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McKinsey: Leap Beyond Digital Transformation | CxOTalk

McKinsey: Leap Beyond Digital Transformation | CxOTalk


What’s the next step beyond digital transformation? For many large organizations, it’s building
a new business within the established company. We’re speaking with Ari Libarikian who is
a senior partner with McKinsey & Company. Hey, Ari. How are you? I’m good, Michael. How are you? I’m excellent. We’re talking about digital business. What is a digital business? In this era, customers are expecting more
and more technologically enabled services. They want to go online and buy stuff. A digital business is basically a business
that’s centered around technology, both in the construction of the product as well as
delivery and the service of the product. The experience for the customers ends up being
typically faster, cheaper, more seamless, and easier because it’s accessible everywhere
and it’s much more user-friendly. For an established company, they’re still
selling their original set of products and services or is it something different? A lot of cases, what they do is, they leverage
some of the intelligence and experience they have in the core company, but they leverage
that into a digital business and they build something that looks completely different,
ground up, to serve customers. How is this different from digital transformation? At McKinsey, when we talk about digital transformation,
we talk about two things at the highest level: transforming the core, which is taking what
we do today and leveraging technology to do it better, faster, cheaper, more effectively;
and we talk about new business building, which really is stepping out of the core and creating
something that didn’t exist. Typically, that business building is a much
more radical step out for companies because the executives who are very good at running
a large company, some of them, many of them don’t have the experience of building something
and scaling it. Why is it so important to build a digital
business? Our belief, as McKinsey, is that it’s a requirement
for long-term success. If you at the Fortune 20 companies today versus
the list 20 years ago, it’s almost entirely different. Every company on the list today has regenerated
itself through business-building or was a startup a few years ago and has scaled massively. There are risks that are associated with not
embracing this kind of digital business building. Mm-hmm. Tell us about that. The obvious risk is viability and long-term
success is put at risk. A lot of industries are being disrupted by
startups, by venture capital and private equity-backed companies. The risk is if incumbents today don’t think
about business building and reinventing themselves that way, they could be out of business or,
at a minimum, not as successful as they today, just in a few years. Ari, let’s talk about the strategy of building
a business. How does a company begin? It is a tough process and primarily because
most companies don’t have the capability or the muscle to do this. The first step is always grounding this new
business idea in what is the value; imagining into the future what might be best for the
customer and defining the market opportunity that way. Also, answering the question, “Why us?” We always say at McKinsey, “As an incumbent,
it’s important to figure out what is your unfair advantage to building this business?” Once you have that view of the strategy, then
you move into what we call an MVP or minimum viable product stage where you don’t go ahead
and build this big thing on day one, but you build a small version of it. You build a first version of it. It typically takes two, three, four months. You start to test it with customers. You start to get real-time feedback from customers
to complement your strategic analysis. Then it’s all about scaling. In scaling, you start to think more about
what are the types of talent we need to hire at scale. These typically involve new skillsets that
incumbents don’t have as much of. Data scientists, engineers, designers, agile
coaches, scrum masters: you go down the list. You start to hire them pretty quickly and
at scale all the while, by the way, keeping a light connection back into the mothership,
into the incumbent because, again, you don’t want to lose the value built up in the incumbent. There’s data. There are assets. There are good people, and you want to selectively
pull some of those in. I say selectively because if you pull too
much in, you bring a lot of the culture in and that’s not a great thing. I would imagine developing the judgment, making
the strategic decisions really can be a difficult challenge, especially for an established organization. It is very difficult. You run into a lot of governance challenges. How do you make decisions on how much money? In a given year, there’s a certain pot of
capital. As the CEO, how much money do you put into
the core business, which has been your bread and butter for many years? How much do you put into the new business? If you’re under cost pressures and you’re
looking to reduce budget, how do you think about the core business versus this new business
which, by the way, may take a year or two or more to prove itself out? How do you think about your best people and
