MS Year in Review 2020

In addition, if a company is created by the process of corporate acquisitions, or has

experienced at least one acquisition, then even with a fewer number of people the
issue of culture can be critical. Each acquired company comes with its own culture,
and the result can be a kind of a company with multiple personality (culture)

disorder.



HOW TO MANAGE CORPORATE CULTURE TO

ENHANCE ITS VALUE AS AN ASSET OR TO

CONVERT IT FROM A “LIABILITY” INTO AN


“ASSET”?


Based upon our experience in working with companies, we have developed a
systematic approach for the management of corporate culture. This approach

consists of six steps:

Step 1. the culture management process begins with the identification of the
existing corporate culture. These are the current actual values of the organization

with respect to certain key dimensions, such as treatment of customers, etc.



Step 2. The next step is to formulate the ideal or desired culture of the
organization. These are what the organization wants the culture to actually be or

become. In addition, this desired culture can be viewed as the organization’s
“strategic culture” because it is intended to support the overall strategic
22
development of the enterprise. This can be accomplished by either having the
culture defined by the Alpha leader of the organization or be the entire senior
leadership team working together. Typically, it will require (or at least be useful to
have) a facilitator to assist with the development of the culture statements.






22 It should also be noted that steps 1 and 2 can be reversed, with the identification of the desired
culture first and then identification of the current culture. This can be necessary in situations where
there is no strong preexisting culture.

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© Management Systems Consulting Corporation, 2020. All rights reserved

Step. 3. The third step in the culture management process is to assess the extent

to which the current and desired culture are consistent and identify any “cultural
gaps,” that is, significant differences between the current and desired culture. The
key issue here is the extent to which the desired or strategic culture is actually

being practiced in day to day behavior.



Step 4. The fourth step is to develop a plan to actually mange the corporate culture
including cultural change. This will draw upon a set of tools available for the

management of corporate culture. Briefly, these include culture statements,
recruiting people for cultural fit, training and socializing people in the culture, and

the use of rewards as incentives for aspects of culture emphasis such as customer
orientation and or innovation, retention of people fitting the culture, and related
23
tools. Many companies develop specific statements of corporate culture or core
24
values.


Step. 5. The fifth step is to execute the culture management plan. This includes
communicating the changes in the culture.




Step 6. The sixth (and nominally the final step) in the culture management process
is monitoring cultural changes to assess the effectiveness of the culture
management program and determine the necessary future interventions. This, in

turn, leads back to the first step in this process.













23 These are described in depth in Corporate Culture: The Ultimate Strategic Asset, Stanford
University Press, 2011, especially chapter 3.
24 See for example the statement of Starbucks core values in ibid, 144.

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CULTURE MANAGEMENT AS A WAY OF LIFE


Culture management is not a six-steps and done process; it is, or must become, a
way of life in an organization. Although culture generally changes slowly, except

when there are certain major events such as mergers and acquisitions, it does
require change and the organization grows in size, complexity and geographical
dispersion of people.

When this state or degree of culture management is achieved it is typically denoted

by references to “The Hewlett-Packard Way,” or “The Wal-Mart Way.” At that point,
culture management has been engrained into the actual fabric of daily life; it has

become institutionalized as a way of life.



CONCLUDING COMMENTS


From a managerial standpoint, there are some important implications of this

framework for practice. First, we have identified a specific set of cultural factors
which relate to financial performance and, therefore, must be managed. This also
suggests that formal culture statements ought to include or address these factors.

Often cultural statements observed in companies address a variety of ad hoc factors
that seem to have face validity to management. These are not necessarily optimal

practice, unless they specifically address the five key factors identified by empirical
research and linked to financial performance, as described above.

The development, evolution and management of corporate culture are elusive but
critical processes in organizations. Culture is not static, and it is sometimes an

25
extraordinarily valuable intangible asset. The framework presented here is
intended to help more effectively manage the processes that creates and sustains
this invisible but extraordinarily precious asset.







25 See Eric G., Flamholtz, (2005). Conceptualizing and measuring the economic value of human
capital of the third kind: Corporate culture. Journal of Human Resource Costing and Accounting, 9,
78-93.

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This issue is also particularly timely because of the current pandemic, which has led

many companies to take actions and make decisions that decrease the value of its
cultural assets and risk converting it into a liability.









































































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NAVIGATING THE COVID-19



CRISIS: DYSFUNCTIONAL


CULTURAL CHARACTERISTICS



CREATING SUSCEPTIBILITY TO A


CRISIS


































By: Eric G. Flamholtz, PhD Published on August 21, 2020

Purpose


This article is the seventh in a planned series based upon that research that will
describe some of the key lessons learned about successful and unsuccessful crisis
26
leadership. The overarching theme is how to navigate the economic aspects of the






26 See also: Eric Flamholtz “CRISIS LEADERSHIP LESSONS: Iacocca Changes the Culture at
Chrysler,” Linkedin, July 1, 2020.


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Covid-19 Crisis successfully. The current article focuses on the

key dysfunctional cultural characteristics creating susceptibility to a crisis.



Background

A previous article examined the overall preconditions for “susceptibility to a
27
crisis. ” Some of those preconditions for “susceptibility to a crisis included poor
planning, a dysfunctional organizational structure, a dysfunctional performance
management system, and several aspects of cultural dysfunctionality. Poorly

designed or underdeveloped systems and processes, a dysfunctional or poorly
managed company culture, and ineffective planning or plan execution are all
examples of factors that can cause a crisis. However, a dysfunctional corporate

culture stands out as one of the leading causes so organizational crises. This
problem was observed in 8 of the 9 companies in our sample, and was a possible
contributor to the crisis in the ninth company as well. Accordingly, the current

article focuses on the key dysfunctional cultural characteristics creating
susceptibility to a crisis.




HOW TO NAVIGATE THE COVID-19 CRISIS


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.













27 Eric Flamholtz, “Is Your Organization Susceptible to a Crisis”? Linkedin August. 11, 2020.

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Lessons from Past Crises: Successful and Unsuccessful Crisis Leadership


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
28
research is described in our book titled, The Crisis Leadership Playbook.



Navigating a Crisis

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. As a colleague of mine has aptly stated, “A
29
good sailor knows he cannot change the wind, but he can adjust his sails. ”



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.








