Lesson 3.3.

Industry Analysis
In a book published by the Development Academy of the Philippines, How to Prepare
Project Feasibility Studies, it includes an industry analysis of the following important
factors.
COMPETITION
Who are the major businesses in the industry? Are there locations close to your
proposed business? Have they been long existing or still new entrants? What is the
market share of each of these businesses? It is very important that you know your
competitors and be ready for them. Your aim is to win their customers, convince them to
buy from you instead, and remain as royal customers.
CUSTOMERS
Who will you sell your product to? The target market must be identified. Who
exactly will buy your products? What income groups? What age brackets? What
gender? What career groups? What type of people will you cater to, based on their
preferences, lifestyles, and buying habits?
SUPPLIERS

Every retail business needs suppliers from whom one can source raw materials,
intermediate products, or even the finished goods one intends to resell.
A business may need one or more suppliers. It is important to develop suppliers
who are reliable in terms of the quality of what they supply and their dependability in
coming up with the things you order from them. With modern technology, one can
easily go online and shop for suppliers, look at reviews made by other retailers to
determine who the reliable ones are. The yellow pages of the telephone directories
are also a good source of suppliers' stores and names. The person intending to put up
a business must ask around for prices in order to be more competitive with other
sellers in the market.
A business owner can buy directly from the manufacturers. This will be the
cheapest source since there are no middlemen involved. However, this is only
recommended if the supplier's location is convenient and will not involve expensive
delivery costs.
Another alternative is to buy redistributor’s. They are 'wholesalers or brokers
who buy in big quantities from manufacturers, add a mark-up to their purchase price,
and sell to retailers. Their prices are higher but they can sell in small quantities, which
the manufacturers would not normally do.
A third source of goods is through imports. Some businessmen go to nearby
countries to buy their goods or raw materials there. This is advisable if the prices abroad
are relatively cheaper and no heavy import duties will raise the prices and make the
goods less competitive in the country and when transport costs are unaggressive.
 It is important to maintain good relationships with one's suppliers; they are the
key to one's continued access to goods and to raw materials that will be needed for the
business.
SUBSTITUTES
Substitutes are goods that can be used in place of another. These are goods that may,
even if partly, satisfy the same needs of a consumer such that the consumer may use one
instead of another. For example, margarine can be a substitute for butter or wheat bread for
white bread. Some goods are close substitutes While others are not. Pepsi Cola may be a
very good substitute for Coca Cola, but not everybody will be willing to switch brands
because they have developed a taste for a particular cola. This is why manufacturers try to
differentiate their products from their competitors so that the customers will develop
product loyalty for their brand. We know that Safeguard and Dove are both bath soaps, yet
we can distinguish one brand from another, and we have our own preferences.
The more differentiated a product is, the greater the edge of its manufacturer
because this can convince the customers to buy their product instead of that of the
competition.
A GUIDE TO INDUSTRY ANALYSIS
An industry analysis guide developed by North Carolina's Small Business and
Technology Development Center (SBTDC) can help in making an analysis of one's
business industry.
The key factors to be considered in analyzing your industry identified by the SBTDC are:
Geographic Area - identify the area whether local, regional, nationwide, or international
Industry (as to size) - worth in pesos and number of firms, trends, and developments and
future outlook
Product describe the product as to physical attributes and characteristics, and its uses
Buyers - describe target customers as to age, income group, geographical location, and
occupations; include consumer demographics such as population/ household size, sex, race,
ethnicity, family status, housing status, etc.; may also include psychographics such as
lifestyle information, tastes, preferences, and buying habits
Regulatory Environment - should include government laws and regulations that apply to the
business
Company Information - make a list of the most successful businesses in the industry
A brief history of the industry - when it started and how it developed
Factors that affect growth of the industry - such as migration of population from rural to
urban areas
Trends in sales over recent years - show actual sales in the industry over the past 5 years
Current operational/management trends within the industry, which are standard practices
prevalent among the firms
1. The types of marketing strategies prevalent within the industry
2. Competitor information - include the location of competitors and how long have they been
in business and their market share lesson 3.4. Environmental Analysis

