Papers on Firm death

Source:

 

The case of disappearing firms: Death or deliverance?

The case of the disappearing firms: Empirical evidence and implications

Death is not a success: reflections on business exit

 

 

The case of disappearing firms: Death or deliverance?

Many theories about performance, competitive advantage, legitimacy, and leadership rest upon a core assumption that firms, at least some of them, have long, perhaps limitless, life-spans. Long-term survival is not seen as merely a random outcome or an unattainable goal.

This paper surveys a broad set of empirical findings about firms’ life-spans. It is consistently revealed in the empirical literature that the VAST majority of firms, even large firms, survive relatively short periods.

Specifically, this paper makes three contributions to the organizational literature.

1. clarifies the importance of firm’s life-spans as a pivotal research topic
2. appraises a broad range of research about the survival of firms
3. presents general themes about observed life-spans in relation to concepts, measurement, and theoretical issues

A. Motivation, definitions, conceptual and empirical issues involving life-spans of firms

i.motivation

In thinking this way scholars subscribe, perhaps inadvertently, to a ‘meta-theory’ about success and failure. If a firm’s life ends, it must be the result of defects, of competitive mistakes, of managerial failures, inferior resources, and so on. Put simply, the failure of firms is not random, accidental, normal or inevitable, as it is in human life-spans.

How many firms survive? How long do firms survive? Who survives? Is (long term) survival the planned result of first-mover advantages, or large size, or market structure, or competitive advantage, etc?

ii.definitions-firm

Although the usage of the term ‘firm’ may seem straightforward in conventional business parlance, pinpointing a research definition involves difficult issues.Are firms identical to business organizations? What about subunits and merger activities of larger organizations? How do size, control, and ownership affect the definition? Any of these definition aspects may have a material impact upon ‘counting’ firms.

According to US Census Bureau, ‘A firm is the largest aggregation of business legal entities (enterprises or companies) under common ownership or control … typically corporations, partnerships, Lilacs, or sole proprietors.’

iii. definitions-large firm and data

Under the Census Bureau definitions, there were roughly 6 000 000 firms in the United States in 2001.In empirical research, researchers often think exclusively in terms of very large businesses. There are a vast number of studies involving databases such as the Fortune 500, Fortune 1000, Standard & Pours, NASDAQ, Compustat, Product Impact of Marketing Studies (PIMS), Thomas Register, and so on. All of these sources focus exclusively on a few thousand very large firms, not 6 000 000 firms.

In a statistical sense, the 500 and the 1000 are essentially outliers. Such studies underestimate the number of competitors, hazard rates, disappearance rates, and exit rates, while over-estimating median life-spans, growth rates, role of mergers. Because of their unusual large size, their prosperity, their prominence in the business press, and their leading position with researchers, these firms are simply in a class of their own.

iv. definitions-disappearing and failure

In business parlance, disappearance is related to failure, dissolution, or exit, conceptually broader than failure, because failure only means bankruptcy, shutdown, dissolution, or discontinuance

In addition to outright failure, fundamental changes in ownership and management—changes in identity, mission and governance—cause firms to disappear even where brand names, assets, and operations superficially continue unchanged. Firms disappear through mergers, acquisitions, and divestments. (the two are highly correlated in empirical studies (Baldwin, 1998; Geroski, 1995))

Merged firms disappear in a most fundamental sense, because they lose their independence, they lose control over basic choices about as mission, they lose control over their finances. Although changes in ownership are often ignored by scholars, their consequences are significant for firm behavior and markets (Caves; 1998; Weston, Siu, & Johnson, 2001).

