By Tom Craren
CEO confidence has made a comeback. Despite the trying times of the economic downturn, CEOs have a renewed sense of optimism about their companies’ growth prospects. But what growth means has changed in this new era of recovery.
With developing economies emerging as hotspots for opportunity, many businesses are refocusing their growth efforts to include markets away from home. To succeed in these markets in a post-crisis world, business leaders are redesigning their growth agendas around a new set of strategic priorities including investing in innovation, acquiring critical skills by bringing new talent on board, and entering collaborative relationships with governments, consumers, and other stakeholders.
In making these strategic changes, CEOs are priming their organizations for growth. As part of that process, the following eight questions on emerging markets, innovation, talent, risk, sustainability, operations, regulation, and governance can help businesses chart a course for success.1 How do we enter new, ever-changing markets with confidence?
Across sectors, CEOs agree that tapping emerging markets is a key to capturing growth. While the International Monetary Fund forecasts overall global growth for 2011 at 4.2 percent, developed countries— which make up 52 percent of the world’s economy—are growing at only half that pace. In contrast, emerging markets are booming, with forecasters predicting that China, India, and Indonesia will grow more than 6 percent.² And that surge in growth is expected to continue, regardless of location.
Fear of the unknown is often a barrier for many organizations considering a move to emerging markets. Consumer goods companies, in particular, are confronting this challenge, as our research revealed. Heavily tied to changes in consumer behavior, employment rates, and purchasing power, consumer goods CEOs especially see the growth potential in developing markets. Fifty-seven percent of these executives anticipate having to make strategic changes to capitalize on the increasing prosperity of consumers in emerging markets.
Driven in large part by changing dynamics between developed and emerging economies, a majority of CEOs say they are performing strategy makeovers and making more disciplined, targeted investments in unfamiliar places. Striking the right balance between these diverse worlds is a key challenge that requires effective overseas strategies. They are focusing on two areas to help ensure success: performing due diligence of market demographics and collaborating with local partners.
For example, Unilever’s leaders stress the importance of knowing where consumer trends are headed in order to stay in front of those trends. Given that the company expects 70 percent of its business to come from Asia within 10 years, they recognize that their culture and business model must evolve to reflect the changing demographics of their customers and the tremendous implications of this significant shift. Part of Unilever’s marketing strategy is to support a sustainability agenda that may be pertinent to developing countries, where, in many cases, people face food shortages, environmental problems, and issues stemming from overpopulation. For example, the company is aiming to make its brand of water purifiers available to 500 million homes so that families not only will have access to safe drinking water, but also will be able to utilize other Unilever products, such as chicken stock cubes.
Consumer goods organizations are also embracing critical tactics such as ensuring they have sufficient access to raw materials, evolving their people strategy to encourage key employees to move abroad, and embedding families in emerging markets to better understand local buying and eating patterns. Moreover, they are working closely with retailers to learn how consumers behave at the point-of-sale and merging with local companies to produce consumer goods specialized for local markets.
As a result of these strategies, 93 percent of consumer goods CEOs surveyed expect to generate higher revenues over the next 12 months, with just as many anticipating increased revenues over three years— increases that can be driven by expansion into developing countries, particularly China. (See Figure 1.) Sixty-nine percent believe emerging-market businesses will drive company growth, compared with 59 percent of CEOs across all sectors.
Survey results also show that the consumer goods sector is not alone in understanding the growth potential of emerging markets. Other industries that placed a higher importance on emerging markets over developed ones include the automotive, banking, chemicals, investment management, oil and gas, metals, and technology sectors.2 How do we remake our organization into a continually innovating one?
CEOs across all sectors overwhelmingly agree on innovation’s importance: Almost 80 percent believe that their innovations will lead to new revenue opportunities, will drive efficiencies, and will create competitive advantage. Many are implementing changes at all levels of their operations to make innovation a viable growth strategy. And it is not just about creating the next revolutionary product. Innovation is being applied to every part of the business—from marketing to production to distribution and finance.
