There is increasing recognition that most of current management theory is weak or empty[1]. The weakness of most of current management theory results from a very simple cause: the failure to apply the scientific method of empirical research to the creation and testing of management concepts, frameworks, methods and tools.
MANAGEMENT THEORISTS WHO GOT IT WRONG
There are many examples of management theorists or so-called gurus who got it wrong, including Tom Peters, William Ouchi, and Kaplan and Norton to cite just a few of the well-known theoretical failures.
Peters and Waterman In Search Of Excellence
Peters and Waterman famously wrote the now largely discredited and ignored book In Search of Excellence.[2] The book was a best seller, but many of the so-called excellent companies identified by Peters and Waterman soon ran into difficulties. Peter followed up with another book, that might have been titled “Son of Excellence” or “Excellence Version 2” that purported to correct what was initially missed and to identify the another stronger set of Excellent companies.[3] Some of these too experienced difficulties. This, in turn, led Peters to write a third tome tilted “Thriving on Chaos: Handbook for a Management Revolution” which implicitly and/or explicitly repudiate all of Peters previous ideas and called for a revolution in management thought.
Although the initial book by Peters and Waterman (then consultant for McKinsey) first and Peters second book were at least loosely based upon some degree of “empirical” research in the sense that they actually looked at companies, the final book was Peters philosophical attempt to create a “new(?)” approach to management. Unfortunately, his basic premise was spurious, because no organization “thrives on chaos”!
Peters did make a contribution. He attracted a great deal of attention to management theory and his call for a revolution was prescient, even if the content of his proposed approach was fallacious.
William Ouchi and Theory Z
Another theorist who got it wrong was William Ouchi, who wrote a book titled Theory Z.[4] This was a clever play on the ideas of the Late Douglas McGregor who had formulated a framework called “Theory X and Theory Y.[5]” Prior to the publication of Theory Z, Japan was “eating the lunch” of the united States Businesses. Ouchi’s idea was that we needed to learn from the Japanese, and applied Japanese management approach to US organizations. The book was a blockbuster in sales, but the fundamental premise was flawed. Ouchi made no attempt to analyze the differences in the people, culture, situation and environment of the USA vis a vis Japan. His prescription for the application of management methods from Japan soon proved not only superficial, but his presumed superiority of Japanese management methods was soon understood as a mirage when the “Japanese bubble economy” collapsed.
Kaplan and Norton and the so-called The Balanced Score Card
Another management idea that was appealing in concept but fundamentally flawed was the so-called “Balanced Score Card” proposed by Kaplan and Norton[6]. While the notion of a multi-faceted (or “balanced”) approach to measuring organizational performance rather than using just financial measures is intuitively attractive, the approach actual proposed by Kaplan and Norton was fundamentally flawed. Specifically, the so-called “Four Perspectives” proposed by Kaplan and Norton were never empirically tested or supported by empirical research.[7] Indeed, as stated by Marshall Meyer in Rethinking Performance Measurement: Beyond the Balanced Scorecard, Kaplan and Norton “suggested” three categories in addition to financial performance.[8] Meyer also discusses the various problems of applying the Balanced Scorecard approach in an actual organization.[9] As Meyer concludes, “Balanced performance measurement is an attractive idea that can be difficult to implement.[10]”
The Fundamental Problem
The Fundamental Problem common to these and other management theorists is their failure to support their frameworks and methods with rigorous empirical research. Another classic example of this lack of empirical research is Ichak Adizes, who clearly states that he has proposed a theory; but never states that that theory has been subjected to empirical research for its validation.[11] In fact it has not been subjected to empirical validation; rather, as Adizes has stated, it “…grew out of 20 years of experience working with several hundred companies around the world.[12]”.
NEED FOR AN ALTERNATIVE PARADIGM OF “MANAGEMENT SCIENCE”
Clearly there is a need for an alternative Paradigm for a science of management. Based upon my review of the management literature and my own experience working with companies over a period of more than 45 years, I propose that the management must be “science based”; that is based upon the application of the scientific method. This means that we should strive for empirically based management theory and practice.
This was also the view of my mentor Rensis Likert at the University of Michigan’s Institute for Social Research more than a half century ago. It was the core idea underlying Likert’s work.[13]
In this regard, then, the practice of management is perhaps most like medical practice; it is, or at least should, be a based upon a combination of “Management Science” and practical experience, and not just the latter.
THE DEVELOPMENT NEW PARADIGM OF MANAGEMENT
During the past three decades, I have been engaged in a long term program of empirical research on the determinants of organizational success and failure. The objective was to identify a set of core variables that can determine either organizational success or failure.
This research has led to a model of the key determinants or components of organizational success and failure, as shown in Exhibit 1.
