Consumers And The Internet Environment 3

Consumers and the Internet Environment Yohan Wismantoro [email_address] e-Business Strategy Management Department Dian Nuswantoro University

Learning Goals Identify macroeconomic factors that affect business performance. Explain how market prices are determined. Explain how the government influences economic conditions.

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

Impact of Economic Conditions 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 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 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 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 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 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 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.

Recession 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 Growth 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 of Economic Growth Unemployment level Industrial production level New housing starts Personal income level

Unemployment 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.

Inflation 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 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.

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

Small Business Survey Are Firms Affected by Industry Regulations?

Impact of Industry Demand 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 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 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 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 Effects on a Firm’s Performance Exhibit 5.1

Identifying Industry Segments Exhibit 5.5

Develop Competitive Advantage 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 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.

Motives to Engage in International 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 Expansion Exhibit 6.1

Approximate Hourly Compensation Costs for Manufacturing across Countries Exhibit 6.2

Motives to Engage in International Business (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 (measured by annual sales in millions of dollars) Exhibit 6.3 Source: 2001 annual report

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

Political 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 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. Firm Exhibit 6.6

How Exchange Rates Affect the Degree of Foreign Competition Exhibit 6.9

Consumers And The Internet Environment 3

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