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Organizational Transformations Module 5 Sreenath B. Roll No.45

Organizational Transformations

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Organizational Analysis and Processes

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Page 1: Organizational Transformations

Organizational Transformations

Module 5

Sreenath B.Roll No.45

Page 2: Organizational Transformations

THE ORGANIZATIONAL LIFE CYCLE

• A sequence of stages of growth and development through which organizations may pass.

• Some companies are successful whereas others fail; various outcomes occur because different strategies, structures, and cultures are used to create value.

• Organizations respond differently to problems. • Researchers propose that organizations go

through predictable stages, known as the organizational life cycle

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• The four main stages of the life cycle are birth, growth, decline, and death. No established timetable is set for these stages.

• Organizations pass through the cycle at their own pace, and some do not experience every stage.

• Some companies move directly from birth to death. Others spend a long time in the growth stage, which has sub stages.

• Decline also has sub stages. Some in the decline stage can turn around and move to the growth stage.

• If an organization fails to manage problems in each stage, it will fail.

• Still, these stages are models, and every organization has unique experiences.

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Organizational Birth

• Organizations are born when individuals, called entrepreneurs, recognize and take advantage of opportunities to use their skills and competences to create value.

Eg : Michael Dell – mail order system for marketing low priced computers

 • Entrepreneurs recognize and exploit

opportunities to use their skills to create value.

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• Organization birth, the founding of an organization ,is a dangerous stage of the life cycle and is associated with the greatest chance of failure.

• The failure is high because of liability of newness-the dangers associated with being the first in a new environment .

• Entrepreneurship is risky, and a new organization has no formal structure to provide stability.

• Structure is in the mind of the founder; though an informal structure is flexible, it has no memory and no set procedures.

• Environmental conditions may be hostile and resources hard to secure.

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Developing a Plan for a New Business

• A business plan will help new organizations make it through the dangerous birth stage.

• A business plan outlines how new entrepreneurs plan to compete in the environment 

• Table below lists the steps involved in developing a plan.

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The planning begins when an entrepreneur notices an opportunity to develop a new or improved good or service for the market. Next, the feasibility of the idea is tested through a SWOT analysis: 

• Strengths of the organization• Weaknesses of the organization• Opportunities in the environment• Threats in the environmentFollowing this, a business plan is developed with the

following basic elements:1. A statement of the organization’s mission, goals, and

financial objectives.2. A statement of the organization’s strategic objectives.3. A list of all the functional and organizational resources

needed.

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4. A timeline for completion.• One of the reasons that the birth

stage is so risky is that many entrepreneurs do not have the luxury of having the management team in place to do such an analysis.

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A population Ecology Model of org Birth

Population Ecology theory• A theory that seek to explain the factor that

affect the rate at which new org are born in a population of existing organizations.

• A population of orgnzns comprises the orgnzns that are competing for the same set of resources in the environment.

• Eg: All the fast food restaurant s in college station , Texas .constitute a population of restaurant that compete to obtain environmental resource in the form of dollar that students are willing to spent on food.

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Cont..

Environmental niches Particular set of recourses

• Dell computer chose to focus on the mail order niche of the personal computer environment , IBM and hp originally focused on the business niche

• Apple focus on the published and higher education niche

Number of birth According to the Population Ecology theory the

availability of resource determines the number of organization in a population

Population density The no of org that can compete for the same

resource in a particular environment

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• According to population ecology theory the rate of birth in a new environment increases rapidly at first and then tapers off as recourses become less plentiful and competition increases.

• The two factors account for the rapid birth rate• The first is that as new organzn are found there is an

increase in the knowledge and skill available to generate similar new orgzns .

• Many new orgzns are founded by entrepreneurs who leave existing companies to set up their own companies.

• Eg:Xerox , HP IBM• The success of new orgnzns makes it relatively easy for

entrepreneur to found similar new org nzns because success confers legitamacy,which will attract stakeholder.

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Cont..

• Fast food restaurants for example were a relatively untested kind of org until M c Donald create and succeed in the US food market

Burger king and Wendy• Mc Donald become a US institution gave the population

of fast food industry a legitimacy and allow them to attract the stakeholders.

• Once the organzn environment is populated with a no. of successful organization the org birth rate tapers off.

• Two factor work to decrease the rate at which org are found .

1,Birth tapers off as the resources diminishes for new entrants

2,Difficulty of competing with existing organizations

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First mover advantages• The benefit an org derives from being an early entrant into a

new environment• Companies that start first like Mc Donald or Microsoft have

competitive edge over the later entrant because of first mover advantage

• Customer support a recognizes brand name and best location of the enterprise

• Worker prefer to work in org that have establish reputation and offer secure employment opportunities .

• Potential entrepreneurs are discouraged from entering the industry or market because they under stand that the larger the no of co already competing for recourses the more difficult & expensive the recourses will be to obtain.

