Tag Archives: McKinsey

Updates from McKinsey

Japan offshore wind: The ideal moment to build a vibrant industry
As construction starts on Japan’s first large commercial offshore wind farm in the coastal waters of Akita, the country is heralding a future of energy independence.
By Sven Heiligtag, Katsuhiro Sato, Benjamin Sauer, and Koji Toyama – With the passage in late 2019 of a law that allows offshore turbines to operate for 30 years, Japan has begun in earnest its journey away from fossil fuels and nuclear energy.

The two wind farms of the ¥100 billion Akita project will generate with a capacity of 140 MW, enough electricity to power at least 150,000 of Japan’s 52 million homes. By 2030 Japan plans to have installed a total of 10 GW, and the country’s possibilities are even greater. The International Energy Agency estimates Japan has enough technical potential to satisfy its entire power needs nine times over.

Japan can take advantage of the technology advances and cost improvements the offshore wind industry has made since its early days in Denmark in the 1990s. Today, it can learn from the experiences of other countries, not only in creating the turbines and wind farms but also in building markets, setting offtake prices, and designing regulation and financial incentives.

In only a handful of decades, offshore wind has become one of the core power-generation technologies of Europe, with installed capacity of 22 GW2 and about 100 GW planned by 2030.3 Taiwan and the United States have already commissioned the first small projects and plan for more than 10 and 25 GW by 2030, respectively.4 During the industry’s 30-year evolution, costs have fallen so sharply that offshore wind now compares favorably with competing energy sources.

But that does not mean Japan’s journey will be simple. It will require multiple players, including regulators, utilities, and investors, to do their part in a country where the public remains skeptical about offshore wind’s cost competitiveness with other power sources. more>

Updates from McKinsey

Buy now, pay later: Five business models to compete
Financing at the point of sale may be a small share of unsecured lending in the United States today, but it’s growing fast. Banks seeking long-term growth should explore market entry, and merchants should reassess their financing offers.
By Puneet Dikshit, Diana Goldshtein, Blazej Karwowski, Udai Kaura, and Felicia Tan – Point-of-sale (POS) financing services in the United States have grown significantly over the past 24 months, especially since the onset of COVID-19. Trends fueling growth include digitization, rising merchant adoption, increasing repeat usage among younger consumers, and an expanding set of players targeting lending at point of sale, a service also known as “buy now, pay later.”

Thus far, fintechs have taken the lead, to the point of diverting $8 billion to $10 billion in annual revenues away from banks, according to McKinsey’s Consumer Lending Pools data. In our view, only a few banks are responding fast enough and boldly enough to compete. Banks that underestimate the threat may see continued loss in share and could lose out on participating in a growing value pool and gaining share among younger and new-to-credit customers, as banks in Australia and China did when facing a similar situation. To avoid that outcome, US banks need to understand the landscape for POS financing and choose from among the emerging models.

This article seeks to give POS financing players as well as merchants the necessary insights to refine their strategies in the POS-financing arena. It provides an overview of the market, details key trends and factors influencing growth, and offers ideas for market entry for banks and partnerships for merchants. The insights are based on McKinsey research, including McKinsey Consumer Lending Pools (a proprietary database covering granular market size and growth trends), the McKinsey POS Financing Consumer Survey and POS Financing Merchant Survey, and our recent experience with banks and merchants. more>

Updates from McKinsey

Running on all five sources: Actions leaders can take to create more meaningful work
Knowing about the five sources of meaning is a great start, but the real magic occurs when leaders begin to embed them into how the work gets done.
By Timothy Bromley, Taylor Lauricella and Bill Schaninger – Research shows that when people view their work as meaningful, their performance and job attitudes improve significantly. Previously, we proposed a strategy that leaders can use to create meaningful work: making the connection to and highlighting the impact their work has on society, customers, the company, team, and individuals’ personal success—otherwise known as the five sources of meaning.

Knowing about the five sources of meaning is a great start, but the real magic occurs when leaders begin to embed them into how the work gets done. There are three steps leaders can take to start integrating the five sources this week:

  1. Determine what matters most. Start a dialogue with your team to understand what sources resonate most. This can be done during one-on-one check-ins or as a group exercise during a team meeting.
  2. Hardwire meaning into day-to-day work. Once you know what sources of meaning resonate most for your team, find small ways to hardwire them into existing activities and communications. Perhaps it’s adding an “impact story” or recognition to the start of a meeting, encouraging team members to lead meetings and complete work autonomously, or sharing customer feedback in a weekly recap email.
  3. Create connections. A common thread across the five sources is the impact of the work on others. Providing opportunities for your team to assist, mentor, support, or simply spend time with customers, other teams, members of the community, and one another is key to providing a touchpoint for meaningful experiences—particularly as the workforce returns from remote work.

