McKinsey: Reigniting productivity key to Japan economy

05 May 2015 Consultancy.uk

The Japanese economy continues to underperform on its potential productivity, falling further behind the US over the coming decade without change. Yet according to a recent study from McKinsey & Company, the Japanese have no reason to be disheartened – a drive for best practice productivity in combination with technological advances – something Japan is known for masterminding – could significantly boost GDP growth, and shift the country’s outlook back into rosy waters.

In a recent report (‘The Future of Japan: Reigniting Productivity and Growth’) from McKinsey Global Institute (MGI), McKinsey & Company’s research think tank – the consultancy explores the economic conditions faced by Japan. The consultants find that following its present productivity trend and with the coming changes in demographics, the country will continue to see lacklustre growth over the coming decade to 2025. However, the business advisory too finds considerable potential in the Japanese economy, such that, even with demographic changes – through improvements in productivity – the economy can continue to perform well, jumping from 1.3% GDP growth to ~3% per year.

Accelerating productivity growth would change the outlook for Japans economy over the next decade

Downward pressure
Japan is facing a medley of downward forces on its economic standing. The countries demographic makeup is set to continue to age over the coming decades. In 2011 it reached the point where its population has started to decline on the back of low birth rates and high life expectancy. As of 2013, a quarter of its population was age 65 or older; by 2040, that share will rise to 36%. With further pressure placed on the labour force as only 59% of Japanese in the 60-to-64-year-old age bracket are employed. The consultancy finds that the labour market will decline 3.7% by 2025.

Downward pressures

The Japanese economy has seen two decades of lacklustre growth, often termed ‘the lost decades’. Following the collapse of its stock market and real estate bubble at the beginning of the 1990s, its economic growth between 1992 to 2012 averaged a mere 0.8%. And while the country remains the third largest economy in the world, its productivity has suffered. Productivity – which was for a long time one of the highest in the world at 3.7% increase per annum in the 1970s and 1980s – has plummeted to around 2% over the past decades. This will see the productivity gap with the US increase further, from 29% in 2011 to 37% in 2025.

If productivity stayed at the level and with the current demographic trends, the outcome would see the real term income of its citizens reduced by $1,600 by 2030.

Productivity under pressure
The research reveals there are a number of conditions affecting the competitiveness of Japanese businesses. While the legal basis for a ‘job for life’ that was for a long time enshrined has for the most part been wound back, the consultancy finds that the culture continues making certain parts of the employment market rigid – creating possible inefficiencies and a downward pressure on productivity. One of the examples is the country’s strategy to support companies shift away from the lifetime employment model and begin hiring non-regular (temporary) workers, or haken. The impact has been massive: today more than one-third of workers were covered by ‘haken’ arrangements, and this group is expected to increase to 50% by 2030 following current trends. The downside of haken workers is that they are unproductive, not only do temporary employees have fewer incentives to excel, but employers rarely invest in their development.

Haken growth

Besides inefficiencies in the labour market from flex workers reducing productivity, McKinsey unearthes that the banking system in Japan is creating uncompetitive conditions by not allowing poorly performing companies to exit the market. The banks roll over the bad debt of underperforming companies, however, as the companies continue to struggle they lack the capital to invest in improving themselves or creating the kinds of innovations required to improve their productivity. A further effect of keeping the firms on the books in a competitive market is that resources are tied up and not being distributed toward firms that improve the productivity of the overall market, while new competitors find it difficult to compete against subsidised firms.

A further issue highlighted by the report is that Japan continues to be a poor target for foreign direct investment (FDI), with just 0.06 percent of GDP, compared with 0.60 percent in the United States and 0.24 percent in Germany. This makes international competition or introduction of new – more productive practices – difficult. According to McKinsey this is largely due to regulatory barriers that make it difficult for new competitors to challenge incumbents in certain sectors.

Productivity initiatives in specific industries

Moving forward
While there are factors inhibiting the productivity potential of Japan, the consultancy on a positive note also highlights that a number of factors create positive conditions for the country to grow, including technological know-how, a formidable manufacturing base, a highly educated labour force, world-class infrastructure, and a large and affluent consumer market.

To support policy makers with returning Japan to a steeper growth track, the authors explore the potential for productivity and capital gains in major sectors of the economy, and the contribution on Japan’s GDP growth. In a ‘low range’ case, McKinsey believes Japan could add 18% in value added above the current trajectory. In the more aspiration view the advisors estimate up to 28% in value added could be unleashed. “This would lift Japan’s annual GDP in 2025 by almost 20% to 30% over current trends – for an increase up to some $1.4 trillion in that year alone,” write the authors.

Productivity levers manufacturing

The key trigger lies in productivity improvements, activated through adopting industry best practices, including those developed in other countries; moving to the frontier of technology; and organising for discipline and performance. For example, in the manufacturing sector, a range of levers could combined boost the value added by up to 53% of the current trajectory, while in the retail sector the value added could reach 61%. Overall, Japan can reach some 50% - 70% of the productivity goal of around 4% if a critical mass of companies adopts practices that are already global standards; technology, such as further automation, accounts for most of the remaining potential.

