MS Year in Review 2020

or Uber. Nevertheless, they are an early “wake up call” that there are

issues to be resolved by Zoom.

Regardless of the nature of the specific problems faced by Tesla and Zoom, growing

pains are an indication of potential vulnerability to the “Icarus Syndrome.”




THE UNDERLYING CAUSE OF THE “ICARUS


SYNDROME”


Why do enterprises experiencing “Dazzling Success” sometimes become victims of
the “Icarus Syndrome”? To answer that question, we must look to the Roman deity
Janus. The Roman deity Janus is always depicted with two-faces. This is symbolic of

change, transitions, and (of most relevance in this context) multiple dimensions of
the universe.


With respect to business enterprises, the symbol of Janus represents two different
but related dimensions or sides of a business: The “product” dimension and the

“organizational” or infrastructure dimension:


The “product dimension” refers to the products and or services offered by an
enterprise. For example, at Tesla it refers to the automobiles manufactured and
sold by the company. For Zoom, it is the service provided for video

communications.


The “organizational dimension” refers to the architecture and infrastructure
required to operate a business on both a short and long-term basis. In my model of
organizational development (The Pyramid of Organizational Development™), the

architecture and infrastructure required operate a business consists of the
resources, operational systems, management systems, and culture of an enterprise
(the top four levels of the Pyramid).
85




85 For a discussion of this model, see Eric Flamholtz, “Is Tesla Being “Built for Sustainable
Success”℠? Linkedin, September 2. 2020

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Based upon our research and experience, the finding is that all business

organizations must manage both dimensions in order to be
successful. However, the underlying cause of the “Icarus Syndrome” is the failure
of leadership to manage both dimensions required for sustainable organizational

success. The classic problem of rapidly growing organizations is in their focus on the
product dimension, they tend to neglect the organizational or infrastructure
dimension. This is what causes the growing pains and ultimately can lead to their

demise.


In the short term, an organization can cope with its growing pains by using the
extraordinary revenue that always accompanies “Dazzling Success” to “mask” its

problems. However, in the long run that “extraordinary revenue” will always be
dissipated from increased competition or internal operating problems, leaving the
organization vulnerable to problems without the “extra” resources to cope with

them or mask them.




OSBORNE COMPUTER: A CLASSIC EXAMPLE OF THE

“ICARUS SYNDROME” 86


In this section, we will now examine a classic illustration of the “Icarus syndrome”

involving the rise and fall of Osborne Computer. In the highly competitive early
years of the personal computer industry (the late 1970s and early 1980s), Osborne
Computer was a very well-known and successful company. Specifically, the firm

reached revenues $100 million in two years, but then experienced a crisis brought
about by a failure to manage the company’s rapid growth effectively. Finally, it filed
for bankruptcy!










86 This section is adapted from Eric Flamholtz and Yvonne Randle, is The Crisis Leadership Playbook,
Vandeplas Publishing, 2020.

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Origin of Osborne Computer


Osborne Computer Corporation began when Adam Osborne recognized the market
for a microcomputer that was relatively low-priced, easy to use, portable, and that

came with software (something very unique at the time). His idea was a spin-off of
the personal computer concept pioneered by Apple Computer, but Osborne

identified a new market segment when he made his computers easy to carry. (It
should be noted that this computer was described as “luggable” because while it
was portable, it weighed about 28 pounds). Despite initial skepticism, Osborne

produced and marketed his machines and, in doing so, created a new market.


The Rapid Rise and Fall of Osborne Computer

From its inception, Osborne Computer experienced extraordinarily rapid growth. In

1981, the firm’s first full year of operation, its sales were $5.8 million. By 1982,
sales had grown to $68.8 million. During 1983, they were growing at an annualized

rate of more than $100 million per year.


Osborne’s success was the classic entrepreneur’s dream come true, but it turned
into a classic nightmare and crisis. When some suppliers sued to collect $4.5
million, Osborne filed for bankruptcy under Chapter XI of the Federal Bankruptcy

code in September 1983. In his book entitled Hypergrowth: The Rise and Fall of
Osborne Computer Corporation, Adam Osborne sadly stated, “For Osborne
87
Computer Corporation the game was over.”

What Caused the “Icarus Syndrome” at Osborne Computer?


What caused the fall of Osborne Computer after its initial “Dazzling

Success”? Although the answer is complex, a key to the basic problem was stated
by Adam Osborne himself in reflecting on what had happened. According to
him, the firm:








87 Adam Osborne and John Dvorak, Hypergrowth: The Rise and Fall of Osborne Computer (Berkeley,
CA: Idthekkethan, 1984), p. 120.

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“had existed only eighteen months in terms of operation – hardly time to get my

feet wet; all of a sudden the job was a whole different order of magnitude. I
88
realized it was no longer an entrepreneurial operation in any conceivable way.”

He and his firm were in crisis and despite this recognition, Osborne was unable to
make the required changes in himself or his company.


Some of the problems faced by Osborne Computer were present from the

company’s earliest days, but they were masked or at least made less acute by its
rapid sales growth:


 Engineering problems and manufacturing disputes were buried under an
avalanche of orders created, in part, by a very successful advertising
campaign.

 Money flowed into Osborne Computer and the firm received a great deal of
visibility, but it was actually a profitless prosperity:

o Although revenues were $5.8 million in 1981, the firm incurred a loss of
$1.3 million.
o The next year, when sales exploded to $68.9 million, the company still

incurred a loss of $1 million.
o During the first quarter of 1983, sales were $34.4 million, for an annual

running rate of more than $137 million, but the firm still had a loss of
$600,000 for the quarter or $2.4 million on an annualized basis.


Clearly, something was wrong with its operations. There was also a leadership and
management problem attributable to Osborne himself.


Osborne recognized that he was in over his head as a manager. As he stated:


“Growth had taken Osborne Computer Corporation to a size where I had to question
my own qualifications. I had no professional training whatsoever in finance,
management, or business administration, the very disciplines within which I was

89
making critical business decision every day.”


88 Robert A. Mamis, “Face to Face with Adam Osborne” Inc. (November 1983), p. 21.
89 Osborne and Dvorak, op. cit., p. 88.

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In May 1982, Osborne began looking for a seasoned professional manager to

become president. The search process was not completed until the second week of
January 1983, almost nine months later.


Unfortunately, when a company experiences the kind of rapid growth that Osborne
Computer did, it is analogous to “dog years” (or years in a dog’s life). Each year of

rapid growth may not be equal to seven in a more stable company, but they are
experienced as though they were. For example, Osborne was aware of the need to
bring experienced, talented managers and supervisors into the company and did

so. Yet, in the three to six months required for employees to learn their jobs at
Osborne, the jobs had outgrown them.


Unless an organization has the infrastructure (including resources, operational
systems, management systems, and the managerial capabilities) required to

support this kind of rapid growth in advance of when it is actually required, the
company is playing a very dangerous game. As long as revenue continues to
increase and cash flow is there, the company can keep on going, even though there

are great problems, inefficiencies, even losses. However, if anything breaks the
momentum of increasing revenues and cash flow, the firm will then be caught in a

situation where all its problems will no longer have the financial slack to mask or
overcome them. This is exactly what happened to Osborne Computer in 1983.


In April 1983, Osborne was in the middle of a product transition from its original
core product, the “Osborne I” to a new product, the “Executive,” an IBM compatible

machine. Even though the “Executive” was a very promising product for the future,
and the company had already received orders amounting to more than $25 million
from dealers, the company still needed the revenues and cash flow from sales of

the “Osborne 1.” Unfortunately, the sales of this machine collapsed following the
end of a sales promotion that gave a free copy of “dBASE II” software with each
“Osborne 1” purchased. The company also had some 15,000 “Osborne 1”’s in

inventory, waiting to go into a dealer network already choking with unsold
machines. In brief, the life-sustaining flow of cash slowed sufficiently to bring

Osborne Computer to the verge of collapse.





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There were several other contributing factors, including the inability of the firm to

arrange sufficient financing to give it time to try and survive, the unsuccessful entry
of a new president (Robert Jaunich from Consolidated Foods), the unsuccessful
attempts to sell Osborne to another company, and the company’s aborted attempt

to go public. There were also questions about Osborne’s vision and strategy. We
can infer that as the desktop computer (first with the MAC and then with the IBM
PC) became more sophisticated and less expensive, customers were no longer as

tolerant of Osborne’s small, hard-to-read screen. In addition, many competing
machines were IBM compatible, which Osborne’s were not.




