Pradeep Kumar R

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.
 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
Stage of Life Cycle
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
 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.
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
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.
 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.
 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.
 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
 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.
 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.
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.
 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
 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.
 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
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.
 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.
 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.
 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
 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.
 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.
 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.”
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.
 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
 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.
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.
 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.
 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.
 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.
 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.
 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.