CONSULTING ON PRODUCTIVITY

AND PERFORMANCE
IMPROVEMENT
20
The role of productivity as a major contributor to company competitiveness
and national welfare is universally recognized. Generally, productivity is a
measure of the quantity and quality of what is produced in relation to the
resources used, both human and physical. Productivity is affected by the quality
of the whole human and business environment. However, the principal area
where produc-tivity growth is created is the enterprise, as it is here that the
whole range of available resources and conditions come together to produce
goods and services. The effectiveness of the combined functioning of these
resources in a given macroeconomic, institutional, social and natural
environment is reflected in productivity.
Helping clients to understand and increase productivity has always been one
of the fundamental objectives of management consulting. However, concepts
of productivity and approaches to improvement have undergone many changes.
The “scientific management” and “rationalization” movement initiated by
Frederick Taylor, with its concentration on the workplace and on the simplifi-
cation and better organization of production, was in fact the start of productivity
consulting. It developed numerous techniques for improving productivity and
efficiency, many of which are still in use.
Productivity improvement is nowadays a key element of most management
and business consulting work, although often productivity is described in terms
of business efficiency, performance, total quality, or competitive edge. The
productivity dimension looms large in business process re-engineering, total
quality management (TQM), company performance improvement, kaizen,
bench-marking and corporate excellence.
This chapter begins with a short review of changes in productivity concepts,
factors and conditions. It then focuses on a few issues that form the core of
consulting for productivity and performance improvement: productivity analysis,
strategies and approaches to improve productivity, and programmes for improving
company productivity and performance. At the end we provide a brief overview of
the major techniques and tools for improving productivity.

437
Management consulting

20.1 Shifts in productivity concepts, factors

and conditions
Problems with productivity often start with a poor understanding by
management of its real meaning. In a survey by the American Management
Association in the United States, 95 per cent of respondents agreed with the
statements that productivity related to quality of outputs as well as quantity
(but what about costs?) and 90 per cent thought that productivity referred to
output per person-hour (only?).1

Changes in understanding productivity

Conventionally, productivity has been considered as the ratio of physical
output to input. This implies that productivity is simply production-oriented
and concerns manufacturing activities only. In practice, however, an
organization has multiple objectives and requires resources to meet them.
Furthermore, objectives are seldom met as a result of one particular resource:
multiple resources produce the final result through their interaction. Besides,
some objectives may be achieved at the cost of others. There is, therefore, a
need to have a new – more holistic and systemic – look at productivity.
Since the modern business cycle includes processes of management, supply,
marketing and sales, client service and client relationships, and many others, the
concept of productivity needs to be expanded to cover all of them, not only
production. Therefore, for example, the concept of labour productivity – the ratio
of output to the labour input – may be misleading because the productivity of
labour can be increased by using different components and parts, or by installing
new capital equipment. The concept of capital productivity is equally
unsatisfactory because increasing capital productivity is dependent on many
factors other than capital, such as knowledge, skills, systems and technology.
Because of the evident deficiencies in single-factor productivity
measurement, the concept of multifactor productivity has emerged. Multifactor
productivity is a composite measure of how effective and efficient a company
is in using its labour, capital, technology, management, organization, and other
factors. But even this approach is internally focused and does not refer to
customers, and is therefore becoming less relevant.
Companies can also achieve higher productivity by producing goods or
services that are more valuable to customers. The new paradigm shifts the
focus from the input side of the productivity equation to the output side or
value-added aspects of productivity. The traditional concept of “producing
more with less” is less and less relevant; many companies now seek to produce
more valuable outputs that satisfy customers with the same or more resources.
The “high road” to productivity improvement is characterized by actions to
enhance the outputs, whereas the “low road” focuses on reducing the amount
of inputs, particularly of human resources.
438
 Consulting on productivity and performance improvement

Major factors and conditions affecting productivity

Awareness of the main external and internal factors affecting productivity is of
critical importance to both clients and consultants. External productivity factors are
conditions in the business environment; management cannot control these but
should be aware of them and their dynamics. Internal productivity factors are those
that are under effective control of management and include factors related to
resources (input), processes and output (figure 20.1). Provided that external factors
have been properly taken into account in the business strategy, the main potential
for productivity improvement lies in internal productivity factors.
In many cases, productivity problems have a multifactorial nature and it is
more constructive to think about creating particular conditions by optimizing
many different factors. For example, one key condition may be an effective
productivity management system. Another critical condition of sustainable
productivity improvement is applying innovation and new technology coupled
with entrepreneurship.
To compete successfully today, companies have to be highly entrepreneurial,
which means permanently innovative in business strategies, processes, products
and services. Most traditional companies lack such an entrepreneurial spirit. In a
survey by PricewaterhouseCoopers of more than 800 companies in seven countries,
50 per cent of managers said they would launch a new product or service only if
they believed it had an 80 per cent or higher chance of success, in terms of adding
market share in a set time. This indicates a lack of willing-ness to take risks. Many
companies suffer from “analysis paralysis” prior to launching a new product. In
many cases this leads to more wastage than if they were to accept a certain amount
of failure in return for some breakthroughs.
More innovative companies generally grow faster. Businesses in which less
than 10 per cent of annual revenue comes from products launched in the
previous five years have a 30 per cent chance of seeing their sales decline, as
competitors capture their market share.
Innovation requires a combination of strategy, financial commitment,
operational integration, entrepreneurship and competent people. This means
investing in the company’s intellectual capital and the people likely to
participate in the innovation learning process. Managers have to ensure the
cumulative and collective character of this learning process and provide an
entrepreneurial, innovation-friendly learning environment. To free the
entrepreneurial spirit in a company, the first shift in strategy should be to move
from resource allocation to resource attraction.
Sustainable competitiveness is also closely linked to the level of technological
capability. A company that cuts its investment in research and development will
often lose much more than it saves. It has been reported that a dollar spent on R&D
returns eight times more than a dollar spent on new machinery. New machinery
can help you do old work better, but R&D leads to innovation – new products that
are of higher value than the ones they replace. Research and development are
necessary but not sufficient for achieving a competitive position

