MANAGEMENT SYSTEMS
PERSPECTIVES TM
2020
YEAR IN REVIEW
DIGITAL EDITION
Building Sustainably Successful Organizations TM
TABLE OF CONTENTS
MS PERSPECTIVES ARTICLES: From Eric Flamholtz Linkedin Newsletter
LEADERSHIP IN A CRISIS: LESSONS FROM THE GHOSTS OF CRISES PAST ........... 2
OVERCOMING THE NATURAL HUMAN RESPONSES TO THE COVID-19 CRISIS AND
TAKING APPROPRIATE STRATEGIC ACTION ....................................................... 9
“DYSFUNCTIONAL LEADERSHIP IN A TIME OF CRISIS” ...................................... 21
LEADERSHIP AND THE HUMAN SIDE OF THE PANDEMIC AT WORK ..................... 32
THE VALUE OF A “LEADERSHIP MOLECULE”™ IN A CRISIS ................................ 35
ASSESSING CORPORATE CULTURE AS AN "ASSET" OR "LIABILITY" .................... 40
NAVIGATING THE COVID-19 CRISIS: DYSFUNCTIONAL CULTURAL
CHARACTERISTICS CREATING SUSCEPTIBILITY TO A CRISIS ............................ 54
IS TESLA BEING “BUILT FOR SUSTAINABLE SUCCESS”℠? ................................. 64
“THE ICARUS SYNDROME”: IMPLICATIONS FOR TESLA, ZOOM, ET. AL. ............... 95
THE FALLACY OF AN “APRIORI’ CULTURE”: WHY ICONIC COMPANIES WITH STRONG
CORPORATE CULTURES EXPERIENCED CULTURAL DIFFICULTIES LEADING TO
DECLINE ................................................................................................... 116
“OVERCOMING A NEAR DEATH EXPERIENCE: THE EXAMPLE OF WESTFIELD’S” .. 127
MADNESS, MR. MARKET’S MYOPIA, AND MACHIAVELLIAN MACHINATIONS: TESLA
ADDED TO THE S&P 500.............................................................................. 141
“HOW LEADERS CAN NAVIGATE A CRISIS SUCCESSFULLY” ............................. 147
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LEADERSHIP IN A CRISIS:
LESSONS FROM THE GHOSTS OF
CRISES PAST
By: Eric G. Flamholtz, PhD Published on March 22, 2020
Leadership is always important; but it is especially crucial in a crisis like that of the
Covid-19 crisis we are now in. In a lifetime, all of us can expect to experience many
crises. I personally have experienced several prior crises including:
The Cuban Missile Crisis: The threat of nuclear war
The Volker interest rate Crisis and the Recession of 1980-82
The “Black Monday” stock market crash of 1987
The Dot.com Bust of 1990
The Great Recession of 2007-2008
Although each crisis has its own character and challenges, there are lessons that
can be gleaned for leadership from an analysis of each crisis. The article
summarizes my perspective on the key lessons from these crises which I personally
experienced and some others that I have studied, including World War II. I term
these the "Ghosts of Crises Past," with a polite nod to Charles Dickens and his
wonderful book, A Christmas Carol.
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THE CUBAN MISSILE CRISIS: THE THREAT OF
NUCLEAR WAR
For those people who were living during the Cuban Missile Crisis, the threat of
Nuclear War was real and immediate. There were bomb shelters. Some people
responded by building family bomb shelters and storing foods and water for the
inevitable bomb and its aftermath. Schools had students practice getting under
their desks to avoid the bomb blast and fallout of the bomb.
As a college student at the time, my analysis of the situation led me to the
conclusion that Nuclear War between the USA and Russia would not happen. I
concluded that government of both nations was too smart and aware of the
consequences to let this catastrophe occur. So I simply went about my “business”
with no concern for this event. Fortunately, this assumption proved correct.
My lesson is that if you can’t control something or do anything about it, there is a
no point worrying about it. There was a later movie that came to the same
conclusion. Its title was: “Dr. Strangelove: or how I learned to Stop Worrying and
Love the Bomb.” Pejoratively, one could call this the “Ostrich strategy.” But it
worked quite well for me at that time.
THE VOLKER INTEREST RATE CRISIS AND THE
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RECESSION OF 1980-82
With inflation rampant in the US, Paul Volker, then head of the Federal Reserve, the
FED raised the prime rate rose to 21.5% in 1981. This, in turn, lead to the 1980–
1982 recession, in which the national unemployment rate rose to over 10%.
At that time, I was relatively early in my consulting career, and I was working with
a number of companies in a variety of industries doing organizational development.
1 Under Paul Volker, then head of the Federal Reserve, the FED raised the prime rate rose to 21.5%
in 1981, which helped lead to the 1980–1982 recession, in which the national unemployment rate
rose to over 10%.
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One of them was a residential real estate firm based in San Francisco. Prior to
Volker raising the interest rate, I had been engaged by the CEO to help him
professionalize the management of the firm. In the summer before the rise of
interest rate, the CEO told me that historically in residential real estate “there are
two good years, two ‘OK’ years, and one bad year out of every five.” He also said
that the past several years had been good, and asked me if I thought it would be
useful to do some contingency planning for “the next downturn” as part of our on-
going strategic planning process that I was facilitating for the firm. I agreed and we
did a daylong contingency planning session early in early 1980 just before Paul
Volker raised the interest rate in 1981 to an unimaginable 21%! That rise in rates
caused the housing market to crash. As I recall, we planned for different scenarios
of the market for residential housing: a “normal market,” a “down market” and a
“catastrophic market.” When the market crashed, we continued the planning
process and the plan for the “catastrophic market” became our most optimistic
plan!
As I recall, the firm lost money during the early months of 1981, but there was no
panic by the CEO or his management team, who simply worked the plan. By the
end of 1981, the firm had recovered and according to the CEO “we actually made
more money for the year as a whole than we had in our entire history.”
My lesson was the same as that articulated by the late Dwight D. Eisenhower (who
was both the Supreme Commander in Chief of Allied Forces during WW II and later
President of the United States) said in discussion planning for the Allied invasion of
Normandy: “Plans are nothing. Planning is everything.”
THE GHOST OF THE “BLACK MONDAY” STOCK
MARKET CRASH OF 1987
Prior to the current stock market decline, the “Black Monday” Stock Market crash of
1987 was one of the worst in US history. At that time, I was working as an
organizational development consultant with a firm headquartered in Kansas City
now known as American Century Investments (“American Century”). I was actually
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there on Black Monday to facilitate a strategic planning meeting. The mood was
somber but the meeting was productive.
One aspect of our planning process was to plan for a certain level of firm revenues.
This was, in turn, required to plan the level of infrastructure investment required by
the firm in the foreseeable future. The market crash was a “Black Swan event” (a
rare and an unpredictable event). However, it caused the senior leadership team to
resist planning for a defined level of revenues. This resistance (or the Ghost of
Black Monday) continued until 1991, when another unforeseeable event caused the
team to finally change its mind about the desirability of planning for a defined level
of revenues. Specifically, one of the firm’s flagship funds (called “Ultra”) had a
magnificent year and increased in value by 96 percent! This in turn lead to a
tsunami of investors to send money to the firm to invest in the Ultra
fund. However, this good event had a dark side. The SEC requires that funds
received by invested and acknowledged within a defined time period.
There was a literal flood of mail that virtually overwhelmed the firm and its capacity
to simply open the envelopes and acknowledge the receipt of the investments! The
firm was in serious jeopardy of being sanctioned by the SEC and forced to cease
operations! For a period of about three months it was “all hands-on deck”
and everyone was required to open mail and respond to investors,
including all senior executives who were working late at night as well as
on weekends!
This traumatic event convinced the executives that they must plan for possible
future levels of operations differently. They must forecast revenues and
activity volume and build in capacity (infrastructure) for unexpected increases in
volume. Opening mail was not per se “rocket science”; but too much mail required
a rocket science solution to create a process for handling it.
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THE DOT.COM BUST OF 1990
Another crisis was the so-called The Dot.Com Bust of 1990. You might recall
that once the internet was discovered, there was a “gold rush” to create firms that
would purports to be “internet companies.” These were the so-called “Dot.Coms.”
The initial stock market success of some of the internet companies such as AOL and
certain other dot.coms led to a tsunami of others hoping to cash in. For example,
one of these was a firm called Webvan, which went from being a company a market
cap of $1.2 billion and 4,500 employees to being liquidated in less than two years!
