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WINNING
THE ’20s
COLLECTION
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Month YearBy Author Name, Author Name, and Author Name
[Cover - Authors style]Boston Consulting Group partners with leaders
in business and society to tackle their mostimportant challenges and capture their greatest
opportunities. BCG was the pioneer in businessstrategy when it was founded in 1963. Today, we
help clients with total transformation—inspiring
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Contents

02 | P reface
03 | W inning the’20s
08 | T he New Logicof Competition

24 | T he Science ofOrganizational
Change32 | T he Business
Imperative ofDiversity

37 | O ptimize for
16 | T he Company ofBoth Social andthe Future
Business ValuePreface

The world feels very different at the end of this decadethan it did when we started out—and we have no reason
to think that the changes in the decade ahead will be any
less dramatic. For every business leader juggling shortterm goals and the challenges of long-term success, now is
the right time to step back and understand what it willtake to win in the 2020s.
Our work with organizations across the globe has helped
us formulate a clear point of view on how to survive andthrive in the coming decade. We analyzed trends in technology and society, looked at how pioneering companies

are embracing new ways of thinking about business, leveraged the expertise of leaders from across BCG, and refined
our view during discussions with our senior clients.
With this report, we welcome you to the conversation andwould be pleased to hear your reactions and thoughts. The
two of us, the experts who share perspectives on the individual themes, and our teams around the world lookforward to engaging with you.

Rich Lesser

President and CEO
Boston Consulting Group2

Martin Reeves

Managing Director and Senior Partner
Chairman, BCG Henderson Institute

WINNING THE ’20sWinning the ’20sWinning the ’20s
A LEADERSHIP AGENDA FOR THE NEXT DECADE
By Rich Lesser, Martin Reeves, Kevin Whitaker, and Rich HutchinsonThe winners in business have shifted markedly in thepast decade. When the 2010s began, the world’s ten
most valuable public companies by market capitalization were based in five countries, only two of themwere in the tech sector, and none was worth more than$400 billion. Today, all of the top ten are in the US andChina, the majority are tech companies, and some at least
temporarily have surpassed $1 trillion in value.1
Given the relentlessness of change on multiple
dimensions, the keys to success are likely to be just as
different in ten years’ time. What will it take to win in the
2020s?

Emerging Challenges Will Reshape Business
The future competitive environment will likely be shapedby multiple trends that are already unfolding today:• Artificial intelligence is rapidly advancing, and pioneers areadvancing beyond spot applications to implement AI atscale.
• Businesses are increasingly organized into multicompany“ecosystems” that defy traditional industry boundaries andblur the distinction between competitors and collaborators,
and producers and consumers.
• Technology is beginning to redefine the nature of work,
as well as the relationship between the company and theindividual, as both employee and customer.
• The rise of China is challenging the global economic orderand the institutions and rules that have defined it.

• Long-term global growth projections have been falling,
driven in part by an ongoing deceleration in working-age
population growth across major economies.
• Society is increasingly scrutinizing the social impact oftechnology and the sustainability and broader contributionof business.
• Investor activism and the role of private capital are rising inmany parts of the world.
• The combination of these forces is producing
multidimensional uncertainty, which confounds traditional
forecasting and planning-based approaches for harnessing
the future.
To stay ahead of these trends, leaders need to question
their current assumptions and retool their companies forthe coming decade. This goes for both traditional incumbents and younger digital giants, who will face very different but equally critical challenges in the 2020s—andwould do well to learn from each other’s strengths.
Many of today’s leading tech companies have succeededby building highly scalable digital platforms. But as purely
digital opportunities are depleted (especially the opportunity to dominate broad, consumer-oriented digital ecosystems), new opportunities will come increasingly fromcombining digital technology with existing physical assets.
To succeed, digital natives will need to embrace the messier world of specialized assets and industrial customers.
They will also need to “come of age” by managing leadership transitions, avoiding the bureaucracy and inertia thatgenerally come with greater size and a longer history, anddeveloping new strategies to preserve trust among users

1. Based on market capitalization at the end of 2018 Q3.

4

WINNING THE ’20sand society at large — challenges that traditional companies have considerably more experience with.
Meanwhile, a new era of competition will provide an opportunity for the resurgence of some incumbents. But theones that succeed in the 2020s will look very different thanthey do today — they will have evolved their businesses toharness new technologies and reshaped their external
relationships, organizations, and approaches accordingly.
So, how should you prepare your company to avoid being
left behind in the coming decade and emerge as a winner
in a rapidly evolving landscape?

A Leadership Agenda to Win the ’20s
While many aspects of the agenda will vary by industry
and region, we see five powerful emerging imperatives thatwill cut across industries and geographies.
Master the new logic of competition. Internet andmobile technology ushered in the information age andprofoundly affected technology-intensive and consumerfacing industries such as electronics, communications,entertainment, and retail. But the emerging wave oftechnology — including sensors, the Internet of Things, andartificial intelligence — will turn every business into an
information business. The combination of an exponential
increase in data, better tools to mine insights from thatdata, and a fast-changing business environment meansthat companies will increasingly need to, and be able to,compete on the rate of learning.
Scale will take on a new significance in the learning
economy. Instead of the “economies of scale” that today’s
leaders grew up with — based on a predictable reduction of
marginal production costs across a relatively uniform
offering — tomorrow’s leaders will pursue “economies oflearning,” based on identifying and fulfilling eachcustomer’s changing needs by leveraging data andtechnology.
The arenas of competition will also look different in the
2020s, requiring new perspectives and capabilities. The
familiar picture of a small number of companies producing
a common end product and competing within well-definedindustry boundaries will be replaced by one where competition and collaboration occur within and between ecosystems. Because ecosystems are fluid and dynamic, and not
perfectly controllable even by the orchestrator, companies
will need to be much more externally oriented, to deploy
influence indirectly through platforms and marketplaces,
and to coevolve with ecosystem partners.

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

Orchestrators of ecosystems can leverage the assets ofother participants, and ecosystem-based competition tends
to have a winner-take-all nature. These factors are alreadycausing rapidly rising valuations relative to tangible assets
for the top companies, as well as an increasing gap
between the profitability of high and low performers. But
there is not yet any playbook for how to harness thispremium: practice is racing ahead of theory, and pioneers
who can crack the code on ecosystems will be greatly
advantaged.
Finally, companies will increasingly compete on resilience.
Accelerating technological change, political gridlock, ashifting geopolitical power map, the increased scrutiny ofbusiness, and the polarization of society all point to an eraof protracted uncertainty, in which corporate life cycles arelikely to continue shrinking. Companies will therefore need
to worry not only about the competitiveness of their immediate game but also about the durability of that game andtheir ability to weather unanticipated shocks.
Most of today’s incumbents — designed for relatively stable, classical business environments — are not well adapted for this more dynamic environment. Therefore, today’s
leaders need to fundamentally reinvent the organizationalmodel in order to become future winners.
Design the company of the future. Big data and deeplearning have transformed our ability to learn, and the next
generation of technologies will undoubtedly bring evenmore possibilities. History has shown, however, that
applying new technologies to existing processes andstructures generally yields only incremental gains. To
unlock the learning potential of new technologies, leadersneed to reinvent the enterprise as a next-generation learningorganization.
Merely applying AI to individual process steps is notenough: To increase the ability of organizations to learn inaggregate, they must build integrated learning loops thatgather information from data ecosystems, continuously
derive insights using machine learning, and act on thoseinsights autonomously, all at the speed of algorithms
rather than the speed of human hierarchies.
But organizations must not learn only on algorithmic
timescales — they must also better understand and position themselves for the slow-moving forces, such as socialand political shifts, that are increasingly transforming
business.
To learn on multiple timescales, leaders will need to designorganizations that synergistically combine humans andmachines. Algorithms should be trusted to recognize pat-5

terns in data and act on them autonomously, while humans should focus on higher-order tasks like validating
algorithms, imagining new possibilities, and designing andupdating the hybrid “human + machine” organization
itself. This division of labor also requires rethinking human–machine interfaces so that humans can trust andproductively interact with machines. Collectively, theseimperatives demand a massive evolution of organizational
capabilities and the creation of new “learning contracts”
between employees and enterprises.
Many of these principles are already being implemented inisolated domains, such as the operations of digital marketplaces. But to win the ’20s, the same principles must be
applied to all parts of the organization in order to create a“self-tuning enterprise” that constantly learns and adapts
to the environment. Such organizations must be designedwith flexible backbone systems, evolving business models,and, above all, a new model of management — one basedon biological principles such as experimentation andco-evolution, rather than traditional top-down decision
making and slow cycle planning. Management needs toshift its emphasis from designing hardwired structures andprocedures to orchestrating flexible and dynamic systems.
Apply the science of organizational change. Reinventing organizations to compete in the 2020s will not be atrivial task. Whether because of risk aversion or complacency stemming from today’s increasingly concentrated
industries and elevated profitability levels, leading companies may be understandably reluctant to unleash fundamental change preemptively. But our research shows thatthe single biggest factor influencing the success of majorchange programs is how early they are initiated. It is therefore critical to create a sense of urgency within the organization to ensure that everyone truly understands the needfor change.

approaches to change accordingly, moving beyond themonolithic programs centered only on PMOs and Gantt
charts. By adopting continuous change as the default,
episodic change programs will give way to change as an
ongoing operating imperative.
Embrace the business imperative of diversity. Diversity is not only a moral imperative — it can also make businesses more effective in the long run. Our study of morethan 1,700 companies around the world shows that diversity increases the capacity for innovation by expanding therange of a company’s ideas and options. And as the speedof change accelerates, innovation and reinvention are
increasingly necessary to stay on top.
The most obvious sources of diversity, such as gender,
ethnicity, and sexual orientation, are indeed important indriving innovation, but variety of work experience andeducational background is also meaningful. Importantly,
these factors are mostly additive, so companies that are
diverse on multiple dimensions are even more innovative.
Structural diversity alone, however, is insufficient. Organizations also need an environment conducive to embracing
new ideas, and they must install open communication
practices, participative leadership, commitment to building
diversity in top management, openness to testing multiple
ideas, and other measures to unlock the full potential ofdiversity.
Diversity also increases resilience. Like biological communities and organisms, companies that encompass moreheterogeneity are likely to withstand unanticipated changes better. Enterprises that embrace diverse talent, ideas,
and sources of growth will have an advantage in understanding and adapting to external shocks — which increasingly threaten the survival of individual businesses.

Even for companies that are committed to such transformation, it can be a risky endeavor: our research shows thatmost large-scale change efforts fail. Therefore, leadersneed to employ evidence-based transformation — understanding empirically what works and why, rather thanrelying on plausible assertions and rules of thumb. In an
era when many powerful forces are revolutionizing howorganizations function, building repeatable transformation
capabilities will be more important than ever.

Optimize for both social and business value. Several
trends are fueling resentment toward business. The climate crisis and other negative externalities are increasingly visible, automation is sparking fear about the future ofwork, trust in technology is falling, inequality has risenmarkedly within many countries, and the most successfulcompanies are becoming larger, more visible, and more
powerful. As a result, the role of business in society iscoming under question, risking the sustainability of thecurrent model of corporate capitalism.

Leaders also need to de-average and differentiate theirapproaches to change. Large-scale transformation programs comprise multiple change challenges, from exploring new fields and approaches, to adaptively refining newmodels, to implementing structured change with clear
objectives and means. Leaders will need to diversify their

Political institutions are not likely to address these concerns effectively in the foreseeable future. Demographics
that portend lower global growth, massive public debts
that limit investment, tensions resulting from internationalmigration, and a social media landscape that amplifies
extreme voices are all likely to continue fueling divisive,

6

WINNING THE ’20s

populist politics. The rise of China, and the growing US
response, challenge the stability of multinational institutions that businesses rely on. In an era characterized bypolarization, everything in business will likely become“political.”To keep the game of business going, business needs to bepart of the solution. All stakeholders increasingly expect
companies to play a more prominent role in addressing
social challenges, which will be reinforced as newly adopted metrics and standards make their efforts and impacts
more transparent. Leaders need to focus on their companies’ total societal impact — in other words, they need tomake sure that their businesses create social as well as
economic value. Not only can this increase financial performance in the long run, but it can strengthen the social
contract between business and society, ensuring that therelationship is able to endure. Leaders will need to masterthe art of corporate statesmanship, proactively shaping thecritical societal issues that will increasingly change thegame of businesses.

