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What Is the McKinsey 7S Model?

What are the key elements in the mckinsey 7s model.

• How Are the 7 S's Used in Strategic Planning?

What is McKinsey, and What Do They Do?

What are the 7s factors.

• Why Follow McKinsey's 7S Model?

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How to Use the McKinsey 7-S Model for Strategic Planning

Investopedia / NoNo Flores

The McKinsey 7S Model is a framework for organizational effectiveness that postulates that there are seven internal factors of an organization that need to be aligned and reinforced in order for it to be successful.

Key Takeaways

• The McKinsey 7S Model is an organizational tool that assesses the well-being and future success of a company.
• It looks to seven internal factors of an organization as a means of determining whether a company has the structural support to be successful.
• The model comprises a mix of hard elements, which are clear-cut and influenced by management, and soft elements, which are influenced by corporate culture.

The 7S Model specifies seven factors that are classified as "hard" and "soft" elements. Hard elements are easily identified and influenced by management, while soft elements are more intangible, and influenced by  corporate culture . The hard elements are as follows:

The soft elements are as follows:

• Shared values

The framework is used as a strategic planning tool by organizations to show how seemingly disparate aspects of a company are, in fact, interrelated and reliant upon one another to achieve overall success.

Consultants Thomas Peters and Robert Waterman Jr., authors of the management bestseller "In Search Of Excellence," conceived of the McKinsey 7S Model at consulting firm McKinsey & Co. in the late 1970s.

How Are the 7 S's Used in Strategic Planning?

Below, we take a closer look at each element in the 7S Model:

• The strategy is the plan deployed by an organization in order to remain competitive in its industry and market. An ideal approach is to establish a long-term strategy that aligns with the other elements of the model and clearly communicates what the organization’s objective and goals are.
• The structure of the organization is made up of its corporate hierarchy , the chain of command, and divisional makeup that outlines how the operations function and interconnect. In effect, it details the management configuration and responsibilities of workers.
• Systems of the company refer to the daily procedures, workflow, and decisions that make up the standard operations within the organization.
• Shared values are the commonly accepted standards and norms within the company that both influence and temper the behavior of the entire staff and management. This may be detailed in company guidelines presented to the staff. In practice, shared values relate to the actual accepted behavior within the workplace.
• Skills comprise the talents and capabilities of the organization’s staff and management, which can determine the types of achievements and work the company can accomplish. There may come a time when a company assesses its available skills and decides it must make changes in order to achieve the goals set forth in its strategy.
• Style speaks to the example and approach that management takes in leading the company, as well as how this influences performance, productivity, and corporate culture.
• Staff refers to the personnel of the company, how large the workforce is, where their motivations reside, as well as how they are trained and prepared to accomplish the tasks set before them.

The McKinsey 7-S Model is applicable in a wide variety of situations where it's useful to understand how the various parts of an organization work together. It can be used as a tool to make decisions on future corporate strategy.

The framework can also be used to examine the likely effects of future changes in the organization or to align departments and processes during a merger or acquisition. Elements of the McKinsey Model 7s can also be used with individual teams or projects.

McKinsey & Co. is a global consulting and accounting firm founded by University of Chicago management professor James O. McKinsey in 1926. The firm specializes in management consulting for a wide range of corporations, governments, and other organizations.

The seven factors in McKinsey's model are strategy, structure, systems, shared values, skills, style, and staff.

Why Follow McKinsey's 7S Model?

Among the primary reasons corporate management uses McKinsey's 7S Model is to identify where a company excels and where it needs more work in creating an optimal and efficient workforce. Additionally, it used to evaluate the performance of a company following a merger or other restructuring to identify areas in the business that need greater improvement and alignment. In many ways, it allows organizations to target problems and set a course of action to implement change.

The McKinsey 7S Model is a framework for optimizing organizational design through analyzing seven core elements: strategy, structure, systems, shared values, skills, style, and staff. As a widely-used strategic planning tool, it allows organizations to function more effectively through aligning each of these elements in order to achieve its goals and objectives.

McKinsey. " Enduring Ideas: The 7-S Framework ."

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McKinsey 7S Model

Definition of the McKinsey 7S Model

McKinsey 7S model is a tool that analyzes company’s organizational design by looking at 7 key internal elements: strategy, structure, systems, shared values, style, staff and skills, in order to identify if they are effectively aligned and allow the organization to achieve its objectives.

What is the McKinsey 7S Model

McKinsey 7S model was developed in the 1980s by McKinsey consultants Tom Peters, Robert Waterman and Julien Philips with help from Richard Pascale and Anthony G. Athos. Since its introduction, the model has been widely used by academics and practitioners and remains one of the most popular strategic planning tools.

It sought to present an emphasis on human resources (Soft S), rather than the traditional mass production tangibles of capital, infrastructure and equipment, as a key to higher organizational performance.

The goal of the model was to show how 7 elements of the company: Structure, Strategy, Skills, Staff, Style, Systems, and Shared values, can be aligned together to achieve effectiveness in a company.

The key point of the model is that all the seven areas are interconnected and a change in one area requires change in the rest of a firm for it to function effectively.

Below you can find the McKinsey model, which represents the connections between seven areas and divides them into ‘Soft Ss’ and ‘Hard Ss’. The shape of the model emphasizes the interconnectedness of the elements.

The model can be applied to many situations and is a valuable tool when organizational design is at question. The most common uses of the framework are:

• To facilitate organizational change.
• To help implement a new strategy.
• To identify how each area may change in the future.
• To facilitate the merger of organizations.

In the McKinsey model, the seven areas of organization are divided into the ‘soft’ and ‘hard’ areas. Strategy, structure and systems are hard elements that are much easier to identify and manage when compared to soft elements.

On the other hand, soft areas, although harder to manage, are the foundation of the organization and are more likely to create a sustained competitive advantage.

Strategy is a plan developed by a firm to achieve sustained competitive advantage and successfully compete in the market. What does a well-aligned strategy mean in the 7S McKinsey model?

In general, a sound strategy is one that’s clearly articulated, long-term, helps to achieve a competitive advantage, and reinforced by a strong vision, mission, and values.

But it’s hard to tell if such a strategy is well-aligned with other elements when analyzed alone. So the key in the 7S model is not to look at your company to find the great strategy, structure, systems and etc. but to look if it’s aligned with other elements.

For example, a short-term strategy is usually a poor choice for a company, but if it’s aligned with the other 6 elements, then it may provide strong results.

Structure represents the way business divisions and units are organized and includes the information on who is accountable to whom. In other words, structure is the organizational chart of the firm. It is also one of the most visible and easy-to-change elements of the framework.

Systems are the processes and procedures of the company, which reveal the business’ daily activities and how decisions are made. Systems are the area of the firm that determines how business is done and it should be the main focus for managers during organizational change.

Skills are the abilities that a firm’s employees perform very well. They also include capabilities and competencies. During organizational change, the question often arises of what skills the company will really need to reinforce its new strategy or new structure.

Staff element is concerned with what type and how many employees an organization will need and how they will be recruited, trained, motivated and rewarded.

Style represents the way the company is managed by top-level managers, how they interact, what actions do they take and their symbolic value. In other words, it is the management style of the company’s leaders.

Shared Values

Shared Values are at the core of McKinsey’s 7S model. They are the norms and standards that guide employee behavior and company actions and thus, are the foundation of every organization.

The authors of the framework emphasize that all elements must be given equal importance to achieve the best results.

Using the McKinsey 7S framework

As we pointed out earlier, the McKinsey 7S framework is often used when organizational design and effectiveness are in question. It is easy to understand the model but much harder to apply it to your organization due to a common misunderstanding of what should well-aligned elements be like.

We provide the following steps that should help you to apply this tool:

Step 1. Identify the areas that are not effectively aligned

During the first step, your aim is to look at the 7S elements and identify if they are effectively aligned with each other. Normally, you should already be aware of how 7 elements are aligned in your company, but if you don’t, you can use the checklist from WhittBlog to do that.

After you’ve answered the questions outlined there, you should look for the gaps, inconsistencies, and weaknesses between the relationships of the elements. For example, you designed a strategy that relies on quick product introduction, but the matrix structure with conflicting relationships hinders that, so there’s a conflict that requires a change in strategy or structure.

