Knowledge & Motivation: How Failures in New and Experienced Domains Affect Firm Action & Performance

Abstract

When is failure good or bad for the organization’s subsequent performance? Prior research has been split on this issue, with some suggesting that failures spur the firm to beneficial action and provides knowledge that informs future success, but others suggesting that failures discourage action and may not produce usable learning. To reconcile these perspectives, we offer both organization-level and mechanism-level theory building on the roles of motivation to change or repeat behavior and the existing knowledge the firm possesses. Our theory suggests that failures in new domains are particularly damaging to organizational performance, while failures in experienced domains can produce positive outcomes. Using data on all U.S. mutual fund companies during 1962 to 2002, we find firm-level support for our theory, and offer detailed follow-up empirical analyses showing (among other findings) that failure in new domains leads to costly retreat from opportunities and failure in experienced domains leads the organization to work to fix the problem, while successes in new domains provide long-term growth opportunities and successes in experienced domains leads to a damaging cannibalization cycle. The study has implications for research on both learning from failure and behavioral response to failure.

Keywords: Organizational learning, performance feedback, success and failure, learning from failure, U.S. mutual funds