Productivity Model - Business Models

Business Models

There are several different models available for measuring productivity. Comparing the models systematically has proved most problematic. In terms of pure mathematics it has not been possible to establish the different and similar characteristics of them so as to be able to understand each model as such and in relation to another model. This kind of comparison is possible using the productivity model which is a model with adjustable characteristics. An adjustable model can be set with the characteristics of the model under review after which both differences and similarities are identifiable.

A characteristic of the productivity measurement models that surpasses all the others is the ability to describe the production function. If the model can describe the production function, it is applicable to total productivity measurements. On the other hand, if it cannot describe the production function or if it can do so only partly, the model is not suitable for its task. The productivity models based on the production function form rather a coherent entity in which differences in models are fairly small. The differences play an insignificant role, and the solutions that are optional can be recommended for good reasons. Productivity measurement models can differ in characteristics from another in six ways.

1. First, it is necessary to examine and clarify the differences in the names of the concepts. Model developers have given different names to the same concepts, causing a lot of confusion. It goes without saying that differences in names do not affect the logic of modelling.
2. Model variables can differ; hence, the basic logic of the model is different. It is a question of which variables are used for the measurement. The most important characteristic of a model is its ability to describe the production function. This requirement is fulfilled in case the model has the production function variables of productivity and volume. Only the models that meet this criterion are worth a closer comparison. (Saari 2006b)
3. Calculation order of the variables can differ. Calculation is based on the principle of Ceteris paribus stating that when calculating the impacts of change in one variable all other variables are hold constant. The order of calculating the variables has some effect on the calculation results, yet, the difference is not significant.
4. Theoretical framework of the model can be either cost theory or production theory. In a model based on the production theory, the volume of activity is measured by input volume. In a model based on the cost theory, the volume of activity is measured by output volume.
5. Accounting technique, i.e. how measurement results are produced, can differ. In calculation, three techniques apply: ratio accounting, variance accounting and accounting form. Differences in the accounting technique do not imply differences in accounting results but differences in clarity and intelligibility. Variance accounting gives the user most possibilities for an analysis.
6. Adjustability of the model. There are two kinds of models, fixed and adjustable. On an adjustable model, characteristics can be changed, and therefore, they can examine the characteristics of the other models. A fixed model can not be changed. It holds constant the characteristic that the developer has created in it.

Based on the variables used in the productivity model suggested for measuring business, such models can be grouped into three categories as follows:

• Productivity index models
• PPPV models
• PPPR models

In 1955, Davis published a book titled Productivity Accounting in which he presented a productivity index model. Based on Davis’ model several versions have been developed, yet, the basic solution is always the same (Kendrick & Creamer 1965, Craig & Harris 1973, Hines 1976, Mundel 1983, Sumanth 1979). The only variable in the index model is productivity, which implies that the model can not be used for describing the production function. Therefore, the model is not introduced in more detail here.

PPPV is the abbreviation for the following variables, profitability being expressed as a function of them:

The model is linked to the profit and loss statement so that profitability is expressed as a function of productivity, volume and unit prices. Productivity and volume are the variables of a production function, and using them makes it is possible to describe the real process. A change in unit prices describes a change of production income distribution.

PPPR is the abbreviation for the following function:

In this model, the variables of profitability are productivity and price recovery. Only the productivity is a variable of the production function. The model lacks the variable of volume, and for this reason, the model can not describe the production function. The American models of REALST (Loggerenberg & Cucchiaro 1982, Pineda 1990) and APQC (Kendrick 1984, Brayton 1983, Genesca & Grifell, 1992, Pineda 1990) belong to this category of models but since they do not apply to describing the production function (Saari 2000) they are not reviewed here more closely.