The life cycle of an organization is the set of stages that a company goes through from inception to closure, to death. Although different firms have different lifespans, the trajectory of their lives is predictable. We can make a development plan that any organization will follow.
The concept of the life cycle compares businesses to living things. Like any organism, companies are born, mature, grow, develop, then age – decline – and die. However, although at first glance the model looks simple and clear, each stage is unique and has its own distinctive features. Some organizations decline and die, while others revive after stagnation. To a large extent, this has to do with what management decisions are made and when.
It is important for top management, business owners to understand where the company is on the life growth curve, as only the right decisions taken at the right time will help to keep the company alive for as long as possible. The concept of cycles helps in setting the right priorities, solving current problems in a timely manner. In this article, we will look at life cycle models, as well as their practical application.
The standard model describing the journey of an organization includes 4 stages: birth, growth, maturity, old age. The duration of these stages may vary from organization to organization, but the maturity stage is usually the longest. Not all organizations last for a long time. This may be due to the type of organization, certain specifics of business, which implies a rapid rise and decline, inability to adapt to the changing market environment.
At the beginning of the journey, the initiator of an idea surrounds himself with people with similar views, thus forming a team consisting of people close in spirit. The main efforts are directed not so much at the organization itself as at creating a product and surviving in a dynamic market. Because of this, the size of the organization remains small and informal communication is common at all levels of the hierarchy.
There is a significant degree of freedom and creativity in the work of the firm. Processes are usually managed by the owner, he delves into the details of what is going on and makes key decisions on his own. The entrepreneur is fully responsible for the future of the organization. He is an innovator by nature, promoting his ideas.
Gradually, a management structure is formed with intra-organizational relations, distribution of responsibilities and formalization of authority. Eventually, a product comes out that begins to generate income. The company grows, processes become more complex. The first branches may appear.
As the number of employees increases, it becomes necessary to form an organizational culture and systematize internal processes. The product line expands, sales grow, the firm conquers new markets. The number of employees increases, professional managers appear.
Usually at this stage the owner of the company delegates tactical management to the management. The main risk is that he may not be ready to delegate some of his authority. If the owner is not ready to share responsibilities, it will slow down the development of business processes.
At the stage of organization growth, strategic management is strengthened, the mission and values of the company are formed. The intensity of innovation processes increases significantly. The structure of the organization becomes more complex, the hierarchy breaks down into several levels in accordance with managerial powers. During this period the importance of administrative influence and regulated management decisions grows. New instructions, procedures, regulations on the work of departments are created. Decrees are issued, which form the structure of the organization according to the current strategic directions of management.
The main objective of this stage is to ensure sustainable growth, efficient operation in order to maximize profits and strengthen market positions. The development of an effective management strategy, precise adherence to internal procedures, and careful control of costs become important. Each employee fulfills his or her responsibilities. Performance criteria and labor evaluation are defined, and a system of bonuses and sanctions is in place. Duties and responsibilities are divided between divisions.
Enthusiasm is replaced by conservatism and bureaucracy. As the number of employees grows, the number of management personnel increases, leading to protracted decision-making procedures. This stage requires maintenance of the achieved level rather than innovation. The main thing is to maintain a position in the market.
During old age, a company’s business starts to decline: turnover, sales, and profits decrease. Competitiveness weakens, and more effort is required to simply hold on to positions. Staff turnover increases within the team, and conflicts become more common. There may be a change in the top management of the company.
Emphasis is placed on the development of the most significant areas. Along with the centralization of the processes of development and implementation of management decisions, there is a high level of bureaucratization. If we go with the flow, it is very likely that the next stage will be the complete loss of the company’s viability.
A rebirth phase is not necessary. As noted above, not every company will go through a phase of aging and death. However, organizations are not living organisms, so they should not disappear at the end of their life cycle. But revival awaits only those who have managed to take the necessary steps within the allotted period of time, to direct resources for modernization in order to restore the viability of the firm.
