A report from the Economist Intelligence Unit sponsored by
Preface Leaders of change: is an Economist Intelligence Unit report, sponsored by Celerant Consulting. The Economist Intelligence Unit conducted the survey and analysis and wrote the report. The findings and views expressed in the report do not necessarily reflect the views of the sponsor. The report s quantitative findings come from a survey of 88 senior executives, conducted in November. 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 About the survey A total of 88 senior executives participated in the change management survey, which was conducted in November. Of those who responded, 4% were C-level executives or above and the remainder were in senior management. Respondents hailed from North America (44%), Western Europe (4%) and Latin America (%). Survey participants came from a wide range of industries, with just over 7% from organisations with annual revenue greater than US$bn. For more details on the survey sample and results, see the appendix of this study. Economist Intelligence Unit Limited
Introduction 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 reflects 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. Economist Intelligence Unit Limited
Looking to the future 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 % 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. Contraction and recovery: actual and estimated GDP growth, -4 (%) North America Western Europe Latin America China India - - 7 8 4 Source: Economist Intelligence Unit, Global Forecast. 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 %), preparing the organisation for the future (%) and cost reduction (%). Economist Intelligence Unit Limited
What are the main forces driving change at your company? Consumer goods Energy & natural resources Healthcare, pharmaceuticals & biotechnology Competitive/cost pressures Customer demand (eg, for better quality, service, different products) Regulation Desire to increase market share Merger or acquisition Exploiting emerging market opportunities (sourcing and sales) 4 8 Investor expectations 7 Reducing complexity within company Change for the sake of change Sustainability/green initiatives Reduction of headcount 7 4 7 4 7 4 44 Source: Economist Intelligence Unit survey, November. The overall survey findings 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, % of respondents cited cost reduction as the primary goal of change initiatives, while preparing for the future (4%) and increasing revenue (7%) 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, profit, growth and social good, remarks, Change management activities definitely 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 (%). However, customer demand (%) comes in second, followed closely by a desire to increase market share (4%). The last two findings strongly indicate a renewed focus on sales and growth, especially in certain sectors. In the consumer goods industry, the drive to grow market share (%) and customer demand (44%) are cited nearly as often as the competitive and cost environment (%). 4 Economist Intelligence Unit Limited
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 firms 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 officer (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 Economist Intelligence Unit Limited
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 firms in the last year has been the supply chain (cited by 4% of respondents from the sector). In contrast, the supply chain was the focus of change management for only 7% of energy and natural resources companies, for which the most common focus of change programmes has been finance (%). Overall, though, sales and marketing was the most common function to experience change in the last year (4%), coming in first in every region polled and at or near the top for every industry. For manufacturers the figure hit %. In the previous year s survey (using a different methodology), we found that overall sales and marketing experienced significant change, but on a par with procurement, information technology (IT) and general management, and behind finance. This year s focus on change in the sales and marketing function further reflects the shift in emphasis towards growth and the future and Which areas of your organisation have been the focus of change management initiatives in the last year? Sales & marketing Supply chain/procurement IT R&D/innovation Finance Human resources Customer service 4 The company as a whole in an overarching change initiative 4 Asset optimisation Legal & compliance Senior management as a whole within the company 8 None 4 Source: Economist Intelligence Unit survey, November. 4 Economist Intelligence Unit Limited
Which areas of your organisation have been the focus of change management initiatives in the last year? Consumer goods Energy & natural resources Healthcare, pharmaceuticals & biotechnology Sales & marketing Human resources IT Finance Legal & compliance Asset optimisation R&D/innovation Supply chain/procurement Customer service Senior management as a whole within the company 4 The company as a whole in an overarching change initiative 7 8 None 7 7 7 8 8 4 4 4 7 Source: Economist Intelligence Unit survey, November. 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 topline 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 Economist Intelligence Unit Limited 7
