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: Measuring and Improving Productivity

Overview

This chapter covers how to link higher-level financial goals to operational projects to increase productivity. Highly competitive organizations focus on increasing productivity and shareholder economic value added (EVA). They align organizational resources to achieve their strategies in a highly competitive global environment. This helps them achieve strategic goals. These goals are also carefully selected to increase customer experience metrics, such as net promoter score, which correlates to repeat purchase intentions, and customer satisfaction. The strategy is balanced to ensure customers, employees, and other stakeholders are represented in the operational projects that enable the organizational strategy. Organizational behaviors are driven by metrics that help identify productivity and operational improvement opportunities to increase productivity. These are aligned to “voice of,” financial, and operational metrics that provide a focus for resource alignment to ensure an organization works on things that will increase its competitive position over time.

There are thousands of metrics that organizations and industries use to measure, manage, and improve their products, services, and supporting processes. Some are financial, others operational, and, depending on the goal, they focus on customer satisfaction, sustainability, and interests of other stakeholders. They can be aggregated into higher classifications, such as time, money, quality, sustainability, safety, and other types, or condensed into basic lists organizations use to manage their business.

TABLE 7.1

Financial Metrics

Metric

1. Market Value Add (MVA)

2. Economic Value Add (EVA)

3. Return- on-E quity (ROE) using an average cost of debt and equity capital.

4. Productivity Measured Year-To-Year

5. Net Operating Profit After Taxes (NOPAT)

Table 7.1 lists some important financial metrics. These are business-level metrics and include shareholder EVA, which measures the profit in excess of return to shareholders (i.e., the net profit minus cost of capital), and return on equity (ROE) is the gain to shareholders over what they invested (i.e., the return on assets minus liabilities). Productivity is the ratio of sales revenue divided by operations costs to gain the revenue minus adjustments. Net operating profit after taxes (NOPAT) is revenue minus operating costs. These metrics will be used to identify projects to improve operational performance and are the basis for this chapter. The goal in this chapter is to show how higher-level financial metrics are calculated and disaggregated to identify and strategically align projects that will improve operational performance. This will ensure resources are allocated for operational effectiveness (i.e., doing the right things) and efficiency (i.e., doing them well).

Shareholder value and productivity are increased in organizations that have the right strategic direction and can execute strategies at a tactical level. Effectiveness and efficiency contribute to higher organizational productivity by effectively allocating and efficiently utilizing resources to produce products and services. Organizations do this by aligning financial measures to enable year-over-year productivity improvements as well as increase shareholder EVA and ROE. Productivity targets are incorporated into an organization’s annual operational plan. This plan is based on strategic goals and is developed by the organization’s leadership team to meet sales, cash flow, and operating income goals, among many others.

Examples include gaining market share and achieving safety, sustainability, and diversity goals. The strategy depends on achieving goals by deploying projects of various types. These projects are created to provide solutions for performance gaps and use different tools sets. Therefore, different initiatives are needed to improve organizational performance while implementing the strategy. It is a translation process that carefully aligns and maps higher- level goals to lower-level ones to achieve marketing, financial, and operational goals. To do this, projects must be identified, linked to strategic goals, and executed on schedule, and they must achieve the targeted benefits. They must also be realistic and provide practical solutions to close gaps.

Project linkage is where organizations sometimes lose momentum. The alignment process and execution require concerted effort and transparency. There must also be accountability for both good and poor performance. Some organizations have execution cultures. They move strategy down to a team and an individual contributor level. All employees know the impact of what they do on higher-level goals. Therefore, they work on the right things. In this context, communication is critical at all levels. The messaging must clearly link strategy at every organizational level and explain how those employees can execute the strategy. Execution cultures drive and reinforce the right behaviors through reward and recognition systems. They are laser-focused on what is important.

Some organizational cultures execute strategy well, and some do not. In the latter case, there is usually a lack of accountability, and the reward and recognition systems may be broken. There are several organizational attributes that help effectively execute strategy to increase productivity, EVA, ROE, and customer satisfaction. Organizations that have poor strategy execution and alignment to lower-level operational metrics will be hard- pressed to significantly increase productivity, even with excellent project execution. As an example, if marketing’s strategic plans are inaccurate, the wrong products or services will be designed, produced, and sold. The processes may be efficient, but products and services will not be sellable at expected margins or perhaps not at all.

 
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