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BU111
Combining fall 2014 & winter 2015 BU111 —kimy
External Analysis
Critical Success Factors
Every organization has to achieve these factors for success
Looking at: What, Why, Relation
1. Achieving Financial Performance
to be profitable, both financially and competitively… this is appealing for customers from an investment
perspective. (it is connected to all of the other success factors because they impact the efficiency and
effectiveness of how the organization functions, and therefore its ability to generate revenues or keep
expenses low)
2. Meeting Customer’s needs
customer satisfaction. Know what your customer wants/needs and be understanding. A loss of one customer
is a loss of their friends as well.
3. Building Quality Products and Services
this factor meets customer expectations and beats competitors. If the quality of your product or service is
good this makes the customer happy which ultimately leads to achieving financial performance. (connect to
the financial performance through revenue and expenses, meeting customer needs)
4. Encouraging Innovation and Creativity
Sets your apart from competition and creates new needs for customers. With consistent innovations you are
in the news which is a free form of advertising and rise in stock value. (innovation are linked to meeting
customer needs: lead to identifying new needs or new ways to meet them. Linked to producing quality
products & services: new ways of producing can be identified that effectiveness in production processes. With
financial performance: when the firm identifies new markets or new activities or strategies that can generate
revenues)
5. Gaining Employee Commitment
With dedicated employees comes harder work and better results and productivity. Since employees are the
ones that deal with customers one on one this can make or break your customer relations. (lined customers
need: will treat customers the way they would want to be treated and take personal pride in customer
satisfaction. Financial performance: increase productivity and efficiency and increase expenses)
6. Creating a distinctive Competitive Advantage -;
unique, different, valuable…a unique aspect which sets your identity and sets you apart from the competition.
(F.P: effect the prices that the organization can charge for its goods and services; allow it to stand apart from
the competition, and increase F.P. through production efficiencies or increased revenues.)
Vision:(目标是什么)
1. Communicates purpose and values
2. Should be:
a) Memorable and engaging
b) Aligned with organization values and culture
3. Why is it important?
a) Guides strategy by keeping focus on desired future.
b) Where do we aim to be? Future-oriented
Mission （采取什么行动达成目标）
1. Talks about HOW you will achieve vision-present to future
2. Guides strategy by listing broad goals and acceptable approaches; keeps us in track
3. Effective mission statement answers:
a) What do we do? Who do we do it for? Why do we do what we do? How do we do it? What makes us
different/ what is the benefit?
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Diamond-E Framework
identifies key variables to be considered in strategic analysis
Management
Management can be bias depending on the leader (biases of management), for example one may be for taking risk
while another may be more conservative. This has an impact on strategic uses as it can vary from using one
strategy from another.
Organization
Consists of culture, leadership, structure, and capabilities. Determines what kind of strategy you can pursue.
Do we have the necessary capabilities, if not can we?
Resources
Consists of financial, capital, and human resources meaning we need money, assets, and labour.
Do we have the necessary resources to execute the strategy?
*capabilities can be influenced by resources
Strategy
Does it match with the Management Preferences? Willing to Change?
Strategy – Environment Linkage (MOST IMPORTANT) （includes the political, economic, social, and
technological elements）
Environment determines what opportunities and threats exist.
The critical linking variable in the model, the bridge with internal and external. Any variable can either drive or
constrain strategy. Each variable related to the rest.
Strategy: what opportunities the business is pursuing. Determines needed resources, organizational capabilities,
and management preferences.
Principal Logic: Consistency or Alignment; Absolute alignment is not realistic.
External Analysis
Look towards the / always, potential opportunities and threats.
Analysing the outside world of trends and economic state to determine opportunities or threats.
Firms face multiple environments:
1. General Environment: affects all businesses
PEST model – considers political, environmental, social/demographic, and technological factors.
Identifies general trends and changes.
2. Specific Environment: affects industry participants
Porter’s Five Forces– analyzes five important sources of competitive pressure and intensity
predicts profitability of industry
Both look for data, statistics, trends, forecasts, expert opinions, etc
PEST – Political-Legal Environment
Elements:
1. Laws, regulation
– Determine what a company can/cannot do.
o E.g. product labelling laws: Canada’s labels have to be both in French and English
– Regulations determined through restrictions.
o E.g. bell could be the only one that could provide home phone service, no competition
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2. Taxes
– Governments need to collect taxes because that’s what enables them to fund programs, pay pensions, build
roads, subsidise education, etc… However taxes can be used by the government to create incentives.
o E.g. tax something higher making it more costly discourages consumers to buy it
– Investor’s perspective: you can lend it to a business or buy stocks. Governments can influence investors to
invest in stocks rather than bonds through income taxes
Capital Gain: selling something you bought previously for a higher price (stocks)
3. Trade Agreements or Conditions
– Why is Toyota located in Cambridge? Why not Japan?
