abatement

Abatement, % of total

22 78
Profitable Not profitable

300 Not profitable

With green premium
200

Abatement cost, 100

€ per ton of
CO₂ equivalent 0

–100

–200
Profitable
0 20 40 60 80 100

Abatement, % of total carbon abatement

Abatement, % of total

85 15
Profitable Not profitable

McKinsey & Company

the value chain. For example, to decarbonize company BASF has worked with energy
electricity at its plants and realize its goal developers to support the construction of large
of delivering net-zero products, chemical offshore wind farms.

Decarbonize and create value: How incumbents can tackle the steep challenge 41
— Tap financial partners and asset-level project Enter new value pools
financing. To transform the core business The net-zero transition can generate vast business-
around new net-zero offerings, many companies building opportunities for organizations. Since 2015,
will need to build new plants and facilities. six decacorns and 135 unicorns have been created
Creating this infrastructure could require within the sustainability space.13 However, building
billions of dollars in investment. Companies can green businesses isn’t just a game for start-ups.
rethink how they access funding. To finance As markets transition to green offerings, new value
the construction of its first plant project, H2 pools will emerge—in many cases, upstream or
Green Steel has raised more than €1.8 billion in downstream of a company’s current value chain
equity from a broad group of investors.9 Energy position. There is an opportunity for incumbents to
company Ørsted has financed its transition enter these new value pools, provided they move
to becoming the world’s leading offshore- quickly and strategically.
wind power producer through a strategy that
includes operational cash flows, debt issuances, Incumbents might not be naturals at building
investment partners, and risk management.10 disruptive ventures. However, in recent years,
we have seen incumbents flex a few advantages
— Finance new offerings by improving margins in in building new green businesses, from securing
the core. New net-zero offerings can come with strategic partnerships to attracting low-cost
uncertainty in still-evolving markets. A stable financing, while also embracing the speed and
and cash-generating core can help keep the agility of a start-up.
business foundation stable while transitioning
to the new offerings. To maximize this potential, That said, entering new value pools has challenges.
companies can look to cut costs and improve It often requires, for example, a new set of
margins in the core business. capabilities and new types of risk management.
Companies can consider a set of actions to mitigate
— Execute fast to capture premiums. Green risks while scaling new ventures:
premiums won’t be around forever. We
anticipate that there will be shortages of green — Use the core business to secure captive
products in multiple industries through 2035 (for demand. A critical hurdle for new ventures is
example, steel, copper, plastics, and cement). to find early-stage customers and partners to
Getting ahead of value on the cost curve could secure demand. Maersk, for example, has taken
set companies up for green premiums in the a few steps to create both supply and demand
short term and robust market share going for green shipping fuels. The company has
forward. We are already seeing green premium announced plans to invest in a green ammonia
opportunities in steel and recycled plastics. For facility, along with ferry operator DFDS, and
example, high-quality recycled plastics reached recently set up a green methanol company.14
an average premium of up to 60 percent over Such ventures support the company’s
virgin plastics.11 One way to move quickly on decarbonization ambitions and position the
new offerings is to do “parallel scaling”—that is, organization to gain market share in a nascent
initiate additional growth waves before the first but growing market.
one is complete.12

9
“H2 Green Steel raises €1.5 billion in equity to build the world’s first green steel plant,” H2 Green Steel news release, September 7, 2023.
10
“Ørsted’s renewable-energy transformation,” McKinsey, July 10, 2020; “Funding strategy,” Ørsted, accessed October 4, 2023.
11
Marcelo Azevedo, Anna Moore, Caroline Van den Heuvel, and Michel Van Hoey, “Capturing the green-premium value from sustainable
materials,” McKinsey, October 28, 2022.
12
For more, see Rob Bland, Anna Granskog, and Tomas Nauclér, “Accelerating toward net zero: The green business building opportunity,”
McKinsey, June 14, 2022.
13
McKinsey analysis of PitchBook and HolonIQ data.
14
“Maersk backs plan to build Europe’s largest green ammonia facility,” Maersk press release, February 23, 2021; Johannes Birkebaek and
Jacob Gronholt-pedersen, “Shipping group Maersk sets up green methanol company,” Reuters, September 14, 2023.

Decarbonize and create value: How incumbents can tackle the steep challenge 42
Making strategic moves now could
be the difference between gaining
market share and being stuck with
higher costs for entry later on.

— Secure low-cost financing based on secured Now is the time to strike

demand. Once captive demand is secured, Companies, for good reason, may hesitate to
established players can use their existing commit resources without complete clarity on their
network and reputation to help their venture business case for decarbonization. However, our
attract low-cost funding. For example, in perspective is that now is the time to strike. Cost
2017, Volvo Cars established Polestar as an curves for green technologies are moving down
independent electric-vehicle brand, leveraging across industries, and as we discussed earlier,
its existing assets, capabilities, and customer some green premiums may have a shelf life. Making
and supplier relationships to swiftly develop strategic moves now could be the difference
a fully electric stand-alone brand. By utilizing between gaining market share and securing
platforms and technologies from Volvo Cars, profitable growth, versus being stuck with stranded
Polestar was able to adopt an asset-light assets and higher costs for entry later on.
business model and efficiently create its first
models. Volvo Cars’ balance sheet, liquidity, The three areas of action we have outlined are not a
and cash position can provide support to one-size-fits-all model, and implementing all three
Polestar while simultaneously executing its at once could indeed be a steep task. Leaders can
own plans to transition into a fully electric-car prioritize based on factors including sector supply–
company by 2030. demand dynamics, value chain opportunities,
cost analysis, commercially available climate
— Run a stand-alone new business and recruit technologies, and evolving policy.
new talent. Incumbents can consider providing
assets, capabilities, and relationships to a To decarbonize operations, leaders can swiftly
new business. At the same time, incumbents act on the most cost-efficient moves that still help
should also consider keeping new ventures achieve decarbonization targets. As we noted
at arm’s length operationally to establish a earlier, launching net-zero products and services
fast-paced, agile culture and operating model, ahead of the competition has the potential to earn
while still enabling additional equity to be green premiums, a source of capital for scaling.
added by partners if needed. Additionally, When to enter a new value pool may depend on
companies can look to set up their ventures the pace of technological advancement, as well as
with new capabilities and talent to succeed, as regulatory changes. While it is impossible to predict
new parts of the value chain might require new such developments, companies would be wise to
areas of expertise. These moves can help the anticipate change in these areas and be prepared
new business scale faster and rapidly adapt to to jump on opportunities—before the competitive
emerging opportunities. landscape gets crowded. For example, last year’s
Inflation Reduction Act in the United States, which

Decarbonize and create value: How incumbents can tackle the steep challenge 43
allocates about $370 billion for climate and energy The net-zero transition presents challenges for
spending, and multiple policy packages under incumbents, particularly those in hard-to-abate
the umbrella of the European Green Deal, could sectors. At the same time, established companies
accelerate pockets of the net-zero economy and have a unique opportunity to decarbonize and
facilitate access to funding. create value. While there is no one universal
approach, making timely moves across three
key action areas could help companies create a
competitive advantage in the years to come.

Peter Crispeels is a partner in McKinsey’s Lyon office; Dieuwert Inia is a senior partner in the Amsterdam office; Henry Legge
is an associate partner in the Stockholm office, where Tomas Nauclér is a senior partner; and Philipp Radtke is a senior
partner in the Munich office.

The authors wish to thank Markus Björk, Stefan Helmcke, Sebastian Levi, Lena Lindvall, and Thomas Schmidt for their
contributions to this article.

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

Decarbonize and create value: How incumbents can tackle the steep challenge 44
 The ten rules
of growth
Empirical research reveals what it takes to generate
value-creating growth today.
by Chris Bradley, Rebecca Doherty, Nicholas Northcote, and Tido Röder

August 2022
One of the surest signs of a thriving enterprise extra five percentage points of revenue per
is robust and consistent revenue growth. That year correlates with an additional three to four
has not been easy to accomplish over the past percentage points of total shareholder returns
15 years. Corporate growth slowed dramatically (TSR)—the equivalent of increasing market
after the global financial crisis, with the world’s capitalization by 33 to 45 percent over a decade.
largest companies growing at half the rate they did Firms that managed to grow faster and more
before 2008. Furthermore, increases in capital profitably than their peers during our study period
investments outstripped revenue expansion, did even better, generating shareholder returns six
compressing returns. Now, with a slowing percentage points above their industry averages.
global economy, rising inflation, and geopolitical
uncertainty, growth that delivers profits and However, relatively few companies could boast
shareholder value may become more elusive still. such results. A typical company grew at a measly
2.8 percent per year during the ten years preceding
To buck these trends, business leaders need COVID-19, and only one in eight recorded growth
to follow a holistic growth blueprint consisting rates of more than 10 percent per year (Exhibit 1).
of three core elements: a bold aspiration and
accompanying mindset, the right enablers Healthy growth has also been hard to sustain. When
embedded in the organization, and clear pathways we compared our sample’s performance in the first
in the form of a coherent set of growth initiatives. half of the last decade with the second half, only
To help our clients identify these pathways, we one in three companies that were in the top quartile
conducted an in-depth study of the growth of growth between 2009 and 2014 managed to
patterns and performance of the world’s 5,000 maintain that rate in the subsequent five-year
largest public companies over the past 15 years.1 period. Among companies that grew predominantly
organically, the rate was even lower, at one in four.
The research reaffirmed that revenue growth is This suggests a strong tendency for growth to revert
a critical driver of corporate performance. An to the mean.

A typical company grew at a measly

2.8 percent per year during the ten
years preceding COVID-19, and only one
in eight recorded growth rates of more
than 10 percent per year.

1
Our sample consisted of the 5,000 largest publicly listed companies by revenue globally in 2019. Companies with unreliable or missing
segment data were excluded from the sample. We studied the performance of these companies from 2005 to 2019, the 15 years prior to the
COVID-19 crisis.

The ten rules of growth 46

Web 2022
ten–rules–growth
Exhibit 1 of1 8
Exhibit
Growth is
Growth is hard
hard for
for companies
companies to achieve.
to achieve.
Companies by revenue growth and growth approach, 2009–19, CAGR¹ %
All companies2

More companies 13%

Share of companies that grew
at a rate higher than 10%
Fewer

–14 0 2.8 22
Lowest growth Median Highest growth

Predominantly organic3 growers

6%

1.4

Predominantly inorganic3 growers

23%

5.4

1 Nominal growth in dollars.

2 Largest 5,000 publicly listed companies by revenue in 2009 with revenue and goodwill data from 2009 to 2019; 3,931 companies charted.
3 Companies were classified as inorganic or organic growers, based on their M&A deal data, with organic defined as <1% of market capitalization acquired from
2010 to 2019. Companies with missing deal data were classified based on their net positive change in goodwill relative to starting invested capital (<15% =
organic). Of the companies in the analysis, 59% were classified as organic growers, 41% as inorganic growers.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global; Strategy Analytics by McKinsey

Ten rules of value-creating growth 2. Make the trend your friend. Prioritize profitable,
To understand how organizations can try to fast-growing markets.
overcome these obstacles, we studied the growth
patterns of the sample companies through various 3. Don’t be a laggard. It’s not enough to go with the
lenses. Our findings suggest ten imperatives that flow—you need to outgrow your peers.
should guide organizations seeking to outgrow and
outearn their peers. 4. Turbocharge your core. Focus on growth in your
core industry—you can’t win without it.
1. Put competitive advantage first. Start with a
winning, scalable formula. 5. Look beyond the core. Nurture growth in
adjacent business areas.

