What Causes Organizational Decline?

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Business chart filled with sales data graphs
Business chart filled with sales data graphs (Image: Nonwarit/iStock/Getty Images)

The organizational life cycle consists of four major stages: start-up, growth, maturity and decline. An organization begins as a concept and eventually grows in size, becoming increasingly complex. As the organization reaches maturity, more stakeholders are involved and additional resources are required for successful business decision-making and sustainable profitability. A mature organization will ultimately contend with decline unless it diversifies its structure or offerings to meet current market needs. Competitive forces, resistance to change, outdated technology and economic downturns are typical causes for organizational decline.

Competitive Forces

Competitive forces may create a barrier to entry that is difficult for a new business to overcome. For example, an established player may have the advantage of economies of scale resulting in lower production costs and overhead or use an aggressive pricing strategy, such as selling certain items below cost to increase customer traffic, which may potentially put a newcomer out of business. Even if an organization overcomes these hurdles, effective leadership and strategy should remain in place to counteract competitive threats that may impede growth and reduce market share.

Resistance to Change

Over time, as the business stabilizes, organizational leaders often focus on efficiency and take a conservative approach to decision-making. An organization can become more risk-averse and fail to recognize and address internal and external threats to the business. The inability to adapt to changing conditions may adversely affect profitability. For example, while the digital revolution was taking place, Kodak failed to take an early initiative to move its paper-based film product to a digital product, which led to its bankruptcy.

Outdated Technology

As an organization ages, it may aim to capitalize on profits and not allocate resources to replace legacy systems or invest in innovative technologies to keep pace with its competitors. Outdated technology may lead to compatibility issues, inefficient communications, slower business processes and poor customer retention. A mature organization’s technological investments may also remain stagnant due to the consideration that its current technology is sufficient for its needs. Meanwhile, competitors could be adopting new and more efficient ways of doing business, gaining a competitive advantage.

Economic Downturn

An economic downturn negatively affects many facets of an organization, and ultimately may cause its decline. For example, a rise in unemployment will affect customer spending by reducing disposable and discretionary income. In turn, an organization may need to downsize, discontinue research and development, and cut other costs, which may reduce the quality of its products or services. A poor economy also makes obtaining lines of credit and the ability to pay existing debt more difficult, which may leave an organization with the inability to stay afloat.

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