Logo

McKinsey 7S Model: Importance & How To Use It (2024)

Download our free Internal Analysis Template Download this template

Managing strategic alignment across various business operations becomes increasingly challenging as organizations pivot through ongoing changes.

One strategic tool used by businesses to manage this complexity and drive consistent alignment through change periods is the McKinsey 7S Model.

In this article, we will guide you through the basic principles of the McKinsey 7S Model and show you how to use it in practice based on a real-life example. And yes, you’ll also get a template that will help complete your own 7S Analysis. ;)

  • The 7S Model is a strategic tool that helps you analyze organizational gaps, inconsistencies, and alignment issues.
  • The framework divides organizations into seven categories and shows how key elements impact one another.
  • Both “hard” and “soft” elements in the 7S Model are equally important when implementing change.
  • Pros: The 7S Model helps you understand the broader impact of change initiatives on the entire organization.
  • Cons: It doesn’t analyze external elements and their impact on organizations.

Free Download Download our Internal Analysis Template Download this template

What Is the McKinsey 7S Model?

The McKinsey 7S Model is a change management tool for analyzing organizational design, alignment, and performance. It offers a simplified method of identifying organizational gaps, inconsistencies, and conflicts. Additionally, it is useful for mapping out various types of change initiatives in complex environments.

As the name implies, there are seven components to the 7S Model—all of which start with an “S.” 

These seven components are grouped into “hard” and “soft” elements. Both are equally important to driving successful change initiatives .

Compressed-McKinsey-7S-model

Hard elements

Hard elements are tangible, easy to identify, and can be directly impacted by management. 

Soft elements

Soft elements are intangible and primarily driven by the organization’s corporate culture .

  • Shared Values

7 Elements Of The McKinsey 7S Model

Let’s look at the different elements of the McKinsey 7S Model in more detail.

1. Structure

This is how the organization is set up for decision-making, ownership, and leadership. It includes hierarchy, the chain of command, and accountability between role players.

2. Strategy

The business’s approach to strategic planning and executing actions that ensure success, sustainability, and competitive advantage.

Systems refers to the processes, infrastructure, and workflows established and utilized within the organization.

Skills are the competencies and capabilities of people within an organization that help it reach business goals and objectives.

Style is the way and manner in which people in the organization operate and interact. This includes interpersonal business relationships, management styles, and codes of conduct.

Staff encompasses human resources and talent management related to company decisions, like hiring, training, retention, and incentives.

7. Shared Values

These are the common objectives and values that help form an organization’s culture and align the other elements within the organization. In and outside of your organization, they influence employee, customer, and work experiences.

How to Use the McKinsey 7S Model? (In 7 Steps)

1. analyze each component of the 7s model.

Here’s how you should take it step-by-step: 

  • Start in the middle and analyze Shared Values . This step should help you to identify if you have a clear understanding of where your company wants to be in the future. 
  • Move into the Hard elements ( Strategy, Structure, and System ).
  • Finish with Soft Elements ( Skills, Staff, and Style ).

>>> Download your 7S Model template here .

You can use the following questions during your review process (also included in the template): 

  • How should we proceed to resolve the specific business problem?
  • What is our strategy and its priorities?
  • How will we achieve our strategic objectives?
  • How do we compete in the market? What are our competitive capabilities? 
  • How does the organization respond to changes in customer demand or the business environment? 

Structure: 

  • How is our organization organized? 
  • How are reporting and working relationships structured (hierarchical, flat, silos, etc.)? Who reports to whom? 
  • How are our employees aligned with the strategy? 
  • How do our teams align and collaborate on shared goals?
  • What is our process for making decisions? Is it through centralization, empowerment, decentralization, etc.?
  • How does the organization share information (formally and informally)?
  • Can we execute the strategy with the existing business system or do we have to develop a new one?
  • How do we track progress and performance? 
  • What internal processes and guidelines do we have in place to stay on track? 

Shared Values: 

  • What principles help us to achieve our goals? 
  • What makes us do what we do in the way we do it?
  • What is our vision for the future? What is our mission to get there?
  • What are our core values? How are we incorporating them into daily activities? 
  • What are our strongest skills within the organization? What are our weaknesses? 
  • How are we going to fill the skill gap? Which skills are required?  
  • Is the current employee's skill set sufficient for the job?
  • How do we monitor, assess, and improve skills?
  • What leadership style and cultural qualities will help us to achieve a strategic objective?
  • What is our current management approach?
  • How are our employees respond to it? 
  • Is there anything we can do to support the growth of our team members?
  • What are the current staffing needs?
  • Are there any gaps in required capabilities or resources?
  • What is our plan for addressing those needs?

Remember, you may already be able to identify some of the issues in your organization. However, some problems may be less obvious. 

An exercise like this can help you gain a better understanding of all the issues that are impacting alignment and organizational effectiveness.

2. Identify areas that are misaligned with your vision and strategy

Review your findings and use them to find gaps and inconsistencies in the organization. Create a list of these existing issues. 

“If you want to go to the moon, you need to understand the distance you need to bridge to go from here to there.” – Thibault Mesqui, Managing Director, Heineken

Additionally, speak to other key stakeholders and get their opinions on different business areas and processes in your organization. 

“When you involve people, when you ask them their opinions, they feel a lot more inclined to actually execute the thing later on.” - Ilana Rosen , Director of Strategy and Head of Enterprise Innovation at Old Navy

3. Define the desired state

You’ll then need to identify and articulate the organization's ideal alignment. Go through each “S” and use this question:  “What do we need to change in each element so we can execute our strategy?”.  

This will likely require additional research and consultations with external experts to understand what an optimal organizational design can look like and the possible obstacles that might stand in its way.  

Remember, your “ideal” state should be informed by your company’s long-term strategic goals , conversations with role players, and other internal analyses . 

Once you’re done, review everything and ensure it aligns with your company’s vision and strategy.

4. Prepare your change management plan

Analysis of the 7S Model holds no value if you don’t map out a change management action plan. Your organization needs a clear roadmap to get where it needs to be. Without it, you will either miss growth opportunities or continue to be stagnant. 

As part of this step, clearly define your strategic objectives , key projects or initiatives, and KPIs. Co-create an action plan with the owners who will be responsible for executing it. This collaborative approach is essential if you want to get buy-in and maintain momentum. 

Strategic planning can be challenging depending on your organization's size and existing processes. 

An all-in-one strategy execution platform, like Cascade , can help simplify the strategic planning process with tools to lead, monitor, and manage key change initiatives and projects.

5. Execute your plan

Now it’s time to turn your plans into reality. Execution is the most crucial step in the change process. 

Getting it right will result in impactful changes and help your organization reach important milestones. Getting it wrong will mean delays, lackluster outcomes, and failure. 

But, strategy execution in a complex business environment can be tricky. Especially if you don’t have the right tools to align efforts, ensure accountability, and manage change initiatives. 

Get ahead of the problem. Check out Cascade’s robust transformation management features and see how they can help you drive strategy execution to get results faster.

6. Review your progress against set targets

Monitoring progress is vital if you want your change initiative to have maximum impact. 

Continually review the performance of your teams and projects to ensure your organization is constantly aligned and on track.

Cascade is one of the few platforms that make oversight and monitoring easy. Its focus on strategic alignment, powerful real-time reporting features , and drill-down capabilities give organizations a holistic overview of progress.

7. Adapt your plans and strategy if needed

Any good strategy will change, iterate, and adapt. Don’t be afraid to change your plans and approach as you progress. 

Using insights, knowledge, and new information to improve your approach is important. Plans must be adjusted or refocused as your organization progresses toward its goals. 

“The True North should not change that much, that frequently, but the components of the pillars that make up for the solution might evolve.” - Carlos Trad , Director of Global Business Strategy, Google.

McKinsey 7S Model Example: Chick-fil-A

Chick-fil-A is a popular fast-food restaurant with over 2000 locations in the US, Canada, and the UK. Here’s an example of how a McKinsey 7S Model might look for Chick-fil-A:

  • A private family-owned fast-food franchise. 
  • Wholly-owned subsidiaries that supply franchisee restaurants.
  • Individual Chick-fil-A restaurants are owned and operated by franchisees.
  • Franchise owners (Operators) manage day-to-day operations in their stores.

When it comes to growth, Chick-fil-A pursues a market development strategy . They are expanding into new markets with existing products through franchising. They also pursue international expansions by opening new locations outside the US, including Canada and UK. And they are planning to enter new markets, such as Asia. 

  • Franchise and licensing business with corporate offices to manage broad strategic initiatives.
  • Corporate control of food production and distribution channels.
  • A rigorous vetting process for all prospective franchise owners.

Shared values

Christian and family values play a large part in Chick-fil-A’s corporate identity. For example, all Chick-fil-A restaurants are closed on Sundays. 

Chick-fil-A’s core values also play a big role in shaping their culture, work, and customer experience:

  • “We are better together” 
  • “We're here to serve.”
  • “We are purpose-driven.”
  • “We pursue what's next.”

These values drive their presence and approach in the fast-food industry. And it proves to be worth the investment. Chick-fil-a is one of the most beloved fast-food chains in America, and it enjoys a reputation for providing the best customer service. 

The company invests heavily in upskilling franchise owners through training, support, and investments. 

They also provide staff members with opportunities to grow and move into new roles. For example, in 2019, Chick-fil-A gave employees $15.3 million in educational scholarships.

In the fast-food industry, Chick-fil-A is known for its unique management style and the trust it places in franchise owners. 

  • Known for its servant-leadership style of management.
  • The corporate office is known as the “Support Center.”
  • Franchisees are known as “Operators,” and employees are known as “Team members.”

Chick-fil-A represents over 170,000 Team Members, Operators, and Staff. This is how the

  • Corporate: Strategy, licensing, business development, marketing, compliance, and human resources.
  • Franchise owners: Business management, operations, and people management.  
  • Restaurant staff: Food preparation, front-of-desk service, customer relations, cleaning, and team management.

Now let’s take a look at the 7S Model in action…

The example above suggests Chick-fil-A's operations are aligned and efficient. But what happens if Chick-fil-A decides to enter a new market with a new product? For the sake of example, let's ignore the fact that a diversification strategy like this would be a bold and risky move based on the Ansoff matrix.  

Using the 7S Model, they might realize that they lack the right management staff to help them through this transition. In terms of Staff , they will need to hire people with the right skills and experience to fill these gaps. Looking at Skills , they might even identify that franchise owners and restaurant staff will need additional training because the new product requires new processes and workflows. 

Strategy is another area they should consider.

Their strategy needs to change and it might even require a new approach to strategic planning. They might also realize that their current approach to strategy execution isn’t fast enough and it will need to change if they want to outperform competitors and stay relevant. 

A McKinsey 7S Framework forces leaders to do their homework and identify gaps that could result in a failed strategy execution. As a leader, you don't want to be in that 90% of strategies that fail.

Note: The above is just an example illustrating different scenarios. You should do your own research and apply the model to your organization.

What Are The Benefits Of Mckinsey 7S Model?

The key benefits of the 7S model framework are:

  • It shows the wider impacts of changes on organizations.
  • Simplifies the process of planning and executing change initiatives.
  • Helps align different segments of business units during periods of change. 
  • Useful for different types of change initiatives. 

As with every strategy framework , it also has some disadvantages:

What Are The Disadvantages Of Mckinsey 7S Model?

The disadvantages of the 7S Model are: 

  • It requires a lot of research and benchmarking to be used effectively.
  • Ignores the impact of the external environment on businesses.

When Should You Choose the McKinsey 7S Model? 

The McKinsey 7S Model is a simplified method of understanding organizational structures and how they impact one another. It is beneficial for identifying key organizational elements impacting performance, such as gaps, inconsistencies, and misalignment.

The 7S Model is a great strategic tool for analyzing organizational design and change management in complex environments. It can be used for various types of organizational change initiatives, such as:

  • Diversity, Equity, and Inclusion (DEI) initiatives
  • Digital transformation
  • Restructuring due to M&A
  • Market Development 

Organizations embarking on any transition, reinvention, or reorganization can use this model to bolster strategic planning and execution .

McKinsey 7S Model + strategy execution =  🔥 

7S Model analysis it’s not enough. Yes, you get insights into business areas that need to improve or change within the organization. But that’s just a starting point. 

You need to create your action plan and execute it to close the gap between misaligned elements and your strategy. This is the only way you can create a well-oiled machine that drives business results. And you need the right tools that will help you measure and monitor performance. 

Recommended reading: 23 Best Strategy Tools For Your Organization in 2022

FAQs about the McKinsey 7S Model

Is the mckinsey 7s model still relevant.

Yes, the McKinsey 7S Model remains relevant for businesses and NGOs. It is an important strategic framework for analyzing an organization's alignment and potential future obstacles.

What is the difference between a hard strategy and a soft strategy?

Hard strategies involve planning, executing, and monitoring systems, processes, and structures. The benefits of these initiatives are usually clear and measurable. Soft strategies focus on changes in management style, work culture, and people.

Who introduced the 7S Framework?

The Mckinsey 7S Framework was introduced in the late 1970s by Tom Peters and Robert Waterman, who worked as consultants at McKinsey & Company.

What is the difference between the McKinsey 7S Model and a SWOT analysis?

The difference between McKinsey 7S Model and SWOT Analysis involves each model’s focus and analytical approach. The 7S Model is internally focused and looks at seven elements that affect business performance. SWOT is internally and externally focused and analyses the potential impact of four factors on organizations.

Popular articles

business model transformation mckinsey

What Is A Maturity Model? Overview, Examples + Free Assessment

business model transformation mckinsey

How To Implement The Balanced Scorecard Framework (With Examples)

business model transformation mckinsey

The Best Management Reporting Software For Strategy Officers (2024 Guide)

business model transformation mckinsey

How To Set And Execute Strategic Priorities

Your toolkit for strategy success.

business model transformation mckinsey

Organizational health is (still) the key to long-term performance

For decades we’ve seen companies’ fortunes rise and fall based on their ability to react to, and recover quickly from, geopolitical shocks, technological advances, economic uncertainty, competitors’ bold moves, and other disruptions. Amid this volatility, which these days is accelerating rather than abating, many have a hard time staying the course. But some continue to survive and thrive despite the challenges. Why do these companies manage to succeed, year after year—operationally, financially, and otherwise—while others don’t?

Twenty-plus years of proprietary McKinsey research tells us that one of the main reasons is organizational health.

Organizational health refers to how effectively leaders “run the place”—that is, how they make decisions, allocate resources, operate day to day, and lead their teams with the goal of delivering high performance, both near term and over time. Organizational health comprises three elements: how well the entire organization rallies around a common vision and strategy, how well the organization executes its strategy, and how well the organization innovates and renews itself over time.

