lOMoARcPSD|10470495

Chapter 3 Applied Economics

Elementary Education, Literature (Ilocos Sur Polytechnic State College)

StuDocu is not sponsored or endorsed by any college or university

Downloaded by Adessa Bianca G Navarro (agnavarro@cdd.edu.ph)
 lOMoARcPSD|10470495

CHAPTER 3- INDUSTRY AND ENVIRONMENTAL ANALYSIS: BUSINESS OPPORTUNITY IDENTIFICATION

Learning Objectives: At the end of the lesson, the students shall be able to:
1. identify the principles and tools in creating a business;
2. apply SWOT analysis as a tool in evaluating business opportunity;
3. differentiate classifications of businesses and
4. explain the importance of assessing or analyzing a business

Lesson 3.1: Principles, Tools and Techniques

A business is just a small portion of an industry. It is an undertaking by a person or a group of persons

who are partners, or of stockholders who own a juridical entity known as a corporation. Its main objective is to
earn profit for the owners. An industry on the other hand, is the aggregation of the different businesses
engaged in the same line of undertaking.
For a person to put up a business, it is essential that an industry analysis first be made. Commonly used
is a system known as the SWOT analysis, which lists the strengths, weaknesses, opportunities and threats that
the business faces.

BUSINESS ORGANIZATION
There are four ways to form a business:
1. Sole Proprietorship. This is the simplest way to set up a business. A sole proprietorship is owned by a
single individual who is singly responsible for running the business and is accountable for all debts and
obligations related to the business. The sole proprietor enjoys exclusive control and decision-making as
well as gets all the profits earned but he also shoulders all losses and has unlimited liability which
means payments of his loans will extend to his personal assets.
2. Partnership. It is an agreement in which two or more persons combine their resources in a business
with a view to making profit. A partnership agreement is drawn up and profits are equally divided
among the partners according to the terms of agreement. There are two types of partnership:
a. General partnership. All owners share the management of the business and each is personally
responsible for and must assume the consequences of the actions of the other partners.
b. Limited partnership. Some members are general partners who control and manage the business
and may be entitled to a greater share of the profit while other partners are limited and contribute
only capital, take no part in control or management and are liable for debts to a specific extent only.
3. Corporation. It is a legal entity that is separate from its owners, the shareholders. No shareholder is
personally liable for the debts, obligations or acts of the corporation. Directors and officers can bear
liability for their involvement with the corporation. Owners have limited liabilities. However,
corporations are burdened by heavy taxes.
4. Cooperative. It is an entity organized by people with similar needs to provide themselves with goods
and services or to jointly use available resources to improve their income. Members have an equal say
in decision-making with one vote per member regardless of the number of shares held, there is open
and voluntary membership and surplus earning is returned to the members according to the amount of
their patronage.

SMALL, MEDIUM AND LARGE SCALE BUSINESSES

It is also important to study the classification of businesses as to the size based on the worth of the
business assets. In the Philippines, total assets for micro business are worth below ₱1, 500,001. For the small
business, total assets are from ₱1,500,001 to ₱15,000,000. Medium business has total assets from
₱15,000,001 to ₱60,000,000. Any business with assets in excess of ₱60,000,000 is considered large scale.
For any form of business organization, the business must be registered with the appropriate
government agencies. In the case of sole proprietorships and partnerships, 100% must be owned and
capitalized by Filipinos. For corporations, at least 60% of the outstanding capital stocks must be owned by
Filipino citizens. Business activity conducted maybe within major sectors of industry, services, practice of
profession or operation of tourism-related businesses and agri-business.
The choice of which form of business organization may be a personal preference of the owner, based
on his objectives, his available resources and scope of operations.

Downloaded by Adessa Bianca G Navarro (agnavarro@cdd.edu.ph)

 lOMoARcPSD|10470495

Lesson 3.2. Tools in Evaluating a Business

According to a guide developed by North Carolina’s Small Business and Technology Development
Center, the key factors that must be considered in analyzing the industry are the following:
1. The geographic area which your business will cater to. Is it limited to local areas? Or will it cover a
region, the entire country or even international market?
2. The size and outlook of the industry. What trends can be identified?
3. Description of the product.
4. The buyers have to be identified. Who ae your target customers?
5. The regulatory environment. Are the local, national news will restrict your business? One needs to
identify government regulations specific to the chosen industry.
6. The need to identify the leading businesses in the industry and to provide company information on the
most successful businesses that you will be up against .
7. Factors that will affect the growth of the business.

