Capitalizing On Complexity

Capitalizing
on Complexity
Insights from the
Global Chief Executive
Officer Study

This study is based on face-to-face conversations with more than 1,500 chief executive officers worldwide.

Samuel J. Palmisano
Chairman, President and Chief Executive Officer
IBM Corporation

Letter from the Chairman 3

A note to fellow CEOs
In the first chapter of this report on dealing with complexity, the CEO
of an industrial products company calls the economic environment of
2009 “a wake-up call.”

I agree. I’d only add that it was just the latest in a series of alerts that
sounded during the first decade of this new century. In a very short
time, we’ve become aware of global climate change; of the geopolitical
issues surrounding energy and water supplies; of the vulnerabilities of
supply chains for food, medicine and even talent; and of sobering threats
to global security.

The common denominator? The realities — and challenges — of global
integration.

We occupy a world that is connected on multiple dimensions, and at a
deep level — a global system of systems. That means, among other things,
that it is subject to systems-level failures, which require systems-level
thinking about the effectiveness of its physical and digital infrastructures.

It is this unprecedented level of interconnection and interdependency
that underpins the most important findings contained in this report. Inside
this revealing view into the agendas of global business and public sector
leaders, three widely shared perspectives stand in relief.

1) The world’s private and public sector leaders believe that a rapid
escalation of “complexity” is the biggest challenge confronting them.
They expect it to continue — indeed, to accelerate — in the coming years.
2) They are equally clear that their enterprises today are not equipped to
cope effectively with this complexity in the global environment.
3) Finally, they identify “creativity” as the single most important leadership
competency for enterprises seeking a path through this complexity.

4 Capitalizing on Complexity

What we heard through the course of these in-depth discussions (my own
interview took place on December 2, 2009) is that events, threats and
opportunities aren’t just coming at us faster or with less predictability; they
are converging and influencing each other to create entirely unique situations.
These firsts-of-their-kind developments require unprecedented degrees
of creativity — which has become a more important leadership quality than
attributes like management discipline, rigor or operational acumen.

As always, our biennial examination of the priorities of CEOs around the
world provides terrific insight into both the world as they see it, and
ultimately, what sets the highest-performing enterprises apart. For me
personally, I find one fact especially fascinating. Over the course of
more than 1,500 face-to-face interviews with CEOs and other leaders,
not a single question contained the term “Smarter Planet”— and yet the
conversations yielded primary findings that speak directly to exactly
what IBM has been saying about the challenges and opportunities of this
fundamental shift in the way the world works.

It is our pleasure to bring you this report: Capitalizing on Complexity.

Samuel J. Palmisano
Chairman, President and Chief Executive Officer
IBM Corporation

Table of contents 5

How our research was conducted 6

Executive summary 8

Introduction Stand out in a complex world 13

Chapter One Embody creative leadership 23

Chapter Two Reinvent customer relationships 37

Chapter Three Build operating dexterity 51

The CEO Agenda How to capitalize on complexity 63

For further information 71


How our research was conducted
This study is the fourth edition of our biennial Global CEO Study series,
led by the IBM Institute for Business Value and IBM Strategy & Change.

To better understand the challenges and goals of today’s CEOs, we met
face-to-face with the largest-known sample of these senior executives.
Between September 2009 and January 2010, we interviewed 1,541 CEOs,
general managers and senior public sector leaders who represent different
sizes of organizations in 60 countries and 33 industries.

Figure 1 About our research
More than 1,500 CEOs worldwide participated in this study.

13%
20% Communications 21%
Public 25%
Growth Markets* North America

25%
Distribution
12%
24% Japan
Industrial
42%
18% Europe
Financial Services

Sectors Regions

*Growth markets include Latin America, Asia Pacific (excluding Japan), Middle East and Africa.

How our research was conducted 7

For this report, we did extensive analysis to compare current results to
the findings of our 2004, 2006 and 2008 Global CEO Studies. As part of
our 2010 research, we also sought to understand differences between
financial standouts and other organizations. Our performance analysis
was based on both long-term (four years) and short-term (one year)
performance relative to peers, where available.

Long-term performance included four-year operating margin compound
1
annual growth rate from 2003 to 2008. Short-term performance included
one-year operating margin growth rate from 2008 to 2009.2 This allowed
us to identify “Standout” organizations that were able to improve operating
margins both long term and short term.

In addition to our CEO interviews, we asked a subset of our CEO Study
questions to 3,619 students from more than 100 major universities around
the world. This first IBM Student Study provides insight into the views
of future leaders. Students in undergraduate and graduate programs were
invited to participate by faculty and administrators from October 2009 to
January 2010.

Forty-six percent of surveyed students were pursuing MBA and other
graduate degrees, with 3 percent of those in Ph.D. programs. The remaining
54 percent were enrolled in a wide range of undergraduate programs.

Both the CEO and student response samples were weighted based on
actual regional Gross Domestic Product (GDP) for 2008.3


“Complexity should not be viewed
Executive summary
as a burden to be avoided; we see it How are leaders responding to a competitive and economic environment
as a catalyst and an accelerator to unlike anything that has come before? To find out, we conducted face-
create innovation and new ways of to-face interviews with 1,541 CEOs, general managers and senior public
delivering value.”
sector leaders around the world.4 Those conversations, in combination
Juan Ramon Alaix, President, with our statistical and financial analyses, offer insight into the agendas and
Pfizer Animal Health
actions of global leaders.

In our past three global CEO studies, CEOs consistently said that coping
with change was their most pressing challenge. In 2010, our conversa-
tions identified a new primary challenge: complexity. CEOs told us they
operate in a world that is substantially more volatile, uncertain and complex.
Many shared the view that incremental changes are no longer sufficient
in a world that is operating in fundamentally different ways. Four primary
findings arose from our conversations:

Today’s complexity is only expected to rise, and more than half
of CEOs doubt their ability to manage it. Seventy-nine percent of
CEOs anticipate even greater complexity ahead. However, one set of
organizations—we call them “Standouts”—has turned increased complexity
into financial advantage over the past five years.

Creativity is the most important leadership quality, according to
CEOs. Standouts practice and encourage experimentation and innovation
throughout their organizations. Creative leaders expect to make deeper
business model changes to realize their strategies. To succeed, they take
more calculated risks, find new ideas, and keep innovating in how they
lead and communicate.

Executive summary 9

Embody
The most successful organizations co-create products and services
creative
with customers, and integrate customers into core processes.
leadership Student perspectives
They are adopting new channels to engage and stay in tune with customers. Throughout this report, “Student
By drawing more insight from the available data, successful CEOs make perspectives” sidebars will
customer intimacy their number-one priority. highlight some of the most striking
findings and quotations from the
Better performers manage complexity on behalf of their IBM Student Study.
organizations, customers and partners. They do so by simplifying
Build
operating
operations and products, and increasing dexterity to change the way The responses of over 3,600 students
dexterity offer insight into how the opinions
they work, access resources and enter markets around the world.
and expectations of future leaders
Compared to other CEOs, dexterous leaders expect 20 percent more compare to the views of CEOs.
Reinvent
future revenue to come from new sources. customer
relationships
How CEOs can capitalize on complexity

The effects of rising complexity call for CEOs and their teams to lead with
bold creativity, connect with customers in imaginative ways and design
their operations for speed and flexibility to position their organizations for
twenty-first century success.

Embody
creative
leadership

Build
operating
dexterity

Reinvent
customer
relationships


So, how are these objectives different than CEOs’ past aspirations, now
“Insight and foresight are linked that they’ve identified escalating complexity as their greatest challenge
with leadership. It’s insight that in the new economic environment? Previously, CEOs recognized the need
helps to capture opportunity. ” for business model innovation, but today they are struggling to find the
requisite creative leadership to produce such innovation. In the past, they
Zhou Ming, Executive Vice President
and Secretary General, China Council for told us they needed to be closer to customers; today they need to
International Investment Promotion go much further and bring customers inside their organizations. And, while
global integration is not a brand new goal, CEOs are realizing they must
take it a step further and think in terms of increasing overall operating
dexterity. To capitalize on complexity, CEOs:

Embody creative leadership
Facing a world becoming dramatically more complex, it is interesting that
CEOs selected creativity as the most important leadership attribute. Creative
leaders invite disruptive innovation, encourage others to drop outdated
approaches and take balanced risks. They are open-minded and inventive
in expanding their management and communication styles, particularly to
engage with a new generation of employees, partners and customers.

Reinvent customer relationships
In a massively interconnected world, CEOs prioritize customer intimacy as
never before. Globalization, combined with dramatic increases in the
availability of information, has exponentially expanded customers’ options.
CEOs said that ongoing engagement and co-creation with customers
produce differentiation. They consider the information explosion to be their
greatest opportunity in developing deep customer insights.

Build operating dexterity
CEOs are revamping their operations to stay ready to act when opportunities
or challenges arise. They simplify and sometimes mask complexity that is
within their control and help customers do the same. Flexible cost structures
and partnering capabilities allow them to rapidly scale up or down.

11

To
capitalize on
complexity ...

Introduction 13

Stand out
in a complex
world
Most CEOs seriously doubt their ability to cope
with rapidly escalating complexity. Yet one set of
organizations has consistently performed well.
How do these Standouts mitigate complexity and
even convert it into opportunity?