Our latest research on the topic reiterates the degree to which organizational health is not just nice to have; it’s required for sustained performance and organizational success. McKinsey’s Organizational Health Index (OHI) continues to show, for instance, that, over the long term, healthy organizations deliver three times the total shareholder returns (TSR) of unhealthy organizations, regardless of industry. 1 Aaron De Smet, Bill Schaninger, and Matthew Smith, “ The hidden value of organizational health—and how to capture it ,” McKinsey Quarterly , April 1, 2014. Other findings point to greater resilience and higher financial performance in healthy organizations, even as the world around them has become that much more complicated (see sidebar, “What is the Organizational Health Index?”).

What is the Organizational Health Index?

The Organizational Health Index (OHI) is a diagnostic that measures critical elements of a high-performing culture in an organization. The index draws from a proprietary database of more than eight million respondents across more than 2,500 organizations in a range of geographies and industries. The index aggregates employees’ and managers’ views on the management practices (and employee experiences) that inform an organization’s performance across nine dimensions, or outcomes. An overall score is assigned so companies can see how they compare with others in the database. The result is a detailed view of the health and internal-network dynamics of an organization (exhibit).

Launched in 2003, the OHI model is updated regularly to reflect advances in organizational science and changes in the state of organizations more broadly. The 2023 update includes factors—such as agility, resilience, inclusivity, and employee experience and well-being—that have become more pronounced in the wake of the global pandemic, macroeconomic shifts, geopolitical unease, and other global trends.

In this article, we look at the latest OHI results and highlight a few of the more compelling insights that the index reveals about leadership, data and technology, and talent management. We also identify several principles for building or maintaining organizational health over time—something that leaders often tell us they have limited time and resources to do.

It’s important to make the time, however—not just to spin up new activities but rather to think about how to run the business differently and factor both health and performance into daily actions. The causes of, and conditions for, organizational health are always changing. Just as medical associations continually update their recommendations on diet and fitness, so must the business community regularly monitor its practices and performance. The companies that do can differentiate themselves from others in the marketplace. They can more readily identify the kind of talent they need and the specific behaviors it will take to achieve their organizational objectives.

Organizational health can put companies on a fast track to performance —and a commitment to sustained health can keep them there.

The staying power of organizational health

There is no one right path to sustained success, but the fact is, healthier organizations do tend to perform better than unhealthy ones, especially in times of uncertainty. And that performance advantage increases over time. 2 “ Where companies with a long-term view outperform their peers ,” McKinsey Global Institute, February 8, 2017. According to our research, organizational health is the strongest predictor of value creation and a critical factor in sustained competitive advantage. In one evaluation of 1,500 companies in 100 countries, for instance, we saw that companies that had improved their organizational health realized 18 percent increases in their EBITDA  after one year.

Consider the following data points.

Health and M&A . In merger situations, healthy organizations—those that applied various health interventions during the integration phase and emphasized organizational health throughout the integration—gained a 5 percent median change in TSR  compared with industry peers after two years. The change for unhealthy companies was –17 percent over the same period.

Health and transformations . In large transformations, companies that embedded organizational-health investments and initiatives in their change programs across an 18-month period saw 35 percent higher TSR  than companies that did not invest in health.

Health and resiliency . Healthy organizations are not just higher performers, they are also more resilient and better able to manage downside risk. For instance, from 2020 to 2021, during the COVID-19 pandemic, healthy organizations were 59 percent less likely than unhealthy organizations to show signs of financial distress .

Health and safety . Companies with superior organizational health are better able than their peers to provide safe work environments, thereby limiting their exposure to financial, operational, and reputational risks. Indeed, companies in the top quartile in organizational health have six times fewer safety incidents  than those in the bottom quartile.

The relationship between health and performance can be quantified in other ways, too, including in the areas of talent and culture . In our experience, employees and leaders in unhealthy cultures often focus on what made them successful in the past rather than on what may be required going forward—and their entrenched behaviors and ways of working can take on a life of their own. Consider the situation at one global company: employees had reported in company satisfaction and pulse surveys that they felt motivated to do their jobs—and yet, the company’s performance remained stagnant. The CEO and executive team could not determine how to break through.

An organizational-health diagnostic revealed the problem: misaligned behaviors had dulled the company’s performance edge. Employees were producing day to day—but not in the areas that mattered most for meeting the organization’s long-term strategic goals. They were engaged but comfortable—“like being in a warm bath.” To change the energy, the CEO and executive team embarked on a multiyear transformation in which they reengineered business processes, instituted different working norms for leadership teams, changed their protocols for meetings and communications, activated change agents across the organization, and pushed more decisions down to those on the front lines. Over time, employees’ enthusiasm increased, and descriptions of “what it felt like to work there” became livelier and more focused on achieving great things together. Performance was on the upswing.

A pulse check: How should leaders think about organizational health?

Clearly, organizational health matters as much now as it ever has. The latest OHI results reiterate what we know from McKinsey’s 2023 State of Organizations research  about how companies are faring in an era of unprecedented change. But in these latest OHI findings, three trends in particular stand out: how leaders are leading; the links between technology, data, and innovation; and the value of talent mobility.

1. Leadership is undergoing a generational transformation

It’s fair to say that few—if any—executives anticipated the deeply disruptive business (and societal) changes that would emerge because of the 2020 global pandemic and the speed at which organizations needed to transform themselves. As they have reckoned with changes in where and how work gets done, leaders are learning that they need to be both decisive and empowering .

To that point, the OHI research indicates that decisive leadership is now one of the best predictors of organizational health. Unlike authoritative leadership, in which leaders use influence and authority to get things done, decisive leadership reflects leaders’ quick decisions and their commitment to act on them. During the COVID-19 pandemic, senior leaders at Amazon made quick commitments—within days and weeks, not months—to prioritize essential supplies, protect customers from price gouging, raise the minimum wage for hourly workers, and increase overtime pay. They allowed unlimited paid time off, as well as two weeks of sick pay to those affected by COVID-19. The company also rapidly expanded the capacity in its data center to meet the surge in demand for cloud computing services, which resulted in increased operational efficiency and growth for Amazon Web Services. 3 Karen Weise, “Amazon’s profit soars 220 percent as pandemic drives shopping online,”  New York Times , April 29, 2021.

Would you like to learn more about the Organizational Health Index ?

Decisive leadership is not just for times of crisis, however; it’s a requirement for any business that just wants to keep up. 4 Aaron De Smet, Gerald Lackey, and Leigh M. Weiss, “ Untangling your organization’s decision making ,” McKinsey Quarterly , June 21, 2017. To that end, a number of organizations have taken steps to empower frontline workers. Senior leaders at TJ Maxx, for instance, have empowered more than 1,200 buyers across all stores, each of whom controls millions of dollars, to cut deals on the spot with manufacturers. By committing to a system of delegated decision making, leaders have ensured that items get into stores quicker—within a week, in most cases—than they would have under a more traditional, hierarchical review process. 5 “The Economics of T.J. Maxx’s recession-proof pricing strategy, explained,” Wall Street Journal , June 1, 2023. Leaders at Southwest Airlines have made a concerted effort to put critical customer information in frontline employees’ hands: “Not only are [employees] able to work more quickly, but they are also providing a more tailored experience to customers,” James Ashworth, vice president for customer support and services, told Forbes magazine. The end result has been “a lift in our customer satisfaction scores, as well as a decrease in our call handle times,” he says. 6 Tiffani Bova, “Southwest on the importance of employee experience,” Forbes , November 17, 2020.

According to the OHI research, companies with leaders who take decisive actions—and who commit to those decisions once they are made—are 4.2 times more likely to be healthy, as compared with their peers.

But it’s not enough just to be fast with those decisions; our OHI research shows that decisive leaders who empower their employees (giving those closest to the work the autonomy to make their own decisions) are 85 percent more likely to improve the quality of organizational decisions, as compared with their peers. This supports previous McKinsey research pointing to a paradigm shift in leadership and, among other new requirements, the need for executives to shift from being controllers to becoming coaches  who engage employees and help foster in them a bold mindset of testing, learning, and fast adaptation. 7 Aaron De Smet, Arne Gast, Johanne Lavoie, and Michael Lurie, “ New leadership for a new era of thriving organizations ,”  McKinsey Quarterly , May 4, 2023.

Bank Mandiri, for instance, is using digital tools to ensure that individuals across all parts of the company have access to data analytics. Previously, information requests and report generation at the bank could take weeks, and critical business information had to be pulled from a tangle of systems. Through a new self-service system, employees can now access the data that are most relevant to them in a timelier manner—in a matter of days rather than weeks—allowing employees to make better, faster decisions.

2. Data is the fuel for everyday innovation

Leaders have traditionally thought of innovation as a process for bringing “the next big idea” to life . But our latest OHI data reveal that companies are more likely to succeed with innovation initiatives if “big bang ideas” are supported by data-driven insights and supplemented with smaller, more frequent ideas that target improvements in everyday processes or ways of working.

In many organizations, the ideas for “little i” innovation often come from the people closest to customers— frontline employees . 8 People & Organization Blog , “ Empower the front line for a thriving organization ,” blog entry by Kelli Moles and Michael Park, McKinsey, August 28, 2023. And, as it turns out, it pays to listen to them: the OHI data show that organizations that actively listen and act on recommendations from frontline employees are 80 percent more likely than others to consistently implement new and better ways of doing things.

The research also reiterates that all forms of innovation are more likely to succeed when decisions are grounded in data and facts. According to the research, organizations that emphasize data-driven decision making are 63 percent more likely than others to adapt to a changing business environment.

One of the best recent examples of data-informed innovation comes from Major League Baseball. The rise of data analytics prompted significant changes in many teams’ operations; managers built their rosters and managed their lineups according to batting percentages, probabilities, and other data captured across the league. The downside of that data-driven innovation, however, was longer games (more pitching changes) and a product that was less appealing to younger viewers. Again, the league turned to data—this time conducting surveys, focus groups, and spending time with younger fans—to learn what was important to them. Based on that feedback, the league engaged in some experiments. It implemented rule changes in 2023 (pitch clocks, larger bases, pitching-change limits, and so on) that fundamentally altered the pace and action of the game. The league continues to embrace innovation and technology, not only to improve the game but the overall fan experience. 9 Erik Roth, “ The Committed Innovator: How Major League Baseball built an innovation machine ,” McKinsey, October 27, 2023.

3. The dynamic deployment of talent is becoming even more of a competitive advantage

Workforce dynamics have been completely upended over the past few years, which has left organizations with an increasingly difficult HR-related task: ensuring that they have the right talent on board to tackle the highest-value-creating activities and successfully execute on their strategies. 10 Patrick Guggenberger, Dana Maor, Michael Park, and Patrick Simon, “ The State of Organizations 2023: Ten shifts transforming organizations ,” McKinsey, April 26, 2023. Our OHI research shows that the dynamic deployment of talent can be a powerful lever for both employee attraction and retention. It can also help organizations pivot quickly as markets change or new technologies and global trends emerge. 

Companies that encourage and even facilitate internal role changes can sharpen employees’ skills, maximize their versatility, and provide avenues for growth. According to our OHI findings, employees that experience more mobility at work are 27 percent less likely to report feeling burned out, 47 percent less likely to report intentions to leave their organization, and 2.3 times more likely to recommend their companies to others.

Employee rotations and upskilling became core components of one Latin American bank’s digital transformation. When HR leaders realized that 62 percent of the company’s technology workforce needed to be upskilled to meet the bank’s transformation goals, they launched a large training initiative, which involved more than 1,500 courses focused on about 820 technology skills, 60 boot camps, and countless individual, on-the-job coaching sessions. The HR organization embedded this focus on technology coaching and capability building into all performance management discussions.

As a result of this effort, about 60 percent of the total technology workforce is engaged in upskilling, attrition is low, and what started as a “special transformation program” is now considered business as usual and a cornerstone of the bank’s learning and development efforts. 11 Vincent Bérubé, Dana Maor, Maria Ocampo, and Alex Sukharevsky, “ HR rewired: An end-to-end approach to attracting and retaining top tech talent ,” McKinsey, June 27, 2023.

It's worth noting that more and more organizations are following the bank’s lead and exploring the move to skills-based hiring —in part to address shortages in certain skill areas like technology but also to create pathways for “nontraditional” job candidates, or those who might not have a college degree or a formal certificate of expertise. 12 Bryan Hancock and Brooke Weddle, “ Right skills, right person, right role ,” McKinsey, October 25, 2023.

Getting and staying healthy

Sustained organizational success really comes down to leaders gathering the data that will help them understand which behaviors can help them to meet their performance goals as well as the type and scale of health improvements their organization should target.

It’s critical for leaders to establish a baseline of the organization’s current strengths as well as the strengths it is targeting. With that baseline in mind, leaders can set clear behavioral priorities and begin to act—but it’s also critical to remember that context matters. Organizations will need to launch health interventions that are specific to the business, their performance goals, and their customer value proposition. Two hotel chains—one luxury, one economy—may offer similar services in the market, but each requires different kinds of behaviors to deliver on their value propositions and meet their performance targets. Regardless of their starting points, each will need to track progress against goals and adapt as needed along the way.

McKinsey research points to four foundational behaviors, what we call power practices , that can have disproportionate effects on organizational performance—and whose absence can create a significant drag on organizations: strategic clarity, role clarity, personal ownership, and competitive insights. 13 It is worth noting that the list of power practices has changed over time, and likely will again, but three practices routinely show up: strategic clarity, role clarity, and personal ownership.

  • Strategic clarity . Healthy organizations effectively translate vision and strategy into actionable and measurable objectives that are clearly articulated and shared with employees at all levels.
  • Role clarity . Healthy organizations tend to have structures, processes, and working norms that speed up decision making, remove layers of bureaucracy, and make it easy for employees to get things done—even when situations are new or ambiguous.
  • Personal ownership . Healthy organizations hire and develop managers who have a deep sense of personal ownership for their work and who foster that same sense of ownership in their teams and employees.
  • Competitive insights . Healthy organizations tend to have a clear view of where and how they fit in the competitive landscape and of their value propositions; they use these insights to set strategic priorities, make decisions, and allocate resources.

If any of these power practices are missing or at risk, organizations should take steps to address them; it’s a no-regrets move for achieving good organizational health.

In addition to this list, companies also need to identify which kinds of talent and behaviors are required for them to truly differentiate themselves from competitors—the organizations’ so-called “secret sauce.” Industry insights and benchmarks can provide some direction, but the final list of behaviors that convey competitive advantage to one company and not others can only be identified by an organization’s senior leaders.

