As Canada enters the second decade of the 21st century, GDP growth forecasts remain, by international comparisons, enormously optimistic. Canada is a good, stable place to do business, with abundant knowledge workers, low crime rates, a conservative but stable financial system, and relatively low corporate and personal tax rates (especially when all the tax evasion measures are excluded). But Canada does face some challenges, such as currency fluctuations, deteriorating infrastructure, and weak knowledge and innovation strategies. Above all, Canada and its business community face one, over-riding challenge – improving productivity. Canada’s past record trails the United States by a wide margin, and in most industries, by as much as 10-20 percent. As a general measure, output per employee, or productivity is a simple concept but one that is extremely difficult to measure, especially across industries when so many factors impact both the numerator and the denominator of the ratio. Productivity means many things to different audiences. The simple axiom that productivity means, “working smarter” is really an organizational dictum, meaning that managers and workers must be aligned if productivity is to improve over time. This article addresses how new forms of benchmark measures allow organizations to assess relative performance against competitors. How Canada learns the new principles of productivity that embody ideas, management practices, and business processes will determine the viability and competitiveness of firms that assure job growth and wealth creation. Productivity: Core trendsCanada has a productivity problem, and it is growing. Even the governor of the Bank of Canada has entered the debate, calling on Canadian business to invest more in productivity-enhancing plant and equipment. But the productivity puzzle goes well beyond physical assets like computers and software, state of-the-art machinery and new processes. There are also huge differences because of management tools, and the capacity to absorb new technologies and methods of innovation. Around the world, innovation is now central: corporate agility, speed to market, time and speed are strategic tools. For decades, economists and policy experts have decried the level of labor productivity growth in Canada compared to the United States.1 Since the Second World War, the trend in Canada has shown an annual increase in productivity by 2 percent, compared with 2.3 percent in the United States. But the U.S. has a superior portfolio of knowledge sectors, so in recent years, the gap in productivity growth has widened. Indeed, one study shows that from 2000 to 2008 labor productivity in Canada’s business sector slowed to an average annual increase of 0.7 percent, compared to 2.6 percent in the United States. In the past, Canada’s performance prior to the mid-1980s outpaced America’s. Indeed, between 1961 and 1980, labor productivity in Canada increased 2.9 percent a year on average, much faster than the 2.5 percent level in the United States. International comparisons also show that U.S. firms invested heavily and much faster in IT-enhancing productivity, not just computers, but software and computer-based work processes common in retailing and banking. From 1997–2000, Canadian labor productivity increased by 3.2 percent, but then went into a precipitous decline, reaching 1 percent in 2008. By some measures, Canada is ranked 16th among 29 OECD countries.2 Productivity: TheoryEconomists and policy makers have spent decades on the theory, conceptual underpinnings, and an empirical analysis of productivity. Recent studies show that ideas, institutions and governance, population, and human capital largely explain gaps in international productivity differences and their impact on per capita wealth creation.3 Since the Second World War, U.S. productivity levels have been the benchmark for most countries. They show that country’s amazing ability to adapt to changing technologies, labour markets (e.g. from high immigration), and new management techniques. The U.S. also gains from the huge comparative advantage of a large, integrated, domestic market, mostly free from mobility obstacles like internal trade barriers, diverse languages, legal systems and currencies. The United States leads on most measures of economic competitiveness, including a third of the world’s research-and-development spending. Today, despite the economic downturn, the average worker in the U.S. is nearly 10 times more productive than the average Chinese employee. Indeed, while the number of Americans earning between $35,000 and $70,000 per year declined by 12 percent between 1980 and 2008, the number earning over $105,000 increased by 14 percent. Over the past decade, 60 percent of American adults made more than $100,000 in at least one or two of those years. Forty percent had incomes at that level for at least three years. Exhibit 1: Direct Comparisons of G-7 Productivity: 2008 Source: OECD In general, tension between labour and senior management on productivity issues is real. The fear of unions and organized labour is simple: ‘more for less’ compels a reduction of labour content (e.g. from automation, contracting out, and use of temporary workers) and real job cuts in the cost structure of companies. As a result, labour groups have sought (and usually won) management concessions on work rules, organizational practices, and worker protection against layoffs, pension cuts, and compensation schemes. The public perception is that governments and government workers have a variety of work rules that assure tenure and little job rotation. In reality, many private sector companies and industries have similar work practices, e.g. Detroit’s automobile industry, where the Big 3 operated vertically-integrated plants, in contrast to Japan’s lean production system, now the benchmark for auto manufacturing world-wide. Internationally, policy makers have slowly learned the real advantages of productivity-enhancing measures, as shown in Exhibit 2. Many initiatives are embodied in public policy, annual budget making, design of the financial system, and