Productivity growth—output growth that exceeds the growth of the workforce and capital employed—has been the lifeblood of the US manufacturing sector for much of the recent past. From 1972 through 2010, the sector’s output more than doubled, while its workforce decreased by more than 30%. (See Exhibit 1.) These steady gains in productivity have been a major factor in the renaissance of US manufacturing. (See The Shifting Economics of Global Manufacturing: How Cost Competitiveness Is Changing Worldwide, BCG report, August 2014.)
However, the past decade has seen the emergence of an alarming macroeconomic trend. The US has struggled to improve productivity, which has increased at a tepid pace of 0.7% over the past ten years. Among leading manufacturers, the productivity gap between the US and other countries has widened over the past five years. Most strikingly, the US has fallen behind both Japan and Germany in total-factor productivity growth and is now in the middle of the pack among major manufacturing nations. If this downward trend persists, it could undermine the foundation of US competitiveness over the long term.
At the leadership level, executives of US manufacturers clearly recognize the importance of productivity. In a recent BCG study, more than 90% of the executives surveyed cited productivity as one of their top five most important corporate initiatives. It is easy to understand why. Companies with top-quartile productivity growth achieve five times higher total shareholder returns than bottom-quartile companies, according to a BCG analysis. Even so, surveyed executives showed a lack of urgency about implementing productivity changes. Their responses indicated that they rely too much on traditional improvement levers and are not sufficiently rigorous in managing their improvement programs. As a result, they fail to maximize the impact of their efforts.
We believe that US manufacturers’ current approach to productivity is not sustainable. Indeed, it is imperative for these companies to achieve a step-change increase in productivity and then maintain productivity growth through continuous improvement. And they must act now. Leaders should be bold: success means achieving step-change productivity gains of more than 15% to 20% in key cost areas, not eking out advances of 1% to 2% each year. In many manufacturing industries, such large productivity gains will tip competitiveness from low-cost countries back to the United States and create a virtuous cycle that allows US companies to further invest in top-line growth.
On the basis of BCG’s experience and our study of productivity trends in US manufacturing, we believe that setting an ambitious goal for productivity improvement is critical to maintaining competitiveness. (See the sidebar “An Innovative Way to Measure Corporate Productivity.”) Manufacturers can achieve this goal through the disciplined application of a comprehensive set of productivity levers that attack all the underlying drivers of cost. Essential to this approach is the use of new digital and analytic tools that can help manufacturers reach continually higher levels of productivity. In our experience, a best-in-class productivity program can generate a 3-percentage point to 6-percentage-point increase in earnings before interest and taxes (EBIT).