3 Ways To Create Leverage In Business
The key: don't half-ass execution.
Implementing lessons from business books can be challenging. I simplify abstract principles and add real-world perspectives by summarizing my favorite chapters. These will help you build stronger mental models and spur professional growth.
In this post, I discuss the chapter, titled Using Leverage, of Richard Rumelt’s Good Strategy/Bad Strategy — The Difference And Why It Matters. If you’d like to read my last post on the book, here it is. TL;DR and quotes at the end.
“In general, strategic leverage arises from a mixture of anticipation, insight into what is most pivotal or critical in a situation, and making a concentrated application of effort.”
Beat your competition by using ‘Sources of Power’ as Rumelt describes them. Leverage is the first source of power. Here are three ways to create business leverage and win.
Anticipation
Why India’s High Inflation Will Persist
If a central bank aims to control inflation (usually its primary objective) it needs to be perceived as credible1. Credible as in, if it says it will keep inflation low it does so. This is a fundamental principle in macroeconomics. Here’s why.
If businesses think a central bank will miss (exceed) its inflation target, they will raise prices. When all businesses do this and they predictably do, inflation follows. This vicious cycle leads to years of high inflation. A problem many developing economies’ central banks fight every day. Including the Reserve Bank of India (RBI).
To maintain credibility, a central bank needs to make unpopular decisions. The US Fed’s decision to raise key interest rates for instance will likely start a recession, which won’t help Biden’s reelection chances2. But, this rate hike maintains the US Fed’s credibility. Businesses will expect the Fed to meet its target of 2 percent inflation. After all, it will even start a recession if needed. If the government had its way it wouldn’t have risked high unemployment numbers and low approval ratings by starting a recession. Inflation though would have soared. A central bank, therefore, needs autonomy from other interests.
I think the Indian government greatly influences the RBI's monetary policy. We'll probably never see a rate hike in an election year, even if is needed. Since the RBI is not autonomous, I predict it will not be seen as credible in the long run. So, I anticipate India’s long-run inflation rate will remain high. Jayanth Rama Verma, a member of India’s rate panel and an IIM-A (top management school and home to many think-tanks in India) professor said something similar recently3. I even speculate this is why Raghuram Rajan resigned from the RBI.
This understanding, by the way, informs me how much my salary needs to grow. When businesses raise prices or lay off employees or when we make investing decisions based on such logic, Rumelt would say we are using ‘strategic anticipation.’ Here’s how he describes it.
“Most strategic anticipation draws on the predictable “downstream” results of events that have already happened, from trends already at work, from predictable economic or social dynamics, or from the routines other agents follow that make aspects of their behavior predictable.”
Rumelt clarifies anticipation is not prophesy when he makes the above statement. I think a strong grasp of a context’s relevant first principles helps us build such anticipation. For example, the first principles of user psychology help product managers anticipate how a feature idea or UI change may be received by users. Rumelt also advises the reader to anticipate competitive reactions, not just consumer reactions.
Learn the key first principles at play in your business’ context. Then, test your anticipation often to build intuition. Of course, experience helps. Keeping in touch with sales and your marketing teams helps you learn about competitive responses better. With enough practice and layers of knowledge gained over time, your anticipation will go from tactical to strategic.
Strategic anticipation leads to the discovery of Pivot Points.
Pivot Points
How I Think TikTok Competed With Instagram
When TikTok first entered the social media space Instagram was ubiquitous among creators and audiences. TikTok understood that attracting creators held the key to attracting audiences. Creators though didn’t like migrating platforms because they would need to rebuild their audience4 and learn a new product5. TikTok needed to give creators a strong reason to migrate from Instagram. So, they developed VFX tools not offered by competitors and made them available for free. Since creators needed to pay for even simple VFX software, they were happy to migrate to TikTok. Rumelt would call the creators’ need for inexpensive software and their ability to attract audiences a ‘Pivot Point’. Here’s how he describes it.
“A pivot point magnifies the effect of effort. It is a natural or created imbalance in a situation, a place where a relatively small adjustment can unleash much larger pent-up forces. The business strategist senses such imbalances in pent-up demand that has yet to be fulfilled or in a robust competence developed in one context that can be applied to good effect in another.”
TikTok addressed creator needs - this was their ‘small adjustment’. Concentrating resources there arguably led to better results than concentrating them on direct-to-consumer marketing. For TikTok, the ‘pent-up demand’ was the creators’ demand for cheap creator tools. The ‘pent-up forces’ were a large number of potential creators who didn’t publish because they couldn’t afford to and of course, existing Instagram creators who encouraged audiences to follow them on TikTok as well.
I thought this concept was the hardest to implement. I can’t imagine searching for ‘Pivot Points’ on a daily basis. Finding such insights needs hard work, for sure, but in my opinion, also needs a healthy dose of luck. Moreover, I think ‘Pivot Points’ are ephemeral. Once everybody uses them, they are no longer a source of leverage. What do you think? Have you knowingly or unknowingly found a way to think about Pivot Points that we can use regularly? Let me know in the comments.
Developing VFX tools usable on mobile had to be expensive and time-consuming. It likely needed a concentration of TikTok’s best engineering resources to execute successfully. This brings us to the chapter’s final and most practicable point.
