Strategic Planning: Efficiency or Effectiveness

By FH Cooper | Leave a Comment

Peter Drucker once remarked that it is more important to do the right thing (to be effective) than it is to do things right (to be efficient). Current strategic thinking sees a clear role for both. Strategic planning is competitive planning which strives to improve financial performance by improving the performance of the company. The scale of measure often used is the scale of effective performance, an externally oriented scale of measure that compares the company with the competition. Effectiveness also measures the company’s ability to satisfy customer needs. Usually the customers do the measuring, but a good strategic planner will adopt an independent viewpoint to establish this scale.

The best performance, however, is obtained when the company also performs its internal operations well; that is, it operates at a high level of efficiency. This is an internal scale of measure. It is frequently historical and is much more forgiving than the external scale of effectiveness, which often is outside the control of the company. Improvement in efficiency alone may not protect market share or maintain satisfactory profit margins in the face of competitive actions.

The external view includes customers as well as competitors. The strategic planner must identify very clearly the customer’s needs, not only in terms of products, but also their pricing, availability and service. There are frequently several factors in every industry which are key to achieving success. They include actions that expand sales and market share by adding new customers and keeping the old ones. Competitive advantage achieves this by taking customers from competitors. Comparative advantage grows sales and market share through the possession of some structural advantage; for example, access to specialized raw materials or low-cost capital. The company that can satisfy the key success factors will rank high on the effectiveness scale. If it does this for less cost than others, the company also will rank very high in efficiency.

Fortunately, companies are not locked into the same set of key success factors forever. Since competition is  a dynamic concept, we can modify key success factors and influence customers to appreciate another set more in our favor. Strategic planning is not just progress from guesses and rough numbers to detailed analysis and accurate numbers. Strategic planning is understanding the proper connections between means and ends.

Excerpted from “Making It In Manufacturing”

© David A.  Curtis