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The Year Ahead 2012

What will happen in 2012? BCG experts offer their views on a range of commonly held beliefs
by BCG Staff JANUARY 17, 2012

Theres something about a new year that makes us look to the future with an open mind. But more often than not, our view is restricted by the guide rails of conventional thinking. Major events or trends, like volatile global markets or leaps in technology, exert a particularly strong influence. In the following article, several BCG partners offer their own take on what will happen in 2012, using conventional wisdom as a foil.

https://www.bcgperspectives.com/content/articles/growth_innovation_year_ahead/print 14-02-2012

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Leadership: The Adaptive CEO

The Conventional View: Many pundits laud the heroic leader who stays one step ahead of the market through sheer, solitary brilliance. My View: Market-defining leadership is a team sport. As Walter Isaacson describes in his recent best-selling biography of Steve Jobs, Apples late leader was not just singularly obsessive about every detail of his breakthrough products, he also developed an uncanny ability to size up and leverage top talent. Far from being solitary figures, CEOs like Jobs have long relied on high-performing seniorleadership teams to out-innovate and out-execute the competition. Behind that high performance (https://www.bcgperspectives.com/content/articles/leadership_organization_design_high_performance_organizations/) lies a teams capacity to adapt and thrive (https://www.bcgperspectives.com/content/articles/business_unit_strategy_growth_adaptability_the_new_competitive_advantage/), despite the turbulence that it faces. And regardless of personality, the CEO plays a distinctive role (https://www.bcgperspectives.com/content/articles/leadership_new_leadership_rules/) in creating the team context for adaptation (https://www.bcgperspectives.com/content/articles/leadership_engagement_culture_adaptive_leadership/). A new BCG survey examined a carefully selected sample of companies to discern what the most adaptive leaders do differently or better to foster highly adaptive teams. The study showed that these leaders create teams with five traits: One Voice: They take the time to get everyone completely aligned around the organizations vision, values, and vital prioritieswhile respecting individual differences of opinion and experienceensuring that the team displays an absolute consistency in articulating that message. Sense-and-Respond Capacity: They demand that teams excel at the ability to read external signals (https://www.bcgperspectives.com/content/articles/future_strategy_information_technology_strategy_signal_advantage/), connect disparate trends into meaningful patterns, and put in place mechanisms that allow them to collectively separate the signal from the noise. Information Processing: They require that teams be able not only to sense when change is needed (https://www.bcgperspectives.com/content/articles/future_strategy_business_unit_strategy_adaptive_advantage/), but also to synthesize complex insights and make high-quality decisions quickly. Freedom Within a Framework: They empower team leaders to take bold risks within agreed-to parameters (https://www.bcgperspectives.com/content/articles/strategy_engagement_culture_people_advantage/), with failure acknowledged as a possible but an acceptable outcome. Boundary Fluidity: They encourage team members to move both horizontally across roles and vertically to connect with the next level of leadership down from them. The survey results also uncovered some common fallacies about teamwork and adaptiveness. For instance, adaptability often implies looseness or a lack of discipline. We found just the opposite: adaptive leaders develop teams with highly disciplined mechanisms and processes that free them up to be more adaptive. Roselinde Torres, senior partner and global topic head for leadership

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M-Commerce: Mobile Commerce at a Tipping Point

The Conventional View: Mobile commerce will be the next big thing to transform retailing, but its a slow evolutionsomething thats been talked about for years and still has a long way to go before it leads to a massive shift in consumer behavior. Our View: We are close to a tipping point in m-commerce. In 2011, global shipments of smart phones and tablets (https://www.bcgperspectives.com/content/articles/media_entertainment_technology_software_tablet_market_act_2/) exceeded those of desktops and laptops for the first time. By 2015, more consumers will access the Internet through their mobile devices than from their desktop computers. In just a couple of years, mobile commerce is expected to exceed $100 billion worldwide, with some companies (such as Dominos Pizza in Australia) forecasting that mobile sales will represent more than one-quarter of total sales. Over the next 12 months, m-commerce will change consumer behavior more than it has over the past decade. To win in mobile commerce, companies need to prepare the whole organization to join in the evolution of what we call Multichannel 3.0 (https://www.bcgperspectives.com/content/articles/telecommunications_retail_multichannels_3_0/), or the mobile revolution. This phenomenon is much bigger than the sum of the mobile transactions themselves. It bridges the gaps among three loosely connected shopping worlds: offline, online, and social networks. Companies need to move fast and respond on many frontsfor example, by ensuring a single message across multiple media, developing a one-to-one conversation with customers, deciding when and how to develop mobile apps that are practical and valuable, and developing mobile-friendly transactional sites. They must not underestimate the challenge. To capitalize on Multichannel 3.0, companies will need to break new ground, not repurpose existing websites. To respond in time, they will also need a disciplined approach that allows them to place multiple bets as the market takes off. Just Schrmann, partner and managing director, and Jonathan Sharp, partner and managing director

