|Organizational lifecycle and decline|
|Written by Ashim Gupta|
|Wednesday, 17 March 2010|
Organizational Life-cycle & Decline
An organization undergoes changes in its conceptual and structural dimensions over a period of time, analogous to biological organisms, it is born, and it attains growth, gets matured and eventually dies. Most research on life-cycle suggest three major growth stages and a decline stage, each has its own conceptual variations and they result in observable change in structure and vision.
It is the conceptual stage where the new product is defined, its market is identified and development plan is executed.
The organization emerges from entrepreneurial stage if it succeeds in its initial goal of product creation and had secured finance and perhaps few customers. It then enters the commercialization stage where it has to build the product in larger quantities, reach wider customers and become a profitable venture.
The expansion phase results in an expanded operation related to production like purchasing, inventory control, etc and also diversely deployed sales staff. The organization was geared towards maximizing its production and sales capacity. In consolidation stage, the focus shifts towards cost control, productivity and profit.
An organization enters the decline phase when it experiences continuous reduction in resources and revenue over a substantial period of time. Ironically, the decline can be recognized with certainty only when it is too late to recover from it, early signs are often mistaken to be temporary. The decline can occur after any growth stage, not necessarily after consolidation stage; also growth does not always lead to decline, there is also possibility of long period of stagnation.
Stagnation can be defined as a state with no growth, fewer but dedicated customers, few competitors, a niche market or availability of abundant resources. Stagnation does not usually result in loss of revenues or downsizing.
Reasons for decline
There are several causes of decline, some are quantitative and are easier to detect while other are qualitative and are hard to comprehend. The decline can be due to adverse changes in the external environment or inefficiencies pertaining to internal operations of the organization.
Quantitative reasons of decline
The quantitative analysis can be found in the organization’s financial statements, its internal operation reports and by using other mathematically measurable parameters.
A Model of decline stages
Decline of an organization occurs in a series of observable and distinct stages, each exhibiting a reduced capability to counteract. The most acknowledged model of decline proposes that the organization goes through five stages of decline, before its final termination.
In this stage, the organization fails to recognize any of the internal or external changes that may threaten its survival. Usually, causes for the decline are present but are not evident; the leadership tends be insensitive and simply fails to make a connection between the observed changes and a possible decline. Most organizations lack a unit that performs the task of scanning both internal & external boundaries, partly due to additional cost and uncertain advantage. The mere concept of a stable environment is a myth and exists only as a theoretical concept; environment is stable only for short duration. Similarly the need for internal surveillance cannot be ignored; it includes regular performance reviews, employee satisfaction surveys, training and skill development, and most importantly an open communication mechanism to aid in vertical flow of information. The initial signs of decline are usually very much visible and known to the bottom of the organizational pyramid, but the information fails to propagate upwards to its leaders.
Unlike in blinded stage, the signs of deteriorating performance are clearly evident in this stage, but the leadership still fails to take any action. Leaders often view them as temporary changes and instead of interpreting them as a threat, they choose to take `wait and see’ approach, perhaps because this approach has worked in the past. The past successful approaches fail when the current situations are very different, however the leaders always have tendency to follow the planned course and suppress any dissident opinions. Finally, the aging leadership might simply lack the knowledge and insight to comprehend the influence of the changing conditions.
Faulty Action Stage
In this stage, the organization is clearly on its downfall and pressure to take corrective action is very high. The vertical and horizontal information from within the organization and the external environment increases manifolds along with its complexity. The overload of conflicting information & suggestive actions, combined with time pressure, compels the leadership to centralized decision making and they tend to create a biased task force. However, due to high pressure, the decision makers tends to make quick, risky and often fault decisions, that further accelerates the decline. This further reduces the confidence in leadership and many talented employees might end up leaving the organization in anticipation of its fall. Some of the prescribed cure include introduction of new leadership, diversification of core business either though self development or acquisitions and disinvestment in failing product lines.
The organization reaches a crisis stage when all prior actions have failed and it becomes obvious that without any major change, its survival is questionable. All the stakeholders, including customers, investors, suppliers and employees begin to distance themselves from the organization and have lost faith in it. At this stage, the organization requires a massive structural change, a new strategy to deal with the external environment and a new ideology to revitalize the ailing organization.
This is the last stage of its demise and is irreversible; it is marked by depletion of its finance, diminished market for its products and exodus of its talented employees. The new leadership and the strategy had failed to revive the business and now their responsibility lies in proper dissolution of the organization and its resources.