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Your Personal Character: Ignore at your own Leadership Peril

Mon, 21 Sep 2026 16:17:51 GMT

Trust is Key

Many researchers find your character to be the most important leadership ingredient.

Over multiple decades, research studies on character and its derivate corollaries such as authentic leadership, emotional IQ, ethics and so forth find character to be core to leadership success.

Some authors have coined the term Character Based Leadership. In this blog I want to stick with the richness and power of the word character originating all the way back to the Greeks.

Aristotle advocated that character develops over time as one acquires habits and behaviors from parents and community, first through reward and punishment. In other words, he thought it was a learned behavior.

In my blog on the People Side of Leadership, I advocate that Character Matters.

What then is character all about?

Do not look to me to give you a precise definition of character as like many concepts there is no such consensus in the leadership literature, and I would be just adding another derivation.

One of the reasons for this difficulty is character arises from the perception of others viewing you. That can be summed up as whether they trust you.

Where variations arise is in the behavior that you exhibit that builds the trust. There are many perspectives and qualities advocated by various authors which tells you there are challenges in building trust with others.

What got me to write this blog was a shocking study on chimpanzees that I came across in none other than Lawrence Freedman’s book on Strategy A History.

He starts the evolution of strategy with a view that deception is one of the hallmarks of strategy “across time and space.” (p. 3)

He references studies on chimpanzees finding that “Deception also turned out to be a vital strategic quality.” (p. 5)

The takeaway for me is that in intelligent species, deception is used naturally to gain power over others, not surprising in a world of survival.

However, deception does not build trust.

Chimpanzees Deception

Deception is essentially lying. One can consider honesty largely the opposite of deception.

Honesty and its corollary integrity are almost always a part of describing character.

Whether there are aspects of honesty that are innate is secondary for building your character.

Most argue that honesty can be enhanced by repetition and imitation.

I watch my grandchildren respond to the who did it question.

There is always a lot of finger pointing. It takes repeated effort of reinforcing always tell the truth and rewarding that behavior to see progress.

Honesty a Learned Behavior

Friedman in Strategy A History describes coalitions as another fundamental strategy across time and space.

Coalitions provide strength to combat one’s enemies which holds true even today.

Societies also flourish when there are coalitions to enable what individuals cannot do on their own.

Forming coalitions is almost impossible without some trust.

So, there are natural incentives towards honest behavior which has been valued since ancient societies.

Obviously, there are fragilities in coalitions as circumstances change..

Coalitions require Trust

Societies Growing Complexity

Embedded in our culture are societal values which also form a basis for trusting the other person.

For much of man’s history, survival has been the main driving force.

In this modern world, we have stepped up a hierarchy of needs as Maslow would say.

Social and ego needs predominate bringing on more complexity in our interactions with one another.

There is not always a common agenda or perception of what is correct behavior given the diversity of backgrounds, beliefs, and needs.

On some issues such as killing another individual, society almost always condemns that behavior. However, when it comes to punishing the killer, there are a diversity of views.

And so it goes across the spectrum of social mores.

Within our society, coalitions form with strong advocacy on what is “right” or acceptable behavior proclaiming the moral high ground. It goes well beyond political ideologies.

Thus, your character is judged via different coalitions of societal values which makes it difficult for a leader on how to behave in this complexity.

For some people, your behaviors may be deemed virtuous and of strong character while others consider you entirely untrustworthy and not to be followed.

How then do you build your leadership character in today’s complex world?.

I always recommend that you be open with others about what drives your behavior. Let people know your guiding principles. Then they know what to expect which helps build trust.

One that I advocate is “Do unto other as you would have them do unto you”, the Golden Rule. It only makes sense that this elevates your behavior to a common ground.

I think there is also common sense in avoiding deception. Be honest. People can count on you doing what you say you will do.

I was part of a small start-up company in which two of the partners were conniving and deceitful to myself and the other partner. Even though I was the CEO, I got out of there as quickly as possible when the dishonesty became evident as did my other partner. They made millions but I have no regrets as I sleep well at night being true to myself.

You need to be clear on your relations with others to help build your character.

One of my guiding principles is I will trust you until you prove me wrong, then we part ways or find a way for you to rebuild the trust.

To establish these guiding principles, you need to know yourself, particularly your values.

When teaching Strategic Leadership to MBA students at the University of Houston, I was surprised at how many students were not able to articulate their values. If you are flipping from one value to another, that can appear as deception to those trying to follow you.

My blog on Your Leadership Personal Profile should help you articulate what drives you along with your values and beliefs. .

Guiding Principles

It is hard for people to trust you if they can’t relate to you.

Daniel Goleman provides great insight on interpersonal relationships in his book Emotional Intelligence Why It Can Matter More Than IQ.

He says, “There is an old-fashioned word for the body of skills that emotional intelligence represents; character.” (p. 285)

I think the Oxford Dictionary sums up Emotional IQ best with “The capacity to be aware of, control, and express one’s emotions, and to handle interpersonal relationships judiciously and empathetically. Emotional intelligence is the key to both personal and professional success.”

Besides the tenets of self-awareness, self-regulation, and self-motivation, I think empathy is the key in building trusting relationships. Empathy creates a bond of respect. The relationship becomes more than just about you and your feelings.

The good news is emotional intelligence can be learned.

There are Emotional IQ tests. If your score is low, then it will be well worth your while to put in the effort to improve it.

One way is Emotional Intelligence workshops. Another is to work with a mentor.

Emotional IQ

You need to be true to yourself as advocated in Authentic Leadership. For me, this line of thinking provides another perspective on building character.

The most popular book is Bill George’s Authentic Leadership: Rediscovering the Secrets of Creating Lasting Value written in 2004.

You may also want to read his follow-on book with Peter Sims entitled True North Discover Your Authentic Leadership.

A shortcut is Bill George, Andrew McLean, and Nick Craig’s book on Finding Your True North A Personal Guide. This guide provides another learning vehicle for you to build a strong character.

In the guide, they provide a concise description of Authentic Leadership as follows:

“To be an authentic leader requires you to be genuine and to have a passion for your purpose, you must practice your values, lead with your heart, develop connected relationships, and have the self-discipline to get results. You must stay on course of your True North in the face of the most severe challenges, pressures, and seductions.” (p. xxi).

Authentic Leadership

The concept of character expands when coming from a leadership perspective. This is one of the reasons the definition of character in the leadership literature varies.

From my previous blogs, you know that leaders quite simply have followers.

For people to follow you, they must trust you.

Everything we have just discussed about character comes into play in forming that trust.

But they also must feel the direction is warranted and that you will be able to successfully lead them down that journey.

You saw that in Authentic Leadership that you must have the self-discipline to get results.

Follower’s trust also gets into many other dimensions of leadership including visioning, collaboration, competencies, and on and on.

For example, in Peter Rea and Alan Kolp’s book Leading with Integrity: Character Based Leadership written in 2005, they talk about the virtues of character, competence, courage, faith, justice, leadership and corporate responsibility, prudence, temperance, love, hope, and worthiness.

Bottom line, when you take an action or exhibit a behavior, ask yourself the question will my people trust me more or less?

