CHAPTER 11 ORGANIZATIONAL BIRTH, GROWTH, DECLINE, AND DEATH

CHAPTER 11 ORGANIZATIONAL BIRTH, GROWTH, DECLINE, AND DEATH TEACHING OBJECTIVES 1. To explain that organizations go through a life cycle that has four principal stages: birth, growth, decline, and death. (11.1) 2. To discuss the birth of organizations and the liability of newness. (11.2) 3. To discuss the strategic planning process. (11.3) 3. To examine the population ecology model of organizational birth, which proposes that the number of organizations in a population is determined by the availability of resources. (11.4) 4. To consider r-strategy versus K-strategy and specialist strategy versus generalist strategy. (11.4) 5. To examine the institutional theory of growth, which proposes that organizations survive by gaining legitimacy. (11.5) 6. To review coercive, mimetic, and normative isomorphism and discuss the disadvantages of isomorphism. (11.5) 7. To discuss Greiner’s model of growth: creative, direction, delegation, coordination, and collaboration. (11.6) 8. To consider why companies enter the decline stage, following organizational inertia and changes in the environment. (11.7) 9. To examine Weitzel and Jonsson’s model of organizational decline. (11.7)

This chapter considers how to manage the organizational life cycle and respond to various problems. A firm can adjust its strategy and structure to respond to problems. A life cycle is defined as a predictable series of stages that organizations experience. The four major stages are birth, growth, decline, and death. Organizations go through these stages at different rates, and some do not experience every stage. The birth stage begins when an entrepreneur uses skills to create value. The failure rate is high due to the liability of newness. Entrepreneurship is risky, and no formal structure provides stability. The population ecology model of birth suggests that the number of organizations in a population is determined by the availability of resources. Two sets of strategies are reviewed: r-strategy versus K-strategy, and specialist strategy versus generalist strategy. The institutional theory of growth proposes that organizations grow as they satisfy stakeholders. Coercive isomorphism, mimetic isomorphism, and normative isomorphism are explained, and the disadvantages of isomorphism are considered. Greiner’s model of growth suggests that organizations pass through five stages of growth and must resolve a crisis to move to the next stage. The stages and their crises include: (1) creativity and crisis of leadership, (2) direction and crisis of autonomy, (3)

PHAM HOANG HIEN, MBA, PG. (CSU)

CHAPTER SUMMARY

delegation and crisis of control, (4) coordination and crisis of red tape, and (5) collaboration. Organizational decline may result from inertia or changes in the environment. Inertia increases due to risk aversion, the desire to maximize rewards, and an overly bureaucratic culture. Weitzel and Jonsson’s model of organizational decline has five stages: blinded, inaction, faulty action, crisis, and dissolution. Managers must act to reverse the trend of decline, but once the dissolution stage begins, the result is organizational death. CHAPTER OUTLINE 11.1

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 substages. Decline also has substages. Some in the decline stage can turn around and move to the growth stage. (Fig. 11.1) If an organization fails to manage problems in each stage, it will fail. Still, these stages are models, and every organization has unique experiences. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 11.2

Organizational Birth

Q. What causes an organization to be born? Give some examples of birth. A. Entrepreneurs recognize and exploit opportunities to use their skills to create value. Some examples include Dell Computer, Blockbuster Video, and Mrs. Field’s Cookies. Many organizations move from birth, the founding stage, to death. This stage has the highest failure rate, because new organizations face the liability of newness, the dangers of being new.

PHAM HOANG HIEN, MBA, PG. (CSU)

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.

Q. Why is it dangerous to be new? A. 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. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________

Developing a Plan for a New Business A business plan will help new organizations make it through the dangerous birth stage. Table 11.1 lists the steps involved in developing a plan.

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. 11.4

A Population Ecology Model of Organizational Birth

Population ecology theory explains the rate at which organizations are born and die in a population of existing organizations. A population is the set of organizations competing for the same resources. All the personal computer companies compete for computer customers. Different companies in a population focus on different environmental niches, or sets of resources. In the PC industry, Dell focuses on mail order, and Apple concentrates on the educational institutions.

