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Midterm

BU111 Midterm Notes.docx

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Department
Business
Course
BU111
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N/ A
Semester
Fall

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BU111: Carayannopoulos External Analysis Critical Success Factors Every organization has to achieve these factors for success Looking at: What, Why, Relation 1. Achieving Financial Performance to be profitable, both financially and competitively... this is appealing for customers from an investment perspective. 2. Meeting Customer’s needs customer satisfaction. Know what your customer wants/needs and be understanding. A loss of one customer is a loss of their friends as well. 3. Building Quality Products and Services this factor meets customer expectations and beats competitors. If the quality of your product or service is good this makes the customer happy which ultimately leads to achieving financial performance. 4. Encouraging Innovation and Creativity Sets your apart from competition and creates new needs for customers. With consistent innovations you are in the news which is a free form of advertising and rise in stock value. 5. Gaining Employee Commitment With dedicated employees comes harder work and better results and productivity. Since employees are the ones that deal with customers one on one this can make or break your customer relations. 6. Creating a distinctive Competitive Advantage unique, different, valuable...a unique aspect which sets your identity and sets you apart from the competition. Diamond-E Framework identifies key variables to be considered in strategic analysis Management Management can be bias depending on the leader, for example one may be for taking risk while another may be more conservative. This has an impact on strategic uses as it can vary from using one strategy from another. Organization Consists of culture, leadership, structure, and capabilities. Determines what kind of strategy you can pursue. Do we have the necessary capabilities, if not can we? Resources Consists of financial, capital, and human resources meaning we need money, assets, and labour. Do we have the necessary resources to execute the strategy? *capabilities can be influenced by resources Strategy Does it match with the Management Preferences? Willing to Change? Strategy – Environment Linkage The critical linking variable in the model, the bridge with internal and external. Any variable can either drive or constrain strategy. Each variable related to the rest. Strategy: what opportunities the business is pursuing. Determines needed resources, organizational capabilities, and management preferences. Principal Logic: Consistency or Alignment External Analysis Look towards the future always, potential opportunities and threats. Analysing the outside world of trends and economic state to determine opportunities or threats. Firms face multiple environments: 1. General Environment: affects all businesses PEST model – considers political, environmental, social/demographic, and technological factors. Identifies general trends and changes. 2. Specific Environment: affects industry participants Porter’s Five Forces- analyzes five important sources of competitive pressure and intensity predicts profitability of industry Both look for data, statistics, trends, forecasts, expert opinions, etc PEST – Political-Legal Environment Elements: 1. Laws, regulation - Determine what a company can/cannot do. o E.g. product labelling laws: Canada’s labels have to be both in French and English - Regulations determined through restrictions. o E.g. bell could be the only one that could provide home phone service, no competition 2. Taxes - Governments need to collect taxes because that’s what enables them to fund programs, pay pensions, build roads, subsidise education, etc... However taxes can be used by the government to create incentives. o E.g. tax something higher making it more costly discourages consumers to buy it - Investor’s perspective: you can lend it to a business or buy stocks. Governments can influence investors to invest in stocks rather than bonds through income taxes Capital Gain: selling something you bought previously for a higher price (stocks) 3. Trade Agreements or Conditions - Why is Toyota located in Cambridge? Why not Japan? Tariffs. A tax or duty to be paid on a particular class of imports or exports. - With trade agreements, governments use this to protect their domestic production. 4. Political System - Capitalism vs. Communism - Capitalism: no boundaries - Communism: Restrictions 5. Political Stability - Determines how much predictability there is - Businesses want consistency and predictable environments and stability to execute specific strategies o E.g. Middle East. Very hard to do business there because the economy is so unstable. Hard to survive. Governments can create incentives, constraints, or support/bail out when needed. Affects uncertainty, risk, and constraints/costs faced by firms. PEST- Economic Factors Influences costs, potential sales, and financial uncertainty Elements 1. Economic growth – aggregate output, GDP, and standard of living - How fast is it growing? And how much? - Growing economy: more money in consumer’s pockets therefore more money being spent - Aggregate output: total quantity of goods produced in any country - GDP: gross domestic product. Measures the total value of product and services produced. - When aggregate output and GDP is increasing, your standard of living is increasing. 