SciELO - Scientific Electronic Library Online

 
vol.11 issue4 author indexsubject indexarticles search
Home Pagealphabetic serial listing  

Services on Demand

Article

Indicators

Related links

  • On index processCited by Google
  • On index processSimilars in Google

Share


South African Journal of Economic and Management Sciences

On-line version ISSN 2222-3436
Print version ISSN 1015-8812

S. Afr. j. econ. manag. sci. vol.11 n.4 Pretoria Dec. 2008

 

ARTICLES

 

Critical variables of business failure: A review and classification framework

 

 

Marius Pretorius

Department of Business Management, University of Pretoria

 

 


ABSTRACT

Failure is a phenomenon that ventures face during all stages of the life cycle and requires insight into its causes before it can be reversed. The scientific literature on failure is, however, spread over multiple disciplines. This study's line of enquiry firstly reviews the documented research (both theoretical and empirical) encompassing the phenomenon 'business failure' on a multi-disciplinary basis. A conceptual framework is then proposed for categorising variables into four sub-domains namely: signs and prediction; causes and preconditions; recovery; and cognition and learning. Better understanding of the failure phenomenon is achieved. The methodology applied is fundamentally based on grounded theory interpretation with a focus on classifying the identified relevant variables.

Key words: Decline, Failure, Trouble, Crisis, Turnaround

JEL: E32


 

 

“Full text available only in PDF format”

 

 

References

1 ALLIO, R.J. (2007) "Bad leaders: How they get that way and what to do about them", Strategy and Leadership, 38(3): 12-17.         [ Links ]

2 ALTMAN, E.I. (1983) "Why businesses fail", Journal of Business Strategy, 3: 15-21.         [ Links ]

3 ALTMAN, E.I. & NARAYANAN, P. (1997) "An international survey of business failure classification models", Financial Markets, Institutions and Instruments, 6(2): 1-57.         [ Links ]

4 ANSIC, D. & PUGH, G. (1999) "An experimental test of trade hysteresis: Market exit and entry decisions in the presence of sunk costs and exchange rate uncertainty", Applied Economics, 31: 427-436.         [ Links ]

5 BACK, P. (2005) "Explaining financial difficulties based on previous payment behaviour, management background variables and financial ratios", European Accounting Review, 14(4): 839-868.         [ Links ]

6 BALCAEN, S. & OOGHE, H. (2005) "35 Years of studies on business failure: An overview of the classic statistical methodologies and their related problems", The British Accounting Review, xx: 1-31.         [ Links ]

7 BARKER III, VL. (2005) "Traps in diagnosing organisation failure", Journal of Business Strategy, 26(2): 44-50.         [ Links ]

8 BARKER III, VL. & BARR, P.S. (2002) "Linking top management attributions to strategic reorientation in declining firms attempting turnarounds", Journal of Business Research, 55: 963-976.         [ Links ]

9 BARKER III, VL. & MONÉ, M.A. (1998) "The mechanistic structure shift and strategic reorientation in declining firms attempting turnarounds", Human Relations, 51(10): 1227-1258.         [ Links ]

10 BAUMARD, P. & STARBUCK, W.H. (2005) "Learning from failures: Why it may not happen", Long Range Planning, 38: 281-298.         [ Links ]

11 BOLLEN, L.H.H.; MERTENS, G.M.H.; MEUWISSEN, R.H.G.; VAN ROAK, J.J.F. & SCHELLEMAN, C. (2005) "Classification and analysis of major European business failures", Report by Maastricht Accounting, Auditing and Information Management Research Center (MARC), Maastricht. Accessed 14 December 2005)        [ Links ]

12 BOYLE, R.D. & DESAI, (1991) "Turnaround strategies for small firms", Journal of Small Business Management, 29(3): 33-42.         [ Links ]

