55

The productivityparadox

Wickham Skinner

American manufacturers' near-heroicefforts to regain a competitive edge through productiv-ity improvements have been disappointing. Worse, theresults of these efforts have been paradoxical. Theharder these companies pursue productivity, the moreelusive it becomes.

In the late 1970s, after facing a severeloss of market share in dozens of industries, U.S. pro-ducers aggressively mounted programs to revitalizetheir manufacturing functions. This effort to restorethe productivity gains that had regularly been achievedfor over 75 years has been extraordinary. (Productivityis defined by the Bureau of Labor Statistics as the valueof goods manufactured divided by the amount of laborinput. In this article "productivity" is used in the samesense, that is, as a measure of manufacturing employ-ees' performance.) Few companies have failed to mea-sure and analyze productivity or to set about to raiseoutput/input ratios. But the results overall have beendismal.

From 1978 through 1982 U.S. manufac-turing productivity was essentially flat. Although re-sults during the past three years of business upturnhave been better, they ran 25% lower than productiv-ity improvements during earlier, postwar upturns.

Consider, for example, the XYZ Corpo-ration, which I visited recently. The company operatesa large manufacturing plant, where a well-organizedproductivity program, marshaling its best manufactur-ing talent, has been under way for three years. Its objec-tive was to boost productivity so as to remove a 30%competitive cost disadvantage.

The program has included: appointing acorporate productivity manager; establishing depart-mental productivity committees; raising the numberof industrial engineering professionals by 50%; carry-ing out operation-by-operation analyses to improveefficiency levels, avoid waste, and simplify jobs; re-training employees to work "smarter not harder";streamlining work flow and materials movement; re-placing out-of-date equipment; retooling operations tocut operator time; tightening standards; installing acomputerized production control system; trainingforemen in work simplification; emphasizing good

housekeeping and cleanliness; and installing a com-puter-based, measured-day work plan, which allowsfor daily performance reports on every operation, work-er, and department.

"The very way managersdefine productivity improvement andthe tools they use to achieve it

push their goal furtherout of reach."

For all this effort-and all the boost itgave to production managers' morale-little good hascome of the program. Productivity has crept up byabout 7% over three years, but profits remain negligi-ble and market share continues to fall. As one execu-tive said, "It's been great finally getting managementsupport and the resources needed to get this plantcleaned up and efficient. But it is extremely discourag-ing to have worked so hard and, after three years, to bein worse competitive shape than when we started. Idon't know how long we can keep trying harder whenit doesn't seem to be getting us anywhere."

Unfortunately, XYZ's frustration with afull-out effort that achieves only insignificant compet-itive results is typical of what has been going on inmuch of American industry. Why so little competitivereturn-even a negative retum-on so much effort? Isit the high value of the dollar, which cheapens imports?Is the cost gap just too great for us to overcome? Or arewe going at the problems in the wrong way? What isgoing wrong? Why this apparent paradox?

Wickham Skinner is the James E. RobisonProfessor of Business Administration at the Harvard Busi-ness School, where he teaches production and operationsmanagement. His most recent research and writing focuseson the revitalization of U.S. manufacturing.

56 Harvard Business Review July-August 1986

The wrong approach

With these questions in mind, I havevisited some 25 manufacturing companies during thelast two years. Never have I seen so much energetic at-tention to productivity starting from the top and rico-cheting all the way through organizations. This isAmerican hustle and determination at its best. Produc-tivity committees, productivity czars, productivityseminars, and productivity campaigns abound.

But the harder these companies work toimprove productivity, the less they sharpen the com-petitive edge that should be improved hy hetter pro-ductivity. Elusive gains and vanishing market sharepoint not to a lack of effort but to a central flaw in howthat effort is conceived. The very way managers defineproductivity improvement and the tools they use toachieve it push their goal further out of reach.

Resolutely chipping away at waste andinefficiency-the heart of most productivity programs- is not enough to restore competitive health. Indeed,a focus on cost reductions (that is, on raising labor out-put while holding the amount of labor constant or, bet-ter, reducing it) is proving harmful.

Let me repeat: not only is the produc-tivity approach to manufacturing management notenough (companies cannot cut costs deeply enough torestore competitive vitality); it actually hurts as muchas it helps. It is an instinctive response that absorbsmanagers' minds and diverts them from more effectivemanufacturing approaches.

