MERCY CORPS EVENT, Portland, OR – APRIL 12, 2012

[Introduction referred to the Barefoot Contessa….]

Yes, I am the taste tester, which is probably the biggest challenge that I’ve ever

faced in terms of not blowing up like a balloon and people ask me all the time, how I like

the role! I worry they’ll say “You’re overweight, but you’re really not as overweight as I

thought you would be.” And I have to explain to them that when I go home, it’s not like

there’s one thing but 8 things, and you have to eat them all. And I’ve been married a

long time and one of the secrets is that you really have to taste all 8 and take them

really seriously because my wife has put a lot into each one. But at the end of that, the

calories are absolutely enormous, so for every minute I am eating, I’m determined that

there’s going to be a minute the next morning, probably very early, where I’m going to

work out. So I come home now and I see all these desserts, and I go, oh my God, I’m

waking up at 4:00 A.M.!

* * *

It is a real pleasure to be here for a lot of reasons. I have long been a great

admirer of Mercy Corps. I’m in total awe of the organization and how it started and

how it evolved. And part of that is because I have gotten to know Neal Keny-Guyer, the

head of Mercy Corps. He is a graduate of the Yale School of Management, where I was

the dean for ten years. It is a small school and a very young school. And it was set up to

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develop leaders who could lead organizations across the board - companies, non-

governmental organizations, government organizations like a mass transit system, a

department of energy… Neal is so much the embodiment of that, that I have had the

audacity of that to pull him into my classes time and again. One of the classes that I’d

bring him to was called “Leading a Global Company” and because it’s Yale, not because

it’s me, I can get really top CEOs, the head of GE, or the head of IBM, or the head of

Toyota, and I always ask Neal to appear as well, and just in terms of insight into what

great organizations do, and what they should be, Neal is always the best. And when I

was asked if I would like to come here to talk, I had no hesitation because of the

admiration I have for this organization and also how much I admire Neal.

Theme: The Organization of the Future

I was asked to speak about so many things today, I just didn’t quite know how to

do that - the global economy, emerging markets, sustainability, poverty - so I came up

with 3 possibilities. I could punt the whole thing and say let’s just go right to a

discussion because I have had the fortune to have had in a sense four interwoven

careers – so I know a lot about these subjects, I won’t say I’m the world’s expert in any

of them, but I know them and I know how they fit together. I learned from my

investment banking career or my government career, or my career at Yale – and all

along the way I’ve also been a prolific writer, not a great writer, but I like to write about

my experience which helps me distill what I’m thinking.

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The second alternative would have been to talk about everything, but of course

that would have meant nothing.

And the third, which is what I decided to do, was to try to take one theme that

might bring a lot of different things to bear and then to use that as a platform for us to

have a discussion. And so the theme that I wanted to focus on really was “the

organization of the future”. The key question would be: What makes a great global

organization, given the way the world economy is moving? And that would allow me to

do three things – one is, I want to talk about the setting; I want to talk about the

economy. What is this world economy looking like and why is this context so different

from anything that anybody in this room has ever seen? And secondly, the theme of

“the organization of the future” would allow me to ask, how do you operate? You know

I must say I’m less taken by people who can analyze what’s going on than people who

know what to do about it. I admire organizations that can set goals in a highly complex

environment and achieve them – organizations that can execute. And so I want to

relate this to what I think is the great organization of the future. What you would look

at to assess whether an organization has the capability of actually affecting things in this

changing global economy? And then third, I want to conclude with my own view about

whether we should be optimistic or pessimistic or in between, given the number of

shifting parts that we see today.

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Three Summary Concepts

And let me just say that I’m going to give you three concepts. I’m going to cover

a lot of different issues, no one of which is all important, but at the end of the day, I

want to leave you with three concepts. The first is a concept I’m going to use to

describe the world economy and it’s one word – it’s called “supercycle”. I’ll refine it, but

just remember “supercycle.” Next, I’m going to describe the organization of the future

and there’s one word here that is really worth remembering and that’s “innovation.”

And the third I’m going to talk about what are the periods in history, the third I’m going

to talk about my view, I’m going to base it on other periods of history, and tell you why I

feel the way I do about the future and that one word is “optimism.” Extreme optimism.

So supercycle, innovation, extreme optimism. That’s what I left right now, those are the

3 concepts I want to leave you with.

Supercycle

So let’s talk about the world economy and why am I using the word supercycle?

