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Productivity’s Technology Iceberg

The real story behind America’s productivity revival is the way companies have combined digital technologies with digital organization.

Productivity may be economists’ single most important statistic. Productivity determines the ultimate success of companies; it is the source of the wealth of nations; and it is the key to our standard of living. Fortunately, U.S. productivity has been surging.  Manufacturing productivity grew at more than 8 percent in the third quarter of 2003; the increase continued, though at a less torrid pace of 2.6 percent, in the fourth quarter. But we must recognize that these numbers are part of a larger trend-and we need to understand the origins of this strong productivity growth.

From the 1970s into the 1990s, U.S. labor productivity grew by barely 1.4 percent a year. Many economists thought it would be stuck at that level forever. But the growth rate jumped to more than 2.5 percent in 1995 and has averaged more than 4 percent since 2001.The difference is dramatic. It takes 50 years for living standards to double if productivity grows at 1.4 percent per year, but only 18 years to double at 4 percent growth.

The productivity boom is rooted in a revolution in the way American companies apply information technology. Technology-driven innovation is reshaping the economy, but managers who sit back and wait-assuming that technology alone will quickly or automatically introduce gains-are setting themselves up for failure.

The fruits of technological innovations introduced five years ago are being harvested today as more efficiently run operations. In the short term, this is one of several factors behind the so-called jobless recovery. But over the longer term, the digital revolution will promote sustained business growth and higher living standards for workers and society at large. To achieve this, however, managers must think out of the box-particularly the box that contains all that computer hardware. Capital spending on computer hardware accounts for only a fraction of the total investments powering today’s efficiencies. The biggest investments go toward developing business processes that can reap technology’s benefits. These efforts are less visible than hardware-but they’re more important.

The unsung heroes of the IT revolution have not been the microchip and the Web browser, but rather the creative, diligent, and painstaking work done by those who have been rethinking supply chains, customer service, incentive systems, product lines, and 1,001 other processes and practices affected by computers. Investments of intangible capital constitute the real source of today’s productivity growth. The challenge for managers is to use IT as a catalyst to initiate a wave of complementary innovations throughout their organizations.

Our research at the MIT Center for eBusiness reveals vastly different outcomes among companies that spend similar amounts on technology. Some companies go only part way, using technology to automate particular functions or eliminate specific jobs. But the most successful digital organizations foster a fundamentally new organizational culture. They break down the silos that can isolate the technologists in the IT shop from the managers who run business operations. They automate most routine decisions while giving workers the information and authority to make on-the-spot decisions.

To be successful, businesses need what is still far too rare: managers knowledgeable about both technology and business. Tens of thousands of midlevel managers and frontline workers are creating innovative ways to deploy technology. Their innovations may be small-finding new uses for an inventory database or eliminating obsolete forms-but together, their innovations have an enormous impact. To sustain the productivity surge, today’s managers must develop incentives that encourage their workers-as well as themselves-to be more creative, self-starting, educated, and willing to experiment. Jobs that call for simply following recipes will become scarcer, and demand for an innovation-driven workforce will continue to grow.

A century ago, an exciting technology electricity-was being introduced. By itself, electricity did nothing for productivity. It took 40 years for businesses to figure out how to redesign their factories and processes so that electricity could deliver a productivity payoff. Managers cannot afford to wait decades to harness the greater productivity offered by today’s IT advances. The companies that succeed will be those that understand how to combine and coordinate digital technologies and digital organization.

This article originally appeared in the MIT Technology Insider, a monthly newsletter covering MIT research and commercial spinoff activity.

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