The next big arenas of competition

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Certain industries create more value and have a greater impact than others. We call these outperformers arenas of competition. They are defined by two characteristics: high growth and high dynamism. Due to their growth, they capture an outsize share of the economy’s overall expansion; in terms of dynamism, market share within them changes hands to an outsize degree.

This report from the McKinsey Global Institute identifies 18 future arenas that could reshape the global economy between now and 2040.  To do so, the authors first analyze a data set of the world’s 3,000 largest companies from 2005 to 2020 and pinpoint 12 arenas of today, including biopharmaceuticals, cloud services, e-commerce, and electric vehicles. Arenas of today refers to the arenas that formed over the past two decades. The authors used 2005 to 2020 as their analytical interval to delineate a clean decade boundary and ensure consistent, well-established data. Extractive summary of the report is being shared in this weekly newsletter.

The report identifies a set of present and future arenas of competition, industries that could transform the business landscape and our world. Arenas are defined by high growth and high dynamism. These industries capture an outsize share of value growth, and market share within them shifts dramatically, as measured by the “shuffle rate,” a metric of company market share movements. These two characteristics signal a new era of competition and signify new technologies and business models in play.

The report identified 12 arenas of today: software, semiconductors, consumer internet, e-commerce, consumer electronics, biopharmaceuticals, industrial electronics, payments, video and audio entertainment, cloud services, electric vehicles (EVs), and information-enabled business services (ranked in order of 2020 market cap). “Arenas of today” refers to the arenas that formed over the past two decades. Understanding arenas is important for at least two reasons.  Not only are they where the business world is reshaped, but recognizing the elements that are usually present in an arena and that help explain its growth and dynamism allows us to identify a set of arenas that could plausibly emerge over the next 15 years. If the past is any guide, they will be centers of competition, innovation, and value creation.

Today’s arenas stand out from other industries in six ways:  they captured an increasing share of economic profit, attracted outsize levels of investment for innovation, enabled new entrants to grow, spawned giants, tended to be more concentrated, and were more global.

To identify future potential arenas, the authors examined how today’s arenas originated. They observed three elements that, when combined, were likely to result in high growth and high dynamism and to generate an arena. The three ingredients, which they call an “arena-creation potion,” are business model or technology step changes, escalation incentives for investments, and a large or growing addressable market. 

With these insights on existing arenas and their characteristics as a guide, the authors have identified 18 potential future arenas that together could yield $29 trillion to $48 trillion in revenues and $2 trillion to $6 trillion in profits by 2040. In terms of impact on the economy, we estimate that they could grow from about 4 percent of GDP in 2022 to 10 to 16 percent by 2040. This translates to a 18 to 34 percent share of total GDP growth.

The potential future arenas can be divided into three groups: arenas of today that are likely to continue developing into arenas of tomorrow (these include E-commerce, Electric Vehicles, Cloud services, Semi-conductors); second subsegments of current arenas that may grow sufficiently large and fast to become spin-off arenas (these comprise of AI software and services – spin-off from software, Digital ads – spin-off from consumer internet, and Streaming – spin-off from video and audio entertainment; and third emergent arenas that are not as closely linked as the potential spin-offs to any of today’s arenas (include Shared autonomous vehicles, space, cybersecurity, batteries, video games, robotics, Industrial and consumer biotechnology, Modular construction, Nuclear fission power plants, Future air mobility, and drugs for obesity and related conditions). While at different stages of their evolution, each displays early signs of the three arena-creation potion elements. 

The 18 arenas of tomorrow we have identified could be even more materially transformative than the 12 arenas of today, shaping how we consume and process data, approach health and wellness, and interact and communicate with one another. Recognizing how and when arenas originate, understanding how they evolve, and anticipating the way they could change society can offer a unique view of the arc of society’s progress.

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