Ten 'Megaforces' for Business Leaders to Think About

Ten 'Megaforces' for Business Leaders to Think About

February 2012

U.S. business leaders have plenty on their minds in today’s globalized world, when a Mediterranean country with a GDP smaller than New Jersey’s could blow up the euro and tip the transatlantic economy back into recession.

When an earthquake, hurricane, flood, or some other natural conniption 10 time zones away could snap supply chains in a matter of hours and bollix up production and distribution channels worldwide.

When social media could transmit news of an embarrassing company screw-up to millions in the time it would take for the CEO to tie his shoes.

Here are 10 more things for business leaders to think about, according to a new report about global “megaforces,” prepared by KPMG, a global tax, audit, and business consulting firm. First, it’s important to know that the 10 megaforces are not isolated phenomena that can be managed within a company bureaucracy’s stovepipes. Instead, “they act as a complex and unpredictable system, feeding, amplifying, or ameliorating the effects of others.” They must be considered and planned for as a whole.

Here’s what KPMG had to say about the 10 megaforces:

Climate Change
First on the list, climate change is a megaforce that “directly impacts all others discussed in this report.” Climate change brings an array of risks, beyond extreme storms, falling crop yields, worsening air quality, or the spread of vector-borne diseases. Climate change also brings risks of new regulations, damage to company brands, and threats of lawsuits. The political response to climate change has been “slow and disjointed.” Businesses face a “complex and unpredictable patchwork of carbon legislation around the world.” Clean energy technology, however, is an opportunity to develop new products and markets, as well as to reduce heat-trapping greenhouse gas emissions.

Energy and Fuel
Climate change is closely tied to the global energy economy, which depends on carbon-rich fossil fuels for 80 percent of supply. Even if climate change were not an issue, however, the signs of energy stress are all around. Rising demand and geopolitical frictions have injected volatility into oil markets, increasing the difficulty of incorporating energy costs into corporate planning. By 2035, according to the International Energy Agency, oil prices might be at $120 in 2010 dollars. Word to the wise: increased energy efficiency both decreases exposure to price risks and results in improved financial performance.

Material Resource Scarcity
As developing countries develop, demand will rise for minerals and metals. Since 1990, global production of steel has doubled. Construction materials consumption has gone up 80 percent while industrial metals consumption has gone up 60 percent. “As supplies decrease, governments are likely to protect domestic interests by restricting exports.” We’ve seen that happen in China with its curbs on exports of rare earth minerals whose special properties are essential for manufacturing a range of important products, including fluorescent lighting and wind power turbines. The results: both uncertainty and opportunity for the U.S. and other countries that have rare earth deposits, and an impetus to find substitute materials.

Water Scarcity
Water demand is rising as a result of population growth and industrialization in the developing world. Potential fresh water shortages are a direct threat to business, especially water-intensive industries such as food processing, pharmaceuticals, electronics manufacturing, and electric power utilities. Poorer quality, less access, conflicts with other users, and reputational risks, in addition to broader threats to food and energy economies, are among the dangers. By one estimate, global demand for fresh water will exceed supply by 40 percent by 2030, assuming average growth and no efficiency gains. Which argues for efficiency gains. Improving water efficiency, recycling and reuse would both reduce costs and supply risks.

Population Growth
If the world population hasn’t reached 7 billion already, it will within weeks. By 2032, 20 years from now, there will be another 1.4 billion humans in residence. More people using more resources will force business leaders to manage greater price volatility and supply uncertainties for essential energy, water, and materials. Lack of sufficient jobs in the developing world could result in social unrest and geopolitical stresses. In the developed world, an aging population and dwindling workforce will bring their own sets of fiscal and economic problems.

Wealth
On the bright side, the world’s middle class is expected to increase 172 percent between now and 2030. A significantly larger middle class will mean bigger markets for more and better products and services—provided businesses can source the resources they need to make those products and services. “Resource supplies, infrastructure, and ecosystems will come under increasing stress.”

Urbanization
The move from the farm to the city picks up speed as economies develop. In 1950, more than half the population of developed countries already was urban. Middle-income countries should reach the halfway mark sometime before 2020. The least developed countries will hit crossover in the 2040s. Urban agglomerations in fast-growing countries in the developing world already are enormous: counting metro area populations, Mumbai has surged past 21 million, as has Mexico City. Jakarta exceeds 24 million, Cairo is closing in on 16 million, and it’s only a matter of time before Shanghai hits 20 million. Serving such huge masses of humanity requires heroic infrastructure construction and management: water, sanitation, power, transportation, health, police and fire protection, telecommunications. Providing these services is a business opportunity, but dense slum populations also breed conflict and instability.

Food Security
More people demanding more water in a changing climate add up to more pressure on the food production system, which is projected to translate as higher prices, up by 70 to 90 percent by 2030 for such staples as corn, rice, and wheat. Food demand will increase the most in fast-developing countries. Meeting that demand will depend on the right combination of economic growth, political stability, improved agricultural production methods, and access to the global market.

Ecosystem Decline
Ecosystems are nature’s workshop, supplying the foodstuffs, water, and raw materials on which modern society is utterly dependent. Ecosystems provide services such as water filtration, carbon storage, and crop pollination—services that would be very difficult to replace with engineered substitutes. Damaged ecosystems can’t produce as well as healthy ecosystems. “The decline in biodiversity and ecosystems is making natural resources scarcer, more expensive, and less diverse—increasing the costs of water and escalating the damage caused by invasive species to sectors including agriculture, fishing, food and beverages, pharmaceuticals, and tourism.”

Deforestation
Forests, covering nearly one-third of the Earth’s land surface, are among the ecosystems supplying essential goods and services. Pressures on forests include agricultural expansion to supply meat, dairy products, biofuels, and palm oil. Loss of forests results in soil erosion and desertification, degrades water storage and filtration capacity, and adds carbon to the atmosphere. Businesses such as pharmaceuticals that rely on biodiversity in forests and other ecosystems have an incentive to promote their conservation.

So, what can businesses contribute toward managing the stresses the 10 megaforces impose? KPMG advises that businesses must understand the interrelated risks of the megaforces, find ways to manage risks to their enterprises, and incorporate sustainability into company strategic planning. Understanding the risks and planning for sustainability would open the door to capitalizing on opportunities that efficiency, waste reduction, resource substitution, and cleaner technologies could present for serving the expanding middle-class markets in the developing world, making giant metropolises livable, and in turn, conserving ecosystems, preventing food insecurity and water scarcity, and curbing the buildup of heat-trapping gases.

If there’s any sector of human society that can find the silver linings inside the 10 megaforces and leverage them into more prosperity and a higher quality of life, it’s business.

For any business leader, that’s worth thinking about.