Labor productivity is making front page news. From 1950 to 1970 labor productivity across the U.S. economy averaged 2.6 percent growth annually. Over the next two decades the average fell to 1.5 percent. Since 2010 annual productivity growth has leveled out at 0.6 percent.
With productivity a primary determinant of economic health, the recent performance explains the persistent weakness in gross domestic product (GDP). The latest forecast from the Congressional Budget Office predicts that annual GDP growth will average only 1.9 percent for the next 30 years. The predicted increase in federal spending to 28 percent of GDP and the resulting rise in interest expense will drive our national debt to 150 percent of GDP over the next 30 years.
As The Wall Street Journal said, “That is Greek territory…If weak growth persists, there is almost no combination of plausible spending cuts and tax increases that will get Washington anywhere near a balanced budget.”
According to economists, reversing this worrisome trend will require blending innovative capital equipment with highly skilled workers into highly effective processes. Of those two elements, the people component is far and away the more critical and challenging.
By their nature, people resist being managed. They are not like machines that are set up, tested, and produce consistently for hours, even years. On the other hand, you cannot motivate a machine to go beyond the call of duty, make one plus one equal three. Only people can accomplish that.
Achieving extraordinary productivity requires exceptional management of your people. In his book The Will to Manage, famed management consultant Marvin Bower recognized that people act more productively when guided by established processes and principles.
He added a piece of critical advice: “No business can maximize its success unless its management processes deal effectively with the strengths and weaknesses of its people”.
Bower prescribes the creation of a management system that defines the critical activities and required performance. Such a system consists of fourteen basic management activities:
- Setting Company Objectives: Defining the customers it will serve, the products and services it will deliver; its unique value proposition, meaning how it will capture the target customers; and the projected long-range financial performance.
- Planning Strategy: Developing the operating concepts and plans that will enable the achievement of the company objectives.
- Establishing Goals: Setting short-range targets and performance for the critical metrics.
- Developing a Company Philosophy: Establishing the values and principles that define the company culture, such as, “how things are done around here.”
- Establishing Action Plans & Rules: Creating the key operating processes and the instructions that guide employees what to do.
- Building the Organization: Creating a structure of responsibility and accountability that enables achievement of the strategic objectives and operating targets.
- Providing People: Hiring and developing a team fully capable of satisfying customers at a profit.
- Instituting Effective Processes: Implementing and improving the processes that are critical to short- and long-range objectives.
- Providing Plant & Equipment: Creating the physical facilities required to service customers effectively and generate profits.
- Securing Capital: Ensuring the availability of sufficient cash and credit to operate the business.
- Setting Standards: Defining the operational performance levels required to achieve strategic objectives.
- Establishing Operational Plans: Defining standard operating procedures that enable people to achieve critical goals.
- Providing Control Information: Providing performance measurement tools that enable close monitoring and fine tuning of key processes.
In recognition that people are the core ingredient in every business, Bower added a final process focused on inducing a company’s employees to perform the work required to satisfy its customers at a profit:
- Activating People: Commanding and motivating workers to follow the company’s plans, policies, and procedures.
As a manager, you must avail your company of all legitimate methods to stimulate your people to perform productively, to get them to cut loose and excel. Bower lists eight methods for activating people:
- Orders – Commanding another person to take action.
- Penalties – Threatening or imposing punishment for poor performance.
- Advice – Suggesting, rather than ordering, a specific course of action.
- Constructive Job Attitudes – Providing freedom to act, opportunity to advance, and a sense of achievement.
- Rewards – Compensating for achieving target results with money and/or advancement.
- Personal Commitment – Stimulating interest in the job and company.
- Self-Government – Creating teams in which effort is connected directly to success.
- Leadership – Inspiring effort and sacrifice.
The first seven methods form a continuum ranging from a strict command-and-control discipline to individual empowerment. Smart managers weave these activating means into compensation packages that drive the required productivity of each process.
In general, a productive worker wants to have the responsibility and the authority to complete the task at hand, to know how he is performing against a standard, to learn how he can improve, to understand his promotion opportunities, and to be paid fairly.
Bower believed that self-government activates peak productivity. But he realized that the ideal method could not be employed in every process and thus must be combined with activation techniques 1 through 6. For example no people management system is workable without penalties and advice for correcting under-performance.
Don’t forget that leadership is the best method for activating people and must be evident across the workforce. Few companies can achieve maximum productivity without a chief executive who can inspire people to an all-out effort.
We’re not talking about a Churchill clone but rather someone who can think strategically, build and maintain the business’ processes, assemble a top-notch executive team, and articulate the company’s objectives and the plans for achieving them. The latter attribute, persuasive communication skills, is a must for growing labor productivity.
Bottom Line: Bower believed that corporate success depends on “able people working purposefully and effectively through simple, traditional activities that are integrated into a management system.” Implementing his advice takes real and continuous effort. Doing so, you will create a company that will run rings around poorly managed, better equipped competitors. Bet on it.
Footnote: Published in 1966 The Will to Manage was written by Marvin Bower of McKinsey & Company, who is considered the father of management consulting. Now out of print but available from used booksellers.