A business should constantly be trying to improve its
efficiency. In many markets, a business needs to be at least
as efficient as its main competitors in order to be able to
compete and survive in the long-term. A more efficient
business will produce lower cost goods than competitors and
may generate more profit possibly at lower prices.
Increasing efficiency will boost the capacity of a business,
assuming there is no change in the number of inputs
employed. The capacity of a firm refers to how much a
business can produce during a specific period of time.
Where a business has efficient production, it is operating at
maximum output at minimum cost per unit of output.
Efficiency is, therefore, a measure of how well the
production or transformation process is performing.
However, this is not always easy to assess.
There are several ways to measure efficiency
This measures the relationship between inputs into the
production process and the resultant outputs.
The most commonly used measure is labour productivity,
which is measured by output per worker.
For example, assume a sofa manufacturer makes 100 sofas a
month and employs 25 workers. The labour productivity is 4
sofas per person per month.
There are several other measures of productivity.
Output per hour / day / week
Output per machine
Unit cost (also referred to as cost per unit) divides total costs
by the number of units produced. A falling ratio would
indicate that efficiency was improving.
Unit costs = Total Costs / Units of output
A business will have set itself a target stock level of finished
goods that it should achieve.
This is calculated to satisfy the demand expected by the
marketing department plans and based on what the
production department thinks they can produce.
If the stock level falls below this level then the productive
efficiency has reduced since the output per worker has not
met the planned requirements.
Non-productive (“idle”) resources
Which resources are not in constant use in the business? Are
employees often left with nothing to do? Are machines only
used for part of available time? Too many idle resources are a
common sign of inefficiency in production.
There are many measures of poor quality – any of which could
indicate a problem with efficiency:
Rejected finished goods identified by the quality control
Customer returns of defective goods
Strategies to Improve Efficiency
There are several ways a business can try to improve
Train the workforce
Training the workforce in order to give them more skills or
knowledge is clearly a cost to firms. They will often have to
pay experts to train employees and will also lose the
productive time of employees whilst they are training.
However this increase in cost should be more than offset in
the long term by improvements in the workers productivity
levels. This is because training should enable workers to work
more quickly and more accurately (produce better quality
A better-motivated workforce will work harder and take pride
in their work. This should increase the speed of production
and also improve the quality of products that are being
produced. There are many different financial (e.g. bonuses)
and non-financial ways (e.g. empowerment) for businesses to
motivate their workers.
More capital equipment
Investment into new, higher technological machinery can
have a number of advantages.
Longer hours can be worked
Increased speed of production (machine can perform
repetitive and complicated tasks more quickly)
Increased accuracy and therefore less wastage
Use better quality raw materials
This can reduce the amount of time wasted on rejected or
defective products. A business should ensure they find the
supplier who can supply the best quality resources, but at a
competitive price and also with reliable delivery.
Improvements in efficiency are not that easy to obtain.
For instance managers may find workers resistant to changes
such as introducing new machinery or new working practices.
This is because workers fear that changes will lead to
It can also take a long time for any new strategies to feed
through into the form of increased efficiency.
In addition, there can be a conflict between productivity and
quality. Increasing productivity by its nature implies
increasing the speed of production, and if managers are not
careful this can mean that workers focus solely on quantity
and not the quality of their work.