Chipping away at productivity...

...is mostly concerned with direct laborefficiency, although direct labor costs exceed 10% ofsales in only a few industries. Thus even an immensejump in productivity - say 20% - would not reverse thefortunes of import-damaged industries like autos,consumer electronics, textile machinery, shoes, ortextiles.

...focuses excessively on the efficiency offactory workers. By trying to squeeze out hetter effi-ciency from improved attitudes and tighter disciplineon a person-by-person and department-by-departmentbasis, the approach detracts attention from the struc-ture of the production system itself.

Production experience regularly ob-serves a "40 40 20" rule. Roughly 40% of any manufac-turing-based competitive advantage derives from long-term changes in manufacturing structure (decisions,for example, concerning the number, size, location, andcapacity of facilities) and basic approaches in materi-als and work force management. Another 40% comes

from major changes in equipment and process tech-nology The final 20% -no more-rests on convention-al approaches to productivity improvement.

What this rule says is that the leastpowerful way to bolster competitive advantage is to fo-cus on conventional productivity and cost-cutting ap-proaches. Far more powerful are changes in manufac-turing structure and technology. The rule does not, ofcourse, say "Don't try to improve productivity." Thesewell-known tools are easy to use and do help to re-move unnecessary fat. But they quickly reach the lim-its of what they can contribute. Productivity is thewrong tree to bark up.

...ignores other ways to compete that usemanufacturing as a strategic resource. Quality, reliabledelivery, short lead times, customer service, rapid prod-uct introduction, flexible capacity, and efficient capitaldeployment-these, not cost reduction, are the primaryoperational sources of advantage in today's competi-tive environment.

...fails to provide or support a coherentmanufacturing strategy. By assuming that manufactur-ing's essential task is to make a company the low-costproducer in its industry, this approach rashly rules outother strategies.

Most of the productivity-focused pro-grams I have seen blithely assume that competitive po-sition lost on grounds of higher cost is best recoveredby installing cost-reduction programs. This logic istempting but wrong. These programs cannot succeed.They have the wrong targets and misconstrue the na-ture of the competitive challenge they are supposed toaddress. Worse, they incur huge opportunity costs. Bytying managers at all levels to short-term consider-ations, they short-circuit the development of an ag-gressive manufacturing strategy.

But they also do harm. These programscan, for example, hinder innovation. As William Aber-nathy's study of auto manufacturers has shown, an in-dustry can easily become the prisoner of its own mas-sive investments in low-cost production and in the or-ganizational systems that support it.' When processcosts and constraints drive both product and corporatestrategy, flexibility gets lost, as does the ability to rap-idly introduce product changes or develop new products.

Even more is at stake than gettinglocked into the wrong equipment. Managers under re-lentless pressure to maximize productivity resist inno-vation. Preoccupied as they are with this week's costperformance, they know well that changes in processesor systems will wreak havoc with the results on whichthey are measured. Consequently, innovations thatlead to, say, better service or shorter lead times for prod-uct changeovers are certain to suffer.

Productivity paradox 57

'WeH, just go and tell Comrade Gorbachev you can't'intensify' the economy around here without breakinga few eggs!"

Innovation is not, however, all that suf-fers. A full-out concentration on productivity frequent-ly creates an environment that alienates the workforce. Pressure for output and efficiency are the staplesof factory life as hourly workers experience it. Engi-neers and supervisors tell them what to do, how to doit, and how long they may take. Theirs is an often un-happy quota-measured culture-and has been for morethan 150 years. In such an environment, even the mostreasonable requests are resented.

Recent admirers of the Japanese arguethat low cost and high quality can go hand in hand. In-deed, in the right setting managers need not trade onefor the other. But in an efficiency-driven operation, thislogic can be a trap. When low cost is the goal, qual-ity often gets lost. But when quality is the goal, lowercosts do usually follow.

The will to make large investments inradically new process technology gets lost too. Theslow adoption of such manufacturing technologies asCAD/CAM, robotics, and flexible machining centersreflects managers' wise assumptions that these invest-ments would initially drive productivity down.

Fears that several years of debuggingand learning to use the new gear would hurt productiv-

ity have already cost many companies valuable time inmastering these process technologies. Even more trou-bling, the companies have failed to acquire a strategicresource that could help them restore their competitiveposition. A productivity focus inevitably forces manag-ers into a short-term, operational mind-set. When pro-ductivity is driving, experimentation takes a backseat.