THE CLASSIC END GAME FOR THE ICARUS


SYNDROME: OSBORNE COMPUTER’S BANKRUPTCY


The ultimate failure of Osborne Computer was attributable to a combination of
factors, but was precipitated by the slowdown in orders and cash that exacerbated

all its other problems. The root cause was its inability to develop and implement
that processes and systems (“organizational infrastructure”) needed to effectively
and efficiently function as the larger company it had become. It also failed to adjust

to market changes that eventually would have caused other problems.


Implications and Lessons of the Icarus Syndrome at Osborne Computer

After experiencing its initial dazzling success, Adam Osborne recognized that his

company was in crisis, but it is not clear that he knew what to do to address it. He
was experiencing a crisis brought about by what he himself termed “hypergrowth,”

but he did not have the leadership capability., advisors, or tools or knowledge
required to manage it.


Specifically, he did not have a “template” for identifying the underlying causes and
then making the necessary changes to his business. We believe that if Osborne had

used the template represented by the Pyramid of Organizational Development,™ he
would have had a better understanding of what needed to be done at Osborne




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90
Computer to continue its initial success. For the reader’s convenience, an
abbreviated version of the framework for the Assessment and development of
sustainably successful organizations is presented in Appendix A. This framework
91
was also examined in depth in an earlier Linkedin article.

One of the key weaknesses of his company was its underdeveloped operational and

management systems. Osborne Computer did not have adequate financial,
information, and control systems. For example, in an article on the rise and fall of
Adam Osborne, Steve Coll stated: “In retrospect, it seems clear that the company’s

accounting procedures were so slipshod that no one knew how bad things
were.” There was also clearly a leadership problem attributable to the
92
inexperience of Adam Osborne himself.

Osborne recognized that the firm was in crisis, but he could simply not move fast

enough to fix the problems. Osborne filed for bankruptcy under Chapter XI of the
Federal Bankruptcy code in September 1983. In his book entitled Hypergrowth:
The Rise and Fall of Osborne Computer Corporation, Adam Osborne stated, “For

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Osborne Computer Corporation the game was over.”

As a result of the way it was led, Osborne Computer Corporation has long been
gone from the market that it helped identify and create! As Adam Osborne stated in

reflecting on his experience:

“When you become an entrepreneur, you can go up awfully fast, but you can go

down just as fast. It’s so ephemeral, like actors who end up committing
suicide. One day they’re famous, the next nobody knows who the hell they are.”
94







90 This template has a been described in previous articles in Linkedin: Eric Flamholtz, “Is Tesla Being
“Built for Sustainable Success”℠? Linkedin, September 2. 2020; Eric Flamholtz, “Is Tesla’s is being
“Built for Sustainable Success?” Part 2: Empirical Research Support for the Model Used to Assess
Tesla’s Development,” Linkedin, September14. 2020.
91 Eric Flamholtz, “Is Tesla Being “Built for Sustainable Success”℠? Linkedin, September 2. 2020
92 Steve Coll, “The Rise and Fall of Adam Osborne,” Inc. (November 1983), p. 92.
93 Adam Osborne and John Dvorak, Hypergrowth: The Rise and Fall of Osborne Computer (Berkeley,
CA: Idthekkethan, 1984), p. 120.
94 Mamis, op. cit., p. 21.

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Accordingly, the bankruptcy of Osborne Computer illustrates the dire consequences

of the Icarus Syndrome.




KEY LESSONS FROM THE ICARUS SYNDROME

EXPERIENCE OF OSBORNE COMPUTER


What can we learn from the failure of Osborne Computer to successfully manage its

own rapid growth?


Organizational Infrastructure” Is A Necessity for Long-Term Survival. The
first lesson is that “organizational infrastructure” (day-to-day operational systems,
management capabilities, and management systems) is a necessity for long-term

survival of a business enterprise. It is not just something that might be nice to
do. And, the infrastructure of a company needs to be aligned with its size. Stated in
another way, as a company grows, its internal systems, processes, and capabilities

need to change to support it. A $1 million enterprise is significantly different from a
$10 million business; and a $10 million business is significantly different from a

$100 million business.




The Rate of Growth Experienced by A Company Impacts Need for

Infrastructure. The second lesson is that the more rapid the rate of growth
experienced by a company, the more rapid the need for organizational
infrastructure development. In addition, the more rapid the rate of growth of a

business, the less time there is to identify and manage the crisis brought about by
this growth. There is less clock-time in terms of months or years to accomplish the

development of required organizational infrastructure in rapid growth businesses
such as Osborne Computer. On the surface, hyper-growth in revenues seems to be
very attractive. However, it also represents a serious danger. If the company

cannot move quickly enough to create the management capabilities and
management systems (“organizational infrastructure”) requited to support its
operations, it will be at risk for failure just as Osborne Computer.


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Conclusions


As he himself recognized and stated, the leadership of Adam Osborne was totally
ineffective. Specifically, Osborne Computer went bankrupt in spite of having

achieved more than $100 million in revenues in just three years. It was the classic
entrepreneurial dream of meteoric success come true, but followed quickly by the

entrepreneurial nightmare of failure due to the Icarus Syndrome! Osborne was
totally unprepared for leadership of a rapidly growing company. He was not a
manager in any sense of that word. He knew nothing about anything relevant to the

management of his business. He failed to understand and appreciate that there are
two sides to building a business: 1) a good product and market and 2) the ability to
build, develop and manage the organization required.




THE BOTTOM-LINE IMPLICATION FOR TESLA,


ZOOM, ET. AL.


Although Tesla, Zoom, and several other recent companies have achieved dazzling
initial success, sustainable success is not guaranteed by product uniqueness,

excellence, and quality alone. All business organizations must manage both
the product and the organizational dimensions of a business in order to be
successful. Failure to do that is likely to lead to the Icarus Syndrome.























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APPENDIX A


FRAMEWORK FOR THE ASSESSMENT AND

DEVELOPMENT OF SUSTAINABLY SUCCESSFUL

ORGANIZATIONS


The framework, which has been created over the past 40 years from a combination

of empirical research and experience and using that framework, has three related
parts including:


1) an “organizational effectiveness model,”
2) a “stages of growth model,” and

95
3) a “model of organizational dysfunction (‘growing pains’). ”



Organizational Effectiveness Model.


The “organizational effectiveness model” was previously developed by Flamholtz

96
(1995) and is reviewed briefly below.
The Foundation of a Business


All business or economic organizations are based upon a conceptual foundation,

which is either explicitly defined or implicitly understood. This is termed “the
business foundation.” The business foundation, in turn, consists of three related

dimensions or constructs: 1) the “business concept” or definition, 2) the “strategic
mission,” and 3) the “core strategy.”


The Business Concept. A business concept is a statement of what the
organization is in business to do. It defines an organization’s identity and gives it
strategic focus. It provides the raison d’etre of the business. For example, Coca-



95 Growing pains are caused by disequilibrium when the development of an organization’s
infrastructure does not match it stage of growth.
96 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51.

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Cola is in the beverage business, Federal Express is in the package transportation

business, and Disney is in the entertainment business.

In brief, the identification and clear definition of a business concept provides the

foundation on which all other aspects of the business must be built. The customers
to be served, products offered, and day to day systems of the firm are all built upon

and extensions of the business concept/business foundation, as explained below.


The Strategic Mission. While the business concept defines what an organization
is, the “strategic mission” identifies what the enterprise wants to achieve or
become. It is a statement of the strategic intent of the enterprise. It is the answer

to the question “What do we want to achieve or become over a defined time
period.” For example, in its early days (1994) Starbucks Coffee Company (now
“Starbucks”) established the strategic mission of becoming “the leading brand of

specialty coffee in North America by the year 2000.


The “Core Strategy.” While a “strategic mission” identifies what the enterprise
wants to achieve or become, a “core strategy” is a statement of how the
organizational will complete and achieve its strategic mission. For example, the core

strategy for a commodity type of business (such as a retailer like Walmart or a
mining company such as B.H.P. Billiton) is to be the low-cost

provider. The core strategy is the central theme around which all other strategies
are created.


Importance of a Business Foundation. Just as the foundation of a building is
critical to its structural integrity, the foundation of a business is equally important
for the development of the business.





Key Developmental Tasks for Successful Organizations


An initial premise or hypothesis underlying this framework is that organizations
must perform certain tasks to be successful at each stage of their







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growth. The six key tasks, all of which have been supported by previous

97
research, are:
 Identification and definition of a viable market segment

 Development of products or services for the chosen
 Acquisition and development of resources required to operate the firm

 Development of day-to-day operational systems
 Development of the management systems necessary for the long-term
functioning of the organization

 Development of the organizational culture that management feels necessary
to guide the firm and a related culture management system.


