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Productivity and Decision
making
 Productivity refers to the physical relationship between
the quantity produced (output) and the quantity of
resources used in the course of production (input).
 “It is the ratio between the output of goods and services
and the input of resources consumed in the process of
production.”
 Productivity means balance between all factors of
production that will give the maximum output with the
smallest effort
 Productivity means an economic measure of output per unit of
input.
 Output refers to the total production in terms of units or in
terms of revenues.
 Input refers to all the factors of production used like capital,
labour, equipment, etc. Productivity is a good indicator of the
efficiency with which a factory is operating.
 If a firm has higher productivity, i.e. it produces more with a
given amount of inputs, it means it is utilizing the resources
properly.
 Similarly, a lower productivity indicates wastage of resources
and time. It is vital to have a high productivity rate because
resources like capital and time are scarce and should be
exploited in the best possible way.
 Productivity can be calculated as the ratio of the volume of
output to the volume of inputs.

 Productivity = Measure of Output

Measure of Input
 Better planning and training of employees and improve jobs
and communication and effective management through
CPM/PERT methods.
 Use of time and motion studies to study and improve work
performance.
 Better transportation and material handling system
 By providing work incentives and other benefits to workers.
 Workers involvement in decision making and working of
organizations.
 Improvement in technology of production and specialization
technique.
 Better and efficient utilization of resources at the disposal of
the enterprises.
 Product or system Design
 Machinery and Equipment
 The skill and effectiveness of the worker
 Production volume
Higher productivity results in higher volume of production
and hence sales at lower cost and higher profit.
It is beneficial to all as stated below:
 Benefit to organization
 Benefits to workers
 Benefits to consumers

1.Benefit to organization:
➢ More profit
➢ Higher productivity ensures stability of the concern.
➢ Higher productivity and higher volume of sales provide
➢ opportunity for expansion of the concern and wide spread
➢ market.
2. Benefits to workers:
 Higher productivity permits more wages
 More wages permit better standard of living of
workers.
 Thus more productivity means better working
 Conditions for workers which also help in maintaining
better health for workers
 Higher productivity yields improved moral and greater
satisfaction for workers.
3. Benefits to consumers:
➢ More productivity ensures better quality of product.
➢ It also helps reduction in prices.
➢ It provides more satisfaction to consumers.
 productivity measure is expressed as the ratio of output
to inputs used in a production process, i.e.
Mathematically : P = O / I The measure of productivity
is defined as a total output per one unit of a total input.
Productivity is a crucial factor in production
performance of firms and nations.
 Measurement of overall Productivity means calculating
productivity taking all input factors together or the
productivity of the business as a whole. As material, labour
and overhead affect productivity of the business as a whole, it
is difficult to express these factors by a common denominator
for measuring overall productivity. To overcome this
difficulty, cost of different units of input is adopted as
convenient measure of productivity. Overall productivity can
be measured by the following formula:
 Value of output = Total cost + net Added value
Cot of input Total cost
 Here, Profit = Profit before providing interest on long-term borrowings and
income tax.
Capital Employed = Fixed Assets+ Current Assets -Current liabilities.

Factorial productivity
Factorial Productivity means the productivity of individual factors which
contribute to the overall productivity and it may be of the following types:
1. Labour Productivity:
 Where most of the work is done by hand labour, measurement of labour
productivity is essential to know the efficiency of labour. While calculating
labour productivity all factory labour, both direct and indirect, should be
included.
 Labour productivity= Sale value (or cost) of output
Number of workers


 Here, Added Value = Sales Value — Material Cost i.e., Total of Wages,
Overheads and Profit.
2. Material Productivity:
Some of the ways of measuring material productivity are given as follows:
 Material Productivity= Material cost
No. of units produced
3. Machine Productivity:
 Where most of the work is done by machinery, measure of machine
productivity is essential to know the capacity utilisation and efficiency of
machinery.

