Organizational Environments and Industry Exit: the Effects of Uncertainty, Munificence and Complexity

Abstract

Economists and organization theorists have asked which factors are linked to the rate at which firms exit an industry. Yet little research has linked exit rates to changes over time in the key dimensions which characterize an industry's environment. This study examines linkages between exit rates and changing levels of uncertainty, munificence and complexity in an industry. A longitudinal study of the American cement (1888–1980) and minicomputer (1958–1982) industries reveals that uncertainty is the key environmental dimension associated with organizational mortality. Controlling for ecological and macroeconomic conditions, exit rates are associated with uncertainty, but not complexity or munificence. The greater the uncertainty, the higher the exit rates. Two kinds of uncertainty create hazardous environmental conditions: unpredictable changes in demand and eras of ferment bounded by technological discontinuities and dominant designs. Our results indicate that while organizations can deal with different levels of economic munificence and complexity, uncertainty is a significantly more lethal characteristic of organizational environments. The results support Schumpeterian perspectives linking industry turnover to ‘waves of creative destruction’, but suggest more broadly that an organization's ability to cope with uncertainty is a key determinant of its life chances.