Category Archives: Management

The next productivity revolution: The ‘industrial internet’

Marco_Annunziata-7878Dr. Marco Annunziata, Chief Economist and Executive Director of Global Market Insight, General Electric Co. Dr. Annunziata holds a PhD in Economics from Princeton University and a BA in Economics from the University of Bologna.

This article is published here in by permission of Vox. (voxeu.org)

Today’s technological innovation is regarded by many as all about social media and entertainment, with no impact on economic growth. This column argues that such skepticism is premature. A closer look at selected industries suggests that the ‘industrial internet‘ – a network that binds together intelligent machines, software analytics and people – through accelerated adoption of sensors and software analytics, will have a powerful impact on productivity and growth.

The largest advanced economies are struggling with weak growth prospects and daunting fiscal challenges. Looking at the macroeconomic equation, there is no easy way out. Looking at the microeconomic level, however, suggests that it is innovation that might come to the rescue.

Game over for productivity growth?

US labour productivity surged to an annual average of 3.1% between 1996 and 2004, nearly double the rate of the previous quarter-century; empirical evidence suggests that the Information and Communication Technology (ICT) revolution was an important driver of this productivity boost, which benefited both manufacturing and services (see for example Stiroh 2001 and Bosworth and Triplett 2003, 2007). Then it fizzled out. The deep 2008-09 recession and subsequent weak recovery, as well as the dramatic reduction in employment levels, make it hard to draw any meaningful conclusions from the swings in productivity growth rates of the last few years (labor productivity growth accelerated sharply in 2009-10 and then collapsed in 2011) – but overall, labor productivity has averaged a meager 1.6% since 2005.

Figure 1. The US productivity decline and rebound

CaptureFigure1The skeptics argue that technology has exhausted its growth-enhancing potential, that innovation is now mostly about social media, entertainment and silly games, with no ability to boost living standards. In a recent provocative piece, Robert Gordon (2012) has argued that the recent waves of technological innovations are simply not as transformative as those of the industrial revolution, and Martin Wolf of the Financial Times commented: “Today’s information age is full of sound and fury signifying little.”

The next wave of innovation

This scepticism might be premature. In a recent report (Annunziata and Evans 2012), my co-author Peter Evans and I have looked at the productivity-enhancing potential of the ‘industrial internet’, a network that binds together intelligent machines, software analytics and people. The declining cost of instrumentation is beginning to enable a much wider use of sensors in machines ranging from jet engines to power generation turbines to medical devices. Software analytics can then leverage the enormous amount of data generated in order to optimize the performance of individual machines, fleets and networks. This means, for example, having a better insight in the performance of a jet engine and being able to anticipate mechanical failures so that maintenance can be performed in a pre-emptive way, minimizing the delays that occur when the problem emerges shortly before take-off. It means being able to track the exact location of medical devices in a hospital and whether they are in use or idle, so that patient admissions and medical procedures can be scheduled more efficiently, yielding better health outcomes to more patients at lower cost.

The potential benefits are sizeable. Just a 1% gain in fuel efficiency over fifteen years would yield $30 billion in savings in aviation and $66 billion in the power generation industry, while a 1% efficiency gain would yield $63 billion in the healthcare industry and $27 billion in the rail industry. Our study focuses on the sectors where General Electric has a strong presence, because those are the sectors we know best and where we are seeing these gains materialize. But the industrial internet has the potential to impact a much wider range of industries, as well as services.

The industrial internet’s impact on economic growth

As the industrial internet spreads, it could have a major impact on economic growth. Forecasting productivity is an extremely difficult exercise. But looking at the potential efficiency gains in individual industries, we feel it is not unreasonable to posit that the impact of the industrial internet might be comparable to the first wave of the internet revolution. In the US, if the industrial internet could accelerate annual labor productivity growth by 1-1.5 percentage points, bringing it back to its previous peaks, it could give a crucial boost to US economic growth. And the benefits would not be limited to the US. In fact emerging markets , where investment is likely to increase at a fast pace in the coming years, have the opportunity to become early adopters of the new technologies. Given EM’s greater share in the world economy, this would quickly amplify the impact on the global economy.

Turning point

The technologies underlying the industrial internet have been in the making for some time. Why get excited about it now? The cost of instrumentation is declining, making a wider use of sensors economically viable, and is matched by the impact of cloud computing, which allows us to gather and analyse much larger amounts of data at lower cost. This creates a cost-deflation trend comparable to that which spurred rapid adoption of ICT equipment in the second half of the 1990s.

