90 Long Range Planning Vol.

13 August 1980

Productivity: What is it?

J. B. Coates, University of Aston Management Centre

being carried out will range from the national economy

to highly specialized investigations within companies.
Thus at the national level, a nation’s productive capa-
bility is often quoted in terms of net output/value added,
per head of the population or its workforce; for an
industry it will probably be the value added per
employee; for a company the latter ratio may also be
used, but further refinement is likely into per man hour,
per unit of labour cost, per unit of space occupied, per
unit of materials. This is not intended to be an exhaus-
tive list, but merely an illustration that both global and
narrowly defined productivity computations may be
made: before either constructing or interpreting these
figures, a clear understanding of their purpose and
component elements is necessary.

It is one thing though to measure productivity, it is

another to allot appropriate shares in value added to
Productivity is a heavily worked-some would say groups participating in the process of its creation; it is
overworked-term, with a host of meanings and a further problem still to ascribe causes to ‘high’, or
derivations dependent on the circumstances under more usually in the U.K. case, to ‘low’ productivity
analysis and the use required of the ultimate information. and prescribe policies to remedy what may be seen as
The concept is broadly based on the ratio of input deficiencies. In the latter context and in relation to low
(resources employed in a process) to output, though U.K. productivity, the arguments as to whether the
this ratio obviously requires considerable refinement to government and the burdens it places on the productive
be of any practical value. process through taxes and social service charges is at
fault, or whether it is poor management, inadequate
Calculation of productivity will also be related to the investment, idle workers or whatever, go on intermin-
value &cd by any process to the primary resource ably without firm conclusion. It is virtually impossible
inputs : value added or some closely related quantity to break into the cause-effect cycle; the situation which
will often be the numerator in the ratio referred to exists now is simultaneously determined by many
above. Definition of value added is broadly (for there factors and improvement is likely to require simul-
is no universally accepted definition) the value, measured taneous changes in them. ‘Quality’ is also an attribute
in money terms, created by the efforts of a company whose effect is certain to be difficult to quantify.
and its employees and equals sales less the cost of raw
materials, bought in components and sevices purchased It will be very obvious that a paper of this nature cannot
by the company. A similar computation is made for the propose solutions to the current problem of how to
value added by the nation as a who1e.l raise U.K. productivity; neither can detailed inter-
industry analysis be carried out, even assuming the basic
Productivity analysis is. of course, aimed initially at statistical material were available. The objective is to
determining the effectiveness with which scarce re- establish some of the main features in the current
sources are being employed. However, the resources in economic situation which have contributed, probably
question are varied and the level at which the enquiry is significantly, to the present position, so that in con-
sidering the future, attention will be drawn to some of
‘Dr. Coates is Senior Lecturer in Accounting, Management Centre,
the fundamental, unavoidable problems created by the
University of Aston, Birmingham. past, which must be overcome if progress is to be made.
 Productivity: What is it? 91

There is a vast difference between the U.K. and Japan,

Productivity Growth: A Background
but this is also true of most other countries. Nonetheless,
As any economist would understand, increases in the differences are cumulative in their effect and only a
economic wealth come from a more efficient utilization few percentage points annually make a significant
of existing resources, which in itself increases the total difference to potential improvements in productivity
potentially available, but also provides the capability in a short space of time. Jones,2 in an article discussed in
to create greater productive power (i.e. greater re- more detail later, estimates the investment gap needed
sources) in the future through their investment in the to restore the U.K. to an output capability comparable
means of production. Investn~nt is always singled out in with major industrial nations at ~100,000 millions.
discussion as being a causitive factor in low U.K. Some would qualify national investment statistics as
productivity. Figures 1-4, show that at the very least hiding important features such as where the investment
there must be a large measure of truth in this: for actually undertaken has taken place, the theory being
many years now the U.K. has invested a lower pro- some investment is more significant to economic
portion of its Gross National Product than most of its progress than others. This is true, but as can be seen
major industrial rivals with the exception of the U.S.A. from the figures, one area of weakness in the national
92 Long Range Planning Vol. 13 August 1980

economic performance is the manufacturing industry Squeezed between increasing costs and low growth,
taken in general, and there is no evidence that invest- it is hardly surprising that company Gross Trading
ment there has been proportionately greater than in Profits have been steadily falling for well over a
‘less’ significant areas. decade (Figure 6).