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 findings, companies that have not engaged in change to the sales/marketing function most commonly implemented initiatives that addressed the company as a whole (4%). 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$bn in annual sales, simplification 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. 8 Economist Intelligence Unit Limited
A for effort, but E for execution? 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 figures for increased spending are 47% and %. Nevertheless, most companies are still remarkably unsuccessful at implementing change. Respondents say that on average only % 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]. On average, to what extent have the resources spent on your organisation s most significant change initiatives altered over the past months? has the amount of senior executive time spent on your organisation s most significant change initiatives altered over the past months? Increased greatly Increased Stayed the same Decreased Decreased greatly 4 7 7 4 8 Source: Economist Intelligence Unit survey, November. Economist Intelligence Unit Limited
In your view, approximately what proportion of change initiatives has been successful at your organisation over the past five years? Few Around one-quarter Around half Around three-quarters Most or all None 7 Source: Economist Intelligence Unit survey, November. 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 find efficiencies. Economist Intelligence Unit Limited
Where the buck stops: a challenge for leaders The symptoms of leadership difficulties do not always manifest themselves at the top of the company. Survey respondents cite middle management (8%) as the employment level where bottlenecks occur in change initiatives, well above senior management (%) and the C-suite (%). Significant 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 (%) lead middle management (8%). In your view, which group of employees presents the greatest bottleneck to change management initiatives? Middle management Senior management Supervisors/line managers Front-line workers/operations C-suite Source: Economist Intelligence Unit survey, November. 8 This finding 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, % cited a poor plan as the single biggest cause of the problem. Only 7% blamed a lack of senior management commitment, almost as many as pointed to employee resistance (%). For less senior respondents, though, 8% blamed a poor plan, but % cited lack of senior management commitment, and just % mentioned employee resistance. Moreover, at those companies where successful change initiatives are few, survey respondents indicated that senior management created the biggest bottlenecks (4%), rather than middle managers (8%). They also named lack of senior management commitment as the biggest barrier to change (4%), more than twice as often as other respondents (%). This is consistent with a recent article in The Journal of Change Management, 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. Economist Intelligence Unit Limited. Malcolm Higgs, Deborah Rowland, Emperors with clothes on: The role of selfawareness in developing effective change leadership, December.
Change management in practice: a focus on sustainability The requirements of successful change management are often described in broad terms. The details, however, also matter, and invariably differ from field to field. For example, the integration of sustainability into companies in recent years has involved substantial change efforts. The experience of P&G and UPS illustrates the process of applying broad rules in particular circumstances. Leadership and communication to create a sense of urgency: Successful change requires a widespread belief within the organisation that action is necessary. This requires a consistent message from senior executives otherwise employees will assume that the issue is not important within the business. UPS and P&G start their sustainability efforts with an unambiguous commitment from the CEO and the Board. Both also have extensive internal educational and communication efforts to explain the concept. So far, this does not vary noticeably from the general template for change. For companies seeking to become more sustainable, though, success does not depend so much on winning people over to individual initiatives as convincing them of the need to embrace sustainability more broadly. Here developments in the outside world certainly help. UPS vice-president, sustainability, Scott Wicker, says that increasing awareness of climate change has made it far easier to win hearts and minds. The emergence of climate change as a business issue is driving sustainability, he notes. Yet P&G s Dr White points out that sustainability can be managed in terms of corporate behaviour. This approach requires greater corporate change, but once employees have been won over to its logic, these flow more easily. Building support for particular initiatives: A sense of urgency must be converted into a willingness for the company to provide resources to any given programme. With companies carefully shepherding resources, it can be difficult to advocate sustainability ventures in which the benefits are partly intangible. Mr Wicker therefore stresses the need to blend environmental with financial gains clearly, as both are a part of sustainability. Similarly, Dr White says, You need a clear line of sight for sustainability to the company s purpose. This ideally should include social and environmental, as well as financial elements, and P&G changed its formal statement