Game changer - management thinking - Economist Intelligence Unit

Game changer - management thinking - Economist Intelligence Unit

GamechangerHow companies are responding to afast-changing business environmentA report from the Economist Intelligence UnitSponsored by:

contentsKey points from this report 4123456The challenge of change 6The pace of economic change is accelerating and businesses are struggling to adaptFacing up to disruptive change 9Disruptive innovations can bring companies to their knees, but they can also be a source of rapid growthMessage from the frontline 11Listening to customers and stripping back bureaucracy can help companies adapt more quicklyNavigating to a new reality 12Adapting to change requires strong leadershipBreaking with convention 13The benefits of scenario planningA company with change in its DNA 15How to build a culture of changeLessons for leaders 16© The Economist Intelligence Unit Limited 20113

GAME CHANGER how companies are responding to a fast-changing business environmentkey pointsfrom thisreportCompanies are taking longer to reach criticalbusiness decisions. The pace of change andthe complexity of the environments in whichbusinesses operate have forced them to extenddecision-making times, even though they wouldmuch prefer for them to have fallen. Nearly onehalf(48%) of businesses surveyed say decisionmakingtimes have increased over the past fiveyears; only 22% say they have fallen.Executives fear that they are not making theright decisions. Most businesses are reasonablyconfident about gathering and analysing data,but they are much less comfortable when itcomes to making decisions. Among respondentsto our survey, only 39% think they are goodat making decisions about how and when torespond to change.Cultures will need to adapt. Hal Gregersen,senior affiliate professor of leadership atINSEAD, comments: “Most people have a biastowards the status quo, so when they arefaced with a disruptive opportunity or threat,they see it as a virus they want to kill.” Withchange an ever present in today’s businessenvironment, leaders need to come up with waysof counteracting this resistance to change.Leaders need to be willing to conceivemultiple futures and embrace uncertainty.“Companies need leaders who are tolerantof ambiguity and who can make others feelcomfortable about that,” argues Lowell Bryan,a director at McKinsey. “They have to instilconfidence in their teams that they are makingthe right decisions, even though it’s not clearhow the future will evolve.”Setting up a new division can be an effectiveway of managing disruptive change.Clark Gilbert, president and CEO of Deseret Newsand Deseret Digital, and a former professor atHarvard Business School, advises: “Setting up aseparate unit with its own P&L and managementallows that unit to focus on the breakthroughdisruptive change, while the old unit can beshrunk down and moved to a space in which itcan survive.”Executives should listen to messages fromthe frontline. “One of the most powerfulsources of information about emergingadaptive opportunities and pressures liesat the frontline,” says Ronald Heifetz, cofounderof the Center for Public Leadership atHarvard University’s John F. Kennedy Schoolof Government. “Employees who interact withcustomers are always the first to get the cluesand early warning signs about new sources ofopportunity or competition.”4© The Economist Intelligence Unit Limited 2011

Source: World Bank & IDCmobile phonesBIGINCREASEIt is estimatedthat there arenow more thanthe pace ofchange isaccelerating...w e b s i t e sa nd blo gss ocial m e diaMore thanactive Facebook users andinternet usersusers of TwitterSource: World BankSource: BlogpulseSource: Facebook & Twitter...and businesses are struggling to respondBUT...of respondents toour survey saidthe pace of changein their operatingenvironment haspicked up in thepast five yearsof people think it’simportant for theirorganisation toAnd onlyto changes inits operatingenvironmentsay the time it takestheir organisation tomake decisions hasincreased over thelast five yearsare confident theyare making the rightdecisions abouthow and when torespond to changeSource: Economist Intelligence Unit Survey of 390 business executives© The Economist Intelligence Unit Limited 20115

