The Power of Leverage

Greek mathematician Archimedes was the first to describe levers in approximately 260 B.C. Having discovered the reasoning behind why levers worked, Archimedes once famously stated, "Give me a place to stand on, and I will move the Earth." On the right is a photo I took in London of a construction crane. It seems Londoner has found a church to stand on to move a building.?

Leverage comes in many different forms but plays a particularly important role in the world of finance. Financial leverage is one of the three legitimate ways to make a profit for an given business (i.e. margin, turnover, leverage). Financial leverage refers to a technique that involves using debt in the hopes of increasing a potential return on investment. In other words, it involves multiplying gains and losses by taking certain risks. Overleveraging, however, is a sure way to get into deep hole including the 2008 financial crisis which most economists attribute to over leveraged housing crisis. Financial innovation was often a euphemism for hiding leverage. In the context of business operation, operating leverage refers to the use of fixed operating costs such as depreciation in the operations of a firm which gives an idea about the impact of changes in sales on the operating income of the firm.

Leverage, as a general term for any technique to multiply gains and losses, is often used in business with a positive connotation.?For example, McDonalds is good example of leveraging other people’s resources through franchising to create value. By applying the concept and the power of leverage you can achieve a lot more in both your business and life. Without the power of leverage, your rewards are restricted to only the amount of energy you put into a task. Here are some examples of leveraging:

For personal development, leveraging your strengths, rather than focusing on your weakness, is more likely to help you achieve your goals and objectives. If you are new in an organization, finding a mentor or coach is a good way of leveraging other people’s experience to shorten your learning curve. If you, like most people, confined at home due to the pandemic, leveraging the time you have on hand to learn a new skill. In business relationship, leverage is often about understanding what another party’s desire and figuring out what you need to fulfill it, then using your position to achieve a desired outcome.?When leverage is used responsibly, all parties can benefit from the outcome of the relationship.

Take the time to identify the appropriate levers given your context. Then you will have the opportunity to achieve the desired outcomes. An activity with high leverage will generate a high level of output; an activity with low leverage, a low level of output. One of the best advices about leverage I received from a senior executive was to "leverage strategy to drive organization change".

What are some of the levers you have been using in your business world?

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