CEO Briefing: Corporate priorities for 2007 and beyond


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CEO Briefing is an annual Economist Intelligence Unit research programme designed to identify the management challenges that face the world’s corporate leaders. The 2007 CEO Briefing is sponsored by UK Trade & Investment, the UK government’s international business development organisation.

The Economist Intelligence Unit bears sole responsibility for the content of this report. Our editorial team executed the online survey, conducted the interviews and wrote the report. The findings and views expressed in this report do not necessarily reflect the views of the sponsor. Our research drew on two main initiatives:

● we conducted a wide-ranging online survey of senior executives from around the world in November and December. In total, more than 1,000 executives, half of them from the C-suite, took part;

● to supplement the survey results, we also conducted in-depth interviews with chief executive officers (CEOs), chief financial officers (CFOs) and other senior executives from major companies in all of the world’s regions.

James Watson was the author of the report and Andrew Palmer was the editor. The following researchers conducted interviews with executives around the world: Ross O’Brien, Peter Baldwin, Alison Rea, Jeanette Borzo, Clint Witchalls and Terry Ernest-Jones. John Bowler also contributed to the report. We would like to thank all the executives who participated in the survey and interviews for their time and insights.

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CEO Briefing: Corporate priorities for 2007 and beyond

  1. 1. CEO BriefingCorporate priorities for 2007 and beyond
  2. 2. CEO Briefing Corporate priorities for 2007 and beyondPrefaceCEO Briefing is an annual Economist IntelligenceUnit research programme designed to identifythe management challenges that face the world’scorporate leaders. The 2007 CEO Briefing is sponsoredby UK Trade & Investment, the UK government’sinternational business development organisation. The Economist Intelligence Unit bears soleresponsibility for the content of this report. Oureditorial team executed the online survey, conductedthe interviews and wrote the report. The findingsand views expressed in this report do not necessarilyreflect the views of the sponsor. Our research drew on two main initiatives:● we conducted a wide-ranging online survey of senior executives from around the world in November and December. In total, more than 1,000 executives, half of them from the C-suite, took part;● to supplement the survey results, we also conducted in-depth interviews with chief executive officers (CEOs), chief financial officers (CFOs) and other senior executives from major companies in all of the world’s regions.James Watson was the author of the report andAndrew Palmer was the editor. The followingresearchers conducted interviews with executivesaround the world: Ross O’Brien, Peter Baldwin, AlisonRea, Jeanette Borzo, Clint Witchalls and Terry Ernest-Jones. John Bowler also contributed to the report. We would like to thank all the executives whoparticipated in the survey and interviews for their timeand insights.January 2007 © The Economist Intelligence Unit 2007 1
  3. 3. CEO Briefing Corporate priorities for 2007 and beyond Executive summary I f optimism is any guide, 2007 is shaping up to be Germany, France and Japan, bigger economies all. a vintage year. Respondents to the fifth annual The increasing weight of emerging markets in the CEO Briefing survey are more buoyant than they global economy and in organisations’ plans brings the have ever been. Nine out of ten executives regard the following challenges, however. prospects for business over the next three years as good or very good. ● More complex risk management. Developing No surprise, then, that topline growth will again markets are better equipped than they were to ride be a higher priority for most respondents than cost out financial storms, but the risks are still substantial. control. Spending will be targeted at the front office Emerging markets remain disproportionately exposed first and foremost: sales and marketing are the areas to geopolitical upheavals and to slowdowns in key of the business expected to receive the greatest export markets such as the US. amount of new investment. The dynamism of emerging markets largely explains ● Markets at different stages of maturity. the spring in the executive step. For the second year Emerging markets may be growing rapidly, but they running, rising demand in the developing world is are still much poorer than developed economies. seen as the most critical force at play in the global In the face of fierce competition and the threat marketplace. A clear majority of respondents intends of commoditisation, a large majority of survey to invest more time and money in emerging markets respondents intend to differentiate themselves on over the next three years than in developed markets. quality rather than cost. That is easier said than done Led by China and India, Asia excites most in countries where average incomes will trail those in attention among the respondents, both as a revenue the OECD economies for years to come. opportunity and as a sourcing location. Asian airport lounges will bulge as a result. China vies with the US ● Unfamiliar customers. Fewer than one in ten and the UK as the overseas market that executives respondents think that they are hampered by an intend to visit most frequently in 2007. India will be inadequate understanding of customers in the a more common destination for respondents than developed world. There’s much less confidence about emerging markets. More than one-quarter believe that lack of customer insight is a barrier to growth in CEO Briefing is an annual research programme these countries. designed to take the pulse of global executives. More than 1,000 executives around the world partic- Although the differences between the developed and ipated in the 2007 survey. Roughly 25% of respond- developing worlds are eroding, the survey makes it ents were based in Asia, 25% in North and Latin clear that they are still distinct business landscapes. America, and 40% in western and eastern Europe. In developed markets, executives point to high labour The US, UK, Germany, India, Mexico and South Africa provided the largest numbers of respondents. costs and saturated markets as the critical challenges. Innovation is a priority—respondents primarily look2 © The Economist Intelligence Unit 2007
  4. 4. CEO Briefing Corporate priorities for 2007 and beyondHow does your organisation view the prospects for business in the global marketplace over the coming three years?(% respondents) Very good Good Indifferent Poor Very poor2003 6 55 22 16 12004 7 69 18 5 12005 9 65 17 8 12006 20 67 8 4 12007 28 61 8 2 1Source: Economist Intelligence Unit survey.0 20 40 60 80 100to drive revenue growth by selling new products to Straddling these two types of environmentexisting customers. effectively, let alone addressing the differences In emerging markets, by contrast, the challenges between individual markets, is a huge test ofare quite different. Labour costs are low and markets management. Executives are right to be optimisticare largely untapped. Executives are focused instead about the prospects for 2007 and beyond. They alsoon managing shortages of local talent and plan to grow need to be realistic about the complexity of the taskmainly by selling existing products to new customers. ahead. © The Economist Intelligence Unit 2007 3
