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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.

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Friday, October 23rd, 2009

Multi-User Blogging

12 Comments

I’ve been fascinated by the power of blogging since I began experiencing it back in April.

Now I’m interested in multi-user blogging: specifically, providing a platform that allows multiple people to blog.

Some Top Multi-User Blog Tools

The two multi-user blog tools that I’m noticing the most buzz about in my couple of hours of research are:

  1. WordPress MU — WordPress Multi User (MU) seems to be the most popular multi-user blogging tool. I first heard about it from eBay’s SEO point person Dennis Goedegebuure. They were the only multi-user blogging tool that made claims about the specific number of blogs it could support (e.g. 32,000 blogs (if you use their upload feature) and 230,000 blogs (if you turn the upload feature off).
  2. Drupal — This is a an open-source content management system that has some modules to help you build a multi-user blog . Its main benefit will be customizability and, according to some, speed. A drawback: some Drupal users are reporting that it won’t allow Themes or blog rolls.

Both are free, though you may have to pay someone to customize it for you or to buy some add-ons.

Here is an interesting comparison of WordPress MU versus Drupal MU.

Other multi-user blog software includes (all of them appear to be free):

  • b2Evolution — Open-source PHP/MySQL tool.
  • Elgg — This open source “social engine” was named after a town called Elgg in Switzerland and was started in 2004.  They suggest you have someone very technical help you use it.
  • Compendium — This blogware company claims its differentiator is that it focuses on businesses.
  • 21Publish — This company was founded in 2004 and counts some good-sized media companies in the U.S. and Europe as its clients.
  • Serendipity Weblog System — PHP-powered.
  • Apache Roller — Open source Java blog tool.
  • Moveable Type — This tool is provided by the well-connected Silicon Valley start-up SixApart (they also offer TypePad (for creating an individual blog) and Blogs.com).
  • PyBlosxom — A Python open-source multi-user blogging engine.
  • Text Pattern — An open-source content management system.
  • ByteFlow – A blog engine written in Python using Django (a content management system).
  • ExpressionEngine — Content management system with multi-user blogging features.
  • PressPublisher — These guys appear to focus on online publishing/blog tools aimed at magazines, journals and newsletters.
  • Lifetype — Another open-source tool.

Paid Multi-User Blog Tools

A couple of multi-user blog tools that cost money include:

  1. Userland’s Manila — This is priced at $1,099 (U.S. Dollars)
  2. Invision Power — It appears that you buy the Community Suite for $249.99 and then buy a blog add-on for $49.99.

Make sure that whatever multi-user blog tool you pick is well-supported. One tool called Lyceum has a notice on their site that their development team’s last bug fix appears to have been June of 2008.

Other multi-user blogging tools I’ve heard mentioned include the Blog product that comes as an add-on to Scoop and Elgg.

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Thursday, October 15th, 2009

How to Create A Sales Pipeline

7 Comments

I’ve been teaching someone on our team recently about how a sales pipeline works — and so I thought I’d summarize my sales approach here for you (I’ve used this for straight up sales as well as for partner sales).

Note: I’m going to refer to the party I’m selling to as a “customer” but it could easily be a partner in the case of partnership sales.

There are any number of sales pipeline stages you can use: I’m going to use Leads, 10% Opportunities, 50% Opportunities, 90% Opportunities and Closed Won/Lost. I first adopted this methodology when I began using Salesforce.com which mapped well to how my mind works.

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Monday, October 12th, 2009

Warren Buffett Quotes

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I’ve been into motivational business quotes lately and I was reading the Tao of Warren Buffett (which I highly recommend!) and it reminded of the great quotes Mr. Buffett has shared.

Here are some of my favorite Buffett quotes:

How to define friendship

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Sunday, October 11th, 2009

OODA Loop

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I’m a big fan of using Colonel John Boyd’s OODA Loop strategy for reacting to events in business.

I’m so into the OODA Loop theory that I once chanted “OODA, OODA” (like “Toga, Toga”) at a strategy session!

