WEEK 5 Lesson 3

TABLE OF CONTENTS

APPLIED ECONOMICS

UNIT 3: INDUSTRY AND ENVIRONMENT ANALYSIS:

BUSINESS OPPORTUNITIES IDENTIFICATION

LESSON 1: ECONOMIC ANALYSIS OF PROFIT MAXIMIZATION

LESSON 2: PORTER’S FIVE FORCES OF COMPETITIVE POSITION
LESSON 3: ENVIRONMENTAL SCANNING IN INDUSTRY
ANALYSIS
LESSON 4: ANALYSIS OF STRENGTHS, WEAKNESSES,
OPPORTUNITIES AND THREATS (SWOT ANALYSIS)
LESSON 5: BUSINESS OPPORTUNITIES IN VARIOUS
ECONOMIC SECTORS

TABLE OF CONTENTS .............................................................................................................. i

GRADE LEVEL STANDARD ................................................................................................iii
UNIT 3 ............................................................................................................................................ 1
LESSON 1: ANALYSIS OF PROFIT MAXIMIZATION .............................................. 1
LESSON 2: PORTER’S FIVE FORCES OFCOMPETITIVE ...................................... 1
POSITION ..................................................................................................................................... 1

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LESSON 3: ENVIRONMENTALSCANNING IN INDUSTRY ................................... 1

ANALYSIS ..................................................................................................................................... 1
LESSON 4: ANALYSIS OF STRENGTHS, WEAKNESSES, ...................................... 1
OPPORTUNITIES AND THREATS ................................................................................... 1
(SWOT ANALYSIS) .................................................................................................................. 1
LESSON 5: BUSINESS OPPORTUNITIES IN VARIOUS ......................................... 1
ECONOMIC SECTORS ............................................................................................................. 1
INTRODUCTION ....................................................................................................................... 1
DEVELOPMENT ......................................................................................................................... 3
ASSIMILATION/ASSESMENT .......................................................................................... 33
................................................................................................................................................ 34
REFLECTION ............................................................................................................................. 34
The things I learned from the lesson: ................................................................... 34

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QUARTER
WEEK 5 1 Lesson 3

GRADE LEVEL STANDARD: This course deals with the basic principles of applied
economics and its application to contemporary economic issues facing the Filipino
entrepreneur such as prices of commodities, minimum wage, rent and taxes. It covers an
analysis of industries for identification of potential business opportunities. The main output
of the course is the preparation of a socioeconomic impact study of a business venture.

Content Standards: Learning Competencies:

The learner will be able to analyze

The learners demonstrate the law of
different principles, tools and technique
supply and demand, and factors
in creating business. Apply business
affecting the economic situation industry
principles, tools and techniques in
analysis, its principles, tools and
participating in various types of
techniques leading to identification of
industries in the locality.
business opportunities

Performance Standards:

The learners will be able apply tools and

techniques for business opportunities like
the SWOT/TOWS analysis

Values Integration:

1. Interaction
2. Communication
3. Engagement
4. Respect
5. Community involvement and service towards Nation-building

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Performance Task: Goal – the learner will be able to

The learner will determine SWOT analysis
Role – the learner will choose an
Choose an industry in agriculture, industry
or service sector and prepare a SWOT industry and prepare SWOT analysis.
analysis of the chosen industry.
Audience – co-learners
Situation – learner will present to the
class
Product – any
Standard – Assess the performance
task using the following criteria:
Essay content - 60%
Group Effort – 20%
Class Presentation (Reporting) – 20%

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WEEK 5 Lesson 3

UNIT 3

LESSON 1: ANALYSIS OF PROFIT MAXIMIZATION

LESSON 2: PORTER’S FIVE FORCES OFCOMPETITIVE
POSITION
LESSON 3: ENVIRONMENTALSCANNING IN INDUSTRY
ANALYSIS
LESSON 4: ANALYSIS OF STRENGTHS, WEAKNESSES,
OPPORTUNITIES AND THREATS
(SWOT ANALYSIS)
LESSON 5: BUSINESS OPPORTUNITIES IN VARIOUS
ECONOMIC SECTORS

INTRODUCTION

In this chapter we are going to discuss the various perspectives, principles, tools and
techniques used in business to identify commercial opportunities. The common thread
among these perspective is the motivation of business establishments to earn profit. In
economic analysis, the main concern is to realize the maximum profit. Meanwhile, in 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. On the other hand, in industry analysis,
the focus on environmental scanning is made to show the impact of the various spheres
where industry operates on its profitability. This profitability will affect the stability and growth
of the industry. Lastly, in SWOT (strengths, weaknesses, opportunities and threats) analysis,
these conditions for profit maximization, the five forces of competition and the various

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internal and external spheres affecting an industry are synthesized on how they can actually
and potentially enhance profitability or actually and potentially impede profitability of a
company.

Specific Learning Objectives

1. The learner will be able to determine the opportunities and threats that exist for
firms within a competitive environment.

