How to Distinguish between Efficiency and Productivity
Efficiency measures how little waste is created when producing and selling a product. Productivity, on the other hand, considers how to maximize sales and profits while using as few assets as possible. The difference between efficiency and productivity? Efficiency tries to reduce waste, while productivity tries to use assets to generate more revenues and net income.
Do you know the legend of the goose that lays golden eggs? As the story goes, a farmer buys an ordinary goose, only to discover that his new purchase lays a solid, 24-karat gold egg every morning. Before long, his golden eggs make him rich.
A goose that lays golden eggs would be a paragon of productivity. Normally, to produce gold you need to find and buy a gold mine, hire miners, and then refine whatever ore the miners find. That setup requires large investments of capital and a lot of work; that’s a lot more assets than a small animal that can reliably produce the same output.
Businesses prize productivity because assets, which are necessary to make and sell goods, don’t come free. Companies must pay for them, either by borrowing money or by raising money from stockholders. Accordingly, although companies must push to increase revenues and decrease expenses, they also need to minimize their assets so they can produce and sell more while using as few assets as possible.
This fact is one reason why bricks-and-mortar businesses have so much trouble competing against Internet retailers. Bricks-and-mortar businesses must buy and maintain stores, investing in inventory and paying many employees. They can hardly compete against an Internet start-up run by some kid in his garage who has almost no assets to maintain or pay for.