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Game changer: How companies are responding to a fast changing business environment
 

Game changer: How companies are responding to a fast changing business environment

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This report analyses the factors driving increased change in the business world and explains what corporate leaders can do to adapt. The research draws on a survey of nearly 400 business executives ...

This report analyses the factors driving increased change in the business world and explains what corporate leaders can do to adapt. The research draws on a survey of nearly 400 business executives and 18 senior business specialists, including:

• Richard Axelrod, co-founder of the Axelrod Group

• Rolf Bixner, a senior partner and managing director at Boston Consulting Group

• Andrew Blau, president and chief executive of Global Business Network

• Lowell Bryan, a director at McKinsey

• Michael Denison, research director at Control Risks Group

• Clark Gilbert, president and CEO of Deseret News and Deseret Digital

• Hal Gregersen, senior affiliate professor of leadership at INSEAD

• Anil Gupta, chairman and managing director of Havells

• Ronald Heifetz, co-founder of the Center for Public Leadership at the John F. Kennedy School of Government

• Ken Jones, president and CEO at Astellas Europe

• Eivind Kolding, chief executive of Maersk Line

• Ed Lawler, distinguished professor of business at the University of Southern California Marshall School of Business

• Danny Peltz, head of treasury at Wells Fargo

• Richard Rawlinson, a partner at Booz & Company

• Donald Sull, a professor at London Business School

• Wim Thomas, chief energy adviser to Royal Dutch Shell

• Tiger Tyagarajan, chief executive of Genpact

• Armando Zagalo de Lima, president of global customer operations at Xerox

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    Game changer: How companies are responding to a fast changing business environment Game changer: How companies are responding to a fast changing business environment Document Transcript

