Watching the Canary in the Mine: The Impact of Industry-Level Failure and Performance Variance on Survival-Enhancing Learning

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Anne S. Miner - University of Wisconsin MadisonJi-Yub Kim - University of Wisconsin Madison. # 0001718ABSTRACTWatching the canary in the mine:The impact of industry-level failure and performance variance on survival-enhancing learningContemporary management theory, business school curricula, and advice for managers focus heavily on how firms can learn from successful firms. They emphasize trying to copy 'best practices,' of apparent industry 'winners,' for example. We argue that organizations and do also learn from observing the levels of failure and near-failure by others. They also could learn from variation in performance in their industry. We study these ideas by looking at the effect of prior bank failure levels, near failure levels and performance variation on the survival rates for 2,724 FDIC-insured U.S. commercial banks chartered since 1984 over a 15-year period (1984-1998). We use event history analysis to test our ideas. Our first basic idea is that failure and near-failure of others can produce "survival enhancing learning" in remaining firms. We argue that failure of can serve as a source of learning for others. We argue that the value of such learning is influenced by whether the failures are very visible, and whether the experience of the other firms is actually relevant. These ideas imply that prior industry failure levels (numbers of prior failures) and near-failure levels (numbers of firms that were in trouble but revived) will have different effects on survival enhancing learning. We also predict banks will learn in different ways from failure in local or non-local markets, or by similar or dissimilar organizations. Our second main idea is that firms may also learn from prior industry variation in performance and from extreme success levels. Firms may learn from prior variation in performance by drawing abstract "lessons" from the prior industry experience. If this is the most powerful form of learning, then performance variation should have greater impact than just failure or success levels by themselves. Our third main idea is that firms learn not only from failure and performance variation levels in their own industry, but also from the experience of other, related industries. We study this idea by looking at the impact of experience in the savings and loan industry on survival enhancing learning by banks.Preliminary results show that industry levels of near failure experience levels enhance the survival of banks, as do the levels of failure and near-failure in the savings and loan industry, even controlling for the additional resources that might be available as a result of these failures. This research will provide valuable insight for managers who seek to learn from the experience of others, and to industry leaders or trade-association officers who seek to enhance the overall survival and prosperity in their industry. It also provides theoretical insight into the links between interorganizational learning and competition, and how firms learn from their own industry experience and from other industries.