Framing reinvention: What disruptive change means for business, society, and you


Here is an excerpt from the transcript of a podcast featured in the McKinsey Quarterly, published by McKinsey & Company. To read the complete article and/or hear the ∂iscussion, check out others, learn more about the firm, and sign up for email alerts, please click here.

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Global managing partner Kevin Sneader reflects on the challenges and opportunities that disruptive change presents for business leaders and society.
Sean Brown: From McKinsey’s Strategy and Corporate Finance practice, I’m Sean Brown, and welcome to Inside the Strategy Room. Today’s episode is an excerpt of a presentation that Kevin Sneader, our global managing partner, shared at the annual CFO Forum that we recently held in London.The conference’s theme was around reinventing the role of the CFO and how digital and analytics are helping drive this reinvention. Kevin’s remarks focused on macro disruptions and the implications for business and society. He sets the stage with a historical perspective on the pace of disruptive technological change using the SS Savannah, one of the first hybrid sailing ships that augmented wind power with a steam engine, to highlight that while change is a constant, the pace of disruptive change has risen dramatically—and will continue to do so.Here’s Kevin.Kevin Sneader: Good morning. It’s lovely being back in London. I grew up in Glasgow, and it is always nice to see what the British summer looks like. Certainly this would be a glorious summer’s day in Glasgow, so we shouldn’t complain—we should be enjoying life. We should also understand that there’s a lot going on in the world. My task this morning is at least to frame some of the context and give you a sense that this is a time of reinvention, not just evolution. I will try to substantiate why we believe that to be the case.

I grew up near the water, so I feel I should use the River Clyde and Scotland’s shipbuilding industry to draw the analogy. But I know that there are quite a few Americans in the room, and so I thought I would start with the US.

The SS Savannah was a steamship. If you look really closely, you can see there is one chimney, under the smokestack, right there in the middle of the vessel. It [the steam engine] only operated for about an hour on any given day—and in fact, less than that in aggregate—but it sailed from Glasgow to New York in 1818, in about 30 days, about a month. It was a major breakthrough: it was the first commercial steamship that could actually sail that distance.

Fifty years later, [if you’re a shipwright] you are obviously worried about steam. But you are not doing an awful lot, because you have plenty of opportunity to keep going. There was no particular reason to evolve, at least if you were a shipbuilder: you didn’t see that disruption as being all that material. But, of course, you were worried, and you wanted to make sure you could keep improving your technology in the face of disruption. And so you did this: the German response, the Preussen, in 1902.

Remember, the Savannah was in 1818. But again, why worry, because the Preussen crossed the Atlantic in about 26 days, so it sheared quite a bit of time off—another 10 percent off. It was competitive, but there was one problem—one quite significant problem—and it was this: the SS Grampian, built on the Clyde in 1907. The SS Grampian commercialized the technology. It could run under steam power, and it transformed trans-Atlantic shipping, and it could cross the Atlantic in somewhere between 20 and 22 days, carrying a full cargo—not just of coal, but actually of goods.

However, if you were a shipbuilder, you weren’t prepared to give up just yet on the age of sail. You do this: the Thomas W. Lawson, also built in 1907 and the finest of the sailboats. It was quite a magnificent vessel, and it, too, had a problem—quite a major problem, with hindsight—which is that it was very hard to steer. And so, in 1907, the Thomas W. Lawson foundered near the Isles of Sicilly and lost all hands except for the captain, George Dow, and an engineer. That was the end of the sail ship.

What is intriguing, of course, is that this all took place between 1818 and 1907. The disruption was there. And actually, it was quite revolutionary, but it just took a long time. Our challenge is that we have a very different pace and scale of change, and we don’t want to go building sailboats in the age of steam. What I want to do, therefore, is to frame the context in terms of a series of disruptions that is taking place and then talk more specifically about the technology of evolution—since digital and analytics are part of our theme—and how that is playing out, and what it is doing to the world in which we live.

The pace of change will never be this slow again—the next five years will be the replacement for the next ten years, and rather than two years, perhaps it is 18 months [that will matter].

I thought about reminding ourselves of the bigger context before we get to digital and analytics. We have two world powers. We have the rising world power in the form of China, which most analysts expect to be as big as or bigger than the US economy by 2030, in absolute terms, not relative terms. And we have the established power, of course, in the case of the United States. And we have the European Union and everyone else. Everyone else is trying to figure out what this world order will look like, and books have been written about this.