The mobile revolution will compound this effect, making information sharing and decentralized optimization easier and more affordable. Industrial internet technologies is set to accelerate.

Enabling conditions

Reaping the full benefits of the industrial internet will require a set of key enablers and catalysts:

  • Investment to rapidly incorporate the new technologies into the capital stock.
  • Strengthening cyber security to manage the new vulnerabilities of a more internet-heavy industrial system.
  • Development of a strong talent pool, which will include new professional roles combining mechanical, industrial and software engineering expertise.

More jobs?

The last point is especially important. Every wave of innovation raises a concern that higher productivity will simply mean fewer jobs. In today’s context of high unemployment, this concern is especially acute. As in the past, technological innovation will make some jobs redundant. But it will create new ones and, if the impact on global growth is as strong as we believe, it will certainly create more jobs overall. But the education system will need to ensure that the supply of skills matches the evolving demand.

Conclusion

The industrial revolution unfolded in waves over a very long period of time. The internet revolution is following a similar pattern, and we think the next, most powerful and disruptive wave is arriving now. The efficiency gains that are coming within reach in individual industrial sectors suggest that the potential impact of the industrial internet on productivity and GDP growth is substantial. In 1987, Robert Solow famously quipped: “you can see the computer age everywhere but in the productivity statistics”. Ten years later, productivity growth surged. Today’s widespread scepticism might prove similarly premature.

References

Annunziata, Marco and Peter C Evans (2012) “Industrial Internet: pushing the boundaries of minds and machines”, report, GE.

Bosworth, Barry and Jack Triplett (2003), “Productivity Measurement Issues in Services Industries: ‘Baumol’s Disease” Has Been Cured‘”, Federal Reserve Bank of New York, Economic Policy Review.

Bosworth, Barry and Jack Triplett (2007), “Services Productivity in the United States”, Hard-to-measure goods and services: Essays in Honor of Zvi Griliches, Chicago, University of Chicago Press.

Gordon, Robert (2012), “Is US economic growth over?”, VoxEU.org, 11 September.

Stiroh, Kevin (2001), “Information Technology and the US Productivity Revival: What Do the Industry Data Say?”, Staff Report, Federal Reserve Bank of New York, 116.

Wolf, Martin (2012), “Is the age of unlimited growth over?”, Financial Times, 3 October.

 

 

MAINTAINING HUMAN RELATIONS WITH BUSINESS GROWTH: Importance of the Human Rerations Issue

Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com.  Founder and former CEO, JPIndusries, Inc., a Fortune 500 industrial corporation

In this series of articles, we examine the human relations issue in the corporate environment for growth. After a discussion on what is “Human Relations” it would be very instructive to browse through a set of questions in order to focus your thoughts on human relations in your own company.

Overall we will write articles on the following aspects of this major topic:

WHAT IS HUMAN RELATIONS?

ASSESSING YOUR HUMAN RELATIONS STRATEGY

IMPORTANCE OF THE HUMAN RELATIONS ISSUE

CHARISMA, CORPORATE CULTURE AND SHIFTS IN HUMAN RELATIONS

CHOICE OF VALUES

HOW FIRMS SHARE VALUES AND GOALS

EFFECTIVENESS OF HUMAN RELATIONS STRATEGIES

CHANGE IN THE APPROACH TO FOSTERING SHARED VALUES

RETAINING COMMITMENT TO MISSION WITH GROWTH

BUILDING CULTURE AT JPI

SOME GUIDELINES FOR EFFECTIVE HUMAN RELATIONS

As we will show in a later article, human relations is an integral part of the Dynamic System Model of managing the business.  We find links to most indicators of organization effectiveness, including profitability, sales growth, work flow, public relations and technical mastery.  Human relations is also linked to resource acquisition and resource allocation.  In short, it is intertwined with all the key issues of managing well.

Morale and profits are linked. The relevance of human relations has been debated over several decades because its effects are delayed or lagged — a phenomenon Likert first noted in the 1950’s.  These results are less apparent in cross-sectional studies–those that test ideas by comparing people or companies at the same point of time.  Lagged effects clearly show up in our own study, reinforcing Likert’s long-standing claims that morale and profits are linked.

Growth boosts morale. Our findings further suggest that rather than straining relations among people, rapid growth may be a boost to morale.  It is much more exciting to be part of a success.

Human relations is linked with work flow, company image and productivity. Not surprisingly, firms with better human relations report smoother work flow, too.  Employees can serve as ambassadors of goodwill–or harbingers of ill will.  Poorer morale is reflected in a worse reputation. Of the different components of technical mastery, productivity is most closely linked to human relations effectiveness, including morale and goal integration.

