Read my new book, An Enlightened Entrepreneur:
57 Meditations on Kicking @$$ in Business and Life"4.8/5 stars" on Amazon
Friday, November 13th, 2009

How to Master The Design Process: Six Easy Steps

4 Comments

My friend Jessica has designed products ending up in such places as Pottery Barn, SF MoMA and Barnes & Noble.

She also teaches Product Design in the Mechanical Engineering department at Stanford University.

Designer Jessica Zarin Kessin

Designer Jessica Zarin Kessin

I ran into her at our favorite San Francisco Mission coffee house recently and talked her into sharing her thoughts on the design process as it relates to business.

Q: Why is a product design process important for business?

Product design is a lot more than just the design of an object.  It is a process for creative problem solving.

The design process can yield great products, but the process can just as easily help to create unique solutions to problems in any other area of business.  The design process is a way to think, create and come up with new ideas.

Objects and solutions don’t just appear. It is a time consuming and detail oriented process.  However, it can lead to great results, get you thinking out-of-the-box and you might even have some fun in the process!

There are design consultants of all sizes and types that can come in and facilitate this process for any of your needs.  Each firm or consultant has a specific focus and their own process, I am going to discuss the basic process that I use.

Q: What are examples of when design processes should be applied in a business?

A creative process can be applied anywhere.  I use the process to help me when I am stuck or need inspiration in any area of business….it does not have to be design related.

As the founder of a toy company, I have used this process (or parts of this process) to plot the overall direction of the marketing, branding and the general trajectory of the company.  Of course, I also use it to design toys!

With clients, I often map out the process to show them exactly what I am doing for them.  It also helps to keep them involved.

As an external consultant, I cannot design in a vacuum. We all need to work together as a team.  Especially in the Analysis and Definition stages, I can lead the process, but the trajectory ultimately needs to come from the client.

Being a designer is not a solo job.

Q: Do you have a design process diagram you could share with us?

Source: Don Koberg and Jim Bagnall from The Universal Traveler.

The Design Process Model has these 6 easy steps

This is a basic representation of the process that I use. It is an adaptation of the design process that Don Koberg and Jim Bagnall describe in The Universal Traveler.

Q: Would you explain each of the six steps of your design process model in more detail (I’m especially interested in the ideation phase)?

As shown in the diagram above, design is a process.

Step 1: Analyze

To design an object you need to understand the area surrounding that design.  Why are you designing this object? What is the need or problem that you are trying to solve?

What else is out there? What is your competition?  Why is your competition not filling the need?  Who is going to use it?  Where is it going to be sold?

The list goes on and on….

You can do this in a number of ways.  Market research, talking to primary or secondary users, formal interviews, market surveys and observation are a few of the methods.

Why don’t we pick a need and walk through an example together.  Let’s say you were annoyed that your bike seat got wet in the rain and you wanted to design a cover for it.  How would we go about doing this?

First we would look at stores, catalogs and bikes we see around to see what other solutions exist. We might talk to bike commuters, people who worked in bike shops or kids who ride to school.

We might see how others are solving this problem or are you the only person who has this specific problem….if it is just you, your product might not be such a huge success and we might want to just make one.

This is also the phase when you should question your mission and try to look at it from a new perspective entirely.

Is a bike seat cover really the answer, or do we really need to create a new form of transportation that is rainproof?  Or should we really be creating a way to stop rain all together?  Would waterproof pants solve the problem instead?

Is the bike seat cover really the best solution to your problem or is it just the first thing you thought of?  Take a moment to explore other directions.  We might end up back where we started, but we should take time to consider this.

Step 2: Define

Once we have analyzed the marketplace and environment that we are designing into, we need to define the goals. What are the specific design principles where we will not compromise?  Who are we designing for?  What qualities does the product need to have?

Is our bike cover for bike cover for tri-athletes that have very high-end bikes? Is it for college kids with no money?  Is the price important? Are your users eco-conscious and do we need to consider that?  Is aesthetics an important factor?  Is convenience important?

Does it need to stay attached to the bike so it doesn’t get lost? Are our users somewhere where it might get stolen and does it therefore need to lock?

The list goes on, but the designs that emerge will be vastly different based on the answers to these questions. This is especially important when designing with a team. If everyone is not going down the same path, we are going to have major problems.

(This is why when I design for a client group, their involvement is imperative!)

Once we list out all our design criteria and everyone agrees to them, we are ready for the ideation phase!

