Efficiency Versus Effectiveness for Leaders and Managers

Hello! My name is Dr. Rob Austin McKee, professor of Organizational Behavior and Leadership, here with MGT.EDU, the open access business school. In this video, we will be discussing two related and easily confused topics: efficiency and effectiveness. We will cover their definitions, provide some examples, and discuss the practical importance of each concept, including which one is more important and how they relate to our ideas about management and leadership. Si hablas español, tenemos una versión en español de este video disponible en el canal de YouTube MGT.EDU. A transcript of this video is available on my website, robaustinmckee.com.

Let’s start with efficiency. You have probably heard this word before in car commercials describing the fuel efficiency of automobiles, or perhaps you have seen it on appliances in your home that are rated for energy efficiency. So, what does it mean? What does it mean for an automobile to be fuel-efficient? Well, most modern automobiles prominently display the mpg, or miles-per-gallon, on the driver’s display just behind the steering wheel or on the center console. That metric indicates the number of miles the car would be expected to travel consuming a single gallon of gasoline given the current driving conditions. So, we have a measurable output from the system in terms of miles traveled and a measurable input to the system in terms of gallons of gasoline. So, fuel efficiency, and efficiency more broadly, is the ratio of outputs to inputs for some system or process. This ratio is almost certainly less than one, meaning there are losses inherent to every system or process. The more you get out relative to what you put in, the more efficient the system or process is. In an organizational context, inputs can include time, labor, raw materials, or any other thing used to produce outputs. Outputs can include products, services, or anything else an organization produces.

Let’s move on to effectiveness. You may have heard this term used to describe medications, diets, or exercise routines, among other things. So, what does it mean? What does it mean for a medication to be effective? Well, to be effective, a medication must treat, cure, or prevent whatever disease or condition for which it is indicated. Basically, it must do what it claims to do. One of the primary purposes of clinical trials is to ensure that a medication in question actually works, usually compared to some placebo or alternative treatment.

So, effectiveness measures the degree to which something produces a successful outcome. Before you can consider the effectiveness of something, you must define your desired outcome, goal, or success criteria. If you want to know whether a diet is effective, you must figure out how to measure its effects. For diets, that criterion might be measured in pounds of weight loss per week. If someone had an explicit goal to lose at least 5 pounds in one week and he only lost 4 pounds, then the diet was not effective. If that same person had stated a more general goal to lose some weight in a week or over some other amount of time, then he might have considered the diet to be effective to some degree.

Let’s combine both concepts, efficiency and effectiveness, into a single example. So, let’s say you are the manager of two workers. Worker 1 meets the production quota for the day of 10 units in just 6 hours. Worker 2, however, requires the full 8-hour workday to meet the production quota of 10 units. Both workers met the production quota, but one required 6 hours and the other required 8. So, is the difference between the workers related to efficiency or effectiveness?

The answer is efficiency. Both workers were equally effective in meeting the explicit production quota, but Worker 1 required less time, and thus, from the company’s perspective, utilized fewer resources than did Worker 2. In other words, the same output was achieved with lower input.

Now, I want to talk about the relative importance of efficiency and effectiveness. Which one is more important? Obviously different people might offer differing perspectives, but my opinion is that it doesn’t matter how efficient you are if you are not effectively meeting your goals. So, the first broad steps in any process, system, or organization are to establish your goals and then, by whatever means, to achieve your goals. Once you can effectively meet your success criteria, then you can figure out how to do so more efficiently. As an example, think about taking a road trip somewhere. It doesn’t matter that you’re making good time if you’re heading in the wrong direction.

Finally, how do efficiency and effectiveness fit in with our conceptions of management and leadership? Well, to answer this question, we first need to figure out who determines the goals of an organization. I would argue that establishing or amending organizational goals is more the purview of leaders than managers. So, in setting the strategic direction of the firm, leadership is associated more with effectiveness than with efficiency. Managers generally are more concerned with efficiency because they may have little say in the organizational goals, but do actively deploy the resources, human or otherwise, used to achieve those goals.

Thanks for watching. I hope you found this video informative and at least mildly entertaining. If so, smash that like and subscribe to the channel. If you have any questions, comments, or concerns, or you just want to say hi, please leave us a comment below. Again, my name is Dr. Rob Austin McKee with MGT.EDU. See you in the next video!