The term productivity can be used to examine efficiency and effectiveness of any activity conducted in an economy, business, government or by individuals. For example, learning or studying methods used by students that include reading and/or writing the content of a topic and revising the topic by saying out aloud or rewriting. The efficiency and effectiveness of the studying methods can be determined by the marks obtained by a student during exams. The marks obtained could be considered as a tangible result. Whether the student has understood the topic may however, not be reflective of the marks obtained during exams. Nevertheless, a student can evaluate an appropriate studying method that enables good marks as well as develop proper understanding of a topic and continuously strive towards improvement in studies. In the context of the real world, productivity is mostly examined and evaluated with reference to businesses or an economy. Accordingly, it is essential to study productivity in order to:-
- Understand the processes of a business
- Control the business processes
- Continuously improve processes
- Assess performance of a business
- Determine a business’ ability to sustain in the long-run
According to the Organisation of Economic Co-operation and Development (OECD), productivity can be defined as the ratio of a volume measure of output to a volume measure of input use. The definition can be also explained through the following equation:
Productivity = Output / Input, wherein ‘Output’ refers to anything generated from production or provided through services and ‘Input’ refers to any one or more resources utilized to create the output. The definition implies that productivity is related to efficient utilization of one or more input resources used for producing required output. Production is different from productivity, wherein production is related to the activity of manufacturing or distributing goods or services that converts the input into output and should not be considered synonymous to productivity.
Productivity is also confused with terms like efficiency and effectiveness and these terms are wrongly considered synonymous to productivity. Efficiency and effectiveness are two different terms such that efficiency indicates how well the resources are utilized to accomplish a result. Alternatively, effectiveness refers to the degree of accomplishing the objectives. To understand productivity, efficiency and effectiveness consider a manufacturing company – Britannia Industries representing the foods and beverages industry and producing bourbon biscuits. The business process of Britannia Industries can be studied by evaluating the 1) Basic requirements; 2) operational requirement and; 3) Output derived from manufacturing bourbon biscuits.
1) Basic requirements include:
Raw materials – Flour, cocoa, cream, sugar, salt, water, etc
Machinery – Oven, moulder, mixers, etc
Human resources – Workers, managers, top management
Finance – Self-financed, banks, public investors, private investors
Other inputs – water, energy, electricity, infrastructure
2) Operational requirements include:
Organization – Its structure, size, location, etc
Product mix – Bourbon biscuits packaged in 70 grams and 167 grams
Management – decisions and decision- makers, etc
Level of technology – Technology as per industry or global standards
Utilization of machines – This refers to the extent of actual use of machines with regards to time and sometimes cost
Plant utilization – This refers to the extent of actual use of the installed productive capacity of a plant. It is an indicator of how efficiently does a business utilize their factors of production to produce the required output
3) Output includes:
Units – Number or weight of biscuits produced for use or consumption (includes inventories)
Value – market price of production (includes inventories), gross income or sales
Efficiency, effectiveness and productivity for Britannia Industries can be evaluated in the following manner. The basic requirements for Britannia Industries are the inputs considered for producing Bourbon biscuits and the proper use of these inputs to obtain better output (and quality is assumed) is known as efficiency. The operational requirement of Britannia industries represents the proper use of systems and tools of doing things suitably and continuous improvement processes reflects the effectiveness. The addition or efficiency and effectiveness leads to output which is considered reflective of quality or optimum utilization of inputs and business processes or productivity.
Efficiency, effectiveness and productivity can also be evaluated for businesses in service sector (Please refer to the Lecture 1 slides for Flipkart example). Productivity however, is broadly evaluated mostly through service volume, delivery processes and customer-perceived quality in services offered.
The study on productivity has been mainly focused on the manufacturing sector. However, in recent years, productivity has been explored in the service sector as well. The methods for measuring productivity are mostly different for the manufacturing and service sectors, though, one of the common prerequisite for measuring productivity is, understanding the business processes in the sector.