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This is to certify that the

thesis entitled
The Meaning and Measurement

of Organizational Productivity

presented by

Ronald Joseph Bullock

has been accepted towards fulfillment
of the requirements for

M.A. degree in Psychology

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Major professor

Date November 3, 1977

0-7639

© Coypright by
RONALD JOSEPH BULLOCK

1977

THE MEANING AND MEASUREMENT

OF ORGANIZATIONAL PRODUCTIVITY

By

Ronald Joseph Bullock

A THESIS

Submitted to
Michigan State University
in partial fulfillment of the requirements

for the degree of

MASTER OF ARTS

Department of Psychology

1977

ABSTRACT

THE MEANING AND MEASUREMENT
OF ORGANIZATIONAL PRODUCTIVITY
By

Ronald Joseph Bullock

This paper identifies the problems in both meaning and measurement
of productivity at the organizational level and presents some solutions
to those problems. The reasons for the current problems are explored
and a review is made Of past approaches and perspectives on productivity.
Adopting a multi-disciplinary stance, this review includes the
productivity literature from several fields, enunciating the incon-
sistencies and current confusion and then attempting a theoretical
integration for solving both conceptual problems and measurement
problems. Central to this integration is the differentiation of
performance productivity and financial productivity. Performance
productivity measures reflect a concept of productivity that is
independent of the components' monetary values, while financial
productivity measures include such values and value changes. This
distinction allows the development of a more useful approach to the

meaning and measurement of organizational productivity.

TABLE OF CONTENTS

Introduction
The Meaning of Organizational Productivity
Performance Productivity versus Financial Productivity
Hybrids of Performance Productivity and Financial Productivity
Importance of Productivity
Definitions of Productivity
Perspectives on the Meaning of Productivity
The Measurement of Organizational Productivity
Introduction
Methods of Measurement
Perspectives on Organizational Productivity Measurement
Measurement Literature on Organizational Productivity
Summary and Conclusions

List of References

ii

12

18

24

24

32

34

38

50

57

LIST OF TABLES

Table 1: Performance Productivity versus Financial Productivity 8

Table 2: Definitions of Productivity 13

iii

THE MEANING AND MEASUREMENT OF ORGANIZATIONAL PRODUCTIVITY

Productivity is a word often heard in organizations today. In the
last fifty years, the concept of productivity has gradually come to be
a key concept in business and government. Spurred by the international
concern for productivity after World war II, productivity has become a
dominant theme in assessing economic activity.

Psychologists have not been immune to this epidemic usage of the
concept of productivity. The last quarter-century has seen much written
about the improvement of productivity, the meaning of productivity,
social and psychological factors that affect productivity, etc. Today,
the concept of productivity has emerged in several areas of psychology,
in addition to its prominent place in economic research and in general
business usage.

But one viable question remains: to what extent is productivity
important to modern organizations? Is it merely a vestige of the past
or is it a future-oriented concept useful in dealing with current prob-
lems? The research literature and practicing managers generally agree
on this point: productivity is important.

For managers, productivity is important as a means of organiza-
tional control. Management theorists feel that the primary function of
management is the control of productivity. Umstot, Bell, and Mitchel
(1976) report that "concern for productivity is still the dominant focus
of managers" (p. 379). Beginning with Drucker (1954), productivity has
been proposed as an important element in the development of human
resources. This thinking is continuing today with the dual emphasis

on productivity and the quality of work life (Hackman and Suttle, 1977).

l

For researchers, productivity has been a fundamental criterion
variable. Countless research studies have used some measure of pro-
ductivity as an indicator of significant change within the organization.
For example, within the field of organization development, productivity
increases are Often cited as evidence that a change program has been
successful (Walton, 1972; Gibson, 1973; Huse and Beer, 1971; Bowers,
1976; etc.). Research on group behavior (e.g. Wilson, Aronoff, and
Messe, 1975) and individual motivations (Greenberg and Leventhal, 1976;
Adams and Rosenbaum, 1962; etc.) have demonstrated the usefulness of
productivity measurement. From the original Hawthorne studies (Roethlis-
berger and Dickson, 1939) until today, productivity has been an important
research variable. Thorelli (1960) summarized the perspective of many
researchers when he noted that "productivity must ultimately be the
payoff variable in research on problems of organizations" (p. 5).

Yet with all the emphasis on productivity, there are still many
basic issues that are unresolved. There are many definitions of pro-
ductivity that have been presented in the literature, with no one defi-
nition being satisfactory. Even beyond the formal definition of produc-
tivity, there is no agreement as to what the concept entails. It has
become a vauge, poorly defined word that has been easily adapted to fit
almost any context. Even within its home field of economics, productiv-
ity research has sparked a never-ending controversy as to what is meant
by the word. The issues are further clouded by measurement problems.
Given the confusing state of the art with regard to conceptualizing
productivity, there is little wonder that there is disagreement sur-

rounding productivity measurement.

This paper will review the basic issues of the meaning and measure-
ment of productivity as it relates to organizations. A conceptual dis—
tinction is proposed to help resolve these issues. Then the measurement

literature is reviewed and some prOposals are made for future produc-

tivity research.

The Meaning of Organizational Productivity

Performance Productivity versus Financial Productivity

 

It is helpful to distinguish two basic types of productivity. The
first type will be called "performance productivity;" the second will

be called "financial productivity.‘ These two types of productivity
will be defined and extended to both conceptual and measurement problems.

The definitions of performance productivity and financial produc-
tivity are based on a systems definition of productivity. The context
of system as used in this paper is that of a social system rather than
the cybernetic concept of system. As used in this paper, productivity
means, "given a system, a mathematical relationship between system out-
put and system input." Then, performance productivity is "given a
system, the ratio of output to input expressed in terms of a non-monetary
unit of measurement (energy, time, physical quantities, psychological
variables, etc.)." Financial productivity is "given a system, the ratio
of output to input expressed in terms of a monetary unit of measurement."
The differentiation then, is in the units of measurement and therefore,
the orientation of the measure and its uses. This simple condition,
however, gives us the frame of reference to understand productivity
problems, because the development of a productivity measure is dependent
on the selection of one of these forms, depending on the objectives of
the measure.

Performance productivity measures relate non-monetary output with
non-monetary input. Utilizing the same output and input, financial

productivity measures convert these to dollars (or some other relevant

monetary units). In the former instance, the word "performance" was

4

chosen since the measures typically reflect those factors under the
control of the organization or worker and thus are specific feedback
for performance. In the latter instance, the word "financial" was
chosen in order to reflect the monetary measurement units.

Performance productivity includes such measures as five cars per
hour, ten pins per bowl, eight completed passes out of ten attempts,
six bolts per machine hour, words typed per minute, miles per gallon,
tons shipped per year, six servings per can, and one thousand bachelor
diplomas per year. Financial productivity measures include such meas-
ures as $1,000 of steel produced per $595 of materials, $9.50 of food
served per dollar of waitress time, $100,000 in ticket receipts per
$50,000 game, and 1.523c of bolts produced per dollar of machine time.
In the former, both input and output are expressed in non-monetary
units; in the latter, both input and output are expressed in dollars.

The selection of one of these types is dependent on the objectives
of the measure. Performance productivity is useful for such things as
materials comparison, job design, certain cases of performance feedback
for employees, comparison of plants, production analysis, etc. Outside
microeconomic units, performance productivity is usually the most
important analysis tool because monetary values are often very difficult
to establish or are irrelevant. A family looking for the most efficient
ways of cooking meals, washing dishes, and keeping a clean house is
looking at performance productivity measures. An educator looking for
the optimum conditions for learning a given subject considers performance
productivity measures. Even inside the firm, industrial engineers use

performance productivity measures to set standard times for operations.

Financial productivity measures are also useful for certain objec-
tives. Since financial productivity measures attempt to include market
effects of prices, costs of inputs, etc., it is the type of measure to
use where the objectives include such effects. Decisions between the
implementation of two manufacturing processes would include financial
productivity data. Long-range planning of a firm would include finan-
cial productivity measures. A pay bonus plan for a firm might be based
on financial productivity measures in order to reflect the changing
financial status of the firm.

In light of the distinction between performance productivity and
financial productivity, it appears that these two types of productivity
have been confused and debated. It is suggested that the two approaches
have different objectives, different procedures, different problems,
different uses, and different results. Individuals promoting or deal—
ing with some aspect of productivity have often been biased toward one
of these types and it has limited the interaction with those biased
toward the other aspect. The most serious effect, though, has been
that the development of the productivity concept has been stymied.
Hopefully, the clear differentiation of these two types of productivity
will aid in removing these unwelcome barriers.

Hybrids of Performance Productivity and Financial Productivity

 

In all cases hitherto discussed both the input and output have had
the same type of unit of measurement. That is, they have both been
either monetary units or non-monetary units. There are two more possi-
bilities, making a total of four possible combinations. In one case,
the output can be based on performance measures and the input on finan-

cial measures. Thus there are two hybrids. These hybrids are given

special names to enable proper discrimination. Also, possible uses
can be given for each type, along with pertinent examples (see Table 1).