The six key tasks can also be viewed as “strategic building blocks” of an
enterprise; that is, they comprise a set of “components” of an organization. They

are built upon an enterprise’s business foundation, described above.


A second premise or hypotheses is that each of these tasks must be performed
98
in a stepwise fashion in order to build a successful organization. Each of
these key tasks or strategic building blocks has been discussed in the previous

99
article .



The Model as a Whole. Taken together as a whole, these six “key strategic

building blocks” created in stepwise fashion comprise the “structure” of a
sustainably successful organization. If any one or more of the “key strategic

building blocks” or tasks a is not developed effectively, the entire organization will
be weakened and be subject to risk of failure. In addition, even if all of the
individual strategic building blocks are developed, but the set as a whole is not






97 See Eric Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
Organizations, Wiley 2016.
98 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51; Flamholtz. E. and Yvonne
Randle Y. (2016). Growing Pains: Building Sustainably Successful Organizations, Wiley.
99 Eric Flamholtz, “Is Tesla Being “Built for Sustainable Success”℠? Linkedin, September 2. 2020

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integrated effectively, the organization will be weakened and be subject to risk of

failure.

This set of six “key strategic building blocks” (markets, products, resources,

operational systems, management systems, and culture) is typically shown as a
Pyramid shape, with each of these building blocks comprising a level of the

Pyramid. However, it must be noted here that the “formatting”
of Linkedin unfortunately does not permit a Pyramid shape to be shown correctly;
rather, it typically distorts that shape. The actual Pyramid representation of the

model can be seen in Flamholtz, 1995 and Flamholtz and Randle
2016. 100 Accordingly, the reader is asked to visualize or imagine that the six key

“strategic building blocks” or variables shown below are in a hierarchical Pyramid
shape, with “Markets” at the base and “Culture” at the top.


It should also be noted that the Pyramid shape is not intended not imply that the
key tasks are carried out independently. All six tasks are vital for the health of the
firm, and must be built simultaneously. However, the relative emphasis on each

task or level of the Pyramid will vary according to the organization’s stage
of growth. 101


It should also be noted that the top four levels of the Pyramid (resources,

operational systems, management systems, and culture) form the “infrastructure”
of the firm. Generally, however, although competition between firms takes place at
all levels, long-term sustainable advantage is primarily found at the top three

levels, because there are the least susceptible to are less susceptible to imitation
and, accordingly, provide the basis for long term sustainable competitive
advantage. 102






100 See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate
and Human Resource Management. European Management Journal, 13 (1), 39-51.and Eric G.
Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful organizations, Fifth
Edition, Wiley, 2016
101 See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate
and Human Resource Management. European Management Journal, 13 (1), 39-51
102 See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate
and Human Resource Management. European Management Journal, 13 (1), 39-51

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Developmental Emphasis at Different Stages of Growth


The emphasis that should be given to each task differs depending on the size of the
firm. Organizations experience developmental problems if their infrastructure is not

consistent with their size. The coincident relationship with size and organizational
structure leads to an organizational life cycle model that complements the

Organizational Development Pyramid. 103


A detailed description of this model is beyond the scope of this article, but it is
examined in detail in Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building
Sustainably Successful Organizations. 104 In brief, each stage of growth is viewed as

having a set of critical developmental tasks. For example, the critical tasks at Stage
I (the start-up of an entrepreneurial new venture) are markets and products, while
at Stage III the critical task is the development of management systems.


Model of Organizational Infrastructure Dysfunction (“Growing Pains”)


Another notion of the theoretical framework is that when the top four levels of the

Pyramid, (which comprise the “infrastructure” of the firm) is not developed
sufficiently as required by the given stage of growth, there will be an
“organizational development gap,” or gap between the level of the infrastructure

required by the enterprise and its actual infrastructure.

This developmental gap causes the enterprise to experience “growing pains,” which

are symptoms of organizational distress experienced by entrepreneurial firms. A set
of ten classic growing pains have been identified by previous research (Flamholtz

and Randle, 2016) and experience. They are shown in Exhibit A of the previous
article. 105







103 See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate
and Human Resource Management. European Management Journal, 13 (1), 39-51
104 Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
organizations, Fifth Edition, Wiley, 2016, Chapters 3-4.
105 Eric Flamholtz, “Is Tesla Being “Built for Sustainable Success”℠? Linkedin, September 2. 2020.
See also Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
organizations, Fifth Edition, Wiley, 2016, Chapters 3-4.

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Growing pains are not only problems in themselves; they are symptoms of

organizational distress. Growing pains indicate that the “infrastructure” of an
enterprise (i.e., the internal operational and management systems it needs at a
given stage of growth) has not kept up with its size, as measured by its revenues.

For example, a business with $200 million in revenues may only have an
infrastructure to support the operations of a firm with $50 million in revenues, or
one-fourth its size. This type of situation typically occurs after a period of growth,

sometimes quite rapid growth, where the infrastructure has not been changed to
adjust to the new size and complexity of the organization. The result is an

“organizational development gap,” (that is, a gap between the organization’s actual
infrastructure and that required at its current size or stage of development) which
produces the growing pains.





REFERENCES


 Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably
Successful organizations, Fifth Edition, Wiley, 2016

 Flamholtz, Eric G. and Aksehirli, Zeynep. (2000) Organizational Success and
Failure, An Empirical Test of a Holistic Model. European Management Journal,
18, (5) 488-498.

 Flamholtz, E. (2001). Corporate Culture and the Bottom Line. European
Management Journal, 19 (3), 268-275.

 Flamholtz, E. and Hua, Wei, (2002). Strategic Organizational Development
and the Bottom Line: Further Empirical Evidence, European Management
Journal, 20 (1), 72-81.

 Flamholtz, E. and Hua, Wei, (2002). Strategic Organizational Development,
Growing Pains and Corporate Financial Performance: An Empirical
Test, European Management Journal, 20 (5), 527-536.

 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





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 Flamholtz, Eric G. and Hua, W. (2003). Searching for Competitive Advantage

in the Black Box, European Management Journal, 21 (2), 222-236.
 Flamholtz, E and Kurland, S. Strategic organizational Development,
infrastructure and Financial Performance: An Empirical Test, International

Journal of Entrepreneurial Education, Vol 3, Issue 2 (2005), pp. 117-142.



































































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THE FALLACY OF AN “APRIORI’



CULTURE”: WHY ICONIC



COMPANIES WITH STRONG


CORPORATE CULTURES



EXPERIENCED CULTURAL



DIFFICULTIES LEADING TO



DECLINE




































By: Eric G. Flamholtz, PhD Published on October 22, 2020


Abstract

This article examines why iconic companies like IBM and Hewlett-Packard with

strong corporate cultures experience cultural difficulties leading to decline. It

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explains the underlying problems and considers the consequences for newer high-

flying companies like Google, Netflix, Zappos, Zoom, if they do not take necessary
preventative actions.


Author’s Note to Readers:


This newsletter focuses upon various aspects of the development of
“Sustainably Successful Organizations.”℠


This issue continues our focuses upon the development of Sustainably
Successful Organizations℠ by examining the role of corporate culture in

that development.


Specifically, it examines the case example of IBM, a once iconic
company, that nearly experienced the “The Icarus Syndrome” (which
we have identified and referred to as the (virtual or actual) death of an

enterprise after an initial period of dazzling growth) because of flaws in
their corporate culture.


Finally, it examines the implications for organizations like Netflix, Zappos,
Zoom, all currently renowned for their cultures and all currently “flying high”

with dazzling success, can become potential victims of the “The Icarus
Syndrome,” if they do not take necessary preventative actions.


This newsletter is addressed to various groups including general readers, our
clients, and our licensed global affiliates as well as to investors. 106





Introduction


It is now well recognized that corporate culture is important to organizational
success, Organizations such as Netflix, Google, IBM, Johnson & Johnson, Ritz



106 Our global affiliates are independent consultants in various countries who are licensed, trained,
and certified to deliver our methodologies and tools. Currently our affiliates are in Argentina,
Bulgaria, China, Italy, India, Kazakhstan, Poland, Russia, Singapore, and Vietnam. See:
www.Mgtsystems.com.

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Carlton, Starbucks, Walmart and many others all have formal statements of their

culture.




THE PROBLEM


In spite of this recognition, several companies with reputedly strong positive

corporate cultures have experienced grave difficulties because of their strong
culture! These include IBM, Hewlett-Packard, and GE.


