Unpacking Firm Exit at the Firm and Industry Levels: The Adaptation and Selection of Firm Capabilities

Abstract

Evolutionary theory of business activity studies how firms are selected out of environments that they do not fit, but most existing work under-emphasizes the distinction between acquisition and dissolution as selection processes. We address this gap with a multi-level analysis that investigates how managerial and functional organizational capabilities affect whether struggling firms exit by acquisition or dissolution. We demonstrate that managerial and functional capabilities have heterogeneous effects on selection processes, with managerial capabilities having particularly strong influence on acquisition exits by struggling firms. The work provides a bridge between adaptation and selection views on organizational change; exit by dissolution represents selection of both firms and capabilities, while exit by acquisition represents firm selection but capability adaptation.Key words: Selection, capabilities, acquisition, dissolution, evolutionary theory, business dynamics 1 One of the fundamental tensions in strategic management theories of business evolution concerns the distinction between adaptation and selection when firms encounter problems. Early strategic management research typically assumed that business change primarily occurs by adaptation, in which executives of struggling firms actively lead strategic change of their underlying business capabilities (e.g., Cyert and March, 1963; Andrews, 1971). The evolutionary theory revolution of the 1970s and 1980s then highlighted the presence of strong firm-level inertia, which leads to population-level change in which many struggling firms fail to adapt and, as a result, exit from an industry Freeman 1977, 1989;Gort and Klepper, 1982;Nelson and Winter, 1982, 2002). Follow on studies have typically sought to demonstrate whether and when adaptation or selection tends to be the most pronounced force. What this debate has under-emphasized, though, is that different forms of exit -particularly, the contrast between shutting down and being acquired -have different implications for adaptation and selection. This paper argues that selection and adaption can occur concurrently at the firm and capabilities levels of analysis when one considers different forms of exit.We focus on the difference between business dissolution and business acquisition of struggling firms, emphasizing how different forms of exit reflect the evolutionary influence and fate of business capabilities. In particular, we argue that business dissolution entails a selection process that removes both a corporate entity and its underlying capabilities from the landscape, while acquisition represents a selection process that removes the corporate entity but preserves some of its organizational capabilities within the economic environment. We then argue that the extent of firm-specific managerial and functional capabilities influence whether a struggling firm exhibiting lackluster financial performance exits by acquisition or by dissolution. Hence, the paper studies mechanisms that shape micro le...

Dynamics from open innovation to evolutionary change

“…In turn, selection processes remove struggling firms from the business landscape, if they fail to improve (Nelson and Winter 1982;Aldrich 1999). According to this theory, firms survive by overcoming the obstacles as they dissolve their obsolete skills or assets and by acquiring required new skills or assets (Fortune and Mitchell 2012). However, this theory does not well explain both radical innovation, which arises frequently and appears in unpredictable ways, and acquisition and dissolution aimed directly at knowledge and technology, in a knowledge-based age.…”

“…Fifth, evolutionary theories of business activity note that some firms struggle to meet the demands of their environments and reside at the margins of survival (Fortune and Mitchell 2012). In turn, selection processes remove struggling firms from the business landscape, if they fail to improve (Nelson and Winter 1982;Aldrich 1999).…”

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“…However, these two perspectives have merged within the theory of dynamic capabilities (Eisenhardt and Martin 2000;Helfat et al 2007;Teece 2007;Teece et al 1997;Winter 2003;Zollo and Winter 2002). We need to consider the existing interregnum between discontinuous and continuous innovations, and between radical and incremental changes, in terms of gradualism (Antonelli 2007;Levinthal 1998), reconfiguration process in technological transition (Geels 2002;Meyer and Stensaker 2006), reconfiguration of operational and dynamic capabilities (Di Stefano et al 2010;Helfat and Winter 2011), pre-adaptation, adaptation and selection of capabilities (Fortune and Mitchell 2012). In contrast to what Darwin originally proposed, ''speciation'' (i.e.…”

Systematizing the Empirical Research on Corporate Distress. What Board Features Affect Survival?

“…Bercovitz & Mitchell, 2007;Daily, 1996;Daily & Dalton, 1994a;Dowell, Shackell, & Stuart, 2011;Fortune and Mitchell, 2012;Johnson, Hoskisson, & Hitt, 1993;Tripsas & Gavetti, 2000). This research area plays a pivotal role especially at the present time, due to the dramatic consequences recently inherited, at macro, meso and micro levels, from the global financial crisis.…”