Exhibit 1
Determinants of Organizational Success and Failure
Markets:
Clearly identifying the customer that the company wants to serve and developing systems that allow the company to track customer needs.
Developing a market niche: A place in the marketplace where the company has a sustainable competitive advantage.
Products/Services:
Developing products and/or services to meet the needs of the customers that the company wishes to serve.
Resources:
Acquiring and effectively managing the resources – human, technological, physical, and financial – needed to support the long- and short-term development of the company.
Operational Systems:
Developing, implementing, and successfully managing the systems needed to support the company’s day-to-day operations (e.g., information systems, accounting, human resources management, communication, production, sales, marketing, etc.).
Management Systems:
Developing, implementing, and successfully managing the systems needed to support the company’s long-term development (planning, performance management, organizational structure, and management development).
Corporate Culture:
Having a well-defined and communicated corporate culture and having systems in place to promote behavior consistent with the values, beliefs, and norms of the company (which support the achievement of the company’s long-term goals).
All of these variables or factors in this model have been supported by prior research as impacting organizational performance.[14] However, they were never previously studied as a set (or organized in to a pattern or structure) which, as a unit, impacts or drives performance. Our unique contribution was to view them as a system of variables (or interrelated set of components) that, taken together, impact organizational success and failure. Specifically, these determinants of organizational success and failure have been combined into a framework called the Pyramid of Organizational Development. This Pyramid is shown in Exhibit 2.
THE PYRAMID OF ORGANIZATIONAL DEVELOPMENT
Based upon this research, we have developed a conceptual lens that identifies the true sources of incremental alpha. We call this lens “The Pyramid of Organizational Development,” or for brevity simply “The Pyramid.”
Exhibit 2
Pyramid of Organizational Development:[15]
The Six Key Building Blocks of Successful Organizations
Why a Pyramid Shape? The Pyramidal shape suggests not only that these six variables are key drivers of performances but that there is a hierarchical aspect of their development. More specifically, the intention is to suggest that Pyramid of Organizational Development must be built from the bottom up. Thus the “market” is the most fundamental building block of the Pyramid. The market, which comprises of a set of present and potential customers and competitors of an enterprise, is (or ought to be) the target for the development of the rest of the enterprise. This means that the products and/or services offered depend upon the wants and needs of customers along with competitors comprising the market.
The Strategic Imperative of the Market. This leads to an important strategic principle or imperative of organizational development: to be successful, the enterprise must be designed or suited to serve a defined purpose in the market. Although this notion can be viewed as obvious, in reality it is not obvious as indicated by the failure of so many “dot.com” startups, which did not act in accordance with this strategic principle. Many of not most of the dot.com startups were designed to capture interest and “eyeballs” and not to fulfil a defined market need per se. Accordingly, the failed “dot.coms” never met the initial test of a successful business which is to demonstrate “proof of concept.”
A demonstration of “proof of concept” requires not only that a product or service can be provided per se, but that a business can generate revenue that exceeds the cost of delivery of the product or eservice.
Empirical Research Support for this 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. The primary criterion variable that has been used in validation was financial results. Some of this research has been summarized in Flamholtz (2002-3). The highlights of this research as well as other related studies are presented below.
The “Pyramid model” proposes that there are six key factors or “strategic building blocks” of successful organizations, and the six key variables must be designed as a holistic system, termed “The Pyramid of Organizational Success.” This model has been supported by empirical research. Flamholtz and Aksehirli (2000) tested a link between the organizational success model and the financial success of a set of 16 organizations (8 pairs of successful versus less successful) in eight different industries. Using the Friedman Two-way Analysis of Variance and a regression analysis, they found a statistically significant relationship between the proposed model of organizational success and financial performance. The Pyramid model explains approximately 28% of financial performance for the sample firms. This empirical analysis showed a clear relationship between the organizational development pyramid framework and financial performance.
In addition, Flamholtz and Hua (2002 A) reported the results of an empirical test of the hypothesized relationship regarding financial success and the degree of development of six key variables (or “strategic building blocks”) included in the organizational development pyramid within a single firm. The research site was a U.S.-based, medium-sized industrial enterprise.
To assess this issue, they compared divisional data on the average degree of organizational development with divisional “EBIT” (earnings before interest, and taxes), a classic measure of financial performance for eighteen divisions. Specifically, they ran a regression between: 1) the degree to which each division was perceived as being developed on the six key strategic building blocks as a whole (i.e., the average pyramid development score) and 2) EBIT. Adjusted R2 is 0.55, and is statistically significant at 0.0003 level. This means that approximately 55% of EBIT is explained by the six variables comprising the Pyramid of Organizational Development. There is a 99.97% probability that this result could not occur by chance alone. This result supports the hypothesis of a relationship between the degree of strategic organizational development and the financial performance of organizations.
