Each year at Davos, The Boston Consulting Group (BCG) hosts a breakfast discussion that focuses on the ways that digital technologies are reshaping the global landscape. At this year’s event, the sixth in the series, BCG CEO Rich Lesser took the opportunity to sit down and talk with Martin Reeves, founding director of the BCG Henderson Institute, and Carlos Ghosn, chairman and CEO of the Renault-Nissan-Mitsubishi alliance, about how companies can build strong and adaptive organizations in this time of rapid technological change. Given his position as head of the largest and most successful intra-industry alliance today, Ghosn, the longest-standing CEO in the automotive industry, is well placed to comment.
The following are excerpts from their conversation, which covered wide-ranging topics, including the value of having a diverse set of viewpoints, both across the company and around the management table; the accelerating trends toward artificial intelligence and mobility; the need to help employees adapt and embrace new technologies; the importance of decisive leadership in today’s uncertain world; and the ability of companies to become more resilient by allowing employees to fail fast and learn from their mistakes.
Reeves: Today’s business environments are less predictable and are changing more rapidly than ever before. It’s not that everything has become equally uncertain. Instead, the diversity of environments has increased: we have very stable environments, and we have very unstable environments. We don’t need to replace classical planning-based approaches, but we should supplement them in the right places with more adaptive approaches. Carlos, how did creating Renault-Nissan-Mitsubishi as an alliance, rather than merging the three companies, help you adapt to today’s geopolitical environment? Conventional wisdom would say merge, take out costs, streamline, and have zero overlap. Instead, you’ve embraced the diversity of the three companies.
Ghosn: From the beginning, when Renault and Nissan came together, we knew that we would have to do something different. We decided to make sure that every company maintained its own future and its own autonomy, while avoiding overlaps and duplication so that we wouldn’t waste resources. With Mitsubishi joining two years ago, I rediscovered that having different companies with different identities, personalities, strengths, and weaknesses in an uncertain world is an advantage. It’s a good guarantee that you’re not going to miss something. And it works very well, this agility coming from different teams, coalescing to develop synergies, but at the same time, looking at products and marketing in different ways.
As for overlaps, I believe you have to accept strategic overlaps in some areas. Otherwise, when you get hit by something that you can’t predict, you’re going to be on your knees. I’m going to give you a specific example. Today, as you know, we are the leaders in electric vehicles. Obviously, at some point we had to ask our people, “What’s your forecast for electric car sales next year?” They had never sold electric cars, so they didn’t know. They told us either 0 or 50. What did we do? We said, “OK, very good. We’re going to build 5,000. We’re going to go way beyond the forecasts.” It’s very important to be able to adapt and change your thinking in an environment where you have a lot of innovation and disruption coming into a very competitive game.
Lesser: How we think about talent in a global organization is a key element of making these things really work. We just came out with a report that examines the ways diversity drives innovation. We looked at six dimensions of diversity and found that they all correlated positively with companies that were more innovative. The top three dimensions were the range of industry experiences, male-female gender balance, and nationality, which was actually the highest of all the correlations.
Ghosn: All companies tell you, “We are diverse. We are global.” But ultimately, top management has to be German, French, or Japanese. So the reality is different from the perception. Now, at the top of Nissan, about 50% of the 100 top executives are not Japanese. They come from 13 different countries. Renault is going the same way, with a much bigger percentage of women in top executive positions. I believe that’s our biggest strength. People joining us know that we have one of the most diverse top-management teams in the world. This is a very big attraction for a lot of talent. It allows us to attract, for example, Russian talent, Chinese talent, and Korean talent even though, basically, we are a French and Japanese company. In particular, there are some specific people necessary in design, technology, artificial intelligence, and robotics who are irreplaceable. It’s important to be able to say to these candidates, “You join the Renault-Nissan-Mitsubishi alliance, and there is no limit to what you can do.”
Lesser: Artificial intelligence has been one of the biggest themes of the past year, around the world and across industries. Martin, I know that’s a topic you’ve looked into a lot. And Carlos, you’ve talked about it in the sense of autonomous driving. It touches many aspects of the value chain and how you run a business. Any broad observations about that?
Reeves: We did a 4,000-company survey with MIT to figure out what’s working. We found that 85% of companies globally believe that they will have a competitive advantage within five years from artificial intelligence. But only 20% are actually doing anything about it, and only 5% are actually using artificial intelligence in any intensive way. While we are now at a peak of expectations for AI, it’s still the beginning of the story. We already see the gaps widening between leaders—companies that already understand and have adopted AI—and laggards: we can’t all be competitively advantaged. One sizable difference is in the approach to data. AI algorithms are not natively “intelligent.” They learn inductively by analyzing data. While most of the leaders are investing in AI talent and have built robust information infrastructures, other companies lack analytics expertise and easy access to their data.
Lesser: If you asked most companies that haven’t been involved in AI, they would talk about the algorithms and the intelligence itself as being the most challenging parts. But once you talk to people who are living in this world and trying to make it happen, the real challenge is in how to take advantage of the massive amounts of data and create a culture that can learn from that data.
