The Shift Economy

by Greg Satell

The Shift EconomyIn the wake of the fall of the Berlin Wall, both Russia and Poland embarked on remarkably similar journeys. Using the same western advisors, they privatized state-owned companies, implemented free market reforms and transformed their legal systems to compete more effectively in the world economy.

Yet despite the nearly identical programs, the results couldn’t have been more different.  Poland today is a well functioning, vibrant society, while Russia has descended once more into chaos. It almost defies logic. How could the same plan, designed largely by the same people, have two such divergent outcomes?

There are myriad ways to evaluate the strength of a nation. Military power, GDP, natural resources and human capital all play a role. Yet what struck me most in my 15 years in Eastern Europe is how vital it is to build a culture of change that can adapt to unforeseen challenges.  Now, more than ever, the ability to shift is the ability to compete.

The Myth of American Decline

It seems like every decade experts predict an inevitable American decline.  During the 1960’s, the Soviet launch of Sputnik and a perceived missile gap foretold the imminent dominance of the Eastern Bloc. The 70’s brought the Arab oil embargo and a growing sense of malaise. In the 80’s Japan, much like China today, seemed poised to take over as the #1 economy.

Strangely, none of the expected calamities came to pass. The Soviet Union collapsed, high oil prices encouraged more drilling and, by the 1980’s, led to a glut that impoverished oil-producing nations. Japan’s boom sputtered out, leading to a lost decade and now even China is running into serious trouble.

Yet it would be wrong to say that the US prevailed through simple hard work and ingenuity. In each case, difficult changes were made.  Sputnik inspired a huge commitment to science and technology. High oil prices encouraged better efficiency. US manufacturing hit the rocks in the 80’s, but our high-tech entrepreneurship became the envy of the world in the 90’s.

In effect, we were able to pull ahead of our rivals not by moving faster, but by changing direction. In other words, agility, rather than efficiency, seems to be the secret to American success. The bigger question, however, is why the US, a large country with no shortage of partisan bickering and bureaucracy, is so much more agile than any other place.

The Awfully Successful US Education System

Education in the United States has long been a disappointment. Despite spending more than other developed countries, our students rank merely in the middle of the pack in the international PISA tests, scoring 36th, 28th and 24th in math, science and reading, respectively. Amazingly, our kids rank at the top when it comes to confidence in their academic abilities.

Yet as Fareed Zakaria argues in his new book, In Defense of a Liberal Education, the story isn’t as bleak as it would first seem. First, he notes, US students have never performed well on international tests. Second, other high-tech countries, such as Sweden and Israel, perform even worse than we do and, strangely enough, also rate high in confidence in their abilities.

Zakaria suggests that the correlation is not a coincidence. In fact, he argues that the high self-esteem of our students is what drives them to challenge authority, pick themselves up when they fail and drop out of college to start companies like Microsoft and Facebook. In effect, while other countries are training their kids to take tests, we are teaching ours to shift.

To be clear, our weak performance on academic tests is nothing to be proud of and, in my own experience managing companies internationally, I found that young graduates in places like Poland and Ukraine were far better prepared than ours. However, I also noticed a curious fact.  Within ten years, American professionals had not only closed the gap but exceeded their peers.

Shifting Capital

Another oft-repeated deficiency in America is the emphasis on short-term results at the expense of long-term prosperity. This quarterly capitalism, as Hillary Clinton has called it, is driven by “hit and run” shareholder activists who push compliant corporate executives to return money to investors, rather than investing it the future.

Yet as I argued in Harvard Business Review, much of this concern is misplaced. Yes, it’s true that stock buybacks have increased recently, but then again so has private capital investment and R&D, which are at historically high levels. What’s more, venture funding and the startup market have also reached dizzying, even unprecedented heights.

At the same time, it’s not clear that a focus on long-term planning produces better results. Consider MITI, Japan’s once all-powerful Ministry of International Trade and Industry. It produced astounding results by directing capital to target industries at first, but in time that same centralized decision making made it hard for Japan to adapt to the digital age.

A long-term strategy is only as good as its power to predict far into the future and, in today’s age of disruption, that’s increasingly becoming an untenable proposition. Competitiveness is no longer a matter of mustering resources, but shifting them to where they can be most productive.

Learning To Compete in the Shift Economy

In the 20th century, there was a clear path to success. People could start a career, work their way up the ladder and retire in comfort.  Yet today, a company’s business model is unlikely to last a decade, much less a lifetime. So today’s firms, just like countries, need to master the art of the shift and studies suggest some viable ways to go about that.

First is diversity.  Research shows that a diverse group of people outperform a more uniform set of high performers. Also, as Richard Florida argued in The Rise Of The Creative Class, places that show tolerance for diversity attract more high-quality talent. After all, it was America’s openness to new people and new ideas that made it the exceptional nation.

Most of all, we need to manage for disruption rather than stability. As Rita Gunther McGrath writes in, The End of Competitive Advantage, “Stability, not change, is the state that is most dangerous in highly competitive environments,” because it “allows for inertia and power to build up along the lines of an existing business model.”

And that gets to the heart of what it means to compete in the shift economy,  Performance on tests is a good indicator of how someone can solve problems with a clear answer, just as a good strategist can weave a complex web of data points into an insightful plan. The world, however, is a messy place and does not yield to even the most well-crafted plans.

Facts change, now faster than ever. The path to productivity is never a straight line. It is not enough to race as fast as we can down a chosen course, we need to notice when a more prodigious one begins to appear.

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Greg SatellGreg Satell is a popular speaker and consultant. His first book, Mapping Innovation: A Playbook for Navigating a Disruptive Age, is coming out in 2017. Follow his blog at Digital Tonto or on Twitter @Digital Tonto.

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