Feature Article

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
eb e!clusive, "anuary #$$%
Those who say that business success is all about e!ecution are wrong. The right product
mar&ets, technology, and geography are critical components of long'term economic
performance. (ad industries usually trump good management, however) in sectors such
as ban&ing, telecommunications, and technology, almost two'thirds of the organic growth
of listed estern companies can be attributed to being in the right mar&ets and
geographies. *ompanies 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.
hat are the currents that will ma&e the world of #$,- a very different place to do
business from the world of today. /redicting short'term changes or shoc&s is often a
fool0s errand. (ut 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 too& more than 1$ years to become an overnight phenomenon.
Macroeconomic trends
e would highlight ten trends that will change the business landscape. 2irst, we have
identified three macroeconomic trends that will deeply transform the underlying global
economy.
,. *enters of economic activity will shift profoundly, not 3ust globally, but also
regionally. 4s a conse5uence of economic liberalization, technological advances, capital
mar&et developments, and demographic shifts, the world has embar&ed on a massive
realignment of economic activity. 4lthough there will undoubtedly be shoc&s and
setbac&s, this realignment will persist. Today, 4sia 6e!cluding "apan7 accounts for ,1
percent of world 8D/, while estern Europe accounts for more than 1$ percent. ithin
the ne!t #$ years the two will nearly converge. Some industries and functions9
manufacturing and IT services, for e!ample9will shift even more dramatically. The
story is not simply the march to 4sia. Shifts within regions are as significant as those
occurring across regions. The :nited States will still account for the largest share of
absolute economic growth in the ne!t two decades.
Further reading)
*hina and India) The race to growth
Mapping the global capital mar&ets
#. /ublic'sector activities will balloon, ma&ing 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. ithout clear productivity gains, the
pension and health care burden will drive ta!es to stifling proportions.
;or is the problem confined to the developed economies. Many emerging'mar&et
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 li&ely become pervasive
in the provision of social services in both the developed and the developing worlds.
Further reading)
The demographic deficit) <ow aging will reduce global wealth
(oosting government productivity
1. The consumer landscape will change and e!pand significantly. 4lmost a billion new
consumers will enter the global mar&etplace in the ne!t decade as economic growth in
emerging mar&ets pushes them beyond the threshold level of =-,$$$ in annual household
income9a point when people generally begin to spend on discretionary goods. 2rom
now to #$,-, the consumer0s spending power in emerging economies will increase from
=> trillion to more than =? trillion9nearly the current spending power of estern
Europe.
Shifts within consumer segments in developed economies will also be profound.
/opulations are not only aging, of course, but changing in other ways too) for e!ample,
by #$,- the <ispanic population in the :nited States will have spending power
e5uivalent to that of %$ percent of all *hinese consumers. 4nd consumers, wherever they
live, will increasingly have information about and access to the same products and
brands.
Further reading)
/remium mar&eting to the masses) 4n interview with @8 Electronics India0s
managing director
;ew strategies for consumer goods
Social and environmental trends
;e!t, we have identified four social and environmental trends. 4lthough they are less
predictable and their impact on the business world is less certain, they will fundamentally
change how we live and wor&.
>. Technological connectivity will transform the way people live and interact. The
technology revolution has been 3ust that. Aet we are at the early, not mature, stage of this
revolution. Individuals, public sectors, and businesses are learning how to ma&e the best
use of IT in designing processes and in developing and accessing &nowledge. ;ew
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. e
wor& not 3ust globally but also instantaneously. e are forming communities and
relationships in new ways 6indeed, ,# percent of :S newlyweds last year met online7.
More than two billion people now use cell phones. e send nine trillion e'mails a year.
e do a billion 8oogle searches a day, more than half in languages other than English.
2or perhaps the first time in history, geography is not the primary constraint on the limits
of social and economic organization.
Further reading)
The ne!t revolution in interactions
The McBinsey 8lobal Survey of (usiness E!ecutives, "uly #$$-
-. The battlefield for talent will shift. Cngoing shifts in labor and talent will be far more
profound than the widely observed migration of 3obs to low'wage countries. The shift to
&nowledge'intensive industries highlights the importance and scarcity of well'trained
talent. The increasing integration of global labor mar&ets, however, is opening up vast
new talent sources. The 11 million university'educated young professionals in developing
countries is more than double the number in developed ones. 2or many companies and
governments, global labor and talent strategies will become as important as global
sourcing and manufacturing strategies.
Further reading)
*hina0s looming talent shortage
Sizing the emerging global labor mar&et
%. The role and behavior of big business will come under increasingly sharp scrutiny. 4s
businesses e!pand their global reach, and as the economic demands on the environment
intensify, the level of societal suspicion about big business is li&ely to increase. The
tenets of current global business ideology9for e!ample, shareholder value, free trade,
intellectual'property rights, and profit repatriation9are not understood, let alone
accepted, in many parts of the world. Scandals and environmental mishaps seem as
inevitable as the li&elihood that these incidents will be subse5uently blown out of
proportion, thereby fueling resentment and creating a political and regulatory bac&lash.
This trend is not 3ust of the past - years but of the past #-$ years. The increasing pace and
e!tent of global business, and the emergence of truly giant global corporations, will
e!acerbate the pressures over the ne!t ,$ years.
(usiness, particularly big business, will never be loved. It can, however, be more
appreciated. (usiness leaders need to argue and demonstrate more forcefully the
intellectual, social, and economic case for business in society and the massive
contributions business ma&es to social welfare.
Further reading)
hat is the business of business.
