A good project evaluation and management 7 . 3. Backup options: 8 6. Conclusion 8 7. Bibliography 8 1 . Executive summary Bola outbreak in West Africa this year, it is one Of the dangerous viruses since the past 40 years from now, over thousands of people have died in West Africa this year (BBC, 2014). 1 To develop Bola vaccine, this project would be a “long haul project” and definitely would face many obstacles. Since the past 40 years, no one can successfully develop medical method to curb this virus. 2 One of the obstacles, escalation of commitment, is going to inquiry in this paper.
By examining the case of the Long Island Lighting Company, the company darted a project to build a nuclear power plant in Long Island, New York. The management presumed that this project would cost 75 million dollars and would be finished by 1973. However, the project finally completed in 1986 at a cost more than 5 billion dollars because of the resistance of the local citizens, when a negative feedback was found, the decision maker was faced with a dilemma: should she terminate the project and withdraw the remaining resources to invest somewhere else, or should she stick with the initial decision (Hawks, n. . ). 3 Why was the management in this case prone to he initial decision even the cost and time cost increased significantly? The answer is escalation of commitment. This case shows that escalation of commitment happens where the decision maker discovers that the previous course of action is failing, but they are still willing to put in more resources, including time and money into the ongoing project (Broken, 1992). Stab (1981) concludes that escalation always happens between individuals and groups and that “individuals have the tendency to become locked in to a course of action, throwing good money after bad or committing new sources to a losing course of action There are four main causes: physiological, social, economic and organizational. These causes will be discussed in this report, as well as will inquiry what are the dangers of the escalation that the Bola vaccine development project would face.
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Finally, this report will suggest some measures to deal with the escalation. 2. Introduction Escalation can be defined “as persistence with a course of action beyond an economically defensible point”, escalation can happen while there are decisions involving allocation of resources (Drummond, 1996). 6 Escalation as been examined by many school of thoughts, those researches show that substantial dangers are generated from escalation such as waste a great deal of time, energy and money in an organization (Colonel & Monday, n. D. ). The aim of this report is to inquiry the causes of the escalation of commitment, and also look at the dangers of escalation of commitment to a course of action from the project that began developing Bola vaccine, as well as, to find out the methods that can effectively take to curb escalations. In order to reach the aim, this report focuses on the main causes of escalation which are psychological, social, economic, and organizational. After that, it explains why the project may be particular prone to escalation with escalation theory and examples.
Then, it comes up with measures and suggestion that can prevent escalation. 3. Causes of escalation of commitment 3. 1. Psychological Self-justify theory is one of the psychological cause, it explains why decision escalate commitment to their past investments (Straw, 1976). 8 Decision makers may unconsciously defend themselves against an obvious error in pee;us decision by trying to put in more resources to regain the losses and rye to rationalize their action.
He also suggested that the same decision maker in a project is more likely increase the self-justification need to constitute escalation, this is because they feel responsible for the resource allocation and project selection which leads to perceptual bias. 9 Besides self-justify theory, prospect theory provides another alternative explanation. Under this theory, decision maker would avoid the risk when the feedback of the decision is positive, in contrast, if the feedback of the decision is negative, they would perform risk-seeking behavior, this means that session maker prefers to avoid a smaller but certain loss now.
However, this implies that negative feedback of a decision can contribute to irrational risk seeking decision which subsequently contribute to a much greater loss (White, 1986). 10 Relating to the prospect theory, the ‘sunk costs effect’ triggers to escalation. This effect explains why the decision makers are prone to continue invest more resource for a project. This is because they already put in a huge amount of money in the project, they know that if they terminate a poor performing project, they will definitely suffer certain loss, therefore, they effuse to withdraw (Kelly & Milkman, n. . ). 11 As well as, more sunk cost they have invested, the more reluctance they are. 3. 2. Social Besides psychological factors, social factors also significantly triggers to escalation. As mentioned by Colonel and Monday (n. D. ), people always want to “save face” or tries to gain recognition of others. 1 2 They do not want to admit wrong decision has been made by them and avoid humiliation. The US army got involve in the Vietnam War could be an example illustrated by Stab (1981)13, to avoid national stigma, LOS reluctant to withdraw from the war which leaded to escalation of commitment.
