Global Megatrends and Implications for Leaders

Cass Business School, City University London

Originally published in the November 2015 issue

What I want to do for the next 30 or 40 minutes or so is just give a bit of a tour of what we think is going on in the world as we look ahead, and that sets the context for what type of leadership skills we think will be needed as we go ahead.  

I have to say, especially for those that are just starting their graduate education, I’m particularly jealous because I think you’re going to be leading in some of the most interesting times in history.

I want to start with this context and why we think this period of time, the next 15 to 20 years, is historic from a human point of view.

There are going to be a lot of challenges, as when we saw the rise of China, the fall of the Roman Empire, the Renaissance and the Industrial Revolution. I don’t think we’re going to be living for another 100 years, so you can’t tell whether I’m right or wrong, but that’s my attempt right now.

There are really four forces that we think are making this period unique from an historic point of view.  One is what we call the re-rise of Asia and the rise of Africa. This is going to have a massive economic power shift.
We’re in the middle of it now, but it’s going to continue to move and it’s going to change all organisations, not just businesses, but also if you’re the Catholic Church or you’re the Anglican Church or you’re a religious organisation, whatever it is, you’re going to have to think about where the footprint is going to be – it’s relevant, and it’s shifting very quickly.

The second is the power of disruptive technologies, and we would argue that we’re in the very early stage of a multiple stage technological revolution. I think it’s very difficult to predict beyond ten years what it might look like, but just given what we see today, that force in itself is going to be disrupting all of us.

When I say disrupt, I don’t mean thatin a negative sense; I mean in a positive sense as well. We are going to be the most aged we’ve ever been as humans. Although there are parts of the world that will be very young, for the bulk of the world we’re going to be older. Older people cost a lot of money. Soon there are going to be 400 million people over the age of 80. The biggest impact, I think, will be on labour productivity and unless we change pension ages or retirement ages, we’re going to see a huge shift in terms of productivity.

And then the world is integrating. Despite the geopolitics that we’ve seen rise significantly in the last five years, we are wiring ourselves tighter and tighter, particularly on the data side of things and in terms of people flows. We think that that’s going to continue. So those are the four forces and I’m just going to spend a bit of time flashing through each one, particularly the first couple.

One way that we try and look at the significance of the re-rise or the rise of the emerging markets is from the year zero where it was somewhere north of Afghanistan or in the Afghanistan area. That’s where the world was balanced. There was a very big Chinese economy, Indian economy. In Europe there was quite a lot of activity in the Mediterranean, but not much in terms of economic significance going on west of that.

Over a period of 2,000 years that centre moved to Iceland. 1950’s Iceland would be where you sort of balance it. It’s a fact that we’re going to go back to Afghanistan, or even further east of that, and the speed with which we’re going back is significant. It took 2,000 years to go to Iceland. It’s going to take us about 75 years to go back. So, it’s not only the weight. It’s the speed with which it’s moving which we haven't seen before.

The biggest driver of that is urbanisation and if there’s only one number that I would want you to remember maybe from all the numbers I’m going to throw at you here is this 2.2 billion new, middle class consumers over the next 15 years. That’s what we’re going to see coming into the system.

The vast bulk of these consumers are in the Asia-Pacific region but we also have Africa, and that’s urbanising fast. I think institutions that do not have diversity will bear a cost because this is the group that you’re going to want to be interacting with over time.

If you’ve been in China, you will have seen this on a regular basis, an annual basis, no matter what the context. I was there during SARS; you still had 18 million people moving from rural areas to cities. This is despite the Communist Party saying we don’t want people moving from rural areas to cities.

By the way, China’s only 54% urbanised. In the United States it’s 70% urbanised; Russia is at 80%. The OECD average is about 70%. You can see there is a direct linkage between urbanisation and GDP per capita.  

This is what generates the middle class. The middle class is not like the UK or American or Canadian or Australian middle class in terms of its disposable income, but the middle class here have between $6,000 and $10,000 of disposable income a year. That’s when you can start buying refrigerators, scooters, cell phones; there’s a lot that actually shifts, so it’s not a poor middle class.

