Organization Size, Life

cycle, and decline

Defining Organization Size

Total number of employees

Since it is the people and their interactions
that are structured, their numbers should
be more closely associated with than with
any other size measure
Number of research studies also concluded
that total number of employees appear to
be more related to size
- one study found the correlation between
number of employees and net assets to be
.78
- the correlation between total hospital
work force and daily patient load to be
over .96
- size of full time and part time faculty
correlates with student enrollment at

Is Bigger Better

Pressure for growth

1. Organizational goals: To grow fast and
grow large
. Companies strive to acquire size and
acquire resources to compete on global
scale
. To invest in new technology
. Control distribution channel
. Guarantee access to markets
2. Executive advancement
3. Economic Health

Big company/ Small company

hybrid
a. Combines a large corporations
resources with a small companys
simplicity and flexibility
b. Reorganize into groups of small
companies
c. Provides greater autonomy to
managers
d. Reduces the number of levels of
managers

Conclusions on the Size and Structure Relationship

Size certainly does not dictate all of an

organization structure but it is important in
predicting some dimensions of structure
1. Size and complexity:
. Size affects complexity but at decreasing
rate, in government organizations, whether it
is true in business organizations is
questionable
. In business organizations where managers
have greater discretion structure causes size
. Consistent with strategy imperative, if
managers have discretion they may choose
to make their structure more complex
(consistent with management theory) as
more activities and personnel are added.

Conclusions on the Size and Structure Relationship

Size and Complexity contd.

It cant be ruled out that size-structure relationship is

circular. There is evidence that size generates
differentiation and that increasing differentiation also
increases size

The strongest case can be made for effect size on

vertical differentiation

A less strong but certainly solid relationship could be

made for size-horizontal differentiation relationship

The larger the organization, the more pronounced (at

declining rate) the division of labor within it, the same
being true for functional differentiation of the
organization into divisions

The size and spatial differentiation is problematic

Blaus high correlations are attributable to the type of
organization studied. Further research covering
diverse types of organizations is needed before any
substance can be drawn

Conclusions on the Size and Structure Relationship

2. Size and Formalization:

A comprehensive review of twenty seven
studies covering more than one thousand
organizations concluded that the relationship
between size and formalization was high ,
positive and statistically significant
There is logical connection between size and
formalization
- Two popular methods for control of behavior
of employees are direct surveillance and
formalized regulations
- as one increases the other decreases
- surveillance costs increase very rapidly as
organizations expand in size
- management in order to achieve economies
substitutes formalization to surveillance

Conclusions on the Size and Structure Relationship

Size and Formalization contd.

Henry Mintzberg, after reviewing the size and
formalization literature proposed that the
larger the organization, the more formalized its
behavior.
- Emphasized that larger organization
formalizes
those activities that have a propensity to
recur often
- with increased size comes greater internal
confusion. In order to minimize this confusion
they seek to make behavior at lower levels in
the hierarchy more predictable
- management turns to rules, procedures, job
descriptions, and other formalization technique
to bring about predictability
Size and formalization relationship cannot
ignore whether organization is independent or

Conclusions on the Size and

Structure Relationship
Size and Formalization contd.
Parent firms often impose rules
and regulations to maintain
financial reporting consistencies
that would be unnecessary if small
firm was independent
A moderating factor on sizes
effect on formalization would be
whether organization was a
subsidiary of a large firm or an
independent firm

Conclusions on the Size and Structure Relationship

3. Size and Centralization:

In large organizations there is inevitable
delegation
As formalization increases with size. These
rules and regulations allow top management
to delegate decision making while at the same
time ensure that decisions are in accordance
with the desires of top management
The research is mixed in demonstrating that
size leads to decentralization
George A. Miller in his comprehensive review
concluded that relationship between size and
centralization is not significantly different from
zero
Precisely why this occurs is not very clear
One possibility is that these studies combine
professionally managed and owner managed
business enterprises

Personnel Ratios
Another characteristics of large organizations relates to personnel
ratios for administrative, clerical, and professional support staff
The most frequently studied ratio is the administrative ratio
Two patterns have emerged:
1. Ratio of top administration to total employees actually smaller in
large organization .
. Indicating organizations experience administrative economies as
they grow larger
2. This pattern concerns clerical and professional support staff status
. The clerical ratio increases because of the greater communication
and reporting requirements needed as the organization grows in size
. The professional staff ratio increases because of the greater need for
specialized skills in larger complex organizations
. The net effect for direct workers is that they decline as a percentage
of total employees

