mckinsey profile up1 1201

FOR INTERNAL USE ONLY

MCKINSEY & COMPANY

COMPETITIVE VENDOR PROFILE

Prepared for

IBM CORPORATION

AMERICAS MARKET INTELLIGENCE

WHITE PLAINS, NY

Prepared by

Renaissance Group International, Inc. 495 Wheeler Road Ashby, MA 01431

(978) 386-5858

June 5, 2001


Renaissance Group International, Inc. (RGI), 495 Wheeler Road, Ashby, MA 01431 978-386-5858

TABLE OF CONTENTS

Page

UPDATE HISTORY 1

EXECUTIVE SUMMARY 2

BUSINESS STRATEGY 8

A. Research and Development 11

PRODUCT STRATEGY 15

A. Corporate Finance and Strategy 16 B. Global New Economy 17 C. Growth and Business Building 18 D. Innovation and Technology Management 18 E. Marketing 19 F. Operational Effectiveness 31 G. Organization 32 H. Strategy 33 I. @McKinsey 34 MARKET STRATEGY 41 A. Customers and Company Size 41 B. Account Marketing Approach 46 C. Competition ORGANIZATION STRUCTURE 50

A. Services Delivery Organization 51

ALLIANCES/JOINT VENTURES/PARTNERSHIPS 65

A. Acquisitions 65 B. Alliances 66 FINANCIALS 68 A. International Operations 68 CORPORATE STRENGTHS AND WEAKNESSES 71 INDUSTRY FOCUS 72



TABLE OF CONTENTS (CONT.) A. Auto and Assembly 73 B. Banking and Securities 75 C. Chemicals 76 D. Consumer/Packaged Goods 76 E. Electric Power and Natural Gas 77 F. High Tech 77 G. Insurance 78 H. Media and Entertainment 78 I. Metals and Mining 79 J. Nonprofit 79 K. Payor/Provider 79 L. Petroleum 80 M. Pharmaceuticals and Medical Products 81 N. Pulp and Paper 82 O. Retail 82 P. Telecommunications 84 Q. Transportation 85



CHARTS

Page

MCKINSEY & COMPANY GUIDING PRINCIPLES 8

TOP MANAGEMENT CONSULTING FIRMS WORLDWIDE 47

MCKINSEY & COMPANY ORGANIZATIONAL STRUCTURE 50

MCKINSEY & COMPANY HEADCOUNT 53

MCKINSEY & COMPANY CONSULTANTS BY SELECTED U.S. OFFICES 54

MCKINSEY & COMPANY REVENUE 68

MCKINSEY & COMPANY OFFICE LOCATIONS 69

GEOGRAPHIC DISTRIBUTION OF MCKINSEY & COMPANY 70

CONSULTANTS

McKINSEY & COMPANY: UPDATE REPORT (12/19/2001) PAGE 1

Prepared by RGI and by IBM Americas Market Intelligence



McKINSEY & COMPANY UPDATE

Intent

IBM Americas Market Intelligence commissions Marketing Strategy Reports on an annualbasis. It commissions Update Reports on most companies to be completed when the originalreports are six months old. These reports are to summarize briefly significant recent events thatalter or augment information contained in the main section of the original report.

This report updates the McKinsey & Company Marketing Strategy Report completed in May2001 by Renaissance Group International, Inc. (RGI) of Ashby, Massachusetts. Individualsrequiring specific or related information are encouraged to contact Pat Schuett-Luccarelli [email protected] or to contact RGI directly at 978-386-5858.

Overview

McKinsey & Company prides itself on client confidentiality and, therefore, does not issuepress releases on a consistent basis. In turn, helping to promote itself, the company posts recentarticles, as well as the McKinsey Quarterly, which focus on current topical interests. As such, thisupdate provides summarizations as follows. These topics suggest the technology skills andbusiness practices strategic to the companys current interests.

A September 2001 article in The Financial Times says that, according to a reportpublished by the McKinsey Global Institute, New Delhi economists generally attributeIndias poor performance to its high rate of illiteracy and abysmal infrastructure. Thearticle goes on to claim that the country easily could achieve double-digit annualeconomic growth rates without tackling either of these problems. By taking threesteps -- removing distortions to the countrys property markets, privatizinggovernment assets, and clearing the thicket of barriers that stifle investment inproduct development -- India could add 4 percentage points a year to its currentgrowth rate of 6%. The report says that as many as 90% of Indias land titles areunder legal dispute in one form or another. This uncertainty, which Indias courts saywould take more than a century to resolve at their current rate of progress, hindersthe incentive for land developers to invest in retail or housing. As a result, India hasthe highest property prices in Asia relative to income. The report goes on torecommend that Indias state governments replace the high 8% to 10% stamp dutieson title transfer with more equitable system of property tax. It also recommendssetting up a judicial agency, along the lines of Germanys Treuhand, which was setup to resolve ownership disputes in the former east Germany, to cut through Indiasred tape.

The following outlines articles from the McKinsey Quarterly.





Revving up auto branding -- This article states that US car companies spend upwardof $40B a year on marketing, more than any other US industry. However, thecombined market share of the Big Three continues to slide. The authors go on toquestion the reason for this discrepancy, placing the blame on a loss of brandidentity. As cars become more alike, car manufacturers often have made price themain reason for choosing one brand over another. This is a classic trap of acommoditizing industry, and it destroys healthy profit margins. McKinsey questionswhat to do. Car companies must abandon their emphasis on rebates and incentives,instead putting their marketing budgets behind the holistic management of everyconsumer touch point, from product design through after-sales service.

Vaccines where theyre needed -- In this article, McKinsey finds that people in thedeveloping world often go without the vaccines they need. Vaccines for the diseasesthat afflict it are too expensive for countries with annual health care spending of lessthan $10 a head. Moreover, the development of vaccines for these diseases isusually a risky and unprofitable enterprise for pharmaceuticals companies. Inconclusion, by assuming some of the risks borne by the makers of vaccines,governments and international organizations could reduce the cost of bringing themto market.

What happened to the bull market? -- McKinsey states that by the time NASDAQreached its peak in the recent bull market, many financial commentators had begunto accept the idea that the traditional triumvirate of earnings growth, inflation, andinterest rates no longer drive stock market valuations. Instead, these commentatorssuggested that new factors, such as structural changes in the economy, new rules ofeconomics, and the value of intangible assets and brands, now underpin stockprices. In the article, McKinsey asks if they were right. Using a simple model basedon changes in earnings, inflation, and interest rates, the authors found that traditionalfactors alone explain most of the medium, as well as long-term, movement of theS&P index of 500 stocks. They uncovered scant evidence that the market haschanged the considerations it factors into stock prices.

Unbundling the unbundled -- This article states that monolithic and verticallyintegrated companies once dominated the utility business. More recently, verticaldisaggregation, such as the breakup of the electricity provision business intoseparate generation, transmission, and distribution businesses, sparked efficiencyimprovements in utilities. McKinsey goes on to say that a second wave ofdisaggregation is emerging. This one involves the horizontal unbundling of coreactivities, including ownership, management, and service delivery within assets thathad been disaggregated vertically in the first wave. McKinsey finds that sooner orlater, traditional, capital-intensive service businesses such as utilities will have todecide what they want to be -- asset owners, managers, or service providers. Therewards for the best in each class could be large. Yet, for the "also-rans," the futurelooks bleak.