28 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.
29 I am indebted to Paul F. Wetmore (Managing Director, Wealth Management Advisor, Merrill Lynch)
for this observation.

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Prior articles have examined successful crisis leadership at American Express,

30
Chrysler and Disney, and the unsuccessful crisis leadership at Sears and Kodak.


SPECIFIC FOCUS: DYSFUNCTIONAL CULTURAL

CHARACTERISTICS CREATING SUSCEPTIBILITY TO


A CRISIS


Based upon our research analysis, weaknesses in a company’s culture which can
create the preconditions for “susceptibility to a crisis.” These are cultural

characteristics or traits that leave an organization vulnerable to a crisis and, when
the company does experience a crisis these symptoms put the company at greater
risk. Specifically, we have identified the typical dysfunctional cultural characteristics

– shown in Exhibit A – that can cause or contribute to crises; or inhibit their
resolution.




Exhibit A

Dysfunctional Cultural Characteristics


 Cultural overconfidence or arrogance
 Inflexible corporate identity

 A culture of fiefdoms or silos
 Resistance to change
 Antipathy to anything “not made here”

 Extreme sense of “we are different”



30 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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 Failure to challenge authority

 Unwillingness to question ideas and proposals
 Conflict avoidance
 A cultural lack of accountability



Taken together this is set of dysfunctional cultural characteristics that can cause,

contribute to or inhibit crisis resolution. We have developed tools to assess the
degree of cultural dysfunctionality of this combined set. These tools are beyond the
scope of this article; but they discussed in detail in The Crisis Leadership

31
Playbook. However, we will examine each of these cultural characteristics below in
order to indicate why they are dysfunctional and the role that they can play in

causing, contributing to or inhibiting a crisis and/or crisis resolution.



Cultural Overconfidence or Arrogance


Successes is a wonderful thing. It can motivate ever higher levels of success.
However, a downside to long-term corporate success is that people in the
organization will expect that this success will continue into the future. Some

companies are so successful for so long that it becomes inconceivable that they
could experience anything but success. When that viewpoint takes hold, it sets an

organization up for difficulties or even failure. This was one of the cultural
characteristics and problems at American Express, Kodak, and Sears. In all three
cases, it caused management to ignore or downplay competition and competitive

threats.




Inflexible Corporate Identity

All companies need a sense of identity. However, corporate identities are based on
a concept (either explicit or implicit) of the firm’s role in relation its market. In that




31 For a detailed discussion, see 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, Chapter 10.

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sense, corporate identities are derivative; that is, they are derived from the firm’s

defined role vis a vis its customers and market. If a market changes, a firm may
(and probably will) need to change its business concept or identity. If, in spite of
evidence that its identity no longer fits its market space, a firm resists change, it

will inevitably experience difficulties and possibly a crisis. This is what happened to
IBM, Kodak, and Sears, and led them down a path to inexorable difficulties.




A Culture of Fiefdoms or Silos

Over time many companies develop silos or fiefdoms within. Although these can be

tolerated when things are going well, they can become problematic. They can lead
to a lack of cooperation across the organization which can contribute to or
exacerbate a crisis. Fiefdoms or silos can also be a significant inhibitor or source of

resistance to proposed solutions to a crisis.

This problem with fiefdoms was recognized by Lee Iacocca at Chrysler, and he took

steps to root them out.



Resistance to Change


Having a culture that resists versus embraces change can be a contributor to the
initial crisis, as well as a significant barrier to the effective resolution of the crisis. A
reluctance to change “how we do things” as a company grows can result in a crisis,

even when the company is not faced with challenges from its
environment. Resistance to change when a company is losing customers to

competitors can be even more deadly. A version of this problem was in evidence at
Kodak, which moved slowly while competitors introduced innovative products that
undermined the company’s leadership position. This problem was also encountered

by the leaders at Sears and Unite Airlines in their efforts to deal with their crises
and revitalize those organizations.








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Antipathy to Anything “Not Invented Here”


Closely related to “resistance to change,” a generalized antipathy to anything “not
invented here” tends to inhibit change and innovation. The company may be
resistant to adopt practices that are being used by others to increase efficiency or

effectiveness (as was the case at Chrysler before Lee Iacocca’s arrival). There may
also be excessive (and unnecessary) resources (including time) invested in

developing in-house solutions to problems when a more cost-effective approach
would have been to adopt “proven” systems and processes developed elsewhere.




Extreme Sense of “We Are Different”

Carried to an extreme, when this is a dimension of an organization’s culture, it can
lead to the notion that we cannot learn from anyone else. As is true of “not

invented here,” this can contribute to the crisis and can significantly lengthen the
time that it takes to address it.




Failure to Challenge Authority

In organizations that have had very strong leaders who do not tend to tolerate

dissent, people are sometimes virtually “trained” to not challenge authority. One to
the authors actually heard an exchange between a COO and another senior
executive in which the former said: “When I say jump, you need to say ‘how

high’”! Faced with that attitude, people learn not to challenge authority.

Similarly, when one of the authors was starting out his career, he did a research
project at the AICPA (American Institute of Certified Public Accountants.” He was

hired by the Associate Director of the Research Division and was presenting the
results of the research project to the Director, a former partner of one of the then

so-called “Big 8 CPA” firms. Thrilled with this opportunity and also inexperienced,
he presented the result of his summer study to the director and made the “mistake”
of providing his interpretation of the data. He saw the blood rising in the Director’s

neck toward his head, and the Director boomed out in a loud deep voice: “The




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Director shall decide”! The Director’s “message” was crystal clear and not subject

to rebuttal!

In the context of cases examined above, we recall that Lee Iacocca made
questioning decisions of the CEO as an explicit part of the Chrysler’s culture under

his leadership. This implies that it was not really part of the culture prior to his
becoming CEO. Similarly, we know that Harvey Golub made open debate and key

part of decision-making at Amex. One of the stated reasons he picked Kenneth
Chennault as his successor was the latter willingness to take positions contrary to
Golub as CEO, leading the latter to the conclusion that Chennault had courage.