The “born remote” technology company GitLab provides a good example. Long before these days of remote and hybrid workplaces, the company established foundational norms  to get the most out of its distributed workforce. Ways of working were designed to be independent of time and place. Employees are encouraged to “write things down,” for instance, and playbooks are readily available online. GitLab’s operating model emphasizes a shared reality, equal contributions, decision velocity, and measurement clarity. The central behaviors at the company’s core have given it an advantage as other companies continue to try to define remote and hybrid working models . And GitLab has demonstrated top-decile performance against OHI benchmarks. As this and many other examples show, leaders in outperforming companies always have a plan to be “good enough” at everything and “truly excellent” at the handful of things that matter for them and the organization. And when it comes to how they run the place, they emphasize cultural consistency across the organization. 14 Carolyn Dewar and Scott Keller, “Three steps to a high-performance culture,” Harvard Business Review , January 26, 2012.

The leadership imperative

Our research makes a clear and compelling case that organizational health is the foundation for companies’ ability to successfully create value, attain profitability, build resilience, and thrive in so many other areas.

So why don’t more senior executives make it a priority?

In our experience, there are several common obstacles. The first is inconsistency in how leaders think and talk about organizational health: conversations about organizational health often anchor on employee engagement as the default, and executives often consider organizational health as being separate from performance. In fact, they are actually one and the same. Leaders should be asking themselves, “How do I run the place each and every day—in each and every meeting—in ways that are both healthy and conducive to creating high performance?”

Related, senior leaders may not see the trees for the forest; many will discuss organizational health as a top-level theme but are much less often involved in the interventions and implementation required to achieve and sustain organizational health. Third, realizing improvements in organizational health takes time—and executives often need to move fast. The default here is to focus on putting out fires rather than fixing the system.

And finally, there’s a sense that bad health implies bad leadership. C-suite leaders must make organizational health a central component of their leadership styles and manage it as rigorously as they do their P&L. Otherwise, they may not actually recognize unhealthy actions when they see them. For this reason, leaders may need to spend extra time, attention, and resources on health interventions. They may need to reframe quarterly discussions and incentives and other elements of performance management around the idea of maintaining organizational health.

Even for those companies that are seemingly in great shape, it’s important to continue to monitor the organization for symptoms of upset or disruption. Just as top athletes can lose time or distance or skill if they skip workouts for an extended period, so can companies fall behind competitors if they take a break and rest on their laurels. Commitment is crucial.

Alex Camp is a partner in McKinsey’s New York office, Arne Gast is a senior partner in the Amsterdam office, Drew Goldstein is a partner in the Charlotte, North Carolina, office, and Brooke Weddle is a partner in the Washington, DC, office.

The authors wish to thank Aaron De Smet,  Ben Fletcher, David Mendelsohn, John Parsons, and Laura Pineault for their contributions to this article.

This article was edited by Roberta Fusaro, an editorial director in the Boston office.

Explore a career with us

Related articles.

Organizational health: A fast track to performance improvement

Organizational health: A fast track to performance improvement

""

The State of Organizations 2023: Ten shifts transforming organizations

" "

New leadership for a new era of thriving organizations

Hardware’s business-model shift: Finding a new path forward

IT-infrastructure providers face an unenviable challenge. Technological change has led their customers to view hardware appliances as commod­itized. At the same time, cloud-based vendors and hyperscalers have set new norms for simplifying customers’ experiences of purchasing IT infra­structure. As a result, savvy chief information officers (CIOs) and IT buyers now demand a cloud-like experience even when buying on-premises IT infra­structure, such as pay-per-use models for on-site equipment to help them manage the complexity of their hybrid deployments and IT needs.

Take the case of networking. Advancements in software-defined networking (SDN) help centralize the network’s intelligence and control to the software layer, resulting in the standardization of the underlying hardware. The opportunity for OEMs to compete on hardware-feature innovation has all but dried up as a result. Intense competition from new software-led competitors and cheaper substitutes coming onto the market further accentuate this challenge.

Given these forces, IT-infrastructure OEMs have little choice but to reinvent their business models to increase the share of recurring revenue from subscription, software, and services. Yet many OEMs struggle with their business-model-transformation strategy and its execution. A successful transition requires four key elements, starting first and foremost with selecting a new business model that works best for that particular company. After that critical decision is made, the process involves reinventing core business functions, managing the economic risks of such a major shift, and embracing a flexible and agile new organization and operating model.

IT-infrastructure OEMs have little choice but to reinvent their business models to increase the share of recurring revenue from subscription, software, and services.

The rewards of a business-model transformation

IT-infrastructure providers typically adopt a combi­nation of different approaches to reinventing their business model. When done right, IT-infrastructure providers can see an increase in market share and improvements in customer experience. For example, Hewlett Packard Enterprise (HPE) says its Greenlake 3.0 solution—a bundle of traditional computing and storage hardware with software products and services that is priced using a single “unit of consumption” such as terabytes or number of virtual machines—has onboarded more than 1,000 customers with over $4 billion in total contract value within three years of its launch. In 2019, it also said that the consumer-satisfaction rating for the Greenlake 3.0 solution is more than 80 percent, which is in the 99th percentile for IT-service delivery.

Furthermore, we believe that investors will reward new business models with a higher enterprise value if providers can consistently demonstrate that revenue is recurring in a manner that’s disconnected from the life cycle of the hardware and that’s subject to low customer churn while sustaining or expanding profit margins. Drawing a parallel, software companies that underwent successful business-model transitions from perpetual software-license models to software as a service (SaaS) or SaaS-like recurring-revenue models were rewarded with higher enterprise valuations. The most well-known example is Adobe’s switch to subscriptions, which is widely cited as evidence of what is possible with the model: the multimedia-and creativity-software provider increased its share of subscription revenue from 10 percent to 88 percent between 2010 and 2018. 1 Adobe SEC filings, US Securities and Exchange Commission, sec.gov. During the same period, its price-to-sales multiple increased from 4.1 to 12.2. 2 Trailing 12-month price-to-sales ratio as of December 31, 2010, and December 31, 2018 (Source: Thomson Reuters, reuters.com).

Finding the right model and approach

In our research, we have observed four principal ways that IT-infrastructure providers can transform their business model. They involve redesigning offerings, for example, to separate the use of software from the underlying hardware appliance it runs on, or to allow the software to operate across cloud or hybrid setups, or to provide for subscription options (Exhibit 1).

Each model comes with its own set of considerations, so selecting the right model involves fully under­standing how it would play out for a particular OEM and the type of products it sells.

Software-led product restructuring

Recognizing the migration of value from hardware to software, some IT-infrastructure providers have restructured their products and offerings to separate the use of embedded software from the hardware to offer it on a stand-alone basis. For example, in 2017 Nutanix, a leading provider of hyperconverged-infrastructure (HCI) technology, 3 A hyperconverged infrastructure is a turnkey data-center hardware that combines server, storage, and networking into a single appliance prebundled with server and storage virtualization software. began to shift its focus from sale of hardware appliances with integrated software to the sale of HCI software (Acropolis, sold in software-only form) to be run on hardware appliances from any IT-infrastructure provider. Since then, it has seen its high-margin stand-alone-software-based billing grow in share to about 90 percent of its bookings (a large share of the company’s increased software bookings is also from stand-alone-software add-ons and cloud products). The company reported its overall gross margins increased to 82 percent in 2020, compared with 66 percent in 2016. 4 Nutanix investor presentations for fourth quarter 2020 and first quarter 2018.

However, embracing a software-led product restructuring presents a risk of loss in market share to other hardware-appliance vendors. For example, most IT-infrastructure vendors that run Nutanix HCI software also offer their own competing HCI offer­ings. To manage these risks, hardware companies need to avoid the trap of offering embedded software on its own without added features or functionality. Customers rarely perceive such offers as sufficiently differentiated and independent from the underlying hardware. Such moves done poorly could prove counterproductive since customers often view them as mere payment-model changes.

In our experience, companies that successfully restructure their solutions to be software-led follow three steps. First, they disaggregate the hardware appliance down to its granular features and performance attributes (throughput, input/output operations per second, and latency, for example) and match them to their users’ performance needs. Second, they create a wholly new solution entirely of software, operable on any hardware appliance featuring an integrated control center to manage hardware-performance attributes and adjust underlying hardware or virtual resources as needed. Finally, they offer several value-added software features (performance monitoring and administration, advanced analytics on usage, and proactive maintenance of underlying hardware, for example). Only with these changes do customers view the software form-factor product as a viable stand-alone offer independent from the underlying hardware appliance.

Public-cloud and hybrid-cloud extension

Today, IT buyers manage their workloads seamlessly across multiple deployment models, including on-premises data centers and private-cloud, public-cloud, and remote environments. Many IT infrastructure OEMs have embraced the change by extending their product and offers to cloud and hybrid-cloud deployment models. For example, NetApp is a leading provider of on-premises file-based storage technology. 5 A storage technology best suited for hosting high-performance computing workloads, enterprise web applications, databases, et cetera. NetApp has teamed up with Microsoft Azure to help offer file-based storage technology on the public cloud, which allows enterprises to run file-based applications in Azure. Another example is Palo Alto Networks, which not too long ago was a cybersecurity company predominantly focused on selling on-premise enterprise firewall hardware. Over time, the company has expanded its offerings to include a wide selection of software-based cloud and hybrid-cloud security applications such as threat prevention, SaaS security, and cloud network protection. As a result, the company’s share of software and services revenue has steadily increased from approximately 40 percent in 2014 to approximately 60 percent in 2018. These cloud-based offers are viewed as differentiated and command higher price-to-sales multiples (typically between five and seven times) than traditional on-premises hardware offers (which are typically between one and a half and three times ). 6 Palo Alto Networks SEC filings, US Securities and Exchange Commission, sec.gov. During this period, Palo Alto Networks’ share price increased from an average of just over $80 per share to approximately $190 per share, an increase of about 130 percent, which is about 1.3 times the approximately 98 percent increase that the S&P 500 Information Technology Index experienced in that same period. 7 Palo Alto Networks’ average stock price for 2014 was $82.95 and for 2018 was $215.59; the S&P 500’s Information Technology Index for 2014 was 630 and for 2018 was 1,210 (Source: S&P Dow Jones Indices, spglobal.com). (Of course, multiple market factors affect share prices, and the percentage of recurring software revenue a company generates is just one of them.)

Would you like to learn more about our Technology, Media & Telecommunications Practice ?

Public-cloud and hybrid-cloud product extensions often expose the companies offering them to competition from software-only players and public-cloud providers that are increasingly looking to offer value-added hybrid-cloud service. In our experience, companies that have successfully scaled such public-cloud and hybrid-cloud exten­sions do three things. First, they position the cloud offers with their existing customers as an extension of their on-premises value proposition in the cloud. Second, they design creative buying programs that allow buyers to migrate their spending seamlessly between on-premises and cloud products. That drives a preference for the company’s cloud offerings over others as customers migrate their workloads to the cloud. Finally, they enter partnerships with one or more public-cloud providers to tap into a new customer segment of cloud-first buyers previously not exposed to the company.

Software-adjacent portfolio expansion

Another approach adopted by companies to reinvent their business models is to expand their portfolio of software products. Typically, these expansions center on software add-ons that can serve various parts of the technology stack.

Companies that have expanded their portfolio of software products have often relied on acquisitions of stand-alone software products. For example, Cisco has strengthened its presence in networking and security by acquiring software companies in this space. Since 2017, the company purchased three companies: Viptela, which offers SDN in a wide-area network (SD-WAN); AppDynamics, which offers application-performance management and IT-operations analytics; and Duo Security, which offers unified-access security and multifactor authentication delivered through the cloud. Since the acquisitions, Cisco’s price-to-sales multiple increased from 3.1 to 3.9. 8 Trailing 12 months price-to-sales ratio as of December 31, 2016, and December 31, 2018 (Source: Thomson Reuters, reuters.com).

Companies that expand their portfolio in this way face the risks of low return on investments, whether that’s in-house R&D spending or acquisition costs. They also face the risk of improper integration of new products with existing hardware-based offers.

The companies that have made successful portfolio moves first start by understanding their target decision makers’ typical buying processes. They then expand to other products that these decision makers either already need or are likely to want in the future. Once launched, companies integrate these new products with their existing portfolio and create packages or bundles that holistically address those target customers’ needs.

Cloud-like subscription-pricing models

IT buyers desire a seamless purchasing experience from their on-premises OEMs that parallels the experience they get from their cloud-service providers. IT-infrastructure providers can respond to these demands with cloud-like subscription-pricing models for both software and hardware.

Companies that introduce software products (through one of the approaches already discussed) often offer the hardware on an up-front-payment model while increasing profitability through subsequent sales of software on a subscription model. For example, since moving to a software-led model, Nutanix’s subscription-based billing has grown. In the fourth quarter of 2020, about 65 percent of its billing was subscription-based, compared with 31 percent in 2017 (when it first started reporting subscription-software revenue). 9 Nutanix investor presentations for first quarter 2019 and first quarter 2018.

Even for traditional hardware products, IT-infrastructure providers are innovating on pricing models by offering hardware with turnkey on-site deployment, flexibility to scale on demand, and seamless periodic upgrades. Also, they can offer customers the option to pay on a per-use or consumption model. HPE Greenlake, for instance, is a leading example of such a cloud-like subscrip­tion model for hardware. Another example is the data storage provider Pure Storage’s Pure as-a-Service product, which commits to technical outcomes around input/output operations per second (IOPS), effective capacity, and uptime of 99.999 percent. Pure Storage then delivers and installs the appropriate equipment at the customer’s premises with additional storage media preinstalled to cater to on-demand storage needs.

Almost all major infrastructure providers offer cloud-like subscription-pricing models for their storage, server, and hyperconverged offerings. And cloud-like subscription-pricing models for hardware appliances are gaining adoption among customers. Yet these cloud-like recurring-pricing models are easier to pull off for high-margin, software-only products than for hardware appliances.

For that reason, cloud-like pricing models for hardware appliances are suitable only for certain offerings and providers. Companies that launch and scale hardware appliances successfully make this pricing model’s economics viable by using contracting levers such as minimum contract commitments or cancellation fees. In the case of Pure as-a-Service, Pure Storage requires customers to reserve capacity (at a set cost per gigabyte) and pay in 12-month installments. True-consumption-based pricing is offered only for the on-demand add-on capacity. (For more on best practices in moving to flexible subscription models, see the article “ Subscription myth busters: What it takes to shift to a recurring-revenue model for hardware and software .”)

