Related Expertise: Leadership Development, Digital Transformation
Powerful forces are reshaping the world today—and corporate leaders must create organizations that can thrive in the face of these dramatic changes.
First, we are experiencing the greatest transformation of the global economy since the industrial revolution. Economic power is moving East—and it’s a rapid shift. We expect China will overtake the U.S. as the world’s largest economy by 2030, while India will become the world’s third-largest economy within the next 15 years, overtaking Germany and Japan. At the same time, populations are shifting from the country to the city. Today, one-third of the world’s population—2.6 billion people—live in emerging-market cities. Hundreds of millions of people from emerging markets will rise out of poverty and enter the middle class, sparking a wave of growth. Technologies are fundamentally altering the relationship that companies have with their customers, employees, and society at-large.
As the global economy undergoes this transformation, there is a striking increase in levels of turbulence and volatility. This stems in part from the consequences of rising consumer demand: inflation in supply-constrained commodities, price fluctuations, resource scarcity, environmental damage, and increased competition.
All this leads to a highly unpredictable and unsettling environment for the leaders of companies. What is certain is that companies that will win in this new world need very specific capabilities. The Boston Consulting Group has come up with five requirements that leaders need to focus on.
In the boom years, it was possible to be successful simply by riding market growth, and so leaders often turned their minds to other priorities. But when the financial crisis struck in 2008, the focus switched quickly to cost cutting. Now, leaders, particularly in the developed markets, need to relearn how to generate top-line growth. BCG analyses show that over a five- to ten-year horizon, 70 to 90 percent of value created comes from profitable growth. In other words, it is much more important than earnings or dividend growth.
So what should companies do? They must go on the offensive, whether that means moving into new markets or adjacent sectors. They need to team up with adversaries. They need to innovate and invent new products and services.
Many companies have business models that have not kept up with the pace of change. At worst, they are outmoded and bureaucratic and have employees who are disengaged. If these companies are to thrive, they must create lean, efficient operations and reexamine how they do everything. This effort cannot succeed as a top-down mandate. Employees need to be empowered—and trusted—to work with one another and develop answers to complex challenges.
This brings us onto culture. Many leaders are discouraged by the yawning gap between the culture they have and the culture they would like to have. They must know how to spark the behaviors that will deliver the results they want.
To win, companies must develop the ability to quickly read and react to signals of change. This means experimenting rapidly, frequently, and economically—not only with products and services but also with business models, processes, and strategies. BCG studied 2,500 public companies in the U.S. and discovered that over the past 30 years, these companies saw their overall market capitalization grow eight times larger during stable quarters, but one-third of that value was destroyed during turbulent quarters.
Digital technologies are creating a connectivity that is transforming commerce and society. At the same time digital technologies are becoming embedded in everyday objects—from refrigerators and cars to roads and buildings—blurring the distinctions between the physical and the digital.
The world will be remade as digital technology combines with massive spending on infrastructure. We calculate that the world needs to spend around $40 trillion on infrastructure over the next two decades—rebuilding the crumbling infrastructure of mature markets and constructing the new infrastructure in emerging markets. Companies must invest in the two sides of connectivity and reap the rewards.
It is not enough for leaders to deliver strong quarter-by-quarter results for their shareholders. More than this, they must display the skills of stewardship, developing sustainable and trusted businesses with a vision of their companies’ long-term legacy.
Plenty of companies fail to see sustainability as an opportunity. This is despite the fact that, according to BCG’s annual survey of executives and managers, 37 percent of respondents say that sustainability-related activity has added to their company’s profit, up 23 percent from 2012. Doing well and doing good today and for tomorrow is now an imperative for all leaders.
Meeting all five of these requirements is no easy feat. It might be tempting for companies to simply fortify their position and wait for the dust to settle or ride the wave where there is obvious growth. But the complex challenges facing corporate leaders are not temporary. They are the new status quo. Inaction is not an option.
This commentary originally appeared in Management Today.