Blog

An experienced combat commander and leading expert on training and doctrine assesses recent military history and its implications for the future.

Major General Herbert Raymond (H. R.) McMaster is the commander of the US Army Maneuver Center of Excellence at Fort Benning, Georgia. A facility for military training, doctrine, and leadership development, the center works with forces that specialize in defeating enemies through a combination of fire, maneuver, and combat and then conducting security operations to consolidate those gains. In a December 2012 interview with McKinsey’s Andrew Erdmann, General McMaster talks about how the US Army has evolved, how war itself has—or hasn’t—changed, what we have learned from the wars in Afghanistan and Iraq, and what the Army must do to prepare the next generation of leaders and soldiers for warfare in the future.

McKinsey on Government: Your experience in combat has ranged from the last great tank battle of the 20th century—the Battle of 73 Easting in February 1991—to counterinsurgency in Tal Afar, Iraq, to fighting corruption in Afghanistan with Combined Joint Interagency Task Force Shafafiyat from 2010 to 2012. Looking back on nearly 30 years in the military, what has changed, and how have you adapted?

H. R. McMaster: I think the biggest surprise has been the broadening of the range of conflicts we’ve found ourselves in since I first entered the Army in the 1980s. Obviously, there was a lot of instability during the Cold War, but there was also a certain degree of predictability. The primary mission of our armed forces at that time was to deter aggression by the Soviet Union and its allies. Today, that’s no longer the case. We now need a much wider range of capabilities, including the ability to operate in complex conflicts that require the close integration of military, political, and economic-development efforts.

One great feature of the Army is that it gives us the opportunity not only to have very intense formative experiences but also, consistent with the adult-learning model, to reflect on those experiences and prepare for the next level of responsibility. This type of learning is what helps us gain the breadth and depth of knowledge that allows us to adapt to unforeseen challenges and circumstances.

McKinsey on Government: You are a scholar of military history. How has your study of military history influenced your career?

H. R. McMaster: I think the study of military history has been the most important preparation for every position I’ve had in the last 12 years or so. It’s important to study and understand your responsibilities within any profession, but it’s particularly important for military officers to read, think, discuss, and write about the problem of war and warfare so they can understand not just the changes in the character of warfare but also the continuities. That type of understanding is what helps you adapt.

I think the American tendency—and I’m sure this is often the case in business as well—is to emphasize change over continuity. We’re so enamored of technological advancements that we fail to think about how to best apply those technologies to what we’re trying to achieve. This can mask some very important continuities in the nature of war and their implications for our responsibilities as officers.

The study of military history helps identify not only these continuities but also their application to the current and future problems of war and warfare. This type of study helps us make a grounded projection into the future based on an understanding of the past. It helps us reason by historical analogy while also understanding the complexity and uniqueness of historical events and circumstances. This is what Carl von Clausewitz believed: that military theory will serve its purpose when it allows us to take what seems fused and break it down into its constituent elements.

As one of my favorite military historians, Sir Michael Howard, suggested, you have to study history to get its analytic power in width, in depth, and in context: in width, to see change over time; in depth, by looking at specific campaigns and battles to understand the complex causality of events that created them; and then in the context of politics, policy, and diplomacy. Studying history is invaluable in preparing our officers for their future responsibilities.

McKinsey on Government: You mentioned the continuities of war. What are some examples of things that remain unchanged?

H. R. McMaster: First, war is still an extension of politics and policy. I think we saw that both in Iraq and Afghanistan; we initially failed to think through a sustainable political outcome that would be consistent with our vital interests, and it complicated both of those wars.

Second, war is an inherently human endeavor. In the 1990s, everyone was quoting Moore’s law and thought it would revolutionize war. We saw this in some of the language associated with the “revolution in military affairs” and “defense transformation.” We assumed that advances in information, surveillance technology, technical-intelligence collection, automated decision-making tools, and so on were going to make war fast, cheap, efficient, and relatively risk free—that technology would lift the fog of war and make warfare essentially a targeting exercise, in which we gain visibility on enemy organizations and strike those organizations from a safe distance. But that’s not true, of course.

This links closely to another continuity of war—war is not linear, and chance plays a large role.

One other continuity is that war is a contest of wills between determined enemies. We often operate effectively on the physical battleground but not on the psychological battleground. We fail to communicate our resolve. I think, for example, the reason the Taliban regime collapsed in 2001 is largely because every Afghan was convinced it was inevitable. But much of what we have done since then—at least, as perceived by Afghans—raises doubts about our long-term intentions. This is not a criticism of policy. Rather, it highlights the need for us to be cognizant that war is a contest of wills.

Finally, we often start by determining the resources we want to commit or what is palatable from a political standpoint. We confuse activity with progress, and that’s always dangerous, especially in war. In reality, we should first define the objective, compare it with the current state, and then work backward: what is the nature of this conflict? What are the obstacles to progress, and how do we overcome them? What are the opportunities, and how do we exploit them? What resources do we need to accomplish our goals? The confusion of activity with progress is one final continuity in the nature of warfare that we must always remember.

McKinsey on Government: What have been the Army’s greatest successes in organizational adaptation during the past 25 years? What are some of the enduring challenges, and how might those be overcome?

H. R. McMaster: The wars in Iraq and Afghanistan were not at all what we had anticipated—they weren’t fast, cheap, or efficient. They were extremely complicated politically, and they demanded sustained commitment, as well as the integration of multiple elements of national power. But I think once we confronted the realities of those wars and realized the kinds of mistakes we had made, we adapted very well from the bottom up. That goes against what has emerged as the conventional wisdom about the war, but I think it’s true.