Without the trust, your leadership is in peril.

Trust by Followers

You might ask yourself by following my “True North” sounds like I am building rigidities in this fast-paced chaotic world? Without my willingness to change and adapt, how can I or my company expect to be successful?

This is the key challenge every leader faces in this rapidly changing chaotic world.

In my blog on leadership agility, I introduce you to the concept of core and edge developed by Lee, Hecht and Harrison. My colleague Doug Thorpe further developed their concepts.

Thorpe in his article Leaders: There is a new way to Understand Change eloquently describes core as “not limited to values and beliefs but has much to do with that. Understanding your own core can help define purpose. Core helps to understand the power of harnessing your mind’s attention and your hearts affection.”

He goes on to describe Edge. “As you face new challenges or get pushed into unfamiliar circumstances, you are walking on the Edge. The edge is where everything we don’t know lives. New ideas, new technology, new programs, business growth initiatives, all are edge things.”

So how does one manage the space between Core and Edge?

As Thorpe aptly says, “Agility is the special ability to move from core to edge and back again without losing all sense of balance or security.”

Be conscious of your space between core and edge as circumstances change; take time to develop your leadership agility..

Core vs. Edge

It is exceedingly difficult to get everyone on board on your leadership direction, especially when change is involved.

Openness, collaboration, dialogue, listening all play a role in organizational alignment.

On the Edge, there is organizational strength through diverse ideas and opinions.

However, at the company’s core, you need alignment on the company’s values and acceptable code of conduct.

Otherwise, the common trust cannot be developed to build a strong successful coalition.

Enron had the four corporate values of respect, integrity, communication, and excellence.

All decent values, but they failed to live by them.

Enron ended up as one of the biggest corporate bankruptcies in American history right here in Houston, Texas.

But more than that, they showcased what the moral failure of senior leadership can do to devastatingly impact many lives.

Your leadership character must ensure your company lives by its core values particularly in difficult times which inevitably occur.

In conclusion, a quote from Helen Keller seems apropos, although blind she had great foresight. “Character cannot be developed in ease and quiet. Only through experience of trial and suffering can the soul be strengthened, vision cleared, ambition inspired, and success achieved.”

It will be well worth your while to work on building your character and in the process gain more trust in yourself.

Organizational Alignment

What’s the difference between a Manager and Leader?

Mon, 21 Sep 2026 15:54:55 GMT

The Basics

Are you a manager or leader, or both?

When I taught Strategic Leadership, the students had to read John Kotter’s 1990 article on “What Leaders Really Do.”

Kotter was very effective in setting out different functions for leaders and managers such as leaders align people as opposed to managers who organize and staff.

Over the years, there has been debate on whether one can perform both roles as though they are two distinct types of people.

According to Kotter, the essence of the difference is managers deal with complexity whereas leaders focus on change.

On this basis, one might think leaders and managers are different.

Over time, managers seem to have lost their gravitas as we deal in a world of accelerating change.

The New Cambridge Advanced Dictionary defines a leader as “a person in control of a group, country, or situation”.

Control is a rather funny word to use for leaders.

Control is more of a managerial notion on controlling resources including staff and not per se the foundation of leadership.

We seem to be running amok on intermingling the concept of managers and leaders without a clear understanding of their similarities and differences.

In my opinion, the concept of management and leaders are clearly different, but there is opportunity for significant overlap.

This overlap corresponds to some of the basic thinking of John Gardner outlined in his article 1990 “The Nature and Tasks of Leadership.”

He has a very thoughtful delineation of leaders and managers and truly worth a read with rather sophisticated analysis that I largely agree with.

For me, the key is that managers are derived from organizations. They are given a distinct role with certain responsibility and authority.

Leaders have followers. People follow because they are inspired by the leader’s vision and direction, which supports their needs in some meaningful way.

Thus, leaders are visionaries.

One-way leaders gain followers is engaging people in the visioning process.

In my opinion, the concept of management and leaders are clearly different, but there is opportunity for significant overlap.

This overlap corresponds to some of the basic thinking of John Gardner outlined in his article 1990 “The Nature and Tasks of Leadership.”

He has a very thoughtful delineation of leaders and managers and truly worth a read with rather sophisticated analysis that I largely agree with.

For me, the key is that managers are derived from organizations. They are given a distinct role with certain responsibility and authority.

Leaders have followers. People follow because they are inspired by the leader’s vision and direction, which supports their needs in some meaningful way.

Thus, leaders are visionaries.

One-way leaders gain followers is engaging people in the visioning process.

Managers are given the authority and responsibility to achieve organizational objectives.

Likewise, people follow leaders to achieve envisioned results.

A manager can be a leader and vice versa a leader can be a manager.

If a manager in an organization has people following them because they are inspired by the direction, leadership is being demonstrated.

Likewise, if a leader exists in an organization, by definition followers have been inspired to pursue a course of action.

Of course, a leader does not have to be part of an organization’s hierarchy to have followers.

And a manager in an organization may not be exhibiting leadership skills.

Today’s World

In today’s dynamically changing world, to achieve great results, it is critical that managers be great leaders.

It is also critical that those not in positions with managerial authority also exhibit leadership.

Thus, I think focusing on leadership is a strong agenda for organizations seeking high performance.

I have outlined the construct of a leader’s outer world with the 3 Ps of Leadership: People, Planning, and Performance .

Traditional leadership characteristics play a significant role on the People and Planning side.

A leader must understand the needs of potential followers and set out a direction and vision that reaches critical needs.

Of course, management functions also play a role in people and planning, but a real key to management is the execution of the plan that leads to achieving the vision.

Thus, leadership and management occur simultaneously in these different phases with emphasis varying depending on the phase.

While there are meaningful differences in functions, activities, and perspectives between the manager and leader role, achieving great results requires an orchestrated intermingling in a business setting.

The 3 Ps provide a highly useful framework that facilitates understanding of this interaction of leader and manager roles.

Why isn’t Servant Leadership more Pervasive?

Mon, 21 Sep 2026 15:20:37 GMT

Confusing Contrast

What is Servant Leadership all about?

Robert Greenleaf’s ideas on Servant Leadership have gained quite a group of dedicated followers since the publication of his essay in 1970.

He articulated, “It begins with the natural feeling that one wants to serve, to serve first. Then conscious choice brings one to aspire to lead. That person is sharply different from the one who is leader first, perhaps because of the need to assuage and unusual power drive or to acquire material possessions.”

While the foundation of his ideas is very sound advice on leadership, Servant Leadership has not become the pervasive mainstream theory of leadership.

Why is this so and can his foresight be leveraged with additional insights?

Here are some thoughts to help leverage Servant Leadership into our practical day to day world of business.

The contrast to a servant leader by Greenleaf is a leader being driven by power and material possessions.

This line of thinking would have been natural at the time as the prevailing autocratic model of management was indeed driven by power and authority.

That model was under challenge particularly in the 1960s from insightful thinkers that we discussed in my blog on The People side of Leadership.

Unfortunately, Greenleaf’s depiction of leadership becomes obfuscated without a clear distinction between managers and leaders.