One of my favourite pictures is of Pudong in Shanghai, which my American friends call “Pu-Jersey”, sort of ‘across the river’. As late as 1995 there were onion fields and beans that were being grown there. Now it’s just a radically different place, and that’s happening in 100 cities in China, let alone what we’re now seeing happening in India, Indonesia, even Bangladesh, as this urbanisation is occurring.

Another region that I think we pay far too little attention to is Africa. We’re taught that if you look at the world, Greenland looks bigger than Africa. That was always my mental picture; that Greenland’s this massive place. When you actually look at Africa properly, when you look at what you can put inside that continent, you get a sense of the significance of that place. You can put in the US, Western Europe, China and India and have lots of white space left in that continent.

And it’s not just the resources. It is the people we’re going to see; that is the youngest population, from a continental point of view, on the planet. We’re going to see another billion people that are going to come into the system over the next 40 years in that continent. So I think we need to spend more time there.

As a result of that, we are already seeing a far higher proportion of the most significant companies in the world are coming from the emerging markets. So the players that matter are not the Anglo-Saxon players, the European players, the German industrialists and so forth. We’re going to have almost half coming from just Asia alone and those companies exist now. We know who they are, we can see them, and a lot of them are private. A lot of them are family-owned, but they’re growing at significant rates.

So that’s the first force, just this power shift from the West to the East. I don’t think many organisations, McKinsey included, are moving fast enough in terms of what this means for their leadership profile. If you think about the top 100 people in the organisation, what proportion of them come from that part of the world.

If you think about your own experience as a leader, what is your network like, what is your experience like? Obviously you’re going to be able to build relationships, but I would also think about spending some serious time in these parts of the world to understand how they work and how they operate.

Back in 2010, I was very much into the economic power shift as being the big trend. In the last couple of years I’ve decided the technology shift is the more powerful of the four trends – and the reason is not only the range of technologies but the ones that are going to be most disruptive.  

We know about the mobile internet. We saw what happened on Singles Day in China, the scale of what can happen on a system. If you want to understand how the mobile internet works, it is not the United States or Silicon Valley. It’s what’s happening in China, in India, even Saudi Arabia. The most intensive Twitter social media country in the world, it maybe surprise you, is Saudi Arabia. The average American uses one gigabyte per month. The average Saudi does three gigabytes a month. That’s partly because if you want to watch a movie, there are not very many movie theatres in Saudi Arabia, so you’ve got to use your phone and so forth, but still, consider the intensity of the interaction.

With respect to work, we think about 35% of all tasks that are done in management can be automated.  20% of what CEOs do today can be automated. It doesn’t mean the jobs will disappear. We think only about 7% of the jobs will go, but it means we’ll have to redefine how jobs work. The role of the HR leader is going to go up significantly.

I’m going to talk more about what that does for industry, the autonomous vehicles. There’s a whole slew of changes coming on the biotech side, what genomics has done. Advanced materials, renewable energy, these are some.

I say this always with a bit of caution from McKinsey, because we are the firm who in 1990 when we were advising AT&T predicted that the total global demand for mobile phones would be 90,000 phones.  That’s what we said in 1990! So you might want to use your own judgement.

I think the biggest drivers of these technologies come from three areas. One is computing power. The average washing machine today has more computing power than NASA had in 1969 to send a man to the moon, and that continues with Moore’s Law.

Data – we’re creating more data as humans every two days than we had in our entirety for the last 2,000 years. Unfortunately a lot of that data is useless, but if you can use that data (we use about 1% of it) you can get very significant productivity improvements.

And then connectiveness – more and more of us are wired up, and those three factors together are leading to significant disruption.

One way to look at this on the computing power curve is to look at how close computing power is coming to the human brain. Right now we’re about at the level of an insect brain, and you may not think that’s very impressive, but I can tell you insect brains are complicated.

Some of the best research is going on at UCL. A firm I’m sure you guys have heard of is Deep Mind, Google bought them about two years ago for $1 billion. There are about 300 people there. They create no products, no services. They are some of the best neuroscientists in the world. It’s the potential of this deep neuroscience and computing power talent which is going to generate real insights into artificial intelligence.

