High degree of

decentralization/
empowerment
with relative
performance
contracts: aligned
with today's critical
success factors!

Buraucratization
through growing
hierarchy and functional
differentiation

Pioneering
phase

Foundation

Transformation
through radical devolution
and functional integration

Evolution
within the
decentralized model

Integration
phase

Time line: organization's age

Sustainment
and deepening of
the decentralized
model, over the
course of
generations

Se veSeveral
ra l d years
e c a dolde s
o ld

International Center for

Differentiation Stagnation"
within the tayloristic model
phase

Low degree of
decentralization/
empowerment
and fixed performance
contracts: in conflict
with today's critical
success factors!

Outperformance

Degree of decentralization/empowerment

The four phases of

organizational evolution
Page 1

Beyond-Budgeting-OpenCourseWare

The four phases of

organizational evolution

Course overview

This course describes the three phases of organizational development/evolution (pioneering phase,
differentiation phase, and integration phase) developed by Bernard Lievegoed in 1969 and expanded by the
fourth associative phase by Friedrich Glasl in 1993 accompanied by Beyond-Budgeting-Organizations that
reached the integration phase or the associative phase either by transformation or sustaining the alternative
model since the pioneering phase. Required knowledge is a basic understanding of the Beyond-BudgetingModel, knowledge of Theory X and Theory Y from Douglas McGregor and basic knowledge of open
innovation and crowdsourcing/collective intelligence.

Page 2

Beyond-Budgeting-OpenCourseWare

The four phases of

organizational evolution

Table of Contents
Course overview......................................................................................................................................2
Introduction............................................................................................................................................4
The organizational evolution pathway according to Lievegoed/Glasl and Beyond Budgeting..........................5
The four phases of organizational evolution...............................................................................................7
The pioneering phase..........................................................................................................................7
The differentiation phase.....................................................................................................................9
The integration phase........................................................................................................................12
The associative phase........................................................................................................................14
The evolution of the organizational culture..............................................................................................15
Is the associate phase a contemporary concept?......................................................................................16
The evolution path of Beyond-Budgeting-Organizations............................................................................17
The transformation from the differentiation phase to the integration phase...............................................18
Similar concepts of organizational evolution ............................................................................................19
References............................................................................................................................................20
License..................................................................................................................................................20
Version 1.1: April 2009

Page 3

Introduction

Bernard Lievegoed's concept of the three phases of organizational development is based on the General
System Theory of Niklas Luhmann and is also linked to Cybernetics, that sees organizations as living social
systems that evolve like humans or plants. Further foundations of the original three phases of organizational
development is the Freedom philosophy of Rudolf Steiner.
According to Lievegoed every organization evolves after foundation in different phases (pioneering phase,
differentiation phase, and integration phase) like a human evolves from a child to an adult. Each
organizational phase is thereby linked to a specific organizational form, leadership style and interaction with
the system's environment. In 1993 Friedrich Glasl added a fourth phase, the associative phase, which is
closely linked to the concept of the lean enterprise. Further Glasl notes that the forth associate phase is not
the end of organizational development, but there could be also a fifth phase that is merely linked to beyond
time and space and which is not so material.
The description of the four phases can serve as an diagnostic to determine the status of an organization.

