Why Firms Fail to Sustain? Evidence from Dow Jones Index

Unlock access to all the studying documents.

View Full Document

Why Firms Fail to Sustain? Evidence from Dow Jones Index

Malik Muhammad Sheheryar Khan ∗Muhammad Muzammil Ghayas †

Sadaf Kashif ‡

Abstract: This study, focusing on the longevity of large business organizations as a period

of uninterrupted satisfactory financial market performance, has examined companies failing to

demonstrate longevity, such as by being removed from the Dow Jones Industrial Average index.

The present research has performed group- and case-level longitudinal analyses of financial per-

formance indicators.Afterwards, the qualitative longitudinal analyses were conducted based on pri-

mary qualitative data of sampled US organizations listed on the Dow Jones Industrial Average

index across 28 years (1986-2013). This study has found that, from a longitudinal perspective,

negative inflection points of concerted declines in the frequency with which different longevity fac-

tors are mentioned are highly likely to be among the anticipatory indicators for the financial events

of removal of the corresponding companies from the Dow Jones index. In other words, this study

indicates that organizational longevity is closely related to the dynamics of company-level financial

and managerial performance.

Introduction

Risk has always remained the topic of discussion among the business community and the

researchers; thereby researchers (Raza, Jawaid, & Hussain,2014) have rightly studied the

risk and investment decisions. Researchers have studied the potential risks that arises

from within the organizations and are controllable by the organization such as working

capital management (Khan, Jawaid, Arif, & Khan,2012) as well as the risks that comes

from the factors outside the organizations such as terrorism (Arif, Iqbal, Ali, & Sohail,

2017). However, taking risk in the investment decisions is altogether different from the

risks that challenge the very survival of a business organization. The question concerning

the stock exchange related risk can be answered by portfolio diversification (Arif,2017) .

However, the question concerning the survival related risks have remained under researched.

Therefore this study seeks to find the indicators whose presence or absence have contributed

in leading the organizations towards the failure, especially in the firms that were performing

well.

The basic motivation for this research study especially for studying the organizations

that have been removed from the index is because of the fact that a number of researchers

∗Iqra University, Karachi. E-mail: malik sherry@yahoo.com

†Iqra University, Karachi. E-mail: muzammil.ghayas@iqra.edu.pk

‡Iqra University, Karachi. E-mail: sadaf.kashif@iqraisb.edu.pk

116

South Asian Journal of Management Sciences

Vol: 13(2): 116-136, 2019

DOI: 10.21621/sajms.2019132.02

South Asian Journal of Management Sciences

have pointed to the fact that a lot of organizations fail to sustain even after having a very

good start. In this regard, Montuori (2000) noted that almost 33% of the Fortune 500

companies in 1970 were not on the list in 1983 (i.e, after only 13 years). Foster and Kaplan

(2011) noted that in the original Standard & Poor’s Index, which began in the 1920s,

businesses lasted for 65 years on average. However, by 1998, a firm’s predictable lifespan

on the expanded S&P 500 was reduced to 10 years. Foster and Kaplan (2011) highlight

that approximately 15% of the sample of 1,008 US companies endured from 1962 to 1998.

Collins (2001) studied 1,435 companies over three decades (1965-1995) and found that only

9% of them managed to outperform equity market averages for at least a 10-year period.

De Geus (2002) stated that multinational companies that were in the Fortune 500 usually

existed for 40 to 50 years. De Geus (2002) also found that 40% of all new companies lasted

less than a decade and one-third of the companies in the Fortune 500 index in 1970 were

no longer in existence in 1983. Hence, the topic of organisational longevity is of crucial

importance.

Focusing on longevity of large business organisations (Frye,2000); this study argues

that longevity can be construed as a performance-related phenomenon, rather than being

seen only as a measure of the length of organisational survival. Hence removal of the firm

from the Dow Jones Industrial Average index can be seen as the indicator of failure to

sustain. It is for this reason that this study seeks to study the firms removed from the

DJIA. Hence, this study significantly contributes the literature in a manner that it seeks

to answer the question of longevity not only as the measure of lengthy of organisational

survival but as the performance related phenomenon.

