[p2p-research] Fwd: Deloitte's Shift Index: Advances in Labor Productivity Fail to Drive Profit

Michel Bauwens michelsub2004 at gmail.com
Wed Nov 11 03:29:20 CET 2009

does anyone have an informed perspective on 'return on assets', and if this
may be a flawed metric, as Dmytri seemed to suggest in barcelona, if I
remember it correctly?


---------- Forwarded message ----------
From: Elena Kontalipos <Elena.Kontalipos at hillandknowlton.com>
Date: Tue, Nov 10, 2009 at 11:07 PM
Subject: Deloitte's Shift Index: Advances in Labor Productivity Fail to
Drive Profit
To: "michelsub2004 at gmail.com" <michelsub2004 at gmail.com>

 Dear Michel,

Today, Deloitte’s Center for the Edge has unveiled new industry-specific
data that suggests that, despite major improvement in labor productivity
over the last four decades, many U.S. industries have experienced alarming
decreases in their return-on-assets (ROA).

Deloitte’s “Shift Index,” a new economic indicator, reveals that the current
economic downturn is masking much deeper long-term trends.  It also
underscores that there is a disconnect between productivity improvement and
increased asset profitability.  Deloitte has labeled this the ‘performance

The underlying issue is that while we are adopting the nation’s new digital
infrastructure two to five times faster than previous infrastructures such
as electricity, railroads and telephone networks, most of our institutions
and practices are still geared to earlier infrastructures.  As a result,
increased productivity gains fail to translate into profit.

While virtually every industry that Deloitte examined has been impacted, the
first wave of industries currently feeling the most pressure include
media, telecommunications *and* automotive*.  They also represent a ‘canary
in the coal mine’ for industries that have just started to feel the effects
of the Shift Index, including *banking, retail *and* insurance*.  Finally,
the report also reveals that heavily-regulated industries like *healthcare*and
*aerospace & defense* are the most insulated, at least for the moment.

I would like to set up a time for you to speak with John Hagel Co-Chairman
of Deloitte’s Center for the Edge, who can walk you through the
industry-specific conclusions this week.

Please let me know if you’re interested in setting up a call.




* *

* *

*Deloitte Shift Index: Advances in Labor Productivity*

* Fail to Drive Profit *

* *

*Only the Most Heavily-Regulated U.S. Industries Insulated*

* from Intense Competitive Pressure and Plummeting Return-On-Assets *

* *

*SAN JOSE, Calif., November 10, 2009* — Despite major improvement in labor
productivity over the last four decades, many industries in the United
States have experienced alarming decreases in their return-on-assets (ROA).
This according to Deloitte’s Center for the Edge, which today released
industry-specific findings from its 2009 “Shift Index,” a new economic
indicator identifying three waves of disruption that are shaping today’s
business landscape.

The findings also indicate that only the most heavily-regulated industries
have experienced an improvement in asset profitability.

The 2009 Shift Index recently revealed that on an economy-wide level, U.S.
companies’ ROA has plummeted 75 percent since 1965.  Today’s *“2009 Shift
Index: Industry Metrics and Perspectives” *report analyzes a broad array of
U.S. industries and tiers them by level of corporate performance disruption.
While most industries are being impacted by the convergence of long-term
trends, playing out over decades that the Shift Index measures, some are
experiencing this change — termed the “Big Shift” — much earlier and more
severely than others. The tiers are summarized as follows:

   - *Tier 1: Extreme corporate performance pressure*. These industries are
   experiencing both increases in competitive intensity and declines in asset
   profitability. Industries in this category are technology,
   telecommunications, media and automotive.

   - *Tier 2: Feeling early effects but not yet experiencing full
   performance pressures.*  These industries are also suffering a decline in
   ROA while facing a high, but steady level of competitive intensity. Banking,
   retail, consumer products and insurance are among the industries that are in
   this category, with banking at the highest risk to move into the first tier
   in the near future.

