For decades, Europe’s story was one of triumph. In sectors as diverse as automotive and textiles, European design, engineering, and manufacturing led the world, while European societies took most of the top slots in the United Nations Human Development Index.
Yet Europe’s achievements look increasingly fragile. The continent’s software industry remains dwarfed by competitors elsewhere—particularly in the United States, China, and India. At least in the short term, cheap, reliable energy sources are also scarce. With today’s geopolitics delivering ever more volatility, European companies urgently need more financial and operational agility. Both depend critically on productivity improvement.
As Mario Draghi recognized in his foreword to the European Union’s seminal 2024 report The future of European competitiveness, “raising productivity is fundamental.” By freeing funds for redeployment, productivity lays the foundation for affordability in times of macroeconomic uncertainty, offering the best antidote to inflation when input costs are rising and potentially raising living standards when input costs fall. It’s a critical enabler for the net-zero transition, which the McKinsey Global Institute estimated would require an additional investment equivalent to 7.5 percent of global GDP.1 It could also provide a vital counterweight to demographic changes around the world, helping first-wave countries—including much of Western Europe—continue to benefit from economic growth.2
Reviving productivity growth is Europe’s central challenge. Over the past quarter century, the continent’s labor productivity growth per hour worked has fallen by about two-thirds, from an average of 1.5 percent annually between 1999 and 2008 to below 0.4 percent in 2024.3 By 2023, Europe’s productivity lagged behind the United States by 33 percentage points.
Nevertheless, there is cause for optimism. Rapid technological evolution, such as AI agents that can untangle manual processes in settings from banking operations to innovation and product development to machine maintenance and quality, opens a completely new horizon for productivity gains. European businesses have a once-in-a century opportunity to become more competitive.
But the window for getting started is narrow: In sector after sector, it’s a winner-takes-all world. That means adopting a radical mindset shift, combining targeted operational investments with rapid adoption of new technology. In this article, we focus on the moves companies can make to improve their productivity (see sidebar "Our methodology"), especially the practices that combine to form next-generation operational excellence.
How is Europe doing?
Recent data from the Conference Board’s Total Economy Database and the University of Groningen’s Groningen Growth and Development Centre Productivity Level Database reveal the extent of Europe’s deficit in productivity growth per hour worked, compared not only with rapidly developing economies such as China but also with the United States (Exhibit 1). This trend is particularly concerning given the region’s aging workforce and the need to maintain competitiveness in a global market.
Europe’s productivity growth has been lower than that of the United States and East Asia since the mid-1990s. Although all three regions have seen productivity growth decline since then, the trend has partly been reversed in the United States. Europe has seen no such recovery; instead, for the five largest European economies, productivity per hour worked is now 33 percentage points lower than in the United States (Exhibit 2).
Analysis at the industry level provides only slight comfort. Over the past quarter century, European productivity per hour worked has fallen further behind that of the United States in most sectors. The few exceptions are in small industries, such as arts and entertainment, or show only a modest addition over the United States, as Germany shows in trade, transport, and accommodation (Exhibit 3).
Automotive
In the automotive sector—long the crown jewel of European industry in terms of innovation and employment—the challenges are even more stark. Traditional European car manufacturers now confront disruptive electric vehicle makers whose embrace of new technology, innovative market strategies, and accelerated product development has reshaped the competitive landscape. These companies’ operational breakthroughs have cut new-product development time by up to 60 percent compared with traditional incumbents, backed by cost advantages that squeeze incumbents’ margins right when they have to make unprecedented investments just to keep pace.
Even more significant is the automotive industry’s transformation in China, where investments in improved battery technology and a distinctive operating model focused on speed, execution, and technology leadership have further reduced production costs while significantly improving quality and customer experience. We estimate that among Chinese automakers and new electric vehicle manufacturers, productivity has grown by at least 4.5 percent per year since 2013 (Exhibit 4).