The right business model will be bespoke

IT-infrastructure providers looking to change their business model will likely need to come up with their own tailored combination of the models we describe here to pivot away from appliance-based, low-margin, lumpy revenue to sustainable recurring-revenue business models. In our experience, providers identify the right combination by defining their business-model-transformation aspirations in one or more of the following ways:

  • Increase the percentage of software revenue
  • Increase the percentage of subscription or recurring revenue
  • Increase the services mix
  • Improve the customer experience

The right combination of business-model moves to achieve these aspirations is company specific and needs to be decided based on in-depth research into, first, customer demand, buying preferences, and life-cycle journeys and, second, company opportunities to unlock additional value with premium pricing, new upsell and cross-sell pathways, and new total-addressable-market unlock.

Regardless of the path chosen to reinvent the new business models, successful shifts of this kind require transformation across three major areas—key business functions, economics, and governance.

Pulling it off

Overhauling a business model requires reinventing all core business functions. In our experience, changes to six of these functions have a dispropor­tionate impact on success (Exhibit 2). These include the following changes:

  • Offer design, packaging, and pricing execution. Simplify product pricing and packaging.
  • Sales and marketing. Revamp sales and marketing for new business models.
  • Services, customer success, and renewals. Define your North Star for post-purchase customer journeys and tailor your go-to-market strategy.
  • Operations. Redefine the supply chain and invest in capabilities for asset-life-cycle management.
  • Systems and IT. Digitize end-to-end administration of new offers.
  • Product and engineering. Restructure products and solutions to be software-led and backed by customer needs.

Economics of the transformation

Business-model transitions result in a radical change in revenue, margin, and balance-sheet profiles for companies. CFOs constantly fear that these changes could destroy market value and internal finance risks, such as cash-flow constraints and capital and credit risks. Four best practices for managing economic risk have emerged so far among hardware companies that have undertaken business-model transformation:

  • Accelerating the pace of transition of existing customers to the new business model to minimize the period of uncertainty for them
  • Creating transparency with investors around the business-model transition plan and reporting against new business success metrics
  • Partnering with players along the value chain, such as suppliers, distributors, and value-added resellers, to jointly share and manage financial risks
  • Exploring inorganic moves to mitigate financial risks, such as setting up a separate financing arm, or entering joint ventures with a financial institution, or undergoing corporate restructuring to separate the revenue stream of the new business model from that of the old

To succeed at transforming a business model, IT-infrastructure OEMs have to embrace fully the new organization and operating model around it. The actions required to do so fall into four buckets:

To succeed at transforming a business model, IT-infrastructure OEMs have to embrace fully the new organization and operating model around it.
  • Aligned vision, aspiration, and direction. The top team has to be on the same page around the aspiration for and ownership of the transition and carry out a full communications and engagement plan, just as for any foundational change.
  • Agile operating model for execution. It will take a central control tower to orchestrate the transformation with speed, with cross-functional initiatives broken up into a manageable portfolio of workstreams.
  • Right people, right skills, and right mindsets. This level of change means reconsidering the talent throughout the organization, to ensure the capabilities to run the new business model are in place.
  • Right goals. Cascading objectives and key results (OKRs) designed around recurring revenue and the customer experience will hardwire the change and drive desired transformation outcomes.

We believe reinventing the business model for an IT-infrastructure OEM is an 18- to 24-month journey that requires a total overhaul of a company’s approach to doing business. Gleaning lessons from similar business-model shifts undertaken by software companies, we have seen that it is critical for companies to set bold aspirations and timelines and commit to the change. Companies that adopt a slow and incremental approach to driving change often find they’re not able to truly achieve it.

Himanshu Agarwal is a partner in McKinsey’s Silicon Valley office, where Chandra Gnanasambandam is a senior partner and Mitra Mahdavian is a partner. Srinath Nagarajan is an associate partner in the San Francisco office.

This article was edited by Daniel Eisenberg, a senior editor in the New York office.

Explore a career with us

Related articles.

The next software disruption: How vendors must adapt to a new era

The next software disruption: How vendors must adapt to a new era

New demand, new markets: What edge computing means for hardware companies

New demand, new markets: What edge computing means for hardware companies

Transforming infrastructure operations for a hybrid-cloud world

Transforming infrastructure operations for a hybrid-cloud world

Stratechi.com

  • What is Strategy?
  • Business Models
  • Developing a Strategy
  • Strategic Planning
  • Competitive Advantage
  • Growth Strategy
  • Market Strategy
  • Customer Strategy
  • Geographic Strategy
  • Product Strategy
  • Service Strategy
  • Pricing Strategy
  • Distribution Strategy
  • Sales Strategy
  • Marketing Strategy
  • Digital Marketing Strategy
  • Organizational Strategy
  • HR Strategy – Organizational Design
  • HR Strategy – Employee Journey & Culture
  • Process Strategy
  • Procurement Strategy
  • Cost and Capital Strategy
  • Business Value
  • Market Analysis
  • Problem Solving Skills
  • Strategic Options
  • Business Analytics
  • Strategic Decision Making
  • Process Improvement
  • Project Planning
  • Team Leadership
  • Personal Development
  • Leadership Maturity Model
  • Leadership Team Strategy
  • The Leadership Team
  • Leadership Mindset
  • Communication & Collaboration
  • Problem Solving
  • Decision Making
  • People Leadership
  • Strategic Execution
  • Executive Coaching
  • Strategy Coaching
  • Business Transformation
  • Strategy Workshops
  • Leadership Strategy Survey
  • Leadership Training
  • Who’s Joe?

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.

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.

DOWNLOAD THE 18-PAGE BUSINESS MODEL TEMPLATE

If you found this business model framework and content helpful, click here to download the 18-page Business Model PowerPoint Template - NOW FREE. Get started on developing your winning business model.

Download the free business model worksheet

To get started on thinking through your business model, download the free Stratechi PowerPoint Business Model One-Page Worksheets.

DOWNLOAD STRATEGY PRESENTATION TEMPLATES

168-PAGE COMPENDIUM OF STRATEGY FRAMEWORKS & TEMPLATES 186-PAGE HR & ORG STRATEGY PRESENTATION 100-PAGE SALES PLAN PRESENTATION 121-PAGE STRATEGIC PLAN & COMPANY OVERVIEW PRESENTATION 114-PAGE MARKET & COMPETITIVE ANALYSIS PRESENTATION 18-PAGE BUSINESS MODEL TEMPLATE

THE LEADERSHIP MATURITY MODEL

Joe newsum & client coaching.

STRATEGY COACHING MANAGEMENT COACHING BUSINESS TRANSFORMATION STRATEGY WORKSHOPS LEADERSHIP TRANSFORMATION

CUSTOM PROGRAMS PRESENTATION SKILLS CAREER COACHING STRATEGY TRAINING CONSULTANT COACHING

EXPLORE OTHER TYPES OF STRATEGY

BIG PICTURE WHAT IS STRATEGY? BUSINESS MODEL COMP. ADVANTAGE GROWTH

TARGETS MARKET CUSTOMER GEOGRAPHIC

VALUE PROPOSITION PRODUCT SERVICE PRICING

GO TO MARKET DISTRIBUTION SALES MARKETING

ORGANIZATIONAL ORG DESIGN HR & CULTURE PROCESS PARTNER

EXPLORE THE TOP 100 STRATEGIC LEADERSHIP COMPETENCIES

TYPES OF VALUE MARKET ANALYSIS PROBLEM SOLVING

OPTION CREATION ANALYTICS DECISION MAKING PROCESS TOOLS

PLANNING & PROJECTS PEOPLE LEADERSHIP PERSONAL DEVELOPMENT

Cart

  • SUGGESTED TOPICS
  • The Magazine
  • Newsletters
  • Managing Yourself
  • Managing Teams
  • Work-life Balance
  • The Big Idea
  • Data & Visuals
  • Reading Lists
  • Case Selections
  • HBR Learning
  • Topic Feeds
  • Account Settings
  • Email Preferences

McKinsey’s Three Horizons Model Defined Innovation for Years. Here’s Why It No Longer Applies.

  • Steve Blank

business model transformation mckinsey

It assumes that breakthrough innovations will take years to develop.

In the 20th century McKinsey created a model called the Three Horizons to explain how businesses must invest in current products, incremental innovations, and breakthrough innovations. The framework relied on time as a guiding factor; it assumes that truly breakthrough innovations will take years to develop. Technology has made that assumption incorrect: Today innovations like Uber and Airbnb can be rolled out extremely quickly. Because established companies tend to move slowly and must invest resources in existing products, this means that unlike in the 20th century, attacking disruptors now have the advantage.

I’m a big fan of McKinsey’s Three Horizons Model of innovation.

business model transformation mckinsey

  • SB Steve Blank is an adjunct professor at Stanford University, a senior fellow at Columbia University, and a lecturer at the University of California, Berkeley. He has been either a cofounder or an early employee at eight high-tech start-ups, and he helped start the National Science Foundation Innovation Corps and the Hacking for Defense and Hacking for Diplomacy programs. He blogs at www.steveblank.com .

Partner Center

McKinsey and SAP Join Forces to Maximize Business Transformation Value Through Cloud Solutions

McKinsey and SAP Join Forces to Maximize Business Transformation Value Through Cloud Solutions

New supply chain challenges, the growing threat of cyber-attacks, and other geopolitical factors are accelerating the shift to cloud services — a $1 trillion dollar market opportunity , as illustrated by recent research published by McKinsey.

Historically, such uncertainty has catalyzed organizations to invest in modernizing the technology behind their business operating models. But traditional approaches to enterprise resource planning (ERP) modernization have too often fallen short in maximizing business value, leaving C-suite priorities like corporate strategy and organizational mindset as afterthoughts.

To address this, SAP and McKinsey have drawn on their individual strengths to create a strategic alliance that merges technology modernization with strategy execution, thereby driving business results and addressing critical business challenges. With an initial focus on the consumer products, retail, automotive, and manufacturing industries, SAP and McKinsey now offer an end-to-end design for a migration to SAP S/4HANA . The alliance is part of McKinsey’s open ecosystem of alliances and acquisitions designed to advance client impact in a rapidly changing world.

Most recently, Merck KGaA, a world-leading life sciences company, worked with SAP and McKinsey to transform its complex ERP system, moving from a collection of legacy platforms to a consolidated global system, complete with a new organizational structure and governance model.

“In a world that is constantly changing, companies must continually evolve to stay competitive. As part of that, having the right cloud ERP in place is crucial for any business to address this challenge. Building on our history of strong collaboration, our strategic alliance helps ensure that McKinsey and SAP can work side by side, enabling customers to derive sustained value from technology investments and tap into new areas of growth,” said Christian Klein , CEO and Member of the Executive Board of SAP SE.

This alliance has already delivered compelling impact for a range of clients, including a renowned European grocer that was able to counteract increasing cost pressures from competitors while fulfilling the increasing digital demand of customers. Within the four-month initiation phase, the grocer set up a transformation management function that evaluated outside-in perspectives on current trends and future requirements for all business functions. This helped determine a target operating model for the future ERP landscape. As a result, the grocer developed target operating models for retail, supply chain, category management, and finance, establishing a new future-proof business model.

“Technology enables speed, and it can play an outsized role in driving sustainable, inclusive growth,” said McKinsey Global Managing Partner Bob Sternfels. “SAP and McKinsey’s relationship brings together strategic thinking with technical implementation, helping the boldest leaders find enduring solutions to our most urgent challenges.”

Merck Customer Feature

Merck worked on an ERP transformation with SAP and McKinsey. According to Alessadro de Luca, Group CIO at Merck, the company initially approached the effort as a technical project. They had not considered the fundamental strategic challenges of cross-sector business objectives, including disconnects between system architecture and operational reality.

Through physical and process redesign efforts, SAP and McKinsey helped Merck identify possible complexities and develop a global ERP road map that resulted in an integrated business case that addressed business value and IT changes. Overseen by an organizational structure and supported through CEO governance, the effort consolidated Merck’s ERP landscape while decommissioning legacy systems.

“The combination of SAP’s technical skills and McKinsey’s consulting expertise has boosted Merck’s ERP strategy and roadmap, helping us deliver more value for Merck’s business divisions and enabling functions,” said de Luca. “Working with both organizations for this project was critical. Without the seamless integration of their teams, we would not have been able to achieve the level of impact we did.”

Eric van Rossum is chief marketing and solutions officer for SAP S/4HANA at SAP. Bjørnar Jensen is senior partner and global co-lead of the SAP Alliance at McKinsey.

More in Ecosystem

Digital Eco-Farming: How SAP Japan Helps Revitalize Rural Communities

Digital Eco-Farming: How SAP Japan Helps Revitalize Rural Communities

SAP Goes the Distance with EV Fleet Digitalization

SAP Goes the Distance with EV Fleet Digitalization

SAP Announces Winners of Regional Partner Excellence Awards

SAP Announces Winners of Regional Partner Excellence Awards

Logo.

Technology and Operations Management

Mba student perspectives.

  • Assignments
  • Assignment: The TOM Challenge: TOM…

McKinsey & Company – an operating model perfected through decades of refining

1. Brief description: McKinsey is a leading strategy consulting Firm 2. McKinsey creates sustainable value for clients of which it extracts fixed fee or % of monetary value 3. McKinsey’s continuously evolving Operating Model is designed around its Business Model

1. Brief description: A leading strategy consulting Firm with its people as its largest assets

McKinsey & Company is a global management consulting firm that serves leading businesses, governments, non governmental organizations, and not-for-profits. McKinsey helps clients make sustainable improvements to their performance and realize their most important goals. They’ve been operating for almost a century (89 years to be accurate). (1) Given the industry, McKinsey’s core assets is its people.

2. McKinsey creates sustainable value for clients of which it extracts fixed fee or % of monetary value

McKinsey has a dual mission: “help clients make distinctive, lasting, and substantial improvements in their performance and to build a great firm that attracts, develops, excites, and retains exceptional people.” (2) For the purposes of this discussion we will focus on the first, but it is clear that number 2 is essential given McKinsey’s biggest assets being its employees. So what kind of “improvements” does McKinsey help make? The answer depends on the function (e.g. whether McKinsey is supporting clients do: a) strategy refresh, b) operational improvements, c) organization re-design, d) transformations, etc… However, McKinsey’s customer promise is a positive change that is:

a. Substantial and relevant: The change must be relevant at a company-level, ideally, one of the top priorities of the CEO. McKinsey basically helps takes a CEO approach to Problem Solving and looks at the organization from the point of view of the CEO

Pathways to Just Digital Future

b. Measurable : The effects of the change must be measurable, ideally quantitatively. It is critical for the McKinsey team and the client team to align on key metrics that should be measured. This is specifically relevant when the fee is a % of monetary value created

c. Sustainable : The boost to a company’s performance should be sustainable over several years after the McKinsey team leaves.