During this period, the traditional metrics used to value companies such as its “PE
ratio,” “ROI” and evening earnings per se were abandoned as “old fashioned.” In
their place a new set of metrics including number of visits to a web site, pages
viewed per visit, and, my personal favorite, “eyeballs” as well as other “hyper
modern” constructs were used as a basis to rationalize what proved later to be
insane valuations.
The subsequent failure of approximately 99% of all dot.coms led me to a few key
lessons: First, a business must have revenue to be profitable! Where there is
revenue, there is potential profit. Also a business must have profit to have
value. Unfortunately, value is not 'the eyes of the beholder'; it is the discounted
worth of the stream of earnings and/or cash flow of the enterprise.
THE GREAT RECESSION OF 2007-2008
The most recent crisis until the current Coronavirus crisis was The Great Recession
of 2007-2008. This was a virtual collapse of the entire global financial system. Like
the other crises, it was a Black Swan event.
Yet there were foreshocks that offered a glimpse of preview of impending problems.
It seemed that housing prices were in a bubble. But bubbles can stretch for a very
long time before they burst.
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A core problem was that the magnitude of the crisis was initially underestimated,
and when fissures finally appeared in the foundation the financial system, it was
difficult to react quickly. Nevertheless, most companies survived. What did they do
to survive?
One of the key things to do was to protect the core of their business. The core
consists of the key assets (both tangible and intangible) that are either
irreplaceable or difficult to replace. There was downsizing or so-called “right sizing”
but it was done with a scalpel rather than a meat clever, meaning that it was not
across the board cuts in wages and expenditures. It was more reminiscent to
pruning a tree rather than chopping off its limbs indiscriminately.
The perspective taken to these cuts included a long-term view, and did not only
focus on what was deemed “essential” for the immediate or short term.
Accordingly, certain projects and personnel were protected even though in the short
terms that might have been discontinues as currently “not essential.”
This process of planning allowed these companies to develop competitive
advantages vis a vis competition even during a turbulent period of economic stress.
The CEOs of two of our clients (both savvy and very astute leaders) confided to me
that they actually welcomed periods of great economic stress because it led their
competition to make hasty decisions and take actions with a short run perspective
that actually weakened themselves.
In the strategic plans of both of these companies, “organizational development” had
been identified as a “priority objective” for the next three to five years. The CEOs
of both organizations continued their organizational development work with us. As
one said: “It would have been easy to make the case that this initiative was ‘not
essential’; but that would have been a ‘fool’s gold savings.” We will be stronger
when the economy recovers and not have lost the momentum of our continuing
development.” The other said: “We could have cut back the OD initiative, but that
would have sent the wrong message to our people that this was not essential to our
long-term success. What’s the point of results looking slightly better in the short
term if we sacrifice the longer-term?” Both of these companies recovered, are
among market leaders in their respective fields and are highly profitable, though
both incurred losses during the first year of the financial crisis.
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THE BOTTOM LINE: KEY LESSONS
Stepping back from the individual crises and events, what can be learned as key
lessons? Some of the key insights are:
Always protect the core assets; but carefully define what the "core
assets" are.
Take a long-term perspective in making decisions about what is “essential”
not an immediate perspective.
Plans are nothing; planning is everything!
In planning for the future, you must plan for the future infrastructure
required for possible future levels of operations.
A business must have revenue to be profitable and must have profit to be
valuable.
A business’s value is not "the eyes of the beholder"; it is the discounted
worth of the stream of earnings and/or cash flow of the enterprise.
Downsizing or so-called “right sizing” must be done with a scalpel rather
than a meat clever!
If you can’t control something or do anything about it, there is a no
point worrying about it.
Of course, there is also “Murphy’s Law,” which, as we know, states “what can go
wrong will go wrong!” Finally, however, there is what might be termed the
“Flamholtz Principle,” which states: “Murphy was correct, but we can always
take action and fix it, if we adopt the right perspective”!
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OVERCOMING THE NATURAL
HUMAN RESPONSES TO THE
COVID-19 CRISIS AND TAKING
APPROPRIATE STRATEGIC
ACTION
2
By: Eric G. Flamholtz, PhD and Ivailo Iliev Published on March 25, 2020
Throughout millennia, humans have learned and been “trained” to respond to threat
or danger with three core or classic “defense strategies”: “Fight, Flight, or Freeze.”
When a predator attacks, each of these core strategies has some potential value;
however, the proper choice depends upon the nature of the predator and threat.
2 Ivailo Iliev, is CEO of Ninety Nine, a leading organizational development consulting company in
Bulgaria. He has MA in Organizational and Labor Psychology and is licensed affiliate of Management
Systems. He can be reached at [email protected].
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THE CHOICE OF FIGHT, FLIGHT OR FREEZE: A
SITUATIONAL DECISION
Many predators can only be overcome by an active defense of fighting back. For
example, when the great cats such as lions, tigers, and leopards attack a human,
their objective is food; and the human is typically engaged in a life or death battle.
Flight is not appropriate because the big cat will then see the human as prey and is
programmed to attack. The classic advice given by rangers in African game park
reserves is when you encounter a big cat is simply “Don’t Run!”
However, if a Bear attacks, it might seek to kill the human but it might also be a
defensive attack, for example, to protect young cubs. In the latter, case flight or
freeze might be an appropriate strategy.
Finally, if a deadly snake is the threat such as a Black Mamba all three of these
classic strategies might or might not work, depending upon a variety of factors such
as proximity to the snake, the availability of a weapon, or other conditions.
The bottom line is that the choice of one of classic strategies to threat depend upon
the nature of the threat and other factors. The decision typically must be made in
seconds.
THE RESPONSE TO THE COVID-19 VIRUS
The Covid 19 virus is a very different kind of predator or threat than those that
were the stimulus for the classic three defense strategies build up by humans over
the millennia. In evolutionary terms, the classic predators were either animals or
other humans. The Covid 19 virus is an invisible predator. Potentially, it lurks
everywhere, and as such is even more threatening than the classic predators.
Accordingly, the classic “defense strategies” of “Fight, Flight or Freeze” are
anachronistic and simply not appropriate in their pure form as defenses against the
Covid 19 virus. Instead, we need a different, more sophisticated type of response.
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Assessing the Current Situation and Initial Response
Many countries are just introducing the first measures to respond to the COVID-19
thread. Most measures contain social isolation, closing of businesses, home office
for employees, drastic hygiene and security measures. In this situations many
entrepreneurs, owners of start-up, scale-ups and small and medium sized
enterprises, (a term largely used in Europe) are probably struggling at this moment
with figuring out measures for continuing operations; restructuring work to adhere
to the home-office recommendations and health safety requirements issued by
governments; projecting immediate cash flow challenges, due to drop in demands.
In terms of personal reaction to the changing situations, probably most of the
people are still caught up between denial, fear and anger as the natural first
phases, we humans go through when change happens.
Nevertheless, the difficult ‘here and now’ situation for many businesses and their
owners, this sudden and dramatic change in the business environment, provoked
by the COVID-19 crisis calls for the need of response. What we have certainly
learned from previous crises is that some companies lose dramatically, others win
dramatically, but definitely the most adaptable are the ones destined to survive.
So far, what we see from businesses are the three classic defense strategies to
threat or stress stimuli: “fight, flight or freeze.” Some businesses already respond
with freezing activities, projects and plans; others employ the fight reaction and
answer with new products and more active and aggressive marketing, third are
closing down and redirecting their capital or diversify, which we can call a “fly”
strategy.
The correct immediate responses of businesses depend on the industry, how
prepared are the businesses to diversify delivery, what are their financial reserves,
to what support measures they will have access from their local governments. No
general principle recommendations can be given for the immediate actions
businesses should take.
It is not the same with what happens after this, let’s call it “lock down” of economy
ends. The period of recovery, regardless of the timing and form, will present a great
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opportunity for some businesses or an urgent need for others to re-structure and
re-position themselves strategically.
“PLANS ARE NOTHING. PLANNING IS
3
EVERYTHING”
What is required is a more agile response method. The key to the method required
is found in the immortal words of the late Dwight D. Eisenhower (who was both the
Supreme Commander in Chief of Allied Forces during WW II and later President of
the United States), who stated in discussing planning for the Allied invasion of
Normandy: “Plans are nothing. Planning is everything.”
Always protect “the Core”
One of the key things to do in any crises like the current Covid-19 is to “protect
the core of a business.” But what is the core of a business? “The core” consists
of the key assets (both tangible and intangible) that are either irreplaceable or
difficult to replace.