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Sustainability: Building the Business Case

The Conventional View: In light of the fragile global economy and the inability of governments to agree on substantial, long-term solutions to environmental problems, businesses will water down their commitment to sustainability initiatives. These efforts cost more than they contribute to the bottom line. My View: Most businesses have not backed away from their sustainability commitments. In fact, an increasing number of companies see it as a prioritytoo important to sideline even in a challenging economic environment. This is one of the key findings of an ongoing study (https://www.bcgperspectives.com/content/articles/sustainability_vision_mission_previewing_the_results_of_the_annual_sustainability_and_innovation_study/) being conducted by BCG and MIT Sloan Management Review (http://sloanreview.mit.edu/innovation-hubs/sustainability/), which is based on annual global surveys of more than 4,700 executives, managers, and thought leaders. In the most recent survey, conducted in mid2011, 68 percent of respondents said their organization had increased its commitment to sustainability during the past year, and 74 percent expected such commitments to grow in the year ahead. For some companies, sustainability is smart business. Two-thirds of respondents viewed sustainability strategies as necessary to being competitiveup from 55 percent the year beforeand nearly one-third of companies indicated that they were able to profit from their sustainability initiatives. These findings reflect a broad shift in how companies view sustainability. There was a time when such efforts fell under the umbrella of corporate social responsibility, or CSR, and were done mainly to burnish a brand. This one-dimensional view has since given way to more strategic priorities. In some sectors, like mining and oil and gas, paying attention to environmental or social concerns is critical to maintaining a license to operate (https://www.bcgperspectives.com/content/articles/sustainability_energy_environment_establishing_license_to_operate/). More broadly, companies from a range of industries are using sustainability as a way to create competitive advantage (https://www.bcgperspectives.com/content/interviews/sustainability_regnell_rising_sustainability_is_smart_business/), drive operational efficiency, and pave the way for new growth (https://www.bcgperspectives.com/content/interviews/sustainability_innovation_haanaes_postdurban_climate_efforts_counting_on_business/). Knut Haans, partner and managing director and global leader of BCGs global Sustainability practice

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Operations: Investing in Innovation and Growth

The Conventional View: The global financial crisis shows no sign of improving anytime soon. The best way for companies to weather this continuing downturn is to cut costs, slash budgets, and tough it out. My View: Were in a period of slowing growtheven in emerging markets. But belt-tightening alone isnt the answer. Forward-looking companies are fundamentally rethinking their operating models in order to do more with less (https://www.bcgperspectives.com/content/articles/manufacturing_operations_doing_more_with_less/) and gain a competitive edge. Theyre finding ways to be more innovative and more productive, while using less labor, materials, energy, and other resources. Instead of cutting R&D budgets, theyre developing better products at a lower cost than their competitors. Even in a downturn, innovation pays a premium, and its the best way for companies to gain share and grow in a slow-growth era. Look at Apple. Its sales consistently defy economic storms, and its products inspire true passion, even though theyre far from cheap. (According to a recent survey (http://news.cnet.com/8301-17938_105-20088068-1/iphone-users-would-trade-shoes-sex-for-phone/?tag=contentMain;contentBody), 40 percent of iPhone users would give up their toothbrushes and go shoeless for a week before giving up their beloved phone.) Now is also the perfect time for lean companies (https://www.bcgperspectives.com/content/articles/lean_manufacturing_how_to_become_lean_champion/) with a cash cushion to look for strategic opportunities that weaker companies cant capitalize on, and to make unexpected, game-changing moves. If your costs are low, for instance, you can lower your prices and steal share, or even develop a new product that directly attacks a competitors established stronghold. Finally, its a great time to go bargain hunting. Many traditional sources of funding have dried up, and companies with cash can often acquire equipment, intellectual property, and other assets at fire-sale prices. Instead of simply tightening their belts, ambitious companies are planning to strategically invest and grow. They see the downturn as an opportunity to recreate their industrieson their own terms. Joe Manget, senior partner and managing director and global leader of BCGs Operations practice