Why did IBM, Hewlett-Packard, and GE (companies with vaunted corporate
cultures) experience grave difficulties after many decades of success? In brief, the
reason is that they all have cultures articulated by corporate leaders based upon

what their leadership believed the company’s core values ought to be rather
than based upon what actual empirical research has indicated what the key

dimensions of corporate culture should be.


Purpose

The primary purpose of this article is to explain the irony of why these formerly

great companies (all of which were once celebrated for their strong positive
cultures) fell from grace, precisely because of inadequacies in their cultures! A
related purpose is to provide information about what the key dimensions of cultures

are so that other companies can create strong positive, and durable (sustainably
successful) cultures!


Corporate Culture and The Decline of IBM


IBM is one of the most iconic names in business. For many years it was justifiably
renowned for its corporate culture.


I personally learned about IBM in the early 1980s when I was invited along with

about 5 other professors to visit at their expense and learn about IBM and its
human resource management practices. I always have a list of about ten companies
I would like to know more about and IBM was at the top of that list. I made the visit



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and was suitably impressed. In my view, it was the best managed company I had

ever seen… by far! Its talent was awesome. For example, I will never forget the
person who was responsible for “Benefits” at IBM. I recall his name but that is not
important. What is important is that I judged that he was the equivalent to

managers I had met who were running companies and divisions at other
companies! During a reception prior to dinner that evening off site of the IBM
campus, I spoke with the then SVP of HR, Walt Burdick, who was also very

impressive. I mentioned how impressed I was with “Jim P,” the head of benefits.
He understood my implied point immediately. His answer staggered me. He said

simply, “People are important at IBM, and Benefits are important to people. We
want someone in that role who will do a good job. Jim will get other assignments
later.” The implications were again staggering. For many, if not all companies at

that time, human resource management was a bit of backwater. The most talent
people were not in human resource management. IBM was so deep in talent that

they had a division caliber manager managing Benefits!

As follow up to that initial visit, I was invited to do several consulting projects for

IBM, I was even more impressed. For example, I was invited to do a then
confidential project involving a scan of the literature to assess the economic,
political, technological, and other factors on IBM from 1985 to the year 2000. It was

a nine-month study, and then I presented my findings to IBM in a report and at a
meeting in upper New York State near Armonk. At that time, other companies were

considering the possibility of doing strategic planning, but here was IBM doing a 15
year “Environmental Scan!” I subsequently learned that they had already done a
similar study internally, and they wanted an objective external look at the same

issues! What an amazing company.

It’s the Culture, Stupid!


How could a company so deep in talent and so forward thinking like IBM decline?

Yet it did, and, in retrospect, as I analyzed it, I understood the subtle flaw the led
IBM into decline. The problem was, ironically, the vaunted IBM culture.








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Architects have a concept to “negative space.” Roughly, it’s not the space that the

structure occupies, but the space that it does not occupy! At IBM, the problem was
not what the culture was-- but what it wasn’t!


What does that mean? IBM was strong in culture management; it had a set of three
core values (termed beliefs). Specifically, there core values were:


 Respect for the individual

 Excellence in customer service and
 Excellence in everything we do.


There was nothing wrong with these core values. The problem was the values that
were not there, as explained below!





FIVE KEY DIMENSIONS OF CULTURE


My published empirical research has found that there are five key dimensions of
culture:


(1) customer orientation,
(2) orientation toward employees,

(3) standards of performance and accountability
(4) innovation and/or commitment to change and
(5) company process orientation.


These dimensions of culture are explained 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.






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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 or strategic mission is customer satisfaction, which hopefully will

encourage them to return to the park in the future (create and or enhance
customer loyalty).


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 Dallas, Texas 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 (while remaining highly
profitable).





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 this cultural
value: 1) how people are viewed with respect to their roles within the firm and 2)
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





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employees are considered ‘‘second class citizens." Regardless, treatment of people

is a key dimension of corporate culture.




Performance Standards & Accountability. 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


Another key aspect of culture is “accountability.” Unfortunately, there are many
examples of companies in which accountability is not explicitly part of the culture.





Commitment to Change and Innovation. The fourth major cultural element is

how a company views and reacts to and manages change, including
innovation. Growing organizations that embrace change as a “way of life” tend to
experience less difficulty in making the required transition. Those, in which change

is viewed as threatening, tend to experience sometimes significant
problems. Innovation is an aspect of change, but it is also important in itself. It
includes not only produce innovation but also innovation in organizational processes

and methods.





Company Process Orientation. The fifth and final major cultural element focuses
on the view that people hold of certain specific aspects regarding how the company
operates. These processes are decision-making, communications, and the planning

process. Some organizations and some national cultures are more process oriented
than others. The particular dimension of culture has great relevance to the
transition from entrepreneurship to professional management that is a stage of

growth for many companies.









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THE CULTURAL PROBLEM AT IBM


Give the above discussion, we can now explain the cause of the cultural problem at
IBM. Specifically, the cultural problem was that IBM’s core values did not include

the last two dimensions of culture cited above, but especially commitment to
change. IBM did have strong “company process orientation,” but it was not an
explicit part of their stated culture.


Resistance to Change


What happened? The actual problem was that IBM saw itself as a “Big Iron”
company—specifically, a main-frame company. IBM, it will be recalled, set up a

separate division in Boca Raton to create its famous “PC” to compete with Apple, et.
al. and it was successful! I recall an issue of Business Week that where the cover
said: “… and the Winner is…IBM! Unfortunately, the mainframe folks at IBM would

not accept the success of the PC because it competed with their cash cow-- the
mainframe! They told customers “you don’t need these ‘PC’s; you can do everything

you want with a mainframe and dumb terminals”! and for a while this sales
message worked—until it didn’t! When it stopped working and mainframe sales
began to decline, there were serious consequences.


The Consequences of the Cultural Omission at IBM


When I visited IBM, we discussed their “no layoff practice.” One visitor erroneously
referred to it as a “no layoff policy.” He was corrected. It was a practice not

a policy! In effect, IBM reserved the right to do a layoff if and when it was
deemed necessary. And ultimately, because of the lack of willingness to change

when micro computing was developed, IBM had their first ever layoff, and went
from 425,00 people to 165,000 people, while allowing Microsoft, Intel, and Apple
among other to become giants! All due to as subtle flaw in their culture, a flaw of

omission not commission!


What was required was a culture that was committed to change and innovation—
not to resistance to change and to the suppression of innovation.




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THE UNDERLYING PROBLEM: AN INVALID


APPROACH TO CREATING CORPORATE VALUES

STATEMENTS


Unfortunately, the problem at IBM was that its culture was based on an “’Apriori’

approach” to culture creation. The term “Apriori” refers to “relating to or denoting
reasoning or knowledge which proceeds from theoretical deduction rather than
from observation or experience.


Virtually all culture statements I have seen are attempts based upon ad

hoc statements of core values that have “face validity” (that is, intuitively “make
sense”) to organizations. These statements of corporate core values 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 “doing more
with less,” “the best idea wins,” and “working managers.”


Virtually all of these examples (while well intended) are based upon an overly

simplistic approach to developing culture statements.


Even a very successful organization such as Netflix is a good example of this
problem. Netflix states that these are its seven values:


 Values are what we Value
 High Performance

 Freedom & Responsibility
 Context, not Control
 Highly Aligned, Loosely Coupled

 Pay Top of Market
 Promotions & Development








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We can term this approach to be one where a company makes “assertions of

values.” Specifically, this means that a company states what it wants its value
to be.


Although on the surface, this approach seems to be reasonable, even a cursory
examination indicates a few problems:


1) The stated values of Netflix are not all "value statements." The first,

“Values are what we value” is a definition of value, not a value
statement per se. Some statements are values of a sort (i.e. “High
performance" and "Freedom and responsibility,” and some are practices

(i.e., pay top of market). Stated differently, these purposed value
statements are “apples and oranges.” They are all related to values IN
SOMEWAY but comprise different kinds of constructs. Stated differently,

there is problem with construct validity even on a face validity basis.


2) There is no verifiable empirical support to show that there are the
“real” values of Netflix or that they are drivers of behavior or the
organization’s success. There are two kinds of values: stated

values and real values. Stated values are what the company thing it
values are or ought to be. Real values are what actually drives behavior in
an organization.





The Core Problem with Ad Hoc or Apriori Culture Statements


The problems identified above are not unique to IBM and Netflix. Although on the
surface the approach to “assertions of values” illustrated by Netflix seems to be a

reasonable approach, there are two significant problems with this “method” of
deriving a set of core values. First, how do we know that these asserted values are
meaningful or relevant to performance and organizational success? Stated

differently, the core problem is that ad hoc values are lacking in support
by empirical (predicative) validity. Second, how do we know that these asserted
values are what the key core values ought to be?



