Newsletter 16 - 20 January 2005

Building for the Future... This is the newsletter for www.mindtools.com. You have received this newsletter because you have subscribed to our double opt-in newsletter. If you are not already a member and you would like to subscribe, please visit http://mindtools.com/testspark.htm. To unsubscribe, please send a blank email to leave-mindtools-9074447I@atomic.sparklist.com. This newsletter is published by James Manktelow of Mind Tools Ltd, Hardwick House, Prospect Place, Swindon, SN1 3LJ, United Kingdom. To contact us, please email newsletter@mindtools.com.

Contents: Mind Tools 2005 Survey Porter's Five Forces Active Listening A Final Note

In our last newsletter we used the start of the New Year to help you look forward to your future. We looked at how you could make the plans that would help you achieve lasting success in 2005. We also previewed some of the many new tools and services that we'll be launching on the Mind Tools site over the next six months, all focused on helping you achieve real excellence in your career.

In This Issue - Mind Tools 2005 Survey and More.

In this issue I'm going to be a little more introspective, and ask you for what you'd like to see on the Mind Tools site in the longer term. We'll do this through the reader survey in this issue, which will inform our own planning for this year and beyond.

And believe me, we really do listen to what you say: We ran our last survey in April last year - in it, readers showed strong interest in improving leadership skills, people skills, management skills and career development skills, as well as showing a strong interest in personal coaching. This is what has driven much of our work since then - and you'll see the fruits of this come online over the next eight months.

As a thank you for your help with this, I'm offering prizes of $100 of Amazon.com vouchers to each of three randomly selected readers who complete our brief, 5-minute survey. Click here to let us know what you think and enter the prize draw. I'll announce the three winners in our March newsletter.

In this issue, I'd also like to introduce you to one of my favorite business strategy tools, Michael Porter's "Five Forces Analysis". This is a key technique used to clarify where power lies in your current position, whether on a commercial or on a personal basis. It is an important tool that helps build a credible vision of the future - essential if you are to give true leadership and direction to your team, particularly at a senior level.

Also, in this first newsletter of the New Year, you will find an important article on Active Listening, perhaps the strongest communication tool of all.

We hope you find the information in this newsletter useful. Once again, please continue to share with us any products, services or books you wish to see reviewed, as well as tools you wish to see added to the Mind Tools sites. Please let us know at: Suggestions@mindtools.com.

In the meantime, best wishes, enjoy using http://www.mindtools.com!

James

New Tool:

Porter's Five Forces

Assessing the Balance of Power in a Business Situation

By James Manktelow

Why use the tool?

The Porter’s Five Forces tool is a simple but powerful tool for understanding where power lies in a business situation. This is useful, because it helps you understand both the strength of your current competitive position, and the strength of a position you’re looking to move into.

With a clear understanding of where power lies, you can take fair advantage of a situation of strength, improve a situation of weakness, and avoid taking wrong steps. This makes it an important part of your planning toolkit.

Conventionally, the tool is used to identify whether new products, services or businesses have the potential to be profitable. However it can be very illuminating when used to understand the balance of power in other situations.

How to use the tool:

Five Forces Analysis assumes that there are five important forces that determine competitive power in a situation. These are:-

1. Supplier Power: Here you assess how easy it is for suppliers to drive up prices. This is driven by the number of suppliers of each key input, the uniqueness of their product or service, their strength and control over you, the cost of switching from one to another, and so on. The fewer the supplier choices you have, and the more you need suppliers' help, the more powerful your suppliers are.
2. Buyer Power: Here you ask yourself how easy it is for buyers to drive prices down. Again, this is driven by the number of buyers, the importance of each individual buyer to your business, the cost to them of switching from your products and services to those of someone else, and so on. If you deal with few, powerful buyers, they are often able to dictate terms to you.
3. Competitive Rivalry: What is important here is the number and capability of your competitors – if you have many competitors, and they offer equally attractive products and services, then you’ll most likely have little power in the situation - if suppliers and buyers don’t get a good deal from you, they’ll go elsewhere. On the other hand, if no-one else can do what you do, then you can often have tremendous strength.
4. Threat of Substitution: This is affected by the ability of your customers to find a different way of doing what you do – for example, if you supply a unique software product that automates an important process, people may substitute by doing the process manually or by outsourcing it. If substitution is easy and substitution is viable, then this weakens your power.
5. Threat of New Entry: Power is also affected by the ability of people to enter your market. If it costs little in time or money to enter your market and compete effectively, if there are few economies of scale in place, or if you have little protection for your key technologies, then new competitors can quickly enter your market and weaken your position. If you have strong and durable barriers to entry, then you can preserve a favorable position and take fair advantage of it.

These forces can be neatly brought together in a diagram like the one below:

To use the tool to understand your situation, look at each of these forces one-by-one.

Brainstorm the relevant factors for your market or situation, and then check against the factors listed for the force in the diagram above.

