Leaders around the world are confronting a welter of uncertainties. Here’s how to home in on what matters—and begin making the most of novel opportunities—amid ongoing change.
Over the past few years, CEOs have found themselves repeatedly recalibrating in the wake of shock after shock. And as 2023 shapes up to be another year of uncertainty, stable ground may continue to seem elusive. In this episode of The McKinsey Podcast, Homayoun Hatami, senior partner and managing partner for global client capabilities, and chief client officer Liz Hilton Segel talk about what matters most—as well as how leaders can begin leaning forward to find new opportunities amid ongoing turbulence and change.
The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly. This transcript has been edited for clarity and length.
Lucia Rahilly: Liz, you and I spoke a year ago, on McKinsey Live, about what was top of mind for CEOs during that particular stretch of turbulence. Talk to us about what has changed over the past year.
Liz Hilton Segel: The degree of shock in the macroeconomic environment—including energy prices and the effect on inflation, as well as supply shocks—has taken most CEOs into a place they’ve never been before. Consumer buying behavior has also changed. During COVID-19, digital channels that had previously grown by a few percent increased by 100 or 200 percent. There are radical differences in how consumers are buying things like groceries, for example.
The significance of China’s reopening post-COVID-19 is also quite material for most companies. Multinationals employed 12 million people in China in 2020, and China accounts for 18 percent of total global GDP. Even looking at a more conservative growth forecast over the next ten years, China will add as much GDP as all of India’s 2021 GDP. So companies, and CEOs in particular, need to focus on their mindset and approach to their business in China and their collaboration with China.
Lucia Rahilly: Acknowledging that change is the only constant, as Heraclitus—and also my grandmother—used to say, walk us through what matters most to CEOs aiming to generate outperformance and thrive, despite these exogenous shocks.
Liz Hilton Segel: The world is different. As a CEO right now, your job is all about prioritization. We’ve thought about these concrete priorities, and the first to consider is building resilience as an organizational muscle. The second is having a courageous mindset toward change—leaning into change as opposed to away from it. Next, technology, which should be considered the foundation for growth. The focus on technology relates to building new businesses and taking advantage of other shifts, like the energy transition. CEOs should not take their foot off the gas on net zero and should continue the progress we are seeing across industries.
Underpinning these priorities is rethinking how to compete and win in the talent market. Because at the end of the day, all this is supported by the quality of your talent value proposition.
The resilience difference
Lucia Rahilly: Let’s talk about the first priority: resilience. Homayoun, what does resilience mean in practice for leaders?
Homayoun Hatami: We define resilience as the ability to deal with adversity, to withstand shock, and to adapt fast. The notion of speed is very important, with the goals of winning in the market and of playing defense and offense.
Speed is an essential skill; during the period of 2020 to 2021, resilient companies generated shareholder returns that were 50 percent higher than those of less resilient peers. What did they do? They prepared well. They thought about the flexibility they wanted to bring to their supply chains. They put systems in place to detect potential disruptions, such as cybersecurity threats.
These resilient companies also take action to preempt issues. For example, they use analytics for predictive maintenance. They plan in a different way. Instead of basing plans on last year’s budget, they think about potential scenarios. One of my favorite quotes is from Niels Bohr: “It’s very hard to make a prediction, especially about the future.” That could not be truer now. However, we can all develop scenarios; we can make different plans.
The final point is that top talent is the best response to volatility. These resilient organizations put a lot of effort into the most value-driving roles and having the best talent in those roles, because with the best teams, good things happen—even in tougher times.
Courage as a competitive advantage
Lucia Rahilly: Let’s move to the next priority: courage. What does strategic courage look like—especially when so many economic indicators are flashing red?
Liz Hilton Segel: Choppier waters require greater skill and greater courage—which makes for the opportunity to get ahead. As we engage with clients, we certainly see some folks who are in a more defensive posture, meaning more focus on scenario planning and resilience preparation, more focus on the balance sheet and on margin expansion, and more caution.