2. The learner will be able to determine the strengths and weaknesses of a firm and
to determine the core competence that can be built on to establish a
competitive advantage.

3. The learner will be able to determine the relative strengths of each of the five
forces.

Key Understandings

1. A monopolistic market is considered the most concentrated with a single

determining the price that would maximize the profit of the business enterprise.

2. The two main categories of market barriers are scale barriers and legal barriers.

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Essential Questions
DEVELOPMENT
1. Explain why sizable market power of a company leads to higher profit? What
are the factors that can enhance a company’s market power?

2. In SWOT analysis what are the similarities and differences between strengths
and opportunities? What are the similarities and differences between
weaknesses and threats?

LESSON 1: ECONOMIC ANALYSIS OF PROFIT

MAXIMIZATION
As discussed in Chapter 1, in the economic analysis of decision and actions of individuals
including business firms, the ideal choice is set when the marginal utility is equal to the
marginal cost. The objective of the firm is to earn profit, which is the difference between
revenues and costs. But beyond earning profit the business firm is interested in reaping
maximum profit as an optimal decision goal. Since profit is the gap between total
revenue and total cost, the maximum level of profit is attained when profit is no longer
increasing or when marginal profit is zero. Thus, the condition for maximum profit is when
marginal revenue is equal to marginal cost.

Further investigation reveals that total revenue is composed of two components, output
produced and the price of the commodity. The level of output, in turn is based on the
demand on the product. Meanwhile, demand for the product is formed primarily by the
benefits and satisfaction derived by the consumers. The change in the quantity demand
is influenced by the market structure where the business is operating. In a competitive
market where the business firm has no market power, the demand curve faced by a firm
is a horizontal line. This implies that changes in the output decisions of the firm have no
impact on the overall demand in the market.

On the other hand, in a monopolistic market where the business firm has huge market
power, the downward sloping market demand curve is the demand curve faced by the
firm. This implies that changes in the production of a monopolistic firm can have
significant bearing on the market demand for the product and its price.

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Aside from the output, the structure of the market also has an influence on the price, the
other component of total revenue. In a competitive market, since the firm has no market
power, it is considered a price taker. This means that the market price is not determined
by a single business firm but by all the sellers and all buyers in the market. Using the market
price as information, the business firm can set its output that will maximize its profit.
Meanwhile, the significant market power of a business firm in a monopolistic market can
give it a distinct influence in setting the price that will give it maximum profit.

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.

Table 3.1

Factors Leading to Profit Maximization

Factors Profitability Minimal Profit Medium Profit High Profit

Market Concentration Many Sellers Few Sellers One Seller

Market Entry No Barriers to Some Scale Barriers/ Scale and Legal

Entry Contestable Market Barriers; Gov’t
Barriers

Product Differentiation Homogenous Some Degree of Highly

Good Product Differentiated
Differentiation Product

Information Perfect Limited Information Very Limited

Information for Information
all participants

Market Power No Market Limited Market High Market Power

Power Power

Market Structure Perfect Oligopoly and Monopoly

Competition Monopolistic
Competition

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Market Concentration

This 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 industry. Thus, a
monopolistic market is considered the most concentrated with a single determining the
price that would maximize the profit of the business enterprise. A lesser degree of market
concentration but still with significant market power is observed in an oligopolistic market
with few sellers colluding of forming a cartel to set the price that would give the maximum
profit for the industry. On the other hand, market concentration is diluted with market
power absent in a competitive market due to the numerous sellers and buyers in the
market.

Barriers to Entry

Barriers to entry refer 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. As these barriers restrict the number of
sellers, it can reinforce the degree of concentration of the industry and in turn enhance
the market power of existing players in the industry.

The two main categories of market barriers are scale barriers and legal barriers. Scale
barriers refer to requirements for a large production plants for a feasible operation in the
industry. This in turn will require huge amounts of capital and resources to establish a
factory in the industry. Thus, existing players have market power since potential entrants
without the necessary resources may be automatically excluded and prevented in
entering the industry.

Legal barriers, on the other hand, refer too propriety rights and their corresponding legal
protection extended to existing market players in the production and distribution of a
product or service. These legal protection measures prevent potential competitors in
copying their products, services, technologies, marketing strategies and distribution
arrangements. Thus, patents, copyrights, trademarks and other intellectual property rights
can give market power to existing players in the market.

These barriers are very prominent in monopolistic and oligopolistic industries that give
existing players substantial market power. However, a business enterprise operating in a
competitive market has no market power since entry and exit is not restricted. Any excess
profit in the industry can be easily reduced and removed with the entry of competitors
that will bid the market price down.

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Product Differentiation

This factor refers to the ability of a business firm to create a market niche through several
means of varying its products and services. The ability of the business enterprise to
convince the buyers that the product or service it is selling is different from similar products
and services can give market power to the firm. The result of product differentiation is to
enable the firm to design a new product or service from similar products in the market
and services. As discussed in the previous chapter, firms in a monopolistically competitive
industry may sell similar products but through various styles of packaging and marketing
buyers are convinced that these products and services are different. Such consumer
acceptance that the product is different can give every product or service its own
demand curves. In turn, sellers can use these demand curves to set the price that would
maximize their profits.

