Applied Economics Course Material - Business and Industry PDF

Applied Economics COURSE MATERIAL No. 6 2nd Term, AY. 2024-2025 Applied Economics Page | 1  WHAT WILL YOU LEARN? This module has been designed to help you: INDUSTRY AN...

Applied Economics COURSE MATERIAL No. 6 2nd Term, AY. 2024-2025 Applied Economics Page | 1  WHAT WILL YOU LEARN? This module has been designed to help you: INDUSTRY AND ENVIRONMENTAL ANALYSIS: Identify and explain different principles, tools, and techniques in creating business. BUSINESS OPPORTUNITIES Apply tools and techniques for business IDENTIFICATION opportunities like the PESTLE and SWOT Analysis. Source: https://businesschange.academy/wp-content/uploads/2017/08/Business-Analysis-Techniques-Cover.jpg 2nd Term, AY. 2024-2025 Applied Economics Page | 2 Business and Industry In the global economy, the word business is one of the most WHATS’ INSIDE commonly used terms. Whenever the word business is used by THIS MODULE? anybody, they generally relate it to progress and prosperity, growth and development, employment and productivity, and profitability. ✓ Business and Industry Page 4 ✓ Economics of Strategy: The Business Dictionary defines business as “an organization or Industry and Environmental Analysis economic system where goods and services are exchanged for one Page 5 another or money.” It is an enterprising entity engaged in ✓ Industry Analysis: Porter’s Five Forces of Competition commercial, industrial, or professional activities. A company Framework transacts business activities through the production of a good, Page 6 ✓ Environmental Analysis: offering a service, or retailing of manufactured products. Business SWOT and PESTEL Analysis takes place when there is a transaction or exchange of value Page 10 ✓ Summary between one company and another. Page 11 ✓ References Page 12 Industry is the collection of competitors that produce similar or substitute products or services to a defined market. Industry is an organized economic activity concerned with the processing of raw materials to create goods and provide services. When a business starts production, the industry becomes its business activity. In other words, the production side of a business is called an industry. Types of Industry 1. Primary Industry Primary industries engage in the production of goods through nature, which needs very minimal human intervention. These forms of industry are largely provided by nature such as farming, forestry, fishing, and horticulture. 2nd Term, AY. 2024-2025 Applied Economics Page | 3  2. Manufacturing Industry Firms that are engaged in transforming raw materials into finished products by using equipment, machines, FOCUS QUESTIONS: and manpower belong to the manufacturing industry. Goods produced by the manufacturing industry mostly What is business and industry? satisfy our everyday consumption. What are the tools or techniques used to analyze the industry and business environment? 3. Construction Industry This type of industry covers the construction of What is the importance of understanding the general infrastructure such as buildings, roads, bridges, and environment of a business and water systems. industry? 4. Service Industry Businesses involved in the service industry usually render work for customers for a fee. Firms in the service industry earn revenue by providing intangible products to clients. 5. Extractive Industry Any business activity that involves the extraction of raw materials from the earth for consumer use falls under the extractive industry. This usually entails extractive processes such as those used for oil and gas, mining, and quarrying. 6. Genetic Industry This industry covers firms that are engaged in the reproduction of products from plants and animals to create objects for sale. Examples are poultry raising, Source: https://media.coschedule.com/uploads/2022/10/Screen-Shot-2022-10-19- cattle breeding, and hog raising. at-11.04.14-AM.png?w=3840&q=75 2nd Term, AY. 2024-2025 Applied Economics Page | 4  7. Import-Export Industry Importing and exporting involve buying and selling of foreign goods. Export refers to the sale of goods to a foreign country while import is the purchase of foreign goods and bringing these into the buyer’s local market. Exporting and importing help an economy expand its global market. 8. Retail Industry Companies whose activities involve selling commodities directly to consumers fall under the retail industry. Seasons that usually push people to shop and spend give a huge boost to the retail sector. Economics of Strategy: Industry and Environmental Analysis One step taken by smart entrepreneurs before launching their businesses is conducting a study or research on the industries they want to venture into. This is called an industry analysis. Key points: There are different ways of An industry analysis is a business function completed by business looking at the business owners and other individuals to assess the current business environment to see the level of competition among companies environment. This analysis helps businesses understand various and harness different factors to economic pieces of the marketplace and how these pieces may be each one’s advantage. used to gain a competitive advantage. Industry and market analyses both help define a company’s position in the market. For a firm to understand its competition and know how it can compete with other companies, it must first become familiar with the industry. As