In most crises, downsizing or so-called “right sizing” is a first response. However, it
must be done with a scalpel rather than a meat clever, meaning that it should not
consist of across the board cuts in wages and expenditures. It ought to more
resemble to pruning a tree rather than chopping off its limbs indiscriminately.
The perspective taken to these cuts should be a long-term view, and should not
only focus on what is deemed “essential” for the immediate or short term.
Accordingly, certain projects and personnel must be protected even though in the
short terms that might have been discontinues as “not essential” currently.
The CEOs of two of our clients (both savvy and very astute leaders) confided to me
that they actually welcomed periods of great economic stress because it led their
competition to make hasty decisions and take actions with a short run perspective
that actually weakened themselves. This practice allowed our clients companies to
3 Attributed to the late General Dwight D. Eisenhower, who was both the Supreme Commander in
Chief of Allied Forces during WW II and later President of the United States.
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develop competitive advantages vis a vis competition even during a turbulent
period of economic stress.
TOWARDS AN APPROPRIATE RESPONSE
METHODOLOGY FOR THE CURRENT CRISIS
In this article, we propose the application of a method of Strategic Planning using
4
the “Pyramid of Organizational Development”™ framework as a lens or tool for
increasing the companies’ adaptive capabilities and producing agile responses for
the period of economic recovery, that will inevitably follow after the COVID – 19
epidemic. The “Pyramid of Organizational Development”™ framework is described
below.
The Pyramid of Organizational Development™
The Pyramid of Organizational Development™ identifies six factors that research
has shown to be the key drivers of financial performance and long-term
organizational success:
Identification and definition of a viable market to serve (i.e., set of
customers).
Development of products and/or services appropriate to the organization’s
chosen market.
Acquisition and/or development of resources required for current and
anticipated future operations (including people, equipment, facilities, and
financial resources).
Development of the operational systems necessary for the organization to
function on a day-to-day basis.
4 For a full discussion of the Pyramid of organizational development framework, see: (English) Eric
Flamholtz and Yvonne Randle. Growing Pains: Building sustainably Successful organizations, Wiley,
2016, and (Bulgarian) Ерик Фламхолц и Ивон Рандъл. Болки на растежа. Изграждане на
устойчиво успешни организации, ИК МаК, 2017.
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Development of management systems required for the overall functioning
of the organization on a long-term basis. The four key management systems
are strategic planning, organizational structure, management/leadership
development, and performance management systems.
Development and effective management of the organization’s culture –
that is, the organization’s values, beliefs, and norms that influence the
behavior of people in the company.
In their book “Growing Pains: Building Sustainably Effective Organizations”, Eric
Flamholtz and Yvonne Randle suggests seven generic questions, that must be
addressed by all organizations :
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1. What business are we in?
2. What are our competitive strengths and limitations?
3. Do we have or can we develop a true market niche?
4. What do we want to become in the long term?
5. What is our strategy for competing effectively in our chosen markets and for
achieving our long-term mission?
6. What are the critical factors that will make us successful or unsuccessful in
achieving our long-term mission?
7. What goals shall we set to improve our competitive effectiveness and
organizational capabilities in each of these critical success areas?
USE OF PYRAMID ANALYSIS IN STRATEGIC
PLANNING FOR COVID-19
Effective strategic planning depends upon the time horizon for the planning process
and the plans developed. Unfortunately, the nature of the Covid-19 Virus and the
life cycle are currently indeterminate. Accordingly, the optimum approach for
5 Eric G. Flamholtz. Growing Pains: Building Sustainably Successful Organizations (Kindle Locations
3035-3040). Kindle Edition
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planning is to create different scenarios under different assumptions about the
length of the crisis.
Three Scenarios for Planning
Three assumptions seem relevant here: 1) “Quick recovery” by the end of May or
June, 2) “Intermediate disruption” by year end, 3) “Prolonged economic
disruption” of more than one year.
Scenario 1: Quick recovery – Under this scenario, business will start returning to
“normal” end of May or beginning of June. Businesses will need to restore
operations as quickly as possible and take advantage of every opportunity to
compensate for the suffered losses.
Scenario 2: “Intermediate Disruption” by year end. Under this scenario,
the” COVID – 19 virus” will disrupt business until year end. Consequently, 2020 will
result in negative economic growth and many businesses will face financial losses
and at least temporarily layoff people or reduce their compensation until
recovery. Some industries will be seriously damaged (travel, hotels,
tourism, service, manufacturing, travel, etc.) and some businesses will go bankrupt.
Although recovery will start this year, it will be slow and gradual. Companies will
need to prepare for difficulties but also seek new opportunities to keep operations,
increase their competitive advantages in order to secure as much business as
possible and make attempts to compensate for some of the losses.
Scenario 3: “Prolonged economic disruption” of more than one year . Under
this scenario, the Global economy will experience a depression, possibly similar to
what was experienced in the 1930s. It is also possible that this will lead to a
restructuring of the global economy, with a partial retreat from globalization.
Although this scenario will be very destructive in both economic and social terms,
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like a forest fire, it might also create a lot of opportunities for new ventures, need
for alternative suppliers, opportunities for local markets.
Use of Pyramid Analysis in Strategic Planning under Each Scenario
This next section examines how to apply the Pyramid framework under each
scenario. Specifically, we suggest that businesses apply the model in each of these
scenarios and develop action strategies for each of them. Here are some sample
questions companies should address in order to analyze each of these scenarios
6
using the Pyramid framework :
Scenario 1: Quick recovery
Level of the Pyramid: Business foundation
Which of our competitive advantages have we lost and which have we
strengthened?
Have we kept our market niche? How can we enlarge our market niche?
Is our core strategy still valid and how can we leverage on it?
Level of the Pyramid: Markets
What should we achieve in each of the markets we operate in for this
year?
Can we quickly enter new markets?
Level of the Pyramid: Products
Which of our products or services shall we focus on this year in order to
achieve maximum results?
What new products can we develop with the current resources we have to
enter new markets?
Level of the Pyramid: Resources
6 Please note that the format template of Linkedin does not facilitate the use of exhibits well.
Accordingly, we have adapted the presentation here in the format below. However, we will be
pleased to provide copies of the original matrix format to interested readers who contact us.
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How can we restructure resources so we ensure maximum efficiency for
the current year?
Level of the Pyramid: Operational systems
How can we optimize processes and operations in order to increase
capacity and reduce costs?
Level of the Pyramid: Management Systems
What are the skills our leaders should develop in order to face successfully
the challenges of the following months?
How should we change or adapt the performance goals and indicators in
order to achieve maximum results this year?
Level of the Pyramid: Culture
What can we do in the future weeks to foster the aspects of our culture,
related to Treatment of Employees, Treatment of Customers and
Performance Standards and Accountability?
Scenario 2: Intermediate Disruption
Level of the Pyramid: Business foundation
Do we still have a "live" market to compete on? Are there other markets
we can play in with the current capabilities we posses?
How have the needs of our clients changed and what new needs have
occurred?
How should we change or adapt our core strategy in order to effectively
compete in these new circumstances?
Is there a reason to change or adapt the definition of what we want to
achieve in the long run?
Level of the Pyramid: Markets
Which of our market niches are still live and which are severely damaged?
Level of the Pyramid: Products
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How can we change or adapt our services in order to remain in business or
generate maximum revenues?
Level of the Pyramid: Resources
What resources we can capitalize on in order to support us in this difficult
situation?
Level of the Pyramid: Operational systems
How can we optimize processes and operations in order to increase
capacity and reduce costs?
Level of the Pyramid: Management Systems
How should we change our structure in order to increase effectiveness?
What would be the challenges our leaders will have to deal with and how
can we support them?
What are the KPIs and performance goals, which will measure our success
in this situation?
Level of the Pyramid: Culture
How can we boost morale and practice of the company values?
What new norms will support our success in these difficult times?
Scenario 3: Prolonged Economic Disruption
Level of the Pyramid: Business foundation
How will our business change?
What new markets and market niches may occur for us?
What new needs will emerge that are within our area of business and what
new opportunities this creates?
Which of the current needs of our clients will change and what risks does
this create for us?
What can make us successful in this new environment?
Level of the Pyramid: Markets
How will our market change?
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What markets should we explore for opportunities?
Level of the Pyramid: Products
What new products should we develop and how should we change our
current products and services in order to take advantage of the new
market opportunities or respond to the changes of the market?
Level of the Pyramid: Resources
What resources (technical, financial, human) we will need in order to be
successful in this new environment?
Level of the Pyramid: Operational systems
What operational systems will we need to develop?
Level of the Pyramid: Management Systems
What types of leadership capacity will we need in this environment?
