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%>U.S. Productivity at
Risk
By Becki Hack
“The rank of nations, in the end, is
determined by productivity.” And looking at recent productivity
statistics, the United States has something to crow about, if it
wants to display its competitive feathers. For the World Competitive
Scorecard ranking based at IMD in Switzerland, the United States has
ranked number one among its peers (countries with a population
greater than 20 million after 2000) since 1994, when it unseated
Japan . So why not strut and bask in this leading
position?
“Nothing fails like success,” said Jack Grayson, founder and
chairman of the American Productivity & Quality Center (APQC).
Grayson recently discussed U.S. companies’ productivity at Rice
University’s Jones Graduate School of Management. He warned business
leaders how easily the United States can lose ground in the world
market and provided a vision on what they can do now to be more
competitive.
Grayson quoted Martin Starr, author of Global
Competitiveness: Getting the U.S. Back on Track , in reminding that
history is a great teacher: “there is no institution, enterprise,
society, or human achievement of any sort, no matter how strongly
established or esteemed, that cannot be
ruined.”
Since Japan lost its lead ranking in productivity in 1994,
its global ranking has fallen to eleventh , and productivity growth
remains stagnant. How does the United States avoid this
fate?
Although U.S. numbers look positive¾with GDP rising 2 percent
to 3 percent annually since 1995 and jumping 5.3 percent in 2002
(the best since 1948)¾Grayson warned not to be deceived. A look
behind the numbers raises concern about future competitiveness.
Grayson warned of the five things that could cause the United States
to lose its lead:
1. arrogance,
2. responding with
the same methods that were successful even though challenges have
changed,
3. failing to recognize the distinctive features of
a “knowledge economy,”
4. ignoring an increasingly unequal
domestic and international income distribution,
and
5. failing to improve the U.S. education
system.
Issues in Measurement
“Two factors
underscore our economy: productivity and quality,” said Grayson. His
interest in these two principles led to his founding of APQC in
1972. The Center’s purpose was, and still is, to support
organizations in improving performance to compete globally. At the
time, the top challenger was Japan, with its emerging quality
revolution. (In fact, APQC was modeled after the Japanese
Productivity Center.)
But the face of the competition
changes, and the “score” depends on who is measuring and the
definitions used.
The U.S. Bureau of Labor Statistics, which keeps score using
various economic indicators, has maintained productivity as a core
measurement¾however arguably inadequate. The bureau defines
productivity as “output per hour.” This traditional measure of labor
productivity has its basis in the economics surrounding World War
II, but was first published in 1959. Grayson said, “Output, the
measured net of price change and inter-industry transactions, is
compared to labor input and measured as hours at work in the
corresponding sector.” Thus, productivity is gross domestic product
(the dollar value of finished goods and services), divided by hours
worked (labor input).
Many have long challenged this
productivity measure by attacking the accounting
system’s sole emphasis on monetary
exchange, said Grayson. Some critics argue GDP “gains” can easily
mask significant social and environmental degradation (e.g.,
pollution, natural resource depletion, divorce, obesity, and
alcoholism can increase GDP). And even the more conservative critics
are calling for a better measure of
progress.
Grayson agreed that the U.S. Bureau of Labor Statistics’
current measure is not perfect. “The current denominator of ‘hours
worked’ distorts the measure,” he said. “This would probably be more
meaningful as ‘per employee’ in today’s environment.” A measure of
hours worked, Grayson said, has been held over from earlier emphasis
on manufacturing and its concomitant hourly
labor.
More
importantly, he said, “a more advanced measure would include the
flow of knowledge, which is something we have not yet been able to
measure systematically.”
Grayson also pointed to problems in
the U.S. education system and growing disparities in wealth as two
red flags that do not appear in any GDP calculation. Consequently,
one must look at the numbers and then
beyond.
The Numbers
According to the
bureau’s 2003 report on non-farm productivity growth:
-
between 1947 and 1973,
U.S. productivity grew at a rate of 2.8 percent;
-
between 1973 and 1995,
the rate of growth fell to approximately 1.4 percent;
-
between 1995 and 2002,
the rate of growth returned to 2.8 percent; and
-
for 2002, the non-farm
productivity growth rate jumped to 5.3
percent. The Congressional Budget Office forecasted a real GDP growth
of 2.2 percent for 2003 and then 3.8 percent for 2004. Rankings for
the bureau’s 2003 report of real GDP per employee (purchasing power
parity) in leading countries follow.