OODA stands for:

Observe — As in collect the inputs/data of the situation.

Orient — Analyze the inputs/data to determine your position.

Decide — Determine your course of action.

Act — Execute your decision.

It’s called an OODA Loop (or OODA Cycle) because the event/situation taking place may be changing and so you may have to change your decisions as new data/inputs are gathered.

While Col. John Boyd’s OODA Loops were created in military situations, he made recommendations on their use in business (and OODA Loop Theory is widely used in business today).

For example, Boyd recommended that decisions/actions be distributed throughout a business organization so that decisions and actions are made by the people who are directly observing and oriented to a situation (as opposed to an isolated commander/CEO who is only indirectly involved).

Colonel John R. Boyd is no relation to famous businessman John Boyd Dunlop who founded Dunlop the tire company or peace nobelist Lord John Boyd (United Nations, nutrition).

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Saturday, October 10th, 2009

30+ Charlie Munger Quotes!

6 Comments

I’m a huge fan of Charles T. Munger (aka “Warren Buffett’s right-hand man”) – I named  Poor Charlie’s Almanack the #1 book in The 20 Best Business Books Of All Time because I find myself quoting and utilizing his knowledge all the time.

In the mean time, here are some of my favorite Charlie Munger quotes:

  1. Never, ever, think about something else when you should be thinking about the power of incentives. (For more on incentives, see  my articles on the Incentives Mental Model and  “Are Cubbie Fans The Reason The Cubs Have Sucked For 100+ Years?”)
  2. Almost all good businesses engage in ‘pain today, gain tomorrow’ activities.
  3. Spend each day trying to be a little wiser than you were when you woke up.
  4. In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none, zero.
  5. Choose clients as you would friends.
  6. The best armour of 0ld age is a well-spent life preceding it.
  7. When you borrow a man’s car, always return it with a tank of gas.
  8. If only I had the influence with my wife and children that I have in some other quarters!
  9. Take a simple idea and take it seriously.
  10. In business we often find that the winning system goes almost ridiculously far in maximizing and or minimizing one or a few variables — like the discount warehouses of Costco.
  11. Don’t do cocaine. Don’t race trains. And avoid AIDS situations.
  12. We look for a horse with one chance in two of winning and which pays you three to one.
  13. You’re looking for a mispriced gamble. That’s what investing is. And you have to know enough to know whether the gamble is mispriced. That’s value investing.
  14. It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities.
  15. A great business at a fair price is superior to a fair business at a great price.
  16. All intelligent investing is value investing — acquiring more than you are paying for.
  17. You must value the business in order to value you the stock.
  18. No wise pilot, no matter how great his talent and experience, fails to use his checklist.
  19. There are worse situations than drowning in cash and sitting, sitting, sitting. I remember when I wasn’t awash in cash — and I don’t want to go back.
  20. …it never ceases to amaze me to see how much territory can be grasped if one merely masters and consistently uses all the obvious and easily learned principles.
  21. Once you get into debt, it’s hell to get out. Don’t let credit card debt carry over. You can’t get ahead paying eighteen percent.
  22. If you always tell people why, they’ll understand it better, they’ll consider it more important, and they’ll be more likely to comply.
  23. Spend less than you make; always be saving something. Put it into a tax-deferred account. Over time, it will begin to amount to something. This is such a no-brainer.
  24. You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.
  25. Three rules for a career: 1) Don’t sell anything you wouldn’t buy yourself; 2) Don’t work for anyone you don’t respect and admire; and 3) Work only with people you enjoy.
  26. I won’t bet $100 against house odds between now and the grave.
  27. I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge.
  28. …being an effective teacher is a high calling.
  29. I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart…
  30. Without numerical fluency, in the part of life most of us inhibit, you are like a one-legged man in an ass-kicking contest.
  31. In my life there are not that many questions I can’t properly deal with using my $40 adding machine and dog-eared compound interest table.
  32. Perhaps the most important rule in management is to get the incentives right. (source: Poor Charlie’s Almanack)
  33. I do not think you can trust bankers to control themselves. They are like heroin addicts (source: CNBC interview May 2013)
  34. The best thing a human being can do is to help another human being know more.”“The best thing a human being can do is to help another human being know more.

