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Wealth Inequality: A Bleak Picture
By Shlomo Maital
source: McKinsey Global
Shocking episodes of police violence against African-Americans have again brought the ugly fact of racism in the United States to the fore.
Underlying it, reflecting it, is the equally shocking chronic inequality of median family wealth between white and black. The graph above, from McKinsey, a global consulting company, shows that since 1992, the median white family has wealth from six to ten times greater than the median black family. The graph ends in 2016 – the wealth inequality has doubtless grown under Trump, because of the massive gift of wealth his tax cut gave, to already-wealthy whites.
African-Americans are equally intelligent, equally hard-working (or more so), equally creative. So why can they not accumulate wealth? Is it because they lack opportunities, in schooling, education, employment and political voice? And why are they dying in large numbers, from COVID-19, well beyond their proportion (12-13%) in the population?
The bitter irony between right-wing US cries of Make America Greater (was it ever, since the end of slavery?), and the terrible injustice of inequality, Make America Fairer, is registering, belatedly, on many Americans, as protests continue. Let’s hope enough of them remember this in 140 days exactly, on Tuesday November 3 – the presidential election.
The World After COVID-19
By Shlomo Maital
What happens after the COVID-19 pandemic subsides? Two McKinsey (global consulting company) experts Kevin Sneader and Shubham Singhal provide some insights. This blog is rather long – warning!
They describe a five-stage process we need to manage: In order: the five R’s — Resolve, Resilience, Return, Reimagine, Reform.
First point: Everything, everything will change.
“It is increasingly clear our era will be defined by a fundamental schism: the period before COVID-19 and the new normal that will emerge in the post-viral era: the “next normal.” In this unprecedented new reality, we will witness a dramatic restructuring of the economic and social order in which business and society have traditionally operated. And in the near future, we will see the beginning of discussion and debate about what the next normal could entail and how sharply its contours will diverge from those that previously shaped our lives. Collectively, these five stages represent the imperative of our time: the battle against COVID-19 is one that leaders today must win if we are to find an economically and socially viable path to the next normal.”
The authors then note a five-stage process for moving forward:
Step One. Resolve “ …a toxic combination of inaction and paralysis remains, stymying choices that must be made: lockdown or not; isolation or quarantine; shut down the factory now or wait for an order from above. That is why we have called this first stage Resolve: the need to determine the scale, pace, and depth of action required at the state and business levels. As one CEO told us: “I know what to do. I just need to decide whether those who need to act share my resolve to do so.”
Step Two. Resilience. “A McKinsey Global Institute analysis, based on multiple sources, indicates that the shock to our livelihoods from the economic impact of virus-suppression efforts could be the biggest in nearly a century. In Europe and the United States, this is likely to lead to a decline in economic activity in a single quarter that proves far greater than the loss of income experienced during the Great Depression. In the face of these challenges, resilience is a vital necessity. Near-term issues of cash management for liquidity and solvency are clearly paramount. But soon afterward, businesses will need to act on broader resilience plans as the shock begins to upturn established industry structures, resetting competitive positions forever. Much of the population will experience uncertainty and personal financial stress. Public-, private-, and social-sector leaders will need to make difficult “through cycle” decisions that balance economic and social sustainability, given that social cohesion is already under severe pressure from populism and other challenges that existed pre-coronavirus.”
Step Three. Return. “Returning businesses to operational health after a severe shutdown is extremely challenging, as China is finding even as it slowly returns to work. Most industries will need to reactivate their entire supply chain, even as the differential scale and timing of the impact of coronavirus mean that global supply chains face disruption in multiple geographies. The weakest point in the chain will determine the success or otherwise of a return to rehiring, training, and attaining previous levels of workforce productivity. Leaders must therefore reassess their entire business system and plan for contingent actions in order to return their business to effective production at pace and at scale. Government leaders may face an acutely painful “Sophie’s choice”: mitigating the resurgent risk to lives versus the risk to the population’s health that could follow another sharp economic pullback. Compounding the challenge, winter will bring renewed crisis for many countries. Without a vaccine or effective prophylactic treatment, a rapid return to a rising spread of the virus is a genuine threat. In such a situation, government leaders may face an acutely painful “Sophie’s choice”: mitigating the resurgent risk to lives versus the risk to the population’s health that could follow another sharp economic pullback. Return may therefore require using the hoped-for—but by no means certain—temporary virus “cease-fire” over the Northern Hemisphere’s summer months to expand testing and surveillance capabilities, health-system capacity, and vaccine and treatment development to deal with a second surge. See “Bubbles pop, downturns stop” for more.”
