After reading “Learning to Let Go: Making Better Exit Decisions” in the McKinsey Quarterly and “Stuck in the Past: Why Managers Persist with New Product Features” on MarketingPower.com (a publication of the American Marketing Association), I’m more willing then ever to make a donation to my local PBS station since some people clearly need more sesame street. Specifically, ‘H’ is for honesty, ‘T’ is for truth, and it is very important to listen to others.
In “Learning to Let Go: Making Better Exit Decisions”, the article points out that when faced with a failing product or division, companies tend to hang on too long. Executives have common psychological biases that help them downplay the evidence of failure and put off the tough decision to bail out. But it doesn’t have to be that way. These same executives can learn to identify those biases, understand when they are likely to hinder an objective evaluation, and create mechanisms, some borrowed from private equity firms, to counteract their biases and help them move toward the exit at the right time.
In “Stuck in the Past: Why Managers Persist with New Product Features”, they indicate that a significant amount of research suggests that managers tend to stay committed to courses of action even in the face of negative feedback that indicates the action’s inadvisability. Some of the extant literature posits that this tendency to stick with a losing course of action is due to the manager being involved with the initial decision to move forward. However, a more likely explanation to be put forward points to the role of initial beliefs about the viability of the venture. Specifically, it is suggested that when the manager is exposed to new, negative information, the manager distorts and weights this new information to conform to his initial positive beliefs. A blind study was done, and it was found that the driving force behind escalation behavior is the failure to appropriately update initial positive beliefs in the face of new negative information. However, once this is understood, systems can be designed to help managers avoid the trap of escalation bias. For example, pre-determined stopping rules or transfer of responsibility to an unbiased third party after a fixed amount of time are two possibilities.
Note that, in both cases, the major point of failure is managerial or executive bias. And this can effect every aspect of your business – sales, marketing, and sourcing included! The lesson here is to continuously analyze your decisions, products, and processes to make sure that the market has not significantly changed, and if it has, that you change with it. Otherwise, ‘L’ is for ‘Loser’ is a lesson that you might learn the hard way.