Making the most of uncertainty -- McKinsey questions whether companies shouldshape or adapt when faced with uncertainty. For years, executives have regardedthe question as perhaps their most fundamental strategic choice. The article asks if itis better to try to influence, or even determine, the outcome of crucial elements of anindustry's structure and conduct, or whether it is wiser to scope out defensible





positions. As globalization, digitization, and unfettered capital markets raise levels ofuncertainty and rewrite definitions of opportunities and risks, this basic strategicchoice has morphed into a more complex high-stakes problem. In conclusion, thearticle finds that there does not appear to be a one-size-fits-all answer for allcompanies in all situations. However, by more thoroughly contemplating the leveland nature of the residual uncertainty facing decision makers, strategists can definefeasible alternatives and make better-informed choices to shape or adapt.

Brains abroad -- This article states that foreign-born workers now make up 20% of allemployees in the US information technology sector. This appears to be a boon forthe US as the global war for talent heats up, but also a hardship for poor countries,from which many of these workers emigrated. The talent drain could have lastingeconomic repercussions for the developing world, depriving it not only of the skills ofthese workers but also of their influence on the productivity of others. It goes on tosay that for most countries, tackling the fundamental cause of the talent drain willtake years. This instills a requirement for a comprehensive economic reform toreplace the mixture of regulatory and fiscal incentives that emerging marketsgenerally have offered to lure emigrants back home. Meanwhile, a strategy thatencourages the participation of emigrants in the economic development of their homecountries can mitigate the effects on people seeking employment in the US.

Chips off a new block -- This article questions if the market could get any worse forsemiconductor makers. Market prices for their chips have fallen steadily, even as thecost of building a new fabrication facility to produce increasingly complex productshas soared to $2B or more. The industry faces its biggest challenge yet in the formof a new generation of plastic-based semiconductors. McKinsey states thatcommodity chip makers, such as Hitachi, Rohm, and Toshiba, may suffer as the newtechnology takes hold, and so will manufacturers of chip making equipment, such asApplied Materials. Likely beneficiaries include plastics and chemical companies,such as Dow and DuPont, as well as printer manufacturers such as Canon andHewlett-Packard.

Thailands chance for no-pain gain -- A McKinsey Global Institute study finds thatimproved productivity in Thailand's key industries could lead to faster economicgrowth. It also states that most of the needed policy reforms do not require additionalgovernment spending or industry subsidies. The MGI research, analyzing andbenchmarking company- and industry-level productivity against global best practices,focused on seven important sectors. As a remedy, removing regulatory barriers tohigher productivity, with a careful view to their economic and social implications, canspur growth in the gross domestic product of Thailand. This would bring tremendousbenefits to its people. Should the opportunity be missed, the country, like Japansince the early 1990s, might lapse into a prolonged period of stagnation.

Internet services: whos smiling now? -- McKinsey states that Internet traffic has beenslowing. A joint study by McKinsey and J. P. Morgan suggests that in the US, it willgrow at a compound annual rate of just 88% through 2005, far below the industry'sprevious performance. The article goes on to say that this appears to be bad newsfor the many new companies that gambled on reaching profitable scale on the backof continued explosive growth in Internet traffic. Overall, the shifting mix and generalslowing of US Internet traffic will put traditional players, such as AT&T, IBM, and





EDS, in the lead. This will leave upstarts that lack the scale and expertise to meetthe demand of large enterprises for help in managing streaming media and theapplications now moving onto the Internet.

MCKINSEY & COMPANY.: COMPETITIVE VENDOR PROFILE PAGE 1




Update History

IBM Americas Market Intelligence has been preparing competitive vendor profiles with theassistance of independent consulting companies since 1987. All reports follow the samestandard outline; however, the level of depth and topics covered vary depending on the marketsserved by the profiled company. Market Intelligence, through an assigned point of contact, workswith the independent research company during the research phase of the report.

Market Intelligence intends that the report provide a general overview of the vendorsmarketing and selling strategies, with sufficient detail to cover company policy and modes ofoperation. Individuals requiring specific or related information are encouraged to contact PatSchuett-Luccarelli on 8-224-4064 or [email protected].

The following report on McKinsey & Company has been prepared by IBM Americas MarketIntelligence and by Renaissance Group International, Inc. (RGI) of 495 Wheeler Road, Ashby,Massachusetts (978) 386-5858.





Executive Summary

McKinsey & Company is a privately owned, management consulting firm traditionally servingmajor companies and organizations that are typically leaders in their segments. While currentlyserving the market leaders in virtually all industries, McKinsey also helps startups to rapidlylaunch and grow their operations. The company focuses on issues of importance to seniormanagement that relate to key areas of strategy development, organizational design, technologyand operational improvements. McKinsey provides services to companies in most industrialnations and emerging markets, reaching across a wide range of functional areas and industries.The client base includes a variety of industries such as automotive, banking, chemicals,consumer goods, high technology, media, telecommunications, pharmaceuticals, energy,retailing, and insurance.

Founded in 1926 by James O. McKinsey, McKinsey & Company provided a new approach tomanagement consulting that differed from the management engineering practices at the time.The company based its practices on two major ideas:

Client Service -- serving senior management on issues of importance to them andtheir enterprises, and

Professionalism -- defined as "putting the interests of clients first and maintaining theknowledge and skills necessary to serve these clients."

McKinsey, which has grown to a $3.4B firm based on FY00 revenue, continues toconcentrate on solving challenging and complex problems that are of major concern for topexecutives at businesses and institutions. The company claims to accept a project only ifMcKinsey believes that opportunities for improvement exist and that the proposed solutions canbe implemented. The company draws on its worldwide consultant staff with expertise in severalindustries and functional areas to develop practical answers based on analysis and experience.McKinsey continues to strengthen its electronic commerce practice, called @McKinsey, helpinglarge corporate and startup clients to create sustainable, high growth e-businesses.

As a major management consulting firm, McKinsey & Company continues to exhibit many ofthe same strengths that has made the firm one of the leaders in its field. In addition, the firm hasreacted to changing conditions to position itself for future growth, as follows:

Strong reputation

McKinsey continues to maintain its reputation as one of the top managementconsulting firms specializing in strategic corporate issues. The McKinsey name isrecognized and respected among senior management worldwide. The companypoints to repeat business as a measure of its success in serving clients and providingthese clients with measurable value several times the fees charged by the firm. Inaddition, the company has an impressive network of alumni who have left McKinseyand now serve as CEOs and top executives of major companies. McKinsey can





draw on this network of alumni to secure future projects. The company's reputationhelps in the company's recruitment efforts for new talent.

Strong base values

McKinsey consultants help clients make lasting, substantial improvement in theirperformance. The company claims it will not conduct work for a client if it cannotprovide significant value to that customer, accepting only those projects the companyis qualified to perform. The company has set forth a series of aspirations and guidingprinciples to direct their activities and preserve professionalism in their work. Inconducting their projects, McKinsey consultants must place client interests first,observe high ethical standards, preserve client confidences, and maintainindependence and objectivity. In addition, the company's consultants must work tomaintain and develop the knowledge and skills required to serve its clients. While thefirm continues to maintain its general policy of not revealing client or partner names,McKinsey has relaxed the requirement in its electronic commerce practice where thecompany must point to successes to attract new business and talented employees.

Global firm

McKinsey promotes a "one-firm" image of the company, employing a worldwide staffof consultants who promote the same professional values, mission, standard of clientservice, and willingness to collaborate. The company, which believes one of itsgreatest advantages is its scale and global experience, operates practices in 17industries and across 9 functional areas. The company conducts projects throughteams that are grouped from the global base of consultants as opposed togeographic location, assuring functional and industry expertise. The companyoperates over 80 offices worldwide, expanding into new areas through its ownconsultant activity as opposed to acquisitions of local consulting operations. Thispolicy serves to maintain the one-firm image.