We will get to the human brain. The sense here is that in around the 20-25 year period we will get to the human brain. I think this is going to have some pretty profound implications for how we operate. The Pope has just convened a group of technologists to talk about the ethics of what this means, how we think of what that is going to mean, in terms of how we regulate ourselves. So the computing power will continue to accelerate.

One other element I just wanted to talk about too is this Internet of Things, not just the consumer side. Some of the most profound effects on technology are going to come from how industrial companies work. This is why GE has gone through what they’re arguing is the biggest transformation they’ve done in their history, and they’ve done quite a few of these transformations. The insight came from one of the many products they make – they make jet engines, locomotives, fridges, medical equipment. If you take a locomotive, GE spends a lot of money on R&D on figuring out what type of material to use for wheels, how to make an engine as powerful as it can be, using as less fuel as possible. There’s a lot of sophisticated engineering that goes on in making a locomotive.

But the light bulb moment, so to speak, for GE was when they did some analysis about the impact of a locomotive on a railroad company’s profitability; and it’s far, far bigger than the cost of the locomotive. One of the ways you measure the effectiveness of a locomotive is its average speed per hour per day.  Over a 24 hour period the average speed of a locomotive is 22 miles an hour.

If you can take that average speed up by one mile an hour, that can have up to a $250 million impact upon a railroad company. Therefore it’s the use of that locomotive that actually matters much more than the power, the metal, or the size of it.

GE was worried that some sophisticated hoover-like person is going to come along and say “that’s great, you build the engines and we’ll provide the analytics of how you can actually use those engines more effectively, and we’ll create way more value for the company than you do by manufacturing it”. And what GE said was “forget about that, we’re going to own that ourselves. We will own and develop the data analytics”; and that’s what they’ve done.

So that’s just an example of one hard core industrial business and how the Internet of Things leads to industrial companies having a transformation.

The autonomous vehicle is a reality. We’re now seeing some cities, especially in Asia, that are going to declare that they want to have self-driving cars. That has big implications on traffic patterns. It has big implications on environmental damage.

I think one of the things we forget about when you think about some of these innovations is what I call the second bounce of the ball. When you think about innovation it’s very easy to see the direct implication, the first bounce of the ball. Obviously if you’re in Ford Motor Company, then you can start to figure out okay, what does this mean for us?

What you may not know is that probably one of the most profound effects of the driverless car will be on the cardiac surgery industry, critically in the United States. If you’re a cardiac surgeon, about 90% of hearts that we use for transplants come from accident victims. (Not a very nice dinner conversation but that’s where the hearts come from).

So you get a lot less supply of hearts. The average doctor is not thinking about that. The average person in medical practice is not thinking about that, and that is an illustration of a second order of fact. So these disruptions from outside your sector are going to become more significant, and I’ll come back to this on leadership. So if you’re a leader, you cannot just think about your own industry. That’s too narrow. You have to start to have a broader radar to think about where changes are coming from. That’s just one illustration.

Design has become a much more important factor. Another bizarre fact – the average person checks their phone every 5/6 minutes, so how you interact with your screen is a big deal. That’s why design has become an important part of the world. If you’re a product manufacturer, if you’re a services industry, if you’re a digital, you have to think about design.

McKinsey love to tell people what to do and say – take this medicine, take that medicine – but we don’t like to take it very much ourselves. Well, we have just decided to buy a design firm, Lunar in California, because we need it for a lot of our product development work, for our digital work. It’s to complement the thinking that’s going on.

Even agriculture. I was with a group of about 2,000 veterinarians four weeks ago, and the big question they were asking themselves was will we have a job in the future? And the reason is because of all of the data analytics, the sensors and automation. With the dairy cow, what you can do with the sensors now is radically different to what we could do even two years ago. You needed one vet to handle about 1,000 dairy cows. With the technology you have now, you can go from one to 10,000 easily and with far better quality care. You can tell earlier than is typically diagnosed physically, whether a cow’s beginning to get sick or not.  