    • GamechangerHow companies are responding to afast-changing business environmentA report from the Economist Intelligence Unit Sponsored by:
    • GAME CHANGER how companies are responding to a fast-changing business environment about this report Game changer is an Economist Intelligence Unit report that examines how companies are responding to a fast-changing business environment. Rather than being a single paper, the analysis is presented as a series of articles. The report was sponsored by Progress Software, but the Economist Intelligence Unit bears sole responsibility for the content. The findings and views expressed do not necessarily reflect the views of the sponsor. The report was written by Rob Mitchell, and edited by Chris Webber. Additional interviews were conducted by Fergal Byrne and Sarah Fister Gale. Our research drew on two main initiatives: We conducted a global online survey of 390 executives in September 2011. Approximately one- half were C-level executives and a similar proportion represented companies with US$500m or more in annual revenue. Respondents were spread evenly around the world, with 30% from Asia, 30% from Europe, 30% from North America and 10% from the rest of the world. To complement the survey results, the Economist Intelligence Unit also conducted a programme of qualitative research that included in-depth interviews with a range of experts and senior executives. The insights from these interviews appear throughout the report. The Economist Intelligence Unit would like to thank the following individuals and all survey respondents who contributed to this research: • Richard Axelrod, co-founder of the Axelrod Group • Rolf Bixner, a senior partner and managing director at Boston Consulting Group • Andrew Blau, president and chief executive of Global Business Network • Lowell Bryan, a director at McKinsey • Michael Denison, research director at Control Risks Group • Clark Gilbert, president and CEO of Deseret News and Deseret Digital • Hal Gregersen, senior affiliate professor of leadership at INSEAD • Anil Gupta, chairman and managing director of Havells • Ronald Heifetz, co-founder of the Center for Public Leadership at the John F. Kennedy School  of Government • Ken Jones, president and CEO at Astellas Europe • Eivind Kolding, chief executive of Maersk Line •  d Lawler, distinguished professor of business at the University of Southern California E Marshall School of Business • Danny Peltz, head of treasury at Wells Fargo • Richard Rawlinson, a partner at Booz & Company • Donald Sull, a professor at London Business School • Wim Thomas, chief energy adviser to Royal Dutch Shell • Tiger Tyagarajan, chief executive of Genpact • Armando Zagalo de Lima, president of global customer operations at Xerox2 © The Economist Intelligence Unit Limited 2011
    • contents Key points from this report 41 The challenge of change The pace of economic change is accelerating and businesses are struggling to adapt 62 Facing up to disruptive change Disruptive innovations can bring companies to their knees, but they can also be a source of rapid growth 93 Message from the frontline Listening to customers and stripping back bureaucracy can help companies adapt more quickly 114 Navigating to a new reality Adapting to change requires strong leadership 125 Breaking with convention The benefits of scenario planning 136 A company with change in its DNA How to build a culture of change 15 Lessons for leaders 16 © The Economist Intelligence Unit Limited 2011 3
    • GAME CHANGER how companies are responding to a fast-changing business environment key points from this report Companies are taking longer to reach critical Leaders need to be willing to conceive business decisions. The pace of change and multiple futures and embrace uncertainty. the complexity of the environments in which “Companies need leaders who are tolerant businesses operate have forced them to extend of ambiguity and who can make others feel decision-making times, even though they would comfortable about that,” argues Lowell Bryan, much prefer for them to have fallen. Nearly one- a director at McKinsey. “They have to instil half (48%) of businesses surveyed say decision- confidence in their teams that they are making making times have increased over the past five the right decisions, even though it’s not clear years; only 22% say they have fallen. how the future will evolve.” Executives fear that they are not making the Setting up a new division can be an effective right decisions. Most businesses are reasonably way of managing disruptive change. confident about gathering and analysing data, Clark Gilbert, president and CEO of Deseret News but they are much less comfortable when it and Deseret Digital, and a former professor at comes to making decisions. Among respondents Harvard Business School, advises: “Setting up a to our survey, only 39% think they are good separate unit with its own P&L and management at making decisions about how and when to allows that unit to focus on the breakthrough respond to change. disruptive change, while the old unit can be shrunk down and moved to a space in which it Cultures will need to adapt. Hal Gregersen, can survive.” senior affiliate professor of leadership at INSEAD, comments: “Most people have a bias Executives should listen to messages from towards the status quo, so when they are the frontline. “One of the most powerful faced with a disruptive opportunity or threat, sources of information about emerging they see it as a virus they want to kill.” With adaptive opportunities and pressures lies change an ever present in today’s business at the frontline,” says Ronald Heifetz, co- environment, leaders need to come up with ways founder of the Center for Public Leadership at of counteracting this resistance to change. Harvard University’s John F. Kennedy School of Government. “Employees who interact with customers are always the first to get the clues and early warning signs about new sources of opportunity or competition.”4 © The Economist Intelligence Unit Limited 2011
    • mobile phones internet users BIG the pace of INCREASE change is accelerating ... ia w ed an e b s m d b ite s al It is estimated lo g s s oci More than that there areSource: World Bank & IDC now more than active Facebook users and Source: World Bank users of Twitter Source: Blogpulse Source: Facebook & Twitter ...and businesses are struggling to respond BUT... of respondents to our survey said the pace of change in their operating environment has of people think it’s And only picked up in the important for their past five years organisation to say the time it takes are confident they their organisation to are making the right to changes in make decisions has decisions about its operating increased over the how and when to environment last five years respond to change Source: Economist Intelligence Unit Survey of 390 business executives © The Economist Intelligence Unit Limited 2011 5
