view

Issue 14 28 The anytime, anywhere business opportunity 42 Defining a new CEO agenda 54 Interview with historian Niall Ferguson

Seeking value in a radically changing world 10

Striking the innovation balance

Departments

My view Have you joined the dance? Bob Moritz

22 62

Two views Beyond open and closed innovation Rear view Are you aware of the misconceptions surrounding innovation?

View points

4 6 7 8

Making over healthcare Combating cybercrime: The general counsels role Seeking shared agendas with governments How credible is your sustainability reporting?

Features

10

Cover story Striking the innovation balance Discover the six tensions that most affect your companys ability to innovate successfully. John J. Sviokla Page 24 Measuring innovation Tracking your companys progress and benchmarking your efforts are essential parts of the innovation process. Christopher Wasden

28

The anytime, anywhere business opportunity Mobility is redefining the way companies workdelivering productivity gains in the near term and paving the way for more innovative business activity in the long term. Thomas R. Johnson Page 38 The technology powering business mobility An executive overview of the IT building blocks. Alan Morrison

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Issue 14

Innovation is a balancing act. Find out how to master the art, page 10.

42

Defining a new CEO agenda The eight questions every business leader needs to consider in a post-crisis economy. Tom Craren

54

Interview Taking the long view Historian Niall Ferguson looks at politics, economics, and the killer apps that make or break civilizations. Interview by Gene Zasadinski

By Bob Moritz
Bob Moritz is chairman and senior partner of PricewaterhouseCoopers LLP.

My view

Have you joined the dance?

As philosopher and writer Alan Watts once said, The only way to make sense out of change is to plunge into it, move with it, and join the dance. While coping with change (and risk) has always been a key factor in a global economy, it has never been more of a challenge than during the recent economic crisis and today as we move forward with a post-crisis recovery. As in any period of change, winners and losers will be determined by leaderships response to these and other challenges we are seeing. The losers will be those that hold on to the status quo and allow sweeping change to overwhelm them. The winners will be those that join the dance by embracing change and adapting to a new environment. Earlier this year, we published the 14th edition of our annual global CEO survey.1 As we reviewed the CEOs responses to our questions, it was clear that the world in which they are confronting their issues and concerns is changing radically. For example, centers of power and influence are shifting, as both developed and emerging market countries redefine their roles in the new global landscape. From cloud computing, to social networks, to e-mobility, changes in technology are transforming the way companies do business and interact with their customers, partners, and other stakeholders. Such advances are having a dramatic impact on how CEOs, management teams, and boards are adapting to change. Take innovation, for instance. As a means of achieving growth, innovation has never ranked as high in our survey as penetrating existing markets. Today, CEOs are just as likely to focus on the innovation needed to develop new products and services. In addition, CEOs are turning to product innovation outside of their home markets and are involving customers, employees, and other partners in each stage of the innovation process, wherever in the world these stakeholders reside. Sourcing is another example. Historically, because of cost considerations, CEOs have targeted emerging economies as suppliers. However, with growth prospects in those economies considerably higher than they have been, and with the quality, stability, and innovation resident in Western nations,

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The losers will be those that hold on to the status quo and allow sweeping change to overwhelm them. The winners will be those that join the dance by embracing change and adapting to a new environment.

countries such as the US and Germany have joined the ranks of China and other emerging economies as significant future sources of supply. Depending on how you look at it, talent is a concern or an opportunity. Growth prospects are driving the need for qualified people, but there doesnt seem to be enough available talent to go around. In fact, two-thirds of CEOs believe they are encountering a limited pool of skilled job candidates, a situation even more acute in high-growth regions like China, India, and parts of Latin America. For these reasons, strategies for managing talent are prominent on the CEOs agendas and include more non-financial rewards such as training and mentoring programs and more international assignments. Other strategies include finding ways to better leverage underutilized talent pools. CEOs perceptions of risk are also changing. This year, the top four risks are dominated by threats related to government policies and talent: 1) recession/economy; 2) public deficit;2 3) overregulation; and

4) availability of key skills. This is not to say that CEOs are unconcerned with other risks ranging from energy costs and inflation to higher taxes. However, while this could change given the dynamic environment in which we operate, these currently do not rise to the top of the list. So what does all of this mean for businesses moving forward in a post-crisis world? First, it means that prospects for growth are driving a renewed confidence. CEOs are confident about the future, particularly in the near term and specifically as it relates to corporate performance. In fact, 48 percent of survey respondents are very confident about their companys prospects for revenue growth over the next 12 months, up from 21 percent in 2009 and 31 percent in 2010. Second, it means that, recognizing significant change, companies are gearing up for growth, but are doing so precisely and selectively. For growth initiatives, they have abandoned a scattershot approach and are selectively targeting these to emerging markets that offer the most promisemarkets where recovery is expected to be strong.

And they dont want to go it alone. As we point out in our survey, more and more CEOs are eager to partner with governments on shared priorities that are critical to business growth, such as workforce skills and infrastructure. This is an area where the US can and must do better. Back in 1998, President Clinton said the following: Rarely have Americans lived through so much change in so many ways in so short a time.3 Clearly, those words are even more applicable today than they were a decade or so ago. The difference is that todays successful companies are much better than their predecessors at responding to change by refocusing, adapting, and finding new ways to compete and win. In short, they have plunged into change, moved with it, and joined the dance. Thats my view. Whats yours? Wed like to know. Send us your comments at pwc.com/view.
1 Statistics presented in this column are from PwC, 14th Annual Global CEO Survey, 2011. 2 New options. 3 William Jefferson Clintons Sixth State of the Union Address, delivered January 27, 1998.

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View points

InDusTRy TRenDs

Making over healthcare

While theres still a great deal of uncertainty around the specifics of healthcare reform, one things clear: The healthcare industry in the US will never be the same. And 2011 is shaping up to be a makeover year for healthcare providers, health insurers, pharmaceutical and life sciences companies, and employers. But what are the most significant issues in play? A recent report identifies six.1 1. Health information technology. Thanks to a massive government infusion of stimulus dollars, 2011 will be a peak year for doctors and hospitals to buy electronic health records. But they cant just install them to get the stimulus money. Theyll need to demonstrate so-called meaningful use, which means connecting to other providers and patients. At the same time, providers as well as insurers must make changes to their administrative systems to support both ICD-10, a new coding system that will add five times the number of current diagnosis and inpatient codes, and HIPAA 5010, a new electronic

transaction system that requires more than 1,300 modifications that must be made by January 2012. 2. Health insurance reform. Insurance companies will spend a lot of time worrying about medical loss ratios, which measure the portion of insurance premium dollars spent on medical care. To conform to the new health reform law, insurers must either spend a certain percentage on care or pay rebates to members. The minimum percentages that must be spent on medical services are 80 percent for small employers (those with fewer than 100 employees) and 85 percent for large employers (those with 100 or more employees). In addition, beginning this year, the federal government will issue grants to states so the states can plan and establish American Health Benefit Exchanges and Small Business Health Options Program Exchanges, which are online insurance marketplaces. State legislative activity around those exchanges is expected to be high in 2011 as states seek to meet the certification deadlines set for 2013.

3. Accountable care organizations. Under the health reform law, Medicare is offering a new payment model in which physicians and hospitals can share in any savings generated, but only if they adhere to a complex set of quality, legal, and operational rules that leave little margin for error. Accountable care organizations (ACOs) must achieve both cost efficiency and high quality to stay in the three-year program, the first round of which starts in January 2012. More than half of physicians surveyed by PwCs Health Research Institute (HRI) said hospitals and physicians will become more closely aligned through ACOs in the next five years. However, because the model is so new and the draft regulations seem so complex, providers are carefully analyzing whether the program is worth the performance and financial risks. 4. Consumer healthcare spending. In 2011, for the first time, most employers are expected to require that a deductible of $400 or more be built into their health insurance plans. At the same time, employers are increasing the levels of coinsurance. Research has shown that higher deductibles

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and coinsurance levels push consumers to make hard decisions about how often to go to the doctor or what prescriptions to fill. Thats likely to be especially true in a slowly recovering economy. The danger lies in whether short-term cost avoidance could lead to more-expensive conditions in the long term. 5. unlikely M&A deals. With healthcare undergoing considerable changes, companies in all sectors of the industry will continue to pursue strategic mergers and acquisitions. Some of those venturesfor example, healthcare suppliers acquisitions

of providers or pharmaceutical and life sciences companies moving into patient carewould have been unlikely just a short time ago. Also, private equity investment is likely to increase. Such activity is blurring the lines between providers and payers as they formulate post-reform strategies. 6. Follow-me healthcare. In the digital age, patients want easy and widely available access to more and more health-related information. But not just any information source will do. Although healthcare organizations are investing resources to produce online content, individuals seek

healthcare information from third-party media and information service companies three and a half times more than from any other online health-information source.2 Physicians, too, are demanding full access to health data. While 88 percent of physicians said they would like their patients to track their health information, 40 percent of individuals said they would buy a personal health-monitoring device or pay for a monthly subscription to send health information to their providers.
1 PwCs Health Research Institute, Top health industry issues of 2011, December 2010. 2 PwCs Health Research Institute, Consumer Survey, 2010.

Sources consumers are most likely to use for online healthcare information

12% Consumer-driven organizations

16% Health service and manufacturing companies

16% Government organizations

56% Media/information service companies

Source: PwCs Health Research Institute, Consumer Survey, 2010

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View points

RIsk

Combating cybercrime: The general counsels role

Cybercrime is rising. Estimates of losses from intellectual property and data theft range as high as $1 trillion.1 Last year, a criminal hacker was sentenced to 20 years in prison for stealing more than 170 million credit and debit card numbers, making it the largest identity theft case the Department of Justice has ever prosecuted.2 With legal risks high, companies have to be diligent whenever a system is breached. Yet according to a recent report, the general counsel is often the last person to find out about a cybercrime.3 Cyberattacks arent just an information technology (IT) matter. Legal obligations, damages to the organization, and business relations with customers are all reasons that the general counsel must act promptly when a companys systems have become compromised. This means acting after a breach is detected, not merely after data are actually stolen. Also, special rights exist for cybercrime victims if the victimized company initially investigates after a breach occurs. For instance, employers can obtain injunctive relief against former employees who improperly access a companys digital information. Many times, general counsel isnt even aware that a companys systems have been compromised, which puts the business at risk for litigation and fines. Why are they often in the dark? Although IT professionals are usually the first to know when a breach occurs, they might not report the breach within the organization for fear of losing their jobs. And when the general counsel becomes aware of the system breach too late and investigations have already occurred, companies lose out on a privileged status, which helps protect breached companies if they get sued by external parties or investigated by regulators. Facing cyberthreats doesnt have to be daunting. Acting in a timely way and creating better communication avenues with IT staff can lessen the risks associated with compromised information systems. General counsel can become better equipped to deal with cybercrime by learning more about technology trends, by establishing an information security council, by developing a response plan that includes periodic testing and clear guidelines on how to respond and when, and by having a cyber forensic investigator on retainer. There is no doubt that cyberattacks can be detrimental to a company and its reputation. But general counsel can play a pivotal role in protecting an organization if they are firstrather than laston the cybercrime scene.
1 http://www.whitehouse.gov/assets/documents/Cyberspace_ Policy_Review_final.pdf. 2 http://www.justice.gov/usao/nj/press/press/files/pdffiles/ dojgonzalez0326rel.pdf. 3 PwC, Why cybercrime matters to general counsel, February 2011.

General counsel can play a pivotal role in protecting an organization if they are firstrather than laston the cybercrime scene.
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CEOs see shared commitments with government as a way to achieve public outcomes Percent of CEOs who believe the following should be top priorities for the private sector and the government.

Government priority

Private sector priority

Source: PwC, 14th Annual Global CEO Survey, 2011

Shared priority

60%

Creating and fostering a skilled workforce

Improving the countrys infrastructure Ensuring financial stability and access to affordable capital

45%

Generating innovations and safeguarding IP

Maintaining the health of the workforce Reducing poverty and inequality

30%

Securing natural resources critical to business Protecting consumer interests Addressing the risks of climate change

sTRATegy & gRowTH

Protecting biodiversity and ecosystems

Seeking shared agendas with governments

As businesses around the world recover from the economic crisis, governments are lagging behind. Facing a set of unprecedented financial challenges, governments, especially in the West, are looking at spending cuts and tax increases as a means of tackling fiscal deficits and public-sector debt. According to PwCs recent global CEO survey, business leaders are showing some concern over that approach: 61 percent say the government response to fiscal deficit and debt burden is a threat to their businesses because those actions are believed to slow economic growth and potentially increase business tax contributions.1 At the same time, however, CEOs are looking to enter

strategic and collaborative relationships with governments in order to pursue their own growth agendas. CEOs are looking beyond governments fiscal responsibilities to its role as an enabler. By helping create jobs in the private sector and by investing in infrastructure, governments can create an environment conducive for growth, one that would support fiscal and financial stability in the long term. In fact, almost half of CEOs surveyed agree with that notion, saying that improving the countrys infrastructure and fostering a skilled workforce should be governments top priorities.

CEOs are also willing to share some of those responsibilities. More than 70 percent plan to actively support new government policies that promote economically, socially, and environmentally sustainable growth. For instance, over half of all CEOs surveyed say collaborative efforts will help combat global threats like climate change. The strongest area in which businesses see a shared agenda is in the need to collaborate to create a stronger workforce. Fifty-four percent of CEOs surveyed plan to work with governments and education systems over the next year to improve the talent pool. The global rise of charter, or trust, schoolspublic schools that are funded and managed by the corporate sectoris one example of the types of partnerships between government and business that are growing. Overall, CEOs understand that they and the public sector share a purpose: to create an environment of competitiveness as well as social well-being.
1 PwC, 14th Annual Global CEO Survey, 2011.

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View points

82 48 63
23

37%
12

susTAInAbIlITy

%
55

How credible is your sustainability reporting?

