The success formula

A world filled with smart leaders.” Yvon Pesqueux, Professor, Conservatoire National des Arts et Métiers, Paris, France “Understanding what makes a successful organisation is vital in

“Andrew Kakabadse’s book offers unique insights and practical suggestions Success, particularly in turbulent and unpredictable environments, is driven by value and decisions anchored to value

A recent parliamentary commission on future of management

identified people, purpose, and potential as drivers of success This book offers practical suggestions in all three areas.”

Professor Abby Ghobadian, Head of School of Leadership, Organisations

and Behaviour, Henley Business School

“In front of the ‘hard’ leaders are the smart leaders A world filled with smart leaders.”

Yvon Pesqueux, Professor, Conservatoire National des

Arts et Métiers, Paris, France

“Understanding what makes a successful organisation is vital in today’s fast changing environment – The Success Formula explores the

relationship between, values, evidence, strategy and engagement.”

Lesley King-Lewis, CEO, Windsor Leadership

“Finally we have a book which recognizes that organizations cannot achieve genuine sustainability unless social value is given equal weighting to shareholder, other stakeholder and financial value

If there is a strong values base, diversity of thinking and effective governance, organizations can build long-lasting success.”

Simon Osborne FCIS, Chief Executive ICSA

how to recognize successful organizations and how to determine what

is required to make success a reality.”

Dr Chris Pierce, CEO, Global Governance Services Ltd., London

“Kakabadse’s extensive global research shows how few top companies have a proper engagement with their stakeholders and his evidence reveals the great and sustainable success arise from so doing A must read for the C suite and the Board.”

John Board, Dean of Henley Business School

“Once again, Dr Kakabadse’s in depth research draws out governance and dynamic governance insights, helping us to drive value in our companies.”

Yasmin Allen BCom, FAICD and Company Director, IAG,

Cochlear and Santos Ltd

“The evidence-based account, and unparalleled access, of Professor Kakabadse cuts like a knife to the very heart of this complex and

frequently misunderstood subject This book is a must read for anybody attempting to come to terms with organizational success - or failure.”

Dr Ian Richardson, Director of Executive Education, Stockholm Business

School, Stockholm University

“I read The Success Formula with great interest, and recommend it to any business manager who seeks to ensure the health and continuity

of the enterprise he/she leads Andrew Kakabadse’s guidelines in this book strike me as convincing and eminently practical.”

André van Heemstra, Former member of the board of Unilever

“This book is about leadership, about sustaining vision and values to deliver consistent quality, about the humility to respect the team and the intellectual rigor to challenge its certainties This is a manual on how values generate value.”

Dr Ilia Roubanis, Athens

on trust, authenticity and a clear Organisational purpose.”

John Pollaers, Chairman of the Australian Advanced Manufacturing Council

and Former CEO of Fosters Group and Pacific Brands

“There a few books which combine such outstanding academic knowledge and real world experience on leadership as this one

Government and business leaders in Europe should use it when preparing for the challenge to bring back economic growth and social progress.”

Dr Stefan Schepers, Secretary General of the independent tripartite High Level

Group on Innovation Policy Management (2012–2014)

“Andrew and David have produced seriously worthwhile insights and

a global perspective on success They focus on reality coupled with sound delivery processes as a basis for successful decisions and that’s just the beginning!”

Peter Jollie, Director, Reliance Rail

“Kakabadse has produced yet another outstanding work, cutting through the complexity of leadership to the heart of the issue to provide an accessible and actionable formula for success.”

Robert Galavan, Professor of Strategic Management,

National University of Ireland Maynooth

How smart leaders deliver outstanding value

Andrew Kakabadse

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About the author xiAcknowledgments xiii

Foreword xxiPreface xxiiiIntroduction xxv

Andrew Kakabadse is professor of governance and strategic

leader-ship at Henley Business School, UK, and emeritus professor at Cranfield School of Management He teaches and consults in corporations and governments throughout the world His research covers boards, top teams, governments, and policy design Andrew has published forty-two books, over 240 articles, and eighteen monographs His books include Leading the Board (coauthored with Nada Kakabadse), Bilderberg People (coauthored with Ian Richardson and Nada Kakabadse), and How to Make Boards Work which was co-edited by Lutgart Van den Berghe

In 2011 and 2013, he was named in the Thinkers50 ranking of the world’s top management thinkers

More information can be found at Andrew’s website: http://www.kakabadse.com

HEIDRICK & STRUGGLES

We Help Our Clients Change The World, One Leadership Team At

A Time™

Heidrick & Struggles is the premier provider of senior-level Executive Search, Culture Shaping and Leadership Consulting services For more than 60 years, we have helped our clients build strong leadership teams through quality service, deep insights and our relationships with talented individuals worldwide Today, Heidrick & Struggles’ leadership experts operate from principal business centers in North America, Latin America, Europe, Asia Pacific, Africa and the Middle East For more information about Heidrick & Struggles, please visit www.heidrick.com

I would like to acknowledge with deep gratitude the fantastic inputs and insights of all those who spared time to be interviewed Thank you to

