Productivity – Not Always for the Good

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Productivity – Not Always for the Good

Adapted from Dr. Claes Fornell's book | May 19, 2017
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Productivity gains are usually reported as good news for the economy and good news for the company, but just like good and bad cholesterol, there is good and bad productivity.

Whenever there is a discussion about economic growth, it usually involves productivity. If we become more productive, the economy will grow and produce all sorts of benefits, chief among them rising incomes, a better standard of living, and, yes, more customer satisfaction.

Although there seems to have been more incremental, as opposed to breakthrough, progress during the most recent 50 years, some things have changed dramatically—especially in business. As a result of the shift in economic activity from manufacturing toward service and information exchange, the modern economy is very different from the one around which most economic theory and measurement was developed.

It is also very different from the economy around which most economic theory, accounting, and management practices were developed. Economic progress, for firms and for nations, is no longer simply a matter of producing more with fewer resources (i.e., productivity), but rather a matter of better matching supply to a progressively heterogeneous demand. Yet, poor productivity is a common scapegoat for weak growth. To some extent, bizarre as it may sound to some, there is reason to suspect that it might be the other way around.

The problem is that improved productivity doesn't always lead to better quality, higher consumer utility, or better living standards. This is evident in the service sector, but even in manufacturing, it is by no means apparent that productivity growth due to closing plants and laying off workers is all for the better.

Living standards and economic growth depend on the productivity of economic resources as well as the quality of output that those resources generate. Under these circumstances, does it always make sense to pursue both productivity and customer satisfaction? Isn't there some tradeoff here? There is always some balance between customer satisfaction and productivity and that balance is different for different companies.

Nevertheless, there is widespread belief that excelling at both should be a general business priority. But clearly, the two aren't always compatible. If a firm downsizes, productivity (e.g., sales per employee) may increase in the short term, but future profitability will be mortgaged if customer satisfaction is dependent on the service provided by the sales staff.

Productivity gains are usually reported as good news for the economy and good news for the company, but just like good and bad cholesterol, there is good and bad productivity. What happens when we have fewer doctors per patient, fewer waiters per table, and more students per teacher? Productivity goes up, but is quality better? Are customers more satisfied? How do you improve the productivity of a symphony orchestra? Have it play faster?

But how about substituting labor for technology? At the Brooklyn Opera Company, The Marriage of Figaro was performed by no more than 12 musicians. Computers replaced the others. It's more productive, but is it better? Replace the remaining 12 musicians and productivity goes up again. And we could go on and on. In the end, we will all stay at home and listen to CDs.

The fact is that large increases in productivity can have adverse effects, particularly in a service economy. It is the same as any other difference between quantity and quality.

The idea of productivity as the ultimate driver of economic health is rooted in smokestack economics and in the assumption that prices would adequately reflect differences in quality, but the role of productivity in the service/information economy is more complicated. Like cholesterol, it is about lowering "bad" productivity while bolstering the "good."

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