Step 3: Ideation

Ideation is also known as brainstorming. This is where you should go big and not be afraid to get a bit wild.   The ideation phase is a divergent phase.   We go wide, looking for quantity over quality…yes, quantity, not quality!

The Design Process

There are a number of different brainstorming techniques that you can use.  But the main rules of brainstorming remain the same.

RULES OF BRAINSTORMING:

  • Defer judgment -Don’t edit yourself of others.  No idea is stupid!
  • Encourage wild and crazy ideas (Maybe we should all move to the moon and bounce to work instead of biking?)
  • Build on other people’s ideas.  Steal, Steal, Steal!!  Take other people’s ideas and leapfrog off them. There is no claiming credit in a brainstorm; it’s all about working together!
  • Stay focused on the topic.  Your ideas can get wacky, but keep generally focused on bikes and rain.
  • Have one conversation at a time. If you are brainstorming in a group, let other finish their thought. Jot yours down so you wont forget them in the meantime.
  • Be visual. Drawing conveys ideas; you don’t have to be Rembrandt, stick figures are great!
  • Go for QUANTITY!!!  (We make our students come up with at least 100 ideas before they can pick one to work on).

SUPPLIES:

  • Big paper or a white board
  • Comfy chairs
  • Caffeine and snacks
  • Items for inspiration. (In our scenario, we might have a bike, an umbrella and any existing seat covers on the table for inspiration.)
  • Open minds!
  • In a group, it also helps to pick a facilitator to lead the brainstorm.

There are a number of techniques people use to brainstorm from listing, to different uses of perspective.  Any technique is fine as long as it gets creativity flowing.  My favorite technique is mind mapping.

Mind mapping is the equivalent of a writer’s free-writing.   Mind mapping is simple, you write a topic or question in the center of a paper.  Then as quickly as you can, branch out and write or draw ideas.  Topic areas will naturally form as you branch off each other.

Q: Do you have any mind map examples you could share

Sure, here’s one example of mind mapping:

Mindmap Example

Mind Map Example

When I mind map with a partner, we both write as fast as we can, when we see our writing start to slow down, we rotate the paper and start to branch off of each other’s ideas.  We keep rotating until the paper is full.

Now that you have a huge stockpile of ideas, it’s time to converge again.

Q: Ok, sorry to interupt. What’s the next step in the design process?

Step 4: Select

Don’t forget to look back at those design criteria from the define step.  With those in mind, we will pick 3-5 ideas that we like from the crazy brainstorm.  There should be some really fun ideas that don’t fit the criteria, but hopefully we can find a few that could.

The selection process can be as formal or as informal as we want.  We can pick based on our favorites, we can hold a team vote, or we can use a more formal decision matrix. (I wont go into the details of that here, but it’s an mathematical way to make a decision.)

The decisions might be made due to cost, or manufacturability or just how cool the idea is. Whatever direction we choose, we need to make sure we all know why we are choosing it.  All these reasons are valid as long as we understand our motivations.

After one more check to make sure everyone agrees on the concepts and to make sure all the criteria can be met, we are ready to implement!

Step 5: Implement

Now that we have a direction (or a few) it is time to implement our ideas.

Designer will consider implementation anything from sketching to prototypes.   The quicker or faster we can prototype something, the faster we will be able to evaluate it and move on.

A designer’s motto is “Fail Early, Fail Often!”  Test all the crazy ideas; just don’t invest a lot of time or money to do this.  Ugly prototypes out of foam core or cardboard are great!

If we are testing our bike seat cover, maybe we spend 30 minutes with a garbage bag and an empty soda bottle to test a concept.  All we are doing is seeing if this concept is worth moving on to a more advanced prototype.

There is no point in wasting time or money on something that we can prove wont work with 30 minutes and stuff we found lying around the office.

We build to learn. The first idea might inspire our second and we will certainly take what we learned with us.

Don’t fall in love with any of the ideas! This will cost time, money and heartache.  Test it and move on if it doesn’t work.

Step 6: Evaluate

Now it’s time to debug the prototype.  Take a step back and evaluate it with a fresh set of eyes.  After we do this a few times, and we think we have something good, we are ready to get some feedback!

It is time to take our prototype out for a test run!  The point at which we can do this depends greatly on what we are making, but the earlier the better. Get it in front of users and get feedback!

People often think they can judge a design themselves. Unless you are creating something that is only for your use, get other people to tell you what they think. They will think of things we never could.

