Five Phases of The Organizational Life Cycle

By Murray Johannsen

Summary. Like children, organizations typically go through different phases. Discover the five phases of the organizational life cycle, from start-up to decline.

The first challenge for leaders who wish to grow their organizations is to understand what phase of the organizational life cycle one is in.

Different experts will argue on how many phases there are, but there is elegance in using something easy to remember. We divide the organizational life cycle into the following phases:

• Startup. (or Birth)
• Growth. This is sometimes divided into an early growth phase (fast growth) and maturity phase (slow growth or no growth). However, maturity often leads to
• Decline. When in decline, an organization will either undergo
• Renewal or
• Death

Each of these phases present different management and leadership challenges that one must deal with.

In this phase, we see the entrepreneur thinking about the business, a management group formed, a business plan written. For entrepreneurs needing money to kick start the business, the company goes into the growth phase once the investor writes the check. For those the don't need outside funds, the start-up ends when you declare yourself open for business.

In the growth phase, one expects to see revenues climb, new services and products developed, more employees hired and so on. The management textbooks love to assume that sales grow each year. The reality is much different since a company can have both good and bad years depending on market conditions.

In organizations that have been around for a few years, a very interesting thing happens—dry rot sets in. There are many symptoms, some of which we have presented below:

• Dry Rot in Symptoms Early In Organizational Life Cycle (.pdf file 276 kb)

That's why many companies have different types of programs relating to organizational development in place.

Using the above definition, one finds a tremendous amount of corporate insanity out there. Management that expects next year to be better, but doesn't know or is unwilling to change to get better results.

This simple truth was shown in a 2003 study of 1900 professionals who help businesses in trouble.*

Reasons For Decline

*Source: Buccino and Associates: Seton Hall University Stiffman School of Business, As reported in August 25, 2003, Business Week.

Many organizations will enter decline the decline phase unless there are is in place a rigorous program of transformational leadership development. If senior leaders can detect the symptoms of decline early, they can more easily deal with it. Some of the more obvious signs include:

a. Declining sales relative to competitors,

b. Disappearing profit margins, and

c. Debt loads which continue to grow year after year.

However, by the time the accountants figure out that the organization is in trouble, it takes tremendous leadership to get the organization to change course.

Dry Rot Symptoms Later in the Organizational Life Cycle (.pdf file 112 kb)

Video: The Importance of Leadership

This video covers why effective leadership is crtical for organizations, corporations and nations.

Presenter: Murray Johannsen

Decline doesn't have to continue, however. External experts have focused on the importance of organizational development as a way of preventing decline or reducing its affects.

A story from Aesop's Fables might help here.

A horse rider took the utmost pains with his charger. As long as the war lasted, he looked upon him as his fellow-helper in all emergencies and fed him carefully with hay and corn. But when the war was over, he only allowed him chaff to eat and made him carry heavy loads of wood, subjecting him to much slavish drudgery and ill-treatment. War was again proclaimed, however, and when the trumpet summoned him to his standard, the Soldier put on his charger its military trappings, and mounted, being clad in his heavy coat of mail. The Horse fell down straightway under the weight, no longer equal to the burden, and said to his master, “You must now go to the war on foot, for you have transformed me from a Horse into an Ass; and how can you expect that I can again turn in a moment from an Ass to a Horse?"

One way to reverse dry rot is through the use of training as a way of injecting new knowledge and skills. One can also put in place a rigorous program to change and transform the organization's culture.

This assumes, though, that one has enough transformational leaders to change the status quo. Without the right type of leadership, the organization will likely spiral down to bankruptcy.

As many as 80% of business failures occur due to factors within the leadership's control. Even firms close to bankruptcy can overcome tremendous adversity to nurse themselves back to financial health. Lee Iacocca’s turnaround of the Chrysler Corporation is one shining example.

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