There is a big shift happening right now that’s reshaping the business landscape, and the companies that identify it and act accordingly will be the big winners in a world of rapidly declining return on assets. Thought leaders at Deloitte’s Center for the Edge, which is tasked with identifying and defining emerging opportunities on the edge of business and technology, have encapsulated thoughts on this shift in the book
The Power of Pull: How Small Moves, Smartly Made, Can Set Big Things in Motion. Authors John Hagel, co-chairman of the Center for the Edge, John Seely Brown, independent co-chairman of the Center, and Lang Davison, executive director of the Center, lay out how to take advantage of new forces to unlock individual and institutional potential. Hagel recently sat down with Consulting to discuss The Power of Pull.Consulting: Can you tell me a little bit about your work at the Deloitte Center for the Edge and how this book came about?
The book represents about three years of research that we’ve been pursuing at Deloitte’s Center for the Edge. Our mission is to identify emerging business opportunities that should be on the CEO’s agenda and are not, and then do the research that shows why they should be on the agenda. About three years ago, John Seely Brown and I were recruited to serve as co-chairman for the new research center, and we’ve been pursuing research initiatives that focused on both specific opportunities that were emerging for businesses, as well as developing an integrated point of view about how the business landscape is changing. That’s how the book came about.
At the Center, we’re focused on original research, and now increasingly the focus has been on developing service lines that will help companies and executives address these opportunities more effectively. Part of it starts with a diagnostic effort, and we’ve started to publish some of these reports on what we call the ‘Big Shift’ that’s going on longterm in the business landscape. One of the things clients are asking us to do is help them understand how their company is doing. They are asking: ‘Where are we on this Big Shift? Where are the key performance gaps?’ So, we’re developing a diagnostic and helping them develop service lines to address those performance gaps, as well as helping companies move more effectively to the power of pull. Consulting: What exactly is the power of pull?
I guess it starts with a rather provocative proposition that the current management approaches and institutions that we have in business are fundamentally broken, and to support that proposition we muster a set of evidence around performance trends over long periods of time for all public companies in the United States. In particular, we show that return on assets (ROA) for all public companies in the U.S. has eroded in a very substantial and sustained rate since 1965. In fact, it has come down about 75 percent. There is no evidence of it leveling off, much less turning around. At minimum, it suggests that the current recovery of the economy debate may be a bit misleading. We’re showing some longer-term trends that have been playing out across many economic cycles that we have not been able to respond to effectively.
Consulting: And to what do you attribute that decline over the last 45 years?
On one level, you can simply think about it in terms of intensifying competition. One of the metrics we have shows the intensity of competition has at least doubled over this time period. But at a more fundamental level, the basis of competition is changing. In the past, we lived in a world where the source of economic value was around knowledge stocks, developing a proprietary set of knowledge, protecting it fiercely and extracting the value from it as efficiently as possible for as long as possible.
The problem is in a more rapidly changing world, knowledge stocks depreciate at an accelerating rate, and if all you’re doing is protecting knowledge stocks you’re running a diminishing business. The performance trends suggest that is happening.
Our perspective is that the basis for value creation is shifting to what we call knowledge flows—more diverse and relevant knowledge flows. Our current management practices and institutions are not set up to do that effectively. That’s where we get to the power of pull because we believe there are a set of management practices and institutions based on the theme of pull, and the concept of pull, which provide an opportunity not just to turn us around, but to create very substantial new opportunities for economic value creation.
Consulting: What are the growth opportunities?
We strongly believe there’s enormous growth opportunities for those that harness the power of pull. In essence, what we’re talking about is shifting from a world of diminishing returns in performance improvement. We believe that if you harness the techniques of pull you can actually end up with increasing returns to performance improvement where more participants that join in, the faster performance improves across the board—that’s a very powerful platform for growth. Part of the optimism is a bit perverse in the sense that if you extend the trend lines regarding ROA performance it’s not sustainable. It rapidly reaches zero in about ten years.