Maybe our design only works for tall people, or people that have both hands free at that moment.  Maybe there is a social stigma that we are not aware of for some users. Testers will be honest. We will take their feedback and go iterate.

Iterate

The design process is iterative.  We will cycle through this process many times in the creation of a product.

Express-Test-Cycle is another way to look at this phase of the process.  Express or build your idea, test it and then iterate!

etc

Source: Experiences in Visual Thinking by Robert McKim


We will do this on a macro and micro scale.   The same process we just went through for the overall design will work for the details.  For example, we might do an entire mind map and implementation on how one hinge is going to work in our overall bike cover design.

Ideate and iterate at ever stage and for every part!  Our final results will rarely resemble where we started.  (If it does, we are probably not working the process correctly.)

Q: What are some design tips that most non-designers wouldn’t be aware of?

Come up with crazy ideas. Don’t be afraid to get silly.  They might seem ridiculous, but they can also spur other ideas that may in fact be great.

Remember when we were 5 years old and imagination was endless?   Try to recapture that part of yourself!  It’s still in there!

Only positive energy and positive comments are allowed during a brainstorm.  Don’t edit yourself or others.  There is no such thing as a stupid idea.

Come up with as many ideas as you can…narrow them down later.

Don’t fall in love with any one idea. This will make it easier to test them objectively and move on if necessary.

Q: Let’s put me on the spot: do you have any blog design tips for Purchase.com?

Yup!  Invite friends over and do a brainstorm!  (I am happy to come facilitate.)

Q: What are you favorite books about the design process?

The books that we often recommend to our students are:

Another good book is Back of the Napkin by Dan Roam (This is a more recent book. It does a great job at showing non-designers how to use visual thinking techniques.)

Q: Thanks, Jess. If someone would like to learn more about you, or get in touch with you, what should they do?

I am always happy to talk about design.  I am available at jkessin@yahoo.com if anyone wants to reach me.

Amazing value, Jessica — see ya at the coffee shop!

4 comments so far (is that a lot?) | Continue Reading »


Tuesday, November 10th, 2009

Here’s A Good Example Of A Credo/Mission Statement (Johnson & Johnson)

4 Comments

I’ve been thinking about mission statements lately and I’m real impressed by Johnson & Johnson’s credo (they call it a corporate credo instead of mission statement).

I know J&J people, and they’re truly proud of their credo!

Why is a corporate credo important? Read this article on how it helped guide (and some argue save) J&J during the Johnson and Johnson Tylenol Crisis of 1972.

The Tylenol Crisis put J&J on the map as a leader in PR crisis management.

If you want a great book on credo and mission statement examples, try Say It And Live It by Patricia Jones and Larry Kahaner (the article above is excerpted from the book).

Say It And Live It includes credos and mission statements from such business leaders as UPS, IBM, Kellogg’s, Citicorp, Hallmark Cards, Reader’s Digest, Boeing, Southwest Airlines, UPS, Xerox and Ben & Jerry’s.

(note: You may also enjoy this list of My Favorite Vision Statements)

Oh, and I almost forgot, here’s J&J’s Credo:

We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality.

We must constantly strive to reduce our costs in order to maintain reasonable prices.
Customers’ o

rders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit.

We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs.

Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities.

Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified.

We must provide competent management, and their actions must be just and ethical.

We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens – support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education.

We must maintain in good order the property we are privileged to use, protecting the environment and natural resources.

Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for.

New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return.

4 comments so far (is that a lot?) | Continue Reading »


Monday, November 9th, 2009

Put Your Eggs In One Basket

Comment

You can put all your eggs in one basket (just watch the basket!)

We’ve all heard the saying that you shouldn’t put all your eggs in one basket. While sometimes wise, I think there are many exceptions.

Mark Twain wrote that you should “put all your eggs in one basket and watch that basket.” I agree in many circumstances, including for business.

If you are super-selective and focus on one business (whether as investor or founder or employee) at a time, you can reap huge rewards. Look at Bill Gates of Microsoft (who loves using the word “super” by the way) — he invested purely in Microsoft for 30 years.

I had the good fortune of meeting Bill Gates a few times and I recall how reporters and other people were highly critical of the fact that he was reinvesting his Microsoft profits in Microsoft and not, for instance, in Philanthropic endeavors.

He told me that he believed his most valuable contribution at that time was focusing on Microsoft and that he would later focus on investing his money elsewhere.

