Mechanical levers have been used by human civilisation to reduce the effort needed to move objects since the Stone Age and thus helping lasting monuments such as Stonehenge and the Pyramids to be constructed. Archimedes first described their operation in about 260 BC; basically a rigid length of material (like a plank) is rotated about a pivot (such as a tree trunk) so that a heavy object can be moved a short distance with a lower force applied over a larger distance of movement. If the pivot is between the two ends of the lever, then this is like an asymmetric see-saw in which a heavy adult close to the fulcrum can be balanced by the lighter child sat the other side and further away.
The term leverage has since been applied more abstractly in finance and business to describe taking advantage of a situation to generate returns or improve progress more rapidly. But what does this really mean to the Chief Executive operating a business in the real world?
In an ideal company, a great workforce generates a highly desirable project or service that marketing tells everyone about so that profitable sales are generated and the business grows. Each of these stages can be leveraged, and the analogy with mechanics serves a useful purpose:
Firstly the great workforce is a team that pulls or pushes together to move the business forward weighed down by its many parts including supply chain, internal bureaucracy, and external compliance. The human resource sets itself up in a well organised manner along the length of one side of the lever to provide a measured force in the same direction that shifts the business in the desired direction at the other end. Each member of the team is being leveraged for their contribution by harnessing their best attributes. If some members pull in the wrong direction, they not only work against the team’s directed effort, but they actually help the business to fall further in the wrong direction.
The highly desirable project or service has a string of features each with different value propositions that when lined up along the length of the lever provide a driving force to move the business through its potential sales in the right direction. Too few beneficial features, or a number of faults that don’t sit well with the user experience, wont provide enough impetus to propel the enterprise forward.
Marketing must leverage multiple channels to spread the word positively about the business. Putting the right message out through a range of traditional and social media outlets to drive awareness within the target markets is what is required. Not every channel is equally weighted, but a consistent message across the length of the lever forces it down and pulls up the business. One channel is not enough on its own, and as the business grows and the diversity of the customer base expands, so too the need for concerted effort from many quarters to impact business growth properly.
Finally, sales can be leveraged by having lots of customers all wanting the same thing and better still liking what they buy and coming back for more. Not all customers are equal; some are big and sit far from the pivot with greater influence. Some are small, sitting tight to pivot, but nevertheless contributing. Sometimes, customer demands are in the wrong direction because the sales process is ill-informed or poorly qualified. That’s when leverage fails and sales are lost.
Occasionally the very fabric of the business is strained and broken by the effort being applied to the lever. Think of this as one or more of an oversized costly workforce creating excessive cash-burn, an all-singing all-dancing product or service that can’t be sustainably developed or supported, an overzealous marketing team that generates too much of a buzz that can’t be lived up to, or a sales team that over-promises so that the company can’t cope. That’s when the lever snaps and the business can end catastrophically. Too much leverage in business is not always a good thing; it needs to be measured and controllably applied within the framework of a strategy.
Start to Exit is due to be published in 2017.