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BU111 Mid-Term Study Notes.docx

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Leanne Hagarty

Business Mid-Term Study Notes Relationship between Firm and External Environment: Critical Success Factors:  Achieving financial performance o Combination of profits and cash flow (need good cash flow) o Need this to make business grow o Avoid bankruptcy – stay in business o However, companies that solely focus on financial performance and do not consider other factors are not successful  Meeting customer needs o Keeping customers happy result in increased sales – word- of-mouth marketing  Will tell others about their experience – people will tell more people if they are dissatisfied with a product/company (not meeting their needs may cause bad reputation and decreased sales) o Anticipate, understand, and deliver on customer needs  Doing this will get you ahead of the game o Creates loyalty which leads to increased revenue  Building Quality Products and Services o Customers want to be able to rely on a product working o Building quality products does not always mean the highest quality – need to create products with the quality wanted by the target market o If a product meets or exceeds the customer‟s expectations, you will gain trust  Encouraging innovation and creativity o Expectations are continuously rising, so companies cannot sit still o Need to continue to innovate products/services to keep up with the changing customer needs and expectations  Gaining employee commitment o Employees able to achieve personal goals while also achieving business goals  Will result in happy employees  If the employee feels appreciated, then they will most likely perform better (deliver and execute to the best of abilities) o If employee is not committed, it will result in poor quality products because they will not care if the product is not perfect  Will create poor customer experience – likely lose sales o Employees who are committed take better care of customers  Creating a distinct competitive advantage o Need a unique difference that customers value and care about o Can build your strategy around competitive advantage o Slippery slope to compete solely on price (Price War)  If you create a product that has a distinct difference from other products, then you will avoid a price war (where companies sell the same product and lower their prices to gain an advantage over the others) **Figure out connections to each other** Diamond-E Model:  Identifies key variables to be considered in strategic analysis  All of these variables can either help or hurt a business Key Variables:  Management Preferences o Have biases and desires o Some are risk-takers, others are not o Influences internal organization  Organization o Structures, culture, leadership style  Resources o Human resources o Capital resources o Financial resources  Strategy o The opportunities the business is pursuing o What you will and will not pursue o What is your plan for competing o Should dictate internal elements o Critical Link – Connects inside and outside of organization (has to fit both)  Focus first on getting strategy to match external environment and then tie in internal components o Principle Logic = Goal  Environment (**Is this a variable in the model?**) o External factors Impact of Internal Variables on Strategy:  Any variable can either drive or constrain strategy  **How do internal variables impact strategy?** Principle Logic:  Importance of consistency or alignment among variables o Note: Absolute alignment is not realistic  First deal with strategy-environmental linkage  Assess forces at work and their implications  Examples: o P & G Strategy (Inconsistency)  Strategy was to create a whole new line of products, but resources depleted – consumers were not buying products  Read environment too optimistically (poor management strategy – manager fired)  New manager retracted old manager‟s poor decisions and rebuilt company o Kodak vs. Cannon  Cannon invested in digital camera technology (sales increased dramatically)  Risk paid off  Kodak did not want to take the risk so they waited a while before getting into digital camera technology  Lost a lot of their market share because of the delay  Very important to read environment when making business decisions o IKEA External Analysis: What is it?  Process of scanning and evaluating the external environment  Make meaning of trends for businesses o How managers determine opportunities (positive external trends or changes) and threats (negative external trends and changes) o Why do we care about the information?  