Productivity vs Efficiency. What is more valuable?

Productivity vs Efficiency. What is more valuable

In the race to be successful, a business sooner than later finds itself negotiating concepts like productivity and efficiency. It understands that in order to better its market performance, it needs to increase both but in the daily chaos of efforts, the words are strewn about so indiscriminately till no one can really figure out which means what. Here is then a brief guide on what productivity and efficiency mean, the differences between the two and finally how each has its place in a successful venture.

What is Productivity?

To start with, every business or organization works with three major performance factors – utilization of resources, efficiency and productivity. Productivity is at its simplest the ratio of produced outputs to inputs that go into production. it can be measured by calculating the quantity of the output divided by that of the inputs like raw materials, human labour, capital, money and so on.

 

Image source: Eapo Tokyo

 

And yet things are not so simple after all. Researchers have pointed out the danger of equating productivity to volume of output. In other words simply a higher yield does not inevitably mean higher productivity. For example if a farmer produces 5 tonnes or mushy, insect-ridden vegetables, his productivity cannot be said to be higher than 3 tonnes of firm, glossy vegetables produced by another. Likewise in the digital world, a company can churn out 150 widgets in an hour but if no one is buying or using them, its productivity is questionable as compared to another company that produces fewer number of widgets but garners higher number of users and customers.

What is Efficiency?

In order to avoid wastage incurred from possible scenarios as above, businesses pay more attention to the concept of efficiency. This can be understood as maximization of production of quality products with limited inputs like capital, money, raw materials, labour and others. It can be calculated as the ratio of actual productivity to standard productivity. Efficiency indicates how well a firm can attain its objective like producing goods or services with the minimum costs. Thus efficient firms are often identified as those which have been successful in producing better output with lower costs.

 

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Differences Between Productivity and Efficiency

To crystallize the differences between productivity and efficiency:

  • Productivity indicates the rate of the production of output – thus the more number of goods and services produced by a business in a given time period, the higher its productivity. Efficiency on the other hand means the optimization of resources like time, human energy, raw materials in such a way that there is minimum wastage with maximum production.
  • Productivity as its simplest can be measured as a ratio of output to inputs while efficiency can be calculated as the comparison of actual output to standardized output.
  • While productivity focuses on the amount or volume of output, efficiency can lead to greater quality of output.

Which is more Important?

Once the concepts of productivity and efficiency as well as the mutual differences are understood, it will become clear that each has its place in the production process. However business often end up prioritizing one over the other in their road to goal achievement. For example a business may be so focused on increasing productivity that it loses sight of the value of what is being produced. Two examples above have already illustrated this. Again higher productivity can be achieved while using more expensive resources but this result in lower profits for the business. To continue with the farming example, the first farmer may produce four tonnes of vegetables of the same quality as the other’s three but if that extra tonne was the result of expensive fertilizers and seeds, the first farmer’s profits are compromised. Finally researchers have also pointed out that productivity isn’t too helpful when considering factors like machinery that are unlikely to change over time.

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