GAME CHANGER how companies are responding to a fast-changing business environment1the challenge of changeThe pace of economic change is acceleratingand businesses are struggling to adaptCompanies don’tknow how tosift through themountains ofinformation anddecide what’srelevant orverifiable andwhat isn’t.Michael Denison,Research director,Control RisksChange has been a major feature of oureconomic system since at least the industrialrevolution. From that point on, the dynamicsof technological advance, trade liberalisationand free-market competition have been drivingeconomies forward in an evolutionary processwhere continual change is a defining characteristic.Still, many observers think the pace of economicchange has picked up in recent years, and theresearch carried out for this report shows thatbusinesses are struggling to cope.One important driver of change is that theamount of information the world generates isincreasing. One contributing factor is that theamount of knowledge the world generates isincreasing. For example, World Bank data showthat there was a 56% increase in the numberof academic journal articles published per yearbetween 1990 and 2007 (see Chart 1). Similarly,statistics from the World Intellectual PropertyOrganization show that annual patent applicationsincreased by 90% between 1990 and 2008(see Chart 1).At the same time, information flows are alsoaccelerating. According to KPMG, a consulting firm,the amount of information found in the LehmanBrothers’ e-mail system after the bank’s collapsein 2008 was roughly 30 terabytes, equivalent totwice the amount of information contained in theUS Library of Congress. Equally as striking, Wal-Martis now said to be processing more than 1 millioncustomer transactions every hour and stores themall on a system capable of holding 2.5 petabytes ofinformation, enough space to hold about 33 yearsof HD-TV video.Michael Denison, research director at ControlRisks Group, believes that this increase in theamount of knowledge and information beinggenerated is creating a major headache forbusinesses. “Companies don’t know how tosift through the mountains of informationand decide what’s relevant or verifiable and whatisn’t,” he explains.But the sheer volume of new information beinggenerated is not the only problem; the complexityof today’s economic system has increased as well.A good indicator of this is the share of exportsin global GDP. Although this figure has dippedmarkedly since the recession struck, it has beenrising significantly over recent decades—from12% in 1960 to 29% just before the downturn (seeChart 2). This expansion in trade has been a hugeboost for business, but it has also created manychallenges for them, including having to deal withmore competition, new currencies and widelyvarying regulatory frameworks.Technology—particularly the internet—has beenanother driver of increased complexity. WorldBank data show that the number of internet usersglobally rose by 365% between 2000 and 2009, andthat there are now an estimated 1.8 billion peoplehooked up to the internet worldwide. As well asforcing companies to adapt their infrastructureand business models to take advantage of theopportunities created, research shows that the riseof the internet has led to increases in trade 1 andcompetition 2 . So not only have firms had to adaptto a radical new technology, but they have alsohad to do so in an environment that is becomingincreasingly competitive, dynamic and complex.All of this means that rather than set long-termstrategies and stick to them over a period of years,companies are finding that they need to take a muchmore flexible approach to their business. “The valueof a clearly defined five-year strategy has beendiminishing for some time now,” says Rolf Bixner,a partner at Boston Consulting Group. “Companiesnow need to constantly review and adapt theirstrategy, and ensure that they build an organisationthat is able and willing to change continuously.”What do businesses think of all this? Unsurprisingly,nearly three-quarters (74%) of respondents to our6© The Economist Intelligence Unit Limited 2011

survey think the pace of change in their operatingenvironment has picked up in the past five years.Also, and perhaps equally as unsurprising, almosteight in ten (79%) think it is important that theyrespond quickly to the changes taking place aroundthem. Fascinatingly, however, almost one-half(48%) of all businesses surveyed say the amountof time it takes for them to make key businessdecisions has actually increased over the past fiveyears. Moreover, many are taking a surprisinglylong time to reach decisions that are criticalto the company’s performance. Four out of tenrespondents say that it takes them months and 8%say that it takes years.One of the reasons for this unwelcome extension ofdecision-making time could be that the acceleratingpace of change and increased complexity of thebusiness environment have made decision-makersmore uncertain about the future. Lowell Bryan,a director at McKinsey, points out that this isconsistent with the current tendency for companiesto hoard cash. Currently, there is around US$2trnin cash sitting on corporate balance sheets inthe US alone. “Companies only want to deal withinvestments where they have a very high confidencein the returns,” he says.Further survey findings corroborate this trend(see Chart 4). For example, less than four out often respondents think that they are making theright decisions about how and when to change.Companies also admit that they are much better atgathering information than they are at acting onit. Similarly, executives are more comfortable withtasks like identifying early indicators of changeand assessing the possible impact of changes thanmaking timely decisions and implementing them intheir business.In other words, companies have no problemgathering and analysing data—which is unsurprisinggiven the surplus of information available—butthey struggle with turning this information intostrategic decisions. More information and analysishas not led to less uncertainty. Try as they might, thepace of change and complexity of the environmentsin which they operate have forced businesses toextend decision-making times, even though theywould much prefer for them to have fallen.This dissonance matters. Failure to respondquickly to change implies missing out on growthChart 1: Growth in academic journal articles and patent applications per yearNumber of journal articles published per year800,000700,000600,000500,000400,000300,000200,000100,00019901993Chart 2: Share of exports in world GDP, 1960 -2009Percentage share of exports in world GDP3530252015105196019651970opportunities or undermining existing sourcesof competitiveness. Moreover, in an environmentwhere change, complexity and competition are allaccelerating, the costs and benefits of making theright (or wrong) decisions are being amplified.19961999World journal articlesBusiness decision-makers must urgently find waysof bridging the gap between the kind of companymany of them think they work for (one that does notmake decisions quickly enough) and the kind thevast majority think they should be working for (onethat responds quickly and effectively to changingcircumstances). The remainder of the articles in thiscollection explore ways in which business leaderscan make that transition.1975World patent applications20022,500,0002,000,0001,500,0001,000,000Source: World Bank & World Intellectual Property Organization19801985199019952005200020082005500,000Number of patent applications per year1C Freund & D Weinhold D,‘The effect of the interneton international trade’,Journal of InternationalEconomics 62, 171–189,2004.2J Brown & A Goolsbee,Does the Internet MakeMarkets More Competitive?,NBER Working PaperNo. 7996, 2000.© The Economist Intelligence Unit Limited 20117