To summarize, the disappearance of a firm means that something basic has changed, an identity has been lost—whether or not a name or a brand continues to exist. Because some of these changes are difficult for researchers to identify, many studies over-estimate life spans, survival, hazards, and related variables. The rate of disappearance is sensitive to definitions, data bases, samples and measurements. 

vi. Empirical issues-Incomplete life spans

Some firms survive past the ending dates for the research, rendering calculations, such as average life-spans, incomplete and biased. -> A better measure, one seldom used, is median life-spans. When means are misleading, medians can be calculated to more accurately reflect the data. (not available for large firms)

B. Empirical research findings about disappearance and life-spans

We reviewed a total of 240þ relevant documents, covering a broad range of sources, including different academic fields (technology, entrepreneurship, Strategy, Marketing, Sociology, and Organization) as well as different forms of research, such as academic studies, public information, and independent reports. <- many concepts are related to firms’ disappearance rates, failure or mortality rates, exit, entry, and life-spans per se.

In general, these findings show that American business firms are numerous yet fragile. They enter and exit most industries in large numbers. But from a combination of poor decisions plus competition, the vast majority of new, entering firms soon disappear. But, this is not simply an issue about small firms. Even large firms do not enjoy a median life span anywhere near a human person’s life span.

And if one carefully reviews the research literature, it is difficult to square empirical findings against notions about sustainable advantage, corporate leadership, first-movers, or adaptive change.

i. Entrepreneurship/federal data

Using Census data, Birch (1987) claimed that two-third of net-new-jobs generated by the US economy were attributable to ‘small’ firms.

‘Small Business Data Base’ (SBDB, 1998) painstakingly tracks businesses in the US.

スクリーンショット 2016-10-28 0.21.20.png

Using the SBDB, Audretsch (1991, 1995a) studied the innovative propensities of small firms across a wide range of sectors. In general, about 44 per cent of larger startups survived 10 years, whereas only 31 per – cent of smaller startups survived ten years (1995, pg 92). The highest 10-year survival rate for any sector was 72 per cent for large instrument firms.

%e3%82%b9%e3%82%af%e3%83%aa%e3%83%bc%e3%83%b3%e3%82%b7%e3%83%a7%e3%83%83%e3%83%88-2016-10-28-0-20-55

Boden (2000) studied three broadly defined industry groups—goods, services, and information. Boden estimated the following median life spans: 4.49 years for goods-producing firms, 4.50 years for services providers, and 4.47 years for information-technology firms. 

Dunne, Roberts, and Samuelson (1988b, 1989) used Census of Manufactures data from consecutive 5 year time periods between 1963 and 1982. They confirmed that exits are chiefly comprised of new, small firms. In addition, entry and exit varied greatly across time and across industries, suggesting industry-specific factors may govern these processes. During any 5 year time-frame, entry and exit are strongly correlated, showing that entrants and exits are mostly identical firms. Low market-share and small size were identified as the biggest predictors for exit. Significantly, DRS also noted that rates of entry and exit were increasing during each time period they studied and the relative size of entrants was decreasing.

%e3%82%b9%e3%82%af%e3%83%aa%e3%83%bc%e3%83%b3%e3%82%b7%e3%83%a7%e3%83%83%e3%83%88-2016-10-28-0-33-30

Summary. Federal databases represent one of the most extensive, inclusive and reliable sources for research on business formation, entry, exit, survival, etc. New firms begin their lives under-financed and vulnerable; almost all entrants are too small—far below minimum efficient scale. Larger entrants have better survival rates and longer life-spans, but not as high or as long as one may expect. Median survival rates of 5 years or less are typical. Average survival rates running between 4 to 10 years are common.

ii. Technology studies

they share a preoccupation with technological change as the driving force explaining industry and organizational change. They study innovation, first-mover advantage, dominant designs, technological trajectories, discontinuity, creative destruction, etc. These studies are useful in our review because many of them include detailed accounts of the entire history of important industries.

Utterback and Utterback et al. (1978, 1996) put forward an explanation of the emergence of dominant designs. They found firms who tried to maintain a traditional business while simultaneously starting a revolutionary business nearly all failed.

Anderson and Tushman (1990); Tushman and Anderson (1986) studied several industries, including minicomputers (1956–1982), cement (1888–1980), glass (1893–1980), and airlines (1924–1980). Both entry and exit were erratic and unpredictable.