    • GAME CHANGER how companies are responding to a fast-changing business environment 1 the challenge of change The pace of economic change is accelerating and businesses are struggling to adapt Change has been a major feature of our and decide what’s relevant or verifiable and what economic system since at least the industrial isn’t,” he explains. revolution. From that point on, the dynamics of technological advance, trade liberalisation But the sheer volume of new information being and free-market competition have been driving generated is not the only problem; the complexity economies forward in an evolutionary process of today’s economic system has increased as well. where continual change is a defining characteristic. A good indicator of this is the share of exports in global GDP. Although this figure has dipped Still, many observers think the pace of economic markedly since the recession struck, it has been change has picked up in recent years, and the rising significantly over recent decades—from research carried out for this report shows that 12% in 1960 to 29% just before the downturn (see businesses are struggling to cope. Chart 2). This expansion in trade has been a huge boost for business, but it has also created many One important driver of change is that the challenges for them, including having to deal with amount of information the world generates is more competition, new currencies and widely increasing. One contributing factor is that the varying regulatory frameworks. amount of knowledge the world generates is increasing. For example, World Bank data show Technology—particularly the internet—has been that there was a 56% increase in the number another driver of increased complexity. World of academic journal articles published per year Bank data show that the number of internet users between 1990 and 2007 (see Chart 1). Similarly, globally rose by 365% between 2000 and 2009, and statistics from the World Intellectual Property that there are now an estimated 1.8 billion people Organization show that annual patent applications hooked up to the internet worldwide. As well as increased by 90% between 1990 and 2008 forcing companies to adapt their infrastructure (see Chart 1). and business models to take advantage of the opportunities created, research shows that the rise At the same time, information flows are also of the internet has led to increases in trade1 and accelerating. According to KPMG, a consulting firm, competition2. So not only have firms had to adapt the amount of information found in the Lehman to a radical new technology, but they have also Brothers’ e-mail system after the bank’s collapse had to do so in an environment that is becoming Companies don’t in 2008 was roughly 30 terabytes, equivalent to increasingly competitive, dynamic and complex. know how to twice the amount of information contained in the sift through the US Library of Congress. Equally as striking, Wal-Mart All of this means that rather than set long-term mountains of is now said to be processing more than 1 million strategies and stick to them over a period of years, information and customer transactions every hour and stores them companies are finding that they need to take a much decide what’s all on a system capable of holding 2.5 petabytes of more flexible approach to their business. “The value relevant or information, enough space to hold about 33 years of a clearly defined five-year strategy has been verifiable and of HD-TV video. diminishing for some time now,” says Rolf Bixner, what isn’t. a partner at Boston Consulting Group. “Companies Michael Denison, research director at Control now need to constantly review and adapt their Risks Group, believes that this increase in the strategy, and ensure that they build an organisation amount of knowledge and information being that is able and willing to change continuously.” Michael Denison, generated is creating a major headache for Research director, businesses. “Companies don’t know how to What do businesses think of all this? Unsurprisingly, Control Risks sift through the mountains of information nearly three-quarters (74%) of respondents to our6 © The Economist Intelligence Unit Limited 2011
    • Chart 1: Growth in academic journal articles and patent applications per yearsurvey think the pace of change in their operatingenvironment has picked up in the past five years.Also, and perhaps equally as unsurprising, almost 800,000 2,500,000eight in ten (79%) think it is important that they 700,000 Number of journal articles published per yearrespond quickly to the changes taking place around Number of patent applications per year 2,000,000them. Fascinatingly, however, almost one-half 600,000(48%) of all businesses surveyed say the amount 500,000of time it takes for them to make key business 1,500,000decisions has actually increased over the past five 400,000years. Moreover, many are taking a surprisingly 1,000,000long time to reach decisions that are critical 300,000to the company’s performance. Four out of ten 200,000respondents say that it takes them months and 8% World journal articles 500,000say that it takes years. 100,000 World patent applicationsOne of the reasons for this unwelcome extension of 1990 1993 1996 1999 2002 2005 2008decision-making time could be that the acceleratingpace of change and increased complexity of the Source: World Bank & World Intellectual Property Organizationbusiness environment have made decision-makersmore uncertain about the future. Lowell Bryan,a director at McKinsey, points out that this is Chart 2: Share of exports in world GDP, 1960 -2009consistent with the current tendency for companiesto hoard cash. Currently, there is around US$2trn 35in cash sitting on corporate balance sheets inthe US alone. “Companies only want to deal with 30 Percentage share of exports in world GDPinvestments where they have a very high confidence 25in the returns,” he says. 20Further survey findings corroborate this trend(see Chart 4). For example, less than four out of 15ten respondents think that they are making theright decisions about how and when to change. 