• To obtain new customer ,new companies may need to over spend on advertising or innovation or they may need to reduce their price too much.

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SURVIVAL STRATEGIES• Population ecologist have identified two set of strategies

that organizations can use to gain access to resources & enhance their chances of survival in the envt.

• r – strategy Vs K – strategy • Specified strategy Vs General strategy

• r – Strategy Vs K – strategy 

• Org. that follow an r – strategy are founded early in a new envt. – they are early entrants. Organisations that follow a K – strategy are founded late – they are late entrants.

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• Advantage of an r – strategy is that an org. obtains first – mover advantages & has first pick of the resources in the envt.

• As a result org. is usually able to grow rapidly & develop skills and procedures that increase the chance of surviving and prospecting.

• Org. that follows K – strategy are usually estd. in other envt. and wait to enter new envt. until the uncertainty in that envt is reduced and the correct way to compete is apparent.

• These org. then take the skills they have estd in other envt & use them to dvlp effective procedures that allow them to compete with and often dominate org. following r – strategy.

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• The diff between r – strategy & K – strategy is evident in the situation that emerged in the personal comp industry. Apple comp founded the personal copm market by developing the Apple I.

• Other small companies followed apple’s lead. Each of them pursued an r – strategy & developed its own personal computer. IBM realized the potential in the personal computer market.

• It adopted K- strategy & moved to develop its own PC on MS – DOS OS. As MS – DOS operating system became industry standard, IBM drove many of its r – strategies out of the market.

• K - strategies can often outperform r- strategies when they are competing for the same environmental niche.

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Specialist strategy Vs Generalist strategy• The difference between a specialist and a generalist

strategy is defined by the breadth of the environmental niche – the set of resources – for which an organisation competes.

• Specialist organizations that concentrate their skills to pursue a narrow range of resources in a single niche.

• Generalist Organizations spread their skills thinly to compete for a broad range of resources in many niches

• By focusing their activities in one niche, specialist develop core competencies that allow them to outperform generalist in that niche. They offer customers much better service than generalist

• E.g. Intel invests all its resources in producing state of art microprocessors and does not bother with other kinds of computer components.

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• Generalist can often outcompete specialists when there is considerable uncertainty in envnmnt & when resources are changing so that niches emerge & disappear continually.

• Generalist can survive in an uncertain envmt , they’ve spread their resources thinly.

• Both of them can coexist in many envmt.• Generalist creates the condition that allow

specialist to operate successfully.• Department stores create a demand,

boutiques set up & specialise in one kind of clothing such as evening wear or sportswear.

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THE PROCESS OF NATURAL SELECTION

• The two sets of strategies-specialist versus generalist and r versus k-give rise to four strategies that organization can pursue; r-specialist, r-generalist ,k-specialist,k-generalist.

• Early in an environment, as a niche develops and new resources become available, new organization are likely to become r-specialist,organisation that move quickly to focus on serving the need of particular customer group

• k-generalist strategy, often creates niches for new firms to enter the market

• eg :old car companies are r-specialist ford pursue a k-generalist strategy by producing a low-priced for mass market.

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Natural selection• The process that ensures the

survival of the organizations that have the skills and abilities that best fit with the environment

• New organizations survive if they can develop skills that allow them to fit with and to exploit their environment

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Organizational Growth

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The Institutional Theory of Organizational Growth

• Organizational growth stage of the life cycle occurs as firms develop the ability to acquire resources.

• Growth increases the division of labor and specialization, leading to competitive advantage.

• Surplus resources add to growth. • Organizations do not seek growth as a goal; it

results from developing skills to meet stakeholders’ needs.

• Institutional theory studies how organizations grow and survive in a competitive environment by satisfying stakeholders.

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The Institutional Theory of Organizational Growth

• Increasing legitimacy to stakeholders is as important as increasing technical efficiency.

• New organizations implement the rules and codes of conduct in the institutional environment, the values and norms that govern the behavior of a population of organizations.

• New organizations enhance legitimacy by duplicating the goals, structure, and culture of other successful organizations.

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The Institutional Theory of Organizational Growth

Organizational Isomorphism• As organizations grow and imitate others to

survive, organizational isomorphism—the similarity among organizations in a population—increases.

Several reasons explain why organizations become similar:

1.Coercive isomorphism: Organizations comply with norms due to pressures from other organizations and from society. A dependent organization, a supplier, imitates a more powerful organization, a large buyer, as its dependence increases.

• Xerox coerced Trident Tool into adopting TQM.

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The Institutional Theory of Organizational Growth

2. Mimetic isomorphism occurs when firms copy one another to increase legitimacy. New organizations copy successful organizations if environmental uncertainty exists.

• They may duplicate structure, strategy, culture, and technology to survive. Some companies imitate at first, and then imitation diminishes.