The ten rules of growth 47

6. Grow where you know. Focus on growing where the companies in our sample excelled at more than
you have an ownership advantage. three of the ten rules, and only 8 percent mastered
more than five (Exhibit 2).
7. Be a local hero. Commit to winning on the
home front.
Put competitive advantage first
8. Go global if you can beat local. Expand A high return on invested capital (ROIC) indicates
internationally if you have a transferable a business model powered by a competitive
advantage. advantage. Companies that generate stronger
returns attract and deploy more capital, a virtuous
9. Acquire programmatically. Combine healthy cycle that enables them to grow faster and generate
organic growth with serial acquisitions. still higher returns (Exhibit 3). While some firms
forgo profits for a time in pursuit of growth (with
10. It’s OK to shrink to grow. Ruthlessly prune your Amazon being perhaps the best known), the far
portfolio if you need to. more typical, and practical, approach is to establish
a distinctive business model and then scale it.
We have quantified what it takes to master each
rule, as well as the extent to which excelling at each For example, a department store chain had a
improves corporate performance. The resulting business model—brand-name bargains in stores
“growth code” allows you to benchmark your with low inventories and costs—that in 2007
growth performance and set the bar for your next delivered 5 percent higher ROIC than its cost of
strategy. The more rules you master, the higher capital. The management team used this advantage
your reward. But the bar is high—fewer than half of

Web 2022
ten–rules–growth
Exhibit 2 of 8
Exhibit 2
The more
The more rules
rules you
you master to create
master to creategrowth
growth for
for your
your organization,
organization, the
the better.
better.
Revenue growth and shareholder returns by rules mastered, 2005–09 to 2015–19,¹ CAGR %

Number of Share of all

rules mastered Median growth Excess total shareholder returns2 companies, %

0–1 –1.3 –1.1 20

2–3 1.3 –0.1 43

4–5 4.1 1.3 29

6–7 6.5 4.1 8

8+ 6.8 5.7 0.3

1 Largest 3,000 publicly listed companies by revenue in 2018 with an average revenue of >$1 billion in 2005–09, a reliable business segment, and TSR data;
1,621 companies charted.
2 Excess total shareholder returns calculated as the company’s annual shareholder returns less the median return in its primary industry.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

The ten rules of growth 48

Web 2022
ten–rules–growth
Exhibit 3 of
Exhibit 38
Markets reward
Markets reward strong businessmodels.
strong business models.

Invested capital growth and shareholder returns by competitive advantage, 2005–09 to 2015–19,¹
CAGR %

Starting Median growth in Median revenue Median shareholder

competitive invested capital over the growth rate over the returns over the next
advantage² next decade, CAGR % next decade, CAGR % decade, CAGR %

<–2 0.4 0.9 4.5

–2 to 0 1.9 1.6 6.0

0 to 2 3.4 2.2 6.6

2 to 5 3.3 2.2 6.4

>5 5.3 3.0 8.2

1 Largest 3,000 publicly listed companies by revenue in 2019 with an average revenue of >$1 billion in 2005–09, a reliable business segment, and TSR data;
1,621 companies charted.
2 Average return on invested capital less weighted average cost of capital in 2005–09, a proximate measure of competitive advantage or economic surplus
captured by the company. Shown in percentage points.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

to expand the store network from approximately their resources toward tailwinds, potentially staging
900 locations that year to more than 1,500 in 2019. large-scale pivots.
As a result, revenue grew by 9 percent per year and
the company generated an impressive 29 percent in The selection of markets needs to be precise,
annual shareholder returns. however. In their best-selling book, The Granularity
of Growth, our colleagues observed that many
“growth” sectors have sluggish subindustries,
Make the trend your friend while relatively “mature” sectors include rapidly
This age-old axiom holds especially true today as growing segments. Take the telecommunications
the acceleration of pre-COVID-19 trends widens the services industry, which grew at 1.6 percent
gap between corporate winners and laggards. Over per year over the period of our analysis. The
the past 15 years, companies that expanded in ways fastest-growing company in the sector increased
that maintained or increased their exposure to fast- its revenues by 21 percent annually, while the
growing, profitable segments generated one to two slowest contracted by 9 percent per year. This
percentage points of additional TSR annually. This dichotomy reflects the influence of acquisitions
suggests that organizations already in attractive and divestitures, as well as portfolio choices—that
markets should keep investing to stay ahead of is, varying degrees of exposure to segments with
the pack. Firms facing market headwinds, on the different rates of growth. The cloud services
other hand, may need to aggressively reallocate category is growing faster than voice services, for

The ten rules of growth 49

example, and the growth rates of each category This decomposition reinforced the importance
vary widely by country. of a healthy core business. Put simply, it is
improbable that you can achieve strong growth
if the core isn’t flourishing. Only one in six of the
Don’t be a laggard companies in our data set with core-segment
Outgrowing your industry implies a strong business growth rates below their industry median managed
model—an advantage rewarded by capital markets to achieve overall corporate growth rates above
whether you’re in a fast- or slow-growing industry. those of their peers. Therefore, finding a way to
Furthermore, companies that manage to win market unlock growth in the core needs to be a top priority.
share away from competitors are likely to beat the For some organizations, this may require
growth expectations reflected in their share price, a wholesale revamp of the operating model.
unlocking even stronger returns. Others may need to identify granular pockets with
growth potential in their existing markets or new
Consider this tale of two retail companies, both ones and reallocate resources to them from more
of which grew at 4 percent a year between 2007 stagnant segments.
and 2017 but in different segments. A home
improvement retailer achieved its growth in a
category that grew at 3 percent annually, and the Look beyond the core
company generated annual TSR of 17 percent. A Our study found that, on average, 80 percent of
sports apparel company, in contrast, was outpaced growth comes from a company’s core industry
in growth by its segment peers by one percentage and the remaining 20 percent from secondary
point annually, and its shareholder returns were industries or expansion into new ones (Exhibit
more lackluster at 1 percent per annum. While 4). However, these figures varied among sectors
many factors could have affected these two during our study period. For example, industrial
companies’ stock price aside from their growth companies generated a full third of their growth
rates, our analysis suggests that outgrowing your from new industries, while utilities consolidated
industry is worth, on average, an additional five toward their core business areas more than
percentage points of shareholder returns per year. other sectors.
Among companies that managed to achieve this
while being more profitable than their peers, this Companies that grew into adjacent industries
figure was one percentage point higher still. generated, on average, an extra 1.5 percentage
points per year of shareholder returns above their
industry peers. One such company was a global
Turbocharge your core automotive tire supplier that diversified into brake
When developing a growth strategy, often the first and safety system technology, powertrains, and
question on a CEO’s mind is, “Where should that vehicle connectivity and information systems.
growth come from?” To help find the answer, we Together, these segments now account for
categorized revenue increases among our sample approximately 75 percent of the company’s total
companies into growth within the core industry revenue, and its growth exceeded that of its peers
(their largest industry segments at the start of by 2.4 percentage points per year. But examples
the study period), in secondary industries (smaller of this strategy abound. The current transition to
but still significant revenue contributors in the net-zero carbon emissions, for instance, presents
first year of our time frame), and in new industries many promising opportunities for companies in
(segments where the companies did not initially chemicals, construction, and other industries
have a presence). to expand into fast-growing adjacencies such
as recycled plastics, sustainable construction

The ten rules of growth 50

Web 2022
ten–rules–growth
Exhibit 4 of 8
Exhibit 4
Only 20
Only 20 percent
percent of
of most
most organizations’
organizations’ total
total growth
growthcomes
comes from
frombeyond
beyondthe
thecore.
core.
Share of revenue growth by growth type, 2005–09 to 2015–19,¹ %

Growth in core2 Growth in secondary industries Growth in new industries

Utilities –18 112 6

Healthcare 91 5 4

Information technology 86 6 8

Materials –4 82 22

Consumer discretionary 81 4 14

Industrials -12 79 33

Consumer staples 79 13 8

Telecommunications
76 12 13
services

Financials 65 16 19

All sectors 83 3 14

Note: Figures may not sum to 100%, because of rounding.

1Largest 3,000 publicly listed companies by revenue in 2018 with an average revenue of >$1 billion in 2003–07, a reliable business segment, and TSR data;
1,595 companies are charted.
2We allocated each reported business segment to one of 130 industries and then used the following definitions: the core industry was the one with the largest
share of revenue at the start of the analysis period; secondary industries were all noncore industries in a company’s portfolio at the start of the analysis period;
and new industries were those that a company entered during the analysis period.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

materials, or meat substitutes, as demand for their Grow where you know
legacy products declines. As we saw, diversifying into adjacent segments
can be a valuable growth strategy, but how similar
For companies with fast-growing core businesses, should these segments be, both to the core and to
expanding into new areas can help position their each other? We used a simple measure: industries
portfolios ahead of future trends. Those with slow- are similar if they often appear together in corporate
growing cores, on the other hand, can use adjacent portfolios (for example, cable and satellite together
businesses to offset slow growth elsewhere. with broadcasting, or aerospace and defense with
industrial machinery).

The ten rules of growth 51

Web 2022
ten–rules–growth
Exhibit 5 of
Exhibit 58
Companies that
Companies thatgrew
grewinto
into similar
similar adjacencies
adjacenciesoutperformed
outperformedtheir
theirpeers.
peers.

Excess total shareholder returns1 by similarity of new growth areas, 2005–09 to 2015–19,² %

Entered nonsimilar adjacency

20th percentile Median 80th percentile

–6.9 –1.4 3.2

Entered similar adjacency3

–3.8 0.6 6.4

2.0
percentage
points
1Excess total shareholder returns calculated as the company’s annual shareholder returns less the median return in its primary industry.
2Largest 3,000 publicly listed companies by revenue in 2018 with an average revenue of >$1 billion in 2005–09, a reliable business segment, and TSR data;
1,621 companies charted.
3Top-quartile industry similarity score: we calculated industry similarity based on how frequently two industries occur together in corporate portfolios.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

Our analysis shows that companies growing in a way competencies and assets. This enabled General
that increases the similarity of their portfolios earn, Mills to reduce costs in purchasing, manufacturing,
on average, an additional one percentage point of and distribution, and thereby to raise operating
TSR per annum. Those that expand into new industries profit by roughly 70 percent.
can expect an additional two percentage points if
the new industry is similar to their core (Exhibit 5).
Be a local hero
Why does similarity matter so much? We believe Industry (along with moves up and down the
it is a proximate measure of whether a company value chain) is only one aspect of the “where to
is a natural (or best) owner of an asset and thus grow” issue. The other is geography. Just as
able to generate optimal value from owning it is hard to achieve overall growth if your core
or operating the business. This value could business isn’t thriving, it is unlikely that you can
derive from synergies with other businesses the raise your growth trajectory without winning in
company owns, distinctive technical or managerial your local market.2 In fact, fewer than one in five
capabilities, proprietary insights, or privileged of the companies in our sample that had below-
access to capital or talent. Take the example of median growth rates in their local region managed
General Mills’ purchase of Pillsbury from Diageo. to outgrow their peers. Many members of this
There was little overlap between Diageo’s core minority are companies in slow-growing regions,
business and Pillsbury’s, while Pillsbury’s and such as Japan, that offset lethargic local growth
General Mills’ businesses share many of the same with aggressive international expansion. An air-

2
Defined as the largest region in the portfolio by revenue. We allocated each business segment in a corporate portfolio to one of 12 geographic
regions. The region that accounted for the largest share of revenue at the start of the analysis period is termed the local or home region, while
all other regions are classified as international regions.

The ten rules of growth 52

conditioning and refrigeration manufacturer, growing areas, such as China and North America,
for example, managed to offset slow growth in international regions accounted for closer to
Japan by successfully expanding to North America 30 percent of total growth.
and China.
Companies that expanded internationally
generated 1.9 percentage points more annual TSR
Go global if you can beat local than their industry peers, but those with healthy
Approximately half of the total growth by growth in their home markets benefited more than
companies in our sample came from geographies those merely treading water at home. The former
outside their home regions—an aggregate category generated an additional 2.6 percentage
number fueled by Japanese and European points of annual shareholder returns through
companies that relied on international markets to geographic expansion, while those that struggled
compensate for slow growth at home. In faster- locally gained only 1.3 percentage points—not

Web 2022
ten–rules–growth
Exhibit 6 of 8
Exhibit 6
Organizations with
Organizations withfast
fastgrowth
growthininthe
thehome
homeregion
regioncan
canbenefit
benefitmost
mostfrom
from
international expansion.
international expansion.
Excess total shareholder returns¹ by speed of growth and expansion location, 2005–09 to 2015–19,² %

Grew fast in home region3 Grew slowly in home region3 Stayed local
4.0 Expanded
internationally⁴

2.6
percentage
points

1.4

–0.7
1.3
–2.0
1
Excess total shareholder returns calculated as the company’s annual shareholder returns less the median return in its primary industry.
2
Largest 3,000 publicly listed companies by revenue in 2018 with an average revenue of >$1 billion in 2005–09, a reliable geographic segment, and TSR data;
1,372 companies are charted.
3
We defined a company’s home region as the region (n = 12) with the largest share of revenue at the start of the analysis period; all other regions were classified as
international regions. Grew slowly in home region was defined as growing below the median home region growth rate of all companies in the sample set (1.8% pa).
4
We classified a company as expanded globally if its international growth in the ten years from 2005–09 to 2015–19 amounted to >20% of 2005–09 (starting) revenue.
The companies were distributed across the four categories as follows: 29% were classified as stayed local and grew fast in home region, 34% as stayed local and grew
slowly, 21% as expanded internationally and grew fast, and 16% as expanded internationally and grew slowly.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

