Executive
Perspectives

The CEO’s Dilemma

October 2022

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Transform for ResilienceIntroduction to this document

In this increasingly complex and competitiveenvironment, it is essential that organizations face
uncertainty with an immediate response and atransformation plan to win
This document focuses on how to rapidly address thisuncertainty with concrete actions while leveraging theright behaviors and mindset to successfully transforman organization with sustained results

In this BCG Executive
Perspectives edition, we
address how to respond to
uncertainty and transform
for resilience

For leaders, this entails holistically delivering on
executional certainty, leadership enablement, people
engagement, and desired culture and purpose
1

Copyright © 2022 by Boston Consulting Group. All rights reserved.

With the evolving economic, social, and politicallandscape, there are accelerated changes affecting
corporate strategic priorities and targets

Macrooutlook

Current environment is fraught with increasing uncertainty driven by a set of global disruptions andexacerbated by macroeconomic headwinds; global recession risks are elevated

Need forimmediateaction

It is imperative for organizations to face uncertainty with an immediate response and a plan to win
Building resilience creates significant competitive advantages for companies, especially when future
crises arise as a result of external shocks and disruptions
Rapid and sustained success for all companies requires a focus on both the WHAT, in the form of value
delivery actions needed, and the HOW, in terms of the best way to make these plans truly happen
WHAT actions companies need to take rests on identifying immediate actions and creating an
mp m apa
a x“ ff ”aHow torespondand ensuresustained
impactThe starting point of the transformation should be a pragmatic, rapid assessment, with an evaluation of key
value drivers and execution of immediate response and resilience actions
For sustained results, establishing a strong behavior and mindset within the organization is equallyimportant, comprising four elements:• Executional certainty: setting up comprehensive transformation governance including a transformation
management office that drives actions using agile planning cycles• Culture and purpose: creating the desired organizational environment for sustained change• Leader enablement: activating and motivating leaders to embody role-model best practices• People engagement: defining key activities and linking desired purpose, culture, and target behaviors

2

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Executive Summary | The CEO's dilemma: how companies can respond to
uncertainty and transform for resilience

BCG Executive
Perspectives
Current macroeconomic outlook
Need for immediate action
How to respond and ensure sustained impact

3

Copyright © 2022 by Boston Consulting Group. All rights reserved.

AGENDARising uncertainty—driven by a set of global disruptions and exacerbated bymacroeconomic headwinds—needs to be met head on
Global disruptions

Macroeconomic headwinds

Geopolitical tension

Soaring inflation

With tension unlikely to ease soon, organizations need to rethink—not justderisk—their business models for greater advantage in a multipolar world.

Inflationary pressure and consumer demand shifts continue to affectglobal businesses with impacts on labor, energy, and materials costs.
How will inflation evolve globally and how can leaders blunt its impact
on their businesses?

Supply chain bottlenecks
Bottlenecks will continue, increasing strategic importance of agile &sustainable supply chains to support strategies and boost advantage.

Tech disruption

Consumer behavior shifts

Uncertainty

Consumers are rapidly changing their purchasing behavior as aresult of recent disruptions (e.g., COVID-19).

People challenges
Talent is a critical source of advantage; companies focused on people,
culture, and new ways of working perform stronger in uncertainty.

Climate change
The climate crisis, the defining challenge of our time, is challenging companies
to step up with ambitious ESG and net-zero strategies and commitments.

Central banks are moving carefully and decisively to tamp down
inflation via higher interest rates with knock-on effects forborrowing costs, investment levels, and relative currency values.
How will rising interest rates affect capital access for businesses
and consumers, and will rate increases create tectonic shifts incompetitiveness around the world?

Uncertain recession outlook
Global economic sentiment has been gloomy, with recession
indicators mixed and a wide range of forecasts.
What is the economic outlook, how does it differ from previous
downturns, and how will it play out across sectors?
4

Copyright © 2022 by Boston Consulting Group. All rights reserved.

