Principles, Tools, and Techniques; and Various Market Structures; Contemporary Economic Issues Facing The Filipino Entrepreneur

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1. Different Principles, Tools,
and Techniques in creating a
Business

2. INTRODUCTION
Ineconomicanalysis,themainconcernisto
realizethemaximumprofit.Inrelations,this
chapterdiscussesthevariousperspectives,
principles,tools,andtechniquesusedinbusinessto
identifycommercialopportunities.Itwillfocuson
Porter’sFiveForcesAnalysis,thestrengthsofthe
bargainingpoweroffivemajorforcesaffectingan
industryareevaluatedinaffectingfirm’s
profitability.

3. Porter’s Five of Forces Competitive Position
TheframeworkwasdevelopbyMichaelE.Porter
(1979)asanalternativeperspectiveonprofitability
analysisandontheattractivenessofanindustryfor
businessventures.Thefiveforcesemanatethe
competitionamongrivalfirmswithintheindustry,the
bargainingpowerofcostumer,thebargainingpower
ofsuppliers,thethreatofentryofrivalfirms,andthe
threatofsubstituteproductorservices.

5. The Competition Among Rival Firms within the Industry
Thefirstforcecomesfromcompetitivebehaviorof
existingplayersintheindustry.Theforcesoftheir
competitivebehaviorwilldependonthestructureofthe
market.
Inamonopolisticmarketacompanywhichthesole
sellerintheindustrywillenjoyhugemarketpower.Asa
consequencethecompetitivepressurecomingfromrival
formisalmostabsentlowbecausethefirmisasingle
producerofahighlydifferentiatedproduct.

6. Potentialentrantstotheindustryarerealistic
threatsespeciallyiftheindustryisvery
profitable.Scaleandlegalbarrierswithinthe
industrycanreducethecompetitiveforcethat
thesepotentialcompetitorsmayposeon
existingplayers.However,thepotential
entrantscanhavetheirarmorytostrengthen
theircompetitiveforceontheindustry.
Threat of Potential Entrants

7. Bargaining Power Of Customers
Inamarket,transactionsare
madebetweensellersand
buyers.Forsellersrespondingto
theneedsofthecustomersand
theirimportantreasonisfor
engaginginbusinessasidefrom
earningprofits.

8. For example, if customers are
organized they can exercise and
exert bargaining power by
demanding the lowest price
possible.

9. Options to mitigate the bargaining power of
the customer:
1.Diversification–distributing a large
share of its outputs to other sectors.
2.Offering differentiated products–
selling variety of products instead of single
products.

10. THREATS OF SUBSTITUTE GOODS
In 1970's, the OPEC (Organization of Petroleum
Exporting Countries) member countries considered
the threats of substitute goods that gave a great
impact to the profitability in the industry when
they imposed production cuts that is made by oil
exporting countries lead to the tripling price of oil
in the world that gave a huge profit to the oil
exporters.

11. Bargaining Power of Suppliers
Refers to the pressure suppliers can exert on
businesses by raising prices, lowering quality,
or reducing availability of their products.

12. Bargaining Power of Suppliers
In addressing the solid haggling control
of a single or exceptionally few sources of
raw materials, the industry can alter by
differentiating its sources of raw materials
to debilitate the bartering control of
providers.

13. BUSINESS ORGANIZATION
SOLE PROPRIETORSHIP
PARTNERSHIP
CORPORATION
COOPERATIVE

14. SOLE PROPRIETORSHIP
Owned by a single individual
who is singly responsible for
running the business and is
accountable for all debts and
obligations related to the
business.

15. PARTNERSHIP
An agreement in which two or more
persons combine their resources in a
business with a view to making profit.
An agreement is drawn up and profits are
divided among the partners according to
the terms of agreement.

16. TWO TYPES OF PARTNERSHIP
THE GENERAL PARTNERSHIP
All owners share the management of the business and
each is personally responsible for the must assume
the consequences of the actions of the other
partners.
Unlimited liability which means loan payments will
extend to their personal property.

17. THE LIMITED PARTNERSHIP
Contribute only capital, take no part in
control or management, and are liable for
debts to A specific extent only.