What we believe is that this is also a time for courage—for asking yourself what you feel inspired to change now. Whether it’s an M&A strategy, whether it’s resource reallocation, whether it’s building new capabilities to compete in your marketplace successfully, what we would advocate is a lean-forward posture.
This can be in big ways, like a series of M&A moves, but it can also be in small ways. For example, one of our clients, a large global bank, just assembled 70 country managers together to say, “What are the trends you’re seeing? How are customers buying from us differently and evaluating us differently?” Then they disseminated that information to the sales force to create a greater chance of shifting share, in the sense of leaning forward on those trends.
Lucia Rahilly: Could you say a bit more about bringing that longer-term lens on playing offense?
Liz Hilton Segel: One way to think about a longer-terms lens is to set the tone of an aspirational mindset and culture—to not accept the deck you’re handed as a given, but rather to say, “How am I going to make a play out of this?” Another is to consider whether you’re really leveraging the full set of pathways for profitable growth—things you do to expand the core, things you do to step out into adjacencies bravely, new businesses. We did a survey and found that eight in ten CEOs now see new businesses as a top priority. That fits quite well with our thinking about new businesses as a critical priority at this time.
Getting new-business building right
Lucia Rahilly: Homayoun, suppose I’m one of those eight in ten CEOs Liz mentioned who are prioritizing new businesses. Any suggestions on how to go about building those new businesses at scale? What are the best leaders getting right?
Homayoun Hatami: First, get very close to the buyers. We all know amazing CEOs who have surveys. They have consumer research. They have ethnographic research. They personally spend a lot of time with the customers in the stores. It’s very important to understand the customer pain points that a new business will address.
Second, as you try to build a new business, be clear on the unique advantage you want to bring to bear in solving those customer issues. Take Netflix, which boomed during COVID-19. Obviously, Netflix had an advantage: back in the day, it moved from offline to online channels. But what’s making the difference now is Netflix originals. Because Netflix has this economic model, it’s able to spend much more than other production houses on originals—the top-viewed content that creates stickiness. Netflix also has a recommendation engine, which drives 80 percent of the hours streamed.
Third, dream big. There are lots of opportunities out there for new-business building. If you don’t think a new business will be a unicorn, don’t do it. At the end of the day, this comes back to personal leadership. When you are trying, as an established company, to launch a new business, it’s very important to have a supportive CEO who will be the champion: set the vision, set the aspiration, set the investment profile against that aspiration, and give that new business a certain amount of autonomy. This new business will have to reinvent the way business is done and the way it wants to serve the customers who cannot live with the legacy issues that some established businesses have.
Also, speed is very important. We all know Amazon’s motto: think big. In that regard, acquisitions and serial acquisitions can be quite powerful as you seek to build a new market.
Taking on technology
Lucia Rahilly: A lot of what we’re talking about here—acquiring new capabilities, product innovation, and growth—hinges on tech. Talk us through how CEOs should be thinking about their technology.
Liz Hilton Segel: Recently, I was asked to speak to the sales force of a large technology company. The question they asked me was whether technology is really on the minds of CEOs or whether it’s still more in the purview of the CIO, given everything that’s happening in the world. And my answer to them was unequivocal: it is 100 percent on the minds of CEOs.
We did a survey in which we asked companies whether they are engaged in some form of digital transformation, and 89 percent of them said that they are. But only one-third said they think they’re getting the financial value they anticipated at the start. The CEO challenge or opportunity is to keep up the aspiration and pace of technology transformation but to be clear-eyed about whether that transformation is, in fact, helping deliver growth and margin outcomes.
In that vein, there are a few questions to ask as a management team. Most people know what they’re trying to get done from a technical point of view. But is there a direct link to the value created? And since in many cases, we’re seeing that there isn’t, we put that first and foremost. The second question is “Am I running into trouble, in terms of my talent and my operating model, delivering on that road map quickly enough?” And the third is “Do I have the core technical architecture and the tooling and data management necessary to deliver on the assumptions in the road map?”