The inexorable rise of new technologies (e.g., AI, quantum)
will raise the bar for disruptive innovation and reinvention.

Rising interest rates

In the News | There is an increasingly complex sector- and region-specificeconomic outlook
Growing global uncertainty…

'Excessive' policy choices could trigger
an economic downturn even worse
than 2008 recession, UN agency says

Oct 4, 2022

CEOs are predicting a recession:
’
a
&
now

Oct 6, 2022

Central banks face recessionary
dangers

Oct 4, 2022

'We must change course': UN warns
that the world is on the brink ofrecession

Oct 4, 2022

The first global deflation has begun
and it's unclear just how painful It
will beOct 7, 2022

pma
‘ a a g’in demand as recession looms

Sources: BCG, press search from Fortune, Forbes, Financial Times, New York Times, CNBC, Bloomberg, WSJp

Oct 4, 2022

Pharma is place to hide during
recession

Oct 5, 2022

Tesla's retail fans undeterred bydelivery miss, recession fears

Sept 9, 2022

3 industries that are poised to dowell in a recession

Oct 6, 2022

Tech stocks could bounce back byxa,a ‘v a,’a5

Copyright © 2022 by Boston Consulting Group. All rights reserved.

Oct 3, 2022... varies by sector and region

Recession risks are elevated in both US and EU but drivers and timing
remain distinct
US

EU

1

GDP growthBaseline expectations for very slow growth,under 1%, through 2023

Negative growth in 4Q22/1Q23 expected to bea trough as growth accelerates later in 2023

2

Inflation

Inflation may have peaked, but concern
remains over the degree of moderation

Inflation surge has hammered real incomesbut remains largely about energy

An equity bear market and much higher
borrowing rates are headwinds to activity

Sharply lower stock prices and increasing
borrowing rates are a headwind to activity

3

Financialmarkets

4

Monetary
policyPolicy will tighten until price trends improve

Monetary policy has tightened but does notintend to become a large sustained headwind

5

Labor market

Labor market remains strong with solid job
creation and low unemployment rates

Labor markets still tight, pointing toward
residual strength

6

Manufacturing

Surveys of manufacturing activity point to asignificant slowdown in growth

Surveys of manufacturing activity point to acontraction

Magnitude of risk
Very highHigh
Moderate

Source: BCG

Key risk: Policy tightening, driven bypersistent high inflation, delivers arecession in 2023

Deep energy shock has hammered real
incomes and impaired competitiveness,leaving Europe in near-term recession

Select business implications• Margin compression
underway, as passing throughprice increases gets harder• Labor markets may remaintighter than in priordownturns, keeping laborretention top of mind
• Interest rates may stayhigher for longer, with
distinct cost of capital
implications• Overall, a recession increases
competitive spread – tooutperform in the long run,businesses need to build
resilience & seek advantage• Winners are likely to target
M&A and CAPEX through the
downturn to build strength
for the next cycle
6

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Key risk indicators

Economic snapshot for October shows most recent developments acrossrisk indicators
Global growth outlook