The bottom line of incremental innovations is to get closer to customers. Understanding how to engage today’s consumers could mean addressing cultural and organizational factors or rethinking what technology can do and for whom.
More than any other sector, the chemicals industry is investing heavily in innovation to garner a competitive edge. Ninety-two percent of CEOs in this industry believe that innovation will lead to operational efficiencies and competitive advantage, 13 percent more than all CEOs surveyed.
Chemicals CEOs are putting customers at the center of innovation. For instance, they know the importance that environmentally friendly products and services play in helping customers reduce their carbon footprints. The industry recently adopted Life Cycle Analysis (LCA)— an approach that looks at the emissions generated during the complete life cycle of a product—to help document the impact its products have on the carbon footprint of customers. This “greening” of innovation strategies is found across all industries; 64 percent of all CEOs agree with this change.
CEOs in this industry are also moving development processes closer to the customer. Forty-two percent, compared with 29 percent of all CEOs, plan to move the development of their innovation to other than home markets. Companies looking to be successful in global markets may need to localize processes to benefit new customers.
In some cases, an organization may not have sufficient capital and the right talent to innovate on its own. Fortunately, going it alone isn’t the only option. Many companies are collaborating with partners or targeting innovation efforts at their supply chains. (See Figure 2.) Chemelot, one of the largest chemicals industry parks in Europe, offers a clear example of this collaborative approach. The establishment combines research and production facilities in one location, where 70 companies share the facilities and have access to raw materials and peripheral services. But true collaboration lies in the method of communication between these companies— they use Twitter and Facebook to stay connected.
Whether through market research, localization, or partnerships, business leaders in many sectors understand that focusing on business process innovation while tuning in to the needs of customers may offer the best opportunities to capture growth. Our survey indicates that besides chemical companies, automotive, consumer goods, insurance, investment management, pharmaceuticals and life sciences, and technology organizations are also turning to innovation for significant new revenue opportunities.3 How do we identify, engage, and empower the talent that will distinguish our business from the competition?
Companies are starting to hire again. With confidence in economies on the upswing around the world, more than half of all CEOs surveyed say they expect their talent pool to grow over the next 12 months. But even with a surplus of eager candidates ready to rejoin the workforce, finding and keeping talent will be difficult: Two-thirds of CEOs believe there is a shortage of candidates with the right skills. Additionally, with considerable opportunities in emerging markets, finding appropriate skills to bridge both foreign cultures and demographics with those at home is critical to success overseas.
Chief among organizations coping with this issue are automotive companies, which collectively identify closing the global skills gap as a top priority. (See Figure 3.) Hit deeply during the economic crisis, the industry had to reduce headcounts considerably, more so than other sectors. But currently, the industry is on the rebound, and its core concern is emerging markets.
Sixty-five percent of automotive CEOs believe emerging market consumers will drive growth for their companies, and, as a result, will be adjusting their strategies over the next three years. Eighty percent of automotive CEOs are changing their talent strategies to deploy staff overseas, more than their counterparts in other industries.
As a first step in securing global talent and maintaining corporate and operational practices overseas, companies often establish international assignments to train local talent and help support business relationships with domestic companies. However, many companies are moving beyond this strategy. Some, like auto components and parts supplier BorgWarner, are nurturing local talent and are focusing on localization—manufacturing their products in the countries where their customers produce vehicles. The company grooms and retains local managers to run these manufacturing bases and then to supply the company with strong local talent.
In China, one of the fastest growing countries in the world, a competitive compensation environment makes it particularly difficult to retain employees. But investing in the country was a priority for BorgWarner. The company has more people employed in China now than during its company-wide peak employment of 2008.