Continued emphasis on professional development

McKinsey places significant importance on its employees' professional developmentand growth, offering both formal and on-the-job training to enable its employees todevelop a common understanding of approaching problem solving and sharing ideaswith colleagues worldwide. The company assigns associates to projects based ontraining requirements relating to skills, industry knowledge, clients, and types ofbusiness problems. This approach helps to ensure a broad exposure to issues andthe development of a general background. As consultants progress in their career,the company shifts the focus of additional training to client leadership, negotiatingskills, and client-relationship building. The company also requires that consultantsattend training related to their particular industry or functional specialty, referred to asPractice Learning, to ensure they remain current on industry developments and newproblem solving approaches. The company looks to its team approach to provide





mentoring and coaching for its consultants and as a mechanism for consultants toshare their knowledge. McKinsey measures its associates on this criterion as animportant component in evaluating their performance for promotion to partner. Tofurther its staff's training in technology, professionals within the company's BusinessTechnology Offices must attend a one-week course developed and delivered inconjunction with professors at MIT.

Strengthened electronic commerce practice

McKinsey's electronic commerce business, called @McKinsey, has grown over thelast few years, to help create sustainable, high-growth e-businesses. McKinseypositions its value as combining leading-edge knowledge of new business models,with expertise in specific industries and global markets to ensure the firm's ability toidentify and capture the full economic potential. The @McKinsey practice helpsclients accelerate speed to market, establish and test the viability of new businessmodels, enable large-scale marketing of products and services, and develop newbusiness ideas that build on existing skills, assets and relationships. @McKinsey,positioned as the fastest growing practice in the company, meets the requirements ofemerging Internet businesses by offering a range of services in three areas:improving online performance, understanding consumer behavior, and developingcustomer relationships. McKinsey now claims that approximately 40% of the firm'srevenue has an associated e-commerce component, serving both startup venturesand established large corporate clients. The firm differentiates its electroniccommerce business from its competitors as providing expertise in global industries,utilizing an extensive network of business partners with strong ties to the startup andventure capital communities, and offering a capability to re-integrate e-businessesinto their parent companies after launch.

Rise of accelerator offices

In an effort to shed the firm's "deliberate pace" image to support the fast-pacedimage of companies competing in the Internet economy, @McKinsey has establisheda network of "Accelerator" offices. These business development centers providehands-on Internet business-building services for clients worldwide, addressing thedevelopment phases of launch, growth, and expansion of e-businesses. Thesecenters, which combine the expertise of McKinsey professionals and an extensivethird party network of "best in class" service providers and technology vendors, helpbusinesses launch and integrate an online business in three to nine months.Accelerators operate either in an existing McKinsey office or in a stand-alone facilitywhere startups and established companies can work with @McKinsey consultants.Accelerators offer focused, rapid problem solving at critical junctures and cancomplete some engagements in as little as two weeks.

Acceptance of equity stakes in clients





To further its ability to win high-growth, startup clients, McKinsey has instituted astrategy to accept equity stakes in these companies in exchange for services. Whilethe company claims to prefer cash payments, McKinsey realized that a segment ofthese companies could not hire the firm under the previous fee structure. Byaccepting equity stakes, the company has broadened its target market of clients.

Relaxed up-or-out policy

To compete more effectively for new employees and retain current employees,McKinsey now follows a more relaxed "up-or-out" policy. The company recognizesthat the partnership path does not appeal to some qualified candidates, especially inthe IT arena. While the company continues to offer a well-defined development path,McKinsey now allows consultants to take as few as three years or as many as tenyears or more to achieve the partnership level. This policy provides consultants withtime to pursue graduate degrees or to have children. The company does not imposestrict tenure-based requirements for advancement. McKinsey has established anAssociate Partner level in which promising consultants can share in theresponsibilities and monetary rewards of partnership prior to attaining partnership. Inaddition, the firm now allows associates more say in choosing assignments. In early2000, McKinsey implemented VOX (Visibility, Options, Expression of preference), afirm-wide system that further extends the influence that consultants have over whatthey do in the firm. By providing each consultant with a global view of prospectiveengagements, including pro bono projects, knowledge building, and other initiatives,individual consultants can voice their interests and preferences.

Increased flexibility in corporate policies

While continuing to follow its basic principles and maintains its core values, the firmhas demonstrated flexibility in relaxing some of its corporate policies to competemore effectively in the current economy. As already noted, the firm has relaxed its"up-or-out" hiring policy, providing its consultants with more say in choosing projects,and now has accepted equity for payment of the firm's fees. In addition, McKinseyacquired a Chicago-based branding practice, which is contrary to the firm's policy ofgrowing practices from within. These policy shifts point to the firm's ability to adapt tothe changing environment.

Despite these strengths, McKinsey & Company demonstrates some weaknesses and facessome risks, as follows:

Tight recruiting market

McKinsey must compete with other management consulting and investment bankingfirms, and other businesses across a diverse array of industries for quality new hiresfrom top business schools. Overall demand for top business students, as well asstudents in information technology, remains high. To compensate, McKinsey





continues to expand its new hire process to include a greater variety of disciplines toavoid going deeper into the MBA class. Half of the company's new consultants comedirectly from industry or with graduate degrees other than MBAs. In addition, thecompany now hires employees with established careers in specialized areas ofinterest to McKinsey including electronic commerce, brand management, corporatefinance, information technology, law, and medicine. Over the last few years,McKinsey has taken steps to make the firm's pay structure more competitive withstartup companies that can offer stock options. To attract and retain top IT talent,McKinsey has taken minority stakes in more than 100 technology startups.Furthermore, McKinsey has established an Investment Office as a mechanism for itspartners and associates to tap into the Internet and other startup money. TheInvestment Office, which is run independently of the firm's consulting services,invests pooled monies into venture capital funds, leveraged buyout funds, hedgefunds, and index funds managed by independent managers.

Employee turnover

McKinsey has seen its employee turnover rate drop from a high of 20 to 21% overthe last two years, to a low of under 12% at the current time. The firm attributes thedecreased turnover rate to the slowdown in the growth of dot.com businesses.During the last few years, employees were more likely to leave the company morequickly for greater equity positions in new dot.coms as well as e-commerce positionsat established vendors. The firm views 17% as the equilibrium figure, providing theright balance of employees leaving either because they are not McKinsey material orto pursue careers in startups or at clients.

Compromising principle concerning independence

By accepting minority equity stakes in clients, McKinsey risks compromising its long-established reputation for complete independence from its clients. The firm mustcarefully balance its stake in these companies against its perceived objectivity inclient projects. In an effort to minimize potential conflict, in many cases McKinseykeeps its partners shares in a blind trust so partners typically do not know if thecompany holds shares in a particular client.

Competitive market

The consulting market has become increasingly competitive as smaller, moreentrepreneurial companies continue to enter the management consulting marketserving niche segments. These new consulting firms provide e-business services aswell as broader strategy offerings. In addition, the Big Five accounting firmscontinue to build their consulting divisions that have expanded into management andtechnology consulting. Furthermore, technology consulting has increased withsystems vendors housing their own consulting divisions to meet customerrequirements in this area and firms offering online consulting services. In addition to





competition for clients, the company competes against these services firms andInternet businesses for talented employees.

McKinsey has established itself as a leading management consulting firm focused on servingmajor Fortune 500 companies; education, financial and government institutions; medium-sizedbusinesses; and entrepreneurial companies. The firm continues to strengthen its electroniccommerce business to broaden its offerings in the Internet economy and to attract moreentrepreneurial clients. Across all of its practices, McKinsey's strategy remains to help clientsimprove performance and profitability. The company continues to compete on the basis of itsstaff of partners and consultants providing services across a range of industries and functionalareas, addressing issues concerning strategy, organization, operations and technology ofconcern to top executives. To continue to succeed in its various markets, McKinsey mustpersevere in its efforts to attract and retain top talent for the company and further develop itsimage as a force in the Internet economy. In an effort to compete in the new Internet economy,McKinsey has relaxed some of its more rigid policies, helping the company to win high-growthclients.





