Application of structural equation modelling to establish causal relationship among financial factors for strategic management of productivity in Indian sugar industries

Indian sugar industry has proved itself to be a nucleus of rural development. Thus, the performance of Indian sugar industry plays a significant role in Indian economy. It is faced by several problems and strategic productivity management is one of the major strategies to overcome the problems faced. Since a firms' productivity can be evaluated in terms of financial ratios, financial factors can be used as a means of managing productivity. Selection of financial ratios from the available set of published ratios is done by correlation study between total factor productivity (TFP) and financial ratios. The perceptions about the strategic management of productivity in Indian sugar industries are captured through factor analysis was carried out to bring out six factors/latent-variables/constructs representing the variables/attributes. This paper discusses the establishment of causality between these latent variables/financial factors using structural equation modelling (SEM). These causal relationships among the latent variables help in developing a robust dynamic system for strategic management of productivity. The paper evolves a design methodology to integrate the various management tools and arrives at a structural methodology of using them to link to system dynamics (SD) modelling. Purview of the paper is SEM modelling results and interlinkage to SD modelling.