There’s no shortage of inspiration in how other companies put the five sources of meaning into practice. Many organizations have found creative and bold ways to integrate the five sources of meaning into their communications, talent processes, and day-to-day activities. more>

Updates from McKinsey

Post-close excellence in large-deal M&A
The most successful large-deal transactions follow four key practices during integration execution.
By Brian Dinneen, Christine Johnson, and Alex Liu – You cannot judge a deal by the market’s response to its announcement. Neither can you predict its success based on investor reaction at closing. It is only after the first 12 to 18 months of integration and after companies have reported the performance of their first year that the markets can reliably predict the success of the deal.

This finding is based on our recent review of 248 large deals over the last ten years. We found that 79 percent of those whose total return to shareholders outperformed their market index in the first 18 months were still above the index three years after close.

What did CEOs do differently in those successful deals? To better understand what made those deals successful, we surveyed experienced integration practitioners at the twice-annual Merger Integration Conference, and we also surveyed a broader population of 305 public company leaders, conducted in-depth reviews of investor transcripts and public financials in 29 of the Global 2000’s 1 large deals, and spoke with individuals who led some of those deals. We observed that companies going through successful large deals follow four key practices that help their total returns to shareholders (TRS) outpace the market index, their synergy achievement to exceed public commitments, and organic growth to continue unabated (Exhibit 1). In this article, we detail these practices.

Protect business momentum

While integration creates value from synergies, this should not come at the cost of disruption to the existing business. Successful acquirers are able to keep growing revenue on a pro forma basis within the first year, whereas unsuccessful deals see a decline or “dip” in revenue. 2 This dip is almost always due to a failure to protect the business momentum. more>

Updates from McKinsey

Moving from cash preservation to cash excellence for the next normal
Companies can build on their initial response to the pandemic to elevate their cash-management capabilities.
By Christian Grube, Sun-You Park, and Jakob Rüden – When the COVID-19 crisis began to affect companies worldwide, the preliminary response of CEOs and CFOs was all about survival: freeing up cash and resources to keep the lights on and the doors open. The liquidity crisis triggered by the sharp disruption in economic activities prompted organizations to rush toward cash and liquidity to keep operations going.

Some industries were hit harder by the pandemic than others: aerospace, travel, oil and gas, and retail experienced a sharp drop in demand for their services and products, as well as restrictions on their operations. As the economic fallout from the pandemic hit their balance sheets, many companies quickly took drastic measures to preserve cash, such as significant cuts on capital expenditure, dividend cuts, reductions in external spending, and temporary plant closures. Governments responded by setting up large stimulus programs that included measures to improve companies’ liquidity and cash flows—for example, postponing the collection of government-related fees.

One silver lining to the crisis is that it revealed the critical importance of cash excellence—a set of best practices that enable prudent cash and liquidity management. In extraordinary times, extra cash can prevent a company from going bankrupt. Now, several months into the crisis, executives have a rare window of opportunity to build the current focus on cash into long-term cash excellence. Executives can focus on strengthening the cash culture across their organizations, changing underlying systems and mindsets, and implementing no-regrets moves to embed cash excellence into ongoing operations.

Building a strong cash culture across people, structure, and process dimensions

CFOs can use today’s short-term crisis in cash preservation as an opportunity to focus on sustainable cash excellence, supported by a strong cash culture from top to bottom. more>

Updates from McKinsey

What’s next for digital consumers
Consumers say they will spend less time in digital channels once the pandemic ends. Here’s what it means for companies.
By Neira Hajro, Klemens Hjartar, Paul Jenkins, and Benjamim Vieira – The COVID-19 pandemic has driven rapid adoption of digital channels across countries and industries, but digital’s growth has plateaued in the past six months and may begin to slip back once the pandemic eases—even as total digital adoption stays well above prepandemic levels. That’s one of the findings from a new McKinsey survey of global consumer sentiment conducted in April 2021. Companies can look to hold on to newly digital consumers by improving digital experiences, investing in “phygital,” and putting consumer trust at the heart of all they do.

The survey suggests that industries across regions experienced an average of 20 percent growth in “fully digital” users in the six months ending in April 2021, building on previous gains earlier in the pandemic. During that same time period, it was primarily younger people joining the ranks of digital users.