3

GDP forecasts1 (Real GDP YoY)
USEurozone
GlobalFinancial markets

5

Equity market performance (YTD change)7

2021A

2022E

2023E

2024E

5.9%

1.6%

0.7%

1.6%

5.2%

3.0%

0.2%

1.8%

6.0%

2.9%

2.5%

3.0%

Jul '22

Aug '22

Sep '22

S&P 500-13.3%-17.0%-24.8%

Eurostoxx 50-13.7%-18.2%-22.8%

Job openings rate4

Jul '22

Aug '22

Sep '22

Change10

US

4.69%

4.84%

5.52%

+68bpsEurozone

5.90%

5.60%

6.31%

+71bpsCommodity prices and inflation

Commodity prices2Brent oil
Natural gas
USEurozone

Jul '22

Aug '22

Sep '22

Change10

98.6

89.6

79.5

-11.2%

8.2
194.7

9.1
228.9

6.8
165.0

-25.9%--27.9%Consumer price inflation (YoY) 3
Jul '22

Aug '22

Sep '22

Change10

US

8.5%

8.3%

8.2%

-0.2ppts

Eurozone

8.9%

9.1%

10.0%

+0.9ppts

4Q4 '21

Q1 '21Q2 '22

Change10

US

7.1%

7.3%

6.8%

-0.5ppts

Eurozone

2.8%

3.1%

3.2%

+0.1ppts

Jul '22

Aug '22

Sep '22

Change10

3.5%

3.7%

3.5%

-0.2ppts

3.0%

3.0%

-

0ppts

7.4%

7.3%

-

-0.1ppts

Unemployment rate5

Corporate spreads (High Yield)82

Labor market

US
Germany
France6

Monetary policy

Monetary policy rates6

Manufacturing

PMI manufacturing (<50 = contraction)9Jul '22

Aug '22

Sep '22

Change10

US

2.5%

2.5%

3.25%

+75bpsEurozone

0.5%

0.5%

1.25%

+75bpsJul '22

Aug '22

Sep '22

Change10

US

52.8

52.8

50.9

-3.6%

Eurozone

49.8

49.6

48.4

-2.4%

1. Bloomberg, data as of 10/12/2022. 2. Data presented as end of month figures. Brent oil in $/bbl; US Natural gas (Henry Hub) in $/MMbtu; Dutch Natural gas (TTF front month future) in EUR/MWh. 3.
CPI monthly seasonally adjusted data from Bureau of Labor Statistics; HICP monthly data for Eurozone from Eurostat. 4. Seasonally adjusted rates; Bureau of Labor Statistics for US; Job vacancy rate from
Eurostat for Eurozone. 5. Bureau of Labor Statistics for US; Eurostat for Eurozone. 6. Federal Reserve for US; ECB for Eurozone (main refinancing rate). 7. Bloomberg. 8. Bloomberg US Corporate High
Yield Average OAS; Bloomberg Pan-European High Yield Average OAS 9. ISM manufacturing PMI for US; S&P Global Eurozone Manufacturing PMI from Markit for Eurozone. 10. Change Sep vs Aug 11. 7
Change Q1 '22 vs Q2 ‘22. Note: All displayed numbers are based on end of month figures. Changes based on incremental changes vs. previous months.

Copyright © 2022 by Boston Consulting Group. All rights reserved.

1

BCG Executive
Perspectives
Current macroeconomic outlook
Need for immediate action
How to respond and ensure sustained impact

8

Copyright © 2022 by Boston Consulting Group. All rights reserved.

AGENDATo rise above competition and capitalize on new opportunities, companies
need to adapt to uncertainties• Decline in competitive position by
resting on an initial strong position

Companies that build resilience
immediately in uncertainty are1 …

19%

More likely to be
growth oriented

20%

Less likely toincrease debt

• Overlooked growth opportunities that
uncertainty exacerbates• Loss of financial buffer and investment flexibility• High burn rate a

p

a

‘

f a ’

• Becoming ‘easy prey’ for stronger-positioned
companies

1. BCG Henderson Institute… than those that wait

9

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What you stand to lose from inactionCompanies that build resilience rapidly in changing environments have ahigher chance of creating significant long-term value
Building resilience is key for companies in order to create significant long-term value by
increasing preparedness against external shocks and disruptions

Resilient company

Total
shareholder
return3

Totalvalue ofresilience

2

Shock

1•

Rapid execution of no-regret actions toabsorb the shock2•

Adapt to new circumstances and ensure ahigh-speed recovery

3•

Reimagine their business to fit the newcircumstances in the 12 months following
the shockIndustry
Transformations improved performance1 by…
1

Recovery

+25pp

-20pp

For top quartileof resilience built

For bottom quartileof resilience built

Time

1. Performance relative to industry in response to future crises, i.e., successful resilient transformations enhance company performance by 25%; Source: Press; BCG Henderson analysis

10

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Building resilience creates competitive advantages
and allows companies to rise above their peers:Rapid and sustained success requires a focus on both the WHAT and the HOW oftransformation

How do we make it happen?

