Reference no: EM131244880

ESCALATING COMMITMENT

During the 11 years that passed between Indium's initial concept to its actual development, its business plan eroded. First, the gradual build-out of cellular dramatically shrank Iridium's target market-international executives who regularly traveled to areas not covered by terrestrial cellular. Second, it became apparent over time that Iridium's phones would have significant design, operational, and cost problems that would further limit usage.

Motorola's decision to push Iridium forward in spite of a deeply flawed business plan is a classic example of the pitfalls of "escalating commitment." The theory behind escalating commitment is based in part on the "sunk cost fallacy"-making decisions based on the size of previous investments rather than on the size of the expected return. People tend to escalate their commitment to a project when they

(a) believe that future gains are available,

(b) believe they can turn a project around,

(c) are publicly committed or identified with the project, and (d) can recover a large part of their investment if the project fails.
Motorola's involvement in the Iridium Project met all four of these conditions. In spite of known problems, top executives maintained blind faith in Iridium. To say that Iridium's top management was unaware of Iridium's potential problems would be wholly inaccurate. In fact, Iridium's prospectus written in 1998 listed 25 full pages of risks including:

? A highly leveraged capital structure

? Design limitations-including phone size

? Service limitations-including severe degradation in cars, buildings, and urban areas

? High handset and service pricing

? The build-out of cellular networks

? A lack of control over partners' marketing efforts

During Iridium's long concept-to-development time, there is little evidence to suggest that Motorola or Iridium made any appreciable progress in addressing any of these risks. Yet Iridium went forward, single-mindedly concentrating on satellite design and launch while discounting the challenges in sales and marketing the phones. The belief that innovative technology would eventually attract customers, in fact, was deeply ingrained in Motorola's culture.
Indeed, Motorola's history was replete with examples of spectacular innovations that had brought the company success and notoriety. In the 1930s, Paul Gavin developed the first affordable car radio. In the 1940s, Motorola rose to preeminence when it developed the first handheld two-way radio, which was used by the Army Signal Corps during World War II. In the 1950s, Motorola manufactured the first portable television sets. In the 1969, Neil Armstrong's first words from the Moon were sent by a transponder designed and manufactured by the company. In the 1970s and 1980s, Motorola enjoyed success by developing and manufacturing microprocessors and cellular phones

By the time it developed the concept for Iridium in the early 1990s, Motorola had experienced over 60 years of success in bringing often startling new technology to consumers around the world. Out of this success, however, came a certain arrogance and biased faith in the company's own technology. Just as Motorola believed in the mid-1990s that cellular customers would be slow to switch from Motorola's analog phones to digital phones produced by Ericsson and Nokia, their faith in Iridium and its technology was unshakable