Step 2. Determine the optimal organizational design

With the help of top management, your second step is to find out what effective organizational design you want to achieve. By knowing the desired alignment, you can set your goals and make the action plans much easier.

This step is not as straightforward as identifying how seven areas are currently aligned in your organization for a few reasons.

First, you need to find the best optimal alignment, which is not known to you at the moment, so it requires more than answering the questions or collecting data.

Second, there are no templates or predetermined organizational designs that you could use and you’ll have to do a lot of research or benchmarking to find out how other similar organizations coped with organizational change or what organizational designs they are using.

Step 3. Decide where and what changes should be made

This is basically your action plan, which will detail the areas you want to realign and how you would like to do that. Suppose you find that your firm’s structure and management style are not aligned with the company’s values. In that case, you should decide how to reorganize the reporting relationships and which top managers the company should let go or how to influence them to change their management style so the company could work more effectively.

Step 4. Make the necessary changes

The implementation is the most important stage in any process, change or analysis and only the well-implemented changes have positive effects. Therefore, you should find the people in your company or hire consultants that are the best suited to implement the changes.

Step 5. Continuously review the 7S

The seven elements: strategy, structure, systems, skills, staff, style and values are dynamic and change constantly. A change in one element always has effects on the other elements and requires implementing a new organizational design. Thus, continuous review of each area is very important.

Example of McKinsey 7S Model

We’ll use a simplified example to show how the model should be applied to an existing organization.

Current position #1

We’ll start with a small startup which offers services online. The company’s main strategy is to grow its share in the market. The company is new, so its structure is simple and made of a few managers and bottom-level workers who undertake specific tasks. There are a very few formal systems, mainly because the company doesn’t need many at this time.

So far, the 7 factors are aligned properly. The company is small and there’s no need for a complex matrix structure and comprehensive business systems, which are very expensive to develop.

McKinsey 7S Example (1/3)

Current position #2

The startup has grown to become a large business with 500+ employees and now maintains a 50% market share in the domestic market. Its structure has changed and it is now a well-oiled bureaucratic machine.

The business expanded its staff and introduced new motivation, reward and control systems. Shared values evolved and now the company values enthusiasm and excellence. Trust and teamwork have disappeared due to so many new employees.

The company expanded and a few problems came with it. First, the company’s strategy is no longer viable. The business has a large market share in its domestic market, so the best way for it to grow is either to start introducing new products to the market or to expand to other geographical markets. Therefore, its strategy is not aligned with the rest of the company or its goals. The company should have seen this but it lacks strategic planning systems and analytical skills.

Business management style is still chaotic and it is a problem of top managers lacking management skills. The top management is mainly comprised of founders who don’t have the appropriate skills. New skills should be introduced to the company.

McKinsey 7S Example (2/3)

Current position #3

The company realizes that it needs to expand to other regions, so it changes its strategy from market penetration to market development. The company opens new offices in Asia, North and South America.

The company introduced new strategic planning systems and hired new management, which brought new analytical, strategic planning, and, most importantly, managerial skills. The organization’s structure and shared values haven’t changed.

Strategy, systems, skills and style have changed and are now properly aligned with the rest of the company. Other elements like shared values, staff and organizational structure are misaligned.

First, the company’s structure should have changed from a well-oiled bureaucratic machine to a division structure. The division structure is designed to facilitate operations in new geographic regions. This hasn’t been done and the company will struggle to work effectively.

Second, new shared values should evolve or be introduced in an organization because many people from new cultures come to the company and they all bring their own values, often very different than the current ones. This may hinder teamwork performance and communication between different regions. Motivation and reward systems also have to be adapted to cultural differences.

McKinsey 7S Example (3/3)

We’ve shown a simplified example of how the McKinsey 7S model should be applied. It is important to understand that the seven elements are much more complex in reality, and you’ll have to gather a lot of information on each of them to make any appropriate decision.

The model is simple, but it’s worth the effort to do one for your business to gather some insight and find out if your current organization is working effectively.

• GE McKinsey Matrix
• The Johari Window Model
• Business Model Canvas (BMC)
• Elaboration Likelihood Model of Persuasion

5 thoughts on “McKinsey 7S Model”

For sure this article is one of the most useful and complete guidelines on 7S model.

Thanks Alireza Nami

Hello! Thanks for this. The article has explained comprehensively well how the 7S McKinsey framework works. 🙂 The case studies illustrated clearly how alignment should be investigated.

Thank so much. Tina Saulo

Can we adopt McKinsey 7S Model for gap analysis of data generation system or simply for data gap analysis of SDGs?

Very well explained. Very simple to follow.

Wanted to know how does McKinsey 7S Model differentiate from EFQM Model.

Excellent and accessible insight on the application of the model

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STRATEGIC PLANNING

Strategic planning solves for 3 levels of strategy.

Strategic planning typically solves for three levels of strategy:

1. Business Model Strategy 2. Organizational & Financial Strategy 3. Functional Strategy

For larger companies with multiple business units there is a 4th higher level of strategy, Corporate Strategy, which is about the allocation of capital and resources across business units/models, and the harvesting of synergies through centralization of functions, shared sales, and marketing spend, M&A, customer synergies, etc.

Understanding which level of strategy you are solving for is beneficial when thinking through a strategic planning process. We'll go more in-depth in strategic planning for each level, but before that, let's go over some strategic planning fundamentals.

WHAT IS STRATEGIC PLANNING?

Strategy is simply the goals you choose and the actions (plans) you take to achieve those goals. Strategic Planning is the process by which you create goals and actions over a defined period.

A strategic planning process can take many forms. It can be in the form of a:

• Few hours with the team in a conference room
• Leadership offsite
• CEO thinking through the next year while backpacking for the weekend
• Very involved and coordinated multi-month process
• Strategy consulting project

Most strong CEOs and leaders spend a large portion of their mental capacity on strategic planning. They are constantly reframing their strategic context, thinking of new goals, initiatives, ways of organizing, etc.

At any level, formal strategic planning typically follows four high-level steps:

• Generate insights
• Develop opportunities

All of the strategy guides on Stratechi.com follow this 4-step process.

WHEN SHOULD WE DO STRATEGIC PLANNING?

Given the various levels of strategy (corporate, business model, org & financial, and functional) to solve for, your company's strategic planning process should be staggered with some overlap and feedback loops, since they should influence each other.

If your company has multiple business units, you typically need a planning cadence for your corporate strategy, which should take a few months and start sometime in Q2. Considering how deep you need to go into your business model strategy, you should kick off that planning process in Q2 or Q3. It typically takes a few months to finalize the headcount and budgets from org and financial strategic planning, so you should begin that process in Q3. Functional strategies should start in Q4; once business model, org & financial strategies are finished or almost finished.

If you are looking for a business coach to collaborate on your strategic planning, set up some on-demand one-on-one time with Joe Newsum , the creator of this content and a McKinsey alum

CORPORATE STRATEGIC PLANNING

Corporate strategic planning occurs in larger companies with multiple business units. The focus is two-fold. First, corporate strategic planning solves for the company's overall financial model/projections and the optimal allocation of capital and costs across the business models/units. Second, corporate strategic planning solves for any cross-business unit initiatives, such as shared services (finance, sales, HR, etc.) and major IT initiatives, which cascade down into the business unit strategies.

BUSINESS MODEL STRATEGIC PLANNING

Most companies struggle with business model strategic planning. They may not have a clear business model. They may revisit business model strategy too often, try to solve for too much, or at a level of specificity that is too low.

If your company doesn't have a well-documented and robust business model strategy, then your leadership team needs to take a step back and go through a systematic business model strategic planning process. The litmus test on this is, can you answer all of the questions below in our one-page business strategy template? Furthermore, do most managers and above understand the business model? If you need to develop a business model strategy I encourage you to read developing a strategy or set up some time with me to start figuring it out.

Business model strategy is defined at a high-level:

1. The Mission    2. Targets   3.  Customer Value  Proposition   4. Go-to-Market   5. The Organization

It serves as a true north for team members to understand the long-term strategy of the company and align their functional strategies too.

