Leaders of change companies prepare for a stronger future

January 2011 Preface About the survey A total of 288 senior executives participated in the change management survey, which was conducted in November 2010.. The focus of change management

sponsored by

A report from the Economist Intelligence Unit

Leaders of change: Companies prepare for a stronger future is an Economist Intelligence Unit report,

sponsored by Celerant Consulting The Economist Intelligence Unit conducted the survey and analysis and

wrote the report The fi ndings and views expressed in the report do not necessarily refl ect the views of the

sponsor

The report’s quantitative fi ndings come from a survey of 288 senior executives, conducted in November

2010 The Economist Intelligence Unit’s editorial team designed the survey Paul Kielstra was the author

of the report and Gilda Stahl was the editor Mike Kenny was responsible for the design

To supplement the quantitative survey results, the Economist Intelligence Unit conducted in-depth

interviews with relevant experts We would like to thank all interviewees for their time and insights

January 2011

Preface

About the survey

A total of 288 senior executives participated in the

change management survey, which was conducted

in November 2010 Of those who responded, 42%

were C-level executives or above and the remainder

were in senior management Respondents hailed from North America (44%), Western Europe (40%) and Latin America (16%) Survey participants came from a wide range of industries, with just over 75%

from organisations with annual revenue greater than US$1bn For more details on the survey sample and results, see the appendix of this study

The focus of change management has shifted, according to a survey conducted by the Economist Intelligence Unit and sponsored by Celerant Consulting Although companies remain, as always, cost conscious, they are putting much more emphasis on growing market share and preparing for the future Similarly, organisations are increasingly devoting their attention to the sales and marketing functions This further refl ects the shift in emphasis towards growth and the future and away from cost cutting Apparently, executives are leaving the preoccupations of surviving the downturn behind

Yet companies are still, all too often, unable to execute change The responsibility inevitably resides with their leaders

Introduction

Although downside risks remain, the world’s big economies appear to have returned to growth, albeit

slowly The Economist Intelligence Unit forecasts that GDP in North America will increase annually by

around 2% in real terms and in Western Europe by a little less than that The engines of growth, however,

will now be in the developing world: China and India should average annual real GDP growth of over 8% in

the next few years, and Latin America should average around 4% per year

Meanwhile, companies are adjusting to the new landscape, moving beyond the emphasis on survival

that dominated considerations during the economic downturn This does not mean returning to strategies

that worked in earlier, better times; the world has changed too much Instead, the three main goals of

corporate change initiatives over the next year—according to respondents to a survey conducted by the

Economist Intelligence Unit and sponsored by Celerant Consulting—are increasing revenue (cited by

55%), preparing the organisation for the future (52%) and cost reduction (50%)

Looking to the future

Contraction and recovery: actual and estimated GDP growth, 2006-14

(%)

Source: Economist Intelligence Unit, Global Forecast.

North America Western Europe Latin America China India

The overall survey fi ndings represent a discernable shift from the responses to this question in two previous surveys conducted by the Economist Intelligence Unit and sponsored by Celerant, where cost concerns dominated Last year, for example, 66% of respondents cited cost reduction as the primary goal

of change initiatives, while preparing for the future (46%) and increasing revenue (37%) lagged behind

As Rosabeth Kanter, Ernest L Arbuckle Professor of Business Administration at Harvard Business School

and author of Supercorp: How vanguard companies create innovation, profi t, growth and social good,

remarks, “Change management activities defi nitely follow the economic cycle There is a great deal of interest in tightening processes in leaner times When that runs its course, companies start focusing on growth.”

In this year’s survey, the perennial challenge of the overall competitive and cost environment remains

by far the leading external driver of change (60%) However, customer demand (36%) comes in second, followed closely by a desire to increase market share (34%) The last two fi ndings strongly indicate

a renewed focus on sales and growth, especially in certain sectors In the consumer goods industry, the drive to grow market share (51%) and customer demand (44%) are cited nearly as often as the competitive and cost environment (56%)

Reducing complexity within company

Change for the sake of change

Sustainability/green initiatives

Reduction of headcount

What are the main forces driving change at your company?