Defined actions that need to be taken

Ensure that actions realize rapid and sustained impact

Strategy

CultureandpurposeThe starting point should be a pragmatic rapid assessment
Source: BCG analysis

11

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What actions are needed?

The WHAT | The current environment causes changes to P&L and balance
sheet items that drive the need for transformation

Changes across P&L and BS items

Levers to be pulled to improve positionNon-exhaustive

Income statement
In millions of USD

FY22

FY21

1

Total revenues

-

-

2

Costs of goods sold

-

-

•
•

2

3

Operating expenses

4

Salaries

-

5

SG&A

-

....

-

EBITDA....

-- millions of USD FY22 FY21
In

2

6

Assets

-

-

...

-

-

-Liabilities-

-

-

...

-

-

Equity

-

-

...

-

-

-

4

, ….

Deep dive on next slide

Optimize direct and indirect material spending
S am
ga za
,
g p
a

p a

gm

, ….

Implement value-driven shoring and E2E managed and automated processesaagav
paf m ,…

Optimization of energy consumption
•
•

6

pp

Labor cost reduction••

5

Reduce supply chain costs and risks
Eva ap m zaa j

E2E cost transformation••

Balancesheet

Quantify exposure and margin risk and assess ability to increase prices
f
a
x
a a a
,…

Supply chain optimization••

Gross profit

3

Top-line protection

Explore alternative sources of energy, limit hedging
Rg a
mp v pf
g ,…

Unleashing of cash reserves••

Identify value through top-down targetingAct upon selected levers and monitor across real-time dashboards

12

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1

The WHAT | The four pathways approach to assessing cost transformation
More on this topic in the following
Executive Perspective

Sample levers:
Spans and layers, simplification,
consolidation/scale, redundancy
elimination

Sample levers:
Demand mgmt., make or repair
or buy, variance reduction,
contract management (including
for tech and digital suppliers)

Sample levers:(De)centralization, techlandscape simplification, sharedservices, lean process,automation, digitization ofprocesses

Sample levers:
Strategic sourcing, digital supply
chain, production efficiency,
design to value

Supportlabor costs optimization
Directlabor costs optimization

Support nonlabor costs
reduction
Direct nonlabor costs
reduction

Support laborcosts optimization
Support nonlaborcosts reduction
Direct labor costs
optimization

Value discovery sprint

FULL STRATEGIC OPS
TRANSFORMATION

Value discovery sprint

OPERATING MODEL AND
PROCESS REDESIGN

Value discovery sprint

DIRECT/INDIRECT
MATERIALS OPTIMIZATION

Value discovery sprint

ORG STREAMLINING

Support nonlaborcosts reduction
Direct nonlaborcosts reduction
Direct labor costs
optimization
13

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Pathways can go together: inparallel or sequentially

BCG Executive
Perspectives
Current macroeconomic outlook
Need for immediate action
How to respond and ensure sustained
impact14

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AGENDAThe HOW | The HOW of transformation needs to be prioritized to break the ~75%transformation failure rate
Change is often necessary, but business
transformation success is rare

Transformations where the HOW is prioritizedachieve sustained performance improvement

+90%
+19%
…
clarity on the casefor change

Only 1 in 4 companies are successful
in the short and long term1+21%…
a CTO isstrongly equipped
and leading thetransformation+27%…
leaders arealigned on theirtransformation roles
and responsibilities

1. TSR outperformance relative to sector over following 1-year & 5-year periods
Note: Includes U.S. public companies ex-energy with $10B+ market cap; based on 2-year performance samples from 2000-2011.
Source: S&P Capital IQ, BCG Henderson Institute analysis, BCG Global 1000-company research change readiness baseline

15

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25%…
changemanagement ismanaged holisticallyin a transformation

Critical building blocks of the successful HOW of transformation

Leaders are aligned on thechange needed and are motivatedto deliver on the objectives andare accountable for results.

