Winning the '20s: A Leadership Agenda for the Next Decade
by Richard Lesser, Martin Reeves, Ryoji Kimura and Kevin Whitaker
What will it take to win in the 2020s? Among other things, leaders must make learning, imagination and ecosystems part of their ongoing strategy.
THE WINNERS IN BUSINESS have shifted markedly in the last decade. When the 2010s began, the world’s ten most valuable public companies by market capitalization were based in five countries, only two of them were in the tech sector, and none was worth more than US$ 400 billion. Today, all of the top ten are in the U.S. and China, the majority are tech companies, and some — at least temporarily — have surpassed US$ 1 trillion in value.
Given the relentlessness of change on multiple dimensions, the keys to success are likely to be just as different over the next ten years. What will it take to win in the next decade? The Boston Consulting Group recently released a series called “Winning the 20s”, in which we present five imperatives for the next decade for organizations of all shapes and sizes:
- Master the new logic of competition;
- Design the organization of the future;
- Apply the science of organizational change;
- Achieve innovation and resilience through diversity; and
- Optimize for both social and business value.
In this article we will do a deep dive on the first imperative: Mastering the new logic of competition. For details on the other four imperatives, visit: bcg.com/en-ca/featured-insights/winning-the-20s/overview.aspx.
Mastering the New Logic of Competition
Internet and mobile technology ushered in the Information Age, profoundly affecting technology-intensive and consumer-facing. industries such as electronics, communications, entertainment and retail. But the emerging wave of technology — including AI, sensors and the Internet of Things (IoT) — is poised to turn every
business into an information business. The combination of an exponential increase in data, better tools to mine insights from that data, and a fast-changing business environment means that companies will increasingly need to — and be able to — compete on the rate of learning.
The emerging wave of technology is poised to turn every business into an information business.
Instead of the ‘economies of scale’ that today’s leaders grew up with — based on a predictable reduction of marginal production costs across a relatively uniform offering — tomorrow’s leaders will pursue ‘economies of learning’, based on identifying and fulfilling each customer’s changing needs by leveraging data and technology.
The arenas of competition will also look different in the 2020s, requiring new perspectives and capabilities. The familiar picture of a small number of companies producing a common end product and competing within well-defined industry boundaries will be replaced by one where competition and collaboration occur within and between ‘ecosystems’. Because ecosystems are fluid and dynamic, and not perfectly controllable even by the orchestrator, companies will need to be much more externally oriented, to deploy influence indirectly through platforms and marketplaces, and to co-evolve with ecosystem partners.
Orchestrators of ecosystems will be able to leverage the assets of other participants, and as such, ecosystem-based competition tends to have a winner-take-all nature. These factors are already causing rapidly rising valuations relative to tangible assets for the top companies, as well as an increasing gap between the profitability of high and low performers. But there is not yet any playbook for how to harness this premium. Practice is racing ahead of theory, and pioneers who can crack the code on ecosystems will be greatly advantaged.
Finally, companies will increasingly compete on resilience. Accelerating technological change, political gridlock, a shifting geopolitical power map, the increased scrutiny of business, and the polarization of society all point to an era of protracted uncertainty in which corporate life cycles are likely to continue shrinking. Companies will therefore need to worry not only about the competitiveness of their immediate game, but also about the durability of that game and their ability to weather unanticipated shocks.
Most of today’s incumbents — designed for relatively stable, classical business environments — are not well adapted for this more dynamic environment. Therefore, today’s leaders need to fundamentally reinvent the organizational model in order to become future winners.
Based on our research, following are five principles for mastering the new logic of competition.
PRINCIPLE 1: COMPETE ON THE RATE OF LEARNING. Learning has long been considered important in business. As Bruce Henderson, BCG’s founder, observed more than 50 years ago, companies can generally reduce their marginal production costs at a predictable rate as their cumulative experience grows. But in traditional models of learning, the knowledge that matters — learning how to make one product or execute one process more efficiently — is static and enduring. Going forward, it will instead be necessary to build organizational capabilities for dynamic learning — learning how to do new things, and ‘learning how to learn’ by leveraging new technology.
Today, artificial intelligence, sensors and digital platforms have already increased the opportunity for learning more effectively — but competing on the rate of learning will become a necessity in the 2020s. The dynamic, uncertain business environment will require companies to focus more on discovery and adaptation rather than only on forecasting and planning.
