Starting up in a turbulent environment: A process model of failure among firms with high customer dependence

This paper proposes a process model on how new and small organizations may fail. Based on prior research, the paper builds a foundation for a process model, and then elaborates it inductively by explaining how and why significant reversals and shifts occurred between 1983 and 1985 in the entrepreneurial, organizational, and ecological conditions of ten new educational software companies. The process model states that all organizations. engage in transactions with others in the normal conduct of business, and it is inevitable that a certain proportion of these transactions fail. The probability of transaction failures is a product of the failure rate at the level of the organizational population, as well as the kinds of transactions in which individual firms engage. New and small firms in a turbulent environment represent a subset of the organizational population particularly vulnerable to the chance occurrence of a failed transaction. Because of liabilities of newness and small size, these firms lack legitimacy. Furthermore, in many industries there is an absence of tangible physical assets that entrepreneurs can use as collateral to attract valuable resources and customers. In such situations, entrepreneurs often use transactions with key external constituencies as a surrogate to attract other resource constituents, thus giving rise to a leveraged set of transactions. This leveraging strategy, however, makes the set of transactions of the firm tightly coupled. And when any one transaction in a tightly coupled set fails, the set often collapses. Hence, a small business firm in this situation fails when a transaction in which it is highly dependent or leveraged happens to fail. The very strategies that contributed to overcoming the problems of liabilities of newness and small size turn out to be the root causes of failure. The experiences of the courseware companies are generalized to a process model of failure of new small businesses in turbulent environments.