As we can see from the chart the differentiation of performance
productivity and financial productivity provide a framework for ana-
lyzing productivity measures. There are endless varieties of measures
in each category. The division of these four basic types of measures
gives an orientation to analyze how effectively the measure meets its
Objective and what its limitations are.

The most popular economic measure of productivity is output per
hour. As we can see from the chart, it is only one type of measure.
When the output is expressed in floating dollars it is a "financial
productivity of a performance input" measure, i.e., output is in dollars,
input is in hours worked. When the Output is expressed in constant
dollars, the measure is a pure performance productivity measure. This
is the case most often encountered. Constant dollars are performance
measures (rather than financial measures) since the measures do not
reflect actual economic value of either the inputs or the output. The
reason most output per hour figures use constant dollars to measure the
output is that it is usually the best measure for aggregating the
diverse goods and services produced by the economy. Thus the produc-
tivity measures available on the national, international, sector, and
industry level are only performance productivity measures. The imme-
diate limitations are that we know nothing of the financial productivity

of labor, which is very significant information in financial decisions.

Importance of Productivity_

 

Productivity has been proposed as a key concern for the society as

well as for organizational psychologists. Herbert Stein, in a bulletin

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from the Bureau of Labor Statistics (Bulletin 1714) to the National
Commission on Productivity (Stein, 1971), establishes some reasons for
the national importance of productivity at the present. First, pres-
sures on the American economy are great, both through the market proc-
ess and the political process. As the American economy has grown so
rapidly, the expectations of workers and consumers have grown concomi-
tantly. These claims require increasing levels of productivity. Second,
in recent periods, the rate of growth of both the GNP and productivity
has slowed, leading to a deterioration in the real wages of workers.
Third, productivity "is a way of increasing the ability of people to

do what they want to do," including a higher standard of living, a
choice of leisure through vacations and earlier retirement, and by
providing the resources for improving the quality of the environment.
Fourth, the economy is approaching the period where maintaining the

rate of growth of productivity will be difficult. One of the main
reasons for growth in productivity is the shift of agriculture workers
into industrial jobs. At the present, that shift is nominal and the
more important shift is the shift from manufacturing workers to workers
in the service sector. The fifth reason for the concern for productivity
is the remarkable growth of Japan and several Western European countries.
Their growth rates have emphasized to many Americans the necessity for
the concern about levels of productivity.

One of the primary economic arguments for the importance of pro-
ductivity is that productivity must rise as fast as costs (particularly
labor costs) in order to prevent inflation. Bloom (1971) asserts that
the wage-price dilemma is primarily a productivity problem. Modest

productivity increases are swamped by massive wage adjustments and

10

result in higher prices. Thus productivity must be a vital concern for
the control of costs and prices in the economy.

One political reason for concern for productivity is the economic
stance it gives America in international relations. Teplow (1954) noted
the image of American productivity was that "we are and always shall be
leaders in this field" (p. 17). Beller (1967) suggests that complacency
about productivity improvement will lead to other countries becoming
leaders in the industrial realm. This will have a negative impact on
the bargaining issues of international problems. The command of pro—
ductivity is a leadership position America cannot afford to lose. Now,
in spite of that, Japan is overtaking America in productivity and econo-
mists are not particularly concerned (for example, see Stein, 1971).
This inconsistency needs to be recognized and dealt with more realis-
tically.

Beller (1967) identified the importance of productivity in the
universal goals of greater leisure, rising income, and lower costs.
Labor benefits from productivity increases through such changes as the
decrease in the work week and earlier retirement. Therefore, although
productivity is not typically a goal of labor unions, it has been an
important key to the realization of the goals of American labor.

Thus productivity is "perhaps the most important single indicator
of our national well-being" (Slesinger, 1969, p. 14). Stein (1971)
suggested that productivity is important for restoring the rate of gain
in average real income and for meeting the growing demands placed on
the economy expressed through the political situation and the growing
expectations of workers and consumers. Therefore, the proper viewpoint

for productivity must be a very broad one.

11

This striving for higher productivity must not be viewed

as a whip-cracking exhortation to "work harder" in order

to raise some arbitrary abstract measure of economic
performance....Increasing productivity may thus be regarded
as the keystone to an improved standard of life and envi—
ronment for all of society. (Stein, 1971, p. 3)

For development of particular industries, productivity is also a
vital concern. Industries that cannot maintain productivity increases
are forced to maintain relatively high prices and are therefore subject
to foreign competition (such as the fishing industry), stiff competition
from other related industries (such as the railroad industry being re-
placed by the trucking industry), intense social pressures (such as the
health care services), or even governmental regulation (such as the rail-
road industry). Jacks (1968) emphasized to the steel industry, where

the biggest technological advance in two decades has come from another

 

countgy, that productivity gains, although they have been significant
in the past decades are even more important for meeting foreign compe-
tition.

Beller (1967) was concerned with developing a social role for
productivity. The drastic difference of the capability of American
enterprise and the actual conditions of the workers, he felt, was
sufficient reason for redirecting productivity efforts. "The importance
of increasing productivity is apparent. However, a society...must
increase productivity without injuring millions of people in the proc-
ess" (p. 10). He added that society should be concerned with the
proper distribution of productivity gains. Government interest in
human capital formation is very important. These human investments are

as important as the investments in machines. Equal opportunity in

12

education and employment, racial discrimination, and investment in
minorities are all issues related to the productivity of human resource
investment.

Definitions of Productivity_

 

One of the primary problems in the productivity literature is the
lack of agreement regarding the definition of productivity. In general,
there is a great deal of confusion regarding the meaning of productivity—-
among scientists and_managers.

The present study attempts to review and contrast the definitions
presented in the literature. The review will include those definitions‘
presented over the last quarter century. Many articles on productivity
fail to give any definition of productivity, thereby side-stepping the
morass of unsatisfactory definitions already presented. Nonetheless,
some articles do present the main idea of "productivity" as perceived
by the authors, without presenting a formal definition. In those cases,
the main ideas will be included as definitions. Thus while all the
entries are not the formal presentation of the author as a definition,
they §£g_the expression of the main concept of productivity as presented
by the author.

There are three main approaches to defining productivity (see
Table 2). First, productivity can be defined as a quality or state of
being. This is the basic historical definition and still is the primary
dictionary definition. However, the verbalization of this quality has
never been adequately accepted by most productivity researchers and
consequently, no single statement of this quality has been successful
as a definition. The quality i§_the fundamental meaning of the word,

but the verbal expressions of this quality are unsuccessful as a

13

Table 2
Definitions of Productivity
A. Productivity is a quality or state of being:

1. Davis (1951) — "Quality or state of being productive."

2. Davis (1951) — "The possession or use of power to create, to
bring forth, or to make."

3. Steiner (1949) - Measure of performance or potential."

4. OECD (1955) - "The measure of economy of means."

5. Littre (1883) - "Faculty to produce."

6. French National Committee for Productivity (1955) - "The measure-
ment of the economic soundness of the means."

7. Fabricant (1962) - "A measure of our power to produce the goods
and services we need and want."

8. Odiorne (1959) - "An accrual to the nation or the group resulting
from the best combination of hundreds of controlling factors--
sound organization of production and distribution, a stable
money system, adequate bank credit, a solid foundation of
science and technology, ample natural resources and knowledge
of how to use them, stable government, and a sound set of moral
and social values in the population."

9. Davis (1951) - "Degree to which power to make or provide goods
or services which have an exchange value is utilized."

10. Fenske (1965) - "The magnitude of productiveness."
B. Productivity is the efficiency Of resource utilization:

1. Langenberg (1952) - "Efficient expenditure of a number of

resources."

2. Jerome (1932) - "Yardstick for net efficiency of our industrial

10.

14

Table 2 (cont'd.)
system in delivering goods to the final consumer."
OECD (1955) - "Utilization of resources in relation to some
standard." .
Beller (1967) - "Productivity is a measure of efficiency in
production."
Brower (1974) - "The efficiency with which the organization
uses inputs to produce its goods or services."
Thorelli (1960) — "The relationship between goal achievement
(output) and resources expended (input)."
English (1951) - "A qualification of the efficacy of human
industrial endeavour."
U. S. Chamber of Commerce (1954) - "Rate at which we convert
work and raw materials into useful goods and services."
"Productivity, the last frontier" (1958) - "A measure of
efficiency with which the resources at work are utilized."
Fabricant (1959) — "A measure of efficiency with which the
resources are converted into the commodities and services that

men want."

C. Productivity is a ratio of output to input:

1.

Greenberg (1973) - "Measure of relationship between quantity of
resources used and quantity of output."

Stein (1971) - "The most commonly used definition of productivity
is real output per hour of work."

Mark (1971) - "Productivity is loosely interpreted to be the
efficiency with which output is produced by the resources

utilized. A measure of productivity is generally defined as a

10.

