Original article was published by Goh Seh Kai on Artificial Intelligence on Medium
The implication of Efficiency and Effectiveness to Enterprises during the Pandemic
By Dr Goh Seh Kai
18 Oct 2020
Enterprises have to stay optimistic during the current pandemic as the future will be promising for them after the pandemic runs its course. As Covid-19 virus has caused a lot of companies to wind up their business, those survived organizations will become more competitive after the pandemic is over. The reason is these survived companies will have devised new ways of dealing with the challenges during this period. They should have learnt how they could still be effective and efficient under the current adverse economic situation caused by the pandemic.
Indeed, the pandemic has provided enterprises with opportunities to strengthen their know-how, eradicate their mindset of complacency, learn how to adapt flexibly to the environmental changes and rethink their business model. How to cope with the challenges during the current pandemic is a lesson that enterprises should treasure since it is rare. They might not face the same difficulties again in this era. However, if a new pandemic will to occur also in the future, they will know how to overcome the challenges posed. Without having the opportunity of experiencing in how to tide over the tragic situation like now, the chances that enterprises can survive in the next crisis if it happens again might be slim. Moreover, if organizations can survive the current downturn, they will face fewer competitors in the post-pandemic than when they had in the pre-pandemic situation. Enterprises should, therefore, find ways to stay viable now so that they can reap fruits during the post-pandemic period.
Two critical performance indicators that companies should beware are effectiveness and efficiency. In layman’s terms, “effectiveness” is referred to as doing the right things, and “efficiency” is doing the things right. Sometimes, we may be confused to use them interchangeably. Let us take a look at the concept of these terms with a scenario as follows:
Concept of Effectiveness
If you own a company and your goal is to sell ten pieces of products in a week. You can measure the effectiveness using a formula — Actual Sale/Target Sale X 100%. If you sell only seven (7) products, the effectiveness will be 70% (7/10 X 100% = 70%). The causes of the effectiveness could be due to some customers may demand different types of products with lower price, better quality, unique design and features, etc.
The consequence of ineffectiveness is costly since you need to store the unsold goods, which incurs storage cost and the risk that the goods could become obsolete shortly. Also, your opportunity cost will increase since some of your financial resources could be otherwise be invested in producing high-demand products for generating revenue for you instead of being tied up as your inventory cost. Therefore, you should strive for high effectiveness by innovating new products to satisfy customer needs, forecasting customer demand accurately, etc., as it will help you increase revenue and reduce cost. However, despite your relentless effort, you might still fail to achieve a high degree of effectiveness because of the environmental impacts, such as economic downturn, destructive technological development, political instability, pandemic, intensified competition and so forth. Sometimes, you cannot avoid the onslaught of these external forces but have to adapt flexibly to the changes to survive. The current pandemic is a good example which exemplifies how vulnerable companies are facing despite having high effectiveness during the normality.
Concept of Efficiency
In the example above, let’s look at how to measure the efficiency of your organization. If according to the production standard, you need two (2) workers and twenty (20) pieces of materials to produce the ten (10) products. Since one of the workers is not well versed with the job, you need one more experienced worker to guide the worker. The total number of workers is now three (3) instead of two (2). As for the materials, you need two (2) more pieces because two (2) pieces are damaged during the production process. The total number of materials used is twenty-two (22) pieces now. You can measure the worker’s efficiency by using the formulae — Productivity=Output/Input; Efficiency=Actual Productivity/Standard Productivity X 100% and. Also, you can determine the material utilization and wastage by using the formulae — Utilization = Output/Input X 100% and Wastage = 100 % — Utilization. Let’s calculate the worker’s efficiency and material utilization and wastage of your company as follows.
The actual average worker’s productivity is 3.3 pieces of products (productivity = 10 pcs/3 = 3.3 pcs per worker). The standard average worker’s productivity is 5 pieces of products (productivity = 10 pcs/2 = 5 pcs per worker). Hence, the worker’s efficiency is 67% (efficiency = 3.3/5 X 100% = 67%).