Well, in 2000 Bill and his wife Melinda French (who I also had the pleasure of meeting once) created what is now the largest charitable foundation in the world and Bill turned his focus to investing in creating value elsewhere (specifically, helping solve many of life’s diseases).

So, Bill had his Microsoft basket for 30 years and now has his Foundation basket.

Similarly, Warren Buffett, who has created more wealth investing than anyone to date, has focused primarily on one business — Berkshire Hathaway — most of his life.

If the stock in Berkshire were to tank, Warren’s net worth too. But it probably won’t, because Warren is watching his one basket!

It’s no coincidence that when Warren finally decided to put his eggs (his money!) in a second basket, he chose to put them in the Bill and Melinda Gates Foundation basket – one that he trusted would be watched closely for years to come by his younger friends Bill and Melinda.!

No comments yet | Continue Reading »


Sunday, November 8th, 2009

5 Simple Steps On How To Do A Gap Analysis

17 Comments

Gap Analysis is a strategic planning tool to help you understand where you are, where you want to be and how you’re going to get there.

Here’s a simple Gap analysis chart:

Gap Analysis Template: Profit

Here's an example of a GAP analysis for profit

Here’s the Gap Analysis process:

Step 1: Decide the topic you’re going to do the Gap Analysis on? This is the challenge you’re trying to tackle.

Gap Analysis sample topics include:

  • Revenue
  • Profit
  • Market Share
  • Product Functionality/Features

Step 2: Identify where you are right now based on metrics or attributes.

Examples:

  • Revenue — We’re at $10 million in annual sales right now
  • Profit — We’re at $1.5 million in annual profit right now
  • Market Share — We have 7% of the market share right now
  • Product Functionality/Features — Our product has was just launched so it has limited features

Step 3: Identify where you’d like to be over a specific time frame?

Examples:

  • Revenue — We’d like revenue to grow to $35 million in annual sales by 2012
  • Profit — We’d like profits to grow to $12 million per year by 2012
  • Market Share — We’d like to own 15% of a particular market by 2012
  • Product Functionality/Features — We’d like our product to have industry leading features by 2012

Step 4: Identify the gap between where you are and where you want to be.

  • Revenue — They gap is $15 million per year in annual sales by 2012
  • Profit — The gap is $5.5 million in annual profit by 2012
  • Market share — The gap is 8% market share by 2012
  • Product Functionality/Features (let’s use Web site as an example) — The gap is that you’d like to have the following features by 2012: a blog, a sign-up form to let visitors follow your business on Facebook and Twitter and a way for customers to buy products directly.

Step 5: Determine how the Gap should be filled.

  • I recommend using the “6 M’s” from my Fishbone Analysis Article:
    • Manpower — The people resources you need.
    • Methods — The processes you need.
    • Metrics — The measurements you need.
    • Machines — The automation or technology you need.
    • Materials — The material items (such as physical goods or marketing collateral) you need.
    • Minutes— The time you need.
  • Or you could use a SWOT Analysis and simply list out your:
    • Strengths, Weakness, Opportunities and Threats related to filling your Gap.

Some other related Gap Analysis definitions:

  • Usage Gap = Market Potential minus Existing Usage
  • Product Gap = The part of the market that your missing because of your product features.

Fore more on the Gap Analysis model, check out Gap Analysis Wiki.

Note: There’s a separate “GAP” used in business related to how to run meetings. Read The 3 Simple Steps To An Effective Meeting: The GAP Approach for more.

17 comments so far (is that a lot?) | Continue Reading »


Monday, November 2nd, 2009

Black Friday

2 Comments

I woke up today and noticed that Google Trends lists “Black Friday Deals 2009″ as the fifth hottest trend in terms of search traffic.

As I reviewed my other keyword tools, it looks to me like more than two million people will search the keyword “Black Friday” this month.

Here are some examples of the number of searches involving “Black Friday” in the most recent month available (September):

  • Black Friday Ads: 246,000
  • Black Friday Deals: 110,000l
  • Black Friday Sales: 90,500
  • Walmart Black Friday: 22,200
  • Black Friday Specials: 9,900
  • Black Friday Coupons: 5,400
  • Black Friday Flyers: 1,300

What is “Black Friday”?

Black Friday is primarily an American event referring to the popular shopping day of the Friday following Thanksgiving each year.

Many retailers provide deals on Black Friday to attract the numerous people who take that Friday as a vacation day.

