The Concept
Hearing of the Toyota debacle reminded me of the organizational life-cycle, an often over-looked tool in the management armoury.
The reports of Toyota’s problems[1], [2] indicate that organizations do have problems when they grow and evolve. But are these problems predictable? Can research help us?
The answer to these questions is “yes”, in the form of a concept called the organizational life-cycle.
I am surprised that the organizational life-cycle concept is not more widely used. In my experience, it can act as an effective tool to forewarn managers of current and impending problems inside their organizations.
The concept that organizations, like human beings, progress through a predictable life-cycle, has been put forward by a range of academic researchers including Danny Miller[3] and Larry Greiner[4]. The only difference between organizations and human beings is that the former, if managed properly, do not have to die! It is however, a pity about the latter. We will have a wait for a breakthrough in the field of genetic research. But back to organizations.
The phases of the organizational life-cycle, as it is generally represented, are shown in Illustration 1 below.
The value of the tool is that each stage of the life-cycle presents managers and their organizations, with particular problems. Knowing which stage your organization is in, and what may be in store within the next life-cycle stage, can therefore be most helpful.
A Diagnostic Tool
The problems presented by each life-cycle stage (based upon my own experience and research) are as follows:
Stage #1: Birth.
Innovation flourishes but the potential causes of a premature organizational death are:
(I) Poor marketing. It is one thing developing a new, potentially winning product. A completely different skill set is needed to bring it successfully to market. Frequently new start-ups are great at innovation, but poor at marketing.
(II) Cash flow. The old chestnut. New ventures are strongly cash-flow negative. All too frequently managers are over-optimistic when it comes to the timing of sales and therefore inwards cash-flows.
(III) Leadership – can the innovator – now usually the CEO – lead as well as innovate?
Stage #2: Growth.
The focus is on developing market share and gaining a substantial foothold before any rival new entrants do. But real issues are:
(a) Formalizing systems, processes and roles.
(b) Maintaining service levels as the organization grows rapidly.
(b) Quality management.
(c) Delegation.
The challenge is to move from a fast moving small business to one that can rapidly absorb market share.
But if not tackled, these above challenges can lead to “the crisis of control”.
Stage #3: Maturity.
Market share has been built. Priorities change to maintaining stability and maximising returns before either (i) demand ebbs away or (ii) new entrants force prices and returns down. These pressures tend to encourage an inwards, as opposed to an outwards focus. Innovation moves away from major offering enhancements to cost control and process innovation.
The dangers are:
(a) Losing contact with developments in the real outside world, slowness of response to major changes.
(b) Increasing distance between top-level management and customer-facing staff.
(c) Over-reliance upon “the strategies that worked before”.
Stage #4: Decline.
Typically, the organization retreats to defend the market sector where it originally built its fortunes. It “returns to the womb”. Revenues fall. The organization reacts to changes in the outside world as opposed to predicting them.
The organization follows established industry “strategy recipes”. Anything more than incremental changes to products and processes is frowned upon.
Leaders see the outside world still as it was in the organization’s heyday.
When an organization is this position there are only two routes that can be followed:
- Revival. A massive change effort, usually accompanied by a wholesale change in top management. Or
- Death: Failure to change brings the obvious consequences.
A Lesson
If there is one lesson to be learnt it is through answering the question:
“When is the best time to fundamentally challenge the assumptions that drive our business?”
Waiting until the organization is in the decline phase is, in reality, just too late. The scale of change required is difficult to comprehend. And, at best, the chances of success are 50:50.
It is far better to challenge the business’s key underlying assumptions at an earlier point. Challenging assumptions and beliefs is far better done in the first stages of Maturity. Leaving it any later means that values, beliefs, attitudes and perceptions become hard-wired into the organization’s fabric.
References
[1] Simon, B and Kirchgaessner, S Toyota ‘lost way’ in rapid expansion, Financial Times, February 24, 2010.
[2] Simon, B LaHood voices concerns over Toyota culture, Financial Times, February 24, 2010.
[3] D. Miller and P. Friesen, “A longitudinal study of the corporate life cycle,” Management Science, vol. 30, 1984, pp. 1164-1183.
[4] L. Grenier, “Evolution and Evolution as Organizations Grow,” Harvard Business Review, 1972.