Fighting fit for the future – PwC’s Global CEO Survey

25 October 2016

In the last quarter of 2013, PwC surveyed 1,344 business leaders across 68 countries around the world and conducted in-depth interviews with 34 CEOs. Its 17th Annual Global CEO Survey saw a leap in chief executives’ confidence in the global economy, tempered with caution about whether this will translate into better prospects for their companies.

While the global economic recovery continues to be fragile, immediate pressure is easing and CEOs are feeling more optimistic. They are coming out of survival mode.

The search for growth, however, is getting more complicated as opportunities in developed and emerging economies become more nuanced, leading the leaders to revise the portfolio of overseas markets they focus on.

In 'Fit for the future: Capitalising on global trends', PwC also explores three forces that business leaders think will transform their business in the next five years: technological advances, demographic changes and global economic shifts. The survey shows how these trends and, more importantly, the interplay between them, are creating many new but challenging opportunities for growth through creating value in totally new ways, developing tomorrow's workforce and serving the new consumers.

It also shows how, by responding to these trends, CEOs have the opportunity to help solve important social problems. In short, the demands being placed on business leaders to adapt to the changing environment are increasing exponentially; CEOs must become hybrid leaders who can successfully run the business of today while creating the company of tomorrow.

Four fifths of CEOs identified technological advances as a top-three megatrend that will transform their businesses over the next five years (see Figure 1). This trend isn't new, but what has changed is the pace at which it is unfolding, and the way it is colliding with other megatrends to create a completely different environment.

The world has benefitted from the development of more general-purpose technologies in the past century than in the previous four combined (see Figure 2), and consumers are embracing these advances ever more rapidly. The telephone took 76 years to reach half of all US households. The smartphone reached the same level of penetration in less than a decade.

The number of digital natives (those actively using social media and multiple devices regularly) is expected to grow at a rapid pace. In the UK, for example, 61% of consumers are expected to be digital natives by 2020 - up from 19% in 2013.

And we know that many of these tech-savvy consumers want to communicate and share information electronically. Just how much they are connecting is clear from the fact that Facebook's membership - at 1.19 billion - is now nearly as large as the population of India. The number of networked devices is soaring accordingly; by 2020, there will be seven times more of these devices than there are people.

Creating value in new ways

The digital revolution has given birth to a new generation of consumers who want more accessible, portable, flexible and customised products, services and experiences. They expect to move seamlessly - in real time - between the physical and virtual worlds, and they're prepared to disclose quite a lot about themselves to achieve their desires.

When we asked CEOs what they thought would be the next big thing that would revolutionise their business, industry or society over the next ten years, technology was unsurprisingly their top pick (see Figure 3). Mobile was the top emerging technology to be cited by CEOs, followed by big data, social media, automation, cloud, 3D, robotics and cybersecurity. These technologies that underpin the digital revolution are creating numerous opportunities for companies to generate value in entirely different ways - and even, indeed, to redefine the businesses they're in.

Moreover, the ramifications go far beyond serving customers better in order to expand. Armed with new technologies, CEOs have the leadership opportunity to drive social change by addressing complex needs. And this doesn't have to be a philanthropic exercise; as some firms have proved, it's quite possible to solve pressing social problems profitably. Dow Chemical, for example, has developed a seed line for making cooking oils that produce high yields, and oils with a longer shelf life and less saturated fat than competing products. What's good for farmers, food manufacturers and consumers has been good for Dow; the seed line has become a best seller. Similarly, Becton Dickinson has developed a syringe to protect health workers from needlestick injuries, which spread HIV and other infections. Needleless injection systems now account for a quarter of the company's revenues.

Tomorrow's world

How, then, are CEOs preparing for this future? A third of them are pinning their hopes on new products or services, primarily to fuel organic growth in existing markets (see Figure 4). Most also want to improve their company's ability to innovate: 86% aim to alter their R&D functions, while 88% are exploring better ways of using and managing big data and 90% are changing their technology investments.

But there is a glaring gap between aspiration and action. Only 27% of CEOs have already started or completed the changes they are planning to make their companies more innovative. Only 28% have made any headway in getting to grips with big data, and only 35% have altered their technology investments. This is despite 65% thinking the R&D function is insufficiently prepared to capitalise on the trends now transforming business and society.

So what's holding CEOs back? One factor may be uncertainty about how to convert those "a-ha" moments into systematic innovation. A second, may be concern that a newer technology could negate their efforts. Nearly half of CEOs are worried about the speed at which technology is advancing - and getting on the "wrong side" has major consequences; witness the diverged fortunes of the Blu-ray and HD DVD formats. Many companies are also unsure about how to use the data they collect.