Business Strategy

McKinsey & Company is an international management consulting firm that advisescompanies on strategic, operational, organizational, and technological issues. McKinsey'smission is to help the companys "clients make distinctive, lasting, and substantial improvementsin their performance and to build a great firm that is able to attract, develop, excite, and retainexceptional people." The firm serves senior management on issues critical to them and theirenterprises, seeking to exceed client expectations and provide high levels of "client impact." Inaddition, McKinsey's strategy encompasses recruiting and retaining talent in sufficient numbers toenable the company to serve its clients properly.

McKinsey defines a set of aspirations and guiding principles to direct its activities, as shownin the chart below. McKinsey instills these principles in its employees with new consultantsobserving the actions of more senior employees. The company's aspirations and guidingprinciples remained essentially unchanged over the last year. The firm positions itself as avalues-driven organization, committed to "people over profit" and "impact over fees." In additionthe company operates as a meritocracy, offering a single worldwide standard for its people,service, and professional integrity.

McKinsey & Company Guiding Principles

Aspirations Guiding Principles

To serve the company'sclients as primarycounselors on overallperformance

Adhere to the highest professional standards

Follow top management approach

Play an integrative role in problem solving,implementation, and capability building

Build enduring, trust-based relationships Strive for superior quality and distinctive impact

Deliver the best of the firmto every client

Serve all clients as "firm" clients by leveraging thecompany's scale and global network

Develop and disseminate state-of-the-art managementpractices

Manage client and firm resources in a cost-effectivemanner

Create an unrivaledenvironment for superiortalent

Develop and excite McKinsey people through activeapprenticeship and stretching, entrepreneurialopportunities

Foster an inclusive and non-hierarchical workingatmosphere

Uphold the obligation to dissent Respect the individual's responsibility for balancing

personal and professional life





Demonstrate care and concern for every individual

Govern themselves througha values-driven partnership

Live by the principles of participative partnership throughinvolvement, collaboration and trust

Benefit from individual freedom and assume theobligations of mutual accountability and self governance

Maintain a meritocracy Operate as one firm

Source: McKinsey & Company, May 2001

Marvin Bower, the successor to founder James McKinsey as Managing Partner, instilled therequirement that the company's management consultants be professionals. McKinseyconsultants continue to adhere to the following standards:

Place client interests first, believing that over the long term, the company can onlyprosper if it provides services of real value to clients;

Observe high ethical standards, treating clients with integrity and trust;

Preserve the confidences of clients and their personnel to generate a long-termrelationship;

Accept only those assignments that the company is fully qualified to perform; and

Maintain independence and objectivity, even if it means declining or withdrawing froman assignment. The company believes it must take positions that are in the client'sbest interests even if it adversely impacts McKinsey. The company claims it will notwithhold "unwelcome facts, conclusions, or recommendations" to preserve arelationship or "protect personal positions."

In order to have an impact on clients, McKinsey believes its consultants must earn the trust ofclients and colleagues through an understanding of the following:

Authority based in ideas, not hierarchy; Persuasiveness, not power; and Empathy, not detachment.

The company further believes that its people represent the primary factor in the firm's abilityto serve its clients successfully. The firm's strategy incorporates the attraction, development, andretention of "excellent" people. McKinsey's strategy continues to rely on a "one-firm" concept,employing a worldwide staff of consultants that supports the same professional values, mission,standards of client service, and willingness to collaborate. In addition, consultants have acommon understanding of how to approach problem solving and share their ideas withcolleagues worldwide. The company relies on a collaborative team approach across all of itsoffices, respecting local culture and organizations.





Across all of its practices, the company's strategy is to help clients improve skills,performance, and profitability. The company utilizes a top management focus stressing anobjective, collaborative approach while viewing problems from the integrated, cross-functionalpoint of view of chief executive officers and presidents. McKinsey consultants apply functionaland industry expertise to proven analytical frameworks for its projects, using a facts-basedapproach to conduct analyses based on quantitative/logical foundations. The firm provides anobjective, third-party perspective to arrive at an actionable conclusion, recommending actionablesolutions that have a positive, lasting impact on the client's business.

Specifically, McKinsey consultants implement their business strategy through the followingsteps:

Develop winning strategies for the client in such areas as:

New products and services; Market entry strategies; Restructuring; Sales and distribution; Strategic alliances; Technology; and Electronic commerce.

Anticipating and responding quickly to business challenges such as:

Regulatory threats; Increased competition; Excess capacity; and Cost pressures.

Building superior organizational capabilities by reviewing strategies, styles, skills,values, systems and staff; and

Increasing operational effectiveness and productivity considering cost, quality, andtimeliness.

Across all of its services, the company believes it must add value for the client. The companyaccomplishes this through the following techniques:

Provide objective, fact-based analysis and advice; Utilize state-of-the-art processes on critical management issues; Contribute expertise spanning industries and functional areas; Offer creative, yet pragmatic, solutions for clients; and Provide effective support during solution implementation.

McKinsey has traditionally accepted assignments only if the company believes it will havelasting positive impact for the client, defined as an increase in shareholder value. The company'sstrategy is to assist clients in ways that surpass the client's expectation and to strive for higher





levels of client impact. The company positions its work as supplementing the client's leadership,not replacing it. McKinsey will accept a client if it meets the following conditions:

The problem or opportunity is big enough to justify and demand seniormanagement's attention;

The client is open to new and broader perspectives; and

The client will take action and implement changes.

McKinsey permits client organizations to stop a study at any time during the process if theclient feels the project is not benefiting them. The company believes its strategy has beensuccessful, pointing to repeat business from clients looking to McKinsey to conduct new projects.

Over the last few years, the firm has tried to re-position itself to address the requirements ofthe Internet economy. While McKinsey adheres to its aspiration and guiding principals, the firm'sManaging Director, Rajat Gupta, believes McKinsey has to adapt its approach to analysis,focusing on using the Web. Mr. Gupta has stated that the firm is currently evolving itsapproaches.

The company has recently strengthened its electronic commerce services, creating the@McKinsey practice. Approximately 40% of McKinsey's current revenue is gained from e-commerce and technology-based business, either for existing clients such as insurancecompanies and banks, or for startups. The company was involved with more than 1,000 e-commerce projects in 2000, a three-fold increase over 1999s level.

In addition, McKinsey has slowly implemented a "consulting-for-equity" structure in anattempt to gain more high-growth companies as clients. As part of its current fee structure, thefirm will accept payment in the form of equity and cash, noting that the company claims to prefercash for its services. McKinsey has taken equity stakes in over 100 companies, ranging fromstartups to spin-offs owned by larger firms. These equity arrangements may be liquidated overtime.

Along with revising the payment structure to include equity stakes, McKinsey has revised itsteam structure to serve these companies. @McKinsey, the firm's e-commerce business,supports these clients in a more flexible manner than McKinsey's traditional practices. The firmhas established Accelerators worldwide to house client projects for a limited time period. Theteams typically work with these clients from idea inception to actual implementation and ongoingexecution.

While McKinsey's reputation has been built on its relationships with some of the world'slargest companies, McKinsey has leveraged its traditional leadership role to become a player inthe new economy. The firm's e-commerce staff has operating experience in more than 100industries, including professionals who have been instrumental in more than 150 startups.