The challenge now is to get better at deep institutional learning. This is what you’ll hear people in the US military call DOTMLPF, meaning changes in doctrine, organization, training, material, leadership and education, personnel, and facilities. We need the kinds of integrated solutions that acknowledge the complex nature of the environments in which we are working and that take into account the determined, adaptive, and often brutal nature of our enemies. In this context, our doctrine is still catching up. We have the counterinsurgency manual, the stability-operations manual, and the security-force-assistance manual, but I don’t think we have put the politics at the center of those manuals.¹ So, for example, we assume in our doctrine that the challenges associated with developing indigenous security forces are mainly about building capacity, when, in fact, they’re about trying to develop institutions that can survive and that will operate in a way that is at least congruent with our interests.

What’s going to be really important for the Army, and for our military in general, is what we’ve learned from the past 12 years of war. We need to use what we’ve learned to make a grounded projection into the near future and to inform our understanding of the problem of future armed conflict. Once we understand that problem, we then need to reshape our doctrine, educate our leaders, conduct the necessary training, develop combat capabilities, and design the right evolutions within our organization. To do so, we need to put aside narrow, parochial interests and avoid slipping back into our enamorment with exclusively technological solutions to the problem of future war.

McKinsey on Government: How do you think our land forces will evolve, and what do you see as the greatest challenges to the US Army’s future success?

H. R. McMaster: There’s no single greatest challenge to the Army’s future success. We are facing a broad range of challenges and emerging enemy capabilities, which will increasingly involve technological countermeasures. Our enemies will try to disrupt our ability to communicate by going after our networks, for example. We have to be prepared to counter those types of attacks, and we have to build redundancy into our forces so that we can operate if our capabilities are degraded.

Ultimately, all the threats to our national security are land based. We therefore have to be prepared to operate in a broad range of physical environments and terrains. To do that, we need to retain combined-arms capabilities and indirect-fire capabilities, as well as access to our Air Force, Navy, and our engineers—together, they give us freedom of movement and action.

One challenge we are seeing more frequently is state support for proxy forces, or nonstate organizations that have many of the capabilities that were once associated only with nation-states. For example, Hezbollah has antitank capabilities, mines, and roadside bombs. It has missiles and rockets, and it has weaponized unmanned aerial vehicles. We will need to continue to defeat nations that threaten our interests, but more and more, we also have to deal with proxy forces or networked enemy organizations that have the kinds of advanced capabilities once held only by nation-states.

But rather than picking certain countries or certain areas, we have to look more broadly at our enemies’ emerging capabilities. We know that our enemies are going to employ traditional countermeasures: dispersion, concealment, intermingling with civilian populations, deception. We know that the application of nanotechnologies is going to reduce the signature of these forces, which means we’re going to have to fight for information in close contact with enemy organizations and with civilian populations. The enemy can’t beat us on the open battleground, so they’re going to operate in restrictive terrain or urban areas. How we fight in cities is going to be important. We’re going to need to maintain our mobility, our engineer capability, and our ability to defeat shoulder-fired antiaircraft weapon systems. We also see emerging longer-range rocket and missile capabilities, as well as chemical weapons and other weapons of mass destruction.

McKinsey on Government: The US Army today has a deeply experienced, battle-tested corps of officers and noncommissioned officers. What are the essential qualities of Army leaders in the next 10 to 20 years?

H. R. McMaster: At the Maneuver Center, we’re working on a strategy that identifies what competencies our leaders need and then looks at how, where, and at what point in their careers we train and educate them. The “how” increasingly involves cutting-edge technologies that allow us to offer more effective distance learning and collaboration between leaders. We also want to cultivate within our leaders a desire for lifelong learning and to provide them with the tools necessary for informal self-study and collaborative study across their careers. (For more, see sidebar, “A reading list for military professionals.”)

First and foremost, we need leaders who can adapt and innovate. As Sir Michael Howard has said—and I’m paraphrasing—we’re never going to get the problem of future war precisely right. The key is to not be so far off the mark that you can’t adapt once the real demands of combat reveal themselves, and you need leaders who can adapt rapidly to unforeseen circumstances. They need to be able retain the initiative as well as sustain the types of campaigns that require a broad range of capabilities—rule of law, development of indigenous forces, and military support for governance, for example.

The human dimension of war is immensely important for the Army as well; we need leaders who are morally, ethically, and psychologically prepared for combat and who understand why breakdowns in morals and ethics occur. In The Face of Battle, John Keegan said that “it is towards the disintegration of human groups that battle is directed.”² So how do you protect organizations against that kind of disintegration? I think there are usually four causes of breakdowns in moral character—ignorance, uncertainty, fear, or combat trauma. It is important to understand the effects of those four factors on an organization and then educate soldiers about what we expect of them. We need leaders who have physical and mental courage on the battlefield, of course, but also the courage to speak their minds and offer respectful and candid feedback to their superiors. Our leaders can’t feel compelled to tell their bosses what they want to hear.

McKinsey on Government: What about our soldiers? How are we helping them learn?

H. R. McMaster: What’s great about soldiers who join the Army is that they expect it to be hard, and they’re disappointed if it’s not. They want to be challenged. This is a self-selecting, highly motivated group of people. Soldiers tend to define themselves based on other people’s expectations of them, and we have to keep those expectations high.