  5. 5. CEO Briefing Corporate priorities for 2007 and beyond The global marketplace F ollowing a bubbly 2006, global executives are our large chemical plants to take advantage of buoyed up about the future. Nine out of every the attractive growth rates. In North America, the ten executives polled for this report consider economic climate is robust despite a few negative business prospects over the next three years to be indicators. And the upturn continues in Europe.” either “good” or “very good”. Strikingly, nearly one- It is not surprising, then, that topline growth third of executives (28%) chose the latter option, up will be a higher priority than cost control for most from 20% in 2006 and just 9% in 2005. “Candidly, we executives. “Growth will be top of the agenda for have never been more optimistic about our growth 2007,” says Henry Seddon, a vice-president for prospects than we are today,” says Lew Frankfort, the Europe, Middle East and Africa at product lifecycle CEO of Coach, a US-based upmarket accessories firm. management firm, UGS. “The target is 20% for There are certainly good reasons to be cheery. [2007].” The global economy expanded by some 5.4% in 2006 Greater optimism is balanced by an awareness of (measured at purchasing power parity exchange rates) greater uncertainties, however. Thanks to ongoing and despite a modest dip this year, is expected to headlines about Iraq, Iran and the Middle East, along continue to grow robustly (4.7% on average) over the with tensions in North Korea, geopolitical instability next five years. World trade growth will also fall slightly continues to concern executives. “There are lots of in 2007, but expansion of 7.6% is hardly insignificant. risks,” warns Michael Sproule, the chief financial “The global economy continues to grow strongly,” officer (CFO) of New York Life Insurance, which says Jürgen Hambrecht, chief executive officer (CEO) operates globally. “I’d say I’ve probably not ever in of German chemicals giant, BASF. “Asia, and China my career felt that there was so much geopolitical especially, continues to act as a powerful growth uncertainty that has ways of impacting the company.” engine. In China, we are well positioned through Economic risks are also visible. Interest rates have World and regional GDP growth (%) 2005 2006 2007 2008 2009 North America 3.2 3.3 2.0 2.6 2.8 Western Europe 1.7 2.6 2.0 2.1 2.2 Asia & Australasia 4.7 5.1 4.6 4.6 4.4 World (market exchange rates) 3.4 3.9 3.1 3.3 3.3 World (PPP exchange rates) 5.0 5.4 4.7 4.8 4.7 Source: Economist Intelligence Unit World trade growth (%) 2005 2006 2007 2008 2009 Developed countries 6.1 8.2 5.7 6.0 6.0 Developing countries 11.8 13.2 10.7 10.6 10.5 World 8.0 10.0 7.5 7.7 7.7 Source: Economist Intelligence Unit4 © The Economist Intelligence Unit 2007
  6. 6. CEO Briefing Corporate priorities for 2007 and beyondbeen on the rise for the past two years in the US and The Asian opportunityEurope. A sharp slowdown in the US housing marketis leading to fears of a decline in consumer spending, When firms discuss emerging market opportunities,while the ongoing decline in the dollar has put they’re usually talking about Asia-Pacific. Half thepressure on exporters to the US market. “We are not companies (52%) polled for this report believe thatlooking for growth to be as strong in 2007 globally,” the greatest opportunity for revenue growth lies insays Douglas Flint, group finance director of financial Asia. North America, in second place, captured justservices giant, HSBC Holdings Plc. “We are coming off 13% of the vote.of the back of what has been a very strong period with Six out of ten respondents (60%) believe thevery benign characteristics.” region offers the greatest sourcing opportunities, The oil price has fallen significantly from its peak followed by central and eastern Europe with 15%.of US$78.40 in July 2006, but it remains historically Businesses are putting their money where their mouthhigh, and there are numerous scenarios that could is. The largest share (43%) of respondents will pumpabruptly disrupt supply and push markets into most new investment into Asia, with western Europe,turmoil. “Our energy bills have gone up, or are going eastern Europe and North America all lagging wellup, significantly from before,” says Darren Shapland, behind.CFO of British supermarket, J Sainsbury. “Oil price has The Economist Intelligence Unit predicts thata big impact on our business.” Overall, Mr Shapland growth in the economies of Asia and Australasiasees the outlook for 2007 as decidedly uncertain. “I (excluding Japan) will average 6.3% between 2007think on the macro-economic environment there are and 2011. China and India lead the way with dramaticsome pressures that are maybe a bit higher now than growth rates of 9.6% and 7.6% in 2007, respectively.they were a year ago.” However, other parts of the region should not be If risks are greater and world growth is forecast ignored. “I think everyone is underestimating theto dip this year, why then are spirits higher among growth opportunity in ASEAN,” says Bill Barney, CEOexecutives? One reason might simply be the growing of Asia Netcom. “This region is collectively more stabledistance from the last major economic downturn. politically and economically than it has been in atAnother is that the wave of regulatory initiatives thathas swept over companies and financial institutions Which region do you think will offer the greatest opportunities,over the past three years or so has crested. in terms of revenue growth, for your business over the next three years? The chief wellspring of optimism, however, lies in (% respondents)the dynamism of emerging markets. OECD economies Asia-Pacificgrew at an average rate of 2.9% in 2006, while non- 52 North AmericaOECD ones expanded at 8.1% (see box: Emerging 13markets: rebalancing act). HSBC’s Mr Flint says that his Western Europe 10firm is in a good position because of its strong access Central and Eastern Europeto markets with rapidly expanding middle classes, 10which in turn drives demand for banking and credit Latin America 7services. “HSBC’s biggest opportunity over the long Middle East and North Africaterm is in China, and nearer term in India,” he says. 5 Sub-Saharan Africa“But then Turkey, Brazil, Mexico and the Middle East 3are all strong.” Source: Economist Intelligence Unit survey. © The Economist Intelligence Unit 2007 5
