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
• Catches the customers attention or implies an impression of the product
• Ensures that the product is delivered in good condition
Promotion
• Any type of persuasive communication
• Aimed at increasing purchases
• Broader target than the current customer base
• May be:
o Short term (e.g. linked to sales) o Longer term (e.g. public relations, press conferences, press releases, publicity events)
• Internal promotion
• Advertising o Narrowcast: trying to get direct to customers/consumers (e.g. specialist trade magazines) o Broadcast: lots of people to hear about it, but few to act upon (e.g. TV)
Advertising (ADA)
• Attract attention
• Create Desire for the product
• Encourage consumers to take Action to purchase the product Introduction to Engineering Business Studies
Place
• Not where in the world, but how the product reaches the customer.
• There are various distribution channels o Selling outlets (shops, showrooms, distribution centres) o Home sales that are “Direct from the Factory” o Web based
• The customer experience is also very important o Merchandise assortment (what products are sold together) o Store location o Store layout, ‘atmosphere’ and ‘ambiance’
10. Product Criteria in the Market Place
ORDER QUALIFYING CRITERIA
• Features which get the product onto the market place
• Also ensure that it stays there and remains successful
ORDER WINNING CRITERIA
• Features which collectively provide a competitive edge over the competition.
• Similar to USP (Unique Selling Points) in marketing.
Competition, economic factors etc. ensure that today’s order winning criteria will become tomorrows order qualifying criteria.
Introduction to Engineering Business Studies
FIRST MOVER ADVANTAGE
‘Market pioneers’ achieve the shortest ‘time to market’ and this can give them a ‘first mover advantage’ because they create a ‘temporary monopoly’. This advantage can be greater with products where there is a ‘network effect’.
Network effect: Where if more people use the product, the effect is magnified and the effect can help to create a monopoly.
Benefits of being a market pioneer:
• Creating a Temporary Monopoly giving ‘Super-Normal’ profits.
• The existence of Network Effects where the more users there are, the more people want the product.
• Higher brand loyalty, reducing promotion costs
• Higher ‘Switching Costs’ for customers, also reduces promotion costs
• Broader product ranges that pre-empt competition
• Reduced costs through the Experience Curve and Economies of Scale
Risk is quantifiable, uncertainty is not. Therefore companies may expect to be able to manage the risk, but the uncertainties can present problems.
Goal of market leaders
It is important to realise that every business aspires to become the market leader – but that may be achieved by being a pioneer or by being a follower.
Introduction to Engineering Business Studies
MARKET FOLLOWERS OR LAGGERS
‘Market followers’ or ‘market laggers’ can benefit by learning quickly from mistakes made by the market pioneers, as a result of market uncertainties, technological uncertainties or legal uncertainties
• Market uncertainties reduced
– Able to witness what the customers like/dislike about pioneer’s product
– Customers more accepting of new design/technology
• Technological uncertainties reduced
– Able to reverse engineer from pioneer’s product, reducing R&D costs
– Able to improve design by learning from pioneer’s mistakes
– Able to exploit pioneer’s bad reputation for any design/safety problems
• Legal uncertainties reduced
– Authorities may attack the pioneer only
– Legislation more established, based on experience with pioneer
– Followers may be encouraged to avoid a monopoly
Next Bench Syndrome: Designing for other engineers not the real customer
Introduction to Engineering Business Studies
11. Life Cycle Costing
Life Cycle Costing for all units from the OEMs (Original Equipment Manufacturer’s) viewpoint
• Cost of initial product design
• Cost to set up production
• Costs to manufacture
• Marketing and selling costs
• Distribution costs
• After market costs including servicing and warranty
• Product liability costs
• Costs to recycle the product
• After 66% of cost is committed before the preliminary design,
• Prior to the production stage, 95% of production cost is committed.
• These costs cannot be reduced…any changes incur higher costs!
• It is better for engineers to work the initial stage perfectly so as to control the costs.
Introduction to Engineering Business Studies
12. Simultaneous (Concurrent Engineering)
An approach to product design in which companies attempt to reduce the elapsed time to market by integrating design engineering, manufacturing engineering and other functions in the company.
Benefits:
- improve the product design to avoid any need for changes (materials, workforce, equipment) and eliminate inevitable dangers
- reduce the time to produce for market consumption
- make available and tap ‘downstream’ expertise to resolve problems
- bring the market closer to the production process
- reduce product life cycle costs
This leads into the fact that in any design we are constantly making trade-offs or compromises.
