Exact Colleges of Asia

Suclayin, Arayat, Pampanga

BS Tourism Management
APPLIED ECONOMICS
CHAPTER 1: INTRODUCTION TO ECONOMICS

What Is Economics?
Economics is a social science that focuses on the production, distribution, and
consumption of goods and services, and analyzes the choices that individuals,
businesses, governments, and nations make to allocate resources.

Understanding Economics
Assuming humans have unlimited wants within a world of limited means,
economists analyze how resources are allocated for production, distribution, and
consumption.

The study of microeconomics focuses on the choices of individuals and

businesses, and macroeconomics concentrates on the behavior of the economy
as a whole, on an aggregate level.

One of the earliest recorded economists was the 8th-century B.C. Greek farmer
and poet Hesiod who wrote that labor, materials, and time needed to be
allocated efficiently to overcome scarcity. The publication of Adam Smith's 1776
book, An Inquiry Into the Nature and Causes of the Wealth of Nations sparked the
beginning of the current Western contemporary economic theories.

Microeconomics
Microeconomics studies how individual consumers and firms make decisions to
allocate resources. Whether a single person, a household, or a business,

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economists may analyze how these entities respond to changes in price and why
they demand what they do at particular price levels.

Microeconomics analyzes how and why goods are valued differently, how
individuals make financial decisions, and how they trade, coordinate, and
cooperate.

Within the dynamics of supply and demand, the costs of producing goods and
services, and how labor is divided and allocated, microeconomics studies how
businesses are organized and how individuals approach uncertainty and risk in
their decision-making.

Macroeconomics
Macroeconomics is the branch of economics that studies the behavior and
performance of an economy as a whole. Its primary focus is the
recurrent economic cycles and broad economic growth and development.

It focuses on foreign trade, government fiscal and monetary policy,

unemployment rates, the level of inflation, interest rates, the growth of total
production output, and business cycles that result in expansions, booms,
recessions, and depressions.

Using aggregate indicators, economists use macroeconomic models to help

formulate economic policies and strategies.

What Is the Role of an Economist?

An economist studies the relationship between a society's resources and its
production or output, and their opinions help shape economic policies related to

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interest rates, tax laws, employment programs, international trade agreements,
and corporate strategies.

Economists analyze economic indicators, such as gross domestic product and the
consumer price index to identify potential trends or make economic forecasts.

What Are Economic Indicators?

Economic indicators detail a country's economic performance. Published
periodically by governmental agencies or private organizations, economic
indicators often have a considerable effect on stocks, employment, and
international markets, and often predict future economic conditions that will
move markets and guide investment decisions.

• Gross domestic product (GDP)

The gross domestic product (GDP) is considered the broadest measure of a
country's economic performance. It calculates the total market value of all
finished goods and services produced in a country in a given year. The Bureau of
Economic Analysis (BEA) also issues a regular report during the latter part of each
month.3 Many investors, analysts, and traders focus on the advance GDP report
and the preliminary report, both issued before the final GDP figures because the
GDP is considered a lagging indicator, meaning it can confirm a trend but can't
predict a trend.

• Retail sales
Reported by the Department of Commerce (DOC) during the middle of each
month, the retail sales report is very closely watched and measures the total
receipts, or dollar value, of all merchandise sold in stores. Sampling retailers across
the country acts as a proxy of consumer spending levels. Consumer spending

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represents more than two-thirds of GDP, proving useful to gauge the economy's
general direction.

• Industrial production
The industrial production report, released monthly by the Federal Reserve, reports
changes in the production of factories, mines, and utilities in the U.S. One measure
included in this report is the capacity utilization ratio, which estimates the portion
of productive capacity that is being used rather than standing idle in the
economy. Capacity utilization in the range of 82% to 85% is considered "tight" and
can increase the likelihood of price increases or supply shortages in the near term.
Levels below 80% are interpreted as showing "slack" in the economy, which may
increase the likelihood of a recession.

• Employment Data
The Bureau of Labor Statistics (BLS) releases employment data in a report called
the nonfarm payrolls on the first Friday of each month.7 Sharp increases in
employment indicate prosperous economic growth and potential contractions
may be imminent if significant decreases occur. These are generalizations and it
is important to consider the current position of the economy.

• Consumer Price Index (CPI)

The Consumer Price Index (CPI), also issued by the BLS, measures the level of retail
price changes, and the costs that consumers pay, and is the benchmark for
measuring inflation. Using a basket that is representative of the goods and
services in the economy, the CPI compares the price changes month after month
and year after year.8 This report is an important economic indicator and its
release can increase volatility in equity, fixed income, and forex markets. Greater-
than-expected price increases are considered a sign of inflation, which will likely
cause the underlying currency to depreciate.

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Economic Systems
Five economic systems illustrate historical practices used to allocate resources to
meet the needs of the individual and society.

• Primitivism
In primitive agrarian societies, individuals produced necessities from building
dwellings, growing crops, and hunting game at the household or tribal level.

• Feudalism
A political and economic system of Europe from the 9th to 15th century, feudalism
was defined by the lords who held land and leased it to peasants for production,
who received a promise of safety and security from the lord.

• Capitalism
With the advent of the industrial revolution, capitalism emerged and is defined as
a system of production where business owners organize resources including tools,
workers, and raw materials to produce goods for market consumption and earn
profits. Supply and demand set prices in markets in a way that can serve the best
interests of society.

• Socialism
Socialism is a form of a cooperative production economy. Economic socialism is
a system of production where there is limited or hybrid private ownership of the
means of production. Prices, profits, and losses are not the determining factors
used to establish who engages in the production, what to produce and how to
produce it.

