New Concepts of Productivity and its Improvement*

Arturo L. Tolentino

“Productivity… [is being] better today than yesterday, and that tomorrow
will be better than today…” The concept of what is better and how to
become better is changing.

The changing notion/concept of productivity and competitiveness

Current economic realities (liberalized and dynamic markets, constantly changing customer
preferences, new structure of production and work, etc.) are leading to a rethinking of the
notion/concept of productivity. Whereas traditionally, productivity is viewed mainly as an
efficiency concept (amount of outputs in relation to efforts or resources used), productivity is
now viewed increasingly as an efficiency and effectiveness concept, effectiveness being how
the enterprise meets the dynamic needs and expectations of customers (buyers/users of
products and services) i.e. how the enterprise creates and offers customer value. Productivity
is now seen to depend on the value of the products and services (utility, uniqueness, quality,
convenience, availability, etc) and the efficiency with which they are produced and delivered
to the customers.

The globalization of the economy and other associated trends require a much broader
conception of productivity and a fuller appreciation of the changing dynamics of the
determinants involved in the process of its improvement. The increased competitiveness,
internationalization and sophistication of markets, the globalization of manufacturing and the
increased concern about social and ecological issues make productivity improvement more
important. At the same time, a broader meaning of productivity is emerging. Correspondingly,
such broader conception of productivity calls for a wider set of indicators to catch and reflect
the new elements and parameters involved.

The broader conception of productivity is incorporating wider definitions of what the outputs
and inputs are of the production-distribution process. The social and ecological impacts are
now increasingly considered as outputs of the production process in addition to the traditional
physical and value measures of outputs. Similarly, the social and ecological costs are now
also being recognized as inputs in the productivity equation. With increasing concerns on the
social and ecologic impacts of the operations of enterprises, the definitions of what are inputs
and outputs are changing. Social and ecological inputs and outputs are increasingly being
factored-in in the efficiency and effectiveness performance of the enterprise.

The structures of the production-distribution systems are also changing. Products and services
and hence customer values are increasingly created through enterprise networks, supply-
chains and value-chains that even extend beyond national boundaries. In these situations
where an enterprise relies on network of suppliers, service providers, extended and
disaggregated supply and delivery networks, its effectiveness and efficiency are very much
dependent on the way it manages its value-chain. The notion of value-chain productivity

*
Presented at the European Productivity Network Seminar, Budapest, 13-14 May 2004

1
(using a broader notion of productivity referred to above) is becoming of increasing
significance.

New Productivity Improvement Paradigm

To be relevant in the dynamic and changing environment, productivity improvement effort

must focus on

• Doing the right things (know “what” to produce and distribute) by continuously
reviewing and identifying changing customer and societal needs and expectations
(economic, social and ecological) and developing and designing products and services
to best satisfy the needs and meet the expectations. Create more customer values.

• Doing things right (know “how”) by constantly improving production and

distribution processes to produce and deliver the goods and services in the most
efficient way while at the same time minimizing their negative social and ecological
impacts.

Because of the very dynamic markets, rapid advance of production and information
technology, changes in resource availability and constantly changing customer needs and
expectation, constant innovations in products, processes and organizations are essential for
productivity.

Productivity improvement must now focus on value creation rather than on minimization of
inputs. Higher customer value is created when the products and services meet customer needs
for utility, timeliness, esteem, service, etc. This is what customers buy and pay for. With the
rapid advance of technology and greater access to information, customer expectations are
constantly changing and becoming more demanding. For long term productivity and
competitiveness therefore, enterprises must constantly innovate (come-up with new and better
products and develop better ways of doing things), be flexible and agile, respond rapidly to
the increasingly sophisticated customer needs which are constantly changing, and be able to
anticipate and adjust to the very dynamic market conditions. Some of the key shifts in
productivity improvement paradigm are:

• Productivity is not just an efficiency concept: First, there is increasing appreciation

that productivity is not just an efficiency concept but that -equally important- it is also
an effectiveness concept. Productivity improvement does not just mean the efficient
production of any product or service but of products and services that are needed,
demanded and bought by very discerning customers and society at large. Customer
orientation is now a primal consideration and superior quality is up front as indicator
of good productivity performance. Productivity is getting synonymous to quality. At
the same time, quality is also getting a much broader conception. The concept refers
not just to high quality embodied in the attributes of the products anymore but also
encompasses quality in terms of service delivery, of timeliness, after-sale services, and
of the production process itself.

To meet the challenge of the new business environment, productive enterprises have
reversed the emphasis in the productivity equation to make effectiveness (products and
services) the first priority in the over-all strategy of the enterprise. The questions “Are

2
 we doing the right things?” and “Are we producing the goods and services required by
the customer?” determine effectiveness.

Goods produced, however efficiently, which cannot be sold or are not required by
customers, indicate low productivity. Any notion of productivity that is not related to
the customer is meaningless. The potential to improve productivity is much more than
mere reduction in costs. Goods and services must be designed and produced in a way
that satisfies customers’ requirements for use, reliability, durability, price, delivery,
esteem and other values. Productivity improvement starts with an understanding of
who the customers are, what they need, why they need the products, how they use
them, etc.

