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Chapter 2

MGTA01H3 Chapter Notes - Chapter 2: William Baumol, Business Process, Total Quality Management

Management (MGT)
Course Code
Chris Bovaird

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Productivity: a measure of efficiency that compares how much is produced with the
resources used to produce it (the more we are able to produce which using fewer
resources, the more productivity grows and everyone—the economy, businesses and
-productivity considers both the amounts and the quality of what is produced
Quality: a product's fitness for use in terms of offering the features that consumers want
Most countries use labour productivity to measure their level or productivity:
labor productivity of a country= GDP/ total number of workers
oA decline in productivity shrinks a nation's total wealth. When that happens, an increase
in one person's wealth comes only at the expense of others with whom he/she shares an
economic system. For example, additional wealth from higher productivity can be shared
among workers (as higher wages), investors (as higher profits), and customers (as
stable prices). When productivity drops however, wages can be increased only by
reducing profits (penalizing investors) or by increasing prices (penalizing customers)
oManufacturing productivity is higher than service productivity. For many years, it was
widely believed that the service sector suffered from "Baumol's disease," named after
economist William Baumol who argued that since the service sector focussed more on
hands-on activity that machines couldn't replace, it would be more difficult to increase
productivity in services
oThe productivity of specific industries concerns many people for different reasons.
Labour unions need to take it into account in negotiating contracts, since highly
productive industries can give raises more easily than can less productive industries.
Investors and suppliers consider industry productivity when making loans, buying
securities, and planning their own future production
oHigh productivity gives a company a competitive edge because its costs are lower. As a
result, it can offer its product at a lower price ( and gain more customers), or it can make
a greater profit on each item sold. Increase productivity also allows companies to pay
workers higher wages without raising prices.
-the productivity of individual companies is also important to investors, workers,
managers. Comparing the productivity of several companies in the same industry helps
investors in buying and selling stocks. Employee profit-sharing plans are often based on
the company's productivity improvements each year. And managers use information
about productivity trends to plan for new products, factories, and funds to stay
competitive in the years ahead.
oIt is no longer enough for businesses to simply measure productivity in terms of the
number of items produced. They must also take quality into account
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