GAME CHANGER how companies are responding to a fast-changing business environmentChart 3:Has the time yourorganisation typicallytakes to takes to make keydecisions increased ordecreased over the past five years?Select all that apply. (% respondents)Source: Economist Intelligence Unit12%Significant increaseChart 4: How effective do you think your organisation is at dealingwith the following aspects of change?Identifying early indicators of changeeffectivenot effective49% 17%36%Slight increaseAssessing the impact of potential change47%16%Making timely decisions about how and when a response to change is required38%24%31%No changeMaking the right decisions about how and when to respond to change39%20%18%Slight decrease4%Significant decreaseImplementing changes to systems and processes37%25%Communicating the rationale for the response to stakeholdersSource: Economist Intelligence Unit36%21%8© The Economist Intelligence Unit Limited 2011

2facing up to disruptive changeDisruptive innovations can bring companies to theirknees, but they can also be a source of rapid growthMost people havea bias towardsthe status quo,so when theyare faced witha disruptiveopportunity orthreat, they seeit as a virus theywant to kill.Hal Gregersen,Senior affiliateprofessor of leadership,INSEADXerox has learned the lessons from disruptivechange the hard way. In the 1990s, it quicklyfound its share in the photocopying marketeroded by disruptive entrants from Japan,including Canon and Ricoh. These companiesproduced basic digital versions of Xerox’sproduct and had few of the incumbent’s highendfeatures. But, crucially, they were smallerand cheaper, and therefore accessible to amuch larger customer segment. Xerox couldnot compete and its dominance of the copiermarket came to an end.Today, Xerox is trying to keep its eyes wideopen to the potential for disruptive change.A department called Corporate Intelligencespends its time analysing the market,anticipating client requirements and feedingthat information to product developmentspecialists. “The earlier you can detect change,the more capable you are to react,” saysArmando Zagalo de Lima, president of globalcustomer operations at Xerox. “If you drivechange as a company, you are in a much betterposition than if you are trying to follow it.”But how should companies distinguishdisruptive change from more run-of-the-millcontinuous change? Clark Gilbert, president andCEO of Deseret News and Deseret Digital, and aformer professor at Harvard Business School,describes disruptive change as a situation wherethe customer, business model and performancecriteria fundamentally invert in such a way thateverything in the core business looks inferiorwhen viewed through the lens of the new idea.Faced with a disruptive innovation that conflictswith their existing business model, companiesmust dramatically change their strategyto embrace the new approach. But as manybusiness leaders have discovered, this isextremely difficult to achieve. “Rather thanprioritise the new model, companies end upallocating resources and attention back to thecore, traditional way of doing things ratherthan the new, more innovative model,” saysMr Gilbert.To Hal Gregersen, senior affiliate professorof leadership at INSEAD, and co-author ofthe Innovator’s DNA, the failure to respondto disruptive change stems from an inabilityto shake off entrenched ways of thinking.“Most people have a bias towards the statusquo, so when they are faced with a disruptiveopportunity or threat, they see it as a virus theywant to kill,” he says. “It is so threatening toso many people in the company that they doeverything they can to avoid contemplating adifferent way of doing business.”Sony’s loss of the digital music market toApple is symptomatic of this problem. Havingenjoyed decades of success with devices suchas the Walkman and the MiniDisc player, Sonyexecutives had a rigid view about how the futureof their business would unfold. The entire focusof the company was on developing and refiningexisting technologies and business models thathad been hugely successful in the past, andthey could not imagine a world in which thesewould become obsolete. But rather than givingthem a head-start in an emerging industry, theirexperience and knowledge was a handicap thatprevented them from making the leap to the newdigital world.Over time, most industries face disruptivechange as a result of new innovations, businessmodels or competition. And in an increasinglyinterconnected and competitive world, theprobability of disruptive change continues togrow. “The world is now so full of unexpected,surprising changes that companies today musteither disrupt themselves or be disrupted,”says Mr Gregersen.But even if companies understand the needto change their strategy in response to a new© The Economist Intelligence Unit Limited 20119

