The 2009 Shift Index recently revealed that on an economy-wide level, U.S. companies' ROA has plummeted 75 percent since 1965. Today's "2009 Shift Index: Industry Metrics and Perspectives" report analyzes a broad array of U.S. industries and tiers them by level of corporate performance disruption. While most industries are being impacted by the convergence of long-term trends, playing out over decades that the Shift Index measures, some are experiencing this change - termed the "Big Shift" - much earlier and more severely than others. The tiers are summarized as follows:
- Tier 1: Extreme corporate performance pressure. These industries are experiencing both increases in competitive intensity and declines in asset profitability. Industries in this category are technology, telecommunications, media and automotive.
- Tier 2: Feeling early effects but not yet experiencing full performance pressures. These industries are also suffering a decline in ROA while facing a high, but steady level of competitive intensity. Banking, retail, consumer products and insurance are among the industries that are in this category, with banking at the highest risk to move into the first tier in the near future.
- Tier 3: Bucking the trend in asset profitability erosion -- for now. Healthcare and aerospace and defense are the only industries that have improved their ROA. This can be largely attributed to limited competition reinforced by public policy, especially in the form of regulation that limits entry and movement by competitors within the industry.
"Executives understandably believe that productivity drives higher returns, but that assumption appears flawed," said John Hagel, co-chairman of Deloitte's Center for the Edge. "Looking across industries, there doesn't seem to be any relationship between productivity improvement and increased asset profitability. Companies focus on automation and scale economics to squeeze continuing improvements in labor productivity, but these efforts yield diminishing returns over time. In part, this is because the cost savings are passed through to customers as competition intensifies. Given this performance paradox, firms need to re-evaluate how they create and retain value."
Shift Index findings suggests that the most promising way to reverse performance erosion is to find more creative ways to harness the proliferating knowledge flows enabled and amplified by the nation's digital infrastructure. This is a key driver of the growing bargaining power of customers and creative talent -- which in turn is increasing competitive intensity across many of the industries surveyed. The Shift Index metrics suggest that most companies across these industries are participating in a small fraction of the potential knowledge flows.
"We are adopting the digital infrastructure two to five times faster than previous infrastructures such as electricity, railroads and telephone networks," said Hagel. "Yet most of our institutions and practices are still geared to earlier infrastructures. Businesses need to learn how to create more economic value by more effectively participating in new knowledge flows to refresh their existing knowledge stocks more rapidly, rather than simply exploiting existing knowledge stocks with greater economic efficiency."
The Shift Index also found, with variations across industries, that more than 75 percent of the workforce is not passionate about 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.
Sector-specific Shift Index findings include:
Tier 1
The technology, media, telecommunications and automotive industries are currently experiencing the full force of the Big Shift and represent the best examples of the type of disruption other industries are likely to face in the future.
With dramatic increases in productivity - upwards of 800 percent - telecommunications and technology in particular are prime examples of sectors that experienced innovation and productivity improvement that did not translate into improved corporate performance.
Technology: The industry creating much of the nation's digital infrastructure has not yet made the leap from product innovation to institutional innovation. The ROA has declined by nearly 70 percent despite the highest gains in labor productivity in the U.S. This is due to a level of competitive intensity that has magnified almost four-fold since 1965 and is 30 percent greater than the rest of the economy. Despite Silicon Valley's reputation for entrepreneurial leadership, this sector has a surprisingly low level of employee passion.
Telecommunications: While labor productivity in the telecommunications sector has risen sharply, ROA has plummeted by more than 30 percent. This sector has been profoundly affected by the rapid increase in technology-driven, intermodal competition, which has had a far greater impact on creating a competitive marketplace than the regulatory actions over the past two decades. While the Telecom Act of 1996 laid the groundwork for today's market-based competitive environment, financial returns in the telecom sector have continued to decline since the removal of previously regulated rate-of-return on assets.
Media: The only sector in tier one that has experienced a negative ROA, dropping from 7 percent to negative 4.4 percent, despite gains in labor productivity. This industry has seen competitive intensity double in the last 40 years, with the rise of the Internet as the most powerful driver of this disruption. Traditional media companies have struggled with the combination of being regulated while contending against unregulated competitors, newly powerful consumers and a range of online substitutes for traditional media and entertainment products.
Automotive: Competitive intensity has been largely driven by global competition in the light vehicle subsector and resulted in lower asset profitability, as domestic firms have been unable to quickly adjust their production capacity to meet market demand.
Tier 2
Many sectors of our economy are feeling early effects of the Big Shift but are not yet exhibiting the full impact of the performance pressures.
Banking: Highly vulnerable because the commercial banking side of the business has historically benefited from public policy which has regulated prices for banks over time. Recent trends suggest that there is decreasing protection from public policy resulting in erosion of the industry's ROA over the past couple of years.
Retail: The ROA in the retail sector has fallen 60 percent over the course of four-plus decades, from 6.6 to 3.1 percent, despite labor productivity increases that outpace nearly all other industries studied. However, it is technology's impact on the consumer that has most profoundly affected the industry - as a key driver of the growing bargaining power of consumers and the declining influence of brands, causing performance to fall even as industry consolidation has decreased competitive intensity.
Consumer Products: The consumer products industry has seen a slight erosion of performance since 1965 as consumers and retailers gained strength relative to consumer products companies. Although average ROA dipped through the 1980s and 1990s, it steadily increased from 2000 to 2007, resulting in a relatively static average ROA over the past four decades. This slight drop is considerably smaller than the average decline across all U.S. industries, likely reflecting consolidation in the industry, which reduced the forces of competition.
Insurance: Despite a lack of competitive intensity, the sector's ROA has dropped by 142 percent from 2.6 to negative 1.1 percent. Pending regulatory and demographic change - coupled with increasing competition from outside the industry - may bring increased pressure in the future.
Tier 3
Two industries have actually experienced an increase in asset profitability: healthcare and aerospace and defense. These least affected industries are associated with high levels of regulation and government purchasing activity.
Healthcare: The sector has been and continues to be deeply affected by regulation and public policy at the national and state levels. The ROA in healthcare rose from 1.7 percent in the early 1970's to 3.8% in 2008, an increase of more than 200 percent. Limited competition coupled with regulatory protection has enabled asset profitability in this industry. However, this competitive environment may evolve in the near future, given pending political reforms and increased "consumerism."
Aerospace & Defense: Appears to be an anomaly as the only industry which has not yet been disrupted due to the unique characteristics under which it operates. Procurement policies and national security considerations have a profound influence on this industry and its relationship with its largest customer - the US government. Improvements in ROA and declines in competitive intensity in this industry can be attributed to high barriers to entry from start-up costs including investment in technology and capital requirements.
"The answer to thriving in this environment is not going to be found in product innovation or traditional cost reduction," said Hagel. "Rather, executives need to focus on driving institutional innovation -- redefining roles and relationships across large numbers of institutions. This will be the only way to effectively address the profound trends shaping profitability and competitive success well beyond the current economic downturn."