Secondly, let’s not forget that all of you are dealing with companies that are facing great change in the form of the consumer. I will argue, however, that much of that change is rather like the sailboats: the wonderful thing about demographics is that you can see it coming. It should not be a surprise that we are in a world where the millennials this year will outnumber the baby boomers. I can see quite a few boomers in this room, but I do not see very many millennials. No offense—perhaps there are a few, and I just can’t tell. There was at least one on the stage last night, and that millennial spoke a slightly different language to the rest of us. This is the reality of the world: this year, there will be more millennials than boomers in the United States.

The world as a whole will see some very interesting changes. There will be more people aged over 65 in China than there are citizens of the United States within the next ten years: about 400 million over the age of 65. That is greater than the population of the United States. Think about that—and think about China in that context. Again, the great thing about demographics is that you can see it coming. I’m sure you’ve all seen it coming and are thinking accordingly, but this is part of the disruption that we see.

Part of the world in which we live is premised on “tomorrow will be better than today,” but for many households, tomorrow has not been better than today. That is a big disruption.

The environment: I know there is much debate about the environment, and I am going to assert that the debate is one that is interesting, but what is more important is what the rising cost of environmental damage is doing to the economics of business around the world. If you are on the West Coast of the United States, you are feeling the pain of rising insurance premiums if you are a business. Those insurance premiums are rising because we know that there will be wildfires, and we know that there will be twice as many wildfires this year as there were three years ago. The environment has moved from being something we, of course, care about as citizens of this planet. As business leaders, it is now a cost of doing business that is being seen right around the world—whether it is in the cost of energy supplies if you are in a country that has chosen to deviate from using nuclear versus coal or, indeed, in the cost of insurance premiums if you are dealing with catastrophic events.

Populism: You can dialogue around why this is happening and what the rise of populism means. One of the most interesting reports that McKinsey has published was called Poorer than their parents, and that had one striking statistic—it had many, but it had one that really caught the eye. It was a simple statistic that said that between 1995 and 2005, if you looked at the OECD [Organisation for Economic Co-operation and Development] and at the disposable income of households in the OECD, then 98 percent of those households saw incomes go up, while only 2 percent saw incomes go down. It was 98 percent up, 2 percent down: a pretty good number. The same statistic fastforwarded ten years—from 2005 onward—looks rather different. That 98 percent going up became 30 percent, but that means that the 2 percent going down became 70 percent.

So we went from 2 percent of households seeing incomes go down to 70 percent of households. Incidentally that number was even larger in the United States and much smaller in Sweden. The reality is, therefore, that they are poorer than their parents. Part of the world in which we live is premised on “tomorrow will be better than today,” but for many households, tomorrow has not been better than today. That is a big disruption. And again, we could spend all day talking about why, wherefore, and whether we are sure about that number. Are there other numbers that point in the other direction? No.

The next disruption we are going to talk about is a revolution. Interestingly, it is a revolution not in terms of new technology—we often talk as if all this technology is new. It is a revolution in terms of the way in which that technology combines—the connectivity—which is far more important than the individual technologies themselves.

Those technologies are creating real change, and they are doing so in a way that is similar to the change in the eras of various industrial revolutions—such as in the First Industrial Revolution, which none of us can remember, with steam power to modern production at the turn of the last century. Importantly between that revolution and the electric-power revolution, something big happened, which was a transition.

Again, if we were here in a different context, I would be arguing that the future is very bright in that there will be more jobs created than lost when we get all the way to the Fourth Industrial Revolution. But the problem is, what happens in between? What happened in between those two revolutions was war. There were many other things that went on, but there was conflict—real disruption—as people started to fear for their futures. “What happens to my job? I can see that there are going to be more jobs, but what are you going to do for me?” This is part of the environment in which we live. There are machines and modern production methods. Automated production: that one went peacefully, but there is no guarantee. With all this disruption, against those four other disruptions I talked about, you can see why the world is a tense place.

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Here is a direct link to the complete article.

Sean Brown is McKinsey’s global director of communications for strategy and corporate finance and is based in the Boston office; Kevin Sneader is McKinsey’s global managing partner and is based in the Hong Kong office.

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