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How to Use the McKinsey 7-S Model for Strategic Planning

mckinsey strategic planning process

Investopedia / NoNo Flores

What Is the McKinsey 7S Model?

The McKinsey 7S Model is a framework for organizational effectiveness that postulates that there are seven internal factors of an organization that need to be aligned and reinforced in order for it to be successful.

Key Takeaways

  • The McKinsey 7S Model is an organizational tool that assesses the well-being and future success of a company.
  • It looks to seven internal factors of an organization as a means of determining whether a company has the structural support to be successful.
  • The model comprises a mix of hard elements, which are clear-cut and influenced by management, and soft elements, which are fuzzier and influenced by corporate culture.

Understanding McKinsey 7S Model

The 7S Model specifies seven factors that are classified as "hard" and "soft" elements. Hard elements are easily identified and influenced by management, while soft elements are fuzzier, more intangible, and influenced by  corporate culture . The hard elements are as follows:

The soft elements are as follows:

  • Shared values

The framework is used as a strategic planning tool by organizations to show how seemingly disparate aspects of a company are, in fact, interrelated and reliant upon one another to achieve overall success.

Consultants Thomas Peters and Robert Waterman Jr., authors of the management bestseller "In Search Of Excellence," conceived of the McKinsey 7S Model at consulting firm McKinsey & Co. in the late 1970s.

A Closer Look at the 7 S's

  • The strategy is the plan deployed by an organization in order to remain competitive in its industry and market. An ideal approach is to establish a long-term strategy that aligns with the other elements of the model and clearly communicates what the organization’s objective and goals are.
  • The structure of the organization is made up of its corporate hierarchy , the chain of command, and divisional makeup that outlines how the operations function and interconnect. In effect, it details the management configuration and responsibilities of workers.
  • Systems of the company refer to the daily procedures, workflow, and decisions that make up the standard operations within the organization.
  • Shared values are the commonly accepted standards and norms within the company that both influence and temper the behavior of the entire staff and management. This may be detailed in company guidelines presented to the staff. In practice, shared values relate to the actual accepted behavior within the workplace.
  • Skills comprise the talents and capabilities of the organization’s staff and management, which can determine the types of achievements and work the company can accomplish. There may come a time when a company assesses its available skills and decides it must make changes in order to achieve the goals set forth in its strategy.
  • Style speaks to the example and approach that management takes in leading the company, as well as how this influences performance, productivity, and corporate culture.
  • Staff refers to the personnel of the company, how large the workforce is, where their motivations reside, as well as how they are trained and prepared to accomplish the tasks set before them.

The McKinsey 7-S Model is applicable in a wide variety of situations where it's useful to understand how the various parts of an organization work together. It can be used as a tool to make decisions on future corporate strategy.

The framework can also be used to examine the likely effects of future changes in the organization or to align departments and processes during a merger or acquisition. Elements of the McKinsey Model 7s can also be used with individual teams or projects.

Frequently Asked Questions

What is mckinsey.

McKinsey & Co. is a global consulting and accounting firm founded by University of Chicago management professor James O. McKinsey in 1926. The firm specializes in management consulting for a wide range of corporations, governments, and other organizations.

What are the 7S Factors?

The seven factors are: strategy; structure; systems; shared values; skills; style; and staff.

Why follow the 7S model?

These 7 factors are used by management to identify where a company excels and where it needs more work, in terms of creating an optimal and efficient workforce. It is also used to evaluate performance following a merger or other restructuring to identify areas that need improvement.

McKinsey. " Enduring Ideas: The 7-S Framework ," Watch "Interactive Video." Accessed July 20, 2021.

McKinsey. " Enduring Ideas: The 7-S Framework ." Accessed July 20, 2021.

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Guide to the McKinsey 7s model

The Easy Guide to the McKinsey 7S Model

Updated on: 10 January 2023

Although invented in the late 1970s, the McKinsey 7S model still helps businesses of all sizes succeed. A conceptual framework to guide the execution of strategy. 

In this guide, we’ll walk you through the 7S of the McKinsey Framework and how to apply it to evaluate and improve performance. 

McKinsey 7-S Model Definition 

The McKinsey 7S model is one of the most popular strategic planning tools .  Businesses commonly use it to analyze internal elements that affect organizational success. 

The model recognizes 7 of these elements and considers them to be interlinked, therefore it’s difficult to make significant progress in one area without making progress in other areas as well. Accordingly, to be successful, the organization should ensure that all these elements are aligned and reinforced.

The model divides these 7 elements into two categories;

Hard elements – Strategy, Structure, Systems (these are easier to be identified and defined and can be directly influenced by the management)  

Soft elements – Shared Values, Skills, Style, Staff (these are harder to be defined because they are less tangible, but are just as important as the hard elements) 

You can use the framework 

  • To successfully execute new strategies
  • To analyze how different key parts of your organization work together
  • To facilitate changes in the organization 
  • To help align processes during a merger or acquisition
  • To support management thinking during strategy implementation and change management

The 7 Elements of the McKinsey 7-S Framework 

  • Shared values

Let’s dig into these elements in more detail. 

Strategy 

A strategy is a plan the company develops to maintain its competitive advantage in the market. It consists of a set of decisions and action steps that need to be taken in response to the changes in the company’s external environment which includes its customers and competitors. 

An effective strategy would find external opportunities and develop the necessary resources and capabilities to convert the environmental changes into sources of new competitive advantage. 

The structure is the organizational chart of the company. It represents how the different units and divisions of the company are organized, who reports to whom and the division and integration of tasks. The structure of a company could be hierarchical or flat, centralized or decentralized, autonomous or outsourced, or specialized or integrated. Compared to most other elements, this one is more visible and easier to change. 

Organizational Structure Template for McKinsey 7S Model

Systems 

These are the primary and secondary activities that are part of the company’s daily functioning.  Systems include core processes such as product development and support activities such as human resources or accounting. 

Skills are the skill set and capabilities of the organization’s human resources . Core competencies or skills of employees are intangible but they a major role in attaining sustainable competitive advantage. 

The most valuable strategic asset of an organization is its staff or human resources. This element focuses on the number of employees, recruitment, development of employees, remuneration and other motivational considerations. 

This refers to the management style of the company leadership. It includes the actions they take, the way they behave, and how they interact.  

Shared Values

Shared values are also referred to as superordinate goals and are the element that is in the core of the model. It is the collective value system that is central to the organizational culture and represents the company’s standards and norms, attitudes, and beliefs. It’s regarded as the organization’s most fundamental building block that provides a foundation for the other six elements. 

McKinsey 7S Model

How to Use the McKinsey 7-S Model

The model can be used to do a gap analysis or to determine the gap between what the company is currently doing and what it needs to do to successfully execute the strategy. 

Step 1: Analyze the current situation of your organization

This is where you need to understand the current situation of the organization with regard to the 7 elements. Analyzing them closely will give you a chance to see if they are aligned effectively.

The following checklist questions will help you explore your situation. 

Strategy  

  • What’s the objective of your company strategy? 
  • How do you use your resources and capabilities to achieve that?
  • What makes you stand out from your competitors? 
  • How do you compete in the market? 
  • How do you plan to adapt in the face of changing market conditions?
  • What’s your organizational structure ?
  • Who makes the decisions? Who reports to whom? 
  • Is decision-making centralized or decentralized?
  • How do the employees align themselves to the strategy?
  • How is information shared across the organization?
  • What are the primary processes and systems of the organization? 
  • What are the system controls and where are they?
  • How do you track progress?
  • What are the processes and rules the team sticks with to keep on track? 
  • What are the core competencies of the organization? Are these skills sufficiently available? 
  • Are there any skill gaps?
  • Are the employees aptly skilled to do their job? 
  • What do you do to monitor, evaluate and improve skills? 
  • What is it that the company is known for doing well? 
  • How many employees are there? 
  • What are the current staffing requirements? 
  • Are there any gaps in the required resources? 
  • What needs to be done to address them?
  • What is the management style like? 
  • How do the employees respond to this style?
  • Are employees competitive, collaborative or cooperative? 
  • What kind of tasks, behaviors, and deliverables does the leadership reward? 
  • What kind of teams are there in the organization? Are there real teams or are they just nominal groups? 
  • What are the mission and vision of the organization? 
  • What are your ideal and real values? 
  • What are the core values the organization was founded upon? 
  • How does the company incorporate these values in daily life? 

