Academic journal article Management International Review

Determinants of Corporate Efficiency in a Declining Industry - an Empirical Analysis of German Foundries

Academic journal article Management International Review

Determinants of Corporate Efficiency in a Declining Industry - an Empirical Analysis of German Foundries

Article excerpt

Introduction

After the end of stable economic growth in many important industries, effective management of declining industries has become a relevant topic both for management practitioners as well as researchers (Harrigan 1988, Welge/Huttemann 1993). For instance in Germany, according to the industry classification of the German Federal Statistics Office, one finds that six manufacturing industry clusters representing more than 10% of net production reported a shrinking index of net production for at least ten years (1986-1996). These industries were (1) mining, (2) textile production and clothing, (3) leather manufacturing and processing, (4) iron production, (5) the foundry industry, and (6) aerospace, ship, and rail manufacturing (Statistisches Bundesamt 1997).

Many reasons exist for industry-wide decline (Hartigan 1988). In summary, such reasons include location quality, regulatory changes, entry of new competitors, characteristics of a national economy, the business cycle, technical obsolescence of products or processes, sociological or demographic change, and changes in consumer requirements. Despite the relevance of understanding decline, few recent studies provide empirically-substantiated insights into successfully managing companies in shrinking industries. Traditionally, investigations of management patterns in declining industries focus on isolated functional management aspects, such as marketing procedures or product management (Sarfert 1989), restructuring (Targetti 1991), and divestiture (Bruggerhoff 1992). Other authors elaborate on relationships between industry decline and corporate life cycle theory (Miller/Friesen 1984), portfolio theory and business unit strategies (Trummer 1990). Few studies have analyzed companies in declining industries in a more holistic manner, i.e., included a broader range of variables which account for intra-industry variance of company success measures (Hartigan 1988, Vasconcellos/Hambrick 1989, Welge/Huttemann 1993).

Given this overall situation, the purpose of the present study is to provide empirical data on levels and determinants of business success in one specific declining industry. This approach has two distinct advantages: (1) industry specific measures of success and of managerial practices can be tailored to meet the particular measurement requirements of the chosen industry which, in turn, contributes toward a study's contents validity; (2) the approach captures industry specific tendencies and, therefore can disentangle determinants of success which hold in particular for industries sharing similar structural characteristics (e.g., decline of demand, predominance of mid-size firms). We chose to analyze the German iron, malleable cast, and steel foundry industry. Four main reasons let to the selection of this industry: First, demand indicators clearly revealed that firms in the foundry industry operate under conditions of severe decline. Second, the German foundry industry included approximately 400 firms at the end of 1992. Thus, the number of firms in this industry is large enough to justify the expectation that one could reach a sample size in a mail survey sufficient for the use of multivariate statistical methods. Third, no previous research has explored empirically efficiency determinants in the foundry industry. Fourth, normative results obtained for the foundry industry may also hold for a number of similar supplier industries dominated by mid-size firms.(1)

In addition to the substantial purpose given above, a further methodological objective of our work is to demonstrate the usefulness of an advanced OR-method, Data Envelopment Analysis, in the context of analyzing key success factors. This method can provide industry specific success criteria by capturing technical and revenue efficiency of foundries.

Background: Modified Chance-Risk Profile of the Foundry Industry

In Germany, the market for foundry products has decreased since the 1980s. …

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