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BU111 Midterm Notes

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Wilfrid Laurier University
Leanne Hagarty

BU111 Exam notes The relationship between the firm and its external environment - the external environment consists of everything outside an organization that might affect it - managers must understand the key features of the external environment, and strive to operate and compete within it - managers should not react to changes in the external environment; rather they should be proactive and at least try to influence their environment - elements of the external environment include:  economic conditions issues of ethical and social  technology responsibility  political-legal considerations the business environment itself  social issues emerging challenges and opportunities  the global environment Organizational Boundary: that which separates the organization from its environment Economic Environment: conditions of the economic system in which an organization operates Critical Success Notes Factors Achieving Financial - profits: revenue > expenses Performance - growth in the company with steady cash flow - avoiding competition and bankruptcy Meeting Customer - demands need to be satisfied Needs - expand number of customers - anticipate, understand, and deliver needs - understand consumers are the source of revenue - customers need to come back in order to earn continuous revenue Building Quality - best quality- people pay for quality Products and Services - identify target customer and delivers such quality products - consistency is key  reputation Encouraging - as technology grows, customer needs change, therefore innovation required Innovation and - putting something new out there to capture the customers’ attention Creativity - anticipating trends - not just about what you give the customers but about how you create the product Gaining Employee - employees should be proud of their business, know that its “cool” Commitment - keep employees so they do not switch to competitors - enthusiasm= better business - happy employees will do more than what they are paid for Creating a Distinctive - businesses want monopoly Competitive Advantage -by providing something that other companies don’t, consumers are willing to pay more for that specific product you can set your own process (not easy with competition) 1 BU111 Exam notes Critical success factors are those that must go well to ensure success for a manager or an organization, and, therefore, they represent those managerial or enterprise areas, that must be given special and continual attention to bring about high performance. CSFs include issues vital to an organization's current operating activities and to its future success. Diamond- E framework: Key variables: Management Preferences Organization Strategy Environment Resources 2 BU111 Exam notes Double headed arrows mean that everything influences each other Internal Variables: 1) MANAGERS: make decisions (management preferences)- they are humans to therefore can be bias and can have bias approaches, desires, and can be aggressive 2) ORGANIZATION: soft and hard things, structure, capability, leadership 3) RESOURCES: 3 categories: human, capital, financial External would be strategy Strategy- Environment linkage: - Strategy: what opportunities the business is pursuing - determines the resources, organizational capabilities, and the management preferences - The critical linking variable in the model  any variable can either drive or constrain strategy - Principal Logic- consistency or alignment - strategy must be consistent with internal workings of company (preferences, resources, etc) - strategy must align with the external environment; you may have the best strategy but it may not be right for that environment  environment is changing, so strategy must be shifting - absolute alignment is not realistic- can either limit or be advantageous to other factors - First task: deal with strategy-environment linkage  assesses forces at work, and their implications Organization influences… - organization refers to culture, leadership, structure, and capabilities (CLSC) - STRATEGY: you have to have the right CLSC in order to have the right strategy  you may not have the leadership/structure/etc appropriate for the strategy you prefer Management Preferences influence…. - they are the biases & preferences within organization  bias creeps into everything - ENVIRONMENT: there should be a double headed arrow between management preferences and environment because how the managers view the environment influences their preferences - STRATEGY: your strategy must satisfy your personal preferences  you lean toward a strategy Resources Influence… - resources are the financial, capital and human resources of the organization - ORGANIZATION: resources determine the capabilities, investments and how we spend money, type of human resources (culture) and hence organization - STRATEGY: you have to have the right resources to do certain things 3 BU111 Exam notes External Analysis: 1) Processing of scanning and evaluating the external environment  look for data, stats, trends, forecasts, etc. - SWOT: strengths, weaknesses, opportunities, threats 2) How managers determine: - opportunities (+ve external trends/changes) - threats (-ve external trends/changes) 3) Firms face multiple environments (must analyze both environments) 1) GENERAL ENVIRONMENT: affect all businesses - PEST model identifies general trends/changes - considers: political, economic, social/demographic, and technological factors 2) SPECIFIC ENVIRONMENT: affects industry participants  every industry has its own environment - Porter’s 5 Forces analyzes 5 important sources of competitive pressure and intensity  predicts profitability of industry Benefits of external analysis: 1. Makes managers proactive: puts them in a ready position- takes discipline, gets you anticipated- prepared for everything 2. Provides information used in planning 3. Helps organization get needed resources- VALUABLE: get supplies, human resources 4. Helps organization cope with uncertainty (matter of life, but helps cope)- fragmented markets, demanding consumers, therefore helps 5. Improves consistency and performance- trap internal environment and excel with external analysis Challenges of external analysis: 1. Forecasts and trend analyses imperfect: can lead to wrong decisions; some industries easy to handle but some are really tough 2. Rapidity changing environment hard to keep up with: global companies for analysis and have multiple environments to work with 3. Time consuming- time is money! PEST Political-Legal environment  Reflects relationship between business and government, government regulation of business  Affects uncertainty, risk, and constricts/costs faced by firm  New major/provincial leaders can affect many organizations, especially small firms that do business in a single location and are susceptible to zoning restrictions, property and school taxes, etc. 4 BU111 Exam notes  Government can create incentives, constraints, support/bail out when needed if business closes, people lose jobs, suppliers suffer, communities suffer; thus easier to just prop up the business 1. Laws, regulations - determine what companies must and must not do  regulation protects consumers (ex: banks) - Government regulates certain industries  wants to ensure that there is an adequate amount of competition, but prevents too much competition 2. Taxes - The government uses taxes to subsidize things such as education and health care - Use taxes & the way they tax us to create incentives/disincentives to do certain things 3. Trade agreements or conditions - When FTA (free trade agreement) was first signed, businesses thought American companies will take over market  but Canadian companies worked hard & overpowered the American market - Open up opportunities  open up new markets - Can also be a threat due to competition 4. Political system - At one extreme, there is capitalism: the government is “laissez faire”  allows private ownership of the FoP and encourages entrepreneurship by offering profits as an incentive - At the other extreme, there is communism: the government controls everything - Companies prefer capitalist approach  more flexibility and room to pursue opportunities 5. Political stability - Businesses hate uncertainty  No business wants to set up shop in another country unless trade relationships with that country are relatively well defined and stable - Need a plan and a strategy to predict what might happen Economic Environment  Influences costs, potential sales, and financial uncertainty 1. Economic growth- aggregate output, GDP, and standard of living - More money with economic growth, thus more opportunity to sell things to the populations - They are sufficiently wealthy to buy things and with more money they want to spend more - Aggregate output –total output of goods that a country produces in a given periodhigher output = growth = higher standard of living, more exports - GDP is the value of the goods and services that the country produces through FoP 2. Trade balance – comparison of imports vs. exports 5 BU111 Exam notes - If imports > exports, you have a trade deficit - If exports > imports, you have a trade surplus - Wants to balance trade deficit = trade surplus 3. National debt – government borrowing - Government borrows from the same places as businesses  from us, banks, and foreign countries  but there is only so much money to go around. - Affects economic growth because the government competes with every other potential borrower (households, businesses, etc) for available supply of loanable money. The more the government borrows, the less available for the private borrowing and investment that increases productivity  businesses must compete - Budget deficits are when more is spent per year than gained accumulation of annual deficits lead to national debt  amount of money that the government owes its creditors 4. Economic stability - Condition in which the amount of money available in an economic system and the quantity of goods and services produced in it are growing at about the same rate - Inflation: o Good for inflation to be slow  easier to adjust o When amount of money injected into the economy is greater than increase in actual output o People have more to spend; there’s still the same number of products available to