McKinsey recently published an article on the long-term trends that are reshaping the business environment. The article reminds us that the trend is your friend is an old adage that applies to business strategy as well as to investing. The ability to anticipate where your industry is moving and to begin to reposition your company ahead of competitors is one of the most important elements of business strategy. Companies that correctly identify and ride the tailwinds of technology and market trends will generally perform significantly better than companies for whom these same trends become tough headwinds.
But, the full version of the phrase is “The trend is your friend, until the end when it bends.” Identifying long term trends is easier said than done. Major trends involve competing complex forces interacting with each other, making it even more difficult to ascertain where things are heading. And, they will eventually change direction. It can be just as painful to miss an important trend as to stay with the trend once it starts to bend.
The article discusses nine major global forces organized into three distinct mega-trends: global growth shifts, accelerating industry disruption, and a new societal deal. Let’s take a closer look at each of them.
Globalization is at a crossroads. It’s still making progress but also facing powerful headwinds. Traditional globalization metrics like trade and financial flows have slowed down. Cross-border trade has stagnated since 2007 compared to the late 1990s and early 2000s. Global capital flows as a percentage of GDP have dropped precipitously over the past decade, and have not returned to pre-financial-crisis levels.
The US, the UK and much of continental Europe are convulsed by a “more-or-less generalized anger against globalization,” wrote NYU and IESE professor Pankaj Ghemawat in a recent HBR article. Whether we like it or not, “The anger is real, and its possible implications are too threatening for us to simply wait for it to dissipate by itself… And although purely economic countermeasures are important,… they are unlikely to suffice because emotions, not just economics, are involved.”
At the same time, the globalization of digital products and services is surging. “Cross-border data flows are increasing at rates approaching 50 times those of last decade,” notes Mckinsey. “Almost a billion social-networking users have at least one foreign connection, while 2.5 billion people have email accounts, and 200 billion emails are exchanged every day. About 250 million people are currently living outside of their home country, and more than 350 million people are cross-border e-commerce shoppers - expanding opportunities for small and medium-sized enterprises to become micro-multinationals.”
Globalization was never meant to be an unstoppable, monolithic force. Despite our increasingly digital connections, the world is far from homogeneous. Profound differences will continue to exist in local tastes and customs around the world. “As globalization’s complexities have become increasingly evident, the importance of competing with local precision at international scale continues to grow.”
Business opportunities are still considerable for those who understand the changing nature of globalization. Large, emerging markets are still rising. Urbanization is empowering three major billion-person markets, - China, India and Africa, - and a fourth half-billion market, - Southeast Asia. Each of these enormous markets is confront serious internal obstacles, but they have the potential for widespread economic development thanks to poverty reduction, greater educational attainment, new communications and manufacturing technologies, and health-care advances. Digital technologies, and innovative products and services specifically aimed at these markets will play a central role in their development.
With billions rising out of poverty and rapidly growing urban populations we can expect an increased demand for natural resources, - especially food, water and energy, - as well as for all kinds of new consumer products and services. But, meeting these demands and hopefully unleashing an age of prosperity will only be possible in an economy based on sustainable production and consumption patterns.
“Resource-related business opportunities will turn up in unexpected places, and there’s room for a multitude of new products and services,” writes McKinsey. “An example is new carbon-based materials that are lighter, cheaper, and conduct electricity with limited heat loss. They could transform entire industries, including automobiles, aviation, and electronics. Business leaders will have more opportunities to seize the initiative as they stretch their thinking about the changing nature of resource constraints.”
Accelerating Industrial Disruption
The digital technology revolution continues unabated, and in the process, it’s spinning off a series of related revolutions, including the datafication of the economy, - data science, AI, machine learning; and the Internet of Things, - zettabytes (1021) of data generated by 10s of billions of devices. Klaus Schwab, - founder and executive chairman of the World Economic Forum, - wrote about the fusion of technologies across the physical, digital and biological worlds in his recently published The Fourth Industrial Revolution:
“Consider the unlimited possibilities of having billions of people connected by mobile devices, giving rise to unprecedented processing power, storage capabilities and knowledge access. Or think about the staggering confluence of emerging technology breakthroughs, covering wide-ranging fields such as artificial intelligence (AI), robotics, the internet of things (IoT), autonomous vehicles, 3D printing, nanotechnology, biotechnology, materials science, energy storage and quantum computing, to name a few. Many of these innovations are in their infancy, but they are already reaching an inflection point in their development as they build on and amplify each other…”
We’re seeing a true combinatorial-technology explosion across seemingly disparate inventions and disciplines. These radical technology advances are redefining industry boundaries, altering the very definition of what a company does and transforming the terms of competition. “By reducing economic friction, digitization is enabling competition that pressures revenue and profit growth. It also is creating fresh opportunities to improve performance through supply-chain, product, process, and service improvements. Ensuring alignment between a company’s digital and its corporate strategy appears to be one of the factors differentiating winners and losers - a useful reminder that leading today requires tough choices about big, disruptive forces.”
A New Societal Deal
“The biggest opportunity of all - and arguably the biggest need - transcends companies and competition. If private-, public-, and social-sector leaders can cooperate to create a new societal deal, they will forge a brighter future for individuals and for a wide range of institutions.” The report focuses on three key areas where such collaborations are critical:
- Safeguarding society against malevolent actors. “The costs of fighting cyberthreats are rising into the trillions. Meanwhile, rogue states continue to frustrate the global community, and the strains from combating terrorism are reverberating worldwide.”
- Driving middle-class progress. “The rising tide of progress has not lifted all boats equally… Trust has fallen among the threatened middle class… The need for middle-class progress isn’t just a developed-markets issue. As the emerging world’s new consuming class comes to the fore, it is striving for opportunity beyond entry-level roles.”
- Encouraging experimentation to help us address key economic challenges. Examples include the slow economic growth that the world has been stuck on for years; and our changing demographics, in particular, how to support the growing number of retirees without placing a crushing burden on workers.
“Growth shifts. Accelerating disruption. A new societal deal. These are powerful forces that demand thoughtful responses and contain the seeds of extraordinary opportunity. Leaders reaching for these opportunities will need to question their own assumptions and imagine new possibilities. Those who do will compete more effectively; they also will be better able to contribute to broader solutions, and ultimately to a new and more inclusive narrative of progress.”