Different Principles, Tools, and

Techniques in creating a Business

 In the study of applied economics, it is essential to identify the principles,
tools and techniques in creating a business for us to clearly evaluate the factors
that might affect your business or a business proposal that you’re planning. There
are lots of factors within the business environment which includes all the
environmental factors and the contemporary issues that can affect it. It was
discussed in your previous module the different contemporary issues that might
affect the Filipino entrepreneurs, which is why in this module we are going to
identify few principles, tools, & techniques to help us understand more about
these factors (environmental, social, technological and competition), that we will
be facing before we enter into a business or before planning for a business
proposal

INTRODUCTION
 Juan is planning to put up a business in their village
since he saved up few of his salary over the years of
working which yielded more than he expected. Since he
already acquired the discipline to manage his finances, he
wanted to open up a business and make sure that this
savings would be put to good use and ensure that his
money will grow. He had a hard time thinking which
business idea suit him and is feasible in his area. He did not
know where to start and he was tired of thinking of what is
the best idea for business.

What is the best way should Juan do in this situation?

For us to help Juan in this situation we need to identify

clearly what is these principles, tools and techniques that
we must use so that Juan will be able to know which
business idea will be best to open and to which strategies
will be used to identify new markets and what type of
business will he open based on the vision and mission that
he wants to attain.
 For a person to put up a business, it is essential
that a comprehensive analysis must first be
made. According to Richard Lannon, “there are
many tools and techniques that can be applied
to a strategic analysis.
 The challenge is selecting the best approach,
tools, and techniques to use given the business
problem or opportunity.”
 Another part of the challenge is understanding
the objectives that you want to achieve based on
your mission and vision that you have
envisioned in your business proposal which
should be always aligned.
 This is why the following common analysis
tools will be very important for us to achieve a
thorough study.
 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
Common
Analysis
Tools and
Techniques
  VMOST stands for Vision, Mission,
Objectives, Strategy, and Tactical.
 VMOST is a tool designed to help you establish if
all of your business activities are aligned to your
strategy.

VMOST  Alignment is a key factor in ensuring a strategy

is successful, so this can be a useful process to go

Analysis
through. The main benefit is breaking down a
strategy and the core components into an easy to
consume format
This Guideline consists of 4 Steps. In each of these VMOST
Steps, it proposes to define certain Factors related to
the Company Analysi
s
1. Vision & Mission:
 Vision: How you see the Market, and its Future.
 Mission: The Role that the Company plays in it.
2. Objectives: The Goals to be Achieved (and When).
 They should be Defined and Measurable
3. Strategy: What Methodology will be used to achieve those Goals.
 It will vary depending on the project.
4. Tactics: What Actions will be used to comply with that Strategy.
 Example of VMOST Analysis
 Strategy
 Vision & Mission
• Customer Satisfaction is at the center of
• Your Vision: High-quality Food is everything.
very expensive and must be accessible
to everyone. • You’ll focus on a Total Quality approach.
 Tactics
• Your Mission: To offer high quality
food in an affordable and attractive • You’ll implement a Continuous Learning
way for everyone. process to find what your Customers value
 Objectives the most.
• Have the Restaurant Open and fully • You’ll use recipes that people know but
operational before 6 months. employing good products.
• Have a 10% Profit Margin. • You’ll check Social media to track How
your Customers perceive your Restaurant..
• 20% of your Clients must be Loyal
Clients. • You’ll analyze your Income and Costs
once a month.
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).
 The TOWS Analysis

TOWS analysis first

matches internal factors
to external factors to help
identify relevant strategic
TOWS Analysis is a variant
options that an
of the classic business
organization could
tool, SWOT Analysis
pursue. By combining the
created by Heinz
external environment’s
Weihrich. It is a variant of
opportunities and threats
the classic business tool,
with the internal
SWOT Analysis. Both TOWS
organization’s strengths
and SWOT are having the
and weaknesses, we can
same acronyms for
come up with four basic
Strengths, Weaknesses,
strategies. It can help an
Opportunities and
organization to see how it
Threats, and in reverse
can take advantage of
order of the words.
opportunities, reduce
threats, overcome
weaknesses and exploit
any strengths.
 Four TOWS strategies
As a result, you structure your thinking to cover all strategic perspectives with
corresponding action items:
 Strengths/Opportunities (SO): Consider all strengths one by one listed in the
SWOT Analysis with each opportunity to determine how each internal strength can
help you capitalize on each external opportunity.
 Strength/Threats (ST): Consider all strengths one by one listed in the SWOT
Analysis with each threat to determine how each internal strength can help you
avoid every external threat.
 Weaknesses/Opportunities (WO): Consider all weaknesses one by one listed in the
SWOT Analysis with each opportunity to determine how each internal weakness
can be eliminated by using each external opportunity.
 Weaknesses/Threats (WT): Consider all weaknesses one by one listed in the SWOT
Analysis with each threat to determine both can be avoided. The inner four squares
inside the Matrix represent what happens when the corresponding column and row
labels come together.
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.
Porter’s Five Forces
1.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.
Competitive Rivalry

