ORGANISATIONAL DECLINE CAUSES
CAUSES OF ORGANISATIONAL DECLINE OR DECAY:
Organizational Slack
Slack is uncommitted or
committed (but underutilized) resources that are at the disposal of the
organization. The existence of uncommitted slack (especially in the form of
cash and liquid assets) is considered a necessary strategic factor for the
survival of the declining organization because during decline, there are not
enough sales to generate sufficient cash. On the other hand, slack may be a
handicap during growth period and it may represent a high opportunity cost
causing a drag on performance. While organizations in decline require high
discretion and flexibility in using slack, in more stable or growing markets,
high levels of slack (especially in the form of cash) may reduce performance.
Hence, critical to the choice and the timing of retrenchment strategies and the
likelihood of survival, is the amount of slack within the organization. Unfortunately
this situation does not exist in many organizations facing decline or decay. In
particular, while exercising retrenchment strategy as a strategic option, the
existence of critical slack, will give the organization more flexibility in
dealing with internal and external adversity.
Leadership
The lack of effective
leadership has been identified as one of the most significant causes of
business failure. Leadership vacuum may exist due to managerial incompetence or
managerial succession. As mentioned earlier, this problem is more acute in
declining organizations since qualified managers seek alternate employment
before they become associated with any potential stigma. A critical success
factor for companies facing high adversity and unpredictability created by
competition is the existence of leaders who can create an agenda for change and
build an effective implementation environment. The leaders should also be able
to alter the organizational philosophy, defining success as lower growth and
smaller size and persuade the various constituencies to support the
retrenchment choice.
It may be a good idea to
recruit influential leaders prior to implementing a retrenchment strategy
because in the retrenchment process and more specifically in turnaround process,
powerful leaders with an access to elite groups and other networks can; a)
provide more flexibility with creditors, stockholders, and the government, b)
influence creditors to support the management’s right to continue in control,
and c) provide additional capital more easily and on better terms. Highly educated,
well connected, competent, and trustworthy leaders have better chances of successful
reorganization.
Managerial Control
In successful
organizations, managerial depth provides better coordination and control.
However, organizations in decline often choose to cut back their managerial staff
especially at the middle levels of management. Creditors may also force
cutbacks in staff or reduction in management compensation. Excess reduction in
managerial depth may eliminate critical functions and decrease chances of
survival. Organizations may have the option, however, to replace personnel
involved with coordination and control functions by applying appropriate
information technology. In order to cope with high complexity in the external
and internal environment, firms may find it useful to increase their usage of
information and communication technology.
An organization can stop
its decay and increase its survival by adopting an appropriate retrenchment
strategy at the appropriate time. The following propositions provide guidelines
for the timing of retrenchment strategies. The choice of a specific strategy is
a function of the level of environmental adversity and the level of organizational
slack.
Condition of Moderate Adversity
Firms with low slack
should consider an early retrenchment strategy when faced with moderate
adversity because alternatives are limited. In the context of strategic planning,
retrenchment may include the shrink selectively strategy: discharging some debts
while restructuring others, reducing stigma, and shifting the organizational philosophy
to define success as accepting lower growth and size. It is important to trigger
the actions and implement a retrenchment strategy while talented top management
is still in the organization and still feels positive (moderate adversity) about
their business and its future.
When slack is moderate,
the organization should focus on profitable or promising businesses in which it
has distinctive skills and experience. This strategy variant may take the shape
of a combination of an “extracting cash strategy” and a “shrink selectively
strategy”. Firms with high slack can withstand moderate levels of adversity.
High slack enables the organization to maintain its strategic direction through
the use of uncommitted or under utilized (committed) assets.
Condition of High/Severe Adversity
Small firms are more
likely to stop operations apparently due to lack of slack resources, thus
increasing the probability for failure. Large firms have greater physical and
financial capacities to hold excess resources and are expected to have more
slack than small firms. Therefore, small firms or firms with low levels of
slack, faced with high/severe adversity, may select to sell off assets outside
of its strategic focus (i.e. SSS) or to accept a leverage buyout (divest). When
high slack exists, augmenting the organization’s leadership and managerial
resources would be beneficial. The coordination and control provided by
managerial depth could take the form of a computer based reporting and
budgeting system linked with the strategic planning system.
Retrenchment is a short-run renewal strategy designed to overcome
organizational weaknesses that are contributing to deteriorating or declining
performance.
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