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One of the biggest mistakes made during a period of economic boom is to assume productivity levels are high. But this may be a serious error.
Productivity is the measure of how efficient the production process is, irrespective of the stand-alone quality or quantity of output or inputs. This means that productivity will rise when inputs are optimized to achieve greater levels of output.
Achieving productivity gains is therefore not equivalent to working longer; ‘throwing manpower at a problem’ will just result in a greater amount of inputs for every output and reduce productivity. Nor does greater input necessarily correlate with higher volumes of outputs – as inputs could be increasing at the same or greater pace.
Let’s say the same measure of iron, coal and labor inputs equals one steel unit. The only way to realize a productivity gain is to reduce one or more of the inputs to achieve the same end result. Alternatively, you can keep the same measure of inputs and increase the number of units produced. Just bear in mind that if you add one measure more of labor input, you would need to increase unit yield by 40 percent before making a productivity gain.
Increased productivity is crucial
You already understand the importance of increased productivity – the challenge is how to achieve these gains. Process and efficiency – not technology – is everything when it comes to improving productivity.
Productivity growth is important to a firm because more real income (or its relative purchasing power) means the company can meet its obligations to customers, suppliers, workers, shareholders and governments (taxes and regulation) and remain competitive or even improve its competitiveness for labor, capital and raw materials in the marketplace.
Many companies have formal programs for improving productivity. Companies constantly look for ways to improve quality, reduce downtime and increase inputs of labor, materials, energy and purchased services.
Simple changes to operating methods or processes can increase productivity – think Henry Ford’s assembly line. However, the biggest gains often come from adopting new technologies or concepts, which requires capital expenditures for new equipment, training, devices or software. This means resources need to be dedicated to innovation, a responsibility which is best linked to an executive.
Previously, operations viewed machine as an extension of man. However, today’s operating models need to consider that man is the biggest factor in improving the output of machine. Digital technology is an extension of the machine and only when all three (man, machine and technology) are working in concert can an organization realize a productivity gain.
Productivity gains are rarer than you think
The most productive 20 percent of companies in each industry are driving productivity growth – more than doubling productivity through digital transition, according to the World Economic Forum. However, the rest see average productivity fall.
Further, OECD (Organisation for Economic Co-operation and Development) analysis shows that uneven uptake of digital technology is an important source of productivity slowdown. The world’s most advanced firms are not slowing in productivity gains; rather, there is a widening performance gap between the most productive and least productive firms.
Top firms are pushing out the productivity frontier, while laggard firms stagnate or decline in productivity due to limited capabilities, or a lack of incentive, to adopt best practices. Digitization may be contributing to this divergence.
The threat of zombification
The incentive to adopt new technologies is often related to competitive pressures. Any organization that is falling behind the competition can mask its productivity issues if financials (a lagging indicator) appear healthy (i.e. low net debt). This leads to what OECD defines as “zombie firms”– non-viable companies that would typically exit or be forced to restructure in a competitive market.
How can you tell if you work for a zombie firm? The classic characteristic is being more than 10 years old and unable to cover interest payments with their profits for three years running. In a normal economic cycle, your business would have already defaulted. Instead low interest rates and capital-raising initiatives have kept the firm afloat. British facilities management and construction company Carillion is a prime example.
Zombie firms can be successfully recovered using digital transformation, however, if you can transition or adapt your people and process to new technology effectively. But true success will come by focusing on productivity, not production.
Whether your business is seeking to escape the zombie trap or to take more market share, increasing productivity must be a priority. Research and anecdotal evidence show that technology is extremely effective at helping to achieve those gains.
Those businesses who fail to increase process efficiency with the assistance of technology will instead find themselves lagging behind their more agile competitors.
Learn more about the role of technology, digital transformation and how to avoid becoming a zombie firm in our free eBook, The Complete Executives’ Guide to Digitising Operations.
Adrian has been with Hexagon PPM since 2007 and currently serves as the Vice President for Owner Operator Business Development for EMIA. From 2007 to 2018 he worked in Global Business Development for Information Management solutions. He is based in Sandnes, Norway.