| |
2002 (%
growth)
|
1995
to 2000 (% growth) |
| Korea |
3.5 |
4.1 |
| United States |
2.8 |
2.2 |
| Sweden |
1.7 |
2.5 |
| United Kingdom |
1.4 |
1.7 |
| Japan |
1.4 |
1.4 |
| Canada |
1.1 |
1.9 |
| Belgium |
0.8 |
1.5 |
| Germany |
0.8 |
1.1 |
| Austria |
0.0 |
2.1 |
| France |
0.0 |
1.4 |
This leadership ranking shifts when
competitiveness is defined more broadly than GDP. The IMD World
Competitiveness Scorecard, which ranks 59 countries using four
factors (economic performance, government efficiency, business
efficiency, and infrastructure), reported the following 2003 ranking
for countries with population greater than 20
million:
| 1. |
United States, |
6. |
Taiwan, |
| 2. |
Australia, |
7. |
United Kingdom, |
| 3. |
Canada, |
8. |
France, |
| 4. |
Malaysia, |
9. |
Spain, and |
| 5. |
Germany, |
10. |
Thailand. |
The
Future
Future productivity improvement targets can be
reached in five ways.
-
Managing
growth -- Increase costs but increase output
more.
-
Working
smarter -- Increase output while input remains
static.
-
Winning both
ways -- Increase output and decrease input.
-
Cutting
costs -- Cut inputs and hold output
constant.
-
Paring
down -- Decrease both input and
output.
“There are many tools for
improvement, but you must pick the one that fits the process,” said
Grayson. “And customers and employees must be involved.” APQC’s
improvement approaches include quality improvement techniques,
benchmarking and the transfer of best practices, knowledge
management, knowledge sharing, performance and process measurement,
and Six Sigma.
When asked what the future holds for the United States,
Grayson advised organizations to capitalize on their strengths:
productivity, market economy, democracy, knowledge emphasis, and
connectivity (people-to-people connections such as communities of
practice). “At the same time,” he said, “we must work to solve our
biggest threats: terrorism and anti-Americanism, a floundering K-12
education system, income polarization domestically and
internationally, and hubris.”
The Role of
Knowledge
Grayson, an author and expert on knowledge
management, echoed Peter Drucker’s warning: “The single greatest
challenge facing managers …is to raise the productivity of knowledge
and service workers. This challenge, which will dominate the
management agenda for the next several decades, will determine the
competitive performance of companies.”
Knowledge management is a systematic
process for identifying, sharing, and using knowledge to get the
right knowledge to the right decision maker at the right time. It is
a continuous process that includes creating new knowledge.
Understanding the value of people, employing virtual networking,
capturing and sharing tacit knowledge, building communities of
practice, and building relationships are all vital components in a
knowledge economy, one in which the push to the highest levels of
productivity will result from sharing and harvesting existing
knowledge in order to work smarter.
“Knowledge is not just information;
we are drowning in information,” said Grayson. “Knowledge is
information that is valuable as determined by your customers,
society, and your employees.”
The Role of Education and
Other Social Factors
Grayson referred to the U.S.
education system as a knowledge supply chain that begins in early
childhood and develops through K-12, higher education, and the work
force. Nowhere is the productivity risk more evident, Grayson said,
than in the education statistics. “We are a nation at risk,” said
Grayson.
He
pointed to the U.S. math and science rankings, as well as dropout
rates. According to the Third International Math & Science Study
conducted in 1995, U.S. performance compared to other countries
dropped substantially between the fourth and twelfth grades. In
math, U.S. fourth graders ranked twelfth of 26 countries; by the
senior year, they ranked nineteenth among 21 countries. In science,
the gap was even greater between the fourth and twelfth grades; the
United States fell from third of 26 countries to sixteenth of 21
countries.
Grayson also cited figures from the National Adult Literacy
Survey. “If students are not literate—that is, they cannot read,
write, and do basic arithmetic—75 percent will go on welfare and 68
percent will commit a criminal offense.” In terms of productivity,
these children will grow into adults with limited careers and an
inability to earn, said Grayson.
The irony is that the United States
spends more per student than any other country. And expenditures
continue in the work force. Grayson said that approximately a third
of organizations find it necessary to provide remedial education in
reading, writing, and arithmetic.
Dropout rates are not encouraging,
either. A USA Today article in January 2003 on dropouts
showed dropout rates of 8 percent for whites, 12 percent for blacks,
and 21 percent for Hispanics. Ethnic group achievement gaps are also
readily apparent when breaking down standardized test results. “The
results illustrate the lack of opportunities due to background and
schools’ failure to focus on these ethnic groups,” said Grayson.
“Schools are most successful when they set aside social problems at
the school door and start with the attitude that each child has the
ability and desire to learn.”
He commended the No Child Left Behind
act, which emphasizes test data disaggregation and sub-group focus,
as well as best practices in education. But he also believes that
social problems must be addressed.
