Bankruptcy in strategic studies: past and promise.

Schoonhoven, 1990; Reinganum, 1985).

Bankruptcy is a complex process; multiple perspectives are needed to fully capture the phenomenon. Those perspectives which address the role of strategic leaders offer particular promise for increasing our understanding of the failure and recovery processes. The blame for bankruptcy often falls on the shoulders of firms' leaders. "Chronic mismanagement", for example, has been suggested as a cause of failure (Chaganti et al., 1985, p. 409).

A variety of approaches may appropriately be employed in bankruptcy studies. The vast majority of research has relied on large sample, matched-pair designs. More focused case studies would greatly enrich our understanding of Organizational research has historically been dominated by a focus on those factors associated with organizational growth and survival. Yet, in order to gain a comprehensive understanding of organizations, researchers must also examine an alternative outcome-organizational failure. Filing for bankruptcy protection provides an explicit case of formal organizational failure; consequently, bankruptcy offers what may be the definitive organizational performance indicator. Unlike alternative performance measures which are more readily manipulated by management, a bankruptcy filing is a discrete event. This paper explores the contributions of the behavioral environmental financial/accounting, and legal approaches to bankruptcy. The challenge currently facing organizational researchers is the integration of these diverse perspectives, particularly as they apply to strategic studies.

The reason why firms succeed or fail is perhaps the central question in strategy.

Porter, 1991, p. 95

Survival may be the predominate goal of organizations (e.g., Donaldson & Lorsch, 1983; Pfeffer & Salancik, 1978). Barnard (1938), for example, has suggested that the only true measure of a firm's success is its ability to survive. Additionally, Starbuck (1965, p. 463) proposed almost thirty years ago that the "one thing which [the organization] must do, if it is to be an organization at all, is to survive."

Organizational scholars have relied on a variety of theoretical perspectives to advance our understanding of organizational survival. Population ecologists, for example, believe that an organization's ability to survive is largely, if not exclusively, determined by environmental forces acting upon the organization (e.g., Aldrich, 1979; Hannan & Freeman, 1977). Managerial discretion is recognized only as a reactionary response to the environment. Alternatively, the strategic choice perspective views managers as the primary determinants of organizational effectiveness vis-a-vis their selection of strategic options (e.g., Child, 1972; Hambrick & Mason, 1984).

A more contemporary view acknowledges the contributions of both strategic leadership and environmental forces in determining organizational effectiveness (e.g., Astley & Van de Ven, 1983; Hrebiniak & Joyce, 1985). Organizational survival is seen as a function of the interaction between strategic leadership and environmental forces as managers attempt to acquire and maintain critical environmental resources (Pfeffer & Salancik, 1978). While the degree to which strategic leaders impact organizational processes and outcomes has not been unequivocally established (e.g., Davis-Blake & Pfeffer, 1989; Day & Lord, 1988; Hambrick & Mason, 1984; Hambrick & Finkelstein, 1987; Meindl & Ehrlich, 1987; Meindl, Ehrlich & Dukerich, 1985; Thomas, 1988), the literature illustrates a growing appreciation of firms' strategic leaders. Porter (1991, p. 101), for example, has expressed the view that "the essence of strategy is choice." His position would seemingly support the importance of strategic leadership.

After several decades of inattention to the impact of senior executives on firm outcomes, interest in strategic leadership has received renewed attention. As editor of a special issue of Strategic Management Journal ("Strategic Leaders and Leadership"), Hambrick (1989) noted the inevitability of this resurgence given management's responsibility for firm performance. Perhaps due in part to this important top management/firm performance linkage, Sutton and Callahan have observed that the "images of organizations and their leaders are intertwined" (1987, p. 405).

Associations between executives and their organizations are common. We immediately associate, for instance, the successes of Microsoft, Disney and General Electric with Bill Gates, Michael Eisner and Jack Welch respectively. These same attributions are made when leaders are associated with less successful outcomes. John Akers of IBM, Paul Lego of Westinghouse, or James Robinson of American Express provide notable examples. The suggested association between strategic leaders and organizational performance would seem unequivocal.

Curiously, organizational research is dominated by those factors associated with organizational growth and survival. Progress in determining the antecedents to organizational success may have occurred at the expense of expanding our understanding of those factors associated with organizational decline and failure. As strategic leaders continue to struggle with increasingly unfriendly operating environments and rising rates of organizational failure, the need to understand the full spectrum of organizational processes and outcomes is imperative.

This study addresses this gap in the literature by focusing on organizational failure. Specifically, formal failure as manifest in the form of a bankruptcy reorganization filing will be addressed. Because bankruptcy is often viewed as the result of a downward spiral of extended decline (Hambrick & D'Aveni, 1988), an overview of decline studies, especially those with implications for strategic studies, is provided. This introductory overview is followed by an examination of the multiple perspectives which have informed bankruptcy research. Lastly, implications for future research which develops linkages between bankruptcy and strategic studies are offered.

