Deloitte's 2011 shiftindex 111011
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Deloitte's 2011 shiftindex 111011

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In the midst of an economic downturn, when it is all too easy to fixate on cyclical events, there is real danger of losing sight of deeper trends. Short-term cyclical thinking risks discounting or......

In the midst of an economic downturn, when it is all too easy to fixate on cyclical events, there is real danger of losing sight of deeper trends. Short-term cyclical thinking risks discounting or even ignoring powerful forces of longer-term change.

Deloitte’s Center for the Edge has developed the Shift Index to provide a clear, comprehensive, and sustained view of the deep dynamics changing our world, and what companies can do to address them. The Shift Index consists of 3 indices and 25 metrics designed to make longer-term performance trends more visible and actionable.


Key themes in the 2011 Index include:

ROA (Return on Assets) performance continues its long-term decline due to deteriorating firm performance
Layoffs and other short-term measures taken by firms are not a sustainable solution to improving long-term firm performance
Connected individuals, not companies, are the ones harnessing flows and have more power because of it
Firms have untapped opportunities to reverse their declining performance by embracing pull
Connect the dots

From disruption in the music and entertainment industry to cleaning up oil spills using smart phone apps, these journalistic nuggets help bring to life the key metrics of change captured in the Shift Index.

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  • 1. The 2011 Shift Index Measuring the forces of long-term changeDeloitte Center for the EdgeJohn Hagel III, John Seely Brown, and Duleesha KulasooriyaCore Research TeamShalini BhatiaMichelle LallyJonathon WongKimberly KorinekSarah ScharfSJ Lu 2011 Shift Index Measuring the forces of long-term change i
  • 2. “We are shifting “I believe that most largefrom a world where organizations today are sufferingthe key source of from a crippling disease —strategic advantage hierarchical bureaucracy. This diseasewas in protecting is resulting in remarkable declinesand extracting value in long term return on assets, lifefrom a given set of expectancy of firms and engagementknowledge stocks — of people doing the work, as shown bythe sum total of what studies such as Deloitte’s Shift Index”we know at any point ~ Knowledge Leader and Best Selling Author, Steve Denning, April 12, 2011in time, which is nowdepreciating at anaccelerating pace — “Until now, executives have focusedinto a world in which on two forms of strategic advantage:the focus of value structural and capability-based.creation is effective The Big Shift challenges both. Itparticipation in undermines traditional approaches toknowledge flows” structural advantage by systematically~ NY Times Columnist, reducing barriers to entry andThomas L. Friedman, movement.”Published: January 19, 2010 ~ Bloomberg, December 10, 2009, Are Your Sources of Strategic Advantage Eroding? “Overall, the Deloitte report provides fodder for those, likeBusinessWeek’s Michael Mandel, who argue that the woes of theU.S. economy extend beyond the financial sector and beganshowing up well before the housing bubble.”~ Business Week, November 23, 2009, Why You’d Better Beware of the Big Shift, By HarryMaurer and Cristina Linblad
  • 3. ForewordForeword A lot has changed since the 2010 Shift Index came out. In work from the customer back into your own organization. no particular order, the Euro has been in nearly continual Consider the revenue stream, for starters. A product crisis for many months; the Arab Spring has toppled conception for revenues means that the big money comes autocratic regimes across the Middle East; Occupy Wall from The Sale, when the customer buys the product. A Street and its Occupy brethren inhabit a large number large lump sum of money is paid at that point, and then of city centers across the US amidst persistently high the customer uses that product as he or she wishes. A unemployment; and Steve Jobs finally succumbed to a product-focused business spends relatively little time or long-term illness, much to the dismay of Mac, iPod, iPad, money with the customer after that, until the time comes iPhone (and, one suspects, even PC) users everywhere. for the next sale. This is the Push approach to business. Yes, a lot has changed. Yet one of the most valuable Things are different in a service-oriented company. The aspects of the 2011 Shift Index is its timely reminder that sale of the product is merely the inauguration of the many of the most important trends that will drive our customer relationship, with many subsequent interactions economic lives for the foreseeable future remain largely to follow. And the service-oriented company may offer to unchanged. The 45 year decline in companies’ profitability, transfer the product to the customer in return for a stream as measured by their declining ROA persists, despite of payments, instead of one initial sum. The company temporary fluctuations. The topple rate of leading firms and customer remain engaged throughout the stream of continues to rise (supplemented, perhaps, by a rising payments. A clear example of this is GE’s Power by the topple rate of undemocratic political regimes around the Hour offering for its jet engines. Under this approach, GE’s world). And the competitive intensity confronting firms in customers pay per flight hour, rather than upfront. So GE the global market economy continues to intensify. So the makes money only when the customer’s planes are flying, core trends identified by the Shift Index remain very much which is when the customer makes money. In this way, a as they were before. fixed cost is converted to a variable cost. And GE wants to keep those planes flying every bit as much as its customers There are three elements of the 2011 Shift Index that I do. From Push to Pull. would like to reinforce, due to their resonance with my own research. One that I have recently explored1 is its Another important dimension of the Shift Index is the implications for thinking about one’s business, whether importance it rightly assigns to openness. People, both one makes a product or a service, as a service business. as customers and as creative producers, access a wealth When one conceives the business this way, one learns to of useful knowledge, most of it from outside their own
  • 4. Forewordfour walls. This incredible use and re-use of knowledge Lest this be considered incredibly naïve, consider the mostpermits both economies of scale and economies of scope. recent quarterly income statements from two leadingBy opening up its server infrastructure to others, Amazon innovators. One spent 13.4% of its sales on R&D, whileWeb Services has created a new business that is built on those sales grew 7.3% from a year ago to over $17 billion.the open access it provides to its internal operations. In The other spent only 2.3% of its sales on R&D, yet its salesthe process, it spreads its fixed costs over much more grew 39.0% from a year ago to reach over $28 billion.volume (provided by the external customers using the Which organization is getting more results from beinginfrastructure), making its own costs lower. By allowing connected, from empowered and passionate people, andthird party merchants to use amazon’s web page creation from the pull exerted by its customers? While Microsofttools, amazon achieves economies of scope: customers (the first of these two innovators) is no slouch, few wouldgoing to amazon’s site have the same purchasing dispute that Apple (the second innovator) is realizingexperience whether they are buying books (stocked by greater leverage from its innovation investments. And Steveamazon) or jewelry (stocked by third party merchants). A Jobs’ passing reminds us all of the value of focusing on thevirtuous cycle ensues: the more we purchase, the more individual customer’s experience amidst the overwhelmingamazon knows about our buying habits, the more useful panoply of technological possibilities.amazon becomes to us as a shopping destination, andthe more attractive amazon becomes to those third party So take the time to read this latest Shift Index, as a guidevendors looking for customers. to what is coming over the longer term. It might help you connect with enduring trends that can carry you past theThe final dimension of the 2011 Shift Index I wish to daily distractions and noise, to a more successful business,highlight is its fundamental orientation towards people, with more satisfied customers, thanks to more connectednot towards technology. While there is a lot of technology and empassioned people, both inside and outside yourin these pages, the whole perspective is anchored in a organization.humanistic approach. Focusing on the passion of yourpeople is vital to effective innovation performance. Beingconnected, both within your own organization andespecially outside to many other people, organizations andinstitutions, is central to accessing the knowledge flowsthat bring prosperity. And today’s business empires, orautocratic states, are only temporary structures, destinedto be undermined by the fundamental human desire toopen up, to connect, to inspire, and to collaborate with Henry Chesbroughone another. Author2 and Professor at the Haas School of Business, UC Berkeley 1 H. Chesbrough, Open Services Innovation: Rethinking Your Business to Grow and Compete in a New Era, (Jossey-Bass: San Francisco), 2011 2 H. Chesbrough, Open Innovation: The New Imperative for Creating and Profiting from Technology (Harvard Business School Press), 2003
  • 5. Contents4 Executive Summary6 2011 Shift Index: Key Themes20 Big Shift Overview: Context, Findings, and Implications26 Key Ideas28 Cross-Industry Perspectives40 Shift Index in Practice42 The Shift Index: Numbers and Trends48 2011 Foundation Index68 2011 Flow Index106 2011 Impact Index149 Shift Index Methodology171 Appendix224 AcknowledgementsRead This Focus for New Readers These sections provide a concise introduction to the key ideas behind the Big Shift and this year’s Shift Index. Focus for Seasoned Readers These sections provide new insights and findings captured in this years Shift Index. Connect the Dots New to this years release, these journalistic nuggets help bring to life the key metrics of change captured in the Shift Index. Join the Conversation Participate in the debate by posting your opinion on these propositions. Scan the Quick Response (QR) code from your mobile or follow the Uniform Resource Locator (URL).
  • 6. Executive SummaryExecutive Summary In the midst of an economic downturn, when it is all too This 2011 release of the Shift Index updates all 25 metrics easy to fixate on cyclical events, there is real danger of and finds new revelations and examples. This year, we also losing sight of deeper trends. Short-term cyclical thinking explore several themes in depth that have influenced our risks discounting or even ignoring powerful forces of thinking on the Big Shift. longer-term change. To provide a clear, comprehensive, and sustained view of the deep dynamics changing our A few of the key themes that we will discuss this year are: world, Deloitte’s Center for the Edge has developed the • ROA performance continues its long-term decline due Shift Index. The Shift Index consists of 3 indices and 25 to deteriorating firm performance. This year, we explore metrics designed to make longer-term performance trends ROA performance in context of two macro trends, more visible and actionable. Mergers & Acquisitions (M&A) activity and declining interest rates, which have been put forth to explain Our first release of the Shift Index in 2009 highlighted (or explain away) the observed decline. Based on our the decline in firm performance that has been playing out analysis, we contend that the declining trend in ROA for decades. Remarkably, in 2009, the Return on Assets reflects fundamental firm performance. (ROA) for U.S. firms had fallen to less than one-third of • Layoffs and other short-term measures taken by firms 1965 levels while improvements in Labor Productivity had are largely the cause of the recent uptick in ROA. modestly improved over the same period. While there As performance pressures mount, firms are reacting has been a modest improvement in ROA over the past by taking short-term measures and pushing hard on couple of years as the downturn eases up, we believe employment and payroll as the principal cost-cutting that this is simply a short-term adjustment similar to the levers. While offering short-term relief, current efforts improvements in ROA seen in previous economic cycles. taken by firms to eliminate jobs are not sustainable The long-term trend is still an underlying reality and there drivers of firm performance going forward. is no reason to believe that these short-term adjustments, • Connected individuals, not companies, are the ones achieved largely through significant layoffs, mark a reversal harnessing flows and have more power because of it. of the long-term trend. Declining information asymmetry, lower switching costs, and emerging trends, such as a technology-enabled Additional findings of our Shift Index include the following: resources sharing, are increasing Consumer Power and • The ROA Performance Gap between winners and losers providing additional options for consumption. While has increased over time, with the “winners” barely individuals are leveraging knowledge flows to increase maintaining previous performance levels, while losers their power in the marketplace, this hyper-connectivity experience rapid deterioration in performance. also drives volatility in the economic, social, and political • The “topple rate,” the rate at which big companies arenas. lose their leadership positions, has more than doubled, • Firms have untapped opportunities to reverse their suggesting that “winners” are in a precarious positions. declining performance by embracing pull. To accomplish • Competitive Intensity in the United States has more than this, firms must develop and encourage passionate doubled during the last 40 years. workers at every level of the organization. Additionally, • While the performance of U.S. firms is deteriorating, companies must tap into knowledge flows and expand the benefits of productivity improvements appear to be the use of powerful tools, such as social software to As used in this document, “Deloitte” means Deloitte LLP captured in part by creative talent, which is experiencing solve operational/product problems more efficiently and and its subsidiaries. Please see greater growth in total compensation. Customers also effectively as well as to discover emerging opportunities. www.deloitte.com/us/about appear to be gaining and using their market power for a detailed description of the legal structure of Deloitte LLP as reflected in increasing Consumer Power and Brand Given these trends, we cannot reasonably expect to see a and its subsidiaries. Disloyalty. significant or sustainable easing of performance pressure • The exponentially advancing price/performance capability as the current economic downturn begins to dissipate — 3 More than just bits and bytes, this digital infrastruc- of computing, storage, and bandwidth is driving an on the contrary, all long-term trends point to a continued ture consists of institutions, adoption rate for our new “digital infrastructure”3 that erosion of performance. So what can be done to reverse practices, and protocols that is two to five times faster than previous infrastructures, these performance trends? together organize and deliver the increasing power of such as electricity and telephone networks. digital technology to business and society. 4
  • 7. Executive SummaryThe answer can be found in the three waves of deep In the end, these innovations will lead to achange occurring in today’s epochal “Big Shift.” Thefirst, the “Foundation” wave, involves changes to the fundamental shift in the rationale for institutionsfundamentals of our business landscape catalyzed by theemergence and spread of digital technology infrastructure from scalable efficiency to scalable learningand reinforced by long-term public policy shifts toward as firms use digital infrastructure to createeconomic liberalization. The metrics in our FoundationIndex monitor changes in these key foundations and environments where performance improvementprovide leading indicators of the potential for changeon other fronts. Changes in foundations have systemati- accelerates as more participants join.cally and significantly reduced barriers to entry and tomovement, leading to a doubling of competitive Intensity. where we are in the Big Shift and what to anticipate in the future. Current metrics indicate that we are still in theThe second, the “Flow” wave, focuses on the key drivers first wave of the Big Shift and facing challenges in movingof performance in a world increasingly shaped by digital forward into the second. Changes still manifest them-infrastructure. This second wave looks at the flows of selves much more as challenges rather than opportunitiesknowledge, capital, and talent enabled by the foundational because our institutions and practices are still geared toadvances, as well as the amplifiers of these flows. Because earlier infrastructures. At the same time, an understandingof the rapid change, higher unpredictability and volatility of these three waves leads to significant insights about thecreated by the Big Shift, knowledge flows are a particular moves required to reverse current performance trends:key to improving performance. Developments on this frontare lagging behind the foundations metrics because of the • Deeper, yet strategic, restructuring of firm economicstime required to understand changes in foundations and to generate maximum possible value from existingdevelop new practices consistent with new opportunities. resources; • Development of new management practices to moreThe third, the “Impact” wave, centers on the consequences effectively catalyze and participate in growing knowledgeof the Big Shift. Given the time it will take for the first flows; andtwo waves to play out and manifest themselves, this third • Significant innovation in institutional arrangements towave—and its related index—provides an even greater drive scalable participation in knowledge flows and reaplagging indicator. While current trends in firm performance the increasing returns to performance improvement.indicate sustained deterioration, we expect, over time, thatperformance will improve as firms begin to figure out how The Shift Index is updated regularly to track changes overto participate in and harness knowledge flows. Doing so time and measure movement along the Big Shift. Wewill require significant institutional innovations, not just have designed this year’s Shift Index both as a stand-alonechanges in practices, resulting in value creation through summary of the findings to date and as an update forincreasing returns performance improvement. In the end, those who have read previous editions.we expect these innovations to lead to a fundamental shiftin the rationale for institutions from scalable efficiency to In response to growing interest from executives, thescalable learning as firms use digital infrastructure to create Center for the Edge is also further researching which flowenvironments where performance improvement accelerates metrics at the individual firm level, could be drivers ofas more participants join. Early signs of these changes are performance, ultimately captured in operating and financialvisible in emerging open innovation and process network metrics. In particular, we are investigating the ability ofinitiatives underway today. companies to participate effectively in a larger and more diverse range of knowledge flows, with the intent of iden-The Shift Index seeks to measure these three waves of tifying a set of flow metrics that can be drivers of perfor-deep and overlapping change operating beneath the visible mance metrics for the firm to monitor on an ongoing basis.surfaces of today’s events. The relative rates of changeacross the three indices can help executives understand 2011 Shift Index Measuring the forces of long-term change 5
  • 8. 2011 Shift Index: Key ThemesKey Themes2011 Shift Index: Challenging times and opportunities: Unemployment, volatility, and worker passion in an era of constant change Introduction infrastructure and its amplifying effect on change. The Big Shift is a story of long-term trends and the Finally, we conclude by discussing how firms can behave increasing pressures on firms in an environment of more like these connected individuals by tapping into constant, and disruptive, change. The Shift Index was knowledge flows and stoking worker passion. By creating developed in 2009 to help describe and quantify the a passionate workforce and giving these workers ample dimensions of the Big Shift. With this third edition of the access to flows of knowledge, corporations can drive Shift Index report, we have updated our 25 metrics and real, sustainable improvement and begin to reverse their gone deeper into a few dimensions of the Big Shift. We long-term performance deterioration. hope to entice new readers and provide fresh perspectives to those we have connected with in the past. We have ROA Continues its Long-Term Decline Due to explored our metrics again, finding new insights and Deteriorating Firm Performance examples, and for each metric, relayed a story that we One of the central themes of the Shift Index, and the topic hope will resonate with the reader and make the metric which generates the most questions each year, is that asset come to life. profitability (ROA) has shown a downward trend over the past four decades; a trend illustrating a steady decline In this foreword, we explore several themes that have in firm performance that not many have even noticed, influenced our thinking on the Big Shift. First we continue much less investigated. Indeed, there continues to be a to explore our most discussed finding: the persistent profound cognitive dissonance around this point: on one decline in firm performance, manifested in declining asset hand, we all acknowledge experiencing increasing stress profitability. We will address two challenges put forth to as performance pressures mount; on the other hand, we explain the decline in Return on Assets (ROA) as a result of seem unwilling to accept that all of our efforts continue to external factors. Analysis of these challenges suggests that produce deteriorating results. they do not explain away the sustained decline in ROA over a period of more than four decades. The challenges to our findings prompted us to undertake additional analyses — to test, re-test, and validate our Next, we add our perspective to the public discourse approach, data, and assumptions. We welcome and around the hot-button topic of unemployment, presenting encourage such conversations as they test our thinking, our findings from the perspective of firms, an often open our minds to new possibilities, and bring us neglected player in this discussion. We argue that cuts to collectively closer to discovering an answer for declining headcount, while providing relief in the short-term, are firm performance. only a temporary balm for more fundamental performance issues. Although such measures may help to explain the In last year’s edition of the Shift Index, we addressed recent upturn in asset profitability, we believe that only by several questions surrounding the decline in ROA for embracing the changes required by the Big Shift can firms the overall economy. We began by analyzing two other be able to reverse their declining performance in the long measures closely related to ROA — Return on Invested run. Capital (ROIC) and Return on Equity (ROE). For each of these proxies, we found a similar downward trend, further This finding, along with the insights provided by our 25 bolstering our argument for declining firm performance. metrics, left us with a question we wished to explore: if The downward trend of ROE was not as dramatic as that knowledge flows are increasing, and firms are not tapping of ROIC or ROA. But, as stated in the 2010 Shift Index, ROE into them, then who is? The answer can be found in what may vary depending on a firm’s capital structure. In short, we refer to as the ‘connected individual.’ In this section, it does not provide the same comprehensive picture of a we discuss the social and economic impacts brought about firm’s fundamental performance as ROA does. by these individuals, testaments to the power of the digital 6
  • 9. What’s New 1 2011 Shift Index:Exhibit 1: Summary of Forces and Impact on ROAExhibit 1: Summary of Forces and Impact on ROA Key Themes Return = Return on assets (ROA) Assets Need to insert the starting points of all Economic trend Resulting impact of company Expected impact on ROA trend trendlines • Service-based companies tend to have • Assuming constant returns, as assets Transition from product fewer intangible assets than product-based reduced, ROA should have improved over to service economy companies time • Depends on the return over time; current impairment rules would not result in write • Firm assets are market valued at point of down of goodwill and certain other intangibles sale, usually resulting in an increase over Increased M&A activity if subsequent performance is equal to or book value being added to the acquiring better than expectations at the acquisition firm’s balance sheets date; therefore, ROA should accurately reflect market performance • Companies shed assets related to asset- • Assuming constant returns, as assets Outsourcing/ offshoring intensive operations (e.g., manufacturing, reduced, ROA should have improved over call centers) time • Goodwill and many intangible assets are not • Intangible assets make up a larger portion of Increased importance of amortized. In the absence of impairment total assets and are increasingly important intangible assets writedowns of these assets, ROA should for driving competitive success reflect market performanceSource: Compustat, Deloitte AnalysisSource: Compustat, Deloitte Analysis In addition to investigating these two proxies, we also Although intangibles assets (including but not limited to considered several alternate explanations for the decline Goodwill) have grown from 0.47% of the total asset base in ROA. These included the transition from a product in 1965 to 5.54% in 2010, these intangible assets continue to a service economy and the growing prevalence of to constitute a minor portion of the total asset base. Thus, outsourcing. While these topics provided interesting we do not believe that this increase in intangible assets is a additional dimensions of the changes we are experiencing, primary driver of economy-wide Return on Assets.1 ultimately found that the data did not support either we © 2011 Deloitte Touche Tohmatsu argument. Again, we returned to our original finding: ROA Interest Rates & ROA is following a downward trend due to the deterioration of The second alternative explanation proposed is that the fundamental firm performance. decline in ROA is a natural and inevitable consequence of declining interest rates over this time period. ProponentsIn the 2011 edition of the Shift Index, we will continue our of this argue that when rates are low, there are implicitlyopen dialogue by investigating in greater depth the impact lower expectations on all invested capital. Becauseof two other challenges we have received. Two common investors cannot get better returns by putting their moneyobjections we address this year are: elsewhere, it eases the performance pressure on assets. On one level, it is easy to understand how one might draw this• Increased M&A activity has driven down ROA by conclusion. Over the past few decades, both interest rates increasing Goodwill and other intangible assets, thus and ROA have shown a strong decline. However, here we growing the asset base denominator of ROA must reinforce our core belief in the value of longitudinal• Lower interest rates have caused the decline in ROA; as study. Though public policy, economic conditions, and the the cost of capital declines, the expected returns on any like may change from decade to decade, creating false invested capital also decreases positives, it is the long-term trends that truly illuminate changes in firm performance and can be used to deriveThe M&A Challenge sound explanations.First, let us begin by addressing the Mergers & Acquisitionsargument. As shown in Exhibit 2, both the absolute Looking at the longitudinal data in Exhibit 3, it becomesnumber of transactions and the total value of these clear that ROA is not declining as a result of falling interesttransactions peaked in 2000 and have been on the decline rates. For the first third of our analysis, from 1965 to 1981,since then. interest rates rose from 4.1% to 16.4%. During this same period, however, ROA declined by almost 30% from 4.7% 2011 Shift Index Measuring the forces of long-term change 7
  • 10. Join the ConversationKey Themes2011 Shift Index: The long-term decline in performance is a result of firms’ slow responses to the Big Shift. www.deloitte.com/us/DecliningPerformance Exhibit 2: M&A Activity and Goodwill Created, ($, Billions), (1992–2011) Exhibit 2: M&A Activity and Goodwill Created ($, Billions) (1992-2011) 700 900 800 600 Sum of Goodwill Created through M&A Activity Number of M&A transactions per year 700 500 600 per year ($, Billions) 400 500 300 400 300 200 200 100 100 0 0 1992 1997 2001 2005 2009 Number of M&A Transactions Sum of Goodwill Created, $B Source: Compustat, Deloitte Analysis Source: Compustat, Deloitte Analysis Exhibit 3: Federal Reserve Interest Rate and Economy ROA (1965-2010) Exhibit 3: Federal Reserve Weighted Annual Interest Rate and Economy ROA, (1965-2010) 18.0% 1981 5.0% 16.0% Overall Economy Return on Assets (%) Federal Reserved Weighted Annual 14.0% 4.0% 12.0% Interest Rate (%) 3.0% 10.0% 8.0% 1 2.0% 6.0% 4.0% 1.0% 2.0% 0.0% 0.0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 FED Interest Rate ROA Linear (ROA) Linear (Fed Interest Rate (1965-1981) Linear Fed Interest Rate (1981-2010) Source: Data from Compustat, Deloitte analysis 8
  • 11. 2011 Shift Index: Key Themesto 3.4%. While interest rates and ROA have shown a significant price pressures on more traditional producers.similar trend in recent decades, one cannot draw causality As technology makes sharing knowledge easier and morebetween the two. Thus, we can assume that ROA decline prevalent, virtual flows will become increasingly importantcannot be explained away merely as the result of falling drivers of competition.interest rates. While some firms are embracing Pull tactics, such asIn fact, we believe that the declining interest rates of scalable learning, to overcome mounting performancethe past two decades may be shielding firms from the pressures, most are still using outdated Push businessfull effects of the significant decline in performance. practices, reacting to one-off problems rather than findingBecause interest rates are so low, investors have had lower innovative ways to circumvent them. These persistentexpectations of invested capital. When interest rates rise, issues are only exacerbated in economic downturns- buthowever, there will be even more pressure on companies how do firms respond in particularly tough times? Weto improve their performance. have found that firms by and large are taking short-term measures in an effort to salvage quarterly earnings.Given this analysis, we still contend that the long-term Like plugging holes in a ship, these measures can offerdecline in performance is the result of firms’ slow response temporary relief. However, over time, the underlyingto the Big Shift. If anything, the imperative to adapt to the structural issues must be addressed if firms want to addresschanges in the Big Shift will become all the more pressing the real causes of their performance challenges.as interest rates- and expectations- rise in the future. The Layoff ‘Solution’Layoffs and Other Short-Term Measures Taken by Unemployment is a hot button topic in political discourse,Firms are Largely the Cause of the Recent Upturn media coverage, and around the dinner table. The socialin ROA effects of unemployment have been covered from manyPerformance Pressures are Mounting angles: the long-term impact on youth, the gender divideTake one glance at the Sunday business section, and it is (men have endured three-quarters of job losses since theclear that today’s firms are facing tremendous pressures beginning of 2008), and the disproportionate impact onand scrutiny. It is not simply a matter of a poor economic already hard-hit urban neighborhoods, just to nameclimate. As our Competitive Intensity metric shows, market a few.4concentration has steadily decreased, meaning that moreand more firms are battling it out for top market shares. A less-discussed topic, however, is the impact on firms.Not only has the intensity of competition increased, but Why are firms laying off workers? What is the effectalso the velocity and frequency at which changes are on firm performance? Are these employment trendsoccurring. As described by our Firm Topple Rate metric, sustainable in the long run?firms are dropping out of their ROA rankings at anincreasing rate since 1965. Not only is overall performance Headcount is one of the key levers firms use to improvedeclining, but firms are finding their time at the top of the performance, particularly in poor economic climates.pile to be all the more tenuous. Payroll expenses primarily accrue to Cost of Goods Sold (COGS) and Selling, General, and Administrative ExpenseIn parallel with Competitive Intensity, Virtual Flows, (SG&A). When a firm lays off workers, the firm’s costsincluding inter-firm knowledge flows, wireless minutes, decrease, and assuming constant revenue, returnsand Internet activity, have risen steadily over time. increase. Thus, ROA will increase following periods ofSome participants are harnessing these flows to add heavy layoffs. This made us curious about the relationshipsignificant competitive pressures in the marketplace. between national unemployment (an indicator of theThe open source model, for example, was first adopted extent to which companies are using layoffs to achievein software development and is now gaining traction in financial performance) and ROA. Our analysis shows aother arenas such as Media, Government, and Scientific strong relationship between unemployment and ROA.Research. This model of development, tapping into anincreasingly diverse range of virtual flows, has allowed new The data reveals that similar patterns have emergedgenerations of producers to overcome the limitations of multiple times since 1965 (see Exhibit 4). When cyclicaltraditional business models by leveraging a vast pool of economic pressures mount on firms, they are forcedtalent, accelerating the development cycle, and has placed to address the severe and short-term pressure on 4 Peck, Don. “How a New Jobless Era will Transform America.” The Atlantic, March 2010, http://www.theatlantic.com/ magazine/archive/2010/03/how- a-new-jobless-era-will-transform- america/7919/2/?single_page=true 2011 Shift Index Measuring the forces of long-term change 9
  • 12. Key Themes2011 Shift Index: Exhibit 4: Return on Assets and U.S. Unemployment Rate, (1976–2010) Exhibit 4: ROA and U.S. Unemployment Rate (1976-2010) ’07-’10: Unemployment from ’81-’82: Unemployment from 7.6%-9.7% 4.6%-9.6% 12.0% ’82-’83: ROA from 2.7%-2.8% ’08-’10: ROA from 0.5%-1.7% 4.5% ’00-’03: Unemployment from 4.0%- 4.0% Overall Economy Return on Assets (%) 10.0% 6.0% Unemployment Rate (%) ’01-’06: ROA from 0.2%-2.2% 3.5% 8.0% 3.0% 2.5% 6.0% 2.0% 4.0% 1.5% ’91-’92: Unemployment from 6.8%- 7.5% 1.0% 2.0% ’92-’96: ROA from 1.6%-2.3% 0.5% 0.0% 0.0% 1976 1980 1984 1988 1992 1996 2000 2004 2008 Unemployment Rate ROA Source: U.S. Bureau of Labor Statistics, Compustat, Deloitte Analysis Source: U.S. Bureau of Labor Statistics, Compustat, Deloitte Analysis performance. In these times, firms use layoffs as a release competitive economy, companies are seeking to preserve valve, triggering a spike in the unemployment rate. Exhibit profits at the expense of employment. This increasing 4 shows that following a short lag, Return on Assets rises reliance on layoffs is not a sustainable practice in the as well. However, all these efforts to be more efficient, long-run; in order to reverse declining performance, firms take people out, and drive productivity are proving cannot focus solely on short-term, reactive solutions. insufficient in the face of long-term trends. While the Labor Productivity metric has increased by almost 2.5 times from The Automation Paradox 1965 to 2010, firm performance has continued a steady We have argued here that the recent upturn in ROA decline. reflects short-term and largely unsustainable measures rather than the more fundamental changes required 4 While companies have long used layoffs as a means to cut to respond to the mounting pressures of the Big Shift. costs, the practice has become especially prevalent in more However, how does one reconcile this with the prevailing recent economic downturns. As explained in a McKinsey belief that automation is driving sustained productivity Global Institute report, management in the 1960’s and growth and making workers dispensable? 1970’s considered labor to be a ‘quasi-fixed’ resource since they had already invested in their training and workers held It is true that firms are finding ways to automate low firm-specific knowledge that was not easily transferable. In complexity, and increasingly, mid-complexity positions. tough times, firms were less likely to lay off large numbers; Indeed, the rapid adoption of self-checkout at retail they were instead willing to take a hit to profit and locations has shown that even some face-to-face customer productivity so that workers could drive recovery faster on interactions can be replaced with technology. However, the back end.5 as shown in Exhibit 6, Fixed Investment IT Spend in 2000 was almost three times as high as in 2010, whereas As shown in Exhibit 5, employment has constituted unemployment was only 4.0%, as compared to 9.6% in an increasingly larger portion of Real GDP loss in each 2010. Given these numbers, it would be difficult to make subsequent recession since the event of 1973-1975. the case that the significant recent increase in layoffs is GDP loss measures the severity of a downturn on a due to a sudden surge in automation. While IT spend macroeconomic level. Firms’ decisions whether or not to rose significantly between 2009 and 2010 in parallel with lay off workers during these recessions dictate the degree the unemployment rate, this increase marked a return to to which employment bears the brunt of the downturn pre-crash levels of investment. and the degree to which firms absorb GDP loss internally, taking a hit to productivity. As shown in a McKinsey Global Firms are seeking increased employment flexibility by 5 James Manyika et. all. “An Institute study, where once companies were shielding relying on short-term, part-time, or contract workers. Economy that Works: Job Creation and America’s Future.” McKinsey workers and absorbing losses themselves, in this globally In particular, routine and administrative tasks are being Global Institute Report. June 2011. <http://www.mckinsey.com/mgi/ publications/us_jobs/index.asp> 10
  • 13. Join the Conversation 2011 Shift Index:Layoffs are not a sustainable solution to improvinglong-term firm performance. Key Themeswww.deloitte.com/us/Layoffs 2011 Shift Index Measuring the forces of long-term change 11
  • 14. Key Themes2011 Shift Index: Exhibit 5: Contribution to Change in Real GDP During Recessions, (1973–2009) Exhibit 5: Contribution to Change in Real GDP During Recessions (1973-2009) Compounded quarterly growth rate peak to trough (%) Compounded quarterly growth rate peak to trough (%) 100%= -0.65 -0.53 -0.45 -0.27 -0.70 100% 90% Percentage contribution to change in real GDP (%) 32% 80% 51% 70% 75% 60% 50% 98% 98% 40% 68% 30% 49% 20% 25% 10% 0% 2% 2% 1973-75 1981-82 1990-91 2001 2007-09 Productivity Employment 1Calculated from the onset of recession torecession GDP. Calculations use real GDP estimate (2005 chained dollars) and total employment (full-timeemployment Note: Calculated from the onset of trough of to trough of GDP. Calculations use real GDP estimate (2005 chained dollars) and total and part-time) for workers agefor workers age 18 and over (full-time and part-time) 18 and over Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, McKinsey Global Institute Source: U.S. Bureau of Labor Statistics, U.S. Bureau of Economic Analysis, McKinsey Global Institute Analysis Analysis pushed out around the world to temporary workers, often and demand from the market, which may translate to a in remote locations, propelled by digital infrastructure and more persistent breed of unemployment, particularly for sites, which make managing virtual resources easier. In low-skilled workers. 2010, the number of part-time workers reached a new high of 19.7% of all employees. According to one survey, 2 The automation and flexible staffing of jobs have largely 58% of firms expected to use more part-time, temporary, been focused on routine tasks, and thus, have diminishing or contract employees over the next 5 years.6 returns. There are certainly examples of firms using flexible employment to drive real productivity gains and improve At the same time, there is a growing compensation performance; however, these practices have not been gap between high-skilled and low-skilled work.7 Skilled, widely adopted in the market. Ultimately, most firms or ‘creative class,’ workers are increasingly critical to a are still engaging in Push tactics to deal with immediate firm’s profitability and, as a result, these skilled workers problems. As these companies eliminate jobs, they squeeze have increased bargaining power with their employers, harder on the remaining workers to get more output. reinforced by greater visibility into alternative employment While firms can push hard on employment for the sake options than ever before. As shown in our Returns to of productivity in the short-term, it is not a sustainable Talent metric, creative class workers are garnering higher practice for long-term growth. compensation and market power because of these advantages. As shown in the repeated cycles of unemployment in Exhibit 4, these short-term responses to longer-term Lower skilled workers have less bargaining power and pressures are not sufficient to address the real causes of therefore feel the brunt of the increasing performance declining performance. It is only when firms embrace the 6 James Manyika et. all. “An pressure on companies. Moreover, as jobs return to the institutions and practices required to drive scalable learning Economy that Works: Job Creation and America’s Future.” McKinsey economy, they are in highly-skilled service sectors, such and tap into the digital underpinnings of the Big Shift will Global Institute Report. June 2011. as health care, and not in those industries hardest hit. they be better positioned to see a sustainable upward <http://www.mckinsey.com/mgi/ publications/us_jobs/index.asp> This means a growing divide between the supply of skills trend in ROA, rather than simply representing cyclical 7 “The Great Mismatch.” The Economist, September 10, 2011. <http://www.economist.com/ node/21528433> 12
  • 15. Join the Conversation 2011 Shift Index: Consumers are gaining more power than firms because they are quicker to adopt disruptive technologies. Key Themes www.deloitte.com/us/ConsumerPower What’s NeExhibit 6: 6: Unemployment andInvestment IT Spend Contributions to Real GDP, (1997–2010) Exhibit Unemployment and Fixed Fixed Investment IT Spend Contributions to Real GDP (1997­ 2010) - 12.00% 1.00% 0.80% 10.00% IT Contributions to Real GDP (%) 0.60% Unemployment Rate (%) 8.00% 0.40% 6.00% 0.20% 4.00% 0.00% 2.00% -0.20% 0.00% -0.40% 1997 1999 2001 2003 2005 2007 2009 Unemployment Rate Fixed Investment IT Contributions to GDPNote: ITCalculated as the sum of Fixed is calculated as thesales of Fixed Investment final sales of Communication equipment Note: Spend Contribution to Real GDP Investment final sum of Computers, Software, and Computers, Software, and Communication equipment Source: Bureau of Economic Analysis, Compustat, Deloitte AnalysisSource: Bureau of Economic Analysis, Compustat, Deloitte Analysis noise. When cyclical economic pressures mount on Connected Individuals, Not Companies, are firms, they are forced to address the severe Harnessing Flows — and Have More Power Because of It and short-term pressure on performance. In In decades past, the possession and protection of stocks of these times, firms use layoffs as a release valve, knowledge set apart the powerful from the uninformed. Today, however, it is one’s ability to harness flows of triggering a spike in the unemployment rate. knowledge, made possible by the digital infrastructure, which gives advantage. But if companies are not tapping 47% of respondents strongly agreed that there wasn’t into these increasing flows to create value, then who much cost associated with switching between brands. Only6 © 2011 Deloitte Touche Tohm is? The answer is the “connected individual,” whether 6 and 7% of respondents strongly disagreed with either of acting as individual consumers or as creative talent, who these statements, respectively. Consumers are leveraging harnesses flows to exert power in the marketplace and increased information to make real-time comparisons society in unprecedented ways.. between prices and product features before they even get to the store. And for firms, this means it is more difficult to Consumer Power and the Connected Individual use information asymmetry to their competitive advantage. One clear outcome of this phenomenon is an upward trend in our Consumer Power score, which measures the While consumers perceive themselves as having more value captured by consumers based on the degree to information, we wondered if they were changing their which consumers perceive they have choices, convenient purchasing decisions in a way that affects company access to and information about those choices, access to earnings. According to our Brand Disloyalty metric, customized offerings, the ability to avoid marketing efforts, consumers are starting to view brands in the same and minimal switching costs. In 2011, 49% of consumers categories as more interchangeable. As a result, they surveyed strongly agreed that they have more information are less likely to “buy in” to traditional advertising and about brands and products. And as shown in Exhibit 7, 2011 Shift Index Measuring the forces of long-term change 13