Level of the Pyramid: Culture
What company values will support our success in this new environment?
CONCLUSIONS AND ACTION STEPS
Although humans have learned and been “trained” to respond to threat or danger
with three core or classic “defense strategies” of “Fight, Flight, or Freeze,” the
proper choice depends upon the nature of the predator and threat. The attack on
human kind by the “Covid-19 Virus” requires a more agile and sophisticated
strategy. In this article, we have proposed the use of the Pyramid of Organizational
Development as a lens in strategic planning for an organizational response to the
Covid-19 virus.
As we have discussed, effective strategic planning for a response to the Covid-19
virus depends upon the time horizon for the planning process and the plans
developed. Unfortunately, the nature of the Covid-19 Virus and the life cycle are
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currently indeterminate. Accordingly, the optimum approach for planning is to
create different scenarios under different assumptions about the length of the crisis.
We have defined the three scenarios a: 1) “Quick recovery” by the end of May or
June, 2) “Intermediate disruption” by year end, 3) “Prolonged economic
disruption” of more than one year.
We also believe that combining the specific industry knowledge of the management
team with a well moderated and fruitful discussion on the scenarios and questions,
presented above, can dramatically increase the company’s capacity to adapt to the
changing economic environment.
We hope that readers find this discussion of value, and take the appropriate agile
steps to overcome this horrendous virus and situation.
Post Script: This article was published on linkedin on March 25. One of the
readers, Mazdak Vaezpour, President International Operations at C.R.
Laurence Co., Inc., commented in part: “…Time to plan for the post CoVID-19
is NOW, despite all the unknowns and how long this all might last!” We
wished we had said that; but since we did not we are adding his comment as
a Postscript!
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“DYSFUNCTIONAL LEADERSHIP
IN A TIME OF CRISIS”
By: Eric G. Flamholtz, PhD Published on March 29, 2020
There are many different facets of the harm and problems being caused by the
Covid-19 Virus. I will leave the health issues to the health professionals and deal
with the economic and organizational ramifications.
“Dysfunctional Leadership”
The greatest economic and organizational problem of the Covid-19 Virus is a failure
of effective leadership. This can be termed “Dysfunctional Leadership.”
Nature of “Dysfunctional Leadership”
There are different possible concepts or definitions of “Dysfunctional Leadership.”
However, I will use the term to refer to actions taken by organizational leaders
that result in greater harm or damage to their organizations than the
benefits intended or derived.
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There are two types or extremes of dysfunctional leadership: 1) a bias for action,
and 2) the inability to act. A “bias for action” refers to the tendency to take action
in a situation rather than planning a systematic response. Peters and Waterman
described a bias for action as follows: “In its simplest terms, this says ‘get out there
7
and try something. ’”
The “inability to act” or Hamlet Syndrome is the polar opposite of a bias for action.
It refers to an inability to make a decision or act in the face of a problem or crisis. It
is a version of the “Deer in the Headlights” syndrome. We have previously
described and explained the psycho-dynamic of leaders who are victims of the
8
Hamlet syndrome elsewhere.
These are two extremes or end points on a continuum. Both extreme leadership
behaviors can result in dysfunctional results. In this article, I will focus primarily on
a bias for action and leave the inability to act for a later discussion.
THE DYSFUNCTIONAL RESULTS OF A BIAS FOR
ACTION
A bias for action can produce dysfunctional results. Such actions taken as a
response to the crisis to immediately cut costs amount to a “Ready-Fire-Aim”
leadership strategy. For example, in response to the sequestering of people at
home, many organizations are faced with the partial or total loss of revenue. In
extreme case, this might even result in bankruptcy. Accordingly, some
organizations are taking the steps to terminate, layoff or “furlough” employees. In
order to preserve cash and help diminish or prevent economic losses.
While this is an understandable approach or reaction, it might well have very
dysfunctional consequences. Specifically, the organization is sending a clear but
possibly unintended message: “our survival as a business is more important than
7 T. Peters and R. Waterman, In Search of Excellence, McGraw-Hill Book Company, 1982.
8 See Eric Flamholtz and Yvonne Randle, The Inner Game of Management, American Management
Association, 1987. This book is currently being revised and updated under contract to Vandeplas
Publishing, and is expected to be published later in 2020.
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your economic distress as an individual or other factor.” This is a cultural message.
It clearly demonstrates through behavior what the real core values of the
organization are. Although we might say that “people are our most important asset,
“our behavior indicates otherwise. This is also a repudiation or abrogation of an
unspoken value or “implicit bargain” of reciprocity between business and its
employees: “You take care of the firm, and the firm will take care of you!”
Similarly, if companies have agreements or contract in place with vendors, and it
they are peremptorily canceled the same message is being sent. These vendors are
only “partners” when it is convenient for the organization.
These actions will serve to immediately diminish “goodwill” and trust among
employees and vendors. “Goodwill” and trust are intangible assets that once
damaged or lost will be very costly and take a very long time to repair. In fact, they
might be irreparable.
Actions taken to immediately cut costs amount to a “Ready-Fire-Aim” leadership
strategy.
Please note that I am not suggesting that a business should take no action to
reduce its costs and cash outflow. Instead the business should look for more
creative ways to reduce costs without the consequences of the loss of goodwill and
trust. A more creative way to reduce to reduce its costs and cash outflow can only
result from a deep dive and systematic assessment using a disciplined planning
9
process that has been described in a previous article.
It can be argued in rebuttal that during a fire everything must be sacrificed to put
out the fire. True, but the analogy is spurious, because a precipitous decline in
revenue and profit is not the same as a fire.
9 See Eric Flamholtz and Ivailo Illiev, “Overcoming the Natural Human Responses to the COVID-19
Crisis,” Linkedin, March 25, 2020.
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CAUSES OF THE “READY-FIRE-AIM” LEADERSHIP
STRATEGY
There are at least three fundamental causes or contributing factors to motivate
leaders to adopt the “Ready-Fire-Aim” Leadership Strategy: 1) key behavioral
patterns or personality traits of leaders, 2) support from management theory, and
3) popular culture.
Key Behavioral Traits. First, there are certain aspects of behavior which are
characteristically associated with leaders or natural “Alphas.” Generally, the word
“alpha” is used to describe males as in the phrase “Alpha male.” However, there are
clear examples of “Alpha females” as well. For example, Boudica, a Celtic Warrior
Queen was clearly an Alpha female. In 60 A.D., she led a revolt by the Iceni tribe
(later joined by others) against the Romans. Although accounts vary, Boudica led
an army of more than 50,000 against the Romans. Her tribe, who lived in what is
now East Anglia, Britain, won initial major battles against the Romans and, in fact,
destroyed the IX (ninth) Roman legion, before she ultimately was defeated.
Although Boudica must have been a charismatic leader, she was not trained
extensively as a military strategist. She was, however, like other Celtic women of
the time, trained as a warrior and aware of their tactics. The sheer numbers of her
“Army” and their hatred of the Romans fueled by the latter’s outrages against
Boudica, her daughters, and the Celtic people as a whole, was initially sufficient to
10
lead to a series of victories. Boudica’s army cleverly ambushed the IX Roman
legion and decimated it.
Her limitations as a military strategist became apparent when she battelled against
the Roman General Suetonius, who was recalled from what is now Wales to put
down the rebellion. Aware that Boudica’s army had ambushed and destroyed the
IX Roman Legion, and also aware that he was vastly outnumbered, Suetonius
withdrew from Londinium (present day London), leaving the city to Boudica’s
army. He retreated until he found a location which could neutralize the size
10 Boudica was the wife of a Celtic King or Chieftain. After his death, the Romans publicly flogged her
and raped her daughters. Understandably vengeful, Boudica led a revolt of her total tribe against the
Romans.
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advantage of Boudica’s army. Specifically, it was a place where he could not be
attacked either from the flanks or the rear, and because of the narrowness of the
location Boudica’s army could only attack frontally with a limited number of
troops. Having neutralized Boudica’s advantage in size, the Romans now has the
advantage in fighting because they were better armored than the lightly armored
Celts, and were trained to fight as a unit rather than as a band of individuals.
Under Boudica’s leadership, her army made a frontal assault on the better
positioned but much smaller army led by Suetonius. Estimates vary, but Suetonius’
legion numbered about 10,000 troops, while Boudica’s army is thought to have
ranged upwards of 50,000. However, it was now Suetonius’ troops who decimated
the heroic yet outmaneuvered Celts.