A. Research and Development





The McKinsey Global Institute represents an independent research group within McKinsey.The Institute conducts original research and develops "substantive points of view" on economicissues that the company views as critical for its clients. It continues to help businessesunderstand the evolution of the global economy, improve their performance and competitiveness,and provide a fact base for "sound" public policy-making at the national and international level.

Formed in 1990, the Institute is financed by internal McKinsey investment. The staff consistslargely of McKinsey's consultants plus leading university scholars from schools such as MIT,Princeton, Harvard, and Mannheim University. The research conducted by the facility combineseconomics and management disciplines, relying on the academic views of economics combinedwith the real-world, management issues faced by the company's clients. The company believesthat its research results in views of the global economy that challenge conventional assumptionsof corporate leaders and public policy-makers. Broad research topics for the McKinsey GlobalInstitute include the following:

The relative health of the U.S. economy, assessing whether globalization cancontinue in the face of cultural and political opposition;

Manufacturing and service sector productivity, labor productivity, and capitalproductivity in the developed and developing world; and the

Economic performance of major economies of the world, including, Germany,France, the U.K., Brazil, Korea and Russia.

A recent research project studied the lack of growth in the Japanese economy, looking atstructural barriers at the microeconomic level. The McKinsey Global Institute examined theperformance of four critical sectors in Japan -- retailing, food processing, residential construction,and health care -- comparing their productivity with that of their U.S. and European counterparts.

The company also funds other research projects, which address large issues such as globalcapital markets, forces at work in the international economy, and the future shape of corporations,as follows:

Advanced statistical analysis; Agriculture interest center; Analytic services; Architecture of organizational performance; Business technology; Client capability development; Client communications; Corporations of the future; Electronic commerce; Emerging markets; Environment; Family owned businesses; Foreign affiliated companies; Latin American desk; and





Strategy metrics.

McKinsey uses the results of its research to help position its services to clients. In manycases, the consultants base their findings on a survey of several companies in the same industrysegment or those performing the same function. The company generalizes its findings to assistother companies in similar segments or functional areas.

To promote its knowledge base internally, the companys consultants share their knowledgeby collaborating with other consultants. McKinsey extends its knowledge within the firm throughseveral mechanisms, including the following:

Office transfers;

Practice development meetings;

Project teams, consisting of partners with in-depth knowledge in an industry orfunctional area; and

Investments in information technology and human resources, including researchersand experts to support collaboration in teams.

McKinsey does not create profit centers in functional or industry practices to avoid any policythat may discourage collaboration across specialties. This supports the concept of "one-firm"across all offices and practices. The company believes its knowledge base becomes strongerthrough collaboration between different types of expertise in functions and industries using ateam-based, integrative approach to problem solving. The company also assumes that it is in theinteractions of different types of knowledge that truly creative and valuable insights occur. Inaddition, as client problems become more complex, the company believes that it must rely moreon an understanding of specific industries and functions, while still allowing consultants andpartners to remain generalists. McKinsey claims knowledge per se is of limited value until peopleand consulting skills (not merely processes) combine to make it valuable.

McKinsey points to its commitment to building and sharing knowledge and continues to claimthe following:

McKinsey has written more articles for the Harvard Business Review than all theother major management consulting firms combined;

Each year the McKinsey Quarterly publishes over 50 articles written by the firm'sconsultants;

70% of McKinsey consultants have authored practice documents for the companysinternal database; and

McKinsey consulting teams request 4,800 copies of these documents each week.





The McKinsey Quarterly is a print and online publication that distills current McKinseyresearch and knowledge into focused articles. The firm offers free online access to McKinseyQuarterly articles by registering at the McKinsey Quarterly website. Recent e-business relatedarticles address issues such as B2B marketplace success, e-tailing success, m-commerce,financial services competition on the web, and building digital brands.

McKinsey disseminates information about firm strategy and management through thecompany's Month by Month internal news magazine. The magazine, which the company targetsat its administrative and consulting staff, also includes news about McKinsey offices, practices,and employees. The news magazine features articles about a variety of McKinsey projectsincluding projects that consultants conduct free of charge for educational, cultural, medical andsocial organizations in their communities.

Twice a year, the company includes a collection of new partner profiles written by the firm'snew partners concerning challenges, opportunities, and development at the company. Overall,the company hopes that the magazine supports its consultants as they progress through theircareers at the company.

The company's Silicon Valley Office (SVO) publishes E-Insights, a series of technologybusiness articles that examines the business of technology, ranging from e-commerce to e-healthto wireless communications. The reports cover a broad range of issues, such as transformingwebsite volume into e-business value, multi-channel marketing, the value of intellectual assets,corporate alliances, the "war" for technical talent, and Internet pricing. The company e-mailsissues of E-Insights to top industry executives and influencers on a bimonthly basis. Recentarticles have addressed the value of B2B E-Commerce, the value of intellectual assets, shiftingpower from sellers to buyers, and transforming website volume into e-business value.

The firm's marketing practice also produces a monthly magazine, called Solutions, whichprovides information on marketing issues. The firm's Marketing Practice professionals are at thecore of McKinsey's marketing knowledge development. Using industry relationships, clientengagements, and ongoing research efforts, the firm identifies trends and explores issues thatare of greatest concern to businesses and business leaders. The firm then disseminates itsresearch and ideas through the publication of articles and participation in industry forums,providing thought leadership to the profession and the business community at large. Thecompany also develops white papers providing in-depth information on current marketing issues.

@McKinsey produces two in-house publications -- Velocity I and Velocity II -- addressingissues unique to online ventures and the companies that build and manage them. In Velocity I,@McKinsey experts discuss fundamentals of successful business models in the e-commercearena. Velocity II focuses on issues relating to improving operational performance for e-businesses. Recent articles provide information on retaining e-customers, building mobilecommerce (M-commerce), building online vertical marketplaces, and building a profitable e-business.





Product Strategy

McKinsey offers services across a variety of functional and industry practices. The companydefines a practice as a network of people interested in developing McKinsey's capability in aspecific industry, or in a function or issue of particular interest across industries. McKinsey'sfunctional practices advance the state-of-the-art in addressing problems facing clients, coveringthe following types of issues:

Improving efficiency; Leading organizational change; Strengthening sales force management; Redesigning financial systems; and Shaping new roles for the corporate center.

The firm currently operates more than 70 functional and industry practices that extends thefirm's knowledge and provides support to client service teams. The company's consultants usean integrative perspective when working with its clients, typically using the following approacheson a client project:

Looks across various functions when the focus of the work is in a specific functionalarea, such as marketing, logistics, or product development;

Considers strategic, operational, and organizational issues when the problem oropportunity seems to cross only one of those dimensions;

Incorporates knowledge of other industries and countries;

Assesses options from a senior manager's point of view; and

Thinks across different time horizons including the immediate and longer-termsolutions.

By using this approach, the company must:

Be able to keep senior managers involved and help make difficult tradeoffs anddecisions that cut across functions, regions, and planning horizons;

Provide a sense of organizational readiness for change and recognize how much andwhat kind of capability and discipline will be needed; and

Earn people's trust, but stay independent.

McKinsey's services combine "analysis with action," with the company quickly formulatinghypotheses and then testing the hypotheses through interviews, fact-finding studies, and





economic and organizational modeling. The company also uses prototypes and field tests insome projects.

Despite using standard procedures in some areas, such as sales force deployment, processdiagnosis and design, and capital productivity, the company does not believe that each problemcan be solved in the same way. The company looks across its consulting practices to determinethe appropriate method but avoids an attachment to any single philosophy due to the speed withwhich strategy changes.