 

 

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Sunday, September 27th, 2009

PEST Analysis

3 Comments

I’ve been receiving a lot of attention to my articles on strategic planning tools such as SWOT Analysis, Fishbone Analysis and DACI To Get Things Done.

Here’s another one: PEST Analysis (by the way, there are many variations of PEST Analysis and so I’ve listed all of the ones at the bottom of this article with their definitions).

What is a PEST Analysis?

PEST is an acronym that stands for the following four Macro-Economic factors:

  • Political — These include factors related to how a government intervenes in your business. It may include taxes, law, political stability, regulation and de-regulation.
  • Economic  — These include factors such as interest rates, inflation rates, unemployment rates, income rates/distribution and tariff rates.
  • Social — These include cultural aspects such as population growth, age distribution, career trends (attitudes towards work), lifestyle trends, etc.
  • Technological — These include trends such as remote working (see my article called A Virtual Workplace), mobile computing, the Internet and other research and development innovation.

PEST analyses are best used to measure a market situation (this differs from SWOT Analysis as SWOT is best used to measure a company or business unit situation). A good time to do a PEST Analysis is right before a SWOT Analysis.  More PEST Analysis definitions and history can be found at PEST Analysis Wikipedia

The best uses for PEST Analysis are:

  • Strategic Planning
  • Business Planning
  • Acquisitions
  • Business Development/Joint Ventures
  • Product Development
  • Marketing Planning

PEST Analysis Example/Template

  1. Identify the key trends related to Political, Economic, Social and Technological factors
  2. Rank them on a scale of 1 to 10 in terms of what type of impact they could have on your business
  3. Pick the highest ranked items and dig into those using whatever tool you prefer (I recommend SWOT Analysis or Fishbone Analysis)

Here’s a good sample PEST Analysis of Yahoo

And, as promised here are those other variations of PEST with their definitions:

  • PESTEL Analysis (sometimes misspelled “PESTAL” Analysis)stand for: Political, Economic, Social, Technological, Environmental and Law
  • PESTLE Analysis is just spelled different than PESTEL (it stands for: Political, Economic, Social, Technological, Law and Environment
  • STEEPLE Analysis stands for: Social, Technological, Economic, Environmental, Political, Law and Education
  • STEEPLED Analysis stands for: Social, Technological, Economic, Environmental, Political, Law and Education and Demographics
  • PESTLIED Analysis stands for Political, Economic, Social, Technological, Legal, International, Environmental, Demographic
  • SLEPT Analysis stands for: Social, Legal, Economic, Political, Technological
  • PESTELI Analysis stands for: Political, Economic, Social, Technological, Environmental, Law and International
  • STEEP Analysis stands for: Social, Technological, Economic, Ecological and Political

You can tell that some people are really into these things!

If you like my articles on SWOT, PEST, etc. then you might want to check out my posting on DOS Exercise.

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Tuesday, September 22nd, 2009

7 Steps To Maximize the Value of Your Business

1 Comment

I often get asked the following questions from business owners and leaders:

  • How much is my business worth?
  • How do I go about maximizing shareholder value for my business?
  • How do I look at revenue versus profit to determine how to maximize value?
  • What are other keys to selling a company?
  • What should I look for when buying a company?

Well, I’ve got my own thoughts but there’s a guy you’d much rather hear from — he’s been doing mergers and acquisition (M&A) deals for 20 years.

M&A Adviser Doug Hubert

M&A Adviser Doug Hubert

His name is Doug Hubert (pictured) and he leads the M&A work as a Managing Director at CBIZ Inc.

He and I graduated high school together and even though I haven’t done a good job staying in touch, he was kind enough to share seven tips for you to use to maximize value in your business. Here they are!

