Dangers of Escalation of Commitment in Accounting

Dangers of Escalation of Commitment in AccountingThis line analyses the recognise of escalation of commitment to a course of accomplishment from the perspective of the pharmaceutic companyceutical industry. Escalation can be defined as a patch where a failing bring to the highest degree is supplied with additional resources beyond the point of feasibility. As such(prenominal), escalation carries substantial dangers for organisations by generating avertable economic losses. The report inquiries into the generic wine causes of escalation by examining subject literature. Accordingly psychological, kindly, organisational and proposal-specific factors be identified as common escalation activators. Exploration into the particulars of the said industry categorises positiveness issues, market place proceeding concerns, maturing harvest-tides portfolio alongside development pipeline conditions as cavorts amplifying pharma companies vulnerability to escalation. The point is back up by real-life brass examples located in the appendix.Appreciation of escalation causes allows for development of stampive prevention policies. The report suggests preventive measures captureed at simplification the occurrence of escalation triggers, such as challenging the individual and social causes. Approaches for reducing separate factors impact on decision-making are outlined in the form of strategy alteration as comfortably as cultivate management 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 assess the dangers of escalation of commitment to a chosen course of action through the perspective of pharmaceutical companies. In order to achieve the aim put up, the paper first analyses the definition and threats arising from the phenomenon of escalation.Next, following the framework proposed by Ross Staw (1993) generic causes of escalation are summarised. Subsequently, the report looks at industry- and medicine development-specific escalation triggers in an attempt to rate why the pharmaceutical companies are particularly vulnerable to the dangers of escalation of commitment.Then, escalation prevention supply 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 gamble afterwardwards receiving negative feedback on its performance. Having an option to blockade, the decision-maker forgoes sage behaviour and devotes more money, age or effort in a false belief that great involvement leave bring the switch to supremacyful completion (Staw, 198 1). just about examination suggests that escalation as such should not be automatically appoint negative connotation. Low level of employee commitment is also damaging to organisational performance background factors might justify over-commitment (Heath, 1995). Anformer(a) view assumes escalation to be a natural feature of the business decision-making that should be treated as an needed expense (Bowen, 1987). The dominant notion supported by extensive look into 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 premise of business activity to maximise gains with token(prenominal) appealsGenerating substantial opportunity beConsuming unrecoverable resources, such as time.Appreciation of escalation triggers allows for development of efficient prevention methods aimed at reducing the occurrence of such facto rs, subsequently protecting the company from the aforementioned detriments. generic wine causes of escalationPsychologicalInitial research suggested that escalation arises primarily from the natural incline of the mankind being to self-justify behaviour. Supplying the course of action with additional resources serves as unconscious(p) defence technique the individual reassures him/herself that the original decision made 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 funds decision setting.Prospect theory applied to escalation suggests that self-justification is not zippy prerequisite for its occurrence. Escalation is provoked 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 fr ame. The negative feedback on the initial resource allocation results in the subsequent distribution being viewed as a choice surrounded by definite 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). pursuit 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 hate of waste provides another motivation to supply the course of action upgrade, previous than baptismal font a definite loss (Arkes Blumer, 1985). Interestingly, excitement about the task outcomes (Schmidt Calantone, 2002), and sunk-time effect (Navarro Fantino, 2009) aid escalation occurrence.SocialImporta ntly, the aforementioned need to justify the rightness of behaviour is not limited to the individual and applies to the wider social context (Staw, 1976). Maintaining an examine of a unchanging decision-maker among peers proves equally, or more, important to meeting self-justification needs.The impulse to obtain social approval is exacerbated under insecurity of the social precondition in the convention, or in a presence of an adverse gathering (Staw, 1976). In such instances the individual is likely to model his/her behaviour to upchuck the model endorsed by the audience (Brockner, 1992). As the group replicates leader stereotypes that express the need for decision-makers to be consistent in actions in order to be comprehend as competent (Staw Ross, 1980), the individual aspiring to achieve congruity with the stereotypical image will over-commit not to distort others belief in their leadership latent, and to reaffirm position in the group social system.Intra- or inter- group competition can indicate escalation. The focus is shifted away from objective judicial decision of the possible outcomes of a chosen decision onto the motivation to win. The need to do whatever it takes to get a step ahead of the competitors introduces scope for unreason and escalation as such irrational behaviour is common to both of the parties tangled (Bazerman, 2006).OrganisationalProjects receiving strong organisational support are prone to escalation (Pfeffer, 1981 in Ross Staw, 1993), as the decision-makers rate 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 supporting floor might threaten the very basis of working organisational structure induce change that is often associated with risks and dangers. The costs of acceptance of status quo are perceived as minor to the electric potential dangers of modified environment.Maintaining story 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 misfortune 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 activatedly detach from the prolonged projects account for greater escalation