Here is a brief excerpt from a brilliant article written by Richard Dobbs, Sree Ramaswamy, Elizabeth Stephenson, and S. Patrick Viguerie for the McKinsey Quarterly, published by McKinsey & Company. They explain how and why the collision of technological disruption, rapid emerging-markets growth, and widespread aging is upending long-held assumptions that underpin strategy setting, decision making, and management. To read the complete article, check out other resources, learn more about the firm, obtain subscription information, and register to receive email alerts, please click here.

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Intuition forms over time. When McKinsey began publishing the Quarterly, in 1964, a new management environment was just beginning to take shape. On April 7 of that year, IBM announced the System/360 mainframe, a product with breakthrough flexibility and capability. Then on October 10, the opening ceremonies of the Tokyo Olympic Games, the first in history to be telecast via satellite around the planet, underscored Japan’s growing economic strength. Finally, on December 31, the last new member of the baby-boom generation was born.

Fifty years later, the forces symbolized by these three disconnected events are almost unrecognizable. Technology and connectivity have disrupted industries and transformed the lives of billions. The world’s economic center of gravity has continued shifting from West to East, with China taking center stage as a growth story. The baby boomers have begun retiring, and we now talk of a demographic drag, not a dividend, in much of the developed world and China.

We stand today on the precipice of much bigger shifts in each of these areas, with extraordinary implications for global leaders. In the years ahead, acceleration in the scope, scale, and economic impact of technology will usher in a new age of artificial intelligence, consumer gadgetry, instant communication, and boundless information while shaking up business in unimaginable ways. At the same time, the shifting locus of economic activity and dynamism, to emerging markets and to cities within those markets, will give rise to a new class of global competitors. Growth in emerging markets will occur in tandem with the rapid aging of the world’s population—first in the West and later in the emerging markets themselves—that in turn will create a massive set of economic strains.

Any one of these shifts, on its own, would be among the largest economic forces the global economy has ever seen. As they collide, they will produce change so significant that much of the management intuition that has served us in the past will become irrelevant. The formative experiences for many of today’s senior executives came as these forces were starting to gain steam. The world ahead will be less benign, with more discontinuity and volatility and with long-term charts no longer looking like smooth upward curves, long-held assumptions giving way, and seemingly powerful business models becoming upended. In this article, which brings together years of research by the McKinsey Global Institute (MGI) and McKinsey’s Strategy Practice, we strive to paint a picture of the road ahead, how it differs from the one we’ve been on, and what those differences mean for senior executives as they chart a path for the years to come.

Forces at work

In an article of this length, we can only scratch the surface of the massive forces at work. Nonetheless, even a brief look at three of the most important factors—emerging-markets growth, disruptive technology, and aging populations—is a useful reminder of the magnitude of change under way.

[Here are the first two forces they discuss.]

Dynamism in emerging markets

Emerging markets are going through the simultaneous industrial and urban revolutions that began in the 18th century in England and in the 19th century in the rest of today’s developed world. In 2009, for the first time in more than 200 years, emerging markets contributed more to global economic growth than developed ones did. By 2025, emerging markets will have been the world’s prime growth engine for more than 15 years, China will be home to more large companies than either the United States or Europe, and more than 45 percent of the companies on Fortune’s Global 500 list of major international players will hail from emerging markets—versus just 5 percent in the year 2000.

The new wave of emerging-market companies now sweeping across the world economy is not the first. In the 1970s and 1980s, many US and European incumbents were caught unaware by the swift rise of Japanese companies that set a high bar for productivity and innovation. More recently, South Korean companies such as Hyundai and Samsung have shaken up the leading ranks of high-value-added industries from automobiles to personal electronics. The difference today is that new competitors are coming from many countries across the world and in numbers that far outpace those of past decades. This new wave will be far tougher on some established multinationals. The shift in the weight of the global economy toward emerging markets, and the emergence of nearly two billion consumers who for the first time will have incomes sufficient to support significant discretionary spending, should create a new breed of powerful companies whose global expansion will take place on the back of strong positions in their home markets.

