Organizational Transformations: Birth, Growth, Decline & Death PDF

§11 Organiza onal transforma ons: birth, growth, decline and death 11.1 The organiza onal life cycle The organiza onal life cycle refers to a sequence of stages of growth and development through which organizaons may pass. These stages are: birth, growth, decline and death. Organizaons pass throug...

§11 Organiza onal transforma ons: birth, growth, decline and death 11.1 The organiza onal life cycle The organiza onal life cycle refers to a sequence of stages of growth and development through which organizaons may pass. These stages are: birth, growth, decline and death. Organizaons pass through these stages at di*erent rates, and some do not even experience every stage. 11.2 Organiza onal birth Entrepreneurs are people who recognize and take advantage of opportunies to use their skills and competences to create value. Organiza onal birth is a dangerous stage of the life cycle and associated with the greatest chance of failure. The failure rate is high because new organizaons experience liability of newness: the dangers associated with being the rst to operate in a new environment. A new organizaon is fragile because it lacks a formal structure to give its value-creaon processes and acon reliability and stability. The structure is :exible and responsive, allowing the organizaon 52 to adapt and connually improve its rounes to meet the needs of its environment. Another reason why organizaonal birth is a dangerous stage is that condions in the environment may be hosle to a new organizaon. Developing a plan for a new business Planning for a new business begins when an entrepreneur noces an opportunity to develop a new or improved good or service for the whole market or for a specic market niche. The next step is to test the feasibility of the new product idea (SWOT). A2er that, the actual business plan will be developed. 11.3 A popula on ecology model of organiza onal birth Popula on ecology theory seeks to explain the factors that a*ect the rate at which new organizaons are born (and die) in a populaon of exisng organizaons. A popula on of organiza ons comprises the organizaons that are compeng for the same set of resources in the environment. Di*erent organizaon within a populaon may choose to focus on di*erent environmental niches, parcular sets of resources of skills. Number of births According to populaon ecology theory, the availability of resources determines the number of organizaons in a populaon. Popula on density is the number of organizaons that can compete for the same resources in a parcular environment. Two factors account for the rapid birth-rate: (1) as new organizaons are founded, there is an increase in the knowledge and skills available to generate similar new organizaon. And (2) when a new kind of organizaon is founded and survives, it provides a role model. Once an environment is populated with a number of successful organizaons, the organizaonal birth-rate tapers o*, because of two factors. (1) Births taper o* as the availability of resources in the environment for late entrants diminishes. First-mover advantages are the benets an organizaon derives from being an early entrant into a new environment. Besides (2) birth-rate decreases because of the di;culty of compeng with exisng organizaons for resources. Survival strategies Populaon ecologists have idened two sets of strategies that organizaons can use to gain access to resources and enhance their chances of survival in the environment: (1) r-strategy versus K-strategy and (2) specialist strategy versus generalist strategy. - R-strategy is a strategy of entering a new environment early. K-strategy is a strategy of entering an environment late, a2er other organizaons have tested the water. The di*erence between a specialist strategy and a generalist strategy is dened by the number of environmental niches for which an organizaon competes. Specialists are organizaons that concentrate their skills to pursue a narrow range of resources in a single 53 niche (e.g. smartphones). Generalists are organizaons that spread their skills thinly to compete for a broad range of resources in many niches (e.g. smartphones, landline phones, tablets, etc.) Specialists focus more on developing their core competences, and might be able to o*er customers much be9er service than o*ered by generalists. Generalists can o2en outcompete specialists when there is considerable uncertainty in the environment and when resources are changing so that niches emerge and disappear connually. The process of natural selec on The two sets of strategies give rise to four strategies that organizaons can pursue: r-specialist, r-generalist, Kspecialist, and K-generalist. An r-specialist operates in one niche with an early entry. An r-generalist operates in several niches with an early entry. A K-specialist operates in one niche with a late entry into the environment, and a K-generalist operates in several niches with a late entry. The driving force behind the populaon ecology model of organizaonal birth is natural selec on: the (compeve) process that ensures the survival of the organizaons that have the skills and abilies that best t with the environment. 