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.