The effect of productivity on profitability: a case study at firm level

Long-term productivity and profitability are important concepts and measures for both the formulation-evaluation of the proposed future strategic options and for the performance and success of a firm. Accounting measures of profitability are not good indicators of long-term profitability at the firm level. Thus, world class companies, today, adopt new measures of profitability, like the Shareholder Value Added (SVA) or the Cash Value Added (CVA) concepts, which are based on the Discounted Cash Flow (DCF) method. This study creates a framework/model to support the strategic management process, as well as a tool to assess the performance and improvement process, through long-term productivity and profitability measurements. It is a Total Productivity Measurement (TPM) model, which directly measures and relates productivity with long-term profitability (defined as the Shareholder Value Added-SVA) and uses dynamic productivity ratios and their effects on profitability in value terms. a) The undertaken case study tests the validity of the proposed framework and the constructed tool and its "usefulness" to managers. The present study's contributions to knowledge are: 1. Its improvement of Gold's model in two ways: a) The addition of a fourth input, the general expenses, and b) The connection of Gold's model to the Shareholders Value Added (SVA) analysis, because it is a better indicator to the firm' s long-run profitability. 2. The construction of a detailed management tool for the strategic management and control of productivity and profitability based on above 1 (a) and (b) improvements. 3. The connection of the Gold model with Value Chain Analysis or the ABC and Strategic Cost Management. 4. The evaluation of the proposed model / tool by the management team of a Greek company and the empirical results that came out from this evaluation process.