• Internally cost, quality and functionality
• External selling price, perceived quality and perceived functionality
• Cost includes all investment costs, all production costs, all marketing and selling costs, all support costs • Quality is performance to specification
• Functionality is multidimensional specification
• Consumers expect this. In 90s Lotus found that by increasing price they could actually sell more cars. They had lowered the price too far and consumers assumed quality and functionality were compromised. In some markets consumers like to pay a high price to get the intangible benefit of owning the brand or good.
Introduction to Engineering Business Studies
13. Boston Consulting Group Matrix
INTRODUCTION - QUESTION MARK
• Marketing intense
– Create product awareness
– Establish clear identity for new product
– Create many trial or impulse purchases
• Cash negative
– High demands to fund product development & marketing
– Low returns due to low market share
• Possible Actions
– Invest heavily to increase market share
– Sell off
GROWTH – STAR
Marketing needs high
– Sustain marketing efforts to fend off new competitors and encourage repeat buys
• Cash neutral or negative
– Large expenditures and sales, cash flows in balance
– Larger expenditure to maintain or increase leadership position
• Actions
– Invest in marketing & product development to create cash cow Introduction to Engineering Business Studies
MATURITY - CASH COW
• Marketing needs low as
– Customers can be very loyal
– Competitors begin to leave market
• Cash positive
– High, steady sales
– Little product development needed
– Production equipment paid for, ‘sweating the assets’
• Actions
– Invest profits & cash to find next ‘cash cow’
– Maintain to ensure maximum cash
– Try to avoid standardisation and ‘commodity status’
DECLINE - DOG
• Marketing needs rise
– Customers loyalty declines
– Demand reduced/eliminated by new designs or technologies
• Cash low positive or negative
– Slow growth or decline
• Actions
– Continue, maximise cash flow
– Consider investment in ‘turnaround’
– Expand to specialise in ‘obsolete’ products
– Sell off
PRODUCT LIFE CYCLE LIMITATIONS
• May have a different demand pattern
• Your marketing activities may force a product into a life cycle stage
• Difficult to predict which stage a product is in
• An unconventional strategy can be successful
Introduction to Engineering Business Studies
MARKETING MIX FOR A CONSUMER PRODUCT
BALANCED PORTFOLIO APPROACH
A balanced portfolio generates steady cash flows and profits now and in the future because:
• question marks can be converted into stars;
• stars have high share and high growth to assure the future;
• cash cows supply funds for that future growth;
• dogs generate some extra cash or help to sell other products
Introduction to Engineering Business Studies
WEAKNESS OF PORTFOLIO APPROACH
• It can be difficult to measure and predict market share/growth
• Firms can be too quick to drop healthy, mature businesses because they see them as dogs
• Attempts to create a new question mark or star can fail because it takes a company away from its core competencies
14. Porter’s 5 forces
RIVALRY AMONGST EXISTING COMPETITORS
High intensity is associated with:
• Small number of similarly sized competitors
• Low rate of industry growth
• Low level of differentiation or switching costs
• High fixed costs relative to the value added
• High exit barriers
• Low resale value for assets
• High fixed costs on exit (e.g. Redundancy payment, warranties, maintenance contracts)
• Government and social pressure to provide employment
Introduction to Engineering Business Studies
THREAT OF NEW ENTRANTS
Level of threat depends on:
• Barriers to entry (Anything that puts newcomer at a disadvantage)
– Economies of Scale
• Fixed costs do not change over a particular range of output
• Variable costs change with the level of output
• As output rises the fixed cost per unit falls
– Product differentiation
• Creates brand identification & brand loyalty
– Absolute cost disadvantage
Existing competitor has:
• Patented product technology
• Cheaper raw materials
• Learning or experience curve benefits
• Lower cost of borrowing
• Lower costs by owning more of the supply chain (vertical integration)
– Large capital requirements
– Access to distribution channels
– Government policy
• Expectations of how existing competitors will react
THREAT OF SUBSTITUTES
• Substitutes are other products or services that perform the same function in the eyes of the consumer.
• Manufacturing machinery has very few substitutes, so less threat of substitutes.
