Large Corporate Failures as Downward Spirals

Abstract

This exploratory study of 57 large bankruptcies and 57 matched survivors examined the dynamics of major cor- porate failure. Prior research was used to guide selection of the four major constructs studied: domain initiative, environmental carrying capacity, slack, and performance. What emerges is a clear portrayal of a protracted process of decline, aptly portrayed by prior theorists, and modeled here, as a downward spiral. In the firms studied, signifi- cant features of the downward spiral included early weak- nesses in slack and performance, extreme and vacillating strategic actions, and abrupt environmental decline. An elaboration of the last two stages of decline is also pre- sented, based on the findings from this study. The down- ward-spiral model is then illustrated with a case example. The study sheds light on major debates and dilemmas in the fields of organization theory and strategy regarding why major firms fail.