18. CORPORATION
A legal entity that is separate from its owners, the
shareholders.
No shareholder is personally liable for debts, obligations,
or acts of the corporation.
Corporation normally can exist for a life of 50 years,
which is renewable for another 50 years.
Corporation are burdened by heavy taxes.

19. COOPERATIVE
An entity organized by people with similar needs to
provide themselves with goods or services or to jointly use
available resources to improve their income.
Cooperative members have an equal say in decision-
making.
There is open and voluntary membership and surplus
earning is returned to the members according to the
amount of their patronage.

20. SMALL, MEDIUM AND LARGE SCALE BUSINESSES
P1, 500, 001 MICRO BUSINESS WORTH BELOW
P1, 500, 001 to 15,000,000 SMALL BUSINESS
P15, 000,001 to 60, 000, 000 MEDIUM BUSINESS
P60, 000, 000 excess LARGE SCALE BUSINESS
SOLE AND PROPRIETORSHIP AND PARTNERSHIPS, 100%
MUST BE OWNED AND CAPITALIZED BY FILIPINOS.
CORPORATIONS, AT LEAST 60% OF THE OUTSTANDING
CAPITAL STOCKS MUST BE OWNED BY FILIPINO CITIZENS.

21. KEY FACTORS THAT MUST BE CONSIDERED IN
ANALYZING THE INDUSTRY ARE THE FOLLOWING
•The geographic area which your business will cater to. Is it limited to local areas? Or
will it cover a region, the entire country, or even the international market?
•The size and outlook of the industry. What trends can be identified?
•Description of the product
•The buyers have to be identified. Who are your target customers?
•The regulatory environment. Are there local, national laws that will restrict the
business? One needs to identify government regulations specific to the chosen
industry.
•The need to identify the leading business in the industry, and to provide company
information on the most successful businesses that you will be up against.
•Factors that will affect the growth of the business.

22. THE SWOT ANALYSIS
Analysis was created in the 1960s
by business gurus, Edmund P.
Learned, C. Roland Christensen,
Kenneth Andrews, and William D.
Book in their book, Business
Policy, Text and Cases (Irwin
1969).

32. A GUIDE TO INDUSTRY
ANALYSIS
Developed by North Carolina’s Small
Business and Technology Development
Center(SBTDC)

33. Key factors to be considered in analyzingthe
industry according to (SBTDC)
GEOGRAPHIC AREA
INDUSTRY (AS TO SIZE)
PRODUCT
BUYERS
REGULATORY ENVIRONMENT
COMPANY INFORMATION
A BRIEF HISTORY OF THE INDUSTRY
FACTORS THAT AFFECT GROWTH OF THE INDUSTRY
TRENDS IN SALES OVER RECENT YEARS
CURRENT OPERATIONAL/MANAGEMENT
THE TYPES OF MARKETING STRATEGIES
COMPETITOR INFORMATION

34. 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
Physical attributes and characteristics, and its uses.
BUYERS
Describe target customers as to age, income group, occupations
and buying habits.

35. REGULATORY ENVIRONMENT
Include government laws and regulations that apply to the business.
COMPANY INFORMATION
Make a list of the most successful businesses in the industry.
BRIEF HISTORY OF THE INDUSTRY
When it started and how it developed.
FACTORS THAT AFFECT GROWTH OF THE INDUSTRY
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.

36. THE TYPES OF MARKETING STRATEGIES PREVALENT WITHIN THE
INDUSTRY
COMPETITOR INFORMATION
Include the location of competitors and how long have they been in
business and their market share.

37. In addressing the strong bargaining power
of a single or few sources, the industry can
adjust by:
1.Diversifying its sources of raw materials.
2.Subcontracting labor services
3.Integrate banks and other financial
institutions.

38. For one they have enough
resources to overcome the scale
barriers as well as technology that
can produce differentiated product
or can provide a production
process that can lower their cost.

39. Withtheupsettingcompetitivethreat
fromresources-endowedpotential
entrant,theoptionforexisting
companiesisalsotoengageinresearch
anddevelopmenttoimprovetheir
productandtosegmentthemarket
throughproductdifferentiation.

