AE_SQNotes #3: Principles, Tools, and Techniques in Creating a Business

Lesson 1: Types of Business Organizations and Factors in Industry Analysis

I. Business Organizations
Business organizations are entities aimed at carrying on commercial enterprise by providing goods or services, to meet
needs of the customers. Online sellers, malls, department stores, sar- sari stores, manicure/ pedicure home service, car wash
establishments, amusement parks, carinderia, and many others are all examples of business organizations, but they are different
from one another in many ways. The discussions below will present their characteristics, advantages and disadvantages. Take
note of the terms to remember before you proceed to help you understand the content.
Terms to remember:
1. start-up costs- expenses incurred during the process of creating a new business which include business plan, research
expenses, borrowing costs, and expenses for technology, advertising, promotion, and employee expenses.
2. operational costs or manufacturing expenses, are costs associated with making a product or providing a service.
3. overhead costs- expenses involved in running your business such as rent, insurance, utilities (water, electricity),
marketing costs, administrative salaries and wages, telephone bill, internet costs and others. These are costs that you
continually pay for regardless of how big or small your sale is, or even when you stop you operations for a period of time.
3. liabilities are obligations and responsibilities that business owners have to be take on due to past transactions or
events. This can be financial obligations such as loans and losses, employee misbehaviors, and other business
shortcomings.
4. capital- an economic resource needed to start and operate businesses.

Types of Business Organizations:

A. Sole Proprietorship--This business organization is the simplest and most common form of business ownership, which is
owned and run by someone for their own benefit. And as the name implies, it consists of one individual doing the business. The
business’ existence is entirely dependent on the owner’s decisions.

Advantages Disadvantages
 ease of formation and dissolution  unlimited liability-- owners are personally responsible for
 low start-up costs and low operational overhead the obligations of the business, including actions of any
 ownership of all profits employee representing the business.
 typically subject to fewer regulations  limited life-- in most cases, if a business owner dies, the
 no corporate income taxes-- any income realized by a sole business dies as well
proprietorship is declared on the owner's individual income  It may be difficult for an individual to raise capital. It's
tax return. common for funding to be in the form of personal savings
or personal loans.

B. Partnership--This business organization consists of two or more individuals doing business together. There are two types of
partnerships:
1. In general partnerships, owners invest their money, property, labor, etc. to the business and are both 100% liable for business
debts. In other words, even if you invest a little into a general partnership, you are still potentially responsible for all its debt.
General partnerships do not require a formal agreement—partnerships can be verbal or even implied between the two business
owners.
2. Limited partnerships require a formal agreement between the partners. They must also file a certificate of partnership with the
government. Limited partnerships allow partners to limit their own liability for business debts according to their portion of ownership
or investment.

Advantages Disadvantages
 Synergy. There is clear potential for the enhancement of  Unlimited liability. General partners are individually
value resulting from two or more individuals combining responsible for the obligations of the business, creating
strengths. personal risk.
 may be subject to fewer regulations  There is a real possibility of disputes or conflicts between
 relatively easy to form, however, considerable thought partners which could lead to dissolving the partnership. This
should be put into developing a partnership agreement at scenario enforces the need of a partnership agreement.
the point of formation
 There is stronger potential of access to greater amounts of
capital.
 no corporate income taxes. The individual partners declare
their share of the net income of the partnership on their
individual income tax returns and pay taxes at the individual
income tax rate.

C. Corporation--A Corporation is a legal entity doing business, and is distinct from the individuals within the entity. Owners of a
corporation are called shareholders or stockholders and receive dividends as income. One becomes a stockholder by buying
into the stocks of the corporation.