What is a supercycle? It’s another way of saying that we are in one of the great

historical transformations. We are seeing a massive shift in virtually all the

underpinnings of what the world economy has been based on. It’s a very rare

occurrence; in fact, it’s only happened twice in the last 500 years.

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In a supercycle here are the kinds of thing that shift: First: the source of demand

shifts. The whole world economy is based on the notion of satisfying demand

somewhere. In the past, in the last 50-75 years, that demand has emanated from the

United States. It’s you and me; it’s American consumers consuming everything they can

possibly get their hands on and using every means, every source of credit that they can

possibly get. That source of demand now is going to shift. It will not be us. The

burden’s going to go to someone else.

Second, in a supercycle the direction of investment shifts. We used to invest in

all kinds of infrastructure and consumer goods that basically satisfied us and so did the

rest of the world. When investment went into Korea, it was to build the export

platforms that it uses to sell us our stuff. Now the direction of investment is shifting.

In a supercycle, technology is totally transformed. And I don’t have to spell out

that we are living in a technological revolution.

In a supercycle also growth dramatically accelerates. It’s faster than it ever was,

than we’ve seen in the past several decades.

We have all kinds of social movements in a supercycle because these changes

actually affect the way people think and what they want and how they want to receive

it.

And in a supercycle there are major shifts in politics and geopolitics.

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The only two supercycles that existed in the last 500 years are first the industrial

revolution when Europe and the US went from a totally agrarian society to

manufacturing and industrialization. And every one of those elements that I talked

about were present – shifting demand, shifting supply, shifting investment, shifting

technology, shifting social norms, and shifting politics. The second time it happened was

much more recent; that was right after the Second World War. When all but the United

States was basically leveled. And in the first 20 years after 1945, the degree of recovery

in Europe and Japan was so enormous and so amazing that you’d have to call it a

supercycle because they went from basic rubble back to being more or less on par with

us. Those are the only other two times you could say there was a supercycle like there

is today.

And let me give you some more details of this current supercycle. The first is that

we are seeing a massive shift in the gravity of the world economy from the west to the

east and particularly, I really should say from the west to the east and the south. And

emerging markets, whether it’s China, India, Brazil, Turkey, South Africa, Nigeria,

emerging markets are where all the locus of demand. About ten years ago, maybe 28%

of the global economy was accounted for by these emerging markets. Today, believe it

or not, it’s over 50%. And the engine of demand that was the United States is now

going to be these emerging market economies. And that’s going to be the case; of

course there are going to be setbacks and every one of you can point to one country

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that is where the prospects are hyped and every day we can take a newspaper and say,

look, you’re saying Brazil is one of these, and you’re saying Mexico is one of these, and

look at the problems happening there. But in the aggregate, these emerging markets

are growing two and three times, sometimes four times as fast as the US and Europe.

So this is an engine that is revving up. It may not be a perfect straight line up, but it is

straight up to the point where probably by 2050, 70% of the global economy could be

represented by emerging markets.

And what does all that mean? Well one thing it means is that there is going to be

a very fast growing middle class outside of the US, outside of Europe, outside of Japan.

In emerging market economies we are seeing a middle class emerge which will be the

source for all of this activity that I’m talking about. And just to give you a dimension, in

the last 30 years, the middle class outside the US grew from about 700 million to 1.8

billion (according to the World Bank). So in the last 30 years, let’s say it doubled. In the

next 30 years, the World Bank predicts it will go from this 1.8 billion to 5 billion. That is,

if you take the 60 year period, you will have a massive, massive increase in the number

of people who want everything that we have, and who, in the past, didn’t have access to

it.

The emerging markets also reflect hyperurbanization. Today is April 12, right?

180,000 people today moved from the country to the city in emerging markets –

180,000. You’re probably wondering how did I know? Today is not even over! I know

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because it’s about 180,000 every single day between 2005 and 2045. So, if you want to

look at it another way, six New York Cities are emerging every year in emerging markets.

The implications of this I say, with no false modesty, are beyond any of us to actually

understand, in terms of the appetites, in terms of the health issues, issues of water,

issues of infrastructure, communications. But the one thing that you have to bear in

mind is that civilizations have advanced only in urban areas. Urban areas have been the

motors of innovation; that’s where people crowded together; that’s where they invent

stuff; that’s where they specialize; that’s where the energy is. So this is on balance

probably one of the great things for humanity, even though at times it looks like a

horror show from the standpoint of chaos, crime, pollution, etc.

