Today’s Guest Blog is provided by Mike Meikle.  He offers some great insight to the declining value of manufacturing as producitivity continues to skyrocket, pushing all of us toward understanding and competing in markets where greater value lies in digital products rather than physical.

Summary

• Hyperdigitization is the economic shift toward “virtual” goods and services
• Manufacturing jobs have dropped 31 percent but output is at a near record $1.7 trillion.
• Economic output of Hyperdigitization is $2.9 trillion.
• Google, Facebook and GroupOn all have large revenue streams/valuations yet no physical product.
• Industrial Age economic model of static business models is rapidly fading.
• Organizations must release their innovative capabilities to survive and thrive.

Recently, I was engaged by ExecSense to give a Risk Management & Outsourcing Trends for 2011 webinar targeted for Risk Management executives.  Since I only had an hour to cover a vast amount material, I could only briefly touch on some interesting topics. One of these was Hyperdigitization, a jargon-laden term that means economic output is moving toward “virtual” goods and services.

So how does hyperdigitization tie into outsourcing trends?  As companies continue shift their business processes to outside service providers, firms will have to develop ways to protect their intellectual property and virtual output.  Since intellectual property is data, risk managers will have to develop and monitor Key Performance Indicators (KPI) and Key Risk Indicators (KRI) to ensure their firm does not sacrifice their long-term competitive advantage for short-term cost savings.  This penny-wise, pound-foolish strategy has been discussed previously by Mr. Hartung.

But before we dig further into explaining hyperdigitization, let us review an example of the current fading Industrial economic model.  One of the chief laments heard throughout the Great Recession is that America doesn’t “make” anything anymore.  Manufacturing jobs have left primarily to cheaper labor, less regulation, lower tax countries.  Without construction jobs to fall back on, this has left a broad swath of the population unemployed.  Unfortunately this high unemployment fallout is a result of our economic model shifting away from Industrial Age practices.

While the jobs may have left (down 31%) productivity boosts have pushed the U.S. manufacturing output to near record highs of 1.7 trillion dollars.  We make more goods with less people due to technological advances.  Contrary to the economic doomsayers this is a positive trend, one that has happened before (agrarian-based economy) and will undoubtedly happen again.

What does this hyperdigitization of economic output mean in real terms?  Well, based on a Gartner report, about 20 percent of U.S. economic output in 2009 or 2.9 trillion dollars. That’s nearly double the U.S. manufacturing output.  We are awash in virtual products and services.  Think about Google alone.  The company is worth $163 billion at last estimate and does not have one physical product.

Other examples are Facebook and GroupOn.  Both are projected to be worth $65 billion and $25 billion respectively.  Yet again, neither has a physical product.   These three companies have based their business models on information arbitrage; the process of mining available data for new opportunities.

So where does all this intellectual property (data) that generates billions in profit come from?  People, who are supported by a corporate culture that values innovation and measured risk taking.

As the global economy gets exponentially more competitive, organizations need to be fast, flexible and innovative; a near polar opposite of the Industrial Age business model. A large percentage of companies are still mired in outdated business practices that protect the status-quo (Extend & Defend), squash risk taking and stifle innovation.  This has especially become prevalent in the era of downsizing culminating in the practices of the Great Recession.

In order to compete in an economy driven by hyperdigitization, the human capital of an organization has to be made a priority.  Developed nation’s economies are shifting away from static business models that produce generic widgets and services.  To thrive in the hyper competitive, constantly shifting global economy, organizations will have to create and promote a culture that emphasizes and values the Information Age success triumvirate of risk taking, innovation and rapid-execution.

Thanks Mike!  Mike Meikle shares his insights at “Musings of a Corporate Consigliere” (http://mikemeikle.wordpress.com/). I hope you read more of his thoughts on innovation and corporate change at his blog site.  I thank Mike for contributing this blog for readers of The Phoenix Principle today, and hope you’ve enjoyed his contribution to the discussion about innovation, strategy and market shifts.

If you would like to contribute a guest blog please send me an email.  I’d be pleased to pass along additional viewpoints on wide ranging topics.