As with our leaders, we need our soldiers to be able to adapt. At the Maneuver Center, we immerse our soldiers in complex environments, and as we train them on fundamentals, we also test their ability to observe changes in the environment and to adjust as necessary so they can accomplish their mission. We call this “outcome-based training and evaluation.” Rather than using a checklist of individual capabilities, we are evaluating them on their ability to innovate and adapt to unforeseen conditions. We’re trying to build into our training the kinds of things soldiers encounter in combat—uncertainty, bad information, and casualties, for example. Before we would say, “Go to point A and wait for instructions.” Now we’ll say, “You have to get to five or six points in the amount of time you have available—you pick which order you want to do it in.” This means they have to analyze the terrain, the routes between the points, and the sequencing of the points themselves.

In addition to the fundamentals of combat, our soldiers really have to live the Army’s professional ethics and values. They must be committed to selfless service, to their fellow soldiers, to their mission, and to our nation. That also involves, obviously, respect for and protection of our Constitution and understanding their role in that context. They also need to understand the environments they’re operating in. For example, we’re dealing with a wartime narcotics economy, essentially, in Afghanistan; that’s a big driver of the conflict there. We need to educate our soldiers about the nature of the microconflicts they are a part of and ensure that they understand the social, cultural, and political dynamics at work within the populations where these wars are fought.

Our soldiers also have to recognize how being in persistent danger can affect organizations and be able to identify warning signs. They have to be good at grief work and be able to support one another when they lose a fellow soldier. This can’t be achieved through standard training alone—this has to be done through reading, thinking, and discussing as well.

McKinsey on Government: When you think about future conflict, how does the ability to work well with allies and partners fit into the equation?

H. R. McMaster: I think it’s immensely important that we’re adept at working as part of multinational teams. Transnational terrorist organizations use mass murder of innocent people as their principal tactic, and so they are a threat to all civilized people; we have to work together to defeat those threats. Terrorist organizations use the complex cultural-political dynamics of microlocal conflicts to their benefit. They use ignorance to foment hatred, and then they use that hatred to justify violence against innocent people. They pit communities against one another, and then they portray themselves as patrons and protectors of one of the parties in the conflict. You can see it in Mali, in northern Nigeria, and in Yemen. And you certainly see it in Syria, in what is becoming a humanitarian crisis of colossal scale. You can also see it along the border between the predominantly Kurdish and Arab regions in Iraq, in Afghanistan, and in portions of Pakistan.

I think we’re always going to have to operate as part of a multinational force. To do so, we have to understand the history and the culture of each of these conflicts and of the microconflicts in each subregion. Obviously, our multinational partners are invaluable for their perspectives, but we also need strong partnerships with indigenous leaders. As in business, we need negotiation competencies and the ability to map stakeholder interests in particular. When we’re partnering with somebody we need to understand several things: their interests, how they align with our interests, how to build relationships based on mutual trust and common purpose, and how to use those relationships to work together to accomplish the mission.

Printed with permission from McKinsey Insights & Publications

As the strategic landscape shifts, an economic-scenario approach can help defense organizations grapple with uncertainty.

The art of strategy, in defense as elsewhere, involves understanding possible futures to inform present decisions. Change, volatility, and uncertainty are perennial challenges to the defense strategist and are likely to increase in the coming years. Formulating strategy in these conditions will test planners in the public and private sectors alike.

To succeed, decision makers should look behind the headlines of the day to ask the right questions about what will affect their organization in the future. This requires considering the deeper underlying trends that will reshape the strategic landscape in the years ahead. Foremost among them is the shift in global economic power. Although often commented upon by economists and pundits, many strategists focused on defense issues have not fully internalized this historic shift and its implications.

Here we offer a perspective on how strategists in defense organizations and aerospace and defense companies should approach this challenge. First, we describe how the profound shift in economic power since the end of the Cold War has already reshaped the world’s strategic landscape, including the distribution of global defense spending. The potential evolution of these economic dynamics is fundamental to strategy. Predicting their future is, of course, impossible. Instead, we offer something more modest and practical: a new approach to scenario planning that is rooted in a deep understanding of global economics. Such an understanding reveals the potential for unexpected scale and pace in the shift of defense spending from the United States and its treaty allies to emerging economies.

The strategic landscape reshaped, 1991-2012

The past 20 years saw dramatic changes on the battlefield, even as some features endured, and the beginnings of an equally dramatic shift in economic power. In combination, these movements have altered the strategic landscape, and provide a glimpse into the future.

Continuity and change in military operations

For the world’s defense and security organizations, history certainly did not end with the collapse of the Soviet Union and the cessation of the Cold War in 1991. We have since seen conflict on almost every continent, from the last major tank battle of the 20th century at 73 Easting in the Gulf War to numerous wars, clashes, and insurgencies in Europe, Asia, Africa, and the Americas. Since the attacks of September 11, 2001, attention has focused on the greater Middle East—Afghanistan, Iraq, and, increasingly, the struggles for control and influence in the aftermath of the Arab Spring.

The tempo of military operations has been relentless. Since 1991, for instance, the United States has embarked upon a new military intervention roughly every two years. North Atlantic Treaty Organization (NATO) forces have been at war in Afghanistan for over a decade. South Korean and Japanese forces have deployed for the first time to the Middle East. Meanwhile, the United Nations has launched a new peacekeeping operation every six months. Moreover, the duration of most of these operations has increased to five to ten years.