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Marketing: Whats Old Is New Again

The Conventional View: In a year that will feature one of the worlds premier marketing events, the Olympics, companies that do not push the envelope across a range of digital platformsincluding social media (https://www.bcgperspectives.com/content/articles/consumer_products_marketing_sales_getting_more_from_social_media/), Web mining (https://www.bcgperspectives.com/content/articles/consumer_insight_media_entertainment_beyond_the_buzz_on_web_mining/), and mobile and multichannel (https://www.bcgperspectives.com/content/articles/telecommunications_retail_multichannels_3_0/) commercerisk losing significant market share. Digital marketing is the future. Ignore it at your peril. My View: The infatuation with cutting-edge technology is clouding companies view of what matters most. Digital marketing may enable companies to do things differently or more efficiently, but it doesnt trump traditional competencies and people-driven solutions. Classic marketing disciplines matter now as much as they ever have. Ignore them at your peril. Four disciplines, in particular, will be critical to success in 2012: optimizing the return on marketing investment (https://www.bcgperspectives.com/content/articles/marketing_sales_marketing_no_shortcuts/) (ROMI), having a strategic, value-driven key account management strategy (https://www.bcgperspectives.com/content/articles/sales_channels_technology_software_creating_value_in_key_accounts/), using pricing to communicate and extract value (https://www.bcgperspectives.com/content/articles/pricing_sales_channels_are_you_fluent_in_pricing/), and investing in consumer insight (https://www.bcgperspectives.com/content/articles/consumer_insight_marketing_consumers_voice/). These are perennial musts prerequisites for effective marketing strategies, both traditional and digital. But at many companies, there is still room to improve on the fundamentals. Measuring ROMI can be notoriously difficult, for example, so executives often take shortcuts to guide their decision-making. But relying on rules of thumbsuch as marketing spending as a percentage of revenuescan be costly. In fact, the lack of rigorous analytics accounts for the lions share of the 15 to 30 percent of the marketing budget that is being wasted by companies today. To maximize ROMI, companies must take both a top-down strategic perspective and a bottom-up modeling approach to all marketing investments. This is especially true for untested platforms. Experimentation is necessary, given the fast evolution of digital marketing, but its not an excuse to overlook or downplay proven metrics and rigorous analytics. A best-in-class consumer insight function can be a source of strategic advantage, but this is something only 35 percent of companies (https://www.bcgperspectives.com/content/articles/consumer_insight_marketing_consumers_voice/) feel they have achieved. Companies need to review not simply how much theyre spending on this function, but also the types of research being conducting and the insight being generated for the businesstheres a big difference between information and knowledge, particularly given the overwhelming amount of data now available. And while consumer insight matters in all markets, theres no substitute for local research in fast-changing developing economies, where many companies are looking for growth. Miki Tsusaka, senior partner and managing director and global leader of BCG s Marketing and Sales practice

https://www.bcgperspectives.com/content/articles/growth_innovation_year_ahead/print 14-02-2012

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Social Media: The Stereotype Shattered

