How do effectiveness and efficiency relate to productivity?

When you start a small business, you must determine your purpose. One way to do this is to explain why you will be good at serving your customers. Once you have this purpose firmly in mind, you can target your productivity efforts toward serving your customer and therefore growing your sales. 

Effectiveness and efficiency - very important!

• You must look at how effective you are at serving your customer
• You must look at how efficient you are at serving your customer

Effectiveness and efficiency drive productivity.

Effectiveness

Effectiveness must come first in all of your considerations about productivity. Effectiveness is doing the right things. 

You must make sure that:

•  all your objectives serve your goals
• your goals serve your purpose. 

Objectives are short-term achievements, goals are long-term achievements, and your purpose is serving customers in ways that satisfy their needs and desires. Start by looking at whether you are doing the right things, and whether you are asking employees to do the right things. For example, if you are a manufacturer, ask yourself whether all employee tasks contribute to manufacturing, or whether some tasks, such as washing company vehicles or ordering lunch for staff, are irrelevant. 

Make sure your employees engage in activities that are effective in moving you toward your goals.

Efficiency

Once you have employees doing the right things, you can make sure they do things right. 

Examine all employee tasks and determine if there is a better way to get them done. 

For example, perhaps your order pickers spend most of their time walking through the warehouse looking for products. To give another example, your back-office personnel may be dictating to front-office salespeople how many orders they can handle. 

Find more efficient ways to get work done through:

• Computerization
• Streamlined communication channels
• Rearranging of the physical environment.

Productivity

Productivity is doing the right things in the right way. Once you ensure employees are being effective and efficient, you will see a rise in productivity. You should start measuring this productivity on a daily, weekly and monthly basis. You can use metrics such as number of units produced, sales or customer-satisfaction surveys. With effectiveness and efficiency in place, you will be able to establish some baseline measures of the productivity of your company.

Increased Productivity

With the basics in place, you can increase productivity incentives. 

• Increased commissions on sales above your present levels
• Bonuses for reaching higher production quotas 
• Pay raises for sustained productivity increases

With incentives in place, employees will find their own ways to become more effective and efficient, and thus increase productivity.

Productivity and Industrial strategy

The green paper is arranged around ten strategic pillars, one of which is to ‘develop affordable energy and clean growth’. Within this, the green paper reiterates the Government’s commitment to shift towards a lower carbon economy, but stresses that his must be done in a way which ‘minimises the cost to UK businesses, taxpayers and consumers’. This echoes very similar statements in a previous Policy Exchange report, The Customer is Always Right, which argued that previous Governments had paid insufficient attention to the rising cost of energy and climate policies, and that going forward the Government should place consumers and affordability at the heart of its energy strategy.

There is significant focus in the green paper on how to manage or reduce the cost of energy through improvements in network efficiency, and also in energy efficiency. In addition, the document makes a passing reference to improving resource efficiency more generally. It notes that ‘increasing the efficiency of material use across the whole supply chain can deliver huge cost savings and improve the productivity of UK businesses.’ It is clear that the Government has the appetite to develop this idea further, indicating that it plans to ‘explore opportunities to reduce raw material demand and waste in our energy and resource systems, and to promote well-functioning markets for secondary materials, and new disruptive business models that challenge inefficient practice.’

Following the publication of the green paper, Policy Exchange hosted a roundtable last week, which considered the opportunity to embed resource productivity thinking in the Industrial Strategy. The roundtable was held jointly with SUEZ Recycling and Recovery UK (a waste management firm) and also involved a number of manufacturers across the automotive, metals, paper, and construction sectors. This blog provides a summary of the key points from the discussion.

Opportunity to Improve Resource Productivity

Improving resource productivity represents a significant economic opportunity for businesses. Research by Accenture has shown that there is potential to unlock $4.5 trillion of global growth through improvements in resource productivity. They suggest that this can be achieved by moving from traditional ‘linear’ business models, in which resources are extracted, consumed, and disposed, to more ‘circular’ business models in which businesses reduce their dependence on natural resources, and turn waste streams into new sources of revenue. Accenture has also done sector-specific analysis, for example showing that the automotive sector could reduce its cost base by 14 percent through improvements in resource efficiency, delivering $400-600 billion of additional profit globally by 2030.