The fate of Boudica and her warrior daughters is not known for certain but it is
thought to be likely that they took poison rather than being captured by the
Romans. Nevertheless, there is now a statue in London as tribute to Boudica as a
heroic (if defeated) Britannic warrior.
What is the lesson from this historic encounter? Boudica seemed to adopt a “Ready-
Fire-Aim” approach, while Suetonius adopted a “Ready-Aim-Fire” approach.
Specifically, comparing the strategy of Suetonius and Boudica, we see a glaring
difference. Aware that he was vastly outnumbered, Suetonius chose not to fight
until he had a strategic advantage in location and withdrew from Londonium--
leaving the city unprotected to Boudica’s army. He retreated until he found a
location which could neutralize the size advantage of Boudica’s army. Boudica must
have been aware of the strategic advantage that the location which Suetonius
selected for battle gave his troops. Nevertheless, she chose to attack with her
overwhelming numbers rather than either position her troops for siege warfare or
wait for Suetonius to be forced out of his protected niche. The result was a
massacre and overwhelming defeat for the Celts.
This was a classic confrontation of strategy versus action. Clearly, planned strategy
was superior to action without a clearly defined strategy.
What might have caused Boudica to attack in the face of an opponent that had
positioned itself in a very favorable place? It is likely that Boudica was impelled to
act by several by factors affecting any Alpha--notably a bias for action.
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The underlying behavioral pattern of Alphas is what can be termed a “bias for
action.” Alphas think of themselves as leaders, and leaders (by definition) lead!
Accordingly, leadership implies action. The failure to act, and act decisively, is by
implication a weakness or character flaw. Hence the bias to action is a self-
reinforcing notion among Alphas.
Support by Management Theory. The notion that “a bias for action” is a positive
managerial strategy is also sometimes cited in management theory. For example, it
was cited by Peters and Waterman as one of the “eight characteristics of excellent
companies” in their 1980s best seller, In Search of Excellence to explain the
purported success of some then leading companies. The book was
based purportedly based upon their “research.” Unfortunately, the research and
conclusions by Peters and Waterman was clearly flawed. Several companies that
they cited as “excellent companies,” including Hewlett-Packard, IBM, Digital
Equipment (“DEC”) and Dana Corporation), later experienced great difficulties and a
few even failed.
Popular Culture. The third factor was a popular cultural notion created and
reinforced by Nike. People were bombarded by an advertising blitz of Nike’s slogan
“Just Do it!” This, in turn, almost subliminally, helped create and reinforced the
notion of what a “good leader” is supposed to do: Just do it! Act! Do something!
THE COMBINATION OF ALL THREE FACTORS
Taken together, all three factors ultimately caused or at least contributed to the
notion of a bias for action to be morphed into a simplistic managerial “philosophy”
of: “Do it! Try it! Fix it!” In summary, the notion of a bias to action is reinforced
by a propensity to act among Alphas, by support from managerial theory, and by
popular notion of what constitutes a “good leader.”
The Dysfunctional Results of the Inability to Act.
Although a bias for action can be dysfunctional, at the other extreme the inability to
act in crisis can also be damaging to an enterprise. Like the proverbial “deer in the
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headlights,” some leaders can be virtually paralyzed and unable to make a
decision. They seem (and virtually are) frozen and unable to make up their minds
about what to do.
Sometimes the leader of a strategic business unit (“SBU”) is handcuffed by the
parent company. In that case a leader that appears to be frozen is actually shackled
by the parent company. At other times, the leader is handcuffed by his or her own
personality and fearful of making the wrong decision. However, unlike the bias for
action, the inability to make a decision is not supported by theory or popular
culture. A leader experiencing this syndrome is likely to be criticized for lack of
moving quickly or the failure to act--period. Such a leader will undoubtedly be
viewed as a “weak leader.” Hence the desire to avoid be characterized as a weak
leader is yet another factor leading to or reinforcing the more common phenomenon
of a bias for action.
Situational Leadership: Optimum Leadership Style depends on the
situation
Situations matter. They determine the type of leadership response required.
Under certain conditions or situations, a bias for action is an advantage; in other
circumstances to situations it can cause great harm. It depends upon then
situation.
Types of Leadership Approaches
Although there are many different ways to categorize leadership approaches, we
will identify a typology that is appropriate for our purposes in this situation. These
are:
Entrepreneurial: Ready-Fire-Aim
Bureaucratic: Ready, Ready, Ready…
Professional manager: Ready-Aim-Fire
Each is described below.
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The “Entrepreneurial” approach can be characterized as “Ready-Fire-Aim.” Action
is preferred to planning. However, often action often takes place without much
analysis and forethought. This style is the apotheosis of a bias for action. The
entrepreneurial style is designed to maximize opportunity. It can, however, be a
very chaotic style.
The “Bureaucratic” approach can be characterized as “Ready- Ready-Ready ….”
Action is deferred, and deferred, and might not even ever be taken. Hence the
“ready-ready-ready….” A typical comment is: “we are studying that.” This behavior
cans also be referred to as “paralysis through analysis.” The bureaucratic style is
intended to minimize risk.
The “Professional manager” approach can be characterized as “Ready-Aim-Fire.”
Action is taken, but only after systematic analysis, evaluation, and consideration of
alternatives. Data or information is a key component of the professional approach.
The “Professional manager” approach is designed to strike a balance between
taking advantage of opportunity and controlling risk. However, it can drift into
either the chaos of the entrepreneurial style or the rigidity of the bureaucratic style.
FACTORS THAT “DEFINE A SITUATION”
There are two main factors that “define a situation” for a choice of leadership
approach: 1) the degree of uncertainty or degree of knowledge about the situation,
and 2) the degree of risk in the situation.
These two factors lead to four “situational leadership combinations” as
follows:
Type A) Low risk and high certainty of information
Type B) Low risk and low certainty of information
Type C) High risk and high certainty of information
Type D) High risk and low certainty of information
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What type of leadership approach is optimal or acceptable in each type of
leadership situation? The optimal leadership styles for each are as follows:
Type A) Low risk and high certainty of information: Any leadership style
Type B) Low risk and low certainty of information: Entrepreneurial
leadership style
Type C) High risk and high certainty of information: Bureaucratic
leadership style
Type D) High risk and low certainty of information: Professional
leadership style
Nature of the Current Situation with the Covid-19 Virus
What type of situation is created by the Covid-19 virus? Let’s examine the factors in
this situation.
What do we know about the virus? We know that it is:
Highly transmittable and
Can cause death.
What don’t we know yet about the Virus? Almost everything else, including:
Its true gestation-period.
Its duration.
Why some people get it and others who are presumably exposed apparently
do not get it. For example, President Trump has been exposed to people who
have the virus but apparently has not been affected by it himself.
The complete nature of its transmission.
Its true death rate as well as its death rate for people of varying age groups.
Who is at most risk for the ultimate consequence of death?
Do vaccinations for the flu help prevent or reduce the seriousness of the
disease?
Are there existing vaccines or antibiotics (which typically do not kill viruses)
able to cure or control it?
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THE BOTTOM-LINE IMPLICATIONS FOR
LEADERSHIP
Given this analysis, what is the bottom line about the leadership situation with this
virus? This virus creates a “Type D” situation with a very high degree of
uncertainty and a lack of complete knowledge. Accordingly, both the “Ready-
fire-aim” and the “Ready-Ready-Ready…” approaches are sub-optimal in this type
of situation.
The “Ready-Aim-Fire” approach is optimal under a situation with a very high
degree of uncertainty and a lack of complete knowledge. This (“Professional
manager”) approach is designed to strike a balance between taking advantage of
opportunity and controlling risk.
Action is taken, but only after systematic analysis, evaluation, and consideration of
alternatives. Data or information is a key component of the professional approach.
Unfortunately, however, the has been a bias against the Professional
manager approach for the last few decades. It has been mischaracterized as a
bureaucratic approach.
In brief, the call to action of this discussion is to reconsider the virtues and value of
a “Ready-Aim-Fire” approach to leadership.
The wisdom of this approach was seen in the behavior and later expressed
philosophy of General Dwight D. Eisenhower, during World War II. Eisenhower, who
was both the Supreme Commander in Chief of Allied Forces during WW II and later
President of the United States, stated in discussing the Allied invasion of
Normandy: “Plans are nothing. Planning is everything.”
This approach is not a panacea. Yet it offers clear advantages over the other
approach at the ends of the continuum. The implication of this is that data,
analysis, and planning ought to precede decision making and action.
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Finally, as the late great Basketball coach of the UCLA Bruins, John Wooden, whose
teams was an unprecedented and amazing 10 NCAA Championships, said: “Failing
to prepare is preparing to fail”!
