Why is business productivity important? The simple answer is productivity benefits everyone!
When productivity increases, the cost to produce the output decreases. This widens the margin between the cost to produce a product and the price it’s sold at. Wider margins mean higher profits for a company. Profits lead to investment in R&D, dividends to shareholders, and higher employee wages. It also improves economic competitiveness through price reductions for consumers. Since employees are consumers, their purchasing power increases and drives more demand. Productivity also means higher tax revenues for governments. And higher tax revenue can help reduce debt and boost social investment.
Productivity Is About having a Plan to Manage Resource Costs When Demand Increases
To meet the changing needs of the marketplace, companies may need to produce more output. Often, companies will increase their resource usage and accept an increase in the cost of the output. This will cut margins and increase the cost of a product. If the increase in demand is temporary than companies may want to tolerate an increase in the cost of the output. But if the increase in demand is long-term then higher resource costs will lead to higher prices. When the price increases customers may search out alternative products.
The Goal of Management is to Increase Demand and Management Resource Costs
The goal of management is to increase demand. That’s why companies have Sales people. If Sales do their job well then demand will increase. But when demand increases, management better have a plan to manage resources costs. If they don’t they’ll often take drastic measures when resource costs go out-of-control.
Knee Jerk Reactions to Reduce Cost Is Often Unproductive
Productivity drops when resource costs go out-of-control. This may lead to knee jerk reactions to cut resource costs to keep up productivity. Sometimes a company will use alternative materials to lower their material costs. Such a change in materials can result in poor product quality. This is often true if there is no prior knowledge to suggest the materials work.
Another way to cut cost is to cut labor. This is the easiest thing for management to do. Doing so has an immediate effect on the bottom-line. It will make the books look good, but it comes at a cost to both people and the business. First it up-ends the lives of the people who lost their jobs. And second, lost is brain power; gone is the inherent knowledge in business systems and know-how. This knowledge deficit will take the company time to replace. But sometimes it’s needed when external economic pressures beyond their control decrease demand. In this case management may call a temporary layoff until economic conditions improve.
Having a Plan to Manage Resource Costs is a Responsible Way to Manage Growth & Economic Prosperity
In my opinion, the responsible way to run a business is to have a plan to improve resource costs while trying to increase demand. Doing so drives profitability, jobs, and economic prosperity.
Learn how to measure and calculate productivity in the following post.