Exploring the relationship between efficiency and profitability

Purpose – This paper aims to identify the relationship between efficiency and profitability by using data from Greek meat processing companies over the period 1994‐2007. Design/methodology/approach – The relationship of efficiency and profitability is studied, by applying a new performance decomposition model. This method is capable of making valid and consistent inferences about the performance of a two‐stage production system, as well as the main sources of inefficiencies within a company. Findings – A poor performance over the study period is observed in the sample companies. The low performance is mainly due to the low profitability. The results do not confirm the existence of a positive strong correlation between efficiency and profitability. The companies that have the capability of producing their products with the best practices are not always capable of generating the maximum profits. Practical implications – The need for the improvement of performance has two aspects: first, it is a demand for the effective use of resources, and simultaneously, it is an urgent requirement for the generation of profits. According to the study findings, the long‐term survival of firms in our sample seems to require adopting mainly profitability‐enhancing strategies. Originality/value – This paper provides one of the first evaluations of performance focusing on efficiency and profitability, by applying an innovative performance decomposition approach that has not yet been applied in Greek industries.