Then mark the key factors on a diagram like the one above, and summarize the size and scale of the force on the diagram. An easy way of doing this is to use, for example, a single “+” sign for a force moderately in your favor, or “--" for a force strongly against you (you can see this in the example below).

Then look at the situation you find using this analysis and think through how it affects you. Bear in mind that few situations are perfect; however use this as a framework for thinking through what you could change to increase your power with respect to each force.

This tool was created by Harvard Business School professor, Michael Porter, to analyze the attractiveness and likely-profitability of an industry. Since publication, it has become one of the most important business strategy tools. The classic article which introduces it is “How Competitive Forces Shape Strategy” in Harvard Business Review 57, March – April 1979, pages 86-93.

Example:
Martin Johnson is deciding whether to switch career and become a farmer – he’s always loved the countryside, and wants to switch to a career where he’s his own boss. He creates the following Five Forces Analysis as he thinks the situation through:

This worries him:

• The threat of new entry is quite high: if anyone looks as if they’re making a sustained profit, new competitors can come into the industry easily, reducing profits;
• Competitive rivalry is extremely high: if someone raises prices, they’ll be quickly undercut. Intense competition puts strong downward pressure on prices;
• Buyer Power is strong, again implying strong downward pressure on prices; and
• There is some threat of substitution.

Unless he is able to find some way of changing this situation, this looks like a very tough industry to survive in. Maybe he’ll need to specialize in a sector of the market that’s protected from some of these forces, or find a related business that’s in a stronger position.

Key points:

Porter’s Five Forces Analysis is an important tool for assessing the potential for profitability in an industry. With a little adaptation, it is also useful as a way of assessing the balance of power in more general situations.

It works by looking at the strength of five important forces that affect competition:

• Supplier Power: The power of suppliers to drive up the prices of your inputs;
• Buyer Power: The power of your customers to drive down your prices;
• Competitive Rivalry: The strength of competition in the industry;
• The Threat of Substitution: The extent to which different products and services can be used in place of your own; and
• The Threat of New Entry: The ease with which new competitors can enter the market if they see that you are making good profits (and then drive your prices down).

By thinking through how each force affects you, and by identifying the strength and direction of each force, you can quickly assess the strength of the position and your ability to make a sustained profit in the industry.

You can then look at how you can affect each of the forces to move the balance of power more in your favor.

For more information on this tool, and on Michael Porter's approaches to competitive analysis, read Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter.

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Personal Coaching: Active Listening

By Kellie Fowler

Often when a misunderstanding occurs in the workplace, communication, or a lack thereof, is to blame. To effectively combat such misunderstandings or setbacks, you must sharpen your communication skills, and most importantly, your listening skills.

In fact, listening skills may very well be the most important communication tool of all.

Consider this: when a person communicates with another person, he or she does so to fulfil a need. The person decides on the method of communication to use and then sends the message to another person. The code used to send the message can be verbal or non-verbal.

But what happens if the person receiving the message cannot decode it, or if they just decode it wrong? Perhaps they do not understand, or perhaps they misinterpret the message altogether. This can prompt serious and damaging misunderstands.

Effective communication can only take place when the receiver understands and interprets the sender’s message in the exact same way the sender intended it, making effective listening paramount to your success in the workforce.

There exist three basic listening modes, including:

• Competitive or Combative Listening:this happens when we are more interested in promoting our own thoughts or point of view than in understanding someone else’s. We may pretend to pay attention when we are waiting for an opening or already deciding what we will say next.
• Passive or Attentive Listening: this happens when we are genuinely interested in hearing and understanding the other person’s point of view. We assume we heard correctly and understand, then stay passive and do not confirm it.
• Active or Reflective Listening: this is the most useful and important listening skill and the one you need to sharpen to ensure you are both hearing and understanding what is being communicated to you. This occurs only when we are genuinely interested in understanding the other person’s thoughts and feelings and then follow this with a confirmation that we understand the message and reflect it back to the sender.

To do this, paraphrase or restate the message to verify it, as this is the only way to distinguish communication problems.

Remember that when you listen effectively, you do more than merely hear the words; you really listen for the message.

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A Final note from James

I like being the bearer of great news. And I'm happy to let you know that you can now look for the Mind Tools newsletter to be delivered to your inbox twice a month. We’re doing this because it seems to us that there is always so much to convey, yet we remain conscious of the fact that everyone is busy and needs information in a concise, accessible format.

We're also going to continue issuing the letter in HTML format. Thank you to everyone who sent in their views on this - the response was overwhelmingly in favor of HTML. With this in mind, over the new few issues we will work on the formatting of the newsletter and add new areas that we hope you will enjoy. Please let us know if you would like to see something else added to the newsletter; after all, it is for you!

And of course, if you know anyone else who would find the newsletter useful, please just forward it on to them.

Best wishes, and until next time!

James & Kellie

James Manktelow & Kellie Fowler

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