Advantages Disadvantages
 Unlimited commercial life. The corporation is an entity of  Regulatory restrictions. Corporations are typically more
its own and does not dissolve when ownership changes. closely monitored by governmental agencies. Complying
 Greater flexibility in raising capital through the sale of with regulations can be costly.
stock.  Higher organizational and operational costs. Corporations
 Ease of transferring ownership by selling stock. have to file articles of incorporation- articles of
 Limited liability. Individual owners in corporations have incorporation- a set of formal documents filed with a
limits on their personal liability. Even if a corporation is government agency to legally document the creation of a
sued for billions of pesos, individual shareholder's liability corporation, which has legal and clerical expenses, along
is generally limited to the value of their own stock in the with other recurring operational expenses, can contribute
corporation. to budgetary challenges.
 Double taxation- corporate income tax returns plus, if the
corporation also pays out dividends to individual
shareholders, those shareholders must declare that
dividend income as personal income and pay taxes at the
individual income tax rates.

If a corporation runs out of funds, its owners are usually not liable, unless under these circumstances:
1. If personal funds are intermingled with corporate funds—when shareholders invested even their personal funds/ assets into the
corporation.
2. If a corporation fails to have director and shareholder meetings—it is mandated by the law for coporations to hold annual
shareholders meeting.
3. If the corporation has minimal capitalization or minimal insurance—when corporations fail to secure financial requirements.
4. If the corporation fails to pay state taxes or otherwise violates state law (like defrauding customers)

D. Cooperative-- This business ownership is organized primarily for the purpose of providing service to their user-owners, rather
than to generate profit for investors. It is organized by people with similar needs to provide themselves with goods or services to
jointly use available resources to improve their income. Members have an equal say in decision- making, there is an open and
voluntary membership and surplus earning is returned to the members according to the amount of their patronage.

Advantages Disadvantages
 less taxation. No corporate income taxes-- any income  Cooperatives may suffer from slower cash flow since a
realized is declared on the owner's individual income tax member’s incentive to contribute depends on how much
return. they use the cooperative’s services and products.
 funding opportunities. Depending on the type of  lack of membership and participation. If members do not
cooperative you own or participate in, there are a variety of fully participate and perform their duties, whether it be
government-sponsored grant programs to help you start. voting or carrying out daily operations, then the business
 reduce costs and improve products and services. Because cannot operate at full capacity. If a lack of participation
of their size, cooperatives can more easily obtain becomes an ongoing issue for a cooperative, it could risk
discounts on supplies and other materials and services. losing members.
 unlimited life. A cooperative structure brings less
disruption and more continuity to the business. Unlike
other business structures, members in a cooperative can
routinely join or leave the business without causing
dissolution.
 democratic organization. Democracy is a defining element
of cooperatives. The democratic structure of a cooperative
ensures that it serves its members’ needs.

II. Industry Analysis

In business, the internal conditions and set-up are as important as the external environment. This means that there is a
need to understand what is happening outside of a business that directly affects it or the industry it belongs to. In
macroeconomics, an industry is a branch of an economy that produces a closely related set of raw materials, goods, or services.
For example, all companies that produce juice or carbonated drinks are part of the beverage industry.
Industry analysis is a a business function completed by business owners and other individuals to assess the current
business environment. It is a tool that facilitates a company's understanding of its position relative to other companies that produce
similar products or services. The following are the factors that need to be studied in a business environment:

A. Competition or Competitors-- Competition is rivalry among sellers where each seller tries to increase sales, profits and
market share by varying the marketing mix. Out of total purchases of a customer of a product or service, what percentage goes to
a business defines its market share.
There are 7 Ps in the marketing mix which the competition is based on:
1. The product or mix of goods and services, should be appropriate and suitable for the market and the customers of today.
2. The prices of the products and services you sell should be appropriate to the realities of the current market.
3. Promotion includes all the ways you tell your customers about your products or services and how you can market and sell to
them.
4. The entrepreneur must make the right choice about the very best place or location for the customer to receive essential buying
information on the product or service needed to make a buying decision.
5. Packaging refers to the way your product or service appears from the outside.
6. Positioning or how you are seen and thought about by your customers is the critical determinant of your success in a
competitive marketplace.
7. The people inside and outside of your business who are responsible for every element of your sales, marketing strategies, and
activities.