Rich Lesser is the president and CEO of Boston Consulting
Group. You may contact him by email at lesser.rich@bcg.com.
Martin Reeves is a managing director and senior partner in
BCG’s New York office and the chairman of the BCG Henderson Institute. You may follow him on Twitter @MartinKReevesand contact him by email at reeves.martin@bcg.com.
Kevin Whitaker is an economist at the BCG Henderson
Institute. You may contact him by email at whitaker.kevin@bcg.com.
Rich Hutchinson is a managing director and senior partner
in BCG’s Atlanta office and the global leader of the firm’sMarketing, Sales & Pricing practice. You may contact him byemail at hutchinson.rich@bcg.com.

W

inning the present is challenging enough, but themore essential task of leadership is winning thefuture. The fast-changing world will test our status quo
assumptions, and it is critical to look forward in developing
an agenda for the next decade. Here we’ve offered a starting point for that journey. We invite all leaders who aim to
win the ’20s to join the conversation.

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

7

The New Logic of Competition

The New Logic of Competition
By Ryoji Kimura, Martin Reeves, and Kevin WhitakerM

any of today’s business leaders came of age
studying and experiencing a classical model ofcompetition. Most large companies participated inwell-defined industries selling similar sets of products; theygained advantage by pursuing economies of scale andcapabilities such as efficiency and quality; and they
followed a process of deliberate analysis, planning, andfocused execution.
The traditional playbook for strategy is no longer sufficient. In all businesses, competition is becoming more
complex and dynamic. Industry boundaries are blurring.
Product and company lifespans are shrinking. Technological progress and disruption are rapidly transforming business. High economic, political, and competitive
uncertainty is conspicuous and likely to persist for theforeseeable future.
Accordingly, in addition to the classical advantages of scale,companies are now contending with new dimensions ofcompetition — shaping malleable situations, adapting to
uncertain ones, and surviving harsh ones — which in turnrequire new approaches. And the stakes are higher thanever: the gap in performance between the top- andbottom-quartile companies has increased in each of thepast six decades.2
Today’s business leaders are dealing with complex competitive concerns in the short run. But as the 2020s approach, they must also look beyond today’s situation andunderstand at a more fundamental level what will separate the winners from the losers in the next decade. We
see five new imperatives of competition that will come tothe forefront for many businesses (see Exhibit 2.1):• Increasing the rate of organizational learning• Leveraging multicompany ecosystems• Spanning both the physical and the digital world• Imagining and harnessing new ideas• Achieving resilience in the face of uncertainty
In short, the logic of competition has changed—from a
predictable game with stable offerings and competitors to
a complex, dynamic game that is played across many
dimensions. Leaders who understand this, and re-equip
their organizations accordingly, will be best positioned to
win in the next decade.

Competing on the Rate of Learning
Learning has long been considered important in business.
As Bruce Henderson, BCG’s founder, observed more than
50 years ago, companies can generally reduce their
marginal production costs at a predictable rate as theircumulative experience grows. But in traditional models oflearning, the knowledge that matters — learning how tomake one product or execute one process more
efficiently — is static and enduring. Going forward, it will
instead be necessary to build organizational capabilities
for dynamic learning — learning how to do new things, and“learning how to learn” by leveraging new technology.
Today, artificial intelligence, sensors, and digital platforms
have already increased the opportunity for learning more

2. Based on the average difference in EBIT margin between companies ranking in the top quartile and those in the bottom quartile in each of 71 industries(among US public companies with at least $50 million in revenue).

BOSTON CONSULTING GROUP

9

Exhibit 2.1 - Five New Imperatives of Competition
Competing on therate of learning

Competing on
resilience

Competing on
imagination

Competing inecosystems

Competing in a hybrid
digital+physical world

Source: BCG Henderson Institute.

effectively — but competing on the rate of learning will
become a necessity by the 2020s. The dynamic, uncertain
business environment will require companies to focus
more on discovery and adaptation rather than only on
forecasting and planning.
Companies will therefore increasingly adopt and expand
their use of AI, raising the competitive bar for learning. And
the benefits will generate a “data flywheel” effect —companies that learn faster will have better offerings,
attracting more customers and more data, further increasing their ability to learn.
For example, Netflix’s algorithms take in behavioral datafrom the company’s video streaming platform and automatically provide dynamic, personalized recommendations
for each user; this improves the product, keeping moreusers on the platform for longer and generating more data
to further fuel the learning cycle. (See Exhibit 2.2.)
However, there is an enormous gap between the traditional
challenge of learning to improve a static process and the
new imperative to continuously learn new things throughout the organization. Therefore, successfully competing onlearning will require more than simply plugging AI into
today’s processes and structures. Instead, companies willneed to:• Pursue a digital agenda that embraces all modes oftechnology relevant to learning—including sensors,
platforms, algorithms, data, and automated decision
making.
• Connect them in integrated learning architectures that canlearn at the speed of data rather than being gated byslower hierarchical decision making.
• Develop business models that are able to create and act on
dynamic, personalized customer insights.

Competing in Ecosystems
Classical models of competition assume that discrete
companies make similar products and compete withinclearly delineated industries. But technology has dramatically reduced communication and transaction costs, weakening the Coasean logic for combining many activities
inside a few vertically integrated firms.3 At the same time,
uncertainty and disruption require individual firms to be
more adaptable, and they make business environments
increasingly shapeable. Companies now have opportunities
to influence the development of the market in their favor,
but they can do this only by coordinating with other stakeholders.

3. Ronald Coase, “The Nature of the Firm,” 1937.

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WINNING THE ’20s

Exhibit 2.2 - Netflix Leverages a Learning and Data Flywheel
Number of subscribers(millions)% of streams originating fromAI recommendation1

118

150

80

100
50

75

24

0

80

75

70
2011

2017

More users (more data)

2011

2017

More eﬀective algorithms

Avg. usage persubscriber (hr/yr)

654

600
400

310

200
2017

2011

Better customer experience

Sources: Company reports; Wired; Business Insider; BCG Henderson Institute analysis.
Based on company releases and news reports.

1

As a result of these forces, new industrial architectures are
emerging based on the coordination of ecosystems— complex, semifluid networks of companies that challenge several traditional business assumptions. Ecosystems blur the boundaries of the company: for example,
platform businesses such as Uber and Lyft rely heavily on“gig economy” workers who are not direct employees but
rather temporary freelancers. Ecosystems also blur industry boundaries: for example, automotive ecosystems include not just traditional suppliers but also connectivity,
software, and cloud storage providers. And they blur the
distinction between collaborators and competitors: forexample, Amazon and third-party merchants have a symbiotic relationship, while the company competes with thosemerchants by selling private-label brands.
A few digital giants have demonstrated that successfully
orchestrating ecosystems can yield outsized returns. Indeed,
many of the largest and most profitable companies in theworld are ecosystem-based businesses.4 One example is
Alibaba, which leads China’s massive e-commerce market
not by fulfilling most functions directly but by building
platforms that connect manufacturers, logistics providers,marketers, and other relevant service providers with one
another and with end users. By decentralizing businessactivities across large groups of firms or individuals, theAlibaba ecosystem is rapidly adaptive to consumers’ needs

and also highly scalable—resulting in 44% annualized
revenue growth for the company in the past five years.
The playbook for how to emulate these ecosystem pioneers has not yet been fully codified, but a few imperatives
are becoming increasingly clear:• Adopt a fundamentally different perspective toward
strategy, based on embracing principles like externalorientation, common platforms, co-evolution, emergence,and indirect monetization.
• Determine what role your company can play in yourecosystem—not all companies can be the orchestrator.
• Ensure that your company creates value for the ecosystem
broadly, not just for itself.

Competing in the Physical and the Digital World
Today’s most valuable and fastest-growing businesses are
disproportionately young technology companies, which
operate ecosystems that are predominantly digital. (SeeExhibit 2.3.) But the low-hanging digital fruits in consumer
services, including retail, information, and entertainment,
seem to have been plucked. New opportunities are likely to

4. At the start of 2019, seven of the world’s top ten companies by market capitalization leveraged multicompany ecosystems: Apple, Amazon, Microsoft,
Alphabet, Facebook, Alibaba, and Tencent.

BOSTON CONSULTING GROUP

11

Exhibit 2.3 - Young Tech Companies Were the Biggest Winners of the 2010s
DEMOGRAPHICS OF TOP TEN GLOBAL COMPANIES BY MARKET CAPITALIZATION
Primary sector1

Median company age2

57

70%

34

20%
2010

2019

Financials
Health care

Materials
Energy

2029

2010

2019

2029

Consumer staples
Technology

Sources: S&P Capital IQ; BCG Henderson Institute analysis.
Note: Based on market capitalization at beginning of year.
Based on GICS classifications; Technology includes information technology, communications services, and internet services & retail.

1

Years since company founding.

2

come increasingly from digitizing the physical world, enabled by the rapid development and penetration of AI andthe Internet of Things. This will increasingly bring techcompanies into areas — such as B2B and businesses involving long-lived and specialized assets — that are still
dominated by older incumbent firms.
Early signs of “hybrid” competition at the physical-digitalintersection are already emerging. Digital giants are moving
into physical sectors: for example, Amazon has opened newretail stores in addition to its acquisition of Whole Foods,
while Google has entered automotive and transportation
through its Waymo subsidiary. Meanwhile, incumbent companies are furiously pursuing digitization. For example, John
Deere has invested heavily in IoT technology by adding
connected sensors to its tractors and other equipment. The
company collects and analyzes data from each machine,using the insights to provide updates to its equipment orsuggestions to users. “Our roadmap is calling for machinelearning and AI to find their way into every piece of John
Deere equipment over time,” said John Stone, the senior
vice president for Deere’s Intelligent Solutions Group.5
These trends point to a new battle between younger digital
natives and traditional physical incumbents. But unlike inthe past decade, in which upstarts unseated many legacy
leaders with purely digital models, the next round is likely to
be a more balanced contest. Technology companies nolonger have a limitless social license; in the next decade,they will have to navigate thorny issues like user trust, data
privacy, and regulation, which will likely be even morecritical in the context of hybrid competition. And
incumbents will still have to fight against institutional
inertia and the long odds of disruption, but they will be able
to better leverage existing relationships and expertise in thephysical world. Therefore, the next wave of “natural
selection” in business is likely to test both digital natives andincumbents—and winners could emerge from either group.
What will make the difference? To succeed in hybrid competition, companies will need to:• Build strong relationships with actors on both sides of theecosystem—customers and suppliers.
• Rethink existing business models in order to win the battle
for new hybrid markets.
• Adopt good practices for governance of data and algorithms
to preserve users’ trust.

Competing on Imagination
Companies can no longer expect to succeed by leaning
predominantly on their existing business models. Long-run

5. Scott Ferguson, “John Deere Bets the Farm on AI, IoT,” Light Reading, March 2018.

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WINNING THE ’20s

economic growth rates have declined in many economies,
and demographics point to a continuation of thatpattern. Competitive success has become less permanentover time. And markets are increasingly shapeable,
increasing the potential reward for innovation. As a result,the ability to generate new ideas is more important
than ever.
However, creating new ideas is challenging for many companies. Inertia increases with age and scale, making it
harder to create and harness new ideas: our analysis ofcompanies around the world shows that older and larger
companies have less vitality, the capacity for sustainablegrowth and reinvention. (See Exhibit 2.4.) And businessand managerial theory has emphasized a “mechanical”
view — dominated by easily measurable variables likeefficiency and financial outcomes — rather than focusing
on how to create new ideas.
To overcome these challenges, companies need tocompete on imagination. Imagination lies upstream ofinnovation: to realize new possibilities, we first needinspiration (a reason to see things differently) and thenimagination (the ability to identify possibilities that are notcurrently the case but could be). Imagination is a uniquely
human capability — artificial intelligence today can makesense only of correlative patterns in existing data. As
machines automate an increasing share of routine tasks,
individual managers will need to focus on imagination tostay relevant and make an impact.
How can companies compete on imagination?
• Focus on anomalies, accidents, and analogies, rather than
averages, in order to spark inspiration.
• Enable the open spread and competition of ideas—for
example, by limiting hierarchy and empowering employees
to experiment and make imaginative proposals.
• Become a “playful corporation” that is able to effortlessly
explore new possibilities.

