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Chapter 12

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University of Toronto St. George
Rotman Commerce
Michael Szlachta

Ch.12 RSM100Y Chapter 12 Increasing Productivity and Quality The Productivity-Quality Connection - Productivity and Quality are watchwords in todays business. Companies are not only measuring productivity and insisting on improvements but also insisting on quality so they can bring to market products that satisfy customers, improve sales, and boost profits. - Productivity: a measure of economic performance that measures how much is produced relative to the resources used to produce it. The more we are able to produce the right things while using fewer resources the more productivity grows and the economy, businesses, and workers benefit. - Productivity considers both the amounts and the quality of what is produced. - By using resources more efficiently, the quantity of output will be greater, but unless the resulting goods and services are of satisfactory quality consumers will not want them. - Quality: A products fitness for use in terms of offering the features that consumers want. Responding to the Productivity Challenge - Productivity has both international and domestic ramifications. when one country is more productive than another, it will accumulate more wealth; a nation whose productivity fails to increase sa rapidly as that of competitor nations will see its standard of living fall. - Since quality must be defined in terms of value to the customer, companies must design their marketing efforts to cultivate a more customer-oriented focus. - As quality-improvement practices are implemented, more and more firms will receive payoffs from these efforts. - Four factors interact in this process customer, quality, productivity, and profits. Measuring Productivity - Most countries use Labour Productivity to measure their level of productivity. Labour productivity of a country = GDP total number of workers - It compares a countrys total annual output of goods and services with the resources used to produce that output. - The focus on labour is preferred because most countries keep accurate records on employment and hours worked. - Usually, firms that compete internationally have more incentive to be more productive. Productivity Among Global Competitors - The productivity levels different from nation to nation, and the reason lies in many factors such as technologies, human skills, economic policies, natural resources, and traditions. - According to Michael Porter, Canadas competitiveness is a concern because Canadians have been living off the diet of natural resources, and Canada will have to start emphasizing innovation and develop a more sophisticated mix of products if it hopes to be successful in international markets. - 1 - www.notesolution.comCh.12 Domestic Productivity - Nations must be concerned about domestic productivity regardless of their global standing. - A country that improves its ability to make something out of its existing resources can increase the wealth of all its inhabitants, and conversely, a decline in productivity shrinks a nations total wealth. E.g. Additional wealth from higher productivity can be shared among workers (as higher wages), investors (as higher profit), and customers (as stable prices). When productivity drops, wages can be increased only by reducing profits (penalizing investors) or by increasing prices (penalizing customers). Then the investor, suppliers, managers, and workers are all concerned about the productivity of specific industries and companies. Manufacturing vs. Service Productivity - Manufacturing productivity is higher than service productivity. - Service sector focussed more on hands-on activity that machines couldnt replace, so it would be more difficult to increase productivity in services is a theory by William Baumol and was believed for many years. - However, productivity gains are starting to appear among a wide array of service providers such as airlines, package delivery companies, providers of financial services, and retail establishments. - Many service organizations have increased their productivity by becoming more like factories, and they use modern information technology to eliminate inefficiencies. E.g. Automated check-in kiosks in airports. Industry Productivity - Industries within manufacturing and service sectors are different in terms of productivity as well. Technological advances gave the computer industry a productivity edge in many areas. - The 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. Company Productivity - High 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. - Increased productivity also allows companies to pay workers higher wages without raising prices. - The productivity of individual companies is also important to investors, workers, and - 2 - www.notesolution.com
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