McKinsey on Finance
Number 44,
Summer 2012
Perspectives on
Corporate Finance
and Strategy
2
11
20
Overcoming a bias
against risk
How strategists
lead
7
17
A yen for global
growth: The Japanese
experience in
cross-border M&A
Avoiding a risk
premium that
unnecessarily kills
your project
Not enough comps
for valuation?
Try statistical
modeling
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Illustrations by Ken Orvidas
1
McKinsey on Finance
Number 44, Summer 2012
2
7
11
Overcoming a bias
against risk
Avoiding a risk
premium that
unnecessarily kills
your project
How strategists lead
Risk-averse midlevel
managers making routine
investment decisions
can shift an entire company’s risk profile. An
organization-wide stance
toward risk can help.
Too high a discount rate
can make good projects
seem unattractive. How
high is too high?
17
20
Not enough comps
for valuation? Try
statistical modeling
A yen for global
growth: The Japanese
experience in
cross-border M&A
Traditional approaches
rely on data from
comparable businesses—
but such data aren’t always
available. Statistical
modeling can broaden the
comparison while
controlling for differences.
Japanese companies have
embarked on an increasing
number of international
acquisitions in recent
years. Can they learn from
past failures and create
value from cross-border
deals?
A Harvard Business
School professor reflects
on what she has learned
from senior executives
about the unique value that
strategic leaders can
bring to their companies.
Interested in reading McKinsey on Finance online?
E-mail your name, title, and the name of your
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and we’ll notify you as soon as new articles
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2
McKinsey on Finance Number 44, Summer 2012
Overcoming a bias
against risk
Risk-averse midlevel managers making routine investment decisions can shift an
entire company’s risk profile. An organization-wide stance toward risk can help.
Tim Koller,
Dan Lovallo, and
Zane Williams
Here’s a quick test of your risk appetite. Your
might lead managers to overstate the likelihood of
investment team has approached you with two
a project’s success and minimize its downside.1
variations of the same project: you can either
Such biases were certainly much debated during
invest $20 million with an expected return of
the financial crisis.
$30 million over three years or you can invest
$40 million with an expected return of $100 million
Often overlooked are the countervailing behavioral
over five years (and a bigger dip in earnings in
forces—amplified by the way companies struc-
the early years). In each case, the likelihood that
ture their reward systems—that lead managers to
the project will fail and yield nothing is the
become risk averse or unwilling to tolerate
same. Which would you choose?
uncertainty even when a project’s potential earnings
are far larger than its potential losses.2 In fact,
Much of the commentary about behavioral
the scenario above is based on the experience of a
economics and its applications to managerial
senior executive in a global high-tech company
practice, including our own, warns against
who ultimately chose the smaller investment with
overconfidence—that biases in human behavior
the lower up-front cost. That variation of the
3
project would allow him to meet his earnings
In contrast, midlevel executives making repeated
goals, and even though the amount of additional
decisions about the many smaller investments
risk in the second variation was small—and
that a company might make during the course of a
more than offset by a five-fold increase in the net
year—expanding a sales force at a consumer-
present value—it still outweighed the potential
goods company into a new geography, for example,
rewards to him.
or introducing a product-line extension at an
electronics firm—should be risk neutral. That is,
For projects of this size at a large company,
they should not overweight negative or positive
the profit forgone by choosing a safer alternative—
outcomes relative to their actual likelihood of
putting less money at risk with a shorter time to
occurrence. Decisions about projects of this size
payoff—is modest: in this case, about $20 million.
don’t carry the risk of causing financial distress—
But the scenario becomes more worrying
and aversion to risk at this level stifles growth and
when you consider that dynamics like this play out
innovation. Risk aversion is also unnecessary
many times per year across companies, where
because statistically, a large number of projects are
decisions are driven by the risk appetite of individual
extremely unlikely all to fail (unless they are
executives rather than of the company as a
highly correlated to the same risks). Yet many
whole. In a single large company making hundreds
managers at this level—who make many such
of such decisions annually, the opportunity
investments over a career—exhibit an unwarranted
cost would be $2 billion if this were to happen even
aversion to risk.
20 times a year over five years. Variations of this
scenario, played out in companies across the
In fact, we frequently run across CEOs stymied by
world, would result in underinvestment that would
their company’s struggle with risk; decisions
ultimately hurt corporate performance, share-
that may be in the best interest of individual execu-
holder returns, and the economy as a whole.
tives, minimizing the risk of failure, are actually
Mitigating risk aversion requires that companies
manufacturing company observed, his company’s
harmful for their companies. As the CEO at a
rethink activities associated with investment
business unit–level leaders gravitate toward
projects that cause or exacerbate the bias, from the
relatively safe, straightforward strategies with
processes they use to identify and evaluate
earnings goals that seem reachable, even if
projects to the structural incentives and rewards
these strategies mean slower growth and lower
they use to compensate managers.
investment along the way. We have also heard
from many nonexecutive board members that their
A widespread challenge
companies are not taking enough risks.
The right level of risk aversion depends on the
size of the investment. CEOs making decisions
Their anecdotal observations are consistent
about large, unique investments are typically
with findings we reported last year that suggested
more risk averse than overconfident—and they
executives are as risk averse about small invest-
should be, since failure would cause financial
ments as they are about large ones.3 When we tested
distress for the company.
how 1,500 executives from 90 countries reacted
to different investment scenarios, we discovered
4
McKinsey on Finance Number 44, Summer 2012
that they demonstrated extreme levels of risk
money, we would expect a risk-neutral manager
aversion regardless of the size of the investment,
to be indifferent to the project—because the
even when the expected value of a proposed
potential gains are equal to the potential losses.
project was strongly positive. Specifically, when
If the upside were greater than $100 million,
presented with a hypothetical investment
we would expect the same manager to make the
scenario for which the expected net present value
investment. However, the upside would have
would be positive even at a risk of loss of 75 per-
to be almost $170 million to entice the typical risk-
cent, most respondents were unwilling to accept it
averse manager to make the investment. In
on those terms. Instead, they were only willing
other words, the upside would have to be about
to accept a risk of loss from 1 to 20 percent—and
70 percent larger in order for that manager
responses varied little, even when the size
to overcome his or her aversion to risk.
of the investment was smaller by a factor of 10.
This is almost shocking, as it suggests that
But what if we were to pool these risks across
the level of risk aversion is remarkably constant
multiple projects? If the same manager faced not
within organizations, when it should vary
1 decision but 10, the story would change. The
based on the size of the investment and its
manager’s range of outcomes would no longer be
potential to cause financial distress.
an all-or-nothing matter of success or failure,
but instead a matter of various combinations of
Understanding the source of risk aversion
outcomes—some more successful, some less.