2. Trade balance – importing vs. Exporting - Always want to be exporting more than importing so that more money is flowing in than flowing out. - Foreign money to help growth, your aggregate output and GDP goes up therefore your standard of living increases. 3. National debt – government borrowing - Borrowing differences of budget deficits to make ends meet and to pay for all our expenses - Business don’t like when this happens because then they are competing with the government on borrowing money and it also makes the economy unstable - 4. Economic stability – inflation - Inflation: increases in prices - Therefore spending power goes down, affordability decreases - Business perspective: costs go up and revenues go down because consumers can’t afford to buy - As long as inflation increases at a constant rate it gives consumers and businesses to keep up with it 5. Interest rates – time value of money - Higher interest rates mean less buying - When interest goes down people spend more as they can fund purchases 6. Exchange rates - Foreign consumers are unhappy when Canadian dollar is high, affects the competition abroad PEST- Social Factors Elements 1. Customs, values, attitudes, and demographic characteristics 2. Influences consumer preferences 3. Influences worker attitudes and behaviours 4. Influences standards of business conduct 5. Ethics, social responsibility, stakeholder management Affects how we live, work, consume, and produce PEST- Technological Factors Elements 1. Internet affects buying, selling, communication 2. Information technologies affects information access, inter-firm cooperation, cycle times 3. Computer technologies have changed our products and how we design and build 4. Not limited to computers and information Affects what we produce/what it can do, affects how we produce and how we sell Challenge with Technology: demands constant learning and scanning PEST Three most important issues facing Canadian Business: 1. The value of the Canadian dollar o If the Canadian dollar’s strong your imports are cheaper 2. A skilled labour shortage o Educated population but still have a shortage, some due to immigration 3. The natural/physical environment o Canada cares for the environment which influences companies to operate in different ways Questions to answer from PEST 1. Do the economic conditions support my business? 2. Does it make sense? Is it appropriate to launch with the economic conditions? 3. What legal protection or laws do I have to consider? 4. Are there regulations? Patents? Etc... 5. What demographic and social trends affect my business and how? 6. What are current fads and trends that can benefit you 7. What technological forces affect me now and in the future? How do they assist of constrain? 8. How do they help me? 9. What opportunities or threats does the environment possess? 10. Go into detail, WHY ... and in what way. So what? Porters Five Forces Five different sources that directly affect the profitability of an industry 1. Each firm operates in a specific industry; each industry has different characteristics 2. Intensity of competition has a big influence on how the company operates and how profitable the industry can be 3. Porter’s five forces is one of the most popular tools to analyze the competitive environment and decide on strategy Porter’s Five Forces: Breakdown 1. Suppliers: those businesses that you do business with in order to buy critical inputs (e.g. computer chip manufacturer is a critical supplier for computer hardware). b. Fewer suppliers or high switching costs (signed contract, fee to cancel the contract and switch suppliers) means increased bargaining power c. More choice = more bargaining power, vice versa d. Bargaining power increases costs of inputs e. Use strategic alliance or internal supply 4. Potential Entrants: what new competition may come into the market? a. Can cause big changes with new ideas b. Ease of entry means intense competition i. Regulations are used to slow this down, to protect your game c. Barriers = capital intensity, technology, know-how, regulatory approval, brand loyalty, etc... i. Capital intensity: building a big plant gets you into that market, forces your competition to build a big plant too. We don’t see new car manufacturer everyday due to capital intensity. ii. Technology: sometimes complex, a technology that can be patented. Guarantees them 17 or 18 years of manufacturing the product themselves (without competition). Government does this to create incentive for the manufacturers to share their product/recipe. iii. Know how: if you can’t protect it by patenting sometimes your expertise is so difficult to imitate that that itself is a barrier iv. Regulatory Approval: Licenses v. Brand Loyalty: Reputation 5. Substitutes: those products or services that provide a similar function (e.g. glasses substitute contact lenses) a. Many substitutes = more competition as there are more alternatives b. Puts ceiling on price that can be charged c. Pressure increases as price of substitutes and switching costs decline i. Easier for people to switch substitutes when it’s low (e.g. butter to margarine) ii. How do you deal