The Conceptual View of Organizational Decline
The bankruptcy of an organization is the end result of many years of organizational decline. It is not an event that happens ad-hoc. Rather, it is the culmination of a series of events that have happened over the past few years. Experts agree about the fact that organizational decline does not happen overnight. However, they do not seem to be able to agree about how exactly organizational decline actually happens. Over the course of many years, several models of organizational decline have been proposed. In this article, we will explain the different points of view regarding organizational decline.
What is Organizational Decline?
Before understanding the different approaches to organizational decline, we must first understand what organizational decline is. In simple words, the organizational decline is defined as the reduction in the number of resources that are controlled by an organization. This reduction must be consistent and must happen for at least two consecutive years.
The reduction in resources must be involuntary i.e., the company must not have willingly reduced its resources. This is what segregates organizational decline from downsizing, or any other strategy wherein the company deliberately lowers its use of resources. Downsizing is a voluntary reduction in the number of human resources utilized by a company. Since it is voluntary and part of a strategy, it may not be considered to be part of organizational decline.
Models of Organizational Decline
Different people have proposed different conceptual views of organizational decline. These different models have been explained below.
Model #1: Life-Cycle Model:
The first and the oldest model of organizational decline calls it the part of an organization’s natural life cycle. This model compares the life of an organization to the life of a human. Hence, just like humans grow old and perish over time, this model believes that the same happens to organizations as well. This makes the time the only important variable in predicting the decline of an organization.
This model proposes that every organization will grow through introduction, growth, maturity, and then decline. This is called the life cycle approach. The problem is that there are several examples of organizations that are hundreds of years old, which have not gone through decline. On the other hand, there are organizations that are barely three or four decades old and have gone through decline. Hence, the age factor is important to some extent. However, it cannot be considered to be the sole determinant behind the decline of any organization. Also, critics of the life cycle model have shown that companies have repeatedly reinvented themselves and moved from the maturity stage back to the growth stage.
Because of the reasons mentioned above, this model has been under severe criticism. As a result, other models have been developed to explain the phenomenon of organizational decline. This model is quite simple and, therefore, does not need any further explanation.
Model #2: Environmental Model:
The second model of organizational decline does not consider age as the most important factor. Instead, it argues that the decline of an organization is caused by the inability of its management not to pay attention to environmental factors.
This theory then goes on to list down the factors in the external environment, which actually change wherein the organization does not change. These factors are then categorized into four main categories. According to the model, the change can be in market size. This means that the market itself starts shrinking since it faces competition from a different product with better technology. Alternatively, the change could also be in the shape of demand. This means that the distributional channel of the product might undergo a change. For instance, services that were being provided offline start being provided online.
Further, the nature of change could be continuous or episodic. Continuous changes are easier to pick up since their effects begin to show up in the financial statements over successive periods. However, if the effect is episodic, the company may have a difficult time finding the root cause. This makes it difficult to detect.
The environmental model of organizational decline also proposes five different stages. These stages, as well as the model, have been explained in detail in the next article.
Model #3: Internal Causes Model:
There is a third theory which believes that organizational decline is caused largely by internal factors. This theory believes that a company needs to constantly reinvent itself even though its previous models have been successful. Some companies tend to continue their past strategy for too long even after these strategies have stopped paying dividends. This is what ends up becoming the cause of their failure in the long run. The specific reasons which are present in the company’s culture, which tend to cause the downfall, have been explained in detail in the next article.
The reality is that organizational decline is a complex phenomenon that is difficult to decipher. The reasons which cause organizational decline could be many and varied. Each of these theories provides a partial understanding of this phenomenon. This partial understanding can then be used to gain a more holistic view.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.
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- The Conceptual View of Organizational Decline
- External Causes of Organization Decline
- Internal Causes of Organization Decline
- Predicting Bankruptcy in Organizations
- Shortcomings of the Bankruptcy Prediction Models
- Bankruptcy: From a Legal Standpoint
- Bankruptcy as a Strategy - Part 1
- Bankruptcy as a Strategy - Part 2
- Types of Bankruptcy Frauds
- How Bankruptcy Affects Personnel Contracts
- The Deepening Insolvency Theory
- Costs Associated With Bankruptcy
- Cutting Costs during Bankruptcy Proceedings
- How to Choose a Venue for Filing Bankruptcy
- How does DIP Financing work?
- Sources of DIP Financing
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- The Role of Creditors Committee in Bankruptcy
- The Disclosure Statement
- The Solicitation Process
- The Voting Process
- Confirming the Bankruptcy Plan
- Sale of Assets during Bankruptcy
- Debt to Equity Conversions
- The Impact of Bankruptcy on Shareholders
- Reporting Requirements in Bankruptcy
- Why Investors and Banks Must be Protected When Firms and Tycoons Go Bankrupt
- Cram Down in Bankruptcy Proceedings
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- Cross Border Bankruptcies
- Investing in a Bankrupt Company
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