Organizational life cycle


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Organizational life cycle:
Organizational Birth,
Population Ecology Model of Organizational Birth, The Institutional Theory of Organizational Growth, Greiner’s Model of Organizational Growth,
Organizational Decline and Death,
Weitzel and Jonsson’s Model of Organizational Decline

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Organizational life cycle

  1. 1. Pradeep Kumar R
  2. 2. Organizational Life Cycle  Organizations go through predictable patterns of growth and development.  As an organization grows, its personality (culture) changes. Its focus, priorities, problems, concerns and complexity also change. It has been said that this life cycle is but a series of phases of evolutionary growth followed by crisis which necessitates revolutionary growth of the organization and/or its people, followed by another period of evolutionary growth, etc., etc.
  3. 3.  The organizational life cycle is the life cycle of an organization from its creation to its termination.  There are four level/stages in any organization. 1. Birth 2. Growth 3. Decline 4. Death
  4. 4. Stage of Life Cycle
  5. 5. Organizational Birth  Organization are born when individuals, called entrepreneurs, recognize and take advantage of opportunities to use their skills and competence to create value.  Organization birth, the founding of an organization, is a dangerous stage of the life cycle and is associated with the greatest chance of failure.  The failure rate is high because new organizations experience the liability of newness-the dangers associated with being the first in a new environment.  E.g.: Michael Dell
  6. 6.  A new organization is fragile because it lacks a formal structure to give its value creation processes and actions stability and uncertainty.  Structure specifies an organization’s activities and procedures for getting them done.  Organization structure emerges gradually as decisions about procedures and technology are made.  A flexible structure allows organization to change and take advantage of an opportunity.
  7. 7. Developing a plan for a New Business 1. Notice a product opportunity and develop a basic business idea.  Goods/Services  Customers/Markets 2. Conduct a strategic (SWOT) analysis  Identify opportunities  Identify threats  Identify strengths  Identify weakness 3. Decide whether the business oppurtunity is feasible 4. Prepare a detailed business plan.  Statement of mission, goals and financial objectives.  Statement of strategic objectives  List of necessary resources  Organizational timeline of events
  8. 8. Population Ecology Model of Organizational Birth  Population ecology theory explains the rate at which organizations are born and die in a population of existing organizations. A population is the set of organizations competing for the same resources.
  9. 9.  Number of Births  Population ecology theory states that population density, the number of organizations in a population, depends on the availability of resources. Births in a new environment are initially rapid and then diminish as the environment becomes filled with successful organizations.  Rapid birthrate results from two factors: new organizations create knowledge and skills for similar organizations; and a new organization is a role model, making it easier for others to attract stakeholders. Stakeholders see a business success and invest in similar businesses.
  10. 10.  Number of births in an environment diminishes. This is because the availability of resources decreases. The first companies in a market obtain first mover advantages, the benefits of entering early. The advantages are customer support, brand name recognition, and choice locations  Latecomers have difficulty attracting resources and competing with existing organizations for resources. Obtaining new customers may require large advertising expenses. Existing organizations may work together to deter new entrants. They may collude (illegally) to fix prices at artificially low levels or advertise heavily, making it expensive for latecomers to enter the market.
  11. 11.  Survival Strategies  r-strategy versus K-strategy:  An r-strategy is early entrance into a new environment, providing first-mover advantages, which facilitate core competences and rapid growth.  A K-strategy, pursued by those established in other environments, is a late entrance and less uncertain. Firms use skills developed in other environments to compete effectively and often dominate r-strategists.  In the personal computer industry, Apple followed an r- strategy, and IBM followed a K-strategy
  12. 12.  Specialist strategy versus general strategy:  Specialists compete for a narrow range of resources in a single niche.  Generalists spread their skills to compete for a broad range of resources in many niches.  Porsche, Dell Computer Corp., and Rolex pursue a specialist strategy, also called a niche strategy. Specialists offer better customer service and can develop superior products. Yet, they risk that the niche will disappear in an uncertain environment.  IBM, and GM pursue a generalist strategy. A generalist can survive in an uncertain environment, because if one niche disappears, it has others. Yet, a generalist offers a lower level of customer service, because it concentrates on a broader range of resources.
  13. 13.  The Process of Natural Selection:  An organization can pursue one of four strategies: r-specialist, r- generalist, K-specialist and K-generalist.  The choice of strategy evolves over time. New organizations pursue an r- specialist strategy to meet the needs of specific customers.  Organizations frequently become r-generalists through growth and compete in new niches.  K-generalists, usually divisions of large companies like GE, enter the market and threaten weak r-specialists. An r-specialist without a distinct competence fails.  Eventually, the strongest r-specialists, r-generalists, and K-generalists dominate the environment by pursing a low-cost or a differentiation strategy and serving many markets.  Large K-generalists establish niches for new firms, so K-specialists seize new opportunities.  Generalists and specialists compete for different resources, thus they coexist in an environment.