Later studies of airlines (after deregulation) and computers (after 1980) showed increasing rates of turnover, exit and outright failure (see Miller & Chen, 1994), consistent with an increasing-turbulence environment.

On a broader level, Gort and Klepper (1982) studied 46 industries. The average shakeout during Stage Two was 53 per cent. They also presented evidence showing that the average time required for an industry to reach its peak number of producers, has been falling. That finding, especially across 46 industries, lent additional support to the idea that change is accelerating, that exit rates and fatalities are increasing, and that industry life spans are probably decreasing.

%e3%82%b9%e3%82%af%e3%83%aa%e3%83%bc%e3%83%b3%e3%82%b7%e3%83%a7%e3%83%83%e3%83%88-2016-10-28-0-53-15

Summary. Lifecycle theories find significant empirical support but not universal confirmation (Iansiti & Clark, 1994). life-cycle models entail a surprising number of valid empirical patterns: entry by innovators heralding creative destruction; large numbers of firms enter and quickly exit; one severe shakeout; and finally the endgame converges on an oligopoly. The life-cycle model inherently carries a implication that the vast majority of entrants to any industry must fail (or exit), especially over a long-term. Therefore, technology studies reinforce the case for short life spans that was shown through the Entrepreneurship data (above).

iii. Ecology studies

Population Ecology measures variables such as exit, entry, mortality, and hazard rates, and are hyper-vigilant regarding the conceptual and measurement issues.

Aldrich (1979, 1999) estimated US business formation and business failure between 1940 and 1962 at about 3 400 000 new firms created and 2 800 000 discontinued per year. He reported that between 1910 and 1980 the number of US railroads declined from 1250 to merely 10 major firms.. For railroad firms, both the expansion and the exit periods involved astonishing disappearance rates.

Many other studies highlight industries where long-term mortality rates have been exceedingly high, such as automobiles, airlines, telephones (Barnett, 1990), discount retailers, savings and loan banks, etc.

Carroll and Swaminathan, studied strategic groups in the American brewing industry (1991). In 1880 the record showed 2474 brewers in the US. By 1980 only 45 survived. Many of those who disappeared were regional or local.

Hannan and Freeman (1987) investigated newspapers in the San Francisco Area.During the period they studied, 1840–1975, about 2179 total papers were founded,about 200 remained. In addition, they studied semiconductor manufacturers.1197 entrants between 1946 and 1984, 302 firms in 1985. Half of the entrants lasted less than 3 years. This study is especially important because many of the entrants were relatively large firms, or divisions of large firms. It shows that large-scale entry does not guarantee survival or long life.

Dowell and Swaminathan (2000) studied the US Bicycle industry between 1880 and 1915, when the industry experienced tremendous turbulence. 607 firms in 1898 had just 14 firms in 1904, a reduction approximating annihilation of a whole generation of firms in just 7 years.

Baum (1996) reviewed 20 years of PE research. The results are superficially consistent with notions about organizational ‘senility and rigidity’: whereas initial increases in age are correlated with decreased failure rates, ‘old’ age is often correlated with increasing failure rates.

However, research on organizational change (‘structural inertia theory’) have produced only mixed results (Aldrich, 1999). It is accurate to state that mortality risks increase for very old organizations, but the source(s) of those increased risks remains unclear.

Summary. Population Ecology studies report high mortality rates, similar to other findings (above). Failure rates are correlated with newness, size, and market-niche density. Moreover, mortality rates increase in organizational old age.

iv. Entry, exit, and mobility in economics research

Geroski (1995) reviewed empirical research on entry, exit, and failure. He found that smallscale entry is widespread in most industries. Entry comes sporadically, in ‘bursts’ or ‘waves,’ that are not correlated across industries, bursts that do not result from macro-economic shocks. More importantly, most exits result from economic distress. Entry and exit are highly correlated (0.5 to 0.7). Apparently, for many industries, entry is easy but survival is hard.

Caves (1998) reviewed turnover and mobility among firms. Caves defined turnover as, ‘entry and exit + mobility+ changes in control’. 

