MGT504 - Organization Theory and Design - Lecture Handout 21

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A Useful way to think about organizational grows and change is the concept of an organizational life cycle. Which suggests that organizations are born, grow older, and eventually die, organizational structure, leadership style, and administrative systems follow a fairly predictable pattern through stages in the life cycle. Stages are sequential in nature and follow a natural progression.


Recent work on organizational life cycle suggests that four major stages characterize organizational development. Each time an organization enters a new stage in life cycle, it enters a whole new ballgame with a new set of rules for how the organization functions internally and how it relates to the external environment.


1. Entrepreneurial Stage: When an organization is born, the emphasis is on creating a product and surviving in the marketplace. The founders are entrepreneurs, and they devote their full energies to the technical activities of production and marketing. The organization is informal and non- bureaucratic. The hour of work is long. Control is based on the owners’ personal supervisor. Growth is from a creative new product or service. Apple Computer was in the entrepreneurial stage when it was created by Steve. Jobs and Stephen Wozniak in Wozniak’s parents’ garage. Small internet –based companies such as Homeruns, Peapod, and ShopLink, which sell groceries online, are currently in the entrepreneurial stage.

Crisis: Need for leadership as the organization starts to grow, the larger number of employees causes problems. The creative and technically oriented owners are confronted with management issues, but they may prefer to focus their energies on making and selling the product or inventing new products and services. At this time of crisis, entrepreneurs must either adjust the structure of the organization to accommodate continued growth or else bring in strong managers who can do so. When apple began a period of rapid growth, A.C. Mark Kula was brought in as a leader because neither jobs nor Wozniak was qualified or cared to manage the expanding company.

2. Collectivity Stage: If the leadership crisis is resolved, strong leadership is obtained and the organization begins to develop clear goals and direction. Departments are established along with a hierarchy of authority, job assignments, and a beginning division of labor; Employees identify with the mission of the organization and spend long hours helping the organization succeed. Members feel part of a collective, and communication and control are mostly informal although a few formal systems begin to appear. Apple Computer was in the collectivity stage during the rapid growth years from 1978 to 1981. Employees threw themselves into the business as the major product line was established and more than two thousand dealers signed on.

Crisis: need for Delegation. If the new management has been successful, lower-level employees gradually find themselves restricted by the strong top – down leadership. Lower-level mangers begin to acquire confidence in their own functional areas and want more discretion. An autonomy crisis occurs when top managers, who were successful because of their strong leadership and vision, do not want to give up responsibility. Top managers want to make sure that all parts of the organization are coordinated and pulling together, the organization needs to find mechanisms to control and coordinate departments without direct supervision from the top.

3. Formalization Stage: The formalization stage involves the installation and use of rules, procedures, and control system, Communication is less frequent and more formal Engineers, human resource specialist, and other staff may be added. Top management becomes concerned with issues such as strategy and planning, and leaves the operations of the firm to middle management. Product groups or other decentralized units may be formed to improve coordination. Incentive systems based on profits may be implemented to ensure that managers work toward what is best for the overall company when effective, the new coordination and control system enable the organization to continue growing by establishing linkage mechanisms between top management and field units. Apple Computer was in the formalization stage in the mid-1980s.

Crisis: Too Much Red Tape, at this point in the organization’s development, the proliferation of systems and programs may begin to strangle middle-level executives. The organization seems bureaucratized. Middle management may resent the intrusion of staff people, innovation may be restricted. The organization seems too large and complex to be managed through formal programs. It was at this stage of Apple’s growth that jobs resigned from the company and CEO John Sculley took full control to face his own management challenges.

4. Elaboration Stage: The solution to the red tape crisis is a new sense of collaboration and teamwork. Throughout the organization, manager develops skills for confronting problems and working together. Bureaucracy may have reached its limit. Social control and self – discipline reduce the need for additional formal controls. Managers learn to work within the bureaucracy with out adding to it. Formal systems may be simplified and replaced by manager teams and task forces. To achieve collaboration, teams are often formed across functions or divisions of the company. The organization may also be split into multiple divisions to maintain a small –company philosophy. Apple Computer is currently in the elaboration stage of the life cycle, as are such large companies as Caterpillar and Motorola.

