As leader of McKinsey’s Strategy & Corporate Finance Practice in Asia, Angus Dawson helps clients to shake up their thinking in a world of constant disruption.
When Angus Dawson sits down to talk to clients about business strategy, he often starts with a simple question: What is the only man-made structure visible from space with the naked eye? If your response was “The Great Wall of China” you’re in good company. It’s proved overwhelmingly the most popular answer with business leaders in more than 30 cities around the world. Unfortunately, it’s also a myth.
“It was first written that you could see the Great Wall of China from space in the 1850s,” Dawson says. “Yet we’ve known from the 1960s that it’s not true – but everyone still believes it.
“I often use that as a way of saying, ‘What are the Great Walls of China in your own company and isn’t it worth trying to uncover them?’”
That’s important, he says, because the stories that companies tell themselves about their past will play a powerful role in shaping their future. “Strategy is actually about beliefs. Beliefs will drive choices. Choices will drive initiatives.”
Yet when Dawson and his McKinsey colleagues test these strongly held beliefs against empirical data, they often find that company legends do not reflect reality.
“There is a lot of mythology,” he explains. “I’d say in the majority of cases, we have had to completely debunk the legends.”
As a student, Dawson took an atypical path to the world of strategic consulting. After graduating with honours in law and economics from the University of Sydney, he eschewed an MBA, opting instead to do masters studies in computer science and technology-based businesses at Stanford University. He says it has given him an invaluable perspective in an age of digital disruption.
“I was at Stanford for the last year of the dotcom boom and the first year of the bust. I got to hear from a lot of the executives who ended up being the legends of Silicon Valley … how they were thinking about the future and their businesses, and how they would shape them.
“Wait a minute, we’re assuming this is true, but is it really?”
“What’s really interesting now is that so many of the forces we all thought were being unleashed back then and that people were confidently predicting would dramatically change industries, it’s only now actually happening.”
Dawson has spent almost 20 years at McKinsey & Company, first as a strategic consultant, more recently overseeing the firm’s Australasian Strategy Hub. Today he is a director and the leader of the Strategy & Corporate Finance Practice in Asia, advising companies on growth strategies and innovation, as well as mergers and acquisitions. In that time he has seen strategy evolve from a focus on standardised micro-economic frameworks to a multilayered discipline which uses empirical analysis to harvest insights from increasingly rich sources of data. But while the discipline has seen a decisive movement towards data-driven strategic thinking, there is also a renewed interest in the social and psychological dimensions of decision-making.
The social dimension
“One of the new things in the way we do strategy is that we’re very focused on this whole human and social side of it,” says Dawson. “That means the key question is often not ‘How do we get the right answer intellectually?’ but ‘How do we help the management team actually shift its underlying beliefs?’
“Human beings don’t change their beliefs very easily. If I ask someone ‘Could your industry be disrupted?’, most executives would say no. But the truth when you look back empirically, is that industries get disrupted all the time.”
That potential for disruption is rising, thanks to the impact of digital technologies and fundamental shifts in the structure of the world’s economy. Greater uncertainty after the global financial crisis is also driving a new level of interest in good strategic practice.
“Both because of big demand and supply fluctuations in the real economy as well as digital innovations … I think we’ve now got a period where strategy matters more than ever,” he says.
For established market leaders, one of the most disturbing aspects of this new environment is their vulnerability to what Dawson describes as the worst possible kind of competitor: one with a completely different business model and different economic incentives.
“At least a low-cost airline is still trying to make money from plane tickets. But if you are a digital camera manufacturer and smartphones come along, you’ve got, first of all, a different business model … secondly, they don’t care about making any money from selling a digital camera.
“The combined effect is you no longer know who your competitors are, because there are players whose platforms can influence your industry as you would have defined it without really caring about the economics.”
Dawson believes digital technologies have the effect of purifying both demand and supply, creating a situation that is much closer to a perfect market.
“All of a sudden, I don’t have to buy an album, I can buy a song. My demand function is not for albums, it’s actually for music.
“On the supply side, it purifies as well. I can enter the market as a transportation provider using the excess capacity of my car.
“Anywhere there is production that’s been only bundled, or demand that’s distorted from its core, we can now see a way to create a market mechanism that purifies that … That’s leading to value shifting very dramatically.”
As a result, virtually all consumer businesses are potentially threatened by platform-based giants such as Amazon, Google and Apple. These companies not only have the ability to pivot rapidly into new industries, they can also fundamentally change the economics of those industries. Yet Dawson also stresses that the disruptions caused by digital innovation are nothing new.
“For us, digital is another in a series of discontinuities that have hit industries. The difference with digital is that it involves multiple technologies that are all converging at the same time to create the ability for industries to be disrupted very quickly.”
Choose your battleground
The key to countering strategic threats like these, he says, is to start asking fundamental questions about how, where and when to compete. Yet while most businesses focus on the how, it’s actually the where that can make the biggest difference.
“Over the last 15 years, we’ve looked at around the top 2000 companies in the world – pretty much any business with over US$100 million of revenue where you can get publicly available data,” Dawson says. “We’re now in a position where we’ve got enough data that we can look at strategies and effectively give [business leaders] some empirical guidelines.
“Our research on growth showed that it’s actually more important for them to think about which markets they’re in than to try to gain share.”
He explains that while it is possible to grow your share of a market, the data reveals that it’s actually very rare for companies to gain sustainable market share over time. As a result, choices about which markets to compete in typically explain around four times as much revenue growth as movements in market share.
That makes the question “Where to compete?” an essential starting point for your business strategy.
“If you start a strategy conversation about growth and you don’t start by saying ‘How are we going to change the mix of markets that we play in?’ you’ve immediately said, ‘Alright, we’re going to have a strategy that has much lower odds of being successful’.”
Sharper strategic thinking
Making an informed decision means analysing the business at a very granular level – giving rise to the concept McKinsey has dubbed “the granularity of growth”. Whereas many businesses tend to think that they operate in just a few distinct markets, Dawson says the reality is generally very different.
“I could take [any large company] and very quickly come up with a way of describing what they do as being in 50 different markets. By changing the emphasis on those 50 markets, you can quite dramatically shift the underlying revenue growth rate and the likely economic profit.”
His advice to others wanting to hone their strategic thinking is simple: be willing to step back and ask the big, fundamental questions. “Just be the person in the room who is willing to say, ‘Wait a minute, we’re assuming this is true, but is it really?”
An Asian perspective
Angus Dawson’s work with leading businesses across Asia has given him a useful perspective on differences in strategic thinking and business conditions across the region. He says that while the overall quality of decision-making is high, there are distinct differences in approach as you move from country to country.
“If you go to Korea, you’ve got conglomerates who have no natural source of advantage, who are wondering how they can compete on the global stage and what’s their next big growth business. It’s all about what new business I can build as other parts of my portfolio decline and die.
“If you’re in India or China, it’s much more about which kind of rapid stream do I put myself in to try to find the next 10 billion dollars of revenue … I think there are still a lot of businesses in India and China existing on razor-thin margins and relying on the industry to shake out a bit over time.
“Whereas you go to Japan, and it’s much more about how do we survive in a declining domestic market?”
The unifying theme across the region, he says, is a drive to find new opportunities by continuing to build and change an existing portfolio of businesses – combined with a keen awareness of the inevitability of change.
“One question that I think would resonate at the moment with any executive [across the region] would be ‘How will my portfolio of businesses be different in the next 10 years?’”
This article is from the July issue of INTHEBLACK