• Paul Achleitner, Chairman, Supervisory Board, Deutsche Bank,

Germany

• Achal Agarwal, President, Asia Pacific, Kimberly-Clark, Singapore

• Michael Andrew, Global Chairman and CEO, KPMG, Hong Kong

• Ilana Atlas, Director, Coca Cola Amatil, and portfolio NED,

Australia

• Gihan Attapatu, President, Ball Asia Pacific, Singapore

• Jaspal Bindra, Group Executive Director and Chief Executive Officer

Asia, Standard Chartered Bank, Singapore

• Ian Blackburne, Chairman, Aristocrat, Australia

• Peter Bodin, Chairman, Grant Thornton International, Sweden

• Ken Borda, Chairman, Santos, Australia, and Chairman, Aviva Asia,

Hong Kong

• Graham Bradley, Chairman, Stockland Corporation, and portfolio

NED, Australia

• Alec Brennan, Chairman, EMECO Holdings Limited, Australia

• Berndt Brunow, Chairman, Finnish Food and Drink Industries’

Federation, and Fazer Group, Finland

• Stephen Chipman, CEO, Grant Thornton, LLP, Member firm of

Grant Thornton International Ltd, USA

• David Cunningham, President, Asia Pacific, Federal Express,

Singapore

• Georges Dabaghi, General Manager, Middle East and CIS countries,

Vubiquiti, UAE

• Lord Geoffrey Dear, House of Lords, UK

• Bob Dudley, Group CEO, BP, UK

• Doug Elix, Chairman, Advance Global Advisory Council, Australia,

and retired Senior Vice President, Group Executive Sales and Distribution, IBM, USA