Much of the typical risk aversion related to
In this case, the same manager would be willing
smaller investments can be attributed to a combi-
to invest if the upside were only $103 million,
nation of two well-documented behavioral
or only 2 to 3 percent above the risk-neutral point.
biases. The first is loss aversion, a phenomenon in
In other words, pooling risks leads to a striking
which people fear losses more than they value
reduction in risk aversion.
equivalent gains. The second is narrow framing,
in which people weigh potential risks as if
Many of the managerial tactics used by companies
there were only a single potential outcome—akin
in their capital-allocation and evaluation
to flipping a coin only once—instead of viewing
processes fail to take note of these basic behaviors.
them as part of a larger portfolio of outcomes—akin
By considering the success or failure of projects
to flipping, say, 50 coins. Together, these two
in isolation, for example, they fail to understand
biases lead to a distinctive set of preferences out-
how each will add risk to the company’s overall
lined in Daniel Kahneman and Amos Tversky’s
portfolio and institutionalize a tendency toward
prospect theory, which was largely the basis for
risk aversion, essentially recreating the narrow
Kahneman’s 2002 Nobel Prize in Economics. 4
framing that occurs at the individual level.
To make matters worse, many companies also
Consider a simple example of a risk-averse
hold individuals responsible for the out-
manager5 weighing whether to invest $50 million
comes of single projects that have substantial
today in a project that has an equal likelihood
uncertainty and fail to distinguish between
of returning either $100 million or $0 a year from
now. If we were to ignore the time value of
“controllable” and “uncontrollable” events, leaving
people accountable for outcomes they cannot
5
Overcoming a bias against risk
influence. As a result, many companies wind up
drivers such as penetration rates, prices, and
with risk aversion at the corporate level that
production costs. For example, when evaluating
resembles that at the individual level—squandering
the introduction of a new consumer-goods
the risk-bearing advantages of size and risk
product, managers should explicitly consider what
pooling that should be one of their greatest stra-
a “home run” scenario would look like—one
tegic advantages. In fact, many companies
with high market share or high realized unit prices.
seem to exacerbate loss aversion, which is the
They should also look at a scenario or two that
primary driver of risk aversion.
captures the typical experience of product intro-
Toward a company-wide approach to risk
By forcing this analysis, executives can ensure that
ductions, as well as one scenario where it flops.
Companies can reduce the effects of risk aversion,
the likelihood of a home run is factored into the
where appropriate, by promoting an organization-
analysis when the project is evaluated—and they
wide attitude toward risk that guides individual
are better able to thoughtfully reshape projects to
executive decisions. More specifically, companies
capture the upside and avoid the downside.
should explore the following:
Avoid overcompensating for risk. Managers
Up the ante on risky projects. Risk-averse
should also pay attention to the discount rates
organizations often discard attractive projects
they use to evaluate projects. We repeatedly
before anyone formally proposes them.
encounter planners who errantly use a higher
To encourage managers and senior executives to
discount rate simply because an outcome
explore innovative ideas beyond their comfort
is more uncertain or the range of possible out-
levels, senior executives might regularly ask them
comes is wider (see “Avoiding a risk premium
for project ideas that are risky but have high
that unnecessarily kills your project,” page 7).
potential returns. They could then encourage
Higher discount rates for relatively small but
further work on these ideas before formally
frequent investments, even if they are
reviewing them. They could also require managers
individually riskier, do not make sense once
to submit each investment recommendation
projects are pooled at a company level.
with a riskier version of the same project with
more upside or an alternative one.
Instead, if companies are concerned about risk
exposure, they might adopt a rule that any
Consider both the upside and downside.
investment amounting to less than 5 to 10 percent
Executives should require that project plans include
of the company’s total investment budget
a range of scenarios or outcomes that include
must be made in a risk-neutral manner—with
both failure and dramatic success. Doing so will
no adjustment to the discount rate.
enable project evaluators to better understand
their potential value and their sources of risk.
Evaluate performance based on portfolios of
outcomes, not single projects. Wherever possible,
These scenarios should not simply be the baseline
managers should be evaluated based on
scenario plus or minus an arbitrary percentage.
the performance of a portfolio of outcomes, not
Instead, they should be linked to real business
punished for pursuing more risky individual
6
McKinsey on Finance Number 44, Summer 2012
projects. In oil and gas exploration, for example,
The corporate center must play an active role in
executive rewards are not based on the per-
implementing such changes—in setting policy,
formance of individual wells but rather on a fairly
facilitating risk taking, and serving as a resource
large number of them—as many as 20, in one
to help pool project outcomes. It will need
company. Hence, it may not be surprising to find
to become an enabler of risk taking, a philosophy
that oil and gas executives pool risks and are
quite different from that currently expressed
more risk neutral.
by many corporate centers. The office of the CFO
should also be involved in oversight, since it
Reward skill, not luck. Companies need to better
is particularly well suited to serve as manager of a
understand whether the causes of particular
company’s portfolio of risks, making trade-
successes and failures were controllable or uncon-
offs between them and taking a broader view of
trollable and eliminate the role of luck, good or
projects and the effects of risk pooling.
bad, in structuring rewards for project managers.
They should be willing to reward those who
execute projects well, even if they fail due to anticipated factors outside their control, and also to
discipline those who manage projects poorly, even
if they succeed due to luck. Although not always
easy to do, such an approach is worth the effort.
1Daniel Kahneman and Dan Lovallo, “Delusions of success:
How optimism undermines executives’ decisions,” Harvard
Business Review, July 2003.
2Daniel Kahneman and Dan Lovallo, “Timid choices and bold
forecasts: A cognitive perspective on risk taking,” Management
Science, January 1993.
3Tim Koller, Dan Lovallo, and Zane Williams, “A bias against
investment?” McKinsey on Finance, Number 41, Autumn 2011.
4Daniel Kahneman and Amos Tversky, “Prospect theory: An
analysis of decision under risk,” Econometrica, 1979, Volume 47,
Number 2, pp. 263–91.
5That is, a manager with a standard concave utility curve of the
type U(x) = x.575 in the domain of gains.
Tim Koller ([email protected]) is a partner in McKinsey’s New York office, where Zane Williams
([email protected]) is a senior expert. Dan Lovallo is a professor at the University of Sydney Business
School, a senior research fellow at the Institute for Business Innovation at the University of California, and an
adviser to McKinsey. Copyright © 2012 McKinsey & Company. All rights reserved.
7
Avoiding a risk premium that
unnecessarily kills your project
Too high a discount rate can make good projects seem unattractive.
How high is too high?
