9 Management Services Spring 2013 Competitive productivity Competitive productivity – a new perspective on effective output By Dr Chris Baumann and Iggy Pintado The shortcoming of the traditional understanding of productivity is that it overlooks the nature of competitiveness. The key question in a competitive market environment is to what degree any activity not only leads to productivity, but also its direct impact on competitiveness. Traditional paradigm of productivity Productivity is a hot topic in Western markets like Australia. Aging populations coupled with low fertility rates and growing social costs only allow one way to maintain current lifestyle levels: an increase in productivity. Problematically, however, Western productivity levels are dropping, and the current understanding of productivity may result in falling behind dynamic East Asian markets. The traditional understanding of productivity is that it is: ‘A measure of the efficiency of a person, machine, factory, system, etc, in converting inputs into useful outputs. Productivity is computed by dividing average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical determinant of cost efficiency.’ (www.businessdictionary.com.) The drivers of productivity have been identified, for example in the UK, as investment, innovation, skills, enterprise and competition. The Organisation for Economic Cooperation and Development’s (OECD) foundation for productivity are the framework conditions (low and stable inflation, developed financial markets, low taxes), infrastructure investment, degree of competition in product markets (eg, strict product market regulation undermines productivity growth), and open markets (trade and investment). At the same time, the OECD has identified relatively liberal labour market regulation as a contributing factor to productivity since excessive job protection results in high costs for firms to restructure. Strong job protection may also lead to a reduction of incentives for employees to focus on performance. A key factor in the productivity discussion is the OECD- acknowledged importance of human capital accumulation. “Competitive productivity is in essence both an attitude and a behaviour directed at beating the competition.”