Adventure of Strategy

It's nearly midnight here now and I've just finished going through the PWC 12th Annual Global CEO Survey. The main body of it (+/- 40 pages) at any rate. There are still another +/- 100 pages of appendixes to digest later. If you have a leadership role in any commercial organization, I urge you to read it too. If you don't have time to do this, here is a +/- 4 page headline commentary / summary:

With none but the most optimistic now predicting the recession’s end earlier than early 2010, there are no surprises that the survey results show a global business community that is deeply pessimistic about the short-term future. Nor that uncertainty about the future in the minds of CEOs is very high. Only 21% of CEOs reported that they were ‘very confident’ about their one-year revenue growth prospects, and the report suggests that had the survey been held just a few months later (it was conducted between September and December 2008,) this figure would probably have been lower.

In the foreward to the report, PWC global CEO Samuel A. DiPiazza Jr makes the same point that I have been stressing in this blog and elsewhere ever since the crisis broke:

“In times of unprecedented economic and financial turmoil like these, however tempting it is to focus on short-term imperatives, we cannot afford to ignore the longer term. Amidst the confusing haze of risks, regulations and recovery packages, this year’s CEO survey asks this question: How do company leaders determine the strategy that will lead to success when the economic fog eventually clears?”

My consulting practice right now is almost wholly focused on helping law firms answer that question. Part of the solution is for law firms to help their clients, in turn, answer that question for themselves.

GLOBALIZATION

CEOs were more or less evenly split between those that believed that the world will become more open to free international trade international trade, and those that believe that governments are going to become more protectionist. 76% believed that political and religious tension in the world will increase. 73% believed that a new set of countries will emerge and challenge the economic, political and cultural power of the G8 and fully 70% believed that the gap between rich and poor will increase. Fully half of the CEOs surveyed were pessimistic about the ability of Government and business efforts to be sufficient to reduce significantly the impact of key global risks such as climate change, terrorism and financial crises. The report's conclusion is that attempts at protectionism are doomed because globalization has progressed too far and is now too advanced to be able to be reversed; nor is there any compelling reason for the world in general to want to reverse it.

TAX

A paradox that emerged in the 2008 survey continued in this one, where CEOs on the one hand are concerned about over-regulation as an obstacle to growth, but on the other hand they want more government leadership. For instance in driving convergence of global tax and regulatory frameworks. The survey results indicate an opportunity for both business and government to collaborate more across borders and further to jointly create innovative solutions to the world’s problems. These transcend just the economic crisis and include matters such as environmental sustainability, climate change and security.

THE NEXT BIG CRISIS?

The report suggests that climate change may well yield the next global crisis. While it seems a bit premature to talk about the “next” crisis while we are still embroiled in the current one, the effects of climate change are already under way and it is quite possible that this crisis may erupt before growth levels reach pre-crisis levels again, or indeed it may be accelerated by the economic crisis. 83% consider it important or critical for governments to provide a clear and consistent policy framework on climate change. They value clarity over specific types of frameworks, such as a Copenhagen protocol or a global carbon market. Globally, only 28% of CEOs feel that their governments have clear and consistent long-term environmental policies.

WALKING THE TIGHTROPE

The survey deals with the dilemma that CEOs have to face in balancing intense short-term survival with longer term strategic considerations. In the short term, cash is king. As Robert Willett, CEO of Best Buy International (a US-based multinational retailer) put it:

"Companies don’t go bust because they don’t make money; they go bust because they don’t have any cash ... We could see this downturn was going to be here for a while, so we started conserving cash … We’ve also asked, what are the three things we’re going to really push hard on? We always have a hundred opportunities, but what are the three or four really big things that can accelerate our strategy, differentiate us from our competitors, and use the downturn to our benefit?"

The report continues:

"Walking the tightrope requires CEOs to balance extreme ,short-term threats to survival, on the one hand, and on the other, large-scale, global issues that impact long-term success. Many CEOs believe this requires a mindset that is different from the past."

So far as the long term is concerned, CEOs recognize that it takes years to build the critical sources of competitive advantage that businesses need in order to thrive. Agility, customer service, talent and reputation remain at the top of the list. So too meeting strategic objectives (i.e. actually executing what is planned) and maximizing financial returns. Click on the image below to see how CEOs responded to the question: “How important are the following sources of competitive advantage in sustaining your growth over the long term?” 

CEOs also report that a wider range of stakeholders is involved in influencing their corporations’ strategies now than before and that a wider range of information is required in order to craft the most competitive strategy:

“CEOs do not just want more data. They want different kinds of information than the historical financial metrics they already have in abundance. More specifically, they want forward-looking information, which includes non-financial data. For example, the widest gap, 74 points, concerns the information necessary to anticipate customer needs. The second largest gap, is 70 points, between the importance and availability of risk information.”

