Productivity improvement: Efficiency approach vs effectiveness approach

Abstract

Traditionally, raising the level of technology is considered the most effective way to improve productivity. Nevertheless, without the support of sound management systems, the contribution of technology to productivity is limited. In a sample of fifteen machinery firms, this paper calculates three indices for automation technology, production management, and productivity, respectively, to represent their levels of achievement. By using technology and management as the explanatory variables, a piecewise linear productivity frontier is constructed by applying a data envelopment analysis approach. At a given combination of the levels of technology and management, a firm may not be able to achieve the expected maximum productivity due to inefficient utilization of the input factors. One approach, the efficiency approach, for improving productivity which does not require the consumption of extra resources is to efficiently utilize the input factors. Another approach, the effectiveness approach, is to adjust the levels of technology and management toward the best combination to accomplish the highest productivity. Based on the productivity frontier constructed from the surveyed firms, the two approaches for improving productivity are discussed.