ORGANIZATIONAL & FINANCIAL STRATEGIC PLANNING

Strong companies typically rigorously revisit their business model strategy every 3-5 years. They may need to go deeper in a few areas every year or so, such as targeting a new market, customer, or geography and understanding the implications to the value proposition , go-to-market, and organization. Or, maybe the go-to-market strategy needs to evolve from a distribution focus to a direct model. Regardless, strong businesses have strong business model strategies that they stick with over time.

For struggling companies, business model strategic planning is critical. They need to quickly figure out what is working, and not working, where the market is going, how the targets are evolving, the strengths and weaknesses of the value proposition and go-to-market, and the organizational gaps. We recommend starting with the Leadership Strategy Survey and Strategy Workshop to deeply understand the leadership team's collective view on the company's strategy, while also aligning the team on what strategy is, and generating compelling potential strategies.

For all companies, it is prudent to revisit business model strategy, at some level, annually or every few years, to test major assumptions and think through competitive and market dynamics.  Lighter versions of business model strategic planning typically involve a series of leadership meetings or off-sites to systematically go through and discuss all of the major elements in the business model.  In between sessions, various analyses are done to prove or disprove important hypotheses about business model elements and dynamics.

Every 3-5 years, companies should embark on a rigorous business model strategic planning process to ensure their business model is competitive over the next 5-10 years. This process necessitates extensive project planning and management. We typically recommend bringing in a Strategy Coach to help with the planning, process, and workshops, while mentoring and coaching the internal teams driving the process.

Every year, every company does some flavor of organizational and financial strategic planning. Often, they term it "annual budgeting." Though, many companies fall short of infusing real strategic rigor into their budgeting, instead applying broad-based increases or decreases across the board to forecasts, headcount, and budgets. The process should involve a significant amount of analytical retrospection on the KPI performance and the ROI of spend and headcount.

Organizational and financial strategic planning solves for the financial forecast, functional headcount and budgets, and company-wide initiatives. Primarily driven by the finance and leadership team, the planning cycle typically begins in late Q2 into Q3 and is finalized a month or two before year-end. Of course, as the year plays out, there are quarterly or monthly tweaks to plan.

With the right KPIs , systems, and governance , the planning is typically straightforward with a series of meetings to systematically go through a structured process. We often advise bringing in a Strategy Coach to assess and improve the existing process, KPIs, systems and governance. In many cases, the Strategy Coach provides light support through the strategic planning process to push the thinking, analytics , rigor, and governance.

Often overlooked is the importance of properly communicating the business model strategy and the org & financial plan to the next few levels of management. This step is often more work than creating the plans, but if done correctly, ensures the functional strategies are aligned and impactful.

FUNCTIONAL STRATEGIC PLANNING

While strong leaders are always thinking and implementing new strategies, a systematic functional strategic planning process is important to get the broader team involved and aligned in creating winning strategies. The functions of a company are below; organized into value chain and support functions. In the end, all of these functions fuel the collective processes that produce and deliver the value proposition and go-to-market.

One of the most useful things to do for an organization is to drive consistency in functional strategic planning processes, governance, and outputs such as their strategic plans and KPIs. Consistency creates many benefits. It allows different leaders and team members to quickly understand a function's strategy allowing more time for collaborative problem solving . It ensures plans include all the major and necessary elements of a strategy and that they are at the right level of specificity. And, execution becomes simpler since everyone is talking the same language.

Stratechi.com goes in-depth into most of the functional strategies. If you are looking for strategic planning templates click here , otherwise visit:

Product Strategy Service Strategy Pricing Strategy Distribution Strategy Sales Strategy Marketing Strategy HR Strategy Partner Strategy

The key to creating strong functional strategies is to get managers and the next generation of leaders involved in the process. It not only produces great ideas, but also develops team members, ensures alignment, and drives a higher level of commitment and execution. I support many teams with a Strategy Coaching to help guide and mentor teams through a strategic planning process and project.

We hope this was helpful and if you need any support with your strategic planning, please set up some time with Joe Newsum .

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The McKinsey 3 Horizon Framework for Business Growth Explained

“Long range planning does not deal with future decisions, but with the future of present decisions.” — Peter Drucker

I learned about the 3 Horizon framework some years ago as a way of planning business growth and aligning innovation for the future business.

It’s a simple model, and that it’s strength.  And it creates a common language for talking about business investments up and down the chain.

The problem is that I see a lot of leaders misunderstand it or misuse it.

The most common way I see people misuse it is to simply stick a bunch of big interesting projects in Horizon 3 and call it the future.

I think more people would use the McKinsey 3 Horizon model better if they read the McKinsey article, Enduring Ideas: The three horizons of growth ,  read the article by Steve Blank, The Fatal Flaw of the Three Horizons Model , and read THE book by the original McKinsey team, The Alchemy of Growth that explains the model, its origins, its intent, and its use in detail.

That said, let’s take a quick tour of the 3 Horizon model and why it’s a big deal for business leaders…

What is McKinsey’s 3 Horizon Model for Business Growth?

The 3 Horizons of Growth was developed by Steve Coley at McKinsey as a way to think about business growth

Here is a visual of the McKinsey 3 Horizon framework:

• Horizon 1 = Extend and defend core businesses
• Horizon 2 = Build emerging businesses
• Horizon 3 = Create viable options

It’s a way to align innovation efforts with future challenges and opportunities to grow the business–“changing the plane, while flying the plane”.

You use the 3 Horizon framework to evaluate your future plans for your product and service strategy.  When you implement this framework, you create a common language that you can use from top to bottom in the organization to describe how you are investing and preparing for growth.

The 3 Horizon Framework Combines S-Curves with Weed, Seed, and Feed

According to Steve Coley, the 3 Horizon framework emerged from two different strands of thought:

• S-Curves of Business Life .   First, S-Curves of business life.  In the very beginning, a lot of investment and very little progress and then there’s a period of accelerating growth. At the top of the S, revenue and profit growth slows down or declines.
• Weed, Seed, and Feed .  Second, more often than not, companies that had been growing for a long time of time, were reinvigorating their portfolio through some sort of a weed, seed, and feed process and we put those two ideas together.

If you add up S-curves for different time frames, you get what looks to be like the 3 Horizon framework.

Metrics, People, and Capabilities Vary by Horizon

Each horizon within the 3 Horizon framework has different metrics, people, and capabilities.

Here’s a summary per Steve Coley:

According to Steve Coley:

“It does take a different kind of leadership and organizational approach to make it work. The same performance metrics and organizational style for Horizon 1 businesses are not the same that are appropriate for Horizon 2 and Horizon 3 — it’s important to differentiate where you manage the initiatives in each one of these horizons.”

99% of the Norm Focus on Horizon 1 Core Businesses

Another aspect of the 3 Horizon framework is to manage all 3 horizons concurrently.   The challenge is that the norm is for 99% of the organization to focus on Horizon 1 core businesses:

“Another aspect is to manage all 3 of these horizons concurrently as opposed to the norm where 99% of the focus of the organization is on horizon 1 core businesses.”

CEOs and Senior Leaders Need to Focus More on Horizon 2 and 3

What McKinsey also learned is that Horizons 2 and 3 need more CEO and senior level support.

Otherwise, Horizons 2 and 3 end up starved for resources (and ultimately, starving the future of the company):

“Counterintuitively, we found that Horizons 2 and 3 need more senior management and CEO attention than what you would commonly expect.

Initiatives in Horizons 2 and 3 are the ones that are often times spending money and sucking up cash flow that the organization will inevitably starve these initiatives and not make resources available to them in order to make their annual budget.

Only with very senior leadership can you overcome those instinctive organizational attitudes towards starving what is ultimately going to be the future of the company .”

Neglecting Horizon 2 (Spending All Their Time in Horizons 1 and 3)

Another pattern of mistakes that business leaders make is to focus on Horizon 1 and Horizon 3, but neglect Horizon 2.

The issue is that Horizon 2 is where the emerging businesses are.

