Ch09 Organization Size, Life Cycle, And Decline

N Chapter 9: Organization Size, Life Cycle, and Decline Organization Size: Is Bigger Better? Pressures for Growth • Organizational size is a contextual variable, and it influences design and functioning • Organizations often experience pressures for growth, even at the expense at making the best products and showing the greatest products • Today, the business world has entered an era of the mega-corporation • Companies in all industries, from aerospace to consumer products to media, strive for growth to acquire the size and resources needed to compete on a global scale, to invest in new technology, and to control distribution channels and guarantee access to markets • Other pressures include that many execs have found that firms must grow to stay economically healthy, and to stop growing is stagnant o To be stable means that customers may not have their demands fully met or that competitors will increase market share at the expense of your company o Wal-mart, for example, keeps growing because execs have “inferiority complex” and are ingrained with the idea that to stop growing is to stagnate and die Dilemmas of Large Size • Large Organizations o Economies of Scale: Huge resources and economies are scale are needed, as only large company could build a massive pipeline in Alaska, for example o Global Reach: Have the resources to be a supportive economic and social force in difficult times. Wal-Mart gave employees $1000 for emergency assistance when Katrina hit, for example o Vertical Hierarchy, Mechanistic: standardized o Complex: offers hundreds of functional specialties within the organization o Stable Markets: companies can have a presence that stabilizes a market for years if they’re well established o “Organization Men”: The organization can provide longevity, raises, and promotions • Small Organizations o Responsive, Flexible: These are the crucial requirements for success in a global economy o Regional Reach: Quick reaction to changing customer needs or shifiting environmental and market conditions o Flat Structure, Organic: They have a free-flowing management syle that encourages entrepreneurship and innovation o Simple: Smaller amount of people, less resources, less departments, etc. o Niche Finding: Done through encouraging innovation o Entrepreneurs: Come up with ideas for new small businesses • Big-Company/Small-Company Hybrid o The paradox is that the advantages of small companies sometimes enable them to succeed, and hence, grow large o Most of the 100 firms on Fortune magazine’s list of the fastest-growing companies in America are small firms characterized by an emphasis on being fast and flexible in responding to the environment o Small companies can become victims of their own success as they grow large, shifting to a mechanistic structure emphasizing vertical hierarchies o Giant companies are “built for optimization, not innovation”

o The “big-company/small-company hybrid” combines a large corporation’s resources and reach with a small companies simplicity and flexibility, for instance, by using a divisional structure Organizational Life Cycle • A perspective on organizational growth and change that suggests that organizations are born, grow older, and eventually die Stages of Life Cycle Development 1. Entrepreneurial Stage − Emphasis is on creating a product or service and surviving in the marketplace − The founders are entrepreneurs and they devote their full energies to the technical activities of production and marketing − Organization is informal and nonbureaucratic − Control is based on owners’ personal supervision − Growth is from a creative new product or service − Crisis: Need for Leadership  Must adjust structure to accommodate growth or bring in strong managers who can focus on management issues − Many businesses fail because they are unsuccessful at the transition out of this stage 2. Collectivity Stage − Strong leadership is obtained and the organization begins to develop clear goals and direction − Departments are established along with a hierarchy of authority, job assignments, and a beginning division of labour − Communication and control are still relatively informal but formal systems begin appearing − Crisis: Need for Delegation  Lower-level employees gradually find themselves restricted by the strong top-down leadership  Lower-level managers begin to acquire confidence in their own functional areas and want more discretion  An autonomy crisis occurs when top managers, who were successful because of their strong leadership and vision, do not want to give up responsibility 3. Formalization Stage − Involves the installation and use of rules, procedures, and control systems − Communication is less frequent and more formal − Engineers, HR specialists, and other staff may be added − Top management becomes concerned with issues such as strategy and planning and leaves the operations of the firm to middle management − Product groups or other decentralized units may be formed to improve coordination − Crisis: Too Much Red Tape  Organization seems bureaucratized and innovation is restricted  Need to eliminate unnecessary red tape 4. Elaboration Stage − The solution to the red tape crisis is a new sense of collaboration and teamwork − Managers develop skills for confronting problems and working together − Bureaucracy may have reached its limit, and social control and self-discipline reduce the need for additional formal controls − Formal systems may be simplified and replaced by manager teams and task forces − Teams are often formed across functions or divioions

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− For example, Apple Computer is in this stage − Crisis: Need for Revitalization  May enter periods of temporary decline  A renewal may need to occur every 10 to 20 years  Organization could shift out of alignment with the environment  Becomes inflexible  Often replace top managers Diagram of Life Cycle:

Organizational Characteristics during the Life Cycle

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Organizational Bureaucracy and Control What Is Bureaucracy? • Weber perceives it as a threat to basic personal liberties, but recognizes it as the most efficient possible way of organizing and notes that it focuses on rational ways of control • 6 Characteristics of Bureaucracy Identified by Weber o Rules and procedures Enable activities to be performed in a routine/predictable manner o Specialization and Division of Labour  Each employee has a clear task o Hierarchy of Authority Allows supervision and control o Technically qualified personnel Hire employees based on expertise, rather than nepotism, etc. o Separation of position and incumbent Individuals did not “own” job o Written communications and records Provide organizational memory and continuity Size and Structural Control • Formalization o The degree to which an organization has rules, procedures, and written documents o Tends to be higher in large organizations • Centralization o The level of hierarchy with authority to make decisions o Decisions tend to me made at the top • Personnel ratios o The proportions of admin, clerical, and professional support staff o Number of top administrators tend to decrease with size, as economies of scale are realized o Clerical staff tends to increase as organizations grow in order to deal with greater communication and reporting requirements o Professional staff tends to increase to meet the need for specialized skills • Percentage of Personnel Allocated to Admin and Support Activities

