The McKinsey Quarterly recently featured a web-only article on ten trends for the coming years. You can subscribe for free to its online version if you are interested. I thought it would be worth mentioning these trends to help identify any investment implications.
Trend 1: The centers of economic activity will change profoundly, not only globally, but also regionally. Asia’s GDP (excluding Japan accounts for 13 percent of world GDP, while Western Europe accounts for more than 30 percent) will catch up with Western Europe in the next 20 years. As a result, we should see rising demand for consumer goods as people in these nations earn more disposable income.
Investment idea: Consumer companies with a strong presence in Asia and transport companies with a strong presence in the region and global reach.
Trend 2: Public sector activities will soar, making productivity gains essential. The unprecedented aging of the population throughout the developed world will demand new levels of efficiency and creativity from the public sector. The demand for retirement health and security will overwhelm a nation’s ability to support these services through taxes. Proven private sector approaches are likely to become widespread in the provision of social services in both developed and developing countries.
Investment idea: Companies that can provide these services profitably; companies that can take advantage of technology to outsource these services to low-cost countries.
Trend 3: The consumer landscape will change and expand significantly. Nearly a billion new consumers will enter the global market in the next decade as economic growth in emerging markets pushes them past the threshold of $5,000 in annual household income, a point at which people typically start spending on discretionary goods. By 2015, the purchasing power of consumers in emerging economies will almost equal the purchasing power of Western Europe. It is estimated that 100 million Chinese households will reach European income levels by 2020. In addition, the US Hispanic population will have purchasing power equivalent to 60 percent of all Chinese consumers.
Investment Ideas: Consumer goods and luxury companies with a strong presence in Asia and other developing countries that are achieving economic success. Companies that are able to identify and target consumer market niches that will continue to evolve. Transportation companies that can easily move raw materials and finished products around the world.
Trend 4: Technological connectivity will transform the way people live and interact. We are still in the early stages of this revolution. Geography is no longer the main constraint for social and economic organization. As new developments in biotech and nanotech come along, people around the world will find new ways to take advantage of their promise. More transformative than the technology itself is the behavioral change it enables. We work not only globally but also instantly. We’re building communities and relationships in new ways (in fact, last year, 12 percent of newlyweds in the US met online). More than two billion people now use cell phones. We send nine billion emails a year. We do a billion Google searches a day, more than half in languages other than English. Perhaps for the first time in history, geography is not the main constraint on the boundaries of social and economic organization.
Investment ideas: Software companies with experience in bringing together diverse capabilities to create new products and services.
Trend 5. The ongoing changes in labor and talent will be much more profound than the widely observed migration of jobs to low-wage countries. The shift to knowledge-intensive industries highlights the importance and scarcity of well-trained talent. However, the increasing integration of global labor markets is opening up vast new sources of talent. The 33 million college-educated young professionals in developing countries is more than double the number in developed countries. For many companies and governments, global workforce and talent strategies will be as important as global sourcing and manufacturing strategies.
Investment Ideas: Outsourcing all kinds of professional talent, not just low-wage workers, to educated talent pools in India, China, and elsewhere with an educated talent pool.
Trend 6. The role and behavior of large companies will come under increasing scrutiny. As companies expand their global reach and economic demands on the environment intensify, the level of social suspicion of large companies is likely to rise. The principles of today’s global business ideology, for example share value, free trade, intellectual property rights and profit repatriation, are not understood, let alone accepted, in many parts of the world. Environmental scandals and mishaps seem as inevitable as the likelihood that these incidents will subsequently be blown out of proportion, thus fueling resentment and creating political and regulatory backlash. This trend is not just from the last 5 years but from the last 250 years. The increasing pace and extent of global business, and the rise of truly giant global corporations, will exacerbate the pressures over the next 10 years. Business, particularly big business, will never be loved. However, it can be more appreciated. Business leaders need to argue and demonstrate more forcefully the intellectual, social and economic case for business in society and the massive contributions business makes to social welfare.
Investment ideas: Companies that find ways to make good profits and be socially responsible.
Trend 7. The demand for natural resources will grow, as will the pressure on the environment. As economic growth accelerates, particularly in emerging markets, we are using natural resources at an unprecedented rate. Oil demand is projected to grow 50 percent over the next two decades, and without major new discoveries or radical innovations, supply is unlikely to keep up. We are seeing similar increases in demand across a wide range of commodities. In China, for example, the demand for copper, steel and aluminum has almost tripled in the last decade. The world’s resources are increasingly limited. Water scarcity will be the main constraint to growth in many countries. And one of our scarcest natural resources, the atmosphere, will require drastic changes in human behavior to prevent further depletion. Innovation in technology, regulation, and resource use will be critical to creating a world that can drive strong economic growth and sustain environmental demands.
Investment Ideas: Water filtration, pollution control, and energy companies, especially those offering new forms of clean energy.
Trend 8. New global industrial structures are emerging. Even basic structural assumptions are being altered: for example, the emergence of strong private equity financing is changing corporate ownership, life cycles and performance expectations. In many industries, a bar-like structure is appearing, with a few giants at the top, a narrow center, and then a burgeoning of smaller, fast-moving players at the bottom. Similarly, corporate boundaries are becoming more blurred as interconnected “ecosystems” of suppliers, producers, and customers emerge. Even basic structural assumptions are being altered: for example, the emergence of strong private equity financing is changing corporate ownership, life cycles and performance expectations. The winning companies, using the efficiencies obtained by the new structural possibilities, will capitalize on these transformations.
Investment ideas: Companies that offer special capabilities in important process networks and supply chains that can offer substantial improvements and capture higher profits.
Trend 9. Management will go from art to science. Today’s business leaders use highly sophisticated software to manage their organizations. Larger and more complex businesses require new tools to run and manage them. Indeed, improved technology and statistical control tools have given rise to new management approaches that make even mega-institutions viable.
Gone are the days of the “gut instinct” management style. Today’s business leaders are adopting algorithmic decision-making techniques and using highly sophisticated software to run their organizations. Scientific management is moving from being a skill that creates competitive advantage to a gamble that gives companies the right to play the game.
Investment Ideas: Methods and tools (software) that match skills with job needs and training requirements. Business consulting and corporate software companies that offer special capabilities that help manage mega-businesses.
Trend 10. Ubiquitous access to information is changing the knowledge economy. Knowledge is increasingly available and, at the same time, increasingly specialized. The most obvious manifestation of this trend is the rise of search engines (such as Google), which make an almost infinite amount of information instantly available. Access to knowledge has become almost universal. However, the transformation is much deeper than just broad access.
New models of knowledge production, access, distribution and ownership are emerging. We are seeing the rise of open source approaches to knowledge development as communities, not individuals, become responsible for innovations. Knowledge production itself is growing: worldwide patent applications, for example, increased between 1990 and 2004 at a rate of 20 percent per year. Companies will need to learn to take advantage of this new universe of knowledge, or risk drowning in an avalanche of too much information.
Investment ideas: Companies that offer new ways to capture and distribute specialized knowledge. Also, companies that have specialized knowledge that can be used to reduce costs or create innovative ways to differentiate products or services.