James talks about his outlook on productivity and considers how leaders can contribute to growth.
Is there a productivity problem?
In general, productivity is the rate of output per unit of input. It tends to be examined on a national level (Gross Domestic Product per hour worked) or a firm level (Gross Value Added per worker). As economist Paul Krugman said:
"Productivity isn't everything, but in the long run, it is almost everything."
The UK has a well-documented productivity problem. Since 2008, the UK’s productivity has underperformed relative to the expectations of Government, economists and analysts. Without productivity growth, UK living standards would be stuck at late-Victorian levels; since individual income largely depends on wages and wages depend on productivity, organisational underperformance contributes to stagnant incomes and lower standards of living.
However, not all businesses have a productivity problem. A handful exist in a virtuous cycle where innovation leads to high or rising productivity, which, in turn, leads to further innovation. The productivity leaders are likely to keep winning, as they exist in their own ecosystem, working with more productive suppliers and securing more capital. Critically, this enables them to pay higher wages, attracting talent that embeds new knowledge into the organisation.
Taking the leap
Often the productivity issue is addressed from the shop floor: Manufacturers are looking for efficiencies and, often, a ‘lean’ consultant can walk into a time-poor small manufacturer and find quick wins.
However, in the longer term, this approach tends to stall and research provides some useful insight into why this might be. Vidal (2017) studied a number of US manufacturers who had implemented lean and matched pairs of effectively identical factory contexts (based on product volume/mix/strategy and technology) with differing lean adoptions (one with best practice throughout and one without) to examine the reasons for the differences. The results suggested that the type of lean adopted (and the associated productivity improvements) depended mostly on the aspiration of leaders in the business. For companies that had not adopted best practice, managers reflected low aspirations and used phrases such as “it wouldn’t work here”, whereas managers with successful best-practice implementation had overcome local problems due to their high aspiration levels.
How important is good management?
Research by Bloom and Van Reenen (2006) shows that, specifically, poor management processes and practices explained the long tail of low productivity in manufacturers. They identified that these poor practices were most prominent in sectors where competition is weak and in family-owned firms where management control rests with the eldest son. The good news is that improving management processes goes a long way: One standard deviation improvement in the quality of management raises productivity by an average of around 10%.
There are other things that point to good management being key. For example, exporters are generally more productive and every 10% increase in export turnover is associated with a 3% increase in productivity. While difficult to infer causation, it does seem that being plugged into global supply chains exposes businesses to different levels of complexity, competition, innovation and provides more rewards for effective management.
Then there is the question of ‘meaning’ and the deeper expectations employees have in addition to wages. For individual employees, job satisfaction correlates strongly with productivity, but not with compensation level. Research by Böckerman and Ilmakunnas (2012) around job satisfaction and productivity ratios showed that highly meaningful work can generate an additional £7,000 per worker per year. We know that knowledge workers experience greater meaning in their work than others and Bernstein (2012) showed that all work becomes knowledge work when employees are given the opportunity to make it so.
BEIS introduced Management KTPs for precisely this reason. Bringing a business together with a university, these part-funded partnerships are designed to support a step change in productivity by helping businesses implement first-class management processes and practices. These programmes allow world-leading research to feed into industry and new research can be generated. For a business serious about a leadership step change, they represent an incredible opportunity.
At WMG, we’ve worked with hundreds of manufacturing leaders to improve productivity in their business, supporting them on their long-term journey. We know the operating environment is increasingly complex and that step changes don’t happen overnight. As well as using our experience to solve technical problems, part of what we do at WMG is help develop the vision and communicate aspiration across the business, showing how new technology is accessible to SMEs and how leading research can be applied practically on the shop floor. We find that the more we can help leaders visualise success, the more productive they are and the better the overall picture for UK manufacturing.
For more information contact James on email@example.com