The latest McKinsey Global Survey of Business Executives tells a two-sided story of growth and risk. On the one hand, rising affluence in developing economies and the increasingly fast pace of technological innovation present new opportunities for growth. Yet these same forces are driving the emergence of low-cost business systems that make global markets increasingly competitive, thus upping the "topple rate," at which companies lose their leadership positions.¹ The most recent McKinsey Quarterly survey quizzed some 9,300 business leaders around the world (see sidebar, "About the research") on the most important trends influencing the global economy in the next five years, with a particular focus on growth and the constraints to it.

Eighty-one percent of the executives surveyed think that increasing affluence and growing demand for goods in developing economies will be important during the next five years. Some 70 percent believe that these factors will buoy the profitability of their own companies. Technological innovation and the corresponding proliferation of new technologies emerged as an equally critical trend, which 81 percent of the executives consider important and 71 percent see as a significant driver of profitability.

The survey also highlights key differences of opinion. While most executives view the rise of low-cost business systems in developing economies as an important trend, the respondents are divided over the impact these systems will have on the profitability of their own companies; the answer depends upon which side of the cost divide they occupy. Likewise, while many company leaders think that the aging of the developed world—and the resulting decline in its workforce—will be an important economic factor, they disagree about the consequences: those in consumer-facing industries see opportunity, but those in labor-intensive ones see risk.

On the whole, global business leaders are bullish about the impact of key trends on profitability. Of the ten trends we studied, seven garnered more positive than negative responses—some by a wide margin (Exhibit 1): for example, 71 percent of the respondents expect technological innovation to have a positive impact on profits, while only 5 percent expect it to have a negative impact. The trends perceived as threats to global business are growing geopolitical instability, increasing risks to the supply of natural resources, and mounting environmental hazards. Many of the executives in the survey think that these three will have a negative impact on profitability.

In addition, the survey explored the actions that executives intend to take in response to the trends. How will the respondents expand the businesses they manage? What markets are they seeking? What constraints are most likely to limit growth? And what capabilities do companies require to prosper given the trends at work in the global economy?

Sources of growth

When asked about the geographical sources of growth, executives point to both the developed and the developing world. Some 27 percent believe that the relatively slow-growing but vast market of the United States will account for the bulk of future expansion. China, a close second, was the choice of one-quarter of the executives—little surprise given that country's meteoric rate of expansion (Exhibit 2).

Interestingly, the key factor differentiating the United States and China as the market of choice appears to be company size. Of the respondents from companies with revenues of less than $250 million, 30 percent choose the United States as the key growth market. Larger players, by contrast, anticipate more growth in China: 41 percent of the companies with more than $5 billion in revenues expect it to be their biggest growth market (Exhibit 3). This focus on China reflects the substantial investments that many large companies have made there already. Perhaps less obviously, it also shows the growing realization that demographic trends are slowing growth in the developed world and forcing growth-hungry companies to look elsewhere.

As for the growth prospects of sectors, the executives say that health care has the greatest top-line potential in the next five years, with energy- and natural-resource-related industries coming in second. Information technology and telecommunications are tied for a distant third (Exhibit 4).

Optimism about the health care sector's growth prospects may reflect an increasing awareness of demographic trends affecting the developed world—in particular, the fact that older households will control an increasing share of total spending and will devote a growing proportion of their income and accumulated wealth to health care (see the articles from our special section on the economics of an aging world: "The demographic deficit: How aging will reduce global wealth," "Taking the risk out of retirement," and "Can pension plans age gracefully?"). This view of the health care sector's future probably results from other factors as well, including its historical growth and profitability, rapid innovation in health care technologies, and the brisk expansion of basic health care services in the developing world. Indeed, respondents from developing markets pick health care as the third most important growth sector, behind energy and telecommunications.

Constraints on growth

When asked about constraints on growth, the executives say that the shifting nature of their markets—the competitors and the consumers alike—will create the biggest challenges. Seventy-seven percent believe that intense competition will be an important constraint on the growth of their companies. Sixty-four percent cite the challenges of satisfying an increasingly sophisticated consumer market. Sixty percent worry that competitors will introduce new products that could displace theirs. Large companies, which may be less confident of their ability to innovate and to stay ahead of rivals, fear the growing competitiveness and sophistication of their markets more than smaller companies do.

Another constraint preoccupying the executives is the high cost and low availability of talent; 73 percent consider this problem a key limitation on growth (Exhibit 5). Interestingly, even executives in labor-rich China and India are quite concerned about talent, with 71 percent and 81 percent, respectively, seeing it as a constraint—a response that may reflect the inherent challenges of managing rapid growth. As China and India rise to global stature, local companies with relatively little experience managing large-scale organizations suddenly face the difficulties of handling a vast, newly employed workforce (see "Global champions from emerging markets").

The constraints on growth that seem most serious to the executives vary widely by region—not surprising, given the vast differences among local business environments. North American executives are more concerned than their counterparts elsewhere about rising health care costs. Indian executives see a lack of infrastructure as a key limitation. Executives across developing economies worry about the rising cost of natural resources—a concern that probably reflects both an increasing demand for energy and the greater manufacturing orientation of these economies relative to those in the developed world.

Executives from different industries also disagree about the relative importance of various constraints. Financial-services executives see a hostile regulatory environment as a potentially key problem. Respondents from heavy industry, reacting to the recent double-digit price hikes across most commodity categories as Asian demand strains global supply, are significantly more concerned about the rising cost of natural resources.

Other potential concerns barely register with the respondents. European executives, for example, are among the least worried about rising health care costs, despite the region's rapidly aging population and the potential strain it places on national health care systems. US executives express relatively muted concern for the risks posed by environmental hazards, notwithstanding the global, if uneven, tendency to worry about and regulate them more vigorously.

These responses and others like them suggest a tendency to assume that current local conditions will persist. This assumption creates potential blind spots about what trends are likely, over time, to upset the status quo.

Methods for growth

When the executives were asked how they plan to promote growth in the current environment, they overwhelmingly pointed to innovation, which some 43 percent describe as the capability their companies most need in order to grow. Asked what specific action is most necessary to achieve growth, one-quarter said innovation within current product lines and 22 percent said developing new ones (Exhibit 6). Interestingly, financial-services executives, while seeing innovation as important, also regard better distribution as crucial, probably in response to the challenge of trying to deliver financial products in new and growing markets.

A majority of the respondents think that their companies will grow organically; 63 percent say that they plan to meet their goals in their most important growth markets by expanding existing operations. Only 12 percent and 11 percent, respectively, said that acquisitions and joint ventures are their most important growth strategies (Exhibit 7).

Coupled with the emergence of developing economies such as China and India, the pace of technological innovation creates a paradox of growth and risk for today's global executives. The way companies cope with the double-edged sword of low-cost business systems that make markets increasingly competitive will do much to determine which companies prosper—and falter—in a rapidly globalizing world.