Academic journal article Management International Review

Alternatives to Decline, Threat or Scarcity: Exit, Voice, Loyalty and Institutional Response

Academic journal article Management International Review

Alternatives to Decline, Threat or Scarcity: Exit, Voice, Loyalty and Institutional Response

Article excerpt

Introduction

This paper examines alternative strategies facing firms subject to decline, threat or scarcity. Four alternative strategies are suggested: exit, voice, loyalty and institutional reorganisation. These strategies apply both to internal activities (within the firm) and to external relationships, most particularly with suppliers and customers.

The following section presents the perspective and background to the analysis. This is followed by an overview of the alternative strategies and then by an analysis of each strategy in turn.

This paper is unusual in that it examines exit, voice, loyalty and reorganisation as active strategies of the company, not simply as responses to external pressure.

The Analytical Perspective

The key concepts of the analysis derive from Albert Hirschman's pathbreaking work Exit, Voice and Loyalty (1970), in which the three key concepts were introduced as responses to decline in firms, organisations and states. This paper attempts to tie in these concepts to notions of organisational change. It also examines both the internal and external implementation and ramifications of the key management strategies.

The critical innovation made by Hirschman was to focus attention on repairable lapses of economic actors. Economists had hitherto paid little attention to this because of the key assumption of "fully and undeviatingly rational behaviour or, at the very least an unchanging level of rationality on the part of the economic actors" (1970, p. 1). But, as well as changes in demand and supply conditions, there could also be some "loss of maximising aptitude or energy" within the firm. The question is how can such a loss be repaired? In addition, given the assumption of a competitive economy, recovery from any lapse is not essential - a new firm or other existing firm will take up the slack. Resources are reallocated in accordance with the new conditions and equilibrium is restored. Competition and the exit mechanism thus is one major mechanism of recuperation.

However, there is another key mechanism. Effective "voice" means that management searches for possible cures for dissatisfaction. The firm's customers, suppliers or workers express this dissatisfaction through voice and management can engage in negotiations leading to remedial action.

The presence of loyalty makes exit less likely to the extent that (1) customers, members or suppliers are willing to trade off the certainty of exit against the uncertainties of an improvement in the deterioration of product, service or conditions and (2) the estimate that customers, members or suppliers have of their ability to influence the organisation. Hirschman notes "in the choice between voice and exit, voice will often loose out, not necessarily because it would be less effective than exit, but because its effectiveness depends on the discovery of new ways of exerting influence and pressure towards recovery. However "easy" such a discovery may look in retrospect the chances for it are likely to be heavily discounted in ex ante estimates, for creativity always comes as a surprise. Loyalty then helps to redress the balance by raising the cost of exit. Loyalty or specific institutional barriers to exit are therefore particularly functional whenever the effective use of voice requires a great deal of social inventiveness while exit is an available, yet not wholly effective, option." (1970, p. 80). Loyalty thus raises the cost of exit. Its usefulness depends on the closeness of the available substitute. If the gap between two firms (price and quality) is huge, there is a great deal of scope for the use of voice in the course of the progressive deterioration of one of them before exit occurs. Thus, there is not much need for loyalty. However, the closer are the substitution possibilities between two firms, a small deterioration in one of them will result in exit (of customers and members). …

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