Productivity and Innovation – Crisis Time?

Abstract 
Vandy Van Wagener discusses a critical crossroads the global economy is facing.

I sense that we’re at a critical crossroads, not just for the US economy, but globally. Just look at the tepid pace of economic recovery. Or the stagnating middle class wages. Or the highly inefficient economic stimulus programs. All against the backdrop of continued deficits, infrastructure erosion, etc.

What started me down that path today is a new study on Global Growth from McKinsey. The key point of the study was the dire need to boost productivity if we all are to continue to enjoy increasing living standards. The past 50 years’ economic growth was driven about half by population (worker) growth and half by productivity growth. But with worker growth waning, it’s going to be totally a productivity game. McKinsey estimates that even if we matched the relatively healthy productivity growth of the past 50 years (1.8% pa) over the next 50 years, the rate of GDP growth would still decline by 40%. In fact, they estimate that we need to accelerate productivity growth by almost 25% to sustain past per capita income growth.

I’ve seen two similar crossroad times in my life:

First, when I got out of business school and started working was about the time that the US finally got serious about the need to improve quality across the board. Japan had jumped into quality in the 50’s, ironically with a lot of help from Deming, an American ignored in his home country. But we managed to largely dismiss the Japanese juggernaut for 25 years or so. I actually saw Deming speak at P&G in my early days, and still remember him goading us into action in his unique elocution style.

Later on in my career, when working in Singapore, I watched that country re‐invent itself against the threat from up‐and‐coming lower cost nations who were quickly grabbing Singapore’s cheap manufacturing base. Singapore found the bottom dropping out at an alarming rate and responded with amazing focus – as one can in a small country with a strong central government. Their answer wasn’t incremental change. Instead they enacted bold new national strategies to move up the value chain, coupled with tough love on the currency front, and successfully accelerated through the rough times into renewed prosperity.

Still don’t think we’re at a critical moment? Well, an old friend and colleague, Doug Hall (who is doing some amazing work in the Innovation area called Innovation Engineering), pointed out to me that the world’s top 10 companies in terms of value in 2000 have seen their market caps decline by about 60% in the ensuing 15 years. If that doesn’t set off alarm bells, what will?

There’s only one way I know of to boost long term productivity – and that’s via innovation. But incremental innovation isn’t going to fill the gap. Neither will discontinuous innovation in the tech sector alone. And, unlike the Singapore story above, nor can we count on the government to fix our massive needs. How can we meaningfully accelerate the pace of innovation to hit those productivity targets? How can the US innovate up the value chain? That innovation drive is going to have to come from all of us … via new paradigms and aggressive action. How? Well, I’ve got some ideas percolating and am going to try to write some of them down for discussion. What do you think is needed? Tweet us @sycamoreandco or comment on our LinkedIn page