Page 4

The organizational evolution pathway according to Lievegoed/Glasl and

Beyond Budgeting

Originally to Lievegoed/Glasl each organization evolves from the pioneering phase to the differentiation
phase to the integration phase and finally to the associative phase. The change to a new phase is always
accompanied by a crises with specific symptoms to which a new solution is searched.
With reference to the BBRT research and the Beyond-Budgeting-Model, the problems of traditional
Budgeting which served as the initial starting point of the BBRT research, can be seen as one of the
indicators of the differentiation phase's crises symptoms that affects the entire organization / the entire
system. Correctly the BBRT stated that budgeting is merely a symptom of a deeper problem with the
command-and-control management model that reflects the differentiation phase.
Like the Beyond-Budgeting-Movement Lievegoed/Glasl see not the curing of the symptoms of a phase's
crises as essential, but to transform completely to a new phase, or in Lievegoed/Glasl's words to renew the
organization.
Noncompliance with Beyond Budgeting is that an organization cannot evolve according to Lievegoed/Glasl
from the pioneering phase into the integration phase. Thus this issue has to be evaluated further in detail
within the pioneering phase. Furthermore it is not possible to evolve directly into the differentiation phase
(thus leaving the pioneering phase out).
With reference to this chart it is to note, that it inspired formally tayloristic organizations to transform to
Beyond Budgeting. Dm drogeriemarkt (Germany) and Paradigma (Germany) both became aware that the
organization was stuck within the differentiation phase. Lievegoed's influence can further very good seen at
dm drogeriemarkt in firstly that the underlaying philosophy of Rudolf Steiner was adopted and the the aim of
the integration phase that all employees can and will act intelligent in the sense of the entire organization
is verbally integrated into dm drogeriemarkt's organizational culture.

Page 5

Degree of decentralization/empowerment

Low degree of
decentralization/
empowerment
and fixed performance
contracts: in conflict
with today's critical
success factors!

High degree of
decentralization/
empowerment
with relative
performance
contracts: aligned
with today's critical
success factors!

Differentiation Stagnation"
within the tayloristic model
phase

Buraucratization
through growing
hierarchy and functional
differentiation

Pioneering
phase

Foundation

Transformation
through radical devolution
and functional integration

Evolution
within the
decentralized model

Sustainment

Integration and deepening of the

decentralized model,
phase
over the course of

Time line: organization's age

generations

Se veSeveral
ra l d years
e c a dolde s
o ld

The three original organizational development phases according to Beyond Budgeting. Source: BBTN

Page 6

The four phases of organizational evolution

The pioneering phase

Thought the vision and creativity of an pioneer the organization is founded and starts is evolutionary
pathway always within the pioneering phase. Lievegoed researched organizations, especially subsidiaries
abroad, that were initially founded as differentiation phase organizations, but shortly failed. From the
beginning on the entire organization is created outside-in to fulfill a customer need. The pioneers own
leadership style influences the entire organization. Usually it is autocratic. With reference to Beyond
Budgeting it is to conclude that the specific leadership styles of the pioneers were initially in line with the
devolved leadership style of Beyond Budgeting, that finally resulted in maintaining the alternative model
even over decades and generations. This can for example be seen in the leadership philosophy of Bill Gore
(W.L. Gore & Associates), Dennis Bakke (AES), Roger Sant (AES), Richard Branson (Virgin), Linus Torvalds
(Linux), and Klaus Kobjoll (Schindlerhof). The best metaphor to describe the pioneering phase is a big
family.
Key principles of the Pioneering phase are:

direct and informal communication between all members, all employees know each other

the pioneer speaks the language of his employees, often he or she solely recruits new staff and
recruits people that matches his or hers personal style and personality

no formalized and written values, rules, regulations, obligations, policies and procedures,
organizational charts, job descriptions, etc. exist

the knowledge about customers is like very aspect of the organization very intuitive

the organization is built around the employees: e.g. the work is linked to individual employees; in
this way every employee tries to do the work which matches his or hers own interests and abilities
(job sculpting); new staff is not hired for a specific function, but to usually to start with a tasks
that matches his or hers skills and to further develop around talents and interests. Usually the
pioneer recruits other persons that do not only reflect his or hers own style and personality but are
also co- entrepreneurs.

the style of work and problem solving is improving and the true force of a start-up and assures the
adaptability of the organization e.g. to adapt to changing customer needs or customer orders

no staff to take care of HR issues exists and like a big family employees care for each other
Page 7

the pioneering organization works outside in from customer order to customer order without
planning to much ahead and without an inventory (sense-and-respond philosophy)

all customers are known and individual relationships are nurtured (no anonymous market exists)

transparency

control is based on the customer and the annual profit and loss statement

if a single persons leaves the organization usually a tied to this person service or product cannot be
offered any longer to the customer

assumptions about human nature: Theory Y view

Typical first crises symptoms of the pioneering phase are:

a too fast changing environment (incl. technological changes and new arising competitors) to which
pace the pioneers cannot follow

