Increased competition has set small businesses searching for measures to improve competitiveness. Moreover, the costs of doing business, such as energy and material costs, are increasing. To address these challenges, small-business managers need to boost the productivity of their companies. However, productivity is a multifaceted concept and closely related to effectiveness and efficiency. Without a clear understanding of these concepts, efforts to boost productivity can fail.
Efficiency is an internal measure of performance for companies that shows how well the company converts inputs into outputs. The more the ratio of outputs to inputs approaches 100 percent, the better the efficiency of the process will be. In simple terms, it is “doing things right” and comes from proper harnessing of time, cost and efforts. For example, an employee can improve efficiency by developing a daily work schedule, avoiding personal phone calls and preventing distractions.
Organizational effectiveness is an external measure of performance and indicates how well an organization fulfills the demands of various organizational stakeholders. Simply put, it is “doing the right things." For example, in educational institutions, effectiveness is measured by teaching students what they need to know. Managers need to make sure that the services or products meet customers’ expectations. When analyzing a company's processes, effectiveness takes precedence over efficiency.
Productivity relates the output of goods and services of the company to the inputs of all the resources used in the production of goods and services. In other words, it measures how well a company transforms resources into products. Productivity is the combination of efficiency and effectiveness. This means that a company that only attains efficiency or effectiveness is either partially productive or not productive at all. To be productive, a company needs to be efficient and effective at the same time.
Relating efficiency and effectiveness overcomes the shortcomings of using either of them alone. If managers focus on efficiency alone, they may jeopardize the competitiveness of their company. For example, mere focus on efficiency ignores the contribution of the activity to customer value creation. Likewise, exclusive emphasis on effectiveness ignores the cost-effectiveness of the activity. Improving productivity boosts competitiveness by lowering operational costs, using resources better, increasing market share and increasing profits.