No Ordinary Disruption by Richard Dobbs, James Manyika & Jonathan Woetzel
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In this insightful, informative report, directors of the McKinsey Global Institute Richard Dobbs, James Manyika and Jonathan Woetzel identify four disruptive trends that business leaders must contend with: the rise of cities in the developing world; the pace of technological change; the aging of the world’s population; and new patterns of global trade and information flow. Dobbs, Manyika and Woetzel show how these trends send ripples through the world economy, bringing both risk and opportunity. Their vision for the future conveys optimism – though they sometimes seem to understate the potential effects of environmental disruptions and political instability. They make it clear that business leaders must rethink the obsolete assumptions driving their decisions.
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- How four disruptive trends will alter the global economy,
- How these trends bring risk and opportunity, and
- How smart businesses can exploit them.
Four Disruptive Forces
In the 21st century, four major trends are shaping the world’s economy and disrupting traditional business. To adapt, leaders must rethink decades-old assumptions about “consumption, resources, labor, capital and competition.”
The first trend is growing urbanization in developing nations, which helps shift the locus of economic power to the east and south. The second is the unprecedented speed of technological innovation and the way consumers are adopting it. The third is the aging of the world’s population, as businesses face older workers and consumers. The fourth is the reshaping of the world’s trade and information flow from hub-to-hub lines into a sprawling “web.” A lot of executive thinking on these subjects stems from “intuition.” Leaders must “reset” their intuition in light of these new realities.
Opportunities
Forward-looking leaders should view these transformative trends as opportunities, not threats:”
1. New Urban Centers
Across the world, people are moving at an unprecedented rate from rural areas to cities in search of opportunity and the prospect of a better life. In China, where 400 million people eke out a living as subsistence farmers, the government engineers mass migration to urban areas. This rapid movement to cities is unfolding as China, Brazil, India, Indonesia and Russia are becoming major manufacturing centers. The world’s “economic center of gravity” is shifting east and south, reversing centuries of history. Until about 1500, the economic center straddled China and India. The Industrial Revolution moved that center to Europe, and then to Britain and North America. Economic reforms in the populous nations of Asia have triggered a new eastward shift – and by 2025, the center of gravity will be in Central Asia.
By 2025, nearly half of the world’s economic growth will come from emerging market cities that many Western executives may not yet be able to find on a map, such as Tianjin, southeast of Beijing. By 2025, Surat, India; Foshan, China; and Porto Alegre, Brazil will contribute more to global growth than Madrid, Milan or Zurich. Movement to cities raises living standards: Between 1990 and 2025, the world’s “consuming class” – those with disposable income exceeding $10 a day – will grow by roughly three billion people.
Corporations need “city-level market intelligence” to understand the costs, demographics and consumption patterns of these burgeoning urban centers. Appliance maker LG, for example, sells refrigerators with larger vegetable compartments in India, but larger freezer compartments in Brazil. Nestlé makes its instant coffee sweeter in China.
2. The Increasing Speed of Technological Change
The computer printer appeared 500 years after Gutenberg invented the printing press. But 3D printers appeared only 30 years after the advent of the computer printer. Technological innovation accelerates, as does consumer adoption. Innovative technology changes the world in four broad ways:
- “Changing the building blocks of things” – Human gene sequencing gets faster and less costly, leading to potential innovations in food and medicine. “Materials science” advances, transforming ordinary materials into “nanomaterials” with extraordinary properties of strength or elasticity.
- “Rethinking energy” – Technologies such as fracking “unleashed a shale energy boom.” Renewable power, like solar, grows cheaper every day. Advances in energy storage could boost “battery-powered vehicles” and bring electricity to remote regions.
- Putting machines to work for people – Robotics transform manufacturing, services and even surgery. Driverless vehicles revolutionize air and ground transportation. Today, 3D printers manufacture new medical and dental products and even artificial human organs.
- Serving people’s needs with IT – More than a billion people use the Internet on mobile devices. “The Internet of Things” will continue to grow as manufacturers embed more data-collecting sensors in everything from machines to consumer goods.
Companies can reap the benefits of these changes by strategically using their data to predict demand and manage inventory.
Monetize your digital content with new strategies such as “freemium” pricing, offering basic services for free and charging for premium options. Take advantage of the digital world’s “lower marginal costs” – low barriers to entry that make it possible to scale up quickly, as Snapchat did when it reached 400 million users within two years of launch.
Look for technological innovators when hiring new talent, and don’t wait to bet on new technology. Google acquired Android in 2005 and YouTube in 2006, well before the benefits of those acquisitions became clear.
3. “The Aging World”
Countries around the world saw their populations rise dramatically after World War II, thanks to advancements in public health, such as vaccinations and lower infant mortality. The population of working-age adults grew quickly, as did their demand for homes, products and services.