I addressed that in a previous blog Manager vs Leaders.

In essence, a manager has a position of authority and responsibility within the organization. It involves making decisions such as setting plans and budgets, organizing and staffing, controlling through accountabilities and so forth.

Leaders quite simply have followers on where they are going.

Greenleaf does not explicitly discuss managers.

However, he implicitly intertwines the functioning of institutions and “the system” with leadership insights in his essay.

This is not surprising as too often managers and leaders are equated. We see HR vernacular like “she was promoted to a leadership position.”

The idea of assigned leadership is still prevalent in modern leadership theory.

In my opinion, this misrepresents the actions of followers. An employee may obey a manager’s direction. That is different than followers who want to follow.

When Greenleaf talks about an unusual power drive or material possessions. That too gets all intermingled with the role of a manager. It has little to do about leadership.

Managers because of their role in the organization make more money than the employees working for them. The position has inherent power which in many respects depicts the leadership contrast Greenleaf presents.

But unfortunately, that tells us little about the manager’s leadership ability.

Greenleaf’s alternative in many respects is a false alternative to Servant Leadership. Someone focused entirely on “me” being driven by power and purely self-interest will not be a leader.

Leadership requires a “we” not a “me” mindset.

We Mentality

Leadership requires more than one.

The leader must persuade someone to follow their advocated vision, goal, or simply direction. For someone to follow, their needs must be met in some meaningful way of value to them.

Make the direction a common goal. Develop value propositions that motivates them to follow that direction.

Thus, the leader’s mindset must shift from “me” to “we.”

The leader must indeed serve the needs of followers.

As many authors suggest this leads to some form of collaboration. If that direction and collaboration achieves meaningful results, then the followership is strengthened.

It is a natural process. There is no need for the leader to have a position of authority in the organization or institution in Greenleaf’s vernacular.

Anyone can be a leader at any point in time.

In pursuing the leader’s advocated direction, the leader has needs that are met in some meaningful way as well.

Thus, the foundation of leadership is that mutual benefit is naturally derived for both the leader and the follower.

In essence, leader and follower are serving one another.

Clearly, a manager is in a hugely attractive position to provide leadership because of their designated authority to direct.

If the advocated direction is seen to provide meaningful value to the employee, then following can occur naturally, and there is mutual benefit derived by both parties.

But for that to happen, the manager must be reaching out to employees and get them engaged and aligned with the direction. When this occurs, then indeed a manager can be a leader and, in the process, unleash inspired motivation from employees because the direction aligns with their higher-level needs.

Some may argue that leadership is not about “we” but rather about strictly serving the other person without expecting something in return.

This is not really a discussion about leadership as leaders have followers. Serving may or may not lead to following.

There are many ways to get others to follow you. One of the strongest is to develop them, get them engaged and guide them in the pursuit of their personal purpose.

In the case of managers, developing employees is a key responsibility.

A centerpiece of people development is serving, coaching, guiding, and mentoring others..

Managers Need to be Leaders

What Greenleaf advocates is core to being a leader.

The leader must understand the needs of people in order to provide a direction that will meaningfully fulfill their needs through value propositions.

Leaders dedicate themselves to fulfilling value propositions.

For a leader and followers plus managers and employees, mutual benefit for me is the leader serves by providing a value proposition that is meaningful to followers (employees in the case of a business owner).

Likewise, the follower or one can correspondingly think of employee should provide a value proposition to the leader/manager to create mutual benefit.

Still, the manager and hopefully leader has other stakeholders.

There are many stakeholders that must be considered in a business enterprise including investors/banks, the relevant community, and so forth.

It is not simply the employees accountable to the manager even though they are crucial to success.

Practically there are tradeoffs in vision, goals, and directions for the various constituencies. Thus, the reality is more complex than simply one on one relationships of manager and employee.

In serving to fulfill other’s needs, the manager/leader’s needs will also come into play which leads to the centerpiece of achieving mutual benefit.

Mutual benefit lends itself to adaptability depending on the situation with various people shifting in and out of the leadership role (not managerial role) as appropriate depending on their relative strengths, capabilities, and foresight.

Thus, there is mutual support serving one another to achieve the greatest benefit for all.

Think Value Propositions

This is the nature of teamwork and collaboration. Leadership is very much like a team sport where everyone wins.

In Greenleaf’s essay the leader’s role is much more static with less dynamism than required in our fast paced always changing world today.

Without this concept of mutual benefit and its derivative teamwork, people in managerial roles find it challenging to pursue only a servant leader mentality.

For example, companies stay in business because they provide a meaningful value proposition to their targeted customers.

In that respect, successful companies serve the customer just as leaders serve their followers.

Think Teamwork

The term servant can get in the way as well for managers even though there are interesting philosophical underpinnings in Greenleaf’s essay.

No one needs to be a true “servant” to a master.

The humbleness and will to serve are terrific traits of leaders. Tom Collins found this in his book Good to Great: Why some Companies Make the Leap and Others Don’t.

But for many the term servant seems demeaning.

In my opinion, servant leadership needs to transcend to a more comprehensive state of mutual benefit with a “we” mentality.

This involves collaboration, engaging value propositions across the board, teamwork leading to successful outcomes.

I believe this approach facilitates managers becoming leaders.

The positive momentum of a company grows enormously when managers become leaders too.

This is why organizations spend so much time and money on leadership development programs.

When managers become leaders, they can unleash the motivational potential of their employees and correspondingly significantly increase the performance of the organization.

Remember that people follow success..

Servant seems Demeaning

A Rapidly Changing Chaotic World Requires Leadership Agility

Mon, 21 Sep 2026 14:48:17 GMT

Model of Technology Change

It is undeniable that change is accelerating and becoming more chaotic.

Leaders need to understand this change.

What is driving the change?

What are the implications on your leadership?

Technology is driving the change.

I have put together a model to help you understand this change and high-level implications on your leadership.

After exploring the model, we will highlight key thoughts on leadership agility to deal with this rapid and chaotic change in today’s business world.

Each technological revolution has brought on new change dynamics, management styles, and leadership focus.

We are all familiar with the industrial revolution starting back in the mid-1700s. New technology in the form of machines changed the manufacturing process of goods. Machines substituted for human labor.

It brought about new forms of business enterprise because this change was mass production. Organizations had to evolve to deal with the larger volume of transactions.

It was a new world.

Back in the 1960s when I was taking organizational behavior courses the buzz word was “management by exception.” You probably heard of “If it ain’t broke, don’t fix it.”

The assembly line was key to production. You had to keep it going.

Change was not rampant.

Therefore, the focus was on control.

To lead these massive organizations with their hierarchies, the management style was traditionally autocratic..

Industrial Revolution

The technology of automation from the Industrial revolution paved the wave for a transformation change in information processes with the advent of computers. Software programs did the work of repetitive clerical type roles and more.

I joined Shell Oil in 1970 as one of those programmers to create this new software.

The new buzz word was “Change is the Constant.”

The rigidity of large bureaucratic organizations was being significantly impacted by the delayering and restructuring brought on by this information processing revolution.

More decisions had to be made to cope with the constant change.