Maintaining the right workforce may often mean considering non-traditional sources of talent or coming up with new ways to motivate staff. This might include identifying new talent pools, or finding new ways to incentivize workers. Collaborating with governments and the educational system is increasingly important as well. Sixty-four percent of automotive CEOs are seeking to improve local workforce skills this way.
While the automotive industry ranks high with regard to talent concerns, survey results show that finding the right people is a top priority across the board. Industries that ranked highest in planning to change their strategies for managing talent over the next year include banking, entertainment and media, insurance, investment management, and transportation and logistics.4 How do we reinvent our operations to take change in stride while remaining disciplined about costs?
Keeping costs down is a priority for CEOs. But instead of slashing budgets, companies are collaborating with external partners to reshape their futures. Whether through strategic alliances, joint ventures, crossborder mergers and acquisitions, or outsourced business functions, companies across many industries are finding out that partnerships can be fruitful. Operational structure changes like these are on the horizon for companies in the engineering and construction, entertainment and media, industrial manufacturing, insurance, investment management, pharmaceutical and life sciences, retail, and transportation industries, according to our survey.
In the entertainment and media industry, business leaders have embraced collaboration out of necessity. Outdated industry models can’t meet the challenges of rapid change in customer demand and behavior, technology, and industry dynamics. Those entertainment and media companies that embrace scale, diversification, agility, and restructuring are more likely to survive and prosper. Eighty-seven percent of those surveyed expect some degree of organizational change.
More than in any other industry, entertainment and media CEOs are likely to seek out external partnerships. (See Figure 4.)
As entertainment and media consumers trend younger and more tech-savvy, entertainment and media companies will have to provide content through new devices. Partnering with outside organizations can help in that regard. This is echoed throughout the industry, where 78 percent of entertainment and media CEOs are looking to suppliers for product innovation.
While cost cutting can be viewed as a short-term survival option, controlling costs through collaborative partnerships can better equip companies to face challenges that lie ahead and to manage costs over the long term.5 How do we become more resilient to new and unpredictable risks?
CEOs are gearing up to make changes across their businesses. Some of the changes are designed to help them counter unfamiliar risks. For example, as they cross borders to seek out new opportunities, they will face new tax regimes, laws, management styles, and other local challenges.
Almost 80 percent of all CEOs surveyed say they plan to change their approach to risk management in the year ahead. And a majority of these CEOs are also looking to more formally incorporate risk mitigation into strategic planning. For example, 72 percent of CEOs plan to allocate more senior management attention to risk management, and 40 percent are looking to incorporate more crisis-readiness drills. (See Figure 5.)
But in the aftermath of the economic crisis, C-suite leadership has taken a more comprehensive approach to risk, even so far as to include addressing global risks in their management strategies. (See Figure 6.) For example, utilities company E.ON AG is trying to lessen its dependence on banks by looking for longer-term capital. In the chemicals industry, nearly 75 percent of CEOs surveyed will be looking to support government activity that is environmentally sustainable. And it’s no wonder why these CEOs want to work with governments on green initiatives—the chemicals industry’s top global risks include scarcity of natural resources and climate change.
This shift to including new and unpredictable risks—such as political instability, scarcity of natural resources, and currency volatility—marks a new era of risk resilience. Including these new risks enables organizations to remain flexible during downturns while still finding opportunity in a fast-changing world.6 How do we see beyond constraints to spot the opportunities in the new regulations?
The specter of over-regulation is a major concern for business leaders around the world. Today’s changing regulatory environment brings with it uncertainties as to how companies will do business in the future. Survey results show that the following industries view over-regulation as a top concern: financial services, pharmaceuticals and life sciences, oil and gas, and utilities.
