The secrets to missing productivity

PART II Productivity Series

Levers exist at the national, business and individual level to promote productivity growth

Productivity growth of just 1.1% over the past decade is at its lowest level in the past 60 years. With productivity the elixir of real wages growth and improved standard of living, it should be front and centre in the national debate, at the core of business strategy, and central to individual development plans. In Part I of this series, potential causes for the lack of translation of unprecedented advancement in technology and education into productivity growth was explored. In this Part II article, I address the levers that could, and should be pulled by government, business leaders, and individuals to change the trajectory of productivity growth for the mutual benefit of all participants.

Australian productivity commission guides improvement opportunities at the national?level

In February 2023, the Australian Productivity Commission, released its 5-Year Productivity Inquiry: Advancing Prosperity. It provides a comprehensive analysis (over 1500 pages!) of the levers that should be pulled to improve the productivity of the Australian economy. With productivity growth the consequence of a more efficient use of labour, capital, and innovative ideas in translating inputs into outputs, it is not surprising that recommendations focus heavily on labour skill and flexibility and the adaption of transformative technologies – particularly in the services and non-market sectors. An outline of the five core productivity improvement themes is outlined below.

• Building an adaptable workforce to supply the skilled workers for Australia’s future economy, through education reform, skilled migration, and modern, fit-for-purpose labour market regulations.
• Harnessing data, digital technology, and diffusion to capture the dividend of new ideas, focused particularly on the adoption of ideas by the 98% of businesses who are not cutting-edge innovators.
• Creating a more dynamic economy through fostering competition, efficiency and contestability in markets, through a range of levers — from competition policy and sector specific regulation to broad enablers of business entry and investment.
• Lifting productivity in the non-market sector to deliver high quality services at the lowest cost, by changing incentives and culture.
• Securing net-zero at the least cost to limit the productivity impact caused by climate change, including by fostering efficient adaptation to a changing climate.

However, the productivity lever most in the control of national governments is the size, role, and performance of the public sector. While there is a role for the non-market sector, the larger its share of the overall economy, the higher the risk of distorting productivity both through the choices made in the allocation of public resources and the efficiency at which those resources are then deployed. There is clear evidence that the productivity in spending other people’s money on other people is much less than the productivity of individuals spending the same money on themselves or others.

Building dynamic capability in business

To improve productivity in business, it is necessary to address improvement at two levels of capability in the business. The first level of capability is the?ordinary capability?of the firm and are the basic skills needed to run the business during steady state times. These capabilities are largely operational and focused on efficiency. However, on its own, this is a necessary, but not sufficient capability to prosper and grow productivity during times of highly volatile, uncertain, complex, and ambiguous (VUCA) change. To prosper during times of change, business need to also build?dynamic capabilities?to be more forward looking and strategic to maximise their chance of long-run survival and success.

In a framework first conceptualised by David Teece, firms with strong dynamic capability focus on building skills in three core areas including;

• Sensing –?Sensing is about continuously seeking to identify threats, opportunities, and customer needs. Firms that sense well can manage their current business profitably, while also exploring whether it’s the right business model for the future. These firms are good at acquiring strategic information including market trends, best practices and competitors’ activities.
• Seizing?– Seizing is about innovating and implementing a business model to satisfy customers, shape markets and capture value. This involves recognising valuable information, then selecting and developing opportunities that best fit the firm’s environment, strengths and weaknesses. Market opportunities are exploited, and threats are avoided. It is closely linked with strategic decision-making, especially investment decisions.
• Transforming?– Transforming is about periodic, strategic renewal through adapting resources, structures and processes as markets and technologies change. Renewal may be required when there are new opportunities to pursue, or organisational rigidities have developed. Transforming involves taking action on new business models, products or process innovations

Embedding a capability of sensing, seizing, and transforming is essential for ongoing viability and success in a world of changing customers, markets, technologies, and a dynamic environment. Firms with stronger dynamic capabilities can be better at identifying new opportunities, managing competitive threats, using their resources effectively, and making necessary transformations. They are also more resilient, productive and profitable, enabling them to support more innovative cultures. While stronger ordinary capabilities can bring firms closer to the productivity frontier, stronger dynamic capabilities can expand this frontier.

Replicating nature to rediscover clarity of purpose and the distinctive functions of an individual

When thinking about improving the productivity potential of the individual, it is instructive to draw inspiration from one of the most productive systems in nature – that of a beehive.

While seemingly a chaotic system, the inbuilt rules of nature drive absolute clarity of purpose for all bees in the hive, which is the preservation of the queen bee – who’s reproductive capability serves as the literal lifeline of the hive. While all bees in the hive have a particular role to play (such as, cleaners, caretakers, pollen collectors, and honeycomb builders), their roles are highly coordinated and all subordinate to the primary purpose of preserving the queen bee.?Bees in the hive cannot survive without each other, they know their specific role and stick to it with the comfort that others in the hive will continue to perform their role. Interestingly, bees spend a large portion of their time doing very little to ensure they recharge their batteries to be the most focused workers when they are at work.

These principles of a beehive can be translated to the aspiration of productive individuals. Productivity is maximised by maintaining clarity of the core purpose of the group and the function that only they as individuals can do to deliver on that group purpose. This distinctive function of an individual needs to be understood and protected against all other distractions that need to be reallocated, reduced, or eliminated. While in some ways the advances in technology enable more connectivity than at any other time in history, they equally provide ample opportunity for distraction and reduced clarity and accountability around the distinctive function of the individual.

A pathway for our children to enjoy a better standard of living than I have

Productivity is a simple equation of integrating labour, capital, and ideas in efficiently converting inputs into outputs. Productivity starts with the individual, but the system in which they operate is shaped by the firm, and by the economy in which the firm operates. Therefore, all players have a role to play in unleashing the full capability of labour and capital to expand the productivity frontier. My personal motivation is high as the prize for improving productivity and real wages growth is that my children get to enjoy a better standard of living than I have.