Chapter 8
Organizational Transformations: Birth,
Growth, Decline, and Death
The Organizational Life Cycle
• Organizational life cycle a sequence of stages of growth and
development through which organizations may pass
• The four principal stages of the organizational life cycle are:
birth, growth, decline, and death
• Organizations pass through these stages at different rates,
and some do not experience every stage
• Moreover, some companies go directly from birth to death
without enjoying any growth if they do not attract
customers or resources
Cont..
• Some organizations spend a long time in the growth stage,
and many researchers have identified various substages of
growth through which an organization must navigate
• There are also substages of decline. Some organizations in
decline take corrective action, change quickly, and turn
themselves around
• The way an organization can change in response to the
problems it confronts determines whether and when it will
go on to the next stage in the life cycle and survive and
prosper or fail and die
Organizational Birth
• Organizations are born when people called entrepreneurs
recognize and take advantage of opportunities to use their
skills and competences to utilize resources in new ways to
create value
• Organizational birth, the founding of an organization, is a
dangerous stage of the life cycle and 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 to operate in a new environment
Cont..
• This liability is great for several reasons
• Entrepreneurship is an inherently risky process. Because
entrepreneurs undertake new ventures, there is no way to
predict or guarantee success
• A new organization is fragile because it lacks a formal
structure to give its value-creation processes and actions
reliability and stability
• At first, all its activities are performed by trial and error;
organizational structure emerges gradually as decisions are
made about what roles, rules, and SOPs should be
implemented
Developing a Plan for a New Business
• One way in which entrepreneurs can address all these issues
is through the crafting of a business plan that outlines how
they plan to compete in the environment
• Planning for a new business begins when an entrepreneur
notices an opportunity to develop a new or improved good
or service for the whole market or for a specific market
niche
• For example, an entrepreneur might notice an opportunity in
the fast-food market to provide customers with healthful
fast food, such as rotisserie chicken served with fresh
vegetables or burritos made with organic ingredients
Cont..
• The next step is to test the feasibility of the new product idea
• The entrepreneur conducts as thorough a strategic planning
exercise as possible, using SWOT analysis, the analysis of
organizational strengths and weaknesses and
environmental opportunities and threats
• If the environmental analysis suggests that the product idea
is feasible, the next step is to examine the strengths and
weaknesses of the idea
• At this stage the main strength is the resources possessed by
the entrepreneur
A Population Ecology Model of Organizational Birth
• Population ecology theory seeks to explain the factors that
affect the rate at which new organizations are born (and die)
in a population of existing organizations
• A population of organizations contains the organizations that
are competing for the same set of resources in the
environment
• Different organizations within a population may choose to
focus on different environmental niches, or particular sets of
resources or skills
Number of Births
• According to population ecology theory, the availability of
resources determines the number of organizations in a
population
• The amount of resources in an environment limits population
density—the number of organizations that can compete for
the same resources in a particular environment
• Population ecology theorists assume that growth in the
number of organizational births in a new environment is
rapid at first as organizations are founded to take advantage
of new environmental resources
Cont..
• Two factors account for the rapid birth-rate
• The first is that as new organizations are founded, there is an
increase in the knowledge and skills available to generate
similar new organizations
• The second factor accounting for the rapid birth-rate in a
new environment is that when a new kind of organization is
founded and survives, it provides a role model
• The success of the new organization makes it easier for
entrepreneurs to found similar new organizations because
success confers legitimacy, which will attract stakeholders
Survival Strategies
• Population ecologists have identified two sets of strategies that
organizations can use to gain access to resources and enhance
their chances of survival in the environment:
1. r-strategy versus K-strategy
2. specialist strategy versus generalist strategy
• R-STRATEGY VERSUS K-STRATEGY
• Organizations that follow an r-strategy are founded early in a
new environment—they are early entrants
• Organizations that follow a K-strategy are founded late—they
are late entrants
Cont..
• The advantage of an r-strategy is that an organization obtains first-
mover advantages and has first pick of the resources in the
environment
• As a result, the organization is usually able to grow rapidly and
develop skills and procedures that increase its chance of surviving
and prospering
• Organizations that follow a K-strategy are usually established in other
environments and wait to enter a new environment until the
uncertainty in that environment is reduced and the correct way to
compete is apparent
• SPECIALIST STRATEGY VERSUS GENERALIST STRATEGY The difference
between a specialist and a generalist strategy is defined by the
number of environmental niches—or sets of different resources
(customers)—for which an organization competes
Cont..