• Jeff Fettig, Chairman and CEO, Whirlpool, USA

• Mark Gainsborough, Executive Vice President, Global Commercial

Business, Royal Dutch Shell, Singapore

• Stephan Gerlich, Chairman, Bayer Group, Mexico

• Chris Gibson-Smith, Chairman, London Stock Exchange, and

Partnership, UK

• Rickard Gustafson, CEO, SAS Airlines, Sweden

• Stig Gustavsson, Vice Chairman, Konecranes, Sweden

• Diane Grady, Director, Macquarie Group, and portfolio NED,

Australia

• Russell Higgins, Director, Telstra, and portfolio NED, Australia

• Sarah Hillier, Team Manager, Northamptonshire County Council, UK

• Jeremy Hunter, President, Henkel Adhesive Technologies, India

• Belinda Hutchinson, Director AGL, and portfolio NED, Australia

• Mike Jeans, Independent NED (Deputy Chairman), Gemserv, UK

• Gunender Kapur, CEO and Managing Director, TPG Wholesale

Private Ltd, India

• Graham Kraehe, Chairman, BlueScope Steel, Australia

• Sanjiv Lamba, Member of the Executive Board, The Linde Group AG,

Germany

• Ronnie Leten, CEO, Atlas Copco, Sweden

• Rod Leaver, CEO, Lend Lease, Asia Region, Singapore

• Lionel Lim, CEO, CA, Asia Pacific, Singapore

• Catherine Livingstone, Chairman, Telstra, and portfolio NED,

Australia

• Kevin Lobo, President & CEO, Stryker Corporation, USA

• Dave Mackay, Director, Woolworths, Australia, and retired President

& CEO, Kellogg Worldwide, USA

• Vadim Makov, Chairman, OMZ Group, Russia

• Charlie Mayfield, Chairman, John Lewis Partnership, UK

• Alexey Marey, CEO, Alfa Bank, Russia

• Trevor Matthews, Chairman Financial Skills Council, and portfolio

NED, Australia

• Kevin McCann, Chairman, Macquarie Group, and Origin Energy

Ltd, Australia

• Paul McClintock, Chairman, Myer Holdings Limited, Australia

• Darshan Mehta, President & CEO, Reliance Brands, Ltd, India

• Bruce Morgan, Director, Origin Energy Ltd, and portfolio NED,

Australia

• John Neill, Chairman and Group Chief Executive, Unipart Group, UK

• Helen Nugent, Chairman, Funds SA and portfolio NED, Australia

• Renè Obermann, CEO, Deutsche Telecom, Germany

• Michael Olosky, President, Henkel, Asia Pacific, Singapore

• Sir John Parker, Chairman, Anglo American, UK

• Jonas Persson, President APAC, Assa Abloy, Asia Pacific, Hong Kong

• Madhabi Puri Buch, Director, Agora Advisory, and Greater Pacific

Capital, Singapore

• Ed Rapp, President, Construction Industries, Caterpillar, Singapore

• Monika Ribar, former CEO, Panalpina Group, Switzerland and

port-folio NED

• Diane de Saint Victor, General Counsel & Board Secretary, ABB,

NED, Barclays Bank, Switzerland

• Ulf “Mark” Schneider, CEO, Fresenius Group, Germany

• Steve Sargent, CEO, GE Australia & New Zealand, Australia

• Nitin Seth, Managing Director and Country Head, India, Fidelity

Worldwide Investment

• Ranjit Shahani, President, Novartis Group, India

• N Sivaraman, Whole-Time Director, L&T Finance Holdings Limited,

India

• Sergey Soldatenkov, Chairman of Board of Directors, Megafon, Russia

• Ajay Srinivasan, CEO, Financial Services, Aditya Birla Group, India

• Sam Su, Chairman and CEO, Yum! Brands, China

• Rajesh Sud, Managing Director and CEO, Max Life Insurance, India

• Ashu Suyash, CEO, L&T Investment Management Limited, India

• Robert Swannell, Chairman, Marks and Spencer, UK

• Kim Taylor, Group Chairman, Asia Pacific, Johnson & Johnson,

Singapore

• Shane Tedjarati, President and CEO, Honeywell Global, High Growth

Regions, Singapore

• Michael Treschow, Chairman, Unilever, Sweden

• Arvind Uppal, Regional President, Asia South, Whirlpool, India

• Rajiv Verma, Group CEO, HT Media Ltd, India

• Petteri Walldén, Chairman, Nokian Tyres, Finland

• Vladimir Yakunin, President, RZD (Russian Railways), Russia

The designations and organization of each interviewee are as offered at the time of interview Numerous respondents now hold different positions in different enterprises

Thank you also to all who have made this book possible

My heartfelt gratitude goes to Stuart Crainer and Des Dearlove, outstanding editors and accomplished authors in their own right You have really brought this book to life

My deepest thanks go to my wife, Professor Nada Kakabadse, and Madeline Fleure, who patiently and with good humor prepared numer-ous drafts

Very special thanks to my Heidrick & Struggles colleagues who have given so generously of their time to make this project happen

My thanks to the partners and staff of Heidrick & Struggles, who arranged the interviews and discussions with top executives worldwide and developed and coordinated the global surveys

Thank you to

Torrey Foster, Bill Matthews, and Randall Thorne in America

Vicki Hickson, Russell King, Will Moynahan, Andrew Myers, Anabelle Parsons, and Dave Tullett in the United Kingdom

Tuomo Salonen in Finland

Alain Deniau in France

Christine Stimpel in Germany

Elise Andström and Carina Nordgren in Sweden

Christina Atchison, Anna Knuckey, and Thomas Liddle in AustraliaYao Li and Linda Zhang in China

Karen Fifer, Robert Knight, Karen Lau, Richard Meiklejohn, Harry O’Neill, Seth Peterson, and Lily Siu in Hong Kong

Rajiv Inamdar, Neha Jain, Arun Das Mahapatra, Gauri Padmanabhan, and Puneet Pratap Singh in India and

Stafford Bagot, Karen Choy-Xavier, Charles Moore, Hamish Shaw, Frazer Wilson, and Alex Yew in Singapore

In addition, there are my three Heidrick & Struggles colleagues without whom this project would never have taken off.

Peter Lever in London championed and supported this project from the start with his initial thoughts on engagement and alignment Thank you, Peter

My deepest gratitude goes to Steve Mullinjer in Shanghai whose thoughts on cultural diversity brought an exciting and new dimension

to the original thesis His support and thoughtful guidance has not only made this study possible but has enriched it with new insights.Finally, I wish to convey a very special thank you to David Pumphrey in Sydney for his facilitation, perseverance, and persuasion in making this project happen He guided me through the study and through the writ-ing of the manuscript and ensured that the process ran smoothly I and this book have benefited considerably from his generous counsel

As you can see, this book has been made possible by an extraordinary level of team work From those who gave their time for interviews, to those who organized one meeting after another, to those who managed the surveys, and to those who were part of the development of the manuscript, I am grateful for all you have done

Andrew Kakabadse

Figure 2.1 Diversity 40

Figure 6.3 Impact of handling awkward or sensitive

Figure 8.2 Input into the development of the

Figure 8.4 Shared view regarding the criteria for

Figure 8.5 Shared view regarding the criteria for

the appointments to the Executives/

Figure 9.1 Those involved in determining the strategic

Robert Swannell, Chairman, Marks and Spencer, UK

What matters in business?

First, results Executives and their organizations have to deliver ances that satisfy all the stakeholders involved

perform-Second, how you behave What kind of manager and leader are you? What kind of culture do you help create and nurture in the organiza-tion? How do you treat people you work with?

It is tempting, especially reading the media, to regard results as the be-all and end-all of corporate life and to begin to believe that they exist

in some kind of vacuum Reality is different Results and behavior are inextricably linked

I don’t believe that true sustainable value can be created without values

If anyone didn’t believe that before the recent banking crisis, surely it is now clear I spent my working life in banking It’s a simple business at heart that depends on the trust of depositors and customers to exist from day to day Trust depends on values and behaviors that are real and demonstrated every day, year after year Businesses without values don’t stand the test of time

In terms of behavior, as a leader it is worth reminding yourself of how you would have liked to have been treated earlier in your career If you were fortunate, you would have worked as part of a team where you were given freedom to make things happen and achieve results Your role in the success of the team and the organization would have been acknowledged, perhaps celebrated Often this does not happen It should

The work of leadership is to build such engagement so that all ute and their contribution is fairly acknowledged The leader also must build trust As a chairman, this is a vital part of my role Trust is not an abstract concept; it is a day-to-day reality and it is built on respecting

contrib-individuals, listening to their concerns, and distilling and ing them The last element is vital Communication needs to be open and should be encouraged throughout any organization.