439
440
Figure 20.1 An integrated model of productivity factors
Management consulting
 Consulting on productivity and performance improvement

in the market. The way technology is used and managed is important as well;
it is most effective when coupled with innovation.
Some of the most admired companies in traditional sectors owe their success to
their masterful use of information. Toyota built powerful competitive advantages
through simultaneous engineering, kanban (“just in time”), and quality control –
all of which depend on techniques for processing and utilizing information.
WalMart exploited its electronic links with suppliers and the logical technique of
cross docking to achieve a dramatic increase in inventory turnover. And thousands
of companies that have embraced TQM, re-engineered their operations, and
focused on their core competencies have chosen to define their managerial goals in
terms of information flows. IT can be used to create business value by managing
risk in financial management, to reduce costs by improving business processes and
transactions, and to add value for customers with information about products and
services before, during and after sales.
Manufacturers are also beginning to tap the Internet’s potential, trans-
forming e-business into the engine of industry. In 1999, Ford unveiled the
AutoXchange, a massive online shopping centre for all its goods and services.
The company expects to save US$8 billion in a few years from lower prices
and improved supplier productivity. The glassmaker Corning claims that it will
be able to reduce its average procurement cost from US$140 to US$10 by using
a Web-based catalogue in its science products unit. Business-to-business trans-
actions (B2B; see Chapter 16) transform every step in the conventional
business practice from order-taking to delivery. According to some experts,
B2B exchanges enable many smaller companies to become part of large
networks, which was previously impossible.
Knowledge management, including knowledge-sharing (see Chapter 19), is
becoming another important condition for productivity improvement. For exam-ple,
sharing knowledge is one of the three business processes for which the General Electric
CEO Jack Welch takes personal responsibility (the other two are allocat-ing resources
and developing people). At Shell, employee teams meet weekly to consider ideas
emailed to them by others in the company. In 1999, the teams, called game changers,
collected 320 ideas. Of the company’s top five new business ini-tiatives in 1999, four
came from the collaborative work of teams. Experience indicates that the best
knowledge-sharing happens in the companies that create communities of practice –
clusters of people linked by common practical interests or activities and sharing
knowledge focused on their practical needs.
The most critical condition for sustainable productivity growth is the quality of
employees and managers, and this demands good human resource manage-ment
practices. This, however, is often ignored in practice. Workers who would like to
be more productive are often held back by repressive management practices. The
importance of “job fit” is often ignored in hiring and promotion. Research by
Anderson Leadership in the United States found that 50 to 85 per cent of employees
in client organizations were miscast in their jobs.2
Another condition related to human resource management practices is an
enabling and supporting policy environment, and corporate management
441
Management consulting

Figure 20.2 A results-oriented human resource development cycle

Training
Identification Identification
of company of sources HRD needs
problems/goals of problems assessment
(people
) Motivation
and
OD

Feedback Top-level line Development

management objectives

Motivation
and OD
programme Training objectives

Training programme

Training resources
(trainers, facilities,
materials, funds)

Assessment of Training Programme

contributions to goals programme organization and
and problem-solving evaluation implementation

accountable for the performance achieved by its workforce – hence the import-
ance of corporate culture for productivity improvement. This culture needs to
support collaboration to ensure the involvement of all people making work-
related decisions.
Figure 20.2 provides a general model of links between company objectives and
problems, employees’ specific training needs and approaches that can be combined
with the envisaged productivity improvement measures in a single results-oriented
and flexible human resources development consulting cycle.
The first phase of this model includes identification of company goals and
problems, the sources of the problems, and personnel training and develop-
ment needs. The results of this phase provide the necessary information for the
second phase – identification of development and training objectives.
442
 Consulting on productivity and performance improvement

Development objectives provide information for designing organizational

development (OD) programmes, while training objectives serve as a basis for
training programmes. After both programmes have been implemented, the
results are assessed and compared with the objective and/or company needs.
The cycle can be repeated if necessary.
Such integration of business objectives with training and development helps to
improve organizational performance by making people aware of the need to change
and assisting them in solving strategic and operational problems.
An important condition for a successful productivity drive is a system for
recognition and sharing of productivity gains. Gain-sharing, profit-sharing and
payment by results or performance are generally positively related to corporate
productivity provided the system is comprehensive, based at the appropriate
level and developed with the involvement of the workforce. It is important that
connections between bonuses and improvements in productivity are clearly
understood by the personnel.
Partnership between employers and workers’ organizations, and trust and
confidence between management and employees, are also important enabling
factors of productivity improvement. Measures to promote such trust include
secure employment, information-sharing, productivity gain-sharing, partic-
ipative management, training, and fairness in relationships.