picture of RD projects (Schmidt Calantone, 2002).Low potential reusability (Staw Ross, 1993) of the generated output results in reluctance to discontinue the venture in order to avoid waste. Negative framing induces the perception of take place costs, such as compensation packages as definite waste, leading to escalation.The betterment of the project on a timeline constitutes another threat due to sunk-cost effect (Navarro Fantino, 2009). Projects reaching advanced full stops of development would be discontinued reluctantly because of assembling of used resources, including time, and the perception of imminent availability of the anticipate gains.Industry-specific Escalation TriggersProfitability issues young data suggests that pharmaceutical companies are to face decline in net profit figures in forthcoming years (Datamonitor, 2010). This can be attributed to steadily change magnitude 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 observe steady profit margins (Gassmann Reepmeyer, 2005). However, due to high attrition range the overall success of organisations strateg y is often reliant on the success of a single project (Kola Landis, 2004). These factors pressurise the companies to continue with projects and disregard arising reservations to maintain profitability.Maturing product portfolioThe reduction in new component approvals can be partially attributed to strengthening drug registration requirements. Other explanation lies in the controversial innovation deficit experienced by the industry (Schmid Smith, 2004). bring down innovation figures account for pharmaceutical companies being faced with maturing product portfolio. Consequently, the companies accept in a variety of advanced(a) 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 mechanical press to persist is further reinforced by th e need to be consistent with companys vision (Ross Staw, 1993). Endorsing the projects demonstrates consistence with the mission statement reaffirms the reputation as hale as reassures the market and investors on following the profitable trail. However, forgoing respectable and safety aspects of drug delivery over concerns for market performance and cost-cutting proves harmful (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. scrape figures reveal that escalation is common in the industry as the most projects are draw back after reaching the most c ost intensive stage of advanced clinical trials that precedes the registration process or are recalled after reaching the patient due to safety concerns that grant been ignored earlier on (Kola Landis, 2004) (Appendix Avandia case).Escalation how to prevent it?Tackling individual and social causesPerhaps introduce approximation procedures emphasizing ones ability to build on past actions, rather than furtherance of the project. This will reduce managers fear of negative consequences if the project fails. Confidential intervention of sensitive matters, such as personal failures, will reduce the reputation retention motivation for escalation (Simonson Staw, 1992). reach developing positive leader stereotypes supported by convergent organisational values emphasizing the rationality of decision-making. Furthermore, introducing panel decision-making procedures stomach to preventing escalation by reducing individual responsibility for the decision taken (Simonson Staw, 1992 Schmidt C alantone, 2002). Inviting members of germane(predicate) departments allows for assessing the projects success potential from a variety of angles limiting scope for escalation to arise. debate developing neutral 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 psychical budgeting (Heath, 1995).Project evaluation and managementClear and achievable targets should be set out at the project initiation alongside exit points at various stages of progression (Schmid Smith, 2004). Measuring projects performance against set aims assessing the efficiency with which resources throw results at the selected points allows for early estimation whether the project is following the anticipated pathway, and then 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 innovative 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 ensure 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 battle in me-too drug developments. This ensures steady revenue generation from inelastic beg segments (Ganuza et al., 2009) and carries less risk comparing to reliance on anticipated gains from innovative enhances. Estimations suggest that involvement in drug-related sectors or focusing on progression in licensed compounds constitute a potentially profitable substitute (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 mind in order to remove the negative thinking frame, rid absent 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, gauge potential deliver value of the project towards establishing uses other than the initial one anticipated (Appendix sildenafil citrate case).Furthermore, consider whether external financial support for advanced research is acquirabl e and if is feasible to use towards accomplishment of the projects aims. Otherwise, ponder engaging in partnership with a company undertaking research in comparable compound in order to combine knowhow and reduce costs.AppendixAvandia case novel withdrawal of GSKs highly 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 virulence 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 care prices, and the company facing negative profit accounts (FT.com, 2010c).Dimebon casePfizer has recently wi thdrawn from advanced clinical trials (undertaken in partnership with Medivation) of highly anticipated Alzheimers disease cure, Dimebon, after the drug exhibited 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 fictional 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 million in RD costs (the Economist.com, 2010).GSK Puerto Rico Plant caseGSK is report to pay $750m in penalty payment to US government and other claimants following allegations on manufacturing malpractice and f ailure to adhere to safety standards in merchandise plant in Puerto Rico. The allegations regarding mal-adjusted doses of active ingredients and ineffectiveness of drugs submitted to government programmes were revealed by a former employee and resulted in the company being charged with a vile offence (Wall Street Journal Law Blog, 2010).Viagra case ab initio 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 erect dysfunction in men.In the six months following its launch as a revolutionary treatment, in 1998 Viagra worldwide sales have exceeded 300 million (BBCnews.com, 1999).