The news media hypes up Black Friday as the busiest shopping day of the year in the U.S. — this has been true twice this decade (according to Black Friday Wikipedia).

The Black Friday history dates back to January 1966 when the Philadelphia Police department described the day after Thanksgiving as “Black” because the excessive shopping that day brought traffic jams.

Technically, the Saturday before Christmas is typically the largest sales day (but I’m not going to blog about that because there’s no nickname for that day (and only 36 people searched for “Saturday before Christmas” on Google last month (I checked!)

When is Black Friday?

Since Thanksgiving falls on the fourth Thursday in November, Black Friday occurs between November 23rd and 29th each year).

This year (2009), Black Friday falls on November 27th.

How Businesses Can Leverage Black Friday on the Internet

One way for you to leverage the Black Friday trend is through search engine marketing — buying keywords (such as through Google AdWords) or search engine optimization (making sure that you have good content on your Web sites that represent what people are searching on).

I recommend you use the Google AdWords Keyword Tool to review what people are searching on.

For example, if you are in the consumer electronics vertical, here are some of the top Black Friday-related keywords searched last month:

  • Black Friday Laptop: 2,400
  • Black Friday Electronics: 1,900
  • Black Friday TV Deals: 1,600
  • xBox 360 Black Friday: 1,000
  • Fry’s Electronics Black Friday: 590
  • Microcenter Black Friday: 590
  • K mart Black Friday: 210

The day after Thanksgiving “Black Friday” should not be confused with the Black Friday 1929 which refers to one of the days following the Wall Street Crash of 1929.

2 comments so far (is that a lot?) | Continue Reading »


Friday, October 30th, 2009

Pareto’s 80/20 Rule

8 Comments

The 80/20 Rule is one of the most powerful ideas you can use in most aspects of business.

You’ll find it discussed in my post on The 20 Best Business Books of All Time.

In The Four Hour Work Week, author Tim Ferriss recommends focusing your attention on the 20% of projects that contribute 80% of your income; and firing those 20% of your customers who take up the majority of your time and trouble.

The 80/20 Rule is also featured in the Tipping Point (where author Malcolm Gladwell calls it The Law of the Few).

The 80/20 Rule — also known as the “Pareto Rule,” “Pareto Law” or “Pareto Principle”– is named after Vilfredo Pareto who observed in 1906 that 80% of the land in Italy was owned by 20% of the population.

Pareto and others quickly learned that the 80/20 rule is applicable to numerous situations (business and otherwise).

To find out more about Vilfredo, and the mathematics behind Pareto’s Principle check out Pareto Wiki.

My Personal Examples of Pareto’s 80/20 Principle

Here are some 80/20 examples I’ve personally experienced in life (note: I’m rounding my numbers).

  • 80% of the money I’ve raised for startups came from 20% of investors.
  • 80% of the Web traffic to this blog comes from 20% of the traffic sources.
  • 20% of the advertising campaigns generated 80% of the Web traffic for a business I’m associated with.
  • About one in seven venture capital investments is said to be a major success (that would be 14.2% of investments creating the cast majority (80%+) of investment returns).
  • 80% of my happiness every day typically comes from something I did during a few hours (e.g. 20% of my awake time)
  • 80% of our profit comes from 20% of our products.
  • 95% of sales in one business I ran came from 20% of my sales team (one of five sales people)

You’ll notice that in a couple of my Pareto’s Rule examples the numbers aren’t 80 and 20: The Pareto distribution doesn’t have to be exactly 80% and 20% nor does it have to add up to 100%. It’s just an approximation.

I was amazed to see how many 80/20 and Pareto books are available on Amazon. While I haven’t read any of them, here’s a link to some:  Books on the Pareto 80 20 rule.

Thanks, Vilfredo!

8 comments so far (is that a lot?) | Continue Reading »


Thursday, October 29th, 2009

DOS Exercise

4 Comments

A lot of people have checked out my article  on SWOT Analysis: Strengths Weaknesses Opportunities Threats (amazingly, an estimated 300,000 people Google “SWOT Analysis” each month, according to Google’s own Keyword Tool).

If you want a variation on an exercise for strengths, opportunities, etc., there’s another simpler one called D.O.S.

DOS stands for Dangers, Opportunities and Strengths.

DOS Exercise

It’s very simple to learn DOS. Here are the steps:

1) Pick a new goal or thing that you’re considering taking on.

2) List out the dangers of taking on such a project.