McKinsey builds capabilities within its client's organizations and transfers skills to the client inall of its engagements. The company seeks to instill a higher set of performance standards at theclient. McKinsey sees its role of consultant as supplementing the role of managers at its clients,with the clients making tradeoffs and the ultimate decisions resulting from McKinsey's work. Inaddition, McKinsey relies on the client to provide the "best" people to work with McKinsey teamsto involve them in the process and draw on their expertise of the business.

McKinsey currently operates the following functional practices, described below:

Corporate finance and strategy; Global new economy; Growth and business building; Innovation and technology management; Marketing; Operational effectiveness; Organization; Strategy; and Electronic commerce (@McKinsey).

A. Corporate Finance and Strategy

McKinsey established the Corporate Finance and Strategy Practice to support tactical andstrategic initiatives such as corporate valuations, restructuring, and transformations. McKinseybelieves that rapid changes in the global marketplace such as mergers, alliances, and portfoliorestructuring, require increasingly specialized financial and strategic expertise. McKinsey'spractice is comprised of four areas, as follows:

Alliances -- The Alliances group provides independent insight and developmentalexpertise to help clients structure effective deals to stay "relevant and competitive,"including:

Developing strategy; Negotiating and structuring a deal; Managing or restructuring an alliance; and





Developing internal alliance management programs.

Mergers & Acquisitions (M&A)/Change of Ownership -- The M&A/Change ofOwnership group provides seamless, integrated thinking and support along the entireM&A process, including deal strategy, valuation and negotiation support, and pre-merger integration. The company currently focuses on the following areas:

Helping clients with strategy development; Synergy identification; Negotiation strategy and deal structuring; Strategic due diligence and valuation; and Divestitures, pre-merger planning, and post-merger activities.

Principal Investing -- The Principal Investing group provides a value-added role toprincipal investing firms in all stages of an investment's life including sourcing deals,acquiring companies, increasing portfolio value, and monetizing investments. Thefirm serves clients in several areas, including:

Opportunity identification; Strategic due diligence; and Portfolio performance improvement.

Post-Merger Management -- The Post-Merger Management group serves clients bydelivering strategic solutions in a high-pressure, time-sensitive environment andincorporating execution capabilities that ensure value capture that is situation-specific.

B. Global New Economy

McKinsey believes the global new economy requires its clients to become the best in a morefocused set of activities worldwide, as opposed to being good across a broader spectrum ofactivities. The firm believes that to be successful clients must leverage their intangible assetsincluding intellectual property, brands, talent, and networks and reshape industries to theircompetitive advantage.

Within this practice, McKinsey focuses on several issues related to the global new economyincluding:

Strategic control maps; Intangible assets; Global capital markets; Cross-border arbitrage; Global management models; and





Macroeconomic analysis.

The Global New Economy practice positions itself as a source of strategic and functionalinformation, part of a global firm with an international knowledge network.

C. Growth and Business Building

McKinsey's Growth and Business Building Practice specializes in helping client organizationsinitiate and sustain profitable growth through the following activities:

Designing a growth program; Laying the foundation for growth; Developing a growth strategy; Building new businesses; and Organizing for growth.

The practice has conducted over 700 growth engagements across all business sectors overthe last several years, offering experience across these areas. The company has established theMcKinsey Growth Alliance, a network of multiple clients grouped around a common objectivesuch as accelerating growth. In addition, the company holds internal business plan competitionsto identify and nurture new businesses.

D. Innovation and Technology Management

McKinsey's Innovation and Technology Management Practice focuses on helping companiesachieve growth by improving their ability to generate, commercialize, and sustain technology-based innovation. The firm works with clients to help create an innovative context through theappropriate organizational structures and processes.

The practice is comprised of three groups, as follows:

Innovation & Technology-Based Growth -- The Innovation & Technology-BasedGrowth group serves clients by conducting the following:

Raising and focusing innovation aspirations; Generating and evaluating ideas, and achieving regional redevelopment and

growth through innovation; Building innovative new businesses; Commercializing new technologies; Managing an innovation portfolio; and





Creating the context and environment for continuous innovation.

Product Development -- The Product Development group works in the followingareas:

Product line strategy and platforming; Design-to-cost studies; Product development process; Partner integration; and Organization and performance management.

Research & Development (R&D) Strategy & Management -- The R&D Strategy &Management group works with clients to maximize their R&D investment throughSound Strategy and Smart Management, as follows:

Sound Strategy -- McKinsey's practice helps clients provide R&D support ofcorporate and business unit strategies, prioritization issues, and productdevelopment strategies.

Smart Management -- McKinsey addresses management issues including how tomake R&D investments most effective; minimizing the business impact ofreducing R&D activities; drawing on core capabilities; allocating limited budgetand human resources; and recruiting top R&D talent.

E. Marketing

McKinsey's Marketing Practice draws on the firm's global resources to work with clients andbuild substantial, profitable growth through "superior marketing." The firm claims to bring to eachbusiness challenge a combination of highly experienced marketing professionals and state-of-the-art knowledge, both linked to McKinsey's industry and client knowledge.

McKinsey positions its marketing practice as focusing on marketing issues that are of mostrelevance to clients, including issues that reflect real-world concerns of business leaders.McKinsey concentrates on the most critical marketing issues and keeps the firm's knowledge-building at the forefront of marketplace developments. This strategy reflects the scale of thecompany's consulting engagements and its constant interaction with thought leaders frombusiness and academia. The company bases its efforts on a thorough understanding ofcustomers and their needs. The firm's knowledge and ongoing studies across the entirespectrum of marketing issues are supplemented by the broad capabilities of professionalsdedicated to supporting clients through the design, execution, and interpretation of custom marketresearch in B2C and B2B environments.

By combining its knowledge development and experience, McKinsey can provide state-of-the-art, road-tested strategies in a rapidly evolving marketing environment. The firm commits to





providing its clients with a demonstrable impact on performance and reflects the way McKinseymeasures itself. The company believes that its proven ability to fulfill this commitment enhancesits leadership position.

McKinsey builds client solutions on a foundation of in-depth knowledge of both customerneeds and marketing approaches. For each engagement, McKinsey dedicates a professionalteam that practices the firm's objective, fact-based approach to problem solving. Each teamdraws on professional talent with a combination of industry-specific backgrounds and a creativeperspective built on expertise in the relevant marketing-related disciplines. McKinsey provides anobjective assessment of marketing investments and returns, so that resources are allocated toaccelerate growth and build shareholder value.

Over the past two years, McKinsey has completed over 500 projects across key marketingand sales disciplines, spanning a wide range of industries including financial services, retailing,telecommunications, electronics, and pharmaceuticals. The focus of these projects has been 50%on offline issues, 25% on online issues, and 25% on multi-channel issues.

The McKinsey Marketing Practice engages in work that covers a wide variety of issues for abroad range of companies. The firm organizes this practice into twelve key areas, up from eightlast year, to facilitate access to the company's growing and increasingly specialized expertise, asfollows:

E. 1 Business-to-Business (B2B) Marketing Strategy

The Business-to-Business Marketing group offers strategic support that helps clients extendtheir capabilities, build business, and better serve their customers. McKinsey has developed acomprehensive approach to B2B marketing that covers strategic issues (i.e., what to offer towhom), marketing tactics (i.e., what mix of products, sales and channel choices, brands, andprices will best deliver the desired value proposition), and organization choices (i.e., what are thebest roles for product groups, segment groups, geographic units, and functional specialists).

McKinsey helps clients by first understanding the functional process and relationship needsof different kinds of customers. This objective can be met through qualitative interviews, a widearray of survey techniques (e.g., cluster analysis, conjoint analysis), or modeling of customers'economics. The firm claims experience from its involvement in more than 100 B2B engagementsin the last three years.

