Managing the age of disruption

Bold predictions based on intuition are rarely a good idea.

Margaret Thatcher, as education secretary in 1973, famously asserted that the United Kingdom would not have a woman prime minister in her lifetime.

IBM’s president, Thomas J. Watson, declared in 1943 that there was “a world market for perhaps five computers”.

And, when movies with sound made their debut in 1927, Warner Brothers’ Harry Warner asked: “Who the hell wants to hear actors talk?”

At a time when four powerful forces are disrupting the global economy, upending most of our assumptions, such pronouncements on the future, shaped by intuitions based on the past, are even more likely to be wrong.

Each of these four “great disruptions” is transformational on its own, and all are amplifying the effects of the others, producing fundamental and unpredictable changes on a scale the world has never seen — and that will prove our intuitions wrong.

The first great disruption is the shift of economic activity to emerging-market cities.

As recently as 2000, 95 per cent of the Fortune Global 500 was headquartered in developed economies. By 2025, nearly half of the Fortune Global 500 companies will be based in emerging economies, with China home to more of them than the United State or Europe.

Cities are at the vanguard of this shift. Nearly half of global GDP growth from 2010 to 2025 will come from 440 emerging-market cities, many of which Western executives may not even know exist.

They are places like Tianjin, a city southeast of Beijing with a GDP that is practically on par with Stockholm’s today — and could equal all of Sweden’s by 2025. 

The second great disruption is the acceleration of technological change. While technology has always been transformative, its impact is now ubiquitous, with digital and mobile technologies being adopted at an unprecedented rate.

It took more than 50 years after the telephone was invented for half of American homes to have one, but only 20 years for cellphones to spread from less than 3 per cent of the world’s population to more than two-thirds.

Facebook had 6 million users in 2006; today, it has 1.4 billion.

The mobile Internet offers the promise of economic progress for billions of emerging-economy citizens at a speed that would otherwise be unimaginable. And it gives entrepreneurial upstarts a greater chance of competing with established firms.

But technological change also carries risks, especially for workers who lose their jobs to automation or lack the skills to work in higher-tech fields.

The third disruption is demographic.

For the first time in centuries, our population could plateau in most of the world. Indeed, population ageing, which has been evident in the developed world for some time, is now spreading to China and soon will reach Latin America.

Thirty years ago, only a few countries, home to a small share of the global population, had fertility rates substantially below the replacement rate of 2.1 children per woman.

In 2013, about 60 per cent of the world’s population lived in countries with sub-replacement fertility rates.

As the elderly increasingly outnumber working-age people, pressure is building on the labour force, and tax revenues, needed to service government debt and fund public services and pension systems, are diminishing.

The final disruption is the world’s increasing interconnectedness, with goods, capital, people and information flowing ever more easily across borders.

Not long ago, international links existed primarily among major trading hubs in Europe and North America; now, the web is intricate and sprawling.

Capital flows among emerging economies have doubled in just 10 years, and more than 1 billion people crossed borders in 2009, over five times the figure in 1980.

The resulting challenges — a host of new and unexpected competitors, volatility stemming from faraway places, and the disappearance of local jobs — are already overwhelming workers and companies.

Of course, this interconnectedness also offers important opportunities; but an implicit bias towards the familiar is impeding the ability of workers, firms and even governments to take full advantage of them.

This is especially true for companies. 

According to McKinsey research, from 1990 to 2005, US companies almost always allocated resources on the basis of past, rather than future, opportunities. Firms that succumb to such inertia will probably sink, rather than swim, in the new global economy.

Some firms, however, will adapt, taking advantage of unprecedented opportunities to remain agile. Instead of, say, building a new headquarters, renting a storefront or purchasing a restaurant — traditional requirements that demanded large amounts of up-front capital — they can open a satellite sales office, create an online store or launch a food truck.

Flexibility and responsiveness will enable such firms to thrive.

The pace and scale of the current economic transformation is undoubtedly daunting.

But there is plenty of reason for optimism. Inequality may be on the rise within countries, but it has dropped dramatically among them.

Nearly a billion people were lifted out of extreme poverty from 1990 to 2010; another 3 billion will join the global middle class in the next two decades.

In 1930, at the height of the Great Depression, John Maynard Keynes declared that the standard of living in “progressive economies” would increase 4-8 times over the subsequent 100 years.

His prediction, which was regarded as hopelessly Pollyannaish at the time, has turned out to be correct, with the improvement likely to be at the top of his projected range.

Keynes, unlike many of his contemporaries, recognised the forces at work in the economy, adjusted his thinking and, crucially, was not afraid to be optimistic.

We must do the same.

The writers are directors of the McKinsey Global Institute and co-authors of “No Ordinary Disruption: The Four Global Forces Breaking All the Trends”. ©Project Syndicate, 2015. www.project-syndicate.org