Efficiency and effectiveness

Efficiency is producing output at the highest ratio of output to input.

It is measured by productivity

Effectiveness is meeting the objectives of the enterprise by using inputs productively to meet consumer
needs.

It is achieved if consumer needs are met.

Effectiveness is meeting objectives rather than being efficient.

Eg we may achieve highest levels of productivity over producing an old model bicycle we have been
producing for the past 25 years, obviously the sales of our bicycle would be very low and stocks of it
would pile in our factory warehouse. This is not effectiveness because wasting resources.

Effectiveness is meeting objectives and customer needs profitably both in the short-term and long-term.

It is not about wasting resources, but putting them to use to achieve the objective of the business.

Labour intensity and capital intensity

Firms can be described as being labour intensive of capital intensive.

Labour intensity is the involvement if more labour input than capital input in the production of output.

Capital intensity is the involvement of more capital inputs than labour inputs in the production of output.

A business may choose between the two or may be forced by some factors to resort to one eg lack of
finances may compel a firm to be labour intensive.

Market advantage may make a business make hand made products because that is what the customers
want.

Nature of the product and its production process won’t allow hand production but rather machinery eg
electricity generation.

A company may choose to employ both.

The idea of profitability will also influence the choice.

The objective of every firm is to produce at the lowest possible unit cost.

Advantage of labour intensity

Useful in job production where customer specification is high.

The firm can charge high price for producing what customers want.
There is less competition as most of the production is based on talent.
Disadvantages of labour intensity
Low unit production so that demand may not be met.
High labour cost as more people need to be employed to increase production.
Advantages of capital intensity

High productivity and low unit cost.

High levels of production to meet demand.
Appropriate for flow production. Economies of scale
Disadvantages

High fixed costs.

High maintenance costs.
Pace of technological advancement can quickly render the latest production equipment obsolete and relatively
inefficient.
Which approach to choose?

It depends on:

Nature of product and product image that the firm wishes to establish.
The cost of the approach to be used
The size of the firm and its ability to afford the equipment.