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 • Communism
Communism holds that all economic activity is centralized through the
coordination of state-sponsored central planners with common ownership of
production and distribution.

What Is a Command Economy?

A command economy is an economy in which production, investment, prices,
and incomes are determined centrally by a government. A communist society
has a command economy.

What Is Behavioral Economics?

Behavioral economics combines psychology, judgment, decision-making, and
economics to understand human behavior.

Who Has Influenced the Study of Economics in the 21st Century?

Since 2000, several economists have won the Nobel Prize in economics, including
David Card for his contributions to labor economics, Angus Deaton for his study
of consumption, poverty, and welfare, and Paul Krugman for his analysis of trade
patterns.

Key Takeaways:
• Economics is the study of how people allocate scarce resources for

production, distribution, and consumption, both individually and

collectively.
• The two branches of economics are microeconomics and
macroeconomics.
• Economics focuses on efficiency in production and exchange.
• Gross Domestic Product (GDP) and the Consumer Price Index (CPI) are
widely used economic indicators.

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CHAPTER 2: CONCEPT AND NATURE OF APPLIED ECONOMICS

What Is Applied Economics?

Applied economics applies the conclusions drawn from economic theories and
empirical studies to real-world situations with the desired aim of informing
economic decisions and predicting possible outcomes. The purpose of
applied economics is to improve the quality of practice in business, public policy,
and daily life by thinking rigorously about costs and benefits, incentives, and
human behavior. Applied economics can involve the use of case studies
and econometrics, which is the application of real-world data to statistical
models and comparing the results against the theories being tested.

Understanding Applied Economics

Applied economics is the application of economic theory to determine the likely
outcomes associated with various possible courses of action in the real world. By
better understanding the likely consequences of choices made by individuals,
businesses, and policy makers, we can help them make better choices. If
economics is the science of studying how people use various, limited means

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available to them to achieve given ends, then applied economics is the tool to
help choose the best means to reach those ends. As a result, applied economics
can lead to "to do" lists for steps that can be taken to increase the probability of
positive outcomes in real-world events.

The use of applied economics may first involve exploring economic theories to
develop questions about a circumstance or situation and then draw upon data
resources and other frames of reference to form a plausible answer to that
question. The idea is to establish a hypothetical outcome based on the specific
ongoing circumstances, drawn from the known implications of general economic
laws and models.

Applied Economics Relevance in the Real World

Applied economics can illustrate the potential outcomes of financial choices
made by individuals. For example, if a consumer desires to own a luxury good but
has limited financial resources, an assessment of the cost and long-term impact
such a purchase would have on assets can compare them to the expected
benefit of the good. This can help determine if such an expense is worthwhile.

Beyond finances, understanding the meaning of the economic theories of

rational choice, game theory, or the findings of behavioral
economics and evolutionary economics can help a person make better
decisions and plan for success in their personal life and even relationships. For
example, a person who wants to quit smoking might recognize that they are
prone to hyperbolic discounting and might choose to employ precommitment
strategies to support their long-term preference to quit over more powerful short-
term preferences to smoke. Or a group of friends sharing a large bowl of popcorn
might explicitly or implicitly agree to limits or shares on how much popcorn each
will take in order to avoid a tragedy of the commons situation.

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Understanding Applied Economics
Applied economics reduces abstract concepts into examples that can be
discussed and related to the business community at large. However, depending
on whom you ask, what constitutes applied economics versus what constitutes
core economics is open to interpretation.

A popular philosophy taught in many business schools as to what constitutes the

field of economics more broadly is that economics is the study of whatever
economists themselves do. For simplicity’s sake, the mainstream view of applied
economics is generally thought of as consisting of the below:

1. Labeling variables as core-specific

2. Providing numerical estimates
3. Interpreting real-world events
4. Providing a structure to draw conclusions

Why is Mainstream Economics Important?

Understanding the world in which we live is pivotal to many economic theories.
Economics helps explain market phenomena, such as corrections and recessions,
or even why we as consumers are more inclined to purchase one product or
another. Applied economics is at the center of everything we do, and it is pivotal
to explaining and conveying market principles.

Business leaders and managers can draw on the lessons in applied economics in
order to better avoid potential pitfalls and make stronger decisions as managers.
Even everyday consumers can better understand the prices they are paying at
the grocery store. It can help explain why certain prices rise and fall and why sales
occur.

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Relevance
Applied economics marks the utilization of the knowledge and skills acquired by
professionals during their theoretical economics lessons. The leaders, policy-
makers, and decision-makers use it in any context to figure out how their choices
would impact their decisions. However, they can approve or disapprove a
strategy, initiative, or step after proper analysis and validation.

The field of study makes individuals apply theories and knowledge to solve their
problems. It, therefore, finds relevance in different theories, concepts, and
industries, including the game theory.

With applied economics, finding answers to questions related to the

environmental sector, human behavior, market situations, legal aspects, etc.,
becomes easier. From helping environmentalists determine the cost of carbon
emissions to framing legal market strategies with respect to economics, this
applied form of the subject lets individuals and entities find answers to the queries

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they have. For example, the applied field of economics helps utilize analytical
tools to assess consumer behavior and accordingly target a market.

Recently, COVID-19 led to the heavy use of resources, which the healthcare
sector was unprepared for. The application of economics helped healthcare
administration or authorities to conduct predictive analysis, initiate resource
allocation, and boost policies to support the sector to tackle the health care
turmoil. It shows how applied economics and management remain interrelated
no matter which industry professionals work in.

KEY TAKEAWAYS
• Applied economics is the use of the insights gained from economic theory
and research to make better decisions and solve real-world problems.
• Applied economics is a popular tool in business planning and for public
policy analysis and evaluation.
• Individuals can also benefit from applying economic thinking and insights
to personal and financial decisions.

