For the last 50 years, the world economy has benefited fro.docx

For the last 50 years, the world economy
has benefited from a demographic
boom that has contributed 1.8 percent
to average annual global GDP increases,
helping to generate an unprecedented
level of growth.1 This demographic
tailwind is coming to an end. With
populations aging and fertility rates
dropping around the world, the growth
rates of the past 50 years may prove to
be the exception, not the rule. The latest
research of the McKinsey Global Institute
(MGI) suggests that unless increases in
labor productivity compensate for an
aging workforce, the next 50 years will
see a nearly 40 percent drop in GDP

growth rates and a roughly 20 percent
drop in the growth rate of per capita
income around the world.
The potential for diminished growth
varies considerably among countries.
In the developed world, Canada and
Germany are poised for the biggest
drops in GDP growth rates. Saudi Arabia,
Mexico, Russia, and Brazil are most at
risk in developing countries (Exhibit 1).
Richard Dobbs, Jaana Remes, and Jonathan Woetzel
Productivity gains could make the difference in an aging world.
Where to look for
global growth
Societies that fail to raise their game
for the productivity needed to sustain
growth will find it harder to achieve a
host of desirable goals, such as reducing
poverty in developing economies and

meeting current social commitments in
developed ones.
But the research also suggests reasons
for optimism. Among the countries we
studied, fully 75 percent of the needed
productivity increases through 2025
could occur if lagging companies
and public-sector institutions caught
up to the productivity of their best-
performing peers. Emerging markets
have the biggest opportunities to do
so. These opportunities are known and
currently available, and they represent
a critical link in the virtuous cycle of
emerging-market development: rising
labor productivity goes hand in hand
with growth in disposable income,
consumption, and GDP.

To close the gap, companies must seize
the opportunity to accelerate productivity
J A N U A R Y 2 0 1 5
2
Exhibit 1
Web 2014
MGI Global Growth
Exhibit 1 of 2
Source: UN population statistics; McKinsey Global Institute
analysis
The demographic drag on growth will vary considerably across
countries over the next 50 years.
GDP per capitaGDP
Projected change in growth rate by 2064,
assuming historical productivity growth, %
−26South Korea −39
−40Australia −36
−7Japan −36
−57Canada −53

−28United States −34
−6France −18
−11United Kingdom −10
−2Germany −52
−14Italy −36
−12China −30
−11Indonesia −32
1India −27
−67Saudi Arabia −73
24Turkey −23
39Nigeria 7
−33Brazil −60
−60Mexico −66
51South Africa −30
2Argentina −37
−20Russia −60
D
e
v

e
lo
p
e
d
E
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e
rg
in
g
3
processing—accounts for a range of
1 to 3 percent of GDP in the countries
we studied. Globally, the sector’s
productivity is 20 percent higher
than total worldwide productivity, but
significant gaps remain among countries.
The overall productivity of food
processing could rise by an estimated 59

percent, mostly in developing economies,
through operational improvements,
such as lean manufacturing, and bigger
processing facilities to take advantage of
scale effects.
Automotive. The automotive sector,
which accounts for an estimated
1.6 percent of global GDP, boasts
productivity that is, on average,
roughly 95 percent higher than that of
other industries. Big differences exist
among regions, however, reflecting
the productivity performance of tier-
two and tier-three component-supplier
operations. (For example, in aggregate,
auto manufacturing in India operates at
less than one-quarter of the productivity
level in the United States.) MGI estimates

that the automotive industry could raise
its overall productivity by 90 percent
as of 2025. The opportunity varies by
region. The largest—in China and India,
which today employ over 40 percent of
all automotive workers—involve greater
scale and improved manufacturing
processes.2
Retail. In most economies, 5 to 12
percent of all employees work in the
retailing industry—and more when
wholesale is included—so retail
matters. Globally, productivity in this
growth and the value-creation potential
it holds, while governments will need to
support them by assessing regulatory
barriers to competition in product and
labor markets. While these actions tend

to grab less attention than, say, the
pursuit of boundary-pushing possibilities
(such as artificial intelligence and the
Internet of Things), boosting productivity
by rethinking regulatory barriers holds
enormous potential for the global
economy.
MGI’s micro-to-macro analysis shows
plenty of upside in global sectors
such as agriculture, food processing,
automotive, retail, and healthcare. As
Exhibit 2 shows, the bulk (but by no
means all) of these opportunities are
found in emerging economies.
Agriculture. Productivity in agriculture,
which accounts for only 4 percent of
employment in developed economies but
for about 40 percent in emerging ones,

could more than double by 2025. The
largest opportunities for mechanization
and scale are in emerging regions, where,
according to UN calculations, nearly
30 percent of crop cultivation is still
done by hand. In developed economies—
which tend to have larger farms, higher
levels of mechanization, and more
advanced practices in applying fertilizers,
herbicides, and pesticides—further gains
are available from technology, including
the use of precision sensors and satellite
data to increase crop yields.
Food Processing. The manufacture
of food and beverages—or food
4
Exhibit 2

Web 2014
MGI Global Growth
Exhibit 2 of 2
The biggest opportunities to accelerate productivity growth are
in emerging markets.
Productivity-level potential in 20251
Index: base year2 = 100
139
229Agriculture
138
208
130
198
Food
processing
Retail
133
Healthcare,3
overall
Emerging Developed
151
255
Automotive

1Estimated for Brazil, China, Germany, India, Japan, Russia,
the United Kingdom, and
the United States.
2Base year = latest available data. For full methodology, see
Global growth: Can productivity save
the day in an aging world?, on mckinsey.com.
3Metrics for healthcare outcomes are lacking. Estimates are
based on opportunities to reduce
costs for delivering the same quality and access while
maintaining or improving health outcomes.
Underestimates overall productivity potential from increased
quality and access. Separate
data for developed and emerging markets are not available.
Source: McKinsey Global Institute analysis
sector is 30 percent lower than average
productivity across all sectors. Retailing
is also an industry with large, sustained
productivity differences between
developed and emerging economies,
as well as among countries at similar
income levels. The opportunities in the
retail sector fall into three broad areas:
increasing the share of more productive
formats, narrowing the gap between the

least and most productive outlets in a
particular format, and improving even the
best performers’ productivity by using
new technologies and processes. These
hold the promise of boosting worldwide
retail productivity by more than half.
Healthcare. Healthcare spending
accounts for 10 percent of GDP
among the member countries of the
Organisation for Economic Cooperation
and Development (OECD) and for
an average of roughly 6 percent of
GDP in the four leading emerging
5
1 For a preliminary scoping of the challenge and
opportunity, see James Manyika, Jaana Remes,
and Jonathan Woetzel, “A productivity perspective
on the future of growth,” McKinsey Quarterly,
September 2014. For a fuller treatment of the

issues discussed in this article, see Global growth:
Can productivity save the day in an aging world?,
McKinsey Global Institute, January 2015. Both are
available on mckinsey.com.
2 World Input-Output Database, 2012 release,
wiod.org.
Richard Dobbs and Jonathan Woetzel
are directors of the McKinsey Global Institute,
where Jaana Remes is a partner.
Copyright © 2015 McKinsey & Company.
All rights reserved.
economies: Brazil, China, India, and
Russia. Moreover, total healthcare
spending is growing faster than global
GDP, heightening the need to deliver
healthcare as efficiently as possible.
MGI analysis finds opportunities to save
nearly 25 percent of overall healthcare
spending by 2025, without compromising
health outcomes. Countries could
realize this potential by catching up

to best practices in operations and
procurement, by reducing the number of
clinically ineffective procedures, and by
developing innovative delivery models
(notably, providing care outside of
hospital settings and using new digital
technologies).
Having ample opportunity to improve
productivity does not guarantee that we
will do so. There is a robust debate about
how much growth is actually desirable,
given the economic, social, and
environmental externalities that rapid
change often creates. Yet without growth,
the world is a poorer place—and fulfilling
social and debt commitments becomes
harder. Business can and should
upgrade its capital and technology,

pursue innovation, and mobilize talented
workers. Governments need to assess
whether and how to go on opening up
their economies and integrating them
into the world economy. Since the rate
at which different countries and sectors
exploit the opportunities before them is
bound to vary, global business leaders
will need strong antennae to understand
where new opportunities are arising,
how to adapt accordingly, and what new
competitors they are likely to meet along
the way.
ExEcutivE summary
Global Growth:
can productivity
savE thE day in an
aGinG world?

