You can’t open a newspaper these days without reading some headline about the economic recovery. Hopes are rising that we may actually be turning the corner – consumer demand is growing, factory orders are increasing and the unemployment rate seems to have stabilized if not significantly dropped. Each day brings a new index number that we eagerly cluster around and struggle to interpret, much like tea leaves that are open to multiple interpretations.
While understandable, these efforts to read near-term indices also present very significant risks. We continue to be seduced by near-term news, while losing any perspective on longer-term trends. These longer terms trends tell a very different story and suggest that we may be lulled into complacency by the short-term news of recovery.
Long-term performance deterioration
In our new book, The Power of Pull, we summarize the metrics that we developed for the Shift Index – the first attempt to quantify the longer-term trends that have been re-shaping the business landscape over the past four decades. Of the 25 metrics in the Shift Index, one metric in particular stands out: return on assets for all public companies in the US. Since 1965, return on assets has collapsed by 75% - it has been a sustained and substantial erosion in performance. There is no evidence of any flattening of this trend, much less turning it around.
What does this mean? It provides strong evidence that any “recovery” is merely a short-term relaxation of pressure and that there will be no “back to normal”. We often hear executives talk about the Red Queen effect where they feel they are running faster and faster to stay in the same place. The actual situation is far worse: we are running faster and faster and falling farther and farther behind. There is absolutely no reason to believe that the long-term performance erosion will not continue.
The key question is what to do about it? Market economies are generally successful in spawning innovative new approaches to overcome existing performance pressures. That has not yet happened here. The fact that this trend has continued over such a long period suggests that the causes of the performance erosion are deeply embedded in our current management practices and institutions.
Shifts in the source of value creation
The Power of Pull suggests that we are going through a fundamental shift in the source of economic value creation. In the past, economic value creation depended on proprietary knowledge stocks. The challenge for any company was to acquire some proprietary knowledge, rigorously protect it to make sure no one else had access to it, and then as efficiently as possible extract the economic value from this proprietary knowledge stock for as long as possible. As change accelerates and uncertainty grows, though, knowledge stocks depreciate at a more rapid rate. In this kind of environment, the key to economic value creation shifts to the ability to participate in a growing number of diverse knowledge flows to more rapidly refresh our knowledge stocks.
This shift calls into question our most basic assumptions about where and how economic value gets created. Perhaps that is why firms have had such a difficult time responding to the deteriorating performance trends. Even more challenging, responding to this shift requires developing a whole new set of management practices and institutional arrangements.
Mastering the techniques of pull
We discuss these management practices under the broad rubric of pull. Rather than trying to forecast demand and design push programs to ensure that the right people and resources are in the right place at the right time, a new approach is emerging. This pull approach seeks to develop scalable pull platforms that amplify our ability to draw out the people and resources when we need them and where we need them. The pull techniques developed in lean manufacturing approaches are a promising first step, but they have only worked when there are a very limited number of participants. The leaders of a new generation of pull techniques are demonstrating the feasibility of aggregating thousands and even millions of independent and very diverse participants on global pull platforms.
As we begin to better understand these pull techniques and how they work, something interesting begins to happen. For the first time, we have the potential to shift from our current pattern of diminishing returns performance improvement (as documented in the well-known experience curve) to a business environment where we can begin to unleash increasing returns performance improvement. We are already beginning to see some of the early indications of this potential on the edges of our economy, in such diverse areas as extreme sports, online gaming and software development networks.
The good news is that there is a pragmatic migration path that can move us from where we are today to where we need to be in a world of pull. Small moves, smartly made, can in fact set big things in motion. To pursue this path, though, we will need a sense of direction, harness different forms of leverage and deploy platforms that can accelerate the pace of change.
Economic recovery? Don’t count on it. We are just beginning to understand the challenges ahead. True recovery – in other words, sustainable, long-term recovery - will only come when we pull back from the near-term events that today consume our attention and re-focus on the less visible, longer term trends playing out around us. Those who refuse to be blinded by short-term trends and focus on the longer term shift playing out in our global economy will begin to understand that the game is changing in fundamental ways. By harnessing the power of pull, they will create enormous wealth and leave those still struggling to read the tea leaves of short-term indices in the dust.