A push toward investment is also traditionally seen to However, the absolute level of investment is not a
come from relative increases in wage and salary in- sufficient condition for improved productivity even
creases per unit of output. In manufacturing industry, if it does take place. How it is utilized may be an equally
Figure 5 shows an almost exponential growth in these important factor. Once again, those studies which have
production costs, but the substitution of capital for been carried out do not give the U.K. a high placing.
relatively expensive labour has clearly not taken place. Dud1ey,3 concluded from a study carried out amongst
Given a slow expansion in net capital stock (i.e. total West Midland Firms, that substantial output improve-
investment being at least sufficient to cover replacement ments could be obtained from existing equipment and
of existing equipment), this will be one factor ac- Table 1 gives the results of a study showing the U.K.
counting for the marginal growth rates recorded in the to be far and away the least successful country in
U.K. both overall and in many sectors, since 1973. securing increases in output per incremental unit of
 Productivity: What is it? 93

Table 1. Increase in manufacturing output per increment personnel) as a whole are unwilling to adopt the kind
in capital expenditure in manufacturing 1953-1973 of work practices necessary to secure high utilization
or whether both factors are at work and to what degree
is again virtually impossible to decide.
Japan 100
W. Germany 80
France 70 The only thing that can be clear from the above dis-
U.S. 70 cussion is that all the measurable elements in the
Italy 65
Sweden 60 productivity arena are operating at best in the direction
U.K. 40 of only marginal gains; at worst their influence may
even be negative.
Source : OECD National Accounts.
International In&try Comparisons
3ones’2 analysis of manufacturing industry pointed to
investment in manufacturing. Other individual com- the relatively low level of assets per employee in U.K.
parative studies cast some light on this situation, for manufacturing industry in 1976, by comparison with
example in Ford plants in the U.K. and the continent, Japanese and German industrv (A7500, A30,OOO and
where manufacturing equipment is almost identical, Q3,OOO per employee respeciively. The gulf between
show the U.K. operation unable to keep plant operating the U.K. and the others is indeed enormous.
to the same level of potential capacity as their con-
tinental counterparts. Whether U.K. management are Certain detailed industry comparisons were also made.
at fault here due to inability to organize resources to Without exception these show the U.K. firms as the
ensure a high level of investment utilization or whether weaker performers. Jones points out that in the wealth
the workforce (\vhich may well include management creating process there are really only two variablcs-
94 Long Range Planning Vol. 13 August 1980