Innovations in military technology and operations have marked these past two decades of conflict. Precision-guided munitions have evolved and demonstrated their effectiveness in conflicts beginning with the Gulf War and continuing in Kosovo, Afghanistan, and most recently NATO’s Operation Unified Protector in Libya in 2011. Advanced missiles now pose particular threats to capital ships and fixed bases. Unmanned aerial vehicles (or remotely piloted air systems) are now standard components in many militaries’ intelligence, surveillance, and reconnaissance (ISR) tool kits, and they increasingly serve as weapons platforms as well. Harnessing big data and employing advanced analytic techniques are other features of 21st century ISR. Cyberwarfare has moved from theory to practice.

Militaries today confront adversaries who employ a full spectrum of tactics, from conventional to irregular and even criminal (“hybrid war”). Modern navies, for instance, cope with traditional and unconventional foes, including Somali pirates and asymmetrical threats such as terrorist suicide speedboats. Air forces are investing in fifth-generation fighters even as they continue to provide workhorse logistical support for operations in the field. And for foot soldiers, despite the numerous technical advances in communications and equipment, the past decade has been largely spent relearning the lessons of counterinsurgency: “Walk. Stop by, don’t drive by. . . .Situational awareness can only be gained by interacting face-to-face, not separated by ballistic glass or Oakleys.” Plus ça change, plus c’est la même chose.

The power shift begins

Concurrent with these tactical and operational developments, tectonic plates moved at a deeper strategic level. A profound shift in economic power began during this period—one that has already manifested itself in the distribution of traditional “hard” military power among the great powers. This shift will continue to reshape the strategic landscape in the years ahead.

Future historians will likely point to 2007–08 as an inflection point in global history. For the first time in over two centuries—since the start of the Industrial Revolution—the majority of the world’s economic growth took place in the developing world, driven in large part by China, India, and other Asian economies. In addition to favorable demographics and reforms to open emerging economies, increasing urbanization—especially in China—drove much of this growth. Significantly, 2008 was also the first time ever that a majority of people lived in cities. The pace of urbanization is staggering. More than 1.3 million people migrate every week to urban areas. And this historic migration will likely continue unabated for the next two decades, mainly in the emerging economies of Asia, Latin America, and, increasingly, Africa. The global economic crisis that began in 2008 accelerated this shift in economic power from developing to emerging economies, as the BRIC countries (Brazil, Russia, India, and China) weathered the storm well and the developed economies of the United States, Europe, and Japan suffered and remain vulnerable more than four years later. Between 2009 and 2012, China’s economy grew over 30 percent and India’s 22 percent in real terms, whereas Germany’s grew 7.9 percent and the United States’s 7.1 percent. And in 2008, for the first time, a Chinese company led the world in international patent applications.

Taken together, economic and demographic forces drove the most rapid shift in human history in what the McKinsey Global Institute (MGI) calls the “economic center of gravity”—the geographic midpoint of global economic activity (Exhibit 1). MGI projects this movement to continue, at a slightly slower pace, for the next 15 years or so, when, by this measure, most of the regional imbalances ushered in by the Industrial Revolution will have been erased.

Exhibit 1

The ten years from 2000 to 2010 saw the fastest-ever shift in the world’s economic center of gravity.

---

---

These economic trends have already started to reshape the global landscape of defense spending. To be sure, a nation’s assessment of its security threats plays a critical role in shaping its defense spending in the near term. That said, a major country’s military power flows in large part from its underlying economic strength over the medium to long term: the faster a country’s economy grows, the more likely its defense spending will increase as well. Despite widely different geopolitical complexities and economic dynamics, the countries with the largest defense budgets, which account for the vast majority of the world’s defense expenditures, have fit this pattern since 1991 (Exhibit 2).

Exhibit 2

Growth in military spending and GDP are correlated over the long term.

---

---

Other more subtle shifts in national power were also taking place between 1991 and 2011. R&D expenditures in all major economies nearly doubled in constant 2011 dollar terms, rising from roughly $740 billion in 1991 to $1.5 trillion in 2011. But just as we saw in defense spending, countries’ R&D investments mirrored trends in their overall economic growth. Europe and Japan’s combined share of global R&D expenditures declined by 11 percent in the 20 years after 1991. Meanwhile, China increased its share of global spending to 9 percent from 1 percent during the same period. Developing countries are thus emerging as true competitors to the developed economies not only with regard to their economies’ sheer scale but also their innovation and technical prowess. R&D spending matters: a country’s R&D investments are strongly correlated with the quality of the military’s equipment 25 years later. This suggests that in the future, developing countries will narrow the gap in quality between their military equipment and that of developed countries.

Glimpses of the future

We have seen these dynamics play out around the world since 1991. Sustained operations and the increasing costs of modern weapons platforms have proved too much for many Western governments and their publics as they manage the aftermath of the global economic crisis and structural strains in their aging societies. For example, the United Kingdom’s 2010 Defence and Security Review declared bluntly that its “inherited defense spending plans… [are] completely unaffordable” and that it needs to “confront the legacy of overstretch.” France’s earlier national-security review analyzed the changing strategic context and new priorities and thus, through a different logic, reached similar conclusions. The US Department of Defense (DOD), under Secretary of Defense Robert Gates, launched its own efficiencies campaign, which has accelerated under his successors. The planned reductions in the US defense budget in the next decade are literally on the scale of some countries’ GDPs. Other Western militaries are undergoing similar retrenchments. At the same time, however, China, other East Asian countries, India, Brazil, and other emerging economies have continued to increase not only their defense expenditures in real terms, as shown in Exhibit 3, but also, in many cases, the sophistication of their own defense industries.

