Management intuition for the next 50 years
The collision of technological disruption, rapid emerging-markets growth, and widespread aging is upending long-held assumptions that underpin strategy setting, decision making, and management.
Intuition
forms over time. When
McKinsey began publishing the Quarterly,
in 1964, a new management environment was just beginning to take
shape. On April 7 of that year, IBM announced the System/360
mainframe, a product with breakthrough flexibility and capability.
Then on October 10, the opening ceremonies of the Tokyo Olympic
Games, the first in history to be telecast via satellite around the
planet, underscored Japan’s growing economic strength. Finally, on
December 31, the last new member of the baby-boom generation was
born.
Fifty
years later, the forces symbolized by these three disconnected events
are almost unrecognizable. Technology and connectivity have disrupted
industries and transformed the lives of billions. The world’s
economic center of gravity has continued shifting from West to East,
with China taking center stage as a growth story. The baby boomers
have begun retiring, and we now talk of a demographic drag, not a
dividend, in much of the developed world and China.
We
stand today on the precipice of much bigger shifts in each of these
areas, with extraordinary implications for global leaders. In the
years ahead, acceleration in the scope, scale, and economic impact of
technology will usher in a new age of artificial intelligence,
consumer gadgetry, instant communication, and boundless information
while shaking up business in unimaginable ways. At the same time, the
shifting locus of economic activity and dynamism, to emerging markets
and to cities within those markets, will give rise to a new class of
global competitors. Growth in emerging markets will occur in tandem
with the rapid aging of the world’s population—first in the West
and later in the emerging markets themselves—that in turn will
create a massive set of economic strains.
Any
one of these shifts, on its own, would be among the largest economic
forces the global economy has ever seen. As they collide, they will
produce change so significant that much of the management intuition
that has served us in the past will become irrelevant. The formative
experiences for many of today’s senior executives came as these
forces were starting to gain steam. The world ahead will be less
benign, with more discontinuity and volatility and with long-term
charts no longer looking like smooth upward curves, long-held
assumptions giving way, and seemingly powerful business models
becoming upended. In this article, which brings together years of
research by the McKinsey Global Institute (MGI) and McKinsey’s
Strategy Practice, we strive to paint a picture of the road
ahead, how it differs from the one we’ve been on, and what those
differences mean for senior executives as they chart a path for the
years to come.
Forces at work
In
an article of this length, we can only scratch the surface of the
massive forces at work.Nonetheless, even a brief look at three of the
most important factors—emerging-markets growth, disruptive
technology, and aging populations—is a useful reminder of the
magnitude of change under way.
Dynamism in emerging markets
Emerging
markets are going through the simultaneous industrial and urban
revolutions that began in the 18th century in England and in the 19th
century in the rest of today’s developed world. In 2009, for the
first time in more than 200 years, emerging markets contributed more
to global economic growth than developed ones did. By 2025, emerging
markets will have been the world’s prime growth engine for more
than 15 years, China will be home to more large companies than either
the United States or Europe, and more than 45 percent of the
companies on Fortune’s Global 500 list of major international
players will hail from emerging markets—versus just 5 percent in
the year 2000.
The
new wave of emerging-market companies now sweeping across the world
economy is not the first. In the 1970s and 1980s, many US and
European incumbents were caught unaware by the swift rise of Japanese
companies that set a high bar for productivity and innovation. More
recently, South Korean companies such as Hyundai and Samsung have
shaken up the leading ranks of high-value-added industries from
automobiles to personal electronics. The difference today is that new
competitors are coming from many countries across the world and in
numbers that far outpace those of past decades. This new wave will be
far tougher on some established multinationals. The shift in the
weight of the global economy toward emerging markets, and the
emergence of nearly two billion consumers who for the first time will
have incomes sufficient to support significant discretionary
spending, should create a new breed of powerful companies whose
global expansion will take place on the back of strong positions in
their home markets.
Within
those markets, the locus of economic activity is also shifting,
particularly in China. The global urban population is growing by 65
million a year, and nearly half of global GDP growth between 2010 and
2025 will come from 440 cities in emerging markets. Ninety-five
percent of them are small and medium-sized cities that many
executives haven’t heard of and couldn’t point to on a map: not
Mumbai, Dubai, or Shanghai, of course, but Tianjin (China) and Porto
Alegre (Brazil) and Kumasi (Ghana), among many others. Hsinchu, in
northern Taiwan, is already the fourth-largest advanced-electronics
and high-tech hub in the China region. In Brazil, the state of Santa
Catarina, halfway between São Paulo and the Uruguayan border, has
become a regional hub for electronics and vehicle manufacturing,
hosting billion-dollar companies such as WEG Indústrias.