  • 16. Key Themes2011 Shift Index: Exhibit 7: Consumer Power, (2011) Exhibit 7: Consumer Power (2011) Strongly Disagree Strongly Agree 1 2 3 4 5 6 7 Top 2 There are a lot more choices now in this category 1 than there used to be 3% 3% 7% 26% 20% 20% 21% 41% 2 I have convenient access to choices in this category 16% 12% 12% 20% 16% 12% 12% 24% There is a lot of information about brands in this 3 category 3% 3% 5% 21% 19% 22% 27% 49% 4 It is easy for me to avoid marketing efforts 7% 5% 10% 26% 16% 17% 18% 35% I have access to customized offerings in this 5 category 9% 7% 9% 27% 17% 16% 15% 31% There is not much cost associated with switching 6 away from this brand 4% 3% 5% 20% 21% 23% 24% 47% Source: Synovate, Deloitte analysis Source: Synovate, Deloitte analysis Consumers are leveraging increased information companies use in running their internal applications. Firms such as ZipCar prove how business models based to make real-time comparisons between prices on sharing can both grow the market and capture share from traditional incumbents. A single ZipCar, for and product features before they even get to example, is estimated to replace the need for 15-20 the store. And for firms, this means it is more privately-owned cars, posing a significant threat to car dealerships in addition to the traditional car rental firms.9 difficult to use information asymmetry to their At the same time, ZipCar extends the car rental market to college campuses and other consumers previously competitive advantage. excluded from reliable access to a vehicle. Both rental companies and auto manufacturers have borrowed from are instead leveraging new knowledge flows to alter the ZipCar sharing model in hopes of gaining access to their purchase decisions. Homemakers, who often make these underserved markets. The passage of legislation in purchase decisions for the household, have seen the California that amends insurance law and permits auto 7 highest jump in brand disloyalty, suggesting that brands owners to share their private vehicles is a telling example no longer hold the clout for consumers they once did. of how these emerging trends, made scalable by the digital Additionally, consumer trust in firms has declined from infrastructure, are becoming mainstream. 59% in 2008 to 46% in 2011, according to the Edelman Trust Barometer.8 Firms can no longer rely on customers Growing Pains of the Big Shift “shopping blind” and buying out of trust and loyalty. The notion of empowering individuals through knowledge Instead, they must win the hearts and wallets of an transfer is significant and seductive. In a world where increasingly brand-agnostic and mistrustful population. consumers can widely disseminate knowledge and choose their preferred means for acquiring goods and Emerging Trends in Consumer Choice services (buying, renting, borrowing), end-users can push Technology is also enabling other consumer trends, some back on firms, forcing them to be more transparent, to 8 Respondents were posed the question “How much do you trust of which have significant implications for businesses price competitively, and to engage in dialogue with their business to do what is right?” and the market. One such trend is the growth of a customers. While these are positive outcomes of the digital 2011 Edelman Trust Barometer, Edelman, January 2011< http:// ‘sharing economy,’ which is increasing the power of infrastructure, society is experiencing growing pains along www.edelman.com/trust/2011/ uploads/Edelman%20Trust%20 collective individuals by providing additional options the way; today’s increasingly inverted pyramid of power Barometer%20Global%20Deck. for consumption. While the proclivity to share is by no is driving greater volatility in the economic, social, and pdf> 9 Keegan, Paul. “Zipcar- The best means new, technology has enabled the sophisticated political arenas as hyper-connected individuals tap into new idea in business.” CNN Money, August 27, 2009. < http:// coordination of resources, from smartphone applications increased flows of knowledge. money.cnn.com/2009/08/26/news/ for accessing shared car services to the cloud platforms companies/zipcar_car_rentals. fortune/> 14
  • 17. 2011 Shift Index:Exhibit 8: Economy-wide Stock Price Volatility, (1972-2010) Key Themes Exhibit 8: Economy-wide Stock Price Volatility (1972-2010) 0.030 0.025 Standard Deviations 0.020 0.015 0.010 0.0120 0.005 0.005 0.000 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 Stock Price Volatility Linear (Stock Price Volatility) Source: CRSP US Stock Database ©200903 Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business,Source: CRSP US Stock Database ©200903 Center f or Research in Security Prices (CRSP®), The Univ ersity of Chicago Booth School of Business, Deloitte analy sis Deloitte analysis The power of individuals to create market disruptions At the intersection of these social and economic has been put into sharp relief by the global recession. disruptions is a real and growing political volatility, With greater access to information, both factual and characterized by faster cycles of change. As individuals questionable, an already fearful and reactive public is become more empowered, the change they are affecting causing significant and oftentimes unanticipated shifts in has real consequences- both in the United States and economic activity. However, this volatility is not just a side abroad. As Tom Friedman writes, “This globalization/I.T. effect of a poor economic climate; it is an outcome of revolution is also ’super-empowering’ individuals, enabling long-term changes brought about by the Big Shift. them to challenge hierarchies and traditional authority figures — from business to science to government.2As shown by the Stock Price Volatility index data, there Footer It is also enabling the creation of powerful minorities © 2011 Deloitte Touche Tohm has been a long-term increase in stock price volatility (see and making governing harder and minority rule easier Exhibit 8). The many online and on-air financial gurus that than ever.11 Egypt provides perhaps the most striking have emerged, with their legions of loyal fans, are likely example — leveraging the digital infrastructure, the large one factor contributing to markets movements — at least youth population has banded together and rallied for in the short-run. political reform. The incarceration and trial of Egyptian autocrat Hosni Mubarak for allegedly ordering violence Not only are individual investors capable of driving short- against peaceful demonstrators is a testament to how term fluctuations in the marketplace, groups are also “the power-pyramid is being turned upside down” and leveraging the digital infrastructure in socially disruptive individuals are affecting true change on a national, and ways, generating greater social volatility. The London Riots global, platform.12 and youth flash mobs in Philadelphia demonstrate the power of the digital infrastructure to organize and rally Firms Have Untapped Opportunities to Reverse individuals faster and more visibly than ever before. On Declining Performance by Embracing Pull August 8, 2011, in the heat of the London Riots, 1 in every As of today, individuals have largely been the beneficiaries 170 U.K. internet visits was to Twitter, and the Twitter of flows, leveraging them to increase their own power and 10 “London Riots cause traffic spike on Twitter.” Experian Hitwise. handle ‘LondonRiot’ received over 1.1 million tweets.10 drive change. And for firms caught in a long-term trend of August 9, 2011. < http:// weblogs.hitwise.com/james- While demonstrations and rallies were disruptive social declining performance, this transfer of power to end-users murray/2011/08/london_riots_ forces throughout the 20th century and much earlier, the is certainly a driver of increasing performance pressure. cause_traffic_spi.html> 11 Friedman, Thomas. “A Theory of digital infrastructure allows impassioned individuals to However, companies have untapped opportunities to “act Everything (Sort Of).” New York Times, August 13, 2011 < http:// disseminate knowledge faster, stoke the emotions and like consumers” and reverse their declining performance. www.nytimes.com/2011/08/14/ interests of others, and catalyze unrest at a pace and scale To accomplish this, firms must consider fostering opinion/sunday/Friedman-a- theory-of-everyting-sort-of. previously unthinkable. passionate workers at every level of the organization. html?_r=3&ref=unemployment> 12 Ibid. 2011 Shift Index Measuring the forces of long-term change 15
  • 18. Join the ConversationKey Themes2011 Shift Index: Worker Passion drives interfirm knowledge flows, which can significantly improve firm performance. www.deloitte.com/us/WorkerPassion Exhibit 9: Passion and Questing Disposition, (2011) Exhibit 9: Passion and Questing Disposition (2011) 80% 72% 70% Percentage of respondents by disposition 61% 60% 50% 48% 40% 36% 30% 20% 10% 0% Disengaged Passive Engaged Passionate When asked how they would respond to an unexpected challenge responded ‘Energized’ or ‘Inspired Source: 2011 Deloitte Worker Passion/Inter-firm Knowledge Flow Survey (n=3108); Administered by Synovate Source: 2011 Deloitte Worker Passion / Inter-firm Knowledge Flow Survey (n=3108); Administered by Synovate Additionally, companies should consider tapping into keep an eye fixed on developments across a broad range knowledge flows and expanding the use of powerful tools of industries, game changers, and new ideas — as they such as social software. no longer enjoy the luxury of time to exploit accrued knowledge to generate value for an indefinite period. One lesson we take from the Egyptian youth is how individuals with passion and access to knowledge flows In this competitive atmosphere where time-to-market is can collaborate to create change. If a similar equation, critical, creating and retaining passionate workers provides passion + flows, was applied to workers within an a strong competitive advantage to firms. Passionate organization, firms could begin to reverse declining workers drive sustained performance improvement, inspire performance. They can accomplish this by tapping into innovation and possess both a “questing” disposition, 9 knowledge flows and expanding the use of powerful tools which drives them to seek out new sources of knowledge, such as social software to support and foster passionate and a “connecting“ disposition, which drives them to build workers at every level of the organization. relationships within the organization and outside of its walls to tap into the latest thinking and insights. Why is Passion Important? What, exactly, is worker passion, and why is it important When asked how they respond to unexpected challenges, to firms? Worker passion, different from employee the passionate employee most often responded that they satisfaction, denotes a strong desire to continually improve are inspired (seeing an opportunity to learn something performance. More than being satisfied with their current new) or energized (seeing an opportunity for problem job, passionate employees constantly seeking to stimulate solving) rather than being indifferent or exhibiting negative new thinking and creativity. behaviors. The passionate are twice as likely (72% versus 36%) as disengaged workers to express this disposition As cycles for innovation and knowledge creation speed (See Exhibit 10). The questing disposition drives higher up in today’s world, the stocks of knowledge held by performance as passionate workers do not shy from any one organization or institution rapidly depreciate. challenges and actively pursue opportunities to blend new Further, competition continues to intensify as technology ideas from across companies, industries and disciplines into based platforms make replication of services and solutions their current work (see Exhibit 9). easier and faster. In this environment, companies must 16
  • 19. 2011 Shift Index: Key Themes As the rate of change in the business environment The U.S. labor force is projected to reach 166.9 million by increases, the passionate worker is most apt to adjust and 2018, an 8.2% increase from the 2008, with an increasing thrive, and will likely foster those behaviors within their proportion of older workers. Workers aged 55 years and companies. They view challenges as exciting opportunities older will make up 23.9% of the labor force, up from to drive themselves to a new level of performance. 18.1% in 2008. Meanwhile workers aged 16 to 24 are Employees who are not passionate tend to experience expected to make up only 12.7% of the labor force (down unexpected challenges as a source of stress and are from 14.3%), and the primary working-age group, those increasingly likely to burnout and become a drain on the between 25 and 54 years old, is projected to decline to organizational vitality. 63.5% (from 67.6%). In addition to thriving in challenging environments, The ability to ignite and sustain the passion of senior passionate workers also seek out connections with others workers is becoming more and more important as who are relevant to their work and to their continuing the labor force ages. Organizations should explore efforts to find and overcome performance challenges opportunities to retain retiring employees as advisors Looking at proclivity to engage in a range of inter-firm within the company. Passionate older workers could be knowledge flows, from social media and news alerts to assigned roles where they can focus their energies on conferences and professional organizations, as well as taking performance challenges that have a measurable frequency of engagement, passionate workers are twice effect on the company. This can eliminate the need for as likely to participate in knowledge flows as disengaged workforce reductions, and may allow for faster return employees. Our Shift Index suggests that effective on asset gains in periods of economic recovery and participation in an increasing range of diverse knowledge strengthening the organization in the long run. flows will be a key driver of performance improvement in the Big Shift — as employees seek to bring external Social Software & Knowledge Flows thinking into the organization to cross-pollinate ideas. Worker passion will be crucial for firms as they seek to Workers who lack passion and who self select out of inter- compete in a globally connected and evolving service firm or intra-firm knowledge flows will likely find their value economy. A second critical element, as discussed earlier, diminished over time as they vainly draw on aging stocks is providing workers with access to flows that can drive of knowledge to try to deliver results for a shifting world. real, sustainable value throughout the organization. For firms, social software is a powerful, and under-utilized, What’s New The Future of Worker Passion tool as they seek to leverage flows more effectively. While An important consideration for companies is the need to current technologies like ERP software are excellent tools draw out the passion of workers of all ages and enable for standard processes, and are geared towards scalable them to tap into knowledge flows. efficiencies, these technologies are ill-adapted to handleExhibit 10: Passion and knowledge flows, (2010–2011) Exhibit 10: Passion and knowledge flows (2011, 2010) 25 21.8 20.9 20 Inter-firm Knowledge Flow Index score 17.6 16.6 14.9 15 12.8 10.7 9.8 10 5 0 Disengaged Passive Engaged Passionate 2011 2010 Source: 2010, 2011 Deloitte Worker Passion/Inter-firm Knowledge Flow Survey; Administered by Synovate 2011 Shift Index Measuring the forces of long-term change 17Source: 2010, 2011 Deloitte Worker Passion / Inter-firm Knowledge Flow Survey; Administered by Synovate
  • 20. Key Themes2011 Shift Index: Exhibit 11: Percent of Labor Force by Age Group, (2011) Exhibit 11: Percentage of Labor Force by Age Group 30 25 23.3 23.9 22.1 22.7 21.6 20.8 20.6 Percentage of Labor Force 20 18.1 14.3 15 12.7 10 5 0 16 to 24 25 to 34 35 to 44 45 to 54 55 years and older 2008 2018 (projected) Source: Bureau of Labor Statistics Source: Bureau of Labor Statistics Lighter, more nimble firms are often better inter-firm knowledge flows. Of front line workers surveyed, 30% do not participate in any inter-firm knowledge flows, positioned to more quickly to translate these virtual or physical (e.g., conferences and lunch meetings). Firms stand to reap tremendous benefits if they can expand disruptive technologies into new practices, participation through adoption of social software tools and therefore, will likely be among the first to throughout the organization. OSIsoft, a data solutions company, experienced a 22% improvement in average garner the business benefits. issue resolution time after deploying a Socialtext workspace (wiki) for their customer-facing technical support team and non-standard business transactions, or “exceptions,” which engineering units.14 3 are increasingly common in business operations. These one-time events, which can be time sensitive and resource Prior to the wiki, OSIsoft had no central repository for intensive to handle, are unwieldy to resolve via traditional expert knowledge and employees relied upon word-of- means. mouth connections to resolve issues. Moreover, the expert knowledge they did have was static and generic, rarely Social software tools, on the other hand, have a uniquely offering the level of detail and specificity needed to handle relevant set of capabilities to address the exceptions. The exception cases. E-mail was the primary tool for collecting real-time and borderless nature of social software makes it and exchanging knowledge, so any documentation of well-suited for organizations to identify expertise, facilitate how to resolve an issue was privately held and not easily cross-boundary communication, preserve institutional available to other engineers when they encountered similar memory, harness distributed knowledge and create new issues. With the wiki, OSIsoft was successful in creating knowledge. In short, social software can give companies a single, easily accessible source of reliable customer the ability to solve problems more efficiently and with solutions that represented a breadth of issues and up-to- better results — while discovering new opportunities. date information. Although social software is an invaluable tool in an Knowledge flows and worker passion might seem like 13 The survey defined participation amorphous concepts, but firms can gain tangible results in social media as “Using social increasingly connected world, today, it is largely relegated media to connect with other to consumer-facing functions. As shown in Exhibit 12, by engaging and supporting workers at every level of professionals (e.g., Blogs, Twitter, LinkedIn).” While we intend for 62% of marketing professionals surveyed use social media, the organization and giving them the tools and channels this metric to capture the use of to drive scalable learning. Of course, simply investing in social software for business, we but only 34% of accounting/finance professionals tap into recognize that this terminology this flow.13 Further, while companies do not explicitly ban social software is not sufficient to turn around almost four is not yet commonplace and that the definition of ‘social media’ is social media (only 16% of respondents reported that it decades of deteriorating performance. However, it is a subject to interpretation by the promising tool to help amplify knowledge flows within survey respondent was banned), they are not using it effectively (only 22% of 14 Miller, Megan, Aliza Marks, respondents reported that social media is used internally). and across institutions. Companies that fall behind in the and Marcelus DeCoulode. “Social Software for Business The Deloitte Inter-Firm Knowledge flow survey indicates deployment of this technology are likely to increasingly fall Performance.” Deloitte Publication, behind in a world of accelerating change. 2011. that front line workers are the least likely to participate in 18
  • 21. Join the Conversation 2011 Shift Index: The digital infrastructure will likely increase the frequency and scope of social volatility. Key Themes www.deloitte.com/us/SocialVolatilityOf course, the adoption of new technology in and of Creating a new set of indices is not a straight-forward oritself is not sufficient to reverse declining performance. simple process. Through our discussions and analysis weCorporations will first have to “unlearn” certain practices continue to refine our perspective on the metrics that makein order to leverage the digital infrastructure as individuals up the Index. When we set out on this journey, more thanhave done to increase their own market power. Lighter, anything else, we wanted to serve as a catalyst to re-focusmore nimble firms are often better positioned to more attention on longer-term trends that, ultimately, have aquickly to translate these disruptive technologies into new much more profound effect on the markets and societypractices, and therefore, will likely be among the first to we work and live in than the short-term changes thatgarner the business benefits. As these new practices scale dominate our media attention.we may see the emergence ‘institutional’ innovationssignificant enough to improve aggregate firm performance. Our goal, in part, is to motivate others to join us on thisThese new innovations in turn could drive new practices journey as we continue to develop and refine the analyticsin a recursive and positively reinforcing manner to reverse and insights that capture these longer-term changes.decreasing returns. We invite everyone to undertake additional research to test, challenge, refine, and add to the metrics we haveThe Journey Continues… presented.From our first conception of the Shift Index, our view was What’s Newthat traditional economic indicators did not accurately In that spirit, it is our pleasure to present the 2011 Shiftcapture the long-term shifts that are producing a world of Index. We welcome your thoughts and questions. Let theconstant change and increasing performance pressures. discussion continue.Exhibit 12: Social media usage by position, (2011) Exhibit 12: Social media usage by position (2011) 70% 62% 60% Percentage of respondents by position 50% 47% 45% 39% 38% 40% 37% 34% 30% 30% 27% 23% 20% 10% 0% Note: Based on use of social media to connect with other professionalsNote: Based on use of social media to connect with other professionals Source: 2011 Deloitte Worker Passion/Inter-firm Knowledge Flow Survey (n=3108); Administered by SynovateSource: 2011 Deloitte Worker Passion / Inter-firm Knowledge Flow Survey (n=3108); Administered by Synovate 2011 Shift Index Measuring the forces of long-term change 19
  • 22. Big Shift Overview: Context,Big Shift Overview Findings, and Implications Introduction: The Big Shift To help managers in this decidedly challenging time, we Focusing on traditional business metrics often masks have developed a framework for understanding three long-term forces of change that undercut normal sources waves of transformation in the competitive landscape: of economic value. Indeed, “normal” may, in fact, be a foundations for major change; flows of resources, such as thing of the past. Even when the economy heats up again, knowledge, that allow firms to enhance productivity; and companies’ returns will likely remain under pressure. Trends the impacts of the foundations and flows on companies set in motion decades ago are fundamentally altering the and the economy. Combined, these factors reflect what we global business environment, abetted by a new digital call the Big Shift in the global business environment. infrastructure built on the sustained exponential pace of performance improvements in computing, storage, and Additionally, we have developed a Shift Index consisting of bandwidth. This infrastructure is not just bits and bytes three indices that quantify the three waves of long-term — it consists of institutions, practices, and protocols that change we see happening today. By quantifying these together organize and deliver the increasing power of forces, we seek to help institutional leaders steer a course digital technology to business and society. This power must for "true north,” while helping to minimize distraction from be harnessed if business is to thrive. short-term events — and the growing din of metrics that reflect them. No one, to our knowledge, has yet quantified the dimensions of deep change precipitated by digital Today, we face epochal challenges that continue to technologies and public policy shifts. Fragmentary metrics intensify. Steps we take now to address them will not and sporadic studies certainly exist. But nothing yet only help us to weather today’s economic storm but can captures a clear, comprehensive, and sustained view of also position us to create significant economic value in an the deep dynamics changing our world. We experience ever-more challenging business landscape. We believe that instead a daily bombardment of short-term economic the Shift Index can serve as a useful compass and catalyst indicators — employment, inventory levels, inflation, for the discussions and actions necessary to make this commodity prices, etc. happen. 20
  • 23. Big Shift Overview Select Findings the last 40 years. While the performance of U.S. firms The Shift Index report highlights a core performance is deteriorating, at least some of the benefits of the challenge and paradox for the firm that has been productivity improvements appear to be captured by playing out for decades. ROA for U.S. firms has steadily creative talent, which is experiencing greater growth in fallen to almost one-quarter of 1965 levels at the same total compensation. Customers also appear to be gaining time that we have seen continued, albeit much more and using power as reflected in increasing customer modest, improvements in labor Productivity. While disloyalty toward brands. this deterioration in ROA has been particularly affected • The exponentially advancing price/performance capability by trends in the financial sector, significant declines in of computing, storage, and bandwidth is driving an ROA have occurred in the rest of the economy as well. adoption rate for the digital infrastructure that is two to Some additional findings that highlight the performance five times faster than previous infrastructures, such as challenges facing U.S. firms include the following: electricity and telephone networks. • The gap in ROA performance between winners and These findings have two levels of implication. First, the losers has increased over time, with the “winners” barely gap between potential and realized firm performance maintaining previous performance levels, while the losers is steadily widening as productivity grows at a rate far experience rapid deterioration in performance. slower than the underlying performance increases of the • The “topple rate,” at which big companies lose their digital infrastructure. Potential performance refers to the leadership positions, has more than doubled, suggesting opportunity companies have to harness the increasing that “winners” have increasingly precarious positions. Some of them dropped out of the market during the power and capability of the digital infrastructure to create higher returns for themselves as they achieve even higher 12 recent economy downturn, which temperately raised the levels of productivity improvement through product, average ROA of the bottom players. process, and institutional innovations. • U.S. Competitive Intensity has more than doubled during DExhibit 13: Firm performance metric trajectories, (1965-2010) Exhibit 13: Firm performance metric trajectories (1965-2010) Present 1965 Linear (Labor Productivity) Linear (Competitive Intensity) Linear (Return on Assets) Linear (Topple Rate) Source: Deloitte analysisSource: Deloitte analysis 2011 Shift Index Measuring the forces of long-term change 21
  • 24. Big Shift Overview Second, the financial performance of the firm continues to and delivered to markets. In other words, change occurs in deteriorate as a quickly evolving digital infrastructure and distinct waves that are causally related. public policy liberalization combine to intensify competition (Recent regulatory moves to the contrary, the To quantify these waves, we broke the corresponding overwhelming policy trend since World War II has been Shift Index into three separate indices. In this section, we toward reducing barriers to entry and movement in terms will explain each wave and the metrics we have chosen to of freer trade and investment flows as well as deregulation represent it. of major industries). The benefits from the modest productivity improvements companies have achieved The first wave involves the fast-moving, relentless evolution increasingly accrue not to the firm or its shareholders, but of a new digital infrastructure and shifts in global public to creative talent and customers, who are gaining market policy that have reduced barriers to entry and movement, power as competition intensifies. enabling vastly greater productivity, transparency, and connectivity. Consider how companies can use digital How do we reverse this trend? For precedent and technology to create ecosystems of diverse, far-flung users, inspiration, we might look to the generation of companies designers, and suppliers in which product and process that emerged in the early 20th century. As Alfred Chandler innovations fuel performance gains without introducing and Ronald Coase later made clear, these companies too much complexity. This wave is represented in the first discovered how to harness the capabilities of newly index of the Shift Index — the Foundation Index, which emerging energy, transportation, and communication quantifies and tracks the rate of change in the foundational infrastructures to generate efficiency at scale. Today’s forces taking place today. companies must consider how to make the most of our own era’s new infrastructure through institutional The Foundation Index reflects new possibilities and innovations that shift the rationale from scalable efficiency challenges for business as a result of new technology to scalable learning by using digital infrastructure to create capability and public policy shifts. In this sense, it is a environments where performance improvement accelerates leading indicator because it shapes opportunities for new as more participants join, as illustrated in various kinds of business and social practices to emerge in subsequent emerging open innovation and process network initiatives. waves of change as everyone seeks to explore and master Only then can the corporate sector generates greater new potentialities. However, business will also be exposed productivity improvement from the rapidly evolving digital to challenges as a result of increased competition. Key infrastructure and capture their fair share of the ensuing metrics in this index include the change in performance rewards. As this takes place, the Shift Index will turn from of the technology components underlying the digital an indicator of corporate decline to an indicator that infrastructure, growth in the adoption rate of this reflects powerful new modes of economic growth. infrastructure, and the degree of product and labor market regulation in the economy. Three Waves; three Indices The trends reported above, and the connections across The second wave of change, represented in the second them, are consistent with the theoretical model we used index in the Shift Index, the Flow Index, is characterized to define and structure the metrics in the Shift Index. The by the increasing flows of capital, talent, and knowledge Shift Index seeks to measure three waves of deep and across geographic and institutional boundaries. In this overlapping change operating beneath the visible surfaces wave, intensifying competition and the increasing rate of of today’s events. In brief, this theoretical model suggests change precipitated by the first wave shifts the sources of that a first wave of change in the foundations of our economic value from “stocks” of knowledge to “flows” of business and society are expanding flows of knowledge new knowledge. in a second. These two waves are expected to intensify competition in the near term and put increasing pressure Knowledge flows — which occur in any social, fluid envi- on corporate performance. Later, institutional innovations ronment where learning and collaboration can take place emerging in a third wave of change is expected to harness — are quickly becoming one of the most crucial sources the unique potential of these foundations and flows, of value creation. Facebook, Twitter, LinkedIn, Yammer, improving corporate performance as more value is created Google+, and other social media can foster them, 22
  • 25. Big Shift Overviewas do virtual communities and online discussion forums flows. That is why we give such prominence to them in theand companies situated near one another, working on second wave of the Big Shift. The number and quality ofsimilar problems. Twentieth-century institutions built and knowledge flows at a firm — partly determined byprotected knowledge stocks — proprietary resources its adoption of openness, cross-enterprise teams, andthat no one else could access. The more the business information sharing — will be key indicators of its abilityenvironment changes, however, the faster the value to master the Big Shift and turn performance challengesof what you know at any point in time diminishes. In into opportunities. The ultimate differentiator amongthis world, success hinges on the ability to participate companies, though, may be a competency for creatingin a growing array of knowledge flows in order to and sharing knowledge across enterprises. Growth inrapidly refresh your knowledge stocks. For instance, intercompany knowledge flows will be a particularlywhen an organization tries to improve cycle times in important sign that firms are adopting the new institutionala manufacturing process, it can find far more value in architectures, governance structures, and operationalproblem solving shaped by the diverse experiences, practices necessary to take full advantage of the digitalperspectives, and learning of a tightly knit team (shared infrastructure.through knowledge flows) than in a training manual(knowledge stocks) alone. The final wave — captured by the Impact Index — reflects how well companies are exploiting foundationalKnowledge flows can help companies gain competitive improvements in the digital infrastructure by creating andadvantage in an age of near-constant disruption. The sharing knowledge — and what impacts those changessoftware company SAP, for instance, routinely taps more are having on markets, firms, and individuals. For now,than 1.5 million participants in its Developer Network, institutional performance is broadly suffering in the facewhich extends well beyond the boundaries of the firm. of intensifying competition. But over time, as firms learnThose who post questions for the network community how to harness the digital infrastructure and participateto address will receive a response in 17 minutes, on more effectively in knowledge flows, their performance canaverage, and 85% of all the questions posted to date improve.have been rated as “resolved.” By providing a virtualplatform for customers, developers, system integrators, Differences in approach between top performingand service vendors to create and exchange knowledge, and underperforming companies are telling. As someSAP has significantly increased the productivity of all the organizations participate more in knowledge flows, weparticipants in its ecosystem. should see them break ahead of the pack and significantly improve overall performance in the long term. OthersThe metrics in the Flow Index capture physical and virtual still wedded to the old ways of operating are likely toflows as well as elements that can amplify a flow — deteriorate quickly.examples of these “amplifiers” include social media useand the degree of passion with which employees are This conceptual framework for the Big Shift underscoresengaged with their jobs. This index represents how quickly the belief that knowledge flows are expected to be theindividual and institutional practices are able to catch up key determinant of company success as deep foundationalwith the opportunities offered by the advances in digital changes alter the sources of value creation. Knowledgeinfrastructure. The Flow Index illustrates a conceptual way flows thus serve as the key link connecting foundationalto represent practices. Given the slower rate at which changes to the impact that firms and other marketsocial and professional practices change relative to the participants will experience.digital infrastructure, this index will likely serve as a laggingindicator of the Big Shift, trailing behind the Foundation To respond to the growing long-term performanceIndex. It will be useful to track the degree of lag over time. pressures described earlier, companies should consider how to design and then track operational metrics showing howThe good news is that strong foundational technology well they participate in knowledge flows. For example,is enabling much richer and more diverse knowledge companies might want to identify relevant geographicflows. The bad news is that mind sets and practices tend clusters of talent around the world and assess their accessto hamper the generation of and participation in those to that talent. In addition, they might want to track the 2011 Shift Index Measuring the forces of long-term change 23
  • 26. Big Shift Overview number of institutions with which they collaborate to suggests a potential red flag for institutional leaders — improve performance. Success against these metrics can companies appear to have difficulty holding onto provide a clue as to how well companies will perform later passionate workers. as the Big Shift continues to unfold. But management can play an important supporting role, Implications for Business Executives recognizing that passionate employees are often talented Our research findings highlight the stark performance and motivated, but also tend to be unhappy because they challenges for companies. What is more, the data suggest see a lot of potential for themselves and their companies, that unless firms take radical action, the gap between although they can feel blocked in their efforts to achieve their potential and their realized opportunities will likely it. Management should consider identifying those who grow wider. That is because the benefits from the modest are adept participants in knowledge flows, providing productivity improvements that companies have achieved them with platforms and tools to pursue their passions, increasingly accrue not to the firm or its shareholders, but equipping them with proper guidance and governance, to creative talent and customers, who are gaining market and then celebrating their successes to inspire others. power as competition intensifies. Performance pressures will continue to increase well past Until now, companies were designed to become more the current downturn. As a result, beneath these surface efficient by growing ever larger, and that is how they pressures are underlying shifts in practices and norms created considerable economic value. However, the rapidly that are driven by the continuous advances in the digital changing digital infrastructure has altered the equation: As infrastructure: stability gives way to change and uncertainty, institutions must increase not just efficiency, but also the rate at which • A rich medium for connectivity and knowledge flows they learn and innovate, which, in turn, can boost their is emerging as Wireless Subscriptions have increased rate of performance improvement. Scalable efficiency, as from 1% of the U.S. population in 1985 to over 90% in mentioned above, must be replaced by scalable learning. 2010, growing at a 20% compound annual growth rate The mismatch between the way companies are operated (CAGR). As a result of technology advances in the areas and governed on the one hand and how the business of computing, storage, and bandwidth, innovations, landscape is changing on the other helps to explain why such as 3G and emerging 4G wireless networks, and returns are deteriorating while talent and customers reap more powerful and affordable access devices, such as the rewards of productivity. smartphones and tablets, the line between the Internet and wireless media will continue to blur, moving us to a In contrast to the twentieth century — when senior world of ubiquitous connectivity. management decided what shape a company should take • Practices from personal connectivity are bleeding over in terms of culture, values, processes, and organizational into professional connectivity — institutional boundaries structure — we now see institutional innovations largely are becoming increasingly permeable as employees propelled by individuals, especially the younger workers, harness the tools they have adopted in their personal who put digital technologies, such as social media, to their lives to enhance their professional productivity, often most effective use. Findings from our research indicate without the knowledge of, and sometimes over the a correlation between the rapidly growing use of social opposition of, corporate authorities. media and the increasing knowledge flows between • Talent is migrating to the most vibrant geographies and organizations. institutions because that is where individuals can improve their performance more rapidly by learning faster. Our Worker passion also appears to be an important amplifier: analysis has shown that the top 10 creative cities have When people engage with their work and push the outpaced the bottom 10 in terms of population growth performance envelope, they seek ways to connect with since 1990. Between 1990 and 2008, the top 10 creative others who share their passion and who can help them cities grew more than twice as fast as the bottom 10. improve faster. Self-employed people are more than twice as likely to be passionate about their work as those who work for firms, according to a survey we conducted. This 24
  • 27. Big Shift Overview• Companies appear to have difficulty holding onto improvements promised by technology is to jettison passionate workers. Workers who are passionate about management’s distinction between creative talent and their jobs are more likely to participate in knowledge the rest of the organization. All workers can continually flows and generate value for their companies — on improve their performance by engaging in creative average, the more passionate participate twice as much problem solving, often by connecting with peers inside as the disengaged in nearly all the knowledge flows and outside the firm. Japanese automakers used elements activities surveyed. We also found that self-employed of this approach with dramatic effects on the bottom line, people are more than twice as likely to be passionate turning assembly line employees from manual laborers into about their work as those who work for firms. The problem solvers. current evolution in employee mindset and shifts in the talent marketplace require new rules on managing and At the end of the day, the Big Shift framework puts a retaining talent. number of key questions on the leadership agenda: Are companies organized to effectively generate andLeaders must move beyond the marginal expense cuts on participate in a broader range of knowledge flows,which they might be focusing now in order to weather especially those that go beyond the boundaries of the firm?the economic downturn. They need instead to be ruthless How can they best create and capture value from suchabout deciding which assets, metrics, operations, and flows? And most importantly, how do they measure theirpractices have the greatest potential to generate long-term progress navigating the Big Shift in the business landscape?profitable growth and shedding those that do not. They We hope that the Shift Index will help executives answermust keep coming back to the most basic question of all: those questions — in these difficult times and beyond.What business are we really in?It is not just about being lean but also about makingsmart investments in the future. One of the easiest butmost powerful ways firms can achieve the performance 2011 Shift Index Measuring the forces of long-term change 25
  • 28. Key IdeasKey Ideas Foundation Index Advances in computing power accelerate the pace of innovation Computing p. 53 The fast moving, relentless evolution of a Plummeting storage costs accelerate the creation of information and the need for Digital Storage new digital infrastructure data filters p. 55 and shifts in global public policy are reducing Low-cost bandwidth bolsters connectivity, enabling consumption of richer data Bandwidth barriers to entry and p. 58 movement Accelerating internet adoption makes digital technology more accessible, increasing Internet Users competitive pressure as well as creating opportunity p. 60 Explosion in wireless communication expands knowledge flow and reach Wireless Subscriptions p. 64 Increasing economic freedom intensifies competition while at the same time Economic Freedom enhancing the ability to collaborate p. 66 Flow Index Individuals are finding new ways to reach beyond the four walls of their organization Inter-Firm Knowledge to participate in diverse knowledge flows Flows p. 74 Sources of economic value are moving from Wireless activity is surging due to demand for mobile data and a growing ecosystem Wireless Activity “stocks” of knowledge of applications and services p. 79 to “flows” of new knowledge Broader availability of Internet access enables “connected-ness” with a growing range Internet Activity of people, resources, and rich content p. 82 Increasing migration suggests virtual connection is not enough — people continue to Migration of People to seek rich and serendipitous face-to-face encounters as well Creative Cities p. 86 Travel volume continues to rise as virtual connectivity supplements, but does not Travel Volume replace in person interactions p. 90 Cross-border capital flows provide an efficient way to access pockets of global talent Movement of Capital and innovation p. 92 Passionate workers are more likely to participate in knowledge flows and generate Worker Passion value for companies p. 96 Social media activity creates scalable ways to connect and tap into knowledge flows Social Media Activity p. 102 26