Businesses increasingly want a second pair of eyes to verify their corporate sustainability reporting.1 Why? Its important to give stakeholders comfort that the information is credible and to uncover areas for performance improvement. CEOs and boards are recognizing the benefits of corporate responsibility reporting: increasing their profitability, reducing supply chain risks and costs, and garnering sustainability ratings and recognitions, to name a few. Leadership and external stakeholders are setting higher standards for sustainability performance goals such as reducing water use, waste, or greenhouse gas emissions throughout the company and its supply chain; setting revenue goals for products that have environmentally friendly attributes; and lowering costs by improving energy efficiency. Therefore, on corporate websites, in press releases, in annual reports, and in corporate responsibility reports, companies are disclosing their own metrics on sustainability variables such as greenhouse gas emissions, safety records, and community contributions. Simply by disclosing commitments and performance goals, companies imply that the information can be used for determining a companys health. But companies are still new at this practice and many are using rudimentary and manual methods to collect data. A more rigorous tracking and data collection process, then, will enable companies to better assess risks and opportunities at all levels of the business; to feel confident that their baseline measurements are accurate; to be able to enhance trust with stakeholders; and to ensure fewer errors and restatements. When companies use data that are outdated or when they restate key metrics from year to year, chances are their reporting programs are not reliable. Certainty with regard to ranges also matters. Half of the companies surveyed for the 2010 Carbon Disclosure Project reported greenhouse gas emissions within a 5 percent range of certainty. But 25 percent of those same respondents did not disclose information about uncertainty ranges, or they do not evaluate uncertainty at all.2 Equally important is the publication in which metrics get reported. Many executives are reluctant to publish sustainability data in their companies financial reports, fearing that stakeholders would scrutinize the sustainability performance metrics as carefully as they do the companies financial results. Those who do publish are implicitly

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The rise of sustainability reporting Number of corporate responsibility or sustainability reports issued (global sample)

2010 4,579 reports

sending the message that the environmental and social data have the same rigor as the financial databut chances are they dont. To win stakeholders trust, companies need to be credible with respect to sustainability. How? New software programs exist that will enable companies to automate reporting functions and improve performance metrics. Aside from building a process of disciplined data collection and analysis, companies can also subject their sustainability data to independent, third-party verification. Already, two prominent rating organizationsthe Dow Jones Sustainability Index and the Carbon Disclosure Projectseek some level of independent verification as part of their assessments. While reporting gives stakeholders visibility into company practices, thats not the endgame. Ultimately, companies need this information to drive operational efficiencies and facilitate innovation.
1 PwC, Creating value from corporate sustainability: Does reported data get the respect it deserves? February 2011. 2 PwC, Carbon Disclosure Project 2010, September 2010. Source: CorporateRegister.com, 2011

2000 823 reports

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Cover story

Striking the innovation balance Seeking value in a radically changing world

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By John J. Sviokla
John J. Sviokla is a principal in PwCs Diamond Advisory Services where he serves as business strategy and innovation leader.

In strategy it is important to see distant things as if they were close and to take a distanced view of close things.
Miyamoto Musashi 1584-1645

Executives know that their decisions have consequencesnone more powerful than in the area of innovation. Ignore innovation and watch your competitors pass you by. Do it the wrong way, and watch your resources and efficiencies drain away. The bad news is that the ash heap of business history is littered with companies that have failed to innovate. No need to name names. You know who they are. The good news is that innovation is climbing to the top of the CEO agenda as a primary strategy for achieving profitable growth in a post-crisis economy. Is your company innovating to its full potential? Have you thought about your innovation goals and about how to achieve them? In this article, business strategy and innovation leader John J. Sviokla helps you answer those questions and more. He also introduces the six tensions that most affect a companys ability to innovate successfully.

Samurai Miyamoto Musashi was a great innovator. His two-sword (nitojutsu) style of fighting made him victorious in many battles, including 60 duels. He was also an accomplished calligrapher, sculptor, and part-time architect. Historians wonder whether this samurais ability to balance hard fighting skills and artistic intellect enabled him to be a dominant force in the clan wars that characterized the tumultuous world of his time. Fast forward to today. Successful leaders in the post-crisis economy also will need to strike a balance by simultaneously innovating for long-term differentiation and short-term efficiency. Like Miyamoto Musashi, to succeed in a changing world, todays leaders must excel at their core capabilities while cultivating broad skills and understanding in others, most important, in their senior executive teams.

What characterizes the post-crisis economy? Our research suggests that a number of fundamental shifts are altering the nature of global commerce. In consumer markets, the shift is from Western to Eastern dominance, where the majority of growth is occurring. Resources that once were plentiful are becoming scarce. More countries are continuing to move away from planned economies to quasi-marketor market-based systems of competition. In short, we are seeing a set of major shifts that are changing the underlying structure of competition on the world stage and establishing a new playing field. As a strategy designed to help companies succeed in this new environment, innovation is rising to the fore. According to PwCs 14th Annual Global CEO Survey, innovation has gained prominence among global chief executives strategic priorities
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No longer focused on generic products and services suited to all markets, CEOs are basing their innovation efforts on their customers needs, wherever in the world those customers happen to be.

as a means of boosting revenues and reducing costs. In fact, for the first time, CEOs say they are just as likely to focus on innovation to achieve growth as on exploiting existing markets. (See Figure 1.) But approaches to innovation need to keep pace with the dramatic changes occurring in the global business landscape. No longer focused on generic products and services suited to all markets, CEOs are basing their innovation efforts on their customers needs, wherever in the world those customers happen to be.

According to our survey, they are using innovation to win battles on two fronts by simultaneously increasing new revenues and driving efficiencies. no firm is immune When people and companies face tumultuous environments, a normal reaction is to retreat to the known, nervously hoping that change will mercifully pass by without effect. But this is a dangerous assumption. We now inhabit a world where threats may arise quickly and unpredictably.

Take the case of a conglomerate based in a developing nation that created a refrigerator specifically for the rural residents of its home country. The unit employs innovative technology to maximize affordability and functionality, relative to other goods in its class. Low-cost products such as this will benefit the more than two billion developing-world consumers who have a limited amount of money to spend. While competitors in the cooler or fridge business need to take heed, companies in any industry that are not paying attention to similar developments may be blindsided by a disruptive innovator who resets the competitive rules, sometimes almost by accident. This is why CEOs believe innovation is critical to their near-term success. balancing innovation tensions Of course, in this challenging environment, there is no cookbook approach to innovating successfully. However, the core of innovation balance can be achieved when leaders learn to reconcile the tensions within six aspects of innovation: 1. Incremental or radical innovation

Figure 1: CEOs have a new commitment to innovation

40%

37% 31%

38%

30

29%

23%
20

20% 21% 14% 19% 17% 15% 13% 10%

20% 15% 14% 11% 17% 14% 10%

2. Management or leadership 3. Short-term results or long-term commitment 4. Open innovation or proprietary investment 5. Organic or acquired innovation

10

13%

13%

0 2007 2008 2009 2010 2011

6. One innovation processor two?

Increased share in existing markets New geographic markets Mergers and acquisitions New product/service development New joint ventures and/or alliances

Base: 2007 (1,084), 2008 (1,150), 2009 (1,124), 2010 (1,198), 2011 (1,201) Note: Percentage of CEOs who see the following as the main opportunity to grow their business in the following 12 months Source: PwC, 14th Annual Global CEO Survey, 2011

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Figure 2: Balancing innovation tensions

Incremental innovation

Radical innovation Leadership Management

Long-term commitment

Open innovation

Short-term results

Proprietary investment Organic newness Acquired newness Two innovation processes One innovation process

These six tensions present core tests for leadership; admittedly, within each it is difficult to accomplish both objectives. But if you understand the tensions it can be done. The leading firms navigate these complexities by combining action, culture, and performance to deliver ongoing innovation and value creation. That is, they understand the essential paradox of innovation: Because it injects tension into the organization, innovation is always at odds with the key executives job, which, paradoxically, is to foster that very tension. So, innovation can succeed only when there is a will to do it, an environment that fosters it, and the talent necessary to get it done. With increasing global competition and accelerated commercial improvement, more firms than ever have realized the urgent need to master these tensions, and to do so sooner rather than later.

Tension 1 Incremental or radical innovation Should companies aim for incremental or radical innovation? The answer is both. As Chris Wasden1 points out, If you look at the gross domestic product of the world over the last centuryyou see an exponential increase in the past 150 years due to the power of innovation. Innovation powers all human progress. But, as Chris goes on to state, The job of leadership is to make the current organization lean, while at the same time, creating the organization of tomorrow. This is a fundamental job of the C-suite, and it is not easy! Why is embracing both radical and incremental innovation hard? There are many reasons; first among them is that when radical innovation is on the table, the tendency is to treat it like incremental
1 Chris Wasden is a managing director in PwCs Advisory practice, focusing on strategy and innovation.

innovation, because that is the comfort zone where measurement is easy and return on investment is predictable. After all, most business school curriculums and management training programs foster such an approach. The result is that companies reward those who make the current organization run smoothly. Many of todays leaders rose to the top by playing the existing game better than anybody else. Distribution partners, and even customers, prefer the traditional path because they want tried-and-true solutions, products, and services. Unfortunately, those attitudes, while necessary under certain circumstances, are anti-innovation. I suspect that if a major music label that serves artists had gone to its customers back in the 1990s with a value proposition of selling one song at a time instead of selling complete albums, their talent would have rejected the idea. Apple succeeded in doing this very thing because it had no vested customers in the music market.

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Figure 3: Innovation funnel

Idea creation

Selection and testing

Scaling

Tension 2 Management or leadership When it comes to innovation, companies need to decide how to strike a balance between managing the process and leading the context. If you read scores of books on innovation, the image of a funnel will be embedded in your mind. This funnel begins with idea creation, progresses through selection and testing, and terminates with scaling. Most of the books will also speak to the importance of managing a portfolio of innovationsbecause, as with any investment, investors in innovation should diversify their risks. All organizations need a funnel for innovation. The easiest way to understand this is to ask a simple question: If someone in an organization has a great idea, does that person know where to take it? If the answer is no, then the organizations innovation process needs improvement. My colleagues and I recently conducted a survey of more than 5,000 employees of a global insurance

carrier, and we found that they wanted to innovate. They also believed that their organization could innovate, but they did not know where to take their innovative ideas, and they did not have faith that the organization could manage the process of listening to new ideas, sorting them, funding them, and building them. These attitudes indicate that this company, like many firms, does not have the fundamental funnel process in place. Leadership, whose job it is to fix this problem, can do so by applying the focus, analysis, money, and commitment required. But thats the easy part. The trickier part is leading the context of a companys top executives, their management teams, and their organizations. This involves several fundamental questions leadership needs to ask and answer: Am I hearing the best ideas? Are my people plugged in to the fact that a breakthrough idea may be coming from anywhere? Can I see what might strike our industry from an entirely different angle?

Other critical questions are: What ideas do we consider? Whom do we interact with? Whom do we do business with? Put another way, the innovation space that a firm occupies is bounded by what the organization thinks, by the people with whom the organization regularly interacts, and by the customers with whom it does business. If a companys innovators compare their organization with others in its industry, that companys innovation will be constrained by what those innovators know. If they are in dialogue with those outside their firm, industry, and social sphere, the chances of innovating are better. A look at the history of entrepreneurs shows that they have deep hobbies and passions outside of work that find their way into new inventions or ideas. As with samurai Miyamoto Musashi mentioned earlier, a broad context can lead to competitive advantage.

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Despite what pundits say, organizations need not tolerate failure in order to innovate. The problem is not tolerating failure. Rather, it is a matter of understanding that no revolutionary approach that I know of has ever been right the first time.

Tension 3 short-term results or long-term commitment Despite what pundits say, organizations need not tolerate failure in order to innovate. The problem is not tolerating failure. Rather, it is a matter of understanding that no revolutionary approach that I know of has ever been right the first time. Senior executive teams that understand innovation also understand how to make an innovative difference in the marketplace. They know that even as the teams in the firm create new and improved ways of doing things everything from checking out at the local supermarket to improving the interface to a cars navigation systemthere will be

from time to time a revolutionary approach to the market that might not immediately go as planned. It is this type of noble failurewell executed and seeking great valuethat should be tolerated. Let me offer an example involving Dave Pottruck and Charles Schwab, at the time, co-CEOs of Schwab, a major investmentservices company. The organization was trying to create a no-load mutual fund marketplace. Schwab had invested millions of dollars in the platform, which allowed them to enable a customer to have multiple accounts across many mutual fund providers. Despite the fact that Schwab had collected almost $2 billion in assets on this

new platform over an eight-year period, it was not the game changer that management expected. Yet, the firm continued to invest and to try to figure out how to make this good idea into a great idea. Pottruck and Schwab decided to do an experiment in which the firm did not charge its customers anything to purchase a new mutual fund within its portal. This was radical because, at the time, investors who wanted to purchase new funds were required to pay a Schwab transaction fee to purchase a third-party no-load fund. Without yet having any other sources of revenue associated with these transactions, Schwab waived its fees at these test branches to see

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Even in this world of increasing openness there is a very valuable role for a closed approach when it comes to innovation.

what customers would do. They found that customers flocked to Schwab because they had enormous choice without any extra costs. Schwab then used this experience of enhanced volumes to negotiate with a pilot group of no-load funds to absorb Schwabs fees. Thus, the No-Fee, No-Load Mutual Fund Marketplace was born. The idea was a huge success, resulting in the firms garnering hundreds of billions in assets. Pottruck and Schwab had in effect changed the entire nature of the pricing and power structure in its industryand almost all companies have followed suit. However, as Pottruck is quick to note, they had it wrong for years before they got it right. In other words, they were willing to tolerate what Pottruck calls noble failure on their way to success. That is the challenge for senior management.

Tension 4 open innovation or proprietary investment There is much energy around the notion of open innovation, and the stories are compelling. One need only look at iTunes, or talk with an executive at Procter & Gamble (P&G) to see the power of involving customers, suppliers, traditional partners, and even some non-traditional ones in the process of innovating. As the saying goes, No one is as smart as everyone. At the same time, great fortunes are made in types of businesses that are extremely closed, from investment banking, to drug creation, to computer software. Many

institutions aggressively protect their intellectual property and stop others from using itoften to great advantage. So, even in this world of increasing openness there is a very valuable role for a closed approach when it comes to innovation. In determining how to achieve the right balance of open and closed innovation, there are three key questions to consider: 1) What parts of the project are open to whom? 2) For what purpose? 3) Who gets to extract the value? For a detailed discussion of each of these questions, see Two views on page 22.

Innovation at HCSC

things that will fundamentally change the system. Everybody will benefit. While using technology in a new way means big changes for HCSCs customers, it also means a radical shift for the company itself and for the healthcare industry. Nutting explains: Weve always focused on providing innovative solutions and services to our customers, and now technology is helping us to do that quicker and better. These tools are intended to empower our members with better information and to become better consumers of healthcare. HCSCs mobile innovations include public sites that allow customers to shop for insurance and to find physicians and hospitals. Features include the ability to check on claims and other coverage matters and to access information on specific conditions such as maternity care and on managing specific diseases such as diabetes. Were using Facebook, YouTube, and Twitter to take customer engagement to another level, says McGuffin. We want to stay connected to our customers. Our objective is to be a partner for life.