Unwillingness to Question Ideas and Proposals

The type leadership behavior described above is intended to shut down any

challenge to authority. However, it tends to lead to a relatively passive organization
that is unwilling to question ideas and proposals even among equals. It is

commonly found in siloed organizations and those with fiefdoms where the cultural
norms (either stated or implicit) are: “You stay out of my territory and I’ll stay out
of yours”!




Conflict Avoidance

While extreme conflict can be counter-productive, a lack of conflict in a culture can

provide a spurious sense of harmony and lead to poor decisions. A good example is
the consequences of the culture at AIG in the period leading up to the great

financial crisis of 2008-09, where there were no challenges to the assumption that
32
credit default swaps were a “free lunch. ” Specifically, one of the key aspects of
the culture at AIG which had characterized the firm from its beginnings was that

33
“just about anyone could question a trade.” However, this cornerstone of the AIG
culture eroded over time under the leadership of Frank Cassano, formerly the firm’s




32 Eric Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Advantage, Stanford
University Press, 2011, pp. 180-183
33 Ibid.

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Chief Operating Officer, and the man who assumed leadership of AIG’s Financial

Products group in the fall of 2001. In 1998, Cassano played a key role in the
34
company’s internal “credit-default swap” debate. Almost from the beginning,
Cassano was a big supporter of the credit default swap product. He, as well as

others, failed to understand the risks involved, and he seemingly failed to
understand that he was betting the company. Under his Cassano’s leadership, the
Financial Products division would take on more risk. Management became more top

down. The long held cultural norm that anyone could question any transaction at
AIG was abandoned: “The culture that had characterized the firm (AIG) from the

outset – one in which just about anyone could question a trade – would change,
35
according to people who worked at the firm.”
No one dared question the logic of the credit default swaps trade, leading to an

existential crisis that required a government bailout of AIG.



THE UNDERLYING CAUSE OF A CRISIS CAN BE


INTERNAL, EXTERNAL, OR BOTH


Poorly designed or underdeveloped systems and processes, a dysfunctional or

poorly managed company culture, and ineffective planning or plan execution are all
examples of factors that can cause a crisis. However, a dysfunctional corporate
culture stands out as one of the leading causes so organizational crises. As noted

above, a dysfunctional corporate culture was a key contributor to the crisis
8 of the 9 companies in our sample, and a possible contributor to the crisis in
the ninth company.












34 Ibid.
35 Ibid.

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THE BOTTOM LINE


In brief, the ten dysfunctional cultural characteristics described above that make an
36
organization susceptible to a crisis can also be the cause of the crisis. Just as
prevention is better than a remedy for Covid-19, prevention or elimination of
the preconditions for “susceptibility to a crisis” is better strategy than remediation
of a crisis. The set of ten dysfunctional cultural characteristics described above can

be used to assess whether any organization is susceptible to a crisis. Hopefully
this information is helpful as you “adjust you sails” to navigate this terrible crisis.






















































36 Ibid.

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IS TESLA BEING “BUILT FOR



SUSTAINABLE SUCCESS”℠?










































By: Eric G. Flamholtz, PhD Published on September 1, 2020

Author’s Note to Readers:

The September issue of this newsletter will focus upon various aspects of the

development of “Sustainably Successful Organizations.”℠ This month’s key issue
will be addressed to the question of assessing whether organizations are in

fact built as sustainably successful enterprises, and our particular focus is
on whether Tesla is being built for “sustainable success.”












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The newsletter will be published in four related parts at different times during the

37
month :
 Part 1(the current issue) focuses upon the question of whether Tesla
is being built as a sustainably successful organization, presents a
framework to address that question as well as applying it to assess

Tesla’s probability of “sustainable success.”
 Part 2 to be published at a later date this month will summarize the empirical

research support underlying the Organizational development model used to
assess Tesla’s “sustainable success.”
 Part 3 (to be published at a later date this month) will examine the

development of Starbucks to illustrate a company that has been built for
“sustainable success” and will also contrast it with Tesla’s development.

 Part 4 (to be published at a later date this month) will examine some tools
that are available to companies that wish to assess their likelihood of
sustainable success.

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

clients, and our licensed global affiliates as well as to investors.
38
To read the additional follow-up parts use the link below:
https://www.linkedin.com/in/ericflamholtz/detail/recent-activity/posts/




IS TESLA BEING “BUILT FOR SUSTAINABLE

SUCCESS”?


Tesla 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








37 Multiple parts are required because of the scope of analysis and related length of the discussion.
38 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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million per car delivered by Tesla, while it places a value of $10,000 per car

39
delivered by GM.
Regardless, Tesla skeptics remain legion, and Tesla is among the most shorted of
stocks. It must be noted, however, that shorting Tesla has been very bad idea for

quite some time.

Nevertheless, the issue remains: “Who is right: the “Tesla Bulls” or the “Tesla
Bears”?




WHO IS RIGHT: THE “TESLA BULLS” OR THE


“TESLA BEARS”?


The question most people ask is: “Who is right: the “Tesla Bulls” or the “Tesla
Bears”? That is the wrong question. The key question is: Is Tesla Being “Built
for Sustainable Success”? That is a very different, yet critical question.


This article uses an empirically validated organizational development framework
that explains what is required to be a sustainably successful organization to address
the question of whether Tesla is being “built for sustainable success.”℠ The

framework has several applications. It provides a methodology to assess whether
Tesla or any organization is being built for sustainable success. Similarly, it provides

a template for building a sustainably successful organization. It has been applied in
many organizations ranging from start-ups to members of Fortune 100.

This newsletter article consists of two parts:


 Part I presents the model for developing sustainably successful organizations,
and

 Part II will apply it to Tesla.







39 Ben Levinsohn, The Trader “Thanks, Apple for the Stock markets All-time High,” Barron’s, August
24, 2020, p. M1.

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PART I. FRAMEWORK FOR BUILDING


SUSTAINABLY SUCCESSFUL ORGANIZATIONS℠


The framework has been created over the past 40 years from a combination of
empirical research and experience using that framework. The framework itself has

three related parts including:

1) an “organizational effectiveness model,”

2) a “stages of growth model,” and
3) a “model of organizational dysfunction (‘growing pains’)” caused by
disequilibrium when the development of an organization’s infrastructure

does not match it stage of growth.

