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Organizational Mortality

Organizational mortality is the study of organizational survival and failure. It includes the emergence and extinction of organizational forms and the rate and frequency of organizational exit within and between populations, as well as the causes and consequences of exit at the level of individual organizations. Some definitions are broad and treat mortality as a binary condition; a firm is alive or it is not. Other definitions are more specific and distinguish among different types of exit, including merger (when an acquired organization is subsumed and ceases to exist as a distinct entity), voluntary discontinuance of operations, and mandated discontinuance (bankruptcy). Within a population of organizations, the hazard rate represents the proportion of exits at a given point in time.

Conceptual Overview

The Liabilities of Newness and Smallness

Organizations face their greatest mortality risk (or hazard) when they are young or small. Since most organizations are small when they are new, early research focused on the liability of newness, which associates high exit rates with firm youth. Organizations are prone to exit when they are young because they often lack the routines, social relationships, structure, and external connections (with customers and suppliers) that are necessary for survival. The longer an organization remains in existence, the better its chances of continued survival. In other words, there is a negative relationship between age and mortality risk.

Small organizations face greater mortality risk than large organizations do. Small organizations have fewer resources and are thus more vulnerable to shocks, whether internal (e.g., loss of a key employee, failure of a research and development project) or external (e.g., loss of a key customer, change in the regulatory environment). Medium-size organizations have larger resource stocks than small organizations have and can weather storms better. When an organization becomes very large, external stakeholders (e.g., governments, financial institutions) often have vested interests in ensuring its survival because of the severe consequences of failure. Airlines and auto makers are two such examples.

The Liability of Adolescence

Even though the risk of failure decreases as organizations become older and larger, there is also a period of relative safety when they are at their youngest and smallest. When an organization first appears, it generally has a stock of assets that, even under the worst conditions, will take some time to exhaust. It also takes time for members of an organization to learn from stakeholders whether they are creating value and fulfilling their mission. This period of initial asset depletion and learning typically lasts from a few months to a few years. During this time, the mortality rate increases to its maximum hazard rate (generally, two years from start-up) and then declines to a steady level of exit by roughly year 10. This pattern of maximum risk after a period of safe infancy (or honeymoon) is known as the liability of adolescence. Figure 1 illustrates this pattern of increasing and then decreasing hazard rate (probability of exit) over time. Of course, the exit rate never drops to zero; organizations exit at any age. Some fail or cease to exist because their advanced age limits their ability to adapt to a changing environment. This is sometimes known as the liability of obsolescence or liability of senescence.

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