Ryan Davies,
Marc Goedhart,
Tim Koller
CEOs are naturally wary of some investments.
in business school, they bump up the assumed
Large capital projects in politically unstable
discount rates in their cost-of-capital calculations
countries, common among companies in the mining
to reflect the uncertainty of the project. In doing so,
and oil and gas sectors; speculative R&D projects
they often unwittingly set these rates at levels
in high tech and pharmaceuticals; and acquisitions
that even substantial underlying risks would not
of unproven technologies or businesses in a
justify—and end up rejecting good investment
wide range of industries all carry what many see as
opportunities as a result.1 What many don’t realize
an above-average degree of risk. The potential
is that assumptions of discount rates that are
returns are alluring, but what if the projects fail?
only 3 to 5 percentage points higher than the cost
Weighing the pros and cons of such deals, exe-
expected value. Adding just 3 percentage points to
cutives delve into the usual cash-flow projections,
an 8 percent cost of capital for an acquisition,
where they often make one seemingly small
for example, can reduce its present value by 30 to
adjustment: forgetting what many of them learned
40 percent (depending on its long-term growth rate).
of capital can significantly reduce estimates of
8
McKinsey on Finance Number 44, Summer 2012
Moreover, increasing the discount rate embeds
goes well. Managers, realizing this, increase
opaque risk assumptions into the valuation process
the discount rate to compensate for the potentially
that are often based on little more than a gut
overstated cash flows.2
sense that the risk is higher. The problem arises
because companies take shortcuts when they
A better approach for determining the expected
estimate investment cash flows. To calculate net
value of a project is to develop multiple cash-
present value (NPV), project analysts should
flow scenarios, preferably including at least one
MoF 44 2012
discount the expected cash flows at an appropriate
Risk weighting
cost of capital. In many cases, though, they use
Exhibit 1 of 2
only estimates of cash flow that assume everything
Exhibit 1
downside case, value them at the unadjusted
cost of capital, and then calculate the average
weighted by the probability that each will happen
Risk-weighted scenarios are more nuanced than adding
a premium to the discount rate.
Approach 1: using a probability-weighted scenario
$ million
Expected NPV1
Probability of
scenario2
NPV at 8%
WACC3
Cash flows
Year 1
Year 2
Year 3
Base case:
50%
1,667
100
102
104
Downside case:
50%
1,000
60
61
62
...
1,333
Approach 2: adding a premium to the discount rate
$ million
Risk premium
1 Net
NPV at 8% WACC plus
risk premium
1.5 points
1,333
3.0 points
1,001
5.0 points
909
present value.
case assumes cash-flow growth in perpetuity of 2%; downside case assumes 40% slower cash-flow growth. Both cases exclude
cash-outlay up-front investment; with up-front investment included, drop in NPV would be even more dramatic in percentage terms.
3Weighted average cost of capital.
2Base
9
Avoiding a risk premium that unnecessarily kills your project
MoF 44 2012
Risk weighting
Exhibit 2 of 2
Exhibit 2
Small changes in discount rate imply unrealistic
expectations of failure.
%
Illustrative premium for risk
above cost of capital
Size of cash-flow reduction
Probability of lower
cash flow
20
40
60
80
100
10
0.1
0.2
0.4
0.5
0.7
20
0.2
0.5
0.8
1.1
1.5
30
0.4
0.8
1.3
1.9
2.6
40
0.5
1.1
1.9
2.8
4.0
50
0.7
1.5
2.6
4.0
6.0
A 1.5% risk premium added to
an 8% cost of capital is the same
as assuming even odds that an
investment will lose 40% of its value
A 6% risk premium is the
same as assuming even odds
that it will lose all its value
1 Assuming
a smooth cash-flow profile, 8% weighted average cost of capital, 2% terminal growth, binomial outcome; in real
life, the cash-flow profile of the investment may provide additional complications: the more back-weighted the expected payback,
the lower the increment on the discount rate needed to reflect higher risk.
(Exhibit 1). This approach has a number of
practical advantages:
flexibility into a project with options for stepwise investments, scaling up in case of success
and scaling down in case of failure. Creating
• I t provides decision makers with more information. Rather than being presented with a project
such real options can significantly increase the
value of projects.
with a single-point estimate of expected value—
say, $100 million—decision makers know that
• It acknowledges the full range of possible outcomes.
there is a 20 percent chance that the project’s
When project advocates submit a single scenario,
NPV is –$20 million and an 80 percent chance it
they need it to reflect enough upside to get it
is $120 million. This encourages dialogue
approved—but also enough realism that they can
about the risk of the project by making implicit
commit to its performance targets. That often
risk assumptions explicit.
results in poor compromise scenarios. If advocates
present multiple scenarios, they can show a
• I t encourages managers to develop strategies to
mitigate specific risks, explicitly highlighting
project’s full upside potential, as well as realistic
project targets that they can truly commit to—
the value of a failed project or a smaller degree of
while also fully disclosing a project’s potential
success. For example, they might build more
downside risk.
10
McKinsey on Finance Number 44, Summer 2012
Managers applying the scenario approach should
Marking up discount rates is a crude way to
be wary of overly simplistic assumptions of,
include project-specific uncertainty in a valuation.
say, a 10 percent increase or decrease to the cash
Scenario-based approaches have the dual
flows. A good scenario analysis will often lead
appeal of better answers and more transparency
to a high case that is many multiples of the typical
on the assumptions embedded within them.
“base” case. It will often also include a scenario
with a negative NPV. In addition, there may not be
a traditional base case. For many projects there
is only big success or failure, with low likelihood
that a project will just barely earn more than
the cost of capital.
1Marc Goedhart and Peter Haden, “Are emerging markets as risky
as you think?”, McKinsey on Finance, Number 7, Spring 2003.
2Adding a premium to the cost of capital may be appropriate for
nondiversifiable or systemic risks, depending on the expected
correlation of cash flows to stock market and economic activity,
or beta. While this premium can easily be 5 to 10 percent, it
has nothing to do with the probability of failure for a business
or project.
Managers who insist on adjusting the discount rate
instead of evaluating scenarios should at least
calibrate their markup to their best estimate of the
amount that cash flows could fall below basecase assumptions and the probability of such drops
occurring. Actual values will vary depending
on the assumed cash-flow profile, cost of capital,
and estimated terminal growth, but for illustrative purposes, if you believed that there was a
50 percent chance that cash flows would be
40 percent below the base case, you would only
want to increase the discount rate by 1.5 percent—
far below what we’ve seen many managers
propose. Exhibit 2 shows appropriate discountrate increments given fixed assumptions for
cost of capital and cash-flow profile.
Ryan Davies ([email protected]) is a consultant in McKinsey’s New York office, where Tim Koller
([email protected]) is a partner. Marc Goedhart ([email protected]) is a senior expert in the
Amsterdam office. Copyright © 2012 McKinsey & Company. All rights reserved.