There are a lot of other issues relating to emerging markets which I won’t go into

and one of them is the emergence of multi-national companies of emerging markets.

You know we used to be a Fortune 500 were all western names. No longer. Companies

from Mexico and Brazil and Korea and India and China – these are massive companies

that are emerging and they are spreading throughout emerging markets and they’re

also spreading into the US. And that is happening at an increasingly accelerated rate,

such that it’s ten years from now, you pick up the Fortune 500, most of those names,

half of those names, you won’t be able to pronounce and spell.

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Globalization = Cooperation + Confrontation

A second subtheme of this supercycle is that we’re having much more

globalization, more capital flows, more communication, more issues like climate change

that spread over everything; but at the same time, we’re having more confrontation

among governments about how to manage globalization. Now this is a whole shifting

from free markets and globalization being seen as a good thing (on balance) to real

concern about jobs and dislocation and most recently competition for natural resources.

The huge demand that is occurring in China and India for resources is putting strains on

natural resources everywhere; I mean the nightmare scenario is that they would

consume the way we do and whether the earth can actually produce this, but that may

be an academic issue that we’ll find out about long before there’s really fierce

competition among the companies and among the governments to secure these

resources for the economic development that they are bound to have. And arguments

over the rules of the game. When China joined the World Trade Organization they

basically said we’re buying into these rules. We’re going to sign that treaty; we’re going

to change our domestic economy. The west has been very successful with that set of

rules. But now that China is a surrogate for a lot of emerging markets; now that they’re

in the system, they say, wait a minute, we don’t necessarily buy all of these rules. We

have a different set of priorities. We’re not built in the American image of liberal

international economic theory. And so you have something like the world trade

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negotiations that started in 2011 and are dead in the water. We may never actually see

global trade negotiations of the kind we knew again because there are just too many

differing views about how they should be conducted.

New Pressures

I think in this supercycle we’re seeing the emergence of all kinds of social

pressures – now these are not necessarily new, but they’re becoming a lot more

intense. Pressures for sustainability. Some years ago the word didn’t exist. Much more

pressure on all aspects of human rights. Much more pressure on issues of privacy. And

in an area which is very big, the pressure is clearly there, but I can tell you what it is, on

capitalism itself. I think the crosscurrents are such that there is growing amount of

support for capitalism around the world and a growing amount of opposition. I mention

this because these value issues are very important in a world economy and when

they’re in the process of being argued about, shifting, you have a tremendous amount

of uncertainty.

Geopolitics

And finally, geopolitics. The geopolitics of running the world economy is clearly

changing. In our lifetime we saw a situation which the US and England basically ran the

show. Then we saw the US and Japan and the European Union running the show. Now

it’s spreading much more to a much more multilateral situation where no one’s running

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the show. And maybe some 20 or 30 countries are basically saying we want a voice and

we want a very effective voice. And like the shifting values, these shifting geopolitics

results in a lot of uncertainty about what should happen and probably a lot of changes

in whatever system exists right now.

A New World

So when I put all these elements together, I see a world of very rapid change,

very disorienting change, a breaking down of all the models that we used to know. Big

changes in politics, big changes in the way companies are going to behave. A lot of

competition to seize the high ground, wherever it is. And I think that the setting should

be highly relevant to the operation of any organization. After all, how would you, how

could you run an organization if you didn’t have an understanding of the environment in

which you’re in? How could you plan strategy if you had the wrong funding? How could

you deal with all of your stakeholders, your customers, your suppliers, your investors,

your owners, without having a concept of what you’re actually doing? And so in this

setting of uncertainty and volatility and even discontinuity, the question I want to raise

is what are the features of the organization of the future, the organization that will be

successful? And as I said at the outset, in framing it this way, my premise is that we can

argue all day long about what’s actually happening, but it’s really organizations and us

as individuals that are at the middle of it and are going to have to decide how we are

going to conduct ourselves. I’m dealing today with the organizational side.

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I want to say that in talking about the organization of the future I don’t want to

give the impression that everything that we know, every organization that is trying to

deal with this situation, needs to be changed, or needs to be radically changed. I’m

talking in many cases about preserving the tried and true elements of what is effective

leadership – there’s no substitute for integrity, there’s no substitute for trust, there’s no

substitute for exquisite execution in whatever you’re doing. But I’m talking about things

that need to be emphasized more, things that need to be added to a list of priorities.

And it’s very important that you know this because there are some people who feel that

we are living in such radical times that everything has to be scrapped, and I’m exactly

opposite. All I’m saying is the model has to be tweaked and sometimes in some

fundamental ways.

