Relationship between corporate profitability and measurement of organizational capability in manufacturing companies

Using the “7M + R&D Approach”

Abstract

This paper presents the “7M + R&D Approach” as a perspective for measuring organizational capability in manufacturing companies and examines the relationship with return on assets (ROA), an indicator of corporate profitability. The 7M + R&D Approach is defined as the evaluation of manufacturing companies’ organizational capability using eight items as important measures of organizational competitiveness: Manpower, Machines, Materials, Methods, Markets, Money, Management, and R&D. The sum of the eight items is defined as the manufacturer’s organizational capability (MOC) indicator. Using the 7M + R&D Approach, interviews were conducted at manufacturing sites in 16 Japanese companies, and MOC, along with the ROA for that fiscal year, were calculated for each company. After obtaining a Spearman’s rank correlation coefficient, a positive relationship equal to p = 0.76 was found between the respective MOC and ROAs. The high and low values for the MOC of these companies correlated with high and low values for the ROA. Therefore, a company’s MOC should be developed to increase its ROA. In other words, with an improvement in one or all of the elements of 7M + R&D that comprise MOC, one can expect a corresponding improvement in ROA. This approach can be used by company managers and consultants desiring to increase the profitability of manufacturing companies as a guideline for prioritizing which of the 7M + R&D items should be improved.