U.S. Productivity Risk, from the APQC - American Productivity and Quality Center

U.S. Productivity Risk
By Becki Hack, American Productivity & Quality Center

“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
  2. Australia
  3. Canada
  4. Malaysia
  5. Germany
  6. Taiwan
  7. United Kingdom
  8. France
  9. Spain, and
  10. Thailand

The Future 

Future productivity improvement targets can be reached in five ways.

  1. Managing growth -- Increase costs but increase output more.
  2. Working smarter -- Increase output while input remains static.
  3. Winning both ways -- Increase output and decrease input.
  4. Cutting costs -- Cut inputs and hold output constant.
  5. 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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