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Sat 20 Apr 2019 09:42 AM

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What makes for better leaders?

At a time of technology-driven change, the need to inspire, engage and tap into the creativity of employees demands better leaders, say McKinsey's experts

What makes for better leaders?

We do not live in a static world: far from it. New technologies are rendering business models obsolete, increased interconnectedness is amplifying the effects of global shocks, and demographic shifts are creating new consumer and employee groups – each with different demands.

Organisations and leaders must thus have the mental flexibility to be able to adapt to different situations and adjust their behaviours rapidly.

We call this adaptive leadership. Adaptive leadership requires increased self-awareness and the right mindset for learning. It is thus a supplement to both the baseline and situational leadership components – while baseline and situational leadership help you lead effectively within a given context, adaptive leadership helps you transition between contexts quickly and effectively. And while it seems simple enough in theory, it is much more challenging in practice, especially in high-paced environments.

A new industrial revolution

In the past, organisations could hold on to proprietary advantages for longer as business activities were primarily local, and the pace of business was slower. Commercial companies, for example, often operated in one or a few industries, and their organisational contexts were relatively stable.

However, the world has changed dramatically, and is now more short term, more global, faster and more unstable. As a result, in the past 20 years we have seen organisations facing increasing challenges to maintain performance.

As a result the demands on leaders have grown. The velocity of value creation and disruption is increasing, fuelled in large part by an increase in knowledge creation and sharing. For example, while it took a typical Fortune 500 company around 20 years to reach a market cap of a billion dollars, successful new organisations are now able to reach the milestone within a few years.

The estimated lifespan of a Fortune 500 company has gone from 90 years in 1935, to 30 years in 1975, to 14 years in 2010. The number of positions reporting to the CEO has gone from five in 1990 to ten today. The proportion of international business activities has risen from 33 percent in 1990 to 66 percent in 2018. While response times of up to 48 hours were previously deemed acceptable, today it is a response time of two or three hours on critical issues that is often expected.

We know that the world is changing, but will the future really be that different from earlier? We believe it will.

Factors to consider

Our interviews with leaders globally highlight five main trends that are relevant for organisations and for the leadership required to succeed:

  • Increased interconnectedness. The world is becoming increasingly connected, whether measured by internet statistics, global trade, or company supply chains. These trends can be a boon but they also act as an amplifier for shocks.
  • The rise of emerging markets. Based on current projections, by 2050 the emerging seven economies (China, India, Brazil, Russia, Indonesia, Mexico and Turkey) will be over 50 percent larger than the G7 (US, Japan, Germany, UK, France, Italy and Canada) at market exchange rates.
  • The changing nature of capitalism. We are seeing a rise in alternative ownership structures, growing resource scarcity, and increasingly demanding consumers and customer centricity.
  • Technological disruptions. Technological innovations are advancing faster than ever in a non-linear fashion, and will shape organisations across all industries and lead to new business models, shifting profits and new labour markets.
  • Marked demographic shifts. These are leading to an increase in the proportion of elderly (categorized as over 65 years of age) globally, primarily in developed countries, and simultaneously a rise in the proportion of Millennials and Generation Z in the workforce.

Each of the trends is important in and of itself and requires leaders to master new behaviours, skills and mindsets. For example, organisations will need to adopt a more systematic approach to understanding potential shocks, increase sustainability as a business imperative, up their ‘technology quotients’ across the organisation, and align their people processes with the demands of new generations.

However, taken together, the implications of these trends are even more profound. Compared with the industrial revolution, change is happening ten times faster and at 300 times the scale, or roughly 3,000 times the impact. We are operating in what some call a ‘post-VUCA’ (volatile, uncertain, complex and ambiguous – a term originally used in the military in the 1990s) world, and are in the midst of a new industrial revolution. And we believe that complexity will only increase in the future, at an increasing rate given the velocity of change.

The need for adaptive leadership

Previously, organisations might stay in a certain context (for example, turnaround or rapid growth) for an extended period  —  meaning that the behaviours, experiences and mindsets needed were relatively stable and familiar to their leaders. However, the accelerating scale and pace of change has increased the movement of organisational contexts within a much shorter space of time. At any given moment approximately one in three organisations will be undergoing some kind of significant restructuring. A third of these efforts last more than two vears. Indeed, many organisations often find themselves in different situations at the same time across business units and/or geographies.

Our research, with interviews of over 100 CEOs, supports the primacy of adaptive leadership, finding that leaders must be able to step back, ‘see with a telescope and a microscope’, to make decisions under increasing uncertainty. Other interviews stressed the importance of humility and openness to change as key success factors for adaptive leadership.

Our transformational change research shows that organisations that manage the change effort with rigour, building up a cadre of change leaders and shifting mindsets in the organisation to adapt to the desired new state, are twice as likely to succeed as organisations that don’t manage the change effort rationally and scientifically.

This new reality means that leadership more than ever, and its importance for organisation performance will only increase in the future. The analogy is that of a decathlete, who combines power, agility and technique to compete across ten separate disciplines. In practice, adaptive leaders display a broader range of behaviours, drawing on a more comprehensive set of skills, and accessing greater self-awareness to achieve peak performance.