20.2 Productivity and performance measurement

Productivity measurement and analysis form the foundation of sound productivity
improvement consulting. The success of productivity measurement and analysis
depends largely on a clear understanding by all stakeholders of the relationship
between productivity and the effectiveness and efficiency of the organization.
Productivity measurement can stimulate operational improve-ment: the
announcement, installation and operation of a measurement system can improve
labour productivity, sometimes by 5 to 10 per cent, with no other organizational
change or investment. Productivity indices also help to establish realistic targets
and checkpoints for diagnostic activities during an organizational development
process, pointing to bottlenecks and barriers to performance. They can also indicate
where to look for opportunities to improve and show how well improvements are
progressing. There can be no real improvement in industrial relations or proper
links between productivity and compensation policies without a sound
measurement system.

Shifts in productivity measurement approaches

The traditional approach is to measure productivity as the ratio of output to
input, or products to resources used. This is not always relevant. Many
companies today are more interested in measuring total productivity than only
labour or capital productivity. Total productivity measures reflect the
443
Management consulting

relationship between the total value added and the total input of an enterprise,
as well as the quality of their interrelationships. In addition, there are other
performance indicators, such as profitability, return on investment, quality,
customer needs satisfaction, social climate, and environmental impact, that
need to be assessed.
A survey of the most admired companies by Fortune in October 2000 stressed
that they all focus on performance measurement.3 Though 80 per cent of them used
profits as a measure of success, the best companies were much more likely to use
return-based methods of measurement, such as assets, equity, capital, and
shareholder value. When it came to charting their performance, these companies
were more likely to focus on customer- and employee-based measurements.
Almost 60 per cent relied on customer indicators like satis-faction, loyalty, and
market share. And 40 per cent charted employee retention, career development,
and other employee-oriented measurements – almost three times the percentage
among companies that did not make the list.
Many executives from the best companies report that these measures
encourage cooperation and collaboration, and help companies to focus on
growth, operational excellence, customer loyalty, human capital development,
and other critical issues. They use these measurements to link performance
with real rewards. The top organizations create performance measures that
focus on all drivers of their businesses – financial performance, shareholder
value, and employee and customer satisfaction. Productivity is just one of the
most important sources of profit (see figure 20.3).
The recognition of customer focus as an important part of any competitiveness
strategy has led many consultants to look for measures that are closely linked to both
customer satisfaction and value creation. Indeed, the purpose of any business is to
create and provide products and services that are of value to customers. In the long run,
a business organization can produce shareholder value only if it first produces
competitive customer value added (CVA). CVA can be expressed as the relationship
between the degree of customer satisfaction with the product or services and the
satisfaction with the price paid. An organization can also be said to create CVA when
it provides products and services for customers that are of greater value (or worth) than
those of competitors. CVA can be measured through market surveys of customer
satisfaction and calculated as the ratio of the company performance relative to its
competitors as follows:
CVA = Perceived value of the company offers / Perceived value of competitive offers
If the CVA ratio is below one, then the company has no competitive
advantage in its offers. The higher above one the CVA ratio, the greater the
competitive advantage of the company offers.
Improvement in productivity is the result of the combined efforts of many
stakeholders with different objectives and perceptions about organizational
effectiveness. No part of an organization is so simple that it can be measured
adequately by one indicator, and a “family of measures” should therefore be
used. By drawing together a set of measurements from the perspectives of its
444
 Consulting on productivity and performance improvement

Figure 20.3 The contribution of productivity to profits

Change in Change in Change in

sales volumes revenue selling prices

Change in Change in Change in

productivity profit price recovery

Change in Change in Change in

purchase quantity purchase costs purchase prices

Source: Adapted from European Association of National Productivity Centres (EANPC): “Productivity, innovation,
quality of working life and environment”, in Memorandum (Brussels), Feb. 1999, p. 6.

various stakeholders – customers, employees, stockholders, owners, suppliers

and communities – an organization can avoid the shortsightedness that often
results from focusing on a single measure of success.
As is the case with any organizational change (see Chapter 4), consultants
may meet some resistance to productivity and performance measurement.
Reasons may include potential misunderstanding and misuse of measurement,
fear of exposure of inadequate performance, additional time and reporting
demands, reduction of autonomy, and others. Implementing a productivity
measurement system is an organizational change and should be managed as a
change process.

20.3 Approaches and strategies to improve

productivity

There are many approaches to improving organizational productivity and

performance, ranging from incremental, small-steps improvement to radical
strategic changes. One of the most important tasks of the productivity consult-
ant is to make conscious and educated judgements on the needs of the client
organization. Does the organization have the potential and reserves to cope
with incremental continuous improvements? Or is the client already in a
situation where only radical strategic intervention can help? The two
approaches will be considered separately.

