FEATURE — We all make decisions every day. Every decision comes with a cost. That cost, also known as opportunity cost, can be hard to determine. A lot of these decisions are no big deal. They won’t make or break our business. They are very inexpensive. Some decisions are very expensive and will be a make or break for our businesses. Calculating those costs is part of making that decision. It can make up for or even stop making bad gut decisions.
Obviously, you want to make the right decisions for your business. But where do you start if you don’t have all the information you need, and don’t have the time or resources to hunt that information down? What are the costs of shortcutting the process and making major decisions from the hip?
The effects of opportunity cost ripple out. These ripples can help you like in the case I’ll share below, or it can harm you, like in the case of the Third Reich’s invasion of the USSR. Thankfully, it was far more expensive than Hitler expected.
Hitler’s victory assured
Hitler had all of Europe under his boot. In areas not directly controlled by the Third Reich, Hitler had installed puppet regimes, like Vichy France, or dealt with friendly governments that would do his bidding. But, despite this success, the German war machine was still in a shaky position. Germany and the territories it controlled had limited coal and oil reserves, as well as constraints on land for food. And, although Germany was a thoroughly industrialized nation, there weren’t enough factories to keep up with the demand for guns, tanks, planes and other weapons. Hitler needed the oil reserves, factories and farmland of the southern USSR if he was going to retain control of Europe and further expand.
Operation Barbarossa, the planned invasion of the Soviet Union started June 22, 1941, and is to date the largest invasion in human history. On that day 3 million personnel from the Axis crossed the border into the Soviet Union and met with relatively weak resistance.
By October, Hitler’s troops had seized Ukraine, were closing in on Moscow, and had laid siege to Leningrad (St. Petersburg). If they continued this course, the Soviet government would be forced to surrender or retreat into Siberian exile within weeks if not days. Hitler’s victory seemed inevitable.
Hitler’s big mistake
In a shocking turn of events, Hitler made a gut decision. He shifted his focus from capturing Moscow and forcing Soviet capitulation to securing Leningrad and the Crimea. He took some troops from their drive toward Moscow and moved them, without thinking of the overall impact it would have on ending Soviet resistance or winning the war with the USSR. This weakened the German push to Moscow and allowed the Russian winter and soviet forces to stop the advance.
By making a gut decision to weaken his main push on the Soviet capital, Hitler prolonged the war in Russia. What was going to take a few months, turned into years of brutal violence on the eastern front. Many historians agree that more than any other choice, Hitler’s failure to quickly end the war with the USSR was responsible for the destruction of the Third Reich and Germany’s defeat. Dec. 7, 1941, the Japanese launched a surprise attack on the US naval base at Pearl Harbor and pulled the United States into the war in the spring of 1942. The U.S. began supplying the Soviet Union and Great Britain in earnest, dedicating lives to ending the war, destroying Hitler’s evil regime and promoting freedom throughout the world.
The simple math of the ripple effect
Hitler’s failure to think through the consequences of his decisions thankfully lost him the war. It’s that simple. He miscalculated the cost of his decision to change his focus from Moscow. And, as a result, he created a situation that cost millions of lives before taking his own. Hitler’s big mistake was not looking for the ripple effect.
Obviously, your decisions won’t end up killing people, I hope. But it’s entirely possible that the ripple from one choice could lead to bankruptcy, stagnation or wild success. The key to knowing the difference is to harness the ripple effect. Let me illustrate using simple “napkin” math I recently shared with a friend.
He was considering hiring a personal assistant to free up 10 hours of his time so he could do other things. I asked him what he thought the cost of that assistant was. He said, “oh, probably about $35,000 per year,” (Her salary). “It’s way more than that!” I replied. His sales calls took 1 hour, including travel. This meant that he could perform 8 sales calls per day. He brought in on average $2,500 per sales call. If he did nothing but sales and had a 30% close rate, he could make $1.5 million for his business in one year. In other words, not having that 10 hours per week to go sell was costing him $375,000 per year downstream. If not properly understood and applied, opportunity cost can wind up costing you more than you expect.
So, how can you get better at assessing opportunity cost and by extension make better decisions?
The three questions
There are three questions that I share with clients to help them get a better handle on the impacts of their decisions.
- What are the direct costs? Direct costs are the costs directly related to an action you may take. For example: hiring a new IT guy and how much money that will cost you in salary and benefits and setting up their workstation. When assessing opportunity costs, you want to know what the direct cost of taking that action is.
- What are the indirect costs? Indirect costs are the costs that go along with a decision that we make but aren’t directly incurred. For example: hiring a new business consultant to increase your revenues. What are the secondary effects of your decision? This is the beginning of the ripple effect. By asking this question, you’ll find where to improve your business and exactly how to get the data you’ve always wanted.
- Who benefits and how? This question takes the ripple effect further. Understanding who benefits from your choices and how they benefit is critical. If you hire that executive assistant, who benefits? You, your family and your team all benefit because you now have two more hours to dedicate to sales or execution. You get more money and can do more to grow your business.
Life is full of decisions, and each one of those decisions comes with a cost. But you have a superpower: your ability to choose. It means that you can choose the consequences of your actions. Choosing the best options requires foresight, analysis and a little intuition. By asking the three simple questions you’ll better understand the true costs and benefits of your decisions. You’ll make better decisions all around.
Keep your sword sharp.
Written by ZACHARY STUCKI. Stucki is a business consultant based in St. George, Utah, with years of experience helping companies hit their targets and scale their businesses. He holds an MBA from Arizona State University and focuses on supplying clients with the latest solutions, as well as time-tested solutions garnered through human history. Contact Stucki at [email protected].