THE SWOT ANALYSIS

The SWOT analysis was created in the 1960’s by business gurus, Edmund P. Learned, C. Roland
Christensen, Kenneth Andrews and William D. Book in their book, Business Policy, Text and Cases.
SWOT, which stands for Strengths, Weaknesses, Opportunities and Threats is an analytical framework
that can help a company meet its challenges and identify new markets. The framework can help identify the
business’s risks and rewards. It is also a means of identifying the internal and external forces that may affect
the business. It is very helpful in assessing new ventures. The SWOT actually refers to the internal factors and
these are the resources and experiences readily available to the business proponent. Included as internal
factors are:
1. financial resources such as money and sources of funds for investment;
2. physical resources, such as company’s location, facilities, machinery and equipment
3. human resources consisting of employees
4. access to natural resources, trademarks, patents and copyrights; and
5. current processes such as employee programs, department hierarchies, and software systems, sales
and distribution capabilities, marketing programs, etc.
On the other hand, when we speak of external forces, those that affect a company, an organization, an
individual and those outside their control. These may include:
1. economic trends including local, national and international financial trends, developments in the
country’s stock markets, reforms in the banking system, growth of the GDP;
2. market trends such as new products or technology or evolving buyer’s profile, including changes in
tastes and lifestyle behavior;
3. national and local laws and statuses as well as political, environmental and economic regulations;
4. demographic characteristics of target market such as the age, gender and culture of customers;
5. relationships with suppliers and co-owners and
6. competitive threats

Before an owner can plan for its business future, he/she must first evaluate the business by identifying
and analyzing internal and external resources and threats. The SWOT analysis is a tool that can help a
proponent by enabling him/her to identify and assess the internal and external forces that can affect the
business.

Strength Weakness

s w
o T
Opportunity Threat

Table for SWOT Analysis

This table presents a SWOT analysis template that can be used as a guide to identify the strengths,
weaknesses, opportunities and threats. List its elements side by side for comparison. Most of the time, the

Downloaded by Adessa Bianca G Navarro (agnavarro@cdd.edu.ph)

 lOMoARcPSD|10470495

business’s strengths and weaknesses will not match the listed opportunities and threats, and this is where the
owner should attempt to make them meet.

Example:
Strengths: Weaknesses:
 government incentives  difficulty of organization
 low capital requirements  costly set-up
 market acceptance  possible pollution problems
 experienced leaders  lack of training of workers
Opportunities: Threats:
 project may replace imported goods available  entry of competitors
in the market  time consuming production processes
 will improve employee welfare  opposition from the residents in the
 improved company reputation community

PORTER’S FIVE FORCES OF COMPETITIVE POSITION ANALYSIS

This is another analytical tool to assess a business. It was developed by Michael E. Porter of Harvard
Business School in 1979 as a framework or a guide for assessing and evaluating the competitive strength and
position of a business organization. The five forces that need to be evaluated are the following:
1. Supplier power- A supplier enjoys this power if there are a few supplier of an essential input and they
therefore control the supply of that input. Another source of power is how unique the product or
service. The more unique the product, the easier it is for the supplier to drive up the price. In the same
manner, the supplier who has a relatively larger size and strength in the market enjoys the power of
driving up the prices.
2. Buyer power- If the supplier can enjoy the power to drive prices up, it is also possible for a buyer to
drive prices down. An assessment needs to be made on of how easy it is for buyers to drive prices
down. The smaller the number of buyers in the market, the greater is the power enjoyed by the buyer.
Likewise, the more important an individual buyer is to the organization, the greater his power is.
3. Number of competitors – If competitors are numerous and offer similar products and services, the
market will be less attractive. Low capability of competitors to meet the market’s current needs will
serve as an attractive opportunity for the firm.
4. Possibility of substitution – when it is easy to substitute products in a market, it is expected that buyers
will switch to alternatives in case of price increase. The suppliers will enjoy less power to drive prices up
and the market will be less attractive.
5. Possibility of new entrants – when market is profitable, the investors will desire to join the bandwagon
and get a share of the profits. But when new investors enter a market, the share of the participants in
the market will be divided among more people and will therefore decline, thus eroding profits.

Importance of Porter’s Five Forces Analysis

 a significant tool for organizations to understand the factors affecting profitability in a specific
industry;
 can help to form decisions on whether or not to enter a specific industry, whether or not increase
the capacity in a specific industry and also for developing competitive strategies;
 Under this theory, a business becomes more attractive. The greater the supplier’s power to drive
prices up, the less the buyer’s power to drive prices down, the less the number of competitors in
the market, the more differentiated the product or service is, the less the substitutability of the
products for similar goods, and the more difficult it is for new entrants to participate in the market.

Downloaded by Adessa Bianca G Navarro (agnavarro@cdd.edu.ph)