Our world is changing so much in terms of both speed and magnitude. “As the business landscape reforms itself quickly, CEOs have to make correct business decisions within a much shorter timeframe. At the same time, the visibility is not great as everything seems so uncertain,” the CEO of a global information services company confided to us. “One way to deal with this”, he said, “is to gain intelligence and insights into what the future lies”. My business partner Dr Mark Esposito and I cannot agree more.

But how can companies read early signals of change and adapt? We believe they can be found in 5 megatrends that we called DRIVE:

  • Demographic and social changes
  • Resource scarcity
  • Inequalities
  • Volatility, scale and complexity
  • Enterprising dynamics

Demographic and social changes

At the heart of all change is people. Demographic and social changes therefore matter. Most countries in the world are experiencing aging populations, leading to shrinking populations of young people. The challenges that these aging countries face include healthcare issues, social security systems and financing pensions. Meanwhile, some countries in the Sub-Saharan region would remain mostly youthful. Their challenges would be providing both education and employment opportunities.

More and more people are living in cities. Urbanization, while bringing new problems, could bring a great deal of economic benefits. In the future, cities, and not countries, would become the main unit of economic analysis. Cities are going to be more of an economic powerhouse than now.

Resource scarcity

Increase in consumption will make more demands on available resources. Contrary to what many believe, oil and gas is not one of them. There is an ample supply of oil and gas and many reserves are yet to be explored.

Water presents more of a problem. At the current consumption rate, it is possible that by 2025 two-thirds of the world’s population may face water shortages.[1]This would have vast implications. At the society level, cities may experience difficulties in maintaining their supply and sanitation requirements. Water shortage could hit business too. For instance, each microchip requires 35 gallons of clean water to make.[2] Naturally, food production is also under pressure as water is an indispensable input – it takes 2,500 gallons of water to produce a pound of meat.[3] Pressure on food supply could increase food prices, which in turn would account for greater portions of personal income, especially in developing countries.[4]

Inequalities

Income and wealth inequalities have got worse in the past few decades. In the US, the top 0.1% hold almost as much wealth as the bottom 90%.[5] China, meanwhile, ranks very low in terms of the world’s richest countries, yet has the 2nd highest number of billionaires in the world.

But what about the middle-income earners? The bad news is that many of their jobs are gradually replaced by machines. In the US, the percentage of households earning 50% of the average income has decreased from 56.5% to 45.1% from 1979 to 2012.[6] The effectively means that middle-income earners would become low wage ones over time.

At the same time, there is a growing “age” inequality. A clear indicator of such is that youth unemployment, which remains stubbornly high – and indeed continues to go up – in many parts of the world. Often, this is the result that there are not enough jobs around. Other times, government policies tend to favour the older population than the young ones. On top of this, we argue that “capital inequality” – the reliance of borrowing as a means of financing instead of shares, at least in Europe – is making it difficult for innovative startups to get the funding needed, preventing them from flourishing.

Volatility, scale and complexity

Since the mid-80s, information communication technologies have changed the world dramatically. But the true power of such technologies is only about to reveal itself now: combining different components such as processing power, digital cameras, memories and sensor to create new technologies. Subsequently, such combinations spawn further new technologies as well as new combinations.

Evidence of this can be seen through the rise of robotics and artificial intelligence. As bulky and impractical as Google’s driverless car is right now, it marked the significant development that artificial intelligent machines are on the verge of taking over the many roles that was previously believed to be “human only”. The recent 4-1 victory of AlphaGo over the best human player over the game of Go, which is believed to be the game that is most difficult for computers to win, made it clear that the development of artificial intelligence has reached new height. It is certainly not stopping here. Shortly after AlphaGo’s win, AI in Japan has “co-written” with human a short novel that passed through the first screening of a literary award.

Enterprising dynamics

The speed of change has led companies to come up with new ways of doing things. This is not only restricted to advanced economies. Developing ones are also spearheading at various fronts. For example, while China is not yet very good at science- and engineering-based innovations, it is leading in customer-focused and efficiency-driven innovations.[7]

Take Alibaba for instance. In a move to help SMEs trade on its online platform, the company went to establish a financial services arm to provide these firms with financing. This might sound trivial. But we imagine that it would be rather difficult in the US or UK for online platforms to extend into financial services without running into regulatory concerns or competition from banks. Elsewhere, we are now witnessing an increasing number of new business models.

The five megatrends of DRIVE clearly demonstrate that our economic future can be, to a large extent, predictable. By paying closer attention to these megatrends, individuals, companies and governments could have a better understanding of what is in store for them. In this case, they will be able to take advantage of change and see a greater impact from their decisions.

 

Written by our professor Terence Tse, PhD, co-authored with Dr Mark Esposito.

 

[1] http://www.worldwildlife.org/threats/water-scarcity

[2] Hoekstra, A. Y. and Chapagain, A. K. (2007) “Water footprints of nations: Water use by people as a function of their consumption pattern”, Water Resource Management, 21(5), 35-48

[3] Robbins, J. (1987) A Diet for a New America

[4] Roland Berger Strategy Consultants (2015) Roland Berger Trend Compendium 2030: Trend 3 Resource Scarcity

[5] Congressional Budget Office (2011) Trends in the distribution of household income between 1979 and 2007

[6] ‘The Great Decoupling,’ Harvard Business Review (2015)

[7] McKinsey Global Institute (2015) The China Effect on Global Innovation