Limited scholarly attention has been paid to the longevity of large corporations (Lubinski,

2011). Moreover, the concept of corporate longevity is not adequately defined in scholarly

literature (Wolfram & Mohr,2009). The impact of business strategy on longevity remains

under-researched, due to the relative paucity of empirical studies that have addressed this

interrelation (Voss & Voss,2000). This is especially the case if the definition of orga-

nizational longevity is broadened beyond the length of a company’s existence (Mayfield,

Mayfield, & Stephens,2007). While alternative approaches to organizational longevity

exist, such as investigations of adaptations made by organizations to their environments

from the perspective of organizational life cycle or ecology theories (Kasimoglu,2006), the

performance focus of the present study sets it apart from previous research concerned with

the probability of companies ceasing to exist. In other words, alternative definitions of cor-

porate longevity exist as well as empirical definitions, especially due to the long-standing

disagreement in scholarly literature regarding the link between organizational performance

and survival (Akin,2000). According to Sanchez (2008), management is an important

determinant of an organizations survival or non-survival.

Hence, this research will first seeks to examine the existing literature related to the

organizational longevity, causal factors of organizational longevity and the internal factors

of organizational longevity in the literature review. After discussing the literature, research

philosophy and epistemology, sampling and data collection, validity and reliability are

discussed in the research design. Whereas, the company level financial performance and

the content analysis results are mentioned under the findings section. Lastly, discussions,

recommendations, conclusions and limitations are mentioned in the last chapter of this

117

South Asian Journal of Management Sciences

research.

Literature Review

The Concept of Organizational Longevity

Frye (2000) defines organizational longevity as the length of survival of a self-governing

organization without a market crash that ends trading. Davis (2014) stated survival is the

ultimate performance measure. Peters, Waterman, and Jones (1982) search states that two-

thirds of the companies listed by Stacey (1992) as best practice examples have disappeared

five years after release. Furthermore, Collins and Porras (1994) note that when CEOs

wanted to benchmark against the best-run companies, they did not refer to fast-growing

companies but to companies with long lifespans. However, high growth rates in the short

term may not necessarily indicate organizational longevity in the long term, especially in

relation to large companies and in rapidly changing economic environments (Demirbag,

McGuinnness, Wood, & Bayyurt,2015). This raises the question of whether an organiza-

tions economic sustainability is primarily related to performing financially (Dechow, Ge,

& Schrand,2010) . However, researchers are divided about whether financial stability

accounts for organization long- or short-term success (Rothaermel & Alexandre,2009).

Researchers continue to vouch for financial success as a means of purchasing innovative

tools, which can make organizations successful, long-lived and sustainable in the compet-

itive market (Rothaermel & Alexandre,2009). Johnson, Whittington, and Scholes (2009)

agree that prioritizing financial obligations enables the attainment of other responsibilities.

Organizational perseverance over time can be affected not only by external, market-

related factors but also by internal factors. Veider and Kallmuenzer (2016); Carr, Haggard,

Hmieleski, and Zahra (2010) stated that organizations that suffer from non-survival owe

their collapse to having created inappropriate objectives and goals and focusing too much

on the past instead of focusing on the future. An organizations survival can, thus, be

ensured only when the organization internalizes its need to survive as its foremost priority

and applies methods that will provide beneficial outcomes in the future (Carr et al.,2010).

Edwards (2010) also asserts that organizations that take their core business practices se-

riously are most likely to stand the test of time because they can attract and retain more

customers.

Dunphy (2003) states that organizational sustainability is triggered by several factors,

including leadership and strategic management coupled with the organizations adaptability

to change whereas (Arif et al.,2017) studied the importance of Human capital. Morgan,

Pritchard, and Pride (2011) also note that several resources apart from human resources

contribute to organizational longevity. Weakness or failure of one of the components within

an organization can result in the failure of the entire organization. The effective manage-

ment of an organizations finances determines its economic sustainability. An organizations

ability to sustain its bottom line determines the organizations future (Dechow et al.,2010).

Thus, it can be emphasized that business systems are primary to an organizations financial

obligations and must be aligned with the organizations financial objectives to achieve eco-

nomic sustainability (Li,2008). Johnson et al. (2009) noted that financial sustainability

118

South Asian Journal of Management Sciences

defines the core measure of an organization’s ability to maintain relevance in the future.

Researchers such as M. Porter (1996) also highlight the role of consumers in defining an

organizations destiny by assessing the organization’s value in satisfying consumer’s needs.

Wade and Recardo (2009) argue that financial viability is the ultimate measure of economic

sustainability. Collins (2001) demonstrate that large global companies acknowledge both

external and internal issues, ensure they have highly skilled leaders and can use and apply

modern, innovative technologies and products, enabling these companies to ensure their

endurance.