Each is described and examined below.




ORGANIZATIONAL EFFECTIVENESS MODEL


The theoretical framework underlying the “organizational effectiveness model” was

previously developed by Flamholtz (1995) and is reviewed briefly below. A more
40
extensive discussion can be found in Flamholtz (1995) or Flamholtz and Randle
(2016). By definition, this discussion is necessarily conceptual, though I have
41
minimized the extent of the theoretical discussion as much as possible.



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




40 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51.
41 See Eric Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
Organizations, Wiley 2016.

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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-Cola is in the beverage business, Federal Express is in the

package transportation business, and Disney is in the entertainment business.

The overriding key problem or challenge of creating a business concept is that
it must be must be “valid” or validated by customers in the marketplace. This

means that the business must provide something (tangible or intangible) that
the market wants or will accept. Validation occurs when there are customers
who purchase the enterprise’s product or service, thereby enabling it to

continue to operate and survive as a business entity. When a new business
concept fails to achieve this, or an existing business concept no longer works

in the market, the organization will suffer and ultimately fail or die. For
example, many “dot.com”s (such as Webvan, eToys, Pets.com, and many
more!) never succeeded in creating valid business concepts and ultimately

perished. Similarly, “RadioShack” was once a business successful enterprise,
serving several generations of electronics hobbyists; but its business concert
became outdated and muddied, leading to a long period of and irrelevance in

the market and decline that suggests its ultimate disappearance from the
retail market space.1


Another key strategic problem or challenge of creating a business concept is
to strike a balance between one that is too narrow to facilitate future growth
and too broad as to be strategically meaningless. We shall deal with the
development of a business concept when we address strategic planning in a

future issue. At this point, our primary concern is with the purpose or function
of a business concept in the context of building a successful organization over

the long-term.

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

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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. It

was an aspirational statement. Similarly, in 2014, Techcombank (then the 8th
largest bank in Vietnam) established the strategic mission of becoming “the
leading bank in Vietnam.”


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. Most
organizations have several strategies, but only a relatively few have core
strategies. Core strategies depend upon the type of business. 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. However, it must be noted here that many companies
do not have core strategies. They can have lots of strategies without a true
core strategy that ties all strategies together.


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.
Just like a building, if you want to build a large business must have a strong

foundation. The business foundation will provide the conceptual framework for the
development of the business.










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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

growth. The six key tasks, all of which have been supported by previous
42
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
in a stepwise fashion in order to build a successful organization. Each of
43
these key tasks or strategic building blocks will be discussed in detail below.




Identification of Market Segment and Niche. The first challenge for a new

venture in organizational survival or success is to identify a market need for a








42 See Eric Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
Organizations, Wiley 2016.
43 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.

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marketable service or product. The chances of organizational success are enhanced

44
to the extent that the firm is successful in this step.
The challenge is not merely in identifying the market but also, if possible, to
capture a “market niche,” a relatively protected place that would give the company

sustainable competitive advantages. Failing to define a niche or mistakenly
abandoning the historical niche can cause an organization to experience difficulties

and even failure. The process of identifying the market involves the development of
a strategic market plan to identify potential customers and their needs and the
45
creation of a competitive strategy.

Development of Products and Services. The second challenge or strategic
46
building block involves the development of products and/or services. This process
can also be called “productization,” which refers to the process of analyzing the

needs of customers in the target market, designing the product and developing the
47
ability to produce it. For a production firm this stage involves the design and
manufacturing phases, whereas for a service firm, this stage involves forming a
system for providing services to the customers.

The success at this stage is highly related to the previous critical task, proper

definition of the market niche. Unless a firm fully understands the needs of the
48
market, it cannot satisfy those needs in “productization."





44 Aldrich, I. (1979). Organizational Passages: Diagnosing and Treating Life Cycle Problems in
Organizations. Organizational Dynamics, Summer, 3-24; Brittain, J. W. & Freeman, J. H.
(1980). Organizational Proliferation and Density-Dependent Selection: Organizational Evolution in
the Semiconductor Industry. Berkeley, California: Institute of Industrial Relations, University of
California; Freeman J., & Hannan, M. T. (1983). Niche Width and the Dynamics of Organizational
Populations. American Journal of Sociology. 88(6), 1116-1145; Flamholtz, E. (1995). Managing
Organizational Transitions: Implications for Corporate and Human Resource Management. European
Management Journal, 13(1), 39-51.
45 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51.
46 Burns, T., & Stalker, G. M. (1961). The Management of Innovation. London, England: Tavistock;
Midgley, D. F. (1981). Toward a Theory of the Product Life Cycle: Explaining Diversity. Journal of
Marketing, 45(4), 109-115.
47 Flamholtz. E. and Yvonne Randle Y. (2016). Growing Pains: Building Sustainably Successful
Organizations, Wiley.
48 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51.

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Acquiring Resources. Success in identifying a market niche and productization

will create increased demand for a firm’s products or services. Consequently, the
resources of the firm will be spread very thin. The organization will require
49
additional physical, financial and human resources. This is the point at which the
entrepreneurs should start thinking about the long-term vitality of the firm and
procure all the necessary resources to survive the pressure of current and future
50
increase in demands.

Development of Operational Systems. The fourth critical task is the
development of basic day-to-day operational systems, which include accounting,

billing, collection, advertising, personnel recruiting and training, sales, production,
delivery and related systems. Entrepreneurial companies tend to quickly outgrow
the administrative systems available to operate them. Therefore, it is necessary to

develop sufficient operational systems, on time, to build a successful organization.
In contrast, large established companies might have developed overly complicated
operational systems. In this case, the success of the organization depends on the

reengineering of operational systems.

Development of Management Systems. The fifth step is to develop the

management systems, which is essential for the long-term viability of the
51
firm. Management systems include systems for planning, organization,
management development and control. Planning systems involve planning for the

overall development of the organization and the development of scheduling and
budgeting operations. It includes strategic planning, operational planning and
52
contingency planning. The mere existence of planning activities does not indicate
that the firm has a planning system. A planning system ensures that planning
activities are strategic and ongoing.



