Digging Deeper Into Organizational Decline Theory

Dear HRart Worker,

First off, are you wondering what Organizational Decline Theory is? If so, check out my last blog post, “The Basics of Organizational Decline Theory”. In that blog post I go over the theory, what the 5 stages of organizational decline are, and list many of the warning signs that can alert you that your company may be falling into this period.

While it is natural for an organization to experience a fluctuation in sales and performance, the inability to acknowledge the rapid changes can negatively affect the future perspective of the company. There are three theories that signify the importance of understanding the life cycles of a company. If understood, recognizing signs of organizational decline can save a company.

Considering organizational decline is a broad topic, three conceptual views have been formed to explain why a company experiences the 5 stages of decline and the reluctancy to change. These three theories as to why a company will encounter organizational decline can be labeled as the Life-Cycle Model, External Model, and the Internal Causes Model. 

The Life-Cycle Model

The Life-cycle model compares the life of a company to the human lifespan. The four phases, introduction, growth, maturity, and decline, describe the life expectancy of a business. The life cycle can be viewed as such:

1. Introduction/Startup: If a company can succeed as a startup, it will have a smooth transition when growing. A startup signifies a young company’s first stages of development. This phase allows for the development of new ideas and create a diverse employee base. Unfortunately, the majority of businesses do not get past the startup phase due to financial struggles or poor partnerships. Once a company establishes its product-market fit, secures funding, and creates a clear mission, the company will enter the growth phase. 

Source: Oxford Review

2. Growth: Within the growth phase, a company solidifies its place in the market separating itself from its competitors. The company will no longer needs to confirm why they fit in the market. This phase will often experience rapid expansion. 

Airbnb is an example of a startup that experienced rapid growth. Founded in 2008 after two years of challenges in developing the business, Airbnb started making a name for itself in 2011 when they expanded services into Germany. This signifies the start of the company’s expansion and when Airbnb started to make a name for themselves. By 2015, the company would have officially entered the next stage, the maturity phase. 

3. Maturity: As a company’s growth phase starts to settle down, profits will become dependable. Instead of the steady incline that companies experience within the growth phase, the maturity phase receives slight but persistent profit growth each calendar year. Employees during the maturity phase will feel more comfortable in the role without burning out and the leadership team does not need to be involved in every meeting. 

The Coca-Cola company is currently in its maturity phase. The company no longer needs to produce products to solidify its place in the market but will venture into new territories. Since the introduction of the original Coca-Cola drink, the company has introduced multiple innovations, Coca-Cola Cherry Vanilla for example, to maintain customer interest.

4. Decline: Once a company is no longer able to meet profit and sales demand, a company will enter the decline phase of a company’s life cycle. During this phase, companies have failed to adopt to the changing business environment and meet the market demands. If a company continues to decline it will need to file for bankruptcy.

Disadvantages of Life-Cycle Theory

While the theory can explain how a company can grow and decline based on its evolution in the market and its business decision-makings, many companies have followed a different trajectory. The age of a company is important, but it cannot be the sole determinant of a company’s life span. Many companies have continuously reinvented themselves to the point where they have never entered the decline phase or built themselves back up. There is no foreseeable decline as the theory describes, instead companies encounter temporary sales decline. 

The Lego company, founded in 1932, proved the test of time that the life-cycle theory is not always dependable. In 2003, the Lego company sales were down 30%. If the company continued the trajectory, they would have needed to file for bankruptcy. Instead, the company reinvented itself by releasing themed kits, clothes, girls jewelry, and movies. The company created a fan base. 

The life-cycle theory is a good basis for explaining how and why a company will experience organizational decline, but the flaw is its reliance on the age of the company. 

The External/Environmental Model Theory

The External/Environmental Model Theory does not consider age to be the sole explanation for the Organizational Decline Theory. Instead, if focuses on the environmental changes that can affect the decline of a company. The organization does not change but the environment surrounding the company does. This occurs when the company and its management does not acknowledge the changes developing around them. 

The changes may be acknowledged or undetected. How a company reacts to the changes determines if they will experience a decline. There are two types of changes a company will experience: continuous and episodic

Continuous changes are easier to pick up on. They can usually be identified through financial statements.