10Companies also admit that they are much better at 5gathering information than they are at acting onit. Similarly, executives are more comfortable with 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005tasks like identifying early indicators of changeand assessing the possible impact of changes thanmaking timely decisions and implementing them intheir business. opportunities or undermining existing sources of competitiveness. Moreover, in an environmentIn other words, companies have no problem where change, complexity and competition are allgathering and analysing data—which is unsurprising accelerating, the costs and benefits of making thegiven the surplus of information available—but right (or wrong) decisions are being amplified.they struggle with turning this information into 1 C Freund & D Weinhold D,strategic decisions. More information and analysis Business decision-makers must urgently find ways ‘The effect of the internethas not led to less uncertainty. Try as they might, the of bridging the gap between the kind of company on international trade’,pace of change and complexity of the environments many of them think they work for (one that does not Journal of International Economics 62, 171–189,in which they operate have forced businesses to make decisions quickly enough) and the kind the 2004.extend decision-making times, even though they vast majority think they should be working for (onewould much prefer for them to have fallen. that responds quickly and effectively to changing 2 J Brown & A Goolsbee, Does the Internet Make circumstances). The remainder of the articles in this Markets More Competitive?,This dissonance matters. Failure to respond collection explore ways in which business leaders NBER Working Paperquickly to change implies missing out on growth can make that transition. No. 7996, 2000. © The Economist Intelligence Unit Limited 2011 7
    • GAME CHANGER how companies are responding to a fast-changing business environment Chart 3: Chart 4: How effective do you think your organisation is at dealing with the following aspects of change? Has the time your organisation typically takes to takes to make key effective not effective decisions increased or decreased over the past five years? Select all that apply. (% respondents) Source: Economist Intelligence Unit Identifying early indicators of change 12% Significant increase 49% 17% 36% Slight increase Assessing the impact of potential change 47% 16% Making timely decisions about how and when a response to change is required 38% 24% 31% Making the right decisions about how and when to respond to change 39% 20% No change Implementing changes to systems and processes 37% 25% 18% Slight decrease Communicating the rationale for the response to stakeholders 36% 21% 4% Significant decrease Source: Economist Intelligence Unit8 © The Economist Intelligence Unit Limited 2011
    • 2 facing up to disruptive change Disruptive innovations can bring companies to their knees, but they can also be a source of rapid growth Xerox has learned the lessons from disruptive core, traditional way of doing things rather change the hard way. In the 1990s, it quickly than the new, more innovative model,” says found its share in the photocopying market Mr Gilbert.Most people have eroded by disruptive entrants from Japan, a bias towards including Canon and Ricoh. These companies To Hal Gregersen, senior affiliate professor the status quo, produced basic digital versions of Xerox’s of leadership at INSEAD, and co-author of so when they product and had few of the incumbent’s high- the Innovator’s DNA, the failure to respond are faced with end features. But, crucially, they were smaller to disruptive change stems from an inability a disruptive and cheaper, and therefore accessible to a to shake off entrenched ways of thinking. opportunity or much larger customer segment. Xerox could “Most people have a bias towards the status threat, they see not compete and its dominance of the copier quo, so when they are faced with a disruptive it as a virus they market came to an end. opportunity or threat, they see it as a virus they want to kill. want to kill,” he says. “It is so threatening to Today, Xerox is trying to keep its eyes wide so many people in the company that they do open to the potential for disruptive change. everything they can to avoid contemplating a A department called Corporate Intelligence different way of doing business.” Hal Gregersen, spends its time analysing the market, Senior affiliate anticipating client requirements and feeding Sony’s loss of the digital music market toprofessor of leadership, that information to product development Apple is symptomatic of this problem. Having INSEAD specialists. “The earlier you can detect change, enjoyed decades of success with devices such the more capable you are to react,” says as the Walkman and the MiniDisc player, Sony Armando Zagalo de Lima, president of global executives had a rigid view about how the future customer operations at Xerox. “If you drive of their business would unfold. The entire focus change as a company, you are in a much better of the company was on developing and refining position than if you are trying to follow it.” existing technologies and business models that had been hugely successful in the past, and But how should companies distinguish they could not imagine a world in which these disruptive change from more run-of-the-mill would become obsolete. But rather than giving continuous change? Clark Gilbert, president and them a head-start in an emerging industry, their CEO of Deseret News and Deseret Digital, and a experience and knowledge was a handicap that former professor at Harvard Business School, prevented them from making the leap to the new describes disruptive change as a situation where digital world. the customer, business model and performance criteria fundamentally invert in such a way that Over time, most industries face disruptive everything in the core business looks inferior change as a result of new innovations, business when viewed through the lens of the new idea. models or competition. And in an increasingly interconnected and competitive world, the Faced with a disruptive innovation that conflicts probability of disruptive change continues to with their existing business model, companies grow. “The world is now so full of unexpected, must dramatically change their strategy surprising changes that companies today must to embrace the new approach. But as many either disrupt themselves or be disrupted,” business leaders have discovered, this is says Mr Gregersen. extremely difficult to achieve. “Rather than prioritise the new model, companies end up But even if companies understand the need allocating resources and attention back to the to change their strategy in response to a new © The Economist Intelligence Unit Limited 2011 9