January 2015
Copyright © McKinsey & Company 2015
The McKinsey Global Institute (MGI), the business and
economics research
arm of McKinsey & Company, was established in 1990 to
develop a deeper
understanding of the evolving global economy. Our goal is to
provide leaders
in the commercial, public, and social sectors with the facts and
insights on
which to base management and policy decisions.
MGI research combines the disciplines of economics and
management,
employing the analytical tools of economics with the insights of
business
leaders. Our “micro-to-macro” methodology examines
microeconomic
industry trends to better understand the broad macroeconomic
forces
affecting business strategy and public policy. MGI’s in-depth
reports have
covered more than 20 countries and 30 industries. Current
research focuses
on six themes: productivity and growth, natural resources, labor
markets, the
evolution of global financial markets, the economic impact of
technology and
innovation, and urbanization. Recent reports have assessed
global flows;
the economies of Brazil, Mexico, and Nigeria; China’s digital

transformation;
India’s path from poverty to empowerment; affordable housing;
and the
economics of tackling obesity.
MGI is led by three McKinsey & Company directors: Richard
Dobbs, James
Manyika, and Jonathan Woetzel. Michael Chui, Susan Lund, and
Jaana
Remes serve as MGI partners. Project teams are led by the MGI
partners
and a group of senior fellows, and include consultants from
McKinsey &
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The partners of McKinsey & Company fund MGI’s research; it
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For further information about MGI and to download reports,
please visit
www.mckinsey.com/mgi.
www.mckinsey.com/mgi
James Manyika | San Francisco
Jonathan Woetzel | Shanghai
Richard Dobbs | London

Jaana Remes | San Francisco
Eric Labaye | Paris
Andrew Jordan | New York
January 2015
Global Growth:
can productivity
savE thE day in an
aGinG world?
in briEf
Global Growth:
can productivity savE thE day
in an aGinG world?
What are the prospects for growth in the decades ahead? What
will it take to get global
growth going? These are contentious questions that MGI has
attempted to answer in a new
report focused on the G19 (the G20 minus the European Union)
and Nigeria, which generate
80 percent of global GDP. The main findings include:
� GDP growth was exceptionally brisk over the past 50 years,
fueled by rapid growth in
the number of workers and in their productivity. Now the first
of these is weakening, and
even reversing in some countries. Employment growth of
1.7 percent between 1964 and
2014 is set to drop to just 0.3 percent a year. Peak employment

is likely to occur within
50 years.
� The onus is therefore on productivity to drive long-term
GDP growth. Even if productivity
were to grow at the (rapid) 1.8 percent annual rate of the past
50 years, the rate of GDP
growth would decline by 40 percent over the next 50—slower
than in the past five years
of recovery from recession. The global economy expanded
sixfold in the 50 years after
1964 but would grow only threefold between 2014 and 2064,
making it more difficult to
meet social and debt obligations. To compensate fully for
slower employment growth,
productivity growth would need to be 80 percent faster, at
3.3 percent a year.
� The declining prime-working-age population share implies a
19 percent decrease in per
capita income growth over the next 50 years. The waning of
demographic tailwinds is
expected to affect both developed and emerging economies. In
Australia, Canada, Saudi
Arabia, Brazil, and Mexico, per capita GDP could fall by more
than 30 percent at historical
productivity-growth rates. Globally, the standard of living
would rise 2.3 times in the next
50 years from 2.8 times over the previous 50. To sustain past
per capita income growth,
historical productivity growth would need to accelerate by
22 percent.
� Five sector case studies—agriculture, food processing,
automotive, retail, and health
care—suggest that annual productivity growth to 2025 in the

G19 and Nigeria could be as
high as 4 percent, more than needed to counteract demographic
trends. About three-
quarters of the potential comes from the broader adoption of
existing best practices—
“catch-up” productivity improvements. The remaining one-
quarter—counting only what
we can foresee—comes from technological, operational, and
business innovations that
go beyond today’s best practices and “push the frontier” of the
world’s GDP potential.
� Ten enablers could lift global GDP growth closer to its
potential—although this will
be extremely challenging—by creating transparency and
competition, incentivizing
innovation, mobilizing labor, and further integrating the world
economy.
� We need a new, frank conversation about the tough trade-
offs that will be required. We
need more attention on resource productivity to avoid rapid
growth imposing undue
damage on the environment, and on how the fruits of growth are
distributed not just
between nations but within them. Finally, we need to improve
how we measure growth.
Auto assembly line, Cologne, Germany
© Alamy

ExEcutivE summary
Over the past 50 years, the global economy expanded sixfold as
the world’s population
and per capita income each grew at unprecedented speed. The
global population more
than doubled while average per capita income almost tripled to
about $13,000 at 2012
purchasing power parity (Exhibit E1). However, there are
significant doubts that this growth
bonanza will continue in the long term given that the
demographic tailwinds of the past half
century are now waning.
Views on the outlook for long-term growth diverge. Many
people question whether growth
is measured well (see Box E1, “GDP: Strengths and
weaknesses”). Some even question
whether growth should be a primary aspiration. However, the
McKinsey Global Institute
(MGI), the business and economics research arm of McKinsey
& Company, has undertaken
a major research effort on economic growth because we believe
it matters. We do not
see growth as an end in itself but as a critical enabler for
meeting a much broader set of
6x
expansion in global
GDP 1964–2014
3x
over next 50 years

Countries’ population and per capita GDP have each grown
strongly
over the past 50 years1
Exhibit E1
SOURCE: The Conference Board Total Economy Database;
McKinsey Global Institute analysis
1 Based on data for 99 countries, 1964–2014.
70
30
10
5.5
80
5.04.50 1.5 2.0 3.00.5 2.51.0
40
20
6.56.04.03.5
50
7.0
60
90

Country population
Billion
Per capita GDP
$ thousand, 2012 purchasing power parity
United States
Germany
Japan
France
Italy
Russia
Mexico
China
India
Nigeria
Indonesia
Brazil
Turkey
Luxembourg
1964
2.9 billion
2014
6.6 billion

McKinsey Global Institute Executive summary 2
desirable goals. Growth is a way to expand economic
opportunities to the many millions
of people who remain vulnerable and poor. The challenges of
meeting pension and other
social obligations that increase as the population ages and of
managing public debt are less
severe in a growing economy. Forthcoming MGI research
suggests that countries such as
the United Kingdom and France would need to achieve long-
term GDP growth that is more
than 50 percent faster than historically in order to start reducing
the ratio of public debt to
GDP, given current fiscal balances and interest rates.1
The deep uncertainty about long-term growth prospects makes it
difficult for decision
makers in the public and private sectors to prepare for the
future. This research is an attempt
to clarify the potential paths ahead. The analysis draws on
nearly a quarter century of MGI
research on economic growth across the globe. The aim is to
provide a fact base of past
performance and future outcomes if current trends continue, and
then to identify and
estimate the size of the levers that could alter the long-term
growth trajectory. This report
focuses on the G19 and Nigeria, looking in particular at trends
in employment—people
working outside the home as employees or self-employed
(including subsistence farmers)—
and productivity, the two major drivers of long-term GDP
growth.2

1 Given that debt levels are fixed at nominal currency, what
matters for debt level reduction are changes in
nominal GDP levels, not real GDP that is adjusted for inflation
and is the focus in the rest of the report. This
means that the 50 percent acceleration requirement applies to
nominal GDP growth and can be met with
different real GDP growth and inflation levels. Assuming
inflation remains at historical levels, real GDP would
need to accelerate by 50 percent; higher inflation in turn would
reduce the real GDP growth threshold. The
calculation on the GDP-growth acceleration required to start
deleveraging assumes fixed projected interest
rates on government bonds and inflation rates. For analysis on
this topic, see the forthcoming McKinsey
Global Institute report on debt and deleveraging.
2 For many countries, time-series data going back 50 years is
limited for both employment components and
labor productivity, defined as output per employee, by industry.
For this reason, we chose to focus on 20
countries: the G19 (the G20 grouping without the European
Union as a composite member) plus Nigeria.
These 20 countries include a wide range of economies at
different stages of their development with a major
impact on global GDP and employment. Together, they account
for 63 percent of the global population and
80 percent of global GDP.
Box E1. GDP: Strengths and weaknesses
We use changes in gross domestic product (GDP) as
the metric for economic growth. Given the 50-year
historical horizon of our analysis, there are no measures
for assessing the overall economic evolution of a large
number of countries other than GDP, the most widely
available and commonly used metric.1 We anchor our

analyses on changes in aggregate GDP and look at
changes in per capita GDP as a component of the
total. Per capita GDP growth indicates improvements
in material living standards and is itself a key economic
indicator. The size of the overall economy matters,
too. For companies, the market opportunities for their
products and services reflect the number of consumers
in each market as well as their average incomes.
To assess environmental sustainability nationally
and globally, incorporating the impact of the overall
1 The one alternative could be gross national income (GNI),
which
allocates income from production by the nationality of the
owner
rather than the output of production based on the physical
domicile of operations. However, for our analysis that looks at
how
employment and labor productivity contribute to changes in
output,
the geographic data available on jobs and establishments makes
the latter a more suitable choice.
population is critical. More broadly, demographic
trends can dramatically shape the economic, social,
and political challenges and opportunities facing
governments (for example, the capacity to meet social
and debt obligations).
We fully acknowledge the many measurement challenges
and conceptual shortcomings associated with GDP and
welcome the many initiatives under way to refine and
broaden the measurement of growth.2
2 For an overview of the evolution of GDP as a measure of
economic performance and the challenges in its measurement

