Productivity is key to a business growth, and recently, productivity has been on the decline. McKinsey & Company latest research examines how a new take on operational excellence can help rekindle productivity—and reveals five practices that matter in jump-starting performance.

As reported by McKinsey & Company on October 4th, 2024, by Erik Schaefer, Joris Wijpkema, and Richard Sellchop.

Breaking Operational Barriers to Peak Productivity

The world needs more productivity growth. As a recent McKinsey Global Institute report  argues, it’s the best possible antidote to wealth inequality, inflation, and exploding debt and could provide crucial funding for the net-zero transition and improved living standards.

It’s also what every company needs. Yet productivity growth has largely declined since the global financial crisis of 2007–09, particularly in the most advanced economies (Exhibit 1).

The macro causes of declining productivity growth are visible in everyday life. First, the dramatic benefits of technological change—such as Moore’s law, the doubling of transistors on a chip every two years—have faded, with improvements becoming more incremental. Second, investments in restructuring and offshoring also reached a point of declining returns.

Our methodology

Our latest research (see sidebar “Our methodology”) suggests that there are also micro causes of declining productivity growth, which are harder to see until the observer reaches the operating level of a factory or call center. The loss of operational discipline in the wake of the repeated shocks of the past five years led to high levels of attrition and job churn. Practices that had been painstakingly refined, codified, and passed down from worker to worker—often over decades—were set aside during the initial COVID-19 emergency. The subsequent loss of critical talent  (Exhibit 2) meant that the chains of knowledge stayed broken.

What is operational excellence?

These challenges arise at the same time that new technologies—whether advances in automation and analytics under the Fourth Industrial Revolution (4IR) or, most recently, generative AI (gen AI)—show great promise as a means to increase productivity.

The risk, of course, is that the high initial impact from such technologies proves difficult to sustain in the absence of a broader commitment to operational excellence. Most leaders know what the required operational excellence looks like: five elements that together enable organizations to operate at the highest level (see sidebar “What is operational excellence?”). Achieving it, however, has never been easy: the new research points to specific challenges to implementing each of the five elements.

The better news is that the data also point to practical actions companies can take that can not only get them back on track but also help them make the most of the digital world.

Companies that reach this standard of performance record transformative outcomes not only in the short term—increasing customer satisfaction by ten percentage points, reducing CO₂ emissions by 20 percent, improving employee retention by 25 percent—but also continue to improve year after year. That’s where lasting productivity gains come from.

They’re available to any organization that’s willing to examine its current practices in depth, understand where improvement is needed, and commit to change.

What’s blocking operational excellence

Over the past few years, three primary vectors of operational improvement have promised to raise productivity, but companies have often struggled to take full advantage of the potential:

• The technologies collectively referred to as 4IR (or Industry 4.0) can improve performance across an entire value chain. But McKinsey research indicates that only 30 percent of organizations successfully scale and sustain digital improvement.
• In 2023, research from McKinsey Digital estimated that gen AI could add $2.6 trillion to $4.4 trillion to the global economy. But by 2024, only about 5 percent of organizations said they could attribute at least 5 percent of their EBIT to gen AI.
• Core operational excellence practices have a proven track record of creating significant improvement across variables ranging from cost reduction to employee retention—with the effects increasing over time. But data from the Operational Excellence Survey (OES) indicate that few organizations perform well across all five elements (Exhibit 3). Those that do are far more likely to sustain impact from 4IR and gen AI: operational excellence increases the value that technologies can generate.

Regional variations

The results of the OES research and the Next-Generation Operational Excellence Survey (NGOES) showed that for each element, critical barriers are keeping companies from achieving and sustaining operational excellence. The research also revealed differences among regions, particularly in Asia and Latin America, that could merit additional attention from companies operating in those locations (see sidebar “Regional variations”).

A clear purpose and strategy aren’t enough

McKinsey research from 2021 on attrition and attraction trends found that purpose is essential to employees throughout the organization, with 70 percent of surveyed employees saying that their individual purpose is defined by their work. It also correlates with performance: a 2019 study by academics at Columbia, Harvard, and Wharton found that clarity of purpose increases companies’ returns on assets by 3.8 percent.

Our findings on corporate purpose are at least somewhat encouraging: in both surveys, respondents said that purpose and strategy were the strongest of the five operational excellence elements at their organization. But only half of the OES participants say their organization’s purpose and strategy were reasonably clear and aligned with their own day-to-day work—a figure that fell to 40 percent for NGOES respondents. Moreover, according to our survey analysis, only 7 percent of organizations excelled in all elements of operational excellence, which suggests real limits to the impact of even a well-understood purpose and strategy.

Behavior challenges: Providing recognition and feedback

The second element of next-generation operational excellence, principles and behaviors, translates purpose and strategy into everyday norms that define culture. Here, the most striking finding from the two surveys concerned gaps in one of the most basic elements of a culture: ensuring that good work is recognized and that all work gets feedback.

Regular, development-oriented feedback boosts employee engagement; one recent study found that 80 percent of employees who had received meaningful feedback in the previous week were engaged. That is more than triple the global employee engagement rate of 23 percent. Yet less than one-quarter of respondents to our two surveys said that their organizations expected leaders to provide development-oriented feedback—and only about 11 to 13 percent said that their leaders actually gave the type of continual feedback that helps employees grow.

Similarly, only one-fifth of respondents said their organizations systematically recognized employees for achievements, either individually or as teams.

A sputtering innovation engine

Management systems, the third element, refers to structures and processes that reinforce behaviors, develop leaders, and strengthen capabilities over time through a continuous cycle of improvement. Organizations that apply rapid experimentation and continuous improvement best practices can increase productivity by 25 percent or more, largely thanks to innovation.

