Two of my favorite management thinkers, John Hagel and John Seely Brown, have just released an important new study, The Big Shift. I’ve read the research, which expands on some of my own constructs, and had a chance to talk with Hagel about it at length last week. One of the most important findings is that return on assets for American companies has been declining for decades. Here’s a short-form version that appeared over at Harvard Business Review online.
The 2009 Shift Index reveals a disquieting performance paradox in the US corporate sector. On the one hand, labor productivity has nearly doubled since 1965. During those same years, however, US companies’ Return on Assets (ROA) progressively dropped 75 percent from their 1965 level.
How can firms be getting lower returns even as they’re becoming more efficient? The answer resides in the heightened competition among firms. Competitive intensity nearly doubled between 1965 and 2008, forcing firms to compete away the benefits of productivity gains, which were instead captured by creative talent in the form of higher compensation and numbers of consumers through increasing performance/price ratios and wider choice.
It’s little surprise to find also that the highest-performing companies are struggling to maintain their ROA rates and are increasingly losing market leadership positions. Taken as a whole, the findings portray a U.S. corporate sector in which long-term forces of change are undercutting normal sources of economic value. “Normal” may in fact be a thing of the past: even after the economy resumes growing, companies’ returns will remain under pressure.
To respond to this performance challenge, U.S. companies will need to let go of industrial- era organizational structures (and the reporting relationships, incentive systems, and managerial processes that go with them) and operational practices in favor of the new institutional architectures and business practices needed to create and capture economic value in the era of the Big Shift.
Companies must move beyond their fixation on getting bigger and more cost-effective to make the institutional innovations necessary to accelerate performance improvement as they add participants to their ecosystems, expanding learning and innovation in collaboration curves and creation spaces. Companies must move, in other words, from scalable efficiency to scalable learning and performance. Only then will they make the most of our new era’s fast-moving digital infrastructure.
The full report is here. The section on creative cities begins on p. 60. It shows strong relationships between cities with high scores on the Creativity Index and economic output (measured as GDP), returns to talent and economic freedom, as well as a large performance gap between high and low scoring cities on that index.