McKinsey then captures part of this value created through its fixed fees per project or a % share of the monetary value created for the client over a certain period of time (e.g. extra Net profit for then next 3 years) or through fixed fees conditioned on the actual achievement of the performance management. In addition to direct monetary gains, McKinsey sought to build and sustain relationships with its clients.

3. McKinsey’s continuously evolving Operating Model is designed around its Business Model

McKinsey designs and continuously refines its Operating model using 3 pillars of lean, centered around customer-centricity:

a. Technical System

b. Management Infrastructure

c. Mindsets and behaviors

The framework is depicted below. (3) Each pillar is tightly linked to the Core value proposition

Technical System is in a way the hardware of the company: How are resources allocated to the projects? McKinsey’s solution is simple: a relationship-manager partner and a small dedicated teams supported by a wide expert network and a research arm (with a budget larger than the top 10 B-schools combined – don’t quote me on this). This ensures that the changes are substantial and relevant as follows:

  • The partner, who oversees all projects with the same client, ensures connection with the CEO of the company thereby maintaining a connection between the CEO’s top priorities and the Core On-the-Ground team. This ensures the changes are substantial
  • The Core team is full time on the project, meets with client employees across all levels of the organizations and ensures McKinsey understands the client’s perspective, and that the proposed solutions are relevant and applicable to the company environment. The Core team agrees with the client on ways to “see” the impact of the change, ensuring measurable metrics
  • Research department ensures that the most cutting-edge solutions/ innovations as well as the most traditional “game-books” are surfaced to the team
  • The Experts have seen similar projects across multiple industries and geographies, ensure the recommendation is practical and helps team think through unexpected problems that have emerge on previous projects. The change after-all needs to be sustainable , and this requires the changes to be seamlessly implemented over time, after the McKinsey teams leaves the project.

The processes of the project work are flexible, but the quality systems are rigorous: Developed recommendations should be signed off by each key stakeholder, including the partner, the experts, other partners who have previously worked with the client or have relevant expertise in the area, the client employees across multiple levels of the organization, and ultimately, the highest level main client counter-part (usually company CEO).

In addition, McKinsey teams and partner follow up with the client after completion of the project to ensure the performance metrics are being monitored, and are showing positive impact. The Feedback loop is necessary for the continuous learning of McKinsey (more in section c. below)

The Management infrastructure includes the performance management as well as the talent management. This matches McKinsey’s dual mission of client impact and people development.

  • The performance management matches exactly with the value proposition: for example, each consultant’s performance is measured across multiple metrics, including for example the analytical problem solving skills, and whether the consultant is able to step back from a problem to think about it through a CEO’s mindset. This ensures that the solution/ changes proposed are substantial and relevant. Similar metrics exist for the partner, the experts and the researchers.
  • The talent management is also rock solid: starting from the case interview, every interviewee is subjected to a problem faced by a top level executive of a company (usually real life examples) with no guidance on information availability. The candidate should be able to hone in on the problem and ask for the right information to look for. After all, in an actual work environment, getting information is time consuming, and so, if a consultant does not know what information to look for, the project might take a lot of time and end up being irrelevant with non-substantial changes recommended. Similarly, candidates are judged based on their analytical skills, and whether or not they are able to define numerical metrics to track performance for certain changes. Post recruiting, consultants are subjected to on-the-job coaching as well as formal training.

Mindsets and behaviors are basically the software of the company. The two most relevant topics are:

  • Ownership of the problem: For changes recommended to be practical, and thereby sustainable and substantial, the team should “own” the problem. The core consultant team takes full accountability for the problem. This indirectly leads to performance across all 3 value proposition metrics. For example, the team understands that it can only “manage what it can measure” and would thereby recommend measurable change
  • Continuous Learning: To deliver sustainable changes, McKinsey ensures that its tracks whether its previous recommendations has led to actual sustainable change at the client. This is the feedback loop discussed in section a. above. The feedback loop monitors sub-optimal performance and comes back with actionable steps. An example of continuous improvement is the launch of “McKinsey implementation”. Given the criteria of measured impact at their client (and sometimes McKinsey fees being conditional on the achievement of this impact), McKinsey has realized that there were many instances (especially in emerging markets), were clients faced multiple practical obstacles while implementing the recommendations suggested by the McKinsey team. The issues were driven by either impractical recommendations or limited capabilities at the client (or both). In both scenarios, McKinsey took on the challenge of implementation and launched “McKinsey implementation”, a group of expert implementation consultants who would work hand-in-hand with the clients to implement the recommendations and ensure proper and sustainable knowledge transfer.

(1) http://www.mckinsey.com/about_us

(2) http://www.mckinsey.com/about_us/who_we_are

(3) http://www.mckinsey.com/insights/operations/from_lean_to_lasting_making_operational_improvements_stick

(4) http://www.economist.com/news/business/21586524-mckinsey-looks-set-stay-top-heap-management-consulting-future-firm

(5) http://www.businessbecause.com/news/inside-view-top-jobs/3246/inside-view-mckinsey-company

(6) http://www.businessbecause.com/news/inside-view-top-jobs/3246/inside-view-mckinsey-company

Student comments on McKinsey & Company – an operating model perfected through decades of refining

As many professional service firms claim, McKinsey see its people as the most important asset. However, do you think as the technology advances, Artificial Intelligence will replace humans to do some of the analytical work? As a very capital-lean company, I figure it’s very difficult for McKinsey to invest in the technology in this area. How do you think McKinsey would react to this possible trend?

Really interesting post. As we’ve discussed in a number of our classes this year, work-life balance is top of mind for many millenial high achievers. Consultancies are notorious for the time and stress demands it places on its people, which as you’ve noted, are critical assets. Companies like HourlyNerd have created a business model that is potentially disruptive to McKinsey on two fronts: 1) it offers superior flexibility, autonomy, and work-life balance for consultants and 2) it has the potential to lower a client’s consulting costs significantly. In the face of these disrupters, how, if at all, can / should a larger consultancy like McKinsey adapt to 1) retain its status as an elite and prestigious employer and 2) preserve its high-priced revenue model?

I’m curious to know how McKinsey, its competitors, and strategy consulting in general are thinking of responding to the increasing importance and prevalence of big data in making important business decisions. Historically (at least in the US), the talent pool that contributes to this field has been extremely averse to joining McK-type firms. Do you think McK will respond by adjusting its operating model to incorporate such capabilities, or tweak its business model to not include such analytical offerings?

To be successful in such a global environment consultants have to collect and share knowledge inside the firm. However, collecting and sustaining that knowledge keeping client data confidential doesn’t sound like an easy task and creates more questions than answers: How do you keep client data confidential but share the knowledge? How do you create a feedback loop between the teams and internal research groups? And how do you ensure that the knowledge is not gone from the firm when an expert leaves?

Thanks all for the great comments. Below my thoughts: 1) Feiran: a) AI is still in very early development and still needs to replace many less thought heavy industries before reaching consulting b) Within upcoming years, repetitive Analytical work can be replaced with AI. The org structure of McK has such analytical work in a support function (special department). I’m guessing as AI becomes better, this department can be down-sized leaving some people to tailor the technology to the consultant’s needs c) McKinsey currently invests in Technology break-throughs through its “Digital Labs”. IMO, this doesn’t enable to develop moonshots, but allows us to leverage moonshots to improve our Operating Model.

2) BT (Tyler Biddix?): I don’t see HourlyNerd as a competitor. I see them as a competitor to GLG or AlphaSites as they get you in touch with an expert who can provide industry trends, industry breakthroughs and insights into competitive landscape. Couple reasons: a) I really doubt a company would be comfortable sharing confidential data with someone on HourlyNerd. McKinsey relationships with client are very very long-term and trust-based b) I’ve worked on projects remotely, and, as a consultant, you gain way more insight by being on-the-ground and interacting with client on daily basis

3) Kchoo: As mentioned to Feiran, McKinsey is using its “McKinsey Digital Labs” to leverage such technology. I fully agree with you that “Big data” will become THE key driver of decision making and McKinsey hasn’t focused as much as needed on that.

4) Teti: In all cases, I guess our value is HOW we analyze data and strategies, not WHAT data we have – We keep client data confidential by masking client names and sharing either average numbers across multiple companies or sharing qualitative info. More and more companies are becoming public and are sharing info, which makes our database less valuable with time – Feedback loop is a bit messed up at the moment. While I worked at Booz & Company we did a better job of codifying our knowledge from every project, by creating IP pieces (which is basically a “masked” version of the final presentation, where we hide company name and remove all company specific numbers) – You’re always part of the McKinsey family even after you leave 🙂 As long as I have the expert’s name, I’ll reach out to him whether or not he’s left the Firm. On a more serious note, there are multiple people working on same project over time and chances are super high one of them is still at the Firm (from Director to Experts to Research analysts to managers to consultants)

Thanks again everyone!

Good job Dany. I would be curious to hear your answer on following questions : (a) We have seen in the news that McKinsey started its “Implementation Practice”, with a slightly different proposition and operating model than its core strategy arm. How does this new practice work? How does it fit to McKinsey’s strategy? How does new practice tie back to its business model? (b) Does McKinsey’s operating model differ from its competitors? (c) How does McKinsey incorporate advancing technology into its operating model? (d) How does the expert path differs from consultant path? What are the different capabilities and know-how requirements for each? Very well done again

Leave a comment Cancel reply

You must be logged in to post a comment.

The Change Management Blog

Thank you! We will contact you in the near future.

Thanks for your interest, we will get back to you shortly

  • Change Management Tools
  • Organizational Development
  • Organizational Change

walkme

Home » Change Management » A Concise McKinsey Organizational Transformation Guide

A Concise McKinsey Organizational Transformation Guide

A Concise McKinsey Organizational Transformation Guide

In this McKinsey organizational transformation guide, we’ll explore key concepts related to change management, organizational change, and more.

Among other things, we’ll learn about:

  • McKinsey’s “scientific” approach to change management
  • The impact of leadership on organizational change and transformation
  • The building blocks of successful change

McKinsey, a famous research firm, has a lot to say on these topics, so let’s get started.

Change managment ebook guide for donwload

McKinsey Organizational Transformation 101: Key Concepts and Ideas

Here are some of McKinsey’s most important ideas and concepts related to organizational transformation and change:

Organizational transformation should be a science, not guesswork.

Large-scale organizational changes , says the research firm, can be designed scientifically.

Organizational change is not easy, but with the right approach, organizations can engineer success.

There are four key actions that change practitioners should engage in when designing change:

  • Role modeling
  • Fostering understanding and conviction
  • Reinforcing changes through formal mechanisms
  • Developing talents and skills

According to McKinsey, the more actions that a business engages in, the greater its chances of success.

These mechanisms echo many other change management frameworks, such as the ADKAR model. 

Like this set of key actions, Prosci’s famous model also recommends building awareness, developing skills, and reinforcing change.

Change leaders should follow an integrated transformation approach in order to keep transformation projects on track.

Organizational transformation is not the same as organizational change .

An organizational transformation is a set of interdependent organizational changes designed to reinvent an organization across almost every dimension.

However, McKinsey points out, the problem with organizational transformation is that each business unit has its own idea of what change should look like:

  • HR wants change that centers around employees
  • Finance wants changes built around the finance department
  • Operations wants operational changes

And so forth.

Unfortunately, these competing agendas can prevent useful dialogue … the kind of dialogue that management teams must engage in to drive successful transformation.

To tackle this conundrum, business leaders should follow an integrated transformation approach.

McKinsey dubs its three-pronged model the “ transformation triangle .”

Predictably, it consists of three parts:

  • Top-down direction setting , which helps create focus within the organization
  • Bottom-up performance improvement , to get ideas and enhance performance
  • Cross-functional core process redesign , to achieve breakthrough improvements in cost, quality, and timeliness

All three “axes of change” are necessary to successfully drive transformations.

Business leaders that don’t implement each axis will end up with a disparate set of activities, no dialogue, and no coordination.

Needless to say, this would produce poor results, and can easily cause a transformation project to fail.

Today, most organizational transformations involve digital components – to successfully transform, organizations need to evolve their approach to change management.

Digital transformation lies behind many organizational transformations in the modern era.

A #digital transformation definition should be something you can actually apply in business. Let’s decode it so you can understand its #business value, why it is such a big trend, and what you can do about it. https://t.co/BhnKEuBZ4E — WalkMe (@WalkMeInc) July 4, 2019

Although digital transformations present a great deal of opportunity, they are also more complex and challenging.

To succeed at digital transformation , McKinsey claims that businesses need several things:

  • New skills and resources
  • The right talent
  • New approaches to change and change management

In order to overcome these hurdles, McKinsey offers a few suggestions:

  • Leaders must stay engaged at every step and be aware of blind spots
  • Given the difficulty of finding employees with the right skills, organizations should allocate time and resources to obtaining that talent
  • Environments can change rapidly, so change programs should stay agile and responsive

These approaches can help during each stage of a transformation: setup, piloting, scaling and implementation, and sustaining change.

Following a few best practices can triple the odds of success.

The more rigorous the approach to change management – and the more actions a business engages in – the greater the chances of success.

In their research, McKinsey identified a few best practices and activities that successful change programs all had in common.

These practices were based on traits that the most successful survey respondents had in common and included:

  • Communication. Communication means communicating openly about the transformation’s progress, success, and its implications for individuals. It also means using a consistent change story to help align the organization .
  • Leading by example. That is, leaders should embody the change and spend a significant amount of time working on the change. They should also take on the responsibility of leading and developing their teams.
  • Engaging employees. The survey’s most successful transformations proactively engaged the workforce through several means. They held change leaders accountable, clearly defined roles and responsibilities, allocated sufficient personnel to support the change, gave supportive employees key roles in the change effort, and assigned high-potential personnel to lead the transformation.
  • Continuous improvement. Planning for continuous improvement is another trait that boosts success rates. Organizations can do this by ensuring that everyone in the organization understands how their work relates to the organization’s overall vision, identifies errors before they reach the customer, identifies and share best practices, continually develops, and stays engaged with their personal goals and targets.

Following these change management principles can triple the chances of success, says McKinsey.

If you liked this article, you may also like:

What is the Deming Cycle (PDCA) in change management?

