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4.1 Production of goods and services

The meaning of production

Managing resources effectively

As mentioned in section 4.1.0 (/study/app/2025-igcse-business-studies-ig1/sid-181-cid-
251207/book/the-big-picture-id-27961), production is the creation of a product or the
delivery of a service that satisfies the consumers’ needs or wants (see section 1.1.1a
(/study/app/2025-igcse-business-studies-ig1/sid-181-cid-251207/book/the-purpose-and-
nature-of-business-activity-2-id-28474)). The company must organise all available
resources such as land, labour, capital and enterprise to create a product or a service.
These resources are also called inputs . By organising the different inputs in a specific
way, the company creates added value ; that is, the cost of inputs (such as components
or materials) is lower than the value of the final product.

Figure 1. Inputs within the production process.

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Successful businesses combine these in an efficient way, so that costs are low and
profits are high. Businesses use more labour in places where wages are low, such as in
developing countries, and this is called labour-intensive production. In developed
countries where wages are high, businesses use more technology such as machines and
robots, and this is called capital-intensive production.

Difference between production and

productivity
Production is the process organised by the operations department. This department can
take different forms depending on the size of the business.

Larger manufacturing companies will have a number of managers who will be

responsible for different functions within the department, for example a factory manager
will monitor the production process on the factory floor. In a retail business, shop
managers will be responsible for the sale of products and updating the inventory (stock).
In a service business, such as a hotel chain, the managers will be in charge of the service
quality and delivering this to the customers.

Productivity is different from production. Production is the level of output as a result of

the production process. Productivity measures how efficient the production process is:

Productivity = quantity of outputs / quantity of inputs

For example, the productivity of labour (work completed by employees) as a factor of

production can be calculated by this formula:

Labour productivity = outputs (over a period of time) / number of employees

Activity
A local Italian restaurant serves an average of 120 customers per day. The owner of
the restaurant decided to send the restaurant staff on an intensive training course.
After the training course, the following changes occurred.

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 Befo Numbe Output
re r of per
train After employ employ
Output ing training ees ee

Meals cooked 120 150 2 chefs

Meals served/day 120 150 3

on average waiters

How, and why, has the productivity of the restaurant staff changed after the
training? Complete the table to help justify your answer.

Methods and benefits of improving

productivity
Improved productivity leads to greater efficiency in using resources, lowering costs and
making businesses more competitive. Productive businesses will be able to survive and
thrive.

The following are some benefits of improved productivity for a business.

Less material and equipment needed for production reduces

business costs.
Automation and fewer employees reduces wage costs for the
business.
Reducing average costs helps the business become more
competitive by lowering prices on the market.
Fewer employees could lead to higher wages, increasing
motivation and further increasing productivity.

There are two principles that can improve productivity:

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 1. Producing more with the same materials and labour – For
example, if a waiter in a restaurant has additional training and
now serves 12 customers per hour instead of the 10 served
before, this means that the labour productivity of the waiter has
improved after training.
2. Producing the same quantity with fewer materials and less
labour – For example, if the introduction of lean production (see
section 4.1.2 (/study/app/2025-igcse-business-studies-ig1/sid-
181-cid-251207/book/why-businesses-hold-inventories-id-
27963)) in a shoe factory made it possible to produce the same
amount of shoes per month with 10% fewer materials, this means
that the productivity has been increased due to the removal of
wasteful production practices.

Here are some other ways in which the above principles can be applied:

Using the available resources in a more efficient way (principle

1)
Choosing the most suitable layout of machines in a factory so
that there is less movement and therefore less wasted time
(principles 1 and 2)
Training employees to improve their skills and increase
motivation (principle 1)
Introducing automated production processes (principle 2)

Activity
A car factory has recruited more employees over the last few years. Output has
increased and the board of directors considers it a good thing for the business.

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 Outpu Number of Output per
Year t employees employee

2016 10 000 100

2017 15 000 120

2018 20 000 130

Questions

1. Do you agree that productivity has improved? Complete the table to help
justify your answer.
2. Suggest two other ways in which the productivity of the car factory could be
improved.
3. How could the business measure the output of the administration employees
in the factory?

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