Join Derek Hudson as he explores Essential Dynamics, a framework for approaching the challenges facing people and organizations. Consider your Quest!
Welcome to Essential Dynamics. I'm Derek Hudson, the host of the Essential Dynamics podcast. I'm joined today by my colleague from Unconstrained, Dave Kane. Dave, how are you?
Dave:Hey, good. I'm doing well. Thanks.
Derek:It's good to have you on today. On the podcast, we talk about essential dynamics, a thinking framework that we're working on at Unconstrained. And we explore the concepts of essential dynamic dynamics through deep conversations with interesting people. We're stuck with you and I today, Dave. But we've got an interesting topic, and, I'm I'm really excited for the opportunity we have to talk about this.
Derek:I don't have the date in front of me, but, within the last couple of weeks, there was a speech given by Carolyn Rogers from the Bank of Canada, declaring a productivity emergency in Canada. So we wanna talk about productivity today. Dave, first of all, you've done some work in the past on economic impact and economic indicators and stuff like that. Do people do we understand what we're talking about when we talk about productivity?
Dave:I don't think it's it's widely understood. It's sort of that that economics term, that's usually followed by a bunch more of economics terms that that people don't really they just kinda gloss over and you start getting into it. But, I mean, essentially, it's, you know, how much value an economy is making per hour worked is is how it comes down to being measured. But more simply, it's, you know, how effectively are you using the inputs to make outputs?
Derek:So I think that's really interesting. I hadn't thought about that hour thing much, but but I I use it in my in my work with, with clients, and and we'll get to that in a, you know, probably a little bit later in the conversation. But just to highlight
Dave:Yes. Where that one comes from, I mean, the the Bank of Canada kinda kinda watches it. And, back in, you know, early eighties ish, they'd compare us to The United States and say, you know, we're we're 88% as efficient, you know, for for what we produce in our versus them. And I think this emergency they're declaring is they're watching it, and it's gone down to the low seventies. So we're we're becoming less efficient compared to, you know, our our biggest trading partner and and North American neighbor here.
Derek:So So less efficient per hour worked.
Dave:And I think the other reason they're bringing it up so much now is because inflation is, you know, the thing they're most worried about, but inflation and productivity kinda go a bit together in that, if you have a relatively unproductive economy, your ability to control inflation is is weakened. You you get in, say, today's environment, you end up having to pay people more and they're not producing anymore. So you're getting this inflationary effect, and so they wanna increase productivity because it makes you more resilient. It makes you handle inflation and keep it under control better.
Derek:Well, I suppose that would be the same for an individual or a family.
Dave:Absolutely.
Derek:If you're making minimum wage and your car breaks down, you're in a pickle. If, you're pulling in 300,000 a year and your car breaks down, well, first of all, it's less likely to break down because it's probably a newer car and better repair. But if it does break down, you just take it to the mechanic and pay for it. And you go with on with with your life. So our country is kinda more like working at minimum wage.
Derek:Is that what you're saying?
Dave:I guess. Yeah. I'm not quite sure I follow that analogy, but, but but, yeah, we are cost of what we've been paying people have been going up, and we're making equal goods. And so that's that's bad for productivity.
Derek:That's right. So, you know, I took a look at the, the material that BankAccount had put out, and one of the things they do is they sell the value of high productivity. We can handle inflation. We have faster growth. There's more jobs, higher wages, and overall, that creates generates capacity for for, public services as well.
Derek:So there's there should be no arguments, on any side of the political spectrum against higher productivity. Does that do you think that holds up?
Dave:Oh, yeah. Absolutely. It's just how how do you how do you get there? And and quite often, you know, it's, picking winners or trying to do things that are seen as as affecting it.
Derek:Let's talk about picking winners for a second. What are some, some, things you've seen in the past about the the futility of that.
Dave:Well, the way they're gonna do it is they're either gonna go after trying to improve the training and skills to to make your your workforce, you know, better, or they're gonna go after investment and trying to get better tools for the workers so that they can produce more within that time. And so, you know, it it's often just being seen as trying trying to affect it by going after the biggest pieces in the industry and, you know, particularly out in Ontario where you have a huge manufacturing part of your your, your economy. Whereas out here in Alberta or even in Edmonton, aside, from some of the big oil and gas side, we're predominantly small and medium sized businesses. And so, we don't always see the effect as quickly. Potentially on the training side, the the bomb and pop businesses aren't aren't gonna see what the government's doing quite as quickly.
Derek:So let's, let's take a step back and connect us to essential dynamics and and maybe take some time to reframe that challenge step. So essential dynamics is based on the idea that we can look at things we do as humans in a simple simplified systems thinking approach, where we're trying to do something hard. Originally, the idea there was we're on this quest, and the way we accomplish what we're trying to do, which is the purpose, is to take a bunch of people on a journey. So that gives us with the three elements. So we talked about essential dynamics of purpose, the path, and the people.
