The Basics of Organizational Decline Theory

Dear HRart Worker,

What is Organizational Decline Theory? This theory describes a suspended period in which a company’s resources and performance decline. Organizational decline occurs when companies do not anticipate, recognize, and adapt to environmental threats. If an appropriate resolution is not implemented, the future of the company will be at risk. 

There are 5 stages that describe the cycle of organizational decline. From the point when decline develops to how a company reacts to the change.

The 5 stages of organizational decline are:

Stage #1 Blinded

  • Decline begins but fails to be recognized

Stage #2 Inaction

  • Problems become more visible but no action is taken

Stage #3 Faulty action

  • Company announces plans to cut cost and increase efficiency without recognizing the need for fundamental changes

Stage #4 Crisis

  • With the lack of resources to properly change, companies will file for bankruptcy

Stage #5 Dissolution

  • Company is dissolved through bankruptcy procedures 

What are some early signs that a company is entering organizational decline?

  • Decline influence in market, community, and employee base
  • Higher turnover rate, especially from long term employees
  • Inability to attract new customers
  • Company no longer accepts feedback
  • No digital presence

No matter why a company is experiencing organization decline, if a company is reluctant to change, it will be harder to build itself back up. Acknowledging early signs of organizational decline will allow a company to adapt to the changes before there is too much financial loss. 

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?

Have you experienced organizational decline? How did you acknowledge and adapt to the changes?


Grace (she/her/hers) 

p.s. This blog post was adapted from the Letters From the HRart fortnightly newsletter. I invite you to subscribe

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