Understanding The Economic Affect On Business Commerce Essay

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In usual economic times when economies are growing, companies exists advantages and disadvantages. Economic influence is when a business is affected in any way by the economical factors. Economic Factors such as income, inflation,, recession , exchange rate and interest rate are the main elements that affect financial matters of a business.Economic growth can promote business development. Economic growth is the increase of gross domestic product or other measures of aggregate income. Companies produce more goods and services with the same inputs of labor, capital, energy and materials.When the economy improves, customers have more money to spend. So the companies can offer them products that customer can purchase from the companies.The Marketing department of the companies always pays particular attention to the economic situation to see how current or future demand, prices and sales are going to be affected. This helps to determine actions a firm should take or plan on taking in order to succeed. Wal-Mart is the example of good economy environment. In the time of economic growth when demand and sales increase, unemployment falls, and production goes up, Marketing must consider how to accommodate these changes and adjust production and sales strategy as well as prices accordingly.

It also has negative effects of economic growth for business. For instance, taxation can affect a business because companies have to pay more tax to the government .Companies should take high interest rate on every loan from the bank, this can affect a business because if they keep on borrowing the loan. At last, they would have to pay extra money back to the bank. The profit has the direct relationship with it. Because of the growing economic, the number of unemployment is low. But firms need more workers. it becomes difficult to recruit necessary employees. Companies should make additional efforts in recruitment in order to get labor.

Wars, terrorism and government instability are the good example on difficult time. In difficult times, such as the current global economic downturn, although it is worse for companies to be success, companies can take the measures and analysis to overcome the bad economic environment. The example of mobile phone company LG achieved a great success in economy crisis. And Washington Mutual bankrupted in economic crisis. If there is a war, the likelihood of retaliatory terrorist strikes at home will grow. This would cause more threats. And then threats realize no good for business. Moreover, it could leave companies unable to pay out salaries, which would mean many employees would default on mortgage and debit payments, triggering a meltdown in the lending and retail sectors and ripples out into wider economic disruption. Economists also assess terrorism's impact on global supply chains which is the sequence of steps that suppliers of goods take to get products from one area to another. These steps can become extremely costly in terms of time. Emerging economies have to pay higher transportation costs .Such as the 9-11 attacks in the US, many businesses have had to change their traditional ways in doing business. Terrorism brings a very serious business worry. Terrorism affects a lot of area in business process.Political instability is also the existence of possible threats in business. If the political system is stable, it will lead government to help people get what the people need and want. But if government put up taxes, then the disposable incomes of people tends to go down. With a reduction in income, people tend to be more cautious about how they spend their money. In order to keeps the business running during the tough times, companies need to offer the people something for free. The profits of the company will decrease. Then the companies are seemed to have trouble to be success in this difficult times.

External and Internal environment

An integrated understanding of external and internal environments is essential for firms to understand the present and predict the future.

External environment

A firm's external environment is divided into 3 major areas: the general, industry and competitor environments. The general environment groups these dimensions into 6 segments:



General environment analysis is often carried out by business planners which enable them to develop more informed strategies. Firms cannot directly control the general environment's segments and elements. Accordingly, successful companies gather the information required to understand each segments and its implications for the selection and implementation of the appropriate strategies. The social culture segment is concerned with a society's attitudes and cultural values. Because attitude and values form the cornerstone of society, they often drive demographic, economic, political, and technological conditions and changes. The political segment represents how organizations try to influence government and how government influences them. The organizations and interest groups compete for attention, resource, and a voice in overseeing the body of law and regulations guiding the interaction among nations. The demographic segments are analyzed on global basis because of their potential effect across countries' borders and because firms compete in global market. Given the rapid pace of technological change, it is vital for firms to thoroughly study the technological segment. By finding the adopters of new technology often achieve higher market share and earn higher returns. The global segment offer firms more opportunities to obtain the resource needed for success. For example, firms can identify and enter valuable new global markets. Many global, market are becoming borderless and integrated. So firms should recognize potential competitive threats in these markets. Economic factors relate to changes in living standards and how these affect consumptions patterns. As it mentioned above, economic segment is most important for companies to be success. The health of a nation's economy affects individual firms and industries. Compared to the general environment, the industry environment has a more direct effect on the firm's strategic actions. Porter's five forces model of competition includes the threat of entry, the power of buyers, product substitutes, and the intensity of rivalry among competitors. The power of the forces increases companies' ability to earn above-average returns.

The competitor analysis informs the firm about the future objectives, current strategies, assumptions, and capabilities of the companies with whom it compete directly. Critical to an effective competitor analysis is gathering data and information that can help the firm understand its competitor' intentions and the strategic implications resulting from them.

Internal enviroment

Internal analysis is the systematic evaluation of the key internal features of an organization.The strategic decision managers make in terms of the firm's resources, capabilities and core competencies are no routine, have ethical implications, and significantly influence the firm's ability to earn above-average returns.

Resources are assets employed in the activities and processes of the organization.

Broad in scope, resource cover a spectrum of individual, social, and organizational phenomena. A competitive advantage is created through the unique bundling of several resources. For example, Amazon.com has combined service and distribution resource to develop its competitive advantage. Resources are assets employed in the activities and processes of the organization. They can be obtained externally (organization-addressable) or internally generated (organization-specific). An audit of resources would be likely to include an evaluation of resources in terms of availability, quantity and quality, extent of employment, sources, control systems and performance. Competences and capabilities will often be internally generated, but may be obtained by collaboration with other organizations. Core competences or distinctive capabilities are combinations of resources and capabilities which are unique to a specific organization and which are responsible for generating its competitive advantage.