Competing on Resilience
Looking ahead to the 2020s, uncertainty is high on many
fronts. Technological change is disrupting businesses andExhibit 2.4 - Older Companies Are Generally Less Vital
BCG vitality score1

8
6
4
2
0
–2
–4
10

30

100

300
Company age (log scale)2Information technology
Financials

Consumer discretionary
Industrials

Health care
Other

Source: BCG Henderson Institute analysis.
Note: Shows 1,083 companies worldwide (companies with $10 billion+ revenue or $20 billion+ market cap through year-end 2017); excludes energy, metals& mining, and commodity chemicals.
Based on 18 metrics weighted by ability to predict future long-term growth; see “The Global Landscape of Corporate Vitality,” BCG, 2018.

1

Years since company founding.

2

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

13

bringing new social, political, and ecological questions to
the forefront. Economic institutions are under threat fromsocial divisions and political gridlock. Society is increasingly questioning the inclusivity of growth and the future ofwork. And planetary risks, such as climate change, aremore salient than ever.
Furthermore, deep-seated structural forces indicate that
this period of elevated uncertainty is likely to persist: technological progress will not abate; the rise of China as an
economic power will continue to challenge international
institutions; demographic trends point toward an era oflower global growth, which will further strain societies; andsocial polarization will continue to challenge governments’ability to effectively respond to national or global risks.
(See Exhibit 2.5.)
Under such conditions, it will become more difficult to rely
on forecasts and plans. Business leaders will need to consider the larger picture, including economic, social, political, and ecological dimensions, making sure theircompanies can endure in the face of unanticipated shocks.
In other words, businesses will effectively need to compete
on resilience.
Survival is already challenging for many businesses today.
Building resilience is often at odds with traditional management goals like efficiency and short-run financial maximiza-tion. But to thrive sustainably in uncertain environments,
companies must make resilience an explicit priority:• Prepare for a range of scenarios to ensure that strategy isrobust and risks are survivable.
• Build an adaptive organization that can rapidly adjust
to new circumstances—for example, by constantly
experimenting to identify new options.
• Proactively contribute to collective action on the biggest
issues facing global economies and societies, in order tomaintain a social license to operate.

The New Significance of Scale
These new forms of competition are highly intertwined. For
example, companies that orchestrate ecosystems will havean advantage in competing on learning, because ecosystems are a rich source of real-time data and digital platforms facilitate experimentation. Many companies will
integrate physical and digital assets by leveraging partnerships in hybrid ecosystems. Machine learning and autonomous action will increase humans’ need for and ability tofocus on imagination. And those shifts will collectively
create further unpredictability for business, necessitating
strategies for resilience.

Exhibit 2.5 - Global Risks Are Elevated Across Many Dimensions

SOCIETY

PLANET

ECONOMYTECHNOLOGY
AI governance
Data privacy
Trust

GrowthUncertainty
Trade regime
US vs. China

Future of Work
Inequality
Inclusion
Cohesion

Plastics
Global warming
Water

Source: BCG Henderson Institute.

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WINNING THE ’20s

These five emerging aspects of competition point to a newlogic for “scale.” No longer will scale represent only the
traditional value of achieving cost leadership and optimizing the provision of a stable offering. Instead, new kinds ofscale will create value across multiple dimensions: scale in
the amount of relevant data companies can generate andaccess, scale in the quantity of learnings that can be extracted from this data, scale in experimentation to diversify
the risks of failure, scale in the size and value of collaborative ecosystems, scale in the quantity of new ideas companies can generate, and scale in resilience to buffer the risks
of unanticipated shocks.

T

he capabilities that companies need in order to compete in the next decade will not come automatically.
Instead, leaders need to create them by designing the organization of the future — for example, by building autonomous, algorithmic learning loops, by synergisticallycombining humans and machines, and by rethinking therole of management and leadership.

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

Ryoji Kimura is a managing director and senior partner in
the Tokyo office of Boston Consulting Group and the global
leader of BCG’s Corporate Finance & Strategy practice. You
may contact him by email at kimura.ryoji@bcg.com.
Martin Reeves is a managing director and senior partner in
BCG’s New York office and the chairman of the BCG Henderson Institute. You may follow him on Twitter @MartinKReevesand contact him by email at reeves.martin@bcg.com.
Kevin Whitaker is an economist at the BCG Henderson
Institute. You may contact him by email at whitaker.kevin@bcg.com.

15

The Company of the Future

16

WINNING THE ’20s

The Company of the Future
By Allison Bailey, Martin Reeves, Kevin Whitaker, and Rich HutchinsonIn the coming decade, companies will increasingly needto compete on the rate of learning. Technology promises
to play a critical role: artificial intelligence can detect
patterns in complex data sets at extreme speed and scale,enabling dynamic learning. This will allow organizations toconstantly adapt to changing realities and surface newopportunities, which will be increasingly important in an
uncertain and fast-changing environment.
But for companies to compete on learning, it is not enoughmerely to adopt AI, which alone can accelerate learning only
in individual activities. As with previous transformative technologies, unlocking the full potential of AI—and of humans—will require fundamental organizational innovation.6 Inother words, to win the ’20s, leaders will need to re-invent theenterprise as a next-generation learning organization.

Reimagine the Organization
The next-generation learning organization will need to beredesigned to fulfill several key functions: (See Exhibit 3.1.)• Learning on All Timescales. The growing opportunityand need to learn on faster timescales, driven bytechnological innovation, is well known—algorithmic
trading, dynamic pricing, and real-time customized productrecommendations are already a reality in many businesses.
But it is perhaps under-appreciated that slow-moving forces
are also becoming more important. For example, trade
institutions, political structures, wealth stratification, andsocial attitudes are slowly changing in ways that could havea profound impact on business. Gone are the days whenbusiness leaders could focus only on business and treat
these broader variables as constants or stable trends. But

such shifts unfold over many years or even decades. In
order to thrive sustainably, businesses must learn on alltimescales simultaneously.
• Combining Humans and Machines Optimally.
Machines have been crucial components of businesses for
centuries—but in the AI age, they will likely expand rapidly
into what has traditionally been considered white-collar
work. Instead of merely executing human-directed andhuman-designed processes, machines will be able to learn
and adapt, and will therefore have a greatly expanded rolein future organizations. Humans will still be indispensable,
but their duties will be quite different when complemented
or substituted by intelligent machines.
• Integrating Economic Activity Beyond Corporate
Boundaries. Businesses are increasingly acting in
multicompany ecosystems that incorporate a wide varietyof players. Indeed, seven of the world’s largest companies,
and many of the most profitable ones, are now platformbusinesses. Ecosystems greatly expand learning potential:
they provide access to exponentially more data, they
enable rapid experimentation, and they connect withlarger networks of suppliers of customers. Harnessing
this potential requires redrawing the boundaries of theenterprise and effectively influencing economic activity
beyond the orchestrating company.
• Evolving the Organization Continuously. The needfor dynamic learning does not apply just to customerfacing functions—it also extends to the inner workingsof the enterprise. To take advantage of new informationand to compete in dynamic, uncertain environments, theorganizational context itself needs to be evolvable in theface of changing external conditions.

6. T. Bresnahan, E. Brynjolfsson, and L. Hitt, “Information Technology, Workplace Organization and the Demand for Skilled Labor: Firm-Level Evidence,” The
Quarterly Journal of Economics, MIT Press, 2002.

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Exhibit 3.1 - The Next-Generation Learning Organization

ECOSYSTEMSCOPECOMPANY

MACHINESHUMANSINDIVIDUAL

TRADITIONALORGANIZATIONSMILLISECONDS

DAYS

YEARS

DECADESTIMESCALE

Source: BCG Henderson Institute.

Today’s organizations, which were designed for more stablebusiness environments, are not well-suited to performthese functions. Reinventing the organization for the next
decade will require embracing five imperatives: (SeeExhibit 3.2.)
1. Integrate technologies for seamless learning.
2. Migrate human cognition to new, higher-level activities.
3. Redesign the relationship between machines and humans.
4. Nurture broader ecosystems.
5. Rethink management and leadership accordingly.

Integrate Technologies for Seamless Learning

automate but also to “autonomize” significant parts of
their businesses. In traditional automation, machines
execute a predesigned process repeatedly and consistently.
In autonomization, machines use continuous feedback toact, learn, and adapt on their own — without the bottleneckof human intervention.
Autonomous systems are designed by combining multiple
technologies into integrated learning loops. Data from digitalplatforms automatically flows into AI algorithms, whichmine the information in real time to facilitate new insights
and decisions. These are wired directly into action systems,
which continuously optimize outcomes under changing
conditions. These actions produce yet more data that canbe fed back through the cycle, closing the loop and allowing the organization to learn at the speed of algorithms.

As powerful as today’s emerging technologies are, they will
yield only incremental gains if they simply enhance individual steps of existing processes. The effective rate of anorganization’s learning is gated by its ability to act on new
insights. And classical organizations act slowly, owing totheir reliance on human decision making and hierarchy.

Some organizations are already implementing autonomous learning systems. For example, Amazon’s pricing andproduct recommendation engines, among dozens of otherfunctions, are operated by AI systems that learn and adapt
as new information emerges. And these systems are interconnected, so new data or insights from one part of thebusiness cascade through all other functions, which reactaccordingly.7

In order to truly accelerate the speed of learning to algorithmic timescales, organizations will need not only to

In contrast, traditional organizational approaches—for
example, unchanging rules or hierarchical decision

7. V. Granville, “21 data science systems used by Amazon to operate its business,” Data Science Central, 2015.

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WINNING THE ’20s

Exhibit 3.2 - Five Imperatives for the Company of the Future
NURTUREBROADER ECOSYSTEMSECOSYSTEMRETHINK LEADERSHIPACCORDINGLY

5

4

3
SCOPE

RECONCEIVETHE HUMAN–MACHINERELATIONSHIPCOMPANYINDIVIDUAL

1

2

INTEGRATE TECHNOLOGIESFOR SEAMLESS LEARNINGMIGRATE HUMAN COGNITION
TO HIGHER-LEVEL ACTIVITIESMILLISECONDS

DAYS

YEARS

DECADESTIMESCALE

Source: BCG Henderson Institute.

processes—can impede companies’ ability to harness the
rapid learning potential unlocked by technology. As BCG’sresearch on Smart Simplicity has shown, today’sorganizations already face the need to reduce bureaucracy
and complicatedness in order to promote fluid collaboration.
With the introduction of AI and other new technologies,
leaders need to redouble their efforts to simplify theirorganizations in order to enable autonomous learning aswell as more effective human-to-human collaboration.
Actions that companies can take to harness autonomous
learning include:• Gather real-time data on all aspects of the business byleveraging platforms, the Internet of Things, and other new
technologies.
• Deploy AI at scale, integrated with data and decisionmaking systems.
• Take human hierarchy “out of the loop” of routine, databased decision making.

Migrate Human Cognition to New, Higher-Level
Activities
The widespread adoption of autonomous learning machines naturally raises the question of what role human

workers will play in the organization of the future. Today,
there is already widespread concern about the speed atwhich technology will disrupt the future of work. To shape
this future — and to maximize organizational learning
capabilities — businesses need to focus human cognition
on its unique strengths.
For all its power and potential, AI is still inherently limited inits cognitive scope. It can analyze correlations in data (“whatis the case”) at extreme speed, on extreme scales, withextreme complexity. But it cannot reason at higher levels,
such as causal inference (“why is it the case”) or counterfactual thinking (“what is not the case but could be”).8
Humans should increasingly focus their efforts on thesehigher-level activities. For example, while correlative analysis is generally sufficient for learning about repeated actions on fast timescales, it is less useful for learning aboutslow-moving forces, such as political, social, and economic
trends. These shifts are unique and depend on the historical context and trajectory, which means there is no repeated data set in which to find patterns. Human abilities, suchas understanding causal relationships and generalizing
from limited data, are necessary to decode these forces
and adapt the organization accordingly.
Counterfactual thinking is also critical, as businesses needincreasingly to compete on imagination. Existing businessmodels are being exhausted faster, and long-term growth is8. J. Pearl and D. Mackenzie, The Book of Why: The New Science of Cause and Effect, Basic Books, 2018.

