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Icarus Paradox: Why Successful Ventures Fail?

Though most people deem pride as transgression, some appraise it as a trait that can be capitalised upon. Research teams at the University of Montreal and UC Santa Barbara’s Center for Evolutionary Psychology (CEP) suggest that pride is an evolutionary by-product of the trait of self-preservation. Because of the frequent lethal reversals that our ancestors faced, they needed their fellow band members to value them enough during hardships to pull them through. Therefore, in making choices, humans had to weigh their self-interest over the approval of others, so that when they needed help, others would value them enough to give it.

Though we have come a long way, hubris is still not hard to come across. Irrespective of the peculiarity of its radix, pride is not limited to individuals - organisations also emanate it. The anomaly, however, is that organisational hubris is just a compendium of the egos of individuals who comprise it, but people in an organisation struggle to keep their individual pride in parity with the organisational one. Therefore, in theory, there is no comprehensible line distinguishing individual pride from organisational pride, as one is a concoction of the other. The practical aspect, however, differentiates between the magnitude and gravity of the two.

Vanity is believed to be the root of all sin by cultures across the globe. While the widely followed Abrahamic religions talk about the spiritual descent of Lucifer into Satan as a result of his pride, the Greeks present the tale of Icarus. Icarus was the son of Daedalus - a famous Greek inventor. While in captivity, Daedalus crafted two pairs of wings which would enable him and his son to escape certain execution. Before taking off, Daedalus specifically instructed his son not to fly too high. Ignoring the words of his father, Icarus soared too near to the clouds, which ultimately led to his wings failing him. The boy plummeted to his death in the sea because his pride clouded his judgment.

Danny Miller coined the term ‘Icarus Paradox’ in 1990. The term, alluding to the Greek tale, refers to the phenomenon of businesses suddenly failing after a period of success, where this failure is brought about by the very elements that led to their initial uprise. Miller noted that it’s the victories of the past that conceit a successful organisation, lulling them into complacency. The very values that usher companies upwards in the pecking order - such as tried-and-true business strategies, dauntless and self-assured management, and the overall combination of all these elements - may be rendered blunt and platitudinous, ultimately leading to business catastrophes. Managers tend to make injudicious decisions, as they cling onto the past success of their manoeuvres and fail to factor in the revamp in the external business environment.

Most successful firms owe their fortune to a unique competitive algorithm which guides the formulation and execution of their policies. It helps it gain momentum and reach a higher pedestal, but cloaks its dynamism and its ability to acclimatise because the management’s confidence in this winning formula is bolstered. Eventually, the firm ends up focusing only on refining and extending these strategies, products and values. Activities/policies that do not conform to the paradigm are neglected or even discouraged. This may be profitable in the short run as companies continue to specialise and improve in a certain product or strategy, leading to higher efficiency, sales and growth as they develop a competitive advantage in a particular area. However, its viability is leached away in the long run, as the stereotypical aspect ingrained in their corporate culture barres them from keeping up with the threats of new competitors, changing consumer demands, newly developed business models and changes in the external environment.

Standard economic theory explains the high rate of failures as an inevitable result of companies taking rational risks in the face of peaky situations. The rewards of a few successes outweigh losses incurred from many failures in the long run. Executives know this and accept the risk. Anyhow, this theory absolves them from blame as they simply obey rationality.

Lovallo and Kahneman from the Harvard Business Review, however, argue that most failures are actually the results of flawed decision making. While predicting the outcomes of potentially risky projects, executives easily fall victim to what psychologists call the ‘planning fallacy’. They make decisions based on delusional optimism instead of rational computation of gains, losses, and probabilities, dwelling in situations of hypothetical success while overlooking potential problems. Consequently, they are overly optimistic and pursue opportunities that are unlikely to succeed.

A prime example of the paradox at work would be Tesco’s experimental venture into the US market – Fresh & Easy. Tesco opened the chain in 2007- right before the economic recession which took a severe toll on consumer spending. Tesco also did not anticipate the upshot in the popularity of online grocery shopping. Additionally, Tesco’s research segment misconstrued the spending habits of their consumer base. While their Metro stores in the UK were popular, there was not enough demand in the US as the population was not accustomed to grab-and-go meals. Most of the Americans would usually order take out or cook their own meals - as purchasing such meals would be comparatively costlier than grocery shopping. Lastly, an elementary point of distinction was the statistics indicating that most people in the US buy their groceries once a week, with bulk and diversity of purchase being the key takeaways. Conversely, Europeans tend to make more frequent, but smaller trips to the grocery stores. After they took a hit of approximately £1.2bn ($1.8bn), Tesco’s net profit slithered down by 96%, compelling them to abandon the US market.

In this case, Tesco’s confidence in bringing its successful concept of ready meals to the US market contributed heavily to its failure. The intensive marketing required to change people’s daily consumption proclivities takes time and money, neither of which Tesco invested enough of. Tesco was also confident enough to continue to hang on for over 5 years despite indications of possible failure.

The above example highlights hubris in its raw essence, which can be used as a base for conceptual bifurcation, creating multiple subdivisions rooted in the same basic concept.

  • Humans have a natural tendency to amplify their own talents, which leads a lot of executives to believe that they transcend the rest in ability and output. This is further reinforced by the tendency to misperceive causes of certain events and attribute success to their abilities when it might have been out of pure luck.

  • People also display keenness to take credit for positive outcomes and ascribe undesirable ones to external factors. A study of letters to shareholders in annual reports, for example, found that managers tend to attribute favourable outcomes to variables under their control, like corporate strategy or R&D (research and development) programs, while inimical ones were more likely to be attributed to uncontrollable external factors like the weather or inflation.

  • A company’s values unify its people. Strong, meaningful credos can help inculcate employee loyalty, strengthen the bonds between a company and its customers, attract like-minded partners, and hold together a company’s far-flung operations. However, as companies mature, these values may morph into commandments- which contribute more towards suppressing novelty and flexibility, rather than inspiring moral conduct.

  • A peculiar observation made in business process analysis is that, as more investment is made in information technology, worker productivity may go down instead of going up. This observation has been firmly supported by empirical evidence from the 1970’s to the early 1990’s. Prior to the upward jolt in IT investment, the expected return on investment in terms of productivity was 3-4%. The aberration, however, was that with IT, the normal return on investment was only 1% from the 1970’s to the early 1990’s. Thus, the investment in IT - done for performance enhancement - led to contradictory outcomes that threatened to pick the organisation apart. This is known as the ‘paradox of information technology’- a concept encapsulated by the Icarus paradox.

Although it may seem easy to deal with, the paradox is a trap that is too hard to escape, with companies like Lehman Brothers, Xerox, Atari, Digital Equipment, Tupperware and Revlon on the victim list. Also, a lot of unforeseen complications arise upon the initial implementation of solutions. The key is an optimum blend of flexibility, innovation, and diversification, which needs to be instilled in the bedrock of the organisational structure of business entities.

aryaman.dhiman

Aryaman Dhiman

I am an undergraduate student at Shri Ram College of Commerce. Over the years, my interests have jumped ship between art, theater, and sports, but my love for religious and historical research remains unchanged.

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