Master Efficiency, Leverage, and Scale
Master Efficiency, Leverage, and Scale
You can always produce more and be more efficient than you previously thought. Therefore, you must prepare your infrastructure early on if you aspire to grow. With greater scale, you can accomplish more with less effort, even though it will still take considerable work to achieve anything worthwhile.
The idea behind leverage is that as you amplify your success and money, the resources you control become even more of a draw to vendors as well as potential employees, partners, customers and investors. This means that each dollar at a larger company should go farther than the same dollar at a smaller company. The more resources you have, the more attractive you are to the business world.
You can create leverage, and with it, you will be in a position to extract better prices on products and services, find better candidates for job opportunities, and attract more demand from prospective customers. Leverage facilitates additional pricing power and even enables further discrimination in your choice of customers.
If you are too good at growing your business and you feel it’s beginning to move too fast to maintain quality, then your prices can always be raised to new customers. In fact, the high demand for your services proves either you give great service, are too cheap, or are just a good overall value. In any case, this leaves you leverage for additional pricing discrimination. Another option would be to re-focus your marketing just on the most profitable niches you’ve tested, so less time and fewer dollars are spent in less profitable areas.
Over time, you can invest double the money and energy in the most profitable niches you’re developing (double down) and dump the remainder. Alternately, you could keep all your niches fully operational, as long as the parts are compatible, and your investment dollars should go further.
Plan in advance for each task you undertake to be bankable, meaning it will lead to real profits within a reasonable period. Merely filling time by “faking it,” or producing academically good yet unprofitable work rather than making serious, planned and measured financial accomplishments, will not help one reach his goals. Focus on analyzing the metrics that best represent key aspects of your corporate performance to guide you towards future Best Practices.
Your leverage should primarily be due to your provision of quality services and products. If you have something of value, people need to know about it so you can use this strategic positioning to your advantage.
For instance, West Coast Choppers (WCC) is a small custom motorcycle company with clients who are generally mega-millionaires. In this case, one would assume the clients, and not WCC, would have leverage in negotiations since they are wealthy and powerful. But in reality, the service and product quality from the WCC’s shop is so high (and their customers know it) that they have leverage in every deal. As a result, they can extract ostensibly high prices and other favorable deal conditions from their customers.
They don’t abuse their right to use leverage lest they lose it. If customers were to sense a pompous attitude or price gauging, the WCC brand could easily be diluted and lose hard earned leverage.
Providing quality services over time and promoting them accordingly creates additional service demands, which creates valuable leverage, and therefore, opportunities to appropriately scale your entity. Here is one simple example of how scale can work to the advantage of a business: if you were a real estate agent, you would discover that selling a hundred homes is more than a hundred times as profitable as selling one. The more homes you sell, the less time, energy, and money is consumed per transaction.
This same basic precept applies to almost any product or service: making 200 sales is not 20 times harder than making 10 sales. At some point, you hit sweet spots where successive transactions aren’t proportionately more expensive to produce. Added up, these sweet spots show patterns that prove scale offers significantly advantageous financial opportunity (dollar for dollar; hour for hour) compared to chugging along on a steady course, at a low level, with light resources.
Taking a private company public generally invokes a public premium because of the public buyers’ perception of the advantages of scale, and because there is substantially greater liquidity.
The public premium gets you a higher share value compared to a private company with the same amount of profits, revenues, and projects. So you see that added liquidity is yet another way scale provides companies with extra leverage, which means each additional dollar of profit will come with less effort.
The bigger you are, the more money you should make merely due to your size and the added efficiencies created by your size, assuming that bureaucracy doesn’t paralyze your business like it does many large organizations.
Often, your competitors do not believe they can effectively scale their organizations. They conveniently think that their current size is their optimal size. In this case, your strategic advantages are for you to understand economies of scale better than the competition, believe you can effectively scale, and be willing to make an assertive try at it. Just as the rich get richer, the bigger companies with more scale, and therefore leverage, get what they need cheaper and faster. This leaves them at a perpetual advantage by effectively distancing themselves ever further from their mainstream competitors.
Don’t forget that incompetence or wasted time in large or small businesses could readily reverse any strategic advantages that scale may offer.
In many cases, the mom-and-pop shops that are content with their productivity and profits are at perilous risk. The client relationships of most small businesses that appear to be sustainable, in reality, are potentially “ripe for picking” by more aggressive small businesspeople who are operating with more scale, efficient guerilla tactics, or lower operating costs. It is not fair; it is just business.
There are other ways to gain economies in your business besides becoming a larger company with more employees. These include replacing old technologies with newer ones, and sometimes hiring fewer people in favor of employing technologies that are more advanced. Cutting expenses and growing without incurring additional fixed costs will also result in bigger profit margins, which will be enhanced later by applying an “industry multiple” in order to assess the company’s fair market value (FMV) for mergers and acquisitions. This is where the most money is likely to be gained.