1,541 CEO interviews

1. Leadership in a global reality6th December 2011 PrebenThalund Madsen, Partner IBM Global Business Services

2. 2010 2004 2006 2008 Capitalizing on Complexity Your turn! Innovation Enterprise of the Future Key Findings Key Findings Key Findings Key Findings • Hungry for change • Demanding customers as opportunity to differentiate • Extensive business model innovations • Moving towards global business designs • Business model innovation matters • External collaboration is indispensable • Innovation must be orchestrated from the top • Revenue growth is the number one priority • Responsiveness is a new key competence • Improving internal capabilities is a first step toward growth • Rapid escalation of complexity creates need to: • Embody creative leadership • Reinvent customer relationships • Build operating dexterity The Global CEO Study 2010 is the fourth biennial CEO study, building on our insights and findings over the last 6 years 456 CEO interviews 765 CEO interviews 1,130 CEO interviews 1,541 CEO interviews

3. In this largest known sample of face-to-face CEO interviews, we spoke with over 1,500 CEOs and public sector leaders The study represents organizations in 60 countries and 33 industries 13% Communications 20% Public 21% North America 25% Growth markets* 25% Distribution 12% Japan 24% Industrial 42% Europe 18% Financial Services Regions Sectors Note: The CEO response sample has been weighted based on 2008 Actual Regional GDP of the IMF World Economic Outlook, October 2009;* Growth Markets include Latin America, Asia Pacific (excluding Japan), Middle East and Africa

4. Agenda CEOs must navigate in a highly volatile, increasingly complex environment - Massive global shifts increase uncertainty - Continued rise of technology as key external factor - Challenges are compounded by regional differences Standing out in a complex world - Embody creative leadership - Reinvent customer relationships - Build operating dexterity Seizing the upside of complexity

5. CEOs are confronted with massive global shifts in the New Economic Environment Mature markets retain economic power Consumer demand, economic power and innovation skewed towards mature markets Rapidly developing markets gain economic power Consumer demand, economic power and innovation shifting to rapidly developing markets 14% 76% 10 Small government, light regulation Move or return to unrestrained markets with limited state ownership or regulatory reform Big government, heavier regulation Greater government involvement, more regulation and government as a stakeholder in strategic businesses 70% 16% 14% Slow down or reversal of globalization Increased protectionism, dominance of local interests and local requirements Continued globalization Global capital flows, trade, access to markets, skills and knowledge 67% 17% 16% Not at all/to a limited extent To some extent To a large/very large extent Source: Q8 Which of these future scenarios for the next five years do you consider more realistic? Globalization n=1,515; Markets n=1,502; Government n=1,519

6. Continued rise of technology as key external factor for CEOs Three most important “external” forces over the next three years Source: Q1 What are the 3 most important “external” forces that will impact your organization over the next 3 years? n=1,538

7. Vast majority of CEOs experience the New Economic Environment as distinctly different The New Economic Environment 13% 18% 69% More volatileDeeper/faster cycles, more risk 14% 21% 65% More uncertainLess predictable 18% 22% 60% More complexMulti-faceted, interconnected 26% 21% 53% Structurally differentSustained change “Last year’s experience was a wake-up call, like looking into the dark with no light at the end of the tunnel.” President and CEO, Industrial Products, The Netherlands Not at all/to a limited extent To some extent To a large/very large extent Source: Q7 To what extent is the new economic environment different? Volatile n=1,514; Uncertain n=1,521; Complex n=1,522 ; Structurally different ,

8. CEOs are now challenged to close the complexity gap and use complexity to their advantage Expected level of complexity and preparedness to handle Expect high/very high level of complexity over 5 years 30% 79% Complexity gap* 49% Feel prepared for expected complexity “Complexity should not be viewed as a burden to be avoided; we see it as a catalyst and an accelerator to create innovation and new ways of delivering value.” Juan Ramon Alaix President, Pfizer Animal Health, United States “The world is non-linear, so the ability to cut through complexity relies on processing a large amount of information quickly and extracting nuggets to make quick decisions. Building advantage will be an outcome of dealing with complexity better than our competitors” Julian Segal Director and CEO, Caltex Australia Limited, Australia * Complexity gap = difference between expected complexity and the extent to which CEOs feel prepared to manage complexity Source: Q10 How much complexity will your organization have to master over the next 5 years? n=1,512; respondents who selected “More/significantly more complexity”; Q12 How prepared do you feel for the expected complexity ahead? n=1,508; respondents who selected “Fully prepared”

