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Organizational

Transformations
Module 5

Sreenath B.
Roll No.45
THE ORGANIZATIONAL LIFE CYCLE
• A sequence of stages of growth and development
through which organizations may pass.
• Some companies are successful whereas others
fail; various outcomes occur because different
strategies, structures, and cultures are used to
create value.
• Organizations respond differently to problems.
• Researchers propose that organizations go
through predictable stages, known as the
organizational life cycle
• The four main stages of the life cycle are birth, growth,
decline, and death. No established timetable is set for
these stages.
• Organizations pass through the cycle at their own pace,
and some do not experience every stage.
• Some companies move directly from birth to death.
Others spend a long time in the growth stage, which has
sub stages.
• Decline also has sub stages. Some in the decline stage
can turn around and move to the growth stage.
• If an organization fails to manage problems in each
stage, it will fail.
• Still, these stages are models, and every organization
has unique experiences.
Organizational Birth

• Organizations are born when individuals, called


entrepreneurs, recognize and take advantage of
opportunities to use their skills and competences to
create value.
Eg : Michael Dell – mail order system for marketing
low priced computers
 
• Entrepreneurs recognize and exploit opportunities to
use their skills 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 is high because of liability of newness-the
dangers associated with being the first in a new environment
.
• Entrepreneurship is risky, and a new organization has no
formal structure to provide stability.
• Structure is in the mind of the founder; though an informal
structure is flexible, it has no memory and no set procedures.
• Environmental conditions may be hostile and resources hard
to secure.
Developing a Plan for a New
Business

• A business plan will help new organizations make


it through the dangerous birth stage.
• A business plan outlines how new entrepreneurs
plan to compete in the environment 
• Table below lists the steps involved in developing
a plan.
The planning begins when an entrepreneur notices an
opportunity to develop a new or improved good or service for
the market. Next, the feasibility of the idea is tested through a
SWOT analysis: 
• Strengths of the organization
• Weaknesses of the organization
• Opportunities in the environment
• Threats in the environment
Following this, a business plan is developed with the following
basic elements:
1. A statement of the organization’s mission, goals, and financial
objectives.
2. A statement of the organization’s strategic objectives.
3. A list of all the functional and organizational resources needed.
4. A timeline for completion.
• One of the reasons that the birth
stage is so risky is that many
entrepreneurs do not have the
luxury of having the management
team in place to do such an
analysis.
A population Ecology Model of org
Birth
Population Ecology theory
• A theory that seek to explain the factor that
affect the rate at which new org are born in a
population of existing organizations.
• A population of orgnzns comprises the orgnzns
that are competing for the same set of resources
in the environment.
• Eg: All the fast food restaurant s in college station
, Texas .constitute a population of restaurant
that compete to obtain environmental resource
in the form of dollar that students are willing to
spent on food.
Cont..
Environmental niches
Particular set of recourses
• Dell computer chose to focus on the mail order niche of
the personal computer environment , IBM and hp
originally focused on the business niche
• Apple focus on the published and higher education
niche
Number of birth
According to the Population Ecology theory the
availability of resource determines the number of
organization in a population
Population density
The no of org that can compete for the same resource in
a particular environment
• According to population ecology theory the rate of birth in a new
environment increases rapidly at first and then tapers off as
recourses become less plentiful and competition increases.
• The two factors account for the rapid birth rate
• The first is that as new organzn are found there is an increase in
the knowledge and skill available to generate similar new
orgzns .
• Many new orgzns are founded by entrepreneurs who leave
existing companies to set up their own companies.
• Eg:Xerox , HP IBM
• The success of new orgnzns makes it relatively easy for
entrepreneur to found similar new org nzns because success
confers legitamacy,which will attract stakeholder.
Cont..
• Fast food restaurants for example were a relatively untested kind
of org until M c Donald create and succeed in the US food market
Burger king and Wendy
• Mc Donald become a US institution gave the population of fast
food industry a legitimacy and allow them to attract the
stakeholders.
• Once the organzn environment is populated with a no. of
successful organization the org birth rate tapers off.
• Two factor work to decrease the rate at which org are found .
1,Birth tapers off as the resources diminishes for new entrants
2,Difficulty of competing with existing organizations
First mover advantages
• The benefit an org derives from being an early entrant into a new
environment
• Companies that start first like Mc Donald or Microsoft have
competitive edge over the later entrant because of first mover
advantage
• Customer support a recognizes brand name and best location of
the enterprise
• Worker prefer to work in org that have establish reputation and
offer secure employment opportunities .
• Potential entrepreneurs are discouraged from entering the
industry or market because they under stand that the larger the
no of co already competing for recourses the more difficult &
expensive the recourses will be to obtain.
• To obtain new customer ,new companies may need to over spend
on advertising or innovation or they may need to reduce their
price too much.
SURVIVAL STRATEGIES
• Population ecologist have identified two set of strategies
that organizations can use to gain access to resources &
enhance their chances of survival in the envt.
• r – strategy Vs K – strategy
• Specified strategy Vs General strategy

