Business Psychology - Latest Findings

Article No. 105
Business Practice Findings, by James Larsen, Ph.D.

Jumping Ship - A Business Virus

Researcher discovers a new way businesses can get themselves into trouble.

Imagine being a passenger on a ship at sea and being awakened in the dark by panicky shouting to abandon ship. You rush onto the deck and witness passengers grabbing life preservers and jumping overboard and urging others to follow them before it's too late. But there are no signs of immediate danger. Do you jump?

Let's assume for a moment that you do, but that there is nothing wrong with the ship. Imagine your dismay as you cling to your life preserver and watch the ship move quickly away.

Ahh, but you'd never do that, you say. But what if the fog was thick, you smelled smoke, and you were the very last person left on board? What then?

Now what's this got to do with business, you say?

Jumping ship is an example of an abandonment decision made under conditions of uncertainty and risk. People who jump take on faith that passengers leaping ahead of them have information justifying this choice. If that's true, then imitating their action allows them to exploit this information without even knowing what it is. They appear brilliant. But if they're wrong, they're dead in the water.

Does this happen in business? Does it happen often? Maybe so.

That's the disturbing conclusion of a doctoral dissertation done at Stanford University by Henrich Greve. He noticed a curious example of mass abandonment in the U.S. broadcast radio industry and examined it looking for evidence of "jumping ship" as an explanation. He hoped to learn if the radio stations had fallen victim to this process and how it had happened. What he found should concern us.

There are over 11,000 radio stations in the U.S., and in 1984, 286 of them, in the 12 states Greve studied, used an Easy Listening format. But by 1993, 90% of these stations had abandoned it, and the format had gone "belly up" in the industry even though 9 years earlier it had been a viable format.

Initially, Greve thought the abandonments might have been a problem solving decision, but when he looked more closely, he found the stations weren't having problems that would warrant such a drastic action. Next, he explored the effect of competition, but as the product-market niche of Easy Listening steadily cleared of competitors, abandonment should have slowed. That didn't happen. That left only contagion as an explanation, that is, contagion as in the spread of a contagious disease, and it did fit. That was the explanation.

Contagion is a form of learning that leads to decisions. It occurs when business owners respond to uncertainty by comparing the practices of their firms with the practices of a select group of other firms, called an organizational reference group. Executives are often unaware they've selected such groups, unaware they place so much importance on what they do, and unaware they're comparing the actions of these firms with their own.

Abandonment of a practice is only one kind of decision which contagion can lead to, but it is the most dangerous. Once you abandon a practice you stop learning anything about it, so you're unlikely to discover if you've made a mistake. Contagion of abandonment becomes very strong when more and more members of the reference group begin to imitate it. Each additional example of abandonment increases the pressure and causes business owners to convince themselves that the abandonment decision must be the right one. That's what happened with the radio stations.

Imagine, if you can, every single person on a ship jumping overboard and watching it steam off by itself. That's a severe example of contagion, but it occurred in the broadcast radio industry between 1984 and 1993 to the Easy Listening format.

Like the spread of a computer virus, Greve found contact to drastically increase the probability radio stations would abandon the format: 14 times more likely if a corporate sister station abandoned it, and 1,800 times more likely if a market contact with no formal ties to the station abandoned it. Going through a change in ownership also increased the probability 2.4 times.

Scary, isn't it?

Reference: Greve, Henrich R. (1995). Jumping Ship: The Diffusion of Strategy Abandonment. Administrative Science Quarterly, 40 (1995), pp. 444-472.

© Management Resources

Back to home page