The other analysis that has to be done is an analysis of the environment in which
the business will operate.-This means an evaluation of the possible or probable effects
of external forces and conditions on the survival and growth of the business.
An environmental analysis includes a thorough study of:
ECONOMIC FORCES
This involves a look at economic factors such as income of the people,
specifically the target market, economic conditions such as inflation, recession,
prosperity, demand, and supply in the market.
PHYSICAL ENVIRONMENT
This includes a look at the population size, the geography of the place where
business will be located, land distribution, climate, and in today's global warming
situation, whether or not the area is prone to flood or earthquake.
POLITICAL FACTORS

The type of government, the stability and strength of the government, and good
leadership are factors that can be an advantage to a business.
CULTURES AND LIFESTYLES

It is important to study cultural practices such as fiestas, celebration of the

Christmas season, trends in consumption patterns, as a means to identify the goods and
services that will fit into these celebrations and spending behavior.

COMPETITION
This is something that needs to be studied. As already mentioned above, the degree
of competition in the market and the extent and strength of competition are all very
vital in determining the success or failure of a business.

Lesson 3.5. The Circular Flow of Economic Activity

To further guide the students on how the market works, this section describes the
various economic activities that take place in an economy. This is referred to as the
circular flow which is defined as the flow of activities of household and firms in a
circular direction. Let us start with the first illustration.

THE SIMPLE FLOW OF GOODS AND SERVICES

In Figure 3.3, goods and services flow from the firms as producers, to the
households as consumers, in a clockwise direction. On the other hand, households as
resource
ECONOMICS
owners provide firms as producers with resource use such as labor rendered, capital lent
or invested, land rented to producers, and entrepreneurial skills. In Figure 3.3, these
resources flow from the households to the firms also in a clockwise direction. It is the use
of these resources that enables the firms to produce the goods and services delivered to
the households. The flow of products and resources are the physical flows in the
economy.
The flipside to the physical flow is the money payment flow. Household pay and
firms earn revenues in exchange for the goods and services received and i)provided,
respectively. In Figure 3.3, revenues flow counterclockwise from the households to the
firms as payments for the goods and services received by the former. Likewise, firms pay
and households earn factor income for the use of resources provided to the former. Factor
income payments counter flow from the firms to the households for resources provided by
the latter.
For as long as households are willing to consume, producers continue to produce
goods and services for the households using the resources provided by the latter. As the
physical flow continues, so is the money payment flow in exchange for products and
resources. In Figure 3.3, the physical flow continues in a clockwise direction in exchange
for money payment flow in the counterclockwise direction.
 Figure3.3. The Circular Flow

Figure3.3. The Circular Flow

A Closer Look
Among the firms, there is also the product flow up the production stages, that is,
from the raw material to the intermediate good on DI) to the final good stage for
consumption (solid arrows, Figure Opposite the product flow is the money payment flow
in exchange for product delivery down the production stages from the consumer, that is,
to the final then to the intermediate and on to the raw material stage (broken arrows,
Figure
 /Raw materials are unprocessed goods like raw minerals, logs, and wheat, which are
extracted from their sources and (io not undergo any process of production• frf6mediate
goods are semi-processed goods that are not ready for final use by the consumer, such as
leather, cloth, and steel, which have undergone some processing but need to go through
additional processing before they can be actually used. T e are supplied to final good
firms for conversion into goods in their finished stag . Final goods are goods that are
ready for direct consumption such as refrigerators, dresses, or pants. These final goods
are then sold to customers for their use.
Figure 3.4 magnifies the production side of the circular flow diagram in Figure 3.3.
Goods flow up the production stages to the consumers in return for payments trickling
down the production stages in retiirn for the inter-stage product flows.