Incremental continuous improvement

The essence of incremental continuous improvement is reflected in the kaizen
approach developed in Japan and described in many publications. It involves
making continuous small improvements that require little or no investment,
445
Management consulting

Figure 20.4 Kaizen building-blocks

TQM

total
quality
management

total
productive
maintenance
TEI JIT
TPM
total just
employee in
involvement time

Source: J. DeWeese: “The people–machine connection at Texas Instruments”, in National Productivity Review (New
York), Summer 1999, p. 40.

involving all employees in making them, and providing structured oppor-

tunities, systems and tools for increasing productivity. Its main objectives
could be, for example, eliminating waste, reducing defects, keeping the
workplace tidy, improving quality, and developing good working habits. The
main building-blocks of kaizen are total employee involvement (TEI), just-in-
time (JIT), total productive maintenance (TPM) and TQM (figure 20.4).
For example, kaizen involves workers in maintenance operations by
harness-ing the symbiotic relationships between processes, operators and
maintenance technicians through:
taking positive actions to eliminate barriers to operator maintenance
training operators to perform routine set-up and maintenance tasks
supporting a steady stream of process modification projects, and
rotating operators to interesting jobs elsewhere in the organization.
The most important task of continuous improvement is to achieve sustainable
growth in productivity through elimination of all kinds of waste – of materials, energy,
labour-time, machine-time – anything that does not provide value to the customer.
Sources of waste could be poor design, inappropriate technology, wrong choice of
materials, carelessness, improper work methods, material scrap, rejects, pollutants,
movement inventories, machine breakdown, delays in obtaining

446
 Consulting on productivity and performance improvement

repairs and other services, inefficient space utilization, employees’problems,

idle money, work in process, and many others.
A preventive approach focused on reducing the generation of waste is most
effective. The development of waste management indices, such as the reduction
index, collection index, recovery index, and disposal index, at various stages of the
process can help in monitoring and reducing waste and improving productivity.
One such effective approach to reducing waste and improving the quality of
environment is the green productivity approach developed and popularized
recently by the Asian Productivity Organization (box 20.1).
Another important task of continuous improvement could be saving on small
capital expenditures. Here we are not talking about strategic investments, but small
amounts of money within the approved budget. But are they really small? Any
company can create far more sustainable value by reducing its capital expenditures
through rigorous evaluation of the small-ticket items that are usually rubber-
stamped. Those “little” requests – which could take up to 80 per cent of the
remaining budget after strategic items – often prove to be unnecessary (duplicating
other requests) or very expensive. But few managers have the time, energy, or
inclination to question their justification.
It may be useful to ask the following eight questions concerning small-ticket
capital budget items, as suggested by T. Copeland:4
To operating managers:
Is this your investment to make? Often a unit manager will overstep his or
her boundaries and put in a request for an investment that is someone else’s
responsibility.
Does it really have to be new? Overall costs can be 30 to 40 per cent lower
if a company continues using an existing machine for five more years
instead of buying a new one.
How are our competitors meeting compliance needs? A good way to
combat conservative and costly compliance with different regulations is to
require unit managers to look into the practices of other companies.
To senior managers:
Is the left hand duplicating investment already made by the right? Many
organizations with complicated operations have a tendency to accumulate
excess capacity, sometimes up to 70 per cent.
Are the trade-offs between profits and capital spending well understood? Often
managers will request new assets, neglecting future productivity and creating a
culture that places earnings above all other performance measures.
Are there signs of budget “massage”? It is common for unit managers to be
reluctant to propose reductions in their capital spending, for fear that the head
office will not be generous when they need an increase. On the other hand,
asking for more money could provoke an encounter with internal auditors. So
they “massage” the budget, shuffling expenditures between budgets items or
spending money urgently before the end of the budget year.

447
Management consulting

Box 20.1 Green productivity practices

Steps Tasks
Get started Formation of green productivity team
Walk-through survey of the production
process
Preliminary identification of waste-
generating operations
Analyse process steps Detailed process study
Preparation of process and activity flow
chart
Preparation of materials balance
Identification and characterization of
sources of waste
Assignment of costs to waste streams
III. Conduct energy audit Causal analysis for waste generation from
known sources
Identification of energy usage areas
Preparation of energy balance
Identification of energy losses
Generate waste Causal analysis for energy loss
prevention options Process optimization studies
Development of waste prevention options
Select waste prevention Preliminary selection of workable options
solutions Assessment of technical feasibility
Assessment of economic impact
VI. Implement waste Evaluation of environmental aspects
prevention solution Preparation of implementation plan
Implementation of waste prevention
solution
VII. Study pollution control Monitoring and evaluation of results
Treatability studies of effluents
Design of appropriate pollution-control
systems
Implementation of pollution-control
system
VIII. Maintain green Performance evaluation of pollution-
productivity control system
Sustain waste prevention and control
Go to step II Identify and select next focus area

448
 Consulting on productivity and performance improvement

Questions to be put at the end of the process:

Are shared assets fully used? Businesses in networks may use a lot of shared
assets, and are thus highly sensitive to slow-moving bureaucratic proced-
ures. If shared assets are not fully used most of the time, it means that a
company has problems with coordination.
How fine-grained are capacity estimates? If measurements of need for
equipment are not adequately fine-grained, managers can underestimate the
capacity of equipment networks.

