A Factor Analytic Study of the Perceived Causes of Small Business Failure

Abstract

The important role of small business in the U.S. economy suggests that an understanding of why firms fail (and are successful) is crucial to the stability and health of the U.S. economy. Robinson and Pearce (1984) recognized a growing interest, statewide and on the federal level, in identifying factors associated with the conduct and performance of small firms. An understanding of such factors would enable public policymakers and small business advisors to better serve the small business sector. Cochran (1981) suggests that research on business failure for subgroups of the small business sector would prove useful, and that research on business failures for specific industries in regions might be more useful than studies that are national in scope. Consistent with the advantages cited by Robinson and Pearce (1984), and Cochran (1981), the focus of this study is limited to a single industry within one region of the country. An analysis of the distribution of the total U.S. small business population identified retail trade as the largest sector of the small business industry (Handbook of Small Business Data 1988). In terms of specified kinds of retail businesses, the most current Census of Retail Trade for Iowa (1982) lists apparel and accessory stores as the most numerous types of retail establishments. This article, therefore, presents the results of a study that examined perceived causes of small business failure in the apparel and accessory retailing industry. Such research would be useful in identifying practices to be avoided and in aiding educators, consultants, and small business support agencies in meeting the needs of the small business community. REVIEW OF THE LITERATURE Recognizing the dynamic relationship between the firm and its operating and environmental characteristics, Keats and Bracker (1988) proposed a conceptual model of small firm performance. This model suggests that performance outcomes are a function of many variables, including individual owner characteristics, owner behaviors, and environmental influences. Their model, grounded in strategic, entrepreneurship, and organizational theory, transcends the belief that small firms are merely miniature versions of large businesses and recognizes small firms as unique entities. According to Keats and Bracker (1988), small firm performance is influenced by multiple constructs which have been labeled as Entrepreneurial Intensity (entrepreneurial characteristics and behaviors which differentiate entrepreneurs from other individuals); Task Motivation (intensity of entrepreneurial motivation to attain goal achievement); Perceived Strength of Environmental Influences (strategic choices and reactions in response to environmental elements); Behavioral Strategic Sophistication (acquisition and implementation of sophisticated strategic management practices); Cognitive Strategic Sophistication (comprehension and integration of strategic management practices); and Task Environment Factors (structure of the industry in which the organization operates). These six constructs have been proposed as substantial influences of small firm performance outcomes. Performance outcomes in the Keats and Bracker model includes a number of interpretations and measures including financial performance. The Keats and Bracker model is meant to provide a basis for explaining how owner characteristics, behaviors, and contextual factors relate to small firm performance. Small firm performance has been studied from a variety of approaches to better understand why some firms fail and why others succeed. Weitzel and Jonsson (1989) discuss business failures as being the last stage of an organization's life cycle. Organizational decline, leading to failure, is characterized by managers who have become reactionary. The result is inadequate or non-existent planning and inefficient decision-making. One of the earliest empirical studies (Larson and Clute 1979) examined the role of various owner and firm characteristics to explain business failures. …

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