Why Companies Enter the Decline Stage, Following Organizational Inertia and Changes in the Environment. By Miford Lau May 11, 2010 Table of contents Abstract3 Chapter 1 – Overview of Organizational Decline4 Chapter 2 – Organization Inertia5 Chapter 3 – Changes in the Environment9 Chapter 4 – Conclusions and Suggestions 11 Reference 12 Abstract 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 phases in growth stage.
They are growth through creativity, direction, delegation, coordination and collaboration. Various crises are associated with the five growth phases. A specific organizational problem causes a crisis that must be solved in order to advance from one phase to the next. The organizations grow through the five phases until a new, unknown crisis arises. He suggests that if an organization cannot solve the crisis associated with a growth phase, this will result in organizational decline rather than growth (Greiner, 1972). Greiner’s model assumes that managers have the ability to be aware of crises and fix the problems.
Company profitability so can be restored if the performance begins to fall (Greiner, 1972). However, it’s difficult for the managers to identify the internal and external forces, some of which are even out of the managers’ control. Organizational Inertia Once crises and threats are identified, managers have to execute action items to fix the problems. However, some companies may not be able to adapt to the changing environment. Population ecology theorists believe that organizational inertia, one of the factors causing continuing loss in effectiveness and decline.
Many forces inside an organization make it difficult for the organization to change in respond to changing conditions in its environment (Kanter, 1989). Some factors that increase organizational inertia include power and conflict, differences in functional orientation, mechanistic structure, organizational culture, risk aversion, and the desire to maximize rewards (Gareth Jones, 2010). Organizational inertia can be treated as a property by virtue of which the company remains in its pace constantly or even in a static status. It is not restricted to big organizations but applicable to small and medium organizations.
As seen in many companies, they are not willing or capable to grow but remaining at same company size or performance. As the leaders or top management people play an important role in companies their behavior or working attitude is sometimes a major source of organizational inertia and decline. Organizational inertia is developed with various sources in many companies. Tushman (1999) states that successful company could be said to have a niche in the marketplace within which it has demonstrated its ability to overcome challenges and operate profitably. However, that success breeds inertia.
A company that grows too fast may exceed the maximum effectiveness and managing capacity. The rapid growth is beyond its sustainable level as a result of having the risk of decline. Most companies may wish to find certain stability in their growth processes and certain level of consistency. When a company has matured and saturated to a level so that all its processes, procedures and even the culture have been frozen, the managers feel there is nothing to achieve further. If stability and consistency are achieved, the managers become risk averse and inertia sets in.
This phenomenon can often be seen in many big Japanese companies, in which the management teams are not confronted with the threat of takeover. The overly bureaucratic culture and mechanic structure make managers become not aggressive and conservative. To achieve their goals safely, they always set their sales budget in conservative direction. Even there’re changes in demand from market they are not willing to adjust their production plan or budget. This explains why the formerly largest semiconductor companies NEC declined continually (LaPedus, 2007).
In contrast, those Taiwanese semiconductor companies, such as TSMC, UMC, and Mediatek which have more organic structures are still growing. Dick Brass (2010), the former Vice President of Microsoft, reviews the internal problems of Microsoft in last decade. Although Microsoft still reports huge profits, which come almost from Windows and Office programs first developed decades ago, it has become an uncompetitive innovator (Brass, 2010). Microsoft has been losing its core competence as seen in failing to compete with its rivals such as Apple and Google in smart phone, igital music player, and search engine business. Dick states that there had been many innovative ideas created or invented by engineering groups but most of these projects development were terminated because of unable to get resources inside Microsoft. It has created an organizational culture in which the big established groups are allowed to prey upon emerging teams, belittle their efforts, compete unfairly against them for resources, and over time hector them out of existence (Brass, 2010). Obviously, organizational inertia is developed in Microsoft.
The decline stage embodies an internal environment characterized by politics and power (Mintzberg, 1984) as organization members become more concerned with personal goals rather than organizational goals. In the case of Microsoft, people may not think it is in a risk of organizational decline by measuring the performance by financial report since it is and has been earning huge profit. However, the inability to meet the external demands of Microsoft former organizational stage may lead to decline.
The question is how long Microsoft can sustain its profitability by Windows operating systems and Office software applications. Technological forces will be the biggest forces threaten the effectiveness of Microsoft. Though spending billions of dollars in new products development, it keeps failing to launch innovative products to the market in recent years. The resistant to change in organizational culture and design has made Microsoft difficult to compete with its rivals in innovative products and services. In contrast, Apple, Google, etc. keep introducing innovative products to the market, as a result of creating hug profit and brand image. Inertia decreases the flexibility and the effectiveness of a company thus reduces the chance of its survival (Hannan & Freeman, 1996). Apple and Google are changing their strategies to adapt to the changing environment of information technology and consumer market. They are able to fully utilize their effectiveness and competence to obtain resources. Unless Microsoft changes its strategy and organizational design, the existing organizational culture and inertia has made Microsoft in a risky position to decline.