• Process is equally important: Second, the link between productivity and social
progress is increasingly given much importance. There is a growing appreciation that
the resulting high productivity level is not the only determinant of improvement of the
quality of life. Equally important consideration is the impact of the process and
approaches used in improving productivity. It is not just the end results that count but
so are the means used to achieve the results. So called high productivity level of an
enterprise achieved through exploitative measures, in disregard of fundamental
principles and rights at work and without the equitable sharing of the productivity
gains among the stakeholders will not lead to improvement of the quality of life.

An intangible output of the operations of the enterprise is the experience of employees

during the process of producing and distributing the goods and services. These
experiences influence the employees’ attitude towards the organization and the job,
which in turn affects productivity. The production process and the productivity
improvement processes should provide good and satisfying experiences as well as
opportunities for employees to learn new skills and competencies required for
continuous innovation and improvement. Thus, the increasing use of participatory
improvement approaches, high performance workplaces and learning organization
processes.

• Green productivity and sustainable development: Third, the important role that
productivity improvement can play in the preservation, rehabilitation and
enhancement of the environment is increasingly recognized. Productivity
improvement through better utilization of the energy, materials, water, solvents, etc. is
now seen as an effective tool in preventing pollution at source. Productivity
improvement must therefore take into full consideration the impact of the production,
distribution, consumption and disposition processes on the environment.

While meeting the customer needs, products and services supplied and the processes
used to produce and distribute them must have minimum negative impact on the
physical environment. Increased concern for sustainable development makes
approaches such as “green productivity” defined by APO as “strategy for enhancing
productivity and environmental performance for socio-economic development. It is the
application of appropriate technologies and process and management techniques to
produce environmentally-compatible goods and services for enhanced productivity
and profitability” very essential.

3
 • Focus on productivity improvement through better value-chain, supply-chain
management. Fourth, the changing structure of the production-distribution system
shifts the focus from just looking at the organization’s internal processes to those of
the extended value-chain, supply chain and networks of the organization. An
enterprise can significantly improve its internal productivity by focussing on those
things it can do well and subcontracting or outsourcing the other activities to others
who could do them better. In a situation where increasingly, the enterprise relies on
network of suppliers and service providers, its effectiveness and efficiency are very
much affected and very much dependent on the way it manages its supply chain and
value chain.

• The human factor is the key: Fifth, the importance of the human factor as the main
determinant of sustained productivity improvement is getting to be more widely
appreciated. The productivity improvement impacts of technological advance would
not be fully realized without a human resource capable to exploit its potentialities and
make new technologies work in a production environment. A human resource that is
able to adapt the production system and work organizations to the rapidly changing
technologies and markets is the foundation of long term competitiveness.

In a market environment where productivity is very much dependent on innovations in

products and processes and continuous improvement process, the human and social
capital of the enterprise are the key to productivity and competitiveness. Hence, the
increasing importance of human resource management and development.

Human capital and social capital are now among the main sources of productivity and
competitive advantage.

To be able to continuously innovate, be flexible and agile, an enterprise must have the
competent, skilled, motivated and dedicated people who are working together in an
atmosphere of mutual respect, trust and confidence, partnership and collaboration which
facilitate cooperation and coordination. Sustained productivity improvement depends on the
enterprise’s human capital (the skills, knowledge, competencies and attitudes that reside in the
individual employee of the enterprise) and its social capital (trust and confidence,
communication, cooperative working dynamics and interaction, partnership, shared values,
teamwork, etc. among these individuals as well as among the different parties the enterprise
interacts with in its supply-chain and value-chain including the host community of their
operations). Thus, it is also increasingly being recognized that human and social capital of the
enterprise are the sources of long term competitive advantage of enterprises. New product
designs get easily imitated or copied and new technology are easily accessed or bought. It is
the unique human capital and work systems and relationships that are much more difficult to
copy.

Human capital and social capital of the enterprises are complementary. Social capital enables
employees and the enterprise’s extended network to act together, create synergies and build
teamwork and partnerships. It also sets the context in which human capital can be developed
through various learning processes: developing, sharing and transferring, and applying
knowledge. It is the foundation on which a learning organization’s processes and good
knowledge management are built. On the other hand, human capital helps to produce social
capital through competencies and attitudes that enable individuals to participate and build the

4
trust and relationships essential to be able to participate effectively as members of various
teams, work groups and other elements of the enterprise’s networks.

The building of these unique human and social capitals transcends the traditional boundaries
of the enterprises. In an era characterized by production distribution systems based on
extensive outsourcing, disaggregated value chain, and alliances and partnerships, the
productivity and competitiveness of an enterprise depend on the human and social capital of
its extended enterprise system.

