Edge Perspectives with John Hagel

Economic Recovery? Don't Count On It.

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.

Bottom line

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.

The Power of Pull Has Finally Arrived

When you write a book, there comes a point when you begin to believe it will never see the light of day. Well, today my new book, co-authored with John Seely Brown and Lang Davison is officially released by Basic Books—The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion. We began writing it more than a year ago, and the direct research started even further back. In some ways, however, the three of us have been working on this book in various permutations since 1996.

Power shift

That’s when Net Gain (Hagel and Davison) was written around a foundational insight:  that digital technology was setting in motion a shift in market power from the makers of goods and services to the people that buy them, and to talented employees from the institutions that employ them.  We developed that theme even further in a subsequent book, Net Worth (Hagel and Davison).

While we may have had this insight fourteen years ago, what we didn’t yet have in clear focus was the mechanism by which this shift in power from institutions to individuals would take place. That mechanism is pull.

Pull allows each of us to find and access people and resources when we need them, while attracting to us the people and resources that are relevant and valuable, even if we were not even aware before that they existed. Finally, in a world of mounting pressure and unforeseen opportunities, pull gives us the ability to draw from within ourselves the insight and performance required to more effectively achieve our potential.

The power of pull puts each of us, individually and together, in a position to collaborate in a complete re-imagination of our biggest private-and public-sector institutions, one that may eventually remake society as a whole. As customers, we have more choices, and more information with which to make those choices, than ever before. As talented employees we have greater power too than before, since we create the lion’s share of today’s corporate profitability.  As each of us votes with our feet and allies ourselves with new generations of institutions, we’ll abandon the old ones, leaving them to drift into obsolescence and setting in motion a reshaping of broad arenas of economic and civic life.

The relationship economy

While this broad shift in power to individuals is one thread woven through our work, another has to do with how technology is amplifying and transforming relationships. That theme came into even sharper focus in the book Out of the Box (Hagel and JSB), which described the emergence of a new generation of technology architecture – service oriented architectures -  and placed it explicitly in the context of new relationships that this more flexible architecture enabled.

It’s a peculiar thing about technology: Many people seem to regard it as an end in itself. (Consider the companies that throw money at technology without thinking through commensurate changes in management practices or social relations necessary to create value from that investment.) Yet technology is revolutionary in its implications due to the changes it enables in how people find each other, interact, and collaborate to create and share knowledge.

That’s why the mantra in Net Gain was “community before commerce”: If you don’t handle the community aspect right you’re unlikely to get the commercial aspect right, either. Companies that put their own interests ahead of those of their customers would find their customers defecting to companies that treat them better.

Talent development as the only sustainable edge

In The Power of Pull we broaden the point to include employers that fail to provide sufficient professional development opportunities for their employees. These companies will lose their most talented workers to more magnetic organizations that provide better chances for learning and growth.

We began to explore the role of talent development as a competitive advantage in The Only Sustainable Edge (Hagel and JSB).  That book ventured out to the geographic edges of China and India to explore the ways in which entrepreneurial companies were developing new approaches to talent development that harnessed loosely coupled  business networks that provide scale without inertia.  We made the case in that book that the only sustainable edge in the future would come from accelerated capability building - creating the conditions to enable people to learn faster by working together.

Performance improvement and learning

Prior to The Only Sustainable Edge, JSB had been separately pursuing some of the same themes – in fact, our mutual passion for these themes led the three of us to meet and to develop a deeper collaboration over time.

In writings during the 1990’s, JSB explored new approaches to learning that broke the traditional educational model and depended deeply on situating learning within the context of relationships, as illustrated by his piece on “Stolen Knowledge” and “The University in the Digital Age.”  In his work as head of Xerox’s Palo Alto Research Center, JSB had become deeply engaged in the role of communities of practice in driving learning and performance improvement.  Once again, deep personal relationships were a key to driving capability building.  It was in fact through a shared interest in communities that I first met JSB.

In his introduction to the book, Seeing Differently, published in 1997, JSB highlighted the importance of people from diverse backgrounds coming together and, through the creative tension that often arises from confronting different points of view, increasing the potential for innovation. The Only Sustainable Edge developed this further by exploring the conditions necessary to generate productive friction.

Prior to that, JSB co-wrote  (with Paul Duguid) The Social Life of Information, a book that powerfully explored the role social networks play in providing necessary context for information.  In that book, he offered an extended analysis of how learning occurs in practice.  He also developed an important contrast between practice and process in the context of organizational activity. JSB particularly highlighted the vital role of practice, again rooted in the social context of communities of practice, in driving innovation and learning.

In many respects, The Power of Pull can be read as an attempt to reinstate the central role of socially embedded practice in driving knowledge creation and performance improvement relative to the recent emphasis in the management literature of process reengineering. The Power of Pull at one level seeks to refocus technology innovation on providing tools to amplify the efforts of communities of practice to drive performance improvement.

It was also in The Social Life of Information that JSB underscored the importance of tacit knowledge in the creation of new knowledge, a theme that became central to The Power of Pull. In an even more recent book, Storytelling in Organizations, JSB discussed the role of storytelling in helping to communicate tacit knowledge.  Once again, the need to engage in knowledge sharing and knowledge creation through social relationships remains a continuing theme.

Bringing it all together

So, there you have it.  In many respects, this book is simply a continuation of themes under development for a couple of decades.  We explore power shifts, evolving social contexts, scalable networks, and new modes of learning and performance improvement, as well as the development of technology infrastructures that continue to change the game in profound and pervasive ways – all themes that have focused our previous writing as well.  This time, though, we have brought it together into an integrated framework that bridges description and prescription, destination and migration path, and individual and institution.  We try also to mix it up with some stories of people who are making the most of the new world around us by turning challenge into opportunity. We hope you will find the book reflective of your own interests and passions.

Next steps

We had our first launch events last night in New York, and they were a huge success (thanks to everyone who showed up). There will be other launch events, including Silicon Valley on May 4 (hosted by The Churchill Club and Tim O’Reilly), San Francisco, Boston, Washington DC and Seattle.  For more details, visit our joint website and sign up for e-mail updates on the event plans and other developments regarding the book as they unfold.

The Power of Pull represents not an end point but one more step on a broader journey. Where will we go from here? In part that’s up to you. Let me know what you think we’ve gotten right—and what you think we’ve missed or where there might be the greatest potential to focus as we seek to build upon the perspectives in this book. Rather than identifying a single element and elevating it to represent the whole, we’ve tried to capture the whole itself. You’ll be the best judge of how well we’ve succeeded.

(This is an extended version of a more abbreviated blog posting that appeared a few days ago at the Harvard Business Review blog site)