and use, see Diane Coyle, GDP: A brief but affectionate history,
Princeton University Press, 2014. For further discussion, see
Human Development Reports published by the United Nations
Development Programme since 1990 at www.hdr.undp.org/en;
Millennium Development Goals reports and Beyond 2015
reports at
www.un.org/millenniumgoals/reports.shtml; and the OECD’s
Better Life Index at www.oecdbetterlifeindex.org/. Also see
Joseph
Stiglitz, Amartya Sen, and Jean-Paul Fitoussi, Report by the
Commission on the Measurement of Economic Performance and
Social Progress, 2009; Yusuf J. Ahmad, Salah El Serafy, and
Ernst
Lutz, eds., Environmental accounting for sustainable
development,
World Bank, June 1989; and Moving towards a common
approach
on green growth indicators, Green Growth Knowledge Platform
scoping paper, April 2013. See Chapter 6 for further discussion.
3McKinsey Global Institute Global growth: Can productivity
save the day in an aging world?
Rapid GDP growth over the past 50 years was exceptional
Over the past 50 years, two factors powered exceptionally fast
GDP growth: a rapidly
expanding labor force and rising average productivity.
Growth in the labor force was fueled by two demographic
trends. The first was brisk
population growth, reflecting initially high fertility rates,
falling infant-mortality rates, and
lengthening life expectancy as hygiene and health-care
provision advanced and expanded,

and casualties of war were reduced.3 The second was a rising
share of those of working age
in the population—a demographic dividend. Over time, the
number of children in each family
declined, and the share of people of working age—15- to 64-
year-olds—in the population
climbed sharply, from 58 percent in 1964 to 68 percent in 2014.
Employment in the G19 and
Nigeria grew at an annual rate of 1.7 percent in this period,
doubling the total labor force and
contributing about 48 percent of GDP growth in these
economies.
Rising productivity generated the other 52 percent of GDP
growth. Productivity grew at an
average annual rate of 1.8 percent between 1964 and 2014. A
number of factors propelled
productivity growth, including a shift from low-productivity
agriculture to more productive
manufacturing and service-sector jobs in cities, automation and
more efficient operations,
and increasing integration of the world economy that led to
more productive modern
businesses gaining share from less productive ones. The average
employee generates
2.4 times as much output today as in 1964. Although the
average pace of productivity
growth was brisk, there were significant differences in the rate
of that growth among
economies. In Western European nations and the United States,
labor productivity grew by
between 1.5 percent and 1.9 percent a year from 1964 to 2014
from a relatively high base.
Productivity growth during this period was exceptionally strong
in South Korea and Japan,
rising 4.6 and 2.8 percent per annum respectively, allowing

these economies to narrow their
aggregate productivity gaps with Western Europe and the
United States.
Productivity in developed economies today remains
almost five times that of emerging economies.
Among developing economies, the variance in productivity
performance has been
much wider. There is no typical rate of productivity growth in
these economies. China’s
productivity grew at an annual pace of 5.7 percent between
1964 and 2014. In contrast,
Mexico and Saudi Arabia clocked less than 1 percent annual
productivity growth over
this period. Overall, it is striking that the absolute gap between
productivity in emerging
and developed economies has not narrowed. Productivity in
developed economies today
remains almost five times that of emerging economies.
Narrowing this gap is one of the
biggest opportunities for—and challenges to—long-term global
growth.4
Peak employment will occur in most countries within 50 years
The strong demographic tailwind that powered GDP growth has
come to an end and
is starting to turn into a headwind in some countries. Fertility
rates have declined, in
many countries falling below the replacement threshold that
needs to be met to keep
the population steady. Population growth is expected to fall in
all countries in the G19
but continue to grow rapidly in Nigeria. The boost to growth
from a favorable shift in age
structure has also come to an end. As the bulge of working-age

people grows older, the
3 Robert S. McNamara and James G. Blight, Wilson’s ghost:
Reducing the risk of conflict, killing, and
catastrophe in the 21st century, Public Affairs, 2003.
4 MGI has studied the reasons for sustained productivity gaps in
more than 20 countries over the past 20 years.
For more on this research, see www.mckinsey.com/mgi.
average share of the prime-working-age population in the G19
and Nigeria is expected to fall
to 61 percent from 68 percent today. Only Nigeria bucks this
trend.
Taking all factors into account, average employment growth in
the 20 countries studied is
expected to wane to 0.3 percent a year over the next 50 years,
less than one-fifth of the
1.7 percent growth observed between 1964 and 2014. There is a
distinct prospect that
employment in the 20 countries overall could peak around 2050
and then settle into a
declining path (Exhibit E2).
Employment prospects vary significantly. The number of
employees has already peaked
and started to decline in Germany, Italy, Japan, and Russia;
their labor pools could shrink
by up to one-third by 2064. In most other countries,
employment is likely to peak within

50 years. In China and South Korea, the peak is expected as
early as 2024. China and India,
the countries with the largest and second-largest populations in
the world, respectively, are
expected to follow very different paths. India’s labor pool could
expand by 54 percent over
the next 50 years, but China’s could shrink by one-fifth. Other
nations, including Indonesia,
South Africa, and the United States, are likely to continue to
experience rising employment,
albeit at slower rates.
There is scope to use policy to boost labor-market participation
among women, young
people, and those aged 65-plus. We estimate that it is possible
to double employment
growth from 0.3 percent today to 0.6 percent in the 20 countries
studied. However,
achieving this doubling would require each gender and age
group across countries to close
Employees in G19 and Nigeria, 1990–2064E
Billion, at best activity and unemployment rates, 2007–12
The global number of employees is likely to peak around 2050
Exhibit E2
Germany
2000
Japan
2003
China

South Korea
2024
Brazil
2041
Saudi Arabia
2045
Turkey
2048
Mexico
2055
Argentina
2057
India
2061
Italy
2010
Russia
2011
Historical
Forecast
Peak employment
Total

Emerging
Developed
United Nations Population Division; W orld Bank; International
Labour Organisation; McKinsey Global Institute analysis
1.5
2.5
1.0
0.5
2.0
0
20 401990 5010 302000 206460
the employment gap with high performers for the group—which
would be very difficult.5 In
any case, even 0.6 percent growth in employment is still only
about one-third of the rate of
the past 50 years, and insufficient to counter the erosion of the
growth of the labor pool.
At historical productivity-growth rates, long-term GDP growth
would be 40 percent

slower than its rate of the past 50 years
If productivity growth continued to rise over the next 50 years
at its average rate between
1964 and 2014, the rate of global GDP growth would decline by
40 percent in the G19
and Nigeria—from 3.6 percent a year to only 2.1 percent
(Exhibit E3). Putting this into
perspective, average GDP growth over the next five decades
would be one-third lower than
it was over either the past five years of recovery from the global
recession or the energy-
crisis decade of 1974 to 1984. Over the course of 50 years, such
a slowdown in growth
would add up to a significant shift in the world’s growth
trajectory. While the global economy
expanded sixfold in the 50 years from 1964, it would grow only
threefold between 2014 and
2064 (Exhibit E4).
5 To estimate the size of the potential to expand employment,
we assume that all countries close current gaps
to the employment rate of top-quintile performing nations in
each demographic category. For prime-working-
age women (aged 15 to 64), Norway and Canada, with a
participation rate of 75 percent and unemployment
at 5 percent, are the benchmarks. For young people, pre-
recession United States is the benchmark, with a
55 percent participation rate and 10 percent unemployment rate.
For prime-working-age men, the benchmark
is 90 percent participation and, at most, 5 percent
unemployment. For those aged 65-plus, the potential
participation rate is set at 25 percent and unemployment rate at
10 percent. For nations that exceed these
benchmarks in any of the categories, we use their current
participation rates instead.

