Chapter 3: Industry Analysis and Environmental Scanning PDF

CHAPTER 3: INDUSTRY ANALYSIS AND ENVIRONMENTAL SCANNING MOLCESHANE M. POCONG, MBA, LPT S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Learning Outcomes: o Identify the main sectors of the economy and related industries; o Distinguish the different pro...

CHAPTER 3: INDUSTRY ANALYSIS AND ENVIRONMENTAL SCANNING MOLCESHANE M. POCONG, MBA, LPT S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Learning Outcomes: o Identify the main sectors of the economy and related industries; o Distinguish the different products and services of business and industries in the locality; and o Identify industry tools and principles used in identifying business opportunities. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Sectors of the Economy and Related Industries Based on similarities in outputs, processes, or other attributes, businesses are grouped into industries. Industries, on the other hand, are grouped into sectors. Economic sectors are commonly categorized based on the production process: 1. Primary sector – this includes industries in the business of extracting raw materials from natural resources. 2. Secondary sector – this includes industries that process raw materials into goods through manufacturing and construction. 3. Tertiary sector – this covers the marketing and selling of raw and manufactured products. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  GDP 9% Primary Sector 33% Secondary Sector 58% Tertiary Sector GDP contributions by sector origin (Values are based on average semiannual contributions from 2014 to 1st half of 2016) S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  2014 2015 2016 Industry Sem I Sem II Sem I Sem II Sem I 1. Agriculture, Hunting, Forestry and Fishing 346,656 372,122 348,305 371,443 336,847 a. Agriculture and Forestry 287,953 300,031 290,468 300,807 282,420 b. Fishing 58,703 72,091 57,837 70,636 54,427 2. Industry Sector 1,175,778 1,215,410 1,243,016 1,292,779 1,341,014 a. Mining and Quarrying 51,981 29,714 48,841 31,658 48,520 b. Manufacturing 815,543 850,971 859,148 901,840 920,756 c. Construction 196,277 213,001 217,698 230,061 242,878 d. Electricity, Gas and Water Supply 111,978 121,724 117,329 129,219 128,860 3. Service Sector 1,995,311 2,065,007 2,118,264 2,220,021 2,287,900 a. Transport, Storage, and Communication 274,069 263,976 294,550 286,739 312,951 b. Trade and Repair of Motor Vehicles, Motorcycles, Personal 543,528 642,282 577,933 692,593 625,622 and Household Goods c. Financial Intermediation 262,208 253,276 275,568 271,146 297,780 392,071 411,233 418,212 443,280 456,724 d. Real Estate, Renting, and BusinessActivities e. Public Administration and Defense; Compulsory Social 152,211 141,321 148,818 148,264 157,548 Security f. Other Services 371,224 352,920 403,182 378,000 437,274 Gross Domestic Product 3,517,745 3,652,539 3,709,585 3,884,243 3,965,762 Gross Domestic Product by Industry Origin (At constant Prices, 2000, in million pesos. Source: Philippine Statistics Authority S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL The primary sector in the Philippines includes two main industries: 1. Agriculture, Hunting, and Forestry – covers farming of rice, vegetables, and other crops, the cultivation of land resources, livestock poultry, and other agriculture-related activities. 2. Fishing – includes extradition of marine products from bodies of water. The secondary sector in the Philippines includes four main industries: 1. Mining and quarrying 2. Manufacturing a. Heavy manufacturing – includes textile manufactures and fabricated metal and steel products. b. Light manufacturing – composed of relatively easier-to-transport products such as household food products. 3. Construction 4. Electricity, gas & water supply S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL The Tertiary sector in the Philippines has five service industries: 1. Transport, storage, and communication 2. Trade and repair of motor vehicles, motorcycles, and personal and household goods 3. Financial intermediation 4. Real estate, renting, and business activities 5. Public administration, defense, and compulsory social security All other industries that cannot be classified under any of the above are lumped under a sixth category labeled ”Other services”. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Employment Structure of the Economy Employment structure of the economy Ø refers to the concentration of labor in the main sectors of the economy. Example: A greater percentage of labor employed in the agriculture and fishing sector implies a labor-intensive agriculture economy. Similarly, a higher number of workers employed in the service sector imply a service-driven economy. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Public Sector versus Private Sector Category Private sector public sector Ownership privately owned government-owned enterprises Goods associated Private Goods Public goods (characterized by rivalry (characterized by and excludability) nonrivalry and nonexcludability. Rivalry – means that a good consumed by an individual cannot be consumed by another individual or household. Excludability or exclusiveness – means that paying for a good or service prevents access by others who have not paid for the good. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Public Sector versus Private Sector Category Private sector public sector Ownership privately owned government-owned enterprises Goods associated Private Goods Public goods (characterized by rivalry (characterized by and excludability) nonrivalry and nonexcludability. Nonexcludability – means that consumption or use of a public good does not prevent other individuals from consuming or using the same good regardless if they paid for it or not. Nonrivalry – means that consumption or use does not reduce the quantity of goods available for others. