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The Shift Economy

2015 September 27

In 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.

– Greg

7 Responses leave one →
  1. September 27, 2015

    Good post Greg, thank you. My broken record comment is the same as always. Change comes regardless so flexibility of mind and action becomes the most valuable commodity. It seems you concur, as it is this approach that has led to change, thinking different.
    As for education, I believe that to some extent the practice of social promotion, and the “everyone’s a winner” mentality while building esteem also at first does not push students to their best. However, over time our competitive and open society people go into after school allows them to grow a lot which is what you observe. Interestingly, this seems often the opposite in other societies. My experience in Asia is that many feel incapable of speaking up or taking risk even when they know what to do. The embrace of risk and its relatively less harmful effects here in the US are a factor as we compete in the world.

    [Reply]

    Greg Reply:

    Thanks Robert. You bring up an interesting point about the “everybody gets a trophy” trend. I’ve seen research that supports both sides of the argument. Some argue that the outsized emphasis on self esteem makes it hard for our kids to accept failure. Others point out that self esteem makes promotes risk taking.

    I’m strangely apathetic on the subject. In my experience working internationally, it seems that the US is the most hyper-competitive place on earth, so whatever the effects of the “everyone’s a winner” mentality they don’t seem to be very pervasive. Certainly our culture of obnoxious little league dads hasn’t been curbed. I’ve also noticed that the trophies and belts for showing up in my 6 year old’s karate class seem to be a good motivator.

    So, all in all, I really don’t know what to think, except that with all the great problems in the world, this doesn’t seem to be one of them:-)

    – Greg

    [Reply]

  2. CJ Grey permalink
    September 28, 2015

    Another excellent post in Tonto’s significant recurring theme of agility, disruption, Bayesian, End of Power, black swans, etc in light of our world’s increasingly rapid pace of change.

    I’ve chewed on these insights for many hours since becoming a loyal reader back in 2012. Thank you for introducing me to these profound insights; makes a lot of sense.

    If I have it right, the idea here is to “be less wrong over time”, “just launch & figure it out (refine/reiterate) later”, or “ready, fire, aim”.

    On the other hand, I’ve had this nagging, confusing thought to these insights; particularly as it pertains to some future projects I intend to pursue: real estate development that seeks to improve environmental footprint, better efficiencies, and better designed space to increase users’ happiness in their physical space.

    To build new buildings, bridges, roads, other infrastructure, etc… doesn’t this necessitate very carefully & thoughtfully planning out every last detail you can? You know, the old saw of “Measure twice, cut once”?

    After all, the idea of just throwing up some large piece of infrastructure and “see what happens” and rebuilding it after it falls down (oops we better pivot based on feedback from the market; let’s try this again) is obviously not the way to go. IT industry can get away with this releasing betas and v.1, v.2, etc but not all services can behave this way.

    So perhaps this Bayesian approach is NOT appropriate for all social/business endeavors (yes honey you DO look fat in those jeans… ooops – sorry dear that was just my Bayesian approach talking)?

    Isn’t there a place in this world for rigorous, (yes, even centralized) planning aiming to get it right the 1st (and perhaps only) time?

    Your clarification on this is greatly valued.

    [Reply]

    Greg Reply:

    That’s a great question CJ! I think to answer it fully, you have to go back to the origins of Bayesian thinking in the late 18th century, which I explained in a post a few years ago.

    In any case, here’s the short version: The Bayesian method was initially developed by Thomas Bayes to solve the problem of “inverse probability” or how to infer causes from effects. Bayes suggested that we simply guess and then update our answer as more data came in. The method was later augmented and formalized by the great mathematician Pierre-Simon Laplace, but even back then, the idea was somewhat controversial.

    The method largely disappeared in the 20th century, largely due to the efforts of Ronald Fisher, the father of modern statistics. He abhorred the thought of guessing and developed the methods of controlled experiments, confidence intervals and so on that you’ll find in any basic statistics textbook today.

    Today, Bayesian thinking is coming back into fashion for several reasons. The first is speed. It takes time to do controlled experiments and, considering how fast things move these days, time is a luxury we often don’t have. Another problem is a technical one within statistics itself that I won’t go into but described here. Suffice it to say, even in highly controlled experiments, we never get 100% confidence. That’s why we have the “replication crisis” plaguing scientific studies now.

    The final factor is data. We can now collect, analyze and combine data on a scale that wasn’t possible even a decade ago. So it’s often more efficient to simply collect massive amounts of it very quickly and apply Bayesian methods.

    So back to your question. There is certainly nothing wrong with rigorous planning. However, the world is a messy place and, now matter how careful you are, you’re still going to be wrong a relatively large percentage of the time. Even if you do get it right, the world changes and you will soon be wrong anyway. So it’s important to update your first guess as new information comes in. The good news is that we can do this now on a scale that was unimaginable before.

    So it’s important to scale your planning to the task. If you’re building a road, you don’t expect the contours of the earth to change frequently. But if you’re developing something for a market, you can expect consumer tastes, competition and other market forces to evolve rapidly, so you’ll have to be more agile.

    Make sense?

    – Greg

    [Reply]

  3. September 29, 2015

    hi greg,

    the next tide wave shift is for the economies who will first grab the technologies to transform CO2 into chemicals without passing by fossils.

    this is coming and these will be the winners of the new industrial era.

    best

    [Reply]

  4. Aiying Wang permalink
    October 9, 2015

    Greg, I am a Chinese American woman who lived in the US for 25 years. Right now I am working in China for a US Company with a Chinese team of 1400 people with whom I often share cultural and educational insights from both countries. Your article on education is interesting. I shared with some team members on how you indicated the emphasis on individual respect in the US education system (respect all students’ ability, respect privacy on grades and relatively low pressure on grades…) has a positive impact on kids’ confidence and actual satisfactory professional achievement. I am separating the individual respect part out because in China teachers share grades (plus praises and criticism) openly and put a huge pressure on the kids and their parents with lower grades. This could cause unhealthy (in my opinion) competitiveness, defensiveness and unhappiness in the children which impact some with self-esteem and social capability. Plus the overemphasis on grades could potentially hinder openness for analytical and problem solving independence at a young age.
    My three children grow up in the US public schools and International school oversees, we were able to instill the self-esteem and confidence from both cultures by respecting their interest and freedom to explore, volunteer and lead, at the same time, we do encourage them to maximize their potentials. They might not make the best grades or score the highest SAT (agree with you, nothing to be proud to make low scores for American students) , they are happy and confident young individuals who should be agile enough to face their challenges in life.
    Thank you for sharing. I like it. Aiying

    [Reply]

    Greg Reply:

    Thanks Aiying. A particularly interesting case is that of South Korea, which performs very well on international tests. Yet as Amanda Ripley reports in The Smartest Kids in the World, they are desperately trying to change their system, because kids are pushed so hard, it’s creating social problems.

    [Reply]

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