Companies will therefore increasingly adopt and expand their use of AI, raising the competitive bar for learning. And the benefits will generate a ‘data flywheel’ effect — companies that learn faster will have better offerings, attracting more customers and more data, further increasing their ability to learn. For example, Netflix’s algorithms take in behavioural data from the company’s video streaming platform and automatically provide dynamic, personalized recommendations for each user. This improves the product, keeping more users on the platform for longer — generating even more data to further fuel the learning cycle.
However, there is an enormous gap between the traditional challenge of learning to improve a static process and the new imperative to continuously learn new things throughout the organization. Therefore, successfully competing on learning will require more than simply plugging AI into today’s processes and structures. Instead, companies will need to:
- Pursue a digital agenda that embraces all modes of technology relevant to learning — including sensors, platforms, algorithms, data and automated decision making.
- Connect them in integrated learning architectures that can learn at the speed of data rather than being gated by slower hierarchical decision making.
- Develop business models that are able to act on dynamic, personalized customer insights.
PRINCIPLE 2: COMPETE IN ECOSYSTEMS. Classical models of competition assume that discrete companies make similar products and compete within clearly delineated industries. But technology has dramatically reduced communication and transaction costs, weakening the logic for combining many activities inside a few vertically integrated firms. At the same time, uncertainty and disruption require individual firms to be more adaptable, and they make business environments increasingly shapeable. Companies now have opportunities to influence the development of the market in their favour, but they can do this only by coordinating
with other stakeholders.
As a result of these forces, new industrial architectures are emerging based on the coordination of ecosystems — complex, semi-fluid networks of companies that challenge several traditional business assumptions. Ecosystems blur the boundaries of the company. For example, platform businesses such as Uber and Lyft rely heavily on ‘gig economy’ workers who are not direct employees but rather temporary freelancers. Ecosystems also blur industry boundaries. For instance, automotive ecosystems include not just traditional suppliers but also connectivity, software and cloud storage providers. And they blur the distinction between collaborators and competitors. Amazon and third-party merchants have a symbiotic relationship, while the company competes with those merchants by selling private-label brands.
A few digital giants have demonstrated that successfully orchestrating ecosystems can yield outsized returns. Indeed, many of the largest and most profitable companies in the world are ecosystem-based businesses. One example is Alibaba, which leads China’s massive e-commerce market, not by fulfilling most functions directly but by building platforms that connect manufacturers, logistics providers, marketers and other relevant service providers with one another and with end users. By decentralizing business activities across large groups of firms or individuals, the Alibaba ecosystem is rapidly adaptive to consumers’ needs and also highly scalable — resulting in 44 per cent annualized revenue growth for the company in the past five years.
The playbook for emulating these ecosystem pioneers has not yet been fully codified, but a few imperatives are becoming clear:
- Adopt a fundamentally different perspective toward strategy, based on embracing principles like external orientation, common platforms, co-evolution, emergence and indirect monetization.
- Determine what role your company can play in your ecosystem or ecosystems. Not all companies can be the orchestrator.
- Ensure that your company creates value for the ecosystem broadly, not just for itself.
PRINCIPLE 3: COMPETE IN THE PHYSICAL AND THE DIGITAL WORLD. Today’s most valuable and fastest-growing businesses are disproportionately young technology companies, which operate ecosystems that are predominantly digital. But the low-hanging digital fruits in consumer services, including retail, information and entertainment, seem to have been plucked. New opportunities are likely to come increasingly from digitizing the physical world, enabled by the rapid development and penetration of AI and the Internet of Things (IoI). This will increasingly bring tech companies into areas — such as B2B and businesses involving long-lived and specialized assets — that are still dominated by older incumbent firms.
Early signs of ‘hybrid’ competition at the physical-digital intersection are already emerging, with Digital giants moving into physical sectors. For example, Amazon has opened new retail stores in addition to its acquisition of Whole Foods, while Google has entered automotive and transportation through its Waymo subsidiary. Meanwhile, incumbent companies are furiously pursuing digitization. For example, John Deere has invested heavily in IoT technology by adding connected sensors to its tractors and other equipment. The company collects and analyzes data from each machine, using the insights to provide updates to its equipment or suggestions to users. “Our roadmap is calling for machine learning and AI to find their way into every piece of John Deere equipment over time,” said John Stone, the senior vice president for Deere’s Intelligent Solutions Group.
These trends point to a new battle between younger digital natives and traditional physical incumbents. But unlike in the past decade, in which upstarts unseated many legacy leaders with purely digital models, the next round is likely to be a more balanced contest. Technology companies no longer have a limitless social licence; in the next decade, they will have to navigate thorny issues like user trust, data privacy and regulation, which will likely be even more critical in the context of hybrid competition. And incumbents will still have to fight against institutional inertia and the long odds of disruption, but they will be able to better leverage existing relationships and expertise in the physical world. Therefore, the next wave of ‘natural selection’ in business is likely to test both digital natives and incumbents — and winners could emerge from either group.
