Organization Size, Life Cycle,

and Decline
Chapter

9
Organization Theory and Design
Eleventh Edition
Richard L. Daft

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Differences Between Large and
Small Organizations

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Organization Size: Is Bigger Better?
Pressures for Growth
– Companies in all industries strive for growth to acquire the
size and resources needed to compete globally
– Size enables companies to take risks

Dilemmas of Large Size

– Large organizations are able to get back to business more
quickly following a disaster
– Large companies are standardized, mechanistic, and
complex
– Small companies are flexible and can be responsive
– Many companies aim to have a big company/small-
company hybrid
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 Five Famous Mergers and
Acquisitions Gone Wrong

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 Organizational Life Cycle

four stages along with

the problems associated
with transition to each
stage.

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 Organizational Life Cycle
• Entrepreneurial stage:
– the emphasis is on creating a product or service 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 nonbureaucratic.
– Control is based on the owners’ personal supervision.
– Growth is from a creative new product or service.
• 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.

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 Organizational Life Cycle
• 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.
– In the collectivity stage, employees identify with the mission of the
organization and spend long hours helping the organization succeed.
Communication and control are mostly informal although a few formal
systems begin to appear.
• Crisis:
– Need for delegation: If the new management has been successful,
lower-level employees gradually find themselves restricted by the
strong topdown leadership. Lower-level managers begin to acquire
confidence in their own functional areas and want more discretion.
– The organization needs to find mechanisms to control and coordinate
departments without direct supervision from the top.

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 Organizational Life Cycle
• Formalization stage:
– involves the installation and use of rules, procedures, and control
systems.
– Communication is less frequent and more formal.
– Top management becomes concerned with issues such as strategy and
planning and leaves the operations of the firm to middle management.
– Incentive systems based on profits may be implemented to ensure
that managers work toward what is best for the overall company.
• 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. Innovation may
be restricted. The organization seems too large and complex to be
managed through formal programs.

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 Organizational Life Cycle
• Elaboration stage:
– The solution to the red tape crisis is a new sense of collaboration and
teamwork.
– 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 without adding to it.
– Formal systems may be simplified and replaced by manager teams and task
forces.
– The organization may also be split into multiple divisions to maintain a small-
company philosophy.
• 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 overbureaucratized and must go
through a stage of streamlining and innovation. Top managers are often
replaced during this period.

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Organization Characteristics During
Four Stages of Life Cycle

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 What is Bureaucracy?
• Although Weber perceived bureaucracy as a threat to
basic personal liberties, he also recognized it as the
most efficient possible system of organizing.
• Bureaucracy includes:
– Rules and standard procedures
– Clear tasks and specialization
– Hierarchy of authority
– Technical competence
• The control introduced by Weber was rational and a
significant idea
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Weber’s Dimensions of Bureaucracy and
Bases of Organizational Authority

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 Size and Structural Control
In the field of organization theory, organization size has been
described as an important variable that influences structural design
and methods of control.
Most of these studies indicate that large organizations are different
from small organizations along several dimensions of bureaucratic
structure, including formalization, centralization, and personnel
ratios.
• Formalization – rules, procedures, and written documentation
• Centralization – level of hierarchy with authority to make decisions
• Personnel Ratios – clerical and professional support staff ratios

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 Percentage of Personnel Allocated to
Administrative and Support Activities

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 Bureaucracy in a Changing World
• Bureaucracy worked for the industrial age
• The system no longer works for today’s challenges
• Organizations face new challenges and need to
respond quickly
• Over-bureaucratization is evident in the inefficiencies
of large U.S. government organizations
• Narrowly defined jobs and rules limit creativity,
flexibility, and rapid response
• Some organizations are using temporary structures for
emergencies or crisis situations
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 Approaches to Busting Bureaucracy

• Google uses bullpen sessions (7-min

meetings) every afternoon
• Small geographic based teams
• Increasing authority of workers
• The increasing professionalism of employees
is attacking bureaucracy

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 Three Organizational
Control Strategies
Managers at the top and middle levels of an organization can
choose among three overall control strategies.

Each form of control uses different types of information. However,

all three types may appear simultaneously in an organization.

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 Three Organizational
Control Strategies
• Bureaucratic control is the use of rules, policies,
hierarchy of authority, written documentation,
standardization, and other bureaucratic mechanisms to
standardize behavior and assess performance.
• Market control occurs when price competition is used
to evaluate the output and productivity of an
organization or its major departments and divisions.
• Clan control is the use of social characteristics, such as
shared values, commitment, traditions, and beliefs, to
control behavior.

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Examples of Rules at a Yacht Club

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Organizational Decline and Downsizing
The decrease of an organization’s resources over
time is caused by:
– Organizational atrophy
– Vulnerability
– Environmental decline or competition

Downsizing refers to intentionally reducing the size of a

company’s workforce

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Stages of Decline and the Widening
Performance Gap

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 Stages of Decline and the Widening
Performance Gap
• Blinded stage:
– The first stage of decline is the internal and
external change that threatens long-term survival
and may require the organization to tighten up.
– The organization may have excess personnel,
cumbersome procedures, or lack of harmony with
customers. Leaders often miss the signals of
decline at this point, and the solution is to develop
effective scanning and control systems that
indicate when something is wrong.

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 Stages of Decline and the Widening
Performance Gap
• Inaction stage:
– The second stage of decline is called inaction in
which denial occurs despite signs of deteriorating
performance. Leaders may try to persuade
employees that all is well.

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 Stages of Decline and the Widening
Performance Gap
• Faulty action stage:
– In the third stage, the organization is facing
serious problems, and indicators of poor
performance cannot be ignored.
– Actions may involve retrenchment, including
downsizing personnel. Leaders should reduce
employee uncertainty by clarifying values and
providing information.

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 Stages of Decline and the Widening
Performance Gap
• Dissolution stage:
– This stage of decline is irreversible. The
organization is suffering loss of markets and
reputation, the loss of its best personnel, and
capital depletion. The only available strategy is to
close down the organization in an orderly fashion
and reduce the separation trauma of employees.

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 Design Essentials
 Organizations experience pressures to grow
 Organizations evolve through stages of the life-cycle
 Larger organizations usually adopt bureaucratic
characteristics
 All organizations require systems for control
 Many organizations experience decline

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