Step 2: Determine the ideal situation of the organization 

Specify where you ideally want to be and the optimal organizational design you want to achieve, with the help of the senior management. This will make it easier to set your goals and come up with a solid action plan to implement the strategy. 

Since the optimal position you want to be in is still not known to you, you will have to collect data and insight through research on the organizational designs of competitors and how they coped with organizational change. Answering the questions above are just the starting point. 

To understand what your organization is best at, use the Hedgehog Concept by Jim Collins

Step 3: Develop your action plan

Here you will identify which areas need to be realigned and how you would do that. The result of this step should be a detailed action plan listing the individual steps you need to take to get to your desired situation, along with other important details such as task owners, timeframes, precautions and so on.

Action Plan Template for Applying McKinsey 7S Model

Step 4: Implement the action plan 

Successfully executing the action plan is depended on who executes it. Therefore you need to make sure that you assign the tasks to the right people in your organization. Additionally, you can also hire consultants to guide the process. 

Step 5: Review the seven elements from time to time

Since the seven elements are subjected to constant change, reviewing them periodically is essential. A change in one element will affect all the others, which will require you to implement a new organization design. Review the situation frequently to stay aware of the remedial action you might want to take.

Advantages and Disadvantages of McKinsey 7-S Model 

  • Considers 7 elements of strategic fit, which is more effective than the traditional model that only focuses on strategy and structure
  • It helps align the processes, systems, people, and values of an organization
  • Since it analyzes each element and the relationship between them in detail, it ensures that you miss no gaps caused by changed strategies
  • Helps organizations identify how they should align the different key parts of the organization to achieve their goals

Disadvantages

  • It requires the organization to do a lot of research and benchmarking, which makes it time-consuming
  • It only focuses on internal elements, while paying no attention to the external elements that may affect organizational performance.
  • It requires the help of senior management which may not be readily available depending on how busy they are

To analyze and understand the performance or the functioning of the organization use Weisboard’s six box model framework.

What’s Your Take on the McKinsey 7-S Model? 

The McKinsey 7S model is a proven framework for helping organizations understand how to get from their current situation to the situation they prefer to be in. 

Maybe you are a big fan of the McKinsey 7S model. Maybe you prefer another strategy framework that has worked well for you. We’d love to hear what you feel about the subject; give your feedback in the comments section below. 

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Planning in an agile organization

Companies large and small are discovering that agility—the ability to quickly reorient the organization toward valuable opportunities—can improve the performance of working groups across the enterprise. 1 A McKinsey survey found that agile teams of various kinds were 1.5 times more likely to report financial outperformance than other business teams and 1.7 times more likely to report nonfinancial outperformance. Eighty-one percent of respondents in agile units report a moderate or significant increase in overall performance since their transformations began. For more, see “ How to create an agile organization ,” October 2017, McKinsey.com. Agile ways of working can also reduce risk and create flexibility, because they allow teams to test and validate ideas before the business commits to developing them. These benefits can be lessened, however, if companies don’t apply agile concepts to enterprise-wide processes—particularly the planning and budgeting processes, by which companies translate their strategy into decisions about how to allocate people and resources. When agile teams must submit ideas to a planning committee and wait months for funding, they can miss out on precious opportunities to win customers or boost efficiency. At the business-unit level, the company can be slow to reallocate money and resources to endeavors that create the most value.

Stay current on your favorite topics

Most of the techniques that agile organizations use to make planning more dynamic are not new. Rather, they’ve been tried and tested by companies across industries and geographies. What’s apparent, though, is that agile organizations can use them to match the pace of planning with the pace of agile teams. These techniques help corporate planners to ratchet up the frequency of resource-allocation decisions and to grant teams more leeway to spend their budgets, while still ensuring that money and people are deployed productively.

To achieve agility in planning, companies should combine elements that promote both stability and dynamism . 2 For more on the way that stability and dynamism together promote agility, see Wouter Aghina, Aaron De Smet, and Kirsten Weerda, “ Agility: It rhymes with stability ,” McKinsey Quarterly , December 2015, McKinsey.com, and Wouter Aghina, Aaron De Smet, Gerald Lackey, Michael Lurie, and Monica Murarka, “ The five trademarks of agile organizations ,” January 2018, McKinsey.com. The elements that lend stability to agile planning are setting clear strategic priorities and defining closely related objectives for teams. The dynamism in agile planning comes from holding quarterly planning sessions, in which funding is redistributed among business units, and providing teams with support to use funding as they see fit. In this article, we will explore these four elements and illustrate them with examples from several companies.

Focus on a small set of strategic priorities

While an excess of strategic priorities can create difficulties for any organization, it can be especially problematic for agile companies, where empowered teams enjoy the rights to make more day-to-day decisions than project teams at traditional command-and-control companies. Our experience suggests that if agile teams each have their own idea about the company’s strategic priorities, then these teams can end up pursuing endeavors that are too diverse to produce significant performance gains in any single area.

Executives at an agile company must therefore agree on a small, well-defined set of priorities—ideally, ten or fewer. 3 A McKinsey survey found that agile performance units are more likely than other performance units to have “actionable strategic guidance” and a “shared vision and purpose.” For more, see “ How to create an agile organization ,” October 2017, McKinsey.com. These priorities should then guide planning and budgeting decisions at all levels of the organization, such that business units receive extra funding if their main initiatives support the main strategic priorities, and business units assign more funding to individual teams whose work makes a demonstrable contribution to the strategic priorities. Additionally, these priorities should be updated on a quarterly basis to ensure they’re still in line with changing customer and market trends. That is not to say that agile companies should not explore and experiment. Experimentation outside the strategic goals is often accomplished by granting teams and individuals certain capacity to pursue their discretionary endeavors. For example, Google encourages its employees to spend 20 percent of their time on projects that they think will benefit the company.

A North American provider of financial and software services developed a five-year strategy consisting of three pillars and eight enablers that translated into more than 25 priorities. Since each priority would require rapid execution and frequent monitoring, leadership soon realized that it could not look after so many priorities at once, let alone explain them all to the company’s workforce. To focus its attention, the executive team chose to identify no more than five strategic priorities to pursue every year. Executives also set clear, measurable goals that they could use in quarterly reviews of the company’s progress toward its strategic priorities, a practice we explore more in the following section.

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Ensure teams have clear, specific goals.

Once executives have established the company’s strategic priorities, they need to convey those to personnel at every level of the organization. Managers and other employees may be working on hundreds of activities that seem important from their vantage points, so it’s important to make sure that everyone puts most of their energy into endeavors that correspond to the company’s priorities. We have found that articulating company priorities in a concise memo and distributing it to the entire company greatly helps to orient agile teams toward the same set of high-level priorities.

Strategy memos, however, are ordinarily too general for teams to use as guidance for their day-to-day decisions. Agile organizations should therefore translate strategic priorities into more specific goals that teams can work toward. 4 A McKinsey survey found that agile performance units are 2.2 times more likely than other performance units to maintain “performance orientation.” For more, see “ How to create an agile organization ,” October 2017, McKinsey.com. One way that agile organizations can do this is by establishing objectives and key results (OKRs). An OKR spells out the company’s priorities in terms of specific accomplishments and performance improvements. The objective consists of a clearly defined qualitative change, while the key result is a specific, often quantitative performance target that must be met. Agile organizations should set OKRs annually and assess progress against them on a quarterly basis.

The setting of OKRs shouldn’t be a strictly top-down exercise. Ideally, staff at each level will be allowed to suggest changes to the OKRs and outline the budget they will need to meet them. These suggestions should be aggregated, reconciled, and taken into account. The idea is not to challenge and debate the premise for every OKR (as an organization might do in a zero-based-budgeting approach), but to make reasonable adjustments to the OKRs. Most organizations will set budget envelopes (fixed amounts of funds, allocated for a duration) at different levels to accelerate the process and reduce variability.