At past rates of productivity growth, GDP growth would slow
down by about 40 percent
and per capita GDP growth by about 20 percent
Exhibit E3
United Nations Population Division; McKinsey Global Institute
analysis
NOTE: Numbers may not sum due to rounding.
GDP Per capita GDP
G19 and Nigeria
Compound annual growth rate, %
1.7
1.8
1.8
0.3
2.1
-40%Productivity
growth
Next 50 years
at historical
productivity
growth

Employment
growth
Past 50 years
3.6
1.8
1.8
-0.2
0.3
Employment per
capita growth
Past 50 years
Productivity
growth
2.1
Next 50 years
at historical
productivity
growth
1.7
-19%

1.4
1.3
3.2
3.5
1.7
1.3
1.8
0.7
2.7
1.1
3.2
1.3
2.5
1.4
2.1
0.9
3.3

0.6
1.7
1.4
5.4
1.5
1.7
1.4
1.6
1.8
1.5
1.7
6.1
1.8
1.2
2.0
2.8
5.8
0.8
2.6
1.9
4.3

1.9
3.2
2.0
3.1
3.3
3.4
7.5
1.9
2.9
3.7
5.3
1.0
2.2
2.0
5.1
1.4
2.1
2.2
3.8
5.1

2.4
5.3
2.1
2.2
7.0
4.3
0.6
1.7
2.6
2.0
3.7
1.6
4.0
2.9
4.5
3.6
4.6
4.9
1.6
1.3

1.4
1.5
Developed
countries
Emerging
countries
South
Korea
Australia
Japan
Canada
United
States
France
United
Kingdom
Germany
Italy
China
Indonesia
India

Saudi
Arabia
Turkey
Nigeria
Brazil
Mexico
South
Africa
Argentina
Russia
7
-60
-37
-30
-66
-60
-23
-73
-27

-32
-30
-36
-52
-10
-18
-34
-53
-36
-36
-39
2
51
39
24
1
-20
-60

-33
-67
-11
-12
-14
-2
-11
-5
-28
-57
-7
-40
-26
At historical productivity-growth rates, GDP and per capita
GDP growth are set to slow in most G19 countries
Exhibit E4
NOTE: Numbers may not sum due to rounding.
United Nations Population Division; International Labour

Organisation; McKinsey Global Institute
analysis
Change, %
GDP growth Per capita GDP growth
Change, %
CAGR, past 50 and
future 50 years
Employment, productivity, and growth
Medium UN population scenario, best activity and
unemployment rates, 2007–12; compound annual growth rate
(CAGR), %;
future 50 years assumes past productivity growth rates for next
50 years
CAGR, past 50 and
future 50 years
Productivity growthEmployment growth Employment per capita
growth
The expected impact of waning demographic tailwinds on the
global standard of living
measured by per capita GDP is not as dramatic as it is on GDP
growth. The expected fall
in the share of the prime-working-age population age implies a
19 percent decline in the

growth rate of per capita income from the rate of the past
50 years. This would mean the
standard of living rising by 2.3 times over the next half century
compared with an increase of
2.8 times over the previous 50 years.
Changing the long-term growth trajectory that appears to be in
prospect will largely depend
on the rate of productivity growth. Princeton University
professor Alan Blinder commented
in November 2014, “Maybe some of the copious attention now
being devoted to assessing
labor-market slack should be redeployed to studying
productivity growth. It might be more
productive.”6
Faster productivity gains can compensate for the waning of
demographic tailwinds. To
do so fully, productivity growth over the next 50 years would
need to be 80 percent faster
than the already high rate of the past 50 years. Productivity
would need to accelerate by
22 percent to compensate for the shift in demographics on per
capita income. In turn,
productivity growth that is below its historical rate would mean
even slower GDP and per
capita income growth.
There is large potential to improve productivity if all available
levers are fully deployed
MGI developed five sector case studies—agriculture, food
processing, automotive, retail,
and health care—to help us to understand the potential scope for
accelerating productivity
growth.7 Drawing on this analysis, we find that it is possible—
but extremely challenging—to

boost the annual rate of productivity growth in the G19 and
Nigeria to as much as 4 percent
a year over the next decade. This would be more than the
80 percent acceleration required
to compensate fully for waning demographic tailwinds.
However, all available means to boost productivity growth
would need to be deployed. The
issue, in our view, is not that the world is running out of
technological potential for growth but
rather how to ensure that governments and company managers
have a strong incentive to
pursue higher productivity by adopting proven best practices
from others and by innovating.
Achieving a step change in productivity growth would
necessitate strenuous efforts by
business owners, managers, and workers to change established
ways of doing things and
to adopt new approaches that improve how they operate. Efforts
to improve the traditionally
weak productivity performance of large and growing
government and health-care sectors
around the world will be particularly important.
6 Alan S. Blinder, “The unsettling mystery of productivity,”
The Wall Street Journal, November 25, 2014.
7 We used MGI’s micro-to-macro approach to assess
opportunities for productivity gains in our five sector
case studies. The sectors we studied are large employers that
collectively represent diverse industries and
productivity patterns. We drew on sector data from the World
Input-Output Database, dozens of MGI country
and industry studies, and McKinsey’s industry expertise across
regions to understand patterns in productivity
performance. We limit our projections to the period to 2025

rather than to 2064 because that is the period for
which understanding today’s starting position can help to guide
informed projections.
4%
annual productivity
growth potential
Catching up to best-practice productivity could deliver three-
quarters of the opportunity
Roughly three-quarters of the total global potential for
productivity growth that MGI has
estimated comes from the broader adoption of existing best
practices—which we can
characterize as “catch-up” productivity improvements
(Exhibit E5). The positive message
here is that these types of opportunity are all known to us and
exist somewhere in the world.
Eighty percent of the overall opportunity to boost productivity
in emerging economies
comes from catching up. Opportunities include increasing the
share of modern retail
formats, increasing the scale and capacity utilization of auto
assemblers, improving
operational efficiency in health care, reducing waste in food
processing, and shifting to a
greater share of higher-value products or services.
In developed economies, more than half—55 percent—of the
productivity gains that MGI’s
analysis finds are feasible could come from closing the gap
between low-productivity

companies and plants and those that have high productivity.
There are opportunities to
continue to incorporate leaner supply-chain operations
throughout retail, and to improve
the allocation of the time spent by nurses and doctors in
hospitals and health-care
centers, for example. Across countries, large differences in
average productivity within
the same industry indicate industry-wide opportunities for
improvement. For instance, low
productivity in retail and other service sectors in Japan and
South Korea reflects a large
share of traditional small-scale retailers. High costs in the US
health-care system partly
reflect the excessive use of clinically ineffective procedures.
Even agriculture, automotive
manufacturing, and other sectors that have historically made
strong contributions to
productivity growth have ample room to continue to diffuse
innovations and become more
efficient.8
8 For additional examples, see the MGI reports Growth and
renewal in the United States: Retooling America’s
economic engine, February 2011; European growth and renewal:
The path from crisis to recovery, July 2011;
Beyond Korean style: Shaping a new growth formula, April
2013; and Why the Japanese economy is not
growing: Micro barriers to productivity growth, McKinsey
Global Institute, July 2000. For further examples of
cross-country productivity gaps in different industries based on
MGI’s productivity research over more than
20 years, also see James Manyika, Jaana Remes, and Jonathan
Woetzel, “A productivity perspective on the
future of growth,” McKinsey Quarterly, September 2014.

Approximately three-quarters of the productivity potential
identified
comes from catching up, and the rest from pushing the frontier
SOURCE: McKinsey Global Institute analysis
Exhibit E5
Emerging
G19 75%
18%
45%
6
Developed 255%
82%
425%
Pushing the frontierCatching up
Potential per annum productivity growth rate
%

Pushing the productivity frontier through innovation could
deliver the remaining one-
quarter of the opportunity
The remaining one-quarter of the opportunity to boost
productivity growth—or about
one percentage point a year—comes from technological,
operational, and business
innovations that go beyond today’s best practices and that “push
the frontier” of the world’s
GDP potential. In contrast to some observers, we do not expect
a drying up of technological
or business innovations to constrain growth. On the contrary,
we see a strong innovation
pipeline in developed and emerging economies in the sectors we
studied.9 We cannot
account for future developments that we cannot foresee today,
and it is quite possible
that waves of innovation may push the frontier far more than we
can anticipate on the
current evidence.
In contrast to some observers, we do not expect a
drying up of technological or business innovations to
constrain growth.
Some opportunities require simply continuing existing industry
research programs, such
as agricultural research into tailoring and improving seeds and
agronomical practices to
raise crop yields in new geographies, and automotive industry
initiatives to power cars using
more efficient fuel technology. Others rely on technological
innovations that could potentially
transform many different industries. For example, highly
efficient and intelligent robots—

or bots—are already boosting efficiency in retail warehouses
where they are deployed,
mobile technology is increasingly being used to deliver health
care in remote regions, and
automobile manufacturers are installing a broader range of
digital features in cars. Advanced
materials such as nanolaminates—edible lipids or
polysaccharide compounds—can be
sprayed on food to provide protection from air or moisture and
reduce food spoilage, while
carbon-fiber composites can make cars and airplanes both more
resilient and lighter.10
The Internet of Things can cut time spent in production
processes by detecting potential
failures early, increase crop yields by measuring the moisture of
fields, and cut the cost of
monitoring health dramatically.11 Such innovations are not
confined to developed economies
but are happening in emerging economies, too. For instance,
Aravind Eye Care of India,
which has become the largest eye-care facility in the world,
performs cataract surgeries at
one-sixth of the cost and with fewer infections than the National
Health Service in the United
Kingdom achieves.12
9 MGI has published extensively on the outlook for technology.
See, for example, Big data: The next frontier
for innovation, competition, and productivity, May 2011;
Internet matters: The Net’s sweeping impact on
growth, jobs, and prosperity, May 2011; The social economy:
Unlocking value and productivity through social
technologies, July 2012; China’s e‑tail revolution: Online
shopping as a catalyst for growth, March 2013;
Game changers: Five opportunities for US growth and renewal,
July 2013; Lions go digital: The Internet’s