The Conventional View: Social media have moved into the mainstream, but many in the business world still typecast the typical user as young, Western, and more than likely completely self-absorbed. My View: Its a new year and a good time to think again2012 is the year when social media (https://www.bcgperspectives.com/content/articles/consumer_products_marketing_sales_getting_more_from_social_media/) will shatter these stereotypes. Social media applications now account for the fourth most-popular online activityand the first among active users, who spend more than five hours a week on social-networking sites. However, its not just the kids who are on Facebook and Twitter. Users ages 35 to 44 now spend 5.3 hours a week on social networking (compared with about 6.3 hours for people ages 18 to 43), while 45- to 54-year-olds spend almost five hours a week, and even those over 55 spend three. Its not just (or even predominantly) a Western phenomenon, either. In such countries (https://www.bcgperspectives.com/content/articles/consumer_products_media_entertainment_internets_new_billion/) as India, Indonesia, Turkey, Russia, and Brazil, which have relatively low Internet penetration, three-quarters or more of users are engaged in social networking. People in these developing economies are bypassing the traditional Internet and going straight to social. Social show-offsusers who constantly post their status even when they have nothing new to sayare another overhyped stereotype. In fact, the majority of users simply check out their friends or send messages. Only one user in five updates his or her status daily, and fewer still link to their websites or blogs or use social media to meet new people. Finally, social networks do make money. U.S. display-ad revenues on Facebook already far outpace those on Google, Yahoo!, and AOL, a trend that is expected to continue. Social networks will come of age in 2012. Companies that ignore their impact (https://www.bcgperspectives.com/content/commentary/marketing_go_to_market_strategy_winning_in_digital_economy/)or operate on the basis of common misperceptionsdo so at their peril. Dominic Field, partner and managing director and global topic leader for the digital economy

https://www.bcgperspectives.com/content/articles/growth_innovation_year_ahead/print 14-02-2012

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Inflation: Germany Finally Gets Comfortable With Inflation

The Conventional View: Germanys memories of the Weimar hyperinflation and its unwillingness to bail out the overly indebted countries of southern Europe will keep the countrys political and business leaders focused squarely on preventing inflation. My View: 2012 will be the year that Germany finally gets comfortable with the idea of inflation. Economic logic demands it. The sovereign-debt crisis in the euro zone is just one especially complicated illustration of a far larger reality: the punishing after-effects of a 30-year credit boom that has created a debt monster (https://www.bcgperspectives.com/content/articles/management_two_speed_economy_growth_debt_monster/) throughout the developed world. Total debt-to-GDP levels in the 18 core countries of the Organisation for Economic Co-operation and Development (http://www.oecd.org/home/0,3675,en_2649_201185_1_1_1_1_1,00.html) rose from 160 percent in 1980 to 321 percent in 2010. Disaggregated and adjusted for inflation, these numbers mean that the debt of nonfinancial companies increased by 425 percent, the debt of governments also increased by 425 percent, and the debt of private households increased by 600 percent during this period. In theory, there are four ways to deal with too much debt. Given current political and economic realities, however, only one is really likely. Trying to pay back the debt through increased saving and fiscal austerity will only lead to lower growth, higher unemployment, and correspondingly less income. Shrinking relative debt-to-GDP ratios through faster growth is also unrealistic. The entire developed world faces a sustained period of low growth. Restructuring (https://www.bcgperspectives.com/content/articles/management_two_speed_economy_back_to_mesopotamia/) or otherwise writing down the debt also seems unlikely. The kind of taxes required to fund restructuring would be highly unpopularand would represent yet another drag on economic growth. Thus, the only way to achieve higher nominal growth will be to generate inflation. Inflation would reduce real debt and make it easier and less costly to restructure that debt through partial defaults. When combined with labor policies that push employees in high-debt countries in the euro zone to accept wage increases below the rate of inflation, increased inflation would also lessen the divergence in labor costs within the euro zone. Finally, inflation would make it possible for northern European countries to lower taxes and introduce stimulus programs to support domestic consumption. Which brings me back to Germany. Some observers believe that the German government and its citizens will be unwilling to pursue such a strategy. Im more optimistic. I believe that Germany willafter long resistancesupport an inflationary strategy on the part of the European Central Bank (http://www.ecb.int/home/html/index.en.html) as the only way the euro zone can survive in its current form. The only real alternative, breakup, would have major negative repercussions. Of course, increased inflation will have major implications for companies (https://www.bcgperspectives.com/content/commentary/managing_two_speed_economy_growth_time_to_get_ready_for_inflation/) implications for which they need to be planning now (https://www.bcgperspectives.com/content/articles/managing_in_two_speed_economy_value_creation_strategy_making_your_company_inflation_ready/). Daniel Stelter, senior partner and managing director

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Global Growth: Its Time for a New New Deal

