Table Of ContentProductivity Based Management
Studies in Productivity Analysis
Ali Dogramaci, Editor
Rutgers University
Titles in the Series:
Adam, Dogramaci, Productivity Analysis at the
Organizational Level
Dogramaci, Adam; Aggregate and Industry-Level
Productivity Analysis
Dogramaci; Productivity Analysis: A Range of
Perspectives
Dogramaci; Developments in Econometric Analyses of
Productivity: Measurement and Modelling Issues
Productivity Based Management
Ephraim F. Sudit
Rutgers, The State Univ'ersity of New Jersey
"~
Kluwer-Nijhoff Publishing
a member of the Kluwer Academic Publishers Group
Boston The Hague Dordrecht Lancaster
Distributors for North America:
Kluwer Academic Publishers, Boston
1 90 Old Derby Street
Hingham, MA 02043, U.S.A.
Distributors Outside North America:
Kluwer Academic Publishers Group
Distribution Centre
P. O. Box 322
3300AH Dordrecht, The Netherlands
Ubrary of Congress Cataloging in Publication Dala
Sud it, Ephraim F.
Productivity based management.
(Studies in productivity analysis)
Bibliography: p.
1. Industrial productivity. 2. Industrial management.
I. Title.
HD56.S83 1984 658.5 83-20001
ISBN 978-94-011-9669-7 ISBN 978-94-011-9667-3 (eBook)
DOl 10.1007/978-94-011-9667-3
Copyright © 1984 by K1uwer Nijhoff Publishing. No part of this
book may be reproduced In any form by print, photoprint,
microfilm, or any other means wHhout written permission of the
publisher.
Softoover reJDtt of tile bardeover 1st edition 1984
Dedicated to My Wife and My Mother
PREFACE
Realization of productivity gains is a necessary condition for long-term
consistent improvement in economic well being. We have to work smarter
and produce more efficiently to attain an ever higher quantity and quality of
goods and services without sacrificing leisure. This is true for the economy at
large as well as for individual firms. In a competitive environment, businesses
must continuously improve the productivity of their operations in order to
sustain and augment profitability and growth. This basic requirement may be
temporarily obscured by unexpected external developments or financial
manipulations, but it is nevertheless essential to the long-term health of any
economic enterprise. Increasing awareness of the importance of productivity
has recently motivated renewed interest in the development and refinement
of productivity-based management techniques. The purpose of this book is to
review and evaluate some of the new contributions in this area.
The analysis of productivity-based management in this book encompasses
planning, decision making and control methods which explicitly incorporate
techniques designed to measure, monitor, induce and improve underlying
productivity performance in production, financial planning, marketing and
international operations. These productivity-based methods can easily
accommodate built-in efficiency incentives designed to motivate people
vii
viii PRODUCTIVITY BASED MANAGEMENT
working in decentralized organizations toward goal congruent behavior. It is
argued throughout the book that productivity-based management, at its best,
is likely to improve significantly the efficiency and effectiveness of economic
enterprises. In fact, many of the productivity-based methods described in this
book have been successfully implemented in recent years in a variety of
managerial settings.
This book is intended primarily for general managers, professional
analysts and students of management in the private and public sectors. The
predominant emphasis is on applied analysis and practical managerial
applications. Only very basic quantitative skills are necessary to follow the
discussion. At the same time, I did not try to cover all or even most areas of
applied productivity analysis. Instead, I have selected an array of methods
and approaches which, in my view, appear to be among the promising tools
for the enhancement of effective management.
Many of the ideas in this book are based on joint published research with
my colleagues at Rutgers University, New York University, Columbia
University, The University of Haifa and the American Telephone and
Telegraph Company. In writing this book, I have therefore greatly benefited
from my work with Ali Chaudry, Michael Crew, Dan Eldor, Harsharanjeet
S. Jagpal, Akira Ishikawa, Paul Kleindorfer, Abraham Ravid, Melvin
Shakun and H.D. Vinod. For very helpful advice and assistance in planning
this work lowe a debt of gratitude to Ali Dogramaci. I would also like to
thank Lorraine Kenny for her most competent typing and technical
assistance. Finally, I am most grateful to my wife Myriam Sudit for her
professional and editorial assistance, as well as for her patience and
encouragement.
