A Behavioral Theory of Market Retrenchment: Role of Changes in Market Shares and Market Attractiveness

The behavioral theory of the firm explains how firms react to performance feedback, yet little is known about how firms integrate backward-looking feedback with forward-looking assessments of market opportunity. This study proposes and tests a retrenchment model grounded in SWOT-based behavioral logic via the TOWS matrix. Changes in market share are conceptualized as an internal strength or weakness, and market attractiveness, as an external opportunity or threat. Using prefecture-level panel data on Japanese life insurance companies (2006–2019), the analysis showed that market attractiveness served as a cognitive frame that shapes a firm’s response to performance signals. In attractive markets (opportunity), firms reduced retrenchment, as share gains (strength) were leveraged and losses (weakness) triggered problem-solving. Conversely, in unattractive markets (threat), firms accelerated retrenchment, as losses (weakness) confirmed the need to exit and gains (strength) enabled a profitable withdrawal. The study extends behavioral theory by showing that the strategic meaning of an internal strength or weakness depends on the external context of an opportunity or threat. This mechanism helps explain why firms sometimes persist after failure and retrench after success. Practically, the findings offer a diagnostic framework that helps managers assess market portfolios and mitigate behavioral biases in resource allocation decisions.