Different Principles, Tools,

and Techniques in creating a

Business
 INTRODUCTION
In economic analysis, the main concern is to
realize the maximum profit. In relations, this
chapter discusses the various perspectives,
principles, tools, and techniques used in business to
identify commercial opportunities. It will focus on
Porter’s Five Forces Analysis, the strengths of the
bargaining power of five major forces affecting an
industry are evaluated in affecting firm’s
profitability.
Porter’s Five of Forces Competitive Position

The framework was develop by Michael E. Porter

(1979) as an alternative perspective on profitability
analysis and on the attractiveness of an industry for
business ventures. The five forces emanate the
competition among rival firms within the industry, the
bargaining power of costumer, the bargaining power
of suppliers, the threat of entry of rival firms, and the
threat of substitute product or services.
The Competition Among Rival Firms within the Industry

The first force comes from competitive behavior of

existing players in the industry. The forces of their
competitive behavior will depend on the structure of the
market.
In a monopolistic market a company which the sole
seller in the industry will enjoy huge market power. As a
consequence the competitive pressure coming from rival
form is almost absent low because the firm is a single
producer of a highly differentiated product.
Threat of Potential Entrants
Potential entrants to the industry are realistic
threats especially if the industry is very
profitable. Scale and legal barriers within the
industry can reduce the competitive force that
these potential competitors may pose on
existing players. However, the potential
entrants can have their armory to strengthen
their competitive force on the industry.
Bargaining Power Of Customers

In a market, transactions are

made between sellers and
buyers. For sellers responding to
the needs of the customers and
their important reason is for
engaging in business aside from
earning profits.
 For example, if customers are
organized they can exercise and
exert bargaining power by
demanding the lowest price
possible.
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.
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.
Bargaining Power of Suppliers
Refers to the pressure suppliers can exert on
businesses by raising prices, lowering quality,
or reducing availability of their products.
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.
BUSINESS ORGANIZATION

SOLE PROPRIETORSHIP
PARTNERSHIP
CORPORATION
COOPERATIVE
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.
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.
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.
THE LIMITED PARTNERSHIP

Contribute only capital, take no part in

control or management, and are liable for
debts to A specific extent only.
CORPORATION

A legal entity that is separate from its owners, the

shareholders.
 Noshareholder is personally liable for debts, obligations,
or acts of the corporation.
 Corporationnormally can exist for a life of 50 years,
which is renewable for another 50 years.
 Corporation are burdened by heavy taxes.
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.
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.
 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.
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).
A GUIDE TO INDUSTRY
ANALYSIS
Developed by North Carolina’s Small
Business and Technology Development
Center (SBTDC)
Key factors to be considered in analyzing the
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
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.
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.
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.
 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.
 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.
 With the upsetting competitive threat
from resources-endowed potential
entrant , the option for existing
companies is also to engage in research
and development to improve their
product and to segment the market
through product differentiation.
 For example the San Miguel Corporation , to arrest
the competitive edge of potential rivals in beer
market. San Miguel Corp. introduced varoius product
line from the original San Miguel beer to cater
various market. This strategy made to neutralize
whatever competitive force the potential competitors
have on profitability of the existing players in the
industry.
 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.
 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.
ECONOMIC ANALYSIS OF PROFIT MAXIMIZATION

Since market power is crucial in the

determination of the profitability of a business
firm, it is important to inquire on the factors that
shape this market power. As discussed in
chapter two, the concentration of the market,
product differentiation, barriers to entry, and
limited information can give a firm some degree
of market power in setting the price.
 FACTORS LEADING TO PROFIT MAXIMIZATION
PROFITABILITY
MINIMAL PROFIT MEDIUM PROFIT HIGH PROFIT
FACTORS

Market
Concentration Many Sellers Few Sellers One Seller

Market Entry No Barriers to Some Degree Scale and Legal

Entry Barriers Barriers
Gov’t Barriers
Product Homogenous Some Degree of Highly
Differentiation Good Product Differentiated
Differentiation Products
 FACTORS LEADING TO PROFIT MAXIMIZATION
PROFITABILITY
MINIMAL PROFIT MEDIUM PROFIT HIGH PROFIT
FACTORS
Information Perfect Limited Very Limited
Information Information Info
Market Power No Market Limited High Market
Power Market Power Power
Market Perfect Oligopoly and Monopoly
Structure Competition Monopolistic
Competition
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.
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.
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.
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)
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)
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)
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.
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.
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.
THANK YOU