At Health Care Service Corporation (HCSC), the countrys largest customerowned health insurer, innovation is not a luxuryits a necessity. Healthcare reform and changing customer expectations are just two of the challenges facing large organizations like HCSC and their customers. Another is rapidly rising costs. As Paul Nutting, HCSCs senior director, electronic commerce notes, If we dont innovate, rising costs become a problem for everybody. Large employers cannot afford continuous cost increases and still compete in their markets. So for us as an organization, we have to innovate just to stay in business. In response to these challenges, HCSC has launched an innovation program that it hopes will fundamentally change the way healthcare is delivered. A key aspect of the program is technology innovation with a particular focus on mobile and social media. Addison McGuffin, HCSCs vice president, business technology innovation explains why: Children today cant remember a time when there wasnt a Facebook or an Internet. We have to be able to connect with that new consumer and understand their priorities.

After considering a number of alternatives, the mobile platform seemed the best means of achieving that goal. As Nutting sees it, the mobile platform offers a unique opportunity for HCSC to engage with its customers and take costs out of the system. Almost everyone has a mobile device that is dramatically accelerating communication and connectivity, he says. When we looked at our capabilities and at what we wanted to achieve, the mobile platform seemed the logical choice. Today, HCSC is focusing on using mobile devices to help physicians get the information and tools they need to provide personalized and cost-efficient care. They are also developing mobile applications that help people better manage and track their illnesses, which is information they can share with their physicians. According to Nutting, these capabilities working together can start to dramatically change how healthcare is delivered, can help to keep people healthier by encouraging and enabling prevention, and can significantly reduce costs. These things are a small subset of the innovation going on in healthcare, he says, but they are enabling other

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A robust and continuing appetite exists for organizations to acquire their innovation in addition to building it. It is vital for senior executives to keep in mind the ability to bring in, through investment, that which cannot be homegrown.

Tension 5 organic or acquired innovation Most large organizations acquire that which they cannot build. Whether it is Google buying YouTube for $1.65 billion in stock back in 2006, or P&G purchasing Gillette, a robust and continuing appetite exists for organizations to acquire their innovation in addition to building it. It is vital for senior executives to keep in mind the ability to bring in, through investment, that which cannot be homegrown. Some organizations buy others to acquire strategic capacity. Others do it to grab a position in a growing market before it is too late. Still others acquire to expand their product lines. The vital insight in this increasingly competitive environment is to keep in mind that all innovation decisions are also

build-versus-buy decisions. It is almost always possible to acquire the innovation you might want, or at least the germ of an innovation that your organization needs. For most companies, it takes an enormous amount of managerial courage to acquire an organization within their sweet spots because of the underlying fear that they have been bested on their core turf. It is vital for all organizations, as they look at their own innovative capacity, to decide if they are better off living with the known risks of acquisition and integration. And they are manifest. For example, US sources place merger failure rates as high as 80% and evidence indicates that around half of mergers fail to meet financial expectations.2 Nevertheless, acquisition is always on the tableespecially in a fastmoving world of competitive options.

2 Cited by Toby Elwin, Mergers and acquisitions failures are project management failures, November 30, 2010, at http:// www.amajorc.com/blog/mergers-and-acquisitions-failures-areproject-management-failures#.

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78%

of CEOs expect their innovations will lead to significant new revenue opportunities over the next three years.
Source: PwC, 14th Annual Global CEO Survey, 2011

Tension 6 one innovation processor two?

The final, and perhaps most difficult challenge for senior executives is determining whether an organization needs one innovation process or two. In my experience, it is not possible for the same people, same investment committee, or same set of partners to create both incremental and radical innovation. Or at least, it is very unlikely. Companies that are still run by their founders often are willing to fund new, breakthrough initiatives. Some, like George Hatsopoulos, the founder of Thermo Electron, would spin out a new business every time someone had a good idea, and between spin-outs and acquisitions, the group grew to a few hundred companies. He managed to create an organization that delivered enormous value over the years. In addition, a robust mechanism existed to fund the new companies with capital from the core companyallowing everyone to prosper. This innovative structure allowed Thermo Electron for a time to grow into a massively profitable, multi-billion dollar company. More simply, it is possible for an executive team to have a healthy and vigorous internal process for incremental and sustaining

improvements, and, at the same time, have a different process for radical improvement or change. As a general rule, the existing capital budgeting and assessment systems of an organization are very good at incremental innovations but terrible at radical ones. The implementation approach for incremental innovations is one that is compatible with an existing companys systems, but more radical innovations often need a separate structure so that the mother ship does not overwhelm the effort. Many seasoned executives are accustomed to separating out new and different business ideas so that they have an ability to germinate outside the normal process. In general, those executives who want both incremental and radical innovation must be willing to have two innovation processes, or at least an ability to craft a unique solution when a product is created that has the potential to disrupt an entire industry. Also, management needs to be willing to tolerate noble failure from these more radically minded groupsas long as they have not had a failure of concept or execution. These might be on their way to figuring out how to reconfigure an industry.

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winning the challenge

Based on my experience helping companies to innovate, the challenge for the senior executive team is threefold. First they must decide how much they need to innovate and where growth will come from. Second, they need to create an innovation process, if one does not already exist. Third, and most important as well as difficult, management needs to assess where they are in terms of the six aspects of innovation Ive discussed in this article.

The real leadership challenge is to understand how to achieve the right balance for any organization in its particular setting. The important thing to remember is this: Innovation is coming to every industry; faster, and with more vengeance than ever before. With regard to innovation, the good news is capitalism is winning. Ironically, thats also the bad news. Technology and globalization have combined in a crucible from which have sprung vast new networks of supply and

As Miyamoto Musashi noted, leaders must take a close view of distant things and a distanced view of close things.

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demand. People and ideas are more connected and are moving faster than ever before. Growth is a given, and everyone wants a piece of the action. This makes for a vibrant but also hyper-competitive business landscape. And theres no going back. But the trajectory is clear. On one hand, as competition heats up, customers will be rewarded by continuing to get more for less. On the other hand, companies that innovate successfully will reward their shareholders as well. But theres another

group of companies, an elite group, if you will, that brings something more to the table in the form of a legacy of curiosity and experimentation. Leaders who leave behind a legacy of didactic thinking and normative advice are doing their organizations a huge disservice by dooming them to a future of mediocrity. Leaders who prepare their organizations for the future by leaving behind a legacy of inquisitiveness and bold thinking assure their companies a lifetime of success.

As Miyamoto Musashi noted, leaders must take a close view of distant things and a distanced view of close things. The speed of innovation and improvement is increasinga phenomenon called the law of accelerating returns. In response, the best leaders are looking again at the innovation balance of their organizations and making sure that they are prepared to encounter both the promise and the peril of a world that is changing faster than ever before. Are you among them?

Two views

Until the early 21st century, most innovation was closed. That is, it occurred within the boundaries of an organization and was performed by the companys own employees within its internal R&D function. This model is based on a number of assumptions that have changed radically in todays marketplace. These include the notions that internal resources are most reliable and trustworthy and always superior, and that closed doors stave off competition. However, in 2006, the concept of open innovation was popularized by Professor Henry Chesbrough in his book, Open Innovation: The New Imperative for Creating and Profiting from Technology. Under the open innovation model, by inviting customers, partners, and other stakeholders to participate in the innovation process, companies can and should take advantage of the wealth of knowledge that exists outside of the organization, and, conversely, share their knowledge when doing so does not jeopardize their own competitive positions. Open innovation employs such techniques as crowdsourcing, whereby large numbers of people are invited to contribute ideas around an innovation goal. Open innovation is greatly facilitated by the meteoric rise of social media, blogs, wikis, and other Internet-enabled communications. Both models are employed today and each has its place, depending on a companys innovation goals. Have you thought about which model is right for you?

Closed innovation

Open innovation

Rationale

Exploits talent and knowledge that are known quantities. Keeps competitors at bay. Protects intellectual property. Provides maximum control. Reduces time to market.

Cost effectively expands an organizations talent base. Provides insight into customer attitudes, needs, and concerns. Places the broadest range of ideas on the table. Shares and therefore mitigates risk. Provides insight into the unique features of a new product/service.

Suitability

Projects involving complex science or a high level of integration. Projects where secrecy or protection of intellectual property is paramount. Examples: New weapons systems, new drugs, infrastructure projects.

Projects not dependent on complex science or high levels of integration. Projects that involve products that are small scale, more open, and more modular. Projects where secrecy and/or intellectual property are not issues. Examples: consumer products, movies, music.

beyond open and closed innovation While for discussions sake its convenient to consider these two models as discrete approaches to innovation, the fact is, they are rarely applied in a vacuum. Why? Innovation is almost never an either/or choice. As most companies have discovered, their innovation goals involve a complex mix of closed and open innovation that is uniquely tailored to their innovation objectives. So how is this mix configured? One approach is to analyze each innovation project through the prism of three questions: 1) What parts of the project are open to whom? 2) For what purpose?

3) Who gets to extract the value? If these questions are asked and answered in advance of an innovation project, both closed and open innovation practices can be selected and adjusted to accomplish your innovation objectives. These questions are actually derived from three design principles associated with innovation: 1) architecture of participation;3 2) minimum efficient scale; and 3) value extraction and control.

3 This term is used by computer book publisher Tim OReilly to describe the nature of systems that are designed for user contribution. See his article, The Architecture of Participation, June 2004 at http://oreilly.com/lpt/a/5994.

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Innovation is almost never an either/or choice. As most companies have discovered, their innovation goals involve a complex mix of closed and open innovation that is uniquely tailored to their innovation objectives.

open only in a limited sense. The same is true with, for instance, drug development, where there is sometimes limited sharing but gated openness at best.4 Scale also comes into play when the cost of creation runs high. Companies like Intel, for instance, spend millions creating new chip plants, so some sharing is bound to occur. However, such companies are not in the business of sharing their vast process and manufacturing knowledge in any truly open way. Value extraction and control Innovation is, ultimately, about value. Depending on the product or service, value can flow to a number of constituents, including creators, investors, platform hosts, participants, users, and customers. The direction of that flow determines how open or closed the approach to innovation will be. For example, if the innovation involves an open-source software product dependent on collaboration for development, the approach will be very open and all of the value will go to consumer surplus (whats left when value produced exceeds consumer cost). If, however, the innovation involves a service that solicits customer ideas that are then approved and distributed, then the value derived is more dispersed and the approach is likely to be more of a balance between open and closed. The bottom line is that while in theory its easy to silo approaches to innovation, in reality innovation is a complex dance with many steps and rhythms that intersect and interplay as the process moves forward. Deciding how to use the optimal blend of open and closed systems to invite participation and innovation while maximizing economic value is the job of the highest levels of leadership. In any organization, understanding this is essential if meaningful innovation is to take place.
4 However, evidence is beginning to emerge that suggests pharmaceutical companies are moving to more open structures because their closed structures have failed them. See, for example, What does open innovation mean to pharmaceutical R&D and how can it be realized? at http://www.paconsulting.com/our-thinking/ what-does-open-innovation-mean-to-pharmaceutical-research-and-development-and-how-can-it-be-realised/.

Architecture of participation Basically, this is a set of rules governing who can participate in a system (in this case, an innovation initiative) and in what capacity. The higher the level of participation, the more open the approach to innovation. Not limited to innovation, the concept has broad application. For example, the classified ads section of a newspaper has a very clear architecture of participation. While within certain bounds customers have control of content, the newspaper can exclude inappropriate content and controls the format. Products like Internet music and movie services also invite participation, but there are rules. Depending on your product or service, market-based innovation always involves an architecture of participation. It is one way of determining how open or closed your approach to innovation can or should be.

Minimum efficient scale Minimum efficient scale involves the lowest cost at which a product or service can be produced and helps determine how competitive the product or service will be in a given market. This impacts the innovation investment and how open or closed the innovation initiative will be. For example, if the innovation is likely to involve millions of dollars and result in an innovative product in a market with a large number of competitors, the approach is likely to be more closed than open. The idea of minimum efficient scale can be related to many things, and in particular R&D. So, for example, when the CAT scanner was first invented, a huge amount of R&D investment was needed to get the first one out the door. Some sharing of risk occurred, but the innovation process was

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By Christopher Wasden
Christopher Wasden is a managing director in PwCs Advisory practice, focusing on strategy and innovation.

InnoVATIon sCoReCARD

Measuring innovation Lessons from the medical technology industry

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As businesses increase their focus on innovation, one logical question often bubbles up: How are we doing compared with other companies? This desire to benchmark innovation efforts against that of industry leaders and competitors isnt limited to the private sector. Other crucial partners in innovation, such as the academic research community or regional and national governments, are just as interested in seeing how they stack up: Are we competitive? What defines a leaderor laggardwhen it comes to innovation in our domain?

innovation pillar. (See Figure 1.) Based on this comprehensive data foundation, we forecast their performance to 2020.1 What did we learn? The very nature of industry innovation is changingboth the definition of what constitutes value and who determines it. Previously, the physician was the primary decision maker, often selecting technologiesand assigning valuebased upon features and functions but not necessarily on their ability to decrease healthcare costs while improving outcomes. In the new era of healthcare innovation, governments, consumers, and private insurers are demanding a different kind of value, one that prizes healthcare that is smaller, faster, and less expensive, enabling delivery of care anywhere and helping to reduce healthcare costs. With innovation essentially being redefined, the locus of the medical technology industry, which has long been the United
1 For a detailed discussion of our methodology, see Appendix, PwC, Medical Technology Innovation Scorecard: The race for global leadership, 2011.

For many, innovation might be characterized as an Ill-know-it-when-I-see-it experience. And, as we explain in our cover story on page 10, innovation is born out of an organization in which the culture supports a dual-pronged approach to creating new value: 1) improvement-focused efforts and 2) invention-driven ones. With so many moving parts, then, can you really distill the investment and activities of a company, university, or country to mere scores or bar charts? Yes, we believe you canand shouldmeasure innovation. With a solid understanding of where you are now relative to your peers, and where you want to be going forward, you can better cultivate and manage innovation. PwC took this approach in a pair of recent benchmarking studies on healthcare innovation. While focused on the medical technology industry, the insights and trends surfaced are valuable starting points for any company, institution, industry, or country serious about innovation. lessons from a country-level assessment Our first study, the Medical Technology Innovation Scorecard, looked at innovation from a country perspective. We assessed the capacity for innovation of nine countriesBrazil, China, France, Germany, India, Israel, Japan, the United Kingdom, and the United Statesselected because

of their strong medical technology market and innovation potential. We collected and analyzed data for the 2005-2010 period, composed of dozens of metrics organized by what we call innovation pillars, crucial supporting factors for innovation like powerful financial incentives and a supportive regulatory system. Using these, we then calculated each countrys overall innovation score, as well as scores for each

Figure 1: Medical Technology Innovation Scorecard sample This 2010 sample from the Innovation Scorecard shows how China and the US compare on 10 key dimensions, and the full data set reveals that the US is experiencing the most rapid relative decline, while China is accelerating most rapidly.
United States China

Powerful financial incentives Market incentives Healthcare incentives Leading resources for creative output Innovative resources Innovative output Supportive regulatory system Regulatory approval process Legal environment and impact Demanding and price insensitive patients Demand for healthcare Needs and infrastructure Supportive investment community Investment environment Medical technology 5.8 8.5 3.2 2.7 8.3 5.9 1.6 3.2 5.3 8.3 5.7 4.0 6.8 7.7 2.0 3.5 5.5 9.0 6.8 1.6

Scores are calculated on a scale of 1 to 9, with 9 being the best rating possible for each dimension.

