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Bridging Behavioral and Economic Theories of Decline: Organizational Inertia, Strategic Competition, and Chronic Failure

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  • Arjen van Witteloostuijn

    (Faculty of Economics and Business Administration, University Maastricht, 6200 MD Maastricht, The Netherlands)

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    Abstract

    This paper is another plea for bridging behavioral and economic approaches to the study of competition in markets and strategy making by firms. The arguments focus on a specific case in point: the behavioral theory of organizational decline and the economic modeling of immediate exit. The arguments come in three steps. First, the literature on organizational decline is reviewed by organizing a framework that summarizes arguments from varying economic and organizational perspectives that have, for the most part, developed independently. Observations from empirical and theoretical studies are combined in order to investigate the causes, conditions, courses, and consequences of organizational downturn. Second, a theoretical argument is developed that explains voluntary exit and chronic failure by introducing a proxy of organizational inertia in a model of strategic Cournot duopoly. The key assumptions, which have a behavioral flavour that seemingly contradicts orthodox economics, are grounded in the theoretical and empirical literatures. The results of the model support the claim that "pure profit maximizing behavior may be at the expense of organizational survival" (D'Aveni 1990, p. 135). Third, by formulating two hypotheses and presenting tentative evidence from the chemical industry, the paper hopes to convincingly argue that such integrative models lead to empirical testing of interesting hypotheses. A key finding here is that inefficient firms may outlast their efficient rivals (cf. D'Aveni 1989a).

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    Bibliographic Info

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 44 (1998)
    Issue (Month): 4 (April)
    Pages: 501-519

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    Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:501-519

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    Related research

    Keywords: Organizational Decline; Game Theoretical Modeling and Nonprofit Maximizing Behavior;

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    Cited by:
    1. Shepherd, Dean A. & Wiklund, Johan & Haynie, J. Michael, 2009. "Moving forward: Balancing the financial and emotional costs of business failure," Journal of Business Venturing, Elsevier, vol. 24(2), pages 134-148, March.
    2. Wennberg, Karl & Wiklund, Johan & DeTienne, Dawn & Cardon, Melissa, 2009. "Reconceptualizing Entrepreneurial Exit: Divergent Exit Routes and Their Drivers," Working Paper Series in Business Administration 2009:10, Stockholm School of Economics.
    3. Maheshwari, Sunil Kumar, . "Organizational Decline andTurnaround Management: Empirical Study of a Government Owned AutomobileCompany," IIMA Working Papers WP2002-03-03, Indian Institute of Management Ahmedabad, Research and Publication Department.
    4. Boone,Christophe & Olffen,Woody,van & Witteloostuijn,Arjen,van, 2003. "THE GENESIS OF TOP MANAGEMENT TEAM DIVERSITY Selective Turnover among Top Management Teams in the Dutch Newspaper Publisher Industry (1970-1994)," Research Memorandum 036, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
    5. Julio Orlando De Castro, 2004. "The Fallacy of ´Only the Strong Survive´: The Effects of Extrinsic (...)," Working Papers Economia wp04-07, Instituto de Empresa, Area of Economic Environment.
    6. DeTienne, Dawn R. & Shepherd, Dean A. & De Castro, Julio O., 2008. "The fallacy of "only the strong survive": The effects of extrinsic motivation on the persistence decisions for under-performing firms," Journal of Business Venturing, Elsevier, vol. 23(5), pages 528-546, September.
    7. Jansen,Thijs & Lier,Arie,van & Witteloostuijn,Arjen,van, 2004. "Strategic Delegation In Oligopoly: The Market Share Case," Research Memorandum 051, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).

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