Why productivity matters

Why businesses are lagging behind and how to avoid making the same mistakes.

5min

Productivity is a vital indicator of success, both at a national and business level.

At its core, productivity measures how efficiently capital and labour are used to generate goods and services. Identifying how to improve the productivity inside your business is therefore crucial.

For a nation like New Zealand, higher productivity isn't just a number; it represents the ability to produce more with the same level of inputs or to maintain current production levels while reducing inputs. Improving productivity isn’t just about producing more, it’s about producing more with less input.

Significance of productivity for New Zealand’s economy 

 

A concerning trend has emerged in New Zealand, highlighting our struggle with productivity growth. Unlike our OECD counterparts, New Zealand has predominantly fuelled recent productivity through increased labour rather than capital investment.

This approach has significant consequences.

Nearly half of our GDP growth is attributed to labour input, a testament to New Zealanders' commendable work ethic, but also a signal of underlying inefficiency. Working more than other developed countries, New Zealanders face the dual burden of decreased economic output and strained personal well-being. This labour-intensive growth model has led to New Zealand being labelled as 'capital shallow', ranking a modest 26th out of 37, in OECD countries for research and development spending, according to The Productivity Commission's report.

The pathway to improved productivity lies in strategic capital investments, which enhance and evolve business capabilities. This shift from labour to capital investment has profound implications for the wider community.

  • Enhanced productivity typically makes goods and services more affordable and of higher quality.
  • Higher incomes enable greater investment in public goods and services that benefit the entire community, like schools, hospitals, and infrastructure.
  • Increased incomes also increase the ability to access the goods and services that contribute to a fulfilling life.

Conversely, poor productivity can inflate prices, impacting household expenditures significantly.

What is business productivity?

 

At the business level, productivity is a measure of your output compared to the resources invested.

  • Labour productivity refers to the efficiency of human work hours. It measures the output produced per labour hour, reflecting how effectively an organisation uses its workforce.
  • Capital productivity focuses on the output generated from investments in assets like machinery, equipment, and buildings, underscoring the importance of modern, efficient tools and infrastructure in boosting productivity.
  • Raw materials gauges how efficiently a business or economy transforms raw materials into finished products.

The interplay of these elements forms the backbone of overall productivity, and a balance of these factors is essential.

Benefits of enhancing business capital productivity
 

In the ever-evolving business landscape investing in capital productivity is vital for sustainable growth and competitiveness. For businesses, capital investment in machinery, technology, buildings, and processes is not just a financial decision; it's a strategic move towards future-proofing operations.
 

‘Capital deepening’ refers to businesses acquiring more and better capital equipment per worker. This increases labour productivity without an increase in labour hours.

By channelling resources into capital, businesses can leapfrog from traditional, labour-intensive practices to more efficient, technology-driven processes. This shift is crucial in an era where efficiency and innovation are the highest priorities. Up-to-date machinery and advanced technologies streamline operations, reduce wastage, and increase the speed of production, leading to a higher output with the same or even fewer resources. Investing in modern infrastructure and equipment can significantly enhance product quality, bolstering your business's reputation and market position.
 

The benefits of capital investment extend beyond mere productivity gains. It often leads to a ripple effect of positive outcomes, including cost savings in the long run, for example:

  • Modern, efficient equipment tends to be more energy-efficient and requires less maintenance, translating into lower operating costs.
  • Access to state-of-the-art tools and technologies encourages employees to develop new ideas and solutions, fostering a culture of creativity, engagement, and continuous improvement.
  • Embracing advanced capital assets enables businesses to not only meet the current market demands but also to anticipate and shape future trends, securing their place at the forefront of their industries.
  • Purchasing additional materials can enable a business to take on operations that were typically contracted out to third parties, saving millions of dollars on the production process.
     

Additionally, for some businesses, there is a direct link between investment in capital productivity and increased quality of life. Healthcare businesses that invest in advanced medical equipment, health information technology systems, and facility upgrades can enhance and streamline patient care, provide more accurate diagnoses, and improve data accuracy and accessibility. Patients and staff benefit from more efficient and accurate service delivery.

Capital productivity helps business owners scale


Investing in technology stands out as a key method to scale your business. This strategic move opens doors to new possibilities and markets.

  • Automating processes to reduce the time and manpower required for routine tasks, freeing up resources to focus on growth and innovation. This automation not only streamlines operations but also significantly reduces the margin for error, ensuring consistency and quality in outputs. For example, manufacturing firms could invest in robotics on their production line, freeing up workers to take on other, high-value tasks. Or they can purchase more equipment to run dual product lines, rather than producing one line at a time.
  • Enabling data analytics to provide insights into market trends, customer behaviour, and operational efficiency. These insights empower you to make data-driven decisions, and anticipate market needs, ensuring you stay ahead of the competition. For example, distributors can use automated inventory management systems to streamline operations, enable demand forecasting, and build robust customer relationship management systems to process orders more efficiently.
  • Facilitating expansion into new markets. From cloud computing offering scalable storage and processing capabilities to AI and machine learning providing personalised customer experiences, technology is a trigger for growth, enabling your business to scale rapidly while adapting to the ever-changing market demands.

Summary
 

Your business may be ready for a capital investment in productivity. For businesses in New Zealand, where the drive towards higher productivity is intertwined with the need to stay competitive on a global scale, capital investment is not just about keeping pace; it's about setting the stage for leadership in innovation.

Next steps 
 

  • Decide which parts of your business would benefit from a productivity push. Allocate a team to execute.
  • Look at complementary (or competitor) businesses to identify if there is anything you can adopt or adapt. Look offshore if you need to.
  • If you need finance, ASB has a Productivity Grant to help improve productivity across a range of business activities - apply before 30 June. Enquire online, visit a branch call 0800 272 222 or contact your ASB Banker. 

 

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