The emphasis on direct costs, wbich at-tends the productivity focus, leads a company to usemanagement controls that focus on the wrong targets.Inevitably, these controls key on direct labor: overheadis allocated by direct labor; variances from standardsare calculated from direct labor. Performance in cus-tomer service, delivery, lead times, quality, and assetturns are secondary. The reward system based on suchcontrols drives behavior toward simplistic goals thatrepresent only a small fraction of total costs while thereal costs lie in overhead and purchased materials.

Why has this gone on year after yeareven as the cost mix has steadily moved away from di-rect labor? By now our accounting and control systemsare pathetically old-fashioned and ineffective. Butnothing changes. Our continuing obsession with pro-ductivity as the be-all measure of factory performanceis to blame, not the stubbornness of accountants.

When managers grow up in this atmo-sphere, their skills and vision never fully develop. Theyinstinctively seize on inefficiencies and waste whilemissing broad opportunities to compete through man-ufacturing. The harsh fact is that generations of pro-duction managers have been stunted by this efficiency-driven mentality. Theirs is the oldest managementfunction, yet today it is often the most backward. Un-able to join finance, marketing, and general manage-ment in thinking strategically about their businesses,they are cut off from corporate leadership. As my re-cent study of 66 "comers" in production managementshows, 10 or 15 years' immersion in a productivity-directed organization creates severe limitations of vi-sion.̂ These limitations, in time, form a long-termmind-set that only a few can shake. Today the produc-tion function is seldom the place to find managers whocan design competitive manufacturing structures.

Indeed, ever since Fredrick WinslowTaylor, our obsession with productivity and efficiencyhas spoiled the atmosphere of the factory. "Factory" isa bad word. Production managers first came into exis-tence not as architects of competitive systems but ascustodians of large, capital-intensive assets. Their jobwas to control and coordinate all factors of production

1 William I. Abcmathy and Kenneth Wayne,"Limilsot theLtaminRCurvt,"

HBR Sepiembet-OcHibtr 1974, p. 109.

2 Wickham Skinner,"The Taming uf Lions;Hi>w Manuiaclurin^ Lt̂ adcrship Evolved,l780-19H4,"in

The Uneasy Alliance,cd. Kim B. Clark, Robcil H. Hayes,and (Jhristophei Liircnz[Boston: Harvard Busmoss School Press,

58 Harvard Business Review fuly-August 1986

SO as to minimize costs and maximize output. Thissingle dimension of performance is deeply ingrained inthe profession and until recently has sufficed as a basisof evaluation.

Not surprisingly, it created a negative,penny-pinching, mechanistic culture in most factories- a culture that has driven out and kept away creativepeople at all levels. Who among our young todaywishes to work in an environment where one is toldwhat to do, how to do it, when to do it, is measured inminutes and sometimes seconds, is supervised closelyto prevent any inefficiencies, and is paced by assemblylines or machines to produce at a rapid and relentlesspace?

Today's problems in making the factoryinto a more attractive place to work are not new. Theyare the direct outcome of the 150-year history of an in-stitution based on productivity. As long as cost and effi-ciency are the primary measurements of factory suc-cess, the manufacturing plant will continue to repelmany able, creative people.

Breaking out

Faced with this paradox-efforts to im-prove productivity driving competitive success furtherout of reach-a numher of companies have broken outof the hind with extraordinary success. Their experi-ence suggests, however, that breaking loose from solong-established a mind-set is not easy. It requires achange in culture, habits, instincts, and ways of think-ing and reasoning. And it means modifying a set of val-ues that current reward systems and day-to-day opera-tional demands reinforce. This is a tall order.

Every company I know that has freed it-self from the paradox has done so, in part, by:

Recognizing that its approach to pro-ductivity was not working well enough to make thecompany cost competitive. This recognition allowedmanagers to seek strategic objectives for manufactur-ing other than those determined primarily by cost.

Ahout 12 years ago, a key division ofAmerican Standard adopted a "become the low-costproducer" strategy. Its productivity-driven focus did lit-tle to reduce costs hut had an immediate negative ef-fect on quality, delivery, and market share. What Stan-dard needed was a totally new manufacturing strategy-one that allowed different areas of the factory to spe-cialize in different markets and quaUty levels. Whenthis approach replaced the low-cost strategy, the divi-sion regained its strong competitive position withinthree years.