Faced with these challenges, it is no wonder that many CEOs feel they can't move fast enough on the innovation front. But the most successful CEOs are doing three things to "industrialise" innovation, or make it repeatable, dependable and scalable, they are focusing on breakthrough innovation in all its forms, putting disciplined innovation techniques in place, and collaborating much more actively.

Breakthrough innovation

The smartest CEOs are concentrating on breakthrough, game-changing, innovation; they are explicitly incorporating it in their strategies. And they are using technology not just to develop new products and services, but also to create new business models including forging complete solutions by combining related products and services. In fact, they don't think in terms of products and services so much as outcomes, because they recognise that products and services are simply a means to an end.

Breakthrough innovation can help a firm rewrite the rules and leapfrog long-established competitors, as some firms in the emerging economies are doing. Khosla Ventures is one such organisation. The company has funded a Kenyan start-up that combines physical schools with online learning using mobile phones instead of textbooks. It is already operating hundreds of schools that break even at just $5 a child each month, which is locally affordable.

"Breakthrough innovation can help a firm rewrite the rules and leapfrog long-established competitors."

New blends of the physical and virtual offer many other opportunities for turning the status quo on its head - and alleviating serious social challenges in the process. Using smart diagnostic systems, delivered via mobile phones, to help patients distinguish illnesses that can be self-medicated from those that require a doctor's attention could cut the cost of healthcare provision, for example.

As Preetha Reddy, managing director of India's Apollo Hospitals observes: "We have to invest in [technology] and find ways and means to be extremely cost-effective in taking the point of care from within the hospital system to the doorstep of the consumer. I think that will revolutionise the way healthcare is delivered... We should be able to take the point of care to their homes."

A robust innovation framework

The most successful executives not only focus on breakthrough innovation, they treat it like any other business process. Close collaboration at board level is crucial. Companies in which the chief information officer has a strong working relationship with the other members of the C-suite typically fare better at fostering systematic innovation.

Such companies set clear ground rules on the sort of innovation they want, how they plan to measure it and the trade-offs they're willing to make. They also create a disciplined R&D structure that has dedicated units and rigorous processes that can be reiterated and scaled up. Intel is a good example. It has established a global innovation centre using systematic R&D processes akin to those used for quality control, and routinely captures feedback from the
people who are closest to customers.

An ecosystem of partners

The top innovators don't try to do everything themselves; they collaborate extensively with a wide range of partners, inside and outside their industries. They regularly co-create new products and services with customers, and they experiment with different ways to progress, including open innovation, incubation and networked innovation.

The CEOs in the survey are aware of the importance of collaboration; 44% are actively developing an innovation ecosystem. Partnerships also feature prominently in their plans; 44% intend to enter into a new joint venture or alliance in the next 12 months. But more than three quarters of all CEOs concede that they either need to change or are already changing their strategies for initiating such arrangements.

This is perhaps partly because it is getting harder to find good allies, as more and more firms collaborate. So any organisation that wants a first-rate partner has to bring more to the table itself. Some companies are also redefining the skills they require as they redefine the businesses they're in. Google is a case in point. It normally works with other technology firms, but it is now seeking a partner in the auto insurance industry to help get its driverless cars on the road.

Working with governments likewise features on the boardroom agenda; 30% of CEOs think it is part of a governing party's job to foster an innovation ecosystem. Yet, only 18% of CEOs think governments have been effective in this respect, and 40% say that regulation has impeded their efforts to innovate; although 33% say the opposite.

In fact, supportive government policies have been critical in developing innovation clusters such as Silicon Valley in San Francisco and Silicon Roundabout in London. The US Government made a major contribution to the creation of Silicon Valley. In the early years, it provided funding directly, and through contracts for spin-offs from Stanford University. This created close ties between the industry and local research institutions. Flexible labour and immigration laws, together with robust intellectual property rules, also helped to bring in the big brains; between 1995 and 2005, immigrants were responsible for founding more than half the firms in the region. Meanwhile, under Chapter 11, it is relatively easy for bankrupts to get back on their feet, creating a culture in which it is acceptable to fail.

The UK Government has replicated this approach by developing London's Silicon Roundabout, with entrepreneurs' visas, R&D tax credits and significant tax breaks for investors. It also set up an agency to promote the area and launched a scheme where 50 firms a year get support to help them expand. The result? In 2008, there were 15 tech start-ups at the Silicon Roundabout; today, there are more than 1,300.

Breakthrough innovation comes from jettisoning old ideas and habits; practising and evolving; and adapting as circumstances change. It also requires a culture that nurtures innovation. A company's ecosystem alters only when the people who work in it alter how they think, talk, decide and act - and that happens only when top management shows the way.