Dangers of Escalation of Commitment in Accounting

Dangers of Escalation of Commitment in AccountingThis report analyses the issue of escalation of commitment to a material body of live up to from the perspective of the pharmaceutical industry. Escalation can be defined as a situation where a failing venture is supplied with additional resources beyond the point of feasibility. As such, escalation carries substantial dangers for organisations by generating avoidable economic losses. The report inquiries into the generic causes of escalation by examining subject literature. Accordingly psychological, neighborly, organisational and go for-specific factors are identified as common escalation activators. Exploration into the particulars of the say industry categorises hitability issues, market performance concerns, maturing products portfolio alongside development pipeline conditions as features amplifying pharma companies vulnerability to escalation. The point is supported by real-life sheath examples regain in the appendix.Appr eciation of escalation causes allows for development of effective prevention policies. The report suggests preventive measures aimed at reducing the occurrence of escalation triggers, such as challenging the individual and social causes. Approaches for reducing other factors impact on decision-making are outlined in the form of strategy alteration as well as process solicitude policies. The report finalises with suggestions on escalating situations management.Statement of ReferenceThe aim of this 2000-word report is to inquiry the causes and dangers of escalation of commitment to a course of action from the perspective of pharmaceutical companies.This report is to tax the dangers of escalation of commitment to a chosen course of action through the perspective of pharmaceutical companies. In disposition to achieve the aim set, the paper first analyses the commentary and threats arising from the phenomenon of escalation.Next, adjacent the framework proposed by Ross Staw (1993) g eneric causes of escalation are summarised. Subsequently, the report looks at industry- and do drugs development-specific escalation triggers in an attempt to identify why the pharmaceutical companies are peculiarly vulnerable to the dangers of escalation of commitment.Then, escalation prevention provisions organised around tackling previously identified triggers are outlined. The report concludes with suggestions concerning the issue of escalating situation management.Escalation of commitment Definition and dangersEscalation can be defined as a situation where an individual over-commits resources to a failing venture aft(prenominal) receiving negative feedback on its performance. Having an option to discontinue, the decision-maker forgoes rational behaviour and devotes more money, time or effort in a false belief that greater involvement result bring the project to successful completion (Staw, 1981). virtually examination suggests that escalation as such should not be automat ically assigned negative connotation. Low level of employee commitment is also damaging to organisational performance mount factors big businessman discharge over-commitment (Heath, 1995). Another view assumes escalation to be a congenital feature of the business decision-making that should be treated as an unavoidable expense (Bowen, 1987). The prevailing notion supported by extensive research suggests that escalation of commitment should be acted against (Brockner, 1992) because of carrying dangers ofUltimately leading to multiplication of avoidable lossesIntroducing irrational decision-makingUndermining the basic inclose of business activity to maximise gains with minimal beGenerating substantial opportunity beConsuming unrecoverable resources, such as time.Appreciation of escalation triggers allows for development of in effect(p) prevention methods aimed at reducing the occurrence of such factors, subsequently protecting the connection from the aforementioned detriment s.Generic causes of escalationPsychologicalInitial research suggested that escalation arises primarily from the natural incline of the human being to self-justify behaviour. Supplying the course of action with additional resources serves as unconscious defence technique the individual reassures him/herself that the original decision make was rational (Staw, 1976). Self-justification need is heightened if the decision-maker holds responsibility for the resource allocation (Staw, 1981), which is typical for investment decision setting.Prospect theory applied to escalation suggests that self-justification is not critical prerequisite for its occurrence. Escalation is induced by the decision-maker using a frame to make decisions under conditions of uncertainty of results. The decision-maker views subsequent decisions in reference to outcomes of initial judgements in order to produce a coherent frame. The negative feedback on the initial resource allocation results in the subsequent dis tribution being viewed as a natural selection between certain(prenominal) and possible loss, or a negative frame. Subsequently individuals are prone to escalation by becoming risk-seeking failing to accept a definite loss even at the cost of incurring greater in the future (Whyte, 1986).How the decision-maker perceives incurred costs, constitutes another escalation trigger (Garland Newport, 1991). Following prospects theory, the sunk costs effect suggests that costs incurred viewed in relation to the total expenditure induce a negative frame, leading to escalating behaviour. Linked with that, the dislike of waste provides another motivation to supply the course of action further, kind of than face a definite loss (Arkes Blumer, 1985). Interestingly, excitement about the project outcomes (Schmidt Calantone, 2002), and sunk-time effect (Navarro Fantino, 2009) aid escalation occurrence.SocialImportantly, the aforementioned need to justify the correctness of behaviour is not limited to the individual and applies to the wider social context (Staw, 1976). Maintaining an image of a ordered decision-maker among peers proves equally, or more, important to meeting self-justification