For example, a global financial institution set a strategic priority to make its customer-service journey more efficient. In line with that strategy, it established an OKR to reduce the cost of servicing customers (the objective) by 50 percent (the key result). Achieving the OKR would require coordinated effort among the “squads,” or teams, working on different aspects of the customer-service journey, such as product, technology, policy, and risk. To promote alignment among the squads, executives gathered the squad leaders to discuss cost-reduction opportunities and what each squad could do to capture them. Thereafter, each squad was assessed with respect to a single metric: reduction in the cost of servicing customers. The single OKR encouraged the teams to focus on cost-reduction initiatives and deprioritize other activities, while promoting a shared understanding of how the squads would be assessed each quarter.

Accelerate planning cycles to reallocate resources more frequently

Agile teams can turn out minimum viable products (MVPs) in just a few weeks, and they reallocate funding continuously, with priorities being refined every sprint. 5 Ibid . Because their work rate is so high, these teams can be constrained or even crippled if they must wait for funding to be dispensed in annual cycles. For example, a large North American insurance provider that allocated funds on an annual basis struggled to promptly finance innovative ideas once its customer-facing teams had adopted agile ways of working. A team that conceived a promising product concept would have to wait until the end of the year before it could start working on it—by which time competitors would have already released similar products.

To help teams obtain funding more quickly, the insurance provider set aside a portion of its budget to be allocated on a quarterly basis. The company then invited agile teams to apply for the funding they would need to develop new ideas. Rather than entirely funding a new idea up front, though, the planning committee allocated each team just enough funding to reach the next milestone in a project, then evaluated the outcome before releasing any more funding.

These decisions were made during quarterly planning sessions: gatherings of business leaders from multiple functions, where teams describe their progress and business outcomes with respect to OKRs and outline their plans for future quarters. The leadership group then assesses funding proposals, whether for new projects or for the continuation of existing projects, and decides what to fund.

Here is an example from the insurance company mentioned above. In one quarterly planning session, a team from the employee-benefits business made a case that it needed a new file-exchange system. The team had observed that clients were unhappy about having to spend significant time and resources to prepare flat files with beneficiary details, which operations teams at the insurer would review and correct, placing further demands on clients. The planning committee granted the team enough funding to conduct user research, which confirmed that these error-prone file exchanges accounted for major lags in turnaround time. At the next quarterly planning session, the team presented its research outlined a concept for the file-exchange system, and requested funding to build an MVP. The planning committee fulfilled the team’s funding request, which enabled the team to spend the next quarter building the MVP.

Unleashing the power of small, independent teams

Unleashing the power of small, independent teams

Enable teams instead of directing them.

Once the leaders of an agile organization have clearly articulated strategic priorities and conveyed them throughout the organization in the form of clear OKRs, they should concentrate on empowering teams and individuals to execute their plans for pursuing the OKRs. This often requires leaders to desist from telling teams what to do and how to do it, and instead allow teams to determine their own courses of action. Leaders then assist teams in carrying out their plans by providing them with adequate resources, as described above, and removing institutional obstacles.

One example of this leadership approach can be found at a North American software provider. While creating the previous version of an online banking platform, the company’s leadership had taken a highly directive approach. One year into the development process, though, the company discovered that the platform’s design, as specified by leadership, failed to take advantage of cloud-based technologies that would make the platform highly scalable.

When it came time to develop a new version of the platform, the company’s leaders restricted their role to defining the vision and providing guidance on which features to include. They then allowed the development team to figure out how best to build the platform. The developers chose to create an MVP by adapting a third-party banking platform that was based in the cloud. That approach proved more efficient, scalable, and technically reliable than coding from scratch—an instance where leadership’s deference to technical experts produced a superior result, with the MVP being released within five months (after previous delays of more than a year and a half).

For many executives, managers, and workers, organizational agility is already a high priority. Nevertheless, at some companies that are going through agile transformations, individual teams have been unable to fully implement agile ways of working because they are hamstrung by bureaucratic planning processes. To help these agile teams realize their potential, executives must integrate agile principles into their planning methods and systems. Stable, enterprise-wide strategic priorities provide the basis for the specific objectives and key results that teams are asked to work toward. With those priorities and objectives in mind, the planning group reviews budgets every quarter, rather than annually, so it can reallocate resources more often to teams that create the most value. Those teams, in turn, receive more authority to deploy funding in service of their objectives and more support from executives—thereby realizing the agility that is conducive to the organization’s success.

Santiago Comella-Dorda is a partner in McKinsey’s Boston office, Khushpreet Kaur is a partner in the New York office, and Ahmad Zaidi is an associate partner in the Chicago office.

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McKinsey 7S Model

McKinsey 7S Model

Definition of the McKinsey 7S Model

McKinsey 7S model is a tool that analyzes company’s organizational design by looking at 7 key internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to identify if they are effectively aligned and allow the organization to achieve its objectives.

What is the McKinsey 7S Model

McKinsey 7S model was developed in the 1980s by McKinsey consultants Tom Peters, Robert Waterman and Julien Philips with help from Richard Pascale and Anthony G. Athos. Since its introduction, the model has been widely used by academics and practitioners and remains one of the most popular strategic planning tools.

It sought to present an emphasis on human resources (Soft S), rather than the traditional mass production tangibles of capital, infrastructure and equipment, as a key to higher organizational performance.

The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a company.

The key point of the model is that all the seven areas are interconnected and a change in one area requires change in the rest of a firm for it to function effectively.

Below you can find the McKinsey model, which represents the connections between seven areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes the interconnectedness of the elements.

The image shows McKinsey 7s model, where 7 organization elements are interconnected with each other.

The model can be applied to many situations and is a valuable tool when organizational design is at question. The most common uses of the framework are:

  • To facilitate organizational change.
  • To help implement a new strategy.
  • To identify how each area may change in the future.
  • To facilitate the merger of organizations.

In the McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’ areas. Strategy, structure and systems are hard elements that are much easier to identify and manage when compared to soft elements.

On the other hand, soft areas, although harder to manage, are the foundation of the organization and are more likely to create a sustained competitive advantage.

Strategy is a plan developed by a firm to achieve sustained competitive advantage and successfully compete in the market. What does a well-aligned strategy mean in the 7S McKinsey model?

In general, a sound strategy is one that’s clearly articulated, long-term, helps to achieve a competitive advantage, and reinforced by a strong vision, mission, and values.

But it’s hard to tell if such a strategy is well-aligned with other elements when analyzed alone. So the key in the 7S model is not to look at your company to find the great strategy, structure, systems and etc. but to look if it’s aligned with other elements.

For example, a short-term strategy is usually a poor choice for a company, but if it’s aligned with the other 6 elements, then it may provide strong results.

Structure represents the way business divisions and units are organized and includes the information on who is accountable to whom. In other words, structure is the organizational chart of the firm. It is also one of the most visible and easy-to-change elements of the framework.

Systems are the processes and procedures of the company, which reveal the business’ daily activities and how decisions are made. Systems are the area of the firm that determines how business is done and it should be the main focus for managers during organizational change.

Skills are the abilities that a firm’s employees perform very well. They also include capabilities and competencies. During organizational change, the question often arises of what skills the company will really need to reinforce its new strategy or new structure.

Staff element is concerned with what type and how many employees an organization will need and how they will be recruited, trained, motivated and rewarded.

Style represents the way the company is managed by top-level managers, how they interact, what actions do they take and their symbolic value. In other words, it is the management style of the company’s leaders.

Shared Values

Shared Values are at the core of McKinsey’s 7S model. They are the norms and standards that guide employee behavior and company actions and thus, are the foundation of every organization.

The authors of the framework emphasize that all elements must be given equal importance to achieve the best results.

Using the McKinsey 7S framework

As we pointed out earlier, the McKinsey 7S framework is often used when organizational design and effectiveness are in question. It is easy to understand the model but much harder to apply it to your organization due to a common misunderstanding of what should well-aligned elements be like.

We provide the following steps that should help you to apply this tool:

Step 1. Identify the areas that are not effectively aligned

During the first step, your aim is to look at the 7S elements and identify if they are effectively aligned with each other. Normally, you should already be aware of how 7 elements are aligned in your company, but if you don’t, you can use the checklist from WhittBlog to do that.