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declining, which means companies must continually generate new ideas to grow sustainably. But businesses today,
which are often implicitly designed for efficiency and the
maximization of short-run financial outcomes, are notconducive to imagination. Organizations will need to better
facilitate individual and collective imagination.
Apple provides a prescient example. When Steve Jobs returned to Apple as CEO in 1997, he made design the core of
the company’s culture, instead of functions like engineeringand finance, which had previously been dominant. By focusing on design—which leverages human creativity and imagination to generate new ideas—Apple was able to produce
the novel products, including the iPhone, that eventually
helped it become the world’s most valuable company.
In addition to imagination and making sense of non-repeated events, there will be many activities where humans
are advantaged, including organizational design, algorithmic governance, ethics, and purpose, to name a few. In
these domains of human activity, organizations will need
to become more effective at dynamic collaboration to get
the most out of their teams. This requires emphasizing
self-organization and experimentation by creating anorganizational context in which responsive decision making and learning can thrive, rather than by relying on direct
instructions.
Finally, organizations will need to recognize that these newactivities are cognitively demanding — which is particularly
challenging in an age of exploding inboxes, endless meetings, and ubiquitous information. Organizations will haveto allow humans to cultivate the art of reflection and avoid
cognitive overload.
How can organizations help humans maximize their value?
• Expose employees to unfamiliar or anomalous information,in order to inspire imagination.
• Schedule and protect time for unstructured reflection.
• Promote new ways of working that enable dynamic
learning and adaptation.

Reconceive the Relationship Between Humans
and Machines
The first two imperatives call for a hybrid learning organization, one that combines the comparative advantages ofmachines and humans: machines’ ability to rapidly identify
complex patterns in big data and humans’ ability to decode complex causal relationships and imagine new possi-

bilities. Together, these will enable the organization tolearn on an expanded range of timescales — faster andslower.
But in hybrid organizations, humans and machines will
increasingly have to collaborate in new and more effective
ways. This includes tasks that require thinking on multiple
levels or timescales simultaneously, as well as tasks thatdemand social interaction, another dimension in whichhumans are currently far more effective. Organizations willthus need to reimagine the relationship between humans
and machines to bring the best out of both and maximize
synergies.
Different types of jobs and tasks will require different typesof human-AI relationships:9• In jobs that are based predominantly on optimizationor pattern recognition, especially at high velocity andscale, humans will likely be substituted by machines. For
example, many tasks done today by retail loan underwriters
can be performed by AI; in these cases, humans will needto shift their focus to new higher-level tasks to add value.
• In jobs that also require social interaction, machines may
take over optimization-related aspects, but a “humanlayer” will still be critical to deliver messages with empathy
and compassion. For example, MIT developed a robot tomatch nurses with patients and allocate scarce resourcesin maternity wards, based on patient histories, schedulingconstraints, and previous experience.10 As a result, nurses
and doctors can spend more time interacting with patients
directly to provide empathy and personalized care.
• In jobs that require more creativity than optimization,
humans will likely be complemented by intelligent
machines that augment the capacity for creativity andimagination. For example, Maurice Conti, an expert ininnovation and technology, describes “generative design
tools” that automatically create new possibilities based ona set of predefined parameters, which can spark new ideas
for human designers.
• Finally, in jobs that require both creativity and social
interaction, humans will have many of the same core
responsibilities that they do today, but targeted AI
applications will help them maximize their skills. For
example, Google and a startup led by former Google
employees have developed the Nudge Engine, which uses
AI to provide personalized suggestions to employees ormanagers that enhance their effectiveness.11
For these new types of human-machine relationships to
succeed, organizations need to develop effective human-

9. Kai-Fu Lee, AI Superpowers, Houghton Mifflin Harcourt, 2018.
10. S. O’Brien, “MIT robot helps deliver babies,” CNN, July 2016.
11. D. Wakabayashi, “Firm Led by Google Veterans Uses A.I. to ‘Nudge’ Workers Toward Happiness,” New York Times, December 2018.

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WINNING THE ’20s

machine interfaces that allow for seamless collaboration.
Today’s AI models tend to be “black boxes” that are notdesigned for interpretability and may therefore impede
trust. Organizations will need to overcome these hurdles bydeveloping and implementing interfaces that provide
transparency into how AI makes recommendations,allowing humans to understand and validate machines’
actions. Similarly, humans and algorithms are rarely
matched for bandwidth and complexity. Choosing the rightlevel of abstraction and compression for communication
between humans and computers is critical: too muchcompression will suppress subtlety and prevent thetinkering through which human innovation proceeds, while
too little will overwhelm human overseers.
For example, Google’s DeepMind AI system that detects
eye diseases was designed to operate in two stages — first
identifying what features of the image are associated witheye diseases and then diagnosing diseases on the basis of
those features. This structure allows doctors to see what in
the image led to each diagnosis, increasing their trust in
the system.12
The frontier of human-machine relationships is still uncertain, but a few imperatives are emerging:• Segment tasks and jobs according to the challenges theyentail and deploy the right configuration of humans andmachines against each.
• Leverage collaborative human-machine relationships more
intensively.
• Develop explainable algorithms that humans can trust andunderstand.

Nurture Broader Ecosystems
In traditional models of production, companies operated ina linear value chain to deliver a narrow range of products.
However, economic activity is increasingly organized within
ecosystems — complex, semifluid networks of companies
that cross conventional industry boundaries.
Ecosystems combine information and capabilities from awide variety of players, increasing their collective ability to
explore new paths and learn about the market. They alsoenable the rapid development of new offerings in responseto emerging opportunities that could not have been foreseen. These benefits will be essential in future businessenvironments, which will likely be more complex and lesspredictable than those of the past.

However, realizing those benefits requires a neworganizational logic. Ecosystems cannot be successfully
managed with deliberate planning and control. Instead,organizations need to be adaptive in order to respond to
signals that emerge from the ecosystem — for example, byimplementing internal processes that are flexible andresponsive. And they need to develop shaping capabilities
to indirectly influence the ecosystem in more beneficial
directions — for example, by designing platforms thatincentivize other stakeholders to act in certain ways.
Ecosystems are not only a new method of developing anddelivering products; they also provide new opportunities forthe “back office” of organizations. The “gig economy” isbecoming more prominent, allowing companies to leverage external, freelance talent at scale — thereby enhancing
flexibility and giving them access to a wider variety of skills.
But harnessing labor-sharing platforms similarly requires
indirect forms of management instead of traditional command-and-control techniques.
For example, the Dutch technology company Philips orchestrates ecosystems in many areas of its business. On
the product side, its health care division participates inecosystems at several stages of value creation — including
an innovation ecosystem that involves academic labs,
robotics companies, and startups; and a sales and servicing ecosystem based on its tele-health app that connects
many digital health care partners. The company also created a labor-sharing platform, Philips Talent Pool, which
maintains a pool of freelancers familiar with the company
and monitors the quality of their work.
By reconceiving the external and internal workings of theorganization as a flexible, evolving ecosystem, businesses
can handle much greater dynamism and complexity. Thisrequires subjecting all aspects of the organization tomarket forces, enabling it to learn and adapt in responseto new opportunities. And it requires internal systems that
adjust automatically to new information, allowing learningand resource reallocation to occur at algorithmic speed.
When combined, these capabilities can create a “selftuning enterprise” that constantly learns and evolves
according to its environment. (See Exhibit 3.3.)
To harness the power of ecosystems throughout and beyond the organization, leaders must:• Engage external partners to create a shared vision of the
future.
• Develop capabilities for collaboration and information
sharing at scale—for example, platforms and APIs.

12. J. Kahn, “Artificial Intelligence Has Some Explaining to Do,” Bloomberg Businessweek, December 2018.

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Exhibit 3.3 - The Self-Tuning Organization Embraces Dynamism andComplexity

COMPLEXITY

Marketplaces

Self-Tuning
organization

Experiments

Scenarios

Classical
organization

Digitalplatforms

Agile
organization

Automatedorganization

Algorithmicorganization

DYNAMISM
Source: BCG Henderson Institute.

• Redesign internal processes to be more adaptive and datadriven, allowing the organization to become “self-tuning.”

Rethink Management and LeadershipCollectively, the above imperatives point to a very different
way of designing and operating organizations — which inturn will significantly change the role of leadership. In
particular, managers and leaders will need to focus on
several new challenges.
Developing Governance Principles for AI and Autonomous Machines. As machines play a greater part inlearning and action, the role of leadership in setting
guardrails and priorities will take on greater importance.
In the last decade, tech companies could sidestep these
topics, as the promise and potential of new technologies
gave them a license to move fast. But as social scrutiny oftechnology increases, questions about governance, trust,and ethics are coming to the forefront. And as AI is adopted more widely, all businesses will have to deal with these
difficult questions.

Some organizations are already beginning to address
them. For example, Microsoft created a new leadership
position to help companies learn how to deploy ethicalprinciples, including fairness, accountability, and transparency, when implementing AI systems.13
Unlocking Continuous Human Learning Capabilities.
As humans increasingly focus on higher-level thinking, they
will need to learn and practice new skills. This shift will not
be “one-shot” learning — the required abilities will continue to evolve unpredictably. Learning will therefore need tobe embedded in the workflow, and responsive to changing
needs, rather than batched at the beginning of careers.
Organizations will also need to invest in “learning contracts” with employees, mutually committing to continuously develop new skills for new roles.
Leading in Ecosystems. As the scope of the organization
expands to encompass broader ecosystems, leaders needto adopt a new approach. Traditional “mechanistic” approaches rely on the assumption that organizational actions can be perfectly planned and controlled, which is nolonger valid. Instead, leaders need to adopt a “biological”

13. S. Castellanos, “Microsoft AI Ethicist Guides Businesses on Responsible Algorithm Design,” Wall Street Journal, October 2018.

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WINNING THE ’20s

mindset, which recognizes that businesses are embedded
in complex systems that evolve unpredictably. This involves
managing with an experimental approach that seeks tolearn about the environment and adapt, rather than assuming that current knowledge is sufficient. And it involves
prioritizing resilience in order to prepare for outcomes thatcannot be anticipated.
Orchestrating an Adaptive Organization. Similarly,
running a self-tuning enterprise requires a different perspective on the role of organizational leadership. Instead ofexerting control over teams and intervening directly inoperations, leaders should reframe their mandate as orchestrating a complex, dynamic system of individuals andmachines, and guiding it to productive outcomes. This canbe considered an extension of the shift in leadership mindset from “classical music composer/conductor” to “improvisatory jazz group leader,” as was presciently laid out
by former BCG CEO John Clarkeson in 1990.

Allison Bailey is a managing director and senior partner inthe Boston office of Boston Consulting Group. She is the global
leader of the firm’s People & Organization practice. You may
contact her by email at bailey.allison@bcg.com.
Martin Reeves is a managing director and senior partner in
BCG’s New York office and the chairman of the BCG Henderson Institute. You may follow him on Twitter @MartinKReevesand contact him by email at reeves.martin@bcg.com.
Kevin Whitaker is an economist at the BCG Henderson
Institute. You may contact him by email at whitaker.kevin@bcg.com.
Rich Hutchinson is a managing director and senior partner
in BCG’s Atlanta office and the global leader of the firm’sMarketing, Sales & Pricing practice. You may contact him byemail at hutchinson.rich@bcg.com.

As a consequence, the day-to-day activities of managers
will change. Traditional management, in the form of direct
decision making, will be reduced — because fewer aspectsof the organization can actually be “managed.” Instead,managers need to think of themselves as coaches rather
than decision makers, and shift their activities to higher
levels, such as shaping the conditions and context of theenterprise.

The organizations that will win the 2020s will look muchdifferent from today’s: they will use different capabilities; they will operate at different speeds and scales ofinfluence; they will contain different structures and responsibilities; and they will embody different leadership models
to enable all of the above.

