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BU111 Mid-term Review notes.docx

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Roopa Reddy

BU111 Mid-Term study notes The relationship between the Firm and its External Environment Critical Success Factors - Achieving financial performance - Meeting customer needs - Building quality products and services - Encouraging innovation and creativity - Gaining employee commitment - Creating a distinctive competitive advantage Diamond–E framework Management Preferences Organization Strategy Environment Resources PEST Political - Laws, regulations - Taxes - Trade agreements or conditions - Political system - Political stability Economic - Economic growth – GDP and standard of living - Economic stability – inflation, unemployment - Trade balance – importing vs. exporting - National Debt – government borrowing - Interest rates - Exchange rates Social - Customs, values, attitudes, and demographic characteristics - Influences customer preferences - Influences workers attitudes and behaviours - Influences standards of business conduct - Ethics, social responsibility, stakeholder management Technological - Internet affects buying, selling, communication - Information technologies affect information access, inter-firm cooperation, cycle times - Computer technologies have changed our products and how we design and build - Not limited to computers and information Porters Five Forces Rivalry among existing firms - Results in price competition and increased costs - Most powerful of the five forces Causes - Many competitors of equal size and capability - Growth rate of industry - Consumers switch costs - Products are commodities or are perishable Substitutes - Many substitutes = increased competition - Puts ceiling on price that can be charged - Pressure increase as price of substitutes an switching costs decline Buyers - Few or concentrated buyers, standardized products, low switching costs, discretionary purchases = increased bargaining power - Reduces price that you can demand Suppliers - Fewer suppliers or high switching costs means = increased bargaining power - Bargaining power increases cost of inputs - Use strategic alliance or internal supply Potential Entrants - Can cause big changes - Ease of entry = more intensity, technology, know-how, regulatory approval, brand loyalty etc. 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 all businesses affects industry participants How to do an external analysis General environment - PEST model – considers political, economic, social/demographic, and technological factors - Identifies general trends and changes Specific Environment - Porters Five Forces – analyze five important sources of competitive pressure and intensity; predicts profitability Benefits of an External Analysis - Makes managers proactive - Provides information used in planning - Helps organization get needed resources - Helps organization cope with uncertainty - Improves consistency and performance Challenges of an External Analysis - Forecasts and trend analyses imperfections - Rapidly changing environment hard to keep up with - Time Consuming Importance of Strategy Strategy: what opportunities the business is pursuing - Determines needed resources, organizational capabilities, and management preferences Critical Linking variable: each variable is related to the next, any variable can either drive or constrain strategy Principal logic: CONSISTENCY or alignment Fist task: deal with strategy-environment linkage - Assess forces at work and their implications Principal Logic: Importance of consistency between variables Example: P&G Strategy 2000 (inconsistency Ikea Strategy (consistency) ** Absolute alignment is not realistic** Entrepreneurship: identifying an opportunity and accessing resources to capitalize on it New Venture: recently formed commercial organization that sells goods/services Idea Generation - Often paradigm shift - Originate in events relating to work or daily life, hobbies, chance happening Screening - Weeding out bad ideas - Saves time, and money - Ensures you have a viable idea with a competitive advantage The Three Step screening process 1 Idea creates or adds value for customer - Solves a problem, meets a need - Customer willing to pay for it 2 Idea provides a competitive advantage that can be sustained - Product unique in avaluable way/better than others - How is it different and better from existing products and substitutes - Are different valuable to customers - Is it something that existing firms can easily do or may want to imitate - Can the idea be protected legally 3 The idea is marketable and financially viable - Are there enough customers who are willing to buy it? - What is the market demand likely to be? - Who are the key competitors and what are the forces that affect profitability? - Is the market growing, shrinking, concentrated, fragmented? Safety point: does the idea have low exit costs? - Longer time to profit or greater up-front investment needed = risk venture How to screen 1. Use PEST analysis to assess environment – is it supportive of your idea? 2. Use Five Forces to determine ease of entry and probability of the industry 3. Use Five Forces, PEST and market exploration to ensure uniqueness of idea 4. Use research of market (library databases) to evaluate how big your market is and whether it is growing, shrinking or stagnant 5. Research expert opinions in the industry 6. Identify and discuss how key trends in the industry affect your idea, i.e represent an opportunity for you Developing Opportunity Business concept often changes from original - Incorporate information and research - Incorporate experience and customer feedback Once business concept finalized, move to business plan - Concept will be “tweaked” as business plan evolves Accessing Resources Bootstrapping – doing more with less - Make do with a few resources as possible - Use other peoples’ resources where possible - Find/use free stuff Financial resources – Debt vs. Equity financing - Debt = interest and control - Sources – financial institutions, suppliers - Equity = no interest, less control - Sources – savings, love money, private investors, venture capitalists Social Entrepreneurs “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” - Bill Drayton, CEO, Chair and Founder of Ashoka Social Enterprise “social enterprises generate social value while operating with the financial discipline, determination & innovation of private sector business”\ - Alter 2006 Key facts of social entrepreneurs Help overcome market inequities/failures - Entrepreneurs seek innovation solutions to the world’s toughest problems - Often in areas of education, health, environment Social value as the primary objective - Economic value is a by-product - Key difference Results in companies with social missions Form of business can vary - Importance of attaining social value propostion through the legal business form (not- for-profit, for-profit, charity) Accountability to community stakeholders - Rather than only private investors Importance of boot
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