That’s a zero percent return on assets, and that puts increasing pressure on companies. The most successful change management efforts are driven by clear and presents threats. So, in a somewhat perverse way, that gives me optimism that there will be change as the pressure mounts.
We also believe there are key opportunities in what we call “institutional innovation,” which is re-thinking at an fundamental level the rationale of the firm, the roles and relationships across large numbers of firms. We think it’s the companies that figure that out that will be the ones that create enormous value. Incidentally, we believe the companies that are the farthest along with this institutional innovation are in China and India, not in the United States. Western executives are so tightly focused on product and technology innovation; they never see this other form of innovation.Consulting: What do you see as the consultants’ role in this transition?
I think there are two sets of implications for professional services firms. The first is the substance of what we communicate to our clients. Secondly, how do we organize and act ourselves? We have grown up in a world of knowledge stocks. In terms of the substance of what we communicate: In many case, we have focused on narrow slices of opportunity. What we’re trying to do is step back and help people see the broader patterns and deeper forces that are shaping very specific opportunities, and we think that’s what clients need to understand to be more effective in this new world. Consulting: How would this impact the way professional service firms serve clients?
That’s interesting: One of the key implications, we believe, is for professional service firms to organize a much broader network of expertise. Most professional service firms tend to operate as ‘we have the answers and we engage one-to-one with our clients’ as opposed to organizing a large network and help to connect that network and its expertise to clients. With more and more options competing for everyone’s attention, the notion of someone who deeply understands what a client’s needs might be and who can be helpful connecting that client to the people, information and resources that are most valuable to them will be well positioned to succeed.
Most professional services organizations tend to be very aggressive in promoting their own thought leadership, but connecting executives to thought leadership on a particular topic regardless of who has it, even if it’s competitors. That is a huge transition for most professional service firms but will be an increasing source of value for clients. Consulting: Are you optimistic that it’s in a consultant’s DNA to make that transition?
Well, I think we face the same challenge that our clients face. We grew up in a world of push; we are familiar with push; we have the mindset of push. I don’t think it’s in our DNA; I think it’s going to be a difficult transition but again, I think pressure is mounting on us, and we’ll have to make the change or risk becoming more and more marginalized.Consulting: What is technology’s role in this?
Technology plays a very interesting role in all of this. Our perspective is that on one level it’s the problem and on another level it’s the opportunity. The problem is that it’s a major catalyst for the intensifying competitive pressure and the shift from knowledge stocks to knowledge flow. It is a key driver to the performance pressure we’re all feeling. In that respect, it’s a problem.
However, on the other side, it provides a set of architectures and tools that will increasingly provide the opportunity to harness more effectively these knowledge flows and create scalable pull. Lean manufacturing is a good example. Toyota is the classic example with very few strategic partners that work very closely together, but it has not been able to scale. So, we’re focused on scalable techniques of pull that will allow us to connect to the even broader ranges of knowledge flows.
Consulting: In the book, you show some examples of companies that you think are doing it right. Can you share one of those?
One of the companies doing some interesting things with regards to scalable pull is SAP and their platform called the Software Developer Network. It now has over 2 million participants, and it started as a relatively narrowly defined transaction platform where software programmers could come when they were encountering a coding problem and hoped to get an answer. That created the internal motivation for participation, but the evolution of that platform is what’s interesting to us. Increasingly, people started to develop reputations on this platform, and people started to connect with others and form deeper relationships. They’ve now moved to a level of engaging in sustained performance-improvement initiatives in teams of people finding each other.
Consulting: So, is pull more powerful for the individual or the organization?
In the book, we make the case that in this transition from a world of push to a world of pull, it really does start with the individual. Then, it’s up to the institutions to figure out how to support these individuals as they become more effective in mastering the techniques of pull. Traditionally, we thought of the role of firms was to minimize transaction costs and efficiency motivation, and our view is that that’s changing in a significant way. The role of firms is to provide platforms
for accelerated talent development of individuals. That’s a fundamentally different mission, but it all starts with the individual.