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In its most simple form, an organization can grow production by either adding more workers or by increasing production per worker (i.e., labor productivity) (see figure). Finding enough workers at the right time, right place, right costs, and with the right qualifications is never easy. But in light of slower growth in labor supply around the globe, boosting labor productivity— which potentially creates more room to drop prices and raise wages while maintaining margins—is the more sustainable way to drive growth. Going beyond the business balance sheet, higher labor productivity can thus strengthen consumers’ purchasing power and create a virtuous cycle of higher demand for goods and services at the aggregate level, rising living standards, and accelerating growth.
There is no single magic bullet for raising productivity. Asking workers to put in more time for the same amount of money only works during downturns when there are not many alternative job opportunities and workers’ mobility between jobs is limited. Most lasting productivity gains therefore come from new investments—in more machinery and equipment, but especially in new technologies such as information and communication technology (ICT), research and development (R&D), organizational innovations, and in people through raising their skills and competencies. But how productive are those new investments?
Our preferred measure of productivity, which is called total factor productivity (TFP), takes into account not only labor as an input but also the contributions of physical, human, and other intangible capital to the production of goods and services. In other words, total factor productivity growth is the result of a combination of improvements in efficiency (i.e., fewer inputs are needed for a given output) as well as technology and innovation (i.e., more output is achieved from a given input). Improving TFP is the key to averting the impending productivity crisis.
Operational efficiency or excellence refers to the level of effectiveness, new processes, business models, and organizational structures to anticipate and meet customer demands and remain competitive in a global marketplace.a
Innovation is both internal and external facing to the firm: an innovative organization creates new ways of organizing and managing its activities as well as new ways of doing business with its customers in delivering new products and services. Innovative activities result in business processes, products, and services that did not exist before, thus, pushing out the productivity frontier.b
Intangible capital, or alternatively called knowledge-based capital, refers to the expanded set of assets that drive innovation including the full range of activities needed to implement or commercialize new ideas, such as:
- computerized information (software and databases);
- innovative property (R&D, mineral exploration, entertainment and artistic originals, and design and other new product development costs); and
- economic competencies (branding, including market research and long-lived advertising, firm-specific human capital and training); and organizational capital including business process investment.c
a Chuck Mitchell, Rebecca Ray, and Bart van Ark, The Conference Board CEO Challenge® 2015: Creating Opportunity out of Adversity—Building Innovative, People-Driven Organizations, The Conference Board, January 2015, https://www.conference-board.org/ceo-challenge/.
b Carol A. Corrado and Charles R. Hulten, Measuring Intangible Capital: How Do You Measure a “Technological Revolution”? American Economic Review Papers and Proceedings, 2010.
c Harvey D. Shapiro, How Do Companies Make the Value of Intangibles More, Well, Tangible? The Conference Board, Executive Action Report 429, June 2014; and Charles Hulten, How Much Does Your Company Really Invest in Innovation? The Conference Board, Executive Action Report 418, October 2013.