Quantifying growth potential
In our article on 'Strategic Planning for Exponential Growth' we concluded that there are two metrics which reflect the essence of the potential of a strategy. These two are Leverage and Scalability.
- Is there significantly more output then input in terms of effort and resources?
- Is there potential for scalability?
It is relevant to think about the quantitative side of this issue. If we truly want to set priorities in a strategy, it would be consistent to prioritize actions on their contribution to these two metrics.
We referred to a common definition of leverage as "The ability to influence a system, or an environment, in a way that multiplies the outcome of one's efforts without a corresponding increase in the consumption of resources. In other words, leverage is the advantageous condition of having a relatively small amount of cost yield a relatively high level of returns."
We achieve leverage by breaking down complexity. When we really see through the complexity of a situation, when we truly understand the root cause of the occurrences, we only have to pull one string to impact the output of the system in a predictable manner. We combine minimum effort with maximum desired effect.
If we know that we have one specific resource that is fully utilized right know despite the fact that this resource (e.g. Customer services) is vital for the added value for the company we can simply focus all our efforts on elevating the output of that resource. Given the fact that this resource is currently fully utilized and it is vital for further expansion of the value proposition, any other investment would be a waste of energy. We ensure maximum effect with minimum effort in a very practical manner.
Therefore the measure for Leverage is Immediate Bottom line impact divided by the immediate effort translated into financial investment of true direct costs.
Scalability on the other hand is the company's ability to grow once the leverage point has been elevated. If the market is saturated there is no use. We would like to quantify scalability in terms of the potential leverage on sales and marketing effort. When we can add significant grow with little marketing and sales effort, our scalability is high. Therefore we quantify scalability as:
Both numbers will give you a factor:
- Leverage factor: for every currency unit we invest in the expansion of our leverage resource we get 5 currency units in return within 12 months.
- Scalability factor: for every currency unit we invest in additonal sales and marketing we get 2 currency units in return within 12 months.
When you multiply the two factors you will get the company's Exponential Growth Potential. We call this number the EGP-factor. In this case it is 10. With the right focus and scrutiny of all redundancies the company can get 10 dollars out of every 1 dollar it puts in within 12 months.