Business leaders will focus intensely on Horizon 1 to try to get the most out of their core businesses, and only loosely coordinate in Horizon 3:

According to Stev Coley:

“An example of the value of this framework is a large tech company found they were spending all their time on Horizon 1 and Horizon 3 and neglecting Horizon 2.

They were intensely focused on managing their core businesses and trying to get the most out of them.

And they had an enormous number of initiatives and experiments that were only loosely coordinated if at all in Horizon 3.”

Cluster Horizon 3 Initiatives and Move Some to Horizon 2 for Commerical Viability

What business leaders need to do to ensure their future is to cluster Horizon 3 initiatives and move some of them to Horizon 2 as quickly as possible to turn them into commercial businesses:

“They had to begin to take control of all the initiatives in Horizon 3 and start clustering them and move some of them as quickly as possible into Horizon 2, so they actually had some commercial viability.

If the organization is not managing these horizons in a concurrent way, you’re not preparing for your future.

What companies do wrong is they will have a lot of activity in horizon 1 and a 1ot of activity in Horizon 3.   What they need to do is cluster activity in Horizon 3 and start turning the opportunities into viable commercial businesses.”

Steve Blank on the Fatal Flaw of the 3 Horizons Model

While Steve Blank is a fan of the3 Horizon model, he says there’s a fatal flaw in that the model was based on time, but now time no longer applies:

“Today, disruption – Horizon 3 ideas – can be delivered as fast as Horizon 1 ideas.”

In his article, The Fatal Flaw of the 3 Horizon Model , Blank  writes:

“In the past we assigned relative delivery time to each of the Horizons.

For example, some organizations defined Horizon 1 as new features that could be delivered in 3-12 months; Horizon 2 as business/mission model extensions 24-36 months out; and Horizon 3 as creating new disruptive products/business/mission models 36-72 months out.

This time-based definition made sense in the 20th century when new disruptive ideas took years to research, engineer and deliver.”

Blank describes the 3 Horizons this way:

• Horizon 1 ideas provide continuous innovation to a company’s existing business model and core capabilities.
• Horizon 2 ideas extend a company’s existing business/model and core capabilities to new customers, markets or targets.
• Horizon 3 is the creation of new capabilities to take advantage of or respond to disruptive opportunities or to counter disruption.

Steve Blank writes:

“However, in the 21stcentury the Three Horizons model has a fatal flaw that could put companies out of business and government agencies behind their adversaries.

While traditional analysis suggests that Horizon 3 disruptive innovations take years to develop, in today’s world this is no longer the case. The three horizons are not bound by time. Horizon 3 ideas – disruption – can be delivered as fast as ideas for Horizon 1 – existing products.

In order to not be left behind, companies / government agencies need to focus on speed of delivery and deployment across all three horizons.”

Interestingly, for me, I hadn’t actually associated the horizons with time.   Maybe because of my introduction to the model, I just imagined Horizon 3 as “outside the core”, while Horizon 1 was “core”.     That said, I do see a lot of confusion as business leaders interpret the model in different ways, and I can easily see how any business leader would naturally associate Horizons to a time frame.

Read The Alchemy of Growth (The Book on the McKinsey 3 Horizon Model)

A friend pointed me to The Alchemy of Growth early on when I was first learning the 3 Horizon model.

It helped me learned from the original team and understand the original intent of the model so this gave me a much better foundation for using the model.

The Alchemy of Growth by Mehrdad Baghai, Steve Coley, and David White (Amazon)

Call to Action

• Read the article Enduring Ideas: The three horizons of growth.
• Read Steve Blank’s blog post, The Fatal Flaw of the Three Horizons Model.
• Read the book The Alchemy of Growth by Mehrdad Baghai, Steve Coley, and David White

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The Easy Guide to the McKinsey 7S Model

Updated on: 10 January 2023

Although invented in the late 1970s, the McKinsey 7S model still helps businesses of all sizes succeed. A conceptual framework to guide the execution of strategy. 

In this guide, we’ll walk you through the 7S of the McKinsey Framework and how to apply it to evaluate and improve performance. 

McKinsey 7-S Model Definition 

The McKinsey 7S model is one of the most popular strategic planning tools .  Businesses commonly use it to analyze internal elements that affect organizational success. 

The model recognizes 7 of these elements and considers them to be interlinked, therefore it’s difficult to make significant progress in one area without making progress in other areas as well. Accordingly, to be successful, the organization should ensure that all these elements are aligned and reinforced.

The model divides these 7 elements into two categories;

Hard elements – Strategy, Structure, Systems (these are easier to be identified and defined and can be directly influenced by the management)  

Soft elements – Shared Values, Skills, Style, Staff (these are harder to be defined because they are less tangible, but are just as important as the hard elements) 

You can use the framework 

• To successfully execute new strategies
• To analyze how different key parts of your organization work together
• To facilitate changes in the organization 
• To help align processes during a merger or acquisition
• To support management thinking during strategy implementation and change management

The 7 Elements of the McKinsey 7-S Framework 

• Shared values

Let’s dig into these elements in more detail. 

Strategy 

A strategy is a plan the company develops to maintain its competitive advantage in the market. It consists of a set of decisions and action steps that need to be taken in response to the changes in the company’s external environment which includes its customers and competitors. 

An effective strategy would find external opportunities and develop the necessary resources and capabilities to convert the environmental changes into sources of new competitive advantage. 

The structure is the organizational chart of the company. It represents how the different units and divisions of the company are organized, who reports to whom and the division and integration of tasks. The structure of a company could be hierarchical or flat, centralized or decentralized, autonomous or outsourced, or specialized or integrated. Compared to most other elements, this one is more visible and easier to change. 

Systems 

These are the primary and secondary activities that are part of the company’s daily functioning.  Systems include core processes such as product development and support activities such as human resources or accounting. 

Skills are the skill set and capabilities of the organization’s human resources . Core competencies or skills of employees are intangible but they a major role in attaining sustainable competitive advantage. 

The most valuable strategic asset of an organization is its staff or human resources. This element focuses on the number of employees, recruitment, development of employees, remuneration and other motivational considerations. 

This refers to the management style of the company leadership. It includes the actions they take, the way they behave, and how they interact.  

Shared Values

Shared values are also referred to as superordinate goals and are the element that is in the core of the model. It is the collective value system that is central to the organizational culture and represents the company’s standards and norms, attitudes, and beliefs. It’s regarded as the organization’s most fundamental building block that provides a foundation for the other six elements. 

How to Use the McKinsey 7-S Model

The model can be used to do a gap analysis or to determine the gap between what the company is currently doing and what it needs to do to successfully execute the strategy. 

Step 1: Analyze the current situation of your organization

This is where you need to understand the current situation of the organization with regard to the 7 elements. Analyzing them closely will give you a chance to see if they are aligned effectively.

The following checklist questions will help you explore your situation. 

Strategy  

• What’s the objective of your company strategy? 
• How do you use your resources and capabilities to achieve that?
• What makes you stand out from your competitors? 
• How do you compete in the market? 
• How do you plan to adapt in the face of changing market conditions?
• What’s your organizational structure ?
• Who makes the decisions? Who reports to whom? 
• Is decision-making centralized or decentralized?
• How do the employees align themselves to the strategy?
• How is information shared across the organization?
• What are the primary processes and systems of the organization? 
• What are the system controls and where are they?
• How do you track progress?
• What are the processes and rules the team sticks with to keep on track? 
• What are the core competencies of the organization? Are these skills sufficiently available? 
• Are there any skill gaps?
• Are the employees aptly skilled to do their job? 
• What do you do to monitor, evaluate and improve skills? 
• What is it that the company is known for doing well? 
• How many employees are there? 
• What are the current staffing requirements? 
• Are there any gaps in the required resources? 
• What needs to be done to address them?
• What is the management style like? 
• How do the employees respond to this style?
• Are employees competitive, collaborative or cooperative? 
• What kind of tasks, behaviors, and deliverables does the leadership reward? 
• What kind of teams are there in the organization? Are there real teams or are they just nominal groups? 
• What are the mission and vision of the organization? 
• What are your ideal and real values? 
• What are the core values the organization was founded upon? 
• How does the company incorporate these values in daily life? 

