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.