GAME CHANGER how companies are responding to a fast-changing business environmentChart 5:What do youconsider tobe the mostimportantbarriers that slowyour organisation’sresponse to change?(% respondents)Source: EconomistIntelligence Unit35%Lack of resources toimplement change34%Lack of co-ordinationacross differentfunctions28%Inaccurate orincomplete data25%Bureaucraticdecision-makingprocessopportunity or threat, the implementationchallenges of responding to disruptive changecan be considerable. Asked about the barriersthat slow their organisation’s response tochange, respondents point to a lack of resourcesas the main factor (see Chart 5).Companies often spend years, if not decades,optimising their resources, processes andtechnology, and building the necessaryrelationships to create a competitive businessmodel and a predictable earnings stream.Abandoning all this in response to majorexternal change requires a massive investmentin resources that a company simply maynot possess. “It’s no wonder people finddisruptive change difficult,” says Donald Sull,a professor at London Business School. “All ofa sudden, you have a business that relies oncompletely different relationships, metrics,processes and resources. Companies need hugeflexibility to explore these new opportunitiesand this comes into direct conflict with therequirement for efficiency to exploit their currentbusiness model.”With managers already stretched in dealingwith the day-to-day responsibilities, engineeringchange and convincing others that it is necessaryand beneficial can be very difficult to achieve.“What is often ignored is the downside tothe participant in managing change becausethere is no slack to pick up the work,” saysRichard Axelrod, co-founder of the AxelrodGroup, a consultancy that specialises in changemanagement. “The change process inherentlyrequires extra time and resources and while youcan find highly motivated people who are able todeal with that, the danger is you continue to drawon those people and at some point they burn out.”So how should companies respond to disruptivechange? Having identified a change as disruptive,Mr Gilbert recommends that companies createan entirely different division to capture thenew opportunity, while migrating the existingbusiness to a lower-cost model and a moretargeted niche where it can compete effectively.“Setting up a separate unit with its own P&L andmanagement allows that unit to focus on thebreakthrough, disruptive change, while the oldunit can be shrunk down and moved to a spacein which it can survive,” he explains.Deseret News and Deseret Digital, the twocompanies managed by Mr Gilbert, are goodexamples of this approach. It has long beenrecognised that the newspaper industry isfacing its own disruptive change moment withthe rise of the internet. Since becoming CEOof Deseret News, a traditional print newspaperbased in Utah, in 2010 Mr Gilbert cut its cost baseand refocused the editorial content on a moredistinctive niche of family values. “Rather thanbe a general interest newspaper, Deseret News isgoing to be a focused product with a distinctivevoice,” he explains. “That’s a more targeted spacebut no one can compete with us there and we cansurvive with that model for a long time.”Meanwhile, Deseret Digital, the business unitfocused on online content, is pursuing anaggressive growth strategy. The company hasits own P&L and management team, and hasa remit to focus on innovation and benefitfrom the disruptive change in the industry.“If the disruptive change is taking away frommy incumbent business, then I need a strongplatform for growth that can compensate mefor that decline,” says Mr Gilbert. “With twoseparate companies, I can manage changein an old legacy organisation and manageinnovation in a new, hyper-growth companyat the same time.”Having separate management teams meansthat Deseret Digital can recruit people with theright experience for managing in the onlineworld, rather than trying to re-skill traditionalnewspaper executives. “Our employees atDeseret Digital aren’t coming to work for anewspaper with a digital division,” explainsMr Gilbert. “They are coming to work for adigital company.”Dealing with disruptive change is highlychallenging. Many companies fail to spotthe impending upheaval, and even if they do,the scale of the change may be so significantthat they cannot marshal the necessaryresources to react. A successful responsemeans admitting that a well-establishedbusiness model may no longer be appropriatefor the new world. This is a painful transition,but the good news is that disruptive changecan bring major new opportunities for growth,as well as decline.10© The Economist Intelligence Unit Limited 2011

