In the age-old debate between efficiency and effectiveness it is worth reflecting on the most admired companies like Apple or Google. Are they efficiency leaders (cost optimizers) or effectiveness leaders (innovators). Efficiency helps us optimize resources (cut costs) assuming we are already producing the business impact we want. Just want to do it cheaper. Effectiveness is questioning the very essence of our assumptions about our markets, channels, products and processes.
I’ll always remember a discussion with an advisor from the late Bear Sterns. He mused that the “efficient” investor tries to optimize trading costs from 14.99 to 9.99 per trade and averages 5-7% of return a year. While the “effective” investor has the right investment strategy that requires advisors and may have trading costs that are much higher but overall produces many times the returns.
My favorite business example is in working capital. “Efficient” companies try to reduce accounts receivables through better collections, credit terms and more aggressive “customer care”. An effective strategy would be to look at R&D, order problems, shipping issues that cause the customer to withhold payments and ultimately improve cash flow for the firm. Few get this: effectiveness fixes root cause issues that impact your ultimate outcome across the entire business. Efficiency is always suboptimal and impacts one aspect of the business. Efficiency asks how you can make your products at lower costs (HOW). Effectiveness asks what products your market needs (WHAT).
Someone with the personal outcome of creating a nest egg has similar choices. The personal dilemma is between spending less (efficiency) or finding a job that pays more (effectiveness), which in turn requires more effort in training, relationships and track record of results.
Effectiveness always requires more investment than efficiency. In fact, efficiency is always about cutting and reducing choices. Costs, resources, distractions, tasks and so on. Effectiveness is additive. We are investing in learning, expanding, transitioning. Efficiency taps our XQ while Effectiveness taps our IQ and EQ more (More on IQ EQ XQ - see here).
Next time we are all facing a choice let us select an effective one and make an investment to get where we are going. Even at a cost.
