Growth-induced crises and transitions in the governance of firm organizations

Abstract

This paper discusses why organizational growth can cause crises in the governance of firms, how such crises typically unfold, and what options for responding they leave for management. More specifically, focus is on growth-induced changes in how the governance of an organization coordinates its members on, and motivate them to contribute to, the pursuit of the common purpose. As outlined by means of two distinct examples, governance approaches differ with respect to the solution of coordination and motivation problems. Nonetheless, when the organization size grows, adaptations in the firm members’ cognitive and motivational attitudes occur and tend to similarly undermine the governance of the organization. As a consequence, confusion, frictions, and internal rivalries increase and work effort declines. The unfolding of such crises is shown to be a case of a self-organizing criticality, a unique feature of nonlinear dynamics. Once the crisis has emerged, the cognitive and motivational conditions characterizing the outmoded governance approach constrain the options for making a transition to one that is better suited for the growing number of employees. Failure to accomplish such a transition results in any case in a state of muddling through with an outmoded governance approach that jeopardizes profitability and, in the longer run, the existence of the firm.