2nd Week Schumpeter - Over the horizon

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Schumpeter

Over the horizon

Three issues that should preoccupy managers in the next 50 years

Sep 6th 2014 | From the print edition

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FOR most people a 50th anniversary is an excuse for a party. For the men and women of McKinsey it is an excuse for a conference. Earlier this year the consulting firm decided to celebrate half a century of the McKinsey Quarterly by arranging a gathering of some of the world’s leading business thinkers and asking them to look forward to the next 50 years of management. The resulting special issue of the Quarterly is inevitably a mixed bag. A discussion on strategy inadvertently demonstrates the parlous state of the discipline that has provided McKinsey with its bread and butter. A puff-piece on eBay’s policy of recruiting female executives demonstrates that you should never let companies write about themselves (“Gender diversity has long been a passion of our CEO…”). But there are three issues that stand out.

The first is that the rise of smart machines will have a dramatic impact on the role of executives. Andrew McAfee of the Massachusetts Institute of Technology points out that the first machine age gave rise to the modern discipline of management: companies hired armies of managers to co-ordinate the workers who operated the machines, and to organise supply chains and distribution systems. The second machine age will reconfigure the discipline: much of the work of bosses, from analysing complex data to recruiting staff and setting bonuses, will be automated.

In this section

• Closing the circle
• After the float
• Keeping it in the family
• Read all about it
• The final reckoning
• Over the horizon

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Related topics

• Economic development
• Business
• Economics
• Globalisation
• India

Some companies have already begun delegating management decisions to machines. Google’s “human-performance analytics group” uses algorithms to decide which interview techniques are best at choosing good employees, and to optimise pay. Deep Knowledge Ventures, a Hong Kong-based venture-capital firm that specialises in drugs for age-related diseases, has even appointed an algorithm to its board of directors. Its name is Vital, and it gets a vote on which companies the firm invests in.

Senior managers will have to rethink their roles dramatically if they are not to become latter-day Luddites. They will have to hand some of their functions to intelligent machines, which will always be better at data analysis than humans, and some to the heads of business units, who will be in a better position to make use of the crunched data. Executives will increasingly focus on the two things that humans can still do better than machines—motivating the troops and producing game-changing thoughts. Mr McAfee says, “I’ve never seen a piece of technology that could negotiate effectively. Or motivate and lead a team.” Tom Peters, a veteran American management guru, reckons the best leaders of the future will spend half their time reading books.

The second idea is a new twist on a familiar worry about productivity. Economic growth has traditionally been fuelled by two things: higher productivity and more workers. But productivity growth has been disappointing in recent years, and, more important, the population is beginning to age: the United Nations predicts that, for the world as a whole, the number of people employed will increase by just 0.03% a year over the next 50 years compared with 1.8% in the past 50.

McKinsey argues that there are good reasons to be optimistic about improving productivity. The IT revolution is turbocharging what once looked like mature management technologies such as lean production and supply-chain management. Cloud computing lets small startups harness computing power that was once reserved for big firms. But the biggest potential gains will come from focusing on areas of the economy that have either been overlooked, because of a lack of imagination, or have stagnated, because they are protected by powerful interests.

There is considerable scope for boosting productivity in the use of industrial materials: first, by greatly expanding the recycling and reuse of metals and other matter; second, by replacing suboptimal materials with better ones (eg, carbon-fibre composites to replace metal in cars and planes) and third, by using “virtual” materials rather than physical ones, as with digital books and records. John van Reenen of the London School of Economics also notes that many developing countries, particularly India, have a long tail of badly managed companies. Productivity would improve significantly if these laggards were subjected to greater competition: Alibaba is already shaking up the Chinese retail industry in the way that Walmart shook up America’s in the 1990s, and India’s productivity would be similarly boosted if it opened up its archaic retail sector to foreign companies.

Obscure cities of the future

The third idea is also a twist on a well-known worry, about globalisation. Understanding emerging markets will no longer be enough. Managers will have to familiarise themselves with a mind-boggling number of mid-level cities in the developing world if they are to ride the next wave of globalisation. McKinsey notes that almost half of the world’s GDP growth between 2010 and 2025 will come from 440 cities in emerging markets: managers will have to learn about big, obscure places like Tianjin (China), Porto Alegre (Brazil) and Kumasi (Ghana).

These cities could be homes to competitors as well as consumers: McKinsey thinks that by 2025 no less than 45% of businesses on Fortune’s Global 500 list of the world’s biggest companies will be based in emerging markets, compared with just 5% in 2000. Given these changes, strategists at multinationals will no longer be able to think in terms of a set of national markets, each divided into a handful of income brackets. They will have to learn to “zoom out” to produce a coherent global approach and then “zoom in” to tailor their strategies to the idiosyncrasies of particular cities and the taxonomy of consumers in each.

Such growing complexity hardly supports Mr Peters’s idea that the managers of the future will be able to devote half of their time reading books. But it certainly suggests they will need all the help they can get—and maybe smart machines will turn out to be better guides even than management consultants.

From the print edition: Business