Stop Doubling Down on your failing strategy
- Author: Freek Vermeulen and Niro Sivanathan
- Full Title: Stop Doubling Down on your failing strategy
- Document Note:
Q: What is an escalation of commitment?
A: It is holding on too long to a strategy that was once successful.
Q: What is the sunk cost fallacy?
A: It is a bias that reinforces the tendency of organizational decision makers to tacitly ignore events that undermine their current strategy and double down on the initial decision in order to justify their prior actions.
Q: What is the best way to prevent escalation of commitment?
A: Companies can reduce their exposure to escalation by adopting practices such as setting decision rules, protecting dissenters, and reinforcing the anticipation of regret.
- What are the main purposes of this document?
- What policies or regulations does this document discuss?
- What recommendations or conclusions does this document make?
- URL: 46370637
- escalation of commitment: holding on too long to a strategy that was once successful (View Highlight)
- Companies often stick too long to a once successful but failing strategy. The British music company HMV did so, and it went from commanding a 40% share of Britain’s music market to receivership in just over a decade. (View Highlight)
- Escalation of commitment is deeply rooted in the human brain. (View Highlight)
- Research has identified many biases that explain why decision makers may escalate a prior commitment, including the sunk cost fallacy, loss aversion, the illusion of control, preference for completion, pluralistic ignorance, and personal identification. (View Highlight)
- These results underscore the fact that people tend
to stick to an existing course of action, no matter how irrational. (View Highlight)
- Companies can reduce their exposure to escalation by adopting six practices: Set decision rules; pay attention to voting rules; protect dissenters; expressly consider alternatives; separate advocacy and decision making; and reinforce the anticipation of regret. (View Highlight)
- Personal identification. Research in both psychology and sociology suggests that people’s identities and social status are tied to their commitments. Thus withdrawing from a commitment may result in a perceived loss of status or a threat to one’s identity. At the same time, no executive likes to admit that a decision was wrong, because the ability to make smart decisions is part of what defines a good executive. (View Highlight)
- onsensual neglect: the tendency of organizational decision makers to tacitly ignore events that undermine their current strategy and double down on the initial decision in order to justify their prior actions. (View Highlight)
- • Loss aversion. This bias, too, is well established. If withdrawing from a course of action implies certain and immediate losses, decision makers often prefer to allocate more resources to continue with it—despite low expected returns—if they see any chance of turning the situation around (View Highlight)
- The illusion of control. This bias clearly reinforces the previous two: People habitually overestimate their ability to control the future (View Highlight)
- SET DECISION RULES One way to stimulate more-objective decision making is to agree to decision rules in advance. Intel, for example, when it was still focused on producing DRAM memory chips rather than microprocessors, made a rule that production capacity would be allocated to products according to several criteria, particularly margin per wafer. This objective formula was designed when no concrete decisions were yet at stake. (View Highlight)
- Preference for completion. A wealth of psychological experimentation suggests that people have an inherent bias toward completing tasks— whether that means finishing a plate of food or seeing a project throug (View Highlight)
- Pluralistic ignorance. Dissenters often believe that they alone have reservations about a course of action; as a consequence, they remain silent. Others, meanwhile, interpret their silence as agreement. (View Highlight)
- instead of leaving the decision to a small number of top managers, this decision rule tapped into the collective wisdom of the company’s highly knowledgeable onthe-ground executives. When we asked the company’s CEO why he didn’t
just make these investment decisions himself, he replied, “Why would I know any better than all the other very experienced television executives in my firm? It is not my job to make the decision; it is my job to make sure the best decision gets made.” (View Highlight)
- Companies that have doubled down on a failing strategy are usually not without dissenters. The trouble is that dissenters can be ruthlessly suppressed—and the knowledge that this might happen itself acts as a suppressant. (View Highlight)
- Consider the following situation: The three members of a top management team are debating whether to continue investing in the company’s current technology or switch to a new one. They agree that two criteria are relevant: (1) whether the current technology is likely to require substantial additional investment; (2) whether the new technology is likely to improve significantly over time. They also agree that they should switch only if it appears that both criteria are met. Let’s suppose that Team Member 1 thinks that
both criteria are met, Member 2 thinks that only the first is met, and Member 3 thinks that only the second is. The team’s recommendation will depend on how those opinions are aggregated. As shown in the exhibit “Rethink How You Count Votes,” if you tally by team member (which academics describe as conjunctively), the team will continue investing in the existing technology, because it’s clear that two out of three members don’t believe both criteria have been met. But if you tally by criterion (disjunctively, in academic jargon), each garners two votes for and only one against, meaning that the company should switch to the new technology. Note that in both situations, the criteria are exactly the same and the team members hold exactly the same opinions. It’s the procedure that makes the difference. (View Highlight)
- To prevent escalation, it is essential that leaders
create an environment in which people do speak up, share dissenting information, and challenge the organization’s course of action. (View Highlight)
- Providing anonymous feedback channels.