9. Agenda CEOs must navigate in a highly volatile, increasingly complex environment - Massive global shifts increase uncertainty - Continued rise of technology as key external factor - Complexity challenges are compounded by regional differences Standing out in a complex world - Embody creative leadership - Reinvent customer relationships - Build operating dexterity Seizing the upside of complexity

10. We identified Standout organizations that delivered superior performance during both the long term and recent short term Performance Analysis Framework Standouts Top 50 percent Long-term, steady-state performance Top 50 percent Short-term,crisis performance Long-term Performance 4 year operating margin CAGR (2H03/1H04 – 2H07/1H08) Short-term Performance 1 Year operating margin growth (2H07/1H08 - 2H08/1H09)

11. Standouts are also better prepared to manage the expected complexity Complexity gap* “Really, I am not afraid of complexity at all. On the contrary, this just motivates me.” Jacques Pellas Secrètaire Général, Dassault Aviation, France Standouts 22% 6% Top 50 percent Gap Gap Long-term, steady-state performance 52% 35% Gap Gap Top 50 percent Short-term,crisis performance * Complexity gap = Difference between expected complexity and the extent to which CEOs feel prepared to manage it Note: Long-term performance: 4 year operating margin CAGR (2H03/1H04 – 2H07/1H08); Short-term performance: 1 year operating margin growth (2H07/1H08 - 2H08/1H09) Source: Q10 How much complexity will your organization have to master over the next 5 years? n=299; Q12 How prepared do you feel for the expected complexity ahead? n=296

12. Standouts capitalize on complexity in three ways • Creativity is #1 leadership quality • Drive change in the organization to stay ahead of market and use a wide range of communication styles and tools • Break with status quo of industry, enterprise and revenue models

13. Creativity is the #1 leadership quality Most important leadership qualities over the next five years Creativity 60% Integrity 52% Global thinking 35% Influence 30% “Creativity is vital in a complex environment.” Government Official, Hong Kong Openness 28% Dedication 26% Focus on sustainability 26% “Only leaders who act with integrity shall and will survive.” CEO, Electronics Industry, Switzerland Humility 12% Fairness 12% Source: Q19 Which of the following leadership qualities do you think are most important in the next five years? n=1,538

14. Standouts focus on quick decisions despite uncertainty Ways in which to achieve rapid change over next five years: Decision Making Standouts 15% 42% 43% 54% Others more 31% 41% 28% Thorough decisions Both Quick decisions “We need to keep making quick decisions instead of waiting and thinking about it: good decisions that may not be absolutely right because we don't know all the information. We have left competitors behind by making quick decisions – it is a differentiating factor for us.” CEO, Life Sciences, Belgium Source: Q21 How will you realize rapid change over the next 5 years? Quick decision vs thorough decision n=299

15. Standouts leap ahead with new management and leadership styles and balanced communication approaches Standouts realizing rapid change over the next five years: Management Style Ad-hocinitiatives Continuouschange 8% 13% 79% Commandand control Persuade andinfluence 17% 25% 58% Top-downcommunication (Managed) viralcommunication 33% 28% 39% Both “There isn’t the luxury of time. We used to say, ‘Wait until this crisis is over and we get back to normal,’ but that never happens. We have to be ‘change animals.’” Michele McKenzie President and CEO, Canadian Tourism Commission, Canada Source: Q21 How will you realize rapid change over the next five years? n=300

16. So what builds creative leadership? • How will you develop the critical capabilities to enhance creativity among your leadership? • In what ways can you explore, reward and integrate diverse and unconventional points of view? • What is your approach to evaluate every element of your business model to get the most from currently untapped opportunities? • How will you leverage new communication styles, technologies and tools, both to lead a new generation of talent and encourage breakthrough thinking? Tough questions to consider • Embrace ambiguity: Reach beyond silos, exemplify breakthrough thinking, act despite uncertainty. • Take risks that disrupt legacy business models: Pilot radical innovations, continually tweak your models, borrow from other industries’ successes. • Leapfrog beyond “tried-and-true” management styles: Strengthen your ability to persuade and influence, coach other leaders, use a wide range of communication approaches. Recommendations