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THE BOTTOM LINE


The Bottom Line is that an optimal or correct approach for defining corporate
culture is that core values must be based upon the five core value dimensions that

our empirical research has identified: (1) customer orientation, (2) employee
orientation, (3) standards of performance and accountability (4), innovation and/or
commitment to change and (5) company process orientation.


Our original empirical research has found that these five key dimensions of culture

which have a statistically significant relationship to (are shown to effect)
financial performance. 107


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. 108


The Bottom Line is that companies ought to be using the five of areas of
corporate culture values which we have identified as the categories to

develop their core values. Failure to do so implies that one or more of the crucial
areas of culture which have been shown to impact financial performance might be
neglected. This, in turn, means that the management of corporate culture will be

suboptimal.















107 Eric Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset, Stanford
University Press, 2011
108 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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“OVERCOMING A NEAR DEATH



EXPERIENCE: THE EXAMPLE OF



WESTFIELD’S”































By: Eric G. Flamholtz, PhD Published on November 7, 2020


Abstract


This article reprises the construct of the “The Icarus Syndrome,” which we define as
the demise of a company after a period of “flying high” with dazzling success. It

examines a case example of a once high-flying company (Westfield’s) that nearly
had the near-death experience of “The Icarus Syndrome.” Finally, it examines the
implications for organizations currently “flying high” with dazzling success (like

Tesla and Zoom), but which are potentially victims of the “The Icarus Syndrome,” if
they do not take necessary preventative actions.










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Author’s Note to Readers:


This newsletter focuses upon various aspects of the development of
“Sustainably Successful Organizations.”℠


The November issue focuses upon how an organization can to recover and

learn from a near-death experience. First, it reprises the construct of the “The
Icarus Syndrome,” which we define as the demise of a company after a period

of “flying high” with dazzling success.

It also examines a case example of a once high-flying company (Westfields)

that nearly experienced the “The Icarus Syndrome” but was saved by the
leadership of Frank Lowey, which changed the strategic direction and culture
of his company as it was about to “go over the edge.”


Finally, it examines the implications for organizations like Tesla and Zoom,

companies currently “flying high” with dazzling success, but potentially
victims of the “The Icarus Syndrome,” if they do not take necessary

preventative actions.

This newsletter is addressed to various groups including general readers, our

clients, and our licensed global affiliates as well as to investors. 109





Introduction

Once upon a time, Westfields, founded and based in Sidney, Australia, was

a high-flying company—just like Tesla, Zoom, Uber and others too
numerous to mention are today. Unfortunately, Westfields and its co-founder
Frank Lowey experienced a near-death experience of what we have termed “The

Icarus Syndrome.”




109 Our global affiliates are independent consultants in various countries who are licensed, trained,
and certified to deliver our methodologies and tools. Currently our affiliates are in Argentina,
Bulgaria, China, Italy, India, Kazakhstan, Poland, Russia, Singapore, and Vietnam. See:
www.Mgtsystems.com.

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THE “ICARUS SYNDROME”


In Greek mythology, Icarus is the son of Daedalus trapped on the Island of Crete.
Icarus and his father attempted to escape from Crete by flying with wings that his

Daedalus (a master craftsman) constructed from feathers and wax. Icarus ignored
his father's instructions not to fly too close to the sun. Ignoring his father’s
advice, Icarus flew too close to the Sun and the wax holding his wings melted. He

tumbled out of the sky and fell into the sea where he drowned. 110


The tragic theme of the Icarus myth or legend concerns “death” and failure from
what the Greeks’ termed “hubris.” Specifically, the Greek conception of hubris
refers to the notion that an individual’s own personality contains a tragic flaw that

will ultimately lead to their destruction. It has become an eternal lesson in Western
thought.


The “Icarus Syndrome” in Business


The “Icarus Syndrome” has profound implications for leaders of business
enterprises.


Many companies experience a period of “dazzling success” followed by virtual
death. Just as Icarus died when he fell from the sky, “high flying companies” can

also “die,” if not literally, by becoming corporate Zombies or entering bankruptcy.
Examples of once high-flying companies that have experienced the Icarus

Syndrome include Boston Markets, Webvan, and Osborne Computer.













110 Gabi Ancarola, “The Tragic Story of the Fall of Icarus,” April 17,
2018: https://greece.greekreporter.com/2018/04/17/the-tragic-story-of-the-fall-of-icarus/

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THE PROBLEM WITH HIGH-FLYING BUSINESSES


AND THEIR “DAZZLING SUCCESS”


Unfortunately, such “dazzling success” in High-Flying Businesses can create its own
problems. Extraordinary growth is typically accompanied by a classic set of

problems known as “Growing Pains. 111 ” The nature and causes of these growing
pains has been described in previous articles. In brief, growing pains are problems
in and of themselves, but also an indication and early warning of deeper systemic

problems. Specifically, growing pains indicate that the “infrastructure” of an
enterprise (i.e., the internal operational and management systems it needs at a

given stage of growth) has not kept up with its size, as measured by its revenues.
For example, a business with $200 million in revenues may only have an
infrastructure to support the operations of a firm with $50 million in revenues, or

one-fourth its size. This type of situation typically occurs after a period of growth,
sometimes quite rapid growth, where the infrastructure has not been changed to

adjust to the new size and complexity of the organization. The result is an
“organizational development gap,” (that is, a gap between the organization’s actual
infrastructure and that required at its current size or stage of development) which
produces the growing pains.


Our research has also indicated that growing pains are an early warning indicator of

future declines in profitability. 112 In brief, rapid growth leads to growing pains, and
growing pains are the classic precursor or early warning symptoms of the

susceptibility to the “Icarus Syndrome.”

Examples of Currently High-Flying Businesses: Tesla and Zoom


There are a number of current examples of currently high-flying businesses

experiencing “Dazzling Success.” For corporations, “Dazzling Success” occurs not
just in sales and products, but also in stock market valuation. For example, Tesla



111 See Eric Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
Organizations, Wiley 2016.
112 See Eric Flamholtz, “Is Tesla’s is being “Built for Sustainable Success?” Part 2: Empirical Research
Support for the Model Used to Assess Tesla’s Development,” Linkedin, September14. 2020.

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has become the most valuable car company in the world. Its total market

value has exceeded that of Toyota. The market is placing a value of $1 million per
car delivered by Tesla, while it places a value of $10,000 per car delivered by
GM. 113 Similarly, spurred by the restrictions on face to face contact from the

pandemic, Zoom has become virtually iconic. Its usage and revenue have
accelerated dramatically, and its share price has increased almost 600 % from
about 69 pr share on January 2, 2020 to about $480 per share on October 5. Its

market value increased to about $136 Billion.


Growing Pains at Tesla and Zoom


There is evidence that growing pains have emerged at all three of our examples of:
Tesla, Uber, and Zoom:


 Tesla:
o There are clearly problems in Tesla’s operational systems. Specifically,

In February, 2018, an article in the Los Angeles Times was entitled
“Tesla’s Troubles. 114 ” It discussed some early problems that are being
reported by “Model 3” owners. Later in the article it referred to “Tesla’s

‘Growing Pains.’” 115
o On June 25, 2020, an article in the Wall Street Journal, states “Tesla

Falls Short in Customer Satisfaction Survey. 116 ”

 Zoom:

o The explosive growth of its usage has led to some technical problems in
Zoom’s operational systems, including problems of logging in, echoes,
and security issues. Although these are clearly warning symptoms of

growing pains, they are relatively less severe that the problems at Tesla






113 Ben Levinsohn, The Trader “Thanks, Apple for the Stock markets All-time High,” Barron’s, August
24, 2020, p. M1.
114 Russ Mitchell, “Tesla’s Troubles,” Los Angeles Times. Business, pp.1 and 7, February 18, 2018.
115 Ibid, p. 7.
116 Tim Higgins, “Tesla Falls Short in Customer Satisfaction Survey,” Wall Street Journal, June 25,
2020, p. B. 1

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or Uber. Nevertheless, they are an early “wake up call” that there are

issues to be resolved by Zoom.

Regardless of the nature of the specific problems faced by Tesla and Zoom, growing

pains are an indication of potential vulnerability to the “Icarus Syndrome.”




THE UNDERLYING CAUSE OF THE “ICARUS


SYNDROME”


Why do enterprises experiencing “Dazzling Success” sometimes become victims of
the “Icarus Syndrome”? To answer that question, we must look to the Roman deity
Janus. The Roman deity Janus is always depicted with two-faces. This is symbolic of

change, transitions, and (of most relevance in this context) multiple dimensions of
the universe.


