Different theories highlight the force of history in explaining growth and decline. One popular stream of research is life cycle theories. Such theories search for general laws predetermining choices and actions in deterministic stages. Stage models (e.g., Greiner, 1998) are popular descriptions which are easy to follow, but there is no agreement upon the number of stages in the models and what the stages consist of (Stubbart and Smalley, 1999). These models often use biological metaphors in describing organizations as developing through different stages of their “life,” such as birth, youth, maturity, and death and are accused of viewing growth as a linear and deterministic process. Penrose (1959), among others, has criticized those theories.
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Because humans have free will and are social and intelligent, such theories miss the complexities and uncertainties of organizational processes. Several researchers (e.g. Phelps et al., 2007) also question whether such life cycle or stage models are appropriate in analysis of organizational growth. Such models have problems explaining complex processes in dynamic and unpredictable environments (Mintzberg, Raisinghani and Theoret, 1976; Nutt, 1984).
Still, these models, combined with other theories, can explain certain organizational challenges related to growth and decline. In discussing decline after “earlier spectacular and continuous growth,” Whetten (1987, p. 346) found that managers tend to get a “dysfunctional over-confident mind set” based on their success. Child and Kieser (1981) claimed that growth is a basis for security. It has a kind of self-energizing effect. They further argue that it is not growth per se that causes problems for growth firms, but rather poor management. One likely consequence of growth is a need for structural change in the organization, like more use of formal systems and procedures.
3.12.1 The consequences of growing
According to the OECD (2010), rapid growth represents an exceptional event and a transitory phase in the life of an enterprise. Rapid growth can be a disruptive event for a small firm because of the sudden pressure on managerial, financial, and technical resources. Such events are periods of intense change. “They can be exciting (providing opportunities for promotion, etc.) but also periods of stress, flux, and uncertainty” (Coad et al., 2014, p. 106). Further, we do not know much about which aspects “are important for sustaining high-growth over longer periods”(Coad et al., 2014, p. 107). According to Acs et al. (2008), most firms remain in business four years after their period of rapid growth, and only about three percent dies.
Moreover, they found that larger firms are more likely than small firms to continue their rapid growth for more than one period, but they do not discuss the reasons for why these larger firms continue to grow.
In their descriptive analysis, Hambrick and Crozier (1985) argue that some RGFs develop a sense of infallibility based on their successful growth. This makes it difficult to respond to changes and continue their growth. They further found that the rapid growth put the organization under great strain as a social organism. Often these firms need to hire more employees, and if the staffing process is not taken seriously, it may weaken the decision-making process and culture, creating turmoil—and key employees can burn out and leave.
Probst and Raisch (2005) asked why some of the most successful companies suddenly crash and identified four characteristics of their failure: 1) excessive growth, 2) uncontrolled
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change, 3) autocratic leadership, and 4) excessive success culture. These firms experience market constraints on growth and thus turn to acquisitions to maintain their growth, resulting in difficulties in integration and a more complex organization. In order to finance their growth, especially acquisitive growth, the companies borrow outside capital. Even a small recession can make it difficult to repay their huge debt burden. These changes, both huge growth and acquisitions, create managerial challenges. The organization faces increased complexity, which is difficult for managers to coordinate and control. Autocratic leadership—
characterized by a charismatic and self-confident top executive with too much power, pursuing aggressive and visionary goals, and with no room for critique—was recognized as a sure road to catastrophe. Furthermore, a highly competitive company culture and reward systems with bonus payments and opportunities for promotion can be detrimental to trust within the firm. A lack of trust hinders openness in communication and affects job satisfaction and the organizational climate and thereby contributes to lower organizational performance.
Lastly, successful organizations like Kodak and Xerox had a strong resistance to change, with leaders blocking any attempt at changes. In these firms, an old-fashioned mindset and bureaucratic organization hindered innovation. As a result, their outdated products and processes led to their failure (Probst and Raisch, 2005). In theory, this is often referred to as structural and cultural inertia.
In a case analysis of two RGFs, Nicholls-Nixon (2005) postulated that in the phase of growth and change there is a gap between the demands of the firm and the internal structures and systems in place to manage its activities. To ensure order while also retaining the flexibility of the firm, she advocates that managers develop structures to allow self-organizing behavior to emerge. This includes developing a clear sense of the firm’s business logic to guide individual actions; creating information systems to capture, share, and interpret information; emphasizing building relations within the firm and with external stakeholders to access expertise and resources; minimizing the potential for disruptive organizational politics;
and adopting a leadership style that focuses on facilitating rather than directing or controlling the growth process.
In their study, Parker et al. (2010) found that having a single dominant product or service increases the chances of RGFs to survive after their period of growth. Following this, firms should be sticking to their specialization strategy since a product diversification strategy tends to be counter-productive in the long run. RGFs that develop new products after their rapid growth are less likely to survive, reflecting the risks associated with new product development. In addition, moving into foreign markets (a geographical diversification
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strategy) with a dominant product reduces the likelihood of survival over time. Firms that invest in marketing or sales departments while growing are more likely to grow or be bought later rather than liquidated. Such investments might be investments for growth. Interestingly, most firm-related variables are insignificant determinants for future growth. As such, past successes do not necessarily serve as a guide to future success. According to contingency theory, growth has to be examined related to the firm’s specific situation and environment.
Strategic changes, new knowledge, and changes in management and firms’ networks can be viewed as important situational factors for a firm as well as important explanations for the dynamisms of growth (Littunen and Virtanen, 2009). Littunen and Niittykangas (2010) observed that the use of external networks has a positive effect during the rapid-growth period but that internal networks are more important later. Contrary to Parker et al. (2010), they found that firms developing new products have significantly higher growth in their later period.