13 BRUNO, A.V; MCQUARRIE, E.F. & TORGRIMSON, C.G. (1992) "The evolution of new technology ventures over twenty years: Patterns of failure, merger and survival", Journal of Business Venturing, 7: 291-302.         [ Links ]

14 BRUTON, G.D.; AHLSTROM, D. & WAN, J.C.C. (2003) "Turnaround in East Asian firms: Evidence from ethnic overseas Chinese communities", Strategic Management Journal, 44(6): 519-540.         [ Links ]

15 BURBANK, R.K. (2005) "The classic five-step turnaround process: Case study of Prodigene, Inc.", The Journal of Private Equity, Special Turnaround Issue, Spring: 53-58.         [ Links ]

16 CAMERON, K.S.; WHETTEN, D.A. & KIM, M.U. (1987) "Organisational dysfunctions of decline", Academy of Management Journal, 30(1): 126-138.         [ Links ]

17 CANNON, M.D. & EDMONDSON, A.C. (2005) "Failing to learn and learning to fail (intelligently): How great organisations put failure to work to innovate and improve", Long Range Planning, 38: 299-319.         [ Links ]

18 CARDON, M.S. & MCGRATH, R.G. (1999) "When the going gets tough ... Towards a psychology of entrepreneurial failure and re-motivation",. Frontiers of Entrepreneurial Research, http:/www.babson.edu/fer/papers99/I/I_B/I_B%20Text.htm. Accessed 19 April 2005.         [ Links ]

19 CARROLL, P.B. & MUI, C. (2008) "Seven ways to fail big", Harvard Business Review, September: 82-91.         [ Links ]

20 CHARITOU, A.; NEOPHYTOU, E. & CHARALAMBOUS, C. (2004) "Predicting corporate failure: Empirical evidence for the UK", European Accounting Review, 13(3): 465-497.         [ Links ]

21 CHOWDHURY, S.D. & LANG, J.R. (1993) "Crisis, decline and turnaround: A test of competing hypothesis for short-term performance improvement in small firms", Journal of Small Business Management, 31(4): 8-17.         [ Links ]

22 CHRISMAN, J.J.; HOFER, C.W. & BOULTON, W. R. (1988) "Toward a system for classification of business strategies", Academy of Management Review, 13(3): 413-428.         [ Links ]

23 COLLARD, J.M. (2002) "Steering clear of the brink: Early warning signs pinpoint business troubles - Changing leadership style to accomplish a turnaround", The Journal of Private Equity, Fall: 25-31.         [ Links ]

24 CONGER, J.A. & NADLER, D.A. (2004) "When CEOs step up to fail", MIT Sloan Management Review, Spring: 50-56.         [ Links ]

25 COPE, J. (2003) "Entrepreneurial learning and critical reflection: discontinuous events as triggers for 'higher level' learning", Management Learning, 34(4): 429-450.         [ Links ]

26 CORBIN, J. & STRAUSS, A. (1990) "Grounded theory research: Procedures, canons and evaluative criteria", Qualitative Sociology, 13(1): 3-21.         [ Links ]

27 CRESSY, R. (2006) "Why do most firms die young?", Small Business Economics, 26: 103-116.         [ Links ]

28 CRUTZEN, N. & VAN CAILLIE, D. (2007) "The business failure process: Towards an integrative model of the literature", Working paper. HEC-ULG University de Leige. No 200705/02: 1-32.         [ Links ]

29 CYBINSKI, P. (2001) "Description, explanation, prediction: The evaluation of bankruptcy studies?", Managerial Finance, 27(4): 29-44.         [ Links ]

30 D'AVENI, R.A. (1989) "The aftermath of organisational decline: a longitudinal study of the strategic and managerial characteristics of declining firms", Academy of Management Journal, 32(3): 577-608.         [ Links ]

31 DE CASTRO, J.O.; ALVAREZ, S.A.; BLASICK, J.D. & ORTIZ, M. (1997) "An examination of the nature of business closings: Are they really failures?", Frontiers of Entrepreneurship Research, http://www.babson.edu/entrep/fer/papers97/decastro/. Accessed: 10 March 2005.         [ Links ]

