Module III – Productivity and

decision making
• Concept of productivity and its measurement;
• Competitiveness, Decision making process;
• Models in decision making, Decision making under
certainty and risk, Decision making under uncertainty,
Decision trees,
• Models of decision making.
 PRODUCTIVITY

 Productivity may be defined as the ratio between output

and input.
 Output - amount produced or the number of items
produced
 inputs - various resources employed

 Productivity is some relationship between inputs and output

of an enterprise. It is the quantitative relationship between
what we produce and the resources used.
Some of the definitions,
 Productivity is measure of how much input is required to produce a given
output i.e. it is ratio of output to input.

 Productivity is the ratio between the amount produced and the amount of
resources used in the course of production. The resources may be any
combination of materials, machines, men and space.

 According to Peter Drucker, "Productivity means balance between all

factors of production that will give the maximum output with the smallest
effort."

 I.L.O. generally takes productivity to mean, "The ratio between the volume of
output as measured by production indices and the corresponding volume of
labour input as measured by employment indices.
 Productivity = Measure of Output / Measure of Input

 The measures can be expressed in terms of money value or in

terms of quantity.

 In most cases output will be goods and services produced

 High productivity suggests minimum use of resources for

achieving a set of targets.

 High productivity increases production and reduces cost of

production per unit and, therefore, reduces selling price and
increases profitable of the concern.
 Factors affecting productivity

(a) Factors affecting (b) Factors affecting

National Productivity productivity in
 Human Resources Manufacturing and Services
 Technology  Product (or System) Design
 Research and development  Machinery
 Trade unions  Skill upgradation
 Government Regulation  Materials
 Group Policy  Working environment
 Production Volume
 Measures to Improve Productivity
 Better planning and training of employees, improved jobs and communication and effective
management through CPM/PERT methods.

 Use of time and motion studies to study and improve work performance. It enables to assess
the quantum of work, which can be used for planning and control.

 Better transportation and material handling system.

 By providing work incentives and other benefits to workers.

 Workers involvement in decision making and working of organizations.

 Improvement in technology of production process and nature of raw-material and its quality

 Simplification, standardization and specialization technique.

 Measures to Improve Productivity
 Better and efficient utilization of resources at the disposal of the enterprises.

 Use of linear programming and other quantitative techniques for better decision making.

 ABC analysis to identify more important items and then apply inventory control to reduce
capital investment

 Value engineering to reduce material content by good design.

 Tie wages more closely to output and use merit awards.

 Develop and utilize more standard times in service industries.

 Redesign the content of jobs to make them more interesting and challenging.
 INCREASING PRODUCTIVITY OF RESOURCES
 Material
 through proper use of materials, ie., by reducing scrap
 Productivity of materials can also be increased by using correct process, properly
trained workers, suitable material handling and storage facilities and proper
packaging.
 Labour.
 Work methods
 Plant, Equipment and Machinery.
 Productivity can be increased through the use of improved tools
 Total production times can be cut short considerably by improving machine setting up
methods,
 Proper maintenance will (avoid sudden breakdown and) add to the productivity.
 Land and Buildings.
 A suitable plant layout can accommodate more machinery in the same space and
thus raise productivity.
 Benefits from Increased Productivity
Benefit to Organisation:
 More profit.
 Higher productivity ensures stability of the concern.
 Higher productivity and higher volume of sales provide opportunity for
expansion of the concern and wide spread market.
 It provides overall prosperity and reputation of the concern.

Benefit to Workers:
 Higher productivity permits more wages.
 More wages per unit better standard of living of workers.
 Thus more productivity means better working conditions for workers which
also help in maintaining belter health for workers.
 Higher productivity yields improved moral and greater satisfaction for
workers.
 Benefits from Increased Productivity
Benefit to Consumers
 More productivity ensures better quality of product.
 It also enables reduction in prices.
 It provides more satisfaction to consumers.

Benefit to Nation:
 It provides greater national wealth.
 It increases per capital income.
 It helps expansion of international market with the help of
standardised and good quality goods.
 It improves standard of living.
 It helps in better utilisation of resources of the nation.
 Difficulty in measuring productivity
Interdependence of Factorial Productivities
 Productivity of one factor may be affected by the productivity of
another.
 For example, labour productivity may be affected by bad quality of
materials, defective tools and machinery and poor quality of
management.
General Disagreement as to measuring output and input
 When a concern is engaged in the production of a variety goods, it is
difficult to measure productivity of the concern because of the
differences in the volume of individual products.