Eric Flamholtz is Professor Emeritus at the Anderson School of Management UCLA
and President of Management Systems, which he founded in 1978. He also served
on the faculties of the business schools at Columbia University and the University of
Michigan. He can be reached at: [email protected]. See also: www
Mgtsystems.com.
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LEADERSHIP AND THE HUMAN
SIDE OF THE PANDEMIC AT
WORK
By: Eric G. Flamholtz, PhD Published on April 12, 2020
The Covid-pandemic is clearly an existential threat to humanity as a species. That
is the overwhelming primary issue. A second-order issue is existential threat to a
great many business organizations as well.
Organizational leaders are now caught in a "Catch 22" facing the need to solve the
immediate problems facing their businesses while preparing for an uncertain future.
I have continued in contact via Linkedin, Zoom, Skype, etc. with some of the CEOs
I am working with. Yesterday, one of them said on a Zoom call: "I am spending
most of my time dealing with the emotions of people. They are understandably
afraid."
This was a vivid reminder of the importance of the role of leadership and the human
side of the pandemic at work. This particular CEO is an excellent role model in
many ways; but what he is doing now during the crisis is especially important.
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The late great Abraham Maslow, one of the leading organizational psychologists of
his or any other generation, created the famous and widely cited "Hierarchy of
needs." This model of the "drivers" of human behavior postulates that five different
sets of needs drive human behavior including: physiological, safety, belonging,
esteem, and self-actualization needs. According to Maslow, the needs are organized
in a hierarchy with the lower level needs having primacy until they are relatively
satisfied and then being superseded by higher level needs. Although unstated, what
is also implied is when an individual is faced with a situation in which his or her
lower level needs are not satisfied, the dominant needs will revert to the lower
levels.
THE THREAT POSED BY COVID-19
Such is the situation created by the threat of the Covid-19 virus. Faced with an
existential threat to survival posed by the virus, an individual's physiological, and
safety needs are under direct attack. The pandemic destroys people's illusion of
safety. This triggers the part of the human brain known as the “amygdala,” which is
activated by fear and responds by producing adrenaline in the body. That is a
functional (useful) response to many types of threats. However, if a threat
continues for an elongated period of time, the body responds by producing
“cortisol,” which in turn tends to diminish a person's capacity for rational thought
and can create panic in various forms such as a “panic attack.”
THE SOLUTION OR "TREATMENT"
Although an organizational leader cannot eliminate the threat of the Covid-19 virus
per se, he or she can take steps to increase peoples' sense of safety and enable
them to regain a feeling of control-- at least to some degree. There are many ways
to do this, but among them the act of communication with people who are members
of the organization is possibly the most significant.
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NATURE OF THE COMMUNICATION REQUIRED
This communication needs to be frequent, open, two-way and candid. It can be
as simple as:
"How are you doing?"
"How is your family taking all of this?"
"Is there any way we can help?"
In a sense, the medium or very act of communication itself is its "message," as
originally proposed by Marshall McLuhan. Specifically, the act of
communication itself sends the message that the leader cares about the people
in the organization as more than mere "workers" but as people.
Thus the communication process is the method of treatment of for the underlying
problem of peoples' sense of threat. Although it cannot eliminate the threat, it can
make a difference by impacting the extent to which people feel they are "on their
own" in facing this threat.
The bottom line for leaders is: Remember the human and humane aspects of
this crisis! The three most important action steps are: Communicate!
Communicate! and Communicate! An ounce of effort in this regard can be worth
a pound of cure!
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THE VALUE OF A “LEADERSHIP
MOLECULE”™ IN A CRISIS
By: Eric G. Flamholtz, PhD Published on May 3, 2020
This article examines the value of a “Leadership Molecule”™ during a time of crisis.
Our concept of the Leadership Molecule™ was the product of an “accidental
discovery” as part of an organizational development initiative.
ORIGINS OF “THE LEADERSHIP MOLECULE”™
In 1994, I was asked to do coaching with the senior three people who were leading
Starbucks: Howard Schultz, founder and CEO, Howard Behar, SVP of operations,
and Orin Smith, CFO. In brief, I would visit Starbucks in Seattle and do individual
coaching for each individual and then work with the three as a team. As Orin Smith
stated in his initial phone call, “We have Tiger by the tail and only once chance to
get this right. This thing is growing very rapidly and we are all under great pressure
individually and as a management team.” They were looking for someone to coach
each individually and help them smooth out some wrinkles as a team. Smith had
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read the third edition of our book, Growing Pains, and fell that Starbucks was a
11
classic of what we described in that book.
Over the next few years, I worked with Starbucks and this leadership team to help
12
position them for sustainable successful growth. And then I moved on to
working with other companies facing similar issues. One of my strong impressions
was how well the Big 3 at Starbucks ended up working together. They became a
true team, not merely a team in the nominal sense of the word. Each had his own
defined sphere of responsibility but they worked together formally and informally.
They had, for example, a weekly dinner at McCormick and Schmick’s, a Seattle
seafood restaurant, where they met without agenda and as equals to discuss the
business very openly. They had gelled into a true leadership unit.
THE FLASH OF RECOGNITION
A few years later as I was working with another company in a different market
space (financial services) I observed that they had a very strong core senior
leadership team that (like Starbucks) seemed to work very well as a true leadership
team. They seemed also like a “molecule,” or compound that was a unit.
That moment of recognition led me to think about various companies with which I
had worked in Organizational Development. It seemed to me that where this
leadership unit existed the there was also high performance, and where it did not
exist performance was not so good or even great problems.
THE CONSTRUCT AND HYPOTHESIS
That flash of recognition led me to formulate what I now term a “Leadership
Molecule”™ construct and related hypothesis. This construct has now been
11 Eric Flamholtz, and Yvonne Randle, Growing Pains, Jossey-Bass publishers, Inc., 2007.
12 For a description of my work at SBUX, see Howard Schultz and Dori Jones Yang, Pour Your Heart
into it: How Starbucks Built a Company One Cup at a Time, Hyperion, 1997.
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13
formulated and studied empirically. Stated briefly, a Leadership Molecule™ is a
core “team” (“group” or unit), including a two person dyad) that cohesively
performs a set of five key functional of strategic leadership as a unit rather than as
a set of individuals. These functions are:
1. Creating the vision,
2. Defining and managing culture,
3. Coordinating operations,
4. Overseeing systems development, and
5. Leading and managing innovation and change.
It is a “core leadership team” (in true sociological sense) with defined but
overlapping and complementary roles. Typically, the roles
of vision, culture, operations, and overseeing systems development, are
performed by one or more individuals comprising the molecule, while the fifth task
of strategic leadership (leading and managing innovation and change) is
performed as a collective team, as shown schematically in the overlapping three
circle picture a the top of this article.
FORMATION OF THE LEADERSHIP MOLECULE™
A team can either pass through these stages by (accidental) “natural evolution” or
by design through team building activities. Team building can help accelerate the
process of creating the molecule. For example, I helped create this Leadership
Molecule ™ at Starbucks (without calling it that or thinking of it in those terms)
through role definitions and team building activities.
13 Eric Flamholtz, “The Leadership Molecule: Implications for Entrepreneurial Firms,” International
Review of Entrepreneurship, 2011.
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“SIGNATURE” OF A LEADERSHIP MOLECULE’S
EXISTENCE
A “marker” or signature of the existence of such a molecule is typically (but not
always) that an organization has assigned a “nickname” or label to the molecule,
such as:
“H2O” and “H2O2 (at Starbucks)
“The three Musketeers,” (at PacifiCare)
Batman and Robin (Steve Jobs and John Scully at Apple),
“The Troika” (at Google)
Also where the molecule is seen as negative, dysfunctional or even toxic by the
organization at large, it can receive a nickname with negative connotations or
overtones, such as:
“Gang of Four,” and
“The Ghost and the Darkness:” (Dyad)
The absence so a nickname is not conclusive evidence that a molecule does not
exist, but it is suggestive. However, the nickname is a “marker” or “DNA” signature
for a true leadership molecule (team).
THE VALUE OF A LEADERSHIP MOLECULE
My published empirical research has indicated that any organization that has a
Leadership Molecule™ possesses a valuable if intangible asset. Specifically, I was
invited by Cheung Kong Graduate School of Business in China to participate in their
CEO leadership program, and coach CEOs of forty leading Chinese companies for
one year. As part of that program, I designed a survey to assess the extent to
which a Leadership Molecule™ existed in companies, and empirically studied the
extent to which the existence of the Leadership Molecule™ was associated with
varying degrees of Organizational Development, using measures that have been
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14
show to link to financial performance. The results indicated that companies
where a leadership molecule exists has superior financial performance
than those where it did not exist.