  • 29. Key IdeasImpact Index Competitive Intensity is increasing as the digital infrastructure and changing public Competitive Intensity policy erode the barriers to entry and movement p. 111Foundations andknowledge flows Technological and business innovation, open public policy, and fierce competition, Labor Productivityare fundamentally drive long-term increases in Labor Productivity p. 114reshaping theeconomic playing field Digital infrastructures and public policy initiatives amplify Competitive Intensity, Stock Price Volatility market uncertainty, and Stock Price Volatility p. 117 Cost savings and the value of modest productivity improvement tends to get Asset Profitability value from productivity gains are being competed away and captured by p. 120 customers and talent Winning companies are barely holding on, while losers experience rapidly ROA Performance Gap deteriorating performance p. 124 Big companies are losing their leadership position at an increasing rate Firm Topple Rate p. 128 Shareholder returns for market “winners” increase at a modest rate; while “losers” Shareholder Value Gap destroy more value than ever before p. 131 Greater access to information and choices boost Consumer Power Consumer Power p. 134 Brand Disloyalty is increasing among consumers, particularly the younger generation Brand Disloyalty p. 138 Talented workers garner higher compensation and market power as their value and Returns to Talent career options expand p. 142 Executive Turnover is increasing as performance pressures rise Executive Turnover p. 145 2011 Shift Index Measuring the forces of long-term change 27
  • 30. Cross-Industry PerspectivesPerspectivesCross-Industry The forces of the Big Shift are affecting U.S. industries at of the value created by productivity improvements. Access varying rates of speed. One set of industries has already to information and greater availability of alternatives been severely disrupted and is suffering the consequences: have put customers squarely in the driver’s seat. Similarly, declining return on assets ROA and increased Competitive creative talent finds itself in a better bargaining position as Intensity.15 A second set, which includes the bulk of talent becomes more central to strategic advantage and U.S. industries, is currently midstream: some are seeing labor markets become more transparent. declining ROA, and others are facing increases in Competitive Intensity, but none have yet encountered How, then, can firms also benefit from the Big Shift? The both. A third, smaller set of as-yet-unaffected industries key is to not only create value, but to capture the value shows little change in performance. created. To do so, firms must learn how to participate in and harness knowledge flows and to tap into the These findings — a follow-up to the macro-level study passion of workers who will be a significant source of released in June 200916 — reflect a U.S. corporate sector value creation as companies shift away from stocks of on a troubling trajectory. The difficulties are more apparent knowledge. This move, from scalable efficiency to scalable in some industries, but all industries will eventually be learning, will be a key to surviving, and thriving, in the subject to the forces of the Big Shift, which represent a world of the Big Shift. fundamental reordering of the economy driven by a new digital infrastructure17 and public policy changes. Most Industries are Feeling the Effects of the Big Shift The industry-level findings are cause for some alarm. U.S. The 2009 Shift Index highlighted trends at the economy- industries are currently more productive than ever, as wide level: declining ROA, increasing Competitive Intensity, measured by increases in Labor Productivity.18 Yet those increasing Labor Productivity. The industry-level findings are improvements have not translated into financial returns. similar. With few exceptions, all U.S. industries are being Underlying this paradox is the growing Competitive affected by the foundational forces of the Big Shift. Intensity in most industries. In some cases, consolidation has helped offset the effect of increasing competition, but One set of industries is already deeply impacted by the it is a short-term solution. Likewise, although firms in most Big Shift.19 These industries have experienced significant industries are investing heavily in technology, the benefits increases in competition and corresponding declines in are short-lived, accruing only until a firm’s competitors do profitability. A middle tier, representing the majority of U.S. the same. industries, is experiencing the early effects of the Big Shift. A third tier consists of two industries that have, so far, The breadth and magnitude of disruption to U.S. been insulated from the forces of the Big Shift. industries, and a trajectory that suggests more disruption to come, call into question the very rationale for today’s In the Eye of the Storm companies. Do they exist simply to achieve ever-lower While most U.S. industries have experienced declining costs by getting bigger and bigger — “scalable efficiency”? ROA, only 4 of the 14 industries evaluated have also Or can firms turn the forces of the Big Shift to their endured a significant increase in Competitive Intensity 15 For further discussion of these metrics, see the metrics section. advantage by focusing instead on “scalable learning” —the (see Exhibit 14). These early entrants into the Big Shift 16 See John Hagel III, John Seely ability to improve performance more rapidly and learn include the technology, media, and telecommunications Brown, and Lang Davison, The 2009 Shift Index: Measuring the faster by effectively integrating more and more participants and automotive industries. They embody the long-term Forces of Long-Term Change (San Jose: Deloitte Development, June, distributed across traditional institutional boundaries? forces that are reshaping the business environment and are 2009). harbingers of the changes to come in other industries. 17 More than just bits and bytes, this digital infrastructure consists U.S. firms can learn two key lessons from the industries of the institutions, practices, and protocols that together organize experiencing early disruption. First, the assumption that In the technology industry, customers have gained power and deliver the increasing power productivity improvement leads to higher returns is flawed: as open architectures and commoditization of components of digital technology to business and society. industries with higher productivity gains do not necessarily have intensified competitive pressure. As a result, the 18 See the metrics section for further discussion experience improvement in ROA. This is the performance industry has experienced a significant deterioration in 19 For further information regarding paradox mentioned earlier. Second, customers and return on assets. survey scope and description, please refer to the Shift Index talented employees appear to be the primary beneficiaries Methodology section. 28
  • 31. Cross-Industry PerspectivesThe media industry has become more fragmented as forms U.S. industries are currently more productiveof content proliferate and the long tail becomes ever richerwith options. In a very real sense, customers — supported than ever, as measured by increases in Laborby digital infrastructures that enable convenient, low-costproduction and distribution of their own content — are Productivity. Yet those improvements have notemerging as competitors to traditional media companies. translated into financial returns.The telecommunications industry has experienced dramatic Entering the Stormchanges over the past two decades. Wireline service, the The industries in this tier have not yet felt the dual impactformer mainstay of the industry, is being supplanted by of intensifying competition and declining ROA, but arewireless and voice over Internet protocol (VOIP). Driven by likely to soon. Because these industries were alreadyregulatory changes and increased competition, firms have very competitive in 1965, as measured by industryimproved Labor Productivity, but have not realized better concentration (see Exhibit 15), the initial fragmentingfinancial returns. impact of the Big Shift may have been muted. On the other hand, many of these industries did experience erosionThe Automotive industry has struggled with increased of ROA, suggesting that other forms of Competitiveglobal competition as a result of trade liberalization and Intensity were increasing. As we will discuss, the metricrobust digital infrastructures that facilitate global for Competitive Intensity does not capture competitionproduction networks. Over the long term, Asset Profitability from other parts of the value chain. One of the pervasivein this industry has decreased as asset growth has themes of the Big Shift is the growing power of customerssurpassed income growth. However, following the financialcrisis of 2007-2008, we have seen an upward spike in and creative talent and the effect on firms’ profitability as Crossthe industry’s Asset Profitability due to a rise in industryincome. these two constituencies capture more of the value being created. Many firms in this tier are subject to this type of Persp competition. UpdateExhibit 14: Changes in Competitive Intensity and ROA, (1965-2010)Exhibit 14: Changes in Competitive Intensity and ROA (1965-2010)20 20 Insurance and Health Care ROA data is from 1972-2010. Data from 1965-1972 was from a very small Competitive Intensity 21 number of companies for these industries and therefore not truly Decrease Static Increase indicative of market dynamics. Health Care and Aerospace Defense ROA data display some Aerospace & Health Care cyclicality. The increases discussed Defense Increase here are derived from a line fit. Note: industries are classified using Aerospace & self-reported SIC codes and the data is provided by Standard & Defense Poor’s Compustat. 21 Static Competitive Intensity is defined as a change of less than 0.01(+/-) in the HHI. Note that Life Consumer Static Sciences and Energy are on the cusp of increasing Competitive ROA 22 Products Intensity based on actual values versus a line fit. HHI is used in competitive and antitrust law to Energy assess concentration of market power and is a proxy for competi- Banking & tive intensity (with the notion Securities Decrease that markets where power is Aviation Insurance more widely dispersed are more Retail Life Sciences Automotive competitive). As a result, HHI is an Process & Media imperfect measure of competi- Industrial Technology tive intensity because it does not attempt to measure competi- Products Telecom. tive action (such as price wars) between players in an industry. 22 Static ROA is defined as a change Source: Compustat, Deloitte AnalysisSource: Compustat, Deloitte analysis of less than 5% (+/-). 2011 Shift Index Measuring the forces of long-term change 29
  • 32. PerspectivesCross-Industry Exhibit 15: Competitive Intensity, All Industries, (1965-2010) Exhibit 15: Competitive Intensity, All Industries (1965-2010)23 Absolute Industry 1965 Actual 2010 Actual change 0.01 0.01 0.00 Industries that began Process & Industrial Products at higher levels of Consumer Products 0.01 0.02 0.01 Competitive Intensity Banking & Financial 0.02 0.03 0.01 Institutions Aviation & Transport Services 0.03 0.03 0.00 Energy 0.03 0.03 -0.01 Retail 0.03 0.06 0.02 Insurance 0.04 0.04 0.00 Aerospace & Defense 0.04 0.11 0.07 Life Sciences 0.04 0.04 -0.01 Media & Entertainment 0.07 0.02 -0.05 Technology 0.15 0.03 -0.13 Industries that began at lower levels of Automotive 0.16 0.08 -0.09 Competitive Intensity Health Care Services 0.32 0.08 -0.24 Telecommunications 0.37 0.03 -0.34 Source: Compustat, Deloitte analysis Source: Compustat, Deloitte Analysis The aviation, consumer products, and retail industries all markets surveyed by the American Medical Association in experienced decreasing Competitive Intensity as measured 2010, 99% were dominated by one or two health plans. by industry concentration, although aviation and retail also Limited competition, reinforced by regulatory protection, experienced a decline in ROA.24 Historically, the consumer has sustained Asset Profitability in this industry. products and retail industries were highly competitive; both have experienced significant consolidation among Aerospace & defense appears to be an anomaly, the large firms to combat the margin pressures driven, in only industry that shows no impact from the Big Shift. part, by greater customer power. The consolidation of Improvements in Asset Profitability can be attributed to these two industries is related. As retailers became more consolidation and related scale efficiencies and Labor concentrated, consumer products companies began to Productivity measures as well as a movement from consolidate as a defensive measure to preserve bargaining hardware to software as a source of value. ROA has power with the retailers. Conversely, as consumer products peaked in recent years as a result of historic highs in companies consolidated, retailers felt additional pressure to revenue resulting from wartime spending. The ability of consolidate in order to preserve bargaining power against companies in this industry to capture and retain value has 15 the larger consumer products companies. The aviation been supported by the industry consolidation (leading to industry was also competitive, but has recently seen a a decline in one key measure of Competitive Intensity) and spate of consolidation following the economic downturn. high barriers to entry, including technology and capital requirements. Subsidies to incumbents act as a further The Calm Before the Storm barrier to entry, as do burdensome qualifying requirements, This last tier is composed of just two industries that have which require significant upfront investment by new bucked the overall trend and have seen Asset Profitability players just to bid on government contracts. Collectively, increase. The aerospace & defense and health care these factors limit the effects of broader public policy 23 Insurance and Health Care data is from 1972—2010. Data from industries have actually improved ROA to 8.0% and 4.6%, trends towards economic liberalization and enable the 1965—1972 was from a very small respectively. As we will discuss, regulation and public relatively small number of industry participants to achieve number of companies for these industries and therefore not truly policy have played a significant role in shielding these two higher Asset Profitability. indicative of market dynamics. 24 Retail ROA data display some industries from the effects of the Big Shift. cyclicality. The decline discussed For health care, ROA increased while the Competitive The future is uncertain for these two industries. Of the two, here is derived from a line fit. Note also that Consumer Products, with Intensity metric was also increasing. As described in the health care is perhaps more exposed to changes that could a 6% change in ROA, is on the cusp of increasing ROA but is not health care industry section, however, the health plans dramatically reshape the industry: changing legislation, as pronounced as either Aerospace subsector is still dominated by six plans that account medical tourism, new provider delivery and alternative care & Defense or Health Care. for two-thirds of all enrollees. Of the 313 metropolitan options are just a few. In an intriguing parallel, greater 30
  • 33. Cross-Industry Perspectivesemphasis on prevention of both of these industries may to be, deeply affected by regulation and governmentrepresent a major catalyst to accelerate change. In the spending at the national and state levels. Varying stateaerospace & defense industry, the rise of asymmetric regulations create a barrier to entry for health planswarfare driven by a new generation of “competitors” will to provide national coverage. Providers too are largelymake the industry increasingly susceptible to the Big Shift. regulated at a state level and only a few have a nationalSuccess may no longer be achievable through incremental reputation (such as the Mayo Clinic) or a national networkimprovements and scalable efficiency, but through product (such as some laboratory companies).innovation. The increasing emphasis on advanced softwarecapabilities in intelligence, surveillance, and reconnaissance Thus public policy appears to be the primary determinantperhaps sets the stage for a more fragmented and of the extent to which industries are affected by the Bigcompetitive software-driven industry. Shift. The exponential advances of the digital infrastructure and its broader adoption across the business landscapeTechnology or Public Policy as Key Differentiators create the potential for competition. Whether or not thatThis brings us to the question of why industries are potential is realized, however, depends on the regulatoryaffected by the Big Shift sooner rather than later? All of environment and, in particular, the degree to which publicthe industries in this report have access to the increasingly policy actively increases barriers to entry (or movement) orubiquitous digital infrastructure, so the infrastructure helps to reduce them.itself does not appear to be a significant differentiator inhow industries are affected. Of course, industries differ in Lessons From The Disruptedterms of how they use the digital infrastructure and how All industries, whether part of the first wave of impact orcreatively they rethink their own operations relative to the not, should take note of the trends driving the first tierpotential of this infrastructure. In this regard, intensifying of industries. The performance paradox — decreasingcompetition appears to motivate firms to make the most of profitability in the face of improving productivity — isthe infrastructure. A 2002 study found that the impact of prevalent in technology, media, and telecommunicationsIT investment on productivity growth depended upon the and automotive (see Exhibit 13).presence of one or more competitors that had used IT todevelop fundamental innovations in business practices or At an industry level, there appears to be a relationshipprocesses, putting pressure on all companies to replicate between productivity and competition: Industries that havethe innovations.25 At the same time, while the digital faced significant increases in Competitive Intensity haveinfrastructure reduces barriers to entry and movement and also improved their Labor Productivity. For example, theenhances the likelihood that a disruptive innovator can technology industry has experienced one of the greatestchange the game, other factors can dampen these effects increases in Competitive Intensity and has improved Laborin an industry. Productivity through advances in technology and business innovations. Industries that are typically on the leadingIn fact, our findings suggest that public policy significantly edge of innovation and adoption of new practices are mostdetermines the extent to which a given industry is affected likely to experience higher increases in productivity.by the Big Shift. It is not coincidence that aerospace &defense and health care are the least affected industries Unfortunately, productivity is not translating into profits.and are also associated with high levels of regulation and The old assumption that improvements in productivity leadgovernment purchasing. Since 1989, the U.S. government to higher returns turns out to be flawed. An unremittinghas accounted for between 40 and 60% of total annual focus on efficiency is no longer sufficient for success.sales in the aerospace & defense industry.26 Procurement Our research suggests that companies are struggling topolicies and national security considerations have a retain the value they are creating through productivityprofound influence on this industry and its relationship improvements. Some of the most significant increases inwith its largest customer — the U.S. government. productivity occurred in industries like telecommunications and technology, where productivity increased upwards 25 "How IT Enables Productivity Growth," McKinsey Global of 800%, yet ROA still declined (see Exhibit 15). These Institute, November 2002.Similarly, the health care industry has been, and continues industries are prime examples of innovation and 26 "Global Military Aerospace Products Manufacturing," IBIS World Industry Report, March 26, 2009. 2011 Shift Index Measuring the forces of long-term change 31
  • 34. PerspectivesCross-Industry productivity improvement that did not translate into The Economy Wins but Firms are Losing improved firm performance. The economy, as a whole, is benefitting from greater value creation. In his book, The Power of Productivity,27 Bill Lewis At the other end of the spectrum, we find aerospace & makes a connection between a country’s wealth and its defense. The capital requirements associated with aircraft productivity, but firms are unable to retain the value. As construction and the restrictions tied to manufacturing competition intensifies across all industries, productivity and sales of advanced weapons systems create a unique gains are competed away, and consumers and talented ecosystem within which this industry has managed to workers are reaping the benefits. Consumers and talent improve its ROA. have been able to increase their share of value largely through participation in information flows, which provide While productivity improvements seem to be necessary, greater information and access to alternatives than ever especially in competitive markets, alone they cannot before. sustain, much less improve, profitability. In fact, the rate of ROA deterioration seems to be unrelated to the rate Armed with information and alternatives, consumers of Labor Productivity improvement (see Exhibit 16). There are less loyal than in the past. The digital infrastructure were no industries that experienced both an increase in enables consumers to access a wider range of vendor ROA and a high increase in Labor Productivity. The Big Shift and product options , and to gain information about, requires that companies broaden their focus to include compare, and switch between vendor and product other operating metrics if they want to thrive in an era of options. Choices abound, information is plentiful, and increasing economic pressure. brand loyalty is declining. Want a camera? There are many independent online resources that provide news, reviews, But if improvements in productivity are not showing up and information about digital photography. Need a on the companies’ bottom lines, where are all those gains programmer? Buyers can gain instant access to thousands going? What are the implications for industries that are of professionals who offer technical, marketing, and trying to reverse the trend of declining profitability? business services. Exhibit 16: Changes in ROA and Labor Productivity, (1987-2010) Exhibit 16: Changes in ROA and Labor Productivity (1987-2010) Labor Productivity 28 Moderate Low Increase High Increase Increase Increase Aerospace & Defense 29 Consumer Static ROA Products 27 William Lewis, The Power of Aviation Productivity (Chicago: the Energy Automotive Decrease University of Chicago Press, 2994). Life Sciences 28 Labor Productivity increase is clas- Banking & Technology Media sified as low, 0 to 50; moderate, Securities Telecom. 50 to 100; or high, >100. Labor Process & Retail Productivity data is not available Industrial for the Health Care and Insurance Products industries. 29 Static ROA is defined as a change of less than 5% (+/-). Source: Compustat, Deloitte Analy sis Statistics, Deloitte analysis Source: Compustat, Bureau of Labor 32
  • 35. Cross-Industry PerspectivesSimilarly, talented workers today are less loyal to their One of the pervasive themes of the Big Shift isemployers, often viewing jobs as transactional. Workersuse the digital infrastructure to participate in both the growing power of customers and creativeinformation and knowledge flows. For example, whereemployees once would have used a software programs talent and the effect on firms’ profitability asbuilt-in help function, they now search online to find a these two constituencies capture more of thesolution. If a solution is not apparent, a worker can post aquestion and small communities develop to suggest ideas. value being created.Through participation in these knowledge and informationflows, talented workers are learning at a faster pace than pressure for firms as they work harder to meet consumerever before. In addition, talented workers use the digital demand and attract and retain talent. We expect thatinfrastructure to connect with their professional network growth in Consumer Power will have a direct effect onto generate and explore job opportunities, including Competitive Intensity within an industry. In this regard,developing new ventures of their own. Talent, particularly Consumer Power and Returns to Talent could be viewed ascreative talent, looks for jobs that provide them with the leading indicators of Competitive Intensity. In this context,greatest benefit. In today’s environment, benefits take the Herfindahl-Hirschman Index (HHI), a traditional measureform of fast-paced learning environments and monetary of competition, is more of a lagging indicator. Executivesrewards. Talented employees are also gaining power as would be well-served to look at consumer and talenta result of their crucial role in developing and sustaining trends, in addition to direct competitors, to preview thethe intangible assets that increasingly drive competitive competitive dynamics of their industries.differentiation and profitability. Our 2010 Shift Index survey offers interesting insightsThese changing power dynamics will affect all industries, related to the power consumers and talent have today. Theincluding those that were historically less competitive. following sections provide some highlights.As traditional industry boundaries dissolve, competitionwill emerge from unexpected edges. Consumers will Consumersmove fluidly across industry boundaries, looking beyond The Shift Index Consumer Power and Brand Disloyaltytraditional providers to find the solutions that meet their survey indicates that few sectors have been spared in anyneeds. Talent will also look beyond traditional firms for of the metrics evaluated.31 The indices were normalizedemployment. According to the Intuit Small Business Report to a 0—100 scale — any score over 50.0 indicates that(2007), “Entrepreneurs will no longer come predominantly the majority of respondents believe they have more powerfrom the middle of the age spectrum but instead from the as consumers or are more disloyal towards brands. Theedges. People nearing retirement and their children just Consumer Power index values for the consumer categoriesentering the market will become the most entrepreneurial ranged from 56.3 for newspapers to 72.4 for hotels.generation ever.”30 Talented workers today have the Similarly, the Brand Disloyalty index values range from 45.0opportunity to take learning from one industry and apply it for soft drinks to 75.9 for airlines.to others as the digital infrastructure has lowered switchingcosts in the employment landscape. Consequently, The two major trends underlying Consumer Power areindustries that do not offer sufficient monetary rewards more convenient access to alternatives and greateror development opportunities may lose critical talent information about alternatives. Each of these trendsas employees flee to other industries. For example, is driven by consumers’ use of digital infrastructure totechnology companies participating in e-commerce provide participate in information flows. The ubiquity of devices 30 Steve King, Anthony Townsend,opportunities for retail talent and offer higher monetary (desktops, laptops, mobile, etc.) to access the information, and Carolyn Ockels, "Intuit Future of Small Business Report," Januaryrewards. the increasing richness of the information (descriptions, 2007. 31 The Consumer Power and Brand reviews, comparisons, pricing etc.), along with increased Disloyalty indices were createdThe power consumers and talent have gained trustworthiness of the source (independent consumers), as the aggregate responses to six questions per each index. Whilefundamentally changes the competitive landscape. This has destroyed the information asymmetry companies once only categories that were directlyshifting power dynamic will lead to increased competitive related to consumers were studied, we assume the impact to industries and firms upstream on the value chain as the disruptions trickle up. 2011 Shift Index Measuring the forces of long-term change 33
  • 36. PerspectivesCross-Industry Cross Industry Perspectives 4 Updated Exhibit Consumer Power and Brand Disloyalty Matrix, (2011)Disloyalty Matrix (2011) Exhibit 17: 17: Consumer Power and Brand 100 80.00 Airline 90 75.00 Hotel 80 Home Mass Retailer entertainment 70.00 Department Store Grocery Store 70 Computer Shipping Automobile 65.00 Manufacturer 60 Cable/Satellite TV Brand Disloyalty Brand Disloyalty Restaurant Gas Station Investment Athletic Shoe Wireless Carrier 50 60.00 Household Insurance Cleaner (Home/Auto) Gaming System Snack Chip 40 Pain Reliever 55.00 Magazine 30 Banking Search engine 50.00 Broadcast TV 20 News 45.00 10 Newspaper Soft Drink 0 40.00 0 10 20 30 40 50 60 70 80 90 100 55.00 60.00 65.00 70.00 75.00 Consumer Power Consumer Power Source: 2011 Deloitte Consumer Power/Brand Disloyalty Survey (n=3765); Administered by Synovate Source: 2011 Deloitte Consumer Power/Brand Disloyalty Survey (n=3765); Administered by Synovate Exhibit 18: Consumer Access to Information and Availability of Choices, (2011) Exhibit 18: Consumer Access to Information and Availability of Choices (2011) 80% 17 © 2011 Deloitte Touche Tohmatsu 70% Percentage of consumers responding 60% 50% 40% 30% 20% 10% 0% Computer Home entertainment Gaming System Automobile Manufacturer Wireless Carrier Athletic Shoe Investment Restaurant Hotel Magazine Banking Broadcast TV News Household Cleaner Snack Chip Airline Search engine Grocery Store Cable/Satellite TV Insurance (Home/Auto) Department Store Newspaper Pain Reliever Soft Drink Gas Station Shipping Mass Retailer There is a lot of information about brands I have convenient access to choices Source: 2011 Deloitte Consumer Power/Brand Disloyalty Survey (n=3765); Administered by Synovate Source: 2011 Deloitte Consumer Power/Brand Disloyalty Survey (n=3765); Administered by Synovate 34 18
  • 37. Cross-Industry Perspectivesenjoyed. Consumers can now easily compare products and In the future, we expect to see a cross-industry warprices when making a purchase decision. These trends are for more and more categories of talent. This poses aalso leading to a lower reliance on brands as an indicator special challenge for those industries that are currentlyof value and reliability with trusted flows trumping brand in lagging in rewarding talent through faster-paced learningpurchasing decisions. environments or higher compensation.The numbers indicate that consumers perceive themselves Knowledge Flows are Key to Converting Challengesto have significant power in all categories and are relatively to Opportunitiesdisloyal to brands in many categories as well (see Exhibit As the source of economic value creation shifts from stocks17). The few categories that fall below the midpoint to flows of knowledge, participation in these flows isvalue for Brand Disloyalty (Newspapers and Soft Drinks) essential if firms are to convert challenges to opportunities.are low-cost items where consumers may not invest a lot Currently, the value that firms create is being capturedof time exploring options (see Exhibit 18).32 Some of the by consumers and creative talent: They have harnessedhigher-cost categories (Hotel, Airline, Home Entertainment) knowledge flows ahead of the firms and they are reapingfall on the high end of the spectrum for both Consumer the benefits. Firms have an opportunity to participate inPower and Brand Disloyalty. For these categories, the same knowledge flows and networks and to rebalanceconsumers are participating in information flows to gauge that equation. Participating in knowledge flows will alsovalue and reliability and are consequently becoming more "grow the pie" and move firms away from the zero-sumbrand-agnostic. game mindset that drives much of their behavior today.Talent Participating in knowledge flows can be mutually beneficialThe second group of winners from the Big Shift is talented for firms, talent, and consumers. The greater the firm’semployees. The Center for the Edge research shows that participation in knowledge flows, the more value theyaverage total cash compensation to creative talent in the can create. This value will be distributed between firms,United States grew 22% — from $87,000 to $107,000 — talent, and consumers, but as they start offering morefrom 2003 to 2010. This pattern repeated in all industries, non-monetary value to talent and consumers, firmswith growth in total cash compensation for creative talent have an opportunity to retain an increasing share ofranging from 18% in the consumer products and process the monetary value. Talent, particularly the creative and& industrial products industries all the way to 28% in the passionate talent, is attracted to firms that are rich inbanking & financial services industry. relationships, generate knowledge flows, and provide tools and platforms to support employee growth andThe gap between compensation for creative and non- achievement. A large part of Google’s attraction is itscreative workers is also growing.33 Based on the Returns to reputation for allowing employees to grow; specialTalent metric, the gap increased 28% over the past eight programs, such as “20% time,” which allows engineersyears across the entire U.S. talent pool. Looking at the gap one day a week to work on projects that are not in theiracross industries provides an equally compelling picture: 12 job descriptions, are magnets for passionate talent. Theof the 15 industries had gap increases of 20% or greater. Center for the Edge research shows that, in their quest to learn and create, passionate workers participate in moreIn a world where industry boundaries are blurring and knowledge flows than their peers. It follows that firmsdisruptions can come from outside traditional industry that attract the creative and passionate will participatelines, firms are also competing across industry boundaries in increasing volumes of knowledge flows and createfor the best talent. Talented employees are likewise more value. Consumers too are attracted to firms that aresearching for opportunities across industry boundaries, continuously creating value for them, either in productoften applying their learning from one industry to careers features or expanded services, and may be willing to pay ain another. premium for the value. Apple’s ability to maintain a price premium in otherwise commoditized product categories is 32 Although the survey focused primarily on B2C consumer catego- one example. ries, similar trends hold true in B2B categories as well. 33 As defined by Richard Florida; The Rise of the Creative Class (New York: Basic Books, 2003). 2011 Shift Index Measuring the forces of long-term change 35
  • 38. PerspectivesCross-Industry C P Up Exhibit 19: Average Compensation and Compensation Gap, All Industries, (2003-2010) Exhibit 19: Average Compensation and Compensation Gap, all industries (2003, 2010) Non- Creative Gap Creative Creative Non-Creative Non-Creative Creative Gap Industry Growth Gap (2003) Growth (2003) (2010) (2003) (2010) Growth (2010) (2010) (2010) (2010) Aerospace & Defense $92,885 $115,009 24% $51,753 $61,499 19% $41,132 $53,510 30% Automotive $89,347 $107,439 20% $44,023 $54,679 24% $45,324 $52,760 16% Aviation & Transportation $77,525 $95,739 23% $41,883 $48,498 16% $35,642 $47,241 33% Banking & Financial Services $86,974 $111,090 28% $39,005 $45,605 17% $47,970 $65,485 37% Consumer Products $81,772 $96,484 18% $37,112 $42,910 16% $44,660 $53,575 20% Energy $98,174 $120,708 23% $45,745 $56,174 23% $52,430 $64,534 23% Health Care Services $71,624 $90,047 26% $32,469 $41,689 28% $39,155 $48,358 24% Insurance $83,102 $100,792 21% $49,113 $44,984 -8% $33,989 $55,808 64% Life Sciences $101,269 $126,184 25% $45,254 $52,597 16% $56,015 $73,588 31% Media & Entertainment $82,631 $101,322 23% $38,565 $37,500 -3% $44,066 $63,822 45% Process & Industrial Products $89,395 $105,442 18% $42,377 $50,808 20% $47,018 $54,634 16% Professional Services Firms $88,538 $107,165 21% $38,432 $50,381 31% $50,106 $56,784 13% Retail $67,081 $80,312 20% $33,188 $39,122 18% $33,893 $41,189 22% Technology $105,059 $128,598 22% $48,742 $57,414 18% $56,317 $71,184 26% Telecommunications $94,747 $114,803 21% $50,662 $56,243 11% $44,085 $58,560 33% Source: US Census Bureau, Richard Floridas "The Rise of the Creative Class,“ Deloitte Analysis Source: US Census Bureau, Richard Floridas "The Rise of the Creative Class,“ Deloitte Analysis Two of the Shift Index metrics, Inter-firm Knowledge Flows Worker Passion and Worker Passion, attempt to measure the rates of flow Worker Passion, different from employee satisfaction, and passion by industry. denotes an intrinsic drive to do more and excel at every aspect of one’s profession. The 2011 survey of Worker Inter-firm Knowledge Flows Passion found that 21% of the overall U.S. workforce is The Shift Index survey of Inter-firm Knowledge Flows for passionate about their work. 19 overall U.S. workforce revealed a 2011 index score of the © 20 14.34 This score ranged from 11 for the retail industry to U.S. workers are generally not passionate about their 17 for the media & entertainment and insurance industries professions: 79% of the U.S. workforce (ranging from (see Exhibit 20). Employees in the media & entertainment 70 to 85% depending on the industry) reported not industry are more likely to connect with other professionals being passionate about work. In nearly every industry, via social media, phone, or lunch meetings than peers in more employees were disengaged or passive than were other industries. Individuals in the insurance industry are engaged or passionate with most employees falling more likely to engage through membership in community into the “passive” category. Even in the highest scoring and professional organizations. Employees in the retail industry (Health Care), only 30% of employees reported industries are least likely to participate in any type of being passionate about work. The highest incidence of interfirm knowledge flow, either virtual or physical. In disengagement was in the Insurance, Automotive and absolute terms, though, the current levels of knowledge Telecommunications industries. sharing across firm boundaries are very low in all industries, and we expect participation in Inter-firm Knowledge Flows While the factors contributing to Worker Passion are to increase as competition intensifies. complex, there is a clear need for companies to foster passionate employees in the coming years. Firms will 34 Inter-firm Knowledge Flows scores were calculated based on communication levels between firms across eight categories of knowledge flows. See the metric discussion for further information. 36
  • 39. Cross Indus Cross-Industry Perspective Perspectives UpdatedExhibit 20: Inter-firm Knowledge Flow Index Value, All Industries, (2011) Exhibit 20: Inter-firm Knowledge Flow Index Value, All Industries (2011) Media & Entertainment 17% Insurance 17% Energy 16% Life Sciences 15% Telecommunications 15% Banking & Financial… 15% Technology 15% Health Care Services 15% Consumer Products 14% Aerospace & Defense 14% Aviation & Transport… 14% Process & Industrial… 14% Automotive 12% Retail 11% Average Inter-Firm Knowledge Flow Index ValueNote: IFKF IFKF participation was updated to include to include participation in discussion groups/forumsSource: Note: participation was updated in 2011 in 2011 participation in discussion groups/forums 2010 Deloitte Worker Passion/Inter-firm Source: 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey (n=3108); Administered by SynovateSource: 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey (n=3108); Administered by Synovate need to tap into the passion of their employees to stay a longer-term view. In fact, the first tier of industries to competitive in a globalized labor market, which requires be affected by the Big Shift has been unable to overcome constant renewal and enhancement of professional skills performance pressures. While firms in these industries and capabilities. The Center for the Edge research indicates have improved their efficiency, these improvements have that passionate workers participate in more knowledge delivered diminishing returns. Today’s business environment flows in all but two industries (see Exhibit 22). Therefore, requires a focus on value creation and capture. Knowledge the firms that attract and retain passionate workers will flows are the key to surviving and thriving through likely benefit from participating in more flows and creating these tough times and beyond. The good news is that20 more value. knowledge flows are proliferating and becoming richer © 2011 Deloitte Touche Tohmats on a global scale as a result of the increasing capability of Efficiency is no longer sufficient digital infrastructure and public policy initiatives to remove The performance pressures on U.S. industries will regulatory barriers to knowledge flows. In order to improve continue well past the current downturn. Today’s business performance and retain a greater share of the value environment has been fundamentally changed by the created, firms must amplify Inter-firm Knowledge Flows underlying shifts in practices and norms as a result of and instill greater Worker Passion. Without more effective advances in digital infrastructure and public policy playing participation in knowledge flows, firms will be unable to out over decades. respond successfully to the Big Shift. While conventional wisdom would suggest a greater focus on efficiency and investments in a time of growing economic pressure, the findings of the Big Shift suggest 2011 Shift Index Measuring the forces of long-term change 37
  • 40. PerspectivesCross-Industry Exhibit 21: Worker Passion, All Industries, (2011) Exhibit 21: Worker Passion, All Industries (2011) Health Care Services Energy Media & Entertainment Retail Aerospace & Defense Aviation & Transport Services Insurance Banking & Financial Institutions Process & Industrial Products Technology Automotive Telecommunications Consumer Products Life Sciences 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Disengaged Passive Engaged Passionate Source: 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey (n=3108); Administered by Synovate Source: 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey (n=3108); Administered by Synovate 21 38
  • 41. Cross Indu Cross-Industry Perspectives Perspectiv UpdatedExhibit 22: Inter-firm Knowledge Flows by passion Type, All Industries, (2011)Exhibit 22: Inter-firm Knowledge Flows by Passion Type, All Industries (2011) Insurance Media & Entertainment Telecommunications Aerospace & Defense Energy Banking & Financial Institutions Technology Process & Industrial Products Life Sciences Health Care Services Professional Service Firms Consumer Products Automotive Aviation & Transport Services Retail 0 5 10 15 20 25 30 Average Inter-firm Flow Index value Disengaged Passive Engaged PassionateSource: 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey (n=3108); Administered by SynovateSource: 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey (n=3108); Administered by Synovate3 © 2011 Deloitte Touche Toh 2011 Shift Index Measuring the forces of long-term change 39
  • 42. Shift Index in PracticePracticeShift Index in Companies could generate actionable insight by better understanding flow dynamics While there has been a modest improvement tools, such as social media and collaboration platforms that scale flow and enable ongoing bi-lateral interations. Both in ROA over the past couple of years as the virtual and physical flows are amplified by technology and platforms that cross geographical and time disparities. downturn eases up, we believe that this is simply a short-term adjustment similar to Examples of flow metrics include: measurement of access to knowledge flows, depth of flow engagement, virtual the improvements in ROA seen in previous and physical closeness to colleagues, the connectedness of the organization, business unit and individual, and economic cycles. the correlation of flows to profit and revenue. As with operating and financial metrics, the flow metrics In response to growing interest from executives, the Center that matter most to an individual organization would for the Edge is further researching which flow metrics at vary depending on the industry, corporate goals, and the individual firm level, could be drivers of performance, organizational structure. ultimately captured in operating and financial metrics. In particular, we are investigating the ability of companies to Companies could generate actionable insight by better participate effectively in a larger and more diverse range of understanding flow dynamics. Because flow participation knowledge flows, with the intent of identifing a set of flow and performance is a continuum and the quality of flow metrics that can be drivers of performance metrics for the participation drives performance, a key management firm to monitor on an ongoing basis. challenge could be identifying and encouraging quality participation in information flows through policy, tools, and Flows in a firm are the result of social and working culture. practices, manifested in three ways: virtual flows, physical flows, and flow amplifiers. Virtual flows are the The insights derived from this research may inform thinking communication of information through virtual means around how organization can be better equipped to such as phone, internet, and video. Virtual flows are operate with more flexibility and agility in response to the enabled by advancing digital infrastructure and increasing pressures of The Big Shift. virtual connections. Physical flows are the movement and connectivity of individuals. Flow amplifiers are enabling 40