11.

15

Table 2 (cont'd.)
ratio relating output (goods and services) to one or more of the
inputs (labor, capital, energy, etc.) which were associated with
that output. More specifically, it is an expression of the
physical or real volume of goods and services related to the
physical or real quantities of inputs."
International Labor Office (1969) — "The ratio between output
and input."
Bureau of Labor Statistics (1974) — "A concept that expresses the
relationship between the quantity of goods and services produced--
output--and the quantity of labor, capital, land, energy, and
other resources that produced it--inputs."
Stephenson (1965) - "Expression relating the performance achieved-—
output in'a given period--to identifiable and tangible input fac-

tors."

OUTPUT "
AGGREGATE INPUT '

 

Chaumet (1961) — "Expressed by the ratio
Vincent (1961) — "Productivity, as everyone knows, is expressed
by a fraction whose numerator represents an output and whose
denominator represents one or more of the factors of production
which contribute to this output."

French National Committee fOr Productivity (1955) - "The rela-
tionship (measurable) between product and factors."

French National Committee for Productivity (1955) - "Production
per factor unit."

Siegel (1955) - "The class of conceivable measures depicting out-
put per unit of associated input in a sequence of compared

periods."

l3.

14.

15.

16.

17.

18.

19.

20.

21.

22.

16

Table 2 (cont'd.)
Steiner (1949) — "Output per unit of input."
Diebold (1952) - "The quotient obtained by dividing output by
one of the factors of production."

Diebold (1952) - "Output per unit of labor input."

Output "
Labour Input °

 

Fourastie (1957) - "Productivity =
Dean (1960) - "The ratio of physical output to a single input
factor, usually labour, also measured in physical terms."
Woodhall and Blaug (1968) - "The ratio of some specified output
to the inputs of resources required to produce it."

Lomax (1965) - "Output per unit of labour input, per unit of
capital input, or per unit of combined labour and capital
utilised."

Easterfield (1961) — "The ratio of some measure of output of a
firm, or a lower productive unit (down to the individual worker
or machine), to a measure of the input of some or all of the
factors of production required (labour, raw materials, machine
time, and so on)."

Borch (1965) - "The ratio of output to input."

Fenske (1965) - "The amount of goods and services produced by a
unit of a productive factor in a specific period of time, or the
average amount of goods and services produced by a unit of the
productive factor in a specific period of time."

Schulz—Mehrin (1955) -

Output measured in physical quantities "
Input measured in physical quantities '

 

"Productivity =

17

definition. The second possibility for approaching the definition of
productivity is that of the efficiency of resource utilization. There
are various ways of describing this efficiency concept, and it, too,
touches on an important aspect of the productivity concept. This approach
has been a very popular approach for defining productivity and is one
used by many managers. The class of things that are considered as
resources varies from person to person, but the same general idea is
apparent throughout the definitions. The third approach to the defini-
tion of productivity is the mathematical comparison of the output and
input. This is usually done through the form of a ratio. This defini—
tion has gradually become the most popular definition in the last

quarter century. The basic reason for this development is the increasing
emphasis in science, and particularly economics, on quantification.

Since this trend in quantifying concepts is very likely to continue,

this approach to defining productivity will probably continue to be
popular.

One of the elements of this quantification phase is the relative
objectivity that it allows in comparison to the completely conceptual
definitions of the first two appraoches. Consequently, one would sus—
pect that it would be possible for the field of productivity researchers
to centralize on one definition of productivity using this third
approach. This has not been the case. Instead, the number of definitions
has increased even more, as every conceivable twist is made in the defi-
nitions. Different authors want different limitations placed on what
can and cannot be considered as inputs and outputs. Other authors want
it to only represent a ratio, some a fraction, some simply a comparison

of any sort. Some want the only input to be labor. Others want all the

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inputs to be devoid of price changes. Some want the definition to be
limited to only one factor input. ‘Some want it to refer only to aggre-
gate inputs. And the list goes on and on. There is little agreement
and few efforts are being made to integrate the definitions into some
acceptable standard definition. The definitions have continued to pro-
liferate as various researchers express their perspectives on produc-
tivity. The result of this individualism, however, is a state of concep-
tual confusion unparalleled for a concept that has been investigated
for over two centuries.

Thus there have been three approaches to defining productivity.
The notion of productivity as a quality is rare in the recent litera-
ture. General business literature tends toward the resource utiliza-
tion definition, while researchers emphasize the output/input defini-
tion. Productivity as "output per unit of labor" or some similar
definition is an extreme form of operationalism that avoids theory.
Productivity theory which leads logically to some particular definition
of productivity (with the exception of the classical micro-economic
theory Of production) continues to be non-existent and yet is currently
ignored by researchers. This paper proposes that the concepts of
performance productivity and financial productivity, based on a systems
concept of organizations, provide the foundation of a productivity theory
with a definition of productivity developed from and consistent with
that theory.

Perspectives on the Meaning of Productivity

 

Given this range of definitions, what is the essence of productivity?
What is the fundamental meaning of the concept and how does that meaning

have value to organizations and psychologists?

19

The meaning of productivity has had a long history. Quesnay, a
physiocrat of the eighteenth century, first used the word in an article
in 1766 (cited in OECD, 1956). For over a century, the meaning was very
vague and was not pursued consistently. In the early twentieth century,
economists began to attach a more precise meaning. Attempts were made
to define and measure the concept. Although there was general progress,

the results were something less than optimal:

Beginning at least two centuries ago, economists concerned
themselves with production and productivity. We groped
and fumbled a good deal at first. But today after succes-
sive clarifications, most economists agree that any activ—
ity or contribution of one of the factors of production
which increases the value of the materials worked upon,

is productive. (Maverick, 1955)

The current perspective of the Bureau of Labor Statistics on the
meaning of productivity is represented by Bulletin 1714, prepared by
the BLS for the National Commission on Productivity. In the first of
two papers of that bulletin, Stein (1971), of the President's Council
of Economic Advisors, explained that "the most commonly used definitiOn
of productivity is real output per hour of work." The basis for this
definition lies in its (1) important social implications in meeting
individual and social desires, (2) economic significance in comparison
with prices and wages, and (3) "estimates of productivity defined in
this simple way are available to permit interesting and analytical
comparisons of different times and countries, whereas more sophisticated
measures are not." Stein acknowledges the common criticism of this
definition as reflecting only quantity and not quality. Another problem

Of such a definition of productivity discussed by Stein is the failure

20

to recognize consequences of economic externalities (such as pollution)
not included in the output per hour measure. Stein concludes that the
output per hour figure is too simple to be adequate for many purposes,
although it is sufficient for certain analytical purposes.

In the second paper of the same bulletin, Mark (1971) presents

another definition of productivity:

Productivity is generally defined as a ratio relating out~
put (goods and services) to one or more of the inputs
(labor, capital, energy, etc.) which were associated with
that output. More specifically, it is an expression of the
physical or real volume of goods and services related to
the physical or real quantities of inputs. (p. 7)

Productivity concepts and measures are then grouped into two classes.
The first class contains measures that relate output to one input.
The second is the class of concepts and measures that related output
to a combination of inputs. The first class measures only one input,
but does ng£_measure the specific contribution of that input. Rather,
these measures reflect the interaction of many interrelated influences
on this input in the production process. This interaction of factors
is a major productivity problem that is generally unrecognized.

Davis (1951) considers productivity in its general sense to
denote "the quality or state of being productive" or "the possession
or use of power to create, to bring forth, or to make." Noting that
it is common practice to define productivity as the "output per unit
of labor time expended," he feels that this popularity is due to the
social interest in labor savings, although it removes the confusion from

neither the analysis nor interpretation of productivity. He gives two

21

reasons for the unacceptability of this definition: (1) this mathemat-
ical definition is as applicable to other inputs as it is to labor, and
(2) the meaning Of the ratio is not fixed, making interpretation a risky
business. It also reflects changes in other factors in addition to the
changes in the utilization of labor. He concludes that "the meaning of
productivity in the economic field may be stated as the degree to which
the power to make or provide goods or services having exchange value is
utilized as measured by the output obtained for the resources expended."

Other definitions have been prOposed which avoid the notion of a
property of materials, people, etc. Fabricant (1962) defines produc-
tivity in the broadest terms as "a measure of our power to produce the
goods and services that we want.” Diebold (1952), echoing the business
community, defines productivity as the "quotient obtained by dividing
output by one of the factors of production." Labor, too, has addressed
the issue of productivity. Beller, an AFL-CIO economist, defines pro—
ductivity as "a measure of efficiency in production"'(Be11er, 1965).

Still another definition of productivity provided by the BLS is
shown in Bulletin 1811 (Bureau of Labor Statistics, 1974) where it was
explained to be "a concept that expresses the relationship between the
quantity of goods and services produced--output--and the quantity of
labor, capital, land, energy, and other resources that produced it—-
inputs" (p. 1). Notice this definition has no direct implication of
the necessity of a ratio as in other definitions.