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CHAPTER 3: LAW OF DEMAND
Law of Demand
The law of demand is one of the most fundamental concepts in economics. It
works with the law of supply to explain how market economies allocate resources
and determine the prices of goods and services that we observe in everyday
transactions.

The law of demand states that the quantity purchased varies inversely with price.
In other words, the higher the price, the lower the quantity demanded. This occurs
because of diminishing marginal utility. That is, consumers use the first units of an
economic good they purchase to serve their most urgent needs first, then they
use each additional unit of the good to serve successively lower-valued ends.

Understanding the Law of Demand

Economics involves the study of how people use limited means to satisfy unlimited
wants. The law of demand focuses on those unlimited wants. Naturally, people
prioritize more urgent wants and needs over less urgent ones in their economic
behavior, and this carries over into how people choose among the limited means
available to them. For any economic good, the first unit of that good that a
consumer gets their hands on will tend to be used to satisfy the most urgent need
the consumer has that that good can satisfy.

Factors Affecting Demand

Even though the focus in economics is on the relationship between the price of a
product and how much consumers are willing and able to buy, it is important to
examine all of the factors that affect the demand for a good or service.

These factors include:

• Price of the Product

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 • Consumer’s Income
• Price of Related Goods
• Taste/Preferences of Consumers
• Consumer’s Expectations
• Number of Consumers in the Market

Price of the Product

There is an inverse (negative) relationship between the price of a product and
the amount of that product consumers are willing and able to buy. Consumers
want to buy more of a product at a low price and less of a product at a high
price. This inverse relationship between price and the amount consumers are
willing and able to buy is often referred to as The Law of Demand.

The Consumer's Income

The effect that income has on the amount of a product that consumers are willing
and able to buy depends on the type of good we're talking about. For most
goods, there is a positive (direct) relationship between a consumer's income and
the amount of the good that one is willing and able to buy. In other words, for
these goods when income rises the demand for the product will increase; when
income falls, the demand for the product will decrease. We call these types of
good as normal goods.

However, for some goods the effect of a change in income is the reverse. For
example, think about a low-quality (high fat-content) ground beef. You might buy
this while you are a student, because it is inexpensive relative to other types of
meat. But if your income increases enough, you might decide to stop buying this
type of meat and instead buy leaner cuts of ground beef, or even give up ground
beef entirely in favor of beef tenderloin. If this were the case (that as your income
went up, you were willing to buy less high-fat ground beef), there would be an

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inverse relationship between your income and your demand for this type of meat.
We call this type of good an inferior good. There are two important things to keep
in mind about inferior goods. They are not necessarily low-quality goods. The term
inferior (as we use it in economics) just means that there is an inverse relationship
between one's income and the demand for that good. Also, whether a good is
normal or inferior may be different from person to person. A product may be a
normal good for you, but an inferior good for another person.

The Price of Related Goods

As with income, the effect that this has on the amount that one is willing and able
to buy depends on the type of good we're talking about. Think about two goods
that are typically consumed together. For example, bagels and cream cheese.
We call these types of goods compliments. If the price of a bagel goes up, the
Law of Demand tells us that we will be willing/able to buy fewer bagels. But if we
want fewer bagels, we will also want to use less cream cheese (since we typically
use them together). Therefore, an increase in the price of bagels means we want
to purchase less cream cheese. We can summarize this by saying that when two
goods are complements, there is an inverse relationship between the price of one
good and the demand for the other good.

On the other hand, some goods are considered to be substitutes for one
another: you don't consume both of them together, but instead choose to
consume one or the other. For example, for some people Coke and Pepsi are
substitutes (as with inferior goods, what is a substitute good for one person may
not be a substitute for another person). If the price of Coke increases, this may
make Pepsi relatively more attractive. The Law of Demand tells us that fewer
people will buy Coke; some of these people may decide to switch to Pepsi
instead, therefore increasing the amount of Pepsi that people are willing and
able to buy. We summarize this by saying that when two goods are substitutes,

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there is a positive relationship between the price of one good and the demand
for the other good.

The Tastes and Preferences of Consumers

This is a less tangible item that still can have a big impact on demand. There are
all kinds of things that can change one's tastes or preferences that cause people
to want to buy more or less of a product. For example, if a celebrity endorses a
new product, this may increase the demand for a product. On the other hand, if
a new health study comes out saying something is bad for your health, this may
decrease the demand for the product. Another example is that a person may
have a higher demand for an umbrella on a rainy day than on a sunny day.

The Consumer's Expectations

It doesn't just matter what is currently going on - one's expectations for the
future can also affect how much of a product one is willing and able to buy. For
example, if you hear that Apple will soon introduce a new iPod that has more
memory and longer battery life, you (and other consumers) may decide to wait
to buy an iPod until the new product comes out. When people decide to wait,
they are decreasing the current demand for iPods because of what they expect
to happen in the future. Similarly, if you expect the price of gasoline to go up
tomorrow, you may fill up your car with gas now. So your demand for gas today
increased because of what you expect to happen tomorrow. This is similar to what
happened after Huricane Katrina hit in the fall of 2005. Rumors started that gas
stations would run out of gas. As a result, many consumers decided to fill up their
cars (and gas cans), leading to long lines and a big increase in the demand for
gas. This was all based on the expectation of what would happen.

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The Number of Consumers in the Market
As more or fewer consumers enter the market this has a direct effect on the
amount of a product that consumers (in general) are willing and able to buy. For
example, a pizza shop located near a University will have more demand and thus
higher sales during the fall and spring semesters. In the summers, when less
students are taking classes, the demand for their product will decrease because
the number of consumers in the area has significantly decreased.

