The Threat of Failure, the Perils of Success and CEO Character: Sources of Strategic Persistence - chief executive officer

Organization Studies, May, 2000 by Veronika Kisfalvi

Abstract

The survival and continuing prosperity of an organization depends on its ability to remain flexible and responsive to changes in its own performance levels as well as in its environment. However, some organizations persist instead in pursuing strategies that may no longer be appropriate and that can at times turn out to be disastrous. There are two related streams of explanations for this phenomenon: those that see inappropriate strategic persistence as a possible response to potential failure (escalating commitment to a chosen course of action) and those that see it as a possible outcome of success (the perils of success or excellence). Based on findings from a case study, this article argues that the strategist's character-based personal issues can also contribute to strategic persistence.

Descriptors: escalation of commitment, decision making, perils of success, strategic leadership, strategic persistence

Introduction

For an organization to survive and prosper, it must remain flexible and responsive both to changes in its own performance levels and to changes in its environment. It must be able to quickly diagnose these changes and most importantly, be able to respond to them in order to maintain or improve its competitive position. However, some organizations persist instead in pursuing strategies that may no longer be appropriate and that can at times turn out to be disastrous. A well-known historical example of this kind of inappropriate persistence is the case of the first Henry Ford and his attachment to the original Model T long after market conditions indicated that changes were necessary ('any colour so long as it is black'; see Jardim [1970] for a full account). In an attempt to understand this type of apparently non-rational behaviour, researchers have focused their efforts on exploring why some organizations seem unable at times to adapt to changes in their environment.

We begin by looking at two related streams of explanations for what some authors (e.g. Ghemawat 1993; Miller 1997; Milliken and Lant 1991; Lant et al. 1992) have termed strategic persistence that can sometimes be dangerous for a firm: those that see it as the outgrowth of an attempt to avoid failure (escalating commitment to a losing course of action) and those that see it as a possible consequence of past success (the perils of success or excellence). Based on findings from a case study, we argue that the strategist's character-based personal issues can also contribute to strategic persistence, and that they should therefore be included in models attempting to explain this phenomenon.

The Threat of Failure: Escalating Commitment to a Course of Action

Staw (1976) and Staw and Ross (1978) gave research on escalating commitment its initial impetus by investigating why people sometimes 'throw good money after bad' in what seems a flagrant violation of economic rationality. Escalation situations consist of 'repeated (rather than one-shot) decision making in the face of negative feedback about prior resource allocations, uncertainty surrounding the likelihood of goal attainment, and choice about whether to continue' (Brockner 1992). Staw first investigated the phenomenon using an experimental framework and found that 'individuals invested a substantially greater amount of resources when they were personally responsible for negative consequences' (1976: 39, emphasis in original). He explained these results as the outcome of self-justification: 'individuals actively seek to maintain or restore the appearance of rationality to a previously chosen course of action' (idem: 41) or attempt 'to prove to others that a costly error was really the correct decision over a longer term perspective' (idem: 42). That is, they will try to 'save face', in their own and others' eyes. The joint presence of two conditions is necessary for escalation to occur: negative feedback concerning the results of the original resource allocation, and a need to justify the correctness of the initial decision (Brockner 1992).

The mixed nature of empirical findings caused those working within this stream to gradually revise their models; for example, Staw and Ross (1987) have suggested that escalation involves not only individual-level cognitive phenomena such as self-justification but the influence of forces on both an individual and a contextual level (project, psychological, social and organizational determinants), acting sequentially over time. Empirical testing of the model (Ross and Staw 1986, 1993) has led to refinements involving sequencing and interrelationships between these four determinants.

A serious challenge to the role of self-justification in escalation was raised by Whyte (1986), who proposed an alternate explanation based on prospect theory, itself rooted in Kahneman and Tversky's (1979) work on framing effects in decision making. For Whyte, escalating commitment is 'a product of the manner in which individuals naturally frame decisions and choose between alternatives' (1986: 320). Thus, if the initial decision outcome was negative, the subsequent decision will be framed as a choice between losses; if the initial decision outcome was positive, the subsequent decision will be framed as a choice between gains. Prospect theory predicts that escalating commitment will occur in the first case, where the choice becomes one between a sure loss (the initial loss on the investment) on the one hand, and the possibility of a larger loss combined with a chance to make up for previous losses, on the other. Empirical work on prospect theory, however, has also yielded mixed results. Whyte has suggested t hat it is possible that escalating commitment is 'also influenced by the personal attributes of the decision-maker' (1986: 316), and that these may account for some of the inconsistent findings.