Step 2: Determine the ideal situation of the organization 

Specify where you ideally want to be and the optimal organizational design you want to achieve, with the help of the senior management. This will make it easier to set your goals and come up with a solid action plan to implement the strategy. 

Since the optimal position you want to be in is still not known to you, you will have to collect data and insight through research on the organizational designs of competitors and how they coped with organizational change. Answering the questions above are just the starting point. 

To understand what your organization is best at, use the Hedgehog Concept by Jim Collins

Step 3: Develop your action plan

Here you will identify which areas need to be realigned and how you would do that. The result of this step should be a detailed action plan listing the individual steps you need to take to get to your desired situation, along with other important details such as task owners, timeframes, precautions and so on.

Step 4: Implement the action plan 

Successfully executing the action plan is depended on who executes it. Therefore you need to make sure that you assign the tasks to the right people in your organization. Additionally, you can also hire consultants to guide the process. 

Step 5: Review the seven elements from time to time

Since the seven elements are subjected to constant change, reviewing them periodically is essential. A change in one element will affect all the others, which will require you to implement a new organization design. Review the situation frequently to stay aware of the remedial action you might want to take.

Advantages and Disadvantages of McKinsey 7-S Model 

• Considers 7 elements of strategic fit, which is more effective than the traditional model that only focuses on strategy and structure
• It helps align the processes, systems, people, and values of an organization
• Since it analyzes each element and the relationship between them in detail, it ensures that you miss no gaps caused by changed strategies
• Helps organizations identify how they should align the different key parts of the organization to achieve their goals

Disadvantages

• It requires the organization to do a lot of research and benchmarking, which makes it time-consuming
• It only focuses on internal elements, while paying no attention to the external elements that may affect organizational performance.
• It requires the help of senior management which may not be readily available depending on how busy they are

To analyze and understand the performance or the functioning of the organization use Weisboard’s six box model framework.

What’s Your Take on the McKinsey 7-S Model? 

The McKinsey 7S model is a proven framework for helping organizations understand how to get from their current situation to the situation they prefer to be in. 

Maybe you are a big fan of the McKinsey 7S model. Maybe you prefer another strategy framework that has worked well for you. We’d love to hear what you feel about the subject; give your feedback in the comments section below. 

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McKinsey 7S Model

A tool that analyzes a company’s "organizational design"

What is the McKinsey 7S Model?

The McKinsey 7S Model refers to a tool that analyzes a company’s “organizational design.” The goal of the model is to depict how effectiveness can be achieved in an organization through the interactions of seven key elements – Structure, Strategy, Skill, System, Shared Values, Style, and Staff.

The focus of the McKinsey 7s Model lies in the interconnectedness of the elements that are categorized by “Soft Ss” and “Hard Ss” – implying that a domino effect exists when changing one element in order to maintain an effective balance. Placing “Shared Values” as the “center” reflects the crucial nature of the impact of changes in founder values on all other elements.

Structure of the McKinsey 7S Model

Structure, Strategy, and Systems collectively account for the “Hard Ss” elements, whereas the remaining are considered “Soft Ss.”

1. Structure

Structure is the way in which a company is organized – the chain of command and accountability relationships that form its organizational chart.

2. Strategy

Strategy refers to a well-curated business plan that allows the company to formulate a plan of action to achieve a sustainable competitive advantage , reinforced by the company’s mission and values.

Systems entail the business and technical infrastructure of the company that establishes workflows and the chain of decision-making.

Skills form the capabilities and competencies of a company that enables its employees to achieve its objectives.

The attitude of senior employees in a company establishes a code of conduct through their ways of interactions and symbolic decision-making, which forms the management style of its leaders.

Staff involves talent management and all human resources related to company decisions, such as training, recruiting, and rewards systems

7. Shared Values

The mission , objectives, and values form the foundation of every organization and play an important role in aligning all key elements to maintain an effective organizational design.

Application of the McKinsey 7S Model

The subjectivity surrounding the concept of alignment concerning the seven key elements contributes to why this model seems to have a complicated application. However, it is suggested to follow a top-down approach – ranging from broad strategy and shared values to style and staff.

Step 1: Identify the areas that are not effectively aligned

Is there consistency in the values, strategy, structure, and systems? Look for gaps and inconsistencies in the relationship of elements. What needs to change?

Step 2: Determine the optimal organization design

It is important to consolidate the opinions of top management and create a generic optimal organizational design that will allow the company to set realistic goals and achievable objectives. The step requires a tremendous amount of research and analysis since there are no “ organizational industry templates ” to follow.

Step 3: Decide where and what changes should be made

Once the outliers are identified, the plan of action can be created, which will involve making concrete changes to the chain of hierarchy, the flow of communication, and reporting relationships. It will allow the company to achieve an efficient organizational design.

Step 4: Make the necessary changes

Implementation of the decision strategy is a make-or-break situation for the company in realistically achieving what it set out to do. Several hurdles in the process of implementation arise, which are best dealt with in a well-thought-out implementation plan.

Advantages of the Model

• It enables different parts of a company to act in a coherent and “synced” manner.
• It allows for the effective tracking of the impact of the changes in key elements.
• It is considered a longstanding theory, with numerous organizations adopting the model over time.

Disadvantages of the Model

• It is considered a long-term model.
• With the changing nature of businesses, it remains to be seen how the model will adapt.
• It seems to rely on internal factors and processes and may be disadvantageous in situations where external circumstances influence an organization.

Practical Example

The McKinsey 7S model can be applied in circumstances where changes are being brought into the organization that may affect one or more of the shared values. Suppose a company is planning to undertake a merger. It will affect how the company is organized since new staff will be coming in. It will also affect the structure of the company, along with strategic decision-making, as new ideas flow in through synergy.

In such a case, the McKinsey 7s model can be used to first identify the inconsistent areas – here, it would primarily be the structure, staff, and strategy. After identifying the relevant areas, the company can make effective decisions to optimally re-organize and incorporate the changes in a way that streamlines the merger process – after conducting extensive research and analysis of the consequences that the changes bring to the company.

Additional Resources

Thank you for reading CFI’s guide to McKinsey 7S Model. To keep learning and advancing your career, the following resources will be helpful:

• Corporate Structure
• Mission and Values
• Organizational Analysis
• M&A Considerations and Implications
• See all management & strategy resources
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The Leading Source of Insights On Business Model Strategy & Tech Business Models

What Is The McKinsey Horizon Model And Why It Matters In Business

The McKinsey Horizon Model helps a business focus on innovation and growth . The model is a strategy framework divided into three broad categories, otherwise known as horizons. Thus, the framework is sometimes referred to as McKinsey’s Three Horizons of Growth.

Table of Contents

Understanding the McKinsey Horizon Model

The McKinsey Horizon Model was developed after two decades of extensive research on high-growth companies.

At this point, it is useful to make the distinction that McKinsey’s growth strategy should not be confused with an innovation strategy .

Instead, the three horizons model should be used to implement a growth strategy – which in turn drives future strategies centered on innovation .

McKinsey’s model is also ideal for large businesses with expansive member boards that have different visions for the future of the organization.

Here, the model seeks to create a united and cohesive plan for growth over time. Ideally, milestones are set regarding investments, results, and profits.

Ultimately, the McKinsey Horizon Model is an adaptable future tool. It identifies short, medium, and long term changes to an industry and details how a business might react to these changes.

Using the McKinsey Horizon Model in practice 

Imagine that three horizons are plotted on a graph, with time on the x-axis and the potential growth of the company on the y-axis.

Let’s take a look at each horizon according to its position on the graph.

First horizon

At the bottom left of the graph, a business is at the start of its journey with low potential growth .

As a result, the first horizon usually describes activities that currently contribute to revenue generation and company stability. 

Once stability has been achieved, the business can look at short-term projects that will deliver growth in the next 1-3 years – but actual timeframes will vary from industry to industry.

For example, a tech start-up might experience higher initial growth than a new café. 

Second horizon

In the middle of the graph, several years have passed and the business has experienced a moderate amount of growth .

Second horizon growth strategies should ideally span 2-5 years and often relate to adopting processes, revenue streams, or technologies from other industries. 