employees and money-in the form of assets. For output, then, in the long run at least inflation and its
example, in the year to 30 September 1976, Japanese attendant consequences will inevitably result.
vehicle manufacturers employed 208,591 people, with
assets of E42,020 per employee. Value added per However, measurement of productivity, where it is
employee was All,894 and wage costs 36.9 per cent carried out as part of the pay determination process, is
of the total value added. Total production of lorries, not conducted at national levels, but at industry,
buses and cars was 7,799,308 at an average factory company or even plant level. The calculations as they
price of Al472. By contrast, British Leyland employed reach the micro levels tend to become more varied and
183,384 people with total assets of A8595 per employee; the simple net output or value added per head approach
value added per employee was k4673 and wage costs may well not suffice. It is also the evident case, that
were 80 per cent of this total; 981,000 vehicles were whatever the productivity measurement produces, it is
produced with an average factory price of A2650, difficult to define an agreed basis of its distribution
some 80 per cent more expensive than the Japanese between competing groups, even assuming they would
vehicle. There are admittedly, many differences in the be willing to keep within measurable productivity
structure of the two industries, but certainly these increase limits. There is no real reason why the sum
would not be large enough to explain differences in total of all agreements should balance real resources at
detail and performance of this magnitude. Similar national levels.
findings were produced for steel and firms operating in
the electrical goods industry. Discussion of the subject at this point increasingly
becomes repetitive: productivity and the need to define
It is also pointed out that once stock appreciation has it and keep within it in respect of overall payment etc.
been allowed for, U. K. industry appears to have been are all topics which have continually recurred in recent
running at an increasing loss per employee each year decades.
since 1973, amounting to J283 per employee in 1976
(the latest year for which figures are available). The Quoting the National Board for Prices and Incomes in
Gross Trading Profit percentages in Figure 6 are the U.K. Eilon and Soesan4 give a list of factors to be
inclusive of depreciation allowances and certainly show a observed in productivity bargaining formulated in
serious decline in the period 1973/1976 with some 1967 which would not sound out of place today.
improvement subsequently. On either basis, one must
agree with Jones that it is not entirely surprising- (9 It should be shown that workers are making a
direct contribution towards increasing productivity
‘that investors have not been exactly tumbling over
by accepting more exacting work or a major change
themselves to invest in manufactnring industry’. It is a
in working practices.
situation though which feeds on itself.
(ii) Forecasts of increased productivity should be
In pointing to an increase in the proportion -of value derived by the application of proper work
added per employee taken by the U.K. government standards.
(24.7 per cent in 1973 rising to 31.4 per cent in 1976), (iii) An accurate calculation of the gains and costs
compared to 18.5 per cent for Japan, and the fact that should normally show that the total cost per
the government take tends to increase, the more unit of output, taking into account the effect
successful the company is, Jones concludes that the on capital, will be reduced.
financial burden placed on British industry by govern-
ment has much to do with its poor financial performance (iv) The scheme should contain effective controls to
as well as the generation of negative attitudes within ensure that the projected increase in productivity
industry towards attempting to improve it. However, is achieved, and that the payment is made only as
in a situation which has been developing for so long, productivity increases or as changes in working
it would seem dangerous to point to one cause: cer- practice takes place.
tainly, government programmes cannot always be
(v) The undertaking should be ready to show clear
turned on and off and the fact that the government benefits to the consumer through a contribution to
‘take’ has increased could in many aspects be due to the stable prices.
failure of wealth creating activity in the U.K. to increase
as expected, rather than it being held back by govern- (vi) An agreement covering part of an undertaking
ment financial demands. The operation of U.K. should bear the cost of consequential increases
corporation tax together with stock relief could in fact elsewhere in the same undertaking if any have to
be regarded as exerting a rather benign influence, be granted.
though corporation tax does not of course represent (vii) In all cases negotiators should beware of setting
the full extent of government financial demands on extravagant levels of pay which would provoke
industry. resentment outside.

Productivity Measurement and Reward Eilon and Soesan go on to comment ‘. . . many of the
It is an obvious truth that if rewards paid in the form of under publicised discussions of productivity levels have
wages and salaries, rents and dividends etc. in the been derived from a basic concern with such larger issues
economy as a whole exceed the total real net value of as inflation control, industrial peace and economic
 Productivity: What is it? 95

growth. As a consequence, it is not surprising that output output

X
relatively little attention has been given to the seemingly Total Investment Capacity
minor issues of how to measure productivitv changes, (utilization rate)
how to determine the means whereby changes have
Capacity x Fixed Investment
been effected and how to assess their consequences- X
Fixed Total Investment’
esneciallv when the answers to such Questions have Investment (Internal Alloc-
long been assumed to be known. Unfortunately, there (productivity ation of capital)
is little basis for such blithe assumptions. Moreover, it of fixed
is precisely because such knowledge has yet to be investment)
_ _ _ _
developed on an authoritative basis that some of our
public policies relating to inflation control and to the ‘Thus, changes in the ratio of profit to total investment
improvement of industrial performance rest on vul- may be attributed to five areas of performance : product
nerablc foundations.’ (My underlining) prices (Total Product Value/Output); unit costs (Total
Costs/Output) ; utilization of facilities (Output/Ca-
pacity) ; productivity of facilities and equipment
Gold,5 states widely used concepts of productivity have (Capacity/Fixed Investment) ; and the allocation of
three serious shortcomings : investment resources between capital goods and
working capital (Fixed Investments/Total Investment)‘.
(9 Output per ma+hour does not measure productive
efficiency as a whole, or even the productive
contributions of labour; If profit to equity investment were considered then a
sixth control ratio may be added:
(ii) Increases in output per man-hour may or may not
be desirable and may or may not reduce unit Profit Profit
labour costs ; and Equity Investment = Total Investment

