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Bu111 Midterm 1.docx

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Laura Allan

Bu111 Midterm Review The Relationship between Firms and the External Environment Course Model and critical success factors (what are they, how are they important, how do they connect to one another) Critical Success Factors - Achieving Financial performance o Combination of performance and cash flow o You can’t stay in business unless you pay the bills (make profits as well) more money coming in than going out - Meeting customer needs o Satisfaction allows them to come back OR tell other people o Allows revenue to occur o You have to anticipate what a customer wants and you deliver (anticipate, understand, deliver) o A dissatisfied customer will buy from a competitor and will complain (word of mouth) therefore you lose revenue. - Building quality products and services o People will become loyal o Build a strong reputation o Not every company needs to deliver the same level of quality (depends on the customer’s needs) i.e. Louis Vuitton and Wal-Mart have different qualities and different target customers yet they are both successful - Encouraging innovation and creativity o Quality definition is always changing and improving o The only way to be successful is to BUILD your business and keep improving it o Sometimes it can be really obvious (Apple) but other times it’s behind the scenes - Gaining employee commitment o Managers need to gain mutual respect and trust with their employees o When managers lead more efficiently, their employees become more engaged (achieve results) o Walking the talk, being transparent, communicating effectively, treating people equally, teaching, leading subordinates to increasingly excellent performance - and responding to subordinates as mature individuals who are owed fairness, the truth and recognition of their achievements. - Creating a distinctive competitive advantage o Firm sustains profits that exceed the average for its industry o 2 types (positional advantages)  Cost advantage  Differentiation advantage o Firm is able to deliver the same benefits at lower costs (cost adv) o Deliver benefits the exceed those of competing products (diff adv) Diamond-E Framework  Identifies key variables to be considered in STRATEGIC ANALYSIS o Used when designing a brand new strategy o Does the strategy fit all the diamond needs and the outside environment The framework can be divided into two sub-group: - the internal group (consisting of Management Preferences, Organization, and Resources), - external component (Environment). The purpose is to find deficiencies or gaps within each of the components, how they relate to each other, and how they relate to the strategy. If gaps or deficiencies are discovered, it is up to the company to either correct the component-specific issues or make changes to their strategy appropriately. Management Preferences: managers are human beings and they will have a natural bias, tendencies, judgements, desires what are the management styles Organizations: structure, capabilities (what can it do), what is the culture like, leadership styles what is the atmosphere like Resources: HR (people and skill set), Assets (capital), Financial Res.  what are your resources STRATEGY: what strategies are you going to pursue, what are you not going to pursue? - Critical link that determines needed resources, organizational capabilities, and management preferences - A thorough environmental analysis uses the tools to come to specific conclusions regarding the nature of the competitive arena, what it takes to succeed in the industry, and what strategies are possible Principal Logic: consistency or alignment between the variables st 1 task deal with the STRATEGY  Environment link (assess forces at work and their implications) Examples - P&G Strategy in 2000 (inconsistency) o o stock price abruptly fell from $86 to $60 per share o The biggest crisis at P&G was not the loss of $85 billion in market capitalization, however: it was the crisis in confidence -- particularly leadership confidence -- that permeated the organization. o Weren’t delivering on goals and commitments to analysts and investors. o P&G brands were not delivering good consumer value - Ikea Strategy (consistency) o o Known for its simple product design; its massive, friendly retail stores; and its very low prices (which have dropped an average of 2 to 3 percent each year since 2000), the company has built a remarkable level of customer loyalty around the world. - Digital Camera Market: Canon vs. Kodak o Canon : looked at their external environment and decided to invest in digital photography  canon has done very well o Kodak : waved and waited for the digital photography  kodak is selling off pieces of their business External Analysis External Analysis (what is it, how to conduct one, general vs. specific environments, benefits and challenges of conducting one) 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 conduct an External Analysis - General Environment o PEST  political, economic, social/demographic, and technological factors o Identifies general trends and changes - Specific environment o Porters 5 Forces analyzes five important sources of competitive pressure and intensity  predicts profitability of the industry  Look for the data, statistics, trends, forecasts, expert opinions, etc PEST forces (elements, impact on business) Political and Legal o Laws and regulations o Taxes o Trade agreements o Political system o Political stability  Government can create incentives, constraints, or support/bail out what we need  Affects uncertainty, risks and costs faces by the firm Example: Describing the relationship between businesses and government for a country  play out the role by putting laws and regulations in place Laws and Regulations - Product labling (English and French, where its made) - Product safty - Minimum wage - Banking industry Taxes - Things that are taxed differently and therefore we behave in different ways - Taxes can attract business (encourage people to not consumer different things  cigarettes) Trade Agreements - Political and economic - Tariff  tax that can make dometic products more attractive o Automobile tariffs on the cars that weren’t made in Canada (Toyota decided to set up manufactures in Canada) Political System - Is the country able to allow businesses to act freely (capitalist) - Less freedom for business (socialist) Political Stability - How stable is the political environment in the country or area Economic - Economic growth  GDP and standard of living - Economic stability  inflation, unemployment - Trade balance  importing vs exporting - National dept government borrowing - Interest rates - Exchange rates  Influence costs, potential sales, financial uncertainty GDP: total value of goods and services produced in a national economy by a given period regardless of where the factors of production are located - Is the economy growing? - GDP is bad because it measures all economic activity which isn’t always good (BP oil spill caused GDP to increase because so much money was spent on it) Inflation and unemployment - Hurt the economies stability - 70 percent of economic growth comes from consumer spending therefore unemployment can harm the economy because people will not have the resources to purchase anything Trade - Positive trade balance: trade more than what we import (money is staying within our economy) - Negative trade balance: import more than we export (money will be leaving our economy and going into another’s) Interest Rates - Consumers and businesses are more willing to spend if the interet rates are lower - When interest rates go up we see people holding back from entering into a mortgage because the risk is higher Exchange Rates: - Determine how attractive your products are on the international stage Buying supplies from the US External change  exchange Internal change  how we feel about it - Everything you were buying felt like it was on sale (good news) - Bad for the exports because the customer will not buy from us because our goods are more expensive (artificial advantage --> exchange rates doing) - Tourists: Not as many American tourists because our dollar is higher, Canadians are heading down to the states Social - Customs, values, attitudes and demographic characteristics - Influence customer preferences - Influence worker attitudes and behaviours - Influences standards of business conduct o Ethics, social responsibility, stakeholder management  Affects how we live, work, consume and produce Largely Intangible - Rules, norms, customs, that we hold and they shift and change over time. They influence what we end up buying and not buying o Example: gr 6 teacher used to smoke in the classroom but since habits have changed now we think this is wrong - Demographics is the EXCEPTION: influence customer behaviour - Income levels, age culture - Companies benifited from the green movement o Car industry  hybrid cars that are mindful of fuel effieciency o Solar panels o Toronto changing its waste management o E-books o Oil production o Paper bag companies (plastic to paper) o Plastic water bottles  reusable water bottles Technological - Internal affects buying, selling, communication - Information technologies affects information access, inter-firm cooperation, cycletimes - Computer tech have changed our products and how we design or build them - Not limited to computers and information Consumers have so much data at their finger tips  blessing and a curse because you have more access to competitors information - Firms can cooperate with each other - Cameras, cars, phones have all changed - Technology is changing everything Porter’s Five Forces Tool to analyze competitive situations in an industry - Model helps managers analyze five important sources of competitive pressure and then decide what their competitive strategy should be Suppliers - Fewer SUPPLIES or high switching costs low attractiveness of substitute suppliers, high threat of forward integration meansincreased bargaining power - Bargaining power: relative ability of parties in a situation to exert influence over each other - Use strategic alliance or internal supply In class notes - The power of the supplier than the more attractive it is to you - Not many suppliers gives more power to the suppliers (increased bargaining power over the business buying the supplies) o Example: cell phone providers  since we do not have a lot of options then we have to buy whatever they offer - There is a high cost for switching suppliers (time, new learning, quality may not be good)  bargaining power of supplier will increase business costs - Some companies may start making their resources themselves if they think its crucial and important to their product and the supplier has a high cost for it (buy out supplier, start own company) - If it is too risky or expensive then they start to build an alliance with their supplier Potential Entrants - Can cause big changes - Easy of entry  intense competition - Barriers  capital intensity, technology, know-how, regulatory approval, brand loyalty, access distribution etc. o Example: automobile industry is capital intensive therefore it is hard to enter, home cleaning and lawn care services are relatively easy to enter Substitutes - Other products that have the same criteria as yours - Many substitutes  increased competition - Puts ceiling on price that can be changed - Pressure increases ar price of substitutes and switching costs decline Buyers - Few or concentrated buyers, standardized products, low switching costs, discretionary purchases  Increased bargaining power - Reduces price that you can demand In class notes - We like to have more power than our buyers - Walmart will squeeze you and abuse their power - Standardized (a lot of difference between you and your competitor) - Discretionary do they determine when they will buy your product - If the buyer has more power then we have to keep our prices low (hurts revenue) Rivarly among existing firms - Results in price competition and increased costs - Most powerful of the five forces - Causes o Many competitors of equal size/capability o Growth rate of industry (when this goes down we could be stealing customers) o Consumers switching costs (low switching costs means you are more likely to move) o Products are commodities or are perishable  Power and relevance of a force will vary by industry In class notes - If there is more rivalry then we will have to do more spending to win more of the market Value of the five forces model 1) Predicts industry profitability 2) Helps determine whether a firm should enter a particular industry 3) Helps determine whether and/or how it can carve out an attractive position in that industry Notes on video - Competition is looked at too narrowly, your in a fight for profits btween all your competitors - Airlines o Rivalry very intense, all on price, cannot get customer to wait o Entry many airlines even thou profitability is low o Buyers o Substitue getting on a train, going by car o Supplier unionized labour, labour can shut you down - Positive sum competition companies can compete on different attributes that are relative to their customers’ needs o Expand the pie instead of going in a head to head battle with your competitors - Looking at the industry analysis