Money Payments
 Figure 3.4. Intra-Production Payment Flows

/ Another form of physical flow is the flow f resources from the households to the
business firms (solid arrows, Figure 3.5)The -household is the source of resources used
by the raw material firm, the intermediate good firm, and the final good firm. In the
flow, it can be seen that the household provides resources to the raw material,
intermediate good and the final good firms for use in the production of goods.
 Figure 3.5. Resource-Production-Payment Flow
In return for the use of the resources, the three types of producing units make money
payments to households (broken arrows). This is now a financial flow since it involves
the payment of money to the resource owners. Money is now paid by the various firms to
the households as payment for the resources they provide. Figure 3.5 magnifies the flows
of resources and payments in exchange between households and the producers in the
circular flow diagram in Figure 3.3.

THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

There are two other relevant units in the flow: the government and foreign countries.
The government is important because it makes purchases of economic resources from the
household and makes money payments to the resource owners for the use of their
resources. The government also buys goods and services from the producing units for
which it makes money payments.
The significance of the global economy cannot be overemphasized in today's times.
An economy buys goods from other countries; these are called imports. An economy sells
goods o other countries; these are called exports. A country pays for the goods imported
And earns income from exports.

Lesson 3.6 The Economy's Producing Sectors

The economy has three main producing sectors:
Agriculture, Fishery and Forestry
Industry
Manufacturing
Construction
Electricity, Gas and Water
Mining-and Quarrying
 3. Service

Transportation, Communication and Storage

Banking and Finance
Public Service (Government)
Real Estate
Private Services

The Agriculture, Fishery fiests. and Forestry Sector reaps the fruits of natural
resources like the soil, water, and However, these environmental resources are
VUInerab1e to climate change affecting production such as long dry spells and
frequent devastating typhoons due to say, the El Nifio phenomenon. From this sector
comes the fo we CODkat home and the raw materials processed or used by other
economic sectors ( making pillows and mattresses). Agriculture accounts for most
(84%, NED of sectorial production as fishery lags far behind despite the country's
big fishing grounds. Much less does forestry contribute to output as it will take
decades to vegetate our vastly denuded forests.
INDUSTRIAL SECTOR
The Industrial Sector supposedly processes raw materials from agrifishery and
forestry into intermediate products that are further processed into final oducts. For
example, local makers of wallets and bags produce the final products by cessing the
intermediate product of leather which is manufactured from the animal hid extracted by
agriculture. Within the industrial sector itself, local cement manufacturers' produce the
product by heating limestone mixed with clay from the quarrying industry for use in the
construction industry. The lead industries in resource use and output are Ra factoring and
construction as they respectively account for 65% and 20% of sector production (NSCB
2009).
SERVICE SECTOR
The Service Sector produces the intangibles supporting and co plementing
production in the other sectors as well as among its own industries. For example% the
transport industry brings input and output among the other industries. eliant on its
activity is the trade industry that takes on the complementary role of m keting their
produce. The single biggest industry in resource use and output is trade asi ecountsfor
29% of sectorial production (ÅSCB 2009).
"Lesson 3.7. Competitiveness and Efficiency
The fair ranking of the Philippines in world competitiveness means that the
country's industries are yet on their way from the factor-driven to the efficiency-driven
stage. In The Global Competitiveness Report 2013-2014 of The World Economic
Forum (WE), the country ranked number 58 among the 148 countries on its list. Factors
allowing the free flow of products and resources are already in place such as
institutions, infrastructure, stability, and basic education and health. However, our yet
to attain the efficiency enabled by higher education/skills, technological readiness and
product/labor market competition. For example, we have yet to design and produce the
first Filipino car (includes engine, transmission) following in the footsteps of countries
like Malaysia and
China. Much less are we even close to the innovative stage driven by business
sophistication
APPLIED ECONOMICS
and innovative ideas. This stage cuts across standards to produce sophisticated products like
the electric-powered cars of Japan and the United States. Figure 3.6 outlines what makes a
country's industries globally competitive and responsive to both local and global needs.