Step Four. Reimagination. “A shock of this scale will create a discontinuous shift in the preferences and expectations of individuals as citizens, as employees, and as consumers. These shifts and their impact on how we live, how we work, and how we use technology will emerge more clearly over the coming weeks and months. Institutions that reinvent themselves to make the most of better insight and foresight, as preferences evolve, will disproportionally succeed. Clearly, the online world of contactless commerce could be bolstered in ways that reshape consumer behavior forever. But other effects could prove even more significant as the pursuit of efficiency gives way to the requirement of resilience—the end of supply-chain globalization, for example, if production and sourcing move closer to the end user. The crisis will reveal not just vulnerabilities but opportunities to improve the performance of businesses. Leaders will need to reconsider which costs are truly fixed versus variable, as the shutting down of huge swaths of production sheds light on what is ultimately required versus nice to have. Decisions about how far to flex operations without loss of efficiency will likewise be informed by the experience of closing down much of global production. Opportunities to push the envelope of technology adoption will be accelerated by rapid learning about what it takes to drive productivity when labor is unavailable. The result: a stronger sense of what makes business more resilient to shocks, more productive, and better able to deliver to customers.
Step Five. Reform. “The world now has a much sharper definition of what constitutes a black-swan event. This shock will likely give way to a desire to restrict some factors that helped make the coronavirus a global challenge, rather than a local issue to be managed. Governments are likely to feel emboldened and supported by their citizens to take a more active role in shaping economic activity. Business leaders need to anticipate popularly supported changes to policies and regulations as society seeks to avoid, mitigate, and preempt a future health crisis of the kind we are experiencing today.
“In most economies, a healthcare system little changed since its creation post–World War II will need to determine how to meet such a rapid surge in patient volume, managing seamlessly across in-person and virtual care. Public-health approaches, in an interconnected and highly mobile world, must rethink the speed and global coordination with which they need to react. Policies on critical healthcare infrastructure, strategic reserves of key supplies, and contingency production facilities for critical medical equipment will all need to be addressed. Managers of the financial system and the economy, having learned from the economically induced failures of the last global financial crisis, must now contend with strengthening the system to withstand acute and global exogenous shocks, such as this pandemic’s impact. Educational institutions will need to consider modernizing to integrate classroom and distance learning. The list goes on.
“The aftermath of the pandemic will also provide an opportunity to learn from a plethora of social innovations and experiments, ranging from working from home to large-scale surveillance. With this will come an understanding of which innovations, if adopted permanently, might provide substantial uplift to economic and social welfare—and which would ultimately inhibit the broader betterment of society, even if helpful in halting or limiting the spread of the virus.”
When to Trust Your Gut
By Shlomo Maital
Daniel Kahneman
Daniel Kahneman, a psychologist, won the Nobel Prize for Economics in 2002, for his pioneering contribution to how people make decisions under uncertainty.
In 2009 Kahneman debated Gary Klein, a senior scientist at MacroCognition, about a crucial question: When should people trust their intuition, and when should they suspect it? The debate was published in the American Psychologist. Here is a brief summary, thanks to McKinsey Quarterly and their interview of the two following the original article:
McKinsey Quarterly: In your recent American Psychology article, you asked a question that should be interesting to just about all executives: “Under what conditions are the intuitions of professionals worthy of trust?” What’s your answer? When can executives trust their guts?”
Gary Klein: It depends on what you mean by “trust.” If you mean, “My gut feeling is telling me this; therefore I can act on it and I don’t have to worry,” we say you should never trust your gut. You need to take your gut feeling as an important data point, but then you have to consciously and deliberately evaluate it, to see if it makes sense in this context. You need strategies that help rule things out. That’s the opposite of saying, “This is what my gut is telling me; let me gather information to confirm it.”
