How to Evaluate Your Competitive Position

In discussing technology strategy with undergraduates, I emphasized the use of a strategic analysis tool that goes by the name of SWOT. SWOT stands for Strengths, Weaknesses, Opportunities, Threats. 

SWOT is a good, basic tool. It gives us perspective of our specific company, product, or business plan as it may react to external emergent market forces.

The internal analysis methods focus on the strategic position of your product as you perceive it in the context of strengths and weaknesses.

Strengths refers to the nature of your project that will give it an advantage over others; weaknesses refers to the disadvantages your project has that makes it vulnerable.

SWOT can be used to evaluate the external forces that threaten to impact your position. The question is: how will changes in externalities create both opportunities that enhance your strengths/position, or, diminish your strengths/position.

(A quick note on externalities ... these are changes that happen outside of you and your firm's control. Things like changes to consumer opinion and preferences, changes in tax or foreign policy, shifts in technology, industry regulations, surprise news events. This is stuff that you can anticipate but not necessarily control.)

Opportunities reflects changes in market dynamics brought on by shifts in externalities; threats are conditions that could harm your position should the externalities come to pass. 

It's a simple tool and it's been taught in business schools since the 1970's. It's not something you just conduct when putting together your business plan. It's something you constantly revisit for two facts will always hold constant:

• Your product/service will change over time;

• Externalities that shape the success of your product/service will change over time.

Change happens. And your technology strategy should adapt accordingly. In fact, we measure technology generations in about nine months; SWOT may be a tool you're using on a bi-annual or six-month basis to re-evaluate how changes influence your spending plan.

There's a good reason for this. Technology projects take a long time to implement. Over the implementation and adoption period, a SWOT analysis is a litmus test. A reality check. Is this still the right plan? Is it good to continue spending and strategic investment in this direction? Or is there a change - a shift - that's about to happen, that will influence adoption and use?

It's the middle of September 2014 and Apple just released the new iPhone6, capable of NFC (Near-Field Communication) and a new payment system called ApplePay. Over its introductory weekend, Apple has sold 10 million of their new phones - that's a record, even for Apple. 

Now use the SWOT. If your in the middle of implementing a technology solution for your company like POS (Point of Sale) systems that rely/depend on magnetic swipes found on the back of credit cards, you're already at a technological pivot. An externality will now start shaping consumer behavior and preferences to start using NFC instead of magswipes for credit card transitions. It also stands to reason that Samsung and Google will ramp-up Droid solutions like Google Wallet to complete.

So, a couple of questions for you - the small business owner - at this critical time:

1. How rapidly do you expect your consumer's adoption rates of this technology? How does that present an opportunity or threat to your business?

2. How could the early internal adoption of NFC improve your product/service's competitive position? What are the risks/consequences to your business for later adoption?

3. What are the potential security consequences? How would your employees need to be trained?

4. How could the shift from magswipe to NFC influence your brand and delight everyone?

Thinking like this, applying SWOT when there's an obvious change in externalities, is a strategic application of technology spending. It allows you to think about, project, anticipate, and respond constructively rather than react. How could you apply SWOT today, tomorrow, next week, next month, next quarter?

R

Containing Your Expenses

It's The Next Big Thing

In my last post, I was describing the first and most basic IT strategy called Reducing Expenses. Under that strategy, we use technology spending to reduce the expenses associated with our current business operations. Applying technology, we can both improve the speed and reduce the cost of doing business, and earn a fair return in the process. 

Today, I'm going to write about containing expenses, or, containing the cost of your growth. It's the next big thing we try do with technology to provide a return. Usually, we won't focus on this strategy until we've exhausted the "low-hanging-fruit" associated with Reducing Expenses since that's the easier kill. 

It Takes Money to Make Money

When containing expenses, we're mostly talking about investments with technology helping to pay for your growth over time. Let's work with an example.

You're a small grocery owner and you've got big plans. You've been relatively successful growing your business and have attracted new customers. Your business processes have been managed with the assistance of technology as to reduce the impact of labor while maximizing return - and mostly because you've been reading all of my great advice on the subject of Reducing Expenses! Good job!

But you know you're going to get bigger. Based on your current growth projections, you're going to need another 5 people over the next five years to accommodate the business volume in your checkout lanes and to earn a 4% margin (a pretty healthy profit for this line of business - there's not a lot of money in retailing food, and that's factoring in the increasing costs of labor over that five year time period, too).

Now, you could hire on eight more people and acquire the long-term liabilities associated with labor - sick leave, vacation, payroll, taxes, family leave, education and pensions, 401k's; sounds kind of risky though given the 4% margin. If you grow on the back of labor, the variable costs could erode your profit. 

On the other hand, you could purchase 4 "U-Scan" machines to take on the extra volume in the checkout lane by shifting the labor (and those costs) onto the back of the consumer. You're paying a fixed, depreciable expense for an asset that can handle the excess volume while taking on, say, just 1 employee - a knowledge worker who helps consumers check out using the new machines.

Because the U-Scan machines are a fixed expense that can be depreciated over time, the cost structure of your growth becomes less variable and more known. Your volume commitments will be met and you're more likely to meet the 4% margin, all the while reducing your dependence on labor.

This is expense containment: spending a little today to reduce the cost of your growth in the future. Through investing in "U-Scan", the company is able to meet its projections and reduce the cost of its growth by not investing in variable expenses like more labor.

Everybody's Doing It

Take a good look around. Where do you see other examples where companies have shifted away from owning labor to putting labor on the back of consumer. Self-checkout lanes like "U-Scan" is just one example. Can't you book your own airline ticket? Reserve your own book at the bookstore? Directly interact with your doctor and schedule an appointment without a phone call? Of course you can! Everyone everywhere is containing the expense of their growth through leveraging self-service technology.