Don‟t just focus on today and the past, but try to get a grasp of what is happening next (focus on the future as well!) o Difficult because things are changing so rapidly  Firms face multiple environments: o General Environment  Affects all businesses  Uses PEST model – sort into categories and organize thoughts  Identifies trends and changes o Specific Environment  Affects industry participants  Uses Porter‟s 5 Forces – analyze five important sources of competitive pressure and intensity; predicts profitability of industry  Breaks down key forces that occur within specific industries  Look for data, statistics, trends, forecasts, and expert opinions Benefits of Conducting External Analysis Challenges of Conducting External Analysis  Makes managers proactive  Time Consuming  Provides information used in planning  Forecast and trend analysis are imperfect  Helps organization get needed resources  Rapidly changing environment hard  Helps organizations cope with to keep up with uncertainty  Improves consistency and performance PEST Factors: Political-Legal:  In general, the relationship between government and businesses Elements:  Laws, regulations o Product labelling (English/French, where it‟s made) o Product Safety o Minimum Wage o Number of competitors allowed per industry (Ex. Banking is regulated) o Putting incentives/disincentives into place  Taxes o Encourage/discourage certain behaviours o Applied to businesses o Support strategic policy (in terms of government)  Trade Agreements or conditions o Tariffs – make domestic products more attractive (Ex. Charge tax on foreign cars to attract customers to buy Canadian-made cars)  To avoid this, Japan built a manufacturing plant in Canada – therefore, the tariffs Canada charges attracts foreign businesses to move to here  Political system  Political stability o How much risk is there in a political structure? o Difficult to know what is coming next in countries that are politically unstable  Will the rules change?  Very risky Impact on Business:  Government can create incentives, constraints, or support/bail out when needed  Affects uncertainty, risk, and costs faced by firm Example:  Junk Food Tax (how would this impact businesses?) o Junk Food Industry = Threat o Food Retailer = Opportunity and Threat Economic: Elements:  Economic growth – GDP and standard of living  Economic stability – inflation, unemployment o Is it predictable? Is there a trend?  Trade Balance – Importing vs. Exporting o Are we selling more goods than we bring in? o Canada = exporting nation (this is a good thing!)  Money coming into country – trade surplus  National debt – Government borrowing o Government in competition with businesses to borrow money o May be harder for businesses to get loans  Interest Rates o Low interest rates – more willingness to spend money  Exchange Rates o Determine how attractive products are on an international scale o Ex. If Canadian dollar is high, it is a threat to Canadian businesses and exporters, but a good thing for importers Impact on Business:  Influences costs, potential sales, and financial uncertainty Social: Elements:  Customs, values, attitudes, demographic characteristics o Shift and change over time o Affect what we buy and not buy o Demographics influence customer behaviour o Influence work relationships o Need to be sensitive of other cultures  Ex. Do not sell hamburgers in a country that does not eat beef o Ex. Attitude shift – workers are becoming more loyal to themselves – more willing to change jobs o Ex. Attitude shift – Teacher‟s used to smoke in classrooms, and now that is against the law  Influences customer preferences  Influences worker attitudes and behaviours  Influences standards of business conduct o Ethics, social responsibility, stakeholder management  There was a car model that was not built properly (would blow up if crashed) – the company was not legally obliged to change the model or inform customers – Ethical dilemma! Do you recall all of the cars and lose money? Or do you wait until people start dying? Impact on Businesses:  Affects how we live, work, consume, and produce  Companies that benefitted from the Green Movement: o Car Industry o Waste Management o E-Books o Oil Companies (trying to find more efficient ways) o Paper Bag Companies o Waterbottles Technological: Elements:  Internet affects buying, selling, communication o People can shop online now  Information technologies affect information access, inter-firm cooperation, and cycle times o Blessing and a curse o Companies have better access to competitors (but customers do also) o Just-in-time inventory systems – new products in much faster cycles – get products as soon as you need them  Computer technologies have changed our products and how we design and build o Everything happens in a much faster time frame  Not limited to computers and information o Technology is changing every industry  Farming  Cleaning products Impact on Businesses:  Affects what we produce/what it can do  Affects how we produce and how we sell  Demands constant learning and scanning  Location of where you sell your product does not matter as much now because of GPS‟s o People are able to locate your store using GPS navigation Porter’s 5 Forces Model:  Used in marketing a lot  Use this to determine a business‟s attractiveness  Caveat: Power and relevance of a force will vary by industry 1. Suppliers – Companies you purchase critical inputs from (Ex. Computer chip manufacturer is a critical supplier for computer hardware stores) o The lower the power of the suppliers, the more attractive the industry o Fewer suppliers, large-sized suppliers, or high switching costs (Ex. Signed contract, fee to cancel contract and switch suppliers) = Increased Bargaining Power for Seller  Companies not as easily able to bargain with input prices  Pressure on expenses