What is efficiency? Definition and meaning

Efficiency looks at what is currently being produced and compares that with what could be achieved with the existing consumption of resources, i.e. labor, time, money, machinery, etc. It is one of the main factors when determining productivity – however, productivity focuses on quantity while efficiency is all about quality and eliminating wastefulness. It signifies a level of performance that describes a process that utilizes the minimum of inputs to create the greatest amounts of output, i.e. getting more out of less.

Put simply, efficiency is the ability – often measurable – to avoid wasting energy, money, efforts, materials and time in doing something or in producing a desired result. The ability to do things flawlessly and without waste – the ability to do them well.

Efficiency is all about making the best possible use of available resources. Efficient companies maximize outputs from given inputs, thus minimizing their costs. When a company’s efficiency improves, its costs are reduced and its competitiveness enhanced, as long as the focus is also on productivity.

Dictionary.com has the following definition for ‘efficiency’:

“1. The state or quality of being efficient, or able to accomplish something with the least waste of time and effort; competency in performance. 2. Accomplishment of or ability to accomplish a job with a minimum expenditure of time and effort.”

Efficiency versus productivity

In its simplest form, the difference between productivity and efficiency is the difference between quantity and quality. Achieving 100% quality at maximum production levels is not always possible.

Companies need to find the right combination of efficiency and productivity in order to optimize output while at the same time minimizing waste.

  • Productivity

Productivity is commonly measured as output during comparable periods – production per minute, hour, day, week, etc. For example, if a worker produces 100 shirts in one week, and then 110 shirts the following week, his or her productivity has increased by 10%.

Productive efficiency is all about making products and delivering services with the optimal combination of inputs to produce the maximum output for the lowest cost. It is a level at which the economy can no longer produce more goods without reducing production levels of another good.
  • Efficiency

Efficiency looks at the quality of the work done, which usually includes creating output with less waste, spending less money and fewer resources.

Sometimes efficiency is more desirable than productivity. For example, imagine two people, Judith and Bob, they both sell industrial valves. Bob sells valves worth $20,000 each week, and claims $3,000 on business expenses. He visits customers, takes them out for lunch, arranges expositions, rents venues, contracts specialized speakers, etc.

Judith only sells valves worth $21,000 each week. However, she does all this over the telephone, never leaving her desk. Her expenses are less than $50.

While Bob’s productivity – output per employee – is higher, Judith is more efficient, she wastes less money. Judith is making more money for her company.

Bill Gates efficiency quote
Bill Gates, co-founder of Microsoft, which became the largest PC software company in the world, once said: “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency.” (Image: twitter.com/BillGates)

How can efficiency be associated with quality? Efficiency is linked to the amount of waste – the less waste there is, the more efficient a company or employee is. If John Doe Ltd. produces 1,000 valves each week with 100 employees and Mary Smith Inc. produces 1,100 valves each week with 100 workers, Mary Smith Inc. has clearly got superior productivity.

However, if Mary Smith produces 200 faulty valves each week compared to John Doe’s 20, John Doe is more efficient – John Doe ends each week with 980 valves of good quality that can be sold compared to Mary Smith’s 900.

Balancing efficiency with productivity

Sometimes focusing too much on productivity – paying commissions and bonuses on amounts sold or produced – may be at the risk of quality. When people try too hard to boost productivity, they may become less careful.

Aldous Huxley efficiency quote
Aldous Huxley (1894-1963), a British writer, philosopher, and prominent member of the Huxley Family, once said: “The worst enemy of life, freedom and the common decencies is total anarchy; their second worst enemy is total efficiency.” (Image: mmlafleur.com)

If your greater quality output outweighs the number of problems you have, then that might not be a bad thing.

For example, if you push hard for a steep increase in output, the number of defects and returns may rise by 10%. However, if operating at that rate means that the increase in the production of quality units is worth it, then productivity is a good thing.

Over-concentration on efficiency can undermine worker productivity to such an extent that they become too frightened of making mistakes and work at a snail’s pace to make sure things never go wrong. However, this results in an exponential decline in productivity, which is not good for any business.

Two Educational Videos

These two YouTube videos come from our sister channel, Marketing Business Network or MBN. They explain what the terms “Efficiency” and “Productivity” mean using easy-to-understand language and examples:

  • What is Efficiency?

  • What is Productivity?