Causal Factors of Organizational Longevity

The organizational longevity or viability of business enterprises has been the subject of nu-

merous empirical studies that have concentrated on causal factors, such as organizational

resources, that are relevant to this phenomenon (Hoverstadt & Bowling,2005). Scholarly

literature tends to agree that multiple characteristics exists that ensure the longevity of

organizations and that they come from both the external environment and internal orga-

nizational systems (Britz,2009;Cox,2004) position is that, due to the constant change in

external environmental factors in relation to marketing and global competency, organiza-

tions need to adapt internally to the demands of their environment. By changing internal

factors such as strategies, designs and plans, companies can adapt to the needs of the

business world. Embracing better business practices allows organizations to embrace new

ideas, suggestions and a wide range of business opportunities (Linnenluecke & Griffiths,

2010).

Sanchez (2008) states that an organization’s longevity is determined by its dynamic

response to changes that include both the external environment and an organization’s

internal factors. This can be achieved through a holistic approach where organizations

should have appropriate goals and planning in place to align various stakeholders’ interests

while cultivating managerial skills (Sanchez,2008) . Volgy, Sabic, Roter, and Gerlak

(2009) argue that cultural understanding with appropriate structural arrangements and

changes can also contribute to organizational longevity and development. Cox (2004)

also asserts the importance of culture in an organization and highlights the importance of

organizational provision of information, support and resources to employees as important

criteria for an organization’s durability.

According to Barney (1991), consistent financial performance in organizations creates

longevity for present and future survival in the competitive market. A company that

performs well financially and retains viability in the market is more likely to succeed in

the long term (M. E. Porter & Kramer,2006). Johnson, Scholes, and Whittington (2010)

concur that prioritizing financial obligations enables the attainment of other obligations,

such as innovation. Redmon, Mawhinney, and Johnson (2013) also equate sustainability

with long-term financial viability. They support their position through an assessment

of organizations that have dominated technological transitional periods, and demonstrate

that during such transitions, these organizations employed their financial abilities to retain

their positions in the market (Redmon et al.,2013). Longevity allows organizations the

possibility of detecting and correcting any deviations from desired goals (Hargreaves,2007).

119

South Asian Journal of Management Sciences

Longevity also allows continuous improvements in other areas, such as business systems,

to enhance quality standards (Ehnert,2009), which allows changing the organization for

the better in the present and future. And most importantly, longevity would require allow-

ing the organization to change per changing technological developments, market demands,

competition and regulations. Longevity in an organization can require adopting cost-

effective techniques, risk management strategies and encouraging stakeholder involvement,

leadership and strategic management (Blackburn,2012). However, longevity can be main-

tained and pursued by organizations through many essential factors. One such factor is

good leadership skills that enable the organization to boost operating capacity and ensure

adaptability in accordance with the business environment (Linnenluecke & Griffiths,2010).

Leadership capability and skill can help organizations retain their longevity, for example,

through developing strategic leadership roles that maintain the relationship between orga-

nizational structure and culture, properly maintain and use resources, adopt measures for

adapting to change and ensure dynamic relationships with the board of directors. Once

the organization’s stability and longevity is maintained, longevity allows it to pursue goals

that are possible and within the purview of organizational planning for the present and

future (Dyllick & Hockerts,2002).

Several management systems have been designed by various analysts and management

researchers to explain the longevity of organizations. However, a system and its evolving

organizational structure will always be limited in its ability to capture the complexity of the

system (Pawlowski,2000). Thus, the problem occurs of how to design a list of key longevity

factors that avoids the problem of intuitive ideas . External forces play an important role

in organizational survival because organizations depend on the environment for resources

(Maguire,2003). The nature of an organization is to evolve over time towards a better fit

with its environment, while when an organization does not fit into its environmental niche,

it does not survive. Weisbord (1976) focuses on the organization and advocates viewing an

organization from formal (organizational systems) and informal (organizational culture)

perspectives.

Internal Organizational Longevity Factors

According to Waterman Jr, Peters, and Phillips (1980) productiveness and subsequently

longevity are not simply conditioned by the organizational structure but involve the entire

interrelationship between variables of structure, strategy, systems, style, skills, staff and

superordinate goals. He further proposed that at a certain point in time if an organization

does not maintain connectivity between structures and the other variables, the organization

tends to break down. In 1921, DuPont was the first company to identify the importance of

the interconnectedness of these variables. By 1970, 80% of companies listed in the Fortune

500 are believed to have followed this approach.

