(introduction...)

Productivity improvement is not just doing things better: more importantly, it is doing the right things better. This chapter aims to identify the major factors, or “right things”, which should be the main concerns of productivity programme managers. Before discussing what to tackle in a productivity improvement programme, it is necessary to review the factors affecting productivity.

The production process is a complex, adaptive, on-going social system. The inter-relationships between labour, capital and the socio-organisational environment are important in the way they are balanced and co-ordinated into an integrated whole. Productivity improvement depends upon how successfully we identify and use the main factors of the socio-production system. It is important, in connection with this, to distinguish three main productivity factor groups:

- job-related;
- resource-related;
- environment-related.

Since our main concern here is the economic analysis of managerial factors rather than productivity factors as such, we suggest a classification which will help managers distinguish those factors which they can control. In this way, the number of factors to be analysed and influenced decreases dramatically. The classification suggested here is based on a paper by Mukherjee and Singh.¹

There are two major categories of productivity factor:

· External (not controllable).
· Internal (controllable).

The external factors are those which are beyond the control of the individual enterprise and the internal factors are those within its control.

To deal with all these factors we require different institutions, people, techniques and methods. For example, any performance improvement drive which plans to deal with external factors affecting the management of the enterprise must take such factors into consideration during the planning phase of the programme, and try to influence them by joining forces with other interested parties.

Thus it can be clearly seen that the first step towards improving productivity is to identify problem areas within these factor groups. The next step is to distinguish those factors which are controllable.

Factors which are external and not controllable for one institution are often internal to another. Factors external to an enterprise, for example, could be internal to governments, national or regional institutions, associations and pressure groups. Governments can improve tax policy, develop better labour legislation, provide better access to natural resources, improve social infrastructure, price policy, and so on, but individual organisations cannot.

Factors external to an enterprise are of interest to that enterprise because an understanding of them can motivate certain actions which might change an enterprise's behaviour and its productivity in the long run. We suggest the following integrated scheme of factors constituting a major source of productivity improvement.

Figure 2.1. An integrated model of enterprise productivity factors

Source: Adapted from S. K. Mukherjee and D. Singh, 1975, p. 93.

(introduction...)

Since some internal factors are more easily changed than others, it is useful to classify them into two groups: hard (not easily changed) and soft (easily changed). The hard factors include products, technology, equipment and raw materials, while the soft factors include the labour force, organisational systems and procedures, management styles and work methods. This classification helps us build priorities - which factors can easily be dealt with and which factors require stronger financial and organisational interventions. A brief description of some key aspects of each internal factor follows.

Hard factors

Product

Product factor productivity means the extent to which the product meets output requirements. “Use value” is the amount that the customer is prepared to pay for a product of given quality. “Use value” can be improved by better design and specifications. Many companies around the world fight a constant battle to incorporate technical excellence into marketable products. Breaking down the walls between research, marketing and sales has become a major productivity factor. For example, leading Japanese companies continually redesign products which are on the market. Product “place value”, “time value” and “price value” refer to the availability of the product at the right place, at the right time and at a reasonable price. The “volume factor” in particular gives us a better notion of the economies of scale through increased volume of production. Finally, the cost-benefit factor can be enhanced by increasing the benefit for the same cost or by reducing the cost for the same benefit.

Plant and equipment

These play a central role in a productivity improvement programme through:

- good maintenance;
- operating the plant and equipment in optimum process conditions;
- increasing plant capacity by eliminating bottle-necks and by corrective measures;
- reducing idle time and making more effective use of available machines and plant capacities.

Plant and equipment productivity can be improved by attention to utilisation, age, modernisation, cost, investment, internally produced equipment, capacity maintenance and expansion, inventory control, production planning and control, and so on.

Technology

Technological innovation constitutes an important source of higher productivity. Increased volume of goods and services, quality improvement, new marketing methods, etc., can be achieved through increased automation and information technology. Automation can also improve materials handling, storage, communication systems and quality control.

During the past 25 years, considerable productivity increases have been realised through the use of automation and current developments in information technology suggest great improvements to come. Significant examples of the application of this technology are the development of automatic downtime recording systems and automatic lubrication systems which have reduced the idle time of men and machines, and reduced overtime expenditure. New technology is normally introduced as a result of such productivity improvement programmes as fighting obsolescence, process design, R & D and the training of scientists and engineers.