%e3%82%b9%e3%82%af%e3%83%aa%e3%83%bc%e3%83%b3%e3%82%b7%e3%83%a7%e3%83%83%e3%83%88-2016-10-29-16-17-00

/Mobility: He shows the variance of growth rates e diminishes with greater size.Mobility seems to be independent from overall growth rates, cycles, firm size, investment patterns, macro-economy, and directionality of demand changes in the industry – many gainers in contracting industries as well as many losers in expanding industries. The facts imply limited life spans for all firms, large as well as small.
/ Entry rates and survival: About a decade after entry, continuing firms are looking at a 5–7 per cent hazard rate (the expectation of failure during the next year). These hazard rates increase when studies include progressively smaller firms in their sampling.
/ Entry and exit through control changes: Economists usually regard control changes as having no economic importance. Caves argues that control changes signify more than simply name changes, that control changes have real and important economic consequences. Caves contends that control changes can lift the productivity of large plants and greatly expand the size of productive small plants. Control changes must be included as part of industry dynamics. This reinforces our argument that control changes are real strategic changes, that they signal the disappearance of firms. Moreover, an active market for control implies that inefficient or vulnerable firms will soon disappear.

Agarwal and Gort (1996); Agarwal (1997) analyzed survival rates for entrants to 33 product markets, including large 3435 firms. They found hazard rates rising until firms reached ages 18–22. Therefore in a mature market, age and survival follow the typical positive correlation, similar to what PE would predict. However, an increase in hazard rates eventually takes hold of firms. Agarwal and Gort also calculated the ‘Mean Residual Life of Firms.’ – given a specified age how many additional years of life can be expected. Residual lives ranged from 5.8 years to a maximum of 14.6 years.

%e3%82%b9%e3%82%af%e3%83%aa%e3%83%bc%e3%83%b3%e3%82%b7%e3%83%a7%e3%83%83%e3%83%88-2016-10-29-16-56-53

Summary. Economist’s studies of entry and exit, although largely fixed on manufacturing industries, provide important information relative to firms’ life spans: a vast majority of entrants begin far below minimum efficient scale; entry comes in ‘bursts’ or ‘waves’ unrelated to measured demand that inter-industry differences in profits don’t account for. These findings are consistent with the vision of an environment full of uncertainties, surprising spurts of growth and dramatic reversals—an environment where long term survival is problematic.

C. Large firms’ life-spans, in comparison to small, firms or ‘average’ firms

Are large and long-lived firms merely freak events, or do they represent some normal trends?

In 1987 Forbes Magazine reviewed their first ‘Forbes 100’ list and compared it to their 1887 list. Of the original group, 61 firms had ceased operations, 20 had been acquired or fallen out of the top 100, and only 18 firms managed to stay in the top 100. But the 18 did not perform well, data shows only GE survives. 

According to Census data, death rates ran high, 8 per cent, 10 per cent, and 9 per cent for firms employing 500 persons (include all US large firms) during the years 1995, 1996, 1997, respectively. Considering that these data cover mere one-year periods, these rates are quite large.

Moreover

– Dow Averages: Of 20 Dow Industrials listed in 1920, only 2 remain on the Dow today, ATT and GE. (Pierce, 1995),
– Fortune 500: One-third of Fortune 500 in 1970 ‘disappeared’ by 1983. During the 1980s, no fewer that 113 of the 500 firms were acquired (Collins, 2001).
– S&P: The S&P averaged about 1.5 per cent annual turnover in 20s and 30s, but in 1998 the turnover rate in the S&P 500 had increased to 10 per cent. Annual S&P turnover, as a rolling 7-year average for whole 20th Century, is increasing. The average lifespan of S&P companies has been falling since about 1930, to less than 15 years today. (Foster & Kaplan, 2001).
– Geus (1997) reported findings from internal studies at Shell. His information placed the average lifespan of multinational firms at only 40–50 years.

Private research

Collins (2001) looked for firms that made a transition, from ‘good to great.’, Starting his research in 1980, his team eventually cut 1435 firms to merely 11. 

