Management consulting

20.1Shifts in productivity concepts, factors and conditions

Problems with productivity often start with a poor understanding by management of its real meaning. In a survey by the American Management Association in the United States, 95 per cent of respondents agreed with the statements that productivity related to quality of outputs as well as quantity (but what about costs?) and 90 per cent thought that productivity referred to output per person-hour (only?).1

Changes in understanding productivity

Conventionally, productivity has been considered as the ratio of physical output to input. This implies that productivity is simply production-oriented and concerns manufacturing activities only. In practice, however, an organization has multiple objectives and requires resources to meet them. Furthermore, objectives are seldom met as a result of one particular resource: multiple resources produce the final result through their interaction. Besides, some objectives may be achieved at the cost of others. There is, therefore, a need to have a new – more holistic and systemic – look at productivity.

Since the modern business cycle includes processes of management, supply, marketing and sales, client service and client relationships, and many others, the concept of productivity needs to be expanded to cover all of them, not only production. Therefore, for example, the concept of labour productivity – the ratio of output to the labour input – may be misleading because the productivity of labour can be increased by using different components and parts, or by installing new capital equipment. The concept of capital productivity is equally unsatisfactory because increasing capital productivity is dependent on many factors other than capital, such as knowledge, skills, systems and technology.

Because of the evident deficiencies in single-factor productivity measurement, the concept of multifactor productivity has emerged. Multifactor productivity is a composite measure of how effective and efficient a company is in using its labour, capital, technology, management, organization, and other factors. But even this approach is internally focused and does not refer to customers, and is therefore becoming less relevant.

Companies can also achieve higher productivity by producing goods or services that are more valuable to customers. The new paradigm shifts the focus from the input side of the productivity equation to the output side or valueadded aspects of productivity. The traditional concept of “producing more with less” is less and less relevant; many companies now seek to produce more valuable outputs that satisfy customers with the same or more resources. The “high road” to productivity improvement is characterized by actions to enhance the outputs, whereas the “low road” focuses on reducing the amount of inputs, particularly of human resources.

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Major factors and conditions affecting productivity

Awareness of the main external and internal factors affecting productivity is of critical importance to both clients and consultants. External productivity factors are conditions in the business environment; management cannot control these but should be aware of them and their dynamics. Internal productivity factors are those that are under effective control of management and include factors related to resources (input), processes and output (figure 20.1). Provided that external factors have been properly taken into account in the business strategy, the main potential for productivity improvement lies in internal productivity factors.

In many cases, productivity problems have a multifactorial nature and it is more constructive to think about creating particular conditions by optimizing many different factors. For example, one key condition may be an effective productivity management system. Another critical condition of sustainable productivity improvement is applying innovation and new technology coupled with entrepreneurship.

To compete successfully today, companies have to be highly entrepreneurial, which means permanently innovative in business strategies, processes, products and services. Most traditional companies lack such an entrepreneurial spirit. In a survey by PricewaterhouseCoopers of more than 800 companies in seven countries, 50 per cent of managers said they would launch a new product or service only if they believed it had an 80 per cent or higher chance of success, in terms of adding market share in a set time. This indicates a lack of willingness to take risks. Many companies suffer from “analysis paralysis” prior to launching a new product. In many cases this leads to more wastage than if they were to accept a certain amount of failure in return for some breakthroughs.

More innovative companies generally grow faster. Businesses in which less than 10 per cent of annual revenue comes from products launched in the previous five years have a 30 per cent chance of seeing their sales decline, as competitors capture their market share.

Innovation requires a combination of strategy, financial commitment, operational integration, entrepreneurship and competent people. This means investing in the company’s intellectual capital and the people likely to participate in the innovation learning process. Managers have to ensure the cumulative and collective character of this learning process and provide an entrepreneurial, innovation-friendly learning environment. To free the entrepreneurial spirit in a company, the first shift in strategy should be to move from resource allocation to resource attraction.

Sustainable competitiveness is also closely linked to the level of technological capability. A company that cuts its investment in research and development will often lose much more than it saves. It has been reported that a dollar spent on R&D returns eight times more than a dollar spent on new machinery. New machinery can help you do old work better, but R&D leads to innovation – new products that are of higher value than the ones they replace. Research and development are necessary but not sufficient for achieving a competitive position

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in the market. The way technology is used and managed is important as well; it is most effective when coupled with innovation.

Some of the most admired companies in traditional sectors owe their success to their masterful use of information. Toyota built powerful competitive advantages through simultaneous engineering, kanban (“just in time”), and quality control – all of which depend on techniques for processing and utilizing information. WalMart exploited its electronic links with suppliers and the logical technique of cross docking to achieve a dramatic increase in inventory turnover. And thousands of companies that have embraced TQM, re-engineered their operations, and focused on their core competencies have chosen to define their managerial goals in terms of information flows. IT can be used to create business value by managing risk in financial management, to reduce costs by improving business processes and transactions, and to add value for customers with information about products and services before, during and after sales.

Manufacturers are also beginning to tap the Internet’s potential, transforming e-business into the engine of industry. In 1999, Ford unveiled the AutoXchange, a massive online shopping centre for all its goods and services. The company expects to save US$8 billion in a few years from lower prices and improved supplier productivity. The glassmaker Corning claims that it will be able to reduce its average procurement cost from US$140 to US$10 by using a Web-based catalogue in its science products unit. Business-to-business transactions (B2B; see Chapter 16) transform every step in the conventional business practice from order-taking to delivery. According to some experts, B2B exchanges enable many smaller companies to become part of large networks, which was previously impossible.

Knowledge management, including knowledge-sharing (see Chapter 19), is becoming another important condition for productivity improvement. For example, sharing knowledge is one of the three business processes for which the General Electric CEO Jack Welch takes personal responsibility (the other two are allocating resources and developing people). At Shell, employee teams meet weekly to consider ideas emailed to them by others in the company. In 1999, the teams, called game changers, collected 320 ideas. Of the company’s top five new business initiatives in 1999, four came from the collaborative work of teams. Experience indicates that the best knowledge-sharing happens in the companies that create communities of practice – clusters of people linked by common practical interests or activities and sharing knowledge focused on their practical needs.

The most critical condition for sustainable productivity growth is the quality of employees and managers, and this demands good human resource management practices. This, however, is often ignored in practice. Workers who would like to be more productive are often held back by repressive management practices. The importance of “job fit” is often ignored in hiring and promotion. Research by Anderson Leadership in the United States found that 50 to 85 per cent of employees in client organizations were miscast in their jobs.2

Another condition related to human resource management practices is an enabling and supporting policy environment, and corporate management

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