Growth requires letting go of old systems, strategies, and decisions that worked well at an earlier stage of business but are no longer sufficient once a business reaches a certain size.
As a business systems and processes strategist, I’ve noticed three common mistakes that many companies make when it comes to optimizing their operations.
Sunk cost fallacy, law of diminishing returns, and reasoning by analogy are all mental models that can be major obstacles to success.
Here’s what they look like and how to avoid them.
Sunk costs are costs that have already been incurred and cannot be recovered.
One of the biggest mistakes I see business owners make is sticking with a flawed strategy simply because they’ve already invested time, money, or resources into it. This is known as the sunk cost fallacy, and it can be a major obstacle to progress.
For example, imagine a small business that invested heavily in developing a new product that isn’t selling as well as they had hoped. Despite clear signs that the product is not meeting the needs of their target market, the business owner continues to pour resources into it, hoping to recoup their investment.
This is a classic example of the sunk cost fallacy at work. By continuing to invest in a strategy that isn’t working, the business owner is throwing good money after bad and risking the long-term success of their business.
If you find yourself in this position, it’s important to take a step back and reassess the project or strategy objectively. Consider whether it is still feasible, necessary, and relevant to your goals.
Don’t let past investment cloud your judgment. Instead, make decisions based on the current and future state of the project or strategy, not past investment.
Another common mistake I see business owners make is optimizing their processes and systems beyond what makes sense. While optimization is important for efficiency and growth, there comes a point where additional efforts yield diminishing returns.
Let’s look at an example.
A manufacturing company produces a range of products and operates several production lines. Management wants to optimize the production process to increase efficiency and reduce costs. They have identified several areas where improvements can be made, including streamlining the production line, optimizing the supply chain, and reducing waste.
Instead of trying to optimize every aspect of the production process, the company applies the 80/20 rule to focus on the critical few factors that will have the most significant impact on efficiency and cost reduction. After analyzing the production process, they learn that:
As a result, the company decides to focus their optimization efforts on the assembly line for this product.
They invest in new equipment, modify the assembly process, and train employees to work more efficiently. By focusing their efforts on this critical area, the company can achieve significant improvements in efficiency and cost reduction without wasting resources on areas that are less critical.
By applying the 80/20 rule, the manufacturing company was able to avoid the trap of over-optimization and the law of diminishing returns.
Instead of trying to optimize every aspect of the production process, they focused their efforts on the critical few factors that would have the most significant impact on their business.
The third mistake business owners make is reasoning by analogy and adopting best practices that don’t fit their specific needs. While best practices can be helpful, blindly adopting them without considering how they fit your business can lead to problems.
For example, let’s look at a mid-sized software development firm that specializes in creating customized solutions for its clients. The company has experienced steady growth in recent years, and management is looking for ways to optimize their operations to support further expansion.
The company decides to adopt a best practice that they read about in a trade publication. The best practice recommends using a specific project management framework and associated tools to manage projects more efficiently.
Initially, the team is excited about the new framework and begins using it to manage their projects. However, they quickly realize that the framework doesn’t work as well for their unique business model as they had hoped.
For one thing, the framework doesn’t allow for the high degree of customization that is required for the company’s projects. The team is forced to adapt the framework to fit their needs, which takes time and resources away from actual project work.
Additionally, the framework doesn’t account for the company’s agile development process, which is critical to their success. The team finds themselves struggling to reconcile the rigid framework with the flexible and iterative approach that is required for agile development.
As a result of these issues, the project management framework ends up causing more problems than it solves. The team is less efficient, less productive, and less satisfied with their work.
In this case, the software company fell prey to the trap of reasoning by analogy and adopted a best practice without considering how it fits their specific needs. By doing so, they wasted time and resources on a solution that didn’t work for their business model and may have even set themselves back in terms of growth and expansion.
By avoiding these mental model-based traps, business owners can optimize their operations more effectively and achieve long-term success.
But only if you see them. It can sometimes be hard to see the whole picture when you’re stuck inside the frame. Mental model errors are insidious because we don’t always recognize that we’re making them.
Sometimes it can be helpful to get an outside perspective from a colleague, mentor, or consultant who can provide a fresh perspective and help you see things more objectively.
If you’re ready to get some help with optimizing your business processes and systems, I encourage you to book a free consultation with me. Together, we can identify areas for improvement and develop a customized plan to help your business achieve its goals.
Don’t let these mental model-based mistakes hold you back – take action today and start optimizing your business for success.