Fenske (1965), after reviewing several definitions of productivity,

proposed that productivity be defined as:

22

the magnitude of productiveness; the amount of goods and
services produced by a unit of a productive factor in a

specific period of time, or the average amount of goods

and services produced by a unit of the productive factor
in a specific period Of time. (p. 21)

This definition is an attempt to define productivity while avoiding
certain problematic words (output, input, efficiency, ratio, etc.).
However, the definition appears to be synoymous with several related
definitions and offers nothing different conceptually.

Thus, various persons and groups have taken different perspectives
on productivity. For theoretical economists, it is often a quality or
state of being which describes the firm that is being productive. For
the econometrician/statistician, it is a rather narrow ratio of physical
goods and services produced to the number of labor hours used. The
political perspective sees productivity as a measure of national health
which is vital for industrial growth and international economic stability.
To the manager, it is a measure of the quality of performance for his/her
division. To the worker, it is just another way of getting you to work
harder. To the accountant, it is a set of costs and budgets which
reflect the financial performance of the organization. To the industrial
engineer, productivity means standard times for the individual operations
in plant production and assembly. For the organization development
practitioner, productivity is often an indicator of the success of an
intervention. Finally, for the behavioral scientist, productivity is a
dimension of organizational effectiveness and is thus a useful criterion
variable in organizational research.

Unfortunately, there is little collaborative effort among these

groups on productivity issues. It is clear that all of these groups

23

offer an important perspective on organizational productivity. It is
also clear that each of these groups have an impact on organizations.
These perspectives are therefore interdependent, requiring mutual
responsibility for achieving the optimum results in an organization.
This interdependence suggests, and indeed demands, collaboration and
communication among these parties on achieving a common perspective in

order to control organizational productivity.

The Measurement of Organizational Productivity

After the concept of productivity has been clarified through a con-
sideration of the definitions and meaning, it is necessary to Operation-
alize the concepts. This second phase is the measurement phase. It
includes the development of measurement procedures and techniques and
the substantiation of how these measures represent measures of the aspects
of productivity they intend to measure.

In the past, various attempts have been made to measure organiza-
tional productivity, although none havebeen used on anything more than
a very limited scale. While proponents of productivity measurement
point out many uses of a measurement system, little measurement devel-
Opment has been accomplished. At the firm level, productivity measure—
ment in the United States is virtually nonexistent. The situation in
EurOpe is the same (Nanninga, 1975). Apparently, most managers have
not found the information provided by productivity measures available
to be worth the time and expense necessary to develOp them.

Nonetheless, productivity continues to be an important topic that
has not declined in popular usage. The "pep talks" on improving produc-
tivity continue (though no measures are available to know when the goal
is reached). It continues to be an important topic in wage negotiations.
Government agencies are still being formed and funded to improve produc-
tivity at the national level and the industry level. Psychologists still
point to it as an important element in the success of longitudinal organi-
zational development. Economists still point to it as the major element
for survival for the firm. So with all this interest in productivity,

all of the groups (agencies) should find productivity measurement to be

24

25

of value. Unfortunately, there are few adequate or accepted measures
available.

Accountants are not familiar with productivity measures at the
organizational level, since most of the accounting books and textbooks

do not even mention the word "productivity,"

or explain how to measure
it. The lot for measuring has usually fallen to economists who have given
particular meaning to the word and developed special techniques of meas-
uring it at the national level. Consequently, when economists were
called upon to measure productivity at the firm level, the measures were
merely miniaturization of the national accounts and procedures. Unfortu—
nately, this approach has limited value, since most of the macro-economic
measures are only basic measures available on the national level (Bureau
of Labor Statistics, 1971) and do not take account of many important
aspects of individual organizational performance. Consequently, economic
measures of productivity are generally over—simplified measures of output—
per-hour that relate production output to the time used by the production
workers. Thus, important aspects of organizational functioning are ig—
nored. NO account is made of the cost of the production labor. No
account is made of the prices of the output and how it changes over sev-
eral periods. NO account is made of the very important divisions of
administrative personnel——sales, accounting, financial executives, re-
search and development, marketing, purchasing, etc. No account is made
for the output of the employees other than the actual physical labor
done, including new ideas for future improvements, additional training
for broader skills, group meetings to develop a cohesiveness among the

work group, and the important aspects of developing an organization.

26

This narrowness of the economists has been a disadvantage. The
limited measures have only had limited usefulness. Usually, the result
is something like a series of indices for several years that show that
productivity rose during this period and declined during that period.
The user is left to interpret the data and decide why the index rose or
fell. This is interesting to the managers and executives of an organi-
zation, but it does not give them any information on how to improve it
in the future. The simple measures are easily discussed but not so
easily understood in the light of the many factors that have affected
the measures.

Although accountants have not traditionally used the word "produc-
tivity," they hayg_measured productivity at the organization level in
certain respects. The determination of profit is a form of productivity
measure, although it is expressed as a difference of output minus inputs
rather than a ratio of output to input. It is, however, an output/input
approach to measuring organizational performance. Standards for work
performed are productivity measures. If these are aggregated for all
applicable areas of the organization, a productivity measure can be devel-
Oped (Ross and Bullock, in press). Budgets, particularly flexible budg—
ets, are productivity measures, since for accomplishing certain objec-
tives (output) the department is programmed to achieve a certain level
of costs (input). It is unlike the economists' measure of productivity
since it does not compare the present performance to historical perform-
ance but rather to the expected performance that should have been

accomplished.

Productivity is actually under continuous measurement in
your plant, whether you're conscious of it or not....

27

Most of these methods measure productivity by inference;
they rely on the fact that there is a reasonably consis-
tent relationship between a variable that is easy to
watch and actual plant production. ("Productivity",
1971, p. 52)

Thus if one does not restrict the meaning of productivity to a
limited class of processes and systems, the measures take on much more
meaning. What accounting as a field has done is to develop these pro-
ductivity measures, almost always for sub-divisions of the organization,
without ever invoking the word "productivity." It would be virtually
impossible to have an accounting system that did not measure productivity
in one way or another, since it is such a basic concept of accountability
that it is impossible to ignore. The actual word "productivity" is not
used due to the hapless history the concept has had. It has been pri-
marily owned by the economists, who have only developed the measures in
certain ways.

Unfortunately, there is little research on the measurement of pro-
ductivity at the organization level. Correspondingly, there are few
organizations systematically measuring and monitoring productivity at
the organization level. This level of productivity measurement has been
researched by four main studies, with a multitude of smaller publications
addressing one particular aspect of measurement at the organization level.
However, these studies have been inadequate in develOping valid measures
for organizations. Consequently, the area continues to remain undeveloped.

Considering the plethora of exhortations to improve organizational
productivity it is surprising to discover that there are no generally use-
ful and valid techniques for measuring productivity at the company level.

From a research standpoint, this is unfortunate due to the fundamental

28

position of firms as the basic unit of economic activity. On one side
is a host of economic research on the industry, sector, and national
level. On the other side, is an equally large volume of engineering
research on work measurement of particular workers. Between these two
well—researched areas is the virtually unresearched area of organiza-
tional productivity measurement.

There are measurement problems in organizational productivity meas-
urement, but these problems are not insurmountable and are no more
debilitating than typical accounting problems. What then are the rea-
sons for the lack of research on organizational productivity?

One reason for the lack of research is the inability of some studies
to overcome the technical difficulties involved in productivity measure—
ment. Basic decisions on the identification and quantification of output
and input have been difficult. Consequently, many studies have simply
failed to develop an adequate or representative measure of productivity.

Secondly, the development of an information system for an organiza-
tion requires an understanding of economics, accounting, and organizational
behavior in order to be successful. Many studies (some published but most
unpublished) have failed to satisfactorily account and integrate the
varied perspectives that must be dealt with in developing organizational
productivity measures. This necessity for a multidisciplinary approach
has been a barrier for many researchers.

The third possible reason for the lack of research on organizational
productivity is the tendency of organizations to take a short-range view.
Productivity measurement does not usually give specific information about
any one of the smaller decisions that a manager must make in the course

of the work day. That information is given by other techniques and

29

sources of information. Productivity measurement gives information
about a series of decisions and the overall productivity of the organiza-
tion over a period of time. The feedback is for medium-range and long—
range decisions and company policy (for example, expansion, product
diversifications, etc.). Most organizational systems are not designed
to reinforce long-range perspectives of its managers, but rather empha-
size the short-run profit position. This has adversely affected the
measurement of productivity on the organization level.

Fourth, the lack of organizational productivity measurement is due
to the lack of clear applications of the information. Since the infor-
mation is broad and encompasses several accounting periods, the useful-
ness and interpretation of the information is dependent on the resource-
fulness and perSpectives of those that use the information. Unlike other
measurement techniques that have a specific purpose (machine purchase or
not, make or buy decisions, etc.) productivity measures can be used for
many things. This further highlights the necessity for a common meas-
urement approach. Part of the range of decisions that can be made from
the productivity information is based on the particular measurement pro—
cedures that are developed; however, it is not always possible to specify
ahead of time which particular techniques the measurements will use. For
this reason it is not always possible to specify the complete list of
uses that the measurement will have, although there are many common
Objectives for the use of productivity measures.