Derek:And we're trying to think about a system that accomplishes a purpose. When we talk about the economy, you know, yeah, there's an economic system, but I think that the real unit of an economy is a is a producer. It's an organization that produces products or services. And if you want productivity to increase, then you have to look at the individual organizations that that produce a product or a service and ask yourself, how can they produce that product or service better, more efficiently, at higher value with, with less cost? Is that that's holding up?
Dave:That's holding up. Yep. Yep. So if
Derek:so if that's if that's the case, when the government tries to improve the economy, the the only way they can improve the economy is for individual businesses to operate more productively. I remember, years ago I had a fantastic board member, that taught us that there's no such thing as a market. There is only a customer. And as an individual business, you don't sell to a market. I mean, unless maybe you're at, in that commodities, but you sell to a customer, and then you can you can step back and try and frame up a market by grouping customers or products or something like that.
Derek:But, for an individual business, the transaction is we get a sales order and we deliver. And, you know, that's how we get revenue. And there's there's nothing other than that. There's no other way to get revenue than to sell to an individual customer. Now you might have one contract the last five years, or you might get 500 downloads a day.
Derek:But in each of those cases, there's a customer that's buying your product. And so that's part of the equation. So you have an organization that can be more or less productive. And so the government's trying to fix this problem of productivity. And so, as you said, the, the things that were thrown out there were job training, somehow in incentivizing investment.
Derek:Then I think the other one that they tossed out there was competition. I I think that's the reason we're talking about this today. I don't think those are the source of, the answers.
Dave:Yeah. Because they'll they'll throw out competition into that mix because it puts that pressure on to produce things more effectively or be more efficient with what you have. So it's sort of the the pressure that focuses you back on your your skills, your processes, your investments.
Derek:But competition, like like the way I kind of look at it is, I think that, so it's almost a direct quotation, competition drives companies to be more productive. And I would say in actuality, competition drives out the unproductive.
Dave:True. But in our economy, I'm not sure increasing competition is gonna be the lever that's gonna drive us to be more productive. Especially when you look at our history, right, of of oil and gas booms, where productivity is helped because we're putting these massive investments in and then there's a bump in productivity. Those weren't driven by, you know, benefits of competition. It was because they're the opposite of anyone who could produce something, was able to in a few instances.
Dave:Right?
Derek:Well, no. No. It's it's interesting because, we complain about things in Canada like mobile phone services, which in Canada is really an oligopoly, and it's not competitive. And so we pay more for cell phones and internet than, most places in the developed world. We also complain about the cost of air travel.
Derek:And in both those cases, there is less competition. But the answer to introducing competition is simple. It's open up the border. And if you open up the border in air travel and telecommunications, the price will go down for consumers. There's no doubt about that.
Derek:The question is, will a Canadian company survive?
Dave:What, the question is, would that drive productivity growth, for, yeah, that survival issue?
Derek:I I don't I don't think it I don't think that's I don't think competition, is the answer. I think that competitive pressure, will reveal the increases in productivity, but it doesn't necessarily create them.
Dave:Right.
Derek:So so we throw that one out, and now we have, job training and investment. And I'm just gonna, yeah, go
Dave:Well, there's there's also there's job training and there's investment, and then there's what they would call the the multifactor productivity, which is basically, how do you balance those two? Right? So it's it's not so much just the one lever versus the other lever. It's how do you work the two of them together. And I think that's more the management side because the on the skill side, yeah, there's gonna be management training, but I think it's more just management's ability in each of these organizations to work both levers and to balance, you know, do I add a higher skill level?
Dave:Do I add more equipment? Or do I just go and focus on the right things?
Derek:So do we have a productivity problem because we have a management problem?
Dave:Well, I think it's it's certainly a component of it. I mean, yes. You can say we have a a lower level of investment compared to other countries. We have a whole lot of different issues, but one of them that most, you know, small and medium sized organizations can can address is, you know, am I focusing on the right things that are gonna lead to productivity, or am I distracted, or am I too busy doing something else? So it kinda leads a lot back to, you know, the essential dynamic side of of sort of the the management attention, deficits.
Derek:Yeah. Let's talk about management attention deficit. We've, we've covered that topic before. So here's here's the profile. So you have a business owners, small business owner.
Derek:This could be, you know, what some people might think is a fairly large small business, you know, with couple hundred employees, but there's, there's a small team at the top and there's one owner, they can only handle so much. And they're, they would like to be more productive. They would like to be more profitable as well. So there's a new, job training program that comes out. And they send their bunch of a bunch of employees to the job training program, and they come back.
Derek:But they come back to the same business with the same systems, the same order book, same processes, the same specifications for their products. I'm not sure you're gonna see instant, improvement in productivity because somebody went on a course.
Dave:Yeah. It's gonna help for sure, but it's it's, like, say the processes and all things inside. Because if you if you think of the value creation system of a company and, you know, what inputs do you have to work with versus what outputs are you are you gonna do, you know, adding a a little bit of that training in isolation is you're not gonna see long term benefit. You're not gonna Immediate benefit, I guess.
