Good news for managers - not so useless after-all !

I came across an interview that McKinsey did with the Noble prize winning economist - Robert Solow.

Background and some initial thoughts - 

Economics - before Solow - essentially said that the output depends on two factors - Capital and Labor. These so called factors of production mean different things for different industries. For an auto industry Capital would mean the production facilities, the warehouses etc. whereas labour would encompass man and machine.

Solow said that apart from these what matters is the technological progress. Putting it in slightly mathematical terms would make more sense. Suppose that the output is governed by the following equation -

                                          O = f (t, C, L) 

Apart from the capital and labour, an important factor to consider would be the technological part. Why are some countries with limited access to capital and labour some of the biggest producers of some products? How can China possibly hope to grow at above 7% in the long term? Would it be possible by just deploying more people on the job and/or more capital investments? The answer is no. Even without looking into it too much two reasons justify this answer -

1. Diminishing returns - Putting in more people in the same factory would start leading to overcrowding and ultimately lead to a productivity decline.

2. Deploying more capital and increasing the fixed cost without a proportionate increase in the demand would ultimately lead to lower contribution margins.

So to increase productivity one needs to focus on the technology aspect. Squeezing more out of your capital and labour is the key. In the current state, talking about man-machine coordination exemplifies this line of thought.

Ok.. what about the managers?

The report shows that the in many industries with similar levels of capital, labour and technology - productive efficiencies differ. What could be the possible reasons for this? 

It was seen that resource allocation, better managerial decisions and organizational structures were able to explain these differences. As the countries and various sectors become exposed to competition with increasing globalization, the managers need to push themselves harder to sustain that level of growth in-spite of advances in technologies. 

Moreover, exposing these industries to global best practices is important as that would ultimately drive them to achieve growth by focusing on these marginal gains and improvement in efficiencies. 

I am often bewildered about how growth works. In the present state it feels as if growth and innovation is incremental. 20 years ago, it worked in leaps and bounds - uneven and unpredictable. This makes the case of micro-level management even more important. 

Although the leaps and bounds growth concept is not completely out of the picture. The next technological leap would likely occur when human and machine interaction becomes more seamless... the point where man and machine start working together in a truly integrated manner. However, organizations cannot just wait for this to happen only to be thrown out of the business. Marginal gains would govern profits for them in short to medium durations. 

On the business model front, managers would need to me more pro-active. We have seen entire models being wiped out in a relatively short time period (e-retail replacing the brick and mortar is one prime example). 

The point that managers would need to keep in mind is that technological advances occurring in unrelated areas will affect them - affect them in a big big way! Pro-activeness and not just cognizance is extremely important!