Quantum leaps and large-scale strategic improvements

“Quantum leap” improvements are necessary to achieve dramatic break-
throughs in products and services design and delivery, competitiveness,
creation of new markets and similar. The changes are drastic and require
considerable investment in new technology, equipment, and product
development, as well as major changes in production processes. Such changes
are normally organi-zation-wide and affect a large number of employees. The
gains can be substantial and strategic in nature, but resistance and difficulties
in imple-mentation are likely to be much higher than with kaizen.
Approaches and programmes that produce major improvements in
productivity and performance exhibit one common characteristic. They do not
start by identifying and dissecting current problems, shortcomings and under-
utilized resources with the intention of devising a better method and so
increasing productivity. Their starting-point is the client’s vision of the future
and a strong desire to translate this vision into reality. This vision could be to
become a sector leader, achieve a significant competitive advantage, offer a
completely new sort of product or service, or cut costs by 30–40 per cent.
The most important method for achieving new and ambitious goals is strategic
management coupled with productivity improvement programmes or projects
(PIP). Strategic management requires a business strategy defining the business in
which the organization operates (“the right things to do”) and capability strategies
defining the organization’s general capabilities and operational competencies (“to
do things right”). With this approach, productivity and perfor-mance improvement
can be directed to a future purpose, which serves as the main common target and
driving force for the consultant and the client. It helps the client organization to
develop a long-term perspective within which to determine and realize short-term
goals, and to learn to work towards its purpose over time. We mention below a few
choices related to performance improvement that are emerging as a result of recent
shifts in the business environment.

Innovative or adaptive strategies? The most basic choice, which makes the further
design of strategy easier, is between an innovative and an adaptive strategy. An
innovative strategy means investing in productive capability or new combinations of
inputs which generate higher-quality, lower-cost outputs. In contrast, an adaptive
strategy does not attempt to upgrade and recombine the firm’s

449
Management consulting

assets and inputs. In its extreme form, an adaptive strategy can entail disinvest-ments,
which reduces the ability to create value tomorrow; it extracts value today without
putting new value-creating capabilities in its place, thus reducing the abil-ity to
compete. An adaptive strategy can make sense in the short or medium term. An
innovative strategy is a development process that takes time and a delay in its
introduction can make it more difficult to develop an effective innovative response.

Competitive advantage through strategic capabilities. Winners in the global

marketplace demonstrate management capability to coordinate and redeploy
competencies within the organization. These dynamic capabilities must be tuned
to customer needs; they should be unique or difficult to replicate so that products
and services can be priced with little regard for competition. Any assets that can
be bought and sold at an established price, that can readily be assembled through
markets, or that can be replicated through formal contracts with a portfolio of
business units cannot be considered as strategic. A capability that is difficult to
replicate or imitate can be considered a distinctive competence.

Competitive growth strategies. Companies that select the growth path as

their main direction have to apply special growth-oriented strategies. Growth
is hard to achieve and even harder to sustain. Three general conclusions
emerged from a 1999 review of the fastest-growing companies:5 young
growing companies need to see themselves as much larger enterprises almost
immediately; sustaining value-creating growth requires heavy investment in
IT, R&D and capital assets; and the ability to form and manage alliances to
share learning is a key strategy for companies of all sizes and in all sectors.

Moving down the value chain. Providing services is generally more lucrative
than making products. The top companies are starting to create new business
models to capture profits at the customer end of the value chain. They have gone
“downstream”, towards the customer, to tap into valuable economic activity that
occurs throughout the entire production cycle. Downstream markets offer
important benefits besides revenue. They tend to have higher margins and require
fewer assets than manufacturing. And because they tend to provide steady service-
revenue streams, they often work against business cycles and provide more
economic stability. To capture value downstream, producers have to expand their
definition of the value chain, shift their focus from operations to customer
allegiance, and look again at their vertical integration.

Customers as partners in innovations. Businesses today consider customers as an

important source of information, and as partners in R&D and product-testing. Thanks
largely to the Internet, consumers increasingly engage in active dialogue with
manufacturers, and create and compete for value, becoming a new source of
competence for corporations. For example, more than 650,000 customers tested a beta
version of Windows 2000® and reported back on their ideas for changing some of the
product features. The value of this collective R&D

450
 Consulting on productivity and performance improvement

investment by customers was estimated at more than US$500 million.6

Dialogue with customers dramatically improves organizational flexibility.
The following assumptions are of critical importance in designing
strategies for radical improvements in productivity and performance:
The future is more important then the past.
Intangibles are more important than tangibles.
Speed is intrinsic to economic value.
Derivatives become the core events.
Wealth comes more often from the periphery than from the centre.

Combining strategies
The two strategic approaches to productivity improvement could be combined to
give a third approach. While the two ways are contradictory to each other and
should not be applied simultaneously, if applied successively they could be very
effective. Kaizen could assist in eliminating evident waste and inefficiency before
an organization undertakes a project for dramatic strategic improvement.

Learning from best practices through benchmarking

One of the best ways to improve company competitiveness and productivity is
through benchmarking – studying how world-class companies operate.
Productivity consultants should be aware of this important and popular method,
which involves not only examining performance results but also understanding
what lies behind them. Companies’ success may be based on optimal staffing
structure, use of new technology, organizational design, ability to network, or
many other things. But often the essence of their strategy is to bring all these
elements together, forming combinations that change continuously, while at the
same time pursuing innovation.
Benchmarking is a continuous process of assessing products and services
against the toughest competitors or the companies recognized as industry leaders.
It is a process of identifying and understanding outstanding practices in organi-
zations anywhere in the world and adapting them to help in improving your
company performance. It requires being humble enough to admit that others are
better at something, and wise enough to try to learn how to match and even surpass
them. Benchmarking can be applied in many areas, the most important of which
are strategy, products, processes and competence. Benchmarking provides
information needed to focus and support improvements, and develop a compet-
itive advantage. In productivity analysis, benchmarking helps to identify specific
activities and practices that ought to be changed. A good example of bench-
marking is given in figure 20.5, which illustrates Nokia’s corporate fitness ratings
in comparison with other computer and electronics companies.
Kari Tuominen provides an interesting and practical benchmarking model,7
which is described briefly in box 20.2.
451
Management consulting