With respect to business enterprises, the symbol of Janus represents two different
but related dimensions or sides of a business: The “product” dimension and the

“organizational” or infrastructure dimension:


The “product dimension” refers to the products and or services offered by an
enterprise. For example, at Tesla it refers to the automobiles manufactured and
sold by the company. For Zoom, it is the service provided for video

communications.


The “organizational dimension” refers to the architecture and infrastructure
required to operate a business on both a short and long-term basis. In my model of
organizational development (The Pyramid of Organizational Development™), the

architecture and infrastructure required operate a business consists of the
resources, operational systems, management systems, and culture of an enterprise
(the top four levels of the Pyramid). 117





117 For a discussion of this model, see Eric Flamholtz, “Is Tesla Being “Built for Sustainable
Success”℠? Linkedin, September 2. 2020

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Based upon our research and experience, the finding is that all business

organizations must manage both dimensions in order to be
successful. However, the underlying cause of the “Icarus Syndrome” is the failure
of leadership to manage both dimensions required for sustainable organizational

success. The classic problem of rapidly growing organizations is in their focus on the
product dimension, they tend to neglect the organizational or infrastructure
dimension. This is what causes the growing pains and ultimately can lead to their

demise.


In the short term, an organization can cope with its growing pains by using the
extraordinary revenue that always accompanies “Dazzling Success” to “mask” its

problems. However, in the long run that “extraordinary revenue” will always be
dissipated from increased competition or internal operating problems, leaving the
organization vulnerable to problems without the “extra” resources to cope with

them or mask them.




THE NEAR-DEATH EXPERIENCE OF WESTFIELDS 118


On October 24, 2007, Frank Lowy, Chairman of the Westfield Group (“Westfield”)

addressed a group of the most senior leaders of Westfield at a dinner in Sydney,
Australia in connection with a “graduation” from Leadership Development
Program. 119 The dinner took place on Lowy’s yacht in Sydney harbor. The author

(Eric Flamholtz) was serving as co-Faculty Coordinator for this program and was in
attendance at this dinner. He expected Lowy to talk about Westfield and its great
strengths and promising future. However, Flamholtz was astounded when Frank

Lowy chose not to discuss the strengths of Westfield but to reflect back on the
company’s greatest moment of crisis.







118 This section is adapted from Eric Flamholtz and Yvonne Randle, is The Crisis Leadership Playbook,
Vandeplas Publishing, 2020.
119 Presentation by Frank Lowy to attendees of the UCLA-Australian Graduate School of Management
“Westfield Executive Development Program,” October 24, 2006, Sydney, Australia.

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He reflected back on the lessons from Westfield’s ill-fated acquisition of Channel

Ten in Australia as a result of the attempted diversification into media business and
the near bankruptcy that it caused. Lowy said that this experience was a great
lesson in managing failure.


At that dinner, he pointed out that not all business decisions result in success;

some are inevitable failures. Lowy discussed what he had learned in dealing with
the problems of Channel Ten and identified the steps Westfield had taken to
address these problems.


Flamholtz was impressed by Lowy’s candor, humility, and his leadership during the

crisis. He later asked permission to write a case about this crisis.

This article provides background on the origins of Westfield in 1960 and then

describes how company leaders engaged in an ill-fated diversification in the early
1980s that led to an existential crisis for the company. Finally, it examines how

Frank Lowy, then Executive Chairman of The Westfield Group, led Westfield thru a
“minefield” to save his company and identifies what leaders can learn about
managing a crisis caused by diversification.


Westfield’s Background and Events Leading to a Crisis


John Saunders and Frank Lowy were Eastern European Jews who survived the
Holocaust and emigrated to Australia in the early 1950’s. Their first partnership was

a delicatessen in Blacktown, a suburb of Sydney, where they served a mixed
population of railway commuters and workers who were European

immigrants. Soon, they opened an espresso bar in a nearby shop, which became a
great success with local Italian immigrant workers.


Within a few years, they began their initial venture in land development by
purchasing and subdividing local farms around Blacktown to meet the housing
needs of the expanding population. In what would be a characteristic of their

approach to business, the partners personally involved themselves in the details of
developing and selling their lots.






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Success in property development prompted Saunders and Lowy to convert their

partnership into a private company called “Westfield Investments.” They expanded
from developing property into retail shops. In 1958, they sold the delicatessen and
focused all of their energy on property development.


Pioneers in the Australian Shopping Center Industry: 1956-1960


Australia’s first two modern shopping centers opened in 1957. Saunders and Lowy,

who had already read about the success of shopping centers in the United States,
were determined to develop their own. While Frank was overseeing the building of
their first shopping center in Blacktown, John traveled to the United States to

survey shopping centers there. He met with developers and retailers and visited as
many shopping centers as he could fit into his schedule. He noted the importance of
car access and parking facilities to success.


Westfield Place in Blacktown opened in the summer of 1959. It had twelve shops, a

small department store and a small supermarket, arranged around an open square,
with a “car park” to the side. The center drew many shoppers, and Frank and John
began to receive unsolicited offers for partnerships and joint ventures.


To obtain new sources of capital for expansion, shares of a public company,

Westfield Development Corporation Ltd., were floated in September 1960. The
partners decided that the public company would own four Westfield properties. Two
business executives with public company experience helped Frank and John form

the public company and joined the board of directors.


While Frank and John conferred closely on all business decisions, their roles in the
company were becoming more clearly defined. John focused on finding new
business opportunities, while Frank focused on the financial and legal aspects of

running the company and on assessing the potential for risk and reward in the
business opportunities that John identified. One business partner observed how
effectively Frank and John complemented each other: “John was an astute,

calculating operator and while Frank was equally so he was a bit more casual and
friendly. Frank would calm John down if he became heated during





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negotiations. John was a bit impulsive, Frank a natural diplomat. But it’s my opinion

that one without the other wouldn’t have had the same success.” 120

In 1960, Frank had a chance to make his own trip to the United States to study how

shopping centers and motels were run in California. Over the years, Frank and John
went to the United States periodically, often to attend meetings of the International

Council of Shopping Centers, and frequently came home with new ideas.


As the business continued to expand, the partners’ roles evolved. Frank took
responsibility for management and administration. John oversaw leasing, marketing
and promotion. John loved to spend his time at the shopping centers. He had an

instinctive ability to judge the success of individual shops and he enjoyed
exchanging ideas with local center management about ways to draw more
traffic. Frank valued detailed financial planning and budgeting. “Frank was not given

to rash decisions and his orderly method combined well with John’s appetite for
expansion and growth.” 121


An example of the detailed, hands-on approach to running the business was the
way the two partners would spend Saturday mornings. They would drive to one or

more of Westfield’s shopping centers to assess crowds (based on cars parked) and
mingle with shoppers to hear their opinions.


Growth and Expansion: 1961-71


Throughout the 1960’s, Westfield expanded into other parts of Australia. Besides
opening new centers, Westfield invested in redeveloping existing centers where

there was an opportunity to enhance revenues and improve profitability. The pace
of business growth and the intense involvement of the top executives was
remarkable. “From the mid-1960s to the mid-1970s, the company was opening a

shopping center a year. To keep up with the exponential increase in work, Frank








120 Tom North of retailer G.J. Coles, quoted in Jill Margo, Frank Lowy: Pushing the Limits, Harper
Collins 2000, p. 87.
121 Margo, p. 91

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and John were each putting in twelve to sixteen hours a day. … Every detail about

every development was decided by them; everyone reported to them. 122

In 1971, its eleventh year as a public company, Westfield announced its eleventh

consecutive profit increase and announced a name change to Westfield Ltd. Further
recognition of the business’ attractiveness came in the form of an investment in two

new Westfield shopping centers by the European company General Shopping SA, a
Luxembourg-based investment company and an associate of Credit Suisse.


Westfield’s Situation and Factors that Led to the Crisis


By 1972, Frank Lowy and John Saunders realized that the shopping center market
was reaching a saturation point and they began looking for opportunities to
diversify. In 1986, Westfield Capital was created as a vehicle for long-term equity

investments in companies outside of the shopping center industry. Consistent with
the incremental approach used at the company – which served it well as a leader in

the shopping center business – this process was the results of many individual
decisions, versus having a “grand design.”


Westfield’s expansion and diversification took place in two phases: Phase 1 – Entry
into the U.S. market and continued expansion in Australia, 1972-1984; and Phase 2

– Diversification outside of the real estate industry, 1985-1989. Although Phase 1
was well thought out and executed, a “crisis” emerged in Phase 2 brought about by
the diversification into the Media business and the acquisition of Channel Ten in

Australia.


