Chapter 3 Applied Economics PDF

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CHAPTER 3- INDUSTRY AND ENVIRONMENTAL ANALYSIS: BUSINESS OPPORTUNITY IDENTIFICATIONLearning Objectives: At the end of the lesson, the students shall be able to: 1. identify the principles and tools in creating a business; 2. apply SWOT analysis as a tool in evaluating business opportunity; 3. differ...

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CHAPTER 3- INDUSTRY AND ENVIRONMENTAL ANALYSIS: BUSINESS OPPORTUNITY IDENTIFICATION Learning Objectives: At the end of the lesson, the students shall be able to: 1. identify the principles and tools in creating a business; 2. apply SWOT analysis as a tool in evaluating business opportunity; 3. differentiate classifications of businesses and 4. explain the importance of assessing or analyzing a business Lesson 3.1: Principles, Tools and Techniques A business is just a small portion of an industry. It is an undertaking by a person or a group of persons who are partners, or of stockholders who own a juridical entity known as a corporation. Its main objective is to earn profit for the owners. An industry on the other hand, is the aggregation of the different businesses engaged in the same line of undertaking. For a person to put up a business, it is essential that an industry analysis first be made. Commonly used is a system known as the SWOT analysis, which lists the strengths, weaknesses, opportunities and threats that the business faces. BUSINESS ORGANIZATION There are four ways to form a business: 1. Sole Proprietorship. This is the simplest way to set up a business. A sole proprietorship is owned by a single individual who is singly responsible for running the business and is accountable for all debts and obligations related to the business. The sole proprietor enjoys exclusive control and decision-making as well as gets all the profits earned but he also shoulders all losses and has unlimited liability which means payments of his loans will extend to his personal assets. 2. Partnership. It is an agreement in which two or more persons combine their resources in a business with a view to making profit. A partnership agreement is drawn up and profits are equally divided among the partners according to the terms of agreement. There are two types of partnership: a. General partnership. All owners share the management of the business and each is personally responsible for and must assume the consequences of the actions of the other partners. b. Limited partnership. Some members are general partners who control and manage the business and may be entitled to a greater share of the profit while other partners are limited and contribute only capital, take no part in control or management and are liable for debts to a specific extent only. 3. Corporation. It is a legal entity that is separate from its owners, the shareholders. No shareholder is personally liable for the debts, obligations or acts of the corporation. Directors and officers can bear liability for their involvement with the corporation. Owners have limited liabilities. However, corporations are burdened by heavy taxes. 4. Cooperative. It is an entity organized by people with similar needs to provide themselves with goods and services or to jointly use available resources to improve their income. Members have an equal say in decision-making with one vote per member regardless of the number of shares held, there is open and voluntary membership and surplus earning is returned to the members according to the amount of their patronage. SMALL, MEDIUM AND LARGE SCALE BUSINESSES It is also important to study the classification of businesses as to the size based on the worth of the business assets. In the Philippines, total assets for micro business are worth below ₱1, 500,001. For the small business, total assets are from ₱1,500,001 to ₱15,000,000. Medium business has total assets from ₱15,000,001 to ₱60,000,000. Any business with assets in excess of ₱60,000,000 is considered large scale. For any form of business organization, the business must be registered with the appropriate government agencies. In the case of sole proprietorships and partnerships, 100% must be owned and capitalized by Filipinos. For corporations, at least 60% of the outstanding capital stocks must be owned by Filipino citizens. Business activity conducted maybe within major sectors of industry, services, practice of profession or operation of tourism-related businesses and agri-business. The choice of which form of business organization may be a personal preference of the owner, based on his objectives, his available resources and scope of operations.

Lesson 3.2. Tools in Evaluating a Business According to a guide developed by North Carolina’s Small Business and Technology Development Center, the key factors that must be considered in analyzing the industry are the following: 1. The geographic area which your business will cater to. Is it limited to local areas? Or will it cover a region, the entire country or even international market? 2. The size and outlook of the industry. What trends can be identified? 3. Description of the product. 4. The buyers have to be identified. Who ae your target customers? 5. The regulatory environment. Are the local, national news will restrict your business? One needs to identify government regulations specific to the chosen industry. 6. The need to identify the leading businesses in the industry and to provide company information on the most successful businesses that you will be up against . 7. Factors that will affect the growth of the business. THE SWOT ANALYSIS The SWOT analysis was created in the 1960’s by business gurus, Edmund P. Learned, C. Roland Christensen, Kenneth Andrews and William D. Book in their book, Business Policy, Text and Cases. SWOT, which stands for Strengths, Weaknesses, Opportunities and Threats is an analytical framework that can help a company meet its challenges and identify new markets. The framework can help identify the business’s risks and rewards. It is also a means of identifying the internal and external forces that may affect the business. It is very helpful in assessing new ventures. The SWOT actually refers to the internal factors and these are the resources and experiences readily available to the business proponent. Included as internal factors are: 1. financial resources such as money and sources of funds for investment; 2. physical resources, such as company’s location, facilities, machinery and equipment 3. human resources consisting of employees 4. access to natural resources, trademarks, patents and copyrights; and 5. current processes such as employee programs, department hierarchies, and software systems, sales and distribution capabilities, marketing programs, etc. On the other hand, when we speak of external forces, those that affect a company, an organization, an individual and those outside their control. These may include: 1. economic trends including local, national and international financial trends, developments in the country’s stock markets, reforms in the banking system, growth of the GDP; 2. market trends such as new products or technology or evolving buyer’s profile, including changes in tastes and lifestyle behavior; 3. national and local laws and statuses as well as political, environmental and economic regulations; 4. demographic characteristics of target market such as the age, gender and culture of customers; 5. relationships with suppliers and co-owners and 6. competitive threats Before an owner can plan for its business future, he/she must first evaluate the business by identifying and analyzing internal and external resources and threats. The SWOT analysis is a tool that can help a proponent by enabling him/her to identify and assess the internal and external forces that can affect the business.

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