What is the Deming Cycle (PDCA) in change...

What can simulation training do for your business?

What can simulation training do for your business?

business model transformation mckinsey

WalkMe Team

WalkMe spearheaded the Digital Adoption Platform (DAP) for associations to use the maximum capacity of their advanced resources. Utilizing man-made consciousness, AI, and context-oriented direction, WalkMe adds a powerful UI layer to raise the computerized proficiency, everything being equal.

Join the industry leaders in digital adoption

By clicking the button, you agree to the Terms and Conditions. Click Here to Read WalkMe's Privacy Policy

loading

How it works

For Business

Join Mind Tools

Article • 9 min read

McKinsey's Three Horizons of Growth

Developing future opportunities.

By the Mind Tools Content Team

business model transformation mckinsey

Over time, many organizations go through distinct stages of growth and decline. They're born, they mature and then – seemingly inevitably – they fade away.

However, some organizations avoid the downturn. They manage to sustain their growth over decades, and continue to surprise customers with their innovation and creativity.

They do this by devoting time, energy and resources to developing new ideas. These then mature and become profitable, replacing older products and businesses as they fall away.

In this article, we'll look at McKinsey's Three Horizons of Growth, a model that organizations can use to focus their energy and resources on projects that sustain their growth over the long term.

About the Model

Mehrdad Baghai, Stephen Coley and David White, partners at McKinsey & Company, published the Three Horizons of Growth model in their 2000 book, " The Alchemy of Growth ."

The model, shown in figure 1 below, outlines three different types of innovation that need to go on in parallel for a business to be successful. Organizations must invest in each one, and meet the specific management challenges that accompany them, to sustain long-term growth.

The framework focuses your organization on developing future revenue streams and business opportunities, so that, when existing products have run their course, new ones are ready to take their place.

Figure 1: The Three Horizons of Growth

business model transformation mckinsey

The three phases are:

  • Horizon 1: This refers to your organization's current core businesses – the products and brands generating the most profit right now.
  • Horizon 2: This relates to your organization's emerging businesses or products. These are still in their early stages, and require investment or research to thrive. However, they generate plenty of interest among your investors and customers.
  • Horizon 3: This focuses on your organization's seedling investments, and ideas for future business. These could be research projects, early discussions or alliances, or products still being prototyped.

According to the model, organizations must invest time, energy and resources in exploring all three of these horizons at the same time. Without the continuous innovation that this brings, growth eventually stagnates and organizations decline.

The Three Horizons of Growth model keeps your attention focused on defending and developing your current brand, investing in upcoming businesses, and generating new ideas and opportunities.

It also prevents organizations from making common mistakes when they are seeking to achieve sustained growth. For example, some focus entirely on Horizon 1 products. Then, when these start to decline, they find that there are no other opportunities waiting to replace them.

Another common mistake is to become overly obsessed with growth and new business. Here, organizations put too much focus on Horizons 2 and 3, and lose sight of their Horizon 1 products. This is dangerous, because core products and businesses provide the money to support the development of new opportunities, and it's easy to underinvest in improving these further.

Each horizon has its own time frame. For example, your investments in Horizon 3 opportunities might not pay off for years, while those in Horizon 2 might start to generate a profit in a year or two.

That's why it's necessary to pay attention to all three horizons at the same time, so that you always have opportunities ready to mature and generate growth and profitability.

As well as developing new products, the Three Horizons of Growth can guide your expansion efforts.

In Horizon 1, for example, your organization might be comfortably settled in the United States, with a strong brand and customer base. In Horizon 2, you might want to expand into Europe with slightly modified products. Your Horizon 3 plan could include breaking into an Asian market, which might require entirely new products.

You could also use the framework to develop a long-term recruitment plan .

For example, while your existing team might continue working in current operations, a Horizon 2 recruitment drive might bring in entrepreneurial professionals who excel at building new businesses. A recruitment initiative for Horizon 3, however, could target researchers, visionaries and dreamers, or even rebels , who are skilled at thinking outside the box and coming up with new ideas.

How to Apply the Three Horizons

For your organization to thrive in the long term, you need to be working effectively across all three horizons. Below, we've outlined strategies that you can use to achieve this goal.

Horizon 1 represents your organization's core businesses. These are the brands, products or services that customers associate with your company right now.

You need to work on safeguarding and enhancing these, so that they continue to generate profits and growth.

First, conduct a SWOT Analysis for your most significant products to understand your current strengths and weaknesses, and to identify the threats and opportunities that your organization faces. Then, conduct a USP Analysis to think about how these products can compete more effectively in the market.

Next, make sure that your production line (whether it's in-house or outsourced) is as streamlined and error-free as possible. Efficiency here will cut costs and quicken your time to market. Use approaches like lean manufacturing to improve this.

Profitability is extremely important: remember, your Horizon 1 businesses will provide financial support for the other two horizons while they're in development, and at the early stages of growth.

Last, look at your market share. Is it stable or expanding? You might want to segment your market to gain a better understanding of it, and to identify new opportunities for growth.

Now it's time to look at what your organization invests in. Often, Horizon 2 businesses are a natural expansion of the products and services that you already offer in Horizon 1.

Has your organization invested in viable businesses that have the potential to replace your current moneymakers? Are you gaining momentum in your respective markets, or are they stagnant or declining?

You'll also want to conduct a PEST Analysis to map out "big picture" changes that might threaten your current products, or open up new opportunities for them; this could include new technology or upcoming government or industry regulations.

You need to think about how to push the most promising of your Horizon 2 businesses to a new level. Here, use the Boston Matrix to determine which of them warrant additional investment and resources.

If you don't have any products or services on this second horizon, brainstorm ways that you could further enhance existing, successful products. How could you expand your current offering and add more value to it? Doblin's 10 Types of Innovation® can help you think about this in many different areas of your business.

Also, explore and understand your organization's core competencies , and think about how you can strengthen them and use them to develop new businesses.

Your last step is to look at ideas and growth opportunities that might be years away from production or profitability. These might be nothing more than drawings from your last brainstorming session, or research projects that are underway.

First, look at the variety of ideas and projects that you have in the pipeline. Do you have a number of options, or are they all focused in one area? If the scope is too narrow, look at how you can widen it. Your goal is to have a rich source of potential products and businesses that fit with your organization's business model and mission.

Encourage team members to submit their ideas for future businesses or products, and make sure that your culture rewards innovation, creativity and risk taking.

If you haven't invested much time or energy in developing these opportunities, it's time to start. Regularly set time and resources aside to brainstorm ideas with your team members, and to encourage people to “think big” about what the organization could achieve.

Last, it's not enough to have good ideas; you need to be able to develop the best ones, so that they can make the transition into Horizon 2. Learn how to run effective business experiments to identify and pursue your best prospects.

McKinsey partners Mehrdad Baghai, Stephen Coley and David White published the Three Horizons of Growth in their 2000 book, "The Alchemy of Growth." The model outlines three different types of innovation that need to go on in parallel for a business to be successful in the long term:

  • Horizon 1: This is routine innovation within your organization's current core businesses – the products and brands generating the most profit right now.
  • Horizon 2: This refers to innovation and investment in your organization's emerging businesses or products.
  • Horizon 3: This describes your organization's seedling investments, and ideas for future businesses.

You can improve how your organization grows over the long term by understanding the importance of each horizon, and the specific management challenges it raises.

You've accessed 1 of your 2 free resources.

Get unlimited access

Discover more content

Bowman's strategy clock.

Making Sense of Eight Competitive Positions

Book Insights

Three Moves Ahead

Add comment

Comments (0)

Be the first to comment!

business model transformation mckinsey

Introducing Mind Tools for Business

Mind Tools for Business is a comprehensive library of award-winning performance and management support resources.

Whether you want to increase engagement, upskill teams, or complement your existing workplace programs – this is content designed to achieve impactful results.

Sign-up to our newsletter

Subscribing to the Mind Tools newsletter will keep you up-to-date with our latest updates and newest resources.

Subscribe now

Business Skills

Personal Development

Leadership and Management

Most Popular

Newest Releases

Article av8xg61

5 Ways to Build Great Work Relationships

Article ayve4tq

How to Manage Company Growing Pains Using the Greiner Curve Infographic

Mind Tools Store

About Mind Tools Content

Discover something new today

Make change happen with kotter's 8-step change model infographic.

Infographic Transcript

Infographic

Time Management Tips Infographic

How emotionally intelligent are you.

Boosting Your People Skills

Self-Assessment

What's Your Leadership Style?

Learn About the Strengths and Weaknesses of the Way You Like to Lead

Recommended for you

Quality circles.

The Key Points to Consider When Forming a Quality Circle

Business Operations and Process Management

Strategy Tools

Customer Service

Business Ethics and Values

Handling Information and Data

Project Management

Knowledge Management

Self-Development and Goal Setting

Time Management

Presentation Skills

Learning Skills

Career Skills

Communication Skills

Negotiation, Persuasion and Influence

Working With Others

Difficult Conversations

Creativity Tools

Self-Management

Work-Life Balance

Stress Management and Wellbeing

Coaching and Mentoring

Change Management

Team Management

Managing Conflict

Delegation and Empowerment

Performance Management

Leadership Skills

Developing Your Team

Talent Management

Problem Solving

Decision Making

Learn Transformation

What is Business Transformation? Mckinsey Model

mckinsey-business-transformation-model-for-business

 “Transformation isn’t about improving, it’s about re-thinking” Malcolm Gladwell
  • Transform Your Business with This Business Model

Business Transformation  allows an organization to have better collaborate with its employees in a more personalized way. It helps in engaging customers, high employee innovation and productivity, along with more accurate insights of various types of data. All of which are important for an organization’s survival in the competitive era.So, In this article we are going to discuss about mckinsey business transformation.

What is Business Transformation?

Steps for business transformation, key takeaways.

Business Transformation is the term that is used for making important changes in how an organization runs. They can be defined as bold, and seismic shifts that organizations make for accelerating change and growth that is beyond typical incremental advancements. It aims to make changes to processes, people, and systems as well as to align the organization with a business transformation strategy . And also, vision to work upon. A business’s transformation may bring changes to the whole organization. Such as integration of two companies getting involved in an acquisition, or it may include a specific change to a compartment like IT, Marketing, HR, or Finance. Organizations undertake business transformation so that they can create additional value to it.

Handpicked for our Leaders:   Drivers of business transformation .

steps-of-business-transformation

So, For a successful business transformation, there are a few steps listed below that an organization needs to follow-

1. Build Strategy-

Firstly, an organization wanting to transform by bringing a change should have a vision of what they want to do in the future. They should take a look at where they are standing presently. And where they want to be in the future, and then bridge the gap between the two. Moreover, This vision should be lined with strategic goals and all the necessary needs. So, A proper business transformation strategy will guide your organization to go ahead.

Also Read: 5 Signs Of Women Harassment

2. Establish Leadership-

The second step is to select leaders who will provide support to the transformation program. Further, A leader who is knowledgeable of his role can take full responsibility to ensure any transformation. And its smooth delivery and that too on time, within the budget.

3. Do Planning –

A clear strategy will build a roadmap of the transformation and ultimately help your organization to achieve its vision. Implementation of a plan determines that essential changes are being made for the transformation strategy. A proper plan will have clear objectives, scope, milestones, budget, and timeframe.

4. Set-Up Program Management-

The next step is to set up program management. This step helps in the establishment of program governance, and supervision of all parties. Along with adopting the transformational change and keeps all these on track. Moreover, leaders should manage the business transformations while having the right skills and capabilities to motivate their team and make the change happen.

5. Collect Resources-

To achieve your goal successfully, you need the appropriate resources at each stage of your transformation plan. It’s all about having the right people, doing the right work, at the right time. Thus, you should collect the right resources to improve the profitability of your organization. Make sure that you have the right team who works to achieve the vision by showcasing their best skills and in time.

Read Also: 5 Signs Of Women Harassment

6. Execution –

After the collection of resources, the next step is to execute the business transformation into reality. It doesn’t matter how good your business transformation strategy is, if you don’t execute them well, it won’t make any such difference. Therefore, as a leader, make sure that you execute your plan well with the help of all the fundamental steps.

7. Integration –

It doesn’t end when we implement the strategy. After you auspiciously implement your plan, you need to embed and integrate new ways of working that meet the changing demands of the market. 

Read More:   Best Books

Leader’s Tip:

To successfully restructure a business, a leader must actively involve the team, articulate the vision, and offer resources and support., about mckinsey business transformation model.

McKinsey’s Business Transformation Model is one of the management frameworks that hold the potential to draw a case interview. This influential McKinsey business transformation model is more like a management framework that you can use to navigate the changes in employees and be able to focus on when your organization should begin to operate in a much different manner than it did in the past. Mckinsey business transformation model includes-

  • Encouraging the development of understanding the organization.
  • Reinforcement of changes with the help of formal mechanisms.
  • Developing talent and skills in the employees.
  • Role modeling the team members.

If you follow all these four above-mentioned steps of McKinsey’s business transformation model and reinforce them one after another, it will benefit your organization by bringing a change in employee’s mindsets and positively influence their behavior.

Furthermore, there are 4 important D’s of  digital transformation  which holds an equal significance in McKinsey’s business transformation model, and goes as follows-

  • Discover – For a profitable business transformation, you should shape your digital ambition, strategy, and cases that are based on your organization’s insights.
  • Design – Make sure you’re able to reinvent the new capabilities of your employees and breakthrough journeys as a part of your digital transformation program.
  • Deliver – The next important phase is to deliver by activating such an ecosystem that rapidly provides at scale.
  • De-Risk – The last and most major stage is de-risking by structuring the change in program, resources, and commercial model as well for reducing risks related to operations and finances.

Encourage a culture of continuous improvement, support creativity, and give teams the freedom to take charge of the business transformation process.

Check out the Video-

Conclusion-

An organization that is interested in maximizing performance, increasing efficiency, and improving profits should be exploring business transformation opportunities. For building a successful business transformation strategy, you should make sure that you have a proper plan and follow all the steps for the establishment of that business transformation strategy, which would eventually benefit your organization and employees.

How do you identify the need for business transformation?

The need for transformation can arise from various factors, such as changes in market dynamics, disruptive technologies, declining performance, or shifts in customer preferences. It requires assessing the organization’s challenges and opportunities.

What is the role of strategic goals and vision in business transformation?

Strategic goals and vision provide a clear direction for the transformation effort, aligning it with the organization’s long-term objectives and helping guide decision-making and resource allocation throughout the process.