Consumer goods
Consumer goods is a notable exception, with European companies’ labor productivity growth well outpacing that of their US-based competitors over the past decade (Exhibit 5). Accordingly, European consumer goods manufacturers have increased revenue per employee at a steady clip, reflecting the continent’s proud tradition of leading consumer goods and apparel brands. However, as our colleagues have noted in “Rescuing the decade: A dual agenda for the consumer goods industry,” after an era of strong growth and high TSR, the consumer goods industry has been hit hard by macroeconomic and other external forces, including a fragmenting consumer base, a squeeze on mass merchants (especially in Europe), and volatile costs driven by climate change. Moreover, the past several years have delivered a series of shocks: the global chip shortage from 2020 to 2023, the war in Ukraine, trade uncertainties, and geopolitical challenges.
Each of these disruptions is likely to amplify in the coming decade. European consumer goods companies that want to remain leaders will need to increase their competitiveness and free up capital to invest in further growth and innovation. The consumer goods sector faces major challenges, and TSR has been plummeting.
The sector’s traditional business model has been under strain for more than a decade as the rise of digital channels, fragmenting consumer preferences, and competition from private label goods take their toll, along with diminished macroeconomic and population growth. Consumers are wary, as evidenced by the European Commission’s economic sentiment indicator falling from almost 120 in 2021 to 94 in mid-2025.4
Telecommunications
For Europe’s telcos, productivity improvements are especially urgent for a somewhat different set of reasons, starting with the market’s high fragmentation, which limits growth opportunities and economies of scale. Furthermore, European telcos face unique constraints, such as large legacy portfolios and highly customized and complex business regulations that increase time to market and maintenance costs. These factors make it difficult for companies to optimize operations, further stalling productivity improvements.
Financial pressures also weigh heavily on the sector, with a narrowing ratio between ROIC and weighted average cost of capital: from 6.4 percent in 2010 to just 1.8 percent in 2021 (Exhibit 6). This decline, coupled with stagnant EBITDA margins and rising energy costs, has left European telcos struggling to generate sufficient returns on their investments. The capital expenditure requirements are immense, with over $600 billion needed globally for mobile network upgrades between 2022 and 2025, 85 percent of which is allocated to 5G. These financial burdens are exacerbated by inflationary pressures and the need for continuous technological upgrades, making productivity improvements not just desirable but essential for survival.
The fact that European telcos are so much smaller than their US counterparts poses difficulties in adopting advanced technologies, including AI and automation. Limited capabilities often lead telcos to rely on external support, slowing deployments and further hampering the sector’s ability to address its productivity challenges.
European businesses can rekindle productivity growth by rewiring
Clearly, European businesses face enormous challenges. But they can thrive nonetheless. By adapting and investing, they can significantly improve productivity. With changed mindsets, effective deployment of technology, and a new focus on productivity, they might even join the ranks of standout firms whose successes drive productivity gains far beyond their organizations.
Changing the productivity playbook
The productivity playbook has transformed radically, evolving from the early days of time studies to the integration of AI in all its forms. This evolution underscores a broader shift in how businesses and industries approach productivity. They don’t see rising productivity simply as a vehicle for subtracting cost but as an invaluable driver of new value.
Rewiring operations: Observations from the Lighthouse shop floor
Since its launch in 2018, the Global Lighthouse Network, a World Economic Forum initiative cofounded with McKinsey, has become a benchmark for advanced manufacturing, highlighting sites that have successfully scaled Fourth Industrial Revolution technologies. The network has expanded rapidly to include 189 sites worldwide, with a notable concentration in Asia and including a significant share in China (Exhibit A). Many of the Asia-based companies with Lighthouse sites export globally and have announced ambitions to achieve world-class levels of efficiency and productivity. Compared with Chinese manufacturers, European firms face a considerable challenge in translating innovation into scaled productivity gains.
Lighthouse factories are not simply automating for efficiency; they are fundamentally redefining how operations work by integrating advanced analytics, robotics, and AI—including gen AI—across the value chain. Among the most recent cohort of Lighthouse designees, 79 percent have deployed AI to optimize everything from logistic scheduling and energy usage to predictive maintenance, and 10 percent are now using gen AI (Exhibit B) in a manufacturing setting—defying assumptions that large language models would be useful only for services.
Moreover, many Lighthouses are now using robotics, such as autonomous vehicles, not just for repetitive tasks but for flexible, collaborative applications on the factory floor. These technologies enable a step change in agility, quality, and cost, with Lighthouse members typically achieving sustained productivity improvements of 20 to 40 percent. For Europe, the key question is not whether these technologies work but rather how to adopt and scale them faster across its more fragmented industrial landscape.
