What Influences the Value of Productivity and How to Calculate It?

If you feel called out and protest when you hear or read that Croatia has low productivity, while you know that both you and those around you work a lot, know that you are mistaken. Productivity is least dependent on the amount of time spent working. In theory, productivity or output is the ratio between production performance and the resources (labor, capital, natural resources, long-term tangible and intangible assets) used in production. Productivity per worker primarily depends on the structure of the economy, on what the comparative advantages are and how they are utilized in dominant (strategic) industries.

In fact, it is about the achieved level of overall excellence (the interconnected effect of business effectiveness – ‘doing the right things’ and operational excellence, efficiency – ‘doing things the right way’). Regardless of the potentially high value of human capital (educated, responsible, and motivated workers), workers will not be highly productive if they do not work in industries that create products or services with higher added value. This implies that productivity per worker, calculated by dividing GDP adjusted for price differences by the number of workers in the economy, does not accurately reflect the productivity of their work.

What It Depends On

The productivity of a particular economy depends on the available and applied technology, on how economically reasonable the sources of financing are, tax policies, education and healthcare, the strength of the scientific community (institutes) and its connection to the economy, the level of societal ethics and corruption, the efficiency of public administration, demographic and immigration policies, the level of leadership (at all levels), and sensitivity to influences from the environment – all of which are subjects of PESTLE analysis. Good workers are better than bad ones, but they cannot alone compensate for all other deficiencies in society and the economy, whose impact on the level of productivity is crucial, significantly greater than their own.

Why We Are Low on the List

Croatia is currently low on the EU countries’ productivity ranking. According to data for 2022, it was at 79.1 percent of the EU average productivity per worker. According to current analyses, (smart) use of EU funds in the next five years can be expected to improve, but after that, without significant changes that would affect the decline in demographic contraction and increase in investment, stagnation and potentially a greater crisis will occur.

In increasing investments, the emphasis should be on investments in the development of competencies and new business models, digitalization (automation and robotization), information systems (big data), and research, as well as strengthening exports (economic diplomacy, networking, information gathering, financing). In research and development (R&D), Croatia invested (expenses) 72 euros per capita in 2022, more than ten times less than in Germany (910 euros). At the same time, an exceptionally complex task relates to changing negative demographic trends. Croatia has been losing its most capable and educated young people for a long time, potential drivers of development, in whose education a lot has been invested, and their departure has not ensured the expected return on investment.

The Role of Managers

The abilities of segmentation and differentiation allow for connecting the needs and potentials of well-chosen markets and customers with a well-crafted portfolio of products and services to ensure an appropriate level of output prices and quantities of produced and sold goods and services while minimizing various risks (non-collectibility, lower inventory turnover, unnecessary costs…). Continuous support for these abilities has a significant impact on productivity in activities related to collecting, recording, and analyzing information from the environment and the organization.

For organizational productivity, it is extremely important to what extent senior and middle management has developed their competencies in strategic management and leadership qualities; how capable they are of developing a ‘future vision’ and based on that creating the future of the organization instead of mostly focusing on short-term profits; how able they are to enable freedom, share information, and teach, encourage, and delegate instead of controlling and playing to routine. Changes in managerial behavior lead to significant changes in behavior at operational (executive) positions, where the focus shifts from satisfying bosses to serving customers according to their status, needs, and potentials.

Good Execution of the Plan

Changes in behavior and relationships positively affect the quality of the (Deming) PDCA cycle, which is most often referred to today as ‘controlling’. Of various combinations, from excellent to poor plans and from excellent to poor execution, it is clear that ‘good execution of a good plan’ positively influences productivity. In the opposite direction, the worst combination is not ‘poor execution of a poor plan’, but ‘good execution of a poor plan’, which adversely affects productivity and can lead to a loss of business capability.

