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BU 111 Midterm Review Notes.docx

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Roopa Reddy

Course Model & Environmental Analysis Models  Critical Success Factor: o Achieving Financial Performance: profitability, cash flow; enable growth or expansion, survival; connects to other factors because you cannot achieve the rest without financial performance o Meeting customer needs: satisfying the customer; happy customer will return; disappointed customers go to competitors, also tell others about bad experience; connects to other factors because customers bring in revenue which leads to profitability o Building Quality Products and Services: determine expected level of quality, meets expectations of target market and do this consistently; connects to other factors because by meeting the expectations of the market you are meeting customer needs and are bringing in revenue o Encouraging Innovation and Creativity: proactively meeting and exceeding changing customer expectations. Innovation ensures you are building quality products and meeting customer needs and in return being profitable o Gaining Employee Commitment: happy employees are productive employees o Competitive Advantage: Diamond E Framework (identifies key variables to be considered in strategic analysis)  Strategy: what opportunities the business is pursuing o Determines needed resources, organizational capabilities, and management preferences. Other parts are determined by which strategy you choose  Double headed arrows show that they are all connected and that certain things can benefit strategy or impact strategy  Each variable is related to the rest  Each variable can either drive or constrain strategy  Principal Logic: CONSISTENCY or alignment  First Task: deal with strategy-environment linkage o Assess forces at work and their implications  Management Preferences: managers are humans and humans have bias. A managers preference may be bias, influence strategy and organization (culture and capabilities)  Organization: consists of culture, capabilities, leadership, and its structure within a company. Can drive or constrain strategy  Resources: not restricted to financial resources, includes employees, money, capital  Environment: (strategy to environment) critical link; must think of how the external factors of the environment affects your strategy and if they will drive or constrain your strategy External Analysis Process of scanning and evaluating the external environment How managers determine opportunities (positive external trends or changes) and threats (negative external trends or changes) Firms face multiple environments: general environment; specific environment; affects industry participants affects all businesses  General Environment: o PEST model- considers political, economic, social/demographic, and technological factors o Identifies general trends and changes o Regardless of the industry the company is affected  Specific Environment: o Porter’s Five Forces-analyzes five important sources of competitive pressure and intensity; predicts profitability of industry o Companies who produce more substitutes or similar products are effected  Benefits of External Analysis o Makes managers proactive o Provides information used in planning o Helps organization get needed resources o Helps organization cope with uncertainty o Improves consistency and performance  Challenges of External Analysis o Forecasts and trend analyses imperfect (good estimate on credible information) o Rapidly changing environment hard to keep up with o Time consuming PEST P-Political/Legal  Relationship between business and government  Elements: o Laws, Regulations: what a business can and cannot do (patents, liquor licenses, safety regulations, product labeling, ethics, food safety, quality control, how many players you can have in an industry, environmental regulations) o Taxes: corporate tax rate, large corporate tax breaks are great for corporations but harm small businesses. Creates an incentive to invest o Trade Agreements/Conditions: NAFTA (try to offer incentives to trade between the countries), EU; implications of trade agreements on other countries o Political System: most conductive to businesses is a mixed market system o Political Stability: tied into economic instability. During this a new business would not be wise to be started. Affects not only small businesses but the larger companies as well. Difficult to start or grow a business  Government can create incentives, constraints, or support/bail out when needed  Affects uncertainty, risk, and costs faced by firm E-Economic  Elements: o Economic Growth: GDP represents productivity and growth. Higher GDP indicates a higher standard of living o Economic Stability: inflation and unemployment lead to an unstable economy o Trade Balance: trade surplus (exports>imports), trade deficit/shortage (imports>exports). March 2012 Canada reported a trade surplus of $350 million Canadian (US accounts for 79% of Canadian exports), export mainly energy in Canada o National Debt: leads to recession, outside investors will not invest because the economy of a country is declining. Government borrowing takes away from money that could go to a small business o Interest Rates: increase in interest rates increases the cost of borrowing (turns consumers off of investing or borrowing money because it costs more to pay back the loan), gives incentive to save money. Effect of housing industry-banks are losing business because people will not want a loan with a high interest rate, construction industry, more people are saving however the money is not stimulating the economy, rental industry will increase o Exchange Rates: value of the Canadian dollar compared to other currencies. High Canadian dollar leads to more spending in other countries leading to more importing and less exporting. Affects international trade S-Social  Elements: o Customs, values, attitudes, and demographic characteristics o Influences customer preferences o Influences worker attitudes and behaviours o Influences standards of business conduct  Ethics, social responsibility, stakeholder management  Affects how we live, work, consumer, and produce  Social preferences change over time  Environmental (social shift): automotive industry (making more hybrids and fuel efficient cars to protect environment and because of increasing gas prices), appliances (energy efficient)  Example: McDonald’s change their products in different locations around the world to better suit the