A drastically different world
“You feel ready, Increasingly interconnected economies, enterprises, societies and
but ready for what?”
governments have given rise to vast new opportunities. But a surprising
Andreas Coumnas, Managing Director number of CEOs told us they feel ill-prepared for today’s more complex
Europe, Baltimore Aircoil
environment. Increased connectivity has also created strong — and
too often unknown — interdependencies. For this reason, the ultimate
consequence of any decision has often been poorly understood.

Still, decisions must be made. As CEOs turn their attention to growth,
a significant number said their success depends on doubling their revenue
from new sources over the next five years. A Telecommunications CEO
in Brazil predicted, “The services that account for 80 percent of our revenue
today will only be our second-largest source of revenue in five years.”
Finding these new categories of growth is not easy in an environment
characterized by an untold number of discrete markets, proliferating product
and service categories, and ever-individualized customer segments.

This means CEOs must shake up their portfolios, business models, old
ways of working and long-held assumptions. They have to address what
customers now care about and reassess how value is generated.

With few exceptions, CEOs expect continued disruption in one form
or another. The new economic environment, they agree, is substantially
more volatile, much more uncertain, increasingly complex and structurally
different. An Industrial Products CEO in the Netherlands summed up
the sentiments of many when he described last year as “a wake-up call,”
adding that “it felt like looking into the dark with no light at the end of
the tunnel.”

Stand out in a complex world 15

Figure 2 Organizations are experiencing significant upheaval
Changes in the new economic environment are large-scale, substantial and
drastically different.

13% 18% 69% More volatile
Deeper/faster cycles, more risk

14% 21% 65% More uncertain
Less predictable

18% 22% 60% More complex
Multifaceted, interconnected

26% 21% 53%
Structurally different
Sustained change

Not at all/to a limited extent To some extent To a large/very large extent

Today, as organizations emerge—or prepare to emerge—from a confidence-
draining global recession, many leaders admit they really don’t know
what to expect next. Nevertheless, in our conversations with CEOs, we
gained insight about the path forward. It will require entirely new leadership “This economic downturn
was far more than just business
styles, new approaches to better understanding customers, and new and
cycle fluctuations. We view
flexible structures for their businesses.
it as a true paradigm shift
Global shifts compound complexity that is revolutionizing not only
business, but global social
CEOs told us that the current trend toward globalization would not let structures as well.”
up. They anticipate shifting of economic power to rapidly developing
Fumiyuki Akikusa, President
markets, and foresee bigger government and heavier regulation ahead. and CEO, Mitsubishi UFJ Morgan
These shifts are unyielding and contribute to the sense of a world Stanley Securities Co., Ltd.
growing more uncertain, volatile and complex.


Interestingly, views on the strength and impact of these shifts differ by
vantage point. In North America, which faced a financial crisis that led to
governments becoming major stakeholders in private enterprise, CEOs
are more wary of “big government” than CEOs elsewhere. A full 87 percent
anticipate greater government intervention and regulation over the next
five years, compounding their sense of uncertainty.

In Japan, 74 percent of CEOs expect the shift of economic power from
mature to rapidly developing markets to have a major impact on their
organizations. By contrast, the European Union is less concerned about
this shift, with only 43 percent of CEOs expecting to be impacted.

China proved more resilient than most other nations during the economic
downturn. CEOs there are less concerned about volatility than CEOs in
other regions and they are more focused on developing a new generation
of leaders who bring global thinking.

Understanding these and other sharp differences emerging by region
becomes more significant in a world where economies and societies are
closely linked. Organizations confront these differences as they
increasingly operate across boundaries and across different regions.

Technology continues to rise
“The next generation, as natives
Every two years since 2004, we have asked CEOs to name the three
of the digital world, will have
external forces which will have the biggest impact on their organizations.
revolutionary implications for
politics, the public sector and Market factors has consistently topped the list while technological
the way we do business. The citizen factors has risen in relative importance and now holds second place.
will drive change and bring
Technology is also contributing to growing complexity — creating a world
social revolution, not evolution.
”
that is massively interconnected, with broad-based convergence of
Peter Gilroy, CEO, Kent County Council systems of all kinds, both man-made systems like supply chains or cities;
and natural systems like weather patterns or natural disasters.


Figure 3 Top external factors
The relative impact of technology as an external factor rises year on year.

84% 67% 48% 56%
Market factors
56%
say market
Technological factors factors
42% 44% 48% 39%

39% 41% 35% 38%
Macroeconomic factors
39%
say technological
People skills factors
37%
Regulatory concerns
38%
say macroeconomic
Globalization factors
33% 25% 21%
Environmental issues

Socioeconomic factors

Geopolitical factors

2004 2006 2008 2010

Our world is increasingly subject to failures that require systems-level and
cross-systems-level thinking and approaches. The consequences of any
decision can ripple with unprecedented speed across business ecosystems
the way the recent economic crisis has impacted nearly every market.

It is no longer sufficient, or even possible, to view the world within the
confines of an industry, or a discipline, or a process, or even a nation.
Yet the emergence of advanced technologies like business analytics
can help uncover previously hidden correlations and patterns, and provide
greater clarity and certainty when making many business decisions.


Deepening complexity

One major surprise may be the speed with which complexity has
permeated leaders’ thinking. Six out of ten CEOs told us that the new
economic environment is significantly more complex. Looking ahead to
the next five years, eight of ten leaders expect the level of complexity
to increase. They say they have never faced a learning curve so steep.

Figure 4 Expected level of complexity
CEOs agree complexity will only continue to rise.

Currently experiencing high/very high level of complexity
60%

Student perspectives
Expect high/very high level of complexity over ﬁve years
79%
32%
more

In a world where economic, social
and physical systems are all intercon
nected, students are acutely aware of
A critical aspect of their learning will be to determine which elements of
the complexity they will face in their complexity — for example, overcomplicated internal processes or inflexible
careers. More students see high impact customer interactions— are unnecessary or hinder value creation. Likewise,
on organizations from complexity than they will need to identify which aspects can be harnessed for greater
CEOs—70 percent compared to 60
efficiency, innovation or growth. To do so, a Consumer Products CEO in
percent. And among MBAs, 78 percent
Belgium said his organization works to truly understand and manage
see high impact from complexity.
complexity: “Our organization is well-prepared to handle complexity, but it
“My generation has a completely
should be demystified and standardized.”
different view and understanding
of unbounded, unlimited social Wrestling with uneasiness: The “complexity gap”
connectivity, science and technology,
and cultural conglomeration, that Two years ago, public and private sector leaders framed the major
leads to more open, interconnected challenge they faced as “change.” They pointed to what we called the
ambitions.”
“change gap”— the difference between the change they expected and
Student, United States their ability to handle it. Today, CEOs feel more confident about
dealing with change, but they have identified an entirely new dilemma.


Figure 5 The complexity gap
While eight out of ten CEOs anticipate significant complexity ahead,
less than half feel prepared to handle it.

Expect high/very high level of complexity over ﬁve years
79%

Feel prepared for expected complexity
49%
30%
complexity
gap

Our interviews revealed that CEOs are now confronted with a “complexity
gap” that poses a bigger challenge than any factor we’ve measured in
eight years of CEO research. Eight in ten CEOs expect their environment
to grow significantly more complex, and fewer than half believe they
know how to deal with it successfully.

When asked how prepared they felt for the complexity ahead, some,
like an Insurance CEO in Germany, were guardedly optimistic, “In relation
to others, we are well prepared. But in absolute terms, it will be difficult.”
Others admitted bluntly they were not up for the challenge, like an Energy
and Utilities CEO in the United States who said, “Most people are looking
backward, wishing it was still like it always was.”
“Really, I am not afraid of
Learning from top performers
complexity at all. On the contrary,
Certain organizations have historically delivered solid business results even this just motivates me.
”
in the recent economic downturn. These Standout organizations come Jacques Pellas, Secrétaire Général,
from every industry and every part of the world. And importantly, they feel Dassault Aviation
much more prepared for complexity.


We analyzed performance relative to industry peers both short term during
“We are entering an era the economic crisis and long term pre-crisis. Long-term performance
of ten to twenty years of new included four-year operating margin compound annual growth rate from
significant investment. 2003 to 2008. Short-term performance included one-year operating
There is opportunity and margin growth rate from 2008 to 2009.
uncertainty that we
have not seen before.” Standouts: Navigating complexity superbly

Tom King, President, National Grid U.S. Compared to their industry peers, Standouts had higher increases in
year-to-year operating margin. Even more striking, during the economic
crisis, Standouts’ revenue growth was six times higher than the rest
of the sample. So, what is this group doing to thrive?

Figure 6 Standouts are better prepared to manage the expected complexity
Complexity gap: Difference between expected complexity and the extent to which
CEOs feel prepared to manage complexity.
Top 50 percent

Standouts

22%
gap
6%
gap
Steady-state performance

52% 35%
Long term

gap gap

Top 50 percent

Short term
Crisis performance


Standouts expect high complexity ahead, but have a complexity gap
of just 6 percent. This is in stark contrast to other CEOs. This substantial
disparity reflects the Standouts’ confidence in their own capabilities
to prosper from complexity. Standouts extol the value of making
decisions quickly, testing them in the market, and then making required
course corrections.