Knowledge became more important with these constantly changing dynamics.

Information Revolution

It made sense to have others participate in the decision-making process.

Thus, the management style shifted more toward Participative.

Companies needed to keep up and not get lost in the change from their competitors.

The focus turned to adaption..

Participative Management Evolves

By 1965, an M.I.T. scientist developed a way of sending information from one computer to another that he called “packet switching.”

This has continued to evolve into today’s multi-faceted internet world.

It is not just social media.

You can type anything into your browser and get a voluminous amount of information in seconds.

This has been a big driver of the acceleration of change which creates instability.

Second Wave of the Information Revolution

The hybrid DNA-RNA was created around 1960 as part of the early beginnings of the Biotechnology Revolution.

At the turn of the century, the world had advanced to the sequencing of the human genome.

On a similar front, the theory of manipulating atoms was around 1960.

Some twenty years later, the scanning tunneling microscope was developed that could see individual atoms.

Nanotechnology is real.

Together this has all led to the manipulation of cells and atoms.

Molecular Revolution

What’s driving the chaos?

Today, this Molecular Revolution has come to the forefront.

It is transforming the very fundamentals of living systems and materials.

In short, the molecular revolution is another key driver underpinning the chaos..

The ability to fundamentally reprogram things is opening people’s minds not constrained by traditional boundaries.

Management styles are shifting to visionaries.

Instead of being whipsawed by accelerating and chaotic change, visionaries are creating the future.

Fundamental Reprogramming

There are practical ramifications of today’s changing dynamics for every leader.

Those in fast cycle industries have been in this chaos for some time.

Slow cycle industries have sped up.

Life spans for companies have shortened.

Technology and imaginative minds are driving more technology and transformations that lead to even faster change and more chaos.

Leaders must be more agile and flexible to cope and prosper, but how do you do that?

What competencies and skills are needed to be an agile leader?

There has been some very thoughtful research on this question. In this blog, I can only give you highlights and direct you to some of the better resources (in my opinion).

Ramifications on your Leadership Style

In 2007, Bill Joiner & Stephen Josephs wrote the book LEADERSHIP AGILITY Five Levels of Mastery For Anticipating and Initiating Change.

It is a rather sophisticated approach based on their notion of a Leadership Agility Compass outlining four competencies: Context Setting Agility, Stakeholder Agility, Creative Agility, and Self Leadership Agility.

Using the compass, they then take you through their five levels of agility development: Expert, Achiever, Catalyst, Co-creator, and Synergist.

It has a lot of content. If you are really trying to enhance your leadership agility, it is worth a read.

Leadership Agility: Managing through the Chaos

Learning Agility

Korn Ferry has also done a lot of research on leadership agility outlined in their paper on The Organizational X Factor: Learning Agility.

They describe learning agility as made up of five factors: Self Awareness, Mental Agility, People Agility, Change Agility, and Results Agility.

You can see some similar ideas to Joiner and Josephs’ Leadership Compass.

I like their addition of Results Agility described as delivering results in first time situations.

The authors, Mary Knight and Natalie Wong, contend that Learning Agility is a top predictor of high potential people. Companies with highly agile executives have 25% higher profit margins than their peers.

Agility competencies are important.

It is also important to have a perspective in thinking about the context of this change in your day-to-day world.

What is central to how the world should work for you to what are the dramatic implications of changing technologies?

In this respect, Lee, Hecht, and Harrison, a global leader in talent development, wrote an interesting paper on Core, Edge, and Agility.

My colleague Doug Thorpe has condensed their ideas and his own in an article on his website in 2018 entitled Leaders: There’s a New Way to Understand Change | Business Advisor, Mentor and Executive Coach | Doug Thorpe

It is certainly worth your read with the idea that agility helps manage the forces of what’s core and what is on the edge.

Core, Edge and Agility

Agility has certainly become a popular topic for organizational consultants in this 21 ^st century.

One concept I like from McKinsey’s March 2018 article of Leading with inner agility is “set direction not destination.”

This brings us back to my model introduced at the beginning of this blog on understanding change.

You not only have to have agility competencies, and a framework of thinking about agility as we have just discussed.

You also need to be the visionary highlighted in the model.

Ultimately, the management style of significance in this world of accelerating and chaotic change is a visionary leader.

Set directions with the agility to adjust destinations.

To quote Jack Welch, “control your own destiny or someone else will.”

Set Direction Not Destination

Learning Organization: Your Company’s Survival Depends on It

Mon, 21 Sep 2026 14:27:40 GMT

The Proverbial S Curve

Change is rapidly accelerating and becoming more chaotic. Leadership agility is a competency every leader should learn.

The main purpose of this blog is to say that will not be enough for your company. If you want your company to survive without a premature death, then you need to build a learning organization,

A former colleague of mine at Royal/Dutch Shell, Arie de Geus wrote a book called The Living Company Habits for survival in a turbulent business environment.

He contended through his work that a central attribute of companies with long lives was a sensitivity to the environment with the ability to learn and adapt. De Gues highlighted several other attributes that contribute to a long company life, which will be discussed later.

What are some of the attributes of a learning organization?

My tutelage on learning organizations came from a consultant Shell used, Peter Senge, who wrote The Fifth Discipline: The Art & Practice of The Learning Organization.

Senge delves into the notion of a learning disability. A key point I want to make is that you will naturally develop this learning disability.

In my opinion, living systems tend to follow the proverbial S shape curve because of their learning ability.

A newborn entity has little knowledge and focuses outward through a structuring process of how things work or should work.

Once a foundation is set, the structuring process accelerates, and rapid learning growth occurs.

As time progresses, this learning growth slows as the focus shifts inward towards maintaining all this structure of perceptions, beliefs, values, processes, procedures, mental models and so forth.

As Senge aptly points out in his book, “Today’s problems come from yesterday’s ‘solutions’” (page 57)

Eventually, the growth and learning plateaus, that is, unless there are interventions.

As a “living” entity, what can a company do to become a learning organization to combat the natural inertia from the past?.

Learning Structures

Your company must specifically build in learning structures. De Guess identified two more habits worth noting.

One is tolerance both within and outside the entity itself. Another way of thinking about this habit is valuing diversity of thoughts.

It’s more than inclusion. The organization needs to seek out understanding of these diverse views. In this respect, the diverse views involve differences from the current modus operandi of the company.

Understanding does not imply immediate change.

Many diverse views will not make sense for the company to pursue. But an arbitrary discounting of such ideas becomes deadly in this rapidly changing world.

Secondly, de Guess describes the habit of building cohesion and identity.

This may sound contradictory to diversity. Quite the contrary, the persona must be built around this burning desire to learn from one another.

As Senge describes, your people need to be lifelong learners.

Thus, the concept of a learning organization needs to be built into the stated company values.

The organization needs to celebrate renewal efforts and achievements.

Learning must become fundamental to the culture..

Systems Thinking

Peter Senge advocates that systems thinking is a key discipline of learning organizations. I clearly agree.

When I received my master’s degree in management science, systems thinking was a cornerstone, but you don’t hear as much about it today.

It is all about seeing the big picture in a wholistic way looking at the various relationships and factors that bring about your outcomes.