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The Science of Organizational
Change24

WINNING THE ’20s

The Science of Organizational Change
By Lars Fæste, Martin Reeves, and Kevin WhitakerThere is a gap between where most organizations aretoday and where they will need to be in order tosucceed in the coming decade. The companies
that win in the 2020s will be designed to constantly learn
and adapt to changing realities, combine artificial
and human intelligence in new ways, and harness thebenefits of broader business ecosystems. Reaching
this necessary future state will require a fundamental
transformation.
This change effort will be challenging. Many businesses
have deeply entrenched operating systems that are predicated on hierarchy and human decision making. They willneed to redesign their internal processes and build newcapabilities and business models.
Furthermore, this will not be a one-time change effort: thedynamic nature of business will require organizations tobuild capabilities for ongoing large-scale change to keep up
with evolving technology and competition.
Traditional approaches to organizational change are
generally not very effective. Change management is usually
thought of as one-size-fits-all and based on plausible rules of
thumb. But our research shows that only about one in fourtransformations succeeds in the short and long run, and thesuccess rate has been trending downward. Meanwhile, thestakes are high: the cumulative difference between successand failure for the largest transformations over a decade can
add up to the company’s entire market value.
Leaders need to take a new approach to change — one that
deploys evidence, analytics, and emerging technology. In
other words, leaders must apply the emerging science oforganizational change, which is based on five key components. (See Exhibit 4.1.)

Exhibit 4.1 - Five Keys to Organizational Change
Ground change
programs in evidence

Embrace uncertainty inchange management

De-averagechange strategies

Tap into
emerging science

Use technology toidentify the right talent

Source: BCG Henderson Institute.

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25

1. Ground change programs in evidence.
2. De-average change strategies according to the nature of thechallenge at hand.
3. Embrace uncertainty and complexity in change
management.
4. Use technology to identify the right talent to executechange.
5. Tap into emerging science to enhance change programs.

Ground Change Programs in Evidence
When it comes to understanding how to enact change,business leaders have often relied on intuition and experience. In a typical transformation effort, the program design, choice of tactics and value levers, and ongoing
management are often based on little more than subjective data such as customer surveys and progress reports.
But the increasing availability of data, together with novel
analytical approaches, has made it possible to empiricallydecode what really works and what doesn’t. Leaders thus
need an evidence-based approach to transformation.
Our empirical analysis of hundreds of large companies thatexperienced major change reveals a number of lessons.
In the short term, the most successful companies articulat-

ed a compelling story to reset investors’ expectations inaddition to improving efficiency. (See Exhibit 4.2.) In thelonger term, they took actions to increase revenue growth,such as spending more on R&D. They launched formaltransformation programs, rather than a series of ad hoc
improvements, and invested in them sufficiently. And they
initiated their transformations preemptively, when things
were still going well, instead of in reaction to declining
performance.
To succeed in the next decade, leaders can apply such anevidence-based approach to all types of change situations — turning transformation from a reactive necessity
into a competitive opportunity. For example, empiricalanalysis can help companies successfully acquire andtransform underperforming businesses: our researchshows that although such “turnaround M&A” deals arevery risky, there are demonstrable ways to beat the odds.
These include launching turnaround initiatives quickly andsetting ambitious synergy goals, as well as giving attention
to key soft factors— for example, companies with a welldefined purpose had significantly better outcomes in turnaround deals, demonstrating the importance of motivating
employees on the change journey.
A similar approach can also help companies respond tochanging external conditions, such as an economic slowdown: while most companies see performance decline
during a downturn, a minority thrive — and historical analysis can identify what sets them apart.

Exhibit 4.2 - Evidence Shows That Performance Drivers Vary AcrossTimescales

Drivers of cumulative TSR outperformance in transformation (%)

Investors’ expectations

40

24
37

Cost reduction

35

Revenue growth25
1 year41
5 years

Sources: S&P Capital IQ; BCG Henderson Institute analysis.
Note: Based on total shareholder return relative to industry over given timeframe for 70th-95th percentile performers (to exclude outliers), for companies
with two preceding years of severely declining performance.

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WINNING THE ’20s

What steps can leaders take to adopt an evidence-basedtransformation approach?
• Draw insights from the full range of historical evidence,
rather than relying only on personal experience or rules of
thumb.
• Build analytical capabilities to be able to identify tailoredinsights for your individual change situation and optimize
program design accordingly.
• Create a sense of urgency in your organization to make thecase for preemptive change.

De-average Change Strategies
Organizational change is often seen as a single type ofchallenge that calls for a single type of change management in all situations. Accordingly, most change efforts
follow a recipe with common ingredients: for example,
centralized program offices, periodic pulse checks, measurement against predefined milestones, and a one-shotprocess with a clear end date.

try to seek “higher ground,” which corresponds to higher
performance. Different change situations can be considered along two dimensions: Is the target destination clear(the ends)? And is there a clear path to get from here to
there (the means)? (See Exhibit 4.3.)
De-averaging the challenge this way reveals five types ofchange strategies, each of which requires a fundamentallydifferent approach to change management:• A planned itinerary represents the traditional approach toorganizational change. This is appropriate when there isa clear goal and obvious steps to get there. For example,
HSBC identified a clear opportunity to simplify andstreamline its business, through the well-defined meansof exiting noncore locations and eliminating excessorganizational layers. It executed the program with a typicalgoal-oriented approach, setting clear cost and profit targets,
reporting its progress against those targets, and clearly
defining accountability.

In reality, there are many types of organizational changethat present very different challenges and have very different requirements. Leaders need to de-average organizational transformation into various components andunderstand the right approach for each.

• A river crossing strategy is more appropriate when there
is a clear goal but the path to get there is unknown.14
For example, Starbucks in 2008 understood it needed toincrease customer loyalty but didn’t know precisely how to
do so. Rather than planning its change program in detail,it took a more experimental approach to find the best
path—running pilot programs in emerging areas like social
media, learning from those efforts, and amplifying theactions that made concrete progress toward its goal.15

Change can be considered as movement across a “landscape” of possibility, where each point corresponds to adifferent possible state of the organization. Organizations• A hill-climbing strategy is needed when the means ofchange are clear but the end state is not. For example,
John Deere recognized that the importance of the Internet

Exhibit 4.3 - Different Situations Call for Different Change Strategies

River crossing
Clarity ofends

Planneditinerary

Escape theswamp
Scouting andwanderingHillclimbing

Clarity ofmeans

Source: BCG Henderson Institute analysis.
14. As coined by Deng Xiaoping, who described China’s reform effort as “crossing the river by feeling for the stones.”
15. Nancy F. Koehn et al., “Starbucks Coffee Company: Transformation and Renewal,” Harvard Business School Case, June 2014.

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27

of Things would continue to grow, but the company hastaken an open-ended approach to its investments in thetechnology: rather than defining an end goal from the
beginning, it started with a few minimum viable productsthat were believed to be heading in the right direction.
After learning more about the value of those products, thecompany aims to “build from those and create a broader
service around them”—eventually reaching an end statethat likely could not have been foreseen.16• Companies may seek change even when they know neither
the ends nor the means—for instance, when they arelooking for the next big opportunity. This situation calls
for a strategy of scouting and wandering. For example,
the Japanese company Recruit instituted an exploratory
program called Ring, which allows any employee topropose a new business in any field, not only those related
to the company’s existing products. The program receives
more than 1,000 new ideas every year, some of which havebecome substantial businesses for Recruit.
• Finally, some companies face situations in which the only
clear imperative is to change substantially and urgently,
which demands an escape the swamp strategy. For example,
facing severe threats in 2012, Best Buy adopted thephilosophy, “If we don’t change, we are going to die.”17
The company pursued bold, pragmatic moves without
exhaustive evaluation, because they represented the best
chance to promptly escape an adverse situation.
Major transformation programs, such as the ones many
companies will have to undergo to reinvent themselves
for the next decade, require a composite of thesestrategies — in which various change management
approaches are applied in sequence, or in different partsof the business simultaneously. Companies therefore
need to develop capabilities to tackle each type of change
effectively.
A few key imperatives can help leaders leverage therequired variety of change strategies:• Understand the variety of potential change challenges andthe tactics required to succeed in each.
• Divide complex transformation efforts into theircomponents, and select change strategies accordingly.
• Build organizational and leadership capabilities to enact
multiple types of change simultaneously.

Embrace Uncertainty and Complexity in
Change Management
Businesses have traditionally been managed with a “mechanical” mindset. This mentality assumes that everythingthat needs to be known can be known, everything thatneeds to happen can be planned, and all necessary change
can be enacted through direct intervention.
However, companies are composed of people who interact
with one another and with a complex dynamic environment. So businesses, like other biological systems, behave
like nested complex adaptive systems. Lower-level systems(such as individuals) are embedded in higher-level systems(such as teams, business units, companies, industries,
national economies, and societies) — and changes in any
system can cause unintended and unpredictable effects inothers.
Interactions between individuals or systems are becoming
even more complex today, because employees, companies,
and economies are more connected as a result ofdigitization, and because production is starting to beorganized in dynamic multicompany ecosystems rather
than traditional static supply chains. Therefore, mechanicalapproaches to change management are increasingly
inadequate. Instead, leaders need to employ a “biological”
approach, which is more realistic about what can be known
and directly controlled.
Biological management involves several principles:• Adapt to changing conditions by seeing what works, rather
than designing or deducing static solutions.
• Shape the organizational context, rather than dictating
individual actions.
• Allow new approaches to emerge from a diversity ofperspectives, rather than relying on standardization.
• Observe how the organization behaves as a whole, rather
than optimizing individual parts.
• Compete on resilience and preparedness for the unknown,rather than only static efficiency.
These principles point to new strategies for enactingchange in business. To address a complex task (for instance, shifting a company’s culture), direct interventions(such as mandating individual behaviors) are unlikely tobring about the required change. Indirect interventions— those that change the mindset, assumptions, and context that underpin employees’ actions — often prove to be

16. Tim Greene, “John Deere is plowing IoT into its farm equipment,” Network World, May 2016.
17. Susan Berfield and Matthew Boyle, “Best Buy Should Be Dead, but It’s Thriving in the Age of Amazon,” Bloomberg Businessweek, July 2018.

28

WINNING THE ’20s

more effective because they touch the deeper, more persistent drivers of behavior.
Biological approaches also enable the orchestration of
external change, such as shaping the behavior of other players in a business ecosystem. For example, early in the evolution of its Taobao e-commerce platform, Alibaba wanted to
expand the range of offerings by making it easier for small
or inexperienced sellers to join the market. Rather thanaddressing this challenge through direct actions, the company set up Taobao University—a platform on which established sellers could produce certified training materials for
new sellers. By finding this indirect leverage point, Alibaba
was able to capture the best wisdom from its marketplace,transmit it to potential sellers with greater scale and specificity, and improve the quality of services on Taobao, which
ultimately became the world’s largest e-commerce website.

For example, our research (in collaboration with pymetrics,
a startup using neuroscience and AI to help companies
improve hiring processes, and Professor TejPavan Gandhokof the Indian School of Business) used digital games toassess individuals’ cognitive and emotional traits as well as
their capabilities in various simulated problem-solving
environments. We found that different neuro-traits reliably
predicted success in different situations, suggesting thatscience can indeed play a helpful role in identifying talent
to fill new roles. And we found that very few individuals
were successful in all environments — demonstrating theneed to effectively align skills with roles.

What steps can leaders take to embed biological thinking
in change management?

Furthermore, there were clear differences in how wellcertain capabilities could be learned over time. Some
capabilities could be learned effectively, indicating thatbusinesses are able to develop them internally overtime — while others could only be learned very slowly,
indicating a need to acquire them externally if they cannot
be found within the organization. (See Exhibit 4.4.)• Be realistic about what you can predict and what is beyond
managerial control.

How can leaders ensure they have the proper capabilities
to successfully execute change programs?

• Foster trust and reciprocity to coordinate competinginterests.

• Use objective measurements of individuals’ skills, and deaverage talent needs in different parts of the business.

• Experiment frequently and amplify the initiatives andapproaches that are most successful.

• Base hire-or-build decisions on the learnability and market
for different capabilities.

Use Technology to Identify the Right Talent to
Execute Change
Large-scale organizational change often results in a needfor new capabilities, which may be found by reallocating
workers within the enterprise or by identifying new talent
externally. To execute change effectively, it is therefore
necessary to develop strategies for identifying individuals’
unique skills and matching them to the right roles.
The challenge of aligning skills with positions, like manyother aspects of large-scale change, has generally been
based on subjective judgments of individuals’ track recordof performance in different roles. But advances in scienceand technology are unlocking new possibilities. The studyof neuroscience, and advances in testing technology, allow
for the rapid, scalable identification of cognitive and emotional traits — which are more objective than self-reported
survey measures or judgements based on interviews. And
AI can now find and refine complex relationships between
these traits and job performance across very large sets oftraits and roles.