But, with consumers having reached high levels of digital penetration in most regions and industries, the acceleration into digital channels now seems to have leveled off in both Europe and the United States, with consumers in some industries saying that they will be using digital channels less frequently once the pandemic ends. As a result, even as total digital adoption remains above prepandemic levels, many industries and regions may see a modest negative net change in postpandemic digital use relative to 2020.

The industries most vulnerable to the loss of digital consumers may be those that saw the biggest gains in digital adoption during the pandemic. New adopters had little choice during lockdowns but to embrace digital channels, and the channels they entered were more likely to have been newly built and with a less satisfying user experience than established ones. more>

Updates from McKinsey

The dos and don’ts of dynamic pricing in retail
Dynamic pricing doesn’t have to be extraordinarily complex, but it does have to be strategic and disciplined. Here’s a checklist for retailers.
By Sara Bondi, Maura Goldrick, Emily Reasor, Boudhayan Sen, and Jamie Wilkie – Over the past year, as homebound consumers placed online orders for everything from groceries and soap to yoga mats and laptops, many people were reminded of how easy it is to comparison shop on the internet. With just a few clicks, a shopper can find out which retailer sells a particular item at the lowest price. And because the shift to e-commerce is expected to continue even in the postpandemic era, pricing will become an increasingly important competitive tool for retailers. Dynamic pricing, in particular, is poised to become one of the core capabilities that sets winners apart in the retail landscape of the future.

Simply put, dynamic pricing is the (fully or partially) automated adjustment of prices. It’s a staple of the travel industry: dynamic pricing is the norm for airline tickets, hotel rooms, and ride-sharing services. In e-commerce, Amazon has long been a leader in dynamic pricing; the company reprices millions of items as frequently as every few minutes. But dynamic pricing isn’t just for travel companies or e-commerce giants, and it doesn’t necessarily require ultra-sophisticated software that changes every product’s price multiple times a day. Even traditional retailers can reap tremendous benefits from merchant-informed, data-driven algorithms that recommend price changes for selected products at some level of frequency.

Despite the competitive advantage that dynamic pricing can confer, few omnichannel retailers have developed this capability. Some are only now starting to explore the potential of dynamic pricing. Other retailers conducted half-hearted and poorly planned pilots that, unsurprisingly, had little impact and thus failed to get the organization’s buy-in.

Dynamic pricing isn’t just for travel companies or e-commerce giants, and it doesn’t necessarily require ultra-sophisticated software that changes every product’s price multiple times a day. more>

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Updates from McKinsey

Streaming and royalties in mining: Let the music play on
Renewed growth sentiment among miners’ management teams, combined with the rise of streaming-and-royalty financing over the past ten years, suggests that this particular type of alternative financing could be set for significant expansion over the next decade.
By Scott Crooks, Siddharth Periwal, Oliver Ramsbottom, Elijah Saragosa, and Jessica Vardy – Following the commodity downturn in 2014, many miners were forced to focus on cost-out initiatives, deleveraging balance sheets and returning cash to shareholders who had become disillusioned with the industry’s track record. Growth projects were inevitably over budget (and often behind schedule), and M&A deals were often completed at lofty premiums—but, in hindsight, they often were executed at the top of the market, resulting in value destruction. In the post-boom environment, many mining companies found it challenging to raise capital from either the public-debt or public-equity markets. As a result, many industry commentators predicted the emergence of private debt and private equity. While the growth in private debt and equity has been below expectations, one form of alternative financing that has blossomed has been streaming-and-royalty financing. Expansion in this form of alternative financing, coupled with increasing focus on growth by management teams, leads us to believe that streaming-and-royalty financing is poised for strong growth over the next decade.

Metal streaming-and-royalty contracts are transactions under which mining companies sell future production or revenues in return for an up-front cash payment. There are some distinct differences between the two types. Streaming deals are normally focused on specific commodities produced by a particular project, such as precious-metal by-products from a base-metals project. In return for this up-front cash payment (the “deposit balance”), the streaming partner secures a share of future production at an agreed-upon discounted price, which may be fixed or alternatively a floating percentage of the prevailing spot price. Thus, miners receive payment on delivery for streamed physical volumes. In contrast, royalty deals are normally commodity agnostic and based on overall project revenues; the royalty company never actually “sees” the commodities that the mine produces, but rather just receives a share of the revenue generated (the royalty). In effect, streaming deals are settled by the physical transfer of metal while royalty deals are settled with cash.

