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Business Midterm Notes.docx

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Wilfrid Laurier University
Roopa Reddy

-1- Business Midterm Study Notes Lecture 1 Critical Success Factors For Business 1) Achieving financial performance a. Profit & cash flow; Survival & growth 2) Meeting customers needs a. Without them no profit! Multiplier effect (customers complain to others & take business elsewhere); retain customer base 3) Building quality products and services a. Not necessarily high quality, but meeting customer expectations; must provide this quality consistently 4) Encouraging innovation and creativity a. Exceeding customer expectations; keeping up with changing expectations and industry trends; possibly exceeding own & competitor products and services 5) Gaining employee commitment a. People are the foundation of the company; need to be committed for the company to succeed; happy employees are productive employees 6) Creating a distinctive competitive advantage a. A unique/different product or service that there is a need for/that is valued by customers Lecture 2 External Analysis is a process of scanning and evaluating the external environment (opportunities and threats) Look for data, statistics, trend forecasts, expert opinions, etc. - General environment: affects all businesses (PEST) - Specific environment: affects industry participants (Porter’s Five Forces) o Opportunities - positive external trends and changes o Threats – negative external trends and changes Diamond-E Framework identifies key variables to be considered in strategic analysis -2- 1) Management preferences 2) Organization 3) Resources 4) Strategy 5) Environment Strategy - Determines what opportunities the business will pursue - Critical link variable in the model - Any other variable can either drive or constrain stratedy - Involves quite a bit of marketing - Determines needed resources, organizational capabilities and management preferences Resources - Capital and human resources Environment - Everything in the external environment Organization - The culture of a company; the type of leadership and capabilities of a company Consistency between the variables is the most important aspect of the model - Absolute alignment is unrealistic o Risk is sometimes necessary o It is the role of senior managers to decide which risks they are willing to live with - The first task is to deal with the strategy-environment linkage PEST Model Political-Legal Environment - Relationship between business and all levels of government - Elements o Laws & regulations (the more regulated an industry is the more difficult it is to operate in) o Taxes (certain businesses get tax breaks, which can be an incentive) o Trade agreements or conditions (ex. NAFTA) o Political system (ex. Capitalism, which supports business more than others) o Political stability - Government can create incentives, constraints, or support/bail out companies when needed - Affects uncertainty, risks, constrains/costs faced by firm Economic Factors - Economic factors can influence costs, potential sales, and financial uncertainty -3- - Elements o Economic growth (aggregate output, GDP, and standard of living) o Trade balance (importing vs. exporting)  Trade surplus is when you have higher exports than imports  Trade deficit is when you have higher imports than exports o National debt (government borrowing)  When governments spend more money than it is bringing in  This means less capital to borrow for businesses, as well as potentially higher taxes and interest rates o Economic stability  Ex. inflation (general rise in prices; power of the dollar decreases)  Difficult to get investors when the dollar in your country is unstable o Interest rates (time value of money)  When you need a loan, low interest rates preferred  When you want to invest or save, high interest rates preferred o Exchange rates  Strong dollar – imports more attractive  Weak dollar – exports more attractive Social Factors - Elements o Customs, values, attitudes that people have and demographic characteristics  Influences customer preferences  Influences worker attitudes and behaviours  Influences standards of business conduct (ethics, social responsibility, stakeholder management, etc.) o Affects how we live, work, consume and produce Technological Factors - Elements o Internet affects buying, selling, and communications (essentially the entire face of business) o Information technologies affect information aces, inter-firm cooperation and cycle times  Computer technologies have changed how we design and build  Technological factors are not limited to computers and information o Affects what we produce/what it can do, affects how we produce and how we sell o Technological factors demand constant learning and scanning Three Key Issues Facing Canadian Business 1) The value of the Canadian Dollar 2) Skilled labour shortage 3) The natural/physical environment -4- Porter’s Five Competitive Forces Competitive analysis and interpreting potential profitability - Rivalry: who’s already in the industry and how intense the competition is between competitors - Suppliers: organizations of inputs - Potential entrants: new entrants in the industry - Buyers: customers or consumers - Substitutes: different products that people could purchase other than what you have to sell 1. Rivalry Among Existing Firms - Results in price competition and increased costs - Most powerful of five forces! - Causes o Many competitors of equal size/capability o Growth rate of industry (the more the industry grows, the less rivalry there is) o Consumers switching costs (consumer power) o Products are commodities or they are perishable Caveat: relevance and strength of a force will vary by industry 2. Suppliers - Fewer suppliers or high switching costs means increased bargaining power o Bargaining power increases costs of inputs - Use strategic alliances or internal supplies 3. Potential Entrants - Can cause big changes - Ease of entry means more intense competition - Barriers: capital intensity, technology, know-how, regulatory approval, brand