Similar analysis by Oakdene Hollins for Defra in 2011, suggested that UK firms could realise resource efficiency savings of £55 billion per year (increasing gross profits by 5%), mainly through improvements in waste management practices. The bulk of these potential savings relate to the construction sector, and manufacturing (where an estimated 45 percent of costs relate to materials).

On face value, it appears that improving resource efficiency could make an important contribution to reducing the cost base and raising the productivity of UK firms, and it is right that this should be a focus of the Industrial Strategy.

In addition to the economic benefits, there are obviously significant environmental gains to be made by improving resource and energy efficiency. The Defra study mentioned above suggested that improvements in energy and resource efficiency could yield a reduction in carbon emissions of 90 million tonnes of CO2 equivalent per year (or 13 percent of the UK’s total greenhouse gas emissions). Increasing resource productivity can also reduce our ecological footprint, water use, and our reliance on material imports (see research by WRAP).

The Industrial Strategy green paper rightly recognises that improving energy and resource efficiency could contribute not only to the Industrial Strategy and the UK’s productivity problem, but also towards meeting our carbon targets under the Climate Change Act, and making environmental improvements in line with Defra’s forthcoming 25 Year Plan for the Environment.

Why and how should Government intervene?

The question then is what Government should do about it? If the economic opportunities to improve resource productivity are so great, then it should be in the interest of companies to realise these opportunities, and improve their competitiveness. What is the rationale for Government intervention?

Participants at the Policy Exchange roundtable indicated that whilst there are significant opportunities to improve resource productivity, they are not always realised by businesses. The main barriers can often be a shortage of internal capital, coupled with risk aversion or short-termist attitudes towards investing to improve future efficiency. Improvements in resource efficiency can yield long term savings, but still often require significant up front capital investment. Business investment horizons are often very short, with firms looking for a 2-3 year payback. This severely limits the scope of possible improvements in resource efficiency. Short investment horizons are compounded by the fact that resource efficiency investments have to compete against other demands on capital (potentially on a global basis if a multinational firm). It is often difficult to make the case to invest in resource efficiency – even within a resource-intensive business. Businesses could also look to external sources of finance, such as banks. But informational failures may impede the use of external finance, for example the cost of producing ‘investment grade’ analysis of efficiency opportunities can be prohibitive.

There may be a role for Government intervention to overcome these financing challenges and unlock projects. However, interventions to promote energy and resource efficiency need to be well thought through, and evidence led. There have been some notable failures of policy in the past, due to a lack of understanding of the underlying barriers to investment in efficiency – such as the Green Deal energy efficiency scheme. Government must explore in detail the underlying barriers to business investment in resource efficiency investment before it proceeds further.

Because of the difficulties in financing resource efficiency improvements, businesses rarely make significant transformational changes in the way they use resources, and instead tend to make relatively incremental improvements. There are of course exceptions. For example, over the last few years Jaguar LandRover has developed a completely new range of lightweight aluminium car bodies, driven by a need to reduce the weight of its vehicles in order to meet fuel efficiency and carbon standards. As part of this process, Jaguar LandRover made fundamental changes to its manufacturing process, to reduce overall material consumption, and increase the recycled content of the materials used. Central to this change was the development of a new aluminium alloy which can tolerate higher levels of impurities. This means that scrap castings and offcuts, which were previously discarded, can now be recycled back into the production process, thereby creating a closed-loop system. Overall, this has resulted in a 40 percent reduction in the weight of the cars, improvements in fuel efficiency, a reduction in the amount of virgin materials consumed, and the amount of waste generated.

This example highlights an important way in which Government can encourage resource efficiency improvements – through research funding and catalysing the rollout of new innovations. The project was delivered through a public-partnership between Jaguar LandRover and Novelis, facilitated by the University of Cambridge, and part-funded by Innovate UK.

Whilst this is an excellent example, in general the Government could do more to support research and innovation into resource efficiency. In 2015/16, Innovate UK allocated just £6 million of its £547 million annual budget to research into Resource Efficiency. Government has pledged to substantially increase R&D spending – with the Autumn Statement revealing an additional £4.7 billion of additional funding by 2020/21, including a new ‘Industrial Strategy Challenge Fund’. Given the size of the opportunity outlined above, and its relevance to both the Industrial Strategy and the Emissions Reduction Plan, resource efficiency should arguably be one of the areas of focus.