Royalty ownership in the mining industry is generally agreed to have originated with Franco-Nevada in the mid-1980s. The mining company’s first royalty investment in 1986 involved spending half the corporate treasury to acquire 4 percent of the revenues from a mine in Nevada owned by Western State Minerals. Following this initial transaction, Franco-Nevada went on to purchase royalties in various other commodities, further developing the mining sector’s royalty business model. The arrival of the precious-metals streaming business model is often attributed to Wheaton River: while seeking to raise funds in 2004 to expand its core business of gold mining, the company conceived the idea of streaming silver by-product from the San Dimas gold mine in Mexico to a new subsidiary company, Silver Wheaton. In the world’s first streaming agreement, Silver Wheaton purchased yet-to-be-produced silver from Wheaton River’s operations in Mexico in return for an up-front payment and additional payments on delivery of the silver. New players have emerged in the past decade in the streaming-and-royalty sector, including Triple Flag in 2016, Nomad Royalty in 2019, and Deterra Royalties in 2020. However, the industry remains very consolidated, with the top three players—Wheaton Precious Metals, Franco-Nevada Corporation, and Royal Gold—representing approximately 80 percent of the total value of streaming-and-royalty contracts as defined by volume of gold equivalent ounces (GEOs). more>

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Updates from McKinsey

CEO dialogue: Perspectives on reimagining operations for growth
The hyper-acceleration of the Fourth Industrial Revolution (4IR) has led to an unparalleled industry transformation, giving organizations a unique opportunity to reimagine operations for growth.
By Enno de Boer, Katy George, and Yves Giraud – In late March, CEOs representing leading innovative organizations from around the world joined McKinsey & Company in collaboration with the World Economic Forum for a discussion on the future of manufacturing. Hundreds of thousands of participants across dozens of industries tuned in to hear from Satya Nadella, CEO of Microsoft, Alex Gorsky, chairman and CEO of Johnson & Johnson, and 11 CEOs of companies that recently joined the Global Lighthouse Network, a community of world-leading companies using 4IR technologies to go beyond productivity improvements to create sustainable, profitable growth.

Their conversation has been edited for clarity and legibility.

“Digitization is going to touch every aspect of our business,” said Alex Gorsky, Johnson & Johnson. “I can´t imagine ten years from now that whether it’s our businesses, our manufacturing, our financial systems, our human-resource systems—it will just be so imbued into every process, every function, every connection that we make.”

Unique growth opportunities

By deploying 4IR technologies at scale, lighthouses are creating new revenue streams through new business models. These companies are more in touch with what their customers want, even as preferences change faster than ever—and they have built the capability to respond rapidly and gain market share in the void left by others that get stuck in pilot purgatory. In fact, being stuck in the pilot phase is a more common feeling in 2020. The three-year trend shows scaling Industry 4.0 tech is reversing. Industrials have had their investments pressure-tested, and as a result have realized they have not scaled as much as they thought. more>

Updates from McKinsey

Building a cloud-ready operating model for agility and resiliency
Four operating-model changes can help companies accelerate the journey to cloud.
By Santiago Comella-Dorda, Mishal Desai, Arun Gundurao, Krish Krishnakanthan, and Selim Sulos – With customer expectations and technology evolving at an unprecedented clip, moving to cloud is increasingly becoming a strategic priority for businesses. Capturing the $1 trillion value up for grabs in the cloud, however, has proven frustratingly difficult for many companies. One of the main reasons for this difficulty is that IT’s operating model remains stuck in a quagmire of legacy processes, methodologies, and technologies.

Overcoming this problem requires business and IT to take a step back and think holistically about their cloud operating model. And they need to move now. IT has become integral to driving value and a crucial enabler in meeting business and customer expectations of speed, flexibility, cost, and reliability. At the same time, the risk of failure is increasing because of the growth in complexities and demands around new architectures, agile application development, on-demand access to infrastructure through self-service, cloud migration, and distributed computing, to name a few.

While most organizations will need to adopt a hybrid-cloud approach for the foreseeable future, it will be hard to capture much of cloud’s value without reimagining the IT infrastructure that is ground zero of the cloud operating model. Set up correctly, infrastructure can quickly expand access to new services and products, accelerate time to market for application teams, and cut operating costs at the same time—all of which unleash businesses’ innovation potential.

To capture these benefits, companies must undertake a holistic transformation of infrastructure grounded on four mutually reinforcing shifts: adopt a site-reliability-engineer (SRE) model, 1 design infrastructure services as products, manage outcomes versus activities, and build an engineering-focused talent model. The benefits of these shifts can accrue to infrastructure and operations (I&O) even if they remain completely on-premises. more>