The article of record as published may be located at http://dx.doi.org/10.1016/S1474-7871(05)14007-

Euske, K.J.

Malina, Mary A.

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Calhoun: The NPS Institutional ArchiveFaculty and Researcher Publications Faculty and Researcher Publications2005The Pyramid of OrganizationalDevelopment as a PerformanceMeasurement ModelEuske, K.J.þÿ A d v a n c e s   i n   M a n a g e m e n t   A c c o u n t i n g ,   V o l u m e   1 4 ,   1 6 7  1 7 5http://hdl.handle.net/10945/39555THE PYRAMID OFORGANIZATIONALDEVELOPMENT ASA PERFORMANCEMEASUREMENT MODELK. J. Euske and Mary A. MalinaIn recent times, performance measurement has moved from lists of keyperformance indicators to more comprehensive business models that reflectthe firm as a system. Consistent with this more comprehensive approach,Flamholtz (2005) presents a holistic performance measurement modeltermed the Pyramid of Organizational Development. The Pyramid presentssix key building blocks of successful organizations: (1) markets, (2) prod-ucts, (3) resources, (4) operational systems, (5) management systems, and(6) corporate culture. Flamholtz suggests that different levels of the Pyramidare relatively more important at different stages of company growth. Heargues that if fit between the Pyramid and growth stage is not achieved, thenthe organization will experience growing pains that negatively impact fi-nancial performance. Our task is to comment on how to improve and buildupon this model, as presented in Flamholtz (2005), with an eye to the moregeneral question of what we should expect of performance measurementAdvances in Management AccountingAdvances in Management Accounting, Volume 14, 167–175Copyright r 2005 by Elsevier Ltd.All rights of reproduction in any form reservedISSN: 1474-7871/doi:10.1016/S1474-7871(05)14007-6167models.1 We proceed with a discussion of model characteristics, followed bymodel testing, and then implications for such models.MODEL CHARACTERISTICSCapturing Complex InterrelationshipsIf a comprehensive performance model for business is to be useful in ananalytic and predictive sense, the model must capture the interrelationshipsof factors that influence organizational performance such as organizationalmaturity, size, products and services, management systems, industry char-acteristics, and environmental influences. Flamholtz includes a number ofkey factors in his model. However, Flamholtz’s explication of the factorsdoes call into question some aspects of the model. For instance, Flamholtzexplicitly equates level of sales revenue with specific growth stages of theorganization and implicitly equates level of sales revenue with the maturityof the organization. Although these factors may be correlated in many or-ganizations, care must be taken so that the comprehensive performancemodel does not confound key factors.A manufacturing organization, such as a shipyard, could be a relativelynew venture with only one order and be in the highest sales revenue categoryof the Flamholtz model. On the other hand, a firm could be very mature witha small sales volume. It appears that the model as presented by Flamholtz(2005) is meant specifically to apply to organizations where dollar sales vol-ume categories as shown in Exhibit 3 (Flamholtz, 2005) correlate with boththe chronological age of the organization and the maturity of its products andprocesses. Greiner (1998) clearly distinguishes between size and age in hismodel of organizational evolution. Interestingly, his definition of size is vaguebut he does discuss both number of employees and sales volume as indicatorsof growth. Growth and organizational maturity are complex concepts that arich holistic performance measurement model needs to fully capture. InFlamholtz and Randle (2005), the authors do discuss the complexity of therelationships and the difficulty of operationalizing these concepts.Assessing Issues of Use Versus DesignThe applicability of a performance measurement model will also depend onits ability to identify and relate issues to the design versus the use of theK.J. EUSKE AND MARY A. MALINA168performance factors. It is possible to have proper processes and systems inplace and not use them well, just as it is possible to have well utilized butweak processes and systems. In the Flamholtz model, a consequence of misfitbetween the Pyramid and firm growth stage is labeled growing pains. It isunclear whether fit, or lack thereof, is based on the design of the buildingblocks, how employees use the building blocks, or both. The logic behind themodel appears to be that it is designed for relatively large growing organ-izations that render the infrastructure of the organization framework obso-lete at regular intervals. An implicit assumption in the model seems to be thatthe issues are those of design not in use. A generalizable holistic performancemodel