Failure processes and causes of company bankruptcy: a typology

Abstract

This paper describes a typology of failure processes within companies. Based on case studies and considering companies' ages and management characteristics, we discovered four types of failure processes. The first failure process describes the deterioration of unsuccessful start-up companies leaded by a management with a serious deficiency in managerial and industry- related experience. The second process reveals the failure process of ambitious growth companies. Those companies have, after a failed investment, insufficient financial means to adjust their way of doing business to the changes in the environment in order to prevent bankruptcy. Third, we describe the failure process of dazzled growth companies, leaded by an overconfident management without a realistic view on the company's financial situation. Lastly, the failure process of apathetic established companies, describes the gradual deterioration of established companies where management had lost touch with the changing environment. We also found that there is a great difference in the presence and importance of specific causes of bankruptcy between the distinctive failure processes . Errors made by management, errors in corporate policy and changes in the general and immediate environments differ considerably between each of the four failure processes.