Derek:You're not gonna see immediate benefit. Okay. So so management's job anyway is to make sure that they have, trained employees. They I mean, the employees that are fit to do the job. Like, they have to recruit or train or, you know, develop and improve.
Derek:Yeah. Improve, like, they that's their job. And and the other side is on the on the investment side is, it's management's job to make investments that improve productive capacity, you know, into the future and to find the source of funds for those investments.
Dave:Yeah. They're not doing it for the purpose of trying to improve Canada's productivity, though. They're doing it on an ROI. Right?
Derek:That's right.
Dave:And and they're making rational business decisions to improve their profitability.
Derek:Right. And if you and if you complain about, managers not making those decisions the way you want, I'm not sure how you change that.
Dave:I mean What Is it that that that that they're not making the right decisions? Or yeah. That's because I'm kinda thinking, it's quite often the programs and policies that that come out to try and encourage, say, productivity, they're gonna say, oh, let's go focus on this or even, you know, programs to help, the digital marketing or those types of things. Does management start to go, oh, that's where I can get this at a discount or I can get subsidization or this is where I'm gonna go because, you know, somebody's gonna help me out as opposed to is that the right place to invest my time and my energy. So sometimes I think they just get distracted and and go after, you know, those that are presented in front of them.
Derek:So that's, that goes back to that premise about management attention. So let's, let's sort that one out a little bit. So if management's job is to assemble all of the resources and set up the processes necessary to to add value to their customers, then the more management attention is wisely used, the more productive an organization can be, and the more productive an organization can be. And the more management attention is distracted on things that don't add to that, the less improvement you're gonna see. So one of the problems that I've seen with government support programs over my career in in a bunch of different areas is anytime that, free money from the government becomes a distraction to management.
Derek:And, they get off their they get off their strategy because if they just step a little bit over to the side, they can get some money to do something. And so I I think that any government program that takes management off their game and adds to management distraction is probably gonna cause more harm than good as an example.
Dave:If it is a distraction, whereas, you know, if was it preparation meets opportunity? That type of if you have your plan in place and you know the areas you you wanna focus and that you wanna leverage and then these programs come along, then that's just a huge boon. It's just if if you don't have the plan in place and you don't know what you need to do and then you just jump on the shiny object, then it can be a distraction and then it can sort of get you working on, the areas that aren't gonna have the highest benefit for your organization.
Derek:So, let's set this up, for our next conversation because, we agree that Canada has a productivity problem. And and, our our position is is that the way you improve Canada's productivity is improving the productivity of all of the individual businesses or as many as you can in the country. It's it's actually a individual organization game in in a lot of cases. And that management's job is to do that, but it's but it's not that easy. So, Dave, just as we wind this one up, I wanna kinda set the stage for our next episode.
Derek:Let's and let's talk about what are the key things that management can do to improve their productivity on an individual basis. And if we add that up for a lot of companies, that'll improve Canada's productivity. What are the things that come to mind?
Dave:Well, it it's no different than what you're doing at an economic level. Right? So it it is the training, the skills, and the investment, but it's focusing them on the the right areas that are gonna provide you the greatest return. And I think that comes back to, like you sort of said at the beginning, your quest to people path to purpose. It's knowing your own value creation system, knowing where your your constraints are, and applying the productivity opportunities to those pieces.
Dave:You don't go apply it to where you're already efficient or you're not gonna see the same amount of return. So I think it's it's the same logic. It's just applying it into your model.
Derek:So, first thing I heard there is you understand your value chain. So that's the really cool thing about, this productivity conversation. The productivity conversation is about creating value, and it's about creating value, you know, with the sort of lowest amount of, work that you can you can do. So you so we strongly encourage every organization to step back and say, what are the steps we take to take go from input to output? So that's that's one thing you said.
Derek:Then you look at that and you can say, of the steps in our value chain, what's the one that limits our production? Where do we have least capacity or what's the hardest step for us? And, then I think you said, so then take all your energy for improvement and apply it to the point that has the most leverage. And if you do that, you can see significant impacts, which will include higher productivity per labor hour, higher profit per revenue, and, that'll benefit the company. And if enough companies do that, that'll benefit the economy.
Derek:Some of that might be job training. It might be investment. It, could be just the way you flow your process, to create value. It could be how you specify things with your customers. It could even be changing your pricing.
Derek:And that's the unique part to every organization, so they have to figure that out. And I think in that next episode, we should talk about how an organization might figure that out.
Dave:That makes a lot of sense to me. It's well well summarized.
Derek:Okay. So, that was, that was a great start to this conversation. I just wanna sort of highlight the importance of this. Our central bank has declared an emergency on productivity. They've proposed some things which we don't think are exactly on track, and we're proposing some alternate ways of thinking about it.
Derek:So that's episode, 91, and we'll come back and continue this conversation and talk about how each of us in our organizations can improve, productivity, which improves the lot of employees. It improves improves the services customers get, takes care of, investors, and that builds our great nation. So until next time, everyone, on a, national and global level, consider your quest.