clever measures to provide a judicious balance between the public and private sector. These initiatives including three P partnerships, tax measures to enhance investment over consumption, and measures to improve long-term expenditures in the knowledge sector. However, the growing evidence is that productivity enhancement is more than a challenge for public policy, although bad public policy can be devastating – (witness countries as diverse as Argentina, Venezuela, and too much of Africa). Political and social processes embedded in institutions, the population at large, and the corporate culture of firms all impact productivity, including issues such as the will to succeed, the desire to be Number One or, as shown in the Olympics, the will “to own the podium.” Private firms and individual incentives are central. The policy trick is that there is no quick fix or silver bullet. Exhibit 2: Potential Policy Impacts on Productivity
Productivity at the Corporate LevelNational productivity and international competitiveness are enhanced by the convergence and alignment of macro country performance, usually measured by GNP per capita, and micro performance issues at the corporate level, not only on profitability measures, but issues like new start-ups, venture spending, and corporate R&D investments. Macro and micro issues reinforce each other. For example, public policies and investments in broadband, highways, universities and R&D, ports and public transit, and airports influence corporate initiatives in product innovation, supply chains and logistics, export marketing, overseas strategic alliances, and foreign investment.4 Table 1: Productivity – Converted to US Dollars Using 2009 PPPs in $US (Real GDP/hr Worked, 1990-2009)
What do these productivity issues mean at the corporate level? Recent research on productivity focuses on managerial practices, e.g. monitoring, target setting, and organizational incentives.5 Monitoring refers to organizational mechanisms that apply to manufacturing techniques, performance evaluation, and performance review. Targeting refers to the balance between goal setting of financial and non-financial objectives and time horizons. “Incentives” refers to the mechanisms for removing poor performers and rewarding high performers. On these management measures, there remains a productivity gap between Canada and the United States(see Table 2). Table 2: Productivity and Management Scores by Country
Conventional corporate strategic performance has focused on the fundamental differences between efficiency and effectiveness. Efficiency implies short-term solutions to operating problems. More for less often means optimizing throughputs via sales growth, higher operating margins, or better use of existing capacity with little increase in overhead costs. By contrast, effectiveness is a more inclusive term, implying the long-term alignment of environmental demands and organization inputs. Efficiency tasks are managerial and administrative. Effectiveness tasks are risk-taking, explorative, and entrepreneurial. Peter Drucker’s classic aphorism summarizes the point succinctly: “Efficiency is doing things right; effectiveness is doing the right things.”6 Corporate analysisBenchmarking tools used to assess a company or organization must go beyond the conventional indicators of financial position – e.g. profitability, return on equity and assets employed, and annual cash flow generated. Clever diagnosis examines various organizational practices and processes, which are usually industry-specific. At the strategic level, this approach involves studying the organization’s value chain, i.e. an assessment of critical inputs and the ways in which they contribute to the creation of value-added products and services for customers. These tools of analysis consider hierarchical flows of decisions, from the top levels of the organization to the bottom, and the numerous obstacles (e.g. organizational levels, silo mentalities, budgets and skewed incentives) that affect the flow of information and communications, and the weakness of feedback loops, as reaction time is time specific. The second and related diagnosis is the focus on business processes, or horizontal organizational analysis and assessment, from one stage of the value chain to the next. Leading companies consider all aspects of their internal operations, the communication flows, business processes, and the capacity to innovate continually. The strategy is to focus on customers, what their main needs are, and when and how fast they want them. Time-based competition, with its conceptual links to lean production and just-in-time processes, focuses on a greater variety of products, at lower cost and higher capacity utilization, and requiring less time via clear understanding of real engineering and business processes7. An efficient tool to study organizations and productivity-enhancing methods is a four-T analysis8 – the combination of Trade, Technology, Talent, and Treasury (see Exhibit 3). Each dimension is both strategic and operational, and each depends on the other three as a form of inter-dependence. Each also has its own set of competencies and capabilities, requiring specific tools, processes, and metrics. Each assessment is organizational-specific. Trade refers to present and new customers, industrial, consumer, or public. Technology means the application of know-how and ideas flow, either embodied in people, machinery, software or computer systems. Talent refers to the knowledge level of employees, derived not only from formal education, but also from experience, on-the-job-training and professional development. Treasury refers to the capital structure of the firm (equity, loans, and other borrowed capital). Environmental scanning and benchmarkingGlobalization now presents constant tensions to manage disruptive change and the presence of new competition. Today, if anything, managers face the paradox of needing more strategic information yet trying to cope with too much data. Best-practice firms have learned to design information systems, using environmental scanning tools, to benchmark best practices of competitors and companies outside their industries. Software systems and Internet tools are useful adjuncts, but successful benchmarking requires a very high level of continuous attention and a keen appreciation of the firm’s distinctive competitive competence, or core capabilities, and their sustainability against intense competition. Philip Selznick, who coined the popular MBA buzzword distinctive competence, shows how technical issues reinforce human factors9:
