Opportunities & Oppurtunity Cost. The Marshmallow-Test for Management
The marshmallow test is a well-known psychological experiment with children. They are given a delicious candy and can either eat it immediately or get another one later if they resist the temptation to sacrifice the immediate pleasure. This test examines impulse control and how children relate their needs in relation to rewards.
Some kids succeed, others prefer to eat the candy right away, and some struggle with the decision for a long time. The videos are funny because you can see the ambivalent feelings on the children’s faces. Waiting time, authority of the task setters as well as the cultural background of the children change the outcome as expected. By the way, a later study found that children with good impulse control tended to be “more stable and successful” as adults.
What candy is to children, opportunities are to (product) management. Because they are tempting. They present themselves, for example, in the form of concrete and lucrative contracts, in partnerships, the buyout of competitors, or typically in the implementation of ideas designed to make one’s own product more successful. Should they therefore be pursued while they are still present?
Opportunity costs in (product) management
It is not the investigation of whether a supposed opportunity actually is one that makes the decision difficult. Rather, it is the opportunity costs. Without exception, they occur when opportunities are perceived. All the things that cannot be done and achieved because these opportunities have been taken. Not only in terms of effort and time spent, but also because the business logic or direction of the products may change with them. Products may take different paths as a result and other opportunities may no longer exist.
The big dilemma is primarily the situation where many mediocre opportunities are realized. Mediocrity does not lead to great success. In the worst case, these mediocre opportunities therefore lead product development away from pursuing a much more promising strategy or initiating a necessary product makeover. Gradually, the products lose value and are replaced by better products in the future.
The right way to deal with opportunity costs
So how to escape the trap of mediocrity and properly deal with opportunities?
First, responsible decision makers should have sufficient impulse control to consider opportunity costs. They are part of any analysis of whether opportunities should be taken.
Then, the valuation of alternative opportunities must be considered in contrast. They usually come in the form of larger, but also uncertain strategic options that lie in the future. From a controlling perspective, they are also difficult or impossible to evaluate in a meaningful way. Too many assumptions, too much complexity. Either there is too much simplification or it ends up in Excel spreadsheets that are no longer usable. The most successful, product-driven companies therefore do not prioritize opportunities over strategic options in this way. Instead, they choose the path of only seizing opportunities that move them one step closer to their vision. These can also be tactical opportunities, which may only serve to satisfy a secondary purpose such as sufficient financing. All other opportunities with no clear benefit to the vision are dismissed. When in doubt, they choose the strategic option.
Finally, the observation that without a valid product vision and a comprehensible and promising product strategy, the alternatives to mediocre opportunities will simply not exist. Only in relation to a promising strategy opportunity costs can become evident.