In a monopolistic market, single producer of a unique product or service is faced with an

inelastic demand curve with changes in quantity demand not as responsive to price
changes. In such a situation, the monopolist has enormous market power since it can
charge a very high price without inviting a proportional decrease in quantity demand.
This will give the monopolist huge profits.

On the other hand, in monopolistically competitive markets, a typical firm selling a

differentiated product is faced with an elastic demand curve with changes in quantity
demand quite responsive to price changes. In such a case the firm still enjoys a moderate
market power since it can set the price in the market. However, it cannot charge a very
high price because it may encourage consumers to drastically reduce their quantity
demand.

Lastly, in a competitive market, a firm is selling a similar or undifferentiated product is

faced with a horizontal demand curve with changes in quantity demand very responsive
to price change. In this example, the competitive firm does not have market power since
it cannot set or change the market price. Deviating from the market price will result in
dire consequences as it will incur huge costs or loss of its market.

Limited Information

This element refers to the unevenness in the distribution of information among the actors
in market. When market actors are not evenly informed those with more information can
have market power and extract surplus from the other actors. In monopolistic and
oligopolistic industries, existing market players can have information like new
technologies, sources of raw materials, innovative products and processes that are not
available to other potential sellers. This information edge can provide market power to

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existing market players. On the other hand, in a competitive market sufficient information
is available to all not only to existing players in the market. As a result, potential players in
the market can know this and make appropriate decisions.

LESSON 2: PORTER’S FIVE FORCES OF

COMPETITIVE POSITION
In the previous section, the role of market power in enhancing profitability of a business
enterprise was discussed. By protecting the existing seller and limiting the number of sellers
in the industry, restricting the entry of potential competitors, differentiating their products
and restraining information to few players, the market power of existing players in the
industry is boosted. With heighted market power this single seller or few producers can set
the price that maximizes their profits.

In this section, the goal of profitability of an industry will still be pursued through the use of
Porter’s Five Forces of Competitive Position. This framework was developed by Michael
Porter (1979) as an alternative perspective on profitability analysis and on the
attractiveness of an industry for business ventures. The five forces emanate from the
competition among rival firms within the industry, the bargaining power of consumers,
the bargaining power of suppliers, the threats of entry of rival firms and the threat of
substitute products or services. According to Porter, the stronger the forces of competition
have bearing on the industry the lower its profitability and the less attractive the industry
for business enterprises. Because of this, the appropriate strategy for the industry is to
control and manage these forces in order to enhance the industry’s profitability.

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Competition Among Exiting Firms in the Industry

The first force comes from the competitive behavior of existing players in the industry. As
discussed in the previous section firms within an industry compete with one another to
improve their market control and profitability. 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 firms is almost absent low because the firm is a
single producer of a highly differentiated product.

On the other hand, in a competitive market, the aggressive forces coming from rival
companies are very intense that a business enterprise is weak in mitigating these strong
forces because there are too many players in the market selling similar products. In
addition, free entry and even distribution of information reinforce the impacts of these
forces that make profitability very low in a competitive market.

In an oligopolistic market, the forces of competition will depend on the behavior and the
interaction of the few firms in the industry. If they cooperate and act like monopolist, the
forces of competition are mitigated. As a consequence, profitability can be high for the
industry. On the other hand, if they pursue independent actions imitating the behavior of
competitive firms, the forces of competition are strong and profitability may be low.

Meanwhile, the ability of the sellers to differentiate their products and appeal to specific
market segments in a monopolistically competitive market can temper the forces of
competition. However, these forces of competition among rival firms can be further
heightened because there are many sellers in the market and the entry is not restricted.
As a result, the profitability in the industry may be moderate if not low.

Bargaining Power of Customers

In a market, transactions are made between sellers and buyers. For sellers, responding to
the needs of the customers is a major reason for engaging in business aside from earning
profits. Although buyers are supposed to be served by sellers the interests of these market
players are conflicting. Utility maximizing buyers prefer lower price to enhance their level
of satisfaction while sellers want higher price to maximize their profits. These contrasting
interests can start a force that can have an effect on the profitability of the industry. That
force comes from the bargaining or market power of the buyers.

In a monopsony, a market structure where there is a single buyer, the sole buyer can
have a huge bargaining power on the sellers in the industry. If this sole consumer does

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not buy from the company it does not only threaten the profitability of the business
enterprise but also its survival. In addition, if customers are organized they can exercise
and exert bargaining power by demanding the lowest price possible. For example, a
consumer cooperative can demand huge discounts from sellers because they purchase
their products on a wholesale basis and distribute it to their members on a retail basis.
Similarly, large and lightly integrated companies normally buy their equipment and
suppliers in bulk so they can exert bargaining power over their suppliers.

