Contributed value

A productivity measurement is the only yardstick that can actually gauge the competence of management and allow comparison between managements of different units within the enterprise, and of different enterprises. For productivity includes all the efforts the enterprise contributes; it excludes everything it does not control.

Business has pretty much the same resources to work with. Except for the rare monopoly situation, the only thing that differentiates one business from another in any given field is the quality of its management on all levels. And the only way to measure this crucial factor is through a measurement of productivity that shows how well resources are utilized and how much they yield.

The Wall Street exercise of comparing the profit margin of Chrysler and General Motors is actually meaningless. General motors manufacturers most of the parts of the car; it buys only the frame, the wheels and the brake. Chrysler until recently was an assembler; it made nothing but the engine which is but a fraction of the value of the car. The two companies are entirely different in their process mix. Yet both sell a complete car. In the case of Chrysler the bulk of the sales price is paid out again to independent suppliers. The profit G.M. shows is for 70 percent of the work and risk, the profit Chrysler shows is for 30 or 40 percent of the work and risk. Obviously General motors must show a much bigger profit margin but how much bigger? Only an analysis of productivity which would show how the two companies utilize their respective resources and how much profit they get out of them would show which company did the better managing job.

But such a yardstick is needed also because the constant improvement of productivity is one of management’s most important jobs. It is also one of the most difficult; for productivity is a balance between great varieties of factors, few of which are easily definable or clearly measurable.

We do not as yet have the yard stick we need to measure productivity. Only within the last few years have we found a basic concept that even enables us to define what we have to measure the economist calls it “contributed value”.

Contributed value is the difference between the gross revenue received by a company from the sale of its products or services, and the amount paid out by it for the purchase of raw materials and for services rendered by outside suppliers. Contributed value, in other words, includes all the costs of all the efforts. It accounts for all the entire reward received for these efforts by the market.

Contributed value is not a panacea. It can be used to analyze productivity only if the allocation of costs which together make up the figures is economically meaningful. This may require major reforms in the accountant’s traditional concepts, figures and methods. We have to think through what depreciation charges are supposed to do charge for the use of capital, measure the shrinkage in value of the equipment, or provide for its eventual replacement; we cannot be satisfied with a provide for its eventual replacement; we cannot be satisfied with a “rule of thumb” percentage depreciation allowance. In short, we have to focus accounting data on management’s needs in running a banker, or on the old wives ‘ tales so many investors imbibe at their security analysts knee and forever after mistake for financial wisdom.

Contributed value will not measure productivity resulting from balance or functions or from organization structure, for these are qualitative factors rather than qualitative ones, and contributed value is strictly a quantitative tool. Yet, the qualitative factors are among the biggest factors in productivity.

Within these limitations, however, Contributed Value should make possible, for the first time, a rational analysis of productivity and the setting of goals for its improvement. In particular it should make possible the application to the systematic study of productivity of new tools such as the mathematical methods known as “operations research” and “information theory.” For these tools all aim at working out alternative courses of action and their predictable consequences. And the productivity problem is always one of seeing the range of alternative combination that gives the maximum output at minimum cost or effort. —

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