• Maintain a diversity of skills throughout the organization
for when new challenges arise.

Tap into Emerging Science to Enhance Change
As science and technology advance, more tools for managing change in complex dynamic environments will emerge.
The leaders who are willing to let go of established models
and embrace this frontier will have an advantage in transforming their organizations in the coming decade.
Some emerging lessons from science and technology
include:• Identify early-warning indicators. Understanding whenand how change is required is no easy task. By the time
traditional performance measures signal a need for change,
it is often too late to recover. In some domains, however,scientific study has revealed early-warning signals—higherorder patterns that predict critical changes to complex
systems. For example, in ecology, certain configurations ofvegetation in a dry region are indicators that the region isabout to become completely barren.18

18. Martin Scheffer et al., “Early-warning signals for critical transitions,” Nature, September 2009.

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

29

Exhibit 4.4 - Technology Identifies Which Capabilities Can Be Learned
Effectively
Average scoreincrease2

Progression of an average player (normalized)1
4

15%

3

13%
5%

2

3%
1

Increasingly
diﬃcult to
learn

2%

0

1%
1

2

3

4

5

6

7

8

9

10
Game #

Environments
Classical

Adaptive

Visionary

ShapingRenewalAmbidexterity

Sources: Data collected by pymetrics, Professor TejPavan Gandhok, and BCG Henderson Institute; analysis by pymetrics and BCG Henderson Institute.
Normalized score calculated on the basis of average increase between two successive rounds.

1

Average across ten games.

2

Businesses may be able to identify early-warning signalsof impending shifts—for instance, the threat that theircurrent growth engines will run out of steam—andunderstand how to change accordingly. For example,
Thorton Tomasetti, a leading engineering firm, has adopted
new metrics to measure its vitality in order to identify
signs of deterioration before they show up in measures offinancial performance.
• Learn how to “nudge” behavior. As business leaders
shift from mechanical approaches to indirect ones that
account for uncertainty and complexity, they will need to
identify influential leverage points in the business that
may not be obvious. The emerging study of behavioral
psychology can help leaders identify small interventions
that may nudge employees into different, more productive
behaviors. For example, in a randomized experiment Virgin
Atlantic found that giving reminders and fuel use goals topilots resulted in millions of dollars of cost savings.19• Leverage new program management technologies. As
companies adopt an expanded array of change strategies,
they will need new methods of reporting on and managing
their change programs. Emerging technologies may help.

For example, new digital crowdsourcing platforms may
offer a template for companies to gamify change initiatives
and gather real-time feedback about what works andwhat doesn’t. And dynamic program management
platforms can enable leaders to continuously adjust theportfolio of change initiatives instead of following rigid
timelines.
• Use AI to enhance change. Lots of organizations areenacting major change so that they can use artificial
intelligence effectively (often a central goal of digitaltransformation). But few are using the capabilities of
AI itself to enhance major change programs. Instead,change efforts are still largely designed and managed withsubjective approaches.
However, in the next decade, forward- looking companies
will likely leverage increasingly powerful AI capabilities as
an essential part of their change programs. For example,
machine learning has already shown remarkable ability inpredicting the dynamics of some chaotic systems, such as
weather.20 Similar technologies could identify disruptionsin the business environment or diagnose organizational
health in real time.

19. Greer Gosnell et al., “A New Approach to an Age-Old Problem: Solving Externalities by Incenting Workers Directly,” NBER working paper, June 2016.
20. Natalie Wolchover, “Machine Learning’s ‘Amazing’ Ability to Predict Chaos,” Quanta Magazine, April 2018.

30

WINNING THE ’20s

For example, according to analytics startup KeenCorp, deep
semantic patterns in Enron’s internal emails identified
latent tensions in the organization, which could have
served as a sign of trouble to observers even if they did
not know the full extent of its fraud.21 This type of analysis
could be applied not only to legal risks, but to strategic risks
as well.

Lars Fæste is a managing director and senior partner in the
Hong Kong office of Boston Consulting Group and the managing
partner of BCG Greater China. He has expertise in large-scaletransformation and turnarounds. Follow him on Twitter @lars_faeste and contact him by email at faeste.lars@bcg.com.

How can leaders use the emerging science of change totheir advantage?

Martin Reeves is a managing director and senior partner in
BCG’s New York office and the chairman of the BCG Henderson Institute. You may follow him on Twitter @MartinKReevesand contact him by email at reeves.martin@bcg.com.

• Identify the new metrics and analytical approaches thatcan provide early-warning signals to your business.

Kevin Whitaker is an economist at the BCG Henderson Institute. You may contact him by email at whitaker.kevin@bcg.com.

• Use AI to optimize and enhance the change process itself.
• Monitor ongoing technological and scientific advances to
identify new opportunities, perhaps including generative AI
algorithms, biometrics, or control theory.

Major, ongoing change will be necessary to succeed in
the next decade. But successfully enacting organizational change is highly challenging. By recognizing thecomplexity of change, and using lessons from science andanalytics to address it, leaders can ensure their companies
are best positioned to win the ’20s.

21. Frank Partnoy, “What Your Boss Could Learn by Reading the Whole Company’s Emails,” The Atlantic, September 2018.

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

31

The Business Imperative ofDiversity

32

WINNING THE ’20s

The Business Imperative of Diversity
By Miki Tsusaka, Christian Greiser, Matt Krentz, and Martin ReevesT

he next decade is fast approaching, and there are no
spoilers. It’s likely that the years to come will bemarked by geopolitical and economic uncertainty,
with continued disruptions from digital challengers. Organizations that are ready to learn and pivot on the fly will be
the ones that not only stay afloat through the 2020s but
thrive.
How can business leaders ensure that their organizations
are primed for innovation and reinvention — and thus beas prepared as possible for the relentless change the next
decade will bring? The not so secret but often elusive
answer: diversity.
Increasing diversity is a moral imperative, but it is also
becoming a powerful business requirement. Organizations
equipped with a range of voices and perspectives throughout the ranks are better able to innovate, take risks, solve
problems creatively, bounce back from failures, and turnchallenges into opportunities. But progress around theworld , especially in leadership roles, has been lackluster.
(See Exhibit 5.1.)
Now is not the time, however, to be discouraged. To not
only cope with the uncertainties of the global economy in
the next ten years but gain advantage, leaders must makediversity an urgent priority in their strategy playbook.

The Link Between Diversity and Innovation
Instinct tells us that diversity should spark innovation.
When a team is made up of people who have a great deal
in common, we risk “group think” — a sameness of perspectives that can lead to complacency, stagnation, and

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

even downfall. Such homogeneity also inhibits a company’s ability to respond to challenges in a resilient manner.
And it turns out that our instinct is right: we can movebeyond assuming the benefits of diversity and back it up
with data. A BCG study of more than 1,700 companies
around the world shows that diversity increases the capacity for innovation by expanding the range of a company’s
ideas and options , leading to better financial performance.
And the BCG Henderson Institute recently demonstrated
that gender diversity, for example, not only correlates with
but is predictive of future growth.
Diverse and inclusive organizations generate unconventional solutions and offer up more ideas, increasing the
likelihood that they will deliver winning products andservices and greater long-term growth. Over the long haul,
growth is the predominant driver of outperformance. And
in an environment of declining aggregate economic growth
globally, innovation provides the necessary fuel for anindividual company to grow.
In the corporate world, the primary types of diversity thatcome to mind — gender, ethnic, racial, and sexual
orientation — all drive success. But so do other kinds,
including work experience, age, educational background,and nation of origin.
Cognitive diversity — people with different ways of solving
problems working together — is also key. Joint research by
BCG and AI-neuroscience startup pymetrics shows thatlarge companies need diversity in cognitive skills in orderto master the range of strategies — from classical to adaptive to visionary— needed to cope with the complex anddynamic environments they face.

33

Exhibit 5.1 - Little Progress on Gender Diversity in the Past Ten Years
Average share of women managers at large companies (%)
Parity: 50%

26

26

25

27

2009

2012

2015

2018

Sources: Thomson Reuters; BCG Henderson Institute analysis.
Note: Includes listed global companies with at least $10 billion in sales or $20 billion in market capitalization that are reporting gender diversity data.

And the more types of diversity, the merrier. Companies
that have achieved diversity on multiple dimensions arestronger innovators than those that haven’t. In addition,
when an organization invests in digital innovation, theadvantages of diversity multiply, allowing it to better capitalize on those investments.
Furthermore, diversity is most important at the top. Thereis a clear correlation between the diversity of management
teams and an organization’s overall level of innovation. For
example, nearly half the revenue of companies that havemore diverse leadership comes from products and services
launched in the past three years. And those companies
have higher EBIT margins as well, delivering 9 percentage
points more than those with below-average diversity on
their management teams.

in technology, the complex dynamics of globalization, andpolitical uncertainty worldwide are creating an unpredictable business environment that will make it harder forcompanies to endure. Public companies today have a
one-in-three chance of ceasing to exist in their current
form over the next five years, owing to failure, takeover, orother causes. That’s a rate that’s six times higher than therate 40 years ago.
Greater diversity fosters innovation, but it can also
strengthen resilience — the capacity to survive theunexpected — which is an equally important weapon
heading into the next decade. Diverse companies are
better than their more homogenous counterparts atwithstanding unanticipated changes and adapting toexternal threats.

The composition of the boardroom —a topic in the spotlight of late — is also important, as its diversity leads to abroader range of ideas and publicly expresses how committed the company is to embracing diversity overall. Gender
diversity on boards has become mandatory in some countries, but good board governance has always encouraged
diversity, starting with the basics of including people fromoutside the organization.

In fact, diversity is a pivotal feature of all long-lived naturaland social systems, including companies. When a company
can deploy a range of perspectives and ideas, it effectively
has more ways of hedging the unexpected. Diversity not
only mitigates against the risk of system collapse but isalso the grist for evolutionary adaptation. It allows forconstant variation and experimentation with products,
strategies, and business models — essential in maintaining
fitness in a changing environment.

Diversity Also Builds Resilience

Not surprisingly, when smaller, short-term failures occur
within a resilient workplace culture, winning companies
learn and thrive. A crisis provides an opportunity to adapt,as long as the company has a wide range of perspectives

The most innovative companies will be at an advantage inthe coming years, but that won’t be enough. Rapid changes

34

WINNING THE ’20s

to pull from and the means to choose the best ideas andact upon them.
And as the business environment grows more complex anddynamic, a uniform and steady approach to strategy andexecution isn’t sufficient. Instead, companies need to apply
a diverse set of approaches to succeed in different environments. That kind of constant adaptation will promotelongevity, since in a changing environment it is not enoughto focus on the traditional question of strategy: How goodis my game? An equal emphasis needs to be placed on thequestion, How long will my game last?
One executive from a Fortune 500 company used half ofeach management meeting to open up a conversation
about recent failures and the lessons those failures provided. Jeff Bezos of Amazon is likewise well known for embracing failure, writing to shareholders that “failure andinvention are inseparable twins.” The goal is to avoid asuccess trap — an overreliance on the approaches that
produced yesterday’s success, often at the expense of
tomorrow’s — by constantly seeding new approaches.