49 Brittain, J. W. & Freeman, J. H. (1980). Organizational Proliferation and Density-
Dependent Selection: Organizational Evolution in the Semiconductor Industry. Berkeley, California:
Institute of Industrial Relations, University of California Carroll, G. R. & Yangchung, P. H. (1986).
Organizational Task and Institutional Environments in Ecological Perspective: Findings from the Local
Newspaper Industry. American Journal of Sociology, 91(4), 838-873.
50 Flamholtz. E. and Yvonne Randle Y. (2016). Growing Pains: Building Sustainably Successful
Organizations, Wiley.
51 Ibid.
52 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51.

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Organizational structure involves the ways in which people are organized and

activities are coordinated. As with the planning activities, success depends not on
the mere existence of a structure but on the match between the structure and
business strategy.


The process of planned development of the current and future managers is a
Management Development System. Control systems are the set of processes

(budgeting, goal setting) and mechanisms (performance appraisal) that would
53
encourage behavior that would help achieving organizational objectives.
Developing Corporate Culture. The sixth step is to develop the Corporate

54
Culture. Just as people have personalities, organizations have cultures, which are
composed of shared values, beliefs and norms. Shared values refer to the
importance the organization attaches to the aspects of product quality, customer

service, and treatment of employees. Beliefs are the ideas that the people in the
organization hold about themselves and the firm. Lastly, the norms are the

55
unwritten rules that guide interactions and behavior.
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
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



53 Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human
Resource Management. European Management Journal, 13(1), 39-51.
54 Peters, T. J. & Waterman, R. H. (1982). In Search of Excellence. New York, New York: Harper &
Row.; Walton, 1986;
55 Schein, E.H. & Schein, P. (2017). Organizational Culture and Leadership, Jossey-Bass; Flamholtz,
E. and Randle, Y. (2011). “Corporate Culture: The Ultimate Strategic Asset. Stanford, California:
Stanford University Press.

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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

56
2016. 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.


 Culture
 Management Systems

 Operational Systems
 Resources
 Products (services)

 Markets

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

57
of growth.
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
58
advantage.





56 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
57 See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate and
Human Resource Management. European Management Journal, 13 (1), 39-51
58 Ibid.

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Additional Factors of Relevance. In addition to the factors identified above and

confirmed by empirical research, through our actual experience in working with
organizations for more than 40 years, we have also identified to additional factors
of relevance to building a sustainably successful organization. These are

“leadership” and what we term “financial results management.”

“Leadership” refers to the process through which an organization’s senior

managers articulate, provide, and manage an enterprise’s overall vision, core
values (culture), organizational development, operations, and change
(adaptation). “Financial results management” refers to the planning and control of

financial results. We have actually conducted empirical research to assess the
impact of leadership on organizational development, which in turn, impacts financial
59
results.



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
60
Organizational Development Pyramid.
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
61
Sustainably Successful Organizations. In brief, each stage of growth is viewed as



59 Flamholtz, E. (2011) “The Leadership Molecule Hypothesis: Implications for Entrepreneurial
Organizations,” International Review of Entrepreneurship. Volume 9, Issue no. 3, pp. 1-23;
Flamholtz, E Kannan-Narasimhan, R. (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.
60 See Eric G. Flamholtz (1995). Managing Organizational Transitions: Implications for Corporate and
Human Resource Management. European Management Journal, 13 (1), 39-51
61 Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
organizations, Fifth Edition, Wiley, 2016, Chapters 3-4.

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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.

Exhibit A


Ten Classic Growing Pains
62
1. People feel that “there are not enough hours in the day.

2. People spend too much time “putting out fires.”
3. People are not aware of what other people are doing.
4. People lack understanding about where the firm is headed.

5. There are too few good managers.
6. People feel that “I have to do it myself if I want to get it done correctly.”

7. Most people feel that “our meetings are a waste of time.”
8. When plans are made, there is very little follow-up, so things just don’t
get done.

9. Some people feel insecure about their place in the firm.
10. The organization continues to grow in sales but not in profits.





62 Eric G. Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
organizations, Fifth Edition, Wiley, 2016, p.94.

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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.



Empirical Validity of Organizational Development Framework


There has been a significant amount of empirical research designed to assess the
predictive validity of the proposed framework and its three core models. This

research is detailed and technical in nature. A detailed summary of this research is
beyond the scope of this article. AS noted at the outset of this article, we will
examine this research in detail in the next issue of this newsletter. However, this

research can also be found in the references.



Conclusions of Empirical Research


Based upon the empirical research conducted, there is a statistically significant
indication that:


1) The pyramid is a driver of financial results,
2) There is an inverse relationship between growing pains and financial results,
and

3) There is an inverse relationship between pyramid development and growing
pains.


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Stated differently, our key finding is that the Pyramid model is an empirical

validated framework for building successful organizations. Accordingly, it can be
used both as a template to build a business enterprise, or as a template to evaluate
an existing organization as the likelihood of its sustainability.




Applications of this Framework


The framework has several applications or uses. As shall see below, it provides a
methodology to assess whether Tesla or any organization is being built for
sustainable success. Similarly, it provides a template for building a

sustainably successful organization. It has been applied in many organizations
ranging from start-ups to members of Fortune 100. For example, we will examine
its application at Starbucks and how it helped Starbucks become a sustainably

successful enterprise in a future article.



PART II. APPLICATION TO TESLA: IS TESLA BUILT


FOR SUSTAINABLE SUCCESS?


Now that we have explained the Pyramid model for organizational development, we
will use it as a template to evaluate Tesla to assess the likelihood of it becoming a

sustainably successful enterprise. This illustration has a dual purpose. Frist, it is
intended as an example of how to use the Pyramid framework. Second, it is
intended and an appraisal of Tesla’s sustainability per se. However, it should be

noted at the outset that the assessment of Tesla will necessarily be an abbreviated
assessment because it is based upon published information and not an actual in-

depth first hand assessment.

As we have explained above, an organization must develop its “business
foundation” and) the six strategic building blocks individually and as an integrated

system in order to have a high likelihood of becoming a sustainably
successful. First, to the extent feasible from public information, we will assess the





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business foundation being created by Tesla. Then we will assess the extent to which

Tesla seems to be developing each of the six key strategic building blocks.



Assessment Methodology


The assessment will be done in two ways. There will be a qualitative assessment
and a quantitative assessment (based upon that qualitative assessment).