Material Utilization and Wastage
The material utilisation is 91% (Output/input = 20/22 X100% = 91%), or the material wastage is 9% (100% — 91% = 9%).
From the above calculation, the efficiency of your company is not optimal since the worker’s efficiency is mediocre due to more workers are needed, and more material is required due to quality problem. As a consequence, you will incur higher labour and material cost more than expected. Hence, you should train your workers to improve their skill when the production volume is low. When the production volume is back to normal, you will have the experienced workers to improve your efficiency. Based on these two concepts, let’s take a look at their implications to enterprises during the pandemic as follows.
Implications of Efficiency and Effectiveness to Enterprises during the Pandemic
Depending on the nature of business and the complexity of processes, it may be more challenging for organizations to perform effectively and efficiently as compared with the above scenario. However, regardless of the type of company, effectiveness and efficiency should be the two objectives that organizations should pursue to succeed in their endeavour. Based on the concept of efficiency and effectiveness, I will like to use the following four categories of scenarios to elaborate on how enterprises should strategize in each situation during the pandemic.
Category One — Enterprises with High Effectiveness and High Efficiency: in this category, enterprises have high sales and are profitable. These companies may be the efficient producers of products and services, such as face mask, sanitizer, medicine, equipment, etc. which can help minimize the infection rate and impact of Covid-19 virus. The enterprises may also be the manufacturers or sellers of products, such as computer software, hardware, telecommunication devices, etc. that can enable people to conduct training, hold meetings, communicate and collaborate virtually due to pandemic. These companies may have emphasized on research and development, focused on market research and data analyses, automated production process, embraced e-commerce and leveraged on the information system, artificial intelligent technology, innovation, digitalization, etc. to enhance their effectiveness and efficiency. Moreover, they should also have a competent workforce, who are skilful, united as a team and can apply the technology well. As a result, these companies can still perform effectively and efficiently and be profitable even during the pandemic. Given the pandemic will not run its course soon, I believe these businesses will always be promising in the near future. Nevertheless, these enterprises should maintain their performance but not to be complacent in the long run.
Category Two — Enterprises with High Effectiveness and Low Efficiency: the business nature of these companies may be similar to the enterprises in category one. They are effective since the demand for their products is high. But due to low or moderate efficiency, they have lower profits than the enterprises in category one. The reasons could be they have high labour cost due to they do not have experienced workers, or they have not automated their production processes to improve worker productivity. Hence, more workers are required as compared with the enterprises in category one. It could be they have not embraced e-commerce for lowering their transaction cost during sales. They may not focus on improving their process, such as the skills of workers to reduce the rejection rate of their products. Hence, they may have high material wastage due to quality problems during the production process. Also, they may not leverage the information system for integrating the various departments to reduce their operating and administrative cost, such as paper cost, administrative cost, etc. There are many more causes of their low efficiency. I think these companies should benchmark their performance with the performance of the enterprises in category one. Also, they should study the entire operation to streamline their processes, improve their workers’ skills regularly through training and learn how they can leverage digitalization and automation, artificial intelligent technology, etc. for enhancing their efficiency.
Category Three — Enterprises with Low Effectiveness and High Efficiency: the companies in this category are impacted by the pandemic, such as hotel, tourism, restaurant, beverage, entertainment and so forth. As it is vital for preventing Covid-19 virus from spreading through social interaction, restriction by governmental legislation has caused these businesses severely affected and even ground them to a halt. Most of these companies used to be quite effective and efficient in their business before the pandemic, but now their effectiveness is undermined although they are still efficient. I think they should adopt a different business model by leveraging on their strength of efficiency and contemplating on how to minimize social interaction during their business operations. For example, since restaurants have excellent chefs, well-trained waitress and waiters, the right environment, etc., they can still operate their business by cooking the meals and let consumers order food online and deliver the meals to them. Abiding by the social distancing legislation is also crucial for these businesses so that they can resume their business and at the same time, prevent the virus from spreading. If possible, laying off experienced workers with excellent performance at this stage should be the last resort since these workers are efficient and hardly sought after in the future when the normality resumes. However, these companies should find ways to reduce cost since their sale is decreasing tremendously, although governmental support is also essential in ensuring these businesses can tide over this challenging time. Also, there were also ineffective enterprises even before the pandemic because of low demand for their products or services. I feel that these enterprises should innovate new products and services to meet dynamic customer needs. They should also consider to divest their current business and reinvest their resources in a more profitable business since their existing business may not be viable if they continue to operate it in the long run.