The fifth possible reason for the lack of productivity measurement
at the organization level is the particular development of the field of
accounting. Most accounting books never mention the word "productivity"

in the entire book, although many measurement developed in accounting

30

are for the evaluation of performance. Thus, organizational accountants
are unconcerned with the field of productivity measurement and how to
apply the measurement principles to their organizations.

Economics has also had an adverse effect on the development of the
measure of organizational productivity. The over-emphasis on labor pro—
ductivity and the output per man-hour measure of labor productivity has
led to a justifiable scepticism on the part of managers of the useful-
ness of using productivity data when they realize the complex importance
of materials, capital, risk-taking on the part of the organization,
managerial decison-making, etc. Thus the manager is aware of many fac-
tors that affect organizational productivity and views a single index of
organization productivity as a questionable practice. Even the economic
formulation of "total factor productivity" is inadequate to any manager
aware of the complexity of his own organization. Thus the oversimplifi-
cation of the outputs and inputs by economists has prevented the develOp-
ment of measures that give sufficiently detailed information about the
complex state of affairs inside the organization.

Seventh, a study for the National Center for Productivity and Quality
of Working Life has documented that the predominant attitude toward
productivity in the United States is a negative one. This was shown by
a Harris Poll done for the Center (National Center for Productivity and
Quality of Working Life, 1971). This most unfortunate situation is per-
haps the result of the narrow perspective that has been applied to
productivity. It has come to have a "cracking the whip" connotation.
Thus the employee cringes when the word "productivity" is mentioned since
the next expectation is of some exhortation to improve productivity by

working harder and putting out more effort. As a consequence of this

31

situation, employees have generally developed a negative connotation
toward the word. Thus, the situation has arisen where productivity

is proclaimed as the primary factor responsible for raising man from
poverty (Kendrick, 1961) and at the same time most people harbor strong
negative feelings and attitudes toward the word. How paradoxical that
the factor that national economists bill as Egg factor responsible for
bringing mankind from the bonds of poverty is sorely detested by most
of the population! Certainly some dreadful harm has been done to dis-
tort this concept to the point that the very people that it helps dis-
like it. If it has done so much for mankind, why is it so hated?

The last reason is the unsatisfactory state of the literature.
Articles and books on productivity measurement are not integrated into
any one field. Instead, the information is spread over many areas:
general business magazines, journals in accounting, economics, and organ—
izational psychology, trade journals, government publications, European
documents and studies, finance publications, engineering books and arti-
cles, labor union publications, etc., etc. This endless array of per-
spectives and approaches has never been integrated and has contributed
to the difficulties of developing a unified measurement of organiza—
tional productivity.

Thus there are eight basic reasons for the lack of measurement of
organizational productivity. First, there are basic measurement problems
that have not always been overcome in the development of the measures and
these failures have hindered the attempts of other researchers. Second,
the field is a peculiar combination of economics, accounting, and organi-
zational behavior and this multiplidisciplinary combination has not been

appealing to most prospective researchers. Third, business emphasizes

32
short-term goals rather than long-range goals, obviating the usefulness
of a long-range measurement tool like productivity measurement. Fourth,
it is not always possible to adequately specify in advance exactly how
the measure will be used after it is developed. Fifth, accounting, as
the field of business measurement, has given little attention to produc-
tivity measures for the organization. Sixth, economics had promulgated
an oversimplified view of the complexities of business and caused a
justifiable degree of scepticism regarding the utility of the measures
that are generated. Seventh, there exists in the American population
(and other countries) a negative attitude toward the concept and im—
provement of productivity. Eighth, the productivity literature is spread
over many diverse areas and has not been integrated, so that the research-
ers or practitioners cannot readily understand the concepts of productiv-
ity or apply measurement techniques to them.

Methods of Measurement

 

There are two primary methods of productivity measurement. One

is the econometric/statistical method and the other is the accounting
method. The economic method is generally best for the economic analysis
of the productivity of countries, sectors of an economy, and industries.
The accounting method is generally best for the analysis of the produc—
tivity of organizations, individuals, groups of individuals, physical
processes, etc. Whereas the economic method involves the statistical
manipulation of aggregate measures of the output and input of an economy,
the general accounting method is basically a counting and direct measure-
ment method. Since the economic method normally relies on the validity
of production functions and sampling procedures, it is an indirect means

of measurement. The accounting measurement technique is often, therefore,

33
more valid and reliable, although it is often not feasible for a diverse
economy or for extremely large groups. Both measurement techniques are
dependent for their validity on the strengths and weaknesses of the con-
ceptual basis of the measurements.

Within the field of economics there are two basic approaches to the
measurement of productivity (Kleiman, Halevi, and Levhari, 1966). The
traditional approach has been through the use of the production func-
tions. Most of the economic studies in the literature have utilized one
or more production functions in measuring productivity. This approach is
used to explicate such concepts as the quality of capital (Domar, 1963),
quality of labor (Philpot, 1970), and technical progress (Beckmann and
Sato, 1969). In recent years, another approach has been used to attempt
to measure what is known as total factor productivity (Kendrick, 1961;
Rymes, 1968). This approach has used the company-based data on input
and output as aggregated by governmental agencies and used it in a type
of measurement that closely resembles the direct accounting approach to
measurement, although it relied on economic concepts and assumptions for
its development. Thus on the national level, economists have measured
productivity primarily through the use of production functions, but also
through the use Of direct measurement techniques.

On the other hand, the accounting method is more of a direct meas-
urement method, although it is normally used for the analysis of pro-
ductivity at the organization level, individual level, and process level.
After the outputs and inputs have been identified, it is a counting proc-
ess to determine the level of output and input and then a simple ratio
is formed to compare the two. The usefulness of this technique lies

in its simplicity and its validity. This is the process that an

34

individual uses when he/she determines an automobile's gas mileage.
This is the process that is used to determine the purchase of machinery
within an organization for the purpose of decreasing the hours required
to make a unit of a product. It is versatile, relatively simple to
develop, and does not depend on the validity of production functions.
The problems of the accounting method are in the lack of theory and the
oversimplification that often results from focusing on specific ratios.
There is one branch of the accounting technique of productivity meas—
urement that deserves special mention here. It is the technique of the
system of ratios for the analysis of productivity at the organizational
level. This system uses the basic accounting ratios derived from the
accounting reports and develops a more or less structured system.whereby
these ratios are analyzed in order to determine organizational productiv-
ity. The problem with this system lies in the exclusivity of the inter—
pretation and application Of each ratio, since different individuals
attach varying degrees of significance to the individual ratios. The
system, however, has great potential for developing an overall perspec-
tive of the integrated activities of the organization.

Perspectives on Organizational Productivity Measurement

 

Thus, although the word "productivity" has been distorted to the
point that it is despised rather than respected, productivity measure-
ment is still important. Furthermore, measurement has been vital for

many years.

To be fair this is really one of the most important points
that has emerged from the reports of the visits to the
U.S.A. organized by the Anglo-American Council on Produc~
tivity. The best American methods can be spotlighted
because they indulge to a far greater extent than we

do in methods of accounting for management control; and

35
thereby reveal the factors we are seeking and permit of

the comparison that not only are we slow to make but to
a great extent not equipped to make. (English, 1951, p. 358)

Chappell (1961) noted that interest in productivity measurement was
only a part of the total trend of quantifying every possible business
activity. The background for productivity measurement was the measure-
ment of production volume, capital investment, plant capacity, time
studies, work measurement, predetermined production plans, etc. Thus
productivity measurement was a logical extension of these earlier attempts
to establish the output/input ratios. The value of productivity measure
is that it pinpoints the output values against specific input values.

It is also more Objective than other solutions as far as the problem of
quantifying productive efficiency. Furthermore, it provides invaluable
assistance for planning, economic operation, and effective control. It
is also useful for interfirm comparisons. He also emphasized that if
measures were to be used for various groups, including trade unions, the
measures would have to be understood and accepted by all those involved,
a criteria that productivity measures have not met.

Measurement, then, is a key link in productivity analysis. This
is generally agreed upon for all levels of productivity concerns.
Econometricians are still working on national productivity measures.

At the organization level, there is also general agreement on the neces-
sity of some form of productivity, although there is not as much agree—
ment on the difficulty of measurement at this level. Davis (1947)
asserted that despite these difficulties, it is nonetheless essential

to find a way of develOping adequate productivity measures--not only for

the whole economy, but also for sectors, firms, and even individuals.

