“A bank and a steel company can walk into a bar and not have much to do with each other. But once one of the arena companies walks in, we’re all involved.” That’s McKinsey Global Institute director Chris Bradley. On the latest episode of The McKinsey Podcast, Chris spoke with global editorial director Lucia Rahilly about a new report delving into the next arenas of competition—namely, a set of dynamic, high-growth industries that are fundamentally redefining the global economy and changing the game for businesses across the board.
The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.
This transcript has been edited for clarity and length.
Looking back to look forward
Roberta Fusaro: Hi, everyone. Quick, right now, go to McKinsey.com and search “McKinsey Quarterly.” There’s a special edition of the Q out now. It’s a collection of articles from the 1960s to the early aughts—all about technology.
Lucia Rahilly: A lot of what we wrote back then about adapting to new technologies is still true. Although these days, deciding which tools to invest in, and where to find the right talent, is probably a lot more complicated.
Roberta Fusaro: We need a return to simpler times! One article from 1968 did predict that managers’ main interface with computers would be the old-fashioned telephone.
Lucia Rahilly: Well, we still have the phone part!
Roberta Fusaro: That we do . . . And now let’s hear from McKinsey senior partner Chris Bradley about the industries that McKinsey believes will reshape the global economy.
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Step into the arenas
Lucia Rahilly: Today we’re talking about the next big arenas of competition: new research from the McKinsey Global Institute, our business and economics arm, where you are a director. The new report talks about the industries that will matter most in the global business landscape, which you and your coauthors describe as arenas of competition. What do we mean when we use the term arenas of competition?
Chris Bradley: If I go back and look at the top ten companies in 2005, they were in traditional industries such as oil and gas, retail, industrials, and pharmaceuticals. The average company was worth about $250 billion.
If I advance the clock forward to 2020, nine in ten of those companies have been replaced.
This statistic is still true by the time we get to 2023, but the companies that replaced those old guards are eight times bigger. And this new batch of companies comes from these new arenas of competition. What we found is that there’s a set of industries representing about 10 percent of revenue that play by very different rules. In fact, they’re so different that we have a nickname for them. If you’re a fan of Harry Potter, it’s wizards versus muggles.
Arena industries are wizard-ish; they seem to have a very different set of economic rules about them and get very different results, while the rest of the muggles, even though they run the world, finance the world, and energize the world, play by a more traditional set of economic rules.
Arena industries are wizard-ish; they seem to have a very different set of economic rules about them.
How arenas conjure outsize success
Lucia Rahilly: Could we put a finer point on what is novel or different about the lens that you and your coauthors applied to determine what’s a wizard and what’s a muggle?
Chris Bradley: It’s very simple. The wizards are defined by growth and dynamism. We looked at the places where value is flowing and the places where value is moving.
That gives us two axes. One axis is value flowing. What we see is that this set of industries, which, again, represents about 10 percent of industries, is 45 percent of the growth in market cap. But there’s another dimension or axis too, which is dynamism. That is measured by a new metric we’ve come up with called the “shuffle rate.”
Just imagine a deck of cards: How much does the top move to the bottom? How much does the bottom move to the top? It turns out that in this set of wizard-ish industries, or arenas, the shuffle rate is much higher than it is in the traditional industry.
So these are places not only where value is really moving, but it’s moving to new companies and new places.
Lucia Rahilly: So when it comes to these companies and industries, where are we seeing the most profit?
Chris Bradley: In our firm, we look at what’s called economic profit, which is the profit you make minus a cost for the capital you employ. And, by some measures, all the economic profit in the world is in the wizard industries. It’s where R&D happens; they’re two times more R&D intensive. It’s the locus of new businesses, the nebulae, where new business is born. They’re big stars.
In these places, half the value in an arena industry is held by companies worth $200 billion or more. So there’s this whole bunch of characteristics that make us say, “Hang on.” It’s not just that growth and dynamism are different. It’s almost a different world. That’s why we almost had to travel from London to Hogwarts to understand these industries.
Lucia Rahilly: Geographically, where are we seeing these arenas of competition?
Chris Bradley: They tend to be focused geographically on the Pacific Rim—particularly the US, which accounts for about two-thirds, but also Greater China. Europe, on the other hand, represents less than 10 percent of the value of the arenas. The world of business kind of moved from the Atlantic to the Pacific.
Lucia Rahilly: In the report, you talk about what you call an arena-creating potion. Chris, tell us, what is this potion you speak of? What are the ingredients?