  7. 7. CEO Briefing Corporate priorities for 2007 and beyond“Asia has got the best opportunity least five years.” 2007 significant new investment will go into Europe,for growth. It is starting from a Japan continues to experience which will provide the greatest opportunity,” sayslower base, but it certainly has one of the longest economic Ed Colligan, president and CEO of mobile computingmore opportunities.” expansions in its post-war history, firm, Palm.Peter Jackson, CEO at Asia Satellite although this is likely to slow Europe’s real growth story lies further east with theTelecommunications. slightly in 2007. We forecast that new members of the EU, which are expected to expand the economy will grow by 1.7% by an average of some 4.7% in 2007, down from 5.5% in 2007 and 2008—still respectable rates by the in 2006. The Baltic region (Estonia, Lithuania and standards of the past decade. Latvia) will grow by some 7.8% in 2007, slightly cooler than the red-hot growth of 9.6% in 2006, but sizzling Europe: A little more cheer nonetheless. After years of stubbornly slow growth, the euro Much risk remains, though. Should the euro economies are in the midst of a recovery. Estimated strengthen more sharply than expected against the growth of 2.4% in 2006 within the euro-13 countries dollar and the US economy deteriorate, growth would was strongly up from 2005. And while we expect be substantially reduced. Moreover, housing markets this rate of expansion to fall to about 2% in 2007, in several countries have become substantially in part because of a decline in external demand, the overvalued, increasing the risk of a correction. We fundamentals are in place for an average growth forecast that interest rates will increase to 3.75%, rate of just above 2% between 2007 and 2009. “In most likely in March 2007. Emerging markets: threats, to a slowdown in the US, to capital previous decade, many of the fault lines flight and to the risk of overheating. And it are now in the developed world, in the rebalancing act is important to remember that incomes in form of large current-account deficits, the developed world are still much higher. rising household debt and overvalued The balance of economic power is shifting Emerging markets are also better property markets. from the developed world towards the equipped to deal with a liquidity crunch Going for growth larger emerging markets, and in particu- than ever before, however. Whereas Real GDP growth (%) Non-OECD OECD lar towards China and India, Russia and ten years ago a large proportion of the 9 Brazil. “Asia and eastern Europe, includ- emerging world was vulnerable to a 8 ing Russia, offer most potential for us and balance of payments crisis, today the risk 7 will get most investment in 2007,” says is concentrated on fewer countries that 6 Henry Seddon of UGS. account for a much smaller share of global We have been here before, of course. GDP, such as Turkey and Hungary. 5 The last time sentiment about emerging Several of the larger developing 4 markets was so positive was the first economies, including China, India, Korea, 3 half of the 1990s, shortly before a wave Taiwan and Singapore, are net external 2 of crises that devastated the emerging creditors, able to cover not only their 1 world in the second half of that decade. short-term foreign debt with foreign Risks remain. Emerging markets are exchange reserves, but also their entire 0 2005 2006 2007 2008 2009 disproportionately exposed to geopolitical foreign debt. Indeed, in contrast with the Source: Economist Intelligence Unit.6 © The Economist Intelligence Unit 2007
  8. 8. CEO Briefing Corporate priorities for 2007 and beyondThe US: dodging a cold? deteriorate in 2007 (leading to a moderate slowdown in corporate investment) as domestic demandThe rate of growth in the US is slowing considerably weakens and productivity growth dips. A weakeningand the economy as a whole is forecast to expand by dollar will give a boost to exports, but will result in ajust 2% in 2007, partly because of a slowdown in the slowdown in US demand for imports.housing market, which will dent consumer demand. Fortunately, however, the reliance of theWe expect the US Federal Reserve (the central bank) world economy on the fortunes of the US market,to cut rates modestly from around mid-2007, helping while still huge, is being steadily reduced, as Chinato deliver a moderate recovery in 2008, but the and India emerge as powerful sources of globalchances of a recession before the end of 2007 are demand. “If the US caught a cold, it used to behigh, at around one in three. that emerging markets stumbled, whereas it is less Four years of double-digit profit growth has led to certain that that would be the outcome today,”a surge in corporate investment, but profitability will says HSBC’s Mr Flint. Hyped up? up about prospects for business in “Growth prospects are huge.” He 2007, but China-based executives cites the airline industry as just one are notably cooler. Eight out of ten example: “For 1bn people, we’ve China and India are the headline- respondents there say the outlook only got about 250 to 280 planes. grabbers of globalisation, with is promising, but just 3% agree In the US, for 300m people, there’s their disproportionately large that it is looking “very good”, well over 6,500 aircraft. So that gives populations captivating the atten- down on a figure of 28% overall. a perspective about how big the tion of firms the world over. China India-based executives, by opportunity is in India,” he says. has firmly established itself as the contrast, are practically melting True enough, but being fired workshop of the world, while India with excitement: 98% say the up can also lead to overheating. is the globe’s back-office. Both are prospects are either good or very Inflation in India has almost racing to make inroads on each good, with 70% of those falling doubled in the past 12 months, other’s territory. into the “very good” camp. In housing prices are skyrocketing Unsurprisingly, respondents India, says Tejpreet Chopra, CEO and strong wage gains are fuelling based in both countries are fired of GE Commercial Finance in India, buoyant domestic demand. How does your organisation view the prospects for business in the global marketplace over the coming three years? (% respondents) Very good Good Indifferent Poor Very poor Global 28 61 8 2 1 India 70 27 2 China 3 78 13 3 3 Source: Economist Intelligence Unit survey. © The Economist Intelligence Unit 2007 7
  9. 9. CEO Briefing Corporate priorities for 2007 and beyond Enabling commerce: more things up and down the river.” source more from Asia, they are also Much of the growth in the industry starting to supply local customers from logistics complexity ahead over the past few years has been within the region itself, rather than from driven by trade between developed Europe and the US. “The way things are and developing markets. “We are a stored and moved is more complex,” says beneficiary of offshoring and outsourcing Mr Remund. It is no longer just about a Behind the growth in global commerce by our customers because as and when Chinese firm shipping goods on the main lies a vast network of ships, trucks and customers outsource their manufacturing routes to the west, he says, but rather aeroplanes, manned by literally hundreds to China or to other places, their about goods being made in multiple of thousands of people. As globalisation consumers will still be here in western locations, with components sourced from and trade increases, global logistics and Europe or in North America, or wherever numerous other places, before being transportation firms ensure that millions they may be, and therefore their transport shipped to markets all over the world. of tonnes of oil, coal, food, clothing, elec- requirement as part of their supply chain The notoriously poor transport tronics, car parts and other goods are all increases,” says Peter Bakker, CEO of networks within developing countries efficiently delivered every day. express and mail delivery company, TNT. remain a major challenge. The Transport Many firms are struggling to keep pace The big new story, though, is the Corporation of India, a freight firm, notes with demand. Take American Commercial rising volume of trade within emerging that the 2,150-km journey between Lines, a barging company in the US. “In markets themselves. “Intra-Asia trade Kolkata and Mumbai can take a cargo the barging company, capacity is the actually has the highest growth at the truck some seven days to navigate, at an constraint. If you don’t have enough moment,” says Christoph Remund, CEO average speed of 11 km per hour, with barges to serve your customers, that for DHL’s Global Forwarding business in some 32 hours spent waiting at tollbooths means rates skyrocket,” says board India. “[There’s] obviously a key focus on and checkpoints. “Transport providers director, Richard Huber. “We will have a China, India, Japan and South Korea, [but need to invest in putting domestic period of several years where capacity will also] other countries, such as Indonesia, transport solutions inside China [and] be very much constrained. That’s good if which supply raw materials. It’s a two-way inside India to allow those economies to you happen to own barges. It is not good street.” develop and to allow those consumers to, if you happen to be a guy who has to ship And as international firms start to basically, consume,” says TNT’s Mr Bakker.8 © The Economist Intelligence Unit 2007
