The Cost of Winning!!

In 279 BC, King Pyrrhus of Epirus defeated the Romans at the Battle of Asculum. The victory, however, came at a considerable cost. His forces suffered substantial losses, including experienced commanders whom he could not readily replace. The Romans, notwithstanding their defeat, retained the capacity to replenish their ranks and continue the war.

According to the Greek historian Plutarch, when congratulated on his victory, Pyrrhus reportedly remarked that another such victory would leave him utterly ruined.

His experience gave rise to what became known as a Pyrrhic victory, where the cost of winning threatens to outweigh the benefit of victory itself. It presents a paradox that remains relevant to modern commerce.

Success, however apparent, is not necessarily evidence of strategic advantage.

Businesses secure contracts, increase turnover and expand into new markets. Yet the attainment of an objective does not, without more, establish that the business is better off. Regard must also be had to the resources expended, the obligations assumed and the opportunities forgone.

The difficulty arises when the pursuit of success becomes detached from the commercial purpose it was intended to serve. In such circumstances, achievement risks becoming an objective pursued irrespective of its consequences.

Hedonic treadmill

The hedonic treadmill, also known as hedonic adaptation, describes the psychological tendency for individuals to become accustomed to improvements in their circumstances, such that the satisfaction initially derived from those improvements may diminish over time.

Consider an entrepreneur whose ambition is to establish a business generating €500,000 in annual turnover. Upon reaching that milestone, what was once extraordinary gradually becomes ordinary. The next objective becomes €1 million, thereafter €2 million.

Yesterday’s ambition becomes today’s minimum expectation.

The pursuit of increasingly ambitious targets does not, of itself, establish that hedonic adaptation is at work. Growth may be justified by market opportunities, competitive pressures or commercial necessity. The distinction arises where further achievement is pursued principally to satisfy expectations that continually shift, notwithstanding that its underlying commercial justification remains uncertain.

It must be noted that the danger lies not in ambition itself, but in allowing the satisfaction derived from achievement to become the measure of commercial necessity. The former concerns the expectations of the decision-maker, while the latter concerns the interests of the business. They may coincide, but one does not establish the other.

Whilst expectations may continue to rise, productive capacity and economic returns do not necessarily follow the same trajectory.

It is precisely here that psychology encounters economics.

Diminishing returns

The law of diminishing marginal returns describes an economic principle whereby increasing one productive input, whilst other inputs remain fixed, eventually produces progressively smaller additions to output.

Consider an SME operating with limited premises, equipment and production capacity. Initially, employing additional staff may substantially increase output. However, as more employees are introduced without a corresponding increase in capacity, each additional employee may contribute progressively less.

The business continues committing resources, but the additional productive benefit declines.

This does not necessarily mean that total output has fallen or that further investment is unprofitable. Rather, it demonstrates that increasing inputs does not necessarily produce proportionate increases in output. The wider commercial enquiry is whether the anticipated benefit of further investment justifies its cost.

Returning to our entrepreneur, whose business has grown from €500,000 to €1 million in annual turnover, further expansion becomes the principal objective. Additional staff are recruited, larger premises secured and increasingly demanding contracts undertaken.

Revenue continues to rise, but so too do operational complexity, financing requirements and management commitments. Suppose the business secures a substantial contract which significantly increases turnover. To fulfil it, however, the company must commit additional capital, accept narrower margins and divert resources from existing profitable customers.

The securing of a contract is evidence of commercial achievement, but it is not, without more, proof of commercial advantage. Its value cannot be determined by reference to the consideration payable alone. Regard must also be had to the obligations assumed, the resources committed and the opportunities forgone.

On paper, another milestone has been achieved. In substance, the business may be worse off.

Pyrrhic victory

It may be contended that commercial advancement necessarily involves calculated risk and, on occasion, the acceptance of reduced immediate returns. The author accepts that proposition. The distinction, however, lies between sacrificing present value for a reasonably anticipated future advantage and committing resources merely to sustain the appearance of progress.

The former represents a calculated commercial sacrifice undertaken in pursuit of an identifiable strategic benefit. The latter, the author contends, constitutes a strategic miscalculation where resources are committed to further achievement without sufficient regard to whether that achievement advances the interests of the business.

The difficulty becomes particularly pronounced where psychological expectations continue to increase whilst the additional productive benefits of investment diminish. The decision-maker may consequently pursue increasingly ambitious objectives at precisely the point when further investment is producing progressively smaller gains.

Although distinct in their operation, hedonic adaptation and diminishing marginal returns may converge in their commercial consequences. Where the desire for further achievement is not subjected to economic scrutiny, the pursuit of growth risks becoming detached from the value it is intended to create.

It is in these circumstances that the lesson of Pyrrhus becomes particularly instructive. His predicament was not that he had failed to achieve his immediate objective, but that achieving it had compromised the resources upon which his wider ambition depended. The danger, therefore, is not necessarily that a business will fail to achieve its objectives, but that it may succeed at a cost which undermines its capacity to benefit from that success.

The same distinction confronts modern businesses. Growth may be desirable, ambition necessary and commercial sacrifice justified. However, none of these considerations, whether individually or collectively, establishes that pursuing a particular objective is strategically sound.

Rodney Jack BL

Founder, RJ Strategic Advisory

Rodney's background in law, business, cyber-risk and compliance informs RJSA's approach to governance, data risk, communications and crisis response. About the founder

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