Leverage, to most people, is the use of borrowed money in combination with one’s capital to maximize an investment’s volatility. While an example of “financial” leverage, the meaning of the term is more succinct and inclusive. Leverage, in its many forms, is the ability to affect a decision, action, or outcome to one’s advantage.
Movie-goers will recall the famous line in the 1972 film, The Godfather, where Don Corleone (played by Marlon Brando) tells his godson about dealing with a Hollywood mogul: “I’m gonna [sic] make him an offer he can’t refuse.” Discounting the implied threat, the remark illustrates the use of influence to one’s advantage. The Don understands the various “levers” available to him to get his desired outcome.
Examples of leverage are present in most aspects of human relations, from the so-so student accepted into a prestigious college due to the father’s position to the business getting the highest price for its products as the only supplier. Whether the influence is overt or packaged in allusion and innuendo, the impact is equally effective.
Entrepreneurs sometimes fail to appreciate their leverage potential with customers, competitors, and potential funding sources. Consequently, they accept less favorable terms than might be possible in a more balanced arrangement. Successful entrepreneurs use leverage to accomplish their organization’s internal and external goals. They understand that a point of leverage is present in most business transactions in one guise or another. To be successful, they need to identify its nature and determine when and how to best deploy or counter it.
Sources of Potential Leverage
Leverage is applicable to individuals and organizations in varying degrees and relationships. Managing leverage requires understanding and responding to organizational vulnerabilities to external influence. The following sources of potential advantage are not exclusive since managers, companies, market conditions, and relationships constantly change.
For example, employees are subject to the employer’s power of the purse – the ability to hire, set compensation levels, and terminate. At the same time, a company’s success depends on the skills, commitment, and institutional knowledge of its employees, qualities that are not easy to replace. In most cases, the leverage possible to either party is offset by the other’s party’s advantage.
Using Leverage to Your Advantage
Potential sources of leverage are present in every transaction, some more applicable in certain situations than others. The following are examples of areas that might be exploited by entrepreneurs:
- Customer Knowledge. The ability to identify customer needs and create products that anticipate and fill those needs drives revenues and stifles competition. The ability to understanding your customers’ needs faster and more completely is a highly sought-after skill easily leverageable to one’s advantage.
- Complexity. The advantage of complexity – the use of unique materials, processes, and skills – enables organizations to deliver superior customer solutions (lower costs, higher quality, greater choice, expanded availability).
- Technology. Technology allowed mankind to unlink physical effort and production outcomes as well as time from income. Individuals and organizations with the skill to design, use, and adapt mechanical and electrical machines in the workplace can upend whole industries by their influence on customer and competitor actions.
- Leadership. The ability tomultiply one’s effort and output through directing other people is the key to deliver more products of higher quality for less costs in shorter periods. Those with the ability to lead others are highly valued in every organization.
- Individuality. Each person is unique with a varying set of experiences, skills, aptitudes, education, and goals. Each of us take a different path in life to reach different objectives. Find a niche/model/arena that aligns with your path, and no one can compete with you, in being you.
- Patience. The personal ability to defer instant gratification encourages fuller investigation and reflections about the consequences of an action before implementation, reducing or eliminating mistakes of haste and carelessness. Leveraging patience to forcefully overcome the urge for immediacy and focus on long-term results.
- Brand. Effectively, each person and organization have their own “brand,” or reputation, that signals who we are and what we offer others in a relationship. Branding typically affects a consumer’s choice between two similar products or the willingness to accept a celebrity’s endorsement over that of a man-on-the-street. Entrepreneurs should work to enhance and preserve their reputations as they are often a big factor in other’s decisions.
- Equity. The position that some call “skin in the game” is a powerful influence, especially when dealing with those who have no ownership or consequence from a decision. Equity shows commitment and persistence, two qualities essential for a successful relationship.
- Capital. The presence or lack of available capital is mistakenly believed to be the most valuable source of influence, especially by those who have it. Most entrepreneurs are familiar the Business Golden Rule: “He who has the gold makes the rule.” While a factor in most relationships, those with money ( and those who need it) frequently overstate its value and enter into alliances that are disappointing for both parties and cannot be sustained.
Entrepreneurs should understand that influence cannot be universally applied since the nature of the relationship is a determining factor. The effectiveness of influence typically depends on who needs who the most. Understanding the balance is critical in exerting influence or responding to it. Negotiation is the parries and thrusts between parties to achieve the desired result, though not necessarily to the detriment of the opposite party. Win-win outcomes are most likely to endure as both parties achieve a benefit.
While a Fortune 500 company generally has more clout in the general market than a startup organization, the outcome of the former’s applied pressure depends on each company’s relative influence with the specific subject of the influence. For example, if your supplier’s success depends on your company’s success, a rival’s efforts to shut off supply are apt to work.
Entrepreneurs voluntarily accept one of the greatest challenges in business: the creation and maintenance of a growing, vibrant company. Statistics indicate that most startups are not successful. Even so, a few not only survive but thrive. Many of today’s largest, most profitable companies were startups a few decades before. Their founders understood leverage and applied their influence adroitly to capture customers, attract employees, and engage their communities.