Identification, goal-setting, analysis, planning, implementation, monitoring, and adjustment are the 7 steps of corporate transformation. To enable successful corporate change, leaders should involve staff members, communicate clearly, and offer resources. The strategic justification, thorough planning, execution schedule, and transformation management make up the McKinsey Business Transformation Model.

A carefully prepared business master, gets an abundance of involvement methodology, money, and tasks. His profound information and bits of knowledge assist organizations with driving development, further develop productivity, and make long haul progress.

Related Posts

What is glbt – business industry examples, glbt vs. lgbtq: a clear comparison, lgbtqi rights and inclusion in india.

Comments are closed.

Type above and press Enter to search. Press Esc to cancel.

business model transformation mckinsey

How McKinsey's 7S Model Can Enable Successful Digital Transformations

Table of Contents

What is the McKinsey 7S Model?

The McKinsey 7S Model is an academic framework widely taught in business and MBA programs worldwide. However, its significance extends beyond the academic realm, playing a vital role in facilitating successful digital transformations. This discussion aims to explore the application of the McKinsey 7S Model in the context of digital transformation.

YouTube player

One of the principal tenets of an effective digital transformation is developing a robust strategy. This process starts with the overarching corporate strategy, which should then inform the formulation of a specific digital strategy to support and enhance the broader corporate goals. The McKinsey 7S Model, a tool often used in this context, emphasizes that strategy is the foremost among the seven S's.

It highlights the necessity for this strategy to be in harmony with the other six areas, which will be discussed. Essentially, the initiation and the culmination of an effective digital transformation hinge on a well-crafted strategy, underscoring its position as the first 'S' in the 7S Model.

The second 'S' in the McKinsey 7S Model refers to 'Style,' which encompasses the overall management approach and the organizational ethos . This model element addresses questions such as whether an organization adopts a command-and-control or a top-down management style. Alternatively, it may operate as a bottom-up, decentralized entity, or perhaps it embraces a laissez-faire approach, allowing different business segments to function independently with a high degree of trust in their effectiveness.

The key objective is to ensure that this chosen style is congruent with the overarching strategy the organization aims to pursue. Additionally, it is crucial for this management style to be in alignment with the other elements represented in the 7S Model, ensuring a cohesive and effective operational framework .

The next critical component of the McKinsey 7S Model, particularly relevant to digital transformation, is 'Staff.' This aspect concerns having the right personne l in place to support and enact the desired strategy and organizational style , along with the other elements of the model.

In the context of a digital transformation project , it is imperative to ensure that the team comprises individuals best suited to facilitate the intended strategy. The concept of having the 'best people' on a project refers to selecting those who are most capable and appropriately equipped to realize the strategic goals.

Aligning the right staff is not just vital for the success of the digital transformation initiative but is also crucial for the organization as a whole. During a digital transformation , assessing and aligning the staff with the strategy, style, and other elements of the 7S Model is essential. Failure to do so can lead to misalignment , where the capabilities and focus of the staff do not match the strategic objectives and the preferred management style, as well as potentially affecting other areas that will be discussed subsequently.

YouTube player

Once the right staff is in place, ensuring the organization has the correct personnel, attention must turn to assessing their skills. Although it might seem similar to considering the staff, focusing on skills represents a distinct and crucial aspect. It involves aligning the workforce's skills with the broader objectives of the digital transformation, the organizational style, the strategy, and other elements previously discussed.

The process entails identifying the specific skill sets required to facilitate the transformation. This may include technical skills related to the deployment and utilization of new technologies, as well as competencies in organizational change management , ensuring that the organization can adapt to the transformation and other changes effectively.

These skills are vital not only within the digital transformation team but across the entire organization. As one of the most crucial components of the McKinsey 7S Model, skills alignment plays a key role in the success of a digital transformation .

Shared Values

The next component of the McKinsey 7S Model is 'Shared Values,' which can also be considered the organization's culture . This encompasses the philosophical aims of the organization, the type of work environment it strives to create, and the overall cultural ethos it seeks to foster.

In the context of digital transformations, shared values and culture assume a significant role. While all other elements of the model are crucial to digital transformation, shared values often necessitate change. Organizations typically aim to build upon the existing culture and values that have contributed to their success but must also consider how to adapt without undermining their core ethos. This involves careful calibration of the organizational culture . To gain deeper insights into company culture, you can explore more by visiting this link to our enlightening podcast titled - Company Culture and its Role in Organizational Change Management .

For instance, companies that have expanded through acquisitions often retain a strong entrepreneurial spirit , which is a key factor in their success and growth. However, as such companies mature and scale, there is a need to shift towards more standardized operating models and consistent business processes , potentially becoming less entrepreneurial and more structured or corporate.

The objective is not to completely discard the existing culture but to find a balance akin to adjusting a dial on a stereo. Incremental adjustments to the cultural aspects might be necessary. During a digital transformation, one of the most commonly overlooked aspects is this very concept of shared values and culture. Ensuring that these are in alignment with the other components of the 7S Model is critical for a successful transformation .

YouTube player

'Structure' is another vital component of the McKinsey 7S Model, synonymous with organizational design . This aspect focuses on envisioning the ideal form of the organization, determining roles and responsibilities , and defining how different departments will interact and operate. It also encompasses considerations about business processes and the overall vision of the organization's future structure.

In the realm of digital transformations, the structure or organizational design is often an overlooked element. However, it is essential not only to address organizational design but to do so in the context of the rest of the 7S Model. This ensures that the developed organizational structure aligns with the strategy, shared values, and other aspects discussed earlier.

When embarking on a digital transformation, it is crucial to integrate this aspect of structure or organizational design into the transformation plan. It should be a deliberate component carefully considered to ensure it complements and supports all other areas of the 7S Model.

The seventh and final component of the McKinsey 7S Model is 'Systems,' specifically focusing on technology. Notably, systems have been intentionally discussed last in this context. While systems and technology often appear as the primary focus of digital transformation on the surface, it is the other six elements of the model that are more critical.

Before considering how systems can integrate and align with the organization , it is imperative to ensure alignment and clear direction in the other six areas: strategy, structure, skills, style, staff, and shared values. A common pitfall in digital transformation efforts is the premature or exclusive focus on systems, neglecting the other essential elements of the model.

Systems should be viewed as a capstone, serving as an enabler for the six other aspects. Only after defining and aligning these six elements should the organization implement technology. This approach ensures that the chosen systems and technologies effectively support and enhance the other key areas of the organization, aligning with the overall strategy and goals of the digital transformation.

In "The Final Countdown," Eric Kimberling emphasizes the importance of prioritizing People and Processes in organizational change, advocating for a transformative strategy where Technology is skillfully incorporated as the last, strategically essential element. You can purchase his book by clicking the link here - The Final Countdown .

YouTube player

Key Takeaways

The key takeaways for successfully managing digital transformation involve the utilization of the McKinsey 7S Model as a comprehensive framework. This model is instrumental in assessing alignment and ensuring that all critical components necessary for an effective transformation are addressed.

As previously mentioned, organizations often disproportionately focus on the 'Systems' aspect of the model, sometimes considering one or two other elements. However, to achieve a successful transformation, it is crucial that all seven components of the model — Strategy, Structure, Systems, Skills, Style, Staff, and Shared Values — are well-aligned and integrated.

These components should collectively form a part of the organization's overall digital strategy and roadmap . Such an inclusive approach guarantees a more holistic and effective digital transformation, taking into account not just the technological aspects but also the organizational, cultural, and human factors that are essential for sustainable success.

Get in Touch

I would enjoy brainstorming ideas with you if you are looking to strategize an upcoming transformation or are looking at selecting an ERP system, so please feel free to contact me at  [email protected] . I am happy to be a sounding board as you continue your digital transformation journey .

Be sure to download the newly released 2024 Digital Transformation Report to garner additional industry insight and project best practices.

business model transformation mckinsey

Subscribe for updates

Stratosphere 2023.

business model transformation mckinsey

Related Blog Posts

business model transformation mckinsey

Top 5 Essential Skills for Navigating Digital Transformation in 2024

business model transformation mckinsey

The Role of ERP in Inventory Management

business model transformation mckinsey

How to Train Employees on a New ERP System

Popular resources.

business model transformation mckinsey

2023 Digital Transformation Report

business model transformation mckinsey

Digital Transformations in Emerging Markets: 4 Considerations for Success

business model transformation mckinsey

Change Management: The Secret Sauce to ERP and HCM Success

business model transformation mckinsey

eBook: 20 Lessons from 1,000+ ERP Implementations

business model transformation mckinsey

ERP Due Diligence Private Equity Investors Playbook

Additional blog categories.

  • Artificial Intelligence
  • Business Intelligence
  • Business Process
  • Business Transformation
  • Cloud ERP Implementations
  • Coronavirus and Digital Transformation
  • CRM Implementations
  • Cyber Security
  • Data Management
  • Digital Strategy
  • Digital Stratosphere
  • Digital transformation
  • digital transformation case studies
  • Digital Transformation News
  • Emerging Technology
  • ERP architecture
  • ERP Consulting
  • ERP Expert Witness
  • ERP Failures
  • ERP Implementations
  • ERP project
  • ERP software selection
  • ERP Systems Integrators
  • ERP Thought Leadership
  • Executive Leadership in Digital Transformation
  • Future State
  • Global ERP Implementations
  • HCM Implementations
  • Independent ERP
  • Independent ERP Consultants
  • Internet of Things
  • Manufacturing ERP Systems
  • Mergers and Acquisitions
  • Microsoft D365
  • Microsoft D365 Consultants
  • Microsoft Dynamics 365 Implementations
  • Microsoft Sure Step
  • NetSuite Implementations
  • Oracle Cloud ERP Implementations
  • Oracle ERP Cloud Expert Witness
  • Oracle ERP Cloud Failures
  • Organizational Change Management
  • Project Management
  • Quality Assurance
  • SAP Activate
  • SAP Expert Witness
  • SAP failures
  • SAP S/4HANA Implementations
  • SAP S/4HANA vs. Oracle vs. Microsoft Dynamics 365
  • SAP vs Oracle vs Microsoft Dynamics
  • SAP vs. Oracle
  • Small Business ERP Implementations
  • Small Business ERP Systems
  • Software Selection
  • Software Testing
  • Software Vendors
  • SuccessFactors Implementations
  • Supply Chain Management
  • System Architecture
  • Systems Integrators
  • Technology Consultant
  • Top ERP software
  • Uncategorized
  • Warehouse Management Systems
  • Workday Implementations

International Office Locations

Third stage consulting.

Cost Transformation Model – McKinsey Framework

What is it.

The McKinsey 7-S framework was developed by Tom Peters and Robert Waterman at McKinsey & Company. It argues that organisational effectiveness involves more than simply putting in place the right command and control structure to coordinate the delivery of an organisation’s strategy. Instead, the framework maps a constellation of seven interacting factors that are key to helping people function effectively together, in order to achieve a high performance organisation.

What each element means:

Also referred to as culture, this represents the way things are done and, particularly, the way the leadership team conducts itself in the organisation. The leadership’s style will influence how the rest of the employees behave. Therefore, if the leadership visibly embraces, champions and demonstrates cost transformation and management, then people around the organisation will typically follow.

Refers to the skills needed to deliver the cost transformation and management strategy. Having the right skills to deliver the strategy is vital and skills gaps can pose a risk to achieving cost competitiveness objectives.

These are the activities, processes and procedures that people engage in to do their work. It also includes software systems, which are increasingly automating activities, processes and procedures.

The hierarchy of control exercised through delegated responsibility. The structure should be as simple as possible to help people understand who is accountable for specific results.

This includes the inherent talents of the organisation’s people, the number of staff and the diversity needed in each area to optimise organisational capability and capacity.

Organisations need to compete in volatile, uncertain, complex and ambiguous environments. So, strategy needs to respond to this with agility. Organisations must constantly adapt to strategies to succeed.

Shared values

These encapsulate the organisation’s purpose or its societal mandate. The organisation’s purpose tends to remain a fundamental constant over time and this purpose shapes the organisation’s values.

Having shared values at the centre of the constellation emphasises that it is the core values of the organisation, aligned to the organisation’s purpose, that shape the remaining elements.

What benefits does McKinsey 7-S provide?

Perhaps strategy is changing and execution requires new delivery platforms. McKinsey’s 7-S framework provides a useful approach to organisational design, specifically for:

Facilitating organisational change

Aligning the organisation to new strategy

Aiding the merger or acquisition of organisations

Improving the performance of a company

Modelling the likely effects of future changes within a company.

Implementing McKinsey 7-S? Questions to consider:

Is there senior support to review the organisation’s design?

Are the seven elements of the framework aligned with each other?

What is the best organisational design to support the objectives?

What needs to change to achieve the best organisational design?

Do you have the necessary resources to bring about the changes identified?

Do we have the right skills and competencies to develop and deliver strategy?

Does our structure get the most out of our skills and competencies? Do the skills and competencies of our organisation complement those of our interdependent organisations?

Are our systems and processes complementary to the skills and talents of our people? For example, has increased automation left some business processes with over-qualified people? Or do our systems and processes inadequately plug gaps in our skills and competencies?

Do our people have the right skills and competencies for the way we do things? Are there conflicts between how we do our work and our organisation’s culture?

Do our people have the right mix of skills and competencies to optimise our organisation’s capabilities? Are we long on some skills and competencies or short on others?

The skills element refers to the skills needed to deliver the strategy. Having the right skills to eliver the strategy is vital, and skills gaps can pose a risk to the achievement of objectives.

The example questions above aim to illustrate how the elements of the McKinsey 7-S model’s interact with one another. In doing so, they are designed to help you with deploying the 7-S framework.

The framework consists of two main sets of factors: first, the ‘hard’ elements (strategy, structure and systems) that management can directly control; and second, the 'soft' elements (shared values, style, staff and skills) which managers need to influence indirectly.

The questions included in this template are examples designed to help users better understand the framework. They could also be used as starter questions for their businesses. We encourage you to modify or supplement them to better suit your own situations or, if you prefer, to change them to open-style questions.

Actions required

Actions to take / dos.

Make the business case. A review of the organisation’s design can be unsettling for employees – so it will need the support of senior leaders.

Document the current organisational design.

Gain the support of influential people across the organisation.

Take an iterative approach to implementation.

Review each iteration to assess whether the desired impacts have been achieved.

Be prepared to change plans to reflect what has been learned from reviews.

What did you think of this?

Every bit of feedback you provide will help us improve your experience

Mentioned in this article

Related content.

This site is brought to you by the Association of International Certified Professional Accountants, the global voice of the accounting and finance profession, founded by the American Institute of CPAs and The Chartered Institute of Management Accountants.