KEY TAKEAWAYS
• The law of demand is a fundamental principle of economics that states that
at a higher price, consumers will demand a lower quantity of a good.
• Demand is derived from the law of diminishing marginal utility, the fact that
consumers use economic goods to satisfy their most urgent needs first.
• A market demand curve expresses the sum of quantity demanded at each
price across all consumers in the market.
• Changes in price can be reflected in movement along a demand curve,
but by themselves, they do not increase or decrease demand.
• The shape and magnitude of demand shifts in response to changes in
consumer preferences, incomes, or related economic goods, NOT to
changes in price.

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CHAPTER 4: LAW OF SUPPLY
Law of Supply
The law of supply is the microeconomic law that states that, all other factors being
equal, as the price of a good or service increases, the quantity of goods or
services that suppliers offer will increase, and vice versa.

The law of supply says that as the price of an item goes up, suppliers will attempt
to maximize their profits by increasing the number of items for sale.

Understanding the Law of Supply

The chart below depicts the law of supply using a supply curve, which is upward
sloping. A, B, and C are points on the supply curve. Each point on the curve
reflects a direct correlation between quantity supplied (Q) and price (P). So, at
point A, the quantity supplied will be Q1 and the price will be P1, and so on.

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The supply curve is upward sloping because, over time, suppliers can choose how
much of their goods to produce and later bring to market. At any given point in
time, however, the supply that sellers bring to market is fixed, and sellers simply
face a decision to either sell or withhold their stock from a sale;
consumer demand sets the price, and sellers can only charge what the market
will bear.

If consumer demand rises over time, the price will rise, and suppliers can choose
to devote new resources to production (or new suppliers can enter the market),
which increases the quantity supplied. Demand ultimately sets the price in a
competitive market; supplier response to the price they can expect to receive
sets the quantity supplied.

The law of supply is one of the most fundamental concepts in economics. It works
with the law of demand to explain how market economies allocate resources
and determine the prices of goods and services.

Factors affecting supply

Supply can be influenced by a number of factors that are termed as determina
nts of supply. The following factors are:
• Price
• Cost of production
• Technology
• Government Policies
• Transportation Conditions

Price
Price can be understood as what the consumer is willing to pay to receive a go
od or service. This is the main factor that influences the supply of a product. In th

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e law of supply, when the price of a product goes up, the supply of the product
also increases andvice versa. This is considered as the variation in the price. How
ever, if there is any speculation of a rise in the price of the product, it is typical th
at the supply in the present market would drop in order to gain more profit in the
future. That also indicates that if the price is expected to decrease, the supply in
the current marketplace would strongly increase.

Besides that, the price of substitutes and complementary goods could also affec
t the supply of a product. For example, if the price of wheat increases, the farme
rs would tend to grow more wheat than rice. This would potentially decrease the
supply of rice in the market. Overall, price is a factor that affects a product’s su
pply the most.

Cost of production
The supply of a product and the cost of production is adversely related to each
other. For companies, if the cost of production increases, the supply of products
would shrink so as to save resources. For example, due to the high wages rate of
labor, poor natural conditions such as crop failure as well as the increase in raw
materials price, taxes, transportation cost … the cost of production is raised. In this
case, managers of the company would either supply a smaller quantity of
product to the market or stock the product till the market price is exceeded.

Technology
Shifts in the supply curve are usually the result of advances in technology that re
duce thecost of production. Technology advances can improve production effi
ciency and therefore cut down the cost spent for production. Computers, televi
sions and photographic equipment are good examples of the effects of technol
ogy on the supply curve. A huge computer that used to cost several thousand d
ollars can now be purchased for a few hundred dollars with such improvement i

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n storage and processor. In this case, the supply for the computer in the present
day would be much higher than that of the past.

Governments’ policies
With the role to regulate and protect the industry, the Government has a great i
nfluence on the supply of a product. The lower the tax, the higher the supply of t
hat product. On the other hand, if strict regulations are imposed and the excise
duty is added, the product’s supply would fall off.

Transportation condition
The supply chain relies on the efficient management of assets and logistics to ge
t raw materials, parts and finished products from one place to another. Transport
is always a constraint to the supply of products, as the products are not availabl
e on time due to poor transport facilities.

KEY TAKEAWAYS
• The law of supply says that a higher price will induce producers to supply a
higher quantity to the market.
• Because businesses seek to increase revenue, when they expect to receive
a higher price for something, they will produce more of it.
• Meanwhile, if prices fall, suppliers are disincentivized from producing as
much.
• Supply in a market can be depicted as an upward-sloping supply curve
that shows how the quantity supplied will respond to various prices over a
period of time.
• Together with demand, it forms half of the law of supply and demand.

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CHAPTER 5: INDUSTRY ENVIRONMENT ANALYSIS
What is Industry Environment Analysis?
Industry Environment Analysis is a study or exercise done to assess the current
industry environment. This exercise helps understand the various aspects and
predict trends of the industry better, and helps in many other ways. Generally,
industry analysis is done by external research agencies, consulting firms or
businesses themselves.

An environmental analysis, also called an environmental scan, is a strategic tool

used to identify and assess all external and internal elements in a business
environment. It examines organizational and industry factors that can positively
or negatively affect the business. By anticipating short-term and long-term
impacts, the organization can readily respond to them when they appear.

Purpose
An environment analysis assists organizations in defining factors that can influence
their business operations. By weighing these elements, they can foresee the
trajectory of their business given the circumstances. This approach allows them to
develop a strategy that takes advantage of opportunities and reduces threats.
Incorporating an environmental analysis in the strategic planning sessions helps
businesses systematically approach their decision-making process. This way,
organizations can achieve their business goals and propel their performance to
new heights.

