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In September, IBM published its third biennial study of chief executive officer outlooks and attitudes. This study paid particular attention to the midmarket; companies with fewer than 1,000 employees and prime targets for the i platform. IBM found that midmarket CEOs have similar concerns and yearnings as their counterparts in larger organizations, but they expect greater change and often feel an even stronger urge to seek new opportunities. These attitudes are part of a growing trend among organizations of all sizes to envision a future with wide horizons, but this year's study might have defined a zenith of optimism.
The study was conducted before what used to be Wall Street died in fiscal agony and was promoted by IBM in no less prestigious a medium than the Harvard Business Review during September, when Lehman Brothers met its ignominious end. Despite changing business conditions, IBM apparently feels its findings remain valid and valuable, and in October the company offered an executive summary of its study to the general public. IBM also will give a full-length version of the report to anyone who wants to register to receive the document.
The IBM CEO report is not some kind of puff piece, not by a long shot. It reflects the sentiments of CEOs as expressed to IBM's researchers. Even as IBM was conducting and distilling its interviews with 1,130 top executives, 136 of them midmarket CEOs, business conditions were in flux and, as IBM's findings indicate, the concept of change that was on their minds was not only about opportunity but also about necessity.
One key concept in IBM's work is something it calls the change gap. This is the difference between what CEOs say was their rate of success with changes they implemented in the past and the need to make additional substantial change in the future. The difference, the amount by which the need for future change exceeds the success rate the CEOs claimed for past activities, is the gap. This gap has widened considerably during the past two years, an outcome that reflects both an increase in changes already made and a larger increase in the perception that even more change is needed.
In 2006, IBM's researchers reported 57 percent of the CEOs they studied said that they had achieved change in their enterprises, while 65 percent said they expected substantial change in the future, which by IBM's definition put the change gap at 8 percent. In 2008, 61 percent of the CEOs said they had implemented big changes in their realms, a rise of 4 percent. At the same time, 83 percent said they expected substantial change in the future, a huge leap from the 65 percent who said this only two years earlier. The change gap had tripled to 22 percent. When IBM isolated midmarket CEOs, it found the gap was 29 percent. Some 57 percent of the midmarket CEOs said they had put big changes in place, while 86 percent said there was a need to bring substantial additional changes to their businesses.
IBM asked the CEOs to list the main reasons for the change gap, for their inability to adapt as quickly as they felt they should. The most frequently mentioned reason was market factors, cited by 48 percent of all CEOs and by 56 percent of midmarket CEOs. A lack of adequate people skills was another big factor and it was cited by 48 percent of all CEOs. The CEOs of midmarket companies apparently think their people are better than do CEOs at big companies; these executives mentioned inadequate people skills as a problem only 44 percent of the time. The next three big reasons change fell short, according to the CEOs, were regulator concerns, technological factors, and globalization.
It is possible that the change gap can be a driving force for CEOs and their companies and not a metric of the way executives felt their companies had fallen short. IBM's researchers came to this observation by dividing the companies they studied into what they call Outperformers and Underperformers, an attempt to measure corporate success against the achievements of other companies in the same industry.
When IBM drilled down into the data on its midmarket CEOs, it found that 64 percent of its Outperformers said they had achieved change in the past. The need for substantial future change was expressed by 96 percent of this group for a 32 percent change gap. Among midmarket Underperformers, only 42 percent claimed successful past change, while 83 percent said they needed to make big changes in the future, which works out to a change gap of 41 percent. So the gap may be higher for underperforming CEOs, but the rate of change and the urge to change in the future are both much larger among CEOs who outperform their peers.
While the CEOs who IBM interviewed said change was a key factor in their thinking, what they meant by change was not merely different but new. IBM says that CEOs expressed an urge to innovate, to develop products, services, and whole systems that put them ahead of customers' thinking. The study says that CEOs are "innovative beyond customer imagination," and that this optimism about the future is sparked to a considerable extent by the rise of middle classes in the developing economies. These newly wealthy customers will be, according to the CEOs IBM studied, a vital source of growth and prosperity for companies that can serve them. Moreover, the study says, companies that want to serve these emerging customers should lead rather than follow.
When asked to whether they were putting their money where their mouths were, CEOs of midmarket companies said, in aggregate, that they were going to invest 20 percent more in emerging market opportunities during the next three years than they were currently investing.
But as IBM's researchers drilled down into their data, they found that the leaders of the most successful midmarket companies, the Outperformers, differed from their Underperformer counterparts. Many Underperformer CEOs said they were going to pump more money into the development of products and services for emerging markets during the next three years compared to the prior three years, for an upturn in innovative investments IBM calculates at 41 percent. A contrasting picture emerges from interviews with Outperformers, who said growth of their investments in emerging economies would be slightly lower in the future than in the recent past. IBM pegs the decrease in growth plans at 6 percent. Still, the Outperformers were reducing their growth plans from a much higher base, so they remain more committed to new offerings in emerging markets than Underperformers. This is a bit complicated, but IBM's research seems to show that the Outperformers that target emerging economies are not cutting back on their investments as much as reducing the rate of investment growth.