As a result, huge amount of money was wasted and lots Of soldiers were killed (BBC, n. D. ). 14 Furthermore, Baseman and Moore (2009) also suggested the impression management factor, decision makers do not want to admit their initial decision contributing to venture failure as this may cause others to doubt their ability and competence. 15 Therefore, they try to appear consistency to others. Furthermore, people tends to dislike people acting inconsistent. For example, in 2004 U. S. Presidential election, Kerry had been mocked as “flip flopper” as is inconsistence views on the second Iraq war.
This is because people may think that it is a sign of weakness or lack of confidence while people overthrow his initial course of action. Thus, it shows why decision makers are prone to stick with the initial decision and to avoid inconsistent even though they know that it was a poor decision. 16 3. 3. Economic Economic is a further reason that contributes to escalation of commitment. Stab (1981) stated that sometimes the cost required to terminate an ongoing project would be very high or maybe sometimes without any workable alternative options as well. By illustrating an example is that the decision maker decide to improve the sewage and draining system in a city with a huge cost, however, the cost and resources raised while the project is ongoing. The decision maker could choose to stop the project, however he would face compensation like paying for the workers, investors, sub- contractors, as well as legal cost to break a contract. Sometimes those compensation would involve huge amount of money, therefore decision maker would look at the consequences of termination of an ongoing project.
While they think no other options are better or maybe just similar to current reject, they would like deciding continue the project, as a result to avoid extra effort and cost (Stab 1 981 18 3. 4. Organizational Different background and culture of an organization would contribute to different degrees of escalation of commitment (Geiger, Robertson & Irwin, 1998). 19 For an example, an international company is having a joint project with another close related company in another country, in order to keep in a good relationship, the decision makers may try to conceal the failure due to political reason or conflict of interest.
Another example is that if the culture of company is very independent, the decision makers are more likely prone to escalation because of the more responsibility that they think they bear (Geiger et al, 1998). 20 Furthermore, Stab & ROSS (1989) mentioned that strong organizational support to the project would prone to escalation as the decision-makers seem the existence of organization itself as them. Therefore, it shows that different background and culture would trigger different escalation situation. 21 4. Dangers of Escalation of Commitment of the Bola vaccine project 4. . Physiological Dangers In the Bola vaccine project, the invested Some invested is a huge sunk cost ere. By using the self-justify theory, decision makers do not want to admit their mistake as they feel responsible for the sunk cost and the project, so they try to rationalize the decision by escalation of commitment; by applying prospect theory, as a huge amount of money or effort have already spent, they refuse to let go the big sunk cost, as a result become risk-seeking and try to minimize the loss by pouring more money into the failing project.
However, the danger is that result to further losses. This also may reduce the decision maker’s confident in the future and try to follow a safe course of action in the true project that can harm to company’s interest (Drummond, 1996). 22 4. 2. Social Dangers By applying the impression management factor, reputation always closely relates to market performance (Drummond, 1996)23. As shown in the case of US army in Vietnam War, as well as, the 2004 U. S. Presidential case shows that it is sometimes important to show consistency with the initial decision.
For firms including pharmaceutical companies, it sometimes looks unprofessional by terminating an ongoing project in an early stage, which can harm the reputation. In contrast, it is relatively harmful for the company’s interest if over-concerning the reputation and market performance by forgoing some important aspects such as ethical and safety aspects of drugs delivery while commits escalation, see the case of ASK Puerco Rich Plant case, because of the malpractice, ASK was reported by his employee and had to pay $750 m to resolve criminal and civil liability . 4 4. 3. Economical Dangers As mentioned above, the sunk cost here is always difficult to let go for the decision maker, as well as, sometimes it is “too costly to change direction” while once the negative feedback is given in this ongoing project (Hodgkin et l, 2009). 25 Therefore, decision maker in this project would, acting as same as the example mentioned above, look at the quitting cost. At last, they think there is no other better option, so choose to continue the project.
