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Examining the Relationship Between Profit, Productivity, and Business Performance

Jun 21, 2023 | 0 comments

Jun 21, 2023 | Essays | 0 comments


Businesses are investments that are required or expected to provide a return. The key objective for any business is to maximize returns on investments. These lines up with the goals it has set up and the promises it has made to investors. At the key to any business, performance is its human resource. This is the group entrusted to bring about results for the enterprise. They are entrusted with the key task of meeting shareholders’ expectations by bringing out a profit but providing the ultimate return on investments.

The management of any enterprise sets goals and allocates them to different departments and then waits for the results. Every manager hopes for the best from his department to align to the expectations and realizations for the organization. Every bit of investment is made towards the realization of the company agenda, targets, and expectations. The investments are huge towards the realization of a target. The investments include physical effort and monetary commitment. This paper is going to summarize, describe and discuss themes in twelve articles regarding the concept of profit and productivity and its application to business performance.


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Profit and productivity

Productivity and profitability of a business company are related concepts but also have fundamental differences. The financial performance of any business is measured by how much profit it generates using receipts fewer costs. In economics, the cost can be fixed or variable depending on the output produced. Profitability can be measured in either an absolute or in a relative sense. Absolute profit measures the total performance of a business while relative profit measures the returns according to the business assets (Ha et al., 2001).

According to Ha et al. (2001), productivity is the ability to turn an effort into the desired output effectively and efficiently. Productivity uses a physical quantity of inputs and outputs as opposed to financial quantity. It can be termed as the rate at which an effort is invested and in turn, realizes the desired output. There are different levels of measuring an output or a desirable realization of a result in any enterprise or organization. The methods for measuring productivity can be scientific where a research method is applied to measure the effectiveness of an outcome whereas sometimes it can take the form of a basic nature of observation where the person tasked to oversee a result gauges the outcome by just observing the process of production (Ha et al., 2001).

The director of HR at SSE, John Stewart points out that people concentrate more on profitability which is a short-term aspect instead of productivity (Roper, 2015). Other companies such as the SSE take initiatives such as projects in IT, investment in staff training, and performance-related pay. In other words, productivity brings about profits in businesses hence it is always advisable to look at the bigger picture.

A research study conducted by Kumbhakar and Lien (2009) focuses on the link between productivity and profitability which takes into account the technical change and the prices. The article describes the available approaches that are used to measure the productivity change such as econometric and non-parametric approaches. The difference between this article with other reviewed articles in productivity and profitability is that it focuses more on the sources of the changes in these two concepts. The analysis in this research study showed the components such as the input price change and the output price change hurt the profit growth while there was a positive effect contributed by the technical change (Kumbhakar and Lien, (2009). A study by O’Donnell (2012), shows similar research carried out using the nonparametric test on the components of the profit and profitability change. This article focuses on the U.S. agricultural productivity change. O’Donnell (2012) identified a gap in information about the components of productivity change which led him to research the issue to fill the gap.

Productivity, Productivity, and Performance

Many factors contribute to performance in different firms. In research conducted by Bottazzi et al (2006), it sheds light on the degree of persistence of profitability and productivity performances. Pricing and marketing strategy, investment policy among other factors contribute greatly to the efficiency of operations in different firms. This study involved Italian manufacturing and service firms in identifying the application of profit in business performance and growth. The data used in this study was obtained from the Centrale Dei Bilanci database covering more than 40000 firms across Italy from1996 to 2003. From the analysis done on profit and productivity, a discovery was made when the two concepts were linked to performance; economic performance is not fully a determining factor for the improvement of financial conditions.

Pekuri et al (2011) analyze the performance measurement in the construction industry in Finland. This article points out that productivity in the construction industry has a huge impact on the national economy hence its important contribution to the wellbeing of society. As mentioned earlier, most firms concentrate on improving productivity to maximize output for stability purposes. According to Pekuri et al. (2011), competition pressure in the construction industry is the reason why much emphasis is put on productivity improvement. In his article, Pekuri et al. (2011) mention other studies conducted touching on a similar issue. Just like the previous research study by Bottazzi that I have reviewed, the metrics in this study are also based on financial information. The research concludes that national growth can be explained by productivity but differences in industry sectors cannot be explained by productivity and term it as an inadequate measure.

The relationship between the concept of productivity and performance is also applicable in the privatized companies. The article by Parker and Saal (2001) evaluates the effects of company privatization on productivity growth and performance output. This article discusses the water and sewerage companies of England and Whales which were privatized in 1989. The paper’s main aim is to compare the performance using indices of labor and total factor productivity before and after privatization. Parker and Saal (2001) claim that there are little researches conducted on this issue despite its importance in the England economy. But they go ahead and review the few studies that have been conducted so far. It is observed that the privatization of companies affects the performance; this is also determined by the financial and accounting data. The methods used to assess performance in this study are non- parametric. The study concludes that the productivity growth is not consistent with the study’s hypothesis that privatization may result in higher performance.

