Question 5

Productivity Accounting

Productivity Accounting stems from the growth measurement studies or class of learning (Nithikeng, 2010). It is also related to what is known as Total Factor Productivity (TFP) or Multi Factor Productivity (MFP). It can be applied to companies and specific profit centres within companies and blends neatly with financial accounting presentation of profit changes unlike the other two.

With regard to the productivity accounting, based from Porter's framework, it is mentioned that to achieve a competitive advantage, a firm/SBU must devise a strategy to defend against, or take advantage of, the structural determinants of the nature and intensity of competition. The levels and time-paths of the ratios reflect outcomes of managers' efforts to exploit sources of bargaining power over consumers and suppliers and to reduce threats from new entrants and substitutes, as well as the intensity of competition (Rajiv and Holly, 2002). Rajiv and Holly (2002) also explain to this that low cost strategies emphasizes on improvements in the productivity and capacity utilization, shifts in product mix toward products with lower unit costs, and low price recovery whereas when less emphasis on productivity and capacity utilization, changes in product mix which may be more costly but serve less price sensitive consumers, and higher price recovery, these are in actuality are consistent with differentiation strategies. These relationships are fairly general and should hold for any industry or SBU.

In this case, for instance, energy utilities produce power as an input to the various industries of societies. Moreover, these utilities have to make a profit, while at the same time selling the energy at a reasonable price to its customers. Regulators (Government) often have to curb excessive energy prices to force the electricity utilities to be productive or obtain the required profit levels through productivity rather than price gains. Very often some resources are...