CultureandpurposeA purpose that is aligned todesired state and target behaviors
clearly articulated, with leaders'role modeling the change

Source: BCG analysis

All efforts are coordinated throughan empowered transformation
management office with clear
financial tracking and a definedtransformation structure

16

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People feel seen and supported,understand what is happening andwhy, and are feeling energized by
the visionRapid assessment

First 100 days

• Develop & empower transformation mgmt. office• Finance discipline, robust tools and reporting• Follow agile planning cycles• Culture and change initiatives• Set up initial transformation governance• Tracking methodology and tools• Create 'case for change' for leaders tocommunicate the value to the broader org.

• Define target picture of the company including clear
targets and aligned incentives

equips and unifies leaders• Develop transformational leaders with enhanced
skills to support and deliver on change• Strengthen leaders to pursue allocated targets
individually and in teams

Peopleengagement• Implement two-way communication channels toengage the organization and create buy-in• Allocate targeted change evenly across the firm

motivates and upskills theorganization• Identify key talents and create retention plans• Identify key skills and capabilities gaps inorganization and upskill as needed

Culture andpurpose• Conduct holistic diagnostic to baseline
organizational strengths and opportunities• Enable and motivate quick decision making• Explain the clear purpose of transformation• Embed desired culture into organization

Executional
certainty
ensures that change happens

Leaderenablement

create the environment forsustained change

Source: BCG analysis

Examples – deep dives available

17

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The HOW | Ensure rapid impact and sustained success along the journey

Transformation management office | Effective central steering is essential forsustained results along the full transformation journey
Strong transformation governance centers around 3
transformation roles with complimentary skill sets
Transformation
management
officeCEO
Sponsors
CTO

Transformation
management
office (TMO)CTO
TMO team

Case example
For years, a global company had struggled to implement costinitiatives across a decentralized organization, resulting in cost levels
above peers and a limited ability to fund strategic moves.
Starting a new cost transformation, leadership decided to strengthen
the global TMO and mirror the TMO setup in all regional divisions.
The regional TMOs were responsible for execution using global
expertise and local tailoring. A strong collaboration between the
TMOs also resulted in increased knowledge sharing across regions.

…

Workstream
1

Source: BCG analysis

Workstream
2

Workstream
3…

The company executed a very successful cost transformation anddecided afterward to keep the setup for future strategic moves.
18

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Transformationcommittee

The TMO is the heart of thetransformation, ensuring that change
happens and the results are delivered

Financial discipline | Deployed to drive accountability and ensure real impact
Some of the key building blocks for financial discipline include…
Develop
DetailImplement
G1
G2
G3
idea
financials
plan…alignedstage gateapproach

Idea
substantiatedBusiness plan
approved

Deliver

Implementation
approved

G4

Close

Implementation
completed

G5
Benefits
realized

Financial discipline is critical for
executional certainty, from funding
the right initiatives, to tracking, to in
the end ensuring that the impact
hits P&L

A company experienced vital market disruption andhigh cost levels, leading to a decreasing market
position and a critical need for change.

One sourceof truth
captured ina toolConsolidate
finance andimplementation data

Track and reportprogram progress

Monitor and predict
performance

Identify and act on
issues to course
correct

Finance was involved as a key part of the program,
implementing financial discipline to ensure ample
targets, progress tracking, and validation of impacts.

Adjustments tracked and analyzed

Impactlinked toreal P&L
Forecast
Source: BCG analysis

To regain its position, the company undertook a 3year E2E cost transformation.