Technology and connectivity
From
the mechanization of the Industrial Revolution to the computer-driven
revolution that we are living through now, technological innovation
has always underpinned economic change and disrupted the way we do
things. But today is different—because we are in the “second half
of the chessboard.” The phrase comes from the story told by Ray
Kurzweil, futurist and director of engineering at Google, about the
inventor of chess and the Chinese emperor. The inventor asked to be
paid in rice: a single grain on the first square, two on the second
square, four on the third, and so on. For the first half of the
chessboard, the inventor was given spoons of rice, then bowls, and
then barrels. The situation changed dramatically from there.
According to one version of the story, the cost of the second half of
the chessboard bankrupted the emperor as the continued doublings
ultimately required 18 million-trillion grains of rice, enough to
cover twice the surface area of the Earth. Similarly, the
continuation of Moore’s law means that the next 18 months or so
will bring a doubling of all the advances in computational power and
speed we’ve experienced from the birth of the transistor until
today. And then it will happen again. We’re accustomed to seeing
Moore’s law plotted on a logarithmic scale, which makes all this
doubling look smooth. But we don’t buy computers logarithmically.
As power increases, prices decrease, devices proliferate, and IT
penetration deepens, aggregate computing capacity surges at an
eye-popping rate: we estimate the world added roughly 5 exaflops of
computing capacity in 2008 (at a cost of about $800 billion), more
than 20 in 2012 (to the tune of just under $1 trillion), and is
headed for roughly 40 this year.
These
extraordinary advances in capacity, power, and speed are fueling the
rise of artificial intelligence, reshaping global manufacturing,and
turbocharging advances in connectivity. Global flows of data,
finance, talent, and trade are poised to triple in the decade ahead,
from levels that already represent a massive leap forward.
For
example, less than 3 percent of the world’s population had a mobile
phone and less than 1 percent was on the Internet 20 years ago.
Today, more than two-thirds of the world’s population has access to
a mobile phone, and one-third of it can communicate on the Internet.
As information flows continue to grow, and new waves of disruptive
technology emerge, the old mind-set that technology is primarily a
tool for cutting costs and boosting productivity will be replaced.
Our new intuition must recognize that businesses can start and gain
scale with stunning speed while using little capital, that value is
shifting between sectors, that entrepreneurs and start-ups often have
new advantages over large established businesses, that the life cycle
of companies is shortening, and that decision making has never had to
be so rapid fire.
Aging populations
Simultaneously,
fertility is falling and the world’s population is graying
dramatically. Aging has been evident in developed economies for some
time, with Japan and Russia seeing their populations decline. But the
demographic deficit is now spreading to China and will then sweep
across Latin America. For the first time in human history, the
planet’s population could plateau in most of the world and shrink
in countries such as South Korea, Italy, and Germany.
Thirty
years ago, only a few countries had fertility rates considerably
below those needed to replace each generation (approximately 2.1
children per woman), comprising only a small share of the global
population. But by 2013, about 60 percent of all people lived in such
countries.6 This
is a sea change. Germany’s Federal Statistical Office expects that
by 2060 the country’s population will shrink by up to one-fifth and
that the number of people of working age will fall to 36 million
(from roughly 50 million in 2009). Thanks to rigorous enforcement of
the one-child policy, the size of China’s core, working-age
population probably peaked in 2012. In Thailand, the fertility rate
has fallen from 6.1 in 1960 to 1.4 in 2012. These trends have
profound consequences. Without a boost in productivity, a smaller
workforce will mean lower consumption and constrain the rate of
economic growth.
The great collision
Declaring
an inflection point, particularly when the underlying forces at work
have been operating for some time, is a major claim. What justifies
it, we believe, isn’t just the growing pace and scale of these
forces, but the ways in which they are coming together to change the
dynamics we are accustomed to experiencing on both the demand and the
supply side of the global economy.
On
the demand side, since the 1990s we’ve been enjoying a virtuous
cycle of export-led emerging-market growth that created jobs, raised
incomes, and generated enormous opportunities in those markets, while
also reducing prices for goods in developed ones and enabling faster
consumption growth in the West. For example, in the United States,
real prices for nonpetroleum imports fell more than 30 percent
between the early 1990s and today. As emerging markets get richer, it
will be harder for them to play the low-cost-labor arbitrage game,
making it critical for local consumers to emerge as growth drivers in
place of ever-rising exports to developed markets. It will also be
harder for Western consumers to continue enjoying de facto gains in
living standards resulting from ever-falling import prices. As all
this happens, trade between emerging markets, already on the rise,
should continue growing in importance.