PHAM HOANG HIEN, MBA, PG. (CSU)

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:

Number of Births Population ecology theory states that population density, the number of organizations in a population, depends on the availability of resources. Births in a new environment are initially rapid and then diminish as the environment becomes filled with successful organizations. (Fig. 11.2) Rapid birthrate results from two factors: new organizations create knowledge and skills for similar organizations; and a new organization is a role model, making it easier for others to attract stakeholders. Stakeholders see a business success and invest in similar businesses. Q. Why do the number of births in an environment diminish? A. The availability of resources decreases. The first companies in a market obtain first mover advantages, the benefits of entering early. The advantages are customer support, brand name recognition, and choice locations.

Survival Strategies r-strategy versus K-strategy: An r-strategy is early entrance into a new environment, providing first-mover advantages, which facilitate core competences and rapid growth. A K-strategy, pursued by those established in other environments, is a late entrance and less uncertain. Firms use skills developed in other environments to compete effectively and often dominate r-strategists. In the personal computer industry, Apple followed an rstrategy, and IBM followed a K-strategy. Specialist strategy versus general strategy: Specialists compete for a narrow range of resources in a single niche. Generalists spread their skills to compete for a broad range of resources in many niches. Q. Give examples of a specialist strategy. What are the advantages and disadvantages of this approach? A. Porsche, Dell Computer Corp., and Rolex pursue a specialist strategy, also called a niche strategy. Specialists offer better customer service and can develop superior products. Yet, they risk that the niche will disappear i_n_ _a_n_ _u_n_c_e_r_t_a_i_n_ _e_n_v_i_r_o_n_m_e_n_t_._ _A_ _c_o_m_p_a_n_y_ _w_i_t_h_ _a_ _n_i_c_h_e_ _i_n_ _e_i_g_h_t_-_t_r_a_c_k_ _t_a_p_e_s_ _w_o_u_l_d_ _b_e_ _o_u_t_ _o_f_ _b_u_s_i_n_e_s_s_._ _

PHAM HOANG HIEN, MBA, PG. (CSU)

Latecomers have difficulty attracting resources and competing with existing organizations for resources. Obtaining new customers may require large advertising expenses. Existing organizations may work together to deter new entrants. They may collude (illegally) to fix prices at artificially low levels or advertise heavily, making it expensive for latecomers to enter the market.

_·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _1_ _h_e_r_e_ _t_o_ _r_e_v_i_e_w_ _t_h_e_ _a_d_v_a_n_t_a_g_e_s_ _o_f_ _a_ _s_p_e_c_i_a_l_i_s_t_ _s_t_r_a_t_e_g_y_._ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ____________________ Q. What companies pursue a generalist strategy? What are the advantages and disadvantages of this approach? A. Sears, IBM, and GM pursue a generalist strategy. A generalist can survive in an uncertain environment, because if one niche disappears, it has others. Yet, a generalist offers a lower level of customer service, because it concentrates on a broader range of resources.

The choice of strategy evolves over time. New organizations pursue an r-specialist strategy to meet the needs of specific customers. Organizations frequently become rgeneralists through growth and compete in new niches. K-generalists, usually divisions of large companies like GE, enter the market and threaten weak r-specialists. An rspecialist without a distinct competence fails. Eventually, the strongest r-specialists, r-generalists, and K-generalists dominate the environment by pursing a low-cost or a differentiation strategy and serving many markets. Large K-generalists establish niches for new firms, so K-specialists seize new opportunities. GM may create a demand for a premium sports car like Porsche. Generalists and specialists compete for different resources, thus they coexist in an environment. ______________________________________________________________________ _____________·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _2_ _t_o_ _g_i_v_e_ _e_x_a_m_p_l_e_s_ _o_f_ _r_ _a_n_d_ _K_ _s_t_r_a_t_e_g_i_e_s_._ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ _____________________________________________ _ _F_o_c_u_s_ _o_n_ _N_e_w_ _I_n_f_o_r_m_ation Technology: Amazon.com, Part 5 Jeff Bezos gave Amazon.com a first-mover advantage.

