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Does Productivity Influence Profit? --Dickeson

January 2003
Increased productivity doesn't translate directly to increased profits.

"The main cause is a profound misunderstanding of the relationship between productivity and profits. Everyone from Alan Greenspan and Wall Street economists to corporate chieftains and financial journalists made the assumption that higher productivity and new technology would inevitably translate into higher profits." (From the cover story of Business Week, November 4, 2002, pg. 108, "The Painful Truth About Profits." )

Perhaps, in the long run, increased productivity converts to increased profits. But wasn't it Lord Keynes who said, "In the long run we shall all be dead?" It's a cold comfort to realize that it's not just printers who misinterpreted the benefits of productivity increase.

Other industries and some very smart people have also gone astray. Increased productivity means more output per applied labor hour. Increased capacity is the direct, and desired, result.

Q. How is increased capacity utilized?

A. By increased sales.

Q. How shall I increase sales?

A. Lower your prices.

Q. But won't lower prices decrease my sales gross margins?

A. Yes.

Q. Must I increase my productivity?

A. Yes.

Q. Why?

A. In order to remain competitive with other printers that are increasing their productive capacity and reducing prices.

Q. Can't I reduce my capacity and lower my costs?

A. Yes.

Q. How?

A. Downsize by reducing the number of people you employ.

Q. You mean lay off my friends?

A. Yes.

Q. Why?

A. You must decrease your expense burden by reducing headcount through a combination of attrition and discharge.

Q. Have I only choices between increased lower margin sales volume and letting people go?

A. Yes. In reality, those are the gains and penalties, the joys and sorrows, of increased productivity in a free economy.

Q. What happens if I don't increase sales or release people?

A. You will suffer from costly excess capacity and endanger your business survival.

This is the stark, naked truth about increased productivity. In 1811 the Luddites of Great Britain learned of this inevitable result and tried to destroy new automation in the knitting mills. Thus, it should really come as no surprise 200 years later. We want productivity to increase. We want more output per labor hour.

When we get it we have to pay the price by eliminating people, painful as that always is, or subsidizing excess capacity by depleted earnings. We can't join the latter day Luddites or put the genie back in the bottle. Recall the dismal fate of 10,000 hand manuscript monks after Gutenberg's achievement.
 

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