In the aftermath of the financial crisis, the financial services industries have become among the most regulated. The US Dodd- Frank Act, European Union Alternative Investment Fund Managers Directive (AIFMD), and the US Foreign Account Tax Compliance Act (FATCA) are just a few of the regulatory challenges facing asset managers. Equally as important, national and regional differences and potential conflicts may negatively impact many financial services firms’ ability to manage increased regulation. In addition, regulatory changes could also lead to a more conservative risk appetite among institutional investors, which could challenge asset management CEOs as they attempt to achieve a balance between maximizing return and minimizing risk. It’s no surprise then that 77 percent of investment and asset management CEOs say they are deeply concerned about overregulation, compared with just 58 percent of all survey participants. (See Figure 7.)
Nevertheless, growth-seeking CEOs are not sitting still, waiting for these uncertainties to be resolved. In the US—where regulatory change runs the gamut from the granular, such as the new way companies must account for leases, to the major structural overhaul of the health and financial systems—47 percent of US CEOs surveyed say they are rethinking their corporate strategies in response to regulation, compared with 34 percent worldwide.
Asset and investment management CEOs are no different. They see opportunities in rationalizing operations and improving tax and capital efficiency. Though consumers are becoming more price-conscious, regulation could increase expenses. To deal with this challenge, almost 70 percent of asset management CEOs surveyed have initiated a cost-reduction initiative.
While major regulatory change is top of mind for today’s business leaders, survey results demonstrate that C-suite leadership is planning to extend their focus beyond dealing with constraints and preparing for compliance. Focusing on greater transparency and beefing up risk management are other ways that asset management CEOs are looking for opportunity in a highly regulated environment. Transparency can renew investors’ trust that there are appropriate controls across the fund value chain. More than 70 percent of asset management CEOs plan to rebuild their companies’ reputations in the coming year. Focusing more closely on risk is another way these leaders will earn greater investor confidence. Nearly 90 percent of asset management CEOs are modifying their operating models to manage risk more effectively.7 How do we tap into growing customer and employee sentiment about sustainability?
Customers, businesses, and governments alike agree that sustainability is key to economic growth and competitiveness. As a result, companies are finding that their environmental and corporate responsibility practices are increasingly under the microscope. The shift toward social responsibility is driving change in consumer spending patterns. Globally, CEOs feel pushed to make eco-friendly changes to their products and processes.
Almost half of the CEOs surveyed expect consumers to factor environmental and corporate responsibility practices into purchasing decisions and say they will change their strategy in the next three years to capture customer and employee sentiment. And, believing that the supply chain plays a critical role in innovation, most CEOs are looking to their suppliers to help them generate new ideas for developing green products, powering cities and factories, moving people and freight, growing food, and securing the natural resources so essential to business.
Nearly three-quarters of CEOs told us they will actively support government policies that promote “good” growth, while half are optimistic that collaborative government and business efforts will mitigate global risks such as climate change.
Survey results show that business leaders in some industries overwhelmingly agree that consumers will factor a company’s environmental and corporate social responsibility practices into their purchasing decisions. These include banking, chemicals, engineering and construction, investment management, oil and gas, and utilities. For the utilities industry, climate change is particularly pertinent, as environmental conditions can impact utilities’ infrastructure and ultimately affect customer service.
Recognizing the importance climate change can have on their customers, 60 percent of utilities CEOs cite climate change as a risk that will impact their companies’ growth over the next three years, compared with just 27 percent of all CEOs surveyed. More than half say they have already factored climate-change risk into their strategies, while a majority say they plan to address climate change over that same time frame in order to improve competitive advantage and enhance social wellbeing. (See Figure 8.)
Energy companies have been profoundly affected by changing consumer-spending patterns. In Germany, this shift is driving companies like E.ON AG to market its services to various consumer segments. For example, in the European retail segment— private households and small businesses—the company recognizes that consumers are equally as interested in energy optimization as in energy consumption. Management views this transition as a challenge that will require it to adapt to new patterns of consumer behavior and embrace new technologies.
Organizations across sectors are beginning to realize the importance of meeting the public’s high expectations—not only by changing their strategies today to capture stakeholder sentiment, but also by looking ahead for changes on the horizon. As social awareness continues to gather momentum, demand for sustainable and eco-friendly products, processes, and services can only escalate.8 How do we tell our company’s story in a way that helps stakeholders see the changes we’re making in a new light?