Both operations surveys found gaps in practices that enable employees to continually improve a company’s operations. Few organizations consistently follow baseline practices, such as conducting frequent check-ins with employees to see how work is going—serving as an early-warning system for problems and opportunities for new approaches. Only 21 percent conduct check-ins on at least a weekly basis.

When those check-ins do occur, they tend to be superficial. Almost half of check-ins cover only one or two performance dimensions, such as output, overall equipment effectiveness, or on-time percentage—decreasing the odds of finding and correcting issues before they grow (Exhibit 4).

According to respondents, less than half of organizations actively involve employees in developing operational improvements.

Overlooking the basics in visual tools

Technical systems form the core value-generation infrastructure in a business operation. Some technical systems, such as assembly lines in manufacturing, are technology intensive. But others are not: a problem resolution process in customer service may depend mainly on human interaction. Regardless of the environment, however, the goal is maximizing value creation while minimizing waste.

Effective resource planning using visual tools can improve both resource allocation and execution efficiency. Yet one of the most basic supporting elements of effective management—the use of visual tools that ensure performance transparency, such as digital whiteboards to track core performance metrics—shows surprisingly low adherence among survey respondents. At best, only about one-quarter of respondents used visual tools to support essential tasks such as workload balancing and resource prioritization, with almost no respondents saying that their organization used the tools well.

Technology: Digital needs analog investment

The final element, underpinning all the others, is technology. Most respondents showed frustration with their organization’s technology capabilities, with 93 percent expressing concern about how current technology translates to performance, and almost three-quarters saying their organizations lacked defined processes for building business cases for new digital tools.

At the same time, respondents also suggested that priorities other than technology would make more difference to future performance (Exhibit 5).

Respondents identified increasing frequency of development-oriented feedback and transparency of performance management as the two top performance improvement factors. In both, technology plays at most a secondary role; what matters more is the human willingness to view performance discussions as an opportunity to learn, rather than a danger to be avoided.

The research found that companies are underinvesting in some of the practices that matter most for performance improvement.

Invest more in what matters most

Although the two surveys differ in methodology, several of their strongest findings were strikingly similar, with practical implications for how companies achieve and sustain operational excellence. Most important, the research found that companies are underinvesting in some of the practices that matter most for performance improvement (Exhibit 6):

• Recognize achievements. It’s easy enough to set up an “employee of the month” program or hand out engraved paperweights for milestone anniversaries. A North American medtech company did much more, designing its recognition program to reinforce a wide range of operational excellence practices and outcomes. Some awards focus on individual achievements in areas such as quality or regulatory compliance; others recognize major group efforts to improve operations strategy or customer service. Regularly updated to reflect current priorities, the program is also integrated with the company’s performance management and capability-building programs so that recognition translates into promotion opportunities and new career pathways.
• Clarify the relation between work and purpose. At the medtech company, a disciplined internal communications program continually reinforces the connection between people’s work and the company’s purpose: improving human health. The company brings patients to production sites so that employees can hear how the products they make and the services they support change people’s lives. For a chemical manufacturer, the connection is to agriculture: employees understand how their products improve food production, relieve price pressures, and reduce water consumption.
• Understand customer needs. At many companies, employees who aren’t directly customer-facing may have only a limited understanding of what customers want. The chemical company instead made substantial investments in sending production superintendents overseas to visit agricultural customers. The experience proved eye-opening. Customers showed how impurities and other imbalances in products affected crop production and increased environmental waste. After seeing these effects in person, the superintendents returned to launch major new efforts to reduce deviations from quality standards. At a European telco, employees knew customers were dissatisfied with broadband installation, but not in sufficient detail to identify the right problems to solve. Only by bringing a single, cross-functional team together could the underlying customer needs be identified—and fulfilled.
• Use visual tools to create transparency about performance. Although companies have known how effective visual performance management can be—whiteboards showing work status have been around for decades—our surveys indicate that only exceptional organizations maintain the required discipline over time. The medtech company, for example, built a real-time, global platform that shares its major performance metrics throughout the company. Advanced companies, including a Latin American basic-materials company, are sharing the metrics via mobile phones so that anyone can look up performance data wherever they happen to be.
• Double down on development-oriented feedback. The largest gap our surveys found was in providing development-oriented feedback. The basic-materials company had long followed a very typical top-down management culture in which feedback came only rarely—for many people, only in annual reviews—and with little view to helping employees learn and grow. Part of its transformation centered on teaching managers how to provide better feedback so that people could make improvements and better understand potential career paths.

Together, these sorts of investments can yield major results. The medtech company, for example, has seen its stock price more than double in five years compared with its sector index. The basic-materials company has reduced its costs by 20 percent over three years, as output rose by more than 50 percent.

Senior executives at the companies that have made the most progress toward operational excellence often say that one of the hardest steps is simply to get started. That’s especially true for organizations that see themselves as performing well. A willingness to look at an operation objectively, with an openness to the possibility of achieving much more, is a prerequisite.

The second step is to set a bold ambition. The basic-materials company focused on its best-performing location, where some managers thought that only a few percentage points of improvement would be feasible. Instead, production has risen by more than 25 percent, despite erosion in the quality of raw materials.

The third step is to commit across an entire organization. Operational excellence isn’t something that can be sustained with only one department or business unit executing the elements needed to succeed. Instead, it requires the whole organization’s involvement so that entire processes can be reimagined from supplier through customer.

A few companies are on the path now. Will yours join?

Additional Productivity Resources

Top Productivity Tips for COOs in 2024 to Keep Operations Running Smoothly

How COOs Can Foster a Culture of Continuous Improvement

Understanding Operational Excellence