Daniel Kahneman: There are some conditions where you have to trust your intuition. When you are under time pressure for a decision, you need to follow intuition. My general view, though, would be that you should not take your intuitions at face value. Overconfidence is a powerful source of illusions, primarily determined by the quality and coherence of the story that you can construct, not by its validity. If people can construct a simple and coherent story, they will feel confident regardless of how well grounded it is in reality.
McKinsey Quarterly: Is intuition more reliable under certain conditions?
Gary Klein: We identified two. First, there needs to be a certain structure to a situation, a certain predictability that allows you to have a basis for the intuition. If a situation is very, very turbulent, we say it has low validity, and there’s no basis for intuition. For example, you shouldn’t trust the judgments of stock brokers picking indivi dual stocks. The second factor is whether decision makers have a chance to get feedback on their judgments, so that they can strengthen them and gain expertise. If those criteria aren’t met, then intuitions aren’t going to be trustworthy.
Daniel Kahneman: This is an area of difference between Gary and me. I would be wary of experts’ intuition, except when they deal with something that they have dealt with a lot in the past. Surgeons, for example, do many operations of a given kind, and they learn what problems they’re going to encounter. But when problems are unique, or fairly unique, then I would be less trusting of intuition than Gary is. One of the problems with expertise is that people have it in some domains and not in others. So experts don’t know exactly where the boundaries of their expertise are.
McKinsey Quarterly: Yet senior executives want to make good decisions. Do you have any final words of wisdom for them in that quest?
Daniel Kahneman: My single piece of advice would be to improve the quality of meetings—that seems pretty strategic to improving the quality of decision making. People spend a lot of time in meetings. You want meetings to be short. People should have a lot of information, and you want to decorrelate errors.
Gary Klein: What concerns me is the tendency to marginalize people who disagree with you at meetings. There’s too much intolerance for challenge. As a leader, you can say the right things—for instance, everybody should share their opinions. But people are too smart to do that, because it’s risky. So when people raise an idea that doesn’t make sense to you as a leader, rather than ask what’s wrong with them, you should be curious about why they’re taking the position. Curiosity is a counterforce for contempt when people are making unpopular statements.
“Drowning in Debt”
By Shlomo Maital
A new report from McKinsey Global Research, “Global Debt: Challenges and Opportunities”, sounds the alarm, from a rather unlikely source – a consulting company that makes its living on optimism and activism.
Here is what McKinsey says, worth heeding!
”The world is deep in a flood tide of debt. Do we care and what do we do about it?
….More than 8 years since the 2008 global financial crisis started the world seems to be drowning in debt. Global economic growth remains anemic..some economists attribute it to the high level of debt (govt., businesses, households have been devoting significant resources to debt servicing instead of productive activities). …Global debt has been growing faster than the economy… as of mid 2015 it stood at 294 % of global gross domestic product, up 25 percee end of 2007 and 48 percentage points since the end of 2000. In many countries debt has increased to levels not normally seen during peacetime in advanced economies.”
The world has painted itself into a corner. Advanced economies desperately need major investments in infrastructure and human capital. Instead they are either a) slashing public spending, to try to control the high level of debt, or b) recycling huge debts, borrowing new money just to pay off old money, because slow growth has put the brakes on tax revenues and increased deficits.
I see little sign of creative thinking to solve the problem. Central Bankers recently meet at Jackson’s Hole, Wyoming, took off their ties and formal dress…. And heard Janet Yellen, head of the US Fed, speak about how she plans, maybe, perhaps, to raise interest rates a bit this year. In Europe the central bank continues to push negative interest rates, after everyone knows for sure that you cannot get out of the painted corner solely by adding to the already huge mountain of money.
Does anyone have a creative idea? Our central bankers are completely out to lunch… literally.
Global Trade: More Information Than Goods
By Shlomo Maital
McKinsey Global Research points out a remarkable fact about global trade: “Soaring flows of data and information now generate more economic value than the global goods trade.” According to McKinsey:
“…. although the global goods trade has flattened and cross-border capital flows have declined sharply since 2008, globalization is not heading into reverse. Rather, it is entering a new phase defined by soaring flows of data and information. Remarkably, digital flows—which were practically nonexistent just 15 years ago—now exert a larger impact on GDP growth than the centuries-old trade in goods, according to a new McKinsey Global Institute (MGI) report, Digital globalization: The new era of global flows.”