JVs VERSUS M&A

A shortage of capital and strategic preference is forcing corporations to explore more innovative joint venture arrangements, especially for cross-border expansion, rather than conventional acquisitions as were the norm pre-crisis:

“The increased collaboration with business partners may be a strategic choice in many cases, but in others it may be the consequence of a lack of availability of capital in the current market. JVs and strategic alliances, for example, may reduce cultural conflicts, but they also typically cost less and require less funding than an outright acquisition."

Over the long term, however, they may be less stable and ultimately more costly because control is divided among partners, and strategic objectives can never be totally aligned. This argues for adding more rigour to the strategic evaluation, execution and governance of alliances, including a more thorough evaluation of potential risks.”

TALENT RETENTION

A focus on short-term survival has caused attention to be diverted away from talent retention as an immediate priority, but CEOs still recognize this as a key strategic issue. Some expressed concerns about the impact of reducing headcount now, on the medium term future (+/- 5 years away.) It takes several years to train good people and inculcate the culture and practices of an organization. Some see investment in technology as a remedy for future talent shortages. 97% of CEOs believe that the access to and retention of key talent is critical or important to sustaining growth over the long term. Most (72%) rate it critical and a similar number (69%) say that a limited supply of candidates with the right skills is a key challenge.

“Many CEOs feel that they are trying to conduct surgery by candlelight. They do not have a complete picture of the workforce, the money invested in employees and the skills needed for the business.”

RISK MITIGATION

The most important immediate threats driving CEOs priorities right now are as follows. The number in parentheses indicates the percentage of CEOs who said that they were “somewhat concerned” and “extremely concerned” about the issues.

1.    Downturn in major economies (43% ; 42%)
2.    Disruption of capital markets (42% ; 30%) Over-regulation (37% ; 18%)
3.    Energy costs (33% ; 17%)
4.    Inflation (37% ; 12%)

Numbers 2, 4 and 5 did not even feature on the list in the 2008 survey.

“Short-term cultures change too late because the relentless drive towards growth encourages employees to ignore slowly building signs of trouble. One of the fundamental problems in the financial crisis was that many companies simply did not take the time to fully understand their own investments, because the returns were so good. Regulations can encourage people to take a wider and longer view of the risks behind outsized returns, but they will fail if people have strong incentives to work around them. This is sometimes thought of as the difference between a rules-based culture and a values-based culture. Aligning the values of top management, governance, compensation and infrastructure to support ethical and constructive behaviour is the cornerstone of any plan to build high levels of risk awareness into decision-making.”

CONCLUSION

The report concludes that “connectedness" was part of the problem, and will be part of the solution. The world has become a single market. Globalisation has produced enormous financial returns over the past few decades although cross-border flows of information, people and capital have also spread this crisis farther and inflicted more damage, faster than was ever possible before.

CEO responses to the survey indicate that attempts to “protect” industries and countries from each other will fail. Markets around the world are now linked inextricably.
The massive upside of global connectedness makes it politically and economically impossible to stop. As a result, more crises will emerge in the future that are beyond the control of any single nation or business. It therefore becomes a critical skill for the leader of any organization, to be able to lead and manage under adverse and uncertain conditions. This implies:

1.    Businesses have no choice but to increase the strength and variety of their connections. The broader and richer the network of connections, the greater the opportunities for collaboration and the richer the source of intelligence on which to base strategy.

2.    To help business, public policy needs to be clearer. This, in turn, will help businesses to calculate risk and return more accurately. The choice of policy in some cases is much less important than transparency, leadership and consistency across borders.

3.    Businesses and business leaders need to shift their mindsets, to take responsibility for issues once considered external to corporate responsibility and to allow greater scope for larger scale, less predictable investments. “As long as predictable, quarterly earnings and other short-term financial metrics (such as those tied to employee compensation) remain the ultimate measures of success, short-termism will continue and create more crises in the future.”

A FINAL WORD

"Despite the thin margin for error, business and governments have no choice but to keep trying new ideas. Fortunately, that is where the opportunity lies. Even in the hardest hit sectors, CEOs still spoke to us about gaining market share, planning for new markets and maintaining readiness for growth. Often, CEOs see the greatest business potential in products, services and operating models that help solve large-scale, social and environmental problems. And an increasing number of stakeholders, from customers to investors to employees, believe these issues are inseparable from success. In other words, the race to succeed in the post-crisis world has already started."

How does this impact your firm's clients? Do you and your colleagues know? If not, then I'd respectfully suggest that finding out should be one of the most critical strategic tasks on your "to do" lists over the next while. How does all this impact you and your firm directly? How has the economic crisis changed the strategy that you had in place in your firm just twelve months ago? How well developed; reduced to action planning; communicated within your firm is your new strategy? Is it being executed?
 

Getting comprehensive information about the competitors is hard. Only few companies have done comprehensive researches . Recently I came across this site - ecompetitors.com, which apparently has quality information on top 10,000 global industries.

It is worth a look.