4. Total Productivity (Craig and Harris model)

PT= QT
L+C+R+M
Where PT = Total productivity
L= Labour
C= Capital
R= Raw material
M= Other miscellaneous
QT= Total Output
 The following information regarding the
output produced and inputs consumed for a
particular time period for a particular
company is given below. Compute various
productivity indices.
 Output = 10000
 Human Input = 3000
 Material Input = 200
 Capital Input = 300
 Energy Input = 100
 Other miscellaneous= 50
Labour productivity = Total output = 10000 = 3.33
Labour Input 3000
Capital productivity = Total output = 10000 = 3.33
capital Input 3000
Material productivity = Total output = 10000 = 5.00
Material Input 2000
Energy productivity = Total output = 10000 = 20.00
Energy Input 500
Total productivity = Total output
Total Input
= 10000
3000+2000+3000+1000+500
= 10000 = 1.053
9500
 Competitive advantage refers to factors that allow a
company to produce goods or services better or more
cheaply than its rivals. These factors allow the
productive entity to generate more sales or superior
margins compared to its market rivals.
 Competitive advantages are attributed to a variety of
factors including cost structure, branding, the quality of
product offerings, the distribution network, intellectual
property and customer service.
 Competitive advantage means superior performance relative to
other competitors in the same industry.
 Competitive advantage is the favorable position an
organization seeks in order to be more profitable than its
competitors.
 To survive and win in this age of globalization organization
must adapt the fundamental success drivers to gain the
competitive advantage over their rivals.

Following are the fundamental success drivers:-

 Cost competitiveness

 Differentiation advantage

 Quality

 Speed

 Inniovation
➢ Cost competitiveness:
Cost competitiveness is about keeping the price low and realizing
profits.

➢ Differentiation advantage
A firm differentiates itself from its competitors “when it provides
something unique that is valuable to buyers beyond simply offering a
low price.

➢ Quality:
Quality refers to the excellent features of the product including
attractiveness, lack of defects, reliability and long term dependability.

➢ Speed :
Fast and timely manufacturing and delivery of the products is the key
requirement in business.

➢ Innovation:
Creation of new devices, objects, ideas or procedures is very important
in business.
 A decision is an act of selection or choice of one action
from several alternatives.
 Decision making can be defined as the process of
selecting a right and effective course of action from
two or more alternatives for the purpose of achieving a
desired result. Decision making is the essence of
management.
 Define the problem
 Analyze the problem
 Develop alternatives
 Evaluate Alternatives
 Select and Implement the decision
 Follow up and feedback
 The decision situation
 The decision makers
 Time
 Decision support techniques
 People affected by the decision
 Decision criteria
 Better utilization of resources
 Facing problems and challenges
 Achieving objectives
 Increases efficiency
 Facilitate innovation
 Motivates employees
 Time consuming
 Compromised decision
 Biased decisions
 Limited analysis
 Uncontrollable environmental factors
 Uncertain future.
 Programmed and non programmed decisions are the two
basic types of decisions that managers make. This depends
on their authority, responsibility and position in
organizational decision making structure.

 Programmed decisions:

✓ These decision are recurring in nature

✓ Here the problems are structured
✓ Such decisions are relatively simple and have a small
impact.
✓ These decisions are guided by organizational policies and
procedures etc.
✓ These decisions are taken by the lower level management.
 Non programmed decisions:

✓ These decision are non recurring in nature.

✓ Here the problems are unstructured.
✓ Such decisions are relatively complex and have a long
term impact.
✓ These decisions are guided by the factors of the
particular situation.
✓ These decisions are taken by the top level management.
 Every business involves some risk and most people do not
like being involved in any risky enterprise.
 Risk refers to a decision making situation where there are
different possible outcomes and the probabilities of these
outcomes can be measured in some way.
 Risk involves choice with multiple outcomes where the
probability of each outcome is known or can be estimated.
 A manager investing in new product development adoption
of new technology or new market entry faces various risks.
 There are various types of risk that relates to investment in
projects.
Risks can be broadly classifies into two groups that is:-
 Systematic risk
 Unsystematic risk

Systematic risk
 It arises due to macroeconomic factors of business such as
social, political or economic factors, it includes,
➢ Market risk:
Recessions, changes in interest rates etc.
➢ Inflation risk:
A general increase in the price level.
➢ Interest rate risk:
Variability in the interest rate from time to time.
Unsystematic risk

 It arises due to the fluctuations in returns of a company's

security due to microeconomic factors that is factors
existing in the organization.
 The factors that cause systematic risk relates to a particular
industry such as labour problems. It includes;

➢ Business risk:
Internal business risk: Firms limiting environment
External business risk: Business cycle, demographic
factors, political and monetary policies
➢ Credit risk:
Other party fails to abide by the contractual obligations.
➢ Liquidity risk:
Difficulty of selling corporate assets & investments.
E.g real estate.
 Usually, there are three different conditions under
which decisions are made, which are explained below.

