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Here’s another example of partners investing in each other’s success. I know of a company that paid to have consultants teach strategic planning to their employees’ union.Many members of management were dumbfounded when they heard about this. They wondered why the company would pay to have the union become more organized and stronger through company-provided strategic planning. When the question was asked of the CEO, her answer demonstrated her high PQ: “In the next round of negotiations with the union, I want them to know what their members want so we can get down to the critical issues that are facing our industry. Neither side wants to drag out these talks. It’s an investment in our management’s time to have the union be strategically prepared for these negotiations.”

Operating leverage is the idea that companies can make more money from each additional sale if they do not have to increase fixed costs to produce more. In general, operating leverage refers to the fact that a lower ratio of variable cost per unit to price per unit causes profit to vary more with a change in the level of output than it would if this ratio was higher. So operating leverage is a function of fixed unit costs and output. The benefits of operating leverage unfold when business picks up. Then the existing workforce, plant and equipment can produce more without additional costs. Profit margins expand, and profits boom. Obviously, the profit of a business with a high degree of operating leverage varies more, everything else remaining the same, than do those profits of businesses with less operating leverage.

Greater variability of profits, of course, means that the credit risk is higher. Conversely, with a lower level of operating leverage, the business shows poor growth in profits as sales rise, but faces a lower risk of loss as sales decline.