Exhibit 3: A 4-T Framework for Organizational BenchmarkingBenchmarking, the systematic exploration through the environmental scanning of external, best-practice products, processes, and systems is a time-consuming exercise. The prime focus is on customer needs and external demands. Systematic benchmarking can be a massive exercise in organizational learning. Boeing, for instance, compared itself on 50 strategic dimensions against 14 leading U.S. firms, seven European and seven Japanese firms, a costly exercise. Often, firms’ benchmark processes originated outside the relevant industry (airlines studying the process of ticketing passengers by examining the tools at Disneyworld in Florida, or theatres on Broadway in New York). ISO quality models for manufacturing are a case in point. The metrics may be in dollars, time, markets, or speed. Companies and organizations undertaking benchmarking activities often focus on stretch targets achievable over time. The raw numbers are important, but it is the specific work practices and processes behind the numbers, and their philosophical underpinnings, that become the keys to successful benchmarking. Strategic benchmarking and human resource training go hand in hand. External pressures like competitive forces, disruptive technologies, and quality demands impact customer-retention strategies. Internal drivers derive from operating performance at many levels: process speeds, information sharing, cost margins, platform linkages. The performance metrics on these internal processes will in fact feed into the benchmarking strategy. Data-based studies help determine how the organization will function in the future, thus suggesting possible new metrics. The organization’s value chain, i.e. the sequential steps of production (processes and activities) provides the first conceptual basis of benchmarking. Interface issues become central: relations with suppliers, customers, and even workers or service companies like transportation and IT. Software systems now help accelerate these inter-face relations for B2B and B2C links. Actual indicators may not be simply physical, numerical, or financial. For example, recent experience with best-managed firms shows that speed, convenience, customer satisfaction, and innovation (flexibility) are crucial variables in any benchmarking strategy. The impact of benchmarking is based on what the organization is good at: internal strengths and competencies. Internal dynamics impact core fundamentals – strengths and core competencies, quality defects, speed to market, customer service, indiscernible knowledge assets, and the like – all of which help define real, sustainable competitive advantage and operating margins. The real value of benchmarking comes from a constant, relentless search for best-management practices that lead to superior competitive performance. The fallout occurs when the CEO and senior management don’t take benchmarking practices seriously or they fail to reach aspiration targets that evoke a real stretch. Benchmarking techniquesKey target areas for benchmarking force the organization to measure itself against close competitors, not against firms who excel at certain functions (e.g. Dell at delivery, Honda at quality, Disneyworld at cleanliness) or possibly against organizations that are not in the same industry but apply similar processes (order taking, customer service, etc.). As noted, Boeing chose seven European and seven Japanese firms. In Japan, these firms had received the Deming Award for Quality. Only one of these 14 firms was a strategic alliance partner in the aerospace sector. Speed to market was one of 50 benchmark measures. Clearly, firms need to have well-defined performance metrics and adequate process indicators. However, the organization’s readiness, especially that of top management, to accept benchmarking information and feedback can be problematic: many organizations and their managers want to ignore comparisons, change the output metrics or targets to simplistic, easy-to-reach targets, or apply a stop-go approach and relegate any findings to subordinates. An alternative approach is an “adapt and learn” strategy: slowly developing stretch techniques for change and innovation. In many cases, management must determine what the organization is not good at, focus on those areas, and outsource the inefficiencies and inadequacies to superior supply chain producers. Serious companies that run scared take best-practice benchmarking techniques seriously. Managers and workers learn from strategic problems and apply new learning tools to stay ahead of their rivals. They play hardball. Performance metrics determine what an organization is trying to achieve. Regular feedback shows a readiness to develop new metrics that tell if the organization can meet its own internal targets and underlying causes for failures. New process indicators help determine and calibrate cost inefficiencies, specifically which processes can be eliminated or contracted out. Benchmarking also allows the firm to monitor execution to ensure that inefficiencies are indeed eliminated. Clearly, benchmarking can help organizations, but it remains a learning tool only. Indeed, since best-practice companies employ benchmarking, a firm’s own performance is the ultimate test of standards. If all firms imitate one another, the end result is a lack of continuous innovation. Declining margins can follow.10 Various techniques of benchmarking – direct interviews, publicly available data from trade journals, research studies – provide data on how the organization is performing a particular function. The organization can be measured against its own