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05 MCK The-Strategy-Analytics-Revolution
05 MCK The-Strategy-Analytics-Revolution
The strategy-
analytics revolution
It’s time to bring advanced analytics into the strategy room—
here’s why.
© Stevecoleimages/Getty Images
April 2021
Over the past decade, advances in digital analytics specifics of the case at hand combined with their
have transformed the way businesses operate. From personal experience and intuition (commonly
marketing and pricing to customer service and referred to as “the inside view”), without taking into
manufacturing, advanced analytics is now central to account the distribution of outcomes of similar
many corporate functions. The same, however, cases (“the outside view”).2 As a result, many
cannot be said for strategy—at least not yet. forecasts are overly optimistic. The two
collaborators went on to propose a corrective
While strategy development will always require procedure called “reference class forecasting” that
creative and thoughtful executives to set aspirations involves complementing the inside view with data on
and make bold choices, analytics tools can give you real-world outcomes, or “base rates,” from a
an edge. Advanced analytics can be used to reference class of similar cases.
accomplish the following:
In the past 20 years, the use of this technique has
— Reduce bias in decisions by calibrating the gathered impressive momentum, with hundreds of
likelihood of your strategy succeeding before articles highlighting the methodology’s application
you allocate resources. in both academic and practical settings. To date,
such calibrations have been limited largely to
— Unearth new growth opportunities by the field of project management, but forecasts
complementing traditional brainstorming made during strategic planning confront similar
methods to reveal hidden pockets of growth. challenges. Strategic plans, too, involve estimating
the future costs and benefits of investments,
— Identify early-stage trends by painting a real- making an outside view just as valuable in
time picture of how your business context is informing those decisions.
unfolding so that you can trigger big moves
before your competitors do. In our recent book Strategy Beyond the Hockey Stick
(Wiley, February 2018), we introduced the idea of
— Anticipate complex market dynamics by using data analytics to bring an outside view to
generating proprietary insights about the strategy. By embracing the outside view, you can
combined impact of myriad forces. estimate your strategy’s odds of success before you
allocate resources to that strategy. For example, if
Each of these applications can sharpen business your target is to grow economic profit by $100 million
leaders’ views of the competitive arena and how they per year in the next decade, would it not be helpful to
can position themselves to win. But that requires know that only 35 percent of large companies
putting advanced analytics front and center in the managed to achieve that over a decade? And if we
strategy process. told you that companies which implemented
programmatic-M&A3 strategies and reached the top
quintile in productivity improvements were 1.5 times
Reduce bias in decisions more likely to achieve that profit target, would you
When Daniel Kahneman and Amos Tversky 1 not consider prioritizing those two areas in your
observed that even experienced planners tend strategic efforts (Exhibit 1)?
to underestimate the cost and time required to
complete projects, they termed the phenomenon We have often applied this methodology to calibrate
“planning fallacy.” They argued that this tendency strategies and performance aspirations against data
results from people making forecasts based on the from thousands of publicly listed companies. The
1
Daniel Kahneman and Amos Tversky, “Intuitive prediction: Biases and corrective procedures,” TIMS Studies in Management Science, 1979,
Volume 12, pp. 313–27.
2
The terms “inside view” and “outside view” were proposed by Daniel Kahneman and Dan Lovallo in “Timid choices and bold forecasts: A
cognitive perspective on risk taking,” Management Science, January 1993, Volume 39, Number 1, pp. 17–31.
3
Many small deals that accrue to a meaningful amount of market capitalization over multiple years instead of episodic, “big-bang” transactions.
For more, see Jeff Rudnicki, Kate Siegel, and Andy West, “How lots of small M&A deals add up to big value,” McKinsey Quarterly, July 12, 2019,
McKinsey.com.
By embracing
By embracing the
the outside
outside view,
view, you
you can
can estimate
estimateyour
your strategy’s
strategy’sodds
oddsofofsuccess
before you
success allocate
before you resources.
allocate resources.
Companies by absolute economic profit growth, 2005–09 to 2015–19, % share
All large companies¹ Plus top quintile productivity Plus programmatic M&A³
improvement²
100 100 100
35 41 52
approach can be used to motivate bold strategic new products or services, or even new applications
moves while, in some cases, demonstrating that for existing offerings. The most effective of these
an ambition is unlikely to be achieved without algorithms use sophisticated network analysis and
exceedingly strong execution. For example, when natural-language processing to parse and find
shown this approach, an energy company realized connections among hundreds of disparate text data
that their planned strategy had achieved the sources such as company descriptions, patent
financial performance they were targeting in only filings, M&A data, and academic papers.
10 percent of historical cases. The strategy was
simply too timid. This led the company to reassess For example, a company that specializes in
the plan and include bigger, bolder strategic moves producing brominated compounds (largely used
that would improve their odds of achieving desired in commodity-chemicals segments such as
gains. At the other extreme, a materials-industry detergents) scanned all publicly available
company set a strategy that only 5 percent of information on such compounds, including more
companies in a database had managed to execute than 120 million patents and 100 million academic
successfully. Highlighting the stretch of this ambition publications, to identify hundreds of potential new
helped demonstrate the importance of establishing a applications for its products. The organization
rigorous execution- and performance-management prioritized 30 higher-margin applications, such as in
infrastructure for the plan’s delivery, helping to lower niche medical devices, which ended up collectively
the risk in $8 billion worth of investment. contributing $50 million of revenue to its growth
plan. Similarly, when another company specializing
in performance materials wanted to analyze growth
Unearth new growth opportunities opportunities within the gasket and insulation space,
Advanced analytics can also enhance strategic it used a text-clustering algorithm and network
planning by unearthing growth opportunities that analysis to pinpoint 45 potential growth areas within
would otherwise be hard to spot, be they attractive five clusters, each with a shortlist of acquisition
industry segments and acquisition targets, ideas for prospects (Exhibit 2).
Floor
Geogrids Spiral-wound Conveyor Fluid Sanitary membranes
gaskets belts filters seals
Screen
fabrics
Locomotive Heating Sealing
Geomembranes rubber gaskets sealants membranes
Molded Heavy-
gaskets duty mats
Geotextiles Elastomeric
membranes
Thermal Moisture
insulation Wall Slab barriers
insulation water-
proofing
Web 2021
StrategyAnalytics
Exhibit 33
Exhibit 3 of
Inductive Patents
charging Firm 1
Publications Firm 2
Firm 3
Social Firm 4
Firm 5
Flow
battery Firm 2
Publications
Firm 1
Patents Firm 4
Social Firm 3
Firm 5
Primary Patents
cell Firm 3
Firm 1
Social
Firm 2
Publications
Firm 4
Chris Mulligan is a partner in McKinsey’s New York office; Nicholas Northcote is strategy and corporate finance director in
the Brussels office; Tido Röder is a solution associate partner in the Munich office; and Sasha Vesuvala is a solution associate
partner in the Mumbai office.
The authors wish to thank Anchal Aggarwal and Felipe Gonzalez for their contributions to this article.