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Productivity, agility and how to find the right balance

30 Sep 2015
Craftsmen working in a factory

A report by the IoD's chief economist and director of policy James Sproule.

Key findings:

  • Views on productivity have to be seen in the context of a rapidly changing economy and likely future demands and developments; UK productivity may have languished since 2007, but the critical question is: are we prepared for the future?
  • The productivity challenge is acute. Incremental productivity gains, while desirable, are unlikely to give the UK economy the boost that demographics suggest it needs.
  • Institutional agility is vital. Firms need to be open to new products and processes; an active employment market can encourage new approaches to work and more rapid acceptance of innovation, resulting in greater productivity gains.
  • New industries and methods of working are altering the productivity challenges that businesses face; economic success will ultimately be more about mastering entrepreneurism than excelling at mature processes.
  • Investment can be critical to improving productivity, but effectiveness is largely determined by three critical elements: volume of investment, how capital is directed into new investment, and the agility within the broader economy to be able to capitalise on any investment.

In all the debate on UK productivity, there are two things that should be remembered. Productivity is not something that businesses tend to target. Instead businesses look to measure profitability, or margins, or some form of return on capital. Of course productivity and returns are related, but they are not the same, nor are they thought of in the same way.

A business could produce good profits, but underinvest, meaning not only would productivity suffer, but that the business itself may ultimately prove unsustainable. Alternatively a business could invest heavily, enjoying good productivity, but fail to meet expected returns on capital, which again calls into question the sustainability of any business model. Ultimately a successful economy needs agility in outlook and willingness to question assumptions across the entire business spectrum to identify the best route to ensuring prosperity and business sustainability.

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