3) List out the opportunities of taking on such a project.

4) List out the strengths of taking on such a project.

I’ve been using DOS for a few years and I’ve learned it’s important you go in the order of danger, opportunity, strength because psychologically it’s best to end on a positive — this is one advantage the DOS model has over the SWOT model (in SWOT analysis you START positive with strengths and END on a negative with threats).

Here’s a DOS example on a new challenge a friend of mine’s business is having with fundraising (she needs to raise some money to fund her new startup).

Dangers (of raising money)

  • She’ll take her eye off the ball of a new product launch.
  • She’ll be distracted from managing her newest hire (an engineer)

Opportunities (e.g. what the opportunities for her to take advantage of to raise money)

  • She has 100+ “friends and family” who might be able to invest
  • She has a new advisor she could add to her advisory board who is well connected and has raised money for a couple of different startups.

Strengths

  • This woman is very persuasive and can make a great pitch!
  • She has a superb team
  • She has an amazing product

That’s the DOS exercise.

4 comments so far (is that a lot?) | Continue Reading »


Saturday, October 24th, 2009

Porter’s Five Forces

6 Comments

I met a guy named Dan Neukomm recently who has a real zest for business-life. He’s got an MBA degree from Paris (where as an American he was a minority) and he has been a key member of a couple of successful start-ups.

He and I brainstormed mutual areas of interests and strategic planning was one of them. He kindly agreed to share his thoughts on one key strategic model: The 5 Forces from Michael Porter.

5-forces-pic-of-daniel-neukomm

Here’s the Q&A — I hope you enjoy it:

Please explain the origin of “Michael Porter’s Five Competitive Forces That Shape Strategy”

Strategic assessment models are utilized by senior management and other stakeholders to assess external factors to direct and efficiently distribute resources driving growth.

While many such models exist, few have become as widely valued and practiced as the Five Forces model, developed by Harvard Business School professor Michael Porter.

This model helps to analyze external variables and structure, primarily at the industry level, which influence the attractiveness of entering and successfully competing in a specific marketplace/industry.

Each of the five forces can be attributed a weighted numerical strength on a scale of 1 to 10 and then added together to determine industry attractiveness.

Please describe each of the Five Competitive Forces?

Porter’s Competitive Forces are barriers to entry, bargaining power of suppliers, bargaining power of buyers, threat of substitutes, and competitive rivalry among existing players.

1. Barriers to Entry

Accurately assessing barriers to entry in a given industry are vital to understanding the ability of a venture to succeed. High barriers to entry almost always directly relate to higher costs, both for the venture under consideration as well as potential competition in the future.

Understanding those barriers can help to effectively identify and leverage market entry routes without removing existing barriers for future entrants to navigate. Examples of barriers include economies of scale, IP protection and government regulatory restrictions.

2. Bargaining Power of Suppliers

The power of suppliers is almost entirely supply side driven, resulting in reduced costs as the competition among suppliers rises, and increased costs as suppliers monopolize the supply chain.

Attractive, high growth markets tend to present low supplier power at early stages of the industry life cycle, steadily increasing as growing volume and high margins attract additional suppliers.

Examples of supplier power include the concentration of suppliers, threat of forward vertical integration, and costs associated with switching suppliers.

3. Bargaining Power of Buyers

Buyer power can have considerable implications and influence on price and is a function basic demand side economics. Buyers can be defined as end consumers in B2C sales or another business in B2B sales. The power of buyers in the marketplace can have two distinct impacts.

First, an increasing number of buyers in the market, resulting from increased demand, results in higher prices. Second, as the volume and demand of buyers increases so does the incentive for buyer collaboration to leverage economies of scale.

This can be further offset by attracting additional suppliers who in turn offer more choice and drive prices back down. Identifying and measuring variables influencing buyer power are necessary for accurately assessing viability and price control.

Such variables include product differentiation, brand identity/value, buyer’s incentives and the threat of reverse vertical integration.

4. Threat of Substitutes

The threat of substitutes relates to those products or services that can directly displace or offset the demand and/or consumption of the penetrating product or service being considered.

Perhaps the most considerable implication is the ability for the buyer to directly substitute the product or service for a something similar but equally effective at satisfying demand. Another consideration is the cost incurred by the buyer to switch to the substitute.

5. Existing Rivalry

Those firms currently competing within the target industry whose existing competitive dynamic is dictated by numerous factors define this. These include the concentration within the industry, the differentiation among products/services, the barriers to exit and the growth rate of the industry.

