Using Utility in Business Decision Making

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  • 0:00 Driven by Utility
  • 1:03 What Is Utility?
  • 1:41 Upgrading Efficiency
  • 2:30 Real-Life Examples of…
  • 3:47 Lesson Summary
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Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught middle and high school history, and has a master's degree in Islamic law.

A company should always work to maximize profits, right? Well, yes and no. In this lesson, we look at the idea of utility and see how profits can sometimes come second if something with greater utility is needed.

Driven by Utility

Let's say that you run a widget factory. One day, someone comes into your office and offers a brand new way of manufacturing widgets. You'll have the full rights to the process, if you choose to buy it, and it will definitely make your profits go up. However, there's a catch. The new process has a price equivalent to how much your factory makes in three months! Also, you'd have to slow down production for the new equipment to be installed, meaning that your company wouldn't make as much money in the two months to install it as it would otherwise. So what do you do? Do you thank the inventor for his time and show him the door? Or, do you call the Chief Financial Officer and have her start crunching some numbers?

If you want your business to stay competitive, then chances are that you're already on the phone with the CFO! Utility is the idea that the real value of something is in its usefulness, not anything implicit. In this lesson, we'll take a look at what utility means for business decision making.

What Is Utility?

Let's back this up for a second just to make sure you get the idea of utility. Suddenly, you go from being in your office to being stranded on a deserted island. A genie appears and offers you a choice. You can either have all the money in the world and never be rescued, or a fully charged satellite phone and GPS beacon. Chances are you take the phone and beacon. After all, that money doesn't do you any good if you can't spend it! That is the core concept of utility - what is most useful to the organization. In the above example, using the new manufacturing process had great utility because it upgraded efficiency.

Upgrading Efficiency

Still, utility has to be balanced properly to find out the real cost. By real cost, I mean how much you're actually going to spend making that happen. Let's go back to our widget manufacturing plant. Let's say that your widgets are timeless and always in demand. Before you think that I've lost my mind, that could mean anything from a pencil to a toilet seat. You'll have to take a short-term loss to make the necessary upgrades, but you'll have so much more to gain later. However, let's say that the new process actually wasn't such a great deal. Whereas everyone is currently trained on how to use the current manufacturing system, the new version requires yearly training of a month at a time! That's a massive loss of productivity. In that case, it may not be so worthwhile.

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