What is the relationship between ogranizational efficiency and effevtiveness?

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krishna-agrawala | College Teacher | (Level 3) Valedictorian

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Efficiency and effectiveness are two very important facets of an organization's performance. Efficiency refers to the quantity of outputs that it can get from a given quantity of resources. Thus mathematically efficiency may be defined as a ratio of output and input. Thus:

Efficiency = Outputs/Inputs

Effectiveness of an organization is defined as the extent to which it achieves its desired objectives.

Frequently, higher efficiency enables an organization to achieve it's objective better. But this is not always so. We will explain this concept by a simple example.

Let us say an organization manufactures and sells pens at price of $1 each. If the company makes 1000 pen per day at cost of $0.8 each, it will earn a profit of $200 per day.This company can improve its profits by reducing the inputs it uses for manufacturing the pen. Thus if company is able to reduce its cost to $0.7 per pen its daily profit will increase to $300 per day. But the company is not able to reduce its cost below $0.7. Therefore to increase its profit further it mus increase its production and sales. But to do this the company will have to spend extra money on marketing and selling activities. By spending $150 extra the company is able to increase its sales to 1500 pens. Thus for achieving a sale of 1500 the cost per pen has again come to $0.8 per pen. That is the efficiency has come down to original level, but the profit continues to be $300. Thus the company is able to improve its profits in two ways. One way is to improve its efficiency that will cut down the cost per pen from $0.8 to $0.7. The other way is to improve its effectiveness that will increase its production and sales to 1500 pens per day, but the cost will remain unchanged at $0.8 per pen.

Let us also consider a third scenario. The company decides to increase its expenses on marketing and sales by $450 instead of $150, and as a result the sales goes up to 3000 pens per day. In this scenario the cost per pen increases to $0.85, bus because of higher sales the total profit goes up to $450 per day. Thus the efficiency of the company has come down but the effectiveness has improved.


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