36

Since productivity is conceptualized in a number of ways, there
is a corresponding range of differences of Opinion as to the difficulty
of productivity measurement. At the organizational level, the problems
Of productivity measurement are usually recognized as being rather
large ones and problems which make research difficult. On the other
hand, other experts think it easy. Altenkirch (1957) humorously noted
the range of Opinions on productivity measurement at the organizational

level.

Expert NO. 1: Productivity Measurement is very simple.
Expert No. 2: It is not so easy to measure productivity
as people generally think.

Expert NO. 3: Don't bother to measure productivity-—
it is as impossible as squaring the cir—
cle or creating the perpetum mobile.

For general economic develOpment, whether through productivity cen-
ters or through the interests and efforts of industry associations,
measurement at the organization level is the key for understanding the
factors affecting productivity and the clarification of methods of
improving productivity. Davis (1947) agreed, doubting that the condi-
tions which influence productivity can be meaningfully studied as
national aggregates. Since the actual changes in efficiency are not
made on the national level, measurement emphasis should be concentrated
at the factory, farm, and mine level. This emphasis includes measures
Of the various combinations of labor, capital, and materials. This
potent argument has not received adequate attention, unfortunately,
and emphasis is still concentrated very heavily on the sector and

national levels.

37

The posture of the European Association of National Productivity
Centers is meaningful to note. While the United States is just beginning
to experiment with the formation of National Productivity Centers, the
European (and Asian) Productivity Centers have been in successful opera-
tion for many years. These centers are in the process of systematically

dealing with practical steps for productivity improvement at the company

 

level (Integrator, 1973). Set up by the post-war concern for economic

 

improvement in EurOpe, the centers have come a long way since the 1950's
and the early struggling with productivity measurement. Utilizing methods
and ideas generated all over the world, these centers have been actively
promoting pragmatic solutions to the productivity problems of the

individual countries (Integrator, 1974).

 

Therefore, one of the most important of all the possible levels of
productivity measurement is the organizational level, the area that has
received the least attention in the last two decades. It is also impor-
tant for understanding the productivity of small groups and individuals
since they are part of the organization as a functional unit. Thus the
organization serves as the fulcrum for productivity measurement linking
the other levels of productivity measurement. For this reason and for
many others, it is vital that research on organizational productivity be
increased.

But the primary problem in the area of organizational productivity
measurement is not the interest or the lack of understanding of the im-
portance. The primary barrier to organizational productivity measurement
is the inadequate measures that are available, which are merely adapta—
tions of economic measures used on more macro levels. This is most un-

fortunate since these measures are extremely narrow.

38

Thus, production and productivity measures often refer

to narrowly defined industries, to industry groups,

to broader economic sectors, or to the entire economy.
Productivity ratios and time series are also computed
occasionally for individual workers, occupations, opera-
tions, processes, plants, or firms. (Siegel, 1955, p. 389.)

Also unfortunate is the fact that nothing has changed over the years
in this situation. Output per hour is still looked upon as thg_measure
of productivity, labor is still the only input that is generally consi-
dered, and performance productivity concepts are still dominating. These
and the many other limitations point to the need for drastic changes in

measurement procedures.

But almost all economic statistics are only estimates.
Reliable data are difficult to get, and they are sub-
ject to errors and different interpretations. The
output-per-manhour data reflect such factors as tech-
nology changes, capital investment, and labor skills.

But they do not measure labor's contribution....And
year-to—year changes in output-per-manhour are irregu-
lar. They don't necessarily indicate long-term trends....
Even the definition of manhours may differ....Different
figures for the same industry may stem from sampling

and reporting differences. Other flaws may be due to
statistical weighting, erroneous shipment data, and
unrepresentative sampling. ("Productivity", 1971, p. 48)

Measurement Literature on Organizational Productivigy

Over the last quarter-century, however, several attempts have been
made to go beyond informal estimates Of productivity. In particular,
there have been four main studies which serve as the basic literature on
productivity measurement at the organizational level. The four publi-
cations are spread over a period of twenty years and do not represent an
integrated development. The studies have developed vastly different

measures of productivity with varied results. The net result of the

39

field, however, is that few if any organizations are longitudinally
measuring productivity. The reasons are not perfectly clear, but the
benefits of understanding, measuring, and controlling productivity are
still great enough to warrant further research.

In addition to these four main studies, there are innumerable
smaller studies that approach only one aspect of productivity measure—
ment. Since these studies have been reported in a wide range of journals,
they are often inaccessible to the researcher. Attempts at integration
are virtually nonexistent. Many of the articles are iterations of other
accounts of productivity and have very little marginal contributions.
Others restate the ideas for a particular industry or trade.

The most recent attempt to explain organizational productivity was
Greenberg (1973). In this monograph, Greenberg presents a practical
approach to productivity. In contrast to other publications on produc-
tivity, the monograph addresses itself to many types of organizational
situations. Although the publication attempts to be practical to many
situations, it suffers with the limitations of the depth to which it
went. The objective at practicality is an admirable goal, although the
monograph falls short of the goal. Productivity measurements are not
practical at the present time and as more measurements are developed,
it is hOped that the emphasis on practicality will continue.

Another strong point of the Greenberg monograph is that it is
oriented to the managers Of an organization. Most productivity publi-
cations have some limited audience in mind, seriously limiting the influ-
ence of the effort. Thus, rather than address the issues to the company
economist or the company statistician or the company accountant, this

monograph discusses the issues in relation to the perspective of the

40

decision-makers of the organization. This is a most important step in
the actual implementation of productivity measures, since a review of
the literature shows that managers are not comfortable with the inter-
pretation of broad measures of productivity that have little to do with
the Operating language that they are accustomed to.

Whereas Greenberg (1973) only presented the very basic issues of
measuring productivity, Kendrick and Creamer (1965) discussed the issues
in more depth. The intention of the publication is to serve as a hand-
book for the company economist to use in the measurement of productivity
from the economist's perspective. Although the book may be useful for
those who are interested in applying the traditional micro-economic
model, it fails as a handbook for those with a different perspective
of organizations. It fails to consider the accounting problems inherent
in such an approach and the psychological and organizational consequences
of implementing a productivity measurement system. It also fails to pre-
sent the measurement system in the light of the desired Objectives of
the organization or researcher and instead presents a basic approach that
attempts to be applicable to a host of objectives. Unfortunately, most
of the main objectives of any productivity measurement system that are
outlined by the authors are not met by the measurement system that is
presented. The most notable example here is the objective of basing wage
negotiations or wage increases on the measures that are presented by the
authors. The problem is that the measures are performance productivity
only, while the questions to be answered are financial productivity ques-
tions. The issues here are more complex and are not at all met by the

measures presented.

41

In addition to covering productivity measurement in more depth than
the Greenberg monograph, the Kendrick and Creamer monograph shows how
the measures are actually developed in organizations and discusses some
of the major problems that they encountered in this implementation. Six
case studies are presented and the various situations are described in
some detail. Thus one of the advantages of this monograph is that the
description of the various measures provide a meaningful backdrop from
which to compare future measures and the elucidation of the various situ—
ations that are important determinants of the types of productivity
measures that should be used in a given situation.

There were two studies in the mid-1950's that are still important
in productivity measurement at the organizational level although they
do not receive the attention that they are due. The two publications
are entirely different approaches to the same problem of the measurement
and meaning of productivity at the firm level. One is the highly indi-
vidual work of Davis (1955), while the other is the result of the group
of economists and government officials in the European Productivity
Agency of the Organization for European Economic Cooperation (1956).

One of the differences of the two publications is the degree of consis—
tency within the books. Whereas Davis (1955) systematically develops

the concept of productivity and discusses the ramifications of his argu—
ments, the EPA book is a series of essays from various economists about
what productivity meant to them. There was no agreement in the EPA book
as to the essence of productivity, the definition of productivity, the
meaning of productivity, the various related concepts of productivity,
the future of productivity as a field of study, the difficulty of measur-

ing productivity, the limitations of productivity measurement, the scepe

42

of productivity measures, etc. These economists were part of the American
assistance to post-war Europe and the attempt of the EPA was to culminate
the effort into a coherent book regarding the issues of productivity. Un-
fortunately, they were unable to reach consensus about the meaning and
measurement of productivity. Consequently, the three short volumes

serve as much to confuse the reader as to enlighten.

With regard to the measurement systems presented in these two pub-
lications, different results were obtained. Davis approached the topic
with a distinct emphasis on the accounting problems. The EPA books em-
phasized the development of measurement systems that had the most rele-
vance for the comparson of productivity across firms. This was the ante-
cedent for the European drives for inter—firm comparisons.

In addition to these four studies there have been numerous smaller
studies regarding productivity measurement at the organization level.
Most of these are oriented to industrial situations and manufacturing
plants. The economic model predominates the discussion and consequently
many of the studies are but minor variants of the others. Langenberg
(1952) provided one of the earliest proposals--and one of the most suc-
cessful ones—-for a plan of productivity accounting. The orientation of
the measure was to provide managers with criteria for the evaluation of
long-term performance. Although there was no theoretical foundation for
his measures, Langenberg was aware of the limitations of the government
measures. By weighting physical production by the fixed standard cost
of the base period, Langenberg was able to generate productivity meas-
ures for payroll hours, depreciation, and repair and maintenance.