Within those markets, the locus of economic activity is also shifting, particularly in China (Exhibit 1). The global urban population is growing by 65 million a year, and nearly half of global GDP growth between 2010 and 2025 will come from 440 cities in emerging markets. Ninety-five percent of them are small and medium-sized cities that many executives haven’t heard of and couldn’t point to on a map: not Mumbai, Dubai, or Shanghai, of course, but Tianjin (China) and Porto Alegre (Brazil) and Kumasi (Ghana), among many others. Hsinchu, in northern Taiwan, is already the fourth-largest advanced-electronics and high-tech hub in the China region. In Brazil, the state of Santa Catarina, halfway between São Paulo and the Uruguayan border, has become a regional hub for electronics and vehicle manufacturing, hosting billion-dollar companies such as WEG Indústrias.

Technology and connectivity

From the mechanization of the Industrial Revolution to the computer-driven revolution that we are living through now, technological innovation has always underpinned economic change and disrupted the way we do things. But today is different—because we are in the “second half of the chessboard.” The phrase comes from the story told by Ray Kurzweil, futurist and director of engineering at Google, about the inventor of chess and the Chinese emperor. The inventor asked to be paid in rice: a single grain on the first square, two on the second square, four on the third, and so on. For the first half of the chessboard, the inventor was given spoons of rice, then bowls, and then barrels. The situation changed dramatically from there. According to one version of the story, the cost of the second half of the chessboard bankrupted the emperor as the continued doublings ultimately required 18 million-trillion grains of rice, enough to cover twice the surface area of the Earth. Similarly, the continuation of Moore’s law means that the next 18 months or so will bring a doubling of all the advances in computational power and speed we’ve experienced from the birth of the transistor until today. And then it will happen again. We’re accustomed to seeing Moore’s law plotted on a logarithmic scale, which makes all this doubling look smooth. But we don’t buy computers logarithmically. As power increases, prices decrease, devices proliferate, and IT penetration deepens, aggregate computing capacity surges at an eye-popping rate: we estimate the world added roughly 5 exaflops of computing capacity in 2008 (at a cost of about $800 billion), more than 20 in 2012 (to the tune of just under $1 trillion), and is headed for roughly 40 this year (Exhibit 2).

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Businesses suffer from a surprising degree of inertia in their decisions about how to back up strategies with hard cash to make them come to fruition. Research by our colleagues showed that between 1990 and 2010, US companies almost always allocated resources on the basis of past, rather than future, opportunities. Even during the global recession of 2009, this passive behavior persisted. Yet the most active companies in resource allocation achieved an average of 30 percent higher total returns to shareholders annually compared with the least active. The period ahead should raise the rewards for moving with agility and speed as digitization blurs boundaries between industries and competition in emerging markets heats up.

It would be easy, though, for organizations and leaders to become frozen by the magnitude of the changes under way or to tackle them on the basis of outdated intuition. Taking the long view may help. In 1930, the great British economist John Maynard Keynes boldly predicted that 100 years on, the standard of living in progressive countries would be four to eight times higher. As it turned out, the upper end of his optimistic expectation turned out to be closer to the truth. Those who understand the depth, breadth, and radical nature of the change and opportunity that’s on the way will be best able to reset their intuitions accordingly, shape this new world, and thrive.

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Here is a direct link to the complete article.

Richard Dobbs is a director of the McKinsey Global Institute, where Sree Ramaswamy is a senior fellow; Elizabeth Stephenson is a principal in McKinsey’s Southern California office; and Patrick Viguerie is a director in the Atlanta office.

The authors would like to acknowledge the contributions of Ezra Greenberg, Chip Hughes, James Manyika, Catherine Tilley, and Jonathan Woetzel to this article.