40. ForexampletheSanMiguelCorporation,toarrest
thecompetitiveedgeofpotentialrivalsinbeer
market.SanMiguelCorp.introducedvaroiusproduct
linefromtheoriginalSanMiguelbeertocater
variousmarket.Thisstrategymadetoneutralize
whatevercompetitiveforcethepotentialcompetitors
haveonprofitabilityoftheexistingplayersinthe
industry.

41. For existing firms with excess
capacity, another option is to allow the
potential competitors to enter and
establish their business in the industry.
Once they established their business, the
existing firms with excess capacity may
expand production and lower their price.

42. The emergence of substitute goods used
to challenge industries with high rate of
profitability. The advantage of this is that
the competitive force may also be measured
by the cross elasticity of demand that is the
responsiveness of the demand to substitute
the changes in the price of products that is
produced.

43. ECONOMIC ANALYSIS OF PROFIT MAXIMIZATION
Sincemarketpoweriscrucialinthe
determinationoftheprofitabilityofabusiness
firm,itisimportanttoinquireonthefactorsthat
shapethismarketpower.Asdiscussedin
chaptertwo,theconcentrationofthemarket,
productdifferentiation,barrierstoentry,and
limitedinformationcangiveafirmsomedegree
ofmarketpowerinsettingtheprice.

44. FACTORS LEADING TO PROFIT MAXIMIZATION
PROFITABILITY
FACTORS
MINIMAL PROFIT MEDIUM PROFIT HIGH PROFIT
Market
Concentration
Many Sellers Few Sellers One Seller
Market Entry No Barriers to
Entry
Some Degree
Barriers
Scale and Legal
Barriers
Gov’t Barriers
Product
Differentiation
Homogenous
Good
Some Degree of
Product
Differentiation
Highly
Differentiated
Products

45. FACTORS LEADING TO PROFIT MAXIMIZATION
PROFITABILITY
FACTORS
MINIMAL PROFITMEDIUM PROFIT HIGH PROFIT
InformationPerfect
Information
Limited
Information
Very Limited
Info
Market PowerNo Market
Power
Limited
Market Power
High Market
Power
Market
Structure
Perfect
Competition
Oligopoly and
Monopolistic
Competition
Monopoly

46. FACTORS LEADING TO PROFIT MAXIMIZATION
1. Market Concentration–refers to the
number of sellers and buyers in the market.
The more concentrated the market means the
lesser producers are there in the industry.
These few suppliers command huge market
power in determining the price in the
economy.

47. FACTORS LEADING TO PROFIT MAXIMIZATION
2. Barriers to Entry–refers to inherent
features of the industry and various means
devised in the market to prevent the entry of
potential players and competitors that want to
take advantage of the enormous profit in
industry.

48. FACTORS LEADING TO PROFIT MAXIMIZATION
Two main categories of market barriers:
a. Scale Barriers –refers to requirements for a
large production plants for a feasible
operation in the industry. This in turn require
huge amounts of capital and resources to
establish a factory in the industry.

49. FACTORS LEADING TO PROFIT MAXIMIZATION
Two main categories of market barriers:
b. Legal Barriers –refers to proprietory rights
and their corresponding legal protection
extended to existing market players in the
production and distribution of a product or
services. (e.g. patents, copyrights, trademarks)

50. FACTORS LEADING TO PROFIT MAXIMIZATION
3. Product Differentiation–refers to the
ability of the business firm to create a market
niche through several means of varying its
products and services. (e.g. new design,
packaging, features)

51. FACTORS LEADING TO PROFIT MAXIMIZATION
4. Limited Information–refers to the uneveness in
the distribution of information among the actors in
the market. When market actors are not evenly
informed those with more information can have
market power and extract surplus from the other
actors. (e.g. new technologies, sources of raw
materials, innovative products and processes)

52. ENVIRONMENTAL ANALYSIS
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 include a look at the population size, the geography of the place
where business will be located, land distribution, climate, and its
today’s global warming situation, whether or not the area is prone to
flood or earthquake.

53. 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 celebration and
spending behavior.

54. COMPETITION
This is something that needs to be studied. 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.

55. THANK YOU