Based on our extensive analysis of how Standouts are unique and
different, we found that CEOs who are capitalizing on complexity have
focused their attention on three areas:

• Embodying creative leadership— Creative leaders consider previously
unheard-of ways to drastically change the enterprise for the better,
setting the stage for innovation that helps them engage more effectively
with today’s customers, partners and employees.
• Reinventing customer relationships— With the Internet, new
“There isn’t the luxury of time.
channels and globalizing customers, organizations have to rethink
We used to say, ‘Wait until
approaches to better understand, interact with and serve their this crisis is over and we get back
customers and citizens. to normal,’ but that never happens.
• Building operating dexterity— While rising complexity may sound We have to be ‘change animals.’ ”
threatening at first, reframing that initial reaction is fundamentally Michele McKenzie, President and CEO,
important. Successful CEOs refashion their organizations, making them Canadian Tourism Commission
faster, more flexible and capable of using complexity to their advantage.

Chapter One 23

Embody
creative
leadership
CEOs now realize that creativity trumps other
leadership characteristics. Creative leaders are
comfortable with ambiguity and experimentation.
To connect with and inspire a new generation,
they lead and interact in entirely new ways.


Defy complexity with creativity

The degree of difficulty CEOs anticipate, based on the swirl of complexity,
has brought them to an inflection point. Asked to prioritize the three
most important leadership qualities in the new economic environment,
creativity was the one they selected more than any other choice.

Figure 7 Top leadership qualities
CEOs cited creativity as the most important leadership quality over the next five years.

Creativity
60%

Integrity
52%

Global thinking
35%

Inﬂuence
30%

Openness
28%

Dedication
Student perspectives
26%
Like CEOs, six out of ten students
Focus on sustainability
rated creativity among the top three
leadership qualities, more than any other 26%

quality. However, areas of difference Humility
are striking. Students included global 12%
thinking 43 percent more than CEOs,
Fairness
and included a focus on sustainability
12%
36 percent more.

“Global thinking is a must for leaders,
but it should be associated with focus CEOs recognize that leading creatively will require them to shed some
on sustainability and integrity; otherwise
long-held beliefs. Their approaches need to be original, rather than
businesses will be short lived.”
traditional. They must be distinct and, at times, radical in their conception
Student, Japan and execution, not just marginally better than existing models or methods.
Or, as one Telecommunications CEO in India put it: “Creativity in everything.”

Embody creative leadership 25

Creativity is often defined as the ability to bring into existence something
new or different, but CEOs elaborated. Creativity is the basis for “disruptive
innovation and continuous re-invention,” a Professional Services CEO
in the United States told us. And this requires bold, breakthrough thinking.
Leaders, they said, must be ready to upset the status quo even if it is
successful. They must be comfortable with and committed to ongoing
experimentation.

We analyzed comments from those CEOs who selected creativity as a
top leadership quality to generate a “word cloud” highlighting areas they
associate with creative leadership. In the graphical representation, the
font size of each word correlates to how often it was mentioned. In their
comments, CEOs strongly stressed the relationship between integrity and
creativity, the need for global thinking and a strong focus on customers.

Figure 8 Conversations with over 1,500 CEOs
CEOs citing creativity as a top leadership quality provided new insights into leading
in the new economic environment.5
sustainability

“Creativity means new ways of solving
tough problems. Many challenges require
integrity
employee

innovative thinking.
”
decision
organization

humility
understand

passion

David Rankin, Chief Executive, Auckland City Council
commitment

people

“We cannot globalize without diversity.
government

sector
flexibility

water

creativity
strategy
future
responsibility

products think It leads to new ideas and improves our
trust
safety

dedication quality
team

capability

drive

ability to scale, so we would like to
form a matrix organization globally. ”
growth

direction

skills
challenge

management
know

change
strategic communication development Motoki Ozaki, President and CEO, KAO Corporation
political

personal

leadership
power

complexity

balance

public
model

openness
new
high

risks

fairness
collaboration

customer
ideas
value environment

global
vision
cost

energy technology
service

needs risk
qualities
unique

innovation influence
understanding

leaders culture successful social

market thinking
financial
open services
knowledge
others

time
sense

complex

local

“A challenge is to understand the needs and
focus
transparency
speed

buying behaviors of our children and
grandchildren, who have expectations and
usage of technology very different from ours.
”
Alain Weill, President and General Director, NextRadioTV


Commit to upsetting the status quo

Standout CEOs expressed little fear of re-examining their own creations
or proven strategic approaches. In fact, 74 percent of them took an
iterative approach to strategy, compared to 64 percent of other CEOs.
Standouts rely more on continuously re-conceiving their strategy versus
an approach based on formal, annual planning.

Figure 9 Strategy process
Standouts pursue iterative, ongoing strategy development more than other organizations.

Standouts

16%
12% 14% 74%

Others
14% 22% 64%
more

Formal annual strategy planning Both Iterative ongoing strategy

It’s not that CEOs are just now becoming aware of the importance of
creativity — they have long been aware of the need to innovate their
products, their processes and their customers’ experiences. Even in
2004, CEOs were telling us that “CEOs the world over were refocused
on growth, and they viewed innovation as the way to get there.”6 But
today, creativity itself has been elevated to a leadership style. Traditional
approaches to managing organizations need fresh ideas — ideas that
are intended to disrupt the status quo.


CEOs told us that the new mandate is immediacy. It is no longer sufficient
to think, manage or delegate based on traditional time horizons or “The management environment
strategic planning cycles. Both new threats and emerging opportunities is rapidly becoming more complex.
require an ability to see around corners, predict outcomes where possible, In these uncertain times, the
act despite some uncertainty, and then start all over again. need for effective and swift decision
making is more important
Act despite uncertainty than ever.”
In an environment in which margins for error are shrinking to near nil, Shuzo Sumi, President and
CEOs recognize that they can no longer afford the luxury of protracted Chief Executive Officer, Tokio Marine
Holdings, Inc.
study and review before making choices. In our conversations, CEOs
said they are learning to respond swiftly with new ideas to address the
deep changes affecting their organizations.

Standouts master this dilemma by finding ways to push past uncertainty.
They were 54 percent more likely to rely on quick decisions rather than
thorough study. Of course, no one advocated making ill-considered
judgments, but avoiding unnecessary delays was a recurring ambition.
“The world is spinning faster,” said a Government CEO in Australia.
“We need to keep pace.”

Figure 10 Decision style
Standouts focus on quick decisions even when facing uncertainty.

Standouts
15% 42% 43%

31% 41% 28%
Others 54%
more

Thorough decisions Both Quick decisions


Many CEOs admitted that they felt overwhelmed by data while still being
short on insight. They believe a better handle on information and mastery
of analytics to predict consequences of decisions could go a long way in
reducing uncertainty and in forging answers that are both swift and right.

At the same time, leaders can’t hesitate to act where certainty does not
exist. And it is ultimately the leader who must take the stand against
common wisdom, break though legacy inertia, and bring along the team.
Those who hesitate know that more confident competitors are stepping
in during ever-shrinking windows of opportunity.

Break ground with new business models

To better understand creative leadership, we looked more closely at
only those CEOs who selected creativity as one of three top leadership
qualities. We found them to be much more prepared to innovate and
between 10 and 20 percent more likely to pursue innovation through
business model change.

Historically, business models have changed from time to time. But now
these changes are occurring in rapid-fire succession. In the words of
an Industrial Products CEO in Japan, “A business model is not absolute,
but must adapt to environmental change.”

CEOs must be able to test, tweak and redesign their core activities
continually. Today, partnerships, revenue models and a host of core business
decisions require modification in light of the fast-changing forces impacting
their organizations. To operate more effectively in a volatile environment,
creative leaders strongly encourage and experiment with all types of business
model innovation.


Figure 11 Creative leaders experiment to improve the status quo
Creative leaders score much higher on innovation as a crucial capability and
many more of them expect to change their business models.

Others
21%
Innovation as
crucial capability Creatives
38%
81%
more

15%
more
10%
more
20%
more Types of business model
innovation considered:7

Enterprise model
Specializing and reconfiguring the
business to deliver greater value
by rethinking what is done inhouse
and through collaboration.
60%
57%
52% 52% 54%
Industry model
45%
Redefining an existing industry,
moving into a new industry,
or creating an entirely new one.
Others
Revenue model
Creatives Changing how revenue is generated
through new value propositions
Enterprise Industry Revenue and new pricing models.
model model model

Continual business model innovation is similar to the way product
designers keep improving their offerings based on ever-changing customer
preferences. Driving this new fluidity of business design are profound shifts
in both customer expectations and competitive activity that simply don’t


adhere to yearly planning schedules. Frequent business model experi-
“You must be a part of, and not apart mentation brings about innovation — including new kinds of relationships
from, the society in which you and partnerships — based upon what’s happening in the marketplace,
operate and this requires humility. not the conference room.
The day of the business tycoon is
gone. Managers are appointed; Craft the creative organization
leaders are elected. It’s not a Standouts recognize that continuous change is the norm. And it’s
question of people following you — not sufficient to be prepared for it personally. They must equip their entire
they need to be a part of you.”
organization to be a catalyst for creativity. For most leadership teams,
Ian Tyler, CEO, Balfour Beatty Plc this requires an entirely new set of capabilities. A Media and Entertainment
CEO in the United States said, “We need to find, recognize and
reward creativity.”