is the bases of business strategy - Five forces give you the tools for understanding the dynamics and how you can find a spot where you can command a profit - How can strategy become a way of day to day life o Managers need to understand the 5 forces o Helps people step back from the little details to see what is really important - Number on purpose of strategy is to see that everyone is working towards the same goal Benefits of an External Analysis Challenges of an external Analysis Makes managers proactive Forecasts and trend analyses inperfect Provides information used in planning Rapidly changing environment hard to keep up with Helps organization get needed Time consuming resources Helps organization cope with uncertainty Improves consistency and performance Entrepreneurship (what is it, what are the key elemenets and how does the entr process work) New venture: recently formed commercial organization that sells goods and services Entrepreneurship: identifying an opportunity and accessing resources to capitalize on it Small business: owner managed, not dominant in the market (less than 100 employees) - Contribute >26% annually to GDP - Provide more jobs than large businesses - New ventures lead in new products and services Entrepreneurship process - Influenced by PEST - Successful only when the Entrepreneuropportunityresources MATCH - Begins with an entrepreneur identifying an opportunity Oppurtunity recognition - Idea generation o Often paradigms shifts (thought process, thinking within the box) o Originate in events relating to work or daily life, hobbies, chance happening - Screening o Weed out bad ideas o Saves time, money o Ensures you have a viable idea with a competitive advantage Three Step Screening Process Screening for viability and comparative advantage 1) Idea creates or adds value for the customer o Solves a problem, meets a need o Customer willing to pay for it GREEN GYM: - Screening: people want to be more active (social trend), people want to be more environmentally friendly, safety standards have been increased, meets children and parents demand 2) Idea provides a competitive advantage that can be sustained o Product is unique in a valuebale way/better than others  How is it different and better from excisting products and subsitutes?  Are the differences valuable to customers  Isit something that existing firms can easily do, or may wanna imitate  Can the idea be protected legally - GREEN GYM - Unique in a valuable way: they have applied safety standards that are not met in other excersice equiptment in his market, different than a gym, in canada it may not be used so much in the winter but in the US it could work and in other parts of the world 3) The idea is marketable and financially viable o Are their enough customers who are willing to buy it? What is the market demand likely to be? o Who are the key competitors and what are the forces that affect profitability o Is the market growing, shrinking, concentrared, fragmented? Exit cost: how much we would have to sacrifice if it does not work out? - GREEN GYM: - Marketability: very strong in his field, very knowledgeable about his product, knows his idea very well How to screen Use PEST analysis to assess Use Five Forces to Use Five Forces, PEST, and environment – is it determine ease of entry and market exploration to supportive of your idea? profitability of industry ensure uniqueness of idea Use research of market Identify and discuss how key (library databases) to trends in the environment evaluate how big your Research expert opinions in and the industry affect your market is and whether it is the industry idea, i.e. represent an growing, shrinking, or opportunity for you stagnant Evaluating your business idea Criterion Highest Potential Lowest Potential Product Changes way people live, work, learn, Incremental improvement etc.; recurring revenue only; one-time revenue Customers Reachable Loyal to others; unreachable Value added High Low; minimal market impact Market structure Imperfect; fragmented competition Highly concentrated, mature Market Large and growing Small and/or declining Incumbents’ Production At or near full capacity Undercapacity capacity Barriers to entry Low, competition slow or napping, High, competition stiff, can’t have or can gain protection, have gain protection, hard to tap needed networks needed networks Developing the Oppurtunity - Business concepts often change from the original  Incorporate information and research  Incorporate experience and customer feedback - Once business concept finalized, move to business plan  Concepts can be tweaked as the business plan evolves Accessing Resources - Bootstrapping doing more with less  Make do with as few resources as possible  Use other peoples resources where possible  Find/use free stuff - Financial resources  dept vs equity financing  Dept= interest and control - Sources – financial instiutions, suppliers - Equity  no interest, less control  Sources – savings, love money, private investors, venture capitalists Social Entrepreneurs Society’s change agents: creators of innovations that disrupt the status quo and transform our world for the better Key Facets of Social Entrepreneurs - Help overcome market inequalities/failures  HOW: entrepreneurs seek innovative solutions to the world’s toughest problems  Often in areas of education, health and environment - Social value is 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 proposition through the legal business form (not for profit, for profit, charity)  Accountability to community stakeholders - Rather than only on private investor  Importance of bootstrapping In class notes - Innovation is trying to address market failures  Many people cannot afford some of their basic needs  Clean water, health care, education  Groups of individuals cannot afford or they do not have the power to change their circumstances - Key difference  Traditional business  profit is the key focus  Social values entrepreneurs goal is to create and achieve their social objectives (serve people in need of basic products, unable to afford) while trying to make profit Example of Social Entrepreneur - Professor Muhammad Yunus: Grameen bank  On the hour : - Grameen – providing (micro-credit) loans to women in impoverished areas of rural Bangladesh - Unique: these people did not have access to reasonable small loans - Social Value: women are able to invest in children’s education, building their own homes etc. - Self-sustaining: loans are repaid, and money reused - capital given to other members Partnership with Danone: Example #2: • Greg Overholt: Students Offering Support (SOS) (p.
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