So, what does this key fact mean for innovators and entrepreneurs?
Here are a few important implications:
- “Individuals are using global digital platforms to learn, find work, showcase their talent, and build personal networks. Some 900 million people have international connections on social media, and 360 million take part in cross-border e-commerce. Digital platforms for both traditional employment and freelance assignments are beginning to create a more global labor market.”
- “….not all countries are making the most of this potential. The latest MGI Connectedness Index—which ranks 139 countries on inflows and outflows of goods, services, finance, people, and data—finds large gaps between a handful of leading countries and the rest of the world. Singapore tops the latest rankings, followed by the Netherlands, the United States, and Germany. China has grown more connected, reaching number seven, but advanced economies in general remain more connected than developing countries. In fact, each type of flow is concentrated among a small set of highly connected countries.”
- “…over a decade, all types of flows acting together have raised world GDP by 10.1 percent over what would have resulted in a world without any cross-border flows. This value amounted to some $7.8 trillion in 2014 alone, and data flows account for $2.8 trillion of this impact. Both inflows and outflows matter for growth, as they expose economies to ideas, research, technologies, talent, and best practices from around the world.”
Bottom line? Innovator, wherever you are, if you have an Internet connection (true, 4 billion people, or over half the world, do not), you have access to the New World of trade in information data and knowledge. Perhaps trade in goods is lagging, owing to the Great Recession, but globalization of knowledge is alive and well.
McKinsey: Testing for Innovation
By Shlomo Maital
McKinsey Global Research April 2015 has circulated a lovely article on Innovation: “The eight essentials of innovation” by Marc de Jong, Nathan Marston, and Erik Roth. It includes a short self-test for you and your organization. Their key point: (often repeated in this space): “Since innovation is a complex, company-wide endeavor, it requires a set of crosscutting [and at times paradoxical] practices and processes to structure, organize, and encourage it.”
Here are the eight questions you should ask:
- ASPIRE Do you regard innovation-led growth as critical and do you have cascaded targets that reflect this? Yes/No
- CHOOSE Do you invest in a coherent time- and risk-balanced portfolio of intiatives with sufficient resources to win? Yes/No
- DISCOVER Do you have differentiated business, market and technology insights that translate into winning value propositions? Yes/No
- EVOLVE Do you create new business models that provide defensible and scalable profit sources? Yes/No
- ACCELERATE Do you beat the competition by developing and launching innovations quickly and effectively? Yes/No
- SCALE Do you launch innovations at the right scale in the relevant markets and segments? Yes/No
- EXTEND Do you win by creating and capitalizing on external networks?
- MOBILIZE Are your people motivated, rewarded, and organized to innovate repeatedly?
Score yourself and your organization. Six out of 8 or above? You’re an innovator. Five and below – you need to make some urgent changes.
Chinese Innovation: On the Rise
By Shlomo Maital
An insightful new report by McKinsey Global “China’s Innovation Imperative” sheds important light on China’s massive effort to become more innovative.
Here are some of the report’s key insights:
* “to realize consensus growth forecasts—5.5 to 6.5 percent a year—during the coming decade, China must generate two to three percentage points of annual GDP growth through innovation”. In other words up to half of China’s GDP growth must come from innovation. This is no easy task.
* “…about 40 percent of the increase in total factor productivity could come from innovations in higher-level manufacturing and services enabled by the Internet. Other innovations could come from catch-up activities that bring Chinese enterprises up to global best practices as well as breakthroughs yet to emerge. China will have evolved from an “innovation sponge,” absorbing and adapting existing technology and knowledge from around the world, into a global innovation leader.”
* “China has become a strong innovator in areas such as consumer electronics and construction equipment. Yet in others—creating new drugs or designing automobile engines, for example—the country still isn’t globally competitive. That’s true even though every year it spends more than $200 billion on research (second only to the United States), turns out close to 30,000 PhDs in science and engineering, and leads the world in patent applications (more than 820,000 in 2013).”