• Range of products and services offered

 • Brand loyalty
• Number of competitors in market
 • Ease of switching between providers
 • Market growth rate
 • Industry lifecycle point
 2. 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.
 Threat of New Entrants
• Brand reputation • Ease of access to
• Customer loyalty technology
• • Input requirements
Your differentiation
• • Operational margins
Market growth rate
• • Industry knowledge
Entry capital
requirements requirements
• • Government regulation
Economies of scale
• •Ease for customers to
Logistics and
distribution networks move provider
• Skills requirements
3. 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.
 Power of Buyers
• Number of buyers and market size
• Value of each buyer
• Ease of switching to competitor
• Number of options for buyers
• Alternative options for buyers
• Sensitivity to price points
• How key is product or service to buyer
4. 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.
 Threat of Substitution

• Current substitute products on offer

• Reasons for buyer churn
• Price of substitute vs product or service
• Quality of substitute vs product or service
• Cost of switching
• Usage trends
• External trends
5. 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.
 Power of Suppliers

•Number of suppliers in  Substitution options for the

market supplier product or service
•Size of suppliers in • Ease to move between
market suppliers
•Risk of supplier • Differentiation of
moving into your market suppliers offering
• Cost point of suppliers • How big a customer you
are to the suppliers
PESTLE Analysis
PESTLE analysis is a strategic management tool that
businesses use to identify macro-economic factors that it
needs to consider. The word ‘PESTLE’ stands for the six factors
– Political, Economic, Social, Technological, Legal, and
Environmental. Together, they form the basis for identifying
key issues that may impact the strategic direction of the
company (Boyce 2021).
Political

These factors are all about how and to what degree a

government intervenes in the economy or a certain industry.

Basically, all the influences that a government has on your business

could be classified here. This can include government policy,
political stability or instability, corruption, foreign trade policy, tax
policy, labor laws, environmental law and trade restrictions.

Here are the guide questions:

• What government policies or political groups could be
beneficial or detrimental to our success?
• Is the political environment stable or likely to change?
 Economic Factors

Economic factors are determinants of a certain economy’s

performance. Factors include economic growth, exchange
rates, inflation rates, interest rates, disposable income of
consumers and unemployment rates.

Here are the guide questions:

• What economic factors will impact on us moving forward?
• Does the current economic performance affect us?
• How does each economic factor impact our pricing, revenues,
and costs?
 Social Factors
 This dimension of the general environment represents the demographic
characteristics, norms, customs and values of the population within which the
organization operates.
 This includes population trends such as the population growth rate, age
distribution, income distribution, career attitudes, safety emphasis, health
consciousness, lifestyle attitudes and cultural barriers.
 These factors are especially important for marketers when targeting certain
customers. In addition, it also says something about the local workforce and its
willingness to work under certain conditions.
 Here are the guide questions:
 • How do our consumer’s values and beliefs impact on their buying habits?
 • How does human behavior or cultural trends play a role in our business?
 Technological Factors
 These factors pertain to innovations in technology that may affect the operations of
the industry and the market favorably or unfavorably.
 This refers to technology incentives, the level of innovation, automation, research
and development (R&D) activity, technological change and the amount of
technological awareness that a market possesses.
 These factors may influence decisions to enter or not enter certain industries, to
launch or not launch certain products or to outsource production activities abroad.
By knowing what is going on technology-wise, you may be able to prevent your
company from spending a lot of money on developing a technology that would
become obsolete very soon due to disruptive technological changes elsewhere.
 Here are the guide questions:
 • What innovations and technological advancements are available or on the horizon?
 • How might they affect our operations?
 Environmental Factors
 Environmental factors have come to the forefront only relatively recently. They have become
important due to the increasing scarcity of raw materials, pollution targets and carbon
footprint targets set by governments.
 These factors include ecological and environmental aspects such as weather, climate,
environmental offsets and climate change which may especially affect industries such as
tourism, farming, agriculture and insurance.
 Furthermore, growing awareness of the potential impacts of climate change is affecting how
companies operate and the products they offer. This has led to many companies getting more
and more involved in practices such as corporate social responsibility (CSR) and
sustainability.
 Here are the guide questions:
 • What regulations and laws apply to our business?
 • Do they help or hinder our business?
 • Do we understand the laws across all our markets?
 Legal Factors
 Although these factors may have some overlap with the political factors, they
include more specific laws such as discrimination laws, antitrust laws,
employment laws, consumer protection laws, copyright and patent laws, and
health and safety laws.
 It is clear that companies need to know what is and what is not legal in order to
trade successfully and ethically. If an organization trades globally this becomes
especially tricky since each country has its own set of rules and regulations.
 Here are the guide questions:
 • How does our physical environment affect us and vice versa?
 • What are the effects of climate, weather or geographical location?
 • Are we prepared for future environmental targets?
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.
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