Environmental change and rational failure of the firm: application of an integrated model of transaction costs and dynamic capacities

The prevailing traditional paradigm is a classic dichotomous view—firms either succeed rationally or fail irrationally. However, in today’s constantly changing environment, there may be an intermediate phenomenon in which firms fail rationally or succeed irrationally. To address this issue, we develop a new integrated model based on transaction cost economics and the dynamic capability perspective. This model provides a theoretical explanation for the existence of this phenomenon and a method to avoid it. To empirically validate this theoretical explanation, we employ a qualitative case study of film companies Kodak and Fujifilm. The findings reveal that when a firm adapts to environmental changes, it incurs transaction cost to persuade resistors and saves opportunity costs over existing assets by means of self-transformation. In a situation of environmental change, based on the cost structure, a firm could fail rationally and succeed either rationally or irrationally. This study offers a theoretical explanation for the phenomenon of rational failure from the perspective of organizational economics. It also provides a theoretical explanation for the type of rational failure treated by Levinthal and March (Strateg Manag J 14:95–112, 1993) and for another intermediate phenomenon known as irrational success.