Tariffs. A tax or duty to be paid on a particular class of imports or exports.
– With trade agreements, governments use this to protect their domestic production.
4. Political System
– Capitalism vs. Communism
– Capitalism: no boundaries
– Communism: Restrictions
5. Political Stability
– Determines how much predictability there is
– Businesses want consistency and predictable environments and stabilpity to execute specific strategies
o E.g. Middle East. Very hard to do business there because the economy is so unstable. Hard to survive.
Governments can create incentives, constraints, or support/bail out when needed.
Affects uncertainty, risk, and constraints/costs faced by firms.
PEST- Economic Factors
Influences costs, potential sales, and financial uncertainty
Elements
1. Economic growth – aggregate output, GDP, and standard of living
– How fast is it growing? And how much?
– Growing economy: more money in consumer’s pockets therefore more money being spent
– Aggregate output: total quantity of goods produced in any country
– GDP: gross domestic product. Measures the total value of product and services produced.
– When aggregate output and GDP is increasing, your standard of living is increasing.
2. Trade balance – importing vs. Exporting
– Always want to be exporting more than importing so that more money is flowing in than flowing out.
– Foreign money to help growth, your aggregate output and GDP goes up therefore your standard of living
increases.
3. National debt – government borrowing
– Borrowing differences of budget deficits to make ends meet and to pay for all our expenses
– Business don’t like when this happens because then they are competing with the government on borrowing
money and it also makes the economy unstable
–
4. Economic stability – inflation
– Inflation: increases in prices
– Therefore, spending power goes down, affordability decreases
– Business perspective: costs go up and revenues go down because consumers can’t afford to buy
– As long as inflation increases at a constant rate it gives consumers and businesses to keep up with it
5. Interest rates – time value of money
– Higher interest rates mean less buying
– When interest goes down people spend more as they can fund purchases
6. Exchange rates
– Foreign consumers are unhappy when Canadian dollar is high, affects the competition abroad
PEST- Social Factors
Elements
1. Customs, values, attitudes, and demographic characteristics
2. Influences consumer preferences
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3. Influences worker attitudes and behaviours
4. Influences standards of business conduct
5. Ethics, social responsibility, stakeholder management
Affects how we live, work, consume, and produce
PEST- Technological Factors
Elements
1. Internet affects buying, selling, communication
2. Information technologies affects information access, inter-firm cooperation, cycle times
3. Computer technologies have changed our products and how we design and build
4. Not limited to computers and information
Affects what we produce/what it can do, affects how we produce and how we sell
Challenge with Technology: demands constant learning and scanning
PEST
Three most important issues facing Canadian Business:
1. The value of the Canadian dollar
o If the Canadian dollar’s strong your imports are cheaper
2. A skilled labour shortage
o Educated population but still have a shortage, some due to immigration
3. The natural/physical environment
o Canada cares for the environment which influences companies to operate in different ways
Questions to answer from PEST
1. Do the economic conditions support my business?
2. Does it make sense? Is it appropriate to launch with the economic conditions?
3. What legal protection or laws do I have to consider?
4. Are there regulations? Patents? Etc…
5. What demographic and social trends affect my business and how?
6. What are current fads and trends that can benefit you
7. What technological forces affect me now and in the future? How do they assist of constrain?
8. How do they help me?
9. What opportunities or threats does the environment possess?
10. Go into detail, WHY … and in what way. So what?
Porters Five Forces
Five different sources that directly affect the profitability of an industry
1. Each firm operates in a specific industry; each industry has different characteristics
2. Intensity of competition has a big influence on how the company operates and how profitable the
industry can be
3. Porter’s five forces is one of the most popular tools to analyze the competitive environment and decide
on strategy
Porter’s Five Forces: Breakdown
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1. Suppliers: those businesses that you do business with in order to buy critical inputs (e.g. computer chip
manufacturer is a critical supplier for computer hardware).
b. Fewer suppliers or high switching costs (signed contract, fee to cancel the contract and switch
suppliers) means increased bargaining power
c. More choice = more bargaining power, vice versa
d. Bargaining power increases costs of inputs
e. Use strategic alliance or internal supply
2 . Rivalry 竞争，对抗: rivalry among existing firms= who sells
– Result in price competition, lower volume, increased costs.
4. Potential Entrants(新会员，新竞争者): what new competition may come into the market?
a. Can cause big changes with new ideas
b. Ease of entry means intense competition
i. Regulations are used to slow this down, to protect your game
c. Barriers （屏障）= capital intensity, technology, know-how, regulatory approval, brand loyalty,
etc…
i. Capital intensity（资本密集度）: building a big plant gets you into that market, forces
your competition to build a big plant too. We don’t see new car manufacturer everyday
due to capital intensity.
ii. Technology: sometimes complex, a technology that can be patented（授权）.