Human and social capital of extended enterprise network

The product or service that an enterprise sells to a customer is the result of a series of
activities that involve bringing together the inputs required, manufacturing these inputs into
the enterprise’s products, transporting these products to wholesalers and distributors, bringing
them to the customer through retailing and other outlets, and providing after sales services as
required. The supply chain is made-up of segments: the up-stream segments made-up of
suppliers of raw-materials, components, services, consumables, etc., the internal supply-chain
made-up of the various departments and units involved in the production of the products or
services, and the down-stream segment made-up of distributors, wholesalers, retailers and
providers of after-sale service. Improved value to customers can be achieved through the
improvement in the various segments of the chain, as well as in completely redesigning the
supply chain.

One way for enterprises to improve their flexibility, acquire new technical and managerial
competencies, increase leverage of their internal resources, and achieve speed in bringing
product to market from market research, product development to distribution and retailing is
through entering into networks and alliances with other enterprises. Through cooperation and
collaboration with other enterprises -even with those in the same business and competitors-
an enterprise could access new market opportunities and sources of needed inputs;
concentrate and perform only those activities and functions that it can do most productively
and quickly; have better access to new technology and innovation; learn and access new
managerial practices and organizational systems; increase speed of the product cycle; and
improve overall productivity.

On a broader scale, good corporate citizenship and high level of corporate social
responsibility are increasingly recognized as key factors in an enterprise’s long term
productivity and competitiveness. They are increasingly becoming the foundation of the
broader social capital of the enterprise. There is a growing body of evidence that they create
long term competitive advantage by improving recruitment and retention of good quality
employees, generating customer loyalty, building and nurturing good and productive
relationship with partners in its extend value chain and alliance networks, generating
community and societal support, etc. For many multinational enterprises being good corporate
citizens has even opened-up new markets, attracted new investments, reduced regulatory
obstacles, and differentiated them from competitors.

Building the internal human and social capital of the enterprise

Hire the right people; enable them through good work organization, work environment and
management practices; continuously build and upgrade their knowledge and capabilities
through formal and informal learning, and hold on to them by making them committed,

5
motivated and engaged. These are the ways enterprises build the internal human and social
capital it needs for long term productivity and competitiveness.

Through good workplace policies and practices the enterprise builds the internal human and
social capital essential for sustained productivity improvement. These workplace policies and
practices are referred to under different names: “‘high-road’ productivity and competitiveness
improvement”, “high performance working”, “people-oriented management”, etc., but they
are all based on the same principles such as involvement and participation; labour-
management partnership; respect and recognition; equality and non-discrimination; enabling
the human resource through good work design and organization; competency and skills
development and providing good working conditions; sharing gains; etc. The importance of
learning (individual and organizational) experience as well as of the team building and
partnership effects in the course of productivity improvement is recognized. Human capital
and social capital are the results as well as the source of high-road productivity improvement
and good workplace practices.

Principles of the “High Road” to Productivity

Integrated and Holistic Productivity improvement
explicitly part of company
mission and philosophy, the
achievement of which is integral
to its management systems and
processes.
Total organization view
Value-chain improvement
Focus on Total Productivity Productivity improvement of all
inputs not just on labour
productivity
Focus on outputs and results Customers needs and improved
customer values
Minimized negative impact on
the environment
Concern for the social impacts
Improvement in the quality of
work life
Maximizing stakeholders’ value
Participation, consultation and Employee involvement
involvement, social partnership Labour-management partnership
Communication and Communicating productivity
information sharing improvement priorities
Sharing of company performance
measures and results

6
 Enable the human resource / Continuous development of skills
focus on people and competencies
Work organization and design
encourages learning and
creativity
Mechanisms for individual and
group-based participation in
improvement
Good working condition and
environment
Enabling management styles and
practices
Sharing of information
Respect for human dignity and
fundamental principles and rights
Good monitoring and feedback Productivity monitoring and
measurement system whose
results available to all
Share productivity gains among Financial
employees, owners, customers, Non-financial
community and other
stakeholders

Documented studies of good workplace practices show that they are good for business. The
impacts are both qualitative relating to building the human and social capital of the enterprise,
and quantitative, reflected in improved productivity, reduced staff turn-over, lower
absenteeism, cost effectiveness, speed and agility, etc

Challenge ahead

With such a multi dimensional and multifaceted concept of productivity, the challenge facing
productivity practitioners is measurement.

1. What are the various units of observations and what are the productivity indicators to
use? A cardinal rule in productivity measurement is that the measurement must
support decision making. If increasingly, the productivity performance of an enterprise
depends on the supply-chain, value-chain and clusters where it is embedded, whose
productivity should we be measuring?

2. What ever the unit of observation is, whether a workplace, a unit, a department, a key
business process, a value-chain, etc., what productivity are we going to measure? If
customer value is the main output, how are we going to measure it? How do we factor
in the social and ecological dimensions of the outputs? How do we factor-in the other
aspects e.g. utility, speed, availability, etc.? Similarly, how do we measure inputs?
How do we factor-in the social and environmental inputs?

Clearly, the single measure of productivity, much so the partial labour productivity measure,
is no longer sufficient. A family of measure may be more appropriate and useful.