U.S. CEOs express high levels of confidence about the economic outlooks for the U.S., their companies, their industries and the global economy.
U.S. CEOs express high levels of confidence about the economic outlooks for the U.S., their companies, their industries and the global economy. “Now that the economic expansion is likely to break all previous post-World War II records in terms of length, it’s unsurprising that CEOs are feeling positive. Growth in the U.S. is not robust, but it is steady, bolstered by continuous jobs growth and gradually improving wages. When I speak to CEOs, one legitimate concern is around the expectation for how long the expansion can continue, especially as the risks to growth continue to build,” says Constance Hunter, KPMG’s Chief Economist.
U.S. CEOs are committed to global expansion, more so than CEOs globally. A majority of U.S. CEOs continue to express interest in expanding to emerging markets (74 percent), with the top focus on Central and South America (33 percent). Additionally, more U.S. CEOs are prioritizing countries and regions that form part of China’s Belt and Road Initiative (85 percent U.S. vs. 65 percent globally), are more likely to invest in the U.K. post-Brexit (76 percent U.S. vs. 53 percent globally) and view building their presence in emerging markets as building resiliency as a business (93 percent U.S. vs. 87 percent globally).
Their optimism is somewhat tempered by the perceived threats to globalization and the spread of protectionist policies. Jonas Prising, Chairman and CEO of ManpowerGroup, a leading global workforce solutions company, is cognizant of the unequal impact that current technology-driven growth has on different participants. “The Fourth Industrial Revolution is affecting a lot of people in different ways and not all of them positively,” he says. “The concern around polarization, aside from the obvious downside of people not having such a good time, is that it’s starting to affect politics and ideology in a way that makes the environment unpredictable and highly volatile,” he says.
Note: Numbers do not total 100% due to rounding
A majority of U.S. CEOs (81 percent) are planning to pursue inorganic growth. KPMG’s Hunter sees the reticence to invest in organic growth (19 percent) as somewhat incongruous with the high levels of optimism about economic growth. “The only chink in the armor is this disconnect between how much CEOs say they’re going to invest in R&D and innovation versus how much they think they’re going to grow through M&A and strategic alliances,” she says.
The largest number of U.S. CEOs (38 percent) cite entering strategic alliances with third parties (compared with M&As being the top way to grow last year). “We continue to be in a growth market that is driven by disruption. Forming strategic alliances is allowing companies, today more than ever, to quickly innovate and enter new markets where they’re not constrained by their traditional, organic growth structures,” explains S. Singh Mecker, KPMG’s U.S. Leader, Alliances and Partnerships.
Arrow Electronics, a technology services company, will launch an open lab the second half of 2019 that will serve as a test site for establishing certain standards for artificial intelligence, where the company collaborates with municipalities, agencies, businesses, universities and research institutions on issues such as street lighting, public safety and security. “You have to work with other companies and pull together information from many to have a solution that works for all. It’s our core belief that technology and innovation are enablers of progress and the improvement of everyday life, and if that’s really something you believe in, that means you have to be able to work with everyone,” says Michael Long, Chairman, President and CEO of Arrow Electronics.
But while strategic alliances are a chosen way to stay competitive, CEOs recognize that they can be tricky. Almost two-thirds (65 percent) believe that the only way for their organization to achieve the agility it needs is to increase the use of third-party partnerships. Yet the same number also admit that in the past they have reconsidered a third-party partnership that would have helped with growth because the third party did not fit well with their organization’s culture and purpose.
Mecker points to three main determinants of whether an alliance will be a success or failure. The first is alignment about market opportunity and shared strategy. The second issue relates to operational execution, defining each party’s role in executing the alliance’s goals. Finally, the third element necessary to ensure a well-functioning alliance is around the culture. Not all cultures can unite to form a proverbial melting pot, and without agreement about reporting structures, incentives and purpose, an alliance is bound to be strained.
While challenges run across all three areas, Mecker believes that execution and culture are more difficult to get right. Creating a collaborative culture requires consistent definitions of success, accountability, support and rewards on both sides of an alliance partnership.
You have to work with other companies and pull together information from many to have a solution that works for all.
Almost half of U.S. CEOs (49 percent) describe their M&A appetite as high this year, compared with 36 percent last year. Apart from the continuing economic conditions that are ripe for M&A and joint venture activity—such as a strong economy, low interest rates and high confidence—advances in technology are driving new business models. In many cases, companies choose joint ventures or acquisitions to introduce new business models and products and to secure access to new technologies and talent. “As technology disrupts many industries, companies find they need to expand their talent and their products to grow. Companies can either hire, acquire or enter into a JV to gain the talent and technology,” says Daniel Tiemann, KPMG U.S. Lead Partner, Deal Advisory and Strategy.
Technology, and specifically data analytics, also plays a role in the process of M&A. It is making the M&A due diligence much more precise, with data streams from across companies enabling up-to-date analysis, producing granular insights about synergies, down to a person or machine. “Data analytics allows buyers to gain new insights on assets before they acquire them, which will make them better buyers in the long run,” says Tiemann.