Productivity 534
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In the simplest terms, productivity is the ratio between the quantity of goods and services produced and the quantity of resources used to produce them. Economists have come up with a number of intricate ways to measure productivity, but any business owner knows that if he or she is producing more of a product with the same number of resources, productivity has gone up. Of course, the opposite is true if fewer products are being produced.

Worker productivity is one of the key issues for any business, but for small businesses with limited resources, getting the most out of the least is an essential element in establishing and maintaining competitiveness. Small businesses need to have tools in place to measure productivity and must combine increased productivity with a commitment to quality and efficiency. Innovative goal setting, planning, and organizing are essential to improving productivity. Some of the major threats to productivity, as cited in Industrial Management, include an ineffective use of technology and lack of worker training and support, in addition to "an aging workforce, a declining labor supply, a lack of qualified workers, and rising wage and benefit costs."


The first step in improving productivity is putting meaningful methodologies of measurement in place to evaluate and monitor the performance of a business operation. To be meaningful, productivity measurements must show a linkage with profitability; after all, it is the bottom line that is the ultimate barometer of a company's success. Measurements should clearly demonstrate how efficiently (or inefficiently) a company is using its resources to produce quality goods and services.

In the past, productivity was a stand-alone issue—a company could either improve it, or it could not. For most small businesses, increasing productivity has meant one thing—improving the output rate. When this is the only goal, improving quality is seen as a very expensive proposition that does nothing to boost output. In other words, improved quality and increased output are seen as mutually exclusive ideas. This way of thinking is a mistake. In fact, small business owners need to realize that just the opposite is true. An increase in quality most often results in lower costs as rework is eliminated and unnecessary inspections are eliminated. Improved quality should be seen as a strategic tool that can increase efficiency by improving resource utilization and increasing customer satisfaction while lowering costs.

Another tool to increase productivity is to improve communications between workers and management. This may be easier in a small firm than a large one since the total number of employees is lower. Managers must sell employees on their obligation to make things work better at the company, both in the work environment and the work product. By gathering input from more and more workers, that job can be made easier.

A business owner or CEO can begin gathering input from workers by starting at the top and letting the process filter down. Off-site retreats with top managers to discuss the company's values and goals are a good place to start. From there, those values and goals can be communicated to the whole work force at the same time it is conveyed to them that their input matters and that direct communication is valued throughout the organization. If something goes wrong, any employee should feel safe in stepping forward and identifying the problem without fear of reprisals. If one person has a conflict with another employee, they should be encouraged to go directly to that other person instead of ignoring the problem or complaining about it to people who cannot solve it. A high-level manager, or even the CEO or owner, can step in to solve disputes if there is still a conflict after communications have been initiated.

This improved and open communication eases tension in the workplace and fosters a cooperative, growth-oriented atmosphere. Employees feel that their problems will be listened to and that their suggestions will be taken seriously, which means they are more likely to work harder and to think creatively when initiating production improvements.

Improved communication can also lead to another step known to enhance productivity in small businesses—enabling the work force. Once communication channels are open, upper management may find that employees are as committed to improving the business as they are. They also realize that front-line employees are quite often the best source of ideas on how to improve productivity and the best source for implementing those ideas. In small businesses, employees are often forced to perform a greater variety of tasks than employees at large firms—it is up to small business owners to take advantage of that fact by empowering employees. As Jay Nathan observed in the Review of Business, "empowerment in the small business environment enables employees and management to learn and implement new ways of working, thus improving business operations for increased profits and productivity."

True empowerment also requires employers to provide their workers with the skills and knowledge to perform their jobs, as well as the unquestioned support of management. Upper management must provide ongoing training and skills development, while managers should act as coaches and leaders who make needed resources available. Finally, a mutual trust and caring must develop between associates and managers—such trust is essential if positive changes are to occur.