To mitigate the bargaining power of the buyers of the products and enhance the
profitability of the industry there are options that the industry can do. One option is to
diversify the buyers of the product. Diversification frees the dependence of a business
enterprise and the industry on a single or relatively few buyers. Another alternative is for
the industry to sell a variety of differentiated product instead of a single product. By
offering differentiated products in the market the industry is able to segment or divide its
product lines.

These two options can be seen by analyzing the flow or the disposition of outputs of the
industry. A portion of the outputs of an industry can be bought by other firms within and
outside the industry as intermediate goods and the rest may be distributed as final goods
to consumers, investors, government and the rest of the world. To weaken the impact of
the bargaining power of a particular buyer on the profitability of the industry, the industry
can distribute a large share of its outputs to the other sectors mentioned above where
the bargaining power of the buyer is not as significant. For example, if there is a single
buyer in the domestic market exerting too much competitive pressure on the industry,
the industry can try exporting a sizable portion of its products to mitigate the bargaining
power of the domestic buyers. In another example, if the government is a major buyer of
the products of the industry with sizable bargaining power, the firms and the industry can
concentrate on the production of intermediate goods where buyers are numerous
instead of final goods where the government is the single buyer.

Bargaining Power of Supplies

As discussed in previous chapters, the process involves the conversion of raw materials or
intermediate inputs performed by factors or processing inputs to produce an output. Thus,
a business enterprise as well as the industry will need raw materials as intermediate inputs
to be further transformed. In addition, it will need labor services, capital, land service of
managers and other factor inputs that will process the raw materials.

The sourcing of raw materials and factor inputs can have an impact of the profitability of
the industry if these suppliers have marker power. If the industry sources its raw materials

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from a single or few suppliers; these suppliers can have strong forces on the industry that
may lower industry’s profitability.

Even in the factor markets, suppliers of factor inputs can exert bargaining power on the
business enterprise and on the industry. Even if companies in the industry hire their laborers
from various sources these laborers can have bargaining power once they organize and
form labor unions. We often hear deadlocks in the discussions on collective bargaining
agreements because of the demands from the labor unions that can significantly cost
and lower their profitability.

In addressing the strong bargaining power of a single or very few sources of raw materials,
the industry can adjust by diversifying its sources of raw materials to weaken the
bargaining power of suppliers. In addition, companies with huge resources can integrate
vertically. This means that the mother company can form a subsidiary firm that will supply
all the raw materials for the conglomerate. San Miguel Corporation is an example of a
vertically integrated company with the production of the various subsidiaries feeding into
the other members of the conglomerate as raw materials.

There are also various ways of responding to the powerful forces in the factors markets.
One popular measure used by firms in various industries to mitigate the bargaining power
of labor unions is subcontracting of labor services. In this case, the company does not
employ laborers for their noncore tasks but hire their services through a number of
manpower services firms. In this case, companies deal directly with manpower services
companies and not with the laborers.

Meanwhile, in weakening the market power of the suppliers of capital, many large
companies integrate banks and other financial institution in their conglomerate. Thus, any
bargaining power that sources of funds have is diminished because the financial
institution is a subsidiary of large integrated company.

Threats of Potential Entrants

Potential entrants to the industry are realistic threats especially if the industry is very
profitable. In the previous section we have discussed the various ways an industry can
arrest the entry of potential entrants. Scale and legal barriers within the industry can
reduce the competitive force that these potential competitors may pose on existing
players. However, these potential entrants can have their armory to strengthen their
competitive force on the industry. For one, they have enough resources to overcome the
scale barriers as well as the technology that can produce a differentiated product or
can provide a production process than can lower their cost.

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With the upsetting competitive threat from resource-endowed potential entrants, the
option for existing companies is also to engage in research and development to improve
their products and to segment the market through product differentiation. In the case of
San Miguel Corporation, to arrest the competitive edge of its potential rivals in the beer
market, they introduced various product lines from the original San Miguel Beer to cater
to various markets. With the division of the market the entry of a potential competitor will
be concentrated on a particular segment of the market and not on the entire market.
This strategy is made to neutralize whatever competitive force the potential competitors
have on the profitability of the exiting players in the industry.

For existing firms with excess capacity, another option is to allow the potential competitors
to enter and establish their plans in the industry. Once competitors have established their
presence, existing firms with excess capacity may expand production and lower the
price. With a diminished price the new entrants may find it unprofitable to continue their
operations and may opt to exit the industry.

Threats of Substitute Goods

Another major competitive force that may impact on the profitability in the industry is the
threats of substitute goods. This legitimate factor was considered by the OPEC member
countries when they imposed production cuts in the 1970s. With no significant and viable
substitutes for crude oil the production cuts made by oil exporting countries led to the
tripling of the world price of oil that brought huge profits to the oil exporters. As a
consequence of this huge oil price increase, the production of various alternative sources
of energy became economically viable. Currently, the OPEC is very cautious in increasing
the price of oil because it may trigger a significant shift in demand for these alternative
sources of energy that may imperil the industry.

