McKinsey's Four Biases of Failure

Last Updated Jun 27, 2008 2:24 PM EDT

mckinsey-quarterly-ggcm.jpgSaying goodbye can be a hard thing to do. But it is a necessary part of the creative process and is good management, according to a new McKinsey Quarterly study.

Too often, executives stick to what was once thought a bold and brilliant idea. But when the idea goes bad, inherent biases keep management from dumping it.

A few examples:

  • Smitten by the popularity of small Japanese cars in the 1980s, General Motors launched Saturn as a "new kind of car company." Sales peaked in 1994, but GM held on, sinking billions into the brand that has yet to turn a profit.
  • Brewers of Schlitz beer decided to use a cheaper process in making the beer in the early 1970s. Schlitz had been the No. 3 brands in the U.S., but its loyal beer-drinking fans hated the new taste. Schlitz went into declined and was bought by Stroh.
  • Polaroid had been an extremely popular brand since its cameras produced nearly-instant images. Then the digital camera came along in the 1980s as management stubbornly stuck to its technology and business plan. Polaroid went bankrupt in 2001.
Authors John T. Horn, Dan P. Lovallo and S. Patrick Viguerie say that four biases affected bad decisions such as these. The biases are:
  1. The confirmation bias. Companies fail to confirm that a new product or strategy is actually working and meeting goals.
  2. The sunk-cost fallacy. Once an idea is not living up to expectations, management doesn't want to consider dumping it arguing that they put too much money in developing it.
  3. The escalation of commitment. If a product is a bummer, management holds on to it, thinking that someday it will be profitable.
  4. The anchoring and adjustment bias: If the company does decide to exit a product, it has to make savvy decisions about how to get rid of it, such as finding the right new owner and at the right sales price.