PHAM HOANG HIEN, MBA, PG. (CSU)

The Process of Natural Selection An organization can pursue one of four strategies: r-specialist, r-generalist, K-specialist, and K-generalist. (Fig. 11.3)

Q. Describe Amazon’s advantage. A. An early establishment of an online bookstore gave Amazon a first-mover advantage over rivals. This has been an important component of the company’s strong market position. Amazon’s success has deterred competitors from entering the marketplace, and the birthrate in this industry has slowed. Natural selection has operated as many small specialized bookstores have closed. Amazon and Barnes and Noble are locked in fierce competition. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 11.5

The Institutional Theory of Organizational Growth

Institutional theory studies how organizations grow and survive in a competitive environment by satisfying stakeholders. 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. 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: 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. 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.

PHAM HOANG HIEN, MBA, PG. (CSU)

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.

Normative isomorphism occurs when organizations become similar by indirectly adopting the norms and values of others. 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. Q. What are the problems of isomorphism? A. Organizations may learn outdated behaviors, and pressures to imitate decrease innovation. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 11.6

Greiner’s Model of Organizational Growth

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. Learning occurs by trial and error. The informal organization directs communication and decision-making. Q. What are the problems of a new organization? A. 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. An organization must resolve this crisis by replacing entrepreneurs with managers to move to the next stage. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ Stage 2: Growth through Direction

PHAM HOANG HIEN, MBA, PG. (CSU)

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. (Fig. 11.4)

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. Q. What structure will be adopted? A. A company adopts a functional or a divisional structure. A formal structure centralizes decision- making, and formal rules and procedures control activities. 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 topmanagement approval to start a project hesitates to take the initiative. Bureaucracy stifles innovation. Q. What happens if the crisis of autonomy is not resolved? A. Talented people leave the organization and start their own businesses. The entrepreneur’s exit reduces the ability to innovate and competitors increase.

Q. What structure fits this stage? A. 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. 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 Q. How can the crisis of control be resolved? A. A proper balance must exist between centralization and decentralization. Top management assumes responsibility for coordinating divisions and motivating managers to consider the whole organization. Coordination is important for a related diversification or a global expansion strategy, which requires a “matrix in the mind” to foster

PHAM HOANG HIEN, MBA, PG. (CSU)

Stage 3: Growth through Delegation Decentralizing authority to lower-level functional managers and tying performance to rewards resolves the crisis of autonomy

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. 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. Q. What structures are appropriate for this stage? A. 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.”

Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ 11.7

Organizational Decline and 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. (Fig. 11.4) 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. Banks hesitate to lend money to a troubled company and talented employees choose successful, secure organizations. An organization’s decline may result from too much growth. Some organizations, such as GM, grow past the point of effectivenes_s_._ _T_h_e_ _r_e_l_a_t_i_o_n_s_h_i_p_ _b_e_t_w_e_e_n_ _s_i_z_e_ _a_n_d_ _e_f_f_e_c_t_i_v_e_n_e_s_s_ _s_h_o_w_s_ _t_h_a_t_ _g_r_o_w_t_h_ _b_e_y_o_n_d_ _a_ _c_e_r_t_a_i_n_ _p_o_i_n_t_

PHAM HOANG HIEN, MBA, PG. (CSU)

Managerial Implications: Organizational Birth and Growth Managers should analyze resources and the environment for a niche and then develop the competences to pursue a specialist strategy. They should analyze the institutional environment to learn the norms and values of competitors, prepare for growth problems, and understand top management’s role in building growth effectively.