As entities build structures on how things work, there become a lot of parts and sub processes which bogs down learning as the focus is on the trees and not the forest.

This is not to say that continuous improvement programs should be scrapped. They are one of the “structures” that should be imbedded in a learning organization.

The major shifts and transformations occur at the wholistic system level of a company.

Learning organizations need to imbed vehicles to periodically look at the big picture or when alarms are sounded from external sensing systems.

System audits should ask from the internal side, “What ground-breaking change could we do differently that would have a magnitude improvement on our outcomes?”

From an external perspective, system audits should look at competitors but also pace setting companies who have made major transformations.

Obviously, scanning for new technologies and how they could redesign the way your company operates is another part of a systems audit.

Then there are also major environmental events like COVID 19 that should trigger a systems audit..

Layering on a new S Shaped Curve

Graph from In Blogs : What we Do. by Cole Scott Group Nov. 16, 2016

Another Shell consultant back in the 1990s was Ichak Adizes who taught us about corporate lifecycles. He authored a book called Corporate Lifecycles: How and Why Corporations Die and What to Do About It.

Adizes described to us the growing and aging process a company goes through and outlined some characteristics of growing companies versus aging companies.

A couple of these characteristics really struck me.

In a growing company, “Personal success stems from taking risks” whereas in an aging company “Personal success stems from avoiding risk.” (page 87)

In a growing company, “Everything is permitted, unless expressly forbidden” whereas in an aging company “Everything is forbidden, unless expressly permitted.” (page 87)

Relating to this last point, he talked about the importance of culture with the two dimensions of flexibility and control.

At a company’s prime, flexibility and controllability are balanced. As controllability becomes more dominant, the aging process eventually leads to death.

My big takeaway was a learning culture can expand the shape and timing of a company’s S curve through maintaining flexibility.

Today, that is called agility. It needs to be part of the organization’s fabric.

Beyond that, there are times in the life cycle when systems thinking can bring about a major transformation in the business model.

In essence, the company layers on a new S curve as shown in graph above. The key is to jump onto the next S wave before it is too late.

When this structural competency is developed in an organization, the life cycle can be extensively extended by having multiple layers of S curves..

Adding Learners to your Company

The last “learning structure” that I want to recommend is consciously adding learners to your company.

Bringing diversity of thought, perspective, and backgrounds as previously discussed is important for your hiring process and something you have likely already included.

My suggestion is that you carefully examine potential hires’ willingness to be tolerant of other points of view along with a strong learning desire.

You can’t build a learning culture with a preponderance of people who aren’t learners.

Many new hires will come from the Millennials (those born between the early 1980s and mid-1990s) plus some of Gen Z (those born between the mid-1990s and 2010).

Fortunately, the Millennials are generally curious with an eagerness to develop new skills and learn.

They are also multi-taskers.

I remember one day when I heard a lot of noise from my Millennial daughter’s bedroom. She had told me she had a lot of homework, so I wanted to check up on the commotion. It was an incredible sight.

She was sitting with a laptop in her lap but typing on her desktop while watching TV with music blaring away.

When I asked her what she was doing, she answered my homework.

Beyond that, Millennials tend to excel with out of the box thinking and creative problem solving. This will be an important competency skill set in developing the next S shape curve for your company.

Many have high expectations of your company and not afraid to express their views which is what you want in a learning organization.

Millennials Like to Learn

Generation Z also has some positive characteristics.

They are entrepreneurial and not surprising all about technology.

This generation has grown up in a rapidly changing world, so they are receptive to change.

You will need that attitude in your learning organization.

Fortunately, diversity of all forms is natural to them and generally not a divisive issue.

Gen Z Diversity

Lastly, you may want to consider a baby boomer (those born between 1946 and 1964) as a mentor to help you build your learning organization.

They have many positive characteristics too including resourcefulness and being mentally focused.

As this generation deals with their Millennial sons and daughter and their grandchildren of the next Generation Alpha, their views of change continue to morph.

Now that they are in a mentor position in their careers, baby boomers can bring a lot of unbiased wisdom having seen it all evolve.

Don’t Forget Baby Boomers

The most basic need of a living system is to survive.

Have you built structures that will foster a learning organization in your company?

Take some advice from a baby boomer—do so now before it’s too late.

Your company’s survival depends on it.

Summing it Up

Maturing your leadership: Situation Based

Thu, 10 Sep 2026 20:54:33 GMT

Leadership does not have a simple formula for every situation.

A lot of the leadership theory comes from academicians studying a formulation of their leadership model from observing the real world.

They test the model with empirical research to determine results on performance. Then, it’s the publish or perish phenomenon.

Look at the chapter headings from a well-known college text by Northouse entitled Leadership: Theory and Practice.

We find a long list of these type models as well as some more generalized topics: Trait Approach, Skills Approach, Behavioral Approach, Situational Approach, Path-Goal Theory, Leader-Member Exchange Theory, Transformational Leadership, Authentic Leadership, Servant Leadership, Adaptive Leadership, Followership, Leadership Ethics, Team Leadership, Gender and Leadership, Culture and Leadership.

Wow, how do you sort out all these concepts? And this is just a college textbook articulating all these different perspectives.

There are lots of other relevant authors both academicians and practitioners not included in the chapters listed above such as Strength Based Leadership.

Dimensions of Leadership

The point is there are many dimensions and factors that come into play when leading.

One facet is all about the leader.

Another dimension is the organization which includes followers, culture, and so forth.

Others are about the relationship of the leader and the follower.

Still other facets are about the broader environment. And so forth. It is hard to mold all this into a grandiose model.

If that were not challenging enough, the overall environment is changing at a rapid pace as we discussed in my blog on leadership agility.

Ultimately, it all centers on the particular situation and how all the multiple dimensions line up.

Fortunately, many situations are comparable, and the response can be repeatable.

Many others will be unique in some fashion that will require you to adjust.

Like playing a game of golf, the better you are the more natural the adjustment.

Situational Leadership

One model by Paul Hersey and Ken Blanchard has been coined “Situational Leadership.” The model has evolved over time, but the basics are the style of the leader changes depending on the situation and readiness level of the followers.

In a situation of low readiness such as a new employee, then the style is much more directive. You have to tell them what to do.

As progress is made, the mode of the leader shifts to coaching with high on direction and supportive behavior.

Further progress by the employees suggests lower direction but still highly supportive behavior from the manager.

Finally, in the fourth stage with a matured employee on performing their role, the leadership style shifts to delegating with low on direction and relatively low on support.

Of course, this model is limited in that the focus is on only the dimension of the manager and employee’s relationship.

Nevertheless, it provided a significant breakthrough that no one leadership style fits every situation.

Moreover, it makes sense and can be applied rather easily.

Adaptive Leadership first described by Heifetz in Leadership Without Easy Answers back in 1994 also gets into the relationship of the leader and the follower based on the follower’s situation.

As the name implies, this model gets into adapting to change which has become more pronounced today.

Here are my recommendations for you.

What to Do?

First, do not think you have all the answers by learning one highly touted approach to leadership.