needs.The passion to obtain social approval is exacerbated under insecurity of the social status in the group, or in a presence of an adverse crowd (Staw, 1976). In such instances the individual is likely to model his/her behaviour to reproduce the model endorsed by the audience (Brockner, 1992). As the group replicates leader stereotypes that emphasize the need for decision-makers to be consistent in actions in order to be perceived as competent (Staw Ross, 1980), the individual aspiring to achieve consistency with the stereotypical image will over-commit not to distort others belief in their leadership potential, and to reaffirm position in the group structure.Intra- or inter- group competition can indicate escalation. The management is shifted away from objective assessment of the p ossible outcomes of a chosen decision onto the motivation to win. The need to do whatever it takes to get a step forrad of the competitors maintains scope for irrationality and escalation as such irrational behaviour is common to both of the parties involved (Bazerman, 2006).OrganisationalProjects receiving strong organisational support are prone to escalation (Pfeffer, 1981 in Ross Staw, 1993), as the decision-makers identify them with the existence of organisation itself. Furthermore, the centrality of the project to organisational values and its entrenchment in the organisational structure account for the projects being continued despite reservations (Goodman et al., 1980 in Ross Staw, 1993). Unwinding the reinforcement radical might threaten the very basis of working organisational structure induce change that is often associated with risks and dangers. The costs of bankers acceptance of status quo are perceived as minor to the potential dangers of modified environment.Main taining disposition and consistency between values and actions prove to constitute forces inducing over-commitment from organisational perspective (Ross Staw, 1993). Companies having publicly announced success might be more hesitant to admit failure and discontinue with the course of action.Project-specificHigh development costs and risky market performance of the finished product, the acceptance of failures and losses as a feature of the RD process, and reluctance of decision-makers to emotionally detach from the prolonged projects account for greater escalation exposure of RD projects (Schmidt Calantone, 2002).Low potential reusability (Staw Ross, 1993) of the fall ind output results in reluctance to discontinue the venture in order to avoid waste. Negative framing induces the perception of exit costs, such as compensation packages as definite waste, leading to escalation.The advancement of the project on a timeline constitutes another threat due to sunk-cost effect (Navarro Fan tino, 2009). Projects reaching advanced stages of development would be discontinued reluctantly because of accumulation of used resources, including time, and the perception of imminent availability of the anticipated gains.Industry-specific Escalation TriggersProfitability issuesRecent data suggests that pharmaceutical companies are to face decline in profit figures in forthcoming years (Datamonitor, 2010). This can be attributed to steadily increasing drug development costs the costs producing the final product exceed $1 billion, with as few as 20% of successful product entries achieving the break-even point (Innovation.org, 2010). Estimates suggest that pharmaceutical companies should launch two to four drugs annually to maintain squiffy profit margins (Gassmann Reepmeyer, 2005). However, due to high attrition rates the overall success of organisations strategy is often reliant on the success of a single project (Kola Landis, 2004). These factors pressurise the companies to cont inue with projects and disregard arising reservations to maintain profitability.Maturing product portfolioThe reduction in new component approvals can be partially attributed to strengthening drug readjustment requirements. Other explanation lies in the controversial innovation deficit experienced by the industry (Schmid Smith, 2004). Lower innovation figures account for pharmaceutical companies being go about with maturing product portfolio. Consequently, the companies engage in a variety of advanced projects overly-optimistically assessing their revenue potential, failing to discontinue when reservations arise. Eventually, the companies face greater losses as the projects fail to generate anticipated revenues, but incurring avoidable losses (Appendix Dimebon case).Concerns for market performanceThe pressure to persist is further reinforced by the need to be consistent with companys vision (Ross Staw, 1993). Endorsing the projects demonstrates consistence with the mission stateme nt reaffirms the reputation as well as reassures the market and investors on following the profitable trail. However, forgoing ethical and recourse aspects of drug delivery over concerns for market performance and cost-cutting proves detrimental (Appendix GSK Puerto Rico Plant).Development pipeline conditionsThe specificity of the drug development pipeline further adds to the vulnerability to the dangers of escalation of commitment. The drug development time is estimated to surpass 10 years, with the costs amplifying as the project progresses (Accenture, 2007). This suggests heightened emotional attachment and excitement towards results, as well as existence of supporting infrastructure as powerful motivators of escalation. Attrition figures reveal that escalation is common in the industry as the nigh projects are withdrawn after reaching the most cost intensive stage of advanced clinical trials that precedes the registration process or are recalled after reaching the patient due to safety concerns that commence been ignored earlier on (Kola Landis, 2004) (Appendix Avandia case).Escalation how to prevent it?Tackling individual and social causesPerhaps introduce appraisal procedures emphasizing ones ability to build on past actions, rather than progression of the project. This will reduce managers fear of negative consequences if the project fails. Confidential treatment of sensitive matters, such