What is Efficiency?

Efficiency measures the level of performance achieved against a standard. A high level of efficiency generates the highest possible amount of outputs with the smallest amount of inputs. An efficient process typically contains the minimal amount of wasted labor, materials, energy, and processing time. Highly efficient processes tend to be those that deal with high volumes, since a business is more likely to benefit from improvements in these areas.

When to Focus on Efficiency

A business that focuses intently on efficiency is more likely to be competing in the marketplace as the lowest-cost producer, though efficiency improvements can enhance profits under any type of strategy. As the lowest-cost producer, a business can undercut the prices being charged by its competitors while still earning a profit. If the low-cost producer charges very low prices, it may be able to drive its competitors out of the market, unless they can protect themselves by focusing on niche markets where customers are willing to pay extra for the goods and services being provided.

Disadvantages of Efficiency

A business can find itself in trouble if it pursues efficiency to an excessive extent, taking the focus of management attention away from the effectiveness of the overall corporate direction. It is also not a useful focus when a business produces one-of-a-kind products, since it is difficult to enhance a process that may only be conducted one time.