Added value conceptA system wide organizational performance measure
One attempt, popularized in recent years for managers (Smith (1978)), as well as for accountants (Cox (1980)), is measuring the overall performance of an organization by measuring the value added. This is in effect a total measure of productivity, converted into a partial measure, by deducting the value of raw materials and bought-out goods and services from both the numerator and the denominator to give a measure of value added during the production process.
This method can thus provide an index of the productivity of the total system.
Added value and national prosperity
Its use is enhanced by the fact that economists tend to use 'net output per employee'. In other words, added value as a measure of productivity where:
Net output per employee = Added value per annum / Total number of employees
For exact details of how this is calculated see Norman & Bahiri (1972).
The benefit for companies is that they can compare their performance with the performance of other companies undertaking similar work. The minimum list headings of the Standard Industrial Classification lists include such headings as net output per employee, net output as a proportion of sales, new investment per employee, and average wages and salaries per operative.
Nonetheless, very little use appears to be taken of this facility, companies preferring instead to use their own methods for comparing their performance against competitors. (Department of Economic Affairs Regional Study 1965).
The tendency for managers to ignore performance comparisons with their competitors in this way, either nationally or internationally, appears to be changing as the need for competitiveness is increasingly brought home.
Professor Brian Wilson (1979) points out that the GDP, which serves as the indicator of the total of added value by manufacturing and service sectors of industry, is in the UK much lower per employee than many of its international competitors.
In 1976 added value per employee in Britain was £3759, whilst in Japan it was £8000. The percentage taken in taxes in the UK to pay for public services, public employees and their pensions is also much higher, although the ratio of net takehome pay to added value is often greater.
The answer to this problem at national level lies very much at the level of the individual firm. The concept of added value applies just as well as an indicator to employees of the proportions of the wealth created that is being taken out in wages and salaries, being retained for further investment or for distribution to shareholders.
Two main advantages have been found in this approach:
- If real increases in productivity are measured in added value terms, then by tying increases in wages and salaries exactly to changes in productivity (rather than through price increases) and by paying for productivity 'after the event' (rather than bargaining for it) wage drift can be minimized.
- If bargaining and discussions on how to improve added value become part of a participative process it could herald the way for a new attitude towards performance, its measurement and the share to which all employees are entitled.
Studies conducted in America such as the Jamestown project have shown how disclosure of information of this kind in depressed industries led to a spirit of cooperation that has eventually transformed the industry concerned.