_s_h_o_w_s_ _a_ _d_e_c_l_i_n_e_ _i_n_ _e_f_f_e_c_t_i_v_e_n_e_s_s_._ _(_F_i_g_._ _1_1_._5_)_ _A_n_ _o_r_g_a_n_i_z_a_t_i_o_n_ _m_a_y_ _g_r_o_w_ _t_o_o_ _m_u_c_h_ _d_u_e_ _t_o_ _i_n_e_r_t_i_a_ _a_n_d_ _e_n_v_i_r_o_n_m_e_n_t_a_l_ _c_h_a_n_g_e_s_._ _ _·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _4_ _h_e_r_e_ _t_o_ review the reasons for decline. ______________________________________________________________________ ______________________________________________________________________ ______________________ 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:

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. 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. Changes in the Environment Q. What are the sources of environmental uncertainty? A. 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. The end of the cold war c_a_u_s_e_d_ _m_a_n_y_ _d_e_f_e_n_s_e_ _c_o_m_p_a_n_i_e_s_ _t_o_ _e_n_t_e_r_ _t_h_e_ _d_e_c_l_i_n_e_ _s_t_a_g_e_._ _

PHAM HOANG HIEN, MBA, PG. (CSU)

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.

_·ð _R_e_f_e_r_ _t_o_ _d_i_s_c_u_s_s_i_o_n_ _q_u_e_s_t_i_o_n_ _5_ _h_e_r_e_ _t_o_ _r_e_v_i_e_w_ _o_r_g_a_n_i_z_a_t_i_o_n_a_l_ _i_n_e_r_t_i_a_._ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ________ Weitzel and 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. (Fig. 11.6) Stage 1: Blinded. Managers are unaware of problems that threaten long-term survival in the first stage of decline, the blinded stage. Q. Why are managers oblivious to large problems?

Signs of potential problems include too many employees, slow decision-making, increased conflict among subunits, and reduced profits. 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. Organizational Insight 11.1: General Dynamics Goes from Weakness to Strength General Dynamics, a large defense company, faced a poorer and more uncertain environment at the end of the Cold War. Top management acted quickly, and the company went from a $578 million loss in 1990 to a $305 million profit in 1991. Q. How did General Dynamics prevent decline? A. General Dynamics responded immediately because the first signs of decline did not blind top managers. Lack of demand made General Dynamics sell off many assets and streamline operations to focus on aircraft, submarines, armored vehicles, and space launch systems. The company reduced its workforce by over 25 percent. 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. 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.

PHAM HOANG HIEN, MBA, PG. (CSU)

A. The monitoring and information systems to evaluate effectiveness are not in place.

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 topmanagement 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. 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. 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.

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. Notes_________________________________________________________________ ______________________________________________________________________ ______________________________________________________________________ ___________________________________________ DISCUSSION QUESTIONS AND ANSWERS 1. What factors influence the number of organizations that are founded in a population? How can pursuing a specialist strategy increase a company’s chance of survival? The number of organizations in a population is determined by the availability of resources. Growth is rapid when resources are available and slows as resources become scarce. Birth is rapid, as new organizations increase knowledge and skills to

PHAM HOANG HIEN, MBA, PG. (CSU)

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.

create other firms. A surviving organization is a role model and confers legitimacy, which attracts stakeholders. Increased competition decreases resources, so the number of births falls. Pursuing a specialist strategy increases survival by developing core competences to outperform generalists. Specialists provide better customer service and can develop superior products through a niche strategy. 2. How does r-strategy differ from K-strategy? How does a specialist strategy differ from a generalist strategy? Use companies in the fast-food industry to provide an example of each strategy. Answers will vary. An r-strategy is an early entry into the new environment whereas a Kstrategy is a late entry. Established organizations enter a new environment when uncertainty is reduced. McDonald’s, an early entrant in the fast-food industry, pursued an r-strategy. Wendy’s, who entered later, pursued a K-strategy. Specialists pursue a narrow range of resources in one niche; generalists spread their skills to compete for a broad range of resources in many niches. Taco Bell pursues a niche by offering lowcost Mexican food. McDonald’s pursues a generalist strategy by offering different items, such as hamburgers, fish sandwiches, and chicken.