17. Standouts capitalize on complexity in three ways • “Getting closer to customers” is the single most important theme • Better understand customer needs through collaboration and info sharing • Exploit the information explosion to deliver unprecedented customer service

18. “Getting closer to the customer” is THE top priority for Standouts Dimensions to focus on over the next 5 years Getting closer to customers 88% 14% Getting closer to customer 95% more 81% People skills 83% 76% Insight and intelligence 57% Enterprise model changes 55% Risk management 54% Industry model changes 51% Revenue model changes Standouts Others “To surprise customers requires unexpected ideas through interactions of people with diverse perspectives.” Shukuo Ishikawa President and CEO, Representative Director, NAMCO BANDAI Holdings, Inc. Japan “Our customers want personalization of services and products. It is all about the market of one.” Tony Tyler CEO, Cathay Pacific Airways, Hong Kong Source: Q13 Which of the following dimensions will you focus on more to realize your strategy in the new economic environment over the next 5 years? n=1,523, n=303

19. CEOs want to better understand customer needs and actively work with them CEOs’ view of “How customer expectations will change over the next 5 years” Better understanding of needs 82% 12% 6% New or different services 70% 20% 10% More collaboration, information sharing 69% 20% 11% 22% New or different products 61% 17% 51% 24% New or different channels 25% 30% 24% Increased focus on social responsibility 46% 45% 24% 31% Stronger focus on price-value equation All participants: To a large/very large extent To some extent Not at all/to a limited extent Source: Q15 To what extent will your customers’ expectations of you change over the next five years? n=1,518

20. Customer-centric CEOs exploit the information explosion to better understand and serve customers Deep dive analysis: CEOs that scored high or very high on “getting closer to the customer” Customer focused CEOs use data... ... to generate insight and intelligence Impact on organization of information explosion More focus on insight and intelligence to realize strategy 29% 18% more more 78% “Insight and foresight are linked with leadership. It's insight that helps to capture opportunity.” Zhou Ming, Executive Vice President and Secretary General, China Council for Int’l Investment Promotion China “Information is not well validated. The problem is a ‘misinformation explosion.’” Dr. Paul Byrne, President, Grant MacEwan University Canada 66% 63% 49% Customer focusedCEOs Customer focusedCEOs Other CEOs Other CEOs Source: Q9 To what extent will the following factors impact your organization over the next 5 years? n=1,507; respondents who selected Information explosion “to a large/very large extent”; Q13 Which dimensions will you focus on more to realize your strategy in the New Economic Environment? n=1,516; respondents who selected insight and intelligence “to a large/very large extent”

21. So how do you reinvent customer relationships? • How will you engage customers in new ways that increase interest and loyalty to generate new demand and revenue sources? • How can you involve customers more effectively and directly in product and service development? • Can you hear the voice of your customers through the vast amount of data? Can you understand and act upon the information? • Honor your customers above all else: Unprecedented level of focus, heightened customer exposure for every employee, measure what customers value. • Use two-way collaboration to sync with customers: Make customers part of your team, solicit customer wants, co-innovate and interact with customers in new ways, deliver true process transparency. • Profit from the information explosion: Tap the value of limitless data, use analytics to translate data into insight into action that creates business results, share information freely to build trust and improve customer relationships. Tough questions to consider Recommendations

22. Standouts capitalize on complexity in three ways • Simplify operations and products to better manage complexity • Use iterative strategies, make quick decisions and execute with speed • Integrate globally, increase cost variability and exploit partnering to increase agility

23. Standouts simplify operations and products to better manage complexity Changes to operating strategy: Simplify Others 47% 30% Standouts more 61% “Simplification and standardization are key strategies that we have been using for several years to reduce existing and future complexity.” Brenda Barnes, Chairman and CEO, Sara Lee, United States “When things look very simple, you need to look for a competitive edge. When things are complex, you simplify to get the competitive advantage” Graeme Liebelt, Managing Director and CEO, Orica Limited, Australia Source: Q18 How will you change your operating strategy? Manage complexity versus simplify n=294

24. CEOs that prioritize speed and dexterity are increasing the share of variable cost Deep dive analysis: CEOs that selected ‘iterative strategies, quick decisions and execute with speed’ Changes to operating strategy of operational dexterity focused CEOs Dexterous CEOs 12% 12% 76% 27% CEOs not prioritizing dexterity more 14% 26% 60% Increase share of fixed cost Both Increase share of variable cost Source: Q18 How will you change your operating strategy? Fixed versus variable cost n=170

