Business Studies

Efficiency

Efficiency, productivity and competitiveness are linked. Better productivity means increased efficiency which results in a higher level of competitiveness.

Efficiency and productivity

Efficiency is about making the best possible use of resources. Efficient firms maximise outputs from given inputs, and so minimise their costs. By improving efficiency a business can reduce its costs and improve its competitiveness.

There is a difference between production and productivity. Production is the total amount made by a business in a given time period. Productivity measures how much each employee makes over a period of time. It is calculated by dividing total output by the number of workers. If a factory employing 50 staff produces 1000 tables a day, then the productivity of each worker is:

1,000 tables/50 staff = 20 tables

Graph showing different output efficiencies

Graph showing staff efficiency

An increase in productivity from 20 tables to 25 tables, without any increase in costs, means the firm has improved efficiency. The resultant lower unit costs increase profit margins.

Staff productivity depends on their skill, the quality of machines available and effective management. Productivity can be improved through training, investment in equipment and better management of staff. Training and investment cost money in the short term, but can raise long-term productivity.

Other methods of cutting costs

As well as improving productivity, a business can cut costs by:

The bright lights of Times Square in New York at night

Reducing electricity usage can lower overheads

  • Reducing overheads such as administration, eg making some support staff redundant. Customer service may suffer as a result of this.
  • Relocation to countries where staff with appropriate skills can be hired at lower wages.
  • Improving management so staff are motivated to work harder, or are better used.
  • Redesigning the product so an item is easier and cheaper to make.

Lean production is a set of measures that aim to reduce waste during production. Waste reduction methods, such as just in time ordering of stock, will increase efficiency.

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