Bureaucracy in a Changing World Advantages of Bureaucracy • Provides an effective way to bring order to large groups of people and prevent abuses of power by establishing a hierarchy of authority and specific rules and procedures • Impersonal relationships based on roles rather than people reduce the favoritism and nepotism characteristic of many preindustrial organizations • Provides for systematic and rational ways to organize and manage tasks too complex to be understood and handled by few individuals, thus greatly improving the efficincy and effectiveness of large organizations Disadvantages of Bureaucracy • Can hinder attempts to respond to a changing environment • Can cause inefficiencies having to do with intelligence and communication • Delays movement of info o “Every time you add a layer of bureaucracy, you delay the movement of info up the chain of command…And you dilute the info because at each step some details are taken out” Organizing Temporary Systems for Flexibility and Innovation • Incident command system (ICS) o Developed to maintain the efficiency and control benefits of bureaucracy yet prevent the problems of slow response to crises o The basic idea is that the organization can glide smoothly between a highly formalized, hierarchical structure that is effective during times of stablitity and a more flexible, loosely structured one needed to respond well to unexpected and demanding environmental conditions o Moves from a bureaucratic structure to a flat structure in times of uncertainty • Professionalism o Creating a standard of behaviour can act as a substitute for bureaucracy o It is the length of formal training and experience of employees o A form of organization called “professional partnership” has emerged that is made completely of professionals, including medical practices, law firms, and consulting firms Organizational Control Strategies Bureaucratic Control • The use of rules, policies, hierarchy of authority, written documents, standardization, and other bureaucratic mechanisms to standardize behaviour and assess performance • Primary purpose is to control employee behaviour • To make it work, managers must have authority to maintain control over the organization • Weber identified 3 types of authority that could explain the creation and control of a large organization: o Rational-legal authority: based on employees’ belief in the legality of rules and the rights of those in authority to issue commands o Traditional authority: based on the belief in traditions and the legitimacy of the status of people exercising authority through those traditions o Charismatic authority: based on devotion to the exemplary character or heroism of an individual and the order defined by him or her Market Control • A situation that occurs when price competition is used to evaluate the output and productivity of an organization

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The idea originated in economics Requires that outputs be sufficiently explicit for a price to be assigned and that competition exist Market control was once used primarily at the level of the entire organization, but it is increasingly used in product divisions

Clan Control • The use of social characteristics, such as corporate culture, shared values, commitments, traditions, and beliefs, to control behaviour • It is important when ambiguity and uncertainty are high • High uncertainty means the organization can’t put a price on its services, and things change so fast that rules and regulations are not able to specify every correct behaviour • Many people may be hired because they are committed to the organization’s purpose Organizational Decline and Downsizing Definition and Causes • Organizational decline is a condition in which a substantial, absolute decrease in an organization’s resource base occurs over a period of time • It is often associated with environmental decline in the sense that an organizational domain experiences either a reduction in size or shape • 3 factors are considered to cause organizational decline: o Organizational atrophy  Occurs when organizations grow older and become inefficient and overly bureaucratized  Organization’s ability to adapt to its environment deteriorates  Often, it follows a long period of success, which it takes advantage of and fails to adapt to the new environment  For example, Blockbuster had trouble adapting to the new world of video-on-demand and digital downloading o Vulnerability  Reflects an organization’s strategic inability to prosper in its environment  Often happens to small organizations that aren’t fully established  They are vulnerable to shifts in consumer tastes or in the economic health of the larger community  These companies must redefine their environmental domain to enter new industries or markets o Environmental decline or competition  Decline refers to reduced energy and resources available to support an organization  When environment has less capacity to support organizations, the organization has to either scale down or shift to another domain  New competition increases the problem A Model of Decline Stages 1. Blinded Stage − The internal and external change that threatens long-term survival and may require the organization to tighten up − The organization may have excess personnel, cumbersome procedures, or lack of harmony with customers − With timely info, alert execs can bring the organization back to top performance

− Solution: develop effective scanning and control systems 2. Inaction Stage − Denial occurs despite signs of deteriorating performance − Leaders may try to persuade employees that all is well − Solution: leaders must acknowledge decline and take prompt action to realign the organization with the environment through new problem-solving approaches, increasing decision-making participation, and encouraging expression of dissatisfaction to learn what is wrong 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 − Solution: retrenchment, including downsizing. Also, reduce employee uncertainty by clarifying values and providing info 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 − Solution: major reorganization, such as replacing top admins and revolutionary changes in structure, strategy, and culture are necessary. Workforce downsizing may be severe. 5. Dissolution Stage − Stage of decline is irreversible − The organization is suffering loss of markets and reputation, the loss of its best personnel, and capital depletion − Solution: close down the organization in an orderly fashion and reduce the separation trauma