During a steep recession, managers obsess over short-term performance goals such as cost cutting, sales, and market share growth.
Meanwhile, economists chart data like GDP growth, unemployment levels, and balance-of-trade shifts to gauge the health of the overall business environment.
The problem is, focusing only on traditional metrics often masks long-term forces of change that undercut normal sources of economic value. “Normal” may in fact be a thing of the past: Even when the economy heats up again, companies’ returns will remain under pressure.
One reason traditional measures alone don’t capture the challenges and opportunities for U.S. companies and the national economy is that the digital infrastructure supporting the lion’s share of industries has sustained rapid performance improvements—especially in computing power, bandwidth, and storage.
Previous infrastructures experienced sharp bursts of innovation in underlying technologies, such as the telephone and the internal combustion engine, and then quickly stabilized.
Today, we do not yet see any signs of stabilization, which suggests not only that competitive intensity (which has more than doubled in the past 40 years) will continue to build but also that the digital infrastructure will keep boosting the potential—and necessity—for business innovation.
To help managers in this decidedly challenging time, we present a framework for understanding three waves of transformation in the competitive landscape:
foundations for major change;
flows of resources, such as knowledge, that allow firms to enhance productivity; and the
impacts of the foundations and flows on companies and the economy.
Combined, those factors reflect what we call the Big Shift in the global business environment.
The Shift Index
Additionally, we have developed an index to measure the changes that have had the biggest effect on business over the past four decades (see the exhibit “The Shift Index”).
That set of metrics reveals a dramatic increase in performance pressure on U.S. companies.
Their average return on assets (ROA) has steadily fallen to almost one quarter of what it was in 1965, despite the fact that labor productivity has improved.
Worse yet, even the highest-performing companies are struggling to maintain their ROA levels and losing their leadership positions at an ever-faster rate.
The paradox of falling ROA alongside growing productivity is explained at least in part by the rising total compensation of knowledge workers and other talented employees, and by consumers’ growing power over vendors that end up “competing away” their cost savings. An even closer look at the situation shows a fundamental mismatch between the mind-set of today’s companies and the environment in which they compete.
Elements of the Big Shift
The first, foundational wave in the Big Shift consists of the extraordinary changes in digital infrastructure that enable vastly greater productivity, transparency, and connectivity.
Consider how companies can use digital technology to create ecosystems of diverse, far-flung users, designers, and suppliers in which product and process innovations fuel performance gains without introducing too much complexity.
The second wave involves the increasing movement of knowledge, talent, and capital.
Knowledge flows—which occur in any social, fluid environment where learning and collaboration can take place—are quickly becoming one of the most crucial sources of value creation. Facebook, Twitter, LinkedIn, and other social media foster them. Virtual communities and online discussion forums do, too. So do companies situated near one another, working on similar problems. Twentieth-century institutions built and protected knowledge stocks—proprietary resources that no one else could access. The more the business environment changes, however, the faster the value of what you know at any point in time diminishes. In this world, success hinges on the ability to participate in a growing array of knowledge flows in order to rapidly refresh your knowledge stocks. For instance, when an organization tries to improve cycle times in a manufacturing process, it finds far more value in problem solving shaped by the diverse experiences, perspectives, and learning of a tightly knit team (shared through knowledge flows) than in a training manual (knowledge stocks) alone.
Knowledge flows can help companies gain competitive advantage in an age of near-constant disruption. The software company SAP, for instance, routinely taps the more than 1.5 million participants in its Developer Network, which extends well beyond the boundaries of the firm. Those who post questions for the network community to address will receive a response in 17 minutes, on average, and 85% of all the questions posted to date have been rated as “resolved.” By providing a virtual platform for customers, developers, system integrators, and service vendors to create and exchange knowledge, SAP has significantly increased the productivity of all the participants in its ecosystem.
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