    • GAME CHANGER how companies are responding to a fast-changing business environment Chart 5: opportunity or threat, the implementation Deseret News and Deseret Digital, the two challenges of responding to disruptive change companies managed by Mr Gilbert, are good What do you can be considerable. Asked about the barriers examples of this approach. It has long been consider to be the most that slow their organisation’s response to recognised that the newspaper industry is important change, respondents point to a lack of resources facing its own disruptive change moment with barriers that slow as the main factor (see Chart 5). the rise of the internet. Since becoming CEO your organisation’s of Deseret News, a traditional print newspaper response to change? (% respondents) Companies often spend years, if not decades, based in Utah, in 2010 Mr Gilbert cut its cost base Source: Economist optimising their resources, processes and and refocused the editorial content on a more Intelligence Unit technology, and building the necessary distinctive niche of family values. “Rather than relationships to create a competitive business be a general interest newspaper, Deseret News is 35% model and a predictable earnings stream. Abandoning all this in response to major going to be a focused product with a distinctive voice,” he explains. “That’s a more targeted space Lack of resources to implement change external change requires a massive investment but no one can compete with us there and we can in resources that a company simply may survive with that model for a long time.” not possess. “It’s no wonder people find disruptive change difficult,” says Donald Sull, Meanwhile, Deseret Digital, the business unit a professor at London Business School. “All of focused on online content, is pursuing an a sudden, you have a business that relies on aggressive growth strategy. The company has completely different relationships, metrics, its own P&L and management team, and has processes and resources. Companies need huge a remit to focus on innovation and benefit flexibility to explore these new opportunities from the disruptive change in the industry. and this comes into direct conflict with the “If the disruptive change is taking away from 34% requirement for efficiency to exploit their current business model.” my incumbent business, then I need a strong platform for growth that can compensate me Lack of co-ordination across different for that decline,” says Mr Gilbert. “With two functions With managers already stretched in dealing separate companies, I can manage change with the day-to-day responsibilities, engineering in an old legacy organisation and manage change and convincing others that it is necessary innovation in a new, hyper-growth company and beneficial can be very difficult to achieve. at the same time.” “What is often ignored is the downside to the participant in managing change because Having separate management teams means there is no slack to pick up the work,” says that Deseret Digital can recruit people with the Richard Axelrod, co-founder of the Axelrod right experience for managing in the online Group, a consultancy that specialises in change world, rather than trying to re-skill traditional 28% management. “The change process inherently newspaper executives. “Our employees at Inaccurate or requires extra time and resources and while you Deseret Digital aren’t coming to work for a incomplete data can find highly motivated people who are able to newspaper with a digital division,” explains deal with that, the danger is you continue to draw Mr Gilbert. “They are coming to work for a on those people and at some point they burn out.” digital company.” So how should companies respond to disruptive Dealing with disruptive change is highly change? Having identified a change as disruptive, challenging. Many companies fail to spot Mr Gilbert recommends that companies create the impending upheaval, and even if they do, 25% an entirely different division to capture the new opportunity, while migrating the existing the scale of the change may be so significant that they cannot marshal the necessary Bureaucratic decision-making business to a lower-cost model and a more resources to react. A successful response process targeted niche where it can compete effectively. means admitting that a well-established “Setting up a separate unit with its own P&L and business model may no longer be appropriate management allows that unit to focus on the for the new world. This is a painful transition, breakthrough, disruptive change, while the old but the good news is that disruptive change unit can be shrunk down and moved to a space can bring major new opportunities for growth, in which it can survive,” he explains. as well as decline.10 © The Economist Intelligence Unit Limited 2011
    • Chart 6: 3 message from the frontline Which of the following groups Listening to customers and stripping back bureaucracy are most valuable as sources can help companies adapt more quickly of information about change? (Select up to three) Source: EconomistA good place to start when trying to anticipate presentation where problems are concealed Intelligence Unitchange is to engage the parts of the workforce and the emphasis is on telling a story everyonethat have day-to-day contact with customers. wants to hear. “It’s important that these 61%Asked which groups are most valuable as sources sessions are a forum for debate,” he says. Customersof information about change, respondents point “Boards should not just rely on presentationsto customers by a considerable margin (see from direct reports but encourage a broaderChart 6). “One of the most powerful sources conversation, perhaps by bringing in peopleof information about emerging adaptive from several layers down who may have aopportunities and pressures lies at the frontline, different perspective.”which may be the sales force all the way out inthe periphery,” says Mr Heifetz. “Employees who Companies that excel at gathering and actinginteract with customers are always the first to on this information can gain an importantget the clues and early warning signs about new competitive advantage. A US bank, Wellssources of opportunity or competition. Fargo, for example, has set up customer 33% advisory boards across the country, which it PartnersYet despite recognising that customers are the uses to present new product ideas and seekbest source of information about impending feedback on its current offering. “We listenchange, few companies are good at capturing to their challenges and try to distil that into something that we can apply across ourthis intelligence. In large, bureaucraticorganisations, there are often too many layers customer base,” says Danny Peltz, head of 30% Regulatorsbetween customer-facing employees and Treasury at Wells Fargo. “It helps to informsenior management. This means that salient our product development process and alsoinformation that might suggest an impending gives us some of the insight we need to figurechange is too easily blocked or lost in layers of out their unmet needs.”bureaucracy. 