transformative potential in Africa, November 2013; Disruptive
technologies: Advances that will transform
life, business, and the global economy, May 2013; Global flows
in a digital age: How trade, finance, people,
and data connect the world economy, April 2014; and China’s
digital transformation: The Internet’s impact
on productivity and growth, July 2014. Also see the discussion
of the transformative power of technology
in Manufacturing the future: The next era of global growth and
innovation, McKinsey Global Institute,
November 2012.
10 Manufacturing the future: The next era of global growth and
innovation, McKinsey Global Institute,
November 2012.
11 Disruptive technologies: Advances that will transform life,
business, and the global economy, McKinsey Global
Institute, May 2013.
12 “Driving down the cost of high-quality care: Lessons from
the Aravind Eye Care System,” Health International,
McKinsey & Company’s Health Systems & Services Practice,
issue 11, 2012. Visit www.mckinsey.com/client_
service/healthcare_systems_and_services/latest_thinking/health
_international/archive/issue_11.
The cross-cutting effects of digitization, including big data, and
combinations of these
technologies could yield astounding results. Think of the impact
of a combination of big data
and synthetic biology. The cost of gene sequencing is falling

sharply, making a huge amount
of genetic data available. Scientists and companies are using
these data to develop new
techniques to write DNA and insert it into cells and are even
designing DNA from scratch to
produce desired traits—a practice known as synthetic
biology.13
Ten enablers need to be in place to fuel long-term global growth
Having ample opportunities to improve productivity does not
guarantee that they will be
realized. MGI first identified some of the productivity gaps that
persist today more than
ten years ago. Drawing on many years of analysis of
productivity and growth as well as the
new case studies in this report, we detail ten key enablers that
would need to be in place to
boost productivity growth and thereby help to lift the world
economy’s long-term growth
rate closer to its potential. These enablers broadly fall into four
groups.
� Enabling catch-up by creating transparency and competition.
The first group
of three reflects the barriers to catching up found in our sector
case studies, as well
as what we have learned from past MGI productivity studies:
remove barriers to
competition in service sectors, focus on efficiency and
performance management in
public and regulated sectors, and invest in physical and digital
infrastructure, especially
in emerging markets.
� Helping to push the frontier by incentivizing innovation. The
next four enablers

reflect the case studies in this report and MGI’s research on the
economic impact of
technology: craft a regulatory environment that incentivizes
productivity and supports
innovation, foster demand for and R&D investment in
innovative products and services,
exploit existing and new data to identify transformational
improvement opportunities,
and harness the power of new actors in the productivity
landscape through digital
platforms and open data.
� Mobilizing labor to counter the waning of demographic
tailwinds. The third group of
enablers draws on the demographic analysis in Chapter 2 of this
report as well as MGI’s
body of analysis on global labor markets: put in place
regulation and social support to
boost labor-market participation among women, young people,
and older people; and
improve education and matching skills to jobs, and make labor
markets more flexible.
� Opening up economies to cross-border economic flows, from
trade in goods and
services to flows of people. Being open to global economic
activity allows companies
and economies to benefit from competition, the flow of ideas,
and better practices and
personal connections. This enabler draws on our sector case
studies and previous MGI
analysis of global flows.14
Companies are crucial to seizing the full range of opportunities
to boost productivity
growth. Much of the scope to improve productivity can be

achieved independently from
government policy, whether this involves mechanization in
agriculture in emerging countries
or the adoption of best practices in merchandising and online
retailing. Businesses need
to play a full part as investors in upgrading capital and
technology. They need to take risks
by investing in R&D and unproven technologies and processes.
They are central to efforts
to mitigate the erosion of the growth of the labor pool by
providing a more flexible working
environment for women and older workers, and training and
mentorship for young people. In
an environment of potentially weaker global economic growth,
and certainly evolving growth
dynamics, executives need to be adaptable and informed. They
need to anticipate where
13 Disruptive technologies: Advances that will transform life,
business, and the global economy, McKinsey Global
Institute, May 2013.
14 Global flows in a digital age: How trade, finance, people,
and data connect the world economy, April 2014.
market opportunities are coming from, and the competitors they
will meet in those markets.
Above all, companies need to be competitive in a world where
productivity will increasingly
be the arbiter of success or failure.

In this report, we have looked at growth from a traditional
economic standpoint. We have
defined growth as expanding GDP and rising per capita GDP.
But we acknowledge that
this approach has limitations and that some big questions now
being actively debated
have not been addressed in any detail in this report. Some of the
productivity enablers we
have discussed will require making trade-offs that might be
uncomfortable. Continued
rapid growth will require increasing attention on productivity in
resources if that growth
is not to place undue strain on our environment. The good news
here is that MGI has
identified opportunities for being smarter about how we use our
resources and therefore
achieve growth that is ecologically responsible. The issue of
how the fruits of growth are
distributed has also become subject to intense debate in recent
years. Rapid GDP growth
has contributed to a significant closing of the income gap
among nations but there appears
to be increasing inequality within nations. While perspectives
vary on potential solutions to
rising inequality, the reality is that changes in average income
will not be enough to increase
demand if most of the gains accrue to individuals whose needs
have already been met.
Broad-based income gains will therefore also matter for the
growth of markets for many
products and services. We welcome these questions and hope
that this report represents
the start of a broader conversation about the nature of long-term
growth and its implications
for society.

•••
The past 50 years have been ones of extraordinary economic
expansion around the world.
But now one of the twin engines of growth—rapid labor-pool
growth—has lost power.
The world economy must forge ahead with just one remaining
engine, productivity, firing
at full throttle. Boosting productivity growth is now the only
way to drive growth. However,
the business and policy changes needed to sustain and
accelerate productivity gains
will undoubtedly involve tough trade-offs. We need to be clear-
minded and have a frank
discussion about the difficult decisions ahead. Leaders of
companies will need to think even
harder about every aspect of how they do business.
Governments need to act on many
fronts to help craft an environment that is conducive to growth.
Only sweeping change—and
being smarter about growth—will meet the challenge.
Productivity and innovation need
to be at the core of all conversations about long-term growth.
Without giving them our full
attention, global prosperity is in jeopardy.
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Download and listen to MGI podcasts on iTunes or at
www.mckinsey.com/mgi/publications/multimedia/.
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McKinsey Global Institute
January 2015
Copyright © McKinsey & Company
@McKinsey_MGI
McKinseyGlobalInstitute
Big companies are finding growth in new markets by
harnessing an underused asset—their brands.
At a time of stagnating markets, technological disruption, and
rapid changes in consumer

behavior, where can big brands find growth? One popular path
is through brand extension:
stretching a brand into an adjacent market where its value
proposition is still relevant to
consumers. Classic cases include Colgate’s sideways move from
toothpaste to toothbrushes,
Nivea’s from body care to hair care, and Gillette’s from razor
blades to shaving foam.
However, some incumbents are taking this approach a step
further by using their brand as a
springboard to drive innovation in an entirely new market. Take
the Weather Company, which
owns the Weather Channel, as an example. It has used its deep
weather-data assets to move
beyond the TV business, extending successfully into new
markets by supplying data and
forecast models that help companies make better decisions.
Analyzing its data, for example, the
Weather Company has learned that insect repellent sells well in
the spring in Dallas when there
is a below-average dew point, but spring bug-spray sales in
Boston do well when the dew point
is above average.1
Apple’s introduction of the iPhone is, of course, a well-known

example of how it became an
attacker by carving out new business spaces that capitalize on
the unique link its brands have
forged with consumers. What is less well known, however, is
that innovations not only achieve
impressive results in their own right, but they often also create
a halo effect by attaching new
cachet to the original brand. In the year the iPhone was
launched, for instance, sales of Apple Mac
computers rose by 16 percent—almost eight times the growth
rate for personal computers overall.2
This kind of brand-driven innovation has come of age in the
past few years for a number of reasons.
If you are an incumbent with a dominant position in a saturated
market, your chances of gaining
much more share may be slim. Entering a new category could be
your only realistic option to
achieve internal and external growth targets. In addition, brands
are increasingly defined not by
what they communicate or the campaigns they run but by the
kind of customer experiences they
provide. What’s more, brand-driven innovation can be a tool to
strengthen or sharpen a brand’s
positioning: consider how Apple’s brand strength seems to grow

with each new category it enters.
Incumbents as attackers:
Brand-driven innovation
Jean-Baptiste Coumau, Victor Fabius, and Thomas Meyer
M A Y 2 0 1 5
1 Katherine Rosman, “Weather
Channel now also forecasts what
you’ll buy,” Wall Street Journal,
August 14, 2013, wsj.com.
2 Ed Sutherland, “Apple’s iPhone
‘halo effect’ boosts Mac sales 16.4
percent,” Cult of Mac, December 1,
2009, cultofmac.com.
2
Finally, the advent of 3-D printing and rapid-prototyping
techniques, coupled with a “trial and
error” mind-set and A/B testing capabilities, has made it easier
for corporate innovation teams
to pitch, trial, and continuously improve their brand ideas.
All of which is to say: innovation isn’t just for start-ups. With
the right brand equity, incumbents
can do it too.
The new attackers