Concentration
TikTok had many options for product and growth strategy. TikTok could have paid creators who ceased posting to Instagram. They could have spent millions on advertising. They could have tried all options and hoped one stuck. If they had though, everything may have been half-assed. Since budgets are usually constrained, money would have been spread across multiple initiatives. Lacking enough money, TikTok wouldn’t have hired the best talent. Without talent, their creator features wouldn’t have been cool enough for creators to migrate. For instance, if TikTok didn’t create video effects and only gave small improvements on image editing, creators wouldn’t have cared. Video features are very valuable to creators and represent a harder engineering problem. I am guessing their engineering team concentrated on that product aspect.
There are two factors that make the concentration of resources on a pivot point, a competitive advantage.
#1 We’re not geniuses
Even if we got a sub-300 All India Rank in the IIT-JEE, 1600 on our SATs, or went to Harvard Business School.
Leadership too has cognitive limitations. These cause indecision in the face of infinite options when devising a strategy. Indecision leads to trying and half-assing everything. Most of your competitors are busy trying everything because they couldn’t decide. If you don’t, you’re at an advantage. When execution is half-assed, it doesn’t truly change business outcomes. This leads directly to the next factor.
#2 Threshold effects
When such effects exist, a base level of effort is needed to truly change business outcomes. Rumelt believes if this base level of effort is not applied it may be better to not apply effort at all. By his logic, TikTok needed to create really cool video tools or not focus on creators at all.
Threshold effects can be seen elsewhere. Content marketers are often forced to choose between channels. Resource constraints are a big reason. ‘Threshold effects’ are another. Channels like Instagram or TikTok incentivize frequent posting and/or bursts of posts. Meaning, a content marketer may get more engagement if she posted five Instagram reels in one week instead of 8 reels over a month. Similarly, it usually takes a minimum level of followership before a page truly gains traction. If she worked several channels in parallel, she may not be able to post frequently enough on one channel. So, she may not reach the threshold these channels require.
Leaders often expect middle-management to work on many unrelated initiatives. This fully goes against Rumelt’s advice. As middle-management, prioritizing and learning when to say ‘no’ is the real world implementation of this chapter’s lessons. Leadership can construe this as laziness. That is a stupid notion. Clarify that you’ll work hard and manage many initiaves as long as your effort is concentrated in one general direction. Say you don’t want to half-ass shit. Not in those words, obviously.
On the other hand, it is important to have a discussion before dismissing unrelated iniatives. Sometimes leaders fail to explain their rationale which makes their instructions appear haphazard when they aren’t. Other times, there is too much going on for leaders! A manager who creates structure out of ambiguity is highly valuable. Be your leader’s consigliere.
Bringing It Together
The previous chapter defined the framework this book is built on: A diagnosis to define crucial obstacles, a guiding policy to clarify decision-making, and coherent action to define execution plans. This section ties this chapter’s ideas to that framework as I understand them.
Anticipation will help us form a diagnosis and a guiding policy. I don’t think it contributes to defining coherent action.
Pivot Points will help us identify crucial aspects of the situation. So they certainly contribute to creating a guiding policy but may also help us form a diagnosis.
Concentration I think is mainly about coherent action.
Read the chapter’s summary here.
TL;DR
No need to read this if you’ve read the whole article. But! you can share just this section with someone who isn’t as patient as you.
Leverage can be found through strategic anticipation, the discovery of pivotal market dynamics, and the concentration of efforts on those pivotal dynamics.
Anticipation does not mean prophesy. It comes from predictable patterns we observe in business. Key-rate increase in the US → a drop in share prices in India. Why? FDIs have a fiduciary responsibility to seek low-risk, high-yield investments. So they always divert funds from risky assets in developing countries to US Fixed Income assets.
To build this skill, learn the key first principles relevant to your business. Test your anticipation to build intuition. For example, PMs or PMMs should understand UX design principles. Gather a variety of experiences to complement first principles. This builds ability to anticipate.
Pivot Points represent an imbalance where relatively a small adjustment can yield high benefits. 1000 hours applied to a pivot point would yield better results than if 1000 hours were applied elsewhere. I think Pivot Points in real-life constantly change. Since when everybody learns about them, they stop being a source of advantage.
How can you find a Pivot Point? As a PMM in tech, I can only speak to myself. I think research focused on uncovering competitive, customer, and partner insights is one of many ways to uncover Pivot Points.
The concentration of effort on a pivot point yields competitive advantage. Two reasons why:
Cognitive limitations make competition indecisive. They spread resources over many strategic options, reducing impact. Your anticipation should make you decisive and gives you a competitive advantage when you concentrate on a Pivot Point.
Presence of threshold effects means sometimes no effort may be better than some effort. Like with awareness marketing. Spending money on repeated exposure ensures high brand recall. Consumers may not recall your brand if they aren’t exposed to your message often enough.
As middle-management, ensure you prioritize well and learn to say no to managing disparate, unrelated initiatives. Hard to do, but this will ensure your efforts are concentrated.
Seriously though, I am stumped on Pivot Points. Besides, not many read this newsletter. If you did, your opinion matters. I’d love to use your comments to improve future articles.
Sources
Rumelt, Richard.Good Strategy/Bad Strategy — The Difference And Why It Matters. Crown, 2011.
See Footnotes
https://cfo.economictimes.indiatimes.com/news/jayanth-rama-varma-the-lone-dissenter-on-rate-panel-says-rbis-credibility-is-at-risk/89959810
I think TikTok gave creators large audiences very quickly. They solved that creator problem too. Somehow.
Here’s HBRs view on 2-sided marketplaces. By the way, attracting supply (creators for TikTok), not attracting demand, is the main bottleneck for 2-sided marketplaces. A first principle to keep in mind if you’re managing drivers at Uber or vendors on Amazon.