25. Speed and dexterity enable revenue growth from new sources Deep dive analysis: CEOs that selected ‘iterative strategies, quick decisions and execute with speed’ Revenue generated from new sources Others 15% 33% Last 5 years Dexterous CEOs more 20% Others 25% 20% Next 5 years Dexterous CEOs more 30% “Scaling for growth takes a balance of operations, innovation and business model changes to enable growth to the next level of a business. Leadership needs to balance the timing to make the right changes at the right time.” Jay Geldmacher Executive VP, Emerson, United States Source: Q16 What percentage of our revenue (budget) comes from new sources, such as new products or services, new markets or new industries? Median of percentage for past five years n=1380 and median of percentage next five years n=1,388

26. So what are the steps to build operating dexterity? • In what ways can you simplify processes, without ignoring underlying complexity, and develop the agility required to execute rapidly? • How can your organization benefit from taking on more complexity on behalf of your clients or customers? • How will you integrate and analyze timely information to gain insight, make quick decisions and enable dynamic course correction? • Have you implemented asset and cost flexibility and defined partnering strategies to compete in your chosen markets? • Simplify whenever possible: Simplify interactions with customers, simplify products and services by masking complexity, simplify for the organization and partners. • Manage systemic complexity: Put complexity to work for your stakeholders, take advantage of the benefits of analytics. • Promote a mindset of speed and flexibility: Act quickly, push execution speed, course-correct as needed. • Be “glocal”: Leverage the world through partners, constantly tune your operating model – global where possible, local where necessary. Tough questions to consider Recommendations

27. Agenda CEOs must navigate in a highly volatile, increasingly complex environment - Massive global shifts increase uncertainty - Continued rise of technology as key external factor - Complexity challenges are compounded by regional differences Standing out in a complex world - Embody creative leadership - Reinvent customer relationships - Build operating dexterity Seizing the upside of complexity

28. Seizing the upside of complexity 1 Embodycreativeleadership 2 Reinventcustomerrelationships Buildoperatingdexterity 3 Embrace ambiguity Honor your customers above all else Simplify whenever possible Take risks that disrupt legacy business models Use two-way communications to sync with customers Manage systemiccomplexity Leapfrog beyond “tried-and-true”management styles Profit from the information explosion Promote a mindset of being fast and flexible Be “glocal”

29. IBM Institute for Business Value IBM Strategy & Change APPENDIX 1Geographic differences

30. Geographical divergence of perspectives and actions adds another layer of complexity Three most important external factors by geography North America (US, Canada) European Union Market factors 45% Regulatory concerns 41% Technological factors 40% Market factors 57% Technological factors 39% Macroeconomic factors 36% China Japan Market factors 54% Macroeconomic factors 45% Technological factors 45% Market factors 78% Globalization 41% Technological factors 40% “Globalization brings complexity. We must localize decision making to where the action is.” CEO, Retail Company, United States Source: Q1 What are the 3 most important ‘external’ forces that will impact your organization over the next 3 years? n=1,538

31. North America: Concerned about the impact of regulation and government 3 Most important external factors “Due to government regulations, cycle time to get our product to market is slowing down.” CEO, Medical Device Company, United States North America (U.S., Canada) Market factors 45% Regulatory concerns 41% Technological factors 40% NA CEOs are least likely to change organization and governance NA CEOs expect “big government” and regulation North America North America 87% 37% EU EU 70% 49% Japan China 53% 67% China Japan 50% 67% NA CEOs are least focused on risk management to realize their strategic goals NA CEOs see integrity as top leadership quality North America North America 45% 65% EU EU 50% 48% China China 64% 30% Japan Japan 68% 29% Source: Q1 What are the 3 most important ‘external’ forces that will impact your organization over the next 3 years? n=1,538; Q8.2 Which of these future scenarios of the next five years do you consider more realistic? Small vs. Big government n=1,519; Q13.4 Which of the following dimensions will you focus on more to realize your strategy in the new economic environment over the next 5 years? Risk Management n=1,511; Q17.3 To what extent will you make changes to your operating model in the next 5 years? Organization and governance n=1,508; Q19 Which of the following leadership qualities do you think are most important in the next 5 years? n=1,538