11
How strategists lead
A Harvard Business School professor reflects on what she has learned
from senior executives about the unique value that strategic leaders can bring
to their companies.
Cynthia Montgomery
In this article, reprinted from the McKinsey Quarterly,
to the discussion. Of particular interest is her
Harvard Business School Professor Cynthia
discussion of overconfidence, which she encounters
Montgomery discusses how a strategist leads. At
among executive-level decision makers facing the
the heart of her argument is a simple observation:
bigger investments that help define the business—
it is the strategist who must make the vital choices
and that can make or break a company. Her
that determine a company’s very identity, who
observations complement our own discussion of
says, “This is our purpose, not that. This is who we
the risk-aversion bias, which we find common
will be. This is why our customers and clients
among lower-level managers making frequent, smaller
will prefer a world with us rather than one without
investment decisions (see “Overcoming a bias
us.” Being a meaning maker plays out in the
against risk,” page 2).
strategist’s role as a voice of reason in the face of
overconfidence and when working as an operator,
bridging the gap between strategy and operations.
Seven years ago, I changed the focus of my
While Montgomery does not address CFOs
strategy teaching at the Harvard Business School.
specifically, these are roles that will ring true for these
After instructing MBAs for most of the
leaders, who bring hard data and sound analytics
previous quarter-century, I began teaching the
12
McKinsey on Finance Number 44, Summer 2012
accomplished executives and entrepreneurs
Harvard Business Review article four years ago
who participate in Harvard’s flagship programs
and in my new book, The Strategist, whose
for business owners and leaders.
thinking this article extends.1 After all, defining
what an organization will be, and why and to
Shifting the center of my teaching to executive
whom that will matter, is at the heart of a leader’s
education changed the way I teach and write about
role. Those who hope to sustain a strategic
strategy. I’ve been struck by how often executives,
perspective must be ready to confront this basic
even experienced ones, get tripped up: they become
challenge. It is perhaps easiest to see in single-
so interested in the potential of new ventures, for
business companies serving well-defined markets
example, that they underestimate harsh competi-
and building business models suited to particular
tive realities or overlook how interrelated stra-
competitive contexts. I know from experience,
tegy and execution are. I’ve also learned, in conver-
though, that the challenge is equally relevant at
sations between class sessions (as well as in
the top of diversified multinationals.
my work as a board director and corporate adviser),
about the limits of analysis, the importance of
What is it, after all, that makes the whole of a
being ready to reinvent a business, and the ongoing
company greater than the sum of its parts—and
responsibility of leading strategy.
how do its systems and processes add value
to the businesses within the fold? Nobel laureate
All of this learning speaks to the role of the
strategist—as a meaning maker for companies, as
Ronald Coase posed the problem this way:
“The question which arises is whether it is possible
a voice of reason, and as an operator. The richness
to study the forces which determine the size of
of these roles, and their deep interconnections,
the firm. Why does the entrepreneur not organize
underscore the fact that strategy is much more than
one less transaction or one more?”2 These are
a detached analytical exercise. Analysis has
largely the same questions: are the extra layers what
merit, to be sure, but it will never make strategy
justifies the existence of this complex firm? If so,
the vibrant core that animates everything a
why can’t the market take care of such transactions
company is and does.
on its own? If there’s more to a company’s story,
what is it, really?
The strategist as meaning maker
I’ve taken to asking executives to list three words
In the last three decades, as strategy has
that come to mind when they hear the word
moved to become a science, we have allowed these
strategy. Collectively, they have produced 109 words,
fundamental questions to slip away. We need
frequently giving top billing to plan, direction,
to bring them back. It is the leader—the strategist
and competitive advantage. In more than 2,000
as meaning maker—who must make the vital
responses, only 2 had anything to do with
choices that determine a company’s very identity,
people: one said leadership, another visionary.
who says, “This is our purpose, not that. This
No one has ever mentioned strategist.
is who we will be. This is why our customers and
clients will prefer a world with us rather than
Downplaying the link between a leader and a stra-
without us.” Others, inside and outside a company,
tegy, or failing to recognize it at all, is a dangerous
will contribute in meaningful ways, but in the
oversight that I tried to start remedying in a
end it is the leader who bears responsibility for the
13
How strategists lead
choices that are made and indeed for the fact that
400 of them. Substitutes abound, and there is a
choices are made at all.
lot of competition for the customer’s dollar.
Competitors quickly knock off innovations and
The strategist as voice of reason
new designs, and the industry is riddled with
Bold, visionary leaders who have the confidence to
inefficiencies, extreme product variety, and long
take their companies in exciting new directions
lead times that frustrate customers. Consumer
are widely admired—and confidence is a key part
research shows that many adults can’t name a single
of strategy and leadership. But confidence can
furniture brand. The industry does little advertising.
balloon into overconfidence, which seems to come
naturally to many successful entrepreneurs
By at least a two-to-one margin, the senior
and senior managers who see themselves as action-
executives in my classes typically are energized,
oriented problem solvers.3
not intimidated, by these challenges. Most
argue, in effect, that where there’s challenge there’s
I see overconfidence in senior executives in class
opportunity. If it were an easy business, they
when I ask them to weigh the pros and cons
say, someone else would already have seized the
of entering the furniture-manufacturing business.
opportunity; this is a chance to bring money,
Over the years, a number of highly regarded,
sophistication, and discipline to a fragmented,
well-run companies—including Beatrice Foods,
unsophisticated, and chaotic industry. As the
Burlington Industries, Champion, Consolidated
list above shows, my students are far from alone:
Foods, General Housewares, Gulf + Western,
with great expectations and high hopes of
Intermark, Ludlow, Masco, Mead, and Scott Paper—
success, a number of well-managed companies
have tried to find fortune in the business, which
over the years have jumped in with the intention of
traditionally has been characterized by high trans-
reshaping the industry through the infusion of
portation costs, low productivity, eroding prices,
professional management.
slow growth, and low returns. It’s also been highly
fragmented. In the mid-1980s, for example,
All those companies, though, have since left the
more than 2,500 manufacturers competed, with
business—providing an important reminder
80 percent of sales coming from the biggest
that the competitive forces at work in your industry
Confidence is a key part of strategy and leadership,
but it can balloon into overconfidence.