buy  compete  rising prices  erases increase in money amount  purchasing power declines o Consumer price index (CPI) is used to measure inflation - Deflation: o When amount of money injected into economy is less than the increase in actual output o Good: prices fall due to increasing productivity, cost savings passed onto customers  jobs o Bad: when consumers have high debt and are thus unwilling to buy much  unemployed - Unemployment o Level of joblessness among people actively seeking work o When unemployment is low, there’s a shortage of labor for businesses  compete raise wages  eat profit margins  prices rise  buy less  reduce workforce  cycle A. Frictional: people are out of work temporarily while looking for a new job B. Seasonal: people are out of work because of the seasonal nature of their jobs C. Cyclical: people are out of work because of a downturn in the business cycle D. Structural: people are unemployed because they lack skills needed to perform available jobs 6 BU111 Exam notes 5. Interest rates – time value of money - When interest rates rise, people are more likely to save because they get more interest  borrow less so that they don’t have to pay back interest  vice versa - Government raises interest rates to drop demand (supply stays the same) and prices drop in order to attract more consumers 6. Exchange rates - People go on vacation to buy stuff for cheaper in other countries than in their home country - High exchange rates means that each unit of the currency will buy more foreign currencies  downward pressure on inflation, more imports, more efficiency, but damage to export/domestic industries due to competition with imports and hence unemployment - Low exchange rates means that imports and raw materials are more expensive, resulting in inflation. It also means more employment in export/domestic industries due to cheaper exports. - A high value of a currency may be good to fight inflation, but may create unemployment, whereas a low value of a currency may be good for employment, but may create inflation. Social Factors 1. Customs, values, attitudes, and demographic characteristics - Our values change  customer preferences change  color, style, taste, etc. - Vary across and within national boundaries and time product uses varies between nations - Influences worker attitude 2. Influences customer preferences - In some countries, consumers are willing and able to pay premium prices for designer clothes, but the same clothes have virtually no market in other countries 3. Influences worker attitudes and behaviours - In some countries, workers are as loyal to their companies as families, and at the same time, companies do their best for workers - In NA we do not have that approach, but we change careers and employers many times - Company is also not as committed to their workers 4. Influences standards of business conduct  Ethics, social responsibility, stakeholder management - Will vary from one country to the next - Certain expectations are shared -> honesty - In Canada we do not bribe companies, but in other countries, bribes are expected  customs, values, attitudes, and demographic characteristics of the society where company operates 7 BU111 Exam notes  Affects how we live, work, consume and produce  customer preferences, business standards Technological Factors  Companies must look out for technological breakthroughs that may make their products obsolete& threaten survival  many breakthroughs aren’t from direct competitors or from the same industry  Technology transfer refers to the process of getting a new technology out of the lab and into the marketplace where it can generate profits for the company  Efficient technology transfer  cycle time: the time that it takes a firm to accomplish some recurring activity or function 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 - Research and development provides new ideas for products, services, and processes 4. Not limited to computers and information - New technologies revolutionize business, ranging from the ways customers& companies interact to where/when/how employees perform  important contributors to economic development  Affects what we produce and what it can do, affects how we produce and how we sell  demands constant learning and scanning The 3 most important issues facing Canadian business 1. The value of the Canadian dollar 2. A skilled labour shortage 3. The natural/physical environment Questions to answer from PEST:  Do the economic conditions support my business?  What legal protection do I have or laws do I have to consider?  What demographic and social trends affect my business and how? - Be careful as future trends may sabotage your plans  What technological forces affect me now and in the future? How do they assist/constrain?  What opportunities or threats does the environment possess? 