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01-The Firm 1 Introduction to Engineering Business Studies 01-The Firm 1. A System A company can be modelled as a system, which converts inputs into outputs, and is affected by the external environment. There are a number of factors of production: • Natural Resources - All the natural resources used to produce goods and services, including raw materials. • Labour - The time and resources people devote to producing services or goods, and this is rewarded with wages. • Capital - Is used to buy all the equipment, buildings, tools and other manufactured goods or services. The return to capital or the payment for the use of capital is interest (generated by banks). • Information - Information is rewarded with knowledge, which can create an advantage for the firm. • Entrepreneurship - A special type of human resource, that organises the other 3 factors of production, makes business decisions, innovates and bares business risks, this is rewarded with profit. This is the same as the theory of the 4 M’s of Operations Management; • MEN • MATERIALS • MONEY • MACHINES Companies can also have different types of transformations; • PHYSICAL – Manufacturing • LOCATION – Transportation • EXCHANGE - Retailing • STORAGE – Warehousing • PHYSIOLOGICAL - Health Care • INFORMATIONAL - Telecommunications Introduction to Engineering Business Studies The outputs of a transformation include core services (delivers what the customer wants correctly, on time and competitively priced) and value-added services (builds relationship with the customer and is more difficult for competitors to copy): CORE • Core Products/Services VALUE ADDED • Information • Problem Solving • Sales Support • Field Support In developed countries, firms are more likely to be competitive if they provide a higher proportion of value added services, in addition to the core product/service. Introduction to Engineering Business Studies 2. The Business Environment There are three levels of the business environment: • Internal Environment o The structure and politics of an organisation affect the manner in which the organisation responds to environmental change. - Marketing - Production - Finance - Personnel - Research & Development • Micro-Environment o Organisations and individuals who directly or indirectly affect the activities of a company: • Suppliers and intermediaries → Channels of Distribution - Competitors - Government - Financial Institutions - Local community or pressure groups Introduction to Engineering Business Studies - Shareholders - Employees or Unions - Customers • Macro-Environment o Comprises more general forces and trends rather than specific organisations → Macro-economic environment • Economic cycles cause trends in the consumption of goods and services, which increase during ‘booms’ and decrease in times of ‘recession’ as well as price fluctuations. →Political Environment • The stability of the political system affects the attractiveness of the business environment. • Governments pass legislation that directly and indirectly affects firms’ business opportunities. • Also trading blocs (e.g. EU, ASEAN and NAFTA) and influence of worldwide intergovernmental organisations (World Trade Organisation) and pressure groups (e.g. Greenpeace). →Social & Cultural Environment • A number of general social trends with potential impacts on businesses can be observed in most developed economies: →Demographic Environment →Ecological Environment →Technological Environment • New technologies can allow new goods and services to be offered to consumers - Internet banking, mobile Internet and new anti-cancer drugs, for example. • New technology can allow existing products to be made more cheaply, therefore widening their market through being able to charge lower prices (e.g. Cheaper air travel) • Technological developments have allowed new methods of distributing goods and services (e.g. Amazon online) The business environment presents opportunities as well as threats e.g. “No thrills airlines”, wind turbines, farmers markets. Introduction to Engineering Business Studies Introduction to Engineering Business Studies 3. Strategic Decisions Corporate: What type of business is it? What markets are they in? What purchasing and supply chain strategies are used throughout the firm? What infrastructure is in place? Overall decisions about CORE COMPETENCIES and DIVERSIFICATION, as well as the overall structure. Business: - Strategic Business Unit (a profit centre which focuses on product offering and market segment) How can the SBU compete in a market? What products and services do they offer? Where to locate? How to finance within corporate constraints? What supply chain structure? Operation: Focus on products, markets and how to achieve corporate and SBU objectives. Manage capacity, locate facilities, manage technology, people, values. Design of facilities and infrastructure. 4. Vision, Mission, Values & Operation Vision: Where do we want to get? (simple one line inspirational aspiration) Mission: What business are we in? (a brief paragraph outlining the company, its direction, values and policies) Values: How do we do business? Objectives: Translate the Vision, Mission and Values into operational terms Introduction to Engineering Business Studies Mission Statements • All companies simplest mission statement is to “kill competition”. • Provide a credible definition of the competitive scope of the business • Give a customer orientated perspective • Have a long timescale • Focus on a manageable number of key goals • Inspire and motivate employees • Be realistic • Should ideally include o Who are the customers? o What are the products or services? o Markets: Where does the company compete geographically? o What is the firms basic technology? Introduction to Engineering Business Studies Objectives Two types: OPEN= Cannot be measured CLOSED= Can be measured (Stretching, Measurable, Achievable, Relevant, Time Limited) Economists assume that the firm’s main goal is PROFIT MAXIMISATION. 5. Company Analysis EXTERNAL ANALYSIS There are two main categorisations for identifying external opportunities and threats, PEST or STEEPLE. Political Economic Social Technological Social Technological Economical Environmental Political Legal Ethical SWOT ANALYSIS Strengths & Weaknesses (from internal analysis) and Opportunities & Threats (from external analysis) Internal analysis needs to protect and develop a firm’s CORE COMPETENCIE Core competencies are the collective learning of the organisation. They give a firm its key competitive advantages because: • They provide potential access to a variety of markets • Significant contribution to the perceived customer benefits of the end product. • They are difficult for competitors to imitate. Introduction to Engineering Business Studies 6. Corporate Planning Model The corporate planning model was created for large firms. It provides a set of linear steps for a central corporate planning team to follow to develop the strategy There is emphasis on rigorous analysis of a stable external environment. Middle and Lower level managers implement but do not develop the strategy. Because the business environment is turbulent, strategies are devised but realised in different directions to the original direction, requiring the business to respond quickly to change. It involves all levels of managers so that strategies can emerge, bottom-up and top-down. Introduction to Engineering Business Studies 7. Strategic Decisions Strategic management involves a decision about where the firm wants to be, then critically evaluating the current situation of the firm and where its current policies will lead it. This leaves a gap, which could be addressed through deciding the actions in terms of organisational policies, products, services and projects. 8. Customer or Consumer Consumers • User of the article • Opposite of Producer • Consumer goods are used directly, domestically, AND NOT in manufacturing • Create consumer markets for goods and services Customers • Purchaser of the article • Industrial Goods are used by commerce, industry and manufacturing. Often described to be sold to customers not consumers. • Individual customers create industrial markets for goods and services • Customers who will never use the article can create “consumer markets”. Introduction to Engineering Business Studies 9. Marketing Mix Product • A physical entity or a service • Should provide some benefit to the customer o If competitors cannot match these benefits then the product has USP (Unique Selling Points) • Judged on criteria including: o Quality o Durability o Brand Price • Price is usually set by the market, o Usually at a lower price, just above cost -> to increase volume produced and to deter competition o Pricing gap (how much extra is a customer willing to pay for this product?), discounts, offers, trade terms etc. o Price sensitivity (how flexible people are on the price) • Ability or willingness of customers to pay o Affluent/poor areas o Luxury branding • Strategic Costing o Loss leadership (e.g. supermarkets offering cheap petrol) Introduction to Engineering Business Studies Pricing Strategies • Price maker or price taker (market pricing), (price maker set by market leader, price taker have to accept the price of the market leader) • Cost plus pricing o Design product then set the price o Product cost + Profit Margin = Selling Price • Target Pricing o Target market price - Profit margin = Target cost o Determine the target cost and price accordingly • Discounts o Pass on the cost saving o Reward loyalty Packaging
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