Therefore, the chance of successful growth is relatively high, despite the longer time frames.

Third horizon

After a significant amount of time has passed, the company now has more resources to devote to large and complex strategies that may take 5-15 years to materialize.

These strategies may relate to research, pilot programs, and brand new product offerings. 

Given their large upfront cost, third horizon strategies often have a focus on incremental improvements.

But because of their longer time frame and a large number of variables, many strategies are risky and can become unprofitable.

Case Studies

• First Horizon (Short Term): Focus on improving user experience and increasing market share through regular software updates and enhancements.
• Second Horizon (Medium Term): Explore partnerships with other tech firms to integrate complementary technologies or services, expanding the product ecosystem.
• Third Horizon (Long Term): Invest in research and development for emerging technologies, such as artificial intelligence or blockchain, to create entirely new product lines.
• First Horizon (Short Term): Optimize inventory management and supply chain processes to reduce costs and improve margins.
• Second Horizon (Medium Term): Launch new store formats or online sales channels to reach untapped customer segments.
• Third Horizon (Long Term): Experiment with innovative retail concepts, such as cashier-less stores or personalized shopping experiences, to shape the future of retail.
• First Horizon (Short Term): Streamline production processes to increase efficiency and reduce production costs.
• Second Horizon (Medium Term): Invest in electric and hybrid vehicle technologies to meet evolving consumer preferences and regulatory requirements.
• Third Horizon (Long Term): Explore autonomous driving solutions and mobility-as-a-service platforms for the future of transportation.
• First Horizon (Short Term): Enhance customer service and digital banking capabilities to improve customer retention.
• Second Horizon (Medium Term): Expand into new geographic markets with tailored financial products and services.
• Third Horizon (Long Term): Investigate blockchain technology and decentralized finance (DeFi) solutions to transform traditional banking practices.
• First Horizon (Short Term): Streamline research and development processes to accelerate drug development timelines.
• Second Horizon (Medium Term): Explore partnerships with biotechnology firms to access innovative drug candidates.
• Third Horizon (Long Term): Invest in gene therapy and precision medicine research for groundbreaking treatments.
• First Horizon (Short Term): Optimize production and distribution to reduce waste and improve sustainability.
• Second Horizon (Medium Term): Launch new product lines or acquire brands that cater to health-conscious consumers.
• Third Horizon (Long Term): Research alternative protein sources and sustainable packaging solutions to address future food industry challenges.

Key takeaways

• The McKinsey Horizon Model is a strategy that is particularly beneficial for mature companies that tend to devote fewer resources to growth .
• The McKinsey Horizon Model helps large businesses with different points of view settle on a unified direction for the future of the company.
• The McKinsey Horizon Model offers a framework of three horizons. These act as stepping stones for businesses that want to balance current profitability with future growth .

Key highlights of the McKinsey Horizon Model:

• Framework for Growth: The McKinsey Horizon Model, also known as McKinsey’s Three Horizons of Growth, is a strategy framework designed to help businesses focus on innovation and growth . It provides a structured approach to planning for the future.
• Three Horizons: The model divides growth strategies into three broad categories or horizons, each with its own time frame and focus. These horizons represent different stages of a company’s growth journey.
• Not an Innovation Strategy: It’s important to note that the McKinsey Horizon Model is not an innovation strategy in itself. Instead, it is a tool to implement a growth strategy that can drive future innovation efforts.
• Large Business Focus: This model is particularly useful for large businesses with diverse stakeholders and visions for the future. It helps create a unified and cohesive growth plan that aligns with the organization’s goals and objectives.
• Adaptability: The model is adaptable and can be applied to various industries and business types. It identifies short-term, medium-term, and long-term changes in the industry and guides how a company can respond to these changes.
• First Horizon: The first horizon represents the initial stage of a company’s journey, where there is low potential for growth . This phase typically involves activities that contribute to revenue generation and stability. Short-term growth projects (1-3 years) are considered here.
• Second Horizon: In the second horizon, the company has experienced moderate growth . This phase spans 2-5 years and often involves adopting processes, revenue streams, or technologies from other industries. The likelihood of successful growth is relatively high in this horizon.
• Third Horizon: The third horizon is characterized by significant time passing and the availability of more resources. Strategies in this horizon may take 5-15 years to materialize and often involve research, pilot programs, and the development of brand -new product offerings. Due to the longer time frame and complexity, these strategies can be riskier.
• Balancing Profitability and Growth: The McKinsey Horizon Model helps businesses balance current profitability with future growth . It allows companies to allocate resources strategically across the three horizons based on their growth potential and risk.
• Alignment of Stakeholders: For companies with diverse stakeholder perspectives, the model serves as a tool to align these perspectives toward a common vision for the company’s future.
• Resource Allocation: The model guides decision-makers in setting milestones, making investments, and measuring results across the three horizons, ensuring that resources are allocated effectively.

McKinsey’s Related Frameworks

GE McKinsey

McKinsey Horizon Model

McKinsey’s Seven Degrees of Freedom

Minto Pyramid

McKinsey Organizational Structure

Connected Business Frameworks

• Porter’s Five Forces

SWOT Analysis

Balanced Scorecard

Blue Ocean Strategy 

GAP Analysis

Scenario Planning

Read also :  Business Strategy, Examples, Case Studies, And Tools

Connected resources:

• Ansoff Matrix
• Business Strategy Frameworks
• Blue Ocean Strategy
• Competitive Moat
• Profit Margins

Additional resources:

• Business Models
• Business Strategy
• Digital Business Models
• Distribution Channels
• Go-To-Market Strategy
• Marketing Strategy
• Network Effects
• Platform Business Models
• Revenue Models

More Resources

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McKinsey Three Horizons of Growth: A Strategic Framework for Business Expansion

Master business expansion with our McKinsey Three Horizons guide and free PowerPoint template for effective growth planning.

StrategyPunk

Take advantage of the free, easy-to-use PowerPoint template available at the end of the post , perfect for strategizing your company's unstoppable expansion.

Introduction

The model categorizes growth opportunities into three horizons with distinctive characteristics and objectives. Horizon 1 optimizes core business activities to generate cash and maintain market position. Horizon 2 encourages organizations to explore new market segments and innovative offerings while preparing to scale them. Finally, Horizon 3 is about scouting and nurturing future growth opportunities that could fundamentally alter the company's competitive landscape.

What are the Three Horizons of Growth?

The Three Horizons of Growth is a strategic framework developed by McKinsey & Company to help businesses map out their long-term growth strategy. This model focuses on planning for sustainable growth by dividing business initiatives into three interconnected horizons. Each horizon represents a different growth stage and has unique characteristics, objectives, and challenges. They are:

Horizon 1: Core Business

Horizon 2: emerging opportunities, horizon 3: future growth engines.

Finally, Horizon 3 encompasses future growth engines. These disruptive ideas or technologies can potentially revolutionize the industry or create entirely new markets. This stage is the most uncertain and demands a long-term, visionary approach. To thrive in Horizon 3, organizations should foster a culture of curiosity and exploration, engage in strategic partnerships, and maintain a systematic approach to scanning and monitoring potential game-changers in their industry.

Horizon 1: Existing Market and Mature Technology

One aspect of Horizon 1 is continuously improving existing products and services. This involves:

Horizon 2: Emerging Market and Emerging Technology

In the McKinsey Three Horizons of Growth framework, Horizon 2 bridges the current core business and the new growth areas. This stage is characterized by the emergence of disruptive innovations and the acceleration of their adoption in the market.

During this stage, organizations must be flexible in adapting their strategies and tactics, as they may face setbacks or unforeseen challenges in their pursuit of growth. They should be prepared to modify their plans according to market demands and allocate resources accordingly.

Horizon 3: New Market and New Technology

As industries progress through constant change and technological advancements, organizations must explore and embrace nascent possibilities to sustain their competitive edge. In Horizon 3, companies actively seek opportunities for growth beyond their core business, envisioning and investing in innovative ideas that are farther ahead in the development pipeline.

How do you use the Three Horizons of Growth?