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States, is also changing. Emerging-market countries such as Brazil, China, and India, despite their comparatively less well-developed healthcare system infrastructures, are quickly taking the lead in developing so-called lean innovation or frugal innovation. For example, with frugal innovation, innovators refine process to the point that they can deliver high volume and high quality at a low cost. Such is the case with Dr. Devi Prasad Shetty in Bangalore who has perfected a $1,500 heart surgery by optimizing processes and applying supply chain principlesthe same procedure with the same quality outcomes would cost more than 50 times as much in the United States. While healthcare consumers will begin having greater influence on innovation than they have today because they are bearing more of the costs, those in the United States may find themselves unable to readily access new products and services. Our study

found that many companies are increasingly going outside the United States to garner clinical data, register new products, and begin earning revenue. Today, due to differences in the regulatory process in Europe and other regions, compared with the United States, they are going first to market in Europe and, by 2020, they likely will move into emerging-market countries before taking on the United States challenging regulatory environment. Countries are finding that a superior regulatory process can create a competitive advantage, compared with the United States, where the FDA struggles to keep pace with medical technology innovation. While at first glance, these insights may seem obvious to those in the medical technology industryand many other industriesthe significance of the Innovation Scorecard is that there is hard data to back up the assertions. The

Scorecard also illustrates how the industrys innovation pillars have changed and reveals a new set of factors that will be crucial for countries and companies as they seek to foster innovation going forward. This new paradigm for the future will require medical technology companies to provide systembased solutions that deliver valuea radical departure from the current featurefocused approach that drives the system toward higher volumes rather than value. lessons from an academic research center assessment Our second study on healthcare innovation focused on academic medical centers and was conducted in partnership with Memorial Sloan-Kettering Cancer Center (MSKCC).2 Universities represent an
2 PwC and Memorial Sloan-Kettering Cancer Center, If innovation isnt measured can it be managed? How universities manage innovation through disciplined and novel measures, 2011.

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Figure 2: Innovation Scorecard example Businesses can use an innovation scorecard to understand their relative performance and identify which areas in their innovation process need improvement. Below the scorecard compares nine organizations, flagging the areas in which they ranked eighth or ninth as needing improvement.

Overall score (9 = high 1 = low)

6.1 3

5.9

5.7 7 1 2 2 7 3

5.6

5.2

4.8

4.7

4.3

3.5

9 4 3 3 6

8 6 6 4

1 7 8 8 3

5 3 7 5 5

8 8 4 1

2 2 1

Ranking (1 = high 9 = low)

2 2 1 2 2 4

4 9 5 9 1

5 4 5

8 6 6 6

6 9 7 2

9 1

8 3

4 9 8 3 9

7 5 7

9 7 8

Organization Organization Organization Organization Organization Organization Organization Organization Organization A B C D E F G H I Market Institutional Yield Productivity In/outreach Services Workforce Resources Needs improvement

essential component of the innovation value chain, thanks to their resources and their knowledge of how to generate technologies that can improve peoples lives, create commercial value, enhance the prestige of the institution, and further advance research and development. But until innovations are shown to have economic value, these benefits are not fully realized. Thats why the commercialization services of universities technology transfer offices (TTOs) are so important. But why are some TTOs more successful than others? To find out, we created an Innovation Scorecard that applied the same principles as our other study but was tailored to the academic research community. We sought to identify the leading practices that can be applied and then measuredto better manage the innovation process in the university setting.

From our analysis, three major themes emerged: 1) Leading practices varied considerably across institutions in their approaches to patenting, networking, marketing, funding structures, and licensing, resulting in measurable differences in workflow processes and outcomes. 2) No institutions excelled in all innovation dimensions, indicating that all could benefit from applying the leading practices performed at other universities. 3) No institutions have a robust system for measuring and managing leading innovation practices. Even with so much room for improvement, the university environment is ahead of most businesses in supporting and measuring innovation because of decades of open innovation and commercialization of their intellectual property. The corporate world is only now beginning to look for better ways to support and accelerate innovation and can learn from the leading practices and measures used in universities.

Measures of success Both Innovation Scorecard studies underscore why measuring innovation in an objective way and tracking progress over time are crucial parts of the innovation process. Today, very few companies, universities, or countries measure innovation, and, if they do, they often rely on incomplete measures. But by taking a comprehensive approach to measurement, they can better drive innovation in their organizations.

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Innovation and technology

The anytime, anywhere business opportunity How mobility is redefining the way organizations work

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By Thomas R. Johnson
Thomas R. Johnson is an Advisory principal in PwCs Retail and Consumer practice.

No longer viewed as a strictly consumer phenomenon, smart devices enabled by wireless data networks are getting down to business. Companies operating within all kinds of value chains are embracing them to improve processes, enhance collaboration, and reduce costs. But those benefits are only the beginning: The real payoff comes when companies begin looking at the full spectrum of business mobility and how it can create new value for the organization, its partners, and its customers. Businesses are reaping productivity gains in the near termwhile paving the way for more-innovative business activity in the long term. In this article, the first in a series, PwC Advisory principal Thomas R. Johnson examines how mobility can transform businessand why formulating the right strategy for the organization is the first step.

While just 12 to 18 month ago, smart devices like the Android, iPad, PlayBook, and Xoom were barely on the corporate radar screen, business leaders nowadays are starting to take them seriously. In PwCs most recent global CEO survey, 88 percent of US CEOs say they expected to make some change or significant change to their business strategies in the next three years because of consumers increasing use of mobile devices and social media. Additionally, 46 percent say their information technology (IT) investments will be made primarily to support growth initiatives and take advantage of emerging innovations, such as mobile devices and social media.1 Take the airline industry, for example. When pilots at charter airline Executive Jet Management need to review a flight plan, they no longer wrestle with paper charts or access the information via specialized laptops. Instead, its only a matter of tap, tap, done. Thanks to an Apple iPad mounted at knee level in the cockpit, pilots can quickly zero in on the information they need, bookmark it for later reference, or make relevant notes.2

Executive Jet Management is one of the first carriers to win approval for exclusive use of iPad-based navigational charts no paper-based backups are required. The company has worked closely with the Federal Aviation Administration and the application developer to rigorously test the safety of the device, whose approval represents a significant milestone, paving the way for large commercial carriers to follow suit. Meanwhile, commercial carriers such as Alaska Airlines3 have begun testing similar applications or are in the planning stages of doing so. Eliminating industry-standard paper manuals or laptops is a productivity win for the airlines. Pilots can more quickly access information, and they no longer need to lug around 20 pounds of manuals or a heavy laptop. But more than that,
1 PwC, 14th Annual Global CEO Survey, 2011. 2 Executive Jet Management press release, http://www.executivejetmanagement.com/articles/pr20110211.asp. 3 Alaska Airlines testing iPads in cockpits, Seattle Times, March 5, 2011, http://seattletimes.nwsource.com/html/sundaybuzz/2014402413_sundaybuzz06.html.

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might design apps that serve as intelligent agents, interacting directly with the aircraft to handle routine tasks precisely and automatically according to the pilots instructions or the airlines policies. What began as a more convenient way of accessing navigational information ultimately is creating a disruptive ripple effect for pilots, airlines, even the whole industry: How can apps improve safety and service? How should pilots be trained to better utilize the technology? Do aircraft systems need retooling to better integrate with smart devices? And this kind of transformation isnt limited to the airline industry. Forward-looking business leaders across the board are considering mobile business opportunities from two perspectives: 1) How can we boost productivity in the next one to two years? and 2) Where can we add real value or make transformations in the next decade?

busting mobility myths At present, business mobility may be garnering leadership attention, but we believe that the current focus may not always yield the best results. In our experience, companies often look at mobility too narrowly or only through the lens of technology. The danger is that they will not reap the biggest payoffs. To help ensure your company is looking at the full range of possibilities, here are four mobility myths to be mindful of. Myth 1: Mobility is about the consumer. In many organizations, mobility is automatically pigeonholed as part of consumer marketing, customer touch points, and other externally facing activities. While we believe consumer mobility initiatives are essentialvirtually all consumer-facing businesses will need to develop the right strategythey represent just one side of the coin. The other sidemobility for internal or business-to-business projectsholds the

an iPad in the cockpit opens up a world of possibilitiesboth in the near term to improve productivity and in the long term to transform an organization. More-immediate payoffs include using tablets to accomplish tasks currently handled by other systems, such as GPS, weather information, and crew scheduling. And as carriers take a longer view, they

promise of being truly disruptive. Companies will want to take a balanced approach, looking at mobilitys role both inside the business and in the consumer marketplace.4 Myth 2: Mobility is about IT. It goes without saying that technology is a fundamental part of a companys mobility strategy. After all, there are several important technology decisions to make: Do we standardize on a single device platform or support a bring-your-own-device model? Which app programming environment is right for us? How do we implement robust security? Do we have the wireless connectivity, trusted data, and rich media available? But these are decisions best made in support of a mobile approach that is integrated with a companys primary business strategy. Organizations that relegate mobility to the IT shop miss out on the broader perspective of the leadership team
4 For a detailed look at how businesses are using mobility to better engage customers and enhance their brand, see the second part of our series, The anytime, anywhere customer, in the next issue of View.

and key business users. And for their part, company leaders beyond the CIO will want to have a high-level understanding of the enabling technologies that make the mobile strategies realities. Myth 3: Mobility is about the device. While smartphones and tablets are symbolic of the mobile opportunity, theyre really just the tip of the iceberg. PwC defines mobility as an organizations ability to digitally connect employees, assets, suppliers, partners, and consumers from any location and in real time. This broader vision, beyond smart devices and apps, is about the business prospering in the post-PC era, which contains new possibilities for working and for creating new products and services. Mobility is not just about data on a device; its also about the capability to deliver interactive media in real time, including video, high-definition images, and searchable

knowledge. The linchpin here is operational data, combined with GPS location information and relevant rich media. Companies will be able to use mobile devices to access, analyze, and exploit real-time business eventsoften via the cloudby using current business systems, as well as new, sensor-rich ones, such as highly calibrated restaurant equipment, truck trailers, aircraft, and other devices with embedded systems. Myth 4: Mobility is about apps. Instead of wondering how to adapt digital newspapers, gaming, and e-books or any of a number of popular consumer apps to a business context, bigger thinking yields better results. How will greater sensing capabilities and a variety of intelligent devices affect the way an organization works? Mobility runs the spectrum from apps to agents. A business will be just as interested in an expense-reporting app on a BlackBerry as it will be in a softwarebased agent that automatically reroutes a repair vehicle in response to real-time traffic data and notifies the registered customer of the new estimated time of arrival.

why the time is now The picture of the anytime, anywhere business is a compelling one. Like other recent business revolutions, such as the Internet and e-commerce, the impact is already being felt, albeit incrementally. If they havent already, employees, partners, and customersmaybe even boards of directors, toowill demand to know just what a company is doing with mobility. For example, the next generation of company leaders will be digital nativesthose born in the digital age and who have so fully embraced smart devices that theyre already integrating them into their work lives, with or without corporate blessings. The same goes for other early adopters in an organization. Chances are that departments or business units in many organizations are already experimenting with one-off business mobility initiatives. The initiatives dont necessarily need to be reined in, but their lessons need to be considered and integrated into

coherent strategies. The best managers will apply the lessons learned from the projects to other areas as the organization moves on to the next level of real productivity improvement. Also, disruptive technologies bring with them special challenges. In the case of mobility, while the technology is rapidly maturing there remain questions around interoperability and security, among other long-term implications. Nevertheless, in our experience, more and more executives are discovering that businesses cant afford to wait, and the approaches they take need to be well thought out and disciplined. In each instance, theyre considering both the near-term and longterm implications of their strategies. More specifically, operations leaders will be asking, How can we improve the productivity of our resources by eliminating routine tasks through smart apps and trusted data? And those in IT leadership roles will be asking,

What are the functional requirements, data, and apps we need to get started? To begin along this path, its helpful to think of the opportunities as falling into three domainswhat we refer to as the three Fs: on the floor, in the field, and in flight. on the floor Mobility efforts on the floor refers to those that focus on internal business processes: inside buildings and locations. In some cases, that may mean adding smart devices to an existing process flow, but often its about rethinking the way work is done so as to take advantage of mobile capabilities. Several examples of that are already taking place in the healthcare industry. In particular, many hospitals are addressing an all-too-common pain point for physicians: the fact that viewing up-to-date patient information is time-consuming and cumbersome. For each patient on rounds, doctors have to log on to a computer and use

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Figure 1: Physician interest in performing tasks wirelessly

86%

83% 74% 63% 60% 57%

Access EMRs

Prescribe medications

Monitor patients in hospital

Initiate/track referrals

Communicate with patients

Monitor patients outside of hospital

Source: PwC Health Research Institute, Physician Survey, 2010

disparate systems to access test results, chart information, radiology images, and other relevant information. In a survey of 1,000 physicians conducted by PwCs Health Research Institute (HRI), one-third said they make decisions for nearly 70 percent of their patients based on incomplete information. And only half of physicians surveyed access electronic medical records (EMRs) while visiting and treating their patients. They believe the greatest benefit of mobile devices will be to help them make decisions faster as they access moreaccurate data in real time, with 56 percent saying mobile health would expedite decision making.5 From small private practices to large health systems, mobility is being viewed as a way of giving doctors a comprehensive view of a patient from wherever they are in the hospitalor even outside it. Providers are taking different approaches to enable clinicians to view patient data on wireless devices. Some organizations have built portals that pull data from other hospital information

systems, thereby enabling secure display on a phone or tablet. The data reside on the core systems, but doctors can access an integrated and up-to-date view of a patient as they make their rounds.6 Other providers, especially those in smaller practices, are adopting EMR applications that are cloud based. They can use the EMR from any Web browser: via computer, tablet, or smartphone. Tablets, in particular, have proved to be popular choices because they resemble paper charts in their look and feel and have been easy for physicians and patients to get used to. Healthcare providers are also piloting mobile apps that improve workflow. In the HRI survey, after EMR access, the other top areas of physicians interest included prescribing medication and monitoring patients in the hospital. (See Figure 1.) In current pilots, some organizations are conducting
5 PwC Health Research Institute, Healthcare unwired, 2010. 6 Ibid. 7 Ibid.