communicat-Engagement and trust take time It is a long-term commitment, but one that needs to percolate into your daily activities You must, for example, spend time on the front line of the business In the retail world, this is comparatively easy You can visit a store You can feel the mood of the business and its ethos But it is not that difficult in any business Only by being there on the commercial front line will you really understand the company, its culture, and its performance.Results and behavior—not necessarily in that order—lie at the heart of

my view of business This coincides with the most persuasive themes of

The Success Formula As Andrew Kakabadse argues, business is not a

complex science governed by a complex algorithm, but a compelling combination of art and science

For more than 60 years, Heidrick & Struggles has helped global zations secure, build, and strengthen their leadership teams As the complexities of leadership have increased, we have continued to explore the factors that underpin success

organi-In this recent collaboration with acclaimed top leadership advisor and business author Professor Andrew Kakabadse of Henley Business School, we set out to better understand the dynamics of leadership, diversity, and the power of teams Our goal in supporting the global research project that forms the foundation of The Success Formula was to

cut through the clutter and demystify the link between leadership and sustainable business value in today’s fast-paced world

Accelerated globalization and technology have redefined the leadership skills to be successful in the global marketplace Many CEO’s find their skills becoming obsolete as their organizations change in this volatile and unpredictable landscape The new normal requires continuous shifts in people, process, technology, and structure to be competitive.The skills and abilities leaders once needed to create value in their organizations are no longer sufficient New CEO skills are required to win in this new world The ability to harness culture and diversity of thinking to strategy has emerged as a key competitive discipline for twenty-first-century leaders

Further questions were advanced and tested for the research How, for example, do successful business leaders organize their strategies and teams to identify—and deliver on—fleeting opportunities in an era of relentless complexity? What matters most? Is it the advantage of cross-cultural diversity across the management suite and the boardroom? Is it a bold strategy communicated robustly across all levels of the organization? What are the best companies doing and how can we learn from them?

In The Success Formula, Andrew argues that in the new VUCA world (the

military acronym for Volatility, Uncertainty, Complexity, and

Ambiguity), strategy works best when leaders create an evidence-based culture—one in which they are able to transform their vision into their organization’s purpose and encourage diversity of thinking to gain alignment and engagement An organization needs to have a culture with which people are engaged and aligned before their strategy will deliver real value And diversity of thinking is the glue that creates a common culture that encourages adaptive advantage in highly diverse markets It provides a new model for globalizing an organization The best-led organizations have their eyes open to opportunities, ideas, and perspectives They embrace them where once they attempted to railroad

a way through them

Evidence and reality checking are a vital part of building the tional coalitions and momentum required to succeed and overcome obstacles in the twenty-first century Andrew talks persuasively of the need for evidence-based leadership.

organiza-For senior executives, this means that each and every leader in an zation must be constantly engaged with how the company creates value

organi-in a complex and ambiguous world Strategy matters, but leaders must use practical evidence to illuminate reality and be willing to question—-and even shatter—the status quo when necessary The power of evidence-based leadership is its ability to harness multiple stakeholder points of view to create a dynamic strategy that engages and aligns the organiza-tion to create sustained value

Andrew’s research is robust and practical The book explores the seven disciplines vital to fulfilling the success formula and concludes with a series of thought-provoking questions that provide a starting point for CEOs and chairmen to apply the findings in today’s fast-paced, complex, and uncertain world of business

We hope that The Success Formula helps you approach your

organiza-tion’s challenges and opportunities with renewed vigor and a clearer sense of purpose Strong leadership is required With it, our teams will

be empowered to not only succeed, but change the world

Steve Mullinjer

Regional Managing Partner, Asia Pacific

Heidrick & Struggles

Each and every organization—and individual—has an idea of what success looks like It might be a matter of getting through the next quarter, mere survival It might be a specific target—a level of profitabil-ity, market share, ROI, or some other on offer from the host It might be

a grand vision of creating a different world

Over the last five years, I have traveled across the globe interviewing leaders to gain new insights into the nature of organizational success and how it is created In-depth interviews were carried out in over 100 organizations in private, public, and third sectors in fourteen countries Insights and quotations from the research interviews are used through-out the book

Those interviewed were all senior leaders in their organizations, ing many CEOs and chairmen Their companies, from Europe, North America, Asia, Africa, Australasia, and the Middle East, spanned indus-tries from financial services to fast-food restaurants; airlines to IT; car making to chemicals; public services to pharmaceuticals; software to shampoos; heavy machinery to home appliances; telecoms to transpor-tation; mining to banking; cereals to minerals; and retailing to railways

includ-The Success Formula is the result.

