The potential for productivity
Productivity growth has been declining since the financial crisis of 2008, particularly in advanced economies. Some of the brakes on productivity that could be termed “macro” or secular include the fading dividends from the rapid technological change epitomized by Moore’s Law and diminishing returns on investments in automation, restructuring, and offshoring.
However, more localized reasons for lackluster productivity growth can be regularly observed on factory floors, at contact centers, and at retail distribution depots everywhere. The good news is that leaders looking for an upward trend in productivity growth can address many of these blockers today.
Broken chains
Our recent work1 shows how an era of digitalization and disruption has broken the links in the chains of command and sharing of knowledge refined, codified, and passed down from worker to worker—often over decades. The disconnect manifests itself in everything from recognizing ideas and achievements to having the right digital technology and analytics capabilities to meet business opportunities and challenges. “Strong innovators,” for example, are about seven times as likely as “weak innovators” to report using generative AI at scale to accelerate R&D and innovation.
The result of waning attention to the basics has been a loss of operational discipline and standards, many of which were further set aside during the initial phases of the COVID-19 emergency. On top of this, we see talent drifting away in key roles. So, how can leaders and managers work together to establish new best practices and boost productivity growth?
For more than two decades, McKinsey research has found that high-performing organizations execute well on five elements that collectively define operational excellence: crafting a purpose and strategy, articulating a set of behaviors and principles, building an effective management system, refining technical systems, and applying technology to augment human capabilities. These are the basics we need to get back to.
More than words
The top-line news on strategy and purpose is that they are important but that they are a starting and anchoring point only. We found that 70 percent of surveyed employees said that their individual purpose was defined by their work, underlining how organizational purpose is essential for attracting and retaining employees. It also correlates with performance: a 2019 study by academics at Columbia, Harvard, and Wharton found that clarity of purpose increases companies’ return on assets by 3.8 percent.
Our studies also show that a full 40 to 50 percent of workers said their organization’s purpose and strategy were reasonably clear and aligned with their own day-to-day work. However, given that only 7 percent of organizations excelled in all five elements of operational excellence, it follows that a well-understood purpose and strategy alone aren’t enough to yield a sustained competitive advantage. It is more than that—without them, it’s impossible to build the associated elements that drive performance and productivity growth.
Management and recognition
If the waning dividends of Moore’s Law and offshoring seem a little removed from your day-to-day operations, take heart. After articulating organizational purpose, aligning management behaviors, incentives, rewards, and recognition is perhaps the next most helpful step in terms of reviving productivity growth.
Few organizations conduct frequent check-ins with employees, with only 21 percent conducting them on at least a weekly basis. It’s also reported that these tend to be superficial. According to respondents, less than half of organizations actively involve employees in developing operational improvements. Only 11 to 13 percent said that their leaders gave the type of continual feedback that helps employees grow.
Managers must also operate in new ways. Planning, for example, one of the management sacraments of the previous business age, is a changed game. Insisting on a detailed plan for exactly how a major initiative is going to run can be a threat rather than a strength. The manager who doesn’t pivot fast enough from a plan when circumstances and inputs change is more likely to destroy value than create it. Leaders need to make sure they are rewarding and encouraging the right management behaviors for the world as it is, not as it was.
Refining practices of operational excellence
Operations inevitably change as humans and machines work together in new ways. However, there is a sense that previous models have been left behind without knowing what the next destination will be. Both our surveys found gaps in practices that enable employees to improve a company’s operations. Some 93 percent of respondents in our research expressed concern about how current technology translates to performance. Almost three-quarters said they lacked defined processes for building business cases for new digital tools.
The use of visual tools, for example—which can boost productivity by 15 percent—shows surprisingly low adherence. At best, only about one-quarter of respondents used visual tools to support essential tasks such as workload balancing and resource prioritization, with almost no respondents saying that their organization used the tools well.
The Fourth Industrial Revolution (4IR) means rapid organizational evolution
Technology is offering compelling opportunities to transform business operations, but there can be no successful transformation without radical “organizational evolution,” which might feel closer to a revolution when it comes to what needs to change and how quickly.
Certainly, there are investments to be made in technology and specialist hires and key partnerships to be sealed along the way. But the structural foundations are as important as the capital investment calls. Communicating purpose clearly, rewarding the right behaviors, ensuring that check-ins and feedback are meaningful, and refining operational practices are classic examples of this groundwork. And leaders can start work on those today.
1 The Next-Generation Operational Excellence (NGOE) Survey (December 8, 2023‒January 15, 2024) comprised 1,000 employees representing hundreds of organizations. Half of the respondents were senior leaders, defined as C-suite executives and their direct reports, and half were either frontline workers or middle managers. Fifty-two percent of respondents worked in the manufacturing sector, with the remainder working in services. Thirty-five percent of respondents were in North America, 30 percent in Europe, 20 percent in Asia‒Pacific, and 15 percent in Latin America. The Operational Excellence Survey (OES) (January 9, 2023‒February 16, 2024) comprised 1,225 respondents at 15 organizations—12 in North America and three in Latin America. About 21 percent of the respondents were senior leaders, and 79 percent were frontline workers or middle managers.