On the Road to Disaster: Strategic Misalignments and Corporate Failure

Abstract

Prior research has identified the link between strategic misalignment and corporate failure, but little empirical research to date has examined the process leading to misalignment and eventual corporate failure over time. To explore this crucial link, we conducted indepth case studies of two American conglomerates: WorldCom and Nortel Networks. We find patterns in terms of factors through which misalignments develop, ultimately leading to bankruptcy. The process begins with dysfunctional leadership and ineffective corporate governance, moving to unduly risky strategic actions, which are then followed by lax execution. Gradually spreading organizational misalignments develop, which ultimately foster a large gap between the demands of the competitive environment and the organization's strategy and competencies, leading to failure. An unforgiving external environment exacerbates the effects of misalignments. With this study, we also expand the ESCO strategic alignment model (Environment, Strategy, Core Competencies, and Organization), by adding leadership as the actor guiding alignment, and sustainable advantage as an outcome. IntroductionCorporate bankruptcy rates have soared. Between 2007 and 2010, total bankruptcy rates rose by 87.2% (Flynn and Kearns, 2011). Among the bankrupt organizations in recent years were numerous multinationals, once healthy and leading corporations such as General Motors, Delphi, Tribune Group, Conseco and Chrysler. Why do so many previously highly successful firms fail? Organizational failure can be brought about by strategic misalignments; e.g., an inappropriate strategy for the external environment, or a poor operationalization of the strategy. Strategic alignment is the consistency and synergy among the external environment, the strategy, core competencies, and organizational elements such as culture, organization design, processes and people (Heracleous et al., 2009). Conversely, strategic misalignment is inconsistency or tension among these elements.Whereas the link between strategic alignment and competitive advantage (and conversely misalignment and failure) has been recognized (Beer et al., 2005;Miles and Snow, 1984a;Powell, 1992) the processes of how strategic misalignments can develop over time and lead to corporate failure have not yet been explored. Despite their valuable contributions, most studies on corporate failure have adopted a fairly static orientation, rather than a time-sensitive, processual perspective of how a corporation can move towards failure (Zajac et al., 2000). In light of environmental dynamism, and the insights that can be afforded by a longer-term examination, scholars have called for research that examines fit and alignment "within a longitudinal perspective" (Venkatraman, 1989, 441). In our research, we take such a perspective and examine how misalignments can develop over time, ultimately leading to corporate failure.Are there typical patterns of strategic misalignments? What are the processes that can lead to failure if left unchecked, and can we id...

A Process Perspective on Organizational Failure: A Qualitative Meta‐Analysis

“…While we agree with these scholars about the strong potential of process models to explain organizational failure (Hambrick and D'Aveni, ; Heracleous and Werres, ; Tripsas, ; Weitzel and Jonsson, ), this stream of literature is currently at a crossroads. Most previous process models try to capture the paths to failure in one singular process model (Amankwah‐Amoah, ; Hambrick and D'Aveni, ; Heracleous and Werres, ; Tripsas, ; Weitzel and Jonsson, ), which tends to fall into one of two competing patterns.…”

“…While we agree with these scholars about the strong potential of process models to explain organizational failure (Hambrick and D'Aveni, ; Heracleous and Werres, ; Tripsas, ; Weitzel and Jonsson, ), this stream of literature is currently at a crossroads. Most previous process models try to capture the paths to failure in one singular process model (Amankwah‐Amoah, ; Hambrick and D'Aveni, ; Heracleous and Werres, ; Tripsas, ; Weitzel and Jonsson, ), which tends to fall into one of two competing patterns. Whereas some portray failure as characterized by organizational inertia, i.e., the tendency of an organization to remain stable (e.g., Tripsas, ; Weitzel and Jonsson, ), others characterize failure rather as an extremism pattern, i.e., the tendency of an organization to change radically (e.g., Heracleous and Werres, ).…”

“…To understand failure, scholars have adopted various theoretical perspectives, which can be roughly grouped into externally and internally driven approaches (Mellahi and Wilkinson, ). Externally driven approaches examine how certain environmental conditions or situational factors lead to organizational failure (Heracleous and Werres, ; Mellahi and Wilkinson, ). For instance, in population ecology theory, the external environment selects those organizations out that are unfit with respect to environmental conditions (e.g., Hannan and Freeman, ).…”

“…Traditionally cutting across these external‐internal approaches (Mellahi and Wilkinson , ) is a stream that developed process models of organizational failure (Hambrick and D'Aveni, ; Heracleous and Werres, ; Weitzel and Jonsson, ). Contrary to variance models ‘dealing with covariation among dependent and independent variables’ (Langley et al, , p. 2), process models attempt to capture the sequence of certain conditions and events in explaining how failure unfolds over time (Langley, ).…”

A contingency view to novelty

“…The contingency theory is based on the premise that firms as open systems are required to achieve alignments and good fits between their internal needs and the environmental circumstances, if they are to sprout, grow, adapt and succeed (Heracleous and Werres, 2016).…”