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Thursday, January 24, 2013
CAUSES OF ORGANISATIONAL DECLINE OR DECAY:
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.
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.
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.