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BU111 Midterm Review.docx

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Leanne Hagarty

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. Business Model  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 • Profits • 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 needs. 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 competitions.  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.  Desire  Approaches Organization  Structure (Centralized, Decentralized)  Capabilities  Culture  Leadership Resources  Human  Capital  Cash 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 the two. Strategy-Environmental Linkage • Strategy: what opportunities the business is pursuing – determines needed resources, organizational capabilities, and management preferences • 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 Principle Logic • Importance of Consistency between strategy and environment. Proctor & Gamble  Misaligned.  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. IKEA  Saw a need for decently built, and affordable furniture. Aligned the environment well. FOCUS FIRST ON THE ENVIRONEMENT AND STRATEGY External Analysis 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 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. Political-Legal Elements:  Laws, regulations  Taxes  Trade agreements or conditions  Political system  Political stability 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 country.  Governments can place tariffs to protect their domestic manufacturers.  More stable government is more attractive to businesses as rules will stay the same. Economic Elements: • 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 Venture)  National debt is problematic. More debt means paying off interest instead of paying for education, etc.  Higher exchange rates make your stock look unattractive. Social Elements: • 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 Elements:  Internet affects buying, selling, communication  Information technologies affects 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 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 Suppliers: • 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. Potential Entrants  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. Substitutes  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 Buyers • 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 – Causes: • 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 choices. (^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 on it. Entrepreneurship drives the creation of new venture and small businesses. Process: • Influenced by PEST • Successful only when entrepreneur, opportunity, and resources match. • Begins with entrepreneur identifying an opportunity then accessing resources. Idea Generation • Often paradigm shifts • Usually occur during work or life experiences. Screening • 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 imitate? • Can the idea be protected legally? 3. The idea is marketable and financially viable
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