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Australian Defence Industry Productivity

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Australian Defence Industry Productivity School of Business (Australian Defence Force Academy Campus) University of New South Wales Australian Defence Industry Productivity Benjamin Edward Wright This thesis is submitted for the Degree of Master of Philosophy (MPhil) November 2011 Originality Statement I hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and linguistic expression is acknowledged. Signed …………………………………………….............. Date …………………………………………….............. 2 Copyright Statement ‘I hereby grant the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or part in the University libraries in all form of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all proprietary rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350 word abstract of my thesis in Dissertation Abstract International (this is applicable to doctoral theses only). I have either used no substantial portions of copyright material in my thesis or I have obtained permission to use copyright material; where permission has not been granted I have applied/will apply for a partial restrictions of the digital copy of my thesis or dissertation.’ Signed …………………………………………….............. Date …………………………………………….............. Authenticity Statement ‘I certify that the library deposit digital copy is a direct equivalent of the final officially approved version of my thesis. NO emendation of content has occurred and if there are any minor variations in formatting, they are a result of the conversion to digital format.’ Signed …………………………………………….............. Date …………………………………………….............. 3 Abstract Since 2001 the Australian Government has applied increasing pressure to the Department of Defence to find efficiency savings in its ongoing business operation. During the early 2000s the savings required by the Australian Government in the operational costs of the Department of Defence were fixed amounts and realised primarily through the reduction of administrative overheads and the early retirement of specific military platforms1 such as two of the guided missile frigates (Defence 2008). In 2005 the Australian Government introduced to specific parts of the Department of Defence budget the concept of an efficiency dividend, which required an ongoing percentage of budgetary funds to be returned to the Australian Government in the form of savings. Between 2005 and 2011, as the size and scope of the efficiency dividend increased, the Department of Defence has been required to develop initiatives internally and externally to meet its savings commitments to the Government. One of the initiatives under investigation is ensuring that the productivity benefits generated by the Australian defence industry are distributed equitably to the Department of Defence in its role as sole consumer of defence industry goods and services. Using an index number approach, this study empirically measures the changes in the productivity of the Australian defence industry during the period 2001 to 2009. In addition, the study compares changes in defence industry productivity with changes in defence industry profits, defence industry employee wages, the quality of service being provided by the defence industry, and the level of competition in the defence industry marketplace, to determine how any productivity benefits are being distributed. This study finds that during the period of interest, the defence industry experienced an increase in both multifactor and labour productivity. The study finds evidence to suggest that changes in defence industry productivity have an effect on both the profitability and performance measures calculated for the defence industry but have no obvious direct relationship with changes in defence industry employee wages. The study also finds evidence to suggest that even small changes in the level of competition within the defence industry market can potentially influence changes in defence industry productivity. 1 A platform refers to a military asset such as a ship, plane or vehicle. 4 Table of contents Originality Statement.............................................................................................................2 Copyright Statement..............................................................................................................3 Authenticity Statement..........................................................................................................3 Abstract..................................................................................................................................4 Table of contents ...................................................................................................................5 List of charts...........................................................................................................................9 List of figures........................................................................................................................12 List of tables .........................................................................................................................13 Chapter 1 : Introduction.......................................................................................................15 Background ............................................................................................................................. 15 Objectives of the research ...................................................................................................... 16 Significance of the research.................................................................................................... 16 Thesis organisation ................................................................................................................. 16 Australian defence industry classification .............................................................................. 17 Defence industry market characteristics ................................................................................ 19 Chapter 2 : Literature review – productivity measurement ..................................................23 Productivity concepts ............................................................................................................. 23 Productivity benefits............................................................................................................24 Productivity and efficiency...................................................................................................25 Measures of productivity........................................................................................................ 26 Measurement variables .......................................................................................................... 27 Measures of output .............................................................................................................27 Measures of input................................................................................................................29 Methods of productivity measurement.................................................................................. 31 Index number approach.......................................................................................................31 Stochastic frontier approach ...............................................................................................32 Data envelopment analysis approach..................................................................................34 Comparison of methods.......................................................................................................... 37 Chapter summary ................................................................................................................... 38 Chapter 3 : Literature review – productivity distribution......................................................39 Productivity benefits distribution ........................................................................................... 39 Defence industry firms............................................................................................................ 40 5 Profitability of defence industry firms .................................................................................40 Measuring profitability ........................................................................................................42 Defence industry employees .................................................................................................. 44 Wages and productivity .......................................................................................................44
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