New technology needs new models

According to the WEF – World Economic Forum – manufacturing executives today are confronted with an enormous variety of promising new technologies, ranging from artificial intelligence to connected machinery to 3D printing, all of them offering some combination of cost savings, quality improvements and increased flexibility

They then say it’s tempting to think that a manufacturer could modernise itself simply by replacing its old processes with new ones that feature these technologies – but the historical record suggests that isn’t enough

N.B. The following text reproduces most of the interesting detail in a recent WEF article

ELECTRIFICATION

For an analogy, consider the late 19th century when managers rushed to electrify their factories – electrification seemed an obvious productivity boost but it failed to produce any notable gains for more than three decades – just before 1920, that began to change; gains from electrification accelerated, and it accounted for half of all productivity growth in manufacturing during the 1920s

The Stanford economist Paul David found that managers at first simply overlaid “one technical system upon a preexisting stratum” – factories of the late 19th century used “group drive” systems, with a waterwheel or steam engine driving large groups of machines through systems of pulleys and belts – in the first wave of electrification, managers simply replaced the old power sources with new electric motors, which continued to drive large groups of machines through these pulley systems – they enjoyed modest cost savings on fuel as well as slightly improved control, but their factories continued to function exactly as before

A new generation of factories in the early 20th century began to use electrification differently – rather than instal centralised motors that drove machines through rotating shafts, they began to use “unit drive”, in which a single electric motor is installed in every machine, driving it independently – the advantages of electrification turned out to be profound in ways that early electrifiers hadn’t imagined

Because group-drive shafts lost energy to friction quickly over distance, early factories were arranged around the transmission of power rather than the flow of labour and goods – they needed to be compact to keep machines close to power sources, and any reorganisation was a cumbersome process

By contrast, the 1920s and 1930s saw the birth of factories without group-drive shafts bolted to their ceilings – factories could be bright, airy facilities with efficient single-floor layouts that could be rearranged quickly in response to market demands – electrification thus changed manufacturing, but only after managers became willing to redesign their entire businesses around the fundamental capabilities of electric machinery

COMPUTERS

Computers have since become another example – it seemed obvious that they should boost productivity, but those gains didn’t materialise at first

In the 1960s and 70s, businesses simply moved individual functions like payroll, inventory management and invoicing to computers, treating them more like glorified databases and printers – this led to some modest efficiency improvements, but no more – the real gains would be realised not from saving a little money on record-keeping and printing but by reorganising entire companies and industries around computers – indeed, from the mid-1990s onwards, we’ve seen the rise of an entire generation of valuable companies that invented new, fundamentally digital business models around computers and networking

Today’s manufacturers are in a position similar to that of the semi-digitised businesses in the early 1990s – individual technological solutions are available for a wide range of problems that manufacturers experience:

  • Artificial intelligence can save worker costs on tasks like quality assurance
  • Connected machinery can reduce downtime by warning of maintenance needs in advance
  • 3D printing offers rapid prototyping, flexible production, and savings on small- and medium-run manufacturing

Manufacturers that adopt these technologies without a plan for reinvention will earn only incremental improvements and fail to realise the full value of such new technologies

Ways to reimagine manufacturing

Manufacturers should look to early successful examples of digital factories driving changes in products and business models

These include:

Mass customization, in which products are designed and fabricated around individual consumers – first applications have emerged in high-value fields such as medical devices – decreasing costs for digital fabrication technologies promise to bring mass customisation to lower-value products, including consumer electronics, apparel and athletic equipment

Example: Align Technology has treated more than 5 million orthodontic patients with its Invisalign dental aligners – they begin with a 3D scan of a patient’s mouth and continue with a 3D printing-based manufacturing process

Continuous product development, in which physical products are constantly refined in order to offer improvements or address new markets – the flexibility of digital manufacturing reduces product-development and retooling costs and makes continuous product development possible.