Well, maybe everyone except you.

Yeah, say, how's your expense containment strategy coming along? How are you shifting the cost of your growth away from you and on to consumers? How are you enabling consumers to interact with you faster, to integrate with your processes, so that you don't need to own that labor in the process? How are you giving your customers self-service tools? And if you're not doing this, right now, what are your competitors up to?

Next time around, I'll talk about self-service and the last strategy in our bucket: Revenue Generation. For now, thanks for reading!

R

On Being an Owner

In a previous post that I wrote this week, I talked about the difference between an owner and an employee. There's a big difference and you definitely want to be an owner. 

Remember: an owner is a person who owns the process of production. They have the capability to make changes to way work is performed, and to reinvent work where necessary. 

So, okay: why do you want to be an owner and not an employee? 

Let’s say you’re an employee and you earned $1.00.

The federal IRS gets paid before any of your other debtors. That’s roughly $.20 taken from your $1.00 check before you receive anything.

Your state, too, may incur an income tax and let’s say that was $.10.

Then it’s your turn to contribute to Medicare/Medicaid which is another $.10, if you make less than $63k/year.

So far, instead of earning $1.00, you’re netting $.60. Right off the top.

The employee pays their taxes first. Remember this. It's important.

Now, from here, an employee's condition may vary but their plight is predictable.

The next largest expense is housing which could be as high as 30% of net income, or, $.18. After housing, the common everyday employee is now left with $.42.

Okay, now the employee must subtract utilities, food, and transportation. What’s interesting about these expenses is that they’re variable depending upon the price of energy. These expenses can rise faster than your than an employee's base pay. Let’s say, combined, they’re ~9% of their net pay, or 5.5 cents.

Following thus far? Subtracting necessities, the employee is now looking at  $0.36 for disposable income.

Then there is life, medical, and auto insurance. Yes, certainly, these things are disposable and not required ... still, you might feel differently about that assessment. Premiums on medical, in particular, rise about 25-percent per year, out-pacing the growth of income, just as utilities and transportation, insurance premiums rise faster than your earning potential and erodes your disposable income. Let’s pretend those are another 10-percent of net, or, 6 cents.

As an employee, your net disposable income is now about a third of your gross, or, $0.305. And from that 30-odd-cents, you must save for retirement, and experts suggest that should be at least 10-percent of gross wages, or, $.10, leaving the employee with $0.205.

You see, employees really don’t make $1.00. They actually make a fifth of their gross, or, $.20.

It is from that 20-cents that employees pay for daycare, apparel, entertainment, charitable contributions, education, student loans, and the like.

And employees feel the pinch in times where those variable expenses like utilities and insurance erode what little play they’ve left.

That’s an employee's view of the universe. It is a cycle of debt and poverty. It also explains why real wages for the middle class have flatlined since the the 1970's. Meanwhile, the employee owns nothing, really – not the guarantee of a job (thanks to the demise of unions), not a real pension, not even his house because the bank can foreclose on it on default – and the employee has little money or assets by which to create wealth. 

Employees just have obligations. 

Employee poverty is a form of socially-accepted slavery, heck, we even tell our kids, “Go out there and get a good job”, or, “Go to school to find work”, or, “Man, I can’t wait until I find a job.” 

The owner’s view of the universe is quite different.

If an owner makes $1.00, something made it for them - like a business, royalties, an automated system, or, as interest off of their investments.

For the owner, money works for them, not the other way around, and because they’re not making a straight swap of time/labor for money like employees, owners can earn a lot more money … even when they’re not working.

Unlike employees, owners aren’t taxed right away. Instead, the owner gets to make pre-tax deductions to lower their taxable income. Think about that. They’re allowed to generate expenses that employees must also pay for (transportation, meals/travel, lodging, housing, vehicles, even employee-sponsored daycare), and then used that to lower their tax burden so they’re taxed at a lower rate, unlike employees, that must make such expenses after-tax. Owners pay taxes last.

So owners make more, by working less, and are taxed at a lower rate than employees, because they're allowed to deduct their expenses prior to being taxed, and are therefore taxed at a much lower rate. 

Income an owner earns can also be hidden. Unlike employees, instead of having to pay income taxes or capital gains, they can roll those earnings into real estate or other assets which, in turn, makes them more money without incurring more tax liability.

And sometimes, owners may not even have to pay taxes.

In paying considerably less taxes yet making more money, the owner has real assets: things that make them money without trading their time/labor for cash flow.

Thus excess money can be poured into tax shelters, charities, other businesses, land improvements, or other financial instruments that lower their taxes and yet further increase their cash flow.

Owners have more cash flow. More cash flow = more financial freedom.

Meanwhile, owners own the obligations owed by employees. The employee must pay out mortgages, insurances, living expenses, health care, retirement … all of these commitments … to other owners, yet meanwhile, the employee owns nothing.

Employees cannot be an owner and have others indebted to them. Employees don’t have the excess capital to build businesses, make investments, or buy assets that’ll make them money without trading their time/labor for it.

Owners know all of the tax loopholes and incentives, yet employees can never exercise them. They don’t have the means.

To be an employee is a form of servitude. Employees owe to owners and can never pay themselves.

To be an owner is a form of empowered self-mastery in a capitalist system. Owners own the capital and means of production by which to reduce their obligations, and pay themselves first. 

This is why you want to be an owner. Are you an owner? Or are you an employee? If you're a small business owner, how are you responding to the problem of managing your business: from the perspective of an owner or of an employee?

R