Efficiency and effectiveness are two sides of the same coin, of a successful business.
Efficiency is doing things the right way. In terms of business, it means that you operate with as low a level of resources as possible. You should be efficient in terms of expenses, time, investments, etc.
Effectiveness is doing the right thing. It means you have chosen the right business, the right industry, and the right market niche in which you can make a profit.
Why do you need to be efficient and effective at the same time?
Let’s try to define businesses that lack at least one of these two.
If a business is neither efficient nor effective, it will soon face bankruptcy. It is in the wrong industry (an unattractive one) and resources are not used properly. Therefore, the business is not profitable and cannot pay its liabilities.
If a business is effective, but not efficient, it means it has a good idea, but poor execution. An example is a start-up with a good product and technology but without a team of people who can execute the idea successfully.
Can business be efficient, but not effective? Remember Other people’s money with Danny DeVito (Larry the Liquidator)? You remember what he said about companies facing technology changes?:
‘’ New technologies. Obsolescence. We’re dead alright. We’re just not broke. And you know the surest way to go broke? Keep getting an increasing share of a shrinking market. Down the tubes. Slow but sure. You know, at one time there must’ve been dozens of companies making buggy whips. And I’ll bet the last company around was the one that made the best goddamn buggy whip you ever saw. Now how would you have liked to have been a stockholder in that company? You invested in a business and this business is dead. ‘’
The business Larry the Liquidator is referring to is efficient, but not effective.
Therefore, you need to choose the right business and do it the right way.
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