In my first economic class I was introduced to this idea of opportunity cost, the cost of one activity measured against the activity with the next highest value. During lectures of opportunity costs there were lots of examples involving diagrams with beer and pizza or coconuts and fish. The beer and pizza examples seemed to be an attempt to appeal to crazy college kids who do nothing but drink beer and eat pizza. Coconuts and fish pulled in the more literary types and was always used in the context of the character Robinson Crusoe. I know it seems a bit silly, but it stuck in my mind. From that point forward I found myself asking the what else can I do with that dollar or block of time?

Opportunity cost works like this. If you are stranded on a deserted island like Robinson Crusoe, you can gather coconuts or try to catch a fish to stay alive. You could also try a combination of gathering some coconuts and fishing. What do you do? The answer always seems to be spend a day or two gathering as many coconuts as possible, then you focus on building a net or trap of to catch a fish. Questions like this present themselves everyday. They may not involve survival, but they do involve time and money. Your most precious commodities. Begging the question how do you use them?

Here are a few questions I found myself thinking about over the last year. Is my current job depleting precious resources that could be used to make my life better? What is the opportunity cost of dragging myself into the office everyday? Am I using my free time at home to realize my goals? What is opportunity cost of watching two to three hours of television each night?

The answer to the questions? Yes my job was depleting precious resources. Dragging myself into the office each was using up more energy than it had a right too. I can use my free time to learn new subjects, write down ideas and share them with the world. Two hours of television costs a lot more than its worth. I’ll bet your answers are similar. The only option then is to choose the activity with the highest value. But how can you use idea at work?

The concept of opportunity cost has a profound impact on businesses. Yet many do not look beyond the big picture to see what the opportunity cost of internal actions are doing to their bottom line. For example lets say your business has three departments, A, B and C. Each one conducts a series of steps, 1, 2 and 3. Workflow begins with A and ends with C. For some reason department A starts doing steps 1 and 3. In turn the flow to department B is impeded as is the flow to department C. Resulting in inefficiency. How does this relate to opportunity cost? Department A’s actions must be measured against the activity with the next highest value. If workflow begins in A then to do anything else impedes workflow. If you don’t keep an eye on internal actions, then you risk inefficiencies.

Key questions to ask:

Why do we do what we do?

How do we do what we do?

Who is doing the work?

What are they doing?

Why are they doing it?

Of course asking the question are not enough. You must be willing to act upon the answers. More importantly you need to make sure that your asking the right people. I suggest you go to the people doing the work. You really don’t need to know the opinion of the middle manager and the supervisor and the team leader place over the department. You need to ask the people setting things in motion. There is really no other way to ensure you and your business choosing the action with the highest value.

It seems that the best practice is to write down some goals and make sure you are taking steps to reach those goals. Every activity you complete at home and work should move you closer to that goal. If it doesn’t, kick it to the curb. That means you may need to change jobs, cut out television and get up earlier. You may need to realign work assignments at the office or completely ditch a redundant department. But every activity should be measured against the activity with the next highest value.

Photo Credit: David Simmonds, downloaded from stock.xchng.