The difficulty of measurement of productivity, where variety of goods is

produced, can be overcome by expressing the output in terms of
standard hours.
 Sources of Information for developing
measures of productivity
1. Product Identification Information
2. Accounting Information
3. Work Measurement Information
 Measurement of Productivity
 Measurement of Overall Productivity means calculating productivity taking all
input factors together or the productivity of the business as a whole.

𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑜𝑢𝑡𝑝𝑢𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡+𝑛𝑒𝑡 𝐴𝑑𝑑𝑒𝑑 𝑣𝑎𝑙𝑢𝑒 𝑁𝑒𝑡 𝐴𝑑𝑑𝑒𝑑 𝑉𝑎𝑙𝑢𝑒

 = =1+
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑖𝑛𝑝𝑢𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

𝑃𝑟𝑜𝑓𝑖𝑡 𝑃𝑟𝑜𝑓𝑖𝑡 𝑆𝑎𝑙𝑒𝑠

 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 = 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ∗ 100 = ∗ 𝐶𝑎𝑝𝑖𝑡𝑎𝑙 𝐸𝑚𝑝𝑙𝑜𝑦𝑒𝑑 ∗
𝑆𝑎𝑙𝑒𝑠
100
Factorial Productivity

 The productivity of individual factors which contribute to the overall

productivity.

 Labour Productivity:
 Material Productivity:

 Machine Productivity:
 Total productivity (Craig and Harris model):
Direct labour cost productivity
 The resource inputs are aggregated in terms of direct labor costs. This index will reflect
the effect of both wage rates and changes in the labor mix.

Capital productivity
 Several formulations are possible. In one, the resource inputs may be the charges
during the period to depreciation; in another, the inputs may be the book value of
capital investment.

Direct cost productivity

 In this formulation, all items of direct cost associated with resources used are
aggregated on a monetary value basis.

Energy productivity
 In this formulation the only resource considered is the amount of energy consumed.

Raw material productivity

 In this formulation, the numerators arc usually weight of product; the denominators
are the weight of raw material consumed.
 Production Machine hours
Month
(units) used
January 50000 5000
February 57000 6000
March 63000 7000
Find the partial productivity and total productivity for M/S
ABC company for which the following data is available:
 Output Rs 15000,
 Labour input = Rs 4500,
 Material input Rs 3000,
 Capital input =4500,
 Energy input Rs 1500,
 Other input expenses = Rs 750.

Assume the above values are in constant rupees with

respect to a base period.
 Products X and Y are being manufactured by a company using materials A
and B. Both materials are equally suitable. Product X is expected to sell at Rs
75 per unit and product B at Rs 35 per unit. The operating data is given below
Compare the productivity of material, labour and electrical energy in using
materials A and B. Comment on the relative advantage of using either of the
materials.
Sales value of output with material A
= Output of product X in units x rate/unit of X
+
output of product Y in units x rate/unit of Y

= 200 x 75 +300 x 35 15000+1 0,500 = 25,500

Sales value of output with material B.

= 400 x 75+200 x 35
= 30,000+ 7,000
= 37000
COMPETITIVENESS
 Competitive
COMPETITIVENESS advantages - factors
 Competitive advantage refers to factors that allow a cost structure,
company to produce goods or services better or
more cheaply than its rivals. branding,
the quality of product
 These factors allow the productive entity to offerings,
generate more sales or superior margins compared
to its market rivals. the distribution
network,
 Competitive advantage is what makes an entity's intellectual property,
products or services more desirable to customers
than that of any other rival. and
customer service.
Competitive advantages can be broken down into
comparative advantages
differential advantages

Comparative advantage is a company's ability to

produce something more efficiently than a rival,
which leads to greater profit margins.

A differential advantage is when a company’s

products are seen as both unique and of higher
quality, relative to those of a competitor.
 HOW TO ACHIEVE COMPETITIVE
ADVANTAGE?
Can be achieved by
Differentiation
Cost Leadership
Focus
Differentiation
focus
Cost Focus
 1. Differentiation:
 A company that pursues differentiation strategy selects only one or just a few of the total choice
criteria that are used by customers of the industry.