Education and approaches to various contents and knowledge bases from the perspective of classical accounting are costs, but from the perspective of productivity, they are important investments in the development of productivity. The theory of learning organizations (the fifth discipline of Peter Senge) emphasizes that the competence and competitiveness of an organization (which also implies productivity) grow as the competence of its workers grows and their ability to apply it in practice. This is followed by teamwork ability, quality of internal communication, and the ability to create a shared understanding. In sports, basketball, a player who scores the most points is not always a member of the winning team. Often, scoring the most points is a result of selfishness, too many shots with a low success rate, and can negatively affect the motivation and ‘work performance’ of other players. The team result is, of course, much more important than the individual result, and achieving it involves different profiles of players and other participants in various ‘workplaces’ in the team. For a team to be productive, it is important that its members communicate intensively and openly with each other, exchange knowledge, experiences, suggestions, and all other important information, and from all this, they can create a shared understanding (how to do the right things the right way – how to be optimally productive).

What is Good and What is Bad

In the commentary on the book ‘Corporate Longitude’ by Leif Edvinsson, the authors of the business bestseller ‘Funky Business’, Kjell A. Nordström and Jonas Ridderstråke, stated that the human brain (intellect) is the most powerful weapon on planet Earth that, in synergy with the heart (emotions) and hands (work ethic and energy, motor skills), maximizes its power. And thus the productivity of organizations. For this 3H (head – heart – hand) to give its maximum and leverage productivity, it depends on the quality of the human capital management system. If this system respects the principles of the common good, justice, and solidarity (impartiality, specificity, constructiveness, openness, honesty, reality, encouragement, comprehensiveness, and ethics), if it measures and motivates people based on their behavior (ethics, responsibility, cooperation…), realizations (primarily team) of set business goals, and competencies and achievements of personal development goals, this is a good prerequisite for good productivity and its growth. Nepotism, placing people in the wrong positions (often excellent specialists are unnecessarily moved to managerial positions for the sake of promotion), the absence of appropriate measurement of all work effects, and the lack of opportunities for diverse material rewards and promotions based on achievements will negatively affect productivity and its trends.

Not Wasting Time in Vain

In this medium-term period, when discussing the growth and development of productivity in our economy, great hopes are placed at all levels on the use of funds from the European Union. This is indeed a great opportunity that, when linked to the term ‘smart use’, helps those who would invest in projects they believe will bring them adequate returns on investment and other acceptable economic effects to implement them more easily, with less stress (costs) and risk of failure.

If this is deviated from and EU funds are treated as customers to whom a certain idea and project need to be sold (with the help of those who write project documentation well, without thinking about the real effects and risks of the project) to secure money, there is a high likelihood that the cost of depreciation of fixed assets above the amount of the subsidy will not be covered by commercial and economic effects in future periods, that it will turn out that working on that project was a waste of time that could have been used for something that meets the needs and potentials of the market and brings new quality and competence to the organization, thus affecting the growth of productivity.

Positive and Negative Influences

When considering all of the above, productivity implies the best utilization of various resources (intellect, time, material and immaterial assets), provided that it is about continuity and consistency, that agility is preferred over reactivity and mere execution. For senior management, productivity could be interpreted in the way described by a manager of a large American conglomerate in Senge’s ‘Fifth Discipline’: ‘This year I was exceptionally productive. I made ten important decisions, eight of which turned out to be good.’

Productivity for salespeople could be interpreted as ‘being in the right place at the right time, as many times as possible’, and for those in procurement as ‘reducing procurement costs of resources without affecting quality’. And thus, respecting the specifics, various forms of productivity of individual organizational units and jobs could be interpreted.

Regardless of which organizational level we are talking about (economy, sector, company, organizational unit, job), it is important to know what contributes positively to productivity and what negatively affects it (analytics). If this is known, one obstacle is removed to create a good system for improvements, growth, and development (strategy). And after that, focus on the key according to the principle ‘less is more’ (operational plan, tactics) and action, with monitoring changes and managing them. In any case, the past and routine are not sources of solutions and ways to improve productivity.