IBM recently released the 2010 Global CEO Study. This is IBM’s fourth biennial CEO study since 2004. It is also the largest. For the 2010 study, IBM held more than 1,500 face-to-face interviews with private sector CEOs (80%) and senior public sector leaders (20%) from 33 different industries spread over sixty countries.
In the past three studies, CEOs consistently said that coping with change was their most pressing challenge. This time around, the primary challenge emerging out of the CEO conversations was pretty clear: complexity. “CEOs told us they operate in a world that is substantially more volatile, uncertain and complex. Many shared the view that incremental changes are no longer sufficient in a world that is operating in fundamentally different ways.”
Given the realities of globalization, disruptive innovation, and profound changes across technology, markets and society, it should not be surprising that CEOs and their companies must now navigate a highly volatile and unpredictable business environment. Nearly 80% of CEOs expect the business environment to grow significantly more complex over time, but less than half believe that their organizations are equipped to deal with it successfully. This gives rise to what the report refers to as a Complexity Gap, that is, the difference between the expected complexity and the extent to which CEOs feel well prepared to manage it.
Globalization is one of the major causes of this complexity gap. “CEOs told us that the current trend toward globalization would not let up. They anticipate shifting of economic power to rapidly developing markets, and foresee bigger government and heavier regulation ahead. These shifts are unyielding and contribute to the sense of a world growing more uncertain, volatile and complex.”
Technology is a second major factor contributing to growing complexity: “… creating a world that is massively interconnected, with broad-based convergence of systems of all kinds, both man-made systems like supply chains or cities; and natural systems like weather patterns or natural disasters. Our world is increasingly subject to failures that require systems-level and cross-systems-level thinking and approaches. The consequences of any decision can ripple with unprecedented speed across business ecosystems the way the recent economic crisis has impacted nearly every market.”
Capitalizing on Complexity is the title of the 2010 study. As the name indicates, the same complexity factors that can negatively impact or even kill a company can also open up new opportunities for those companies that are prepared to capitalize on the rapidly changing business environment. This is not a new concept. Almost seventy years ago, Austrian economist Joseph Schumpeter wrote about creative destruction, the process of transformation that accompanies radical, disruptive innovation, does away with companies that are not able to adjust to changing market realities and opens up new opportunities for those companies that are ready to capitalize, adjust to and thrive on those same changes.
The Study identified certain Standout organizations that have been able to deliver good business results even in the recent economic downturn and feel much more prepared to deal with complexity. They come from every industry and every part of the world. One CEO, for example, said: “Really, I am not afraid of complexity at all. On the contrary, this just motivates me.”
While the average complexity gap was 30 percent, the Standout companies had a complexity gap of just 6 percent. At the other end, companies with poorer business results had a 52 percent complexity gap. “Compared to their industry peers, Standouts had higher increases in year-to-year operating margin. Even more striking, during the economic crisis, Standouts’ revenue growth was six times higher than the rest of the sample. So, what is this group doing to thrive?”
Based on extensive analysis of the interview results, the Study concluded that Standout CEOs are capitalizing on complexity by focusing on three key areas: embodying creative leadership; reinventing customer relationships; and operational dexterity.
Embodying Creative Leadership
“Creativity is the most important leadership quality, according to CEOs. Standouts practice and encourage experimentation and innovation throughout their organizations. Creative leaders expect to make deeper business model changes to realize their strategies. To succeed, they take more calculated risks, find new ideas, and keep innovating in how they lead and communicate.”
What this means to me is something that is easy to say, but frightfully difficult to implement in practice. The more successful leaders acknowledge, are comfortable with and welcome the disruptive innovations all around them, instead of fighting these changes, as so many do. They also realize that embracing disruptive innovations implies a different, much more distributed and collaborative management style that engages with a new generation of employees, partners and customers.
Earlier this year I read an excellent article in the New York Times, “Multicultural Business Theory. At B-School?” on the work of Roger Martin, the dean of the Rotman School of Management at the University of Toronto. For the past decade, Professor Martin has been trying hard to transform business education. I find it particularly interesting that the ideas that he has been advocating are very similar to those uncovered in the CEO Study, namely:
“ . . . students need to learn how to think critically and creatively every bit as much as they need to learn finance or accounting. More specifically, they need to learn how to approach problems from many perspectives and to combine various approaches to find innovative solutions.”
“ . . . even before the financial upheaval last year, business executives operating in a fast-changing, global market were beginning to realize the value of managers who could think more nimbly across multiple frameworks, cultures and disciplines. The financial crisis underscored those concerns - at business schools and in the business world itself.”
In order to develop the creative leadership that Standout companies require, we need to teach business students to think more holistically and creatively, as much as we need to teach them discrete skills like finance, accounting and marketing. Successful leaders and general managers need to learn how to think holistically about the complex problems they will encounter, both to help them find innovative solutions to whatever immediate crisis they are facing, and to formulate the overall strategy of the business.