Guarantees them 17 or 18 years of manufacturing the product themselves (without
competition). Government does this to create incentive for the manufacturers to share
their product/recipe.
iii. Know how: if you can’t protect it by patenting sometimes your expertise is so difficult
to imitate that that itself is a barrier
iv. Regulatory Approval: Licenses
v. Brand Loyalty: Reputation
5. Substitutes: those products or services that provide a similar function (e.g. glasses substitute contact
lenses)
a. Many substitutes = more competition as there are more alternatives
b. Puts ceiling on price that can be charged
c. Pressure increases as price of substitutes and switching costs decline
i. Easier for people to switch substitutes when it’s low (e.g. butter to margarine)
ii. How do you deal with this? Convince consumers your product has no substitute,
Lock in customers, make switching costs high.
6. Buyers: buyers of your product negotiate the price, this affects the revenues.
a. Few or concentrated buyers, standardized produces, low switching costs ,discretionary
purchases 自由裁量权 = increased bargaining power 讨价还价
i. Few buyers: If there are less buyers, suppliers will accept bargaining so they could win
you over
ii. Concentrated buyers: high volumes and customer loyalty will accept bargaining as big
significant buyers have that power (e.g., Wal-Mart)
iii. Standardized products: lots of substitutes, only distinguishing feature is
price…therefore lower the price to stand out
iv. Low switching costs: if buyers have the ease of switching products, they then have
bargaining power
v. Discretionary purchases: if the product is “optional” and if they don’t really WANT the
product then the buyers have the bargaining power
b. All these factors reduce price that you can demand
*Businesses need to make their product “unique” and consider low switching costs to fight bargaining power
– Industry Competitors: rivalry among existing firms
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c. Start with rivalry -> has biggest impact on profitability.
i. Competition great for consumers, bad for companies
d. Results in price completion and increased costs
e. Most powerful of five forces
f. Causes:
i. Many competitors of equal/size capability
ii. Growth rate of industry
1. if the growth rate is high, good for businesses as there will be a demand surplus
iii. Consumers switching costs
iv. Products are commodities or are perishable
1. Products that we consider to be the same, we buy the cheaper one (e.g. Gas or Milk)
2. Which ones are on sale?
3. Perishable: expiry date, if it’s expired it has no value
g. Caveat: power and relevance of a force will vary by industry
i. This depends on the industry you are examining, no two industries are alike
Value of Five Forces Model
The greater the competition the lower the prices go
Four other impacts that affect profitability: 1. Suppliers 2. Potential entrants 3. Substitutes 4. Buyers
7. Predicts industry profitability
8. Helps determine whether a firm should enter a particular industry
a. Is it worth entering this industry? Should I chase another opportunity?
9. Helps determine whether and/or how it can carve out an attractive position in that industry
a. Allowing us to charge a higher price with our unique attractive attribute
Video Notes
10. Five competitive forces start with the notion that competition is looked to narrowly
11. Shows that you have to fight with profits with a broader set of competitors
12. Use the Porter forces to apply to every industry
a. What are the trends to change the game on the industry?
b. What are the constraints?
13. E.g. Airlines
a. Least profitable industries
b. Nature of rivalry is intense, many competitors
i. Cheaper flights, new airlines, one straight flight, connecting flights etc…
14. How can I position myself to profit from these forces
15. These concepts can be applied to any economy, powerful framework… it allows you to focus on the
underlying concepts
16. There’s a lot of confusion and complexity when applying the framework,
a. E.g. rivalry… how do we understand when it’s positive? Or negative?
17. If this is the way competition works, what do you do about it?
a. Expanding, new innovations, etc… rather than creating a battle with a rival
18. Industry analysis is the starting discipline in any strategy planning and understanding the industry
19. Five forces give you the tools to understand the dynamics and how do you position yourself to find your
spot in that industry to command given the other forces
20. Everyone involved in the strategy should be aware of the strategy, and maybe if your competitor knows
your unique attribute they’ll choose a different attribute for themselves
New Venture
1. Is this industry a realistic place for a new venture to enter? Is it worth my time and money? If yes, then…
2. Can we do a better job that incumbents at avoiding or diminishing factors that suppress industry
profitability?
3. Is there a unique position we can pursue?
4. Is there a superior business model that incumbents would find hard to duplicate?
Sources of Information
21. Library Databases
a. Standard and Poors net advantage
b. GMID
c. Data Monitor
d. FPInfomart
Benefits of External Analysis
22. Makes managers proactive
a. You can anticipate opportunities, challenges, threats
23. Provides information used in planning
24. Helps organization get needed resources
25. Helps organization cope with uncertainty
a. Plans will never go as expected because the environment keeps changing
b. Although we can’t anticipate everything, we can try anticipate the more likely things that will
happen
26. Improves consistency and performance
a. Strategy is consistent with internal qualities of the organization
Challenges of an External Analysis
27. Rapidly changing environment – hard to keep up with
a. This will vary depending what industry you’re in
28. Time consuming
