look ay two world files
The future of any business or corporations relies heavily on the kinds of decisions made by their leaders. Examples abound of giants of industry of yesteryears who have since been consigned to the relics of history – Kodak, the telegraph, just to mention two – courtesy of poor strategic decisions (Bratvold & Begg, 2010, page number missing). An understanding of the factors that impede sound and rational judgment is important from managerial point of view. This paper isolates two bad decisions, particularly the ones that led to the collapse of Kodak Company and the American on Line (AOL) - Time Warner Company respectively, for discussion. The biases that led to their ratification are also considered. The impact of the prejudices on the selected decisions is then considered with a view of preventing future blunders. Avoidance of biases in decision making remains the only practical life lines for business entities (citation missing).
Business commentators concur that few business blunders rival the ones that led to the demise of Kodak, a company which once commanded 90% market share of the United States film industry (DiSalvo, 2011). Kodak’s decline is estimated to have begun in 1981, with a failure to recognize digital photography, its invention, as a disruptive technology (citation missing). According to DiSalvo (2011), the company’s executives chose to remain in denial for several years, shockingly making the famed assertion that “Kodak is back” in 2007. Kodak’s decline was further accelerated by the entry of Fuji into the local market. DiSalvo (2011) adds that the belief that the United States market would stay loyal to their local brand and their inexplicable failure to obtain exclusive filming rights for the 1984 Los Angeles Olympics –which Fuji won – are believed to have accelerated Kodak’s demise. Gavetti, Henderson & Giorgi (2014) traces Kodak’s inertia and subsequent collapse to an aggregation of four biases.
The decisions by Kodak’s leaders principally revealed an overconfidence bias as they had extraordinary faith in the loyalty of their local customers (Gavetti, Henderson & Giorgi, 2014). They never anticipated a shift of loyalty to Fuji despite offering cheaper products and services. The company also suffered from confirmation bias which predisposed its management to stick with film, while discounting information that affirms the place of digital technology as the future photography. The growth of digital photography presided over proportionate decline of Kodak’s market share, culminating in its bankruptcy three decades later (DisSalvo, 2011). Elements of biases related to escalation of commitment are also believed to have compounded Kodak’s conundrum. The decision to hang on to film when it was apparent that that was the wrong course of action further confirms this predisposition. Available evidence suggested that digital cameras would take over the photography business, but the management at Kodak intransigently believed that they had invested so much resource in setting up an “immutable” film industry. Persuasion by progressivists within their ranks proved insufficient in convincing the company to change course. Finally, biases compounded by risk aversion also played a role in the collapse of Kodak. The company executives, in choosing fidelity to the sure and tested film technology over the risky, untested digital innovation, sanctioned its own collapse (Gavetti, Henderson & Giorgi, 2014).
Vital lessons on corporate decision making can be drawn from the experience of America on Line’s acquisition of Time Warner in 2000. The former, a new internet company had shelled out some $162 billion for Time Warner, a leading media conglomerate to cement the largest merger of all time (Arango, 2010). Both companies had hoped for a synergetic venture, a prospect that was realized immediately as Time Warner shares spiked some 39% in the immediate aftermath of the deal according to Arango (2010). The confidence exuded in the merger, and the trail of profitability by AOL and Time Warner extenuated a sense of security on both sides. Arango further concurs that the management of Time Warner had the option of placing a collar on the transaction, a preemptive step that would protect its shareholders stocks in case AOL suffered losses below a prescribed cap. However, buoyed by recent profits and trends in the tech industry, the collar was not considered (Arango, 2010). In an ominous turn of events, the tech bubble exploded as AOL shares plummeted by up to 50%. Time Warner shareholders had an ignominious prospect of forfeiting their shares as the reality of losses kicked in (Goodnight & Green, 2010).
Barnes (2014) points to an array of biases that contributed to ratification of the worst merger in American history. The most visible bias was based the anchoring or focalism bias. Time Werner erred in anchoring their decision to merge with AOL on the tech revolution, and the consequent profits attributed to it (Barnes, 2014). In similar fashion, there were instances of the bandwagon effect, as Time warner jumped into what everybody else was doing. At a time when everyone was buying shares from tech companies and the sale of dotcom contraptions soared, Time Warner had no reservations on the future of their merger. Commentators also points to the role of gamblers bias in making the following through with the merger. Clawing on recent fiscal results, from 1997 to 2000, when information technology was booming in the United States, it was improbable that Times Warner would ignore the established trend established by AOL and other tech companies (Barnes, 2014). The decision to invest in AOL could have been unilateral as it was considered a no-brainer, and an obvious call to make. Accordingly, Barnes (2014), the decision to omit the collar from the deal could have arisen out of this bias. The frenzy and fanaticism which accompanied the merger was reported to have provided sufficient gravitas for the joint venture. The optimism bias, produced as almost every commentator supported the merger, propelled the over-optimistic Time Warner team, as pleasing outcomes were propped at the expense of caution. Finally, there was overconfidence on both sides of the deal, as both companies hoped to leverage on the strengths of the other. Available trends in the New York stock exchange shifted momentum in the direction of the merging entities, further elevating growing confidence in the joint venture (Barnes, 2014).
From the considerations of the Kodak and AOL-Time Werner companies, the damaging effects of biases on corporate decision making have been brought to the fore. Avoidable missteps in the decision making process have been blamed for the collapse of the once undisputable leaders of American business environment. Had these companies approached decision making more conscientiously and objectively, Kodak and AOL-Time Werner would still be thriving today.
Arango, T. (2010). How the AOL-Time Warner merger went so wrong. New York Times, 10.
Barnes, J. H. (2014). Cognitive biases and their impact on strategic planning. Strategic Management Journal, 5(2), 129-137.
Bratvold, R. B., & Begg, S. H. (2010). Making good decisions.
DisSalvo, D. (2011). The Fall of Kodak: A Tale of disruptive technology and bad business. Forbes Oct, 2.
Gavetti, G. M., Henderson, R., & Giorgi, S. (2014). Kodak and the digital revolution (A).
Goodnight, G. T., & Green, S. (2010). Rhetoric, risk, and markets: The dot-com bubble. Quarterly Journal of Speech, 96(2), 115-140.