3A good place to start when trying to anticipatechange is to engage the parts of the workforcethat have day-to-day contact with customers.Asked which groups are most valuable as sourcesof information about change, respondents pointto customers by a considerable margin (seeChart 6). “One of the most powerful sourcesof information about emerging adaptiveopportunities and pressures lies at the frontline,which may be the sales force all the way out inthe periphery,” says Mr Heifetz. “Employees whointeract with customers are always the first toget the clues and early warning signs about newsources of opportunity or competition.Yet despite recognising that customers are thebest source of information about impendingchange, few companies are good at capturingthis intelligence. In large, bureaucraticorganisations, there are often too many layersbetween customer-facing employees andsenior management. This means that salientinformation that might suggest an impendingchange is too easily blocked or lost in layers ofbureaucracy.Another common problem is that seniordecision-makers do not want to hear aboutproblems as it means being proven wrong.“People who have invested a lot in a particularmarketing plan or sales plan often don’t wantto hear that there needs to be a redesign,” saysMr Heifetz. “They would rather conclude thatproducts aren’t selling because the sales peopleare not doing their jobs properly.”Increased communication between thoseon the periphery of the organisation andthe key decision-makers can increase thechances of salient information reaching theright audience. Mr Bixner points out thatthis dialogue should be about challengingassumptions, rather than a traditional boardmessage from the frontlineListening to customers and stripping back bureaucracycan help companies adapt more quicklypresentation where problems are concealedand the emphasis is on telling a story everyonewants to hear. “It’s important that thesesessions are a forum for debate,” he says.“Boards should not just rely on presentationsfrom direct reports but encourage a broaderconversation, perhaps by bringing in peoplefrom several layers down who may have adifferent perspective.”Companies that excel at gathering and actingon this information can gain an importantcompetitive advantage. A US bank, WellsFargo, for example, has set up customeradvisory boards across the country, which ituses to present new product ideas and seekfeedback on its current offering. “We listento their challenges and try to distil thatinto something that we can apply across ourcustomer base,” says Danny Peltz, head ofTreasury at Wells Fargo. “It helps to informour product development process and alsogives us some of the insight we need to figureout their unmet needs.”One of the most powerful sourcesof information about the emergingadaptive opportunities and pressureslies at the frontline, which may bethe sales force all the way out in theperiphery. Employees who interactwith customers are always the firstto get the clues and early warningsigns about new sources ofopportunity or competition.Ronald Heifetz,Co-founder, Center for Public Leadershipat the John F. Kennedy School of GovernmentChart 6:Which of thefollowinggroupsare mostvaluable as sourcesof informationabout change?(Select up to three)Source: EconomistIntelligence Unit61%Customers33%Partners30%Regulators29%Suppliers25%The media17%Government15%Investors12%Businessadvisers(eg, accountancy firms)9%8%TradeassociationsNon-governmentalorganisations© The Economist Intelligence Unit Limited 201111