CA Do Not Sell or Share My Personal Information

 FourWeekMBA

The Leading Source of Insights On Business Model Strategy & Tech Business Models

McKinsey Business Model

The McKinsey Business Model emphasizes delivering high-value consulting services to clients worldwide. It focuses on providing strategic insights, data-driven solutions, and expertise in various industries. With a strong operational foundation, diverse client base, and strategic partnerships, McKinsey generates revenue through consulting fees, driving its success in the industry.

Table of Contents

Value Proposition:

  • Strategic Insights: McKinsey’s core value proposition lies in its ability to provide clients with strategic insights that enable them to navigate complex business challenges. Through extensive research, data analysis , and industry expertise, McKinsey offers clients a deep understanding of their market landscape, competitive positioning, and growth opportunities.
  • Industry Expertise: McKinsey’s consultants are experts in various industries, allowing them to offer tailored solutions that address the unique challenges and opportunities specific to each sector. This industry specialization enables McKinsey to provide relevant and effective recommendations to clients across diverse fields.
  • High-Value Consulting: McKinsey’s consulting services are known for their high value . Clients seek McKinsey’s assistance when facing critical decisions that can significantly impact their business outcomes. McKinsey’s reputation for delivering tangible results and driving organizational transformation positions it as a top-tier consulting firm.

Operational Model:

  • Global Presence: McKinsey’s extensive network of offices around the world allows the firm to serve clients on a global scale . This presence enables McKinsey to understand regional nuances, regulatory environments, and market trends that affect clients’ businesses in different regions.
  • Diverse Client Base: McKinsey serves a diverse range of clients, including corporations, government agencies, non-profit organizations, and high net worth individuals. This diversity allows McKinsey to accumulate a wealth of cross-industry knowledge and insights, which can be applied to address various client needs .
  • Strategic Partnerships: McKinsey collaborates with strategic partners, such as technology providers, industry associations, and academic institutions. These partnerships enhance McKinsey’s capabilities, giving them access to cutting-edge tools, industry trends, and research-driven insights that enrich their consulting services.

Revenue Model:

  • Consulting Fees: McKinsey generates its primary revenue through consulting fees charged to clients for its advisory and consulting services. These fees are often premium due to the firm’s reputation for delivering high-quality, actionable recommendations and strategies.
  • High-Value Proposition: The depth of expertise, insights, and actionable strategies that McKinsey provides justifies the premium consulting fees it charges. Clients view McKinsey’s services as investments that can lead to significant improvements in their business performance and competitive advantage.

Distribution Strategy:

  • Direct Client Engagement: McKinsey’s consultants directly engage with clients through one-on-one consultations. These consultations involve in-depth discussions to understand clients’ specific challenges, goals, and needs , enabling McKinsey to tailor its services accordingly.
  • Global Network: McKinsey maintains a vast network of offices and professionals across the globe. This extensive presence allows the firm to serve clients in various geographic regions, providing localized insights and recommendations that consider regional nuances and market dynamics.
  • Industry Specialization: McKinsey organizes its professionals into industry-focused teams. These teams possess expertise in specific sectors, such as healthcare, finance, or technology. Industry specialization ensures that clients receive tailored solutions relevant to their business context.
  • Strategic Partnerships: McKinsey collaborates with strategic partners, including technology providers, industry associations, and academic institutions. These partnerships enhance the firm’s capabilities, enabling access to cutting-edge tools, industry trends, and research-driven insights that enrich its consulting services.
  • Digital Engagement: In recent years, McKinsey has increasingly leveraged digital platforms and technology to engage with clients remotely, share insights, and deliver services efficiently, especially in the wake of global events like the COVID-19 pandemic.

Marketing Strategy:

  • Brand Reputation: McKinsey has cultivated a strong and prestigious brand reputation over decades. Its brand is synonymous with high-quality strategic consulting, which attracts clients seeking trusted advisors for critical business decisions.
  • Thought Leadership: McKinsey actively produces thought leadership content, including research reports, whitepapers, and articles. These resources are made available to clients and the broader public through McKinsey’s website and publications. Thought leadership establishes the firm’s expertise and showcases its capabilities.
  • Client Engagement: McKinsey places significant emphasis on building and maintaining long-term client relationships. Repeat engagements and referrals from satisfied clients play a vital role in the firm’s growth and sustainability.
  • Digital Presence: McKinsey maintains a strong digital presence through its website, where clients and the public can access a wealth of industry insights, reports, and articles. McKinsey also uses digital platforms for client interactions and sharing deliverables.

Organizational Structure:

  • Board of Directors: McKinsey is governed by a board of directors responsible for overseeing the firm’s strategic decisions, governance, and financial performance.
  • Executive Leadership: The executive leadership team, led by the global managing partner and senior partners, manages the firm’s operations, client engagements, and strategic direction.
  • Service Line Divisions: McKinsey organizes its professionals into service line divisions, each specializing in areas such as Strategy & Corporate Finance, Operations, Marketing & Sales, and more. These divisions deliver specialized consulting services.
  • Industry Practices: McKinsey further specializes its professionals into industry practices. These practices focus on specific sectors, such as automotive, energy, or retail, allowing McKinsey to provide industry-relevant solutions to clients.
  • Global Network: McKinsey’s global network comprises numerous offices and branches worldwide. This network ensures that the firm can provide localized services, industry insights, and regulatory expertise tailored to different regions and markets.

Key Takeaways

  • In summary, McKinsey’s business model revolves around offering unparalleled strategic insights, industry expertise, and high-value consulting services to clients worldwide.
  • This model is supported by a global operational presence, a diverse client portfolio, and strategic collaborations that enable the firm to maintain its position as a leader in the consulting industry.

McKinsey’s Related Frameworks

GE McKinsey

ge-mckinsey-matrix

McKinsey Horizon Model

mckinsey-horizon-model

McKinsey’s Seven Degrees of Freedom

mckinseys-seven-degrees

Minto Pyramid

minto-pyramid-principle

McKinsey Organizational Structure

mckinsey-organizational-structure

Connected Business Frameworks

  • Porter’s Five Forces

porter-five-forces

SWOT Analysis

swot-analysis

Balanced Scorecard

balanced-scorecard

Blue Ocean Strategy 

blue-ocean-strategy

GAP Analysis

gap-analysis

Scenario Planning

scenario-planning

Read also :  Business Strategy, Examples, Case Studies, And Tools

Connected resources:

  • Ansoff Matrix
  • Business Strategy Frameworks
  • Blue Ocean Strategy
  • Competitive Moat
  • Profit Margins

Additional resources:

  • Business Models
  • Business Strategy
  • Digital Business Models
  • Distribution Channels
  • Go-To-Market Strategy
  • Marketing Strategy
  • Network Effects
  • Platform Business Models
  • Revenue Models

More Resources

mckinsey-horizon-model

About The Author

' src=

Gennaro Cuofano

Discover more from fourweekmba.

Subscribe now to keep reading and get access to the full archive.

Type your email…

Continue reading

  • 70+ Business Models
  • Airbnb Business Model
  • Amazon Business Model
  • Apple Business Model
  • Google Business Model
  • Facebook [Meta] Business Model
  • Microsoft Business Model
  • Netflix Business Model
  • Uber Business Model

IMAGES

  1. What is The McKinsey 7-S Model And Why It Matters In Business

    business model transformation mckinsey

  2. The McKinsey 7-S Model Framework, Explained (2024)

    business model transformation mckinsey

  3. What Is The GE McKinsey Matrix And Why It Matters In Business

    business model transformation mckinsey

  4. How to use the McKinsey 7S model in marketing

    business model transformation mckinsey

  5. A transition flow for companies under McKinsey's 3 horizon model by

    business model transformation mckinsey

  6. McKinsey 7S Framework

    business model transformation mckinsey

VIDEO

  1. How McKinsey's 7S Model Can Enable Successful Digital Transformations

  2. McKinsey Transformation: Tell a compelling change story to inspire your organization

  3. McKinsey 7S Model

  4. 7S Model of McKinsey explained

  5. The Context for a Digital Transformation Framework

  6. Using Mckinsey 7s Model in Change Management

COMMENTS

  1. What is business transformation?

    McKinsey recently looked at data from 60 organizations that are at least two years into their transformations and found that transformations with at least 7 percent of employees owning part of the transformation are twice as likely to deliver better total shareholder returns.

  2. The "all in" approach to business transformation

    Business transformation programs have long focused on productivity improvement—taking a "better, faster, cheaper" approach to how the company works. And for good reason: disciplined efforts can boost productivity as well as accountability, transparency, execution, and the pace of decision making.

  3. Transformation Insights

    October 10, 2019 - Improve the odds of a successful business transformation by going "all in" to kick-start performance and remake your portfolio.... Article Sustaining the momentum of a transformation November 23, 2016 - Five elements can keep bad habits from reasserting themselves. Article Setting aspirational targets November 17, 2016 -

  4. Business Transformation: Success Metrics

    1. Go big, go broad The first indicator of top-quartile transformation is the scope of the effort itself. Successful companies, our findings suggest, typically favor an all-in, enterprise-wide transformation, rather than constraining the transformation to individual business units or functions.

  5. Measuring performance during business transformation

    Measuring performance during business transformation | McKinsey (7 pages) Today's volatile business environment continues to challenge organizations no matter their size, industry, or geography.

  6. The science of organizational transformations

    Psychological research and McKinsey's experience point to four specific actions that drive changes in mind-sets and behaviors—the very changes that underlie successful transformations. 4 We asked executives about the use of all four at their companies (see sidebar, "Changing mind-sets and behaviors through the 'influence model'"). 5

  7. Transformation consulting

    What do you want to become? Let's talk Learn how McKinsey Transformation helps organizations scale new technology and solutions and implement sustainable change with innovative, holistic initiatives.

  8. McKinsey 7S Model: Importance & How To Use It (2024)

    The McKinsey 7S Model is a change management tool for analyzing organizational design, alignment, and performance. It offers a simplified method of identifying organizational gaps, inconsistencies, and conflicts. Additionally, it is useful for mapping out various types of change initiatives in complex environments.

  9. The Transformative Business Model

    A business model that can link a new technology to an emerging market need is the key to industry transformation. When Apple coupled the iPod with iTunes, it revolutionized the audio devices...

  10. A focus on organizational health can help ...

    As a result of this effort, about 60 percent of the total technology workforce is engaged in upskilling, attrition is low, and what started as a "special transformation program" is now considered business as usual and a cornerstone of the bank's learning and development efforts. 11 Vincent Bérubé, Dana Maor, Maria Ocampo, and Alex ...

  11. Accelerating the shift to a next- generation operating model

    1 1 Financial Financial similarity similarity returns returns on on capital, capital, and and on customer journeys, optimizing end-to-end customer journeys is a core priority for incumbents that wish to speed up the transition to next-generation operating models.

  12. Hardware's business model shift

    Yet many OEMs struggle with their business-model-transformation strategy and its execution. A successful transition requires four key elements, starting first and foremost with selecting a new business model that works best for that particular company. After that critical decision is made, the process involves reinventing core business ...

  13. Business Model Strategy by McKinsey Alum

    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

  14. 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 ...

  15. McKinsey's Three Horizons Model Defined Innovation for Years. Here's

    Summary. In the 20th century McKinsey created a model called the Three Horizons to explain how businesses must invest in current products, incremental innovations, and breakthrough innovations.

  16. SAP and McKinsey Maximize Business Transformation Value

    McKinsey and SAP Join Forces to Maximize Business Transformation Value Through Cloud Solutions. New supply chain challenges, the growing threat of cyber-attacks, and other geopolitical factors are accelerating the shift to cloud services — a $1 trillion dollar market opportunity, as illustrated by recent research published by McKinsey.

  17. McKinsey & Company

    McKinsey's continuously evolving Operating Model is designed around its Business Model 1. Brief description: A leading strategy consulting Firm with its people as its largest assets McKinsey & Company is a global management consulting firm that serves leading businesses, governments, non governmental organizations, and not-for-profits.

  18. A Concise McKinsey Organizational Transformation Guide

    An organizational transformation is a set of interdependent organizational changes designed to reinvent an organization across almost every dimension. However, McKinsey points out, the problem with organizational transformation is that each business unit has its own idea of what change should look like: And so forth.

  19. McKinsey's Three Horizons of Growth

    About the Model. Mehrdad Baghai, Stephen Coley and David White, partners at McKinsey & Company, published the Three Horizons of Growth model in their 2000 book, "The Alchemy of Growth." The model, shown in figure 1 below, outlines three different types of innovation that need to go on in parallel for a business to be successful.

  20. What is Business Transformation? Mckinsey Model

    Key Takeaways What is Business Transformation? Business Transformation is the term that is used for making important changes in how an organization runs. They can be defined as bold, and seismic shifts that organizations make for accelerating change and growth that is beyond typical incremental advancements.

  21. How McKinsey's 7S Model Can Enable Successful Digital Transformations

    The McKinsey 7S Model is an academic framework widely taught in business and MBA programs worldwide. However, its significance extends beyond the academic realm, playing a vital role in facilitating successful digital transformations. This discussion aims to explore the application of the McKinsey 7S Model in the context of digital transformation.

  22. What Is The McKinsey Horizon Model And Why It Matters In Business

    The McKinsey Horizon Model helps a business focus on innovation and growth. The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey's Three Horizons of Growth. Developed by management consultants at McKinsey & Company.

  23. Business Model Transformation

    Gartner Executive Guidance Q1 2019 Edition Leaders must adopt a new playbook for business model change Digitalization is rapidly changing how organizations create value and how they compete. To survive and thrive in the digital era, you must embrace new approaches that can help your organization transform 2x faster.

  24. Cost Transformation Model

    Week 4: Filling the knowledge gap. in 5 days. CGMA. Membership. Week 3: Catch-up week. in 5 days. CGMA. This site is brought to you by the Association of International Certified Professional Accountants, the global voice of the accounting and finance profession, founded by the American Institute of CPAs and The Chartered Institute of Management ...

  25. McKinsey Business Model

    The McKinsey Business Model emphasizes delivering high-value consulting services to clients worldwide. It focuses on providing strategic insights, data-driven solutions, and expertise in various industries.

  26. 30 Emerging Technologies That Will Guide Your Business Decisions

    This theme focuses on making the right business and ethical choices in the adoption of AI and using AI design principles that will benefit people and society.. Human-centered AI (HCAI) is a common AI design principle that calls for AI to continuously benefit from human input. Behavioral analytics refers to session-tracking capabilities that monitor user interactions with a protected service to ...