THE FOUR GLOBAL FORCES BREAKING ALL THE TRENDS

NO ORDINARYDISRUPTION

1 23 4

Beyond Shanghai: The Age of Urbanization

Getting old isn’t what it used to be: Responding to the challenges of an aging world

Managing a complex organization isn’t easy in the best of times. It’s especially difficult when the news continually reminds you that everything you think you know about how the world works seems to be… wrong, or at least a little bit off.

The formative experiences of many senior executives were during a period that was uniquely benign and placid for the global economy. With good reason: the 25 years leading up to the 2008 financial crisis came to be known, in the words of economists James Stock and Mark Watson, as the “Great Moderation.” The value of our homes and investments rose each and every year. In developed economies, parents generally assumed that their children, upon becoming adults, would be more prosperous than they were. Natural resources became ever more abundant and cheaper. Jobs were plentiful, and a seemingly endless supply of trained workers stood ready to fill them.

The four global forces breaking all the trends

NO ORDINARYDISRUPTION2

4

The tip of the iceberg: Accelerating technological change

Trade, people, finance, and data: Greater global connections

RESETAN INTUITION

RESETBut since the start of the new century, that world has started to change— and radically. The collision of four global forces means we are now living in an era of near-constant discontinuity. Competitors can burst upon the scene in a blink of an eye. Businesses that were protected by large and deep moats find that their defenses are easily breached. Vast new markets are conjured seemingly from nothing. Five years is an eternity.

This is No Ordinary Disruption. The world is in the midst of a dramatic transition as a result of four fundamental disruptive forces. None of these disruptions, on its own, is a surprise. The unique challenge is that they are happening at the same time—and on a huge scale, creating second-, third-, and even fourth-order effects that are scarcely possible to anticipate. As they collide, they are producing change so significant that much of the management intuition that has served us in the past will become irrelevant.

1Beyond Shanghai: The Age of Urbanization

THE BALANCE OF POWER OF THE WORLD ECONOMY IS SHIFTING EAST AND SOUTH AT A SPEED NEVER BEFORE WITNESSED.

1

The focus of economic activity and dynamism is shifting to emerging markets like China and to cities within them. The balance of power of the world economy is shifting east and south at a speed never before witnessed—with 3,000 times the momentum of the first Industrial Revolution that so profoundly transformed the world.

The global urban population is growing by 65 million annually, equivalent to adding seven Chicagos a year, every year. Nearly half of global GDP growth between 2010 and 2025 will come from 440 cities in emerging markets—95 percent of them small and medium-sized cities like Kumasi, Surat, and Foshan, cities that many western executives may not even have heard of and couldn’t point to on a map.

1Beyond Shanghai: The Age of Urbanization

Countries are becoming much more urbanized

This is equivalent to 7 new Chicagos every year

x7

65MA YEAR

City populations are growing by

Emerging economies are taking a larger share of the world economy

Emerging economies are becoming major forces

By 2025, emerging economies will grow 75% faster than developed nations

75%

2025

2015

33%

50%This is equivalent to 7 new Chicagos every year

x7

Cities in emerging markets will account for nearly half of global GDP growth by 2025

People will live in Asian citiesby 2025—that’s half of allurbanites in the world

440

2.5B

By 2025, 46 of the world’s 200 largest cities will be in China

46

2

2

The tip of the iceberg: Accelerating technological change

TECHNOLOGY HAS ALWAYS BEEN A GREAT FORCE IN OVERTURNING THE STATUS QUO. THE SCOPE, SCALE, AND ECONOMIC IMPACT OF TECHNOLOGY ARE ACCELERATING.

Globalization and technology are changing the face of the business world

1.4 billion additional people expected to go online from 2012 to 2017

Time to reach 50 million users

Adoption of new technologies is accelerating

Technological breakthroughs are speeding up

First phone call

1876

38 13 4Radio

YEARS YEARS YEARS

Television iPod

1991

2007

First website

First iPhone

1.4B

The scope, scale, and economic impact of technology are accelerating. From the printing press to the steam engine and the Internet, technology has always been a great force in overturning the status quo.

The difference today is the sheer ubiquity of technology in our lives, the pace of new innovation, and the scale of adoption. It took radio 38 years to attract an audience of 50 million people; Facebook did so in 12 months, and Twitter in 9 months. Processing power and connectivity are only part of the story.

Digitization and big data are fueling new business models— from retail platforms like Alibaba to car-hailing apps like Uber— and leveling the playing field among large and small businesses in emerging and developed markets.