To avoid inertia, managers have to change the organizational structure from time to time as any operation or process carried consistently over a period of time, inertia will set in. This is what Foxconn, the leading electronic manufacturing service company, has been doing by promoting job rotation across the groups, continuously learning and culture of experimentation. Changes in the Environment The environment is the set of forces surrounding an organization that have the potential to affect the way it operates and its access to scarce resources.
Complexity, dynamism, and richness are the three major sources of uncertainty in the environment. The level of complexity depends on the strength, number and interconnectedness of the forces that an organization has to manage. The more strength, number and interrelated the forces in the environment, the more uncertainty the organization faces. Changes in environment can reduce a company’s competence and affect its ability to obtain scarce resources. Sometimes a change in general environment in certain market makes the companies to decline quickly.
For instance, developments in digital audio represent a change in technology or technological forces. The explosive growth of the format has prompted the development of portable, flash memory-based MP3 players. These specialized computing devices exhibit many qualities that make them more attractive than portable CD or tape players. The domination of Apple iPod even changes the music buying and listening behavior of most people. The shrinkage of the CD or tape player market increases the competition that makes the environment poorer.
This threatens the survival of those CD or tape player manufacturers. Some of them keep survive by changing the strategy but some are struggling, decline or even cease to death. For instance, Ngai Lik, one of the biggest CD player manufacturers and exporters in Hong Kong were impacted as a result of entering decline stage. Although the top management of these two companies tried to diversify their product categories and enter into different market segment but their core competence is limited by audio products and the response is too late.
By contrast, another audio manufacturer Alco adapts to the change of this environment by changing strategy to develop new video products such as LCD TV and Blu-ray disc player before the shrinkage of market demand of audio products, still survive in the market. Sony, the portable music player pioneer, invented Walkman and had been the market leader for years until the ramping up of flash memory-based players. By late 90, however, Sony had become bloated, disorganized, rudderless, arrogant, and worst of all, slow to adapt (Greenfeld, 2010).
Sony’s hesitancy is not due to lack of technical expertise or blindness to the growing acceptance of a new music standard, but rather because of internal forces from organizational Inertia. While Sony has begun to respond to the seemingly unstoppable migration to new music formats, its early inaction has initially ceded standard setting, partnerships, and market share leadership to others, like Apple iPod. To change, Sony appointed non-Japanese Howard Stringer as the CEO. Stringer’s initial attempts to remake Sony Corporation after becoming CEO in 2005 faltered because of internal resistance or inertia (Greenfeld, 2010).
Since 2008, Stringer has overseen tens of thousands of layoffs, a shock to Sony’s jobs-for-life culture that probably would have been impossible for a Japanese CEO to carry out. The organizational change and downsize of Sony has improved its effectiveness as seen in the market share of some of its products in the past two years. People may think that it is easy for a big company, which has strong human and capital resources, to change in order to adapt to the changing environment. It’s not true when there are many internal forces or barriers, which resist a big company to change.
Sometimes it would be more difficult for a larger size company to change because of organizational inertia as described earlier. In a population of organizations, the general environments around the organizations are similar. Uncertainty and changes in environment may cause decline and give threat to survival of companies. Nevertheless, new opportunities are also created and available in the market at the same time. Changes in internet bandwidth technology lead the growth of AOL, but also the decline of the same company. Conclusion and Suggestion
In today global environment, uncertainty threatens the survival of companies, which are easy to enter into the decline stage. Organizational inertia reduces the effectiveness thus the competitive advantages of companies. It’s also the source of barriers making companies difficult to change and adapt to new conditions in their environment. The combination of changing environment with organizational inertia creates big challenge to companies. Companies have to be ambidextrous and managers should change and move their companies to more organic structures from time to time before inertia is firmly developed.
To avoid decline, managers have to quickly change their strategies and company structures adapting to the changing environment. Reference List Brass, Dick (Feb 4, 2010). Microsoft’s Creative Destruction. The New York Times. Retrieved from http://www. nytimes. com/2010/02/04/opinion/04brass. html? pagewanted=1 Greenfeld, Karl Taro (March 22, 2010 ). Saving Sony: CEO Howard Stringer Plans to Focus on 3-D TV. Wired Retrieved from http://www. wired. com/magazine/2010/03/ff_sony_howard_stringer/ Greiner, Larry E (Jul-Aug, 1972).
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