Example: Airbus uses over 1,000 3D-printed parts in its newest airliner, the A350-1000 – most must be reconfigured whenever a modification is made to the layout of the cabin – by 3D-printing these components, Airbus avoids retooling costs and supply chain disruptions – meeting a customer demand for a new cabin configuration only requires a digital redesign

Digital supply chains, which combine digital design files with flexible, automated production facilities that are able to fabricate them – by making distributed manufacturing feasible and cutting inventory requirements, they reduce supply chain cost and risk, and make it possible to serve markets in ways that would not otherwise be feasible or cost-effective.

Example: Deutsche Bahn, the German railway operator and global logistics provider, found that 50% of the replacement parts it requires to maintain its trains can be 3D-printed – this reduces its costly inventory of spare parts, currently worth €600 million, increases dependability, and brings flexibility to the railroad’s fleet planning by making it possible to operate trains, some of which are 50 years old, without long-term support from their original manufacturers

Digital supply chains also offer a way to respond to the emerging global tariff regime: product specifications can be transmitted digitally to distributed factories, which can produce them for local markets without exposure to tariffs.

CONCLUSIONS

When new manufacturing technologies emerge, it’s easy to think about them in terms of concrete applications—the requirements they’re able to meet, the kinds of products they’re able to fabricate

But the real returns go to those who are able to build new business models that stand on top of them, and are willing to reorder entire industries around them

Puzzle – What puzzle?

“The Miracle Years Are Over – get used to It”

So announced Ruchir Sharma, a contributing opinion writer for the NEW YORK TIMES, in a well-argued article reprinted with only minor tweaks below

Across the world, economists have had to downgrade growth forecasts – but it’s not as bad as it sounds

Last year (2018) looked like the time when President Trump had delivered on his promises to strengthen the economy – his tax cuts appeared to juice growth above 3%, a pace the United States had not topped since 2005 – but the US Commerce Department has since revised 2018 growth downward to below 3%, even as forecasts for 2019 were also trending lower, toward 2%

And it’s not just an American story and Mr. Trump who won’t deliver on promises of 3, 4 or even 5% growth – across the world, economists have downgraded growth forecasts in most years since the global financial crisis of 2008:

  • Defying the hopeful projections, Japan has rarely grown faster than 1%
  • Europe has struggled to sustain growth faster than 1.5%
  • And no one quite knows how fast China is growing, but it’s clear that there, too, the economy is slowing.

So why is the dismal science suddenly guilty of issuing overly optimistic forecasts that set the whole world up for disappointment?

Economists keep basing forecasts on trends established during the postwar miracle years, when growth was boosted by expanding populations, rising productivity and exploding debt – but population and productivity growth had stagnated by 2008, and the financial crisis put a sudden end to the debt binge

The miracle is over

Politicians often promise to bring back a golden age, but serious economists also are encouraging a similar illusion – even during the Industrial Revolution, in the 19th century, the world economy rarely grew faster than 2.5% a year, until the post-World War II baby boom began to rapidly expand the labour force – after 1950, the combination of more workers and more output per worker lifted the pace of global growth to 4% – economists came to think 4% was “normal”

Yet by the last decade, the baby boom had faded out from Europe to Japan and China – even in the United States, younger and faster-growing than most developed countries, growth in the working-age population slowed to a mere 0.2% last year from 1.2% in the early 2000s – and because fewer workers correlates directly with slower growth, that decrease implied a 1-point drop in economic growth

Roughly, economists should have expected that United States economic growth would slow to 2% from 3% — and it has – this is the new normal for the American economy – stimulus measures like the Trump tax cuts can lift growth above this path, but at best temporarily, at the risk of higher deficits and debt

For political leaders, the new age of slow growth is not a problem to solve – it’s a reality they need to accept and explain to the public – especially because it’s just not that bad:

  • When populations are growing slowly, the economy doesn’t need to grow as fast to keep incomes high
  • In the United States this decade, growth in GDP per capita has slowed much more gradually than the overall economy, by half a point, to an average of 1.4%
  • Although Mr. Trump likes to boast about how well the United States is doing against developed rivals, Europe has been growing just as fast in per capita terms this decade
  • And Japan has been growing slightly faster
  • In a rich country, that is fast enough to satisfy most people
  • Indeed, surveys show that Americans have rarely been more confident about the economy.