Creating safe channels that lower-level executives can use to share opinions is one way to surface dissent. (View Highlight)
- To be sure, smaller teams reduce coordination and communication costs and reach consensus faster. But larger teams have more information-processing capacity and a greater diversity of perspectives. We recommend enlisting 10 to 14 executives when it comes to debating the company’s long-term strategy. (View Highlight)
- Calibrating diversity. In addition to enlarging the
strategy-making team, companies should increase its diversity. More than two decades’ worth of research demonstrates that diverse groups produce more innovative and creative solutions, are better at solving complex problems, and are more capable of incorporating novel information. But diversity must be carefully calibrated (View Highlight)
- Modeling doubt. Executives can make dissent safer
RETHINK HOW YOU COUNT VOTES
A team of three must recommend whether its company should change its core technology. Managers agree that this should happen only if both of two criteria are met. What this team recommends will depend on how the members’ votes are counted.
CRITERION #1 FURTHER
INVESTMENT IN THE OLD TECHNOLOGY IS NEEDED
TEAM MEMBER 1 YES
CRITERION #2 THE NEW
TECHNOLOGY IS LIKELY TO IMPROVE
CONJUNCTIVE PROCEDURE (TALLY BY
MEMBER): SWITCH TECHNOLOGIES?
YES YES TEAM MEMBER 2 YES NO NO TEAM MEMBER 3 NO YES NO
for subordinates by expressing their own doubts about a current strategy. To be sure, leaders are not used to doubting themselves—a situation reinforced by the fact that followers expect them to be decisive and confident. But the payoff for occasionally admitting some fallibility can be significant. (View Highlight)
- This experiment suggests that framing strategic questions to include the possibility of alternatives is an effective way to avoid an escalation of commitment to one course of action. (View Highlight)
- Paul Nutt, of the Ohio State University, analyzed 137 key decisions in as many North American companies and found that when only one course of action had been considered, 52% of the decisions resulted in failure. By contrast, when just one alternative had been considered, the failure rate dropped to 32%. (View Highlight)
- Managers who initiate a course of action are more likely to continue funding it (even in the face of failure) than managers who assume leadership after a project is started. You can reduce the likelihood of escalation if you give responsibility for a strategic move to people who did not advocate or initiate that move. (View Highlight)
- Research in banking, for example, shows that loan officers who have approved a loan to a particular client often escalate their commitment to the borrower by assigning further loans, even if the borrower is relatively likely to default. Banks that make a practice of separating initial credit decisions from subsequent requests outperform banks that place those decisions in the same hands (View Highlight)
- the “premortem.” At a point when a management team had almost come to an important decision but was not yet formally committed, he would say, “Imagine that we are a year into the future. We implemented the plan as it now exists. The outcome was a disaster. Please write a brief history of that disaster.” (View Highlight)
- Moore was initially reluctant to withdraw from DRAM, because it was “the product that had made Intel.” He changed his mind only after the company’s cofounder Andy Grove famously asked him, “If we got kicked out and the board brought in a new CEO, what do you think he would do? (View Highlight)
- regret as an “emotion that we experience when realizing or imagining that our present situation would have been better had we decided differently.” A good way to prevent doubling down on a failing strategy is to get managers to anticipate the regret they may feel at not having taken a different road (View Highlight)
- Group 1: Imagine that an entirely new executive
team enters the company. What would it change? Group 2: A hedge fund has shorted our stock.
Please explain its reasoning. Group 3: A small group of middle managers have
produced a memo urging us to change course. Please write down their arguments. (View Highlight)
- By taking a temporal perspective. The first
approach is to get people to explicitly consider what might go wrong with the current strategy. Of course, companies claim to routinely undertake this sort of exercise, but in most cases they simply ask managers to look forward in time. (View Highlight)
- BY ITS NATURE, an escalation of commitment is difficult to detect. Rather like the apocryphal frog that doesn’t know until too late that it’s being boiled alive, overcommitted executives are prone to ignore signs of their company’s imminent collapse. (View Highlight)
- A far better exercise is to get people to imagine
a concrete scenario and then work backward, using what is called prospective hindsight. For example, instead of asking people to imagine why a strategy might fail, try telling them, “It is January 2025, and the unexpected has occurred: Our strategy has failed to deliver even a respectable market share. Think about the reasons why.” (View Highlight)