  10. 10. CEO Briefing Corporate priorities for 2007 and beyondCritical forcesT he biggest story, if not the newest one, In your opinion, which of the following forces will have the greatest impact on the global marketplace over the coming emerging from this year’s report is the relentless three years? Select up to three options. march of globalisation. “The number of markets (% respondents)to do business with is increasing,” says UGS’s Mr Rising demand in emerging markets 34Seddon, “and the producing countries are becoming Global sourcingconsumers.” 32 The proportion of revenue that firms derive from Geopolitical instability 30overseas is one obvious indicator of globalisation. Increased competitionWithin the next three years, more than half the 27executives surveyed for this report expect to get more Increased globalisation and deregulation 25than 50% of their revenue from abroad. Customer pressure for improved products and services Much of that growing pool of overseas revenue 18 Advances in customer-facing technologies (eg, Web 2.0)comes from the developing world. For the second 17year running, the biggest critical force at work in Increased emphasis on environmental issues 17the global marketplace is seen as rising demand in Economic and financial instabilityemerging markets. China and India’s burgeoning 15middle classes are being pursued with particular Demographic change (eg, population ageing, low birth rates) 13vigour. “The growth in Asia has created a phenomenal Rising competition from domestic companies based in emerging marketspool of wealth in China and India in particular, and the 12size of the middle class in those countries is creating Rising M&A activity 12an unprecedented scale in global consumerism,” says Catastrophic events (eg, terrorism, pandemic, natural disasters)Mr Barney at Asia Netcom. 9 Rising protectionism India alone is expected to be home to some 500m 9middle-class people by 2010. For many, developed New business regulations 8markets pale by comparison. Take Mr Sproule of New Advances in back-office technologies (eg, RFID)York Life Insurance, who says his firm’s international 7focus is on emerging markets. “Generally, the Other 3developed markets are much slower growth Source: Economist Intelligence Unit survey.marketplaces and we don’t see those as really primeopportunity areas for us to go and invest our capital,”he argues. His firm already employs some 12,000 sourcing as the second-biggest force impacting on theagents in India in a joint venture with a local firm, Max global marketplace. As Mr Barney recounts: “I recentlyIndia, and plans to double that number over the next met the CIO of a group of US hospitals that does not docouple of years. a single dollar’s worth of business outside of its home Demand is just one side of the globalisation country, but it had moved its entire customer servicecoin. Supply is the other, and executives pick global infrastructure to Bangalore. In today’s economy, you © The Economist Intelligence Unit 2007 9
  11. 11. CEO Briefing Corporate priorities for 2007 and beyond“Our customers are becoming more don’t have to be a global company also tomorrow’s new rivals. A small but significantand more dependent on the way in order to globalise.” minority of firms point to the threat of risingtheir business operates in real time Cubist Pharmaceuticals, competition from domestic companies based inacross huge distances, as the world a US pharmaceuticals firm, emerging markets (see box: Race for the top).globalises.” has established a “virtual”Andy Green, CEO, BT Global Services. manufacturing and logistics The talent gap chain, all managed by external One of the biggest problems that businesses will partners. “We don’t own the manufacturing plant. contend with in 2007 is a shortage of talent. This is We don’t own the shipping routes. We don’t own especially true in emerging markets, where one in the warehouses that store our product,” says David two respondents identify a lack of available talent as McGirr, the firm’s CFO. “All of that is done for us by the primary barrier to growth. “If there’s one limiting subcontractors. So all we have in the company are the factor to growth, it is people and talent,” says Tejpreet thinkers, the brains, the scientists and the doctors— Chopra, the president and CEO for GE’s Commercial who do all the clinical studies and research—the Finance business in India. marketing and sales force, and then all the people Despite the vast numbers of graduates entering like me, who support them.” the workforce every year in both India and China, Executives also recognise that these emerging a relatively low proportion of them have the skills markets not only provide today’s new customers, but required by global firms, especially given the brisk Race for the top organisations (CROs), such as Parexel, on recently partnered with Eli Lilly to set up the provision of clinical data management an exclusive medical information centre The developed world isn’t alone in wor- services for clinical trials. near New Delhi, which will provide Eli rying about competition. “We started at “Pharmaceutical companies want Lilly with data management, statistical a particular point on the value chain for more flexibility and they want more analysis and medical writing. historical reasons,” says Mr J Rajagopal, scalability,” says Mr Rajagopal. “One of Mr Rajagopal says Eli Lilly has global head of the life sciences division of our customers wanted 100 people and, partnered with TCS because it is looking India’s Tata Consultancy Services (TCS), because of the innovation processes we for a flexible model. “They want to make “but as time has gone by we have gone up have, we were able to hire these people in sure that they have access to resources the value chain. There is a clear realisa- a flat four weeks and have them working and a global talent pool,” he says. “They tion that we cannot stay where we are. in our organisation. Now that’s something want to be able to scale resources when The competition is catching up both from a normal CRO organisation could not possible and they want to maintain a India and from other countries.” possibly do.” global work flow, 24 by 7. We were able to India has a staggering 1.5m doctors TCS’s life sciences division began five offer all those things.” and, as Mr Rajagopal discovered, not all years ago and took a year before it won its In order to provide a global workflow, of them are gainfully employed. Given first contract. Today, however, revenue TCS has acquired (and will continue to the rich pool of medical talent, plus is growing at 30-40% per year and it acquire) companies in locations from TCS’s knowledge of information systems, employs some 3,200 people, including China to Chile. “It’s no longer an Indian continuous improvement and quality medical doctors, biostatisticians, story,” says Mr Rajagopal, “It’s a global control, the company realised that it biochemists and pharmacologists. Its story and we will go where the markets are was in a strong position to compete clients include Johnson & Johnson, GE and where we can offer our services most with traditional contract research Healthcare and Novo Nordisk. In fact, TCS effectively”.10 © The Economist Intelligence Unit 2007