CEOs saw the need to seed creativity across their organizations rather
than set apart “creative types” in siloed departments like product design.
To benefit from the diversity of ideas each employee can contribute,
Standouts encourage a new mindset of questioning. They invite employees
at all levels to challenge assumptions based on past experiences and
scrutinize “the way we’ve always done things.” An Insurance CEO in the
United States admitted that his organization has not always managed
complexity very well and added, “I am excited about our next generation
of leadership and the new level of energy it brings.”

To enact continuous change, Standouts avoid the old command and control
style of leadership. Fifty-eight percent prefer to persuade and influence
compared to just 17 percent that tend toward command and control. An
Electronics CEO in Switzerland told us, “The world does not function
top-down as in the army. Today’s leader needs to exercise collaborative
influence and demonstrate strong team leadership.”


Figure 12 How Standouts will enact change
To change continuously, Standouts will use new leadership styles and
balanced communication approaches.

Ad-hoc initiatives 8% 13% 79% Continuous change

Command and control 17% 25% 58% Persuade and inﬂuence

Top-down communication 33% 28% 39% (Managed) viral communication

Both

In addition to leading differently, CEOs and their teams are communicating
differently. To communicate with customers and employees, they are “For flight crews, we need a
experimenting with and assessing the results of using many newer types virtual communication
of digital media and social networking channels. environment to pull them into
the internal community.
Standouts reported a better balance of communication approaches. With our younger workforce,
They acknowledge the continued importance of communications “from the there is a complete delta in how
top,” especially to establish clarity of purpose and company values. But they expect to communicate.
they also are embracing “viral” forms of communication to engage those We need to build a multi-
inside and outside their organizations. generational communication
strategy to weave our diverse
Breaking from the past, CEOs made a bold choice in naming creativity their workforce together.”
premier leadership quality. Traditionally, leaders were most admired for
David Cush, President and CEO,
other qualities, like operational excellence, strategic vision or engineering
Virgin America Airlines
big deals. Our sense is that CEOs are embarking on a significant shift, both
personally and for their organizations as a whole. Committing to creativity,
they understand the need to challenge their most basic assumptions, and
reconceive what it takes to be successful.


Recommendations
Today’s CEOs know that creativity is an essential asset and that it must
permeate the enterprise. Creative leaders — which include CEOs and their
teams — are courageous and visionary enough to make decisions that
alter the status quo. In addition, they increasingly deploy a broad range of
innovative communication tools to engage with a new generation.

Embrace ambiguity
Reach beyond silos. Pull creative elements of your organization out
of compartments and integrate them into the mainstream. Transcend the
obvious to form unconventional partnerships. Proactively exchange
knowledge and cooperate with internal and external stakeholders, eliminating
every communication barrier to improve your ability to handle the unknown.

Exemplify breakthrough thinking. Practice and encourage experimentation
at all levels of the business. Forge ahead with rule-breaking innovation that
sets your organization apart from the crowd. Study and question what
others do — scour technology and customer trends. Build scenarios to plan
responses to a range of possible futures.

Act despite uncertainty. Fight the natural urge to wait for clarity and
stability; taking calculated risks — while others hesitate — can pay off. Find
a creative way to turn complexity into an advantage. Rely on deeply felt
values and a well-defined vision to provide the confidence and conviction
to exploit narrow windows of opportunity.

Take risks that disrupt legacy business models
Pilot radical innovations. Stimulate the extended management team to
break the mold of existing business models. Think “green field”— what
would you do if you were a new entrant with no legacy burden? Question
industry practices that seem obvious. When you think you have the
answer, ask “why?” again.


Continually tweak your models. Push tailoring to the extreme. Perpetually
reassess your enterprise, industry and revenue models to find out what
works best. Always look ahead and be prepared to scale up or down, as
needed. Promote a mindset of never being satisfied with “good enough.”

Borrow from other industries’ successes. Learn from and be inspired by
creative achievements from outside your industry. Regularly discuss
case examples from other industries in your management team meetings.
Stay abreast of customer and technology trends that are transforming
other sectors and consider how you could apply them.

Leapfrog beyond “tried-and-true” management styles
Strengthen your ability to persuade and influence. Even if it feels uncom-
fortable, lead by working together toward a shared vision. Dare to
relinquish some control in favor of building more mutual trust throughout
the organization. Don’t present your logic; discover logic with your team.

Coach other leaders. Spark the imagination of others. Instill the pursuit of
creativity into your organizational mission through informal and formal
training. Challenge every team to prioritize creativity, and support and reward
employees who step outside their comfort zones to innovate.

Use a wide range of communication approaches. More than before,
supplement top-down organizational communication with less formal, more
innovative channels. Accept that for customers and employees alike,
blogs, Internet presence, instant messaging and social networking are
more credible—and often faster—than traditional top-down communication.
Be more open in giving stakeholders access to you.


Case study
Axiata Group
Writing the future

Axiata Group is one of the largest Asian telecommunication companies,
with operations in ten countries, 25,000 employees and 120 million
subscribers. Axiata’s vision is to be a regional champion by 2015, by
piecing together the best throughout the region in affordable connectivity,
innovative technology and developing talent, and uniting them toward
a single goal and greater purpose: advancing Asia.8

Over the past two years, Axiata has made major progress toward that goal.
It began when Jamaludin Ibrahim emerged from retirement to take over as
CEO in March 2008. Ibrahim was formerly head of Maxis Communications
and, under his leadership, the company’s revenues grew more than
twenty-fold to US$ 2.3 billion — an accomplishment that earned him the
accolade of Malaysia’s “CEO of the Year” in 2009.9

Ibrahim’s first order of business at Axiata was to innovatively forge one
team, bringing together the operating companies that made up the
group to work in unison toward a shared vision. He invited key stakeholders
to a leadership summit in Tokyo. But, rather than concentrating on
organizational issues, he asked each participant to pretend they had his
job and write a fictional press release dated in the future explaining how
they had accomplished the group’s growth objectives. This creative
approach forced them to rethink the status quo and admit that they could
never do so alone, paving the way for cooperation on various fronts.

Ibrahim’s collaborative approach to building a common vision and fostering
creativity is delivering results. Axiata recently posted stellar financial
results, with net profits tripling to RM 1.7 billion (about US$ 495 million)
10
from just RM 498 million in 2008.


Are you leading creatively?

How will you develop the critical capabilities
to enhance creativity among your leadership team?

In what ways can you explore, reward and globally
integrate diverse and unconventional points of view?

What is your approach to challenge every element
of your business model to get the most from currently
untapped opportunities?

How will you leverage new communication styles,
technologies and tools, both to lead a new generation
of talent and encourage breakthrough thinking?

Chapter Two 37

Reinvent
customer
relationships
Customers have never had so much information
or so many options. CEOs are making “getting
connected” to customers their highest priority to
better predict and provide customers with what
they really want.


Rethink customer relationships
“Our products need to Customers keep getting connected — but are they connecting with you?
anticipate need, rather than
In a dynamic and more complex environment, more enterprises feel
respond to a request.
”
customers pulling away instead of getting closer, as new social networking
Michael D’Ascenzo, Commissioner of channels capture a greater share of customer attention.11
Taxation, Australian Taxation Office
It’s not just customer attention that has wandered. Interactions have
changed too. For example, even the best-designed retail Web sites can’t
control the shopping experience, as more and more sales take place
through auction and affiliate sites, location-based sites and a multiplicity
of new channels.

Customers encountering new products, services and experiences on what
seems like a daily basis are growing less loyal to their brands and even
their own habits. Reputations can be built and burned by opinions shared
online, “texted” and “tweeted” by friends, bloggers and advocacy groups.
CEOs told us they need to re-ignite customer interest and loyalty, or risk
losing ground to competitors.

Get even closer to the customer

Customer intimacy is foremost on CEOs’ minds. Eighty-eight percent of all
CEOs, and an astounding 95 percent of Standouts, picked getting closer
to the customer as the most important dimension to realize their strategy
in the next five years. These CEOs are convinced they must not only stay
connected (or reconnect) with customers, but keep on learning how to
strengthen those bonds.

Reinvent customer relationships 39

Figure
Figure 13 Top focus areas incustomersyears CEOs priorities.
Getting closer to next five tops
Abovefew other priorities, CEOsplace to focus on getting closer to customers
With all exceptions, Standouts plan customer relationships above all other
to realize their strategy. ve years.
focus areas for the next

14%
Getting closer to customer
88%
more
People skills
81%

Insight and intelligence 95%

76% 83%

Enterprise model changes
57%

Risk management
55%

Industry model changes
54%

Revenue model changes
51% Others Standouts

A Telecommunications CEO in the Czech Republic acknowledged it is no
trivial task. “As a major player in our market, customer intimacy is most “To surprise customers requires
important to us, but this is easier to say than do.” Like just about everything unexpected ideas through
else in this more complex environment, getting closer to the customer will interactions of people with
require both new approaches and a new mindset. diverse perspectives. It is urgent
for us to develop a system to
In our conversations with leaders, we sensed CEOs were more committed manage this unexpectedness. ”
than ever to taking personal responsibility for being customer driven.
Shukuo Ishikawa, President
Decisions need to be guided primarily by customer needs —“even on the and CEO, Representative Director,
CEO level,” affirmed a Banking CEO in Hungary. NAMCO BANDAI Holdings, Inc.