An organization grows by obtaining resources and developing core competences. Surplus resources facilitate growth. In the first stage, an organization experiences a leadership crisis because the founder may lack the skills to manage growth. New management teams move the firm to the direction stage. In this stage, a crisis of autonomy occurs, as innovative employees feel frustrated by their lack of decision making. Delegating authority moves the company to the delegation stage, which brings a crisis of control. Top and functional managers conflict over control. A balance between centralization and decentralization moves the company to the coordination stage where it faces a crisis of red tape, which stifles innovation. The final stage is collaboration. 4. Why do organizations decline? What steps can top management take to halt, decline, and restore organizational growth? Organizations decline if they fail to manage threats to their survival. In the birth stage, organizations decline if they can’t overcome the liability of newness. In the growth stage, an organization declines if it fails to manage crises, including the crisis of leadership and red tape. Sometimes organizations decline because they grow past the point of maximum effectiveness. Once an organization enters the decline stage, it declines unless top management takes action. In the blinded stage, top management implements an effective monitoring and information system and takes timely corrective action. In the inaction stage, management makes changes, such as altering the structure or downsizing. In the crisis

PHAM HOANG HIEN, MBA, PG. (CSU)

3. Why do organizations grow? What major crisis is an organization likely to encounter as it grows?

stage, top management initiates a radical reorganization to halt decline. A new topmanagement team initiates reorganization, which includes streamlining operations. 5. What is organizational inertia? List some sources of inertia in a company like IBM or GM. Inertia is resistance or lack of inclination to change. Sources of inertia are risk aversion, the desire to maximize rewards, and an overly bureaucratic culture. IBM managers avoided the risk of entry into the PC market and concentrated on mainframes, a source of past success. GM kept producing large cars. Managers at IBM or GM lacked the incentive to improve effectiveness; pay was not tied to performance. These companies had overly bureaucratic cultures and tall, centralized structures that stifled innovation. The cultures emphasized the status quo, not innovation.

Answers will vary. I selected a small carryout seafood place that failed. The owner was successful at one location and opened a second store. The second store failed due to a poor location and high rent. The first store was small, and customers placed orders at a window. No seating was available. The building was inexpensive and had a good location. The second store was in a nice strip mall with little traffic. There was a crisis of leadership because the founder managed the store and performed all tasks, including cooking and hiring workers. The organization may have survived had it hired a manager. Moving to a different location or advertising were options. The founder could have concentrated on core operations and the menu. ORGANIZATIONAL THEORY IN ACTION In small groups, students are top managers of a growing company that develops web sites for Fortune 500 companies. Although a loose, organic operating structure has worked well in the past, performance is now decreasing due to lack of cooperation. Discuss the type of crisis experienced and the changes that should be made to the operating structure. Consider the problems associated with these changes. Making the Connection Students will find an example of an organization that is either experiencing a crisis of growth or trying to manage decline. They will explain how top management is trying to solve the problems. The Ethical Dimension The decline models illustrate what humans have a tendency to do during times of decline, such as taking advantage of subordinates, stealing their ideas, or becoming risk

PHAM HOANG HIEN, MBA, PG. (CSU)

6. Choose an organization or business in your city that has recently closed, and analyze why it failed. Could the organization have been turned around? Why or why not?

averse. Students are asked how the ethical code can be used to help prevent this type of behavior. ANALYZING THE ORGANIZATION Students will analyze the life cycle of their organization, considering when it was founded, what strategy it pursued, what stage it is currently in, how it managed growth, and symptoms of decline. They predict any potential future problems. CASE FOR ANALYSIS The Body Shop Gets Middle Aged The Body Shop, founded in 1976 by Anita Roddick, grew to over 700 stores by 1993 but did not franchise in the United States as it did in Europe. The owner wanted to maintain control over U.S. stores. 1.

What strategy did the Body Shop use to grow in Europe?

The Body Shop developed natural cosmetics and grew rapidly throughout Europe using franchising and alliances.

