As Efficiency Gains Peter Out, Leaders Must Boost Productivity

This article originally appeared in Business Day.

Business leaders tend to think of "efficiency" and "productivity" as two sides of the same coin. When it comes to strategy, however, efficiency and productivity are very different. At a time when so many companies are starved for growth, leaders must bring a productivity mindset to their business and remove obstacles to workforce productivity.

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This view differs substantially from the relentless focus on efficiency that has characterised management thinking for most of the past three decades, but it is absolutely essential if companies are going to spur innovation and reignite profitable growth.

The common definition of labour efficiency is: "The number of labour hours required to accomplish a given task, relative to an industry standard." The typical way of assessing efficiency is to compare the number of hours it takes to produce a given product or service with those usually required.

Improving efficiency is about doing the same with less as companies find ways to reduce the time required to produce the same level of output. This results in savings because the company spends less on wages and other labour-related costs.

Efficiency is about shrinking the denominator—inputs (headcount, labour hours)—to improve profitability.

At first glance, the definition of productivity appears remarkably similar. A common definition is: "the ratio of the output of goods and services to the labour hours devoted to the production of that output". Productivity is typically measured by comparing the amount of goods and services produced with the inputs used in that production.

Productivity is about doing more with the same. Growth in labour productivity is measured by the change in output per labour hour over a set period.

For a country, productivity is closely linked with living standards. For a company, it is tied to performance. With higher labour productivity, a company can produce more goods and services with the same amount of work. Productivity is about lifting the numerator, the output, to increase top-line growth from the same workforce.

Read the full article at Business Day.

Tiaan Moolman is a partner in Bain & Company’s Johannesburg office and Michael Mankins a partner in the group’s San Francisco office.