A New Emphasis on Productivity Improvement

Editor's note: This article will discuss four strategies, formulated by Peter Drucker, for obtaining productivity improvement, namely: innovation, continuous improvement, technology and knowledge worker management for maximum productivity.

These four productivity improvement strategies are not mutually exclusive. An organization often combines two, and sometimes even elements of all four, into their productivity improvement strategy.

More importantly, these productivity improvement strategies are not sharply differentiated; each of the strategies overlap with each other. Yet each strategy requires a specific set of distinct actions.

Productivity improvement will be a major challenge and a major concern in the years just ahead.

Productivity, we've all heard a good many times by now, is the key to managing the inflation many believe will occur because of the government's well-intended (but questionable) economic policies.

To have price stability, wages must not rise faster than productivity. A simple equation, formulated by C. Jackson Grayson Jr, former pricing commissioner/czar during the Nixon administration, explains this quite well:

[Wages — Productivity Increases = Price Increases]

For example, if wages increase by 10 percent and productivity increases by 3 percent, then price increases would increase by 7 percent.

If wage increases gallop at a significantly faster rate than productivity, price inflation will occur.

We expect we will soon be hearing about gearing wages to productivity improvement guidelines. Unfortunately, many economists believe this never works.

One scenario predicted by several leading economists claims that the Obama administration's prescription for using government spending to stimulate consumption is a sure-fire recipe for inflation. It will lead to too much money chasing too few goods and services.

Once the inflation starts—if, indeed it does—people will demand higher wages to keep up with the increasing cost of living. If wages increase faster than productivity increases, hyper-inflation is a possibility.

The only way our society will be able to maintain or enjoy a comfortable, let alone rising, standard of living is if managers in all enterprises solve the productivity puzzle. This is not an easy task.

Managing Productivity

Making resources productive is the specific job of management, as distinct from the other jobs of the "manager": administration and entrepreneurship.

The world knows that Peter Drucker was the greatest management thinker of the last century. His story is a story of management itself.

According to Drucker, it is only managers—not nature or laws of economics or governments—that make resources productive.

Resources can be made productive in the individual plant or enterprise, the individual store, the individual hospital, the individual office, the individual research and development lab and the individual port.

They are made productive—or deprived of productivity—by individual managers within their own individual spheres of responsibility.

Productivity Improvement through Innovation

Thanks to Drucker we now know quite a bit about productivity improvement. We know that it is, in part, achieved by innovation—the shifting of resources from old and declining employments to new and more productive ones.

Organizations must be able to systematically identify emerging opportunities and develop the structures required to make the new and different happen.

In his book Innovation And Entrepreneurship (Harper & Row,1985), Drucker definitively described what must be done and how to do it with respect to making innovation an acquired organizational skill.

But—and this is a big but—organizations must be able to get rid of yesterday's tasks and free their energies and resources for new and more productive tasks. Abandonment is a prerequisite for innovation and change.

"If an organization wants to be able to work on opportunities, it must be able to abandon the unproductive and slough off the obsolete," Peter Drucker said.

No organization that purposely and systematically abandons the unproductive and obsolete ever wants for more productivity improvement opportunities. Ideas are always around in profusion.

The key, said Drucker, is to convert them into doing. Lack of creativity is, therefore, not the problem of today's organization. Rather it is organizational inertia which always pushes for continuing what we are already doing.

Drucker left no doubt that existing organizations must know how to organize for innovation. Otherwise the ongoing business will squash newness of more than a trivial dimension.

Internal entrepreneurship will be a major trend in most organizations. It's mission-critical if organizations want to leverage productivity improvement opportunities. But internal entrepreneurship requires systematic, organized, purposeful management.

Innovation within an existing organization is a device for moving scarce and expensive resources from areas of low productivity and non-results to opportunities for achievement and contribution.

