Just so there is no confusion for any short-term result capitalists who might be reading this, I want to make something clear as you begin loading your verbal guns to take target practice at this blog. High character leaders and leadership teams are great for business! Slowly un-cock the trigger on your gun, activate the safety and read on….
Economic academics agree that total value creation is the result of three elements: Macro-economic factors, a robust business model that can capture good margins from these factors, and finally something called The Leadership Effect™ – the latter I will expand on a little later. Macro-economics includes everything from interest rates, broad consumer purchase trends, trade agreements, commodity prices, technological disruption, and even civil wars and natural disasters. These are big levers that can dramatically shift where economic value migrates and where new opportunities or potential disaster lurks. Companies and organizations are mostly on the periphery of these levers and often surprised onlookers and become either positive or negative beneficiaries. Winners and losers are quickly created by such levers as a positive job creation report, declining oil prices, a foreign exchange boost, outbreak in a regional civil war in the Middle East, a devastating flood or accelerated consumer demand for high speed mobility devices. Despite the sophisticated marketing prowess in their hands, executives and their organizations have very little control of this part of the total value creation model.
What they do have control of is defining their business model. A robust business model is one that is aligned well with the migrating value. Such models are designed not only to bring in the money and drop it abundantly to the bottom line, but also protect the company’s value proposition from being copied and made obsolete too quickly.
Oliver Wyman, a top global management consultancy firm that I was a global partner in for several years had defined 22 different value-capturing business models. For instance, large mature OEM companies often make small margins on their equipment sales but make a killing on the accompanying service and maintenance contracts. Consumer product or entertainment companies with a compelling recognizable brand then use it as leverage to promote other channels and product lines. Get the wrong model and you are doomed. Get the right model and you can win, and sometimes win big…and for a long time.
The third value creation lever, and potentially the most elusive, is The Leadership Effect™. This is the impact that the most senior executive and his/her leadership team have on the organization’s ability to execute the business model within the context of the macro-economic environment it competes in. Here is what may surprise you, and where I might cause the capitalist reader some angst, so please keep your gun on safety and trigger un-cocked. Researchers now agree that The Leadership Effect™ has no less than 20%, and up to 30% impact on value creation.
I DON’T mean that short term performance results are up every quarter. I DO mean steady sustainable return on assets over time which produces more positive quarterly performance results than negative ones leading to good long term shareholder/stakeholder value.
Conversely the reverse is true as well. The Leadership Effect™ is a neutral lever and can work both ways. Witness the horror stories of Enron, Tyco and the like. The Leadership Effect™ is often one of the most important “assets” successful private equity companies evaluate when they are buying companies. Warren Buffet says, “When we own portions of outstanding businesses with outstanding management, our favorite holding period is forever.” In mature industries where all the players pretty well use the same business model(s) and are impacted by the same external macroeconomic factors, The Leadership Effect™ will likely be the key differentiator between winning and losing.
So what exactly is The Leadership Effect™? Stay tuned to part two of this blog.