Creating leverage in your business

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.

Leveraging Marketing

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.

Advertisements

Is there a Moore’s Law for business?

Back in the 1965, Gordon Moore predicted that the number of transistors on a chip would through technological advance double every (two) year(s). He made one prediction based on the period of a year, and adjusted the time period a bit later, although as co-founder of Intel he was in a good position to make such a tweak.

Of course, in the case of silicon chips physics does eventually limit this trend. You can’t go on making things smaller for ever, as you’ll eventually be dealing with sub-atomic particles. However, the prediction has stood the test of time and pretty much defined the IT industry as we know it with faster-cheaper-smaller computers year-on-year for the last five decades.

Nature also likes these kinds of exponential relationships, with simple organisms for example doubling their numbers in fixed (often quite short) periods of time as they reproduce. This is why disease can spread quickly and bread dough rises in just a couple of hours.

Sometimes business growth can be exponential; certainly that could be part of the plan in the first few years. A business that doubles its revenues every one or two years is doing very well, and during the initial startup phase this may be an achievable goal. But to keep this up over say just five years is a real struggle; and for decades is almost unheard of.

Google is probably one of the few companies that has bettered Moore’s Law over its lifetime.  Early data for its revenues are hard to come by, but in 2002 (after 3 years from being founded in September 1998) it was reportedly generating revenues of about USD 0.4 bn. The following years were 1.5 bn (much more than double), 3.2 bn (about double), 6.1 bn (just under double), and 10.6 bn (just under double). Fantastic growth continued year-on-year to nearly 75 bn last year in 2015. If Google’s revenues had followed Moore’s Law by doubling every two years it would have reached about USD 35 bn of revenue in 2015. And Google really is an exception because it has a very scalable business leveraging the growth of the Internet (and therefore the industry to which Moore’s Law applies!). However, I don’t think we should use exceptions like this to prove the Law.

Unfortunately, there might well be a Moore’s Law where costs are concerned. Doubling your headcount every one or two years is not unreasonable in early stages, and investment is often needed to sustain this level of growth in overheads as revenues, never mind profits, don’t tend to keep up.

Where manpower increases, so do overheads in general because in addition to salaries, there is also all the support functions that go with it; more computers, more offices, and more infrastructure in general. This explains how an exponential growth in costs can occur which, if unchecked, will put huge pressures on cash flow and bring a business down. Eventually you hope efficiencies and sales out pace the overheads so as to start repaying the investments and increase the profits; and this can only be achieved if you make sure your costs don’t follow Moore’s Law!

But increasing your staff is actually more closely related to Moore’s Law than just its direct impact on headcount or associated costs. Every new member of staff introduces a new node in the organisation; in effect a new interconnected transistor on the silicon wafer. These connections are where information must flow if the business is to function and grow. So, for example, one new member of staff in sales incurs multiple connections with the production team, the marketing team, the management team and so forth. Anyone who has scaled-up a business knows that the growing pains arise through maintaining effective staff communication to the extent that it can sometimes seem a bit like herding cats. Add just one member of staff and management complexity for the business might easily double!

However, don’t be put off, because the same considerations can help a business accelerate on the outside. Every new member of staff, every new partner, every new happy customer creates many more interconnections and links in the real world. This is the ‘network effect’ that will help spread the word and could result in your product or service ‘going viral’. We’re back at that exponential relationship that Nature likes again; and this is where I believe Moore’s Law may well apply more generally to a business startup scenario and therefore really make a difference. Empower the people in and around your business to make contacts, leverage social networking, and spread good news, and year-on-year your enterprise’s influence could easily grow exponentially and outpace Moore’s Law.

MooresLaw

Start to Exit is due to be published in 2017.