In many European economies, major investments in technology and Industry 4.0 have not (yet) led to the much-heralded efficiency improvements in industrial sectors. In the light of international competitiveness and job security, that development is now becoming a growing concern for politicians and business leaders.
We asked Andreas Hoberg, Managing Partner of Ingenics Consulting, to share his views on the reasons behind the stagnating productivity growth, and what steps should be taken to rejuvenate industrial efficiency.
To start with, why has productivity growth fallen in recent years?
“Indeed, in recent decades, we have observed a significant slowdown in productivity growth – particularly in Germany, but also throughout Europe. While methods such as lean production and lean management were actively promoted in the 1970s and 1980s, this dynamic has almost come to a standstill recently.”
“And despite rapid advancements in important areas such as technology and digitization, the previously much anticipated increase in productivity has remained modest. That is because technological investments alone are not enough to increase productivity. It also requires continuous optimization of processes and a culture of continuous improvement.”
On the latter point, why have these continuous improvements fallen by the wayside?
“There are obviously many reasons, but a main one clearly has to do with a lack of urgency. The good economic situation in Europe has put a brake on innovation. Because manufacturing companies were enjoying solid growth and financials, there seemed to be a lack of urgency around the need for process optimization.”
“In addition, company management is typically accustomed to focusing on short-term success without pursuing more long-term growth objectives. Both in their strategic planning as well as in their operational instruments.”
“As a result, there has been little attention to the importance of operational excellence, and ensuring this is embedded into the organization and culture (‘continuous improvement’). For long, in the good times, the consequences of this lack of focus was less apparent, but fast forward to today, following a period of war, climate disruption, energy and supply chain crises, and more, the consequences have become abundantly clear.”
What impact does this have on corporate management?
“Dropping productivity and efficiency levels can have a devastating impact on industrial companies. Take the automotive industry and its suppliers as an example. While the industry was successful worldwide, the pressure on margins also grew continuously. In many cases, the reaction to rising production costs, falling prices and discount battles was not the development of production excellence, but instead catchy marketing strategies.”
“That reflects a short-term lens on the matter. While marketing strategies can do the trick, they in essence cover up long-term factors such as productivity and competitive edge. Long-term investments in efficiency and process optimization are neglected, which weakens the competitiveness and innovative strength of companies.”
“The developments in the German automotive sector are a classic example. Once recognized around the world for its high-quality and high efficiency, the sector is now struggling. Facing a range of structural issues, from competitiveness and regulation to macroeconomics, car makers are finding themselves in choppy waters. It has led big brands such as Volkswagen and Mercedes to releases warnings to the industry and their staff.”
On Germany’s automotive case: what needs to be done in your opinion to increase value creation and make it fit for the future?
“Instead of focusing on short-term, easily achievable but isolated small successes, as has been seen widely in recent times, the industry should take on the key challenges of the future, as well as concentrate on driving sustainable excellence throughout their entire value chains.”
“Investing in lean excellence should be a key part of the strategy going forward. This means that companies must promote a culture of continuous improvement and ensure that all employees are involved in the process of increasing efficiency. This is the only way they can master the challenges of the future and secure their long-term competitiveness.”
Andreas Hoberg is Managing Partner of Ingenics Consulting, a German consulting firm specialized in operations strategy, transformation management, and lean excellence. Ingenics Consulting is a member of Nextcontinent.