Materials and energy

Even small efforts to reduce materials and energy consumption can bring remarkable results. These vital sources of productivity include raw materials and indirect materials (process chemicals, lubricants, fuels, spare parts, engineering materials, packing materials). Important aspects of materials productivity include:

- material yield: output of useful product or energy per unit of material used. This is dependent upon selection of the right material, its quality, process control and control of rejects;

- use and control of wastage and scraping;

- upgrading of materials by initial processing to improve utilisation in the main process;

- use of lower grade and cheaper materials;

- import substitution;

- improving inventory turnover ratio to release funds tied up in inventories for more productive uses;

- improved inventory management to avoid holding excessive stock;

- developing sources of supply.

Soft factors

People

As the principal resource and the central factor in productivity improvement drives, the people in an organisation all have a role to play - as workers, engineers, managers, entrepreneurs and trade union members. Each role has two aspects: application and effectiveness.

Application is the degree to which people apply themselves to their work. People differ not only in their ability but also in their will to work. This is explained by a law of behaviour: motivation decreases if it is either satisfied or blocked from satisfaction. For example, workers may do their jobs without working hard (no motivation), but even if they did work to their full capacity they would not be satisfied (motivation is blocked from satisfaction).

In order to stimulate and maintain motivation, the following few factors should be considered:

A set of values conducive to higher productivity should be developed in order to bring about changes in the attitude of managers, engineers and workers.

Motivation is basic to all human behaviour and thus to efforts in productivity improvement. Material needs are still predominant, but this does not mean that non-financial incentives are not effective or have no place. Workers' success in increasing productivity should be reinforced immediately by rewards, not only in the form of money, but also by improving recognition, involvement and learning opportunities, and, finally, by the complete elimination of negative rewards.

If management can plan and execute effective incentive schemes, then the result is invariably a significant improvement in productivity. Wage incentives must always be related to the amount of change accomplished.

It is also possible to improve productivity by eliciting co-operation and participation from workers. Labour participation in goal-setting, for example, has been quite successful in many countries. Human relations can be further improved by reducing the complexity of communications procedures and by minimising conflicts. Labour productivity can be tapped only if management encourages workers to apply their creative talents by taking a special interest in their problems and by promoting a favourable social climate.

Standard of performance plays an important role in productivity. It should be set at a high but realisable level. Management expectations of high performance need to be considerably raised in many cases. However, standards should always be achievable to maintain confidence and the “will to do”.

The “will to do” is affected by job satisfaction which managers can enhance by making jobs interesting, challenging and bigger, more worth while and self-contained. Job enrichment and job enlargement can influence job satisfaction and motivate higher productivity.

The second factor in the role played by the people involved in a productivity drive is effectiveness. Effectiveness is the extent to which the application of human effort brings the desired results in output and quality. It is a function of method, technique, personal skill, knowledge, attitude and aptitude - the “ability to do”. The ability to do a productive job can be improved through training and development, job rotation and placements, systematic job progression (promotion), and career planning.

To summarise, the following key approaches, methods and techniques can be used to improve labour productivity: wages and salaries; training and education; social security - pensions and health plans; rewards; incentive plans; participation or co-determination; contract negotiations; attitudes to work, to supervision and to change; motivation to higher productivity; co-operation; organisation development; improved communications; suggestion systems; career planning; attendance; turnover; job security.

Organisation and systems

The well-known principles of good organisation such as unity of command, delegation and span of control, are intended to provide for specialisation and division of work and co-ordination within the enterprise. An organisation needs to be dynamically operated and led towards objectives and must be maintained, serviced and reorganised from time to time to meet new objectives.

One reason for the low productivity of many organisations is their rigidity, They fail to anticipate and respond to market changes, ignore new capacities in the labour force, new developments in technology and other external (environmental) factors. Rigid organisations lack good horizontal communication. This slows down decision-making and inhibits delegation of authority close to the point of action, encouraging inefficiency and bureaucracy.

Compartmentation according to professional groups or functions also inhibits change. For example, the decision-making steps may have been designed for a particular existing technology, for a definite product or service mix. Things have now changed, but procedures have survived because managers want to minimise change.

No system, however well designed, is efficient in all situations. Dynamism and flexibility should be incorporated into the system design in order to maximise productivity.

