BU111 Midterm Review
TOPICS TO BE COVERED
The business environment is very dynamic and to be great you must adapt effectively.
Models are used in business to show reality yet they simplify it.
Top Management; Thinks about external and internal capabilities when
thinking about critical success factors.
Plan first, organize, direct, and then control.
Critical Success Factors
Achieving financial performance
• Cash Flow (Even though you have profits, you must have the money to pay the
bills; allow customers to pay later)
Meeting customer needs
• High customer satisfaction.
• Up to date in trends.
• Interact with customers and develop relationships.
• Anticipating customer needs and understanding them.
• If you don’t the multiplier effect takes effect. (One person tells 10 others, and so
on) or Recurring revenue when you do meet needs. Building quality products and services
• Should be based on customer needs
• Finding the level of quality your customer expects and delivers on that level
consistently and reliably.
• There are high, medium and low level products as they match the consumers
Encouraging innovation and creativity
• The only way for companies to keep on succeeding you must continue to
improve quality to keep with the market.
• Doesn’t just mean the product improves, such as the supply chain.
Gaining employee commitment
• Affects every other success factor.
• You achieve the other success factors through people.
• Create a culture where the employees are engaged and happy to be there.
• When an employee is committed they take pride in the product and are
encouraged to innovate and better it.
• Committed employees are good financial stewards.
• Your reward system must have a fine line. Not too much but not too little.
Creating a Distinctive Competitive Advantage
Need to make sure that your product is unique and different then the
Must still meet the markets needs.
Ties everything together.
Diamond-E Framework Management Preferences
Managers (Human beings!) make the decisions, not the company.
Biased; a natural tendency in human beings.
Structure (Centralized, Decentralized)
Importance of Strategy
Here’s what were going to do as well as, what were not going to do.
Connects the internal components to the external. Tries to balance between
• Strategy: what opportunities the business is pursuing
– determines needed resources, organizational capabilities, and
• Critical linking variable
• Each variable related to the rest
• Any variable can either drive or constrain strategy
• Principal logic – CONSISTENCY or alignment within the Diamond-E
• First task - deal with strategy-environment linkage
– Assess forces at work and their implications
• Importance of Consistency between strategy and environment.
Proctor & Gamble
He was a new CEO and was more aggressive. He misread the environment in
that he could pump out new products. Resources weren’t there and costs
were too high. Not enough space on shelves.
Saw a need for decently built, and affordable furniture. Aligned the
environment well. FOCUS FIRST ON THE ENVIRONEMENT AND STRATEGY
How to Do an External Analysis
PEST model – considers political, economic, social/demographic, and
Identifies general trends and changes
Porter’s Five Forces - analyzes five important sources of competitive pressure and
intensity; predicts profitability of industry
Look for data, statistics, trends, forecasts, expert opinions, etc.
Trade agreements or conditions
Government can create incentives, constraints, or support/bail out when needed
Affects uncertainty, risk, and costs faced by firm Relationship between business and government
How much influence they have on what and what not they can do in that
Governments can place tariffs to protect their domestic manufacturers.
More stable government is more attractive to businesses as rules will stay
• Economic growth – GDP and standard of living
• Economic stability – inflation, unemployment
• Trade balance – importing vs. exporting
• National debt – government borrowing
• Interest rates
• Exchange rates
Influences costs, potential sales, and financial uncertainty
You prefer slow growth instead of erratic growth (up and down).
Inflation and unemployment affect stability.
70% of spending is consumer based. We rely on the consumer. If inflation
creeps in, it will hurt as well as unemployment. (Think of this in New
National debt is problematic. More debt means paying off interest instead of
paying for education, etc.
Higher exchange rates make your stock look unattractive.
• Customs, values, attitudes, and demographic characteristics
• Influences customer preferences
• Influences worker attitudes and behaviours
• Influences standards of business conduct
• Ethics, social responsibility, stakeholder management
Affects how we live, work, consume and produce
Customs, etc are always changing.
You can get information on demographics, which affect consumer behaviour.
Bribes are illegal in Canada yet in other countries you probably have to have
some funny business to get a deal done. Technological
Internet affects buying, selling, communication
Information technologies affects information access, inter-firm cooperation,
Computer technologies have changed our products and how we design and
Not limited to computers and information
Affects what we produce/what it can do, affects how we produce and how we sell
Demands constant learning and scanning
There’s an obesity of data. It’s a blessing and a curse.
Companies are working more closely with their suppliers and consumers.
Without the information technology this couldn’t happen.
Identify trends and changes
Porters Five Forces
• Fewer suppliers, high switching costs, low attractiveness of substitute suppliers, high threat
of forward integration means = increased bargaining power for supplier Bargaining power increases costs of inputs
Use strategic alliance or internal supply
If you have more relative power then other participants in the industry you’ll
be better off.
Have less power then you do.
If there’s a small amount of suppliers, they have more leverage.
Can cause big changes
Ease of entry = more intense competition
Barriers = capital intensity, technology, know-how, regulatory approval,
brand loyalty, access to distribution etc.
How easy is it for new companies to enter into your industry.
The easier it is, the worse it is for your profit.
Many substitutes (Not your competitors product) = increased competition
Ex: Glasses or laser eye surgery, car or bus
• Puts ceiling on price that can be charged
• Pressure increases as price of substitutes and switching costs decline
• Few or concentrated buyers, standardized products, low switching costs,
discretionary purchases = increased bargaining power for buyer
• Reduces price that you can demand
Rivalry among existing firms
“Nothing focuses the mind better than the constant sight of a competitor who wants to
wipe you off the map.” – Wayne Calloway
– Results in price competition and increased costs
– Most powerful of five forces
• Many competitors of equal size/capability
• Growth rate of industry
• Consumers switching costs
• Products are commodities or are perishable
Caveat: Power and relevance of a force will vary by industry
Porters Five Forces Video
Managers often look at competition too narrowly.
You’re in a fight for profits with a broader extended set of competitors.
Shows the structural competition base.
Where the constraints are that you can relax. Ex: Airline industry (5-star industry – All are strong)
o Rivalry – exclusively on price. Very competitive. Price competition
o A lot of new entrants. Buy a plane or lease a gate.
o Price sensitive
o Suppliers have a lot of clout. Can bargain.
o Substitute of getting on the train or car, etc.
o Labour can literally shut them down. Unions.
Ex: Soft Drinks (0 star industry – None are strong)
Helps you avoid getting tricked by the newest trend.
Zero-sum competition – They get one price
Positive sum competition – More competition and consumers have more
(^Three ways the Five Forces Model is valuable to a firm)
Benefits of External Analysis
• Makes managers proactive
• Provides information in planning
• Helps organization get needed resources
• Helps organization cope with uncertainty
• Improves consistency and performance
Challenges of External Analysis
• Time consuming
• Forecasts and trend analysis imperfect
• Rapidly changing environment Entrepreneurship
Entrepreneurship – identifying an opportunity and accessing the resources to capitalize
Entrepreneurship drives the creation of new venture and small businesses.
• Influenced by PEST
• Successful only when entrepreneur, opportunity, and resources match.
• Begins with entrepreneur identifying an opportunity then accessing
• Often paradigm shifts
• Usually occur during work or life experiences.
• Weeding out bad ideas
• Saves time, and money
• Insures a viable idea with a competitive advantage.
Three-Step Screening Process
Screening for Viability & Competitive Advantage
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 a valuable way/better than others
• How is it different and better from existing products and substitutes?
• Are differences valuable to customers?
• Is it something that existing firms can easily do or may want to
• Can the idea be protected legally?
3. The idea is marketable and financially viable