Five steps for big improvements

Managers, whatever their level, need to take just five basic steps to make big productivity improvements – click on the link below for outline details

http://www.productivityknowhow.com/?page_id=378

BUT:

1. Corporate plans – If they exist, they’re not seen or understood by most managers

2. Performance measures – Most lack 80% of the measures they need

3. Analysis of potential – Most managers don’t know how to assess their % scope on offer to improve

4. Special improvement projects – Most have not been taught how to manage special improvement projects

5. Continuous improvement – Most in the West ignore the huge benefits possible from taking such action on a daily basis

No wonder national productivity improvement is slow at best, whatever the nation

The same five steps also apply to the action required of government ministers for they have a significant role to play – click on the following link

http://www.productivityknowhow.com/?page_id=1331

Again, the same problems as above arise with each step

Hence, despite well-intended speeches and media headlines about the need to improve productivity and ‘close gaps’, little effective change happens

Apr 15

Passports for Productivity Improvement?

Some say the ‘Productivity Puzzle’ is the result of a storm of problems affecting both supply and demand in G7 developed nations viz:

  • Supply: In the past, major technological advances (aka Schumpeter discontinuities) enabled quantum leaps in productivity levels – G7 nations would all adopt them and improve at about the same rate – now, without more significant advances (as Robert Gordon, US economist, suggests) and much of what does add value being offered for free, GDP and so national productivity levels have flattened out – most goods and services have kept on improving in quality but are being offered at the same or less unit prices

  • Demand: G7 populations have stopped growing significantly, some even falling, so demand for most goods and services has also stalled – also, most people in the G7 already have enough of the goods and services they need – they don’t want more cars, TVs or iphones but simply to replace them when better quality and latest versions are on offer – hence consumer demand has apparently stopped growing

Overall, therefore, it’s no surprise that G7 GDP and productivity growth are both suffering ‘secular stagnation’ according to Larry Summers, Harvard economics professor and ex US Treasury Secretary – and this is likely to persist for many more years

So, if G7 nations are to increase demand (i.e. GDP) as before, they must export more – sales directors and government ministers must dust down their passports and go find the extra demand needed from outside their home borders i.e. from the two thirds of the world that, so far, has been left trailing far behind

 

Apr 15

IoT – Internet of Things

“The IoT can help businesses be more productive and efficient” says Phil Goldstein, web editor for BizTech – but they need a plan to integrate disparate technologies whilst addressing protection needs against malicious actors

Steve Darrah, director of national solutions at Intel, says that “IoT can be used to improve efficiency and profitability, drive safety and increase worker productivity e.g.

  • Retailers can use radio frequency identification tags to track inventory

  • Healthcare providers can use wearables to track the vital signs of seniors in long-term care and predict if a person is going to suffer a heart attack

Link Simpson of CDW notes that IoT technologies work in combination with other systems e.g. in the event of a fire, an office with IoT sensors can call the fire service, shut down elevators, take control of digital signage in the office, turn on video cameras to find workers and feed the images to the firemen on site, and lock or unlock doors to direct traffic out of the building

However, Simpson also cautioned about one major hurdle to afflict the IT revolution ever since it began mid last century – that different technologies running on different protocols and programming languages often cannot talk to each other – but the good news is that this can now be accomplished using ‘modern network gateway technologies’

He concluded: “IoT is really no longer just about the data and the information you can pick up from sensors – it’s about transforming your business processes”

 

Apr 01

Bravo – Diageo has appointed a CPO

  • At long last, a major company has appointed a Chief Productivity Officer (CPO) – at least it’s the first one I’ve read about

  • Diageo have clearly recognised the supreme importance of productivity improvement to their long term success and elevated their previous CIO, Brian Franz, to this new position

  • IT is indeed important, but it is only one of the tools/ skills needed for productivity improvement

  • In his new role as CPO Brian says he is: “Helping to lead a targeted drive across our entire cost base and plans to save £500m by 2019, two-thirds of which will be reinvested in growth”

