The Productivity Paradox: Leadership Lessons to improve productivity

June 20th celebrates World Productivity Day. Productivity, the measure of how effectively resources are used to produce outputs, is a crucial driver of economic growth and prosperity. Countries with high productivity rates typically enjoy stronger economies, higher standards of living, and greater capacity for public spending.

Two economic powerhouses that often come into focus for a comparative analysis of productivity are the United States (US) and the United Kingdom (UK). The stark contrast in their productivity levels reveals significant insights into how each country handles its resources and economic factors, and offers valuable leadership lessons for productivity improvement.

The US-UK Productivity Divide

Since 2007 labour productivity or output per worker has risen by 17.3% in the US and just 4.4% in the UK. Today the average US worker produces 25% more per hour than their UK counterpart. 

What type of UK business tends to be most productive? Research carried out by the Office for National Statistics (ONS) shows that large firms, those that trade internationally or are foreign owed, tend to be more productive than peers in the same sector. The data on foreign-owned firms are particularly striking. In the same sector and region, and, crucially, with companies of the same size, foreign-owned businesses were 74% more productive than UK-owned businesses. 

Several factors contribute to this divergence. The US has demonstrated a strong focus on innovation, capital investment, and technological advancement, leading to increased efficiency and output. Its entrepreneurial culture encourages risk-taking and facilitates the fast adoption of new technologies.

The UK, on the other hand, has faced several challenges. Despite having a highly skilled workforce, the UK has struggled with underinvestment in capital, infrastructure, and technology. Its productivity problem is often dubbed the "productivity puzzle," characterised by slow growth even in the face of significant employment increases.

Characteristics of high productivity businesses

Several characteristics appear to be more commonly found in high productivity businesses. As can be seen from the list below, many of these practices relate back to good management and leadership, which we explore in section 4

In general, high productivity businesses are more likely to:

• be aware of their own and relative performance;

• regularly review their performance and practices;

• have structured management practices in place (monitoring, incentives, targets);

• be part of a peer-to-peer network;

• have effective relationships with their supply chain;

• utilise a wide range of external advice and support, particularly strategic advice;

• have a clear vision for the business and an up-to-date business plan;

• have higher levels of employee engagement and job satisfaction;

• have more highly skilled managers and staff;

• provide training to improve the skills of managers and staff;

• adopt new technology and utilise digital tools to improve efficiency;

• take part in behaviours associated with growth (e.g. export, innovation, strategic decision-making).

What can CEOs and UK organisations do to improve productivity? 

A long-running study by two British academics, Nick Bloom and John Van Reenen, suggests a good place to start would be by sharpening management skills. Since 2003, the World Management Survey (WMS) has mapped management practices across more than 20,000 businesses, hospitals and schools in 35 countries. 

Leadership Lessons for Productivity Improvement

1. Investing in Technology and Innovation

A central lesson from the US productivity model is the emphasis on technology and innovation. Leaders should strive to create an environment that fosters technological adoption and incentivises research and development. Leveraging technology can lead to significant productivity gains by automating routine tasks, improving decision-making through data analysis, and enabling the creation of new products and services.

2. Building a Culture of Entrepreneurship

The US is recognised for its robust entrepreneurial ecosystem. Leaders should encourage an entrepreneurial mindset within organisations and society at large. This involves embracing risk-taking, encouraging new ideas, and rewarding innovation. Such a culture can lead to business growth and improved productivity.

3. Investing in Leaders

They set clear, demanding goals that link the performance of the organisation to the actions of individual employees.
Progress against goals is carefully monitored with managers looking to improve where necessary and to reward top performers.
Leaders in well-run organisations are evaluated on their ability to attract, develop and retain the right people.

Good management is strongly associated with high productivity. The WMS finds that the top 20% of firms by management quality are over three times as profitable as the bottom 20%. Research by professors Bloom and Van Reenen and Professor Raffaella Sadun of Harvard, finds that management practices explain 55% of the difference in levels of productivity in the UK and the US. 

More generally, strong managers adopt best practices for their sector. Examples include evidence-based medical practices in healthcare, data-driven decision making in retail or total quality management in manufacturing

3. Prioritising Skills Development 

Both the US and UK highlight the importance of a highly skilled workforce. Regular training and skills development should be central to an organisation's strategy, improving worker competency and adapting to technological change. This can lead to higher productivity as employees are better equipped to carry out their tasks.

Recent research has found that British SMEs that used formal management practices had higher productivity than those that did not. For example, one standard deviation increase in management score was found to be associated with a 5% increase in the growth rate of firm productivity. 

4. Emphasising Capital Investment

Investment in physical capital such as equipment, machinery, and infrastructure is critical to enhancing productivity. Leaders should ensure adequate funding is allocated to upgrade and maintain the capital stock, enabling workers to do more with less.

5. Promoting Economic Stability

The stability of the economic environment influences productivity. The US's strong institutional framework has contributed to its high productivity levels. Leaders should advocate for policies that promote economic stability, including robust regulatory systems, effective fiscal policies, and a supportive business environment.

In conclusion, while the productivity gap between the US and UK is notable, it offers an opportunity for introspection and growth. By fostering innovation, promoting an entrepreneurial culture, investing in skills development and physical capital, and ensuring economic stability, leaders can drive significant productivity improvements, ultimately propelling economic growth and societal wellbeing.

6. Measuring the right key performance Indicators

Below are some powerful KPIs that you could introduce into your business to help improve your organisations productivity.