Percentage of Personnel Allocated to

Administrative and Support Activities
Line employees
75

Percentage
of
Employees

50

Top administrators
Professional staff

25

Clerical

Large

Small

Organization Size
Thomson Learning
2004

9-14

Organizational Life Cycle

1. Entrepreneurial Stage:
. Characteristics:
. Emphasis is on creating a product and
surviving in the market place
. Founders are entrepreneurs and devote
full energies to technical activities of
production and marketing
. Organization is informal and nonbureaucratic
. Control is based on owners personal
supervision
. Growth is from a creative new product or
service

Organizational Life Cycle

1. Entrepreneurial stage
. Crisis of leadership
a. As the organization starts to grow, the
larger number of employees causes
problems
b. The creative and technically oriented
owners are confronted with management
issues, but they prefer to focus their
energies on inventing new products or
services
c. Entrepreneurs must either adjust the
structure of the organization to
accommodate continued growth or bring
in strong managers who can do so

Organizational Life Cycle

2. Collectivity stage
. If strong leadership is obtained the
organization begins to develop clear
goals and direction
. Departments are established along with
hierarchy of authority, job assignments,
and beginning of division of labor
. Employees identify the mission of the
organization and work long hours helping
the organization succeed
. Members feel part of a collective,
communication and controls are mostly
informal although few formal system
begin to appear

Organizational Life Cycle

2. Collective Stage
Crisis: Need for Delegation
Employees gradually find themselves
restricted by strong top-down leadership
Lower level managers begin to acquire
confidence in their own functional areas
and want more discretion
An autonomy of crisis occurs when top
managers who were successful because of
their strong leadership and vision do not
want to give up responsibility
The organization needs to find
mechanism to control and coordinate
without direct supervision from the top

Organizational Life Cycle

3. Formalization Stage:
Characteristics
Involves the installation and use of rules,
procedures, and control systems
Communication is less frequent and more
formal
Top management becomes more
concerned with issues such as strategy,
and planning and leaves operation of the
firm to middle level managers
Product groups or other decentralized
units may be formed to improve
coordination
Incentive system based on profits may be
implemented

Organizational Life Cycle

Formalization Stage:
Crisis: Red Tape

Proliferation of systems and

programs begin to strangle middlelevel executives
Organization becomes
bureaucratized
Organization becomes too large and
complex to be managed through
formal programs

Organizational Life Cycle

4. Elaboration stage
. Characteristics:
. New sense of collaboration and team
work
. Managers develop skills for confronting
problems and working together
. Bureaucracy may have reached its limit
. Social control and self discipline reduce
the need for additional controls
. To achieve collaboration, cross functional
teams are formed
. Organization may be split into multiple
divisions to maintain small company
philosophy

Organizational Life Cycle

Formalization stage
Crisis: Need for revitalization
May enter into periods of temporary
decline
The organization shifts out of alignment
with environment or becomes slow moving
and must go through a stage of
streamlining and innovation
Top management is often replaced during
this period
The company faces simultaneous needs
for cost cutting to remain competitive and
innovative new products
Organization needs bold leadership to
move forward

Discussion Questions
1. Apply the concept of life-cycle to
your university. What stage the
organization is now? How did the
organization handle or pass through
its life cycle crises?
2. Should a no-growth philosophy of
management be taught in business
schools? Is a no growth philosophy
more realistic for todays economic
conditions

Characteristics and causes during decline

Definition:
A condition in which a substantial,
absolute decrease in an organizations
resource base occurs over a period of
time
Often associated with environmental
decline in the sense that an
organizational domain experiences either
a. Reduction in size ( shrinkage in customer
demand)
b. Reduction in shape

Causes of decline

1.
.
.
.

Three factors are considered to cause

decline
Atrophy:
When organization grow older, become
inefficient and overly bureaucratic to lose
muscle tone
Organizations ability to adapt to its
environment deteriorates
Often atrophy follows a long period of
success, because organization takes
success for granted and becomes
attached to practices and structure that
worked in the pastand fails to adapt to
changes in the environment

Causes of decline

2. vulnerability:
. organizations strategic inability to
prosper in the environment
. Happens often with the small firms
that are not fully established. They
are vulnerable to shifts in consumer
tastes
. Some organizations are unable to
define correct strategy to fit the
environment
. Typically need to redefine their
environmental domain to enter new
industries and markets

Causes of decline

3. Environmental decline or competition

. Refers to reduced energy and resources
available to support an organization
. When the environment has less capacity
to support organizations, the
organization has to either scale down
operations or shift to another domain
. Increased global competition is also
influencing many companies to scale
down operations and cutback personnel
as they strive for lean, nimble
organizations