Unlocking the Potential of Diversity
Achieving diversity in the workplace has been a struggle
globally — more so in some regions than others — with
progress being slowest in the leadership ranks. And evenwhen companies can impress the outside world with increased diversity numbers or commitments, they’re notalways able to convert that structural progress into business success.
Leaders need to focus on three primary areas in order topush for progress on diversity and unlock its potential.
Build an Inclusive Workplace
Diversity has become top of mind for business leaders
everywhere. But so far they’re not only not getting thenumbers they need; they’re also not gaining as much as
they could from the numbers they have.
Hiring more diverse talent is only the first step. Leaders
have to move beyond compositional diversity and create aworkplace that allows diversity to thrive. In other words,
diversity won’t work for companies if they aren’t working tobuild an environment that unlocks the potential of diversity and ensures that the best ideas and practices canemerge and be embraced.
Explaining the challenge of building an inclusive workplace, Citigroup CEO Michael Corbat recently said, “I think
we’ve been okay at bringing women and minorities into

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

the firm, but I don’t think we’ve created the environmentthat creates the sustainability of them wanting to be
there.”As in biological evolution, taking advantage of diversity
within an organization requires the ability to select andamplify the best approaches. When that kind of adaptive
mechanism is baked into the environment and operations of the organization, diversity can do its best work.
And the resulting adaptive, inclusive workplace will allow
for easier maintenance of a diverse pool of talent overtime, including a pipeline of leaders contributing to theinnovative capabilities and resilience of the organization
for the long term.
There are five enabling factors needed to create this kindof inclusive environment: participative leadership, withdifferent views readily heard and appreciated; a strategicemphasis on diversity led by the CEO; frequent and open
communication among teams; a culture of openness to
new ideas; and fair and transparent employment practices,
including equal pay. When a corporate ecosystem has all ofthese in place, the organization will be able to reap thetrue business benefits of diversity and be ready for the next
decade.
Don’t Become Complacent About Progress
As companies improve their diversity numbers and build
an environment conducive to unlocking the power ofdiversity, leaders may think their job is done. In fact, building and maintaining diversity will become even more
mission critical over time and has to stay at the top of theagenda. Rather than being satisfied with 30% diversity inleadership, for example, it may be time to aim for 50%.
Three steps can accelerate the progress of diversity initiatives and build the innovation capabilities and resilience oforganizations:• Come to an honest consensus on how much progress
the company has made on its diversity initiatives
and how much further it needs to go. Express a senseof urgency about the need for real change, ensuringthat the workforce hears a strong, vocal leadershipcommitment—and hears it often.
• Define ambitious, realistic, and specific targets.
Leaders must tailor goals to the unique needs of theorganization and revisit them periodically, since strategies
for diversity today may not respond to the challenges of the
future. For example, a company may make strong progresson gender diversity in leadership, but a new corporate
acquisition could necessitate a different type of diversity,
such as in geographic or academic background.

35• Apply the specific measures that will achieve
those targets, including the tried-and-tested
measures, such as antidiscrimination policies
and bias awareness training. Also don’t overlook the“hidden gems”—the measures that work but tend to beundervalued by senior-level management—as well as
specific measures that may be necessary for a particularcompany, such as boosting cognitive diversity.
Increase Diversity — and Win the Race for Talent
How companies attract and retain talent in the next
decade — and how they populate their leadership
positions — will be a strong predictor of their success or
failure. Talent will be in short supply in the world’s largest
economies, and specific capabilities will be even rarer: 30%of the skills that will be needed just by 2020 are lacking or
are seen as not critical in today’s talent pool. It will
therefore be especially important for companies to activate
an always-on recruiting, retention, and retraining strategy
in the coming years.
Technology will play a powerful role—for better and forworse—in shaping how diverse the workforce of the future
will be. AI, for instance, could erode progress in gender
diversity. The IMF projects that more jobs currently held by
women are at risk of elimination as a result of AI thanthose held by men.
Offsetting this risk, technology could likewise help. AI andneuroscience-based skills assessments, for example, canactually reduce bias in hiring by focusing on empiricalpatterns, thus expanding the potential talent pool.
Those that don’t address their diversity failings will be
missing out on hiring and retaining top talent and will notsurvive technological upheaval. But an ambitious strategy
to increase diversity — and a plan to create a workplaceenvironment that embraces it — will lead to an innovativeand resilient company poised for growth and long-term
wins.

36

A

chieving innovation and resilience through diversity is
crucial for succeeding in the 2020s. The push for diversity is visible everywhere — in headlines every day and as aregular part of business strategy conversation. As a largely
internal matter, it should be controllable and predictable,
but it remains an underleveraged opportunity to create acompetitive edge.
No matter the industry, diversity and inclusion have to be abusiness imperative — a core part of a company’s collective
purpose. If leaders successfully drive diversity and establish the workplace environment that allows it to thrive,
companies will gain the ability to innovate, grow, and withstand the shocks of the coming decade.

Miki Tsusaka is a managing director and senior partner in
the Tokyo office of Boston Consulting Group and the firm’s
chief marketing officer. You may contact her by email at
tsusaka.miki@bcg.com.
Christian Greiser is a managing director and senior partnerin the firm’s Düsseldorf office and the global leader of its
Operations practice. You may contact him by email at greiser.
christian@bcg.com.
Matt Krentz is a managing director and senior partner in
BCG’s Chicago office and the global leader of the diversity andinclusion topic. He was a member of the firm’s executive
committee for eight years and its global people chair for six
years. You may contact him by email at krentz.matt@bcg.com.
Martin Reeves is a managing director and senior partner inthe firm’s New York office and the chairman of the BCG Henderson Institute. You may follow him on Twitter @MartinKReeves and contact him by email at reeves.martin@bcg.com.

WINNING THE ’20s

Optimize for Both Social andBusiness ValueBOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

37

Optimize for Both Social andBusiness ValueBUILDING RESILIENT BUSINESSES, INDUSTRIES, AND SOCIETIES
By David Young, Wendy Woods, and Martin ReevesAs we approach a new decade, we are also
approaching a tipping point for business, with new
benchmarks for what constitutes a good company, agood investment, and a good leader. The defining
expectation: good companies and investments will delivercompetitive financial returns while helping society meet its
biggest challenges, and in so doing will enable sustainablebusiness.
Leaders with foresight and courage will use this dynamic tocreate new opportunities for growth, sustained returns forshareholders, and greater societal impact. To do this, they
will need to think in new ways, create new modes of competitive advantage, pursue deep and broad business model
innovation, and engage strategically with ecosystems. They
must merge the two currently disconnected uses of the“S-word” in business: sustainability and sustainable competitive advantage.
The implications for companies, capital, and capitalism areprofound. Here, we share our take on the emerging era ofbusiness value, and the CEO agenda for value and thecommon good.

Why Is Corporate Capitalism at a Tipping Point?
Stakeholders are beginning to pressure companies andinvestors to go beyond financial returns and take a more
holistic view of their impact on society. This should notsurprise us. After all, we have lived through two decadesof hyper-transformation, during which rapidly evolving
digital technologies, globalization, and massive investment flows have stressed and reshaped every aspect ofbusiness and society.

38

As in previous transformations, the winners created new
dimensions of competition and built innovative businessmodels that increased returns for shareholders. Manyothers found their businesses at risk of being disrupted,
with familiar formulas no longer working. To meet the
unwavering demands of Wall Street, many companies
relentlessly optimized operating models, streamlined andconcentrated supply chains, and specialized their assets
and teams — leaving them less resilient and less adaptable
to shifting markets and trade flows. The resulting waves ofcorporate restructuring, consolidation, and repositioning
have fractured companies’ cultures and undermined theirsocial contracts.
Furthermore, this hyper-transformation cascaded beyond
individual companies and created socio-economic dynamics that left many people and communities economicallydisadvantaged and politically polarized. Combined with theincreasing shared anxiety that the earth’s climate is changing faster than the planet can adapt, a global zeitgeist ofrisk and insecurity has emerged. We will enter the 2020s
with more citizens, investors, and leaders convinced thatthe way business, capital, and government work mustchange—and change quickly.
We now must rethink the sustainability of the whole system in the face of extreme externalities — or risk losingsocial and political permission for further progress. The
2030 UN Sustainable Development Goals (SDGs) identify
the moral and existential threats that we must meethead-on. While some question the SDGs’ breadth andtimeline, most agree that, if achieved, they would create amore just, inclusive, and sustainable world. Goal 17 calls
for new engagement by companies and capital in partnership for collective action across the public, social, andWINNING THE ’20s

private sectors. Five years into the SDG agenda, there is
ample evidence that governments, investors, and companies are beginning to exercise their capacity to createmuch-needed change.

Change Is Underway but Is Hardly Sufficient
Many institutional investors are racing to integrate ESG(environmental, social, and governance) assessments into
their decision making, and they are expecting companies
to report on how they deliver on those metrics. New efforts promote radical disclosure, like the Bloomberg/
Carney TCFD (Task Force on Climate-Related Financial
Disclosures), which encourages signatories to report on
the climate risks of their financial holdings. New standards initiatives are creating a foundation for nonfinancial
performance accounting, and the prospect of widespread“integrated reporting” seems realistic. Companies areinvesting in “purpose” and defining their contributions tosociety against material ESG factors and SDG goals. Corporate sustainability and CSR (Corporate Social Responsibility) functions, historically on the sidelines, are now
being integrated into line business activity, with progressive companies expanding the scope of competition to
include differentiation on environmental and societal
dimensions. And through industry consortia, many companies are taking collective action on issues that both threaten their right to operate and open up new opportunities
for their industries.
Such examples are important early signals that the context
for business is changing. However, for all the progress oncommitments, agreements, metrics, and policies, there has
been little aggregate progress against top-level goals, like
reducing CO2 emissions, cutting plastics waste, or narrowing social and economic inequality within nations. Without
demonstrable impact and collective progress, social andpolitical pressure will only build, further threatening thelegitimacy of corporate capitalism.

A New Societal Context for BusinessCompanies will face escalating social activism by investors, stakeholders, social mission organizations, andpolicymakers on issues of climate risk, economic inequality, and societal well-being. Governments and local communities will set a higher bar for a company’s right tooperate, and in a connected world a company’s local
performance will quickly affect its global reputation andtrigger social and regulatory consequences. Stakeholders
will expect radical transparency on ESG performance.
This will shift investors’ perceptions of a company’s risk

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

and opportunity, skewing capital toward those that deliver
both financial returns and positive societal impact. To
satisfy a growing demographic of socially minded consumers and businesses, companies will need to demonstrate “good products doing good” and anchor theirbrands and identity around a credible purpose. Talent will
gravitate toward companies that give employees a line-ofsight to making the world better while also providing afulfilling career.
To win, companies will need to define competition more
broadly, adding new dimensions of value through environmental sustainability, holistic well-being, economic inclusion, and ethical content. This will require radical businessmodel innovation to enable circular economies for precious resources; to provide assets that are shared rather
than owned; to broaden access and inclusion; and to multiply positive societal impact.
At this critical moment for corporate capitalism, businessis more trusted than government, according to the Edelman Trust Barometer. Farsighted corporate leaders will see
the opportunity for their industries to mitigate environmental and societal threats, catalyze collective action to
discover new solutions, shape wider ecosystems, and expand trust with stakeholders. Such actions will be indispensable to strengthen social permission for corporate
capitalism before it is further undermined.

Management Will Need a Value and Mission
Mindset
As in previous transformative eras for business, it will takea shift in managerial mindset to unlock new ways to win.
We need a fundamental rewiring of managerial imagination and decision making, underpinned by an equation forcorporate value that goes well beyond delivering a predictable P&L and a steady dividend stream.
The starting point is to instill an inspiring purpose that
captures the broader ambition of the business beyond
profit and gives employees meaning in their daily work.
“Purpose” should not be a comforting and selfcongratulatory statement of what the company alreadydoes, however — that would be an impediment to progress.
Rather, it should define the aspirational societal
contribution of a company based on its unique attributes,
and inspire awareness of the broader context and progress
toward business and societal value.
Armed with purpose, leaders can promote a culture ofcuriosity and courage to stretch their business models in
new ways, into their surrounding economic, environmen-

39

tal, and societal ecosystems. Knowing that such transformative thinking can be impeded by traditional metrics,
which only tell us how to ascribe value, farsighted leaders
will work to change what we value. They will break fromthe tyranny of quarterly financial reporting by engaging
investors and stakeholders in the company’s performanceagainst a more balanced scorecard, demonstrating how
their actions will transform the business model, better
positioning the company to deliver returns and societal
impact over time. They will think beyond designing theiroperations and organization mainly for efficiency, andthoughtfully engineer-in redundancy, diversity, and flexibility for more resilience and adaptability. And they will
enrich their decision making by including staff with nontraditional business skills.

corporate statesmanship, and elevating governance. (SeeExhibit 6.1.) While challenging to execute, we argue that
this agenda will be essential to create a great company, agreat stock, a great impact, and a great legacy.

Success in the coming decade will take management
teams that both know the business and envision its larger
potential to compete differently, with benefits for bothshareholders and the common good.

Consequently, it widens the scope of competition to encompass creating rich differentiation and relative advantage in multiple areas of societal value. It embeds “social
value” into new business constructs, shared value chains,
and reconstructed ecosystems. It also opens, broadens,
and deepens markets to enable access and inclusion. And
it expands the scope of business by calling for coalitions
for collective action that address existential risks to environmental and societal ecosystems.