In the United States, the owner decided to maintain control over the stores, so the Body Shop missed out on the rapid growth achieved through franchising. Large U.S. cosmetic companies like Estee Lauder imitated the Body Shop and had more name recognition. These competitive threats propelled Roddick to franchise in the U.S. TEACHING SUGGESTIONS 1. As a review, r and K strategies can be linked to business-level or corporate-level strategies and low-cost and differentiation strategies. An r-strategy or K-strategy is a decision about the timing of market entry; a specialist strategy is a decision about pursuing a niche. After entry, the firm competes through low cost or differentiation. An rspecialist could pursue either low cost or differentiation. For a single business, the strategy is at business level; for an established, larger firm, the decision is made at the corporate level. 2. Review the crisis of control. Point out the difficulty of establishing a proper balance of centralization and decentralization. Organizations can implement structures to promote cooperation between corporate headquarters and divisions, such as a multidivisional matrix. They can use complex integrating mechanisms, such as teams and integrating roles to foster cooperation and develop a cooperative culture. 3. In six gr_o_u_p_s_ _t_h_e_ _c_l_a_s_s_ _r_e_v_i_e_w_s_ _t_h_e_ _p_r_o_b_l_e_m_s_ _o_f_ _t_h_e_ _o_r_g_a_n_i_z_a_t_i_o_n_a_l_ _l_i_f_e_

PHAM HOANG HIEN, MBA, PG. (CSU)

2. What strategy did the Body Shop use in the United States, and what problems did it encounter?

PHAM HOANG HIEN, MBA, PG. (CSU)