The Three Horizons of Growth framework can be applied effectively to foster business growth and innovation. The process involves streamlining the allocation of resources (like time, money, and talent) across the three interconnected horizons of growth. By applying this framework, it becomes possible for organizations to identify and address the most critical opportunities at every stage. Below are some steps to effectively utilize the Three Horizons of Growth:

Step 3: Prioritize Once the organization's current state has been assessed, prioritize critical initiatives within each horizon. Consider each initiative's potential impact, resource requirements, and the extent to which it aligns with the organization's strategic goals.

What is the 70-20-10 McKinsey Rule?

The 70-20-10 McKinsey rule is a widely known framework within innovation management. This helpful guideline for businesses aims to prioritize and allocate resources effectively for innovation projects. By adhering to the rule, a company can successfully focus on core, adjacent, and breakthrough innovation simultaneously, ensuring long-term success and resilience.

In summary, McKinsey's Three Horizons of Growth framework offers a structured approach for companies to balance their focus and resources on long-term sustainable growth. The model emphasizes the importance of simultaneously investing in the core business (Horizon 1), emerging growth areas (Horizon 2), and creating new opportunities for the future (Horizon 3).

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A data leader’s operating guide to scaling gen AI

After almost two years of infatuation with generative AI (gen AI), companies are moving past the honeymoon phase 1 “ Moving past gen AI’s honeymoon phase: Seven hard truths for CIOs to get from pilot to scale ,” McKinsey, May 13, 2024. to embrace the work that matters most: creating value from this tantalizing technology. Expectations are high. A recent McKinsey Global Survey  found that 65 percent of companies across sizes, geographies, and industries now use gen AI regularly, twice as many as last year. 2 “ The state of AI in early 2024: Gen AI adoption spikes and starts to generate value ,” McKinsey, May 30, 2024. Investment in gen AI continues to rise amid the belief that early gains seen by high performers are a harbinger of cost decreases and profits to come. But most companies have not yet seen significant impact from gen AI.

About the authors

This article is a collaborative effort by Alex Singla , Asin Tavakoli , Holger Harreis , Kayvaun Rowshankish , and Klemens Hjartar , with Gaspard Fouilland and Olivier Fournier, representing views from McKinsey Technology and QuantumBlack, AI by McKinsey.

To keep up with the competitive pace of innovation, data executives at most organizations have drafted gen AI strategies. Not all companies have moved past the pilot stage, but most have made steps to integrate AI into their tech stacks at some level. Yet a technical integration model  is only part of what is necessary to generate lasting value from gen AI. Companies must also create gen AI operating models to ensure their technology implementations deliver measurable business results.

An operating model is a familiar structure in most large organizations. A company’s operating model is a plan that outlines how people, processes, and technology will be deployed to provide value to customers and stakeholders. It can encompass financial structures, partnerships, and product road maps to meet the company’s long-term goals. When applied specifically to gen AI, an operating model includes every decision—from staffing and organizational structures to technology development and compliance—that guides how gen AI is used and measured throughout a company.

A well-defined gen AI operating model can help leaders successfully and securely scale gen AI across their organizations. Data is the backbone of a successful gen AI deployment, so chief data officers (CDOs) often lead the charge to create these models—bringing technology, people, and processes together to transform gen AI’s potential into real impact. Yet when creating gen AI operating models, data leaders commonly fall into two traps:

• Tech for tech: This approach involves allocating significant resources toward gen AI without a clear business purpose, leading to solutions disconnected from real-world impact. This can result in overspending on gen AI tools that are rarely used in daily workflows and create little business value.
• Trial and error: This approach entails experimenting with disparate gen AI projects, but not doing so in a coordinated manner. This presents a particular risk in sectors such as technology, retail, and banking, where gen AI has the potential to quickly increase productivity. Companies in industries where gen AI may take longer to have a significant effect on productivity, such as agriculture and manufacturing, could potentially afford to wait to deploy the technology.

About McKinsey Technology

Many business leaders feel a sense of urgency to deploy gen AI. This creates an opportunity for data executives to get approval for gen AI operating models that put data at the center of the organization.

When CDOs and their executive supporters are ready to define a gen AI operating model, what are the first steps to get started? And what measures should companies take to ensure these operating models meet risk, governance, security, and compliance measures? We present a practical guide data leaders can use to create a gen AI operating model, including how to structure talent teams, organize data assets, and determine whether a centralized or domain-centric development is the best approach.

Design a gen AI operating model around components

Gen AI innovation is moving at an exceedingly fast pace, so it makes sense to design an operating model that leverages components. With this approach, a company creates a plan for adding new gen AI components to the enterprise architecture at regular intervals, and in ways that are aligned with business goals. The operating model enables changes to gen AI components without having to overhaul the tech stack.

On one hand, adding gen AI functionality to mature elements that require fewer regular updates, such as cloud hosting and data chunking, warrants a higher level of investment and implementation complexity. On the other hand, fast-moving elements with shorter life cycles, such as agents and large language model (LLM) hosting, should be quick to implement and easy to change.

In this area, organizations can be flexible, first implementing the minimum necessary components for critical gen AI use cases, and then adding and removing components as needs evolve. For instance, a leading European bank implemented 14 key gen AI components across its enterprise architecture. This approach allowed the bank to implement 80 percent of its core gen AI use cases in just three months (Exhibit 1). By identifying the gen AI components with the largest potential impact early on, the bank focused its developer resources to produce gen AI features aligned with clear mid- to long-term goals. However, while a component-based approach to gen AI deployment is a crucial success factor for scaling gen AI, only 31 percent of gen AI high-performers and 11 percent of other companies have adopted this model. 3 “ The state of AI in early 2024: Gen AI adoption spikes and starts to generate value ,” McKinsey, May 30, 2024.

To succeed with a component-based gen AI development model, companies can create a task force to review, update, and evolve the road map. The task force also assigns execution plans, ensuring IT, data, AI, and business teams have appropriate responsibilities for specific rollouts. This requires clear communication between a variety of stakeholders, including AI engineers, software developers, data scientists, product managers, and enterprise architects, as well as regular reporting to business leads. Coordination is essential to ensure that component rollouts are systematized and aligned with organizational goals instead of presented in a series of disjointed pilots.

Choose an extended or distinct gen AI team

When building a gen AI operating model, defining a core team is crucial. There are two main options: extend an existing data or IT team by equipping them with new gen AI skills or build a distinct and separate gen AI team. The latter can be accomplished by selecting people from an existing data or IT team or by hiring new talent. Each has its own advantages and constraints.

Making an existing data team responsible for gen AI may seem to be the easier option, though the pendulum could shift as gen AI matures. For instance, a leading logistics organization extended its IT organization, which included data teams, to launch several gen AI initiatives. The company wrapped gen AI into its data and analytics road map, encouraging existing teams to upskill in gen AI capabilities. While the company succeeded in deploying a gen AI pilot, it was limited in scope. And future rollouts were slower than expected because gen AI products were integrated into the company’s overall technology platform, requiring time and resources to ensure compliance with existing systems.

Decoupling the gen AI team from the IT or data organization has different advantages. This approach allows an organization to build a new highly skilled gen AI team from scratch. With a solid foundation in data and AI architectures, the new team can quickly iterate on gen AI components outside of the larger IT function.

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Several leading European banks have launched such gen AI task forces, with the idea they could potentially expand into full-fledged centers of excellence (CoE). In highly regulated industries such as healthcare and financial services, creating new, centralized gen AI teams also appears to be the best practice. Using this approach, these companies launched several gen AI projects within weeks instead of months.

Either model can be successful, but both have pitfalls companies should be careful to avoid. If the gen AI team is decoupled from IT, its road map should still be aligned with the broader IT organization to avoid duplicating efforts or building disconnected gen AI components in multiple places. The capability map and ownership of each component should be clearly defined and shared across the organization. For example, the gen AI task force could oversee prompt engineering and guardrails, LLM operations and orchestration, and model improvement—but not data ingestion, management, and storage.

However, if the gen AI team expands as an offshoot of existing IT and data functions, the team will need to successfully manage two starkly different technology life cycles. Specific gen AI components, such as LLM hosting and model hubs, will need to be developed and put into production more rapidly than traditional IT and data components, such as hosting and containers.

