Organizational Life Cycle (Encyclopedia of Small Business)
The organizational life cycle (OLC) is a model which proposes that over the course of time, business firms move through a fairly predictable sequence of developmental stages. This model, which has been a subject of considerable study over the years, is linked to the study of organizational growth and development. It is based on a biological metaphorhat business firms resemble living organisms because they demonstrate a regular pattern of developmental process. Organizations that are said to pass through a recognizable life cycle, wrote Gibson, Ivancevich, and Donnelly in Organizations: Behavior, Structure, Processes, are fundamentally impacted by external environmental circumstances as well as internal factors: "We're all aware of the rise and fall of organizations and entire industries Marketing experts acknowledge the existence of product-market life cycles. It seems reasonable to conclude that organizations also have life cycles."
In a summary of OLC models, Quinn and Cameron wrote in Management Science that the models typically propose that "changes that occur in organizations follow a predictable pattern that can be characterized by developmental stages. These stages are sequential in nature; occur as a hierarchical progression that is not easily reversed; and involve a broad range of organizational activities and structures." The number of life cycle stages proposed in various works studying the phenomenon have varied considerably over the years. Some analysts have delineated as many as ten different stages of an organizational life cycle, while others have flattened it down to as few as three stages. Most models, however, tout the organizational life cycle as a period comprised of four or five stages that can be encapsulated as start-up, growth, maturity, decline, and death (or revival).
TRENDS IN OLC STUDY
While a number of business and management theorists alluded to developmental stages in the early to mid-1900s, Mason Haire's 1959 work Modern Organization Theory is generally recognized as one of the first studies that used a biological model for organizational growth and argued that organizational growth and development followed a regular sequence. The study of organizational life cycles intensified, and by the 1970s and 1980s it was well-established as a key component of overall organizational growth.
Organizational life cycle 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. Baird and Meshoulam stated in the 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 the firm's managers must change the goals, strategies, and strategy implementation devices of the business to fit the new set of issues. 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. For example, in a longitudinal study of 36 corporations published in Management Science, Miller and Friesen proposed five growth stages: birth, growth, maturity, decline, and revival. They traced changes in the organizational structure and managerial processes as the business firms proceeded through the stages. At birth, the firms exhibited a very simple organizational structure with authority centralized at the top of the hierarchy. As the firms grew, they adapted more sophisticated structures and decentralized authority to middle- and lower-level managers. At maturity, the firms demonstrated significantly more concern for internal efficiency and installed more control mechanisms and processes.
GROWTH PHASES Despite the increase in interest in OLC, though, most scholarly works focusing on organizational life cycles have been conceptual and hypothetical in content. Only a small minority have attempted to test empirically the organizational life cycle model. One widely-cited conceptual work, however, was published in the Harvard Business Review in 1972 by L. Greiner. He used five growth phases: growth through creativity; growth through direction; growth through delegation; growth through coordination; and growth through collaboration. Each growth stage encompassed an evolutionary phase ("prolonged periods of growth where no major upheaval occurs in organization practices"), and a revolutionary phase ("periods of substantial turmoil in organization life"). The evolutionary phases were hypothesized to be about four to eight years in length, while the revolutionary phases were characterized as the crisis phases. At the end of each one of the five growth stages listed above, Greiner hypothesized that an organizational crisis will occur, and that the business's ability to handle these crises will determine its future:
Phase 1rowth through creativity eventually leads to a crisis of leadership. More sophisticated and more formalized management practices must be adopted. If the founders can't or won't take on this responsibility, they must hire someone who can, and give this person significant authority.
Phase 2rowth through direction eventually leads to a crisis of autonomy. Lower level managers must be given more authority if the organization is to continue to grow. The crisis involves top-level managers' reluctance to delegate authority.
Phase 3rowth through delegation eventually leads to a crisis of control. This occurs when autonomous employees who prefer to operate without interference from the rest of the organization clash with business owners and managers who perceive that they are losing control of a diversified company.
Phase 4rowth through coordination eventually leads to a crisis of red tape. Coordination techniques like 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.
Phase 5rowth through collaboration, is characterized by the use of teams, a reduction in corporate staff, matrix-type structures, the simplification of formal systems, an increase in conferences and educational programs, and more sophisticated information systems. While Greiner did not formally delineate a crisis for this phase, he guessed that it might revolve around "the psychological saturation of employees who grow emotionally and physically exhausted by the intensity of team work and the heavy pressure for innovative solutions."
ORGANIZATION LIFE CYCLE AND THE SMALL BUSINESS OWNER
Entrepreneurs who are involved in the early stages of business creation are unlikely to become preoccupied with life cycle issues of decline and dis-solution. Indeed, their concerns are apt to be in such areas as securing financing, establishing relationships with vendors and clients, preparing a physical location for business operations, and other aspects of business start-up that are integral to establishing and maintaining a viable firm. Basically, these firms are almost exclusively concerned with the very first stage of the organization life cycle. Small business enterprises that are well-established, on the other hand, may find OLC studies more relevant. Indeed, many recent examinations of organization life cycles have analyzed ways in which businesses can prolong desired stages (growth, maturity) and forestall negative stages (decline, death). Certainly, there exists no timeline that dictates that a company will begin to falter at a given point in time. "Because every company develops at its own pace, characteristics, more than age, define the stages of the cycle," explained Karen Adler and Paul Swiercz in Training & Development.