Chris Bradley: You’re exactly right. It turns out there is a special formula that these industries run by. Three things occur: first, a step change that creates a new platform for the industry. It unlocks a new type of competition. The classic example is who’s the number-one player in EVs [electric vehicles]? The answer is Tesla and BYD—companies that were born on that platform. Despite over a hundred years of R&D, the combustion engine players didn’t change when the platform was created, and a new starting gun was fired.
The second thing that must be in place is dynamic escalation. And it’s no coincidence that the word escalation is also used in something like an arms race or the nuclear arms race, where competition is not just in the setting of the price or the amount of advertising, but fundamentally in what your overall capability level is. And if you invest a lot, you’re able to shift your value proposition. The third thing you’ll need is a massive market.
If we look at those three things, when we look at the 12 arenas we observed in the last era (2005–20)—e-commerce, EV, semiconductors, et cetera—it’s no coincidence that these are digitally oriented business models. This is because digital has made the market equal to the world. It ticked those three boxes. It reset a lot of races.
Back to the future
Lucia Rahilly: How predictive is this potion? Or is it largely a descriptive framework?
Chris Bradley: We’ve used it to look forward because the game theory is a bit predictable. If escalation can happen and there are incentives for it to happen, that’s what will happen. One little thought experiment we did was to “time machine” ourselves back to 2005 and ask ourselves if we forgot we knew the future, what would we see with innocent eyes?
The answer is, a lot. We’d see the first EVs. There weren’t many of them, but battery technology had come to that point. Tesla existed, though it wasn’t big yet. Amazon certainly existed and was firing on all cylinders by 2005. The future environment of semiconductors was clear with the growth of TSMC [Taiwan Semiconductor Manufacturing Company] and the foundry model, which meant that the industry split into specialist vertical components.
Back then, any of those things were there. Now, does that mean I can, with a hundred percent accuracy, hand on heart, tell you this is exactly what’s going to happen? No, but what I can say is the arenas that are going to be important by 2040 are already important today.
Lucia Rahilly: What are some of the arenas that we expect to be big in 2040 that are not part of the current set?
Chris Bradley: There are a few of these arenas that are continuations of the game, not fully played out yet. One example is e-commerce because there’s still a lot of penetration. Video streaming, because there are still a lot of places where it’s not dominant. And sports, that hasn’t gone digital yet. Sports is the biggest category, so there’s still a lot of headroom there.
But there are some arenas that we think are more nascent today that are going to be really defining in terms of the industries of the future: shared autonomous vehicles, batteries, robotics, space.
There are some arenas that we think are more nascent today that are going to be really defining in terms of the industries of the future: shared autonomous vehicles, batteries, robotics, space.
Lucia Rahilly: I thought the point about obesity drugs was really interesting.
Chris Bradley: Yes, we zoom in on obesity drugs; this is a total game changer. All the GLP-1 ones, and we’ve already seen companies like Novo [Nordisk] have quite radically rerated valuations on the back of it.
We mention obesity because that’s where we can see these things, but you can keep applying that to other kinds of chronic conditions that some of our new medicine platforms can address. We see huge markets with new medicine pathways.
But it’s not just the pharmaceutical market we’re talking about here. We’re also asking what the economic value of solving some of these problems is and therefore what society’s willingness is to pay for it. And you start getting astronomical numbers.
More on muggles
Lucia Rahilly: Any examples of industries that were formerly arenas but didn’t make it to the next set?
Chris Bradley: There are a few arenas we call graduates, Hogwarts graduates. Let’s go back to the muggle land of things that definitely had the characteristics of arenas in the past era, but maybe have hit more of the mature point on the S-curve.
The payments sector is a good example because over this period, we merged into this massive global payment system and the creation of these electronic rails. We’d also say something like information-enabled business services, because we’ve created these gigantic, large professional-services and IT services companies.
One thing I want to be careful of as well is not to denigrate the muggles. There are lots of great, amazing companies in there that’ve done incredible things. It’s just that as a category, the action in the industrial landscape was in the arenas.
Lucia Rahilly: There must also be industries that are regionally high growth that don’t fit this category because they’re not global in nature. Is that right?
Chris Bradley: Yes. If an industry is totally regional, criteria two of our formulas starts falling down because the incentives to do this radical level of investment go down.
Let me give you an example. In the US, six big tech companies collectively are spending over $400 billion a year in capex [capital expenditures] and R&D. Capex and R&D are exactly this kind of escalation because it’s tomorrow’s money. It’s investing in who you are tomorrow, not who you are today. These companies, in many ways, are big, and they straddle the globe because they invest in doing so. They invest radically. But then try to find any company in Europe that invests at anything close to that scale, and you’ll really struggle.
One of the reasons it’s much harder for European companies to scale beyond their borders is that they end up in the old world of the nuclear arms race, where you get only regional players that project into a global game and get this kind of exponential liftoff.