Manufacturing strategyA manufacturing strategy describes the competitiveleverage required of-and made possible by-theproduction function. It analyzes the entire manufac-turing function relative to its ability to provide suchleverage, on which task it then focuses each ele-ment ot manufacturing structure. It also allows thestructure to be managed, not just the short-term,operational details of cost, quality, and delivery. Andit spells out an internally consistent set of structuraldecisions designed to forge manufacturing into astrategic weapon. These structural decisions in-clude:

What to make and what to buy.

The capacity levels to be provided.

The number and sizes of plants.

The location of plants.

Choices of equipment and process technology.

The production and inventory control systems.

The quality control system.

The cost and other information systems.

Work force management policies.

Organizational structure.

Accepting the fact that its manufactur-ing was in trouble and needed to be run differently.

In the mid-1970s officers of the Cope-land Corporation, a large producer of refrigeration com-pressors, decided that their industry was fast hecomingmature. An analysis of their nearly obsolete productionfacilities and equipment made it clear that manufactur-ing had become a corporate millstone. Without a majorchange in the number, size, location, and focus of thesefacilities, long-term survival would be impossible.Copeland made these changes. The results (descrihedlater) were remarkable.

Developing and implementing a manu-facturing strategy (see the insert).

When production managers activelyseek to understand (and, in some cases, to help develop]the competitive strategy of relevant business units,they are better able to work out the ohjectives for theirown function that will tum it into a competitive weap-on. The requirements of such a manufacturing strategywill then determine needed changes in the manufac-turing system's structure and infrastructure.

At Copeland, this approach led to order-of-magnitude improvements in quality, shortened de-livery cycles, lower inventory investments, and muchgreater flexibility in product and volume changes.

Productivity paradox 59

Adopting new process technology.Changes in equipment and process

technology are powerful engines of change. Bringingsuch technology on line helps force adjustments inwork flow, key skills, and information systems as wellas in systems for inventory control, materials manage-ment, and human resource management. There are fewmore effective means of loosening up old ways of orga-nizing production.

General Electric and Deere & Companyhave made wholesale process changes at their dish-washer and locomotive (GE) and tractor (Deere)plants-changes that boosted product quality and relia-bility. Timken and Cooper Industries have each madelarge investments in radical new technologies thatspeeded up their ability to deliver new products andcustomer specials.

Making major changes in the selection,development, assignments, and reward systems formanufacturing managers.

The successful companies I looked atdecided they needed a new hreed of production leader-managers able to focus on a wider set of objectivesthan efficiency and cost. It was, however, no simplematter to find or train this new hreed.

Some, in fact, turned up in unexpectedplaces: marketing, sales, engineering, research, generalmanagement. As a group, they were good team buildersand problem solvers and had broad enough experienceto hold their own in top corporate councils. Their com-panies considered them among the most promising,high-potential "comers" for future leadership at thehighest levels.

Only when manufacturers were willingto try such novel approaches to the competitive chal-lenges facing them have they broken loose from theproductivity paradox and transformed their productionfunction into a strategic weapon. There is hope for man-ufacturing in America, hut it rests on a different wayof managing in this oldest of managerial professions.

As we have seen, our pursuit of produc-tivity is paradoxical: the more we pursue it, the moreelusive it becomes. An obsession with cost reductionproduces a narrowness of vision and an organizationalbacklash that work against its underlying purpose. Tohoost productivity in its fullest sense—that is to un-leash a powerful team of people supported by the righttechnology-we must first let go of old-fashioned pro-ductivity as a primary goal. In its place we must set anew, simple but powerful objective for manufacturing:to be competitive. ^

Labor intensiveThat people love their work, who work a drillOr run a lathe, sounds alien to someWho see in them "the robots they've become":Automatons bent to assembly's will.

And some are that, who welcome programmedsteel,

Greet automation heralded as Change-But others feel an intimate exchange,The tiniest components but a field

As varied as a single breed of snail,With textures, contours hidden from all eyesSave those communing daily half their livesWith parts they know like totems. They have nailed

That one philosophy, have made the gradeWho see in work their lives, and love their trade.

Elissa Malcohn

Elissa Malcohn has published her poelry,ticlion, and commentary in variousmagazines. She works on the slalf olthe Harvard Business School News andInformation Bureau.