Once the customer base is segmented and appropriate strategies are in place, McKinseyassists clients in developing comprehensive B2B marketing plans. Typically, this involvesreshaping the company's "go-to-market" approach so that the "best" possible channel deliverseach part of the intended value. The company moves from a "one-size-fits-all" sales force to anapproach in which it must build and manage multiple specialized channels (e.g., sales force,telesales, Web-enabled sales, independent intermediaries). Best practice marketers thensynthesize the data and insights collected from all these customer touchpoints to continuouslyrefine decisions on branding, CRM, marketing spending, and pricing.





B2B concentrates its focus on the following areas:

Value proposition extensions into new products, services, and businesses;

Product/market strategy and customer segmentation;

Developing customer intimacy to better meet customer needs;

Decommoditizing or differentiating products; and

Partnering with customers and other suppliers.

McKinsey's business-to-business knowledge-building initiatives are focused on how to createand implement new marketing strategies in a business-to-business environment. These initiativesembrace a broad range of issues that include when and how companies can deliver "solutions"and other intangibles-based strategies to their customers, new "go-to-market" approaches, andmulti-channel management in an e-enabled world.

E. 2 Branding

McKinsey's Branding specialty helps clients formulate strategies that communicate andleverage the strength of brand identity. McKinsey's research has indicated that companies withstrong brands consistently earn two to five percentage points higher total returns to shareholdersthan their industry counterparts. McKinsey sees the challenge of brand delivery becoming morecomplicated as companies enter multi-channel environments where the brand must be able toprevail across both online and offline businesses.

The Branding specialty works with companies to build shareholder value through their brandsby providing an end-to-end set of branding capabilities across brand strategy, brand architecture,and brand delivery. McKinsey's approach builds on the firm's experience with business strategy,identifying where a company can best invest its brand-building resources for profitable growth.These perspectives help ensure focus on developing integrated, fact-based branding solutionsthat are firmly grounded in the customer's needs and wants, as well as in the overall business orcorporate strategy.

Over the last few years, the company has added professionals with deep brandingexperience and built knowledge in brand strategy, brand architecture, and brand delivery, asfollows:

Brand strategy -- The firm's branding professionals have backgrounds in McKinsey'straditional fact-based approach to marketing. In addition, they have gainedexperience from working at very senior levels on many powerful brands at leadingmarketing agencies. The company positions itself as building "breakthrough brandconcepts," integrating both rational and emotional brand elements to provide lasting





impact consistent with the core business or corporate priorities. McKinsey's brandstrategies focus on simultaneously creating distinctive benefits in the marketplaceand satisfying customers. McKinsey claims to have completed over 80 high-impactbrand strategy client engagements in the last few years.

Brand architecture -- McKinsey applies a brand name or names (and sub-brands,when appropriate) strategically to optimize both the brand assets within a company'sportfolio and the required level of marketing investment. McKinsey has developed adistinctive approach to brand architecture strategy that identifies and creates clearroles for brands to play within the customer's purchasing framework and details howto allocate investments across the brand hierarchy.

Brand delivery -- McKinsey research shows that the key to building brand equity isconsistent delivery on three to five key touchpoints where the brand promise to thecustomer is fulfilled. McKinsey's brand delivery work uses its Branding group,supplemented by McKinsey organization and operations expertise, to identify themost important customer touchpoints. The firm then defines the most effectiveexecution at each critical touchpoint and aligns the business system and theorganization to deliver the brand consistently.

In January 2001, McKinsey grew its branding practice through the acquisition of Envision, aChicago-based brand strategy firm, as described in the Alliances section of this report. Envisionis regarded for its empirical approach to deriving new consumer insights and brand strategies.Envision executives combine sophisticated consumer market research and quantitative modelingwith creative insights to develop brand strategies that are grounded in a deep understanding ofconsumer behaviors and attitudes. The firm serves blue-chip clients in a variety of sectors,including financial services, retailing, packaged goods, media, and pharmaceuticals.

McKinsey now provides services in the following areas:

Building and maintaining powerful brands, and leveraging brands for growth;

Capturing the value of brands in M&A transactions, brand consolidation, and portfoliooptimization; and

Dynamic brand value management, including modeling key consumer and marketdrivers for a deeper understanding of brand building.

McKinsey invests in building state-of-the-art knowledge through its branding practice. Recenttopics include maximizing shareholder value through brand leverage, new approaches foraccelerating the enhancement of brand equity, new strategies for branding in Internet/multi-channel environments, and new approaches for building brand presence. The firm participates inindustry events pointing to its recent co-hosting of the Advertising Age "Brands and BrandManagement in the Next Century" industry summit and its lead role in P&G's FAST Summit"Future of Advertising: Scenarios & Perspectives."





E. 3 Continuous Relationship Marketing (CRM)

McKinsey believes Continuous Relationship Marketing (CRM), including database marketing,micro marketing, and one-to-one marketing, represents an increasingly valued approach tobuilding and sustaining customer loyalty. Superior Continuous Relationship Marketing provides acompetitive advantage and can transform business performance by increasing the attraction ofprofitable new customers, wallet share, and retention. These customer-centered gains deliversubstantial bottom-line impact, typically increasing sales and profit by 15% to 40% according toMcKinsey research.

Building on its expertise in fields such as customer segmentation and valuation, programdesign and management, and organization and capability building, McKinsey consultantscustomize CRM strategy and reshape "go-to-market" programs for clients. McKinsey's worktargets the following areas:

Customer acquisition -- McKinsey develops cost-effective acquisition programsbased on data-driven insights that link the choice of creative, and communicationsvehicles, with expected customer response and value potential.

Customer loyalty -- McKinsey consultants work with clients to identify opportunitiesand formulate strategies to improve customer loyalty and profitable cross-sell. Thefirm draws on its value proposition and program development expertise to generatehigh-impact customer loyalty programs.

Customer experience management -- McKinsey professionals have expertise in thedefinition, execution, and continuous refinement of high-value customer experiencethroughout a multi-channel distribution network. The firm assists clients in definingcustomer requirements, enabling processes, selecting tools and software, andinstitutionalizing management systems and metrics that provide an integratedcustomer experience.

e-CRM -- McKinsey works with B2C and B2B Internet companies to exploit insightsinto online customer behavior patterns. The firm uses both its data and data fromMcKinsey's exclusive partnership with Media Metrix to shape new high-impactstrategies for both site and customer management. McKinsey helps to ensure thatthe right information is captured and used to improve targeting, offers, and proactivemanagement across the entire customer lifecycle, from customer attraction toconversion to retention/revisit. The firm also helps companies to navigate andprioritize online customer management technologies.

The company serves clients by:

Applying an analytical focus as a means of enhancing Customer Lifetime Value(CLV);

Using customer data to understand and leverage behavior, through systematicprocesses/programs to drive business; and





Incorporating systematic experimentation to gather new customer informationand improve programs.

Over the past five years, McKinsey has completed over 120 CRM assignments in suchindustries as banking, insurance, retailing, airline, and telecommunications, demonstrating animpact on customer acquisition, development, retention, and profitability. Recent topics includebest practices in e-CRM, key imperatives for multi-channel marketers, new approaches tomanaging customer loyalty, the role of "infomediaries," business-to-business CRM, databasesand marketing in the banking industry, and the role of CRM for credit card providers.