would address not only the growing organization, but also those thatachieve a steady state before reaching the categories containing the larger-sized organizations listed in Exhibit 3 (Flamholtz, 2005). Such a model wouldmore readily support the analysis of issues of both design and use.Reconciling Divergent ViewsA generalizable holistic performance measurement model will need to ad-dress the seemingly divergent views regarding factors that are most likely tobe important to an organization at various stages of its growth. For in-stance, several parallels can be made between the Pyramid and Simons’(1995) Levers of Control model. As an example, Simons’ beliefs and bound-ary systems mirror the corporate culture level of the Pyramid, while Simons’interactive and diagnostic control systems are similar to the Pyramid’smanagement systems level. Simons addresses the concept of fit between hislevers of control and life cycle stages. Simons suggests that beliefs andboundary systems should be implemented as a firm begins to expand. Newlocations, new product offerings, and an increase in the number of employ-ees necessitate top management formally document and communicate thevalues, beliefs, and norms of the organization. However, Flamholtz (2005)suggests that this is optimally performed later at the consolidation phase.The implications for the analysis of poor or even well-performing systemsdiffer depending on the model adopted.Specifying Causal RelationshipsFew would argue with the observation that past experience conditions ourreactions to the future. We are likely to use or adapt past successfulOrganizational Development as a Performance Measurement Model 169intervention strategies to address new experiences. Eventually, as Greiner(1998) argues, the very practices that were successful in the smaller andyounger organization become a problem as the organization grows andmatures. If we could successfully judge when the old practices and structuresare a problem, we could replace them with practices and structures thatappear to be appropriate. However, if we misjudge what needs to be re-placed, the fix could in effect become the problem.The issue of inappropriate adjustments must be incorporated in any ho-listic performance measurement model. Otherwise, the direction of causalityin the performance measurement model along with its usefulness as a tool toenhance performance will be open to question. For instance, in Flamholtz’smodel, the assumption that the misfit between sales revenue and organiza-tional infrastructure causes growing pains is tenuous. In order to mitigatethe growing pains, Flamholtz suggests that organizations put their larger,improved infrastructures in place prior to anticipated growth. However,putting the larger, improved infrastructure in place may result in the grow-ing pain described as growth in sales but not in profits. This growing paincould result from changing the infrastructure too soon, not too late. Per-haps, so much money was invested in improving infrastructure that currentprofits suffered. There may be circularity in the causal cycle of growingpains and infrastructure.Defining the Degree of GeneralizabilityIt is an open question whether performance measurement models are uniqueto each organization or are generalizable across companies. To help ensureappropriate application, performance measurement models should be de-fined in terms of their generalizability. For example, a balanced scorecard(Kaplan & Norton, 1996, 2001) is virtually unique to each organizationsince it is tailored to each company’s specific strategy. Cross-sectional as-sessment of performance using balanced scorecards is nearly impossible.The Pyramid, however, has potential to assess performance across compa-nies. Scales used to assess the level of organizational development in earlygrowth stages appear to be rather generic. For example, Flamholtz and Hua(2002a) assess the level of organizational development based solely on sixquestions, one for each building block. However, once a company movespast the early growth stages, Flamholtz suggests that competitive advantagebecomes rooted in the company’s unique culture. At that point, cross-sec-tional assessment of performance becomes less plausible. Idiosyncrasies ofK.J. EUSKE AND MARY A. MALINA170firm-level definitions of organizational culture are likely to emerge makingcross-sectional comparisons difficult. For example, Flamholtz (2001) as-sesses the level of cultural development, just one of the six building blocks,based on more than 25 questions developed specifically to map to thatparticular organization’s strategy. The Pyramid has potential for cross-sec-tional performance evaluation in early growth stages, but that power wanesas the model shifts its focus to the unique cultures. This does not necessarilydiminish the potential usefulness of the model. However, the