Shift Happens Redux

Today is a big day.  It is the first time that we can offer a view of something I have been working on for the past year.  About one year ago, we began an undertaking that some described as bold, and others characterized as foolhardy. The first product of this effort is just now being released – we call it the Shift Index. Hopefully the scope and size of this undertaking will help to explain why it has been a while since I posted to this blog.  I have been just a bit distracted.

The catalyst for this effort was a meeting about one year ago.  We were looking at economic indices and struck by the fact that most of the well-known indices focus on very short-term cyclical events – unemployment, inflation, purchasing activity, consumer confidence levels, etc. Of course, these are extremely valuable in helping executives to assess the current context for their operations.

On the other hand, everyone acknowledges that we are in the midst of a fundamental shift playing out on the business landscape on a global scale over many decades. We may not all agree on the exact dimensions of the big shift, but the reality is so widely recognized that it is often unstated. When we looked for indices that gave us some insight into the nature and pace of this big shift, we pretty much came up drive.  There were isolated measures and one-off analyses, but there was nothing resembling a comprehensive index of key metrics updated on a regular basis.

So we decided to develop one.  We had a team work for about six months developing the conceptual framework for describing the dimensions of the big shift and how these dimensions related to each other. We then spent the next six months working to define the specific metrics for a Shift Index and collect and analyze the data related to these metrics.

The result is now being formally launched – we call it the 2009 Shift Index.  It initially focuses on the US economy although over time we intend to expand the Shift Index to cover other economies around the world.  In the fall, we will release a separate report pulling apart the data for fifteen industries in the US economy and comparing performance at the industry level.

For the moment, though, we have a report that draws attention to some of the key findings in the Index.  The report is accessible here.  Perhaps the most interesting findings can be summarized as follows:

• Return on assets (ROA) for U.S. firms has steadily fallen to almost one-quarter of 1965 levels at the same time that we have seen continued, albeit much more modest, improvements in labor productivity.
• The ROA performance gap between winners and losers has increased over time, with the “winners” barely maintaining previous performance levels, while the losers experience rapid deterioration in performance.
• The “topple rate,” at which big companies lose their leadership positions, has more than doubled, suggesting that “winners” have increasingly precarious positions.
• U.S. competitive intensity has more than doubled during the last 40 years.
• While the performance of U.S. firms is deteriorating, the benefits of productivity improvements appear to be captured in part by creative talent, which is experiencing greater growth in total compensation. Customers also appear to be gaining and using power as reflected in increasing customer disloyalty.
• The exponentially advancing price/performance capability of computing, storage, and bandwidth is driving an adoption rate for our new “digital infrastructure” that is two to five times faster than previous infrastructures, such as electricity and telephone networks.

Given these long-term trends, we cannot reasonably expect to see a significant easing of performance pressure as the current economic downturn begins to dissipate—on the contrary, all long-term trends point to a continued erosion of performance. So what can be done to reverse these performance trends?

The answer to this question can be found in the three waves of deep change occurring in today’s epochal “Big Shift.” The first, the “Foundation” wave, involves changes to the fundamentals of our business landscape catalyzed by the emergence and spread of digital technology infrastructure and reinforced by long-term public policy shifts toward economic liberalization. The metrics in our Foundation Index monitor changes in these key foundations and provide leading indicators of the potential for change on other fronts. Changes in foundations have systematically and significantly reduced barriers to entry and to movement, leading to a doubling of competitive intensity.

The second, the “Flow” wave, focuses on the key driver of performance in a world increasingly shaped by digital infrastructure. This second wave looks at the flows of knowledge, capital, and talent enabled by the foundational advances, as well as the amplifiers of these flows. Because of higher unpredictability and volatility created by the Big Shift, knowledge flows are a particular key to improving performance. Developments on this front will likely lag behind the foundations metrics because of the time required to understand changes in foundations and develop new practices consistent with new opportunities.

The third, the “Impact” wave, centers on the consequences of the Big Shift. Given the time it will take for the first two waves to play out and manifest themselves, this third wave—and its related index—provides an even greater lagging indicator.

While current trends in firm performance indicate sustained deterioration, we expect, over time, that performance will improve as firms begin to figure out how to participate in and harness knowledge flows. Doing so will require significant institutional innovations, not just changes in practices, resulting in value creation through increasing returns performance improvement. In the end, these innovations will lead to a fundamental shift in rationale from scalable efficiency to scalable learning as firms use digital infrastructure to create environments where performance improvement accelerates as more participants join. Early signs of these changes are visible in the varied kinds of emerging open innovation and process network initiatives underway today.