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Public Sector versus Private Sector Club goods Ø characterized by excludability and nonrivalry. Ø Public goods with restrictions on rivalry. Ø Examples include movie houses, parks, concerts, etc. Common goods Ø characterized by rivalry and nonexcludability. Ø Examples include coal, fish in the ocean, and clean air. Common goods generally include natural resources and are sometimes considered as free goods. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Excludable Private Club goods goods Rivalrous Non-rivalrous Common Public goods goods Nonexcludable Public and private goods categorized based on rivalry and excludability criteria. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL The Free Rider Problem Ø the availability of public goods to everyone leads to a market failure. Externalities – it happens when consumption of a good affects another party. Positive externalities lead to benefits to third parties. Negative externalities lead to harmful effects. Merit goods – have positive externalities but the benefits are often underestimated. Examples of merit goods include education and health care. Demerit goods – have negative externalities and consumption of which causes harm to society. Examples include smoking and illegal drugs. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Industry Classifications Some of the more popular industry classifications used globally include the following: Global Industry Classification Standard (GICS) – is a standard industry classification developed and primarily used in the financial market. International Standard Industrial Classification (ISIC) – is the UN's version of the GICS. It is primarily used to measure and compare economic activities across nations. Standard Industrial Classification (SIC) and the North American Industry Classification (NAIC) systems – is established to fulfill the same objective of having a standard for industry comparisons. Philippine Standard Industrial Classification (PSIC) – is the country's guide to industry classifications based on business productions. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL Industry Principles, Tools, and Techniques in Identifying Business Opportunities Conducting industry analysis helps in identifying business opportunities. It is also useful in in effectively evaluating the risks involved and the probability of success of a business. An industry analysis usually starts with an overview of the industry. This includes a brief history of how the industry started and outlines the growth of the industry. Factors that drive business expansion are identified. It is also essential to understand any government regulations that affect and continually impact the industry. Another major component of the analysis is key players and competition. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Two most common frameworks in business analysis Threat of New Entrants Positive Negative Internal Bargaining Strengths Weaknesses Rivalry of Power of Competition Suppliers Porter's Five Forces External Opportunities Threats Bargaining Threat of Power of Substitutes Buyers S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Threat of New Entrants A barrier to entry evaluates the ease for new players to penetrate an industry. Barriers to entry determinants include the following: 1. Economies of scale 2. Product differentiation 3. Capital requirement 4. Access to distribution channels 5. Government policies 6. Resource exclusivity 7. Industry growth rate S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Bargaining Power of Suppliers Determinants of supplier power: 1. Supplier concentration – refers to the number of suppliers in the industry. The higher the supplier concentration, the weaker is the bargaining power of suppliers. 2. Availability of substitute inputs – suppliers have high bargaining power in a situation in which there are no alternative inputs available. 3. Supplier's product differentiation – suppliers that are able to differentiate their products have higher bargaining power. 4. Buyer's switching cost to other inputs – a low switching cost means the supplier's bargaining power is also low. Conversely, it means it is fairly easy for buyers to change suppliers to procure raw materials. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Bargaining Power of Suppliers Determinants of supplier power: 5. Supplier's threat of forward integration – the higher the threat of forward integration by suppliers, the higher is the supplier's bargaining power. 6. Buyer's threat of backward integration – the increase in threat of backward integration of buyers reduces the bargaining power of suppliers. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Bargaining Power of Buyers Common determinants of buyer power: 1. Number of buyers relative to sellers – the more buyers in the industry, the less is the buyer's bargaining power and the greater is the competition. Conversely, the fewer buyers there are relative to suppliers, the greater is the buyer power and the less is the competition. 2. Product differentiation – the more specialized a business's product is, the less likely that a buyer can influence the product price. 3. Switching costs to use other products - low switching costs give switching cost give consumers greater bargaining power by enabling them to easily switch products. 4. Buyer's threat of backward integration – the greater the threat of backward integration by buyers, the greater is the bargaining power of buyers and the greater is the competition in the industry. 