Trending 2016

Posted April 26, 2016

An Interview with Dominic Barton, Global Managing Director, McKinsey & Company

With uncertainty in so many local markets, where should firms be looking to invest and expand?

This year and the last have been tough for sure, but there are always pockets of growth – and we have seen a remarkable rebound in markets over the last month or so (with equities markets regaining $4.5 trillion that they had lost in value since the start of the year). We need to think about the long-term opportunities that are in front of us.

In fact, we believe there is a disconnect between the turbulence in the markets and the real economy. The U.S. is growing (it has seen 71 months of consistent job growth, the longest streak ever) and even the EU, while volatile politically, has been stabilizing from an economic point of view. Emerging markets still have incredible potential as well – we estimate there will be 2.2 billion new middle class consumers by 2030, most of them in the developing world.

With this in mind, firms should continue to invest in Asia and Africa. We estimate that 315 cities in Asia will fuel 31% of global GDP growth through 2025. Africa is also a continent to be reckoned with – the African consuming class will reach 128 million households by 2020, with consumer spending growing 8-9% per annum. And there is also still a lot of opportunity in North America and Europe (which represent 51% of global GDP today, and will retain a high share (37%) in 2035) – one needs to identify the “pockets” of growth in these regions.

How can companies continue to perform in this global slow-growth environment?

The most successful companies are responding in a few common ways. First, they are reallocating resources (people and capital) – dramatically. Analyzing 1,508 companies over 20 years, our corporate strategy practice has found that companies that raise their reallocation rate by 10% see a 2.5% increase in TRS within 5 years.

Second, leaders (and the organizations that they lead) need to look at the global environment with both “a telescope and a microscope” – they need to be focused on the long-term trends for their business, while also managing the near-term issues. Randall Stephenson, the CEO of AT&T, is a case in point. AT&T anticipated the trend toward mobile media consumption and completed a merger with DirecTV in order to capture the opportunity. They are also investing in aggressively retraining their 280,000 employees to prepare for the future.

Third, companies are “organizing for the future.” We are seeing flatter, more decentralized organizations that can innovate at speed – for example, Haier has reorganized its 80,000 person workforce into 2,000 self-governing units of about 40 people each, each with its own P&L. Companies are also thinking of themselves and their products as "platforms," not traditional structures – DJI, the Chinese drone manufacturer, focuses developing their "core technology" gives away developer kits for free, allowing others to create apps for the drones. This has allowed DJI to scale incredibly quickly -- they are now the top civilian drone maker worldwide.

What will be the next industry to be disrupted by high-tech upstarts?

All industries are being disrupted – no one is immune, including us at McKinsey. The most obvious changes are happening in “business-to-consumer” industries (for example, media, retail, telecom, retail banking), but we are also seeing significant shifts in “business-to-business” industries – from manufacturing to mining to energy.

A good example of the kind of transformation occurring in “business-to-business” industries is the acceleration of “Industry 4.0” in manufacturing.  24 billion data-collecting sensors were purchased in 2014 – up from just 4 billion in 2012. These and other technological advances are making production far more efficient. Using sensors, manufacturers are also producing “smarter” machines, which can deliver huge value. Optimized scheduling and predictive maintenance, for example, can improve a locomotive’s velocity by 1 mile per hour per day – which is potentially worth a couple hundred million dollars in annual profit for a large railway. These kinds of changes are happening across all industries, creating challenges (how do we adapt?) and incredible opportunities.

What will the remainder of the year bring for the Chinese economy? How will that impact global firms?

As we all know, China is undergoing a transition from an economy led by investment and exports to one led by consumption and services – I am confident in the country’s technocratic leadership, though, and remain “bullish” on China. Growth in 2016 will be lower than it has been for the past 25 years, but will nonetheless be robust (likely around 6.5%) and from a much larger GDP base than before ($11 trillion). A close read of the 13th Five Year Plan shows the scale of reforms and investment that the Chinese government is making to support long-term growth – they aim to create 50 million new jobs by 2020 and raise 56 million people out of poverty, while also reducing emissions, retraining redundant industrial workers, and improving the country’s urban housing stock.

Global firms looking at opportunities in China need to remember that growth varies by sector – Gordon Orr, who led our China practice for many years, says, “China’s economy today is made up of multiple sub-economies, each more than a trillion dollars in size – some are booming and some are declining.” Manufacturing output is falling, but consumption and services are booming. Services surpassed 50% of Chinese GDP for the first time in 2015. Household consumption is nearing 40% of GDP, and will continue to grow as Chinese consumers become wealthier and spend more – ecommerce sales, for example, grew 33.3% last year, to $600 billion.

The talent market is again competitive, what trends are you seeing in recruitment/retention problems and solutions?

One of the biggest trends we are seeing is the growth of online talent platforms – these tools are making the talent market much more competitive. 50% of working-age adults in the U.S. have registered for sites like LinkedIn, Monster.com, and Glassdoor – these services make it easier to find talented people, but also make it harder to retain them, since employees can very easily compare their compensation, lifestyle, and career track to those at other companies.

One way companies are responding is by creating internal talent platforms. Our McKinsey Global Institute has found that digitized internal “job boards” (e.g., Société Générale’s international talent mobility platform, which connects employees to job opportunities abroad) can significantly improve retention – potentially leading to a 9% increase in output and 7% reduction in the cost of the human resources function. These benefits aren’t restricted to sectors with high recruiting costs, such as professional services – for example, the average retailer could use an internal talent platform to improve store output by 3% and reduce talent and human resources costs by 5%.  

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