The Case For Management Intuition For The Next 50 Years

Intuition (Quick And Ready Insight… Webster) forms over time, says McKinsey in a new report. In 1964 a new management environment was just beginning to take shape. IBM announced the System/360 mainframe, a product with breakthrough flexibility and capability. Then, 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. And, finally, 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, says the report. 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.

In the years ahead, says the report, 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 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.

This article, bringing together years of research by the McKinsey Global Institute, and McKinsey’s Strategy Practice, paints a picture of how the road ahead 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.

A look at emerging-markets growth, disruptive technology, and aging populations, is a useful reminder of the magnitude of change under way.

Emerging markets contribute more to global economic growth than developed ones do. 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% of the companies on Fortune’s Global 500 list of major international players will hail from emerging markets—versus just 5% in the year 2000.

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 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.

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; 95% of them are small and medium-sized cities that many executives haven’t heard of and couldn’t point to on a map.

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.

The continuation of Moore’s law means that the next 18 months 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: the report shows an estimate that the world added roughly 5 exaflops of computing capacity in 2008 (at a cost of about $800 billion), more than 20 in 2012 (to just under $1 trillion), and is headed for roughly 40 trillion this year

These extraordinary advances in capacity, power, and speed are fueling the rise of artificial intelligence, reshaping global manufacturing, and turbo-charging advances in connectivity.

For example, less than 3% of the world’s population had a mobile phone and less than 1% 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
  • 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

Simultaneously, fertility is falling and the world’s population is graying dramatically, says the report. 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% of all people lived in such countries, says the report. 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). 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.

Declaring an inflection point, particularly when the underlying forces at work have been operating for some time, is a major claim. What justifies it, says the report, 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.
  • As emerging markets get richer, it is 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 this happens, trade between emerging markets, already on the rise, should continue growing in importance.

On the supply side

  • Developed markets are 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
  • 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.
  • Digitization and mobile technologies should provide a platform for product and service innovation, seen in Africa, where 15% of transactions are carried out via mobile banking (versus 5% in developed markets)

It will be increasingly difficult for senior leaders to establish or implement effective strategies, says the report, 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.
  • 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. The research suggests that as many as 140 million full-time knowledge workers could be displaced globally by smart machines, and, at the same time, aging workforces are becoming commonplace and labor shortages are emerging for pockets of technical expertise.
  • 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.
  • Capturing 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).

The report concludes by noting that 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.

  • 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.
  • Between 1990 and 2010, US companies almost always allocated resources on the basis of past, rather than future, opportunities.
  • The most active companies in resource allocation achieved an average of 30% higher total returns to shareholders annually compared with the least active.
  • 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.
  • 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.

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