Kempster (1954) used the same approach and attempted to develop an

output per hour measure of productivity. The economists' influence through

43

government indicators is apparent in most of the articles on productivity
measurement, and is apparent here. Kempster concluded that productivity
measurements were useful, but that cost systems gave them as much infor-
mation about productivity as their productivity measurements did.

Another example of the early work of accountants can be found in
a brief article by the British Institute of Incorporated Accountants (1951).
They attempted to develop measures of capacity uses, operating efficiency,
and overall efficiency. They emphasized the importance of value added
for the measurement of production output and developed several other
basic ratios of performance that they felt might be useful in certain
situations.

Ernst (1956) attempted to measure productivity through a production
function. Through a survey questionnaire Ernst developed an equation that
reflected labor and technology inputs in the production of the output
for a group of companies. Labor is measured as hours worked, while tech-
nology is measured by the number of kilowatt hours used by the firm.

Ernst failed to establish the usefulness of this production function in
either organizational research or in organizational management. Conse-
quently, the production function approach has not been used to understand
organizations except by some economists.

James and Rooney (1957) attempted to develop a productivity state—
ment to be used on the same level as an income statement. With primarily
an accounting viewpoint, they used their cost systems to quantify direct
labor, direct materials, and indirect manufacturing expense. Although
this approach may be extremely useful in a proper form to managers of a

company, it has not been used.

44

Because of the problem of measuring productivity through one ratio,
another approach is to develop a set of ratios. Hoffman (1956) presents
such a case. Through the use of operating ratios and financial ratios,
he attempts to develop control ratios for use in a firm. There are many
indirect applications of the operating ratio approach to productivity
measurement. One example is Abb (1961), who developed a productivity
measurement system for small businesses. Abb contended that there were
three primary ratios: return on investment (profit/capital), profita-
bility (proceeds/costs), and productivity (output/input).

Geary (1965) used this approach in attempting to develop productiv-
ity measures based on the information already developed in production
companies for government reporting purposes. The primary orientation of
this system is economic although the system is sufficiently practical to.
be used in modern organizations. Unfortunately, the measurement system
does not have a decision-making perspective and has not been widely used.

Rimer (1965) attempted to develop an efficiency profile for measuring
organizational performance. Fourteen measures were used to compare ideal
performance with actual performance, and all were expressed in terms of
a percentage. The data for the measures is derived from the sampling of
work time according to preset criteria. The primary problem with this
approach is the inability to establish ideal performance.

The industrial engineering approach to productivity measurement is
exemplified by English (1951). Based on a definition of productivity as
"a qualification of the efficacy of human industrial endeavour," the
measurement system isolated six productivity factors-—design, method,
facilities, activity, application, and quality. English proposed that

productivity be measured through the use of index hours which would be

45

compared to national standards for utilization. Such a system of
standards has not been developed and consequently this approach is not
used.

One unusual attempt to measure productivity was Martin (1959).
He prOposed that it was possible to develop a universal method of meas-
uring productivity based on the statistical sampling of work measurement
of production workers. Martin develops a unique jargon of productivity
terms and uses them to explain this system. The basic orientation is
industrial engineering. In addition to being enormously expensive
(requiring over twenty thousand obesrvations by the members of the
organization), the measurement system gives no information about change
over time and is merely a static reading of organizational performance.
Consequently the measurement system has not been used.

Schultz-Mehrin (reviewed in "Productivity measurement and cost
analysis", 1955) used productivity as the basic unit of a triad of

three ratios that should be important to operating managers.

Output measured in physical quantities

 

 

 

Productivity = Input measured in physical quantities

Profitability = Proceeds of the sale of the output
Costs of the inputs

Rentability Pr0f1t (or sales minus purchases)

Capital applied

The emphasis here was also on cost control and value to the operating
managers. The book is unusual in that it considers the theoretical
perspective of the various ratios that are presented.

Another technique of measuring productivity at the organization

level is to use the production functions as a measure of the progress

46

of the firm. Although these have been used for many years, their
usefulness has not been demonstrated to any great extent. Neverthe—
less they are hailed as the "true measure" of productivity at the
organization by some economists (Ernst, 1957). Usually these are based
on the marginal productivity functions of the Cobb—Douglas type and its
later versions, although their usefulness has been seriously questioned.
Thus, their attempts are to find the best approximation to the "true
production function" (e.g., see Ernst, 1957).

English (1951) also took steps to make productivity measurement
a successful venture. Being a production engineer, English defines
six main productivity factors: design, method, facilities, activity,
application, and quality. Three additional factors were identified
as supervision, administration, and maintenance. English suggests
that finance be excluded in order to promote analysis across firms.
Rather than emphasizing budgetary control and standard costing, he
developed a system of "index hours" based on work evaluation such as
time study. Index hours were a peculiar form of equivalents that
attempted to convert such things as buildings, services, and tools to index
hours based on national standards of conversion tables that related the
pound sterling in index hours. Thus, the average factory building would
be roughly .5 to 1.0 index hours per square foot per annum. This attempt
to convert everything into enginerring terms was unsuccessful and has
never received serious attention.

Another attempt to make productivity measurement practical for
business managers was Lauzel (reviewed in "Practical accounting for
managers", 1959). The accounting approach to productivity measurement

was presented from the perspective of the operating manager. The wide

47
range of tools available for answering managerial problems are outlined
and explained. There are three major sections of the book: the relation
of accounting to social question, economics, and management, the explana-
tion of various accounting techniques, and the application and exploi-
tation of these techniques. The very broad usage of productivity is
employed to show how costs can be effectively controlled in an organiza-
tion, including the use of inter-firm comparisons.

Another strain of organizational productivity measurement has been
work measurement. McCarr (1962) combines the labor productivity measures
with time studies to produce productivity work measurement. This is done
by comparing the output in physical units with the time expended in the
production of the manpower. Inputs are the number of workers. Produc-
tivity work measurements attempt to measure the contribution inputable
to the particular workers and to the particular groups. Work measure-
ment shares the common base of comparison with the base period. In
productivity measurement, the indices indicate the rate of change of
productivity, but not the level of productivity. Therefore, resort is
made to interfirm comparisons. Productivity work measurement is based
on statistical time standards, which are averages of recorded data on
individual performance, and are expressed in man-hours per work unit.
It can also be applied to the organizational functions--typing, deliver-
ing packages, etc. The key advantage is simplicity--no detailed method
recording, no need for allowances for fatigue, etc. The method is not
ordinarily used on the indirect or administrative fields, since in
these fields it is not possible to have engineered standards.

Although the main issues for total organization productivity meas-

urement are by no means settled, emphasis is being placed currently on

48
the productivity measures for sub-organization levels. Recently, the
National Science Foundation Division of Advanced Productivity Research
and Technology announced the provision of $1.6 million dollars for pro-
ductivity measurement research in the administrative services, including
eight areas: accounting and auditing services, budget and management
analysis, purchasing management, distribution, sales and marketing manage-
ment, public information programs, personnel administration and training,
inspection and quality control, and computing and information services
(National Science Foundation, 1975). Administrative services, the
knowledge-based functions of an organization, are growing significantly
as part of the managerial movement that is affecting American business.
This is a direct response to the over-emphasis upon the productivity
measurements of economically-based productivity studies when ggly_pro-
duction workers are studied. Although much needs to be done on perform—
ance measures for administrative services, such an emphasis without a
corresponding emphasis directed toward whole organizations is unfor-
tunate .

One recent article on productivity measurement is Craig and Harris
(1973). This study also uses the economic model of organizational func—
tioning to develop productivity measures. However, the model includes
one major innovation in organizational productivity measurement-~that of
utilizing the service value of capital as the input of capital. The
output for the measures was the value added by production and the inputs
were labor and capital. They develop a comprehensive measurement system
that is similar to the total factor productivity model explained by
Kendrick and Creamer (1965). Unfortunately, many of the issues concern-
ing productivity were not discussed, so the impact of the system has been

minimal.

49

Thus, like the conceptual literature on productivity, the measure-
ment literature is a disjointed collection of various individual efforts.
Again it becomes clear that there is no mutuality or integration.
Researchers have tended to disregard each other's contributions. Vari-
ous groups concerned with organizational productivity have pursued
entirely different routes with little collaboration. As a result, even
those seminal ideas and measures which show promise as integrative tools
have not been utilized. Consequently, the measurement literature has
not demonstrated a cumulative progress that is essential for measurement

development.

Summary and Conclusions

This paper makes a basic differentiation between performance pro-
ductivity and financial productivity. Performance productivity measures
quantify relationships between input and output independent of changes
in value. Financial productivity measures monitor input-output relations
that include changes of values in both input and output.