Source: World Economic Forum (WEF)

Figure 3.6. Factors for Global Competitiveness Index
As the country's industries struggle to attain efficiency toward the government's
vision of sophisticated innovation, they do so with those in the rest of the world. Figure
3.7 shows that the Philippines still lags behind her neighbors in past Asia in labor
efficiency alone. Reflective of her global competitiveness, much less is the country
attractive to host foreign businesses serving regional markets. According to said
competitiveness report, prominent among the problematic factors for doing business
in the Philippines are inadequate infrastructure, corruption, inefficient government
bureaucracy, policy instability, crime rate, tax rate, and restrictive labor regulations.
50000

40000

30000

20000

10000

Taipeh South
Philippines Malaysia Thailand China Korea Source: NEDA
 Figure 3.7. Labor Efficiency of ASEAN Countries in 2009
The country's producing sectors also struggle with one another as they Compete for
the use of local resources (e.g., labor)• The least efficient is Agriculture, Fishery, and
Forestry combined while the most efficient is Industry. While Agriculture, Fishery, and
Forestry combined employs one third of local labor for production, it only contributes
one tenth to the country's total output (Figures 3.8 and 3.9). In contrast, Industry has
almost twice as much share in output (27%) as it has in employment (16%). In between is
Service which has a slightly greater share in output (63%) than in employment (53%).
Figure 3.10 shows the comparative efficiencies of the country's main producing sectors.

Agricultural

Source: Philippine Statistical Authority

Figure 3.8. Sectorial Shares Output (2013)

Source: Philippine Statistical Authority

 Figure 3.9. Sectorial Shares Employment (2013)

100,0
90,000
80,000
70,000
60,000
50,000
40,000
30,000
2b,ooo
10,om

Agriculture Industry Service

Source: NEDA
Figure 3.10. Sectorial Productivity (2008)

AGRICULTURE AND FISHERY

In a global setting, these industries are the least competitive despite the country's
natural resources mainly due to human factors affecting efficiency. The uncontrollable
nature (e.g., typhoons, drought, etc.) occasionally disrupts production and causes
damage to crops. But socio-economic and governance factors explain more why the
country's agriculture lacks the technology, skills, market competition, and even credit
enabling efficiency to be at least self-sufficient in food. Figure 3.11 shows that rice
production—the leading crop of agriculture—is even short of consumption. Unlike
fishery and livestock, agriculture is more exposed to both natural and human factors
with its longer production cycle involving land cultivation and nurturing what nature
grows.
105
100
95
90
85
80
75
Rice Corn Fish Chicken Pork

Source: Bureau of Agricultural Statistics,

Department of Agriculture

Figure 3.11. Contribution of Local Production to Local Consumption (2008) (in Percent)
 In particular, inadequate socio-economic and public infrastructures coupled With
liberalized trade smother agricultural efficiency of the know-how, resources, and
competitive environment to at least meet local consumption. small-scale farming—the
foundation of agriculture—is limited to take advantage of size and access to
technology skills, credit, and marketing networks. Most farms (63%) are micro in
scale with average size of 2.2 hectares (List of Establishments, NSO 2009). Also, the
continuous conversion of agricultural lands for industrial use and settlement even
threatens to decimate the number of farmlands left, Let alone that almost one-half of
irrigable lands (44%) is not irrigated yet (World Development Indicators, World Bank
2006). On top of the limitations of size, inadequate infrastructures (roads, transport,
and storage) hamper the free flow of products and input between farms and markets.
On the other hand, trade liberalization (e.g., tariffs) has overwhelmed local production
that is yet too weak to stand up to foreign competition as of rice from China, Thailand,
and Vietnam. Figures 3.12 and 3.13, respectively, show that we have the lowest yield
per hectare Of rice land and per person among ASEAN countries. Thus, we import
cheaper rice to supplement local production although the latter has been accelerating
to decrease the former.

