Drivers and moderators of business decline

Marius Pretorius

doi:10.4102/ac.v10i1.132

Abstract

Purpose: Reports of business failure elicit various reactions, while research in this domain often appears to be limited by a lack of access to information about failure and by the negativity that surrounds it. Those who have experienced failure do not readily talk about it, or they disappear from the radar screen of researchers. Yet failure is preceded by decline which, when focused on strategically, can reduce eventual failures if early action is taken. The main purpose of this study is to develop a conceptual framework or typology of the drivers and moderators of business decline. Design/methodology/approach: After applying the "grounded theory" approach to the academic literature on decline and failure, a conceptual framework for the variables that drive and moderate business decline is proposed. Findings: The study proposes that decline has three core drivers, three peripheral drivers and four moderators. The core drivers identified are: resource munificence; leadership as origin; and causality (strategic versus operational origin of decline). The three peripheral drivers are: unique preconditions; continuous decisions impact; and extremes dichotomy. The study describes four moderators of the drivers: life cycle stage; stakeholder perspective; quantitative versus qualitative nature of signs and causes; and finally the age and size effects. Research limitations/implications: The proposed conceptual framework is based on literature only, although it has found support during discussions with practitioners. It is proposed to readers of this journal for scrutiny and validation. Practical implications: Strategists need to understand what drives decline in order to act timeously; practitioners who have an insight into the moderators with their impacts could make better decisions in response to decline in organisations and possibly avoid business failure. Originality/Value: Understanding business decline is still a huge theoretical challenge, which drives turnaround strategies chosen by management. The proposed conceptual framework has this as its focus.

Highlights

We know that businesses fail, as such failures attract media attention on a regular basis
The methodology was selected because primary sources of decline are limited; failed firms disappear and entrepreneurs of failed ventures rarely like to talk about the reasons for the failure
The findings of the research are reported as a conceptual framework of the “drivers” of business decline and are proposed to govern the thinking and reporting for the rest of the study

Summary

Introduction

We know that businesses fail, as such failures attract media attention on a regular basis. Failure is financially costly to firms and owners (Shepherd, Wicklund & Haynie, 2007:1). For many years it has been acknowledged that the analysis of failure in business is important to counter business risk and improve indications of success. Icons like Enron and Worldcom were not spared eventual failure; their declines have dominated reports of crises in the media in recent times, and led to investors losing major assets. The potential consequences of failure have significant and interesting impacts on business decisions. Crutzen & Van Caillie (2007:2) postulate that business failure has been one of the most investigated topics of the last seven decades

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