The Conventional View: There is not much that business or government can do about the great recession: we need to pay for past excesses by tightening our belts and accepting austerity. My View: Its more a manifesto than a prediction, but I think we need a new New Deal to ally business and government behind a wave of investments that will break the investment strike and drive short-term expansion and long-term productivity growth. Ultrabroadband telecommunications, the smart electrical grid, and health care information alone offer $1 trillion in transformative investment opportunities. Corporations have $2 trillion in idle cash. Its money that could be poured into these opportunitiesbut the returns to society dont translate into business cases. Governments, conversely, have all the incentive to invest but lack the resources or political will. This impasse is an illusiona failure of creativity and nerve. The rules of competition are not eternal verities: they have been renegotiated many times in response to shifts in technology, economics, and power. Technology today continues to drive down transaction costs, further weakening the informational glue that bonds activities into conventional value chains. Economics of scale are polarizing, intensifying to near monopoly strength in new infrastructures and data but becoming negative (small is beautiful) in innovation by communities of users. Both imply power shifts: threats and opportunities beyond the control of most corporations and outside the scope of traditional concepts of strategy. Given our current economic straits, it is in everybodys interests to change the rules. We could finesse the market failures at the core of our current investment strike if stakeholders struck a bargain to create new, stacked industry architectures. What if, for example, telecom executives approached regulators and agreed to a regulated dark fiber utility in return for a free hand to sell services on it? What if utility executives asked for mandated or subsidized deployment of smart meters in return for the freedom to compete on timevariable pricing? Whole industries could be rethought to recombine efficient scale and decentralized adaptation to drive a new wave of investment, innovation, and growth. Taking this road will demand imagination and courage from business leaders and policymakers. But the stakes are too high and the crisis too deep for us to rely on the increasingly sclerotic nostrums of either political ideology or business strategy. Philip Evans, BCG Fellow, senior partner and managing director

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Cloud ComputingOpportunity or Liability?

The Conventional View: Cloud computing offers companies sizable potential advantages, chief among them being lower costs and greater flexibility. But the risks of the cloud, including the potential compromise of sensitive business data, are very real and, for some companies, should be a legitimate deal breaker. My View: Undoubtedly there are some risks to trusting parts of ones business to the cloud. Data privacy, for one, is not necessarily ensured, as a number of governments (including the U.S.) have sought or are seeking the legal right to access the data of companies that operate in their territories. And governments reach is likely to expand. There is also, for example, the possibility of business disruption if a companys chosen provider has operational problems. A number of businesses learned this the hard way last April, when Amazon, the cloud industrys dominant player, suffered a major outage (http://bits.blogs.nytimes.com/2011/04/21/amazon-cloud-failuretakes-down-web-sites/?scp=2&sq=Amazon's%20cloud%20outage%20April&st=cse). On balance, though, the cloud is a relatively safe, smart bet for most businesses. In particular, most companies biggest fearthe loss or breach of critical proprietary datais exaggerated. In fact, data stored in the cloud are often more secure than data stored in-house and accessed via a companys standard networks and desktop computers. Cloud providers, which are well aware that security is a make-orbreak issue for them, continue to focus on the problem and have made great strides toward hardening their infrastructures. In addition, the distributed nature of cloud computingthat is, the fact that data are stored in multiple placesarguably makes data less vulnerable than if stored centrally in-house. Finally, having data stored externally removes the threat of an in-house security breach resulting from equipment theft. The threat of a business disruption in the event of an Amazon-like failure is real. But the danger can be mitigated considerably by proper planningfor example, arranging to have data automatically duplicated to a second site or contracting with a second provider. Bottom line, moving data to the cloud represents far less of a risk than many people thinkand, for most companies, would actually result in greater security.Ralf Dreischmeier, senior partner and managing director and leader of BCGs European IT practice

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Managing Talent in the Public Service: Why Governments Should Aim to Rival the Private Sector
The Conventional View: Attracting the best and the brightest to government jobs is a challenge. Who would want to work for an organization thats generally regarded as cumbersome, inefficient, and behind the times (https://www.bcgperspectives.com/content/commentary/public_sector_it_strategy_public_service_how_public_wants_it/)? The problem, which is rooted in how governments operate, is intractable. And really, why should governments invest in talent when there is so much else that needs to be fixed

