3.4.3 Making operational decisions to improve performance: increasing efficiency and productivity.

Question 1

Define efficiency.

Answer 1

Output (production) is maximised from a given level of inputs.

Question 2

What is the difference between labour productivity and efficiency.

Answer 2

LP measures the efficiency of labour, whereas efficiency takes into consideration all factor inputs - labour, capital and enterprise etc aka factors of production.

Question 3

What are the benefits of high labour productivity and efficiency.

Answer 3

Efficient use of inputs - allows for production maximisation and therefore satisfying the needs of more customers.

Efficient use of inputs means fewer inputs are needed to produce a given level of output - reduces unit costs.

Lower UC - competitive advantage - can lower prices yet still maintain the same profit margin.

Consumers desire high quality - costs savings from greater efficiency can be used to improve product quality.

Comparing LP with the level of efficiency - recognise whether they should modify the balance of their inputs in order to improve overall efficiency.

High LP and efficiency - enable business to increase its appeal to stakeholders.

Greater efficiency allows for: 
- higher employee wages. 
- lower prices and or 
  improved quality to 
  consumers.
- Spend more on the local
  environment. 
- increase overall profits for
  shareholders.

Question 4

What are the different methods of increasing efficiency and labour productivity?

Answer 4

Improving the fertility of land.

Using renewable or recyclable resources.

Greater education and training of the workforce.

Increasing the level of investment in capital equipment.

Improvements in management skills and willingness to take risks by a business.

Combining the factors of production in a balanced way.

Extending the overall scale of production.

Question 5

How can improving the fertility of the land increase efficiency and LP?

Answer 5

Modern agricultural techniques enable farmers to achieve greater output per acre.

Question 6

How can using renewable or recyclable resources

increase efficiency and LP?

Answer 6

Factories designed to minimise waste and improve energy efficiency so that resources are used more effectively.

Question 7

How can greater education and training of the workforce increase efficiency and LP?

Answer 7

Lead to greater output from labour - important in the UK as the skills of the labour force are essential in allowing UK businesses to compete with countries that have lower wage levels.

Question 8

How can increasing the level of investment in capital equipment increase efficiency and LP?

Answer 8

High quality capital goods, e.g. modern machinery, can greatly enhance the efficiency of a labour force. Businesses that are able to continually update their machinery - operate more efficiently - provide goods/services that meet the ever-changing requirements of customers.

Question 9

How can improvements in management skills and willingness to take risks by a business increase efficiency and LP?

Answer 9

Factors such as production will be converted into goods and services that meet customer needs.

Question 10

How can combining the factors of production in a balanced way increase efficiency and LP?

Answer 10

Help avoid problems, such as reduced efficiency, that may arise if one factor of production is overused in comparison to the other factors.

Question 11

How can extending the overall scale of production increase efficiency and LP.

Answer 11

As a business grows larger - tends to improve both LP and efficiency - benefits that lead to these improvements are known as economies of scale.

Question 12

Define economies of scale.

Answer 12

Aka internal economies of scale.

The advantages that an organisation gains due to an increase in size - can cause an increase in efficiency (a decrease in the unit costs of production) and also tend to improve LP.

Question 13

Outline the different types of internal economies of scale.

Answer 13

Technical economies.

Specialist economies.

Purchasing economies.

Marketing economies.

Financial economies.

Research and development economies.

Social and welfare economies.

Managerial and administrative economies.

Question 14

What are the difficulties in increasing labour productivity and efficiency?

Answer 14

Fertility of the land cannot be increase indefinitely.

Many resources are not renewable - world demand increase could lead to shortages.

Education and training consumer resources, particularly time.

Increasing the level of investment diverts resources from customer goods to capital goods - consumers have fewer products available to them in the short run.

Question 15

Define diseconomies of scale.

Answer 15

Aka internal diseconomies of scale.

The disadvantages that an organisation experiences due to an increase in size.

Question 16

Outline co-ordination diseconomies.

Answer 16

• Loss of control by management as the organisation becomes more complex.
• Individuals less likely to follow organisational policies if the level of control is reduced.
• Large firms often have more rigid and inflexible policies - imposed to limit the loss of control - reduce the ability to respond quickly to changing customer needs.

Question 17

Outline communication diseconomies.

Answer 17

Too many levels of hierarchy can reduce effective communication - messages can get distorted and or not reach everyone.

More difficult to meet with subordinates as the span of control widens.

Inappropriate methods of communication are likely to be used as standardised, large scale approaches are more common.

Employees who do not receive, or are not involved in, communication may feel unvalued and demotivated.

Question 18

Outline motivation diseconomies.

Answer 18

More difficult to assess the needs of many individuals.

Less time for recognition and reward.

Create feelings of distance between decision makers and employees.

Financial wealth to provide rewards - lack management time for recognition.