The highest performers apply this mindset across their entire organization, from the CEO to the shop floor (see sidebar “Rewiring operations: Observations from the Lighthouse shop floor”). It informs every major operational decision, from R&D investments to customer care practices—all part of a continual reexamination of the business that promotes a culture of innovation. That means making a continuous commitment to accelerated capability building throughout the organization, from the front line to the executive suite. And it suggests adopting a new openness to thinking in terms of “partnerships” and “ecosystems” rather than “vendors” or “suppliers.”
New technologies have increased the metabolic rate of change. Programs that once required years of sustained effort to show lasting results can now deliver real transformation in only a few quarters. For instance, gen AI can automate data collection and analysis, providing real-time insights that enable quicker decision-making and more efficient process adjustments. Agentic AI pushes even further, offering new capabilities for making decisions on critical matters such as how to execute multistep workflows.
This new approach therefore expands traditional continuous-improvement mindsets of operational excellence to include bold, transformative actions. By building on the foundation of traditional methods, companies can achieve significant leaps in productivity through genuine strategic innovation and rewiring.
Adaptations by industry
While the core elements of productivity transformation are universal, the specific strategies and tools vary by industry. Next-generation operational excellence provides a structured approach for these transformations, emphasizing the importance of a multihorizon agenda that balances short-term gains with long-term strategic investments.
Automotive. The transformation of one global automotive player with dozens of plants worldwide illustrates the potential for Europe’s incumbents. With its financial returns stagnant, the company reexamined every aspect of its operating model. As is the case at many large companies, the effort uncovered major technical debt from aging tech systems—resulting in highly manual processes that depressed sales because customers were frustrated.
Company leaders recognized that a technology solution alone was unlikely to show sustained value, especially given the risk and cost of technology transformations. Instead, they turned to a customer-back operating model based on deep behavioral insights about what end customers wanted. And they committed to move quickly, taking advantage of AI capabilities from carefully selected partners to focus on rapid iteration.
Setting highly ambitious targets motivated the organization: The changes would eventually deliver a multibillion-dollar increase in profit, along with double-digit increases in customer satisfaction and a doubling of e-commerce growth. Along the way, the company achieved full visibility across every tier of its supply chain, starting at more than 500 suppliers and ending at more than 1,000 sales locations. The total cost of the changes amounted to less than 20 percent of the incremental profit they delivered.
This kind of thoughtful deployment of technologies such as gen AI and agentic AI is accelerating transformation. Several automotive sector leaders have deployed gen AI in software development, which has reduced time wasted on busy work, improved software quality, increased coding speed by up to 44 percent, and created a better employee experience. Others are expanding AI into additional functions. One commercial vehicle OEM is using gen AI in sales to create customer profiles tailored to product use cases such as fleet management. For each sales rep, gen AI prioritizes customer profiles and develops personalized, fact-based sales strategies. So far, incoming orders have risen by 40 percent.
As with previous technologies, impact from gen AI (and agentic AI) is likely to be greatest once it expands beyond function-specific applications and reaches scale across an entire organization. That means addressing the human side: McKinsey has estimated that by 2030, up to 30 percent of hours worked could be automated by these technologies. At the same time, additional McKinsey research has found that employees are ready for gen AI. To thread the needle, one global OEM undertook a company-wide program to identify precisely where gen AI could have the greatest impact—based not on generic ROI estimates but on how the organization’s tens of thousands of employees work. The company developed sophisticated personas that enabled it to shape the deployment of gen AI to real needs, for a total long-term efficiency potential of 20 to 25 percent.
Consumer. For consumer goods companies, a multihorizon productivity agenda is crucial. This approach involves a combination of immediate cost-saving measures and long-term investments in technology and innovation. For example, automating supply chain management can lead to immediate efficiency gains, while investing in gen AI for product development can drive long-term growth and competitiveness.
Changes at a European-based global food manufacturer illustrate the potential. As is typical in its industry, the company faced rising complexity in its product portfolio, which raised costs while diminishing economies of scale. Company leaders sensed that new technologies would help but struggled to find commonalities across factories that varied widely by size, configuration, age, and digital maturity.