Rather think of the dimension it is adding to your leadership portfolio of knowledge.

The critical point I have been trying to make is there is no one holistic model that prescribes what you should do in every situation.

Second, if you’re in the early stages of your leadership growth, do get several books to read. Take a leadership course or seminar.

But also get advice from a leadership coach/mentor. Think of learning golf, a coach goes a long way.

If you are a CEO at a small company that is growing, you should also consider joining a CEO Roundtable.

Third, once you have some leadership experience, do an assessment of yourself. I would suggest you look at my Leadership Personal Profile blog.

It will help you identify areas for improvement.

Specifically examine your Persuasions.

Then, you should further develop your proficiencies.

Fourth, I advise mentees do not get yourself in a “tizzy” on what to do.

Think about your emotional IQ skills.

In leading, be engaged. Get whatever input you feel is important, then, behave/decide what you think is best given all the circumstances and what you know at the time.

In the case where action is needed, that can range from you making the decision, to a team participation, to a delegation and so forth.

In other words, all you can do is the best you can based on where you are at in your leadership journey.

Fifth, whatever the leadership situation and the action has been taken, always be open to feedback from followers particularly with significant events or direction.

Simultaneously, look at the impact on the performance of the business.

Think of the feedback and results not as a critique but as a new learning in your portfolio whether it’s good or bad.

Sixth, as your leadership matures, be flexible to the situation and not locked into you know the answer of what to do.

Situations always evolve over time, and now they are evolving rapidly.

In the maturing process of living systems, we naturally structure approaches to solve problems, issues, and opportunities.

Many CEOs go through a pattern of first being incredibly open and inquisitive in their early days to eventually becoming rigid in their thinking to the detriment of the organization.

Seventh, insure you maintain your character and are true to your core values.

These builds trust with your followers.

They know they can count on you to do what is best given changing circumstances.

This is all about the People Side of Leadership

Eighth, utilize a wise coach who can act as your alter ego.

This helps you avoid rigidities setting into your leadership and maintain your authenticity.

Ninth, be sure you are coaching your leadership team and employees to become better leaders.

This will be a huge help to them but also keep you fresh.

Lastly, if you want to be a great leader, then seek first to be a wise leader.

Wisdom is knowing you need to know more.

Your rigidities will set in when you quit learning.

A little humbleness on what you know goes a long way in your lifelong leadership journey.

10.

Is Power a Dirty Word?

Wed, 09 Sep 2026 17:01:12 GMT

The purpose of this blog is to weave the story that power is the interwoven fabric of leadership.

You might say, “You will have to convince me.

Rosabeth Moss Kanter once wrote that “Power is America’s last dirty word. It is easier to talk about money, and much easier to talk about sex, than it is to talk about power.”[i]

Power and politics are often equated but they are not the same thing although deeply related.

Politics often relates to the influencing strategies and tactics within governments, which are usually quite contentious particularly at the federal level today.

In the American democratic construct, there are two opposing sides trying to gain the upper hand to impose their point of view through vehicles not always healthy for the nation.

In many respects, power by its association with politics remains a very dirty word in this 21st century.

Of course, there are still lots of power plays in many organizational settings that are detrimental perpetuating this sinister view of people who use power.

Power: Interwoven Fabric of Leadership

All through my executive career, I always felt that power was this negative dark force never really grasping that it was the interwoven fabric of leadership.

This latter view did not come clear to me until my role change into an executive professor teaching strategic leadership where I had to study more in depth the role of power in leadership.

My intent in this blog is to bring forward some of those insights such that power is seen in a more objective light out in the open.

Understanding power as this interwoven fabric of leadership enables you to elevate your leadership capability to a higher level of sophistication.

Now in my role as a leadership mentor, I can really see how the lack of understanding of power often reduces the overall effectiveness of a leader.

There was a fair amount written on power when organizations were more hierarchical and leaders more autocratic.

But power does not go away just because today’s organizational structures are flatter.

It is worth a deeper understanding.

The Flow of Organizational Energy

My view is that power controls the flow of energy in an entity whether a work group, large organization, company, government or even a society.

With this perspective, it becomes clear that power is the interwoven fabric of leadership since the essence of leadership involves influencing people to follow a direction or path that will create a flow of organizational energy.

On this positive side, the levers of power can unleash motivation, enhance productivity, and increase value generation.

Zaleznik understood that “Leadership inevitably requires using power to influence thoughts and actions of people.” ^[ii]

What is important for a leader is to recognize that power can expand this flow of energy or reduce the flow.

It can gather momentum in a direction, or different flows of energy can run smack dab into each other diffusing and even stopping the overall flow.

Thus, power is really a neutral concept.

As Gardner points out, “The significant questions are: What do they use to gain it? How do they exercise it? To what ends do they exercise it?” ^[iii]

The key for a leader is understanding the various controls of organizational energy.

They really break down into two categories: formal and informal.

Formal Power

In a business setting, the formal controls are the legitimate authorities the organization bestows upon a position such as supervisor, manager, or executive.

For a small business, the power resides primarily with the owner or CEO.

In the end of the day, these authorities provide the ability to reward or punish.

While the formal control mechanisms are much more direct, the nature of the influence tends to be extrinsic.

This translates into focusing on lower-level needs such as security in the sense of keeping one’s job.

Positive rewards can reach higher level needs including social positioning and ego.

Unfortunately, often the flow of energy in formal controls stems from obedience rather than a natural flow driven by belief in the directional pathway.

The solution for positive energy is to get people are engaged and believe in the vision.

Informal Power

Informal control mechanisms derive from the compelling attributes of an advocated direction.

The leadership literature gets into concepts like referent power where the leader is trusted and respected, or associate power based upon who you know and who knows you.

Expert power can be very compelling as it is based on highly valued knowledge and skills.

A derivative of expert is the power of one’s vision and ideas.

An important point that I often argue is that a leader does not have to be a manager (i.e. the CEO for a small business).

A manager has the formal control mechanisms, but anyone can wield informal control mechanisms regardless of position in the organization.

Understanding Power

As Rosabeth Moss Kanter has pointed out there are various strategies to enhance one’s informal influence.

The leader needs to be there and have a presence which leads to the power of speaking out, putting one’s ideas into the organizational conversation.

Power comes through persistence.

Power also comes through partnering.

This last point is quite potent. Power is not isolated to an individual.

Teams, coalitions, cliques, large subgroups, etc. can exert substantial control over the flow of energy in an organization.

Leaders who do not think in terms of the organization’s energy flow tend to rely on themselves often to the organization’s detriment.

Informal power often comes from thoughtfully influencing and organizing teams, coalitions, and so forth.

As mentioned previously, referent power is a source of forming these coalitions.

Dealing with Conflict

The sophisticated leader needs to understand that any organization can have conflicts relative to the flow of energy.

The leader needs to think through the different styles of addressing these conflicts.

Too often the unsophisticated leader ends up avoiding the conflict seeing it as that dark force.

In such cases, those with significant formal authorities often win through domination.

Sometimes that is needed to right the ship, but often domination builds pent up negative organizational energy that has lasting impact.

Compromise has its place particularly to minimize loses.

