Making Decisions

How 'Groupthink' Can Cost Your Business (and 3 Corporate Examples)

After all, achieving a true consensus can be overrated.
How 'Groupthink' Can Cost Your Business (and 3 Corporate Examples)
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Guest Writer
Founder and CEO, AudienceBloom
5 min read
Opinions expressed by Entrepreneur contributors are their own.

Groupthink is a psychological phenomenon born of our innate desire to conform with others. First coined in 1972, the term specifically refers to the tendency for a group to make bad or poorly thought-out decisions because its members aligned themselves with one other, insulating themselves from outside opinion and reinforcing viewpoints they already share.

Related: How to Use 'Decision Trees' to Improve Your Decision Making

According to John Malmo, author of Why GroupThink Is a Bad Idea, groupthink’s most detrimental effect is the pressure it exerts to form a consensus; in meetings and conversations, members aim for consensus because they mistakenly believe it reflects the strength of the idea or opinion at hand.

Instead, because groupthink manifests itself in most groups, consensus forms quickly -- meaning that the first reasonable idea usually becomes the universally accepted one, and alternative ideas stop coming to the surface.

The most famous thought experiment regarding groupthink is the Abilene paradox, introduced by management expert Jerry Harvey in 1974, based on an anecdote.

In the anecdote, four Texans are relaxing at home. One suggests taking a trip to Abilene for dinner, and another, who has reservations about the idea because the 53-mile drive is (pre-air-conditioning) hot and dusty, agrees, just to be polite. A third, who doesn’t want to go but doesn’t want to defy the wants of the group, also agrees, and a fourth follows suit. Upon their return from a rather lackluster meal, each member expresses his or her initial lack of enthusiasm about making the trip in the first place; and the originator of the idea acknowledges that he only made the suggestion because he thought the others were bored.

The anecdote is amusing and educational, but it may be hard to visualize groupthink’s importance to business management with only hypothetical examples. Instead, let’s look at some real-world examples of how groupthink can be a detriment to your business.

1. Swissair

Swissair is a Swiss airline company that became so powerful and financially stable that it earned the nickname “the Flying Bank.” Over time, the board of directors came to believe themselves not only invulnerable to bad decisions, but also morally superior to other companies.

Related: 6 Ways to Make Hard Decisions Easier as a Leader

The company subsequently restructured its board in an effort to achieve a more ideologically and strategically aligned group. But in the process, it lost most of the board's industrial expertise, along with its alternative, opposing voices. The resulting groupthink eventually grounded the company and prompted such a pronounced financial collapse that it prompted academic study.

Swissair remains one of the most oft-cited examples of corporate groupthink today.

2. The American auto industry

Though not confined to a single group or company, the American auto industry and its confidence and stagnation has been one of the most important examples of groupthink in a corporate setting over the past century. For decades, American auto manufacturers viewed their enormous growth, productivity and profit, which was practically unrestrained as an economic force.

Over time, they cultivated leadership and a culture that believed that not only were Americans the undisputedly best automakers in the world, but that these companies knew exactly what the American population wanted.

Then, despite the rising influence, innovation and appeal of the energy-saving small cars being marketed by foreign automakers like Toyota, Honda and Hyundai, American manufacturers continued producing the vehicles they thought would perform best. This included the gigantic, gas-guzzling SUVs and minivans of that period, which eventually made up the majority of trade-ins in the 2009 Cash for Clunkers program.

Despite an eventual major market shift, the lack of new ideas and new directions meant a dramatic blow for the industry -- and one that it’s still recovering from.

3. Banks and the economic crisis of 2008

The 2008-09 economic crisis was a result of many independent, coexisting factors, so it can’t be attributed to any one fault point, or any one decision. However, groupthink may have been a significant contributor to the banking practices that led to the economy’s collapse -- or at least prevented industry experts from seeing it coming.

The driving belief was that housing prices would continue to rise, no matter what, despite evidence to the contrary. More than that, groupthink may have pushed banks to extend themselves more and more. For example, if a bank officer was perceptive enough to recognize the irrational behavior of the industry, and brave enough to vocalize his or her concerns, other bank officers could dismiss those concerns.

After all, as long as a greater fool existed to keep buying financial derivatives, the banks could comfortably keep issuing bad loans.

And if competing banks were staying in the game longer, any conservative banks would be punished for their early withdrawal. Accordingly, the banks perceived it to be smarter to stay within the confines of the philosophy and actions of the group -- a position which eventually drove the housing market to collapse.

Related: 9 Ways to Escape 'Group Think' Trap

Alarming, isn't it? You, yourself, can resist groupthink at your company by encouraging independent thinking and alternative ideas, presenting your own thoughts as honestly as possible and ensuring that your meetings are attended by a diverse group of people. As these above examples show, achieving a true “consensus” is ... overrated.

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