However, structure is not the only factor, as strategy acts as its associate. Strategy

comprises all chosen routes of the organizations competitive success, and it involves all

actions that a company or organization undertakes in the form of plans and methods

for present survival, as well as for future needs that incorporate the requirements of the

organizations, stakeholders and consumers (Nadler & Tushman,1980;Waterman Jr et

120

South Asian Journal of Management Sciences

al.,1980). All formal and informal procedures that enable organizations and companies

to sustain ongoing daily activities are considered to constitute the organization’s system.

The term system broadly refers to procedures such as capital budgeting systems, training

systems, cost accounting procedures and budgeting system (Waterman Jr et al.,1980). An

efficient system guarantees an organization’s effectiveness.

No organizational structure or system can function without leadership or workforce

skills. Skills are the crucial attributes dominating capabilities in areas such as customer

service, quality control, and innovation that differentiate an organization from its com-

petitors (Palmer, Dunford, & Akin,2006). Skills allow companies to have visionary goals

and determine present and future needs. Many companies obtain market recognition from

what they do best, and marketing, structure and systems come along with this. Thus, skills

capture the company’s crucial attributes, and many multinational companies are known

for what they deliver best and the global market they have captured. For example, since

its foundation in 1911, IBM has been known for its? Prodigious customer service capabili-

ties, or its sheer market power. Furthermore, strategy is considered the preeminent factor

in playing an effective role in organizational development (Palmer et al.,2006). Strategy

determines the organization’s direction and is the fundamental element for success be-

cause strategies determine specific goals, objectives, values and missions the organization

must pursue to ensure growth and development within the organization (Galbraith,2008).

Strategy obliges the organization to list and priorities its primary needs over its secondary

needs.

The main function of structure is determining the location of the decision-making power

and authority within the organizational framework (Galbraith,2008). Through designing

appropriate policies and strategies, human resource policies are responsible for producing

effective employees and leaders in the organization because appropriate screening during

the selection procedure allows them to groom employees to work towards organizational

goals . Environment, resources, history and strategy are likely to influence the organi-

zation in its performance against rival companies in the market, which makes these fac-

tors vital in conditioning organizational functioning and longevity (Nadler & Tushman,

1980). Environmental forces place market pressure on the organization, since it can con-

strain organizational production and functioning by imposing threats and regulations (e.g.

through imposed regulation by government bodies) or technological constraints (Palmer et

al.,2006), even though it can also provide innovation opportunities for the organization .

Factors such as human resources, technological and financial capital, information, raw

materials, brand and premium value of the organization in the market (Barney,1991)

help organizations determine to what extent their resources remain flexible or inflexible

when considering operations and new ventures. Resources also help determine which parts

or types of resources the organization can deploy to ensure strength for organizational

longevity. Learning from past mistakes, crises or strengths can help business organizations

make appropriate decisions. In many successful organizations, important key strategic de-

cisions such as appointing leaders, recruiting employees and decision making for change are

determined by reflecting on the organizations history (Nadler & Tushman,1980). Strat-

egy creation and strategy management include considering all other factors to formulate

plans and policies for organizational growth and development. Ensuring effective output

121

South Asian Journal of Management Sciences

can be expected to guarantee organization’s longevity, while ineffective output is likely to

compromise the organization’s functionality (Nadler & Tushman,1980).

De Geus (2002) refers to companies as organisms that should be willing to change to

survive. Organizations are always evolving and searching for new ways of innovating to

ensure an advantage over competitors (Martins & Coetzee,2009). If an organization es-

tablishes only strategies, motives or a mission without effective leadership, the mission or

strategies cannot succeed. Thus, effective leadership is required to enforce the mission and

strategy, which are in turn affected by the cultural change of the internal environment.

Apart from strategies, motives and culture, other variables exist such as structure, man-

agement practices, systems and work unit climate, which motivate employees to achieve

productive performance and organizational change. Yet, strategy can lay the foundation

for achieving mission statement objectives over an extended time scale (Burke & Litwin,

1992), so that strategy does not refer to performance but to longevity.

Haugh and Talwar (2010) stated that, organizational economic sustainability results

from a wide variety of factors. Hubbard, Pocknee, and Taylor (1996) stated that organiza-

tional capabilities depend on certain factors, which are culture, structure, systems, human

resource capacity and financial resources. Pawlowski (2000) indicated that to sustain itself,

an organization must be stable, continuous and long lived. While Hubbard et al. (1996)

did not emphasis an organization’s longevity. Pawlowski (2000) noted the importance of

longevity by studying changes in the external environment; however, he did not discuss