In short, efficiency means productivity. It is about the management of resources, using machinery, making people work harder, processes and people altogether.
It is important not to confuse production with productivity – productivity is not the same as the level of production (or output).
Here is the difference between productivity and efficiency: https://clockify.me/blog/managing-tasks/productivity-vs-efficiency/
What is production?
Production is the process of converting (turning) inputs in to outputs. Overall, production is an absolute measure of the quantity of output that a firm produces in a given period of time.
Production (Output) = Resources + Productivity
Level of production is the number of units produced during a time period.
What is productivity?
Productivity is a relative measure of how efficiently the inputs are changed into output. Specifically, it is the ratio of outputs to inputs in a production process during a given time period.
In other words, productivity is the rate of output of a worker or machine – number of units of output produced for every unit of input.
How to measure it?
Productivity measures the level of efficiency of inputs a business organization uses in the production process.
Specifically, productivity is a measurement of output per unit of the factor used – mainly labor and capital.
Simply, it can be measured by the number of units produced in a given period of time (the level of production). The productivity rate measures how well resources are used in the production process.
- Technical Efficiency – Output produced using the fewest possible inputs.
- Productive Efficiency – Output produced at the lowest possible cost
What determines productivity?
Productivity matters in a business because any production method relies on efficiency. There are five determinants of productivity rates including:
- Management capabilities. A firm’s productivity rate is largely dependent on the leadership skills of entrepreneurs who take business risks in the pursuit of profit. Personal motivation of entrepreneurs will allow the business to exploit new business opportunities.
- Expertise of workforce. The labor productivity rate is mainly determined by firm’s human capital – the quantity and quality of labor including: education, knowledge, skills, training and development, experience, etc.
- Technology. The capital productivity is mainly determined by availability of advanced technology that allows the firm to produce more output that is of better quality. Investment in the latest technologies helps workers to be more productive while innovation makes the commercialization of new ideas and products easier.
- Level of competition. In general, rivalry between different businesses in the marketplace can create an incentive for firms to be more productive in order to win over the competition. Without any competition, there will be lack of incentive to be efficient.
Why is improving productivity important?
The main reason for improving productivity is to increase the output by higher proportion than to increase costs in order to reduce average unit costs.
The higher the level of productivity, the lower the cost per unit produced (assuming other factors remain unchanged). High productivity means that the business has efficient production line and can provide low-cost production.
Higher productivity rates are important to businesses for the following reasons:
- Economies of scale. Using the mass production method will allow to produce higher levels of output in the same time period. This will help to reduce the Average Cost (AC) of producing each unit. These costs savings could be passed onto customers in the form of lower prices making the business more competitive around the world.
- Lower unit cost of production. Increasing productivity decreases the average cost of producing one product (the unit costs of production). Any increase in output per worker or machine will lead to a fall in unit costs. Therefore, nearly all firms are trying at all times to become more efficient, even if total production is not increasing. In competitive markets, this could give firms a crucial advantage to compete on price.
- Improved competitiveness. More productive, can compete more effectively on the international scale thanks to both economies of scale and low unit cost of production. This competitive advantage is typically required to become the market leader in a certain industry.
- Higher profits. Higher productivity rates are a reliable source of cost savings which lead to higher profits for businesses. Cost savings from the higher productivity rate can also help businesses to gain greater profit margins on each product sold.
- Business growth. Higher profits can be both reinvested back into the business to fund business growth – attracting better workers, developing and launching new products, expanding operations by opening more shops, etc. Thanks to the combined benefits of these factors, the firm can increase its productive capacity.
Reasons for decreasing productivity
In the pursuit of achieving a high productivity, the following things can happen that will negatively impact productivity rates:
- Machine break downs causing production process to stop unexpectedly.
- Unnecessary stress imposed on workers which can cause a decrease in quality
- Demotivated workforce hence slow work.
- Supply chain disruptions caused by bad weather, natural disasters, health epidemics, etc.
Does raising productivity guarantee business success?
Increasing productivity does not guarantee business success at all. Here are the reasons why:
- Poor product. No matter how high productivity levels in your business are, if your firm’s products are not popular with customers, you will not be able to sell them profitably, nor survive in the long term.
- Higher demand for wages. While greater effort from workers could increase productivity, it could also lead to much higher wage demands from them. If reaching a high productivity rate in this way actually costs a business more money, it will increase unit costs after all. Hence, the productivity gains will not achieve their goal.
- Fear of job losses. When the business achieves great improvements in labor productivity, workers may be afraid of losing their jobs. They may find themselves without the job after being replaced by the machines.
Overall, the higher the labor productivity rate, the more productive the workers are in a business. And, the higher the capital productivity rate, the more productive the use of capital is, mainly machinery.
