Why do so many great businesses fail?

by John Persico

Lets Take Another Look

Why do so many great businesses fail?by John Persico

A few years ago, I started thinking about all of the “mistakes” that management and organizations have made.  There are several books dealing with the subject and various companies, leaders and managers are noted for the blunders they have made in decision making.  For instance, out of the top ten mergers undertaken in the 90’s, eight of them lost money or shareholder value. Not just a little money, but billions and billions of dollars. We are all familiar with other noted disasters such as “New Coke”, Apple’s Newton and Ford’s Edsel. The question I wanted to answer was simply: “what is behind such faulty decision making?”  I found an excellent article that looked at the top ten mistakes managers make in decision making.  The title of the article was “10 reasons people make stupid decisions.”  I have found this article posted on many blogs but I am unable to find the author of the article. The top ten reasons the author lists are:

  1. Attribution error
  2. Illusion of control
  3. Conformity
  4. Availability bias
  5. Endowment effect
  6. Dysfunctional competition
  7. Overconfidence
  8. Confirmation bias
  9. Egocentric bias
  10. Sunk cost bias

I won’t go into describing each of these as you can readily find the article on line. However, if you are familiar with the work of Kahneman and Tversky, many of these biases and errors will be familiar to you. These two men wrote one of the greatest books of all time. The book Judgment Under Uncertainty: Heuristics and Biases deals with the numerous errors and mistakes that humans make in decision making. There have been other books such as The Abilene Paradox by Dr. Jerry B. Harvey, The Challenger Launch Decision by Diane Vaughan, Groupthink by Dr. Irving Janis and recently works by such authors as: Dan Ariely, Ori Brafman and Jonah Lehrer that all deal with the irrationality that goes into much decision making. However, to my thinking most of them are simply elaborating and extending the work done by Kahneman and Tversky.

It is very interesting to reflect on the fact that Dr. Herbert Simon won a Nobel Prize in Economics in 1978 for his work on the “rational” thinking that takes place in the economic sphere. In 2002, Dr. Kahneman and Dr. Tversky won a Nobel Prize for their work on the “irrational” decision making that takes place in the economic sphere. It took us another 24 years beyond Simon’s work to realize that a model of decision making based solely on the concept of rationality is flawed. Perhaps many people realized intuitively that such a model was flawed but that did not stop the experts and teachers at universities all over the world from basing economic decisions on a flawed theory. The concept of a Yin and Yang in respect to human decision making seems quite appropriate.  Humans make decisions based on both rational and irrational perspectives. It is probably safe to say that no decision ever made was made on perfectly rational criteria, unless perhaps it was pre-programmed into a computer.

The issues that can be raised by noting the manner in which managers and leaders make decisions raises three key questions. The first is whether or not irrational biases help or hinder decision making. The second is just how many different biases actually affect our decision making?  Are there more than ten and if so what are they and how can we recognize or categorize them. The third question is how can we overcome any negative effects that our biases play on our decision making?

My partner and I came up with the concept of pathologies and pathological thinking to describe and start a sort of typology of the various irrational biases that manager’s exhibit. We began to sort these into groups and to identify various strategies that could be used to overcome the negative effect of these biases. The term pathology seemed to fit since pathology can be defined as:  “A departure or deviation from a normal condition.” We want to regard the irrational forces that adversely impact human decision making as temporary departures from normality. Granted, these “temporary” departures are frequent and systemic but they are temporary nevertheless. Most “rational” humans will want to understand their biases and learn how to overcome them or at the very minimum will want to learn how to mitigate their impact.  We believe that “pathological thinking” can be “treated” and overcome.

Now perhaps you think we are being idealistic. How can human beings ever overcome emotions and psychological biases that are hardwired into their anatomy?  Well, in the first place, we have a positive view of the evolution of humanity. We believe that people are getting better and better and indeed want to be better and better. Second, we believe that biases while perhaps part of our basic human nature can be identified and understood. Once a bias is identified, it can be dealt with as any other “pathological condition” can be dealt with.  We can treat it, soothe the symptoms and minimize the possible negative effects. If we refuse to recognize our biases, we are helpless to avert the unintended consequences that often are the effects of irrationality and pathological thinking.  Ellen Langer wrote an interesting book called Mindfulness. The premise of Dr. Langer’s book is that:  “The mindless following of routine and other automatic behaviors leads to much error, pain and a predetermined course of life. Only by living a mindful life will we have free rein to imagination, intuition and creativity.” 