  • 43. Shift Index in Practice2011 Shift Index Measuring the forces of long-term change 41
  • 44. The Shift Index:Numbers and TrendsThe Shift Index: Numbers and Trends Shift Index Structure we could find or generate to directly measure the forces There is no shortage of indicators for measuring today’s underlying the Big Shift, we have not attempted to prove cyclical events, but what we often need is a way to quantify causality, although we have not refrained from offering long-term trends. Our Shift Index, a composite of 25 metrics hypotheses regarding potential causal links. In this regard, tracking a variety of concepts, is a way to measure the deep, we hope the Shift Index will catalyze research by others to secular forces underlying today’s cyclical change. test and refine our findings. The Shift Index consists of three indices — the Foundation The Three Indices: A Comparative Discussion Index, Flow Index, and Impact Index — that quantify the Findings from the 2009, 2010 and 2011 Shift Indices three waves of the Big Shift. Exhibit 23 summarizes these suggest that deep changes in our economic foundations indices and describes the specific indicators included in each. continue to outpace the flows of knowledge they enable and their impact on markets, firms, and people. Fitting The current Shift Index Report focuses on the U.S. a trend line to each of the three indices, we see that the economy and U.S. industries, although the detailed analysis Foundation Index has moved much more quickly in the of industry-level data. past 17 years (with a slope of 8.63) relative to the Flow Index (6.48) and the Impact Index (1.63). These compara- The choice of metrics above was the result of a robust tive rates of change are shown in Exhibit 24. selection process. Many metrics are directional proxies chosen in the absence of ideal alternatives. Some are Tracking these relative rates of change helps us to drawn from secondary data sources and analytical meth- determine the economy’s position in the Big Shift as a odologies; others are proprietary. Given the limited data whole. This initial release of the Shift Index suggests that Exhibit 23: Shift Index Indicators Exhibit 23: Shift Index indicators Competitive Intensity: Herfindahl-Hirschman Index Markets Labor Productivity: Index of Labor Productivity as defined by the Bureau of Labor Statistics Stock Price Volatility: Average standard deviation of daily stock price returns over one year Asset Profitability: Total ROA for all U.S. firms Impact Index ROA Performance Gap: Gap in ROA between firms in the top and the bottom quartiles Firms Firm Topple Rate: Annual rank shuffling amongst U.S. firms Shareholder Value Gap: Gap in the TRS1 between firm in the top and the bottom quartiles Consumer Power: Index of 6 Consumer Power measures Brand Disloyalty: Index of 6 consumer disloyalty measures People Returns to Talent: Compensation gap between more and less creative occupational groupings2 Executive Turnover: Number of top management terminated, retired, or otherwise leaving companies Inter-firm Knowledge Flows: Extent of employee participation in knowledge flows across firms Virtual Flows Wireless Activity: Total annual volume of mobile minutes and short message service (SMS) messages Flow Index Internet Activity: Internet traffic between top 20 U.S. cities with the most domestic bandwidth Migration of People to Creative Cities: Population gap between top and bottom creative cities2 Physical Travel Volume: Total volume of local commuter transit and passenger air transportation3 Flows Movement of Capital: Value of U.S. foreign direct investment (FDI) inflows and outflows Worker Passion: Percentage of employees most passionate about their jobs Amplifiers Social Media Activity: Time spent on social media as a percentage of total Internet time Foundation Index Computing: Computing power per unit of cost Technology Digital Storage: Digital storage capacity per unit of cost Performance Bandwidth: Bandwidth capacity per unit of cost Infrastructure Internet Users: Number of people actively using the Internet as compared to the U.S. population Penetration Wireless Subscriptions :Percentage of active wireless subscriptions as compared to the U.S. population Public Policy Economic Freedom: Index of 10 freedom components as defined by the Heritage Foundation TRS — Total Return Shareholders TRS – Total Return to to Shareholders Creativeoccupations andand cities defined by Richard Floridas "The Rise of the Creative Class." 2004 Creative occupations cities defined by Richard Floridas "The Rise of the Creative Class." 2004 Measured by the BureauTransportation Statistics Transportation Services Index Measured by the Bureau of of Transportation Statistics Transportation Services Index Source:Deloitte analysis Source: Deloitte analysis 42 23
  • 45. Numbers a Numbers and Trends Trends 2 The Shift Index: UpdatedExhibit 24: Component index trends, (1993-2010) Exhibit 24: Component Index trends (1993-2010) Slope: 8.63 Slope: 6.48 Slope: 1.63 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Linear (Foundation Index) Linear (Flow Index) Linear (Impact Index) Source: Deloitte analysisSource: Deloitte analysis the United States is still largely in the first wave of the Big Our initial findings show that the Flow-Impact Shift, although specific industries vary in their positions and are moving at different rates. gap is substantially larger than the Foundation- We expect that companies, industries, and economies in Flow gap, meaning that participants are the earliest stage of the Big Shift will see the highest rates relatively more successful at generating new of change in the Foundation Index. Over time, as the Big Shift gathers momentum and pervades broader sectors of knowledge flows than at capturing their value. the economy and society, the Flow Index and Impact Index will likely pick up speed, while the rate of technological relevant future. But it can be narrowed by a substantial improvement and penetration captured by the Foundation24 increase in the rate at which businesses innovate and learn. © 2011 Deloitte Touche Tohma Index will likely begin to slow. Insight also emerges from relative changes in the gaps Comparing the relative rates of change and magnitudes between the Foundation Index and the Flow Index of the three indices reveals telling gaps. The gap between and between the Flow Index and Impact Index. The the Foundation Index (190) and the Impact Index (101), for Foundation-Flow gap measures the degree to which flows example, defines the scope of the challenges and opportu- have grown through new social and business practices, nities that arise from rapidly changing digital infrastructure. relative to the growth in digital infrastructure. The Flow- Essentially, it measures the economic instability that results Impact gap measures the impact upon market participants, from performance potential (reflected by the Foundation relative to the growth of flows in the economy. Index) rising more quickly than realized performance (reflected in the Impact Index). If realized performance is Our initial findings show that the Flow-Impact gap significantly lower than potential performance, there is is substantially larger than the Foundation-Flow gap, growing room for disruptive innovation to narrow this gap. meaning that participants are relatively more successful at In this sense, the gap is also a measure of the opportunity generating new knowledge flows than at capturing their awaiting creative companies that determine how to more value. Relative changes in these gaps over time will provide effectively harness the capabilities of digital infrastructure. executives with an important measure of where progress Given the sustained exponential performance increases is being made, where obstacles exist, and where manage- in digital technology, this gap is unlikely to close in the ment attention needs to be paid. 2011 Shift Index Measuring the forces of long-term change 43
  • 46. Numbers and TrendsThe Shift Index: 2010 Foundation Index Our findings show that the rate of change in the perfor- The Foundation Index, with an index value of 190 in 2010, mance of technology building blocks substantially exceeds has increased at a 10 percent compound annual growth the rate of change of the two other foundational metrics rate (CAGR) since 1993.35 This index, shown in Exhibit 25, — adoption rates and public policy shifts. It remains the tells the story of a swiftly moving digital infrastructure primary driver of the strong secular change captured by the propelled by unremitting price performance improvements Foundation Index as a whole. in computing, storage, and bandwidth that show no signs of stabilizing. Exhibit 25: Foundation Index trends, (1993-2010) Exhibit 25: Foundation Index trends (1993-2010) 200 190 180 168 160 153 143 140 132 121 120 110 Index value 100 100 92 83 80 74 64 59 60 54 50 46 41 38 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Source: DeloitteFoundation Exhibit 26: analysis Index drivers, (1993-2010) Exhibit 26: Foundation Index drivers (1993-2010) 200 180 160 140 120 Index value 100 25 80 60 40 20 35 For further information on how 0 the Foundation Index is calculated, 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 please refer to the Shift Index Technology performance Infrastructure penetration Public Policy Methodology section. Source: Deloitte analysis 44 Source: Deloitte analysis
  • 47. Numbers and Trends Numbers The Shift Index: Trends 5Exhibit 27: Flow Index, (1993-2010)Exhibit 27: Flow Index (1993-2010) 180 160 155 145 139 140 128 117 120 104Index value 97 100 89 83 77 80 72 65 61 57 60 51 54 47 49 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Source: Deloitte analysisSource: Deloitte analysisAs Exhibit 25 demonstrates, Technology Performance rely on proxies like Migration of People to Creative Citiesmetrics (e.g., Computing, Digital Storage, and Bandwidth) and Travel Volume to provide indirect measures of thishave been driving the changes in the Foundation Index kind of activity. Social media use, conference and webcastsince 1993. These metrics have been increasing rapidly attendance, professional information and advice sharedat a 25% CAGR as a result of technological innovations by telephone and in lunch meetings — all of these serveand decreasing costs. Infrastructure Penetration metrics as suggestive proxies of various kinds of knowledge flows.(e.g., Internet Users and Wireless Subscriptions) have been As Exhibit 28 demonstrates, Virtual Flow metrics (e.g.,growing slower, but at a still significant CAGR of 17%. Inter-Firm Knowledge Flows, Wireless Activity, and InternetPublic policy has maintained a relatively constant position Activity) have been driving the index, increasing at an 10%in the Foundation Index for the past 17 years. CAGR.27 © 2011 Deloitte Touche TohmaHowever, policy is still a key wild card. There is consider- However, policy is still a key wild card. There is consider-able risk that policy responses to the current economic able risk that policy responses to the current economicdownturn may increase barriers to entry and movement. downturn may increase barriers to entry and movement.The Shift Index will represent this trend over time relative The Shift Index will represent this trend over time relativeto the changes in the other foundations. to the changes in the other foundations.2010 Flow Index While virtual flows are gaining importance as a result ofThe Flow Index, with an index value of 155 in 2010, has technological advancements, physical flows are still a keyincreased at a 7% CAGR since 1993.36 The Flow Index, to knowledge creation and transfer. As a result, Physicalshown in Exhibit 27, measures the rate of change and Flow metrics (e.g., Movement of Capital, Migration ofmagnitude of knowledge flows resulting from the advances People to Creative Cities, and Travel Volume) maintain ain digital infrastructure and public policy liberalization. significant contribution to the Flow Index, increasing at a 6% CAGR since 1993. Flow Amplifiers (e.g., WorkerWhen considering the Flow Index, it is important to bear Passion and Social Media Activity) have also been gainingin mind that the face-to-face interactions driving the most importance and are expected to be a major driver of the 36 For further information on howvaluable knowledge flows — resulting in new knowledge index in the future. the Flow Index is calculated, please refer to the Shift Indexcreation — are difficult to measure directly, forcing us to Methodology section. 2011 Shift Index Measuring the forces of long-term change 45
  • 48. Numbers and TrendsThe Shift Index: Exhibit 28: Flow Index drivers, (1993-2010) Exhibit 28: Flow Index drivers (1993-2010) 180 160 140 120 Index value 100 80 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Virtual Flows Physical Flows Amplifiers Source: Deloitte analysis Source: Deloitte analysis Exhibit 29: Impact Index, (1993-2010) Exhibit 29: Impact Index (1993-2010) 120 111 106 104 105 99 101 100 100 101 98 98 100 95 93 88 84 81 78 78 80 Index value 60 2 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Source: Deloitte analysis 2010 Impact Index attempts to determine how effective they are as consumers The Impact Index, with an index value of 101 in 2010, has and creative talent at harnessing the benefits of knowledge grown at a 1.5% CAGR since 1993. This index, shown in flows unleashed by advances in the core digital infrastruc- Exhibit 29, captures the dynamics of firms’ performance as ture. Because they are already good at doing this — and they respond to increasing competition and productivity, as are only getting better at it — the index is set to increase well as powerful new classes of consumers and talent.37 as they derive more value from the Big Shift. This index is designed to measure the rate of change and At least in the short term, however, markets and firms 37 For further information on how magnitude of the impact of the Big Shift on three key appear to be moving in the opposite direction. Partly at the Impact Index is calculated, please refer to the Shift Index constituencies: markets, firms, and people. For people, it the hands of the consumers and talent who are doing so Methodology section. 29 46
  • 49. Numbers Trends 8 Numbers and Trends The Shift Index:Exhibit 30: Impact Index drivers, (1993-2010) Exhibit 30: Impact Index drivers (1993-2010) 120 100 80Index value 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Markets Firms People Source: Deloitte analysisSource: Deloitte analysis well, pressures on returns are unparalleled, and the tradi- There is considerable risk that policy responses tional way of doing business is increasingly under siege. So as markets grow more volatile, competition intensifies, to the current economic downturn may and firm performance declines, the Impact Index will also increase. increase barriers to entry and movement. Albeit small shifts in the Impact Index are indicative of We must note that the Impact Index is more susceptible to powerful trends. For example, Exhibit 30 shows that where economic cycles than the other two indices, and, as such, we are today (an index value of 101) is the result of parallel the three drivers show much more volatility. The recessions growth in the impact of the Big Shift on all three constitu- in 2001 and 2008 particularly moved the needle, repre-30 encies. The markets driver, for example, has gone up more senting much greater pressures on firms, consumers, and © 2011 Deloitte Touche Tohm than 33% since 1993, at a CAGR of 1.7%, indicating that talent during those times. As one would expect, competitive pressures are rising steeply. Strikingly similar firm performance metrics (e.g., Asset Profitability, ROA is the increase in the firms driver which measures the Performance Gap, Firm Topple Rate, and Shareholder Value negative effect of these pressures on corporate perfor- Gap) are affected most by these economic events. mance and returns. This driver has increased by 20% since 1993, itself just at a CAGR of 1.1%. This relation- To limit the extent to which cyclical fluctuations can ship between growth in market pressures and deteriora- sway the Impact Index, we have used data smoothing to tion of firm performance, which is nearly one to one, is put the focus on long-term trends instead of short-term particularly revealing with regard to the mismatch between movements (for further information on data smoothing, today’s management approaches and the forces of the please refer to the Shift Index Methodology section). Big Shift. Finally, while we are forced to make assumptions when it comes to the impact of these forces on people, Once peaks and valleys are removed, we see clearly that because our way of measuring this through a recent survey the growing power of creative talent and consumers, a precludes us from assessing historical trends, we intui- driving force behind Competitive Intensity, is sapping value tively know that technological platforms and knowledge from corporations at the same time that Labor Productivity flows tend to change the world first on a social level, well is on the rise. before institutions catch on. So while we cannot accurately calculate how it has changed for them over time, we can reasonably assume that people have been most affected by the Big Shift and the most consistently. 2011 Shift Index Measuring the forces of long-term change 47
  • 50. 2011 Foundation Index Technology Performance 53 Computing 55 Digital Storage 58 Bandwidth Infrastructure Penetration 60 Internet Users 64 Wireless Subscriptions Public Policy 66 Economic Freedom48 2011 Shift Index Measuring the forces of long-term change 48
  • 51. 2011 Foundation Index 2011 Foundation Tab Title Here IndexThe fast moving, relentless evolution of a new digitalinfrastructure and shifts in global public policy arereducing barriers to entry and movement.The Foundation Index quantifies the first wave of the Big • Wireless subscriptions have grown dramatically sinceShift, which involves the fast-moving, relentless evolution 1985, jumping from 1% of the U.S. population toof a new digital infrastructure and shifts in global public more than 90% in 2010, creating another mediumpolicy that have reduced barriers to entry and movement. for connectivity and knowledge flows. As core digitalKey findings include: technology continues to improve, the line between the Internet and wireless media will continue to blur, further• The exponentially advancing price/performance capability enhancing our abilities to connect regardless of physical of computing, storage, and bandwidth is contributing to location. an adoption rate for the digital infrastructure that is two • U.S. Economic Freedom has shown an upward trend to five times faster than previous infrastructures, such as from 1995 to 2010, increasing 5% over that period electricity and telephone networks. while consistently staying above the world average. Over• The cost of 1 mm transistors has steadily dropped the past 15 years, it was primarily driven by investment from over $222 in 1992 to $0.13 in 2010, leveling freedom (a 14% increase), financial freedom (a 14% the playing field by reducing the importance of scale increase), trade freedom (an 11% increase), and business and thus increasing opportunities for innovation. Intel freedom (an 8% increase). While there is no prospect technologists anticipate this trend to continue for at least for a near-term leveling of improvements in digital the next four generations of processors. technology, the trend toward increasingly open public• The cost of 1 gigabyte (GB) of storage has been policy is uncertain moving forward. The current turmoil decreasing at an exponential rate from $569 in 1992 in world markets has created a very real potential for a to $0.06 in 2010. The increase of both storage and policy backlash and a rebuilding of protectionist barriers. bandwidth has helped to enable the boom in user- These barriers would detract from the benefits created generated content, which has helped to break down by advances in the digital infrastructure and its adoption information asymmetries between vendors and by market participants. It is encouraging, however, customers who now have easier access to product price that while a move to protectionist policies is certainly and quality information. The cost of 1,000 megabits possible, it would be difficult to sustain unless large parts per second (mbps), which refers to data transfer speed, of the world followed suit. dropped 10 times from over $1,197 in 1999 to $47 in 2010, allowing for cheaper and more reliable data Advances in computing, storage, and bandwidth, coupled transfer. with wireless networks and powerful devices, such as• The percentage of the U.S. population using the Internet smartphones and netbooks, have created an increasingly has grown from 1% in 1990 to 68% in 2010, taking robust platform for users to connect and communicate less time to penetrate 50% of U.S. households than anywhere and anytime. Meanwhile, access to this platform any other technology in history. As access continues to has become easier and more affordable, creating a new spread and as content and services improve, we expect foundation for the ways we interact and participate in the Internet to become an increasingly dominant enabler knowledge flows. of the robust knowledge flows central to economic value creation. 2011 Shift Index Measuring the forces of long-term change 49
  • 52. Index2011 FoundationTab Title Here As computing power grows and becomes companies and institutions can harness the powerful potential brought about by the Big Shift and progressively ubiquitous, today’s highly complex problems, turn mounting challenges into growing opportunities. in fields ranging from medical genetics to The Foundation Index nanotechnology, are expected to become the The Foundation Index, as shown in Exhibit 31, has a 2010 value of 190 and has increased at a 11% CAGR building blocks of future innovation. since 1993.38 Its metrics capture the price/performance trends in technology, its adoption by the U.S. population, These foundational changes define a new performance and corresponding advances in public policy. The potential and thus reflect both new possibilities and Foundation Index is a leading indicator: Advances in core challenges. This new potential refers to the opportunity technologies and their adoption define the potential for companies have to precipitate, participate in, and profit firm performance. However, this potential will take quite from knowledge flows enabled by an ever-improving some time to materialize in performance, as institutions digital infrastructure and the reduction in interaction costs lag behind at developing practices that truly leverage the that make it easier to coordinate complex activities on a digital infrastructure. global scale. At the same time, these foundational changes also represent significant and growing challenges for firms. We have built the Foundation Index around three key Technological advances and economic liberalization have drivers, shown in Exhibit 32: systematically and significantly reduced barriers to entry and movement. This, in turn, has substantially increased • Technology Performance: Core digital performance competitive intensity (see the Competitive Intensity trends that enable knowledge flows, creating pressures metric in the Impact Index) and has generated growing and opportunities for market participants. This driver performance pressure (see the firms metrics in the Impact consists of three metrics: Computing, Digital Storage, Index). However, by adjusting institutional architectures, and Bandwidth. governance structures, and operational practices, Exhibit 31: Foundation Index trends, (1993-2010) Exhibit 31: Foundation Index Trends (1993-2010) 200 190 180 168 160 153 143 140 132 121 120 110 Index value 100 100 92 83 80 74 64 59 60 54 50 46 41 38 40 20 0 38 For further information on how 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 the Foundation Index is calculated, please refer to the Shift Index Source: Deloitte analysis Methodology section. Source: Deloitte analysis 50
  • 53. 2011 Foundation Foundation I Tab Title Here Drivers IndexExhibit 32: Foundation Index drivers, (1993-2010) Exhibit 32: Foundation Index drivers (1993-2010) 200 180 160 140 120Index value 100 80 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Technology performance Infrastructure penetration Public Policy Source: Deloitte analysisSource: Deloitte analysis • Infrastructure Penetration: The adoption of innovative As key technologies, such as the Internet, approach a satu- products and technologies brought on by the advances ration point, growth in the Infrastructure Penetration driver in the core digital infrastructure. This driver consists of is expected to slow. However, advances in the technologies two metrics: Internet Users and Wireless Subscriptions. themselves are expected to continue at a rapid pace in the • Public Policy: Technological advances and adoption near future. This slowdown in adoption does not mean rates can be either dampened or amplified by public that participation in knowledge flows will slow or stop; policy initiatives; this driver represents the concept that on the contrary, saturation will indicate a robust installed the liberalization of economic policy removes barriers to base equipped to fully engage in knowledge flows. As the the movement of ideas, capital, products, and people. It digital infrastructure continues to improve, users will be consists of one metric: Economic Freedom. able to engage with it in new and innovative ways, further32 enhancing their abilities to connect and learn. © 2011 Deloitte Touche Tohm Consistent with its role as a leading indicator of the Big Shift, the Foundation Index has grown most rapidly over Public policy liberalization, measured by the degree of the last 16 years. This growth has primarily been driven Economic Freedom, has remained at a very high level by accelerating improvements in the performance of relative to the rest of the world, but has improved only technology, represented by the Technology Performance modestly in recent years, growing at a 1% CAGR (see driver, which has grown at a 25% CAGR since 1993 Exhibit 35). (see Exhibit 33). The penetration of these technological infrastructures, represented by the Infrastructure Penetration driver, has also been increasing, albeit at a slower 17% CAGR (see Exhibit 34), confirming that adoption of technology advances somewhat lags behind the rate of innovation. 2011 Shift Index Measuring the forces of long-term change 51
  • 54. Exhibit 33: Technology Performance, (1993-2010) Exhibit 33: Technology performance (1993-2010)Index2011 Foundation 120 100 80 Index value 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Exhibit 34: Infrastructure Penetration, (1993-2010) Source: Deloitte analysis Exhibit 34: Infrastructure penetration (1993-2010) 60 50 40 Index value 30 33 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Exhibit 35: Public Policy, (1993-2010) Source: Deloitte analysis Exhibit 35: Public policy (1993-2010) 80 70 60 The chart (right) represents the combined movements of 50 the underlying metrics in the Index value index, after data adjustments and indexing to a base year of 40 2003. For more information on the index creation process, 34 30 see the methodology section of the report. 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis 52 Source: Deloitte analysis
  • 55. Computing 2011 Foundation IndexAdvances in computing power acceleratethe pace of innovationIntroduction Once the engineers, scientists, and architects developComputing has gone through a number of transformations a working proof of concept, equipment vendors invest The Computing metricin the last 30 years, moving from mainframe to client billions of dollars creating the manufacturing equipment measures the vendor costserver and, today, into the cloud. The driver of these required to produce the new semiconductor specification. associated with puttingtransformations has been the remarkably consistent drop in These investments continue apace, even during recessions, one million transistorscomputing cost/performance. This exponential decline, first as vendors position themselves for the resumption of on a semiconductor. Thedescribed in 1965 by Gordon Moore who predicted that economic growth. metric provides visibilitythe number of transistors on an integrated circuit would into cost/performancedouble every 24 months and the cost would decrease The Shift Index will look for changes in computing cost/ associated with theby half, has proven to be one of the most enduring performance curves over time, however, we expect this computational power attechnology predictions ever made. It also serves as a metric to be highly predictable. Over the past 40 years, the core of theself-fulfilling prophecy as semiconductor vendors seek to there have been times when Moore’s Law appeared in Big Shift.maintain the trend. danger of failing, yet in each case Moore’s Law persisted as a result of human ingenuity to extend Moore’s Law into a A decline in this metricTo maintain the downward progression in computing cost/ relevant future. represents a decrease inperformance, semiconductor vendors invest in ever-more the cost of computingresearch and development (R&D) and capital equipment Observations and Implications power.to develop new semiconductor designs. Engineers shrink As Exhibit 36 shows, the cost of transistors has steadilytransistors down to the atomic level, materials scientists dropped, from over $222 dollars per 1MM in 1990 toexplore the electrical properties of the exotic materialsused in chips, physicists employ quantum mechanics to $0.13 in 2010, a negative 66% CAGR. Computinbuild atomic computers, and process engineers improve One recent innovation that promises to both extendmanufacturing throughput and quality. Increasingly, Moore’s Law and reduce semiconductor energy Updated– adcomputer architects are part of the equation, employing requirements is 3-D architecture. While today’s chips aremultiple computing cores to achieve processing efficiency. built in three dimensions, they operate in a planar fashionExhibit 36: Computing Cost Performance, (1992-2010)Exhibit 36: Computing Cost Performance (1992-2010) write up 1000 $222 100$ per 1 MM transistors 10 1 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 0 $ per 1 MM transistors $0.13Source: Leading technology research vendor 2011 Shift Index Measuring the forces of long-term change 53Source: Leading technology research vendor
  • 56. Index2011 Foundation — electrons move in two dimensions across the chip. Are You a Fraud? Intel’s new Tri-Gate architecture allows electrons to move “up, left, and down.”41 This translates to higher F ebruary 4, 2011 — Multiple arrests were made in relation to a credit performance with less power. Intel estimates that card fraud ring that affected at least 57 people. The arrests come after individual Tri-Gate transistors at 22 nm will show a 37% members of the Louisiana Financial Crimes Task Force concluded a increase in performance and require half the power of a three-month investigation into numerous credit card fraud complaints planar transistor built on a 32-nm architecture. If Intel’s from St. Tammany Parish residents. It was discovered that all of the victims had one estimates hold, that virtually guarantees that Moore’s thing in common, they had all used their card at the same McDonald’s Restaurant Law will extend well past 2020. in Mandeville. Police discovered during their investigation that Christopher M. Brumfield, 25, of Mandeville recruited Todd Pea Jr., who worked the drive- “For years we have seen limits to how small transistors thru at a Mandeville McDonalds, to collect credit card and debit card numbers can get," Moore said in an Intel Press Release. "This using a separate credit card swiping device. Pea would swipe cards once on the change in the basic structure is a truly revolutionary restaurant’s machine and then on a separate machine. He would then pass on approach, and one that should allow Moores Law, and the electronic credit card information to members of the criminal organization, the historic pace of innovation, to continue."42 who transferred the information to counterfeit credit cards. Once transferred to the counterfeit cards, members of the criminal network, used the credit card Even if architectural and process innovation cannot information to purchase a variety of merchandise within a short period of time.39 overcome the next limit to Moore’s law, Moore points out that it will “not be the end of the world … You In order to reduce chances of credit card fraud such as this, Visa announced just make bigger chips.”43 Semiconductors are built on dramatic improvements to its security capabilities early in 2011. Visa Advanced wafer-thin slices of silicon crystal. Today, cutting-edge Authorization is better able to detect "high speed fraud," where criminals fabs manufacture 300-mm wafers. The next step is attempt multiple transactions within a very short time period — minutes or even 450-mm wafers. Taiwan Semiconductor Manufacturing seconds apart. Because Visas network is not only able to process thousands of Company Limited (TSMC), one of the largest transactions per second, but also instantly recall and analyze millions of pieces of independent semiconductor foundries in the world, information in its memory, Visa is able to identify emerging fraud trends as they has announced plans to launch a 450-mm pilot line in happen — not hours or days later. An analysis of past global transactions suggests 2013-2014 and production in 2015-2016.44 Visas enhancements could help identify $1.5 billion in fraud, representing a 29% performance improvement from 2009. In particular, fraud detection rates on the As computing power grows and becomes ubiquitous, riskiest transactions improved by 122% over the previous model. today’s highly complex problems, in fields ranging from medical genetics to nanotechnology, are expected to This increase in fraud identification is the result of an enhancement to the become the building blocks of future innovation. Those underlying processing platform that powers Visas Advanced Authorization — a who use computing to analyze, arrange and apply security technology that analyzes and scores every Visa transaction for its fraud these building blocks will likely usher in new waves of potential. VisaNet is the foundation of Visa Advanced Authorization, a modular innovation. One thing seems clear: success will depend processing platform that handles more than 10,000 transactions per second and upon having the talent and organizational ability to contains a significant amount of processing memory. A new operating system effectively harness this processing power to deliver new implemented earlier this year allows more information to be analyzed at once innovations to market. and performs more complex processing functions in milliseconds. This provides 41 Dadi Perlmutter, Executive Vice President and General Manager for the Intel Architecture Visa with a more comprehensive view into the global payments system, spending Group 42 “Intel Reinvents Transistors Using New patterns and better positioning the company to detect and prevent fraud in near 3D Storage” http://newsroom.intel. real time.40 com/community/intel_newsroom/ blog/2011/05/04/intel-reinvents-transis- tors-using-new-3-d-structure 43 Quoted in Ed Sperling, “Gordon Moore on Moore’s Law,” Electronic News, September 39 Multiple Arrests Made in Credit Card Fraud 40 Visa Advances Cardholder Security Through 19, 2007, http://www.electronicsnews. Ring. February 7, 2011. Tech Talk Seattle. Improved Fraud Detection. Jan. 6, 2011. com.au/Article/Gordon-Moore-on- Department of Information Technology. Visa Corporation. < http://investor.visa. Moores-Law/74412.aspx. <http://techtalk.seattle.gov/2011/02/07/ com/phoenix.zhtml?c=215693&p=irol- 44 TSMC Q4 2010 Earnings Call Transcript, multiple-arrests-made-in-credit-card-fraud-ring/> newsArticle&ID=1513794&highlight=> Morris Chaing CEO, TSMC. January 27th 2011. 54
  • 57. Digital Storage 2011 Foundation IndexPlummeting storage costs accelerate the creation ofinformation and the need for data filtersIntroduction Observations and Implications The Digital StorageBeginning with the introduction of magnetic drum Over the past 19 years, the compounding effects of metric measures thetechnology for early mainframe computers in 1955, technology innovation, competitive pressures, market vendor cost associatedstorage cost/performance has decreased exponentially, demand and the substitute effect (storage as utility) have with producing 1 GB ofmaking storage globally ubiquitous. These cost/ driven storage costs down dramatically and contributed digital storage.performance improvements are described by Kryder’s to exponential increases in performance. The cost of 1Law which predicts that storage capacity (on a unit basis) GB of storage has decreased from $568.9 in 1992 to The metric providesdoubles every 12 to 18 months. And while Kryder’s Law $0.06 in 2010 as shown in Exhibit 37. To put this trend in visibility into the cost/was an observation after the fact, it has proven remarkably perspective, without the improvements in storage capacity performance curvedescriptive of the trend in storage capacity since 1955. and related drop in costs since 1992, it would cost $3.4B associated with digitalToday, more than 50 years after the application of to store all of the information available on the Web today. storage allowing for themagnetic storage to digital computing, users can store on Instead, storing all of the information on the Web today computational power ata thumb drive what formerly required thousands of square costs only a fraction of that, $0.4M!46 the core of the Big Shift.feet. Experts believe that cost/performance will continue toThe Digital Storage metric tracks changes in the storage decrease at its current pace in the foreseeable future.47cost/performance curve over time. We expect this metric However, in the long term, innovation will depend on newto be relatively stable as innovation and increased usage of technologies, including nanotechnology, 3-D holographicthe devices and applications that create and capture digital storage, carbon nanotubes, and heat-assisted magneticinformation drive growth and innovation in the devicesand applications used to store information. “Information recording.48 Digital Storacreation” and available storage are the yin and yang of the The demand for storage is expected to continue to growdigital universe.”45 over the next three years, but while on-premise growth stagnates, cloud-based storage is experiencing massive Updated– aExhibit 37: Storage Cost Performance, (1992-2010)Exhibit 37: Storage Cost Performance (1992-2010) write up 1000 $569 45 John F. Ganz et al., The Diverse and Exploding Digital Universe 100 (Framingham, MA: IDC, 2008), http://www.emc.com/collateral/$ per Gigabyte (GB) analyst-reports/diverse-exploding- digital-universe.pdf. 46 Based on Google estimates of 10 average web page size of 320KB < http://code.google.com/speed/ articles/web-metrics.html >and 18.56 billion indesed pages as of July4, 2011< http://www.world- 1 widewebsize.com/>. 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 47 Mark H. Kryder and Chang Soo Kim. “After Hard Drives-What Comes Next?” IEEE Transactions on Magnetics, Vol. 45, No. 10, October 2009. http://www. 0 dssc.ece.cmu.edu/research/pdfs/ After_Hard_Drives.pdf 48 Burt Kaliski, “Global Research $0.06 Collaboration at EMC Corporation,” http://www.emc.com/leadership/ 0 tech-view/innovation-network.htm $ per GB (updated 2009).Source: Leading technology research vendor 2011 Shift Index Measuring the forces of long-term change 55Source: Leading technology research vendor
  • 58. Index2011 Foundation e-discovery Redefines the Legal Paper Chase I n the trial of Green vs. Blitz USA Inc. March 2011, Mrs. Green alleged that her husband’s death was caused, in part, by the lack of a flame arrestor on gas cans manufactured by Blitz USA Inc. Although the lawsuit had been settled a year earlier, Mrs. Green sought to reopen her lawsuit upon learning that the defendant had failed to produce relevant documents. Obtained through manual collection processes, the information discovery process failed to identify documents critical to the trial. Finding that the defendant had committed information discovery abuses, including failing to disclose relevant evidence , the court ordered the defendant to pay the plaintiff $250,000 in addition to other punishments. The trial of Green vs. Blitz USA Inc. is the latest in a line of cases that have been highly critical of manual (or self) information collection efforts by legal counsel and individual custodians, the limitations of which could be overcome through electronic discovery.49 In the past, law firms deployed large numbers of junior associates and paralegals to conduct discovery to determine which documents were relevant. In fact, discovery is 80% of the cost of litigation. Historically, this manual collection process was largely deemed defensible provided the information collection process was closely monitored. However, lately, this behavior of manual collection of information and discovery is being considered simply too risky for any conservative enterprise. Over the past decade, the troves of digital information in litigation have exploded right along with inexpensive storage & search technology. Today, a case with 20 GB, more than 40,000 documents, is considered small. Enabled by this rapid progress in technology, throwing junior lawyers at information discovery is no longer feasible. The better practice is to leverage the custodians to point out where relevant electronically stored information (EST) might exist and utilize software tools to conduct broad collections from key players. For example, Jill Kirila, a partner with the litigation firm Squire Sanders & Dempsey in Columbus uses Equivio (Relevance) for e-discovery. “We reduced one project that was estimated to cost more than $500,000 in human review. We were able to do it for under one third of that using Equivio,” said Partner Jill Kirila.50 Solutions from Equivio (Relevance) and Xerox (CategoiX) are helping to maximize the value of human input in the process by applying new filtering and predictive indexing technologies to accelerate discovery beyond keyword search. Once an expert lawyer completes discovery on a set of documents, typically a few thousand, the system is “trained” and can analyze an immensely large set of documents for the case. The idea is not to remove lawyers from the process, but to allow them to focus on what they are trained to do. While low-cost storage has enabled the document overload, storage, and cloud computing play a role in the delivery of e-discovery solutions as well. Customers can pay software license fees for gigabyte analysis limits or can hire hosted solutions which simply apply a per GB charge when analysis is needed. This provides a scalable solution for law firms with variable discovery demands. 49 GREEN v. BLITZ U.S.A., INC. CIVIL e-discovery solutions have yet to be challenged in court and the consensus at legal conferences seems to be ACTION NO. 2:07-CV-372 (TJW). favorable. At the rate of information storage growth, it is only a matter of time before throwing bodies at the Filed in the United States District Court for the Easter District of problem, even low-cost domestic and international talent, becomes unworkable. Texas Marshall Division 50 Electronic discovery software helps lawyers sort through digital troves. Robert Celaschi. Business First. http://www. bizjournals.com/columbus/print- edition/2011/04/08/litigators-lean- on-automated-doc.html?page=all 56
  • 59. 2011 Foundation Indexadoption51. Cloud-based storage is expected to play a It is not unusual for a technological innovation to providesignificant role in meeting the demand at lower costs by dramatic benefits to either individuals or businesses (thinkmigrating storage away from on-premise solutions and iPhones and client/server). The difference with cloudonto shared cloud servers. storage is the wide relevance of its value proposition around simplicity, efficiency, and dependability. CloudAlthough cloud-based storage is expected to be storage has a unique potential to address both individualincreasingly important to both individuals and businesses, and businesses storage needs and overcome previousthese groups are at different levels of understanding cloud- limitations.based storage and the benefits it offers. Several cloudbased products and services are emerging for individuals. In solving our storage limitations, we create a newFor example, the cloud may provide individuals with challenge: the proliferation of digital data. As the cloudubiquitous access to data with the same safeguards against enables vast and accessible storage, our attention becomesfailure that businesses have enjoyed for years. Individuals increasingly scarce. More and more documents, emails,are also experiencing the cloud through emerging cloud- videos, blogs, papers, comments, articles, advertisements,based services, such as Apple’s iCloud (a combination etc., will vie for our limited attention. While participatingof iTunes/hard drive cloud storage solution that allows in and sampling from streams of data, information andindividuals to access content from any device) and Dropbox knowledge is increasingly important in the Big Shift,52(which allows dragging and dropping family photos), the proliferation of digital data makes it more difficult tohowever, they may not consider themselves users of the separate the valuable signal from the valueless noise.cloud nor understand the real value it is providing.For businesses, the value proposition is more evident.Cloud storage is scalable; it can efficiently accommodatevariable data flows, such as when a retailer is in the midstof the Christmas rush. Cloud storage also locates datanear scalable computing resources, allowing businesses toaccess massive computational power without having toinvest in computing assets. Because it is scalable, cloud-based storage can be more cost effective, avoiding theneed to invest in expensive on-premise storage that maybe underused. Business concerns with the cloud centerprimarily around security and risk of failure. 51 ”Cloud Computing Takes Off.” Morgan Stanley Research. <http:// www.morganstanley.com/views/ perspectives/cloud_computing. pdf> 52 The role of knowledge streams in the Big Shift is discussed in greater detail in the Flow Index section. 2011 Shift Index Measuring the forces of long-term change 57