I don’t want to go off down another tricky trail but what data analytics is doing is disrupting how one thinks about businesses. Who would have thought ag food would be one of the high tech future areas. I think of it as one of the implications from the 2.2 billion is that ag food is going to be one of the biggest industry opportunities in the world. Those people want to eat and live like we do.

You know that if you’re in banking, almost every aspect of a bank is being attacked or disrupted by technology players. We’re even seeing the education system being disrupted. I don’t know if people have heard of a firm called 42 in Paris? It was set up by a telecoms entrepreneur. They provide free three year computer programming courses. They don’t care what background you have. You have to do a qualification but they’re not looking at what your educational background is; you can get a test in terms of your character or capabilities. What they’re doing, if you think about the jobs that those people are getting in a very different way, it’s disrupting the education system.

On the technology side, we’re in the early stages of disruption that’s affecting all of us.

As we look at an ageing population of 400 million people over the age of 80, we’re going to double people over the age of 65. As I mentioned, a lot of our costs – healthcare in particular, but also social security and others – is directly driven by age. Assuming we have the same retirement ages and benefits, one of the implications for me is there’s no way we can continue to do that.

I doubt that anyone in this room here is going to stop working at the age of 65. I think people are going to work till they’re 80 and maybe that has implications for education. Maybe going to university in our 20s is just a bit narrow-minded. Maybe we have to go in our 40s and our 60s, our 70s, to go through it to re-tool ourselves as we move through. I don’t think it’ll be a steady state but it’s going to mean a lot of changes.

The other comment that I made before is labour productivity. The biggest driver of labour productivity is more people coming into the workforce. For example in the US, the largest increase in productivity from 1950 to 2000 was not because of technology. It was because women entered the workforce.  

So immigration is going to matter. I’m a big fan of immigration. It may not be politically correct. I come from Canada. I’m part of a group that says we should have 100 million people in Canada. We should open the doors. Donald Trump probably wouldn’t like that!

Trade flows, as I said, are getting much wider. As we relate it to economic power, we’re seeing more of the size of the bubbles and the thickness of the lines happening in Asia. Back in 1994 when I was first in Asia I went to see one of my Japanese colleagues; he was a bit of a mentor and he said “I want to tell you something: Asia is a western invention. It doesn’t really exist. It’s on your map but we actually don’t do that much together. The trade routes are not very linked, because some of us actually don’t like each other very much”. My jaw dropped. But I think Asia is much more Asia now. If you just look at the trade routes, the supply chains, it’s deep.  It’s got lots of linkages and lines.
Africa right now looks to me like Asia did in 1993, ‘94, ‘95, and I think we’re going to see a much deeper linkage, we’re going to see more of that trade.

But probably the biggest shift or change is now going to be in data, and we’ve found that those countries and cities that are more connected with data are the ones that are going to be able to achieve more growth and productivity.  

This is an area where regulation is still being formulated in terms of how we move data. Data’s an asset class. We have to look at how we manage it and how we protect it. That’s deepening, and it’s an area where governments are going to have to play a more critical role in terms of the infrastructure that they put in place.

People are also becoming much more of that flow. I think the migration issue in Europe is the tip of the iceberg, with the technology we have now today. If you are in a troubled part of Africa or the Middle East, you can very quickly see what the rest of the world looks like, and you can figure out how to get from A to B. We never used to have that. I think there is a very big pent-up demand there.

There’s also a lot of movement in Asia. We’re not talking about that right now, but from central south-east Asia to the rest of Asia, there are very big flows. It’s a very sad situation because a lot of it is trafficking, it’s illegal, it’s people in very tough situations, but I think that’s going to continue, and I personally don’t think Japan is going to be able to survive without having a much more open immigration policy.

And I look at the Philippines, which is an amazingly young, vibrant population. If I’m betting on a place over time because of the demographics, it’s the Philippines. I think it’s going to be a scarcity to have young people in a very ageing Asia, in north Asia, including China.

We’re also not very good at using our resources right now. I’m a big believer in climate change and resource efficiency and effectiveness. I think we as business people have to own that problem. It can’t just be done by government. There is a cost and it’s going to get worse unless we address it.

