Difference between efficiency and effectiveness in business

Businesses are complicated and the jargons used in the day to day running of any business are also confusing at times!

Efficiency and effectiveness are words that are, more often than not, used together in a sentence and this is true especially in business planning related to resources, output or employees.

Let us first understand what effectiveness and efficiency mean and then let us go on to see a few examples to get the distinction clear.

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What is Effectiveness?

Effectiveness is the output that a resource is able to generate. Let us use the concept of employee output throughout this article to make things simple. Speaking from the viewpoint of an employee, effectiveness is how much output that employee is able to generate for the company.

If an employee generates high levels of output, he or she will be termed as an effective employee and a low level of output will brand him or her as an ineffective employee. The level of output is a standalone figure and is not compared to another numerical value for further analysis.

What is efficiency?

When we talk of efficiency, another numerical value to aid in comparison is added. Efficiency is the amount of resources that it takes to get the job done. Again for the viewpoint of employees, efficient employees are those who can get the job done using the least resources like time, money, space etc.

Example of Efficiency vs Effectiveness

Let us take an example of effectiveness versus efficiency. Let’s imagine a scenario where a sales representative from a company has to make cold calls to make sales. Suppose that each phone call costs Rs. 5 and each sale is worth Rs. 100 to the company. Sales representative A makes 25 phone calls and is able to convert 5 of them into sales for the company. This means that A spent Rs. 125 on phone calls and in return got Rs. 500 for the company. Calculating the return per Rupee he spent, we can see that he made Rs. 4 for every Rupee he spent. Looks effective!

Now sales representative B made just 16 phone calls and converted 4 of them. This means that he spent Rs. 80 on making calls and in return got business worth Rs. 400 for the business. Return for every Rupee spent is Rs. 5!

B made fewer calls than A and also fewer number of sales but his return on the cost incurred is higher than A.

In this case, A is more effective but B is more efficient!

Effectiveness does not always have to translate into efficiency. At the speed at which businesses these days work and the kind of competitive environment that they are a part of, it becomes imperative for employees to be efficient along with being effective.

Summary of Efficiency vs effectiveness

All the processes, operations and sales channels are made efficient by companies. However, it is also important to note that a business, in the pursuit of efficiency, should not overdo it to such an extent that lucrative opportunities to grow and invest in a potentially bright future are lost out. A few investments and process changes might not seem to be the most efficient, or even effective for that matter, in the present but need to be done to reap returns in the future.

Efficiency and effectiveness make sense only when the goal is clearly defined and the process flow is carefully thought after. Going after the wrong goal or following a flawed business process will fail in the medium run. While some resources have started to be found in abundance for businesses, many have started becoming increasingly rare. Hence it is all the more important keep the goal clearly defined.