Qualitative Assessment. The qualitative assessment will consist of

descriptive comments about the extent to which Tesla has developed each of
the six key strategic building blocks. To the extent feasible, will draw upon

independent published assessments. However, I will also provide my own
commentary.

The assessment will be organized into four parts: positives, negatives,

questions, and Evaluation. “Positives” are clear “assets,” “negatives” are clear
“weaknesses,” or limitations and “questions” are simply “issues” that cannot
yet be resolved, but are potential limitations and/ or problems. The

“evaluation” is the result of these three aspects.

Quantitative Assessment. The quantitative assessment will be based upon

a five-point scale, where “5” is the highest score and “1” is the lowest score.”
I will explain the rationale for the assignment of these scores to each
dimension (foundation and building blocks).


Benchmarking the Scores. In addition, I will draw upon our historical data-
base (consisting of thousands of companies) to compare the scores assigned

to Tesla to that of other organizations in our data base. As explained further
below, our data base scores have been used to identify five levels of
organizational success from “Business Champions” to “Firms at risk of

failure.”









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ASSESSMENT OF TESLA’S BUSINESS FOUNDATION


As explained above, the business foundation consists of three related dimensions or
constructs: 1) the “business concept” or definition, 2) the “strategic mission,” and

3) the “core strategy.” We will now examine the extent to which Tesla seems to be
developing a strong business foundation.

Tesla’s Business Concept. What is Tesla? This is not a simple question to

answer. Although most people envision Tesla as an electric vehicle company,
it is actually much more than that. Tesla manufactures and sells cars, but it
also has a solar-panel business, and an energy storage business. It is possible

that Tesla might once day also sell its batteries to other automotive
companies. Tesla also have plans for a “Robo-taxi” business based upon its
software for autonomous, self-driving vehicles. Tesla could potentially create

other adjunct businesses from its technologies.

Tesla’s “Strategic Mission.” Although Tesla has not stated an explicit

strategic mission, one can be imputed from comments made by Elon Musk.
Specifically, Musk has stated that he targets an annual volume of 20 million
cars. Implicitly that would make Tesla the de facto leader in the automotive

space. According, that implies a key aspect of strategic mission: to become
the leader in the automotive space. Nevertheless, given that Tesla’s business
concept is broader that automobiles, a strategic mission for the enterprise as

a whole is required.

Tesla’s “Core Strategy.” Tesla has not defined an explicit core strategy; but

it is clear that “synergy” is an aspect of its strategy.



Evaluation:


This section will treat the assessment and evaluation differently than the later
assessment of the strategic building blocks, because of a paucity of information. In

brief:





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 Tesla’s business concept makes Tesla a very complex but high potential

business.
 Neither Tesla’s explicit strategic mission nor its core strategy are explicitly
defined or fully clear.

 Our overall assessment is that Tesla’s business foundation is underdeveloped
for a company of its size, scope and complexity.
 This, in turn, comprises a risk factor as Tesla increase further in scale and

complexity.
 It is possible that Elon Musk has a concept of Tesla’s business foundation, but

does not want to reveal it for competitive reasons. Nevertheless, the lack of
clarity of its business foundation remains a risk factor. Lack of clarity can
create structural and execution problems, especially as the company grows

rapidly in size.
 Giving Tesla the benefit of the doubt and recognizing its potential, I would

assign a score of “3” to its business foundation. The firm’s huge potential is
offset (at least to some extent) by the risks posed by lack of clarity if its
business foundation. This is a trade-off of potential versus complexity and

lack of clarity.



ASSESSMENT OF DEVELOPMENT OF STRATEGIC


BUILDING BLOCKS BY TESLA


We will now examine the extent to which Tesla seems to be developing each of
these key strategic building blocks:


 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





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 Development of the organizational culture that management feels necessary

to guide the firm and a related culture management system.




Identification and Definition of a Viable Market Segment

Positives:

 There is clearly demand for Tesla cars. The company sold approximately

63
368,000 vehicles globally in 2019.
 The company has a chance (the potential) to become the dominant

provider of electric vehicles.
 Tesla also has an opportunity to become an integrated energy company.


Negatives and Risk Factors:

 Although Tesla is the leader in the electric vehicle space, global mass
adoption of electric vehicles is still a long way off. It has been estimated

that it will not happen in the current decade.
64
Questions:


 Although demand for Tesla cars has been established, what is less clear is
the role that government subsides play in purchases. Since price always
matters to consumers, Tesla’s overall market strength currently has been

bolstered to an unknown degree by governmental subsidies, and, at some
point these subsidies might stop. Accordingly, we must “discount” (reduce)
its apparent market strength for this factor.


Evaluation:


 For a quantitative evaluation, we assign a score of “4” to Tesla for
its market position and strength, where “5” is the highest score and “1”







63 Analyst Note David Whiston, CFA, CPA, CFE, Analyst, 22 July 2020. Morningstar Equity Analyst
Report, as of 25 Aug 2020.
64 Ibid.

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is the lowest score.” The negatives and risk factors and questions result in

a score of 1 point less than the maximum of “5.”




Development of Products and/or Services

Positives:

 Tesla has developed a product that is clearly attractive to a growing

number of customers. cars. As above, the company sold approximately
368,000 vehicles globally in 2019 and Elon Musk, its founder and CEO,

65
projects that it will sell 20 million long term.
 Tesla also has an opportunity to become an integrated energy company,
producing lithium-ion batteries.

 Tesla also plans a launched autonomous vehicle ride hailing business, also
called “Robotaxis.”


Negatives and Risk Factors:

 On June 25, 2020, an article in the Wall Street Journal, states “Tesla Falls
66
Short in Customer Satisfaction Survey.” Customer satisfaction
problems are an indication of weakness in the “Product.”

Questions:


 As above, although Tesla is the leader in the electric vehicle space, global
mass adoption of electric vehicles is still a long way off. It has been
estimated that it will not happen in the current decade.

 There is still a great deal of developmental work to be done for its electric
automotive, battery, and autonomous vehicles products.