Let us look at my first question “Do irrational biases help or hinder decision making?” On the face of it, the answer might seem obvious, but sometimes what we call “irrational” might reflect a deeper intuition based on experiences that have become a part of our inner psyche. Richard Farson notes in his wonderful book “Management of the Absurd” that “the more experienced the managers the more they trust simple intuition.”  The more confident we are, the more we tend to rely on intuition.  Dr. Deming used to say that “experience without theory teaches nothing.” I added “but theory without experience also teaches nothing.”  In the best of all worlds, we learn to balance intuition with a profound sense of data and research.  Dr. Deming promoted a concept of Profound Knowledge shortly before he died in which he extolled managers to rely more on systemic thinking and less on gut feel and tradition.  The concept of Paradigm Shift derived from Thomas Kuhn’s book “The Structure of Scientific Revolution” points out the danger of blindly assuming that what worked in the past will continue to make us successful in the future. This simple advice is often ignored because of the biases we fail to examine and perhaps choose to ignore.

The second is just how many different biases actually affect our decision making?  Are there more than ten and if so what are they and how can we recognize or categorize them.  In my research, I have found so many that I was beginning to wonder how or if anyone was ever rationale. Then, I heard a metaphor that put it all in perspective.  It has to do with writing. Most manuscripts are full of typos and grammatical errors.  Nevertheless, the correct spellings and grammar are often obscured by the salience of the errors that we find. Thus we fail to realize that there are more correct words and grammar than there are incorrect.  It is a little like the concept of one rotten apple in a barrel. It hides the good ones which are much more bountiful.

I could go on with many more examples such as above but I think you get the point.  We make many more correct judgments on a daily basis than we do incorrect ones.  Despite the many biases and thinking traps that exist, for the most part we are making progress as a human race and I venture an optimistic opinion that we are better off today than we were 100 years ago.  Nevertheless, perhaps fewer than twenty of the top one hundred corporations on the first Fortune 100 list in 1954 are still around. This calculates to an average corporate lifespan of less than fifty years.  Dr. Peter Drucker noted that the major reason for the failure of a corporation was its inability to accept a new reality.  New business concepts radically change existing business models and in some fields go on with a sense of “punctuated equilibrium.”  Think of the concept of idea transfer. We have gone from stone tables to e-readers.  Major changes such as paper, the Gutenberg Press, copyrights, books, internet and e-readers have radically changed the transfer of ideas and the design of value in the “printing business.”  I predict that we are about to see the end of large scale publishing companies. Much like Bud and Miller have been relegated to second rate players in a beer market that is now dominated by micro and craft brewers. If you continue to hold on to your old paradigm, you will go the way of the encyclopedia Britannica.

The third question is how can we overcome any negative effects that our biases play on our decision making? There are three keys that will unlock the doorway to get out of these traps.

  1. Imagination
  2. Creativity
  3. Innovation

My partner and I created a visual model to illustrate the relationship between these three concepts:  You can find an example of this model in the blog I posted called Do You Really Need a Mission Statement?  The model shows the relationship between imagination, creativity and innovation.  The three are intimately related and can be used as part of a Play, Design, Create, Activate cycle to develop innovative ideas, processes, services and products.

The “Imaginative and Innovative Organization” is much like the “learning organization” but infinitely more playful and spontaneous.  It cannot fall into pathological thinking because it is too busy exploring new innovations and ideas regardless of where those ideas take it.  Recently Netflix seemed to cannibalize its DVD business by providing free on-demand downloads of movies and TV serials.  Netflix saw the future and choose to take a risk by changing its strategy.  This move has now paid off handsomely for Netflix and will position it to become part of the next paradigm rather than to be stuck in the old paradigm.  Such a move requires the ability to let go of the past.  This can only be done if you are imagining and creating a future that is vastly different from the present.  The “Imaginative and Innovative’ organization will be doing these transformations on a daily basis. The idea of cannibalizing its own business or obsoleting itself will not seem like heresy because it will be part of regular corporate policy.  However, policy will not be set in stone and policy itself can become a thing of play.  Imagine an organization that plays with its policy and procedures.  Imagine an organization where every employee is able to be imaginative, creative and innovative. If you can imagine this, you will be able to create the type of organization that is successful in the 21st century and beyond.

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John PersicoDr. John Persico is a partner with Ms. Peg Peck-Chapman in the Minnesota Consulting Alliance. Dr. Persico has been in management consulting since 1986. He has worked with organizations in both the profit and non-profit sector.

No comments

  1. Apple’s Newton platform certainly wasn’t a “noted disaster” as you state. It was developed and improved over the course of five years, taking advantage of increasingly more powerful hardware as the technology became available. The Newton achieved a well-deserved status within the consumer and corporate communities and is still recognized as an innovative and unrivaled (in many aspects) computing platform.

    Did it make Apple money on the Newton? No. Was it a complete failure? Absolutely not. Newton development was deliberately “killed” just as it was gaining traction in vertical markets such as education and the military.

