R ES. CEO Challenge 2004 Top 10 Challenges

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1 e x e c u t i v e s u m m a ry R ES CEO Challenge 2004 Top 10 Challenges

2 nlinewww.conference-board.org Executive Summary This Executive Summary by Conference Board research director Linda Barrington, with Board statistician Henry Silvert, provides an overview of the Top 10 Challenges cited by 539 CEO respondents to this year s CEO Challenge 2004 Survey, with attention to points of convergence and departure across region, industry, and company size. the conference board creates and disseminates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. Working as a global, independent membership organization in the public interest, we conduct research, convene conferences, make forecasts, assess trends, publish information and analysis, and bring executives together to learn from one another. The Conference Board is a notfor-profit organization and holds 501 (c) (3) tax-exempt status in the United States. acknowledgments The Conference Board gratefully acknowledges Heidrick & Struggles and PeopleSoft for their generous support of this research. The authors thank Conference Board Publishing staff John Lumea, Peter Drubin, and Chuck Mitchell for their valuable creativity and guidance; we are grateful to Megan Lam and Wennie Lee for providing research assistance. sponsors All findings and data in this Summary register the collective experience of survey participants and reflect the overall results of the study, not necessarily the views of individual companies or CEOs, unless otherwise specifically indicated. Research Report The Conference Board also conducted in-depth interviews with 11 CEOs from multinational companies, representing diverse industries, about the headlines that dominated the year s business press. Each of these CEOs companies earns revenues in excess of US$1 billion and has operations outside its country of origin. Detailed results of the interviews, along with additional survey data and further analysis of survey respondents top priorities, are presented in the forthcoming Research Report, CEO Challenge 2004: Perspectives and Analysis. CEO Challenge 2004 Perspectives and Analysis by Esther V. Rudis Table of contents Top Challenges and Top Priorities The Outsourcing and Offshoring Phenomenon Flexibility and Learning in an Outsourced/Offshored Universe The Spiraling Cost of Healthcare and Benefits The State of Executive Compensation and Succession Boards and CEOs Adjust to New Realities Survey respondent profile To get the Research Report members of The Conference Board. For an electronic version of CEO Challenge 2004: Perspectives and Analysis, go to our Members Only Web site, Printed copies of CEO Challenge 2004: Perspectives and Analysis can also be obtained by contacting Customer Service at or via at orders@conference-board.org. John Lumea editor Peter Drubin design Pam Seenaraine production non-members. To purchase an electronic version or printed copy of CEO Challenge 2004: Perspectives and Analysis, go to our public Web site at Or call customer service at

3 CEO Challenge 2004 Top 10 Challenges The global economy is no longer experiencing the drag of a sluggish U.S. recovery, and this is reflected in the results of this year s CEO Challenge Survey. Asked to indicate their level of concern about 62 different challenges, 52 percent of the 539 participating CEOs from around the world indicate that sustained and steady top-line growth is of greatest concern the highest Challenge category. This is the highest share of responding CEOs that singled out any one challenge as being of such high concern to them. Top 10 Challenges Overall ranking concern 1 Sustained and steady top-line growth 52% 2 Speed, flexibility, adaptability to change 42 3 Customer loyalty / retention 41 enabling entrepreneurship 31 5 Cost / ability to innovate 29 executives 26 7 Tight cost control 25 8 Succession planning 25 9 Seizing opportunities for expansion / growth in Asia Transferring knowledge / ideas / practices within the company 23 CEOs were asked to rate each of 62 challenges on a scale from 1 to 5, defined as follows: 1 of greatest concern 2 among my chief concerns 3 important, but not a priority 4 not important 5 not relevant to my business Respondents were allowed to name multiple challenges as concern. The Top 10 Challenges are those that received the highest percent of CEOs marking the challenge as concern. Concern with Top-Line Growth is High Among Companies of Different Sizes The high concern with growth holds regardless of company size, with the most CEOs from each of four revenue categories marking top-line growth as being of greatest concern : less than $100 million $100 million to less than $1 billion $1 billion to less than $5 billion $5 billion and over There is also strong agreement across revenue categories about the next two most important challenges. CEOs from companies in all of these categories place speed, flexibility, adaptability to change and customer loyalty / retention as either second or third in their top 10 list of challenges that are of greatest concern to them. Within the United States, where the number of respondents allows for more detailed analysis by size, two challenges succession planning and vigilance on ethics issues register very differently. CEOs of the largest U.S. companies (revenues of $5 billion and over) rate these two challenges as 2 nd and 6 th, respectively, on their greatest concern list. The same challenges rate 13 th and 26 th, respectively, among CEOs of the smallest U.S. companies (revenues under $100 million). Employee loyalty / commitment / job satisfaction rated 5 th among CEOs of the smallest U.S. companies, but dropped to 16 th among CEOs of U.S. companies $5 billion and over. CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board 3