29% SuppliersAnother common problem is that seniordecision-makers do not want to hear about One of the most powerful sourcesproblems as it means being proven wrong. of information about the emerging“People who have invested a lot in a particular adaptive opportunities and pressures lies at the frontline, which may be 25%marketing plan or sales plan often don’t want The mediato hear that there needs to be a redesign,” says the sales force all the way out in theMr Heifetz. “They would rather conclude that periphery. Employees who interact with customers are always the firstproducts aren’t selling because the sales peopleare not doing their jobs properly.” to get the clues and early warning 17% signs about new sources of GovernmentIncreased communication between those opportunity or competition.on the periphery of the organisation and 15% Investorsthe key decision-makers can increase thechances of salient information reaching the 12% Business advisers (eg, accountancy firms)right audience. Mr Bixner points out that Ronald Heifetz,this dialogue should be about challenging Co-founder, Center for Public Leadership 9% Trade associationsassumptions, rather than a traditional board at the John F. Kennedy School of Government 8% Non-governmental organisations © The Economist Intelligence Unit Limited 2011 11
    • GAME CHANGER how companies are responding to a fast-changing business environment 4 navigating to a new reality Adapting to change requires strong leadership Chart 7: According to our survey, leadership is the single these three key areas, we thought that we could most important factor that enables organisations take leadership in the industry and move away Which of the to respond effectively to change (see Chart 7). from the pack,” explains Mr Kolding. following factors For Mr Axelrod, leadership goes far beyond being do you a figurehead. “You often get leaders who are Making meaningful improvements across think are most sponsors but in name only,” he explains. “It’s these three dimensions required Maersk to important to enable organisations to all very well approving the budget but leaders conduct sweeping changes to its organisational respond effectively also need to use their authority to support and structure. Mr Kolding admits that, prior to to change? engage with the change process.” Eivind Kolding, embarking on the streamLINE process, Maersk (% respondents) chief executive of Maersk Line, the world’s was too bureaucratic and inefficient. To Source: Economist Intelligence Unit largest shipping company, reckons the ability to address this, the company made 8,000 of its support and drive change is intrinsic to the role 33,000-strong workforce redundant and 49% Strong leadership of leadership. “If a leader cannot change the business, he or she won’t be successful—it’s as stripped out layers of management so that, from the CEO to the lowest rungs in the simple as that,” he explains. “You can’t just say organisation, there were seven layers rather we’ll try to do what we already do a bit better. than 11. In addition, many processes that had That will lead to average results, at best.” previously been scattered across the organisation were centralised in shared service centres to Mr Kolding understands more than most the improve efficiency. importance of leadership to ensure effective change. Three years ago, Maersk Line was in Mr Kolding also revamped the management trouble. Although it shipped 15% of the world’s team, bringing in new members who combined 42% Effective flow of cargo, it had a business model, organisational a willingness to embrace and drive change with structure and culture that were stuck in the strong execution capabilities. “It was quite clear information across organisational boundaries past. Customers were becoming frustrated with that a number of the leaders who had been on a service that they regarded as increasingly the long journey of growing the business were inefficient, and shareholders were losing not mentally ready to make the changes,” he patience with deteriorating financial results. explains. “Although it was risky to replace them because it meant that we had a less experienced management team, we needed to bring in new 36% Rather than make incremental changes to make up lost ground, the management of Maersk people to ensure that we had the right platform Decentralised decision-making implemented a major change programme, in place.” called streamLINE, which was designed to turn round the company’s fortunes by simplifying With a new management team, Maersk could organisational layers, standardising processes start to implement streamLINE, which consisted 33% Accurate and and cutting costs across the board. The management team, led by Mr Kolding, identified of seven major change projects, called “leaps”. Each member of the management team took up-to-date data three key areas for change. First, the company responsibility for one leap, and there were bi- needed to increase its reliability and ensure weekly meetings with the entire team to assess that more shipments arrived on time. Second, progress on each project. 29% Ability to shift it needed to be easier for customers to do business with Maersk. Third, the company Mr Kolding stresses the importance of engaging resources quickl;y planned to improve its environmental the broader workforce through frequent performance by increasing the efficiency of its communication, feedback and by providing operations. “By focusing our change efforts on opportunities for everyone in the company to12 © The Economist Intelligence Unit Limited 2011
