Productivity and Competitiveness in the Canary Islands
Productivity and the Canary Islands’ Economy
Understanding Productivity and Efficiency
Productivity (P) is a key factor in production. In the market, it translates to competitiveness. Another related concept is efficiency, which differs from productivity. Efficiency can be measured both in production and in the market. There are two main types of efficiency:
- Technical Efficiency: This involves maximizing the quantity produced (Outputs) with the minimum amount of factors (Inputs) used in the production function. It can be represented as: Outputs / Inputs.
- Economic Efficiency: This focuses on achieving a given output level with the minimum production cost. It can be represented as: Output / Cost.
Productivity is calculated as the value of the product obtained, weighted by the number of factors (L) used, considering the effects of capital (K), natural resources (RN), and the interest rate (r).
P = Value / Inputs
Competitiveness is determined by a combination of three factors, compared to other companies:
- Price
- Quality
- After-sales service
Strategies for Increasing Productivity
1. Increased Output with Fewer Inputs: Productivity increases when a higher product value is achieved using fewer input factors. This can be due to a more qualified workforce, better raw materials, or more efficient management systems. This is often observed in agriculture, where despite a lower labor value, constant production is maintained.
Adding new activities where worker productivity is zero does not contribute, as the same production is achieved with fewer workers.
2. Increased Output with the Same Inputs: The second scenario involves increasing production without changing the number of input factors. This means obtaining a higher value (V2 > V1) with the same amount of factors, which is known as value added.
Increased productivity ultimately leads to lower costs.
- Impact on Pricing and Market Share: If a company increases its value and lowers its costs, it can adopt favorable sales strategies. By producing more, the company can lower prices, attract more buyers, and expand its market share. This can involve an aggressive pricing policy to attract consumers and ultimately increase profits. Increased productivity can also lead to higher wages for workers and greater profits for the company. The public sector also benefits, as higher sales generate more tax revenue.
- Focus on Quality and Brand Loyalty: Alternatively, a company can maintain retail prices despite lower costs and use the increased profits to enhance product quality and services. This strategy leverages demand elasticity, as higher quality at the same price attracts more customers. By not raising prices, the company can build brand loyalty and enhance its products’ prestige. This is also an effective marketing mechanism.
Productivity Challenges in the Canary Islands
Productivity in the Canary Islands is relatively low. Productivity tends to increase with larger-scale production, which leads to lower costs. However, the Canary Islands’ economy is dominated by small businesses, primarily in the service sector. This structure hinders productivity growth, resulting in lower wages and a limited improvement in the economic level of consumers.