fast organic growth with increasingly unknown customers

new hires that do not match the leadership style of the pioneering organization

If the start-up is able to cope with these symptoms, it enters the so called overripe pioneering phase and the
following new crises symptoms arise:

the employees do not anymore trust in the intuition of the pioneer and his or hers image decreases
and the autocratic leadership style of the pioneer dominates

decreasing profits

conflicts arise within the leadership style

customer complaints increase and can't be handled substantially any more

strength and flexibility decrease

communication problems, lack of information

decreasing motivation

The crisis symptoms of the pioneering phase usually result in a loss of the intuition and the visionary
strength of the pioneer and therefore the market environment is lost. Further customer relationships are
more and more replaced by economically efficiency calculations.

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The differentiation phase

The answer to the crises of the overripe pioneering phase is Scientific Management, better known by the
tayloristic or command-and-control system. As Lievegoed points out: The word scientific was without
doubt chosen to distinguish the unscientific, personal organization design of the pioneering phase. Both
Frederic Winslow Taylor as also Henry Fayol are the founding fathers of Scientific Management to deliver
maximizing efficiency. In this context also the scientific view of the homo oeconomicus is created, and both
applied to employees and customers. Within the pioneering phase products were sold that met the
customer's needs. Now within the differentiation phase aggressive selling of non-customized mass products
takes place, the function of sales promotion is created therefore. Products are pushed into the market
(make-and-sell philosophy) and customers are incentivated to buy them, regardless of customer needs.
The best metaphor to describe the differentiation phase is a dead machine.
Their principles of the differentiation phase can be seen as the antithesis of the pioneering phase:

instead of chaos order exists

instead of improvising planning takes place

instead of informal relationships formal relationships dominate

instead of a person the tasks are the main driver

instead of intuition rationalism

instead of organic mechanized

instead of personalized unpersonalized

instead of situational systematic-in-principle

Page 9

Further main principles of the differentiation phase are:

Mechanization and Automation human work is more and more replaced by machines

Standardization Standardizations aims to create standardization and therefore exchangeable. It

both related to technical standardization as also processes and working methods standardization and
enabled during the Industrial Revolution mass production. With reference to process and methods
standardization, standardized quality norms, standard job descriptions and functional descriptions,
performance evaluations, standardized processes and work orders evolve.

Specialization to generate economies of scale and scope. In this context also planning, execution
and control are separated. Both standardization and mechanization/automation are possible due to
specialization.

Coordination to link specialization together. Coordination is created by vertical Theory X style

leadership, the control span, staff and line organization, renumeration (Theory X view), top-down
communication, planned personal trainings.

Formalization this principle may be seen as the direct answer of the pioneering organization.
Hierarchical structures which are separated into functions and further departments, competences,
tasks, policies and procedures are rationally documented and can be seen explicitly in job
descriptions, formulas, hierarchical organizational charts, rules, regulations, planning, and
budgeting.

Assumptions about human nature: Theory X view

Furthermore the formerly outside-in orientation is replaced by an inside-out philosophy, with management's
main task to steer and control the internal structure. Instead of focusing on the customers who were part of
the system within the pioneering phase, internal plans determine production and mass products are sold to
an often anonymous market, that is not part of the system (make-and-sell philosophy). Further a key
aspect of the differentiation phase is the rational, depending on the Theory X and homo oeconomicus
mindset, separation of tasks, and policies and procedures. Over bureaucratization and over formalization
lead to a loss of the entrepreneurial mind-set and spirit.
Page 10

Typical crises symptoms comprising the entire system of the differentiation phase are e.g.

inflexibility due to formalization and bureaucratization issues that cannot handle rapid changes
(increasing complexity and dynamics from the General System Theorie's point of view) within the
system's environment

coordination problems

problems of the internal vertical communication: the communication pathways within the hierarchic
structure are too long, the organization's sphere of activity is not made explicit to the front-line from
the top, vice versa market information is poorly passed from the front-line to the top

external communication problem: the living contact with the customer is lost and replaced by an
internal make-and-sell philosophy with standardized mass products

process problems: intersections of processes do not match and nobody within the organization feels
responsible, the processes are too static and do not allow autonomous responsibility

