Organization Size, Life
Cycle and Decline
Nathan Colaco
Nando D’Oria
Laura Wimperis
Chapter Overview
Organizational Size, Life Cycle, and Decline
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Is Bigger Better?
Organizational Life Cycle
Organizational Bureaucracy and Control
Bureaucracy in a Changing World
Organizational Control Strategies
Organizational Decline and Downsizing
E.G.S.S.
Why Grow?
1. Better serve clients
2. Acquire the size and resources needed to
compete
3. Invest in new technology
4. Control and/or establish distribution channels
5. Fear of stagnation
6. Better access to markets
7. Attract best and brightest employees
Leads to increased market share, customer base,
and MORE MONEY!!!
Is Bigger Really Better?
Large
Small
Economies of Scale
Responsive, flexible
Global reach
Reginal reach
Vertical hierarchy, mechanistic
Flat structure, organic
Complex
Simple
Stable market
Niche finding
Employee longevity, raises, and
promotions
Entrepreneurs
What is the Ideal Size?
The Big/Small Hybrid
• Takes the best features of each size
• From Large Organization
1. Large resources
2. Reach
3. Attracting best qualified employees
• From Small Organization
1. Flexibility
2. Simplicity
3. Organic structure
Organization Life Cycle
1.
2.
3.
4.
Entrepreneurial
Collectivity
Formalization
Elaboration
• As organizations grow in size, they enter new stages of
development
• Stages are sequential and success is essential to pass to the
next stage
Why Is The Life Cycle Important?
• 84% of organizations that make it past Year 1 fail within 5
years because they do not make it past the entrepreneurial
stage
• Knowing which stage the organization you work for is in is
important for the following reasons:
• Finding misalignments between their goals, strategy and
structure
• Knowing which crises your organization is likely to face
• Knowing what your role in the company entails during different
stages
Organization Stages of Development
1. Entrepreneurial Stage Characteristics
Characteristic
Stage 1
Entrepreneurial
Structure
Informal, one-person show
Product or services
Single product or service
Reward and control
systems
Personal, paternalistic
Innovation
By owner-manager
Goal
Survival
Top management
style
Individualistic, entrepreneurial
Entrepreneurial Stage
• Start-up where the emphasis is on creating ONE product or
service
• Goal is to survive in the marketplace
• Founders devote all of their attention to the technical
activities of production and marketing
• Informally structured
• Experience growth through creativity
Entrepreneurial Stage Crisis
Crisis: Need for Leadership
• More employees needed
• Owners tend to focus on product or service and growth
instead of management issues
• Owners need to adjust structure to accommodate growth or
bring in other managers who can
Nike Example
• Founded by Phil Knight and his track coach Bill
Bowerman in January of 1964
• Originally called Blue Ribbon Sports (BRS)
• Operated out of the trunk of Knight’s car as a
distributor for a Japanese shoe maker
• 1st year they sold 1,300 pairs of Japanese runners
grossing $8,000
Entrepreneurial
Stage
Collectivity
Stage
Formalization
Stage
Elaboration
Stage
2. Collectivity Stage Characteristics
Characteristic
Stage 2
Collectivity
Structure
Mostly informal, some procedures
Product or services
Major product or service, with
variations
Reward and control
systems
Personal, contribution to success
Innovation
By employees and managers
Goal
Growth
Top management
style
Charismatic, direction-giving
Collectivity Stage
• Departments are established and a hierarchy
• Employees are dedicated to making the organization succeed
and identify with their mission
• Mostly informal communication but some formal systems
begin to develop
Collectivity Stage Crisis
Crisis: Need for delegation with control
• Lower-level employees begin to become restricted by strong
top-down leadership
• Lower-level managers become more confident and want more
discretion
• Autonomy crisis when top managers do not want to give up
responsibility
Nike Example
• Nike began to grow very quickly in terms of sales
• First retail store was opened in 1966 so the
employees wouldn’t have to sell out of their cars
anymore
• Hired a number of new employees and a hierarchy
was established
• Phil Knight was viewed as a strong charismatic
leader and provided direction for the company to
continue to grow
• Still only selling shoes from the Japanese shoe
manufacturer
Entrepreneurial
Stage
Collectivity
Stage
Formalization
Stage
Elaboration
Stage
3. Formalization Stage Characteristics
Characteristic
Stage 3
Formalization
Structure
Formal procedures, division of labour,
new specialties added
Product or services
Line of products or services
Reward and control
systems
Impersonal, formalized systems
Innovation
By separate innovation group
Goal