32 DUCHESNEAU, D.A. & GARTNER, W.B. (1990) "A profile of new venture success and failure in an emerging industry", Journal of Business Venturing, 5: 297-312.         [ Links ]

33 EISENHARDT, K.M. & ZBARACKI, M.J. (1992) "Strategic decision making", Strategic Management Journal, 13, Special Issue, Winter: 17-37.         [ Links ]

34 FORBES, D.P. (1999) "Cognitive approaches to new venture creation", International Journal of Management Reviews, 1(4): 415-439.         [ Links ]

35 FRANCIS, J.D. & DESAI, A.B. (2005) "Situational and organisational determinants of turnaround", Management Decision, 9: 1203-1224.         [ Links ]

36 FREDLAND, J.E. & MORRIS, C.E. (1976) "A cross section analysis of small business failure", American Journal of Small Business, 1(1): 7-18.         [ Links ]

37 GIMENO, J., FOLTA, TB. & WOO, C.Y. (1997) "Survival of the fittest? Entrepreneurial human capital and the persistence of underperforming firms", Administrative Science Quarterly, 42: 750-783.         [ Links ]

38 HAMBRICK, D.C. & SHECTER, S.M. (1983) "Turnaround strategies for mature industrial-product business units", Academy of Management Journal, 26(2): 231-248.         [ Links ]

39 HARKER, M. & SHARMA, S. (2000) "Leadership and the company turnaround process", The Leadership and Organisation Development Journal, 21(1): 36-47.         [ Links ]

40 HENDERSON, A.D. (1999) "Firm strategy and age dependence: A contingent view of the liabilities of newness, adolescence and obsolescence", Administrative Science Quarterly, 44: 281-314.         [ Links ]

41 HERRMANN, N. (1996) 'The Whole Brain Business Book, New York: McGraw-Hill.         [ Links ]

42 HOFER, C.W. (1980) "Turnaround strategies", The Journal of Business Strategy, 1(1): 19-31.         [ Links ]

43 HOPKINS, H.D. (2008) "Successful turnaround strategies", Strategic Direction, 24(8): 3-5.         [ Links ]

44 INKPEN, A. (1995) "The seeking of strategy where it is not: Towards a theory of strategy absence", Strategic Management Journal, 16: 313-332.         [ Links ]

45 KALE, S. & ARDITI, D. (1998) "Business failures: Liabilities of newness, adolescence, and smallness", Journal of Construction Engineering and Management, November/December: 458-464.         [ Links ]

46 KEASEY, K. & WATSON, R. (1987) "Non-financial symptoms and the prediction of small company failure: A test of Argenti's hypothesis", Journal of Business Finance and Accounting, 14 (3): 335-354.         [ Links ]

47 KEASEY, K. & WATSON, R. (1991) "Financial distress prediction models: A review of their usefulness", British Journal of Management, 2: 89102.         [ Links ]

48 KNOTT, A. & POSEN, H.E. (2005) "Is failure good?", Strategic Management Journal, 26: 617-641.         [ Links ]

49 KOW, G. (2004) "Turning around business performance: Part 1", Journal of Change Management, 4 (3): 229-246.         [ Links ]

50 KRIEGESMANN, B., KLEY, T. & SCHWERING, M.G. (2007) "Making organisational learning happen: The value of 'creative failures'", Business Strategy Series, 8 (4): 270-276.         [ Links ]

51 LAITINEN, T & KANKAANPÄÄ, M. (1999) Comparative analysis of failure prediction methods: The Finnish case", The European Accounting Review, 8 (1): 67-92.         [ Links ]

52 LE ROUX, I.; PRETORIUS, M. & MILLARD, S.M. (2006) "Entrepreneurial cognition and the decision to exploit a venture opportunity", South African Business Review, 10(10): 5-69.         [ Links ]