My research—supported by the global leadership firm, Heidrick & Struggles—found that the starting point for any successful organiza-tion (or, indeed, any individual) must be value Always Value is the currency of success The types of value organizations seek to create and how they approach doing so lie at the very core of any understanding of what success looks like and what is required to make it a reality

Different types of organizations seek to create different sorts of value—whether it is shareholder value, social value, stakeholder value, or finan-cial value But all organizations must create value to legitimize their existence and to be regarded by themselves and others as successful

Creating value, therefore, is the primary purpose of leadership and the building block of every success story that adorns annual reports, maga-zine covers, and more

How do leaders create value? And how do they create value that can be sustained? The leaders I talked to in my research fell into one of three broad categories, according to their approach to value creation Their approach was typically one of the following:

• Replicate: reproduce a previously successful strategy/value

proposition

• Formulate: take a gamble on an unproven strategy/value

proposition

• Evidence-led: Create a value proposition hypothesis and

interro-gate it with evidence

Clearly, the replicate and formulate approaches are flawed Replicating what worked elsewhere is a surprisingly commonplace approach After all, that is what many consulting firms effectively sell I have also encoun-tered many executives who have simply applied the same approach, wisdom, and ideas at a series of organizations; they are corporate ground-hogs in search of their next groundhog day The value this delivers will inevitably diminish with time as the world and contexts change

If someone has a track record, it can be persuasive—for recruiters, colleagues, and others But what if they are intent on simply doing the same thing again but in a different context? A track record is obviously good, but it needs to be combined with a willingness to evolve, develop, and respond to new contexts

The formulate category includes executives—and there are many—who see the creation of strategy to deliver value as a gamble, an intuitive and somewhat desperate art They formulate strategy in a glorious vacuum Sometimes it works, but good fortune has a knack of petering out fairly quickly

Executives willing to wrestle with reality, to interrogate the facts, have a much better chance of repeating the successful creation of value

What I discovered in my travels in C-suites worldwide is that smart leaders create value and deliver success through what I describe as

evidence-led stakeholder engagement: they build the commitment and

passion that delivers value through real evidence rather than neat consultant-generated strategies, or distant dreams In these successful organizations, evidence is not an aberration, but the result of hard work, persistence, and structure Reality is robustly and constructively interrogated and examined Organizational success is built on a disci-plined approach to an array of key issues—from mission to diversity.The insights from my research have a deceptive but refreshing air of simplicity: success is about delivering value and this is best and most reliably achieved through engaging with people, markets, and data and then gathering evidence on that reality and making decisions accordingly

Sounds simple Reality is quite different Engaging with people within their context in order to win over their commitment, appreciating the finer points of competitive advantage, locality by locality, and pulling all that together through a cleverly thought-out global corporate strat-egy require a sophisticated level of what I describe as diversity of thinking

When managers are comfortable with complexity and are able to age that defining difference, then leaders can genuinely claim that the organization delivers value Value delivery and diversity of thinking are inextricably linked They are the two sides of the same coin and both are required to create organizational riches The challenge for the leader-ship of the enterprise is to nurture a mindset of value delivery together with a diversity of thinking so that true differentiation is realized.These insights led to the development of the success formula, a simple but powerful means of getting to the heart of value It argues that three elements are critical to value creation: strategy, engagement, and alignment

lever-Strategy: the plan for how the organization intends to create value

going forward

Engagement: the extent to which people will voluntarily invest their

efforts beyond the financial or contractual benefits to them and

Alignment: the structures, systems, processes, and protocols necessary

to position the organization to realize its strategy, objectives, and desired outcomes

How these elements are configured is the difference between value tion and value destruction As always, below the simplicity lies a some-times dauntingly deep vein of complexity, which we will explore The Success Formula explains how the three elements work and what organi-

crea-zations and leaders need to do to deliver value

Value is the lifeblood of organizations and the raison d’être of leaders

My hope is that The Success Formula will broaden our understanding of

the meaning of success and the vital role played by value and evidence

in making success a reality

Andrew Kakabadse, September 2014

Understanding value

What is your definition of success?

I have asked this question of executives throughout the world Among them was Georges Dabaghi, general manager of Vubiquity in the Middle East and for the CIS countries, and formerly with SeaChange, Lucent Technologies, and AT&T Vubiquity is the world’s largest provider of multiplatform video services and Georges has been involved

in telecommunications in the Middle East and Africa for nearly twenty years His answer was characteristically thoughtful and explored some

of the issues others raised when the question was posed:

I’m tempted to say that success is about meeting goals you set earlier, but I think there is more to it, a feeling of creating value somehow, that you created something I would measure success on more than one dimension

There is financial success, which you cannot ignore, whether it is revenue growth, profitability, or the number of employees you have And then you have the non-quantifiable elements of success: em-ployees’ happiness, your own happiness, how others look at you and whether you bring value to their businesses and the community they belong to

Even though it’s a very small example, we created our own company

in the UAE [United Arab Emirates] so that all our financial tions pass through UAE banks, all our food and drinks and hotels and conference booking, and travel is passing through local enti-ties, which is adding more to GDP, bringing more value and making the economy here a little bit more prosperous I see that as success Success is also measured by how much you give—to the industry, to other operators, to people doing menial jobs and so on

transac-Georges Dabaghi’s answer to the question of what constitutes success raises many of the issues we will explore in the pages that follow Success

is a potent and often troubling cocktail of the short-term and the term, money and conscience, the company and the world, and the indi-vidual and the organization

long-So, what is success? To distill it down, success is the creation of value—economic and social benefits and outcomes that serve a purpose for the people they are intended to help, in accordance with a set of values that the organization subscribes to