Internal stability, market expansion
Top management
style
Delegation with control
Formalization Stage
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Organization becomes more bureaucratic
Use of rules, procedures and control systems
More formal communication
Top management worries about strategy and planning and
middle management is left with operations
• Incentive systems are based on profits
Formalization Stage Crisis
Crisis: Need to deal with too much red tape
• Middle management likely to resent intrusion of staff
• Restricted innovation
• Organization too large and complex to be managed through
formal programs
Nike Example
• Continued growth lead to Nike expanding to the East Coast of
the U.S
• Stopped selling Japanese shoes and launched their own line of
footwear
• Hired an advertising agency and other support staff
• More experienced team of managers were brought in to bring
discipline to Nike
Entrepreneurial
Stage
Collectivity
Stage
Formalization
Stage
Elaboration
Stage
4. Elaboration Stage Characteristics
Characteristic
Stage 4
Elaboration
Structure
Teamwork within bureaucracy, smallthinking company
Product or services
Multiple product or service lines
Reward and control
systems
Extensive, tailored to product and
department
Innovation
By institutionalized R&D department
Goal
Reputation, complete organization
Top management
style
Team approach, attack bureaucracy
Elaboration Stage
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More flexible organization design
Managers learn how to work within the bureaucracy
Formal systems are simplified
More collaboration between departments and divisions
Organization split into multiple divisions to get “smallcompany” benefits
Elaboration Stage Crisis
Crisis: Need for revitalization
• Once reaching maturity, it may have temporary decline
• Out of alignment with environment
• Slow moving or over-bureaucratized
• Top managers replaced
Nike Example
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Nike began international expansion
Multiple new product lines were created
Very extensive R&D department creating new product lines
Knight retired as CEO and brought in Bill Perez who he
believed was the right leader based on Nike’s position in the
life cycle
Entrepreneurial
Stage
Collectivity
Stage
Formalization
Stage
Elaboration
Stage
Goals, Strategy and Structure
Stage
Goals
Structure
Entrepreneurial
Survival
Informal, one-person
show
Collectivity
Growth
Mostly informal, some
procedures
Formalization
Internal stability, market
expansion
Formal procedures,
division of labour, new
specialties added
Elaboration
Reputation, complete
organization
Teamwork within
bureaucracy, smallcompany thinking
Strategy example:
• Collectivity Stage
• Miles and Snow’s Prospector strategy
• Includes innovation, taking risks, seeking out new opportunities and growth
• Formalization Stage
• Porter’s Low-Cost Leadership
• Increase market share, focus on stability
Test Your Understanding
What stage of the life cycle is each of the following organizations
in?
• Snapchat
• Apple when it was created by Steve Jobs and Stephen Wozniak
in Wozniak’s parents’ garage
• Neighbourhood coffee shop
What Is Bureaucracy?
Way of administratively organizing large numbers of people who
need to work together.
1.
2.
3.
4.
5.
6.
Rules & Procedures
Specialization & Division of Labour
Hierarchy of Authority
Technically Qualified Personnel
Separate Position from Position Holder
Written Communications & Records
Size & Structural Control
1. Formalization
Rules, procedures, and written documentation, such as policy
manuals and job descriptions, outlining rights and duties of
employees.
2. Centralization
Level of hierarchy with authority to make decisions.
Either centralized or decentralized.
3. Personnel Ratios
Ratio of administrative, clerical, and professional support staff.
Bureaucracy In a Changing World
“Every time you add a layer of bureaucracy, you
delay the movement of information up the chain
of command… And you dilute the information
because at each step details are taken out.”
Organizing Temporary Systems
for Flexibility & Innovation
Incident Command Systems (ICS):
Formal authority relationships are fixed, decision making
authority is dispersed to individuals who best understand the
particular situation.
Great for organizations that require extremely high reliability,
flexibility, and innovation.
Example: Salvation Army
Other Approaches to Reduce Bureaucracy
1. Cutting layers of hierarchy
Giving lower level workers greater freedom to make decisions.
2. Decentralization & Leanness
Giving frontline workers more authority and responsibility to
define and direct their own job.
3. The increasing professionalism of employees
Defined as the length of formal training and experience of
employees.
4. Professional partnerships
Organization made up completely of professionals.