Foster and Kaplan (2001) compiled a database of 1000 large firms in 15 industries to search for patterns (did not include diversified companies or industries with overwhelming dominant firms, such as Autos) across four decades. Only 160 of 1008 companies survived from 1962 to 1998.

Weston show that the GNP share of the largest 200 firms has declined since 1970,ranges from 30 per cent to 40 per cent in US.

Mueller (1986) investigated a sample of 1000 large firms, 1950–1972. He observed stable market leadership in only 44 per cent of industries he studied. Out of 1000 firms, only 583 were still operating in 1972; 384 had been acquired.  

In addition to first-mover research, studies show that dominant shares decline: Shepherd (1997); Baldwin, (1998); Geroski (1995); Caves (1998); Caves, Fortunato, and Ghemawat (1984); Davies and Geroski, (1997); Elzinga and Mills (1996). Ferrier and Smith (1999). Specifically, Weiss and Pascoe (1983) found industry leaders dethroned in 39 per cent of industry segments they studied.

M&A

Perhaps mergers and acquisitions provide a back door escape from the specter of disappearance, but only for big firms . (according to the SBA (1998, 2000) only 2.6 per cent of US firms were involved in mergers)

Healy, Palepu, and Ruback (1992) studied post-acquisition performance in the 50 largest mergers US between 1979–1984 using lots of complex controls. They found that merged firms did more restructuring than comparable firms. Large firms did not just acquire firms; they also divested units, creating new firms. In 1990s divestitures represented about 35 per cent of M&A activities (Weston et al., 2001). Many studies report limited gains to acquirers and rapid divestment of acquired firms (Anslinger, & Copeland, 1996; Bradley, Desai & Kim, 1983; Caves & Porter, 1978)).

Dunne, Roberts, and Samuelson (1988a, 1989) used the Census of Manufactures, covering 1963–1982 387 two-digit industries. In general, diversifiers did not enter with new plants, they bought existing capacity. Diversifying entrants obtained high initial market shares, grew faster after entry, and had higher survival rates than small firms.

Baldwin (1998) reported many firms who entered by acquisition, soon exited—10 per cent in the first year. The cumulative exit rate of acquirers was about 60 per cent after 9 years. After 10 years, the hazard rates of Greenfield startups, acquisitions, and continuing firms all converge around 5 per cent.

Summary. surveying across many academic fields we find consistent indications that failure rates are increasing, even for large firms, that large firms face more turbulence and more challengers today than 50 years or 100 years ago. These trends all imply shrinking average life-spans. Based upon the research cited above, we could venture a ballpark estimate that medium-size and large-firms are approximately 20 years old and they can probably expect to survive another 20 yearsAll in all, large firms do not occupy a separate universe where marginalization, merger oblivion, failure, bankruptcy, and dissolution do not apply.

D. Themes, Puzzles, and Implications of Disappearance and life spans

Theme 1. The odd behavior of business firms

It’s widely known that a vast majority of small firms enter haphazardly, operate at an undersized, inefficient scale; and they fail (exit) at a prodigious rate. There is a strong case that newness, small size (in employment or capital) and associated inefficiencies all contribute to rapid failure. A majority of these firms cannot continue operations for 5 years, much less provide income during an entrepreneur’s working lifetime.

Theme 2. Over time the failure rates of acquired units converge toward the failure rate of new entrants

Diversified firms and large-size entrants, especially those with related experience, incur lower hazardrates, perhaps on the order of half the hazard rate of newly-founded firms. Even so, empirical research finds excess, illtimed entry and high exit-rates for subsidiaries, divisions, and strategic business units. As studies like Biggadike (1979), Yip (1982), and Robinson et al. (1992) found that the expected response to entry (increased output, ads, retaliatory pricing, etc) was highly selective or even entirely absent.

-> The results of real mergers, acquisitions, and allied activities do not comfortably fit a strategy framework (as Porter, 1980) or popular visions of entrepreneurship (Bhide, 2001).
-> Given large firms’ experience, their financial muscle, their vast core competences, giant strategic assets, and so forth—why aren’t large firms more successful at diversifying entry?