(iii) Even if increases in output man-hour are ac- . Equity Investment

companied by only proportionate increases on 7 Total Investment *
hourly wage rates, production costs are more
likely to increase than to remain unchanged in Gold goes on to claim these ratios provide a good
‘capital-dominated’ industries, such as the steel basis for top management’s planning and evaluation
industries. requirements, since they represent a blend of physical
and financial aspects of resource flows, of short and
long-term perspectives, and, of the stock and flow
From the latter, it is evident that productivity analysis
components of the system.
must be founded in the cost structure of a firm and its
profitability.
From this beginning, a series of ratios in the usual net-
work form can be developed, so that important areas
An unfortunate feature of the productivity debate has of decision making can be identified in the degree to
been the tendency to treat productivity almost as an which they have contributed to observed adjustments
independent phenomenon, existing without regard to in the rate of profits on investment. Trend analysis can
its real roots in business. In fact of course, it should be also be employed and the whole built into the forward
planned and controlled, both on a long and short-term planning framework, based on known past inter-
basis, as part of the normal course of business events. relationships between physical input/output factors
Hence its analysis will be related to the criteria applied and the associated cost structures.
to the evaluation of the performance of a business, the
most common being the rate of return on capital In this respect, although termed by Gold ‘productivity
employed (the shortcomings of which, particularly relationships’, they differ little from the normally
where other objectives are involved, are acknowledged). understood pyramiding of management control ratios
divided and subdivided into increasingly micro aspects
Gold, identifies the areas of decision making which of the operating sectors of a business.
affect this objective as follows, (profit is before tax) ;

Profit Profit output Value Added Ratios in Productivity

Total Investment =OutputX Total Investment Measurement
and Value added may be defined as: Sales Value minus
Profit Value of Products Total Costs Costs of Raw Materials and Bought-out Services.
It includes profit together with the costs of services and
-dutput= output - output .
facilities provided by the firm in transforming the
(average price) (average cost)
outside supplies into finished goods or services; it is
‘this process of transformation which is the reason for
Output to total invcstmcnt is linked via a chain of the csistence of the firm and hence must lie at the root
Iratios : of the idea of measuring productivity.
96 Long Range Planning Vol. 13 August 1980

Like most ratio analysis, LISC of value added ratios is other sector pre-empting the kitty before others have
open to mis-intcrprctation and even abuse: for example. obtained a fair share, to the ultimate detriment of their
it could easily be supposed that an increasing ratio of performance/supply.
value added to total income reflects greater productivity.
Clearly this could bc a self-justifying measure since A number of companies now produce statcmcnts of
higher wages and salaries. constituting part of value value added for both employees and shareholders,
added help to increase the ratio-this could go on showing how it is distributed amongst various re-
looking better and better by paying higher and higher cipients, usually: wages and salaries (employees),
wages and salaries. retained profits (company and shareholders), dividends
(shareholders), interest (loans) and tax (government).
The critical element which brings this situation back These statements do not usually go into a great deal of
into perspective though is profit: without any increase detail: their aim is clearly educational. An example
in the latter, the ratio of total profit to value added will from J. Lucas Limited. is given as Appendix 1.
look smaller and smaller, hence a more satisfactory
overall measure is the ratio of profit to v41~c &M Amey,6 whilst accepting the use of vaIuc added as a
measure of corporate performance and the analysis of its
Value added ratios are already extensively used in inter- distribution between factors of production as an aid
firm comparisons to measure the productivity of to greater employee participation, is very sceptical
individual factor inputs. In fact, any input element could about value added being used as a basis for payments
be treated this way: for example, let v = Value systems. To quote. . . ‘Suggestions for linking these two
Added S = Salaries and II/ = Total Wages, then the (payment to value added) range from the use of value
ratios added as a basis for national incotnes policy, to use as a
v v traditional bonus scheme. It is not clear how such
schemes would deal with the immediate situation in an
K’S
organization, nor why they should or could lead to a
could be regarded as the productivity per pound of change in behaviour’. Supporting arguments follow
wages or salaries, (productive and non-productive this statement. No doubt others could take an equally
labour and administrative respectively). Other ratios hard opposite line.
commonly found are :

