How Will Megatrends Affect Your Business? Learning The Bain Futures Method
Historic patterns, analogical reasoning, and hypothesis testing can prepare you for the future
Bain & Company’s clients outperform the market 4 to 1. While the consulting firm has always emphasized results orientation in its work with clients, several years ago, it recognized a new need: In an increasingly turbulent world, clients were seeking guidance on the rapid changes in the macro environment. Hence, in 2015, it launched Bain Futures.
Bain Futures develops the firm’s insights around major macro trends to help clients, as well as Bain itself, “see around corners.”
To understand their approach and identify the lessons you can use in your own business, I looked into the material Bain published about one of their signature ideas – the Firm of the Future – and interviewed James Root and Andrew Schwedel, two of the leaders of the Bain Futures team.
At the core of Bain’s work around the Firm of the Future is the insight that the prevailing paradigm that underpins the way we do business evolves through distinct eras. “Recognizing the pattern of evolution,” James Allen, James Root, and Andrew Schwedel note, “can help businesses adapt to win in the coming era.”
The tricky part: transitions are fuzzy and stretch over years, hitting different industries and markets with different force and speed. Often it is only with the benefit of hindsight that we recognize a profound shift. Transitions can also be mass extinction events for leaders in the previous era. “In the last transition, for example, 60% of the Fortune 500 disappeared.” Schwedel points out.
To avoid this fate, companies can prepare for the future by applying Bain Futures’ approach.
This includes some more conventional aspects such as keeping a large database of trends and using multiple data sources to investigate these trends but what’s really interesting and distinct is how Bain uses analogical reasoning when unpacking conventional wisdom, looking backward to see forward, and how the firm tries to avoid the traps of groupthink.
In 2003 Italian physician Carlo Urbani identified SARS as a new, contagious viral disease. Government and health organizations had to react quickly but had limited knowledge of the virus. So they resorted to analogical reasoning. Knowing that SARS is a virus, they assumed that like other viruses it will predominantly spread via the respiratory route. The appropriate way to prevent a pandemic was therefore to isolate patients.
In situations where we have limited knowledge, we commonly rely on analogies. Executives do it all the time. They think back to similar situations in the past to find solutions to a current problem.
For analogies to work, they need to have the same underlying cause-and-effect relationships. In the example above, infection is caused by respiratory spread. It’s reasonable to apply preventative measures used in a past situation where infection was also spread in the same manner.
Working with megatrends always has the danger of being highly speculative. How can you spot things that have not happened yet? Bain has realized that you can often apply lessons from industries and markets where the transition is hitting sooner to others that lag behind.
“I was talking about the Firm of the Future with an oil-and-gas client that was worried about regulation,” Schwedel recalls. “We were able to help them draw relevant lessons from other heavily regulated industries such as banking and pharmaceuticals.”
If a trend is visible in a particular industry or country already, it is reasonable to apply these insights elsewhere if (and that is a very important if), you can expect the same cause-and-effect relationships. In short, the key to prepare for the future is analogical reasoning.
Applying analogical reasoning allows Bain to avoid the speculative nature of many prophetic forecasters, offering concrete and proven ideas instead. Be mindful though not to draw lessons from industries and markets that are only superficially similar!
Unpacking conventional wisdom
Whenever Bain Futures starts looking at a new topic, it tries to understand the range of views on that topic and the implicit assumptions behind them. Often, these assumptions are as simple as straight-line projections of a current trend.
Take urbanization as an example. The widely held belief is that urbanization is on the rise. A team of macro-economists at Bain decided to dive into some data. As it turns out, this trend is largely in developing markets; in many developed markets, people are actually moving out of the big cities.
“For 20 years we've seen dispersion of populations away from cities with a few exceptions,” Root points out. “And it's basically driven by declining cost of distance because of technology”, backed by advances in manufacturing technology, connectivity, and logistics.
Covid-19 is accelerating these trends, but they were already underway for at least a decade before the pandemic. As Schwedel and Root noted, this shift has profound implications for everything from retail and restaurants, to real estate, to services, and even to growth models for emerging markets.
