Efficiency and productivity are closely related concepts and it is difficult to differentiate between the two. We can think of efficiency to be related to quality while productivity links itself to quantity. It is essential that a business finds the right balance of efficiency and productivity to minimize losses.
Efficiency is related to the quality of work. This means that to be efficient, you are looking to achieve the highest outputs with the least amount of waste. It is a ratio between the outputs generated and the inputs invested.
For example, a corporate training firm trains individuals in skills on campus and earns $100,000. The firm also incurs expenses in terms of rent, equipment, etc. Another similar firm that has incorporated a Learning management system utilizes the e-learning facility and trains individuals online also earns $100,000. This firm does not have to arrange for the venue, equipment, etc. and therefore has fewer expenses. The efficiency of the latter firm is more than that of the former because it is generating the same outputs with fewer inputs to the system.
Therefore to improve efficiency, we must try to reduce waste and increase the desired outputs.
Productivity appears to be very similar to efficiency, and although the two are used interchangeably, there is a slight difference between them. Productivity is defined as the output per unit of input. Some firms measure productivity based on time frames.
For example, a corporate training firm acquires five good corporate trainers and earns $10,000 per week in sales. Another firm has eight corporate trainers and it also earns $10,000 per week in sales. The former firm is more productive than the latter firm because the sales generated per corporate trainer in the former firm is higher.
Productivity is also linked to quantity, where you try to attain the maximum number of outputs with the least number of resources invested.
Balancing between Productivity and Efficiency
If a firm only emphasizes the quantity aspect of productivity, for example by paying bonuses on number of units produced or customers served, it is actually encouraging its employees to give up on quality. Such an approach might not be effective as it is likely to increase the number of defective products or unsatisfied customers and may cause the firm to lose its credibility.
On the other hand, if the firm emphasizes too much on the quality aspect of efficiency, the employees might have to check and recheck the products. They will be extra careful and slow in delivering the service. This will slow the production rate and your product or service could be out of the market, causing customers to shift towards a competitor in search for similar products or services.
It is therefore essential for a firm to strike a good balance between quality and quantity. The firm must not strive to compromise too much quality in exchange for quantity or vice versa to ensure minimum losses and a good profit.