Episodic changes are not easily detectable and can run under the radar. If these external changes persist regularly, they can become continuous and more detectable. 

External changes that can affect the resources and performance of the company include: 

  • Competition – companies need to stay relevant to the desires of the customers to stay on track with their competitors. New competitors are constantly trying to enter the market. The lack of evaluating and incorporating new products and processes will allow companies to enter the organizational decline phase.  
  • Economic
    • i.e. Lowering economic trends → unemployment will rise
  • Technological 
    • i.e. Developing software, methods
  • Legal or Political 
    • i.e. Employment laws, import regulations, taxations
  • Global
    • i.e. Global cultural norms and consumer trends
  • Demographic
    • i.e. Market’s age, race, belief system, occupation, income
  • Social
    • i.e. Location’s personal values, or socioeconomic status
  • Natural
    • i.e. Environmental impacts (climate change, hurricanes, tornadoes)

Finding the exact external factor that is causing organization decline can be difficult. In many cases, multiple factors can be causing the decay. However, within each external environmental change, the organization stays put. Meaning that the internal changes, or controlled decisions, do not affect the company, but third-party factors do. 

Disadvantages of External Model Theory

The external theory provides a well-rounded explanation as to why it is essential for companies to focus on external factors. Although, it should not be the only reasoning as to why a company would enter organizational decline. So many factors go into the decline of a company that pin-pointing it on one factor is impossible. 

Additionally, the internal and external environments interlap. As discussed above, external factors will change but companies do not. This is true to an extent. Companies cannot determine the environmental impacts a community experiences, or the changing cultural norms. What they can control is how they react to the changing external factors.

Internal Cause Theory

The final theory, Internal Cause Theory explains how internal factors primarily cause organizational decline. This is largely due to companies reluctancy to reinvent themselves. 

There are five internal factors that can cause the lack of innovation and rigitory within the organization leading to organizational decline. These four factors include: 

  1. Company Culture
    • Attitude and beliefs held in the organization
    • i.e. company policies, mission statement, incentives
  2. Staffing 
    • Quality and impact of the staff and managers
    • i.e. Employee satisfaction, training, hiring/firing employees
  3. Finance
    • Aquiring funds for a company to survive and grow
    • i.e. Developing new products, wage raises, loans
  4. Current Technology
    • Companies behaviors and usage around technology
    • i.e. Updating hardware/software, access to social media

Any change from the stated internal factors effects the base for organizational decline. If the staff’s satisfaction starts to decline, or the company does not stay on top of the latest technological advancements, this will cause the lack of innovation. Once the factors build up, and companies are reluctant to change, it affects the innovation and organizational decline.

Why is the innovation so important?

Innovation aids companies in overcoming changes in the market. It can foster growth and encourage market loyalty. The lack of innovation is caused by absence of  improved products/services, inability to update outdated technology/processes, or the reluctancy to update company culture and wages. For example, companies who continue to create policies that were once successful but now refuse to accept feedback lack innovation. This often occurs due to outdated incentives, policies, and technology. When the lack of innovation builds up, the company is experiencing organizational decline.

Disadvantages of Internal Care Theory

As mentioned in the disadvantages of the External Model Theory, internal and external factors interlap with one another. To be able to produce strategies for predictable challenges, one must understand why external factors cause or relate to internal factors. 

The following image better illustrates why both factors must be intertwined:

Wheel graph with external factors pointing in towards the internal factors in the middle.

Source: Rice University

Which theory should we use to explain Organizational Decline?

All three. 

The three theories, Life-Cycle Model, External Model, and the Internal Causes Model, all teach something very important: 

Listen to your company.

As simple as it sounds, acknowledging the environment around and in the company will assist predict the unpredictable. 

Owning and running a business is hard enough on itself. After all the hard work it is to build the company, it is devastating when a company closed because of the lack of innovation or market changes.

Instead of only focusing on only the life expectancy of a company and where it should be in the timeline, or the internal and external factors, acknowledge all three. All three theories can help a company learn something about itself. 

Organizational decline does not mean the end of the road for companies. When it is acknowledged and accepted, it creates the opportunity for companies to rebuild or reinvent themselves. If a company is no longer making an impactful effect on the community, maybe it is time to change the processes and procedures.


Grace (she/her/hers) 

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