Organizational Control Strategies
Bureaucracy – Rules, Standards, Hierarchy, Legitimate
Authority
Market – Prices, Competition, Exchange Relationship
Clan – Tradition, Shared Values and Beliefs, Trust
Organizational Control Strategies
Bureaucratic Control
• Traditional Authority
• Charismatic Authority
• Rational-Legal Authority
Organizational Control Strategies
Market Control
• A situation that occurs when price competition is used to
evaluate the output and productivity of an organization
• Requires that outputs be sufficiently explicit for a price to
be assigned and that competition exist
• Originated in Economics
Organizational Control Strategies
Clan Control
• The use of social characteristics, such as corporate
culture, shared values, commitments, traditions, and
beliefs, to control behaviour
• Excels when ambiguity and uncertainty are high
• Individuals hired must be committed to the organizations
purpose and mission
• Self- Control
Organizational Decline
• A condition in which a substantial, absolute decrease in
an organization’s resources base occurs over a period
• Organizational Atrophy
• Vulnerability
• Environmental Decline or Competition
Organizational Decline Factors
Organizational Atrophy
• Occurs when organizations grow older and become
inefficient and overly bureaucratized
• Organization’s ability to adapt to its environment
deteriorates
• WARNING Signals: Excess administration, heavy
administrative processes, outdated organizational
structure
Organizational Decline Factors
Vulnerability
• Reflects an organization’s strategic inability to prosper in
its environment
• They are vulnerable to shifts in consumer tastes or in the
economic health of the larger community
• WARNING Signals: Unable to to implement a strategy
that fits the environment
Organizational Decline Factors
Environmental Decline or Competition
• Decline refers to reduced energy and resources available
to support an organization
• New competition increases the problem
• WARNING Signals: Low barriers to entry, environment
has a low capacity to support and more organizations
Organizational Decline Factors
A Look Back… Legitimacy
• An organizational must “appear” legitimate to the public
• Scandals, controversy, non-ethical practices, shine a
negative light on organizations
• Loss of consumer loyalty
The Decline
The model suggests that decline if not managed properly,
can move through five stages, resulting in organizational
dissolution.
• Stage 1 - Blinded Stage
• Stage 2 - Inaction Stage
• Stage 3 - Faulty Action Stage
• Stage 4 - Crisis
• Stage 5 - Dissolution
Five Stages of Organizational
Decline
The Decline
Stage 1 - Blinded Stage
• The internal and external change that threatens longterm survival
• The organization may have excess personnel,
cumbersome procedures, or lack of harmony with
customers
• Leaders miss the signals
The Decline – Stage 1 - Blinded
The Decline
Stage 2 – Inaction
• Denial occurs despite signs of deteriorating performance
• Leaders must acknowledge the decline and take prompt
action
• Leaders convince employees that all is well
The Decline – Stage 2 - Inaction
The Decline
Stage 3 – Faulty Action Stage
• Organization is facing serious problems, and indicators of
poor performance can’t be ignored
• Failure to adjust to the declining spiral at this point can
lead to organizational failure
• Leaders are forced to consider major changes
The Decline – Stage 3 – F.A.S.
The Decline
Stage 4 – Crisis Stage
• Organization still hasn’t been able to deal with decline
effectively and is facing a panic
• Organization may experience chaos, efforts go back to
basics, sharp changes, and anger
• Dramatic actions such as replacing top admins occur
The Decline – Stage 4 - Crisis
The Decline
Stage 5 – Dissolution
• Stage of decline is irreversible
• The organization is suffering loss of markets and
reputation, the loss of its best personnel, and capital
depletion
The Decline – Stage 5 - Dissolution
The Implementation of Downsizing
Downsizing: Reducing the number of employees on the
operating payroll
• Communicate More
• Provide Assistance
• Help the Survivors
The Implementation of Downsizing
Communicate More
• Saying less is not more
• Organizations need to provide as much information as
possible to the employees
• Impossible to over communicate in turbulent times
The Implementation of Downsizing
Provide Assistance
• The organization has a “responsibility” to help displaced
workers
• The organization “can” provide training, severance
packages, extended benefits, counseling services etc.
• Allow employees to leave with dignity
The Implementation of Downsizing
Help the Survivors
• Leaders need to remember the emotional needs of the
survivors
• Survivors might experience guilt, anger, confusion,
sadness
• Troubles dealing with additional job duties and
responsibilities
Downsizing
Question
• Why should downsizing be the last option?
• How can downsizing harm an organization?
Summary
Organizational Size, Life Cycle, and Decline
•
•
•
•
•
•
Is Bigger Better?
Organizational Life Cycle
Organizational Bureaucracy and Control
Bureaucracy in a Changing World
Organizational Control Strategies
Organizational Decline and Downsizing