• Specialist organizations (or specialists) concentrate their
competences and skills to compete for resources in a single
niche—for example, smartphones
• Generalist organizations (or generalists) use their well-
developed competences to compete for resources in many
or all niches in an environment—for example,
smartphones, inexpensive cell phones, landline phones,
netbooks, tablets, and so on
• Specialists, for example, may be able to offer customers
much better service than the service offered by generalists
or, because they invest all their resources in a narrow range
of products, they may be able to develop superior products
The Institutional Theory of Organizational Growth
• Organizational growth is the life cycle stage in which
organizations develop value creation skills and
competences that allow them to acquire additional
resources
• Growth allows an organization to increase its division of
labour and specialization and thus develop a competitive
advantage.
• An organization that is able to acquire resources is likely to
generate surplus resources that allow it to grow further
• Over time, organizations thus transform themselves: They
become something very different than they were when
they started
Cont..
• Institutional theory studies how organizations can increase
their ability to grow and survive in a competitive
environment by becoming legitimate, that is, accepted,
reliable, and accountable, in the eyes of their stakeholders
• New organizations suffer from the liability of newness, and
many die if they cannot develop the competences needed
to attract customers and obtain scarce resources
Cont..
• Institutional theory argues that it is as important to study
how organizations develop skills that increase their
legitimacy to stakeholders as it is to study how they
develop skills and competences that increase their
operational efficiency
• Institutional theory also argues that to increase their
chances of survival, new organizations adopt many of the
rules and codes of conduct found in the institutional
environment surrounding them
• The institutional environment is the set of values and norms
that govern the behaviour of a population of organizations
Organizational Isomorphism
• As organizations grow, they may copy one another’s strategies,
structures, and cultures and try to adopt certain behaviours
because they believe doing so will increase their chances of
survival
• As a result, organizational isomorphism—the process by which
organizations in a population become more alike or similar—
increases
• Three processes that explain why organizations become more alike
have been identified:
1. coercive
2. mimetic
3. normative isomorphism
Organizational Decline and Death
• Organizational decline is the life cycle stage that an
organization enters when it fails to “anticipate, recognize,
avoid, neutralize, or adapt to external or internal pressures
that threaten [its] long-term survival
• The liability of newness, for example, threatens young
organizations, and the failure to develop a stable structure
can cause early decline and failure
• Regardless of whether decline sets in at the birth or the
growth stage, the result is a decrease in an organization’s
ability to obtain resources from its stakeholders
Cont..
• A declining company may be unable to attract financial
resources from banks, customers, or human resources
because the best managers or employees prefer to work for
the most successful organizations
• Decline sometimes occurs because organizations grow too
fast or too much
Effectiveness and Profitability
• An important method stakeholders such as managers and
investors employ to assess organizational effectiveness is to
compare how well one company in an industry is
performing relative to others by measuring its profitability
relative to theirs
• In evaluating organizational effectiveness, it is crucial to
understand the difference between a company making a
profit and being profitable, that is, a company’s profitability
• Profitability measures how well a company is making use of
its resources by investing them in ways that create goods
and services that it can sell at prices that generate the most
profit
Organizational Inertia
• An organization may find it difficult to adapt to changes occurring
in the environment because of organizational inertia—the
forces inside an organization that make it resistant to change
• They believe that organizations are subject to considerable
inertia and do not have the ability to quickly or easily change
their strategy or structure to avoid decline
• The three factors that cause inertia are:
1. Risk aversion
2. The desire to maximize rewards
3. Overly bureaucratic culture
Changes in the Environment
• Environmental changes that affect an organization’s ability to
obtain scarce resources may lead to organizational decline
• The major sources of uncertainty in the environment are
complexity:
• the number of different forces that an organization has to
manage
• dynamism, the degree to which the environment is changing
• richness, the amount of resources available in the environment
• The greater the uncertainty in the environment, the more
likely that some organizations in a population, especially
organizations affected by inertia, will go into decline
Cont..
• Sometimes the niche that an organization occupies erodes,
and managers no longer have the incentive or ability to
change strategy to improve the organization’s access to
resources
• Sometimes the environment becomes poorer, and increased
competition for resources threatens existing organizations
that have not been managing their growth very effectively
• Obviously, the combination of an uncertain, changing
environment with organizational inertia makes it difficult
for managers to anticipate the need for change
The End