internal targets, against key competitors within the industry, or against organizations that are best-practice users in certain process areas. For benchmarking purposes, it is not necessary to perform a function perfectly, just better than everyone else, especially direct competitors. Such firms will be the industry leaders, with rising shareholder value. Exhibit 4: Strategic Competencies and BenchmarkingHowever, how the organization assesses the information derived from benchmarking determines the crucial steps for future metrics. The organization must be able to understand those functions that it does very well, i.e. what constitutes core capabilities, and then identify those areas whose performance fails to meet competitive metrics. Production excellence requires a fundamental need to say “Yes” but also the need to say “No.” These choices represent decisive strategic issues for the organization. Benchmarking leads to strategic action, and allows a mix of retaining in-house those tasks that it does well, while offering the option to outsource the rest. Benchmarking risksThe risk for corporate leaders is that they must remain ahead of the competition. As a leader, an organization must be creative and innovative in determining new and better ways of performing tasks. Sustaining this role is a difficult challenge, the classic case of the leader’s disadvantage, because it may be easy to copy what the leader has pioneered. As followers, companies have a point of reference. They can compare themselves to the organization they want to be. They can duplicate the functions or create alternative ways of doing things that lead to the same or better performance. History is full of examples of first-mover advantages giving way to the fallen, as Detroit, Sony, and Kodak amply demonstrate. Benchmarking is a key to strategic intent. If executives are serious about competitive performance, benchmarking is a good place to start. If executives are not serious, benchmarking is a good place to stop. In short, benchmarking carries many risks. If the information derived from benchmarking is not used to help formulate corporate strategy, then the organization may nurture a culture of unreality, make-believe, or even delusional thinking11. Even worse, the enterprise may not be able to compete in a changing competitive environment. There are other risks associated with benchmarking:
Failure to take critical feedback seriously, by simply going through the motions of benchmarking, or measuring for the sake of measuring, is a waste of effort. If benchmarking is done properly, the exercise reveals organizational strengths, and improvements and innovations in core capabilities. Real and relevant metrics of success that strengthen product margins and add value to the customer form part of the organization’s core competence. Activities that the organization just cannot perform well, except at high cost, should be outsourced to appropriate suppliers. In this way, the strategy of an organization is largely dependent on the outcome of benchmarking metrics. Benchmarking informs the strategic thinking that the organization should pursue, as depicted in Exhibit 5. Exhibit 5What should we be doing? The results of the benchmarking should directly impact the strategic path of the corporation. The organization should be focusing on those things that it does well and either eliminates (via outsourcing) or transform the things it doesn’t do well. These two broad category decisions will guide the corporations on its internal abilities and core competencies. How are we doing? Once the strategic path has been determined and the right measures have been developed, the corporation should constantly monitor its performance. On-going performance reviews tell management whether the organization can meet its targets, or how the corporation is operating relative to internal and external standards and benchmarks, and whether the targets are calibrated too high or too low. If the organization shows a readiness to take performance metrics seriously, then training and learning tools help organizations transform processes through Six Sigma or quality management programs. If the output does not meet the pre-determined targets, the organization must have instruments for redesigning and learning how to meet stretch targets. Such tools, including extensive training, involve continuous organizational learning. In short, benchmarking represents a change of mindset, a shift to a form of kaizen or continuous improvement.12 Exhibit 6: Benchmarking Performance: Key Performance Indicators
Canada faces an era of enormous complexity, even hyper-competition on a global scale. Corporate productivity must become the new mindset of Canadian corporations. Progress must be embedded and gain momentum at all levels, from the boardroom to the shop floor, from alignments to Tier II suppliers, to the downstream flows to customers and I. Unions and government aren’t the problem but they can be part of the solution. But it will take executive leadership of a high order. It requires a new spirit of teamwork and commitment, what Jim Collins, the author of How the Mighty Fall, celebrates as a different sort of leader, one with “extreme personal humility with intense professional will.” Globalization is real and global pressures are accelerating. In Canada, too many of Canada’s boardrooms, with they’re emphasis on MBA-style number crunching, fail to appreciate new realities. Leadership needs more than the illusion of an executive-centered or a board-centered pattern of control. Increasingly, management is a form of chess, with all players’ part of the decision patterns, each performing his or her role to cultivate a winning team. Can Canadian managers openly admit their failings, as did a senior GM executive of the auto giant’s past sins: “We were a structural cost-driven company: now we’re a company in the pursuit of revenue and customer satisfaction … we are about the destruction of mediocrity and the pursuit of excellence”? The creation of new business models and recalibration of old business models are forcing productivity-enhancing thinking