Definition: Organizational life cycle, as the name suggests, is the life cycle of an organization from the point of its creation or onset to the point it is terminated. It has five distinct stages which are conception, expansion, stability, growth, and termination.
The organizational life cycle is referred to as a model that has linked business organizations with living organisms and proposed that it passes through predictable sequences of various development and growth stages.
It is believed that like human beings, organizations also are born, they grow and mature with time and there comes a stage when they start declining and like any other human being die. Some of the organizations have a long shelf life, whereas others are unable to cope with the demands and have a short life. Still, it is a fact that every life follows a pattern, and this seems predictable for every organization.
It is up to the management to realise and understand all the phases of the organizational life cycle so that they can understand the priorities of that stage and make decisions accordingly that will work best for that period.
Understanding organizational cycle
The organizational life cycle is described as social systems where a group of people are organised around a common goal or purpose. They indulge in numerous activities like business planning, strategic planning, marketing, product development and financial management. All the activities have both formal and informal goals and include taking steps to achieve these goals by making adjustments along the way if necessary.
For the first time organizations were compared to living organisms by the economist Alfred Marshall in the 1890s and sixty years later it was proved by Kenneth Boulding that the organizations do pass through a life cycle that is very similar to that of living organisms.
Mason Haire was the researcher who came up with the idea that all the organizations adhere to a straight path in the course of their life cycle that can be explained by making similarities with those of living organisms.
More than one hundred and thirty years have passed since the first research was published and the concept of the organizational life cycle has gained prominence over time because of its usefulness in making changes that helps it to cope with the difficulties of every stage.
Importance of studying organizational cycle
It has become essential to understand the organizational life cycle so that the owner, along with his management, can do whatever to stay and thrive in the business. The leaders who have gained experience recognize the symptoms that link life cycle theories to their organization.
With viable comparisons, it becomes easier to understand the phase their organization is going through and the types of problem they are facing and can face in that particular stage of the life cycle. It is this understanding that will provide them with the information to know about the various problems and issues that an organization can face during each cycle. The newly-gained perspective will help the management in making provisions for handling issues and responding to decisions in the workplace.
The understanding that the management gains after studying the theories of the organizational life cycle help them to prioritise the issues and sort them out. It also helps the systems to evolve and reach the next stage gracefully.
In case the management is unable to take viable steps it can lead to decline or stagnation in the organization, and this happens because of unclear roles, unclear priorities, conflicts, frustrations and people living the organization.
It is a fact that when you are trying to understand a particular stage of a system the age does not matter because what matters most is the nature of its current activities and how viable it is in the current situation. This will determine the stage it is going through so that appropriate measures can be taken to make that phase better, productive and worthwhile.
Stages of the organizational life cycle
Organizations are typically changing into different phases, and it is up to an organization to understand the stage or the life cycle which their company is going through. All the organizational life cycle stages present challenges and priorities that should be met head-on to thrive in this world. The various stages of the organizational life cycle are as follows-
1. The start-up or existence phase
This is the first stage of the organizational life cycle and is known by several names as
- The birth stage
- The existence stage
- The start-up stage
- The entrepreneurial stage
All the names have the same meaning and signify the same thing that it is the start of an organization. There is a need for a practical and workable business model at this time that will help the company to find its due course
This is the stage when the companies have to accumulate capital, develop products and services and hire workers. Thus this phase is all about entrepreneurial thinking and includes writing and forming a business plan, formation of various teams, making investment plans to kick-start the business. In case a company does not require outside funds then gearing up for taking out the necessary funds from the personal account.
At this stage, the firms exhibit a simple structure with centralised power at the top of the hierarchy. The primary purpose of this point in time is to establish competencies and generate initial success in terms of products and market.
This is the stage where you will find lots of trial and errors as the companies have to change their products and services in a manner to suit the demands of its customers and establish distinct competencies. The pursuit of a niche strategy and frequent innovations are part of this phase.
The product development and delivery stage during the first phase involve employees wearing several hats and leaders being engaged in strategic as well as tactical levels. The significant attributes in this environment are flexibility and lean management of assets and resources for the continued existence of the company. The success in this birth stage is in finding a niche product/market that will provide enough revenues to maintain and develop the organization and often involves growth via vision and creativity.
Understanding the business model will help in getting a close view of the bigger picture so that it becomes possible to know how to generate earnings and revenues and control expenses for future growth and development of the company.
It is generally seen that by the end of this stage, the organization more often experience explosive and unprecedented growth. To meet the demands, it has to rapidly hire new employees because the business opportunities start surpassing resources and infrastructure.