Slower growth in the working-age population also means less competition for jobs worldwide, which goes a long way to explaining why unemployment is now at record lows not only in the United States but also in the UK, Germany and Japan – surely that’s not a bad thing

Whatever politicians tell the public, their attempts to bring back the miracle years are ill-advised – growth in the economy is driven by growth in the number of workers and in output per worker, or productivity – but since the postwar surges of 1950s and 60s, productivity growth has slowed, also defying government efforts to lift it

For a time, the global economy kept motoring along anyway, fueled by a surge in debt – in the 1980s, central banks began winning the war on inflation, which allowed them to drop interest rates sharply – lower borrowing costs unleashed a worldwide binge that saw debt surging from 100% of global GDP in the late 1980s to 300% by 2008

Then the global financial crisis hit, ruining many private borrowers and lenders, many of whom are still wary of taking on new debt – and after growing faster than the economy for three decades, debt growth in many countries, including the United States, has fallen back in line with economic growth – even China, the one major country that dodged the crisis and experienced a surge in lending after 2008, is now reluctant to build on the mountain of debt that already weighs down its economy

So the postwar miracle is over – economic growth is weighed down by the baby bust and the debt hangover – yet because economists continue to base forecasts on miracle rates of growth — 4% for the world, 3% for the United States — policymakers keep fighting to hit these targets – this is very risky

There are growing calls from economists on both the right and the left to lower interest rates, or increase government spending, to boost growth even if that risks higher inflation – at the Federal Reserve, too, there is an emerging view that letting inflation rise above 2%, long considered a red line, may not be unwise

The underlying assumption seems to be that policymakers must take action because 2% GDP growth is intolerably slow

But must they?

The confidence surveys suggest Americans are quite content with record-low unemployment, benign inflation and 1.4% growth in GDP per capita – why then the rush to pump more money into the economy which risks rekindling its debt problems and inflation?

The world does not need more debt and more inflation to counter trends of declining population growth and high indebtedness

Instead, economists need to adjust their forecasts and politicians need to rethink their polices to match this reality, because trying to recreate a bygone golden age is a shaky way to build the future

Gallup’s ‘most profound’ finding

The Wall Street Journal suggested there could be a single fix for many of the big problems that companies experience – hiring better middle managers

They based this on a Gallup study that found a company’s productivity depended on the quality of these crucial leaders – managers don’t just influence results, they explain a full 70% of the variance — something Gallup called “the single most profound, distinct and clarifying finding” in their 80-year history
 
Quint Studer, founder of his eponymous Community Institute, says: “Great middle managers are the key to creating great companies”
 
He goes on to say: “The irony is middle managers often have the smallest training budget of any group in the organisation – given their level of responsibility, their impact on organisational performance and their facing pressure from all sides (bosses, employees and customers) this makes no sense”

Hence, it’s important to hire and promote the right people for these critical positions, and to train them well

To do this, one first needs to understand exactly why middle managers are so important

Quint suggests the following reasons:

  • Managers control the culture of the company – they model the habits and patterns of behaviour expected of all employees and ensure others live up to them as well
  • They’re key to employee engagement for they determine how employees feel about their jobs – “People don’t quit the company, they quit their boss”
  • They know where performance problems are and who’s doing well
  • They have a huge impact on attracting as well as retaining talent
  • They’re responsible for bringing out the best in people – they need to inspire and nurture creativity, innovation and teamwork
  • They’re on the front line with daily processes so should know where and how things can be improved
  • They manage a multitude of tasks and projects and control whether they get done efficiently or not
  • They make change happen by moving people through the various stages
  • They determine what gets reported to senior management

In short, middle managers have hugely important and difficult jobs

Hence, all organisations should make sure they receive the resources and training they need to do them well

Sadly, at present, few organisations regularly review existing skill sets of their managers and the development needed – so it’s little wonder most employees rate their current managers as ‘bad’

Productive recidivists

Over 70% of offenders re-offend within one year!