A model of decline stages

1. Blinded stage:
. Internal and External changes threaten
long-term survival and may require
organization to tighten up
. Organization may have excess personnel,
cumbersome procedures or lack of
harmony with customers
. Leaders often miss signals of decline at
this point
. The solution is to develop effective
scanning and control systems that
indicate something is wrong
. With timely information alert leaders can
bring back the organization to top
performance

A model of decline stages

2. Inaction stage
. Denials occur despite signs of
deteriorating performance
. Leaders try to persuade employees all is
well
. Creative accounting may make things
look better
. Solution for leaders is to recognize
decline and take prompt actions to
realign organization with environment
. Leadership action include:
(a) New problem solving approaches, (b)
increasing decision-making participation,
( c) expression of dissatisfaction to learn
what is wrong

A model of decline stages

3. Faulty action:
. Organization is facing serious problems
and indicators of poor performance
cannot be ignored
. Failure to adjust to declining spiral at this
point can lead to organizational failure
. Leaders are forced by severe
circumstances to consider major changes
. Leaders should reduce employee
uncertainty by clarifying values and
providing information

A model of decline stages

4. Crisis stage
. Still not been able to deal with decline
and is facing a panic
. Organization may experience chaos,
efforts to go back to basics, sharp
changes and anger
. The only solution is a major
reorganization
. The social fabric of organization is
eroding, dramatic action such as
replacing top administrators,
revolutionary changes in the structure,
strategy, and culture is required
. Workforce downsizing may be severe

A model of decline stages

5. Dissolution
. This stage is irreversible
. Organization is suffering loss of
markets and reputation, the loss of
its best personnel and capital
depletion
. The only solution is to close down
the organization

Organizational Control
Strategies
The strategies for control came from a framework
for organizational control proposed by William
Ouchi
William Ouchi suggested three control strategies
that organization could adapt:
Bureaucratic Control
Market Control
Clan Control
Each of the control uses different information
All three types may appear simultaneously in an
organization

Major Control Approaches

1.

Market Control:
Price competition is used to evaluate the output
and productivity of an organization
Use of market control requires that outputs be
sufficiently explicit for a price to be assigned and
that competition exist
Without competition price will not be an accurate
reflection of internal efficiency
Companies are applying market control concept
to internal departments such as accounting, data
processing, legal departments and information
services

Major Control Approaches

2. Bureaucratic Control
. Use of rules, policies, hierarchy of
authority, written documentation,
standardization
. Primary purpose is to standardize and
control employee behavior
. Bureaucratic control mechanisms are
used when behavior and methods of
processing information are too complex
or ill defined to be controlled with price
mechanism

Major Control Approaches

Management Control systems:
Broadly defined as formalized routines, reports
and procedures that use information to maintain
or alter patterns in organizational activity
Include the formalized information based
activities for planning, budgeting, performance
evaluation, resource allocation, and employee
rewards
These systems operate as feedback systems, with
targets set in advance, outcomes compared with
targets, variances reported to managers for
remedial actions

Four Management Control

subsystems

Major Control Approaches

3. Clan Control
. Use of social characteristics, such as
corporate culture, shared values,
commitment, traditions, and beliefs to
control behavior
. Use of clan control require shared values
and trust among employees
. When ambiguity and uncertainty is high
. With high uncertainty organization can
not put a price on its services and things
change fast that rules and regulations
are not able to specify correct behavior

Clan Control

Employees may be hired because they are

compatible to the organization purpose
New employees may be subjected to a long
period of socialization
Companies that shift to new management
paradigm of decentralization, horizontal
teams, network structures and employee
participation generally use clan control
Clan control may also be used in certain
departments, such as Strategic Management,
where performance is difficult to measure
Clan control is invisible yet very powerful

Contingency Control Model

Supervisory Control Strategies

1.
.
.
2.
.
.
.

Focuses on performance of individual

employees
Output control
Written records that measure employee outputs
and productivity
Outputs of individual workers can easily be
measured (piece rate system)
Behavior control
Personal observation of employee behavior to
see whether an employees follows correct
procedure
Takes more time than output control as it
requires personal surveillance
Used when outputs are not easily measured

Supervisory Control
Strategies
3. Input control:
. Uses employees selection and training to
regulate knowledge, skills, values, motives of
employees
. Attempts to align the goals of an individual
employee with those of the company
. Used when neither procedures or outcomes are
easily measurable
. Involves rigorous staff selection, ongoing
training and development programs