Organizational success generally comes from having a clear plan or strategy to deliver on a mission But a strategy is not a success until it delivers its intended value

“I think the most important role for the CEO is to, first, develop a great leadership team and to develop with that leadership team a clear strat-egy,” Renè Obermann, CEO of Deutsche Telekom, told me

“This involves analyzing the business and its perspectives; ing the market and changes in the market; understanding technologies and the key drivers for the business; and then developing a strategy Thereafter, the CEO and leadership team provide strategic clarity to the organization and constantly work on the alignment and execution of that strategy All of this in order to generate value to all stakeholders.”Successful organizations create value Organizations, of course, come

understand-in many shapes and sizes, flavors and colors This book is nantly concerned with companies, but the same points apply to all organizations The definition of success will vary from organization to organization, but the need to create value in support of a mission is universal

In the 1990s, the focus of organizations worldwide shifted to ing shareholder value Suddenly this was seen as the most relevant measure of a company and leader’s success Its allure has since paled, but it is clearly a vital ingredient in any consideration of what consti-tutes corporate success.

generat-Pure financial value also has its place Chris Gibson-Smith, chairman of the London Stock Exchange and formerly the chief geologist at BP, recounted to me how he helped “turn a cash negative, one and a half billion, into the largest single source of cash revenue in the BP group worldwide.” Turning losses into profits, creating financial value where

it didn’t previously exist, can be immensely exciting and satisfying This

is the corporate equivalent of alchemy, the marvelous transition of losses into profits

Clearly, companies need to make money to survive and provide value more generally But that is not the be-all and end-all of most organiza-tions—or should not be As Henry Ford observed, “A business that makes nothing but money is a poor kind of business.” In my interviews,

it was interesting how little emphasis there was on financial ance It is necessary but not sufficient, the organizational equivalent of breathing

perform-These are enduring themes—as old as business itself Money, price, and profit are simply indicators of value They are by-products of value crea-tion So, too, is quality As the great management thinker Peter Drucker observed: “Quality in a product or service is not what the supplier puts

in It is what the customer gets out and is willing to pay for A product

is not quality because it is hard to make and costs a lot of money, as manufacturers typically believe This is incompetence Customers pay only for what is of use to them and gives them value Nothing else constitutes quality.”2

In other words, value is in the eye of the beholder Value is something that is created in the mind of another person It may have a price tag or

it may be something less tangible Value might be seen in terms of social value Increasingly, the companies I encounter throughout the world have a clear notion of contributing to society more generally They want to help make the world a better place, while still making a profit

Value is often also seen in terms of the stakeholders involved: the viduals, groups, or organizations with a direct interest in the activities

indi-of a corporation These include shareholders, customers, suppliers, employees, investors, and members of the community in the location where the company operates

Stakeholder value thinking has been central to research at Harvard University and many American corporations In particular, the work of Michael Jensen has been influential.3 In recent years, thousands of initi-atives have been launched and billions of dollars have been spent in the quest for improving stakeholder engagement to generate value Yet, the results are mixed

Our notions of value are continually evolving Leading the current intellectual charge is the familiar form of Michael Porter of Harvard Business School The originator of the Five Forces framework now talks

of “creating shared value.” The debate about what constitutes value is gathering pace as the next set of challenges facing companies become clearer “[Companies] remain trapped in an outdated approach to value creation that has emerged over the past few decades They continue to view value creation narrowly, optimizing short-term financial perform-ance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their longer-term success,” lament Porter and Mark Kramer in their 2011 Harvard Business Review article “Creating shared value.”4

Calling on companies to take the lead in bringing business and society back together, Porter and Kramer argue that “the solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and chal-lenges Businesses must reconnect company success with social progress Shared value is not social responsibility, philanthropy, or even sustain-ability, but a new way to achieve economic success It is not on the margin of what companies do but at the center We believe that it can give rise to the next major transformation of business thinking.”

Delivery failure

Value in its many manifestations is at the center of corporate life Different types of organizations will seek to create different sorts of

value, but all organizations must create value to legitimize their ence Value is truly the currency of success.

exist-So far, so good But while it is easy to agree that delivering value is the essential ingredient of success, time and time again it has become evident that value is not being delivered In the success formula of many organizations, the numbers simply don’t add up Value is left on the factory floor or the boardroom table

Consider the very basic notion of financial value If corporate bility alone is taken as the key measure of value, the reality is disappointing

profita-This is brutally exposed in Richard D’Aveni’s 2012 book Strategic Capitalism “America’s long run profitability was highest during the

1950s and 1960s,” reports D’Aveni “Trouble started in the early 1970s but the U.S rebounded until returns peaked somewhere around 1980

in both the services and manufacturing sectors Since then we have seen

a continuous, long run decline in corporate profitability (return on assets), even during periods of economic growth The decline has been about 3 percentage points in profitability for both sectors from their peaks of 9 percent in manufacturing and 5 percent in services around

1980 (It is worth noting here that service industries have not been the saviors anticipated They haven’t filled the employment gulf created by the downsizing of the manufacturing sector Nor have services gener-ated the same level of return on assets that manufacturing did over the last 50 years.).”5