14
McKinsey on Finance Number 44, Summer 2012
determine some (and perhaps much) of your
the term, someone in class always wants to engage
company’s performance. These competitive forces
the group in a discussion about what’s more
are beyond the control of most individual
important: strategy or execution. In my view, this
companies and their managers. They’re what you
is a false dichotomy and a wrongheaded debate
inherit, a reality you have to deal with. It’s not
that the students themselves have to resolve, and
that a company can never change them, but in most
I let them have a go at it.
cases that’s very difficult to do. The strategist
must understand such forces, how they affect the
I always bring that discussion up again at the end
playing field where competition takes place,
of the course, when we talk about Domenico
and the likelihood that his or her plan has what it
De Sole’s tenure at Italian fashion eminence Gucci
takes to flourish in those circumstances. Crucial,
Group. 4 De Sole, a tax attorney, was tapped
of course, is having a difference that matters in the
for the company’s top job in 1995, following years
industry. In furniture—an industry ruled more
of plummeting sales and mounting losses
by fashion than function—it’s extremely challenging
in the aftermath of unbridled licensing that had
to uncover an advantage strong enough to
plastered Gucci’s name and distinctive red-
counter the gravitational pull of the industry’s
and-green logo on everything from sneakers to
unattractive competitive forces. IKEA did it, but
packs of playing cards to whiskey—in fact,
not by disregarding industry forces; rather, the
on 22,000 different products—making Gucci
company created a new niche for itself and brought
a “cheapened and overexposed brand.”
a new economic model to the furniture industry.
De Sole started by summoning every Gucci
A leader must serve as a voice of reason when a
manager worldwide to a meeting in Florence.
bold strategy to reshape an industry’s forces
Instead of telling managers what he thought Gucci
actually reflects indifference to them. Time and
should be, De Sole asked them to look closely
again, I’ve seen division heads, group heads,
at the business and tell him what was selling and
and even chief executives dutifully acknowledge
what wasn’t. He wanted to tackle the question
competitive forces, make a few high-level
“not by philosophy, but by data”—bringing strategy
comments, and then quickly move on to lay out
in line with experience rather than relying
their plans—without ever squarely confronting
on intuition. The data were eye-opening. Some
the implications of the forces they’ve just noted.
of Gucci’s greatest recent successes had come
Strategic planning has become more of a “check
from its few trendier, seasonal fashion items, and
the box” exercise than a brutally frank and open
the traditional customer—the woman who
confrontation of the facts.
cherished style, not fashion, and who wanted a
classic item she would buy once and keep for
The strategist as operator
a lifetime—had not come back to Gucci.
A great strategy, in short, is not a dream or a lofty
idea, but rather the bridge between the economics
De Sole and his team, especially lead designer
of a market, the ideas at the core of a business, and
Tom Ford, weighed the evidence and concluded
action. To be sound, that bridge must rest on a
that they would follow the data and position
foundation of clarity and realism, and it also needs
the company in the upper middle of the designer
a real operating sensibility. Every year, early in
market: luxury aimed at the masses. To
15
How strategists lead
complement its leather goods, Ford designed
choices identity-conferring commitments. They
original, trendy—and, above all, exciting—ready-to-
are central to what an organization is or wants to
wear clothing each year, not as the company’s
be and reflect what it stands for.
mainstay, but as its draw. The increased focus on
fashion would help the world forget all those
counterfeit bags and the Gucci toilet paper. It would
When I ask executives at the end of this class,
“Where does strategy end and execution begin?”
propel the company toward a new brand identity,
there isn’t a clear answer—and that’s as it should
generating the kind of excitement that would bring
be. What could be more desirable than a well-
new customers into Gucci stores, where they
conceived strategy that flows without a ripple into
would also buy high-margin handbags and acces-
execution? Yet I know from working with
sories. To support the new fashion and brand
thousands of organizations just how rare it is to
strategies, De Sole and his team doubled advertising
find a carefully honed system that really delivers.
spending, modernized stores, and upgraded
You and every leader of a company must ask
customer support. Unseen but no less important
yourself whether you have one—and if you don’t,
to the strategy’s success was Gucci’s supply
take the responsibility to build it. The only way
chain. De Sole personally drove the back roads of
a company will deliver on its promises, in short, is
Tuscany to pick the best 25 suppliers, and
if its strategists can think like operators.
the company provided them with financial and
technical support while simultaneously boosting
A never-ending task
the efficiency of its logistics. Costs fell and
Achieving and maintaining strategic momentum
flexibility rose.
is a challenge that confronts an organization
and its leader every day of their entwined existence.
In effect, everything De Sole and Ford did—in
It’s a challenge that involves multiple choices
design, product lineup, pricing, marketing, distri-
over time—and, on occasion, one or two big choices.
bution, manufacturing, and logistics, not to
Very rare is the leader who will not, at some
mention organizational culture and management—
point in his or her career, have to overhaul a com-
was tightly coordinated, internally consistent, and
pany’s strategy in perhaps dramatic ways.
interlocking. This was a system of resources and
Sometimes, facing that inevitability brings
activities that worked together and reinforced each
moments of epiphany: “eureka” flashes of insight
other, all aimed at producing products that were
that ignite dazzling new ways of thinking
fashion forward, high quality, and good value.
about an enterprise, its purpose, its potential.
I have witnessed some of these moments as
It is easy to see the beauty of such a system of
managers reconceptualized what their organiza-
value creation once it’s constructed, but constructing
tions do and are capable of doing. These
it isn’t often an easy or a beautiful process. The
episodes are inspiring—and can become catalytic.
decisions embedded in such systems are often
gutsy choices. For every moving part in the Gucci
At other times, facing an overhaul can be wrenching,
universe, De Sole faced a strictly binary
particularly if a company has a set of complex
decision: either it advanced the cause of fashion-
businesses that need to be taken apart or a purpose
forwardness, high quality, and good value—
that has run its course. More than one CEO—
or it did not and was rebuilt. Strategists call such
men and women coming to grips with what their
16
McKinsey on Finance Number 44, Summer 2012
organizations are and what they want them to
become—has described this challenge as an
intense personal struggle, often the toughest thing
they’ve done.
Yet those same people often say that the experience
was one of the most rewarding of their whole
lives. It can be profoundly liberating as a kind of
corporate rebirth or creation. One CEO described his own experience: “I love our business,
Elements of this article
were adapted from
Cynthia Montgomery’s
The Strategist: Be
the Leader Your Business
Needs (New York:
HarperCollins, 2012).
our people, the challenges, the fact that other
1For more, see Cynthia Montgomery, The Strategist: Be the
Leader Your Business Needs, New York: HarperCollins, 2012;
and “Putting leadership back into strategy,” Harvard
Business Review, January 2008, Volume 86, Number 1, pp.
54–60.
2R. H. Coase, “The nature of the firm,” Economica, 1937, Volume
4, Number 16, pp. 386–405.
3For more on managerial overconfidence, see John T. Horn, Dan
Lovallo, and S. Patrick Viguerie, “Beating the odds in market
entry,” mckinseyquarterly.com, November 2005, as well as Dan
Lovallo and Olivier Sibony, “The case for behavioral strategy,”
mckinseyquarterly.com, March 2010, and “Distortions
and deceptions in strategic decisions,” mckinseyquarterly.com,
February 2006.
