32 Efficiency and Effectiveness
Pooja Malhotra
1. Learning Outcome:
After completing this module the students will be able to:
• Understand the concept and features of efficiency and effectiveness
• Understand the differences and proximities between efficiency and effectiveness
• Explain the factors affecting organisational efficiency and effectiveness.
2. Introduction
An organization works with different types of resources. It makes use of men, money, machinery, materials etc. To organize and coordinate all these resources in a best possible way for the achievement of organizational goals is an important task of a manager. As resources are limited with the organizations, hence, the success of an organization lies in utilizing these resources efficiently and effectively. Effectiveness is concerned with achievement of organizational goals. Efficiency refers to achieve goals with optimum utilization of resources, that is, to make the best possible use of limited resources, viz, men, money, machinery, materials etc. The purpose of this chapter is to get a better understanding on the concept of efficiency and effectiveness and also to differentiate between the two.
3. Organisational Efficiency and Effectiveness
Every organisation works for some goals. It employs all its resources and activities for the achievement of these goals. An organisation that achieves its goals despite its limited resources is known as an effective organisation. In other words, organisational effectiveness refers to the extent to which organisation achieves its goals. Efficiency measures the relation between inputs and outputs. It determines the extent to which an organisation has employed its inputs optimally, i.e. use the limited resources in a best possible manner to give output. Where, Effectiveness refers to “Doing the right things”, Efficiency refers to “Doing things right.”
4. Features of Organisational Efficiency and Effectiveness
1. Flexibility or Adaptability
Business is affected by changing environment. Effective and efficient organisations are quick responders to changing environment. The success of an organisation depends upon how quickly it adapts to these changes.
2. High Morale: organisations keep their employees’ morale level high to achieve their goals effectively and efficiently. As the employees with high morale can do anything successfully.
3. Acceptance by members: for organisational effectiveness and efficiency, all its goals and systems should be acceptable to all its members.
4. Commitment and loyalty: Organisations involve their employees in decision making process to make them committed and loyal towards them. There will be less chances of employee turnover.
5. Factors affecting Efficiency and Effectiveness
Following are the factors that affect organisational efficiency and effectiveness:
1. Environmental Factors: environmental factors affect organisational efficiency and effectiveness to a great extent. The environmental factors are of the following two types:
a. Internal Factors: internal factors refer to the factors which are internal to an organisation and are within its control. Following are the main internal factors:
• Value system
• Objectives, mission and vision
• Organisational structure
• Human resources
• Physical resources
• Financial resources
• Research and development
• Technological developments
• Production capacity and methods
• Management information system
• Marketing resources
b. External Factors: it refers to those factors which are external or outside the organisation and influence the business. Business has no control over these factors. Following are the main external factors:
• Economic environment
• Political environment
• Social environment
• Legal environment
• Technological environment
• Socio-cultural environment
If these external factors are positive, then they will certainly lead to organisational efficiency and effectiveness.
2. Forecasting of resources: if organisation is able to forecast the necessity of resources correctly and timely, then organisational efficiency and effectiveness can be realised.
3. Employee related factors: as employees are an important asset of an organisation, their behaviour and goals have a profound effect on organisation efficiency and effectiveness. Their positive behaviour and equality of their goals with organisational goals will certainly lead to organisational efficiency and effectiveness.
4. Optimum Utilisation of Resources: The optimum utilisation of resources will lead to efficiency and effectiveness. It means to make best possible use of all available resources.
6. Effecieny Vs. Effectiveness
It is not necessary that an organization will be efficient as well as effective at the same time. It may be an effective organization which achieves its goals but at the same time, it may be inefficient due to poor operational management. The organization may not have proper allocation of its resources. It will be a costly affair for the organization. In this case, there will be high employee turnover, no clear vision or mission, unrest amongst the employees, more wastage of resources.
If the organization is managing its resources efficiently, yet it may not be able to realize its long term goals. There may be lack of innovation, or no value creation. Such an organization cannot be competitive. This may lead to bankruptcy slowly.
In both cases, inefficient –effective and efficient – ineffective, organization has chances for failure and if it is a case of inefficient and ineffective, then it will be an expensive failure. Exhibit 1 shows a comparative relation between efficiency and effectiveness:
| Effective | Ineffective | |
| Efficient | Successful companies operating at minimum cost. | Cost is under control but company doesn’t succeed due to innovation or competitive policy. Hence, bankruptcy slowly. |
| Inefficient | Company is succeeding but at a high cost. The company exists. | An expensive failure of the company. The company is bankrupting |
Exhibit 1: comparison of effectiveness and efficiency.
Exhibit 1 shows that if the company is inefficient but effective it may survive, but the cost of operations, processes and inputs will be very high. Such companies will be cost inefficient and may have little profits, though may be rich in market share, innovation, growth rate and overall success. Inefficient but effective organizations should reframe their recourse allocation policy so as to increase their efficiency. Similarly, efficient but ineffective organization may be cost effective but may not have new ideas, innovation or creativity, or competitive advantage as against its competitors. Such organizations should consider their marketing policy and take steps to enhance their competitive advantage and market share.
Effective and efficient organizations are known as high performance organisations. Such organisations have excellence in operational performance. They are cost effective, and have proper resource allocation policies. Their employees have high morale, commitment and loyalty. There is equality of employees goals and organisational goals and hence, achievement of organisational goals in an effective manner.
7. Summary
The success of an organisation lies in how effectively and efficiently it operates. Efficiency and effectiveness are two performance measures which affects each other. While, effectiveness measures the extent to which an organisation has achieved its goals, on the other hand, efficiency measures the relation between input and output or how to make best use of its resources to achieve the goals. An effective but inefficient as well as an efficient but ineffective organisation may exist, but will lead to bankruptcy gradually. In order to excel and get competitive advantage, organizations should attempt to increase the efficiency and effectiveness.
References:
- Bartuseviciene, I. and Sakalyte, E. (2013). “Organizational Assessment: Effectiveness Vs.Efficiency,” Social Transformations in Contemporary Society, (1).
- Robbins, S., Bergman, R., Stagg, I. and Coulter, M. (2014), Management, 7th Edition, Pearson Education.
- Kumar S., and Gulati R., (2010). “Measuring efficiency, effectiveness and performance of Indian public sector banks,” International Journal of Productivity and Performance Management, Vol. 59 Iss: 1 pp. 51 – 74