After you’ve answered the questions outlined there, you should look for the gaps, inconsistencies, and weaknesses between the relationships of the elements. For example, you designed a strategy that relies on quick product introduction, but the matrix structure with conflicting relationships hinders that, so there’s a conflict that requires a change in strategy or structure.

Step 2. Determine the optimal organizational design

With the help of top management, your second step is to find out what effective organizational design you want to achieve. By knowing the desired alignment, you can set your goals and make the action plans much easier.

This step is not as straightforward as identifying how seven areas are currently aligned in your organization for a few reasons.

First, you need to find the best optimal alignment, which is not known to you at the moment, so it requires more than answering the questions or collecting data.

Second, there are no templates or predetermined organizational designs that you could use and you’ll have to do a lot of research or benchmarking to find out how other similar organizations coped with organizational change or what organizational designs they are using.

Step 3. Decide where and what changes should be made

This is basically your action plan, which will detail the areas you want to realign and how you would like to do that. Suppose you find that your firm’s structure and management style are not aligned with the company’s values. In that case, you should decide how to reorganize the reporting relationships and which top managers the company should let go or how to influence them to change their management style so the company could work more effectively.

Step 4. Make the necessary changes

The implementation is the most important stage in any process, change or analysis and only the well-implemented changes have positive effects. Therefore, you should find the people in your company or hire consultants that are the best suited to implement the changes.

Step 5. Continuously review the 7S

The seven elements: strategy, structure, systems, skills, staff, style and values are dynamic and change constantly. A change in one element always has effects on the other elements and requires implementing a new organizational design. Thus, continuous review of each area is very important.

Example of McKinsey 7S Model

We’ll use a simplified example to show how the model should be applied to an existing organization.

Current position #1

We’ll start with a small startup which offers services online. The company’s main strategy is to grow its share in the market. The company is new, so its structure is simple and made of a few managers and bottom-level workers who undertake specific tasks. There are a very few formal systems, mainly because the company doesn’t need many at this time.

So far, the 7 factors are aligned properly. The company is small and there’s no need for a complex matrix structure and comprehensive business systems, which are very expensive to develop.

McKinsey 7S Example (1/3)

Current position #2

The startup has grown to become a large business with 500+ employees and now maintains a 50% market share in the domestic market. Its structure has changed and it is now a well-oiled bureaucratic machine.

The business expanded its staff and introduced new motivation, reward and control systems. Shared values evolved and now the company values enthusiasm and excellence. Trust and teamwork have disappeared due to so many new employees.

The company expanded and a few problems came with it. First, the company’s strategy is no longer viable. The business has a large market share in its domestic market, so the best way for it to grow is either to start introducing new products to the market or to expand to other geographical markets. Therefore, its strategy is not aligned with the rest of the company or its goals. The company should have seen this but it lacks strategic planning systems and analytical skills.

Business management style is still chaotic and it is a problem of top managers lacking management skills. The top management is mainly comprised of founders who don’t have the appropriate skills. New skills should be introduced to the company.

McKinsey 7S Example (2/3)

Current position #3

The company realizes that it needs to expand to other regions, so it changes its strategy from market penetration to market development. The company opens new offices in Asia, North and South America.

The company introduced new strategic planning systems and hired new management, which brought new analytical, strategic planning, and, most importantly, managerial skills. The organization’s structure and shared values haven’t changed.

Strategy, systems, skills and style have changed and are now properly aligned with the rest of the company. Other elements like shared values, staff and organizational structure are misaligned.

First, the company’s structure should have changed from a well-oiled bureaucratic machine to a division structure. The division structure is designed to facilitate operations in new geographic regions. This hasn’t been done and the company will struggle to work effectively.

Second, new shared values should evolve or be introduced in an organization because many people from new cultures come to the company and they all bring their own values, often very different than the current ones. This may hinder teamwork performance and communication between different regions. Motivation and reward systems also have to be adapted to cultural differences.

McKinsey 7S Example (3/3)

We’ve shown a simplified example of how the McKinsey 7S model should be applied. It is important to understand that the seven elements are much more complex in reality, and you’ll have to gather a lot of information on each of them to make any appropriate decision.

The model is simple, but it’s worth the effort to do one for your business to gather some insight and find out if your current organization is working effectively.

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  • Business Model Canvas (BMC)
  • Elaboration Likelihood Model of Persuasion

4 thoughts on “McKinsey 7S Model”

For sure this article is one of the most useful and complete guidelines on 7S model.

Thanks Alireza Nami

Hello! Thanks for this. The article has explained comprehensively well how the 7S McKinsey framework works. 🙂 The case studies illustrated clearly how alignment should be investigated.

Thank so much. Tina Saulo

Can we adopt McKinsey 7S Model for gap analysis of data generation system or simply for data gap analysis of SDGs?

Very well explained. Very simple to follow.

Wanted to know how does McKinsey 7S Model differentiate from EFQM Model.

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The McKinsey Horizon Model

Deep Gandhi

Deep Gandhi

mckinsey strategic planning process

The McKinsey Horizon Model , also known as the Three Horizons Model , is a strategic framework used to identify and manage innovation within an organization. The model was developed by McKinsey & Company in the 1990s and has since become widely used in the business world.

The framework consists of three horizons, each representing a different time frame and level of innovation:

  • Horizon one: This represents the core business activities of an organization. These are the activities that generate the majority of the organization's revenue and profit. Horizon one activities typically have a short-term focus and are characterized by incremental improvements to existing products or services.
  • Horizon two: This represents emerging business opportunities that have the potential to become significant revenue generators in the medium term. These opportunities typically involve some degree of innovation and experimentation and may require investment in new technologies or business models.
  • Horizon three: This represents the long-term future of the organization. Horizon three activities involve exploring new business opportunities that may not yet be fully understood or developed. High levels of uncertainty and risk characterize these activities.

The McKinsey Horizon Model is useful for organizations looking to manage their innovation portfolio and balance short-term priorities with longer-term strategic goals. By identifying and investing in opportunities across all three horizons, organizations can ensure that they’re not neglecting their core business while also positioning themselves for future growth and success.

Such an approach is especially useful when facilitating strategic planning sessions , or when building a longer-term strategic plan.

Allocation of resources across the three horizons

Allocating resources to the different horizons of the McKinsey Horizon Model involves a strategic process that takes into consideration the level of risk, uncertainty, and potential impact of each opportunity. Here are some general steps to follow when allocating resources:

  • Identify and prioritize opportunities: Start by identifying and prioritizing opportunities that fall into each of the three horizons. This may involve conducting market research, analyzing industry trends, and assessing the organization's capabilities and resources.
  • Develop strategies: Develop strategies for each horizon based on the level of risk, uncertainty, and potential impact. For Horizon one, the focus may be on optimizing existing products or services, improving operational efficiency, and maintaining market position. For Horizon two, the focus may be on exploring emerging opportunities and investing in new technologies or business models. For Horizon three, the focus may be on exploring entirely new business opportunities that may disrupt the industry.
  • Allocate resources: Allocate resources based on the strategies developed for each horizon. This may involve investing a larger percentage of resources in Horizon one activities to maintain the core business while allocating smaller portions of resources to Horizon two and Horizon three activities. However, the allocation of resources should be flexible and adjusted over time based on changing business needs and market conditions.
  • Monitor and measure progress: Monitor and measure progress across all three horizons to ensure that resources are being allocated effectively. This may involve setting key performance indicators (KPIs) for each horizon, tracking progress against these KPIs, and making adjustments as needed.

Overall, allocating resources to the different horizons of the McKinsey Horizon Model involves a strategic and flexible approach that takes into consideration the organization's priorities, capabilities, and the changing business environment.

The McKinsey Horizon Model in action: a real-life case study

Amazon’s innovation strategy is a real-life example of the McKinsey Horizon Model in action.

Amazon's Horizon one activities include its core business of selling books, electronics, and other products online. Amazon continues to invest in improving its customer experience, expanding its product offering, and optimizing its supply chain to maintain its market position and generate revenue.

