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 some of my favorite business books:

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!

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 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.

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.

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?

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.

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.

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.

Stage 1: Leads

First you have to get leads in the door.  What is a lead?

A lead is a potential customer at its earliest stage.

Some people call this a sales “prospect.” So, what is a prospect and what’s the difference between lead and prospect?

I think using either “lead” or “prospect” is fine, though in sales I tend to prefer to use lead to define my earliest stage potential customer. I then use prospect more as a verb as what I have to do to find leads (e.g. when I read about a potential customer in the newspaper or on a Web site I am “prospecting.”).

For example, here are the criteria I used for qualifying sales leads (qualifying leads may be quite different based on what industry you are in):

• I have their first and last name
• I have their company name
• I have a quantity metric helping me to understand that they have enough value to merit me working for them (examples of a quantity metric might include the number of employees they have, the amount of revenue they generate or their Web site’s traffic ranking).
• I have a quality metric helping me understand if they are the type of lead I’m looking for (examples include: the vertical market they are in or the title of the individual)

Prospecting sales leads is a full-time job. There are two main types of leads:

1) Inbound Leads

To generate inbound leads, you can simply run advertisements (leaving your phone number, email or Web site information) or it may be as simple as you have a Web site with a “Contact Us” link that leads to a sales lead form (which of course would ask for the type of information (such as their size, type of business, etc.) that helps you define whether someone is a good lead.

2) Outbound Leads

Outbound lead generation consists primarily of having an outbound marketing program or outbound sales (such as outbound telesales). The point is that generating outbound leads consists of proactively making a day to day effort to find leads.

The next stage after qualifying a lead is turning it into what I call an “opportunity.” I have three stages of opportunities: 10%, 50% and 90% — let me explain each.

Stage 2: Opportunity (10%) (“We have connected with the right people at the right business”)

I define a 10% Opportunity as having the following qualifications:

• I have made contact with them
• I have confirmed that the quantity is there for my type of customer (for example, they have a top 1,000 Web site if I’m looking to sell to the largest Web sites in the world).
• I have confirmed a quality metric such as they are in a vertical market that has worked for me in the past or another example is that the person I’m talking to is the proper decision-maker for closing a deal with me).
• Finally, and this sounds obvious, but I define a 10% Opportunity as one that has a 1 in 10 chance of closing — duh!

Stage 3: Opportunity (50%) (“We’re in the ballpark on this deal”)

I define a 50% Opportunity as having the following qualifications:

• The details of the product or partnership have been discussed and it’s agreed it’s a good fit for both sides
• The pricing of the deal is in the ballpark (within 20%)
• The rough timing of the close of the deal has been discussed

Stage 4: Opportunity (90%) (“Negotiations are complete”)

I define a 90% Opportunity as meeting the following criteria:

• Agreement on pricing
• Agreement on product specs
• Agreement on closing date
• Agreement on delivery date of product
• Contract has been reviewed (just not signed  yet)

Stage 5: Closed Won (or Lost)

Finally, when you close a deal you have two scenarios:

1) You closed the deal meaning you won it. That means that you have the contract in hand and you’re off to the races!

2) You closed the deal because you lost it. This is ok. Think about the old story of the vacuum cleaner salesman who sold vacuums for $100 but had to knock on 50 doors to get a sale. Well, each “Closed Lost” deal of his was worth $2 each, right!?

Salesforce Automation

Finally, there are plenty of customer relationship manager software prorams (aka CRM software) available to help you with the stages above. Most include the basics of:

• Sales pipeline management
• Sales pipeline templates
• Sales pipeline reports

I happen to use Salesforce.com and I’m quite happy with it…but there’s plenty of other good sales software out there.

And don’t forget to check out my favorite book on Selling — read my article on it here: SPIN Selling.