The ten rules of growth 53

enough to offset the performance drag from the expanded aggressively into Latin America, its TSR
weak home market (Exhibit 6). trailed that of its peers by seven percentage points
per annum over the subsequent decade.
To succeed at international expansion, it’s critical
to have a clear source of competitive advantage
that is transferable across regions. Without Acquire programmatically
it, foreign companies will probably struggle to Mergers and acquisitions account for
compete with incumbents that better understand approximately one-third of the revenue growth
the local context. This reality may explain why among companies in our data set. McKinsey’s
companies that grow strongly at home benefit so long-standing research into M&A strategies has
much more from global expansion—they are more repeatedly reaffirmed that it is not the total value
likely to have winning business models, aspects of of transactions but the deal pattern that drives
which can be transferred to new regions. shareholder returns. After segmenting companies
into four categories, our colleagues found that
The case of a high-performing European programmatic acquirers—those that did at least
manufacturer of agricultural and municipal vehicles two small or medium-sized deals a year along the
illustrates the benefit of venturing abroad from same theme—outperformed peers using other
a strong home base. The company leveraged its M&A approaches.
equipment’s stellar reputation to expand into the
United States, where it continued to generate We wondered whether programmatic acquirers
market-beating returns. On the other hand, when a outperform organic growers simply because they
European grocer that struggled in its home market grow faster, so we extended the analysis to control

Web 2022
ten–rules–growth
Exhibit 78
Exhibit 7 of

Programmatic acquirers outperform,

outperform, even
even when
when the
the analysis
analysis controls
controls for
forgrowth.
growth.
Excess total shareholder returns1 by deal pattern, 2009–19,² %

Revenue CAGR
Growth pattern3 <0% 0–5% >5% All companies

Programmatic M&A –1.0 2.8 5.1 2.1

Organic only –2.7 0 1.5 0

All other M&A –3.2 0.2 1.4 –0.2

Large deal M&A –3.9 –0.4 2.3 –0.8

1
Excess total shareholder returns calculated as the company’s annual shareholder returns less the median return in its primary industry.
2
Largest 2,000 publicly listed companies by revenue in 2018 with reliable M&A and TSR data; negative-growth companies not shown but same pattern holds;
1,990 companies are charted.
3
Large deal was defined as 1 or more deals with deal value >30% of acquirer market capitalization (MCAP); programmatic as more than 2 deals pa; none
as >30% of acquirer MCAP; organic as <2% of MCAP acquired over the period; 14% of companies were classified as programmatic, 26% as organic only,
16 percent as large deal, and 44% as all other.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

The ten rules of growth 54

 for growth rates—in other words, comparing the Why is programmatic M&A so powerful? First,
performance of companies with different M&A practice makes perfect: programmatic acquirers
strategies but similar growth rates. We found build organizational capabilities and establish best
that programmatic acquirers still outperformed practices across all stages of the M&A process,
their organic peers. This suggests that even when from strategy and sourcing to due diligence and
companies that grow purely organically match the integration planning. Second, those that pursue
growth rates of their acquisitive peers, they are large deals often need to overpay to secure the
less likely to generate peer-beating shareholder asset and then must successfully integrate two
returns (Exhibit 7). businesses of similar size—something that’s
notoriously difficult to get right. Finally, doing many
Today, many companies with legacy business small deals enables companies to gain access
models are using programmatic M&A to both to new markets or consolidate fragmented ones
digitize and enlarge their businesses. Take the without the risk of “betting the house.”
example of a European publishing group that
made more than 60 acquisitions over the past
decade to expand its portfolio into digital media It’s OK to ‘shrink to grow’
offerings: digital assets now account for more Many management teams feel pressure to
than 70 percent of its revenue. deliver consistent growth, which is understandable:
the 10 percent of companies in our sample that

Web 2022
ten–rules–growth
Exhibit 8 of 8
Exhibit 8

For
Forcompanies
companiesthat
thatdon’t
don’thave
havea aconsistent
consistent growth
growthengine, periodic
engine, pruning
periodic pruningof
slow-growing parts
of slow-growing of aof
parts portfolio is the
a portfolio bestbest
is the alternative.
alternative.
Excess total shareholder returns1 by growth profile, 2009–19, %

Consistent growers² Shrink to grow Inconsistent growers Large deal

Divestitures

Large
acquisition

7% 4% –1% –2%
Excess total
shareholder returns

Note: Consistent growers accounted for 10% of all companies, shrink to grow 14%, inconsistent growers 68%, and large deal 11%.
¹ Excess total shareholder returns were calculated as the company’s annual shareholder returns less the median return in its primary industry.
² We analyzed the revenue growth of the largest 3,000 companies in 2019 from 2010 to 2020. Each company was classified into one of four categories: Large
deal are those with a single year when revenues grew by 50%; shrink to grow are not large deal, had one or two years with net divestitures (shrunk revenue by
more than 5%), and grew in at least all but 2 of the other years. Consistent growers were not large deal or shrink to grow, and grew in 7 or more years of the
analysis period; all others were inconsistent.
Source: Corporate Performance Analytics by McKinsey; regulatory filings; S&P Global

The ten rules of growth 55

grew for seven of the ten years between 2010 portfolio, such as insurance, and put the proceeds
and the end of 2019 strongly outperformed their into growth opportunities. Its shareholders have
peers. But suppose you don’t have this consistent been handsomely rewarded, with a TSR of more
growth engine? Statistically, the worst thing than 10 percent per year from 2009 to 2019.
you can do is try to buy growth with a “big bang”
acquisition. Your best option is to periodically
prune back by divesting slow-growing parts of your
portfolio and reinvesting the proceeds into new All business leaders have cost benchmarks.
areas (Exhibit 8). Now you have a growth benchmark, too. However,
mastering the ten rules of value-creating growth is
Companies in our sample that used such shrink- only one part of a holistic growth recipe.
to-grow strategies divested assets in one or Start by developing a clear growth ambition: a
two years but grew consistently during the other quantum of growth that is more than just the
years. They managed to generate five percentage momentum of your current businesses. Then
points more annual excess TSR than inconsistent develop a coherent set of growth pathways that
growers and large-deal acquirers. The key is not encompass as many of the rules as possible.
to confuse increasing scale with value-creating Finally, instill the capabilities and operating
growth. For example, one Australian conglomerate model to execute with excellence.
has consistently divested less attractive parts of its

Chris Bradley is a senior partner in McKinsey’s Sydney office; Rebecca Doherty is a partner in the San Francisco office;
Nicholas Northcote is a senior adviser in the Brussels office; and Tido Röder is an associate partner in the Munich office.

The authors wish to thank Abhranil Das, Marjan Firouzgar, Anna Koivuniemi, Monika Kumari, Karin Löffler, Nikolaus Müller-
Mezin, Joanna Pachner, Florian Popp, Monica Rodriguez, and Jacco Vos for their contributions to this article.

Designed by McKinsey Global Publishing

Copyright © 2022 McKinsey & Company. All rights reserved.

The ten rules of growth 56

Five paths to TSR
outperformance
It’s hard for companies to significantly beat long-term
market TSR, harder still for the largest corporations,
and hardest of all in the face of low growth. But industry
endowment needn’t be destiny.
by Pedro Catarino, Tim Koller, Rosen Kotsev, and Zane Williams

PLACEHOLDER ONLY!
Use Secondary image with Color adjustment
treatment, following guidelines.

October 2023
What does it take for large companies to decisively Methodology: The importance
beat market total shareholder returns (TSR) over of realistic expectations
a decade? To analyze how top performers achieved To quantify and more clearly frame long-term TSR
their success, we studied the 1,000 largest outperformance, we conducted two analyses.
corporations by market capitalization in the United First, we looked at the 1,000 largest corporations
States. In all, we found that long-term TSR out­ in the United States by market capitalization,
performers took one of five distinct paths: (1) being examining how many reached the top decile of
in or moving to high-growth markets (or segments of ten-year TSR performance over any of three
markets), (2) offering new or enhanced products, different ten-year periods.1 Doing so meant beating
(3) refreshing their business portfolio, (4) conducting market TSR by about 20 percent. During those
a successful turnaround, or (5) managing their periods, only 11, 15, and 18 percent, respectively,
business better than their peers. Some of these of the top-decile TSR performers were “very
paths were more likely to best market TSR large” companies—that is, among the 250 largest
outperformance—and being in or moving to growth companies by market capitalization.
provided the widest path of all. But growth
wasn’t the only way to beat long-term market Because so few of the largest companies were
TSR. Strikingly, the same five paths were among the high-TSR performers, we conducted
apparent over each of the three decade-long a second analysis, identical to the one for
periods we analyzed. the 1,000 largest companies, that focused just

‘Merely’ beating market-average TSR

by more than 5 percent over a decade
still puts large corporations on
an extraordinary list: only 23, 28, and
37, respectively, of the 250 largest
companies were able to do so in
the ten-year periods ending 2012,
2017, and 2022.

1
The ten-year periods that ended as of year-end 2012, 2017, and 2022.

Five paths to TSR outperformance 58

on the 250 largest publicly traded US companies. The five paths to outperformance
Knowing that very few could best long-term market “Merely” beating market-average TSR by more than
TSR by about 20 percent, we gave them a lower bar— 5 percent over a decade still puts large corporations
to beat ten-year market TSR by 5 percent or more. on an extraordinary list: only 23, 28, and 37, respec­
Very few large companies reached even that mark. tively, of the 250 largest companies were able to do
so in the ten-year periods ending 2012, 2017, and
The first lesson, therefore, is one of setting expec­ 2022. As well, over the past decade, about 10 percent
tations. It’s not unusual for senior executives of of large companies that bested market TSR by
very large corporations, particularly managers who 5 percent or more were in cyclical industries such as
are new to their roles, to pronounce mandates oil and gas or aerospace and defense; decades
such as “this company will beat market TSR by of research show that cyclical companies will
10 percent”—or sometimes by an even greater margin. not reliably beat the broader markets when their
Realistically, however, that goal is rarely attainable. industry cycles inevitably turn down.
There’s a limit, after all, to how much market size
a company can ultimately capture, and smaller Still, whether or not one considers cyclicality (we
companies have a lot more room left to grow. When conducted both analyses), the results remained
the market or segment in which a company competes stark: there were five distinct paths to substantially
isn’t growing, smaller companies have much better beat market TSR (exhibit).
odds of long-term TSR outperformance: the smaller
a company’s initial market share, the greater 1. Being in or moving to high-growth markets
the likelihood that it can beat and keep beating The widest path to significant TSR outperformance
investor expectations. is growth. Many of the companies that took this path

Web 2023
five-paths-to-tsr-outperformance_ex1
Exhibit
Exhibit 1 of 1

Few of the 250 largest companies beat ten-year market TSR by

5 percent or more.

Distribution of large companies¹ that outperformed 10-year² S&P TSR by category and time period,³ %

Being in or moving Offering a new Refreshing Achieving a Managing your Number of

to high-growth or enhanced the portfolio successful business better than large-company
markets product turnaround your peers outperformers

2012 43 13 9 17 17 23

2017 36 21 14 14 14 28

2022 46 5 24 5 19 37

1250 largest companies by market capitalization, excluding cyclicals.