Small business owners and other organization leaders may explore a variety of options designed to influence the enterprise's life cyclerom new products to new markets to new management philosophies. After all, once a business begins to enter a decline phase, it is not inevitable that the company will continue to plummet into ultimate failure; many companies are able to reverse such slides (a development that is sometimes referred to as turning the OLC bell curve into an "S" curve). But entrepreneurs and managers should recognize that their business is always somewhere along the life cycle continuum, and that business success is often predicated on recognizing where your business is situated along that measuring stick.
Adler, Karen R., and Paul M. Swiercz. "Taming the Performance Bell Curve." Training & Development. October 1997.
Churchill, N., and V. Lewis. "The Five Stages of Small Business Growth." Harvard Business Review. May-June 1983.
Dodge, H. Robert, and John E. Robbins. "An Empirical Investigation of the Organizational Life Cycle Model for Small Business Development and Survival," Journal of Small Business Management. January 1992.
Dodge, H. Robert, Sam Fullerton, and John E. Robbins. "Stage of the Organizational Life cycle and Competition as Mediators of Problem Perception for Small Businesses." Strategic Management Journal. February 1994.
Fletcher, Douglas A., and Ian M. Taplin. "Organizational Evolution: The American Life Cycle." National Productivity Review. Autumn 2000.
Gibson, James L, John M. Ivancevich, and James H. Donnelly, Jr. Organizations: Behavior, Structure, Processes. Irwin, 1994.
Greiner, L. "Evolution and Revolution as Organizations Grow," Harvard Business Review. July-August 1972.
Hanks, S., C. Watson, E. Jansen, and G. Chandler, "Tightening the Life-Cycle Construct: A Taxonomic Study of Growth Stage Configurations in High-Technology Organizations," Entrepreneurship Theory and Practice. Winter 1993.
Kazanjian, R. "Relation of Dominant Problems to Stages of Growth in Technology-Based New Ventures." Academy of Management Journal. June 1988.
Miller, D., and P. Friesen, "A Longitudinal Study of the Corporate Life Cycle," Management Science. October 1984.
Quinn, R., and K. Cameron, "Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence." Management Science. January 1983.
Smith, K., T. Mitchell, and C. Summer, "Top Level Management Priorities in Different Stages of the Organizational Life Cycle," Academy of Management Journal. December 1985.
Tyebjee, T., A. Bruno, and S. McIntyre, "Growing Ventures Can Anticipate Marketing Stages," Harvard Business Review. January-February 1983.
Organizational Life Cycle (Encyclopedia of Business)
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.
THE DEVELOPMENT OF THE OLC MODEL
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.
REASONS FOR BUSINESS CHANGE
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.
PROMOTING NEW GROWTH
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.
SEE ALSO: Corporate Restructuring; Going Public
[John G. Maurer,
updated by Karl Heil]
Adler, Karen R., and Paul M. Swiercz. "Taming the Performance Bell Curve." Training and Development, October 1997, 33.
Baird, L., and I. Meshoulam. "Managing Two Fits of Strategic Human Resource Management." Academy of Management Review 13, no. I (January 1988): 116-28.
Chandler, A. Strategy and Structure: Chapters in the History of the Industrial Enterprise. Cambridge, MA: MIT Press, 1962.
Churchill, N., and V. Lewis. "The Five Stages of Small Business Growth." Harvard Business Review 61, no. 3 (May/June 1983): 30-50.
Greiner, L. "Evolution and Revolution as Organizations Grow." Harvard Business Review 50, no. 4 (July/August 1972): 37-46.
Haire, Mason. "Biological Models and Empirical Histories of the Growth of Organizations." In Modern Organization Theory, edited by Mason Haire. New York: John Wiley & Sons, Inc., 1959, 272-306.
Hanks, S., et al. "Tightening the Life-Cycle Construct: A Taxonomic Study of Growth Stage Configurations in High-Technology Organizations." Entrepreneurship Theory and Practice 18, no. 2 (winter 1993): 5-29.
Miller, Lawrence M. Barbarians to Bureaucrats: Corporate Life Cycle Strategies. New York: Clarkson N. Potter, 1989.
Quinn, R., and K. Cameron. "Organizational Life Cycles and Shifting Criteria of Effectiveness: Some Preliminary Evidence." Management Science 29, no. I (January 1983): 33-51.
Smith, K., T. Mitchell, and C. Summer. "Top Level Management Priorities in Different Stages of the Organizational Life Cycle." Academy of Management Journal 28, no. 4 (December 1985): 799-820.
Thompson, LeRoy, Jr. Mastering the Challenges of Change: Strategies for Each Stage in Your Organization's Life Cycle. New York: AMACOM, 1994.
Tyebjee, T., A. Bruno, and S. McIntyre. "Growing Ventures Can Anticipate Marketing Stages." Harvard Business Review 61, no. I (January/February 1983): 62-66.