Whether a company chooses an extended or distinct gen AI team, it is important for a central IT team to define a common underlying technology infrastructure that ties all gen AI tools together. Avoiding this step could lead to compliance issues or technical debt —the extra work required to fix buggy products that were initially built for speed rather than quality.

Prioritize data management in strategic business domains

As every data leader knows, effective data management is a pivotal factor in implementing gen AI. Without a functional data organization, gen AI applications will not be able to retrieve and process the right information they need. Yet most enterprises report significant hurdles in data utilization, including issues with model reusability, accessibility, scalability, and quality. That is why a data management and governance strategy should be part of any operating model for gen AI. Governance includes managing document sourcing, preparation, curation, and tagging, as well as ensuring data quality and compliance, for both structured and unstructured data.

Managing vast amounts of unstructured data, which comprise more than 80 percent of companies’ overall data, may seem like a daunting task. 4 Tam Harbert, “Tapping the power of unstructured data,” MIT Sloan School of Management, February 1, 2021. Indeed, 60 percent of gen AI high performers and 80 percent of other companies struggle to define a comprehensive strategy for organizing their unstructured data. 5 “ The state of AI in early 2024: Gen AI adoption spikes and starts to generate value ,” McKinsey, May 30, 2024. To address this challenge, organizations can prioritize specific domains and subdomains of unstructured data based on business priorities. For example, one company may prioritize a data domain that groups all gen AI products under development into one business unit, whereas another may prioritize a domain that groups all data related to a specific function, such as finance or HR. The ideal domains and subdomains should be small enough to be actionable while being sufficiently large enough to provide a significant, measurable outcome.

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Since handling unstructured data can be unfamiliar to many data teams, the process should be launched by experts in a centralized manner. These experts are typically data engineers trained to handle unstructured data, as well as natural-language-processing engineers, grouped into a CoE. They establish and implement processes for managing unstructured data so it is accessible to gen AI systems. They ensure policies in the company’s gen AI operating model provide a view on when and where data is consumed. They also ensure consistent standards for data quality, risk management, and compliance.

However, once the CoE provides a deployment road map, domain experts with business oversight should take over the data management process. They are better equipped to extract knowledge from specific records in their field than data professionals alone. As business units begin to provide more higher-quality data for a wider variety of use cases, the centralized data teams tend to become overwhelmed by the demand and lack the expertise to check the quality, veracity, and tagging of domain-specific documents.

Plan for a decentralized approach to gen AI development

As domain teams become more adept at managing data, companies may choose to progressively increase these teams’ ownership of gen AI development—moving from a centralized model to a federated one and finally to a decentralized one (Exhibit 2). Forward-thinking data executives may want to ensure their gen AI operating road maps include future scenarios of decentralized development. There are three approaches to consider.

Centralized gen AI

Some companies choose to centralize gen AI into their own domains. This allows organizations to build capabilities quickly and control costs. A leading global telco used this model, making gen AI a node to its business units, operating under the leadership of a chief data and AI officer. The company was able to quickly set up a knowledgeable gen AI team by pulling existing employees into a central unit. This approach kept development costs low and reduced the risk of multiple teams creating similar projects.

Federated gen AI

As companies build gen AI expertise, they often choose a federated model, in which business units are not only responsible for consuming data related to their domains but also take over data processing and repositories. This model allows domains to integrate gen AI more deeply into their daily workflows for stronger business outcomes.

A major North American investment bank chose the federated model to develop new gen AI use cases within a business unit. The gen AI use cases were so successful that the company later provided funding to scale similar gen AI tools across the organization. This lighthouse project model, in which an innovative project is developed within a business unit and then extended throughout the organization, can be a successful way to boost gen AI deployment without project duplication.

Decentralized gen AI

Some innovative organizations push decentralization even further, transferring all gen AI capabilities to domains. In this model, each domain creates its own gen AI team composed of business, data, and technical experts aligned on a common goal to develop relevant gen AI applications. A decentralized model of gen AI development allows domains to create gen AI agents tailored specifically to their needs, which they can then offer to other domains. For example, a marketing domain that creates agents for social media content creation and post management could then see those agents adopted by many other domains, such as business development, sales, and customer success. With this approach, it is important for a centralized IT team to retain visibility into the tools being developed to avoid blind spots and ensure no two teams develop similar gen AI tools.

Unify federated teams through common infrastructure

While business units know which everyday problems they need to solve with gen AI and are thus well placed to build specific use cases within their own domains, this decentralized development process should never compromise the company’s overall security or resiliency. Instead, companies should ensure IT teams build and manage an underlying common infrastructure on top of which all gen AI tools are developed and deployed. The IT team should also be responsible for building repeatable platforms that can be used by all the business units, such as a prompt library, a repository for Python code, standard agents, and systemized cloud storage. This type of centralized IT management empowers business units to create new gen AI tools, while ensuring all use cases they develop adhere to a highly secure and unified technology framework.

Emphasize risk and compliance governance

Gen AI comes with heightened risks, including potential hallucinations, misinformation, and data leaks. That is why every gen AI operating model should include explicit stipulations for risk and compliance governance . Companies can start by delineating the levels of risk they are willing to tolerate with gen AI and which areas of the business require more safeguards. This initial risk assessment evaluates the diverse ways a gen AI application could affect the company, customers, and partners. When this risk assessment is complete, companies can create a governance and monitoring plan, which should also define any new quantitative and qualitative tests that need to be conducted. By mitigating risks, companies can move forward with gen AI rollouts instead of taking a wait-and-see approach that could hamper competitiveness.

In practical terms, creating a gen AI risk plan involves a six-step process that data leaders must continually monitor and update as new potential risks arise and when new tools are deployed.

• Identify new risks: Ask developers and technology users to identify potential AI-specific threats to add to the company’s overall risk plan.
• Classify gen AI tools: Encourage data teams to collaborate with the risk function to apply oversight to the most critical gen AI tools first.
• Deploy a tiered approach: Adjust the depth and frequency of derisking methods for each gen AI tool based on continual risk assessments.
• Make risk tracking habitual: Begin oversight at the development stage, continuing to measure risks throughout implementation and production.
• Equip risk teams for success: Establish a CoE with developers and risk leaders to ensure the risk team keeps pace with evolving gen AI trends.
• Get everyone on board: Ensure end users, developers, managers, and leaders all understand the company’s policies for safe gen AI use.

By following the above guidelines, data leaders can establish a risk structure that balances oversight with the ability to support rapid decision making and agile gen AI deployments. A strong AI governance plan also helps companies keep pace with constantly shifting AI regulations. For example, the EU Artificial Intelligence Act emphasizes the need for transparency, requiring organizations to notify users about AI risks, ensure model output quality, and conduct regular compliance assessments. Legislation in many countries requires companies to meet privacy standards that can affect how gen AI tools are permitted to consume data. Any gen AI governance model must be flexible enough to take relevant regulations and updates into account.

As gen AI moves from experimentation to implementation, companies must create both operating and technical models  to successfully guide deployments across their organizations. Data sits at the center of these models. Companies must organize all their data so gen AI applications can securely access it at scale. From an operational standpoint, data leaders should coordinate gen AI rollouts as genuine digital transformations, applying best practices to ensure clear governance, objectives and key results, and progress monitoring.

With such a coordinated plan, companies can quickly launch gen AI use cases from a centralized CoE. They can also prepare themselves for a longer-term evolution to a decentralized development approach supported by common technology infrastructure, which can power the agile gen AI deployments companies need to compete in today’s fast-paced AI economy.

Alex Singla is a senior partner in McKinsey’s Chicago office; Asin Tavakoli is a partner in the Düsseldorf office, where Holger Harreis is a senior partner; Kayvaun Rowshankish is a senior partner in the New York office; Klemens Hjartar is a senior partner in the Copenhagen office; and Gaspard Fouilland and Olivier Fournier are consultants in the Paris office.

The authors wish to thank Jean-Baptiste Dubois, Jon Boorstein, and Pedro J. Silva for their contributions to this article.

This article was edited by Kristi Essick, an executive editor in the Bay Area office.

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