Source: Food and Agriculture Organization (2012

Figure 3.12. Average Palay Yield Among ASEAN
Countries (In Metric Tons Per Hectare)
600
500
400
300
200
 100

Source: Food and Agriculture Organization (201

Figure 3.13. Average Palay Production per Person among ASEAN Countries,
Average for 2008-2010 (In Kilogram Per Person)
The same socio-economic and governance factors lilhit efficiency in the fishery
sector that it can hardly produce a surplus for Like in agriculture, tishing activities are
micro in scale confined to municipal fishing and aquaculture (List 01 Establislunents,
NSC)
2009). Municipal fishing is fishing by small shore coral’s while aquaculture is
culturing and growing fish in the controlled environment of Inostly small
fishponds. 'l'hese industries jointly and equally account for the bulk (7 1 0/0) Of
fishery production ( Bureau of Agricultural statistics, Department of Agriculture
2013). In contrast, counterseal fishing accounts for a little over one-third of mostly
exportable fishery production (390/0) by big corporations using big vessels that are
instrument-navigated in deep sea. On top of size limitations is the inadequacy of
road, transport, and storage facilities to preserve and market the perishable product
in order to fetch more competitive prices. Likewise, industrial and trade policies
have even made fuel—a critical input—more costly especially for the motorized
bancas of small municipal fishermen. Going back to Figure 3.16, fish supply,
Inostly from the municipal and aquaculture industries, is just enough to meet local
consumption needs (100%). The weakness of these industries deprives the small
fishermen of the income opportunity to produce a surplus of high-valued species
for export.
MANUFACTURING

In spite of the liberalization of foreign investment and trade, the manufacturing

industry is hardly competitive even in the ASEAN region due to limitations of size and
structural support. Likewise, these limitations smother manufacturing efficiency
especially of the technology and skills to grow and compete in a global context. Almost
all (89%) manufacturing establishments are micro in scale with limited access to
competitive opportunities similar to agriculture and fishery (NSC) 2008). These light
enterprises produce consumer goods—mostly (86%) food manufactures—contributing
the bulk (55%) of manufacturing output using low technology and skills (NSCB 2012).
Lacking government support to deepen technology and production, the fewer
enterprises of much larger scale are into the final production stages of electronics,
machineries, chemicals, petroleum, and garments. In the absence of intermediate
(middle) product industries, they are the most that we can have—import-dependent and
without much need for technology and skills. Thus, they do not contribute much to the
economy in terms of output and jobs. The same lack of government support fails to
challenge micro enterprises to grow toward higher technology and creativity levels. As
in agriculture, even local enterprises of larger scale are still to stand up to foreign
investment and trade competition induced by liberalization policies.

TRADE AND TRANSPORT

In spite of being the top,grosser (34%) of the biggest sector that is service, the
trade industry supported by the transport industry is also handicapped by the limited
size of its establishments. Almost all (92%) are micro in scale engaged in retail trade
that contributes almost one-half (46%) to total trade (Census of Philippine Business
and Industry, NSO 2012). However, the transport industry has a fair majority (73%) of
micro businesses mostly engaged in land transport and transport support services (e.g.,
maintenance). Land transport accounts for almost one-half (46%) of all transport
services while transport support services accounts for the bulk (52%) of industry
output. On top of
 the limitation of size, thirty percent (30%) of trade establishments crowd in Metro
Manila serving only thirteen percent (13%) of the country's population. But crowding
more in the same National Capital Region are more than One-half (56%) of transport
establishments in the country. On the other hand, less crowded are thirteen percent
(13%) Of trade and eight percent (8%) of transport establishments in nearby
CALABARZON (Cavite, Laguna Batangas, Rizal, and Quezon) industrial zone
serving fourteen percent (14%) of the country's population (Census, NSO 2010). At
any rate, even businesses in this industrial zone are near support industries in the Metro
Manila where almost one-third (30%) of manufacturing establishments are also based.
INTERNATIONAL TRADE

Assembled electronic products top the country's exports (40%) dominated by

manufactures reflective of the country's waning agricultural sector (Philippines Statistics
Authority, Foreign Trade Statistics 2013). The assembled parts are imports from
subsidiaries in the global networks Of the same multinational corporations (e.g., Intel,
Texas Instrument). These electronic parts are also the country's leading imports (22%)
followed by minerals, fuels, machineries and equipment, and the like. Almost all imports
are semi-final and final manufactures in the absence of intermediate product industries.
As already mentioned, electronics products hardly contribute to local output and
employment being import-dependent and without much need for technology. Unlike their
counterparts in other sectors, their assembly plants are mostly found in the
CALABARZON industrial zone where support industries in manufacturing and trade are
also moving into.