of purpose to do so. The strong link between sustainability and efficiency frequently helps here as well. Planning: Effective change requires a good roadmap, including clear delineations of responsibility and steps, preferably with initial easy wins to boost morale and momentum. This is as true in sustainability as other fields, but those working in this area face particular complications. Mr Wicker notes that initiatives tend to involve multiple departments and sometimes even external stakeholders such as communities or non-governmental organisations (NGOs). Co-ordinated planning and execution are therefore typically more difficult than for initiatives relating to single departments. Selecting the appropriate metrics for success may not be as straightforward as initiatives focused on money saved, or a company might not even measure them before a given initiative begins. The accurate measurement of carbon emissions related to a given activity, for example, can be highly complex. Yet such measurement can provide additional business opportunities: UPS, for example, finds it valuable to be able to give customers information related to the carbon produced in their shipments. Focus of change: Although in parts of the business the focus of changes has varied with the economic cycle, sustainability provides an example of one that has not. It certainly could have fluctuated between concentrating on efficiency initiatives that reduce cost and those that focus on preparation for the future. Yet Dr White says that the downturn and recovery brought no real change to the balance between these two. Similarly, Lynnette McIntire, who heads sustainability communication at UPS, says that recently, We ve not been shifting efforts from cost cutting to opportunity; it is more of everything. Economist Intelligence Unit Limited
For the change initiatives in your organisation that did not succeed in the past months, what was the single most important factor in determining their failure? C-suite non-c-suite Lack of clearly defined and/or achievable milestones & objectives to measure progress Lack of commitment by senior management Poor communication Employee resistance Insufficient funding Other 7 7 7 7 8 4 7 8 Source: Economist Intelligence Unit survey, November. Powerlessness corrupts. People who are powerless and hemmed in by rules become excessively territorial. Rosabeth Kanter, Harvard Business School That said, middle management s reputation is not purely accidental. Professor Kanter believes that the finding definitely rings true. The reluctance of middle management to embrace change initiatives is understandable. Programmes imposed from above can radically shift middle managers job descriptions even their job security. Middle managers also frequently face multiple demands including for increased profits while being told to find ways to give practical effect to visions of change ordered from above. Mr Tartaglia acknowledges the problem, but lays much of the blame for this behaviour elsewhere: Middle managers are critical, but it has to start from the top. Professor Kanter adds that resistance to imposed change is predictable, especially where it is threatening. Powerlessness corrupts, she says. People who are powerless and hemmed in by rules become excessively territorial. Poor communication is a particular problem. Mr Nelson explains that senior executives can forget that, whereas they have been involved in to 4 conversations relating to an initiative before launching it, middle managers may be ill-prepared. If senior people say that managers need to be, for example, more innovative and think that this is enough to get people to act differently, then they are wrong, he says. Economist Intelligence Unit Limited
Conclusion The global economy is always evolving and companies need in turn to adjust. Businesses, however, are simply not that good at change failing nearly half the time, according to the Economist Intelligence Unit survey. As this study shows, getting the most out of change initiatives requires going beyond the basics of leadership commitment, good planning and communication. The following principles emerge. Treat change programmes as a key, but limited strategic resource. In practice there are limits to how much change a company can absorb on average survey companies make just. change initiatives annually. Competitors will be looking at other areas than just cost cutting, including trying to grab some of your market share. Aligning the focus of change with the most pressing strategic priorities has therefore become more important than before. In preparing for the future, consider whether your sales function needs an overhaul or you need to address an overarching company-wide issue. The most popular area for change programmes over the past year has been sales/marketing. Other businesses, meanwhile, are making a strategic choice to look at company-wide change such as complexity reduction. The key consideration is where change will best prepare the firm for the new competitive environment being shaped by the multispeed global recovery. Sweat the details. The broad principles of change management may vary little, but the details vary in ways that matter. As executives opt for new goals and locations for change programmes, they will need to understand the resulting specific requirements of success. These will likely differ from the requirements of changes in the depths of the downturn. Cutting costs, encouraging growth and promoting sustainability need distinct playbooks. Treat bottlenecks as a symptom not a disease. If middle management is a difficult bottleneck to change, then leadership needs to improve. Bring middle managers into the change process earlier, have them work on the planning, and use them as champions of change. Leadership is not about telling people what to do, but getting them to do it. If more senior employees are the problem, then leadership is dysfunctional and needs to address its conflicts quickly. Change management, says Professor Kanter, is a very broad term for a lot of different activities that are all a part of leadership. Such leadership will, as ever, be essential as business prepares itself for the future. 4 Economist Intelligence Unit Limited