Bain’s appetite for questioning conventional wisdom has deep roots in how science works. In his new book, Adam Grant asks “Why do we refresh our wardrobes every year, renovate our kitchens every decade, but never update our beliefs and our views?”
According to Grant, we do not want to rethink, as challenging our own assumptions makes the world more unpredictable, more uncomfortable. “It requires us to admit that the facts may have changed, that what was once right may now be wrong”.
While rethinking might be unsettling, it is precisely what scientists have been doing for decades. They formulate hypotheses based on prior insights. Then they use data to test whether a particular hypothesis is true or false. It’s a hard-nosed, fact-driven approach that leads to incremental improvements. And it should be an obvious component of any serious attempt to look around the corner.
Looking backward to see forward
In my last book Enduring Success: What We Can Learn from the History of Outstanding Corporations I looked at historic patterns to identify success factors for companies today. Bain Futures goes a step further, arguing that looking backward helps you to see forward.
The current era, which they call the Era of Scale Insurgency, for example, harkens back to earlier eras of business in several ways. Today’s leading companies often echo the audacity of Trust Era leaders, who at their best, acted as curators for their entire industries, with an intense focus on customer benefits—and at their worst, pursued industry dominance and monopoly power.
Similarly, Bain has noted current parallels to early 19th century apprenticeships, with their focus on “mastery of craft” and lifelong skill development—just think of Google, with its emphasis on “elegant coding” today.
While these patterns involve present trends, it is often possible to identify the earliest rumblings of coming change 10 to 20 years in advance. In the 1970s, we entered the Shareholder Primacy Era, which held that companies exist to maximize shareholder value. This wasn’t a new concept at the time—Milton Friedman wrote about it in the early 1960s—it simply took a decade to reach a turning point.
Just as spotting patterns can inform future strategies, it’s critical to evaluate not only the downfalls, but also the advantages of previous systems when charting a path forward. For instance, with all of the critiques of “bureaucracy,” it’s easy to forget why the professional management system became a cornerstone of the firm over a century ago. This system drove breathtaking levels of innovation, growth, and value creation through standardization, routines, and predictability.
As Schwedel notes: “Taking these benefits into account makes it obvious that the path to winning in the Era of Scale Insurgency doesn’t start with an outright rejection of professional management. Instead, companies should rethink the role of the professional manager for a new era of scale and speed.”
When Yale psychologist Irving L. Janis studied the Bay of Pigs disaster, a failed US government sponsored invasion of Cuba, in the late 1960s he identified a new culprit in decision making: groupthink. Despite private concerns, none of the advisors spoke up against John F. Kennedy’s botched plan. None wanted to be seen as soft or un-daring.
Bain Futures has been in the room with at least 2,000 CEOs in the last couple of years. Many of them are from large corporations that make up a big chunk of Bain’s clients. While these firms have deep experience in the challenges of incumbency, it is more difficult for them to develop an outsider’s perspective.
In the US, for example, most CEOs of large companies continue to be middle aged men who graduated from a top ranked university. Just engaging with them is likely to introduce groupthink. Upstart firms that are disrupting their industries on the other hand often face very different issues and therefore add unconventional thinking.
Hence, Bain has also engaged a second group of about 2,500 insurgent leaders—executives and founders from smaller, rapidly growing companies. Combining insights from both groups provides a broader perspective and helps Bain Futures avoid the trap of Ivory Tower thinking.
An important aspect here is also how to engage executives in a discussion. “No matter how smart or intellectually curious, … it's hard to get people in a room and say tell me about a big idea or, what trends … we should be thinking about. It'll be like an imprint of what they read in the FT or somewhere similar.”
Schwedel explains. So what do they do? We “give them something to react to, a jumping-off point for the discussion, a provocative hypothesis.” This simple technique encourages divergent opinions based on the variance of individual experience, thereby mitigating against groupthink.
Building your own capability to see around corners
The approach that Bain Futures uses to make sense of big trends and translate them into actionable insights has lessons for any company, regardless of size. Companies can start by establishing critical signposts of change to monitor, installing rapid market and internal feedback systems to encourage learning, opening up to a wider diversity of data and information sources, and questioning the assumptions underpinning their strategy and business model.