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Efficiency vs. Effectiveness: a Small Business Dilemma

Posted on April 6th, 2017
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Capitalism in Action: Efficiency

In business schools around the world, M.B.A. candidates are prepared to return to the corporate workplace, armed with tools to make business more efficient. Finance makes the most efficient use of funds. Marketing aims to bring the most efficient return on capital invested. Management attempts to make the most efficient use of human and technological capital of a firm.

Efficiency is good. It ensures that profits are maximized and that waste is minimized. It is a foundational principle of modern enterprise analysis. We analyze operations to make them more efficient, thus making the operation more profitable.

Profits keep a business growing and growing businesses need workers. The business is now a job-creating machine. Profits are re-invested into capital equipment that enables the business to reach additional possibilities of production.

The business now lowers production cost which makes the enterprise even more efficient. Profits swell and are returned to the shareholders as dividends. This is capitalism in action. This is efficiency. This is the mantra of most business school programs and the desire of most entrepreneurs.

The Harmony of Effectiveness and Efficiency

Small enterprise owners have a dilemma: How do I balance efficiency and effectiveness in my business. Entrepreneurs need to question the purpose of the business. Why does the business exist? Is my business doing the right things? Am I strategically working in the right areas?

Efficiency needs to be tempered with effectiveness to organically grow the business. When a small business owner loses sight of the purpose of the organization, efficiency takes over as the predominant theme. Efficiency alone produces less than with effectiveness combined. Efficiency needs to work in harmony with effectiveness – form and function, Yin and Yang, left-brain and right-brain, etc.

The balance of these two ideas for a small business creates a robust, growing business with a vibrant business culture: A business that is profitable as well as conscious of its stakeholder community. People become a focus of the small business. Without effective and efficient people, a small business will fail to produce the best results. Here are some steps to help you review your progress:

Review Your Business Strategy


Set aside some time every month to review your business strategy. Ask yourself: Am I working in the right business areas? Review your personal business goals. What is your exit strategy for the business?

Evaluate Profitability

Make sure that your business is making a profit. Business owners need to make sure their product and service offerings have sufficient profit margins to ensure growth. Make sure you know which activities generate the highest profit margin.

Check Your Production Capacity

How many units of a product can you make in a day? What is your maximum throughput? How many service based clients can you handle at one time? If you don’t know your production capacity, then you won’t know when it is appropriate to scale your business.

Plan for Growth

What happens if your business doubles in the next 90 days? Are employees trained to handle the additional workload, or do you need begin training now? How ready are you ready to scale your operation to capture the opportunity? Do you have a written set of procedure for your business? Make a written growth action plan that addresses these issues.

William Lipovsky

William Lipovsky

William Lipovsky owns the personal finance website First Quarter Finance. He began investing when he was 10 years old. His financial works have been published on Business Insider, Entrepreneur, Forbes, U.S. News & World Report, Yahoo Finance, and many others.

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