as personal failures, will reduce the reputation retention motivation for escalation (Simonson Staw, 1992).Consider developing positive leader stereotypes supported by convergent organisational values emphasizing the rationality of decision-making. Furthermore, introducing panel decision-making procedures contribute to preventing escalation by reducing individual responsibility for the decision taken (Simonson Staw, 1992 Schmidt Calantone, 2002). Inviting members of relevant departments allows for assessing the projects success potential from a variety of angles li miting scope for escalation to arise.Ponder developing achromatic decision frames by rotating managers in charge of the project so that different individuals held responsibility for initial and subsequent resources allocations (Simonson Staw, 1992). Additionally, foster for emotional detachment from sunk costs by introducing training in mental budgeting (Heath, 1995).Project evaluation and managementClear and achievable targets should be set out at the project trigger alongside exit points at various stages of progression (Schmid Smith, 2004). Measuring projects performance against set aims assessing the efficiency with which resources yield results at the selected points allows for primordial estimation whether the project is following the anticipated pathway, thus allowing to avoid greater losses. Consider adopting attrite early strategy (Schmid Smith, 2004) as companys motto.Consider participation in multi-stakeholder analysis projects evaluating the potential value of innovati ve drug projects at early stages of development such as the consultations conducted within the European Healthcare Innovation Leadership Network (AstraZeneca, 2010).Ponder involving external parties in the project (Schmidt Calantone, 2002). Perhaps engage auditors to assess the success projects success potential at its outset or to devise effective contingency planning. This will moderate objectivity and independence of organisational politics. Consider outsourcing the project to subcontractors to avoid its institutionalisation in the organisational structure.Alternating middle-to-long-term strategyConsider renewing existing product portfolio and engagement in me-too drug developments. This ensures steady revenue generation from inelastic demand segments (Ganuza et al., 2009) and carries less risk comparing to reliance on anticipated gains from innovative compounds. Estimations suggest that involvement in drug-related sectors or focusing on advancement in licensed compounds constit ute a potentially profitable alternative (Schmid Smith, 2004). Consider GSKs involvement in healthcare brands as an example.Managing EscalationSuppose the escalating situation arises, consider replacing the project manager or establishing panel assessment in order to remove the negative intellection frame, rid off the potential self-justification needs and assess realistically projects success potential (Simonson Staw, 1992). Consequently, ponder engaging external consultants to develop plausible solutions and introduce other point of view independent of the political and organisational influence. Otherwise, evaluate potential salvage value of the project towards establishing uses other than the initial one anticipated (Appendix sildenafil case).Furthermore, consider whether external financial support for advanced research is available and if is feasible to use towards accomplishment of the projects aims. Otherwise, ponder engaging in partnership with a company undertaking resear ch in similar compound in order to combine knowhow and reduce costs.AppendixAvandia caseRecent withdrawal of GSKs super innovative and best-selling diabetes drug, Avandia, in EU was caused by the linkages with deaths by heart failures among the patients on the medication (FT.com, 2010b). Allegedly, the company was aware of the severity of adverse effects, however launched the drug to the market (Avandia Recall News, 2010). Estimations suggest that GSK could face between $1.1bn and $6bn in compensation costs (FT.com, 2010a) that could have been avoided had the company ceased the project when safety concerns were brought to light. Additionally, bad publicity incurred after the allegations surfaced resulted in fall of GSK share prices, and the company facing negative profit accounts (FT.com, 2010c).Dimebon casePfizer has recently withdrawn from advanced clinical trials (undertaken in partnership with Medivation) of highly anticipated Alzheimers disease cure, Dimebon, after the drug ex hibited no promising therapeutic results (MedScape Medical News, 2010). The reservations about the curative properties of the compound have been raised at early stages of the process. It is assumed that the logic behind Dimebons miraculous effects was never properly investigated. Furthermore, similar compounds failed in previous trials (ABC News online, 2010). Escalating behaviour in such case could be linked to Pfizer losing patent rights the currently marketed Alzheimers treatment, Aricept and was in need of a profitable replacement. As a result of failure to investigate and evaluate promptly, Pfizer has incurred $725 one million million million in RD costs (the Economist.com, 2010).GSK Puerto Rico Plant caseGSK is reported to pay $750m in penalty payment to US government and other claimants following allegations on manufacturing malpractice and failure to adhere to safety standards in production plant in Puerto Rico. The allegations regarding mal-adjusted doses of active ingredi ents and ineffectiveness of drugs submitted to government programmes were revealed by a former employee and resulted in the company being charged with a criminal offence (Wall Street Journal Law Blog, 2010).Viagra caseInitially Viagra was developed as a cordial drug aimed at decreasing blood pressure and preventing cardiac arrests. Clinical trials unexpectedly revealed potentially exploitable and marketable properties of the drug high effectiveness in fighting erectile dysfunction in men.In the six months following its launch as a revolutionary treatment, in 1998 Viagra worldwide gross sales have exceeded 300 million (BBCnews.com, 1999).