  • 60. BandwidthIndex2011 Foundation Low-cost bandwidth bolsters connectivity, enabling consumption of richer data Introduction switches. Although the standard was adopted in 2003, The Bandwidth Nearly two decades after the beginning of the boom the early 10-GbE solutions were premium, low-volume metric measures the in commercial internet traffic, the internet continues to solutions, and, thus, expensive to manufacture. As vendor cost associated revolutionize the way people communicate, consume more data centers adopted the 10-GbE technology, with producing gigabit content, and conduct commerce. The consistent decline in manufacturers became more adept at producing them Ethernet/fiber (“GbE- bandwidth’s cost for performance is a fundamental driver until the market reached an inflection point in 2009: Fiber”) as deployed in of the growth in internet traffic and rich connectivity. volume increased substantially, competitive pressure grew, data centers. and manufacturing costs came down. The result was a We expect bandwidth’s cost/performance curve to dramatic reduction in price to the customer. These costs This metric provides continue to decline. Innovations in the underlying are expected to continue to drop for the next couple of visibility into the cost/ technology and progressive industry standards have years before flattening as the cycle begins again with performance curve improved bandwidth performance significantly. First, adoption of the next new standard. that allows for the enhanced computational power that allows content to be computational power further compressed and improved cable technology have With widespread deployment of the new standard at at the core of the Big increased the capacity of fiber. Additionally, the standard Internet service providers (ISPs), greater bandwidth is Shift. setting bodies and the processes required to deploy new available at lower costs; the world is increasingly connected bandwidth technology have been successful in maintaining through infrastructure capable of delivering faster, richer the trend of increased speed and performance. The cost and more mobile user experiences. In prior years, the efficiencies come from manufacturing and deployment bandwidth cost/performance trends pointed toward of the latest standard. In each successive round of cheap and reliable connectivity becoming the norm. Now, deployment, the cost to deploy the new standard drops improved bandwidth is enabling new applications and to a point where carriers rush to upgrade technology business models, from high definition videoconferencing in an effort to grow revenue through new services and to cloud computing, which were previously limited by applications. Combined, these trends suggest that the bandwidth constraints. decline in bandwidth cost/performance curve will persist into the foreseeable future. The decline of bandwidth cost/performance is highly disruptive for many established markets. Optical fiber into Observations and Implications the home, for example, threatens video rentals. Cable and In 2010, the delivered cost represented by the bandwidth digital television face the threat of disintermediation in metric declined markedly. This decline in costs for the end an age where bandwidth enables consumers to pick and user correlated with increased adoption of 10-GbE choose content, often selecting specific Web content over multichannel packages. 58
  • 61. 2011 Foundation Index More broadly, improved bandwidth makes it easier to Putting the ‘Net’ in Netflix collect and transfer data, providing both consumers and N companies access to more information to help make etflix founder Reed Hastings is often quoted as saying, “there decisions, and unlocks new opportunities that hinge on is a reason we didn’t call the company DVDs by mail…”. Two the availability of bandwidth. For instance, employees independent events — a $40 video rental late fee and a gym can participate in problem solving remotely through membership pricing scheme — inspired Reed to contemplate telepresence capabilities and transmission of video in a better pricing and distribution model for entertainment content that led a way that is not possible via simple teleconferencing. to the birth of Netflix in 1998. Netflix is now the #1 consumer of bandwidth Individuals can listen to music streaming from their in the United States. It surpasses Web surfing, Facebook, and iTunes combined. In 2010, the “Net” in Netflix finally became a reality as streaming laptops or watch videos. Neither videoconferencing or video, enabled by relatively low-cost bandwidth, surpassed DVD mailers as music streaming would have been possible without the the primary distribution mechanism. availability of cheap and fast bandwidth. The speed of information sharing among consumers and the ability Netflix is disrupting more than just the media industry. Recently, a Netflix for consumers to connect with relevant parties within content delivery director posted the bandwidth performance of all the a company has increased transparency and decreased major ISPs. The release and discussion thread helped consumers (especially arbitrage opportunities that existed with past ‘lumpiness’ Netflix fans) make purchasing decisions on ISPs and highlighted those of information sharing. ISPs lagging in bandwidth performance. In addition, Netflix also helps subscribers work with bandwidth constraints levied by ISPs that have Declining bandwidth cost/performance is changing the bandwidth limits or tiered pricing by allowing customers to select the quality of their content streaming. Netflix bandwidth selection enables consumers way we work, interact, and organize commerce. As bandwidth becomes increasingly commoditized, we expect Bandwidth to decide the trade-off between high-definition streaming and buying additional bandwidth-customers can elect to receive lower quality digital connected businesses and individuals to reap the benefits streams in order to maximize the content they receive under any data limits. through new applications that make use of it. Updated– adExhibit 38: Bandwidth Cost Performance, (1999-2010) Exhibit 38: Bandwidth Cost Performance (1999-2010) write up 10000 $1,245 1000$ per 1,000 Mbps 100 $47 10 1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 $ per 1,000 Mbps 2011 Shift Index Measuring the forces of long-term change 59 Source: Leading technology research vendorSource: Leading technology research vendor
  • 62. Internet UsersIndex2011 Foundation Accelerating internet adoption makes digital technology more accessible, increasing competitive pressure, as well as creating opportunity Introduction service vendors could create and exchange knowledge, The Internet Users The rate at which more people are actively using the increasing the productivity of all the participants in its metric measures the Internet indicates how rapidly this digital infrastructure is ecosystem in the process. The relatively low cost and number of “active” being adopted. The Internet is itself the sum total of all the nearly instantaneous sharing of ideas, knowledge and skills Internet users in the functionality and technological advancements underlying facilitated by the Internet is making collaborative work United States as a it—the advances in reliable broadband and mobile Internet considerably easier. percentage of total infrastructure, the vast “server farms” that support search U.S. population. engines and the countless Internet applications that run comScore’s State of the Internet Report is the basis of the “Active” users are on browsers. Use of the Internet is also significant to the data for this metric.53 comScore defines active “Internet defined as those who Big Shift because the Internet provides users with instant Users” as persons using the Internet at least once during access the Internet at access to the breadth of information and resources needed the month-long period in which they are surveyed. Data least once a month. to fuel innovation, collaboration, and efficiency. for personal computer (PC) and mobile Internet users were provided in this report, but only the PC Internet user The Internet Users As access becomes more widespread and services figures were incorporated into the index given the very metric is a proxy for continue to improve, the Internet will increasingly high overlap of mobile and PC Internet users in the United adoption of the core become a dominant medium for the knowledge flows States. The overall usage figures were normalized against technology. that are central to economic value creation. Consider the U.S. population to provide a penetration value for this how LinkedIn, Facebook, and Twitter enable individuals installed base. to post news articles, videos, photos, white papers, and other media to audiences of followers, friends, and professional colleagues. Or how the German software maker SAP used the Internet to create a virtual platform in which customers, developers, system integrators, and Exhibit 39: Internet Users, (1990-2010) Exhibit 39: Internet Users (1990-2010) 80% 70% 68% 60% Percentage of U.S. Population 50% 40% 30% 20% 10% 53 For further information, 0% please refer to the Shift Index 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Methodology section. Internet Users 60 Source: comScore, Deloitte analysis Source: comScore, Deloitte analysis
  • 63. 2011 Foundation Internet Use Tab Title Here Index UpdatedExhibit 40: Technology adoption - U.S. households Exhibit 40: Technology adoption - U.S. households 50 46 Number of years technology took to penetrate 50% of 45 40 35 U.S. households 30 25 19 20 17 16 15 12 9 10 5 0 Telephone Electricity Computer Cellphone Color TV Internet Years to reach 50% penetration Source: Deloitte analysisSource: Deloitte analysis Observations and Implications Mobile Internet users are also gaining critical mass. In In the United States, approximately 212 million individuals 2010, more than 60% of U.S. households had at least were actively using the Internet by December 2010. Over one mobile broadband device and more than 25% of the past 20 years, Internet users as a percentage of the households had two or more such devices.56 Technological U.S. population have grown rapidly, from 1% in 1990 to improvements, such as third generation of wireless 8% in 1995 to 68% in 2010 (see Exhibit 39). networks (3G) and advances in smartphone and tablet device capabilities have allowed for easy remote Internet To put these numbers in context, consider that it took less access. The Apple iPhone, iPad, and iPod Touch products time for the Internet to penetrate 50% of U.S. households exemplify this trend: Globally, over 200 million products than any other technology in history (see Exhibit 40). The sold and over 15 billion application downloads from the40 Internet achieved 50% penetration of U.S. households in Apple App Store to date.57 © 2011 Deloitte Touche Tohm 9 years, whereas it took the telephone, electricity, and the computer 46, 19, and 17 years, respectively, to reach the The mobile Internet demographic skews toward younger 54 “Consumption Spreads Faster same milestone.54 users and provides a hint of the future. According to a Today,” New York Times, http:// www.nytimes.com/imagep- recent study, when given a choice of consumer electronic ages/2008/02/10/opinion/10op. graphic.ready.html (updated 2008), One of the drivers for the increase in Internet Users has devices, Boomer Internet users (ages 45+) overwhelmingly Deloitte analysis been the constant improvement in technology cost/ chose PCs over mobile phones (51% and 21%, 55 “Forecast Analysis: PCs, Worldwide and North America 1Q10 Update” performance discussed elsewhere in the Foundation respectively), while the opposite held true (47% and 38%, Standard & Poor’s, http://www. netadvantage.standardandpoors. section. Both Internet access and PCs have become respectively) for Gen Y users (ages 18-24).58 Pew Center com/NASApp/NetAdvantage/ increasingly affordable, making it possible for more people research revealed that 91% of Gen Y users go online; this showIndustrySurvey.do?code=coh (updated 2009). to get online. For example, Gartner reported that the number gradually falls off for older audiences, hitting 30% 56 “Survey Analysis: A Map of Mobile Broadband Consumer and Rate of average system price for PCs fell from $832 in 2008 to for users over 74 years old.59 We are well into a trend Adoption” Gartner $657 in 2010, with prices expected to hit $482 by 2014.55 toward mobility, accessibility, and the convergence of the 57 “Apple’s App Store Downloads Top 15 Billion ” Apple, physical and virtual. http://www.apple.com/pr/ library/2011/07/07Apples-App- Store-Downloads-Top-15-Billion. html (created July 7, 2011). 58 Accenture Get Ready: Digital Lifestyle 3.0 report in late 2008. 59 “Generations Online 2010, Pew Internet and American Life Project 2011 Shift Index Measuring the forces of long-term change 61
  • 64. Index2011 Foundation Exhibit 41: Total Number of Unique Viewers (Millions), October 2009 & October 2010 Exhibit 41: Total Number of Unique Viewers (Millions), (October 2009 & October 2010) 200 180 160 Unique Viewers, (Millions) 140 120 100 80 60 40 20 0 Oct 2009 UVs Oct 2010 UVs Source: comScore, Deloitte analysis Source: comScore, State of The Internet Report, October 2010 The relatively low cost and nearly several prominent new markets are rapidly emerging — for example, online gambling tripled in size to hit 33 million instantaneous sharing of ideas, knowledge, UVs, while training & education doubled in size to hit 10 million UVs. Collectively, these growing user bases and skills facilitated by the Internet is making represent rich commercial opportunities and platforms for collaborative work considerably easier. exchange of information. On a monthly basis, 84% of users viewed at least one online video; 94% of users conducted at least one search User behavior trends are both shaping, and shaped by, the with the average searcher conducting 123 searches. In evolving information-sharing capabilities of the Internet. addition, the U.S. Department of Commerce estimated that 41 October 2010 comScore State of the Internet Report The total e-commerce spending in 2010 was $165 billion, up provides a snapshot of Internet user behavior in the 14.8% from 2009. As users spend more time and become United States: The average user was online 24.8 days in more comfortable on the Internet, they discover and the month, for a total of 31.7 hours, and viewed 2,620 create more diverse and robust ways to connect and share pages. Of the time spent online, the categories driving information.60 usage were search portals (6.5 hours per month per user), conversational media (4.3 hours per month per At the same time, societal trends and advances in the user) and entertainment (3.9 hours per month per user). digital infrastructure are also fostering new ways for users In addition, the content categories which attracted the to engage with the Internet—and with each other via the greatest numbers of unique visitors (UVs) per month were Internet. For instance, online games and game systems and community (180 million UVs), photos (142 million UVs), online music platforms have helped increase the number of sports (132 million UVs), and Newspapers (130 million active Internet users and will continue to fuel that growth. UVs). The content categories that experienced the greatest growth in absolute terms were Photos, Newspapers, As new segments of the population come online and and Sports, which each garnered 50, 46, and 37 million creative ways to engage emerge, there will likely be additional UVs, respectively. In terms of relative growth, substantial opportunities for sales, advertising, and 60 comScore, The State of the Internet in the U.S. in Q4 2010. <http:// www.comscore.com/Press_Events/ Presentations_Whitepapers/2011/ The_State_of_the_Internet_in_ the_U.S._in_Q4_2010> 62
  • 65. 2011 Foundation Tab Title Here IndexA Safe Place for Kids toPlay OnlineI n 2005, Lance Priebe and Lane Merrifield, two game designers at New Horizon Productions in Kelowna, Canada, were looking for social networking sites for their 6-year-old children. They quickly realized the research. Take, for example, the growth of massively dearth of options — Facebook and MySpace were targeted at older multiplayer online role-playing games (e.g., World ofaudiences and had yet to include any age-appropriate games for the 6-14 Warcraft) or the ecosystem of social networks (e.g.,range. The pair decided to create their own. Out of the gap was born Club Facebook) and social game developers (e.g., Zynga)Penguin, one of the world’s most popular multiplayer online role-playing which cater to both mass market audiences and nichegames. Introduced to the public in October 2005 with 15,000 initial beta segments. More than just consumers, new Internet usersusers, less than a year later Club Penguin had 2.6 million members. By late are influencers of purchase decisions and producers of2007, when the Walt Disney Company purchased New Horizons Productions content. For instance, in recognition of the influencefor $350 million, Club Penguin had 12 million user accounts.61 Now, in 2011, that children have on food and beverage purchasethe game boasts a user base of 150 million children worldwide with multiple decisions, General Mills runs “Create A Comic” (a Weblanguage versions.62 site where children can create animation starring patented characters) to promote its Honey Nut Cheerios cerealClub Penguin allows players to control avatars (cartoonish penguins) and brand.64 Likewise, the growth of online marketplaces likeexplore a winter-set virtual world. Like Second Life, players at Club Penguin Craigslist demonstrates how widespread Internet adoptionspend most of their time interacting with each other and connecting through enables a significant number of individuals to partake insafe chat features. The world of the game includes multiple gathering spots, transactions which would previously have been impossible.shops, monthly parties, a theater where players can help stage a monthly The business opportunities afforded by Internet adoptionplay, costumes, and an in-game newspaper (The Penguin Times) offering will also carry risks, as users choose to engage in ways thatcomics, puzzles, and advice columns. Each penguin (user) has an igloo which may be unexpected or uncontrollable.they can personalize and invite friends to. Players also use in-game currencyto buy virtual clothing, costumes, igloo decor, and to care for virtual pets. Internet-enabled collaboration has changed the gamePlayers earn currency by playing a variety of fun mini-games and multiplayer during the past 20 years for pursuits as diverse as scientificgames. Items, such as pins, flags, and stamps are either found hidden in the research, software development, conference planning,game or earned through mini-games and are used to display status. political activism, and fiction writing to name a few. We will continue to keep a close eye on how these changesClub Penguin works on a “freemium” model: All users can join Club Penguin bring utility and value to both customers and businessesand play for free, but paid monthly memberships drive most of the revenue. over time. Leveraging the creativity and collaboration ofWhen Disney bought Club Penguin, approximately 90% of users were free, Internet users will be a key to businesses trying to keep uphowever, the game has increasingly tilted toward paid memberships with with a constantly changing future.an array of exclusive options and opportunities for paid subscribers in thegame. Reviews note that options are limited for those who do not pay formembership, however, many children seem to continue to enjoy coming toClub Penguin into their teenage years. To maintain the appropriateness andsafety for the target audience, the site includes filters, paid monitors, andmultiple parental control features.63 Club Penguin’s success has led to videogame spin-offs for Nintendo as well as several mobile applications. 61 http://www.clubpenguin.com/ company/news/070801-the-walt- disney-company.htm, The Walt Disney CompanyWhile the tremendous growth in Club Penguin’s user base has stalled 62 http://www.prnewswire.com/recently (by April 2008, Nielsen reported that traffic to the site had shrunk by news-releases/club-penguin-gets- more-social-with-debut-of-new-7%), multiple competitors have come on the scene. As long as the options features-132774688.html, PR Newswirefor online entertainment and social media, targeted specifically at children 63 http://www.commonsensemedia.continue to evolve, internet use among the young shows no sign of abating. org/website-reviews/club-penguin 64 “In Online Games, a Path to Young Consumers.” New York Times, Apr 20, 2011 2011 Shift Index Measuring the forces of long-term change 63
  • 66. Wireless SubscriptionsIndex2011 Foundation Explosion in wireless communication expands knowledge flow and reach Introduction were approximately 340,000 Wireless Subscriptions; by The Wireless The network of mobile devices in America creates a platform 2010, this number was approximately 289.2 million. While Subscriptions metric for broad, robust, location-specific knowledge flows Wireless Subscriptions have increased at an 83% CAGR captures the number and drives increased connectivity among individuals and since 1985, reflecting the widespread adoption of the digital of active Wireless institutions. Together with the Internet Users metric, the infrastructure, this growth may begin to flatten or even Subscriptions as a Wireless Subscriptions metric represents the adoption of the decline as carriers attempt to better accommodate their percentage of the digital infrastructure. subscribers’ use of multiple devices. U.S. population based on CTIA’s Wireless Widespread adoption of the digital infrastructure enables In the past few years, consumers have become increasingly Subscriber Usage two- and multiway communication and the sharing of data, dependent on mobile devices to communicate. The nature Report. information, and knowledge from nearly any geographic of their communications is changing as well. Text messaging, location. People now have the ability to participate data services, applications, location-based services, and This metric is a proxy in knowledge flows anytime and anywhere, putting cloud storage are driving Wireless Subscriptions, evidenced for core technology information literally at their fingertips. With the ubiquity of by the proliferation of smartphone devices and rise of adoption. wireless connections, the proliferation of wireless devices media tablets. Like the smartphone before it, the tablet is and the development of new applications designed to transforming consumers’ use of wireless, from simple voice exploit wireless capabilities, carriers will be challenged to and text applications to email, word processing, games, manage capacity and to develop innovative pricing plans mapping, and social media. that will accommodate changing customer needs. However, even as tablets penetrate the market, they are Observations and Implications not cannibalizing mobile phones. Voice traffic was down As shown in Exhibit 42, the number of Wireless only 1.4% in 2010 and SMS/text traffic increased 22.9% Subscriptions as a percentage of the population has grown with carriers reporting over 2.05 trillion text messages on rapidly, from 10% in the mid-1990s to to 92.7% in 2010 their networks.65 This combination of form factor, new In absolute terms, the numbers are striking. In 1985, there applications, and mobility is driving a completely new Exhibit 42: Wireless subscriptions, (1985-2010) Exhibit 42: Wireless subscriptions (1985-2010) 100% 93% 90% 80% 70% % of U.S. Population 60% 50% 40% 30% 20% 10% 0% 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 65 CTIA Wireless Data Useage Wireless Subscriptions Report 2011 Source: CTIA 64 Source: CTIA
  • 67. 2011 Foundation Tab Title Here demand for Wireless Subscriptions as shown in the almost 3% Index uptick in subscribtions between 2009 and 2010.Cell Phone for all FolksW As consumers increasingly use more than one mobile device, hen Emily Connor moved out of her mom’s house during her second year of college companies are trying to create a standardized, interchangeable and started working part-time with four user experience across these multiple devices. For example, families, she knew it was time to get her internet search and social media are now available on theown cell phone, maybe even a smartphone. She was missing computer, smartphone, tablet, and even television. Similarly,connections with friends, missing important scheduling companies are creating applications designed to engage theirchanges for the families she babysat, getting lost driving in customers across all devices. These efforts will further reinforceunfamiliar neighborhoods and not making use of her time the trend toward using multiple devices.when her charges were sleeping. But the 21-year old collegestudent did not have much of a credit history and she did Moreover, as wireless devices proliferate and new applicationsnot have much cash to spare. Earning her money in cash are developed, Wireless Subscriptions, and the quantity ofjobs, on paper she looked like the sum of her debt—student digital data, will continue to grow, requiring greater amounts ofloans and delinquent payments on a store credit card. bandwidth, storage, and computing. The digital technology thatAt 68 years old, Cheryl Henry had heard all the horror stories allows for this ubiquitous connectivity has created an invisibleabout families getting hit with thousand-dollar cell phone infrastructure which is now enabling applications to workbills and she swore she was not interested. But when her together, such as personal health devices, parking meters, globalhusband’s health required her to begin making daily trips to positioning system (GPS), individual users, and giant databases.the VA hospital 60 miles away and she could never find a pay For business leaders, this invisible infrastructure has a profoundphone and barely had time to email her children at night to effect on the ability to open up new markets, utilize new businesskeep them updated, she cautiously began to consider getting models, and reach parts of the world previously unreachable.a cell phone. When her son visited for a week, he had beenable to pull all sorts of useful information off his phone The current generation of wireless devices is more useful andbefore they met with the doctor. She was spending hours at technologically advanced than any previous generation. Ina time in hospital waiting rooms and often wished she couldlook up more information about what the doctors were the past two years, the number of devices with three or moretelling her, just like her son did. But she was still intimidated transmitters — accommodating Bluetooth, Wi-Fi, and other typesby a complex contract and the fear of running up expensive of connections in addition to cellular — has increased by 700%.phone bills every month. She did not want anything too But this explosion in the use of wireless technology is testing thefancy or complicated — just a functional phone that could capacity of our current networks. Not only are there more andhelp her meet her connectivity needs. more wireless devices, but each of them is consuming more and more data.A few years ago, both of these women would have hadtrouble getting a phone, and a plan, that met their needs. With the increase in subscribers who use multiple devices, carriersWith prepaid cell phones, mobile providers hit upon an are exploring ways to streamline plans across these devices.innovative business model which allowed them to take European carriers are leading the way, offering shared dataa minimal risk on new customers who do not have anestablished history, or who want to restrict their cost of plans that allow a user to share a data allotment across multipleusage, such as students, recent immigrants, or retirees. devices, such as an iPhone or iPad. The new shared plans target customers instead of SIM cards, consolidate subscriptions,Prepaid carriers, such as Metro PCS and Boost Mobile, have and remove one barrier to increased data flow. Similar plansnow entered the smartphone market with low, all-inclusive are emerging in other countries, with the basic premise that aprices; smartphones are accessible not only to customers customer pays a small fee each month for each additional devicewithout an established credit history, but also to newer that shares data. Recent announcements from Verizon indicateprice-conscious customers who are unwilling to spend that carriers within the United States are also considering theseon expensive smartphones. Today, Metro PCS customers plans — similar to existing plans that allow families or businessescan choose from 5 smartphone styles, the cheapest of to share minutes across multiple phones. Wireless routers, suchwhich is $79 with no contract. As wireless communication as Novatel’s MiFi, allow customers to connect up to five wirelessbecomes more intrinsic in our lives; carriers are innovatingthe technology, equipment, and services to enable more devices to their own personal Wi-Fi hotspot. Should this trendindividuals to receive and share information more freely. This toward consolidation of Wireless Subscriptions continue, weconnectivity will scale further as technology advances and expect growth of this metric to slow or even decline.becomes even more accessible for all price bands. 2011 Shift Index Measuring the forces of long-term change 65
  • 68. Economic FreedomIndex2011 Foundation Increasing economic freedom intensifies competition while at the same time enhancing the ability to collaborate. Introduction governments allow labor, capital and goods to move The Economic Changes in public policy also play a foundational role in the freely, and refrain from coercion or constraint of liberty Freedom metric Big Shift. Broadly speaking, policy trends toward economic beyond the extent necessary to protect and maintain measures how free liberalization on a global scale have been driving down liberty itself.” a country is across barriers to the movement of products, money, people, ten components of and ideas, both within countries and internationally. These Observations and Implications freedoms, which are flows intensify competition, putting pressure on margins, Globally, economic freedom suffered in 2010 due to the drawn from the Index and speeding the rate at which companies gain and lose financial crisis and global recession. The global average of Economic Freedom market leadership. Economic Freedom score for the 2010 Index is 59.4 produced by the (out of a possible 100), a 0.1 point decrease from 2009. Heritage Foundation The Economic Freedom metric represents the degree Exactly half of the world’s major economies curtailed and copublished to which public policies in a country support economic economic freedom to some degree by introducing various with The Wall Street liberalization. A higher Economic Freedom index for a interventionist measures. This was the first time in the Journal. country indicates more open policies regarding trade, history of the index that average economic freedom investment, finance, and business practices which further declined for consecutive years. This metric is a proxy catalyze and accelerate the foundational changes of the for openness of Big Shift. For the U.S., economic freedom (see Exhibit 43) has public policy and the trended upward from 1995 to 2006, increasing from an degree of economic The 2010 Index of Economic Freedom produced by the index value of 76.7 to 81.2 in 2006. However, since 2006 liberalization. Heritage Foundation and copublished with The Wall Street U.S. economic freedom has fallen 3.2 points, ranking 8th Journal, described economic freedom as the “right of every out of 179 countries. This decline in economic freedom is human to control his or her own labor and property… attributable to decreases in financial freedom, monetary with that freedom both protected by the state and freedom, and property rights. The recent passing of the unconstrained by the state. In economically free societies, Dodd-Frank Act introduced broad-sweeping regulations Exhibit 43: Index of Economic Freedom (U.S.), (1995-2010) Exhibit 43: Index of Economic Freedom (U.S.) (1995-2010) 82 80.9 81 80 79 Index value 78 76.7 78.0 77 76 75.7 75 74 73 72 1995 1997 1999 2001 2003 2005 2007 2009 Index of Economic Freedom (Overall Score) Linear (Index of Economic Freedom (Overall Score)) 66 The Heritage Foundation & the Wall Street Journal, 2011 Index of Economic Freedom Source: Heritage Foundations 2010 Index of Economic Freedom
  • 69. 2011 Foundation IndexFighting for the Right to the financial sector, including capital holding requirements which impact a bank’s lending capabilities.The United States remains above the worldto Braid average in all but the government spending and fiscal freedom components,T with labor freedom and business freedom scoring the highest at 94.8 and oday, Melony Armstrong of Tupelo, 91.3, respectively. Mississippi, runs her own African hair braiding business and a school where she teaches the art. However, Melony does not take Historically, the primary drivers of economic freedom in the United States (inher teaching for granted. In all but a handful of states, terms of percentage increases since 1995) have been: trade freedom (8.5%),performing African hair braiding professionally without a business freedom (6.3%), investment freedom (5%), and fiscal freedomgovernment-issued license is illegal. Until 2005, regulations (3.5%).set by Mississippi’s State Board of Cosmetologists requiredthat Melony complete 3,200 hours of coursework to be Open labor markets enhance overall employment and productivity growth.allowed to teach African hair braiding. Even though the There is a positive correlation between labor freedom and Migration tocoursework had little to do with African hair braiding, the “Creative Cities,” Travel Volume, and Labor Productivity. Open labor marketsrequirements allowed practicing cosmetologists to keep enable individuals to pursue jobs of choice and to congregate in “spikes,”barriers to entry into their industry high. This all changed geographies where talent is concentrated, such as Silicon Valley andwhen Melony Armstrong took on the state’s costmetologyestablishment, joining with two aspiring hair braiders and Boston. Our case research shows that these spikes are expected to fosterthe Institute for Justice to file a lawsuit against the state to opportunities for rich and serendipitous connections that help to acceleratecontest these regulations. talent development and improve productivity. Additionally, we would expect that workers who are free to select jobs of choice will be more passionateThe Institute for Justice is a pro bono law firm that about their work and eventually more productive.engages “in cutting-edge litigation and advocacy bothin the courts of law and in the court of public opinion Business freedom has a strong positive correlation with Competitive Intensityon behalf of individuals whose most basic rights are and GDP. The greater the business freedom, the more competitive thedenied by the government — like the right to earn an environment and the greater the overall economic output of the country.honest living, private property rights, and the right to The U.S. regulatory environment supports the freedom to start a business,free speech, especially in the areas of commercial and which lowers barriers to entry and facilitates rich entrepreneurial activity.Internet speech.”66 Even with a high rating for EconomicFreedom in the United States, there are still regulatory According to the Heritage Foundation’s report and the World Bank’s Doingbarriers that make it difficult for struggling entrepreneurs Business study67, starting a business in the United States. takes six daysto enter many business arenas. Through organizations like compared to the world average of 38. The United States also has somethe Institute for Justice, these remaining barriers are being of the most straightforward bankruptcy proceedings in the world, whichchallenged and overcome. The Institute for Justice selects may encourage more businesses to take the calculated risks that can spurcases where government-imposed licensing requirements innovation and competition.make it impossible for entrepreneurs to start their ownbusinesses with the intent of laying a broad foundation for Compared to other countries, the labor, financial, and business markets infuture litigation to free other industries and occupations. the United States are some of the most open and modern in the world. AsThe effects of such licensing restrictions are starkest for other countries adopt more open policies, the competition and disruptionbusinesses that require little capital or education. The we have described will increase. We should note, however, that, unlike thelicensing laws for braiding hair seemed a perfect example. persistance of digital technology performance trends, continued trendsMelony’s efforts paid off when the the Mississippi Senate toward economic liberalization are much less certain. The current economicvoted to amend the Board of Cosmetology’s regulations turmoil in world markets creates real potential for a public policy backlash,around hair braiding licenses. Now, African hair braiders thus potentially driving some countries to erect protectionist barriers. Whileare only required to register with the Department of protectionist public policies could temporarily constrain some of the forcesHealth, post basic health and sanitation guidelines at driving the Big Shift, they would be difficult to sustain unless large parts oftheir places of work, and complete a self-test on that the world followed suit.information. Thanks to their efforts, thousands of 66 Institute for Justice Website. Ij.org.entrepreneurs across Mississippi can now be free to pursue 67 Doing Business 2009, World Banktheir career of choice. Group, http://www.doingbusiness.org/ ExploreEconomies/?economyid=197 (updated 2009). 2011 Shift Index Measuring the forces of long-term change 67
  • 70. 2011 Flow Index Virtual Flows 74 Inter-Firm Knowledge Flows 79 Wireless Activity 82 Internet Activity Physical Flows 86 Migration of People to Creative Cities 90 Travel Volume 92 Movement of Capital Flow Amplifiers 96 Worker Passion 102 Social Media Activity68 2011 Shift Index Measuring the forces of long-term change 68
  • 71. 2011 Flow Index 2011 Flow Index Tab Title HereSources of economic value are moving from “stocks” ofknowledge to “flows” of new knowledgeRemote communications today are easier than ever. both kinds of flows, making them even more meaningful.Wireless connectivity and Internet access are virtually Some of the findings from our inaugural research are givenubiquitous in the United States, and there is rarely a below:moment today that we are not connected to the restof the world. What may seem commonplace today • Talent migrates to the most vibrant geographies andwas a luxury little less than two decades ago. As the institutions because that is where it can improve itsdigital infrastructure penetrates ever more deeply performance more rapidly by learning faster. Our analysisinto the social and economic domains, practices from shows that the most creative cities tend to grow muchpersonal connectivity are bleeding over into professional faster than the least creative cities; in fact, betweenconnectivity: Institutional boundaries are becoming 1990 and 2008, the top 10 creative cities grew moreincreasingly permeable as employees harness the tools than twice as fast as the bottom 10. This migration tothey have adopted in their personal lives to enhance their creative cities is not only beneficial for the cities andprofessional productivity, often without the their economic livelihood; it also correlates with anknowledge, and sometimes despite the opposition, of their increase in Returns to Talent. By better understanding theemployers. drivers of the disproportionate growth in creative cities, business leaders can create organizations that mimic theWith the Flow Index, we measure the changes in social environment that makes those cities so creative.and working practices that are emerging in response to • Companies appear to have difficulty holding ontothe new digital infrastructure. More and more people are passionate workers. Workers who are passionate aboutadopting practices that utilize the power of the digital their jobs are more likely to participate in knowledgeinfrastructure to create and participate in knowledge flows. flows and generate value for their companies — onOur approach to measuring these knowledge flows average, the more passionate participate twice as muchincludes measuring flows of capital, talent, and knowledge as the disengaged in nearly all the knowledge flowsacross geographic and institutional boundaries. activities surveyed. We also found that self-employed people are more than twice as likely to be passionateThe Flow Index measures Virtual Flows, Physical Flows, about their work as those who work for firms. Theand Flow Amplifiers. Virtual Flows occur as a direct result a current evolution in employee mindset and shifts instrong digital infrastructure. As computing, digital storage, the talent marketplace require new rules on assessing,and bandwidth performance improve exponentially, managing and retaining talent.virtual flows are likely to grow more rapidly than the other • Knowledge flows across companies are currently indrivers of the Flow Index. However, Physical Flows will their infancy. But our survey-based research indicatesnot be fully replaced by Virtual Flows. As people become that increased interest and participation in new types ofmore and more connected virtually, the importance of knowledge flows available through the current digitaltacit knowledge exchange through physical, face-to-face revolution, such as participation in social media and useinteractions will only increase, leading to more physical of Internet knowledge management tools, will likelyflows. Both Virtual and Physical Flows are enriched by Flow drive a marked increase in knowledge flows across firmAmplifiers. These amplifiers enhance the robustness of boundaries. 36% of those surveyed this year currently 2011 Shift Index Measuring the forces of long-term change 69
  • 72. 2011 Flow IndexTab Title Here Internet traffic in North America is expected to better understanding the role travel plays in a Big Shift world, business leaders can more strategically consider almost quadruple from 2010, increasing at a the trade-offs when making decisions about travel. • Historically, FDI has been viewed as a way to improve 26% CAGR to hit 22,000 petabytes per month efficiency, obtain resources, participate in labor arbitrage, by 2015. and enjoy privileged access to local markets, which often favors local manufacturers. However, increasingly, firms are taking a more strategic long-term view by participate in social media in the professional sphere approaching FDI opportunities as ways to identify and across firms and will likely drive significant growth in access pockets of talent and inno- vation across the knowledge flows in coming years. This assumption is also globe. U.S. FDI flows (both inflows and outflows) have supported by our research on the growth of social media increased steadily over the past few decades, with capital platforms: Between 2007 and 2008, the total minutes movement in 1970 being only 3% of what it is today. spent on social media sites increased 27, while the • Wireless Activity (mobile phone usage in minutes talked same metric increased 48% between 2009 and 2010. and SMS text messages sent) and Internet Activity Moreover, the average daily visitors to social media sites continue to grow exponentially. Ten years ago, the grew to 94 million in 2010, up 52% year over year from average user spent 64 minutes per month on his or 62 million in 2008. her mobile phone; today, the average user spends over • Residents of the United States. travel more and more 600 minutes per month on their mobile phone. SMS each year. And as people’s movement increases, Big text messages, which are a more recent phenomenon, Shift forces are amplified and opportunities for rich have shown similar growth: in Q1 2009, the average and serendipitous connections are more likely. Travel U.S. mobile subscriber sent/received 486 text messages within the United States has increased 56% over the per month. By the end of 2010, the average number past 19 years. This rise in travel also correlates with of text messages sent/received grew to over 600 per labor productivity, suggesting that the amount people user per month. On the Internet, traffic across the 20 travel can directly affect the way they work. One highest-capacity routes has grown 37% in the past year. plausible explanation for this is that people benefit in The on-demand rich media experiences offered by the multiple ways from the physical interactions that are ever-improving modes of virtual communications will more likely as a result of higher travel volume. Face-to- continue to shape how we interact with the world, both face interactions will always play a role in promoting personally and professionally. productive and trust-based business relationships. By Exhibit 44: Flow Index trends, (1993-2010) Exhibit 44: Flow Index (1993-2010) 180 160 155 145 139 140 128 117 120 104 97 Index value 100 89 83 77 80 72 65 61 57 60 51 54 47 49 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Source: Deloitte analysis 70