• Late entrants need a unique competence because copying everything makes resource attraction difficult.

3.Normative isomorphism occurs when organizations become similar by indirectly adopting the norms and values of others.

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The Institutional Theory of Organizational Growth

• This occurs as managers and employees change companies and bring norms and values.

• Industry, trade, and professional associations are another indirect way to acquire norms and values.

Problems of isomorphism• Organizations may learn outdated behaviors• Pressures to imitate decrease innovation.

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Greiner’s Model of Organizational Growth

• Larry Greiner developed a life cycle model in the 1970s. • Greiner’s model proposes that an organization passes

through five serial stages and that each stage ends in a crisis; an organization must resolve the crisis to proceed to the next stage.

• The stages are creativity, direction, delegation, coordination, and collaboration.

Stage 1: Growth through Creativity• The first stage in the growth cycle is the creativity

stage, which includes the birth of the organization. • Entrepreneurs develop the skills to innovate and

introduce new products for new market niches.

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Greiner’s Model of Organizational Growth

• Learning occurs by trial and error. • The informal organization directs communication and

decision-making.What are the problems of a new organization?• The founding entrepreneurs have to manage the

organization, a skill different from entrepreneurship. • Management entails employing resources to

accomplish goals effectively. • Entrepreneurs neglect efficiency, as they concentrate

on launching the company and satisfying customers. • Entrepreneurs may lack management skills.• Crisis of leadership may occur as an entrepreneur

becomes a manager. The company may lose market share and see its stock price drop.

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Greiner’s Model of Organizational Growth

• An organization must resolve this crisis by replacing entrepreneurs with managers to move to the next stage.

Stage 2: Growth through Direction• When a top-management team is hired, an organization

moves to the second stage, growth through direction. • The team directs the company, and lower-level

managers perform functional duties. • In this stage a company selects an organizational

strategy, designs its structure, and develops its culture.• A company adopts a functional or a divisional structure.

A formal structure centralizes decision- making, and formal rules and procedures control activities.

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Greiner’s Model of Organizational Growth

• Crisis of autonomy: Direction increases the growth curve, but rapid growth can lead to a crisis of autonomy.

• A centralized structure restricts risk-taking, which decreases employee motivation to be entrepreneurial.

• A creative R&D employee who needs top management approval to start a project hesitates to take the initiative.

• Bureaucracy stifles innovation.

What happens if the crisis of autonomy is not resolved?• Talented people leave the organization and start their

own businesses. • The entrepreneur’s exit reduces the ability to innovate

and competitors increase.

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Greiner’s Model of Organizational Growth

Stage 3: Growth through Delegation• Decentralizing authority to lower-level functional

managers and tying performance to• rewards resolves the crisis of autonomy.What structure fits this stage?• A product team structure or multidivisional structure

reduces the time to bring a product to market, motivates managers to respond quickly to customers, and improves

• strategic decision-making. • Each department or division expands to meet goals,

and top management only intervenes when necessary. • Although growth may be rapid, top managers feel a

loss of control.

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Greiner’s Model of Organizational Growth

• Crisis of control occurs as top mangers compete with divisional or functional managers for resources.

• Top managers may regain control by centralizing decision making, but this response returns the company to the crisis of autonomy.

Stage 4: Growth through Coordination• How can the crisis of control be resolved?• A proper balance must exist between centralization

and decentralization. • Top management assumes responsibility for

coordinating divisions & motivating managers to consider the whole organization.

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Greiner’s Model of Organizational Growth

• Coordination is important for a related diversification or a global expansion strategy, which requires a “matrix in the mind” to foster cooperation.

• To increase the motivation of managers, a company creates an internal labor market, which promotes divisional managers.

• Crisis of red tape emerges if an organization fails to handle coordination properly.

• Although the number of rules and procedures increases, effectiveness does not.

• Bureaucracy can stifle creativity if employees over rely on rules.

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Greiner’s Model of Organizational Growth

Stage 5: Growth through Collaboration• An organization can resolve the crisis of red tape and

move up the growth curve by pursuing growth through collaboration.

• This stage stresses teams to promote immediate actions.

• Social control and self-discipline supersede formal control.

What structures are appropriate for this stage?• Collaboration requires a more organic structure;

product team structures and matrix structures provide a quick response to customers and bring products to market quickly.

• This strategy develops the linkages that promote a “matrix in the mind.”

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Organizational Decline & Death

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Organizational Decline & Death • Companies do not move to more organic

structures until they face the problems of increased costs and reduced quality.

• Many large companies downsize before adopting organic structures.

• Greiner’s model suggests that organizations grow through collaboration until a new, unknown crisis arises.

