How Marginal Thinking Can Slowly Destroy Your Business
Do you stick to your ethics, values, and mission statement in business? Or do you only do it when it’s convenient?
On a recent mini-vacation, I spent many hours sitting with my wife and brother on the roof of a Boston skyscraper, overlooking the city and catching up on a lot of reading. Personally, I find one of the most effective ways to detach from the stressors of everyday life is a good book – I prefer non-fiction, which puts me staunchly in the minority, as my wife regularly tells me. My topics of choice were business, leadership, and psychology.1
I was introduced to a topic called “Marginal Thinking.” Coined by Harvard professor and author Clayton Christensen in his book How Will You Measure Your Life, it focuses on the idea that all it takes is one small veer away from your core values to start a vicious circle. For an extreme example, think of Bernie Madoff. The supposed story is that Madoff’s fund was legitimate at the beginning, running successfully like many others. But one time, he decided to falsify a trade to show a big client that he was making money. Then one time led to two, two led to three, and so on. That’s technically “marginal thinking” – Madoff veered away from the core value once, and it gave him the mental green light to do it repeatedly.2
I tend to think of this as the “snowball” effect, which everyone is likely familiar with. Christensen explains it best in an article for Harvard Business Review:
“The marginal cost of doing something ‘just this once’ always seems to be negligible. But the full cost will typically be much higher…It suckers you in, and you don’t see where the path is ultimately headed or the full cost that the choice entails.”
There are a million obvious examples from the business world just like Madoff that show this theory in action. Take Enron, for example. Disgraced CEO Jeffrey Skilling was actually a classmate of Christensen’s back at Harvard, and Christensen writes in his book about how the Skilling he knew when they were 20 was kind hearted, ethical, and wanting to do good for the world. That’s nothing like the felon we learned about in the early 2000s. Are we to assume Skilling ran Enron fraudulently from the get go? The more likely scenario is that they cooked the books just once, just a bit. Then they didn’t get caught, so they did it again, a bit more. After some years, it was an all-out fraud.
These two business examples are at the furthest end of the “marginal thinking” spectrum, so let’s bring it back to some examples that may be closer to home. Most of us know at least one person who has dealt with substance abuse of some sort, whether it was alcohol, drugs, or anything else. How often have we heard the phrase, “it’s just one drink,” to which we rolled our eyes, or pleaded with them not to do so? What about a friend on a diet, who says, “it’s just one cheat day”? More than likely, both of these loved ones end up failing in their attempts to better themselves and both will usually wonder why with a straight face.
Let’s bring this back to business, as we always do. If you start approving a few negligible expenses while saying, “It’s just $100,” there’s a good chance that the next time someone comes to you with a $100 expense, you’ll blindly sign off on that as well. But those few hundred dollars, every week, or every day, can turn out to be your entire profit for the year. Those commercials that offer you a product or service “for only one dollar a day”? That campaign works because the company knows if they say, “It costs $365,” the door will get slammed in their face. If we’re smart enough to avoid it there, why aren’t we always on top of it within the confines of our own businesses?
All of us have some semblance of ethics and morals with how we choose to run our businesses.3 Personally, we’ve always run our businesses frugally – not cheap, which is a completely different mindset. The way I describe it is, we’ll spend as much money as we need to for our business, and not a dollar more. Just the other week I pushed back against a pretty inexpensive proposal from an employee that I thought was unnecessary. It’s not that we didn’t have the money to cover the cost, but I didn’t see why this specific method was the answer to the outstanding issue. On the flip side, when the roof was leaking, you can bet your life I signed off on the enormous cost to fix it. We’re not cheaping out on the integrity of our building.
Taking a step away from finances, we also have a set of guidelines that determine how we run our business. We have a strong sense of fairness, integrity, and transparency. We treat every customer the same – larger customers don’t get better deals than smaller ones. We’ve certainly received pushback from larger accounts who want to be given a leg up on everyone else. But our mantra has always been, “you can’t grow a small customer into a larger one if you treat the smaller one worse.”
We regularly make decisions that may prohibit growth or stop us from landing a brand we were pursuing. But we’re unwilling to compromise our values in order to succeed. We know many examples of competitors who will blatantly lie to a supplier or a customer and promise them the world, just to get the business. That always comes crashing down on them eventually, but in the short-term we often suffer – and we’re okay with that. We make decisions that allow us to sleep at night.
For example, if a supplier is treating us differently than one of our competitors, we don’t stand for it. We’ve stopped carrying major brands in our industry because we weren’t willing to support the way they did business. We have one supplier who, years ago, kept asking us why we weren’t selling enough of their product. The honest answer was that we didn’t know. But we soon thereafter found out that they were giving a competitor of ours an additional discount that they didn’t offer to us. We demanded the same discount, they acquiesced, we lowered our prices, and our sales skyrocketed. We have a great relationship with this supplier today, but you can bet that I always remember how they chose to do business back then. We take our morality and values seriously, no matter the consequences.
There’s a quote from Sophocles, “Rather fail with honor than succeed by fraud.” Each small step you take away from moral high ground makes it easier to do again and again, eventually leading to your business’s downfall. That’s why avoiding marginal thinking is so crucial.
It’s another crazy example, but think about Steve Jobs and how he ran Apple all those years. He was absolutely obsessed with the design of his products, to the point of driving his staff mad. He berated people on a regular basis if they weren’t up to his insanely high standards. Now, I’m not telling anyone to act like Steve Jobs, but can you imagine if he had said, “Well, that new computer looks a bit strange and doesn’t work perfectly, but I’m sure it’ll be fine. We have to get it on the market, there’s no time to waste”? What kind of company would Apple have turned into if Jobs had sacrificed his demand for technological and artistic perfection?
In the hubbub of everyday operations, most of us don’t have the time to sit down and say “Is this marginal thinking?” before every decision. But one way you can keep on top of yourself is by tracking these types of decisions in a spreadsheet or notebook. Anytime you do something differently than you should, just write it down, along with the date. Over time, you’ll see if patterns develop, or if it really is just once in a blue moon. None of us are perfect – we’re all going to occasionally make decisions that are not in line with our core beliefs. The key is being able to catch when it becomes problematic.
Doing something all the time is actually easier than doing it some of the time. If your goal is to get in shape, saying “I’ll work out one day a week” is actually more difficult than saying “I’m going to go for a 20-minute walk every morning after I wake up.” Make it a routine to stick to your values, even if you think it will put a roadblock in front of your company’s potential. If you only stick to them every so often, then at the end of the day, they’re not really your values.
Are you utterly shocked?
Granted, I’m vastly oversimplifying this, and making a ton of assumptions that may not be true. In fact, there’s a great book that makes the argument it was always a Ponzi scheme, even from the beginning. No one will ever know for certain if that’s true, but it’s wonderfully-researched and well-written.
Some less than others, but we won’t get into that now.