consultations over a mobile video network or using a physicians mobile device to electronically prescribe medication.7 In the field Looking at how mobility can be used outside a companys four walls is an important part of the mobility strategy, enabling companies to operate more effectively with field teams, partners, suppliers, distributors, and customers. In our experience, companies find a multitude of opportunities to boost productivity and generate value in the field. For example, they look at how mobility can make their sales teams, service fleets, or customer service agents more effective in the field. Consider the case of Nationwide. It was the first insurance company to come out with an iPhone app, which was aimed primarily at its policyholders. It then turned its focus inward, looking at how mobile technology could help its claims adjusters, a user group that has generally embraced emerging

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The real transformative application for workers on the go is mobility for reducing travel or changing what it means to be a worker on the movewhether traveling across the factory or to a distribution center, or taking the train to Boston for a supplier visit.

technology. Nationwide developed a mobile app that agents use for capturing photos and data at an accident site and uploading it to the claims management system. Instant access to the system via the cloud helps speed claims processing.8 Looking beyond those immediate productivity gains, Nationwide is considering how mobile devices can improve the way its agents work and interact with customers. For example, the company envisions an app that might take on some of the work a claims adjuster would do when assessing a hurricane-damaged house: Could an app take advantage of multitouch capabilities

and the devices GPS to start pulling in specific coordinates? Can an adjuster use the device to measure the size of a hole in a roof? How else can the device make the adjusters job easier and the interaction with the customer more seamless?9 Field mobility also opens up considerable opportunities for businesses in the consumer packaged goods and retail industries. While many retailers have focused first on consumer initiatives, such as those that let customers call up detailed product and inventory information on their smartphones, many are now looking at how to build upon those early forays to deliver more value. Generally, such consumer efforts have been well-received by customers, but more important, they better position companies to embark on mobility efforts that can increase revenue and service opportunities. For example, by applying the lessons learned from consumer initiativessuch as how to program for the mobile environment and how to package and deliver a sizable amount of product datahard-line retailers might look at how to grow their servicing business. Imagine the revenue potential if a field technician
8 PwC Center for Technology and Innovation, Unleashing enterprise mobility, Technology Forecast, 2011. 9 Ibid.

could access detailed product and service information for a range of products not just the initial one that originated the service call to the customers house. Another way mobility can help field service technicians is through optimized routing. For example, grocery retailers might install remote diagnostic sensors in refrigerators, freezers, and rotisseries that feed to technicians certain hourly updates on equipment performance. The service techs, with the help of the app, could then organize efficient routing to fix the equipment before it breaks. And that savings is in addition to gains realized from increased utilization of service techs. Field mobility is also important for supply chain collaboration, as exemplified by other early initiatives weve seen. Many consumer product companies have begun to enable field sales staff to access the companys customer relationship management system via mobile devices. The benefit is that salespeople have access to up-to-date information, and in turn can more easily and quickly enter their own data remotely so that everyone can get a clear picture of the sales pipeline.

Now, companies are exploring ways of adding functionality that takes on more tasks a field rep might do. For example, a smart tablet could use sensing technology to automatically populate the device with only the SKU and promotional mix relevant to the store the rep was visiting. In flight For businesspeople across industries, all too often much of the workweek is spent in flight. That is, they are in constant motion by moving from building to building, driving out to see clients, or traveling by plane to visit global locations. It all adds up to a loss of productivity when decision makers are cut off from the business applications and information they need to guide their teams or respond to a crisis. Of course, with the introduction of the BlackBerry in the late 90s, followed by a new generation of smartphones, the idea of having an office in your pocket began to take hold. Employees could now get to e-mail and view basic documents, but they were still at a considerable disadvantage when compared with working directly through corporate systems. Now, however, thanks to the combination of mobile-

accessible, cloud-based business applications for office productivity, enterprise resource planning, customer relationship management, and other business apps, this has begun to change. Yet even more potentially powerful is employees ability to combine corporate information with rich third-party data, also accessible from their devices. Consider that traditional knowledge management hearkens back to an era in which the enterprise information system was all that was online. Employees had access only to internal IT resources. Now, in the era of the smart handheld, employees have anytime access to external resources. The new smartphones and tablets take advantage of new classes of applications that facilitate easier commingling of knowledge and information sources on the public Web. They also facilitate context-aware computing, which is computing that benefits from human-assisted, sensor-rich mobile handhelds for timely location, personalization, and environmental input. For example, a salesperson about to visit a prospects headquarters can automatically learn about a local customers team and connections

before walking in the door. Or consider if the sales call gets canceled at the last minute. Thanks to a social networking app and sensing technology, the salesperson could instead instantly call up a list of potential targets and contacts available in the immediate vicinity for visiting. Beyond those productivity gains, the real transformative application for workers on the go is mobility for reducing travel or changing what it means to be a worker on the movewhether traveling across the factory or to a distribution center, or taking the train to Boston for a supplier visit. For example, a store buyer could forgo site visits if factory or farm personnel could use the video capabilities of mobile devices to enable buyers to view and inspect products virtually. Or new store managers could use tablets to access real-time store data and affordably take part in videobased interaction at their location instead of traveling to headquarters for training. building your mobility strategy Business mobility will mean different things to different organizations depending on an organizations industry, unique business challenges, and level of investment. But

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regardless of the variables, certain common approaches can help any company best position itself to take advantage of mobility todayand in the future. To begin, companies can consider the following maturity model for business mobility, identifying where they sit today and where they would like to progress in 2, 5, or 10 years. The model identifies four distinct levels of maturity that focus on how mobility redefines the ways organizations work. (See Figure 2.) As companies ascend the levels, the payback moves from productivity gains to value creation. At the same time, the role of technology needed to transform the organization becomes more important. At lower levels, technology is an enabler, but the productivity gains come from changes in the way that people work. At the first level, in which mobility initiatives are used to reduce task times, the apps are simple and a primary component involves integrating mobile devices with the companys core systems like enterprise resource planning or performance reporting. At the second level, the goal is to accomplish more tasks in the same amount of time. To do this, companies look closely at workflow, required content, and decision trees, embarking upon process redesign and creating tailored apps that may take advantage of device capabilities like GPS. Lean or Six Sigma methods can be useful for redesign of work activities that take advantage of mobility. At the third level, companies consider how to reduce the level of effort required to get the job done. Here they might totally change the way work is perceived and

completed, tapping into operational data in real time through smart devices and sensing technology. At this level, the mobility initiatives are likely parts of a larger strategic effort to transform the organization by automating, digitizing, and modularizing processes called digital transformation. Finally, when organizations reach the fourth level, where the goal is the elimination of tasks, the focus is on collaboration with partners. At this level, organizations look at how mobility can help transform their value chains and how they can create apps that better integrate with their partners operations, systems, content, and data in real time. Organizations also consider

what additional external information or collaborations can serve to inform the best immediate decision making either in the field, on the floor, or in flight. From enhancing productivity to transforming the business Mobility is set to transform business in ways we can only begin to imagine. And as with other disrupters like the Internet, companies cant afford to sit on the sidelines. While we dont see the mobility opportunity reaching a steady state for a number of years, organizations can realize real business benefits in the near term. Companies that develop sound, disciplined strategies and that have gleaned lessons from early mobility efforts will be wellpositioned in this new era of working.

Figure 2: Business mobility maturity model

Level 4

Eliminating tasks Value chain transformation Value chain data integration Value chain apps
Level 3

Reducing level of effort Digital transformation Operational data integration with smart devices Strategic apps
Level 2

Level 1

Completing more tasks in same amount of time Process redesign Rich media over wireless GPS location awareness Tailored apps

Reducing task time Touchscreen Wireless data ERP/BI integration Simple applications
Source: PwC Role of technology Role of people

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Business mobility essentials

field, and in flight. They begin looking at concrete ways they can use mobility to reduce task times (Level 1 in the maturity model), progressing to more-advanced levels in the model. By focusing efforts on real scenarios, the organization can create a future-state blueprint that is specific and attainable. As organizations think about new ways of working or new products and services that become possible due to mobility, they also consider the broader impact: What tasks or workflow are now possible? How will the organization be structured? Do we have the right skill sets? evaluate different kinds of payoffs. Leading organizations also consider the total cost of investing in the mobile solution in terms of both tangible and intangible benefits. Traditional return-on-investment calculations, based on realized employee productivity gains or improved return on assets, can be tempered with the intangible benefits that result in improvements in customer satisfaction, employee and customer retention, and competitive advantage. To evaluate the success of the strategy, they select both quantitative performance measurements as well as softer business measurements such as, Did the mobile solution make our company easier to do business with? and Did the mobile solution drive innovation in the ways people perform their daily routines? Practice risk mitigation. The watchword in pursuing mobility is discipline in everything the company does. This is especially true when it comes to making technology investments. Executives in addition to the CIO will want to understand the tradeoffs when determining the companys platform and application development strategy, among other considerations. Another important riskmitigation technique is to focus initial efforts by using pilots or limited deployments. Likewise, establishing milestones and metrics that will provide crucial data for making go-forward decisions is essential. Even when a project turns out not to be the success hoped for, smart organizations take the time to analyze the outcomes, gleaning valuable lessons to apply to future projects.

As organizations beginor progress alongtheir mobility journeys, leading organizations consider several important actions. bring together the right team. Assembling a diverse group helps company leaders set the companys mobility strategy. Beyond IT and leadership, such groups include business users who represent different groups in the organization, including early adopters of mobile devices, digital natives, and subject-matter experts. By involving such communities early and connecting with them in their work environments, leading companies become able to determine how mobility can boost productivity. They also consider individuals who can help assess changes to process, such as industrial engineers and process designers. As organizations are discovering, mobility efforts are not simply about shrinking or streamlining existing processes, because often, what emerges are brand-new ways of working. They ascertain how their current processes, practices, and workflows might change.

look beyond the companys four walls. Another important user community to involve consists of business partners, such as suppliers or distributors. By soliciting their points of view and collaborating with them, businesses may uncover solutions they might not have thought of on their own. Additionally, they seek customer feedback as they think about consumer mobility efforts. Most businesses tackle mobility on both frontscompanyfocused efforts and consumer-facing onesbut each strategy will likely share commonalities and together will support the companys business strategy. envision the future. With the right strategy team assembled, the group can begin thinking about what mobility means for the organization todayand what it could look like 10 years from now. Yet instead of engaging in blue-sky thinking that can be overwhelming, they consider how mobility can help the organization address real pain points in the three primary business dimensions: on the floor, in the

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InnoVATIon AnD TeCHnology

The technology powering business mobility

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By Alan Morrison
Alan Morrison is an analyst with PwCs Center for Technology and Innovation and an editor of PwCs Technology Forecast.

When it comes to business mobility, many IT components are in play: devices, operating systems, security management tools, app development platforms, wireless networks, and so on. But as the old adage goes, the whole is more than the sum of its parts. That is, the real power lies in the convergence of the technologies and in how each organization applies them to redefine the way it works. While the chief information officer will lead the charge here, the rest of the leadership team will want to understand the choices and issues that pertain to the following technology building blocks.
Devices and operating systems Mobile devices and their underlying operating systems sometimes create a dilemma for organizations: Do we supply every user with a standard device such as an Android, BlackBerry, or iPhone or let employees use what they already ownknown as bring your own device (BYOD)? The first option gives the company the control its accustomed to having over corporate assets; BYOD offers greater flexibility and embraces the personal empowerment that has helped make those devices so pervasive in the first place. For some organizations, BYOD is a good choice right nowfor example, if the organization has user groups with distinct needs or is in a stage of experimentation. For others, the diffuse nature of BYOD there are six major operating systems in play (Android, BlackBerry, iOS, Symbian, webOS, and Windows Mobile)might require too many IT resources to manage, or it might slow down the organizations ability to develop custom applications because custom applications must work with each mobile platform. Or, for security reasons, limited choice might be appropriate in areas where high degrees of rigor and consistency are required, such as in regulated environments, in the finance sector, for protected data, and for physical safety. At least for now, some organizations are limiting the choice of device, operating system, and applications in those circumstances. New tools are making it possible to more easily manage devices that use a range of different operating systems. PwC research suggests that limited BYOD will become the rule more than the exception. Providing the devices at no cost to selected employees reduces clutter and ensures focus on a mobility strategy. A variation on BYOD that might work best for many organizations is to limit employee choice to a few of the popular consumer devices that can be more easily integrated and supported. security and mobile device management For many companies, security is the primary barrier to pursuing mobility. And in a BYOD scenario, the business faces the challenge of managing access, usage, and security across different devices. The new mobile device management (MDM) tools not only allow cross-platform management, but also help protect corporate data. MDM tools such as the BlackBerry Enterprise Server, the Good for Enterprise suite, and the MobileIron server provide

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a central console for managing multiple devices with a common set of policies, thereby ensuring consistent policy enforcement and providing auditing capabilities as well. One important feature is remote wipe and lock, should the device be lost, stolen, or compromised. And for organizations using devices that run on Apples iOS or Research In Motions BlackBerry, the management products can selectively delete datafor example, erasing any corporate information but retaining a users personal data on an employee-owned device. Another approach being developed to address this issue is virtualization, which lets businesses create a partition between enterprise assets and employee assets. Application development and integration Defining the companys mobile app development strategy is a crucial consideration. Organizations must decide how they will extend existing business applications to a mobile environment and how theyll develop others that support new device capabilities and ways of working. Understanding the range of options is

especially important for developing new apps. Even though many companies think that building so-called native appsthat is, apps designed to take advantage of a specific mobile operating systemis the best approach, they might discover that less-resource-intensive approaches can meet their needs. Following are the three primary approaches. 1. Web-based apps. Web-based apps, including cloud-based ones, have two primary advantages. First, they require no new technology on the mobile device, because mobile browsers currently support HTML and JavaScript. And second, businesses can adapt many of the Web applications created for desktop users, including front ends to enterprise resource-planning applications, human resources applications, and order entry applications. To do so, however, they would need to redesign the user interfaces to fit the mobile screen and to accommodate the touch interfaces lack of fine input positioning of the cursor.