Turn the data explosion into insight

To better understand what differentiates customer-focused leaders, we
took a closer look at CEOs whose top priority is getting closer to the
customer. This group was 29 percent more likely to expect the information
explosion to impact their organizations to a very large extent in the next
five years. They also focused 18 percent more on insight and intelligence
to achieve strategy.

Figure 14 Leveraging the information explosion
Customer-focused CEOs will use insight and intelligence to better serve customer needs.

Other CEOs
Impact on 49%
organization of
information
explosion
Customer-focused CEOs
63%
29%
more

Other CEOs
More focus on 66%
insight and
intelligence to
realize strategy
Customer-focused CEOs
78%
18%
more

A staggering number of CEOs described their organizations as data rich,
but insight poor. Many voiced frustration at not being able to transform
available data into feasible action plans, let alone to detect emerging
opportunities. “We seem to have more data, but our information is worse,”
said an Electronics CEO in Canada. “It is more difficult to sift out what
is most important.”


In what seems a growing fog of data, CEOs have never expressed a
greater need to obliterate their blind spots. Too often, they say, “Technology is already
information based on customer interactions is trapped in organizational impacting our clients’ behavior.
silos. Or insights are derived only from the most easily culled information. Currently, clients are price
Organizations that are able to combine, or layer, many kinds of information checking over four continents
from different customer channels — with frequency— are best positioned using today’s technology.”
to succeed.12 An Education CEO in Canada cited the problem of Michael Ward, Chief Executive, Harrods
poor data quality: “Information is not well validated. The problem is a
‘misinformation explosion.’”

Today, unstructured information — comments on Web sites or blogs,
for example — can be analyzed as readily as statistical data from multiple-
choice questionnaires. Much of this unstructured information, however,
is outside an organization’s own control — on the Internet, for example, or
in a partner’s contact center, making enhanced and purposeful collaboration
with customers, partners and others a necessity.

Generate trust to generate insight

When asked how their customers’ expectations of them would change
in the next five years, 82 percent of CEOs expect that customers —
and in the case of government, citizens — will demand a better under-
standing of their needs. Seventy percent said that customers would
expect new and different services, closely followed by more collaboration
and information sharing.

Improved collaboration —both inside and outside the organization— has
long been a high CEO priority. In our last CEO Study, CEOs indicated that
knowing more about customers led to better innovation on their behalf.13
But just two years later, social networking has exponentially increased the
degree of interaction customers and citizens expect of organizations. It isn’t
enough just to collaborate anymore. Today, the watchword is “co-create.”


In fact, unprecedented levels of customer collaboration are becoming
a reality. A recent IBM study found that a remarkably high 78 percent of
consumers surveyed worldwide would be willing to collaborate with
14
retailers to develop products and services.

Figure 15 CEOs predict what customers will expect
Above all, CEOs think customers want organizations to better understand their needs.

Better understanding of needs
82% 12% 6%

New or different services
70% 20% 10%

More collaboration, information sharing
69% 20% 11%

New or different products
“We are heavily focused on 61% 22% 17%
audiences (products, services and
New or different channels
markets). Historically, we ran
51% 25% 24%
our business somewhat like a
utility. Going forward, we are Increased focus on social responsibility
segmenting our products and 46% 30% 24%

services for specific audiences.
” Stronger focus on price-value equation
45% 24% 31%
Glenn Britt, Chairman,
President and Chief Executive
Officer, Time Warner Cable
To a large/very large extent To some extent Not at all/to a limited extent

Today, the real reward of customer connectivity is the intelligence to
be gained from customers who trust that organizations will put the
information they share to mutual advantage — for them, others like them


and the organization. A person who takes medication for chronic conditions
may be more likely to share information about relevant symptoms with Student perspectives
medical researchers when he joins a patient-oriented social networking While students foresee changing
site, for example. customer expectations of new products
and services at the same level as CEOs,
Since we talked to CEOs two years ago about customer loyalty, one of the 24 percent more students expect
bigger changes has been the massive growth in social networking. Twitter significantly greater customer demand
grew 1,928 percent from June 2008 to June 2009, and today has more for new or different channels.
15
than 21 million unique visitors each month. In a single year, from January “Understanding needs is a very important
16
2009 to December 2009, Facebook grew from 150 million to 350 million. factor. But it’s important to understand
If Facebook were a country, it would be the third-largest country in the that this must be on a personal level—
not simply a ‘buying behavior’ level.”
world.17 These and the scores of sites rapidly emerging where consumers
and citizens share likes and dislikes will require an entirely new approach. Student, United States

“Social networks are at the heart of collaboration and information sharing,”
according to a Telecommunications CEO in the United States. “It will
drive differentiation.” A Utility CEO in the United Kingdom acknowledged,
“There is a whole new generation of customers we must learn to engage
with; they’re all ‘twittering’ and we’re not.”

Question the price-value equation

As suppliers and competitors get more global, and communications more
viral, new trends and innovations leap quickly to and from far-flung regions.
Customer preferences change as quickly as they are captured. CEOs
understand that to stay abreast of rapidly evolving changes by region and
segment requires continuous engagement that feeds new sources of insight.


Few trends may be as important as better understanding changing
customer preferences about both price and quality. Naturally, the
economic downturn has elevated price consciousness. At the same time,
new consumer groups are emerging in rapidly developing markets.
Their attitudes about price and value are largely unknown, especially by
organizations outside the region.

The Standout organizations we met with understand the importance of
getting this right. They are 38 percent more likely than all others to focus
on the price-value equation as part of their future strategies.

Figure 16 Standouts are more focused on the price-value equation
Organizations recognize the need to better understand customers’ price-value trade offs.

Others
42%

38%
Focus on
price-value Standouts
equation more
58%

Design the customer experience

Organizations are finding new ways to better understand evolving
needs. In addition, they are designing better customer experiences for all
their interactions.

More and more, organizations are working to synchronize processes
with the desired customer experience, and shift their metrics to measure
that experience. “We will lead with the customer experience,” a Telecom-
munications CEO in the United States explained.


Increasingly, organizations will need to “follow the customer” as customers
communicate with or about them through all possible channels. It is “Our customers want
no surprise, therefore, that Standouts were 13 percent more likely than personalization of services
others to be focused on developing new and different channels. This also and products. It is all about
opens up new ways to engage with customers to harness their creativity the market of one. ”
and co-innovate to develop new products and service models. Tony Tyler, CEO, Cathay Pacific Airways

The CEOs we spoke with showed a new determination to put the
customer first. As a Life Sciences CEO in the United States put it, “Our
industry model will change to drive getting closer to the customer.”

Figure 17 More Standouts seek new paths to customers
Finding new channels to exchange information with customers is fundamental to
providing desired customer experiences.

Others
45%
Use of new or
different channels Standouts
51%
13%
more


Recommendations
A new approach to customer intimacy is critical in the new economic
environment and this necessitates a stronger commitment than ever
before. Organizations that are best at extracting previously undiscovered
insights from vast amounts of customer information have a huge advantage
in deepening existing connections and creating new relationships.

Honor your customers above all else
Establish an unprecedented level of focus. Starting with the CEO, every
employee in the organization must be hyper-focused on customers.
Make customer value your number one value. Ensure every employee is
responsible for and assessed annually on a customer satisfaction or
customer value metric.

Heighten customer exposure. Make it easy for customers to connect with
the right person in your organization. Every employee must have the
information needed to engage with customers appropriately and effectively.
All employees must understand the link between the work they do and
the value it brings to customers.

Measure what customers value. Genuinely know what motivates current
and potential customers to choose your product or service. Surpass
today’s standards to proactively verify that you are providing what customers
want and delivering it in ways that matter to them. Understand your
customers’ business goals and help them succeed.

Use two-way communication to stay in sync with customers
Make customers part of your team. Enhance customer relationships by
finding new ways to communicate, new roles they can play, new questions
to ask them, new ways you can listen, new ways to evaluate their
feedback and new ways to leverage what you learn. Make — and deliver
on — commitments to your customers.


Solicit customer wants. Engender loyalty by directly involving customers
in defining emerging needs. Constantly tune offerings to their rapidly
changing preferences. Make sure you are providing what customers want
tomorrow, instead of what they wanted yesterday.

Co-innovate and interact with customers in new ways. Collaborate across
different channels to create new products and services. Maintain a running
dialogue that includes face-to-face and social networking interaction. Involve
your customers before and beyond the sale, including care and service.

Deliver true process transparency. Ask your customers which processes
work well and what should be done to fix the ones that don’t. Remember
to ask what they want to know about your processes, products, services
and organization.

