Finding the signal in a world of flipped rules

The world may feel noisier, faster and less predictable than it did a few years ago, but Chris Bradley rejects the idea that directors are operating in complete chaos.

“We think there’s a lot of signal in the noise,” says Bradley, a senior partner at McKinsey & Company and director of the McKinsey Global Institute.

“The reason sometimes things feel blurry or noisy is because our dish is stuck on the old network, but the era has shifted and we’ve got to shift our dish with it.”

Ahead of his keynote at the Institute of Directors’ National Leadership Conference in September, Bradley says many of the rules that shaped the past 30 years have flipped and boards need to recognise the new pattern, rather than continue interpreting events through the framework of the previous era.

“We’re at a very special time where many of the rules that all of us have grown up with – the rules of the world, so to speak – have flipped.”

Bradley identifies five shifts:

• • Unipolar to multipolar – the world is moving from one dominant geopolitical order to a more contested one
  • Digitisation to humanisation – technology is moving from digitisation towards “humanisation”, with technologies increasingly able to do jobs
  • Demographic tailwinds to headwinds – demographic trends that supported growth for decades are becoming less favourable
  • Combustion to spark – energy systems are moving towards electrification, while energy itself is becoming more strategically contested
  • Easy growth and cheap money to productivity on our own merits – the tailwinds created by China and India entering the global economy are fading, requiring countries and companies to create high-quality industrial productivity on their own merits.  

“There’s pretty well no company on earth that is isolated from those five trends,” Bradley says. “They are truly megatrends.”

He does not suggest every consequence can be predicted. His argument is that the broad direction is visible and boards should distinguish between what is already known and what remains uncertain.

A multipolar world, for example, means countries will “re-arm, re-energise, re-industrialise and realign”, he says. He argues these are predictable consequences of a shift away from a single dominant geopolitical order.

Trade is not disappearing, but its routes and relationships are changing.

“Trade among friendly players is going up and trade between unfriendly players is going down.”

Bradley points to record global trade as evidence trade is not disappearing so much as realigning around new geopolitical relationships.

He says boards should identify the developments they know are under way, build them into their plans and separately monitor the uncertainties that could alter the organisation’s response.

“We need to learn a new world,” he says. “But we also need to be a little bit gracious with ourselves that it’s no surprise this feels hard because we’ve all spent our entire careers learning how to deal with the old world. And it suddenly moved.” 

Direction before distraction

Bradley’s answer to competing demands is not to add more issues to the board agenda.

“Boards that do well with competing demands are the ones that are committed and convicted about a clear direction,” he says. “If you’re not committed or not convicted and you don’t have a clear direction, you’re blown around.”

In his view, a board with a strong long-range mission can decide which risks, stakeholders and trade-offs matter most. Without that conviction, each new issue can pull the organisation in a different direction.

“When a lot of boards say, ‘I’m struggling to deal with all these stakeholder demands’, that’s actually code for, ‘I don’t have a convicted view of the world and a strong direction’.”

He describes McKinsey’s formula for corporate performance as “endowment plus trend plus moves”.

Endowment is what the organisation starts with – its assets, knowledge, capabilities and brand. Trend is whether the organisation has favourable conditions behind it or is pushing into a headwind. Moves are the choices it makes.

“If you want to be extraordinary, you have to do extraordinary things.”

Bradley says most companies can produce a list of priorities, whether artificial intelligence, personalisation, productivity or growth. His test is whether those priorities amount to decisive strategic moves. “Every company has a list, but can you see it from space?”

The organisations that outperform, he says, make sustained moves that change their position. These may include entering new growth areas, reallocating resources, reinventing the customer proposition, improving productivity or pursuing mergers and acquisitions in a deliberate way. 

Productivity does not come from somewhere else

Bradley sees productivity as a central challenge for Australia, New Zealand and other Western economies.

He traces weak productivity growth to two broad factors – private-sector growth lagging government-sector growth and investment falling below earlier levels.

“The question of what should we do to improve productivity is around investment.”

Research by the McKinsey Global Institute found that most productivity gains within a sector or country are generated by a small number of companies. Those businesses tend to be large organisations undertaking significant reform or medium-sized organisations growing quickly.

“The vast majority of productivity gain in any sector or any country is actually from very few companies.”

Bradley points to US retailing, where several million firms operate, yet just six companies account for more than half the sector’s productivity improvement.

He says that finding places responsibility directly with leading businesses and their boards. Productivity is not only a government policy question or an abstract economic target.

“My message is not just that productivity is important or that we’ve got to unlock investment,” he says. “It’s the role of the best firms in the country to do it. It doesn’t come from somewhere else.”

He argues that large and successful organisations should be more confident about the contribution they make when they invest, grow and improve performance.

“The reason we can have growing living standards in our countries actually traces back to institutions growing and performing amazingly.”

Earn optimism

Bradley uses artificial intelligence to illustrate the need for clearer thinking, stronger investment and greater strategic ambition.

He contrasts Moore’s Law, under which chip capability doubled about every 18 months, with his view that AI capability is doubling about every seven months.  

“A lot of boards are having that newspaper problem now,” he says.

A newspaper company considering digital technology in 2000 might have focused on improving the newspaper itself. Instead, one of the biggest disruptions came through the reinvention of classified advertising, which fundamentally changed the economics of the industry.

He sees a similar risk with artificial intelligence. Boards may ask how it can make the current business slightly better, rather than what customer problems it can solve in a fundamentally different way.

“My bias, when you’re thinking about these new technologies such as AI, is to default to optimism.”

That does not mean ignoring risk or assuming success. “You’ve got to earn optimism,” Bradley says.

He describes the required posture as both optimistic and vigilant. Boards need to recognise that artificial intelligence is foundational while remaining alert to competitors using it more ambitiously.

“Be the ultimate optimist, but also be vigilant that someone else might be more optimistic than you.”

Bradley says the same challenge applies to emerging industries. The McKinsey Global Institute has identified 18 potential growth arenas across areas including artificial intelligence, robotics, electrification, biotechnology and new materials.

“The problem for Australia and New Zealand is we don’t play very hard in those places,” he says.

He does not argue that either country needs to compete in every arena. The task is to participate enough to benefit from the investment, technology and growth gathering around them.

“You don’t need to play in everything, but you just need to get close enough to the sun that you get some of that energy,” he says.

Chris Bradley will speak at the Institute of Directors’ Leadership Conference in Te Whanganui-a-Tara Wellington on 3-4 September. Register here.