B. Customers--A customer is anyone who buys, receives, or uses a product – either a good or a service – from a company or
business. There are two (2) maiin types of customers:
1. Internal customers are the employees or outside suppliers that contribute towards the service provided to external customers.
They include: colleagues, managers/supervisors, staff in other functional departments.
2. External customers, on the other hand, are the people who we more usually associate with the term 'customer', i.e. the people
that actually buy or use an business’ products and services.

C. Suppliers-- A supplier is a person or entity that is the source for goods or services in return for the agreed upon compensation.
As such, suppliers do not generally interact with consumers directly. There are four (4) main types of suppliers:
1. Manufacturers are those who make or produce the product.
2. Distributors buy in quantity from several manufacturers and warehouse the goods for sale to retailers.
3. Independent craftspeople are involved in the exclusive distribution of unique creations is frequently offered by independent
craftspeople, who sell through representatives or at trade shows.
4. Import sources-- many retailers buy foreign goods from a domestic importer, who operates much like a domestic wholesaler.
Or, depending on your familiarity with overseas sources, you may want to travel abroad to buy goods.

D. Substitutes-- Substitute goods are two alternative goods that could be used for the same purpose.

--SUMMATIVE TEST #3—

Lesson 2: S.W.O.T Analysis and Porter’s Five Forces of Competitive Competition

Industry Analysis Tools

I. SWOT Analysis
What you did above is what we call S.W.O.T. or the Strengths, Weaknesses, Opportunities, and Threats Analysis.
This industry analysis tool is effective to determine whether a business is going to be successful or can be a basis to strategize
better business practices to overcome challenges and problems.
This framework was developed by Albert Humphrey, at the Stanford Research Institute (SRI) in the 1960s and early
1970s. The main goal of a SWOT analysis is to reinforce your business strategy by assessing all of your business’s strengths and
weaknesses, as well as the potential opportunities and threats within your industry. SWOT analysis also helps to ensure that
businesses make objectives that are realistic and attainable, minimizing risk and maximizing efficiency.
The internal SWOT analysis comes from identifying the strengths and weaknesses of the business. These are internal
because the information is based on the conditions within the business or company. The STRENGTHS are positive aspects or
qualities of a business, which gives it an advantage over its competitors, while the WEAKNESSES are the shortcomings or
incompetencies of the business. Below are the internal factors where strengths and weaknesses of a business can be identified:

Internal Factors Strengths Weaknesses

Financial resources good source of capital; steady and increasing low funds due to increasing production cost;
sales low sales

Physical resources new equipment and machines with warranty; second hand equipment and machines;
good business location business location is far from main road

Human resources qualified employees with good interpersonal fresh graduates with no experience; poor
relationship skills; good communication skills; customer service; incompetent managers/
exceptional managerial skills supervisors

Technological resources up to date software; regular upgrading of obsolete software; old technological gadgets/
technological gadgets/ equipment equipment

The external SWOT analysis, on the other hand, comes from identifying the opportunities and threats of a business.
These are external because the information is based on the conditions outside the business or company. The OPPORTUNITIES
are on-going potential developments around the business that will be good for allow the business to grow or succeed, while
THREATS are probable events that will affect your business negatively. Below are the external factors where opportunities and
threats to a business can be identified:

External Factors Opportunities Threats

External funding Low loan interest rates offered by financial High loan rates; no new investors; low and
institutions; increasing donations; many new decreasing donations;
investors

Industry trends no new competitors; free trainings on product growing number of competitors; no
development from government agencies; technological developments; limited trainings
technological developments; able to predict on product development; limited information
future trends on future trends
 Economic movements progressive economy recession

Relationships new partnerships with investors and suppliers; withdrawn and sceptical business partners;
continuous supply of products/ raw materials; unreliable suppliers; changing tastes and
loyal customers with identified preferences preferences of customers

Regulations Policies and laws that favor business growth; Restrictive laws and high taxation; increasing
fair taxation; unchanging requirements requirements

The SWOT analysis is usually presented in four quadrants:

STRENGTHS WEAKNESSES

OPPORTUNITIES THREATS

II. Porter’s Five Forces of Competitive Position Analysis

The next common tool in industry analysis is Porter’s Five Forces of Competitive Position Analysis, a simple
framework for assessing and evaluating the competitive strength and position of a business organization. This was developed by
Michael E. Porter of Harvard Business School in 1979.
This tool tries to study how competitive a business can be based on the five forces, which are: (1) supplier power, (2)
buyer power, (3) competitive rivalry, (4) threat of substitution, and (5) threat of new entry. Study the diagram below.
Buyer Power:
Supplier Power:
Buyers have the power to drive prices DOWN
Suppliers have the power to drive UP
when:
prices when:
1. there is a SMALL number of buyers;
1. there are a FEW suppliers of an
2. the individual buyer is VERY IMPORTANT
essential input;
to the organization;
2. the products or services are
3. the cost of switching from one supplier to
UNIQUE;
another is LOW.
3. the supplier has a relatively
BIGGER SIZE and STRENGTH; and
4. the cost of switching from one
supplier to another is HIGH.
Number of Competitors:
Buyer Power  If competitors are
NUMEROUS and offer
basically similar products and
services, the market will be
LESS ATTRACTIVE.
 Low capacity of competitors
Supplier Number of to meet the market’s current
Threat of New Entrants: Power Competitors needs will serve as an
Porter's Five ATTRACTIVE
 When investors see that a
market is profitable, they will Forces of OPPORTUNITY FOR the
desire to join and get a share Competitive firm.
of the profits, but when new Position
investors enter a market, the
share of profit will be divided
among more people and will
therefore decline, thus,
ERODING PROFITS. Threat of
Threat of Threat of Substitution:
 If barriers to entry is high, it New
substitution When it is easy to substitute
will prevent new participants Entrants- products or services in a
from entering, thus, profits will market, it is expected that
be maintained. buyers will switch to alternatives
in case of price in increases.
Illustrating the Five Forces:
Force #1. In a community, there are only two suppliers of coconut milk, Pedro and Joaquin. Pedro’s store is in the market while
Joaquin’s is 1 kilometer away from the market. Since the customers go to the market to buy what they need, they will always
choose to buy coconut milk from Pedro, because it will take one jeepney ride to go to Joaquin’s store. When Pedro increases his
price, customers will still buy from him because the transportation cost to go to Joaquin’s store is higher. Thus, Pedro has
supplier bargaining power or the ability to increase price.
Force #2. After a year, Joaquin finds a store in the market and starts to sell his coconut milk at the same price. Because the quality
of his coconut milk and Pedro’s coconut milk are the same, some of Pedro’s customers switched to Joaquin especially since his
price was lower than Pedro’s. Customers start to ask Pedro to lower his price so they don’t need to switch to Joaquin. In this case
the customers have buyers bargaining power or the ability to bring down prices.
Force #3. Some community members saw how profitable Pedro and Joaquin’s coconut milk business have turned out. There
were OFWs who decide to open their own coconut milk business because they have the resources to start the business. Because
the restrictions to open their business is low, it is easy for them to join the coconut milk industry in their community. So from just
two (2) sellers, there are now seven (7) sellers of coconut milk in the community. Thus, the threat to new entrants is high. On
the other hand, if restrictions are high, the threat of new entrants will be low—investors may choose not to join the coconut milk
industry.
Force #4. Due to the pandemic, many community members decreased their spending due to limited income. Instead of purchasing
coconut milk many customers shifted to evaporated milk or simply rice water. This reflects a high threat of substitution because
it would be cheaper to just use evaporated milk or rice water.
Force #5. Since there are now seven (7) coconut milk suppliers then market share is lesser compared to when there were only two
(2). Potential investors may choose not to join the industry anymore. But if existing competitors in the industry could not provide
the current needs and demands of customers, it can still be a business opportunity for some to join the industry.

---SUMMATIVE TEST #4--