2Time periods are measured as the 10-year periods that ended as of year-end 2012, 2017, and 2022, respectively. “Outperformance” and “outperfomer” for
purposes of this analysis are defined as beating, by 5 percent or more, 10-year S&P TSR.
³Figures may not sum to 100%, because of rounding.
Source: S&P Capital IQ; Corporate Performance Analytics by McKinsey

McKinsey & Company

Five paths to TSR outperformance 59

 started with the good fortune of strong tailwinds, organization’s core. Companies in this category
particularly those whose core businesses were proactively seek out faster-growing markets where
in industries such as high tech or that competed in they can build, or practicably acquire, a competitive
other sectors in which technology could make advantage. It’s a narrow path; over the last decade-
an outsize difference (as was the case for payment long period we studied, only nine of the 250 largest
systems in financial institutions). Yet endowment companies were able to succeed in beating
is not destiny; for example, not every semiconductor market TSR by 5 percent or more by refreshing their
company was a TSR outperformer. Across industries, portfolios. Having a proven track record in a core
the companies that did outperform by taking business or businesses was typically a precondition
advantage of tailwinds both executed well in their to successfully expanding into new spaces and
core business and continued to invest in innovation capturing new pockets of growth. One outperformer,
and improving their business processes. Most for example, had operated significant publishing
important, they relentlessly sought out a high-growth and education businesses while also providing
“niche within the niche.” For example, rather than financial research. Recognizing emerging trends and
settling for providing technology support, one businesses for which it was and was not the best
services firm took advantage of a surging demand owner, the company divested its publishing and
for cybersecurity. Similarly, while the pharmaceutical education divisions and allocated more resources
sector has generated strong returns for toward financial research and analytics, which then
decades, pharmaceutical suppliers have recently played an outsize role in value creation. Another
been a growth dynamo within the broader life prominent example is Microsoft. In 2007, it was the
sciences industry. third-largest US company by market capitalization;
many of its core products, including Office,
2. Offering new or enhanced products Windows, and Xbox, were household names. Yet
The second-biggest category of large companies the company still committed to refreshing its
that beat market TSR comprised companies that portfolio. In 2008, it began to develop its cloud
offered new or enhanced products. We distinguish business; in 2014, new CEO Satya Nadella
this second category from “being in or moving to made clear that the cloud was among the company’s
high-growth markets” because the major driver or highest priorities; and by 2022, Microsoft’s
drivers of outperformance were a small number of “Intelligent Cloud” was firmly in the lead as its largest
specific products (sometimes, only one product) and most profitable division—and still its fastest
rather than an uplift in a specific business as part of growing—as the company moved up to become
industry-wide trends. Here again, companies in the second-largest US corporation.
the pharmaceutical industry, along with the biotech­
nology sector, are instructive. Several companies in 4. Achieving a successful turnaround
these industries introduced breakthrough medicines A small number of large companies—fewer than
(for example, for autoimmune diseases or diabetes) 20 percent in each ten-year period (and in the last
for which there were large, eager markets; these period studied, fewer than 5 percent)—beat market
new products enabled these large corporations to TSR by more than 5 percent by achieving a successful
meaningfully beat broader market TSR. turnaround. These companies came from a diverse
range of industries. Several of them generated large
3. Refreshing the portfolio improvements in ROIC through efficiency upgrades
A third path to TSR outperformance is to refresh and economies of scale. Typically, the turnarounds
the corporation’s portfolio of businesses, tacking were extremely rigorous, going far beyond the
toward more value-creating businesses while at superficial to substantially improve core operations.
the same time not going too far beyond the Best Buy, for example, ended its European

Five paths to TSR outperformance 60

‘Managing your business better than
your peers’ was the second- or third-
largest category of TSR outperformers
among each of the ten-year periods.
Even so, there were more than twice
as many TSR outperformers from a
high-growth sector in each period.

operations and Best Buy Mobile stores and focused portfolio. But they managed their businesses
on dramatically growing revenue from its US stores superbly. Execution brought exceptional strategy
and operations, including through initiatives such and distinctive capabilities to life, as reflected
as the “Geek Squad” for in-home support and repair by their long-term TSR performance. During the
and by more seamlessly matching its online- and ten-year period ended December 31, 2022, these
physical-store offerings. Or consider a large manu­ companies delivered an excess TSR of about 6
fac­turer of technology products. The company and 11 percent, respectively. Over the last ten years,
dramatically upgraded its manufacturing process, Costco grew almost four percentage points faster
shifting from a labor-intensive model to one that than the median for large-cap retail companies.
was faster, more automated, and highly digitized; by Progressive, for its part, outgrew the insurance
year-end 2022, it had exceeded ten-year market industry median by about 5.5 percentage points,
TSR by more than 6 percent. continually investing in advanced institutional
capabilities such as analytics, consumer experience,
5. Managing your business better than your peers and others. Both companies also expanded inter­
Finally, one additional path presented itself for large nationally and benefited from strong customer
corporations: superb execution. As hard as it is for retention. Indeed, “managing your business better
a company in a traditional, steady-state industry to than your peers” was the second- or third-largest
gain market share, continue to outperform peers, category of TSR outperformers among each of
and, as a result, beat long-term TSR by 5 percent or the ten-year periods. Even so, there were more
more, a handful of large caps did just that. Consider than twice as many TSR outperformers from a high-
the retailer Costco and the insurer Progressive. growth sector in each period.
Neither could avail itself of an industry growth wave,
and neither substantially changed its business

Five paths to TSR outperformance 61

An examination of three decade-long periods reveals right, companies should be realistic about the level
that there are five paths to beating long-term of sustained TSR outperformance that’s attainable.
market TSR. Growth is the widest path, though For the largest corporations, beating market TSR
none of the approaches ensure success, and strong over a ten-year time frame by more than 5 percent
strategy and exceptional management are always is a significant achievement indeed.
essential. Indeed, even when everything breaks

Pedro Catarino is a capabilities and insights analyst in McKinsey’s Lisbon office; Tim Koller is a partner in the Denver
office; Rosen Kotsev is a director of client capabilities in the Waltham, Massachusetts, office; and Zane Williams is a senior
knowledge expert in the New York office.

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

Five paths to TSR outperformance 62

What’s your superpower?
How companies can
build an institutional
capability to achieve
competitive advantage
One capability often sets leading companies apart from the rest.
Here’s how to build yours.
This article is a collaborative effort by Homayoun Hatami, Brad Mendelson, Michael Park,
Liz Hilton Segel, and Rodney Zemmel.

March 2023
CEOs, just like everyone else, suffer from the than 600 merchants made pricing and markdown
paradox of choice. Companies have endless decisions, and trained and certified hundreds of
initiatives and plans, all with the promise to employees on new ways of working. In its first
“transform” the organization and deliver attractive year, the company’s new pricing ability produced
financial returns. But how is a CEO to prioritize hundreds of millions of dollars in margin expansion.
and make choices? Our experience indicates the Even more important, the capability has stuck, and
answer may lie in focusing on the one institutional the value continues to roll in.
capability that can separate you from the rest. In
a word, CEOs and their companies should look to This company is not alone. Around the world,
build a superpower. CEOs are concluding that success in congested,
increasingly commoditized markets can be
Two years ago, a retail giant with a glorious history achieved by building a superpower. We’ve talked
was just barely surviving. It had made it through with hundreds of leaders and colleagues across
the darkest months of the COVID-19 pandemic but all industries. They have shared with us the stories
was in serious need of a profitable growth path in a you’re about to read, about companies that have
disrupted industry. The CFO saw an opportunity in made a choice, aligned their resources, and built
analytics-driven pricing. their chosen superpower to deliver superior
economics (and sometimes leapfrog rivals and
With the top team as the driving force, the innovate entire industries). In this article, we’ll
retailer embarked on a journey to build a world- explain what we mean by an institutional capability,
class analytics capability and radically shift sketch the reasons why building one now is the
how the company conducted merchandising. right move for many companies, and describe
It centralized pricing operations, embedded how a company can chart a path to building a
analytics in key parts of the company through a superpower of its own.
new technology platform, changed the way more

Around the world, CEOs are concluding

that success in congested, increasingly
commoditized markets can be
achieved by building a superpower.

What’s your superpower? How companies can build an institutional capability to achieve competitive advantage 64
What are institutional capabilities may need to change or improve dramatically
and why are they important? to build an advantage. In these disciplines,
The term “capability” gets thrown around quite a gaining competitive advantage requires step-
bit and means different things to different people. change improvements.
Often it refers to individual capabilities—the skills of
individual employees and the company’s efforts to Here’s an example. A global medtech
build those skills through learning and development. company determined that supply chain
But the retailer we described did something management—forecasting demand accurately
well beyond that: it built what we refer to as an and manufacturing on time in the right
institutional capability. What do we mean? quantities—was the key to rise to the next
S-curve of performance. Customers were
Simply put, it’s an integrated set of people, increasingly demanding and willing to reward
processes, and technology that creates value by companies that reliably delivered on time.
helping the company consistently do something Unfortunately, the company’s track record on
better than competitors. An institutional capability this dimension didn’t stack up, so it embarked
should derive from the corporate strategy, of on a multiyear journey to turn this capability
course. It must involve work that is integral to the from a hindrance to a superpower. It created
company and the industry; it can’t be a gimmick. a global supply chain function with a new
Done well, such capabilities become a lasting edge, organizational structure and a clear division
leading to consistent outperformance and growth in of responsibilities between the global center
competitive advantage over time. and the regional groups for four layers of
employees. The company shifted the mindset
Think of any company that you admire, and you can of the organization to value global coordination
likely rattle off one or two superpowers that make and to abandon the historical complaint of a
them uniquely successful. Some excel in a specific “global tax.” It upgraded the talent and skills
area of the business. Toyota has historically been of the function by creating a supply chain
revered for its lean manufacturing strengths. LVMH academy that trained 1,000 people in the initial
is well known for exquisite craftmanship and the waves (and continues to train new employees).
entrepreneurship of its brand leaders. Disney is The company addressed its technology deficit
a paragon of imaginative customer experiences. by adopting a sales and operations execution
Progressive Insurance is broadly admired for tool and making a multiyear investment in
analytics-based pricing of auto insurance. Others a new advanced planning solution. The
excel in the way they operate. Netflix is renowned impact has been tremendous, with more
for its “freedom and responsibility” culture. Danaher than $100 million in savings and increased
is known for the Danaher Business System. In all customer satisfaction. Importantly, the journey
these cases, institutional capabilities deliberately continues as the company adds new strengths
built over time have helped these companies to its superpower.
succeed and thrive.
— Enterprise-wide capabilities: these are
Broadly speaking, institutional capabilities fall into strengths that truly span the entire company
two categories: (such as speed of decision making, ability to
innovate, the operating system, customer
— Functional capabilities: these are core centricity). They often relate to how the
activities that a company does today (such company is managed over time or are “net
as sales, supply chain management and new” capabilities a company requires to
procurement, performance marketing) but remain competitive.

What’s your superpower? How companies can build an institutional capability to achieve competitive advantage 65
Simply put, ‘institutional capability’ is
an integrated set of people, processes,
and technology that creates value by
helping the company consistently do
something better than competitors.

As an example, a large and established of the bank’s computing moved to the cloud.
financial-services leader in Latin America was This effort paid off with impressive increases
struggling to cope with the superior time-to- in productivity, between 130 and 530 percent
market, flexibility, and customer centricity for a broad range of tech and nontech tasks.
of fast-moving and aggressive entrants. As a result, the incumbent has been able to
The bank’s leaders determined that the gain market share. Importantly, the bank is
bank needed to develop a “client obsession” recognized internally and externally as a
and become a digital leader. It set out on a digital leader.
comprehensive redesign of its organization,
operating model, talent, and technology to
make it happen. Charting a VECTOR toward success
As Hooi Ling Tan, cofounder of Grab, told us,
The new working model broke down silos “To be successful in a dynamic environment, it is
by integrating technology, business, and important to clearly identify and believe in the one
support functions into communities and cross- single factor that is the stable core of your initial
functional squads aligned with customer and future success.”
needs. It encouraged greater collaboration
through shared incentives and performance Leading companies have an institutional capability
management. An agile academy trained staff (or two) that define them and contribute to their
and teams; more than 22,000 employees success. But how to build these superpowers? The
completed the course. Executives also elements in VECTOR provide a useful guide: vision,
received training on agile to shift their mindsets employees (and talent system), culture, technology,
and enable collaboration. The bank revamped organization, and routines (or processes). Not all
the talent mapping, recruiting, and hiring these elements will require massive reform, but a
systems to attract thousands of new tech company should carefully consider each as it builds
employees. On the tech side, about 4,000 its institutional capabilities.
business services were modernized, and half

What’s your superpower? How companies can build an institutional capability to achieve competitive advantage 66
The VECTOR approach

