Questions: Operation Management

Questions: Operation Management

1. What is the difference between “efficiency” and “effectiveness” in and operation?

Efficiency and effectiveness are central terms in assessing and measuring the performance of organisations, as well as inter-organisational arrangements such as strategic alliances, joint ventures, sourcing as well as outsourcing agreements. Despite the obvious relevance of assessing and measuring performance, it appears that business managers rarely understand the exact meaning of efficiency and effectiveness and rarely assess the full impact of their actions on key financial indicators (Barwise, Marsh, and Wensley, 1989; Myers, 1999). And yet managers are often reassured by efficiency indicators achieved by cost cutting, outsourcing activities or under-funding marketing or research & development, even if these indicators are not measures of effectiveness in the marketplace (Ambler, 2003). Dealing with efficiency and ignoring effectiveness, many company-centred studies focused on issues of competitive advantage through value appropriation rather than on issues of creating new growth opportunities within business networks. This propensity to efficiency may be attributed to the fact that purposive business action is far more applicable to efficiency gains than to the effectiveness by creating new sources of value in a business network (Moran and Ghoshal, 1999).

This paper develops the answer of the question with the theoretical structure that links the difference between efficiency and effectiveness.

Difference

Dealing with efficiency and ignoring effectiveness The challenge that managers face today is to find business opportunities that raise the market value of their companies above the cost of capital that they needed to finance their endeavours. This challenge is best captured by the principle that companies need to embrace business opportunities that consistently generate a return on assets that exceeds their financing cost. It is often the case that companies success of meeting the above challenge is characterized by the term efficiency rather effectiveness. A company, however, can be efficiently run without being effective in embracing business opportunities inherent in its surrounding network. Efficiency is not a measure of success in the marketplace. It is rather a measure of operational excellence or productivity. It is, therefore, concerned with minimizing costs and improving operational margins. On the other hand, effectiveness is linked to a company's ability to design a unique model of embracing business opportunities through exchange relationships. Effectiveness is, therefore, related to the company's own recipe to generate a sustainable growth in its surrounding business network. Gaertner and Ramnarayan (1983) argue that effectiveness is not a characteristic of organizational outputs but a rather a continuous process relating the organisation to its constituencies; it is negotiated and rather than produced. An effective organization is one that is able to create accounts of itself and of its activities that relevant constituencies find acceptable. The accounts may be for various purposes to various audiences and for various activities.

Advancing criteria for determining organizations' efficiency in the marketplace and the effectiveness with which the organizations' offering is rendered, Clark (1921) links efficiency and effectiveness by making the cogent argument that a system is —inefficient when it is cheap ...