Academic journal article Revue Canadienne des Sciences de l'Administration

The Decline of Small Firms: A Preliminary Investigation into the Concept of Complacency

Academic journal article Revue Canadienne des Sciences de l'Administration

The Decline of Small Firms: A Preliminary Investigation into the Concept of Complacency

Article excerpt

"The reason why firms succeed or fail is perhaps the central question in strategy." -Porter, 1991, p. 95

It is well known that the failure rate of small businesses is high. Historically, about 400,000 small businesses fail each year in the U.S. (Small Business Administration, 1986), and the failure rate of start-up firms in their first five years has been about 65% (Bracker, Keats, & Pearson, 1988). Although there are many reasons for the failure of small firms, an overwhelming majority of them are attributed to the managerial weaknesses of their owners (Berryman, 1983; Boyle & Desai, 1991; Haswell & Holmes, 1989; Peterson, Kozmetsky, & Ridgway, 1983; Sheldon, 1994; Wichmann, 1983). This rather comprehensive category usually includes shortcomings in personal managerial skills, as well as weaknesses in almost any phase of the firm's operations. While this attribution has face validity, it precludes more insightful analysis of failure by ignoring contextual circumstances which can affect the influence of various deficiencies to induce or reinforce decline.

Because of its comprehensive nature, the term management includes all operations a business usually undertakes. Operational weaknesses usually reflect managerial incompetence or inadequacy. Although one or more weaknesses generally result in the failure of a firm, the weaknesses and their interactions work within a context of managerial attitudes, which we refer to as complacency. The attribution of failure to a blanket rubric "managerial weaknesses" ignores this context, that is, complacency, and thus defies a concrete analysis of failure. Webster's Third New International Dictionary (1961) defined complacency as "satisfaction or self-satisfaction accompanied by unawareness of actual dangers and deficiencies." Presumably this satisfaction stems from a misplaced perception of excellence regarding one's acts or circumstances.

This definition of complacency has two possible implications when applied to small firm owners. First, unawareness indicates that problem-sensing ability (Kiesler & Sproull, 1982) may be missing in a troubled firm whose management is satisfied with the current state of affairs. In such a business, problems may be set aside as random events, and efforts made to rationalize their continuing existence (Reece, 1994). Second, it might be that opportunities that once brought success have abandoned the troubled firm, or actions that worked in the past no longer do so, but managers remain oblivious to these changes. Past success leads to a belief in the firm's infallibility and reinforces a false confidence "that can edge toward arrogance" (Reece, 1994, p. 52). Thus, complacency is associated with cognitive/behavioural phenomena involving a lack of managerial attention toward critical operational and strategic areas (Hedge, 1982; Reece, 1994) and/or a managerial inability to abandon strategies that no longer work (Labich & de Llosa, 1994; Reece, 1994). Although complacency is manifested in managerial actions or lack of actions, managerial cognitive behaviour is of primary importance in understanding complacency. We believe that a simultaneous focus on both complacency and managerial weaknesses can better unfold the dynamics of their respective roles in the small firm's decline. Further, earlier theory and observations involving managerial cognitive behaviour reinforce the need for such a focus.

A major managerial task, particularly when faced with a decline, is the effective extraction of critical resources from the firm's task environment (Pfeffer & Salancik, 1978). Since a firm's ability to attain its goals is determined, in part, by legitimacy through constituency satisfaction, the reversal of declining performance often depends on stakeholder support (Hambrick, 1985; Ramanujam, 1984). Providers of critical resources might seriously constrain management's ability to reverse decline. Even for big businesses, the loss of support from just one critical constituency-creditors-may lead to bankruptcy (Daily, 1994). …

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