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John Argenti’s Trajectories of Corporate Collapse

Argenti operated at a lower level of abstraction and espoused different objectives than Penrose (examining decline, not growth), but his work is nevertheless a valuable methodological exem-
plar for us. His approach consisted of two steps. First, he identified the three archetypical collapse trajectories shown in figures below. Second, he developed archetypical ‘process stories’ which
outline the sequence of events that drive these trajectories of collapse. Argenti’s motivation for developing such ‘storylines’ underpinning failure was dissatisfaction with the prevailing practice
of identifying factors associated with decline: “… I have now come to believe that a mere list of causes and symptoms, no matter how coherent and comprehensive it may be, is not enough.
What is missing from such an inventory – and indeed from all previous work in this field – is the dynamics of failure, the sequencing of events. We need a storyline that binds together all these
causes and symptoms into a working model” [Corporate collapse : the causes and symptoms by John Argenti 1976, p. 121]

Performance

4
15

11,1
Fantastic
1,2,3,4 5,6
Excellent 16
,7

10
6-
Good 8,9,10
,11 12-16
5,6,7,8,9,10
5
Poor 11, 4, 17
4
,3, 12,1 3
1,2 3
1,2
Failure 18 17
2 to 8 years 4 to 14 years

Trajectory-1 Trajectory-2 Trajectory-3


Newly Formed Organizations Young Organizations Mature Organizations
1. Starts with defective management structure 1. Starts out with same defects as Trajectory 1 1. Organization has good health; profitable; high morale;
2. Follows up with poor accounting system 2. Manager ‘knows everything’ and won’t accept advice gearing low; turnover moderate
3. Gearing increased, adding to risk 3. Fast growth due to energy & ability of entrepreneur 2. Some management defect occur (eg: strategically
4. ‘The BIG Project’ – costing underestimated 4. Sales grow; firm need additional capital injections un-aligned)
5. Apparent that ‘big project’ is a ‘flop’ 5. Margins do not fall due to owner’s persuasiveness; 3. Accounting function defect
6. Cash flows negative – all ratios poor overtrading 4. Environment change
7. Creative accounting 6. More credit is offered by financial institutions 5. Normal business hazard survives unless:
8. Stress 7. Credit offered by unscrupulous creditor who sells out a. Pressure group imposes constraint
9. Business hazard 8. Instead of consolidating to protect risk, maximum profit/ b. Firm is over trading
10. Crisis action – eg. Reduce price sales continue to be pursued c. Firm is over geared
11. Owner seeks another loan 9. Media becomes interested; pressure mounts d. Firm has major product failure
12. Insufficient profit 10. Organization should have a formal management system, 6. Profits fall severely
13. Receiver called in to manage bankruptcy but is still ruled by ONE person 7. Financial ratios deteriorate predictably

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11. Proprietor wealthy; firm has a good name; public demands 8. Morale declines
Improvement possibilities quality 9. Poor profits for two years since #5
1. Type-1 Trajectory 12. Turnover grows but not profitability 10. Creative accounting begins
a. Implement appropriate systems, add managerial skills 13. Creative accounting 11. Gearing moves into ‘danger zone’; ‘waterlogged’
to the proprietor 14. The ‘Big (ridiculous) Project’ again 12. Profits just cover interest payments
2. Type-2 Trajectory 15. Technical overtrading 13. The ‘Big Project’ again
a. Intervene at 8, 9 or 10 16. Bank notices downturn 14. Sales & profits increase; bank gives another loan
b. Some type of regulation necessary (eg: Consolidate) 17. Collapse inevitable 15. The ‘Big Project’ runs into trouble
3. Type-3 Trajectory 18. Receiver called in to manage bankruptcy 16. Cash crisis; firm cannot survive its loans
a. Intervene before 12 17. Receiver called in to manage bankruptcy
b. Restructure; Divest; reduce gearing; cut back trading
if needed
c. Introduce structured strategic planning/management