f12 course and enviro models student version
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BU 111: Fall 2012
Course Model &Environmental Analysis Models
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Opening Thoughts
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
Charles Darwin
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Learning Objectives
• Understand the relationship between the firm and its external environment– Course model– Diamond-E model
• Describe what an external analysis is• Explain how to do an external analysis– PEST factors– Porter’s five forces model– Data sources
• Understand the benefits and challenges of doing an external analysis
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Critical Success Factors
Stakeholders
Top Management
Vision
Strategy
Mission
Middle Management
First-Line Management
Planning Organizing
DirectingControlling
EXTERNAL
INTE
RNAL
Economic
Social
Technological
Political
Marketing
Finance
Human Resources
Operations
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Critical Success Factors Critical Success Factors
• Achieving financial performance• Meeting customer needs• Building quality products and services• Encouraging innovation and creativity• Gaining employee commitment• Creating a distinctive competitive advantage
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Diamond-E Framework
• Identifies key variables to be considered in strategic analysis
Management Preferences
Organization
Resources
Strategy Environment
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Strategy-Environment 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• First task - deal with strategy-environment linkage– Assess forces at work and their implications
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Principal Logic
• Importance of Consistency between variables
• Examples: – P&G Strategy in 2000 (inconsistency)– Ikea Strategy (consistency)
• Note: Absolute alignment is not realistic
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Strategy-Environment Linkage
• First task: Deal with strategy-environment linkage• Assess forces at work and their implications
Examples:- Digital Camera Market: Canon vs. Kodak
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Quick Review: Course Model & Diamond-E
• What factors make up the external environment?
• What are the components of the Diamond-E model?
-What is the most important linkage within it?
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External analysis
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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.
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PEST - Political-Legal
Elements:• Laws, regulations • Taxes• Trade agreements or conditions• Political system• Political stabilityGovernment can create incentives, constraints, or support/bail
out when neededAffects uncertainty, risk, and costs faced by firm
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PEST – Economic
Elements:• Economic growth – GDP and standard of living• Economic stability – inflation, unemployment &&• Trade balance – importing vs. exporting• National debt – government borrowing• Interest rates - the higher, the less ppl buy• Exchange ratesInfluences costs, potential sales, and financial uncertainty
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PEST – 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
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PEST – 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 informationAffects what we produce/what it can do, affects how we produce
and how we sellDemands constant learning and scanning
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Questions to answer from PEST
• Do the economic conditions support my business?• What legal protection do I have or laws do I have to
consider?• What demographic and social trends affect my
business and how?• What technological forces affect me now and in the
future? How do they assist or constrain? • What opportunities or threats does the environment
possess?
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Porter’s Five Forces
POTENTIAL ENTRANTS
SUBSTITUTES
BUYERSSUPPLIERS
INDUSTRY COMPETITORS
Rivalry AmongExisting Firms
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Porter’s Five Forces
• Suppliers – Fewer suppliers, high switching costs, low attractiveness of
substitute suppliers, high threat of forward integration means = increased bargaining power (ex. Our choice of only bell or rogers)
– Bargaining power increases costs of inputs– Use strategic alliance or internal supply
• Potential Entrants– Can cause big changes– Ease of entry = more intense competition– Barriers = capital intensity, technology, know-how/who,
regulatory approval, brand loyalty etc.
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Porter’s Five Forces
• Substitutes– Many substitutes = increased competition– Puts ceiling on price that can be charged– Pressure increases as price of substitutes and switching
costs decline
• Buyers perspective– Few or concentrated buyers, standardized products, low
switching costs, discretionary purchases = increased bargaining power
– Reduces price that you can demand
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Porter’s Five Forces
• 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
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Value of Five Forces Model
http://www.youtube.com/watch?v=mYF2_FBCvXw
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Questions to answer with Five Forces analysis
1. Is the industry a realistic place for a new venture to enter? If yes, then...
2. Can we do a better job than 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?
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Sources of Information
Some library databases:• Standard and Poors NetAdvantage –– Provides Industry Trends, Industry Ratios, and lots of key
industry data
• GMID – market share data by company and brand; industry growth data
• DataMonitor – five forces analysis and SWOT• FPInfomart – Canadian data
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Benefits of External Analysis
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Challenges of External Analysis
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Learning Objectives Summary
• Understand the relationship between the firm and its external environment– Course model– Diamond-E model
• Describe what an external analysis is• Explain how to do an external analysis– PEST factors– Porter’s five forces model– Data sources
• Understand the benefits and challenges of doing an external analysis