with this? Convince consumers your product has no substitute 6. Buyers: buyers of your product negotiate the price, this affects the revenues. a. Few or concentrated buyers, standardized produces, low switching costs ,discretionary purchases = increased bargaining power i. Few buyers: If there are less buyers, suppliers will accept bargaining so they could win you over ii. Concentrated buyers: high volumes and customer loyalty will accept bargaining as big significant buyers have that power (e.g., Wal-Mart) iii. Standardized products: lots of substitutes, only distinguishing feature is price...therefore lower the price to stand out iv. Low switching costs: if buyers have the ease of switching products, they then have bargaining power v. Discretionary purchases: if the product is “optional” and if they don’t really WANT the product then the buyers have the bargaining power b. All these factors reduces price that you can demand *Businesses need to make their product “unique” and consider low switching costs to fight bargaining power - Industry Competitors: rivalry among existing firms c. Start with rivalry -> has biggest impact on profitability. i. Competition great for consumers, bad for companies d. Results in price completion and increased costs e. Most powerful of five forces f. Causes: i. Many competitors of equal/size capability ii. Growth rate of industry 1. if the growth rate is high, good for businesses as there will be a demand surplus iii. Consumers switching costs iv. Products are commodities or are perishable 1. Products that we consider to be the same, we buy the cheaper one (e.g. Gas or Milk) 2. Which ones are on sale? 3. Perishable: expiry date, if it’s expired it has no value g. Caveat: power and relevance of a force will vary by industry i. This depends on the industry you are examining, no two industries are alike Value of Five Forces Model The greater the competition the lower the prices go Four other impacts that affect profitability: 1. Suppliers 2. Potential entrants 3. Substitutes 4. Buyers 7. Predicts industry profitability 8. Helps determine whether a firm should enter a particular industry a. Is it worth entering this industry? Should I chase another opportunity? 9. Helps determine whether and/or how it can carve out an attractive position in that industry a. Allowing us to charge a higher price with our unique attractive attribute Video Notes 10. Five competitive forces start with the notion that competition is looked to narrowly 11. Shows that you have to fight with profits with a broader set of competitors 12. Use the Porter forces to apply to every industry a. What are the trends to change the game on the industry? b. What are the constraints? 13. E.g. Airlines a. Least profitable industries b. Nature of rivalry is intense, many competitors i. Cheaper flights, new airlines, one straight flight, connecting flights etc... 14. How can I position myself to profit from these forces 15. These concepts can be applied to any economy, powerful framework... it allows you to focus on the underlying concepts 16. There’s a lot of confusion and complexity when applying the framework, a. E.g. rivalry... how do we understand when it’s positive? Or negative? 17. If this is the way competition works, what do you do about it? a. Expanding, new innovations, etc... rather than creating a battle with a rival 18. Industry analysis is the starting discipline in any strategy planning and understanding the industry 19. Five forces give you the tools to understand the dynamics and how do you position yourself to find your spot in that industry to command given the other forces 20. Everyone involved in the strategy should be aware of the strategy, and maybe if your competitor knows your unique attribute they’ll choose a different attribute for themselves New Venture 1. Is this industry a realistic place for a new venture to enter? Is it worth my time and money? If yes, then... 2. Can we do a better job that incumbents at avoiding or diminishing factors that suppress industry profitability? 3. Is there a unique position we can pursue? 4. Is there a superior business model that incumbents would find hard to duplicate? Sources of Information 21. Library Databases a. Standard and Poors net advantage b. GMID c. Data Monitor d. FPInfomart Benefits of External Analysis 22. Makes managers proactive a. You can anticipate opportunities, challenges, threats 23. Provides information used in planning 24. Helps organization get needed resources 25. Helps organization cope with uncertainty a. Plans will never go as expected because the environment keeps changing b. Although we can’t anticipate everything, we can try anticipate the more likely things that will happen 26. Improves consistency and performance a. Strategy is consistent with internal qualities of the organization Challenges of an External Analysis 27. Rapidly changing environment – hard to keep up with a. This will vary depending what industry you’re in 28. Time consuming a. If you’re company is successful you have less incentive to spend time on external analysis 29. Forecasts and trend analyses imperfect a. Hard to be motivated if you know it may very well be wrong in the end Opportunity Recognition **New Venture Proposal due Oct14th **CEDAR Individual Writing Assignment – Canadian publicly traded companies Entrepreneurship 30. What is it and how is it related to small business and new venture creation? 