E. 4 Customer Loyalty

Developed as a separate specialty within marketing over the last year, McKinsey's CustomerLoyalty specialty works with clients across a wide range of industries to develop new, significantlyhigher-impact approaches for driving profitable growth through improved customer loyalty. Thecompany takes a broad view of loyalty focused on patterns of customer migration, defined as thechange in customer value over time. McKinsey research has shown that the broad determinantsof downward customer migration vary significantly across industries and from company tocompany. Therefore, the company works with clients to understand the primary drivers ofdownward migration in their customer base and to identify the customers offering the greatestopportunity for value capture. McKinsey professionals then design an integrated approach totarget these sources of value. To maximize speed and impact, the firm uses pilots and a test-and-learn approach. McKinsey then helps clients roll out successful pilot approaches and helps thembuild the capabilities to support those that require new skills.

McKinsey research shows that by pursuing a targeted approach integrating multiple levers,companies can reduce the value lost to downward migration by 20 to 30%. This translates intosignificantly improved top- and bottom-line growth. Over the past several years, the firm hasdeveloped this approach with a broad set of clients to build proven knowledge and experience infour areas:

High-impact loyalty architecture -- McKinsey's experience, proprietary research, andtools enable the firm to work quickly with clients to quantify the opportunity andidentify the highest-leverage customers and sources of downward migration. Thecompany then develops a set of high-impact initiatives based on the loyalty toolsmost suited to these opportunities. McKinsey designs an overall program of pilots,selected rollout, and capability building to put the chosen initiatives into place andsupport them over time.

Powerful relationship marketing -- The firm helps clients identify high-value downwardmigrators; understand at a detailed level the reasons behind their migration; craftdirect, online, and face-to-face programs to influence their behavior; test and roll outthe highest-impact programs; and design and build the infrastructure and capabilitiesto support relationship marketing over time.





Targeted value proposition and delivery redesign -- McKinsey works with clients toidentify targeted changes that are likely to have measurable profit impact in excess ofthe investment required.

Effective and efficient rewards programs -- McKinsey develops a high-impact rewardsprogram or an improved design of an existing program, adding critical elements ofrelationship marketing and developing a powerful partnership strategy.

McKinsey continually invests in new knowledge to push state-of-the art thinking in customerloyalty. The firm recently completed research across 16 industries, defining key patterns ofcustomer migration and developing a Loyalty Profile of migration segments for each industry.This research serves as the foundation of the proprietary tool the firm uses to quickly develophigh-impact Loyalty Architectures for clients. The firm also participates in industry events andforums.

E. 5 e-Consumer Marketing

As a new marketing specialty, e-Consumer marketing utilizes a combination of consumerclickstream data and analytic capabilities to develop insight into consumer online behavior.McKinsey believes that understanding online consumer behavior and identifying the levers tochange those behaviors is essential to achieving profitable growth in the new economy.

McKinsey has a strategic alliance with Media Metrix, described in the alliances section, whichgives McKinsey professionals exclusive access to the individual click-by-click online behavior ofconsumers. Through the use of analytic tools, McKinsey can focus site development activitiesand marketing programs on ways that will attract greater numbers of consumers in the mostprofitable consumer segments. McKinsey can determine the specific site a client's onlinecustomer visits and can then evaluate the effectiveness of different sites as advertising options.Similarly, by identifying the sites consumers visit when they leave the client's site, the firm canestablish the competitive set facing the client's site and pinpoint specific content that has value forvisitors. The company also examines how these measures change over time as an e-businessevolves.

McKinsey's joint research with Media Metrix yields continually updates insights into the e-consumer. A detailed segmentation study of the online consumer population identified six distinctsegments that can be served through different approaches. These insights have been featuredrecently in articles in The Wall Street Journal and Business 2.0. Current knowledge-buildinginitiatives include detailed analysis of the drivers of successful online shopping companies andthe growth potential in online financial services.

E. 6 E-Marketing





McKinsey's e-marketing group helps consumer marketers create shareholder value throughexisting advertising and direct marketing efforts and by building new consumer e-businesses.McKinsey uses a holistic approach to e-marketing that reflects the company's e-commerceexperience and deep marketing knowledge. The firm's expertise comprises core e-marketingdisciplines, including business launch marketing plans, e-brand strategies, customer relationshipmarketing, and multi-channel management. Consultants begin the e-marketing studies with adeep grounding in customer needs and use their knowledge of marketing disciplines to developan e-marketing strategy that simultaneously delivers profitable growth and a distinctive customerexperience.

Over the past year, McKinsey has completed over 150 e-marketing-related studies. For thefuture, the firm is further developing its knowledge of e-CRM, e-branding, e-pricing, multi-channelmanagement, and e-marketing organizations, in conjunction with professors from HarvardBusiness School. McKinsey assists e-marketers in building and expanding their onlinebusinesses through insights into consumer online behavior. This approach includes segmentingand targeting consumers based on site visits, time spent on each site, and transactions to driveprofitability. The firm can develop custom analysis on any site to analyze changing consumerbehavior over time (e.g., time between repeat visits, sites cross-shopped in the same session),determine what works and doesn't work, and use the information to improve site performance oncustomer acquisition, conversion, and retention.

E. 7 Marketing Organization and Capability Building

The Marketing Organization and Capability Building Practice helps clients developcomprehensive, targeted, functional skill/capability building programs that deliver market leadingperformance. The practice offers expertise in the following areas:

Identifying and evaluating the potential impact of the functional marketing skills eachclient needs; and

Designing and delivering programs to build target capabilities and measureperformance.

By focusing on building marketing capabilities that link directly with the strategic andeconomic objectives of the business, McKinsey helps clients create marketing organizations thatcontribute directly to growth. McKinsey consultants typically begin with an analysis of thecompany's strategic and profit goals that define the structure, skills, and style required for the neworganization. Rather than build generic capabilities, the firm builds "precision marketingcapabilities" designed to achieve targeted marketing and business goals. The programs can begrouped into three broad service lines:

Integrated marketing capability building programs -- McKinsey identifies the two orthree marketing skills a company must excel in to achieve its business objectives anddevelop a comprehensive program to pinpoint the talent, build the capabilities, anddesign the organizational processes and metrics required.





Marketing organizations -- McKinsey helps companies change their organizationalapproach to accommodate the greater complexities of online and offline channelsand keep ahead of market pace by moving away from rigid structures to a team-based and rapidly evolving organization. The approach focuses on developing theaccelerated decision-making processes and the more fluid structure required toanticipate and build the specialized capabilities needed to drive pace ahead ofcompetition.

Functional skill development -- When companies need to rapidly build a particularskill, McKinsey consultants work closely with colleagues in the Pricing, CRM,Branding, and Sales and Channel groups to develop a capability.

McKinsey research in this area has concentrated on developing distinctive, integrated,"turnkey" capability building approaches for clients. The firm has focused on Venture MarketingOrganizations (VMOs), whose structure enables them to identify and capture new growthopportunities. This focus allows the firm to concentrate on new approaches to building marketingcapability in several areas including CRM, sales force excellence, customer service, pricing, andpromotions.

E. 8 Marketing Research

The Marketing Research group generates qualitative and quantitative market research thatuncovers insights into consumer needs. The firm uses a variety of state-of-the-art researchtechniques, working with a set of outside research vendors. The company then works with itsMcKinsey colleagues and uses these insights to develop marketing strategy, branding, pricing,and marketing spending effectiveness strategies for profitable growth. McKinsey combines itsexperience in understanding business issues with a wide range of marketing research techniquesto provide actionable insights to address critical business issues.

McKinsey consultants evaluate and determine the best possible research approaches, whichinclude an in-depth qualitative observational study, focus groups, or a major quantitative conjointor choice study. The company also identifies which of its market research partners are best ableto conduct the research. The firm uses the output of this research to address the client's specificbusiness objectiv

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