In Horizon two, Amazon is exploring new business opportunities such as Amazon Web Services (AWS), a cloud computing platform that provides a range of services to businesses. AWS has become a significant revenue generator for Amazon and has helped the company expand beyond its traditional retail business.

Finally, in Horizon three, Amazon is investing in emerging technologies such as drones and autonomous delivery vehicles. These technologies have the potential to disrupt the traditional retail industry and create new opportunities for Amazon in the future.

By investing in activities across all three horizons, Amazon has been able to balance short-term priorities with longer-term strategic goals. The company has maintained its position as a leader in online retail while also expanding into new areas and exploring potentially disruptive technologies.

Overall, the McKinsey Horizon Model is a powerful tool for organizations looking to manage innovation and balance short-term priorities with long-term strategic goals. By adopting a structured approach to innovation management and investing across all three horizons, organizations can position themselves for success in an ever-changing business landscape.

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BUSINESS MODELS

Learn everything you need to know about business models. This guide on business models was created by an ex-McKinsey consultant and includes frameworks, case studies, examples, a step-by-step design guide, and an 18-page business model PowerPoint template.

THE BIG PICTURE ON BUSINESS MODELS

1. To Grow, Get All of the Elements Right

If you think through, analyze , and correctly solve each element of the business model, your company will grow.

2. Sequentially Solve the Business Model

Strategic planning should always start with the mission , then flow through the targets, value proposition , go to market, and finally the organization .

3. Understand the Role of Each Business Model Element

Once you understand each business model element, then it is much easier to solve for the right strategies to grow.

4. Strategic Alignment is the Key to Execution

Strategic alignment is when an organization is laser-focused on developing and delivering a killer value proposition and go-to-market that beats the competition .

A BUSINESS MODEL HAS 5 CORE ELEMENTS

There are five major components to any business model:

1. The Mission   2. Targets  3. Customer Value Proposition  4. Go-to-Market  5. The Organization

The way a business model works is: " The organization efficiently & effectively develops and delivers the customer value proposition and go-to-market to fulfill the needs of the target customers better than competitors , all for the purpose of achieving the mission ."

The horizontal graphic below translates the flow of elements in a business model.

How a business model works

THE WHO, WHAT, WHY, WHERE & HOW OF BUSINESS MODELS

We can take the horizontal business model graphic and make it vertical, which is the graphic we use throughout the site.

Business Model Questions

Let's go over the big picture of the business model.

We start at the top with the "true north" representing a business' mission , vision, and values , which ultimately gives purpose and provides the "why" the company exists. An inspiring and enduring mission, vision, and values serve as a guide to align strategies, and help all employees make the   right decisions , however big or small the decisions .

We next move down to the   targets.   These include the   markets   and   geographies   ("where") the company competes in, for the business of the target   customers  ("who"). Companies that clearly define and deeply understand their targets, develop focused and aligned business models.

Next is the  value proposition , which is the "what" and the core of any business model, composed of the  business's products ,  services ,  and  pricing . Then, there is the  go-to-market , comprised of the  business's distribution ,  sales ,  and  marketing . The purpose of go-to-market is to amplify the value proposition to drive customer acquisition and loyalty.

Finally, the  organization  is organized into  functions  (e.g., sales, ops, finance). Everything the organization does is a  process  (whether defined as one or not) executed by  team members ,  partners , and  infrastructure . The organization is the execution machine and the "how" things get done in a business model. And as stated before, the organization's purpose is to efficiently and effectively develop and deliver the value proposition and go-to-market to fulfill customers' needs better than competitors, all for the purpose of achieving the mission, vision, and values.

SOLVE A BUSINESS MODEL FROM THE TOP DOWN

Let's go over a few things about business models. First, look below to see all the  different types of strategy , which are just the tip of the iceberg. Second, most companies make the mistake of solving their strategy from the bottom up, starting with functional strategies. The conversation goes something like this, "We've got our board meeting coming up. Bob, I need your ops strategy. Jane, I need your marketing strategy . Helen, I need your sales plan and strategy. Nate, give me a readout on the HR strategy ."

I equate it to trying to design a car, with the chassis, brakes, engine, and electronics team independently designing their part. In the end, it won't work. Now, let's get into a simple case study to understand better how a business model works.

SOUTHWEST AIRLINES - ONE OF THE CLEANEST BUSINESS MODELS

Finding a better example of a well-tuned business model than Southwest Airlines is hard. Starting in 1967, Southwest Airlines has grown to be the largest domestic airline in the U.S., with $20 billion in annual sales and 50,000 employees. With a deep history of award-winning service, Southwest has amassed 43 straight years of  profitability . If you were lucky enough to buy $10,000 worth of Southwest stock in 1971, it would be worth over $20,000,000 today.

TRUE NORTH - "THE "WHY"

The true north of a company includes the organization's mission, vision, and values, which provide the foundation for aligning strategies, decisions, actions, and culture . A compelling mission gives the team and organization the inspiration and the focus they need to make mission-based decisions and align their strategies. A strong vision of strategic pillars and ambitious goals provides the next level of focus for aligning the organization's strategies. And values are the foundation of expected norms and behaviors that foster a company's culture. Without a compelling mission, vision, and values, management teams often struggle with strategic focus since they try to navigate without understanding the direction of true north.

Back in 1971, Southwest's mission was so simple and effective, “Charge the lowest possible fare. And provide the highest quality service.”

Over the past 45+ years, Southwest's strategic and day-to-day decisions reinforced how they could charge the lowest possible fare and provide the highest quality service. You'll see Southwest's mission throughout Southwest's business model.

Today, Southwest's true north is encapsulated below in its purpose, vision, mission, and values.

TARGETS - THE "WHO" & "WHERE"

A business model has three primary targets:  1. Markets , 2. Customers, 3. Geographies.  The targets define the "who" and "where" of a business model. A  market  establishes the solution space a business competes in for customers. If a  leadership team  truly understands its market dynamics, it can navigate its way to a leadership position. A defined  target customer  enables an organization to tailor their value proposition better to exceed the target customers' needs. While  target geographies  focus on the execution of a business and add to economies of scale.

Well-defined targets provide an organization clarity to make better decisions and execute at a higher level. Expanding into new markets, customer segments, and geographies can lead to explosive growth when a business already has a winning value proposition in existing markets, customer segments, and geographies. However, suppose a company expands into new target markets, customers, and geographies before the value proposition and organization are ready. In that case, it can fragment focus, create shoddy execution, and overextend the business into financial distress.

Let's better understand Southwest's target market, customer segments, and geographies.

Southwest's Target Market

The output of a market strategy is a differentiated positioning within the market. Southwest competes in the highly competitive commuter airline market, which, as an industry, lost $50 billion from 2001-2012.

The idea of Southwest was born on a napkin with lines connecting the three dots titled Dallas, San Antonio, and Houston. Back in 1967, the founders of Southwest saw a hole in the commuter airline market. While the big airlines were built around national and regional hub and spoke route models, Southwest focused on intrastate point-to-point routes (initially Dallas, Houston & San Antonio). Since then, Southwest has stuck to this point-to-point route market positioning, while most other airlines relied on their hub and spoke models.

Southwest's Target Customers

You start a business to fulfill a customer's need. Southwest started a regional point-to-point airline for customers who wanted an hour-long flight rather than waste 3.5 to 4.5 hours in a car to drive from Dallas to Houston or San Antonio. Instead of spending 7 to 9 hours behind the car windshield for a day round trip, customers could be pampered by  "the best service and the most beautiful girls in the sky."  Southwest had a unique perspective on how they defined the needs of their  target customers , as stated in their 1975 Annual Report,

"We believe that in short-haul markets of up to 500 miles, the private automobile is a worthy competitor for those consumers representing the great majority of us who cannot logically place a value on time commensurate with the airfares now charged in those markets. Except for the businessman and woman market, a fare that does not compete with the cost of personal automobile travel will not permit any air market to reach its potential.

By focusing on this unmet customer need to substitute a flight for a car drive, Southwest was one of the key influencers in driving astronomical growth in U.S. domestic air travel. They attracted business customers with low fares, convenience, and service, and leisure travelers with ultra-discounted weekend tickets to drive up their plane utilization. At the time, the ultra-discounted weekend fares opened up a whole new segment of travel customers who wanted to fly for pleasure, to visit family, recreation, and to explore new destinations.