  12. 12. CEO Briefing Corporate priorities for 2007 and beyondgrowth in demand. In many sectors, costs are already and more … is the whole impact “We see ‘green’ factors as anspiralling. Wage inflation in the Indian information that longer supply chains and opportunity and beneficial totechnology (IT) sector is about 20% and turnover is globalisation have on global our own industry and that of ourdouble that, as highly skilled workers switch jobs in warming and climate change,” says clients. Any regulatory change ororder to boost their wages rapidly. Peter Bakker, CEO of Dutch express investment is an opportunity to It’s a similar story in China. “Most multinational and mail delivery company, TNT. He create new technologies that helpoperations [in China] must contend with a 20-30% believes companies such as his will to develop more environmentallyannual staff turnover rate and recruit 1,000 plus be pushed to reduce their impact friendly operations.”employees annually,” says Indranil Sen, a vice- on the environment, especially as Pierre-Yves Cros, Group Strategy Director, Capgeminipresident for strategic intelligence at logistics firm, global trade continues to climb.DHL Express. “With two years experience in logistics, “In Europe, where the distancesmany employees will job-hop and start work for are smaller, you can already do a lot by moving stuffanother firm, the incentive being a 50% plus pay away from air onto the road, and on the road going forincrease.” cleaner trucks by either putting particle filters on or Competition for the best people doesn’t just come by piloting alternative fuels,” he says.from within the domestic market. Mr Chopra recalls Others will turn their minds to how they canbeing on a flight recently and sitting next to London- profit from the green agenda. Richard Huber frombased staff from one of the world’s major banks, who American Commercial Lines is also an equity investorwere travelling to all the major Indian management and board director of US firm, Covanta, which hasinstitutes to recruit graduates. Asked if they were developed a significant and rapidly expanding waste-recruiting for their Indian offices, the answer came to-energy business. “Everybody ‘oohs’ and ‘ahs’back as no. “From now on, we’re recruiting [in India] about windmills and solar and all that stuff. Theyfor [our] offices in London, New York, Hong Kong and represent 1-2% of renewable energy in the US. That’sSingapore,” they told him. What’s more, Mr Chopra nothing,” he argues. “Burning garbage and turningsays those same bankers plan to pay the top graduates it into electricity is as large a factor and could be anthey hire out of India exactly what they will pay even larger factor in the whole energy productiongraduates coming out of Harvard or any other globally equation.” Better still, the waste energy business, inrenowned business school. his opinion, is built on two near certainties: volumes of waste will increase, as will the demand for energy. “TheShifts in climate one thing that is recession-proof is garbage,” he says.Although the challenges of managing globalisation, Advances in technology feature less prominentlyemerging markets and talent will be the top priorities in the list of critical forces this year, althoughfor business leaders in 2007, other forces will also developments in customer-facing technologies andhave an impact. Environmental issues and climate the ongoing hype surrounding “Web 2.0” will continuechange are creeping up the agenda, boosted by a to affect a number of industries (see box: Recruitingsurge in public interest and helped along by 2006’s the Web 2.0 way).rocketing oil price. “Sustainability issues will become Julie Meyer, CEO of Ariadnemore important,” notes one survey respondent. “My Capital, a UK-based investment “The global market is going toorganisation will respond by developing more energy- firm that specialises in technology, explode for the Internet goingsaving ways of production.” argues that the trend towards the mobile.” “Something that will be put on the agendas more co-creation of content—whether Neil Edwards, CEO of dotMobi (mTLD, Ltd) © The Economist Intelligence Unit 2007 11
  13. 13. CEO Briefing Corporate priorities for 2007 and beyond Recruiting the one in five Fortune 100 companies Boeing and Samsung) not only among its customers. participated in an early “alpha” Web 2.0 way At its core, Jobster is a test, but also invested US$10,000 subscription-based online service each. While much of the business world for recruiters. With its dashboard Jobster has also put its users spent 2006 arguing over the defi- downloaded to their computers, to work developing content for nition, merits or even the existence recruiters have a quick and simple the Jobster site. Job seekers of Web 2.0, Jason Goldberg has way to launch and monitor e- who create an online profile, been busy taking Web 2.0 to the mail campaigns for open jobs. for example, can add comments bank. His Seattle-based start-up, For example, if a recruiter at a about current or past employers, Jobster, demonstrates the key real estate firm needs to hire a answering questions such as elements of Web 2.0, and how to new property manager, they can “what’s something you learned put them to work for bottom-line go to their dashboard and run a from working at Microsoft?” and results. query to see who in the network “what do you miss most about The basic premise of Jobster has relevant experience, knows Amazon?” This user-generated centres on something most a property manager, or has set a content adds personality to recruiters already know: it is related career goal. They can then employers, who can otherwise hard to tap into referrals, the send an e-mail containing unique seem faceless in job listings, and best source of job candidates. tracking URLs to all those contacts. makes the site more interesting for In a February 2006 survey of 73 Each person who gets the e-mail job seekers. leading employers by Booz Allen has the option to respond directly The site also uses the technical Hamilton, 88% of companies said (if interested in the company or and programming mechanics of the best-quality job applicants the job) or to forward the e-mail Web 2.0 to get ahead. Bloggers, for come through referrals. And yet to a colleague by selecting “send example, can copy some code onto companies get less than 20% of to friends”. Each viral click can their sites and get a steady stream their applicants in this way, the increase the recruiter’s network of of industry-specific job listings. study found. candidates, even if the current job This not only gives Jobster’s So Mr Goldberg built a isn’t right for them: a link in the e- customers wider distribution candidate-referral service around mail invites candidates to join the for job listings, but also brings Web 2.0 principles. Jobster uses real estate firm’s network without additional readers to the blogs social networking to increase having to apply for the current job, themselves. network effects (the more people in case future jobs interest them. All these features have put who use a product, the more These and other features were the start-up on the fast track to valuable it becomes); treats designed in collaboration with promotion: revenue for 2006 was customers as co-developers; Jobster’s customers. Before his expected to more than triple, up sells a product as a service; and programmers wrote a line of code, from US$3m in 2005. “Jobster is encourages user-generated Mr Goldberg approached dozens really on to something unique. It’s content to tap the wisdom of of potential customers with the fixing an age-old problem with new crowds. The results speak for suggestion that they build a technology,” says Jason Corsello, a themselves. Officially launched product together. All told, 25 large research director with analyst firm, in 2005, Jobster already counts firms (including Starbucks, Google, Yankee Group.12 © The Economist Intelligence Unit 2007