31. Role of small and new businesses in the economy 32. Process and key elements 33. Opportunity recognition 34. Screening for viability and competitive advantage 35. Accessing resources 36. Social entrepreneurship Definitions New Venture – recently formed commercial organization that sells goods/services Entrepreneurship – identifying an opportunity and accessing resources to capitalize on it Small business – owner-managed, not dominant in market, <100 employees a. 97.8% of all businesses in Canada to GDP b. Contribute > 26% annually to GDP c. Provide more jobs than large businesses d. New Ventures lead in new products and services Entrepreneurial Process 37. Influenced by PEST 38. Successful only when entrepreneur, opportunity, and resources match a. Entrepreneur (manager) brings knowledge, expertise, and managerial value system b. Opportunity (environment) c. Resources (resources) *parallel to diamond-e-framework* The entrepreneur may have a brilliant idea, but if it does not have the skills, expertise, or knowledge to execute the venture it will fail, or the opportunity may not have the environment for it, or maybe can’t acquire the resources to launch the venture. 39. Begins with entrepreneur identifying an opportunity then accessing resources a. Financial resources Opportunity Recognition 40. Idea generation a. Often paradigm shifts i. Paradigm: simple way of doing things 1. E.g. face the front when entering an elevator 2. E.g. IBM created a paradigm shift of personal computers being big complicated expensive machines b. Ideas come from: innovations, dumb luck, c. Originate in events relating to work or daily life, hobbies, chance happening 41. Screening a. Weeding out bad ideas i. Helps you avoid bad ends b. Saves time, money c. Ensures you have a viable idea with a competitive advantage Screening for Viability and Competitive Advantage You know when you have a good opportunity when... 1. Idea creates or adds value for customer d. Solves problem meets a need e. Customer willing to pay for it 2. Idea provides a competitive advantage that can be sustained f. Product has to be unique in a valuable way/better than others i. How is it different and better from existing products and substitutes? ii. Are differences valuable to customers? iii. Is it something that existing firms can easily do or may want to imitate? 1. Can the idea be protected legally? 3. The idea is marketable and financially viable g. Are there enough customers who are willing to buy it? What is the market demand likely to be? h. Who are the key competitors and what are the forces that affect profitability i. Is the market growing, shrinking, concentrated, fragmented? i. A growing market is easy to get ii. Shrinking market has a lot of competition iii. Concentrated market hard to get into them iv. Fragmented markets has a lot of smaller companies, you may not even get noticed j. Safety point: does the idea have low exit costs? i. Longer time to profitability or greater up-front investment needed = riskier venture How to Screen 42. Use PEST analysis to assess environment – is it supportive of your idea? 43. Use Five Forces to determine ease of entry and profitability of industry 44. Use Five Forces, PEST, and market exploration to ensure uniqueness of idea 45. Use research of market (library databases) to evaluate how big your market is and whether it is growing, shrinking, or stagnant 46. Research expert opinions in the industry 47. Identify and discuss how key trends in the environment and the industry affect your idea, i.e. represent an opportunity for you Evaluating your Venture Opportunity Market Capacity: If the current businesses are producing already at their maximum capacity, then there is room for you to get in there because they are fully satisfied Developing the Opportunity 48. Business concept often changes from original a. Incorporate information and research b. Incorporate experience and customer feedback 49. Once business concept finalized move to business plan a. Concept will be “tweaked” as business plan evolves Accessing Resources 50. Bootstrapping – doing more with less a. Make do with as few resources as possible b. Use other peoples’ resources where possible c. Find/use free stuff 51. Financial resources – debt vs. Equity financing a. Debt = interest and control i. Sources – financial institutions, suppliers ii. Advantage to borrowing money is you’re not using any of your equity iii. Disadvantage is you have to pay back the money meeting the conditions 52. Equity = no interest, less control a. Sources – savings, love money, private investors, venture capitalists The Rise of the Social Entrepreneur ”Social entrepreneurs are not content just to give a fish or teach how to fish. They will not rest until they have revolutionized the fishing industry”. 