Productivity is simple … and complicated

What is productivity?

Productivity is both simple and complicated. Productivity measures the efficiency with which we convert capital, labour and materials into outputs. It is simple because we measure productivity by units of output divided by units of input. Lots of different inputs make productivity complicated. It may not be obvious how those inputs interact to help or hinder production of goods and services.

What is efficiency:

There are three types of Efficiency:

• Technical efficiency: doing things right to get maximum output from specific inputs
• Allocative efficiency: doing the right things now – producing to best match current demand
• Dynamic efficiency: innovation – pushing the limits of current efficiency to produce more/better

Improving productivity requires all three types of efficiency. A dynamic efficiency focus drives innovation then we bed in innovations by applying technical efficiency. Allocative efficiency plays a part too. Demand for electric cars has slumped in many markets as innovators scale up production. The products are getting better but customer demand is stalling outside China for now.

Why measure productivity?

• Increasing productivity produces more value for the same inputs
• Our goods and services need to offer better value to be internationally competitive
• Higher productivity creates more value for less work, increasing leisure time
• We have fewer workers to pay for pensioners so we need to be more productive
• Higher productivity uses fewer raw materials and helps the environment
• Improving public sector productivity reduces our tax burden
• New technologies drive economic growth
• Productivity growth increases per capita income and standards of living

Measuring labour productivity

It is common to focus on labour productivity, dividing gross output by the number of full time staff employed. It is very easy to do but it is problematic. Measures of labour productivity are crude and they can imply that people need to work harder or longer or that staff are to blame for poor productivity. That is simplistic and wrong because it doesn’t take a system view of organisational performance.

Measuring capital productivity

In organisations, investment in property, plant, processes, systems and culture drive productivity. We need to measure the output for dollars invested in all these elements. That is harder to do but it is worth the effort. We can measure capital productivity – the increase in output from investing more capital but that is also a crude measure, especially since there can be a big time lag between investment and return.

How else can we measure productivity

Capital and labour inputs cannot explain all productivity. The missing part is Total factor productivity (TFP). It is a measure of operational efficiency. TFP is the “black box” of productivity which everybody wants but it can be elusive. Economists calculate TFP by dividing output by the weighted geometric average of labour and capital input, with the standard weighting of 0.7 for labour and 0.3 for capital. Economists use TFP to measure national productivity.

Back in the real world, there are much simpler ways to figure out how different factors affect the productivity of the business. We can focus on the inputs and outputs of individual business units e.g. call answered per unit of cost or time, goods delivered by km travelled etc. You can split workflows into two groups and apply an existing process to one group and a new “challenger” process to another. We can measure actual value created by a process through value stream mapping. We can used activity based costing, process costing, job costing, value chain analysis and other approaches. The main challenge is to balance the analysis effort with the value it gives you so good advice helps.

Are there simple ways to improve productivity?

Yes. There are lots of simple ways to improve productivity in your business, Not for Profit or government agency. These can include:

• Identifying and reducing waste (in processes and materials)
• Improving training and communications
• Using technology effectively
• Avoiding projects that do not have well defined and measurable benefits
• Benchmarking better ways of doing what you do
• Automating tasks which people don’t do so well

It can be hard to look at your own operations objectively. On 1 August 2025, we are running a Productivity workshop with Capability Collective, BusinessFirstNZ and Massey University. Institute of Management Consultants New Zealand supports the workshop to highlight the role of Certified Management Consultants. Register for the workshop here.

Phil Guerin, Consultant/Director, Hague Consulting Ltd. © Hague Consulting Ltd 2025. If you like this content, subscribe to our blog – it’s free! Enquiries@hague.co.nz

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