  • He adds: “Productivity savings are often wrongly associated in simply cutting costs – we want to put the consumer at the heart of what we’re doing and drive top-line growth through productivity-focused activities”

  • One can only hope all other FTSE 100 companies and, indeed, all UK Medium and Large Enterprises, follow suit – then at long last we might see a breakout in the apparent sclerotic UK productivity growth rate

 

Mar 23

Pareto for Productivity

Pareto, a 19th century Italian economist, spotted that “80% of effects arise from only 20% of possible causes” – apply this rule to national productivity levels and just the top quintile of companies determine whether improvements are made – and it has been ever thus

In other words, the great majority of companies are doing little or nothing to improve their productivity – nt only do they lag far behind the vanguard companies but the productivity gap between them could even be widening, especially when patenting and intellectual property rights restrict the spreading of new ideas and better ways of doing things

Andy Haldane, the chief economist at the Bank of England, recently supported this view by arguing that, if UK firms in the three least productive quartiles were able to improve at the same rate as companies in the top quartile, overall UK productivity would rise by 13% – whilst we might question the veracity of the data he used to calculate this specific figure, we fully agree with his overall view that most companies have enormous scope for improvement

So, given such a distribution of companies applies to most nations, not just the UK, a two-pronged national productivity improvement effort is needed by all viz:

  1. Incentivise the 80% of companies/ organisations that lag behind leaders in their sectors to improve productivity levels:

    1. First, offer them good measures that clearly establish their current productivity levels relative to others – otherwise most will assume they’re at least average, have little to worry about and so do little about it

    2. Then provide education/ help in how to cut waste and make best use of existing costly resources – most will have the opportunity for at least a 20% improvement from these actions alone

    3. Only after successfully completing the above should they consider using latest best practices and major investment in new resources and systems

  2. At the same time, encourage the vanguard 20% of companies/ organisations to at least continue to improve as before, not least by offering more financial incentives for more ‘open research’ and ‘market creating innovations’

For too long, productivity improvement has been ignored by most organisations despite being more important than just about any other business issue – and, if and when it does appear on the national radar, the focus is usually on progress made by vanguard organisations in the manufacturing sector i.e. the 20% of a sector that comprises only some 15% of any developed nation’s GDP i.e. a mere 3% of its economy!

Is it any wonder most managers and ministers don’t ‘get it’ and national productivity improvement staggers from year to year – they’re all focussed on other areas or the on the wrong areas – they need to understand Pareto’s Rule and how it is as relevant today as ever

Mar 20

The Capitalist’s Dilemma

N.B. The following are extracts from an article published in the Harvard Business Review in June, 2014 – it remains highly relevant today

Professor Clayton Christensen and Derek van Bever of Harvard Business School have embarked on a fascinating study into what may be holding back growth in the USA and elsewhere given ‘corporations are sitting on mountains of cash but failing to invest in innovations which might foster growth’

They identify three different types of investment in innovation which have quite different impacts on the growth of jobs and prosperity:

  • Performance improving innovations which replace old products or services with new and better – these create few extra jobs as customers simply buy the new versions instead of the old

  • Efficiency innovations which help companies make and sell existing offerings at lower prices – they can even reduce jobs – they also release capital for other more-productive uses

  • Market creating innovations which create whole new classes of customers, even sectors e.g. computers – the moves from mainframes to minis to PCs to smartphones – at the start, only the rich few could afford a computer – by the end, just about everyone does – such innovations usually generates many new jobs, both internally to meet the increased demand and externally in supply chains

Key features of these market creating innovations are:

  • They have an enabling technology that drives down costs as volume grows

  • They reach many new customers who were unable to afford the first offerings e.g. Ford’s Model T

The problem is that most companies invest mostly in efficiency innovations which often eliminate jobs, some invest in performance improving innovations which tend to maintain the status quo, and very few invest in market creating innovations which generate them

