The Big Shift

In recent months, I’ve repeatedly made the point that the financial crisis was a symptom, not a cause. Innovation was weaker than expected, private sector job growth outside of healthcare was virtually nonexistent, while real wages and real stock values showed little gains from the late 1990s to the end of 2007, when the recession supposedly started. Most distressingly, stock prices for the nation’s innovative sectors, biotech/pharma and information technology, showed a sharp plunge in real terms from 1998 to 2007.

Now there’s a new report out today from Deloitte’s Center for the Edge which provides additional confirmation that the underlying problems extended well beyond the financial sector, and started well before the housing bubble.

Back in June, the Center—led by John Hagel III, John Seely Brown, and Lang Davison—released a report showing that U.S. corporate return on assets has fallen by 75% since 1965. They suggested this decline in corporate performance was driven by the “Big Shift”—a tremendous increase in competitive pressure, combined with the increasingly pervasive digital infrastructure.

At the time, I told Hagel that I didn’t want to write about his “Big Shift” until I saw industry data, so I could understand which industries were driving the corporate performance decline. Well, the new report from the Center takes a closer look at nine industries, out of which seven show the same pattern of deteriorating corporate performance.

For example, here’s the ROA chart for the tech sector.

As the report says:

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.

There are two industries where corporate performance is still strong, according to Hagel & Co: Aerospace & Defense and Health Care. The report notes:

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

I still have to chew through the report some more. But it’s pretty interesting.

Before it's here, it's on the Bloomberg Terminal.