The true opportunity cost of a company

Perhaps most of us have heard of opportunity cost. If you are a finance professional, you likely know that opportunity cost is the benefit forgone by choosing one alternative over a better one. It represents the cost of the best option not pursued. This usually occurs when we are faced with an alternative that offers greater returns than our current choice, but for one reason or another, we decide to remain in our current situation and therefore assume the cost of the benefits we will not obtain from the alternative. For example, when a bank decides not to implement systems that would automate several processes and reduce labor costs, or when a sports club decides not to invest in solar water heaters despite the savings they would generate in water-heating expenses.

However, we will not always have access to alternatives that are theoretically and financially superior, especially when it comes to new business models or the optimal exploitation of an existing one. Technical improvements, such as the implementation of new technologies mentioned above, tend to be far more common. In fact, the best investment opportunities are generally not offered as readily as commodities for purchase—such as franchises.

Cosmetic Innovation vs. Deep Innovation

Ultimately, just as the best businesses are rarely put up for sale, they do not always have to be the product of chance. By implementing a structured, valid, and reliable process for genuine business model innovation, we can begin to define and explore our adjacent business space. This exploration and definition, carried out within a structured process, would allow us to manage the field from which new opportunities (or threats) emerge and, therefore, assess our progress in that regard. It would also enable us to calculate our true opportunity cost at any given moment, because what is not managed cannot be measured, and what is not measured cannot be improved.

For decades, innovation has been a recurring topic in business discussions. Yet true innovation, in its fullest expression, rarely becomes a reality. This is partly due to the costs involved, but also because the concept itself has not fully permeated corporate management paradigms, particularly among medium-sized family-owned businesses, let alone small enterprises. In the few organizations where innovation processes are implemented—typically large corporations—they are generally limited to product development and internal process improvements. While these efforts undoubtedly contribute to optimizing the current business model, they often fall short of their potential due to shortcomings in the methodology itself.

One of the greatest obstacles to adopting an ambitious innovation process that goes beyond incremental improvements, aside from the challenge of securing the right talent, lies in management's attitude toward innovation. Leaders often expect a series of prescribed steps to generate a specific economic return within a defined period. In reality, innovation is a process of discovery and learning, where outcomes depend on three variables: our expectations, our capabilities, and the conditions of the surrounding environment or market. If our expectations are unrealistically high, identifying and developing a business model capable of meeting them becomes an extraordinary challenge. Conversely, when expectations, capabilities, and market conditions are reasonably aligned, the range of available opportunities becomes broader and more abundant.

In fact, the first major benefit of this exercise is realizing how far one may actually be from even a chance opportunity. It is only by studying and comparing our expectations against environmental conditions that we can understand how much luck would be required to encounter the “ideal” project—something that, in many cases, proves far more remote than previously imagined. While we cannot change market conditions, we can adjust our expectations. There are two ways to do this. The first is by recognizing market realities through the innovation process described above. The second is by being forced to do so when confronted with the imminent decline of our business. The latter path is undoubtedly more painful and abrupt, as the reassessment of our assumptions is driven by shrinking budgets, often leading to resignation. This is a far less desirable state than acknowledging and learning from reality through a professional innovation process while the company is still operating from a position of strength.

If It Was Not Managed, Then It Was Never Known

As mentioned earlier, what is not managed cannot be measured, and what cannot be measured cannot be improved. Ignorance of a business's adjacent space—or its broader environment—inevitably leads to neglect, and therefore to the absence of any meaningful measurement.

If we do not have strategic alternatives to compare, there is no way to estimate opportunity costs. Yet the absence of alternatives does not mean they could not exist. As the saying goes, “Those who seek shall find.” However, one can also become lost along the way without a method that facilitates learning from the process, much like the scientific method. Just as great scientific discoveries were the result of years—or even decades—of effort, with the primary reward often being the knowledge gained throughout the journey before the final breakthrough, so too is authentic innovation. The process itself is a disciplined pursuit of understanding, where learning precedes results and where the greatest opportunities are often uncovered long before they are fully realized.