Revenue = Capacity X Efficiency X Cost-Plus Price
Efficiency is a word that can be said with perfect impunity, since no one in their right mind would dispute the goal of operating efficiently. In fact, it is well known that in free market economies, efficiency is critical, as it ensures a society’s resources are not going to waste. It is also well established that different levels of productivity largely explain differences in wages across countries. An American farmer will earn more plowing with a tractor than a Cuban farmer with an ox and hand plow; the American farmer is more productive, hence higher wages and more profits.
There is no doubt that increasing efficiency—or at least not sliding into inefficiency—is important. But the pendulum has swung too far in the direction of efficiency over everything else. It seems innovation, dynamism, customer service, investments in human capital, and effectiveness have all been sacrificed on the altar of efficiency. It is critical to bear in mind that a business does not exist to be efficient; rather, it exists to create wealth for its customers. This wealth creation function can be thought of as the difference between the maximum price a customer would be willing to pay minus the opportunity costs of the activities necessary to bring to market the product or service.
Peter Drucker was fond of pointing out that the last buggy-whip manufacturers were models of efficiency. So what? What happens if you are efficient at doing the wrong things? That cannot be labeled progress. In fact, one indicator an industry is in the mature or decline stage of the product/service life cycle is when it is at the apogee of its theoretical level of efficiency.
The point is this: In industry after industry, the history of economic progress has not been to wring out the last 5 to 10 percent of efficiency, but rather to change the model to more effectively create wealth."