ME/U1 Topic 6 Utility Analysis
Utility analysis is a quantitative method that estimates the dollar value of benefits generated by an intervention based on the improvement it produces in worker productivity. Utility analysis provides managers information they can use to evaluate the financial impact of an intervention, including computing a return on their investment in implementing it.
Utility analysis, a subset of consumer demand theory, provides insight into an understanding of market demand and forms a cornerstone of modern microeconomics. In particular, this analysis investigates consumer behavior, especially market purchases, is based on the satisfaction of wants and needs (that is, utility) generated from the consumption of a good.
Utility analysis is primarily taught in introductory courses. A more sophisticated version of consumer demand theory relies on the analysis of indifference curves and is more commonly found at the intermediate course level and above.
- The first assumption of utility analysis is that human performers generate results that have monetary value to the organizations that employ them. This assumption is also the basis on which people claim compensation for the work they do.
- The second assumption of utility analysis is that human performers differ in the degree to which they produce results even when they hold the same position and operate within like circumstances. Thus, salespersons selling the same product line at the same store on the same shift will show a variation in success over time with a few doing extraordinarily well, a few doing unusually poorly, and most selling around the average amount for all salespersons. This assumption is broadly supported in common experience and in research. It is, for example, the basis on which some performers demand and receive premium compensation.
The direct implication of these assumptions is that the level of results produced by performers in their jobs have different monetary consequences for the organizations that employ them. Performers are differentially productive and the productivity of performers tends to be distributed normally.
What Is Needed to Complete a Utility Analysis?
In completing the analysis, the performer needs to generate the following:6
- A method for measuring role productivity,
- A way to assign monetary value to role productivity,
- The distribution of productivity among performers of the role,
- The dollar value of a one standard deviation difference in role productivity (SD$), and
- A method to measure the intervention’s impact on role productivity.