On
the supply side, we’ve been operating for many years on a two-track
productivity model, with developed markets continually pushing
forward and emerging markets playing catch-up. Emerging markets are
still less productive than developed ones, and those with
capital-intensive catch-up models will find them difficult to
maintain as their economies become more consumer and service
oriented. As anyone who has seen row after row of empty brand-new
high-rise apartments in overbuilt Chinese fringe cities can attest,
the transition from investment-led growth is unlikely to be smooth,
even for countries like China with explicit policies aimed at
shifting to more consumer- and service-oriented economies. On the
other hand, digitization and mobile technologies should provide a
platform for product and service innovation, as we are already seeing
in Africa, where 15 percent of transactions are carried out via
mobile banking (versus 5 percent in developed markets), and in China,
where Alibaba has proved that consumer online markets can take on
unprecedented scope and scale.
How
these interdependencies in supply and demand will play out is far
from clear. We’ve modeled optimistic and pessimistic global GDP
scenarios for a decade from now. They diverge by more than $17
trillion,
a
spread approaching the size of current US GDP. Variables at play
include the pace and extent of the shift to emerging-market consumers
as the critical global growth engine, the adjustment of developed
markets to a world where they can no longer draft off the combined
benefits of low-cost imports and low-cost capital enabled by emerging
markets, and the emergence of new productivity solutions as developed
and emerging markets alike try to advance the frontier in response to
their demographic and other growth challenges.
It’s
likely that different regions, countries, and individuals will have
different fates, depending on the strength and flexibility of their
institutions and policies. Indeed, we’re already seeing this in
portions of Southern and Eastern Europe that remain mired in
recession and debt and in the United States, where some local
governments are on the verge of failure as their economic bases can’t
keep up with the needs of their aging populations. Similarly, as
aging boosts the importance of productivity-led growth in many
emerging markets, progress will be uneven because many known
productivity solutions depend on effective regulatory regimes and
market mechanisms that are far from standard in emerging markets.
Given
the multiple stresses that are occurring at once in the global
economy, we should not expect uniform success—but neither should we
become too pessimistic. The massive pressures created by the dynamism
of emerging markets, technological change, and rapid aging will help
stimulate the next era of innovation and growth in a variety of
areas. They will include the more productive natural-resource use
that will be necessary to support the world’s growing global
consuming class, the more efficient use of capital, and the more
creative management of talent.
Management implications
Emerging
on the winning side in this increasingly volatile world will depend
on how fully leaders recognize the magnitude—and the permanence—of
the coming changes and how quickly they alter long-established
intuitions.
Setting strategic direction
McKinsey
research suggests that about two-thirds of a company’s growth is
determined by the momentum—the underlying growth, inflation,
income, and spending power—of the markets where it competes.
Harnessing market momentum in the years ahead will require covering
more geographies, more industries, and more types of competitors,
prospective partners, and value-chain participants—as well as more
governmental and nongovernmental stakeholders. Rather than thinking
of a primary national market broken into three to five value
segments, tomorrow’s strategist must comprehend a world where
offerings may vary by city within a country, as well as by
distribution channel and demographic segment, with aging and income
inequality necessitating increasingly diverse approaches. All this
will place a premium on agility: both to “zoom out” in the
development of a coherent global approach and to “zoom in” on
extremely granular product or market segments.
The
importance of anticipating and reacting aggressively to
discontinuities also is rising dramatically in our increasingly
volatile world. That means monitoring trends, engaging in regular
scenario-planning exercises, war-gaming the effects of potential
disruptions—and responding rapidly when competitive conditions
shift. For example, few of the traditional mobile-phone manufacturers
protected themselves against Apple’s disruption via the iPhone.
Samsung, however, managed to turn that revolution into an opportunity
to rise dramatically in the mobile-phone league tables.
Finally,
the strategist increasingly needs to think in multiple time frames.
These include a company’s immediate tactics and ongoing
improvements to counteract new competitive threats, market selection
and emphasis given current capabilities and competitive positions,
investments to enhance capabilities within the current strategic
construct and to enable entry into adjacent markets, and, for the
longest term, the selection and pursuit of new, long-lived
capabilities. The latter point is worthy of emphasis—advances in
tech- nology and the interconnectedness of geographic and product
markets make the half-life of “normal” competitive advantages
very short indeed. This puts a premium on the selection and
development of difficult-to-replicate capabilities.
