Economic structural change is NOT industry compositional change


I am currently preparing a number of keynotes for senior business audiences over coming weeks. In preliminary conversations with one group I encountered a very common and deeply misleading view of how business is changing today.

We engaged in discussions on “economic structural change”, that were in fact only about changes in industry composition. The mindset was to consider the changes in relative sizes of industries in the economy, such as manufacturing getting smaller and tourism becoming larger. This perspective is prevalent with economists, who like to predicts shifts in industries over time.

However this is a deeply fallacious perspective in thinking about change in the economy.

The first reason

…is that structural change is happening at an absolutely fundamental level. Perhaps the best frame to understand the nature of structural change is the rapid rise of the “modular economy”, in which value is created in smaller and smaller modules over time.

This is illustrated by examples such as the modular approach to manufacturing that has made Chongqing the global capital for motorcycle production, or the modularization of professional work flow led by firms such as UK’s Lovells.

In knowledge-based work the primary unit of value creation has shifted from the organization to the individual. Work is modularized and distributed globally across algorithms and human work.

We are rapidly shifting to an economy primarily based on distributed value creation, in which value is created across organizational boundaries and between companies and their customers, suppliers, and ecosystem partners.

These kinds of shifts are creating a fundamentally different structure to how value is created and the economy functions.

The second reason

…that structural change cannot be viewed as compositional change is that industry definitions are losing virtually all meaning. Industries are blurring and converging even faster than they have been over the last decade or so. Any partitioning of economic activity between industry sectors, particularly putting any one company in only one industry, starts to create an entirely meaningless and artificial view of the economy.

So let’s not kid ourselves that we live in a steady state economy in which the underlying structure of how value is created and allocated is going to be the same or even similar in 10 years from now compared to today.

What business leaders really need to delving into and thinking about is how the very structure of how value is created is changing. This is a fundamental and absolute shift in what the economy is and how it functions.

I’m currently working on how to make this point forcibly and clearly enough to shift how senior executives are thinking about the future of the economy and their industry, if they still think tomorrow’s underlying structure will be similar to today’s.

  • Geoff Barbaro

    G’day Ross, Can I suggest having a quick look at Stephen Denning’s piece on the Forbes site about the three economies that currently exist, which may help with ways of presenting the issues you have identified.

    Cheers, geoff

    • Thanks Geoff! Good piece. Stephen is making a different and complementary point to mine. The perspective he brings is entirely valid, but does not – to my mind – address the quite different structure of value creation that actually applies across all three economies that he describes. I will muse a bit more on integrating his points with those of shifts in underlying economic structure.

      • Geoff Barbaro

        G’day Ross, I think Steve would agree he’s making a different point, I was only thinking in terms of presentation. Steve’s underlying theme, like yours, is that creating value is fundamentally different now and organisations aren’t adapting. What you describe as modular, he describes as iterative, and where you refer to individuals creating value, he refers to self-organising teams working with only one focus – delighting the customer. This replaces the notion of creating shareholder value, and I think both of you are looking at organisations as being neither top down, or bottom up, but outside in, where work and innovation is driven by customers and stakeholders,

        Good luck with the presentations.

  • This is the talk you should have been giving at #Amplifyfest – but we’ll catch you after! Cant wait for it- send more stuff alone these lines…you’re on the money!

    • Thanks Annalie! I’ll be working on developing this story over the next while…

  • Anna Pham

    Thanks for a very informative articles, It sounds a bit complicated to me but I really enjoy reading this.

  • Sunset Locksmith

    I am sure you’ll find the right convincing words to make senior executives change their thinking about the future of the economy. I wish you luck and great article by the way.

  • moehlert

    Hi Ross, great read and I wander into economics with an awareness of how little I know but I wonder about a third dynamic; we have structural change and industrial composition changes but what about changes in the underlying accounting rules? One example is that we still only regard employees as liabilities on the corporate balance sheet. Do we need an accompanying shift in accounting principles? (largely untouched in about 500 years if I do my math right)

    • Hi Mark, great point, though they are fairly different issues. Economics looks at the flow of (primarily financial) value across society. Accounting is a way of measuring flow of money in a company.

      Back in the ’90s I spent a lot of time on non-financial accounting/ reporting and then decided it would take decades for substantive change, which is turning out to be true. However the nub of the issue in accounting is improved information for investors and managers and thus better allocation of capital and other resources.

      It doesn’t change the economy if a company accounts differently for how it works. It just enables it to manage itself better. A good manager implicitly understands the value of ‘human capital’ even if she doesn’t have the accounting to support it.

      So yes we do need better accounting to help organisations work more effectively. Even with a quite different economic structure (e.g. highly modular and distributed) accounting principles work OK.

      What we do need – and I wouldn’t necessarily call this ‘accounting’ – are ways of measuring value creation across distributed groups. If we can work out how to allocate rewards from collaborative endeavors, this will enable a far richer economy with more distributed value creation. Though in this case the accounting is still a measure, distinct from the economic structure.