THE BOTTOM LINE
A Leadership Molecule™ is an asset that hidden in plain sight, recognized by all
inside the company but not susceptible to copying by competitors. It results
in superior financial performance than in companies where it did not exist,
as for example in companies where the leader is a “one-man (or woman)
show!
I believe that the ultimate test of the value of a leadership molecule occurs
when an organization is in crisis. During a crisis the single person leader will be
stressed and stretched it his or her limit. However, a leadership molecule
functions as a team, and provides not only better decisions but also social
and psychological support for each other.
Note: Developing A Leadership Molecule
Where a leadership molecule does not exist, it can be developed with the proper
ingredients and process, as shown in the example of Starbucks during its early
15
days described above .
14 Eric Flamholtz, “The Leadership Molecule: Implications for Entrepreneurial Firms,” International
Review of Entrepreneurship, 2011; and Eric Flamholtz and Rangapriya Kannan-Narasimhan,
(2013) “Examining the Leadership Molecule: An Empirical Study of Key Leadership Roles in Rapidly
Growing Entrepreneurial Businesses,” International Review of Entrepreneurship. Volume11, Issue
no. 2, pp. 1-22.
15 For further information about the leadership molecule and how it can be created, see
www.mgtsystems.com/team-building and www.mgtsystems.com/leadershipmolecule as well as the
above referenced articles.
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ASSESSING CORPORATE
CULTURE AS AN "ASSET" OR
"LIABILITY"
By: Eric G. Flamholtz, PhD Published on May 16, 2020
In the May 16, 2020 issue of Barron's, there is an interview of two investment
managers (Paul Black and Mike Trigg) with the title “All Eyes on Corporate Culture.”
It states the notion that: “…appraising whether a company truly has the
staying power requires scrutinizing culture with the same diligence as
16
balance sheets and supply chains…”
I totally agree with this notion. The question that remains is how to understand
and assess corporate culture to determine whether it is a true “asset” or
liability? This, in turn, requires that we understand:
16 Sarah Max, “All Eyes on Corporate Culture,” Barron’s, May 16, 2020, p. 27.
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What “corporates culture” is?
When is corporate culture an “asset” or a “liability”?
How to manage corporate culture to enhance its value as an asset or to
convert it from a “liability” into an “asset”?
This article deals with these critical issues.
WHAT IS “CORPORATE CULTURE”?
The concept of corporate culture has become embedded in management vocabulary
and thought. In order to manage it we must first understand what culture is and
what it is not.
Although there are many different definitions of the concept, the central notion is
that culture relates to core organizational values. In turn, values are things which
are important to organizations and underpin decisions and behavior. All
organizations have cultures or sets of values which influence the way people behave
in a variety of areas, such as treatment of customers, standards of performance,
innovation, etc.
To us, corporate culture consists of “values,” “beliefs,” and “norms” which
influence the thoughts and actions (behavior) of people in organizations. Values are
the things an organization considers most important with respect to its operations,
its employees, and its customers. These are the things an organization holds most
dear— the things for which it strives and the things it wants to protect at all
costs. Beliefs are assumptions individuals hold about themselves, their customers,
and their organization. Norms are unwritten rules of behavior that address such
issues as how employees dress and interact. Norms help “operationalize” actions
which are consistent with values and beliefs.
Values, beliefs, and norms, are the, the key components or elements of corporate
culture. These three elements of culture are actually part of an overall mosaic of
culture in an organization. They are not necessarily all visible either single or in
combination.
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There are actually several levels or layers of culture in an organization. There is the
surface layer which is what we see and observe, mostly in the norms of behavior on
a day to day basis. Then there are the core values and related beliefs or
assumptions which drive or underlie the behavioral norms. However, below that is
what might be termed a set of “cultural attributes,” which are the “DNA” of culture.
These cultural attributes are dimensions of “corporate personality.” These are
things such as attitudes towards risk, or ethics; propensity towards planning (or
not!), systems, processes; attitudes towards professionalism, or
entrepreneurialism, or even bureaucracy. These underlying cultural attributes drive
the core beliefs, values, and norms which constitute the most observable level of
culture.
THE KEY DIMENSIONS OF CORPORATE CULTURE
We believe that while many dimensions of culture are important. However, typically
most attempts (actually almost all we have seen) to define and manage a culture
are based upon ad hoc statement so core values that have “face validity”
(intuitively “make sense”) to organizations and entrepreneurs. These typically
consist of lists of key words or phrases that seem reasonable or meaningful. For
example, one company stated that “our core values are ‘professionalism,’ ‘integrity,’
‘hard work,’ ‘teamwork’, and ‘results.’” Another used phrases such as “every penny
counts,” “doing more with less,” “the best idea wins,” and “working managers.”
Although on the surface this seems to be a reasonable approach, there are two
significant problems with this “method” of deriving a set of core values. First, it is
lacking in empirical (predicative) validity. How do we know that these asserted
values are meaningful or relevant to performance and organizational success?
Second, how do we know that these are what the key core values ought to be? To
answer these questions, we have been engaged in empirical research designed to
identify the key dements in of culture than companies ought to be managing.
Based upon our own original research and experience in working with organizations,
we have identified five key aspects of culture which have a statistically significant
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17
relationship to financial performance. These areas are: (1) customer orientation,
(2) orientation toward employees, (3) standards of performance (4) accountability,
and (5) innovation or commitment to change. Although we have reviewed the
literature of culture management, we have not found any other set of variables that
have been identified as empirically related to (drivers of) financial performance.
In addition, we have conducted factor analytic studies which have supported the
validity of the proposed five factor framework. Each of these dimensions is
described briefly below.
Customer-Client Orientation. The importance attached to how the company
views its customers or clients as well as the assumptions employees hold about the
nature of their customers and clients can have a profound impact on how the
company operates and thus on its success.
Some companies have been very effective at developing and communicating to
their employees their values with respect to customers. Employees at Disneyland,
for example, refer to their customers as “guests.” The word was chosen carefully to
send a message to Disneyland employees about the company’s customer
orientation. It is intended to have an impact on the way employees interact with
customers and, in fact, employees are trained to make customers feel “at
home.” The goal is customer satisfaction, which hopefully will encourage them to
return to the park in the future.
Southwest Airlines is another company that has, throughout its history, effectively
managed its culture with respect to treatment of customers. The culture promotes
having “fun” and was built on “Luv” (a play on the airfield where the company was
borne). Customers who travel this airline, which offers “no frills, low cost” travel,
experience the caring first hand – from check in to baggage claim. Flight attendants
have been known to play games in flight (like who has the most pennies) and to
sing songs. This airline has also won the airline industry’s highest customer
satisfaction award 6 years in a row (all the time remaining highly profitable).
17 Eric Flamholtz, Culture and The Bottom line, European Management Journal, 2000: 268-275; Eric
Flamholtz and Rangapriya Narasimhan-Kanan, European Management Journal, 2005: 50-64.
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People (Employee) Orientation. The second critical cultural area is the view
people hold about themselves and others within the organization itself. Again, as
was true with customer orientation, there are two components to the value: how
people are viewed with respect to their roles within the firm and how important
people feel. Some companies devote a great deal of effort to satisfying employee
needs and making them feel valued. At the extreme, these organizations develop a
strong competitive team spirit that is directed at other companies and even at
departments within the same company. At the other end of the spectrum are those
companies in which employees are viewed as replaceable. Somewhere in between
are companies where some employees are considered valuable assets (by
themselves and everyone else) but where other employees are considered ‘‘second
class citizens."
Performance Standards. Performance standards include things like what and how
much employees are held accountable for, the level of quality expected in products,
and the expected level of customer satisfaction. When organizations have high
performance standards which are embedded in the culture it can have a profound
impact upon people’s behavior. For example, the culture at Ford Motor Company in
the late 1960s and early 70s is captured by the statement: “If you can get it to
drive out the door, we can sell it!” Unfortunately, this culture was not just prevalent
at Ford, but at all of the U.S. car manufacturers. Is it a surprise that Toyota is now
the number 1 car manufacturer in the world and that the US car manufacturers are
fighting to avoid bankruptcy?
Accountability. Another key aspect of culture is “accountability.” Unfortunately,
there are many examples of companies in which accountability is not explicitly part
of the culture.