Evaluation:

 For a quantitative evaluation, we assign a score of “3” to Tesla for

its development of products position and strength, where “5” is the


65 Ibid.
66 Tim Higgins, “Tesla Falls Short in Customer Satisfaction Survey,” Wall Street Journal, June 25,
2020, p. B. 1.

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highest score and “1” is the lowest score.” The negatives, risk factors and

questions result in a score of 2 points less than the maximum of “5.”




Acquisition and Development of Resources Required to Operate the Firm

Positives:

 The demand for Tesla stock (regardless of its actual value) has created a

valuable (lower cost) currency for growth. The greater the demand for
Tesla stock, the lower the cost to Tesla of equity capital.


Negatives and Risk Factors:

 Although there is currently very strong demand for Tesla stock, if the
company were to experience operating or market demand problems, this

advantage could reverse.
 The “E” (Earnings) component of the Tesla’s “PE ratio” includes 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

67
regulatory credit revenue.” This is revenue not from operations, a
governmental mandated subsidy for electric vehicles.
 If US governmental policy were to change, and these payments were to be

either reduced or ceased, Tesla’s earnings would be reduced significantly.
Currently they would be negative earnings (that is, a loss!). One can
argue that this is not “real” 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.






67 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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Questions:


 How long will Tesla receive “regulatory credit revenue”?

Evaluation:


 For a quantitative evaluation, we assign a score of “3” to Tesla for
its Acquisition and Development of Resources Required to Operate
the Firm.

 Although the current situation is favorable to Tesla, the negatives, risk
factors and questions result in a score of 2 point less than the maximum of
“5.”





Development of Day-To-Day Operational Systems

Positives:

 Tesla has developed some of the infrastructure required to operate.

 It is producing cars, batteries, and solar panels in volume.

Negatives and Risk Factors:


 There are clearly problems in Tesla’s operational systems. Specifically, In
February, 2018, an article in the Los Angeles Times was entitled “Tesla’s
68
Troubles.” It discussed some early problems that are being reported by
“Model 3” owners. Later in the article it referred to “Tesla’s ‘Growing
Pains.’”
69
 On June 25, 2020, an article in the Wall Street Journal, states “Tesla Falls
70
Short in Customer Satisfaction Survey.”







68 Russ Mitchell, “Tesla’s Troubles,” Los Angeles Times. Business, pp.1 and 7, February 18, 2018.
69 Ibid, p. 7; See Eric Flamholtz, “TESLA’S “GROWING PAINS” AND ELON MUSK’S
LEADERSHIP,” Linkedin, March 13
70 Tim Higgins, “Tesla Falls Short in Customer Satisfaction Survey,” Wall Street Journal, June 25,
2020, p. B. 1

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Evaluation:


 Unfortunately, operational systems are not an apparent area of strength
for Tesla.
 For a quantitative evaluation, we assign a score of “2.5” to Tesla for

operational systems.”
 The published information about “growing pains” and customer

dissatisfaction are a clear indication that operational systems are
insufficiently developed.
 This is a classic problem area for rapidly growing entrepreneurial

companies; but the existence of “growing pains” and customer
dissatisfaction are not an indication of a sustainably successful
organization.




Development of The Management Systems Necessary for The Long-Term

Functioning

Positives:


 Insufficient “direct” data is simply not available to assess the extent to
which Tesla has developed the management systems necessary for the
long-term functioning of the business.


Negatives and Risk Factors:

 However, the existence of published information about “growing pains” and

customer dissatisfaction (cited above) are a clear indication that
management systems are insufficiently developed at least to some extent.


Questions:

 There are several questions in this area:
o How does Tesla do “planning” (both strategic and operational)?

o What is the nature and type of Tesla’s organizational structure?
 The complexity of its business implies the requirement of either a
divisional or a matrix structure.



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o Does Tesla have a “leadership development system” for managers?

o What is the nature of Tesla’s “performance management” system?

Evaluation:


 The existence of published information about “growing pains” and
customer dissatisfaction (cited above) are a clear indication that
management systems are insufficiently developed.

 For a quantitative evaluation, we assign a score of “2.5” to Tesla for the
development of the management systems necessary for the long-term

functioning of the business.



Development of The Organizational Culture and Culture Management

System.

Two of the five core aspects of culture are treatment of customers and employees .
71

Positives:

 There is no published record of employee dissatisfaction with the
culture at Tesla.


Negatives and Risk Factors:

 Unlike some companies, Tesla does not discuss its culture and culture

management system.
 There is, as above, an indication of a degree of customer dissatisfaction.


Questions:

 In a multi-divisional business such as Tesla, a core culture is an important
tool to bind together all employees:

o Does Tesla have a defined set of core values?
o What is the nature of Tesla’s culture management system?





71 Eric G. Flamholtz and Yvonne Randle, Corporate Culture: The Ultimate Strategic Asset, Stanford
University Press, 2011.

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Evaluation:


 Lacking specific information about its core values and culture management
system, and using the absence of negative information about employee
dissatisfaction and the existence of customer dissatisfaction, we assign a

quantitative evaluation score of “3” to Tesla for its organizational culture
and culture management system.




Other Factors


As noted above, there are other factors of relevance, including leadership and the
processes of managing financial results. Tesla is fortunate to have Elon, who is
perhaps the apotheosis of visionaries, as its Alpha leader. Tesla is clearly also
72
skilled at financial management.



THE BOTTOM LINE: IS TESLA BEING “BUILT FOR


SUSTAINABLE SUCCESS”?


The core question that we are addressing is whether Tesla is being “Built for
Sustainable Success”?


Based upon our research and experience in working with companies to develop as
sustainably successful organizations, we have:


1) created a data base of strategic development scores required for
different levels of success over the long run, and also
2) created a set of classes of companies that achieved different levels of
development.








72 See Eric Flamholtz, “TESLA’S “GROWING PAINS” AND ELON MUSK’S LEADERSHIP,” Linkedin,
March 13

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This set of companies and their related average scores (on a five-point scale) are:

 Level V: World Class 4.5 or better
 Level IV: Sustainably Successful 4.0-4.49

 Level III: Marginally Successful 3.0 -3.99
 Level II: At risk < 3.00
 Level I: Likely to be In Crisis < 2.50





Tesla’s Overall Score

The summary of Tesla’s scores for each of these seven factors above is:

 Business Foundation 3.0

 Identification Viable Market 4.0
 Development of Products 3.0
 Acquisition of Resources required 3.0

 Development of Operational Systems 2.5
 Development of the Management Systems 2.5
 Development of the organizational Culture 3.0


The sum of the total item scores for all seven factors above is 21. The average
score of the total of the seven factors is 3.0. Based upon the analysis above,
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Tesla’s overall average score is 3.0. This places Tesla in Level III category of
“Marginally Successful" Organizations.”