Grayson said the largest social
problem is that of “the haves versus the have nots.” Grayson
illustrated this picture by looking at the whole world as 100
people.
-
Six people have 59
percent of the world’s wealth. All six are U.S.
citizens.
-
Eighty people live in
substandard housing.
-
One has a college
education.
-
One has a
computer.
-
Seventy are unable to
read.
-
Fifty suffer from
malnutrition. In terms of average GDP, the chasm is wide between the few
rich and the numerous poor. Grayson reported that:
-
high-income economies
(population total: 1 billion) have a GDP/capita of
$26,510,
-
mid-income economies
(population total: 2.7 billion) have a GDP/capita of $860,
and
-
low-income economies
(population total: 2.5 billion) have a GDP/capita of
$430. “This type of despair leads to violence and force,” said
Grayson. “We must fix this explosive situation in the interest of
peace and humanity.”
Yet Another Perspective on
Productivity
Tor Dahl -- an associate professor at the
University of Minnesota, former president of the World Confederation
of Productivity Science, and a member of APQC’s Board of Directors
-- offered another perspective on productivity in a separate
interview. Admitting some of his opinions are controversial, he
stated that productivity growth is far below its
potential.
“Organizations are getting this process backward; they should
‘unfreeze’ before they freeze,” said Dahl, “which requires a focus
on productivity first and then a focus on quality.” In other words,
organizations should focus on improving productivity (i.e., the
“unfreeze”) and then lock in on the gains (i.e., “the
freeze”).
By not approaching productivity and quality appropriately,
Dahl estimated that the U.S. may have forfeited as much as $10
trillion of GDP from 1973 to 1995, when U.S. productivity fell to
the level it was before the Industrial Revolution. “We could have
had twice the per capita income that we have today had we ensured
that productivity had stayed as high as it did from 1948 to 1973
over the 1974 to 1995 period,” said Dahl. “Had we done so, we would
have had no national unemployment problem, no Social Security
funding problem, and a far lower percentage of people in poverty
than we have today.”
In addition, he calculated that if
the U.S. health sector had kept up with a productivity rate of 3
percent, instead of a negative 2.6 percent per year, then “we would
have delivered all the care we deliver today at 7 percent of GDP;
and we could have used the other 7 percent we spend today on funding
the cost of the uninsured, drugs, Medicare, and Medicaid and still
have had money to spare. …This would have demonstrated leadership.
We would have led the world in health outcomes instead of having the
outcomes of a developing country.”
Dahl said he finds it scandalous that
the United States has not taken advantage of its knowledge of
productivity science. “We know how to improve productivity, and we
know how to do it quickly.” By focusing on quality first, as many
organizations do in programs such as Six Sigma, said Dahl,
organizations cut costs and fire people, which lowers
growth.
“It
is a common thought that productivity takes away jobs, when in fact
productivity is the only way to secure jobs,” said Dahl.
“Productivity improvement never leads to unemployment, but instead
leads to ‘higher value modes’ by creating innovations that yield
higher returns.”
For those poised to argue, Dahl has years of research to
support his point. “In U.S. economic history, productivity is almost
perfectly correlated with wages, and high productivity tends to go
with full employment, as was the case in 2000,” he said. “It also
correlates with government surpluses, a low rate of inflation, job
satisfaction, and believe it or not, lower job
stress.”
In
addition, he has compared the performance data of organizations with
Six Sigma initiatives to Business Week’s “top performers.” The Six
Sigma organizations, Dahl said, demonstrated a job loss of 3 percent
to 4 percent, whereas the top performers experienced a 53 percent
job growth from 1998 to 2003.
So how does he propose to improve
productivity? “Each organization has its own diseases, so it’s much
like diagnosing and curing individuals: each is unique,” said Dahl.
But he agrees with Grayson in that knowledge plays a critical role
in the cure.
“It really is simple,” said Dahl. “I have seen more than 400
companies change their performance within 90 days by mobilizing
their work force to commit to performance improvement.” This
commitment must come from both employees and management. A portion
of the responsibility is within the discretion of employees, who
only need knowledge. The other portion, said Dahl, is buried in
“logjams” that only management can solve. This responsibility split
varies by company type: 50/50 for service companies (with
responsibility equally split between employees and management) and
25/75 for manufacturing companies (with 75 percent of the burden on
management).
Although no two "logjams" are alike, according to Dahl, “90
percent contain five to seven logs out of 23 possible logs, with one
being the key log that must be removed first. All logs have the same
root cause "a bad idea" that must be replaced by a good idea. And the
only log that has been found in every logjam is communication.” This
brings the topic back to Grayson’s assertion: people and knowledge
can be the greatest strengths in positioning an organization’s or
country’s future. But they are also the greatest
risk.
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