8 BU111 Exam notes Porter’s Five Forces  Each business operates in a specific industry, and each industry has different characteristics  Helps managers analyze 5 important sources of competitive pressure competitive environment of industry  Helps managers decide what their competitive strategy should be to exploit opportunities  Competition affects price  affects bottom line (profits)  The bargaining power (BP) suppliers have over buyers helps determine how competitive an industry is. Suppliers:  fewer suppliers or high switching costs (less substitutes) = more bargaining power for suppliers - high switching costs: how much it costs you to switch from one product to another substitute  Bargaining power increases costs of inputs  Use strategic alliance with other buyers, or internal supply to reduce dependence on outside suppliers  increase BP; ex: buying shares, controlling interests or creating their own suppliers Potential entrants  New entrants are usually not the same industry as other business  they enter with new ideas, models, better technologies change the rules of the game  ease of entry = more intense competition  less attractive industry  Some industries (automobile manufacturing) are capital-intensive and are thus difficult to enter  Businesses should try to make it difficult for new entrants by using barriers: capital intensity, technology, know-how, regulatory approval, brand loyalty, etc. - Secure technology or create new one that outsources others , or protect it with patents - Create new drug and patent it  does not allow other companies to use same formula  if you use the formula, you have to pay royalties to the company - Government can be your friend if they can regulate/restrict who can come in and who cannot. If you are already in, you’re good  ex: not everyone can be a doctor; there are regulations Substitutes  Many substitutes = increased competition  Ex: glasses vs. contact lenses vs. laser eye surgery 9 BU111 Exam notes  Puts ceiling on price that can be charged  lid on how big a price you can charge  Pressure increases as price of substitutes and switching costs decline  Consumers like to stick to what they know how to use already  less motivation to switch Buyers  Few/concentrated buyers, standardized products, low switching costs (not tied to you), discretionary purchases = increased BP for consumers more incentive to sell to them  Standardized products: efficient method to reduce costs and increase quality. By minimizing the differences in your products, you increase production, streamline distribution, decrease raw material costs and reinforce product branding. The best product standardization strategies allow you to balance the need for targeted adaptation with the cost savings of standardization.  Discretionary: Luxury vs. necessity  the more they need it, the more bargaining power  2 extremes to buyers: more power or concentrated  Gives them power if prices aren’t satisfying  Not key inputs  Decreases suppliers revenue possibly Rivalry among existing firms  Most powerful of 5 forces  Amount of rivalry among companies varies across industries  seen in activities like price competition, increased costs, and an increased emphasis on customer service.  Decreased revenue, increased expenses  perfect competition reduces prices whereas oligopoly or favourable conditions increase profitability  Causes of rivalry: 1. Many competitors of equal size/capability 2. Growth rate of industry  supply should surpass demand 3. Consumers switching costs 4. Products are commodities or are perishable  perishability makes it desperate to sell, out of style, can easily die, affects business  Caveat: power and relevance of a force will vary by industry  Nature of 5 forces: industries will not be identical Value of Five Forces Model  Predicts industry profitability idea of the factors that drive profitability  Helps determine whether a firm should enter a particular industry  Helps determine whether and/or how it can carve out an attractive position in that industry 10 BU111 Exam notes  Manipulating/ taking advantage of/ changing some of the effects that the forces have on profitability  or at least making the product different/valuable in a way  Relatively easy to enter in an industry, but may be too hard to earn profit because of price war, competition  Positive industry hard to find Questions new venture should answer through 5 forces analysis 1. Is the industry a realistic place for a new venture to enter? If yes, then… a. If no, reconsider industry 2. Can we do a better job than competitors at avoiding/diminishing factors that suppress profitability? a. Example: google vs. yahoo 3. Is there a unique position we can pursue? a. Is there something competitors can’t/ won’t do? 4. Is there a superior business model that incumbents would find hard to duplicate? a. Anything that competitors can’t copy? Example: DELL connects with customers directly- no retailers Video  Michael E Porter  How competitive forces shape strategy  may be significant or benign depending on industry  5 forces is a holistic way of looking at any industry  The underline structure is what drives profitability  model unveils underlined drivers of each force  These concepts can be applied to any industry, products (high/low tech, developed economies, non-developed economies)  How would you apply this analysis to an industry? (complexity!)  Ex: how do we understand where rivalry is positive or negative?  