GAME CHANGER how companies are responding to a fast-changing business environment4navigating to a new realityAdapting to change requires strong leadershipChart 7:Which of thefollowingfactorsdo youthink are mostimportant to enableorganisations torespond effectivelyto change?(% respondents)Source: EconomistIntelligence Unit49%Strong leadership42%Effective flow ofinformation acrossorganisational boundaries36%Decentraliseddecision-making33%Accurate andup-to-date data29%Ability to shiftresources quickl;yAccording to our survey, leadership is the singlemost important factor that enables organisationsto respond effectively to change (see Chart 7).For Mr Axelrod, leadership goes far beyond beinga figurehead. “You often get leaders who aresponsors but in name only,” he explains. “It’sall very well approving the budget but leadersalso need to use their authority to support andengage with the change process.” Eivind Kolding,chief executive of Maersk Line, the world’slargest shipping company, reckons the ability tosupport and drive change is intrinsic to the roleof leadership. “If a leader cannot change thebusiness, he or she won’t be successful—it’s assimple as that,” he explains. “You can’t just saywe’ll try to do what we already do a bit better.That will lead to average results, at best.”Mr Kolding understands more than most theimportance of leadership to ensure effectivechange. Three years ago, Maersk Line was introuble. Although it shipped 15% of the world’scargo, it had a business model, organisationalstructure and culture that were stuck in thepast. Customers were becoming frustrated witha service that they regarded as increasinglyinefficient, and shareholders were losingpatience with deteriorating financial results.Rather than make incremental changes to makeup lost ground, the management of Maerskimplemented a major change programme,called streamLINE, which was designed to turnround the company’s fortunes by simplifyingorganisational layers, standardising processesand cutting costs across the board. Themanagement team, led by Mr Kolding, identifiedthree key areas for change. First, the companyneeded to increase its reliability and ensurethat more shipments arrived on time. Second,it needed to be easier for customers to dobusiness with Maersk. Third, the companyplanned to improve its environmentalperformance by increasing the efficiency of itsoperations. “By focusing our change efforts onthese three key areas, we thought that we couldtake leadership in the industry and move awayfrom the pack,” explains Mr Kolding.Making meaningful improvements acrossthese three dimensions required Maersk toconduct sweeping changes to its organisationalstructure. Mr Kolding admits that, prior toembarking on the streamLINE process, Maerskwas too bureaucratic and inefficient. Toaddress this, the company made 8,000 of its33,000-strong workforce redundant andstripped out layers of management so that,from the CEO to the lowest rungs in theorganisation, there were seven layers ratherthan 11. In addition, many processes that hadpreviously been scattered across the organisationwere centralised in shared service centres toimprove efficiency.Mr Kolding also revamped the managementteam, bringing in new members who combineda willingness to embrace and drive change withstrong execution capabilities. “It was quite clearthat a number of the leaders who had been onthe long journey of growing the business werenot mentally ready to make the changes,” heexplains. “Although it was risky to replace thembecause it meant that we had a less experiencedmanagement team, we needed to bring in newpeople to ensure that we had the right platformin place.”With a new management team, Maersk couldstart to implement streamLINE, which consistedof seven major change projects, called “leaps”.Each member of the management team tookresponsibility for one leap, and there were biweeklymeetings with the entire team to assessprogress on each project.Mr Kolding stresses the importance of engagingthe broader workforce through frequentcommunication, feedback and by providingopportunities for everyone in the company to12© The Economist Intelligence Unit Limited 2011

contribute their views. “You need to give peopleownership and the feeling that they are beingheard and can influence the process,” he says.“The more ambassadors you can get on side, thebetter. Just sending out a memo from the CEOisn’t going to help.”At Maersk, the early signs suggest thatstreamLINE is having a positive impact. In 2010the company announced profits of US$2.6bn,which is a difference of US$4.7bn compared withthe previous year. But despite this early success,Mr Kolding emphasises the need to be flexibleand open to adapting the strategy in responseto changing stimuli. “The strategy sets out adirection, but you need to adjust it all the time,”he stresses. “You don’t always know how you’regoing to get where you’re going at the outset.If you do, you probably aren’t being ambitiousenough.”5breaking with conventionThe benefits of scenario planningWim Thomas spends a lot of time thinkingabout the future. As the chief energy adviserto Royal Dutch Shell, Mr Thomas is part of theteam that conducts the company’s scenarioplanning exercises. In the 1970s, Shellpioneered the commercial use of scenarioplanning as a way of helping the companyto think about how the future might unfold.The goal of the exercise is not to predict thefuture, or even assign probabilities to particularevents taking place, but to present a seriesof plausible narratives that challenge seniorexecutives’ view of the world. “It’s all aboutthinking through the different dynamics anddrivers of change, so that executives canenvisage a number of plausible outcomesand how they might interact over time,”says Mr Thomas.By testing their strategy against a set ofdistinct narratives, Shell executives have anopportunity to assess the robustness of theirbusiness across multiple scenarios. “Most ofthe time, your strategy works across one or twodifferent models, but there may be anothermodel where it doesn’t work,” explains MrThomas. “That’s fine as long as you know thatand have used your judgment to make thatdecision. At least if you know about the possiblescenarios, you can prepare for the uncertaintyand make sure you don’t lose your shirt. That ishow companies survive, and how you make themmore resilient.”In recent years, scenario planning and otherlong-term risk management techniqueshave become more widely accessible to helpcompanies think through how the futuremight evolve, particularly in sectors, suchas energy, that have very long investmenthorizons. But these tools neverthelessremain a minority interest. Among our surveyrespondents, just one-quarter use scenarioplanning to monitor and identify change inthe external environment.Andrew Blau, co-president of Global BusinessNetwork, a consultancy, thinks businessescould benefit from embracing the toolmore wholeheartedly. For him, the value ofscenario planning lies in helping executives toovercome entrenched viewpoints about howthe future will unfold. “When we think aboutthe future and what the sources of changemight be, we look for evidence that confirmsour existing belief and tend to discard signalsthat suggest another story,” he explains.“By forcing us to think about differentnarratives, scenario planning helps usto consider what change might look like,how we can identify it and how we might adaptour strategy in the light of a rangeof outcomes.”Broader conversations about the future areimportant in a business environment wherethere is a tendency for senior executives© The Economist Intelligence Unit Limited 201113

