1. BU 111: Fall 2012
Course Model &
Environmental Analysis Models
2. 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
3. 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
4. Planning Organizing
Critical Success Factors
Stakeholders
Economic Marketing
EX Top Management
TE
L
RN
NA
AL Social Vision Operations Finance
Political
R
TE
IN
Mission Human
Technological Resources
Strategy
Middle Management
First-Line Management
Controlling Directing
5. 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
6. Diamond-E Framework
• Identifies key variables to be considered in
strategic analysis
Management
Preferences
Organization Strategy Environment
Resources
7. 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
8. Principal Logic
• Importance of Consistency between variables
• Examples:
– P&G Strategy in 2000 (inconsistency)
– Ikea Strategy (consistency)
• Note: Absolute alignment is not realistic
9. Strategy-Environment Linkage
• First task: Deal with strategy-environment linkage
• Assess forces at work and their implications
Examples:
- Digital Camera Market: Canon vs. Kodak
10. 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?
12. 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.
13. PEST - 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
14. 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 rates
Influences costs, potential sales, and financial uncertainty
15. 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
16. 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 information
Affects what we produce/what it can do, affects how we produce
and how we sell
Demands constant learning and scanning
17. 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?
18. Porter’s Five Forces
POTENTIAL
ENTRANTS
INDUSTRY
COMPETITORS
SUPPLIERS BUYERS
Rivalry Among
Existing Firms
SUBSTITUTES
19. 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,
20. 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
21. 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
22. Value of Five Forces Model
http://www.youtube.com/watch?v=mYF2_FBCvXw
23. 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?
24. 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
27. 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
Notes de l'éditeur
Employee’s are foundation – they are the people who try (or not) to achieve these factors A motivated and committed employ is key (one who takes pride in his work) Without a distinct difference in a product between companies, than it is just a price war which has low profitiblilty
Key components in a strategic analysis Management Preferences – Has bias, approaches, desires (Human) Aggressiveness/ conservation of the person models their input Organization – culture, capabilities, structure, leadership Resources – HR, Capital R, Financial R
Determines what the business is pursuing and not pursuing If some people in one level are conservation and another level people are aggressive, this will effect the model If one component is lacking, it negatively effects the whole framework Bu111 focus’ on stretegy-enviroment
P&G CEO – put too many new products out, company suffered Ikea -
Canon- took a lot of risk to invest in digital technology Kodak – Kodak did not and now they are trying to make up
Strategy is the crucial piece that holds the 2 together -Internal and environment
External Environment – Main two we discuss – General and Specific
Laws, regulations – e.g product labels in both English and French, wages, certification processes Taxes (extension of Govt. and Law) – the taxes on certain institutions and on certain things, taxes on waste disposal etc. Trade agreements or conditions – Some can positively and some and negatively effect trade, e.g Toyota set up shop in Canada to avoid tariff on cars Political System – ours is stable, which helps trade- Over the last few years, there is a lot more government involvement
-for National debt, companies are competing with govt. for borrowing money. -When our dollar went from 0.60 to par with US dollar -companies buying us items are happy – its more affordable -companies that sell us dollar items are -companies that
These factors can change from one region to another (varies from country to country) Affects attitude and loyalty of employees Which industries can benefit the most from these elements, alternative energies,
Internet has changed the way we sell, buy goods and communicate w each other allows companies to work better with other companies, suppliers, customers Products have been more advanced and completes more tasks and are put out faster changed how we design, build and use products New technologies can make products and companies obsolete (cell phones that do so many things now hurt the companies that offered products that do some of those things)
No, some flourish when the economy is great and others when its tight. Ex luxury cars and groupon
-Tool for industry analysis The more competition, lower the profitability
Suppliers *when supplier have more power, we have less profit (we buy supplies for more)* -the lower the power of supplier (bargaining power), the more attractive the industry (more profitable) -the more important of a customer you are, the more power you get -you might consider buying out the supplier because of the instability of power (if it makes sense and affordable) Ex industry with low supplier power, food industry (lots of choices) high – automotive industry manufacturers Potential Entrants -how easy is it to start up in a certain industry -more new entrants can change things up, bring new technology -more competition, less profits Ex easy to get into, hair salon hard banks, internet
Substitutes - ex few substitutes, prescription drugs high substitutes, beverages - ex of substitutes would be eye surgery (as it gets cheaper) vs glasses
-video talks about 5 forces - zero sum and positive sum good for venture project
-sources that contains data that isn't Google-able -examples of
Puts manager into the right mindset Allows for change for the better All resources like HR, actual resources
Forecast and not fact, not always accurate and can lead you to make the wrong decision