    Proper research is an important factor to a writer’s professional career. Think about that the next time you make such sweeping generalizations.

  2. In Business Mr. Hutchinson, something that does not make money is generally considered a failure. If you have any metrics, other than your opinion to support your point, I would be happy to reconsider my position. However, right now all you offer is your opinion against a known fact, i.e. That the product was a failure on the market.

    See

    http://www.articlesbase.com/computers-articles/lessons-from-the-failure-of-apple-728906.html

    http://www.wired.com/gadgets/mac/multimedia/2008/01/gallery_apple_flops

    By the way, instead of casting aspersions on my writing capability, I suggest you stick to the facts and not attack me personnally. That is a qualification of any professional in business.

    Dr. John Persico Jr.

  3. I don’t entirely agree with your assessment that something that doesn’t make money is a business failiure. There are other tangible (and intangible) benefits to a less than successful product or commercial service.

    Much of hardware and software technology developed and improved for the Newton project (non-hierarchal file systems, object-oriented development frameworks, the StrongARM processor, touch screen user experience) were invaluable to Apple (and related companies) in terms of intellectual property, research, and iterative development.

    But that’s not the main point of my original comment.

    You didn’t call the Newton a “failure” … you specifically called it a “noted disaster.” I would put the same task to you … prove that the Newton was a “disaster” using specific documents or metrics. Without a specific “note” to be “noted” your comment is as anecdotal as my personal opinion.

  4. Oh, and I certainly wasn‘t attacking you or your writing prowess. I was merely suggesting that you dig a bit deeper than some of the editorials currently published on the web. Neither of the articles you point to in your comment offer any metrics to support their arguments either.

    For some positivity, here’s an abstract from a 1998 WSJ article by Jim Carlton that refers to the Newton as “one of the computer industry’s boldest experiments” and being awarded “critical praise for its newer versions.”

    http://xrl.us/bkpzjz (Link to faqs.org)

  5. Dr. John Persico

    Mr. Hutchinson,

    In my first reply to you, I attached two of over 25 articles that you can find on the web describing the Newton variously as a “great flop”, business failure, business mistake or commercial failure. The concept of mistakes was the theme of my article. Being listed as one of the top commercial flops of all time might qualify the Newton as a disaster.

    Trial and error is an important component of business success, but it pays to do more research before releasing a product such as the Newton that assuredly was a financial loss. The literature suggests many problems that the Newton had which “perhaps” could have been overcome by more research and less biased thinking.

    See: http://www.forbes.com/2008/10/29/apple-product-flops-tech-personal-cx_ag_1030apple.html

    Dr. John Persico Jr.

  6. Certainly the Apple Newton line of devices failed to meet sales expectations. There are differing opinions on why. See http://myapplenewton.blogspot.com/2009/04/apple-newton-why-it-was-discontinued.html.

    On the other hand, was it a total failure? There were many assets that it created which have enduring value, one of which was playing a great part in providing a significant amount of cash which kept Apple afloat in the days when it was facing financial disaster, see: http://myapplenewton.blogspot.com/2010/04/success-is-in-eye-of-beholder.html and http://myapplenewton.blogspot.com/2011/03/whats-so-good-about-newton.html.

    Today, the Apple Newton still does many things better than today’s smartphones but I notice that as they have evolved, they have converged toward the Newton’s feature set.

    As with all things, Apple learnt many lessons from the Apple Newton experience which they have carried through into their current practices, see: http://myapplenewton.blogspot.com/2011/04/marketing-consultancy-gets-facts-wrong.html

  7. I think we are losing sight of the point of John’s article which is the reason businesses make mistakes and the Newton is a useful example. Nothing is black and white and I am sure they made some breakthroughs and learned from the Newton effort, but it cannot be construed as a success. Cash flow is king today and I am sure the Newton project did not make the kind of money Apple would consider a success.

    If you doubt the importance of cash flow today, talk to a banker about a loan. They do not care about what collateral you are willing to put up, they already have too much collateral on their hands, they only want to see financial projections that your project will flow enough cash to pay back the loan.

  8. @Lou Shultz

    I couldn’t agree more. Cash flow is important. Check this out as a little known fact relating to the Apple Newton:

    “In summary, a $502.5m outlay resulted in a return of $842.5m to $942.5m or a profit between $340m and $440m.”

    Good money, and money that helped a lot in keeping Apple afloat when it was running into financial trouble in 1998.

    Source: http://myapplenewton.blogspot.com/2010/04/success-is-in-eye-of-beholder.html

  9. Thank you for taking the time to discuss this, I genuinely expertise highly over it and enjoy understanding on this matter.

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