Components
An environmental analysis consists of two major components: internal factors and
external factors. This section will discuss them in detail.

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Internal Factors
These components ask organizations to look inward. They examine the
organization’s strong and weak points based on its mission and vision. These
factors also allow businesses to reflect on their direction and plans in a set
period—say, in five or ten years.

External Factors
On the other hand, external factors refer to high-level considerations that exist
outside the organization. According to SHRM, businesses must examine the
threats and opportunities present in the following matters:
• Industry and market trends
• Competition—their advantages and weak points
• Customers—your customer base and customer service
• Economy—economic activities that can impact the organization
• Technology—technological advancements that can streamline operations
• Labor supply—labor markets in areas of operation
• Political and legal circumstances

Environmental Analysis Process

An environmental analysis follows a systematic process of uncovering factors that
affect your business and its operations. While there’s no hard and fast rule on
doing an environmental scan, these steps can guide you into making the most
out of this process.

• Identify the environmental factors.

An environmental analysis, first and foremost, needs a list of the factors to
evaluate. These factors will depend on your organization’s industry and
geographical location.

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This list should include both micro and macro-environmental factors that have
short-term and long-term impacts on their operations. For example, a mining
company can outline the latest trends in their industry and environmental
regulations in their locality.

• Collect information about these factors.

After outlining the environmental factors, the next step is to gather data related
to them. You can utilize various sources to make sure the information is relevant
and up to date.

For example, customer satisfaction surveys inform you about how your product or
service performs in the market and what improvements you can make.
Meanwhile, government websites work best if you’re following updates on
relevant regulations.

• Check the competitors.

When doing an environmental scan, your research doesn’t stop at your
organization’s business standing. It’s also necessary to scope out how your
competitors are performing. A competitor analysis can help you determine any
threats that can weaken your business and opportunities that set you apart from
the competition.

• Determine the impacts on the organization.

Once you’ve collected sufficient environmental information, you can now use
them to predict how it can affect your business. This step sets your expectations,
so you can prepare for the possible outcomes should these factors come your
way. In assessing risks and their impacts, it’s vital to ask the following questions:
• What are the consequences of this factor on your business?
• How long will this last?

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 • How will this affect the business (positively, negatively, or no impact)?
• How important is this factor in the overall business operations?

• Devise a strategic plan.

The final step allows you to brainstorm and formulate strategies for the possible
changes from these factors. It includes assessing current strategic plans and
adjusting them based on the information you have gathered about your business
environment. Aside from this, you can also enumerate steps to maximize
opportunities and minimize threats.

Importance of Industry Environment Analysis

To be successful in any business, the ecosystem or the environment of business,
industry, geography, trends should be well understood. To understand this, proper
study and analysis of the industry environment has to be performed.

The major objectives of such industry environment analysis are:

- To identify key success factors of that industry
- To assess attractiveness and growth prospects for entry
- To formulate competitive strategy
- To study changes over time and predict trends

To effectively understand the environmental scanning, there are tools that may
help economists and professionals such as SWOT Analysis, PESTEL Analysis, and
Porter’s Five Forces.

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CHAPTER 6: SWOT ANALYSIS
What Is a SWOT Analysis?
SWOT stands for Strengths, Weaknesses, Opportunities, and Threats, and so a
SWOT analysis is a technique for assessing these four aspects of your business.

SWOT Analysis is a tool that can help you to analyze what your company does
best now, and to devise a successful strategy for the future. SWOT can also
uncover areas of the business that are holding you back, or that your competitors
could exploit if you don't protect yourself.

A SWOT analysis examines both internal and external factors – that is, what's going
on inside and outside your organization. So some of these factors will be within
your control and some will not. In either case, the wisest action you can take in
response will become clearer once you've discovered, recorded and analyzed
as many factors as you can.

Why Is SWOT Analysis Important?

SWOT Analysis can help you to challenge risky assumptions and to uncover
dangerous blindspots about your organization's performance. If you use it
carefully and collaboratively, it can deliver new insights on where your business
currently is, and help you to develop exactly the right strategy for any situation.
For example, you may be well aware of some of your organization's strengths, but
until you record them alongside weaknesses and threats you might not realize
how unreliable those strengths actually are.

How to Write a SWOT Analysis

SWOT analysis involves making lists – but so much more, too! When you begin to
write one list (say, Strengths), the thought process and research that you'll go

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through will prompt ideas for the other lists (Weaknesses, Opportunities or Threats).
And if you compare these lists side by side, you will likely notice connections and
contradictions, which you'll want to highlight and explore.

Figure 1. A SWOT Analysis Matrix.

Strengths Weaknesses
What do you do well? What could you improve?
What unique resources can you draw Where do you have fewer resources than
on? What do others see as your others?
strengths? What are others likely to see as
weaknesses?
Opportunities Threats
What opportunities are open to you? What threats could harm you?
What trends could you take advantage What is your competition doing?
of? What threats do your weaknesses expose
How can you turn your strengths into to you?
opportunities?

How to Do a SWOT Analysis

Avoid relying on your own, partial understanding of your organization. Your
assumptions could be wrong. Instead, gather a team of people from a range of
functions and levels to build a broad and insightful list of observations.

Then, every time you identify a Strength, Weakness, Opportunity, or Threat, write
it down in the relevant part of the SWOT analysis grid for all to see.

Strengths
Strengths are things that your organization does particularly well, or in a way that
distinguishes you from your competitors. Think about the advantages your

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organization has over other organizations. These might be the motivation of your
staff, access to certain materials, or a strong set of manufacturing processes.

