Deloitte Shift Index: Advances in Labor Productivity
Fail to Drive Profit
Only the Most Heavily-Regulated U.S. Industries Insulated
from Intense Competitive Pressure and Plummeting Return-On-Assets
SAN JOSE, Calif., November 10, 2009 — Despite major improvement in labor productivity over the last four decades, many industries in the United States have experienced alarming decreases in their return-on-assets (ROA). This according to Deloitte’s Center for the Edge, which today released industry-specific findings from its 2009 “Shift Index,” a new economic indicator identifying three waves of disruption that are shaping today’s business landscape.
The findings also indicate that only the most heavily-regulated industries have experienced an improvement in asset profitability.
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 le