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Agility, not productivity, will drive economic success - IoD

07 Oct 2015

The Institute of Directors has accused policymakers of looking at the ‘productivity puzzle’ in the wrong way, and argued that a much greater focus must be placed on business ‘agility’ to make sure new ideas and technologies spread throughout the economy as quickly as possible.

In a new report, Balancing UK Productivity and Agility, launched today [Tuesday 6 October], James Sproule, Chief Economist at the IoD argues:

“In pursuing the nirvana of steadily-rising productivity, one has to bear in mind how our economy is changing, how people choose to work, and what future economic success will look like. We need to ask if too close a focus on productivity numbers without considering wider factors could pose a long-term risk to the economy and prosperity.”

Demographic trends, technological changes and the UK’s strong employment record since the financial crisis have all brought the ‘productivity puzzle’ into sharper relief in recent years. But focusing solely on how to increase output per hour could be dangerous, Sproule argues. Instead, we should shift the debate on to ‘agility’, since firms who can respond fast, efficiently, and effectively to consumer demands will shape the economy of the future.

The IoD’s principal concern is that the factors which have driven productivity gains in the past, such as large firms realising economies of scale and developing deep specialisations in certain areas, are no longer relevant for the UK and it would be foolish to try to recreate them.

The report, launched today [Tuesday 6 October] at the Institute of Directors Annual Convention, calls on politicians and businesses to: 

  • Tackle the skills shortage, particularly in STEM subjects and to promote life-long learning to help people work longer and harness new forms of technology throughout their careers
  • Commit to protect the UK’s flexible labour market, which encourages employees to move between businesses throughout their career, taking skills, knowledge, and expertise with them, and ensures all firms are open to new ideas
  • Promote a policy environment and regulatory infrastructure which supports entrepreneurialism and innovation
  • Ensure new technologies and business practices are spread throughout the economy quickly

The full report can be downloaded here.

Highlighting the main findings, James Sproule, Chief Economist at the Institute of Directors said:

“Productivity is the word on the lips of every politician and economist at the moment. But for businesses and entrepreneurs across the country it may seem an abstract concept. Companies measure their success in terms of profits, turnover, number of customers, and return on investment, not output per hour. This isn’t to say productivity is not vitally important, simply that there is a mismatch between those who measure and talk about economic growth and the businesses which create it.

“To be sure, the productivity challenge is acute. As baby boomers leave the workforce, the public finances remain stretched and technological developments create new industries almost overnight, ensuring we can do more with less will be one of the most important challenges of the coming decades. But the way we confront this challenge has to change.

“Entrepreneurial activity around the world has exploded and the future will belong to firms who are fast-moving, agile and can respond to consumer demands as quickly as possible. This means that a traditional focus on ‘productivity’ is misguided. Companies can no longer afford to invest heavily in one particular area and entrench themselves in one section of the market. In the past, such a strategy created efficiency. But in the future, it could spell disaster. Improving our productivity numbers is important, but we must not let it blind us to the bigger, more important challenges businesses have to deal with on a daily basis.”

The full report, Balancing UK Productivity and Agility can be downloaded here.

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