5. Buyer's volume – the higher the quantity demanded, the greater is the bargaining power. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Threat of Substitutes The higher the threat of substitutes, the greater is the competition. An industry providing more highly specialized products has a less competitive structure than an industry selling products that can be easily substituted. The main determinants of the threat of substitutes: 1. Relative price of substitute products – major threat to firms in the industry. The presence of cheaper alternatives increases the threat to industry players 2. Relative quality of substitutes – consumers who value quality are more willing to pay extra for a product of better quality. 3. Switching costs to buyers – Industries that offer generic products or products with low differentiation face low switching costs and high threat of substitution. On the other hand, unique and highly specialized products bring high switching costs to consumers and thus have relatively low threat of substitution. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Rivalry of Competition Determinants of industry rivalry: 1. Number of competitors and concentration – the higher the number of competitors in the industry, the higher the level of competition is. Conversely, the fewer players in the industry, the lower the level of competition is. 2. Relative size of competitors – the less number of firms holding a majority of the market, the less is the industry competition. An industry with a low degree of competitor rivalry has a higher profit potential. 3. Industry growth rate – a fast industry growth rate means low intensity of rivalry. 4. Fixed costs versus variable costs – the higher the fixed costs, the more sales the companies need to make in order to recover costs, which increases the level of rivalry among industry players. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Porter’s Five Forces Model Rivalry of Competition Determinants of industry rivalry: 5. Product differentiation – generic products characterize the output of perfectly competitive industries, while unique and specialized goods and services is a distinguishing attribute of less competitive industries such as those identified as oligopolistic in nature. 6. Diversity of competitors – high strategic diversity among competitors leads to more intense rivalry. 7. Exit barriers – the existence of high exit barriers leads to greater rivalry because it discourages players from leaving the industry. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  Threat of New Entrants Bargaining Threat of Rivalry of Power of Substitutes Competition Suppliers Bargaining Power of Buyers S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  SWOT Analysis Positive Negative Internal Strengths Weaknesses External Opportunities Threats S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  SWOT Analysis Strengths Strengths vary across firms and across industries, but identifying the strengths of a firm largely requires analyzing the internal processes and core competencies of the firm. It also entails looking at the performance of a firm's individual departments and management strategies in place. Examples of strengths include state-of-the-art facilities, competitive advantage, and strategic location of business. Simple criteria in identifying strengths are the following: (1)There are factors that are within the control of the firm, and (2) There are factors that the firm can capitalize on. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  SWOT Analysis Weaknesses These are the factors that are causing negative impacts on a company's performance. Examples include high number of untrained workers, inefficient distribution channels, and a high amount of liabilities. Similar to strengths, weaknesses are within the control of the firm but have not been addressed. There are many possible causes of business weaknesses but the most common is resource constraints. For instance, a firm may hold off providing trainings to its workers because training schedules would disrupt production processes. Another firm may currently be burdened with high amounts of debt due to a recent business expansion. It is important to remember that in identifying weaknesses, there are factors that are within the control of the firm, and there are the factors that the firm should strive to eliminate. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  SWOT Analysis Opportunities Opportunities are positive external forces that impact the firm's industry or several industries. In contrast to strengths and weaknesses, opportunities are outside the control of the firm. It requires you to look beyond a company's operations. You have to consider the political, economic, social, and technological environments. For example, a new regulation increasing import quotas is an opportunity for industries that heavily rely on imports of raw materials. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL  SWOT Analysis Threats Forces that are somehow harmful to a business and outside its control are considered threats. Similar to opportunities, identification of threats requires one to look at macroenvironment or industry-wide factors. For example, influx of cheap and imported goods to the Philippines such as clothes and household items is a threat to local industries offering the same products. The imported goods increase competition and cuts local producers' profits. S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL ANY QUESTIONS OR CLARIFICATIONS? S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL Thank you! S ILLIMAN UNIVERS ITY SENIOR HIGH SCHOOL