Consumers And The Internet Environment 3

Consumers and the Internet Environment

Yohan Wismantoroyohan@dosen.dinus.ac.id

e-Business StrategyManagement Department

Dian Nuswantoro University

Business EnvironmentBusiness Environment

Part II: Business EnvironmentPart II: Business Environment

33Assessing Economic Assessing Economic ConditionsConditions

Assessing Economic Assessing Economic ConditionsConditions

Learning GoalsLearning Goals• Identify macroeconomic factors that affect business performance.

•Explain how market prices are determined.

•Explain how the government influences economic conditions.

Assessing Economic Assessing Economic ConditionsConditions

Economic ConditionsEconomic Conditions•Reflect the level of production and consumption for a particular country, area, or industry– Macroeconomic conditions

Overall economic state of a country

– Microeconomic conditions Focus on conditions in a particular business

or industry

Impact of Economic Impact of Economic ConditionsConditions

•Economic conditions can affect:– Revenues of a business– Expenses of a business– Total value of a business

Impact of Economic Impact of Economic ConditionsConditions

•Some firms are more sensitive to changes in economic conditions than others:– Demand for fast food demand is not very

sensitive to declining economic conditions.– Demand for new automobiles is more

sensitive to weak economic conditions than food products.

Harley Davidson ExampleHarley Davidson Example•Demand for motorcycles is stronger when: – The economy is strong.– Customers have more income to buy

motorcycles.

•High demand for Harley Davidson’s motorcycles:– Generates greater revenue.– Improves company performance.

Harley Davidson ExampleHarley Davidson Example•Demand for motorcycles is weaker when: – The economy is weak.– Customers have less income to buy

motorcycles.

•Lower demand for Harley Davidson’s motorcycles:– Generates less revenue.– Weakens company performance.

Harley Davidson ExampleHarley Davidson Example•Harley Davidson tries to predict demand so it will have a sufficient supply of motorcycles to meet future demand.– Demand for motorcycles depends on

economic conditions.– Number of motorcycles produced also

depends on economic conditions.

•Government policies also affect economic conditions.

Harley Davidson ExampleHarley Davidson Example•Harley Davidson must determine:

– How prevailing economic conditions will affect the demand for the motorcycles it produces.

– How prevailing government policies will affect the demand for its motorcycles.

Macroeconomic Effects Macroeconomic Effects • The performance of most firms depends on three macroeconomic factors:– Economic growth

Changes in the general level of economic activity

– Inflation Increases in general level of prices over

specific period of time

– Interest rates Changes in the cost of borrowed money

Economic GrowthEconomic Growth•When the change in the general level of economic activity is higher than normal:– Total income level of all U.S. workers is

relatively high.– There is a higher volume of spending on

products and services.– Firms that sell products and services should

generate higher revenues.

RecessionRecession• Occurs when economic growth is negative for two consecutive quarters

• Lowers demand for products and services– Reduces the revenue of firms that sell products

and services.– Can cause firms to shut down factories in

response to low economic growth. General Motors Ford

Indicators of Economic Indicators of Economic GrowthGrowth

•Gross Domestic Product (GDP)– The level of total production of products and

services in the economy– Total market value of all final products and

services produced in the U.S.

•Aggregate Expenditures– Total amount of expenditures

Alternative Indicators Alternative Indicators of Economic Growthof Economic Growth

•Unemployment level• Industrial production level•New housing starts•Personal income level

Unemployment LevelsUnemployment Levels• Frictional unemployment– People who are

between jobs.

• Seasonal unemployment– People whose

services are not needed during some seasons.

• Cyclical unemployment– People unemployed

due to poor economic conditions.

– Best indicator of economic conditions.

• Structural unemployment– People who do not

have adequate skills.

InflationInflation•An increase in the general level of prices of products and services over a specified period of time.– Estimated by measuring percentage

changes in the consumer price index (CPI).– CPI is a market basket of prices on a wide

variety of consumer products: Grocery products, housing, gasoline,

medical services, electricity, etc.