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Project management industry adds £156 billion of value to UK economy

15 April 2019 Consultancy.uk

Project management has grown into one of UK’s largest areas of business over the past decade, amid the increasing ‘projectification’ of work. With the gross value added to the UK economy by project management estimated to be £156 billion, this trend is likely to continue in the coming era.

Despite the huge success of project management in recent years, until now there has been relatively little data available on the size of project activity. As a result, there has been a great deal of debate on things like the number of people involved in the sector, the number of projects, and how it contributes to economic output. Due to this need for clarity, APM, the UK’s professional body for project management (the largest organisation of its kind in Europe, with 28,000 individual members) commissioned economists from PwC to shed light on the industry's economic impact.

The research concluded that the profession makes a more significant contribution to the UK economy than the financial services sector. 2.13 million full-time equivalent workers (FTEs) were employed in the UK project management sector, generating £156.5 billion of annual gross value added (GVA). In comparison, the financial services sector contributes £115 billion, and the construction industry adds £113 billion.

Gross value added to UK economy

Commenting on the discovery, Debbie Dore, Chief Executive of APM said, “Project management runs as a ‘golden thread’ through businesses, helping to develop new services, driving strategic change and sector-wide reform.”

Who is a ‘project manager’?

To reach these estimates, PwC’s researchers used detailed models to map out the value of project management activity. They ultimately defined relevant ‘projects’ as “temporary, non-routine endeavours or rolling programmes of change designed to produce a distinct product, service or end result… [with] a defined beginning and end, a specific scope, a ring-fenced budget, [and] an identified and potentially dedicated team with a project manager in charge.”

Building on this, they then went on to define what the act of project management actually is. The job consists of applying “processes, methods, knowledge, skills and experience” so that clients can meet their objectives and bring about planned outputs or outcomes. The analysts added that this includes “initiating the project, planning, executing, controlling, quality assuring and closing the work of an identified and dedicated team according to a specified budget and timeframe.”

Importantly, it should be noted that the profession is not exclusive to only roles explicitly labelled as ‘project manager’, but to any role where specialist project management skills are used. This means that across sectors these roles can have very different titles, from the self-explanatory contract managers of procurement, or the campaign managers of advertising, to the likes of festival co-ordinators in the events sector, and many more. The roles in question also span all strategic levels of the profession, from strategic to tactical and operational positions.

Gross value added of project management profession

From a sector perspective, the financial and professional services, construction and healthcare industries make up almost two-thirds of the total project management GVA. At the same time, understandably, the UK Government has a huge project portfolio, which further drives the size of the GVA the sector contributes, thanks to megaprojects like HS2 and Crossrail.

Commenting on this to the report’s authors, Oliver Dowden, Minister for Implementation remarked, “Project delivery is at the heart of all Government activity, whether it’s building roads and rail, strengthening our armed forces, modernising IT or transforming the way government provides public services to citizens. Getting these projects right is essential if we are to ensure that we build a country that works for everyone.”

Throughout 2019, 26 major government projects were delivered, representing a fifth of the overall Government Major Projects Portfolio (GMPP) of 133 projects. According to the IPA annual report 2017-18, these represented a whole life cost of £423 billion. In addition to this were a plethora of smaller scale projects, and those in early development.

Elsewhere, with the increasing digitalisation of the economy impacting entities of all shapes and sizes, IT and digital transformations tended to dominate the projects of the UK scene alongside new product development projects, with a respective 55% and 46% of organisations in the research sample having undertaken these types of project in the past year. At the same time, this varied across sectors, and unsurprisingly, in the construction and local government sectors, fixed capital projects were the main project type undertaken.

Outlook

Looking to the future, 40% of business leaders expect project management will grow in the coming years due to the increased use of projects – or the ‘projectification’ of the UK. In a trend that has been witnessed elsewhere, organisations have to rapidly and continuously change in the digital age of business, driving the need for project management.

Outlook for project management services

An increased focus on value over cost – especially in the construction sector – and a forecast increase in the number of international projects are predicted to be key drivers of growth, according to the expert contributors. However, this will not happen in the absence of challenges; more than half of organisations expressed concern over the perceived impact of political uncertainty in the UK. Skills and capability shortages were also cited as a potential barrier by a third of organisations.

With regard to budgets, meanwhile, a third of those surveyed by PwC said they expect the size of project budgets will increase in the coming three years, while 40% anticipate a growth in project size. As the profession continues to mature, and as the recognition of the importance of good project management grows, it is expected that a greater proportion of project work will gain more distinct attribution to the profession itself, giving more recognition and appreciation to the role of the project manager.

Speaking on the findings of the study, Sandie Grimshaw, a Partner at PwC, concluded, “The project management profession is relatively new compared to some other professions, such as lawyers, teachers and doctors. However, as project management is a core competence vital to organisations in the UK, the profession is critical and will continue to grow in stature.”