32. European Union: Using middle of the road strategies, balancing all 3 Most important external factors “Technology is already impacting our clients’ behavior, currently clients are price checking over four continents using today's technology.” Managing Director, Retail, United Kingdom European Union Market factors 57% Technological factors 39% Regulatory concerns 35% EU CEOs least impacted by talent shortage EU CEOs are least likely to focus on enterprise model innovation EU 45% EU 47% North America 58% North America 59% Japan 71% China 69% China 78% Japan 73% EU CEOs least impacted by shift in economic power EU CEOs consider client connectivity as crucial to executing in the NEE EU 43% EU 48% China 48% Japan 35% North America 49% North America 21% Japan 74% China 11% Source: Q1 What are the 3 most important ‘external’ forces that will impact your organization over the next 3 years? n=1538; Q9 To what extent will the following factors impact your organization over the next 5 years? Talent Shortages n=1,523, Shift in economic power to rapidly developing markets n=1,499; Q13 Which dimensions will you focus on more to realize your strategy in the new economic environment over the next 5 years? Enterprise Model Innovation n=1,491; Q22 What are the 3 most crucial capabilities your organization needs to be successful in executing in the next 5 years? Client connectivity n=1,538

33. China: Increasing global impact but challenged to build capabilities “China is making leaps in economic development, so the enterprise model has to keep pace with the fast-changing environment. You cannot run a business of 1,000 people with same model as one with 100 people.” General Manager, Retail, China 3 Most important external factors China Market factors 54% Macroeconomic factors 45% Technological factors 45% CEOs in China are less concerned about volatility CEOs in China are most focused on industry model innovation China 51% China 72% EU 70% Japan 56% Japan 71% North America 55% North America 75% EU 49% CEOs in China are most focused on building new skills and capabilities CEOs in China see “global thinking” as a top leadership quality China 83% China 61% Japan 82% Japan 42% North America 66% EU 33% EU 66% 33% North America Source: Q1 What are the 3 most important ‘external’ forces that will impact your organization over the next 3 years? n=1,538; Q7.4 To what extent is the new economic environment different? n=1,514; Q17 To what extent will you make changes to your operating model in the next 5 years? People skills and capabilities n=1,514; Q13 Which of the following dimensions will you focus on more to realize your strategy in the new economic environment over the next 5 years? Industry model change n=1,511; Q19 Which of the following leadership qualities do you think are most important in the next 5 years? n=1,538

34. Japan: Responding to shift in economic power by increasing execution speed and changes in operating style 3 Most important external factors “Rapidly developing markets will achieve growth. It is important that we develop a market for export. Our battlefield will be the world.” President, Banking, Japan Japan Market factors 78% Globalization 41% Technological factors 40% CEOs in Japan see the New Economic Environment as structurally different CEOs in Japan are most likely to see execution speed as a crucial organizational capability Japan 82% Japan 44% China 55% EU 38% North America 53% North America 34% EU 47% China 27% The shift of economic power to rapidly developing markets is most acutely felt by CEOs in Japan CEOs in Japan are most focused on developing people skills to realize their strategy Japan 74% Japan 92% North America 49% China 82% China 48% EU 77% EU 43% North America 74% Source: Q1 What are the 3 most important ‘external’ forces that will impact your organization over the next 3 years? n=1,538; Q7.2 To what extend is the new economic environment structurally different? n=1,523; Q9 To what extend will the following factors impact your organization over the next 5 years? Shift in economic power from mature to rapidly developing economies n=1,499; Q22 What are the three most crucial capabilities your organizations needs to be successful in executing in the next 5 years? n=1,538; Q13 Which of the following dimensions will you focus on more to realize your strategy in the new economic environment over the next 5 years? People skills n=1,526

35. IBM Institute for Business Value IBM Strategy & Change APPENDIX 2Backup

36. Standouts capitalize on complexity in three ways • Creativity is #1 leadership quality • Drive change in the organization to stay ahead of market and use of wide range of communication styles and tools • Break with status quo of industry, enterprise and revenue models • “Getting closer to customers” is the single most important theme • Better understand customer needs through collaboration and info sharing • Exploit the information explosion to deliver unprecedented customer service • Simplify operations and products to better manage complexity • Use iterative strategies, make quick decisions and execute with speed • Integrate globally, increase cost variability and exploit partnering to increase agility