Organizational Decline

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Why Companies Enter the Decline Stage, Following Organizational Inertia and Changes in the Environment. By
Miford Lau
May 11, 2010
Table of contents

Chapter 1 - Overview of Organizational Decline4
Chapter 2 - Organization Inertia5
Chapter 3 - Changes in the Environment9
Chapter 4 - Conclusions and Suggestions 11
Reference 12

It’s not difficult to establish a new business organization when there is new business opportunity in a fast growing market especially in a developing country like China. In the beginning stage of some market segment, demand is strong and competition is not keen so resources are easy to obtain. The level of uncertainty is low with simple, stable and rich environment. Organizations are born to take advantage of market opportunities to utilize resources to create value. Tushman and O'Reilly (1996) investigated the life cycles of organizations and found that across industries, there is often a pattern in which success precedes failure. When there’s sustain or growing demand from the market, managers still find it easy to keep profitability and mange the organizational structure. Some managers may not be aware of the factors causing the organizational decline of their companies. Most of the time, they keep the eyes on portion of the outside stakeholders only. This makes them into a very risky position when there’s any big change in the environment. That’s why there have been hundred thousands of company turnover every year in China.

This paper is to search and discuss the causes that make companies enter the decline stage, following organizational inertia and changes in the environment.

Chapter 1 - Overview of Organizational Decline
Organizational life cycle is a sequence of stages of growth and development through which organizations may pass (Gareth Jones, 2010). It’s recognized that there are four major stages which are birth, growth, decline, and death in organizational life cycle. However, not all companies pass through these four stages. Some new companies may go directly from birth to death because of getting not enough resources to enter into the growth stage.

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-terms survival (Weitzel, Jonsson, 1989). There have been other various definitions as seen in many literatures. However, organizational decline, in this paper, refers to the definition as described by Weitzel and Jonsson (1989).

Decline has been variously defined as shrinking markets and increased competition, budget cuts. Some of the prevalent ways of defining decline in the literature has been in terms of organizational size dimensions such as the size of the workforce, market share, assets, profits, stock prices, physical capacity, and number or quality of inputs and outputs. However, in today’s global environment, some of those figures and definitions do not reflect the profitability and long-term survival of a company appropriately. For instance, company downsize can lower the operating cost and improve the effectiveness while stock prices or profits can only reflect the short-term performance of a company.

Companies face new challenges and problems continually. To survive in the uncertain and changing environment, companies should move to more organic structures before having negative impact created by environmental forces. Companies that cannot adapt to the external challenges fail to grow, decline or even cease to exist. Globalization leads to more keen competition among companies in an environment that is more complex, dynamic and unpredictable. Growth is hard to sustain but decline is easier to occur.

Greiner (1972) maintains that organizations move through five sequential and distinguishable...
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