The Organization of the Future

So here are some of the things that I think the organization of the future really

ought to embody and I’m going to do this fairly quickly because I’d like to leave some

time for questions. And I’m going to put this in terms of let’s say if I were running an

organization, I would want to make sure that the organization I ran had a very clear

purpose and that a purpose has to be over and above profits if it’s a commercial

enterprise. I’m not discounting profits; in fact, a friend of mine said if it’s a commercial

enterprise and you’re not profitable, everything else is moot; you’re not going to exist.

You won’t even be able to compete, so I’m just assuming that is a purpose. But beyond

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that, you need some public and social purpose that is very meaningful and that is very

big and very clear to all your constituents. And every company might do this differently.

I used to be on the international advisory board of Toyota and we would argue about

this incessantly and the Japanese tend to be very cautious, but we figured the purpose

really should be safety and sustainability. And that safety and sustainability focused on

road transportation. That’s a purpose. I mention this only because it is very clear. It

has to be very real. You can’t say this is outside of their area of competence. You could

say if they can really deliver this, it’s really kind of revolutionary, but it has to be big,

that’s big, it has to be meaningful, that certainly would affect a lot of things, and it has

to be integral to the brand. And this goes with whether you are a commercial or

noncommercial organization and the definition of purpose and the understanding of

that purpose are critical. And the reason this relates to everything I’ve said is that’s the

North Star. That tells you even in periods of great uncertainty what it is you have to

focus on.

The second thing is you have to have a set of principles that tell you that give you

guidance in all the gray areas that exist, in all the shifting periods of shifts going from

one point to the other. And these principles can’t be just something that you put on the

wall. You go to a lot of firms in Wall Street, for example, and I can say this because I’ve

worked there. And maybe 5 principles and the first one is our customers is our first and

you gag that they don’t mean anything, that’s just words. So the idea of a statement of

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principles has to be debated by the employees and constituencies over and over again

and made to be real and applicable to individual situations. And I think that here the

principles have to deal with a lot of ethical situations. Because when you’re moving,

when you’re in the supercycle, believe me, the ethical dilemmas become real big

because everything is changing, all the models are changing. And it is no small

achievement to have a set of principles that are meaningful and everybody understands

them. And that too is a North Star in a period of great uncertainty.

You have to have strategic vision. Now this is really hard because how do you

have vision when everything is changing? How do you look around the corner? And I

say it’s a combination of two things. It’s a combination of having a plan, say a 3 year

plan and having that plan challenged every six months so that you’re constantly re-

evaluating as opposed to having a plan and say well 3 years is not that long, we’re going

to stick with this plan if things change. Andy Grove who used to run Intel for many years

had a saying that said, “Engage then strategize.” And in explaining this, he’d say you

jump into the pool and then you figure out how to swim. Well I wouldn’t go quite that

far but what he was really trying to get at and he was in the semiconductor industry and

it was very, very fast, is that you have to have a plan, but it has to be constantly tested

and stress-tested or else in the supercycle that I’m talking about it simply won’t work.

And the second part of strategy that is really important is you have to ask

yourself, does this strategy help us be resilient and adaptable? Because the one think

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you know is it’s just like soldiers entering the war – the minute the first bullet is fired, all

the plans fall by the wayside. And in a supercycle, the organizational winners will be

those that are really adaptable and really resilient. And one way to do this is that you

have to constantly envisioning new scenarios and stress-testing those scenarios and

asking yourself, what if, what if, what if, and going further and further out in terms of

the implausibility of the contingency because the one thing we have seen in the last

decade is far beyond anything we can imagine is going to happen. We don’t know

when, but we have reached the limits of our imagination as human beings in terms of

envisioning all the things that can change and change suddenly.

The next major feature is what I would call a global mindset. I get asked

occasionally to talk to companies, big companies, and the question they’re asking me,

“are we global enough?” and I use a theme that I can’t tell you if you’re global enough,

but I can give you a checklist on whether you have a global mindset. Just because you

may be in 50 different countries, doesn’t mean you have a global mindset. And can you

really keep in your mind the idea of an interconnected world that has a lot of walls?

That is both global and local and how you link those two together? And that those

qualities exist not in your top management, but in your board of directors. And in your

workforce will you give the middle manager in Malaysia the opportunity to move to the

United States and eventually run a company? And do you really understand global

diversity or are you looking for someone just like you who speaks English who just

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happens to have a passport from another country, but nevertheless that person went to

an American school? Or do you really want diversity – somebody who brings a

perspective that you never thought about because they don’t even speak English, and

it’s something you need to teach them? So a global mindset is absolutely critical.

