If we listen to the media, advancements in technology and automation are everywhere. The media presents generative Artificial Intelligence (AI) like ChatGPT as true machine intelligence. So if labour productivity growth is decaying and advancement in technology is not providing leaps forward in productivity (see ‘Is There Really a Productivity Decline?’), then why are companies not responding? Where is the laser focus to break us through?
Most companies lack the ability to measure productivity. If you can’t measure productivity, it becomes difficult to identify and implement the right strategies for meaningful change. To measure productivity so that we can fully understand it over short and sustained periods requires the complexity of the supply chain to be mastered. This means overcoming the challenge of size and complexity. This means that we need to have a clear definition of what is wrong and how we can fix it. When considering the market and workforce morale, it is beneficial to deal with operational efficiency problems discreetly and in small increments, if the alternative is not addressing them at all. Many companies lack the sophistication to make improvements sustainable within large interrelated and dynamic systems.
A popular business philosophy: Do something and achieve (transient) results, rather than do nothing.
Short-term improvements, temporary fixes, and complex variability frequently mask operational inefficiencies. As long as equipment and processes appear to be in regular use and running smoothly, ‘they probably are’. Creating an illusion of productive operation. However, these ‘snapshot’ successes come at a cost. When solutions are area specific and do not properly account for holistic integration, we exhaust the misguided effort on temporary changes, while diverting attention from the ‘whole’. For every area bolstered there is an adjacent one depleted and degraded (see image). The result is net zero impact.
An organisation running on a treadmill pointed towards whatever is designated as the ‘new problem’.
If companies are investing in unsustainable, discreet, piecemeal improvements, then how does this appear to be successful? The answer is its own case in point. Capital-intensive industries, like mining, appear to be growing in productivity as their scale increases output. The delay in the increase from investment to additional output, muddies the water. Output increases from investments made 5-15 years ago get confounded with budgeted efficiency improvement expectations. Determining the root cause of changes in production output is already challenging in a highly variable production environment. Coupled with high product prices in industries like mining, provides margins that obscure the negative effects of low productivity and poor capital discipline.
If profit margins are adequate to encourage investment and growth despite decaying productivity, what is the reason to change? The incentive to innovate beyond traditional unsuccessful approaches does not appear to be urgent. However, when there is short-term market volatility and the solution takes a long time to implement, the risk becomes more pressing. And as the business grows further, so does the effort required to retrofit an integrated solution, and the likelihood of failure.
How can companies protect themselves from market changes and diminishing margins?
The Productivity Problem Part 1: Defining the Problem Series