Some powerful brands have highly distinctive characteristics or
associations in consumers’
minds. When they capitalize on them to enter new territories—
rather than simply colonizing a
neighboring category—they bring innovation to their new
domain. Here are three examples.
Disney’s venture into the $4 billion children’s English-language
teaching business in China
capitalizes on its brand essence of representing the American
way of life, entertaining children,
and offering a great customer experience.3 Disney English
opened its first school in Shanghai in
2008, just as the Shanghai Disneyland Park went into
development, and has since expanded to
33 language centers in nine cities. The centers offer English-
language courses that seek to make
learning fun for 2- to 12-year-olds: children “interact” with
Disney characters and stories via
huge video monitors, and they are taught in small classes by
native English speakers supported
by bilingual Chinese assistants. In a country where Disney’s
films and merchandising have yet
to establish a broad market presence, using language learning to
attract small children and their

families looks like a great entry point to the world’s biggest
market and a sound investment in
nurturing a future consumer base for Disney products.
Another company harnessing its brand to drive innovation is of
course Virgin, which recently
used its “maverick outsider” image to power its challenger
business in UK retail banking.
Launched as Virgin Direct in 1995 with a limited product range,
it bought Northern Rock in
2012, rebranded branches as Virgin Money, and introduced a
full suite of banking and insurance
products. Seeking to set itself apart from the distrust
surrounding established banks in the
wake of the global financial crisis, Virgin positioned itself as
the customer’s champion with its
“quest to make banking better,” opening inviting customer
lounges as an alternative to the stuffy
formality of established banks and branches. The strategy paid
off: by 2013, new deposit as well
as mortgage accounts were significantly outpacing the market
average. A year later, Virgin
Money launched a successful initial public offering.
BMW, for its part, joined the attacker ranks with its entry into

the car-sharing business in 2011.
DriveNow, a joint venture with rental company Sixt, provides
urbanites with access to cars. In
return for a registration fee and time-based charges, customers
can choose from a f leet of Minis
and BMWs. Via an app, drivers find the nearest available car,
use a card to unlock it, and later
3 “Middle Kingdom meets Magic
Kingdom,” Economist, August 26,
2010, economist.com.
3
leave it in any parking space in the city when their journey is
complete. BMW described the
venture as a “strategic response to the growth in urban living
and shared ownership.”4 Starting
in Germany, DriveNow has subsequently rolled out to London,
San Francisco, and Vienna, so far.
What differentiates BMW’s offering from competing initiatives
is the appeal of driving stylish
BMWs (including the i3 in some locations) and Minis,
thereby—on the back of its brand
strength—positioning itself as the car-sharing service for
premium cars. Importantly, with the

initiative seen as a way to explore new forms of mobility, it has
strengthened BMW’s reputation
as an innovator.5 After early successes, DriveNow plans to
expand to 15 more cities in Europe.6
These examples suggest that being good at line extensions gives
incumbents a better chance of
succeeding with brand extensions. Consider how Disney has
gone from movies to theaters to
amusement parks to merchandising, or how Amazon seems to do
a line extension every few months.
What it takes
Incumbents have a number of assets and advantages that they
can exploit to act as attackers in
new markets. We believe there are three fundamental success
factors:
� Distinctive brand equity and trust. Virgin’s entry into High
Street banking at a time when trust
in the sector was at an all-time low enabled it to take advantage
of its status as a brand known
for giving customers a better deal. An established brand name
can also act as a powerful form of
endorsement in new markets: National Geographic Society’s
shift from magazines to television
channels, expeditions, and more recently, retail stores—that sell

books, clothes, and travel
gear—is just one example.
� Strong relationships with customers. BMW used its
understanding of customers’ mobility
needs as well as its existing perception of being a premium
brand to enter a new category
with a service that enables it to tap into a different need state. It
also further strengthens its
relationship with consumers who could, in the future, move out
of town and buy its products.
Similarly, the German baby-food manufacturer HiPP entered the
baby-care market by
appealing to customers’ desire for organic, natural, and caring
products for their new babies.
The brand is now the main challenger in the German baby- and
child-care category, with a
market share of 4.5 percent, trailing only the top three
international incumbents.
� Access to data, capabilities, and other institutional assets.
Disney’s expertise in delivering
distinctive customer experiences enabled it to rethink language
learning in the Chinese
market and create and execute a value proposition that no other
provider could match. In
Europe, Inditex, owner of the Zara fashion chain, combined its

intimate knowledge of customer
preferences with its extensive supply and distribution networks
and operational expertise to
launch its interiors chain Zara Home in 2003. The Zara brand
proposition of making runway
4 Sarah Spary, “BMW taps into
sharing economy with launch of
DriveNow across London,”
Marketing Magazine, December 5
2014, marketingmagazine.co.uk.
5 Joan Voight, “BMW moves into
Zipcar’s territory,” Adweek, May 16,
2014, adweek.com.
6 Andy Sharman, “BMW to launch
pay-as-you-go car club in London,”
Financial Times, November 30,
2014, ft.com.
4
fashion accessible to all has made a successful transition to the
home-furnishing sector, with
ten new markets entered in 2013 alone and almost 400 stores in
45 countries. Other types of
assets can range from the technical—such as know-how, which
drove Honda Motor Company’s

extension from cars to lawn mowers—to emotional, as seen in
the “companionship” offered by
Sony Corporation’s MP3 players and TVs.
Successful brand extensions are likely to make use of all three
of these advantages, rather than
one in isolation. For instance, Disney’s venture into English-
language teaching is built on its
established brand equity in entertainment, its deep
understanding of how to engage customers,
and its operational capabilities and expertise in multiple
countries and cultures.
How to begin
Not every established brand can succeed at entering new
markets. To find out if yours can, start
by asking, Does it have brand extension “angles,” or emotional
benefits that could travel to
other categories? If so, what might those categories be? And
how can you use your benefits to
create something new and different?
Next, Where do you want to play? Define your brand’s
aspirations to ensure you focus your
innovation efforts appropriately. Then identify trends and
discontinuities in tangential markets,

analyze the competitive landscape, and evaluate any customer
relationships your brand may
already have. Also important: successful attackers are careful to
deconstruct their assets and
understand which ones can drive value in new markets.
Having selected your target markets, define your brand’s value
proposition in them—a process
that calls for a good dose of creativity, deep immersion in
customer needs, and sharp insight into
decision journeys. Many extensions have failed through lack of
brand relevance. So ask, What is
our brand’s value proposition? Does our brand fit this new
angle? Does it serve an unmet need?
As an incumbent, you need to assess a new market as
thoroughly as a start-up would. The best
performers invest in detailed analysis to estimate the scale of an
opportunity. Is the growth
potential worth the effort? What do the competitive dynamics
look like? Such an analysis
should uncover unmet needs that can highlight how much scope
there is to introduce disruptive
products or services.
To understand customer needs and customer decision journeys,
leading companies go beyond

the basics of existing data sets, focus groups, and surveys by
adopting advanced qualitative
research techniques. They use ethnographic studies, home
interviews, in-store observations,
mobile-photo journals, “netnography” (customer-sentiment
mining), “shop alongs,” and a range
of other innovative methods to check the fit between their
proposed brand extension and their
target consumers.7
7 For more on new market-research
techniques, see Leah Boucher
and John Forsyth, “Winning the
research revolution—Take two,”
McKinsey on Marketing and
Sales, December 2014,
mckinseyonmarketingandsales.com.
5
Once you’ve identified the right angle for your brand extension,
embark on a rapid prototyping
phase. Accept that some innovations—like Virgin Cola—won’t
succeed, and adopt a test-and-
learn, “fail fast” mentality. That way, an operation that f lops
can be quickly closed down before

it does any real damage to your brand. We find that some pilots
can be launched in as little as 12
weeks. Don’t allow a failure to drag on; it will weigh down your
brand and taint it with
mediocrity. Use conjoint analysis on any feedback you get to
assess product trade-offs and
define the value attached to various features.
Finally, make sure your organization is fully prepared and ready
to go. By definition, a brand-
driven innovation will take you outside your core expertise.
Make sure you have enough
knowledge about the new business to judge the right moment to
enter. Develop a rigorous
“reverse profit and loss” that helps clarify the objectives and
assumptions underlying your
business model. Think about how competitors might react and
what your response should be.
Check out any regulatory aspects governing the new market and
identify the variables that
could affect cost projections and supply.
Although it’s too early to judge how successful the new wave of
incumbent attackers will be, it
provides food for thought for established businesses seeking
untapped pockets of growth outside