Value Added : Capital Employed

Value Added : Fixed and Working Assets AcknololeAQment--The author would like to acknowledge the help
Value Added : Sales given by J. Hobbs, Financial Controller, Electrical eC Industrial
Securities Ltd.
Value Added : Number of Employees

Value Added : Square-foot Floor Area

Operating Profit: Value Added

This list is not exhaustive, nor is it in part at least, a Dr. 8. Mitchell, Measuring Value Added from the Census of
Production, Statistical News 41. CSO.
recommended list. With all ratios, it is necessary first
of all to consider what, if any meaning may be attached F. E. Jones, Our Manufacturing industry: The Missing f 100,000
million, National Westminster Bank Quarterly Review, May
to them and how they are to be compiled, including
(1978).
adjustments which may have to be made for example
Comparative Productivity Analysis in Engineering and Metal-
for inflation.
making Industries in the West Midlands, University of Birming-
ham (1969).

Eilan, Gold and Soesan, Applied Productivity Analysis for

Rewards and Productivity Bargaining Industry, Pergamon Press (1976).

The transition from measuring productivity in any Gold, Productivity analyses. Some new and empirical perspec-
tives, Business Economics, 9 (3) (1974).
acceptable way to the question of reward and payment
for factor services is a big step, no matter how scien- R. Amey, No panacea for our industrial ills, The Times, Monday
27 November (1978).
tific a scheme of measurement has been developed.
However, the value added approach again at least
provides an educational basis for the process of pro-
ductivity bargaining, since it concentrates on those
factors provided by the business in the process of
conversion of raw materials and bought-out supplied Appendix I
into finished products and services. Bargaining for a J. Lucas Linlited. Statenrent ofValue Added 1977
share in net output, more especially a share in an A main business objective of all companies is the creation and distri-
increased profit component, is not a matter of precise bution of wealth. A Value Added Statement shows in simple form
calculation (apart from meeting contractual liabilities), how that wealth is created and distributed. The following is our
but of achieving a reasonable balance, without one or statement for the year, with explanatory notes.
 Productivity: What is it? 97

Employees. This is the first and of course the major disbursement. It

1977 1976
covers all pay to employees plus our contribution to national insur-
fm fm
ance and pensions. It also covers the cost of welfare facilities and
supplementary payments to employee pension and other funds.
Sales 886.1 719.3
Less materials and services purchased 460.9 371.8
Gouern~~~~ts. This comprises the taxation on current profits we have
Value added
paid, or owe, to the governments of the countries in which we
425.2 347.5
operate.
Plus other income 14.5 8.4
Providers ofloans. This is the interest we pay, to our bankers on our

Total 439.7
overdrafts and to the holders of our loan stocks who have lent us
365.9
money on longer terms.
Disbursed as folio ws:
To employees 334.3 278.3 Shareholders. These are the total dividends we propose to pay to our
To governments 11.0 10.3 shareholders out of this year’s profits.
To providers of loans 10.8 8.9
To shareholders 7.7 6.6
Retained in the Business.This money which comes from three sources
And retained in the business as follows: is used to renew plant and equipment and to provide for expansion.
From depreciation 18.8 14.3
From profits 28.5 20.8
It constitutes investment in our future ability to create wealth.
From deferred taxation 28.6 16.7
Depreciation. Depreciation is the term given to the funds set aside
Total 439.7 355.9 from our current income to replace our fixed assets in the future
when their working life has expired. The assets covered are buildings,
plant, equipment and motor vehicles.

Murerials and Services. This comprises the cost of the raw materials Deferred Tuxatian. This represents potential taxation liabilities which
and components which have gone into our products and constitutes we do not however believe we will be liable to pay in the foresee-
easily the largest part of this item. The services include items like able future. It comprises the tax allowances granted on the acquisi-
power, light, heat, water, fuel, rates, maintenance costs, insurance, tion of plant and equipment and tax relief on the inflationary element
hire charges and advertising. of stock increases during the year.

Other Incornc. The figure of E14.5, is made up of royalties, interest Prqfits. This represents the net profits of the company after all tax-
received and our share of net profits of associated companies (com- ation, dividends and other expenses which we propose to retain in
panies of which we own 50 per cent or less). the business to finance future expansion.

To Employees 76.0%