Operational efficiency, production costs, and firm-level economic performance: a unified framework

Abstract

To ensure the financial performance of an enterprise in a competitive market, it is necessary to have operational efficiency and effective production cost management. Most of the previous studies however have focused on these factors individually and have paid less attention to the interactional effect of these factors on organizational performance. This study presents and tests a unified Operational-Economic Performance Framework (UOEPF) which combines operational efficiency with production cost management and financial performance in one. The study used a mixed-methods research design, involving a systematic review of 25 peer-reviewed articles in their entirety, as well as a panel data analysis of 280 manufacturing and service companies from 15 industry sectors. Operational efficiency and the financial results and production costs were analyzed using total factor productivity analysis, stochastic frontier analysis, and structural equation modelling. The results show that increased operational efficiency leads to increased productivity, decreases production expenses and boosts the profitability. Regarding the efficiency dimensions, quality management has the most positive effect on financial returns, and a combination of efficiency improvement measures is more effective than an individual measure. The study also finds that the cost of production management is important link between operational efficiency and firm profitability. The suggested UOEPF can serve as a practical tool for managers and policy-makers to evaluate the operational performance, optimize the use of resources and enhance financial returns. The use of a holistic process, labour, energy, quality and supply chain efficiency approach can help in the growth of sustainable businesses and long-term competitiveness.