 It then uniquely positions itself to meet these choice criteria by designing a product that gives a
very high level of performance on the chosen choice criteria, and only a mediocre level of
performance on other choice criteria.

 Eg: a manufacturer of air conditioners may target customers whose choice criteria is 'rapid
cooling/ Therefore, it designs an air conditioner which 'cools rapidly,' but is not very 'energy
efficient.
 Differentiation strategies raise the average cost of the industry, because players of the industry
are providing higher level of performance based on one choice criteria or the other. But the
players can charge premium prices because customers are getting their desired values. Such an
industry will be segmented on choice criteria, and players will target only one or just a few of the
total segments.
 Therefore, another manufacturer of air conditioners may target customers whose choice criteria
is energy efficiency.'
 Companies that pursue differentiation strategy differentiate in ways that lead to price premiums
in excess of cost of differentiating.
 Differentiation gives customers a reason to prefer one product over another and is thus central to
segmentation and positioning.
2. Cost leadership:

Cost leadership involves the achievement of

lowest cost position in an industry.

Firms market standard products that are

believed to be acceptable to customers, at
reasonable prices which give them above
average profits.

Some cost leaders discount prices in order to

achieve higher sales levels.
Differentiation focus:
 The company targets a small segment
or niche, which has special needs.
 The special needs of the segment offer
an opportunity to the company to
differentiate its product from those of
competitors, who may be targeting a
broader group of customers.
 It designs a product to meet the unique
needs of the customers of this small
segment.
 Therefore, when a company pursues
differentiation focus strategy, its
underlying premise is that the needs of
its target segment differ from the
broader market, and that existing
competitors are underperforming in its
target segment.
3. FOCUS
Cost focus:
 A firm seeks a cost advantage with
one or a small number of target
market segments.
 Services/features may be provided
to all segments but in some
segments those services/features
may not be needed.
 For these segments, the company
is over performing.
 By providing a basic product, a
company is able to reduce costs
more than the price discount it has
to give to sell it.
DECISION MAKING
DECISION MAKING PROCESS
 “A decision is an act of selection or choice of one action from several alternatives.”

 Decision-making can be defined as the process of selecting a right and effective course of
action from two or more alternatives for the purpose of achieving a desired result.

 Decision-making is the essence of management.

 All matters relating to planning, organising, direction, co-ordination and control are settled
by the managers through decisions which are executed into practice by the operators of the
enterprise. (Entire managerial process is based on decisions)

 Decisions are needed both for tackling the problems as well as for taking maximum
advantages of the opportunities available.

 Correct decisions reduce complexities, uncertainties and

diversities of the organisational environments.
Characteristics of Decision Making
1. Decision making is based on rational thinking. The manager
tries to force various possible effects of a decision on before
deciding a particular one.
2. It involves the evaluation of various alternatives available. The
selection of best alternative will be made only when pros and
cons of all of them are discussed and evaluated.
3. It is a process of selecting the best from among alternatives
available.
4. It involves certain commitment. Management is committed to
every decision it takes.
5. Decision making is the end product because it is preceded by
discussions and deliberations.
6. Decision making is aimed to achieve organisational goals.
Process of Decision Making
Define the Problem

Analyze the Problem

Develop Alternatives.

Evaluate Alternatives

Select and Implement the Decision

Follow-Up and Feedback

 1. Define the Problem
 A problem is a question put forward for solution.

 A problem may arise due to the unfilled goals or due to deviations from
the desired state of affairs.

 clear understanding of the problem is necessary for providing the right

alternatives

 Wrong definition of the problem leads to wrong solutions.

 The problem has to be examined from different angles so as to identify

the exact causes.

 Unless exact causes are identified, right decisions cannot be taken.

2. Analyze the Problem
 Thoroughly analyzed to determine the causes and scope.

 can be done through classification of the problem and collection of relevant

information.

 The past events that contributed to the problem, the present situation and the
impact of the problem on the future have to be examined.

 Personal prejudices have to be avoided.

 An objective assessment of the situation is to be done.

 problem is of minor nature - subordinates can handle, else manager.

 Sometimes, the problem may not warrant any decision. Leaving the problem as
it is could be better solution.
 3. Develop Alternatives
There are number of ways in which a problem may
be solved, but all of them may not be equally
good.

Effective decision-making depends on the

development of, as many alternative solutions, as
possible.