Moreover, the Bola vaccine development project would be a long term project as research shows that no pharmaceutical company has successful developed the vaccine in the past 40 years (Barber, 2014). 26 Drummond (2001) mentioned that the longer the project last, the nature of risk changes along with the length of time, escalation is more likely to occur as decision Akers continue to put resources into the project. 27 One example is that in the Long Island Lighting Company’s nuclear plant project, the time and cost spent eventually went far more than their expectations. 8 4. 4. Organizational Dangers Escalation Of commitment happens while over-optimistic or poor evaluation are presence at the beginning, however at last the project is out of their control (Hodges et al, 2009)29. Moreover, companies with a strong ambition would be more likely prone to escalation and put more resource into the project (Hodgkin et a’, 2009). 30 On example is the Vancouver 201 0 winter Olympic game, the costs was finally over SSL 00 million than expected and just achieved a break-even point (The Canadian Press, 201 0)31 .
Furthermore, relating to a drugs developing project, some research shows that the drug development cost is steadily increasing, most of those companies’ product cost finally exceed $1 billion, and just 20% can achieve break-even point (Hooper, n. D. ),32 therefore, it is difficult for a drug company accurately evaluating the exactly cost to produce the final product, as well as the benefit is unknown until the project finished. 5. Measures to deal with Escalation of Commitment: . 1 .
Share and reduce responsibilities As mentioned the causes above, there is always much pressure on decision makers which make them bearing a strong responsibility. Moreover, this can easily induce them to cover their flaws by escalation. To counter this problem, organization can choose to hand off the responsibilities, for an example, choosing two different decision makers, one responsible for the starting of the project, and another one responsible for finishing of the project. This can reduce the pressure of the same decision maker and help to decrease the self-justification need (Kelly & Milkman, n. . ). 3 Furthermore, the responsibility on a decision maker can also be reduced by introducing panel decision-making procedures which means let relevant members contribute to the decision making process, therefore, it can help to reduce escalation happening (Cardboard, 2004). 34 5. 2. A good project evaluation and management The escalation of commitment happens always due to a poor project planning and estimation. Thus, it is important for organizations to set clear goals and targets of different stages of the project progression (Kelly & Milkman, n. D. ). 5 With a good preparation, they may foresee what emergency will mom out, so that they can fast enough to deal with it, or they can avoid those uncertainties which would come out with escalation. It also suggests that observation is important for checking whether the progression sticks with the original plan or not (Bagman et al, 2009). 36 Nevertheless, if negative feedback occurs, whether they should persist or not? The quitting point can be set here, for example, think about how much they are willing to loss and the consequences if they are going to put in more resources.
Therefore, those method can help to avoid too much effort and money wasting on a failing reject and quit in time. 5. 3. Backup Options: As mentioned in the causes, escalation can be triggered by there is no other suitable options, on the other hands, Bagman et al (2009) claimed that if there are alternative backup methods, the probability of escalate commitment would decrease. This can help to avoid too relying on that ongoing project, for an example, if the project finally failed, it would bring catastrophic effect to the organization. 7 A research suggests that pharmaceutical companies should run two to four medical development per annual which could help to maintain steady profit margins (Hooper, n. ). 38 However, although there may be other options, decision maker also needs to consider the consequence between switching the plan or continue with the initial decision, this is because the cost of continuing may equal to switching to alternative option. Therefore, a backup option should be well considered as well. 6.
Conclusion The causes and dangers are discussed above, for the benefit of an organization, it shows the importance to consider the escalation of commitment to a course of action while a project is progressing. For Bola vaccine developing project, a huge sunk cost has invested, those agreements mentioned above can be used to deal with the escalation, however, in this ongoing project, it believes that the best way is to rotate decision manager as no one could exactly predict when the vaccine can be completed and how much would it cost at the end.