One fact has become clear over the first two decades of the 21st century. The only certainty is uncertainty. A glance at the Fortune 500 list for 2000 shows General Motors at #1, General Electric at #5, Sears at #16, Enron at #18 and Compaq at #20. Microsoft? Down at #84. Apple sat at #285, far behind Kodak and Gateway.[i] Facebook, Google and Amazon were nowhere to be found. Who could have foreseen the scale of change in that pre-9/11, ISIS, human genome, electric vehicle, streaming, Big Data, AI, Brexit and Kardashian world?
As Peter Drucker commented, ‘Trying to predict the future is like trying to drive down a country road at night with no lights while looking out the back window.’ However, Despite the futility of trying to accurately predict the future, any insight can provide valuable information when used correctly.
Rather than locking in to a single, fixed view of the future, today’s leaders talk more in terms of scenarios and probabilities. What could happen? How likely is it to occur? The goal is not necessarily to come up with a perfect prediction – our crystal ball is not that good – but to provide insights as to how potential future events may shape the economy, a market, an industry, or a company.
As we look forward to the 2020’s I see five very plausible scenarios that could reshape the global economy:
1. A truly sustainable world
2. Another global financial meltdown that makes the Great Recession look like a blip
3. Big tech’s failure to rotate to the ‘new’
4. The collapse of China as a global economic power
5. The slow death of physical retail stores
The seeds for all five of these scenarios can already be seen. This does not mean that they are certain to happen but, given the magnitude each scenario’s potential impact, organizations that could be impacted would be wise to consider them in their planning. Insights gained from scenario planning accomplish two things. First, they reduce the reliance on a single view of the future. This is the biggest weakness of current planning processes; they are far too often predicated on a singular view of the future. Second, by addressing alternate future scenarios organizations can consider the actions they should take when the unexpected occurs. Instead of resolutely sticking to a plan that has been invalidated by events, smart organizations can flex to changing circumstances.
Looking at each scenario in turn, I have estimated the impact using a surrogate measure that in every case will understate the actual magnitude. I looked at the companies in the Fortune Global 2000 list for 2019 and identified those that would be most immediately impacted under each scenario. The actual impact would be far greater as each scenario would impact companies outside the G2000 and also have a secondary effect on many other organizations on the list. For example, while a global financial crisis will directly impact all financial institutions, the secondary effects of reduced credit availability would extend much further. Let’s look at each scenario in turn.
Global Sustainability as The New Normal
Number of G2000 companies impacted = 2000
Revenue at risk = $35-40 trillion
Major Industries Impacted: Oil, Gas, Mining, Construction, Utilities
This is one scenario that is already well underway, and which appears to be unstoppable. Environmental sustainability has gone from a radical fringe issue to the pre-eminent concern of the world today relegating even world peace to also-ran status. Every aspect of human life, commerce and behavior will be impacted either directly or indirectly. However, the impact will perhaps be largest on large swathes of the economy such as oil and gas, mining, construction and transportation which today account for 18% ($7.5 trillion) of G2000 revenues.
Sustainability does not just represent a risk to established industries but also has the potential to create significant new economic value. A 2018 study by the Global Commission on Economy and Climate estimated that low-carbon growth could deliver economic benefits of US$26 trillion to 2030.[ii] However, the beneficiaries of these opportunities may well not be the current incumbents. Are oil and gas companies really going to lead in non-fossil fuel segments? Did Blockbuster become Netflix? Did Sony create the iPod? Will Ford fend off Tesla? A rapid major rotation away from unsustainable practices is likely to be more disruptive than the Industrial Revolution given its much broader geographic impact and the significantly larger scale of the global economy.
A Global Financial Meltdown
Number of G2000 companies impacted = 647
Revenue at risk = $8 -$10 trillion
Major Industries Impacted: Banking, Insurance, Asset Management, Property
Memories of the great recession of 2007-08 are already fading but the speed, global impact and depth of the collapse was unprecedented. Triggered by the burst of a housing bubble in the U.S. the shockwaves rapidly spread, with economic turmoil across Europe and in many emerging markets. Subsequent crises in Iceland, Ireland, Greece and the U.K. rocked the global economy. Only a few countries such as Germany, Australia and India avoided recessions. That may not be the case the next time.