(% respondents)

Consumer goods Energy & natural resources Healthcare, pharmaceuticals & biotechnology

Source: Economist Intelligence Unit survey, November 2010.

56

63 46

44 34

21

10

31 31

51 26

33

12 14

36

24 3

18

17 23 26

37 17

26

2

0

5 9 5

7 3 13

According to Dean Nelson, founder of KKR Capstone, “Most companies have recently focused change

management on cost” To improve further, “they need to focus some of their resources on growth” Down

markets, he adds, are ideally the best times to engage in growth-related change, because they experience

the biggest shifts in market share

Although the emphasis on market growth and the future is increasing in line with the economic cycle,

it is important not to exaggerate the shift This year’s survey results suggest a different emphasis, rather

than a sea change in where fi rms are focusing their change efforts One-half of companies surveyed still

see the reduction of costs as a primary aim Ultimately, notes Robert Tartaglia, chief operating offi cer

(COO) of Allianz Global Corporate & Specialty, a Munich-based large corporate and specialty insurer,

“Change is driven by the needs of the company,” not some “initiative du jour” At the moment, for many,

those needs relate increasingly to the future

“Down markets are ideally the best times to engage

in growth-related change, because they experience the biggest shifts

in market share.”

Dean Nelson, founder of KKR Capstone

Sales and marketing function is in the front line of change

The survey underscores the fact that the focus of change management programmes varies by industry For example, a leading focus for chemicals fi rms in the last year has been the supply chain (cited by 45% of respondents from the sector) In contrast, the supply chain was the focus of change management for only 17% of energy and natural resources companies, for which the most common focus of change programmes has been fi nance (31%)

Overall, though, sales and marketing was the most common function to experience change in the last year (41%), coming in fi rst in every region polled and at or near the top for every industry For manufacturers the fi gure hit 60% In the previous year’s survey (using a different methodology), we found that overall sales and marketing experienced signifi cant change, but on a par with procurement, information technology (IT) and general management, and behind fi nance This year’s focus on change in the sales and marketing function further refl ects the shift in emphasis towards growth and the future and

Sales & marketing

Legal & compliance

Senior management as a whole within the company

Sales & marketing

Senior management as a whole within the company

The company as a whole in an overarching change initiative

None

Don’t know

Which areas of your organisation have been the focus of change management initiatives in the last year?

(% respondents)

Consumer goods Energy & natural resources Healthcare, pharmaceuticals & biotechnology

Source: Economist Intelligence Unit survey, November 2010.

46 29

41 12

20 13

32 23

15

17

31 18

5

9 18

15

9 5

24 17

36 37 17

23

0

20 5

0

0

2

0

away from cost cutting Professor Kanter says, “Marketing always leads growth You can’t manufacture

more if you are not attracting new customers So, marketing expenditure goes up when aiming for

top-line growth.”

A function that interacts with ever-shifting markets and consumer demands will inevitably attract a

large number of change programmes For example, Scott Wicker, vice-president, sustainability, at UPS,

an international shipping and logistics business, notes that as customers have become increasingly

interested in carbon issues, the company has been training and educating its salesforce in how to use its

emission-reduction record and sustainability performance as a sales draw “We realised that we had an

advantage and needed to sell it,” he says “Sales and marketing is being affected the most.”

Sales and marketing need to recover from deep budget cuts implemented during the economic

downturn—especially in North America and Western Europe, where the declines in spending were

substantial Many companies, though, have been changing the sales/marketing function rather than

simply restoring previous budgets, because the markets where they are selling are now substantially

different Growth is largely occurring in less-developed economies and these require different marketing approaches With evolving communication channels, such as social networking technology, businesses would have to adjust rapidly anyway Two years of cutbacks only make the need for some companies to act more pressing Mr Nelson explains, “The sales and marketing function is a higher-return place to implement real change than management on the cost side The customer base has changed; the world has changed People realise that they need to change their sales and marketing approach.”