degree of gen-eralizability does affect how the model should be used.Delineating Granularity and FrequencyUsefulness of a model is also contingent on knowing when and where toapply the model based on the inherent temporal characteristics of the modeland the accompanying data. The Pyramid as presented in Flamholtz (2005)could be considered a broad, episodic performance measurement model. In agrowing firm, the framework is designed to detect the need for three signif-icant changes, one each time a company exceeds the limits of a growth stage.2From the information presented (Flamholtz, 2005), the model does not ap-pear to be designed to detect small changes over time affecting performancewithin a growth stage. Other performance measurement models, such as thebalanced scorecard (Kaplan & Norton, 1996, 2001) and the performancepyramid (Lynch & Cross, 1991), have a greater potential to detect smallchanges that affect performance throughout a company’s life. These twomodels can be characterized as more detailed, continuous use models. In another work, Flamholtz (2003) suggests that the Pyramid can also be used in acontinuous fashion by using the six building blocks as performance meas-urement model categories instead of the balanced scorecard’s four perspec-tives. However, Flamholtz and his co-authors have not recommended ortested specific qualitative or quantitative measures within each of the sixbuilding blocks which would facilitate its use as a continuous model.MODEL TESTINGOur interpretation of the overall Pyramid of Organizational Developmentframework is given in Fig. 1.Any proposed holistic performance measurement model needs to be sup-ported by well-designed and executed research. To be sure, the process ofOrganizational Development as a Performance Measurement Model 171model testing and validation is lengthy and tedious. Flamholtz refers to sixpublished studies, all published in the European Management Journal, todemonstrate what he identifies as at least preliminary results to support themodel. Four are based on multiple divisions of the same company(Flamholtz, 2001; Flamholtz & Hua, 2002a, b; Flamholtz & Kannan-Narasimhan, 2005) and two are based on the same set of companies(Flamholtz & Aksehirli, 2000; Flamholtz & Hua, 2003). AlthoughFlamholtz (2005) does not indicate so, the samples drawn seem to be the-oretical samples (Glaser & Strauss, 1970) chosen to help build the model,which is an appropriate research strategy during model development. Modeltesting requires additional sampling strategies.A major implication from the framework is that there must be fit betweenthe degree of organizational development (i.e., the six building blocks) andstage of company growth (Fig. 1, Box A). If fit is not achieved, then growingpains will result (Fig. 1, Box B), leading to poor financial performance (Fig.1, Box C). None of the six empirical studies outlined in Flamholtz (2005)investigate the first link in the model. One published study, Flamholtz andHua (2002b), tested the relation between growing pains and financial per-formance. Since growing pains and financial performance are measuredcontemporaneously, it is difficult to determine if the growing pains actuallypreceded the poor financial performance. Neither human resource research-ers nor empirical results are in agreement about whether employee attitudes,which Flamholtz’s growing pains appear to reflect, influence business out-comes or whether business outcomes influence employee attitudes (Koys,2001). Once again, circularity comes into question.Another, more basic implication from the model is that the six buildingblocks are drivers of financial performance (see Fig. 2). The majority of theempirical tests (Flamholtz & Aksehirli, 2000; Flamholtz, 2001; Flamholtz &Hua, 2002a, 2003; Flamholtz & Kannan-Narasimhan, 2005) examine thislink between the degree of organizational development and financial per-formance, regardless of fit with growth stage. The results of the Pyramidstudies are encouraging, in that the Pyramid appears to capture relevantdeterminants of financial performance. Flamholtz is making some initialFit Between Degree ofOrganizationalDevelopment and Stage ofGrowthGrowing Pains Financial PerformanceNegative Relation Negative RelationFig. 