The great recession reduced U.S. Real GDP by more than 4%, almost doubled the unemployment rate and drove a more than 50% fall in the S&P 500. In 2012, the St. Louis Federal Reserve Bank estimated that during the financial crisis the net worth of American households had declined by $17 trillion in inflation-adjusted terms, a loss of 26 percent. The U.S. alone made over $700 billion available through the Troubled Asset Relief Program (TARP) to mitigate the effects of the crash.
While many changes have been made to reduce risk, there is no guarantee that a repeat will not occur. Financial services constitute more than 20% of G2000 revenues making it the largest sector. This is consistent with the sector’s overall share of the global economy[iii].
One of the biggest challenges with financial crises is that they are as much about confidence as they are about underlying economics. Once confidence is lost the declines tend to be rapid and deep leaving little time for remedial action. Many economists would argue the question is not whether another global financial meltdown occurs but when it will occur.
Even without a global financial crisis, there are other disruptors that could roil the sector including further regulatory change, Fintech, disintermediation of banks through peer-to-peer relationships supported by blockchain and other technologies. Further intriguing questions include the fate of the automotive insurance sector when all cars are driverless; the need for physical bank branches when all banking is conducted online; and the value of financial advice in algorithm-driven investment world. Leaders of global financial institutions have a lot to ponder as they look to the future.
Demise Of ‘Big Tech’
Number of G2000 companies impacted = 266
Revenue at risk = $2.7 trillion
Major Industries Impacted: High Technology, Software, Semiconductor, Telecommunications, Media, Technology Services
Today’s Big Tech titans exercise a phenomenal grip over many aspects of life influencing our purchases, social interactions, education and opinions. It seems unthinkable that Amazon, Facebook, Google, Alibaba or Tencent will cease to dominate the landscape. However, history shows us, that particularly in the fast-moving world of technology, dominance can be fleeting at best. The biggest threat to the leadership positions of today’s tech giants is a loss of relevance due to a failure to remain current with changes in the landscape. At one time IBM, Digital Equipment, Wang, America Online, Netscape, Napster, Compaq, Atari, Myspace, Motorola and Nokia dominated segments of the technology world only to lose their leadership positions or in some cases completely disappear. Given the rapid evolution of data-driven technologies and the emergence of newer realms such as artificial intelligence, biotechnology, blockchain and edge computing the opportunities for disruption are significant.
As technology further evolves from hardware and software to data the balance of power will continue to shift. IBM is a decade into a major turnaround attempt to reposition itself from old-tech to new-tech. HP split itself into two companies, one focused on the new and the other on the old. Today’s leaders are all looking to hyper-personalize the experiences they offer. However, the barriers to entry remain relatively though particularly in digital uses that have not yet been envisioned!
If irrelevance doesn't damage today’s leaders, there is another threat – government regulation. Standard Oil and AT&T were both dismantled through government action and Microsoft’s dominance in the internet browser market was successfully challenged by the U.S. government in 1998. Today, the threat of regulatory action remains, E.U. regulators are conducting a formal investigation of Amazon and state attorney generals in the U.S. are currently looking at Google. Regulatory action could reshape the technology landscape yet again.
Collapse of China
Number of G2000 companies impacted = 236
Revenue at risk = $2.3 trillion
The amazing transformation of the Chinese economy is perhaps the signature economic story of our times. The economy has transitioned from a closed, collective farm driven, subsistence economy to becoming the world’s #2 economic power in a little over 30 years.
To have accomplished that without sacrificing state control of almost everything is even more remarkable. However, past success is no guarantee of future success. China is already wrestling with a number of issues that could derail its progress. It has one of the highest debt to GDP ratios in the world with debt equal to 2.6 times GDP largely driven by government borrowing to support economic growth.[iv] Much of the investment in the economy is driven by government and there is growing uncertainty as to whether all these investments are economically viable. As China’s GDP growth continues to slow the ability to fund further investments could be constrained.
Other factors that may impact China’s role in the global economy could include:
Government’s ability to retain total control of an increasingly educated, affluent and connected populace;
Dealing with an aging population and reducing overall workforce as a result of the ‘one-child’ policy;
Managing the widening gap between urban wealth and rural poverty;
Rising affluence reducing its cost advantage in manufacturing;
Effectively dealing with major health issues such as SARS and the Coronavirus;
Surviving sustained trade wars given the scale of overseas trade;
Creating new economic growth engines driven by innovation, an area where China lags well behind many other economic powers.
