Boriana Valentinova

effectiveness vs efficiency

Efficiency vs effectiveness

"Efficiency is doing things right. Effectiveness is doing the right things."

That’s Peter Drucker’s quote demystifying the efficiency vs effectiveness dilemma. Doing the right thing comes first. Only then can we improve and do things right. 

But often, we do it all the way around. We try to improve on something wrong at its core, which means we implement efficiencies without being effective at what we do. 

So, first things first. 

Start by defining (or re-defining) what you do – your strategic positioning and your operating model:

  • What is your value proposition for a market, segment, or niche? 
  • How will you fulfil that, and how will you differentiate from the competition? 

Your strategic positioning will require a specific operating model. One that will work for you according to the value you aim to deliver. 

There are mainly two strategic positionings.

1. Cost leadership

Cost leadership refers to competing on price, setting the lowest point possible for a product within your industry. For example, if most Planning and Scheduling apps cost around $35/month for a mid-range pack, you should be offering a package of a similar value for $20. The lower price would set you apart from competitors and may attract more customers within the target. 

Cost leadership is characterised by standardised products/services, high volume sales needed to break-even and low margins.

It would help if you implemented a flat organisation, promoted fast decision-making, and had a rapid product development cycle. Look to standardise the way of working and automate processes to deliver products or services that only need minor maintenance or customer care (RyanAir, IKEA, Claire’s). 

That is the only way for a business in such positioning to be efficient and profitable. 

Cost leadership: Low pricing, standard offering, highly automated processes, big volume sales, low-profit margin.

2. Differentiation

Differentiation is a business strategy that involves creating unique or premium quality products or experiences and charging more. Nich market players also have a differentiation positioning by providing a specialised service or product designed for a small but profitable segment. 

The strategy involves customised marketing, product offering and top-tier customer service, lean product design, and supply chain control and distribution.

To practice differentiation, a company must have a completely different operating model than the one practising cost leadership. Usually, there is little pressure to keep operational costs down as margins are high. As a result, the business can make higher investments in innovation and branding. Still, companies with differentiation positioning can achieve efficiencies and should have reasonable cost structures.

It would be best to incorporate innovative marketing strategies and invest in training and the best CRM and reporting IT for personalised customer service and advanced state-of-the-art product development (Apple, Rolls Royce). 

Also, efficiencies can be sought by clearly defining core and non-core processes and outsourcing the non-core altogether. 

Differentiation positioning: Premium pricing, high R&D budgets, partial or none process automation, many product adds-on, personalised customer service, high margins.

3. Can there be a remix?

It is possible to offer low-cost and differentiation simultaneously. Many businesses have different offerings for different segments.

But the company’s core should be either cost-oriented or differentiated, which defines it as a market player. And so should the operating model be, with the needed adaptation for different product lines and customer service. 

Companies that try to be all things to all customers face complex operational workflows, high expenditures and no ROI and ultimately lose money. Unless they change strategy, they can run out of business.

Applying efficiencies like product standardisation or complete process automation will drive you out of business if you are a differentiation market player and under pressure to boost margins. That is because automating non-standardised processes and product development can bankrupt you. And on the other hand, the customers will turn away from you for not fulfilling personalised needs. 

If you have chosen cost leadership and are tempted to increase repetitive business, bringing a personalised marketing strategy and high-end customer service will eliminate your profits. You are better off launching an entirely new upscaled product line or growing through M&A.

So, when faced with the efficiency vs effectiveness dilemma, first, position your company strategically. Then apply suitable efficiency tools according to that positioning to boost profits. 

Start with the right thing, and then do things right!