German super-grocer Kaufland has announced it has cancelled its plans to dominate Australian retail.
Not an easy decision, given it had already spent $523,000 million, locked in 23 sites across Australia and employed some 200 staff.
The easy thing would have been to keep to its plans. The harder thing was to walk away.
Indeed, walking away was so painful for companies such as Blockbuster, Nokia, Yellow Pages, Kodak and Dell that they have either gone out of business or are pretty close to it. I lived this painful experienced at Sensis when investment in the print directory was prioritised over digital.
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We are simply not wired to walk away.
In 1985, researchers Arkes and Blumer were keen to dig into this propensity to dig our heels in, so had research participants decide whether to invest $1 million in a stealth bomber. They were told, by the way, that a competitor had already launched a superior product. Simple decision, right?
Participants were split into two groups. One group was told the project was yet to begin. These people could see it was a waste of money and only 17% agreed to fund the bomber.
The second group was told the project was 90% complete. This time the decision was very different, with 85% agreeing to commit the $1 million.
Why the difference? The sunk cost fallacy. Or in other words, “a greater tendency to continue an endeavour once an investment in money, effort or time has been made”.
But sunk cost can sink businesses.
Dealing with sunk cost fallacy
1. Pretend someone else is making the decision
We tend to hold onto ideas and endeavours in which we are personally, and emotionally, involved. Our ego doesn’t like being confronted with failure. The answer lies in creating psychological distance between you and the decision.
Andy Grove, then chief executive of Intel, famously did this when he asked himself and his colleague Gordon Moore “what would a new CEO do?”
The answer was clear: move from memory to microprocessors.
When we imagine someone else making the call, our personal baggage falls away. What would a person new to your business do?
2. Track the opportunity cost
Every dollar and hour you continue to spend on a project is a dollar and hour you don’t get to spend elsewhere. There’s an opportunity cost to continuing.
Alongside your current project, track alternative initiatives you’re waiting to do, because it’s easier to end a project if you have something to switch your team into.
3. Create project exit opportunities
Just because a project is underway doesn’t mean it shouldn’t be challenged. Establish funding gates or decision points along the way to make it easy for the project team to end it if that becomes the smart thing to do.
Think of it like a freeway, and build lots of off-ramps as part of your governance.
Should you pull a Kaufland?
This new year, should you pull a Kaufland?
What should you stop doing?
Are you investing in projects simply because it feels like you are too far in to backtrack?
Are you throwing more money at something because you don’t want to let the dream go, even though that’s the smart move?
It’s tough to come to terms with a failure, but it’s better than being the failure.