What will make the difference? To succeed in hybrid competition, companies will need to:
- Build strong relationships with actors on both sides of the ecosystem — customers and suppliers.
- Rethink existing business models in order to win the battle for new hybrid markets.
- Adopt good practices for governance of data and algorithms to preserve users’ trust.
PRINCIPLE 4: COMPETE ON IMAGINATION. Companies can no longer expect to succeed by leaning predominantly on their existing business models. Long-run economic growth rates have declined in many economies, and demographics point to a continuation of that pattern. Competitive success has become less permanent over time. At the same time, markets are increasingly shapeable, increasing the potential reward for innovation. As a result, the ability to generate new ideas is more important than ever.
However, creating new ideas is challenging for many companies. Inertia increases with age and scale, making it harder to create and harness new ideas. Our analysis of companies around the world shows that older and larger firms have less vitality and less capacity for sustainable growth and reinvention. To date, business and managerial theory has emphasized a ‘mechanical’ view — dominated by easily measurable variables like efficiency and financial outcomes — rather than focusing on how to create new ideas.
To overcome these challenges, companies need to learn how to compete on imagination, which lies upstream of innovation: In order to realize new possibilities, we first need inspiration (a reason to see things differently), and then imagination (the ability to identify possibilities that are not currently the case but could be). Imagination is a uniquely human capability — artificial intelligence today can only make sense of correlative patterns in existing data. As machines automate an increasing share of routine tasks, individual managers will need to focus on imagination to stay relevant and make an impact.
How can companies compete on imagination?
- Focus on anomalies, accidents and analogies, rather than averages, in order to spark inspiration.
- Enable the open spread and competition of ideas — for example, by limiting hierarchy and empowering employees to experiment and make imaginative proposals.
- Become a ‘playful corporation’ that is able to effortlessly explore new possibilities.
PRINCIPLE 5: COMPETE ON RESILIENCE. Looking ahead to the 2020s, uncertainty is high on many fronts. Technological change is disrupting businesses and bringing new social, political and ecological questions to the forefront. Economic institutions are under threat from social divisions and political gridlock. Society is increasingly questioning the inclusivity of growth and the future of work. And planetary risks such as climate change are more salient than ever.
Furthermore, deep-seated structural forces indicate that this period of elevated uncertainty is likely to persist. Technological progress will not abate; the rise of China as an economic power will continue to challenge international institutions; demographic trends point toward an era of lower global growth, which will further strain societies; and social polarization will continue to challenge governments’ ability to effectively respond to national or global risks.
Under such conditions, it will become even more difficult to rely on forecasts and plans. Business leaders will need to consider the larger picture, including economic, social, political and ecological dimensions, making sure their companies can endure in the face of unanticipated shocks. In other words, businesses will effectively need to compete on resilience.
Building resilience is often at odds with traditional management goals like efficiency and short-run financial maximization. But to sustainably thrive in uncertain environments, companies must make resilience an explicit priority. Here’s how:
- Prepare for a range of scenarios to ensure that strategy is robust and risks are survivable.
- Build an adaptive organization that can rapidly adjust to new circumstances — for example, by constantly experimenting to identify new options.
- Proactively contribute to collective action on the biggest issues facing global economies and societies, in order to maintain a social license to operate.
As if winning in the present weren’t challenging enough, the more essential task for leaders has always been winning in the future. Our fast-changing world will continue to test status quo assumptions, making it critical for leaders to look ahead and develop an agenda for succeeding in the coming decade. In this excerpt from our Winning the 20s series, we have provided a starting point for that journey by addressing some of the thinking and mindsets that will be required to master the new logic of competition.
is President and CEO of the Boston Consulting Group. Martin Reeves
is Senior Partner and Managing Director in BCG’s New York City office and Director of the BCG Henderson Institute. He tweets @MartinKReeves. Ryoji Kimura
is a Senior Partner and Managing Director at BCG and Global Leader of the firm’s Corporate Finance & Strategy Practice. Kevin Whitaker
is an Economist at the BCG Henderson Institute. To read the complete Winning the 20s series, visit https://www.bcg.com/en-ca/featured-insights/winning-the-20s/overview.aspx
This article appeared in the Fall 2019 issue. Published by the University of Toronto’s Rotman School of Management, Rotman Management explores themes of interest to leaders, innovators and entrepreneurs.
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