Sunk costs

What has the end of the world got to do with business strategy?

Published on: 20 May 2011

Mr Harold Camping, an 89 year old evangelist from America predicts that tomorrow Jesus Christ will return to earth and true followers will be swept up, or in his words “raptured”, to heaven.

He predicts that giant earthquakes will sweep across the world to mark the start of the destruction of the earth and with the exception of the 200 million people that will have been raptured to heaven the rest of the world’s population will perish during the earth’s destruction.

Now, with a little bit of luck you’re sat at your desk with a cup of coffee reading this and the world didn’t come to an end on Saturday.

There’s a nice business strategy example in this though and it also involves a number of pet dogs and cats…

Some of the better known business strategy models include:

The Rational Model – the “original” strategic planning model with 3 clear steps of Analysis – Choice – Implementation.

The Emergent Model – made famous by Mintzberg’s analysis of Honda’s entry to the US motor bike market.

Logical Incrementalism – small regular changes to the strategic approach.

And then there is the concept of “Freewheeling Opportunism”. This is the situation where an organisation doesn’t have a formal plan but takes advantage of opportunities as and when they arise.

In a classic freewheeling opportunism move an American entrepreneur has just set up Eternal Earth-bound pets. This business offers a service to those individuals with pets who believe that they will be raptured tomorrow.

Unfortunately the rapture process highlighted by Mr Camping doesn’t allow people to take their pets. Eternal Earth-bound pets has taken quick advantage of this by offering a service to look after the pets after their owner has been raptured.

As at the time of writing, more than 250 clients have paid $135 for their pets to be looked after after the rapture.

Eternal Earth-Bound Pet’s tag line on their website is:

The next best thing to pet salvation in a Post Rapture World

Eternal Earth-bound pets has a no refunds policy if the end of the world doesn’t happen…

If you found this interesting you may also like:

Should you do a u-turn if you see a GAP in the market and it’s out of the blue?

Published on: 13 Oct 2010

According to dictionary.com the definition of a U-turn is

1. a U -shaped turn made by a vehicle so as to head in the opposite direction from its original course.

2. a reversal of policy, tactics, or the like, resembling such a maneuver.

For anyone that’s looking for a current example of a branding u-turn then I’d recommend looking at what has happened since the US clothing and accessories retailer GAP introduced their new logo last week.

GAP Inc, which was founded in 1969 in San Francisco, is home to a number of brands including Old Navy and Banana Republic. Their most famous brand though is that of GAP itself.

GAP has approximately 3,100 stores around the world and last year had revenue of nearly $15 billion.

They are a great brand and their “blue box logo” (shown above on the GAP shopping bag) is one of the best known logos in the fashion world.

They decided however to change the logo and introduced the new logo shown below. Now, what do you think of the new logo? Which one do you prefer – the original one or the new one?

Personally I think that the new one looks as though it would be more suited to a high tech or consultancy company. The original one seems to better match their concept of clothing being laid back and traditional.

Following the launch of the new logo last week there was uproar on social media sites such as Twitter and Facebook with people demanding that the old logo be brought back.

The upshot is that on Monday GAP released a press release where they announced that the new logo would be withdrawn and the previous one reinstated.

In the words of the President of GAP Brand North America there was “an outpouring of comments from customers and the online community in support of the iconic blue box logo.”

A decision was therefore made not to use the new logo but to revert back to the previous one.

Was this a company listening to its customers and giving them what they wanted or was it a company that didn’t speak to their customers enough before making the change? There will be arguments both ways.

We shouldn’t forget the cost of this u-turn.

There would have course have been the fee GAP paid to their branding agency (probably ex-branding agency now). A quick straw poll in the office felt that the fee paid for this particular design should have been in the region of £10.

There would also have been the costs of redesigned packaging and signage with the new (now old) logo on it plus of course all the management time.

They say that “there’s no such thing as bad publicity”. I’m not sure GAP’s Branding agency would agree with this.

A sunk cost but at least I didn’t sink….

Published on: 08 Jan 2010

It’s a common theme in discussions with my friends that we all seem to be getting busier and busier at work. Spare time is at a premium.

One of my hobbies when I do have some spare time is trying to keep fit. Six years ago I signed up for the 2004 London triathlon and since then I have been hooked on the sport. Triathlon is an event where you swim, cycle and then run. I’m very much an amateur and look up in awe at the elite athletes that seem to literally sprint around the course. For me it’s the training, competing and comradeship that is the fun behind the event.

At last year’s London Triathlon I was hoping to beat my personal best but unfortunately picked up an injury to one of my knees in the run up to the event. I was in two minds whether to start the race and then try to struggle through and finish it. After all, I had spent money on entering and had trained hard for the event.

It took a friend of mine who happens to be an accountant to make me see sense. He mentioned that the money I had spent on entering and the time I had spent on training was simply a sunk cost.  (Students will remember from our free ExPress notes that sunk costs are not relevant. They have already taken place and cannot be reversed.)

What I needed to do now was to focus on the situation as it stood at that time rather than review any costs that had been incurred already.  A very sensible piece of advice by my friend and probably saved me from injuring my knee any further.

In the end though I went for the middle ground by completing the swim but not the bike or run. As my friend pointed out, I didn’t sink in the swim and ignored the sunk costs in the bike and run!

The ExP Group