For most businesses and business leaders, the golden age of the 1990s seems a lifetime away. Beset by uncertainty, suspicion, fear and financial turmoil, CEOs have to adjust to a whole new world. Vernon Ellis and Liz Padmore offer some pointers to success in the future.
After the scandals and uncertainty of the past year, there is an understandable impulse for businesses to keep their heads down and wait for normal service to be resumed. But waiting is futile. Many of the recent changes are irreversible and we must all adjust to the new reality.
Paradoxically, these uncertain and turbulent times can represent a huge opportunity for business, but only if leaders have the courage and determination to stay focused on the fundamental drivers of wealth creation. Technology, leadership and the restless search for new markets are as vital now as they have ever been.
Rather than allow themselves to be panicked into discarding these drivers, or looking for new truths, leaders must instead seek to adapt them to the very different business conditions we face today.
In the mid-1990s, global business embarked on one of its longest periods of uninterrupted growth, and a new set of certainties around key drivers of value began to emerge. Perhaps the most strongly asserted belief was in the power of globalization – which business people and policy-makers saw as a natural, irreversible and inevitable process. As trade and investment barriers were progressively dismantled, economic integration grew and the world became ever more interconnected.
Global trade had been growing faster than output since the 1950s. In the 1990s alone, foreign direct investment grew by almost 600%, driven in part by record levels of cross-border merger and acquisition activity. This integration spurred real income growth in the industrialized world, fuelling demand and profits.
A related driving force of change was information and communications technology (ICT), which gave global companies unparalleled reach, allowing them to sell in new markets, exploit previously untapped resources and produce their products where labour was cheapest.
ICT stimulated productivity growth and new forms of interaction between consumers, suppliers and producers. As ICT spread and became ever more powerful, the old rules of business started to give way to a new set of ideas about economic value, somewhat fancifully termed the “new economy”.
At the same time, a new kind of leadership emerged. As the bubble of the late 1990s swelled corporate earnings, CEOs attained heroic status, becoming increasingly identified with the extraordinary success of the companies they led. As the capital markets craved ever greater growth, leaders faced intense pressure to focus on short-term actions and results.
A time of doubt
Today we survey a very different landscape. Technology investment has dwindled; there is greater suspicion of business and its leaders than ever before; and companies are beating a hasty retreat to core markets. So what has changed to create such an extraordinary turnaround in business attitudes and behaviour?
First, there has been the global economic slowdown, precipitated in part by the bursting of the technology bubble in early 2000 and the subsequent implosion in equity markets. Companies have always had to negotiate swings in the business cycle, but this recession has hit business especially hard because of the direct impact on investment. The bursting of the technology bubble in particular has created uncertainty about the benefits of technology, delaying reinvestment and prolonging the slowdown.
Second, the resurgence of international terrorism has given an additional twist to the normal economic uncertainty of recession. The events of September 11, 2001 highlighted the vulnerability of our interconnected world, with travel among the industries worst affected. The attacks also brought about a new awareness of the importance of geography, reminding us that we do not live in a completely homogeneous world – and never will. The vision of a global village is still a long way off.
Third, business leaders have watched with alarm the dramatic rise of the anti-globalization movement. Many of the issues raised by anti-globalization groups, although sometimes contradictory or ill-founded, strike at the very heart of companies’ global strategies and operations. For every one of the demonstrators on the street, there are thousands more people who worry privately about the same issues in their role as consumers, investors, or employees – the very people on whom business depends for long-term wealth creation.
Finally, this unease about business in general has been compounded by the past year’s unprecedented series of corporate scandals. The sight of once-respected leaders in handcuffs has had a hugely damaging impact on the public’s faith in business. Many people now associate the heroic style of leadership not with success, but with inflated growth in some industries and economies, and with an intense short-termism.
These changes have provoked profound feelings of self-doubt among many people in business. While the fundamental drivers of long-term wealth creation remain as valid as before, our perspective on them has altered dramatically.
Global business models that once looked robust now seem fatally flawed. Investment in new markets appears risky and unappealing. The once lauded “new economy” begins to look like a passing fad. And business leaders seem uncertain about what kind of leadership is needed for success in the very different environment they face. The real danger now is that global business will simply panic under pressure, so that companies overwhelmed by the current despondency will cast aside many of the principles that are fundamental to value creation and corporate success.
So what can leaders of global business do to ensure that their companies not only survive these challenging times but emerge as winners in the years ahead? We have identified five interconnected imperatives for success.