4For more detail on the Gucci case, see Mary Kwak and David
Yoffie, “Gucci Group N.V. (A),” Harvard Business Publishing,
Boston, May 10, 2001.
people get deep benefits from what we sell,” he said.
“Even so, in the coming years I can see that we
will need to go in a new direction, and that will
mean selling off parts of the business. The
market has gotten too competitive, and we don’t
make the margins we used to.” He winced
as he admitted this. Then he lowered his voice and
added something surprising. “At a fundamental
level, though, it’s changes like this that keep us
fresh and keep me going. While it can be painful
when it happens, in the long run I wouldn’t want to
lead a company that didn’t reinvent itself.”
Cynthia Montgomery is the Timken Professor of Business Administration at Harvard Business School, where
she’s been on the faculty for 20 years, and past chair of the school’s Strategy Unit. Copyright © 2012 McKinsey &
Company. All rights reserved.
17
Not enough comps for valuation?
Try statistical modeling
Traditional approaches rely on data from comparable businesses—but such
data aren’t always available. Statistical modeling can broaden the comparison while
controlling for differences.
Mimi James and
Zane Williams
For all the time and money companies invest in
it doesn’t make sense to use the same cost-of-
integrating separate businesses into a single
capital assumptions or valuation multiples—
strategy and culture, most managers also under-
or even an average of them—when assessing these
stand that different businesses have their own
different businesses’ performance or strategic
management challenges. Although they see their
plans. At a universal bank, for example, its retail-
companies as more than the sum of their parts,
banking, commercial-banking, asset-manage-
they also create separate management, P&L,
ment, and trading businesses each have different
strategic plans, and performance targets for each
economics, risk profiles, and valuations, and
of their business units.
so contribute differently to the overall economics
So it’s surprising how often we encounter many
assumptions can lead group managers to allocate
of these same managers using a single cost-
capital incorrectly, giving too much funding
of-capital metric or valuation multiple across the
to some units and too little to others.
of the bank. Using the wrong cost-of-capital
entire organization—instead of breaking these
measures out business by business, the way many
One obstacle to breaking these measures out is
outside observers and securities analysts do.
that the traditional approach requires managers to
For companies with distinctly different businesses,
compare their businesses with others to derive a
18
McKinsey on Finance Number 44, Summer 2012
benchmark. Often, so-called pure-play comparisons
trade-offs between businesses. Such modeling
with similar characteristics and performance
works in industries where many companies
may not exist. And even where there may seem to
have different mixes of similar businesses—such
be an abundance of comparable businesses,
as banking, chemicals, insurance, metals and
identifying the right ones is often as much a matter
mining, and technology.
of personal pride as of getting ahold of enough data.
In our model, which most analysts should be
For many companies, statistical modeling—or
able to recreate on their own, using simple
more precisely, regression analysis—can offer an
regressions in any common spreadsheet software,
alternative. It can help them more accurately
we started by assessing the business mix by
MoF 44 2012
estimate business unit–level betas and valuation
Regression
multiples even where there are few pureExhibit 1 of 2
play comparisons, enabling them to make better
Exhibit 1
revenue or asset weights—the independent
variables—and regressed those weights against
company-level multiples or betas—the dependent
Estimates of beta produced by regression analysis closely
approximate those produced by examining comparable companies.
Oil and gas industry, by business1
Confidence interval
1.21
0.74
Regression
(n = 29)
Pure-play
average
(n = 9)
Upstream, exploration
and production
1 For
0.71
0.69
0.24
0.27
Regression
(n = 22)
Pure-play
average
(n = 6)
Midstream
Regression
(n = 32)
1.14
0.78
Pure-play
average
(n = 5)
Downstream, retail,
refining
Regression
(n = 22)
Pure-play
average
(n = 8)
Chemicals, plastics,
materials
regression, total n = 59 companies; the number shown for regression at the segment level is the number of companies with
a nonzero weight in the segment.
19
Not enough comps for valuation? Try statistical modeling
MoF 44 2012
Regression
Exhibit 2 of 2
Exhibit 2
The approach can also be used to analyze valuations for
lines of business.
Banking industry, market-to-tangible-book estimates1
1.0
Retail banking
1.8
Commercial banking
Consumer credit
1.4
1.0
Private equity
Insurance
0.8
Transactions and payments
Wealth management
2.6
1.8
1 For
regression, n = 55 price/tangible book-based traded companies’ revenue weights against current market/tangible book.
The adjusted r2 = 54 and the f-test and most t-stats were significant. Data as of May 16, 2012.
variables. The regression model then determines
abundant (Exhibit 1). We’ve also employed this
the betas or multiples for individual business
approach in banking and insurance, where
units. With this approach, managers can draw on a
betas estimated by statistical correlation make
broader range of companies—even including
intuitive sense at the business unit level and,
those they would not normally see as peers—and
when summed up, are consistent with estimates
let the statistical regression control for differences
of industry betas.
in the size and makeup of their portfolios. As
a result, analysts are more likely to find sufficient
Moreover, when we extended the approach to
available data.
estimate the market-to-tangible-book multiples for
When we tested them, the estimates produced
that, given the lack of pure plays, are hard to
lines of business in banking (Exhibit 2)—estimates
by this approach stacked up well against the
generate any other way—we were able to better
traditional pure-play approach in the oil and gas
understand the different valuations that investors
industry, where pure-play comparables are
were implicitly assigning to different businesses.
Mimi James ([email protected]) is a consultant in McKinsey’s New York office, where Zane Williams
([email protected]) is a senior expert. Copyright © 2012 McKinsey & Company. All rights reserved.
20
McKinsey on Finance Number 44, Summer 2012
A yen for global growth: The
Japanese experience in cross-border M&A
Japanese companies have embarked on an increasing number of international
acquisitions in recent years. Can they learn from past failures and create value from
cross-border deals?