Work methods

Improved work methods, especially in developing economies where capital is scarce, technology intermediate and labour-intensive methods dominant, constitute the most promising area for productivity improvement. Work method techniques aim to make manual work more productive by improving the ways in which the work is done, the human movements performed, the tools used, the workplace laid out, the materials handled and the machines employed. Work methods are improved by systematically analysing present methods, eliminating unnecessary work and performing the necessary work more effectively with less effort, time and cost. Work study, industrial engineering and training are the main tools of improving work methods.

Management styles

There is a view that in some countries management is responsible for 75 per cent of productivity gains, because management is responsible for the effective use of all resources under enterprise control. One productivity expert and consultant to many leading Japanese companies believes that as much as 85 per cent of the quality and productivity problems in United States industry are common problems of the system that lie within the province of management, not the individual worker, to correct.² There is no perfect management style. Effectiveness depends upon when, where, how and to whom a manager applies a style. Management styles and practices influence organisational design, personnel policies, job design, operational planning and control, maintenance and purchasing policies, capital cost (working and fixed capital), sources of capital, budgeting systems and cost control techniques.

Figure 2.2 summarises the main productivity factors internal to an enterprise.

Figure 2.2. Model of internal productivity factors

Source: Adapted from S. K. Mukherjee and D. Singh, 1975, p. 93.

This model serves as a checklist for identifying the most promising productivity areas for management analysis planning and intervention.

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External factors include government policies and institutional mechanisms; political, social and economic conditions; the business climate; the availability of finance, power, water, transport, communications and raw materials. They affect individual enterprise productivity, but the organisations concerned cannot actively control them.

These factors should be understood and .taken into consideration by management when planning and implementing productivity programmes. What is outside the control of individual enterprises in the short term might be controllable at higher levels of society's structures and institutions. Bearing in mind all the social, political, economic and organisational links between consumers, workers, managers, government, and different pressure groups, and between institutions and organisational infrastructure, it is useful to discuss here the main macro-productivity factors which speed or hinder productivity improvement processes. Because productivity largely determines real income, inflation, competitiveness and people's well-being, policy-makers try hard to discover the real reasons for productivity growth and decline.

A general classification of the three main groups of macro-productivity factors is shown in figure 2.3.

Figure 2.3. Main macro-productivity factors

Structural adjustments

Structural changes in society often influence national and enterprise productivity independently of enterprise management. However, in the long term this interaction is two-way. Just as structural changes affect productivity, productivity changes also modify structure. Such changes are not only the result, but also a cause, of economic and social development.

Understanding these changes helps improve government policy, makes enterprise planning more realistic and purpose-oriented and helps develop the economic and social infrastructure. The most important structural changes are economic, and social and demographic.

Economic changes

The most important economic changes are in employment patterns and the composition of capital, technology, scale and competitiveness.

Employment shifts from agriculture to manufacturing industry have caused an economy-wide increase in productivity that has surpassed productivity growth within any one sector in developed countries. The number of people employed in agriculture, forestry and fisheries in these countries has now become so small that this historical source of productivity growth has very limited potential as a source of future growth. However, in many developing countries these shifts will continue to be a source of high growth of productivity in future, since more people will move from the low-productivity agricultural sector into manufacturing.

A second historical structural change is the move from manufacturing into service industries. These include wholesale and retail trade, finance, insurance, real estate, personal and business services, and a number of others. Even in Japan, with its heavy emphasis on manufacturing, employment and consumer spending have shifted to the service sector, which now accounts for more than one-half of each. In the United States nearly three-quarters of all non-farm employees work in services. The effect on productivity of this second major wave of structural change is controversial, since productivity in the service sector has tended to climb more slowly than productivity in general. However, it has held down the price of labour relative to the rapidly escalating price of capital and raw materials. As a result, in many countries wages declined absolutely during the late 1970s. This stimulated the shift of capital and energy away from equipment into investment in the labour force. Thus, the productivity of other production factors was enhanced at the expense of labour productivity.

Variations in the composition of capital, its relative intensity, age and kind also affect productivity. The growth of capital depends on saving and investment. The age of the capital stock also influences the diffusion of innovations to the extent that technological change is embodied in new investment goods. However, above average capital input per worker does not necessarily increase output per worker. Much of the capital investment that did take place in the 1970s, for example, did little to raise labour productivity. In Canada, Japan and the United States capital intensity differs significantly from relative productivity performance. Some manufacturing industries achieve high productivity with relatively low capital intensity, barely exceeding that of commerce.

A wide discrepancy between productivity and capital intensity often indicates large unused capacities in the economy, over the conventionally measured capacity, which could be tapped by better management.

