Don’t fly too close to the Sun. Icarus succeeded in flying and reaching new heights however his new found success also lead to his downfall; Icarus’ wings melted and he drowned.
Ancient Greek Mythology may not be the most relevant to economics but we see similar cases to Icarus in previously successful businesses. The Icarus Paradox refers to a phenomenon where the elements that lead to the success of a business also played a pivotal role in their failure.
Before moving onto the strategical elements that lead to the downfall, let’s discuss some psychological factors. As I’m sure we all know, having a successful period often leads to arrogance and complacency. The overconfidence bestowed upon companies directly ties to human nature and the natural tendency to over exaggerate one’s talents. Opposed to identifying the primary causes of success as being attributed to events that occurred beforehand or previously implemented strategies, people tend to credit their own abilities to the success. Although undoubtedly a person’s expertise plays a role, it would be vain to assume the success is accredited primarily to that. Alternatively, failures are often labelled as a result of external factors rather than due to human actions. With managers and board of directors discrediting the role of luck and chance when looking at future actions, they ignore the outcomes that are presented by randomness. This results in inaccurate forecasts.
Anchoring, a behavioural economics concept, describes the phenomenon in which one’s judgement is solely based on a single reference point, an anchor, despite it’s relevance not being as pronounced as they make it out to be. This can be detrimental in terms of solely focusing on the positive of a particular plan of action put forth as companies have a skewed perception of the cost-benefit analysis of projects. Additionally, holding hope although it would be wiser to focus resources and attentions elsewhere, results in companies going significantly over their budget. This is both a result of anchoring onto the initial budget as well as an example of sunken cost fallacy; with resources already utilised, companies are adamant to see their initial plan to an end.
Strategically, companies should in theory change their practices with market changes however success can result in companies being stuck implementing singular strategies and therefore lagging behind competitors and performing worse in the market. While it may appear obvious that companies should be changing their strategies continuously, in order for initial success companies must adhere to strict commitments to ensure the so called success. These commitments however can also lead to their downfall.
Focusing on a product or competitive algorithm that has made a business thrive is not necessarily wrong, at least not initially. There is a good chance companies can improve upon these products leading to even greater success. The issues lies more with the continuity of these products being improved; at one point a product can’t be improved any more lest you end up making it worse. With increased focus on a singular entity, the scope of a company narrows, the perspective of managers decrease and attention and focus become increasingly divested from other potential products/ proposals.
While the Icarus paradox can’t explain the downfall of all successful companies, it does teach a valuable lesson on how to approach success as to not let it get the best of you.
Sanuya Johnpetter
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