Ten trends to watch in 2006
Macroeconomic
factors, environmental and social issues, and business and industry
developments will all profoundly shape the corporate landscape in the
coming years.
Ian Davis and Elizabeth Stephenson
Web exclusive, January 2006
Those who say that business success is all
about execution are wrong. The right product markets, technology, and
geography are critical components of long-term economic performance.
Bad industries usually trump good management, however: in sectors such
as banking, telecommunications, and technology, almost two-thirds of
the organic growth of listed Western companies can be attributed to
being in the right markets and geographies. Companies that ride the
currents succeed; those that swim against them usually struggle.
Identifying these currents and developing strategies to navigate them
are vital to corporate success.
What are the currents that will make the world of 2015 a very different
place to do business from the world of today? Predicting short-term
changes or shocks is often a fool's errand. But forecasting long-term
directional change is possible by identifying trends through an
analysis of deep history rather than of the shallow past. Even the
Internet took more than 30 years to become an overnight phenomenon.
Macroeconomic trends
We would highlight ten trends that will change the business
landscape. First, we have identified three macroeconomic trends that
will deeply transform the underlying global economy.
1. Centers of economic activity will shift profoundly, not just globally, but also regionally.
As a consequence of economic liberalization, technological advances,
capital market developments, and demographic shifts, the world has
embarked on a massive realignment of economic activity. Although there
will undoubtedly be shocks and setbacks, this realignment will persist.
Today, Asia (excluding Japan) accounts for 13 percent of world GDP,
while Western Europe accounts for more than 30 percent. Within the next
20 years the two will nearly converge. Some industries and
functions—manufacturing and IT services, for example—will shift even
more dramatically. The story is not simply the march to Asia. Shifts
within regions are as significant as those occurring across regions.
The United States will still account for the largest share of absolute
economic growth in the next two decades.
Further reading:
Making China your second home market: An interview with the CEO of Danfoss
The new Silk Road: Opportunities for Asia and the Gulf
2. Public-sector activities will balloon, making productivity gains essential.
The unprecedented aging of populations across the developed world will
call for new levels of efficiency and creativity from the public
sector. Without clear productivity gains, the pension and health care
burden will drive taxes to stifling proportions.
Nor is the problem confined to the developed economies. Many
emerging-market governments will have to decide what level of social
services to provide to citizens who increasingly demand state-provided
protections such as health care and retirement security. The adoption
of proven private-sector approaches will likely become pervasive in the
provision of social services in both the developed and the developing
worlds.
Further reading:
Applying lean production to the public sector
Meeting the demand for improved public services
3. The consumer landscape will change and expand significantly.
Almost a billion new consumers will enter the global marketplace in the
next decade as economic growth in emerging markets pushes them beyond
the threshold level of $5,000 in annual household income—a point when
people generally begin to spend on discretionary goods. From now to
2015, the consumer's spending power in emerging economies will increase
from $4 trillion to more than $9 trillion—nearly the current spending
power of Western Europe.
Shifts within consumer segments in
developed economies will also be profound. Populations are not only
aging, of course, but changing in other ways too: for example, by 2015
the Hispanic population in the United States will have spending power
equivalent to that of 60 percent of all Chinese consumers. And
consumers, wherever they live, will increasingly have information about
and access to the same products and brands.
Further reading:
Marketing to China's hinterland
A grassroots approach to emerging-market consumers
Social and environmental trends
Next, we have identified four social and environmental trends.
Although they are less predictable and their impact on the business
world is less certain, they will fundamentally change how we live and
work.
4. Technological connectivity will transform the way people live and interact.
The technology revolution has been just that. Yet we are at the early,
not mature, stage of this revolution. Individuals, public sectors, and
businesses are learning how to make the best use of IT in designing
processes and in developing and accessing knowledge. New developments
in fields such as biotechnology, laser technology, and nanotechnology
are moving well beyond the realm of products and services.
More transformational than technology
itself is the shift in behavior that it enables. We work not just
globally but also instantaneously. We are forming communities and
relationships in new ways (indeed, 12 percent of US newlyweds last year
met online). More than two billion people now use cell phones. We send
nine trillion e-mails a year. We do a billion Google searches a day,
more than half in languages other than English. For perhaps the first
time in history, geography is not the primary constraint on the limits
of social and economic organization.
Further reading:
Mapping the value of employee collaboration
How IT can drive business process reorganization: An interview with the CIO of Volkswagen
5. The battlefield for talent will shift.
Ongoing shifts in labor and talent will be far more profound than the
widely observed migration of jobs to low-wage countries. The shift to
knowledge-intensive industries highlights the importance and scarcity
of well-trained talent. The increasing integration of global labor
markets, however, is opening up vast new talent sources. The 33 million
university-educated young professionals in developing countries is more
than double the number in developed ones. For many companies and
governments, global labor and talent strategies will become as
important as global sourcing and manufacturing strategies.