Sometimes the fight is not beneficial and that can lead to accommodation.

In this case, the more powerful style is pursuing collaboration seeking a solution of mutual benefit.

Situation is Key

Many times, the opportunity is to build up the energy flow of the organization.

A leader should intelligently consider the different power control options given the situation.

All the basics of leadership come into play such as understanding people’s needs and the value proposition the leader is offering them.

What are the potential outcomes and which choices will enhance the overall flow of organizational energy?

Thus, as Pfeffer points out “An important source of power is the match between style, skill, and capacities, and what is required by the situation.” ^[iv]

This leads us to reinforce strength-based leadership that we have discussed in prior blogs . Leadership can and should flow to where the strengths reside to enhance this energy flow.

Maxwell advocates that “People naturally follow leaders stronger than themselves.” ^[v]

The important point here is that those possessing leadership strengths change based on the situation. For those with formal authorities, delegation becomes an effective control tool to tap into these strengths within his/her team.

Having this deeper understanding of power can truly enhance the effectiveness of a leader.

Power Can Be Destructive

At the same time, a lack of understanding of the appropriate use of power can impede organizational effectiveness. When power is used in a narcissistic fashion it destroys organizational energy.

The leader with formal controls must address devious tactics seen under his/her purview.

Infighting can lead to very sinister behavior like taking no prisoners.

Those who try to divide and conquer also destroy organizational energy. It can be as subtle as excluding the opposition in the organizational discussions.

Certainly, any leader that is destroying organization effectiveness for their own personal gain must be dealt with quickly.

Continuous Learning

Learning is always critical for a leader. Ultimately, one can develop individual attributes that will become sources of power.

Certainly, focus is a key attribute that leads to developing potent directional pathways. Not everyone will agree with your direction, so having a sensitivity to others provides a foundation to tolerate conflict and effectively deal with it.

This will require some flexibility that in many cases may require submerging one’s ego and getting along. As previously noted, persistence can be quite effective, which requires energy and physical stamina. ^[vi]

Leaders are distinguished by their desire to create and build something of value with a heartfelt interest in helping others. It is a continuous process of learning and acting.

In summary, power is the interwoven fabric that enables the leader to influence and build the necessary organizational energy to create and build value for the various constituencies.

You should embrace power being fully cognizant that used unwisely it can be abusive to your organization.

Acknowledgements:

[i] Kanter, “Power Failure in Management Circuits,” Harvard Business Review, (July-August 1979), p. 65.

[ii] Zaleznik, “Managers and Leaders: Are they really different?” Harvard Business Review (March-April 1992) pp. 126

[iii] Gardner, On Leadership, New York Free Press, 1990, pp 55-57

[iv] Pfeffer, Managing with Power: Politics and Influence in Organizations, Harvard Business School Press, 1992, p. 77.

[v] Maxwell, The 21 Irrefutable Laws of Leadership: Follow them and People will follow You, Nelson Press, 1998.

[vi] Pfeffer, Managing with Power: Politics and Influence in Organizations, Harvard Business School Press, 1992, pp. 165-185.

Really Understanding Financials: A Key to Small Business Success

Wed, 09 Sep 2026 16:34:48 GMT

In talking with small business owners, I am surprised how many have trouble off the top of their heads responding to simple questions like what are your revenues, how much is in your bank account, and what is your cash flow?

Research studies find over 80% of the time poor cash management or poor understanding of cash flows contributes to the failure of a small business.

Another way of describing this predominant problem is a lack of funding or working capital. It is amazing how many people just jump into business without planning and understanding their working capital needs. Even the term working capital is foreign to their vocabulary.

So, if you don’t know, it is the capital in the business used for short-term operations. You take what are current assets such as cash in the bank, receivables, and inventory less the current liabilities and obligations you need to pay out in the short term considered less than a year.

You need to know more than what is working capital. Somehow accounting leaves many with that deer-in-the-headlights look. In many ways, I understand.

Even though I have a master’s in accounting, it was never my favorite subject. But I also understood back then when getting my degree that accounting is the language of business and a necessity for running businesses.

In teaching a Corporate Strategy course to undergraduate business school seniors, far too many of the students didn’t understand balance sheets, income statements, and cash flow statements even though they had introductory accounting courses.

It’s hard to execute a strategy without understanding the underlying economics.

Now to the purpose of this article. In my 4 Stage Growth Model for small businesses, those with this lack of knowledge of the basics of accounting and financial planning are generally in the Development Stage with revenues under one million dollars.

My focus here is on the second and third stages of Growth and Take-Off with revenues generally from two to ten million or more. I will also give some additional profitability concepts for the Expansion Stage.

Margins and Overhead

If you look at a basic income statement, it is made up of revenues and costs. Revenues bring cash in, and costs take money out of the business.

In understanding how to run the business, you need to break out the income statement into more useful concepts like margins. Gross Margin is Net Revenue (i.e., Revenue minus adjustments like refunds and discounts) minus Cost of Goods Sold.

Cost of Goods sold refers to direct costs to produce the goods, that is material and directly involved labor. For Service Companies, this would involve cost of direct services. Service Companies do not always need to calculate a margin particularly if all the salaries are fixed.

Gross Margin tells you how much you have left in revenue to run the business. Often, you will want to turn this into a % by dividing the gross margin by the net revenue. If you have a large percentage, that is a good sign you have an attractive offering.

Your operating expenses beyond the Cost of Goods sold such as administrative salaries/costs, rent, utilities, and the like are referred to as overhead. The higher your gross margin and the lower your operating costs the more income you make.

It is important to keep a close eye on your overhead costs that can get out of hand. In other words, the margins do not support the overhead and income/profit is underwater. Again, most small business owners in the Growth or Take-Off stages fully understand their gross margin and overhead expenses.

You should have a financial plan for the year that targets Gross Margin and Overheads. Obviously, if the Gross Margin falls below the target, you will likely need to reduce overheads. There is a tendency to say these overhead costs are in the budget and just keep spending.

Key Performance Indicators

As the name implies, these indicators are about how the business performed. Not what you did to obtain that performance. However, as the performance looks strong or improves that is a clear sign you are doing things that make a difference to the company’s profitability.

The word key highlights that these indicators are very important in achieving your business objectives. A natural key indicator for Growth and Take-Off stages is revenue growth, particularly as a percentage.

Gross Margin percentage (of revenue) is another indicator of the health of the business. As the company enters the Take-Off stage, understanding how this Gross Margin percentage compares to your competition gives insight into the competitiveness of your offering. Don’t ignore net profit which deducts depreciation of your physical assets like equipment and amortization of your intangible assets such as computer software.

As you become more sophisticated, also determine your return on investment. In simple terms, it is your net profit after tax divided by the capital (debt plus equity) you have invested in the business. That is a reasonable measure of the overall performance of the business. A similar measure is return on equity that excludes longer term debt in the denominator. That gives you a sense of how much your investment in the business is making that you can compare to other options for your money like interest on savings.

It’s not all about growth and income. Ultimately, you need to understand the very fundamental flow of cash in the business that can signal issues of sustainability. A key indicator is your net cash flow defined as net cash flow = cash flow from operations + cash flow from investing + cash flow from financing.