53 LONGENECKER, C.O.; NEUBERT, M.J. & FINK, L.S. (2007) "Causes and consequences of managerial failure in rapidly changing organisations", Business Horizons, 50: 145-155.         [ Links ]

54 LONGENECKER, C.O.; SIMONETTI, J.L. & SHARKEY, TW. (1999) "Why organisations fail: The view from the frontline", Management Decision, 37 (6): 503-513.         [ Links ]

55 LORANGE, P. & NELSON, R.T (1987) "How to reorganize - and avoid - organisational decline", Sloan Management Review, 28(3): 41-46.         [ Links ]

56 LOVALLO, D. & KAHNEMAN, D. (2003) "Delusions of success", Harvard Business Review, July: 56-63.         [ Links ]

57 LUSSIER, R.N. (1995) "A non-financial business success versus failure prediction model for young firms", Journal of Small Business Management, 33 (1): 8-24.         [ Links ]

58 LUSSIER, R.N. & PFEIFER, S. (2001) "A cross-national prediction model for business success", Journal of Small Business Management, 39 (3): 228-249.         [ Links ]

59 MCGRATH, R.G. (1999) "Falling forward: Real options reasoning and entrepreneurial failure", Academy of Management Review, 24 (1): 13-30.         [ Links ]

60 MELLAHI, K. (2005) "The dynamics of boards of directors in failing organisations", Long range planning, 38: 269-279.         [ Links ]

61 MERRIAM-WEBSTER ONLINE DICTIONATY. (2008) http://www.merriam-webster.com/dictionary/cause. Accessed: 9 September 2008.         [ Links ]

62 MOSS KANTER, R. (2003) "Leadership and the psychology of turnarounds", Harvard Business Review, June: 58-67.         [ Links ]

63 OKPARA, J.O. & WYNN, P. (2007) "Determinants of small business growth constraints in a sub-Saharan African economy", SAM Advanced Management Journal, 72(2): 24-35.         [ Links ]

64 OOGHE, H. & DE PRIJCKER, S. (2008) "Failure processes and causes of company bankruptcy: A typology. Management Decision, 46 (2): 223-242.         [ Links ]

65 PANDIT, N.R. (1995) "Towards a grounded theory of corporate turnaround: A case study approach", Unpublished Doctoral thesis. University of Manchester, UK.         [ Links ]

66 PEARCE II, J.A. & MICHAEL, S.C. (2006) "Strategies to prevent economic recessions from causing business failure", Business Horizons, 49: 201-209.         [ Links ]

67 PEARCE II, J.A. & ROBBINS, D.K. (1993) "Towards improved theory and research on business turnaround", Journal of Management, 19(3): 613-636.         [ Links ]

68 PEARCE II, J.A. & ROBBINS, D.K. (1994) "Retrenchment remains the foundation of business turnaround", Strategic Management Journal, 15: 407-417.         [ Links ]

69 POMPE, P.P.M. & BILDERBEEK, J. (2005) "The prediction of bankruptcy of small- and medium-sized industrial firms", Journal of Business Venturing, 20: 847-868.         [ Links ]

70 PRETORIUS, M. (2008) "When Porter's generic strategies are not enough: Complementary strategies for turnaround situations", Journal of Business Strategy, Nov-Dec. In Press.         [ Links ]

71 PRETORIUS, M. & HOLTZHAUZEN, G.TD. (2008) "Critical variables of venture turnarounds: A liabilities approach", Southern African Business Review, 12(2): 87-107.         [ Links ]

72 PROBST, G. & RAISCH, S. (2005) "Organizational crisis: The logic of failure", Academy of Management Executive, 19(1): 90-105.         [ Links ]

73 RICHARDSON, B.; NWANKWO, S. & RICHARDSON, S. (1994) "Understanding the causes of business failure crisis: Generic failure types: boiled frogs, drowned frogs, bullfrogs & tadpoles", Management Decision, 32 (4): 9-22.         [ Links ]