2The tip of the iceberg: Accelerating technological change

Objects expected to connectto the Internet by 2025

3 1 .75Internet Facebook Twitter

YEARS YEAR YEAR

1 TRILLION

3

Getting old isn’t what it used to be: Responding to the challenges of an aging world

FOR THE FIRST TIME IN HUMAN HISTORY, DEMOGRAPHIC CHANGE COULD MEAN THAT THE PLANET’S POPULATION PLATEAUS IN MOST OF THE WORLD.

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Demographics are the third force changing our world. Fertility is falling, and the world’s population is graying dramatically. Roughly 60 percent of the world’s population lives in countries with fertility rates below replacement rates.

For the first time in human history, demographic change could mean that the planet’s population plateaus in most of the world. In some countries, one-third of the workforce could retire in the next decade. Without a boost in productivity, a smaller workforce will mean lower consumption growth and constrain the overall rate of economic growth.

3Getting old isn’t what it used to be: Responding to the challenges of an aging world

A graying workforce

The share of older workers (age 55+) will increase dramatically

2010

2030

2030

14%

Global

Global

China

22%

31%

Global life expectancies are rising

The proportion of the elderly is increasing

Without productivity increases, GDP growth will shrink dramatically

1950 2014 2030

5

1969 2014 20640

1

2

3

4

47yrs

yrs

yrs6974

In 2000, 14% of the population of advanced economies was made up of people 65+ years by 2050, it will be 26%

In 2000, 5% of the population of emerging economies was made up of people 65+ years by 2050, it will be 14%

Advanced economies Emerging economies

GDP growth, rolling 5-year periods, CAGR,%Employment

Productivity

Projected

Productivity growth at 1.8%

Global

Global

China

14% 14%5%2000 20002050 2050

26%

4

4

Trade, people, finance, and data: Greater global connections

IN THE PAST 30 YEARS, GLOBAL TRADE FLOWS GREW TEN-FOLD, FAR OUTPACING WORLD GDP GROWTH.

Global flows – The volume of trade, finances, people, and data – are increasing

Trade and finances

Global flows contribute $250 billion to $450 billion to yearly global GDP growth

36% of financial investments are international transactions

International trade, $ trillion

Highly connected countries can see 40% more GDP growth than the least connected

36%

TRILLION

TRILLION$5$26

1990 2012

40%GDP GROWTH

$250B - $450B

The world is increasingly connected through trade and through cross-border flows in capital, people, and information. In the past 30 years, global trade flows grew ten-fold, far outpacing world GDP growth. Instead of a series of lines connecting major trading hubs in Europe and North America, the global trading system has expanded into a complex, intricate, sprawling web.

The links forged by technology have marched on uninterrupted and with increasing speed, ushering in a dynamic new phase of globalization, creating unmatched opportunities, and fomenting unexpected volatility.

4Trade, people, finance, and data: Greater global connections

People

Data

Tourism added $2 trillion to GDP and provided salaries to100 million people in 2013

1.3 billion monthly Facebook users in 2014—equivalentto the population of China

500 times increase in global online traffic, 2000 to 2012

International migration, millions of people

1.3B

500x

75M

232M

Many of the long-standing trends, which made life so pleasant for investors and managers during the Great Moderation, have broken decisively. The cost of capital may rise. Prices of everything from grain to steel could become more volatile. The world’s labor force could shrink. Individuals, particularly those with low job skills, are at risk of growing up poorer than their parents.

While the new era is full of opportunities, it is also deeply unsettling. There is a great deal of work to be done in resetting our collective intuition. We need to fight against inertia and rethink the assumptions that drive our decisions on such crucial issues as consumption, resources, labor, capital, and competition. We need to monitor trends and war-game the effects of potential disruptions, and anticipate not just the immediate but also second-, third-, and fourth-order effects of the changes that we are witnessing.

Three characteristics will differentiate the most successful managers and executives in this new era. First is relentless outward focus. The second is agility. The third is optimism. These changes cannot be navigated with a pessimistic or defensive outlook. Those who understand the depth, breadth, and radical nature of the change and opportunity that’s on the way will be best able to reset their intuitions accordingly, shape this new world, and thrive.

CONCLUDING THOUGHTS 1 2

1 2 3 RELENTLESS OUTWARD FOCUS

AGILITY

OPTIMISM

The McKinsey Global Institute (MGI) is the business and economics research arm of McKinsey & Company. For 25 years MGI has published in-depth research, combining the analytical tools of economics with the insights of business executives to help leaders in the private, public, and social sectors better understand the forces transforming the global economy.

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McKinsey Global InstituteMay 2015© McKinsey & Companywww.mckinsey.com/mgi

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McKinsey Global Institute

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