1. Pyramid of Organizational Development Framework.K.J. EUSKE AND MARY A. MALINA172efforts at providing evidence to support the model. However, at this pointthe results are, as Flamholtz (2005) clearly states, preliminary.IMPLICATIONS OF EMPIRICAL RESULTSAs argued previously, a well-developed holistic performance measurementmodel should be useful for both analytic and predictive purposes. The re-search necessary to support such use of a model will of necessity involve, asdiscussed by Flamholtz (2005), longitudinal studies. The promising findingsof correlations among some pieces of the model are a first step towardestablishing causality. Temporal precedence needs to be established (e.g.,growing pains occurring before financial performance suffers) before a claimof predictive ability can be made. Given the research cited in Flamholtz(2005), it would seem more appropriate to limit any use of the model toclassification rather than prediction. At this stage of model development,empirical testing to date is useful for generalizing to theory, rather thangeneralizing to a population (Yin, 1994). In the future, other researchers cantest this framework with randomly selected companies in order to generalizetheir results to populations of firms.CONCLUDING COMMENTSAs the trite old expression goes, ‘‘behold the turtle, he only makes progressby sticking his neck out.’’ This is not to imply our colleague is a turtle orturtle like but he has and does stick his neck out. In doing so, he delivers afoundation that can help other researchers develop better models. For in-stance, today it is very popular to be a researcher studying intangibles.Flamholtz was attempting to deal with intangibles long before it was pop-ular. His work in human resources accounting in the 1970s (e.g., Flamholtz,1971) was one of the early serious attempts at the analysis of intangibles.Degree of OrganizationalDevelopment Financial PerformancePositive RelationFig. 2. Building Blocks as Performance Drivers.Organizational Development as a Performance Measurement Model 173We are able to criticize his model from various perspectives primarilybecause he has held it up to be critiqued. More important than our com-ments is that he is developing a model for us to critique.NOTES1. We have attempted to limit our discussion to the model as presented inFlamholtz (2005). To help make this paper coherent, we did at times find it necessaryto refer to other published formulations of the Pyramid. We have used the publishedarticles referenced in Flamholtz (2005) to discuss the development and testing of thePyramid.2. Flamholtz (2005) and Flamholtz and Hua (2002a) present four stages of growthwhile Flamholtz and Randle (2005) presents seven stages.REFERENCESFlamholtz, E. (1971). A model for human resource valuation: A stochastic process with servicerewards. The Accounting Review, 46(2), 253–267.Flamholtz, E. (2001). Corporate culture and the bottom line. European Management Journal,19(3), 268–275.Flamholtz, E. (2003). Putting balance and validity into the balanced scorecard. Journal ofHuman Resource Costing and Accounting, 7(3), 15–26.Flamholtz, E. (2005). Strategic organizational development and financial performance: Impli-cations for accounting, information, and control. Advances in Managerial Accounting,14, 141–168.Flamholtz, E., & Aksehirli, Z. (2000). Organizational success and failure: An empirical test of aholistic model. European Management Journal, 18(5), 488–498.Flamholtz, E., & Hua, W. (2002a). Strategic organizational development and the bottom line:Further empirical evidence. European Management Journal, 20(1), 72–81.Flamholtz, E., & Hua, W. (2002b). Strategic organizational development, growing pains andcorporate financial performance: An empirical test. European Management Journal,20(5), 527–536.Flamholtz, E., & Hua, W. (2003). Searching for competitive advantage in the black box.European Management Journal, 21(2), 222–236.Flamholtz, E., & Kannan-Narasimhan, R. (2005). Differential impact of cultural elements onfinancial performance: An empirical investigation. European Management Journal, 23(1),50–75.Flamholtz, E., & Randle, Y. (2005). Measuring and managing successful organizational scale-upforthcoming in conceptualizing scale-up: Multidisciplinary perspectives. Chicago, IL: TheUniversity of Chicago Press,.Glaser, B. G., & Strauss, A. L. (1970). Theoretical sampling. In: N. K. Denzin (Ed.), Soci-ological methods (pp. 105–114). Chicago: Aldine.K.J. EUSKE AND MARY A. MALINA174Greiner, L. E. (1998). Evolution and revolution as organizations grow. Harvard BusinessReview, 76(3), 55–67.Kaplan, R. S., & Norton, D. P. (1996). The balanced scorecard. Boston, MA: Harvard BusinessSchool Press.Kaplan, R. S., & Norton, D. P. (2001). The strategy-focused organization. Boston, MA:Harvard Business School Press.Koys, D. J. (2001). The effects of employee satisfaction, organizational citizenship behavior,and turnover on organizational effectiveness: A unit-level, longitudinal study. PersonnelPsychology, 54(1), 101–115.Lynch, R. L., & Cross, K. F. (1991). Measure up! Yardsticks for continuous improvements.Oxford, UK: Blackwell.Simons, R. (1995). Levers of control. Boston, MA: Harvard Business School Press.Yin, R. K. (1994). Case study research design and methods. Newbury Park, CA: Sage.Organizational Development as a Performance Measurement Model 175

The Pyramid of Organizational Development as a Performance Measurement Model

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