  14. 14. CEO Briefing Corporate priorities for 2007 and beyondvideo (YouTube), social networking (MySpace) or even As the market for private equity deals matures inconsumer credit (Zopa)— will continue to shake up developed countries, that money will increasingly flowindustries in unexpected ways. Ms Meyer also thinks towards deals in emerging markets, where capital isthat the degree to which people are living their lives scarcer. “The sweet spot is to find places where theonline today is helping to make online businesses less economy is growing and where there is indeed demandvulnerable to the fluctuations of the market. They are for capital, but where capital is either relatively scarcebeing categorised less as “Internet businesses” and or relatively expensive,” says Covanta’s Mr Huber, whomore as online businesses in whatever sectors they is investing in markets like Brazil.operate in, she says. Finally, responding to demographic trends will After a record-breaking 2006, merger and continue to top many agendas. Financial servicesacquisition (M&A) activity will remain lively. Merger firms especially have been gearing up to offer moreactivity has been driven by generally cheap credit and products and services that cater to the growinga massive rise in private equity, among other things. legions of retirees. “Here in Canada there is lots“The amount of private equity investment is just of opportunity to do profitable business with thegrowing in leaps and bounds,” says Jim Goodnight, ageing baby boomers,” says Barbara Stymiest, theCEO of SAS, a privately held multibillion dollar US chief operating officer of RBC Financial, the largestsoftware firm. “A lot of people are interested. They get Canadian-based financial services company. “It is onegood returns on the private equity funds and I think of the underlying drivers of growth in all our majoryou’re going to see that trend continue.” product segments.” © The Economist Intelligence Unit 2007 13
  15. 15. CEO Briefing Corporate priorities for 2007 and beyond Corporate strategies N early 60% of executives surveyed for this Which countries (other than your home country) will you visit most often in 2007? report believe that they will invest more (% of respondents; top 5 shown) time and money in emerging markets than United States of America developed markets. They are making travel plans to 17 suit. China vies with the US and UK as the overseas China 16 market that executives expect to visit most frequently United Kingdom in 2007—and is easily the number one destination if 13 Hong Kong is included as well. India will be travelled India 5 to more often than economic heavyweights such as Germany Germany, France and Japan. 4 Source: Economist Intelligence Unit survey. Managing an enterprise that sprawls across several continents and many more countries may be good for the air miles account, but poses huge challenges. “The more multinational a company about talent shortages, trade and investment becomes, the more exponentially challenging the barriers and an inadequate understanding of management environment is,” says Michael Jenkins, customers. the Asia managing director of the Center for Creative ● Key risks. Whatever the market, there is no Leadership (CCL). escape from competition: executives agree that the biggest risk that they face in both developed Different landscapes and emerging markets is increased competitive That’s particularly true given the substantial pressures. However, secondary risks diverge differences that still exist between emerging markets strikingly. In developed markets, respondents see and developed markets. the second-biggest risk as a failure to innovate—a majority of respondents say that they will drive ● Reasons for expansion. Although expansion revenue growth by selling new products to existing in both emerging and developed markets is customers in developed markets. Within emerging primarily motivated by the goal of increasing sales, markets, executives are more preoccupied by companies’ secondary motives for going into these geopolitical and security threats, as well as types of market vary widely. Executives tend to see macroeconomic and financial risk. emerging markets more as a route to reducing costs and developed markets as a source of ideas and Straddling these two types of environment effectively, innovation. let alone addressing the differences between ● Barriers to growth. Executives pinpoint the high individual markets, is a huge test. To succeed, firms cost of labour and market saturation as the biggest must localise their products and services, differentiate obstacles that they face in developed markets. In themselves appropriately in a range of markets and emerging markets, by contrast, they are concerned have the right people in place around the world.14 © The Economist Intelligence Unit 2007
  16. 16. CEO Briefing Corporate priorities for 2007 and beyondLocalise products and services Which of the following represent the greatest barriers to growth for your business within both emerging and developed markets over the next three years? Select up to three.Although a majority of executives intend to drive (% respondents) Developed markets Emerging marketsgrowth by selling existing products to new customers High labour costsin emerging markets, simply shovelling old products 46 5into new markets is not enough. Leaving aside Increased competition from international rivals 36the fact that emerging markets are themselves 31 Market saturationincreasingly sources of innovation, market-leading 33 4companies recognise the need to develop products Downward pressure on pricesthat are tuned to local needs, cultural preferences 17 29and demands. Lack of available local talent 23 Intel, for example, produces computer equipment 51 Tax and regulatory pressureswith better protection against dust for the Indian 21 24market, while GE’s healthcare business reduces the Rising costs of energy and raw materials 20height of some devices for Chinese hospitals so that 15 Increased competition from domestic rivals(typically shorter) local nurses can use them more 19 24easily. At Allergan, a US-based provider of specialist Risk aversion at board and senior management levelpharmaceutical products, Ravi Menon, the company’s 14 17east Asia managing director, points out that the Lack of new products and services 9company has a low-profile product within its breast 6 Lack of capitalimplant range that is ideally suited to the narrower 9 16chests of the many Chinese and Korean women opting Inadequate understanding of customers 8for breast augmentation. 