Buyer's Market

Finance a la shmoop. What is operating leverage? It's good leverage not like

debt which is a liability and quote bad leverage unquote. Good leverage means a [Operating leverage vs debt diagram]

few things like when you scale in operations and grow very very large then

you have leverage over your suppliers. It's a very different discussion when [Tomatoes in water]

you're buying Tomatoes for your spaghetti sauce like when you're buying

ten thousand tomatoes a month versus when you get very very big like Egyptian [Pyramid of tomato baskets]

pyramid big and are buying 10 million Tomatoes a month like that scale, you get

way more attention at that point from the non-union labor picking them in [Two guys pop out a bush]

Mexico and can command a whole lot more in discounting as far as deal terms go

and you know other favors when you negotiate well operating leverage works [A trolley being pushed around a supermarket]

with stocking grocery shelves as well, meaning that if you are coca-cola you

have a whole lot more operating leverage with Safeway than does Salmonelli's [Scales of the businesses and Safeway showing Coca-Cola with more leverage]

pesto in a can like nobody goes into a Safeway or Kroger's hunting for a brand

of pesto sauce but pretty much every soda drinker on earth which is pretty [Lots of people on a map of the world]

much every human on earth buys Coke or Pepsi and both have extreme operating

leverage. While operating leverage comes in a range of forms like for example

let's consider a semiconductor maker this isn't fizzy water and sugar and [Someone opens a soda can and it explodes everywhere]

union Teamster co-opting this is actually really hard Tech where it took

decades to be able to produce gigaflops of information put through a tiny piece [Binary code going by]

of fiber for a dollar, really hard to make highly unlikely that Somalia is

gonna one day be a big competitor in the semiconductor architecture business so [Guy plugs something in and it explodes]

the winner in that space a little company called

Intel. Yeah it had for a long time a virtual monopoly in being able to [Monopoly logo appears]

produce massive computing power for an incredibly cheap or high value price. [High value price tag appears]

Well Intel had massive operating leverage in its heyday until Apple and a

few Chinese companies spent a hundred billion dollars or so making themselves [Apple and Intel in a boxing ring]

into viable competitors and yeah and that's [Apple chucks a fire ring at Intel and knocks it out the ring]

what happens when you try to be a monopoly in a competitive world.

Well the key idea here is that operating leverage or power that a business has in [Definition of operating leverage]

running itself usually translates directly in the form of profit margins

like the more operating leverage accorded a company the higher its profit [Operational leverage is piled onto the scale and profit margins take off]

margins will usually run which is very different from this kind of operating [A surgeon wiggling a tool round in an operation]

leverage...