In applying these two concepts to analyzing organizational productiv-
ity, this study took a multi-disciplinary approach. Two aspects of pro-
ductivity were explored--the meaning of productivity and the measurement
of productivity. A review of the literature revealed that there is little
agreement on these two issues and consequently, little direction on the
measurement of productivity for organizations or researchers. This unfor-
tunate situation needs to be resolved. Steps were taken in this thesis
to develop a theoretical perspective that will integrate the variety of
perspectives into a cohesive framework.

Performance productivity and financial productivity are proposed here
as fundamental concepts which can provide the nucleus for conceptualizing
organizational productivity. Each productivity researcher must reckon
with performance productivity and financial productivity criteria. The
need for recognizing these criteria is evidenced by past research. The
usefulness of the distinction is primarily a subjective evaluation since
the measurement system has not operated longitudinally at the time of this
writing. Its primary usefulness is in suggesting an organization of the
productivity literature and guiding the design of a measurement system.

This fundamental distinction has different implications for the several

parties concerned with organizational productivity. For government funding

50

51

agencies, it suggests that the coordination of productivity studies
should be sensitive to the proper balance of performance productivity
and financial productivity research. To the manager, it suggests that
optimum resource management is dependent on sensitivity to both perform—
ance and financial criteria. To the accountant, it suggests that atten—
tion must be paid to both performance productivity and financial produc—
tivity objectives and that organizational measurement systems must be
adequate to fulfill both sets of objectives. To the economist, the
distinction suggests that while the stated objectives of productivity
research include both performance and financial objectives, the measure-
ment has shown a strong bias toward performance productivity measures,
excluding financial productivity measures that may be more appropriate
to meeting the objectives. And, lastly, to the organizational psycholo-
gist, the distinction suggests that the factors affecting these two types
of measures are very different and that singular measures of organiza-
tional productivity focusing on only one of these two aspects are inade-
quate for research.

When this study began, it was not possible to clearly identify the
usefulness of developing an economic model of organizational productivity
and using the measures in either the management of the firm or in scien—
tific research. There were several unresolved issues. First, the liter-
ature could not confirm that it was even feasible to do. Second, the
objectives of developing such a measure were not clear. Third, the prob-
ability of successfully implementing such a measurement system could
not be estimated accurately. Fourth, the pertinent issues involved in
the actual implementation of these measures could not be determined.

Fifth, the process of developing such a measure was unclear. Sixth,

52

since there are a variety of perspectives and measure in the literature

it was difficult to determine the appropriate viewpoint to use in this
measurement system. Seventh, the psychological and organizational effects
of using such a system in an ongoing organization had never been deter-
mined. Eighth, there was no clear statement of the technical problems
that would be encountered in the development of the measure.

These issues are interrelated. Clarification of the perspective
and objectives will suggest solutions to technical difficulties. The
objectives also provide a basis for system evaluation. Measurement
development impinges on guidelines and limitations of implementation.
Finally, the usefulness of the measurement system to the organization is
dependent on the technical features of the measurement system and its
perspective and limitations, as well as the situation-specific interaction
of the organization's managers and those that develop the measurement
system.

Based on the distinction between performance productivity and finan—
cial productivity, progress has been realized on resolving at least some
of these issues. This distinction gives direction for establishing
objectives of an organizational productivity measurement system. The
differentiation also allowed a rudimentary categorization of the per—
spectives encountered in a review of the literature. Although much work
remains to be done in developing the ramifications of performance
productivity and financial productivity, it has been useful for beginning
to give conceptual coherence to the organizational productivity literature.

The distinction also guided the development of a productivity measure-
ment system designed by the author concomitantly with this study. Even
though a full account of the measurement system is inappropriate here, the

development of the system aided in the resolution of several issues. The

53
feasibility has been confirmed for designing an appropriate measurement

system. The distinction also pinpointed technical problems. An adequate
(though seldom optimal) solution was found for each of the accounting
difficulties encountered. The design of the measurement system also
clarified the development process. The reports on these activities are
available from the author as working papers. Since the measurement sys-
tem is only beginning the implementation phase at the time of this writ-
ing, questions regarding the actual utilization of a productivity measure-
ment system in organizations are just beginning to be explored.

The current research suggests priorities for dealing with these pro-
ductivity issues. Progress on measurement development is needed, given
the modicum of measurement systems. Although the number of alternatives
is growing, researchers have little direction in the development of organi-
zational productivity issues. As attention is focused on measurement, more
adequate solutions can be found for the technical problems in measurement.

A roughly equivalent need is felt for conceptual develOpment. Perform-
ance productivity and financial productivity are basic concepts that are
the foundation for developing useful measurement systems; however, work
is needed on building more substantive theory. In particular, distinctions
must be made between productivity and the related concepts of efficiency,
effectiveness, profitability, etc. Solid theoretical differentiations
would allow the establishment of accepted conventions in verbal usage,
which are currently non—existent. Clearer definitions, even if reflecting
the perspectives of the several parties concerned with organizational pro—
ductivity, would aid in the development of measurement systems that Opera—

tionalize more precisely that definition.

54

Even more important than conceptual analysis and theoretical devel-
opment is the need for applied research testing the influence of various
factors on performance productivity and financial productivity. As
theoretical models of organizational productivity are developed, it is
imperative that field research test these models. Organization change
projects have a specific need for valid models that would guide the
organization development effort. There is certainly no lack of sugges-
tions, as both the psychological literature and the economic literature
propose factors which affect organizational productivity. There is,
however, a need for field research in ongoing organizations to test these
factors. The fruits of such research can be jointly shared by managers
and social scientists. Behavioral science would gain knowledge of the
factors that affect organizational effectiveness, while practicing managers
would be able to utilize their resources more efficiently than is currently
the case.

But the most significant productivity issue is the lack of interchange
between those parties who are concerned with organizational productivity.
Although the field of organizational productivity suggests mutuality of
concepts and measures, there is little consolidation. Managers are isolated
from the researchers who develop measurement systems. Accountants have
pursued more restrictive measurement approaches than has been necessary.
Even among researchers, there is little correlative exchange. Economists
work in one sphere, psychologists in another. Government agencies pursue
still a different course and have not shown a consistent effort at inte-
grating the various approaches at the organizational level.

Are we then content with our mutual isolation? Is the sanctity of

our recluse worlds more expedient than a constructive dialectic? I think

55

not. At the risk of interrupting our self-imposed solitude, it is essential
that managers, accountants, economists, psychologists, and government rep-
resentatives work more cohesively. Common efforts at conceptualizing pro—
ductivity need to be made. Measurement systems need to be developed that
are useful to both managers and researchers. Economic and accounting meas-
urement techniques need to be merged. Finally, organizational psycholo-
gists and managers need to utilize these measurement systems to isolate and
control those factors which affect productivity without sacrificing the
human system and at the same time improving the quality of working life.

There has been little cumulative growth around organizational produc-
tivity. This accumulation is both a characteristic of and a requisite for
the scientific study of organizational productivity. The continuing absence
of this accrual is directly attributable to the relative isolation of those
studying organizational productivity.

International interest in productivity provides an even broader per—
spective for interpreting organizational productivity research. It piques
the curiosity of any serious citizen to contrast the English and Japanese
experiments on productivity. While it is beyond the scope of this paper
to analyze fully the cultural factors in organizational productivity imr
provement, it is certainly worth noting that various countries have demon—
strated very different concerns for productivity improvement. The English
economy has suffered for the lack of productivity concern at the national
level 33d the organizational level. The Japanese economy, although experi-
encing other difficulties, has demonstrated substantial productivity improve-
ment due to organizational and national commitment to productivity. This
provocative contrast suggests the possibility of fruitful research on the

effects of various national and cultural commitments to productivity.

56

There have been many historical problems with research on productivity.
This heritage has had a strong negative influence on the utilization of
productivity information. It will continue to have such an effect for
many years. Whether it will continue to stifle the research has yet to be
determined. What is needed is the persistent effort of many scholars and
interests of institutions and organizations. There is some evidence that
such interests exist and that the resources are available. It is hoped that
the study of organizational productivity will continue and that progress
will be realized in both the areas of meaning and measurement of produc-
tivity. It is important that the scientific method and rigorous logic
supplant the narrow perspectives that have dominated the field. Without
such progress, the control of productivity will never be possible.

The development of productivity research is dependent on the various
communities that have impact on the research. The academic community can
contribute by committing itself to a sustained effort to identify and
research the various problems associated with understanding and measuring
productivity. The business community can contribute by allocating its
resources for the improvement of productivity while improving the quality
of working life. The community of service organizations can contribute
by amplifying its interest in productivity issues. The government agencies
can contribute by coordinating these resources and by taking more adequate
steps to communicate the importance of productivity and its role in working
life. Thus, the future of productivity research is in the hands of the
several communities who can contribute their interest and resources to the
scientific study of productivity problems. On the whole, the prospects for
the continued growth in productivity research are good. Whether the neces-

sary commitment can be obtained remains to be seen.

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