Organizational Lifecycle Theory

        December-15, 2021

          Asiri Liyanage







It is accepted that like human creatures, organizations too are born, developed with time and there comes a stage when they start to decline. A few of the organizations has a life span, whereas the others are incapable to adapt to the new developments in their particular fields and have a brief life. 

According to (Basin, 2021) “Organizational life cycle, as the name suggests, is the life cycle of an organization from the point of its creation or onset to the point it is terminated. It has five distinct stages”.

An organizational Life-cycle undergoes very predictable and repetitive patterns of behaviors, which can be used to make very useful assumptions and decisions. It is the responsibility of the management to identify the stage where the organization is currently in, and make decisions best fit, according to the priorities of that stage.

 

Main Stages of an organizational Life Cycle

An organizational lifecycle can be described as a social system around which a group of people gather for accomplishing a common goal or a purpose. Various activities such as business planning, strategic planning, marketing, product development and financial management are the components of an organizational Life Cycle.

 

Phase 1: Launch

“Each company begins its operations as a business and usually by launching new products or services. During the launch phase, sales are low but slowly (and hopefully steadily) increasing. Businesses focus on marketing to their target consumer segments by advertising their comparative advantages and value propositions. However, as revenue is low and initial startup costs are high, businesses are prone to incur losses in this phase” (Corporate Finance Institue, 2021).

“In this phase, we see entrepreneurial thinking about the business, a team is formed, and sometimes a business plan gets written. For entrepreneurs needing money to kick start the business, the company goes into the growth phase once the investor writes the check. For those who don’t need outside funds, the start-up ends when you declare yourself open for business” (Johannsen, 2021). 

It is an accepted fact that during this stage it is advisable to develop a workable business model to work with whereas established organizations already have one. “There is a need for a practical and workable business model at this time that will help the company to find its due course” (Basin, 2021). According to Basin it is highly important to develop an applicable model which can be used to achieve the set goals.

 

Phase Two: Growth

In the growth phase, companies experience rapid sales growth. As sales increase rapidly, businesses start seeing profit once they pass the break-even point. However, as the profit cycle still lags behind the sales cycle, the profit level is not as high as sales. Finally, the cash flow during the growth phase becomes positive, representing an excess cash inflow (Corporate Finance Institue, 2021).

This stage is also referred to as the growth stage and some sources describe this stage in terms of several growth stages.

“In the growth phase, one expects to see revenues climb, new services and products developed, more employees hired, and so on. The management textbooks love to assume that sales grow each year. The reality is much different since a company can have both good and bad years depending on market conditions” (Johannsen, 2021).

“In the organization’s youth, those concerns are gaining stability, reputation, and pride. It is also concerned about how to organize and evaluate itself” (Mccoy, 2021).

Phase Three: Shake-out

During the shake-out phase, sales continue to increase, but at a slower rate, usually due to either approaching market saturation or the entry of new competitors in the market. Sales peak during the shake-out phase. Although sales continue to increase, profit starts to decrease in the shake-out phase. This growth in sales and decline in profit represents a significant increase in costs. Lastly, cash flow increases and exceeds profit (Corporate Finance Institue, 2021).

 “In this phase, the companies pay fewer onuses on expansion and more on safeguarding their interests and maintaining the existing growth and development strategies and plans” (Basin, 2021).

 

Phase Four: Maturity

When the business matures, sales begin to decrease slowly. Profit margins get thinner, while cash flow stays relatively stagnant. As firms approach maturity, major capital spending is largely behind the business, and therefore cash generation is higher than the profit on the income statement (Corporate Finance Institue, 2021).

However, it’s important to note that many businesses extend their business life cycle during this phase by reinventing themselves and investing in new technologies and emerging markets. This allows companies to reposition themselves in their dynamic industries and refresh their growth in the marketplace.

Phase Five: Decline

“In the final stage of the business life cycle, sales, profit, and cash flow all decline. During this phase, companies accept their failure to extend their business life cycle by adapting to the changing business environment. Firms lose their competitive advantage and finally exit the market” (Corporate Finance Institue, 2021).

 “This phase of an organization is also referred to as Decline Phase which signifies the death of an organization and during which it is signified by the minimization of sales figures and decline of profitability” (Basin, 2021). As described by the same resource, this stage is signified by market stagnation, reluctance for risk taking, external challenges and lack of renovation.



 

References

Basin, H. (2021, January 30). Organizational Life Cycle – Definition, Stages, Importance. Retrieved 12 05, 2021, from marketing91: https://www.marketing91.com/organizational-life-cycle/

Corporate Finance Institue. (2021). What is the Business Life Cycle? Retrieved December 07, 2021, from Corporate Finance Institue: https://corporatefinanceinstitute.com/resources/knowledge/finance/business-life-cycle/

Johannsen, M. (2021). THE 5 PHASES OF THE ORGANIZATIONAL LIFE CYCLE. Retrieved 12 06, 2021, from Legacee: https://www.legacee.com/types-of-leadership-styles/the-organizational-life-cycle

Mccoy, J. W. (2021). Organizational Life Cycle: Definition, Models, and Stages. Retrieved December 07, 2021, from AIHR: https://www.aihr.com/blog/organizational-life-cycle/

 

Comments

  1. E127918December 16, 2021 at 10:35 AM

    Organizations, like people, go through phases. Organizations are born, become larger and mature, and then begin to deteriorate as they reach their mid-life stage. Organizations, like all other living things, expire in a variety of ways. While some organizations have long lives and others have short lives, all organizations go through the same stages of development throughout the organizational life cycle. It is critical for us to understand the stage of the life cycle of our company so that we may implement tactics that are most effective in current circumstances. Good information. I really like your point of view.

    ReplyDelete
  2. ARSHAD MBADecember 17, 2021 at 5:36 AM

    When Company get in to matured stage, from there need reinvent to sustain in the market, your explanation is very formal.

    ReplyDelete
  3. Chularathna2021MBADecember 17, 2021 at 8:39 PM

    Understanding the organisational life cycle has become critical so that the owner and his management may do everything possible to keep and grow the business. The indicators that link life cycle theories to their organisation are recognised by experienced leaders. The information you have provided in this article is very important thank you.

    ReplyDelete
  4. UnknownDecember 18, 2021 at 2:29 AM

    Understanding the lifestyle of an organisation will effectively helpful to continuously improvemen of an organisation and success.
    Thanks for sharing valuable and creative blog.
    Priyankara

    ReplyDelete

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