at all levels of the organization. Benchmarking allows companies to design new value propositions for the global stage. In the recent past, e.g. before NAFTA, too many Canadian firms survived in a protected domestic market, with tariff protection, a weak currency, and easy access to local advantages. Globalization at best was a future consideration, and managers imitated competitors. These copy-cat strategies allow firms to copy ideas from other firms, usually by showing little intellectual appetite for innovation and state-of-the-art processes. Flexibility, government support, and short-term cost considerations provided a cushion against direct price-based competition. But imitation strategies, over time, do not provide competitive advantage. Corporate strategy must consist of a constant search for new ideas, trends, and externally imposed constraints such as environmentalism, corporate governance, employee diversity and truth-in-advertising. Today, customer demands must trump all other considerations, including short-term financial and treasury objectives. Too often, corporations and other stakeholders like governments and unions refused to accept manifest evidence of new trends, including innovative products and services and effective business models of international competitors (e.g. Indian firms in ICT, Chinese firms in autos, auto parts). The founder head of IBM, Thomas Watson, once predicted that there was room for only five computers in the world. Even Microsoft’s Bill Gates misunderstood the impact of the Internet. Novel forms of organizational innovation, such as just-in-time lean production, big-box retailing, and hub-and-spoke networks for logistics systems are examples of disruptive change, and where too many firms remained rooted in the past. Productivity forces the adoption of a new mindset, addressing fundamentals of core skills, capabilities, and competences. That means thinking through what the organization is good at, but also, what it is not good at. By focusing properly on productivity, Canadian business will develop the ability to lead the industrial world in winning strategies, not only for the domestic market but for the global marketplace as well. This opportunity to lead is Canada’s to lose. Understanding New Performance Metrics: A Case StudyCN was the first railway in North America to understand the profound change taking place in manufacturing logistics and supply chain management. CN’s strategic focus was the manufacturing base of the central North American corridor. Shippers like appliance makers, car companies, and retailers face different challenges – time management. JIT principles make time a competitive weapon, as pioneered by firms like Toyota and Wal-Mart, and change the face of railways, each railroad encumbered by over-capacity, labour problems, slow growth, and weak financial returns. The organizational legacies of the traditional railway business model now address ocean shipping and associated deep water ports, the first links in global supply chains. Japan learned this lesson well, with overseas factories, exporters, and deep water ports forming global supply chains linking domestic maritime gateways, importers and retailers, with railways as the critical transport links in the middle. Rising Asian imports in containers have been in inter-modal traffic, the fastest-growing segment of rail freight, rising from 3m in 1980 to 12.3m in 2006. CN headquarters invested massively in back-office IT systems and logistics infrastructure, opened offices in Rotterdam and Shanghai, and became the only North American railroad that connects the Pacific, the Atlantic and the Gulf Coast. Despite CP’s large operations in Western Canada, and its new headquarters located in Calgary, it was CN, not CP, that invested in the new Prince Rupert, BC container terminal (the only new port opened in North America in 40 years) to accept shipments of containers from Asia, mostly from China. CN’s mission and strategy is forceful, aggressive, and explicit:
CN’s appreciation of just-in-time principles for global supply chains and logistics reflects new theories of time management, time compression, and speed-to-market. This new culture represents a strategic shift for the total organization, from the board and senior management to operating managers and workers with specific tactical objectives. This article is based on a working paper prepared for Canada’s Gateways and Corridor Conference, Sauder School of Business, University of British Columbia, Vancouver, November 17-19, 2010. Appreciation is extended to George Stalk, David Gillen, and Vic Murray.
Is productivity is directly related to competitiveness?In fact, productivity is an element that significantly impacts competitiveness at the company level, being considered one of the measures of competitiveness performance. In the following section, we present the main productivity concepts in company level. Productivity is the only relevant measure of competitiveness 3.
Does competitiveness relates to the profitability of an organization in the marketplace?Competitiveness relates to the profitability of an organization in the marketplace. Competitiveness relates to how effectively an organization meets the wants and needs of customers relative to other organizations that offer similar goods or services. If people would only work harder, productivity would increase.
What is competitiveness in an organization?Competitiveness is the ability of organizations, the economic branches and the state to operate, maintain, advance, and work according to the principles of efficiency and effectiveness to surpass the competition. Thus, competition is superiority over rivals and other competitors in the market.
Which of the followings is not a key factor that influences an Organisation's competitiveness *?Which of the following is not a key factor of competitiveness? Competitiveness often has nothing to do with organization size.
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Is productivity directly related to the ability of an organization to compete?
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