  14. 14. The Institutional Theory of Organizational Growth  Organizational growth stage of the life cycle occurs as firms develop the ability to acquire resources.  Growth increases the division of labor and specialization, leading to competitive advantage. Surplus resources add to growth.  Organizations do not seek growth as a goal; it results from developing skills to meet stakeholders’ needs.  Institutional theory studies how organizations grow and survive in a competitive environment by satisfying stakeholders.  Increasing legitimacy to stakeholders is as important as increasing technical efficiency.  New organizations implement the rules and codes of conduct in the institutional environment, the values and norms that govern the behavior of a population of organizations.  New organizations enhance legitimacy by duplicating the goals, structure, and culture of other successful organizations.
  15. 15.  Organizational Isomorphism:  As organizations grow and imitate others to survive, organizational isomorphism—the similarity among organizations in a population—increases.  Several reasons explain why organizations become similar:  Coercive isomorphism  Mimetic isomorphism  Normative isomorphism
  16. 16.  Coercive isomorphism:  Organizations comply with norms due to pressures from other organizations and from society. A dependent organization, a supplier, imitates a more powerful organization, a large buyer, as its dependence increases. Xerox coerced Trident Tool into adopting TQM.  Mimetic isomorphism:  It occurs when firms copy one another to increase legitimacy. New organizations copy successful organizations if environmental uncertainty exists. They may duplicate structure, strategy, culture, and technology to survive. Some companies imitate at first, and then imitation diminishes. Late entrants need a unique competence because copying everything makes resource attraction difficult.
  17. 17.  Normative isomorphism:  It occurs when organizations become similar by indirectly adopting the norms and values of others. This occurs as managers and employees change companies and bring norms and values. Industry, trade, and professional associations are another indirect way to acquire norms and values.  Problems of isomorphism:  Organizations may learn outdated behaviors, and pressures to imitate decrease innovation
  18. 18. Greiner’s Model of Organizational Growth  Larry Greiner developed a life cycle model in the 1970s.  Greiner’s model proposes that an organization passes through five serial stages and that each stage ends in a crisis; an organization must resolve the crisis to proceed to the next stage.  The stages are  creativity,  direction,  delegation,  coordination, and  collaboration.
  19. 19.  Stage 1: Growth through Creativity:  The first stage in the growth cycle is the creativity stage, which includes the birth of the organization.  Entrepreneurs develop the skills to innovate and introduce new products for new market niches. Learning occurs by trial and error.  Problems of a new organization:  The founding entrepreneurs have to manage the organization, a skill different from entrepreneurship. Management entails employing resources to accomplish goals effectively. Entrepreneurs neglect efficiency, as they concentrate on launching the company and satisfying customers. Entrepreneurs may lack management skills.  Crisis of leadership may occur as an entrepreneur becomes a manager.
  20. 20.  Stage 2: Growth through Direction:  When a top-management team is hired, an organization moves to the second stage, growth through direction.  The team directs the company, and lower-level managers perform functional duties. In this stage a company selects an organizational strategy, designs its structure, and develops its culture.  A company adopts a functional or a divisional structure. A formal structure centralizes decision- making, and formal rules and procedures control activities.
  21. 21.  Crisis of autonomy: Direction increases the growth curve, but rapid growth can lead to a crisis of autonomy. A centralized structure restricts risk-taking, which decreases employee motivation to be entrepreneurial. A creative R&D employee who needs top-management approval to start a project hesitates to take the initiative. Bureaucracy stifles innovation.  If the crisis of autonomy is not resolved, talented people leave the organization and start their own businesses. The entrepreneur’s exit reduces the ability to innovate and competitors increase
  22. 22.  Stage 3: Growth through Delegation:  Decentralizing authority to lower-level functional managers and tying performance to rewards resolves the crisis of autonomy.  A product team structure or multidivisional structure reduces the time to bring a product to market, motivates managers to respond quickly to customers, and improves strategic decision-making.  Each department or division expands to meet goals, and top management only intervenes when necessary.  Although growth may be rapid, top managers feel a loss of control.  Crisis of control occurs as top mangers compete with divisional or functional managers for resources.  Top managers may regain control by centralizing decision making, but this response returns the company to the crisis of autonomy.
  23. 23.  Stage 4: Growth through Coordination:  Crisis of control can be resolved by following ways.  A proper balance must exist between centralization and decentralization.  Top management assumes responsibility for coordinating divisions and motivating managers to consider the whole organization.  Coordination is important for a related diversification or a global expansion strategy, which requires a “matrix in the mind” to foster cooperation.  To increase the motivation of managers, a company creates an internal labor market, which promotes divisional managers.  Crisis of red tape emerges if an organization fails to handle coordination properly. Although the number of rules and procedures increases, effectiveness does not.  Bureaucracy can stifle creativity if employees over rely on rules.