culture T-Technology  Elements: o Internet affects buying, selling, communication o Information technologies affects information access, inter-firm cooperation, cycle times o Computer technologies have changed our products and how we design and build o Not limited to computers and information  Affects what we produce/what it can do, affects how we produce and how we sell  Demands constant learning and scanning  Technology allows for easy communication and information access within a company (especially with locations world-wide)  Example of improvement (Swiffer improvement of broom)  GPS software on smartphone: printed maps, GPS manufacturers, market research for companies, service providers are affected by this new software Example: Facebook 2003  The economic conditions may not have supported the business because of the recession and post 9/11; high standard of living (majority of people had computers and internet allowing for easy access to this service)  Some countries block access to Facebook; privacy issues; selling third parties personal information so they can target users; laws lag behind technology  Social trends showed that people were more willing to share personal information online; targeted youth/young adults who are more vulnerable  Opportunities: businesses can market to youth through Facebook  Threats: advertisements Porter’s Five Forces  Rivalry Among Existing Firms: o Results in price competition and increased costs o Most powerful of the five forces o Causes:  Many competitors of equal size/capability  Growth rate of industry  Consumers switching costs (involve money or time that is involved when switching brands)  Products are commodities (products that are not unique ex. Batteries) or are perishable  Substitutes: o Many substitutes=increased competition o Puts ceiling on price that can be charged o Pressure increases as price of substitutes and switching costs decline o Other businesses or products that consumers can use instead of a certain brand  Buyers: o Not necessarily the end consumer o Few or concentrated buyers, standardized products, low switching costs, discretionary (expensive and not necessary products) purchases=increased bargaining power o Reduces price that you can demand  Suppliers: o Fewer suppliers or high switching costs means=increased bargaining power o Bargaining power increases costs of inputs o Use strategic alliance or internal supply (challenge: costs increase) o Fewer suppliers, high switching costs, low attractiveness of substitute suppliers, high threat of forward integration means=increased bargaining power for supplier of inputs o Ex. Airlines: manufacturer of planes, fuel, plane parts (engine), food, government, labour (strong input/supplier): unionized allows for more strength for employees  Potential Entrants: o Can cause big changes: bring new ideas, innovation, new technology, new business model (how to generate revenue) o Ease of entry=more intense competition (decrease ease of entry to eliminate entrants) o Barriers=capital intensity (ex. Start up of a ski resort), technology, know-how, regulatory approval (entrepreneurship), brand loyalty, etc.  Value of Five Forces Model: Helps determine Helps determine Predicts industry whether a firm shouldcan carve out an it profitability enter a particularattractive position in industry that industry Entrepreneurship  Defined as indentifying opportunity and accessing resources to capitalize on it  New Venture: recently formed commercial organization that sells goods/services  Small business: owner-managed, not dominant in market, <100 employees o 97.8% of all businesses in Canada are small o Contribute >26% annually to GDP o Provide more jobs than large businesses o New ventures lead in new products and services  Influenced by PEST  Successful only when entrepreneur identifying an opportunity then accessing resources Opportunity Recognition Idea generation  Often paradigm shifts (thinking in new ways or ways that others do not see)- example computers originally meant for business use not personal use  No set way to generate ideas  Originate in events relating to work or daily life, hobbies, chance happening  Initial step Screening  Weeding out bad ideas and allows you to focus on ideas that are more worth while  Saves time, money  Ensures you have a viable idea with a competitive advantage  Three step screening process o Idea creates or adds value for customer  What is the problem I am solving? Does it meet a need?  Is the customer willing to pay for it? The product may meet the needs of the consumer but if they are not willing to pay for the product then it is not a viable idea o Idea provides a competitive advantage that can be sustained  If another company can imitate or copy your idea, they might be able to get a patent faster; other companies might watch and see how the idea does and if it is successful they will copy the idea  Product unique in a valuable way/better than others  How is it different and better from existing products and substitutes?  Are differences valuable to customers?  Is it something that existing firms can easily do or may want to imitate? (Can the idea be protected legally) o The idea is marketable and financially viable  Need to understand who is the customer before you determine if there are enough customers willing to buy the product/service  Porter’s Five Forces  Concentrated-fewer buy bigger players in the market. Market share is concentrated among a few players. Only a few companies contain a large portion of the market  Fragmented contains many players and market share is spread out between the many competitors. Ideal market because each company has a small market share and it is easier to gain market share  Ideal market is growing and fragmented  Safety Point: does the idea have low exit costs? o Longer time to profitability or greater up-front investment needed=riskier venture How to Screen Use PEST analysis to assess Use Five Forces to determine Use Five Forces, PEST, and environment – is it supportive ease of entry and profitabilitmarket exploration to ensure of your idea? of industry uniqueness of idea Use research of market (library Identify and discuss how key databases) to evaluate how Research expert opinions in trends in the environment and big your market is and the industry the industry affect your idea, whether it is growing, i.e. represent an opportunity shrinking, or stagnant for you Evaluating your Business Opportunity Criterion Highest Potential Lowest Potential Product
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