Raising Productivity

When we speak of “productivity”, we should first clarify what we mean by that term. Economic agents, such as firms, take factor inputs (labour, capital, and raw materials) and convert them into useful products. This relation between factor inputs and output is defined by a production function:

Y = A F(K,N),

where Y is output (real GNP), K is the stock of physical capital (plant and equipment), and N is labor (the number and hours of people working). The letter A measures what we call productivity. A higher value of A means that the same inputs lead to more output, which is a good definition of productivity. More precisely, it is total factor productivity, as distinguished from average labour productivity, which is, Y/N.

Productivity is the foundation of economic growth, whether it be at the firm level or the level of a national economy. Labour productivity is n indicator of economic growth, competitiveness, and living standards within an economy. Labour productivity is usually measured as the ratio between a volume measure of output (output or value added) and a measure of input use (the total number of hours worked or total employment).

Drivers of productivity include the amount of investment in physical capital (machinery, equipment, facilities, etc.), innovation (new technologies, methods, etc.), education and worker skills, strategic choices to leverage new opportunities, and cooperation and competition as incentives to raise productivity.

Firms desiring to raise productivity levels can look to manipulate these key drivers as appropriate. Short-term gains in productivity can be had by moving to leverage worker knowledge and experience to drive innovations in work methods and processes, employing new technologies (especially automation), changing the organization structure to improve core functions and supply relationships, and altering organizational dynamics to promote cooperation between various functions.

This last is often overlooked as a source of productivity improvements. Too often in business, we focus on competition, when perhaps cooperation offers greater rewards. For example, some firms use competition among  a large number of suppliers to try to keep input costs low, when a more cooperative approach with a smaller supply base might actually reduce total costs more by improving quality and delivery performance.

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