Effectiveness vs. Efficiency

My impression is that over the last years the two words effectiveness  and efficiency are used more and more interchangeable. This is very misleading due to the totally different original meaning. To explain this, we can take both words and use it in a business context.

Effectiveness means that my business generates the wanted effect. My business idea is implemented and working. If I am a baker, it would mean I am able to bake bread and rolls and I am able to sell it. The more customers I have or the more rolls and breads I am able to bake, to bigger is my effectiveness in the production of rolls and breads.

Efficiency comes in, when I try to do find out how much effort I put into the production. Do I need one work hour for baking one roll? That’s not very efficient and is not very profitable either. Do it cost me 2EUR for the baking of this one roll? It’s not very efficient, too. The question is with much effort is the effectiveness correlated?

Therefore, the effectiveness is just a measure of my business impact or the impact of everything else I do. But the efficiency is the ratio of the effectiveness to the effort I put into creating the effect.

In most situations the efficiency is more important than the effectiveness. The efficiency helps to be profitable. If a small business, which is not very effective (does not have a big market penetration), but is profitable enough to pay its bills and to invest enough, is healthy. But, the opposite is a company have a tremendous impact on the market (or maybe I am a market leader ;-)), but it does not make profit, then it’s just a question of time until it gets bankrupt.

Therefore: It’s better to have a small but profitable business than having a big business which struggles to make profit.

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