The consulting firm McKinsey has helped its clients navigate disruption in a wide range of industries. But what can we learn from how McKinsey itself responded to disruption in the management consulting industry in the early aughts?HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.
CLAYTON CHRISTENSEN: Well, I will say that I see disruption occurring there, but everybody needs to know that we’re not pointing the finger at everyone else, that the process of disruption is occurring against the Harvard Business School itself. So this is not just a targeted shot at any one. But you do see it happen, and disruption always occurs in ways that it emerges in parts of the market where you wouldn’t even think to ask.
CLAYTON CHRISTENSEN: Yeah. Really, disruption is a process. The theory itself is in evolution over time. So at the beginning, we thought that the vertical axis in the disruptive diagram was the quality of the product. And to cut a long story short, that work kind of said to me that we are in a time for some significant change in the world, and why should we think that we’re immune to that? I try to see– Amy, as you know– two CEOs a day, and one of the things that always came through was technology’s moving five times faster than management. I don’t know whether to be paranoid or excited. I’m typically both, with sort of a comment– this shift towards Asia and Africa, resource scarcity.
So there was a notion of be more flexible. What we really value is x versus y. Sometimes, you go into far too much analytical detail. We only need to go 60% of the way to be able to get it. DOMINIC BARTON: Sure. Well, as I mentioned, we did this– we called it a firm strategy review, which isn’t a very exciting name, but that was the 2010 effort we launched where, again, we talked to a whole range of clients and non-clients and third parties, if you will, and also alumni; and in that, a number of ideas for how we could work differently with clients, and what we work on or put forward. And one of them was actually an idea that had already been lurking in the background.
So that was the genesis of it. There had kind of been glimpses of it, or it was lurking in the organization. We weren’t really aware of what we had. It was brought more to life through this review. By the way, some of them have not worked. We’ve had to shut them down. But fortunately, the vast number of them are working, but it meant we had to change our people processes, right? A person who is running a McKinsey solution, which is more like a piece of software. So that’s sort of a bit of an overview.
And they were disrupted by discount retailers like Walmart and Target and Kmart. And the way the traditional department stores made their money is they generated gross margins of 40%. They turned their inventory over three times a year. So they got 40% times 3 equals 120% return on capital invested in inventory every year. And that’s the way they measured things.
DOMINIC BARTON: Yeah. And also, I think it’s the– we don’t measure profitability like a department store in that sense where I know where it is. But it’s also tradition, right? It’s kind of we’re here to work in a particular way. We’re not a software house. I mean what is this? There’s that element that comes in, too.
So in a minor way, I’m fearful of the antibodies, because I’ve seen them, and I know that just from some of the things we did do, it took extraordinary leadership of some of the people in those places to kind of– they’ve probably got a lot of scars on their back to keep it going. So I think also relating that a bit to the organization is important, to say, you know, we actually have done some things differently.
But I’m trying desperately to look as much as we can for wherever we’ve had some innovation, to try and drive it, and then kind of relate that to people and say, you know what, guys, I know this may seem strange to you in where it is, but we have done this. My only worry is I think that the speed and pace of change that we’re going to have to go through is going to go faster, and be bigger given these global forces. And that’s where I think Clay’s Jewish mother analogy is a good one.
And so you have kind of two strikes against it in that it won’t come up to the top as an interesting idea if the organization can’t use it. And then b, even if they see it, they will make it conform itself to the way they make money. And to have something that truly is disruptive– and in this case, that deep understanding of how an area or an industry works– and use that in the context of McKinsey Solutions, which would be a disruption in disruption, is really hard to do.
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