CONTENTS
Preface vii
1
The Productivity Concept: Definition, Measurement
and Managerial Importance 1
Aggregation Problems 3
Total Factor Productivity 5
Unbiased and Unique Discrete Approximations to TFP Indexes 7
Value Added Versus Gross Output 9
The Concept and Measurement of Capital 10
Productivity Measures and Financial Statements 13
Objectives and Uses of Productivity Indexes 16
2
Productivity Indexes, Production Functions, Cost Functions
and Technical Change 19
TFP Indexes, Cost Functions and Technical Change 22
Specific Functional Forms and TFP Indexes 24
Some Empirical Macro-Economic Observations 26
Empirical Study of Major U.S. Industrial Groups 30
Selected Empirical Observations on the Company Level 34
ix
x PRODUCTIVITY BASED MANAGEMENT
3
Efficiency and Effectiveness 39
The Relationships Between Technical Efficiency
and Effectiveness 39
Conflicts Between Productivity and Effectiveness 40
The Measurement of Effectiveness 43
Identification of Feasible and Admissible Sets 45
The Importance of Joint Efficiency
and Effectiveness Based Management 48
Notes 49
4
Use of Productivity Accounting in Financial Analysis 51
Quantitative Standards as Productivity Targets 51
Productivity-Based Flexible Budgeting 52
Efficiency Variances as Indicators of Productivity Performance 53
Interdependence among Variances and Evaluation
of Productivity Performance 55
The Role of Indirect Inputs and Capital in Productivity Accounting 57
Determination of Efficient and Effective Quantitative
Standards under Uncertainty 60
5
TFP-Based Financial Analysis 65
TFP-Based Financial Analysis and Flexible Budgeting 65
A Case Study of TFP-Based Financial Analysis
(Eldor and Sudit (1981)) 66
Distribution of Productivity Gains 69
Productivity Based Budget Audits 72
Selective Sequential Budgetary Audit Based on Total Factor
Productivity Indicators (Ishikawa and Sudit (1981)) 73
Notes 77
6
Efficiency Measures in Marketing 79
Marketing Objectives and Total Marketing Output 79
Measuring Efficiency in Expansive Marketing 81
Measuring Efficiency in Retentive Marketing 82
Efficiency Measures for Marketing Financial Services:
A Case Study (Jagpal and Sudit (1978)) 83
Selection of an Efficient Mix of Marketing Instruments 87
Notes 92
CONTENTS xi
7
Productivity Based Management of International Operations 93
International Differences in Productivity Growth 93
The Role of Relative Productivities in Export Decisions 98
Oligopolistic Markets and Politization 104
Productivity Based Diversification
of International Investments 106
The Effects of Flexible Exchange Rates 108
Productivity Accounting Requirements and Their Use
in Export Decisions 109
Conclusions 115
Notes 117
8
Productivity Based Management in the Public Sector
and in Regulated Industries 119
The Valuation Problem 119
Subjective Valuation 121
Objective Valuation and Relative Efficiency 122
Data Envelopment Analysis 125
Relative Efficiency Analysis in Education: A Case Study 127
(Charnes and Cooper (1980))
The Role of Productivity in Rate of Return Regulation 132
Productivity Based Rate Adjustment Clauses 137
Productivity Incentives 138
Built-In Cost Efficiency Incentives 139
Built-in Rate of Return Incentives 140
Pricing Efficiency 141
A Retrospective Illustration of the Effects
of Productivity Based Regulation 142
Productivity Based Pricing in the Public Sector 144
Notes 145
References 145
Name Index 155
Subject Index 157
