Effectiveness or Efficiency?
I’ve seen a couple of articles lately that compare effectiveness and efficiency in a way that misrepresents their differences and suggests they are somehow co-dependent. While these terms are tossed around loosely, they are not well understood. I would like to use this article to clarify the meaning of each and how they impact organization performance.
Effectiveness measures the extent to which an organization delights its customer. Customer delight is based upon several considerations, but begins with the customer’s value proposition.
The value proposition is defined by 1) the customer, 2) their problem, want or need, 3) the solution that solves their problem, or fulfills their want or need, and 4) the customer’s perception of the benefit they derive from the solution.
Without a winning value proposition, there can be no organization.
So the first question of effectiveness is this,
“To what extent does your value proposition solve the customer’s problem or fulfill their want or need?"
Having established the organization’s target value proposition, the next consideration is to define the characteristics of that target. This is accomplished by developing a Customer Value Model, which specifies value proposition characteristics on four essential dimensions.
Solutions defines target specifications of the products and services the organization provides to solve customer problems or fulfill customer wants or needs.
Responsiveness defines target specifications for the response time on all customer interactions.
Relationship defines target specifications of the customer service provided in support of organization solutions.
Value defines target specifications for the customer’s total cost of ownership versus their perceived benefit.
As you can see, the value proposition encompasses a broad range of characteristics that substantially influence the customer’s satisfaction with the relationship.
So the second question of effectiveness is this,
“To what extent does your organization meet the target value proposition specified by the Customer Value Model?”
To sum the effectiveness criteria,
- To what extent does your organization offer a target value proposition that customers desire?
- To what extent does your organization deliver that target?
In general, the organization that offers a winning value proposition delivered as specified is more effective.
Efficiency measures relative assets used and materials consumed to deliver the value proposition. Assets include money, people, equipment, information technology, inventory, and facilities. Materials are the inputs that processes transform into outputs.
While efficiency can be measured many ways, asset efficiency is measured as the products and services produced relative to the assets required for that production. Fewer assets required are more efficient.
Materials efficiency is measured as the input volume required to transform material into a unit of output relative to the material lost in the transformation.
In general, the organization that uses less assets and wastes less materials is more efficient.
Effectiveness vs Efficiency Applied
The important point is this,
“Efficiency and Effectiveness have nothing to do with one another!”
1. If an organization is effective but not efficient, customers will be happy but costs will be higher.
2. If an organization is efficient but not effective, customers will be unhappy but costs will be lower.
3. If an organization is neither effective nor efficient, customers will go elsewhere and costs won't matter.
4. If an organization is both effective and efficient, customers will flock to the organization and profits will be high.