The terms “efficiency” and “productivity” are often considered interchangeable by executives of commercial enterprises as if they were two sides of the same coin. Why Great Companies Obsess Over Productivity ,However, when it comes to the topic of strategy, efficacy and productivity are two whole different things. Companies Obsess Over Productivity, At a time when so many businesses are desperate for expansion, senior executives need to instill a culture of productivity inside their company and get rid of any organizational barriers that stand in the way of staff productivity.
This perspective is very different from the unrelenting emphasis on efficiency that has dominated management thinking for the majority of the last three decades, but it is absolutely necessary for businesses to adopt if they want to reignite profitable growth and encourage innovation within their industries.
“the number of work hours necessary to execute a particular activity when compared with the benchmark in that industry or environment,” is the typical definition of “labor efficiency.”
Comparing the actual number of hours needed to create a product or service with the average number of hours needed for that production is the standard method for determining how efficiently labor is being used.
The definition of efficiency is accomplishing one’s goals with less resources. Why Great Companies Obsess Over Productivity, The majority of the time, businesses are able to enhance their labor efficiency by discovering new methods to cut down on the number of work hours needed to generate the same amount of output.
This results in cost savings for the firm as a whole since less money is spent on salaries and other labor-related expenses. Why Great Companies Obsess Over Productivity, Therefore, in order to increase one’s profitability, efficiency refers to the process of reducing the numerator, which includes inputs (such as headcount and work hours).
At first look, it seems that there is not a significant difference in the definitions of productivity. The ratio of the output of goods and services to the work hours committed to the creation of that output is a popular definition of labor productivity. Another definition of labor productivity is “the ratio of the output of goods and services to the output itself.”
A common method for determining an organization’s level of productivity is to examine the ratio of output (quantity of products and services produced) to input (amount of resources consumed in production).
To be more productive, one must do more with the resources available. The change in output per work hour over a predetermined period of time is the metric that is used to quantify the growth in labor productivity. Why Great Companies Obsess Over Productivity, Productivity and the level of life in a nation are intimately related to one another. It is intrinsically connected to the success of the firm.
A company’s ability to create more products and services with the same amount of relative effort may be increased by increasing its labor productivity. Productivity, on the other hand, is not the same as efficiency since its focus is on increasing output rather than input in order to generate higher top-line growth with the same number of employees.
For the most part of the last three decades, top executives have been strongly urged to approach their company with a focus on maximizing efficiency. Why Great Companies Obsess Over Productivity, Six Sigma, process reengineering, spans and layers analysis, and a great number of other tools have assisted executives in finding waste in their operations.
In essence, these tools have helped executives discover labor hours (or materials) that are not necessary in order to produce the same level of output. Why Great Companies Obsess Over Productivity, In the absence of growth, efficiency improvements are often converted into monetary value by reducing the size of the workforce.
Companies such as General Electric, Honeywell, and HP, along with a great number of other businesses, have highlighted both their efficiency initiatives and the financial gains that have been created as a direct consequence of their efforts.
Reason Why Great Companies Obsess Over Productivity, Not Efficiency ;
1. Better profit
The more productive a corporation is, the more it can generate. This leads in greater profit to it. That extra cash is useful for a number of purposes, including growth. Increased output means a greater return on investment for the business. Why Great Companies Obsess Over Productivity, So, they pay a higher dividend (portion of earnings) to the shareholders. This means that the share’s market price will rise as well.
2. Better credit terms
The company’s ability to negotiate more favorable terms with its suppliers improves as productivity rises. Why Great Companies Obsess Over Productivity, The suppliers may grant higher credit terms owing to its goodwill.
3. Low turnover
Because of the company’s increased efficiency, workers now enjoy upgraded workplace amenities. Why Great Companies Obsess Over Productivity, Employees will be more dedicated to the company as a result of this. As a result, absenteeism and staff turnover will decrease.
The Need for Efficiency
A unique perspective on the world is necessary in order to succeed in today’s corporate climate. It would seem that the gains gained from increasing efficiency have reached their maximum. In the 1990s and 2000s, good results were created as a direct consequence of the leadership’s emphasis on efficiency.
Despite weak top-line growth for many years, earnings growth for the S&P 500 ran at a pace that was roughly three times faster than the rate of inflation over this time period.
Earnings for the companies included in the S&P 500 started a downward trend beginning with the quarter that ended on March 31, 2015, and earnings growth has been negative ever since then. Why Great Companies Obsess Over Productivity, Trying to continue to wring out larger profits via efficiency when there is no top-line growth is the management equivalent of trying to squeeze blood from a stone.
It will be essential for company heads to think in terms of productivity in the next decade. Executives should stop obsessing on the denominator (headcount reduction) and start looking for methods to enhance the numerator (output). Why Great Companies Obsess Over Productivity, Leaders may rekindle top-line growth by methodically reducing hurdles to productivity, employing people strategically, and motivating a bigger proportion of their employees.