➢ Conditions under certainty

➢ Conditions under risk
➢ Conditions under uncertainty
➢ Conditions under certainty:
Conditions under certainty are in which the decision maker has
full and needed information to make a decision . The manager knows
exactly what the outcome will be, as he/she has enough clarity about
the situation and knows the resources, time available for decision
making, the nature of the problem. In most situations, the solutions are
already available from the past experiences and are appropriate for the
problem at hand.
➢ Conditions under risk:
Conditions under risk provide probabilities regarding expected
results for decision making alternatives, it is due to the nature of the
future conditions that are not always know in advance and the
managers face this condition more often in reality compared to
conditions under certainty. Although some good information may be
available it is not enough to answer all questions about the outcomes.
➢ Conditions under uncertainty:
Conditions under uncertainty provide no or incomplete information,
many unknown and possibilities to predict expected results for decision
making alternatives. The manager could not even assign subjective
probabilities to the likely outcomes of alternatives. The manager
himself cannot predict with confidence what the outcomes of his action
to be.
 Decision making under certainty implies that we are
certain of the future state of nature.
 One common technique for decision making under
certainty is linear programming.
 In this method, a desired benefit such as profit can be
expressed as a mathematical functions ( the value
model or objective functions) of several variables.
 When making a decision under the condition of risk,
the manager does not know the outcome of each
alternative in advance, but can assign a probability to
each outcome.
 Decisions under conditions of risk are perhaps most
common. The role of the manager would be to either
eliminate risk or reduce the size of the risk within a
project and would a risk assessment to be undertaken
which would identify the project variables and the level
of risk to be attached to each project variables.
Sensitivity analysis
➢ Identifying all variables that affect the NPV or IRR of the
project
➢ Establishing a mathematical relationship between the
independent and dependent variable
➢ Studying and analysing the impact of the change in the
variables.
Decision tree analysis
It is one of the most effective methods of assessing risks in a
project. In this method, a decision tree is drawn for analysing
the risks associated in a project.
It is a schematic representation of the alternatives available to
a decision maker and their possible consequences.
 Completion time 12
Plant size decision months
Development
program Large Completion time 8 months
succeeds plant
Completion time 6 months
Small plant

Completion time 4 months

Development program Decision point

fails
Development Chance
decision event
Drop Product
 Uncertainty refers to a decision making situation where
there are different possible outcomes and the
probabilities of these outcomes cannot be meaningful
measured, sometimes because all possible outcomes
cannot be foreseen or specified.
There are two sources of uncertainty:

➢ Uncertainty with complete ignorance:

Refers to those situations in which no assumptions can
be made about the probabilities of alternative outcomes under
different states of nature.

➢ Uncertainty with partial ignorance:

Refers to those situations in which the decision maker
is able to assign subjective probabilities to possible outcomes.
These subjective probabilities may be based on personal
knowledge, intuition or experience.
 Maxi-max solution: optimistic decision maker
 Maxi-min solution: pessimist decision maker
 Mini-max solution: between optimism & pessimism
 Cost Benefit Analysis is a process by which business decisions
are analyzed. The benefits of a given situation or business related
action are summed, and then the costs associated with taking that
action are subtracted .
 The CBA is the tool generally undertaken by the government for
the welfare of the entire society. So it is also referred as social
benefits.
 CBA may be summed as “ Cost Benefit Analysis which involves
measuring, adding up and comparing all the benefits and all the
cost of a particular public project or a program.
 Before raising a new plant or taking on a new project, sensible
managers conduct a cost benefit analysis as a means of
evaluating all the potential costs and revenues that may be
generated if the project is completed. The outcome of the
analysis will determine whether the project is financially feasible
or if another project should be followed.
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