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Good OM Reading: The Productivity Challenge

January 21, 2015
Global economic growth is set to slow dramatically

Global economic growth is set to slow dramatically

Over the past 50 years,” writes McKinsey’s Global Initiative Report (Jan., 2015), “global economic growth was exceptionally rapid.” The world economy expanded sixfold. Average per capita income almost tripled. Hundreds of millions of people were lifted out of poverty. Yet unless we can dramatically improve productivity, McKinsey thinks the next 1/2 century will look very different. The rapid expansion of the past five decades will be seen as an aberration of history, and the world economy will slide back toward its relatively sluggish long-term growth rate.

The world isn’t running out of technological potential for growth. But achieving the increase in productivity required to revitalize the global economy will force business owners, managers, and workers to innovate by adopting new approaches that improve the way they operate.

McKenzie found that about 3/4 of the potential productivity growth comes from the broader adoption of existing best practices, or catch-up improvements. The remaining 1/4 comes from technological, operational, or business innovations that go beyond today’s best practices and push the frontier of the world’s GDP potential. Efforts to improve the traditionally weak productivity performance of the large and growing government and healthcare sectors around the world will be particularly important.

Business must play a critical role: aggressively upgrading capital and technology, taking risks by investing in R&D and unproven technologies or processes, and mitigating the labor pool’s erosion by providing a more flexible work environment for women and older workers, as well as training and mentorship for young people. In an environment of potentially weaker global economic growth, and definitely evolving growth dynamics, executives need to anticipate where the market opportunities will be and the competitors they will meet in those markets. Above all, companies need to be competitive in a world where productivity will increasingly be the arbiter of success or failure.

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