no competition means no choice for consumers positive means companies can compete and improve and gives consumers a choice  Distinguish between good and bad in industries, but the important thing is to understand the dynamics (how does the industry change you?)  how is the industry evolving, and how do you adjust in order to command a good profit? how can you reshape the nature of the industry structure  Multiple rivals can be helpful if they understand each other  don’t mindlessly compete Entrepreneurship Market Potential vs. Sales Forecast Market potential: The total amount that consumers might buy, under the right circumstances Sales forecast: the amount you think you can sell using your plan - More important than market potential 11 BU111 Exam notes - Who will buy the product? Will everyone want one? - Who would switch products to buy this? - How is it compatible with consumers’ current way of doing things? - What is the competition? How will they affect you? Sensitivity analysis - Largest/smallest competitors’ sales - Average sales per competitor - Sales of a company that launched a similar product - Last year’s sales +/- (for existing or modified products) - Growth rate over last x years continues (for existing or modified products) Entrepreneurship  Entrepreneurs : recognize and seize opportunities to control their own destiny + access the resources needed to capitalize on that opportunity  Even successful businesses have disappointments and failures, but true entrepreneurs know how to overcome them, reduce their losses, and to capitalize on the best available opportunity  Because starting a business involves dealing with much uncertainty, every new venture founder must exercise some of the personal attributes of an entrepreneur.  Brings knowledge, expertise, capabilities, resources & managerial preferences/bias (diamond E) - Behavioural (taking initiative) - Personality traits (independence) - Skills (problem solving) Small Business:  An owner-managed business with less than 100 employees  While large businesses have more employees, small businesses collectively provide more jobs than large businesses. Small businesses also lead the way in innovation and new technology. In the Canadian Economy…  These patterns are consistent across all provinces - 97.8% of all businesses in Canada are small contribute over 25% annually to GDP - 1.9% of employer businesses are medium-sized (100-499 employees) - 0.3% are large businesses (500+ employees) The new Venture/Firm  Recently formed (in the past year) commercial organization that provides goods/services for sale  Various criteria can also be used to determine when a new firm comes into existence 1. When it was formed 2. Whether it was incorporated 12 BU111 Exam notes 3. If it sold goods/services  main source of job creation also responsible for the majority of new products and services The Entrepreneurial Process  influenced by PEST in the broader environment  3 key elements in the entrepreneurial process, and the way they interact 1. Entrepreneur (main focus) 2. Opportunity 3. Resources - As the 3 key elements interact, they may be mismatched or well matched - the entrepreneurial process is successful only when the 3 key elements match - begins with entrepreneur identifying an opportunity then accessing resources A) Identify an opportunity  generating ideas for new/improved products, processes, or services - involves abandoning traditional assumptions about how things work and how they should be, and seeing what others don’t see  paradigm shifts - most new ventures don’t emerge from a deliberate search for viable business ideas - Work experience is the most common source of ideas - Other sources of new venture ideas include personal interest/hobby or a chance happening  screening those ideas - the faster you weed out bad venture ideas, the more time/effort you devote to others - ensures that you have a viable idea with a competitive advantage use PEST and 5 forces - Identify and discuss how key trends in the environment and the industry affect your idea  use PEST to assess environment and if it supports idea - Use 5 forces to determine the ease of entry and profitability of industry - Use research to evaluate how big the market is; if it’s growing, shrinking, stagnant… - Research expert opinions in the industry - Is it something that existing firms can easily do or may want to imitate?  protect legally - 1) Creates/adds value for customer: a product that creates or adds value for the customer is one that solves a significant problem, or meets a significant need on new/different ways - 2) Idea provides sustainable competitive advantage: unique& better than that of competitors. Sustaining a competitive advantage means maintaining it in the face of competitors actions or changes in industry  easy if markets are in state of flux for long time 13 BU111 Exam notes - Idea is marketable and financially viable (5forces): determine whether sales lead to profits. I. Estimating market demand means understanding who the customers are, what they’re needs are, and how the product/service will satisfy their needs better than competitors’. II. Prepare a sales forecast: estimate of how much a product/service will be purchased by the prospective customers for a specific period of time (usually a year). III. Determining finan
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