Further reading:
Making a market in talent
The people problem in talent management
6. The role and behavior of big business will come under increasingly sharp scrutiny.
As businesses expand their global reach, and as the economic demands on
the environment intensify, the level of societal suspicion about big
business is likely to increase. The tenets of current global business
ideology—for example, shareholder value, free trade,
intellectual-property rights, and profit repatriation—are not
understood, let alone accepted, in many parts of the world. Scandals
and environmental mishaps seem as inevitable as the likelihood that
these incidents will be subsequently blown out of proportion, thereby
fueling resentment and creating a political and regulatory backlash.
This trend is not just of the past 5 years but of the past 250 years.
The increasing pace and extent of global business, and the emergence of
truly giant global corporations, will exacerbate the pressures over the
next 10 years.
Business, particularly big business, will never be loved. It can,
however, be more appreciated. Business leaders need to argue and
demonstrate more forcefully the intellectual, social, and economic case
for business in society and the massive contributions business makes to
social welfare.
Further reading:
The McKinsey Global Survey of Business Executives: Business and Society
One business's commitment to society: An interview with the president of the Novartis Foundation for Sustainable Development
7. Demand for natural resources will grow, as will the strain on the environment.
As economic growth accelerates—particularly in emerging markets—we are
using natural resources at unprecedented rates. Oil demand is projected
to grow by 50 percent in the next two decades, and without large new
discoveries or radical innovations supply is unlikely to keep up. We
are seeing similar surges in demand across a broad range of
commodities. In China, for example, demand for copper, steel, and
aluminum has nearly tripled in the past decade.
The world's resources are increasingly
constrained. Water shortages will be the key constraint to growth in
many countries. And one of our scarcest natural resources—the
atmosphere—will require dramatic shifts in human behavior to keep it
from being depleted further. Innovation in technology, regulation, and
the use of resources will be central to creating a world that can both
drive robust economic growth and sustain environmental demands.
Further reading:
Meeting China's energy needs through liberalization
Europe and Russia: Charting an energy alliance
Business and industry trends
Finally, we have identified a third set of trends: business and industry trends, which are driving change at the company level.
8. New global industry structures are emerging.
In response to changing market regulation and the advent of new
technologies, nontraditional business models are flourishing, often
coexisting in the same market and sector space.
In many industries, a barbell-like structure is appearing, with a few
giants on top, a narrow middle, and then a flourish of smaller,
fast-moving players on the bottom. Similarly, corporate borders are
becoming blurrier as interlinked "ecosystems" of suppliers, producers,
and customers emerge. Even basic structural assumptions are being
upended: for example, the emergence of robust private equity financing
is changing corporate ownership, life cycles, and performance
expectations. Winning companies, using efficiencies gained by new
structural possibilities, will capitalize on these transformations.
Further reading:
Creating value: The debate over public vs. private ownership
Creation nets: Getting the most from open innovation
9. Management will go from art to science.
Bigger, more complex companies demand new tools to run and manage them.
Indeed, improved technology and statistical-control tools have given
rise to new management approaches that make even mega-institutions
viable.
Long gone is the day of the "gut instinct" management style. Today's
business leaders are adopting algorithmic decision-making techniques
and using highly sophisticated software to run their organizations.
Scientific management is moving from a skill that creates competitive
advantage to an ante that gives companies the right to play the game.
Further reading:
Measuring performance in services
The link between management and productivity
10. Ubiquitous access to information is changing the economics of knowledge. Knowledge
is increasingly available and, at the same time, increasingly
specialized. The most obvious manifestation of this trend is the rise
of search engines (such as Google), which make an almost infinite
amount of information available instantaneously. Access to knowledge
has become almost universal. Yet the transformation is much more
profound than simply broad access.
New models of knowledge production,
access, distribution, and ownership are emerging. We are seeing the
rise of open-source approaches to knowledge development as communities,
not individuals, become responsible for innovations. Knowledge
production itself is growing: worldwide patent applications, for
example, rose from 1990 to 2004 at a rate of 20 percent annually.
Companies will need to learn how to leverage this new knowledge
universe—or risk drowning in a flood of too much information.
Further reading:
Competitive advantage from better interactions
Capitalizing on customer insights
Companies need to understand the implications of
these trends alongside customer needs and competitive developments.
Executives who align their company's strategy with these factors will
be the best placed to succeed. Reflecting on these trends will be time
well spent. 
About the Authors
Ian Davis is worldwide managing director of McKinsey & Company and Elizabeth Stephenson is a consultant in McKinsey's San Francisco office. A shorter version of this article was published in the Financial Times on January 13, 2006.
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