The 5 PhasesOrganizational Life Cycle

Organizational diagram of the York and Erie Railroad in 1855. Notice that people are not put in a box and the alphas —the authority figures— are not at the top but at the bottom.


Organizations are not static, they change.  Like children, organizations typically go through different phases. Discover the five phases of the organizational life cycle.

by Murray Johannsen. First Published: October 18, 2012. Feel free to connect with the author by Linkedin, through the website or by email.  Last Update: January 21, 2018.

Overview of The Organizational Life Cycle

The first challenge for entrepreneurs 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 Phase. This is sometimes divided into an early growth phase (fast growth) and maturity phase (slow growth or no growth). However, maturity often leads to
    • Organizational Decline. When in decline, an organization will either undergo:
    • The Renewal Phase. Sometimes great leaders can change the course of the ship.
    • Death

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

The Start-up Phase

“Getting ready is the secret of success.” — Henry Ford

Image by: Alexander Osterwalder. A simple view of


In this phase, we see entrepreneurial thinking about the business, a team is formed, and sometimes a business plan gets 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 any case, this phase requires the development of a workable business model.

It’s been said that entrepreneurial start-ups must discover a workable business model while established organizations already have one.

Understanding the business models helps you to develop the mind-set necessary to understand the big picture. You don’t need a b-school degree, but you do need to understand the essence of how the organization generates revenues, expenses and earnings if you are to prosper.

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The Growth Phase

“It was the best of times, it was the worst of times.
It was the age of wisdom, It was the age of foolishness
it was the spring of hope, it was the winter of despair.” —
Charles Dickens, A Tale of Two Cities

Diagram of the Federal Government and American Union, 1862. Notice the illustration. Makes government almost understandable.
Diagram of the Federal Government and American Union, 1862. Notice the illustration. Makes government almost understandable.


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.

Many companies miss an important part to of their competitive advantage, by not training. Advantages include:

Combat The Hidden Cancer of the Bad Boss

Truth is, people don’t work for companies as much as they work for individuals. For most of us, the most important individual (next to your spouse) is one’s boss. When that person is bad, employees either physically pack their bags for greener pastures or mentally vacation in better climates rather than focus on the work. One can lower turnover costs by improving supervisor skills

Harness Discretionary Effort

Fred Smith, the CEO of Federal Express once coined remarked that harnessing discretionary effort was the great challenge for all organizations. By that he meant, the there is a floor of performance that is close to the minimum once needs to do to prevent disciplinary actions and potential termination. On the other hand, there is a ceiling level of performance that one is capable of when an employee is properly motivated. The difference between these two states is the value added provide by good manager and supervisors

Improve Operations

Unskilled supervisors rely too much on their authority and too much on the power of fear to get things done. This is not a problem when people is shoving dirt, but it the kiss of death in operational environments.

But 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:

Symptoms of Dry Rot 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.

The Life Cycle: The Organizational Decline Phase

Definition of Managerial Insanity.  Doing the same thing, the same way but always expecting better results Common American Saying.

Staff Organisation Diagram by Lewis, J. Slater, 1896. Notice how it reflects the modern corporation. It's heirarchical nature, the fact that on high are those in authority, and that those in the organization are supposed to work for the shareholders.
Staff Organisation Diagram by Lewis, J. Slater, 1896. Notice how it reflects the modern corporation: it’s heirarchical nature, the fact that on higher on the chart have more authority. Notice that the shareholders are put highest of all, symbolizing that this is the group that all employees and mangers are supposed to keep happy.


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

Too much Debt 28%
Inadequate Leadership 17%
Poor Planning 14%
Failure to Change 11%
Inexperienced Management 9%
Not Enough Revenue 8%

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

Many organizations will enter decline 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:

    1. Declining sales relative to competitors,
    2. Disappearing profit margins, and
    3. 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)

Organizational Renewal

“It is not death that a man should fear, but he should fear never beginning to live.”Marcus Aurelius

USSC Org chart by John Y. Culyer, 1863. You might say, that every organization, whether private or public, ultimately exists to service the needs of this group. When it becomes all about the money or all about the stockholders, those the organization services likely will go elsewhere or vote for the other party.
USSC Org chart by John Y. Culyer, 1863. You might say, that every organization, whether private or public, ultimately exists to service the needs of its customers; in this case, “The Loyal American People.” When the organizations purpose becomes all about the money, the power or the shareholders, customers will likely go elsewhere and voters look a a different party.

Decline doesn’t have to continue, however. External experts have focused on the importance of organizational development and leadership 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?”

Morale of the Story: Transformation takes time.

A a rigorous program to change and transform the organization’s culture 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. 

It’s interesting to note that 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. Steve Job’s transformation of Apple is another.

Organizational Death: The Final Phase of the Organizational Life Cycle

From Bill Nye's "Comic History of England"
From Bill Nye’s “Comic History of England”

“Advice after injury is like medicine after death.” — Danish proverb

One study reported that 80% of business failures occur due to factors within the leadership’s control.

However, one should not assume that just individuals or organizations die. Sometimes civilizations do as well. 


There are many causes to an organization prospering or declining. Organizational decline is not inevitable. The good news is most of those factors are within the control of the organizations senior executives.


Leadership Skill Development