11.4 The ins tu onal theory of organiza onal growth Organiza onal growth is the life cycle stage in which organizaons develop value-creaon skills and competences that allow them to acquire addional resources. Growth allows an organizaon to increase its division of labour and specializaon and thus develop a compeve advantage. Ins tu onal theory studies how organizaons can increase their ability to grow and survive in a compeve environment by becoming ‘legimate’, that is, accepted, reliable, and accountable, in the eyes of their stakeholders. The ins tu onal environment is the set of values and norms that govern the behaviour of a populaon of organizaons. The best way for a new organizaon to gain and strengthen its legimacy is to imitate the goals, structure, and culture of successful organizaons in its populaon. Organiza onal isomorphism Organiza onal isomorphism is the process by which organizaons in a populaon become more alike or similar. Three processes that explain why organizaons become more alike have been idened: coercive, mimec, and normave isomorphism. - - Coercive isomorphism is when an organizaon adopts certain kinds of values and norms because it is pressured to by other organizaon or by society in general (e.g. by law). Mimec isomorphism is when organizaons intenonally imitate and copy one another to increase their legimacy. An organizaon is especially likely to imitate the structure and processes of successful organizaons when the environment is highly uncertain. Normave isomorphism is when organizaons come to resemble one another over me because they indirectly adopt the norms and values of other organizaons in the environment. Because of this indirect in:uence, organizaon within an industry come to develop a similar view of the world. 54 Disadvantages of isomorphism - The ways organizaons have learned to operate may become outdated, and the result is low e*ecveness. The pressure to imitate competors and beat them at their own game may reduce the incenve to experiment, so the level of innovaon declines. 11.5 Greiner’s model of organiza onal growth Greiner proposes that an organizaon passes through ve sequenal growth stages during the course of its evoluon, and that at each stage a specic organizaonal design problem causes a crisis that must be solved if a company is not to fall into a chasm and so becomes unable to advance from one stage to the next. Stage 1: Growth through crea vity In this stage, entrepreneurs develop skills and abilies to create and introduce new products for new market niches. Innovaon and entrepreneurship go hand in hand as an organizaon’s founders work long hours to develop and sell their new products. As the organizaon grows, the founding entrepreneurs confront the task of having to manage the organizaon, and they discover that management is a very di*erent process from entrepreneurship. This leads to a crisis of leadership. Stage 2: Growth through direc on The crisis of leadership ends with the recruitment of a strong top-management team to lead the organizaon through the next stage of organizaonal growth. In this stage, a new CEO chooses an organizaonal strategy and designs a structure and culture that allow the organizaon to meet its e*ecveness goals as it grows. With professional managers running the company, many organizaons experience a crisis of autonomy, which arises because the organizaon’s creave people become frustrated by their lack of control. Stage 3: Growth through delega on To solve the crisis of autonomy, organizaons must delegate authority to lower-level managers in all funcons and divisions and link their increased control over organizaonal acvies to a reward structure that recognizes their contribuons. When top managers compete with funconal managers or corporate managers compete with divisional managers for control of organizaonal resources, the result is a crisis of control. Stage 4: Growth through coordina on To resolve the crisis of control, an organizaon must nd the right balance between centralized control from the top of the organizaon and decentralized control at the funconal or divisional level. If not managed correctly, all this coordinaon and the complex structures to handle it will bring about yet another crisis, the crisis of red tape. The organizaon becomes overly bureaucrac and relies too much on the formal organizaon and not enough on the informal organizaon to coordinate its acvies. 55 Stage 5: Growth through collabora on Growth through collaboraon emphasizes ‘greater spontaneity in management acons through teams and the skilful confrontaon of interpersonal di*erences. Social control and self-discipline take over from formal control’. 