Welcome to Business and Beyond. Today I sit down with Rich Lesser, global chairman of BCG and former CEO. We are catching up in Melbourne immediately following a week in Davos. Rich takes us through his perspectives and key takeaways. I hope you'll enjoy this conversation.
Well, thank you very much once again and you've come via New York, but of course most importantly you've spent the week in Davos just gone by. For those who haven't seen your post which I've enjoyed thoroughly reading, we'll link it in the show notes, but you did actually offer some reflections around how this Davos was quite unique in its composition and in fact it wasn't really one conversation or one Davos, but as you put it, four very distinct and different Davoses.
I kept thinking about how to describe this and I ended up with this phrase a tale of four Davos because it just felt like I was in these conversations and you'd go in different directions in the same day and sometimes even in the same conversation.
So yes, it was quite a unique meeting. What were those four Davoses that you experienced?
Sure. Why don't I hit them at a high level and then we can dig in wherever you want?
Okay. So one is, you know, every time you get this group of people together, they're talking about what is the outlook. Do they feel optimistic or pessimistic? The truth is they're often not right. I used to have a joke that actually isn't a joke, which over my many years, I felt like if you invested against the mood of Davos. When people were really exuberant, you would underinvest. When people were really conservative or pessimistic, you'd over, you'd probably actually make more money. So it doesn't always work, but there always is a point of view. And that was true in this one too. And I would say tilting to the optimistic side at least amongst the business community as they looked at the economic outlook and the IMF with its upgrading of global growth for 26 underpinned some of that, but it was also what they were seeing in their own businesses.
There was a second, and I called that Davos on the ground. That's sort of where are we today? What's going on? There was a Davos in the cloud discussion that was all about AI. This is now at least the third year. You could argue it's gone on at some level for many years, but really the third year of intense discussion of what does AI mean for the business world, for society in general, where are the opportunities, where are the risks, how is the technology proceeding? But that was a different conversation as well as the focus shifted more and more to how are we having real world impact at scale, particularly in large organizations. There was a third Davos which I think of as Davos in the north, okay, because so much of this discussion was about Greenland and the geopolitics of the world because people were really quite concerned we might be heading toward an open clash or deterioration of the tariff landscape. Starting with the president's speech, President Trump's speech on Wednesday afternoon, I think that that concern started to calm a bit. First that we weren't heading for an open conflict and then later that night with a Truth Social post that there was a framework that had been worked through and we might be able to avoid an escalation in tariffs. But that got a lot of attention through the week and even lasting elements toward the end of the week after that that might be worth digging into. And the fourth I call Davos underground because it's the underground discussion of climate and sustainability, which for several years in the early part of this decade was an enormous focus of these meetings and this year on the main stage in most public settings it didn't get much discussion, but I was in multiple meetings with CEOs talking about what they were doing and the way they saw the world evolving. And I think there's quite an active discussion underway we should maybe come back to later about what's actually happening in this environment, how robust the green economy is even if the public conversation is much more muted than it was. So those were my four Davoses.
So, let me get this right. So it was Davos on the ground, in the cloud, to the north, and then underground. It's very elegant, actually.
I know Charles Dickens, but I can lift a Charles Dickens idea and apply it to my interesting week in Switzerland.
It was well done and well received. And so maybe if you wouldn't mind, let's go through a little bit of all of them. I think for me, I'm personally very curious. So on the ground, this is really around the economic performance, economic climate, trading environment that we're in. You mentioned cautious optimism, I think. How would you describe that? How would you disaggregate that level of economic confidence around the world?
Yeah, and it's probably even more than cautious among many CEOs right now. You just have to remember it's been such a hard decade, right? We had all of the impacts of the pandemic, then we had inflation, we had supply chain shocks. It's been a tough decade for business to navigate in a real test of resilience for many. And I think many leaders look at this year and they see a world where inflation is more or less under control. It's not down to the 2% target in some places like the US, but it's certainly not at the high points that we've experienced previously. They feel like the underpinnings of growth are there. You've got a productivity tool in AI which is slower to roll out than some might have discussed. We'll come back to that, but still we'll be generating some positive impact. It's been a really tough year for trade that's been discussed in many circumstances. But the truth is our forecast for global trade like others is not that we're seeing a decline in trade. It's probably not going to grow at the rate we had earlier projected. I think a year ago we had thought global trade would be for the next decade around 2.9% per year on average. Now we're projecting global trade at 2.5%. That's a modest reduction, but it is not the end of global trade. And in some parts of the world, it's quite vibrant. And so I think and you've got the IMF, which had been quite concerned about growth, that's now gotten not to the levels we would have seen 10, 20 years ago, but still to reasonable levels of growth, I think 3.3%. So you put all that together, I think most CEOs feel like after years of focusing on resilience, taking cost out, near-term productivity, that those things don't go away, but they can turn more heavily to growth and capturing opportunities. And that optimistic mood came through as it relates to the near-term outlook among many of the CEOs that I spoke to, Christoph Schweitzer, our CEO, others connected with during the week.
And would you say also that that spanned the globe? I mean so the US-centric perspective very much makes good sense. What about in sort of APAC region around Europe? Did you feel the sentiment started to shift quite differently?