74 ROBBINS, D.K & PEARCE II, J.A. (1992) "Turnaround: retrenchment and recovery", Strategic Management Journal, 13(4): 287-309.         [ Links ]

75 SCHERRER, P.S. (2003) "Management turnarounds: Diagnosing business ailments", Corporate Governance, 30(4): 52-62.         [ Links ]

76 SHEPHERD, D.A. (2003) "Learning from business failure: Propositions of grief recovery for the self-employed", Academy of Management Review, 28(2): 318-328.         [ Links ]

77 SHEPHERD, D.A. (2005) "The theoretical basis for my plenary speech about our successes and failures at research on business failure", Proceedings: Regional Frontiers of Entrepreneurial Research, Brisbane. February: 123-134. Invited paper.         [ Links ]

78 SHEPHERD, D.A.; WICKLUND, J. & HAYNIE, J.M. (2007) "Moving forward: Balancing the financial and emotional costs of business failure", Journal of Business Venturing, 28(2): 318-328.         [ Links ]

79 SHEPPARD, J.P. & CHOWDHURY, S.D. (2005) "Riding the wrong wave: Organisational failure as a failed turnaround", Long Range Planning, 38: 239-260.         [ Links ]

80 SMITH, M. & GRAVES, C. (2005) "Corporate turnaround and financial distress", Managerial Auditing Journal, 20(3): 304-320.         [ Links ]

81 STANWORTH, J.; PURDY, D.; PRICE, S. & ZAFARIS, N. (1998) "Franchise versus conventional small business failure in the US and UK: More similarities than differences", International Small Business Journal, 16(3): 56-70.         [ Links ]

82 STEAD, E. & SMALLMAN, C. (1999) "Understanding business failure: learning and unlearning lessons from industrial crises", Journal of Contingencies and Crisis Management, 7(1) March: 1-18.         [ Links ]

83 STEYN-BRUWER, B.W. & HAMMAN, W.D. (2006) "Company failure in South Africa. Classification and prediction by means of recursive partitioning", South African Journal of Business Management, 37(4): 7-18.         [ Links ]

84 SUDARSANAM, S. & LAI, J. (2001) "Corporate financial distress and turnaround strategies: An empirical analysis", British Journal of Management, 12: 183-199.         [ Links ]

85 THENG, L.G. & BOON, L.W. (1996) "An exploratory study of factors affecting the failure of local small and medium enterprises", Asia Pacific Journal of Management, 13(2): 47-61.         [ Links ]

86 THORNHILL, S. & AMIT, R. (2003) "Learning about failure: Bankruptcy, firm age, and the resource-based view", Organisational Science, 14 (5) September-October: 497-509.         [ Links ]

87 UNIVERSAL DICTIONARY (1988) Readers Digest Universal Dictionary, London: Readers Digest.         [ Links ]

88 WALSHE, K.; HARVEY, G.; HYDE, P. & PANDIT, N. (2004) "Organisational failure and turnaround: Lessons for the public services from the for-profit sector", Public Money and Management, August: 201-208.         [ Links ]

89 WEITZEL, W.F. & JONSSON, E. (1989) "Decline in organisations: A literature integration and extension", Administrative Science Quarterly, 91 March: 91-109.         [ Links ]

90 WEITZEL, W.F. & JONSSON, E. (1991) "Reversing the downward spiral: lessons from W.T. Grant and Sears Roebuck", Academy of Management Executive, 5(3): 7-21.         [ Links ]

91 ZACHARAKIS, A.L., MEYER, G.D. & DE CASTRO, J. (1999) "Differing perceptions of new venture failure: A matched exploratory study of venture capitalists and entrepreneurs", Journal of Small Business Management, 37(3): 1-14.         [ Links ]

Creative Commons License All the contents of this journal, except where otherwise noted, is licensed under a Creative Commons Attribution License