Sakr (2014) evaluated a similar issue about the privatization of firms in Egypt and its effect on performance. This paper aims to find out whether the efficiency of operations improves after privatization compared to pre privatization performance. This article is quite similar to the previously discussed article by Parker and Saal (2001), the only difference comes to the results of the study. The article also covers the history of privatization in manager or the Human Resource Coordinator is usually electronically done. LinkedIn and recruitment agencies in Egypt whereby it discusses the privatization program launched in 1991. This was done to improve the country’s economy. The methods of research used in this study are statistical techniques such as parametric and nonparametric tests. From this study, it is concluded that there is an increase in efficiency however a decline in employment was noted after the privatization of companies in Egypt (Sakr, 2014).

Profit, Productivity and Distribution

There is a theory in productivity and distribution known as the marginal productivity theory of distribution. This theory states that marginal productivity is equal to the payment of the supply factor of production. The theory further explains that when there is perfect competition, production price will be equal to the marginal productivity (Kumar, n.d). Grifell (2010) examines the financial and economic performance in the Spanish banks. The article points out that as much as several studies have been conducted in examining the financial and economic performance none has been done to examine the financial and economic of all the three organizational forms i.e. the commercial banks, savings banks, and cooperative financial institutions. The data used in this study was obtained from financial statements in several banks across the country. From the findings of the study, it is evident that commercial banks are doing better in performance as compared to the other organizational forms (Griffell, 2010).

In his research study, Arocena et al. (2002) analyze how the benefits in the Spanish target market. The new brand tried capturing the energy sectors are distributed between firms and consumers. It is also indicated in the article that the energy industry underwent privatization in early 1990. the cooperate growth of the global climate change. Previously solar energy companies has contributed to the growth in production is ranked 7th worldwide. Price regulation evolves depending on consumer welfare changes. The results of this research study on price regulation showed that there is biasness in the Spanish impact on the natural environment. They mostly use green energy sector. Consumers were more affected and all the increased profits benefited the manufacturers (Arocena, et al., 2002).


Arocena, P., & Contin, I. (2002). Price Regulation in the Spanish Energy Sectors: who benefits?. Energy Policy, 30, 885 – 895.

Bottazzi, G., Secchi, A., & Tamagn, F. (2006). Productivity, Profitability and Financial Performance: A Firm-Level Comparative Analysis of Italian Manufacturing and Services. Retrieved from https://editorialexpress.com/cgi-bin/conference/download.cgi?db_name=IIOC2007&paper_id=266

Grifell, E. (2010). Profit, Productivity and Distribution: Differences across Organizational Forms – The Spanish Banks. Socio-Economic Planning Sciences, 45, 72 – 83.

Ha, A., Strappazzon, L., & Fisher, W. (2001). The difference between productivity and profit?. Retrieved from https://pdfs.semanticscholar.org/a022/139bac45b028514acbc02ad92784a4973252.pdf

Kumar, M. Marginal Productivity Theory of Distribution. Retrieved from http://www.economicsdiscussion.net/theory-of-distribution/marginal-productivity-theory-of-distribution-2/7406

Kumbhakar, S., & Lien, G. (2009). Productivity and Productivity Decomposition: A Parametric Distance Function Approach. capital for individuals to venture into the grocery vending business using carts as advised by Michimi & Wimberl (2010). They would aid bring healthy Food Economics, 6, 143 – 155.

O’Donnell, C. (2012). Non Parametric Estimates of the Components of Productivity and Profitability Change in U.S. Agriculture. Oxford Journals, 94(4), 873 – 890.

Pekuri, A., Haapasalo, H., & Herrala, M. (2011). Productivity and performance management – managerial practices in the construction industry. International Journal Of Performance Measurement, 1, 39- 58. Retrieved from https://pdfs.semanticscholar.org/ef58/481070805853878f80d690c7932f4be57a7b.pdf

Roper, J. (2015). The relationship between productivity and profitability. Retrieved from http://www.hrmagazine.co.uk/article-details/the-relationship-between-productivity-and-profitability

Saal, D., & Parker, D. (2001). Productivity and Price Performance in the Privatized activities that result in physical healthiness. For example, proper diet, ensuring that all meals are balanced and taking a lot of Water and Sewerage Companies of England and Wales. Journal of Regulatory Economics, 20, 61 – 90.

Sakr, A. (2014). The Impact of Privatization on the Performance of Firms in Egypt, 5(15), 73-80.

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