Broad organisational retooling holds some advantages over a narrower focus on a single function, however important According to the survey fi ndings, companies that have not engaged in change to the sales/marketing function most commonly implemented initiatives that addressed the company as a whole (24%) Professor Kanter points out that sales strength is less of an issue than an ability to innovate across the company and in product offerings “In the long run”, she says, “you need to be investing in constantly renewing products and services Innovation is the only way to have sustainable growth.”

Larger companies, in particular, are addressing the problem of complexity For those businesses with over US$5bn in annual sales, simplifi cation is the second-biggest aim of change Such change is,

in Professor Kanter’s words, “an exercise that goes on periodically” Large organisations add on layers and roles—particularly in good times—and then need to shed them Mr Tartaglia of Allianz says, “I’ve yet

to embark on a change initiative or project where one of the ultimate objectives is not the reduction of complexity”, because of the costs that it brings Complexity reduction can have multiple advantages A programme at P&G, a global consumer-products company, to simplify its European distribution system, notes Peter White, its director for global sustainability, decreased carbon emissions and costs

As companies make their strategic choices about how best to change in order to face current and future

challenges, change programmes are consuming ever more corporate resources Sixty-three percent

of survey respondents report that more senior executive time was devoted to change management

initiatives over the past year, against just 7% noting a decline The equivalent fi gures for increased

spending are 47% and 11%

Nevertheless, most companies are still remarkably unsuccessful at implementing change Respondents

say that on average only 56% of change initiatives are successful This is no surprise to Allianz’s Mr

Tartaglia Surveying the corporate world as a whole, he sees “a lot more experienced people out there and

a better understanding of best practice, but I can’t say I have seen any empirical evidence that companies

are doing better [at change management]”

‘A’ for effort, but ‘E’ for execution?

…has the amount of senior executive time spent

on your organisation’s most significant change initiatives altered over the past 12 months?

Source: Economist Intelligence Unit survey, November 2010.

10

21

37

42 38

27 9

Any reassurance that the low success rate might give to executives about their own company’s failings

is false KKR’s Mr Nelson says, “If you are not getting better at change management, you are probably becoming irrelevant.”

If anything, the shifting focus of change is likely to make some elements of change harder—especially leadership Although change management literature often discusses the processes of change divorced from the content, what is being changed matters Mr Nelson notes, “Where people struggle is when the nature of what they are trying to change changes a fair amount They may have been very good on change related to costs, but it might be hard for them to change sales or product development.” Professor Kanter adds that such shifts present a leadership challenge: “It is very different to lead people to engage in innovation than encouraging people to fi nd effi ciencies.”

The symptoms of leadership diffi culties do not always manifest themselves at the top of the company

Survey respondents cite middle management (38%) as the employment level where bottlenecks occur in

change initiatives, well above senior management (26%) and the C-suite (5%) Signifi cant variations exist

in individual industries: for energy and natural resources, around one-quarter of respondents cite senior

management, middle management, line management and front-line workers as the most likely obstacles,

while in the healthcare sector senior managers (31%) lead middle management (28%)

This fi nding requires a caveat: all of the survey participants were at the senior management level

or above and leaders at some companies may be reluctant to acknowledge their own shortcomings Of

C-level survey respondents at companies where a change initiative has failed in the last year, 36% cited

a poor plan as the single biggest cause of the problem Only 17% blamed a lack of senior management

commitment, almost as many as pointed to employee resistance (15%) For less senior respondents,

though, 28% blamed a poor plan, but 25% cited lack of senior management commitment, and just 10%

mentioned employee resistance Moreover, at those companies where successful change initiatives are

few, survey respondents indicated that senior management created the biggest bottlenecks (42%), rather

than middle managers (28%) They also named lack of senior management commitment as the biggest

barrier to change (40%), more than twice as often as other respondents (19%) This is consistent with

a recent article in The Journal of Change Management1, which found that corporate “leaders’ ‘blindness’

to organisational systems and/or a focus on their own ego needs led them into a range of ‘traps’ that

seriously damaged the success of change interventions”

Where the buck stops: a challenge for leaders

1 Malcolm Higgs, Deborah Rowland, “Emperors with clothes on: The role of self- awareness in developing effective change leadership”, December 2010.