The Shift Index seeks to measure these three waves of deep and overlapping change operating beneath the visible surfaces of today’s events. The relative rates of change across the three indices will help executives understand where we are in the Big Shift and what to anticipate in the future. Current metrics indicate that we are still in the first wave of the Big Shift and facing challenges in moving forward into the second. Changes still manifest themselves much more as challenges rather than opportunities because our institutions and practices are still geared to earlier infrastructures. At the same time, an understanding of these three waves leads to significant insights about the moves required to reverse current performance trends.

I would love to get your comments and reactions to this report.  Are we on to something? What does it mean? Are we missing anything? What additional research could be done to build on this initial work?

Alas, the release of this report does not mean that I will be soon picking up on posting here.  I am now in the middle of a book project that will consume me for the summer. The book basically picks up where the Shift Index leaves off and focuses on what executives need to do in order to thrive in the Big Shift. If you haven’t already checked it out, I am posting some early views of the book themes at my blog, The Big Shift.  This is all in real time development so a great opportunity to help me shape the perspectives and ideas in the book.  I’ll look forward to hearing from you.

Comments

[Fabius Maximus]

Two things:

A minor point -- You might confused the frequence of observations with the long-term nature of the cycles being measured. Think of a daily temperature used to measure climate shifts.

More important -- Two large shifts might explain might explain much of the shifts you describe. First globalization, esp combined with a loss of US competitiveness vs. new competitors. Second, compositional changes in the US economy. Esp the shifts from manufacturing to services, and the increased role of goods & services not exposed to foreign competition.

[Hemant Puthli]

Interesting concepts and constructs, and I admire the ability to pursue a project of this sort for a year (given the rate of change of priorities these days - is that part of the shift index?)

I was wondering ... hasn't the very definition of corporate performance started to change, over the last few years? In your post here you seemed to have used RoA as the metric of performance. There could be others, all broadly synonymous, but my comment is not about those - the traditional definition of a company's performance has always involved (purely) financial gain for the (purely) financial investor.

These days, however, there seems to be a drive to include social and environmental contribution as additional measures of corporate performance (often referred to as the "triple bottom line"). Is this a shift? or a fad?

How would the shift index look if performance were to be defined and understood differently? Indeed, how might company performance itself look if investors required their companies to contribute in additional ways (over and above giving them good returns).

[Aurelia Masterson]

I think this is an excellent idea--statistics are needing a change. Plus, in much of the world these changes are far from happening, but, hopefully, will happen. So it would be great if they could have something to look at.

But does this exclude or possibly deny changes that don't follow this curve? I hope that it's not taken as dogma by these 3rd world countries assuming that they will go the same way. But it's not on you guys of they don't. I'm interested in seeing where this is going to go.

[Charlie Pinto]

John, I was very impressed with the Shift Index! Big companies are losing ground to smaller, more agile and innovative companies. These companies are able to connect with consumers and tell their story in a way that large corporations can't even begin to imagine. In essence, the toppled companies fall from the "top". The CEOs fail to adopt change (as the newspaper industry failed to do years ago and the TV industry is in the midst of) and board members fail to acknowledge a change in "the game." The social web has created the new business and CEOs who are striving to survive are calling upon Gen Y's to mentor them.

[Michael H Goldhaber]

John,

I think the data you point to, especially the flow of income to creative talent, is consistent with my view that we are headed to anew kind of attention-based economy. For more on this see www.goldhaber.org, and for how businesses can do best in the meantime see mhgoldhaber.com.

Best, M.

[Simon Cast]

Very interesting work John. It is certainly useful to see research into something I've seen and been thinking about for a while.

Interestingly, I think one outcome of the shift is that the economy of scale are shifting quite significantly to the point that many large companies are afflicted by dis-economies which I think is a cause of a lot of the ROA and precarious leadership positions of many businesses.

As business go for marketshare and scale they suddenly become unviable quickly. Which raises two interesting points:
1) Large marketshare becomes self-defeating
2) Today's current large companies are going to have to get much smaller to remain competitive

[Ian Wilson]

The link to the report seems to be broken?

Very interesting and engaging perspective. I see conceptual / structural connections with the perspectives of Umair Haque (at Harvard Business).

This framework seems to give structure to those ideas if I see the parallels correctly. Is his work something you think about at all?