Efficiency, effectiveness and productivity are closely related concept which could be easily be confused with each other.
To begin with let us define each of these concepts in simple terms.
Efficiency is a ration of output to input, generally expressed as percentage. In any process we use some inputs that is converted as useful out put. But during the processing part of the inputs may be wasted. For example, an automobile runs using the energy that is contained in the fuel such as petrol or diesel used. However not all of the energy in the fuel is converted in useful output in form of distance travelled and load carried. Part of the energy in the fuel is lost in overcoming friction of the moving parts of the automobile. Also some energy is lost in the form of hot exhaust gases. Thus we can improve efficiency by reducing the waste. We concentrate on efficiency when our objective is to reduce waste.
Productivity appears to be very much similar to efficiency, but there is a subtle difference. Productivity is defined as output per unit of input, For example we may measure annual energy production of a power plant per employee working in the plant. The difference between efficiency and productivity is that in efficiency we are measuring outputs solely in terms of the inputs employed. To appreciate the difference between the two let us consider two different shoe manufacturing plants. One of these plants is highly automated while the other one uses primarily manual method. The automated plant is likely have much higher production per labour employed than the production per employee in the manual factory. So we can say that the automated factory has higher labour productivity than the manual factory. But this does not mean that the labour efficiency of automated factory is necessarily higher than that of manual factory. The higher productivity is substantially influenced by other inputs like degree of automation in addition to the efforts or efficiency of people employed. We we can improve productivity by increasing the total output, even if it involves higher waste. We concentrate on productivity when our objective is to increase the total output.
Effectiveness refers to the extent of achievement of objectives. These objectives may be to reduce weight, to improve output, or other desired result. For example, although all companies are interested in improving their profits, but in short-term some companies may decide to increase their market share even if it means some measures that reduce profit in short term. While this company is pursuing its goal of growth, it need to measure its effectiveness in terms of market growth also, rather tan just profits in the short term.
In business it is most important to be clear on objectives of the business and focus on achievement of those objectives. Therefore managers need to always make efforts to define, monitor, measure and control the effectiveness.