OVERALL ASSESSMENT


In conclusion, using the methodology for assessing the extent to which Tesla is

being developed as a sustainably successful organization, we find that Tesla is
currently a level III or “Marginally Successful Organization.”




73 Calculated as: total score of 21 divided by 7 factors.

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Limitations. The primary limitation the application of this method to Tesla or any

company involves the availably of information to apply it. A second limitation is that
this assessment is a matter of interpretation and judgment.

There is also a validated tool for collecting the required information by means of an

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organizational surveys. These surveys are typically used in an organizational
assessment for our clients. However, it is obviously not feasible to apply these

surveys when doing an external assessment without access to company employees.

It must be noted that when we have used these surveys in combination with
judgmental assessment of the kind done for Tesla here, there is typically a high

degree of interrater reliability.

Nevertheless, of we want to increase our confidence in the finding, we can do a
“sensitivity analysis” of our scores. Specifically, if our analysis was “wrong” (that is,

it understated Tesla’s strengths) by 0.5 (1/2) point on all of the seven factors, then
the total score for the seven factors would increase from 21 to 24.5 (21
+3.5). Although this is not a likely result, the revised average score of Tesla

would be 3.5. This hypothetical revised average score would still keep Tesla in
the category of “Marginally Successful Organizations.” This would be a

significant improvement, but it will not likely justify the current extraordinary price
premium for Tesla stock. For example, on august 24, Tesla’s stock was selling at a
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price/earnings ratio of 140 times estimated 2021 (next year’s) earnings.

In order to place Tesla to the next level of category of “Sustainably
Successful" Organizations, we would need to adjust it score by a full point on all of
the seven factors; then the total score for the seven factors would increase from 21

to 28 (21 + 7). Although this is not a likely result, the revised average score of
Tesla would be 4.0, and Tesla would then be classified at the next level of success—

but still not the top level of a world class organization.







74 See: www.Mgtsystems.com.
75 Ben Levinsohn, The Trader “Thanks, Apple for the Stock markets All-time High,” Barron’s, August
24, 2020, p. M1.

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THE BOTTOM LINE


The “bottom line” 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.

However, it must be noted that these scores can be changed (improved) by

management initiatives. This would mean that Elon musk and his colleagues would
need to take action to improves the underlying factors that drive these scores, as
many other companies have done for decades. Many companies large and small

(such as Starbucks, Neutrogena, Navistar, Emergent BioSolutions, American
Century Investments and many others both in the US and globally) have used this
methodology in their planning processes.


A Game of “Musical Thrones.” So, who is correct about Tesla--The Bulls or the
Bears? Technically, the Bears seem to be correct, but the Bulls are smiling all the

way to the bank.

In the game of “musical chairs,” people circle around a set of chairs until the music
stops. Then there is a race for a chair, which is always one less than the number of

participants. As long as the music continues, there is no problem.

Similarly, for Tesla, as long as “the music” continues, there is no problem yet.


Memo to Elon Musk (and colleagues)

This analysis is intended as a constructive critique. I have previously expressed my
admiration for you in other articles as well as my concern about how Tesla (the

76
company) is being built. In brief, my advice: Build a company as beautiful as
your cars!






76 See Eric Flamholtz, “TESLA’S “GROWING PAINS” AND ELON MUSK’S
LEADERSHIP,” Linkedin, March 13, 2020; Eric Flamholtz, “TESLA’S “GROWING PAINS” AND ELON
MUSK’S LEADERSHIP REDUX” Linkedin, June 2, 2020; Eric Flamholtz, “Tesla: The Apotheosis of
Stock Market Madness,” Linkedin, August 7, 2020.

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REFERENCES


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Entrepreneurial Businesses,” International Review of Entrepreneurship.

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Jossey-Bass.










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“THE ICARUS SYNDROME”:



IMPLICATIONS FOR TESLA,



ZOOM, ET. AL.




































By: Eric G. Flamholtz, PhD Published on October 6, 2020

Author’s Note to Readers:


This newsletter will focus upon various aspects of the development of “Sustainably

Successful Organizations.”℠ This month’s key issue will be how to build
sustainably successful enterprises.


The newsletter will be published in two related parts at different times during
October:


The current issue focuses upon the overriding issue of the development of

“Sustainably Successful Organizations.”℠ It introduces the construct of the





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“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 technology company

(Osborne Computer) that experienced the “The Icarus Syndrome.”


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.


Part 2 (to be published at a later date) will examine a cases study of a firm
was able to overcome its “growing pains,” avoid the “The Icarus
Syndrome,” and transform into a sustainably successful organization.


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

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

To read part 2 of this article please use the link below:

https://www.linkedin.com/pulse/avoiding-icarus-syndrome-case-study-

developing-eric-flamholtz/





Introduction

Once upon a time, Osborne Computer was a high-flying company—just like

Tesla, Zoom, Uber and others too numerous to mention-- are
today. Osborne Computer was a highflying, rapidly growing start-up that failed.

Osborne Computer and its founder Adam Osborne was a victim of what we now
term “The Icarus Syndrome.”





77 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
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tumbled out of the sky and fell into the sea where he drowned.

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.







78 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

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problems known as “Growing Pains. ” 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
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future declines in and profitability. 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
has become the most valuable car company in the world. Its total market


79 See Eric Flamholtz and Yvonne Randle, Growing Pains: Building Sustainably Successful
Organizations, Wiley 2016.
80 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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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
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GM. 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 per 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. ” It discussed some early problems that are being
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reported by “Model 3” owners. Later in the article it referred to “Tesla’s
83
‘Growing Pains.’”
o On June 25, 2020, an article in the Wall Street Journal, states “Tesla
Falls Short in Customer Satisfaction Survey. ”
84


 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





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

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