The Productivity Riddle

Glenn Hubbard has an excellent article in Strategy+Business about the effects of American management on productivity and economic growth. Free registration is required, and this article is worth your time to sign up.

Through the lens of economics, management is, at heart, a choice made by each firm. To alter that choice is costly; when a firm changes management, it requires additional personnel, time, attention, and other resources. The decision makers who lead the firm must trade off these costs against the benefits they expect. That is why, if all other factors are equal, the new management practices most likely to be adopted are those that promise the greatest cost reduction. In capital-intensive companies, these tend to be those practices that most improve the efficiency of plant and equipment. In companies where highly skilled workers are integral to a firm's financial performance, practices related to incentives and human capital will probably be perceived as more beneficial.

If this theory is correct, then in a knowledge-intensive economy, the firms with better practices for process techniques, goal setting, performance evaluation, and human resources management should be found, by reasonably objective observers, to exhibit generally better performance. And indeed that correlation was found in recent research by economists Nick Bloom of Stanford University and John Van Reenen of the London School of Economics.

The article also references The Good Life: How Managers Made the Modern World, and this paper about management practices across firms and countries. If the assertion is true that management has this much power, then whatever is being taught in our business schools will have a significant impact on the future of this country. That's scary.

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Comments

  1. david foster's Gravatar Comment by david foster on December 22nd, 2006 at 11:49 am

    I haven’t read this piece yet, but was very unimpressed by an earlier Hubbard article–my comments here;
    http://photoncourier.blogspot.com/2006_07_01_photoncourier_archive.html#115302440769488379

  2. laurence haughton's Gravatar Comment by laurence haughton on December 22nd, 2006 at 2:18 pm

    Great background info David. I saw a couple of words that got my radar beeping: “greatest cost reduction” and “improve the efficiency.” This is code for one of the fundamental mental errors in leadership. As Drucker explained it the real difference is made by improving “effectiveness not efficiency.” Doing the right job right not just doing the job right.
    Cost reduction is a cookie cutter process, reduce 15% across the board rather than eliminate waste and use the savings to fund more results.

  3. Harry Steiger's Gravatar Comment by Harry Steiger on December 27th, 2006 at 7:02 am

    The riddle

  4. John W. McKenna's Gravatar Comment by John W. McKenna on December 29th, 2006 at 4:08 am

    Here’s my problem with the management vs leadership argument. The argument is based on the assumption that it is possible to separate the two camps, i.e. Managers do things right while Leaders do the right thing. This may be convenient in the theory-driven world of academia, but it does not reflect the real world.

    The whole argument reminds me of the quip, “What’s the difference between theory and reality? In theory, there is no difference.” In my experience, our apparent inability to understand the difference between theory and reality is the primary driver leading us down the wrong path toward disastrous outcomes.

    When you make your living on the execution side of the equation, you are constantly reminded that success or failure, whatever the endeavor, is not based on theory. Rather, it is a function of reality.

    Take care…

    John

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