Introduction to Engineering Business Studies
BARGAINING POWER OF SUPPLIERS
Suppliers are powerful if:
• There are only a few dominant suppliers
• Their product is unique and involves high switching costs
• There are no substitutes
• The customer industry is not important to the suppliers
• They could take over the customer (forward integration)
APPROACHES TO RELATIONSHIPS WITH SUPPLIERS
Zero sum game, win-lose
• Finite profit available to supply chain
• Most powerful member gets largest share of profit
• Adversarial relationships
• Avoid dependence
• Poor performers lose business
Partnership, win-win
• Work together to increase total profit in the chain
• Share profit more equitably
• Partnership relationships based on trust
• Depend on one or two suppliers
• Use mutual dependence to drive improvement
BARGAINING POWER OF BUYERS (OR CUSTOMERS)
Buyers will be powerful if:
• They buy a large volume
• The purchase is a significant part of their final product or service
• They can choose from many suppliers, offering standard products with low switching costs
• They could buy the supplier (backwards integration)
• They have strong influence over the end consumer
Introduction to Engineering Business Studies
USING PORTER FIVE FORCES
Existing firms will:
• Accept the balance of forces if they are/can make enough long-term profit
• If long-term profits are poor they will:
– Try to weaken one or more forces
– Get out of the industry
New firms will enter:
• If they believe the long
-term profits are attractive
• They can target at least one weak force
MARKETING & COMPETITIVE ANALYSIS
• The marketing mix helps you to understand your customers
• Porter’s 5 forces helps you to understand your competitors and opportunities, threats, strengths and weaknesses (SWOT)
• Superior performance is achieved by gaining a competitive advantage
15. Competitive Strategies
SOURCE OF COMPETITIVE ADVANTAGE
• Differentiation (offering superior customer value)
• Low cost (creating the product or service at the lowest delivered cost)
COMPETITIVE SCOPE OF ACTIVITIES
• Broad (wide range of market and/or industry segments targeted)
• Narrow (confined to a narrow segment of the market and/or industry)
Introduction to Engineering Business Studies
Porter’s Model of Generic Strategies
BROAD COMPETITIVE SCOPE
Both a cost leader and a differentiation strategy target a broad competitive scope.
This enables a firm to take advantage of the benefits of:
• Economies of scale
• Learning curve
• Experience curve
A Broad Competitive Scope can:
• Express the relationship between experience and efficiency.
• The learning curve effect shows that as individuals get more experienced at a task, they usually become more efficient at them.
• The experience curve effect shows that as organisations get more experienced at a task, they usually become more efficient at them.
Introduction to Engineering Business Studies
WHY THE EXPERIENCE CURVE APPLIES
The organisation uses its combined learning to improve:
• Design of existing products
• Design of new products
• Design of the processes in the firm
• Design of its supply chain processes, sharing learning with suppliers & customers
EXAMPLE CALCULATION
The experience curve was first applied in the airplane industry. It was observed that, as output doubled, there was a 20% reduction in direct production worker-hours per unit. Thus,
• Plane 1 utilized 100,000 hours
• Plane 2 will utilize 80,000 hours (0.8 x 100,000)
• Plane 4 will utilize 64,000 hours (0.8 x 80,000)
• Plane 8 will utilize 51,200 hours (0.8 x 64,000)
This is classified as an 80% experience curve.
A COST LEADER
Example: Dell, Wall-Mart
• produces high volumes of standardized, no frills products or services;
• takes advantage of economies of scale and experience curve effects;
• continuously seeks to minimise production costs;
• distributes their products or services widely;
• promotes the low cost features; and
• gains market share; but
• may have low customer loyalty & a poor reputation for quality, and
• risk losing their cost advantage, having no differentiating factors and no clear strategy
Introduction to Engineering Business Studies
A DIFFERENTIATOR
Example: Mercedes Benz, Apple
• offers something perceived as unique by the industry in design, brand image, technology, features, dealers, network, or customers service;
• sells to a broad market and so may also take advantage of some economies of scale and experience curve effects;
• has loyal customers who are less sensitive to price; and
• can generate better profits; but
• must invest heavily to defend its unique features as what is unique today can become standard tomorrow (air bags, satellite navigation), and
• they risk losing their differentiation and ending up with no clear strategy
16. Diseconomies of Scale
As output rises costs increase:
• Workers get tired, work slower, make mistakes
• Machines break down more frequently
• Material costs rise as supplies get scarcer
As firms get bigger & older costs rise because:
• Communication inside the organisation is more expensive & difficult
• More managers are employed to improve communication adding cost
• Experienced employees can be more reluctant to change
• Decision makers are isolated from the results of their decisions and from the customers
• The firm’s own products can compete against each other
A FOCUS STRATEGY
• selects a few target markets;
• provides better differentiation by specialization; or
• lower cost via an enhanced experience curve and/or lower operating costs (i.e. cheaper labour, rents, regulation); and
• can face less competition and make better profits; but
• is vulnerable to substitutes & changes in customer preferences losing business entirely or
• getting too big and losing focus