Tackling these issues will require some novel thinking from Government. Waste policy, resource efficiency, and productivity have historically been led by quite separate parts of Government (across Defra, what is now BEIS, and HM Treasury). There is a risk that work continues in silos, but roundtable participants thought that the process of developing a new Industrial Strategy could bring together these various parts of Government, and create a more joined up approach

Productivity

Productivity measures

Economic productivity measures, including output per hour, output per job and output per worker for the whole economy and a range of industries; productivity in the public sector; and international comparisons of productivity across the G7 nations.

Britain’s poor productivity record has been highlighted by government figuresshowing the biggest gap with other leading western economies since modern records began in the early 1990s.

Output per hour worked in the UK was 18 percentage points below the average for the remaining six members of the G7 group of industrial nations in 2014, the Office for National Statistics said.

The gap – up one percentage point on the previous year – was the widest since 1991 and showed a particularly marked deterioration since the onset of the financial crisis and deep recession of 2007-09. The shortfall was slightly smaller than the 20-point gap reported in the ONS’s preliminary estimates released in September 2015.

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Competitiveness, Strategy....

Competitiveness

The World Economic Forum lists the following indicators of competitiveness:

1. Effective institutions - which create an economic environment in which businesses can develop, and consumers have confidence. These should be ‘sound, honest and fair’.
   
2. Effective infrastructure – which provides effective transport and energy supplies.
   
3. A sound macro-economic environment, including sound public finances, and low and stable inflation.
   
4. A healthy and educated labour force, with an emphasis on higher education, and the continuous upgrading of skills.
   
5. Efficient goods markets, with high levels of competition, and low levels of regulation.
   
6. Efficient labour markets, which are flexible, and provide effective incentives to work and effort.
   
7. An effective financial market, which provides a continuous flow of capital to business, effectively manages financial risk, and is trustworthy and transparent.
   
8. The ‘readiness’ of firms to adopt new technology.
   
9. The extent to which firms operate in large global markets, which enable them to gain from economies of scale.
   
10. Business sophistication, which relates to the effectiveness of business networks, the quality of supporting industries, and advanced business processes.
    
11. Continuous innovation, which counteracts diminishing returns to existing technology. 
    
    Read this....imports improve productivity
    

Productivity and Competitiveness

  Measuring competitiveness

There is no single method of measuring competitiveness, hence it can be measured in a number of ways, including:

1. Relative export prices, which are one country’s export prices in relation to other countries, expressed as an index.
2. A country's terms of trade, which is an index of the ratio of a country's export and import prices.
3. Labour productivity, which is usually expressed as GDP per worker, or GDP per hour of employment.
4. Unit labour costs, which are the cost of labour per unit of output.

   Price competitiveness

   Price competitiveness refers to how well UK exports compare in terms of price.  This is affected by a number of factors, including:
5. Relative inflation - even small annual differences can build-up over time and become significant.
6. The relative real exchange rate (RER) – which is the nominal exchange rate deflated by an index of prices. In the UK it is measured by dividing the trade weighted Sterling Index by the RPI (or the Consumer Price Index – CPI), x 100. For example, if the Sterling Index rises by 7% and UK prices rise by 2%, the RER is 107/102 x 100 = 105, hence the real value of Sterling rose by 5%.
7. Labour costs - including wage and non-wage costs, such as employer contributions to pensions.

Non-price competitiveness

Non-price competitiveness  refers to how well UK exports of branded goods and services do in overseas markets in aspects of competition not associated with price, such as:

1. Product quality and design.
2. Business Research and Development (R&D), especially new product development
3. Product reliability
4. The strength or weakness of ‘local’ brands
5. The effectiveness of marketing in overseas markets
6. Levels of productive and dynamic efficiency of firms.
7. Levels of ‘x’ inefficiency, including poor management, excessive bureaucracy, and government failures.
8. How effective the economic and political system is in allowing markets to form - are there missing or incomplete markets?
9. Investment in new technology, which helps improve quality and reliability
10. Investment in human capital, which improves skill levels and reduces skill shortages – low skills, and labour shortages, can both seriously reduce competitiveness.
    

Competitveness, Strategy and Productivity