Theme 3. Entrants cannot resist an impulse to join an industry shakeout

Theme 4. The bigger they are the harder they fall: The MBA and the NBA

As a result of competitive mistakes and economic distress, large firms have an unimpressive average life-span. Despite their size, their vast financial and human resources, average large firms do not ‘live’ nearly as long as ordinary Americans. Therefore, setting out sustainable competitive advantage represents an elusive goal as achieving the combined goals of high growth, highperformance and long term survival is truly RARE.

(In statistical terms, outliers are usually viewed as a ‘problem.’ They violate assumptions etc. Therefore, outliers are routinely discarded because they distort variances and central tendencies.What would be the relevance of studying high-performance or sustainable advantage among US auto firms now, when only two firms remain—Ford and GM?)

Theme 5. Disappearance and design

As industries age, the proportion of ‘disappeared’ firms rises compared to the number of continuing firms. In a mature oligopoly, life-spans stabilize and the variance of life-spans becomes tighter.This pattern is tied to the shape of growth curves, industry-life-cycles, oligopoly, and empirical observation.

Theme 6. Time, and performance

Wiggins and Ruefli’s (2002) by using Compustat PC Plus, created a huge sample of 6772 (large) firms, from 40 industries, plotted across overlapping time periods up to 25 years. Their dependent variables were Tobin’s Q and Return-on-Assets, defining ‘sustained competitive advantage’ as a 10-year period of above-average performance for either dependent variable. During the entire 25 year period, about 5 per cent of firms achieved one 10 year stretch of superior ROA returns. Only 2 per cent of firms achieved any 10-year period above average Q. If the period is extended to 20 years, only 4 firms met the Tobin’s Q criterion! Although their study does not directly tell us anything about life-spans (they only studied 25 year survivors, not firms that disappeared), it does illustrate the consequences of longer time periods for organizational variables. Consistent with other authors, such as Mueller (1986) and Baldwin et al. (1995), their data show a broad pattern of regression toward the mean

Theme 7. Increasing turbulence

Although we did not review industry turbulence per se, we found considerable evidence pointing toward increasing turbulence, taking the form of increasing entry rates and increasing exit rates across a broad range of industries. It is not much of a stretch to suppose that increasing globalization, technical advances, and added pressures from investors could combine to create a very dangerous competitive landscape, one where thoughts of sustainable advantage are purely fantasy

 

The case of the disappearing firms: Empirical evidence and implications

Stubbatt and Knight’s idea: if the overwhelming majority of organizations have relatively short life spans, then the meta theory is misguided in believing managers make a difference.

In order to establish the life span of most organizations, they review ‘243 relevant documents’ that provide empirical accounts of organizational survival and disappearance.

-> They conclude that very few firms survive even a few years and that even successful firms rarely get beyond four decades. Further, the life span of firms is shrinking in the face of competitive pressures.

–>> The high probability of failure facing new ventures is already well established by entrepreneurship text  and organizational ecology. Organization theorists, similarly, for some time have observed the high ‘hazard’ rates confronting new firms and have explored the liabilities of newness and of adolescence. 

–>> the most interesting observation, however, is that almost all firms have brief lives and that established and successful corporations are subject to high failure rates. Is it true?

A. The Notion of ‘Disappearance’

For them, the endpoint of a life span is ‘disappearance.’ It covers many things from bankruptcy, mergers and acquisitions or the conversion of a closely held company to a limited corporation. 

<- It is important to separate these different meanings of disappearance because Business failure implies that managers were ineffective or perhaps irrelevant, while Mergers and acquisitions, on the other hand, might be the outcome of managerial prescience.

