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This chapter introduces the problem of critical decisions gone awry. Critical decisions are defined and two examples that produced poor outcomes are presented, a prominent merger and an early retirement opportunity program. The Law of Unintended Consequences is put forward as the reason behind these failures. Our approach to improving decision outcomes by “bending” the Law is sketched and the overall structure of the book is previewed.
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The 1999 acquisition of Mannesmann by Vodafone Group was slightly larger than the AOL Time Warner deal. https://en.wikipedia.org/wiki/List_of_largest_mergers_and_acquisitions.
Although the transaction was structured as a merger, AOL purchased 55% of the new entity. https://en.wikipedia.org/wiki/Time_Warner#Merger_with_AOL, https://www.slideshare.net/adhamghaly/aol-time-warner-merger-case-study.
The NASDAQ Composite Index reached its peak of 5132 in March 2000. By October 2002, it was valued at 1114, representing a loss of 78% of its value in 30 months. http://www.nasdaq.com/article/3-lessons-for-investors-from-the-tech-bubble-cm443106.
In fact, in a settlement with the SEC, Time Warner restated more than 2 years’ worth of results, from the fourth quarter of 2000 through 2002, reducing advertising revenue claimed at AOL by $500 million. http://www.ecommercetimes.com/story/41604.html.
In 2000, 2.5% of the US population had high speed broadband, but grew rapidly to 4.5% in 2001, 6.9% in 2002, and 28% by 2012. https://en.wikipedia.org/wiki/Internet_in_the_United_States.
Time Warner executives took financial hits from declining stock value. However, their hostility was fueled by direct losses in compensation because the company changed its executive incentives program from cash bonuses to stock options tied to corporate performance targets. Those targets were never met thanks to AOL’s failures. https://en.wikipedia.org/wiki/Time_Warner#Merger_with_AOL, http://www.thedailybeast.com/articles/2009/05/04/how-time-warner-blew-it.html, http://news.cnet.com/Case-accepts-blame-for-AOL-Time-Warner-debacle/2100-1030_3-5534519.html.
Ted Turner, the largest individual shareholder, lost roughly $8 billion dollars, or 80% of his net worth! He later called the merger “one of the biggest disasters that have occurred to our country.” AOL struggled for many years before being purchased by Verizon in 2015 for $4.4 billion. https://www.fastcompany.com/3046194/a-brief-history-of-aol.
“Du Pont Co.’s Early Retirement Opportunity program is successful.” PR Newswire (Apr. 16, 1985): pH508. Available at http://www.prnewswire.com/. See also Webber [ 20] and “Du Pont’s Retirement Rush.” Time. April 22, 1985. Note that ERO programs are difficult to design because they must not be perceived as targeting specific employees or groups in order to avoid violating Federal discrimination laws such as the Age Discrimination in Employment Act.
Most of the examples in this book refer to critical decisions facing corporate managers and executives. However, the book’s analysis of LUC and its method for combating LUC apply directly to decisions by non-commercial organizations as well, such as government policies, legislation and regulations.
Robert Burns. 1785. “ To a Mouse, on Turning Her Up in Her Nest With the Plough” . Available at http://www.robertburns.org/works/75.shtml.
http://www.murphys-laws.com/murphy/murphy-true.html. The project manager named the “law” and spread it in a more impersonalized form—“If things can go wrong, they will.” See also https://en.wikipedia.org/wiki/Murphy%27s_law.
Merton [ 12].
Rogers [ 14].
Prediction assets that a specific event will happen at a particular time (and place). In contrast, forecasts generally anticipate an event within an interval (e.g., an earthquake of magnitude 6.5 or greater is 70% likely to occur within the next 30 years. Silver [ 17]. You can quantify the certainty of a prediction with a confidence factor (e.g., predicting that an event X will occur with certainty of 90%). Hubbard [ 10].
The test drive method can also be applied, with some modifications, to monitor decisions as they are being executed, to detect emerging threats promptly and mid-course corrections to ensure success. The best analogy for this “mode” is an Early Warning System (EWS) (cf. Sect. 9.6).
All URLs Accessed 07/14/2019.
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Hawthorne, Fran. 1993. Rigging the early retirement game. Institutional Investor. May 1993. 79–80.
Hubbard, Douglas W. 2007. How to Measure Anything: Finding the Value of Intangibles in Business. Hoboken, NJ: John H Wiley and Sons.
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Rogers, Everett M. 2003. Diffusion of Innovations. (Fifth Edition) New York: Free Press.
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Schwartz, Peter. 1991. The Art of the Long View: Planning for the Future in an Uncertain World. New York: Doubleday Currency.
Silver, Nate. 2012. The Signal and The Noise: why so many predictions fail – but some don’t. New York: Penguin Books.
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Richard M. Adler
- Chapter 1
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