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Engineering Business Management - The Firm, Lecture notes of Engineering

University of Warwick (Warw)Engineering

Introduction to Engineering Business Management module Applicable for 2024 and beyond. Key Themes: Systems thinking, strategy, marketing, competition. Ideal for quick revision! This business management document systematically progresses from core concepts (firm operations, inputs/outputs) through environmental analysis (PEST/SWOT) to strategic applications. Covers marketing (5Ps), product strategy (order winners vs qualifiers), cost analysis (life cycle costing), and competitive frameworks (Porter’s Five Forces, BCG Matrix), concluding with diseconomies of scale. Ideal for engineering students mastering commercial strategy.

Typology: Lecture notes

2024/2025

Available from 03/31/2025

vick16 🇬🇧

5 documents

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Don't miss anything!

Sam$Adams$ES187&'&Introduction&to&Engineering&Business&Management$

!

1!

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!

The!outputs!of!a!transformation!include!core'services'(delivers)what)the)customer)wants)

correctly,)on)time)and)competitively)priced))and!valueCadded'services'(builds)relationship)

with)the)customer)and)is)more)difficult)for)competitors)to)copy):!

!

)

Inputs Outputs

Environment Boundary

Transformation

Partial preview of the text

Download Engineering Business Management - The Firm and more Lecture notes Engineering in PDF only on Docsity!

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 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) : Inputs (^) Outputs Environment Boundary Transformation

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.

2. The Business Environment

The general global trend for businesses is: Developing World = Goods or Products Developed World = Services There are three main types of business:

Sole Trader
Partnership
Limited Company (Ltd Co) / Public Limited Company (PLC) or

The 4 M s

Natural Resources Labour Capital Information Entrepreneurship Inputs Transformation Outputs Core Services Products or Services Value-Added Services Information Problem Solving Sales Support Field Support Physical Location Exchange Storage Physiological Informational

§ 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. Value or Supply Chains
Members of the environmental set, who currently add value to the end customer.
Value is added during transformation process.
There may be multiple firms in a value chain. Consumers Products (retailers) Original Equipment Manufacturers OEM First line suppliers Second line suppliers Basic parts suppliers Services Machinery and equipment suppliers Basic equipment suppliers Commodity suppliers

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 center 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 Functional/Operational strategy Corporate strategy Business strategy i.e. Marketing Engineering Finance IT Manufacturing Personnel

5. Company Analysis

EXTERNAL ANALYSIS

There are two main categorisations for identifying external opportunities and threats, PEST or STEEPLE. P olitical E conomic S ocial T echnological S ocial T echnological E conomical E nvironmental P olitical L egal E thical SWOT ANALYSIS S trengths & W eaknesses (from internal analysis) and O pportunities & T hreats (from external analysis) Internal analysis needs to protect and develop a firm’s CORE COMPETENCIES. 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.

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. Define Alternatives Implement Analyse Current Situation & Gaps Choose Strategy Assumptions PLANNING GAP Strategic Fit & Strategic Choice

Vision Mission

Values Objectives

Internal Analysis External Analysis

SWOT Strength/ Weakness Internal to Firm Opportunity/ Threat External to Firm Objectives Strategy and Programme Formulation Implementation Feedback and Control

9. Marketing Mix

5 P’s of the Marketing Mix PRODUCT PRICE PACKAGING PROMOTION PLACE 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) 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 Marketing Mix Product Price Packaging Promotion Place

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 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’

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. 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

Purchasing by

compulsive

“technophiles”

Purchasing by real

market adopters

Early market growth

Maturity (months)

Next Bench Syndrome an

advantage?

Next Bench Syndrome a

disadvantage?

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. Product Planning, Concept Design Preliminary Design Detailed Design & Prototype Production Distribution & After- Market Support

% of Life-Cycle Cost

Committed Cost

Expended Cost

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

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 MARKETING MIX FOR A CONSUMER PRODUCT Introduction Growth Maturity Decline Product Basic product^ Offer product options, service, warranty Diversify brand & models Phase out weak items Price High based on cost-plus or target price Lower, price to penetrate market Lowest, to match or beat competitors Low or rising, cut price to sell or increase as competitors leave Place Selective distribution Intensive distribution Build more intensive distribution Go selective: drop unprofitable outlets Promotion & Packaging Advertise to build product awareness amongst early adopters. Heavy sales promotion to encourage trial. Build awareness in the mass market. Reduce sales promotion as demand rises. Advertise brand differences & benefits. Promote to encourage brand switching Reduce to minimum

14. Porters Five 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 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 INDUSTRY COMPETITORS 1.Rivalry among existing competitors 3.Threat of substitute products or services SUBSTITUTES 2,Threat of new entrants POTENTIAL ENTRANTS 5.Bargaining power of buyers BUYERS 4.Bargaining power of suppliers SUPPLIERS

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. 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 LAC existing competitor LAC = Long-run Average Costs Cost per unit or average costs Number of units or output LAC new entrant