the industry changes, several conditions occur which can affect the decisions of firms. These conditions include more 2nd Term, AY. 2024-2025 Applied Economics Page | 5  intense competition, changing customers’ needs and tastes, technological innovation, entry of major competitors, changes in regulations, and globalization. Being aware of these changes helps firms formulate sound business strategies that can help them achieve their goals. A good industry analysis can help a firm assess the profitability of the industry it is engaged in, forecast the competition, and then help it strategize to boost its profitability. The value of the product and the intensity of the competition influence industry profitability. Another way to study potential business is to conduct environmental analysis. It considers the market where a firm operates. Among the study’s objectives is to identify target customers for the niche market. This is the process of identifying all external (beyond the firm’s control) and internal (within the firm) elements affecting a firm or an organization’s performance. External analysis can be done through the PESTEL analysis, while the SWOT method can be used for an internal analysis of the business environment. Industry Analysis: Porter’s Five Forces of Competition Framework One well-known industry analysis framework is based on the work of Michael Porter, an American academic and professor at the Harvard Business School. The Five Forces of Competition Framework shows how the structure of an industry determines both the intensity of competition within the industry and the level of profitability in that industry. Source: https://www.thestrategyinstitute.org/images/porters-five-forces-model.jpg 2nd Term, AY. 2024-2025 Applied Economics Page | 6  Firms exist for profit, and they certainly must analyze their internal force. This force affects prices that, in turn, affect profitability and external forces, such as the suppliers, buyers, substitutes, and entrants in the industry. All of these can be sources of threats to a firm’s profits. 1. Industry Rivalry Economic models on competition make firms strive for a competitive advantage over their rivals. A firm can have a competitive advantage over its rival firms when it gains and sustains profits that are higher than the average for its industry. If a company can deliver the same benefits as its competitors Key Point: but can provide the benefits at a lower cost (cost advantage), then that company possesses a competitive advantage. Rivalry among firms happens, especially among established companies. For instance, Coca-Cola In some industries, rivalry dissipates the firms’ profits because Co. and Pepsi-Cola Co. have been famous rivals in the soft drinks of aggressive competition. This drives down prices and often market. leads the rival firms to incur losses. When firms compete, prices are pushed down as firms offer the same goods. Rivalry can also trigger advertising and innovation, which are non-price elements of competition. 2. Bargaining Power of Buyers This specifically deals with the ability of the customers to drive Key Term: prices down. It is affected by how many buyers or customers, a Customers: Persons or organization company has, how significant each customer is, and how much that purchase goods and services and it would cost a customer to switch from one company to who have the right to choose between different products offered another. The smaller and more powerful a client is, the more by the different suppliers. power it holds. Buyers have the capacity to exert pressure on prices, which can affect the profits of firms. 2nd Term, AY. 2024-2025 Applied Economics Page | 7  Buyers are powerful when they can do the following: Buy in large volumes, Have full information on market prices and supplier costs, and Purchase products that represent a significant percentage of their cost or purchase. 3. Bargaining Power of Suppliers Key Terms: This force addresses how easily suppliers can drive up the Suppliers: In economics, they are the price of goods and services. It is affected by the number of one who produce goods and services. suppliers of key aspects of a good or service, how unique As part of the supply chain, suppliers may also be producers who provide these aspects are, and how much it would cost a company to inputs, such as raw materials, switch from one supplier to another. The smaller the number equipment, and services to another organization or firm. of suppliers, and the more companies that depend upon a supplier, the more power a supplier holds. Suppliers have the power to drive competition up to increase their products or services prices or to reduce the quality of the goods they provide. This results in a reduction of firms’ profitability to the point that it becomes difficult to recover costs solely from the prices of the products. A supplier is powerful when there is no competition with substitute products and the products make up an important Key Term: part of their buyers’ businesses. Substitute goods: Goods that are interchanged with another good. 4. Threat of Substitute Substitute goods are generally offered Competitor substitutions that can be used in place of a at a cheaper price, thus making it more attractive for buyer to purchase. company’s products or services pose a threat. The presence of substitutes makes competition in an industry tougher. 