One of the main causes of loss for businesses is the escalation of commitment to projects which are failing. It occurs when decision makers go on with a project even when there is adequate evidence and information which shows that investing more resources on the project will not change the tides and create value for the investment.
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A lot of time is wasted primarily because more time is spent on useless projects than is necessary. Getting insight on this subject is important for an aerospace organisation as it will assist in ensuring that the company identifies any such problems and deals with them effectively. This will save the company a lot of resources particularly in terms of time and money.
This report aims to highlight the dangers of escalation and ways to manage these dangers. In addition, the causes of escalation and recommendations on how the company can best manage escalation are discussed.
Escalation refers to persistence with a project or a certain course of action beyond a financially reasonable point. Some theorists claim that escalation is due to wrong decision-making (Bazerman 2004). Escalation is very costly to an organisation because large sums of money must be used to sustain these projects. The managers spend more money on past projects which have a small probability of success instead of starting new projects (Desai & Chulkov 2008)
According to theory, the main cause of escalation is self-justification whereby a manager wants to appear reasonable and capable of carrying out certain tasks. Another approach to this is the economic approach which claims that managers are rational in trying to protect their reputation in the company. (Brockner & Rubin 1975).
The objective of this report is to attempt to show the problems that can affect the aerospace defence company due to escalation and recommend suitable ways to deal with it.
Definition of escalation
The issue of escalation is a major issue in decision making in organizations. People become so committed to a certain project such that they are willing to continue pumping in loads of money even when it is clear that the project will never materialize. The escalation of commitment includes trying further actions that are deemed corrective which unfortunately only make the situation worse (Chell, 2001).
Research shows that decision makers prefer continuing to invest in a failing project because of financial commitments to these projects. It has been found that if a person invests a large sum of money and other resources in a project, he or she will allocate more resources to the project if he gets negative feedback. Conversely, if the feedback received is positive such for instance that the project will be a success, the funds allocation will be reduced (Armstrong, Coviello & Safranek 1993).
An example of escalation on an individual level includes investing in stocks which are clearly on a downward trend. Continuing in a job or relationship which is unfulfilling hoping that things will get better yet all signs show a miserable future is escalation. In the organisational level, escalation may occur when a business continues investing in a certain line of business even though past results are bad and there is uncertainty about the outcome of continued investment (Drummond 2001).
Causes of escalation
The desire for justification and presenting one self in a manner that is acceptable in the organization is one of the conditions leading to increased escalation in many organizations. For example, a marketing manager may continue marketing a new product yet there has been no response from the public in 1 year. Therefore, a decision maker may support a project until it succeeds so as to avoid negative feedback (Armstrong, Coviello & Safranek 1993).
If escalation has always been the norm, a new manager may be forced to continue with the trend or suffer opposition. Inertia and passivity by management concerning the progress of projects will certainly increase escalation. Company policies such as bureaucracy may increase escalation because decision-making is often slow and unilateral (Chell 2001).
Psychological determinants cause a person to view a situation which is bad in a positive and optimistic way. Self-justification makes people want to prove to themselves that they can accomplish or succeed in a given task. A study done by Staw in 1976 established that people who were responsible for the initial investment decision are usually more committed to a project than the less responsible individuals.
The study showed that people will spend more resources to justify a decision that was made in the past. Another study by Bazerman, Goodman and Schoorman (1982) found that the measure of commitment that an individual has for a project is related to the perceived significance of that project (Ross & Staw 1986).
Escalation may also be reinforced if the actions taken by an individual are voluntary and were entered into by free choice. If the actions are public and are known to other people, an individual may continue on that line of action because he does not want to look incompetent or foolish. In addition, an activity that has been performed many times in the past would cause an individual to go on investing resources because of familiarity (Drummond 2001).
Another psychological factor that enhances commitment and escalation is the fact that people tend to process information concerning a project in a different manner that causes perseverance of beliefs. There is an inclination by the individual to search for, remember and interpret information in a way that sustains his or her belief in the eventual success of the project. For instance, a manager may receive a report stating that the business prospects are low but he or she will take this as a challenge (Arkes 1996).
The desire to maintain credibility and not to suffer shame in the presence of other people may affect escalation. Managers may continue pursuing a falling project because they do not want to expose their mistakes to other people. Because companies evaluate the employees according to their ability to make sound choices, cases of escalation may increase as no employee wants to appear incompetent.
Research shows that people who are in situations of job insecurity and resistance to policies are more likely to carry out escalation (Ross & Staw 1986).