if supplier has high bargaining power  Some companies may decide to make products themselves if suppliers have too much power or control  Some companies will create an alliance with supplier, or buy a portion or all of a supply company o High bargaining power increases costs of inputs o Use strategic alliance or internal supply o High threat of forward integration – means that supplier may become competitor 2. Potential Entrants – Possible new companies entering industry o Can cause big changes – better product, more competition o Ease of entry = more intense competition o Barriers = capital intensity, technology, know-how, regulatory approval, brand loyalty etc. (Existing companies will try to create barriers for other companies wanting to enter industry)  Capital Intensity – Sometimes better for new companies to sell their ideas to existing companies because the companies already in industry are so strong – High capital intensity can scare new companies away  Technology – Sometimes complex, technology can be patented – guarantees companies 17 or 18 years of manufacturing the product themselves (without threat of other companies copying idea). Government does this to create incentive for manufacturers to share their product  Know-How – If you can‟t protect idea by patenting, but your expertise is so difficult to imitate that it acts as a barrier  Regulatory Approval – Laws depicting how many competitors can enter a certain industry  Brand Loyalty – A lot of people do not want to try new brands 3. Substitutes – Those products or services that provide a similar function (Ex. Glasses substitute contact lenses) o Potential for your customers to have their needs met by a different company  Ex. Newspaper Industry being substituted by online sources, TV etc. o Many substitutes = increased competition o Puts ceiling on price that can be charged o Pressure increases on companies as price of substitutes and switching costs decline  Easier/Cheaper for people to switch when it‟s low  How to deal with this? Convince consumers your product has no substitute o Ex. Food and Entertainment Industries  Many substitutes  Companies cannot increase their prices too much because people will switch to substitute company 4. Buyers – Buyers of your product negotiate the price, this affects revenue o Few or concentrated buyers, standardized products, low switching costs, discretionary purchases = Increased Bargaining Power for Buyer  Ex. Sony used to sell products only to the government and they had a lot of control over Sony – Sony was at the mercy of the government‟s decision of whether they wanted to buy something or not o Few Buyers – If there are less buyers, suppliers will accept bargaining in order to win the buyers over o Concentrated Buyers – If there are high volumes and customer loyalty, suppliers will accept bargaining because large companies have that power over suppliers (Ex. Wal-mart) o Standardized Products – Lots of substitutes, only distinguishing feature is price… therefore, companies lower the price to stand out o Low Switching Costs – If buyers have the ease of switching products, then they have high bargaining power o Discretionary Purchases – If the product is “optional” and it they don‟t really WANT the product then the buyers have the bargaining power o If the buyer has more power, the company cannot simply say “Here is our price increase for this year”  Buyers pressure sellers to keep prices low 5. Rivalry Among Existing Firms o Most powerful force – biggest impact on profitability o Pressure to keep prices low (price competition and increased costs)  Competition is great for consumers, but bad for companies o Causes:  Many competitors of equal size/capability  Growth rate of industry  If there is a high growth rate, good for businesses because there will be demand surplus  Consumers‟ switching costs  Ex. If there is a high switching cost, customers are less likely to switch companies  Products are commodities or are perishable  Perishable – Food, clothing going out of style, old car models Value of Five Forces Model:  Predicts industry profitability  Helps determine whether a firm should enter a particular industry o Is it worth entering this industry? Should I chase another opportunity?  Helps determine whether and/or how it can carve out an attractive position in that industry o Allowing us to charge a higher price with our unique attractive attribute Entrepreneurship:  Entrepreneurship is identifying an opportunity and accessing resources to capitalize it  It relates to small businesses and new venture creations because entrepreneurship drives the creation of them Entrepreneurial Process:  Influenced by PEST  Steps: Identify Opportunity, Develop Opportunity, Access Resources  Successful only when entrepreneur, opportunity, and resources match o Entrepreneur brings knowledge, expertise, and managerial value system o Need to have a good idea o The market must be accessible o The resources need to exist and be accessible  An entrepreneur may have a brilliant idea, but if it does not have the skills, expertise, or knowledge to execute the venture, it will fail; or there may not be a very good environment to launch the idea; or cannot acquire the resource to launch venture  