The ability to identify and develop alternative

courses of action depends on the manager s
creativity and imagination.
4. Evaluate Alternatives
 Development of alternatives does not give any guarantee
of finding the best possible solution but it helps in weighing
one alternative against others and thereby eliminated
unwanted alternatives.

 Alternatives have to be evaluated in the light of the

objectives to be achieved, and the resources required.

 Evaluation involves a thorough scrutiny of the relative

merits and demerits of each of the alternatives in relation
to the objectives sought to be achieved by solving the
problem.
 5. Select and Implement the Decision
 Scientific evaluation of the alternatives reveals the acceptability of various
alternatives.
 It gives a clear picture as to how each alternative contributes towards solving the
problem.
 The best alternative has to be selected and implemented.
 It may not always be possible to select the best alternative, because of lack of
complete information, time and resources.
 In such a case, the manager has to satisfy with limited information and optimize the
yield under given circumstances.
 Once an alternative is selected, that becomes the decision and it has to be
implemented in a systematic way.
 The required cooperation from the people concerned have to be ensured.
 Otherwise, even the best decision may encounter resistance in the implementation
stage.
 6. Follow-Up and Feedback
 Once the- decision is implemented, it brings certain results and
these results are to be compared with the expected results.
 It has to be closely monitored to find out whether decision
taken is correct or not.
 Follow-up enables to identify the shortcomings of the decision.
 It provides valuable feedback on which the decision may be
reviewed or reconsidered.
 The decision may not yield the desired results.
 Constant follow-up helps to take corrective action as and
when necessary.
TYPES OF DECISION
MAKING SITUATIONS
• Decision making under Uncertainty
• Decision making under Risk
• Decision making under Certainty
 COMPONENTS OF A DECISION PROBLEM
A decision problem consists of
Decision  Decision maker: The decision maker is charged with responsibility of
making the decision. That is, he has to select one from a set of possible
maker courses of action.

Acts  Acts (courses of action): Acts are the alternative courses of action or
(courses of strategies that are available to the decision maker.
 The problem is to choose the best of these alternatives to achieve an
action) objective.
 If the decision maker has the alternative choices A1, A2, A3, A4, then (A1, A2, A3,
A4) forms the action space.
Event
 Event (state of nature): Events are the occurrences which affect the
(state of achievement of the objectives.

nature)  The events constitute a mutually exclusive and exhaustive set of outcomes,
which describe the possible behaviors of the environment in which the decision
is made.
Outcomes  The decision maker has no control over the event which will take place and
can only attach a subjective probability of occurrence of each.
 Outcomes: To every act in combination with every state of nature, there is an
outcome (or consequence).
 The outcome is also known as conditional value.
 when the decision maker selects a particular act under a particular state of nature, the result
obtained is called the outcome.
 Outcomes may be evaluated in terms of profit or cost or opportunity loss or utility.

 Payoff
 can be interpreted as the outcome in quantitative form when the decision maker adopts a
particular strategy under a particular state of nature.
 It is the monetary gain or loss of each such outcome. Pay offs can also be based on cost or
time.

 Opportunity loss (regret)

 An opportunity loss is the incurred because of failure to take the best possible decision.
Opportunity losses are calculated separately for each state of nature that might
occur.
 Given the occurrence of a specific state of nature, we can determine the best
possible act. For a given state of nature, the opportunity loss of an act is the difference
between the payoff of that act and the payoff for the best act that could have been
selected.
PAY OFF AND REGRET TABLES
 Pay off table is in matrix form.
 It lists the acts and events.
 It considers the economics of the problem by calculating a conditional pay
off value for each act and event combination.
 Similarly regret table is a matrix showing opportunity loss for each act under a
state of nature.
 QUESTION 1 Given below is a payoff table. From it form a regret (opportunity loss) table.

=
TYPES OF DECISION MAKING
SITUATIONS

1.Decision making under Uncertainty

2.Decision making under Risk
3.Decision making under Certainty
Decision-making under Risk

lacks perfect information or whenever an

information asymmetry exists, risk arises.

Under a state of risk, the decision maker has

Has incomplete information about available alternatives
but has a good idea of the probability of outcomes for
each alternative.

must determine the probability associated with

each alternative on the basis of the available
information and his experience.
Decision-making under Certainty
 A condition of certainty exists when the decision-maker knows with reasonable
certainty what the alternatives are, what conditions are associated with each
alternative, and the outcome of each alternative.