Vision and leadership Yes, training and hiring are needed, Technology
Employees as noted in our examples. But for the Modern institutional capabilities require
Culture and mindset superpower to be truly differentiating and the combination of human and technology
Technology sustainable, companies must do the hard capital. In today’s world, it’s hard to
Organization work to build a full system that will run for imagine a true institutional capability that
Routines years. A well-functioning talent system doesn’t have at its core technology, data,
maps the pivotal roles and skills required and, increasingly, AI. But it’s not easy to
Flash back to high school physics: for the capability; honestly assesses the get right. We see two common mistakes.
a vector has both direction of motion existing strengths and gaps; efficiently Mistake one is relying too heavily on
and magnitude of distance traveled. balances new hiring (with a high bar) and an overhaul of core systems to solve all
For CEOs and the companies they lead, reskilling of current employees; delivers problems. That overreliance creates a risk
vector is also an apt metaphor for the training throughout people’s careers to of slowing down the company’s pace of
coordination and momentum required enhance existing skills and build new change. If you wait until the full enterprise
to build a new superpower. Here’s a ones; designs and manages career paths resource planning system is upgraded to
brief description of the six elements to retain high performers; and maintains do anything else, chances are you will have
needed to build a successful, enduring, strong incentive and performance missed some opportunities. But when
institutional capability. management systems. work on core systems is needed, those
who build distinctive capabilities don’t
Vision and leadership Culture and mindset stop there. They also make appropriate
Companies often set financial targets for All companies like to think they have their investments in the required technology
improvement programs. However, the most own unique culture and mindsets. But foundations (including data products and
ambitious and successful CEOs go further if you put a dozen mission statements machine-learning operations), and create
and outline a vision for what they want side by side, you will be struck by the the teams, ways of working, and practical
to be known for. How will their company similarities. Often, when building or solutions on top to propel adoption and
shape and innovate their industry? What enhancing a capability, a mindset shift is ensure impact.
are the markers that will clearly indicate required. For example, companies creating
that they have created a “superpower”? a superpower in building new businesses Mistake two is opting for a work-around
Equally important, the leadership team usually shift their mindsets to accept solution and building one-off digital
must commit to the journey and drive it failure and thrive on experimentation. customer journeys or AI models. These thin
unwaveringly until the superpower is fully Organizations looking to embed analytics solutions rarely gain the scale and traction
ingrained and sustainable. Furthermore, in throughout the business must help to truly build an institutional capability.
a Darwinian world, adaptation never ends. their people see data as a tool rather Superpowered companies build AI models
The capability needs to continue to evolve than a threat. The techniques of change that scale readily with critical moves, such
and grow, staying at the leading edge. management still work—change stories, as putting their data in the cloud (and
top-team role modeling, change agents, structuring it the right way), guarding
Employees and all the rest. What is often missing, against systemic bias, and directing
Superpowered companies build a full however, is the stamina and consistency the effort from the top down to focus on
system of people and talent to support to make the change stick with thousands areas that will produce the most value.
the institutional capability. Too often, of employees. The key, in our experience, That ensures a distinctive and enduring
companies fall back on one-off efforts is to commit to ongoing measurement of capability and avoids a proliferation of
such as training programs or targeted culture and inclusion of culture change pilots that are good for talking points but
external hiring. We often hear executives metrics in top management incentives. not much else.
boast “we have trained x thousand people” Culture can be measured and its shifts
or “we have hired y hundred new people.” tracked over time.

What’s your superpower? How companies can build an institutional capability to achieve competitive advantage 67
The VECTOR approach (continued)

Organization permanent structure. This requires clearly processes with coaching to truly lock them
The old saying is that “structure follows defining the roles and responsibilities, into the organization at high quality. Too
strategy”; it also applies to creating a new reporting structures, and decision rights frequently, companies launch a new set
capability. The organizational structure so the capability can flourish. Beyond this, of processes, codify them into standard
and ways of operating must be designed superpowers require financial backing operating procedures—and then expect
and constructed to ensure clear roles, and should become part of the ongoing employees to miraculously execute on
responsibilities, and accountabilities to budgeting and governance processes. them with consistent excellence. Leading
enable the capability to grow and thrive. companies treat their superpower like a
Too often, companies rely on temporary Routines star athlete treats his or her sport—as a
constructs such as SWAT teams. Pilots or Processes or routines are where the craft that needs to be continually practiced,
temporary teams are useful in the early rubber meets the road. As in any part with world-class coaching, to ensure ever-
days to move quickly and experiment. of the business, high-quality, well- increasing quality and performance.
However, companies need to eventually designed routines are essential. Critically,
commit to the capability and build the organizations must practice any new

Aligning on your vector 1. What is the one superpower (or, at most, two)
The companies profiled here invested considerable that will determine your company’s success over
energy and dedication to build the capability that the next three years?
they’re now known for. It takes a broad effort across
the organization, which means that only the CEO 2. Are you aligned as a top team around this
can truly integrate all the necessary resources superpower, with a vision for what it needs
required to get from vision to execution. Building a to become?
new superpower is not to be delegated; it requires
the top team as a driving force to be effective. As 3. Does your capability-building effort pass the
you start or continue your journey, we encourage “VECTOR test”—going deep enough on each
you to consider three questions: dimension to build something differentiated
and sustainable?

Homayoun Hatami is the managing partner for global client capabilities and a senior partner based in McKinsey’s Paris office;
Liz Hilton Segel is chief client officer and managing partner of global industry practices and is based in the New York office,
where Michael Park and Rodney Zemmel are senior partners; and Brad Mendelson is a senior partner in the Ohio office.

The authors wish to thank Steve Armbruster, Renee de la Roche-Zhu, Francesco Di Marcello, Sandra Durth, Tatiana Elphimova,
David Hamilton, Jean-Frederic Kuentz, Roberto Migliorini, Florian Pollner, Michele Raviscioni, Emily Reasor, Charlotte Relyea,
Holger Wilms, and Brian Wlcek for their contributions to this article.

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

What’s your superpower? How companies can build an institutional capability to achieve competitive advantage 68
Middle managers
are the heart of
your company
Stop thinking of middle management as a way station.
Instead, make it a destination.
by Emily Field, Bryan Hancock, and Bill Schaninger

July 2023
Do you believe any or all of the following statements? create an effect that can send an organization into a
Does your boss, or your boss’s boss? downward spiral.

— The only way someone at a company can

In particular, the middle layer of management is
truly advance is to be promoted out of their
suffering from these false beliefs—and for three
current role.
main reasons:

— The importance of someone’s job can be

— Senior leadership feels a magnetic pull to
measured by how many people are underneath
promote top middle managers into positions
their box on the org chart.
where they no longer do what they love: coach
and connect people.
— The more senior the role, the more the person
in it should be paid and rewarded.
— Senior leaders persist in promoting their best
individual contributors, without considering
— O
 utstanding individual contributors should be
their fitness for a people leadership role.
rewarded with management roles.

— M
 iddle managers who do stay in their jobs find
— Anyone who stays in a middle-management
themselves pinioned by administrative tasks
role for a long time must not be very good.
and stymied by leaders who won’t empower
them to make changes.
Even if you try to consciously reject these ideas,
they can be hard to push away. That’s because
Unfortunately, the word “middle” implies that the
they are woven into the very fabric of the corporate
person in that spot is on the way to somewhere
world. They are stubborn relics of an era when
else—ideally, the top. That thinking is misguided.
workplaces essentially stayed the same for years at
Instead, we need to view middle managers as
a time and when a hierarchical management model
being at the center of the action. Without their
helped ensure productivity.
ability to connect and integrate people and tasks,
an organization can cease to function effectively.
But the way we work is changing so rapidly that That’s why we think the best middle managers
these outmoded assumptions are now doing serious are best off staying exactly where they are—like
damage. They are forcing people into roles that they Marcus, who refused to accept the prevailing belief
aren’t good at and don’t enjoy. Cumulatively, they systems about management.

Without the ability of middle

managers to connect and integrate
people and tasks, an organization
can cease to function effectively.

Middle managers are the heart of your company 70

Saying no to a promotion opposition from community leaders who feared it
would threaten the city’s small-town atmosphere.
Marcus had big aspirations for changing society.
Marcus listened to their concerns and went back
Just after graduating from college, he was excited
to his superiors and his team. The company agreed
to see a posting for a federal-affairs coordinator at
to build the office farther away from the center of
a trade group in Washington, DC. It was looking for
town than originally planned. Also, by drawing on
a “dynamic team player and a self-starter who can
the experience of another regional center, Marcus
juggle multiple projects” while pursuing “policy and
devised a pilot program that would target people
advocacy efforts on a diverse set of issues.” To his
without college degrees who were struggling to find
delight, he got the job.
work in the region. Marcus’s interventions helped
get the company’s plan unanimously approved by
When he arrived, he was the lowest-ranking person the city council.
on his team. As such, he didn’t do much talking in
meetings. But he was able to observe whom his
When Marcus finished work for the day, he
bosses met with, from lawmakers to lobbyists to
almost always felt that he had added specific and
corporate-policy directors. He always noticed one
substantive value. Soon he was promoted to manage
group from a consumer goods company. They were
his own group, and he excelled as a people leader.
animated and passionate, and it was obvious that
He demonstrated real concern for the development
they respected one another. Most of all, everyone on
of his team members, and he thought carefully about
the team seemed to be having a good time.
how to position them for success. Alice, Marcus’s
boss, was thrilled to see him performing so well and
Eventually, Marcus left for what he thought was didn’t mind giving him credit. She sang his praises to
his dream job: working as a staff member for a US her own bosses so that they were well aware of this
House of Representatives committee. A few years star in their midst.
in, though, while doing research on a consumer
rights bill, he noticed that the consumer goods
Then Alice accepted a job as a top officer at a think
company he had admired in his previous job was
tank. As she prepared to leave, Alice’s bosses let
looking to fill a government affairs position. As
Marcus know that her vice president (VP) position
a defender of “the little guy,” Marcus had never
was his for the asking. At first, Marcus was thrilled
pictured himself working for a big corporation.
at the opportunity. In addition to the cachet of being
But on a whim, he applied, and to his surprise, he
a VP, he would receive a hefty salary increase, plus
got the job.
a large block of stock options. Yet despite his initial
excitement, Marcus found himself dreading the
Marcus was a little afraid that the job would require prospect of his promotion.
him to sacrifice some of his values, but this proved
not to be the case. In fact, he came to realize that he
Alice’s VP job was important, but it didn’t play to
could make more changes from his corporate perch
Marcus’s strengths. Alice was good at planning
than in his past job.
and strategizing. She knew how to maneuver
among senior leaders to get things done. When
In his new role, Marcus kept one foot in government Marcus came up with a great new idea inspired by
while interacting with key players across the his interactions with various constituents, she was
company. In the process, his bosses discovered that the one who could pull the right levers with senior
he had an uncanny ability to bring people from far- leaders to make it happen. But she worked with a
flung groups together to achieve common goals. His much smaller and less varied pool of people than
ability to listen and work toward solutions improved Marcus did.
how his company was perceived both inside and out.

When Marcus considered what Alice actually did all

The company enlisted Marcus’s help when its plan day, the knot of anxiety in his stomach tightened.
to build a new regional office in North Carolina faced

Middle managers are the heart of your company 71

He knew that the people he wanted to interact organizational “permafrost” that resists change and
with were the doers—his team members, the stays stubbornly in place.
researchers, the frontline community leaders—
and not just top executives. He had seen how
We find it maddening that so many corporations
Alice’s time was squeezed by endless senior-
tend to keep poorly performing managers in place
level briefings.
while promoting successful individual contributors
and managers into jobs that they find dull,
After some soul-searching, Marcus did something distasteful, and dissatisfying. It seems so obvious: if
that required a fair amount of fortitude: realizing a person is passionate about their job, then let them
that his daily job satisfaction was more important stay where they are.
to him than a higher paycheck, he declined to apply
for Alice’s job. The company hired an external
candidate as VP. Saying yes to a promotion—
and regretting it
Marcus’s bosses accepted his decision with regret, Unlike Marcus, another excellent manager was
but as they saw him expand his reach and influence unable to resist the pull of a promotion, even though
and take on increasingly complex projects, they her instincts told her to stay where she was. Her
realized that he had made the right choice. They story is all too common.
understood that moving him to a VP position
would have been a mistake, both for him and
Kelsey was a standout manager of a big-city
the company.
kindergarten through eighth grade education
center, where tutors helped children with math,
Marcus’s actions led his company to take a hard look reading, and computer skills. She hired and
at its overall promotion and compensation practices. trained the full- and part-time staff, interacted
He ended up getting a promotion without having with parents and children, and even pulled people
to move up the corporate ladder. He negotiated off the sidewalk and gave them sales pitches. She
key elements of his new role: he would have ample estimates that she put in about 20,000 steps a day
time to lead his team of people, and his VP would because she was constantly in motion.
help him manage many of the time-consuming
interactions with people more senior than him.
Because of the facility’s unique location, it served
students from some of the best and worst schools
We’ve seen star managers like Marcus throughout in the city, and yet it all just worked. The center was
our careers. They naturally attract the attention of open seven days a week, and once Kelsey worked
senior leaders who want to reward and retain stellar 23 straight days. She thrived on the intensity. She
performers, yet the reward normally comes in the still remembers one particularly busy day when she
form of a new job where these managers can no was rushing around with sweat stains under her
longer use the very skills that got them noticed in arms and a couple of pencils in her messy hair. The
the first place. It’s a huge waste of talent to see a air was filled with the excited din of children’s voices
manager who once looked forward to coming into as they worked with tutors. One of the fathers, who
work now sitting in a big, new office drowning in had initially been skeptical about sending his son to
administrative work that makes them miserable. the program, turned to her and said, “You guys do
something pretty magical here, don’t you?” To this
day, it chokes her up just thinking about it.
Meanwhile, senior leaders tend to retain middle
managers who are good at being bureaucrats,
administrators, and political players. They aren’t Then the company was bought by a larger firm.
quite bad enough to be let go, but they also aren’t That’s when the trouble began. Seeing that Kelsey
good enough to promote. They become a part of the was a star at an individual center, a newly installed

