Selection Processes: Firms versus Capabilities

Evolutionary theory discusses the exits of organizations from environments that they do not fit, but most work underemphasizes the distinction between business acquisition and dissolution as selection processes. We address this gap by investigating how the presence of organizational capabilities affects whether struggling firms exit by acquisition or dissolution. The study, which bridges adaptation and selection views on organizational change, highlights two results: first, struggling firms with extensive directive and coordinating managerial capabilities are more likely to exit by acquisition than by dissolution; and, second, managerial capabilities have more influence than functional capabilities on selection processes. Studies of industry evolution typically depict firm exit as the result of selection processes that remove struggling businesses from an industry (Nelson and Winter, 1982). Recent studies are integrating evolutionary theory with resource-based and dynamic capabilities arguments that emphasize the strategic importance of idiosyncratic business characteristics by investigating how business-level factors influence firm exit in various contexts (e.g., Mata and Portugal, 2002; Huyghebaert and Van de Gucht, 2004; Sarkar et al., 2006; Zuniga-Vicente and Vicente-Lorente, 2006). While valuable in advancing the understanding of business strategy and selection processes, these studies do not make a clear distinction between exit by acquisition and exit by dissolution, even though dissolution and acquisition exits represent distinctly different selection processes. Business dissolution entails a selection process that removes both a corporate entity and its underlying capabilities from the landscape (Aldrich, 1979; Hannan and Freeman, 1989), while business divestiture represents a selection process that removes the corporate entity while preserving some of its organizational capabilities (Mitchell, 1994; Baum and Korn, 1999). At the level of organizational capabilities, therefore, the two types of exit contrast selective and adaptive outcomes. This paper extends the understanding of these contrasting selection processes by examining how the presence of managerial and functional organizational capabilities influences whether a struggling firm exits by acquisition or by dissolution. The foundation for this study draws on theories that emphasize the importance of firmspecific capabilities in business strategy. The core literatures include evolutionary economics (Nelson and Winter, 1982), resource-based theory (Wernerfelt, 1984), and dynamic capabilities arguments (Teece et al., 1997; Eisenhardt and Martin, 2000; Karim and Mitchell, 2000). Following Amit and Schoemaker (1993: 35), resources are stocks of available factors that are owned or controlled by a firm (including both physical and human assets) while capabilities are the processes by which firms manipulate resources in attempts to achieve desired results. We