Reinventing customer relationships
“In a massively interconnected world, CEOs prioritize customer intimacy as never before. Globalization, combined with dramatic increases in the availability of information, has exponentially expanded customers’ options. CEOs said that ongoing engagement and co-creation with customers produce differentiation. They consider the information explosion to be their greatest opportunity in developing deep customer insights.”
I could not agree more with the focus of Standout CEOs on customer relationships. For a while now, I have felt that good customer service is the key way for a business to differentiate itself and stand out in our increasingly global, commoditized and hyper-competitive world. The other side of that coin is that in a world full of social networks, blogs and other ways for people to express themselves, poor customer service may be the fastest way for a business to not just alienate its customers but do perhaps irreparable damage to its brand.
Creative leadership and innovation should lead to great customer service. Given the Internet, mobile devices, vast amounts of information and sophisticated analytical tools, companies now have the ability to provide extraordinary service to their customers at relatively affordable costs, - if they so desire. But, based on my experience, many companies don’t have this culture of service built deep into their DNA. Sooner or later, such companies discover how dangerous poor customer service can be, as competitors with innovative business models and a strong services culture start walking away with their customers.
Roger Martin succinctly explained why it has been so difficult for companies to embrace customer service in a recent article in the Harvard Business Review, The Age of Customer Capitalism. His central premise is:
“For three decades, executives have made maximizing shareholder value their top priority. But evidence suggests that shareholders actually do better when firms put the customer first.”
“Modern capitalism can be broken down into two major eras. The first, managerial capitalism, began in 1932 and was defined by the then radical notion that firms ought to have professional management. The second, shareholder value capitalism, began in 1976. Its governing premise is that the purpose of every corporation should be to maximize shareholders’ wealth. If firms pursue this goal, the thinking goes, both shareholders and society will benefit. This is a tragically flawed premise, and it is time we abandoned it and made the shift to a third era: customer-driven capitalism.”
I believe that business and management schools need to shift their focus to be relevant to the needs of companies and markets. They have educated a generation of students very adept with math and spreadsheets, and maniacally focused on the stock market, but whose only experience with customers is as abstract entities in their models from whom they seek to extract as much profit as possible. They need to heed Peter Drucker’s decades-old advice: “A company's primary responsibility is to serve its customers . . . Profit is not the primary goal, but rather an essential condition for the company's continued existence.”
Building operating dexterity
“CEOs are revamping their operations to stay ready to act when opportunities or challenges arise. They simplify and sometimes mask complexity that is within their control and help customers do the same. Flexible cost structures and partnering capabilities allow them to rapidly scale up or down.”
While creative leadership and customer relationships are relatively subtle concepts, operational dexterity is much more concrete. It is all about leveraging advances in technology, systems architecture and organizational capabilities to help the business become more flexible and agile so it can quickly adapt to rapidly changing market conditions.
Ever since the advent of the Industrial Revolution, we have made huge progress in applying science, technology and engineering to physical products of all sorts. In the last century, our sophisticated industrial economy has produced highly complex physical objects like airplanes, cars, bridges, skyscrapers and microprocessors made up of huge numbers of components.
I strongly believe that we are now entering an information and service economy where we can apply similar advanced science, technology and engineering to complex organizational systems, including companies and industry ecosystems, as well as local, regional and global economies. But such people-based organizational systems are both much more complex and much newer than the physical systems we have mastered over the last two hundred years.
We have only been able to start thinking broadly about technology, services and organizations since computers came on the scene. In my opinion, we can only seriously consider something like a technology-based revolution in information and services since the mid-1990s, when the Internet and World Wide Web took the world by storm. And perhaps only in the last five years have we been able to start building the necessary infrastructures, given the emergence of ubiquitous broadband and wireless communications, mobile devices and sensors, as well as massive and relatively inexpensive cloud-based systems and supercomputers.
Furthermore, the presence of people as the key components in these organizational systems makes them quite different from classic, physically engineered systems. People’s behaviors will generally exhibit lots more variation than the components of a physical system, which subjects complex organizational systems to significantly higher degrees of variance. In other words, the components of these systems are changing all the time. As a result, such systems are intrinsically emergent or unpredictable, and their design, analysis and management require major creativity and innovation.
CEOs of Standout companies intuitively realize that one of their main jobs is to master complexity in all dimensions of their organizations. They must constantly simplify operations, products and services. They must experiment in the marketplace in close collaboration with their customers and partners, so they can quickly evaluate and continuously improve new ideas. They must standardize back-end operations and processes where different approaches don’t typically translate into business value, so they can then invest their monies and energies in the customer- and market-facing activities that provide true competitive differentiation. And, most important, they must promote an entrepreneurial mindset in their organizations based on speed and flexibility.
In its concluding words, the 2010 Global CEO Study observes: “For CEOs and their organizations, avoiding complexity is not an option - the choice comes in how they respond to it. Will they allow complexity to become a stifling force that slows responsiveness, overwhelms employees and customers, or threatens profits? Or do they have the creative leadership, customer relationships and operating dexterity to turn it into a true advantage?”