27 Trade and investment barriers CCL’s Mr Jenkins highlights how even the 7seemingly simplest products need to be adapted to 26 Source: Economist Intelligence Unit survey.local tastes. “[The Indian] market is a great exampleof one that requires companies that have had tocreate new delivery paradigms: a tube of toothpaste that are geared to protecting small business peopleor soap in a large ‘western’ size won’t sell here, and from losses that could put them and their familyit is only partially because of the price—it is the size totally out of business,” says New York Life’s Mrof the packaging.” Consumer goods firms that have Sproule.been successful in India, local and multinational alike,have put their products into sachets and other smaller Differentiate yourselfpackages that can be more easily transported and sold Faced with rising competition, about three-quarterswithin smaller retailers, as well as consumed more of survey respondents agree that their firms willefficiently. differentiate themselves on quality in future, rather The need for adaptation stretches into services than cost. A race is under way for the high ground,too, such as the growing array of financial products as firms seek to differentiate themselves on brand,that are being marketed in emerging markets. “Some through better product or service quality, or byunique products would include some of the micro- innovating in their field—or by a combination of theseinsurance products that we sell in places like India, approaches. © The Economist Intelligence Unit 2007 15
  17. 17. CEO Briefing Corporate priorities for 2007 and beyond“We believe in having a global “Consumers are increasingly Which of the following strategies will be most important to driving revenue growth in your company over the next threesales methodology, but there is [a] careful about the way that they years? Select one.different finished coating for each make purchases. They are looking (% respondents) Developed markets Emerging marketsmarket.” for distinctive concepts,” says Selling new products to existing customers 39Alex Murchie, head of global sales Coach’s Mr Frankfort, who argues 15operations, Orange Business Services. Selling existing products to new customers that a strong brand will be critical 24 49 for firms to succeed. “Some of the Selling new products to new customers mass retailers that try to differentiate only on price 21 26 are having a real challenge. Consumers are discerning, Selling existing products to existing customers 16 they’re intelligent and they get more so each year. 10 Source: Economist Intelligence Unit survey. Each year the bar rises.” Alex van Someren, CEO and co-founder of nCipher, a software firm that provides security functionality and cost (See box: Lenovo: marrying East products, believes the main risk in developed and West). “I think that’s a key success factor for firms markets is competition, which is best defended like ours, to be able to innovate and adapt to local through innovation. “Reputation is very important in conditions,” says GE’s Mr Chopra. security and is a barrier to entry for new companies. Innovation is vital so [other firms] don’t outpace us. Fight for talent We’ve got to keep research and development going.” As discussed earlier in this report, companies Depending on what industry firms are in, this must also find enough talented people—be they race to the top can take very different forms. Within statisticians, airplane mechanics or coffee shop supermarkets, for example, much attention is being baristas—to power a firm’s expansion plans globally. paid to organic foods and other premium products Executives favour two approaches in particular: that appeal to a growing niche of price-insensitive building successful training and development consumers that are willing to programmes to develop tomorrow’s stars from within“We feel the pressure of pay for goods matching their and placing greater emphasis on performance-basedtechnology leadership. We need to ethical outlook. “We would look compensation, in order to give today’s stars morelead the market with differentiated to continue to grow via our focus incentive to weave their magic.products.” on fresh, healthy, tasty, safe GE, for example, has long had a strong focus onDale Sohn, president, Samsung food, including organic and ‘free internal development. “We believe in training upTelecommunications America from’ foods,” says Sainsbury’s Mr people, so we build our own pipeline of people,” says Shapland. “And it is those areas Mr Chopra. “Bring them straight out of school and help where we are seeing the strongest demand and where train them and bring them in.” The next challenge is to we believe we can grow the business.” retain these stars, which is “where all of us are being A strategy of differentiation can be more difficult to challenged right now,” he says. “In [India], with the execute in emerging markets, however, where average crazy boom in growth happening, figuring out ways to incomes are low and price sensitivity remains high. keep people is stretching our imaginations.” For many companies the challenge will be to find a way In China, DHL has set up its own Logistics to translate the high-end products and services that Management University, which covers everything they sell in developed markets into something that from basic operational aspects of the courier can appeal in emerging markets, perhaps by reducing business to full-fledged supply chain management.16 © The Economist Intelligence Unit 2007
  18. 18. CEO Briefing Corporate priorities for 2007 and beyond Lenovo: marrying East functions (tax, services and supply chain) Russia, India and China—are now priority are located in Singapore. The company markets. However, the problem that firms and West employs more than 19,000 people like Lenovo face is that these markets all worldwide and is listed on the Hong Kong have varying degrees of pent-up demand stock exchange. that is constrained by limited purchasing Nonetheless, Lenovo’s heritage power. For example, while India is a Lenovo is a new breed of company, a is unmistakably Chinese. The name US$1bn PC market, this represents a hybrid of Western and Eastern business combines the Latin word for “new” penetration rate of only about 5%. cultures, which aims to cross-pollinate preceded by “Le” from Lenovo’s Computer use is actually much higher, but the best practices of each. What Lenovo is progenitor, Legend. Legend was the mainly through the country’s ubiquitous not, insists David Miller, the firm’s presi- Chinese equivalent of Microsoft, a Internet cafés. dent for Asia Pacific and Japan, is a Chi- company founded on a shoestring in 1984 To tap into this potential demand, nese company. Rather it is a “new world by 11 Beijing computer scientists that Lenovo has partnered with Microsoft and company”, a US$14bn start-up that just grew to dominate the Chinese personal various local banks to launch a pay-as- happens to have a major global footprint computer (PC) market. The firm’s global you-go “cyber café at home” concept. and well distributed sales revenue across leap was achieved at a stroke when it Under the scheme, which borrows from the world—just over one-third in China acquired IBM’s PC business in early 2004, the mobile-phone market, consumers that and just under one-third in the US, with along with 10,000 employees, advanced can’t afford a PC outright can get their the balance across Europe and the rest of design facilities in Japan, China and first Lenovo desktop