The Productivity Paradox

Work productivity doesn’t mean working productively.

Published: Wednesday, April 7, 2010 - 06:01

Recently, here in Canada, there has been a lot of talk about the need to increase productivity within Canadian businesses. Canada has consistently lagged behind other developed nations in productivity. According to 2009 data from the Conference Board of Canada, the country gets a “C” grade, and sits in the No. 12 spot among developed countries with a productivity growth rate of negative 0.9 percent. Canada’s productivity performance has been lower than that of top countries for several decades, which has undoubtedly hurt the country’s international competitiveness.

Productivity is a key economic term, measuring the output per unit hour of labor. Economists generally hold productivity to be a measure of how efficiently goods and services are produced. Typically, a country’s productivity is measured by dividing its gross domestic product (GDP) by the number of hours worked. Among the top 17 countries for productivity, the United States ranks as No. 1.

The intense focus on productivity raises interesting questions: How valid is productivity as a measure of business performance; and might a misplaced emphasis on productivity actually be damaging?

There can be no question that a business must apply its resources productively to satisfy customer needs, drive revenue, and enable profitability. Every business is confronted with the same issue: how to successfully apply financial, human, and technological resources to generate a return. Moreover, the successful application of resources must be kept evergreen if the business is to sustain itself. In other words, a business must constantly, and forever, determine and understand the end to which resources are to be applied if sustained business success is to result.

This notion exposes one of the weaknesses inherent in the mantra “improve productivity.” If a business applies its resources to the wrong ends, improving productivity is not likely to help its performance. The “wrong ends” include such things as the wrong markets and customers, the wrong products and services, and the wrong processes and outputs, such as poor product quality. In other words, it’s not about just working harder; it’s about working smarter by making sure the business is focused on doing the right things, and then doing those things in the right way to deliver value to the customer.

Focusing on the right things is a strategic question. It involves asking and answering such questions as were formulated by Peter Drucker:

• What is our business?
• Who are our customers?
• What do they perceive as value?
• What are our products and services?

These are strategic questions. Asking and answering these questions forces a company to think about what it is doing, and the ends to which it will apply resources. Furthermore, these questions can only be asked and answered by top leadership, for it is they who will determine the aim of their business system. Focusing on raising productivity, when the role of top leadership in asking and answering these questions is absent, is akin to polishing the brass on the Titanic.

Advocates of productivity improvement tend not to be discriminating in identifying whose productivity should be improved within an organization. They hold to the belief that if everyone produces more per unit of time, then how can that be a bad thing since we’re more productive, aren’t we? However, such a belief violates a key principle of systems thinking: Optimizing all the parts of a system doesn't necessarily optimize the performance of the whole system.

Focusing indiscriminately on improving productivity within a system may produce the same results as blindly pursuing cost-reduction strategies: The system becomes suboptimized and cost (or productivity) performance actually worsens. An example of this is when organizations choose to improve profitability by reducing costs through downsizing: They usually introduce significant gaps into their business system which erodes its capability to serve and satisfy customers. This in turn depresses revenues which further erodes profitability—the very variable they were trying to improve.

The solutions that are usually proposed for improving a country’s (or a company’s) diminished productivity include better education and training for workers (both those in the current work force and the future work force), and encouraging companies to increase their investment and focus on innovation, research, and development. The problem with both of these solutions is that they are not cheap and the payback is not immediate, if it comes at all. Most important, these solutions start from the assumption that the causes of diminished productivity lie outside a system rather than within it.

In my experience, lessened productivity in companies finds it root in two sources:

1. The presence of nonvalue-adding activity within processes, which make up the business system

2. Dysfunctional connections or pathways between these processes in the system

These causes prevent people from being productive in a system, and unless these causes are addressed, better education and increased focus on innovation will only serve to further “bake in” the waste. Of course, these thoughts are not necessarily new: they are embodied in lean thinking and find their root in Taiichi Ohno’s dictum that the capacity of a system is the sum of “work plus waste” as described in his book Toyota Production System: Beyond Large-Scale Production (Productivity Press, 1988).

To illustrate, consider figure 1 below. The outer circle represents a process and the inner circle (colored green) represents the value-adding activity within the process. The space (colored red) between the inner and outer circle is the nonvalue-adding activity that is performed in the process—work that adds no value to the product or service being produced, but which consumes resources because it must be carried out with the current design of the process.

Figure 1: Value-adding and nonvalue-adding activities

In the example of figure 1, the company which “institutes leadership”—W. Edwards Deming’s term, articulated in his 14 Points for Management in Out of the Crisis (MIT Press, 2000)—to reduce or eliminate the nonvalue-adding activity, will literally overnight begin to find itself more productive since more of the right things are being done in the right way at the process level. A pathway for accomplishing this is, of course, through contributive kaizen, where improvements to reduce or eliminate nonvalue-adding waste in a process are made from the experience and common sense of those who do the work (the employees). Through kaizen contribution, the red area shown in figure 1 can be shrunk and the process brought closer to pure value adding.

A second common productivity block is shown in figure 2 below. This highlights the nonproductive work that results from dysfunction in the connections or pathways between processes in a system.

Figure 2: Nonvalue-adding activity resulting from dysfunctional connection between two processes

In figure 2, each process still maintains the common ratio of nonvalue-adding activity to value-adding activity, but has the additional waste (the overlap area between the two processes) that results from a dysfunctional connection or pathway through which value does not flow readily. In this case, diminished productivity usually results from things not being done right the first time in the upstream process, causing losses which are experienced in the downstream process.

The causes of the productivity losses shown in figure 2 include the following:

• No appreciation of the difference between function (or department) and process within the organization. This results in process being subordinated to the primacy of function or department, rather than the other way around.

• No appreciation of what Joseph M. Juran referred to in Juran on Quality by Design (Simon and Schuster, 1992) as the “triple role” (TRIPROL) of each process within a system. The TRIPROL concept means that any process can be considered as a supplier, processor, or customer within the flow and that effective flow (and improved productivity) requires a clear understanding of how these roles are to be carried out by each process within the flow.

Reducing or eliminating the losses shown in figure 2 requires the company to institute leadership directed at mobilizing resources to identify and remove the causes. The multiprocess nature of the waste shown in figure 2 will require the use of cross-functional improvement teams with resources drawn from the involved processes.

The implications of both figures 1 and 2 are that most systems are not designed to allow or support high productivity. The wastes shown in figures 1 and 2 rob a system of its productivity and unless the causes of the waste are addressed, unproductive work will remain “designed-in” to the system.

Companies should design their process systems with the customer in mind, allowing the customer to easily pull out of the company the value that is needed. Working productively is not just about working harder—it’s about making sure that the right things are being provided in the right way at the right time. Working productively is an evergreen concept—leadership must continuously ensure that their process system is aimed in the right direction to remain connected to the real needs in the marketplace.

About The Author

Stewart Anderson

Stewart Anderson is a partner with Anderson Lyall Consulting Group, a Toronto-based consulting and advisory firm that helps firms develop their competitive advantage. Anderson’s background and expertise includes competitive strategy and value chain engineering. He has advised companies in the manufacturing, service, and contract manufacturing industries. Anderson is completing his bachelor of arts in economics and he is a certified trainer in lean manufacturing principles and techniques.