Human relations is also clearly linked with resource acquisition and allocation but we lack the right kind of data to pin down which is the cause. We might guess, though, that when people have the right resources to work with, they do their jobs more easily and encounter fewer frustrations.

 

For an in depth treatment of this management process read the four related articles recently published in this magazine and the book:

“Dynamic Management of Growing Firms”
University of Michigan Press. 1998

 

 

MAINTAINING HUMAN RELATIONS WITH BUSINESS GROWTH: What is Human Relations?

Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com.  Founder and former CEO, JPIndusries, Inc., a Fortune 500 industrial corporation

In this series of articles, we examine the human relations issue in the corporate environment for growth.  After a discussion on what is “Human Relations” it would be very instructive to browse through a set of questions in order to focus your thoughts on human relations in your own company.

Overall we will write articles on the following aspects of this major topic:

WHAT IS HUMAN RELATIONS?

ASSESSING YOUR HUMAN RELATIONS STRATEGY

IMPORTANCE OF THE HUMAN RELATIONS ISSUE

CHARISMA, CORPORATE CULTURE AND SHIFTS IN HUMAN RELATIONS

CHOICE OF VALUES

HOW FIRMS SHARE VALUES AND GOALS

EFFECTIVENESS OF HUMAN RELATIONS STRATEGIES

CHANGE IN THE APPROACH TO FOSTERING SHARED VALUES

RETAINING COMMITMENT TO MISSION WITH GROWTH

BUILDING CULTURE AT JPI

SOME GUIDELINES FOR EFFECTIVE HUMAN RELATIONS

 

WHAT IS HUMAN RELATIONS?

Effective human relations refers to the extent individual employees are willing to accomplish overall organizational objectives.1  We refer to willing here rather than to actual doing because many other factors come into play, in addition to employee predilection in determining actual performance–appropriate fit of skills and talents, accurate expectations, sufficient tools and assistance, and other factors beyond even the firm’s control.  Though they overlap somewhat, we look at five components of human relations effectiveness:  1) morale — overall job satisfaction and commitment of employees; 2) goal integration –consistency of organization and individual goals; 3) a consistent view of the mission by CEO and managers; 4) a consistent view of values; 5) how effectively values are shared.

The human relations movement can be traced back to the Hawthorne Experiments in the 1930s.2  Hawthorne researchers were originally interested in effects of light and noise on worker productivity in a sewing machine factory.  Their unexpected results showed no correlation between illumination and worker output.  In some trials, the darker it got, the more workers produced.  Obviously, light levels alone were not affecting performance.  Though a number of alternative explanations existed, they all pointed to “people” factors.  The results of the Hawthorne experiments and others by Roethlisberger and associates triggered systematic research into the connection between employee attitudes and performance.

The human relations movement can also be traced to motivation theorists include MacGregor, Likert, Herzberg, and Maslow–all of whom looked beyond the economic models of work behavior to more complex psychological needs workers desire from the workplace.3 These needs include praise, recognition, power, accomplishment, and pride from a job well done.

Our growing understanding of human behavior underscores the importance of providing opportunities  for people to fulfill individual and organizational needs simultaneously.  Without this link, the firm will experience increased absenteeism, turnover, vandalism, grievances, strikes and litigation.  Where human relations are poorly managed, people may quietly sabotage their work efforts or simply work in a sloppy manner.  Worker attitudes are also linked to the quality of output.   Committed employees feel more pride of workmanship.  How do firms foster such pride?  As many have discovered, no amount of pleading or threatening will improve employee performance as effectively as positive approaches. Today’s workers may not be better educated, but they certainly have higher expectations than their forebears and most won’t work for money and job security alone.    Empowering employees and managers to make decisions is far more effective than “idiot-proofing” jobs.

Despite 35 years of field research pointing to the worker’s importance in the overall company success, a major beating by the Japanese is what finally made this sink in.  Ironically, much of Japan’s success is traced to a U.S. citizen, Dr. Deming.  Known for his work in statistical process control,  Deming’s philosophy is grounded in early motivation theorist Douglas MacGregor and his Theory Y view of workers.  Theory Y asserts that the employee wants to do a good job, and does so when given the chance. 4  We now see more American companies implementing Theory-Y human-relations concepts, adding new twists as they go.  McDonald’s has demonsrated that these ideas even work in Russia!

Next article will be:  ASSESSING YOUR HUMAN RELATIONS STRATEGY