Figure 20.5 Nokia’s corporate fitness rating

Mission
and vision
Customer Corporate
orientation culture

Organization Planning and

and systems intelligence

Human Technical
resources resources

Marketing
Innovation
operations

Market strategy International strategy

Performance

All computer and electronics companies Nokia

Source: R. Maruca: “Entrepreneurs versus executives at Socaba.com”, in Harvard Business Review, July–Aug. 2000,
pp. 30–38.

Benchmarking tells us what the best companies have in common and what
could be useful for a consultant to be aware of in advance. Normally, the best
companies are those that consistently serve customer needs better. Customer-
focused practices usually result in lowest total cost, highest quality, most
responsive lead-time, reliable service, and customer satisfaction and loyalty.
The next most important feature of the best companies is an ability to learn and
an open learning culture, which encourages managers to search for continuous
improvements, and develops a corporate-wide perspective on how best to
create value and reduce costs.
As mentioned earlier, the most admired companies focus on performance
measurement. Their measurement systems are heavily focused on
implementation success. Every activity takes time and costs money. The longer
things take, the more they cost. Time is, therefore, a good neutral measure for
competitive benchmarking. It separates activities into value-adding and non-
value-adding. And we know that customers do not want to pay for time that is
not adding value to the operation.
All world-class companies have operating strategies that include total
quality commitment, simplified continuous flow, flexible responsiveness,
participation and involvement, and supply-chain networking. Best-practice
452
 Consulting on productivity and performance improvement

Box 20.2 Benchmarking process

Steps Tasks

Determine what to Identify key performance figures with a critical

benchmark impact on the company’s success. This will
influence the search for a benchmark company

Identify benchmark Identify benchmark companies that are

companies significantly better than yours in terms of
the selected performance measures

Measure performance Identify performance gaps between you

gap and the benchmark company, and how
performance areas have improved and are
expected to be developed

Identify excellence Identify factors that account for difference in

enablers performance and that need development to
achieve improvement

5. Learn how we do it Develop an understanding of your own process.

Measure performance and identify practices to
achieve a satisfactory performance

6. Learn how they do it Visit company. Develop an understanding of

their process. Measure their performance,
identify aspects of the process that contribute
to excellence, compare performance and
observe the root causes and enablers,
determine gaps

Establish performance Establish performance goals for

goals improvements. Determine ideas to be
implemented immediately after the visit, as
well as long-term goals

Adapt and implement Prepare plans and schedules and implement

them. Adapt and implement the best methods,
practices, and enablers into your own process

To gain superiority, The aim is to use continuous measurement to

continue development ensure that the objectives are achieved and
the benchmark level exceeded

Start again with higher Determine the long-term target, and start
targets again from the beginning

453
Management consulting

companies pay serious attention to changes in the workplace, such as work

organization, which includes changes in the production process, job content,
work allocation and organizational structure; human resource management
practices; and industrial relations practices.
Enterprises that invest effectively in intangible assets through training are
also likely to report positive performance trends in terms of revenue. Invest-
ments in human capital today are generally concentrated on well-educated and
skilled employees at the core rather than on less skilled workers at the
periphery. Best-practice companies tend to use lean production systems,
though not in an extreme form, which would reduce flexibility to adapt to sharp
market changes and would also have adverse social implications.
The best companies are distinguished by their high productivity. A wide range of
approaches, tools, methods and techniques have been developed for improving
productivity. These include continuous improvement, learning organizations, enter-
prise restructuring, business process re-engineering, strategic cost management, TQM,
organizational rejuvenation, Six Sigma, 5S, kaizen, strategic business units, green
productivity, innovative organizations, value creation, knowledge manage-ment,
customer orientation and many others. Implementing different combinations of these
approaches enables companies to enhance management dynamism, harness employee
potential, apply new technology more effectively, improve process management,
reduce waste and provide higher value for less money.

20.4 Designing and implementing productivity and

performance improvement programmes

A productivity consultant should be prepared to answer the typical client’s question:

“Why do we need a separate productivity (or performance) improve-ment programme?
Can’t we just improve our existing management and raise the discipline of employees?”
It should be pointed out that productivity embraces all components, processes and
activities of an organization. Depending on economic conditions and the stage in the
life cycle of the organization, not only incremental, but also systemic and radical
changes, may be needed. Radical changes can be introduced only through a horizontal
productivity (performance) improvement programme (PIP) across the board. There is
no standard PIP relevant for all situations; a PIP always has to be tailor-made to suit
specific organizational objectives, conditions and business environments. We will
therefore discuss here some principles to be applied in designing and implementing
such a programme.

