Efficiency vs. Effectiveness: What Low- and Middle-Income Countries Can Learn from a Key Business Mistake in the Developed World
At any given time, some societies are further down the road of development than others. But no matter where a society is on the journey, the goal of development remains the same: to create enduring systems that can improve the quality of life for everyone.
For societies that are earlier on the development path, the focus is primarily on addressing people’s essential needs for survival. In this stage of development, the goal is to leverage advances in technology to create and deliver enough of the basics (such as food, clothing and shelter) so they are accessible and affordable to more people.
Over the centuries, free enterprise has excelled at driving the efficiencies necessary to do this, using market forces to reward individuals for the ideas and solutions that allow societies to deliver more for less.
For example, the introduction of the seed drill in the 1700s, the invention of the horse-drawn reaper in the 1800s and the discovery of how to create synthetic fertilizers in the 1900s each improved agricultural output by orders of magnitude, allowing the world to reduce hunger like never before. Businesses played a key role in the development and distribution of these innovations across the agriculture sector, enabling these inventions to reach and benefit people around the world.
Similarly, the invention of the flying shuttle in 1733, the mechanized cotton gin in 1794 and the sewing machine in the mid-1800s all helped to revolutionize the textile industry, reducing the price of clothing so that people didn’t just have enough to wear, but could also begin to express themselves through their fashion.
Likewise, significant improvements were seen in the housing industry, with the invention of the circular saw and the nail-cutting machine in the late 1700s – each drastically reducing the cost of the materials needed to build shelter, leading to larger and safer places for people to rest their heads.
As these examples show, efficiency can be a powerful force – and business can be an effective driver of scale. But to paraphrase author John C. Maxwell, “while efficiency is the foundation for survival, effectiveness is the foundation for success.” And as societies grow more prosperous, driven largely by business efficiency, their focus should shift from the pursuit of greater efficiency to the search for a new definition of success – a change with considerable implications for both businesses and the broader societies in which they operate.
Indeed, as a society travels further down the road of development, it becomes clear that success isn’t just attained through efficiency – by getting more for less. Increasingly, what begins to matter more is the qualitative side of the value equation – what people are actually getting in exchange for their time and money.
As this process advances, an overemphasis on efficiency can actually limit the effectiveness of developmental efforts, damaging the quality of life for some, if not all, of the members of society.
Such is the case in today’s more developed economies thanks to the concept of shareholder primacy – the common business belief and operating principle that a business’ shareholders are more important than its other stakeholders, including customers, employees and communities. As first articulated by Nobel laureate Milton Friedman in 1970, the assumption behind shareholder primacy is that by taking a singular focus on one stakeholder (investors) and one goal (paying them as much money as possible), a business will remove inefficiencies from the entire system, which will be good for everyone.
And while this approach did initially lead to substantial financial benefits (especially for investors), after 50 years, this lingering obsession with efficiency, combined with a singular focus on monetary benefits, has created significant problems for all members of society, including investors. Income inequality, class tensions and environmental degradation are just a few of the issues that are exacerbated by the efficiency-driven wealth transfer demanded by shareholder primacy.
Indeed, focusing on material efficiency in the business sector is overly simplistic in two ways: First, a business needs all the members of its stakeholder ecosystem to be successful, so choosing one stakeholder for preferred treatment is self-limiting and discriminatory. And second, the needs of each stakeholder group can’t be met solely by maximizing the financial benefits delivered to a single group.
Customers want more than a bargain. Employees want more than a paycheck. Communities want more than tax revenue. And increasingly, investors want more than capital gains. As human beings, the people who make up all these stakeholder groups want a million other things, including peace and justice, equality and diversity, art and music, a nice dinner with friends, and a sustainable environment for their children.
If developed economies and the businesses that have driven their progress could evolve away from their focus on efficiency and, instead, embrace the effort to effectively satisfy the full breadth of human needs, they will find a new level of sustainable success. They’ll help ensure their future viability by creating broad value that customers will pay for, employees will work for, communities will welcome, and shareholders will invest in. And if the businesses that are emerging across the developing world can also adopt this broader focus, they can build a stronger economic foundation – both for their own enterprises and the communities they serve.
So, as we in the developed world work to support businesses and development efforts in low- and middle-income countries, let’s ensure that they learn from not just our successes, but from our mistakes. To start with, let’s encourage companies to not define themselves based on a product category, but rather on a human condition. Human needs rarely align with industry verticals, so this shift inherently refocuses the enterprise on how effectively it solves human problems, rather than how to dominate a production vertical through efficiency.
Additionally, let’s help companies do a better job of defining and communicating the non-monetary costs associated with their products. As mentioned above, all stakeholders care about more than just money, so the more a company can share its social and environmental footprint with its constituents, the more informed its stakeholders will be. And, thanks to market forces, the company with the lowest costs in these areas will be rewarded with more business, because it is providing a more effective overall solution.
Efficiency can be a useful tool – but at a certain point, economies must pivot to focus more on effectiveness. Only then can they leverage the significant power and resources of private enterprise to continue elevating everyone – not just in monetary ways, but also with a multitude of other benefits that lead to a truly better quality of life.
Ed Chambliss is author of “A One-Legged Stool: How Shareholder Primacy Has Broken Business (And What We Can Do About It)” and is founder and CEO of Best Friend Brands.
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