 

 

Today, the United States remains the world’s preeminent military power in scale, sophistication, battle-tested experience, and global reach. US defense spending in 2011 was more than five times that of the next highest defense spender, China. America’s traditional allies also occupy important positions in the global defense landscape. Japan, France, and the United Kingdom ranked third, fourth, and fifth in defense spending in 2011. The momentum, however, is unmistakable: emerging economies are positioned to displace the other developed economies in the top tier of defense spenders. China’s rise in defense spending is starkest. In 2011 it spent $126 billion, more than twice as much as the countries that are the next largest spenders: Japan, France, the United Kingdom, and Russia. Chinese authorities announced in March 2013 that they plan to increase defense spending another 10.7 percent in 2013.

The direction is clear. Developed economies—and the world’s leading military establishments historically—have experienced relative decline vis-à-vis the major developing economies since 1991. Yet the scale, scope, and pace of change of the shift in economic power cannot be simply extrapolated from the recent past to understand the future. Instead, strategists will require a new approach to manage this era’s particular strategic uncertainties.

An economic-scenario approach

Scenario planning is an established tool for business and defense strategists. Done right, scenario planning accounts for the major variables or drivers that could shape the future, in sufficient depth and vividness to enable strategists to draw out potential implications for the strategy and plans of their organizations. Scenarios are not meant to be predictive or comprehensive, covering all possible futures. Rather, the goals are to define a range of possibilities and identify important continuities among them, as well as significant uncertainties or risks that a strategy should address. Such an analysis, in turn, helps to frame critical questions and generate strategic insights that then shape the strategic decisions of today and adaptation tomorrow.

Today, defense scenarios typically start with geopolitical, security, or more operational assumptions or with a statement of guiding objectives (such as “Counter violent extremism, deter and defeat aggression, strengthen international and regional security, and shape the future force”; “US forces must be prepared to fight ‘two and a half’ wars simultaneously”; or “Blue Force must be ready to counter Red Force in country X”). For example, the US DOD’s recent strategy documents—the February 2010 Quadrennial Defense Review Report and the February 2011 National Military Strategy of the United States—briefly review the changing strategic environment but do not offer alternative scenarios. The importance of this era’s economic forces, however, suggests that a different approach, one with a more explicit grounding in these new economic realities, is needed. National-security strategies typically do not explore the full implications of the shift in economic power now under way. The approach outlined here is designed to address this gap. The development of rich, sophisticated scenarios for the future course of the global economy provides its starting point. These scenarios, in turn, enable the mapping of changes in countries’ economic power in relative and absolute terms. The trends most immediately relevant for defense and security organizations—especially levels of defense spending and R&D investment—are then built upon these economic foundations.

We use a set of economic scenarios for the next decade built with McKinsey’s Global Growth Model (GGM) to illustrate this approach. The GGM is a database and modeling tool that supports the construction of detailed economic scenarios down to the country level. Its variables span GDP and more than 100 others, including demographics, education levels, public debt, R&D investments, and urbanization rates.

The baseline economic scenarios employed here are predicated on the assumption that major developed and emerging economies will develop with different growth rates—namely, developing economies will tend to grow at a significantly higher rate than developed economies. We emphasize these different outcomes and groups because, broadly speaking, the challenges faced by countries in each group are similar. Generally, advanced economies have struggled not only with the aftermath of the 2008 downturn but also with meeting their aging populations’ multifaceted challenges. Meanwhile, emerging markets have tried to sustain or accelerate growth through export promotion, the allocation of capital, continued economic reform, urbanization and industrialization, and other tactics.

The relative performance of these different groups of economies thus describes a range of four principal scenarios. The GGM scenarios are bounded by emerging markets’ growth rates (between 3 and 7 percent per year from 2013 to 2022) and advanced economies’ growth at 1 to 3 percent annually. These growth rates define four broad-based scenarios shown in Exhibit 4: Global Growth Renewed, Advanced Economies Rebound, Emerging Economies Lead, and Global Lost Decade.

 

 

Together, these scenarios portray different potential future international landscapes and balances of economic power among the major economies. They make clear that the stakes are extraordinarily high for the health of the entire global economy. While growth continues across all scenarios, the difference in total global real GDP between the most favorable scenario ($100 trillion, under Global Growth Renewed) and the least favorable one ($84.5 trillion, under Global Lost Decade) is a staggering $15 trillion per year in 2022. That is roughly equivalent to the US economy today.

The scenarios also have quite different outcomes for the relative distribution of economic power among countries. Across all scenarios, the US economy remains the world’s largest economy. China’s rapid growth continues, but by 2022, it still does not equal the size of the US economy today. The absolute gap between the two narrows more or less depending on the scenario. The other major developing economies follow a similar pattern; Europe and Japan experience steady growth in the most favorable scenarios and stagnation in those that are less favorable.

Defense-spending scenarios to 2022

The four baseline economic scenarios paint very different possible futures for the world’s major economies—and thus for their self-confidence, internal political stability, and the vision of their roles internationally. Geopolitical relations (for example, strains among past allies over burden sharing or opportunities for new alignments among rising powers) would also vary under the different scenarios.

To understand these implications, we analyzed global defense spending under the economic scenarios. We focus our analysis on the top 15 defense spenders in 2011. These countries account for the lion’s share of global defense spending under any scenario (that is, nearly 85 percent in 2011) for the sake of simplicity. As mentioned, growth in countries’ defense spending is strongly correlated (r-squared equals 0.84) with their underlying economic growth over longer periods of time. Therefore, we use each scenario’s estimate of countries’ real GDP and a country-specific correlation between defense spending and GDP to derive the percentage of each nation’s real GDP devoted to defense spending in 2022 under each scenario.