Why is this?

Most prisoners are locked up for most of the day and not treated well by the officers which surely makes them worse than they were at the start, not better – in these Universities of Crime, they learn to despise authority, not learn a trade for when they’re released and that there’s better ways of living

According to Rod Aldridge, founder of Capita:

  • 66% of people going to prison have no job
  • 75% of people leaving prison have no job to go to
  • And 30% of them don’t even have a place to live

It’s not rocket science to see that, if they have no job, no job experience and nowhere to live, they have a major incentive to go back to offending – what options do they have?

As a result, some enlightened UK companies have set up schemes to train and employ offenders and thus give them a second chance – and they’ve found only 7% of those that take this opportunity re-offend, a huge benefit to society at large

Many other benefits also accrue to the employer organisations involved – Adrienne Selko has just reported in Industry Week about the same initiative taken in the USA

Nehemiah Manufacturing’s workforce comprises former felons, returning citizens as they are called, who are creating great results for the company

Richard Palmer, president of the company, wanted to provide jobs for people in Cincinnati who were unable to find them – the company’s mission is to rebuild the city of Cincinnati by giving people jobs and a “renewed hope for the future”

When he opened the doors, one of the first people who came to him looking for a job was a former felon – Palmer hired him immediately – it worked out so well that currently 90% of his workforce comprises returning citizens – and one important way they show they are welcome is to stop asking them about their past – they delay criminal background checks until later so that potential candidates are not immediately dismissed.

Palmer says: “The loyalty of these workers and their productivity is just amazing – it’s been a great business decision with a high rate of retention, which is especially important given the labour shortage:

  • They’re some of the hardest working people we’ve ever seen
  • In proving themselves, these employees become fiercely loyal, insistent on high quality, positive teamers who help each other, hard chargers who self-sacrifice for the success of all”

Offering second chance opportunities to returning citizens has now been going on for years in the USA – and with almost 700,000 people released from prison each year, it’s a very large pool of workers to fish in

Conclusions:

  • Clearly the upsides here are significant not only for employers and returning citizens involved but also society in general
  • The downside concern is the relatively small % of ‘no-hoper’ felons who have a long record of stealing or worse – if this is not known upfront, they may well abuse such altruism and spoil matters for all others

Catching the right fish

With globalisation, all organisations can fish for new recruits in the one big pond

But the most successful anglers are they who hire on merit, not in their own image, according to Tomas Chamorro-Premuzic, a professor of business psychology at Columbia University in his book Why Do So Many Incompetent Men Become Leaders

An article by Rosamund Urwin in The Times goes on to quote Tomas saying bosses need “data-driven assessment i.e. CVs, psychological tests and analysis of past performance” to identify potential winners who might be humble and understated in interviews compared with other self-aggrandising applicants

At present, most organisations tend to haul on-board the wrong candidates and then promote them up corporate ladders:

  • “Boss interviewers are not great at judging competence and can be unaware of interviewees’ limitations
  • Many can charm people initially but don’t make good bosses, being more prone to bullying and harassment, and resistant to negative feedback
  • They blame others for their mistakes and take credit for others’ achievements”

Hence survey after survey show a majority of employees believe they have a bad manager

Tomas says: “People get rewarded for sucking up when leadership should be about managing down – turning a bunch of people into a high-performing team – but bosses don’t care about people development, they’re more focused on politics and, sadly, this works for them”

One major hurdle, according to Tomas, is that most people think a good leader is overconfident, narcissistic, inspirational, even bullying – citing Steve Jobs and Philip Green as examples – when the qualities that make a great leader are humility, integrity and competence – virtues (he believes) which are more readily found in women like Angela Merkel – they lead in a more transformational way, are less likely to be absentee leaders and have more emotional intelligence

Tomas’s concludes with: “The people who are best at something tend to be very self-critical”