Look, it does vary country by country and I'm not going to do a full review, but it was not just the US. I would say Japan and India for example were places where I think there was a pretty good optimism for what was happening. People have been quite gloomy about Europe as I'm sure you're aware, and I think that it's not that people have turned super positive, but the relative view has probably improved partly because there's a perspective Europe is going to be investing more. Investing more in defense is one topic, investing more in its own energy security which has come up, investing more to not fall too far behind in technology. So it's still not a super positive outlook, but it is better than it was. And of course the Middle East with a lot of money, a huge commitment to invest, a major focus to create a positive climate for business also came up in multiple discussions. And then last, obviously China in terms of its local demand. I think people aren't ready to project about whether there can be a turnaround in some of the local demand consumption growth in China, but no one doubts that Chinese industrial might across so many sectors of the global economy, the integrated supply chains, the $1.2 trillion positive export import balance, that it is a massive power in the world economically. And that often comes up I think with a great deal of respect for just how strong it's become.
Great. Thank you, Rich. And you talked about it, we can either cover it now or later but I certainly want to cover it, this idea of resilience and sort of business resilience and business model resilience I suppose in the context of how trade is evolving. It's great to hear there's a shift towards optimism and that we're going to start to invest behind growth. I wonder if now is a good time to ask you your perspectives on how institutions and businesses start to really build that resilience for this phase. It's such an important question and it's actually one in a lot of discussions that it comes up because, well let's talk trade first, but of course there's resilience needed for cyber risk, there's resilience needed in many other dimensions. But let's start with trade. I think we've been using this expression about geopolitical muscle that companies need to build.
And I'm often asked what that actually means and for me just to keep it simple I think about five S's.
The first is sensing. You need to be better at sensing what's happening in the geopolitical landscape, how that might affect your business, including trade but not just trade. The second is scenario planning. The problem is human beings, I mean this isn't just a business issue, tend to think in more linear terms. We have a hard time with disruptive change and envisioning it and we have a hard challenge with time with exponential change. We tend to think linearly. And the problem is when you put that in a world where there is both exponential change happening, think AI, and there's disruptive change happening, think so many topics in the last few years, it needs to widen your view of scenario planning. Your scenarios need to be broader than the way many companies have traditionally done it. The third S is strategy, the ability to think strategically both about how you prioritize markets and how you prioritize capital deployment in a much more geopolitically complex world. The fourth is around supply chain flex. That probably gets the most focus, even starting back at the pandemic, how do you build supply chains that can be resilient whether it's to the weather shocks of rising temperatures that we're experiencing as climate change unfolds or whether it's due to geopolitical changes or tariffs or other things. And the last is shaping. Some elements of all the geopolitics and the way trade unfolds are beyond the ability of individual companies to control, but where possible they should be trying to shape the environment, not just be a taker of it. For many companies they'll never be able to do it. I mean for the very largest companies they might have the influence to be able to help shape the environment. For most companies doing it alone is not possible. But it means thinking deeply about who do you partner with, which companies have common interest to you and how do you make that work. And so those elements, sensing, scenario planning, strategy, supply chain flexibility, shaping, those are the kind of things that I think it what it means to build resilience and geopolitical muscle. But on climate resilience with rising temperatures, more extreme weather events, there's another way to think about resilience. Cyber, there's another way to think about resilience. But you are absolutely right that resilience is a much more top of mind topic than it has been prior to this decade. It really started with the pandemic and it just keeps continuing.
It keeps, and it's great and it makes a lot of sense to me in this sort of geopolitical complicated, uncertain at times context that you need to build this sort of resilience into the business model. From my vantage point it just sounds also like it will be quite costly. You're building redundancies and or sort of alternatives. Does it add a lot of cost to doing business?
I'm so glad you put that on the table. That is exactly the issue and that's why companies underinvested in it in the teens, the prior decade where for so many years it was a relatively calm environment on all of the dimensions I just mentioned. What happened was investors became very active and wanting to see performance really max out and companies not because they didn't think resilience was important, it just seemed in a relative way less important. It was easier just to focus on driving performance to the max. Now people are realizing you need a balance. I will highlight that the better you can do in sensing and scenario planning, often using AI as multipliers, particularly as it relates to climate risk but also macroeconomic risk, different scenarios are ways to be smarter about which investments have the highest ROI.
But it's not free. So whether it's carrying a bit more inventory, whether it's making facilities a bit stronger, whether it's helping your suppliers strengthen their supply chains, whether it's building supply chain flexing where you maybe pay a very small bit more for individual components in order to have the flexibility to shift if you need to, on all of those dimensions there is a cost to build resilience.
But that doesn't mean it's not worth bearing relative to the alternative, to run quite brittle structures that are more at risk as the world changes.
Yeah, thank you, Rich. And maybe just one last follow-on question here, which is does that resilience really involve more localization or sort of moving away from globalization as it has been just given the way the world map is shaping at the moment?
I think localization is an overstatement. Okay. I think for most companies, for many parts of their business, first they want to be global. They want to access markets. They want to have customers all around the world. Second, the economics are just so incongruous to try to do it all yourself in your own country or your own facilities. You have to have broader supply chain networks. You have to work internationally. So I worry about using the word local, but it does require understanding where you were local, where you were regional, and where you were global, but with more flexibility built in to be able to make shifts. And so the extreme of that, we're going to do everything ourselves, frankly, that's not very resilient either. So thinking that through in a very strategic way is a big issue for many companies right now.
Very helpful. Thank you. I wonder do we talk about Davos in the cloud?
That's the fun one. How can we not want to talk about Davos in the cloud?
And if I were to play back a component or a portion of your post, it was really exciting for me to read outside in that the dialogue is shifting from what is AI and what can it do to how do we really monetize, create and capture value both for the top line and the bottom line. Possibly also that the dialogue is shifting from a cost or productivity agenda alone to really at scale growth agenda through AI. That's at least my read of it and if that's true, I'm very excited because I think that that will be a fantastic agenda to be working on. But would love to hear from you.