CEOs Need an Agenda for Value and theCommon GoodWe frame the journey to new corporate value and thecommon good around six imperatives. It begins with reimagining corporate strategy, then involves transforming
the business model, reframing performance and scorekeeping, leading a purpose-filled organization, practicing

Reimagine Corporate Strategy
We believe few companies have strategies for this new eraof business. Exhibit 6.2 illustrates the ambition of such a
strategy, which establishes competitive advantage at theintersection of shareholder value, corporate longevity, andsocietal impact. The “quality” of the strategy is thus judged
by how it delivers both total shareholder returns and totalsocietal impact.

This new type of strategy flips leadership’s perspectivefrom “company-out” to “societal needs-in,” by asking how
a specific SDG target could be met by extending thecompany’s capabilities, assets, products, services, andExhibit 6.1 - An Agenda for Value and the Common Good
Reimagine corporate
strategy
Elevate board
governanceTransform businessmodelsPractice corporate
statesmanship

Improve scorekeeping andincrease transparency
Lead a purpose-ﬁlledorganization

Source: BCG Henderson Institute.

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Exhibit 6.2 - Corporate Strategy Cannot Separate Social Impact from theBusiness

Shareholder
valueSocietal
impactCorporate
longevity

Source: BCG analysis.

ecosystem—and those of its industry. Exhibit 6.3 lists ten
questions that strategists should incorporate into theirstrategy processes to ensure that they embrace theopportunity to create both shareholder returns andsocietal impact.
However, these new strategies cannot simply be grafted
onto existing business models. Business models themselves will need to be transformed. Sustainable businessmodel innovation (S-BMI) takes a much wider perspective
than traditional business model innovation by consideringa broader set of stakeholders; the system dynamics of thesocio-environmental context; longer time horizons forsustaining adaptable advantage; the limits of businessmodel scale, viability, and resilience; the cradle-to-grave
production and consumption cycle; and the points ofleverage for profitable and sustainable transformation.

Transform Business Models
We can already observe seven topologies for sustainablebusiness model innovation, sometimes in combination, allwith the potential to increase both financial returns andsocietal benefits.
• Own the origins. Compete on capturing anddifferentiating the “social value” of inputs to production

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

processes, products, or services. For example, pursue
cleaner energy, sustainable practices, preserved
biodiversity, recycled content, inclusive and empowering
work practices, minimized waste, digitized traceability,
fair trade, and so on. Performance here will requiredifferentially advancing the societal performance ofthe supplier base and its stewardship of resources,
communities, and trade flows. Achieving this may require
backward integration to ensure fast and complete
upstream transformation and then holding and using
these new capabilities for competitive advantage anddifferentiation.
• Own the whole cycle. Compete by creating societal
impact through the whole product usage cycle, fromcreation through end of life. This competitive typology
puts a wide aperture on the business and requires
systems analysis to uncover business models that offer
the richest competitive and financial options. For example,
designing for circularity, recyclability, and waste to value;
creating offerings that enable sharing rather than owning
to ensure high utilization of resources and end-of-lifevalue; constructing infrastructure to facilitate circularity
and repurposing; integrating into other value chains tocapture societal value; educating and enabling consumers
to choose whole-cycle propositions on the basis of value
to people and planet. To achieve these ends, expect
to reposition operations, reinvent supply chains and41

Exhibit 6.3 - Ten Questions for Strategists in a New Era of Business
1

Does our purpose lead to sustainable value creation? Is
our self-interest aligned with social value?

6

Are we measuring the long-term competitiveness of thebusiness? Have we balanced the present and the future?

2

Are we “on purpose” and, if not, are we taking corrective
action accordingly?

7

Where does our business model fail ﬁrst as a result of
ESG-related risks?

3

Are those actions suﬃcient in impact and speed?

8

How will we address this weakness with sustainablebusiness model innovation?

4

Are we deﬁning the boundary of what we measure andmanage appropriately?

9

Do we have the right collective-action platforms to addresspressing problems?

5

Are other stakeholders represented in or part of ourstrategy process?

10

Are we exercising corporate statesmanship to eﬀect
external change?

Source: BCG Henderson Institute.

distribution networks, pursue new backward or forward
integration, acquire business adjacencies, or undertake
unconventional strategic partnering.
• Expand “social value.” Compete by expanding the valueof products or services on six dimensions: economic gains,environmental sustainability, customer well-being, ethicalcontent, societal enablement, and access and inclusion.
Then advocate new standards, increase transparency
and traceability, tune marketing and segmentation,
engage customers on the product’s wider value and theirinvolvement in bigger change, and seek premium pricing.
In business-to-business offerings, help customers integrate
the full social value of your products, services, and businessmodel into their own differentiation and ESG ambitions.
• Expand the chains. Compete by extending the company’svalue chain, layering onto other industries’ value chains
to extend the reach of your products and services andthe societal impact for both parties, while changing the
economics and risks of doing so. For example, use thereach of a consumer products distribution system to extend
payments and financial services to small merchants; layer
one company’s health services onto another company’s
physical supply chain to benefit its workers and theirfamilies while expanding markets for health services; or use
the byproducts of one company’s operations as feedstockin other companies’ value chains.
• Energize the brand. Compete by digitally encoding,promoting, and monetizing the full accumulated social

42

value that is embedded in products and services, along
the whole value chain—from origins to customer, from
cradle to grave. Use such data to rethink differentiation,
the brand experience, customer engagement, pricing forvalue, ESG reporting, investor engagement, and evenpotential new businesses. For example, strengthen thebrand with promotions that showcase the business’s
performance on the open, clean, green, renewable,
and inclusive attributes of its operations; and increasecustomer engagement and loyalty by using data on
the product’s environmental and societal footprint toempower customers in choosing how their lifestyleaffects the planet and its people.
• Relocalize and regionalize. Compete by contracting andreconnecting global value chains to bring societal benefits
closer to home markets in ways stakeholders value. For
example, build local and regional brands that better
express local tastes and values; source from smaller local
producers to minimize logistics emissions and strengthen
local economies; reimagine production networks against
total environmental and societal costs; capture local waste
streams as feedstocks for other activities; or reconstitutejobs for microwork to use local talent.
• Build across sectors. Compete by creating models
that include the public and social sectors to improve thecompany’s business and societal proposition, particularlyin emerging and rapidly developing economies. For
example, work alongside governmental bilateral aid
institutions and NGO development organizations to

WINNING THE ’20s

improve the agricultural capacity of small farmers sothey become reliable sources of agricultural inputs tothe agro-processing value chain; partner with global
environmental organizations and governments topromote the reuse of ocean plastics as feedstocks
to production systems; partner with governments tostrengthen social safety nets and prevent corruption
through digitization and electronic payments; or partner
across sectors to restructure recycling systems to enablehigher penetration of waste-to-value business models.
Extend this into industry coalitions for collective actionthat reshape broader rights to operate and generate newopportunities.
All seven types of S-BMI create new sources ofdifferentiation, operating advantage, network dynamics,
and societal value — enabling more durable and resilientbusinesses that benefit shareholders and society. But toassess and improve the performance of these businessmodels and communicate their value, we need to expand
today’s scorecards.

Improve Scorekeeping and Increase
Transparency
Managers will need new scorecards for a fuller equationof business value to assess and reward performance andinform decision making. While today’s ESG measures area start, their use and the mindset they represent, as formost nonfinancial reporting, remain anchored in compliance, not business advantage. Consequently, scorecards
and reporting must go beyond mapping general ESG
materiality. Instead, they should focus the business andits stakeholders on insightful metrics that directly connect the company’s unique purpose and business models
to the way the company creates differentiated value andsocietal impact — its full business value (FBV).
These metrics will assess performance throughout thevalue chain — from procuring inputs, to owning the postuse cycle, to establishing the company’s full societal
footprint. As with financial performance, good companies
will integrate these metrics into their managerial software — operating plans, target setting, investment decisions, executive compensation, and employee
recognition. Further, the company will promote radicaltransparency of its FBV scorecards, fully reflecting themin investor relations and corporate communications,quarterly calls, and annual meetings, and making them
integral to marketing, social media, public relations, andgovernment affairs. As a result, stakeholders will see thecompany in new ways and its advantages relative topeers on new dimensions.

BOSTON CONSULTING GROUP | BCG HENDERSON INSTITUTE

Lead a Purpose-Filled Organization
Talent prizes purpose. Consequently, winning and engaging
the best talent depends on reinforcing a motivating
purpose that captures ambitions beyond profit and gives
employees meaning in their work. Research shows thatcompanies with a motivating purpose have higher
employee engagement, and that higher engagement
correlates to better financial performance. So purpose is a
win for recruiting employees with “mission-mindedness”
and enhancing the organization’s energy and performance.
But building a stronger organization will take rethinking
the skills and capabilities that can truly differentiate
performance on both financial and societal metrics. The
organization can no longer delegate sustainability andsocial responsibility to individual departments; rather,those considerations need to be fully integrated into
operations and decision making. That requires augmenting
line businesses with nontraditional businessskills — finding people capable in systems thinking,anthropology, social dynamics, behavioral economics,
sustainability, and development policy.
Those workers will become part of agile teams thatconceive innovative operating models optimized for both
operational effectiveness and societal benefit within value
chains, markets, and customer segments. That requires
developing and rewarding new ways of working that are
more flexible, embedding rapid cycles of learning anddeployment, and reaching into the wider business andsocietal ecosystem to create positive change andperformance. Successes in doing so create the stories
that bring purpose alive for the organization and energize
its culture.

Practice Corporate Statesmanship
It will take the scale and capacity of entire industries andtheir ecosystems to help solve society’s biggest challenges,
such as reducing plastic and food system waste. Thus,farsighted leaders will turn threats to their industry’s rightto operate into opportunities for reinvention and expansion. Rather than ignoring these risks or mobilizing theirgovernment affairs groups to block change, they will instead practice strategic statesmanship and build coalitions
for collective action within their industry, and sometimes
across industries, to find and scale new solutions.
As in their own companies, they will articulate acompelling purpose and vision for how the industry andecosystem could expand the total value delivered tosociety, while ensuring the industry’s longevity,43

profitability, and resilience. They will promote platforms
that foster pre-competitive R&D, scale solutions, expand
access and inclusion, accelerate industry learning andstandards, and build capacity in the larger industry
ecosystem. They will seek new partnerships with the
public and social sectors to multiply what the industry
could accomplish alone and shape new models ofcollective action for positive societal change.

Elevate Board Governance
Boards need to build new capacity to responsibly guidemanagement toward setting an ambition for the full role
the corporation will play in society. As with current management, most directors spent their careers focused on
financial performance, with some sidelined activities in
CSR and sustainability. However, to steer the company inthis new era of business and hold the CEO accountable forthe company’s financial, environmental, and societal performance, boards will need to be educated on societal
needs and the SDGs; they will need directors with different
skills and life experience in the social sectors; and they willneed to restructure committees, charters, and policies toprovide oversight on social performance. They must challenge long-held views about the boundaries and time
horizons of business, about what makes a good CEO, about
new risks and rights to operate, and about measuringperformance, and they will need to expand their view ofmanagerial competence beyond the ability to hit annual
business targets. They must also assess whether management is building a more resilient and adaptable company
that delivers for shareholders and society even at theexpense of short-term financial performance.

David Young is a managing director and senior partner inthe Boston office of Boston Consulting Group and the global
leader of the company’s work in total societal impact andsustainability. You may contact him by email at young.david@
bcg.com.
Wendy Woods is a managing director and senior partner in
BCG’s Boston office and the global leader of the Social Impact
practice. You may contact her by email at woods.wendy@bcg.
com.
Martin Reeves is a managing director and senior partner inthe firm’s New York office and the chairman of the BCG
Henderson Institute. You may follow him on Twitter@MartinKReeves and contact him by email at reeves.martin@
bcg.com.

This ambitious agenda challenges us to reconceive
business, commit to purpose, and pursue sustainablebusiness model innovation. Doing so will open up newopportunities for growth, shareholder value, and benefits tosociety and the planet. CEOs and their boards can wait tobe pushed into this agenda by competitors, customers, andregulators. Or they can embrace it proactively and use it toreinvent the company, reshape the industry, propel thestock, deliver remarkable impact, and leave a notablelegacy of corporate public good.

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WINNING THE ’20s

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