Your strengths are an integral part of your organization, so think about what
makes it "tick." What do you do better than anyone else? What values drive your
business? What unique or lowest-cost resources can you draw upon that others
can't? Identify and analyze your organization's Unique Selling Proposition (USP),
and add this to the Strengths section.

Then turn your perspective around and ask yourself what your competitors might
see as your strengths. What factors mean that you get the sale ahead of them?
Remember, any aspect of your organization is only a strength if it brings you a
clear advantage. For example, if all of your competitors provide high-quality
products, then a high-quality production process is not a strength in your market:
it's a necessity.

Weaknesses
Weaknesses, like strengths, are inherent features of your organization, so focus on
your people, resources, systems, and procedures. Think about what you could
improve, and the sorts of practices you should avoid.

Once again, imagine (or find out) how other people in your market see you. Do
they notice weaknesses that you tend to be blind to? Take time to examine how
and why your competitors are doing better than you. What are you lacking?

Be honest! A SWOT analysis will only be valuable if you gather all the information
you need. So, it's best to be realistic now, and face any unpleasant truths as soon
as possible.

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Opportunities
Opportunities are openings or chances for something positive to happen, but
you'll need to claim them for yourself!

They usually arise from situations outside your organization, and require an eye to
what might happen in the future. They might arise as developments in the market
you serve, or in the technology you use. Being able to spot and exploit
opportunities can make a huge difference to your organization's ability to
compete and take the lead in your market.

Think about good opportunities that you can exploit immediately. These don't
need to be game-changers: even small advantages can increase your
organization's competitiveness. What interesting market trends are you aware of,
large or small, which could have an impact?
You should also watch out for changes in government policy related to your field.
And changes in social patterns, population profiles, and lifestyles can all throw up
interesting opportunities.

Threats
Threats include anything that can negatively affect your business from the
outside, such as supply-chain problems, shifts in market requirements, or a
shortage of recruits. It's vital to anticipate threats and to take action against them
before you become a victim of them and your growth stalls.

Think about the obstacles you face in getting your product to market and selling.
You may notice that quality standards or specifications for your products are
changing, and that you'll need to change those products if you're to stay in the
lead. Evolving technology is an ever-present threat, as well as an opportunity!

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Always consider what your competitors are doing, and whether you should be
changing your organization's emphasis to meet the challenge. But remember
that what they're doing might not be the right thing for you to do. So, avoid
copying them without knowing how it will improve your position.

What is a TOWS Analysis?

A TOWS Analysis is an extension of the SWOT Analysis framework that identifies
your Strengths, Weaknesses, Opportunities and Threats but then goes further in
looking to match up the Strengths with Opportunities and the Threats with
Weaknesses. It’s a great next step after completing your SWOT and allows for you
to take action from the analysis.

Adding the relationship between the internal and external factors makes TOWS a
much more useful matrix than a standalone SWOT and an obvious next step. The
main purpose of a TOWS Analysis is to:

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 • Reduce threats
• Take advantage of opportunities
• Exploit strengths
• Remove weaknesses

A well thought out TOWS can not only provide you with detail of your SWOT, but
also some data to make a decision about your overall direction.

What is the difference between SWOT and TOWS?

The big difference between a TOWS and a SWOT is the relationships between the
internal and external factors, examining how they link up, impact and influence
each other.

Strengths to Opportunities:
The S-O focuses around how you can exploit your strengths in order to respond
to the potential opportunities in the market.

Strengths to Threats:
The S-T examines how strengths can be used to mitigate or remove the threats
to the business, and in some cases look at how threats can be transformed to
opportunities.

Weaknesses to Opportunities:
The W-O can be the hardest consideration, as it doesn’t always come naturally.
Consider how your opportunities can remove your weaknesses.

Weaknesses to Threats:
The W-T highlights how weaknesses can play into, develop or enhance the
threats of the business.

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What are the advantages of TOWS?
TOWS has a number of advantages:
• It’s simple to understand and complete
• It provides a good analysis of both internal and external issues
• It focuses on the positive and negative
• It leads to actions to improve your current position

What are some of the limitations of TOWS?

The limitations of TOWS are:
• It can be too broad to be used to make decisions
• It doesn’t contain a way to weight the importance or the element of risk
• It takes longer to complete than other frameworks
• You need a good knowledge of both internal and external issues to
complete it

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CHAPTER 7: PESTEL ANALYSIS
Concept and Nature of PESTEL ANALYSIS
A PESTLE analysis studies the key external factors (Political, Economic,
Sociological, Technological, Legal and Environmental) that influence an
organization. It can be used in a range of different scenarios, and can guide
people professionals and senior managers in strategic decision-making.

It is a broad fact-finding activity around the external factors that could affect an
organization’s decisions, helping it to maximize opportunities and minimize
threats. It audits six external influences on an organization:

• Political: Tax policy; environmental regulations; trade restrictions and

reform; tariffs; political stability

• Economic: Economic growth/decline; interest, exchange, inflation and

wage rates; minimum wage; working hours; unemployment (local and
national); credit availability; cost of living

• Sociological: Cultural norms and expectations; health consciousness;

population growth rates; age distribution; career attitudes; health and
safety

• Technological: New technologies are continually emerging (for example,

in the fields of robotics and artificial intelligence), and the rate of change
itself is increasing. How will this affect the organization’s products or
services?

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 • Legal: Changes to legislation impacting employment, access to materials,
quotas, resources, imports/exports, and taxation

• Environmental: Global warming and the increased need to switch to

sustainable resources; ethical sourcing (both locally and nationally),
including supply chain intelligence. Pandemics and other emergencies.

