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Procedia - Social and Behavioral Sciences 40 (2012) 550 556

The 2012 International Conference on Asia Pacific Business Innovation and


Technology Management

Productivity Through Effectiveness and Efficiency in the


Banking Industry
Parastoo Roghaniana*, Amran Raslia, Hamed Gheysaria a*
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Abstract

Raising the competition of the modern world exposes service organizations such as banks to seek the options
which either increasing the productivity and efficiency or reducing the costs, in other words optimizing the
operations enhancement. In this study the definition of productivity, efficiency, and effectiveness will be reviewed
and the necessity of paying attention to both side of productivity (i.e. effectiveness and efficiency) will be stressed.
It is followed by interpreting of the accurate position of banks productivity in matrix effectiveness
efficiency .The paper finds that literature suggests to banks managers and policy makers to evaluate their
productivity and also their productivitys position accurately based on effectiveness and efficiency.

2012
2012Published
PublishedbybyElsevier
Elsevier Ltd.
Ltd. Selection
Selection and/or
and/or peer-review
peer-review under
under responsibility
responsibility of theofAsia
the Pacific
Asia
Business Innovation and Technology Management Society Open access
Pacific Business Innovation and Technology Management Society (APBITM). under CC BY-NC-ND license.

Keywords: Productivity; effectiveness; efficiency; banking industry

1. Introduction

The financial part plays a crucial role in the effective allocation of resources, economic growth, and
job creation. Possessing the efficient financial firm to boost and uphold the growth of economy is
requirement for all countries. Especially, it was more seen in the last decade when the basic changes
happened in financial parts of industrialized economies [1, 2]. The study on relation between economic
growth and finance, for the first time comes back to the King and Levine [3] work. They illustrate that
the better financial organization results into tendency to improving faster.
Furthermore, the progress in technology and the globalization of financial services and also
deregulation of banking industry makes banks to be vulnerable to increased pressure of competitive

* Corresponding author. Tel.:+6-07-5531800; fax: +6-07-5566911.


E-mail address: parastoorg2000@gmail.com.

1877-0428 2012 Published by Elsevier Ltd. Selection and/or peer-review under responsibility of the Asia Pacific Business Innovation and Technology
Management Society Open access under CC BY-NC-ND license.
doi:10.1016/j.sbspro.2012.03.229
Parastoo Roghanian et al. / Procedia - Social and Behavioral Sciences 40 (2012) 550 556 551

[45]. So according to the situation in which every company has to consider how to enter a market and
then build and protect its competitive position, banks begin to realize that no bank can offer all
products and be the best /leading bank for all customers [4]. They are imposed to find a new basis for
competition and they have to improve the quality and productivity of their own products/services [5]
and reduce their costs of production [1, 6] as well. Productivity is observed as a significant success
element for operation of organization in global and competitive condition [7, 8] and to be likely the
most critical area for operational and process management [9]. [9-12] point out that achieving the
profitability, cost competitiveness, and growth in long-term would be created through productivity
enhancement. So, due to important role of banks in the economic activities, the investigating about
their productivity and efficiency becomes more important. Hence, the number of studies done in this
field has been increased in developing and emerging countries.
In addition, limitations of human and financial sources make the situation worse, so by upgrading
productivity of factors, it can be supplied some parts of economic growth without needing to new
investments and avoid wasting of resources. Furthermore, the productivity can be the most significant
part of process and operational management [9]. Hence, in spite of increasing the growth of innovative
services to attract customers and competition among different banks, knowing the accurate level of
productivity has been pressing.

2. The definition of productivity

According to the definition by European Productivity Agency[13] with adjustment of Japan


