Productivity is the value of output produced by a unit of labour or capital. Using the same amount of labour or capital to produce higher value output, or producing the same value of output with less labour or capital, is what is meant by productivity improvement.
Productivity is at the heart of competitiveness. If a firm is unproductive and does not use its natural, physical, human, and capital resources wisely, it is not likely to be competitive within its industry.
Productivity can be improved by making innovations which reduce resource consumption and its associated costs. Producing the same value of output with fewer resources (less labour, less capital, etc.) reduces a firm’s costs and improves its productivity. Firms may reduce resource consumption by developing or using new production methods or technologies, developing new linkages with other firms, or choosing to perform different activities in their value chains.
On the other hand, productivity can also be improved by making innovations which increase the value of the output which is being produced. Using the same resources to produce a higher value output that commands a higher price is another form of productivity improvement. Firms can increase the value of their products and services through addressing under-served or unmet needs, improving their quality and reliability, and developing new technologies and capabilities in their products and services.
Firms have a choice in how they choose to improve productivity. Whichever pathway they choose, they must have the capability and capacity to innovate. Innovation is what underpins and drives productivity. If there is no innovation, there can be no improvement in productivity.