Managers selected one of the company’s Central European production sites to take the lead. The effort became a full-scale digital transformation that mobilized the entire workforce in deploying connected shop floor technologies, AI, and automation at scale. Production costs fell by almost 20 percent, operating efficiency rose by more than 10 percent, greenhouse gas emissions were halved, and quality improved. The site provided a blueprint for the company’s broader manufacturing network of more than three dozen facilities—and turned the company into a top employer in this local market.
What made the transformation work? First, it wasn’t driven by a “shiny object” tech mindset. Instead, the company began with a clear, top-down view of the value at stake, then empowered site-level teams to unlock that value in ways tailored to their operational realities. Site leaders engaged frontline managers and employees from the start to assure buy-in, long-term success, and changes that addressed real problems.
A central team built a comprehensive menu of solutions that local managers could adapt, enabling rapid scaling of proven approaches while preserving room for local variation. Minimum viable products and rigorously designed pilots helped refine proposed options, which teams codified and shared once the impact was confirmed. This approach allowed the company to avoid the common pitfall of site-level fragmentation and vendor overload. Rather than striving for perfect, bespoke solutions, the team focused on “good enough to scale”—standardized tools that addressed the majority of needs and could be deployed quickly across the network.
Equally important, the transformation was people led as much as it was tech enabled, with intensive training for more than 100 digital leaders and targeted training for more than 500 additional employees. As a result, some use cases—ranging from AI-guided machine optimization to digital dashboards and integrated batch-release processes—have driven gains of up to 50 percent in labor productivity, with faster changeovers and process improvements now implemented throughout the facility.
Perhaps most important, the initiative unleashed a culture of innovation that now extends beyond a single site. With the right combination of executive sponsorship, standardized yet flexible tools, and empowered local teams, the company is on track to realize over $100 million in value from its digital manufacturing program in just two years.
Telecommunications. Across sectors, business leaders increasingly understand the urgent (and daunting) need for the entire workforce to develop tech skills. Technology can provide an increasingly powerful solution, as it did for a European telco that was seeking ways to improve frontline employee performance and service levels without raising costs.
Despite the company’s investments in building employee skills, some service agents consistently outperformed others—leading to uneven customer experience, high support costs, and slow resolution times. Executives recognized that the existing training model, based on standardized content and uniform delivery, lacked the precision to address the specific needs of individual employees. Efforts to improve coaching had been constrained by limited supervisory capacity, inconsistent feedback, and a lack of clear visibility into performance drivers.
The solution came via an AI-powered learning engine, which the company designed to deliver personalized training and coaching at scale. Using operational data—such as call center transcripts, service logs, and performance metrics—the system identified recurring skill gaps and matched each employee with targeted learning interventions. Training was embedded directly into daily workflows through personalized dashboards, ensuring that content was delivered at the point of need rather than through separate, periodic programs. Supervisors retained oversight of the process, reviewing and validating the training paths recommended by the system.
In call centers, the AI system was used to address specific patterns, such as frequent escalation of particular types of service requests. The learning engine responded by suggesting brief coaching modules or instructional content tailored to those issues. Over time, this approach helped reduce call transfers and increase first-time resolution rates. In the field, technicians received targeted refreshers ahead of appointments involving complex or uncommon service types, supporting a rise in first-time fix rates.
The shift also provided management with clearer insight into capability development across teams and regions, enabling individuals to become more effective in their roles. More than 5,000 employees were engaged in the early stages of the rollout as the system expanded to include retail, sales, and support functions.
The introduction of personalized, AI-supported learning has contributed to measurable gains in both productivity and customer satisfaction. First-time resolution rates have increased by 10 percent year on year while first-time fix rates in field operations have risen by 5 percent. These improvements have been accompanied by a 14-point increase in net promoter score, reflecting more consistent and effective service delivery.
European business leaders and policymakers must embrace a radical mindset shift and make targeted investments in technology and innovation. By enhancing traditional productivity playbooks with modern technologies and tools, developing strong leadership, and upskilling the workforce, they can position Europe to capitalize on its unique opportunities and maintain its social contract while driving economic competitiveness. Now is the time to act boldly so that Europe can once again be a leader in global productivity.
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