Profit from the information explosion
Tap the value of limitless data. Identify and prioritize hidden opportunities
by managing and using information better. Find new ways to extract
value from unstructured, non-numeric (and often short-lived) data. Switch
from merely collecting data to connecting it — help internal and external
stakeholders integrate facts in a meaningful way.

Translate data into insight into action that creates business results.
Make the right data accessible for the right people at the right time. Remove
blind spots that hinder informed decision making by providing contextual
analytics and insight. Perform analysis that allows you and your employees
to “predict and act,” not just “sense and respond.”

Share information freely to build trust and improve customer relationships.
Confirm you are providing the information that customers want and
how they want it. Improve the effectiveness — not just the efficiency — of
information exchanges to avoid the trap of speeding up delivery of what
they don’t even need.


Case study
CenterPoint Energy and Oncor
Smart meters putting power in the hands of customers

Customers traditionally left all the decisions about energy supply to their
providers, as long as the energy flowed when they needed it. But times
have changed. Texas-based electricity distributors CenterPoint Energy and
Oncor are responding to customers’ changing needs and now give them
more control over their power usage.

Both companies are part of a consortium that has launched a new
service Web site where consumers with smart meters can monitor their
daily electricity consumption.18 CenterPoint Energy started rolling out
its advanced metering system in March 2009. It has installed 267,000
19
smart meters and plans to install over 2 million by 2014. Meanwhile, Oncor
has installed over 800,000 smart meters and aims to replace all three
million-plus meters in its system by 2012.20 Oncor’s deployment includes
providing retail electric providers the ability to directly control thermostats
and other interruptible loads, send pricing signals and provide tiered
pricing information to consumers’ ZigBee-enabled in-home devices.

Smart meters are the link between customers and the smart grids many
electricity companies are now building. And the grids themselves
are a perfect example of how technology can be used not just to control
complexity but to exploit it. They draw on sophisticated sensors and software
to route power as effectively as possible, given the prevailing conditions.

These initiatives will give consumers access to near-realtime usage data —
a major step toward helping consumers make smart energy decisions.
They will also enable retail electric providers — the companies selling
energy directly to consumers — to support retail offerings such as energy
analysis tools, time-of-use rates and prepaid service that will help customers
better manage their electricity expenditures.21


Are you reinventing
relationships with customers?

How will you engage customers in new ways that
increase interest and loyalty to generate new demand
and revenue sources?

How can you involve customers more effectively and
directly in product and service development?

Can you hear the voice of your customers through
the vast amount of data? Can you understand and act
upon the information?

Chapter Three 51

Build
operating
dexterity
CEOs are mastering complexity in countless ways.
They are redesigning operating strategies for
ultimate speed and flexibility. They embed valued
complexity in elegantly simple products, services
and customer interactions.


Get ready for growth
“Simplification and Today’s CEOs face grueling conditions. Buffeted by volatility, they have
standardization are key
come to expect the unpredictable. But they know that the return to growth
strategies that we have
will require more than resilience or sure footing. They need to spring forward
been using for several years
to reduce existing and with the vigor of Olympic-caliber athletes. Not only are new opportunities
future complexity. ” emerging in rapidly developing markets, new customer segments are
differentiating themselves in mature markets. Organizations unprepared to
Brenda Barnes,
Chairman and CEO, Sara Lee
act immediately on these new opportunities may watch them slip away
from their grasp almost as quickly as they emerge.

Adding to the pressure is rapid fragmentation. The world may be flat, but it
is now made up of discrete markets, proliferating product and service
categories and ever-individualized customer segments. Such diversity and
splintering adds greatly to the complexity that private and public sector
leaders are experiencing.

At the same time, the CEOs we met with talked of adopting a new approach
to planning — iterating their business strategies with greater frequency
and instituting continuous change through business model innovation. This
calls for operating models designed for extreme flexibility and the surety
to act with speed.

Simplify for speed

Complex operating structures too often degrade to an overly and
unnecessarily complicated state. Over the years, design flaws crop up in
even the best operating models.

An inefficient process becomes linked to a critical one, for example, and
slows down the whole organization. Mergers and acquisitions introduce
redundant systems, and create wide-open gaps. Objectives change,
and old processes are no longer adding value, but they stay embedded.
Eventually the process “spaghetti” makes it hard to judge which connections
are adding value and which are introducing untenable dependencies.

Build operating dexterity 53

Figure 18 The majority of Standouts intend to simplify operations
Fewer than half of other CEOs will emphasize simplification to better manage complexity.

Others
47%

Standouts
61%
30%
more

In response, many CEOs expressed the need to simplify their operating
strategies in order to better manage complexity. Standouts were 30 percent
more likely than others to be focused on simplification. “Simplifying our
products and processes is our response to the extended complexity in the
world,” one Banking CEO in the Netherlands told us.

Mask complexity for your advantage

The CEOs we spoke with expressed a need for simplification that extends
beyond lean processes and easier-to-use products to more useful and “When things look very simple,
streamlined interactions with their customers, employees and partners. you need to look for a competitive
CEOs weren’t advocating stripping their operating structure or product
edge. When things are complex,
you simplify to get the competitive
lines of all complexity. Rather, they were focused on optimizing their
advantage. ”
operating models for specific objectives. For many, the primary purpose
is the speed and flexibility to go after new revenue sources. For others, Graeme Liebelt, Managing Director
and CEO, Orica Limited
it is to get closer to customers by creating better customer experiences.

It goes without saying that even the most complex products should have
intuitive—and easy-to-use—interfaces. The same is true of every interaction
with a customer, patient or citizen. A Government CEO in New Zealand
summed up planned changes to his operating strategy: “We will manage
complexity on the business side, but simplify the customer experience.”


The trick is keeping complexity “behind the curtains,” making it easy for
“The world is non-linear, so the customers, as well as employees whose productivity is thwarted by
ability to cut through complexity unwieldy systems and processes. In a world of sweeping complexity, the
relies on processing a large ability to mask it becomes a competitive advantage in critical areas like
amount of information quickly the ease of doing business and customer service.
and extracting nuggets to
make quick decisions. Building Benefit from complexity
advantage will be an outcome
To lead in the marketplace, complexity also has to be mastered. Complexity,
of dealing with complexity better
in the form of increasing interconnectedness, won’t go away, nor should
than our competitors. ”
it. The tsunami of data released from the Internet of people and things,
Julian Segal, Managing Director and coupled with new technologies and analytics, has already led to industry-
CEO, Caltex Australia Limited
disrupting innovations, such as e-books, Internet retailing and digital
music, and massive improvements to the way the world works, such as
intelligent “farm to fork” systems.

In China, 84 percent of the consumers surveyed by the IBM Institute
for Business Value say their concern about food safety has increased, and
65 percent don’t trust food manufacturers.22 This is not just a problem
in China. In the United States, it took authorities two months to identify the
source of a deadly salmonella outbreak.

In Norway, Canada and elsewhere, stockyards, feed suppliers, processing
plants, truckers and retailers are working together to build systems to
track meat, poultry and even wheat from farm to fork, to keep it in optimal
conditions throughout the supply chain.23 Data is collected and analyzed
to trace every aspect of a piece of food for safety, quality and other
considerations. In many cases, consumers can now access information
on Web sites to determine the specific origin of the individual food item
they just purchased.24 The same systems and data collected to track food
can be used by producers to increase efficiencies and cut costs — even
optimize for carbon output — across the supply chain.


A Healthcare provider in the United States described complexity as
opportunity: “The more complex, the more interesting it is. I never believed “We are looking at a vast
the good old days were good. Never a better time to be in healthcare. transformation in how we
Not easier, but more rewarding.” use our existing assets.
”
Design for dexterity Dr. Stephen Duckett, President and
CEO, Alberta Health Services
To create a profile of dexterous organizations, we grouped those CEOs
who recognized the value of fast decisions, an iterative approach to strategy
and the ability to execute with speed. These are the basic organizational
constructs for quick, effective action in a changing and complex environment.
An Aerospace and Defense CEO in the United States concisely stated
the need for operating dexterity: “You can be good at everything, but if
you can’t adapt, you are dead.”

Notably, we discovered that this dexterous group was 19 percent more
likely to view creativity as a top leadership quality. They have other objectives
in common. They are more likely to avoid fixed costs wherever possible.
Three-fourths of CEOs who are keenly focused on operational dexterity
plan to change their operations to increase cost variability.

Figure 19 Replacing fixed costs with variable costs
The most dexterous CEOs focus much more on variable cost structures
so they can scale up and down more quickly.

Dexterous CEOs

27%
12% 12% 76%

CEOs not prioritizing dexterity
more
14% 26% 60%

Increase share of ﬁxed cost Both Increased share of variable cost


By adopting a service model approach, outsourcing and partnering more
Student perspectives extensively, they are able to tap into skills and can scale their businesses as
Students expect organizations to be flat required. This gives them more flexibility to pursue targeted pockets of
and flexible. They were 90 percent growth.25 They standardize processes where possible, and take advantage
more likely than CEOs to select adapt of shared service models across key functions, such as Human Resource
ability as one of three top capabilities and Finance operations. This frees them up to put more emphasis on
that organizations should build into their
activities that customers or citizens value.
operating strategies.

