The challenges of productivity

There is a widespread concern about decreasing US productivity. Productivity, how efficiently resources are used to create outputs, has fallen in the United States since World War II, according to the American Productivity Center. From 1948 to 1965, productivity grew at an annual compound rate of 3.6 per cent. From 1965 to 1973, the growth rate was 2.1 per cent. The effect of the energy crisis was felt in an increase of only 0.2 per cent between 1974 and 1975. The late seventies and eighties have actually seen a national decline in productivity.

Productivity in the hospitality industry is no better than the national trend; some would argue the prospects are far worse. If we consider productivity the relationship between the output of goods and services and the input of resources, the hospitality industry is not performing well. The US National Restaurant Association, in fact, estimates that the restaurant industry is only half as productive as manufacturing industries.

Government figures indicate that in eating and drinking places, labor costs are outpacing sales and annual sales per employee are declining. From 1969 to 1980, sales per labor-hour in the US decreased from USD 6.15 to USD 4.80 in constant dollars, which is more than a 20 per cent decline. The problem is not that sales, even in constant dollars, have declined. In fact, from 1980 to 1985, sales in eating and drinking places increased an average of 2.7 per cent after inflation. However, the industry required 4 per cent more employee-hours to generate these sales. The result is a decline in productivity as measured by the ratio of output (in this case sales) to input (in this case employee-hours).

There are several special factors that make the problem of productivity especially acute for the hospitality industry. The first of these is that the industry is in the mature stage of its life cycle. The idea of a life cycle is that products, services and industries go through various stages of development. In the introductory stage the industry is rather new and appeals to a relatively small number of people. In this stage of the hospitality industry, few people ate out, took vacations (which were for only the very affluent), or stayed in hotels.

The second stage is that of growth, which can be rapid. In travel and tourism, this began after World War II and increased dramatically in the sixties and seventies as a result of growing numbers of people and the amount of discretionary income they had. The impact was felt in foodservice in the seventies as a result of these and other factors.

The size of the market increased because of the baby boom. Income grew with the emergence of the two-career household. The number of such households has expanded to 55 per cent of all families. Seventy per cent of the women associated with the baby boom are in the labor force.

This means there are more people who have money to spend but lack the time to prepare food at home. The answer has been to eat out. Between 1972 and 1975, sales in eating and drinking places increased by 75 per cent. In an era of growth, mistakes in operations can be disguised. Poor management can be covered up by the increase in sales from an expanding market.

There are limits, however, to the number of meals that can be eaten out and weekend vacations that can be taken. There are signs that a saturation point is approaching. The industry is moving toward, and fast food is already at, the mature stage of the life cycle.

In the previous stage, sales grow at an increasing rate. In the mature stage, sales are still rising, but at a decreasing rate. In this stage the industry cannot rely on more customers, guests, or tourists to fuel its profits. Growth in profits in the nineties will have to come from improving the effectiveness of the operation. This is the productivity challenge for the hospitality industry.

If no action is taken, the product, service, or industry moves into the declining stage of the life cycle. A decline in sales is experienced. Before this happens a new life cycle can be developed by identifying a new market for the product (for example, baby shampoo for adults who wash their hair every day) or a new time use for the product, as in the movement of fast-food operations into the breakfast business.

The hospitality industry can no longer rely on its previous years of growth to increase profits. As a maturing industry, its growth must come from increased productivity.

A second challenge for the hospitality industry is that its nature makes productivity difficult to measure, much less improve. The hospitality industry provides a combination of products and services: a hamburger and quick service; a hotel room and a cheerful smile; a martini and a sympathetic ear. While we can measure the number of burgers sold, rooms cleaned and drinks served, how do we quantify the intangible services?

A related problem is the labor-intensive nature of the industry. In delivering a service or in being hospitable, there is only so much substitution of machines for employees that can be made. In the hospitality industry, service is tied to people. This puts great pressure on managers to increase the productive use of employees rather than rely totally on technological innovation to produce a more productive operation.

A third problem is that although employees are critical to increased productivity, we have traditionally placed little emphasis on employee development and training. Managers can understand the investment necessary in a machine and the value of a preventive maintenance program for that machine. They do not, however, regard money spent on an employee as an investment; rather it is seen as purely a cost. We have to realize that ROI means Return on Individual as well as Return on Investment. A 1982 study of high-quality managers by the American Hotel and Motel Association indicated that although managers considered the training and development of employees to be a significant problem, they admitted that few programs existed to take care of the situation. The problem, apparently, is not considered important enough for managers to do something about it.