their core markets. Caution is needed; not every big brand has
what it takes. But some brands, it
seems, are so important to us that their entry into new markets
can have dramatic effects—not
only carrying consumers with them but also kick-starting new
growth and giving a boost to core
products too.
Jean-Baptiste Coumau is a principal in McKinsey’s Paris office,
where Victor Fabius is an
associate principal; Thomas Meyer is a senior expert in the
London office.
Copyright © 2015 McKinsey & Company. All rights reserved.
Journal of Management Research
Vol. 11, No. 3, December 2011, pp. 131-137
Ajit Prasad
Professor of Strategy
SP Jain Institute of Management & Research
DN Road, Andheri (W),
Mumbai 400058 (India)
The Impact of Non-Market forces on
Competitive Positioning
Understanding Global Industry Attractiveness

through the Eyes of M. E. Porter
Ajit Prasad
Abstract
In 1980 Michael E Porter gave us the 5 forces model for
analyzing industry attractiveness. These forces
have their own individual determinants, but being behaviorally
determined, they are obviously subject
to the history and culture of the social fabric in which they
operate. The paper looks at each of the
forces and isolates non market influences like history, religion
and culture that have influenced the
competitive positioning of firms in specific markets. The
instances discussed are obviously not completely
exhaustive in their determination of the competitive positioning,
but suggest a methodology that may
be adopted for looking at the international attractiveness of
foreign markets. It may thus be used to
support and verify market entry decisions for MNCs.
Keywords: Competition, industry analysis, culture and religion
In 1980, Michel E Porter of the Harvard Business
School gave us his understanding of competitive
strategy based on the now famous 5 Forces Model
(5FM) . Between 1980 and now, the 5FM has
emerged as a unique tool in the analysis of the
environment. It has also been used effectively as a

tool to support decision making in strategic
choices1. It has been often criticized; it has more
often been applauded; but it has never been
ignored. In 1996, Mr. Andrew Grove, the then
CEO of Intel added to the model a 6th force: the
“Force of the Complementors” making the model
even more complete to take into account the role
of the government and the other environmental
factors.
In brief, Porter’s model tries to look at the
environment and the strategic positioning of the
firm in terms of the stability of the different forces
that the firm has to contend with. Primarily these
forces are: the bargaining powers of buyers and
suppliers, (which between them take care of the
input throughput output process); the threat of
new entrants; the threat of substitutes, and of
course the eternal “jockeying” for position among

the different players in the industry. These five
coupled with the “Role of Complementors2”,
which could be either positive or negative, gives the
complete model of the factors that determine the
competitive strategy of the firm.
Consider the very basic 5FM for the airline
industry. In the “jockeying for position” we have
airlines like British Airways, Lufthansa, and United,
each competing on its own differentiating factor.
The Buyers can be segmented into the business
travelers, vacationers etc. The Suppliers would be
inputs like air-traffic control, food, newspapers, oil
etc. The Substitutes, would be private jets and in
the extreme case even trains. The New Entrants
would be firms considering entering into the
132 Journal of Management Research
market; and the Complementors can be

government policy or even (regretfully) any
terrorist group that can shift the consumer
preference from airlines to trains, i.e. change the
balance of forces within the industry from outside.
The five forces model has been used very
effectively for defining market entry decisions.
From the producers point of view the most
favorable matrix of force intensity is one in which
all the elements are “low” is the one which is
favorable for market entry. On the other hand the
sanguineness of moving from a “low “to a “high”
market characteristics may be questioned.
An often ignored factor in the determining of the
force intensity has been the role of history and
culture. Since the determination of the force
intensity essentially tends to be an ordinal
exercise the role of behavioral characteristics
tend to be very strong. For example what would

explain why the buyers in Britain are much stronger
group that buyers in America. Or on the other
hand what would explain the inherent
competitiveness of the Japanese industry, or why
Bargaining
Power of
Suppliers
“Jockeying
for
Position
Bargaining
Power of
Buyers
Threat of New Entrants
Threat of Substitutes
Role of the
Complimentors
PORTER’S FIVE FORCES MODEL
Table 1: The impact of Non-market Forces on the Five Forces
The forces Decomposition Historical Validation
1. Bargaining Power of Buyers Size, cross elasticities of UK
(1756), the rise of the

demand, segmentation protestant ethics and the
Industrial Revolution
2. Bargaining Power of Suppliers Size, relative market share,
USA, civil war 1861, north south
criticality, inventory management divide, role of catholic Vs
protestants
3. Threat of new entrants Entrepreneurship, ability to South
Korea (1960), the rise of
cross- subsidize the Chaebols
4. Threat of substitutes Back to generics India (1930), Gandhian
Economics, generic products
etc
5. “Jockeying” for position Industry competitiveness Japan
(1868), the Meji
restoration and Matsukata’s
boom and bust policy
6. Role of complementors Outside-the-industry influencers
USSR (1991), Perestroika and
Glasnost and the Role of
McDonalds
is it that Indian supermarkets will never see 73
varieties of bread, so common in its western
counterparts, even if the income elasticities were
the same. The answer would lie steeped in history

and culture that has determined the intensity of the
forces.
Volume 11, Number 3 • December 2011 133
Consider the above table which lists the five forces
and their broad decomposition. The last column
also isolates historical instances3 which have tended
to influence the behavioral parameters that will
influence the intensity of the forcers.
Consider the following historical developments
that have shaped the culture of a nation and has
an impact on the intensity of different forces.
THE PROTESTANT ETHIC AND THE
RISE OF CAPITALISM
The work of Max Webber is fairly exhaustive on
this. The separation of the Church of England
from Rome, and the resultant rise of the protestant
ethic had a lasting impact on consumption pattern

in society. Weber clearly documents how the spirit
of Protestantism led to low consumption rates and
thus to high savings rates, which was basically
funneled to finance the industrial revolution. Not
only did capital movements have their own impact
on the nature of expenditure pattern, but also the
changing nature of consumption. The non-
ostentation style of the Protestants was
substantially different from the conspicuous
consumption that characterized the Church in
Rome. In Porter’s terminology, with the shift from
the catholic ethic to the protestant one, the
bargaining power of the buyer increased, and also
his ability to say no to a large number of
producers. This also explains in later centuries the
phenomenal success of standardized discount
stores like M&S and ASDA. The average British4
buyer today is very conscious of even penny

discounts, and has no problems shifting loyalty.
The bargaining power of buyers here in the British
society is probably higher than say in Germany or
France who have not gone through this transition.
THE MEJI RESTORATION
With Commander Perry’s gun boat diplomacy, the
restoration of the Meji, the role the then Finance
Minister, Matsukata is essential in understanding
the inherently competitive behavior of the Japanese
industry. What has been often forgotten is that
Matsukata’s inflationary boom-and-bust policy was
the key to weeding out inefficient firms. With a
farsightedness far beyond the conventional
knowledge of economics, Matsukata followed a
classic sine wave policy so far as fiscal policy was
concerned. Having introduced an inflationary
situation over a period of 5 years, wherein industry
would grow substantially because of the cheap

availability of credit, he would for the next cycle,
have a deflationary policy. This would lead to the
inefficient industry being closed down. This policy
followed over cycles spread over 30 years, ensured
that the inefficient firms were effectively “weeded”
out of the industry. It is this historical peculiarity
that explains why the “Jockeying for position”
tends to be higher in the Japanese industry than
else where, something which also explains the
generic strategy that Japanese firms tend to follow,
based mainly on cost leadership than on product
differentiation.
THE US CIVIL WAR 1861-65
The War split the country between the industrial
north and the agricultural south. The forefront
issue was the issue of slavery. The secession of the
south was not even considered because of the
hidden agenda of the need to protect the cheap

supply of not only labor but wage goods that
provided the stability for the industrial growth of
the north. The south not only provided the
essential raw materials, but because of their
relatively higher incomes (income distribution was
relatively skewed), following the low costs of
production (slavery!), also served as a good market
for the finished goods that were predominately
produced in the north. The economic basis of the
civil war has been well recognized, and perhaps
explains in substantial detail, the initial
competitiveness of the American firms in the area
of supply chain management, which unfortunately
they lost out to the Japanese in the post 60’s
primarily on account of lagging behind so far as
the innovation cycle was concerned. The federal
structure of the US constitution, a necessary
outcome of the civil war, can also explain to a large

degree the loss in competitiveness5. In Porters’
terminology, the bargaining power of suppliers will
be historically and culturally determined by events
like the civil war.
GANDHIAN ECONOMICS
The Indian commodity and factor market has been
extremely influenced by the thoughts of Mahatma
Gandhi (affectionately christened as “the Father of
the Nation”). Gandhian economics attacked the
basics of consumer theory in that it questioned the
fundamental premise that more consumption does
not give more utility. In the spirit of Levitt’s
differentiation between the core (generic) product
and the peripheral product, Gandhi questioned the
basis of product differentiation, in that his
valuation of the utility of the peripheral product