  • 73. Flow Inde Drivers 2011 Flow Index Tab Title HereExhibit 45: Flow Index drivers, (1993-2010) Exhibit 45: Flow Index drivers (1993-2010) 180 160 140 120Index value 100 80 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Virtual Flows Physical Flows Amplifiers Source: Deloitte analysisSource: Deloitte analysis Taking a step back, we can see the interrelated nature structure, this index will likely serve as a lagging indicator of many of the foundation and flow metrics discussed of the Big Shift, trailing behind the Foundational Index. As in this report. The results of our research have shown such, we track the degree of lag over time. that as economic freedom increases, people are freer to take control over their careers and lives. This leads to an Eight metrics within three key drivers are included in the increased likelihood of mobility and a profound increase in Flow Index: population growth within creative cities. These epicenters of creativity, with a high concentration of talent, have • Virtual Flows: Knowledge flows enabled by advancing helped to propel recent growth in GDP and power much of digital infrastructure and its impact on increasing virtual the increase in productivity. We attribute this, in part, connections. This driver consists of three metrics: Inter-45 the increased opportunity for rich and serendipitous to Firm Knowledge Flows, Wireless Activity, and Internet © 2011 Deloitte Touche Tohm encounters. Activity. • Physical Flows: Knowledge flows enabled by the The Index movement of people and capital, strengthening virtual The Flow Index, shown in Exhibit 44, has a 2010 score connections with physical interaction. This driver consists of 155 and has increased at a 7% CAGR since 1993.68 of three metrics: Migration of People to Creative Cities, The Flow Index measures the velocity and magnitude Travel Volume, and Movement of Capital. of knowledge flows resulting from the adoption of • Flow Amplifiers: Knowledge flows amplified and practices that take advantage of the advances in digital enriched as people’s passion for their profession infrastructure and public policy liberalization. increases and technological capabilities for collabora- tion improve. This driver consists of two metrics: Worker The metrics in the Flows Index capture physical and virtual Passion and Social Media Activity. flows as well as elements that can amplify a flow — examples of these “amplifiers” include social media use and Historically, the Flow Index has grown at an increasing rate, the degree of passion with which employees are engaged reflecting faster and faster growth in its underlying metrics. 68 For further information on how with their jobs. Given the slower rate with which social and Exhibit 44 shows the contribution of each metric to the the Flow Index is calculated, please see the Shift Index professional practices change relative to the digital infra- overall index value, and Exhibits 46 through 48 show the Methodology section. Note that because several metrics in the Flow Index are indexed to 2008 due to limited- data availability, the value in 2003 (the base year) does not equal 100. 2011 Shift Index Measuring the forces of long-term change 71
  • 74. Exhibit 46: Virtual Flows, (1993-2010) Exhibit 46: Virtual Flows (1993-2010)2011 Flow IndexTab Title Here 80 70 60 50 Index value 40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Exhibit 47: Physical Flows, (1993-2010) Source: Deloitte analysis Exhibit 47: Physical Flows (1993-2010) 80 70 The charts (right) represent the 60 combined movements of the underlying metrics in the index, 50 after data adjustments and Index value indexing to a base year of 2003. 40 Due to data availability, certain Flow Index metrics were indexed to 2008. For more information 46 30 on the index creation process, see the methodology section of 20 the report. 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Exhibit 48: Flow Amplifiers, (1993-2010) Source: Deloitte analysis Exhibit 48: Flow Amplifiers (1993-2010) 80 70 60 50 Index value 40 47 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis 72 Source: Deloitte analysis
  • 75. 2011 Flow Index Tab Title Heregrowth of each index driver. Comparing the three, it is A key challenge for companies in the 21stevident that the Virtual Flows and Amplifiers have beendriving the increasing rate of the change of the Flow Index. century is to become more open to ideas fromAs shown in Exhibit 46, Virtual Flows have grown at a the outside and to make use of resourcesconsistently accelerating pace with an overall CAGR of wherever they may be located, internally or11%. This has been powered by the exponential growthof wireless and Internet Activity. We expect this trend to externally.continue if not accelerate, as the above metrics continuegrowing exponentially, and knowledge flows between Therefore, the more recent curvature of the graph is acompanies start increasing exponentially as well. In reflection of the recent exponential growth in Social Mediacontrast, Physical Flows, as shown in Exhibit 47, have Activity.grown fairly linearly, with a CAGR of 6%. We expect thistrend to continue at a steady pace, reflecting the long-term Overall, we expect the Flow Index to grow at an ever-secular trends in capital flows, Migration of People to increasing pace in the coming years. With more peopleCreative Cities, and travel. adopting new conventions and practices that take advantage of the advances in digital infrastructure, it isExhibit 48 depicts Flow Amplifiers, which were flat initially, very likely that the growth rate of this index may eventuallybut started growing near the millennium; this is a function surpass that of the Foundation Index.of both the metrics and the methodology. The initial periodreflects the two metrics in this category (Worker Passionand Social Media Activity) both being relatively new (one isbased on a custom survey, and the other representsa recent phenomenon). With no prior data for WorkerPassion, we assumed a flat trend for passion for thepast years using job satisfaction trends as a rough proxy. 2011 Shift Index Measuring the forces of long-term change 73
  • 76. Inter-Firm Knowledge Flows 2011 Flow Index Individuals are finding new ways to reach beyond the four walls of their organization to participate in diverse knowledge flows IntroductionThe Inter-firm As the digital infrastructure and public policy shifts While it would be impossible to quantify the core andKnowledge Flows undermine stability and accelerate change, the primary richness of the types of flows that harness the greatestmetric is a normalized sources of economic value are shifting. “Stocks” of value, we have attempted to look at the drivers of rich,measure of how much knowledge—fixed and enduring know-how and personal interactions as a proxy for interfirm knowledgeworkers participate experience—were once what companies accumulated flows. In our survey-based study, each respondent wasin eight categories and exploited to generate profits. Think of the proprietary scored based on how frequently the individual participatedof activity in their formula for baby foods or the patents protecting in each of eight activities that suggested the potentialprofessional lives, blockbuster drugs in the pharmaceuticals industry. for knowledge flows. Some of the activities, such asranging from the use of conference attendance, represent more traditionalsocial media to connect In a less predictable and faster changing world, however, professional networking while others, such as social media,with other professionals stocks of knowledge depreciate more quickly. The value are relatively new to the professional world. Over time, weto attendance at of what we know at any one point in time diminishes. As expect to be able to see trends regarding participation inconferences. one simple example, consider the rapid compression of various kinds of interfirm knowledge flows and the impact product life cycles occurring in most industries. Even the of that activity on organizations.This metric is a proxy for most successful products are quickly supplanted as newknowledge flows across generations come through the pipeline faster and faster. Observations and Implicationsfirms. In the past, companies had time to exploit what they The Inter-firm Knowledge Flow score is an index value learned and discovered and could generate value from that of participation in knowledge flow activity; thus it is best knowledge for an indefinite period. Not anymore.69 understood relative to other years or compared across industries or job types rather than as an absolute number. To succeed now, companies (and individuals) have to For the past three years, the Inter-Firm Knowledge Flow continually refresh what they know by participating in Index value has remained the same. This means that, on relevant “flows” of knowledge that extend beyond the average, workers are participating in knowledge flow four walls of the firm. Tapping into these flows, especially activities at about the same frequency they were three those that create new knowledge, increasingly defines years ago, and that overall, there is still opportunity for one’s competitive edge. Technological advances that allow workers to become more active in connecting with others people to connect virtually enable greater participation in in their professional lives. flows. By enabling individuals to seek new perspectives, keep While research suggests a high correlation between abreast of innovative approaches and learn from seasoned interfirm knowledge flows and innovation70, a critical practitioners, interfirm knowledge flows serve two key subtlety is that some types of flows result in greater purposes: refreshing organizational knowledge and benefits. We believe the most valuable knowledge is infusing worker passion. The stagnation in the Inter- tacit knowledge — the knowledge which resides in our Firm Knowledge Flow value suggests that individuals are heads and which cannot easily be codified or abstractly not seeking out external sources of information or that aggregated. Tacit knowledge often embodies critical companies are failing to equip their employees with access insights about processes or nuances of relationships to interfirm flows. This limits the organization to the stocks 69 Deloitte Research and is best communicated through stories and personal of knowledge amassed by current employees. 70 See, for instance, Alessia Sammarra and Lucio Biggiero, connections—modalities that are discounted in most “Heterogeneity and Specificity of Inter-Firm Knowledge Flows in enterprises. Innovation Networks,” Journal of Management Studies 45, no. 4 (2008): 800-29. 74
  • 77. 2011 Flow Index Tab Title HereAlthough the overall level has not changed, respondents’ has declined, while use of social media is trending upparticipation in each type of knowledge flow activity is over three years, indicating increased acceptance ofslowly changing (see Exhibit 49). Physical events, such as new platforms and methods of tapping into knowledge IFKF 1conferences and lunches, persist as the most common type flows. The marketing, human resources (HR), and salesof interfirm knowledge flow — 46% of those surveyed functions lead in use of social media, while customerreported attending at least one conference per year. service, accounting/finance, and manufacturing lag.Participation in online forums and community organizations While newer methods of interaction like social media are Updated Exhibit 49: Percentage participation in Inter-Firm knowledge flows, (2011-2009) Exhibit 49: Percentage participation in Inter-Firm knowledge flows (2011-2009) 100% 90% 80% 70%Percentage participation 60% 48% 47% 50% 46% 39% 37% 38% 38% 40% 37%37% 37% 36% 35% 33%33% 32% 33% 34% 32% 31% 30% 26%25% 22% 19% 19% 20% 10%10% 10% 0% Email alerts Online 0 Community Lunch Web Casts Professional Telephone Social media Conferences IFKF 2 groups/forums organizations meetings organizations 2011 (n=3108) 2010 (n=3108) 2009 (n=3201) *2011 Email Alerts redefined Source: SynovateAlerts redefined2009 Note: 2011 Email 2011, 2010,ExhibitMeasurement = Significantly higher at participation and frequency, (2011) WP/IFK 50: Inter-Firm knowledge flow 95% confidence interval Source: Synovate 2011, 2010, 2009 WP/IFK Measurement = Significantly higher at 95% confidence interval Exhibit 50: Inter-Firm knowledge flow participation and frequency (2011) 60% 50%Percentage participation 40% 30% IFKF Me 49 Write-u © 2011 Deloitte Touche Toh 20% 10% 0% Using social Email alerts Conferences Web Casts Telephone Lunch Community Professional Online media meetings organizations organizations discussion Daily Several times a week Weekly forums A few times a month Monthly Once every few months Once a year Less often than once a year Source: Synovate, Deloitte analysisSource: Synovate , Deloitte analysis 2011 Shift Index Measuring the forces of long-term change 75
  • 78. 2011 Flow Index Would like to shorten the y-axis to 10% to 70% Exhibit 51: Social media usage by employee function, (2009-2011) Exhibit 51: Social media usage by employee function (2009-2011) 70% Percentage of employees using social media, 60% by employee function 50% 40% 30% 20% 10% 2009 2010 2011 Marketing Human Resource Sales Management Supply Chain/Logistics IT/Technology Accounting/Finance Other Manufacturing Customer Service Source: Synovate, Deloitte analysis Source: Synovate , Deloitte analysis Exhibit 52: Percentage participation in Inter-Firm knowledge flows by user age, (2011) Exhibit 52: Percentage participation in Inter-Firm knowledge flows by user age (2011) 60% 56% 52% 52% 49% 49% 49% 38% 50% 36% 47% 42% 42% 32% 40% 48% 39% Percentage participation 36% 40% 37% 31% 35% 35% 37% 34% 33% 33% 46% 32% 10% 33% 34% 37% 32% 10% 35% 29% 28% 27% 39% 33% 30% 38% 33% 23% 21% 21% 37% 51 20% 22% 25% 19% 19% 26% 17% 17% 19% 20% 19% 10% 0% Email alerts Online Community Lunch Web Casts Professional Telephone Social media Conferences groups/forums organizations meetings organizations 0-24 25-34 35-44 45-54 55-64 65+ *Note: 2011 Email Alerts redefined *Note 2011 Email Alerts redefined Source: Synovate 2011, 2010, 2009 WP/IFK Measurement Source: Synovate 2011, 2010, 2009 = Significantly higher at 95% confidence interval WP/IFK Measurement = Significantly higher at 95% confidence interval 76
  • 79. 2011 Flow Index Tab Title HereSpiceWorks & The Guildof SommeliersW gaining acceptance in customer-facing applications, firms hat does a master sommelier have in common with seem reluctant to apply these technologies to business your office IT support staff? And what does this operations. mean for you? Of all types of flows, social media, Web forums, and alertsChances are that both are connecting with other professionals in are among of the few flows that employees engage in ontheir fields and questing online for insights on how to improve their a daily or weekly basis. With the capability of immediateperformance. If knowledge is power, then the potential for self- and iterative information and feedback loops, employeesempowerment has grown tremendously with the profileration of are able to access and digest information as they need it inweb-based platforms where geographically dispersed users of diverse a way that is applicable to their work.skill levels sign on to access high-value knowledge flows and build theirexpertise. There is a strong correlation between age and the types of flows in which employees are likely to participate. YoungerThe Spiceworks Community boasts a membership of 1.5 million IT employees gravitate toward social media, while employeesprofessionals from 196 different countries who share IT best practices, older than 45 are more likely to attend conferences orhow-tos, product reviews, relevant articles, and scripts and codes connect by phone, over lunch, or within a professionalthrough a web-based forum. Part professional association and part organization.software company, Spiceworks has grown rapidly since it began in2006 with the mission to, in the words of CEO and co-founder Scott There is a predictable correlation between an employee’sAbel, “simplify the lives of small and medium business (SMB) IT pros.” role within a company71 and participation in differentMembers ask questions, contribute expertise, and provide feedback types of knowledge flows. Individuals in senior rolesto influence vendors. They are encouraged to form SpiceCorps, have higher participation across all types of knowledgelocal, member-driven groups that host in-person networking events. flows (see Exhibit 52) — though most pronounced inSpiceWorld provides an annual conference for users, community conferences, lunch meetings, phone calls, and professionalmembers, and IT vendors to meet and exchange ideas in person. organizations. Of respondents at the executive and senior manager level in the 2011 survey, 95% indicate theyThe Guild of Sommeliers enables wine and hotel and restaurant participate in at least one type of interfirm knowledge flowprofessionals from across the globe to tap into the knowledge of the — as compared to 85% at the middle management levelbest wine professionals to keep members on top of new developments (increased from ~80% in 2009), and 70% at the frontlineand standards. It fosters collaboration, inspiration, and ongoing level (increased from ~65% in 2009). Executive and senioreducation for the sommelier community through discussion forums, manager participation has remained consistent over threestudy groups, blogs, quizzes, and a compendium knowledge base in years of survey data.addition to live networking and enrichment events and tastings. GuildPresident, Fred Dame, led the founding of the U.S. Guild in 2003 to Inter-firm knowledge flows can fuel efficiency andextend the educational reach of the Court of Sommeliers (which is open innovation, benefitting the entire organization by providingonly to Master Sommeliers) “to promote the knowledge and service of access to flows that are relevant to a function or position.fine wine and cuisine.” The web-based membership forum also includes Corporations have an imperative to make interfirmjob postings and social networking. knowledge flows available and to train employees on how to maximize their use (e.g., identifying, digesting,Whether you are looking to solve a specific problem at work or delvedeeper into your passions, online communities offer new opportunitiesto connect, build knowledge, and drive performance to new levels. 71 Our survey explicitly defined the administrative role as one with clerical or assistant duties and the executive role as a CEO, COO, president, senior VP, director, or VP. 2011 Shift Index Measuring the forces of long-term change 77
  • 80. 2011 Flow Index Exhibit 53: Inter-Firm knowledge flow participation by level, (2011) Exhibit 53: Inter-Firm knowledge flow participation by level (2011) 80% 70% 60% Percentage participation 50% 40% 30% 20% 10% 0% Executive Senior Middle Lower-level Non-Management Administrative Manufacturing Management Management Management Conferences Telephone Professional Organization Web Casts Lunch Meetings Social Media Community Organization Google Alerts Source: Synovate, Deloitte analysis Source: Synovate , Deloitte analysis By enabling individuals to seek new flows to impact firm performance. As engagement and collaboration platforms profilerate, understanding how to perspectives, keep abreast of innovative use these flows will be increasingly important. approaches and learn from seasoned While many executives pursue the supposed nirvana of practitioners, interfirm knowledge flows serve a frictionless economy, we believe that aggressive talent development inevitably and necessarily generates friction. two key purposes: refreshing organizational A key challenge for companies in the 21st century is to 53 become more open to ideas from the outside and to make knowledge and infusing worker passion. use of resources wherever they may be located, internally or externally. Enabling and encouraging participation in and filtering). As Sun Microsystems co-founder Bill Joy interfirm knowledge flows, while providing appropriate observed, "There are always more smart people outside guidance, governance, and training programs, will your company than within it." Companies should look help create a robust network of internal and external for ways to increase participation in interfirm knowledge relationships, providing opportunities for the “productive flows at all levels of the organization, while also better friction” that results when people with different harnessing the knowledge of all employees inside the firm. backgrounds and skill sets engage with each other on real problems.73 Friction forces people out of their comfort Increasingly, “socialytic” tools72 enable firms to monitor zones and often involves confronting very different flows with customers and partners, as well as flows views as to the right approach to a given challenge or within the enterprise, to improve performance. Currently, opportunity. This friction will shape the learning of the socialytics are most often used to understand customer individual and the organization. behavior or to measure the efficacy of marketing campaigns; however, a potentially more exciting use is to evaluate employee interpersonal engagement relevant to performance. In our preliminary socialytics analysis of 72 Socialytic tools are business flows within the enterprise (including use of Web, email, applications that apply analytics social media, and VOIP) we gained substantial insight into against social and collaborative networks. Defined by IDC in the effective use of interfirm and intrafirm knowledge "Predictions 2010: Recovery and Transformation" report. 73 John Hagel III and John Seely Brown, “Productive Friction: How Difficult Business Partnerships Can Accelerate Innovation,” Harvard Business Review, February 1, 2005. 78
  • 81. Wireless Activity 2011 Flow Index Wireless Activity is surging due to demand for mobile data and a growing ecosystem of applications and services Introduction although the strong upward trend began to flatten by Wireless telephones and mobile internet are increasingly 2009. Text messaging volume also increased exponentially, The Wireless Activity vital communication channels which enable knowledge from 14 million in 2000 (the earliest year for which data metric measures flows. Measuring knowledge flows directly is difficult, are available) to 173 billion in 2010. The growth rates the total number of if not impossible, however, wireless minutes and text for these two activities highlight the shift in how users wireless minutes and messaging volume provide suggestive proxies for are engaging wireless technology to connect with and total number of SMS knowledge flow activity on mobile devices. Together, they share information with one another. Wireless minutes messages in the United represent the increasing degree to which connectivity have grown at a CAGR of 32% over the past 19 years as States per year. and mobility are becoming essential in both personal and compared to SMS messages (see Exhibit 54), which grew professional life. at a CAGR of 156% over the past ten years. SMS volume This metric is a proxy rose more than four times as quickly as wireless minutes for connectivity and Wireless Activity is highly correlated to the technological did in its first ten years. This rapid growth of SMS volume knowledge flows. advancements of the digital infrastructure that enable could be attributed to technological advancements, such users to leverage mobile phones in a multitude of ways. as intercarrier texting, as well as shifting social norms. As a platform for knowledge flows, Wireless Activity will continue to grow as technology metrics, such as While both forms of wireless activity have boomed, Exhibit Computing, Digital Storage, and Bandwidth evolve at 55 suggests that mobile phone calls are losing ground exponential rates. to text messaging, particularly in younger demographics. According to a Neilsen survey, The typical teenaged mobile Observations and Implications As shown in Exhibit 54, both wireless minutes and text subscriber (age 13-17) in the United States now sends or receives 2,779 text messages per month and uses only Wireless Ac messaging volume have risen sharply over the past decade 631 voice minutes.74 We expect this trend to continue as 1 despite competing connectivity applications, such as the short and simple SMS medium gains popularity among computer-based instant messaging. Total wireless minutes other demographics. have grown from 11 billion in 1991 to 2.24 trillion in 2010, UpdatedExhibit 54: Wireless Activities: Wireless minutes, (1991-2009) vs. SMS volume, (2000-2009) Exhibit 54: Wireless Activities: Wireless minutes (1991-2009) vs. SMS volume (2000-2009) 2,500 200 2,241 180 2,000 173 160Wireless Minutes (Billions) 140 SMS Volume (Billions) 1,500 120 100 1,000 80 60 500 40 20 0 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Wireless Minutes SMS Volume 74 The Neilson Company, April 2009- March 2010 and Deloitte Analysis Source: CTIA, Deloitte analysis 2011 Shift Index Measuring the forces of long-term change 79Source: CTIA, Deloitte analysis
  • 82. 2011 Flow Index Exhibit 55: Average Number of Monthly Phone Calls and Text Messages by Age Group Exhibit 55: Average Number of Monthly Phone Calls and Text Messages by Age Group 2,779 <18 631 1,299 18-24 592 25-34 952 441 35-44 896 234 45-54 757 80 55-64 587 32 65+ 398 0 500 1000 1500 2000 2500 3000 Texts sent/received Voice Minutes Used Source: CTIA, April 2009-March 2010, Deloitte Analysis Source: CTIA, April 2009-March 2010, Deloitte Analysis Mean data consumption increased from about that more than 10 billion applications had been downloaded from the App Store, ranging from games to 90 MB per month during the first quarter of travel applications to social media.76 The explosive growth in applications has spurred data consumption and allowed 2009 to 298 MB per month during the first users to participate in knowledge flows in many different quarter of 2010. ways. Increased wireless activity both reflects and enhances In recent years, the rapid growth of data consumption the frequency and richness of virtual connections. has marked another fundamental shift in how individuals Improvements to wireless technology and mobile internet 55 communicate and disseminate information via their access have empowered individuals to connect — through wireless devices. Mean data consumption increased from email, social media, blogging, etc. — at all times and in all about 90 MB per month during the first quarter of 2009 places. to 298 MB per month during the first quarter of 2010.75 This growth is concentrated amongst the heaviest users; in 2010, the top 10% of data users generated approximately 90% of all traffic. Smartphones, and more recently media tablets, have driven this data-centric usage by making mobile browsing easy for the user. 75 “Quantifying the Mobile Data Tsunami and its Implication”. June 30, 2010 The Nielson Meanwhile, the robust application marketplace is Company. http://blog.nielsen.com/ fundamentally changing the way customers engage with nielsenwire/online_mobile/quan- tifying-the-mobile-data-tsunami- their mobile devices; in January 2011, Apple announced and-its-implications/ 76 “Apple App Store Reaches 10 Billion Downloads” http:// news.cnet.com/8301-13579_3- 20029267-37.html 80
  • 83. 2011 Flow IndexApps Help Clean an Oil SpillO n April 20, 2010, the explosion of Deep Water Horizon caused the largest marine oil spill in history, releasing up to 4.9 million barrels of oil and causing economic and ecological distress in the Gulf Coastregion. In the wake of this cataclysmic event, citizens were angryand concerned—they saw oil seeping into their fishing grounds,waterways, marshes, and beaches and wanted to make surethat everyone understood their reality and that someone cleanedit up. Meanwhile government agencies and civic organizationsscrambled to deploy resources effectively across a vast anddynamic spill zone. There were hotlines and other outlets to reportspill activity, but these methods had two weaknesses: inaccuracyand the high level of effort required for a citizen to file a report.Enter wireless technology and applications.Using smartphone applications, such as SpillMap77, regular citizenscould tag a location and submit content-rich incident reportscomplete with text, photos, and video. This geo-aware andopen-source application tapped into the power of crowd sourcingand mobile activity, allowing users to tag incidents in seconds,without logging in or waiting on hold. With over 15,000 posts,SpillMap (and the corresponding Web site, spillmap.org) madereal-time conditions publicly available to government agencies,civic organizations, and other interested parties. Not only did thevolume of incidents reported on SpillMap exceed the volume ofincidents reported on many hotlines, but the geo-specific andimage-rich posts often provided greater value, helping volunteerorganizations prioritize and deploy resources, and allowing usersall over the country to receive updates in real time. The successof Spillmap is just one example of how wireless communicationoptions have transformed not only how we connect with oneanother but also with the world. 77 SpillMap App. Android Market. https://market.android.com/ details?id=com.spillmap.android 2011 Shift Index Measuring the forces of long-term change 81
  • 84. Internet Activity 2011 Flow Index Tab Title Here Broader availability of internet access enables “connected-ness” with a growing range of people, resources, and rich content Introduction Observations and ImplicationsThe Internet Activity Over the past decade, the channels that support Internet Activity has grown exponentially in the lastmetric measures connection over the Internet have continued to grow. From 20 years. For the top 20 routes (in terms of capacity),Internet traffic for the email to instant messaging to streaming video to social average Internet traffic increased 58% between 2009 and20 highest capacity media—there are ever-increasing ways for people to share 2010. Some of the most rapid growth was found alongU.S. domestic Internet information, communicate, and view content. The richness the following routes: Chicago-Denver, New York-Sanroutes in gigabits/ and magnitude of the data transmitted across these Francisco, and Chicago-San Francisco. As shown in Exhibitsecond as calculated by channels is constantly expanding as a result of the societal 56, internet traffic in North America is expected to almostTeleGeography, which and technological changes that provide the foundation for quadruple from 2010, increasing at a 26% CAGR to hitdetermines Internet this activity. 22,000 petabytes per month by 2015.78 Underlying thiscapacity and traffic growth are the rapid improvements in computationalthrough surveys, While it is nearly impossible to quantify Internet volume as power, storage, and bandwidth that enable richer anddiscussions, and a whole, the rate of traffic growth on the major intercity more robust Web content.interviews with network routes in the United States provides a reasonable proxyengineering and for the country’s Internet traffic patterns. By studying this Not surprisingly, we found a high correlation between theplanning staff of major trend over time, we can see the quantity of data being growth in Internet volume and the growth in the use ofInternet backbone transmitted via the Internet and attempt to interpret the connectivity platforms, such as the Internet and wirelessproviders. effects on knowledge flows. devices. The widespread adoption of the technological infrastructure that will drive Internet Activity is evident inThe metric is a proxyfor connectivity andknowledge flows. Exhibit 56: Forecasted Growth in Internet Activity (U.S.), (1990-2010) Exhibit 56: Forecasted Growth in Internet Activity (U.S.) (2010-2015) 25,000 22,274 20,000 (PetaByte = 1,000 terabytes) PetaByte/month 15,000 10,000 6,998 5,000 0 2010 2011 2012 2013 2014 2015 Average Internet Activity Source: Cisco Visual Networking Index 78 Cisco Visual Networking Index 2011 Source: Cisco Visual Networking Index 82
  • 85. 2011 Flow Index Internet Acti Tab Title Here UpdatedExhibit 57: Total Online Music Spend ($, Millions), (2008 – 2010) Exhibit 57: Total Online Music Spend ($, Millions) (2008-2010) 7,000 5,888 6,000 5,376Total Online Music Spend ($, Millions) 5,000 4,736 4,000 3,000 2,000 1,000 - 2008 2009 2010 Total Online Music Spend ($, Millions) Source: Gartner, Forecast: Online Music, Worldwide, 2008 — 2015Source: Gartner, Forecast: Online Music, Worldwide, 2008 – 2015 the penetration levels: 68% for Internet Users and 90% for annually on online music grew from $4.7 billion in 2008 to Wireless Subscriptions as of 2010.79 $5.8 billion in 2010, an 11% CAGR.81This trend is expected to continue, bolstered by The amount of video content being transmitted over thetechnological advances that make the Internet more Internet also continues to grow. Recent research indicatesaccessible. In the past year, the number of mobile Internet that U.S. consumers watch an average of 2.45 hoursusers increased 28%.80 No longer confined to desk or per week of over-the-top video content over broadbandhome, users armed with cell phones and wireless access connections (using providers, such as Netflix and Hulu).82are now able to remotely access video, Web content, According to digital analytics provider comScore, moreimages, music, and other forms of information in virtually57 than 80% of the U.S. Internet audience watched videos © 2011 Deloitte Touche Tohmany location. A single laptop can generate as much data online during any given month ( 84.6% in Decembervolume as 450 basic-feature phones (voice and SMS); 2010).a high-end handset, such as an iPhone or Blackberry,creates as much traffic as 30 basic-feature phones. These The number of content providers is also increasing, furthernewer-generation devices offer consumer content and spurring Internet activity. These professional sites offerapplications which account for much of the richness and original content to subscribers through news, productvolume of mobile internet traffic. information, blogs, reviews, games, and entertainment. With content providers vying for viewers, new players are Internet Activity is also being driven by growth in online popping up in the delivery space, where content delivery music exchanges. New business models for the sale and networks (CDNs) seek more efficient ways to deliver video sharing of music online, such as Apple’s iTunes and internet and other forms of content to end users. Advances in the radio operator, Pandora, have enabled strong growth. CDN infrastructure and business model are supporting the As shown in Exhibit 57, the amount consumers spend increased demand for professional content. 79 For further information, please refer to the Internet Users and Wireless Subscriptions metrics. 80 ComScore, Deloitte Analysis 81 Gartner, Forecast: Online Music, Worldwide (2008 — 2015) 82 “Market Trends: Over-The-Top Video, Worldwide, 2011”, Gartner 2011 Shift Index Measuring the forces of long-term change 83
  • 86. 2011 Flow Index Electronic networks and geographic spikes (concentrations Some 90% of the cities having the highest Internet volume of talent in dense urban areas) reinforce each other, were also creative cities, indicating the remarkable role helping to integrate physical and virtual connections. Our of geography in the growth of information sharing and analysis of migration to “creative cities” (as identified by Internet volume. Dr. Richard Florida) has shown large disparities between population growth in the 10 most- and the 10 least- Online communities are also flourishing. Social media creative cities in the United States.83 What is striking, but dominates this category and social networking leaders perhaps not surprising, is the high correlation between continue to gain new members. In 2010, 22% of total time Internet volume and the distinction of being a creative city. spent online globally was associated with social media and e-Patient Dave and the Participatory Medicine Movement I n January 2007, during a routine shoulder x-ray, Dave deBronkart discovered that he had Stage IV kidney cancer. With a grim prognosis for survival, Dave turned to the Internet for information and support to supplement his treatment at Beth Israel Medical Center in Boston. Dave embarked on a variety of efforts, including participating in an expert online patient community through the Association of Cancer Online Resources (ACOR), starting an online journal and support community on the social networking site, Caring Bridge, and sharing his hospital medical records with medically knowledgeable friends and family. “It goes without saying that there’s immense value to discovering that you’re not alone. Immense value,” says Dave. “In my case, I was already at the best place in the world for my disease, and they were already planning to give me the treatment that the ACOR members recommended. However, what my doctors couldn’t give me was information on how to deal with the treatment, which is very difficult. ... There is no Web site, FDA-approved or anything, that will tell you that. But the people who have been down that road all know what they encountered, and they shared that with me.”84 Complementing his treatment regime with a wealth of online resources and support, Dave was deemed cancer-free in 2009. Today, Dave is a spokesperson for the participatory medicine movement, which advocates for the active role of patients as responsible drivers of their health. Dave’s journey illustrates how widespread growth in Internet activity is changing multiple facets of health care. The proliferation of expert-run doctor and patient communities (e.g., WebMD and ACOR) reflects the tremendous demand for information for medical diagnosis, treatment options, and support. There is also growing Internet activity around research, marketing, and treatment. For example, the Mayo Clinic recently used Twitter to solicit feedback on its research into celiac disease. In marketing, Palomar Pomerado Health in California has partnered with Cisco and virtual world operator, Second Life, to give prospective patients virtual tours of its newest health care facility. In treatment, the emergence of fields like e-therapy (online provision of mental health services) demonstrates how greater accessibility and richness of content is allowing the Internet to become a channel for 83 For further information, please the delivery of medical services. refer to the Migration of People to Creative Cities metric. 84 http://www.inspire.com/John2/ journal/the-inspire-q-and-a-inspire- talks-with-e-patient-dave-de- bronkart/For further information, please refer to the Migration of People to Creative Cities metric. 84
  • 87. 2011 Flow Index Tab Title Heresocial networks had reached 72% of all active users in the at the right time for the right purposes will be one of theUnited States.85 Facebook, Twitter, and LinkedIn claimed great challenges in the Big Shift—both for individuals and500-,86 100-,87 and 60-million users, respectively, and institutions.social network advertising exceeded $1.5 billion in 2010.This explosive growth has continued into 2011.88 Theseplatforms offer new ways for businesses to participatein, and create, social networks on the Internet. Emerging Some 90% of the cities having the highest Internetpractices, such as open source software, that leveragethe Internet through networks, communities, and other volume were also creative cities, indicating theconnectivity platforms hold great promise for companies.89 remarkable role of geography in the growth ofWith the growth in Internet Activity, filtering the signal information sharing and Internet volume.from the noise becomes even more difficult. Society’sinformation overload should only increase, for better andfor worse, as more and more data is exchanged virtually.The capability to filter and amass the right information 85 Nielsen, http://blog.nielsen.com/ nielsenwire/online_mobile/social- media-accounts-for-22-percent-of- time-online 86 Facebook, http://www.facebook. com/press/info.php?statistics#!/ press/info.php?timeline 87 TechCruch, http://techcrunch. com/2010/04/14/twitter-has- 105779710-registered-users- adding-300k-a-day/ 88 TechCrunch, http://tech- crunch.com/2010/02/11/ linkedin-now-60-million-strong/ 89 John Hagel III and John Seely Brown, "Creation Nets: Harnessing the Potential of Open Innovation," Journal of Service Science 1, no. 2 (2008): 27-40. 2011 Shift Index Measuring the forces of long-term change 85
  • 88. Migration of People to 2011 Flow Index Creative Cities Increasing migration suggests virtual connection is not enough — people continue to seek rich and serendipitous face-to-face encounters as well Introduction to make serendipitous connections with people from outsideThe Migration of When it comes to creating flows of new, tacit knowledge, their own firm. As creative talent congregates, innovationPeople to Creative face-to-face interactions are by far the most valuable. and economic growth can be expected to ensue.Cities metric measures Yet these interactions and the knowledge flows they canthe increase in generate are difficult to measure directly and we must turn In designating cities as “creative,” Richard Florida assignspopulation in cities instead to proxies. each U.S. region92 a score based on the region’s technology,ranked “most creative” talent, and tolerance. Cities with a high creative index scoreas compared to the One of these is the growth in population, as provided by the have high concentrations of creative class workers (talent),increase in population U.S. Census Bureau, within the “creative cities” defined by high concentrations of high-tech companies, and innovativein cities ranked “least Richard Florida.90 As a greater number of creative individuals activity (technology) and are demographically diversecreative.” (including professions, such as computer engineers, health (tolerance). We extend Florida’s work by tracking migration care professionals, and architects)91 gather in one place, patterns across “creative cities” and the rate at which theThe metric serves as one can reasonably assume that they will likely have a population gap between the 10-most and 10-least creativea proxy for the ability greater number of face-to-face interactions with each cities (cities are identified in Exhibit 58) widens.93of people to access other — and more new knowledge will likely be created.knowledge flows more Cities that attract creative talent are rich spawning grounds We see this metric as a proxy for the level of taciteffectively and intimately for knowledge flows, especially across firms. As people knowledge, geographic spikiness, and mobility to areas mostwhere they live. congregate in these creative epicenters, they are more likely likely to have rich knowledge flows. As the migration of Exhibit 58: Top 10 Creative Cities and Bottom 10 Creative Cities, (2004) Exhibit 58: Top 10 Creative Cities and Bottom 10 Creative Cities (2004) Creative Cities / Creativity Overall (all Technology Talent Tolerance Rank Regions Index regions rank) Rank Rank Rank 1 Austin 0.963 1 2 9 22 2 San Francisco 0.958 2 6 12 20 3 Seattle 0.955 3 21 15 3 4 Boston 0.934 5 35 11 12 5 Raleigh-Durham 0.932 6 5 2 52 6 Portland 0.926 7 12 45 7 7 Minneapolis 0.900 10 47 22 17 8 Washington -Baltimore 0.897 11 41 1 45 9 Sacramento 0.895 13 15 27 47 10 Denver 0.876 14 61 18 25 90 Richard Florida, The Rise of the 40 Norfolk 0.557 113 130 90 149 Creative Class (New York: Basic Books, 2004). 41 Cleveland 0.550 118 139 95 139 91 Ibid. 42 Milwaukee 0.539 124 155 108 120 92 Metropolitan Statistical Areas (MSA) and Consolidated 43 Grand Rapids 0.525 131 102 206 86 Metropolitan Statistical Areas 44 Memphis 0.524 132 78 135 183 (CMSA) as defined by the U.S. Census: Robert Bernstein, 45 Jacksonville 0.498 143 224 107 88 “Statistical Brief,” Bureau of the Census, http://www.census.gov/ 46 Greensboro 0.492 145 148 159 113 apsd/www/statbrief/sb94_9.pdf 47 New Orleans 0.490 147 211 99 113 (created May 1, 2009). 93 The list of creative cities was pulled 48 Buffalo 0.483 150 148 104 175 from Florida’s The Rise of the 49 Louisville 0.409 171 189 160 143 Creative Class Source: Richard Florida, “The Rise of the Creative Class” 86 Source: Richard Florida, “The Rise of the Creative Class”
  • 89. 2011 Flow Index Tab Title Here people to creative cities relative to other cities maintains an the population growth of the top 10 creative cities (with upward trend, society can be perceived to be more “spiky” population greater than one million) against the bottom and more likely to engage in tacit knowledge creation and 10. The top 10 cities show an upward trend in population exchange—at least in creative areas of the country. growth (see Exhibit 59) and an increasing gap relative to the bottom 10.94 Migration Observations and Implications Increasing returns appear to be at work here—cities that On average, the population growth of the top 10 creative have higher concentrations of creative talent are growing cities has outpaced growth in the bottom 10 since 1990. By faster than those with lower concentrations. Consider 2009, the growth gap between the two comparative sets UpdatedExhibit 59: Migration to Creative Cities growth and gap, (1990-2009) Exhibit 59: Migration to Creative Cities growth and gap (1990-2009) 50% 45% 40% 35%Percentage growth from 1990 25% 30% 25% 20% 14% 15% 10% 5% Migration 0% 1990 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Updated Top Ten Creative Cities Growth from 1990 Bottom Ten Creative Cities Growth from 1990 Source: US Census Bureau, Richard Floridas "The Rise of the Creative Class", Deloitte analysisSource: US Census Bureau, Richard Floridas "The Rise ofof People Class", Deloitte analysisExhibit 60: Correlation between Migration the Creative to Creative Cities and Economic Freedom, (1993-2009) Exhibit 60: Correlation between Migration of People to Creative Cities and Economic Freedom (1993-2009) 82.0 25% Gap in percentage growth between top ten and Correlation: 0.92 80.0 20% bottom ten Creative Cities 78.0 Index value 15% 76.059 10% © 2011 Deloitte Touche Tohm 74.0 5% 72.0 0% 70.0 94 Deloitte analysis based on “Creative 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Cities” from Richard Florida’s The Rise of the Creative Class and population data from the U.S. Index of Economic Freedom Migration of People to Creative Cities Census Bureau. Source: US Census Bureau, Heritage Foundation, Richard Floridas "The Rise of the Creative Class“, Deloitte analysis 2011 Shift Index Measuring the forces of long-term change 87Source: US Census Bureau, Heritage Foundation, Richard Floridas "The Rise of the Creative Class“, Deloitte analysis
