The shift index: Industry metrics and perspectives

Deloitte

Description

The report measures long-term changes affecting U.S. business in the digital era. It applies 13 metrics to nine industry sectors: automotive, consumer products, financial services (banking), health care (health plans and providers), insurance, media, retail, technology and telecommunications.

Informations

• Publié par: deloitte
• Publié le: 09 novembre 2011
• Nombre de lectures: 116
• Langue: English
• Poids de l'ouvrage: 2 Mo

Extrait

The 2009 Shift Index Industry metrics and perspectives

Deloitte Center for the Edge: John Hagel III, John Seely Brown, and Lang Davison Core Research Team: Duleesha Kulasooriya Neda Jafarnia Jason Trichel Chris Nixon

Contents

1 3 13 27

Executive Summary Shift Index Overview Cross-Industry Perspectives Industry Reports 27 45 65 85 105 123 143 159 175 Automotive Consumer Products Financial Services Health Care Insurance Media & Entertainment Retail Technology Telecommunications

193 Methodology 204 Acknowledgements

Executive Summary

The 2009 Shift Index for the U.S. economy, released in June, 2009, revealed a troubling, long-term trend: return on assets (ROA) for U.S. public companies had declined by 75 percent since 1965. This sustained erosion in corporate performance suggests that the current way of doing business is fundamentally broken. The 25 metrics of the Shift Index went a long way toward describing and quantifying the forces underlying this steady deterioration in corporate performance. Executives with whom we shared these economy-wide findings reacted with understandable concern. Many of them wanted to know, “What’s happening in my industry?” This report provides insight into that question for nine major U.S. industries. We found that there are few, if any, safe harbors from the mounting performance pressures unleashed by the Big Shift. The Big Shift represents the convergence of long-term trends, playing out over decades, that are fundamentally re-shaping the business landscape. While these trends are leading to severe performance erosion in the near-term, they also offer powerful new ways to create economic value in the longer-term. Performance on specific metrics varies across industries. However, these variations appear to be largely a function of timing: some industries are experiencing the Big Shift much earlier and more severely than others. Technology, Telecommunications, and Media, the industries that are most directly involved in developing and deploying the technologies, practices, and protocols underlying the new digital infrastructure—which, along with public policy, is catalyzing the Big Shift—are among those hit earliest and hardest by the mounting performance pressures of this new era. Analysis suggests that, in time, virtually every industry will experience the full force of the Big Shift. Most of the industries we examined fall within a middle tier, feeling the early effects of the Big Shift but not yet subject to the full impact of performance pressures. Only two industries—Aerospace & Defense and Health Care—have bucked the overall erosion in Asset Profitability

that has occurred since 1965. Looking across industries, one variable stands out as the key to the impact of the Big Shift on a particular industry: public policy, especially in the form of regulation that limits entry and movement by competitors within the industry. We do not believe it is an accident that two of the most highly regulated industries in the U.S.—Aerospace & Defense and Health Care—are outliers in a broader trend of performance erosion. The ever-more-powerful digital infrastructure increases the potential for competitive intensity and performance pressures, but public policy shapes the degree to which specific industries feel that pressure.

The Big Shift represents the convergence of long-term trends, playing out over decades, that are fundamentally re-shaping the business landscape.
This does not mean that companies should rush to Washington, D.C. in search of additional barriers against the forces of the Big Shift; such barriers may turn out to provide the same false complacency as the Maginot line. Like France in World War I, companies risk focusing on building barriers against frontal assaults while ignoring attacks from the flanks. While companies are being buffeted by increasing performance pressures, two constituencies—customers and creative talent—are benefiting significantly from the Big Shift. So far, these two groups appear to be far more effective than companies are at exploiting the digital infrastructure, and the knowledge flows enabled by it, to capture economic value for themselves. In fact, customers and creative talent are driving competitive pressure across many of the industries surveyed and exerting market power to squeeze value from their vendors and employers. For example, while the Health Care business is highly regulated, a less-regulated sub-sector is evolving at the edge of the traditional

2009 Shift Index—Industry Metrics and Perspectives

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Executive Summary

industry. This sub-sector includes a broad array of nutrition, fitness, and integrative health providers centered on helping people to stay healthy and fit. Increasingly, this sub-sector is competing for the attention and spending of traditional health care consumers. From the other side, creative workers are garnering more cash compensation from the firms employing them and have increasing flexibility to change employers as well as industries. While consumers and creative talent gain power, previously secure industry boundaries are crumbling as companies move in from adjacent industries, as is the case with the Telecommunications industry. Thus, the most significant competitive pressures may be coming from the flanks of traditional industries rather than from direct competitors. Regulatory protection has limited value for insulating against competition from these flanks. The power of customers and creative talent may be an important leading indicator of competitive intensity and more revealing than traditional metrics. What is a company to do in response to these growing competitive pressures? The analysis suggests that companies should be wary of relying too heavily on improving labor productivity through cost reduction. The Shift Index cross-industry analysis shows there is little correlation between increases in labor productivity and improvement in ROA. In fact, some of the industries experiencing the most dramatic improvements in labor productivity have also experienced the most dramatic erosion in ROA. Many companies have relied on automation and scale economics to achieve productivity improvements, but these cost-reduction approaches yield diminishing returns over time and competition continues to intensify. Costdriven productivity improvement may be necessary to stay in the game, but it is not sufficient against mounting performance pressures. While labor productivity is a key driver of overall economic prosperity, it does not provide a sustainable refuge for firms. The Center research suggests more promising ways to address performance erosion, through harnessing the

proliferating knowledge flows that are enabled and amplified by the digital infrastructure. Knowledge flows are a key driver of the growing power of customers and creative talent. Rather than attempt to claw back profits from these two constituencies, firms need to create economic value by participating effectively in flows of knowledge and not simply continuing to exploit existing knowledge stocks through greater economic efficiency. The Shift Index metrics reveal that most companies, across all industries, are participating in only a small fraction of the knowledge flows available to them. We also discovered that, despite some variations across industries, 75 to 80 percent of the workforce lacks passion for the work they perform on a daily basis. This is particularly significant given the strong correlation between Worker Passion and more active participation in knowledge flows. If companies are serious about more effective participation in knowledge flows, they must find ways to draw out greater passion from their workers. And what about innovation? At least as conventionally defined and practiced, innovation may not help the trend. The Technology industry, known for innovation, experienced one of the steepest ROA declines of all the industries we studied. This suggests that while product and technology innovation may be necessary, they also are not sufficient. Given the growing importance of knowledge flows, perhaps the most powerful form of innovation in this context may be institutional innovation—re-thinking roles and relationships across organizations to better enable creation of and participation in knowledge flows. The Shift Index cross-industry analysis suggests that the forces of the Big Shift are having a far broader and deeper effect than most executives expect. While focusing on the short-term economic downturn is understandable, we run the risk of losing sight of more profound trends that will continue to shape profitability and competitive success long after the current downturn is over. With this report, we hope to draw attention to emerging cross-industry patterns while at the same time providing in-depth analysis of the drivers and implications of these trends in each industry.

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Shift Index Overview

The following section is an excerpt and adaptation from the 2009 Shift Index that provides relevant context related to the Big Shift themes. The earlier 2009 Shift Index analyzed 25 metrics across three indices while the current Industry Perspectives report focuses on 13 metrics included in the Flow and Impact indices. These metrics were selected based on their importance to assessing industry performance relative to the Big Shift. The key findings for Shift Index Industry Metrics & Perspectives are highlighted in the Cross-Industry Perspectives section.

Introduction: The Big Shift
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