2nd Term, AY. 2024-2025 Applied Economics Page | 8 For example, if customers rely on a company to provide a tool or service that can be substituted with another tool or service or by performing the task manually, and this substitution is fairly easy of low cost, a company’s power can be weakened. When the price of a good increases, consumers tend to look for closely related commodities. Substitute goods are generally offered at a cheaper price, thus making it more attractive for buyers to purchase. 5. Threat of New Entrants A company’s power is affected by the force of new entrants into its market. The less money and time it costs for a competitor to enter a company’s market and be an effective competitor, the more a company’s position may be significantly weakened. New entrants to an industry, or new businesses in an industry, certainly drive competition, which further heightens rivalry among firms. For instance, in the cosmetic industry, Avon and Mary Kay have been two of the most famous makeup brands in the country. However, the entry of cosmetics brands that use organic and natural ingredients has brought noticeable changes in the landscape of the makeup industry. As customers switch to makeup brands with lower costs, there is a high probability that new entrants will continue to join the industry. However new entrants still have to take precautions since there is still the factor of emotions, particularly brand loyalty, and customers may continue to choose products of companies who have already been in the cosmetic industry for a long time. 2nd Term, AY. 2024-2025 Applied Economics Page | 9  Environmental Analysis: SWOT and PESTEL Analysis SWOT ANALYSIS The SWOT analysis is used to analyze an organization or process to evaluate the internal (strengths and weaknesses) and external (opportunities and threats) factors that may prove favorable or unfavorable in achieving its objectives. It is an analytical framework that can help a company meet its challenges and identify new markets. Source: https://projectwidgets.com/wp-content/uploads/2023/11/istockphoto- 1432096756-612x612-1.jpg SWOT analysis can help businesses focus on their strengths, minimize threats, and take the greatest possible advantage of opportunities available. It can also be used as a strategy formulation and a sophisticated way and serious strategy tool to understand the competitors which can give insights needed to craft a coherent and successful competitive position. Key Term: Strengths: Characteristics of a Learning about the SWOT factors helps firms do the business that give it advantages over its competitors. following: 1. Work on strengths (positive characteristics that Weaknesses: Characteristics of a business that put it at a disadvantage give an organization or business an advantage over relative to its competitors. other businesses); Opportunities: Elements in a 2. Eliminate weaknesses (negative attributes of a company’s external environment that business); allow it to formulate and implement strategies to improve performance. 3. Pursue opportunities (external possibilities that the business can venture into or take advantage of); Threats: Elements in the external environment that could endanger the and business, its profitability, or its 4. Prepare for threats (negative external factors that competitive advantages. can affect business performance). 2nd Term, AY. 2024-2025 Applied Economics Page | 10  PESTEL ANALYSIS The most common environmental analysis tool is the PESTEL analysis. PESTEL stands for: Source: https://i0.wp.com/www.business-to-you.com/wp-content/uploads/2016/09/PESTEL.jpg These factors have direct or indirect effects on industries. The PESTEL analysis determines what factors the business should look into and then determines each factor’s influence or impact on the business. 2nd Term, AY. 2024-2025 Applied Economics Page | 11  SUMMARY Business is the lifeblood of any country’s economy. For this reason, the topic of identification of business opportunities through analysis of industry and environment is important. An industry analysis is a business function completed by business owners and other individuals to assess the current business environment. This analysis helps businesses understand various economic pieces of the marketplace and how these various pieces may be used to gain a competitive advantage. The Five Forces of Competition Framework provides a basic structure that enables analysts to work through economic issues. This shows how the structure of an industry determines both the intensity of competition within the industry and the level of profitability within the industry. An environmental analysis is another strategic tool for businesses. It is the process of identifying all external and internal elements affecting a firm or an organization’s performance. The SWOT analysis which focuses on the strengths, weaknesses, opportunities, and threats, and the PESTEL analysis which studies political, economic, social, technological, legal, and environmental factors, are the tools to analyze the environment of a business. 2nd Term, AY. 2024-2025 Applied Economics Page | 12 REFERENCES Dinio, R. & Villasis, G. (2017). Applied Economics (1st ed.). Rex Bookstore. Laraya, J, De Leon, J. & Santos, R., (2019). Applied Economics. Books Atbp. Publishing Corp. Viray, E. & Avila-Bato, J., (2018). Applied Economics. Anvil Publishing, Inc. Contributors Reichel C. Descalsote Cristine L. Gabaon Reynsie Jones V. Solano 2nd Term, AY. 2024-2025 Applied Economics Page | 13