GCC Sutra #3 – The Productivity Checkmate

Why measure Productivity?

From a GCC standpoint, determining productivity metrics post the 5–8-year inception period presents a persistent challenge. The approach to quantifying productivity varies significantly across organizations, influenced by factors such as size, culture, and competency. Despite exploring various frameworks like Balanced Scorecards, KPIs/KPAs, MBOs, and now OKRs, there remains ambiguity in identifying measures that accurately reflect true productivity. The prevailing view suggests that a universal standard is impractical. A notable contention among professionals is the rationale behind measuring productivity at regional centers when headquarters may not do so. In my forthcoming articles, I will therefore delve into this intricate debate with a focus on enhancing productivity rather than the metrics themselves.

Zooming out from a country's viewpoint, Productivity growth is fundamental to economic prosperity, driving output efficiency and elevating living standards. However, a global downturn in productivity, especially in developed nations, poses a significant challenge. In an era marked by demographic aging, energy transitions, supply chain transformations, and economic pressures, enhancing productivity is crucial. While some have thrived with robust labour productivity over the last quarter-century, others have encountered stagnation. Strategic investments and embracing digital innovation are key to bolstering productivity across all economies, amidst various demographic, regional, and technological changes.

Macro Environment:

From 2012 to 2022, global economic growth decelerated compared to the previous two decades, impacted not only by the COVID-19 pandemic but also by enduring structural challenges such as declining birth rates and aging populations. The annual growth rate of the global workforce dwindled from 2.5 percent in 1972–82 to a mere 0.8 percent in 2012–22, primarily due to aging demographics. This slowdown in workforce expansion is evident in many large countries where the workforce size is already on the decline. Productivity, the ratio of output to input, was the cornerstone of economic expansion from 1992 to 2022. Yet, alongside the deceleration in employment growth, productivity growth has also waned, presenting a conundrum for economists and policymakers alike.

The slowdown story:?

The global productivity slowdown can be attributed to several factors. In advanced economies, growth has been consistent but modest, while emerging economies show a mixed picture, with some achieving notable gains in productivity. The decline in the global productivity growth rate is concerning.

To address this, we must consider the two primary drivers of labor productivity: capital per worker and human capital. Investment in both tangible and intangible assets, such as technology and infrastructure, enhances worker productivity. For instance, office workers are more efficient with laptops, and construction workers are more effective with cranes.

Human capital, encompassing education, skills, and experience, is equally crucial. Enhancing worker education and skillsets can lead to significant improvements in productivity.

Reversing the slowdown requires strategic investments in both capital and human resources. By modernizing infrastructure, adopting advanced technologies, and investing in education and training programs, we can stimulate productivity growth across various economies.

The recent productivity slump in advanced economies can be traced to two key factors. Firstly, the manufacturing sector, once a bastion of productivity growth through technological innovation and offshoring, has seen its progress stagnate. The era of rapid gains has waned.

Secondly, there’s been a sustained low investment in tangible capital such as machinery, equipment, and buildings across various industries. This shortfall in investment hampers productivity growth since capital per worker is essential for enhancing efficiency and spurring innovation.

Addressing these issues is critical for reviving productivity. This could involve incentivizing investments in capital assets and fostering an environment that encourages innovation and technological advancement within the manufacturing sector.

To enhance productivity growth, economies must adapt to shifting macroeconomic conditions, such as inflation and interest rate hikes, by fostering investment and innovation. Governments can aid this process by creating favourable regulatory frameworks that balance competition with entrepreneurship.

Fast-lane emerging economies:?

While advanced economies face challenges with productivity growth, emerging economies like China and India have achieved significant progress, lifting over a billion people out of poverty. Other high-productivity nations such as Poland, Romania, Estonia, Lithuania, Vietnam, Bangladesh, Ethiopia, and Rwanda share similar development strategies that have contributed to their success. These strategies include:

• Increasing capital investment.
• Leveraging investments to foster effective urbanization.
• Enhancing productivity in the service and construction sectors.
• Advancing manufacturing sophistication and global integration.
• Creating a conducive business environment.

These commonalities have been instrumental in their remarkable productivity advancements over the past quarter-century.

Organizational Environment:?

Organizations today are confronted with three primary challenges that underscore the urgency of boosting productivity:

1.??? Lackluster growth expectations: Organizations are divided between prospects of growth and recession in the near future.

2.??? Intense competition for talent: According to the WEF job report, 60% of organizations worldwide experience skill shortages and recruitment difficulties.

3.??? Costly capital and labour: The dual burden of an expensive working capital regime and rising wages across many regions.

In times of economic downturn, productivity becomes even more critical to maintain competitiveness, as disparities between industry leaders and others tend to widen. However, traditional productivity methods like outsourcing or automation are insufficient on their own, as they don’t fully address the need for business model simplification and product complexity reduction.

The most successful organizations have achieved transformative productivity improvements by implementing comprehensive changes that extend beyond mere cost-cutting. They utilize multiple levers to unlock value and require collaborative efforts from cross-functional teams. These organizations instill new mindsets, behaviours, and tools throughout their structure to provide strategic clarity, drive growth, and foster organizational health.

General AI’s influence on productivity could contribute trillions to the global economy, with significant value projected in customer operations, marketing and sales, software engineering, and R&D.

