This week takes me to one of our long-term clients in the defense industry. Now that the US election is over and the new administration is formulating, we are in a different place from a geopolitical perspective. This week, our client focuses on some good old-fashioned back-to-basic financial acumen learning through a customized business simulation.

One of the topics we are teaching is analyzing and assessing their long-term return on equity. Although it has been a few years, I am excited to dust off the DuPont Chain of Profitability as a key teaching tool. I figure it’s an interesting topic to share in a blog.

History

The name of the tools comes from the great DuPont company, which began using this formula in the 1920s, over 100 years ago. A DuPont explosives salesman, Donaldson Brown, submitted an internal efficiency report to his superiors in 1912 that contained the first version of the financial formula and it was embraced internally and at leading schools like Wharton where I first learned about it in the 1980’s.

I was a little anxious to present my ideas to the CFO and VP, of Finance for an up-and-coming medical device company as a review of an intensive business acumen program I am running for them in a few weeks.

I was thrilled to hear their positive feedback and best of all they were very complimentary of one section they wanted me to create for them on the concept of operating leverage. The review went so well that I figured I’d turn the content into a nice, practical blog that first defines operating leverage and then provides 10 things everyday managers can do to drive it.

What is operating leverage?

Operating leverage is a financial metric that measures the extent to which a company's operating income can increase due to an increase in revenues (also known as “sales”). Operating leverage reflects the proportion of fixed costs relative to variable costs in a company’s cost structure. When a company has high operating leverage, it means that it has a larger proportion of fixed costs relative to variable costs. This setup can lead to a larger impact on profits when sales volume changes.

How Operating Leverage Works

High Operating Leverage: Companies with high operating leverage have higher fixed costs and lower variable costs. As sales increase, more of each additional sale contributes directly to profit because the fixed costs are already covered. However, if sales drop, profits can decline sharply because those fixed costs still need to be paid.

Low Operating Leverage: Companies with low operating leverage have higher variable costs compared to fixed costs. Their profit margins may not increase as much with additional sales because more of each sale goes toward covering variable costs. However, in a downturn, their profits tend to be more stable since they have fewer fixed expenses.

This week took me to 3 different cities in 5 days delivering 4 Business Acumen training sessions live and in-person while also delivering 6 virtual sessions when I wasn’t in front of a classroom. A busy week to say the least!

In meeting with and delivering Business Acumen training to more than 2,000 people, I was sensitive to some of the issues and challenges leaders feel they are facing as they start preparing for 2025. Sifting through my notes and thoughts, one specific skill keeps coming up over and over as something leaders are searching for; “Critical Thinking.”

But it’s not Critical Thinking circa 2019. Everything has changed in business and the way people work – which hopefully means the way they are delivering their company’s value proposition to their customers – and the skill of Critical Thinking as we look forward to the next 5 to 10 years is going to have to be very different.

I took some time to roundtable and explore what thought leaders are thinking Critical Thinking is in 2025 and beyond and I am happy to share some of the thoughts and insights.

Here are 5 things that need to be developed to have better Critical Thinking:

Most of the readings and insights you will find about “Growth Mindset,” including my own blog on Developing a Growth Mindset in a VUCE Business Environment, are basically “telling” organizations and people what to do.

Which is so counterintuitive because the very essence of the Growth Mindset is built on the principle of taking ownership and self-accountability to find solutions in a positive and constructive way without being told what to do or how to do it.

Based on some of the great feedback I received from my most recent blog on Growth Mindset, I am pleased to share some additional insights and guidance on what individual contributors and leaders can do to actually embrace it and do something about it.

In writing this, I sought out the insights and guidance of leaders I work with whom I consider having strong Growth Mindset skills.

The last 5 years have seen some of the most chaotic and transformative changes in the way businesses operate since the dawn of commerce.

We’ve had a global pandemic, runaway inflation, devaluation of currencies throughout the world, supply chain meltdowns, geopolitical unrest, natural disasters, unprecedented weather events, and wars and several continents.

As Advantexe prepares for 2025 and beyond, we have been conducting research on what are the critical capabilities needed by organizations and leaders as we set the new normal.

With all of the external changes outside of the organization, we have seen far more disruptive change inside of the organization ranging from the evolution of fulltime remote workforces to job-hoping every 9 months, to the phenomenon of “quiet quitting” where employees stick around in jobs they don’t like just to get a paycheck until they find a new job at higher compensation.