Over the past 45+ years, Southwest has continued its focus on the business and leisure customer segments, tailoring its value proposition and go-to-market to these two segments.

Southwest's Target Geographies

While Southwest Airlines now serves over 100 destinations, its deliberate geographic expansion strategy was one of the keys to Southwest's growth. In keeping with its low-cost provider mission, Southwest has always pursued a geographic density strategy to drive cost and capital synergies and utilization.

Over the six years after their 1971 launch, Southwest expanded just in Texas with routes to the Rio Grande Valley, Austin, Corpus Christi, El Paso, Lubbock, and Midland/Odessa. In 1977, Southwest's fleet of 12 737s carried 2.4 million customers, which equals 200,000 passengers per plane, or 548 passengers per plane per day. Considering the population of Texas was only 13 million people in 1977, the word-of-mouth of the new, cool, and cheap Southwest Airlines was unavoidable. This geographic focus also enabled Southwest to leverage its fixed costs related to airports, personnel, maintenance facilities, and advertising .

Southwest has always taken a highly deliberate geographic expansion strategy, choosing routes that are natural extensions of the existing route network, leading to 40 years of steady, profitable growth. Southwest has continuously focused on driving the economies of scale that a dense geographic strategy provides. Furthermore, Southwest has been extremely opportunistic with their airport selection, often focusing on lower-cost second-tier airports in a region such as Dallas Love Field, Houston Hobby, Chicago Midway, Baltimore-Washington International, Oakland, San Jose, Burbank, Manchester, Providence, Ft-Lauderdale-Hollywood.

And, when Southwest expanded internationally, they made the strategic acquisition of AirTran, which had few overlapping routes but did have a robust business to the Caribbean, Mexico, and select Central American cities.

The Strategic Takeaway on Targets

Understanding, defining, and executing against target markets, customers, and geographies is core to building a killer business model. If you create a  differentiated market position,  you have a long-term vision of what you need to execute against. If you define the right target customers, you can tailor a differentiated value proposition to drive more customer value than competitors while also narrowing the scope of your go-to-market strategies. If you develop geographic density, then you reap economies of scale.

Keep your targets focused until your business and economic model are ready to scale into new markets, customer segments, and geographies. New markets, customer segments, and geographies can provide explosive growth, but only if your value proposition and economics are ready to beat the competitors in the new targets. The downfall of too many businesses is they overextend themselves by trying to expand into too many new targets, fragmenting the focus and execution of the organization.

THE VALUE PROPOSITION - THE CORE & "WHAT"

Southwest's value proposition.

Let's return to the original Southwest mission:  "Charge the lowest possible fare. And provide the highest quality service."  Frankly, it sounds like their value proposition, which is what you want in a mission statement .

Herb Kelleher, the co-founder and former CEO of Southwest, understood the customer value equation from the beginning, as he highlighted in an interview with  Strategy + Business, after being honored as a "Lifetime Strategist,"

One of the things that people, I think, didn't understand is that we started out saying we're going to give you more for less, not less for less. We're going to give you new airplanes, not old airplanes. We're going to give you the best on-time performance. We're going to give you the people who are most hospitable."

1970s Southwest Ad

Southwest's Service - Rational Benefits

In evaluating a value proposition, start with the rational benefits of the  products  and  services . Southwest's rational benefits are getting customers and their bags from point A to B through the air, which they do efficiently and competently.

They have the highest frequency of point-to-point routes, providing customers convenience and reduced travel time versus hub and spoke airlines. Southwest has the best historical on-time and baggage performance. They have a fast and convenient check-in process. In the event of a change, they have no change penalties and make it easy to book another flight. They also have the richest and easiest-to-redeem rewards program, averaging 9.5% of passenger miles flown on Rapid Rewards flights versus ~7% on other airlines.

By consistently and efficiently getting passengers and their bags from point A to B, Southwest consistently ranks as one of the top airlines in customer satisfaction.

Southwest's Service - Emotional Benefits

If you fly Southwest, you understand the difference in the emotional experience versus other airlines. It always starts with the people, and Southwest's employees have a fun, caring, and go-the-extra-mile attitude.

Then there is Southwest's physical experience of newer planes, with leather seats and extra legroom compared to other airlines in the same fare class.

Then there are the perks of free live TV, free snacks, drinks, and affordable $5 wifi and alcoholic beverages. If you're a frequent flier, they periodically send you free alcoholic beverage coupons.

There is also the emotional lift of not being taken advantage of with bag and change fees.

Southwest's service is so good, and their emotional connection with customers is so strong that they can pull off marketing campaigns centered around "Love." Imagine what a bad joke it would be if other airlines tried incorporating "love" into their  marketing .

Southwest Pricing

In 1993, the U.S. Department of Transportation coined the term the "Southwest Effect" for the rapid growth in total air travel in a city-to-city route once Southwest started to fly the route. The "Southwest Effect" is driven by their value equation, which equals benefits - price. While we've gone through the customer benefits of Southwest, let's flip to the other side of the coin:  pricing .

Historically, Southwest has been the price leader in the airline industry. With the growth of ultra-discount airlines (e.g., Frontier, Spirit), they may no longer be the ticket price leader. However, they are probably still the leader in the total cost of flying when you factor in the extra cost of bags, seat selection, change fees and the other charges of ultra-discount airlines.

Southwest utilizes its simple pricing in its #FeesDontFly  marketing campaign . While the competitive herd goes one way, Southwest goes the other way, which is the essence of  competitive differentiation .

The Strategic Takeaways on Value Propositions

A business's value proposition comprises its products, services, and pricing. The goal of a value proposition is to drive better customer value (benefits - price) than competitors. Over the past 45+ years, Southwest has consistently delivered superior customer value, leading them to grow into the largest U.S. domestic airline.

For struggling companies, the first thing to look at is the customer value proposition, which is most likely deficient versus the competition . Even for successful companies, the bottom line is to continuously focus on differentiating the value proposition to improve benefits while driving down costs, which can translate into enhanced profit or price improvement. The Customer Value Wedge is a nice visual to understand this concept better.

GO-TO-MARKET - AMPLIFYING THE VALUE PROPOSITION

The go-to-market strategy of a business model is how a company drives and fulfills the demand for products and services to customers. The three components of go-to-market include  distribution ,  sales , and  marketing . Powerful go-to-market strategies effectively and efficiently amplify the value proposition to the defined target customers.

The big strategic choice with distribution is whether to go direct, indirect, or a hybrid model of both direct and indirect channels. The big strategic goal with sales and marketing is to drive campaigns and activities to increase the size of the customer funnel and accelerate customers through the funnel.

Southwest Direct Distribution

With the rise of digital channels, distribution is currently a hotbed of disruption and innovation . Thousands of companies have cut out significant distribution costs from their value chain, by going directly to customers through digital channels .

Given Southwest's mission of low fares, in the late 90s, as Expedia, Priceline, Orbitz, and other travel websites grew, Southwest decided not to partner with third-party websites and only utilize Southwest.com as their online distribution.  At the time it was a risky move as many airline analysts said Southwest was going to suffer. However, given the strength of Southwest's value proposition and loyalty, the direct distribution strategy paid off.

For Southwest, the estimated savings are ~$700 million a year by not using the travel sites. Southwest can split the $700 million between higher profits and lower fares for customers. It is an example of driving the customer value wedge.

Distribution strategy is a critical element of any go-to-market strategy, and getting it right can be the difference between winning and losing.

Southwest Sales & Marketing

Southwest's marketing, encapsulated in their "Tranfarency" and "Love" campaigns, reflects their low fares and high-quality service mission. "Transfarency" amplifies the rational benefits of Southwest's value proposition, while "Love" amplifies the emotional benefits.

One of the main outputs of any marketing strategy is a campaign, simply a combination of messages and media. There are three media meta-channels:  advocacy, owned, and paid . The beauty of Southwest is how consistent they are in driving its brand messages across all three of these media meta-channels.

With Southwest and most B2C companies, there isn't a "Sales" element to their business model, as in most B2B business models.