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Commitment to Change and Innovation. The fifth major cultural element is how
a company views and reacts to change, including innovation. Growing organizations
that embrace change as a “way of life” tend to experience less difficulty in making
the required transitions that have been discussed throughout this book. Those, in
which change is viewed as threatening, tend to experience sometimes significant
problems.
WHEN IS CORPORATE CULTURE AN “ASSET” OR A
“LIABILITY”?
Although there are countless companies, their cultures can be viewed as comprising
a few different classic types. Some have murky cultures, which are ill-defined and
not clear to observers or members. Others have well defined cultures with specific
statements of core values.
“Strong” and “Weak” Cultures & “Functional” and “Dysfunctional”
Cultures. This section provides a brief typology based upon two key variables that
can be used to classify cultures: “cultural strength” and “cultural functionality.”
Cultural strength refers to whether a culture is “strong” or “weak,” as explained
below. “Cultural functionality” refers to whether a culture is ‘functional” or
“dysfunctional.” Companies differ in the extent to which they make an attempt to
“manage” their cultural messages (statements, pictures, icons, etc.). Organizations
that take the time to make explicit statements about their culture and display
cultural icons tend to have “strong” cultures. The intention is to have people
understand and embrace the company’s history and culture. A “strong” culture is
18
one that people clearly understand and can articulate.
When a company is devoid of obvious cultural artifacts, it is typically a weak culture
company. A “weak culture is one that people will have difficulty in defining,
understanding, or explaining what the culture is.
18 Strong cultures can be either positive or negative.
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Although culture is everywhere and in everything, sometimes you enter
organizations where it is not easy to determine what business they are in. In such
environments, the décor is plain, almost non-descript. There are no clues to
suggest what the business does: no culture statements, no pictures about the
business, no hint of what business the company is in. This is characteristic of a
company whose culture is so ill-defined (almost a “non-culture culture”), a culture
devoid of obvious cultural symbols, that it is the apotheosis of a weak culture. It
usually occurs by happenstance rather than design. It is a marker of a company
that does not recognize the importance of culture to people, either to members of
the organization or to those whom they do business with.
A “cultureless” company is an illusion. Just as an individual must have a
personality, a company must have a culture, even though it appears not to exist. A
company that appears cultureless is actually a company with a “weak” or ill-defined
culture. It is not possible for an organization to have no culture, just as it is not
possible for a person to have no personality. Nevertheless, we are using the term to
characterize a special kind of organization that seems devoid of culture.
Strong culture companies can be either positive (an asset) or negative (a liability).
If the company’s values are constructive, then having a strong culture is an asset.
If the company’s values are negative or dysfunctional, then having a strong culture
will be a liability. For example, the informal culture at Ford Motor Company during
the late 1960s and early 70’s was captured in the statement made among
employees that: “if you can get it to drive out the door, we can sell it!” This was not
a formal corporate pronouncement, but a statement that was prevalent in
conversations at the company. It was a statement that contained an implicit lack of
respect for the customer, and suggested the lack of importance of true product
quality. Although Ford later made the pronouncement that “Quality is Job 1,” this
was clearly a response to damage to its brand when customers realized that Ford
products had declined in quality. In contrast, Toyota has steadily increased its
customer loyalty and overcome the once prevailing view that products “made in
Japan” were of inferior quality. It has accomplished this by a culture that
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emphasizes “perfection” in the customer experience from the product to the sales
19
process and the service process as well.
Four types or conditions of Corporate Culture. The two factors of cultural
strength (strong and weak) and cultural functionality (functional and dysfunctional)
can be combined into four different types of cultures, and show in the picture that
accompanies this article:
Type A: Strong Functional Cultures
Type B: Weak Functional Cultures
Type C: Weak Dysfunctional Cultures
Type D: Strong Dysfunctional Cultures
A strong-functional culture can be viewed as an asset, and strong-dysfunctional
culture can be viewed as a liability (in the colloquial sense of a 'handicap'-- not in
the technical sense of a liability.) There is also empirical research showing that
culture can have a positive impact upon financial performance. Specifically, my
published empirical research indicated that corporate culture impacts financial
performance measured as EBIT; and that culture explains as much as 46% of EBIT.
This was reported in Eric Flamholtz , "Corporate Culture and the Bottom Line,
" European Management Journal, 2001, 19 (3), 268-275. This, in turn, supports
that culture is an asset.
Examples of Strong Functional cultures include Starbucks and Ritz Carlton. In one
sense, Huawai is also strong functional culture; specifically, in how its culture is
managed internally. However, Huawai is a complex case. It appears to have done
some things that make it a "corporate outlaw." It has become a pariah.
Nevertheless, its culture management technique is that of a strong-functional
company.
Examples of "weak functional companies" include GM, Toyota, and Southwest.
Examples of Strong Dysfunctional companies include VW, United, and Theranos. VW
had problems of falsifying data about its automotive capabilities, and Theranos is
19 J.K. Liker, and M.Hoseus,. Toyota Culture: The Heart and Soul of the Toyota Way, McGraw-Hill
2008.
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© Management Systems Consulting Corporation, 2020. All rights reserved
the now defunct company who’s founder and CEO Elizabeth Holmes, has been
accused of fraud. United is included here because many of its customers refer to it
as the "unfriendly skies company," the reverse of its advertising mantra. Examples
of weak dysfunctional companies are Wells Fargo (now in recovery from its incident
of employees creating false product sales to customers); Uber which has had a
variety of well-publicized cultural problems; and Sears where America used to shop!
CREATION AND EVOLUTION OF CORPORATE
CULTURE
The effective management of culture requires an understanding of how culture is
created and how it evolves over time. Culture in start-up or entrepreneurial
companies is derived from its founder or founders. The personal professional values
of the founder(s) comprise the “DNA” of the culture of the company during its initial
stages. If the founder is a perfectionist, then the performance standards for the
company will be all about perfection. If the founder is hyper-critical, then the
culture will take on a critical character.
Typically, there is no systematic statement of corporate value in an early stage
entrepreneurial company. In addition, there is not typically a comprehensive set for
corporate values that match the five categories of culture identified as the critical or
key dimensions of corporate culture.
Formal systems of culture management are not typically found in most early stage
entrepreneurial companies. The culture is transmitted by the personal day to day
interaction of people with the entrepreneur or founding group. As the entrepreneur
makes decision his or her values are communicated in behavioral terms.
As a company increases in size in terms of the number of employees, culture tends
to evolve or mutate. New people enter the organizations and some of the original
founding group of employees might leave. This leads to an attenuation of the
culture.
The process of attenuation becomes critical when a company reached about 100
employees. However, geographical dispersion of operations also will accelerate the
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process. If a company operates in multiple locations, even within the same state of
country, the culture can fragment into multiple cultures or subcultures.
By the time a company reaches approximately 500 employees or five “generations”
20
of employees, the need for formal culture management is critical. With
approximately 500 people the cultural issues and conflicts which can emerge can be
catastrophic for a company.
At roughly this organizational size (about 5000 people or $100 million in revenue),
a company will encounter a “classic entrepreneurial cultural transformation crisis.”
This is the cultural dimension of a transformation from entrepreneurship to
professional management that must occur between when an organization is in the
21
size range from $10 to $100 million in revenues. Typically the transformation of
the company from entrepreneurship to professional management begins with the
recruitment of people who are more skilled and “professional” experts in various
fields, such as marketing, production, or finance. In turn, these professionals
initiate structural changes and the development management systems.
Initially this group of professionals is simply outnumbered by the earlier group of
people who joined the company. However, as some point they achieve “critical
mass” and not constitute a powerful sub group with common values.
At that point there is typically a classic cultural crisis, in which there is a “battle”
between the professionals and the early stage recruits to the entrepreneurship. The
battle is often expressed in terms of who is valued, but in effect is its large battle
over the “soul” or sensibility of the company. The underlying cultural issue is
whether the company will remain free spirited and without systems and processes
or will become more structured and professionally managed.
It is at this point that the company has clearly outgrown informal methods of
culture management, and requires a formal system of culture management, as
described below.
20 A “generation” of employees is defined as a cohort of people who enter an organization at about
the same time and therefore share a common set of experiences as the company grows.
21 Eric G. Flamholtz, “Towards an integrative Theory of Organizational Success and Failure: Previous
Research and Future issues, International Journal of Entrepreneurship Education, Vol. 1, Issue 3,
2002-03, pp. 297-319; Eric Flamholtz and Yvonne Randle, Growing Pains: Transitioning from
Entrepreneurship to Professional Management Fourth Edition, Jossey-Bass publishers, 2007.
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