loyalty, etc. 4. Substitutes -5- - Many substitutes means increased competition - Puts ceiling on price that can be charged - Pressure increases as price of substitutes and switching costs decline 5. Buyers - Few or concentrated buyers, standardized products, low switching costs and discretionary purchases (ex. jewelry; not bread and eggs) means increased bargaining power - Reduced price that you can demand Values of Five Forces Model - Predicts industry profitability - Helps determine whether a firm should enter a particular industry - Helps determine whether/how it can carve out an attractive position in that industry Benefits of External Analysis - Makes managers proactive - Provides information used in planning - Helps organization get needed resources and cope with uncertainty - Improves consistency and performance Challenges of External Analysis - Rapidly changing environment - Time consuming - Imperfect forecasts and trend analysis Lecture 3 New Venture: recently formed commercial organization that sells goods/services - New venture = outcome - Entrepreneurship = process Entrepreneurship: identifying and opportunity and assessing resources to capitalize on it Small business: owner-managed, non-dominant market, less than 100 employees Entrepreneurial Process - Influenced by PEST - Successful only when entrepreneur, opportunity and resources match - Begins with entrepreneur identifying an opportunity then assessing resources Opportunity Recognition - Idea generation o Often are related to work/hobbies; chance happenings - Screening -6- o Weeding out bad ideas  Ensures you have a viable idea with a competitive advantage Screening for Viability and Competitive Advantage You know you have a good opportunity when: 1. Idea creates or adds value for customer a. It solves a problem and/or meets a need b. Customers are willing to pay for it 2. Idea provides a competitive advantage that can be sustained a. Product is unique in a valuable way/better than others i. Differences must be valuable to customers ii. Can it be protected legally? iii. It is easy for existing firms to imitate? 3. The idea is marketable and financially viable a. High market demand (enough customers willing to buy it) b. Who are key competitors and what forces affect profitability? c. Is the market growing, shrinking, concentrated (dominated by few large players) or fragmented (many small companies)? Safety point: Does the idea have low exit costs? - Longer time to profitability or greater up-front investment needed makes for a riskier venture How to Screen - Use PEST analysis to assess the environment – is it supportive of your idea? - Use Five Competitive Forces to determine ease of entry and profitability of industry o Use PEST, Five Forces and market exploration to ensure uniqueness of idea - Use market research to evaluate how big your market is and whether it is shrinking, growing or stagnant - Research expert opinions in the industry - Identify and discuss how key trends in the environment and the industry affect your idea Evaluating Business Opportunity Criterion Highest Potential Lowest Potential Product Changes way people live, work, Incremental improvement; one- learn, etc; recurring revenue time revenue Customers Reachable Loyal to others; unreachable Value added High Low; minimal market impact Market Structure Imperfect; fragmented Highly concentrated; mature competition Market Large and growing Small and/or declining Supplier capacity At or near full capacity Under-capacity Barriers to entry Low, competition slow, have or caHigh, competition stiff, can’t gain protection, have needed networks protection, hard to tap needed networks -7- Developing Opportunity - Business concept often changes from original o Incorporate information and research o Incorporate experience and customer feedback - Once business concept finalized, move to business plan o Concept will be ‘tweaked’ as business plan evolves Assessing Resources - Bootstrapping – doing more with less o Make due with as few resources as possible at start up o Use other people resources where possible o Find/use free stuff - Financial resources – Debt vs. Equity financing o Debt = interest and control (money borrowed)  Sources – financial institutions, suppliers o Equity = not paying interest, but less control (giving away part ownership of your company)  Sources – saving, love money (friends, family), private investors, venture capitalists Key Facets of Social Entrepreneurship - Entrepreneurs seeking innovative solutions to some of the worlds toughest problems (ex. poverty) - On a spectrum between non-profit and for-profit organizations - Typically accountable to community stake holders rather than private investors - Importance of social capital (networks your form, cooperation between people, partnerships and trust) o Social capital is hard to define, not as tangible as financial capital If you invest in a social entrepreneur you get your money back but typically no interest (doing a good deed) - It is not charity - The additional profits made, following the investment return, get recycled in the business to continue helping the cause Social Entrepreneur vs. Traditional Entrepreneur - Similarity: must be unique and valuable - Difference: value is defined as socially valuable, not valued in dollars - Similarity: must be financially viable - Difference: must be self-sustained rather than earning a high net profit Lecture 4 Ethics - Individual standards/beliefs regarding what is right and wrong or good and bad -8- o Ethics is not the same thing as just being legal (something can be legal but not ethical) Business of Managerial Ethics - Standards of behaviour that guide individual managers in their work Behaviour Toward Employees - Hiring and firing, wages, work conditions, privacy and respect o Ex. Don’t hire and fire someone based on their religion/ethnicity etc. Behaviour Toward Organization - Conflict of interest, confidentiality and honesty Assessing Ethical Behaviour 1. Gathering Facts 2. Analyze situation a. Utilitarian Approach i. How does it affect
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