3.1 The relation between productivity and value creation

If productivity is to play a role for organisations, it has to be linked to other organisational objectives. In general, organisational success is dominated by three core factors (Van Ark, 2004):

1. the activities the organisation performs (‘what is done’)
2. the purchase and sales prices of goods and services (‘the price for which it is done’)
3. and the productivity with which the inputs are transformed to outputs (‘how it is done’)

These effects, called the activity effect, the price effect and the productivity effect, have all three a direct effect on the general organisational objective: the creation of value or the creation of added value by the factors of production: capital and labour (see figure 1). Productivity improvements can be obtained through an improvement in operational efficiency (the recipes of production/ production management) and technological progress or the introduction of a breakthrough innovation. The price effect is related to a fall in the costs of the inputs used and/or a rise of sales prices. Finally the activity effect consists of three underlying factors: a change in the output mix can lead to a rise of value creation by marketing new products or services, whereas the input mix concerns a change in the input structure. Scale is related to economies of scale which create added value.

Figure 1: The wheel of value creation

The effects, however, can neutralise one another, particularly in the service sector For example standardisation can raise productivity substantially; however the negative consequences on the quality of the service, the comfort, or the custom-made character of the service may cause the customers to abandon the service. It is extremely important to balance the activities, the price and productivity as sources of value creation. The choice of engaging in certain activities determines the markets in which the organisation will be active, while prices determine the revenue. In order to raise productivity it is essential to manage the organisational processes such that the input mix is optimal, which guarantees the market share to be maintained or even raised in times of economic crisis and continuously adds value to the enterprise.