Actualsmpa av +€500m&L mpa ,most of it reinvested into the business to accelerateinnovation and advance the sustainability agenda.
19

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Case example

Case for change | Create a strong narrative with your leadership teamStrong focus on purpose & vision…p v
WHY, WHAT, andHOW that leaders can articulate in anarrative demonstrating value for all

WHY

+110%
likelihoodof successfultransformation…
aenergize & engage
the org. with aclearly definedcase for change

Sr. leaders aligned behind a single story line
Mgrs. equipped with answers to tough questions
Consistent message in all communications
Engaged org. through compelling message
Source: BCG analysis• What is the purpose of ourtransformation?
• Why is it important for us now?

WHAT
• What is our vision for the future,and how will this transformation
help us achieve it?
• What are the implications for our
employees and our customers?

HOW• How will this transformation help
us win?
• How is this transformation different
from previous transformations?

Case for change is a strong
narrative of the vision of where wewant to go and why for thecompany and all stakeholders

Case example
In the first year of a new strategy, a company faced
major unforeseen changes in the environment withvast implications for its business outlook.
Instead of changing the strategy, the company started
a transformation program building on the foundationsof the strategy.
The leadership team worked together to develop acase for change that linked the success of thetransformation to the purpose and vision of thestrategy.

The leaders were energized by the narrative andstarted engaging the broader organization with an
20
aligned and compelling story.

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Case for change…

Two-way communications | Engagement relies on strong communication channels

Effective communication combines both
top-down and bottom-up channels
Org-wide
videosTransformation
intranetsite

Extendedleadershipteam offsite

Retentionplans

Leadershipteam updates… a comms andengagement planshould be created using
a variety of available
two-way communication
channels

Source: BCG analysis

Case example

Town
halls

Transformationcomms
channels

Other/
forums to
submitinputsRegulator
communications
Supplier
communications

Communication leadprograms
Focus
groupsPulse checksurveyPress
statement

Customer
communications

A company struggled to effectively communicate
across the global organization, relying primarily on
the efforts of small local teams.
The leaders utilized the new transformation program
to change its comms strategy, starting with a strong
engagement plan for the transformation.
A central team created a plan using a wide range ofcomms channels, built key assets and tools, andused the local teams for tailoring and execution.
The company experienced a sharp increase inengagement and had much more transparency into
corrective actions on the people agenda.
21

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Once leaders arealigned on thecase for change…

Org-widee-mails/
newsletters

Effective communication about thetransformation is key to ensure buyin and engagement from the wider
organization

Key questions all CEOs should be asking themselves now
Non-exhaustive

Have I identified all possible risks to mybusiness from the uncertain environment?

Do I have the necessary executive andbroader leadership support?

How vulnerable is my business to current headwinds and disruptions (e.g., supply chain issues,
inflation, labor shortages, interest rate changes)?

Do I have the right resources to fund andexecute this transformation (e.g., expertise,
operational team, investment funding)?

Have I translated the uncertainties into a
scenario view for my business in 2023 & 2024?

Do I have the right processes in place that candrive and track this change (e.g., TMO)?

22

3 key actions to respond to uncertainty
and transform for resilience
Understand the need for change based on

2

Act immediately while starting an

3current economic uncertainty and internal factors

assessment to shape the transformation

Plan a transformation with a focus on the HOW
by addressing enablement, engagement,
executional certainty, and culture and purpose

Actions should be based on
the specific business context
23

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The time to act is now

1Connect with our Transform and Resilience leadership team with anyquestions
Europe, Middle East, SouthAmerica

Asia PacificCentral Resilience Team

Kristy Ellmer

Christian Gruss

Gavin Parker

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Managing Director & Partner
Ellmer.Kristy@bcg.com
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BeijingGlobal Leader - Corporate
Finance & Strategy
Tokyo

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Feldkamp.Daniel@bcg.com
MunichClick here for additional insights and our latest evidence-based publications on Transforming for Resilience

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