By this measure, US companies have, on average, been less successful over time Increased global competition accounts for some of the decline, but there are other factors at work—including value destruc-tion as a result of misguided management In particular, one pernicious trend is at work: the tendency to manage companies for the short term

in order to boost the share price, to the detriment of the company’s long-term position

Value is being unsuccessfully delivered in other areas We will come to a variety of examples of this later First, to better understand how compa-nies have failed to deliver value, which defines success, let us look at value propositions They are the starting point of value Modern management theory dictates that all organizations should have a clear and compelling value proposition In simple terms, a value proposition

is a positioning statement that explains what benefits (value) the ization provides for whom and how it does it uniquely well The value proposition is derived from the competitive advantage enjoyed by the organization

organ-In his highly influential work prior to his championing of shared value, Michael Porter argued that there are three generic strategies that companies can pursue based on their market positioning and competi-tive advantages They are either low cost, or differentiation, or focus In this view, a company chooses between one of two competitive advantag-es—either it competes via lower costs than its competitors or it competes

by differentiating itself along dimensions valued by customers to command a higher price A company also chooses one of two types of scope—either focus, offering its products and services to selected segments of the market, or industry-wide, offering its products and services to many segments Which generic strategy a company adopts reflects these choices

As useful as Porter’s model still is, an organization’s strategy should follow from its value proposition rather than vice versa This often does not happen

Failure to define the value proposition properly is one of the most common problems in organizations But there is another, potentially even more insidious, danger Too many senior management teams—led

by ambitious CEOs—create a strategy to support a flawed value sition, or for reasons that have little to do with value creation Business history is replete with examples of CEOs who went on an acquisition spree—buying companies not because they were adding value but because they were empire building Value propositions can be left behind in a headlong rush to pursue imaginary or elusive alternative sources of value

propo-Interestingly, too, the very same traits or behaviors that made leaders successful earlier in their career can derail them Indeed, what has been

a highly successful strategy for a CEO over many years can unwind in spectacular fashion if the context changes The evidence shows that a CEO who was widely admired for his or her strategy and value proposi-tion thinking can become infamous for the very same strategy and value proposition at a later time

Banking without value

When the Royal Bank of Scotland (RBS) acquired NatWest Bank, a bank three times its size, for £23.6 billion in 2000, for example, its newly appointed CEO Fred Goodwin was the toast of London’s Square Mile

Goodwin had joined RBS in 1998 as deputy CEO to Sir George Mathewson, who had ambitions to develop it from a regional bank into

an international player Mathewson led the NatWest deal, but it was Goodwin’s diligence and sharp mind that impressed investors and won them over to cement the deal in the face of fierce competition from its rival the Bank of Scotland In January 2001, Goodwin was promoted to CEO and cut 18,000 jobs by merging parts of RBS and NatWest Nicknamed “Fred the Shred” for his ruthless ability to acquire and absorb banks, over the next seven years Goodwin presided over RBS’s rise to global prominence as the world’s largest company by assets (£1.9 trillion) and fifth largest bank by stock market valuation But if RBS’s rise was meteoric, its fall was even more precipitous In 2008, during the banking crisis, it was forced into nationalization—bailed out

by the UK tax-payer

In October 2008, Goodwin officially resigned as CEO Shortly ward, RBS announced that its 2008 loss totaled £24.1 billion, the larg-est annual loss in UK corporate history Goodwin’s lack of humility, reluctance to give up his undeserved bonuses, and failure to show contrition over his handling of the crisis led to his becoming the United Kingdom’s poster boy for the excesses of the banking industry His unpopularity contributed to his knighthood—awarded in 2004 for services to banking—being canceled and annulled in February 2012 Goodwin’s rise (and eventual fall) should not really have come as a great surprise He was simply replicating a previously successful strategy that had worked for him as RBS expanded The trouble was that the context had changed The same high-risk, aggressive strategy that had made the RBS Group into a global banking powerhouse, creating massive increases in shareholder value, led to its failure some eight years later Yet, with one or two notable exceptions, how many voices warned of the dangers?

after-This is a story repeated many times in corporate history As contexts change, highly successful companies and leaders can find themselves high and dry, stranded, clutching an outdated business model and a value proposition that makes no sense in the new world order A predis-position for a perceived value proposition (it has worked before, so it will work again) blinds the leader to the evidence needed to deliver value The success of the past poisons the individual’s capacity to be adaptive to today’s circumstances and, as everyone in business knows, today is always different Always.