Keiko Honda,
Keith Lostaglio, and
Genki Oka
An appreciating yen and a stagnant domestic
well-known and thus studiously circumvented,
market make global expansion a logical move for
others—particularly those having to do with
Japanese companies with bold growth aspi-
fundamental differences in business and manage-
rations. Indeed, Japanese companies are making
ment culture—seem almost impossible for
international forays, albeit quietly: it is a little-
Japanese companies to avoid. Retaining foreign
reported fact that the number of outbound M&A
talent presents a particular challenge.
deals in Japan has been on an upward trajectory in
recent years. If the trend continues, Japanese
To gain insights into how Japanese companies
cross-border M&A activity will soon surpass its
should manage international acquisitions,
1990 peak.
we interviewed non-Japanese executives whose
companies have been acquired by Japanese
Deal levels would be even higher if Japanese
companies in large cross-border M&A deals within
companies were not haunted by past M&A failures.
the past decade. We also conducted in-depth
Pitfalls abound along the road to international
outside-in analyses on a handful of deals in which
M&A, and although some of them are now
Japanese companies—such as Hitachi
21
Construction Machinery, Suzuki Motors, Takeda
Japanese executives do not stay long at such
Pharmaceuticals, and Toshiba—were able to boost
companies.
international sales through cross-border M&A.1
A hands-off approach. Although Japanese
Our findings indicate that there is no silver-bullet
executives may think the acquired company would
approach to capturing the greatest value from
prefer to be left alone—and although the parent
an international acquisition. Companies have had
company’s restraint may at first appear admirable
success using a variety of approaches, each
and wise—many foreign executives come to feel
tailored to the acquirer’s strategic intentions, its
that this is the wrong approach. One major benefit
unique characteristics, and the dynamics of
of being acquired, they say, should be that the
the industry. Although a company’s particular
subsidiary can fully leverage the capabilities of its
industry, context, and objectives should dictate the
parent company. Foreign executives want the
specific tactics it uses, the approaches we studied
acquirer to engage with its new subsidiary and
can give acquirers a starting point to consider—
jointly tackle issues as they arise.
whether that starting point entails focusing on one
such tactic or emulating all of them.
An ambiguous power structure. Non-Japanese
executives have difficulty determining where
Perspectives of the acquired
the true power lies within a Japanese organization.
Most Japanese executives who have played the
For example, the deal executive in an M&A
global M&A game are familiar with the most
situation could have a lofty title (such as senior
common obstacles: disagreement between the
managing director). The target company might
acquirer and the acquired over how much
therefore focus on building a relationship with this
value ought to be captured immediately after the
person, continue to interact with him after the
deal closes or the positioning of the new sub-
acquisition, and belatedly discover that he actually
sidiary within the parent company, assumptions
has no direct reports and no influence over day-
by Japanese leaders that what works for their
to-day business. In one case, the deal executive was
company must also work elsewhere, inattention
kept on staff only because he was a favorite of
to the acquired company’s employees, and
the former CEO.
a lack of postacquisition-management leadership
and skills.
The tyranny of the middle. Our interviewees said
What may be less familiar—and even surprising—
can be destructive forces: they derive power from
that middle managers at the parent company
to them are the observations of executives
their proximity to the Japanese CEO and try
at US and European companies that have been
to control information. A common example: if the
acquired by Japanese companies. Interviews
acquired company requests additional capital
with executives from six such companies of various
investment for growth, middle managers may
sizes (from $200 million to $1 billion in value)
choose not to raise this request to the CEO. When
indicate a number of stumbling blocks. The first
the leaders of the acquired company follow up
four, in particular, are detrimental to talent
with the CEO a few months later, they learn that
retention; they are the main reasons that non-
the CEO was never informed of the request.
22
McKinsey on Finance Number 44, Summer 2012
Incidents such as this can cause middle manage-
morphed into an intense discussion about
ment to lose the respect of line leaders at the
steep cost reduction. Although this happens in non-
acquired company.
Japanese settings as well, it is particularly
pronounced in Japanese M&A because Japanese
The glass ceiling for foreigners. Japanese
buyers can be extremely polite—to a point
companies often have an insular culture. The
that foreigners sometimes find misleading. In
general assumption is that a foreigner can rise only
one case, even though the acquirer had already
so high in the organization. Foreign executives
decided to eliminate the target company’s research
thus consider leaving not because of unsatisfactory
department, executives still made multiple visits
compensation but because they feel their careers
to the target’s research sites to keep up appearances.
are unfairly capped.
When employees at the target company learned
that the decision was made months ago, their trust
Detail orientation. American and European
in the parent company crumbled.
executives have difficulty understanding Japanese
attention to detail. A Japanese company’s due-
Four approaches
diligence checklist, for example, is typically three
To find out how Japanese companies have
times longer than that of an acquisition-savvy
addressed one or more of these pitfalls, we examined
Western company, in part due to Japanese com-
the approach of the very small number of com-
panies’ risk aversion. In a postacquisition
panies—14, to be exact—that completed at least
setting, a Japanese company would want to under-
five acquisitions during the past decade and generate
stand, for instance, the discrepancy between a
more than half their revenues from overseas
sales forecast and actual sales. It could very well
markets. In each of the deals we examined, the
decide to investigate assumptions made a year
acquirer used a different postacquisition approach
ago, whereas a Western company would care only
depending on the focus of the change program
about the actual sales figure and how to improve it.
(exhibit). The approaches are not mutually
exclusive. A company can emulate elements from
Poor postacquisition planning. Attention to detail
all of them, depending on its particular industry,
notwithstanding, Japanese companies tend to
context, and objectives.
be laissez-faire about what happens immediately
after a deal closes. They do not see value in
Establishing mentorship or exchange programs
creating a concrete architecture in the interim to
to build leadership talent
ensure a successful transition. Foreign executives
For acquirers whose main objectives include
often lament that transition governance and
leadership development, one tactic involves pairing
interim processes for decision making, resource
high-potential managers from the acquired
allocation, and escalation of business-critical
company with an executive from the parent com-
issues are insufficiently discussed.
pany as a coach and mentor. This helps build
Sudden metamorphosis from friendly partner to
The frequent and direct communication between
alignment between the acquirer and the acquired.
distant boss. Our interviewees reported several
leaders at both entities—without having to
experiences in which the initial integration phase
go through middle management—also allows for
was friendly and collaborative, then abruptly
tighter coordination.
23
A yen for global growth
When in 2002 Japanese automaker Suzuki
Another promising tactic is two-way dispatch of
Motor acquired a majority stake of Indian company
executives (from acquirer to target and vice versa).
Maruti Udyog, Suzuki engineered change at
When Takeda acquired US pharmaceutical
the top. It appointed a Suzuki executive as president
company Millennium in 2008, it engineered an
and CEO of Maruti and took over 6 of the 11 board
exchange of personnel to facilitate mutual
seats. But it also promoted four high-potential
understanding of corporate cultures. It invited
Maruti leaders—in sales, marketing, R&D,
Millennium’s CEO to join Takeda’s manage-
and administration—to corporate-officer roles and
ment team. Researchers from both companies
assigned each a functional executive from
traveled between Japan and the United States to
Suzuki as a mentor. The pairs were held jointly
strengthen their research capabilities. In 2011,
accountable for formulating new strategies. If
Takeda transferred several Millennium researchers
postacquisition performance is any indication, the
to its new research center in Japan. And Takeda
MoF 44 2012
mentorship program has worked: Maruti’s sales
Japan
have quadrupled, and profits are up 17 times from
Exhibit 1 of 1
2002 levels.