where they should be? How do you avoid creating an environment where
both sides are looking at each other and saying, “Well, you know, we’re better than them”? You mentioned culture earlier. That seems to be an important issue. Please, elaborate on that. Culture is, in my view, the most important
issue here. A great culture in a company that knows how
to build something ground up will eventually land on a great idea and scale a great business. When I say culture, I mean what’s the way
of working. What type of people are you hiring? How are you learning from mistakes? Are you blending different functions together? One of the exciting things you see in successful
new businesses is, you see a designer with a technologist with a businessperson with
a marketer with legal and compliance, all of them together every day, engaging in rapid
conversation. They all have the mindset of how do we push
this thing forward quickly. Based on your experience, what’s the lifecycle
of developing a business such as you’ve been describing? At McKinsey, we have a practice called Leap
by McKinsey. That is our business building practice. We’ve built over 200 businesses over the last
few years. Our experience has shown us that there are
a few steps here. I won’t get into it in great detail but let
me just give you the highlights. The first is grounding in the strategic framework. We’re not building a business because we like
shiny objects. We’re building a business because there’s
a real value opportunity and market opportunity here; we’re going to pursue that; being clear
on that. Then you get into building the MVP and starting
to pilot this thing. Build something small, make sure it works,
and get real customer feedback from that. As you do that, start to build a team around
it, all the different skill sets we’ve talked about, and then you start to scale from there. You say, “If this kernel is working, what
does a bigger version of this look like?” Eventually, you get to a stage when this is
a thriving business and you’re asking the question, “What is the strategic end state?”
as we talked about earlier. Do we merge it with the mothership? Do we take over the mothership? Do we keep it separate? Do we spin it off? At that point, there’s a series of strategic
options. Ari, can you give us an example of a company
or an industry that has done this well? A few months ago, many of you would have seen
the news that a couple of tech giants made investments in the pharmaceutical industry
in the United States. They made a couple of acquisitions. Well, that sent shockwaves through the industry. A health services company, one of the leading
ones, approached us, approached Leap by McKinsey, and asked for help in, how do I stay competitive
and stay successful in this new world which seems like it’s going digital pretty quickly
because we’ve noticed these tech giants? We helped them envision a fully digital business
that allows customers to buy, order, and get delivered to their house their pharmaceutical
medication in under two hours. Over the course of nine months, we helped
them imagine this business, frame up the opportunity, size it, define the customer journeys that
matter. Then build a tech architecture, do an MVP,
show that it works, and scale from there. By the end of that period, they had three
products defined and they were on their way to scaling to the point where I think they
were targeting several million customers having their prescriptions filled through this digital
business in a couple of years. Ari, as we finish up, what advice do you have
to business leaders and incumbents who are listening to this and saying, “Yes, we need
to look at this”? What advice do you have? How do they start? The first thing I would say is, you’re exactly
right. As I said earlier, this is a requirement. It’s not a luxury anymore, so definitely look
at it. In terms of advice, I would say the first
is to ground in business ideas. Running towards a business built for the sake
of a business build is not a smart thing to do. Running towards a business build because there
is a customer and market opportunity that you understand and you have numbers around,
projections around, and you’ve engaged a team on is a great way to get started. The second piece of advice is, understand
that there’s a capability build. There is something you need to learn how to
do or hire into the company that may not exist today. That’s hard work. Taking what you’ve done already and just trying
to repurpose it is not a great recipe or not a great approach. The third thing I would say is, how you measure
and evaluate this thing is really important. Measuring it on P&L too soon is a high-risk
approach. Thinking about and leveraging some of the
new talent you have to figure out how do you think about success in month 3, month 6, month
9, month 12, different from year 3 or year 6, and having a clear view of the leeway you’re
going to give the new business build and having a clear view for what success really looks
like after a year or what have you is really important. I would say, go into all of that eyes wide
open to give this thing the best chance of success and scaling. Ari Libarikian, Senior Partner at McKinsey
& Company, thank you so much. Thank you, Michael.

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