• For some organizations, the next stage in the life cycle is decline rather than growth

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Organizational decline• The life cycle stage that an orgzn enters when fails

to anticipate, recognize, avoid, neutralize, or adapt to external or internal pressure that threaten its long term survival.

• Organizational decline occurs when a firm fails to manage crises in the growth stage or fails to adapt to pressures.

• Regardless of the time or cause, the decline stage decreases the ability to attract resources.

• The relationship between size and effectiveness shows that growth beyond a certain point shows a decline in effectiveness.

• An organization may grow too much due to inertia and environmental changes

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• Effectiveness & Profitability• To assess the effectiveness of an organization is to

compare how well company performs relative to the other by measuring its profitability.

• Profitability: the measurement of how well a company is making use of resources relative to its competitors.

• Organizational Inertia• Greiner’s model assumes that organizations

have the ability to change. • Population ecology theorists believe that

organizational inertia, resistance or lack of inclination to change, may occur.

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Factors that increase organizational inertia include

• Risk aversion: As an organization grows, managers may be unwilling to change.

• To protect their positions, they take on safe, inexpensive projects.

• They use bureaucratic rules, which stifle innovation, to monitor new ventures.

• The desire to maximize rewards: • Research suggests that managers’ desires for

rewards, such as job security and power, are more associated with organizational size than with profits.

• Managers pursue growth at the expense of other stakeholders.

• Recently powerful stakeholders, such as large institutional shareholders, have forced organizations to streamline operations.

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Cont..

• Overly bureaucratic culture: If property rights, such as salaries, are too strong, managers may protect personal interests, not the organization’s.

• Parkinson’s Law states that managers multiply subordinates, not rivals.

• Managers limit a subordinate’s freedom by establishing a tall hierarchy and a bureaucratic culture that promote the status quo.

• Managers may not intentionally hurt the organization because risk aversion and bureaucracy rise unexpectedly.

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Cont..

• Changes in Envt: Envtal changes that affect an orgzn’s ability to obtain scarce resources may lead to orgznal decline.

• Uncertainty stems from complexity, dynamism, and richness.

• Some organizations are likely to enter the decline stage in an uncertain environment.

• Increased competition makes the environment poorer and threatens those without an effective growth strategy.

• Or, a niche deteriorates, and managers fail to change strategies to secure resources.

• Sometimes a change in the general environment leads to the decline stage.

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Weitzel & Jonsson’s Model of Organizational Decline

• William Weitzel and Ellen Jonsson identified five stages of decline: blinded, inaction, faulty action, crisis, and dissolution.

• Managers can reverse the decline in all stages except the dissolution stage.

• Managers are unaware of problems that threaten long-term survival in the first stage of decline, the blinded stage.

Stage 1: Blinded• The reason for this blindness is the monitoring and

information systems to evaluate effectiveness are not in place.

• Signs of potential problems include too many employees, slow decision-making, increased conflict among subunits, and reduced profits

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Cont..

• An effective top-management team with good information can thwart decline and return to growth.

• Managers must have information to take timely corrective action.

• An organization may use its resources more effectively and not pursue continued growth.

Stage 2: Inaction• An organization that fails to recognize problems will

move to the inaction stage. • Regardless of signs of deterioration, such as

decreased sales and profits, managers take little action.

• They believe the situation will change, or they pursue personal goals.

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Cont..

• Inertia postpones response, and continued inaction widens the gap between acceptable and actual performance.

• Quick action by managers, such as downsizing, can reverse the decline.

Stage 3: Faulty Action.• Failure to take action results in the faulty action

stage. • Decline continues because managers made incorrect

decisions due to: conflict in the top-management team, changing too little too late, fear of radical change, or strong commitment to current strategy and structures.

Stage 4: Crisis.• If change is not implemented, an organization moves

to the crisis stage.

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Cont..

• Survival is possible only through radical changes in strategy and structure.

• Implementing radical change occurs because stakeholders withdraw support.

• The best managers have left, and suppliers hesitate to send inputs out of fear of nonpayment.

• Only a new top-management team can turn around a company in the crisis stage.

• New managers have new ideas that can overcome organizational inertia.

Stage 5: Dissolution.• Once an organization enters the dissolution stage,

decline is irreversible.

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Cont..

• It has lost stakeholder support, and access to resources shrinks as its reputation and markets vanish.

• New leaders won’t have the resources to turn the company around.

• The only choice is to divest resources or liquidate assets and enter bankruptcy.

• Dissolution Results in Organizational Death• As organizational death occurs, people understand

that further actions are useless. • The organization cuts ties to stakeholders and

transfers resources to other organizations.• Within the organization, formal closing services

occur to help members focus on new roles outside the organization

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Managerial Implications: Organizational Decline

• To prevent decline, managers should analyze the environment, structure, and sources of inertia.

• The founder must always put organizational survival and stakeholders first and allow for new leadership.

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Thank You