One important technology here is the forthcoming HTML5, the next generation of the widely used Web programming language that will support more featurerich mobile applications, such as those that take advantage of location data. While HTML5 will not be finalized for several years, major components have already been implemented in the most popular mobile and desktop browsers, thereby providing an opportunity for businesses to test and use the capabilities over time. 2. Virtualization. Virtualization allows a single version of an application to run on any mobile device. Several virtualization methods can be used for developing and deploying mobile apps, but the most promising currently is thin-client virtualization. It provides a high level of security, thanks to its ability to separate the application and its data from everything else on the device.

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Figure 1: Mobile application categories and development platforms

Common smart handheld devices

Texting, Bluetooth, Wi-Fi, camera, accelerometer

Mass-consumption applications

HTML5 only

Content applications (news, books, video...) airline boarding passes, cloud storage Common corporate applications such as ERP, CRM, MRP, cloudbased office productivity tools Mobile payments with devicebased authentication navigation, visual analytics Games, environmental monitoring applications, chemical analysis tools

Employee horizontal applications

HTML5 only

Competitive applications

HTML5 + native SDKs

Device-dependent applications

HTML5 + native SDKs

SDKs = software development kits Source: PwC, Unleashing enterprise mobility, Technology Forecast, 2011

3. Native apps. Native app development lets organizations take advantage of the unique functional or interface capabilities that more-generic Web technologies cannot. In particular, that includes the ability to handle common sensor data from the devicessuch as acceleration, spatial orientation, ambient light levels, and proximity detectionthat could be used for new classes of services and applications. However, many organizations today are spending money developing mobile apps that are native but dont need to be. If your company doesnt need to develop an app that makes heavy use of the phones camera, for example, a native app might not be necessary at all. In many cases, either optimizing existing websites so that mobile device users can view them easily or developing a Web app is enough, especially in view of HTML5s new capabilities. We believe that once HTML5 matures, mobilefriendly websites and Web-based apps will be able to address the majority of mobile enterprise needs. (See Figure 1.)

We see businesses choosing different development approaches depending on the specific application. In our view, its likely that the majority of corporate apps will be Web based, reserving native development for new (no computer-based equivalent was in place) or sensor-enabled applications. Examples of new applications are those that scan products bar codes to get more information or check pricing elsewhere, display the maintenance staffs current status on work requests when theyre in the field, and serve as remote controls for Wi-Fi-enabled devices such as TVs, building automation systems, and security cameras. Examples of sensor applications are pedometers that calculate energy use, routing tools that direct drivers to their destinations based on current conditions, and visual heart-rate monitoring. wireless networks Another technology-related consideration is the cost of wireless communications as more and more corporate data traffic moves to mobile devices. As they plan for increased mobile use, businesses may wish to begin service contract discussions with

carriers, as well as to ensure that employees have access to their usage costs and can monitor them. In the meantime, to provide a direct incentive for cost control, many companies are reimbursing employees a fixed or capped rate for smartphone communication usage. Some businesses are also preparing internal facilities to accommodate broader use of wireless within the organization, which can help control costs. For example, they are upgrading Wi-Fi networks in major offices so that a mobile device can automatically use the companys own Wi-Fi when the Wi-Fi is in range rather than use the cellular network. Another considerable challenge is the ability to accommodate greater input and output capabilitieslike printing spreadsheets and presentationsthan are possible with mobile devices. While more such features will come from mobile vendors, companies can do a great deal to prepare and enable that capability by choosing display and printing facilities that work wirelessly.

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Strategy and growth

Defining a new CEO agenda Eight strategies for capturing opportunity

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By Tom Craren
Tom Craren is PwCs partner-in-charge of Thought Leadership.

As we emerge from the recent economic downturn, CEOs across sectors and around the world are seeing brighter days ahead and are making strategic changes to capture long-term growth. As shown by the results of our 14th Annual Global CEO Survey,1 about half of all CEOs are confident about revenue growth going forward. But how will they achieve it? According to our survey, eight strategic priorities have risen to the fore, suggesting that they are rethinkingreimagining, if you willpaths to growth. To help you determine your own growth imperatives, author Tom Craren recasts the numbers into questions that every CEO should consider when setting a new strategic agenda. He also looks at those industries that are most affected by each.

CEO confidence has made a comeback. Despite the trying times of the economic downturn, CEOs have a renewed sense of optimism about their companies growth prospects. But what growth means has changed in this new era of recovery. With developing economies emerging as hotspots for opportunity, many businesses are refocusing their growth efforts to include markets away from home. To succeed in these markets in a post-crisis world, business leaders are redesigning their growth agendas around a new set of strategic priorities including investing in innovation, acquiring critical skills by bringing new talent on board, and entering collaborative relationships with governments, consumers, and other stakeholders. In making these strategic changes, CEOs are priming their organizations for growth. As part of that process, the following eight questions on emerging markets, innovation, talent, risk, sustainability, operations, regulation, and governance can help businesses chart a course for success.

How do we enter new, ever-changing markets with confidence? Across sectors, CEOs agree that tapping emerging markets is a key to capturing growth. While the International Monetary Fund forecasts overall global growth for 2011 at 4.2 percent, developed countrieswhich make up 52 percent of the worlds economyare growing at only half that pace. In contrast, emerging markets are booming, with forecasters predicting that China, India, and Indonesia will grow more than 6 percent.2 And that surge in growth is expected to continue, regardless of location. Fear of the unknown is often a barrier for many organizations considering a move to emerging markets. Consumer goods companies, in particular, are confronting this challenge, as our research revealed. Heavily tied to changes in consumer behavior, employment rates, and purchasing power,

1 For the PwC 14th Annual Global CEO Survey, 1,201 interviews with CEOs were conducted in 69 countries during the last quarter of 2010. All statistics presented in this article are from the CEO survey unless otherwise noted. Visit http://www.pwc.com/ceosurvey to learn more about the report. 2 International Monetary Fund, World Economic Outlook, October 2010. Estimates for shares of the world economy made on a purchasing power parity basis.

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Figure 1: Growth opportunities in the consumer goods industry Q: Which countries, not including the country in which you are based, do you consider most important for your growth prospects over the next three years? (Percent of respondents)

39 39
All industries Consumer goods

25 21 19 19

18 15 12 10 10

17 11 7 7 6

China

United States

Brazil

India

Germany

Russia

United Kingdom

Mexico

Driven in large part by changing dynamics between developed and emerging economies, a majority of CEOs say they are performing strategy makeovers and making more disciplined, targeted investments in unfamiliar places.

consumer goods CEOs especially see the growth potential in developing markets. Fifty-seven percent of these executives anticipate having to make strategic changes to capitalize on the increasing prosperity of consumers in emerging markets. Driven in large part by changing dynamics between developed and emerging economies, a majority of CEOs say they are performing strategy makeovers and making more disciplined, targeted investments in unfamiliar places. Striking the right balance between these diverse worlds is a key challenge that requires effective overseas strategies. They are focusing on two areas to help ensure success: performing due diligence of market demographics and collaborating with local partners.

For example, Unilevers leaders stress the importance of knowing where consumer trends are headed in order to stay in front of those trends. Given that the company expects 70 percent of its business to come from Asia within 10 years, they recognize that their culture and business model must evolve to reflect the changing demographics of their customers and the tremendous implications of this significant shift. Part of Unilevers marketing strategy is to support a sustainability agenda that may be pertinent to developing countries, where, in many cases, people face food shortages, environmental problems, and issues stemming from overpopulation. For example, the company is aiming to make its brand of water purifiers available to 500 million homes so that families not only will have

access to safe drinking water, but also will be able to utilize other Unilever products, such as chicken stock cubes. Consumer goods organizations are also embracing critical tactics such as ensuring they have sufficient access to raw materials, evolving their people strategy to encourage key employees to move abroad, and embedding families in emerging markets to better understand local buying and eating patterns. Moreover, they are working closely with retailers to learn how consumers behave at the point-of-sale and merging with local companies to produce consumer goods specialized for local markets. As a result of these strategies, 93 percent of consumer goods CEOs surveyed expect

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How do we remake our organization into a continually innovating one? CEOs across all sectors overwhelmingly agree on innovations importance: Almost 80 percent believe that their innovations will lead to new revenue opportunities, will drive efficiencies, and will create competitive advantage. Many are implementing changes at all levels of their operations to make innovation a viable growth strategy. And it is not just about creating the next revolutionary product. Innovation is being applied to every part of the businessfrom marketing to production to distribution and finance. The bottom line of incremental innovations is to get closer to customers. Understanding how to engage todays consumers could mean addressing cultural and organizational factors or rethinking what technology can do and for whom. More than any other sector, the chemicals industry is investing heavily in innovation to garner a competitive edge. Ninety-two percent of CEOs in this industry believe that innovation will lead to operational efficiencies and competitive advantage, 13 percent more than all CEOs surveyed. to generate higher revenues over the next 12 months, with just as many anticipating increased revenues over three years increases that can be driven by expansion into developing countries, particularly China. (See Figure 1.) Sixty-nine percent believe emerging-market businesses will drive company growth, compared with 59 percent of CEOs across all sectors. Survey results also show that the consumer goods sector is not alone in understanding the growth potential of emerging markets. Other industries that placed a higher importance on emerging markets over developed ones include the automotive, banking, chemicals, investment management, oil and gas, metals, and technology sectors.

Chemicals CEOs are putting customers at the center of innovation. For instance, they know the importance that environmentally friendly products and services play in helping customers reduce their carbon footprints. The industry recently adopted Life Cycle Analysis (LCA) an approach that looks at the emissions generated during the complete life cycle of a productto help document the impact its products have on the carbon footprint of customers. This greening of innovation strategies is found across all industries; 64 percent of all CEOs agree with this change. CEOs in this industry are also moving development processes closer to the customer. Forty-two percent, compared with 29 percent of all CEOs, plan to move the development of their innovation to other than home markets. Companies looking to be successful in global markets may need to localize processes to benefit new customers. In some cases, an organization may not have sufficient capital and the right talent to innovate on its own. Fortunately, going it alone isnt the only option. Many companies are collaborating with partners or targeting innovation efforts at their supply chains. (See Figure 2.) Chemelot, one of the largest chemicals industry parks in Europe, offers a clear example of this collaborative approach. The establishment

Figure 2: Innovation insights from the chemicals industry (Percent of respondents) Our innovations will lead to operational efficiencies that provide us with a competitive advantage Our innovations will lead to significant new revenue opportunities We expect the majority of our innovations to be co-developed with partners outside of our organization We use M&A as a significant source of innovation We expect the majority of our innovations to be developed in markets other than the country in which I am based 29 42 39 36 33 39
All industries Chemicals

79 92 78 85

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How do we identify, engage, and empower the talent that will distinguish our business from the competition?

combines research and production facilities in one location, where 70 companies share the facilities and have access to raw materials and peripheral services. But true collaboration lies in the method of communication between these companiesthey use Twitter and Facebook to stay connected. Whether through market research, localization, or partnerships, business leaders in many sectors understand that focusing on business process innovation while tuning in to the needs of customers may offer the best opportunities to capture growth. Our survey indicates that besides chemical companies, automotive, consumer goods, insurance, investment management, pharmaceuticals and life sciences, and technology organizations are also turning to innovation for significant new revenue opportunities.

Companies are starting to hire again. With confidence in economies on the upswing around the world, more than half of all CEOs surveyed say they expect their talent pool to grow over the next 12 months. But even with a surplus of eager candidates ready to rejoin the workforce, finding and keeping talent will be difficult: Two-thirds of CEOs believe there is a shortage of candidates with the right skills. Additionally, with considerable opportunities in emerging markets, finding appropriate skills to bridge both foreign cultures and demographics with those at home is critical to success overseas.

Chief among organizations coping with this issue are automotive companies, which collectively identify closing the global skills gap as a top priority (See Figure 3.) Hit deeply during the economic crisis, the industry had to reduce headcounts considerably, more so than other sectors. But currently, the industry is on the rebound, and its core concern is emerging markets. Sixty-five percent of automotive CEOs believe emerging market consumers will drive growth for their companies, and, as a result, will be adjusting their strategies over the next three years. Eighty percent of

With confidence in economies on the upswing around the world, more than half of all CEOs surveyed say they expect their talent pool to grow over the next 12 months.

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automotive CEOs are changing their talent strategies to deploy staff overseas, more than their counterparts in other industries. As a first step in securing global talent and maintaining corporate and operational practices overseas, companies often establish international assignments to train local talent and help support business relationships with domestic companies. However, many companies are moving beyond this strategy. Some, like auto components and parts supplier BorgWarner, are nurturing local talent and are focusing on localizationmanufacturing their products in the countries where their customers produce vehicles. The company grooms

and retains local managers to run these manufacturing bases and then to supply the company with strong local talent. In China, one of the fastest growing countries in the world, a competitive compensation environment makes it particularly difficult to retain employees. But investing in the country was a priority for BorgWarner. The company has more people employed in China now than during its company-wide peak employment of 2008. Maintaining the right workforce may often mean considering non-traditional sources of talent or coming up with new ways to motivate staff. This might include identifying

new talent pools, or finding new ways to incentivize workers. Collaborating with governments and the educational system is increasingly important as well. Sixty-four percent of automotive CEOs are seeking to improve local workforce skills this way. While the automotive industry ranks high with regard to talent concerns, survey results show that finding the right people is a top priority across the board. Industries that ranked highest in planning to change their strategies for managing talent over the next year include banking, entertainment and media, insurance, investment management, and transportation and logistics.

Figure 3: Talent challenges for the automotive industry Q: Considering the talent required for the success of your business over the next three years, what are the key challenges you expect to face? (Percent of respondents)

Limited supply of candidates with the right skills Difficulty in deploying experienced talent globally Providing attractive career paths in our industry Competitors recruiting some of your best people Understanding and forecasting talent availability in emerging markets Challenges in recruiting and integrating younger employees Talent with the right technical skills lack flexibility and creativity 40 50 54 46 44 40 45 58 50 50 52 50

66 82

All industries Automotive

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How do we reinvent our operations to take change in stride while remaining disciplined about costs?

Figure 4: Collaboration initiatives for the entertainment and media industry Q: Which, if any, of the following restructuring activities do you plan to initiate in the next 12 months? (Percent of respondents)

Implement a cost-reduction initiative Enter into a new strategic alliance or joint venture Complete a cross-border merger or acquisition Outsource a business process or function Insource a previously outsourced business process or function Divest or spin-off majority interest in a business or exited a significant market End an existing strategic alliance or joint venture Dont know/refused 9 10 19 27 14 17 14 17 34 47 31 40 50

64 57

77

All industries Entertainment and media

Keeping costs down is a priority for CEOs. But instead of slashing budgets, companies are collaborating with external partners to reshape their futures. Whether through strategic alliances, joint ventures, crossborder mergers and acquisitions, or outsourced business functions, companies across many industries are finding out that partnerships can be fruitful. Operational structure changes like these are on the horizon for companies in the engineering and construction, entertainment and media, industrial manufacturing, insurance, investment management, pharmaceutical and life sciences, retail, and transportation industries, according to our survey.