Maximizing Productivity Improvement through Continuous Improvement

In addition to innovation, productivity is increased through the continuous improvement of the productivity of resources in existing deployments. Six Sigma advocates speak prescriptively of kaizen, continuous improvement.
Trying routinely to get better one step at a time is a far better way to improve than shooting constantly for the big payoff. Major leaps into sudden business success are very rare.

Sustained success is largely a matter of focusing on streamlining and re-engineering existing processes. Getting better and better one process at a time leads to greater productivity improvement over time.

Productivity Improvement via Technology

Technology can increase productivity if appropriately applied. Technology does not necessarily mean spin-offs from "science and engineering."

Techne, Peter Drucker reminded us, is the Greek word from which "technology" derives and means "useful knowledge," or "organized skill," rather than engineering.

The substitution of capital-intensive technology for labor-intense activities in many instances can help productivity improvement. But in certain areas such as health care, more capital-intensive equipment usually requires more skilled technologists to operate the equipment.

Translated, this means the substitution of capital for labor does not necessarily increase output or productivity and simultaneously lower costs.

In many instances, it just increases the quality of the output with a corresponding increase in costs.

Using a broader definition of technology, that is, "useful skill," points to the direction of more job-focused training. New and better skills must be continually acquired by today's labor force.

Organizations will have to upgrade the skills of their employees and/or find more talented employees to accommodate changing strategies. Organizations need people who can work smarter.

People will have to spend more time at their jobs away from their offices and labs attending conferences, seminars and short courses at universities and colleges. Further, they will have to spend more time when in the office taking webinars, virtual conferences and exchanging information with peers on social networks.

Indeed, acquiring and successfully applying useful knowledge to productive work is probably one of the best solutions for productivity improvement.

Managing the Knowledge Worker for Increased Productivity

Making the knowledge worker productive requires more than training and information acquisition. It requires knowing the factors that determine knowledge worker productivity.

What follows provides a more comprehensive viewpoint of how to manage and maximize knowledge worker productivity.

Peter Drucker listed six key factors that determine knowledge worker productivity. These are:

1. Knowledge worker productivity demands that we ask the question: "What is the task?"

2. It demands that we impose responsibility for their productivity on the individual knowledge worker themselves. Knowledge workers have to manage themselves. They have to have autonomy.

3. Continuing innovation has to be part of the work, the task and the responsibility of knowledge workers.

4. Knowledge work requires continuous learning on the part of the knowledge worker, but equally continuous teaching on the part of the knowledge worker (to facilitate the sharing of best practices).

5. Productivity of the knowledge worker is not—at least not primarily—a matter of quantity of output. Quality is at least as important.

6. Finally, knowledge worker productivity requires that knowledge workers are both seen and treated as an "asset" rather than a "cost." It requires that knowledge workers want to work for the organization in preference to all other opportunities.

Each of these requirements that were noted by Drucker, except perhaps the last one—is almost the exact opposite of what is needed to increase the productivity of the manual worker.

In knowledge work quality is the essence of the output. For example, in appraising the performance of, say, surgeons in a given hospital, the question of how many patients has he/she operated on is quite secondary to the question of how many truly successful outcomes has she achieved?

Knowledge worker productivity, Drucker repeated again and again, has to aim first at obtaining quality—and not minimum quality. Maximum quality.

Only then, , can one ask: "What is the volume, the quantity of work?"

In essence, when managing the knowledge worker, a rigorous operational definition of quality must be established. What results are expected?

Finally, Drucker thought the most crucial question in knowledge worker productivity is the first one: "What is the task?"

In manual work, the key question is always: "How should the work be done?" In manual work the task is always given.

The first requirement in tackling knowledge worker productivity is to find out what the task is so to make it possible to concentrate the knowledge worker on the task and to eliminate everything else.


Productivity is the key to managing inflation. To have price stability, wages must not rise faster than productivity.

Whether it is recognized or not, many practices for productivity improvement are derived largely from the thinking of Peter Drucker. His teachings form a blueprint for every thinking manager.