Category Four — Enterprises with Low Effectiveness and Low Efficiency: the enterprises in this category may be doing a similar business as the companies in category three, but they have low efficiency. They may also be the companies which solely depend on tourists. These businesses are facing an even more difficult situation now since they got the hardest hit because of cross-border travel control between countries. These companies will not see their business recover shortly since the pandemic will not run its course soon. Also, there are companies which are neither effective nor efficient even before the pandemic. Their products or services are not highly sought after by consumers due to abundant supply and high availability. Since these companies are not efficient as well, they may not survive even before the abnormality ends. I think it will be wise for the owners of these companies to consider to cease their business to avoid more losses in the long run and risk of huge debt or being bankrupt. These individuals could take the opportunity now to learn new skills sought after in more promising industries and look for a job to tide through this challenging period. They may start a business in a more profitable sector again after they master the new skills in future. I understand that it is uneasy for them to admit failure for having to quit their business established through their blood, sweat and tears. However, it is wise for them to suffer short-term than long-term pain.
In summary, enterprises should be effective and efficient to be viable. There are four possible scenarios that enterprises may operate in and the strategy they should adopt to be workable during the pandemic. If enterprises operate in category 1 (High Effectiveness and High Efficiency), they should maintain their existing performance but not to be complacent in the long run. For companies in category 2 (High Effectiveness and Low Efficiency), they should improve their efficiency through streamlining processes, improving workers’ skills, automation and digitalization. If enterprises are in category 3 (Low Effectiveness and High Efficiency), they should use a different business model. They should reduce cost but not retrench excellent and experienced staff unless inevitable, or divest their existing business and reinvest in more profitable businesses. For organizations in category 4 (Low Effectiveness and Low Efficiency), they should cease their business, save their money, learn new skills and look for a job to tide through this period.
Adaptation to the environmental changes flexibly is crucial to an organization since environmental impacts can undermine its effectiveness and efficiency. Enterprises should be agile to respond to environmental changes to reduce cost and improve revenue. Innovation, automation, training and digitalization should be the key to the effectiveness and efficiency of organizations in today’s dynamic environment, especially during the pandemic. Innovation and training can enhance organizational effectiveness, and training, automation, and digitalization can improve the efficiency of organizations. First, companies can develop new products and services through innovation supported by research and development. Without embracing innovation, companies cannot survive for long because of the impacts of destructive technologies. We all know there are many successful and renown companies have failed as a result of their complacency in innovation. I think governmental encouragement and support is also critical in spurring the innovation process of enterprises in a country. Innovation training for people should start from young, as it is essential in meeting the demand for human resources for supporting the swift innovation process in businesses. Enterprises should also equip and upgrade their workers’ skills through continued training and development to support innovation. Second, companies should improve their efficiency through automation and train their workers to learn new skills to cope with tasks and challenges brought by the automation. They should digitalize and streamline their business processes as they will improve their efficiency by reducing the cost and time from the purchasing of materials to the production and sales of products. Digitalisation also facilitates workers in market research and data analyses for understanding the trend of customer taste to meet their needs and make more accurate customer demand forecast. Hence, digitalization will benefit organizational agility in responding to environmental changes and support innovation for enhancing effectiveness as well.