James C. Cooper, “The Price of Efficiency.”
Business Week magazine
March 22, 2004
As innovation has brought ever-cheaper computing power and new ways to make use of it, capital has become increasingly cheap relative to labor. The returns on investment in new labor-saving, high-tech equipment have soared. Given that labor accounts for about two-thirds of the cost of making and selling products, greater labor productivity in today's global economy is tantamount to corporate survival.. As a result, productivity is growing even faster now than in the late 1990s. And it's a real job killer this time: A one-percentage-point increase in annual productivity growth costs about 1.3 million jobs.
Up to now, the pressures have been most evident in the manufacturing sector, at both old-line factories and New Economy giants. Increased foreign competition has forced the Big Three to design and engineer new cars on the cheap. General Motors Corp. used to make midsize cars for different global markets using several platforms. Now, the auto maker builds four different midsize cars on one platform designed in Germany. So GM doesn't need to hire more designers and engineers in the U.S.; instead, it has slashed salaried U.S. staff in each of the past three years by 10%, to 40,000 currently. Meanwhile, tech equipment maker Cisco Systems Inc. is also boosting its productivity, increasing Internet-related savings from $650 million in 1999 to $2.1 billion in the latest fiscal year. Cisco says that only when it hits $700,000 in sales per employee-it reached $632,000 per worker in its most recent quarter-will it consider widespread hiring.
Now, a broad range of services industries, and even small businesses, are striving to make similar gains in efficiency. That is especially true in retailing, which employs nearly 12% of all U.S. workers. Retailers from department stores to gas stations to restaurants are now able to move a 35% greater volume of goods and services out the door per worker than they did five years ago, meaning far fewer workers are needed. To take just one example, Home Depot Inc. has self-checkout counters in almost half of its 1,707 U.S. stores, allowing it to move as many as 1,000 cashiers to the sales floor. The shift helped drive sales per labor hour up 4% last year alone. Another big factor: the explosion in goods moved through e-tail sites, which have done away with salespeople, restockers, cashiers, and other posts required in traditional retailing.
It’s not only that companies are getting efficiencies from the equipment they have been laying in over the past year. More important, they're still squeezing productivity gains from the technology acquired during the'90s. Many continue to find new ways of integrating technology into their production and distribution processes, and of getting customers to tap into the technology to make their purchases. Southwest Airlines Co., which made major investments in new technology to upgrade its reservation system during the 1990s, is now eliminating three of its nine reservation centers as increasing numbers of fliers book their tickets online. Plus, those earlier outlays are now facilitating new investments in self-service kiosks. The result of such moves: Even as the discount carrier's fleet grew from 375 to 388 planes last year, its payroll fell from 33,705 to 32,847.