Improvements in labor productivity have been the engine of economic power and prosperity in the US since World War II. But in the last 15 years, productivity growth has slowed averaged only 1.4% per year, compared to long-term rates of 2.2% since 1948.
These small differences add up: If the United States can reverse its long-term trend, it could be worth $10 trillion in cumulative GDP by 2030. And the productivity benefits will help the country cope with longer-term challenges such as looming national debt, underfunded entitlement programs, and the transfer from fossil fuel to renewable energy.
Companies have a starring role to play in this productivity miracle. Our research found significant differences in productivity between leading and lagging firms within each sector. Manufacturing provides a particularly strong example, where leading companies are 5.4 times more productive than the latter. Academic researchers documented similar trends in services, especially information and communication, showing a wide disparity between leading companies and others.
Not only are productivity disparities within sectors wide — they are also growing. Our research shows that in manufacturing, the gap is 25% wider in 2019 than in 1989. Some analysts TIPS this widening gap is the result of the rapid growth of leading companies accompanied by the stagnation of others. That’s encouraging: It suggests that if the laggards can match the leaders, the United States could return productivity growth to historic levels.
These productivity gaps also suggest that companies can raise their own ambitions. Doing more with less, or doing more of the same, shows up in corporate income statements as higher margins and stronger revenue growth. And in the aggregate, performance improvements lead to economy-wide changes in productivity.
Lessons from the Most Productive Companies
For business leaders looking to unlock performance, there is something to be learned by observing companies at the top of the productivity pile. These frontier companies are usually larger than others (though not always, as we discuss below). They are present in most sectors and geographies.
What they have in common is a playbook with the following four elements:
They take value out of digitization.
From 1989 to 2019, our research found a strong correlation between productivity growth in sectors and their level of digitization. Some researchers found the same connection between strong productivity and digitalization; Frontier firms are more capable of technological change than their peers.
However, many companies that invest in the technology do not see its benefits. McKinsey research found that companies typically realize only about 25% to 30% of the expected value of their digital transformations. Most of the shortcomings stem from improperly updating the company’s strategy and business model to take advantage of new digital strengths.
Frontier companies set bold technology-enabled business goals. They are reconfiguring their organizations to digitize their operations and capture the benefits of technology, instead of increasing the ways of working. And they drive accountability for results throughout the organization.
They invest in intangibles.
Frontier companies go beyond investing in technology and also place bets on complementary intangibles such as R&D, intellectual property, and the capabilities of their workforce. Our research found that borderline companies invest 2.6x more in intangibles compared to other companies.
For many of these companies, taking a long-term view is important. These investments are likely create a productivity J-curvewhere the initial benefits of investments are small, but rapidly compound over time to create outsized long-term value.
They are building a future-ready workforce.
Frontier companies are disproportionately securing the skilled talent they need to get the most out of technology, either by attracting top talent or through an in-house investment in employee skills.
Frontline talent and tech-savvy executives are needed to successfully navigate the reconfiguration of complex companies. Leaders win the talent war through recognition the value of employee experienceinvesting in on-the-job training programs, and expanding policies that make it easier for parents and older workers to stay in the labor force.
They adopt a systematic approach.
Frontier companies are often systems thinkers, looking for opportunities to access new markets or creatively collaborate with stakeholders.
High-performing firms tend to be more connected to global value chains, giving them access to global markets, ideas, and talent. They collaborate with suppliers and customers to form new ecosystems that benefit from agglomeration effects and create shared pools of value. They are also looking for opportunities to work more closely with their public sector counterparts to address the challenges of skilled talent and physical infrastructure.
America’s New Productivity Champions
The opportunity to apply these lessons is open to companies of all sizes and shapes. Many border companies are part of what we call Titanium Economy — small, mostly privately held industrial-technology companies that are among the nation’s fastest-growing and most profitable businesses. These companies are often based in small towns, sometimes even in rural areas, and are in different sectors.
Take Dot Foods, a food service distributor based in Mount Sterling, Illinois, population 2,006. For Dot, everything starts with the employee. “Our numbers are off the charts and we can’t work with them … we’re usually under 500 employees,” CEO Joe Tracy told us.
To attract workers, Dot rewrote its shift schedules in ways that gave employees more flexibility to take breaks. The company is investing in automation to do jobs that no one wants to do, like slinging freezer cases on the night shift. It embraces technology throughout the operation and takes the time to teach workers the skills needed to operate the equipment. It works to integrate logistics with advanced analytics, so customers can receive the products they want as quickly as possible. And it acquired ShopHero to provide its customers with a customized, locally branded e-commerce platform loaded with video and photos. Dot Foods is now the nation’s largest foodservice distributor, delivering more than 125,000 products from 1,000 suppliers in all 50 states.
Dot’s growth story is typical of companies in the Titanium Economy — and there’s a good chance others will join them. Recent data shows that small and medium-sized firms are less productive on average than large firms. But in some sectors where niche products or services can be offered at higher price points, smaller companies can be just as productive as their larger rivals. These data should provide a lot of encouragement to business leaders who want to drive improvements in their business.
Neither size nor sector is the absolute measure of a company’s fortunes. Sure, grocery store owners can’t snap their fingers and suddenly enjoy the profit margins of software makers. But almost all companies can increase their productivity by approximating that of frontier companies.
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Ultimately, changes in firm strategy and management must deliver the productivity gains needed to return to the long-term trend and capture the $10 trillion prize. For business leaders, the productivity gap should be enough motivation to raise their own ambitions. Now, it is also clear that the work they do will ultimately make all the difference in the prosperity and well-being of the country.