Productivity Center (JPC), productivity is as a social concept and introduced as an attitude of mind.
It searches to improve things which already exists continuously and stressed that one can do better in
day after day comparing the previous day, in other words every day become better. In 1995, [14]
illustrates three definitions which related to productivity: (1) Productivity is output/input, in other
words is measure of efficiency (techno-economic view); (2) Productivity is composition of
effectiveness and efficiency [15] points out to output/input +output/goal as productivity); and (3) It is
referring to broader concept that whatever makes the organization has a better function.
Moreover, Asia Productivity Organization(APO) [16] defines the productivity as:
Productivity = Efficiency + Effectiveness
=Doing things right + Doing the right things
Kirikal and Tallinna [17] present that the productivity is enumerated as significant factor in
analyzing, monitoring, and supervising the performance which there is a consensus among scholars that
the performance management is important component in continuous improvement and successful
management [11, 18, 19]. Also, it can help firms to follow the missions, vision, policies, objectives and
targets [12, 20, 21]. Likewise, enabling to identify the weakness and strengths along with opportunities
and threats which evolving from market can be the other reason as to why productivity is important in
this level. Companies asses their weak spot and try to compensate and produce what things they
expect .This way helps them to control the output driving various department. Even though, over-
productivity sometimes leads to fail in company growth. On the other hand, some researchers believe
that the profit report of the company is not enough and it is only the last result, while the productivity
determines either efficiency or effectiveness of process and policies. Because of this reason they say
profit and revenue report does not estimate the performance of individual and the company as a whole.
The other reason is the report to be applicable only for companies which produce expected result.
Otherwise, they must enable to check the report of productivity instead of profit report and recognizing
552 Parastoo Roghanian et al. / Procedia - Social and Behavioral Sciences 40 (2012) 550 556

the causes of flaws and defects. Consequently, the productivity report completes the result of profit
report.

3. Definition of effectiveness and efficiency

Drucker [22] has practically stated the variation between effectiveness and efficiency. He refers to
doing things right as efficiency. In his definition of this term, a measure of efficiency appraises the
organizations ability to achieve the output (s) considering the minimum inputs level. Likewise,
Achabal[2] pointed out to efficiency that principally link to costs in minimum level and referring to
allocating resources across optional uses. In other words, Chan [23] defines efficiency in the literature
of management as utilization of resources (Labor, Machine, Capacity, and Energy). He expresses that,
using the resources at best, brings the saving in money and time, and consequently leads to improve
companys performance. Performing act is often pertained to efficiency [24] which has stated in the
literature of management as well. However, this term is known as ratio among consuming resources in
expected consumed and actual consumed [9].
On the other hand, Sumanth[10] has stated the ratio of actual output produced to expected output in
standard way. He comprises this definition involving how well the resources consumed to fulfill the
result. Though, Neely [11] expands this term to utilizing the resources in economically way where the
level of customer satisfaction is given. Furthermore, the efficiency as ratio of ideal system dependent
time over total time [25]. The majority of studies which done in this subject stresses on the changes of
quantity as if [26] explain that, focusing on the changes of quantity has placed in the central of
efficiency and assume that no qualitative changes occur in inputs, process and outputs, or the changes
of quality might be omitted from the study.
Doing the right things and choice the activities in proper way are defined as effectiveness [22, 27].
Also, effectiveness measures the firms ability to gain prearranged objectives and goals [28]. In simple
description, a organization enumerates effective where it attains its goals [29]. On the other hand,
creating value for customer can be one of the main goals of organization which is often connected to
effectiveness and primarily impacts on the output of productivity relation and also, simply the degree
to which desired results are achieved [30] . Moreover, Neely [11] points out to degree to which
requirements of customers are satisfied. In other words, assessing the satisfaction of customer is basic
to the effective services and delivery [31].
Determining the effectiveness is more difficult than efficiency since due to definition, the relation
between input or output to outcome is defined as effectiveness [32]. They explain according to Fig.1,
there are some factors such as output and exogenous factors or environment ones might affect the
outcomes and mostly this term is concerned to growth of objectives or welfare. Also, there exist other
factors such as political choice and being blurred the distinction between outcome and output can
impact on outcome.
Parastoo Roghanian et al. / Procedia - Social and Behavioral Sciences 40 (2012) 550 556 553

Environmental Factors
e.g. Regulatory-competitive framework ,socio-economic background, climate,
economic development, functioning of the public administration

Effectiveness
Allocative Efficiency
Input Output Outcome

Technical Efficiency

Monetary &non-
Monetary resources

Fig1. The relation between input, output and outcome Source: Mandle et al.[32]