-> Sometimes, a firm acquires or merges with another in order to shift its scale or scope of operations, or in response to changing social expectations. For example. Green and Black, an extremely successful ‘fair trade’ cocoa company ‘disappeared’ when it was acquired by Cadbury Schwepps as the latter company repositioned itself to capitalize on the emerging consumer movement to support socially responsible businesses. Similarly, Price Waterhouse and Coopers & Lybrand merged to gain the geographical scale necessary to service the very largest transnational corporations.The entrepreneurship literature also talks about ‘serial entrepreneurs’ who start up businesses, bring them to success and sell them.

–>> Our key observation here is that ‘disappearance’ is not an unambiguous term. Firms disappear for different reasons. If our concem is to infer the role of managerial agency, then we need to distinguish between disappearance arising from poor or irrelevant management (what we might simply call organizational ‘death’), and disappearance that results from managerial prescience (organizational ‘deliverance’).

e.g. PricewaterhouseCoopers is the largest global accounting firm, ‘Legally,’ it began life in 1998. But, for us, PricewaterhouseCoopers is the consequence of managerial prescience on the part of the two legacy firms. These legacy firms did not simply ‘disappear’; they delivered themselves into a more effective firm for the 21st century. 

B. The Extent of ‘Death’

 40 per cent of the 100 largest consulting firms in the world existed in one form or another 50 years ago. All 10 of the world’s largest law firms pre-date 1950 and four of them trace their origins into the 19th century. Here we are defining survival as continued commercial activity irrespective of mergers or changes of name or ownership form. 

Some of sources cited by Stubbart and Knight hint that the life span of many organizations may well be longer than they suggested.

i. Foster and Kaplan (2001) ‘s study, conducted by McKinsey & Co., reports on 1008 companies over a period of 38 years only 160 remains. However,only 249 firmswere included in the database in 1962,the survival rate of firms in the 1962 cohort was 160 of 249 firms, or 64 per cent.

ii. In more scholarly but dated analysis by Mueller (1986) of the largest 1000 firms in the US between 1950 and 1972, he found that 58.3 per cent were operational over the full period and that only 1.9 per cent had been liquidated. The remaining 38.4 per cent had been acquired. Moreover, it is rtot the case that acquired firms were failing: ‘We conjecture that from 1952 to 1972 relatively few of the companies that were acquired faced immediate bankruptcy had they not been merged’. On the contrary, an earlier study by Mueller found that acquired firms were equally profitable to similar non-acquired firms.

->> sufficiently large numbers of established firms do survive for lengthy periods, and that managers probably have something to do with which firms survive and which do not.

Nevertheless, firms may differ as different survival and disappearance rates across industries. The professional service firms operate in very low capital intensive settings and survival may be easier than in industries where capital is more pronounced. 

Another possible source of variation in organizational survival and performance is ownership form. Most of the materials show bias to the limited liability, publicly traded corporation, while other ownership forms exist (Greenwood & Empson, 2003; Hansmann, 1996). Recently, Miller and Le-Breton Miller (2005) highlighted how family-controlled businesses ‘vastiy out survived’ non-family competitors. They report data on forty large, family-controlled businesses, of which more than half ‘had survived for over a century’. 

And international comparisons. Stubbart and Knight pragmatically restricted themselves to US data, but the literature on ‘varieties of capitalism’ (e.g.. Hall & Soskice, 2001) would suggest there may be significant variations between countries in the life cycles of organizations

->>Is the US, more vulnerable to high failure rates because of its widely assumed focus upon short-term results (e.g.. Miller & Le-Breton Miller, 2005)? Do transnational differences in capital markets affect longevity? Do intemational differences in the importance of the social dimension of economic transactions play any role in organizational performance and survival?

C. Bring on Death?

If we conceive of organizations as utility maximizing humans, then, yes, they ought to live forever. But if we adopt a different analogy, namely, that organizations are tools, similar to machines, as suggested by Weber (1964), then organizations ought to last only until their functional utility is exhausted. 

In fact, this is precisely how business corporations were originally conceived. They were designed as limited purpose entities and, until relatively recently, most corporate charters were granted not only for a limited time period, but also for narrowly specified purposes. From this point of view, it is hardly surprising that business organizations do not ‘outlive’ individuals. If business organizations are conceived with the underlying metaphor of a tool used by investors to maximize shareholder wealth, then longevity might be considered an undesirable outcome.