    • contribute their views. “You need to give people which is a difference of US$4.7bn compared withownership and the feeling that they are being the previous year. But despite this early success,heard and can influence the process,” he says. Mr Kolding emphasises the need to be flexible“The more ambassadors you can get on side, the and open to adapting the strategy in responsebetter. Just sending out a memo from the CEO to changing stimuli. “The strategy sets out aisn’t going to help.” direction, but you need to adjust it all the time,” he stresses. “You don’t always know how you’reAt Maersk, the early signs suggest that going to get where you’re going at the outset.streamLINE is having a positive impact. In 2010 If you do, you probably aren’t being ambitiousthe company announced profits of US$2.6bn, enough.” 5 breaking with convention The benefits of scenario planning Wim Thomas spends a lot of time thinking In recent years, scenario planning and other about the future. As the chief energy adviser long-term risk management techniques to Royal Dutch Shell, Mr Thomas is part of the have become more widely accessible to help team that conducts the company’s scenario companies think through how the future planning exercises. In the 1970s, Shell might evolve, particularly in sectors, such pioneered the commercial use of scenario as energy, that have very long investment planning as a way of helping the company horizons. But these tools nevertheless to think about how the future might unfold. remain a minority interest. Among our survey The goal of the exercise is not to predict the respondents, just one-quarter use scenario future, or even assign probabilities to particular planning to monitor and identify change in events taking place, but to present a series the external environment. of plausible narratives that challenge senior executives’ view of the world. “It’s all about Andrew Blau, co-president of Global Business thinking through the different dynamics and Network, a consultancy, thinks businesses drivers of change, so that executives can could benefit from embracing the tool envisage a number of plausible outcomes more wholeheartedly. For him, the value of and how they might interact over time,” scenario planning lies in helping executives to says Mr Thomas. overcome entrenched viewpoints about how the future will unfold. “When we think about By testing their strategy against a set of the future and what the sources of change distinct narratives, Shell executives have an might be, we look for evidence that confirms opportunity to assess the robustness of their our existing belief and tend to discard signals business across multiple scenarios. “Most of that suggest another story,” he explains. the time, your strategy works across one or two “By forcing us to think about different different models, but there may be another narratives, scenario planning helps us model where it doesn’t work,” explains Mr to consider what change might look like, Thomas. “That’s fine as long as you know that how we can identify it and how we might adapt and have used your judgment to make that our strategy in the light of a range decision. At least if you know about the possible of outcomes.” scenarios, you can prepare for the uncertainty and make sure you don’t lose your shirt. That is Broader conversations about the future are how companies survive, and how you make them important in a business environment where more resilient.” there is a tendency for senior executives © The Economist Intelligence Unit Limited 2011 13
    • GAME CHANGER how companies are responding to a fast-changing business environment to surround themselves with people from similar backgrounds. “Although it may not be intentional, executives often end up with teams comprised of people who have closely related If you are in an stories about the organisation’s past and future environment direction,” says Mr Blau. “At its worst, this becomes groupthink, a kind of echo chamber that is changing faster within the organisation whereby everyone and faster, it means you reaffirms what the obvious pathway is going to look like.” have to make more calls and start experimenting. Senior management teams that suffer from groupthink will typically dismiss information You need to fail fast, fail that challenges received wisdom as an outlier or quickly, and fail cheaply. anomaly. But these signals from the periphery, far from being noise in the system, might be extremely valuable information. “Anomalies, such as products that should sell but don’t, or Rolf Bixner, that sold much better than expected, are often Senior partner and managing director, signals that there is a gap between your mental Boston Consulting Group maps of how the world should work and the actual terrain,” says Professor Sull. that they are making the right decisions, Of course, spotting the indicators of major even though it’s not clear how the future change is not straightforward. Less than one- will evolve.” half of the respondents to our survey think that their organisation is effective at identifying Another important step on this journey is early indicators of change. “Sometimes people building a culture of change. In part, that think that signals of change are going to be as means conducting frequent experiments obvious as a man waving a red flag in an empty and being tolerant of failure. Rapid change meadow, but it’s often much more subtle than requires a plethora of new ideas and that,” says Mr Blau. approaches. Not all will work or be successful, but those that are can be scaled up quickly Despite the challenge of spotting early to ensure that the company keeps pace with indicators, companies can maximise their a fast-moving environment. Companies chances of anticipating change by ensuring like Procter & Gamble, using its Connect + that they are open-minded, and willing to Develop model, have put experimentation and have their worldviews regularly challenged. openness to new ideas at the heart of their As Mr Blau says: “Anticipating change requires business. “If you are in an environment that is executives to be sensitive to their environment changing faster and faster, it means you have and tolerant of ideas that come from the to make more calls and start experimenting,” margins, even if they conflict with their view says Mr Bixner. “You need to fail fast, fail of the world.” quickly, and fail cheaply.” Chief executives, in particular, need to build Although organisational structures and awareness of the possibility of change in their flat reporting lines help to encourage a management team and ensure that they are more dynamic approach to management, comfortable with multiple paths. “Companies they will not enable a company to respond need leaders who are tolerant of ambiguity effectively to change on their own. of the world and who can make others feel To do this, executives need to create comfortable about that,” says Mr Bryan. a culture where change is encouraged “They have to instil confidence in their teams and welcomed.14 © The Economist Intelligence Unit Limited 2011