Recognizing the vital role that transparency plays in establishing trust with stakeholders and achieving growth goals, many organizations are going beyond basic disclosure to make sure their stories are heard. As a result, 64 percent of CEOs surveyed agree that companies are becoming more transparent in reporting their financial results and tax obligations.
This is especially true in the insurance industry, where almost 80 percent of insurance CEOs say they are focusing on rebuilding their corporate reputations, with some taking additional steps in risk management and transparency in an effort to improve their public standings. (See Figure 9.)
In the aftermath of the economic crisis, the insurance industry faces the challenge of delivering favorable and sustainable returns. The underlying solution may lie in ways of communicating performance and prospects clearly, credibly, and consistently. Many believe that their companies’ share prices fail to reflect the strength of the business—largely because most analysts and investors find it difficult to navigate through the complexities of the industry, especially since there is little comparability in the way results are being disclosed.
Our research confirms that analysts are particularly keen to see more information about risk, along with the level of cash being generated within companies. While the planned overhaul of International Financial Reporting Standards for insurance contracts will provide a chance for insurers to put disclosure on a more coherent and comparable footing, it may be several years before the details are finalized. Until then, those insurers that can clearly explain the link between their strategies, the risk they have assumed, and the cash that they expect to generate as a result, may have a valuable opportunity to increase their share prices.
Regardless of sector, the winners of tomorrow will be those that can not only develop a clear strategy for value creation and market differentiation today, but also clearly communicate how that strategy differs from that of their competitors and why, as a result, their organization deserves to be valued differently. Other industries that are planning to focus on rebuilding corporate trust in the next year include the banking, entertainment and media, and metals industries.
The new business climate is marked by constant and unpredictable change that is driving new business priorities. As the survey results show, CEOs, whether through talent strategies, markets, innovations, or external collaborations, are on a journey whose ultimate destination is value. Along the way, they are overcoming obstacles and discovering emerging opportunities. Even more important, they are setting new agendas designed to capture them. And while these agendas will differ among companies and industries, they all share a common reality: In a post-crisis economy, those who embrace change will achieve a competitive advantage. Those who don’t will be left behind.
The results from our survey show that CEOs are very confident about companies’ futures in the short term and long term: 48 percent see growth in the next 12 months and 51 percent anticipate it over the next three years. These levels indicate a return to confidence levels last seen during the boom years of 2006 and 2007. But this recovery of confidence isn’t evenly split across all regions and countries. So, who’s the most confident?
Across the board, CEOs from emerging markets showed the highest levels of confidence. Regionally, Africa tops the list, with 65 percent of CEOs from the region reporting confidence for the next 12 months. This is followed closely by the Middle East, Asia, and Latin America. (See Figure 10.)
The single country with the highest degree of confidence is India, where 88 percent of CEOs feel very confident about their future. With India’s quick recovery from the recession and continued booming economy, this should come as no surprise. India is projected to be one of the fastest growing economies in the world—according to estimates, its GDP at market exchange rates will reach 83 percent of that of the US by 2050.³ Indian CEOs also understand this potential for sizable growth. Like many other emerging market countries, they are not just tapping overseas markets but are now focusing on leading their own growing domestic markets.
On the flip side, Western European and North American CEOs were the least confident about growth over the next year. Hit harder by the recession than emerging markets, Western CEOs seem more cautious but still optimistic about the future. And though emerging markets are thought to be the hotspots for growth, Western markets are not far behind. In fact, CEOs around the world indicate that the United States is the second most popular country for sourcing (after China) and Germany is the fourth. Though BRIC countries like Brazil, India, and China are important sourcing hubs, the United States and Germany are thought to bring quality control, innovation, logistics, and existing relationships, which are integral factors in CEOs’ sourcing decisions.