The likely changes in countries’ relative share of global defense spending between 2011 and 2022 are striking (Exhibit 5). If we divide the 15 countries studied into the United States and its 9 treaty allies, and the emerging BRIC countries and Saudi Arabia, we see that while the US and its allies still account for the majority of defense spending in all scenarios in 2022, their relative advantage is eroded in all scenarios by emerging markets’ higher rates of economic growth. Most dramatically, in the Emerging Economies Lead scenario, the United States and its treaty allies’ relative advantage in global share of defense spending falls by 23 percentage points in a decade, dropping to 55 percent by 2022.

Exhibit 5

A substantial share of global defense spending will shift away from the United States and its traditional allies.

---

---

The scenarios likewise suggest dramatic shifts in defense spending in absolute terms. Defense spending in the BRIC countries and Saudi Arabia will increase significantly in all scenarios—from roughly $290 billion in 2011 to between approximately $550 billion and $830 billion by 2022 (in constant 2011 dollars). The fate of the United States and its major treaty allies’ defense spending is mixed, however. When the major developed economies fare well, their combined defense spending increases from a little over $1 trillion in 2011 to more than $1.4 trillion in 2022; when they fare poorly, in the Global Lost Decade and Emerging Economies Lead scenarios, their combined defense spending falls below $1 trillion by 2022.

Exploring these scenarios for individual countries again shows shifts in defense spending away from the developed economies. Consider the top five defense spenders in each scenario (Exhibit 6). The United States and China maintain their one-two positions in total defense spending in all scenarios. In those scenarios in which US economic growth remains sluggish throughout the coming decade, its defense spending falls more than 15 percent in real terms. The United States’s relative advantage in defense spending over China, however, declines significantly from 5.4x in 2011 to between 3.2x and 1.6x in 2022. India enters the ranks of the world’s top five defense spenders in all scenarios (see “A bright future for India’s defense industry?” [PDF–417KB]). Russia and Saudi Arabia round out the top five defense spenders in three of the four scenarios. Only in the Advanced Economies Rebound scenario do France and the United Kingdom—two of the US treaty partners—remain in the top five.

Exhibit 6

The difference between the two biggest defense spenders varies widely by scenario.

---

---

Considering total R&D investments across the different countries provides a rough measure of the dynamism of high-technology industries and innovation, and, as noted above, an indication of long-term trends in the quality of the military equipment the country makes (Exhibit 7).

 

 

Our scenarios show overall R&D investments tracking the trends seen in defense spending but at different rates. The United States retains its leadership position but by less than before, as emerging economies gain ground on the United States and its traditional allies. Most important, China’s investments in R&D accelerate in the next ten years; in all scenarios, China more than doubles its share of global R&D investment. In the coming decade, we should expect China to place second only to the United States in total R&D investments, just as it became the world’s second-biggest defense spender in the previous decade. China’s rise in R&D is stunning: in all scenarios, it will increase its share of global R&D from roughly $1 of every $100 in 1991 to $1 of $5 spent in 2022. In doing so, it surpasses both Europe and Japan; their investments grow slowly in all scenarios. That said, Europe and Japan will remain major centers of global R&D into the 2020s because of their relatively robust starting point. Meanwhile, Brazil, India, and Russia also gain share, though at a much slower pace than China, and they will continue to lag behind Europe and Japan by a significant margin in 2022 (for example, Japan’s R&D spending will remain roughly five times India’s across the scenarios).

This economic-scenario approach enables strategists to assess other underlying factors should a particular analysis require it. These include public-debt burdens (for instance, high for most developed economies, with exceptions such as Australia), subtle variations among some countries’ relative performance (for example, South Korea consistently punches above its weight with regard to defense spending and R&D), education levels (for instance, other countries continue to narrow the US lead in average number of years of education per person), and demographic trends.

From using scenarios to framing the right question

Decision makers in ministries of defense and corporate boardrooms require analytic tools to help them manage uncertainties. Without them, they risk falling prey to misguided confidence in a single, clear, but almost certainly erroneous prediction of the future, or they will be forced to rely on their gut. The economic-scenario approach outlined here is one such tool for the strategist’s tool kit.

The economic-scenario approach highlights how the global strategic landscape may change in the coming decade. Such scenarios can help organizations identify the specific potential opportunities, risks, trade-offs, and outcomes that their strategies should consider. From a defense official’s perspective, such questions could include the following:

• What does it mean for the United States when the defense spending of its traditional treaty allies will continue to decline in relative, and perhaps absolute, terms? What capabilities might these allies be able to deploy in the future? What new security relationships might be needed to manage the shifting balance of defense power? What might be the implications of such shifts for US force structure, overseas basing, and diplomacy?
• What does it mean for European countries’ role in the world as their relative share of defense power shrinks? Will NATO’s role in the world correspondingly retract? Will NATO’s “out of area” operations become a thing of the past? Will individual European countries have effective expeditionary forces in the 2020s, or will limitations force them to decide among increased dependence on US support (for example, logistical and lift support), increased defense cooperation within Europe, and disengagement from traditional areas of influence such as Africa? What might be the implications of these different scenarios for the future affordability of independent nuclear-deterrence forces in France and the United Kingdom?
• What does the wide range of possibilities for US defense spending in 2022 mean for Asian countries? How will such uncertainties shape their defense postures and diplomacy toward the United States, and one another?
• What does it mean for emerging countries that for the next decade the United States will remain the global leader in military spending and R&D investments despite those countries’ rapid growth? How relevant will European powers be in their strategic calculus? What security relationships should they prioritize to cope with the shifting strategic landscape?

