There is considerable disagreement concerning the nature of the relationship between profitability and productivity. In operations research and production management, it is common to argue that this relationship is positive. The firm that achieves superior levels of profit needs to devote fewer resources to handling returns, rework, warranties, and complaint management, thus lowering costs and improving productivity.
In a services context, Reichheld and Sasser (1990) argue that reducing defects leads to greater loyalty and increased loyalty leads, in turn, to greater productivity via lower costs of making future transactions, favorable word-of- mouth, and perhaps even a price premium. However, there is equally compelling logic to suggest that the pursuit of profitability increases costs and thereby reduces productivity. In economics, for example, the relationship between productivity and customer profitability is generally viewed as negative. Profitability is modeled as a function of product attributes.
Increasing the level of utility improving raw materials, adding features or service personnel-requires increasing the level of product attributes and, therefore, costs. Moreover, it is common to expect diminishing returns to such efforts. Finally, empirical analysis based on the PIMS data- base fails to find support for either a positive or neg- ative relationship between quality as perceived by the firm’s managers-or costs. It may be, however, that the nature of this relationship depends on the type of quality under investigation. Conclusion
There is a clear manifestation that businesses will inevitably have a difficulty in simultaneously balancing productivity and profitability. This impossibility is moreover applied to service oriented industries which consequently have a considerable impact to many developed economies therefore bringing about the significance of the study of productivity in correlation to profitability to economic growth. The two schools of though which was assessed in this study has established the variances in terms of how a high regard in productivity can ultimately assess profitability.
The findings of this study based on qualitative data and analytical review of literature suggest that profitability based on productivity is dependent on the quality of service that a business ventures on. If a business is leaning towards providing customer customized services then it is somehow a fact that the business does have the difficulty in balancing both profitable and productive ventures. This is true to the fact that customized services really takes a maximum effort and time to increase productivity, thus bringing forth lost profit due to the lost effort and time.
Future studies could venture on the categorization of these businesses; categories such as businesses that provide standardized or customized service, etc. By having different categories appraised, there would be more direct measures that can evaluate a companies potential in terms of being productive, opting to be profitable, or having both the opportunity to simultaneously pursue both.
Anderson, Eugene W. (1994), “Customer Satisfaction and Word-of- Mouth,” Working Paper, National Quality Research Center, University of Michigan Business School, Ann Arbor, MI.