A behavioral view of SME product termination decisions

ABSTRACT

Drawing from the attention-based view of the firm, we argue that heuristics play a prominent role in product termination decisions in SMEs. Specifically, we predict that performance below aspiration is a significant heuristic used in these decisions. We deepen our examination by developing moderating hypotheses to better understand heterogeneity across SMEs. Attention regulators hypothesized to moderate the main effect include regulatory uncertainty, predisposition toward satisficing behavior in the firm, whether the firm is run by an owner-manager, and the extent to which the firm faces liquidity constraints. Hypotheses are tested with survey data of over 4,000 SMEs from 34 countries.

KEYWORDS:

• SMEs
• product termination
• performance feedback
• attention-based view

Notes

¹ It is important to note that a claim of bounded rationality is not a claim of irrationality. As Simon himself noted “[i]n long-run equilibrium it might even be the case that choice with dynamically adapting aspiration levels would be equivalent to optimal choice, taking the costs of search into account” (Simon, 1979, p. 503). Emerging work in the area of ecological rationality of heuristics argues that they may even be superior to “rational strategies” (for example, Luan et al., 2019).

² The behavioral theory of the firm literature largely focuses on the effect of performance below aspiration on search behaviors. Theoretical predictions about the effect of performance above aspiration highlight two opposing effects. On the one hand, this outcome may encourage the firm to maintain the status quo and not risk any change. On the other, it may produce slack resources that could foster slack search. Given the conflicting views here, we elect to focus on performance below aspiration and its role in inducing problemistic search.

³ One exception is Gaba and Bhattacharya (2012); that study showed that information technology firms were more likely to terminate external corporate venture capital activities as their innovation performance trailed an aspiration level set by comparable firms’ performance.

⁴ Countries included in the survey are Albania, Armenia, Azerbaijan, Belarus, Bulgaria, Bosnia and Herzegovina, Croatia, Czech Republic, Estonia, Former Yugoslav Republic of Macedonia, Georgia, Germany, Greece, Hungary, Ireland, Kazakhstan, Kyrgz Republic, Latvia, Lithuania, Moldova, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, Serbia and Montenegro, South Korea, Spain, Tajikistan, Turkey, Ukraine, Uzbekistan, and Vietnam. We utilized the 2004/2005 version because more recent versions do not include the combination of dependent and independent variables of interest in our study.

⁵ Of firms who had not created a product or service within the last 36 months, just 5 percent reported any product termination activity. Despite this relatively lower rate of termination activity, results were robust to the inclusion of these firms.

⁶ Because our measures are based on survey responses provided by the same respondent, we considered possible bias from common method variance. We believe CMV concern is minimized for several reasons. First, the measures used in our analyses were temporally separated with intervening questions concerning unrelated topics. Second, items did not share common phrasing. Finally, we performed a Harmon one-factor analysis, which failed to indicate a concern that variance in the data was largely attributed to a single underlying factor.

⁷ Results were robust to the inclusion of industry*country fixed effects.

⁸ The BEEPS survey does not include data on prior performance of the focal firm that would allow us to create a separate historical aspiration.

⁹ In essence, this measure asks whether the respondent perceives the existence of price inelasticity in demand but chooses not to act upon it. No significant differences existed across industry sectors in the proportion of respondents coded as satisficing versus nonsatisficing.

¹⁰ We thank anonymous reviewers for the suggestion to investigate differences in the liquidity constraints interaction across countries of different income levels and for the suggested issue of the link to product quality.

¹¹ Credit for this insight goes to an anonymous reviewer.