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CEO Insights: How to Minimize Opportunity Cost in Business Decisions

Posted by StellaPop on Sep 29, 2019 8:35:00 AM
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Opprotunity-Cost

Just like in life, everything in business is a tradeoff. Every decision that you make has an opportunity cost - basically, by taking one route, you're giving up the opportunity to take another route. Some of these tradeoffs are small, and others are major; some are simple, and some are extraordinarily complex.

Say you want to purchase a computer. If your only requirement is that it meets a certain price point, the decision is easy. If, on the other hand, it needs to be a certain size, have a certain amount of processing power, a touch screen, and four USB ports, chances are you're going to have to make some tradeoffs.

While compromise is part of decision-making, the goal is to make the best possible decision with the least degree of opportunity cost. 

So how do you know which tradeoffs to make in order to best benefit your business?

It All Begins With Our Target Market

When making decisions about your business, your target market should nearly always be your starting point. If you're deciding whether to launch a particular product, pivot to a new niche or to change your pricing, consider how this will impact your market. The best decisions are those that will maximize benefits to them while minimizing costs and inconvenience.

If you sell clothing, your decision might revolve around sizing. Perhaps your target audience tends to buy standard sizes, but some are requesting plus or petite sizes. The cost associated with offering these sizes means that you may not be able to expand your core range or lower your prices the way you've been wanting to. However, offering plus and petite sizes may also position your brand as being inclusive and body-positive, which may grow your audience or even engender greater support among your existing customers.

Neither decision is wrong, but one is better than the other. The best one depends on the needs of your market and how they'll respond. Remember, your brand is built around this audience, so every decision that you make with them in mind is one that helps to further consolidate your brand. 

The Even Swap Strategy for Rational Decision-Making

While making decisions with your target audience in mind is simple in theory, the actual decision-making can be extremely difficult. Like our laptop example earlier, most decisions involve a number of different factors that need to be weighed and analyzed. Not only are there many factors involved, but these factors are often highly disparate - think apples, oranges, and entire fruit salads. 

An article in the Harvard Business Review offers a novel approach for distilling down complex problems in order to come to a decision with minimal opportunity cost. Called the "Even Swap" approach, it converts those oranges and fruit salads into apples for simplified analysis.

Here's how. 

  • Begin by creating a consequence table. Write your objectives in rows along the left side and your potential choices in columns along the top. Then outline the consequence of each choice on each objective. Try to keep your terminology consistent so you can easily compare your options.
  • Start eliminating your options. Compare each column to see which alternative is better based on how it performs on each consequence you've outlined, eliminating alternatives as you go. The idea is to have a few alternatives as possible - this translates to fewer tradeoffs being made. 
  • Make your even swaps. Hopefully, you're now down to just a few alternatives. Once there, you want to cancel our as many of the consequence rows as possible so that your decision hinges on just one. To do this, you need to adjust the weighting of the remaining factors up or down until you're left with one obvious, mathematically sound decision. 

It's a process that seems complex, but once you've become accustomed to the mechanics of it, it's a powerful tool for helping you make wise decisions that are of real - not just apparent - value to your company and your market.

Business tradeoffs are a given, but by using rational decision-making methods such as the one above you can make smart choices that are based on more than a gut feeling. For more advice on how to improve your decision-making processes to ensure powerful ROI, get in touch.

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See Also:

Business Minded: Organizational Strategic Planning in 8 Key Steps

Let's See Some Hustle Out There: How to bed the Champion of Business Strategy

Corporate Leadership: The Cost of Carousel Decision Making – Or Lack Thereof

Topics: Management, Leadership, CEO Series

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