General conditions of success

A sound productivity improvement programme should start with a clear and easily
communicated definition of the concept of productivity improvement. It should explain
why organizational improvement is important, evaluate current operating

454
 Consulting on productivity and performance improvement

situations and the reasons for the current status, and develop models of excellence
and policies and plans for improvement. The objective of productivity improve-
ment should always be expressed in terms of organizational improvement. The
overall PIP objectives should be followed by detailed action plans.
The PIP can be successful if a number of conditions are fulfilled within an
organization. The first one is that top management is commited to the pro-gramme
and there is an effective organizational arrangement headed by one of the top
managers. All managers and employees should be aware of and understand the
programme objectives and there should be open communication between different
organizational elements. The programme should be linked with strategic goals and
measurement processes that are practical and easily understood. The productivity
improvement techniques chosen should be appropriate to the situation and needs.
Monitoring, evaluation and feedback processes to identify results and barriers
should provide the basis for design improvements. Recognition of the key role
played by workers is crucial and should be demonstrated through a sound
productivity gain-sharing system supported by sound labour–management
relations. Finally, there must be pressure for change within the organization and its
external environment. Top management and consultants should provide leadership
in programme design and implementation, as well as permission to experiment with
new solutions.
There are many reasons to enter into a PIP, such as a negative balance sheet,
new products, equipment, technologies or materials, stronger competition,
demand for more flexibility in production, or need for shorter delivery time and
better services. Managers and consultants should be sure that there are enough
positive factors to give a reasonable chance of success, that the time is right
and that conditions are generally favourable.

Structuring the process

A systematic eight-step approach to designing a planning process for perfor-
mance improvement, suggested by Scott Sink,8 is shown in figure 20.6.
To run a productivity programme in an organization, a programme manager
must be able to suggest processes that can be used to identify problems, and to
work out and implement solutions. The intra-enterprise productivity processes
include, among others, suggestion schemes, quality circles, task forces, action
teams, productivity committees and steering committees, which should be fully
understood and used by the programme manager.

Deciding on a productivity improvement programme

The decision to enter into a PIP should be taken in the same way as for any other
investment: the cost of the investment should be compared with the likely benefits
and risks. The payback period for a PIP should normally be between 8 and 18
months. To prepare to make the decision to invest in a PIP, the first step must be
the identification and assessment of potential savings. The best way is

455
Management consulting

Figure 20.6 The performance improvement planning process

Recycle (annually):
Organizational
1 continual evolution
systems analysis
and improvement

Planning
assumptions

Performance
Key performance
3 improvement
indicators
objectives

Tactical objectives Key performance

4
and/or action items indicators

Action teams: Manage effective

Key performance
5 scoping proposals 8 implementation:
indicators
and project planning track and control

Project Measurement
6 management 7 and evaluaton

Source: S. Sink: “TQM: the next frontier or just another bandwagon to jump on?”, in QPM – Quality and Productivity
Management (Blacksburg, VA), Vol. 7, No. 2, 1989, p. 18.

to look at the big outputs and the large blocks of cost. Usually large potential areas are
directly related to product costs: the consultant should take the products with highest
output and look into their cost elements such as materials, value added per production
area, tooling, design cost, overhead cost and distribution cost.
Once a good reason for a project and the areas for big potential savings have
been identified, the framework for the PIP has to be set. This includes:
specifying the reason to start a PIP, so that people commit to the programme;
identifying where potential savings could come from, what is the value or the
percentage of cost of the potential savings and what risks must be taken to
obtain them; and ensuring that most of the areas where potential savings can
be made are covered.

The “royal road”

The “royal road”, used in many productivity improvement programmes, is
outlined in figure 20.7. It consists of three phases:
Phase I – The Pre-Survey, or Preliminary Survey Phase, to identify aims
and “sell” the programme to management.
Phase II – The Survey Phase, to set goals and obtain commitment of all
responsible area managers.

456
 Consulting on productivity and performance improvement

Figure 20.7 The “royal road” of productivity improvement

PIP Pre-Survey

identify the right approach

define the programme aims
design the programme tasks
define the areas to cover
Phase I design the project organization
schedule the programme 3 to 10
days

PIP Survey

inform all participants

collect data
describe the basic situation
agree on a reference period
Phase II analyse potential goals
design rough concepts 4 to 10
design detailed programmes weeks
set up task forces
schedule implementation
report on anticipated results

PIP Implementation

inform all participants

set up programme controls
implement sections, steps
get results
Phase III report on results obtained
implement next sections 4 to 6
months

Maintain high productivity

Source: J. Prokopenko and K. North: Productivity and quality management: A modular programme (Geneva and
Tokyo, ILO/APO, 1996).

457
Management consulting

Phase III – The Implementation Phase, to design and develop the

productivity improvement tasks in detail, implement the measures for
improvement and control, and evaluate the results.

To run a successful PIP, it is vital to involve management in the decision-

making process from the very beginning. If “stop/go” decision milestones are
incorporated into the programme after each main step, management becomes
very much involved in decisions on directions, aims, expected results,
necessary changes and investments to be made.
All reporting by the PIP team to management should be focused on decision-
making. This makes it easy to understand which data have to be collected and
checked, and how measures for improvement have to be presented as clear,
accurate and convincing information to the decision-makers.
For a PIP to be implemented successfully, the project team has to be well
motivated to achieve the results aimed for. At the end of the implementation
phase the results should always be documented by quantitative data reflecting
the improvements actually achieved.

