Global forces: An introduction

Five crucibles of change will restructure the world economy for the foreseeable future. Companies that understand them will stand the best chance of shaping it. JUNE 2010 Peter Bisson, Elizabeth Stephenson, and S. Patrick Viguerie

In This Article Video: Why trends matter I never think of the future, Albert Einstein once observed. It comes soon enough. Most business managers, confronted with the global forces shaping the business landscape, also assume that their ability to sculpt the future is minimal. They are right that they can do little to change a demographic trend or a widespread shift in consumer consciousness. But they can react to such forces or, even better, anticipate them to their own advantage. Above all, they ignore these forces at their peril. Business history is littered with examples of companies that missed important trends; think digitization and the music industry. Yet this history also shines with examples of companies that spied the forces changing the global business scene and used them to protect or contribute to the bottom line. Companies ranging from insurers to energy producers did precisely that in embracing the growing social concern about climate change. So did Wal-Mart Stores in applying technology to automate inventory management and reduce costs dramatically for the company and its suppliers. The fact is, trends matter. Systematically spotting and acting on emerging ones helps companies to capture market opportunities, test risks, and spur innovation. Today, when the biggest business challenge is responding to a world in which the frame and basis of competition are always changing, any effort to set corporate strategy must consider more than traditional performance measures, such as a companys core capabilities and the structure of the industry in which it competes. Managers must also gain an understanding of deep external forces and the narrower trends they can unleash. In our experience, if senior executives wait for the full impact of global forces to manifest themselves at an industry and company level, they will have waited too long.

Why trends matter

McKinsey director Peter Bisson explains the value of tracking global forces and how to build them into corporate strategy.

Why is studying trends so important? When we look at these trends, a lot of people will look at them and think, Well, these are very familiar. And because theyre trends, they should be familiar. What we think is important is to understand how the trends come together to drive the enormous need for innovation. We look at the trends as basically shaping the contours of the operating environment for corporationsand the scale of these trends, even if theyre not new, is such that even the largest corporations need to adapt in order to be successful going forward. If we look at what we would describe as a global grid, were basically looking atnow approachingfive billion people harnessed into a network of global telecommunications. Everyone has cell phones. And then you look at how these people communicate with each other and how it shapes their purchase preferences. What is emerging as the most powerful determinate of purchase decisions is not what the marketers are telling you through the advertising and through the carefully paid sponsors, but what people are saying to each other as they proceed. Were seeing many, many companies basically harnessing that visibilitythe transparency into what people are doing, how theyre using a productto help them develop new designs and develop products that better meet their needs. How should an organization act on these trends? From a business-planning purpose, we think were talking about corporate strategy and positioning in the five- to ten-year time frame. So this is most appropriate for a corporation that has the luxury and the foresight to be able to take a five- or ten-year year viewand we think it is quite critical for positioning a corporation for the long term, particularly large corporations where any fundamental repositioning of the portfolio is going to be a long and difficult exercise. The reason we think its important to look at these forces now, and really at all times, is because they happen so slowly that its easy for them to slip to the bottom of the inbox. Each day, each quarter, there will be a more pressing, immediate concern. But you wake up in five years time or ten years time suddenly finding yourself facing competition that is very well entrenched. And so on any given day, this didnt make the top of the list, but it was tenth on the list every day for a decade. By then it becomes, perhaps, a force thats unstoppable. Which of the five trends poses the greatest challenge? The crucible that I think the greatest uncertainty surrounds is the productivity imperative in the West. This is an area where we look and say, If the West is going to grow, were not going to have more labor hours to put to work. So all of our growthlargely all of our growthis going to have to come from productivity improvements. And thats a pretty big step change.

So if you take the US in the 1970s, some 80 percent of our growth came from adding labor, 20 percent from productivity. As we look forward to the next decade, we need to get 70 percent from productivity, 30 percent from labor. Europe needs to get 100 percent from productivity. Japan needs to get 160 percent to boost growth and productivity. It is easy to mathematically show that productivity is what its going to take to get growth and to identify the levers that it would take to achieve that. Were not nearly as confident that those levers will be pulled and adopted at the scale to drive that growth. And if its not the case, well have to get used to a level of growth that is lower than we anticipate. Which trend carries the greatest risk? The area of greatest risk really would come out of what we would describe as the market state. The state needs to respond to the many, many stresses induced by globalization and technology. And this is a difficult challenge. It requires collaboration between government and business to address, because we cant simply hope that government goes away, because its picking up an awful lot of the fallout of a revolution taking place with respect to globalization. You take literally billions of people and integrate them into the global economy, and what shapes their life experience is now totally different. Because its not the weather or what happened in my local village. Whether I keep my job or not depends on the whims of a supply chain officer who decided to move the textile production from China to Vietnam. Thats very different. Now it feels like someone did it to me as opposed to it being an act of God. And youve literally integrated billions of people into that system very, very rapidly. How can you integrate this longer-term thinking into the planning process? Pragmatically, to force an organization to think about these long-term trends can be a bit of a challenge. So many of the processes and incentives really keep the line executives quite focused and quite near-term in their thinking. A first step is to just sensitize people to the sense that we have to recognize that these trends are taking place and our business plans should be reflective of the fact that they are taking place. This might take the form of adaptations to the corporate strategic-planning process. It could take place in the form of the questions that the CEO asks. They may not have to go into the formal planning process, but more important is continuously saying: Will we get enough productivity growth in Europe to be successful? How will we need to adapt to the changing nature of the population and the demands theyre placing? Will we be able to compete with a competitor whose center of business is value-oriented products in Asia, which theyre beginning to export to the US? And to just pose those questions in the regular business dialogue is to try to force an adaptation and reaction. Because these trends dont go away, we feel that you want to put the line executives to this as part of the day-in, day-out decision making, as opposed to isolating thinking about

it as one might typically do to a simple, OK, well, well spend ten minutes at the beginning of a corporate-strategy processsaying there are big things happening in the world, on, and then ending up too tightly focused. Wed rather see processes take moving place the salient issues for each corporation are kept front and center, basically where forcing everyone to take the five-year or ten-year view in addition to, How am I going to succeed in the next one or two? Copyright 2010 McKinsey & Company. All rights reserved.