Usually, industries that exhibit high rate of profitability are the ones challenged by the
emergence of substitute goods. The strength of this competitive force may be measured
by the cross elasticity of demand. The cross elasticity of demand is the responsiveness of
the demand for a substitute good due to a change in the price of the product in the
industry. The strategy of existing players in mitigating the threats of substitute goods is to
lower their cross elasticity of demand with the product of the industry. One alternative of
lowering this cross elasticity of demand is to differentiate the product of the industry. As
the differentiation from the substitute goods widens and the cross elasticity of demand
declines the competitive force of substitute goods is mitigated.

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LESSON 3: ENVIRONMENTAL SCANNING IN

INDUSTRY ANALYSIS
In the previous sections, we have analyzed how profitability is being shaped by
competition for market power among rival firms in the industry as presented in the
economic analysis of profitability. In addition, this profitability is influenced by various
factors that directly affect the competitiveness of the industry as articulated in Porter’s
five forces of competitive positions. In both perspectives, the factors and forces
mentioned have direct bearing enterprise or in the industry. However, the indirect
impacts of factors and forces were not considered in this analyses. To address this
inadequacy, we will identify these factors and forces and how they implicitly affect a
business company and an industry through the use of environmental scanning of an
industry.

Although the economic analysis of market structures is important as well as the evaluation
of the major forces of competition in the study of the attractiveness of an industry, it is
equally important to consider an analysis of the various environments where the industry
is knowing the pull of an industry on business enterprise. A business venture does not
operate in an environment where rival firms interact in an industry. It does not only
respond to the competitive forces and threats that directly affect the industry. The
industry also interacts and responds to various factors and forces that affect not only the
industry but other industries and other economies. In an increasing interdependent world,
a major change in one sector may indirectly affect other sectors even if there is no
supplier-buyer relationship or whether these changes are coming from potential rival firms
or substitute products. These factors and forces will be analyzed from the perspective of
the environments where they impact on a business enterprise and in industry.

A business company or an industry does not operate like a secluded island. Instead,
business firms interact with other firms within the industry and related industries. They also
affected by the health of the national economy where they operate. Meanwhile, tax
measures and other government regulations can shape the conduct of a business
venture and its profitability. In addition, significant developments in the global economy
are felt in national economy and in the industry especially if companies are engaged in
external trade.

Beside these spheres of business, politics and economies affecting the industry, there are
non-sector factors that may impact on the industry. The developments in technology for

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example, can alter the production and distribution processes of several industries. Major
variation in society together with demographics changes can have impact on the
demand for products of the industry. Also affecting the production process and supply
conditions of the industry are fluctuations in the natural environment.

National and Global Economies

A potentially profitable business venture thrives in a favorable business climate which in

turn is set in a vibrant economy. A rapidly growing economy will have positive effects on
various industries and sectors. Since industries are linked with one another a rapid growth
experienced in one industry will have favorable ripple effects on other industries that
supply its raw materials. Meanwhile, with stable inflation, wage and interest rate business
companies in growing industries can proceed with their expansion plans since raw
materials and services of factors inputs are relatively affordable. In addition, a vibrant
economy implies that various sources of demand have sufficient purchasing power.
Because of economic growth consumers have additional income to buy more consumer
durable. Similarly, because of positive outlook on the economy investors may construct
additional physical plants and purchase more equipment. These developments, in turn
have indirect effects on other sectors of the economy.

On the other hand, a lethargic economy is characterized by very slow economic growth,
huge unemployment and depressed demand. With a large portion of the labor force
underutilized, their capacity to purchase goods and services is likewise constrained. As a
result, a significant reduction in the demand for a particular industry will have bearing on
their suppliers of the inputs as well in their demand for factor services particularly labor.

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Similarly, the health of the global; economy has repercussions on the viability and
profitability of an industry. For example, the Asian financial crisis that started in Thailand in
the late 1990s has affected other economies in the region. With the simultaneous
depreciation of the currencies, many foreigners transferred their funds to safe economies
leaving many domestic banks insolvent and local business companies bankrupt. As a
result, almost all economies in the region were affected and registered negative growth.
With this economic recession in the region, even those industries that were not initially
involved with the financial crisis were affected as price of commodities rapidly increased,
interest rates went up and imports became more expensive with depreciated currencies.

Another example of the impact of the global economy is the weakening of the sugar
industry in the Philippines. In the 1950s sugar was one of the major exports of the
Philippines. However, with the Common Agricultural Policy (CAP) in Europe that
effectively protected the sugar producers in the union, global supply of sugar went up
and the price of sugar drastically went down. This price deterioration has made many
sugar plantations and refineries in the Philippines uncompetitive and some have to close
down in response to this global development.