problems with the staff-and-line organization

decreasing motivation closely linked with the specialized and formalized work, the decreasing
knowledge of the interconnectivity of the system and therefore also the decreasing of the meaning
of the work, further the identification with the organization's goals (the work gets less fun)

increasing cost cut measures

increasing efficiency improving measures, or vice versa decreasing of unproductively measures

dysfunctional (unethical) behavior due to fixed and predefined targets (fixed performance contracts)
e.g. within the bonus system

management's inability to trust people and therefore relying on management control

quickly out-of date budgets and plans (usually after about 3 months)

rivalries between departments

impeded work flow

Page 11

The integration phase

The symptoms of the differentiation phase's crises according to Lievegoed/Glasl can only be solved if
intrapreneuring takes place, which means that every employee acts within the sphere of activity as an
entrepreneur. As formerly the differentiation phase was the antitheses of the pioneering phase, the
integration phase is the synthesis of both the pioneering and the differentiation phase, the synthesis of the
advantages of both phases. As Lievegoed points out: The concept of the integration phase brings several
strengths of former two phases to a fertile synthesis. The pioneering phase flourished the start-up, because
the entrepreneurial spirit of the founder infected all employees and all cells of the organization. But the
entrepreneurial mindset and action was retrieved through the identification with the pioneer. The integration
brings the entrepreneurial spirit differently to life. It is not only related to the charismatic person at the top,
but the entire system of the organization is created that all employees can act on all places within the
organization entrepreneurial and responsible. Because of the intelligent action of every person together with
others towards a shared goal will determine the performance of the organization of the third phase. The
best metaphor to describe the integration phase is a living organism.
The final aim is that according to Lievegoed/Glasl that all employees can and will act intelligent in the sense
of the entire organization.
The key characteristics of the integration phase which were outlined in 1969 by Lievegoed do to our own
surprise nearly reflect the Beyond-Budgeting-Model (relating concepts are added in brackets):

horizontal orientation instead of vertical orientation [job sculpting, functional integration,

organization, coordination]

employees are either focused on internal or external customers, the focus is on the work flow and
not on on supervisors [customer, organization]

the organization is a living system that from time to time renews its products, markets, structures,
and procedures

the human nature reflects Theory Y, people strive to find fulfillment within their jobs which is
enabled by an environment that enables employees to act as single people or as teams intelligent in
the sense of the entire system. In order that everyone can act intelligent in the sense of the
organization, goals, vision, mission, shared values, and the business model has to be made
transparent by all employees [transparency, sphere of activity]
Page 12

the organization works again outside-in from the customer [sense-and-respond philosophy,
customer]

a high autonomy and responsibility [autonomy, responsibility]

the structure comprises self-regulating organizational units with responsibility [organization,

responsibility, autonomy]

to not resist in chaos, such an organization needs clear, concrete, recognized, and above all lived
mission statements, principles, and fundamentals. These are the decision basis and the criteria for
the later on control, if the one's own responsibility is linked to the entire system. These principles
are part besides the customer-orientation of the important integrative instruments of the integration
phase. (Lievegoed/Glasl) [responsibility, sphere of activity, customers, values].

Self-initiative and self-control [autonomy]

allocation of information to persons that need them [transparency]

external goals [goals, controls]

decentralized autonomous and linked teams entitled federative units: An autonomous unit can truly
only function well, if it has its own steering organ. This means, that central functions like
administration, planing, HR etc. are also decentralized. (Lievegoed/Glasl) [autonomy, organization,
functional integration]

leader's role is to give upon request a helping hand, to give proposals or to give support to enable
autonomy and entrepreneurial thinking . Instead of conducting the employees, the leaders foster the
study of new problems. [devolved leadership, autonomy, responsibility]

Page 13

The associative phase

The forth phase entitled the associate phase aims to associatively link the organization's environment
(customers, suppliers, etc.) to the system, that it can proactively and cooperative-dialog-based interact with
the environment. The associate phase of the organizational development is an expansion by Friedrich Glasl,
a student of Lievegoed, in 1993 additional to the original three phases of Lievegoed. The phase itself is
derived from the concept of the lean enterprise from the Beyond-Budgeting-Organization of Toyota.
Integral part of the lean enterprise concept is that is it not related to specific tools like quality cycles, kaizen
or total quality management (TQM) but to an interlinked and coherent new philosophy on a new mindset, a
paradigm shift in which has in mind not only the single value creation stream of the organization, but the
complete value creation stream of the entire supple chain.