From an aerospace and defense executive’s perspective, such questions could include the following:

• Which markets will matter most for a company’s growth in the next ten years? What should be the relative balance among developed and developing markets in its portfolio?
• What does the possible emergence of India and Saudi Arabia among the world’s top five defense spenders suggest for a company’s strategic priorities?
• How should a company manage the diversity of regulations and laws related to technology transfer, intellectual property, and local content provisions as it seeks to expand into specific developing markets? How should it manage its defense and civilian aerospace businesses in such markets in light of other diplomatic and commercial considerations? What innovative joint ventures, mergers, or other collaborations will fuel growth among aerospace and defense companies based in different countries?
• How should a company leverage the continued robust R&D base in Europe, Japan, and the United States to serve both developed and developing aerospace and defense markets?
• How will developing countries’ aerospace and defense industries “go global” and compete directly against more established Western players in defense markets around the world in the coming decade? What are the implications for Western companies’ strategies, operations, and costs if many systems are produced for emerging markets?
• What should be a company’s global manufacturing footprint in light of these trends and uncertainties in the coming decade?
• What skills and talent will a company need to succeed in the changed global defense landscape?

Asking the right questions is the starting point for any strategy. We are now living through an unprecedented shift in global economic power. No one can predict precisely what this means for our future. Robust economic scenarios, however, can help strategists frame the right questions and trade-offs for their organizations, which is more helpful than aspiring to predict that which defies prediction.

Printed with permission from McKinsey Insights & Publications.

Big data could transform the health-care sector, but the industry must undergo fundamental changes before stakeholders can capture its full value.

A big-data revolution is under way in health care. Start with the vastly increased supply of information. Over the last decade, pharmaceutical companies have been aggregating years of research and development data into medical databases, while payors and providers have digitized their patient records. Meanwhile, the US federal government and other public stakeholders have been opening their vast stores of health-care knowledge, including data from clinical trials and information on patients covered under public insurance programs. In parallel, recent technical advances have made it easier to collect and analyze information from multiple sources—a major benefit in health care, since data for a single patient may come from various payors, hospitals, laboratories, and physician offices.

Fiscal concerns, perhaps more than any other factor, are driving the demand for big-data applications. After more than 20 years of steady increases, health-care expenses now represent 17.6 percent of GDP—nearly $600 billion more than the expected benchmark for a nation of the United States’s size and wealth.¹ To discourage overutilization, many payors have shifted from fee-for-service compensation, which rewards physicians for treatment volume, to risk-sharing arrangements that prioritize outcomes. Under the new schemes, when treatments deliver the desired results, provider compensation may be less than before. Payors are also entering similar agreements with pharmaceutical companies and basing reimbursement on a drug’s ability to improve patient health. In this new environment, health-care stakeholders have greater incentives to compile and exchange information.

While health-care costs may be paramount in big data’s rise, clinical trends also play a role. Physicians have traditionally used their judgment when making treatment decisions, but in the last few years there has been a move toward evidence-based medicine, which involves systematically reviewing clinical data and making treatment decisions based on the best available information. Aggregating individual data sets into big-data algorithms often provides the most robust evidence, since nuances in subpopulations (such as the presence of patients with gluten allergies) may be so rare that they are not readily apparent in small samples.

Although the health-care industry has lagged behind sectors like retail and banking in the use of big data—partly because of concerns about patient confidentiality—it could soon catch up. First movers in the data sphere are already achieving positive results, which is prompting other stakeholders to take action, lest they be left behind. These developments are encouraging, but they also raise an important question: is the health-care industry prepared to capture big data’s full potential, or are there roadblocks that will hamper its use? (In a related video, McKinsey director Nicolaus Henke explains how analytics is transforming the practice of medicine.)

A new value framework

Health-care stakeholders are well versed in capturing value and have developed many levers to assist with this goal. But traditional tools do not always take complete advantage of the insights that big data can provide. Unit-price discounts, for instance, are based primarily on contracting and negotiating leverage. And like most other well-established health-care value levers, they focus solely on reducing costs rather than improving patient outcomes. Although these tools will continue to play an important role, stakeholders will only benefit from big data if they take a more holistic, patient-centered approach to value, one that focuses equally on health-care spending and treatment outcomes. We have created five pathways to assist them in redefining value and identifying tools that are appropriate for the new era. They focus on the following concepts:

• Right living. Patients must be encouraged to play an active role in their own health by making the right choices about diet, exercise, preventive care, and other lifestyle factors.
• Right care. Patients must receive the most timely, appropriate treatment available. In addition to relying heavily on protocols, right care requires a coordinated approach, with all caregivers having access to the same information and working toward the same goal to avoid duplication of effort and suboptimal treatment strategies.
• Right provider. Any professionals who treat patients must have strong performance records and be capable of achieving the best outcomes. They should also be selected based on their skill sets and abilities rather than their job titles. For instance, nurses or physicians’ assistants may perform many tasks that do not require a doctor.
• Right value. Providers and payors should continually look for ways to improve value while preserving or improving health-care quality. For example, they could develop a system in which provider reimbursement is tied to patient outcomes or undertake programs designed to eliminate wasteful spending.
• Right innovation. Stakeholders must focus on identifying new therapies and approaches to health-care delivery. They should also try to improve the innovation engines themselves—for instance, by advancing medicine and boosting R&D productivity.