Another way to get employees to work harder and improve productivity is to let them share in any gains that result from the productivity improvements. Pay-for-performance bonus systems, or gain sharing, became a popular incentive in the 1990s with both large and small businesses. For example, one restaurant in Ohio offered to pay cash incentives to all employees if food costs dropped below 35 percent of total sales. The very first month, employees offered up several money-saving suggestions that resulted in a1.7 percent drop in food costs and a $40 payout to everyone on staff. Payouts since then have gone as high as $95; in the two months where results did not meet the 35 percent goal, no payouts were made.

Gain sharing, and programs like it, have become successful because they increase employee awareness of the company's bottom line and their ability to have an impact on the firm's financial fortunes. From the employer's standpoint, gain sharing is a "win-win" proposition since employees work harder, feel more committed to the business, and profits (or some other measurable goal) improve.

How does a small business institute a gain-sharing program? First, keep things simple. Pick no more than five key business indicators that are important to the business's success. For example, a sales staff might focus on account growth, market penetration, and customer retention. Selecting more than five objectives complicates the issue and makes it harder for employees to understand. Likewise, it is important to select objectives that the employees have direct control over. Meeting goals that require actions outside their sphere of influence demoralizes employees and makes it far less likely that any improvements will be seen. The plan should be written in language that is easy to understand, with the bottom line goal clearly stated.

Once goals are determined, they have to be measured. Choose a realistic means of measuring progress, and, more importantly, choose realistic goals and performance targets that can be reached through productivity improvements. Employees have no problem spotting and ignoring unrealistic goals that they know they have no hopes of attaining. Goals should be both short-term (monthly) and long-range (annual). Also, it is important to note that goals will almost certainly change over time as employees become more efficient and meet the original goals.

Communication is an important part of the gain sharing process. Once management starts measuring productivity, it needs to share the data it gathers with employees so they can see the progress (or lack thereof) being made. This step—sharing financial or production data that was once considered confidential—might be new for many companies, but it must occur so that employees can make good decisions and sharpen their problem-solving skills. Communication should continue throughout the life of the program; business consultants counsel clients to use tools such as newsletters or memos to tell employees about success stories throughout the company. This lets employees know that their actions matter and provides other employees with examples of how to make improvements. Very visible means of communication such as large charts tracking progress against the goal are also very effective.

In addition to sharing information, management must enable employees to make decisions and act on them without too many layers of approval. Employees are the best source of ideas for improving productivity, and making them feel that they are in control of the program is a key part of making it work. Employees are sure to rebel against any program that they feel is being forced on them by upper management or by an outside consulting firm. One of the best ways to ensure employee buy-in is to form a cross-functional group made up of employees from throughout the company to help design and administer the plan.

Eventually, each department should come up with its own set of goals, but the initial plan must be a company-wide one with a big picture goal. Once that goal is stated, each department can look at its own operations and come up with a set of smaller goals that are all designed to help meet the larger goal. Departments should not set their smaller goals in a vacuum—quite often, the performance of one department is directly dependent on the performance of another department, so it is important that those two departments work together in establishing goals.

Once all the goals are set, the reward needs to be determined. The biggest caution that experts offer is to make sure the reward is worth the employee's efforts. If the incentive is too small, the plan might fail because employees simply do not care if they make the improvements needed to get what they view as inconsequential rewards. Experts recommend that employees be able to earn between four and eight percent of their annual salary as a reward for meeting gain sharing goals. Rewards can be paid as an increase in annual salary, or as a one-time bonus.

It should be noted that gain sharing can be an especially successful tool for a small business that is about to grow beyond the owner-several employee stage. When the company consists of the owner and just a few employees, the owner can control all operations and can rewards employees as he or she sees fit. As the company grows and is split into departments with managers who report to the owner, control is decentralized. The owner may step away from the day-to-day managerial responsibilities and therefore lose touch with the workflow. It is at that point that gain sharing can be an important tool to pull employees together and keep them working towards a common goal.