    • 6 a company with change in its DNA How to build a culture of change Few chief executives receive complaints from their employees that they are not going through enough change. But at Genpact, a business process management company that was once a business When we hire people, unit within GE, acceptance of change has been hard-wired into the business culture. “If our particularly senior leaders don’t see enough change around them, executives, we test their they get restless,” says Tiger Tyagarajan, chief executive of Genpact. ability to deal with change and their willingness to Business process management is a young, technology-oriented industry that is changing drive change and overcome rapidly in response to evolving customer needs. resistance in their team. Having a workforce that is flexible enough to adapt with the business is a vital asset in such an environment. For Mr Tyagarajan, it is essential to set expectations of change in the workforce even Tiger Tyagarajan, at the recruitment stage. “In our core values, Chief executive, we’ve articulated that embracing and driving Genpact change is expected behaviour from everyone in the company,” he says. “When we hire people, particularly senior executives, we test their effective not only at understanding the need for ability to deal with change and their willingness change but at driving it across our processes.” to drive change and overcome resistance in their team.” The ability to respond to and drive change also forms part of executives’ performance Mr Tyagarajan cites Genpact’s adoption of lean management criteria. “Change is core to how six sigma, a set of tools that drives innovation we evaluate people,” confirms Mr Tyagarajan. and excellence in operational management, as “Every manager appraises their people on being a strong agent of change at Genpact. specific measures that show whether they “Lean six sigma helps us to improve processes have driven change or have been able to absorb for our customers and measure the financial it in their role.” benefits for them,” he explains. “We know that to achieve those improvements, change needs to take Genpact also pays careful attention to measuring place, which is why we think of lean six sigma as a the outcomes of its talent management processes. change acceleration process.” It carefully tracks the success of its succession planning processes to find the right internal High-potential candidates for future leadership candidates for senior positions, and measures positions at Genpact are expected to spend time the ability of its lean six sigma process to develop working on lean six sigma, before being rotated to future leaders. “If people are emerging from more senior positions in the company. “We use lean that programme and there is strong competition six sigma as a leadership training ground,” says from functions in the business to grab them, Mr Tyagarajan. “If executives can thrive in that then we know that we’re doing the right thing,” environment, then we know that they have been adds Mr Tyagarajan. © The Economist Intelligence Unit Limited 2011 15
    • GAME CHANGER how companies are responding to a fast-changing business environment lessons for leaders Our research for this paper suggests that Create a culture where change is companies could try the following steps encouraged and welcomed. Although to accelerate decision-making and ensure organisational structures and flat reporting that their strategy processes are aligned lines help to encourage a more dynamic with a fast-changing external environment. approach to management, they will not enable a company to respond effectively Review strategy when faced with change, to change on their own. The culture not according to the calendar. Most and attitude of management are just as companies set strategy over a period of important as the structure within which they time, such as five years, and then review operate. it annually. But there is no guarantee that change will coincide with the moment Conduct frequent experiments and be when this process is at its peak. Conducting tolerant of failure. Rapid change requires a strategic reviews when necessary is a better plethora of new ideas and approaches. Not approach than putting a date in the diary. all will work or be successful, but those that are can be scaled up quickly to ensure that Seek views and information from as the company keeps pace with a fast-moving many sources as possible to feed into the environment. strategy process. Companies cannot set strategy in a vacuum. When reviewing their Be tolerant of ambiguity and willing to future direction, business leaders should conceive multiple futures. An uncertain, ensure that they seek views from a range of fast-moving business environment requires different stakeholders—both internal and business leaders to conceive a variety of external. plausible future narratives for their company. Chief executives, in particular, need to build Ensure that key managers have the awareness of the possibility of change in autonomy to make decisions quickly. their management team and ensure that they Bureaucratic companies with multiple layers are comfortable with multiple paths. and reporting lines are inherently slow at decision-making. It takes time for key Employees who are affected by change are information to reach decision-makers, and much more likely to support the process it is often sanitised and filtered before it if they already trust the leadership. If the reaches them. Flat management structures, chief executive and other senior managers where decision-making responsibility is have consistently demonstrated an approach decentralised and devolved to key managers, that is open, honest and supportive, then are more responsive to change. employees will trust their judgment.16 © The Economist Intelligence Unit Limited 2011
    • notes© The Economist Intelligence Unit Limited 2011 17
    • GAME CHANGER how companies are responding to a fast-changing business environment London NewYork HongKong 26 Red Lion Square 111 West 57th Street 6001, Central Plaza London New York 18 Harbour Road WC1R 4HQ NY 10019 Wanchai United Kingdom United States Hong Kong Tel: (44.20) 7576 8000 Tel: (1.212) 554 0600 Tel: (852) 2585 3888 Fax: (44.20) 7576 8476 Fax: (1.212) 7576 8476 Fax: (852) 2802 7638 E-mail: london@eiu.com E-mail: newyork@eiu.com E-mail: hongkong@eiu.com24 © The Economist Intelligence Unit Limited 2011