In another example, when the economies of the United States and Japan experience
recession, the industries of its major trading partners including the Philippines are also
affected. With a massive unemployment and lower purchasing power in the United
States and Japan, the demand for goods an services that include imports will contract in
these economies. As a result the production and exports of the Philippine electronics
industry declined since the Philippines exports electronics goods to these countries
experiencing economic recession.

Government Policies and Regulations

The government is considered a parameter to be managed in any business venture. The

government will always be there to regulate and tax not only businesses but also business
transactions. It should be recognized that government is an institution that exercises
control over commercial ventures. This jurisdiction of the government on businesses is
made in the name of public interest by protecting stakeholders when there are
imbalances in the information among players in the market. The government is also an
agency tasked to stabilized the economy and promote its growth.

In regulating business transactions, it can impose heavy taxes on commodities and

activities that lead to negative externalities like pollution and unhealthy habits. Taxes on
cigarettes and on alcoholic beverages, also known as sin taxes are targeted to reduce

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the demand for this goods which may have adverse consequences on the profitability
of industries producing these products. Regulations that protect the interests of laborers,
on the other hand, like minimum wage and improved working conditions may increase
the operating costs of firms within covered industries. In addressing inflationary pressures
the government through the Monetary Board of the Bangko Sentral ng Pilipinas (BSP) may
pursue a tight monetary policy that may increase interest rates. Increase in interest rate
may increase the cost of funds for many business firms which in turn may postpone their
investment plans.

On the other hand, the government may also have positive impacts on business and
industry through the promotion of economic growth and employment. By building roads,
bridges and other infrastructures, it can ease the transport of goods produced by
affected industries. In addition, by providing tax incentives, it can attract business to
preferred industries since it enhances the profitability of these targeted industries.
Improving the processing of application of business permits and the processing of tax
exemption, facilitating the release of imported goods can be favorable to business. In
addition, the government can provide subsidies in industries whose products result in
positive externalities to society. For example, the government supports private education
and industries conducting research and development because of the positive spillover
effects of educational services and research and development.

Technological Developments

The rapid developments in technology in recent years particularly in Information and

Communication Technology (ICT) have affected many business and industries in several
ways. It has altered the behavior of consumers created new products and services and
has significantly enhanced the process of production and distribution. The high-speed
transformations in ICT enabled consumers to have access to several commodities and
services globally within their fingertips. Through electronic commerce and the use of
smart phones with their numerous apps, consumers can order books through
Amazon.com, tourist can rent private homes instead of hotel rooms for vacation through
Airbnb.com and commuter can flag down a private car as an alternative to a taxi
through Uber.

With the introduction of 3D (three dimensional) printing, it is positive to manufacture

products with limited scale to cater to a select and small market. This has encouraged
greater product differentiation and created multiple niche markets. To have access to
huge data, expand their data storage and processing capacity at significantly lower cost
companies can employ the services of Dropbox for cloud-based file sharing. Some

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companies use networking websites such as LinkedIn to review qualifications of

professionals and experts that suit their needs to mitigate the cost of talent mismatch.

These changes, in turn have intensified competitions within the industry Technological
developments have threated existing players in the industry as these innovations provide
alternative and probably cheaper goods and services to the public. With enhanced
competition the production cost of business ventures and the profitability of the industry
become unclear. This variability in costs and profitability has threatened the viability,
stability and growth of the industry. Companies that are slow to adapt or fail to adapt to
these rapid developments of technology are bound to exit from the industry. The rise and
fall of Nokia is a classic example of a prominent company failing to respond immediately
to the threats of its competitors with huge technological advantages.

Demographic Changes

From the country’s population, business enterprises draw primarily their customers. As
population expands, it creates additional demand for products and services and can
enhance the profitability of business companies and several industries. Demographic
changes including lower birth rates experienced by developed economies over several
decades ago are not manifesting in terms of an aging population. This changes in the
structure of population has an impact on several business enterprises. Industries catering
to the needs of children and the youth may be considered as sunset industries compared
with those targeting the elderly like health care and retirement homes. However, the
dampening, impact of an aging population on the overall economy can even be more
extensive as experienced in Japan. One of the reasons for the lingering recession in that
country is the consumption pattern of the elderly. Retirees and pensioners tend to save
rather than consume currently to extend the utilization of their savings in the light of longer
life expectancy.

However, aside from treating the population as market base of industries, people are also
the source of firms’ laborers, professional and technical expertise, savers, investors and
entrepreneurs. The lower birth rate and aging population cited above have implications
on the other dimensions of business. With slower labor force growth and an expanding
economy, labor services in these expanding economies have to be sourced from foreign
workers. The demographic changes in South Korea, Taiwan and Singapore relative to
their economic expansion have pressured them to open up their economics by allowing
the entry of additional labor services and professionals from the rest of Southeast Asia
including the Philippines. In turn, the massive outflows of professional manpower from the
Philippines have created shortages of engineer and technical workers in some industries.