* *

   - *Tier 3: Bucking the trend in asset profitability erosion — for now.*
   Healthcare and aerospace and defense are the only industries that have
   improved their ROA. This can be largely attributed to limited competition
   reinforced by public policy, especially in the form of regulation that
   limits entry and movement by competitors within the industry.

“Executives understandably believe that productivity drives higher returns,
but that assumption appears flawed,” said John Hagel, co-chairman of
Deloitte’s Center for the Edge. “Looking across industries, there doesn’t
seem to be any relationship between productivity improvement and increased
asset profitability. Companies focus on automation and scale economics to
squeeze continuing improvements in labor productivity, but these efforts
yield diminishing returns over time. In part, this is because the cost
savings are passed through to customers as competition intensifies. Given
this performance paradox, firms need to re-evaluate how they create and
retain value.”

Shift Index findings suggests that the most promising way to reverse
performance erosion is to find more creative ways to harness the
proliferating knowledge flows enabled and amplified by the nation’s digital
infrastructure.  This is a key driver of the growing bargaining power of
customers and creative talent — which in turn is increasing competitive
intensity across many of the industries surveyed.  The Shift Index metrics
suggest that most companies across these industries are participating in a
small fraction of the potential knowledge flows.

“We are adopting the digital infrastructure two to five times faster than
previous infrastructures such as electricity, railroads and telephone
networks,” said Hagel.  “Yet most of our institutions and practices are
still geared to earlier infrastructures.  Businesses need to learn how to
create more economic value by more effectively participating in new
knowledge flows to refresh their existing knowledge stocks more rapidly,
rather than simply exploiting existing knowledge stocks with greater
economic efficiency.”

The Shift Index also found, with variations across industries, that more
than 75 percent of the workforce is not passionate about the work they
perform on a daily basis.  This is particularly significant given the strong
correlation between worker passion and more active participation in
knowledge flows.

Sector-specific Shift Index findings include:

*Tier 1*

The technology, media, telecommunications and automotive industries are
currently experiencing the full force of the Big Shift and represent the
best examples of the type of disruption other industries are likely to face
in the future.

With dramatic increases in productivity — upwards of 800 percent —
telecommunications and technology in particular are prime examples of
sectors that experienced innovation and productivity improvement that did
not translate into improved corporate performance.

   - *Technology*: The industry creating much of the nation’s digital
   infrastructure has not yet made the leap from product innovation to
   institutional innovation.  The ROA has declined by nearly 70 percent despite
   the highest gains in labor productivity in the U.S. This is due to a level
   of competitive intensity that has magnified almost four-fold since 1965 and
   is 30 percent greater than the rest of the economy. Despite Silicon Valley’s
   reputation for entrepreneurial leadership, this sector has a surprisingly
   low level of employee passion.

   - *Telecommunications:*  While labor productivity in the
   telecommunications sector has risen sharply, ROA has plummeted by more than
   30 percent. This sector has been profoundly affected by the rapid increase
   in technology-driven, intermodal competition, which has had a far greater
   impact on creating a competitive marketplace than the regulatory actions
   over the past two decades. While the Telecom Act of 1996 laid the groundwork
   for today’s market-based competitive environment, financial returns in the
   telecom sector have continued to decline since the removal of previously
   regulated rate-of-return on assets.

   - *Media:*  The only sector in tier one that has experienced a negative
   ROA, dropping from 7 percent to negative 4.4 percent, despite gains in labor
   productivity. This industry has seen competitive intensity double in the
   last 40 years, with the rise of the Internet as the most powerful driver of
   this disruption. Traditional media companies have struggled with the
   combination of being regulated while contending against unregulated
   competitors, newly powerful consumers and a range of online substitutes for
   traditional media and entertainment products.