If the market is large and rapidly growing, it is more likely to contain a large number of competitors with a diverse offering of products and services and diluted liquidity values for exit due to the high number of options.

When’s the best time to use the Five Forces framework?

  • A new/existing firm assessing the implications of entering into a new product or service industry.
  • A firm contemplating an investment in a new/existing firm moving into a new product or service industry.

Where ultimately will the Five Forces analysis lead a business to (what results?)?

The Five Forces Model should be utilized for determining market viability as well as identifying and ultimately avoiding potentially risky and costly pursuits.

Most importantly, Five Forces provides a relatively subjective framework with which to input values designed to determine strategic direction and resource allocation accordingly.

Remember, Five Forces is only one strategic assessment model designed to help understand the variables that shape the competitive dynamic of a given industry. As such, other models should be utilized in conjunction so as to paint as clear and concise picture of both internal and external factors for consideration.

Can you give us a Five Forces example?

In 2001, I founded and grew Mountain Oxygen, a company which provided oxygen products, systems and services to visitors of high altitude ski resorts in Utah and Colorado who suffered mild symptoms of altitude discomfort such as fatigue and insomnia.

Our core/primary service was renting oxygen generators via hotels and resorts to guests for the duration of their stay so they could rest, rejuvenate and enjoy their limited and expensive vacation time.

Porters Five Forces directly articulates the assessment I went through to determine the competitive dynamic and ultimate success of this venture and as such is outlined in further detail below.

Since the recreational oxygen market at high altitude ski resorts in Colorado and Utah did not exist prior to Mountain Oxygen, there were relatively few barriers to entry, making the venture appealing and lucrative (i.e. no IP needs, limited gov’t regulation and no competition).

I was able to secure (at a cost) exclusive agreements with ski resorts and hotels to be the sole supplier of such services, giving me considerable control over my buyers allowing my firm to dictate price more aggressively.

Additionally the act of establishing and maintaining non-compete agreements meant that almost impenetrable barriers of entry existed for future competition.

Since there were numerous suppliers resulting in relatively limited power, my costs remained low. Furthermore, the availability of substitutes was also extremely low, entirely due to the specific nature of the need my firm was meeting.

For example, once vacationing in a resort town like Aspen and altitude malaise sets in, the only other option is to retreat to lower elevations as no drug is available that is immediately effective in alleviating adverse symptoms. As such, my firm was the only provider of the only solution!

My business maintained low buyer power as a result of minimal substitute products and lack of competition allowing me to maintain price control and increase margins.

OK, lets integrate the weighted values of the five forces to this model:

  • Barriers to entry: very low for me (2 out of 10)
  • Power of suppliers: very low (2 out of 10)
  • Power of buyers: very, very low (1 out of 10)
  • Threat of substitutes: very low (2 out of 10)
  • Competitive rivalry: none (0 out of 10)

Total weight: 7 out of 50 and as such very, very attractive/lucrative.

Food for thought: The lack of non-compete clauses at host resorts would have meant additional competition and subsequently increased buyer power resulting in lower prices and tighter margins.

This would have increased the weighted value of both power of buyers and competitive rivalry towards 7 or 8 out of ten shifting the over-all industry attractiveness score accordingly.

Mountain Oxygen was split up and sold in 2006 to strategic buyers.

Is there a Five Forces diagram for us to look at?

five-forces-diagram

source

Can you recommend any Michael Porter books?

Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael Porter.

What are your other favorite strategic planning frameworks besides Porter’s Five Forces model?

In addition to utilizing Porter’s Five Forces to assess external industry level dynamics, PEST(O) is useful in assessing external factors at the most macro of levels.

SWOT also helps to identify and match internal strengths and weaknesses to external opportunities and threats. Understanding Michael Porter’s Value Chain (another Michael Porter model) is also useful in measuring and guiding supply chain dynamics.

If someone wanted to get in touch with you, what’s the best way for them to contact you?

You can email me at dneukomm@gmail.com or here’s my LinkedIn profile.

Thanks, Dan!

Note: Check out Michael Porter Wikipeida for more about this leading strategic planner.

6 comments so far (is that a lot?) | Continue Reading »


  1. Pages:
  2. 1
  3. ...
  4. 20
  5. 21
  6. 22
  7. 23
  8. 24
  9. 25
  10. 26
  11. 27
  12. 28
  13. 29
  14. 30