Effectiveness and Efficiency in Organization

By | March 26, 2018

If the organization is to succeed, it needs to be effective: physical products or software must do what users expect them to and have the other attributes, such as price, appearance or reliability, that consumers desire. Services, similarly, must be available when needed and meet customers requirement regarding speed, courtesy or other factors.

Many organizations also strive to be efficient and keep their costs as low as possible. They may try to reduce the variable costs of obtaining the inputs and converting them into outputs. They may also try to minimize their fixed costs: plant, buildings, web servers and overheads such as sales and administration. Where high fixed costs are unavoidable, the firm may try to utilize its assets as intensively as possible, to minimize the unit costs of its outputs. It may do this by producing individual products in large quantities, to try to gain economies in scale. It may also try to use parts of its fixed cost base, such as warehouses, websites and invoice processing systems, for a variety of products, to gain economies of scope.

Effectiveness: An output or an activity is effective if it does what intended user or beneficiary, inside or outside the organization, requires it to do.

Efficiency: Getting or keeping the cost of an output or process as low as possible, minimizing wastage and unnecessary activities.

Organizations that at first sight seem very efficient are not always the most successful -keeping costs low can sometimes interfere with innovation or customer service, which may in some industries be vitally important to firm effectiveness. However, an organization must meet a minimum standard of efficiency – it must keep the cost of inputs plus the costs of the conversion process below what it receives as income. Normally, of course, there needs to be a surplus to allow the firm to renew its assets and show the required level of profit to distribute to its stakeholders.