Hi Ufuk. I think it should be wrong decisions made by senior managers.

There are many factors causing organizational entropy. Bureaucracy isone of the forms that may cause organizational entropy.

Management's paranoia and manipulative behavior coupled with bureaucratic organization culture will tend to cause organizational entropy.

Entropy can be due to :

1. External Factors : i) Sagging markets ii) Government regulations iii) Competition

iv) External trade unions etc.,

2. Internal Factors : Nicely summarized @Jaharkanti Dattagupta

I still hold the view that organizational entropy is created by incompetent and unethical management. Competent management can respond to the changes in internal and external organizational environment by working out suitable strategy and implementing the necessary changes.

Entropy is the natural tendency of systems to disorganise or ultimately die. several factor can cause it, ranging from lack of maintenance, reactive and against proactive management, poor stategic planning, failure to consider employees as partners and treat them so, and sudden environmental jolts.

i meant reactive as against proactive management....

Anything within an organization that disrupts the INPUT-PROCESS-OUTPUT flow for a significant length of time will contribute to ENTROPY

Poor management skills

Failure to innovate and maintain high creativity accross the organisation is also capable of inducing entropy in a system. 

I saw an interesting link dealing with the Organizational Entropy (see link).

Some excerpts from this article:

"The energy available in the system to do useful work or rather the energy in the system not available to do useful work is the thermodynamic definition of entropy. For e.g. friction wastes the energy generated in an engine from its original objective of moving pistons. The concept of entropy has been already applied to information science to connote the uncertainty in our knowledge of a variable. Physicists know that the entropy of the universe increases with time.

To the lay person, entropy connotes disorder or absence of predictability.

What is entropy in organization context?

a) Organizational effort that are not directed to meaningful outcomes

b) Uncertainty in organizational knowledge about payoff matrix, i.e. what actions will result in what consequences

c) Uncertainty in organizational knowledge about its execution abilities, i.e. plan vs actuals

How do we quantify entropy? At least can we compare organizations or business units on their level of entropy? Is duplication of effort also entropy? Is high rejection rate on a product line a surrogate for entropy? Can we measure entropy at individual level as well and does it have implications for workforce development? How is entropy different from waste? Can we consolidate the 3 notions of entropy above into a single factor that must be minimized in every organization?

While absolute quantification of organizational entropy is a big ask, we can definitely use the notions of entropy to guide large systems intervention or systems optimization

Effort Dissipation

In your function / organization – how much time is spent in internal interfaces – whether communication or decision making or monitoring. This is organizational effort not directly translating into outcomes. Over a period of time, is this quantity (of effort) decreasing or increasing? How to decrease this effort spent at the internal interfaces should drive organization design and business process re-engineering solutions. Entropy is a higher order concept than waste and addresses the core issue of poor design whereas waste is a consequence. Similarly duplication is effort dissipated.

Payoff uncertainty

If you are in compensation function and do not know what will happen if I provide an upside potential in sales incentive plan or if you are in marketing and do not know what will happen if I drop the price by 5%, then you have entropy of a different kind. You are not able to extrapolate the future through data and analytics, or you do not know your optimum “betting point” and this payoff uncertainty reduces predictability of outcomes. This is entropy you have to attempt to reduce and gain mastery over all the time. In fact, the essence of all business or operational planning was to reduce payoff uncertainty. Of course, dramatic shifts in the external environment will increase this uncertainty and this means you have to bring back order by deliberate study and sometimes even re-write your “theory of the business”. These dramatic changes are what experts refer to as paradigm change and where a paradigm change insight and response is called for.

Execution uncertainty

When we do not know if we will be able to do what we intend to do, it is execution uncertainty. In projects, this is measured as schedule variance, effort variance and cost variance. In programs or in product lines - rejection rate, service level violations, downtime is not being able to execute as intended. The whole object of six sigma and other quality processes is to first discover our “error rate” or execution uncertainty and provide for them and hence bring a predictability of error. This is the first step to mastering this dimension of entropy.

The thermodynamic and recently the information construct of entropy are very useful for practitioners of organization diagnosis and design. It helps think through the critical issues and levers by which entropy can be reduced in an organization. This would also help compare two businesses in a conglomerate or even two business units in a company as to their relative levels of entropy. This also gives direction on what kind of things to benchmark and what is the key construct of entropy for various kinds of business.

Hopefully, with more investigation, a more mathematically precise definition of entropy for an organization is not far away and a very desirable construct for organizational consultants."

http://www.odalternatives.com/Organizational-Entropy.asp

If you use the physical definition of entropy it should be easy the create organized systems in closed construction. If concerns or other organisations increase entropy by their "work", their behaviour is good to eliminate this institute. Every organized system like animals or other beeings are able the restrict the entropical increase by creating order and working constructions. If you don´t believe just regard the development of human brains.

Please excuse, but I´m physicist and no enterpriser.

All answers were great. I agree with them specially dear Sundarapandian.

(1) Bureaucracy

(2) Inflation

(3) Anti-Meritocracy