Corporate Value Creation: An Operations Framework for Nonfinancial Managers

CHAPTER SEVEN

Productivity and Operating Margin

CHAPTER 7 TAKEAWAYS

• Economic history has shown that in the long run and on average, a company will not be able to increase prices in the international market by more than 2–3% per year. As interesting as this statistic may be, it's not very helpful in the short run. The point is: If the costs of a company's inputs are increasing by 5% and these costs cannot be passed along to the customer, then the minimum annual increase in productivity must be the difference between the cost increase and price increase that is achievable; otherwise, financial performance will deteriorate.
• Any measure of productivity should include the concepts of manufactured value added, operating value added, and premium value added.
• If a reduction in force (RIF) is to have any impact on cost, the management team has to go after the highly paid people and refrain from the temptation of laying off clerks and secretaries.
• Customers will only pay for value added and will not pay for inefficiencies.
• A company can't save its way into prosperity.
• Without an effective productivity program focused on value added, any benefit achieved via cost reduction will be quickly erased. Cost creep is relentless. Your efforts have to be without end in order to keep them under control and you need imaginative strategies to continuously bring them down.
• While it is seemingly very compelling to be the low-cost producer, the concept may be flawed. You are probably better off if you ...