Modelling and social norms are other social factors which have contributed to escalation. A study done on modelling revealed that people are more likely to invest resources to projects which other people have ventured and succeeded in (Deming, 1986). The norm in society is to respect and approve of managers or decision makers who continued in a certain project until it succeeded. For instance, Henry Ford is widely respected for his persistence and tenacity which enabled his firm to develop a revolutionary engine (Ross & Staw 1986).
The high costs of quitting a project may bring about escalation. The presence of sunk costs makes it very difficult for management to choose to abandon a project. Sunk costs are those expenses which the firm faces incrementally. This means that this is the period when the costs of the project are much more than the returns.
These costs are accepted because the managers are anticipating that eventually business will peak and the initial costs will be recovered (Bazerman & Watkins 2008). Decision-makers have to choose between continuing with a project whose returns are much lower than the costs albeit a lot of uncertainty about the future (Wolf & Northcraft 184).
Paying compensation and penalties to subcontractors is very costly and this may deter managers from letting go of an unprofitable. An example is if contractors had been hired to build houses but it is realised after five months that there is low demand since the development is next to a cement factory. If the contractors are stopped from going one with the construction, they have to be paid a lot of money.
Low salvage value means that if the entire project is sold off, the amount of money that will be received will be much less than what was initially invested. Redundancy costs for employees who are affected by the closure of a project may be so high such that the decision makers decide to continue working on it until it becomes profitable (Wolf & Northcraft 184).
Dangers of escalation
Escalation, although widely practised is very dangerous and may cause the destruction of a company. For example, the $500 million IT venture of the London stock exchange was as a result of consistent escalation which eventually become a waste of resources. Escalation wastes a lot of money on projects which will never be fruitful. If the resources spent on failing projects are very high such that the operations of the business are affected, then the firm will ultimately close down. (Drummond 1996)
Opportunities are also lost when decision makers embark on escalation. The financial resources that are being spent on bad investments could have been used in a better way if they had been invested in projects whose returns are more than costs. The reputation of a decision maker who keeps on investing when it is obvious he or she is wasting money will be tarnished (Drummond 1996).
Escalation in the defence sector
The aerospace defence sector is not exempt from the problem of escalation. The defence sector is prone to escalation as due to the rapid expansion this industry. Aerospace defence manufacturers are under pressure to be innovative and adaptive to the ongoing technological advances. The huge sums of money that have to be invested in the aerospace defence sector could deter managers from halting projects.
The model proposed by Keil and Montealegre (2001) is the best for an aerospace organisation in the defence sector. This model is in four phases i.e. problem recognition, re-examination of prior courses of action, selection of alternative courses of action and implementing the exit plan. This model is appropriate because the defence sector is very volatile and financial investments are very high. Defence procurement can raise problems such as technical breakdown and escalation (Kenny 2006).
Reducing escalation can be done by reducing or eliminating the factors which are known to increase escalation.
Self-justification produces a scenario whereby, the more the negative feedback received the more persistent the decision maker is concerning the failing project. Many managers deal with negative feedback by justifying their original course of action. A logical method of dealing with self-justification is to know that a decision made in the part is not necessarily a reflection of ones abilities or intelligence.
An individual who is involved in decision-making should be assured of confidentiality to reduce his or her need for self-justification. The above measure will enable a person to withdraw from a certain line of business with out suffering psychologically or socially (Simonson & Staw 1992).
Ensuring accurate decision-making
The decisions made by managers are what determine the future and success of a company. Therefore, it is imperative that an organisation creates conditions that are conducive for decision making. Inadequate and unreliable information was found to be a leading cause of escalation as managers did not have enough information to make sound decisions (Allison 1971).
It is important to make information about costs and the rate of return on investments easily available and accessible. This is likely to reduce the tendency for decision makers to focus on projects that will never give the expected financial returns. When adequate economic facts are available, it is unlikely that decision makers will make wrong choices (Simonson & Staw 1992).
Self diagnosing and accountability
In order to reduce escalation, managers in the firm should embark on self-diagnosing which involves examining one self in relation to a given task. This will assist in gauging ones ability to meet the requirements of the project. Accountability in the organisation is whereby an individual has to justify his or her actions to others. It can be beneficial to an organization as it will foster good decision making due thus reducing escalation (Simonson & Staw 1992).
The firm should examine itself to ensure that there are no cases of escalation. If there is escalation, the projects which are being invested in should be abandoned. In addition, it is important that the decision making process be sound so as to prevent escalation. It would be advisable to give decision-making powers to a group of people such as a board of directors instead of to an individual.
This will bring about control and better decisions will be made due to brainstorming. Since self-justification is one of the main causes of escalation, it is important to ensure that the identity of decision makers remains confidential. This may create more motivation or morale for the managers.
Self-justification and improved decision-making are the best measures as research has proved that they are most effective (Drummond 1996).
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