53. Entrepreneurs seeking innovative solutions to some of the world’s toughest problems 54. On a spectrum between non-profit & for-profit organizations a. Profit is used to fund the growth for the venture b. Primary motive is not to maximize profits, it’s to cover costs and generate just enough profits to help that social venture grow 55. Typically accountable to community stakeholders rather than private investors a. The community is being impacted by a social venture and they are their target 56. Importance of social capital a. Importance of being valuable to the society b. Contributing something good, being an asset Yunus: Model Social Entrepreneur 57. Founder of the Grameen Bank and Nobel Prize Winner 58. Providing loans to women in impoverished areas of rural Bangladesh 59. Partnered with Danone to create a social enterprise Notes on Video 60. Danone: yoghurt company 61. “Grameen Danone Company” 62. Motive to produce yoghurt for a special purpose to address the problem of malnutrition 63. Make it very cheap so the poorest children can purchase it and eat it 64. 2 yoghurts/week = regain health 65. It will be a social business – you can invest but no dividends 66. Company continues to expand with the profit it makes (after paying back your investment) but use it within the company 67. Unlike charity, social businesses recycle the dollars it receives to produce and sell – ongoing cycle forever Greg Overholt and SOS 68. Unique value to customer he is willing to pay for – proves assistance with exam preparation 69. Social value – funds educational development projects in Latin America 70. Self-sustaining – volunteers run review sessions and student fee funds projects in Latin America Social entrepreneurship and New Venture project 71. Similarity a. must be unique and valuable b. Must be financially viable 72. Difference a. Value is defined as socially valuable, not valued in dollars b. Must be self-sustainable rather than earning a high net profit Social Environment Ethics and Its Importance Ethics: Individual standards/beliefs regarding what is right and wrong or good and bad Business or Managerial Ethics: Standards of behaviour that guide individual managers in their work How does it relate to Diamond E? It relates to managerial preferences which in turn drive the organization value system and capabilities Ethics is important at managerial level. Categories of Ethical Behaviour 73. Behaviour toward employees a. Hiring and firing, wages, working conditions, privacy and respect 74. Behaviour toward the organization a. Conflict of interest, confidentiality and honesty b. Don’t be bias, don’t sell away secrets, honesty about your feelings toward the organization 75. Behaviour toward other Economic Agents a. Relationship with customers, competitors, stockholders, suppliers, dealers, and unions Assessing Ethical Behaviour 1. Gather facts 2. Analyze situation b. Utilitarian approach – most goods for most people...lets come up with a solution that will generate the most good for a group people c. Rights approach – don’t violate basic/legal rights d. Fairness/Justice Approach – equitable distribution of burdens and rewards... we all win/lose something e. Caring Approach – consistent with people’s responsibilities to each other 3. Make judgement Managing Ethics 76. Hiring criteria a. How you choose to hire and who i. E.g. long criminal record 77. Managerial Role Modeling a. Make sure your leaders are following the rules b. If they aren’t, what incentive is there for other employees to follow the rules? 78. Mission Statement/Core Value Statement a. Written document of what is important to the company 79. Code of Conduct/Ethics a. Written document of what you “shall and shall not do” 80. Ethics Booklets and Training a. Train employees to help them with tough choices and execute them 81. Goals and Evaluation Criteria a. Outlines what the company wants from you 82. Rewards Systems a. Incentives b. When they do something right reward them 83. Employee Protection Mechanisms a. Must protect them when they come out and report unethical behaviour Stakeholders 84. Individuals, group, and other organizations who have an interest in the actions of an organization and who have the ability to influence it 85. Groups or individuals who can significantly affect or are significantly affected by an organizations activities 86. Stakeholders’ importance depends on situation and the issue – affect willingness and opportunity to act 87. Challenge: stakeholders may have varying and confliction expectations of an organization 88. Examples of stakeholders a. Owners/creditors b. Customers c. Employees (and their unions) d. The natural environment e. Suppliers f. Community, society g. Board of directors h. Special interest groups i. Government Business – Stakeholder Connection Stakeholders provide business with the capacity to Stakeholders have expectations of the business... operate... 94. Owners and creditors: Return on their 89. Owners and creditors: capital investment 90. Customers: purchases 95. Customers: quality, choice, 91. Employees: human resources communication, safety, respect 92. Board Of Directors: Leadership 96. Employees: fair pay, meaningful work, 93. Natural Environment: natural resources safety, fair treatment, training 97. Board Of Directors: responsible management. 98. Natural environment: responsible stewardship Why Manage Stakeholders? *link this to previous slide to critical success factors* - to cope with environmental turbulence and uncertainty - to keep pace with societal change in which stakeholders want a voice - to avoid adverse actions by stakeholders - to improve ability to predict/control the external environment - to improve the percentage of successful new product/service introductions - to promote higher levels of operating efficiency and organization
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