In retrospect it seems that Westfield did little due dalliance to understand the
nature of the media business in general or the situation at Channel Ten in
particular. In addition, Westfield had evolved an approach to planning that was

based upon a series of the incremental decisions rather than compressive strategic
planning. This incremental approach, which served it well as a leader in the
shopping center business (probably because they knew that business well), was

clearly not sufficient for entry into a new business. The acquisition of Channel Ten
was characterized by inadequate due diligence, lack of in-depth analysis, and


122 Margo, p. 102

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limited preparation for this diversification initiative. Since the nature of its planning

for entry into the media business was not comprehensive or sufficient, not
surprisingly Westfield soon found itself enmeshed in a crisis.


Key aspects of the crisis can be summarized as follows:


 Soon after the acquisition was completed, Westfield and its partner Northern
Star began to experience a variety of acquisition-related problems.

 Channel Ten quickly became a financial drain on Westfield Capital.
 The global stock market crash in October 1987 caused a sharp drop in the
market capitalization of Westfield Capital, as well as a collapse of media share

prices in Australia, which, in turn, put additional financial stress on Westfield.
 Both factors combined to put Westfield at risk.


Lowy’s Leadership Initiatives to Manage the Crisis


Even though, at some level, Frank Lowy wanted to “stick with the deal,” he made
the decision to exit the media business and take his losses. He authorized the head

of Westfield Capital to work out a plan for exiting the business and gave him a
budget of $200 million to accomplish this.


On September 1, 1989, the exit was completed. The core Westfield business
remained intact and was now protected from the financial albatross that Channel
Ten represented.





LESSONS FROM THE LEADERSHIP OF WESTFIELD

DURING THE CRISIS


The first lesson is that adequate planning – especially when diversifying away from
a company’s core business – is important. Stated in a different way, ineffective

planning can actually lead to a crisis. In Westfield’s case, there seems to have been
a relatively superficial analysis of and plan for purchasing and then managing

Channel Ten in Australia. Westfield leadership never addressed some fundamental



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questions, including “How does this fit with our business?” “Do we know how to

manage this type of business?” etc. Then, the external economic crisis involving
the decline of markets made the situation worse; but it was not the precipitating
cause of the crisis.


A second lesson involves managing the expectation of success. The crisis facing

Westfield was caused by inadequate planning, but this was combined with
overconfidence due to a history of previous success. Westfield had the desire to
expand and had experienced nothing but previous success.


A third lesson is to be willing to admit that a bad decision was made and move

on. The decision to exit the media business took courage, but it also minimized the
impact that this decision was having on the company’s financial performance and
success. Making a commitment to something and sticking with it is “human nature,”

but sometimes sticking with something can eventually take the company completely
down. The unwillingness of Sears to abandon its historical core retail business even
after it proved to no longer be viable is an example of sticking to something even

after it becomes obvious that it is doomed to failure.


A fourth lesson is to never abandon a “winning formula for success” – although as a
company grows and as new opportunities present themselves, it may need to be

adjusted. At Westfield, the winning formula was its use of “small incremental steps
and investments to get on the learning curve.”


A final lesson from this case study is to “learn from our mistakes.” When the crisis
is “over,” ask what you should have done differently, and plan to remember that in
the future. Build this learning into the systems, processes, and culture of the

company so that it can be used to minimize the probability that a crisis of the same
type will occur in the future and so that it can be also be used as the basis for

addressing future crises. Although the diversification into the media business was a
significant business failure for the Lowy family and Westfield, the Lowy's and the
company did learn some lessons that were ultimately to prove invaluable to

Westfield’s future success.





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Evaluation of the Leadership Initiatives


The leadership process of dealing with the Channel Ten crisis led by Frank Lowy was
designed to overcome a business failure and near-death experience. It was,

however, a successful extrication from that business failure. As such, it provides an
excellent model of how to handle a crisis brought about by a company’s desire to

grow through diversification. In addition, Westfield needs to be acknowledged for
learning from a mistake and actually using these lessons to improve/enhance the
company’s future effectiveness.


Epilogue


In 2017 when Unibail-Rodamco acquired the Westfield Group for $16 billion, it
marked the end of the long journey that had begun with company’s inception in

1960.


Our best guess about the rationale underlying this decision is that Frank Lowey,
who understood the Mall business very well, could clearly see the threat of “on-line

shopping” coming, and decided to “cash in some of his chips.” Although we do not
know the details of the agreement, we do know that the Lowey family retained a
“substantial” interest in Unibail-Rodamco, and very likely also used the deal to

diversify and protect its core assets. The deal seems to be a well-conceived
“endgame” for Lowey and his family as well as Westfield’s other shareholders.




THE BOTTOM LINE IMPLICATION FOR TESLA,


ZOOM, ET. AL.


Although Tesla, Zoom, and several other recent companies have achieved dazzling
initial success, as the experience of Westfields shows, initial success is not a
guarantee of continued future success. Failure to do what is necessary to manage

an organization effectively is likely to lead to the Icarus Syndrome.






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MADNESS, MR. MARKET’S



MYOPIA, AND MACHIAVELLIAN



MACHINATIONS: TESLA ADDED


TO THE S&P 500





































By: Eric G. Flamholtz, PhD Published on November 22, 2020

On September 5, an article on Barron’s online by Al Root was titled “Tesla wasn’t

Added to the S & P 500. The Market isn’t Happy.” 123 The article begins with the
statement that “The news will surely disappoint Tesla Bulls who have been waiting
for the addition since the company reported a profit in the second quarter, helping

it meet key criteria for index inclusion.”







123 Al Root, “Tesla wasn’t Added to the S& P 500. The Market isn’t Happy,” Markets/Barron’s Take,
September 5, 2020.

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This past week, Tesla was added to the S & P 500. Why? As pundit Jim Cramer

said: They couldn’t figure out how to avoid it.

What happened? Was its Madness, Market Myopia or Machiavellian Machinations?

Or all of the above? Let’s look at each alternative.




MARKET MADNESS



The madness of crowds has been well documented throughout history. Market
madness has led to a variety of spectacular but unsustainable crazes, including the
Great Tulip crazy of the seventeenth century; Britain’s “South Sea Bubble” in the
eighteenth century; the Great Railroad boom of the nineteenth century which ends

in a bust; and, of course, the Grand Daddy of them all—the great stock craze of the
early 20th century that ended with the crash of ’29. 124


Market Madness, S & P Myopia and Tesla: The Illusion of Profitability


With a nod to Gertrude Stein, Profit is not Profit is not Profit! While
Tesla technically achieved a profit as measured under “GAAP,” the S & P

Committee surely must have understood (what the many in the general public and
market does not) that Tesla’s profit while legal was merely an artifact of its receipt
of payments by other automakers (called “regulatory credit revenue”) as a form

of “carbon tax” on their operations. Specifically, “Tesla reported profitable second-
quarter GAAP results, and adjusted diluted EPS of $2.18 rose significantly from the

prior year’s quarterly loss of $1.12. We calculate Tesla had a pretax loss of
$278 million excluding $428 million of regulatory credit revenue.” 125 This
is revenue not from operations, a governmental mandated subsidy for

electric vehicles.


When these payments will cease Tesla’s earnings will be reduced significantly.
Currently they would be “negative earnings” (that is, a loss!). Accordingly, one can


124 See John Kennethc Galbreath, “A Short History of Financial Euphoria,” Viking Penguin, 1993.
125 Analyst Note David Whiston, CFA, CPA, CFE, Analyst, 22 July 2020. Morningstar Equity Analyst
Report | Report as of 23 Jul 2020 03:20, UTC | Page 1 of 15

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argue that this is not “real” earnings, or at least that they are not sustainable

earnings.

If the stock buying public changed its perspective and did not give Tesla “credit” for

“regulatory credit revenue,” its stock price might decline precipitously.


The criteria for inclusion in the S& P 500 are:


“To be eligible for S&P 500 index inclusion, a company should be a U.S. company,
have a market capitalization of at least USD 8.2 billion, be highly liquid, have a
public float of at least 50% of its shares outstanding, and its most recent quarter's

earnings and the sum of its trailing four consecutive quarters' must be positive 126 .”


While on paper Tesla meets the technical criteria for inclusion in the S& P 500, the
ability to meet the criterion of earnings is an artifact of its receipt of payments by
other automakers (called “regulatory credit revenue”) as a form of “carbon tax”

on their operations. While these are technically “real” rather than “phantom
earnings,” they are not earnings from operations.


