Organizational life cycle (OLC) is a model that proposes that businesses, over time, progress through a fairly predictable sequence of developmental stages. This model is linked to the study of organizational growth and development. It is based on a biological metaphor of living organisms, which have a regular pattern of development: birth, growth, maturity, decline, and death. Likewise, the OLC of businesses has been conceived of as generally having four or five stages of development: start-up, growth, maturity, and decline, with diversification sometimes considered to be an additional stage coming between maturity and decline.
During the start-up stage, companies accumulate capital, hire workers, and start developing their products or services. Toward the end of this stage, companies often experience explosive growth and begin to hire new employees rapidly, because business opportunities exceed infrastructure and resources.
This expansion continues into the growth stage where companies increase their resources and workforces dramatically. The financial situation of companies usually improves during this stage, as company revenues grow and as companies establish strong customer bases. Despite their expansion, companies may still need additional funds to exploit all the available growth opportunities, so many go public at this point, too.
The maturity stage is marked by security and by a slight slowdown. By this stage, companies have amassed assets and solid profits, by becoming established in the market. The primary area of business has become a cash cow because it controls a sizable market share and continues to yield profits, but experiences slow or stagnant growth. In order to avoid the decline stage, mature companies often take a variety of actions to renew their growth, such as acquiring other companies and expanding product lines. Some business theorists consider the foray into new markets a separate stage, namely, the diversification stage.
If companies fail to implement measures to improve growth, they will most likely enter the fourth and final stage of the OLC: decline. In this stage, not only company hiring drops, but also company sales and profits. Furthermore, demand for a company's products or services decreases. To compensate for the decline, companies launch downsizing or reengineering campaigns during this stage. If these efforts do not succeed, however, companies look for a buyer or shut down.
As companies progress through the organizational life cycle the criteria for their effectiveness change. Companies tend to change their management styles, reward systems, organization structures, communication and decision-making processes, and corporate strategies. As companies mature, they usually strive to become more innovative or they diversify by making acquisitions.
Despite the usefulness of this model, business scholars point out that companies do not always develop linearly as the OLC model suggests. Instead, companies may experience little growth initially and then experience decreasing sales, before moving into a stage of growth. Or they may undergo spurts of growth and decline, which makes it difficult to place them in any particular stage. Nevertheless, the model represents general patterns companies experience while developing.
While a number of business and management theorists alluded to developmental stages in the early to mid-1900s, Mason Haire, editor of the 1959 volume Modem Organization Theory, is generally recognized as one of the first theorists to use a biological model for organizational growth and to argue that organizational growth and development follows a regular sequence. A. Chandler, author of the 1962 book Strategy and Structure, influenced later OLC research with his argument, based on a study of four large U.S. firms, that as a firm's strategy changed over time, there must be associated changes in the firm's structure. Since the early 1970s the number of life cycle stages proposed by business scholars has ranged from three to ten, but most OLC models have four or five stages.
OLC is an important model because of its premise and its prescription. The model's premise is that requirements, opportunities, and threats both inside and outside the business firm will vary depending on the stage of development in which the firm finds itself. For example, threats in the start-up stage differ from those in the maturity stage. As the firm moves through the developmental stages, changes in the nature and number of requirements, opportunities, and threats exert pressure for change on the business firm. L. Baird and I. Meshoulam argued in an article in Academy of Management Review that organizations move from one stage to another because the fit between the organization and its environment is so inadequate that either the organization's efficiency and/or effectiveness is seriously impaired or the organization's survival is threatened. The OLC model's prescription is that a company's managers must change its business goals, strategies, and strategy implementation devices to fit the internal and external characteristics of each stage. Thus, different stages of the company's life cycle require alterations in the firm's objectives, strategies, managerial processes (planning, organizing, staffing, directing, controlling), technology, culture, and decision making.
A variety of factors contribute to the passage of companies through the OLC. To begin with, companies usually follow the development stages of the industries in which they operate. Hence, most companies in a mature industry are also mature, and so such companies must launch new products or services or more competitive marketing strategies.
Changes in customer preferences may cause both companies and their respective industries to move into another development stage. For example, consumers may choose alternative products that have superior technology, have more features, or are easier to use.
A closely related factor, therefore, is change in products or services. Consumer needs and wants can cause products and services to change and innovative products and services can cause consumer needs and wants to change. Industries that depend on technology, research, and innovation are the most susceptible to maturing and declining as a result of product changes. Furthermore, products and services have their own life cycles, which involve the passage through the same stages: start-up, growth, maturity, and decline. In addition, if there are significant barriers to entry in an industry, it will tend to be more stable than industries without such barriers.
To avoid declining, companies can take a variety of corrective actions during the maturity or declining stages in order to start a new development cycle or at least to stave off going out of business. Beginning in the maturity stage companies can bypass decline by focusing on product or service positions and implementing new methods of attracting and retaining customers. To promote new growth, companies also must attempt to introduce innovations and hence company management must emphasize creativity at this point, according to LeRoy Thompson Jr., author of Mastering the Challenges of Change.
As a company matures, it must focus more and more on external factors that can lead to decline. If a company fails to take the initiative during the maturity stage, it may face an even more formidable task of trying to reverse its descent later on. Furthermore, if companies anticipate maturation and implement policies that will help them become more innovative during this stage, they can reduce the effects of the maturity stage and more easily spark a new start-up or growth stage (e.g., through intrapreneurship).
Maturity and decline tend to result from companies becoming habituated to doing business a certain way during the start-up and growth stages and being unable to break these business habits when they cease to be fruitful. If a business strategy has been successful, companies tend not to make changes until it is too late, until they start to decline. To avoid losing ground, Thompson recommends that companies maintain a marketing attitude, which entails determining customer needs and wants and striving to meet them.
Thompson, L. Greiner, Lawrence M. Miller, and others correlate the stages of the life cycle with different management styles needed to continue growing. The start-up stage, which involves growth through creativity and vision, eventually leads to leadership and organizational problems. More sophisticated and more formalized management practices must be adopted that emphasize action and control. If the founders can't or won't take on this responsibility, they must hire someone who can, and give this person significant authority. The growth stage is successful because of control and direction, but this management style can cause a crisis of autonomy. Lower-level managers must be given more authority if the organization is to continue to grow. The crisis involves toplevel managers' reluctance to delegate authority.
During the maturity stage, companies can grow through delegation, yet delegation can lead to control problems within diversified companies. Since lowerlevel managers prefer to take charge of their own divisions and departments without interference from the rest of the organization, upper-level managers perceive that they are losing control of their diversified company. Companies also implement systems of co-ordination to enable their various business units and departments to work together. These efforts, however, tend to cause an influx of red tape. Coordination techniques such as product groups, formal planning processes, and corporate staff become, over time, a bureaucratic system that causes delays in decision making and a reduction in innovation. At this stage, companies may become too large and diversified to function effectively with inflexible regulations and dense bureaucracy.
During the final stage, companies must emphasize growth through collaboration, which includes using teams, empowering workers, removing red tape, reducing corporate staff, simplifying formal systems, increasing conferences and educational programs, and introducing more sophisticated information systems. Because decline and closure is likely if companies proceed in the same direction as in the maturity stage, they must adopt these kinds of policies and implement these kinds of changes to ward off shrinking sales and employee apathy. Hence, companies must relaunch or recast themselves at this final stage in the organizational life cycle.
[ John G. Maurer ,
updated by Karl Heil ]
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