20.5 Tools and techniques for productivity

improvement
It is very important for a productivity consultant to be aware of productivity
techniques and tools. In deciding on productivity techniques, managers and
consultants need to understand:
how comfortable the improvement team will be with the technique in the
tasks it is supposed to deal with;
how well the team understands the technique’s language;
how much the team knows about using the techniques or how rapidly it
can be trained.
If managers and consultants understand the purpose, language and relations
among various improvement techniques, using them will be easier. They will
be able to combine them in complementary rather than competitive ways. The
following should be taken into account in selecting the productivity improve-
ment techniques:
The needs of the process customer (internal or external) in identifying the
method.
The technique should be as simple as possible for the task.
Everybody must understand it; and everybody affected by it must have the
opportunity to contribute to its development and implementation.
It must empower people to perform better and have a motivating and not a
punitive character; it must be non-manipulative, honest and unambiguous.

458
 Consulting on productivity and performance improvement

Box 20.3 Some simple productivity tools

Activity analysis Predetermined tome standards

Brainstorming Process flow chart
Cause and effect diagram Quality circles
Cost control Setup reduction analysis
Downsizing 7 quality tools
Energy conservation Simple productivity measurement
Employee participation Statistical process control
Force-field analysis Suggestion schemes
5S good housekeeping Time study
Gantt charts Value analysis
Job enlargement Value engineering
Job enrichment Waste reduction
Job rotation Work analysis
Motion study Work organization
PERT charts Work simplification
Poka-yoke Work sampling
Productivity training Work study

Productivity improvement techniques may be old or new. In most cases old

tools are simpler and less sophisticated than the new ones. New developments do
not necessarily imply that old productivity tools should be – or are being –
discarded. For example, Taylorism is the application of well-proven techniques for
working efficiently in performing well-defined operations and is still used widely
today despite its shortcomings. Old productivity tools may be partic-ularly relevant
in less sophisticated operations and companies. Box 20.3 gives some examples of
relatively unsophisticated productivity tools.
It is worth noting that most of the “new” tools are in fact a combination of
well-tested and simple old techniques, including tools of industrial engineering.
Complex objectives and problems demanding integrated across-the-board
solutions call for more sophisticated and integrated multiple tools. Box 20.4
lists some sophisticated, multipurpose techniques, a number of which are
broadly used in many organizations.
So far we have mentioned here more than eighty different productivity
tools. Many of them overlap by purpose, or by focus (economics, technology,
management, behaviour, etc.); some of them are sophisticated, others less so.
It is difficult to navigate among them. Here are a few tips on choosing an
appropriate tool:
Identify techniques that have universal appeal or cross-over capability.
Create a common organizational language for diverse professional groups.

459
Management consulting

Box 20.4 Multipurpose productivity techniques

Activity-based costing (ABC) Multivariate analysis

Activity-based management (ABM) Objective matrix
Balanced score cards (BSC) Operations research
Benchmarking Outsourcing
Business excellence awards One-to-one marketing
Business process re-engineering (BPR) Pay-for-performance
CAD/CAM/CIM Plan–do–check–act (PDCA)
Conflict management Project management
Cost–benefit analysis Quality function deployment (QFD)
Customer satisfaction measurements Sampling surveys
Customer segmentation Scenario planning
Concurrent engineering Self-managing teams
Cycle-time reduction Six Sigma
Cross-functional teams Statistical tests
Economic value added (EVA) Strategic alliances
Electronic data interchange (EDI) Strategic planning
Experiments design methods Supply chain analysis
Gain-sharing Supply chain integration
Growth strategies System thinking
Group dynamics Taguchi methods
Group performance appraisal Theory of constraints
Just-in-time Time compression management
Kaizen (continuous improvement) Total employee involvement (TEI)
Knowledge management Total productive maintenance (TPM)
Learning organization Total quality management (TQM)
Mission and vision statements Virtual teams

Create cross-functional teams of members who can educate each other

about various tools from their functional disciplines. Key decision-makers
must understand and use the language for multiple tools.
Assess the improvement methods that the functional groups in the organi-
zation currently use and understand their commonality.
Integrate productivity tools to reach a solution that ensures that improve-
ment occurs and which all groups can support.
Another good approach is to mimic the improvement efforts and techniques
used by the competition. Some consulting companies systematically assess the
evolution of these techniques and shifts in their popularity among business
managers. A recent survey by Bain Consultants9 indicated that over the past decade
some management tools and techniques, such as one-to-one marketing,

460
 Consulting on productivity and performance improvement

TQM, and benchmarking, have become particularly popular. The three most popular tools were used by at least three-
quarters of respondents: strategic planning (81 per cent), mission and vision statements (79 per cent), benchmarking (77
per cent) and customer satisfaction measurement (71 per cent). Worldwide, satisfaction was highest for cycle-time
reduction, one-to-one marketing, strategic planning, and mission and vision statements. Firms worldwide are least
satisfied with the application of knowledge management, strategic alliances, and activity-based management. The survey
also found that most successful companies use more frequently the top ten improvement tools given in box 20.5.

Box 20.5 Tools used by most successful companies

1. Pay-for-performance 6. Growth strategies

2. Cycle-time reduction 7. Customer segmentation
3. Strategic planning 8. TQM
4. Mission and vision statements 9. One-to-one marketing
5. Customer satisfaction 10. Scenario planning
measurement

It should be realized that only very few of the techniques and tools described here are needed for any
particular productivity improvement project. The most important considerations in selecting tools are the
purpose, organizational readiness, and management and productivity team awareness and skills as well as the
competence of the consultant in using the tools.10