Explain the business model of an organizational life cycle.

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kipling2448 | (Level 3) Educator Emeritus

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The business model of an organizational life cycle is a chart or diagram depicting the phases of a business’s history from inception to termination.  Intended to provide a picture of how corporations that began successfully ultimately failed due to bloated structures and increasing complacency, the model usually begins with the conceptualization and formation of the business, then reflects its growth as it becomes successful, which is followed by the development of practices and trends that precipitate its decline.  The final phase of the model is the company’s demise, usually through bankruptcy.  As the company achieves its initial success, it becomes ambitious and extends itself beyond its long-term capacity to function effectively.  By branching out into new business lines while expanding its infrastructure or overhead, including hiring more employees, and by losing sight of its core values and markets, the company begins its period of decline, decreasing in profitability and disrupting relationships with important clients.  The business model of an organizational life cycle, if regularly consulted, can help warn businesses of the dangers of over-expansion and complacency with respect to the principles that helped the company achieve success in the first place.  It is not intended to warn businesses against expansion, but merely to advise those who manage these businesses not to neglect those principles and to be ever-aware of the dangers of over-expansion.

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holmwood | (Level 1) Adjunct Educator

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In the 10th edition of Organizational Theory and Design by Richard L. Daft, there are four stages to the organizational life cycle:

1) Entrepreneurial (beginning)

When business first start out, you have one person running everything — creating the product/services, structuring the business model, and managing resources. (e.g. Lemonade Stand)

2) Collectivity 

This is the stage when a handful of people are engaged in the company. The entrepreneur is now in charge of managing a small number of employees to handle specific tasks. The book emphasizes that this is informal, and some of the rules and procedures are not set in stone. (e.g. Bake Sale)

3) Formalization

There is a large number of employees with a definite hierarchy and clear procedures. There are now groups handling different aspects of the company. For instance, the creation of products and services are handled by one group of individuals with their own boss/manager. In another instance, handling the financial aspect of the company is a separate group of individuals with their own boss/manager. The major challenge at this stage is making sure this large group of individuals is working together in an efficient manner. 

4) Elaboration

When a company gets too big and formalized, it limits personal freedom. Think about the amount of red tape you need to jump over to get a promotion, all the phone calls you have to make to talk to someone in a different department, or how you get scolded by your manager for having a lunch break at 11:55 and not the permitted time of 12:00. There is a strain between management and employee, and a distance between fellow employees. The solution, in Daft's book, is to increase cooperation and teamwork. Think company team-building exercises or company-sponsored sports events.

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