Organizational inertia and adaptation in a declining market

Organizations require cooperation from stakeholders with different interests. Stakeholders' interests often diverge, however, when markets shift from growth to decline, and firms must disinvest. Divergent interests underlie organizational inertia, and hinder adaptation to market decline. How, then, do organizations overcome this source of inertia? This study analyzes the intra-firm resource allocation process to specify sources of inertia and how firms adapt--or fail to adapt--to declining markets. The paper proposes a process model to analyze intra-firm resource allocation. The central argument is that most complex organizations have a bottom-up, customer driven resource allocation process that promotes investments in a growing market. The process does not run in reverse, however, and fails to promote disinvestment when markets decline. This process failure results from disincentives to promote disinvestment proposals, and reluctance to break implicit contracts. Findings from a 25-year retrospective case study of Firestone support the hypotheses that a bottom-up resource allocation process was better suited to investment than exit, and that a top-down disinvestment process imposed by an outside CEO promotes disinvestment.