(https://www.bcgperspectives.com/content/videos/management_two_speed_economy_private_equity_wolf_martin_europes_sovereign_debt_crisis_and_global_ec My View: An environment where private-sector companies headhunt the top talent from government departments, where the demand for government jobs exceeds the supply, and where governments deliver high-quality services in a timely and efficient manner (https://www.bcgperspectives.com/content/articles/public_sector_transformation_citizens_are_you_being_served/) is not out of reach. In fact, its already a reality in places like Singapore, where the public sector attracts the best talent and is widely regarded as a rewarding place to work. The governments investment in its employees is the envy of some private-sector companiespublic-sector employees are measured and rewarded accordingly, incentivized through opportunities, and offered continual and varied training. In most countries, however, lackluster service standards have become a self-fulfilling prophecy. The public has low expectations for the quality of government services, and governments have little incentive to lift their game in terms of both improving processes and changing how they recruit and manage talent. The net effect is a continued decline in service quality and expectations. Breaking this cycle is not as challenging as it may seem, and the benefits can be quickly realized. Governments need to start by raising their own expectationsabout the services they can provide and the quality of the people they can attractand then investing to build talent. Is it realistic to think this can happen in 2012? In these trying times, governments require high-quality talent, from the senior policymakers wrestling with a volatile global economy to the frontline employees delivering crucial welfare, security, or enforcement services. With many countries looking to pare back the number of government employees, having a lean but high-quality workforce has arguably never been more importantits one way to do more with less. Larry Kamener, senior partner and managing director and global leader of BCGs Public Sector practice

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Global Health: Maintaining Investments in the Developing World Will Save Money in the Long Run
The Conventional View: With Europe in the midst of a sovereign-debt crisis and the U.S. struggling to keep its recovery on track, fiscal prudence dictates that wealthy nations pare back their investments in fighting diseases in the developing world. According to a recent report (http://policycures.org/downloads/g-finder_2011.pdf), eight of the top 12 government funders cut their investments in neglected disease R&D in 2010. Overall, there has been a $136 million drop in global-health R&D funding in the last year for diseases such HIV/AIDS, malaria, pneumonia, and meningitis. On the delivery side, governments are the primary contributors of funding to roll out lifesaving interventions such as medicines and mosquito nets. There are indications that this funding is being cut as well. Our View: Cutting disease-fighting investments will lead to significantly higher global costs in the long run. The tradeoff, even solely in financial terms, is simply not worth making. Over the last several decades, the progress made in the fight against disease has been remarkable. In the the case of diseases such as polio and malaria (https://www.bcgperspectives.com/content/commentary/global_health_public_sector_malaria_responding_to_urgent_threat_of_drug_resistance/), we have reached a point where eradication is a realistic goal. When a disease is so tightly controlled, trimming back funding may not seem like a drastic step. But the costs of allowing a disease to regain strength are significant, both in dollars and in human suffering. In Rwanda, failure to supply bed nets that protect users from mosquitoes led to a doubling of malaria cases between 2008 and 2009, according to the Rwandan Ministry of Health (http://globalhealthsciences.ucsf.edu/pdf/e2pi-maintaining-the-gains-country-briefs.pdf). This almost wiped out the previous three years progress in reducing cases through control efforts. To make up lost ground, malaria-control costs in Rwanda tripled the next year to over $70 millionand this excludes the cost of treating additional patients, not to mention the untold human suffering. Cutting back on R&D can have a significant impact as well, given that innovative approaches to fighting disease are often far more costeffective than any existing treatments. For example, biologically modifying mosquitoes so they cannot carry and transmit a disease like dengue would be cost saving relative to control efforts. Traditional dengue-vector control in a large country like Brazil could cost as much as $13 billion over 20 years, while BCG modeling suggests that biological modification, if successful, would cost $800 million over the same periodand could have the potential to eliminate the disease. Eradication of developing-world disease requires global coordination and cooperation, both in funding and in political will. Cutting investment now will cost the world more in the long run, in addition to increasing the toll of human suffering and lives lost. Wendy Woods, Sarah Cairns-Smith, and Andrew Rodriguez, partners and managing directors

Copyright 2012 The Boston Consulting Group, Inc.

https://www.bcgperspectives.com/content/articles/growth_innovation_year_ahead/print 14-02-2012