[p2p-research] The Industry Sequel to the Shift Index

Ryan rlanham1963 at gmail.com
Thu Nov 12 00:07:08 CET 2009

Capitalism in trouble...or just the business cycle?

Sent to you by Ryan via Google Reader: The Industry Sequel to the Shift
Index via Edge Perspectives with John Hagel by John Hagel on 11/10/09

About four months ago, I released the 2009 Shift Index from the
Deloitte Center for the Edge. It showed a significant and sustained
deterioration in return on assets (ROA) for all public companies in the
US since 1965. That metric alone attracted a lot of attention from the
media and executives.

Many executives were deeply engaged with the findings of that report,
but understandably asked what the long-term Big Shift trends were in
their specific industry. They asked and we delivered. Today, the
Deloitte Center for the Edge is releasing a sequel to the original
report, systematically examining trends across 14 industries. This
report on Industry Metrics and Perspectives is lengthy (over 200 pages)
and goes into considerable depth on nine industries in particular.
Interested readers can download the full pdf here but for those wanting
the headlines, these are some of the key perspectives emerging from the
industry analysis:

Deterioration in performance is widespread
Firms in most industries are experiencing long-term deterioration in
ROA since 1965. Only two industries – aerospace and defense and health
care experienced improvements in ROA. It is perhaps not coincidental
that these are two of the most heavily regulated industries and
therefore more insulated from the growing competitive pressures
challenging other industries. Even firms in these two industries face
challenges going forward and it is not clear there are any safe harbors
for companies facing the Big Shift

Advances in labor productivity fail to improve return on assets
There is no apparent correlation between improvements in labor
productivity and improvements in return on assets across industries. In
fact some of the industries – especially technology and
telecommunications - that experienced the most dramatic improvements in
labor productivity also experienced the most significant decline in the
return on assets. This suggests that, while improvements in labor
productivity may be necessary to respond to competitive pressure, they
are certainly not sufficient. Most likely, many of the gains in labor
productivity are being captured by more powerful customers and creative

Innovation, at least as traditionally defined, does not appear to offer
a solution
Perhaps one of the most innovative industries in the US – the
technology industry – has also experienced one of the most significant
declines in ROA since 1965. This suggests that innovation defined as
product or even process innovation is also not sufficient as a response
to growing economic pressure. With knowledge flows becoming more and
more important as a source of value creation relative to knowledge
stocks, we suggest that another form of innovation – institutional
innovation – may be much more helpful in turning the performance trends
around. This kind of innovation focuses on redefining roles and
relationships among institutions to generate and sustain richer
knowledge flows across institutional boundaries, something most
institutions find very challenging today.

Traditional measures of competitive intensity understate the challenge
We used a widely accepted measure of competitive intensity that focuses
on industry concentration/fragmentation trends. It soon become apparent
that this measure, favored by many economists and policy makers,
seriously understates gathering competitive forces. Very often, it
ignores significant competitive pressures coming from other parts of
the value chain. In particular, we found that customers are a source of
growing competitive intensity as they gain more power over the vendors
they deal with and demand more value at lower price. In other cases,
growing competition came from companies nominally considered to be in
other industries or markets, for example consider the growing role of
cable companies and Internet companies like Google in the telecom

Worker passion is at very low levels across all industries
At best, only about one in five workers are passionate about their work
across all industries. This is a serious concern given our findings
that passionate workers tend to be much more effective at seeking out
and participating in knowledge flows. If participation in knowledge
flows is key to creating new economic value, most firms are severely
disadvantaged by the low level of worker passion among their employees.
This is certainly one factor explaining our finding that firms are
currently participating in a very small fraction of the knowledge flows
available to them.

Bottom line observations
The industry sequel of our Shift Index confirms the key findings of our
earlier report. Firms in the US have been experiencing a significant
and sustained deterioration in performance over many decades. The most
basic message is that our current approaches to doing business are
fundamentally broken.

This has little to do with the current economic downturn. Certainly
cyclical trends aggravate the longer-term pressures, but there is no
evidence that any cyclical recovery will return companies to where they
were before. Long term pressure continues to mount and shows no sign of
abating. The current economic downturn has understandably consumed our
attention, but we run the risk of missing the more profound,
longer-term trends playing out around us.

While intensifying competition has catalyzed deteriorating performance
for firms, there are significant beneficiaries of these trends. As
customers, we all benefit in the form of increased value at lower
prices. Total cash compensation to creative talent has risen markedly
over this period, so this part of our workforce has also benefited
enormously. The real challenge is to figure out how firms, caught in a
pincer move between more powerful customers and talent, can create more
economic value and improve their own profitability.

Given the profound performance deterioration that firms have
experienced over decades, it is time to step back and reassess our most
fundamental assumptions about what is required to be successful in
business. If we have any hope of turning this longer-term trend around,
we must be prepared to challenge our current approaches to business.

Despite our findings, we remain optimistic about the opportunities for
firms. In particular, we believe that the two foundational catalysts
driving intensified competition – digital infrastructures and public
policy shifts favoring economic liberalization- also create the
conditions for dramatic performance improvement. In fact, by harnessing
the proliferating knowledge flows enabled by these two catalysts, we
believe firms have an opportunity to drive much more powerful
approaches to performance improvement. Experience curves have driven
business performance for much of the 20th century. These curves have
diminishing returns. We believe that for the first time, given a
combination of new digital infrastructures and new institutional
architectures, it may be possible to turn the experience curve on its
side and for the first time generate performance curves with increasing
returns – the more participants, the more rapidly performance
improves.We use the term collaboration curves to describe this new

This is both the challenge and the opportunity confronting firms today.
Those who see this and act upon it will find that the Big Shift creates
the potential for enormous wealth creation.

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