Why so? – Because the financial measures and norms used to determine the attractiveness of investments are seriously flawed – RoCE, RoNA, IRR, DCF etc. all make market creating innovations appear much less attractive because they bear fruit in five to ten years and are risky whereas efficiency investments usually pay off in one or two years and shoulder much less risk

And the average shareholding period for external investors is only about 10 months, which pressurises executives to maximise short-term returns (or else!) – venture capitalists are much the same

However, one might expect longer-term investors, like Pension Funds, to press for more market creating investments to secure their longer-term returns needed

Not so – most now suffer from depressed returns, unfunded commitments and longer life expectancies – their funds are not growing fast enough to meet their obligations, so they also look for quick payoffs

Hence the capitalist’s dilemmadoing the right thing for long term prosperity is the wrong thing for most investors

The authors put forward some first suggestions on changes needed:

  • Tax financial transactions to reduce high frequency trading

  • Introduce rewards for shareholder loyalty

  • Wake up business schools to teach finance and strategy together, not separately as now

  • Establish measures/ tools to analyse innovation pipelines and identify opportunities for long-term growth creating investments

They sign off by quoting Peter Drucker: “The point of a business is to create a customer” and ask for contributions to help devise solutions to this dilemma ‘for the long-term prosperity of us all’

Over to you

 

 

Jan 29

Elephants in the productivity room

The great financial journalist Martin Wolf of the FT recently opined about the current state of UK productivity – disappointingly, his words offered no new insights and were simply a regurgitation of current groupthink.

He kicked off with the well-worn cliche from Paul Krugman about productivity being ‘almost everything’ – and then trotted out a bunch of statistics about population and productivity growth, the two factors which indeed determine national prosperity levels:

  • The working-age population stats could well be reasonably accurate, and show the UK has little potential for significant growth from that quarter

  • But the national productivity stats (GDP/ labour inputs) about the UK’s relative position versus other nations are seriously flawed – nevertheless, like most important commentators, he ignores this widely accepted fact and proceeds to draw conclusions based on them

He rightly points out that there are big differences between the performance of ‘the best and the rest’ in all UK sectors, and that such differences appear to be growing – “a slowdown in the diffusion of knowhow and slower elimination of zombie competitors” being the received wisdom – however, this does not explain why the UK is so much worse than most others

So what’s his ‘big aha’?

By simply comparing the UK with its international competitors (using more spurious data) he spots two fundamental UK weaknesses which explain most of the prevailing productivity gaps:

  • Lack of investment in capex – “physical investment in machines, buildings, ICT and R &D, is very low” – but how much more would be needed to close any gaps (£10bn, 100bn, 1000bn?) – and what of Robert Gordon’s claims that the days of major new productivity-improvement inventions are over?

  • Lack of investment in human capital – “skills overall remain highly deficient” – there is indeed a serious mismatch between the skills organisations need and what kids now study but nobody knows the size of these gaps, nor the potential % GDP and productivity benefits if they were closed, nor the amounts to be invested by whom – all we do know is too many kids (50% was the target) sally off for a very-expensive three year stint at university to graduate in subjects many employers don’t want

The biggest problem facing all organisations, and nations, is not lack of investment but lack of good performance measures and the knowhow to find and implement solutions to productivity problems and opportunities highlighted

At present:

  • Most have only some 20% of the performance measures they need – and they’re mostly financial

  • Most could improve productivity by at least 20%, some over 50%, either by upping output/ sales and/ or reducing inputs/ costs

  • Most do not need any major investment to get these results – instead, they should first focus on cutting existing waste and then optimising use of their existing resources, both of which could involve only modest extra investment in human capital and new systems

  • Only then should they consider any major investment in best practices and/ or new technology

The fact is most UK organisations (80% = ‘the rest’) perform well below their potential – they could make giant productivity improvement strides if only they had the right measures and knowhow – but such a message is the biggest elephant in the productivity room

 

