Last Updated Jun 27, 2008 2:24 PM EDT
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.
- The confirmation bias. Companies fail to confirm that a new product or strategy is actually working and meeting goals.
- 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.
- The escalation of commitment. If a product is a bummer, management holds on to it, thinking that someday it will be profitable.
- 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.