The three former phases of organizational development were clearly defined by a border between the
organization and its environment which now vanishes within the associative phase. More and more trustbased relationships with external stakeholders are nurtured accompanied by a shared exchange of interests
(e.g. profit sharing) and entire supply-chain-management. Glasl describes there organizational forms as
company-biotopes, which are closely linked to the Japanese keiretsu system. Today the concepts of open
innovation or external crowdsourcing/collective intelligence may be a good example on how the border
between the system and the environment vanishes. With reference to these concepts the Beyond-BudgetingPioneers Google and Dell serve as goods examples for open innovation.1
The best metaphor to describe the associative phase is the organization as part if a living organizational
biotope.

Google's open innovation initiative project 10^100: http://www.project10tothe100.com

Dells's open innovation initiative IdeaStorm: http://www.ideastorm.com/

Page 14

The evolution of the organizational culture

As the pioneering phase or integration phase shows first symptoms of a crises, a cultural conflict takes
usually place that can destroy the entire organization. The transformation to a new phase means always to
transform to a new organizational culture. This is always accompanied with the problem, that the old mindsets and behaviors are deeply entrenched within the people.
Key mindsets that are deeply entrenched (and therefore have to be get rid of) of the pioneering and the
integration phase are according to Lievegoed/Glasl:

Pioneering phase: strong influence of the management style and personality of the pioneer; values,
ideas and orientation is lived as archetype by the pioneer and directly communicated to the
employees. This culture can best be described as a persona cult. Material symbols like products,
buildings, machines have a subordinate role.

Differentiation phase: using machines and techniques, new behavior patterns are implemented. The
underlaying values and norms are usually not communicated and discussed by the employees.
Material symbols like products, buildings and machines dominate.

On the way into the integration phase the employees have themselves learned to actively transform the
organization by themselves which this is fully compliant with the consultative transformation approach to
Beyond Budgeting. Usually the old organizational cultures are reflected and new values, vision and mission
statements have to be lived as archetypes of key people within the organization without creating the
persona cult of the pioneering phase. Only this approach to transformation guarantees that the organization
evolves into a self-learning living organism that firstly reach the associative phase by itself and secondly can
maintain the alternative model in the future. Over decades and generations.

Page 15

Is the associate phase a contemporary concept?

As already mentioned Friedrich Glasl added in 1993 the associative phase based upon the concept of the
lean enterprise of the MIT research at Toyota. From our point of view, the associative phase can today be
seen as a design flaw. In 1993 the MIT research revealing the success factors of Toyota may be seen radical
or revolutionary, but these practices e.g. supplier and customer integration seem today common standards,
that can be applied both by start-ups, differentiation and integration phase organizations. Also modern
concepts of open innovation or crowdsourcing/collective intelligence can be applied within the phases of
pioneering, differentiation and integration.

Page 16

The evolution path of Beyond Budgeting Organizations

The next chart shows todays Beyond-Budgeting-Organization that either maintained the alternative model or
transformed to the new model. These two ways are referred to the two ways to work on the model (curing
only the symptoms of the differentiation phase would be the expression to work within the model).

Degree of
decentralization/empowerment
Low degree of
decentralization/
empowerment
and fixed
performance
contracts: in conflict
with today's critical
success factors!

Differentiation
phase

Buraucratization
through growing
hierarchy and functional
differentiation
High degree of
decentralization/
empowerment
with relative
performance
contracts: aligned
with today's critical
success factors!

