June 8, 2010 — Ben Ramalingam
IBM recently released the 2010 Global CEO Survey, its 4th such study since 2004, based on over 1,500 face-to-face interviews with private sector CEOs and senior public sector leaders from 33 different industries spread over sixty countries. A concise summary, drawing on work by Irving Wladawsky-Berger, is below.
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.”
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.
“ . . . 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.”
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.”
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…
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?”
I liked the report, not least because it triggered some interesting questions. I wondered what the ‘complexity gap’ would be among international aid agencies, and which if any are ‘stand out’ organisations in our sector? How much resonance do the suggestions from the business and wider public sector worlds – leadership, relationships, dexterity – have for development and humanitarian work? And finally what are the connections between this business-oriented view of complexity – arguably more akin to risk – and the insights of complexity science? Watch out for future posts following up on these issues.