In 1988, the American business consultant Itzhak Adizes proposed an extended model of the LCA. He divided the life path of a company into ten stages and described them in his book “Life Cycles of the Corporation”. According to the author, the organization moves forward – from birth to blossom, and then to the inevitable sunset. At the same time, death can be avoided by putting the right manager at the helm. Adizes suggests using this principle at every stage, which will help save the business from an early demise.
This stage is also called the “Passion” stage. There is no business yet, just a nascent idea in the mind of an entrepreneur who is enthusiastic and determined. This is how the life journey of an organization begins.
The first steps will require a tremendous amount of energy and labor from the entrepreneur. A team of like-minded people is assembled around him, ready to keep up with the values of the business and work not so much for money as for the idea itself. The premises are rented and the necessary documents are drawn up.
There is a lack of a clear management structure and well-functioning business processes, which causes crisis situations. Sales may become one of the main problems, as optimal sales routes have not yet been found. Relationships between colleagues are often informal. Employee replenishment occurs as needed, without prior planning.
This period is characterized by rapid sales growth. The organizational structure is not yet properly built. This turns out to be an obstacle to further development. In order to work productively, an employee needs to understand his or her place in the company, area of responsibility and duties.
Businesses often overlook the needs of their customers. The desire to sell the product at the maximum price is higher than the desire to improve it. Management does not devote enough time to developing a long-term strategy and improving the quality of service. At the same time, the cost of products sometimes does not cover production costs, and the company operates at a disadvantage.
If the company has learned lessons from the “Give and Take” period, then management is changing its approach to management. It is at this stage that the company moves to a professional management model. Adizes notes that this is the most difficult period for an organization. The owner finds himself unable to manage effectively and as such, he brings managers on board. The focus shifts to profit maximization – the organization seeks to cut costs to achieve greater financial results.
There is a redistribution of powers and a development strategy is being worked out. Lack of mutual understanding between veterans and newcomers becomes a weak point. Intensive growth of the enterprise requires expansion of personnel. Not all newcomers accept the previously established corporate culture.
Internal processes are established and follow the described regulations. The Corporation has reached the pinnacle of development. It actively refines its products in accordance with customer requests. At the same time, the company follows not only the client’s wishes, but also takes into account its own interests. Management can reject unfavorable contracts if it does not benefit the organization.
At this stage, the company focuses simultaneously on increasing sales and maximizing profits. To achieve great results, it is actively expanding – launching new areas, developing products and projects. There is a clear system of rewarding and motivating personnel.
Stage of pleasant stability and sustainability. The organization continues to work with customer requests, increase sales, but activity gradually decreases. The company becomes less flexible than in previous stages. The goal of the business at this stage is to maintain its position in the market.
Documents detailing almost every employee’s every move appear. The organization continues to develop products and launch projects, but the pace becomes more moderate. Every innovation now requires coordination with several managers. The first signs of decline appear – the company has passed its peak. Now it has to move downward.
The company has become fully independent and can easily manage its current expenses, but it stops growing because, due to formalization, the safest possible decisions are now made. The management does not seek to master new technologies and does not look for new markets, but focuses on creating luxury – an office in a prestigious neighborhood, elite furniture, a strict dress code. Employees start to be passive, avoid conflicts. Staff are required to follow regulations exactly, even in situations where this contradicts common sense.
Demand declines, market share decreases, and products become obsolete. Profits are declining and the company is forced to raise prices to maintain the same level. Mergers and acquisitions with developing companies are possible at this stage.
Sales are not growing, and the profitability of the business is falling. Numerous conflicts break out within the team – everyone wants to find someone to blame. The management takes decisive action: it drastically reduces prices, closes projects, and cuts staff. The company can continue to exist through subsidies, but if the firm is deprived of financial support, it is doomed.
The organization is only able to exist because of external financial support. Because of the witch hunt, control at all levels increases, which has a negative impact on productivity. The company becomes too involved in its internal squabbles and contradictions, interacting less and less with the external environment. Formal communication prevails, most issues are resolved in writing, and an unhealthy atmosphere prevails in the organization.
Relationships with customers are deteriorating. The company no longer meets their needs or does it poorly. Nothing changes, everything is stuck on outdated regulations and norms.