_c_y_c_l_e_._ _E_a_c_h_ _g_r_o_u_p_ _h_a_s_ _a_ _c_o_m_p_a_n_y_ _a_n_d_ _i_d_e_n_t_i_f_i_e_s_ _i_t_s_ _s_t_a_g_e_ _a_n_d_ _s_u_r_v_i_v_a_l_ _s_t_r_a_t_e_g_y_._ _ _·ð _C_o_m_p_a_n_y_ _1_:_ _A_ _s_m_a_l_l_ _d_i_s_k_ _d_r_i_v_e_ _p_r_o_d_u_c_e_r_,_ _m_a_n_a_g_e_d_ _b_y_ _i_t_s_ _f_o_u_n_d_e_r_,_ _h_a_s_ _g_r_o_w_n_ _r_a_p_i_d_l_y_ _i_n_ _a_ _s_h_o_r_t_ _t_i_m_e_._ _T_h_i_s_ _c_o_m_p_a_n_y_ _i_s_ _i_n_ _t_h_e_ _g_r_o_w_t_h_ _t_h_r_o_u_g_h_ _c_r_e_a_t_i_v_i_t_y_ _s_t_a_g_e_ _a_n_d_ _n_e_e_d_s_ _t_o_ _r_e_s_o_l_v_e_ _a_ _c_r_i_s_i_s_ _o_f_ _l_e_a_d_e_r_s_h_i_p_._ _ _·ð _C_o_m_p_a_n_y_ _2_:_ _A_ _b_i_o_t_e_c_h_n_o_l_o_g_y_ _c_o_m_p_a_n_y_ _h_a_s_ _a_ _s_t_r_o_n_g_ _m_a_n_a_g_e_m_e_n_t_ _t_e_a_m_,_ _b_u_t_ _R_&_D_ _e_m_p_l_o_y_e_e_s_ _c_o_m_p_l_a_i_n_ _a_b_o_u_t_ _t_h_e_i_r_ _i_n_a_b_i_l_i_t_y_ _t_o_ _s_t_a_r_t_ _p_r_o_j_e_c_t_s_._ _T_h_i_s_ _c_o_m_p_a_n_y_ _i_s_ _i_n_ _t_h_e_ _g_r_o_w_t_h_ _t_h_r_o_u_g_h_ _d_i_r_e_c_t_i_o_n_ _s_t_a_g_e_ _a_n_d_ _n_e_e_d_s_ _t_o_ _r_e_s_o_l_v_e_ _a_ _c_r_i_s_i_s_ _o_f_ _a_u_t_o_n_o_m_y_._ _ _·ð _C_o_m_p_a_n_y_ _3_:_ _A_n_ _e_s_t_a_b_l_i_s_h_e_d_ _p_e_r_s_o_n_a_l_ _c_o_m_p_u_t_e_r_ _m_a_k_e_r_ _h_a_s_ _t_o_p_ _m_a_n_a_g_e_r_s_ _w_h_o_ _f_i_g_h_t_ _w_i_t_h_ _f_u_n_c_t_i_o_n_a_l_ _m_a_n_a_g_e_r_s_._ _T_h_i_s_ _c_o_m_p_a_n_y_ _i_s_ _i_n_ _t_h_e_ _g_r_o_w_t_h_ _t_h_r_o_u_g_h_ _d_e_l_e_g_a_t_i_o_n_ _s_t_a_g_e_ _a_n_d_ _n_e_e_d_s_ _t_o_ _r_e_s_o_l_v_e_ _a_ _c_r_i_s_i_s_ _o_f_ _c_o_n_t_r_o_l_._ _ _·ð _C_o_m_p_a_n_y_ _4_:_ _A_ _s_m_a_l_l_ _c_o_m_p_u_t_e_r_ _c_o_m_p_a_n_y_ _h_a_s_ _m_a_n_y_ _r_u_l_e_s_._ _T_h_i_s_ _c_o_m_p_a_n_y_ _i_s_ _i_n_ _t_h_e_ _g_r_o_w_t_h_ _t_h_r_o_u_g_h_ _c_o_o_r_d_i_n_a_t_i_o_n_ _s_t_a_g_e_ _a_n_d_ _f_a_c_e_s_ _a_ _c_r_i_s_i_s_ _o_f_ _r_e_d_ _t_a_p_e_._ _·ð _C_o_m_p_a_n_y_ _5_:_ _A_ _f_o_o_d_ _m_a_n_u_f_a_c_t_u_r_e_r_ _h_a_s_ _e_x_p_e_r_i_e_n_c_e_d_ _d_e_c_r_e_a_s_i_n_g_ _s_a_l_e_s_ _a_n_d_ _p_r_o_f_i_t_s_,_ _b_u_t_ _m_a_n_a_g_e_m_e_n_t_ _h_a_s_ _n_o_t_ _c_h_a_n_g_e_d_ _s_t_r_a_t_e_g_i_e_s_._ _T_h_i_s_ _c_o_m_p_a_n_y_ _i_s_ _i_n_ _t_h_e_ _i_n_a_c_t_i_o_n_ _s_t_a_g_e_ _o_f_ _d_e_c_l_i_n_e_ _a_n_d_ _n_e_e_d_s_ _t_o_ _c_h_a_n_g_e_ _i_t_s_ _s_t_r_a_t_e_g_y_ _a_n_d_ _s_t_r_u_c_t_u_r_e_._ _ _·ð _C_o_m_p_a_n_y_ _6_:_ _A_n_ _e_s_t_a_b_l_i_s_h_e_d_,_ _l_a_r_g_e_ _d_e_p_a_r_t_m_e_n_t_ _s_t_o_r_e_ _i_s_ _l_o_s_i_n_g_ _s_t_a_k_e_h_o_l_d_e_r_ _s_u_p_p_o_r_t_ _d_u_e_ _t_o_ _a_ _d_e_c_l_i_n_i_n_g_ _s_t_o_c_k_ _p_r_i_c_e_ _a_n_d_ _l_o_s_s_e_s_._ _T_h_i_s_ _c_o_m_p_any is in the crisis stage of decline and needs a major reorganization. 4. Ask students if they have experienced any of the stages in Greiner’s growth model Weitzel and Jonsson’s model. An interesting discussion is why the stages are so easy to recognize in the text, but hard to recognize when one is “in the arena.” 5. Have students in small groups come up with a fictitious business idea, such as a new restaurant or a new invention. Have them do a brief SWOT analysis and see if they can pinpoint where the management challenges will be in the early stages of the business.