The McKinsey Quarterly: Ten trends to watch in 2006

[Owen Densmore]

One of my VC friends sent this along:
   http://www.mckinseyquarterly.com/home.aspx (current quarterly)
   http://tinyurl.com/c9dlk (article)

Note that you have to register for a free subscription..like the NY  
Times.  I attach the raw text .. but you'll be missing the "further  
reading" links which may be of interest to you as well.

     -- Owen

Owen Densmore
http://backspaces.net - http://redfish.com - http://friam.org

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:

China and India: The race to growth
Mapping the global capital markets

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:

The demographic deficit: How aging will reduce global wealth
Boosting government productivity

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:

Premium marketing to the masses: An interview with LG Electronics  
India's managing director
New strategies for consumer goods

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:

The next revolution in interactions
The McKinsey Global Survey of Business Executives, July 2005

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:

China's looming talent shortage
Sizing the emerging global labor market

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:

What is the business of business?
The role of regulation in strategy

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:

Preparing for a low-carbon future
What's next for Big Oil?

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:

Strategy in an era of global giants
Loosening up: How process networks unlock the power of specialization

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:

Do you know who your experts are?
Matching people and jobs

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:

The 21st-century organization
Making a market in knowledge

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.