Impact of InflationImpact of Inflation•Can affect a company’s operating expenses– Can increase cost of supplies and materials.– Can impact indexed wages (labor cost).– Higher inflation can cause large increases in

operating expenses.

•Can affect a company’s revenues– Companies may charge higher prices to

compensate for their higher expenses.

business onlinebusiness online ee -- businessbusiness

33Assessing Industry Assessing Industry ConditionsConditions

Assessing Industry Assessing Industry ConditionsConditions

Learning GoalsLearning Goals• Identify industry conditions that impact business performance.

•Explain why some firms are more exposed to industry conditions.

•Explain how a firm can compete in its industry.

Industry CharacteristicsIndustry Characteristics•Firm performance can be highly dependent on industry characteristics:– Industry demand– Industry competition– Labor environment– Regulatory environment

Small Business SurveySmall Business SurveyAre Firms Affected by Industry Regulations?

Impact of Industry Impact of Industry DemandDemand

• Industry demand– Total demand for the products in an industry

can be affected by: Population growth Seasons and weather Economic conditions Changes in consumer income levels and

preferences

– Impacts the performance of individual firms in an industry.

Industry CompetitionIndustry Competition•Each industry has firms that compete against each other for customers.– Level of competition varies across industries

Intense competition can reduce market share and profitability of individual firms.

– Weak competition in an industry Increased market share for individual firms

allows firms to charge higher prices and not lose customers.

Labor EnvironmentLabor Environment•Labor characteristics differ by industry:– Cost of labor– Impact of unions

Can increase cost of labor Possibility of labor strikes

– Managers must try to estimate how the labor environment might impact labor expenses.

Regulatory EnvironmentRegulatory Environment•Federal regulations

– Environmental rules– Restrictions on operating in particular

locations– Restrictions on who can engage in particular

types of business– Restrictions on the types of services that can

be provided– Regulations that promote competition

Industry Industry Effects on a Effects on a

Firm’s Firm’s PerformancePerformance

Exhibit 5.1

Identifying Industry Identifying Industry SegmentsSegments

Exhibit 5.5

Develop Competitive Develop Competitive AdvantageAdvantage

•Ways to maintain or increase market share:– Low-cost production

Set a lower price to gain market share.

– Better quality than competitors Create higher quality without incurring

excessive costs.

– Product differentiation Satisfy customer needs in ways that are

different than competitors.

Chapter SummaryChapter Summary• Industry demand, competition, and the labor and regulatory environments influence business performance.

• Firms that have large market share and focus most of their business on that industry will be most affected by industry conditions.

• Firms can successfully compete by assessing their main competitors and developing a competitive advantage.

33Assessing Global Assessing Global ConditionsConditions

Assessing Global Assessing Global ConditionsConditions

Motives to Engage in Motives to Engage in International BusinessInternational Business

•Attract foreign demand– Competition may prevent firm from

increasing market share in U.S.– Changes in consumer tastes may decrease

demand in U.S.

•Capitalize on technology– Expand into countries where technology is

not as advanced.

The Coca-Cola Company’s Global The Coca-Cola Company’s Global ExpansionExpansion

Exhibit 6.1

Approximate Hourly Compensation Approximate Hourly Compensation Costs for Manufacturing across Costs for Manufacturing across

CountriesCountries

Exhibit 6.2

Motives to Engage in Motives to Engage in International Business International Business

(cont’d)(cont’d)•Use inexpensive resources

– Find locations where land and labor are inexpensive.

•Diversify internationally– Reduce risk and increase performance

stability by selling in other countries.– Geographic diversification reduces exposure

to economic risk in U.S.