Flaws of the value jungle

At least Fred Goodwin and the like have a track record of delivering value Less obvious but more common are CEOs who believe in a flawed value proposition In other words, they believe that their strategy will create value for stakeholders even though their value hypothesis is untested and there has been no systematic gathering of evidence These leaders formulate a value proposition and then move to create a strat-egy to deliver it Rather than test the hypothesis and open it up to debate with stakeholders, they forge on with their unproven value proposition Typically, they are selective in soliciting opinions, listening only to those who agree with them or support their worldview The results are usually disastrous

You might think this sounds highly unusual But, the reality is that CEOs and organizations regularly pursue strategies that even if perfectly executed are misguided because the value proposition is flawed Over time, a gap develops between the reality of what’s happen-ing on the ground and what the CEO believes is happening The CEO goes into denial, choosing to ignore information that does not fit with his or her value hypothesis The organization creates capabilities and delivers products and services that are out of kilter with what custom-ers value The last person to know is often the CEO, who increasingly adopts a bunker mentality, refusing to listen to the evidence from the market

One senior manager described his experience on being parachuted into a problem area of a company that had been ignored for many years

An untested strategy had been failing but until he arrived no one had done anything about it:

When I arrived at my office there was about a quarter of an inch of dust on my desk And that dust was reminiscent of the dust that was

on the company The people walked around with their heads down There was a culture of fear In my first hour I felt gripped by this no-can-do culture I walked around as if I was a ghost Not a single person knew who I was or came to say hello My first interaction was with the company lawyer, who said: “Are you the new guy in charge

of China? You better read this because we’re about to get sued big time and I need to brief you.” So this was nine o’clock It was a terri-ble place I walked around for a while and then went back to my seat and said, what am I going to do?6

What this manager was experiencing was the result of a strategy that had not been evidence-tested Everyone in that part of the business knew it was failing but the fear culture meant that the message had not reached the CEO at corporate headquarters

Indeed, one of the most daunting facts of a CEO’s life is how little real information he or she receives People’s default setting is to give the CEO good news Bad news rarely percolates through the hierarchy It needs to be sought out If you have ever watched the TV series Undercover Boss you will have seen this in practice In each episode a business leader

comes face to face with the day-to-day reality of his or her business on the front line In virtually every instance, he or she is dismayed to find poor processes, inadequate resources, demoralized people, and unhappy customers The staggering thing is that it requires a TV program for business leaders to confront reality

Testing, testing

More enlightened CEOs, on the other hand, are always testing their value propositions and value hypotheses with their stakeholders They are endlessly curious to understand what stakeholders really value They are constantly testing their perceptions against reality So, they visit their company’s stores, they talk to customers, they mingle on the factory floor, they call people to thank them, and much more

Leaders have to constantly hunt down the truth by pursuing evidence

As Ed Rapp, president of Caterpillar’s Construction Industries group headquartered in Singapore, explains:

The biggest risk in this job—and I would say any job of leadership—is isolation and filters Every time I look at a presentation the question

I ask myself is how many filters has it been through before it got to me? If you maintain access throughout all levels of the organization

it really does give you the ability to bypass the filters that develop in

a large company

The worry is if people don’t always put reality on the table What I keep trying to help people understand is we’ve got a lot of talented people and if we put reality on the table I’m convinced as a group

we can fix it If we don’t have reality on the table we can’t fix what

we can’t see So that’s the one challenge I continue to work, getting people to feel comfortable delivering bad news, feel comfortable putting tough issues on the table However, when they put real-ity on the table, they also need to come with suggested solutions Leadership is not just about identifying issues, it’s also all about fixing them

The truth is elusive Organizations are made up of human beings with their usual array of concerns, worries, fears, prejudices, and much more Understanding and capturing the range of realities and percep-tions that people hold in any organization is fraught with difficulties, but essential if the power of the success formula is to be understood and exploited Evidence must be the mechanism to surface these reali-ties and to act as the platform for constructive and continual dialogue

Listen to how Mick Davis explained his role as CEO of the global mining company Xstrata:

In the case of Xstrata, we have 35 to 40 people in our head office and none of us aspires to—or probably has the skills to—run any of our individual operations We can identify risk, we can interrogate information, we can ask the right questions and we know how to evaluate performance What we don’t do is attempt to take on any of the individual operations’ management decisions, which means we find no need to build a bureaucracy

The trick to managing numerous operations successfully is to row down “who does what.” We have a clearly defined and proscribed

nar-“role of the center.” In most organizations, there is a blurring of who takes responsibility and accountability; but, if you want to be an organization in which your executives have freedom to act, you ac-tually have to give them this freedom And that means a very, very small head office in which you don’t have people at headquarters second-guessing what the people who run the various components

of the whole enterprise are doing.7

Note the importance attached by Davis to asking questions, ing reality, seeking out the evidence Get to the truth and then give people the freedom to execute

interrogat-In an interview, Richard Laxer, president and CEO of GE Capital Europe, Middle East and Africa, explained his approach “My job is to create a strategy for the business I spend a lot of time on that and the only way I can do it is by staying close to what’s happening externally and internally It can’t be a strategy that’s developed in a vacuum; it has

to be something that reflects the real world.”8 It is perhaps no surprise that vacuum-packed strategies tend to be vacuous

The ability of an individual or organization to deliver value can never

be taken for granted At every stage it needs to be tested and tested again

Value creation

To better understand the dynamics at work here, let’s take a step back

If value is the route to success, how do you create value?

This was something I put to all the leaders I interviewed Their responses were revealing Over time, it became clear to me that there are two differ-ent approaches to creating value as a leader One is about perceived value;

the other is about delivered value

In the course of my research, I noticed that these different ways of going about creating value indicated two different types, or styles, of leaders The creator of perceived value is more likely to be a big picture thinker who elevates strategy above all else, while the creator of delivered value