Difference between Effective and Efficient

Joint stock company in which shareholder liability is limited. In the past decades, the sole focus of management leaders has been on promoting shareholder wealth, on the basis that shareholders are the owners of the company. Are they really?

In reality shareholders are the people who are most affected by the company – for example the community, society, employees, vendors. In the model developed over the past few centuries along with the industrial revolution when the focus was sharp on shareholders, more emphasis has been placed on efficiency – the use of manpower, machines and capital – rather than on effectiveness. What is the difference?

Effectiveness means increasing efficiency and converting it into results. However the sole purpose of business is to create and satisfy customers. When talking about organizational performance, you identify an effective organization as one that enables ordinary people to collectively achieve extraordinary results.

Efficiency is getting a lot of things done while effectiveness is getting things done right. Moreover, unlike innate qualities like talent and intelligence, effectiveness involves practices that you can learn. In fact, learning effectiveness is essential because without it, talent and intelligence will take you nowhere.

The contemporary capitalist enterprise model, with its overwhelming orientation to increasing shareholder wealth, is highly committed to efficiency – to extract the maximum from a given resource. The enterprise is almost like a machine, whose efficiency can be increased by continuous improvement. Moreover, too often, human greed, avarice and hubris get added to the menu of efficiency. The trap of efficiency alone threatens all lucrative market capitalizations.

To minimize the risk of falling into this trap, one must consider an alternative model: effectiveness, supported by efficiency.

In this model, the shareholder cannot be the only god whom the enterprise leaders serve. Employees, the community, vendors and many others who work to make the company a “living machine” are also on the leadership agenda. This is because the value that comes from a “living machine” is superior to the value that comes from a machine.

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