Dupont’s Geographic Diversification Dupont’s Geographic Diversification (measured by annual sales in millions of (measured by annual sales in millions of

dollars)dollars)

Exhibit 6.3

Source: 2001 annual report

Global OpportunitiesGlobal Opportunities• Opportunities in Europe

– Single European Act Created more uniform regulations Removed taxes on goods traded between

member countries Increased competition

– Removal of the Berlin Wall (1989) Encouraged free enterprise and privatization of

businesses

– Inception of the Euro Allows single monetary policy Eliminates transaction costs

Global OpportunitiesGlobal Opportunities• Opportunities in Latin America

– NAFTA Eliminated trade barriers between U.S.,

Mexico, and Canada. U.S. firms have moved production to

Mexico to reduce costs. U.S. firms now export products to Mexico.

– Uruguay Round GATT Removed import trade restrictions over 10

years among 117 countries. World Trade Organization (WTO)

Global OpportunitiesGlobal Opportunities• Opportunities in Asia

– Large population base– In 1990s many Asian countries reduced their

excessive restrictions on foreign investment Easier for foreign firms to acquire Asian

companies or negotiate licensing agreements with Asian firms.

– Asian economic crisis Forced many local firms into bankruptcy Created opportunities for foreign firms to

acquire struggling Asian companies

Foreign Expansion in the Foreign Expansion in the U.S.U.S.

•Foreign firms expanded into the U.S. by:– Establishing new subsidiaries.– Acquiring U.S. firms.

•U.S. industries are susceptible to foreign competition– U.S. firms in labor-intensive industries must

compete with foreign firms’ lower labor costs.– Foreign-made products may be perceived as

higher quality than U.S.-made products.

International BusinessInternational Business• Importing

– The purchase of foreign products or services

• Exporting– The sale of products or services to purchasers

residing in other countries

• Direct foreign investment– A means of acquiring or building subsidiaries in one

or more foreign countries

• Strategic alliances– A business agreement between firms whereby

resources are shared to pursue mutual interests

Strategic AlliancesStrategic Alliances• Various types of alliances between U.S. and foreign firms can be made:– Joint venture involves an agreement between

two firms about a specific project U.S. firm makes the product, foreign firm

sells the product in their home country. Two firms share production of the product -

common in the auto industry.

– International licensing agreement Firm allows a foreign company (licensee) to

produce its product according to specific instructions in exchange for a licensing fee.

Influence of Foreign Influence of Foreign CharacteristicsCharacteristics

•Culture– Tastes, habits, and customs vary by country– U.S. products might need to be adjusted to

fit the culture

•Economic systems– Capitalism– Communism– Socialism– Privatization

Influence of Foreign Influence of Foreign CharacteristicsCharacteristics

•Economic conditions– Economic growth in foreign countries can

influence demand for U.S. products: Strong economy might increase demand. Weak economy might decrease demand.

– U.S. firm’s exposure to foreign country’s economy depends on proportion of U.S. firm’s business conducted in that country.

Small Business SurveySmall Business Survey

Many successful small firms rely on international sales for a significant portion of their business.

Political RiskPolitical Risk• Risk that a country’s political actions may

adversely affect a business– Expropriation: extreme form of risk occurs when

foreign government takes over a U.S. subsidiary without compensating the U.S. firm. More common risk occurs when foreign

governments impose higher corporate tax rates on foreign subsidiaries.

Other risks impact costs of doing business in the foreign country - stringent building codes, waste disposal restrictions, and pollution controls.

Exchange RatesExchange Rates• Exchange rates between the U.S. dollar and

other currencies fluctuate over time– Number of dollars needed by a U.S. firm to purchase

foreign supplies may change, even if the actual price does not change When U.S. dollar weakens - foreign

currency strengthens - U.S. firms need more dollars to purchase a given amount of foreign supplies

Exchange rate affects foreign demand for U.S. products because they impact the actual price paid by the foreign customer.

Example of Importing by a U.S. Example of Importing by a U.S. FirmFirm

Exhibit 6.6

How How Exchange Exchange

Rates Affect Rates Affect the Degree the Degree of Foreign of Foreign

CompetitionCompetition

Exhibit 6.9

Consumers And The Internet Environment 3

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