By analyzing those factors, organizations can assess any risks specific to their
industry and organization, and make informed decisions. It can also highlight the
potential for additional costs, and prompt further research to be built into future
plans.

What is a PESTEL Analysis used for?

By auditing the external environment, a PESTLE analysis can detect and
understand broad, long-term trends. This can support a range of business
planning situations, such as:

• Strategic business planning

A PESTLE analysis provides contextual information about the business direction, its
brand positioning, growth targets, and risks (such as another pandemic) to
productivity. It can help determine the validity of existing products and services
and define new product development.

• Workforce planning
A PESTLE analysis can help to identify disruptive changes to business models that
may profoundly affect the future employment landscape. It can identify skills
gaps, new job roles, job reductions or displacements.

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 • Marketing planning
A PESTLE analysis provides the ‘climate’ element in the situation analysis phase of
the marketing planning process. It can help prioritise business activities to
accomplish specific marketing objectives within a set timeframe.

• Product development
By monitoring external activity, a PESTLE analysis can help inform whether to enter
or leave a route to market, determine if a product or service still fulfils a need in
the marketplace, or when to launch a new product.

• Organizational change
A PESTLE analysis helps understand the context for change, and is most effective
when used in association with a SWOT analysis to understand opportunities and
threats around labor changes, such as skills shortages or current workforce
capabilities.

• People strategies, reports and projects

A PESTLE analysis can be used as a framework to look outside the organization to
hypothesize what may happen in future and what should be further explored. It
can ensure that some basic factors are not overlooked or ignored when aligning
people strategies to the broader organization strategy.

Advantages and Disadvantages of PESTEL Analysis

Advantages:
• It’s a simple framework.
• It facilitates an understanding of the wider business environment.
• It encourages the development of external and strategic thinking.
• It can enable an organization to anticipate future business threats and take
action to avoid or minimize their impact.

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 • It can enable an organization to spot business opportunities and exploit
them fully.

Disadvantages:
• Some PESTLE analysis users oversimplify the amount of data used for
decisions – it’s easy to use insufficient data.
• The risk of capturing too much data may lead to ‘paralysis by analysis’.
• The data used may be based on assumptions that later prove to be
unfounded.
• The pace of change makes it increasingly difficult to anticipate
developments that may affect an organization in the future.
• To be effective, the process needs to be repeated on a regular basis.

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CHAPTER 8: PORTER’S FIVE FORCES ANALYSIS
What Are Porter's Five Forces?
Porter's Five Forces is a model that identifies and analyzes five competitive forces
that shape every industry and helps determine an industry's weaknesses and
strengths. Five Forces analysis is frequently used to identify an industry's structure
to determine corporate strategy.

Porter's model can be applied to any segment of the economy to understand

the level of competition within the industry and enhance a company's long-term
profitability. The Five Forces model is named after Harvard Business School
professor, Michael E. Porter.

Porter's 5 forces are:

1. Competition in the industry
2. Potential of new entrants into the industry
3. Power of suppliers
4. Power of customers
5. Threat of substitute products

Understanding Porter's Five Forces

Porter's Five Forces is a business analysis model that helps to explain why various
industries are able to sustain different levels of profitability. The model was
published in Michael E. Porter's book, Competitive Strategy: Techniques for
Analyzing Industries and Competitors in 1979.1

The Five Forces model is widely used to analyze the industry structure of a
company as well as its corporate strategy. Porter identified five undeniable forces
that play a part in shaping every market and industry in the world, with some
caveats. The Five Forces are frequently used to measure competition intensity,

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attractiveness, and profitability of an industry or market.

Understanding Porter‘s Five Forces

Porter theorized that understanding both the competitive forces at play and the
overall industry structure are crucial for effective, strategic decision-making, and
developing a compelling competitive strategy for the future.

In Porter’s model, the five forces that shape industry competition are

1. Competitive rivalry
This force examines how intense the competition is in the marketplace. It considers
the number of existing competitors and what each one can do. Rivalry
competition is high when there are just a few businesses selling a product or
service, when the industry is growing and when consumers can easily switch to a
competitor’s offering for little cost. When rivalry competition is high, advertising
and price wars ensue, which can hurt a business’s bottom line.

2. The bargaining power of suppliers

This force analyzes how much power a business’s supplier has and how much
control it has over the potential to raise its prices, which, in turn, lowers a business’s
profitability. It also assesses the number of suppliers of raw materials and other
resources that are available. The fewer supplier there are, the more power they
have. Businesses are in a better position when there are multiple suppliers. Learn
more about finding suppliers and B2B partners.

3. The bargaining power of customers

This force examines the power of the consumer, and their effect on pricing and
quality. Consumers have power when they are fewer in number but there are
plentiful sellers and it’s easy for consumers to switch. Conversely, buying power is

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low when consumers purchase products in small amounts and the seller’s product
is very different from that of its competitors.

4. The threat of new entrants

This force considers how easy or difficult it is for competitors to join the
marketplace. The easier it is for a new competitor to gain entry, the greater the
risk is of an established business’s market share being depleted. Barriers to entry
include absolute cost advantages, access to inputs, economies of scale,
and strong brand identity.

5. The threat of substitute products or services

This force studies how easy it is for consumers to switch from a business’s product
or service to that of a competitor. It examines the number of competitors, how
their prices and quality compare to the business being examined, and how much
of a profit those competitors are earning, which would determine if they can
lower their costs even more. The threat of substitutes is informed by switching costs,
both immediate and long-term, as well as consumers’ inclination to change.
Learn how to perform a competitive analysis to stay ahead of other players in the
market. To take full advantage of this strategy make sure you’re able to
properly calculate cost of goods sold (COGS).

