During a crisis, organizations face the dilemma of ceasing a questionable line of behavior or committing more resources into the behavior to ensure the course of action pays off. Escalation of commitment is quite common, as struggling organizations strive to regain their profitability again, they easily become vulnerable to escalation of commitment. Staw (1981) asserts that organizations in crisis tend to make decisions that affect the entire course of action as seen in American apparel’s case.
American Apparel filed for bankruptcy in October 2015after a series of setbacks that (Tabuchi, 2015). American Apparel grew from humble beginnings to become an arbiter of made-in-America cool. At its heyday, the company had$205 million in revenue and numerous stores across the U.S. However, continuous losses since 2009 and huge debts led to the filing of bankruptcy on October 5, 2015 (Tabuchi, 2015).
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With the decreasing sales and increasing debt, the organization decided to borrow more money to solve some of its problems, which only escalated the debt problem until it filed for bankruptcy and re-branded. For years, American Apparel was skimpy designs and provocative adverts which attracted teens and rebels across the globe. In an effort to re-brand itself after a series of financial trouble, American Apparel chose to tone down on its overt clothing designs and adverts. Suddenly, American Apparel specialized in loose fitting clothes and tops with rising necklines, and this drove away its fans.
American Apparel’s situation can be explained using Staw’s model. Staw (1981) notes that individuals/organizations often find themselves in escalating commitment for various reasons, the first reason being self-justification. In an effort to turn the situation around, American Apparel kept justifying new decisions to borrow more money from creditors and investors. In 2011, it received 14.9 million from Canadian investors, and yet again in 2014, it issued a private offering of $206 million. Another motivator of escalating commitment is the norm of consistency. Leaders tend to believe that commitment is an important virtue that must be upheld, such that even in crisis, they commit to decisions that are not beneficial to the organization.
Staw’s model is made up of the following concepts: motivation to justify previous decisions, norms of consistency, the probability of future outcomes and the value of future outcomes (Straw, 1981 p. 581). The first concept is motivation to justify previous decisions, in a crisis, decision makers tend to make decisions based on the consequences of the previous decisions. In an effort to show competence, the commitment is escalated further probably due to the self-justification concept. American Apparel made a series of decisions based on the last decisions that eventually led to the course of action. The motivation to justify previous decisions could stem from internal and external need for competence or the negative outcomes of the previous choice. Initially, American Apparel had huge debts, and this problem became the source of more problems (Tabuchi, 2015). The organization tried different strategies such as selling assets, borrowing more and issuing a new offering, but all the decisions did not bring any good results. Eventually, the company decided to re-brand, a major strategic decision that did not pay off.
The second aspect of Staw’s model is the norm of consistency. From the model, the norm of consistency is reinforced by cultural norms and socialization as well as organizational norms and socialization. American apparel started from humble beginnings, the former CEO Dov Charney started the company in his dorm room. The company went through various challenges, and at some point Charney was at the point of bankruptcy yet he did not give up (Tabuchi, 2015). When the company was in financial trouble, the CEO came up with different decisions to solve the financial crisis. The consistent decisions eventually created more financial problems for American Apparel, which eventually bankrupted the organization (Tabuchi, 2015).
The third aspect is the perceived probability of future outcomes. American Apparel implemented various decisions to handle its debt problem, all the decisions were perceived that they will help solve the financial crisis, but they did not. For instance, issuing additional shares diluted the shareholder value while more loans only increased the debt. Even with the probability that the decisions would bring positive outcomes, the persistent cause of the setback was still there as the debts kept growing.
Lastly, the fourth aspect of the model is perceived value of future outcomes. American Apparel engaged in escalation of commitment because it was motivated by the perceived value. Before making losses in 2009, American Apparel had experienced two decades of impressive growth. Despite his many controversies, Dov Charney was an effective leader and he managed to build a strong brand. During the crisis, American Apparel kept engaging in escalation of commitment in an effort to rebuild the brand to its former glory. The four concepts of the model reinforced the course of action (Staw, 1981). Due to failure of various strategies and decisions, American Apparel decided to re-brand. This course of action has not proved fruitful since the existing customer base was interested in the trendy provocative American Apparel designs. American Apparel is still operational, but it is yet to make any profits despite the re-branding.
In conclusion, American Apparel’s situation shows that escalation of commitment is a common business problem. Evidently, there is a tendency to escalate on a single course of action in the event of a crisis. In an effort to reduce its debts, American Apparel found itself implementing decisions that led to more debts, instead of working towards improving its services.
References
Tabuchi, H. (2015). American Apparel Files for Bankruptcy. The New York Times. Retrieved from: http://www.nytimes.com/2015/10/06/business/american-apparel-files-for- bankruptcy.html?_r=0
Staw, B. M. (1981). The escalation of commitment to a course of action. Academy of management Review , 6 (4), 577-587.