The role of regulation in strategy
D. Demand for natural resources will grow, as will the strain on the environment. 4s
economic growth accelerates9particularly in emerging mar&ets9we are using natural
resources at unprecedented rates. Cil demand is pro3ected to grow by -$ percent in the
ne!t two decades, and without large new discoveries or radical innovations supply is
unli&ely to &eep up. e are seeing similar surges in demand across a broad range of
commodities. In *hina, for e!ample, demand for copper, steel, and aluminum has nearly
tripled in the past decade.
The world0s resources are increasingly constrained. ater shortages will be the &ey
constraint to growth in many countries. 4nd one of our scarcest natural resources9the
atmosphere9will re5uire dramatic shifts in human behavior to &eep 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)
/reparing for a low'carbon future
hat0s ne!t for (ig Cil.
Business and industry trends
2inally, we have identified a third set of trends) business and industry trends, which are
driving change at the company level.
E. ;ew global industry structures are emerging. In response to changing mar&et
regulation and the advent of new technologies, nontraditional business models are
flourishing, often coe!isting in the same mar&et and sector space.
In many industries, a barbell'li&e 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 interlin&ed FecosystemsF of
suppliers, producers, and customers emerge. Even basic structural assumptions are being
upended) for e!ample, the emergence of robust private e5uity financing is changing
corporate ownership, life cycles, and performance e!pectations. inning companies,
using efficiencies gained by new structural possibilities, will capitalize on these
transformations.
Further reading)
Strategy in an era of global giants
@oosening up) <ow process networ&s unloc& the power of specialization
?. Management will go from art to science. (igger, more comple! companies demand
new tools to run and manage them. Indeed, improved technology and statistical'control
tools have given rise to new management approaches that ma&e even mega'institutions
viable.
@ong gone is the day of the Fgut instinctF management style. Today0s business leaders are
adopting algorithmic decision'ma&ing techni5ues and using highly sophisticated software
to run their organizations. Scientific management is moving from a s&ill that creates
competitive advantage to an ante that gives companies the right to play the game.
Further reading)
Do you &now who your e!perts are.
Matching people and 3obs
,$. :bi5uitous access to information is changing the economics of &nowledge.
Bnowledge is increasingly available and, at the same time, increasingly specialized. The
most obvious manifestation of this trend is the rise of search engines 6such as 8oogle7,
which ma&e an almost infinite amount of information available instantaneously. 4ccess
to &nowledge has become almost universal. Aet the transformation is much more
profound than simply broad access.
;ew models of &nowledge production, access, distribution, and ownership are emerging.
e are seeing the rise of open'source approaches to &nowledge development as
communities, not individuals, become responsible for innovations. Bnowledge
production itself is growing) worldwide patent applications, for e!ample, rose from ,??$
to #$$> at a rate of #$ percent annually. *ompanies will need to learn how to leverage
this new &nowledge universe9or ris& drowning in a flood of too much information.
Further reading)
The #,st'century organization
Ma&ing a mar&et in &nowledge
*ompanies need to understand the implications of these trends alongside customer needs
and competitive developments. E!ecutives who align their company0s strategy with these
factors will be the best placed to succeed. Geflecting on these trends will be time well
spent.
About the Authors
Ian Davis is worldwide managing director of McBinsey H *ompany and Elizabeth
Stehenson is a consultant in McBinsey0s San 2rancisco office. 4 shorter version of this
article was published in the Financial Times on "anuary ,1, #$$%.
Some facts and predictions to make you think
Total world cross-border trade as a percentage of global GDP
1990: 18%
2015 (estimated): 30%
Number of regional trade agreements
1990: 50
2005: 250
Change in Germany's population over the age of 7 from !"" to !"#: 33%
$ncrease in ta% burden needed to maintain current benefit levels for Germany's future generation: 90%
Change in &apan's population over the age of 7 from !"" to !"#: 36%
Change in &apan's population under the age of from !"" to !"#:
-13%
$ncrease in ta% burden needed to maintain current benefit levels for &apan's future generation: 175%
Computational capability of an $ntel processor' as measured in instructions per second
1971: 60,000
2005: 10,800,000,000
(ultiple by which e-mail traffic has grown from #))7 to !"": 215
Number of *+ ta% returns prepared in $ndia
2003: 25,000
2005: 00,000
Combined mar,et cap of top #" mega-institutions
1994: ! tri""ion
2004: !11 tri""ion
Total capital under management by private e-uity firms in !"". in the *nited +tates and /urope: !1 tri""ion
(ar,et cap of the N0+/ in !"".: !11 tri""ion
Growth rate of the total wealth controlled by millionaires in China from #)12 to !""#: 600%
/stimated number of Chinese households to achieve /uropean income levels by !"!" (assuming real income
grows at 8 percent annually): 100 mi""ion
Total number of wor,ers in China: 750 mi""ion
Number employed in China's state-owned companies: 375 mi""ion
0ear when the income gap in the *nited +tates between the wealthiest 3 and the bottom #"3 was the widest
ever recorded: 200
Part of national GDP spent on the public sector in the *nited 4ingdom in !""5: 20%
*4 public-sector spending as a ratio of GDP when transfer payments 6for e%ample' pensions7 are included: 0%
Proportion of 8atin 9mericans who would prefer a dictator to democracy if he improved their living conditions: 50%
(uslims as a percentage of the global population
2000: 19%
2025 (estimated): 30%
Number of ma:or violent conflicts
1991: 58
2005: 22
Number of coal-fired power plants China plans to build by !"#!: 562
/stimated year China will overta,e the *nited +tates as the number-one carbon emitter: 2025
/stimated year C;! levels will hit "" parts per million: 2050
0ears since C;! levels last hit "" parts per million: 50 mi""ion
9verage years it ta,es a C;! molecule' once produced' to degrade: 100
Global C/;s who thin, overregulation is a threat to growth: 61%
Probability that a company in an industry's top revenue -uartile will not be there in five years: 30 percent
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