The value pathways evolve as new data become available, fostering a feedback loop. The concept of right care, for instance, could change if new data suggest that the standard protocol for a particular disease does not produce optimal results. And a change in one pathway could spur changes in others, since they are interdependent. An investigation into right value, for example, could reveal that patients are most likely to suffer costly complications after an appendectomy if their physician performs few of these operations. This finding could influence opinions not only about value but about the right provider to perform an appendectomy.

The pathways in action

Some health-care leaders have already captured value from big data by focusing on the concepts outlined in our pathways or have set the groundwork for doing so. Consider a few examples:

• Kaiser Permanente has fully implemented a new computer system, HealthConnect, to ensure data exchange across all medical facilities and promote the use of electronic health records. The integrated system has improved outcomes in cardiovascular disease and achieved an estimated $1 billion in savings from reduced office visits and lab tests.
• Blue Shield of California, in partnership with NantHealth, is improving health-care delivery and patient outcomes by developing an integrated technology system that will allow doctors, hospitals, and health plans to deliver evidence-based care that is more coordinated and personalized. This will help improve performance in a number of areas, including prevention and care coordination.
• AstraZeneca established a four-year partnership with WellPoint’s data and analytics subsidiary, HealthCore, to conduct real-world studies to determine the most effective and economical treatments for some chronic illnesses and common diseases. AstraZeneca will use HealthCore data, together with its own clinical-trial data, to guide R&D investment decisions. The company is also in talks with payors about providing coverage for drugs already on the market, again using HealthCore data as evidence.

During a recent scan of the industry, we found that interest in big data is not confined to traditional players. Since 2010, more than 200 new businesses have developed innovative health-care applications. About 40 percent of these were aimed at direct health interventions or predictive capabilities. That’s a powerful new frontier for health-data applications, which historically focused more on data management and retrospective data analysis (exhibit).

Some devices take patient monitoring to a new level. For instance, Asthmapolis has created a GPS-enabled tracker that records inhaler usage by asthmatics. The information is ported to a central database and used to identify individual, group, and population-based trends. The data are then merged with Centers for Disease Control and Prevention information about known asthma catalysts (such as high pollen counts in the Northeast or volcanic fog in Hawaii). Together, the information helps physicians develop personalized treatment plans and spot prevention opportunities.

Another company, Ginger.io, offers a mobile application in which patients with select conditions agree, in conjunction with their providers, to be tracked through their mobile phones and assisted with behavioral-health therapies. The app records data about calls, texts, geographic location, and even physical movements. Patients also respond to surveys delivered over their smartphones. The Ginger.io application integrates patient data with public research on behavioral health from the National Institutes of Health and other sources. The insights obtained can be revealing—for instance, a lack of movement or other activity could signal that a patient feels physically unwell, and irregular sleep patterns (revealed through late-night calls or texts) may signal that an anxiety attack is imminent.

Improvement at scale: What is the potential?

To determine the opportunity of the new value pathways, we evaluated a range of health-care initiatives and assessed their potential impact as total annual cost savings, holding outcomes constant, using a 2011 baseline. If these early successes were scaled up to create systemwide impact, we estimate that the pathways could account for $300 billion to $450 billion in reduced health-care spending, or 12 to 17 percent of the $2.6 trillion baseline in US health-care costs.

Even a few simple interventions can have an enormous impact when scaled up. In the “right living” pathway, for instance, we estimate that aspirin use by those at risk for coronary heart disease, combined with early cholesterol screening and smoking cessation, could reduce the total cost of their care by more than $30 billion. While these actions have been encouraged for some time, big data now enables faster identification of high-risk patients, more effective interventions, and closer monitoring.

Our estimate of $300 billion to $450 billion in reduced health-care spending could be conservative, as many insights and innovations are still ahead. We have yet to fully understand subpopulation efficacy of cancer therapies and the predictive indicators of relapse, for example, and we believe the big-data revolution will uncover many new learning opportunities in these areas.

A few caveats

Although we are optimistic about big data’s potential to transform health care, some structural issues may pose obstacles. The move away from fee-for-service care—already well under way—must continue. Similarly, traditional medical-management techniques must change, since they pit payors and providers against each other, framing benefit plans with respect to what is and is not covered rather than what is and is not most effective. And all stakeholders must recognize the value of big data and be willing to act on its insights, a fundamental mind-set shift for many and one that may prove difficult to achieve. Patients will not benefit from research on exercise, for example, if they persist in their sedentary lifestyles. And physicians may not improve patient outcomes if they refuse to follow treatment protocols based on big data and instead rely solely on their own judgment.

Privacy issues will continue to be a major concern. Although new computer programs can readily remove names and other personal information from records being transported into large databases, stakeholders across the industry must be vigilant and watch for potential problems as more information becomes public.

Finally, health care will need to learn from other data-driven revolutions. All too often, players have taken advantage of data transparency by pursuing objectives that create value only for themselves, and this could also occur in the health-care sector. For instance, owners of MRI machines, looking to amortize fixed costs across more patients, might choose to use big data only to identify underserved patients and disease areas. If they convincingly market their services, patients may receive unnecessary MRIs—a situation that would increase costs without necessarily improving outcomes.

Reprinted with permission from McKinsey Global Institute