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Analyzing the underlying dimensions of firm profitability
Author(s) -
Banker Rajiv D.,
Chang HsiHui,
Majumdar Sumit K.
Publication year - 1993
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090140104
Subject(s) - profitability index , deregulation , productivity , industrial organization , product (mathematics) , maximization , business , margin (machine learning) , product mix , economics , microeconomics , econometrics , finance , computer science , macroeconomics , industrial engineering , geometry , mathematics , machine learning , engineering
In this paper we decompose a traditional measure for firm's performance, return on sales, into four components that capture the impact of productivity, price recovery, product mix and capacity utilization, respectively, on a firm's profitability. The new measures are used as an illustration to explain changes in the performance of firms in the US telecommunications industry following deregulation. Changes in the overall profitability margin of these firms are explained by substantial but offsetting changes in their productivity, price recovery ability, product‐mix maximization and capacity utilization, that have occurred as a consequence of deregulation. The new measures enable us not only to illustrate relative differences between firms in a given cross‐section but also to shed light on how changes take place over time in the different components that underlie firms' profitability.