Managerial Economics - Productivity at the Port of Baltimore

Managerial Economics - Productivity

1. Explain the idea of productivity, and briefly describe why achieving high levels of productivity is important for (a) firms and (b) an economy in general.

Productivity measures the efficiency of an entity. It demonstrates the relationship between production and the resources required to produce. In a manufacturing setting, the output (production) would be finished goods and the inputs (resources) would include labor, raw materials, fixed and variable overhead, etc. The greater the number of finished goods produced, the higher the productivity.

Productivity is important to a firm because efficiency drives profitability. The goal of any business is to minimize input costs, maximize productivity and therefore achieve optimal efficiency. A high rate of productivity can also drive economies of scale by enabling a firm to spread input costs over a greater range of goods/services.

Relative to the economy as a whole, productivity can impact several key areas. Higher productivity increases Gross National Product and can therefore lead to a higher standard of living. While there are several factors that influence inflation, higher productivity can directly impact the need for cost-pass through. Higher productivity alone cannot mitigate inflation but it can help offset higher input costs.

2. Briefly describe the central problem at the Port of Baltimore. How did changes affecting the port in Norfolk contribute to the situation in Baltimore?

The primary problem at the Port of Baltimore is a lack of efficiency. The management/labor relationship is severely strained and they have mutually created an uncooperative environment that is detrimental to the productivity of the Port of Baltimore. Where in Norfolk they have engaged in a collaborative business-building approach, in Baltimore they have created an adversarial relationship where the motivating factors of each side have been prioritized higher than the greater good of getting the Port of Baltimore more competitive. Clearly, both sides would benefit more from fixing their business model and increasing productivity of port operations but neither side appears to recognize the damaging effects of their shortsighted approach.

With a complacent an inefficient operation, the Port of Baltimore enabled Norfolk to capitalize on a growth opportunity and in doing so created a self-fulfilling prophecy. Their operational inefficiencies allowed a competitor to enter the marketplace. The competitor brought a superior product to market (more efficient port operations in Norfolk and competitive cost structure), which in turn led to an increase in lost business for Baltimore. As the Port of Baltimore continues to lose business, the need for increased efficiency grows. The reduction in revenue forces a need for decreased resources and that