It was something of a surprise last spring when the UK government passed a budget with no explicit mention of productivity. After all, Chancellor Gordon Brown has made improving the productivity of the country’s workers the centerpiece of his plan for economic growth. By association, however, better productivity was very much there—as the intended outcome of further innovation.

In the United Kingdom, innovation is very much in fashion these days. Chancellor Brown has announced a ten-year review of scientific innovation. The Department of Trade and Industry has launched an innovation strategy for the entire country. And professor Michael Porter, in his review of UK competitiveness, stresses the development of more innovative products and services. The thread running through all these initiatives is the belief that innovation—as measured by increases in R&D and in the number of new patents—will clear the critical path to productivity growth in Britain. That is not our view, however. Of course these initiatives are worthwhile, but it is hard to see how they alone will close the productivity gap.

The failing of the United Kingdom, as compared with France, Germany, and the United States, is that Britons generate far less output for every hour on the job. They work hard and they work long—almost as long as people in the United States—but they don’t work smart. An average US employee could go home at lunchtime on Thursday and still match an average Briton’s weekly productivity. Solutions to problems like this can’t be patented.

Since the underlying problem is as much about processes and working practices as about science and technology, the government’s emphasis on innovation needs to be rethought. Small improvements in the way UK employees work are as important as big new ideas. For productivity to increase, an innovation agenda should focus on making Britons work smarter.

Everyday work practices need to be changed to generate productivity improvements. Several UK banks, by simplifying their forms and standardizing the mortgage-application process, increased their productivity by 50 percent. Ryanair and easyJet didn’t invent a new product or service, but they did improve the basic processes of running an airline. These types of improved work practices don’t win any awards, though they do yield plenty of productivity gains. To work smarter, companies need to think about and change the way they do things.

These ideas and experiences need to be diffused across the economy. A great idea—be it an exciting new technology or a less exciting work practice—gets nowhere unless every company in the industry successfully adopts it. Supermarkets are the perfect example. Next time you go shopping, take a look at the way products are displayed; increasingly, they come in packaging that can go straight from the warehouse to the shelf. One company developed this innovation, others saw and adopted it, and now it is standard in the industry.

One of the most remarkable diffusion stories is found in the US retail sector, where Wal-Mart’s approach to supplier management, distribution, and store formats generated 35 percent of the whole sector’s productivity boom in the 1990s.¹ The rest of the companies had to copy or suffer: they chose to copy, and the whole sector increased its productivity as a result. On a national level, this transformation must take place in every sector; just a few inventors are needed, but lots of copiers.

Businesses often treat innovation and IT as the answers to low productivity, without changing their management practices

For companies, the challenge is to diffuse innovations or best practices throughout the entire organization. The use of technology, including information technology, presents a similar challenge. All too often businesses treat innovation and IT as the answers to productivity shortfalls, yet without parallel attention to management practices these measures fail. A study of UK manufacturers² suggests that companies working hard to improve their management practices—for example, by setting stretch targets and giving staff members incentives to meet them—are generating far higher productivity gains than are those spending the most on IT.

So why aren’t best practices copied more widely? The first barrier appears to be a lack of incentive. Managers don’t feel constantly compelled to improve everyday working practices unless competition provides the spur, and in this context government can play a critical role. The tougher the competition within a sector, the more companies copy best practices.

The second barrier appears to be a lack of skill in duplicating best practices and making them stick—a problem for managers to solve. UK executives don’t lack knowledge in this area: they read lots of business books and newspapers and go to conferences on Six Sigma, lean manufacturing, and outsourcing. But to make any such idea work, managers must successfully interpret how to do it their own way and then undertake a concerted campaign to implement the required changes. The best managers don’t rely on memos to the staff; rather, they set out to change the attitudes and then the behavior of every one of their employees.

For the third barrier—regulation—the government has initiated a number of audits. This issue looms largest in planning regulations, such as the lengthy process that businesses must endure when they want to change the size of a factory. The planning process is a quagmire for everyone involved. To the government’s credit, it has recognized this state of affairs, but it is now stuck in a quagmire of its own in trying to streamline the review process.

If the government wants to stimulate innovation, it should do more than offer tax credits for R&D. It needs to increase competitive intensity in the United Kingdom, to spur the adoption of best practices, and to remove the constraints that stop the good from becoming the best. Only then will the country close its productivity gap.