4 (Company size, cont d) Less than $100 million Global sales FY03 in US$ 1 Sustained and steady top-line growth 60% 2 Customer loyalty / retention 49 3 Speed, flexibility, adaptability to change 41 enabling entrepreneurship 37 5 Cost / ability to innovate 29 6 Employee loyalty / commitment / job satisfaction 28 7 Commercialization of new products 26 8 Transferring knowledge / ideas / practices within the company 26 9 Availability of talented managers / executives Speed to market 22 $100 million to less than $1 billion Global sales FY03 in US$ 1 Sustained and steady top-line growth 54% 2 Customer loyalty / retention 42 3 Speed, flexibility, adaptability to change 41 4 Cost / ability to innovate 26 5 Succession planning 25 executives 24 7 Stimulating innovation / creativity / enabling entrepreneurship 24 8 Tight cost control 23 9 Seizing opportunities for expansion / growth in Asia Realizing gains from mergers / acquisitions / alliances 21 $1 billion to less than $5 billion Global sales FY03 in US$ 1 Sustained and steady top-line growth 47% 2 Speed, flexibility, adaptability to change 40 3 Customer loyalty / retention 38 enabling entrepreneurship 31 5 Cost / ability to innovate 30 6 Tight cost control 28 7 Succession planning 27 8 Availability of talented managers / executives 27 9 Transferring knowledge / ideas / practices within the company Seizing opportunities for expansion / growth in Asia 25 $5 billion and over Global sales FY03 in US$ 1 Sustained and steady top-line growth 51% 2 Speed, flexibility, adaptability to change 44 3 Customer loyalty / retention 36 enabling entrepreneurship 35 5 Cost / ability to innovate 33 6 Tight cost control 33 7 Availability of talented managers / executives 33 8 Succession planning 31 9 Seizing opportunities for expansion / growth in Asia Making investment / capital allocation decisions 27 About the survey participants The Conference Board mailed and faxed the 3- page CEO Challenge 2004 Survey to 3000 CEOs in April On a scale of 1 ( of greatest concern ) to 5 ( not relevant to my business ), CEOs were asked to register their degree of concern with each of 62 challenges. With 539 CEOs responding, the response rate was 18 percent. Region N = 539 Other* 8 Asia 9 Europe 27 United States 56% * Includes Canada (6%) and Other (2%) Primary industry REGION United Asia Europe States Manufacturing 29% 39% 39% Financial services Other services CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board

5 Regions Looking across regions, CEOs in Europe and the United States most often cite top-line growth as concern. In Asia, interestingly, growth is edged out by both speed / flexibility / adaptability to change and stimulating innovation / creativity / enabling entrepreneurship. Among CEO respondents in Asia, 60 percent rate speed / flexibility / adaptability as concern, while half rate top-line growth that highly. Asia 1 Speed, flexibility, adaptability to change 60% 2 Stimulating innovation / creativity / enabling entrepreneurship 51 3 Sustained and steady top-line growth 50 4 Availability of talented managers / executives 47 5 Customer loyalty / retention 46 6 Succession planning 40 7 Cost / ability to innovate 40 8 Seizing opportunities for expansion / growth in Asia 36 9 Tight cost control Employee loyalty / commitment / job satisfaction 32 Europe 1 Sustained and steady top-line growth 50% 2 Speed, flexibility, adaptability to change 47 3 Customer loyalty / retention 37 4 Tight cost control 35 5 Stimulating innovation / creativity/ enabling entrepreneurship 34 executives 32 7 Cost / ability to innovate 30 8 Seizing opportunities for expansion / growth in Asia 30 9 Transferring knowledge / ideas / practices within the company Making investment / capital allocation decisions 25 United States 1 Sustained and steady top-line growth 56% 2 Customer loyalty / retention 43 3 Speed, flexibility, adaptability to change 37 4 Cost / ability to innovate 29 5 Stimulating innovation / creativity / enabling entrepreneurship 28 6 Succession planning 26 7 Vigilance on ethics issues 23 8 Employee loyalty / commitment / job satisfaction 22 9 Availability of talented managers / executives Realizing gains from mergers / acquisitions / alliances 22 Other Total 40% 38% Global sales FY03 in US$ REGION United Asia Europe States Other Total < $100 million 18% 15% 24% 2% 19% $100 million to < $1 billion $1 to < $5 billion $5 billion and over Is your stock publicly traded? N = 527 No 50 Yes 50% CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board 5