Middle managers are the heart of your company 72

executive urged her to apply for a job as a regional longer. Not much later, she quit her job and applied
manager. She got the full-court press, fancy dinner for a teaching-fellowship program at a public-school
included. So how could she say no? After all, instead system. Now she teaches junior-high English.
of being in charge of one center, she would be
overseeing eight centers. That was so much more
The sad thing, Kelsey says, is that she would have
impressive, right?
been a lifer at the for-profit education company if only
top leaders had known how to nurture and reward her
An inner voice kept saying, “Don’t do it.” But when as a middle manager.
she expressed doubts to her friends, they said,
“You’d be a fool to turn it down. You’re getting a
raise, and it will look great on your résumé.” The Waffle House way
With much of the corporate world still in the dark
So she took the job—and was miserable. about how to promote stars within the same role, we
direct attention to the promotion practices of an iconic
restaurant that gets it right.
A big part of her new job was checking in with the
managers of the other centers, making sure they
were doing their jobs properly. She also needed If you’ve driven highways in the US South, you
to ensure that they were meeting their financial most likely have stopped at a Waffle House. The
targets each month, which turned out to be beloved restaurant chain has more than 2,000
impossible because the centers were coming off an locations, primarily in states such as Florida, North
unrepeatable boom year. Carolina, Alabama, and Georgia—where the first
Waffle House opened in 1955. The chain prides
itself on its doors never closing, which makes it a
The executive who promoted her had tried to seal
favorite of long-haul truckers and just about anyone
the deal by promising that Kelsey could work from
with a 2:00 a.m. hankering for its famous waffles
home most of the time. There was just one problem:
or hash browns served “covered,” meaning topped
Kelsey didn’t like working from home. She missed
with a slice of cheese, or “chunked,” with cubes of
the conferences, the coaching, and the constant
ham added.
buzz that used to surround her each day.

New grill operators at Waffle House start with the

One day, while Kelsey was sitting alone in her
title of, well, grill operator. In addition to learning how
apartment checking out the latest profits and
to make each dish to the chain’s exacting standards,
losses, her boss called to ask her about the
they have to master Waffle House’s shorthand for
maintenance plan at one of the suburban centers.
servers to signal to grill operators what to make for
That’s when she knew she couldn’t take it much
each plate. If a plate comes to the kitchen with a

Much of the corporate world is still

in the dark about how to promote
stars within the same role.

Middle managers are the heart of your company 73

mustard packet turned up, the grill operator knows software engineers was to move them into people
the customer wants Papa Joe’s Pork Chop and management roles. When he finally realized that
Eggs; mustard packet side down means Country this assumption was misguided, he thought it
Ham and Eggs. If a plate comes in with a pat of would be enough to set up separate promotional
butter, it’s for the T-Bone and Eggs, but the location tracks for the engineers. But to his surprise, this
of the butter matters: top of the plate means well wasn’t the “build it, and they will come” scenario
done; bottom means rare. that he had envisioned. That’s because leaders
hadn’t made the changes management required
to keep these pathways fully operational and
With experience and training, these employees
attractive to employees. His star employees,
have an opportunity to rise to the level of master grill
too, needed to unlearn the idea that staying in
operator. Master operators, after passing tests that
individual-contributor roles was unacceptable. The
demonstrate their knowledge of customer service,
company needed to build a new employee value
food safety, and cooking, not to mention Waffle
proposition for its rock stars in tech who derived
House’s lore and practices, then receive a higher
their energy from technical work rather than
salary and more responsibilities.
managing others’ work.

After demonstrating further mastery of techniques

The tech executive deeply regrets not learning this
and safety certifications, as well as generating a
sooner because he knows he lost some of his best
consistent average of $6,000 in revenue per shift
talent by pushing them into management positions
(at an average price of less than $10 per order,
that were not right for them.
mind you), these grill operators receive another
generous salary boost and get to be known as
“Elvis of the grill.” While some of those who achieve We believe that organizations will reap huge
this level take on additional responsibilities to train benefits if this concept spreads to middle
newbies, the goal is to keep them doing what they management. We’ve seen it over and over in our
do best—because without quality grill operators, work: the people who excel at middle- management
the restaurants couldn’t maintain their trademark jobs are true superstars. When one department or
dishes or 24/7 schedule. team clearly stands out from the rest, more often
than not, it’s because of a superstar manager.
Once these superstars are identified, senior leaders
If Waffle House can get this concept right, why can’t
need to do everything in their power to keep them
the rest of the corporate world?
in their jobs. Levers at their disposal can include
the following:
The trades, at least, have long understood the
value of promoting people within the same job. — Salary and bonuses. This seems obvious,
Someone who trains to be an electrician is an but it’s really not. It’s ingrained in corporate
electrician for life, beginning as an apprentice, culture to pay officers, VPs, and other senior
rising to become a journeyman, and closing their leaders more than middle managers. But
career as a master electrician, with corresponding why? When appropriate, pay the best middle
jumps in pay and responsibilities. Smart companies managers even more than your senior leaders
have been applying this same concept to technical to show how much you value them. If you hear
positions by creating technical-career tracks for complaints from the executives, make up the
top performers rather than promoting them to team difference in equity. Compensation should be
lead roles that would take them away from their commensurate with the value a role creates.
excellent contributions.
— Stock and stock options. Speaking of equity,
we’ve been surprised to hear how little equity
We know of one tech executive who spent years
most middle managers receive. Often, it’s zero
thinking that the only way he could reward his best
or a pittance. Let your hardworking managers

Middle managers are the heart of your company 74

 share in the equity pot, or you might just see — Challenging assignments. Every great
them leave for a start-up that showers them manager we’ve met always has ideas about
with options. Yes, those start-up options need how to make things better. Ask your best ones
to vest, and they might end up being worthless, what they would do if they were in charge.
but they send an important message: if you Then, if they’re willing, put them in charge of
help our company succeed, you will be mightily their great idea.
rewarded for it.
— F
 lexible working arrangements. Just as
— A bigger sphere. Expand the scope or scale middle managers can make every effort to
of what someone manages without changing accommodate the needs and preferences of
the essentials of the job. School districts their reports, so can managers receive that
sometimes do this with their principals, same consideration from their bosses.
who are—when you think about it—the
quintessential middle managers. Rather than
promoting them into superintendent roles,
which removes them from the teacher–student
action, enlightened school districts will place How can you make sure you are offering the right
them in much bigger schools instead. In rewards to your most-valued managers? Here’s a
the retail sector, a company might move an thought: ask them! Some may appreciate a bump
excellent manager from a smaller store to a in salary; others may value more time off. Still
superstore or give them hiring, training, and others may want a coveted assignment or a travel
coaching duties at several additional stores. opportunity. Tailor your rewards to the priorities of
your managers.
— Title changes. In the case of a store manager,
a person’s title might change from junior The way we see it, superstars in management are
manager to senior manager to executive like the head coach of a football team. After a team
manager as their sphere of influence grows. wins the Super Bowl, team owners reward and
But these title changes can’t be no-cost empty celebrate the coach with accolades, bonuses, and
words. A new title can come with measurable a fat contract renewal. What they don’t do is show
rewards and increased responsibility while appreciation by saying, “Congratulations, I’m moving
still keeping the job’s focus at the center of you to the front office.” But that’s exactly what many
the action. companies do.

Emily Field is a partner in McKinsey’s Seattle office; Bryan Hancock is a partner in the Washington, DC, office; and Bill
Schaninger is a senior partner emeritus in the Philadelphia office.

The authors wish to thank Marino Mugayar-Baldocchi and Stephanie Smallets for their contributions to this article.

This article was adapted from Power to the Middle: Why Managers Hold the Keys to the Future of Work, by Bill Schaninger,
Bryan Hancock, and Emily Field (Harvard Business Review Press, July 2023).

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

Middle managers are the heart of your company 75

Black swans, gray
rhinos, and silver
linings: Anticipating
geopolitical risks
(and openings)
The need for board-level strategic conversations on
geopolitical risk is urgent.
by Andrew Grant, Ziad Haider, and Anke Raufuss

February 2023
Russia’s invasion of Ukraine in February 2022 Even as boards and CEOs work to build capabilities
triggered more than 1,000 companies to curtail in managing such risks and developing geopolitical
their operations in the world’s 11th biggest economy, resilience, the imperative to lift one’s gaze and look
revealing an imperative for global firms to bolster around the corner has become key to strategy and
their ability to anticipate geopolitical risk and performance. Scenario planning is squarely back.
build resilience.1
In the extensive literature on scenario planning,
The global order still reels from disruptions related notably Peter Schwartz’s The Art of the Long
to the war in Ukraine, including those in energy, View, a core point is the need to develop frame­
food security, supply chains, and more. A central works, with colorful and gripping language,
concern among global CEOs who speak with us that help leaders “reperceive” the future and
is whether and how they will contend with additional unlock strategic foresight.
geopolitical ruptures when they occur. As Japan’s
prime minister, Fumio Kishida, stated at the 2022 To facilitate such reperceiving, we outline a
Shangri-La Dialogue global security forum, “Ukraine framework for geopolitical scenario planning that
today may be East Asia tomorrow.”2 categorizes geopolitical events in three ways: black
swans,3 gray rhinos,4 and silver linings.
In between navigating the fallout from Europe and
unfolding strategic competition in Asia, multinational Evolving from scanning to planning across these
corporations must also manage a host of long-tail categories, leaders should develop lookouts as
political risks and conflicts across other geographies, an early-warning system and full-scale contingency
including Africa and South Asia. plans for a core subset of geopolitical risks.

The imperative to lift one’s gaze and

look around the corner has become
key to strategy and performance—
scenario planning is squarely back.

1
“Over 1,000 companies have curtailed operations in Russia—but some remain,” Yale School of Management, January 19, 2023; “Economy of
Russia—statistics & facts,” Statista, January 16, 2023.
2
John Chipman, “Strategic survey 2022: Strategic prospects,” International Institute for Strategic Studies, December 5, 2022.
3
Nassim Nicholas Taleb, The Black Swan: The Impact of the Highly Improbable, New York, NY: Random House, 2007.
4
Michele Wucker, The Gray Rhino: How to Recognize and Act on the Obvious Dangers We Ignore, New York, NY: St. Martin Press, 2016.

Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings) 77
The concepts “blacks swan” and “gray rhino” are Gray rhinos
widely known and intuitively understood by In contrast to the unpredictable nature of black
many corporate leaders we have engaged. We seek swans, gray rhinos are probable events with high
to go further, offering an integrated, broadly impact. We see these risks out there in the distance,
additive framework for global companies that seek but we don’t clearly perceive their full dimensions.
to distill geopolitical complexity and to structure We’re sure they will charge at us, causing material
their strategic conversations amid a fragmenting damage, but we don’t know precisely when or how
global order. much. Organizations must ensure that they have
a framework in place to clear out of the way of gray
rhinos when they charge. Sometimes, multiple
Reperceiving with multiple lenses gray rhinos may stampede simultaneously, resulting
In scanning for scenarios, organizations must first in an even more appropriately termed “crash” of
purposefully cast a wide net, rounding out their rhinos (as a group of rhinos is called).
thinking with an appropriate mixture of internal and
external perspectives. Among the gray rhinos on the global radar is the risk
of regional conflicts in Asia escalating amid broader
Internal perspectives may combine expertise in strategic competition. Other imminently charging
the organization from country team leadership rhinos may include a major escalation in the Middle
with that from internal public affairs, legal, risk, and East, with cooling relationships and international
security professionals. External perspectives may and domestic pressure against specific regimes that
range from retaining a political risk advisory cause an uptick in direct or proxy conflict.
group that has an arm’s-length view; to scanning
public source materials, such as the World Silver linings
Economic Forum’s Global Risk Report or govern­ In the maelstrom of geopolitical risks, organizations
mental sources such as the US National Intelligence must step back and calmly assess openings and
Council’s Global Trends and similar strategic opportunities that allow them to operate in a safe
assessments commissioned by EU institutions; zone and potentially garner competitive advantage.
to leveraging insights from academic, policy, These “silver linings,” as we call them, can be
media, and nonprofit arenas. fragile and readily blurred out by storm clouds, and
yet they are within the reach of leaders who exhibit
The resulting scenarios can be viewed through strategic courage amid the volatility.
three lenses:
For example, one opening around Russia’s invasion
Black swans of Ukraine has been a material disruption of Europe’s
Black swans are commonly known as unpredictable energy market and the opportunity for an accelerated
events with high impact. Notwithstanding Russia’s renewable-energy transition, whereby Europe can
overt military buildup in 2021, its proceeding to a potentially lead the world. Another silver lining when
full-scale invasion of Ukraine was arguably the core geopolitical tensions constrain supply chains is the
case study in 2022. While black swans are inherently emergence of pivot geographies, such as India and
unpredictable, pushing one’s thinking to anticipate Vietnam, as additional opportunities for investment
as wide a range of scenarios as possible is critical for amid “friendshoring.”
sound planning and preparedness. Potential black
swans could run the gamut from the political implo­
sion of a major economy; the forcible removal of a From scanning to planning
leader or a government; a significant regional military A strategic conversation about black swans, gray
conflict; an unprecedented climate event that rhinos, and silver linings should lead to an aligned
results in mass casualties, waves of migration, and understanding within an organization of which two
famine; to another pandemic. to three scenarios have the most material effect

Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings) 78
An organization should consider how to
employ its voice and how best to inform
policy makers about diligently thinking
through the potential consequences
of their decisions.

on an organization. Teams supporting leadership The CEO of a leading Asian company, for example,
should develop a set of clear lookouts for tracking shared with us how his country’s national-security
the risk scenarios and trends, whether in a leadership invited him to a briefing where the
positive or a negative direction. The lookouts central point of discussion was “which country
might include key economic, political, military, and poses the biggest threat” to their own country. He
regulatory developments. shared his bemusement at the question, saying
“Armies are always searching for enemies,” but also
Equipped with a targeted set of scenarios with key reflected philosophically on his own role, as one
lookouts, we recommend narrowing down to one of his country’s top business leaders, in informing
to two scenarios that fuse thought with action. the discussion.
Specifically, the organization should engage in active
contingency planning on a host of dimensions that As such, an organization should also consider
include data and networks, internet protocols, people, how to employ its voice, whether through its board,
partnerships, repatriation of funds, and security. CEO, public or government affairs, or business
associations—and how best to inform policy makers
about diligently thinking through the potential
Shape or be shaped? consequences of their decisions.
Anticipating the environment that can shape an
organization is critical, but many leaders we speak
with also think about defining their role in shaping
the geopolitical environment around them. All the notions we thought solid, all that made for
stability in international relations, all that made
Indeed, CEOs increasingly expect to take positions for regularity in the economy . . . in a word, all that
on geopolitical matters. According to the 2022 tended happily to limit the uncertainty of the
Edelman Trust Barometer Special Report: The morrow, all that gave nations and individuals some
Geopolitical Business, 59 percent of respondents confidence in the morrow . . . all this seems badly
state that addressing geopolitics is a top priority for compromised. Never has humanity combined
business. The point, however, is not simply about so much power with so much disorder, so much
taking a stand. Leaders within multinational corpora­ knowledge with so much uncertainty.
tions also are reflecting on appropriate ways to inform
policy in a more polarized geopolitical environment. —Paul Valéry, “Historical Fact” (1932)

Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings) 79
These words, penned in an essay nearly a century ago have the trust of the leadership—and a leadership
by French poet Paul Valéry (and excerpted from the team with a common understanding of the
opening of The Art of the Long View), resonate today. geopolitical context. This understanding, refreshed
Valéry was associated with the Symbolist movement through briefings and policy papers, enables
in poetry, a group of late 19th-century French the decision makers to think broadly, creatively,
writers who favored imagination over realism in and deliberatively.
poetry in order to access “greater truths.”
Combining those elements, we pose this two-
In our era of volatility, the need for board-level part question:
strategic conversations on geopolitical risk is vital.
These discussions should channel all participants’ What are your organization’s black swans, gray
imagination and analysis. rhinos, and silver linings, and how will you manage
and seize the corresponding risks and openings?
Doing so, of course, requires not just a compelling
framework. It also demands professionals who

Andrew Grant is a senior partner in McKinsey’s Auckland office, Ziad Haider is global director of geopolitical risk in the
Singapore office, and Anke Raufuss is a partner in the Sydney office.

The authors wish to thank Lucas Lim for his contributions to this article.

Designed by McKinsey Global Publishing

Copyright © 2023 McKinsey & Company. All rights reserved.

Black swans, gray rhinos, and silver linings: Anticipating geopolitical risks (and openings) 80
Why the path of global
wealth and growth
matters for strategy
There are four plausible scenarios for how global economics might
unfold in the next decade. Here’s how companies can chart a course.
by Michael Birshan, Jan Mischke, and Olivia White

August 2023
Recent global turbulence raises a question: Is may start to lead them astray. Companies and their
the world shifting to a new economic regime for leaders may want to prepare for what comes next.
the long run? New McKinsey Global Institute (MGI)
research and a recent McKinsey executive survey 1 In this article, we will examine the dynamics that
suggest that it might be, but the shape of that future led to the expansion of the global balance sheet.
remains uncertain. Business leaders should be We will then propose four scenarios for what
aware of potential scenarios so they can adjust and might come next, describing in broad strokes the
strategize accordingly. impact each could have on the global economy
and identifying which scenario the roughly 1,000
MGI looks at economic health and wealth through a executives and asset managers we surveyed
unique lens we refer to as the global balance sheet, consider the most likely. Finally, we will suggest
a tool we borrowed from the corporate world to sum steps business leaders could consider in order to
up all of the world’s assets and liabilities, including plan for whichever scenario prevails.
net worth. Our view through this lens indicates
that the developments of the past 20 years have
contributed to today’s economic, financial, and The winning strategies during decades
market wobbles.2 of global balance sheet expansion
Leveraged investors have done well since the start
Over the past two decades, the global balance sheet of the millennium. In the United States, for example,
grew much faster than GDP—the real economy. the market value of real estate expanded 1.5 times
Because interest rates were kept low to stimulate faster than GDP from 1995 to 2021 (Exhibit 1), and
economies, asset prices and debt grew. Between in the United Kingdom, 1.8 times faster. The value of
2000 and 2021, $160 trillion was added to paper equities in the United States grew at triple the rate
wealth as asset prices surged on the back of low of GDP.
interest rates. For every $1 in investment, $1.90 of
debt was generated. Meanwhile, productivity growth In this setting, a few strategies proved popular.
among G-7 economies slowed to a sluggish creep: Since credit was cheap, leveraged strategies and
from 1980 to 2000, productivity grew at 1.8 percent finance prevailed, including leveraged buyouts,
per year, while from 2000 to 2018, it decelerated leveraged asset strategies, rising corporate
by more than a factor of two, growing at only debt, and share buybacks. With ultralow discount
0.8 percent annually.3 Too much savings chased too rates and significant venture capital investment,
few productive investments, creating classic secular aggressive growth strategies—including, but not
stagnation.4 This stable and predictable period was limited to, technology—often beat those focused on
kind to wealth accumulation, but it was challenging early profitability and stable returns.
for growth and it exacerbated inequality.
The low cost of capital fueled a focus on how
The majority of executives today have lived most enterprises would succeed in the long term—say,
of their professional lives in this environment. But in 2050—rather than on whether they could reach
the future could be quite different, and the range of their potential for the early 2020s. New productive
plausible medium-term scenarios today is unusually investment struggled to be as compelling as the
broad. As a result, the intuition that has served opportunities awarded by asset price appreciation
many business leaders well in their careers so far and transactions. In extreme cases, businesses

1
McKinsey Executive Survey, June 2023, n = 961.
2
The rise and rise of the global balance sheet: How productively are we using our wealth?, McKinsey Global Institute, November 2021.
3
All productivity figures drawn from Alistair Dieppe, ed., Global productivity: Trends, drivers, and policies, World Bank, 2021.
4
Lawrence H. Summers, “Accepting the reality of secular stagnation,” Finance & Development, International Monetary Fund, March 2020;
Kathryn Holston, Thomas Laubach, and John C. Williams, “Measuring the natural rate of interest: International trends and determinants,”
Journal of International Economics, May 2017, Volume 108, Supplement 1.

Why the path of global wealth and growth matters for strategy 82
Web 2022
Pub-GlobalBalanceSheet2023
Exhibit 1 of 3
Exhibit 1
Growth of US assets has outpaced that of GDP since about the mid-1990s.

Change in asset value at market prices relative to nominal GDP, 1970–2021

US asset value/GDP, indexed (1995 = 100) Growth,

1995–2021, %
350

Equity +208
300

250 Currency +116

and deposits

200 Bonds +55

150 Real estate +51

100

50

0
1970 1980 1990 1995 2000 2010 2020
Source: Federal Reserve Board; national statistics offices; OECD; World Bank; World Inequality Database; McKinsey Global Institute analysis

McKinsey & Company

closed, and corporate sites were redeveloped into is disagreement among economists and business
residential real estate. leaders about what will change. Will inflation
remain high over multiple years? Will asset prices
With soft but persistent economic growth, correct and deleveraging occur? Or is the global
efficiency trumped resilience. Because labor was economy heading for a period of higher productivity
abundant, recruiting and retention efforts could and growth?
focus on the highly skilled. Wage—and, even more
so, wealth—inequality rose, prompting some MGI has developed scenarios based on each of the
sectors to focus on high-net-worth individuals and above three possibilities—and a fourth scenario
premium or luxury segments. in which the past era of balance sheet expansion
resumes (Exhibit 2). Each of these scenarios is
plausible. While structural forces, which may
Will a new balance of wealth push inflation higher, are in play, central banks’
and growth emerge? commitments to curtail inflation could cause
What comes next? After a crescendo during the corrections and deleveraging. Higher investment,
pandemic, when global wealth relative to GDP along with the continued spread of digital and AI
grew faster than during any other two-year period technologies, might boost productivity and help
in the past half century, it appears that a break in the world grow out of an outsize balance sheet (see
the two-decade trend may be coming. But there sidebar, “The four scenarios”).

Why the path of global wealth and growth matters for strategy 83
Web 2022
Pub-GlobalBalanceSheet2023
Exhibit
Exhibit 2 of23

Four broad economic and balance sheet scenarios until 2030 are possible.