And then we have geopolitics. When I started in McKinsey, it was probably at the peak of the thinking that geopolitics didn’t matter. I joined McKinsey in 1986. The Berlin Wall fell, I think it was in ‘89, the Soviet Union collapsed shortly thereafter, and it was almost a notion that you had to obey the capital markets. That’s really what drove the system, and the peak of that was when George Soros took on the Bank of England. A single entrepreneur with a hedge fund beat a renowned central bank. They had to back off, and that was kind of the message. I don’t care what your politics are. If you don’t obey the capital markets, God be with you.

I think it’s a very different world now, and I think many, many business people have to worry about geopolitics. I heard some economic historians at a business conference saying ‘you business people like to think of everything in a nice probability curve. If the rand goes off or goes pear-shaped, you just move down the curve a bit, but you don’t realise that history shows you it’s one or zero. It’s not smooth. It’s one or zero and are you prepared for a zero scenario and where do you go?’

So this is a very important topic that we need to think about. It’s affecting multinational companies. For example think about McKinsey, we have a very large Russian practice, we have a very large Ukrainian practice, we have a very large Chinese practice. We happen to run our Ukrainian practice out of Moscow, probably not a very sophisticated approach to things. We’re a global firm and we don’t like to think of ourselves as being national, but it is a fact that when all of a sudden you have sanctions, we would like to do work in Iran but we’re a US incorporated firm; so even though our German clients are screaming at us to do things in Iran, we can’t. Other firms that are domiciled in other places can and so people ask, what’s the role of a multinational in a world where you have more geopolitics? One of the fastest growing advisory services for CEOs is on the geopolitical advice side. It’s not something we think we’re too naïve to do. It’s an important area to get help on.

When you package all those forces together, those four forces, particularly the first two, one of the implications is that the speed of the world is going up, the metabolic rate, and one way we try to measure it is what’s the average lifetime of a company?  

One way to look at it specifically is to say if you were on the S&P 500 in 1935, what was your average lifetime? And it turned out to be 90 years. 1935 was not exactly a great time in the world from an economic point of view, but 90 years was the timeframe. 2011 is the last time we’ve done it. It’s 18 years right, so the churn rate has gone up.

The challenge of change has become fundamental for leaders. This all has implications for what we as leaders need to do, and I think a lot of emphasis on leadership has been on what leaders do, and how you align an organisation. What are the right KPIs to put in place? How do I structure an organisation properly? Where do I find the talent that I need? How do you develop a marketing programme? What strategy do we adopt?

These are all important; what is not seen as much as it should be is actually who the leaders are? What is their character? And this is the biggest take-away from that last set of questions when I ask CEOs or government leaders, what do you wish you knew in the beginning of your time as a leader that you now know?  

One question is around purpose and resilience and, it’s a bit of a buzzword, organisations saying they have to have a purpose and that’s to attract millennials. I think the more fundamental thing is if you don’t have a compass or a pole star or something that you’re driving towards, you can very easily be taken off-course with all the changes and the volatility that’s going on. You need to have an ambition and a purpose but what you are willing to change is almost everything else to be able to achieve it, and so you’re tight on the purpose but you’re loose on how you deliver it.

A lot of people are tight on how they work and what they do, and they refine it and tighten it, and so thinking about purpose is important. And purpose is a muscle. I don’t think it’s something you just have. It’s something you have to think about and refine and work. It’s a direction.

Dominic Barton is the global managing director of McKinsey. Based in London, he leads the firm’s focus on the future of capitalism and the role business leadership can play in creating long term social and economic value. Before becoming global managing director, he served as chairman of McKinsey’s in Asia from 2004 to 2009. He also headed the office in Korea from 2000 to 2004. He is a participant in the World Economic Forum, the Asia Business Council, the China Development Forum and many other international organisations; an advisor to the Singapore Economic Development Board; a trustee of the Brookings Institution; a Rhodes trustee; and an adjunct professor at Tsinghua University in Beijing. He is the author of two books – Dangerous Markets: Managing in Financial Crises and China Vignettes: An Inside Look at China. Born in Uganda, he graduated from the University of British Columbia and studied at Brasenose College, Oxford.