6 and Industries Comparing different industries, top-line growth is most often a top-of-mind issue for CEOs of manufacturing and services companies. Among CEOs of financial services companies, growth essentially ties for first with speed / flexibility / adaptability and customer loyalty / retention as concern. Manufacturing 1 Sustained and steady top-line growth 50% 2 Speed, flexibility, adaptability to change 35 3 Seizing opportunities for expansion / growth in Asia 35 enabling entrepreneurship 30 5 Customer loyalty / retention 28 6 Tight cost control 28 7 Cost / ability to innovate 27 8 Succession planning 27 9 Lack of pricing power Availability of talented managers / executives 24 Financial services 1 Speed, flexibility, adaptability to change 46% 2 Sustained and steady top-line growth 45 3 Customer loyalty / retention 45 4 Regulatory compliance 38 5 Tight cost control 32 executives 31 7 Cost / ability to innovate 30 8 Stimulating innovation / creativity / enabling entrepreneurship 28 9 Realizing gains from mergers / acquisitions / alliances Aligning IT with business goals 25 Other services 1 Sustained and steady top-line growth 58% 2 Customer loyalty / retention 51 3 Speed, flexibility, adaptability to change 45 enabling entrepreneurship 34 5 Cost / ability to innovate 31 executives 26 7 Employee loyalty / commitment / job satisfaction 26 8 Succession planning 25 9 Transferring knowledge / ideas / practices within the company Short-term performance pressure 22 Across Industries, 6 Challenges Are in Everybody s Top 10 While their relative rankings shift around from industry to industry, the same six challenges appear on the top 10 list of all three major industry groups: sustained and steady top-line growth speed, flexibility, adaptability to change stimulating innovation / creativity / enabling entrepreneurship customer loyalty / retention cost / ability to innovate availability of talented managers / executives While CEOs of both manufacturing and other services companies place succession planning among their top 10 concerns, succession planning does not make the top 10 cut among financial services CEOs. The financial services industry tends to have a younger workforce, 1 so the demographic impact of the eventual exit of the baby boomer workforce is likely less daunting there and may explain comparatively lower CEO concern over succession planning. 1 As measured by percent of workforce 55 years or older. 6 CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board

7 Among manufacturing CEOs, seizing opportunities for expansion / growth in Asia and lack of pricing power are of greatest concern frequently enough to appear among the top 10 challenges. These two challenges do not register among the top 10 vote getters among CEOs of financial or other services companies. Among the challenges manufacturing CEOs mark as concern, seizing opportunities in Asia is third only to top-line growth and speed / flexibility / adaptability. For CEOs of financial services and other services companies, seizing opportunities in Asia ranks 32 nd and 16 th, respectively, on that measure. (Lack of pricing power ranks 9 th on the greatest concern scale among manufacturing CEOs but 39 th and 25 th, respectively, among CEOs of financial and other service companies.) Although industries are in broad agreement about the importance of labor relations / satisfying workers' expectations Other services Manufacturing Financial services Asia manufacturing CEOs are two times more likely than CEOs in any industry by region to see the issue as concern Manufacturing 7% 8% Financial services Other services % Globalization continues to pressure manufacturers in all regions to reduce costs in lieu of raising prices, and examining Asia for beneficial opportunities is at top of mind for CEOs of manufacturing operations around the globe. 2 Asia Europe United States Manufacturing N=14 N=56 N=117 Financial services N=17 N=47 N=36 Other services N=17 N=40 N=143 Are Industry CEOs Different in Different Regions? Comparing the responses of industry CEOs across regions reveals different levels of concern over challenges relating to human resources. Although CEOs tendency to cite labor relations / satisfying workers expectations as being of greatest concern varies between regions, the differences between industries manufacturing (10 percent), financial services (10 percent), other services (13 percent) are very small. But digging deeper into the industry data reveals that Asia manufacturing CEOs (29 percent) are well over three times more likely than their industry peers in the United States (8 percent) and Europe (7 percent) to indicate the highest level of concern about that challenge. Indeed, manufacturing CEOs in Asia register the greatest concern about labor relations twice as often as any industry CEOs by region. Asian CEOs also express higher concern about the availability of talented managers / executives and transferring knowledge / ideas / practices within the company than do their industry peers elsewhere across the globe. Asia is developing rapidly, and top Asian talent is increasingly sought after both by companies located within Asia and by those elsewhere around the world. Human Resources: The big picture overall ranking The set of HR challenges in the survey concern enabling entrepreneurship 31% executives Transferring knowledge / ideas / practices within the company Employee loyalty / commitment / job satisfaction Managing cross-cultural interactions (employee / supplier / customer) Availability of skilled labor Labor relations / satisfying workers expectations 11 2 See Robert H. McGuckin and Matthew Spiegelman (with Xu Jianyi, Liu Yaodong, and Jiang Yuan), China s Experience with Productivity and Jobs: Benefits and Costs of Change, Research Report 1352, The Conference Board, CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board 7