While a wholesale collapse of the Chinese economy is unlikely, but it would not be unprecedented. It is only 30 years since the economies of the Soviet bloc collapsed in parallel with their political systems.
The impact of a China collapse would be far greater than the 236 Chinese G2000 companies. The global economy has become much more dependent on China in recent years. Most other Asian economies are tightly connected to China’s global supply chains. Countries such as Pakistan and Egypt are heavily dependent on Chinese investment; and resource rich economies such as Australia and Chile have found China to be good customer.[v] Perhaps even more impactful would be the loss of access to a market of almost 1.4 billion people in China. For example, General Motors sold 10% more cars in China than it did in the United States in 2018 and more than 25% of Boeing’s sales are to China.
The Continued Demise of The Retail Store
Number of G2000 companies impacted = 133
Revenue at risk = $2.1 trillion
The demise of physical retail stores has long been predicted and there is clear evidence of decline in the segment. In the U.S., 9,300 retail outlets closed in 2019[vi]. In the U.K. almost 8,000 outlets closed[vii]. In April 2019, investment bank UBS predicted as many as 75,000 additional outlets could disappear by 2026. While retail makes up a smaller share of the global economy than other sectors, it tends to be relatively labor intensive. Walmart, Amazon, Kroger, Home Depot, Carrefour, Target, Auchan and Tesco all employ more than 300,000 people[viii]. In the U.S. alone almost 16 million people are employed in the retail sector[ix]. Disruption in the sector has a disproportionate impact on those at the lower end of the economic spectrum given the lower average wages paid to retail workers.
The biggest shift in retail is from physical stores to online. In 2019, online retail sales accounted for just over 14% of total spending and was growing at about 18% a year compared with total retail sales growth of only 3.4%[x]. Therefore, of the total increase in retail sales of $690bn, 77% or $530bn came from online. The move to digital retail is sure to continue and while physical stores may not disappear completely the wholesale restructuring of retail is well under way and it is by no means certain that incumbents will survive the transition. One trend to watch is whether the rotation from selling things (clothes, appliances, etc.) to selling services or experiences (gyms, spas, health centers, restaurants) continues and retail value shifts accordingly. Even that trend is not assured if the rise of ‘at home’ service delivery continues. It's a fascinating time but also a deeply unsettling time from traditional players.
Conclusions
Of course, the scenarios in this paper are not a finite list. Others that I considered include: the U.S. moving to a socialized healthcare system; a major cyberattack that paralyzes or destroys the technology infrastructure of one or more national economies; a major disease event that materially disrupts world trade and decimates portions of the workforce; and finally a series of medical breakthroughs that dramatically reduce health risks and extend life expectancies.
In light of recent events it is not hard to extrapolate a number of other scenarios. So, what are leaders to do in the face of such uncertainty? The first point is that none of this is new. Mankind has been dealing with the unexpected for centuries and in most cases has emerged stronger. As a start point, it can helpful to ask a few simple questions:
Which scenarios are relevant for our business?
How probable is the scenario?
What would be the impact on our strategy – both positive and negative?
What are best leading indicators of the likely occurrence of a chosen scenario?
How should we respond in the event it appears that a scenario is playing out?
Fear and paralysis are not good responses to uncertainty. By all means expect the unexpected but continue to execute with passion and confidence. When change occurs, embrace it and look to capture the opportunities and mitigate the risks.
References
[i] Fortune 500 list for 2000 and 2019 and the Fortune Global 2000 list for 2019
[ii] Unlocking The Inclusive Growth Story Of The 21st Century, The Global Commission on Economy and Climate, August 2018.
[iii] Organization for Economic Co-operation and Development (OECD)
[iv] China's Economic Growth, Its Causes, Pros, Cons, and Future., The Balance, December 18, 2018
[v] China and the world: Inside the dynamics of a changing relationship, McKinsey Global Institute, July 2019
[vi]More than 9,300 stores are closing in 2019 as the retail apocalypse drags on, Business Insider, Dec 29, 2019
[vii] High street crisis to continue into 2020, Sahar Nazir, Retail Gazette, December 27, 2019
[viii] Largest Companies Based Upon Number of Employees 2018, Statista.com, January 2019
[ix] Bureau of Labor Statistics, December 2019
[x] Global ecommerce sales to reach nearly $3.46 trillion in 2019, Jessica Young, Digital Commerce 360, Nov 13, 2019