2. The growth or survival phase
The second stage of the organizational life cycle is the growth stage that is also referred to as the survival stage. It is aptly named because at this point; the companies are looking to solidify their roots, establish a framework, pursue growth and develop their capabilities. The onus is on setting targets and generating revenues for expansion and growth plans. There are two possible scenarios in the growth stage; first, some companies enjoy success and growth and can enter the next step with aplomb whereas some organizations are unable to achieve the desired success and subsequently fail to survive.
The growth stage is crucial for an organization, and this is why it puts its onus on early product diversification and sales growth. Product lines are broadened; efforts are on tailoring products to suit new markets, managers try to identify subgroups of customers and make small modifications in product and services to serve them in a better way.
The niche strategy is often sidelined for a temporary phase to address the broadened markets. Generally, the organizations attain profitability in this stage and might require additional funding to meet the numerous growth opportunities.
In this stage a functionally-based structure is established, procedures are formalised, some authority is delegated to the middle managers, customers influence decisions, and the goal encompasses fulfilling the wishes of the customer to a higher degree.
The roles now become differentiated, and there is an increase in sales and marketing to generate and fulfil demands. In other words, diversification of the customer base and product line results in the specialization. To maintain control, the organization introduces formal methods and cross-functional activities.
One issue that an organization can face in this stage is autonomy. Fewer onuses on innovation activities and limited decentralisation of power can make the company less responsive to market changes. The growth stage will start to end when the sales of an organization begin to slow down.
3. The maturity phase
The next stage in the organizational life cycle is the maturity stage where the company enters a hierarchal structure of management. In this phase, the companies pay fewer onuses on expansion and more on safeguarding their interests and maintaining the existing growth and development strategies and plans. It is the middle and top levels management that take up the mantle of specialising in tasks like routine work, planning, strategising etc.
By the time an organization reaches its maturity level one can see stabilisation in the sales. This happens because of market saturation and high levels of competitive activities.
Some organizations are highly profitable, and the goal then is to maintain smooth functioning to maximise their profits in case the company goes through a declining sales growth phase. The companies put their onus on internal efficiency, and for this, they start installing control mechanisms in place.
Firms remain centralised and functional, and departmental structures continue to exist as they are apt for product-market scope. The delegation of power is less compared to the growth stage because the operations are now more stable and straightforward and do not require the efforts of numerous people.
There is an emphasis on budgets, formal cost controls, performance measures and coordination so that various departments and units can work together effectively.
The maturity phase in an organizational life cycle shows a less proactive and less innovative decision-making stage. This is because the aim of the company at this point is apparent – to focus on efficiency instead of a novelty. It waits for the competition to make the first move and lead the way and then imitates the innovation if necessary.
The maturity stage of an organization can continue for a very long period because as long as the organization is showing good sales and revenues figure there is no need to change the status quo or rock the boat.
4. The renewal phase
The next stage in the organizational life cycle is known as the renewal stage. This is because, at this point, the companies will experience a renewal in their management structure that shifts from a hierarchical organizational structure to a matrix style of organizational structure. This change facilitates flexibility and creativity in the organization.
The renewal stage is also referred to as the revival stage because of its functions. It is an optional stage, and several organizations do not put the onus on it whereas other takes care of it diligently. The revival stage generally occurs between maturity and a decline stage of the organizational life cycle. This happens because an organization recognises the need for drastic changes and initiates plans to implement the set strategies that can alter their current path.
The revival stage is considered for expansion and diversification of product-market scope. Companies try to follow a policy of rapid growth through diversification, innovation and acquisition. This stage involves increased investment and high risks.
The firm forms project teams and task forces to analyse issues and find solution alternatives systematically. Information processing is expanded and becomes diverse because the requirement changes from performance reporting and financial controls to information about customer and market opportunities. This is for identifying the new trends and opportunities to revive the organizational structure.
Significant changes start taking place because of the implementation of various policies by the organization. The revival stage can either be successful, and then the organization can maintain and see high growth or not successful, and this can be identified by the lack of expected sales growth in the company.
5. The decline phase
The last stage of the organizational life cycle is the decline stage that signifies the death of an organization. This can be identified by minimizing sales figures and profitability in the organization. This happens because of market stagnation, reluctance for risk-taking, external challenges, and lack of innovation.
In this stage of the organizational life cycle, organizations start putting the onus on conserving resources. Their sales figures go plummeting downhill because of unappealing product lines and lack of new technologies in the products. The communication between departments and the levels is weak and well-developed mechanism is absent for information processing.
The declining stage is the worst in the organizational life cycle as individuals become preoccupied with personal objectives instead of organizational goals and objectives. This slowly and steadily destroys the feasibility and functionality of the entire company.