8 Are More Successful Companies Different? For a subset of 132 companies, we were able to classify each as more or less successful, based their average return on assets. 3 Analysis of these companies with respect to human resources challenges reveals an interesting difference. With the exception of stimulating innovation / creativity / enabling entrepreneurship, CEOs of more successful companies more frequently register each of the human resources challenges as concern than do CEOs of less successful companies. For example, employee loyalty / commitment / job satisfaction registers as a top priority either of greatest concern or among my chief concerns with two-thirds of CEOs of both more successful and less successful companies. But CEOs of more successful companies are 50 percent more likely to give employee loyalty / commitment / job satisfaction the greatest concern rating, while CEOs of less successful companies are 25 percent more likely to rate it the lower of the top two choices. Likewise, roughly the same percent of CEOs of both more successful and less successful companies rate availability of talented managers / executives as a top concern 79 and 76 percent, respectively but CEOs of more successful companies are more than twice as likely to give availability of top talent the greatest concern rating. What s Changed in 5 Years? We conducted in-depth interviews about the survey challenges with 11 CEOs around the world. 4 The benefit of such conversations is that they surface whys and wherefores that enrich the results of the mass-response survey. In discussing cross-border labor markets and offshoring, these corporate leaders emphasized again and again that economic forces will continue to encourage global sourcing and that staying competitive is the only option. But their comments make it clear that, while cost-control is necessary to stay competitive, it is not sufficient. Learning, flexibility, capabilities, new ideas, change these are all part of the new competitive equation. Looking back at our first CEO Challenge, five years ago, confirms this new reality what CEOs regard as their greatest challenges has undergone a dramatic shift (see table opposite). While the specific wording of management challenges posed in the 1999 survey may have changed, enough consistency exists to reveal that capabilities such as speed, innovation, talent, and knowledge have gained importance. 5 CEOs of more successful companies are twice as likely to cite availability of talented managers / executive as concern What CEOs say: More successful companies (N=58) Less successful companies (N=58) 3 Responding companies were cross-listed with the S&P database Research Insight. For the 132 companies for which return on assets information was available, we computed the average return over the period. Those in the top half we label more successful, those in the bottom half we label less successful. Most of these are U.S. companies listed on U.S. stock exchanges % % 4 For the detailed results of these interviews, see Esther V. Rudis, CEO Challenge 2004: Perspectives and Analysis, Research Report 1353, The Conference Board, Related Conference Board research supports the notion that companies 53 of greatest concern among my chief concerns important, but not a priority not important No executive responded that this challenge is not relevant to my business. Note: More successful companies are those from a subset of 132 companies (for which data are available) whose average return on assets over the period was above the median; less successful companies are those that had a below-median return. 64 are placing a higher priority on innovation and change. Sixty percent of companies responding to The Conference Board s 2003 survey on innovation reported that innovation is part of their mission or vision statement; 55 percent reported having expanded their definition of innovation to include business models, strategies, or processes. Consistent with Challenge CEOs registering high concern around innovation is a further result of that innovation study 56 percent of respondents reported that their companies are only moderately successful in meeting their self-imposed innovation goals. See Kathryn L. Troy, Making Innovation Work: From Strategy to Practice, Research Report 1348, The Conference Board, CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board