“An adaptable organization can deal Rebalance global and local
with anything that comes its way, so
this is a good skill for any organization
Dexterous organizations also carefully consider when to utilize global
at any time. Today, the markets advantage and where to optimize for local impact. Modular approaches,
change constantly, so it is even more using standardized components in areas like product development and
important. Being able to see what manufacturing, help organizations be globally efficient and locally attuned.
is coming reduces the risk of entering
This increased focus on finding the right balance builds on the findings
into business and can be easily done
of our last CEO Study: in 2008, CEOs were starting to voice the need for
to help an organization plan.”
both global integration and local relevance.26
Student, France
The decision on how to balance global and local is similar to the debate
regarding decentralization. It’s rarely an either/or proposition. As one
Electronics CEO in Switzerland told us, “It’s not about centralized versus
decentralized. It’s about deciding on the best fit for each business unit
or element in the value chain.”

The dexterous group was 23 percent more intent than all others on
achieving an optimal balance between global and local markets. They
prioritized the analysis of which operational elements work best on a global
level versus those that are better addressed at local levels. CEOs admitted
that finding the best mix is not easy and that they too often fall back on
doing what is familiar. An Industrial Products CEO in the United Kingdom
recounted that for his organization, centralization was the common default.
“There is always pressure to centralize our way out of issues, he said,
”
“and it is always the wrong answer.”


Target new growth

A Life Sciences CEO in the United Kingdom shared a concern common
“The challenge is the short
window of time that exists to
to many we spoke with: “I am worried that we have missed opportunities
take advantage of a situation
by being too insular.” By contrast, dexterous organizations have confidence
or strategic opportunity.”
in their ability to spot and exploit these potential spikes of growth, and
expect 20 percent more revenue to come from new sources over the next Norman Gerber, CEO,
Versicherung der Schweizer
five years than other CEOs. Ärzte Genossenschaft

Organizations that can flex, recalibrate and optimize their organizations
to pursue specific objectives are best situated to go after any opportunity or
respond to any event that comes their way. Driven by the urgent need for
business recovery — even as the pace of change continues to accelerate —
operational dexterity has become central to the return to growth.

Figure 20 Revenue generated from new sources
CEOs with greater speed and dexterity expect 20 percent more revenue
from new sources in the next five years.

Others
15%
Last ﬁve years Dexterous CEOs
20%
33%
more

Others
25%
Next ﬁve years Dexterous CEOs
30%
20%
more


Recommendations
Operational dexterity enables CEOs to pursue growth opportunities and
address challenges with speed. With fast and flexible operations, they can
also become experts at finding advantages in complexity — for both their
customers and themselves.

Simplify whenever possible
Simplify interactions with customers. Be ultra-easy for customers to do
business with. Eliminate unnecessary complexity so that customer-related
policies and procedures, and access to products and services, are effortless
from the customer’s point of view. Keep the focus on being intuitive.

Simplify products and services by masking complexity. Deliver rich
functionality to customers through simple interfaces. Provide deeply valuable
products and services that are easy for end users despite the necessary
and desirable underlying complexity. Understand which features customers
want to influence and when they prefer not to have to make choices.

Simplify for the organization and partners. Be absolutely clear in communi-
cating organizational priorities and what is expected from whom. Eliminate
bureaucracy and implement lean processes. Integrate functions to create
empowered teams and enable faster decisions.

Manage systemic complexity
Put complexity to work for your stakeholders. Refuse to allow global
complexity to encumber your supply chain — instead, extract value from the
existence of more options to make it more efficient and effective. With
improved insight into customers, processes and business patterns, drive
better realtime decisions and actions throughout the enterprise. Consider
adding value by managing more complexity on behalf of your customers.


Take advantage of the benefits of analytics. Identify, quantify and reduce
systemic inefficiencies. Elevate analysis from a back-office activity limited
to a handful of experts to an approach that can empower everyone in
the organization in context of the current situation.

Promote a mindset of being fast and flexible
Act quickly. Be audacious — make decisions when you “know enough”
and resist the urge to wait until you “know it all.” Rely on a strategic vision
to provide clarity in a nebulous environment.

Push execution speed. Streamline processes to enable rapid decision
making and execution. Remove procedural or policy roadblocks by
empowering employees at appropriate levels to act. Recognize and reward
when flexibility generates value.

Course-correct as needed. Align a few clear metrics with objectives to
identify success patterns, then regularly track results as part of a continual
feedback loop. Modify actions based on what is learned.

Be “glocal” 27
Find the right mix of global and local. Be global where possible, local
where necessary. Gain an in-depth understanding of what really needs to
be localized. Allow for cultural differences and don’t assume what works
for one country or market will work in another. Identify new growth
opportunities around the world constantly.

Leverage the world through partners. Being nimble often means not
doing it alone. Know where the best opportunities lie at any given time,
and pursue them. Strengthen partnering skills to replace fixed costs with
variable costs, and take advantage of geographic expertise and cost
advantages as much as possible.


Case study
The Volkswagen Group
Working the world

The Volkswagen Group is one of the world’s leading automobile manufac-
turers and Europe’s biggest carmaker, with revenues of over €105 billion
(about US$ 140 billion).28 The Group aims to become the world leader by
2018.29 And, given sluggish demand for new vehicles in the developed
economies, it wanted to boost its presence in emerging markets. The key
question was: how could it compete and still be profitable?

The Volkswagen Group’s solution was to build an operating model that
balances global and local. The Group is made up of nine brands from
seven European countries. Each brand has its own character and
operates as an independent entity. The entire Group has a global vision,
replicates best practices and exploits economies of scale. Starting by
2012, a “modular” manufacturing strategy will further optimize production
and costs across brands and regions.30 This will enable the Group to
reduce its unit costs and lead times, while increasing its flexibility.

The Volkswagen Group also adapts its vehicles for local customers and
has localized key elements of the value chain, with the support of regional
R&D teams, local sourcing and local marketing. Local materials and
suppliers account for 80 to 90 percent of the value of all vehicles made in
Brazil, for example. The Group is now developing local dealer networks
and financing facilities, in collaboration with local banks.31

Thanks to this “glocal” approach, the Volkswagen Group enjoyed year-on-
year EBIT growth between 2004 and 2008. And in 2009, it sold more
vehicles in China than in Germany — proof of its foresight in being one of
the first Western carmakers to set up operations there.32


Are you building
operating dexterity?

In what ways can you simplify processes
and develop the agility required to execute rapidly?

How can your organization benefit from taking on
more complexity on behalf of customers or citizens?

How will you integrate and analyze timely information
to gain insight, make quick decisions and enable
dynamic course correction?

Have you implemented asset and cost flexibility,
and defined partnering strategies to compete in your
chosen markets?

The CEO Agenda 63

How to
capitalize on
complexity
Looking ahead, the possibilities for capitalizing
on complexity are expanding rapidly. We learned from
over 1,500 CEOs how they are making
the most of unprecedented opportunities and
addressing new challenges.


Act on the CEO agenda
Embody
“The complexity our organization creative
Even though complexity seems to be at an all-time high, it’s still rising.
leadership
will have to master over the
Each day, business processes are becoming more global, interconnected
next five years is off the charts —
and collaborative. But the complexity that comes from involving more
a 100 on your scale from 1 to 5. ”
people, more organizations and more information also brings fresh perspec-
Edward Lonergan, tives, deeper insight, more innovation.
President and CEO, Diversey, Inc.
In managing, masking or eliminating complexity, creative leaders will invent
Build
new business models based on entirely different assumptions. Benefits
operating
dexterity
are to be had for those who create new products, services, delivery
methods and channels that hide intricacies and make things simple in the
eyes of consumers and citizens. Reinvent
customer
relationships
For CEOs and their organizations, avoiding complexity is not an option —
the choice comes in how they respond to it. Will they allow complexity
to become a stifling force that slows responsiveness, overwhelms employees
and customers, or threatens profits? Or do they have the creative
leadership, customer relationships and operating dexterity to turn it into a
true advantage?

Embody
creative
leadership

Build
operating
dexterity

Reinvent
customer
relationships

How to capitalize on complexity 65

In summary, the combined insight from our 1,541 interviews calls for CEOs
and their teams to:

Embody Reinvent Build
creative customer operating
leadership relationships dexterity

• Embrace ambiguity • Honor your customers • Simplify whenever possible
• Take risks that disrupt above all else • Manage systemic
legacy business models • Use two-way complexity
• Leapfrog beyond communications to sync • Promote a mindset of
“tried-and-true” with customers being fast and ﬂexible
management styles • Proﬁt from the information
• Be “glocal”
explosion

We invite senior leaders to use this latest Global CEO Study to spur
ongoing discussions about how to navigate the hurdles of complexity and
how to prosper because of it. As your organization explores many
options to capitalize on complexity, we look forward to working with you.

Continue the conversation at ibm.com/capitalizingoncomplexity


Acknowledgments
We would like to thank the 1,541 CEOs around the world who generously
shared their time and insights with us. Special appreciation goes to the
CEOs who allowed us to include quotes from their interviews to highlight
major themes throughout this report.