 Under conditions of certainty, accurate, measurable, and reliable Information

on which to base decisions is available.

 The cause and effect relationships arc known and the future is highly
predictable under conditions of certainty.

 Such conditions exist in case of routine and repetitive decisions concerning the
day-to-day operations of the business.
 DECISION-MAKING UNDER UNCERTAINTY
 Most significant decisions made in today's complex environment are
formulated under a state of uncertainty.
 Conditions of uncertainty exist when the future environment is
unpredictable and everything is in a state of flux.
 The decision maker is not aware of all available alternatives, the risks
associated with each, and the consequences of each alternative or
their probabilities.
 The manager does not possess complete information about the
alternatives and whatever information is available, may not be
completely reliable.
 Managers need to make certain assumptions about the situation in
order to provide a reasonable framework for decision-making.
 They have to depend upon their judgment and experience for
making decisions.
The following choices are available before
the decision maker in situations of
uncertainty.
1. Maximum Criterion
2. Minimax Criterion
3. Maximin Criterion
4. Laplace Criterion (Criterion of equally
likelihood)
5. Hurwicz alpha Criterion (Criterion of Realism)
(criterion of rationality)
1. The maximax decision criterion (Criterion
of optimism)
 maximum of the maxima.
 An adventurous and aggressive decision maker may choose the act that
would result in the maximum payoff possible.

Maximum payoffs under each decision A1, A2, A3 are respectively

 A1 - 220
 A2 - 190
 A3 – 200
 2. The minimax decision criterion
 opposite to maxima.
 minimum of the maxima.
 requires a table of losses instead of gains.
 The losses are the costs to be incurred or the damage to be suffered for each of
the alternative act and states of nature.
 The minimax rule minimizes the maximum possible loss for each course of action.
 Under each of the various acts there is a maximum loss and the act that is
associated with the minimum of the various maximum losses is the act to be
undertaken according to the minimax criterion.

Maximum losses incurred by the various

decisions:
 3. The maximin decision criterion (Criterion
of pessimism)
 Waldian criterion
 The maximin criterion of decision making stands for choice between alternative
courses of action assuming pessimistic view of nature.
 Taking each act in turn, we note the worst possible results in terms of payoff and
select the act which maximises the minimum pay off.

Minimum under each decision A1, A2, A3 are

respectively -80, -60, -20
The Act A3 is to be undertaken according to
this criterion because it is the maximum
among minimum.
4. Laplace criterion
 As the decision maker has no information about the probability of occurrence of
various events, the decision maker makes a simple assumption that each
probability is equally likely.
 The expected pay off is worked out on the basis of these probabilities.
 The act having maximum expected pay off is selected.

Since A3 has maximum expected payoff, A3 is the optimal act.

 Harwicz alpha criterion
 combination of maximin criterion and maximin criterion.
 the decision maker's degree of optimism is represented by a, the coefficient of
optimism, a varies between 0 and 1.
 When a = 0, there is total pessimism and when a = 1, there is total optimism.
 We find D1, D2, D3 etc. connected with all strategies
 where

 Mi is the maximum payoff of 'i' th strategy and m, is the minimum payoff of ‘i' th
strategy.
 The strategy with highest of D1, D2,.... is chosen.

 The decision maker will specify the value of a depending upon his level of optimism
Question 2
 A food products company is planning the introduction of a revolutionary
new product with new packing to replace the existing product at much
higher price (S1) or a moderate change in the composition of the existing
product with a new packaging at a small increase in price(S2) or a small
change in the composition of the existing except the word, 'New' with a
negligible increase in the price (S3). The three possible states of nature of
events are (i) high increase in sales (N1) (ii) no change in sales (N2) (iii)
decrease in sales (N3). The marketing department of the company worked
out the pay offs in terms of yearly new profits for each of the strategies on
these events.
 Which strategy should the executive concerned choose on the basis of (a)
Maximin criterion (b) Maximax criterion (c) Minimax regret criterion (d)
Laplace Criterion
Question 3
 The research department of consumer products division has recommended to
the marketing department to launch a soap with three different perfumes. The
marketing manager has to decide the type of perfume to launch under the
following estimated pay off for the various levels of scales (In next page).
Estimate which type can be chosen under maximax, minimax, maximin,
laplace and Hurwicz Alpha criteria, (given a = 0.6)
THANK YOU