Example of Porter’s Five Forces

There are several examples of how Porter’s Five Forces can be applied to various
industries. The ultimate goal is to identify the opportunities and threats that could
impact a business. As an example, stock analysis firm Trefis looked at how Under
Armour fits into the athletic footwear and apparel industry.

• Competitive rivalry: Under Armour faces intense competition from Nike,

Adidas, and newer players. Nike and Adidas, which have considerably

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 larger resources at their disposal, are making a play within the performance
apparel market to gain market share in this up-and-coming product
category. Under Armour does not hold any fabric or process patents,
hence its product portfolio could be copied in the future.

• Bargaining power of suppliers: A diverse supplier base limits supplier

bargaining power. Under Armour’s products are produced by dozens of
manufacturers based in multiple countries. This provides an advantage to
Under Armour by diminishing suppliers’ leverage.

• Bargaining power of customers: Under Armour’s customers include

wholesale customers and end-user customers. Wholesale customers, like
Dick’s Sporting Goods, hold a certain degree of bargaining leverage, as
they could substitute Under Armour’s products with those of Under Armour’s
competitors to gain higher margins. The bargaining power of end-user
customers is lower as Under Armour enjoys strong brand recognition.

• Threat of new entrants: Large capital costs are required for branding,
advertising, and creating product demand, which limits the entry of newer
players in the sports apparel market. However, existing companies in the
sports apparel industry could enter the performance apparel market in the
future.

• Threat of substitute products: The demand for performance apparel, sports

footwear and accessories is expected to continue to grow. Therefore, this
force does not threaten Under Armour in the foreseeable future.

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Strategies for success
Once your analysis is complete, it’s time to implement a strategy to expand your
competitive advantage. To that end, Porter identified three generic strategies
that can be implemented in any industry (and by companies of any size)

• Cost leadership
Your goal is to increase profits by reducing costs while charging industry-standard
prices, or to increase market share by reducing the sales price while retaining
profits.

• Differentiation
To implement this strategy, your company’s products need to be significantly
better than the competition’s, improving their competitiveness and value to the
public. It requires thorough research and development, plus effective sales and
marketing.

• Focus
Successful implementation entails the company selecting niche markets in which
to sell their goods. It requires an intense understanding of the marketplace, its
sellers, buyers and competitors. More information about the generic strategies is
available in Porter’s 1985 book, Competitive Advantage (Free Press).

Alternatives to Porter’s Five Forces

While Porter’s Five Forces is an effective and time-tested model, it has been
criticized for failing to explain strategic alliances. In the 1990s, Yale School of
Management professors Adam Brandenburger and Barry Nalebuff created the
idea of a sixth force, “complementors,” using the tools of game theory.

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In Brandenburger’s and Nalebuff’s model, complementors sell products and
services that are best used in conjunction with a product or service from a
competitor. Intel, which manufactures processors, and computer manufacturer
Apple could be considered complementors.

Additional modeling tools are likely to help round out your understanding of your
business and its potential. A value chain analysis helps companies understand
where their best productive advantage lies, while the BCG matrix helps
companies identify which products are likely to benefit the most from increased
investment.

What Are Porter's Five Forces Used for?

Porter's Five Forces Model helps managers and analysts understand the
competitive landscape that a company faces and to understand how a
company is positioned within it.

Is Porter's Five Forces Model Still Relevant?

Yes, even though it was created more than 40 years ago, the Five Forces Model
continues to be a useful tool for understanding how a company is positioned
competitively.

What Are Some Drawbacks of Porter's Five Forces?

The Five Forces model has some drawbacks, including that it is backward-looking,
making its findings mostly relevant only in the short term; that limitation is
compounded by the impact of globalization.

Another big drawback is the tendency to try to use the five forces to analyze an
individual company, versus a broad industry, which is how the framework was
intended.

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Also problematic is that the framework is structured so that each company is
placed in one industry group when some companies straddle several. Another
issue includes the need to assess all five forces equally when some industries aren't
as heavily impacted by all five.

What's the Difference Between Porter's Five Forces and SWOT Analysis?
Porter's 5 Forces and SWOT (strengths, weaknesses, opportunities, & threats)
analysis are both tools used to analyze and make strategic decisions. Companies,
analysts, and investors use Porter's 5 Forces to analyze the competitive
environment within an industry, while they tend to use a SWOT analysis to look
more deeply within an organization to analyze its internal potential.

The Bottom Line

Porter's Five Forces framework defines the most important criteria to consider
when looking at the competitive landscape of a corporation. High threat levels
typically signal that future profits may deteriorate and vice versa. For example,
an early startup in a fast-growing industry might quickly become shut out if barriers
to entry are not present. Likewise, a company selling products for which there are
numerous substitutes will not be able to exercise pricing power to improve its
margins, and it may even lose market share to its competitors.

The reason Porter's model became so widely adopted is that it forces companies
to look beyond their own immediate business and to their industry as a whole
when making long-term plans. Porter's still plays a vital role in that, but it should
not be the sole tool in the toolbox when it comes to building a business strategy.

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KEY TAKEAWAYS
• Porter's Five Forces is a framework for analyzing a company's competitive
environment.
• Porter's Five Forces is a frequently used guideline for evaluating the
competitive forces that influence a variety of business sectors.
• It was created by Harvard Business School professor Michael E. Porter in
1979 and has since become an important tool for managers.
• These forces include the number and power of a company's competitive
rivals, potential new market entrants, suppliers, customers, and substitute
products that influence a company's profitability.
• Five Forces analysis can be used to guide business strategy to increase
competitive advantage.

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