How To Measure Business Performance. Effectiveness Vs. Efficiency

I found myself in yet another interesting conversation with a successful entrepreneur on the topic of successful business practices. We were discussing what is needed within an organization as it grows from a mom and pop shop to a mature corporation. It is obvious that the demands of the company will change as it matures but how do we measure business performance? Other than the bottom line, what can we look at to know if we are on the right track?

Industry Life Cycle

The answer to these questions will differ depending on your industry and where the industry is in its life cycle. There are many good articles out there discussing the industry life cycle so I won’t explore that here other than to say if you are in a more mature industry you will have your work cut out for you. Here is a quick look at the life cycle.

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A small business generally competes in non-mature industries. The reason for this is that a mature industry has been around long enough to attract the attention of big players who will have deep roots. It is not impossible to compete in a mature market but keep in mind you will need offer more than you would if you were in a new or growing industry. In a mature market purchase decisions are generally made on preference rather than on need.  Think of Coke and Pepsi or MacDonald’s and Burger King. Arguably the products don’t offer a different value, they are simply preferred. Hint: when dealing with preference you start to walk down the road of brand recognition and huge ad spend. This is where big marketing companies can come into play.

I explained the above to give you an idea of where you may be in order that you may know where you are headed.

Decisions Decisions  

Back to measuring business performance. The core conflict that can arise in any stage of the cycle is pursuing efficiency vs. pursuing effectiveness. As an engineer I must admit my bent is to go after efficiency with everything from the start but that is not always the best course of action. The entrepreneur I mentioned earlier shared a story from early in his career.

When he was younger and working for a successful business owner he found himself struggling with some hard decisions that would affect the company. The owner noticed him in his dilemma and said “Just make a decision. Do what you can and get things done. If you make the right decision 50% of the time you will move forward, if you agonize about each decision the world will pass you by. Now I’m guessing you will do better than 50%” From that point on my friend has been much more of a “get er done” type of guy and has built a multimillion dollar business.

Fear of Mistakes

It is my belief that our fear of failure pushes us not to feel ok about making mistakes. It is this fear that leads to the all too common “Paralysis by Analysis”. We may argue that it is for the sake of efficiency that we weigh and reweigh our options but I would suspect fear is the main driver.

That’s not to say we should never concern ourselves with efficiency because it is quite vital for continued success. I would argue however that in a small business, initial efforts should be concerned with effectiveness while later efforts, once you are established, can address efficiency. Remember the life cycle above? The efficiencies and the cutting of the fat are not introduced until more players enter the market and the need to be efficient is required for survival. So, said another way;

Initially a business or organization does not need to be efficient they need to be effective. Efficiency comes into play later when market demand requires you to sharpen your pencil or resource availability becomes limited.

So, don’t worry as much about how a job is done as long as it gets done and doesn’t put you in the red. This takes a bit of intuition but a mistake can often teach you more than success on the first try which in turn build your human capital.

TJ

About TJ

Engineer and Entrepreneur