When we try to separate top economic performers from less successful companies in terms of their returns to shareholders, we see that the top performers say that software they have created is at the center of differentiating themselves from the competition. About a third of them say they are monetizing that software, in some form, directly.
So this whole question—if I’m a traditional company, how do I think and operate like a software company—is front and center for an increasing number of executives and CEOs. Within that, I would call out three more specific questions. One is whether you feel you have a software-like culture. Do you treat the technology executives in your company as equal to, and at the same table as, business executives? Next, how sophisticated is your product management? Do you have a product management capability that ensures an end-to-end connection between the benefits created, the technology to create those benefits, and the feedback loop on customer and business performance? Last, what is the real rigor of your software development engine? Do you have visibility and insight into that engine’s productivity and effectiveness equivalent in the equivalent ways a software company would?
The net-zero opportunity
Lucia Rahilly: Coming out of Davos, we saw that net zero remains front and center on the CEO agenda. Obviously, leaders aim to advance toward an energy system that’s clean and sustainable but at the same time, affordable, resilient, and secure. We’ve called that a “devilish duality” in our research. How should leaders navigate that dilemma, Homayoun?
Homayoun Hatami: Well, it is a duality. On the one hand, we must solve the net-zero equation and manage this climate crisis that is the challenge of our time. At the same time, there’s a need for resilience—for clean, affordable energy.
CEOs should reframe the issue not as a cost but rather as an opportunity. Take an investor’s view as to where you can be an early mover in this domain. There are a lot of investments being made. We estimate there are 12 value pools that could create $12 trillion in opportunity by 2030—transport, electrification, micromobility, the infrastructure for electric or hydrogen vehicles, sustainable aviation, and so on. These can be positive ROI investment opportunities for CEOs. This is not so much “Do I have to do one or the other?”; it’s more of an and. We can invest profitably in those areas, and we would recommend that companies get an early-mover advantage in those spaces.
The same could be said about nature-based solutions. The move to close the equation is not just about the brown-to-green transition for the established footprint we have. We have to preserve nature. Again, there are specific opportunities that are ROI positive—for example, regenerative agriculture, reducing food waste, and returnable and reusable containers to remove plastic waste. In our view, this is all positive for business, positive for the planet, positive for humankind. What’s good for everyone should also be good for business.
Talent in transformation
Lucia Rahilly: Let’s move to our final priority, talent. Liz, what do you see the best leaders doing differently in this very tight talent market?
Liz Hilton Segel: I’d think about three categories. The first is all-around selection and advancement. On selection, we talk about moving from “pedigree to potential.” That means getting away from the classic characteristics used to assess people, like education or experience, and looking more at skill credentials—creating an interview or selection process that allows skill credentialing to be at the core. The companion to that is getting out of a mindset of months or years in roles as the basis for promotion and more into impact delivered, to accelerate the career path of somebody really making a big difference.
Second is the job itself: How does that need to change? Hybrid work is here to stay, but how do you functionally make technologies work? How do you create a new set of cultures and norms? There’s a tremendous amount of experimentation here. Companies that lean forward into that experimentation are going to get the maximum global productivity. Companies that say, “We’re going back to the old way” are going to miss a trick.
Third, there’s much more innovation around apprenticeship: less of the more senior person teaching the younger person how to do things and much more two-way apprenticeship. There’s an awareness of the value the next generation can bring to educating or upskilling more senior folks in the organization. The other area people are exploring more is self-authorship—not assuming that a company tells people what their career path is but rather that individuals explain what would be an exciting, purpose-filled career for them.
A lot of folks have felt that the nature of the post-COVID period and economic shock mean that we can go back to the old way on the talent value proposition. I think that’s a mistake. The world is moving and adapting, and companies need to adapt with it.
By: Homayoun Hatami and Liz Hilton Segel
Source: mckinsey.com
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