Appendix Survey results Appendix: Survey results Percentages may not add to % owing to rounding or the ability of respondents to choose multiple responses. What will be the main motivations for your organisation s change management initiatives over the next months? Select up to three. Increasing revenue Preparing the organisation for future challenges Reducing costs Increasing market share 7 Better engagement of people (eg, improved communication & involvement) New organisation structure with new roles Acquisition/divestiture/merger Cultural change Other How many change management initiatives do you believe your organisation will launch over the next months? One Two Three Four Five or more None 7 In your view, what proportion of change initiatives has been successful at your organisation over the past five years? 8 4 4 How many change management initiatives do you estimate your organisation has launched in the last months? One Two Three Four Five or more None 8 4 4 Few Around one-quarter Around half Around three-quarters Most or all None 7 Economist Intelligence Unit Limited
Appendix Survey results Leaders of change For the change initiatives in your organisation that did not succeed in the past months, what was the single most important factor in determining their failure? Lack of clearly defined and/or achievable milestones & objectives to measure progress Lack of commitment by senior management Poor communication Employee resistance Insufficient funding Other 7 7 What is the most important measure in determining whether a change programme has been successful in your organisation? Behaviour change in the organisation Increased profitability Customer satisfaction Savings delivered Increased market share Employee satisfaction / employee turnover Other 4 On average, to what extent have the resources spent on your organisation s most significant change initiatives altered over the past months? Increased greatly Increased Stayed the same Decreased Decreased greatly 4 On average, to what extent has the amount of senior executive time spent on your organisation s most significant change initiatives altered over the past months? Increased greatly Increased Stayed the same Decreased Decreased greatly In your view, which group of employees presents the greatest bottleneck to change management initiatives? Middle management Senior management Supervisors/line managers Front-line workers/operations C-suite 7 7 8 4 8 Economist Intelligence Unit Limited
Appendix Survey results Which areas of your organisation have been the focus of change management initiatives in the last year? Select up to three. Sales & marketing Supply chain/procurement IT 4 R&D/innovation Finance Human resources Customer service 4 The company as a whole in an overarching change initiative 4 Asset optimisation Legal & compliance Senior management as a whole within the company 8 None What are the main forces driving change at your company? Select up to three. Competitive/cost pressures Customer demand (eg, for better quality, service, different products) Desire to increase market share 4 Reducing complexity within company 7 Investor expectations Merger or acquisition Regulation Exploiting emerging market opportunities (sourcing & sales) Reduction of headcount Sustainability/green initiatives Change for the sake of change 4 In which country are you personally located? US UK, Germany 8 Belgium, Canada, Brazil Italy, Mexico 4 Switzerland, Netherlands, Portugal Colombia Chile, France. Sweden, Ireland, Turkey, Denmark, Finland, Norway, Peru, Poland What is your primary industry? Manufacturing Consumer goods Healthcare, pharmaceuticals & biotechnology Energy & natural resources Chemicals Financial services 7 Professional services Retailing 4 Automotive Construction & real estate Education IT & technology Telecommunications Transportation, travel & tourism Agriculture & agribusiness Entertainment, media & publishing Government/Public sector Aerospace/Defence 4 4 Economist Intelligence Unit Limited 7
Appendix Survey results Leaders of change What is your company s annual global revenue in US dollars? What are your main functional roles? Choose up to three. Which of the following best describes your title? Board member CEO/President/Managing director CFO/Treasurer/Comptroller CIO/Technology director 4 Other C-level executive SVP/VP/Director $m to $m $m to $bn $bn to $bn $bn to $bn $bn or more 4 8 8 Finance Strategy & business development General management Marketing & sales Risk IT Operations & production R&D Supply-chain management Customer service Procurement Human resources 4 Legal Information & research Other 8 7 In which region are you personally based? North America 44 Western Europe 4 Latin America 4 8 Economist Intelligence Unit Limited
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