Finally, one note of caution about gain sharing or incentive based pay. Managers must make sure that employees do not become so focused on the targets needed to achieve gain sharing that they neglect other parts of their work or let quality slip. This is the most common criticism of gain sharing, and it is one of the most important reasons that short-term goals must be combined with long-range goals if the plan is to work. That way, workers will be able to see that if they commit too much effort to the short-term goal, the long-term goal may be lost.


From the time of the first factory, using machines to assist or even replace humans and improve productivity has been the norm. Using machines to create interchangeable parts, the creation of the assembly line, the use of robots to take over manual tasks—these are just a few of the dramatic improvements in productivity that came about as a result of technology. Today, that practice continues unabated. The giant leaps made in computer and robotic technology in the last decade have given business owners tremendous new options for improving productivity.

What is different about this wave of better productivity through technology is that it is directly impacting small businesses. In the past, leaps in technological know-how most often benefited large corporations that had the money to invest in expensive new systems. Today, when the most inexpensive laptop computer is more powerful than some of the behemoth mainframe computers that existed in the 1960s, even the smallest business can afford to take advantage of technology to make his or her business grow. Computers, voice mail, fax machines, e-mail—most people today would not dream of starting a business without these technological aids by their side.

Computers and other advances have simply let small businesses get more done in less time—the very essence of increased productivity. Examples of technological gains include database management software that make it easy to manage inventory, fax-back and e-mail services used by customer service departments to disseminate information that previously had to go through the mail, bar-coding technology that can be used to track customer purchases in a computer database that automatically sends a message to reorder a particular product when in-stock levels drop below a preset point, and "home pages" on the World Wide Web that allow small companies to go global for very little cost.

All of the above are examples of how technology was used to help a company grow; technology can also increase productivity and cut expenses by helping a company "stay small" in other areas. For example, instead of having to outsource bookkeeping operations or hire more customer support people, a small business can now look to computers (easy-to-use accounting software, for example) and communications technology to register significant savings in both time and money.

Communications tools, in fact, are the next wave of technology. Desktop videoconferencing, company intranets which can be linked to manufacturers and suppliers, paging and wireless communications—all are expected to explode in use in the coming years. At the center of this boom is the Internet. Even the smallest businesses are able to use the Internet to communicate with customers and suppliers, sell products, and advertise to both local and international audiences. Business-to-business communications have also increased as the Internet has expanded, making it easier for small firms to find partners to do business with.

While almost everyone concedes that small businesses must invest in technology to compete, there are still complaints about technology. The two most common are that it is still too expensive in many areas, and thus out of reach to many business owners. The second is that it is still too complicated and difficult to learn. The computer industry seems to be taking this complaint seriously and developing a new wave of "plug and play" products that are easy to install and easy to use. Computer networks designed just for small businesses are being marketed that have fewer bells and whistles, fewer set-up requirements, and more customized software.


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Ibielski, Dieter. "So What About Small Business Productivity?" National Productivity Review. Winter 1997.

Livingston, Abby. "Gain-Sharing Encourages Productivity." Nation's Business. January 1998.

Longenecker, Clinton O., Deborah J. Dwyer, and Timothy C. Stansfield. "Barriers and Gateways to Workforce Productivity." Industrial Management. March-April 1998.

Maynard, Roberta. "Tapping Employee's Insights to Expand Productivity." Nation's Business. November 1996.

Nathan, Jay. "Empowerment As a Workplace Strategy in Small Business." Review of Business. Winter 1993.

Page, Heather. "Wired for Success: Entrepreneurs Reap the Rewards of the Technology Revolution." Entrepreneur. May 1997.

Parry, Thomas, and Phil Lacy. "Promoting Productivity and Workforce Effectiveness." Financial Executive. November 2000.

Wrennall, William. "Productivity: Reengineering for Competitiveness." Industrial Engineering. December 1994.

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