Profitability = Intellectual Capital X Price X Effectiveness
In the business of the future, effectiveness takes precedence over efficiency. A business does not exist to be efficient; it exists to create wealth for its customers. An obsessive compulsion to increase efficiency (doing things right) reduces the firm’s effectiveness at doing the right things. The pursuit of efficiency has hindered most companies’ capability to pursue opportunities, hence these organizations spend most of their time solving problems. One cannot grow a company and continuously cut costs and increase efficiency.
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It is not that efficiency is bad, per se, it is that it is being pursued at the expense of nearly everything else. To add insult to injury, the efficiency measures that do exist in the modern organization tend to be lagging indicators that measure efforts and activities, not leading indicators that measure results and define success the same way the customer does.
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The word “efficiency” has been deliberately replaced with “effectiveness,” bowing to the observation that a business does not exist to be efficient, but rather effective. What happens if you are 100 percent efficient at doing the wrong thing? Effectiveness, on the other hand, stresses the power to produce a particular effect, in this case, something of value for customers. Still, this word, too, is not quite precise enough at describing the effect a modern firm is trying to create."
It is not that efficiency is bad, per se, it is that it is being pursued at the expense of nearly everything else. To add insult to injury, the efficiency measures that do exist in the modern organization tend to be lagging indicators that measure efforts and activities, not leading indicators that measure results and define success the same way the customer does.
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The word “efficiency” has been deliberately replaced with “effectiveness,” bowing to the observation that a business does not exist to be efficient, but rather effective. What happens if you are 100 percent efficient at doing the wrong thing? Effectiveness, on the other hand, stresses the power to produce a particular effect, in this case, something of value for customers. Still, this word, too, is not quite precise enough at describing the effect a modern firm is trying to create."
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