9 Changing Priorities, Cited as Cited challenge as 1999 CEO Challenge one of top CEO Challenge ranking Marketplace challenges challenges* ranking Challenges corresponding to the 1999 survey concern ** 1 Downward pressure on prices 48% 1 Lack of pricing power 17% 2 Changes in type / level of competition 43 2 Regulatory compliance 16 3 Industry consolidation 41 3 Industry consolidation 14 4 Changing technology 25 4 Keeping up with new technology 12 5 Shortages of key skills 23 4 Availability of skilled labor 12 6 Changes in supply / distribution systems 22 6 Entry of non-traditional competitors 10 6 Exchange rate volatility 10 7 Access to / cost of capital 17 7 Cost of capital 8 8 Regulatory issues (labor, market access, etc.) 15 8 Advancing supply chain automation 7 8 Transnational regulatory / fair trade issues 7 8 Impact of the Internet Supply chain disruptions / contingencies 5 8 Instability in emerging markets Instability in emerging markets 5 11 Currency issues 5 12 Competitors' Internet capabilities 4 Management challenges Challenges corresponding to the 1999 survey 1 Customer loyalty / retention 40% 1 Speed, flexibility, adaptability to change 42% 2 Customer loyalty/retention 41 2 Managing mergers / acquisitions / alliances 30 3 Stimulating innovation / creativity / enabling entrepreneurship 31 3 Reducing costs 30 4 Cost / ability to innovate 29 4 Engaging employees in the company's vision / values 29 5 Availability of talented managers / executives 26 5 Increasing flexibility/speed 26 6 Tight cost control 25 6 Increasing innovation 24 7 Transferring knowledge / ideas / practices within the company 23 8 Employee loyalty / commitment / satisfaction 21 7 Competing for talent 23 9 Realizing gains from mergers / acquisitions / alliances 20 8 Making investment / capital allocation decisions 17 9 Making investment / capital allocation decisions 20 9 Top management and / or board succession 9 11 Management / succession Transferring knowledge, ideas and practices 9 12 Managing cross-cultural interactions (employees / supplier / customer) Communicating across cultures 6 12 Leveraging diversity (including cultural diversity) 2 * CEOs were asked to choose the top three from among the lists in each section. ** CEOS were asked to register each challenge on a scale of 1-5: 1 = of greatest concern 2 = among my chief concerns 3 = important, but not a priority 4 = not important 5 = not relevant to my business CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board 9

10 Comparing the Top 10 Challenges of 2004 By rank REGION INDUSTRY GLOBAL SALES FY03 Overall United Financial Other < $100 $100 million to $1 billion to $5 billion Challenges of greatest concern ranking Asia Europe States Manufacturing services services million < $1 billion < $5 billion and over Sustained and steady top-line growth Speed, flexibility, adaptability to change Customer loyalty / retention Stimulating innovation / creativity / enabling entrepreneurship Cost / ability to innovate Availability of talented managers / executives Tight cost control Succession planning Seizing opportunities for expansion / growth in Asia Transferring knowledge / ideas / practices within the company Employee loyalty / commitment / job satisfaction Speed to market Realizing gains from mergers / acquisitions / alliances Making investment / capital allocation decisions Vigilance on ethics issues 15 7 Commercialization of new products 16 7 Short-term performance pressure Aligning IT with business goals Lack of pricing power 19 9 Regulatory compliance CEO Challenge 2004: Top 10 Challenges Executive Summary The Conference Board

11 about the sponsors is the world leader in senior-level executive search and a provider of leadership development services, including executive assessment and professional development. For over 50 years, Heidrick & Struggles has been dedicated to building strong companies and effective leaders. Heidrick & Struggles operates from principal business centers in North America, Latin America, Europe, and Asia-Pacific. provides enterprise application software to 12,200 customers in more than 25 industries and 150 countries. PeopleSoft s HCM (human capital management) suite is aimed at helping companies to improve workforce performance, reduce administrative HR costs, and streamline employee access to key corporate services and self-service personnel data. Related Conference Board Publications China s Experience with Productivity and Jobs: Benefits and Costs of Change Research Report 1352, 2004 Making Innovation Work: From Strategy to Practice Research Report and Executive Summary 1348, 2004 Top Executive Compensation in 2002 Research Report and Executive Summary 1340, 2003 The Conference Board Commission on Public Trust and Private Enterprise: Findings and Recommendations Special Report and Executive Summary, 2003 The Conference Board, Inc. 845 Third Avenue New York, NY United States Tel Fax The Conference Board Europe Chaussée de La Hulpe 130, box 11 B-1000 Brussels Belgium Tel Fax The Conference Board Asia-Pacific 2502C Admiralty Centre, Tower 1 18 Harcourt Road Hong Kong SAR Tel Fax The Conference Board of Canada 255 Smyth Road Ottawa, Ontario K1H-8M7 Canada Tel Fax by The Conference Board, Inc. All rights reserved. Printed in the U.S.A. ISBN No The Conference Board and the torch logo are registered trademarks of The Conference Board, Inc. This document is printed on recycled paper.