11.6 Organiza onal decline and death For many organizaons, the next stage in the life cycle is not connued growth but organizaonal decline. Organiza onal decline is the life cycle stage that an organizaon enters when it fails to ‘ancipate, recognize, avoid, neutralize, or adapt to external or internal pressures that threaten its long-term survival’. A declining company may be unable to a9ract nancial resources from banks, customers, or human resources because the best managers and employees prefer to work for the most successful organizaons. Somemes, decline occurs because organizaons grow too fast or too much. Eec veness and pro=tability In evaluang organizaonal e*ecveness, it is crucial to understand the di*erence between a company making a prot and being protable. Pro=t is the total or absolute monetary di*erence between a company’s sales revenues and operang costs. Pro=tability measures how well an organizaon is making use of its resources by invesng them in ways that create goods and services that it can sell at prices that generate the most prot. In any industry, companies are in compeon (1) to develop new and improve products to a9ract customers, and (2) to nd ways to make more producve use of their resources to reduce their operang costs. Two factors that o2en lead to connuing decline and loss in e*ecveness are organizaonal inera and environmental changes. Organiza onal iner a are the forces inside an organizaon that make it resistant to change. Three factors that cause inera (besides others already discussed in chapter 10) are: risk aversion, the desire to maximize rewards, and an overly bureaucrac culture. 1. Risk aversion means that companies are unwilling to bear the uncertainty associated with entrepreneurial acvies. 2. The desire to maximize rewards: research suggests that managers’ desire for presge, job security, power and the strong property rights that bring large rewards o2en leads them to focus on strategies that increase organizaonal size, even if this reduces future protability and organizaonal e*ecveness. 3. Overly bureaucra c culture: managers want to mulply subordinates, not rivals. To protect their posions, managers limit the autonomy of their subordinates. Changes in the environment Environmental changes that a*ect an organizaon’s ability to obtain scarce resources may lead to organizaonal decline. The major sources of uncertainty in the environment are complexity (the number of di*erent forces that an organizaon has to manage), dynamism (the degree to which the environment is changing), and richness (the amount of resources available in the environment). Weitzel and Jonsson’s model of organiza onal decline Weitzel and Jonsson have idened ve stages of organizaonal decline. At each stage except from the dissoluon stage, if managers do take prompt acon they can reverse the decline. 56 Stage 1: Blinded In the blinded stage, organizaons are unable to recognize the internal or external forces and problems that threaten their long-term survival. The most common reason for blindness is that organizaon do not have in place the monitoring and informaon systems they need to measure organizaonal e*ecveness and to idenfy sources of organizaonal inera. At this stage, remedial acon to gain access to good informaon and e*ecve top managers who can react quickly and put in place the right strategies and structures can stop the decline. Stage 2: Inac on In this stage, despite clear sign of deteriorang performance such as falling sales, top managers make li9le a9empt to correct problems. This failure may be because managers are misinterpreng available informaon. Prompt wide-ranging acon by managers is vital to reverse the decline (e.g. downsizing or scaling back to scope of operaons). Stage 3: Faulty ac on If managers fail to halt decline at the inacon stage, the organizaon moves into the faulty acon stage. Problems connue to mulply despite correcve acon. O2en managers fear that radical change may threaten the way the organizaon operates and put the organizaon at risk. Stage 4: Crisis By the me the crisis stage has arrived, only radical top-down changes to an organizaon’s strategy and structure can stop a company’s rapid decline and increase its chances of survival. An organizaon in the crisis stage has reached a crical point in its history, and the only chance of recovery is a major reorganizaon that will very likely change the very nature of its culture forever. Very o2en by the crisis stage only a new top-management team can turn a company around. To overcome inera, an organizaon needs new ideas so it can adapt and change in response to new condions in the environment. Stage 5: Dissolu on When an organizaon reaches the dissoluon stage, it cannot recover, and decline is irreversible. At this point, the organizaon has lost the support of its stakeholders, and its access to resources shrivels as its reputaon and markets disappear. As organizaonal death occurs, people’s a9achment to an organizaon changes. The need to manage organizaonal decline is as great as the need to manage organizaonal growth. The soluon to the problem of many organizaons may be to shrink and downsize and focus their resources on a narrower range of products and markets. 57