In the entertainment and media industry, business leaders have embraced collaboration out of necessity. Outdated industry models cant meet the challenges of rapid change in customer demand and behavior, technology, and industry dynamics. Those entertainment and media companies that embrace scale, diversification, agility, and restructuring are more likely to survive and prosper. Eighty-seven percent of those surveyed expect some degree of organizational change. More than in any other industry, entertainment and media CEOs are likely to seek out external partnerships. (See Figure 4.)

As entertainment and media consumers trend younger and more tech-savvy, entertainment and media companies will have to provide content through new devices. Partnering with outside organizations can help in that regard. This is echoed throughout the industry, where 78 percent of entertainment and media CEOs are looking to suppliers for product innovation. While cost cutting can be viewed as a short-term survival option, controlling costs through collaborative partnerships can better equip companies to face challenges that lie ahead and to manage costs over the long term.

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How do we become more resilient to new and unpredictable risks?

Figure 5: Changing risk management activities Q: What additional steps, if any, are you taking to improve the management of risks that accompany your change in strategy? (Percent of respondents)
Entertainment and media Investment management Automotive Chemicals Consumer goods

Allocating more senior management attention to risk management Formally incorporating risk scenarios into strategic planning Allocating more board meeting attention to risk management Formally designating executive responsibility for risk management Doing more crisis readiness drills Adjusting performance incentives to account for risk Re-examining capital structure Increasing the authority of the risk management executive Increasing risk manager headcount

Insurance

Utilities

Global

CEOs are gearing up to make changes across their businesses. Some of the changes are designed to help them counter unfamiliar risks. For example, as they cross borders to seek out new opportunities, they will face new tax regimes, laws, management styles, and other local challenges. Almost 80 percent of all CEOs surveyed say they plan to change their approach to risk management in the year ahead. And a majority of these CEOs are also looking to more formally incorporate risk mitigation into strategic planning. For example, 72 percent of CEOs plan to allocate more senior management attention to risk management, and 40 percent are looking to incorporate more crisis-readiness drills. (See Figure 5.) But in the aftermath of the economic crisis, C-suite leadership has taken a more comprehensive approach to risk, even so far as to include addressing global risks in their management strategies. (See Figure 6.) For example, utilities company E.ON AG is trying to lessen its dependence on banks by looking for longer-term capital. In the chemicals industry, nearly 75 percent of CEOs surveyed will be looking to support government activity that is environmentally sustainable. And its no wonder why these CEOs want to work with governments on green initiativesthe chemicals industrys top global risks include scarcity of natural resources and climate change. This shift to including new and unpredictable riskssuch as political instability, scarcity of natural resources, and currency volatilitymarks a new era of risk resilience. Including these new risks enables organizations to remain flexible during downturns while still finding opportunity in a fast-changing world.

72 67 58 45 40 36 31 29 20

71 69 53 42 38 31 16 27 11

77 63 46 35 40 29 13 15 6

65 68 53 38 38 22 25 26 9

67 63 63 46 25 38 33 29 21

80 65 70 45 45 45 43 23 28

84 65 61 69 43 39 35 47 45

75 83 63 33 29 29 25 25 17

Figure 6: Global risks that CEOs are actively countering Q: Which of these global risks, if any, are factored explicitly in your strategic planning and risk management activities? (Percent of respondents)
Entertainment and media Investment management Automotive Chemicals Consumer goods

Political instability Scarcity of natural resources Climate change Natural disasters Terrorism Pandemics and other health crises Loss of biodiversity

52 30 26 22 20 20 5

58 54 18 18 8 8 2

37 51 34 19 15 10 3

48 39 29 23 14 23 8

58 35 26 26 23 32 10

49 38 55 38 19 11 0

46 12 35 46 25 44 2

Insurance

Utilities

Global

30 7 20 20 33 20 3

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How do we see beyond constraints to spot the opportunities in the new regulations?

The specter of over-regulation is a major concern for business leaders around the world. Todays changing regulatory environment brings with it uncertainties as to how companies will do business in the future. Survey results show that the following industries view over-regulation as a top concern: financial services, pharmaceuticals and life sciences, oil and gas, and utilities. In the aftermath of the financial crisis, the financial services industries have become among the most regulated. The US DoddFrank Act, European Union Alternative Investment Fund Managers Directive (AIFMD), and the US Foreign Account Tax Compliance Act (FATCA) are just a few of the regulatory challenges facing asset managers. Equally as important, national and regional differences and potential conflicts may negatively impact many financial services firms ability to manage increased regulation. In addition, regulatory changes could also lead to a more conservative risk appetite among institutional investors, which could challenge asset management CEOs as they attempt to achieve a balance between maximizing return and minimizing risk. Its no surprise then that 77 percent of investment and asset management CEOs say they are deeply concerned about overregulation, compared with just 58 percent of all survey participants. (See Figure 7.) Nevertheless, growth-seeking CEOs are not sitting still, waiting for these uncertainties to be resolved. In the USwhere regulatory change runs the gamut from the granular, such as the new way companies must account for leases, to the major structural overhaul of the health and financial systems47 percent of US CEOs surveyed say they are rethinking their corporate

Figure 7: Regulation is a top concern for the asset management industry Q: How concerned are you about the following potential economic and policy threats to your business growth prospects? (Percent of respondents who stated extremely or somewhat concerned)

Uncertain or volatile economic growth Government response to fiscal deficit and debt burden Over-regulation 54 61 65 59

71 74

77

Exchange rate volatility Lack of stability in capital markets Protectionist tendencies of national governments Inflation 31 16 40 48

68 52 55

All industries Asset management

strategies in response to regulation, compared with 34 percent worldwide. Asset and investment management CEOs are no different. They see opportunities in rationalizing operations and improving tax and capital efficiency. Though consumers are becoming more price-conscious, regulation could increase expenses. To deal with this challenge, almost 70 percent of asset management CEOs surveyed have initiated a cost-reduction initiative. While major regulatory change is top of mind for todays business leaders, survey results demonstrate that C-suite leadership is planning to extend their focus beyond

dealing with constraints and preparing for compliance. Focusing on greater transparency and beefing up risk management are other ways that asset management CEOs are looking for opportunity in a highly regulated environment. Transparency can renew investors trust that there are appropriate controls across the fund value chain. More than 70 percent of asset management CEOs plan to rebuild their companies reputations in the coming year. Focusing more closely on risk is another way these leaders will earn greater investor confidence. Nearly 90 percent of asset management CEOs are modifying their operating models to manage risk more effectively.

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Nearly three-quarters of CEOs told us they will actively support government policies that promote good growth, while half are optimistic that collaborative government and business efforts will mitigate global risks such as climate change. Survey results show that business leaders in some industries overwhelmingly agree that consumers will factor a companys environmental and corporate social responsibility practices into their purchasing decisions. These include banking, chemicals, engineering and construction, investment management, oil and gas, and utilities. For the utilities industry, climate change is particularly pertinent, as environmental conditions can impact utilities infrastructure and ultimately affect customer service. Recognizing the importance climate change can have on their customers, 60 percent of utilities CEOs cite climate change as a risk that will impact their companies growth over the next three years, compared with just 27 percent of all CEOs surveyed. More than half say they have already factored climate-change risk into their strategies, while a majority say they plan to address climate change over that same time frame in order to improve competitive advantage and enhance social wellbeing. (See Figure 8.) Energy companies have been profoundly affected by changing consumer-spending patterns. In Germany, this shift is driving companies like E.ON AG to market its services to various consumer segments. For example, in the European retail segmentprivate households and small businessesthe company recognizes that consumers are equally as interested in energy optimization as in energy consumption. Management views this transition as a challenge that will require it to adapt to new patterns of consumer behavior and embrace new technologies. Organizations across sectors are beginning to realize the importance of meeting the publics high expectationsnot only by changing their strategies today to capture stakeholder sentiment, but also by looking ahead for changes on the horizon. As social awareness continues to gather momentum, demand for sustainable and eco-friendly products, processes, and services can only escalate.
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How do we tap into growing customer and employee sentiment about sustainability?

Customers, businesses, and governments alike agree that sustainability is key to economic growth and competitiveness. As a result, companies are finding that their environmental and corporate responsibility practices are increasingly under the microscope. The shift toward social responsibility is driving change in consumer spending patterns. Globally, CEOs feel pushed to make eco-friendly changes to their products and processes.

Almost half of the CEOs surveyed expect consumers to factor environmental and corporate responsibility practices into purchasing decisions and say they will change their strategy in the next three years to capture customer and employee sentiment. And, believing that the supply chain plays a critical role in innovation, most CEOs are looking to their suppliers to help them generate new ideas for developing green products, powering cities and factories, moving people and freight, growing food, and securing the natural resources so essential to business.

Figure 8: The utilities industry aims to tackle environmental challenges Q: To what extent do you agree or disagree with the following statements about your expectations regarding your companys innovation over the next three years? (Percent of respondents) An important part of our innovation strategy is to develop products or services that are environmentally friendly An important part of our innovation strategy is to develop products or services that are environmentally friendly

64 64 70 70

Q: To what extent will you change your strategy in the next three years to the following potential changes to businesss purchasing behaviors? (Percent of respondents) Businesses will factor a suppliers 54 environmental and corporate responsibility 60 practices into will factor a suppliers Businesses purchasing decisions 54 environmental and corporate responsibility 60 practices into purchasing decisions
All industries All industries Utilities Utilities

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How do we tell our companys story in a way that helps stakeholders see the changes were making in a new light?

Recognizing the vital role that transparency plays in establishing trust with stakeholders and achieving growth goals, many organizations are going beyond basic disclosure to make sure their stories are heard. As a result, 64 percent of CEOs surveyed agree that companies are becoming more transparent in reporting their financial results and tax obligations. This is especially true in the insurance industry, where almost 80 percent of insurance CEOs say they are focusing on rebuilding their corporate reputations, with some taking additional steps in risk management and transparency in an effort to improve their public standings. (See Figure 9.) In the aftermath of the economic crisis, the insurance industry faces the challenge of delivering favorable and sustainable returns. The underlying solution may lie in ways of communicating performance and

prospects clearly, credibly, and consistently. Many believe that their companies share prices fail to reflect the strength of the businesslargely because most analysts and investors find it difficult to navigate through the complexities of the industry, especially since there is little comparability in the way results are being disclosed. Our research confirms that analysts are particularly keen to see more information about risk, along with the level of cash being generated within companies. While the planned overhaul of International Financial Reporting Standards for insurance contracts will provide a chance for insurers to put disclosure on a more coherent and comparable footing, it may be several years before the details are finalized. Until then, those insurers that can clearly explain the link between their strategies, the risk they have assumed, and the cash that they expect to generate as a result, may have a valuable opportunity to increase their share prices.

Figure 9: Risk and transparency are top concerns for the insurance industry Q: In response to changes in the global business environment, to what extent do you anticipate changes to any of the following areas of your companys organization or operating model over the next 12 months? (Percent of respondents) 91 83 77 84 74 63 49 65 61 46 81 81
All industries Insurance

Strategies for managing talent

Approach to managing risk

Organizational structure (including M&A)

Focus on corporate reputation and rebuilding trust

Capital structure

Engagement with your board of directors

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Regardless of sector, the winners of tomorrow will be those that can not only develop a clear strategy for value creation and market differentiation today, but also clearly communicate how that strategy differs from that of their competitors and why, as a result, their organization deserves to be valued differently. Other industries that are planning to focus on rebuilding corporate trust in the next year include the banking, entertainment and media, and metals industries.

seizing opportunity The new business climate is marked by constant and unpredictable change that is driving new business priorities. As the survey results show, CEOs, whether through talent strategies, markets, innovations, or external collaborations, are on a journey whose ultimate destination is value. Along the way, they are overcoming obstacles

and discovering emerging opportunities. Even more important, they are setting new agendas designed to capture them. And while these agendas will differ among companies and industries, they all share a common reality: In a post-crisis economy, those who embrace change will achieve a competitive advantage. Those who dont will be left behind.

A recovery of confidence

The results from our survey show that CEOs are very confident about companies futures in the short term and long term: 48 percent see growth in the next 12 months and 51 percent anticipate it over the next three years. These levels indicate a return to confidence levels last seen during the boom years of 2006 and 2007. But this recovery of confidence isnt evenly split across all regions and countries. So, whos the most confident? Across the board, CEOs from emerging markets showed the highest levels of confidence. Regionally, Africa tops the list, with 65 percent of CEOs from the region reporting confidence for the next 12 months. This is followed closely by the Middle East, Asia, and Latin America. (See Figure 10.) The single country with the highest degree of confidence is India, where 88 percent of CEOs feel very confident about their future. With Indias quick recovery from the recession and continued booming economy, this should come as no surprise. India is projected to be one of the fastest growing economies in the worldaccording to estimates, its GDP at market exchange rates will reach 83 percent of that of the US by 2050.1 Indian CEOs also understand this
1 PwC, The world in 2050, 2011.

potential for sizable growth. Like many other emerging market countries, they are not just tapping overseas markets but are now focusing on leading their own growing domestic markets. On the flip side, Western European and North American CEOs were the least confident about growth over the next year. Hit harder by the recession than emerging markets, Western CEOs seem more cautious but still optimistic about the future. And

though emerging markets are thought to be the hotspots for growth, Western markets are not far behind. In fact, CEOs around the world indicate that the United States is the second most popular country for sourcing (after China) and Germany is the fourth. Though BRIC countries like Brazil, India, and China are important sourcing hubs, the United States and Germany are thought to bring quality control, innovation, logistics, and existing relationships, which are integral factors in CEOs sourcing decisions.

Figure 10: Who is very confident about their companys prospects for growth in the next year? (Percent of respondents) 65 54 48 54 56 47 39

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Africa

Asia

CEE

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Middle East

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Interview

Taking the long view Historian Niall Ferguson looks at politics, economics, and the killer apps that make or break civilizations

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Niall Ferguson is a professor of history at Harvard University and a professor of business administration at Harvard Business School. He is also a senior research fellow at Jesus College, Oxford University and a senior fellow at the Hoover Institution, Stanford University. A prolific writer and sought-after commentator, Dr. Ferguson is a frequent contributor to major print and online publications, including Newsweek and thedailybeast.com. His most recent books are The Ascent of Money: A Financial History of the World, and Civilization: The West and the Rest (available in the US on November 1, 2011).

