Worker productivity is the output of goods and services per hour worked. In the broad terms of an industry, productivity is the gross output of industry sales divided by the number of workers allocated to produce the output.
After World War II, worker productivity in the USA improved significantly due to the investments made by companies in the technological advances of the period. Increasingly, American products were in high demand as much of the rest of the world rebuilt after the war. The US government provided educational opportunities largely free of cost to returning service personnel, who then entered the workforce with improved skills. Typical of the times, firms retained and invested profits in their growing businesses. It was a period that is now remembered fondly as being a golden age in the American homeland. During the period 1947-1973, non-farm worker productivity grew at a robust 2.8 percent per year (according to the Bureau of Labor Statistics).
By contrast, the last decade (2007-2016) has seen non-farm worker productivity grow at an anemic 1.2 percent per year. Granted, the USA (and much of the world) was working its way out of a deep recession during the period, but that may not fully explain the low rate of productivity growth. Productivity growth has been weak, and getting weaker, for decades in most industrialized countries. If it continues at this pace, living standards in the USA and highly developed countries around the world will stagnate for most workers.
Economists have provided a number of competing explanations to try to explain what is going on:
1. management strategies that worked in the past have been widely implemented and may no longer contribute to productivity (e.g., efficiency improvements like downsizing, re-engineering, KPIs, etc.);
2. the slow down in capital investment following the financial crisis of 2008 has probably contributed to low productivity;
3. measurement error may be a factor, since the measurement of productivity is notoriously difficult;
4. a delay or lag in productivity gains from any investments in new technology (which may be realized in coming years);
5. a fall in wages across the globe during the recession has put pressure on workers compensation in the USA;
6. the psychological pressures on workers that do not feel secure in their current position;
7. continued weak growth in demand; and
8. the continuing shift from a manufacturing to a service-based economy.
The above explanations generally reflect common beliefs among economists about the nature of the current problems surrounding productivity.
Now let me focus on another possibility — the underlying negative effect of current management practices on productivity and worker engagement. As Gary Hamel (London Business School) has pointed out, many organizations remain inertial, incremental, and insipid in the face of the creative destruction going on in the world economy. The top-down, command and control, and bureaucratic nature of most organizations is hampering innovation at a time when innovation is key to survival and growth.
Clayton Christensen (Harvard Business School) has found another management behavior that is limiting innovation and growth. It relates to the financial metrics (e.g., IRR) being used in public companies. First, Christensen outlines three common types of innovation:
1. Market-creating innovation. This type of innovation creates growth in the economy as it discovers ways to take expensive products that have limited appeal and makes them widely available at lower cost to a mass market. The evolution of the computer from the mainframe to the personal computer, to the smartphone, is an example. The benefits of this type of innovation in the financial metrics are apparent only in the long term (5-10 years), while there is likely to be a short-term decrease until the investments pay off.
2. Sustaining innovations. This type of innovation makes good products better but doesn’t create growth, due to the substitution of new for old. For example, if you buy a Toyota Prius hybrid, you will not be buying a Camry.
3. Efficiency innovations. This type of innovation tries to do more with less, through downsizing, rightsizing, and other cut back measures. It generally eliminates jobs but frees up cash. The benefits of this type of innovation are apparent in the short term in the financial metrics.
Since efficiency innovations provide short-term results which can be seen quickly in the financial metrics, but market-creating innovation only pays off in the long term, it is the efficiency improvements that usually win out. This too can help explain low worker productivity in recent decades.
A recent article in Harvard Business Review (March 1, 2017) noted that great companies obsess over productivity rather than efficiency, since the benefits of efficiency improvements have now played out. Despite weak top-line growth in many years, the 1990s and 2000s saw the earnings growth of S&P 500 companies run nearly three times the rate of inflation due to improvements in efficiency; however, starting with the quarter ending March 31, 2015, S&P 500 earnings began falling and has remained negative ever since. Without top line growth, continuing efforts to achieve improvements in efficiency eventually hit a proverbial brick wall. The same HBR article found three fundamental tenets of a productivity mindset that executives need to understand:
1. Most employees want to be productive, but the organization often gets in the way;
2. A company’s talented “difference makers” are often put in roles that limit their effectiveness; and
3. Employees have plenty of discretionary energy that could be devoted to their work, but many are not sufficiently motivated to do so.
As is often the case with this podcast, we have once again found a need to reinvent management for the 21st Century and beyond. Efficiency improvements have worked their way through companies in recent decades, but have taken a significant toll on future growth. The current path on which many public corporations find themselves is not sustainable. Now we need to create corporations that invest for the future, in workers and their work, by providing the freedom and the tools to do creative and innovative work. It seems that innovation is the only likely path out of the current low productivity regime.
To find this path, I recommend a new management approach that we have discussed before on this podcast, and which is described in my 2017 book, Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness.
Charles G. Chandler, Ph.D.
References & Links:
1. Link to Gary Hamel’s blog
2. Link to Clayton Christensen’s talk
3. Mankins, Michael. 2017. “Great companies obsess over productivity, not efficiency.” Harvard Business Review, March 1, on-line edition.
4. Chandler, Charles G. 2017. Become Truly Great: Serve the common good through Management by Positive Organizational Effectiveness. Powell, OH: Author Academy Elite.