   - *Automotive*: Competitive intensity has been largely driven by global
   competition in the light vehicle subsector and resulted in lower asset
   profitability, as domestic firms have been unable to quickly adjust their
   production capacity to meet market demand.  * *

*Tier 2*

Many sectors of our economy are feeling early effects of the Big Shift but
are not yet exhibiting the full impact of the performance pressures.

   - *Banking*:  Highly vulnerable because the commercial banking side of
   the business has historically benefited from public policy which has
   regulated prices for banks over time. Recent trends suggest that there is
   decreasing protection from public policy resulting in erosion of the
   industry’s ROA over the past couple of years. * *

   - *Retail: *The ROA in the retail sector has fallen 60 percent over the
   course of four-plus decades, from 6.6 to 3.1 percent, despite labor
   productivity increases that outpace nearly all other industries studied.
   However, it is technology’s impact on the consumer that has most profoundly
   affected the industry – as a key driver of the growing bargaining power of
   consumers and the declining influence of brands, causing performance to fall
   even as industry consolidation has decreased competitive intensity.

* *

   - *Consumer Products:  *The consumer products industry has seen a slight
   erosion of performance since 1965 as consumers and retailers gained strength
   relative to consumer products companies. Although average ROA dipped through
   the 1980s and 1990s, it steadily increased from 2000 to 2007, resulting in a
   relatively static average ROA over the past four decades. This slight drop
   is considerably smaller than the average decline across all U.S. industries,
   likely reflecting consolidation in the industry, which reduced the forces of
   competition.*   *

* *

   - *Insurance:  *Despite a lack of competitive intensity, the sector’s ROA
   has dropped by 142 percent from 2.6 to negative 1.1 percent.* *Pending
   regulatory and demographic change – coupled with increasing competition from
   outside the industry – may bring increased pressure in the future.* *

* *

*Tier 3*

Two industries have actually experienced an increase in asset profitability:
healthcare and aerospace and defense. These least affected industries are
associated with high levels of regulation and government purchasing

   - *Healthcare:* The sector has been and continues to be deeply affected
   by regulation and public policy at the national and state levels.  The ROA
   in healthcare rose from 1.7 percent in the early 1970’s to 3.8% in 2008, an
   increase of more than 200 percent. Limited competition coupled with
   regulatory protection has enabled asset profitability in this industry.
   However, this competitive environment may evolve in the near future, given
   pending political reforms and increased “consumerism.”

   - *Aerospace & Defense:* Appears to be an anomaly as the only industry
   which has not yet been disrupted due to the unique characteristics under
   which it operates. Procurement policies and national security considerations
   have a profound influence on this industry and its relationship with its
   largest customer – the US government. Improvements in ROA and declines in
   competitive intensity in this industry can be attributed to high barriers to
   entry from start-up costs including investment in technology and capital

“The answer to thriving in this environment is not going to be found in
product innovation or traditional cost reduction,” said Hagel. “Rather,
executives need to focus on driving institutional innovation – redefining
roles and relationships across large numbers of institutions. This will be
the only way to effectively address the profound trends shaping
profitability and competitive success well beyond the current economic

*About the Shift Index*

Deloitte’s Shift Index pushes beyond cyclical measurement and looks at the
long-term rate of change and its impact on economic performance. The Shift
Index tracks 25 metrics across three sets of main indicators: foundations,
which set the stage for major change; flows of knowledge, which provide more
powerful ways to drive productivity; and impacts, which help gauge progress
for firms, customers and creative talent.  The Shift Index will continue to
be updated to track changes over time and compare performance trends across

For a deeper look at the Shift Index methodology and findings, please go to

* *

*About Deloitte *

As used in this press release, “Deloitte” means Deloitte LLP and Deloitte
Services LP, a separate subsidiary of Deloitte LLP.  Please see
www.deloitte.com/us/about <http://www.deloitte.com/about> for a detailed
description of the legal structure of Deloitte LLP and its subsidiaries.  **

* *

*# # #*

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