Building new management muscle
It
will be increasingly difficult for senior leaders to establish or
implement effective strategies unless they remake themselves in the
image of the technologically advanced, demographically complex,
geographically diverse world in which we will all be operating.
Everyone
a technologist. Technology
is no longer simply a budget line or operational issue—it is an
enabler of virtually every strategy. Executives need to think about
how specific technologies are likely to affect every part of the
business and be completely fluent about how to use data and
technology. There is a strong argument for having a chief digital
officer who oversees technology as a strategic issue, as well as a
chief information officer, who has tended to be in charge of the nuts
and bolts of the technology the company uses. Technological
opportunities abound, but so do threats, including cybersecurity
risks, which will become the concern of a broader group of executives
as digitization touches every aspect of corporate life.
Managing
the new workforce. Technology
is increasingly supplanting workers, and the pace of IT innovation is
transforming what constitutes work as well as how, when, and where we
work. MGI research suggests that as many as 140 million full-time
knowledge workers could be displaced globally by smart machines—at
the same time aging workforces are becoming commonplace and labor
shortages are emerging for pockets of technical expertise. New
priorities in this environment include ensuring that companies are
using machine intelligence in innovative ways to change and reinvent
work, building the next-generation skills they need to drive the
future’s tech-led business models, and upskilling and retraining
workers whose day-to-day activities are amenable to automation but
whose institutional knowledge is valuable.
For
workers with more replicable skills, there’s a danger of doing less
well than their parents—which will create social stresses and
challenge managers trying to energize the entire workforce, including
employees dissatisfied about falling behind. Developed and emerging
markets will experience different flavors of these issues, making the
people side of the equation particularly challenging for
geographically dispersed organizations.
Rethinking
resources. The
convergence of IT and materials science is spawning a surge in
innovation that will dramatically change when, where, and how we use
natural resources. In their new book Resource
Revolution,
our colleague Matt Rogers and his coauthor, McKinsey alumnus Stefan
Heck, argue that combining information technology, nanoscale
materials science, and biology with industrial technology will yield
substantial resource-productivity increases. Taken together, those
improvements represent an extraordinary wealth-creation opportunity
and will be the key to achieving high-productivity economic growth in
the developing world to support billions of new members of the global
middle class. Capturing these resource-technology opportunities will
require new management approaches, such as substitution (replacing
costly, clunky, or scarce materials with less scarce, cheaper, and
higher-performing ones), optimization (embedding software in
resource-intensive industries to improve, dramatically, how companies
produce and use scarce resources), and virtualization (moving
processes out of the physical world).
Breaking inertia
Change
is hard. Social scientists and behavioral economists find that we
human beings are biased toward the status quo and resist changing our
assumptions and approaches even in the face of the evidence. In 1988,
William Samuelson and Richard Zeckhauser, economists at Boston
University and Harvard, respectively, highlighted a case in which the
West German government needed to relocate a small town to mine the
lignite that lay beneath. The authorities suggested many options for
planning the new town, but its citizens chose a plan that looked
“extraordinarily like the serpentine layout of the old town—a
layout that had evolved over centuries without (conscious) rhyme or
reason.”9
Businesses
suffer from a surprising degree of inertia in their decisions about
how to back up strategies with hard cash to make them come to
fruition. Research by our colleagues showed that between 1990 and
2010, US companies almost always allocated resources on the basis of
past, rather than future, opportunities. Even during the global
recession of 2009, this passive behavior persisted. Yet the most
active companies in resource allocation achieved an average of 30
percent higher total returns to shareholders annually compared with
the least active.10 The
period ahead should raise the rewards for moving with agility and
speed as digitization blurs boundaries between industries and
competition in emerging markets heats up.
It
would be easy, though, for organizations and leaders to become frozen
by the magnitude of the changes under way or to tackle them on the
basis of outdated intuition. Taking the long view may help. In 1930,
the great British economist John Maynard Keynes boldly predicted that
100 years on, the standard of living in progressive countries would
be four to eight times higher. As it turned out, the upper end of his
optimistic expectation turned out to be closer to the truth. Those
who understand the depth, breadth, and radical nature of the
change and
opportunity that’s
on the way will be best able to reset their intuitions accordingly,
shape this new world, and thrive.
http://www.mckinsey.com/Insights/Strategy/Management_intuition_for_the_next_50_years?cid=mckq50-eml-alt-mkq-mck-oth-1409
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