Additional research on the predicative validity of the Pyramid and financial performance has also been conducted by Flamholtz and Kurland (2005). That study was conducted with several divisions of a large financial services firm. The results of an empirical test of the hypothesized relationship regarding the degree of development of six key variables included in the organizational development pyramid and financial success indicated that Adjusted R2 is 0.735, and is statistically significant at 0.018 (0.02) level.
USING THE PYRAMID TO CREATE INCREMENTAL ALPHA
The Pyramid can be used as a tool or template for creating “alpha,” the incremental value created in a business vis a vis its competitors. The Pyramid identifies six key building blocks of successful organizations. It can be used, as we will explain, to both assess the source of a company moat or sustainable advantages; it can also be used as a template to plan the creation of a company’s moat or sustainable advantages, which are the source of incremental alpha.
The Sources of Differential Alpha
What we have also learned from our research is that the sources of competitive advantage in the Pyramid are at the top three levels, especially the top two levels, and the business foundation, but generally not at the bottom three levels. Specifically, organizations generally are essentially the same at the bottom three levels of the Pyramid. The exception is when there is some uniqueness in product such as pharmaceuticals under patent protection, as with Neupogen at Amgen. However, even when there is initially a unique product, competition typically erodes that first mover advantage. For example, Viagra developed by Pfizer was the first miracle drug for erectile dysfunction. It was some followed by Cialis by Eli Lilly and Levitra by Bayer.
Differential Advantages at the Top Three Pyramid Levels
The differential advantages at the top three pyramid levels (operational systems, management systems, and culture management) tend to be more sustainable. They are sustainable because these factors are not easily replicated or copied by competition.
Competitive Advantages from Operational Systems
For example, Walmart has developed sustainable competitive advantages in is world class logistics and distributions systems. K-mart, historically Walmart’s main competitor, does not have the same operational systems for logistics and distributions systems. They are at a sustainable competitive disadvantage vis a vis Walmart!
The result of Walmart’s sustainable competitive advantage vis a vis Kmart can be clearly seen the stock prices of both companies. For the period of the 1990s, the stock price of K-mart approximately doubled; however, the stock price of Wal-Mart increased by more than tenfold![16] In addition, if we continue this comparison for three more years (2000-2002), K-Mart filed for bankruptcy protection in 2002. Wal-Mart’s stock price decline from its peak due to the decline in the stock market from the “dot.com” collapse; but it still increased from about $25 per share to more than $190 per share over the 13 year period, an increase of about 660%[17].
Competitive Advantages from Management Systems
Management systems include the planning system, organizational design, performance management system, and leadership development system of an enterprise. Like custom software, these systems are not “commodities” and cannot be easily copied. The development of Management systems can require from two to five years or longer for their creation and installation.
Accordingly, once they are developed they comprise a source of sustainable competitive advantage.
Competitive Advantages from Culture Management
Competitive advantages from culture management are quite possibly the ultimate source of sustainable competitive advantage (Flamholtz and Randle, 2011). All cultures are virtually unique, even if the same verbiage is used to describe two companies’ core values. Culture begins with the “cultural DNA” of its founders.[18]
Because cultural values can “mutate” over time as people enter and leave an organization, it must always be managed. Accordingly, the existence of a culture management system is a necessary tool for effective management of corporate values.
Corporate culture is quite possibly the only truly unique thing a company can create that is a sustainable advantage over time. That is why we have termed it “the ultimate strategic asset.”
Validity of the Pyramid Model
In conclusion, all of the empirical research to date on the validity of the Pyramid model has indicated that there is a statistically significant relationship between the Pyramid and financial results. This is an indication that the hypothesized relationship is valid.
The Management Systems Pyramid of Core Methodologies ©
Based upon the foundation of our program of empirical research, we have developed a set of holistic integrated management methodologies to help organizations achieve long term sustainable success. This set of methodologies includes methods and tools for organizational assessment, strategic planning, organizational systems and management/leadership development.
This is shown graphically in Exhibit 3.
Management Systems’ Integrated Model for Organizational Development©
CONCLUSION
This article has proposed that there is increasing recognition that most of current management theory is weak or empty; and that the weakness of most of current management theory results from the failure to apply the scientific method of empirical research to the creation and testing of management concepts, frameworks, methods and tools. We have also proposed a new emerging paradigm of management based upon the Pyramid of Organizational development and related constructs. We have also cited empirical research that supports the validity of the Pyramid framework.
References
· Flamholtz, E. (1995). Managing Organizational Transitions: Implications for Corporate and Human Resource Management. European Management Journal, 13 (1), 39-51.
