Executive summary of Identifying escalation of commitment in B2B new product development projects using data envelopment analysis

Citation

(2014), "Executive summary of Identifying escalation of commitment in B2B new product development projects using data envelopment analysis", Journal of Business & Industrial Marketing, Vol. 29 No. 3. https://doi.org/10.1108/JBIM-01-2014-0016

Identifying escalation of commitment in B2B new product development projects using data envelopment analysis

Article Type: Executive summary and implications for managers and executives From: Journal of Business & Industrial Marketing, Volume 29, Issue 3

This summary has been provided to allow managers and executives a rapid appreciation of the content of the article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present.

Taken too literally, "flogging a dead horse" is a phrase which conjures up an inhumane scene but it is always been a useful way of describing the futility of carrying on with something when all the evidence indicates that you ought to stop. How many business managers stick with failing projects despite spiraling costs when they should bite the bullet, grasp the nettle, call a halt? There are plenty of phrases to describe what they ought to be doing.

They do not call it flogging a dead horse, of course. "Escalation of commitment" to a troubled project is much more appropriate language in business circles. But the situation is the same – decision-makers maintaining their commitment to losing courses of action even in the face of negative news which ought to be persuasive enough to make them alter course.

There are particularly great risks in new product development where failure is common and expensive, especially in the business-to-business area. It is reckoned that new products fail approximately 40 to 80 percent of the time and, because many of these ventures cost millions of dollars, the consequences are severe. So why are managers reluctant to terminate failing new product development projects when they know the outcome, further along the line, is likely to be much worse than it would be if they took action now?

One reason is managers’ commitments to projects. Previous research has argued that managers who are emotionally involved in new product development projects are reluctant to terminate them even when there are obvious signals that the projects will not succeed. Another researcher found that respondents continued to allocate the most money to a potentially-doomed project when they were personally responsible for initiating it. Another found that the willingness to allocate money to a dubious project increased positively and linearly when it came closer to completion and the sunk costs were high.

People’s general tendency is to rationalize their past actions and behavior to avoid negative feelings, such as regret, and to justify the rationality of their past decisions and the substantial amount of investment. That is why decision makers may insist on continuing to commit resources to a project despite the negative consequences of doing so.

Also, people’s risk-taking propensity changes depending on how the problem is framed. In the case of project decisions, people will choose to continue with the project if the choice is between a sure loss of initial investment and the probability of a larger loss if the project fails. In other words they continue to invest in failing projects because they have already invested a lot.

In addition, the conflict over whether to continue or not results from the competing forces that encourage or restrain project abandonment. These competing forces are the expected future benefits from the project (expected return), the cost of abandonment (sunk cost, budget, people allocated), and completion effect (proximity to project attainment, progress level).

Whatever the reason, managers’ subjectivity seems to affect escalation decisions and, consequently, objective methods are needed to differentiate escalated projects from those that are not escalated. In "Identifying escalation of commitment in B2B new product development projects using data envelopment analysis", Dr Naveen Donthu and Dr Belgin Unal say that data envelopment analysis (DEA) has been widely used in many areas to estimate the efficiency of projects characterized by multiple inputs and outputs. DEA forms the objective method of identifying escalation compared with the subjective (i.e. managerial opinion) method.

Their study shows that when managers are provided with real-life scenarios free from social and political biases, their decisions on escalated projects are more rational and correspond to objective judgments. As an objective tool for determining inefficiencies, DEA can, say the authors, be confidently used to identify inefficient and, therefore, escalated projects. DEA is an objective and automatic tool that makes managers’ decisions free from bias and less time-consuming. Managers can use it by inputting the output and input variables of their projects and then determining which ones are escalated and need to be terminated. As a consequence, escalation of commitment and the resulting large losses can be prevented especially in new product development.

In addition, because DEA provides feedback, managers can evaluate improvement options. Slack values show which inputs and outputs need to be increased or decreased to achieve maximum efficiency. As a result, managers can observe where to locate more resources and determine whether the current situation is efficient or not. Doing so provides an objective report for managers, especially when it is difficult to terminate the project because of social or political pressures. Furthermore DEA does not require an elaborate survey to be conducted to capture managerial opinions of escalation and its results are comparable to managerial judgments.

To read the full article type 10.1108/JBIM-11-2011-0162 into your search engine.

(A précis of the article "Identifying escalation of commitment in B2B new product development projects using data envelopment analysis". Supplied by Marketing Consultants for Emerald.)