Efficiency vs. Effectiveness Revisited

Where firms have opportunities to take advantage of experience curve or scale effects, pursuing a cost-price efficiency strategy may make sense. The danger arises when a cost-price efficiency strategy is misaligned with market needs – for example, when the preference of the majority of customers in the market is for advanced product or service features and technologies. In this case, a firm pursuing a cost-price efficiency strategy will find itself out-of-step with the marketplace and offering a product or service that few customers want.

There are a few screening questions that firms should ask themselves before committing to pursuing cost-price efficiency. First, does the firm’s industry offer significant cost advantages that could arise from experience or scale (some industries do, such as semiconductors, chemicals, etc.)? Secondly, will the firm be rewarded by offering low prices to the marketplace? Thirdly, how well-equipped is the firm to pursue a cost-price efficiency strategy (investments may have to be made to increase the firm’s physical and human capital)? If a firm can answer “yes” to all of these questions, then it may make sense to consider pursuing a cost-pice efficiency strategy.

A danger to be avoided is pushing the envelope of cost-price efficiency so far that effectiveness is sacrificed in the long-run. Pursuing cost-price efficiency entails specialization – specialization of a firm’s work force, facilities, technology and organization around operating at the lowest cost. This specialization can constrain and “calcify” a firm, rendering it unresponsive to changes in customer tastes or preferences, or innovations by rivals.

As with any strategy, cost-price efficiency must be rationalized economically. Too many firms are pursuing efficiency strategies without understanding how these strategies will be economically profitable.

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