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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)

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).

Suggested Citation

  • Arjen van Witteloostuijn, 1998. "Bridging Behavioral and Economic Theories of Decline: Organizational Inertia, Strategic Competition, and Chronic Failure," Management Science, INFORMS, vol. 44(4), pages 501-519, April.
  • Handle: RePEc:inm:ormnsc:v:44:y:1998:i:4:p:501-519
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    File URL: http://dx.doi.org/10.1287/mnsc.44.4.501
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    References listed on IDEAS

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    Cited by:

    1. repec:spr:busres:v:10:y:2017:i:1:d:10.1007_s40685-016-0041-8 is not listed on IDEAS
    2. John W. Boudreau, 2004. "50th Anniversary Article: Organizational Behavior, Strategy, Performance, and Design in Management Science," Management Science, INFORMS, pages 1463-1476.
    3. 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).
    4. 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.
    5. Jansen, Thijs & van Lier, Arie & van Witteloostuijn, Arjen & Boon von Ochssée, Tim, 2012. "A modified Cournot model of the natural gas market in the European Union: Mixed-motives delegation in a politicized environment," Energy Policy, Elsevier, vol. 41(C), pages 280-285.
    6. Maheshwari, Sunil Kumar, 2002. "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.
    7. Shekhar Jayanthi & Aleda V. Roth & Mehmet M. Kristal & Lauren Carter-Roth Venu, 2009. "Strategic Resource Dynamics of Manufacturing Firms," Management Science, INFORMS, pages 1060-1076.
    8. Siepel, Josh & Cowling, Marc & Coad, Alex, 2017. "Non-founder human capital and the long-run growth and survival of high-tech ventures," Technovation, Elsevier, vol. 59(C), pages 34-43.
    9. 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.
    10. Yamakawa, Yasuhiro & Cardon, Melissa S., 2017. "How prior investments of time, money, and employee hires influence time to exit a distressed venture, and the extent to which contingency planning helps," Journal of Business Venturing, Elsevier, vol. 32(1), pages 1-17.
    11. Wennberg, Karl & Wiklund, Johan & DeTienne, Dawn R. & Cardon, Melissa S., 2010. "Reconceptualizing entrepreneurial exit: Divergent exit routes and their drivers," Journal of Business Venturing, Elsevier, vol. 25(4), pages 361-375, July.
    12. Yasuhiro Yamakawa & Melissa Cardon, 2015. "Causal ascriptions and perceived learning from entrepreneurial failure," Small Business Economics, Springer, vol. 44(4), pages 797-820, April.
    13. 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).
    14. Julio 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.

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