Crisis: need for revitalization. After the organization reaches maturity, it may enter periods of temporary decline. A need for renewal may occur every ten to twenty years. The organization shifts out of alignment with the environment or perhaps becomes slow moving and over bureaucratized and must go through a stage of streamlining and innovation. Top managers are often replaced during this period. At apple, the top spot has changed hands a number of times as the company struggle to revitalize. CEOs John Sculley, Michael Spindler, and Gilbert Amelio were each ousted by the board as Apple’s problems deepened. Now, Stephen Jobs—who had retuned to the company as a special advisor to Amelio—is serving as CEO of the company he founded almost 25 years ago. Many believe jobs have gained the management skills needed to help Apple weather the crisis at this stage and move forward into a new era. He has reorganized the company, weeded out inefficiencies, and refocused Apple on the consumer market. The sleek, jelly –bean colored iMac, one of the hottest computer launches ever, has Apple’s sales growing faster than the industry average for the first time in years. However, although jobs have brought life back to Apple, he also must be able to sustain it. If mature organizations do not go through periodic revitalizations, they will decline.

Summary: Eighty –Four percent of businesses that make it past the first year still fail within five years because they can’t make the transition from the entrepreneurial stage. The transitions become even more difficult as organizations progress through future stages of the life cycle. Organization that do not successfully resolve the problems associated with these transitions are restricted in their growth, and may even fail. From within an organization, the life cycle crises are very real, as illustrated by the case of Biogen, a small biotechnology company. As organizations evolve through the four stages of the life cycle, changes take place in structure; control systems, innovation, and goals, the organizational characteristic associated with each stage are summarized in this handout.

Entrepreneurial: Initially, the organization is small, non-bureaucratic, and a one person show. The top manager provides the structure and control system. Organizational energy is devoted to survival and the production of a single product or service.

Organization Characteristics during Four Stages of Life Cycle

  1. Entrepreneurial 2. Collectivity 3. Formalization 4. Elaboration
Characteristic Non-bureaucratic Pre-bureaucratic Bureaucratic Very Bureaucratic
Structure Informal, One
Person Show
Mostly Informal,
Some procedures
Formal Procedures,
division of labor,
New specialties added
Teamwork within
bureaucracy, smallcompany
Products or Services Single Product or
Major product or
Service, with
Line of products or
Multiple product or
service lines
Reward and Control
contribution to
formalized systems
Extensive tailored to
product and
Innovation By owner –manager by employees and
by separate
innovation group
by institutionalized
R&D department
Goal Survival Growth Internal stability,
Market expansion
Top Management
Delegation with
Team approach,
attack, Bureaucracy

Collectivity: This is the organization’s youth. Growth is rapid, and employees are excited and committed to the organization’s mission. The structure is still mostly informal, although some procedures are emerging. Strong charismatic leaders like Scott McNealy of Sun Microsystems or Steve Jobs of Apple provide direction and goals for the organization. Continued growth is a major goal.

Formalization: At this point, the organizations are entering midlife, Bureaucratic characteristics emerge. The origination adds staff support groups, formalizes procedures, and establishes a clear hierarchy and division of labor. Innovation may be achieved by establishing a separate research and development department. Major goals are internal stability and markets expansion. Top management has to delegate, but it also implements formal control systems.

At Dell computer, for example, entrepreneurial whiz-kid Michael Dell has hired a cadre of experienced managers to help him develop and implement formal planning, management, and budgeting systems. According to vice chairman Kevin B. Rollins, “ Michael realized that he needed professional to run this company, so that he could continue to be a visionary,” at the formalization stage, organizations may also develop complementary products to offer a complete product line.

Elaboration: The mature organization is large bureaucratic, with extensive control systems, rules, and procedures. Organization managers attempt to develop a team orientation with in the bureaucracy to prevent further bureaucratization. Top managers are concerned with establishing a complete organization. Organization stature and reputation are important. Innovation is institutionalized through an R&D Department. Management may attack the bureaucracy and streamline it.

Summary: Growing organization move through stages of a life cycle and each stage is associated with specific characteristic of structure, control systems, goals, and innovation. The life cycle phenomenon is a powerful concept used for understanding problems facing organization and how managers can respond in a positive way to move an organization to the next stage.

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