The structural impact of R & D and technology is another important factor in productivity improvement at the macro-level. The management of R & D and technology and the implementation of new methods, techniques, products and processes can significantly influence productivity and at the same time change structure: examples are the introduction of assembly lines, computers and microprocessors, and modern communications equipment. Foreign investment is often an important factor in the introduction of new technology.

However, indiscriminate imports of technology can injure countries. There is a growing awareness of the need for indigenous technological competence and research within the countries and industries concerned.

Economy of scale or scale of production is also closely related to productivity and the industrial structure. Small and medium-sized enterprises can be fully competitive if they specialise and have long production runs. Some developing countries such as India, Indonesia, the Philippines and Thailand have deliberately promoted decentralised cottage, rural and other small-scale industries in order to reduce unemployment and poverty, to curb urban migration and to help traditional artisans. Japan encourages small-scale industry to introduce and adapt important technology and improve economic viability. In this sector, capital productivity can be high and innovative. Even reverse engineering- and technology-transfer from the small to the large-scale sector can be effective.

Industrial competitiveness affects the productivity of both the economy and individual enterprises. The European Management Forum defines industrial competitiveness as “the immediate and future ability of, and opportunities for, entrepreneurs to design, produce and market goods within their respective environments whose price and non-price qualities form a more attractive package than those of competitors abroad or in domestic markets”.³

Ten major factors affect competitiveness:

· The dynamism of the economy measured by criteria such as growth rates, monetary strength, industrial production and per capita performance.

· Industrial efficacy, which involves direct and indirect employee costs, per capita output, employee motivation, turnover and absenteeism.

· The dynamics of the market, when efforts to improve competitiveness are increased and better directed to more intensive market forces.

· Financial dynamism, that is the strength and importance of the commercial banking sector, stock and bond markets and their ability to provide capital.

· Human resources, that is the dynamism of the population and the labour force, employment, unemployment, executive quality and motivation.

· The role of the State in fiscal policies and other regulations.

· Resources and infrastructure (transport and communications facilities), domestic energy and raw materials sources.

· Outward orientation, the will to promote trade actively, buying and selling goods, service-related investments or any other form of international exchange.

· Innovative forward orientation which emphasises national research and development efforts, corporate and government attitudes to exploiting new ideas, products and production processes.

· Socio-political consensus and stability, the degree to which strategies and policies reflect a society's aspirations.

Demographic and social changes

Structural changes in the labour force are both demographic and social. The high birth rates and low mortality rates of the post-war period sent world population soaring from 2.5 thousand million in 1950 to 4.4 thousand million in 1980. By the mid-1960s, the post-war baby boom was beginning to reach the job market. At the same time, the number of women entering the labour force was steadily rising. In addition to this, workers in the industrialised countries have increasingly had to compete not only with each other but also with labour from the developing countries. Productivity and wages in the developing countries tend to be lower and the total cost of production is competitive. Two different and somewhat contradictory pressures influence productivity. On the one hand, producers in more developed countries must try to increase productivity in order to hold down production costs; on the other hand, the restraining influence of competition on wages encourages producers to use more labour, rather than investing heavily in capital equipment. This tends to reduce the growth of productivity. These demographic changes have an impact on jobseekers, on worker experience and useful work skills, and on the demand for goods and services. Geographic shifts of the population will probably also affect productivity as population density varies from region to region.

Among the social factors, special attention should be paid to the increasing percentage of women in the labour force. Women's participation in the labour force is still well below that of men but it is increasing. A change in the ratio of working men to women affects earnings. Men currently have a higher average income than women. Much of this difference has been attributed to education, full or part-time work and length of work experience. As these facts change, so, most likely, will productivity and the income structure. The retirement age may drift upward, as health and longevity improve. Economic pressures may also persuade many older people to stay in the labour force.

All aspects of education affect productivity. Over the past few decades, educational spending has grown significantly. By the end of the 1970s educational expenses in Canada, for example, represented 8 per cent of GNP, and government spending on education accounted for 22 per cent of total government expenditure.⁴

Cultural values and attitudes can promote or hinder productivity. For example, the Chinese are known for their belief in hard work, their entrepreneurial spirit and their propensity to save. The Japanese are famous for their ability to seek, accept, assimilate and adapt to changing needs and circumstances, for their team spirit and discipline. In some countries, greater respect is traditionally given to brain power than to manual work; in others, the elderly are valued, not merely tolerated.