  • 90. had increased to an absolute 25% (from 14% in 2000). In groups, increases in economic freedom make it easier2011 Flow Index other words, the growth of the top 10 creative cities has for people from around the world to travel and gather in been more sustained than that of the bottom 10. Between geographic “spikes.” These spikes represent concentrations 1990 and 2009, the top 10 cities grew by 45%, whereas of talent in dense geographic settlements, like Silicon the bottom 10 grew by only 20%. The absolute number Valley and Boston (see Exhibit 60). The share of the world’s of people is also telling: 38 million people live in the top population living in urban areas has grown from 30% in creative cities, approximately 12% of the U.S. population, 1950 to about 50% today. As we have seen, much of this as compared with the 15 million, 5% of the U.S. population growth is into the cities and regions that drive the world’s living in the bottom 10 creative cities. economy, causing them to grow much more rapidly than less creative cities. At a time when the world is increasingly Although Big Shift forces are significantly driven by flat, the world is also paradoxically becoming increasingly technological advances, not all of the connections are spiky.95 virtual. While the internet helps to connect people in virtual These spikes are becoming more important as individuals Exhibit 61: Correlation between Migration of People to Creative Cities and GDP, (1993-2009) Exhibit 61: Correlation between Migration of People to Creative Cities and GDP (1993-2009) 30% $14,000 Gap in percentage growth between top ten and 25% Correlation: 0.99 $12,000 (U.S. GDP, ($, Billions) $10,000 bottom ten Creative Cities 20% $8,000 15% $6,000 10% $4,000 5% $2,000 0% $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 GDP Migration of People to Creative Cities Source: US Census Bureau, Bureau of Economic Analysis, Deloitte analysis Source: US Census Bureau, Bureau of Economic Analysis, Deloitte analysis Exhibit 62: Correlation between Migration of People to Creative Cities and Returns to Talent, (1993-2009) Exhibit 62: Correlation between Migration of People to Creative Cities and Returns to Talent (1993-2009) 25% $70,000 Gap in percentage growth between top ten and $60,000 Correlation: 0.99 20% $50,000 bottom ten Creative Cities Compensation Gap ($) 15% $40,000 5 $30,000 10% $20,000 5% $10,000 0% $0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Returns to Talent Migration of People to Creative Cities Source: US Census Bureau, Bureau of Labor Statistics, Richard Floridas "The Rise of the Creative Class“, Deloitte analysis 95 Richard Florida, “The World is Spiky,” The Atlantic Monthly, October 2005: 48-51. Source: US Census Bureau, Bureau of Labor Statistics, Richard Floridas "The Rise of the Creative Class“, Deloitte analysis 88
  • 91. Fort Collins, CO: Burgeoning Epicenter of 2011 Flow Index Clean Technology Tab Title Here I n the developed world, technological advances that save and improve lives are evident everywhere: Hereditary propensities can be uncovered with a personal genome mapping, artificial heart transplants are viable, major surgeries can be performed noninvasively. But in the developing world, perils like indoor air pollution, which takes the lives of an estimated 2 million people each year, have gone largely unaddressed. That is the challenge that Nathan Lorenz and Tim Bauer set out to solve in 2003 when they founded EnviroFit, which develops clean-burning cookstoves and other technologies that are intended to reduce pollution and promote energy efficiency. Lorenz and Bauer, who were named “Heros of the Environment” in 2009 by Time Magazine, met as students in Colorado State University’s Engines and Energy Conservation Laboratory during the SAE Clean Snowmobile Challenge, a contest to create an energy-efficient snowmobile. EnviroFit, which is based in Fort Collins, Colorado, is one of many new companies and incubators, made possible by the rich ecosystem of clean energy talent and resources. The non-profit Colorado Clean Energy Cluster was founded in 2006 to bring together academics, corporate innovators, and the public sector in order to develop Northern Colorado into an internationally recognized center for clean energy initiatives and projects. From 2006 to 2009, employment in clean energy companies in the Cluster grew 31% despite a 9% contraction nationally.96 As companies are drawn by the physical proximity that allows for joint R&D efforts and resources, so is the creative talent. People are increasingly moving to creative cities where they can engage in the rich face-to-face interactions. EnviroFit and the other companies of the region will continue to draw people to the clean energy spike city of Fort Collins.and companies face more pressure to develop talent. Spikes of creative talent likely contributed to the recent growth inare seen to offer more opportunities for talent development. GDP and played a role in productivity increases.The flip side is that individuals seek out spikes out of fear,driven to congregate, or risk being marginalized. There is a simple but powerful reason that, in the past two decades, talented people have moved to creative cities atThe spike phenomenon is expected to become stronger as an increasingly higher rate. They are migrating because theyconnectivity improves. Connectivity enables specialization likely believe they can learn faster and better there.97 Andwithin a spike and coordination of activities across with interfirm knowledge flows98 becoming increasinglyspikes. For example, Silicon Valley was able to specialize vital to economic value creation, talented workers are goingin technology innovation and commercialization, while where these flows are most likely to occur.moving manufacturing activities to other spikes. At the sametime, China has developed a series of spikes specializing The same self-reinforcing dynamic may hold true forin manufacturing for technology companies. Serendipity talented workers who “migrate” to companies thatwithin spikes is enhanced by wireless technology that more have high concentrations of creative talent. Like cities,effectively integrates physical and virtual presence. companies that do not attract top talent now will find it 96 Colorado Clean Energy Cluster. ever harder to do so in the future. Innovation today requires “Attacting, incubating andOur analysis found a high correlation between the growth extensive pooling of knowledge and other resources and growing Colorado’s clean energy companies.”www.colorado-of creative cities and the growth of GDP, suggesting that as is accelerated by tacit knowledge gained through face- cleanenergy.com. Accessed Aug 11, 2011.the population found in creative cities grows, there may be to-face interactions. Despite the tremendous increase in 97 We acknowledge that this is nota significant positive impact on economic value creation (see virtual flows, companies still need physical proximity to the the only factor to creative city growth — creative cities also tendExhibit 61). talent and resources that are required for extreme growth. to be pleasant places, and creative people may just like hanging out By better understanding the disproportionate growth in with other “creative people” orThe population flow to creative cities also correlates strongly creative cities, business leaders can mimic the practices that may be seeking a different way of life.with the Returns to Talent metric in the Impact Index. This attract talent in their own organizations. Practices, such as 98 For further information, please refer to the Inter-Firm Knowledgesuggests that the types of talent that make up the workforce recognizing and tapping into creative talent, making the best Flows metric.in creative cities are valued higher and higher as they use of technology and striving for innovation and diversity 99 Cathy Benko and Anne Weisberg, Mass Career Customizationbecome more concentrated in these creative epicenters (see have helped cities become creative epicenters and can be (Boston: Harvard Business School Publishing, 2007).Exhibit 62) and interact more and more within and across applied at the institutional level. Similar approaches — 100 For more information about thespikes. such as pull platforms and mass career customization strategic, organizational, and oper- ational changes needed to attract practices99 — will help companies adapt to the exigencies of and develop talented workers, see John Hagel III, John Seely Brown,As labor freedom and economic freedom increase, people the Big Shift.100 and Lang Davison, “Talent isappear to have a propensity to migrate to creative cities, Everything,” The Conference Board Review, May-June 2009, http://leading to higher concentrations of talent. These epicenters www.tcbreview.com/talent-is- everything.php. 2011 Shift Index Measuring the forces of long-term change 89
  • 92. Travel Volume 2011 Flow Index Travel Volume continues to rise as virtual connectivity supplements, but does not replace in person interactions Introduction interested in the longer-term trends in Travel Volume andThe Travel Volume Steady advances in technology and physical infrastructure what these trends may indicate about knowledge flows.metric measures the during the last 20 years have increased both the reach andvolume of passenger accessibility of travel.101 U.S. residents are travelling more Observations and Implicationstravel based on the and more each year, despite temporary declines related Travel Volume has shown a strong upward trend sincemonthly output of to the recent financial downturn. Not all interactions are 1990 (the year TSI was introduced). Exhibit 63 showsfor-hire passenger equal. Some are more likely to result in the creation of passenger travel volume indexed off of the year 2000transportation services. new knowledge rather than in simple knowledge transfer. (index value of 100); over the past two decades, Travel Face-to-face interactions, in particular, tend to drive the Volume has increased 57%, from a value of 71 in 1990 toThe metric serves as a most valuable knowledge flows. As the movement of 111 in 2010.proxy for physical flows people increases, so do the opportunities for rich andof people and indicates serendipitous connections between them, connections that Although TSI growth has trended strongly upward, notablelevels of face-to-face are vital for knowledge flows to take place. troughs have occurred:103interactions, which are • In 2001, 9/11 and reverberations of the dot-com crashmore likely to drive While we cannot measure these flows directly, metrics, caused the TSI to drop over 23% in one month. It didthe most valuable such as Travel Volume, as measured by the passenger not rebound to pre-9/11 levels until June 2004, nearlyknowledge flows. Transportation Services Index (TSI), provide suggestive three years later. proxies. Changes in Travel Volume over time can help • In 2003, overproduction, billions of dollars invested in to illuminate the relationship between transportation expansion, and too much debt contributed to lagging and other long-term changes in the economy. In fact, airline financial health and a reduced number of flights, in 2004, the U.S. Transportation Secretary Norman causing a decrease in revenue passenger miles. Mineta announced the TSI as a new economic indicator, • The downturn in the economy in 2009 led to reduction using changes in passenger activity as a measure of in both personal and professional travel. Travel Volume macroeconomic performance.102 While movements in the has already begun to increase to its previous trajectory as TSI reflect economic and political pressures, we are mostly the economy recovers. Exhibit 63: Transportation Services Index – Passenger, (1990-2010) Exhibit 63: Transportation Services Index-Passenger (1990-2010) 130 120 116.8 110.7 110 Chain-type Index (2000=100) 101 "Domestic Research: Travel Volume and Trends," U.S. Travel 100 Association, http://www.tia.org/ Travel/tvt.asp (created May 8, 2009). 90 102 "Remarks for the Honorable Norman Mineta Secretary of Transportation," U.S. Department of Transportation Office of Public 80 Affairs, http://www.dot.gov/affairs/ minetasp012904.htm (created May 70.6 15, 2009). 70 103 Peg Young et al., "The 68.6 Transportation Services Index Shows Monthly Change in Freight and Passenger Transportation 60 Services," Bureau of Transportation 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Statistics Technical Report, September 2007: 1-4. 90 Source: US Census Bureau, Bureau of Labor Statistics, Richard Floridas "The Rise of the Creative Class“, Deloitte analysis Source: Bureau of Transportation Statistics (BTS), the statistical agency of the U.S. Department of Transportation (DOT), Deloitte analysis
  • 93. 2011 Flow Index Tab Title Here Increases in Travel Volume have been shown to beCity Centers Take Flight correlated with growth in GDP.104 While there is likely no causality between the two, people’s movement on landT and in air is strongly interrelated with economic expansions hroughout history, the development of cities has been and contractions. Secretary Norman Mineta noted, “A closely intertwined with trade and transportation. From transportation system that keeps the business of America the ports of Boston to the railroads stretching West, moving is vital to the strength of our Nation’s economy” and, metropolitan hubs are often dictated by the inflow and we argue, equally fundamental to Big Shift forces.outflow of goods, ideas, and people. In the 21st century, a new urbanform has emerged: the Aerotropolis. This term, coined by John Kasarda, Indeed, there appears to be a strong positive correlationdirector of the Kenan Institute of Private Enterprise at the University between travel activity and broader labor productivity. Oneof North Carolina, refers to the pattern of development expanding plausible explanation is that people benefit from face-to-faceoutward from a central airport hub and reflects the increasing ubiquity physical interactions facilitated by travel and as a result areof travel and the growing importance of air routes for economic able to be more productive in their jobs.development. Airport regions, such as Kuala Lampur, Hong Kong,and Dubai, are all examples of the Aerotropolis model, with carefully Somewhat paradoxically, the growth in digital technologydesigned airports serving as the heartbeat and source of growth for the infrastructure is actually positively related to growthsurrounding areas. in travel.105 While we might have predicted an inverse relationship, physical travel should decrease as the ability toAmerica has lagged Europe and Asia in adopting Aerotroplis connect virtually increases, travel volume is, in fact, positivelydevelopment and many U.S. airports still sit on the peripheries of cities. correlated with Internet users, Wireless Subscriptions,Memphis is America’s purest Aerotropolis (as the hub of FedEx and a wireless minutes, SMS volume and Internet volume. Itmajor passenger airline hub, the airport pumps more than $28 billion is plausible that the frequency and ubiquity of virtualinto the region’s economy and airport-related jobs employ one in every communication actually increases the propensity to travel bythree residents), but other cities, such as Las Colinas, Texas, the airport creating more reasons to connect with people physically. Inhub between Dallas and Fort Worth, have also emerged as burgeoning this regard, the virtual world actually scales the number ofAerotropolis regions. face-to-face interactions that one can engage in, an example of one type of knowledge flow leading to another.The move towards airport-centric development is expected to pick upsubstantially as physical flows of cargo and people become increasingly Travel will likely remain the primary mode for increasingcrucial to economic development. China, for example, added the face-to-face interactions. Business leaders should considerequivalent of Great Britain’s air traffic during the past decade, and the trade-offs when cutting back on travel during economicaccording to Kasarda, “they have not yet begun to fly.” With much of downturns or thinking of technology as a substitute ratherthis travel coming into and out of the United States, airports and the than as a complement. Travel is not only an indicator ofsurrounding cities, must be developed to support the flow of people, macroeconomic factors at work, but also remains deeplythings, and ideas. The emergence of the Aerotropolis underscores the intertwined with the evolving digital infrastructure.importance of air travel as a means of growth; despite the proliferationof digital infrastructure, travel still constitutes a primary form of physicaland knowledge flows. 104 Peg Young et al., “The Transportation Services Index Shows Monthly Change in Freight and Passenger Transportation Services,” Bureau of Transportation Statistics Technical Report, September 2007: 1-4. 105 Correlation analysis detailed in the Shift Index Methodology section 2011 Shift Index Measuring the forces of long-term change 91
  • 94. Movement of Capital 2011 Flow Index Tab Title Here Cross-border capital flows provide an efficient way to access pockets of global talent and innovation Introduction that force companies to seek efficiency and innovationThe Movement of The flow of capital across geographic and institutional outside of their home country.Capital metric measures boundaries is an important, albeit indirect, indicator ofthe total volume of the forces of long-term change. These capital flows can Observations and ImplicationsFDIs into and out of the be understood as a form of arbitrage in which knowledge Between 1970 and 1999, U.S. FDI flows steadily increased,United States, without moves, via conduits created by investment, from one tracking GDP (see Exhibit 64). From 2001 to 2003, FDInetting the two, to focus country—and company—to another. flows decreased as a result of the economic downturn andon volume rather than the aftermath of the 9/11 terrorist attacks; investors faceddirection of flow. Companies in emerging economies, for example, take greater uncertainty and U.S. policymakers began viewing stakes in (or buy outright) companies in developed foreign investments as a risk to national security.This metric is a proxy for countries in order to access knowledge and expertisecapital flows between among other reasons (e.g., brand equity). Companies from In 2004, the United States regained its status as the world’sthe countries at the core developed countries, on the other hand, have traditionally principal destination for direct investments, a position itand countries at the invested in emerging market companies to acquire local held for most of the last two decades (see Exhibit 64). Asedge. knowledge, such as the most efficient distribution channels a provider of FDI, the United States also showed a sharp in local markets. Thus, capital flows enable some of the increase, although in 2005 U.S. parent companies acted to knowledge flows that drive economic value creation. take advantage of a one-time tax provision, resulting in a drop in FDI.106 Although FDI measures both flows of capital (e.g., equity investments and intracompany loans) and stocks of capital The upward trend that began in 2004 peaked in 2007, (e.g., reinvested capital and retained earnings), the Shift with the financial crisis of 2008 ending FDI growth. Index considers only capital flows. The total flow represents According to the United Nations Conference on Trade the movement of capital between countries triggered by and Development (UNCTAD), flows to the United States, both public policy liberalization and competitive pressures the largest host country in the world, declined by 60% Exhibit 64: Foreign direct investment flows ($, Billions), (1970-2010) Exhibit 64: Foreign direct investment flows (1970-2010) $700 $16,000 $600 $14,000 Total FDI Inflows and Outflows ($, Billions) $12,000 $500 U.S. GDP ($, Billions) $10,000 $400 $8,000 $300 $6,000 $200 $4,000 $100 $2,000 106 James J. Jackson, “Foreign Direct $0 $0 Investment: Current Issues” (report 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 to Congress, Congressional Record Services, Washington, DC, April Total FDI Inflows and Outflows, Current Dollars GDP 27, 2007). Source: UNCTAD, Deloitte analysis 92 Source: UNCTAD, Deloitte analysis
  • 95. 2011 Foundation Flow Index Tab Title Here Index Movemen Capital UpdatedExhibit 65: Movement of Capital ($, Billions), (1970-2010) Exhibit 65: Movement of Capital (1970-2010) $700 $600 Total FDI Inflows and Outflows ($, Billions) $500 $400 $300 $200 $100 Movemen Capital 3 $0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Total FDI Inflows and Outflows, Current Dollars Updated Linear (Total FDI Inflows and Outflows, Current Dollars) Source: UNCTAD, Deloitte analysisSource: UNCTAD, Deloitte analysisExhibit 66: U.S. Capital inflows and outflows ($, Billions), (1970-2010) Exhibit 66: U.S. Capital inflows and outflows (1970-2010) $450 $400 $350FDI Inflows and Outflows ($, Billions) $282.7 $300 $250 $228.2 $20065 © 2011 Deloitte Touche Tohm $150 $100 $50 $0 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Flow Inward (Million USD; current) Flow Outward (Million USD; current) Source: UNCTAD, Deloitte analysisSource: UNCTAD, Deloitte analysis 2011 Shift Index Measuring the forces of long-term change 93
  • 96. 2011 Flow IndexTab Title Here New Jungles to Explore: Tata Buys Jaguar and Land Rover A few years ago, Indian car company Tata was most recognized in the United States for its heavy trucks and introducing the world’s cheapest car. But despite this reputation, Tata had ambitions of expanding into a global luxury brand. And to do this, it needed to enter the extremely competitive U.S. market, which already supported a legion of domestic and imported brands. Undeterred, Tata purchased the luxury car brands Jaguar and Land Rover from Ford Motor Company in 2008. Tata Motors’ Vice-Chairman Ravi Kant had previously stated, “The only way that I can enter the U.S. market is through mergers and acquisitions. So if I get an opportunity, then I will look at it very actively.”107 The decision to acquire Jaguar and Land Rover was a strategic move to expand Tata’s product portfolio and geographic presence, making Tata a global player in the automotive industry. It was easier for Tata Motors to buy Jaguar and Land Rover for their new technology, advanced market distribution channels and brand equity than for Tata to develop them on its own. Caught in the slumping global automotive industry, Tata initially sustained huge losses. However, by reducing costs, improving efficiencies and managing cash flow, Tata Motors turned around the ailing companies. As the market began to rebound in 2009, so did the fortunes of Jaguar and Land Rover. In a remarkable recovery, Jaguar and Land Rover posted a $1.7 billion net profit in 2010, a huge win for Tata and its international portfolio. in 2009.108 The decline was driven by a marked decrease of innovation across the globe. Innovation, whether in 107 Tarun Khanna et al., House of Tata: in cross-border mergers and acquisitions; mergers and product or process or management practice, is no longer Acquiring a Global Footprint (June 30, 2009), http://www.drclas. acquisitions picked up again in 2010. confined to developed economies.112 harvard.edu/files/House-of-Tata- English.pdf 108 UNCTAD, “FDI recovery in Economists argue that relative rates of growth between The level of R&D being performed for U.S. multinationals developed countries, after two-year decline, rests with the rise of economies are indicative of relative rates of returns and by overseas affiliates has been relatively flat, however, the cross-border M&A’s”< http://www. unctad.org/templates/webflyer.asp? corporate profitability; thus, growth rates are a key factor regional distribution of that R&D is changing (see Exhibit docid=13647&intItemID=1528& in the direction and magnitude of capital flows. Public 67 and 68). In 1994, an overwhelming 73% of foreign lang=1>, (created July 2010). 109 “Foreign investors view the ease policy, including relative tax rates, interest rates, inflation, affiliate R&D was performed in Europe. By 2006, Europe’s with which they can travel to the United States as a key indicator and any protectionist policies (e.g., business visas), have share decreased to 65%. At the same time, the share being of how easy it will be to make or a direct impact on FDI levels.109 Investors’ expectations performed by the Asia-Pacific region increased from 5 to administrate investment.” Visas and Foreign Direct Investment: about the performance of national economies also drive 13% and that of the Middle East increased from 1 to 3%. Supporting US Competitiveness by Facilitating International Travel, investment trends. All these factors can be quite volatile, By placing their R&D centers in emerging markets, U.S. US Department of Commerce, thus the volatility of investment trends (see Exhibit 65).110 firms are able to tap into diverse pockets of talent. http://www.commerce.gov/s/ groups/public/@doc/@os/@ Looking past this cyclical FDI volatility, the long-term opa/documents/content/ prod01_004714.pdf (created trajectory of FDI levels shows a strong upward trend over Today, developing countries in the Asia-Pacific region November 2007). time. are growing at a faster rate than developed countries 110 James K. Jackson, “Foreign Direct Investment: Effect of a ‘Cheap’ in North America and Europe and are emerging sources Dollar” (report to Congress, Congressional Record Services, As U.S. FDI continues to grow, the question is for what of management talent and innovation. For example, Washington, DC, October 24, purpose? Historically, FDI was a way to improve efficiency, both the Chinese motorcycle industry in Chongqing and 2007). 111 Vivek Agrawal, Diana Farrell, and to take advantage of opportunities for resource and labor the Hong Kong-based apparel company Li & Fung have Jaana K. Remes,”Offshoring and Beyond,” The McKinsey Quarterly, arbitrage, and to access local markets which often favor demonstrated the process and management practices 2003 special edition: Global direc- local manufacturers.111 Although most U.S. companies referred to as “process networks.” Process networks use tions: 24-35. 112 For more information about still use foreign affiliates to achieve short-term efficiency a loosely coupled, modular approach to organizing the emerging market management innovation, see John Hagel III improvements, firms are increasingly taking a longer- activities in extended business processes that speeds time- and John Seely, “Innovation term approach, using FDI to identify and develop centers to-market, cuts costs, and enhances product quality. Li & Blowback: Disruptive Management Practices from Asia,” The McKinsey Quarterly, 2005, no. 1: 35-45. 94
  • 97. Movemen 2011 Foundation Flow Index Capital Tab Title Here Updated IndexRegional share of R&D performed by foreign affiliates of U.S. multinationals Exhibit 67: Regional share of R&D performed by 68: Year 2006 68:Exhibit 67: Year 1994 Exhibit Exhibit Regional share of R&D performed by foreign affiliates of U.S. multinationals (1994) foreign affiliates of U.S. multinationals (2006) 4.0% 0.8% 0.1% 3.0% 0.3% 3.2% 5.4% 13.0% 9.5% 6.3%7.0% 9.0% 65.4% 73.0% Europe Canada Japan Asia/ Pacific excluding Japan Latin America/ OWH Middle East AfricaSource: Bureau of Economic Analysis, Survey of U.S. Direct Investment Abroad (annual series), Deloitte analysisSource: Bureau of Economic Analysis, Survey of U.S. Direct Investment Abroad (annual series), Deloitte analysis Fung deploys a network of 515,000 specialized business Innovation, whether in product or process or partners to create a customized supply chain for each new item of apparel. The ability to build scalable networks management practice, is no longer confined to of diverse partners forms the core of this management innovation, enabling Li & Fung to participate in rich developed economies. knowledge flows that drive performance improvement. With this network, Li & Fung built a company of $16 billion in revenue while enjoying double digit revenue growth and67 Today, developing countries in the Asia-Pacific region Touche Tohm © 2011 Deloitte high profitability.113 are growing at a faster rate than developed countries While developing countries offer many reasons to invest, in North America and Europe, and are emerging U.S. companies cannot afford to overlook the bigger opportunity to learn new institutional architectures, sources of management talent and innovation. governance structures, and operational practices from foreign affiliates and partners in the developing world. Managing and scaling a flexible network of diverse partners without running into overhead complexity is just one example. At the same time, as emerging markets rebound from the global recession more quickly than the United States and Europe, powerful emerging market companies are increasingly acquiring companies in developed economies. This trend of reverse FDI offers a conduit for emerging market companies to access western expertise and expand globally. 113 Li & Fung. http://www.lifunggroup. com/eng/global/glance.php 2011 Shift Index Measuring the forces of long-term change 95
  • 98. Worker Passion 2011 Flow Index Passionate workers are more likely to participate in knowledge flows and generate value for companies What exactly is worker passion? Passion is not commonly capabilities. The effort required to increase our rate ofThe Worker Passion associated with work—HR departments often try to measure professional development is difficult to muster unless we aremetric measures how “employee satisfaction,” which is an entirely different thing. passionately engaged with our professional activities.passionate U.S. workers Passion is when a person discovers work that they love andare about their jobs. when that work becomes more than just a mode of income. We must also consider differing generational viewpointsThis metric is based on A passionate worker is fully engaged in his or her work and aspirations regarding the meaning of work. The Intuita survey in which we and interactions and constantly strives to get to new levels Small Business Report (2008) notes rapid changes in thetested different attitudes of performance. Satisfaction, meanwhile, describes how demographics of small business ownership and postulatesand behavior around content an individual is with a job. A satisfied worker can that, “entrepreneurs will no longer come predominantlyworker passion— be content with a job, perhaps because it fulfills a worker’s from the middle of the age spectrum, but instead fromexcitement about work, income, location and scheduling needs, and yet have no the edges. People nearing retirement and their childrenfulfillment from work, passion for the work. just entering the job market will become the mostand willingness to work entrepreneurial generations ever.” Different motivations willextra hours. From an employer’s perspective, a passionate worker is lead to similar paths; the broad spectrum of entrepreneurs talented and motivated and has a sense of unfulfilled who will be pursuing their passions as professions will driveWorker passion acts potential. Passionate workers may tend to be frustrated, a fundamental change in the way we view work.as an amplifier to the however, if they feel blocked in their efforts to achieve thatknowledge flows, potential for themselves and their companies. Observations and Implicationsthereby accelerating In our survey-based study, respondents were categorized asthe growth of the Flow A generation ago, most workers followed a similar career “disengaged,” “passive,” “engaged,” or “passionate” basedIndex. path: work for a single employer and rarely deviate from a on their answers to a series of questions.116 The survey also field of expertise, secure in the notion they would collect measured job satisfaction, job search behavior, and inter- a good pension after decades of loyalty. Work was less a firm knowledge flows. The overall worker passion score has pursuit of passion than a means to put food on the table hovered between 20 and 23% over the last three years (see and a roof overhead. A worker hoped to earn enough Exhibit 69), indicating that the percentage of “passionate” money to pursue their real passions after work or after employees in the workforce has not changed significantly. retiring. Over the same period, the percentage of “engaged” workers edged up, offsetting a decline in “disengaged” workers. Unlike prior generations that often enjoyed considerable While companies have not yet managed to ignite worker job stability, today’s workers no longer compete only passion more broadly, they are at least reducing the number with workers in local labor markets, but, thanks to falling of employees who would most negatively impact employee interactions costs,114 with workers across the globe. As a culture. The level of “passive” workers has stayed constant Silicon Valley billboard put it, “1,000,000 people overseas at 31%. can do your job. What makes you so special?”115 We continue to focus on passionate employees—we believe Why does passion matter? Because staying competitive this passionate segment will be best able to increase their 114 See Patrick Butler et al., “A Revolution in Interaction,” The in the newly globalized labor market requires all of us to rate of learning to keep pace with the rapid technological McKinsey Quarterly, 1997, no. 1. 115 For more about this billboard, see constantly renew and update our professional skills and evolution driving today’s Big Shift. “What Makes You So Special?: With Over 1 Million People in the World Able to Do Your Job, Altium Acts to Help More,” Reuters, http://www.reuters.com/article/ pressRelease/idUS180975+20-Apr- 2009+MW20090420 (created April 20, 2009). 116 For information regarding survey scope and description, please refer to the Shift Index Methodology section. 96
  • 99. 2011 Flow Index Worker Passion Tab Title Here 1 UpdatedExhibit 69: Worker Passion, (2011-2009) Exhibit 69: Worker Passion (2011-2009) 40% 35%Percentage of employees, by Passion category 31% 31% 31% 30% 27% 25% 24% 25% 24% 23% 22% 21% 21% and year 20% 20% 15% 10% 5% Worker Passion 2 0% Disengaged Passive Engaged Passionate 2011 (n=3108) 2010 (n=3108) 2009 (n=3201) Source: Synovate, Deloitte analysisSource: Synovate, DeloittePassionExhibit 70: Worker analysis Index by Current work-life situation, (2011) Exhibit 70: Worker Passion Index by Current work-life situation (2011) 70%Percentage of employees, by Passion category 60% 50% and current work-life situation 50% 44% 39% 40% 37% 32% 32% 32% 34% WP Metric Write-up 30%68 24% © 2011 Deloitte Touche Tohmatsu 20% 20% 15% 14% 10% 9% 10% 5% 3% 0% Disengaged passion in my profession I found my Passive Engaged I found a profession that matches my passion Passionate I pursue my passion as a hobby I havent found my passion Source: Synovate 2011 WP/IFK Measurement (n=3108)Source: Synovate 2011 WP/IFK Measurement (n=3108) WP Metric8 Write-up © 2011 Deloitte Touche Tohmatsu 2011 Shift Index Measuring the forces of long-term change 97
  • 100. 2011 Flow IndexTab Title Here Workers self-reported sense of being able to pursue their When asked about whether workers had “little control passions within their professions correlates with their over the amount that they worked,” passionate workers behavior- and attitude-based worker passion score (see were twice as likely to state they very strongly disagreed Exhibit 70). The majority of passionate” workers report or strongly disagreed with this statement, as compared having found a way to connect their passion to their to disengaged workers. These results also indicate that profession, while the remaining “passionate” workers passionate employees feel the most sense of control about pursue their passion outside of work through hobbies or their contributions to the workplace. other endeavors. “Engaged” workers demonstrated similar behavior, though significantly fewer of them found their To a lesser extent than for the self-employed, workers at passion through their profession. Workers classified as smaller firms tend to be more passionate than workers “passive” or “disengaged”, by contrast, either are pursuing at larger firms. The relationship between the size of the their passions through personal hobbies or are entirely company and worker passion highlights two factors that unaware of their passions. seem to drive passion for work: autonomy and opportunities for growth. Both are provided by a less constrained work Self-employed workers tend to be more passionate about environment which is often characteristic of either self- their work. In the 2011 survey, the difference between self- employed or smaller company work environments. In employed and company-employed workers is pronounced addition, smaller companies offer more opportunities (see Exhibit 71): 45% of self-employed workers are for cross-functional interactions, which encourage tacit “passionate” (compared to 19% of company-employed knowledge sharing, and have fewer organizational workers), while only 9% of self-employed workers are boundaries, which inhibit knowledge sharing and innovation “disengaged” (compared to 26% of company-employed in thinking and work practices. workers). This is not surprising given the overlap between Still, large firms run the risk of driving people out of the the motivations for self-employment and the drivers of organization if they are unable to create environments that passion: autonomy, meaningfulness of work and more foster knowledge sharing across the organization. However, intimate interactions in all business transactions. it is unreasonable to suggest that worker passion does not exist entirely in larger enterprises, as indicated by the survey Exhibit 71: Worker Passion by employment type, (2011) Exhibit 71: Worker Passion by employment type (2011) 50% 45% 45% Percentage of employees, by Passion category 40% 35% 32% and employment type 30% 28% 26% 25% 24% 20% 18% 19% 15% 10% 9% 5% 0% Disengaged Passive Engaged Passionate Self Employed Firm Employed Source: Synovate, Deloitte analysis Source: Synovate, Deloitte analysis 98
  • 101. 2011 Foundation Flow Index Worker Pas Tab Title Here 4 Index UpdatedExhibit 72: Worker Passion by size of firm, (2011) Exhibit 72: Worker Passion by size of firm (2011) 40% 34% 35% Percentage of employees, by Passion category 31% 30% 28% 27% 25% 25% 23% and size of firm 20% 17% 16% 15% 10% 5% Worker Pas 0% Disengaged Passive Engaged Passionate 5 1 to 99 100 to 499 500 to 999 1,000 to 4,999 5,000 or more Source: Synovate, Deloitte analysisSource: Synovate, Deloitte analysis Exhibit 73: Inter-Firm knowledge flow participation and passion, (2011) Exhibit 73: Inter-Firm knowledge flow participation and passion (2011) 50% 45% Percentage participation in Inter-Firm knowledge flows, 40% by Passion category and participation type 35% 30% 25% WP Metr71 20% Write-up © 2011 Deloitte Touche Tohm 15% 10% 5% 0% Passionate Engaged Passive Disengaged 2010, 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey; Administered by Synovate 2011 Shift Index Measuring the forces of long-term change 99 WP Metr
  • 102. 2011 Flow IndexTab Title Here Chris Anderson and DIY Drones When Wired Magazine Editor-in-Chief Chris Anderson had to find a president for his fledgling unmanned aerial vehicle business, commonly referred to as UAVs or Drones, it was not a litany of Stanford degrees, but an online video of a helicopter operated by Wii controller that moved Jordi Muñoz’s resume to the top of the stack. Relatively untrained (Muñoz attended one year of University in Mexico before moving to San Diego with his wife), and completely untested in the world of business, it was Muñoz’s passion for Drones and prominence in amateur Drone communities that won him the job. In 2009, Anderson and Muñoz co-founded 3D Robotics – a robot manufacturing company with factories in San Diego, California and Bangkok, Thailand. In short order, the firm had grown to 11 staffers, and in March 2011, revenues hit over one hundred and sixty thousand dollars, up from a modest five thousand their first month. Still a small player in the space, 3D Robotics is generating buzz among large clients. 3D Robotics is able to innovate so quickly in large part because of its rich participation in knowledge flows, including a 15,000-member community of enthusiasts at DIY Drones centered on the open source coding to operate UAVs. Though Muñoz did not have the traditional credentials to lead such a fast-growing venture, his passion for the work and access to rich flows of information made him the strongest candidate. This passion has carried over into his tenure at 3D Robotics. He and Anderson share a vision of a world where drones are household entities: “Our approach,” he said in one interview, “is the personal computer.” To achieve this, Muñoz has retained the questing and connecting dispositions that helped cultivate his boyhood fascination into a deep expertise. The partnership between Anderson and Muñoz continues, as does their rich participation in inter-firm knowledge flows. For more, see Muñoz’s blog at http://diydrones.com, the largest amateur Unmanned Aerial Vehicle community on the web. results (16%). Large companies, because of their size, have Because passionate workers are more engaged in their work a greater potential to foster connections within and often and eager to learn and to improve their job performance, outside of the organization. The latter is particularly true as worker passion is correlated to participation in inter-firm large companies can provide individuals looking to estabilsh knowledge flows (see Exhibit 74). Inter-firm knowledge connections beyond their immediate workplace with a flows allow motivated employees to connect with, and learn ceratin level of creditibilty, acting a large amplifier. from, other motivated and talented workers, reinforcing their sense of meaning and connectedness and providing Given this trend, larger organizations at a minimum should the means for self-improvement and growth. be mindful to avoid creating information silos and look for ways to foster cross-functional knowledge sharing. Leaders Driven by the twin forces of the technology infrastructure in larger firms should consider looking for ways to enable and more liberalized public policies, companies can passionate workers to operate with greater autonomy and increasingly create value through participating in “flows” of should make readily available opportunities for continued knowledge rather than from accumulating and exploiting learning, including social software, published works, and “stocks” of knowledge. Already, the lion’s share of profits both intra-firm and inter-firm knowledge flows – to enable at big companies in the developed world is the result of passionate workers to continue to fuel their passion. talented workers monetizing intangible assets.117 Since passionate workers have a greater propensity to participate The way some of our “passionate” respondents describe in knowledge flows, it makes sense for companies to find their work environments illustrates these ideas. As one ways to increase the level of passion workers find in, and middle manager in the Media & Entertainment industry bring to, their jobs. described it, his work provides him the “freedom to express creativity and the power to present ideas without feeling A talent development value proposition is an increasingly repressed.” An executive in the Life Sciences industry finds important for companies vying to recruit and retain top passion in his work from “utilizing my skills to the most. talent. Talented workers will be attracted to organizations Enjoying the challenges and rewards that come with it.” that provide an environment where workers’ learning and 117 See Lowell Bryan and Michele Zanini, “Strategy in an Era of Global Giants,” The McKinsey Quarterly 2005, no. 4. 100
  • 103. 2011 Foundation Flow Index Tab Title Here Index outlook will be enhanced through ongoing development When asked about whom they identify with most, the and easy access to knowledge flows. passionate employee was most likely to respond as someone who seeks out challenges to improve performance, even One important caveat: attracting talent and tapping in the presence of significant risks (45%). These responses employee passion is not limited to knowledge workers as indicate a willingness by the passionate employee, we conceptualize them today. Peter Drucker initially defined that they are inspired (seeing an opportunity to learn a “knowledge worker” as “one who works primarily with something new) or energized (seeing an opportunity information or one who develops and uses knowledge in for problem solving) rather than being indifferent or the workplace.” However, employees at all levels and in exhibiting negative behaviors. The disengaged employee, all roles will increasingly participate in knowledge flows by contrast, was significantly less likely to react in this way, to perform their work, essentially making every worker a which is indicative of a much more reactive approach. The knowledge worker. This transformation in the workplace passionate employee’s questing disposition also drives calls for new approaches to managing and retaining talent higher performance as passionate workers do not shy from (further described in the Returns to Talent metric). challenges and actively pursue opportunities to blend new ideas from across companies, industries and disciplines into The competitive environment has strengthened the need their current work. for firms to create and retain passionate employees. These workers are proactive, seek continual performance As the rate of change in the business environment increases, improvement, inspire innovation and possess both a the passionate worker is most apt to adjust and thrive, and “questing” disposition, which drives them to seek out new will foster those behaviors within their companies. They sources of knowledge, and a “connecting“ disposition. view challenges as exciting opportunities to drive themselves This connecting disposition then drives them to build to a new level of performance. Employees who are not relationships within the organization and outside of its walls passionate tend to experience unexpected challenges as a to tap into the latest thinking and insights. source of stress and are increasingly likely to burnout and become a drain on the organizational vitality.Exhibit 74: Inter-Firm knowledge flow participation and passion, (2011) Exhibit 74: Passion and worker self-identification (2011) 100% Percentage participation, by Passion category 80% 61% 58% 57% 60% and attitude 48% 45% 40% 32% 27% 22% 17% 15% 20% 11% 7% 0% Disengaged Passive Engaged Passionate Someone who seeks out challenges to improve performance, even in the presence of significant risks Someone who tackles challenges when they are presented because they are opportunities to improve performance Someone who deals with challenges when they are presented because they are unavoidable 2010, 2011 Deloitte Worker Passion/Inter-Firm Knowledge Flow Survey; Administered by Synovate Source: 2010, 2011 Deloitte Worker Passion / Inter-firm Knowledge Flow Survey; Administered by Synovate 2011 Shift Index Measuring the forces of long-term change 101