Exhibit
recently named Millennium’s head of strategy—a
Westerner—as head of business development
for Takeda, showing the company’s openness to
Japanese acquirers used four types of postacquisition
change programs.
Focus of change
Management approach
Top management
Establish mentorship/exchange programs to build leadership talent
• Pair local high-potential managers with executives from parent company
for one-on-one coaching
• Facilitate mutual exchange of senior-management members
Division
Create a special coordination unit at the division level
• Assemble a large team drawing from both parent and acquired company
• Convene a small team for intervention chosen by parent company
Front line
Develop local trainers as change agents
• Provide training by the parent company to create trainers at the
acquired company
Entire organization
Implement company-wide culture-infusion programs
• Establish mechanisms that model the parent company’s values and conduct
24
McKinsey on Finance Number 44, Summer 2012
Talent-development programs signal to foreign
executives that the parent company is willing to invest
in their professional advancement, giving them
confidence that they can break through the perceived
glass ceiling.
high-potential leaders from its subsidiary. Thanks
Toshiba acquired US-based Westinghouse Electric
to Millennium, which has been put in charge of
in 2006 to raise Toshiba’s global presence in
all oncology efforts at Takeda, the company is now
nuclear generation. Toshiba sought to influence
preparing to begin trials of three or four cancer-
Westinghouse while also allowing it a degree
drug candidates per year—a significant increase
of autonomy—which was critical, since the two
from historical levels.
companies had different types of nuclear technology. Toshiba set up two coordination offices: one
These talent-development programs signal
within Westinghouse, whose members were
to foreign executives that the parent company is
drawn from Toshiba and its strategic partners Shaw
willing to invest in their professional advance-
Group and IHI (both of which had minority
ment, giving them confidence that they can break
stakes in Westinghouse), and another within
through the perceived glass ceiling.
Toshiba. The offices worked together on strategy
development and implementation. Three years
Creating a special coordination unit at the
later, Toshiba had record orders, including its first
division level
US orders for two large-scale projects.
Another model entails the creation of a dedicated
coordination office or unit to manage the
Hitachi Construction Machinery took a slightly
integration. Depending on the company’s objective,
different tack when it acquired a majority stake in
the unit can be large or small. A large coordi-
Indian construction-equipment manufacturer
nation office may make sense if there is a strong
Telcon, a joint venture with Tata Motors, in 2010.
appetite for capturing value from cost synergies
With the goal of increasing the quality of
(by streamlining operations) and revenue synergies
Telcon’s products, Hitachi dispatched seven Hitachi
(by launching new initiatives that leverage both
experts to the Telcon functions that needed
companies’ strengths). If the goal is intervention in
fundamental change, such as quality assurance
one or two functions, a smaller, SWAT-type
and product design. This specialist team,
team may be more apt. In either case, the model
which was expanded in 2010, had full authority
helps avoid a leadership gap in postacquisition
to direct Telcon’s performance-improvement
management. With a dedicated team, there is no
efforts and created plans to optimize manufac-
question as to who is leading the integration effort.
turing processes, support services, and
25
A yen for global growth
employee training. By creating a dedicated
By choosing not to dispatch its own employees
team, a company can begin to build internal
but rather to bring in employees from the
skills that will prove useful in subsequent
acquired company, Japanese companies can create
acquisitions. In the best cases, the individuals
room for “translation”: the change agents at the
chosen for the coordination office are high-
new subsidiary come to understand the corporate
potential executives with excellent communication
strategy and the vision for the integrated entity,
skills and business savvy.
and they develop a greater understanding of and
appreciation for the technical advantages that
Developing local trainers as change agents
each company offers. These change agents become
In the third model, the front line is the focus of
effective champions of Japanese techniques
change. Employees from the foreign company
and practices.
are brought to Japan for “train the trainer” sessions
that are more than a means of technology transfer—
Implementing company-wide culture-infusion
they also become opportunities to promote
programs
Japanese corporate values and management philo-
To infuse Japanese business culture into an acquired
sophy. These sessions help create a sense of
company, acquirers can launch initiatives
belonging among the acquired employees that can,
that differ completely from those preceding them
in turn, lead to greater motivation and higher
and ensure frequent communication on all
employee-retention rates.
fronts (for example, through employee newsletters
or town halls). The most effective initiatives
When a Japanese manufacturer acquired a
appear to be informal mechanisms that model
Southeast Asian company in 2006, it became the
Japanese norms while also bridging the divide
industry’s second-largest player. The acquirer
between management and the front line. Company-
was deliberate in how it chose to transfer its tech-
wide programs, implemented correctly, can help
nology to its new subsidiary: it abandoned
motivate and retain target-company employees.
its traditional system of sending senior Japanese
engineers to overseas subsidiaries to serve as
Suzuki, for instance, gave all Maruti employees
trainers. Instead, select employees from the
sufficient exposure to Suzuki’s unique way of
acquired company came to Japan for training, then
doing things. It promoted an open corporate culture,
returned to their home countries to train local
which was foreign and jarring in the Indian
employees. Approximately 700 non-Japanese
context. Top management and employees eat in
employees have now undergone training in Japan;
the same cafeteria. Everyone, from the CEO
60 of them have gone on to further study and
to the factory worker, wears the same uniform to
been designated expert trainers. Although the
work. All employees—again, including the
Japanese corporation suffered along with the
CEO—participate in morning exercise routines.
rest of the industry during the economic crisis, the
(Although several Japanese companies hold
combined company was recently able to beat
dear the ritual of morning exercises, no others, to
the market leader for a high-profile contract—an
our knowledge, have introduced it at a non-
achievement in which the new subsidiary
Japanese subsidiary.)
played a critical role.
26
McKinsey on Finance Number 44, Summer 2012
These case examples should give Japanese
executives the confidence to venture beyond Japan’s
borders. Our findings indicate that there are a
variety of promising approaches to postacquisition
1We focused on deals in which the acquirer sought partial inte-
gration (neither full autonomy for the subsidiary nor a complete
merger) since this is a common model applied by Japanese
companies, many of which do not have the confidence to fully
integrate an overseas entity.
management and that leaders of Japanese
companies must develop their own winning
approach—sometimes through trial and error and
constant refinement. Their first step should be
to compile a list of acquisition targets that make
sense given their strategic intentions. They
should then come up with guiding principles and
a blueprint for a postacquisition-management
approach, tailored to their company’s strengths and
the key value drivers of the industry. Japanese
companies can—and indeed, if they want to grow,
must—go global.
Keiko Honda ([email protected]) is a director in McKinsey’s Tokyo office, where Keith Lostaglio
([email protected]) and Genki Oka ([email protected]) are partners. Copyright © 2012
McKinsey & Company. All rights reserved.
27
28
McKinsey on Finance Number 44, Summer 2012
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