for a small initial the world. the US, the IBM brand (for five years), deposit, and then access it using prepaid The company is undeniably the Think brand and a range of highly cards or through a monthly subscription, international: its executive headquarters engineered products. which is credited towards paying off the are in New York State, with its principal Now, one of Mr Amelio’s key goals is to machine. The concept has only just been operations in Beijing and North Carolina. transplant the company’s competitiveness launched in India, but it exemplifies how Meanwhile, the company’s CEO, William in China into other markets. All the the firm is working to tap into emerging Amelio, along with many of its global primary emerging markets—Brazil, market growth. Rivals have been warned.The institution takes in graduates as well as workers become more international over the next three years,from other industries. “While China’s universities are although much progress remains to be made.churning out good graduates, these young people “Everybody views China and India as the emergingare not trained in logistics,” says Mr Sen. In his view, markets that will deliver the greatest businessthe typical 30-day induction training period is no opportunity in coming years. But how many Fortunelonger sufficient: DHL instead replicates two years of 500 board members are from either of these twoexperience through three months of intensive training markets?” asks Ashis Bhattacharya, the director ofat its university. global marketing at precision manufacturing firm, As well as putting the right people in place on the Moog International. “And how many board meetingsground, firms must also develop management teams are held in the Asia Pacific region? The geographicwith an international outlook. 60% of respondents spread of market opportunity is not reflected inagree that their senior management teams will management teams.” © The Economist Intelligence Unit 2007 17
  19. 19. Appendix: Survey resultsCEO BriefingCorporate priorities for 2007 and beyond Appendix: Survey results In late 2006, the Economist Intelligence Unit conducted a survey of 1,006 executives around the world. Our sincere thanks go to all those who took part in the survey. Please note that not all answers add up to 100%, because of rounding or because respondents were able to provide multiple answers to some questions. In which region are you personally located? What are your main functional roles? Please choose no more (% respondents) than three functions. (% respondents) Western Europe 33 Strategy and business development 44 Asia-Pacific 27 General management 41 North America 20 Marketing and sales Central and Eastern Europe 7 27 Finance Sub-Saharan Africa 6 24 Latin America 5 Customer service 13 Middle East and Risk North Africa 2 12 Operations and production 10 IT 10 Which of the following best describes your title? (% respondents) Information and research 10 CEO/President/Managing director R&D 28 7 SVP/VP/Director Legal 16 5 Manager Human resources 11 3 Head of Department Supply-chain management 10 3 Head of Business Unit Procurement 10 2 CFO/Treasurer/Comptroller Other 7 3 Other C-level executive 7 Board member 5 CIO/Technology director 3 Other 418 © The Economist Intelligence Unit 2007
  20. 20. Appendix: Survey results CEO Briefing Corporate priorities for 2007 and beyondWhat is your primary industry? What is the ownership structure of your organisation?(% respondents) (% respondents)Financial services 25 Privately owned 55Professional services Publicly listed 37 13 State owned 7IT and technology 10Manufacturing 9Healthcare, pharmaceuticals and biotechnology 5Consumer goods 5Energy and natural resources 5Telecommunications 4 How does your organisation view the prospects for business inAutomotive the global marketplace over the coming three years? 3 (% respondents)Transportation, travel and tourism 3 Very good 28Entertainment, media and publishing 3 Good 61Government/Public sector 3 Indifferent 8Education Poor 2 2Construction and real estate Very poor 1 2Retailing 2Chemicals 1Agriculture and agribusiness 1Logistics and distribution 1 What are your organisation’s global annual revenuesAerospace/Defence in US dollars? 1 (% respondents) $500m or less 50 $500m to $1bn 11 $1bn to $5bn 15 $5bn to $10bn 7 $10bn or more 18 © The Economist Intelligence Unit 2007 19
  21. 21. Appendix: Survey resultsCEO BriefingCorporate priorities for 2007 and beyond In your opinion, which of the following forces will have the Which region do you think will offer the greatest opportunities, greatest impact on the global marketplace over the coming in terms of revenue growth and sourcing, for your business over three years? Select up to three options. the next three years? And which will be the source of greatest (% respondents) operational risk? (% respondents) Rising demand in emerging markets Revenue growth 34 Sourcing opportunities (people, services, production) Operational risk Global sourcing Asia-Pacific 32 52 59 Geopolitical instability 29 30 Central and Eastern Europe Increased competition 10 15 27 11 Increased globalisation and deregulation North America 25 13 6 Customer pressure for improved products and services 10 18 Western Europe 10 Advances in customer-facing technologies (eg, Web 2.0) 9 17 7 Increased emphasis on environmental issues Latin America 17 7 7 Economic and financial instability 9 15 Middle East and North Africa 5 Demographic change (eg, population ageing, low birth rates) 2 13 25 Rising competition from domestic companies based in emerging markets Sub-Saharan Africa 3 12 3 10 Rising M&A activity 12 Catastrophic events (eg, terrorism, pandemic, natural disasters) 9 Rising protectionism In which of the following regions will your business commit 9 most new (ie, incremental) investment in 2007? New business regulations (% respondents) 8 Asia-Pacific Advances in back-office technologies (eg, RFID) 44 7 Western Europe Other 14 3 Central & Eastern Europe 13 North America 12 Latin America 8 Middle East & North Africa 5 Sub-Saharan Africa 420 © The Economist Intelligence Unit 2007
  22. 22. Appendix: Survey results CEO Briefing Corporate priorities for 2007 and beyondWhich of the following represent the greatest barriers to growth Which industries do you believe enjoy the best growthfor your business within both emerging and developed markets prospects over the coming three years? Select all that apply.over the next three years? Select up to three. (% respondents)(% respondents) Developed markets Emerging markets Healthcare, pharmaceuticals and biotechnologyHigh labour costs 61 46 5 Financial servicesIncreased competition from international rivals 48 36 Telecoms, software and computers 31 40Market saturation 33 Travel, tourism and transport 4 30Downward pressure on prices Leisure and entertainment 29 17 30Lack of available local talent Mining, oil and gas 23 30 51Tax and regulatory pressures Professional services 21 28 24 Business support servicesRising costs of energy and raw materials 22 20 15 Construction and real estateIncreased competition from domestic rivals 18 19 24 Consumer goodsRisk aversion at board and senior management level 17 14 Electronic and electrical 17 15Lack of new products and services 9 Utilities 6 12Lack of capital 9 Retailing 16 11Inadequate understanding of customers Aerospace and defence 8 10 27Trade and investment barriers Engineering and machinery 7 10 26 Food, beverages and tobacco 8 Chemicals and textiles 6 Automotive 6 Agriculture 5 Other 3 © The Economist Intelligence Unit 2007 21