Tag: opportunity cost

The cost is not just the cost – MBA Learnings

Let’s take a situation where a firm decides to buy a smaller technology firm for $1 Billion.

Every decision that is made is typically the result of a cost-benefit analysis. In some cases, this analysis is entirely quantitative. In others, it has a huge qualitative element (e.g. fit with strategy). Either way, the costs of the acquisition are not just the cost of acquiring the company. Those are just the financial costs.

The costs that should matter to us are the economic costs of the acquisition – driven by the opportunity cost of using that capital. In this case, the acquiring company had 3 options on how to spend the billion dollars related to that acquisition (there are options beyond this – we’ll assume the acquisition was critical) –

  1. Build the technology
  2. Partner with the technology company to get access to it
  3. Acquire it

When we take these options and their opportunity costs into consideration, the only way we get to option 3 is if we believe that it is the best use of the 1 Billion dollars. Or, put differently, had we invested the billion dollars into options 1 or 2, the long term results would be sub-optimal.

Understanding opportunity costs is fundamental in life just as it is business. At any given time, saying “yes” to a decision just because it provides us some benefit is a really bad way to make decisions. The way to make such decisions is to ask – “Is this the best possible use of my time given all my priorities?”

Great strategy requires us to make choices after understanding trade-offs. And, having a good decision making process that considers opportunity costs is an integral part of great strategy.

cost, opportunity cost

No

Every time you say a yes, you are saying no. Opportunity cost – a simple concept in theory.

One of the best practitioners of opportunity cost that I know of is Seth Godin. There are 2 examples that I think about from time to time.

The first was when I emailed Seth asking him if he would be willing to do an interview. His response, as is the norm, was quick and straight to the point. He said “Sorry, I wouldn’t be able to do it justice.” I loved the words – “I wouldn’t be able to do it justice.” Exquisitely chosen. Clearly, he’s had a lot of practice at this.

The second example was when I thought about Seth’s approach to blogging. He just shows up, posts, and leaves. I think he’s got an automated script that shares his posts on Twitter and Facebook. He doesn’t engage on either platform and has turned off comments on his blog. And, yet, his blog is as successful as it gets. It’s not that Seth doesn’t engage – he’s as approachable as anybody. It’s just that he takes a clear stand on where he will and won’t engage.

Both of these examples are representative of Seth’s approach to time and work. This may not work for you and me because his priorities and approach is likely to be different from ours. But, his approach is telling. I learnt 3 things from the exchanges I had with Seth –

1. When you are saying yes, you are always saying no. Always. You can’t do everything. You will piss a few people off. And you just need to accept that.

2. Understand your priorities. If you want to make a positive difference in the world, then cultivate the discipline to say no to projects that don’t contribute to that. It begins with your priorities. Always.

3. Before you say yes, ask yourself if you will truly be able to do it justice. If the answer is no, don’t say it. It might seem like you’re making the other person happy. But, that’s just the short term. It’s not going to end well.

And, one last thing – if it helps at all, find people who do this well and take inspiration from them. Whenever I think of priorities and saying no, I think of Seth.

Thanks Seth.