So, why is the eternal life of an organization considered to be an attractive goal today, Put another way, who benefits from creating the illusion that organizations are sentient organisms with the capacity to choose their life span and their scope of action?

<- It is the managerial class, the MBAs and CEOs that now populate business organizations that benefit most from changing the underlying metaphor of business organizations away from the idea that they are tools and toward the perception that they are ‘corporate persons’ without constraints on life or purpose.

 

Death is not a success: reflections on business exit

This paper is a critical evaluation of claims that business exits should not be seen as failures, on the grounds that sometimes they correspond to voluntary liquidations, or because they are /successful learning opportunities. We reiterate that the vast majority of business exits are unsuccessful. Drawing on ideas from the organizational life course, we suggest that “death” is a better word than “failure” to describe the phenomenon of business exit – we underline that it is not helpful to consider business exits as successful events.

Business exit always relates to unviable businesses – whether they be ‘relatively unviable’ when taking into account the entrepreneur’s outside options, or ‘absolutely unviable’ in the economic sense of being unable to cover its costs. Viable businesses that remain in operation even after the entrepreneur leaves (e.g. trade sale or initial public offering (IPO)) are not, in fact, cases of business death, but cases of business continuation.

%e3%82%b9%e3%82%af%e3%83%aa%e3%83%bc%e3%83%b3%e3%82%b7%e3%83%a7%e3%83%83%e3%83%88-2016-10-26-2-39-21

In some cases, such as an IPO or an acquisition involving the sale of the start-up, entrepreneurial exit can be considered to be a success. Brander et al (2010, p4) write that “using exits as a measure of success is standard in the venture capital literature.” 

<- This kind of successful entrepreneurial exit, according to which the business continues operations after the exit of the entrepreneur but under new management or with new investors, should be conceptualized as a case of business survival, not business exit.

-> We would agree that this type of exit should be seen as a success. However, given that our paper is not concerned with entrepreneurial exit, or investor exit, but our unit of observation is the business, we can sidestep this category of events. We therefore distance ourselves from the standard approach in the survival literature that considers merger and acquisition (M&A) to be a form of exit (e.g. Schary 1991; Cefis and Marsili 2006; Bhattacharjee et al 2009; Balcaen et al 2011). 

(Although reincorporation and change of legal form may constitute a death and re-birth in the way these events are recorded in some national statistics databases, this is not a meaningful death/rebirth in an economic sense (Harada 2007 p403; Hoetker and Agarwal 2007 p447), and statistical offices recognise this and are working on ways of no longer coding a change of legal form as a death and subsequent rebirth. )

We argue here that voluntary closure can be characterized as ‘relatively unviable’: the case where the business has failed to be a viable economic entity when the entrepreneur considers her other outside options, even if it generates enough revenue to cover its costs./The business has perhaps played a useful role in the past, but now the opportunity cost of the business remaining in operation is too high to allow it to continue.

We define ‘absolutely unviable’ with involuntary closureas the case when a business fails to cover its costs even when we leave aside issues of the entrepreneur’s opportunity cost. 

While involuntary business closure corresponds to bankruptcy, voluntary business closure refers to liquidation, which can be described as either a ‘harvest’ liquidation or a ‘distress’ liquidation (Wennberg et al, 2010).

-> Of these two latter outcomes, harvest liquidation is considered to be more successful than distress liquidation. Harvest liquidation corresponds to the liquidation of a successful business, for motivations such as retirement, or perhaps the natural winding-down of projects that had always been thought of as short-term projects.

–>> In our view, the distinction between voluntary and involuntary closure is not always very helpful. 1) self-reported evaluations undertaken by unsuccessful entrepreneurs are likely to be strongly affected by cognitive biases . 2) many business exits that are classified as voluntary closures would have been classified as involuntary closures had the business closure taken place shortly afterwards. 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s