1. Build a deep management team

One of the most difficult challenges for an entrepreneur, and one of the critical differences between a good company and a great company, is the depth and quality of the senior managerial team.

Too many entrepreneurs make the mistake of trying to run and grow their businesses with only one or two people capable of making critical decisions.

As a result, most businesses will plateau in their growth. If your company can’t function efficiently without your direct daily involvement, then you need to immediately begin to hire and develop talent or the future of your business is in jeopardy.

Jack Welch, the former CEO of General Electric, considered talent development and succession planning one of his greatest accomplishments in his tenure. Treat this issue with the same importance.

2. Diversify your customer base

Your largest customer should ideally be no more than 15%-20% of your revenues and/or profitability. While it’s often efficient and easy to allow a major customer to develop into a substantial portion of your sales, nothing could be more dangerous to the future health and value of a business.

Once a customer becomes a critical portion of your revenues and/or profits, then they own you. They can begin to dictate the
financial terms of the relationship and any change in their business, be it financial, personnel or otherwise, has a direct effect on the health and value of your business.

While it might require extra effort and possibly some short-term sacrifices to your bottom line as you build other accounts, the long-term benefit of a diversified customer base is a significant reduction in your financial risk profile.

3. Maintain quality financial information

A consistent area of weakness with most small and middle-sized companies is the lack of strong financial documentation. Most business
owners don’t want to spend the extra money to obtain an audit, believing a review or a compilation is just as good-it’s not.

Audited financials provide credibility with bankers, commercial financing sources, insurance companies, and most importantly, potential buyers.

The extra money spent will be recovered in a higher premium when the business is eventually sold.

4. Develop a proprietary product or service

To truly thrive as a company, you must distinguish yourself in the marketplace by offering a unique product or service that can’t easily be replicated by competitors. While this seems obvious, very few companies are dedicated to creating this distinction.

Ask yourself if your customers, employees and competitors can all quickly describe what differentiates your company. A superior product or service will create the opportunity for a pricing advantage in good times and customer loyalty in difficult periods.

5. Focus on profitability

Too many business owners measure the success of their business on top-line revenues rather than pre-tax profitability. Value is created through maximizing profit, not maximizing revenue growth-a $25 million company earning $5 million pre-tax is worth more than a $40 million company earning $2 million pre-tax.

Another common mistake is desire to limit profitability to limit taxes. While fast growing businesses often need the extra cash to fund growth, this approach loses money for business owners, as the focus becomes tax avoidance rather than operational efficiency and profit maximization.

There are legal ways to minimize your taxes through the use of an S-Corporation or LLC rather than a C-Corporation.

6. Prepare and execute a business plan

Establish operational and financial plans and goals for your business in one, three and five year increments and share them with your employees. The plans should take into account various economic, industry and company specific scenarios and how management would react to each.

In addition to creating a road map for your future growth, this will focus your business and your employees around quantifiable goals and will allow you to make better business decisions as you grow your business.

7. Seek the help of outside professional advisors

Seek the assistance of outside professionals, especially a full service accounting firm, who can provide valuable advice as you grow your business.

Not only can they provide objective counsel as you grow your business, they can help you avoid disastrous legal, financial and operational mistakes that may have significant financial consequences down the road.

Similarly, if you plan on selling your business or are approached by a buyer, an investment banker can ensure that you obtain the best possible transaction by re-stating your financials, preparing a memorandum that highlights the intrinsic value of your business (including off-balance sheet items) and quietly approaching other buyers to ensure a competitive process.

CBIZ Mergers & Acquisitions Group, Inc. (“CM&A”) is the investment-banking arm of CBIZ, Inc. (NYSE:CBZ). CM&A predominantly represents owners of businesses with revenues between $15-300 Million in mergers & acquisitions transactions. CM&A offers a comprehensive and customized approach and welcomes all inquiries, which are treated in confidence.

To learn more about valuing a company and other mergers and acquisitions information, and to learn more about Doug, visit the CBIZ Website.
©2009, CBIZ, Inc.

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