We would also like to acknowledge the contributions of the IBM teams
that worked on this Global CEO Study:

Leadership team: Saul Berman and Peter Korsten (Study Executive
Directors), Grace Chopard, Hans-Henrik Jørgensen, Ryuichi Kanemaki,
Sara Longworth, Dave Lubowe, Eric Riddleberger, Roland Scheffler
and Michel Vlasselaer

Project team: Ragna Bell (Study Director), Denise Arnette, Steve Ballou,
Rajeev Jain, Deborah Kasdan, Christine Kinser, Keith Landis, Kathleen
Martin, Joni McDonald, Susan Ranft, Christian Slike, Raghuram Sudhakar,
Gaurav Talwar and Vanessa van de Vliet

And the hundreds of IBM leaders worldwide who conducted the in-person
CEO interviews.

67

The right partner
for a changing world
At IBM, we collaborate with our clients, bringing together business insight,
advanced research and technology to give them a distinct advantage in
today’s rapidly changing environment. Through our integrated approach to
business design and execution, we help turn strategies into action. And
with expertise in 17 industries and global capabilities that span 170 countries,
we can help clients anticipate change and profit from new opportunities.

About IBM Global Business
Services Strategy & Change
IBM Global Business Services offers one of the largest Strategy & Change
organizations in the world, with over 3,250 strategy professionals. IBM
Strategy & Change practitioners help clients develop, align and implement
their vision and business strategies to drive growth and innovation.

About the IBM Institute
for Business Value
The IBM Institute for Business Value, part of IBM Global Business Services,
develops fact-based strategic insights for senior business executives
around critical industry-specific and cross-industry issues. This Global
Chief Executive Officer Study is part of our ongoing C-Suite Study Series.


Notes and sources
1 The period for long-term performance analysis of four-year operating compound annual
growth rate was from 2H2003/1H2004 to 2H2007/1H2008.

2 The period for short-term performance analysis of one-year operating margin growth rate
was from 2H2007/1H2008 to 2H2008/1H2009.

3 IMF World Economic Outlook Database, 2008 Actual Regional GDP, October 2009.
http://www.imf.org/external/pubs/ft/weo/2009/02/weodata/index.aspx

4 For readability, we refer to this collective group as “CEOs” throughout this report.

5 Global CEO Study interviews; http://www.wordle.net

6 “Expanding the Innovation Horizon: The Global CEO Study 2006.” IBM Institute for Business
Value. March 2006.

7 Giesen, Edward, Eric Riddleberger, Richard Christner and Ragna Bell. “Seizing the
advantage: When and how to innovate your business model.” IBM Institute for Business
Value. November 2009. http://www.ibm.com/services/gbs/businessmodelinnovation

8 Company profile. Axiata Web site. http://www.axiata.com/about-us/at-a-glance

9 Management team. Axiata Web site. http://www.axiata.com/about-us/mgmt/jamaludin

10 Thean Eu, Goh. “A ‘spectacular’ year for Axiata. Business Times. February 25, 2010.
”
http://www.btimes.com.my/Current_News/BTIMES/articles/axiata24-2/Article/index_html

11 Gonzalez-Wertz, Cristene. “The path forward: New models for customer-focused
leadership.” IBM Institute for Business Value. October 2009. http://www-935.ibm.com/
services/us/gbs/bus/html/crm-path-forward-whitepaper.html?cntxt=a1005261

12 LaValle, Steve. “Breaking away with business analytics and optimization: New intelligence
meets enterprise operations. IBM Corporation. November 2009. “http://www-935.ibm.
”
com/services/us/gbs/bus/html/gbs-business-analytics-optimization.html?cntxt=a1008891

13 “The Enterprise of the Future: Global CEO Study.” The IBM Institute for Business Value. May
2008. http://www.ibm.com/enterpriseofthefuture

14 Schaefer, Melissa and Laura VanTine. “Meeting the demands of the smarter consumer.”
IBM Institute for Business Value. January 2010. http://www.ibm.com/smarterplanet/us/en/
consumer_advocacy/ideas/

Notes and sources 69

15 Ostrow, Adam. “Twitter’s 1,928 Percent Growth and Other Notable Social Media Stats.”
Mashable: The Social Media Guide. Accessed on April 10, 2010. http://mashable.
com/2009/07/16/twitter-june-2009-growth/

16 Ibid.

17 Dyer, Pam. “100 Ways to Measure Social Media.” pamorama: marketing, life, social media.
April 5, 2010. http://www.pamorama.net/2010/02/10/the-facebook-juggernaut-
exponential-growth-worlds-leading-news-reader/

18 “Oncor Delivering Industry-Leading Benefits with Smart Meters. Oncor press release.
”
March 23, 2010. http://www.oncor.com/news/newsrel/detail.aspx?prid=1245

19 “CenterPoint Energy gives consumers with smart meters more control over their electricity
use.” CenterPoint Energy press release. http://www.centerpointenergy.com/newsroom/
newsreleases/fb38de0007687210VgnVCM10000026a10d0aRCRD/

20 “Oncor Delivering Industry-Leading Benefits with Smart Meters.” Oncor press release.
March 23, 2010. http://www.oncor.com/news/newsrel/detail.aspx?prid=1245

21 “CenterPoint Energy gives consumers with smart meters more control over their electricity
use. CenterPoint Energy press release. http://www.centerpointenergy.com/newsroom/
”
newsreleases/fb38de0007687210VgnVCM10000026a10d0aRCRD/

22 Blissett, Guy and J. Chris Harreld. “Full value traceability: A strategic imperative for
consumer product companies to empower and protect their brands.” IBM Institute for
Business Value. 2008. http://www-935.ibm.com/services/us/gbs/bus/pdf/fvt_
whitepaper_0069_en.pdf

23 Swedberg, Claire. “Norwegian Food Group Nortura to Track Meat. RFID Journal. July 22,
”
2008.http://www.rfidjournal.com/article/articleview/4208/1/1/; “Can-Trace Completes
Second Version of Canadian Food Traceability Data Standard—Voluntary Standard Enables
Organizations to Implement Traceability System.” Can-Trace press release, August 2, 2006.
http://www.can-trace.org/MEDIAROOM/PressReleases/CanTraceCompletesSecond
VersionofCanadianFoo/tabid/123/language/en-US/Default.aspx

24 “Tracing the origin of food.” TRACE—Molecular Biology Database. Accessed April 8, 2010.
http://www.trace.eu.org/mbdb/


25 Berman, Saul J., Richard Christner and Ragna Bell. “After the crisis: What now?”
IBM Institute for Business Value. March 2010. http://www-935.ibm.com/services/us/gbs/
bus/html/ibv-post-crisis-growth.html?cntxt=a1005266

26 “The Enterprise of the Future: Global CEO Study.” The IBM Institute for Business Value. May
2008. http://www.ibm.com/enterpriseofthefuture

27 In the context of this report, we use “glocal” to describe how organizations increasingly
balance their operations to accommodate both global and local objectives and conditions.
To read more about this informal term and its possible origins, see “Glocalisation” at http://
en.wikipedia.org/wiki/Glocal

28 “Navigator 2010—Facts and Figures.” Volkswagen. December 31, 2009. http://www.
volkswagenag.com/vwag/vwcorp/info_center/en/publications/2010/03/navigator_2010.-
bin.acq/qual-BinaryStorageItem.Single.File/Navigator_2010.web_engl.pdf

29 Tutu, Andrei. “Volkswagen Aims to Unseat Toyota as No. 1 Carmaker.” autoevolution.
February 3, 2010. http://www.autoevolution.com/news/volkswagen-aims-to-unseat-
toyota-as-no-1-carmaker-16275.html

30 Pötsch, Hans Dieter. “Volkswagen: strong foundations—primed for the future.”
Deutsche Bank IAA Investor and Analyst Conference, September 15, 2009. http://www.
volkswagenag.com/vwag/vwcorp/info_center/de/talks_and_presentations/2009/09/
IAA_Mr_Poetsch.-bin.acq/qual-BinaryStorageItem.Single.File/IAA%20DeuBa%20
Pr%C3%A4sentation%20Website%20.pdf

31 Winterkorn, Dr. Martin and Hans Dieter Pötsch. “Volkswagen—The Integrated Automotive
Group Strategy 2018: Ensuring Profitable Growth and Creating Sustainable Value.”
Presentation to investors. The Royal Opera House, London. February 3, 2010. http://www.
volkswagenag.com/vwag/vwcorp/info_center/en/talks_and_presentations/2010/02/
Investor_Day.-bin.acq/qual-BinaryStorageItem.Single.File/Investor%20Day.pdf

32 “Consolidated Financial Statements: Annual Report 2009. Volkswagen. http://annualreport
”
2009.volkswagenag.com/financialstatements.html

For further information 71

For further information
For more information about this study, please contact one of the
IBM leaders below. Or, visit ibm.com/capitalizingoncomplexity or send
an e-mail to the IBM Institute for Business Value at iibv@us.ibm.com.

Americas Saul Berman saul.berman@us.ibm.com

Asia Pacific Grace Chopard grace.chopard@au1.ibm.com

Japan Ryuichi Kanemaki kanemaki@jp.ibm.com

Northern Europe Sara Longworth saralongworth@uk.ibm.com

Southern Europe Michel Vlasselaer michel.vlasselaer@be.ibm.com

IBM Institute for Business Value Peter Korsten peter.korsten@nl.ibm.com

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