  • 104. Social Media Activity 2011 Flow Index Social media activity creates scalable ways to connect and tap into knowledge flows Introduction a network of people as much as a network of information.The Social Media Hundreds of millions of people around the world are online This network is changing how people connect and interactActivity metric measures and a significant portion of them are engaged in trying to with one another, blurring the lines between personal andhow many minutes enrich both personal and business relationships. As more professional, and forcing business leaders to rethink howInternet users spend and more people use the Internet, the ability for individuals best to engage employees and consumers.on social media Web to easily find and communicate with others aroundsites relative to the total common interests, regardless of geography, continues to Observations and Implicationsminutes they spend on reshape and transform the way knowledge flows. Social Consumption of social media has exploded in the pastthe Internet. media sites, the virtual communities within Internet Web few years. The average number of daily visitors on social sites, organize these interests and enable participants to networking sites doubled from 46M per month in 2007The metric is a proxy for connect and exchange information using a variety of tools: to nearly 90M per month in 2011.118 Similarly, the totaltwo- and multiple-way email, voice, chat, instant messages, videoconference, minutes spent by U.S. users on social networking sites grewcommunication, which blogs, etc. Because it supports and organizes information 236%, from 25B in 2007 to 59B in 2011.amplifies knowledge sharing and rich interaction, social media is an importantflows by offering the amplifier of knowledge flows and thus an essential metric in The growth in social media activity is the direct result ofability to collaborate. the Shift Index. both the technological changes (discussed elsewhere in this report) that have made the Internet more widely accessible Society has embraced social media as a means of and changing social behaviors. Every month, more than expression and a creative outlet, while technological 250 million people engage with Facebook on external advancements have allowed social media platforms to Web sites and more than 2.5 million Web sites integrate serve as catalysts for open innovation. The use of social with Facebook.119 Mobility has also had a huge impact, media will continue to be driven by societal as well as giving individuals the ability to check in anywhere, anytime, technological changes. The increasing amount of time on social media. More broadly, social media platforms spent on social media as a percentage of time spent on the have spurred new technologies, including blogs, picture Internet reflects how the World Wide Web is evolving into sharing, vlogs, wall postings, email, instant messaging, Exhibit 75: % of Internet time spent on Social Media, (2007-2010) Exhibit 75: Percentage of Internet time spent on Social Media (2007-2010)120 16% 14.4% Percentage of internet time spent on social media 14% 12% 10% 7.4% 8% 6% 4% 2% 118 comScore and Deloitte analysis 0% 119 http://www.facebook.com/press/ 2007 2008 2009 2010 info.php?statistics Time Spent on Social Media 120 comScore and Deloitte analysis Source: comScore, Deloitte analysis 102 Source: comScore, Deloitte analysis
  • 105. 2011 Flow Index Tab Title HereExhibit 76: Social Technographics Ladder Exhibit 76: Social Technographics Ladder • Publish a blog • Publish your own Web pages Creators • Upload video you created • Upload audio/music you created • Write articles or stories and post them Conversation- • Update status on social networking site alists • Post updates on Twitter • Post ratings/reviews of products or services Critics • Comment on someone else’s blog • Contribute to online forums Groups include • Contribute to/edit articles in a wiki customers participating in at least one of the • Use RSS feeds Collectors • “Vote” for Web sites online indicated activities at least monthly • Add “tags” to Web pages or photos Joiners • Maintain profile on a social networking site • Visit social networking sites • Read blogs • Listen to podcasts Spectators • Watch video from other users • Read online forums • Read customer ratings/reviews Inactives • None of the above Source: Forrester Research Inc.Source: Forrester Research Inc. musicsharing, crowd sourcing, and VOIP, to name a few. ladder to illustrate the concept of Social Technographics® These technologies amplify knowledge flows by making (benchmarking consumers by their level of participation in them richer and more personalized.75 social computing)— the higher the rung, the more involved the participation (see Exhibit 76). According to Forrester, A recent study by iStrategylabs indicates growth in users U.S. consumers people are playing an increasingly active across all age groups. Between 2010 and 2011, the 18-24 role in their social media experience as creators — writing age group showed the highest growth on social networking blogs, making Web pages and updating content — as site, Facebook, with a 74% increase. Surprisingly, the indicated by increases from 2007 to 2010 in all “rungs” second highest growth came from the 55+ age group, with except for “inactives” (those who do not participate in a 59% increase in users.121 A separate study of penetration social media at all). The number of “inactives” decreased rates across age groups indicates that while the younger from 44% in 2007 to 19% in 2010 (see Exhibit 77) and we 121 “71% of All U.S. Web Users generation (below 24 years of age) built critical mass on expect this trend to continue. are On Facebook” http://www. allfacebook.com/71-percent-of-u-s- social networking sites first, continued growth is now web-users-are-on-facebook-2011- coming from the older age groups.122 As social media becomes more pervasive, companies are 01?utm_source=feedburner&utm_ medium=feed&utm_campaign=Fe making social media an integral part of their relationship ed%3A+allfacebook+%28Faceboo k+Blog%29 The online individual is no longer a passive bystander. A with consumers, employees, and other stakeholders. 122 http://www.bzzagent.com/blog/ report published by Forrester Research in 2010 used a Forrester estimated that $716M was spent in social media wp-content/uploads/2010/09/ Pew-older-adults1.png 2011 Shift Index Measuring the forces of long-term change 103
  • 106. Exhibit 76: Social Technographics profile of U.S online adults, (2009) Exhibit 77: Social Technographics profile of U.S online adults (2009)2011 Flow IndexTab Title Here 2009 24% Creators 2008 21% 2007 18% 2009 33% Conversa -tionalist 2008 2007 2009 37% Critics 2008 37% 2007 25% 2009 20% Collectors 2008 19% 2007 12% 2009 59% Joiners 2008 35% 2007 25% 2009 70% Spectators 2008 69% 2007 48% 2009 17% Inactives 2008 25% 2007 44% Source: Forrester Research Inc. Source: Forrester Research Inc. marketing in 2010 and expects it to reach $3.1B by 2014, to appropriately participate in knowledge flows. Companies making social media a bigger channel than email or mobile, must at least prescribe appropriate protocols for sharing though still far smaller than search or display advertising. information. However, the true value of social media Among global Fortune 100 companies: 65% use Twitter, for companies lies in their ability to use social media to 54% are on Facebook, and 50% post videos to YouTube. find new ways to interact with consumers. Collaboration Seventy-nine% of the Fortune 100 use at least one of these marketing, for example, focuses on developing a company’s social media sites and 20% use all of them.123 ability to attract (create incentives for people to seek you 76 out), assist (be as helpful and engaging as possible), and As the lines between networks blur and internal and affiliate (mobilize and leverage third parties). external audiences interact together on social media, employees need some guidance and governance on how Core Metrics Creating New Value I n 2009, CareOne already knew that its online community of 1.4 million people was a valuable source of information. The debt relief company wanted to explore social media channels to further develop its relationships with these customers. “Our primary goal with social media was customer retention,” said team leader Nichole Kelly. But the team soon realized that many of the online community members were prospective customers who needed help rather than existing customers and a larger opportunity was at hand. The team retooled its social media plan to reach out to these potential customers.124 Kelly discovered that the personal connection generated through social media contact had a tremendous impact on the company’s core metrics. Although the social media prospects had a longer buying cycle (24-28 123 http://webbiquity.com/ days versus as low as 30 minutes), there was an incredible jump in successful conversions through the sign-up social-media-marketing/best- process and ultimately the point of purchase. The volume of leads generated was 179% higher, and social social-media-stats-facts-and- marketing-research-of-2010/ media customers were 217% more likely to make their first payment. For one particular problem area (people 124 Case Study: Social Media Customers Are More Valuable who partially fill out the sign-up form then quit), social media prospects went back and completed the form Customers. Social Media Explorer. 680% more often than non-social media leads. The social media prospects also made their first payment at an http://www.socialmediaexplorer. com/social-media-marketing/ astonishing 732% better rate. social-media-customer-value/ 104
  • 107. 2011 Foundation Flow Index Tab Title Here Index2011 Shift Index Measuring the forces of long-term change 105
  • 108. 2011 Impact Index Markets 111 Competitive Intensity 114 Labor Productivity 117 Stock Price Volatility Firms 120 Asset Profitability 124 ROA Performance Gap 128 Firm Topple Rate 131 Shareholder Value Gap People 134 Consumer Power 138 Brand Disloyalty 142 Returns to Talent 145 Executive Turnover106 2011 Shift Index Measuring the forces of long-term change 106
  • 109. 2011 Impact Index 2011 Impact Index Tab Title HereFoundations and knowledge flows are fundamentallyreshaping the economic playing field.Trends set in motion decades ago are fundamentally of scale-based corporate strategy has never been morealtering the global landscape as a new digital infrastructure, clear.built on the sustained exponential pace of performance • At the same time, as returns were bifurcating but generallyimprovements in computing, storage, and bandwidth, on the decline, management innovations and technologyprogressively transforms the business environment. The have enabled workers and companies to be moreFoundation Index and the Flow Index are meant to capture productive. As measured by the Bureau of Labor Statistics,this dynamic, while the Impact Index shows how and why it the productivity of labor has more than doubled sinceall matters. The Impact Index is a lagging indicator of how 1965. This begs a fundamental question: If not capturedfoundational shifts and new flows of knowledge are tangibly by firms, where did this value go?changing the way companies and consumers operate. • It appears that the bulk of it has been captured by consumers and talent, who have learned to harness theBy our calculations, ROA for public companies has decreased power of digital infrastructure much more quickly thanto one-quarter of its level in 1965. While their institutional counterparts. Our Consumer Powerthis deterioration in ROA has been particularly affected by Index indicates that consumers wield significant powertrends in the financial sector, significant declines in ROA have with a 2011 score of 67 out of 100 — put simply, thisoccurred in the rest of the economy as well. Also, when you means that companies have to deliver more and morelook at the best companies — the top value at what is often a lower price. Meanwhile, we see25% of earners — even they have barely held their ground. that the total compensation of creative class occupationsClearly, there is a fundamental disconnect between the is, on average, more than double that of othermindset and practices of companies and the environment in occupations. Moreover, the compensation gap betweenwhich they compete. Here’s why: the creative class and the rest of the workforce has been• Aided by technology, interaction costs are plummeting, increasing, at a 4% CAGR during the past seven years, and public policy has enabled freer movement by eroding suggesting the increasing importance companies place on the barriers that once protected incumbents. At the talent. By participating in knowledge flows, creative talent same time, the economy itself has “gone digital” and is is capturing an increasingly larger share of the economic increasingly service based, meaning that companies need pie. fewer assets to effectively compete. These shifts have led to rapidly intensifying competition, which has more than Traditional, scale-based strategies have provided little doubled since 1965. sustained relief from these trends. Instead, companies are• As mentioned briefly above, this competition has taken an toppling from their leadership positions at nearly double extreme and consistent toll on profits. By comparing net the 1965 rate, and executives, using 20th-century strategies income and assets, we see that economy-wide profitability to address 21st-century problems, are seeing their tenures is significantly lower in 2010 than what it was in 1965. decline.• In addition, economic and shareholder returns are increasingly polarized. During the past 40 years, the top Taken together, these findings suggest a fundamental firms (those in the top quartile of performers) have barely rethinking of the way we do business is in order. Success held their ground, only marginally increasing their profit- in the digital era will be defined by how well companies ability and shareholder returns. The worst performers, share knowledge — how well they leverage foundations however, have seen their percentage losses for both more and participate in flows. In a constantly changing, highly than double. Today, the costs of falling behind are at their uncertain world, the value of what companies know today is highest point in decades and the purely defensive nature rapidly diminishing; new measures of success must be based 2011 Shift Index Measuring the forces of long-term change 107
  • 110. 2011 Impact IndexTab Title Here Exhibit 77: Impact Index, (1993-2010) Exhibit 78: Impact Index (1993-2010) 120 111 106 104 105 99 101 100 100 101 98 98 100 93 95 88 84 81 78 78 80 Index value 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte Analysis Source: Deloitte analysis on how fast they can learn. In this sense, we must transition metrics contribute to the index (that is, positively or nega- from scalable efficiency to scalable learning, as mentioned a tively) will have to be reassessed. number of times in this report. Our hope is that the findings above, revealed by the Impact Index, tangibly quantify the As with the Foundation Index and the Flow Index, this index imperative for this shift. is broken down into three drivers. In this case, these drivers are designed to quantify the impact of the Big Shift on three Rather than a cause for pessimism, these findings can key constituencies: be viewed as an opportunity to remake the institutional architectures of today’s corporations. Companies in the • Markets: The impact of technological platforms, open early-20th century learned to exploit the benefits of scale in public policy, and knowledge flows on market-level response to the energy, transportation, and communications dynamics facing corporations. This driver consists of three 77 infrastructures of their time. Today’s companies must metrics: Stock Price Volatility, Labor Productivity, and develop and adapt institutional innovations of their own Competitive Intensity. if they are to make the most of this era’s emerging digital • Firms: The impact of intensifying competition, volatility, infrastructure. Once these innovations are sufficiently and powerful consumers and talent on firm performance. diffused through the economy, the Impact Index will turn This driver consists of four metrics: Asset Profitability, ROA from an indicator of corporate value destruction to a Performance Gap, Firm Topple Rate, and Shareholder reflection of powerful new modes of economic growth. Value Gap. • People: The impact of technology, open public policy, The Index and knowledge flows on consumers and talent, including Today, the Impact Index score is 101, as shown in Exhibit executives. This driver consists of four metrics: Consumer 78. Note that this index measures the impact of the Big Power, Returns to Talent, Brand Disloyalty, and Executive Shift: So as competitive pressures force down returns, as Turnover. markets become more volatile, or as brand loyalty erodes, the index will increase.125 Individually, these drivers tell us how the Big Shift has affected key groups over time. Collectively, as shown In this sense, to decide whether a decrease in a metric (such in Exhibit 79, they describe how rapid changes in the as profitability) should increase the index, we had to make foundations and flows are altering the dynamics between a guess as to which direction it would go — at least in the companies, customers, and the markets in which they short term — in response to the Big Shift. These decisions operate. were made in accordance with our logic (that competition will put growing pressure on returns) and Right away, we can tell that the Impact Index has not grown long-term trends (that returns have been steadily declining as consistently as the Foundation Index and the Flow Index. since 1965). However, as we predict above, there will This is to be expected: Unlike the latter two, the Impact come a time when companies learn to harness the new Index is particularly susceptible to short-term cyclicality, as 125 For further information on how the Impact Index is calculated, digital infrastructure and generate powerful, new modes it is based on a number of financial measures that fluctuate please refer to the Shift Index of economic growth. At that time, the way many of these over time. As such, we made an attempt to smooth the data Methodology section. 108
  • 111. Drivers 2Exhibit 78: Impact Index drivers, (1993-2010) 2011 Impact Index Exhibit 79: Impact Index drivers (1993-2010) 120 Tab Title Here 100 80Index value 60 40 20 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Markets Firms People Source: Deloitte AnalysisSource: Deloitte analysis to represent long-term trajectories more clearly relative to traditional, scale-based corporate strategy — cut costs and short-term movements.126 acquire others to achieve industry leadership and to capture economies of scale — the pressures in the markets driver After doing this, we see that growth in this index is much impact firms nearly one to one. Since 1993, the firms driver, slower than in the Foundation Index or Flow Index: It has which measures the negative impact of the Big Shift on grown at a CAGR of 1.5% since 1993. The reason for this is individual companies, has grown over 20%, at a CAGR of that, at least right now, the underlying metrics in the Impact 1.1%. The similarity to increases in market pressures, despite Index do not move as fast as, say, increases in computing aggressive efforts to offset them, is striking. If companies power. But we do expect the index to keep growing — do not catch up in their ability to harness the new digital perhaps at an even faster rate — as companies begin to infrastructure, they will likely see their performance continue adapt their institutional architectures and business practices to deteriorate (perhaps even more quickly) as competition78 more effectively harness the potential of the digital to inevitably grows steeper. © 2011 Deloitte Touche Tohm infrastructure and richer knowledge flows. Unfortunately, we are forced to make assumptions when it Slower growth does not mean that movements in this comes to the impact of the Big Shift on people because our index are of less importance. Shifts, albeit small, in the way of measuring this through a recent survey precludes us Impact Index are indicative of powerful trends, many of from assessing historical trends (see Exhibit 82 represents which were discussed in the previous section. For example, an estimate). But understanding that changes in digital where we are today (an index value of 101) is the result of technologies and practices tend to impact individuals before parallel growth in the impact of the Big Shift on all three institutions, we can be confident that people have been constituencies: markets, firms, and people. The impact impacted the most, and most consistently by the Big Shift. on markets, a reflection of growing Competitive Intensity, As technology continues to reshape the playing field and put Labor Productivity, and volatility in stock prices, has gone up power in the hands of consumers and talent, we expect this more than 33% since 1993, as shown in Exhibit 80. Since driver to increase. 1993, it has grown at roughly a 1.8% CAGR each year. As companies learn to harness the new digital infrastructure Overall, we expect the Impact Index to increase at a growing and knowledge flows to become more productive and more rate over the coming years, but with much more volatility effectively compete, we expect this to not only continue, but than the Foundation Index or the Flow Index. As individuals also increase significantly. continue to outpace institutions in the value they gain from technology, the broad competitive forces degrading The economic downturn may also have a lasting effect on performance will only increase and, with them, the index, these dynamics. Again, “normal” may, in fact, be a thing of until firms finally develop the institutional architectures and the past. business practices required to more effectively create and capture economic value. The impact at the firm level — shown in Exhibit 81 — is highly telling. Despite an obsessive focus on tenets of 126 For further information on data smoothing, please refer to the Shift Index Methodology section. 2011 Shift Index Measuring the forces of long-term change 109
  • 112. Exhibit 79: Market, (1993-2010) Exhibit 80: Market (1993-2010)2011 Impact Index 80 70 60 50 Index value 40 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Exhibit 80: Firm, (1993-2010) Exhibit 81: Firm (1993-2010) Source: Deloitte analysis 80 70 60 50 Index value 40 30 79 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Deloitte analysis Exhibit 81: Flow Amplifiers, (1993-2010) Exhibit 82: People (1993-2010) Source: Deloitte analysis 80 70 60 50 Index value 40 The charts above represents the combined movements of 30 the underlying metrics in the index, after data adjustments 80 20 and indexing to a base year of 2003. For more information on the index creation process, see 10 the methodology section of the report. 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Soure: Deloitte Analysis Source: Deloitte analysis 110
  • 113. Competitive Intensity 2011 Impact Index Competitive Intensity is increasing as the digital infrastructure and changing public policy erode the barriers to entry and movement Introduction attachment to brands.128 The shift in market power from Many executives have the sense that the world is more the makers of goods and services to the people who buy The Competitive competitive today. Indeed, consultants and academics alike them increases the pressure on firms to innovate and sell in Intensity metric is a have argued this same hypothesis that pervasive forces of new and creative ways. measure of market the 21st century, such as globalization and technology, concentration and serves are creating unprecedented competitive pressures for Many of today’s companies continue to follow traditional as a rough proxy for established firms.127 Tracking Competitive Intensity is a way scale-based notions of corporate strategy, pursuing how aggressively firms of measuring the falling barriers to entry and movement mergers and acquisitions to achieve industry leadership, interact. It is based resulting from digital technology and public policy focusing tirelessly on cost reduction, and making every on the Herfindahl- changes. effort to squeeze value from the channel and suppliers. Hirschman Index (HHI), As quickly as they accomplish these things, however, which tracks changes in During the last several decades, public policy liberalization competitors enter with new efficiencies and ideas. Even industry concentration has opened up the global economy, allowing freer flow of leading firms struggle to stay ahead. by measuring the market capital across geographic and institutional lines. Businesses share held by the top 50 now find it easier to enter and exit markets, industries, and Observations and Implications firms. countries and workers enjoy fewer restrictions on where To illustrate how the HHI works, imagine an industry This metric is a rough they can work. with high fixed costs of production. The high investment required to do business (to build and operate factories, for Competiti proxy for changes in Meanwhile, digital technology has removed previous example) are barriers to entry that enable a small group of competitive dynamics over time. Intensity barriers to the flow of information, eroding the information players to win the lion’s share of sales. According to the asymmetries that once favored sellers over buyers. HHI, market power is highly concentrated in this industry Today’s consumers have a growing wealth of knowledge and choice when buying goods and services and less and, as a consequence, it is deemed low in Competitive Intensity. Now consider the converse, in which barriers are UpdatedExhibit 82: Economy-wide Herfindahl-Hirschman Index (HHI), (1965-2010) Exhibit 83: Economy-wide Herfindahl-Hirschman Index (HHI) (1965-2010) 0.16 Moderate Competitive Intensity 0.14 0.14 0.12 0.10 0.1 High Competitive IntensityHHI Index Score 0.08 0.06 0.05 0.04 0.03 0.02 127 William L. Huyett and Patrick Viguerie, “Extreme Com petition,” Very High Competitive Intensity The McKinsey Quarterly, 2005, no. 0 2 and Richard D’Aveni, Hyper- 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 Competition (New York: Free Press, 1994). HHI Linear (HHI) 128 For further information, refer to the Consumer Power and Brand Source: Compustat, Deloitte analysis Disloyalty sections.Source: Compustat, Deloitte analysis 2011 Shift Index Measuring the forces of long-term change 111
  • 114. 2011 Impact IndexTab Title Here Exhibit 84: Economy-wide merger activity and HHI, (1972-2010) Exhibit 84: Economy-wide merger activity and HHI (1972-2010) 600 0.1 0.09 0.09 500 0.08 0.07 400 Number of Mergers 0.06 0.05 HHI 300 0.05 217 0.04 200 0.03 0.02 100 0.01 32 0 0 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 Merger Activity HHI Source: CRSP US Stock Database ©200903 Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business, Source: CRSP US Stock Database ©200903 Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business, Deloitte analysis Deloitte analysis Despite a brief climb in recent years, market Before 1995, industry concentration decreased consistently, indicating that Competitive Intensity overall was steadily concentration is still less than half of what increasing (see Exhibit 83).129 Despite a brief climb in recent years, market concentration is still less than half of what it was in 1965, suggesting that Competitive it was in 1965, suggesting that Competitive Intensity has Intensity has more than doubled during that more than doubled during that period. It is worth noting that HHI values between 0 and 0.10 denote low industry period. concentration and by extension high Competitive Intensity. The United States has fallen in that range throughout most 83 of the period under analysis. low and sales are spread evenly across a large number of firms. The HHI would indicate that there is little market concentration and this industry would be much more As noted above, our methodology suggests that competitive: more players means a greater chance — and Competitive Intensity has eased in recent years. We imperative—to compete for customer business. attribute this less to a decline in competition than to a wave of mergers and acquisitions (see Exhibit 84) that Of course, this framework breaks down in a number have increased industry concentration and thus HHI.130 of situations and comparing industries with different Technically, this is a situation where our methodology structural characteristics using HHI is problematic. Overall, breaks down: In a given year, HHI might “get it wrong” however, longitudinal shifts in this metric provide a good because of heavy mergers and acquisitions. However, indicator for how Competitive Intensity has changed over over the long term, we view this merger and acquisition time. behavior as a response to increasing Competitive Intensity 129 Source: Compustat, Deloitte analysis. 130 Source: Deloitte analysis based on historical data from CRSP US Stock Database ©200903 Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business. 112
  • 115. 2011 Impact IndexSpotify: Street Fight forDistribution Channels orMusic Everywhere?E ver since Napster began offering peer-to-peer music file sharing in 1999, the music industry has been roiled by advances in the digital infrastructure that have turned traditional business models upside and, consequently, believe it supports the validity down and unleashed competition from unexpected places. of our metric. Executives seeking to defend their company’s position often acquire competitors both toEnter the newest competitor to the already crowded digital music scene: In July reduce near-term pressure and to squeeze out more2011, Spotify launched in the United States and has already made a significant costs through greater economies of scale. However, ifimpact on the music industry. Prior to their U.S. entry, Spotify had already achieved barriers to entry and barriers to movement continuesuccess overseas; founded in Sweden, the service reached 1 million users less to erode, we expect that these defensive moves willthan 6 months after launch in 2008. Spotify offers consumers the ability to stream only have short-term impacts until another wave ofsongs directly, create playlists, and share music with friends. And after just a competitors emerge to challenge incumbents. Sofew weeks in the United States, Spotify boasted 1.4 million U.S. customers, with even if HHI increases due to mergers and acquisitions175,000 paying for service, an admirable 12.5% conversion rate by consumer over a few years, we believe the long-term trend isinternet standards, where 2-4% is the prevailing conversion of free to premium highly indicative of a tectonic shift toward increasingproducts. Though growing rapidly, Spotify faces a host of direct and indirect competitive pressure.competitors. The firm competes directly with subscription-based streaming sites,such as Rhapsody, with a catalog of over 11 million songs and 800,000 paid The profound increase in Competitive Intensity sincesubscribers. There are also many more tangential competitors among internet the mid-1960s shows no sign of slowing. Not only areradio sites, such as Pandora and MOG, who are more focused on music discovery competitive forces increasing within the country, U.S.than playlist creation. What differentiates Spotify from these competitors, and firms increasingly face competition from firms abroad.may make it difficult to fight back, is the degree of control that Spotify users have In today’s porous economy, where competitors mayover their music and the social features that Spotify offers. Spotify is banking on a come from unexpected places, differentiating friendpartnership with Facebook to encourage users to engage more with the site and from foe is increasingly difficult. As technologicalchange the way people share music across social platforms. While all these music improvements disintegrate barriers to entry andsites provide slightly different services, they are battling for the same customers, promote the free flow of information, businesseshoping to convert internet users into paying music consumers. must rethink traditional strategic, organizational, and operational approaches. Scalable efficiency, the primaryAnd what about the music companies themselves — are they collaborators or strategy firms undertook in the 20th century, will likelycompetitors? Although Spotify has signed distribution agreements with all of the have diminishing returns for firms going forward.‘big four’ music groups, Spotify currently pays more for music royalties than it Instead, companies seeking to remain competitivemakes in subscriptions and advertising.131 Of course, the firm is also dependent on will need to consider increasing efficiency via scalablethese agreements to avoid copyright infringement. learning, empowering employees to perform their jobs better and more efficiently.Finally, a large threat for Spotify and the music industry in general, still comes froma more nefarious competitor: pirating and illegal downloads.A Spotify spokesperson acknowledges “Our biggest competitor is piracy ratherthan other streaming services. Our goal is to offer a user experience that is higherquality, simpler, and altogether better than piracy.”132The rise of Spotify is a testament to the increasing Competitive Intensity feltby traditional incumbents and new entrants alike in the music industry. Just afew years ago, disruptors, such as Pandora and Rhapsody, forever changed the 131 Ben Sisario, “New Service Offers Music in Quantity, Notcompetitive landscape of the music industry. In today’s increasingly fast-changing by Song.” NY Times, <http://marketplace, however, even major market disruptors are susceptible to being www.nytimes.com/2011/07/14/ technology/spotify-music-disrupted shortly thereafter. Going forward, the fight for market share will only streaming-service-comes-to-us. html?pagewanted=all>continue as new models emerge to try to satisfy consumer’s needs. 132 David Lim, “Spotify Looks to Convert Teens from iTunes, Piracy.” Patch. <http://paloalto.patch.com/ articles/spotify-looks-to-convert- teenagers-from-itunes-piracy> 2011 Shift Index Measuring the forces of long-term change 113
  • 116. Labor Productivity 2011 Impact Index Technological and business innovation, open public policy, and fierce competition, drive long-term increases in Labor Productivity Introduction By focusing on “revenue productivity,” executives canThe Labor Productivity Robert Solow famously said, “You can see the computer switch from wringing out ever-more elusive efficiency gainsmetric is a measure of age everywhere but in the productivity statistics.”133 Often to unleashing the potential of employees by increasingeconomic efficiency that referred to as the productivity paradox, this view holds that the rate at which they learn, which can, in turn, lead toshows how effectively big investments in IT have done little to increase long-term innovation and continuous performance improvement.economic inputs are labor productivity. There is tremendous opportunity to couple the digitalconverted into output. infrastructure with new management approaches toIt is based on data from A central hypothesis of the Big Shift is that digital create and mobilize the knowledge that workers possess,the Bureau of Labor technology, as it increasingly penetrates business and unlocking the intangible assets that can drive companyStatistics. social domains, holds the potential to substantially increase profits in the digital era. productivity growth. In this view, the fact that technologyThe metric is a proxy has yet to make a truly significant mark on productivity Advances in productivity, that is, the ability to producefor the value creation may say more about traditional institutional architectures more with the same or less input, are a significant sourceresulting from the Big and management practices than about what is possible in of potential national income.134Shift and enriched the future as companies embrace the Big Shift.knowledge flows. Observations and Implications Traditional approaches to productivity improvement too As a whole, the U.S. economy has been able to achieve often focus on manipulating inputs—the denominator, modest productivity gains since 1965 (see Exhibit 85). or cost, side of the productivity ratio. Since companies The upward trend suggests that in the face of steadily can only reduce costs so far before reaching zero, this increasing competitive pressures, companies have been is ultimately a diminishing returns game. The fixation able to achieve productivity growth. on inputs moreover overlooks a bigger opportunity: the potential to offer more value while keeping the same total cost. Exhibit 85: Labor Productivity, (1965–2010) Exhibit 85: Labor Productivity (1965-2010) 120 111.5 100 101.2 80 Tornqvist aggregation 60 45.3 40 41.4 20 133 Robert Solow, New York Review of Books, July 12, 1987. 134 Bureau of Labor Statistics, “Labor Productivity and Costs”. Unites 0 States Department of Labor. < 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 http://bls.gov/lpc/faqs.htm#P01> Source: Compustat, Deloitte analysis 114 Source: Compustat, Deloitte analysis
  • 117. 2011 Impact Index Tab Title Here While Labor Productivity in the United States has shown increased from 2.1% to 2.6%. This growth was in part a a consistent upward trend, Exhibit 86 suggests that the continuation of 1990s trends, including the proliferation of rates of growth over the past five decades have varied.135 IT advances. However, reductions in labor input also played In the 2000s, Labor Productivity increased at a 2.7% CAGR, an important role in the productivity increases of the past as compared with the 2.1% CAGR in the 1960s and the lowest value of 1.6% CAGR in the 1980s. Productivity decade.136 As firms were hit with the economic downturn, many sought efficiency gains and increased their reliance Labor growth accelerated in the late 1990s, led by rapid output on automation and outsourcing as a means to reduce Productivit in IT-intensive industries and spurred by factors, such as costs. the rise of outsourcing (thus reducing the price of inputs.) In the 2000s, this growth trend continued, as CAGRExhibit 85: Labor Productivity CAGR, (1965 – 2010) Exhibit 86: Labor Productivity CAGR (1965-2010) 2.50% 2.00%Labor Productivty CAGR 1.50% 1.00% 0.50% Labor Productivit 0.00% 1960s 1970s 1980s 1990s 2000s Source: Compustat, Deloitte analysisExhibit 86: U.S. Productivity Growth, (1965 – 2010) Exhibit 87: U.S. Productivity Growth (1965-2010)Source: Compustat, Deloitte analysis 5.0% 3.9%Y-O-Y Percentage change in U.S. Labor Productivity 4.0% 3.1% 2.3% 3.0% 1.9% 2.0% 1.0%85 © 2011 Deloitte Touche Tohm 0.0% 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 135 Note that the 60’s column of data includes data from 1965-1970 136 Holman, Corey, Bobbie Joyeux, -1.0% and Christopher Kask. “Labor Productivity Trends Since 2000, by Sector and Industry”. February -2.0% 2008. Bureau of Labor Statistics. < http://www.bls.gov/opub/ Y-O-Y Percent Change Linear (Y-O-Y Percent Change) mlr/2008/02/art4full.pdf> Source: Federal Reserve Bank of New York 2011 Shift Index Measuring the forces of long-term change 115Source: Federal Reserve Bank of New York
  • 118. 2011 Impact IndexTab Title Here GE’s Enterprise Collaboration A n aviation team scattered across three countries and speaking two languages needs to work jointly to develop an application. A program developer in China wants to leverage the knowledge of an American counterpart to help him do his job faster. A newly minted manager in New York seeks a way to keep in touch with members of his old team. These are just three examples of issues resolved each day on General Electric’s (GE) corporate Web interface, SupportCentral. SupportCentral serves as the backbone of knowledge transfer throughout the multinational and multifaceted firm, creating collaboration between counterparts across the globe, and helping employees get to better answers faster through the power of scalable learning. In the late 1990s, GE Senior Vice President and Chief Information Officer, Gary Reiner, identified collaboration and transparency as primary cultural goals for the 21st century. In 2000, a team of employees deployed SupportCentral, a Web community for GE employees, to share knowledge and connect with one another. Since then, SupportCentral has become “the heartbeat of the company,” according to Reiner. Indeed, the numbers are staggering: In 2008, there were 400,000 global users, including employees, visitors, and consultants working at GE sites in 6,000+ locations, all accessing SupportCentral via a Web interface available in 20 languages. SupportCentral receives over 25 million hits a day from employees all over the world (greater than employee usage of Google and Yahoo combined).137 Employees rely on SupportCentral as a tool for doing their jobs better and more efficiently. Over 100,000 experts (all full-time GE employees) have signed up to help respond to user questions and manage content, and SupportCentral has become the ubiquitous tool for sharing documents and information, keeping groups connected across departments and countries. This has many benefits for employees throughout the organization. For example, whereas before, process owners had to outsource the creation of applications to IT teams and wait for results, SupportCentral is an example of how a company made it simple for IT teams to serve as mentors — empowering process owners to develop and tweak solutions to fit their needs. According to one GE Manager, “Just in our small corner of Aviation, we are saving ~$11 Million in real productivity this year.”138 technology is being used to improve labor productivity Foxconn, the Chinese manufacturer of Apple by moving employees into higher value positions and devices such as the iPhone and iPad, recently reducing the number at lower levels. Foxconn, the Chinese manufacturer of Apple devices, such as the iPhone and announced a plan to deploy one million robots iPad, recently announced a plan to deploy 1 million robots to perform basic manufacturing work. Foxconn CEO to perform basic manufacturing work. announced that, in addition to allowing the company to produce a greater volume of higher quality products, the Going forward, U.S. firms may find greater, and more shift will move the company’s workers “higher up the sustainable, productivity growth in the rapidly advancing foodchain, beyond basic manufacturing work.”139 digital infrastructure. An effective way to realize this potential is for companies to embrace new institutional In thinking about productivity improvement in the Big architectures, governance structures, and operational Shift, it is imperative that companies evaluate how to best practices, and to track, for example, employee adoption capitalize upon the potential of employees. Productivity of new technologies, how well employees are sharing yields can and likely will be influenced by firms’ willingness knowledge across organizational boundaries, and the to adopt technologies that allow resources to do their extent to which their employees are part of an ecosystem jobs better and more efficiently, from using emerging 137 Olivia Marks, “GE’s Enterprise Collaboration Backbone.” ZDNet. that is creating new value for customers. Scalable efficiency technologies to minimize the number of employees July, 17 2008. <http://www.zdnet. will likely not be enough to drive productivity growth; com/blog/collaboration/ges-enter- needed for simple activities to creating platforms that allow prise-collaboration-backbone/126> rather, the real gains can stem from harnessing the employees to access information and connect with one 138 Chuck Hollis, “A Humbling Experience”, Chuck’s Blog. July potential of scalable learning made possible by the digital another more easily. Empowering employees to participate 08, 2008. < http://chucksblog. infrastructure. typepad.com/a_journey_in_social_ in knowledge flows should, in time, allow for long-term, media/2008/07/a-humbling-expe. html> increasing productivity gains. 139 Christina Bonnington, “iPhone Investments in technology can also enable firms to Maker Foxconn Employs 1M produce more with fewer resources. Even in industries and Robots to do Grunt Work.” Wired Magazine. http://www. countries where labor is abundant and cheap, new digital wired.com/gadgetlab/2011/08/ foxconn-robots/ 116
  • 119. Stock Price Volatility 2011 Impact Index Tab Title Here Digital infrastructures and public policy initiatives amplify Competitive Intensity, market uncertainty, and Stock Price Volatility The Stock Price Introduction Volatility in the markets has been a topic among experts Volatility metric is a It stands to reason that equity markets are a primary place for years. Recently, Professor Robert Stambaugh of measure of trends in in which the forces of long-term change would become The Wharton School said that while stocks have been movement of stock visible. Paradoxically, perhaps, these long-term forces are traditionally viewed as less volatile over the long-term prices. playing out in the form of increased short-term volatility in due to “mean reversion.”144 Mean reversion suggests that stock prices. prices and returns eventually move back towards the mean This metric is a or average, and in many respects stock prices tend to be proxy for measuring Our analysis of this metric draws on da