Leverage
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Overview

Archimedes was claimed to say: “give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

Leverage refers to the use of small, well-focused actions that can produce amplified results.

USING AMPLIFIERS.

Leverage might involve using tools, resources, people or anything to amplify the energy we put into something to create a bigger impact. It involves considering how, where and with what we engage in a situation rather than just using blunt force.

It has some similarities to finding the 'vital few' as described by the Pareto Principle, but the approach often implies an indirect attack by utilising an additional element or tool. 

So where applying the Pareto Principle to increase sales might involve focusing on the 20% of top buyers, applying Leverage might involve applying a particular marketing channel or sales offer to gain an amplified impact. 

VARIATIONS.

Some variations on how the mental model is used include: 

  • In finances, Leverage can refer to using borrowed capital as a funding source for investments. 
  • Leveraged income relates to income that is drawn from a ‘passive’ income source, such as a business or book sales, rather than from hourly salary for the effort expended.
  • In business negotiations and relationships, Leverage involves the advantage that exists when someone has the upper hand, including more knowledge or experience, superior networking, trained workforce, etc.

HOW TO USE IT.

The above variations are worth considering, though I suggest you focus your application of this model by identifying amplifiers in any situation. That means considering 'what additional tool, person, point of focus, or anything will create over-sized results?'

IN YOUR LATTICEWORK. 

I've already described the similarities and difference between Leverage and the Pareto Principle.

You might want to consider it in comparison to Catalysts and Activation Energy. And it is a strong model to apply in negotiations, along with models such as BATNA, and sales, along with models such as the 4Ps of Marketing

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Actionable takeaways
  • Look for resources and tools to create Leveraged impact

Rather than approach a problem with direct and personal force, consider how you might apply a smaller force that will deliver an amplified effect. Consider what tools, resources, people you might Leverage to deliver this amplification. Brainstorm options and additional ways to approach a challenge, rather than targeting it head on.  

  • Seek a position of leverage

You have leverage when you are the only one able to provide something that the other party needs. Consider how you can position yourself to ‘gain leverage’ or at least the perception of Leverage, which can be just as effective.

  • Don’t reveal when others have leverage over you

As Warren Buffett once declared, “Don’t ask the barber whether you need a haircut.” Act as if you would make a favour by accepting the other party’s offer, which is worthless and disadvantageous from your perspective.

  • In relation to Leveraged income - don’t just ‘feed the beast’

Feeding the beast refers to investing ongoing time, energy and resources to maintain a situation. In this context, it applies to looking beyond a salaried option to opportunities to generate leveraged income through assets and/or businesses. It might also refer to a business stuck in a cycle of constant service or bespoke delivery rather than having time to develop a product suite that could be leveraged.

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In Practice

Drinks on planes. 

Prices at airports and on planes are notoriously high because the relevant companies have leverage over customers, who have no choices to buy from other vendors. 

Tech companies

Companies that have driven disruption through leveraging technology have changed the face of business and the world over the last decade. From Amazon, Apple and Google — these companies are leveraging technology to deliver greater value than competitors.

Limitations

The limitations of the Leverage mental model were best observed by Jean-Jacques Rousseau in The Social Contract: “It is easier to conquer than to administer. With enough leverage, a finger could overturn the world; but to support the world, one must have the shoulders of Hercules.” Leverage is an excellent starting point, but it does not ensure the success of an endeavour as additional work must be done after gaining traction.

In reference to the second definition of leverage, around 'gaining a position of leverage'. This can create a degree of frustration and discontent with customers who feel forced into a situation — thus it might not prove to be a sustainable strategy.

Build your latticework
This model will help you to:

As seen from the overview description, the mental model of leverage has a range of applications and interpretations. 

Use the following examples of connected and complementary models to weave leverage into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above. 

Connected models: 

  • Pareto principle: similar approach of identification of the ‘vital few’ to focus efforts on. 
  • Critical mass, activation energy and catalyst: the art of leveraging might be described as looking for the catalyst to reduce activation energy. 
  • Lock-in effect: is maximised when there is leverage or an advantage over a customer.
  • Chain reaction/ domino effect: in considering where to apply force to get a long term impact.
  • Butterfly effect: an understanding of potential impact of small targeted energy.

Complementary models: 

  • Porter’s five forces and balanced scorecard and other business measurement mental models provide input into which aspects of a business might be more effectively leveraged for success. 
  • Compounding: combined with leveraging can provide a powerful result from consistently expended energy or investment.
Origins & Resources

The first use of the Leverage mental model is attributed to Archimedes who, over 2,000 years ago, was claimed to say: “give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”

My Notes

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