The terms “efficiency,” “effectiveness” and “flexibility” are used to describe the way a company operates in its markets. While they are often used together, and sometimes interchangeably, they each mean different things:
- Efficiency refers to how well a company turns resources like time, people and money into activities that serve the business. An efficient company generates a high volume of activity for every unit of its resources.
- Effectiveness refers to the speed at which the company’s activities convert to business results. An “effective” company achieves a good number of high-quality results from its activities and by doing so meets the goals of its business plan.
- Flexibility is the speed at which a company adjusts to changing market conditions.
While companies often strive to be simultaneously efficient, effective and flexible, these goals actually trade off against each other. The goal is to achieve the right mix. For example, a company might achieve high efficiency by having well defined processes, but those processes may make the business less flexible.
Many entrepreneurs worry about flexibility in particular. They don’t want to become too bureaucratic (rules-bound and process-oriented) and often oversimplify their internal structures. In fact, there is such a thing as “good bureaucracy” and the right amount of rules and processes can help achieve better results.