Strategic Organizational Development, Growing Pains and Corporate Financial Performance:: An Empirical Test

In a previous paper, Flamholtz (1995) proposed a framework for strategic organizational development. This framework included an organizational effectiveness model (the six factor pyramid of organizational success), and a life cycle model (seven key stages of organizational growth, which uses revenues as a surrogate measure of organizational size. In this framework, strategic organizational development equilibrium occurs when there is a fit between the organization's strategic development of the six key building blocks of organizational success and its size or stage of development. When this fit does not occur, the organization will experience a variety of 'organizational growing pains.' These growing pains are symptoms of organizational distress and an indication of the need to change, if the organization wants to continue to operate successfully. The ultimate criterion of organizational success is the ability to continue to operate profitably, and therefore the ultimate measure of organizational success is financial performance. The current paper builds upon this previous framework and presents an empirical test of the hypothesized relationship between 'organizational growing pains' and corporate financial performance. It also provides evidence that there appear to be certain threshold levels of growing pains which might be used to predict which organizations will be profitable versus those which are likely to be unprofitable. Although there has been research to test the overall relationship between the organizational effectiveness model and financial performance (Flamholtz and Aksehirli, 2000; Flamholtz and Hua, 2001), there has been no previous empirical research on the relationship between growing pains and financial performance, as reported in the present study. Another question of interest in this study is: are there benchmark levels of growing pains which might be used to predict which organizations will be profitable versus those which are likely to be unprofitable? The hypothesized relationship between growing pains and performance in previous literature has been conceptual in nature; in contrast, this study presents some very specific 'benchmarks' for growing pains in relation to successful organizational financial performance. The current paper reports the results of a test of the hypothesized relationship between growing pains and financial performance within a US manufacturing firm, using a set of 15 relatively comparable divisions. Each division's growing pains was measured by a questionnaire (Appendix A). This score and these measures of financial performance ('EBIT') were used in a regression analysis to test the predictive validity of the hypothesized relationship. The results of the analysis suggest that there is a statistically significant relationship between growing pains and financial performance. An analysis of the relationship between specific growing pains scores and financial performance was also conducted to determine benchmark levels of 'safe' versus 'unsafe' growing pains. The results suggest that there appears to be a maximum level of growing pains beyond which organizational financial health is at risk. These findings have potentially significant implications for management theory and practice.