Reeves: Yes. There’s a misunderstanding that you can call up a famous IT manager, buy artificial intelligence, and, once you have the algorithm, you’re fine. But the hardest and the most valuable questions of artificial intelligence today are, first, the strategic question of how to address the competing priorities for AI investment: “What do I want to learn?” Second is understanding the critical interdependence between data and AI algorithms: “Do I own the data I need?” And there’s also knowing how to reconfigure the organization to combine humans and machines in an optimal way. While there are already multiple models for organizing for AI, organizational flexibility is a centerpiece of all of them.
Ghosn: In the long run, it’s about who is putting what on the ground and who is advancing. I’ll give you an example. A lot of people looking at autonomous vehicles today think that the car without the driver is already here. Well, it’s here in a very limited territory, under a lot of conditions, and with a lot of constraints. But mass-marketing is far from being here. We have some challenges to solve first. We are estimating that it’s not going to be here before 2021 or even 2022. There is a promotional competition—I have the technology, I can show it to you, look at my prototype—that drives up expectations and valuations. Then there is a very different reality: you need to make sure that the technology is robust and reliable and that it’s going to get past the regulators. We have to be very careful about what we’re doing on the ground but still market the new technology competitively.
Lesser: When you look at what’s happening in technology and what it’s doing in the auto industry, how have you thought about preparing the company?
Ghosn: I believe that the largest growth that humankind is going to see in the next 20 to 30 years will be in mobility, because we think this is where we’re going to get the return on our investment. We need to develop mobility services. This demand for mobility is coming not only from the fact that the population on the planet is going to grow but also from the fact that the existing population is going to become more mobile. Today, for example, you see that in a country like India there are 35 cars per 1,000 residents, compared with the United States, with 800 cars per 1,000. You can imagine the huge pent-up demand for cars and mobility in a country like India. And 70% of the cars we sell in China—the largest market in the world—are bought by people buying cars for the first time. So there is still pent-up demand for normal cars, and on top of that, there are opportunities to develop many different ways of using these cars.
Lesser: There’s been a big push on enabling organizations to embrace new technology and flow it across the entire value chain. Any reflections on how to embrace those sorts of changes?
Reeves: We’re seeing the emergence of hybrid ecosystems that are both physical and digital. There used to be a first generation of ecosystems that actually was not digitally based. There were also players operating with digital platforms only. Now they need to start to embrace the physical supply chain, as you see with Amazon’s acquisition of Whole Foods. This creates a profoundly different game that demands both domain expertise and digital expertise. It also creates an opportunity for the physical incumbents, a chance for a more evenly balanced fight with the digital natives.
Ghosn: This sudden storm from all the new technology coming—digitization, artificial intelligence, robots—is a huge cause of worry for our engineers. They’re worried that they and their knowledge are going to become irrelevant. Even people working in administrative areas see new tools coming and are worried about what their jobs are going to become. And we have a responsibility to answer the anxiety generated inside our company by this unprecedented flow of new approaches and technologies. The upskilling and reskilling of our people is a massive task that we must all be involved in if we want to keep our workforce engaged and productive.
Lesser: When I talk with clients and other companies around the world that are wrestling with all this, it feels as if they’re wrestling with two things at once. One is the leadership making the bold choices to take the company in a new direction. The second is how to enable the company to make the change happen.
Ghosn: The leadership of an organization—particularity in a period when you have so much uncertainty—is so important: knowing how to ascend, knowing how to prepare, and, at the same time, knowing how to decide. Because no matter what the culture of the organization, at the end of the day the leader has to assume the decision to go into a new field or make a new investment. He has to assume not only the risks involved with the investment but also the consequences for the industry. Companies and organizations need to cultivate employees throughout the ranks who are capable of listening, really seeing the whole 360 degrees, and, at a certain point in time, making a decision. The perfect example for me was the electric car. Sooner or later, it comes to the CEO to say, OK, we go, or we don’t go. It’s a very difficult decision, because you know it’s going to be a long-term effort.
And enablement is also extremely important. It’s a basic element in the performance of the company. You have to pay a lot of attention. We’re never as agile as we think. Large companies are a little bit heavy. What’s important is that we pay attention. We listen. Because enablement is going to be a key element as we face what’s coming.
Lesser: I’ve been quite impressed with what I’ve seen of your digital enablement efforts, and one of the things you’ve built has been this mindset of being able to fail fast. We’ve been talking about that in a lot of our work in innovation and in other areas. It’s so important to create an adaptive way of working that allows you to set milestones. And when something doesn’t work, you shut it down. You shut it down early before it costs too much.
Ghosn: I think one of the most important elements of being resilient is to be able to make the case for failure and to put it in context. If you want to be resilient, you’re going to face a lot of obstacles and you’re not going to be successful all the time. Not being able to deal with failure in an organization makes it, in my opinion, a no-go in terms of resiliency. Of course, failure is very complicated because you can’t prioritize it too much, or eventually you’re going to disappear. On the other side, you have to have some kind of tolerance for failure that people don’t dare go beyond.
On top of this, you have experience. Every time you overcome a crisis, it is very important that you draw conclusions about how you reacted throughout that crisis, how you could have reacted better, and the lessons learned. As you know, some cultures have the tendency, whenever they face a challenge, to sweep it under the rug. This makes the situation worse. The best cultures are those that see problems and dysfunctions as opportunities to do a better job and to become more resilient. That’s very easy to say, of course, and much more complicated to do. But this how we become more resilient.