Too often, companies blame marketing for their growth woes instead of addressing the lack of value in their value proposition. Two of the most successful retailers, Costco and Trader Joe's, spend almost nothing on marketing but continue to grow through the strength of their value proposition and word-of-mouth advocacy. From 2010 to 2013, Southwest kept its advertising spending almost flat but increased revenues by 46%.

The Strategic Takeaways on Go-to-Market

Too often, executives blame distribution, marketing, and sales strategies for growth woes. They usually replace their sales and marketing leaders or spend more on advertising and salespeople when they need to improve their value proposition.

Go-to-market strategies amplify a value proposition. If the value proposition is inferior to the competition, improve the value proposition and then amplify the value proposition through bigger and better go-to-market strategies.

If your business has a strong value proposition, add growth fuel by heavily investing in distribution, sales, and marketing. And align the go-to-market strategies to the target customer and their typical purchasing journey. Lastly, get the brand messaging right to tap into the rational and emotional benefits of the value proposition.

THE ORGANIZATION - THE HEART & "HOW"

The purpose of an organization is to efficiently and effectively develop and deliver the customer value proposition and go-to-market. Reflect on this for a minute. Is your role and everyone in the company focused on developing and delivering the customer value proposition and go-to-market?

Organizations are simply a collection of processes executed by a combination of people, infrastructure, and partners . The  processes are organized into functions .

There are two types of functions: 1. value chain functions and 2. support functions. Value chain functions create the value proposition and deliver and service the value proposition (i.e., logistics, product development , manufacturing, sales, marketing, and service operations). Support functions support the efficiency and effectiveness of other functions (i.e., procurement , IT, finance, HR, legal).

Solve the Top Before Getting to the Bottom

From a strategic perspective, the better the management team defines the top part of the business model, the easier it is for them to define strong organizational and functional strategies. Strategically aligning the value proposition, go-to-market, and organizational strategies to the targets and "true north" is one of the easiest ways to drive the efficiency and effectiveness of the organization.

Another critical component of organizational strategy is  core competencies , which are those capabilities that a business needs to be world-class at to develop and deliver the competitive differentiation and advantage of the business model.

Now, let's dive into how Southwest reinforces its business model through its organizational strategies. Southwest's mission and value proposition of low cost, high service is accomplished through Southwest's strategies related to  Team Members, Infrastructure, Partners, & Processes .

Southwest's Enduring Focus on People

People are the heart and soul of any organization. Southwest's mantra is "employees first, customers second, shareholders third. As co-founder of Southwest, Herb Kelleher said,  "If the employees serve the customer well, the customer comes back, and that makes the shareholders happy. It's simple, it's not a conflict, it's a chain."

Southwest has one of the most passionate and loyal workforces. They were named  the best company for work-life balance . They've ranked as high as  #13 in the Forbes Best Employer list . They've never had a layoff or cut pay.  Voluntary turnover is less than 2%.  With over 50,000 employees, Southwest does an incredible job keeping its  team members  happy, productive, and passionate. So, the question is how?

There are three main elements to a holistic people strategy :  1. org design ,  2. employee journey, and 3. culture . Let's dig into Southwest's employee journey and culture to understand how they elevate and  realize the potential of their team .

Southwest's Culture

A company's culture starts with its  values , which are reinforced by norms and the environment. Benefits and compensation are also critical to a company's culture.

It is hard to beat Southwest's culture. What other companies  celebrate their culture in their recruiting materials ? And, what other companies have a Culture Services Department and Local and Companywide Culture Committees?

It all starts with Southwest's values, which are broken up into "Live the Southwest Way" (Warrior Spirit, Servant's Heart, Fun-LUVing Attitude) and "Work the Southwest Way" (Safety and Reliability, Friendly Customer Service, and Low Costs).

Southwest norms, which define how Southwest team members interact with each other, reinforce the values. Southwest's environment (offices, planes, gates, etc.) celebrates employees, travel, and Southwest. Southwest also reinforces its values and norms with spirit parties, chili cook-offs, and Luvlines (their employee magazine).

Though Southwest is a low-price airline, its compensation is some of the highest in the industry. And they align all team members to their mission and financial performance through a generous profit-sharing plan. In 2015, Southwest paid out $620 million in profit-sharing, which amounted to over $12,000 per employee. This plan reinforces the Work the Southwest Way values. Southwest's benefits are numerous and generous. There are too many to list, but you should glance at them on  Southwest's website .

While culture may seem squishy and nebulous, a solid and enduring culture can take root in any company if you get the values right and reinforce them with norms, the environment, benefits, and compensation.

Southwest's Employee Journey

Strong companies infuse their mission and values into their  employee journey , including recruiting, hiring, onboarding , development, evaluation, and advancement. Some companies do it better than others, but great companies like Southwest are deliberate and thoughtful in their employee journey strategy.

Southwest leadership knows that starting with the right people, who inherently embody Southwest's values, is paramount to realizing its mission and preserving its culture. Southwest hires less than 2% of applicants and 6% of interviewees. Their interview process is rigorous, with group interviews, fit interviews, and a profile guide.

New hires go through a 4-week training program that trains them on the ins and outs of the job and enculturates them in the Southwest values with fun activities such as egg balancing relays and scavenger hunts. Once a team member begins to work, they are assigned a team member sponsor and participate in new hire parties and luncheons to reinforce the Southwest norms and culture.

Evaluation and advancement are based not only on a team member's skills but also on their demonstration of living the Southwest values. Team member development is reinforced through SWA University's extensive leadership and management development programs, along with continuous feedback and coaching.

There is also a continuous celebration of Southwest team members. Customers see it in the Southwest magazine with monthly articles on team members who have gone above and beyond. Southwest advertisements use team members instead of actors. Team members can give each other SWAG (Southwest Airlines Gratitude) points, utilizing an online platform that allows team members to recognize other team members for their Warrior Spirit, Servant's Heart, or Fun-LUVing Attitude.  Team members can turn their points in for gift cards and merchandise . There are also numerous employee awards, such as the Spirit Award.

Southwest has thoughtfully optimized its employee journey to elevate and realize the potential of its 50,000+ person team.

Southwest's Infrastructure

Infrastructure includes the equipment, information technology, facilities, machinery, and other physical assets a business uses. Infrastructure strategy and decisions are challenging, given the typical significant investment, sometimes long and complex implementations, against the backdrop of a continuously changing future.

In Southwest's case, its infrastructure strategy reinforces its low-cost mission. In 1971, Southwest began service with four Boeing 737s, which were introduced into the market a mere four years earlier. While competitors used 15-25 seat commuter jets for the same type of routes, Southwest's 737s seated 112 passengers, ensuring Southwest a superior cost structure once the planes were fully utilized (which took a few years). Still to this day, Southwest's fleet of 700+ planes is all Boeing 737s, compared to United Airlines, which utilizes  over 20 types of aircraft .

As stated in  Southwest's 10-K ,  "The Company's low-cost structure has historically been facilitated by Southwest's use of a single aircraft type, the Boeing 737, an operationally efficient point-to-point route structure, and highly productive employees. Southwest's use of a single aircraft type has allowed for simplified scheduling, maintenance, flight operations, and training activities."

Southwest's no-seat assignments policy massively simplifies its systems and processes, with no need to track seats and seat assignments for every plane for every flight for an entire year out.

Then there is the decision, back in the early 2000s, not to install in-flight entertainment, which would have cost multiple millions of dollars per plane and led to installation downtime. The weight of each in-seat display unit can be upwards of 13 pounds. Every pound of extra weight adds ~$1,400 per year per plane in extra fuel. 13 pounds per seat adds ~$3 million in additional operating costs per year per aircraft. In-flight entertainment didn't align with their low-cost mission. Fast forward a decade, and now Southwest has arguably the best in-flight entertainment with free live TV with BYOD (bring your own device).

Southwest has always aligned its infrastructure strategy with its mission and value proposition, leading to its unit cost leadership of 4.4 cents per available seat mile versus 5.4 to 5.8 cents for other airlines.

Southwest's Partners

Partners are all those companies that support a business. To understand the breadth of partners in a company, simply look at the accounts payable list to see all the partners. Now, while many partners are transactional, in most businesses, a few strategic partners can support the success of a business model.

