CONVERSATION ANALYSIS: Read the following transcript and choose the answer that is closest to the question that is based on the transcript. Lucia Rahilly (Global Editorial Director, The McKinsey…

CONVERSATION ANALYSIS: Read the following transcript and choose the answer that is closest to the question that is based on the transcript.

Lucia Rahilly (Global Editorial Director, The McKinsey Podcast): Today we're talking about the next big arenas of competition, about the industries that will matter most in the global business landscape, which you describe as arenas of competition. What do we mean when we use this term?

Chris Bradley (Director, McKinsey Global Institute): 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, and by companies that are eight times bigger than the old guards.

And this new batch of companies comes from these new arenas or competitive sectors. 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; we found that there's a set of industries that play by very different set of economic rules and get very different results, while the rest, the muggles (even though they run the world, finance the world, and energize the world), play by a more traditional set of economic rules.

Lucia Rahilly: Could we put a finer point on what is novel or different about the lens that you applied to determine what's a wizard and what's a muggle?

Chris Bradley: Wizards are defined by growth and dynamism. We looked at where value is flowing and the places where value is moving.
And where is the value flowing? What we see is that this set of wizards, which represent about ten percent of industries, hog 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." 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.

Lucia Rahilly: So, where are we seeing the most profit?

Chris Bradley: The economic profit, which is the profit you make minus the cost for the capital you employ is in the wizard industries. It's where R&D happens; they're two times more R&D intensive. They're big stars, the nebulae, where new business is born.

"Wizard" industries are characterized by