Factors Influencing Organizational Change

Organization Change is a response of the organization to the various forces within and external to it. Organizations exist within a society and therefore respond to various factors like the economic, the political and legal framework as well as various socio cultural factors. An organization is like a system and is constituted of various sub systems. However what determines an organizations sustainable competitive advantage is its ability to accept change and plan for it.

The two major factors, which can influence an organizations strategy and its ability to survive and grow, are: Business Cycles and Industry Life Cycle.

Business Cycles

Just as a biological organism grows and dies, organizations too experience life and death based on the overall economic activity. Growth in the economy means a growth for the organization and slump in the economy may reflect in a slump in the business. However all organizations do not respond the same way to the fluctuations in the economy, some organizations are likely to be more affected as compared to other organizations.

Parkin and Bade’s text “Economics” gives the following definition of the business cycle: The business cycle is the periodic but irregular up-and-down movements in economic activity, measured by fluctuations in real GDP and other macroeconomic variables.

A business cycle is not a regular, predictable, or repeating phenomenon like the swing of the pendulum of a clock. Its timing is random and, to a large degree, unpredictable. A business cycle is identified as a sequence of four phases:

  1. Contraction (A slowdown in the pace of economic activity)
  2. Trough (The lower turning point of a business cycle, where a contraction turns into an expansion)
  3. Expansion (A speedup in the pace of economic activity)
  4. Peak (The upper turning of a business cycle)

In some years most industries are booming and unemployment is low; in other years most industries are operating well below capacity and unemployment is high. Periods of economic expansion are typically called booms; periods of economic decline are called recessions or depressions. The combination of booms and recessions, the ebb and flow of economic activity, is called the business cycle.

There are two main reasons why organizations need to understand business cycles. First it is easier to manage organizations in the period of growth than when they are in a slump. Secondly the major changes which occur during a business cycle like a new product introduction, expanding to a new market require a great deal of investment by the organization. Improper timing of any of these changes may threaten the very existence of the business. The underlying factor is that if organizations want to survive they must learn to face uncertainty since managing uncertainty is the key to effective change management.

Industry Life Cycle

Just like organizations grow and die, the industry also goes through various stages in its life span. The three major forces, which have an impact on the life cycle of an industry, are competitive structure, technology and institutional rules.

The stages of the life cycle of industry evolution are:

  1. The embryonic stage
  2. The growth stage
  3. The shakeout stage
  4. The maturity stage
  5. The decline stage

The industry life cycle model is a useful tool for analyzing the effects of an industry’s evolution on competitive forces. Using the industry life cycle model, we can identify five industry environments, each linked to a distinct stage of an industry’s evolution:

  1. An embryonic industry environment
  2. A growth industry environment
  3. A shakeout industry environment
  4. A mature industry environment
  5. A declining industry environment

Competitive structure:

The competitive structure of the industry in the early stages of embryonic and growth is disorganized. The number of competitors will be large and the relative position of the competitors would keep continuously changing. In this stage a competitor who adopts superior technology would definitely get an edge over the others. Organizations who make investments in their people by training them to adopt new technology would have a greater chance of survival and growth as compared to those who don’t.

Ultimately organizations who cannot adopt new technology or who don’t develop requisite skills in their manpower would be erased from the competition. This stage is the shakeout stage since in this stage many organizations are shaken out of the competition. The result is that there are fewer organizations in the industry with a larger market share.

Each organization tries to consolidate their position and this leads to an increase in industry concentration. (Concentration here refers to the number, size and strength of competitors.) At this point of time, the market growth slows down and the industry reaches a stage of maturity. From this stage of maturity the markets grow smaller and the industry may go to the decline stage.

Technological Changes

Technology refers to the “equipment, machinery and information, knowledge and activities that are involved in the physical transformation of inputs into outputs.” In the competitive environment, which exists at present, organizations are highly concerned about technology because it is a major determinant of success. Selecting and using the right technology thus becomes a very important factor in giving the organization a competitive advantage in the competition.

Technology is basically of two types – general and specific. General technologies or general-purpose technologies are common and are utilized by all organizations, for e.g.: electricity, steam, computers and the Internet. Specific or specific purpose technologies are those, which are industry specific and sometimes are customized by organizations for their purpose. Such technologies give to the organization an edge over the competition.

Institutional Rules

Institutional Rules refer to the formal or written and unwritten rules, regulations and norms a company must follow. The formal rules are the statutory compliance’s and legislation’s that an organization must follow, for e.g., laws regarding environment, health and safety, employment, consumer protection and wages/salary. The informal rules are the unwritten but implied codes of conduct for the organization as well as for the employees who work within. Norms and codes of conduct evolve over a period of time and in some case get institutionalized in such a way that they become more rigid than legislation’s.

Violation of written laws lead to the organization being legally punished or sanctioned for the offense where as violation of unwritten and informal norms and codes of conduct lead to social sanctions, like ostracism, boycott and a loss of credibility and reputation in the society.

Institutional rules evolve rather slowly but when they change, they change the way that business is conducted in a competitive industry. Those organizations, which are not proactive and cannot prepare for such a change, will experience a slump in the performance. An example for this would be the response of nationalized banks towards emerging customer needs. Slow response and unattractive schemes made the customers move to look for other outlets and this led to the boom for non banking financial institutions, who came up with very attractive schemes like personal loans, etc.

Source: Docstoc.com

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