Why is the private sector—once the pride of America and the engine of economic growth—getting much lower returns on assets and capital than it used to get?

The reason for that is not that the managers have forgotten how to manage. The primary reason is that world has changed and management hasn’t.

Half a century ago, big firms were in charge of the marketplace. They could dictate terms to customers. Customers had few choices and imperfect information. Large hierarchical bureaucracies pursuing economies of scale and pushing products and services at customers were fairly effective in dealing with such a world.

Then the world changed. At first slowly and then, in the last decade, rapidly. Customers now have many choices and instant access to reliable information about those choices and can share views with other customers. As a result, there has been an epochal shift in power from seller to buyer. Now large hierarchical bureaucracies are no longer nimble enough to cope with a world in which the customer is effectively in charge. If customers are not delighted, they can and do go elsewhere. In order to delight the customer, a firm needs continuous innovation.