Effectiveness changes display mainly as changes which happen in outcomes [26]. Fullard [31] notes
that outcome estimation concentrates on effectiveness of the marketing campaign. Likewise,
effectiveness makes a connection between input or output to the outcome to be obtained, i.e. end
objectives[32] . So, clarify the outcome as well as input or output depends on the objectives and
strategies of the organization which is investigated. For example, Kumar and Gulati [33] consider the
net-interest income and non-interest income as outcomes in their study. In the other research by
Achabal et al.[2] , the maximum of ROI rate is considered as outcome. Achieving the productivity in
service organizations is difficult because of some features which service is involved such as
heterogeneity, perish ability, intangibility and simultaneity which becomes the challenging topic
nowadays [34]. Due to be difficult quantifying the productivity in the financial organizations, most
studies measure efficiency instead of productivity [28]. Since 1980s and early 1990s, the interest of
academic studies in this topic was increasing because of bank failures and liberalization. Although , the
great amount of these researches related to efficiency of banking across half a century is in the united
states [35] and proportionately few researches were done in developing countries [36].
X-efficiency and scale economies are known as two critical elements governing productivity in
banking part [37]. Most studies that done in this field employing the parametric or non-parametric
method to estimate the productivity change instead of using the other techniques [38]. So, there exist
few researches that run in the line of definition of productivity which presents the productivity
measures through effectiveness and efficiency at the same time [33].
Likewise, the definition of productivity in marketing which is a combination of effectiveness and
efficiency[39]. Achieving both effectiveness and efficiency in high level enables firm works with low
costs of marketing and higher customer satisfaction level.
Losses Golden
High
Quadrant Quadrant
Efficiency

(B) (C)
Dark Losses
Quadrant Quadrant
(A) (D)
Low
Low Effectiveness High
Fig 2. Effectiveness-efficiency Matrix
554 Parastoo Roghanian et al. / Procedia - Social and Behavioral Sciences 40 (2012) 550 556

So, according to the Fig.2, the position of organizations productivity can be classified into four
quadrants: Dark (A), Grey (B), Grey (D), and Golden (C).
Quadrant (A) is where the banks involved the low effectiveness and low efficiency, that means, nor
services that banks present to the customers is correctly neither the goals of banks can be achieved.
Therefore, this is the end of activity of banks. But, in Losses Quadrant (B) because of defect in one of
necessity element of productivity, effectiveness, and customers are not satisfied with the banks
performance. This problem is appeared in short time and because of the good efficiency and bad
effectiveness, this view brings the short-lived profitability [40]. Also, by contrary, emphasizing on
effectiveness and disregarding efficiency may lead to unprofitable growth [40] that happens in Loses
Quadrant (B). In addition, in second Losses Quadrant(B), the goals of banks are obtained but not with
the same resources ,then banks in order to achieve their goals, should allocate more resources and
budgets which leads to slowly dying [41]. Although, how long the banks can be survive depends on
they are governmental, private, small, or large size.
Thus, if banks do not attempt to run away quickly from their current position, they will fall in Dark
Quadrant. On the other hand, Golden Quadrant is the ideal position that each banks would desire to
locate in it. Thus, it is necessary that organizations pay attention equally to the effectiveness and
efficiency and only the growth of profit maintainable. Consequently, it is so significant that the banks
measure their effectiveness and efficiency and find out where they stand.

4. Conclusion

According to the main responsibility of financial institutions that is to allocate and multiply the
savings of society, and the efficiency with which they intermediate capital has substantive resonations
on the performance of economy [42]. Parasuraman [43] stresses on the significance of analyzing
productivity since banks must attempt to boost their capability in order to convert inputs including
deposits and saving to loans as outputs, will lead in improvement in outcome for savors, organization
and the economy in a general sense.
Therefore, the value of productivity will be measured based on effectiveness and efficiency in order
to achieve accurate and truly value. On the other hand the famous problems related to service industries
such as banks include intangibility, heterogeneity, inseparability, simultaneity and perishability. Due to
the some features of service including perishability and simultaneity, the evaluating bank s productivity
it is worth paying attention to service provisions are more difficult to measure than the production and
consumption processes of the manufacturing sector, as services are often created and consumed
concurrently and there is interaction between consumer and provider. On the other hand, most studies
about banking industry have focused only on the assessment of efficiency[33] and the effectiveness is
disregarded in achieving the productivity. Also, a firm may be efficient in using the resources (inputs),
but not effective and also reversely[33].
On the other hand, Van Looy et al.[44] indicate that if only increased producing in quantitative view
is a reason of improving the productivity, this may resulted in raising the share of low quality and
defective performance. The managerial contribution of this study is evaluating the accurate
productivity must be the regulation for banks managers and policy makers which enable banks to
redesign and revise the banks objectives and strategy based on that real values. The other contribution
refers to the banks productivity belongs to what quadrant. So probing this position is important for both
employees and also customers. Therefore, by understanding the situation precisely the managers can
save their company from losing and move towards flourishing. The future studies could evaluate the
Parastoo Roghanian et al. / Procedia - Social and Behavioral Sciences 40 (2012) 550 556 555

value of efficiency and effectiveness regarding to their own determinants. In addition, measuring the
exact position of organizations productivity can be done in future studies.

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