Productivity puzzle – MIRACLE solution

The US is worried about the puzzle of their low GDP and productivity growth – likewise the UK and other G7 nations – they’re all suffering in much the same way, which must offer a clue as to what’s going on

Explanations offered by a variety of experts include:

  • M = Mismeasurement of GDP, a seriously flawed statistic, which doesn’t count many of the things we value in life e.g. free internet services

  • I = Innovation – Major technological innovations have peaked – Artificial Intelligence, driverless cars and Twitter are no match for the gains made from electricity and the internal combustion engine

  • R = The Rest – Vanguard organisations continue to improve their productivity – but laggards and ‘zombies’, some 80% in all sectors, do little to try and catch up, not least because current very low interest rates put little pressure on them to become more profitable

  • A = Admin – Government/ EU regulations have been mushrooming, and stifling corporate efforts to improve

  • C = Capex – A slowdown in capital investment, much due to the corporate hangover still being suffered following the 2008 financial crisis

  • L = Labour – An influx/ availability of cheap labour has deterred many from investing in productivity enhancing equipment and systems

 

  • E = Exports – Outside the G7 there is a huge ‘Rest of World’ market waiting to be developed and itching to catch up rather than fall further behind – but exports still only account for a small percentage of total output

 

Each of the above probably has some impact on apparent national productivity levels, especially GDP mismeasurement, but none explain why there has been a dramatic slowdown ‘across the board’

As ever, as soon as there’s three or more (credible) explanatory variables involved for an issue, and no clear understanding about their interactions and effects, then it’s open season for all sorts of forecasts and explanations

Hence so many conflicting views from so many learned commentators

Why do national productivity gaps persist?

  • Philip Hammond, UK Chancellor of the Exchequer, says: “It takes a German worker four days to produce what a UK worker makes in five”

  • Others say much the same about French workers

  • But such claims are not new, they’ve been made over the last 30 years at least – big changes are never made so performance gaps are never closed – G7 economies just continue to chug along

  • And it’s not G7 workers who are to blame – they’re all  about as productive as each other, whatever the sector, and not markedly different as the data would have it

  • It’s the mix of sectors in the different economies that makes the big difference to national productivity data – it’s why Japan apparently has a much worse national productivity level than the UK, a claim which, given their work ethic, has to raise suspicions about the data on offer

  • Indeed, the calculation of GDP which underpins all such dramatic headlines is so seriously flawed that some believe it could be dangerously misleading rather than a key indicator and useful

  • If you can’t measure it well, don’t measure it at all

Low productivity affects all, not just a few

New Reserve Bank governor, Philip Lowe, says boosting productivity is essential if Australia is to maintain the living standards it has enjoyed in recent years. He warns that “Australia’s remarkable boom times are over and the best way to maintain our standard of living is to have a “laser-like” focus on productivity”.

In his first appearance before the House of Representatives Standing Committee on Economics, he said:

  • The confluence of factors that boosted living standards in recent decades will not happen again
  • Australians enjoyed real income growth per person of three per cent on average for 15 years until the global financial crisis in 2007
  • Incomes and living standards grew solidly because of strong productivity growth, large numbers of young people entering the workforce and the global commodity price boom.

But he warned that the situation has changed today, with tepid productivity growth, an ageing population and falling terms of trade cutting into standards.

  • “It was a remarkable kind of a period and I think many of us started to think that was the normal state of affairs – it would have been nice if it was”
  • “That period now looks like it’s behind us.”

Dr Lowe said as it was hard to control demographics and impossible to control the terms of trade:

  • “The only way we can go back to anything like the previous rate of growth in our living standards is focusing on productivity growth”
  • “That’s not just a concern for the Reserve Bank, it should be a concern for the parliament and the whole 24 million people in our country – what do we do to get the productivity growth up again to get the living standards rising.”

He also warned of the limits of monetary policy with the key interest rate at 1.5 per cent, the lowest since Federation.

So he urged “some entity” or government to use low interest rates to invest, using their balance sheets to facilitate infrastructure spending.

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