Reference no: EM131439433

An example of the costs of not following intuition is the “Pepsi Challenge,” which is Coca-Cola’s biggest decision-making blunder. By the mid-1970s, Coca-Cola was becoming stagnant, and Pepsi was gaining market share; the Pepsi Challenge was a successful advertising campaign that proved that taste testers preferred Pepsi over Coke. When Robert Goizueta took the helm as chairman of Coca-Cola in 1980, he announced ambitious plans to reinvent the company. Since marketing research clearly indicated that taste testers preferred Pepsi, decision makers thought that they needed to change the flavor of Coke. Coca-Cola addressed the Pepsi Challenge and spent $4 million and 2 years doing marketing research on new Coke flavors. By September 1984, they produced a sweeter Coke with a sticky taste—and it outperformed Pepsi in taste tests. When the new Coke was implemented, consumers protested. In the first four hours, the company received over 650 calls. By mid-May, calls were coming in at a rate of 5,000 per day, in addition to angry letters. People were speaking of Coke as an American symbol and an old friend they had lost. Company executives, worried about a consumer boycott, reintroduced Coca-Cola under the name “Coca-Cola Classic” and keep the “new Coke” on the shelves. Old Coke’s comeback drove the share price up to the highest level in 12 years. In retrospect, the new Coke decision was unsuccessful. What happened?

The market research was flawed. First, participants were not told that by choosing the new Coke they would lose the classic Coke they loved. This seems intuitive in retrospect, but it was not tested. Second, preferences for sweeter tastes diminish after the first test. In the testing, participants in the research based their rating of the Coke flavor on just a sip and not an entire glass. This also should have been intuitive, since consumers typically drink more than one sip. Finally, the symbolic value of Coke’s image to consumers was not taken into account. Coke is a strong brand, and this should have been considered. What the executives learned was that intuition may be more valuable even when it conflicts with research. Changing an existing product may not be the right decision—even if a company spends billions on market research and advertising.

In retrospect, the intuitive nature of the Coke blunder appears obvious. Which decision traps and how would framing have influenced the decision to introduce the new Coke? Explain in detail.

Provide another example of a business mistake that illustrates the lack of attention to intuition. Provide details.

What can be done to prevent bias and lack of attention to intuition from preventing decision-making failures?