Improving operational practices may represent the single biggest driver of productivity gains over the next decade, according to an Ernst & Young report.
The report “Driving Profitable Growth: The Productivity Challenge in China” finds that the most profitable companies surveyed share common features of success in operational effectiveness, which is key to productivity improvement in China.
It is widely accepted that raising productivity will be critical if China is to keep growing and avoid the so called middle income trap. Government policy is already pushing companies to improve their productivity. And the pressure will only increase in coming years.
The most striking finding was the extent of transformational approach to productivity improvement adopted by top performing companies. They have built expertise and capabilities across a wide range of competency areas, which typically go beyond incremental changes and on to development and execution of a clear transformation agenda designed for lasting improvements across the business, straddling traditional organisational silos.
Top performing companies have developed particularly strong capability – or maturity – in five specific operational areas: long range strategic planning, standardisation of operating processes, robust internal controls, effective workforce planning and strong technology infrastructure. All five of these practices are strongly correlated with high profitability and would therefore appear to be an obvious area of focus for companies seeking to drive a step change in their productivity.
“The encouraging message from this analysis is that these improvements do not typically require significant financial investments and can be readily replicated between companies and sectors," comments Nigel Knight, Ernst and Young Greater China Advisory Leader. "They do, however, require strong and sustained leadership involvement and commitment to drive through change.”
He adds, “Leaders at all levels need to consider how their organisations can immediately start to build and implement the capabilities that will be essential to meet the challenges of China’s productivity imperative.”
Implication for companies
Performance gaps will likely continue to widen as competition intensifies in China. In a number of industries such as automotive and machinery manufacturing, consolidation is already well underway.
For companies, survival and success will depend on upgrading productivity through integrated, targeted operational initiatives that can drive year-on-year performance improvements.
“The challenges go beyond simple cost cutting, if they are to continue to grow profitably, there is a compelling need to focus on changing the way business is done. These include deeper and longer lasting improvements in their management and operational practices, creative use of technology and the application of innovation to their businesses,” Nigel concludes.
Xiaoping Zhang, Partner at Ernst & Young says, “We have seen from our survey that top performing companies are already adopting a broad, transformational approach to productivity improvement, with a strong emphasis on strategic alignment and on putting in place the critical foundations – standardised processes, robust internal controls, effective workforce planning and technology infrastructure – needed to support continued profitable growth.”