was close to zero. For Gandhi the “core” product
was all in all important, which he demonstrated in
his personal life too. Examples abound from his
loin cloth dress, to his habit of writing with a
pencil stub, to his fasting to cutting down of more-
than-necessary calories. This has affected the
consumption habit of Indians (Generation X today
of course is not too affected by the Gandhian
philosophy) in terms of the Indians inevitable
quest for the substitute generic product, which will
alter the demand of the product. As an example we
can see the differences between force intensities of
substitutes between France and India so far as
Shampoos are concerned., In France this threat is
likely to be low. In India this threat is likely to be
high because of the prevalent use of generic
alternatives like “reetha” or “mud packs”. In some
cases even legislation can increase the threat of

substitutes. Medical legislation in the US which
prohibits doctors from prescribing brand names
actually increases the threat from generic
substitutes.
SOUTH KOREAN CHAEBOLS
The Korean chaebol is perhaps one of the unique
institutions of the world. Post partition, the major
source of growth in South Korea has been the
growth of the chaebol (the family owned business).
The top 3 (Hyundai, Samsung, LG) are well known
brands all over the world, representing among
them a high complex interrelated ownership
structure and of course highly diversified
conglomerates. This has been both a strength and
weakness of the Korean economy, fuelling high
growth on one hand, and as events of 1997 have
proven can also prove to be the Achilles’ heel of
the growth process. The existence of the chaebols

had contributed substantially to the growth of the
market and industry structure not only in Korea
but also in other countries where the group is
present in a significant manner. In Porterspeak, this
translates into, among other things, reducing the
threat of potential entrants. The balance of forces
in the Indian FMCG industry has been altered
substantially by the entry of LG, which was
hitherto only in the consumer durable industry.
With LG’s decision to enter into the product
categories of shampoos, toothpaste etc, the
existing players in the industry have been wary of
further capacity expansions, because of the
inherent strength of LG in its ability to cross
subsidize. This makes LG a formidable player not
only in existing markets but also in potential
markets that it may decide to enter into.
PERESTROIKA, GLASNOST AND

MCDONALDS
The influence of the external environment is
extremely important in defining industry balance
and attractiveness. This is explained by an example
no better than the Russian experience of reforms
(Perestroika) and openness (Glasnost). The
contributions of Gorbachov towards reforming
the Russian economy, given the disastrous
economic consequences of its ill-timed
expansionist policy in Afghanistan, were also
influenced by the impact of western culture. Two
events come to mind, the first the often quoted
advent of McDonalds in Moscow and the now
famous photographs of long overnight queues of
aspiring customers waiting on a cold winter night,
and the second, what I personally consider as
having been underplayed by history, the impact of
the Lennon-McCartney composition, “Back to the

USSR” in the sixties, which going by underground
sales would have made it one of the biggest hits
of its time. Both instances prove that the external
environment plays a significant role in determining
the intensity of the forces that will define industry
attractiveness. The recent advent of rock stars in
India (Sting, Pink Floyd, Elton John etc) proves
that the Indian market is an attractive one for
western music. What often gets underplayed is the
role that satellite television (MTV, Channel V, etc)
has had in playing the role of the complementor.
Two additional points may be taken into
cognizance so far as the impact of culture on the
Five Forces Model is concerned. One is the
dimension of culture that be defined in the
Hofstede’s framework. If we look at the four

dimensions of power distance, gender issues, risk
averseness and individualism, and the now added
time orientation, it is clear that these factors will
also affect the intensity of the determining forces.
Table 2 attempts to list some of the dimensions
that need to be kept in mind.
Thus international markets that have a greater
proportion of women customers, or matriarchal
driven societies are likely to have a different balance
of forces than patriarchal societies. In India the
differences between the markets of Kerala and
Punjab come to mind immediately, as would in
Europe, the differences between the French and
German markets.
The second factor that also needs to be kept in
consideration is Porter’s own National Diamond
for determining international competitiveness. In
his 1990 treatise, he explores the determinants of

national competitiveness in terms of four factors,
demand conditions, role of supporting industries
and firm strategy, structure and rivalry. Each of
these will have their own impact on the balance of
the forces.
The National Diamond The 5F Equivalent
1 Demand Conditions Bargaining Power of
the Buyers
2 Factor Conditions Bargaining Power of
the Suppliers
3 Role of Supporting Role of the Comple-
Industries mentors, Threat of
Substitutes
4 Firm Strategy, Structure Threat of New
and Rivalry Entrants, Jockeying
for Position
Both Hofstede’s and Porter National Diamond
bring a common understanding to the 5 forces
model: that the behavioral element is important in
understanding industry attractiveness. The study of

the present is important; the study of the past
perhaps is more important. The understanding that
history gives us of the present can also influence
the strategies that we would follow in the future.
One may well remember Orwell’s reflection, “who
controls the present controls the past; who
controls the past controls the future.”
Table 2: Impact of Culture on the Five Forces Model
Hofstede’s Determinants Influencing
1. Power Distance Decision making, relationship between
Consumer and Customer, role of MIS,
game theory, designing organizational structures etc
2. Masculinity Compensation designs, impacts on social costs,
litigations, sexual
harassments, inefficiencies associated with preferential policies
3. Uncertainty Avoidance Impact on entrepreneurship, the
equation between risk and return etc
4. Individualism Impact on buyer behavior, market
segmentation, costs of communication;
approach to cluster behavior
5. Time Orientation Cycle times, inventory management, supply
chain logistics, width and depth
of distribution channel etc.

CONCLUSIONS
Constructing the five forces model even in the best
of times is not an easy thing to do. Not only does
it require a high degree of intellectual clarity and
precision, but because of the essentially ordinal
values of the force intensity, it also requires a good
grounding in behavioral sciences, particularly
history. Understanding the intensity of the
different forces requires an in-depth analysis of the
social fabric that surrounds the industrial
organization.
This appreciation of the social fabric is heightened
by the knowledge of history and the resulting
culture of the society and economy that the
researcher would be considering. Multinational
firms will find this approach invaluable in taking

decisions relating to market entry or even market
exit, something that the traditional models,
including Porter’s National Diamond itself may not
be able to afford a definitive view.
What we have suggested is an approach that may
sound pedantic. Before a five forces model is
constructed the researcher must delve into the
social history that will determine constituent
behavior. It is only by this process will the model
so constructed will be reasonably robust to stand
the test of researcher bias. This process will also
bring out the true “beauty” of the five forces
model in its use of intellectual rigor combined with
pragmatic understanding of the social context.
Our analysis is undoubtedly limited in that in the
true spirit of comparative statics we have looked
at individual events and their impact across the
different forces. A more thorough approach would

involve a possibly computable GE model to take
into account the simultaneity of the various factors
that will determine the intensity of the forces.
Nevertheless, in the true spirit of social science
research, the paper does attempt to offer a model
that can be followed in the further development of
industry attractiveness analysis.
NOTES
1. This is a use of the model that is often ignored. In the ideal
situation the intensity of all the forces should be low. This
serves as a good guideline in establishing decision criterion in
making strategic choices.
2. Grove has taken a rather narrow view of the
“Complementors” in that he would like to “think of them as
“fellow
travelers””. Possibly a broader view of the term is called for:
firms that are outside the industry, but nevertheless have the
power to influence the balance of forces within the industry.
Complementors thus can play both positive and negative
roles.
3. I would like to emphasize here that these are only singular

examples and are neither representative nor exhaustive. In
reality
there will be a large complex number of instances that will
influence the behavioral characteristics. We are focusing on a
finite set of instances merely to establish a methodology.
4. George Mikas, How to be an Alien: When people say
England, they sometimes mean Great Britain, sometimes the
United
Kingdom, sometimes the British Isles, but never England.
5. In strict economic terms, a federal structure of the polity
will lead to market segmentation, both in terms of the product
and the factor markets. Segmentation has inherent inefficiencies
built in the system which can explain the loss of
competitiveness. It may be interesting to compare the strong
federal structure of the US (and the now emerging federal
structure in India) with the absence of the federal structure in
Britain and in Japan to explain differences in competitiveness.
This will of course have to be empirically tested.
SELECT BIBLIOGRAPHY
Appiah, K. A. and Gates, H. L. (1999), A Dictionary of Global
Culture, Penguin.
Collins, Larry and Lapierre, Domonique (1978), Freedom at
Midnight, Bell Books.

Encyclopedia Britannica (1994), Relevant Sections.
Holfstede, G. (1984), Culture’s Consequences, Sage.
Lee, K. (1999), Corporate Governance and Growth in Korean
Chaebols, SNU.
Leitzel, Jim (1995), Russian Economic Reform, Routledge.
Levitt, Theodore (1980), Marketing Success through
Differentiation, Harvard Business Review.
Orwell, George (1977), 1984, Signet Classic, Penguin.
Porter, M. E. (1990), The Competitive Advantage of Nations,
Harvard Business Review.
Porter, M. E. (1980), How Competitive Forces Shape Strategy,
Harvard Business Review.
Rawls, J. (1973), A Theory of Justice, Oxford.
Spear, Percival, (1995), The Oxford History of India, Oxford.
Weber, Max (1992), The Protestant Ethic and the Sprit of
Capitalism, Harper Collins.
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