Countering the Global Slowdown: CEOs Seeking to "Control the Controllable" to Create Competitive Advantage in 2013

Editor’s Note: This article is based on the findings of The Conference Board CEO Challenge 2013 Survey which was fielded globally from September to November 2012 and reported in the recently released report CEO Challenge 2013: Countering the Global Slowdown. Please visit www.conference-board.org to learn more and to download the full report.  The Conference Board is a global, independent business membership and research association working in the public interest. To learn more about The Conference Board in China, contact claire.xia@conference-board.org.

Feeling the Stress: No Emerging Market Miracle
to the Rescue This Time

    As CEOs see it, the global economy is under stress — and there isn’t a lot they can do to fight the externalities that are causing it. The ongoing political drama in Washington, the once-in-a-decade leadership transition in China, the unresolved outcomes of the Arab Spring, and the lingering European debt crisis has created an avalanche of uncertainty. This uncertainty is coupled with a creeping protectionism that is fuelling international trade tensions, along with the continually intensifying challenge to find and develop good talent to challenge the growth agendas of global CEOs.

    Among business leaders there appears to be a resigned acceptance that the world has entered a pro-longed slow growth phase. Just how long it may last (or whether it is even a permanent state of affairs) remains uncertain. But the cooling of the once white-hot growth rates of China, India, and Brazil and the inevitability that their productivity growth will eventually slow down as their economies mature, means, that at least for now, there will be no emerging market miracle to offset the low or stagnating growth in the mature economies. The stress is clearly showing. In its global economic outlook for 2013, The Conference Board predicts a weak global GDP growth rate of just 3 percent (it was 3.2 in 2012) continuing the depressing and somewhat unnerving declining growth trend of recent years.

    But CEOs are not going take all this laying down. Since 1999, The Conference Board CEO Challenge survey has asked CEOs, presidents, and chairmen across the globe to identify their most critical challenges for the coming year. Four of the five top challenges selected by the 729 respondents to the 2013 survey—Human Capital, Operational Excellence, Innovation, and Customer Relationships—show executives’ determination to “control the controllable” and prime their organizations for the slow-growth reality ahead by wringing new efficiencies from existing resources. (The fifth-ranked Global Political/Economic Risk challenge is the exception.)

    This mood of self-examination and focus on managing the firm through a weakening business climate is a definite change from the sentiment of the 2012 survey results, which gave concerns related to the macro business environment (global risk, regulation, and global expansion) a more prominent role.

    CEOs who responded to The Conference Board 2013 survey believe:

    • In a slower growth environment, you have to compete harder and think more about building new markets and finding new efficiencies. You need to pay more attention to the fundamentals – i.e. to the things under your control.

    • Building internal strength and creating value in a weakened business environment require a laser-like focus on your people, your suppliers, and your customers, as well as an enterprise-wide dedication to true excellence regardless of the task, the function, or the external challenge.

CEOs in China—Marching to a Different Drummer

    Human Capital, which has a clear link to the other top challenges in 2013 – operational excellence, innovation, and building customer relationships – is the number one challenge globally (it is also tops in Asia and is number two in China, after Innovation). The critical lesson to be learned according to responding CEOs: if you do not have the right approach in place on the human capital side of the organization, you will struggle to be competitive, innovative, customer friendly, and operationally sound.

    The fact that there is considerably more regional agreement on challenges in this year’s global survey than previous ones (four challenges— Human Capital, Operational Excellence, Innovation, and Customer Relationships make the top five in Asia, Europe, and the United States) underscores that functional and operational excellence have become basic requirements for competitiveness, globally. That being said, results show that CEOs in China march to a slightly different drummer – one that reflects the unique business environment in the country.

    They are the only group of CEOs globally to rank Innovation as their top challenge— a clear indication of China’s determination to move up the global value chain and shake its reputation as a copier rather than a creator. It also underscores that the traditional flow of innovation from the West to the East is being challenged. The quest is no longer a product label that says “made in” but rather one that boasts “designed in” or “created in.” But that quest presents its own set of challenges for both the business and government sectors in China. Despite a considerable commitment of resources and a significant percentage of GDP to R&D, China’s stated intention to become one of the world’s leading “innovative economies” will remain unfulfilled if it is unable to turn those investments in intangible assets into genuine technological leadership or some other form of productivity enhancing, competitive advantage.

    Research by The Conference Board China Center for Economics and Business shows about half of China’s recent spending on intangible assets has been driven by policy— mostly software investment by State Owned Enterprises, government enterprises, and centrally funded R&D programs, and by architectural and engineering design-related investments, part and parcel of the booming fixed asset investment in real estate and infrastructure development over the last 10 plus years. However China’s policy-induced intangible investment may be causing a misallocation of resources resulting in the investment not yielding commensurate returns in economic output. Secondly, Chinese companies are not yet exhibiting the technological innovation needed to capture value in global value chains through intangibles like branding, product development, and IP. It is also possible that a significant portion of State allocated R&D funding, and the touted large-scale R&D investment by many State Owned Enterprises, “leaks” into other uses, or is done primarily for Government Relations purposes, and not for market-driven reasons.

It All Comes Down to the People —
and Growing Your Own Talented Workforce

    The number two ranking given by CEOs in China to the Human Capital challenge is clearly in line with most other global regions (the U.S,. being the exception here with CEOs ranking it number five) and is not surprising considering the 12th Five Year Plan’s emphasis on the “human factor” in economic development. However, rapidly changing workforce demographics leading to mismatches in talent availability and demand, the overall shortage of quality talent, and increasing compliance pressure and complexity in HR and labor policies are just some of the issues facing all companies in China, local firms and MNCs alike.

    Another is the apparent failure of the open market to supply the skilled employees needed, almost regardless of price. The competition between multinationals and local companies has turned fierce, and according to HR practioners in the region, cuts across virtually all jobs levels. As a result CEOs in China—and the rest of the world—are looking to grow their talent internally, which is the top ranked strategy to meet the Human Capital challenge, not only in China but the rest of the world as well. Still the question remains: Will you be able to grow your own talent fast enough to meet growth demands?

    CEOs in China are serious about this internal focus. Five of the top six strategies they selected to tackle their human capital challenges— grow talent internally; improve performance management processes and accountability; provide employee training and development; increase efforts to retain critical talent; and redesign financial rewards and incentives—are all internally focused and put an emphasis on current employees and not on supervisors, managers, or the senior team. This indicates a clear shift toward overall organizational capability building and away from a narrower approach that emphasizes individual high-potential talent. In other words, it makes sense to develop, retain, energize, and manage the employees you have, especially when they may well be your best option in a tight talent market.