It is important to study and understand these beliefs, attitudes and traditions, all of which change with new technology and economic development. The countries that have become development-oriented are under increasing pressure to upgrade their development policy and institutionalise social change through education and the media.

Natural resources

The most important natural resources are manpower, land, energy and raw materials. A nation's ability to generate, mobilise and use these resources is crucially important to productivity improvement and is, unfortunately, often overlooked.

Manpower

People are the most precious natural resource. Several developed countries such as Japan and Switzerland, which lack land, energy and mineral resources, have found that their single most important source of growth is people, their skills, education and training, attitude and motivation, and development. Investment in these factors improves the quality of management and of the labour force. Such countries take great care to invest in educating and training their manpower. Countries with higher per capita GNP generally have a better trained and educated population. Attention to health and leisure has resulted in a tremendous saving due to less illness, longer life expectancy and increased vitality. The general quality of labour has improved with improving health.

Land

Land requires proper management, development and a national policy. For example, industrial expansion and intensive farming have become aggressive consumers of the most fundamental material input, land. Pressure to increase farm productivity per worker and per hectare can accelerate soil erosion. Such land loss can often be masked by using more fertiliser, but at increasingly high cost and at risk of environmental pollution. The rising cost of energy-intensive agricultural input, the limited availability of new land, and the urgent need for more careful husbandry to prevent serious erosion all argue for more prudent use of available land.

Energy

Energy is the next important resource. The drastic change in energy prices during the 1970s was the single most important cause of declining productivity and economic growth. Much of the capital investment that took place during that decade did little to raise labour productivity since it was directed towards retooling the economies to adjust to higher energy prices.

As the price of a barrel of oil rose from US$3 in 1973 to about US$36 in 1980, before dropping back in 1985, a considerable amount of capital stock became obsolete and urgently needed to be replaced or used less intensively. As producers cut back on energy use and capital investment, their only recourse was to use more labour. Thus, demand for labour tends to follow energy prices upwards. However, though more hours are worked, total output may not rise commensurately.

Thus, the supply of energy influences capital/labour combinations and increases or decreases productivity. This fact should be learned, understood and taken into consideration by industrial and enterprise management.

Raw materials

Raw materials are also an important productivity factor. Raw materials prices are subject to the same kind of fluctuations as oil prices, though in less extreme forms. As the richest and most accessible sources of minerals are mined out, the need to exploit lower grades of ore in more difficult locations has called for more intensive use of capital and labour. This reduces productivity growth in mines despite increasing automation in many countries. The exploitation of increasingly marginal mines decreases productivity further.

As the cost of materials rises, the economic rationale for repair, re-use and recycling becomes more compelling since, though productivity in the strictly conventional sense is lower for such work, it is much less expensive for society as a whole than buying new materials.

Government and infrastructure

Government policies, strategies and programmes greatly affect productivity through:

- practices of government agencies;
- regulations (such as price control, income and wage policies);
- transport and communications;
- power;
- fiscal measures and incentives (interest rates, tariffs, taxes).

Many structural changes that affect productivity result from laws, regulations or institutional practices. In addition, the whole area of government productivity itself is extremely important because it enables governments to render more services with the same resources or to provide the same services at lower cost.

We are not going to discuss the government's role in productivity in great detail at this stage, since it is covered in the last chapter. It is sufficient to mention the significant part it plays in economic development.

In this chapter we have considered the major internal and external productivity factors or areas for improvement and we would like to stress again that the internal factors are those under the full control of enterprise management. However, to design good policies, plans or programmes for productivity improvement, all the external factors should be analysed, understood and considered. The best way to do this is to introduce sound productivity measurement systems at all levels of society. This will be discussed in the next chapter.

Notes

¹ S. K. Mukherjee and Duleep Singh: Towards high productivity, Report of a seminar on higher productivity in public sector production enterprises (New Delhi, Bureau of Public Enterprises, 1975), pp. 91-103.

² Harold E. Dolenga: “Productivity: Problems, paradigms and progress”, in SAM Advanced Management Journal (New York, Society for the Advancement of Management), Autumn 1985, pp. 39-45.

³ Robin Pauley: “Sliding down the scale of industrial efficacy”, in Financial Times (London), 10 Dec. 1984.

⁴ Imre Bernolak: “The whole and its parts: Micro and macro productivity research”, in Dimensions of productivity research (Houston, Texas, The American Productivity Center, 1980), Vol. II, pp. 755-764.