In the case of Southwest, Boeing is a strong and important strategic partner. Here is an excellent quote from a  nice history of the Boeing / Southwest partnership,

"Our relationship with Southwest is about more than just delivering great airplanes," said Carolyn Corvi, vice president and general manager of the Boeing 737/757 Programs. "It's about understanding their business, trusting each other, and working together to achieve solutions. We know that while they have a lot of fun and play hard, they also run a business model that the entire industry emulates and admires. We are delighted and honored to have such a wonderful partner."

And you can see the benefits of this partnership, with Southwest often being the launch partner on Boeing's new 737 and customizing them to meet the needs of Southwest's customers. Take a look at the  737-800 MAX as an example .

Southwest's Processes

Every action in a business is a process, whether acknowledged as one or not. The key to processes is that they are lean and efficient by reducing non-value-added actions and inventory, otherwise known as waste. For Southwest, the foundation of processes is great people, infrastructure, and partners, which enables them to have super lean & low-cost processes and high plane utilization.

Just think about Southwest's quick gate turnaround, which originated as a 10-minute turnaround challenge,  which you can read about here . They only use 737s, so their turnaround teams and training are optimized on one type of plane. They don't have food carts, and they have customers and stewards clean up during deplaning. Through the profit-sharing plan, their team members are incentivized to get planes out on time and turn them around quickly.

Or, think about their no-seat assignments, which help them lean out many processes. Customer service interactions about seat assignments are non-existent, which also lowers IT costs by eliminating the complexity of seat assignments. Furthermore, the first customers to check in are the first to get their boarding number, which drives earlier check-in and better over / under-booking  metrics , eliminating the need to kick paying customers off an overbooked flight.

Southwest's lean processes also make it the historical leader in on-time and baggage performance. The collective focus on lean processes helps Southwest's team members realize their mission of being a low-cost airline.

Strategic Takeaways on Organizations

Southwest's organization efficiently and effectively develops and delivers its value proposition and go-to-market. Southwest's alignment of its entire business model from the mission to the targets to the value proposition, go-to-market, and the organization is extremely rare. So is their phenomenal revenue growth and 45 years of profitability.

BUSINESS MODEL STRATEGY

If a company doesn't have a mission or has a weak mission, fix that first. If the target markets, customers, and geographies are too broad, then focus them on the most lucrative. If the value proposition doesn't drive better customer value than the competition, then solve that. If the value proposition is strong, then focus on scaling through an improved go-to-market strategy. The more focused the top part of the business model, the easier it is to develop great organizational and functional strategies. If the business model is robust and working, then, and only then, think about expanding into new markets, customer segments, or geographies.

Every company has the potential to grow for decades, but it all comes down to strategy and execution.

If you need to develop a business model strategy, I encourage you to read  developing a strategy  or  set up some time with me  to start figuring it out.

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THE LEADERSHIP MATURITY MODEL

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Process Street

Strategy Document Template McKinsey

Identify & define the business/project objective, evaluate the current state of the business, conduct an industry/competitor analysis.

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Define the strategy's value proposition, formulate strategy options and scenarios, perform cost-benefit analysis on each option, approval: manager's option selection.

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Develop a Growth Plan

Identify necessary resources.

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Create a Timeline for Execution

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Determine potential risks and mitigation strategies, approval: risks and mitigation.

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Design and Plan for Contingencies

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IMAGES

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VIDEO

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COMMENTS

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    DOWNLOADS. This episode of the Inside the Strategy Room podcast features excerpts from an address that McKinsey senior partner Chris Bradley gave at our recent Global Business Leaders Forum. He discusses the eight practical shifts that executive teams can make to move their strategy into high gear. This is an edited transcript.

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    The building blocks of strategy help companies make strategic choices and carry them through to operational reality. One central building block is deep insight into the starting position of the company: where and why it creates—or destroys—value (diagnose). Executives also need a point of view on how the future may unfold (forecast).

  4. Thinking strategically

    In the late 1970s, Fred Gluck led an effort to revitalize McKinsey's thinking on strategy while, in parallel, Tom Peters and Robert Waterman were leading a similar effort to reinvent the Firm's thinking on organization. The first published product of Gluck's strategy initiative was a 1978 staff paper, "The evolution of strategic management."

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  6. How to Use the McKinsey 7-S Model for Strategic Planning

    McKinsey 7S Model: The McKinsey 7S Model is a framework for organizational effectiveness that postulates that there are seven internal factors of an organization that need to be aligned and ...

  7. The McKinsey 7S Model

    A conceptual framework to guide the execution of strategy. In this guide, we'll walk you through the 7S of the McKinsey Framework and how to apply it to evaluate and improve performance. McKinsey 7-S Model Definition . The McKinsey 7S model is one of the most popular strategic planning tools. Businesses commonly use it to analyze internal ...

  8. Strategic Planning by a McKinsey Alum

    Strategic planning typically solves for three levels of strategy: 1. Business Model Strategy. 2. Organizational & Financial Strategy. 3. Functional Strategy. For larger companies with multiple business units there is a 4th higher level of strategy, Corporate Strategy, which is about the allocation of capital and resources across business units ...

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    Senior executives generally agree that crafting strategy is one of the most important parts of their job. As a result, most companies invest significant time and effort in a formal, annual strategic-planning process that typically culminates in a series of business unit and corporate strategy reviews with the CEO and the top management team.

  10. Planning in an agile organization

    Stable, enterprise-wide strategic priorities provide the basis for the specific objectives and key results that teams are asked to work toward. With those priorities and objectives in mind, the planning group reviews budgets every quarter, rather than annually, so it can reallocate resources more often to teams that create the most value.

  11. McKinsey 7S Model: The 7S Framework Explained

    Definition of the McKinsey 7S Model. McKinsey 7S model is a tool that analyzes company's organizational design by looking at 7 key internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to identify if they are effectively aligned and allow the organization to achieve its objectives.

  12. Mapping Your Growth Strategy: The McKinsey Three Horizons ...

    The process for applying the McKinsey Three Horizons of Growth framework involves the following steps: Identify and map out your current business model: Begin by identifying your organization's ...

  13. 150+ Strategy Frameworks & Templates by a McKinsey Alum

    The Compendium of Strategy Frameworks is 168 PowerPoint slides of strategy frameworks, worksheets, charts, templates, icons, and professional graphics.Developed by a McKinsey alum and the founder of Stratechi.com, this is your one-stop shop for the top-used strategy frameworks for your strategic planning and analysis needs. Below you can view the preview of the deck, the table of contents, and ...

  14. PDF Improving strategic planning: A McKinsey Survey

    Strategic planning is critical to the continued success of any organization, yet fewer than half of the executives who responded to a new online survey conducted by The McKinsey Quarterly1 say that they are satisfied with their company's approach to planning strategy. Further, although more than three-quarters of the respondents report that ...

  15. (PDF) The use of McKinsey s 7S framework as a strategic planning and

    The use of McK insey's 7 S framework as a strategic planning and economic assestment tool in the process of digital transformation. PressAcademia Pro cedia (PAP), V.9, p. 114 -119

  16. McKinsey 7S Model

    The McKinsey 7S Model refers to a tool that analyzes a company's "organizational design.". The goal of the model is to depict how effectiveness can be achieved in an organization through the interactions of seven key elements - Structure, Strategy, Skill, System, Shared Values, Style, and Staff. The focus of the McKinsey 7s Model lies ...

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    The McKinsey Horizon Model, also known as the Three Horizons Model, is a strategic framework used to identify and manage innovation within an organization. The model was developed by McKinsey & Company in the 1990s and has since become widely used in the business world. The framework consists of three horizons, each representing a different ...

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  19. Process Strategy by McKinsey Alum

    One of the largest drivers of org efficiency and effectiveness is aligned functional strategies with well-defined and reinforcing sub-strategies and initiatives. 3. Process Excellence is Everyone's Job. Process is about people, infrastructure and partners creating more quality outputs with fewer inputs. 4.

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  21. How to Create Your Product Strategy with a McKinsey Alum

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  23. Strategy Document Template McKinsey

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