Begins with entrepreneur identifying an opportunity and then accessing resources Opportunity Recognition:  Idea Generation o Paradigm shifts o Originate in events relating to work or daily life, hobbies, or sometimes a chance happening  Screening o Weed out bad ideas o Saves time and money o Ensures you have a viable idea with a competitive advantage Three-Step Screening Process:  Screening for Viability and Competitive Advantage – You know you have a good opportunity when… 1. Idea creates or adds value for customer o Solves a problem, meets a need  Can convince or plant a seed in someone‟s head that they need a certain product o Customer willing to pay for it 2. Idea provides a competitive advantage that can be sustained o Product unique in a valuable way/better than others  If you offer almost the exact same thing as others, a price war will often result – zero-sum competition – existing companies who have a lot of money will overpower the new companies  How is it different and better from existing products and substitutes?  Are the differences 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 o Competitive Analysis – 5 Forces o Are there enough customers who are willing to buy it? What is the market demand likely to be? How easy are they to reach? o Who are the key competitors and what are the forces that affect profitability? o Is the market growing, shrinking, concentrated, fragmented?  Growing Market = Easy to get into market  Shrinking Market = High competition  Concentrated Market = Difficult to get into market  Fragmented = Has a lot of smaller companies, not one dominant company – You may not even get noticed  **Safety Point – Does the idea have low exit costs? o Longer time to profitability or greater up-front investment needed = riskier venture Developing the Opportunity:  Business concept often changes from original o Incorporate information and research o Incorporate experience and customer feedback  Once business concept is finalized, move to business plan o Concept will be “tweaked” as business plan evolves Accessing Resources:  Bootstrapping – Doing more with less o Make due with as few resources as possible to uphold business  Often do not have a lot of paying customers o Use other peoples‟ resources where possible o Find/use free stuff  Financial Resources – Debt vs. Equity Financing o Debt = Interest and control  Sources: Financial institutions, suppliers  Advantage to borrowing money is you‟re not using any of your equity  Disadvantage – You have to pay back the money according to the conditions o Equity = No interest, less control  Sources: Savings, love money, private investors, venture capitalists  Advantage:  Disadvantage: Social Entrepreneurship:  Society‟s change agents – creators of innovations that disrupt the status quo and transform our world for the better  Social enterprises: Generate social value while operating with the financial discipline, determination, and innovation of private sector businesses Key Facets of Social Entrepreneurs:  Innovation is still key o Addresses market inqeuaities/failures  Help overcome market inequities/failures o Markets are not perfect – do not address needs of all of society‟s members – sometimes an unfair allocation of goods and services  If a market does not reach all members of society to meet their basic needs, this is where social enterprise comes into play o How to overcome? Entrepreneurs seek innovative solutions to the world‟s toughest problems o Often areas of education, health, and environment  Some people do not have financial needs or political voice/power to demand basic services that they require (Ex. “Stop polluting!”)  Social value as the primary objective o Economic value is a by-product (not end goal) – not as economically quantifiable as traditional companies  However, these companies need to operate in way which they return investments to investors; profits need to stay in the organization, reach what they need to do, and perhaps grow  Have to create economic value/profit in order to accomplish primary goal  Profits still need to be sufficient – this is often challenging and complex for social entrepreneurs (the people who they are trying to serve are not in a good financial condition) o This is the key difference from normal entrepreneurs!  Form of Business can Vary o Isn‟t one particular legal form that social entrepreneurs need to follow when creating business o Not always a charity – can also be “not-for-profit” or “for-profit” o “For-profit” social enterprise will take profit and reinvest in their social issue  Accountability to Community Stakeholders o Traditional business – primary stakeholder = Owners o Social Enterprise – primary stakeholder = The people you are trying to serve (community) o Need to prioritize stakeholders  Results in companies with social missions Traditional Entrepreneurship Social Entrepreneurship  Value defined in dollars  Social Value Proposition – social benefit is primary  Social benefit may be created as by-  Economic wealth = by-product and product of economic value allows for self-sustainability  Serving Markets that can afford the  Target underserved populations – those new product or ser
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