Build resilience through flexibility
Organizations under intense pressure will often seek to strengthen their structures in the belief that this will give greater protection in difficult conditions. But rigid or hierarchical structures will simply no longer work. Instead, we need to build resilience though organizations that are very loose and flexible, with deep roots.
Flexibility comes in part from an entrepreneurial working environment, in which the company removes bureaucratic obstacles, rewards enterprise and trains and trusts employees to be responsive and creative. It also requires a collaborative approach to strategy in which organizations become highly attuned to the views of internal and external stakeholders.
Deep roots provide the necessary stability for organizations in the midst of change. These can be developed by having a clear sense of mission and direction, and shared values which allow all parts of the organization to work along the same lines toward the same goals. Indeed, there is a new realization of the importance of reasserting core values as drivers of business decisions and actions.
Engage and connect
When the outside world appears difficult and unwelcoming, there is a natural temptation to retreat inwards. But the most successful companies resist this temptation and become more externally focused.
They recognize that, when times are tough, it is more important than ever for businesses to build strong connections with the outside world – winning back the trust of investors, consumers, suppliers and wider communities, and bringing diverse thinking and new ideas into the organization.
The companies that can succeed in this new environment are becoming what we have termed “connected corporations” – embedded within complex networks of other businesses and wider stakeholders. These connected corporations draw on the strength of the networks of which they are an integral part to manage risk, access knowledge and expertise, and focus on what they do best.
They are also strengthening their links with a wider set of stakeholders – consumers, investors, local communities and national and local governments – to gain a better understanding of society and its needs and dynamics.
Create tomorrow’s markets
These deeper external connections will be vital to building more sustainable forms of globalization. As industrialized markets mature and offer fewer possibilities for growth, long-term wealth creation will depend on business’s ability to extend its market space in a way that contributes to sustainable development.
For instance Hindustan Lever, the Indian subsidiary of Unilever, has achieved considerable commercial success through a portfolio of appropriately priced products formulated and packaged for lower-income consumers.
Others are working to improve local labour markets. When the UK-based company BOC set up in Poland, it needed to get new welding practices adopted in the country. So it set up a welding school, teaching unemployed people keen to make a living from the new, improved technologies. This initiative proved good for the company and good for the local economy.
Be a leader of leaders
How should leaders respond to the new environment in which they find themselves? Despite the recent backlash against the CEO as superhero, this is no time for leaders to adopt a lower profile.
These turbulent times demand strong but highly principled leadership. This does not mean a return to the hierarchical or “command and control” models of the past. Instead, it requires leaders with the confidence to set a course for their organization and to give others the freedom to follow it. It requires a willingness to be open and honest with all stakeholders, and the strength of character to cope with conditions of ambiguity and constant change.
This new breed of leader will not rely simply on his or her own ability to lead. Instead, he or she will actively foster leadership skills throughout the entire organization.
This means encouraging an entrepreneurial culture and rewarding intelligent risk-taking. Perhaps above all, it involves equipping people with the necessary skills to be entrepreneurial and innovative.
Seek discipline, not control
The last imperative is perhaps the most difficult, but it is an essential requirement for each of the others. It is discipline – both financial and organizational – that gives companies the strength and confidence to invest strategically in new markets, act flexibly and ensure that their people have the space to be entrepreneurial. However, discipline is often confused with control, which inhibits all these things.
What does discipline mean in practice? First, it requires a culture of cost discipline across the business cycle so that companies have the flexibility to take advantage of often fleeting opportunities in fast-changing markets.
Second, it means emphasizing core values and setting appropriate boundaries for employee autonomy and decision-making. This will ensure that leaders feel comfortable about encouraging more entrepreneurial and innovative behaviour, and that employees feel confident in taking on more responsibility.
Seizing tomorrow’s opportunities
For leaders and their organizations, there can be no return to what some might still see as the golden age of the 1990s. This is a time when business must look forward. Today’s uncertain environment presents a huge opportunity for leading companies to emerge if they have the courage to stay focused on key, long-term drivers of value.
But this opportunity will not last long. It is those companies that act now that will be best placed to succeed in the future.
Now is the time for organizations to become more connected to customers, suppliers and stakeholders, and to forge new markets. Now is the time for leaders to concentrate on the people they lead – inspiring them to collaborate, innovate and be entrepreneurial.
Vernon Ellis/Liz Padmore
Vernon Ellis is international chairman of the management and technology consulting firm Accenture. Liz Padmore is a partner of the firm and director of policy and corporate affairs. For information about recent Accenture studies and Accenture’s relationship with the World Economic Forum, please visit www.accenture.com/wef