No one is interested in the company or its product anymore. Death can take different forms and entities – termination of operations, withdrawal of assets, sale to competitors. If a company is supported by the state or has a monopoly on a product, its demise can be delayed. In this case, the process of bureaucratization increases and eventually reaches its climax, leading the organization to inevitable decline.
Greiner’s model is a classical model that represents the sequence of entrepreneurial formation in terms of temporal characteristics. Greiner’s model provides for the stabilization of successive variants, which are represented by the four points in the example graphically. The evolution of the entrepreneurship fission mechanism occurs through multiple variants, where each variant represents a new characteristic.
In order to understand the specific stage of a company’s life cycle, the first step is to determine the nature of its current operations and assess its viability. It does not matter how many years the organization has been in business. Analyzing the organization will allow you to take process improvement and productivity measures that are appropriate for your particular stage of development.
Depending on the stage, potential risks and opportunities change. The decisions taken will only really work if there are internal prerequisites for this and the enterprise is ready to move to the next level.
A clue that it is time for a company to change is a discrepancy between internal processes at the enterprise and the external environment. This contradiction reduces the efficiency of the business. Such a period is difficult for any organization, and it is impossible to avoid it. However, you can minimize the consequences if you prepare in advance.
Given the nature of the different stages of the life cycle, it is important that the reasons for the transition from one stage to another are consistent with the chosen management style of the organization. If management anticipates the transition, the timing of the transition will be key, as will the relevance of the changes being introduced to the actual changes occurring in the company’s internal and external environment.
The main issue here is the dependence of the company’s behavior on how well management understands the needs of the business. They change depending on the current stage of the life cycle, so the manager must always objectively assess the measures taken for compliance. Management actions, management style should be in line with the current stage of the cycle.
By first determining the stage of development, it will be clear what the future holds for the organization and what measures will help to increase turnover or improve the situation if the business is already at the aging stage. You can use internal resources for the analysis or bring in external consultants for a more objective assessment.
When an organization is at the beginning of its journey, it faces two key challenges. One is to secure the necessary financial, intellectual, labor and material resources, and to achieve a sustainable competitive advantage.
Management should focus on the following aspects:
At the beginning of the life cycle, a company faces complex and voluminous challenges to secure the future. Analytical work takes center stage.
At this stage, management builds its own unique management model. It may include both traditional methods and innovative approaches, which are used more rarely. The main task of top management is to maintain harmony between ensuring stable long-term development and introducing innovations. Such a balance creates conditions for high productivity in the present and also lays the foundation for future progress.
The task of management is to ensure stable development of the organization in the long term. To avoid bureaucracy in management, it is advisable to carry out decentralization, introduce delegation of authority and adjust employee motivation systems. The maximum effect of managerial influence is manifested when innovations are introduced in various spheres of organizational activity.
At the end of their life cycle, it becomes difficult for organizations to achieve their goals due to decreased demand, reduced profits, increased competition, management problems and lack of innovation.
Significant changes must be made in order to move to a new cycle of development of the company. Only through the right management decisions can the stagnation phase become a source of growth and rebirth, otherwise the company will leave the market and cease operations. Management should focus on rebuilding the business.
In practice, the theory of organizational life cycles gives tangible results. First of all, it helps to anticipate the dynamics of events and the emergence of crises, thus providing a chance to prepare for them. It also describes in detail the development of internal processes, which allows you to identify patterns, natural phenomena and deviations that need to be eliminated. Based on the theoretical model of life cycles, the manager can focus on solving real problems and not be distracted by far-fetched difficulties that do not correspond to the age of the company and its level of development.
The behavior of an organization at different stages of its life cycle has its own characteristics. Regardless of the management style and goals of the organization, management must take these characteristics into account. Conscious analysis of the specifics and problems of each stage of the organization’s life cycle is one of the key aspects of successful management. The manager needs to constantly analyze the current stage, assess the prospects of transition to the next stage, and understand what factors influence it. It is also important to identify the life cycle stage of the entire industry.