Efficiency versus effectiveness
We can gain another perspective on customer orientation if we understand the distinction between efficiency and effectiveness. Efficiency is concerned with inputs and outputs. An efficient firm produces goods economically- it does things right. The benefit is that cost per unit of output is low and, therefore, the potential for offering low prices to gain market share, or charging medium to high prices and achieving high profit margins, is present. However, to be successful, a company needs to be more than just efficient, it needs to be effective as well. Effectiveness means doing the right things. This implies operating in attractive markets and making products that consumers want to buy. Conversely, companies that operate in unattractive markets or are not producing what consumers want to buy will go out of business- the only question is one of timing. The link between performance and combinations of efficiency and effectiveness is illustrated in Fig.1.5. A company that is both inefficient and ineffective will go out of business quickly because it is a high-cost producer of products that consumers do not want to buy (see Exhibit 1.2). A company that is efficient and ineffective may last a little longer because its low cost base may generate more profits from the dwindling sales volume it is achieving. Firms that are effective but inefficient are likely to survive because they are operating in attractive markets and are marketing products that people want to buy. The problem is that their inefficiency is preventing them from reaping the maximum profits from their endeavours. It is the combination of both efficiency and effectiveness that leads to optimum business success. Such firms do well and thrive because they are operating in attractive markets, are supplying products that consumers want to buy and are benefiting from a low cost base.
Virgin Atlantic is an example of a company that is both effective and efficient. It is effective by being innovative in terms of service delivery (for example, personal televisions built into the seating on its planes) as well as efficient in keeping costs low (for example, promotional expenditures are kept in check by Richard Branson's capacity to generate publicity for the airline). Similarly, Dell Computer Corporation (www.euro.dell.com) has risen to a position of dominance in the PC industry by being both effective and efficient (see Marketing in Action 1.1). The essential difference between efficiency and effectiveness, then, is that the former is cost-focused while the latter is customer-focused. An effective company has the ability to attract and retain customers.
Exhibit 1.2 Boo.com was one of the highest-profile 'dot.bombs'; the company spent millions trying to encourage shoppers to buy sports clothing online, though it became clear that people still like to try on these products rather than simply see a rotating 3D image. Boo.com was both inefficient and ineffective
Marketing in Action