Lucia Rahilly: Are there factors we know about that could meaningfully change the way these arenas might evolve?
Chris Bradley: One must take great care about predictions, especially about the future. And we must accept that we might be wrong. In this report, we ask ourselves, why might we be wrong, and what are the swing factors? When we step back from that, the really big things—geopolitics, the pace of the energy transition, and the rate of technology development—stand out.
The big switch in technology development is the promise of AI. If we just look at the projections, how many gigawatts of training clusters are we going to have? If you look at the predictions, they’re radically far apart. They go up a lot. But in a world where to train a model, you need a gigawatt cluster—meaning you need a nuclear plant to fare each single learning—that’s a radically different world of capability, cost, spend, and escalation. So those swing factors really matter.
We’re trying to catch the general movement but also understand why these arenas would form.
Implications for leaders
Lucia Rahilly: Suppose I’m a business leader. What should I do differently or ask myself as a result of this work?
Chris Bradley: First, even though I say arenas are special, they’re everywhere because every company touches an arena. If I’m a bank, they’re touching payments. If I’m a consumer company, they’re touching the hyperscalers on the consumer internet. So I’m either buying from or I’m competing within an adjacency.
These arenas also do a lot of blurring between industries. Is it a video company? Is it a consumer electronics company? Is it an AI and software company? And don’t even start me on Amazon, right? So these things get very blurry.
Even though I say arenas are special, they’re everywhere because every company touches an arena. If I’m a bank, they’re touching payments. If I’m a consumer company, they’re touching the hyperscalers on the consumer internet.
Lucia Rahilly: It’s the ecosystem economy.
Chris Bradley: That’s a great way of putting it, because a bank and a steel company can walk into a bar and not have much to do with each other. But once one of the arena companies walks in, we’re all involved.
Second, we’re competing in the input markets for talent and capital. But more than that, it also points to where these opportunities exist. We want our clients to be on the front foot about where to play. And it’s either they change their competitive game, or they play a new competitive game.
That’s where I come back to the point on dynamism and shuffle. As I said earlier, one-third of the market cap in these arenas came from companies that barely existed, were tiny, or played outside their arena. What that says to me is there is time to play in these arenas. But if you can get in early and the competitive space is still nascent and you can be in that deck when it’s shuffling, it’s important.
A bank and a steel company can walk into a bar and not have much to do with each other. But once one of the arena companies walks in, we’re all involved.
Lucia Rahilly: So if I’m an entrepreneur, or a smaller player that’s outside the top ten, it’s not that I have to stay out of these arenas; I just have to compete effectively within them.
Chris Bradley: Yes, that’s right. You’re probably touching these arenas in some way. Even though these arenas are, depending on when you measure it, 8 to 13 percent of the revenue of large companies, they are 45 percent of the change in market cap and, depending on when you look at it, half to more than 100 percent of all the economic profit as well.
This whole idea of economic focal points is that all the energy of change in our world is in only a few places, and those are the places that shift the dial. They’re also the reason why American capitalism outperforms every other market. It’s because they have more exposure to wizards and less exposure to muggles.
Lucia Rahilly: Is there anything else in the research about the larger dynamics that are likely to shape the competitive landscape of tomorrow?
Chris Bradley: We spent a long time saying, “Hey, let’s look at all the trends and how that’s going to turn up in arenas.” Well, the big trend is obviously decarbonization and creating clean electricity systems, but you’ll notice there’s no arena of solar panels or windmills.
That’s because those industries turn out to be super "muggly"; they don’t have high levels of escalation. Yes, there’s an improvement curve, but it’s not particularly proprietary to any one firm or any one system that can win. You’re just in good old-fashioned manufacturing economics and supply chains. So following the trends didn’t help us much.
And the reason we got to semiconductor technology of five nanometers and under isn’t because there was a trend that said thou shalt get to five nanometers. There were consistent races to keep building the next node and a huge amount of investment that followed the creation of each node that was itself a product of the nature of competition in that industry.
Hiding in plain sight
Lucia Rahilly: Was there anything that really surprised you when you undertook this research?
Chris Bradley: Going back to our time machine experiment, I was very much in the business world in 2005. Why didn’t I know I was standing on the side of a volcano, so to speak? Why didn’t I know when I saw Amazon that e-commerce was going to explode? Of course, it stands to reason that the best e-commerce company is going to have a much higher market share than the best offline retail company. Why didn’t I put two and two together?
What was surprising is that these were all hidden in plain sight. These things do not come from nowhere. To create an industry that changes the world, something is already happening today that’s remarkable and different. Let’s find out where those places are.