  24. 24.  Stage 5: Growth through Collaboration:  An organization can resolve the crisis of red tape and move up the growth curve by pursuing growth through collaboration. This stage stresses teams to promote immediate actions. Social control and self-discipline supersede formal control.  Collaboration requires a more organic structure; product team structures and matrix structures provide a quick response to customers and bring products to market quickly. This strategy develops the linkages that promote a “matrix in the mind.”
  25. 25. Organizational Decline and Death  Companies do not move to more organic structures until they face the problems of increased costs and reduced quality.  Many large companies downsize before adopting organic structures.  Greiner’s model suggests that organizations grow through collaboration until a new, unknown crisis arises.  For some organizations, the next stage in the life cycle is decline rather than growth.  Organizational decline occurs when a firm fails to manage crises in the growth stage or fails to adapt to pressures.  Regardless of the time or cause, the decline stage decreases the ability to attract resources.  Banks hesitate to lend money to a troubled company and talented employees choose successful, secure organizations.  An organization’s decline may result from too much growth.
  26. 26.  Organizational Inertia:  Greiner’s model assumes that organizations have the ability to change. Population ecology theorists believe that organizational inertia, resistance or lack of inclination to change, may occur.  Factors that increase organizational inertia include:  Risk aversion: As an organization grows, managers may be unwilling to change. To protect their positions, they take on safe, inexpensive projects. They use bureaucratic rules, which stifle innovation, to monitor new ventures.  The desire to maximize rewards: Research suggests that managers’ desires for rewards, such as job security and power, are more associated with organizational size than with profits. Managers pursue growth at the expense of other stakeholders. Recently powerful stakeholders, such as large institutional shareholders, have forced organizations to streamline operations.  Overly bureaucratic culture: If property rights, such as salaries, are too strong, managers may protect personal interests, not the organization’s. Parkinson’s Law states that managers multiply subordinates, not rivals. Managers limit a subordinate’s freedom by establishing a tall hierarchy and a bureaucratic culture that promote the status quo. Managers may not intentionally hurt the organization because risk aversion and bureaucracy rise unexpectedly
  27. 27.  Changes in the Environment:  Uncertainty stems from complexity, dynamism, and richness.  Some organizations are likely to enter the decline stage in an uncertain environment.  Increased competition makes the environment poorer and threatens those without an effective growth strategy. Or, a niche deteriorates, and managers fail to change strategies to secure resources.  Sometimes a change in the general environment leads to the decline stage.
  28. 28. Weitzel and Jonsson’s Model of Organizational Decline:  William Weitzel and Ellen Jonsson identified five stages of decline:  blinded,  inaction,  faulty action,  crisis, and  dissolution.  Managers can reverse the decline in all stages except the dissolution stage.
  29. 29.  Stage 1: Blinded.  Managers are unaware of problems that threaten long-term survival in the first stage of decline, the blinded stage.  Managers are oblivious to large problems because the monitoring and information systems to evaluate effectiveness are not in place.  Signs of potential problems include too many employees, slow decision-making, increased conflict among subunits, and reduced profits.  An effective top-management team with good information can thwart decline and return to growth.  Managers must have information to take timely corrective action.  An organization may use its resources more effectively and not pursue continued growth.
  30. 30.  Stage 2: Inaction.  An organization that fails to recognize problems will move to the inaction stage.  Regardless of signs of deterioration, such as decreased sales and profits, managers take little action.  They believe the situation will change, or they pursue personal goals.  Inertia postpones response, and continued inaction widens the gap between acceptable and actual performance.  Quick action by managers, such as downsizing, can reverse the decline.
  31. 31.  Stage 3: Faulty Action.  Failure to take action results in the faulty action stage.  Decline continues because managers made incorrect decisions due to:  conflict in the top-management team,  changing too little too late,  fear of radical change,  or strong commitment to current strategy and  structures.
  32. 32.  Stage 4: Crisis.  If change is not implemented, an organization moves to the crisis stage.  Survival is possible only through radical changes in strategy and structure.  Implementing radical change occurs because stakeholders withdraw support.  The best managers have left, and suppliers hesitate to send inputs out of fear of nonpayment.  Only a new top-management team can turn around a company in the crisis stage.  New managers have new ideas that can overcome organizational inertia.
  33. 33.  Stage 5: Dissolution.  Once an organization enters the dissolution stage, decline is irreversible.  It has lost stakeholder support, and access to resources shrinks as its reputation and markets vanish.  New leaders won’t have the resources to turn the company around.  The only choice is to divest resources or liquidate assets and enter bankruptcy.  Dissolution Results in Organizational Death  As organizational death occurs, people understand that further actions are useless.  The organization cuts ties to stakeholders and transfers resources to other organizations.  Within the organization, formal closing services occur to help members focus on new roles outside the organization.