Competitive advantage depends on the ability of the organization to organize its resources and value-adding activities in a way that is superior to its competitors. Value chain analysis is a technique developed by Porter (1985) for understanding an organization's value-adding activities and relationship between them. Porter extended value chain analysis to the value system, analysis of the relationship between the organization, its suppliers, distribution channels and customers. The value chain is the chain of activities which results in the final value of a business's products. The total value system, in addition to the organization's own value chain, can consist of upstream linkages with suppliers and downstream linkages with distributions and customers.

Porter's five forces model

Michael Porter provided a framework that models an industry as being influenced by five forces. The strategic business manager seeking to develop an edge over rival firms can use this model to better understand the industry context in which the firm operates.As Porter's 5 Forces analysis deals with factors outside an industry that influence the nature of competition within it, the forces inside the industry (microenvironment) that influence the way in which firms compete, and so the industry's likely profitability is conducted in Porter's five forces model. A business has to understand the dynamics of its industries and markets in order to compete effectively in the marketplace. Porter (1985) defined the forces which drive competition, contending that the competitive environment is created by the interaction of five different forces acting on a business. In addition to rivalry among existing firms and the threat of new entrants into the market, there are also the forces of supplier power, the power of the buyers, and the threat of substitute products or services. Porter suggested that the intensity of competition is determined by the relative strengths of these forces.

Example of Dyson Company

Dyson is a British appliances manufacturer. The Dyson has been doing a lot of pondering about the differences between washing machines and vacuum cleaners. Its innovation is designs of Vacuum cleaners.  The trend towards smaller households necessitates product development for compact vacuum cleaner models that are easy to store. The main reason of success for Dyson in vacuum cleaner market was that it satisfied the trend of replacement demand. In this often changing market and business environment, it is very difficult for the organization like Dyson to keep a track on the people taste which can prove to be a menace for the organization. Dyson has always been updating itself in terms of technology. To analysis the external environment such as technological segment, Dyson has always been able to keep ahead of the competition with Innovative new technologies. Porter is a major tool in place that can be used to analyze Dyson. 

Intensity of Rivalry among competitors

The degree of rivalry between home appliance companies is immense and on an increasing trend. With the development of the economy, it is essential to use such modernized equipments. Many companies in this industry have opened up a wide range of options which are available to the consumers. This leads the decreasing of the switching costs. Because the Dyson Company introduces the newer and advanced mode of appliances, it increases the level of rivalry between firms who try to hold their existing share in the market and increase it.

Threat of new entrants

Companies are very difficult to find their new competitors. It is important to find new entrants because they can threaten the market share of the existing competitors. For an industry like home appliances, the barriers to entry is mostly the initial cost of set up is very high as it requires great deal of technological equipments to be placed and thus the cost of establishment is very high. Also the requirement of improved and advanced research and development team is very essential to be a successful firm in this sector. Innovating new and better products involves a great deal of initial investment and cost which does restricts many industries from entering this sector of the industry.

Threat of Substitute product

Substitute products are goods or services from outside a given industry that perform similar or the factions as a product that the industry produces. In this sector of the industry, the threat of substitutes is very high. The companies manufacture cooking appliances the ideal threat of substitutes is from the packaged food industries where the food is ready to be eaten. The availability of "ready to eat sandwiches" has increased rapidly is of very high demand in many supermarkets because they already in a state of consumption so consumers do not have to again cook and make it eatable. Such developments can be of immense use in saving time and hence limit the requirements of cooking and as a result in the reduction in the demand for cooking appliances. So though being a product of food industry it can be of great to a complete different sector like cooling appliances.

Example of Apple Company

Bargaining power of supplier

Supplier Suppliers, if powerful, can exert an influence on the producing industry, such as selling raw materials at a high price to capture some of the industry's profits. The Motorola, IBM and Intel are all the suppliers of Apple's processor and memory. Microsoft is the supplier of Mac. Disney, Sony and ABC are the suppliers of TV and movie. The source of the music comes from BMG, Sony, Warner and universal.

Bargaining power of buyer

The buyers can share the music using peer-to-peer networks without to paying for music. And the retailer may pressure for low prices or better terms. The customer may reduce to buy computer if they fear economic downturn. This is adopting the customer attitude and behaviors. Moreover, the customers have fresh cycle.

Balance scorecard

To survive and prosper in today's world, companies can no longer manage using financial measures. The non-financial measures such as speed of response and product quality; externally focused measures, such as customer satisfaction and brand preference. The balanced scorecard is a strategic planning and management system that is used extensively in business and industry, government, and nonprofit organizations. The Balanced Scorecard is an important tool of your strategic management system

China Construction Bank

Customer's perspective: The managers confirm the competition's customers and market segments which the organization will take part in, and turn the goal into a set of indicators. Such as market share, customer retention rate, the rate of customers, customer satisfaction, customer profitability level.

Financial perspective: Timely and accurate funding data will always be a priority, and managers will do whatever necessary to provide it. In fact, often there is more than enough handling and processing of financial data. With the implementation of a corporate database, it is hoped that more of the processing can be centralized and automated.

Internal business process perspective: In order to attract and retain the target customers and meet the requirements of shareholders about financial returns, managers need to focus on customer satisfaction and those internal processes, and establish measurable indicators. In this regard, BSC is not only paying attention to a simple process to improve the existing operators, but to confirm the request of customers and shareholders as a starting point, and to satisfy customers and shareholders.

Learning and growth perspective : .It confirms an investment which the organization must be carried out in order to achieve long-term performance in the future, including the ability of employees, organization information system and so on. The financial success in organizations must be translated into the ultimate success. Only to translate the improvements of product quality, time to complete orders, productivity, new product development and customer satisfaction into increased sales, reduction of operating cost and improvement in asset turnover can bring benefits for the organization.