Growth is shifting, disruption is accelerating, and societal tensions are rising.

Confronting these dynamics will help you craft a better strategy, and forge a brighter future.

According to the latest McKinsey research,it is easy, to lose sight of long-term trends amid short-term gyrations, and there are moments when the nature and direction of those trends become less clear.

Why trends matter

 

That broad narrative of intensifying competition, as well as the growing need for cooperation, contains challenges, but also great opportunity.

How long can their traditional sources of competitive advantage survive in the face of technological shifts?

How will changing consumer and societal expectations affect their business models?

What does it mean to be a global company when the benefits of international integration are under intense scrutiny?

Digitization, machine learning, and the life sciences are advancing and combining with one another to redefine what companies do and where industry boundaries lie.

In many sectors, critical foundations of industry structure—the economic fundamentals, the power balance between buyers and sellers, the role of assets, the types of competitors, even the borders of industries—are rapidly shifting.

And the terms of competition are changing: as interconnected networks of partners, platforms, customers, and suppliers become more important, we are experiencing a business ecosystem revolution.

Technology is transforming resource production, with the potential to reduce resource intensity. Advances in analytics, automation, and the Internet of Things, along with innovations in areas such as materials science, are already showing great promise at reducing resource consumption.

As technology continues to progress and data flows reveal efficiency opportunities across operations, companies should have more influence over their cost structure, and resource prices should be less correlated to one another and to macroeconomic growth than they were in the past.

McKinsey research suggests, for example, that iron-ore demand could decline over the next two decades as a result of softening demand for steel and increased recycling, but copper demand could jump, given its role in a wide range of electronics and consumer goods. Resource-related business opportunities will turn up in unexpected places, and there’s room for a multitude of new products and services.

An example is new carbon-based materials that are lighter, cheaper, and conduct electricity with limited heat loss. They could transform entire industries, including automobiles, aviation, and electronics. Business leaders will have more opportunities to seize the initiative as they stretch their thinking about the changing nature of resource constraints.

Digitization has brought consumers an ever-expanding menu of goods and services to choose from, some of which are free. Many goods and services consumers once paid for are now available online at a swipe or a click.

Customers also are taking the driver’s seat in steering the products that companies develop. They are able to communicate with companies directly and in large numbers for the first time. What they want is more variety, more specificity, and greater self-expression. Google is renowned for its practice of rapidly incorporating direct customer feedback in product design. Chinese mobile-phone maker Xiaomi engages directly with consumers in person or online. Adidas has even built robot-operated “SpeedFactories,” which create sneakers designed by individual consumers, while Doob Group enables consumers to scan their bodies and create unique, 3-D-printed figurines.

It remains to be seen how the willingness of customers to pay a premium will evolve. Right now, as Ray Kurzweil, the futurist and now a director of engineering at Google, recently noted, “There is an open-source market with millions of free products, but people still spend money to read Harry Potter, see the latest blockbuster, or buy music from their favorite artist.” Those examples may seem like outliers, but as Kurzweil pointed out, “coexistence of a free open-source market and a proprietary market” is also “the direction we’re moving in with clothing.”

 

Why trends matter

 In such a world, it won’t be just customers who have more choices; companies, too, have more decisions to make about their business models and how they create value.

 

  • Linear value chains, which dominated for most of the 20th century, comprise a series of value-adding steps with the goal of producing and selling products: think automotive assembly.
  • Horizontal platforms, which gained prominence with the rise of personal computing and the Internet, cut across value chains. Companies operating under this model own hard assets and sophisticated architecture, typically built around value-adding software and technology stacks.
  • “Any-to-any” ecosystems, such as those of Uber and Airbnb, have emerged most recently. These companies also operate at the center of platforms, but they are distinctly asset-light.

The horizontal platforms of players such as Google, Amazon, and Facebook have been creating value for years and currently account for five of the ten largest US companies by market cap.

Platform-oriented companies represent half of the top ten US public companies by market cap.
Alibaba is the world’s largest retailer measured by gross merchandise volume, and it does not own any warehouses. The world’s largest accommodation provider, Airbnb, does not own rooms; the world’s largest taxi company, Uber, does not own cars—and neither company existed ten years ago. That’s disruption, although the staying power of any-to-any models remains to be seen, given the low barriers to creating software-based platforms.

 

The lines of demarcation between categories are beginning to blur as value chains, platforms, and ecosystems open, expand, and combine.

Linear value chains aren’t immune: Under Armour, a leader in sports apparel and accessories, has announced plans to build the biggest connected fitness platform in the world.

In today’s rapidly evolving landscape, leaders face a continuum of possibilities: build an ecosystem, use someone else’s platform, stick to one’s linear-value-chain knitting, or fashion some combination of the above. Navigating this crucible ultimately comes down to asking hard questions about a company’s sources of differentiation and positional advantage, and placing all options on the table, even if that means disrupting or cannibalizing one’s own business.

The achievement of digital resilience also requires collaboration. At a minimum, more collaboration is needed between the broad cross-functional leaders responsible for security-related decisions within a business. In an interconnected world, companies may also need to explore shared platforms and data sharing about cybersecurity threats across the boundaries of their own businesses and industries. As leaders figure out how to strike the right balance between competing effectively, guarding the corporate ramparts, and cooperating in self-defense, they will be helping to redefine what it means to live together, safely, in our interdependent world.

Ensuring alignment between a company’s digital and its corporate strategy appears to be one of the factors differentiating winners and losers.

We’re entering uncharted territory in other areas, too. As the world ages, new approaches will be needed to support retirees who haven’t saved enough or are counting on pension and healthcare benefits that seem unsustainable without placing crushing burdens on the workers of today and tomorrow.

The results of experimentation—with respect to growth, aging, infrastructure, income inequality, and more—will have dramatic implications for our world, for the business environment, and for corporate performance.

Demographic trends are exacerbating matters. The number of workers earning income for each dependent is falling as populations age, making it harder for society to support the young and the old. Entitlement programs such as pension plans are woefully underfunded.

Corporate leaders today need to rethink where and how they compete, and also must cooperate in the crafting of a new societal deal that helps individuals cope with disruptive technological change.

Business leaders typically spend about 30 percent of their time on external engagement, but by their own assessment, few do so effectively. For more business leaders to “step up to the plate” and “play a key role in driving solutions,” as Unilever CEO Paul Polman says, they will need to do more to embed society’s concerns in their business priorities, to make external engagement an integral part of their strategy, and to adopt a long-term mind-set.

McKinsey analysis suggests that 30 percent of corporate profits can be traced to social and regulatory issues, and that shares of companies that connect effectively with all stakeholders outperform their competitors’ by more than 2 percent per year on average.

Employees, too, will reward companies that are part of the experiments ahead.

According to the Edelman Trust Barometer, about 85 percent of employees working at companies engaged in societal issues said they are committed to achieving their leadership’s strategy, motivated to perform and have confidence in the future of their company—some 20 percent more in each case than employees of companies not engaged.