As countries grow wealthier, their fertility rates decline. As living standards rise, people are more likely to use birth control and less likely to regard large families as an “economic necessity.” Nearly two-thirds of the world’s population lives in countries with fertility rates not high enough to make up for dying generations. Japan has the world’s oldest population; nearly a quarter of its people are older than 65. Germany could see its population drop 19% by 2060. Chinese citizens 55 and older will exceed 43% of the population by 2030, compared with 26% now.
Between 2015 and 2030, the global working-age population will increase only half as fast as it did from 2001 to 2015. Growth in retiree populations will strain savings, stress pension funds and pressure government budgets. However, the world’s graying population also presents opportunities. Older workers offer companies a wealth of talent and experience. Some companies have created programs to allow retirees to return to work on a part-time basis; others threw out the age restrictions on their apprenticeships and training programs. Older consumers represent tremendous marketing opportunities, from tourism packages to refurbished iPhones that feature apps for seniors.
4. New Trade Pathways
In the 20th century, most global trade revolved around “hubs” in North America and Western Europe. Today trade travels through an intricate, interconnected global “web” through Asia, Africa, Latin America, Europe and the US. The spread of technology and growth of economies in the developing world spur this change.
As recently as 1990, “the typical transaction might have been a Toyota Celica shipped from Japan to the United States.” Today a growing share of trade occurs among developing nations: soybeans travel from Brazil to Malaysia, or oil flows from the Congo to China. Capital also runs through this increasingly complex web. For example, a Chinese dairy company acquired a majority stake in an Israeli dairy cooperative, and Angola invested in Portugal’s banking and telecommunications systems.
As more of the world goes online, data travel through new global pathways. More than two-thirds of the world’s population has a mobile phone. By 2025, Africa could see its Internet users quadruple to 600 million, and its number of smartphones could increase fivefold – representing an enormous economic opportunity.
Businesses must be alert for new markets and new competitors. Even start-ups can tap into online platforms for access to talent, funding and suppliers. Solar Brush, a start-up that developed robots to clean solar panels, has headquarters in Berlin, but keeps an office in Chile and also targets customers in the US and the Middle East. Even in the digital era, locate your physical operations where you can take advantage of the flow of “goods, services and finance.” For example, P&G and Rolls-Royce relocated major lines of business to Singapore.
This new interconnectedness makes companies more vulnerable to sudden shocks from natural disasters to fiscal crises around the world. Companies should devise strategies to anticipate such crises so they can respond rapidly when necessary.
The “Ripple Effects”
As these four trends transform the world economy, businesses must be sufficiently nimble to anticipate and respond to:
- “Volatile resource prices” – Prices of energy, metals, food and water fell through most of the 20th century, owing to production progress. The growing, interconnected world reverses this trend, bringing rising demand and strains on supply. Environmental damage and changes come with significant economic costs: Floods and drought devastate agricultural harvests and drive up food prices. Governments may impose carbon taxes or controls on water usage, thus raising production costs. To navigate this uncertainty, companies should increase their energy efficiency, conserve water and take advantage of energy innovations such as “advanced battery technology.”
- Uncertain capital costs – The world’s aging population pushes savings rates down, and the developing world’s need for bricks and mortar drives up the demand for capital. This could lead to one of two scenarios: Capital costs will rise, or central banks may continue to intervene to keep interest rates extraordinarily low. In this uncertain environment, companies should pay close attention to “capital productivity,” through such tactics as “just-in-time delivery processes.” They should consider new sources of capital, such as “sovereign wealth funds” or pension funds.
- Labor market disruptions – As computers grow more sophisticated, they replace not only “clerical workers” but “knowledge workers” as well. By 2025, computers and robots could be doing the work of 215 million more people. At the same time, businesses are reporting talent shortages in IT, finance and engineering. Businesses must consider local talent pools when deciding on corporate locations. They should explore breaking up complex jobs, and peeling off less-technical tasks into new “middle-skill” specialties. And they should take an active role in education, such as forming partnerships with community colleges.
- The rise of new competitors – For decades, corporate giants competed in a “steady, slow-moving game”: Ford versus General Motors; Coca-Cola versus Pepsi; Burger King versus McDonald’s. Now, new competitive threats appear with little warning. TransferWise, a money-transfer start-up in the UK, took just four years to reach $1 billion in transactions, and it offers serious competition to traditional currency exchanges. Companies should monitor the competitive landscape, form “smart partnerships,” enhance their distinctive strengths and innovate. Technology should be at the core of corporate strategy.
The Public Sector Has a Role to Play
Given the shortage of high-skilled workers and the surplus of low-skilled workers, countries around the world must invest in secondary education. They should combat rising inequality through “widely distributed productivity growth” – investing in infrastructure and adopting regulations that support innovation. Nations have chosen different approaches to the size, structure and role of governments. What matters is that all governments become agile enough to respond to change.
Focusing on the associated risks is part of the magnitude of current and upcoming changes, but those who understand these trends and “reset their intuitions accordingly” can shape the future and seize opportunities.[/text_block]