Interview by Gene Zasadinski

Gene Zasadinski is managing editor of View magazine.

In trying to make sense of the present, author and commentator Niall Ferguson gives a great deal of thought to the pastboth the past as it was and the past as it might have been. Thats what historians do, he says. Thats what sets historians apart from economists. In this interview, Dr. Ferguson brings this unique perspective to the major issues of the dayfinancial, economic, and political. As a student of empire, he also offers his views on why civilizations rise, fall, and, possibly, rise again.

gZ: In your new book, Civilization: The West and the Rest,1 you use a computer software metaphor to make the case that global Western dominance resulted from what you call six killer applications. Would you explain? nF: Yes. The killer apps model as a metaphor is a very useful way to answer the big question about the history of the world after 1400: Why did the great civilizations of the East stagnate while a few little warring kingdoms in Western Europe took over the world? After a lot of thought and study, I concluded that there were really six factors, or applications, which, taken together, explain Western ascendancy: competition in both economics and politics; Newtonian science; the rule of law and, in particular, private property rights; modern medicine and the resulting
1 Available in the US on November 1, 2011.

increase in life expectancy; a consumer society that led to an Industrial Revolution; and, finally, a strong work ethic. gZ: What about democracy? nF: If by democracy you mean a system of government where elections are held regularly for legislatures or executives, I dont think thats actually a killer app. Lots of countries have elections with universal suffrage. Some do well, and some dont. The critical things, in my view, are the rule of law and the notion of private property rights. Those are more important than democracy. In any case, democracys quite a late phenomenon. Great Britain didnt achieve universal suffrage, including women, until well into the 20th century, by which time Western primacy had been long established. Its way too late, really, to be that important.

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gZ: Does the West still have exclusivity regarding these applications, or is it being challenged by other cultures? nF: Part of the reason for writing the book was the growing sense that Western predominance was coming to an end on our watch, and its the peculiar fate of our generation to see that happen. I think there are two things going on here. One is that non-Western countries are replicating Western models. They are, in a sense, downloading these apps. The second point is that like real software, these apps can be deleted or corrupted. And when you look at some European countries and at certain aspects of the United States, you see a civilization in which there is at least some corruption on the hard drive. One sees that very clearly in a whole range of areas, including a decline in the work ethic and a rise in entitlements, for example. Such changes represent a fundamental shift in the West, away from the core institutions and values that lifted it into a position of power in the first place.

gZ: Is there any hope of getting that power back? nF: Yes. To continue the metaphor, these applications can be upgraded. The antivirus software can be run. They dont stop working by some natural process of decay, and I think reform is possible. gZ: You define yourself as a historian rather than an economist, though your specialty is economic history. How does that shape your thinking and differentiate your perspectives on these and other matters? nF: I think theres an important intellectual difference between what economists do and what historians do. Economists are in the model-making business. Thats really what they do. Historians accept the complexity of the human world and doubt that it can be simplified into a model. And some historiansby no means all engage in thought experiments in which they construct alternative historieswhat-if scenarios, if you willto try to understand the causal sequence of the one history that did happen.

gZ: So, lets apply the economic historians perspective to events currently unfolding on the world stage. How is unrest in North Africa and the Middle East affecting American and other Western economies? nF: At this point, the impact is fairly minimal in the US, although, of course, it is one reason that the price of gasoline is higher than it was a year ago. Its impact in Europe is more immediate, because two things are happening. One, people are leaving the region, so the migration problem has become very acute. And two, money is leaving as well. The wealthy of the Arab world are extremely nervous about what is happening, and were seeing enormous flows of capital out of countries like Egypt into Switzerland and into London. So there are impacts already, but my sense is that we havent yet seen the full impact, because this is a revolutionary crisis at a relatively early stage.

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gZ: What do you mean? nF: As history teaches us, most revolutions of this kind play out over years and take place in four phases. In phase one, theres an almost festive air of excitement when the tyrant is toppled. In phase 2, the economies go into freefall, because the money is pouring out of the country, creating opportunities for political radicals. In phase 3, there either is a shift toward restoration, or the radicals manage to gain control of the political process. My outlook is somewhat pessimistic about this. gZ: And what is the fourth phase? nF: In the fourth phase, you end up with war. Theres already a war in Libya, but the war we really need to worry about is a Sunni-Shiite war. That could send oil prices skyrocketing, which would obviously have a serious impact on the global economy and on the strength of any economic recovery.

gZ: Political unrest aside, what else can history teach us about economic crisis and recovery? Is what were going through now similar to what has occurred in the past, say, Japan in the 90s or even further back? nF: Well, I think thats exactly the right kind of question to ask because the best way to understand a financial crisis or an economic depression is by comparing it with others. Economists are generally fixated on a few well-known disasters, of which the Great Depression is the best known by far. My feeling is that its better to locate these events in a much longer-term perspective that can take you back at least as far as the late 19th century, which was the first great age of financial globalization. And we can learn as much from looking at the Great Depression of 1873 to 1878 as we can from looking at 1929 to 1932, in that the former is in many ways closer to our experience than the latter. In 1873, a huge financial crisis occurred on both sides of the Atlantic, and it had its origins in real estate. Many banks failed. But globalization didnt break down. It slowed the growth of economies, but it didnt cause anything like the collapse that occurred in the early 30s.

gZ: Are there other ways in which this earlier crisis was similar to our own? nF: Yes. Like today, populism became a big part of politics after the 1870s, and the backlash against the crisis was very powerful in both Europe and the United States. The Tea Party is a classic populist movement, and it has much more in common with movements in the late 19th century than with what happened in the 30s. gZ: So from your perspective, are we in a recovery? nF: I think we are. Its a very fragile recovery in the United States, and its a very unimpressive one in Europe. And, again, much can be learned by looking back. In the 1870s, there was a five-year period of subpar growth that went on until 1878, and deflation continued after that for more than a decade. I think we should bear in mind, therefore, that this could all last longer than most of us are conditioned by our own life experiences to expect.

The Tea Party is a classic populist movement, and it has much more in common with movements in the late 19th century than with what happened in the 30s.

gZ: What are your concerns regarding the fiscal crisis? nF: My concern is that were only at the beginning of a very painful process in the United Statesthat of addressing this problem, which is partly structural and partly cyclical, but very large and very politically intractable. Europeans are further down this road, and some European countries have come spectacularly to grief. gZ: And quantitative easing? nF: The problem is that if you print money almost without limit and hold interest rates at zero, you will get inflation. And that is happening. Its hard to detect, because inflation doesnt begin with a bang. Its very stealthy. It creeps up on you. But a moment of truth is coming. Its going to be a moment when we decide either to go further down the inflationary road, or we apply the brakes, both fiscally and in monetary terms, and experience a fading of the recovery. gZ: Can inflation ever be a good thing? nF: It was certainly the belief of a generation of Keynesians in the 1950s and 60s that a little inflation would oil the wheels of the system. What they were really saying implicitly was that it would be better to have negative real rates and transfer resources stealthily from savers to borrowers. But the benefits of inflation are usually outweighed by the costs as the inflation

problem builds. Everything that we know about the history of inflation says its hard to stop, though its easy to start. gZ: Is it right to equate inflation to the Consumer Price Index (CPI) or core CPI? nF: I think that your readers need to ponder how anachronistic our thinking is when we define inflation as the Consumer Price Index, or, possibly, core CPI. gZ: Why is that? nF: The experience of inflation differs between those whose expenditures are not, in fact, concentrated that much on essentials, and those whose expenditures are. For example, the dramatic fall in the cost of personal computing might lead some to conclude that inflation is really low. But those who are relatively poor and worried about food would conclude the opposite because theyve been hit by a doubling of prices in many foodstuffs in the last two years. Also, the CPI deliberately ignores the extraordinary ups and downs in the asset marketshousing prices, for example. In the very blinkered world of monetary policymaking, CPI or core CPI is the thing that you implicitly target. And if somebody says, Hey, what about asset prices? the answer is, Get thee behind me, Satan! I sense a growing disbelief in the official mantra that inflation is low, possibly even too low.

gZ: What are the key factors affecting the recovery? nF: There are two problems. The first and most serious is the fiscal crisis that has been left in the wake of the banking crisis. And the second is the massive printing of moneythe monetary stimulus that was given the appalling euphemism, quantitative easing.

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PeRsPeCTIVes

Niall Ferguson on . . .
Money and trust I associate money and trust with a particular way of running financial institutions. In the 19th century the prudence of the banker and the privacy of the client were givens, and the relationship between banker and client was based on mutual trust. Weve come a long way from that world. I think the breakdown of trust in financial institutions is a huge problem. If the banks are no longer trustworthy, then its very hard for the financial system to function. But we have to recognize that trust has implicitly shifted to the governments that bailed out the banks. The problem is, if you cant trust the banks and you cant trust the government, whats left? I think there is a kind of simmering disillusionment with the system that is partly what fuels populism. Many people feel that the system is, in some measure, corrupt and thats a very unhealthy state of affairs. Tax reform We urgently need tax reform in almost all Western countries, and we should aim for simplicity, clarity, and equity. Currently, there are all kinds of absolutely unjustifiable loopholes and deductions, and these have to go. It would be tremendously good to have a simpler system in which the form that you fill out is a couple of pages long, and everybody understands it. I think that would unleash two percentage points of GDP growth and help solve the fiscal problem in its own right. social networking Theres a default assumption that social networking is good, and in particular, that it is an agent of Westernization or of democratization. The problem with that assumption is that at best this technology is politically neutral. It can be used equally well by those who are profoundly hostile to freedom. Further, networks arent always social. You could have a sociopathic network that serves to promote the cause of political violence. But the worst danger is that the networks on which we grow so reliant are vulnerable to cyber attack. And an attack on the network is a perfectly credible scenario and the kind of thing that, if I were targeting an enemy, I would be aiming to do. Ironically, history teaches us that the status quo power is generally not that good at exploiting new information technology and tends to use it for trivial purposes. The established authorities in France in 1789 had no idea how to manage the press, but the revolutionaries did. So I think, rather than just being neutral, new communication networks, broadly speaking, favor revolutionaries, because the revolutionaries have an aim. Clashor mashof civilizations Some think we are experiencing a clash of civilizations. But I dont agree. Such thinking assumes that there is only one modern civilization. It does not account for the fact that the advances of a modern civilization, particularly in technology, can and are being co-opted by the less modern. So I prefer the word mash to clash. I think whats really impressive about the 21st century scene is that most all civilizations now have access to powerful tools for communication. So, the differentiating factor is not so much about modernity. Rather, it is about how and to what purpose these tools are being used.

gZ: A debate going on in the US right now concerns the magnitude of spending in light of growing deficits. What are your views? nF: For the last seven or eight years, I have been warning that the United States was on an unsustainable fiscal trajectory, particularly because of unfunded liabilities in Medicare and Social Security. If Americans are to keep federal expenditures at 18 or 19 percent of gross domestic product, significantly below the comparable figures for Europe, then government will have to shrink. But heres the bad news. You are going to have to dismantle Medicare as its currently constituted, and a whole bunch of other discretionary and nondiscretionary programs will have to be drastically reduced. The debate between big and small government is beginning, and I think thats great. gZ: So what should Americans be doing? nF: I think Americans should fundamentally rethink their welfare model, their approach to Social Security, and healthcare reform. And Americans should be worried that they have such large, long-term unemployment. My own view is that the United States would be making a big mistake by becoming a European country. And thats a real risk. This country is not a kind of giant transatlantic European Union. Its energy and its success have derived in large measure from the dynamism of its private sector. Its really something quite different.

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view
Issue 14

editorial Editorial Director Tom Craren Managing Editor Gene Zasadinski Assistant Managing Editor Christine Wendin View points Editor Reena Vadehra Contributing Editors Serena Foong Benjamin Isgur Sandy Lutz online Jeffrey Dreiblatt Adiba Khan Scott Schmidt Jack Teuber Design Odgis + Company Creative Director Janet Odgis Art Director, Senior Designer Banu Berker Designers Rhian Swierat Milo Kowalski Justin Suazo Kate Mrozowski

Contributors We thank the following individuals for their contributions to this issue of View: Caroline Calkins-Heine Sarah Haflett Doug Kangos Kathy Nieland Kimberly Peretti Shannon Schreibman Erik Skramstad Photography AP Images Luis Filipe Catarino/4SEE/Redux David Cooper/Toronto Star Corbis Images Ruth Fremson/The New York Times/Redux Getty Images iStockphoto Kit Kittle Rainer Lott/Steffi Esch Reuters Pictures Gilles Rolle/REA/Redux

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View magazine is printed at an ISO 14001:2004 certified plant with Forest Stewardship Council (FSC) Chain of Custody certification (BVCOC-080903). It was printed with the use of renewable wind power resulting in nearly zero volatile organic compound (VOC) emissions. The paper used is 10 percent recycled minimum with postconsumer waste. The paper is FSC certified, which promotes environmentally appropriate management of the worlds forests. By printing at a facility that uses wind-generated electricity: 5,147 lbs of greenhouse gases were prevented equivalent to 4,466 miles not driven in a year equivalent to planting 350 trees By using postconsumer recycled fiber in lieu of virgin fiber: 10 trees were preserved for the future 31 lbs of waterborne waste were not created 4,551 gallons of wastewater flow were saved 504 lbs of solid waste were not generated 991 lbs net of greenhouse gases were prevented 7,589,140 BTUs of energy were not consumed 6,034 cubic feet of natural gas were not used

To request additional copies of View or to comment: www.pwc.com/view. PricewaterhouseCoopers provides industry-focused assurance, tax and advisory services to build public trust and enhance value for our clients and their stakeholders. More than 163,000 people in 151 countries across our network share their thinking, experience and solutions to develop fresh perspectives and practical advice. 2011 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. The information contained in this document is for general guidance on matters of interest only. The application and impact of laws can vary widely based on the specific facts involved. Given the changing nature of laws, rules, and regulations, there may be omissions or inaccuracies in information contained in this document. Before making any decision or taking any action, you should consult a competent professional adviser. Although we believe that the information contained in this document has been obtained from reliable sources, PricewaterhouseCoopers is not responsible for any errors or omissions contained herein or for the results obtained from the use of this information.

Rear view

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Are you aware of the following misconceptions surrounding innovation?

{ Innovation can be delegated. { Senior and mid-level managers are the natural allies

of innovation.

{ Innovative talent works for the money. { Innovation results from lucky accidents. { The more open the innovation process, the less

disciplined.

{ Businesses know how much innovation they need. { Innovation cant be measured.

For an in-depth discussion of these misconceptions, see Demystifying innovation: Take down the barriers to new growth, PwC, 2011.