Return to Higher Balance Productivity

past era for longer sheet reset acceleration

Like after the US global Like after the US oil shock, Like after the Japan real Like the US after World
financial crisis, late 1970s estate bubble, 1990s War II, late 1940s–50s
2000s–10s

What Back to weak Strong desired Fiscal and monetary Technology deployment
would investment and investment and tightening; financial- and productive
happen savings glut consumption despite system “accidents” investment
growth headwinds

What it Sluggish growth, rising Gains in nominal wealth Asset correction and Growth in real wealth,
means wealth on paper, growing but loss in real wealth balance sheet stress declining balance
balance sheet risk sheet risk

Growth1 Slightly below trend2 About 0–1 percentage About 1 pp below trend About 1 pp above trend
points (pp) above trend

Inflation1 About 0–1 pp About 2 pp About 1 pp below target About 1 pp

below target3 above target after initial spike4 above target

Real rate1 About –1%5 About 0% About –1 to 0% About 1%

(after an initial spike)

Change in 2030 outcomes by scenario, US

Real GDP +1.0

growth
(2022–30
average), pp +0.2
Baseline:
1.5%6
–0.4
–0.6

Household +44
wealth,7 $
+17
2022 value:
$147 trillion
–8
–31

Primary Asset price inflation, Inflation dampening Asset correction Productive new
channel “wealth illusion” real value of wealth capital formation
of wealth
adjustment

¹The 2022–30 average. ²Assuming a return to 2008–16 average after 2023. 3 2% US inflation target. 4The 2022–30 average here is 0–1 pp above target due to
this initial spike. 5Central bank policy rates. 6All figures in terms of 2022 dollars. Average forecasted growth over 2022–30 by Federal Reserve Board according
to Federal Open Market Committee Mar 2023 projections. 7All figures in terms of 2022 dollars.
Source: Federal Reserve Board; McKinsey Global Institute Global Balance Sheet (GBS) model; McKinsey Global Institute analysis

McKinsey & Company

Why the path of global wealth and growth matters for strategy 84
The four scenarios

Return to the past era national defense. To avoid endangering This scenario serves a double dose of
It is possible that today’s volatility and financial stability, short-term interest poison: wealth would take a hit (as in the
elevated inflation will prove temporary, rates would settle higher and would not “higher for longer” scenario), and growth
and the global economy will return to the contain inflation. would be dampened (as in the “return to
patterns of the past 20 years. This would the past era”). If this unfolds, the world
Inflation would lower the burden of debt
occur if weak investment and a glut of could find itself in a “lost decade” of
but also the real value of wealth, similar to
savings bring about slow GDP growth and growth, as Japan did in the 1990s when its
the situation in the United States after the
low interest rates. Inflation would decline real estate and equity bubbles burst.
1970s oil shock (although then, inflation
to below 2 percent over the next two
was around 9 percent, more than double Productivity acceleration
years, real interest rates would turn slightly
what is expected in this scenario). The By far the most desirable outcome
negative, and mediocre GDP growth would
lack of price stability in this scenario, a would be to accelerate productivity
resume. As debt and asset prices rise, the
result of continued inflation, would pose so that economic growth catches up
expansion of the global balance sheet
challenges. But it would be accompanied with the balance sheet. Technology
would resume. Overall, real household
by solid income growth, positive (albeit not deployment and productive investment
wealth would grow by a cumulative
impressive) growth in wealth, and a more would accelerate growth by about one
28 percent, or $40 trillion on paper, with
sustainable balance sheet. percentage point above past trends.
rising wealth inequality.
Growth in supply would help bring inflation
Balance sheet reset
For many stakeholders, from asset down to target, while interest rates would
It is also possible that in an attempt to
managers to real estate investors, this may stay one percentage point above inflation.
curtail inflation, central banks would
seem like an attractive prospect because The balance sheet would grow but less
keep tightening. Rising rates would lead
wealth would continue to grow. But in quickly than GDP. Strong growth would
to further stresses—or even failures—in
this scenario, rising wealth would come boost equity prices by about one-third
financial systems, asset values would
at the expense of real economic output, in inflation-adjusted terms in the United
correct sharply, and the world would enter
and the risk of financial stress and future States, while higher real interest rates
a drawn-out deleveraging process. Real
corrections would continue to grow. would put a cap on real estate prices.
estate and equity values in the United
Higher for longer States would fall by more than 30 percent, Only this scenario, which resembles
In this scenario, consumer demand would and real household wealth would drop by the situation in the United States in the
be strong, and investment would pick up. a cumulative 20 percent. Nonperforming late 1990s, combines strong growth
Inflation would settle at about 4 percent loans would increase, and a wave of debt in income, wealth, and balance sheet
as tight labor supply continues and restructurings and defaults would roll health. Optimistic business leaders are
investment flows to the net-zero transition, through the system. anticipating this “Goldilocks” result.
supply chain reconfiguration, and

When MGI asked roughly 1,000 executives which varied by sector and by geography. The financial-
scenario they thought most likely, 84 percent of services executives who participated in our larger
respondents said they expected a scenario different survey, plus a group of about 50 C-suite executives
from that of the past era. Their choices of most likely of large asset managers we surveyed separately,
scenario were divided roughly equally between thought it was more likely that a “higher for longer”
the remaining three options (Exhibit 3). Responses scenario would prevail, where inflation and interest

Why the path of global wealth and growth matters for strategy 85
 Web 2022
Pub-GlobalBalanceSheet2023
Exhibit 3 of 3
Exhibit 3

Less than 20 percent of executives surveyed expect a return to the past era.

Survey on expectations for economic outlook, % of responses ranking scenario as most likely1

Return to past era Higher for longer Balance sheet reset Productivity acceleration
Like after the US global Like after the US oil Like after the Japan Like the US after World
financial crisis, late 2000s–10s shock, 1970s real estate bubble, 1990s War II, late 1940s–50s

Region Greater
China2 21 39 26 13

North
America 7 35 35 23

Europe 14 29 35 22

Sector Financial
services 13 37 24 25

Other 15 28 32 25

Overall Global 16 29 30 24

Note: Figures may not sum to 100%, because of rounding.

¹Question asked: “Please look at the following scenarios for the global economy and rank them in order of how well they describe your outlook for the next
decade. Do not rank any scenario you think has no likelihood of occurring.”
2
Includes Hong Kong and Taiwan.
Source: McKinsey Executive Survey, June 2023 (n = 961)

McKinsey & Company

rates stay elevated for much of the coming decade. This could change if productive investment picks
Respondents in Greater China also favored the up. The net-zero transition will require large outlays.
“higher for longer” scenario, while a plurality of Recent stress in supply chains, both as the result
those in Europe selected “balance sheet reset.” of the COVID-19 pandemic and Russia’s invasion
North Americans were divided between these of Ukraine, have drawn attention to supply chain
two scenarios. resilience; some are being reconfigured, which
takes investment. Greater defense spending may
also represent an area for investment. In the United
Why the next era may be different States, the Infrastructure Investment and Jobs
Few respondents expect a return to the past, which Act could prompt a boom in large-scale
is likely a reflection of the numerous long-term infrastructure investment.
structural shifts that appear to be under way. How
these will play out is, of course, uncertain. The global savings glut may wane. One factor
boosting savings was the fact that inequality rose,
The continuous rise of the global balance sheet over and the labor share of income declined, reducing
the past two decades has essentially been driven consumption by channeling a disproportionate
by limited investment for productive uses and a glut share of value creation to the wealthy, who tend to
of savings, which lowered interest rates and fueled save more than the average person. Labor markets
debt expansion and asset price growth. are now tight, which may tip the balance toward
higher consumption. Aging populations have

Why the path of global wealth and growth matters for strategy 86
When MGI asked roughly 1,000
executives which scenario they thought
most likely, 84 percent of respondents
said they expected a scenario
different from that of the past era.

been saving and have not been spending those mandate, but they also tend to have a financial
savings in retirement, but that, too, might change. stability mandate—two directives that are
A rising dependency ratio means that the share increasingly in tension.5 What discussions are
of people spending their retirement money rises taking place about the trade-offs?
while the share of those saving while they work
declines (though this is a matter of some debate — Fiscal policy stances. Fiscal tightening could
among economists). have significant impact on inflationary pressure
as interest rate increases face the above
financial stability concerns. Where, and to what
How can businesses equip themselves? degree, is tightening likely to happen?
The macroeconomic patterns of the past 20 years
may be over, but the range of possible economic — Business investment. Are commitments, and
scenarios between now and 2030 is broad. It actual investments, picking up materially—say,
makes sense, therefore, for company leaders in by two percentage points of GDP or more?
any kind of business to lay the groundwork for If so, the odds of moving toward accelerated
a potentially different future and to be ready to productivity rise, and a return to balance sheet
operate under uncertainty. expansion becomes unlikely.

Additional markers also matter, including wage

Track the right markers and bargaining-power dynamics, profits, and
inequality; the relative shifts in effective retirement
As a first step, businesses should consider
ages versus life expectancy; and geopolitics and
identifying a broad set of markers that will help
global flows. Because any one of the four scenarios
them ascertain which scenario is more likely to
may occur, it would behoove businesses to track
occur. Many executives look at the latest inflation
these trend indicators and gather a diversity of
numbers but miss more fundamental markers that
economic perspectives rather than simply rely on
distinguish between scenarios. Examples of some
“consensus” forecasts.
of the more important ones include the following:

— Central bank trade-offs. Many central banks

are independent and have a clear price stability

5
See, for example, “Three uncomfortable truths for monetary policy,” remarks by IMF first deputy managing director Gita Gopinath for the
European Central Bank Forum on Central Banking, June 2023.

Why the path of global wealth and growth matters for strategy 87
Pressure-test the business from growth and high capital expenditure
for what might come and shield themselves from rising input and
Businesses, including financial institutions, can labor costs. Scale will matter more to protect
consider going beyond the typical sensitivities they margins. In an environment of rising cost and
test in their risk management and use these four rates, locking in favorable conditions would
scenarios to pressure-test business models. Firms be attractive, from long-dated maturities in
may also think about beefing up equity buffers, financing to long-term contracts for labor and
strengthening balance sheets, and/or hedging suppliers. Firms could also strengthen their
macro risk, among other considerations. focus on catering to the affordable end of the
market as inequality falls. Investors seeking
to protect assets and wealth from inflationary
Understand how strategy would erosion would also find an environment of
transform depending on the scenario higher yields. Financial institutions would need
to rethink business models hardwired to ever-
Some firms may want to bet on one scenario, while
growing balance sheets. Banks, for instance,
others may opt to build optionality and robustness
could seek to complement net interest income
for several. A return to the past era is, essentially,
with more fee-based business models and rely
business as usual, with all the risks that this entails.
less on wealth management for the wealthy.
To prepare for the three options that propose
significant change, specific actions may be needed:
— Balance sheet reset. A flexible cost base,
reduced debt exposure, and “fortress balance
— Higher for longer. In this scenario, a number of
sheets” could help businesses build resilience
the capabilities necessary to navigate the past
in this scenario. Businesses could also consider
couple of years would become the “new normal”
how they can ensure that their cost base is
of competitive differentiation. Businesses
flexible in case of a sharp economic slowdown.
could take a three-pronged approach of pricing,
They may also reduce debt, limit exposure to
procurement, and productivity to respond to
market prices in equity and real estate, and
higher input prices and wages. They could also
identify debtors who may struggle to repay
alter the mix of the business portfolio to benefit

Businesses, including financial

institutions, can consider going beyond
the typical sensitivities they test in
their risk management and use these
four scenarios to pressure-test
business models.

Why the path of global wealth and growth matters for strategy 88
 in such a scenario. Fortress balance sheets If firms plan solely for a slowdown in GDP growth
could help weather the storm and enable or a recession, they will be less likely to invest
opportunistic response when distressed and more likely to wait for more benign economic
M&A opportunities emerge. In a similar vein, conditions. If they expect persistent inflation, they
investors would seek protection from asset may proactively raise prices and cause the inflation
corrections and defaults; holding cash would not they fear. If real estate investors expect lower
be the worst option in this scenario. Financial prices, they may delay starting new projects. Banks
institutions might live through a situation not focused on strengthening their balance sheets
unlike the years after the 2008–09 financial could tighten lending standards, reducing the
crisis. There could be substantial opportunities number of loans they offer.
for consolidation and M&A, including situations
of distress, making preparation essential. To help catapult the economy into faster
productivity growth, it will be critical to play offense,
— Productivity acceleration. To benefit from too. Businesses need strategic courage to invest
growth acceleration, it would make sense boldly in emerging opportunities and to commit
to invest in technology, new capacity, and to the human capital needed to power these
automation to capture market growth ahead investments. These opportunities can be found in
of competitors. Companies that are driving well-known megatrends like the energy transition
the productivity acceleration—for example, and electrification, aging and healthcare, more
through providing new technologies—may resilient supply chains, rising defense investments,
capture significant value. Since human and new technologies like AI. How firms deal with
capital and materials could be in short supply, inflation also matters: the more they manage to
businesses should consider how to lock in raise labor, materials, and energy productivity, the
access to what may well be a highly competitive more they can afford to pay higher wages and prices
market for both. As interest rates rise, firms without passing higher costs onto consumers.
would be wise to secure long-term financing
early. Investors could find opportunities Pessimism is rife at the moment, but it is possible
in growth equities and face interest rate for a productivity acceleration scenario to unfold.
headwinds in real estate. Financial institutions Indeed, about one-quarter of executives polled in
could engage in ample opportunities for capital MGI’s survey consider it the most likely one of the
project and business finance. four, and many believe that it can happen provided
the right actions are taken.

Firms are not passive spectators but

rather participants whose collective
actions shape which scenario unfolds Adjusting to a new era can be difficult and
In the midst of uncertainty and economic pressure, prolonged. It demands revisiting assumptions and
it can be all too easy for companies to be purely modifying planning, strategy, and business models.
defensive, seeking to mitigate negative impacts Few anticipate a return to business as usual. That
on their business and to build resilience. But sense of realism is a useful starting point.
playing pure defense could turn into a self-fulfilling
prophesy of doom and gloom.

Michael Birshan is a senior partner in McKinsey’s London office, Jan Mischke is a partner in the Zurich office, and Olivia
White is a senior partner in the Bay Area office.

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