GAME CHANGER how companies are responding to a fast-changing business environmentto surround themselves with people fromsimilar backgrounds. “Although it may not beintentional, executives often end up with teamscomprised of people who have closely relatedstories about the organisation’s past and futuredirection,” says Mr Blau. “At its worst, thisbecomes groupthink, a kind of echo chamberwithin the organisation whereby everyonereaffirms what the obvious pathway is going tolook like.”Senior management teams that suffer fromgroupthink will typically dismiss informationthat challenges received wisdom as an outlier oranomaly. But these signals from the periphery,far from being noise in the system, might beextremely valuable information. “Anomalies,such as products that should sell but don’t, orthat sold much better than expected, are oftensignals that there is a gap between your mentalmaps of how the world should work and theactual terrain,” says Professor Sull.Of course, spotting the indicators of majorchange is not straightforward. Less than onehalfof the respondents to our survey think thattheir organisation is effective at identifyingearly indicators of change. “Sometimes peoplethink that signals of change are going to be asobvious as a man waving a red flag in an emptymeadow, but it’s often much more subtle thanthat,” says Mr Blau.Despite the challenge of spotting earlyindicators, companies can maximise theirchances of anticipating change by ensuringthat they are open-minded, and willing tohave their worldviews regularly challenged.As Mr Blau says: “Anticipating change requiresexecutives to be sensitive to their environmentand tolerant of ideas that come from themargins, even if they conflict with their viewof the world.”Chief executives, in particular, need to buildawareness of the possibility of change in theirmanagement team and ensure that they arecomfortable with multiple paths. “Companiesneed leaders who are tolerant of ambiguityof the world and who can make others feelcomfortable about that,” says Mr Bryan.“They have to instil confidence in their teamsIf you are in anenvironmentthat is changing fasterand faster, it means youhave to make more callsand start experimenting.You need to fail fast, failquickly, and fail cheaply.Rolf Bixner,Senior partner and managing director,Boston Consulting Groupthat they are making the right decisions,even though it’s not clear how the futurewill evolve.”Another important step on this journey isbuilding a culture of change. In part, thatmeans conducting frequent experimentsand being tolerant of failure. Rapid changerequires a plethora of new ideas andapproaches. Not all will work or be successful,but those that are can be scaled up quicklyto ensure that the company keeps pace witha fast-moving environment. Companieslike Procter & Gamble, using its Connect +Develop model, have put experimentation andopenness to new ideas at the heart of theirbusiness. “If you are in an environment that ischanging faster and faster, it means you haveto make more calls and start experimenting,”says Mr Bixner. “You need to fail fast, failquickly, and fail cheaply.”Although organisational structures andflat reporting lines help to encourage amore dynamic approach to management,they will not enable a company to respondeffectively to change on their own.To do this, executives need to createa culture where change is encouragedand welcomed.14© The Economist Intelligence Unit Limited 2011