· Flamholtz, E. (1996). Effective Organizational Control (1996) A Framework, Applications, and Implications. European Management Journal, 14 (6), 596-611.
· 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
· Flamholtz, Eric G. and Hua, W. (2003). Searching for Competitive Advantage in the Black Box, European Management Journal, 21 (2), 222-236.
· Flamholtz, E. (2003). Putting Balance and Validity into the Balanced Scorecard. Journal of Human Resource Costing and Accounting, 7 (3), 15-26.
· Flamholtz, E.G., Bullen, M.L., and Hua, W. (2003) Measuring the ROI of Management Development: An Application of the Stochastic Rewards Valuation Model. Journal of Human Resource Costing & Accounting, Spring, pp. 21-40.
· Flamholtz, E.G. and Narasimhan-Kannan, Rangapriya (2005). “Differential Impact of Culture upon Financial Performance: An Empirical investigation,” European Management Journal, 23 (1), pp. 50-64.
· 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.
· Flamholtz, E. (2005). Conceptualizing and measuring the economic value of human capital of the third kind: Corporate culture. Journal of Human Resource Costing and Accounting, 9 (2), 78-93.
· Kannan-Narasimhan, R. and Flamholtz, E. “Growing Pains: A Barrier to Successful Corporate Entrepreneurship,” Silicon Valley Review for Global entrepreneurship Research (SVRGER, 20006, 2 (1), 4-24.
· Eric G. Flamholtz and Rangapriya Kannan-Narasimhan, “Growing Pains and Corporate Entrepreneurship,” The Human Factor, May-June, 2006, vol 1, no, 2, pp. 40-45.
· Eric Flamholtz and Yvonne Randle, “Successful organizational Development and Growing Pains,” MORE, March, 2007
· Eric Flamholtz and Yvonne Randle, “Successful organizational Development and Growing Pains,” Jigsya, Delhi School of Economics, India, 2007.
· Eric Flamholtz and Yvonne Randle, “Leading Strategic and Organizational Change: Bridging Theory and Practice,” Jigsya, Delhi School of Economics, India, 2007.
· Flamholtz, E. (2009). Towards Using Organizational Measurements to Assess Corporate Performance, Journal of Human Resource Costing and Accounting, Volume 13, Issue 2, pp. 105-117.
· Eric Flamholtz, (2009) “The Management of Corporate Culture in Entrepreneurial Firms,” International Review of Entrepreneurship. Volume 7, Issue no. 3, pp. 1-20.
· Eric Flamholtz, (2011) “The Leadership Molecule Hypothesis: Implications for Entrepreneurial Organizations,” International Review of Entrepreneurship. Volume 9, Issue no. 3, pp. 1-23.
· Eric Flamholtz and Rangapriya Kannan-Narasimhan, (2013) “Examining the Leadership Molecule: An Empirical Study of Key Leadership Roles in Rapidly Growing Entrepreneurial Businesses,” International Review of Entrepreneurship. Volume11, Issue no. 2, pp. 1-22.
· Eric Flamholtz and Dariusz Brzezinski, “Strategic Organizational Development and Growing Pains: Empirical Evidence from Europe,” International Review of Entrepreneurship, April 2016.
· Antonia Dimitrova, Ivailo Iliev and Eric G Flamholtz, “Strategic Organizational Development and Corporate Culture: Empirical Evidence From Europe,” International Journal of Human Resource Management and Organizational Behavior, February, 2017.
[1] Matthew Stewart, The Management Myth, W.W. Norton & Company, 2009
[2] Peters and Waterman, In Search of Excellence,
[3] Peters with Nancy Austin, A Passion for Excellence,
[4] William Ouchi, Theory Z,
[5] Douglas McGregor
[6] Kaplan and Norton
[7] Flamholtz
[8] Marshall W. Meyer, Rethinking Performance Measurement: Beyond the Balanced Scorecard, Cambridge University Press, 2002, p. 101.
[9] Ibid, pp. 86-107.
[10] Ibid, p.107.
[11] Ichak Adizes, Corporate Lifecycles, Prentice Hall, 1988, pp. xiii-xiv.
[12] Ibid, p. v.
[13] Rensis Likert, New Patterns of Management, McGraw-Hill, 1961; Rensis Likert, The Human Organization: Its Management and Value, McGraw-Hill, 1967.
[14] See Eric 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.
[15] Flamholtz and Randle, Growing Pains: Transitioning from an Entrepreneurship to a Professionally Managed Firm, Fifth Edition, Wiley, 2016 p. 28.
[16] Adjusted for stock splits.
[17] This comparison was terminated after K-Mart filed for bankruptcy.
[18] See Flamholtz and Randle, 2011.