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External causes are considered to be the number one reason behind the organizational decline. However, they do not work in isolation. In reality, there are many causes that exist within the organization as well. In this article, we will have a closer look at the top two internal causes which are known for causing a decline.
Organizations are like living creatures. Hence, just like living creatures, they must constantly grow and evolve. The failure to do so is called rigidity and is one of the leading causes of organizational decline.
The rigidity can be defined as continuing to pursue policies that have been successful in the past without any regard for the current feedback being obtained from the marketplace. External changes in the marketplace can be countered if the organization changes internally as well. These internal changes are inhibited or delayed by regulatory changes. This negatively affects the process, which is required for the company to respond to external threats.
Internal rigidity prevents companies from exploring newer markets when regulatory changes affect their business. It also prevents companies from building innovative switching costs to protect themselves from changes related to competition. Most importantly, it prevents the research and adoption of newer technology.
Technological advancements happen only after a significant amount of money has been invested upfront. Internal rigidity prevents funds from being mobilized and, as a result, prevent the incumbent firm from responding effectively to organizational threats.
Most importantly, rigidity can negatively impact the ability of an organization to learn. Rigid organizations are generally struck in their glorious past. As such, they are slow to recognize the need to learn a new skill and even slower to actually learn one!
Since change is the main cause of the organizational decline, it is obvious that innovation is the best strategy to face this challenge. However, the problem with innovation is that it is a difficult process. Innovation often requires trial and error. This means that firms have to make several changes to their product and distribution mix. The first few changes are likely to be wrong. Not many organizations have been able to launch a best-selling product the first time that they made a change.
The problem with organizations facing decline is that they do not have either the time or the resources. Also, studies have shown that organizations that launch multiple products at the same time face a higher risk of failure as compared to organizations that use incremental innovation.
Organizations facing decline, therefore, face a unique challenge. They need to innovate. However, they also need to be capable of rolling back the innovation if the market feedback is not that good. This is where the concept of flexible and inflexible innovation comes in.
Flexible innovation allows companies to produce new products and services to the market in which the design is such that changes can be made even after the product has been introduced to the market. On the other hand, an inflexible innovation is where companies have to invest significant resources and where they do not have too many options to make changes after the product has been introduced in the market.
Companies facing decline are in unstable markets. Hence, they are unable to predict the nature of customer demand. In such cases, committing too many resources to a single project can be risky. It can quickly become an all or nothing proposition. If the needs of the product are not as per the customer’s requirements, the company doesn’t even get a chance to change.
The best way to innovate in such scenarios is to use product architecture, where delayed differentiation is possible. This allows the same operational strategy to be used with several versions of an operational strategy.
Also, it needs to be understood that a superior product does not guarantee success. Corporate history is rife with examples wherein clearly superior products have failed. It needs to be understood that customers do not adjust to the needs of the product. It always has to be another way round.
It is important to differentiate between the above two causes. Organizational rigidity refers to the rigidity of the entire organization, whereas the innovation problem may be faced only by a particular product or service in question.
The bottom line is that scanning the external organization and identifying the threat is not enough. It is important for the organization to have a culture that allows them to change themselves and negotiate these threats quickly.
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