Understanding the components of profitability and productivity change at the micro level

Bernd Andreas Wiech, Athanassios Kourouklis and James Johnston

International Journal of Productivity and Performance Management, 2019, vol. 69, issue 5, 1061-1079

Abstract: Purpose - The purpose of this paper is to present a refined framework providing clarity in terms of the components of profitability and productivity change from the perspective of the firm level. Design/methodology/approach - The literature is analysed with a scoping study and a systematic literature review. Productivity measurement approaches are compared using data at the product level. Findings - The definition of total factor productivity (TFP) in the literature negatively affects the accuracy of profitability and productivity measurement. In the usual case of a dynamic output mix, TFP change encompasses biasing output mix effects relating to profitability, but not to productivity change. Therefore, this paper defines changes of a ratio of output quantities to input quantities not as TFP change, but as quantitative profitability (QP) change. A framework is proposed decomposing profitability change into price recovery and QP change, whereas the latter comprises of valid productivity change (encompassing technological, technical efficiency and productivity-related scale effects) and output mix change (encompassing proportion, quality, output switching and profitability-related scale effects). Research limitations/implications - Future research should include literature from the industrial organisation field of economics. The presented framework should be transferred to the standard production function framework used in economics. Practical implications - The paper can help preventing faulty decision making or distrust due to the use of biased profitability or productivity indicators. TFP-based productivity indicators are unsuitable for most firms. To measure productivity meaningfully, firms should use adequate approaches (e.g. standard input- or adjusted total factor productivity-based ones). Originality/value - The paper contributes to a more accurate performance measurement approach, as researchers and practitioners better understand the components of profitability and productivity change.

Keywords: Profitability; Total factor productivity; Productivity; Performance measurement; Output mix (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (text/html)
https://www.emerald.com/insight/content/doi/10.110 ... d&utm_campaign=repec (application/pdf)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:ijppmp:ijppm-10-2018-0366

DOI: 10.1108/IJPPM-10-2018-0366

Access Statistics for this article

International Journal of Productivity and Performance Management is currently edited by Dr Luisa Huatuco and Dr Nicky Shaw

More articles in International Journal of Productivity and Performance Management from Emerald Group Publishing Limited
Bibliographic data for series maintained by Emerald Support ().