Respectful Query: Does the S& P committee understand Accounting? What
else can explain this S & P Committee myopia?




TESLA’S GROWING PAINS: IS TESLA BEING BUILT


FOR “SUSTAINABLE SUCCESS”?


In February, 2018, an article in the Los Angeles Times was entitled “Tesla’s
Troubles. 127 ” It discussed some early problems that are being reported by “Model

3” owners. Later in the article it referred to “Tesla’s ‘Growing Pains.’” 128









126 Dow Jones Indices Criteria for inclusion in S & P 500.
127 Russ Mitchell, “Tesla’s Troubles,” Los Angeles Times. Business, pp. 1 and 7, February 18, 2018.
128 Ibid, p. 7.

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On June 25, 2020, an article in the Wall Street Journal, states “Tesla Falls Short

in Customer Satisfaction Survey. 129 ”

Storm Warning: Growing Pains are hazardous for corporate health!


 Danger ahead: Growing pains are a classic leading indicator of future

financial difficulties.
 Warning: Growing pains are a symptom of a deeper systemic

problem—the organization has outgrown its infrastructure.
 Companies that ignored growing pains often become Corporate
Zombies, including Delorean Motors, Osborne Computers, and

Webvan.

In another article, I recently provided a detailed assessment of whether Tesla is

being built for “sustainable success. 130 ” My conclusion is that:


“Currently Tesla’s overall average score of 3.0 places Tesla in the category of
“Marginally Successful Organizations.” In fact, Tesla’s score of 3.0 is barely

above the category of companies that are “at Risk,” which includes companies
which scores are less than 3.0.


What Is Mr. Markets Response? “Doesn’t Matter”!



OTHER EXPLANATIONS FOR MARKET MADNESS


AND S & P COMMITTEE MYOPIA


If the market and the S & P Committee do not care about real profits, what else can
be the rationale for the continued rise in Tesla’s stock price and the Committee’s
seemingly irrational decision to include Tesla n the S & P 500?








129 Tim Higgins, “Tesla Falls Short in Customer Satisfaction Survey,” Wall Street Journal, June 25,
2020, p. B. 1
130 Eric Flamholtz, “Is Tesla Being “Built for Sustainable Success”℠? Linkedin, September 2. 2020

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Some other possible explanations for Market Madness and S & P Committee Myopia

are:

 Could Elon Musk be a master magician and creating a spell over the market

and the


S & P Committee?


 Could it be a consequence of Covid-19?
 Could it be a Machiavellian ploy by the US Government?
 Could it be all of the above?




A Machiavellian Ploy by the US Government?


Could it be that the US Government has decided that Tesla is “too important to
fail”??? Are they so committed to a zero-carbon future that all electric cars are a
Musk—sorry, I mean Must!


Humm. Don’t know yet.





THE BOTTOM LINE?


So, the answer to the question “why Was Tesla Added to the S& P 500"? is simply
not clear.


Tesla has yet to demonstrate (prove) that it is a sustainably successful,
profitable company. Yet Mr. market has decided to continue to purchase its

stock at a current PE ratio (as of Friday November 20) of about 936! That is
Nine hundred and Thirty-Six!


PE ‘Shmee-he’. Some years ago, when I was trying to coach my brother on stock
investing and he wanted to buy Coca-Cola which then had a PE of about 60, he

said, memorably: “PE ‘Shmee-he.’ I’m buying it.” For full disclosure, my brother




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is what I call a “financial magician--” that is, he makes money disappear. And, so

he did, with Coca-Cola. The money just disappeared.

So, the market is saying-- “PE ‘Shmee-he.’ I’m buying it.” PS: So is my

brother.


Does the market, The S & P Committee, and Mr. Brother know something
that we don’t? Or are they all simply being stupid. Humm. Don’t know yet.





To read the follow-up article use the link below:
https://www.linkedin.com/pulse/magicians-illusionists-elon-musk-new-

houdini-eric-flamholtz/

















































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“HOW LEADERS CAN NAVIGATE



A CRISIS SUCCESSFULLY” 131


























By: Eric G. Flamholtz, PhD and Yvonne Randle, PhD Published on December 3, 2020

Abstract


Faced with the Covid-19 Pandemic, corporate leaders are searching for insights,

strategies and lessons to help them navigate the problems caused by this
devastating crisis. We recently completed research and analysis of a select sample
companies whose leaders faced crises in the past. This issue of the Management

Systems Newsletter provides a summary and synthesis of the key leadership
lessons learned about successful and unsuccessful crisis leadership. 132 Specifically,
we have identified two different but related sets of findings and lessons for

successful leadership of an organizational crises: 1) principles of successful
leadership of a crisis, and 2) causes of unsuccessful leadership of a crisis









131 © Eric Flamholtz and Yvonne Randle, June 10, 2020. All rights reserved.
132 See also: Eric Flamholtz “CRISIS LEADERSHIP LESSONS: Iacocca Changes the Culture at
Chrysler,” Linkedin, July 1, 2020.


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Author’s Note to Readers:


This newsletter focuses upon various aspects of the development of “Sustainably
Successful Organizations.”℠


Introduction


Corporate leaders are searching for insights, strategies and lessons to help them

navigate the problems caused by the Covid-19 Pandemic crisis. To assist corporate
leaders, we recently completed research and analysis of a select sample companies
whose leaders faced crises in the past. This particular study was part of a long-term

research program to study organizational success and failure.


Objective: Crisis Leadership Lessons and Tools


Our research objective was to derive insights and lessons which might help
corporate leaders navigate the crisis caused by the current Covid-19 Pandemic. This
research is described in our book titled, The Crisis Leadership Playbook. 133




LESSONS FROM PAST CRISES: SUCCESSFUL AND


UNSUCCESSFUL CRISIS LEADERSHIP


This article is one of a related series that has described some of the key lessons
learned about successful and unsuccessful crisis leadership. 134 Although all crises

are different, based upon our research we find that all crises actually have a
number of things in common. Accordingly, current organizational leaders can
benefit from the experience of others who successfully navigated past crises,

and also benefit from the lessons of some other who failed to navigate past
crises successfully.




133 Eric Flamholtz and Yvonne Randle, with a Foreword by Scott Minerd, The Crisis Leadership
Playbook, Vandeplas Publishing LLC, Lake Mary FL. and the ISBN: 978-1-60042-513-4.
134 See also: Eric Flamholtz “CRISIS LEADERSHIP LESSONS: Iacocca Changes the Culture at
Chrysler,” Linkedin, July 1, 2020.


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Our Select Sample


The companies or case studies included in the sample were some of the
most iconic names of US economic history: American Express, Chrysler,

Disney, Eastman Kodak, International Harvester/Navistar, Osborne
Computer, Sears and United Airlines, and Westfield. These case studies

were selected to illustrate both successful and unsuccessful examples of
leadership responses to crises.


The successful examples were American Express, Chrysler, Disney,
Westfield. The unsuccessful examples were Eastman Kodak, Osborne Computer,

Sears and United Airlines. The case of International Harvester/Navistar had
elements of both success and failure; but on balance we view it as a partial-
success.


Prior articles have examined the individual case examples of successful and

unsuccessful crisis leadership. 135 This issue of the Management Systems Newsletter
provides a summary and synthesis of the key lessons learned about successful and
unsuccessful crisis leadership. Specifically, it focuses upon the leadership

responses to organizational crises, and identifies two different but related sets
of findings and lessons for successful leadership of an organizational crises: 1)

principles of successful leadership of a crisis, and 2) causes of unsuccessful
leadership of a crisis.


This article will describe the overall findings and result of this research. It does not
discus all of the details of each case; the details of each case are discussed in the








135 Eric Flamholtz “CRISIS LEADERSHIP LESSONS: Iacocca Changes the Culture at
Chrysler,” Linkedin, July 1, 2020 and Eric Flamholtz “CRISIS LEADERSHIP LESSONS: Culture Change
at American Express, Linkedin, July 7, 2020; Eric Flamholtz, “Unsuccessful CRISIS LEADERSHIP
LESSONS: The Tragic Downfall of Sears, Linkedin, July 13, 2020; Eric Flamholtz “Michael Eisner’s
Successful Crisis Leadership at Disney,” Linkedin, July 21, 2020; Eric Flamholtz, “Crisis Leadership
lessons: The Downfall of Kodak,” Linkedin, July 30, 2020; Eric Flamholtz, “Is Your Organization
Susceptible to a Crisis”? Linkedin August. 11, 2020.



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