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Note---Analyzing Total Factor Productivity with ROI as a Criterion

Author

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  • David M. Miller

    (College of Commerce and Business Administration, University of Alabama, Tuscaloosa, Alabama 35487-9725)

Abstract

This research note concerns total factor productivity measurement at the firm level. Specifically the purpose of the note is to describe a means for incorporating return on investment (ROI) as the improvement criterion in profit-linked total factor productivity measurement procedures. The expressions presented here provide a mechanism to explain changes in profits due to productivity performance beyond the level associated with an ROI goal. This is an extension of existing measurement procedures that utilize gross profit margin rather than ROI as the improvement criterion. The formulation presented here is more appropriate than the margin approach when ROI is the primary financial yardstick of the firm. In presenting this formulation, the ROI based expressions for calculating the type of information derived in a profit-linked total factor productivity measurement procedure will first be given. Then the use of these expressions will be illustrated through a case study.

Suggested Citation

  • David M. Miller, 1987. "Note---Analyzing Total Factor Productivity with ROI as a Criterion," Management Science, INFORMS, vol. 33(11), pages 1501-1505, November.
    • Handle: RePEc:inm:ormnsc:v:33:y:1987:i:11:p:1501-1505
    DOI: 10.1287/mnsc.33.11.1501
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    Cited by:

    1. John W. Boudreau, 2004. "50th Anniversary Article: Organizational Behavior, Strategy, Performance, and Design in Management Science," Management Science, INFORMS, vol. 50(11), pages 1463-1476, November.
    2. E. Grifell-Tatjé & C. A. K. Lovell, 1999. "Profits and Productivity," Management Science, INFORMS, vol. 45(9), pages 1177-1193, September.
    3. Sahoo, Biresh K. & Tone, Kaoru, 2009. "Radial and non-radial decompositions of profit change: With an application to Indian banking," European Journal of Operational Research, Elsevier, vol. 196(3), pages 1130-1146, August.
    4. Oral, Muhittin & Cinar, Unver & Chabchoub, Habib, 1999. "Linking industrial competitiveness and productivity at the firm level," European Journal of Operational Research, Elsevier, vol. 118(2), pages 271-277, October.

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