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Social Changes

Modifications in family structure and other social changes have impact on consumer
behavior and tastes. For example, with traffic congestion in Metro Manila getting worse
many students and young professionals have opted alternative measures to address this
daily toll on their lives. They have decided to temporary relocate to sites near their schools
and offices. By walking instead of commuting to their schools and offices they save on
gas, fare and time. This information has encouraged a number of real estate companies
to build condominiums near prestigious universities and commercial and business districts
in Makati, Taguig and Ortigas and rent, lease and sell their units to students and young
professionals.

From the demand prospective, this temporary shift in residence away from their families
has altered the consumer behavior of students and young professionals. Instead of home
cooking, a number of restaurants have emerged nearby to respond to the food needs
of those living in condominiums. Similarly, business ventures like house cleaning services
and laundry services have replaced the traditional ways of housework.

Changes in the Natural Environment

In the previous sections, we have identified various spheres of environments that affect
businesses but there is an environment that affects all sectors – the natural environment.
We live in a planet that is affected by variations in weather, temperature, seasons and
even geological movements. We can adapt to a hot summer, monsoon months,
volcanic eruption and even earthquakes. But extreme fluctuations in the physical
environment can have adverse affects on the production of certain sectors and may
even temporarily impair the purchasing power of some consumers.

Heavy monsoon rains and strong typhoons can destroy agricultural produce that can
drastically reduce supply and affect the price of agricultural commodities. Even if some
areas of the agricultural sector have been spared by a typhoon the damaged roads and
transportation network brought by heavy rains and strong winds can adversely affect the
distribution of agricultural commodities to other places. Such supply displacements can
temporary cause the price of agricultural commodities to go up.

Floods destroying agricultural produce are common sights in Southeast Asia. But in more
recent years prolonged floods caused by monsoon rains have affected even the
manufacturing sector. The extended stretched out floods in Thailand some years back
have affected many foreign-based manufacturing companies. In an environment where
major components of a car are manufactured in several capitals in the regions this

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extended floods in Bangkok has affected the car manufacturing industry in the entire
region since these car companies are linked through a regional production network.

Earthquake-prone areas and the outcomes of climate change can affect the feasibility
of a business venture because it can increase the environment risk in the industry. In such
a situation, business companies can respond to this risk by relocating in other areas distant
from identified fault lines. Since climate change can hardly be mitigated, business firms
can adapt to this new reality by changing the production and distribution processes to
adapt to changes in temperature.

LESSON 4: ANALYSIS OF STRENGHTS,

WEAKNESSES, OPPORTUNITIES AND THREATS
(SWOT ANALYSIS)
The fourth perspective in identifying business opportunities in an industry is known as
analysis of SWOT which stands for strengths, weaknesses, opportunities and threats. The
SWOT analysis can be viewed as a spin-off of the marginal benefits and marginal cost
framework developed in Chapter 1. Although it does not really measure benefits and
cost, it focuses on strengths and opportunities than can enhance the profitability of an
industry as a measure of benefits. In the same light, the framework does not measure
costs but identifies the weaknesses and threats that may contribute in increasing the costs
of the industry that make it less attractive for business ventures.

The framework can also be considered as an integration of the various perspective in

identifying business opportunities in an industry. The competition among rival firms to
enhance their market power is considered within the framework in enhancing or
mitigating profitability. Porter’s five forces of competition are also included as forces that
may improve or reduce the profitability of the industry. Lastly, the factors identified in
environmental scanning are also included as factors that can facilitate or inhibit
profitability. These factors are categorized as internal or external factors are categorized
as internal or external factors that interact with one another to form a favorable or
unfavorable business climate.

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Strengths

These are internal characteristics of firms or industry that can contribute directly to the
profitability of firms and the industry. Since managers have direct control on these current,
actual and positive characteristics of firms these features have direct contributions to the
industry’s profitability. Strengths of the industry may include among others, the availability
of skilled laborers, highly qualified management team, adequate equipment and
modern physical plant conductive for production and distribution activities. In addition,
firms within the industry have sufficient financial resources to implement their productive
and distributive activities. These firms also utilize state of the art technologies in production
and distribution that make them competitive domestically and internationally.

Weakness

Like strengths these are internal characteristics of firms or industry but unlike strengths they
mitigate the profitability of firms and industry. Weakness are core features with direct,
actual and current discounting factor on profitability that contributes in making the
industry less attractive for business ventures. Among the key features that may be
classified as weakness are the use of unskilled workforce, low morale of the employees,
high rate of labor turnover, lack of managerial talents and insufficient financial resources.
In addition, it has an old physical plant that uses traditional and outmoded technology
for its production and distribution processes.

Opportunities

Opportunities are positive impacts of various external environments on the profitability of

an industry. Like strengths, opportunities can contribute in enhancing the profitability of

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an industry but unlike strengths, their contributions are only potential, indirect and
prospective. This is so because firms do not have direct control over these external
factors. Some items that may be included as opportunities are the positive impacts of a
growing domestic economy, economic dynamism in the global markets, reliable
suppliers of raw materials and factor inputs as well as first-rate infrastructure that provides
quality, reliable and cheap power and access to various means of transportation and
telecommunication facilities.