Pioneering
phase

Stagnation"
within the tayloristic model

Toyota (Japan)
HCL Technologies (India)
Oticon (Denmark)
Guardian Industries (USA)
Kollmorgen (USA)
Ahlsell (Sweden)
Handelsbanken (Sweden)
Dm drogeriemarkt (Germany)
Alnatura (Germany)
Weleda (Germany)
Rose plastic (Germany)
Logoplaste (Brazil)
Semco (Brazil)
Promon (Brazil)
Sydney Water (Australia)

Transformation
through radical devolution
and functional integration

Evolution
within the
decentralized model

Foundation

Integration
phase

Sustainment
and deepening of
the decentralized
model, over the
course of
generations

Se ve ra l
d e c a d e s o ld

Time line: organization's age

Google (USA)
Virgin (GB)
Southwest Airlines (USA)
W.L. Gore & Associates (USA)
AES Corp. (USA)
Dell (USA)
Whole Foods Markets (USA)
Linux (USA)
Flight Centre Ltd. (Australia)
Ikea (Sweden)
Aldi (Germany)
Wuerth (Germany)
Schindlerhof (Germany)
Egon Zehnder Internatinal
(Switzerland)
Trisa (Switzerland)

Several years old

Organizational evolution path with Beyond-Budgeting-Pioneers

Source: International Center for Outperformance, BBTN
Page 17

The transformation from the differentiation phase to the integration phase

Practical transformation tools and methods to transform an organization within the differentiation phase to
the Beyond-Budgeting-Model representing the integration phase were developed within the BBTN and the
BBRT and are today known as the consultative transformation approach using the Double Helix
Transformation Framework (DHTF) that uses the mind-set of the integration phase.

Organizational
change process
(John Kotter, Leading Change to Our Iceberg
is Melting to a sense of urgency)
Check for complacency and a false
sense of urgency (use e.g. guiding
questions from the book)
Create and increase a true sense of
urgency: Bring the outside in (use e.g.
3D Models, videos, diagnostic,
books ...)
Behave with urgency every day
Find opportunities in crises
Deal with the NoNos

3. Beginning

Change structure
Change management processes
Align projects and decision processes
with 12 principles and the values
defined in the Case for Transformation

2. The neutral zone

Win hearts
and minds!
1.
Create a
sense of
urgency

2.
Pull
together a
guiding
coalition

3.
Develop
change
vision and
strategy

Write the Case for Transformation

Build awareness through selective
action (e.g. abolishing budgets)
Win hearts and minds, train for
empowering leadership styles and
more transparency

4.
Communicate for
understanding
and
buy-in

5.
Empower
all others
to act

1. Ending

6.
Produce
short-term
wins

7.
Don't
let up!

8.
Create a
new culture

Individual
change process
(William Bridges,
Managing Transitions)

The Double Helix Transformation Framework. Source: To lean on BBTN1 Techniques for
Transformation, slide 14; Kotter, John: a sense of urgency, HB Press, 2008

Page 18

Similar concepts of organizational evolution

Lievegoed/Glasl were not the only persons worldwide that described different phases of organizational
evolution. E.g. A.D. Chandler described in 1962 the same four phases of organizational development as
Lievegoed/Glasl. Similar concepts that are not fully in line with Lievegoed/Glasl works are organizational
development phases by B. R. Scott (1971), J. Child (1977), L. Greiner (1972), C. Puempkin / J. Prange
(1991) and K. Bleicher (1991).

Page 19

References

Glasl, Friedrich; Lievegoed, Bernand: Dynamische Untermensentwicklung. Grundlagen fr

nachhaltiges Change Management, 3rd revised edition, Haupt Berne, 2004
Bogsnes, Bjarte: Implementing Beyond Budgeting. Unlocking the performance potential., John
Wiley & Sons, Inc, Hoboken, New Jersey, 2009
Pflaeging, Niels: Fuehren mit flexiblen Zielen. Beyond Budgeting in der Praxis., Campus, 2008
Howe, Jeff: Crowdsourcing. Why the power of the crowd is driving the future of business,
Random House Inc, 2008
MIT Handbook of Collective Intelligence: http://scripts.mit.edu/~cci/HCI/index.php?title=Main_Page
accessed 14th December 2008
International Center for Outperformance (www.intco.org)
BBTN (www.bbtn.org , accessed 14th December 2008, all available publications)

License

This paper except the logos is licensed under a Creative Commons BY-SA License.
Credit: "International Center for Outperformance (www.intco.org)" within the reference list

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