History of Declining Organizations

Until the early 1980s, researchers devoted little attention to organizational decline (Whetten, 1980a; 1980b). Much of this neglect has been attributed to a preoccupation with the study of organizational survival and growth (Summer, Bettis, Duhaime, Grant, Hambrick, Snow & Zeithaml, 1990; Whetten, 1980a). Ironically, management's fixation on growth has been found to bc the primary internal cause of organizational decline (Finkin, 1985; Goodman, 1982; Heany, 1985; Sloma, 1985). In a departure from past tradition, the 1980s witnessed a dramatic increase in the volume of research which addresses organizational decline (e.g., Cameron, 1983; Cameron, Kim & Whetten, 1987; Levine, 1978, 1979; Starbuck, Greve & Hedberg, 1978; McKinley, 1993; Staw, Sandelands & Dutton, 1981; Sutton & D'Aunno, 1989; Weitzel & Jonsson, 1989; Whetten, 1981). As further evidence of the importance of this line of research, a recent special issue of Organization Science (1993), edited by William McKinley, was devoted exclusively to issues of organizational decline and adaptation.

Research in this area has taken the form of both theoretical (e.g., Cameron, Sutton & Whetten, 1988; Harrigan, 1980; Sutton, 1990; Sutton & D'Aunno, 1989; Weitzel & Jonsson, 1989; Whetten, 1980b, 1987; Zammuto & Cameron, 1985) and empirical contributions (e.g., Cameron, Whetten & Kim, 1987; Cameron et al., 1987a; D'Aveni, 1989a; Hambrick & D'Aveni, 1988; Harrigan, 1981, 1982; Miller, 1977; Miller & Friesen, 1977). Much of this research has focused exclusively on the consequences of organizational decline (e.g., Argenti, 1976; Cameron et al., 1987b; Staw, Sandelands & Dutton, 1981; Whetten, 1980b).

Organizational decline denotes a protracted period of decreasing internal resources (Cameron, Sutton & Whetten, 1988). These resources encompass both financial and human resources (D'Aveni, 1989a). Indicators of decline in financial resources include liquidity, profitability, and leverage measures (Altman, 1968). Indicators of decline in human resources include numbers of top managers (D'Aveni, 1989a), managers' educational achievements (Becker, 1975) and top management team status (D'Aveni, 1990).

While decreasing levels of human resources are characteristic of declining organizations, downsizing in the form of work force reductions, for example, is distinct from decline (D'Aveni, 1989a; McKinley, 1993). Downsizing is viewed as a consequence of decline rather than an element of decline (Cameron et al., 1988; Greenhalgh, Lawrence & Sutton, 1988). Efficiency-oriented activities such as work force reductions are typical organizational responses designed to halt, and potentially reverse, decline (Pearce & Robbins, 1993).

Decline has been found to occur at varying rates in organizations (Argenti, 1976). In addition to verifying patterns of decline, D'Aveni (1989a) empirically validated several of the consequences of decline identified by Staw et al. (1981) as threat-rigidity responses. Threat-rigidity responses are largely dysfunctional and include: conservatism, questionable escalation, reliance on past policies, rigidity, restriction of information, increased centralization and formalization, low levels of innovative activity, strategic paralysis, and resistance to change (e.g., Cameron et al., 1987a; Cameron et al., 1987b; D'Aveni, 1989a; Dutton & Duncan, 1987; Singh, 1986; Staw et al., 1981; Whetten, 1980b; Whetten, 1987). Increasing centralization and conservatism may be particularly dysfunctional as management focuses on short-term solutions at the expense of long-term, strategic reorientations (Hall & Mansfield, 1971; Smart & Vertinsky, 1977). Examples of short-term solutions include cutting personnel in functional areas such as marketing and R&D, while building areas such as finance and accounting in order to address creditors' short-term financial concerns (Whitney, 1987).

Threat-rigidity responses need not always be dysfunctional. Efficiency-related actions, for example, may enable the organization to generate enough financial resources in the short-term to keep the organization afloat while longer-term solutions are created (Zammuto & Cameron, 1985). Centralization, too, may prove beneficial for turnaround managers who often rely upon decision-making authority in their attempt to initiate a turnaround.

Unfortunately, these efficiency and centralization responses do little to address the underlying problem of the organization's inability to adapt to current firm pressures. Increasing centralization, for example, may lead to strategic paralysis which results in higher levels of rigidity as managers attempt to address the organization's problems through increased supervision (Masuch, 1985; Meyer, 1985). Often, the consequences of decline inhibit the firm's ability to initiate or implement a successful turnaround (D'Aveni, 1989a).

Empirical support for threat-rigidity responses has been mixed. Cameron et al. (1987a) and Cameron et al. (1987b), for example, found no evidence of these responses among universities experiencing declining revenues. D'Aunno and Sutton (1988), however, found evidence of increasing centralization among drug …