How global giants manage complexity

The world's largest corporations are increasing their scale and scope to a huge degree. And these mega-institutions - such as Citigroup, General Electric, Microsoft, Wal-Mart and Toyota - are changing the landscape of business.

by McKinseyQuarterly 2005, No 4
Last Updated: 23 Jul 2013

The most successful of them are creating a new model of competitive advantage, which poses profound management and planning challenges for corporate strategists.

Whereas the large companies of the past, such as General Motors and Unilever, used their size to obtain privileged access to tangible factors of production, such as capital and labour, today's most successful companies are using their size and scope, as well as the large number of talented professionals they employ, to combine tangible and intangible assets across the enterprise. In so doing, they create unique capabilities and value propositions that help them achieve a competitive edge.

There are three fundamental aspects to this. These mega-institutions recognise an ever more direct link between their profitability and their large professional-talent pools. They overcome the barriers of internal complexity that often accompany size and diversity of activities and they develop and mobilise unique intangibles, such as knowledge and relationships, to create value propositions that exceed the sum of their individual elements.

But this new breed of corporation faces a new set of strategy conundrums. The first is that it must find a way of measuring performance based on the productivity of employees. Because talented employees have become the ultimate scarce resource, just as they have long been in professional service firms, advertising and elsewhere, profit per employee is a critical performance measure.

Even though such companies have largely overcome barriers of internal complexity, they will still find that complexity is a challenge. The larger and more complex a company, the harder it is for it to perform well by the profits per employee standard. Research also suggests that complexity stifles the ability to exploit opportunities.

Successful large corporations deal with this challenge in two key ways - having the discipline to divest businesses that do not benefit from large economies of scale or scope; and continually exploring opportunities to divest businesses that are labour or capital intensive; and use standards and protocols to reduce the unnecessary complexity that arises when employees work together across the enterprise.

Besides dealing with the problems of complexity, successful mega- institutions are evolving their business models in two other critical ways. They are adapting the process of formulating strategy, by combining their tangible and intangible assets to reveal new businesses and value propositions, and they are adopting far more integrated operating models to manage and deploy those assets and capabilities across the enterprise.

Source: Strategy in an era of global giantism. The world's biggest companies are learning to manage complexity
Lowell L Bryan and Michele Zanini
McKinseyQuarterly 2005, No 4

Review by Roger Trapp

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