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This project was sponsored by Columbia University's Strategy Research Center. Warren Boeker, Syd Finkelstein, Jim Fredrickson, Mark Sharfman, and Mike Tushman made helpful comments on earlier drafts. Special gratitude is owed to Ian MacMillan for his substantial help in the matched-pair selection process. This exploratory study of 57 large bankruptcies and 57 matched survivors examined the dynamics of major corporate 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, significant features of the downward spiral included early weaknesses in slack and performance, extreme and vacillating strategic actions, and abrupt environmental decline. An elaboration of the last two stages of decline is also presented, based on the findings from this study. The downward-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.'
Hambrick et al. (Tue,) studied this question.