We already discussed working capital which gets impacted by net cash flow. Many Development Stage companies have a difficult time maintaining positive working capital which puts a strain on paying wages and vendors. As you grow, this working capital indicator needs to be positive. If you have robust growth, that will necessitate cash flow from financing.

Your debt-to-equity ratio will help give you an understanding of your ability to borrow. If this percentage is high, banks will be reluctant to give you more money. You may need to bring in investors to help grow if you are already highly leveraged. Having a low debt-to-equity may give you the capacity for acquisitions to accelerate your growth.

And for many companies, days receivables are outstanding triggers action to speed up cash flow. Other accounting metrics may also be useful for understanding your business’s performance. You may want to use variations of these financial indicators that fit your business better, but this should give you some ideas if you don’t already have these KPIs.

Break Even Analysis

What we have discussed so far is basic financial accounting. Managerial accounting can give you more insight into strategies and decision-making to enhance the company’s profitability.

There are many specific costing concepts in managerial accounting often applied to larger companies, but for me break-even analysis can be very helpful for a small growing company that has unit product sales.

The concept is like gross margin analysis we discussed earlier. The distinction is in the nature of the cost. Some costs are inherently fixed such as rent. They generally remain constant regardless of changes in the level of activity.

Other costs vary with the level of activity and are termed variable costs. Examples are production wages, material, shipping costs, sales commission and so forth.

The difference between revenue and variable costs is termed the contribution margin. You can then determine a contribution margin per unit of volume by dividing the contribution margin by the number of units sold.

To get the breakeven point, you then divide the fixed costs by the contribution margin per unit.

That tells you how many units to sell to cover fixed costs or in other words break even. As you can visualize, the fixed cost per unit goes down as the number of units sold grows.

This break-even methodology can prove a fruitful modeling analysis by changing volume, contribution margin per unit, and fixed costs. You can get a real sense of how to improve your business performance by seeing how these changes impact your profitability.

Obviously, there are a lot of cost nuances such as semi-variable costs and so forth. Overall, understanding contribution margin analysis can give some real insight into the business.

Value Drivers

Break-even analysis is one form of understanding value drivers. Unlike key performance indicators, value drivers deal specifically with operational activities that create value for the company. Sometimes, these are not controllable by you but knowing how they impact the business can improve your decision making.

In Shell’s downstream manufacturing business, we followed closely what was termed the light-heavy differential. In simplistic terms, heavy crude requires a lot of coking or cracking to break down the molecules into usable products such as gasoline. Lighter crudes can be turned into gasoline with a lot less sophisticated and less costly equipment.

If the spread between light and heavy crude is large, then the “cokers and crakers” will be very profitable. That can influence heavily the decision to invest in this type manufacturing equipment. Thus, this light-heavy differential is a significant value driver for refineries.

Other value drivers you can control directly. You might find that the number of calls from your call center has a significant impact on your revenue generated. You can plot the relationship and determine the profitability impact not unlike break even analysis for such a value driver.

Likewise, number of returned items or redoes could be a value driver in that the lower the activity the higher the profit. A similar concept is zero defects as a value driver. The point is these are the operational activities you spend time understanding and acting on.

Value Metrics

Certainly, as you enter the Take-off Stage, you will want to follow indicators of how your company will be valued by potential investors or acquirors.

The concept of EBITDA should become part of your vocabulary and following.

The acronym stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. Ultimately valuations come down to cash generation.

EBITDA is a proxy for cash generation.

There are many factors in valuing your business; in a typical industry you often hear multiples of EBITDA like five times. In high growth high opportunity industries, the multiples will be much higher and low growth stagnant industries will likely be lower.

Similarly, revenue is another barometer of value. There is no value unless the business can generate revenues. You will hear metrics like one times revenue as a measure of the company’s worth.

High potential industries will have much higher multiples. In the Take-off and Expansion stage, you will want to keep up with the going value of your business.

In the Expansion Stage of the growth model, you will want to become familiar with discounted cash flows as a measure of value.

EBITDA and historical revenue relate to the past and are only proxies of the future.

The true value of the business is what it can generate in the future.

The concept of discounted cash flows is based on forecasting the future and then valuing the cash flow stream.

The forecasting you do goes out a number of years like ten and then you set a terminal or sale value at that point as the final cash input.

The key concept is that cash today is worth more to me than cash in the future. Why is that so? Because I could invest cash today and get a return on that cash.

You include not just the projected future cash generated but the cash outflows you must make. The major investment usually occurs in the beginning and is not discounted as it is in the present. It represents a negative cash outlay that must be overcome.

The return on the cash is the discount rate much like the ROI discussed earlier. For any year out into the future, you apply the return multiplicative to the number of years out in the future.

What you find is the value out ten years is much less than the value generated a year from now. The higher the rate of return, the lower the value of future cash generated.

Using this technique, you can determine the exact rate of return on the future cash flows you projected for the business. That occurs when the rate of return causes the present and future cash flows to equal zero. Some people refer to this rate as the earning power of the business.

By the time you consider using this concept to value your business, an acquisition opportunity, or a large investment in the business, you may have determined your cost of capital.

There are many definitions you get when you do an internet search. Simplistically, it is the minimum return you want from making an investment in an acquisition or big expenditure.

From the capital markets standpoint, it is the weighted average return of what it costs you to borrow or have stockholders invest.

It is very useful to know your approximate cost of capital. Venture capital companies have a much higher cost of capital expectation because they are taking on more risk. It is somewhat similar for angel investors.

Debt is almost always cheaper as they will have the rights to your assets in the case of default. If you can get debt, that is generally the preferred option as it lowers your cost of capital.

When the risk is too high for the bank, you will have the higher cost from investors.

If you have determined a cost of capital, then that rate can be used to discount the present and future cash flows projected. There will be a discounted cash value that may be positive or negative.

If the value is negative, then you reject the outlay as the projected value does not meet your cost of capital. If it is positive, then from a financial standpoint the investment is worthwhile. The resultant is called present value profit.

As you grow and have more investment alternatives, it can be useful to determine profitability index by dividing the present value profit by the initial investment. This enables you to compare the attractiveness of these various alternatives.

Discounted Cash Flows

Wrapping Up

None of these measures are without problems and issues. Discounted cash flows would be very exact if you could in fact accurately estimate future cash flows. Thus, you may have to run various cases. ROI does not incorporate the future and so forth. Most of the financial indicators are snapshots in time.

The combination of what we have discussed is much better than flying by the seat of your pants as is often done in the development stage. The more you know and understand these concepts the much greater your chance of growing a successful business. What you use of these financial concepts should grow as your business grows. You must understand working capital as fundamental.

As business develops, get a grip on your margins and overheads. With maturity into the Growth Stage, managing the business with KPIs can be very helpful.

To continue to grow, understanding your value drivers will be key. Break-even analysis can be helpful in this understanding. As you reach the Take-Off stage think more about valuing your business. At first, that will be traditional measures like EBITDA and revenue multiples.

Then as you expand, discounted cash flows can provide more insight which is why large companies use this technique.