6a company with change in its DNAHow to build a culture of changeFew chief executives receive complaints fromtheir employees that they are not going throughenough change. But at Genpact, a business processmanagement company that was once a businessunit within GE, acceptance of change has beenhard-wired into the business culture. “If ourleaders don’t see enough change around them,they get restless,” says Tiger Tyagarajan, chiefexecutive of Genpact.Business process management is a young,technology-oriented industry that is changingrapidly in response to evolving customer needs.Having a workforce that is flexible enough toadapt with the business is a vital asset in such anenvironment. For Mr Tyagarajan, it is essential toset expectations of change in the workforce evenat the recruitment stage. “In our core values,we’ve articulated that embracing and drivingchange is expected behaviour from everyone inthe company,” he says. “When we hire people,particularly senior executives, we test theirability to deal with change and their willingnessto drive change and overcome resistance intheir team.”Mr Tyagarajan cites Genpact’s adoption of leansix sigma, a set of tools that drives innovationand excellence in operational management, asbeing a strong agent of change at Genpact.“Lean six sigma helps us to improve processesfor our customers and measure the financialbenefits for them,” he explains. “We know that toachieve those improvements, change needs to takeplace, which is why we think of lean six sigma as achange acceleration process.”High-potential candidates for future leadershippositions at Genpact are expected to spend timeworking on lean six sigma, before being rotated tomore senior positions in the company. “We use leansix sigma as a leadership training ground,” saysMr Tyagarajan. “If executives can thrive in thatenvironment, then we know that they have beenWhen we hire people,particularly seniorexecutives, we test theirability to deal with changeand their willingness todrive change and overcomeresistance in their team.Tiger Tyagarajan,Chief executive,Genpacteffective not only at understanding the need forchange but at driving it across our processes.”The ability to respond to and drive changealso forms part of executives’ performancemanagement criteria. “Change is core to howwe evaluate people,” confirms Mr Tyagarajan.“Every manager appraises their people onspecific measures that show whether theyhave driven change or have been able to absorbit in their role.”Genpact also pays careful attention to measuringthe outcomes of its talent management processes.It carefully tracks the success of its successionplanning processes to find the right internalcandidates for senior positions, and measuresthe ability of its lean six sigma process to developfuture leaders. “If people are emerging fromthat programme and there is strong competitionfrom functions in the business to grab them,then we know that we’re doing the right thing,”adds Mr Tyagarajan.© The Economist Intelligence Unit Limited 201115

GAME CHANGER how companies are responding to a fast-changing business environmentlessons forleadersOur research for this paper suggests thatcompanies could try the following stepsto accelerate decision-making and ensurethat their strategy processes are alignedwith a fast-changing external environment.Review strategy when faced with change,not according to the calendar. Mostcompanies set strategy over a period oftime, such as five years, and then reviewit annually. But there is no guarantee thatchange will coincide with the momentwhen this process is at its peak. Conductingstrategic reviews when necessary is a betterapproach than putting a date in the diary.Seek views and information from asmany sources as possible to feed into thestrategy process. Companies cannot setstrategy in a vacuum. When reviewing theirfuture direction, business leaders shouldensure that they seek views from a range ofdifferent stakeholders—both internal andexternal.Ensure that key managers have theautonomy to make decisions quickly.Bureaucratic companies with multiple layersand reporting lines are inherently slowat decision-making. It takes time for keyinformation to reach decision-makers, andit is often sanitised and filtered before itreaches them. Flat management structures,where decision-making responsibility isdecentralised and devolved to key managers,are more responsive to change.Create a culture where change isencouraged and welcomed. Althoughorganisational structures and flat reportinglines help to encourage a more dynamicapproach to management, they will notenable a company to respond effectivelyto change on their own. The cultureand attitude of management are just asimportant as the structure within which theyoperate.Conduct frequent experiments and betolerant of failure. Rapid change requires aplethora of new ideas and approaches. Notall will work or be successful, but those thatare can be scaled up quickly to ensure thatthe company keeps pace with a fast-movingenvironment.Be tolerant of ambiguity and willing toconceive multiple futures. An uncertain,fast-moving business environment requiresbusiness leaders to conceive a variety ofplausible future narratives for their company.Chief executives, in particular, need to buildawareness of the possibility of change intheir management team and ensure that theyare comfortable with multiple paths.Employees who are affected by change aremuch more likely to support the processif they already trust the leadership. If thechief executive and other senior managershave consistently demonstrated an approachthat is open, honest and supportive, thenemployees will trust their judgment.16© The Economist Intelligence Unit Limited 2011

notes© The Economist Intelligence Unit Limited 201117

GAME CHANGER how companies are responding to a fast-changing business environmentLondon26 Red Lion SquareLondonWC1R 4HQUnited KingdomTel: (44.20) 7576 8000Fax: (44.20) 7576 8476E-mail: london@eiu.comNew York111 West 57th StreetNew YorkNY 10019United StatesTel: (1.212) 554 0600Fax: (1.212) 7576 8476E-mail: newyork@eiu.comHong Kong6001, Central Plaza18 Harbour RoadWanchaiHong KongTel: (852) 2585 3888Fax: (852) 2802 7638E-mail: hongkong@eiu.com24© The Economist Intelligence Unit Limited 2011

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