IBM says this contrast between Outperformers and Underperformers is due to the feeling among Underperformers that they had to catch up to more profitable rivals. But there's another way to look at the IBM findings. It may be that the Outperformers who were trimming their sails felt that the boom in emerging economies, including the BRIC nations (Brazil, Russia, India, and China), was unlikely to continue as it had in recent years, making increases in investment less fruitful than they had been.
While none of the parties surveyed could have foreseen the way events unfolded in the months following their interviews, the Outperformers might have had a more accurate set of expectations about conditions in emerging markets. IBM's researchers would not, of course, second-guess any of the survey respondents. But there is little doubt that the kinds of CEOs whose prominence attracted the attention of IBM's researchers are likely to spot the issues discussed in David Brooks' recent essay in the New York Times, which sketches out some possible consequences of an economic downturn. Brooks says that in the past, big economic downturns have altered social and political attitudes, generally for the worse, and suggests that the current recession is likely to engender similar effects. While the leading CEOs that IBM surveyed are obviously not the borderline middle class people Brooks says are at risk, they recognize the group Brooks is talking about as recent customers who might not be future customers.
IBM says that more than half the CEOs at midmarket companies it surveyed are engaged in worldwide operations and half the remaining CEOs have shaped their enterprises to better take advantage of global opportunities even if they have not yet built the direct or indirect means to reach out from their home markets. IBM found that the most significant barriers to expansion cited by CEOs of midmarket companies seeking to go global are the same as those cited by larger companies. The greatest difficulty companies of all sizes have, IBM believes, is the shortage of executives who have what it takes to cope with business matters on a global bases; this problem ranks number one for 60 percent of midmarket companies and 57 percent of all organizations surveyed. Legislation and regulation that limit business activity is the runner-up, according to 54 percent of CEOs at both large and midmarket enterprises. None of the other widely mentioned challenges that stand in the way of global activity, including cultural issues, capitalization requirements, diverse standards, and intellectual property matters comes close; not one of these problems was mentioned as a major problem by even a third of the survey participants.
The top executives IBM surveyed overwhelmingly said that they expect to alter their business models so much in the near future that their effort would fairly be described as disruptive. This attitude was expressed by 69 percent of all CEOs and 73 percent of midmarket CEOs.
A third of the CEOs said that they expect to change what IBM calls the enterprise models of their enterprises. In IBM's terms, an enterprise model change means altering what a company makes and what it farms out to other manufacturers. Often this means that the lead company puts its own resources into marketing, product design, market development, and other customer-directed efforts while turning to outside suppliers for the actual goods it sells. Clearly this is not possible for services companies, which cannot afford to be seen as a false front. Nevertheless, where a company can turn a generic service into a brand, it has more freedom to outsource some of the services it delivers to customers.
Some 23 percent of the CEOs said their efforts to change will result in a new industry model. IBM says a classic example of this is the way Apple looked at the portable music player business and saw an opportunity to profit from a focus not so much on the players but on the delivery of content. While consumers love the design of Apple's iPod players, it is the music delivery service that gives this business its great vitality, according to IBM.
About 22 percent of the CEOs said their concept of business model change was a revision in their revenue model. By this IBM means a shift in emphasis like the change at Gillette. Gillette might once have thought its business was selling razors but later realized its success was tied to the sale of blades. In computing, the low-end printer business was once about selling machinery but has long since changed into a trade in ink and toner that can almost give away the printers to secure a customer for consumables.
The remaining 21 percent of CEOs say that their business model changes will involve decisions that don't fit so neatly into one of the three classes IBM says dominate disruptive business development.
IBM's own Power Systems i operations may be part of the 21 percent that is difficult to categorize, although IBM's study does not tie its findings to any particular aspect of IBM's business. IBM's difficulties in the midmarket server business, particularly in the case of the i product line, may in part be due to its inability to shift its business model from hardware to a software and services business.
IBM has changed its manufacturing scheme quite a lot and currently has replaced hardware development with firmware development, making its proprietary midrange systems children of its Power server family. But IBM has not created a disruptive pricing model that would give the i platform the enhanced visibility and uniqueness it might take to reverse declining sales. Like the Outperformer CEOs it has studied and praised, IBM's top executives, particularly those responsible for the i platform, might need to review many aspects of their attitudes and business models taking new risks, facing the challenges of globalization, and expressing a new willingness to sustain disruption in order to achieve their goals.
— Hesh Wiener December 2008