• r – Strategy Vs K – strategy
 
• Org. that follow an r – strategy are founded early in a new
envt. – they are early entrants. Organisations that follow a
K – strategy are founded late – they are late entrants.
• Advantage of an r – strategy is that an org. obtains
first – mover advantages & has first pick of the
resources in the envt.
• As a result org. is usually able to grow rapidly &
develop skills and procedures that increase the
chance of surviving and prospecting.
• Org. that follows K – strategy are usually estd. in
other envt. and wait to enter new envt. until the
uncertainty in that envt is reduced and the correct
way to compete is apparent.
• These org. then take the skills they have estd in
other envt & use them to dvlp effective procedures
that allow them to compete with and often
dominate org. following r – strategy.
• The diff between r – strategy & K – strategy is
evident in the situation that emerged in the
personal comp industry. Apple comp founded the
personal copm market by developing the Apple I.
• Other small companies followed apple’s lead. Each
of them pursued an r – strategy & developed its own
personal computer. IBM realized the potential in the
personal computer market.
• It adopted K- strategy & moved to develop its own
PC on MS – DOS OS. As MS – DOS operating system
became industry standard, IBM drove many of its r –
strategies out of the market.
• K - strategies can often outperform r- strategies when
they are competing for the same environmental niche.
Specialist strategy Vs Generalist strategy
• The difference between a specialist and a generalist strategy is
defined by the breadth of the environmental niche – the set of
resources – for which an organisation competes.
• Specialist organizations that concentrate their skills to pursue a
narrow range of resources in a single niche.
• Generalist Organizations spread their skills thinly to compete for a
broad range of resources in many niches
• By focusing their activities in one niche, specialist develop core
competencies that allow them to outperform generalist in that
niche. They offer customers much better service than generalist
• E.g. Intel invests all its resources in producing state of art
microprocessors and does not bother with other kinds of computer
components.
• Generalist can often outcompete specialists
when there is considerable uncertainty in
envnmnt & when resources are changing so
that niches emerge & disappear continually.
• Generalist can survive in an uncertain envmt ,
they’ve spread their resources thinly.
• Both of them can coexist in many envmt.
• Generalist creates the condition that allow
specialist to operate successfully.
• Department stores create a demand,
boutiques set up & specialise in one kind of
clothing such as evening wear or sportswear.
THE PROCESS OF NATURAL
SELECTION
• The two sets of strategies-specialist versus generalist and r
versus k-give rise to four strategies that organization can
pursue; r-specialist, r-generalist ,k-specialist,k-generalist.
• Early in an environment, as a niche develops and new
resources become available, new organization are likely to
become r-specialist,organisation that move quickly to
focus on serving the need of particular customer group
• k-generalist strategy, often creates niches for new firms
to enter the market
• eg :old car companies are r-specialist ford pursue a k-
generalist strategy by producing a low-priced for mass
market.
..\
Natural selection
• The process that ensures the survival of
the organizations that have the skills
and abilities that best fit with the
environment
• New organizations survive if they can
develop skills that allow them to fit with
and to exploit their environment
Organizational Growth
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.
The Institutional Theory of
Organizational Growth
• 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.
The Institutional Theory of
Organizational Growth
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:
1.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.
The Institutional Theory of
Organizational Growth
2. Mimetic isomorphism 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.
3.Normative isomorphism occurs when organizations become
similar by indirectly adopting the norms and values of others.
The Institutional Theory of
Organizational Growth
• 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
• 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.
Greiner’s Model of Organizational
Growth
• Learning occurs by trial and error.
• The informal organization directs communication and
decision-making.
What are the 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. The company may lose market
share and see its stock price drop.
Greiner’s Model of Organizational
Growth
• An organization must resolve this crisis by replacing
entrepreneurs with managers to move to the next stage.
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.
Greiner’s Model of Organizational
Growth
• 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.

What happens 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.
Greiner’s Model of Organizational
Growth
Stage 3: Growth through Delegation
• Decentralizing authority to lower-level functional
managers and tying performance to
• rewards resolves the crisis of autonomy.
What structure fits this stage?
• 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.
Greiner’s Model of Organizational
Growth
• 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
• How can the crisis of control be resolved?
• A proper balance must exist between centralization
and decentralization.
• Top management assumes responsibility for
coordinating divisions & motivating managers to
consider the whole organization.
Greiner’s Model of Organizational
Growth
• 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.
Greiner’s Model of Organizational
Growth
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.
What structures are appropriate for this stage?
• 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 & Death
Organizational Decline & 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
• The life cycle stage that an orgzn enters when fails to
anticipate, recognize, avoid, neutralize, or adapt to external
or internal pressure that threaten its long term survival.
• 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.
• The relationship between size and effectiveness shows that
growth beyond a certain point shows a decline in
effectiveness.
• An organization may grow too much due to inertia and
environmental changes
• Effectiveness & Profitability
• To assess the effectiveness of an organization is to
compare how well company performs relative to the
other by measuring its profitability.
• Profitability: the measurement of how well a
company is making use of resources relative to its
competitors.
• 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.
Cont..

• 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.
Cont..

• Changes in Envt: Envtal changes that affect an orgzn’s


ability to obtain scarce resources may lead to orgznal
decline.
• 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 & 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.
• Managers are unaware of problems that threaten long-term
survival in the first stage of decline, the blinded stage.
Stage 1: Blinded
• The reason for this blindness is 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
Cont..
• 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.
Cont..

• 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.
Cont..
• 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.
Cont..
• 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
Managerial Implications: Organizational
Decline
• To prevent decline, managers should analyze the
environment, structure, and sources of inertia.
• The founder must always put organizational
survival and stakeholders first and allow for new
leadership.
Thank You

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