External Causes of Organization Decline

Many theorists believe that organizational decay is caused by external factors. In fact, some have gone far enough to suggest the various stages in which this decline happens. However, the exact external causes are often difficult to understand. In this article, we will have a look at some of the most prominent causes of organizational decline.

Competition

Competition is said to be the number one cause for organizational decline. Competition gets attracted to industries where supernormal profits are being made. More and more companies then start entering such an industry. The end result is that existing organizations face a higher decline rate. This is because competition creates an unnecessary shortage of resources. All competitors in the same industry are trying to acquire the best of land, labor, machinery, etc. Since the amount of resources is finite, competition ends up raising the prices.

The effect of competition on any organization has been explained in detail by Michael Porter. However, for simplicity’s sake, it is important to understand that one of the two things happens. Either, competitors start taking up the market share of the company, by offering the same or better product at a lower price. Or, those competitors force the organization to increase its spending on creating a better value proposition for the customers. In either case, the end result is the same. The difference between the revenue and the costs narrows, and the company starts generating lesser profits.

The rise of Amazon and the fall of book stores in the perfect example of how competition can lead to organizational decline. Amazon created a better value proposition as it allowed people to buy books at a lower cost. It also replicated the experience of going through a book by creating a “Look Inside” feature, which allows customers to look at snippets of the book before buying the same.

In order to protect themselves from the effects of competition, companies try to build switching costs. Switching costs act as a deterrent for customers when they interact with the competition of an organization. For instance, banks generally impose closing costs on loans to protect themselves from being paid early with refinanced loans. Similarly, airlines create switching costs using frequent flier miles.

Technological Change

Technology is an integral part of business today. Therefore, the inability to stay abreast of the latest technology is one of the leading causes of organizational decline today. There have been several theories that have been written about the effect of technology on business.

One such theory proposes that technological changes happen in two phases.

1. One phase is characterized by incremental changes. This means that small improvements are made to the existing technology. The continuous improvements which happen in the field of microchips can be considered to be an example of this case.

2. On the other hand, the second phase is characterized by radical changes. This is where there is a fundamental change in the way in which technology is used. The invention of the assembly line, which fundamentally changed the way work is done, can be considered to be an example of the second type.

Technological changes can also be categorized as ones that lead to an increase in competition or ones who destroy competition. Some technological changes encourage the creation of a monopoly. Hence, they are called competition destroying changes. On the other hand, other technological changes, such as cloud computing, lead to an increase in competition. This is because they break down the cost barrier and make technology available to everyone.

Technological changes encourage firms to try to promote a lot of alternate prototypes to the customer. In the end, one of the types becomes the dominant force in the market. The firm which created that particular prototype gets a heads up in the market. However, other firms soon start copying their designs if proper steps have not been taken to safeguard intellectual property.

Creating intellectual property rights is one of the best ways to overcome challenges from technological change. The failure to do so consistently is one of the leading causes of organizational delay.

Regulatory Changes

Regulatory changes have become the third important source of organizational decay in the modern world. This is because regulatory changes have the power to restrict the domain in which the products can be sold.

The word domain can be used to refer to either geographical or demographic boundaries. For instance, the trade war between China and the United States is causing damage to a lot of private organizations. This is because the markets in which these companies are allowed to sell is continuously being redefined.

Similarly, many tobacco companies have failed not because of the effect of competition or the change in technology. Instead, they have failed because governments across the world are making it more and more difficult to sell tobacco products. This is being done by restricting the environment in which the product can be used. It is also being done by restricting the target audience for tobacco products.

Regulatory changes increase the cost of doing business. These added costs are taken straight from the bottom line. This means that the profit margins are hit hard and, in some cases, completely eliminated.

The only way to overcome a regulatory hurdle is to ensure that customers pay for it. Very few firms can pass on the price rise to customers. This is the reason that changing regulations are the leading cause of organizational decay.