Productivity Checkmate:

Recent geopolitical disruptions, shifts in the global economy, AI advancements, new tech platforms, and energy transitions signal the dawn of a new era, keeping a spectrum of economic outcomes open. Business leaders can navigate present uncertainties and foster growth and profitability by leveraging McKinsey’s ‘three-sided productivity opportunity’, which offers a strategic framework for future investments.

Here are?three ways?business leaders can unlock their productivity potential:

Modernize operating models.?Leaders who embrace resource reallocation and a technology-forward culture improve their chances of achieving operational goals.

Multiply the impact of frontline production and delivery.?The front line is where the battle for efficiency and value creation is won or lost. Organizations that deliver sustained productivity increases pay careful attention to their balance sheets and maximize their return on talent investment.

Accelerate top-line growth by raising the value of existing and new market offerings.?Successful innovation is essential to driving the value of existing and new offerings. Innovative growers put growth at the centre of strategic and financial discussions and commit significant financial resources to innovation.

Driving productivity transformation:

Organizations that focus on operating with excellence, optimizing capital leverage, & accelerating growth have the greatest chance of delivering transformative increases in productivity.

1. Make productivity a top-down priority

Productivity transformation should be among the company’s top three priorities. In my experience, the most effective CEOs pursue productivity improvements with extraordinary pace and cadence. They treat pace as a strategy, engage in productivity discussions throughout the organization, have the full support of the board, and inspire teams and individuals.

2. Raise the organization’s aspiration to capture the full potential

Many CEOs are confident they are improving productivity, but their incremental efforts lack the materiality needed to change their earnings trajectory and one-off efforts seldom yield a step-change improvement in efficiency. Only by having a lofty aspiration that cuts across organizational silos can you activate these multipliers and maximize productivity. Lasting productivity gains that tap the organization’s full potential (both in costs and revenues) require a transformative approach vs incremental improvement.

3. Use radical transparency to achieve change at a granular level

The most successful CEOs and top teams take an integrated approach to value creation, with a full suite of initiatives and an emphasis on radical transparency to track progress toward full potential. Successful organizations encourage cross-functional transparency from the C-suite to the front line. Detailed, continuous benchmarking informs organizational targets. Teams are jointly accountable for granular targets, quickly identify challenges, and adjust accordingly to capture value at pace. One of the most effective modern-day methodologies to drive strategy execution across organizations has been OKRs. (stay tuned for an upcoming article on this)

Forward-Looking:

The fourth industrial revolution offers a significant advantage over the third: it doesn’t necessitate substantial capital expenditure. Instead of replacing traditional equipment with costly automated machines, companies can now integrate existing machinery into Industry 4.0’s cyberphysical systems at a lower cost, thanks to technological advancements and standardization.

These systems, powered by robotics, AI, IoT, and machine learning, enable enterprise-wide transformations. Productivity growth is essential for economic prosperity and is more critical than ever. With strategic investments, countries and companies can initiate a new era of productivity. Digital technologies, especially generative AI, could boost labour productivity growth by 0.1 to 0.6 percent annually through 2040.

To capitalize on this opportunity, investment in digital infrastructure and literacy is crucial. Governments and businesses must promote digital integration across sectors to unlock the full potential of these transformative technologies.

Generative AI could propel higher productivity growth.

We are indeed at the early stages of comprehending the full potential of generative AI. The rapid pace of innovation in the past eight months suggests that we’re in for a dynamic period of technological advancements that will reshape our perception of AI’s role in our work and lives.

Understanding and anticipating the impact of generative AI is crucial. Its swift deployment underscores the urgency to expedite digital transformation and reskill labour forces. Here are some key points to consider:

·??Generative AI could add?2.5 to 4.5 trillion dollars?in value to the global economy, significantly impacting productivity.

·??The workforce transformation pace is set to quicken due to increased technical automation potential.

·??While generative AI can boost labour productivity economy-wide, achieving this will require investments to support workers transitioning between tasks or jobs.

Businesses across various sectors are turning to generative AI to combat the sluggish productivity growth of recent decades. The anticipated benefits from gen AI could help counterbalance the slowing productivity growth in advanced economies, marking a pivotal shift in economic development.

In Closing:

Achieving productivity gains at both enterprise and regional levels indeed demands a transformative approach that integrates people, processes, and technology. It’s essential to measure value transparently throughout the journey and customize the productivity improvement roadmap to fit the unique culture and business needs, allowing for impact calibration along the way.

Operate with excellence: Organizations investing in driving operation efficiencies by focusing on business excellence can improve their chances of sustained growth using optimum resources.

Reset resource allocation:? Key to profitable growth would be the ability of reallocate financial capital, talent, and capabilities in the face of shifting market & operational opportunities.

Change your culture to harness technology: Besides Lean & Six-sigma which are proven best practices around reducing waste/variability, there are now proof points of combining process optimization with automation using digital technologies and process optimization should be a strategy across the organization.

Optimize capital leverage:? Organizations should strike the right balance of investing in talent, assets, and technology to drive productivity improvements.? This can be best done by being razor sharp on cash management by improving capital efficiencies & maximizing the return on talent.

Accelerate growth:?? Growing revenues by efficiently raising the market value of current offerings and introducing new ones translates directly into productivity gains, as their actions deliver new revenue.? This is best done by linking innovation to growth, looking at adjacency and in-organic growth, and renewed investments in innovations.

For those interested in exploring organizational productivity gains further, reaching out for a detailed assessment could be a valuable step. Feel free to reach out. (https://bridgepathinnov.com/contact-us/)

Jayen Desai