* “…we identified four innovation archetypes: customer focused, efficiency driven, engineering based, and science based. We then compared the actual global revenues of individual industries with what we would expect them to generate given China’s share of global GDP (12 percent in 2013). As the exhibit shows, Chinese companies that rely on customer-focused and efficiency-driven innovation—in industries such as household appliances, Internet software and services, solar panels, and construction machinery—perform relatively well.”
In general, China has strengths in process innovation, as it proves each time it takes production blueprints from a foreign firm and quickly produces the product. China also appears strong in incremental innovation. Perhaps a new focus should be placed on radical innovation – game changing new ways to create value and to do business.
The mantra of China’s 13th 5-year-plan is “China dreams”. Dream big, China.
John Maeda: Unconventional Design Thinking
By Shlomo Maital
John Maeda has had a remarkable career, in computer science at MIT, and MIT Media Lab, then as head of the famed Rhode Island School of Design, now as a partner in Kleiner Perkins. He is also a famed video artist Here are his views on design, as told to McKinsey’s Hugo Sarrazin.
Design was once largely about making products attractive. Today it’s a way of thinking, a creative process that spans entire organizations, driven by the desire to better understand and meet consumer needs. Good design is good business. This came from T.J. Watson Jr., in a 1966 memo to all of IBM. Moore’s law (computing power doubles every 18 months) is dwindling… so now we have to buy [things] because of how they make us feel.
Whenever someone has come to me asking for the ‘silver bullet’ (for great design), I say, “There’s only a silver ray…and you have to know where to point it, you might get lucky”.
I was talking to a CEO startup — I offered my opinion, “Just because you can do it doesn’t mean you should do it. If you think about design adding value, a lot of what people don’t understand is that sometimes the best design consultants will tell you NOT to design it.
[Consulting for e-Bay companies]… I observed that the designers were all spread out. …So I connected all of them together, some 380 of them, into one community that could see each other. And the CEO could see them. ..the CEO said, “oh, so design itsn’t about this pixels thing, it’s about systems thinking!” He totally got it. [Sarrazin: It’s getting the right people together, creating the sense of community. It’s also reframing what it is!].
Maeda: Reframing: Exactly!
How (and Why) You Should Prepare for a World of Very Slow Economic Growth
By Shlomo Maital
It is becoming more and more clear that in the next 50 years, the world economy (and probably, the economy in which you live and work) will grow more slowly than in the past. What was perceived as a temporary correction, due to the global financial crash of 2008, is now becoming chronic.
Why?
A study by McKinsey Global Research, “Global Growth: Can Productivity Save the Day in an Aging World” (available from McKinsey’s website) notes that “GDP growth was exceptionally brisk over the past 50 years, fueled by rapid growth in the number of workers and in their productivity.” But now, employment growth, which averaged 1.7 per cent yearly between 1964 and 2014, is set to drop to just 0.3 per cent a year.
And productivity growth is slowing too. “Even if productivity were to grow at the (rapid) 1.8 per cent annual rate of the past 50 years, GDP growth would decline by 40 per cent in the next 50 years – slower than the past five years of recovery from recession”. But productivity growth has declined and does not look like it will recover much. China’s economy is slowing. Europe and America grow slowly. Japan has slow growth. Looks like it’s chronic.
What can be done? “Catching up to best practice”, says McKinsey. In other words, if we all benchmarked the world and defined and captured ‘best practice’, productivity growth could nearly make up for the declining growth in workers.
Here are McKinsey’s 10 key “enablers of growth”. Can each of us look at this list closely, and figure out, what is my role? How can I become really skilled, expert, at one or more of these enablers? If McKinsey is right, and if you can, you will be in great demand – and create value for the world.
Here is the list. Which of thee suits you? What must you do, in order to become a true enabler?
- Remove barriers to competition in service sectors. 2. Focus on public and regulated sector efficiency. 3. Invest in physical and digital infrastructure. 4. Foster R&D demand and investment. 5. Exploit data to identify transformational improvement opportunities. 6. Improve eduation and skill matching and labor market flexibility. 7. Open up economies to cross-border economic flows. 8. Boost labor force participation among women, young people, and older people. 9. Harness the power of new actors through digital platforms and open data. 10. Craft regulatory environment, incentivizing productivity and innovation.
TIMnovate 