Innovation – I think everything I’m talking about is innovation. Here if an

organization is not obsessed with innovation at every single level, almost from the

janitor to the top, I don’t think it’s going to be competitive in the supercycle. And if I

were to check whether an organization is innovative, I’d probably sit down with the CEO

and I’d say, “Tell me three things that you’re working on, 2 of which are likely to fail.” If

you don’t have anything that’s likely to fail, you’re not far enough out on that edge of

trying to be innovative. Because everybody is trying to be innovative, the question is

can you do that better than someone else. And I would like to know what is the reward

system for people who innovate and people who innovate both who succeed and who

fail trying valiantly? I want to make sure that this is not just let’s have a lunch for Joe or

Susan, but that they felt when the rubber meets the road, the real hard incentives that

are there to do something way out of the box.

Fighting complexity. You know, in the world that I talked about it is so easy to

drown in complexity. So the organization of the future has to figure out how do I

simplify everything? First suggestion, get rid of all PowerPoint’s. At first, these were

great innovations. But how many of us have sat through a presentation of 20

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PowerPoint slides and each one can be an hour of the presentation. I’m not saying that

the person making the presentation shouldn’t understand what’s in there, but he or she

has got to be able in five minutes to give you the essence of what it is… Get rid of matrix

report – the idea that you can report to a couple of different people equally is simply

too complex. Bite the bullet and say one boss. Make sure every single person knows

who they report to and exactly how they’re getting compensated. Make no ambiguity

along the way. These are just a few things, but the point is it’s like a shrub that is

overgrown, virtually every organization needs to become not for its own sake, but

because they’re going to have to move very quickly; you can’t innovate when you have

layers of complexity.

I remember that a CEO of Unisys told me – he was trying to simplify and he had

all kinds of inventive people, but he basically set a rule. He said no innovation will be

funded unless it applies to over 12 countries. The company was in 100 different

countries and in order to simplify, they could not evaluate all of the ideas. They

basically said, you come up with an idea that can spread to a certain number of

countries, or don’t bother.

Public policy awareness. If there’s one thing that has really changed, it is the

importance of government. Ten years ago, in fact I wrote a book which I don’t want to

say I’m ashamed of it, but I really got it wrong, in 2002 when I said that many of the

major problems of the world are going to have to be solved by companies because

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governments are simply not up to the task. Well, the governments may not be up to the

task, but I think that they’re going to try. And as a result, we’re going to see more and

more government intervention, at both the local and international level, and any

organization that thinks that it is going to be affected in the future is going to have an

acute understanding of public policy and how to deal with it, how to anticipate it, how

to react to it, how to influence it.

My Source of Optimism

It’s possible from what I’ve said that you think, my God, these are very high

hurdles and the past is a better place than the future. I just want to tell you why I’m

very optimistic. Let me refer to a book that I’m writing but that won’t be done for a

while. It’s a book about ten people who changed the world, ten people who built

globalization. And it starts with Genghis Khan and it ends with Deng Xiaoping who is the

prime force, the head of China after Mao. And each one of these people did something

really amazing to make it a smaller and better world. One of the central characters is a

father of exploration, one is responsible for the transatlantic telegraph, one of them was

responsible for the original European Common Market and the erosion of sovereignty.

They all did something amazing. But one of the common things they all had is they lived

in times of major discontinuity. It was not just their own talents. It was the times that

allowed them to do something really major because when everything is in terrible and

dramatic disarray, you have tremendous possibilities that otherwise you don’t have,

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because all the usual channels are much more open, and many new channels open up,

too.

And that’s where we are today, and where we will be for the next several

decades. I think we are in the process of enormous amount of disruptive technology, an

age where a huge number of people have superb educations, an age where we can

compare ideas instantaneously so there’s an aggregation of intelligence, an age where

there’s so many big shifts, so many big needs that we’re going to see a burst of

innovation that is going to alter the world – and mostly for the better for most of the

people. And I believe that when it comes to climate change, I believe that we will see

such progress when it comes to our need for energy, and our need for infrastructure

and our need for better education and all the things that we are rightfully upset about

now. So for everybody in this room and all the organizations that you represent great

opportunities abound. All you have to do is seize it.

So, I’m happy to take some questions.

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