TOURISM

Tourism is an emerging industry as expenditures of foreign tourists on relate

services such as hotels and restaurants, transport and entertainment grew by twenty-
nine percent (29%) in 2012. Gaining importance as an industry, it contributed six
percent (6%) to the gross output of the economy (NSCB, Tourism Statistics 2012). It
also figured as the third leading export of the country after electronics and
miscellaneous services which include business process outsourcing (26.9%). Most
tourists prefer hotels for accommodation (80%) and cars for transport facilities
(42%). Most also prefer restaurants (68%) and avail of Internet access (51%) in
accommodating establishments. In addition, establishments concentrate operation in
Metro Manila, Western, and Eastern Visayas as most preferred tourist destinations.
However, the industry mostly composed of micro enterprises (90%) is yet to grow to
its fullest potential. The country lags behind even in the ASEAN region as a tourist
destination with a minimal share (5%) in total arrivals in contrast to Singapore (16%),
Malaysia (30%), and Thailand (24%). Thus, in Figure 3•14' it also lags behind in
tourist arrivals per 100 population even in the ASEAN region.
 250
200
150
100
50

Singapore Malaysia Thailand Vietnam Philippines Indonesia

Source: World Economic Forum (WEF)

Figure 3.14. Tourist Arrivals per 100 Population (201 1)

SMALL BUSINESS OPPORTUNITIES

Small farmers and fishermen can tap urban consumer markets and distribution
centers with cooperative efforts to minimize the limitations of size and inadequate
farm to-market facilities. They can engage in the cooperative activities not only of
sharing/ collectively owning resources to preserve freshness or delay perishability of
goods at lower cost. Collectively, they can also gain direct and faster access to market
networks to command higher product prices as well as cheaper production input. Let
alone that they can access credit for expansion on collective credibility. However,
more government provisions of farm-to-market infrastructure like concrete road
network can boost the efficiency of cooperative market activities even of farmers and
fishermen in the hinterland.
The country's growing population also affords cooperating micro enterprises in the
manufacturing, trade, and transport of new consumer markets for growth and
expansion. More micro manufacturers of light consumer products can find new
markets in growing industrial and urban areas like CALABARZON, away from
overcrowded Metro Manila. Complementary and support industries are already
gravitating toward these growing centers, let alone the concentration of government
infrastructures and services promoting market efficiency. Thus, new micro trade and
transport enterprises can complement or support the growing number even of light
manufacturers moving to these growth centers. To minimize the limitation of size,
micro enterprises can form associations for introductory. Data analysis is a very
important part of the research process. Before performing data analysis, researchers
must make sure that numbers in their data are as accurate as possibly coordination
and timely availability Of services. In addition, manufacturers association can improve
market access on competitive terms. But more government provisions of physical
infrastructure like concrete road network can greatly improve said inter-industry
coordination and market access.
 In the tourism industry, micro businesses can help to maximize tourist arrivals and
destinations with timely support and substitute services for big establishments
strengthened by cooperative efforts. Car transport services can support hotel
accommodations while lodging houses with restaurants can serve as substitutes in the
latter's absence. Micro enterprises can also form associations for timely coordination with
big establishments and complementation among themselves. For the meantime, tourism
and related services can concentrate operation in major tourist destinations such as Metro
Manila and Western and Eastern Visayas. However, better road networks can pave the
way for the development of other tourist destinations and services, which include
transport.