boiler is running our of steam

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WEB Design By Rory Isserow

Taken from the pages of “Corporate DNA”, this is an extract ….

 

THE BOILER IS RUNNING OUT OF STEAM

 

“We live in a world where amnesia is the most wished-for state.”

John Guare, US playwright

 

What on earth has the intangible subject of Organisational memory got to do with the very tangible matter of productivity? For most managers, they have an incongruous relationship given that memory of any kind is lifeless, merely a remembered record of events past and deeds done. Their characteristic view is that they might have had a hand in how things were done previously, but today, in our fast-moving business environment, circumstances are different and time too short for indulgencies such as history. Consequently, what went on in the days, months and years past is of little relevance. Wrong. This book will contend that for any established cooperative venture, from a private company’s endeavours to a public-sector institution’s activities, the individual establishment’s Organisational memory is not only the reason for its being but also the key to its continued existence. And for that, productivity, which is contingent on management’s good decision-making, is not an optional factor of production.

 

By way of explanation, we all know what happens when businesses are unproductive. They become uncompetitive, get taken over or go bust. That’s serious enough for individual companies but what happens when whole countries lose their edge? Take a deep breath. The productivity growth of five developed countries has entered negative territory. And the rest’s average growth is a paltry 0.8 per cent. This is the first time in modern industrial history that so many have crashed through industry’s own Maginot Line at any one time with so many others so close behind. Back in 1939 the Maginot Line, coincidentally sited just a short train ride from every one of the negatively-measured economies, was a barrier that was considered impenetrable at the time.

 

Productivity is critical in several ways. It is the ability to do things efficiently, and particularly more efficiently than others, that, at the end of the day, determines wealth. It is also one of the main requirements for businesses staying in business.

 

The US has held the top position for much of the twentieth century and, even today, is way ahead of the Organization for Economic Cooperation and Development (OECD) pack by a significant margin. With a few exceptions – mainly the countries that have come up from a low productivity base – the rest are mostly struggling to inch ahead. The inside story across the board – that includes the US – is one of declining annual growth rates, indicating that the developed world is rapidly running out of steam. Individual governments could do their bit by introducing extra defensive macroeconomic measures such as subsidies, import duties and interest rate cuts but, as history shows, this still can’t detract from the underlying failure of managers to ensure that all the corporate resources at their command are used more efficiently. In the multifaceted world of productivity, this un-trumpeted collapse is a late warning sign of systemic trouble for First World industry and commerce. It is now also an eleventh-hour alert that has been threatening for decades, with all remedial measures giving the patients only provisional respite.

 

When profit margins crumple

 

When productivity growth is in the red, employers are getting less than added value from their endeavour. New investment in many areas makes little sense and margins in existing businesses become increasingly difficult to achieve, as Italy, Luxembourg, Holland, Spain and Switzerland will be finding out (see Figure I.2). For their profits, employers increasingly have to depend on a reduction in inputs such as employees, raw materials and capital. Given that the developed world is now predominantly service-oriented, the usual areas targeted are the workforce – the reduction of which automatically affects the quality of service – or prices, or both. And we all know what happens when price increases are not supported by real productivity: that demon inflation kicks in. When higher prices are not supported by corresponding higher value to the consumer, the result is a further loss of competitiveness and a downward spiral towards bankruptcy.

 

Another possible scenario was indicated in June 2005 when the giant HSBC banking group sounded the first establishment warning of impending disaster in circumstances of shrinking export revenues among many OECD countries, a direct consequence of un-competitiveness and its main cause, declining productivity. Its chief European economist, Peter Wandesford, said precipitously: ‘We’re not looking at the doomsday scenario quite yet:

but it is a question of when, not if.’

 

The report on which he was commenting said that Eurozone growth in gross domestic product (GDP) was likely to ‘grind to a halt’ as exports weakened. With Italy in ‘dire straits’ after a collapse in productivity and negative growth for five out of the past nine quarters, Germany perilously close to deflation as its exports to China fall away, a 3.9 per cent drop in Italian retail sales and Holland in equal danger, HSBC forecast a meagre 1.1 per cent growth

across the Eurozone in 2005 and warned that the bloc may tip into recession as the global trade cycle turns down. The report explained that, as countries struggle to cool down property booms, the European Central Bank’s (ECB) one-size-fits-all interest rate is effectively driving Germany and Holland deeper into slump, and added that it could be difficult to hold monetary union together unless the ECB cut interest rates before the downturn became

unstoppable. It concluded: ‘The dangers of a liquidity trap are rising in the region.’

 

The so-called liquidity trap to which the report was referring is the scenario painted by economist John Maynard Keynes in the 1930s when traumatized consumers and investors refused to spend, pushing prices lower and lower. The result? Deflation. It is a condition that renders conventional monetary policy largely impotent as it is impossible to cut interest rates below zero. Inflation-adjusted rates rise as the crisis deepens, causing mass bankruptcy. With their core inflation around 0.7 per cent on a downward trend, Germany and Holland may now be slipping into this trap …….

 

For employers with high staff turnover and low productivity