Iridium Llc

LEARNING FROM CORPORATE MISTAKES: THE RISE AND FALL OF IRIDIUM
Sydney Finkelstein Shade H. Sanford

EXECUTIVE SUMMARY In mid-1998, Iridium was one of the darlings of Wall Street having more than tripled in stock price in less than a year. Armed with expertise and over 1,000 patents, the company seemed poised to capture first-mover advantage in providing global telephony via a network of low-Earth-orbiting satellites. Additionally, Iridium appeared to have identified an attractive target segment after having screened over 200,000 people, interviewed 23,000 people from 42 countries, and surveyed over 3,000 corporations. Finally, analysts cited the company’s experienced top management team as yet another reason Iridium’s future was bright. One year later, however, Iridium’s future appeared increasingly bleak. In November 1998, 11 years after engineers developed the concept for Iridium, the company launched its service. By April 1999, however, Iridium had only 10,000 customers and its CEO, Edward Staiano, resigned under pressure. By August 1999 the subscriber base had grown to only 20,000, putting Iridium in breach of its loan covenants.

During the same month, Iridium filed for Chapter 11 bankruptcy, making it one of the 20 largest bankruptcies in U.S. history. What went wrong? How did Iridium shift from being a leading-edge technological marvel to a billion-dollar business blunder? Why did such a successful, and innovative, company as Motorola seemingly stumble to such a degree? This article attempts to answer these questions. The first part of the article describes the Iridium strategy and the major problems that arose in both its conception and implementation. The second part of the article examines the underlying forces – all common to students of strategy and organization – that make it possible to understand why a series of seemingly apparent blunders were actually made. THE IRIDIUM CONCEPT “What it looks like now is a multibillion-dollar science project.

Bibliography: There have literally been thousands of newspaper and magazine articles written about the Iridium strategy, its implementation, and the resulting bankruptcy. One of the best overviews of the entire project can be found in Steve Frank’s analyst report at Morgan Stanley Dean Witter, “Iridium World Communications: A New Shoe for ‘Get Smart!’,” March 18, 1998 (http://www.bschoolinvestext.com/PDF/INV/105925_26448 71.pdf). An excellent article outlining the contractual benefits Motorola derived from Iridium is in a piece by Ida Picker in the Seattle Times called, “Despite Stunning Failure, Motorola Wins”, October 24, 1999. Joanna Glasner, a writer at Wired News, wrote several insightful articles, including “Iridium: Edsels in the Sky?”, May 10, 1999 and “A Buyer for Iridium?”, December 3, 1999. Finally, a terrific piece on Iridium’s technological arrogance appears in L. Cauley, “Losses in Space – Iridium’s Downfall,” Wall Street Journal, August 18, 1999, A1. There is a rich research literature on escalating commitment. Two of the “classic” articles in this area are: B. M. Staw, “Knee-deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action,” Organizational Behavior and Human Decision Processes, 1976, 16, 27-44; and J. Brockner, “The Escalation of Commitment to a Failing Course of Action: Toward Theoretical Progress,” Academy of Management Review, 1992, 17, 39-61. An interesting application of the theory was written by J. Ross and B. M. Staw, “Expo 86: An escalation prototype,” Administrative Science Quarterly, 1986, 31, 274-297. For a discussion on how to think about investments as real options, see T. Luehrman, “Investment Opportunities as Real Options: Getting Started on the Numbers,” Harvard Business Review, 10 1998, 76, July-August, 51-67 and E. H. Bowman and D. Hurry, “Strategy Through the Option Lens: An Integrated View of Resource Investments and the Incremental-choice Process,” Academy of Management Review, 1993, 18, 760782. Two other articles on real options are also noteworthy. Rita McGrath explores real option logic in entrepreneurial ventures in “Falling Forward: Real Options Reasoning and Entrepreneurial Failure,” Academy of Management Review, 1999, 24, 13-30 and Bruce Kogut, in a seminal 1991 article, argues that joint ventures are actually real options that are cashed in via subsequent acquisition: “Joint Ventures and the Option to Expand and Acquire,” Management Science, 37, 1933. To learn more about strategic leadership, one of the best sources is S. Finkelstein and D. C. Hambrick’s Strategic Leadership: Top Executives and Their Effects on Organizations (Minneapolis/St. Paul: West Publishing, 1996). A terrific book on best practices in boards of directors is Ram Charan’s Boards at Work: How Corporate Boards Create Competitive Advantage (San Francisco: Jossey-Bass Publishers, 1998). Consulting and executive search firms also publish periodic surveys of board practices, for example, Korn/Ferry International, Board of Directors Annual Study, 1999. Finally, while most studies of executive compensation extol the virtues of stock options and other performance-contingent pay, the best article on unintended consequences of pay plans is still Steve Kerr’s seminal “On the Folly of Rewarding A, While Hoping for B,” Academy of Management Journal, 1975, 18, 769-783. While the study of strategy and organizations has been dominated by a focus on best practices and organizational successes, there are several interesting articles on corporate failure and mistakes. Perhaps the largest body of work comes out of the organizational learning framework, and includes C. Argyris, “Double Loop Learning in Organizations,” Harvard Business Review, 1977, 55, 115-125; D. A. Levinthal and J. G. March, “The Myopia of Learning,” Strategic Management Journal, 1993, 14, 95-112; and S. B. Sitkin, “Learning Through Failure: The Strategy of Small Losses,” in B. M. Staw and L. L. Cummings (Eds.), Research in Organizational Behavior, 1992, 14, 231-266 (Greenwich, CT: JAI Press). Other good sources include J. E. Russo and P. J. Schoemaker’s Decision Traps (New York: Doubleday, 1989) (on decisionmaking failures) and C. M. Christensen’s The Innovator’s Dilemma (Boston: Harvard Business School Press, 1997) (on innovation failures). Finally, the first author of this article is currently working on a new book on corporate mistakes that will be published in 2003. 11