Threats

These are undesirable impacts of external factors because they can potentially impair
the profitability of firms in an industry. Just like weaknesses these factors have harmful
impacts on the profitability of the industry. But unlike weaknesses these external factors
can only have potential, indirect, prospective effects because the firms or the industry
do not have control over these factors. The most they can do is manage these threats
and minimize their consequences. Some damaging impacts of external environments are
caused by weak infrastructure with high cost of electricity and inadequate transportation
system. Likewise, the absence of supporting industries that will supply the raw materials
can impair profitability. Similarly, a closed economy and highly regulated market can
prevent entry into the market. A global economy experiencing a recession or a financial
crisis can dispel prospect for the industry.

SWOT Analysis and Business Climate

The profitability of an industry is defined by a favorable business climate. This business

climate in turn is shaped by the interactions between various sets of internal factors and
external manifesting as strengths, weaknesses, opportunities and threats. But these
interaction among internal and external factors are further formed by government
through its implementation of macroeconomics policies, regulatory, framework and
institutional support.

Macroeconomic policies are course of actions of the government meant to stabilize and
promote in the economy. Policies of money supply, taxation and government
expenditures, human resource development and employment, trade and industrial
development can directly and indirectly impact on the profitability of the firms and
industries. For example, tax incentives and subsidies given by the government as well as
an essay monetary policy with lower interest rate can affect the industry positively.

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Government regulations, on the other hand, are set meant to address market distortions
brought by several reasons. Although the intent of government regulations is the
promotion of public welfare, these directives can have adverse effects on the firms and
industry. For example, the packaging of tobacco products showing the adverse effect
of smoking can lower the demand for cigarettes. This can threaten the profitability of the
cigarette industry.

Meanwhile, institutional support refers to a host of assistance from the government that
can make a favorable business climate. For instance, the provision of excellent networks
for transportation and communication, the implementation of the rule of law where
contracts are respected and upheld, peace and order are secured can make the
country conducive for domestic and foreign businessmen.

LESSON 5: BUSINESS OPPORTUNITIES IN VARIOUS

ECONOMIC SECTORS
Agricultural Sector and Agribusiness

Agriculture has been defined as the science and art of cultivating plants and producing
livestock. The agricultural sector has been an important component of the Philippine
economy. In the 1970s 28% of the country’s Gross Domestic Product (GDP) has been
contributed by agriculture. After more than four decades, its share in the economy GDP
has slid down to only 11%. It is also a major source of employment to millions of Filipinos in
the labor force absorbing 32% (2012) of the labor force down from the 54% recorded in
the 1970s. as the producer of food grains it devotes more than 50% of farm lands in the
planting of rice and corn. Aside from producing the staple grains, the agricultural sector
is also the source of raw materials supplied to the industrial sector as well as the producer
of export for the world market. The sector covers the economic activities of fishing and
forestry.

Table 3.1
Gross Value Added in Agriculture, Fishery and Forestry
(In million pesos; at current prices)
1960 1970 1980 1990 2000 2005 2010 2012*
Proportion of GDP 26% 28% 25% 21% 16% 14% 12% 12%
*Data are as of May 2013
Source: 2013 Philippine Statistical Yearbook, National Statistical Coordination Board

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Table 3.2
Employed Persons in Agriculture, Hunting and Forestry
(In million pesos; at current prices)
1960 1970 1980 1990 2001 2005 2010 2011
Proportion to the 61% 54% 51% 45% 34% 32% 29% 29%
Total Labor Force
Source: 2013 Philippine Statistical Yearbook, National Statistical Coordination Board

Because of the low productivity of a sector as indicated by a huge proportion of the

labor force in agriculture contributing a substantially lower proportion of GDP, a number
of initiatives have been implemented to enhance the sector’s productivity. One of these
initiatives is the development of agribusiness. Besides the production of food grains and
other commercial crops, agribusiness includes the manufacture and distribution of farm
supplies, implements and equipment, production of agriculture inputs, managing farms,
processing of agricultural products, storage and distribution of agriculture or farm
produce.

Many business ventures, small and large, derive their income and provide employment
from the production of leading agricultural crops. These crops are rice, corn, coconut,
sugarcane, banana, pineapple, coffee, mango, tobacco, abaca, rubber, cassava,
camote, peanut, monggo, garlic, onions, tomato, eggplant, cabbage and calamansi.
There are also business opportunities in the production of other fruits and vegetables and
varieties of rice and corn that cater to the changing tastes of Filipino consumers.

The long coastlines of the Philippines are endowed with marine resources for fisher folks
to harness for fish production. But aside from commercial fishing for seafood production,
there are business prospects in municipal fishing, aquaculture and cage/pen operations
opportunities.

For animal production, there are two types that can be pursued: livestock (pigs, cows,
carabaos and goats) and poultry production which includes chicken, ducks and goose.
Although production of livestock and poultry are done by medium scale enterprises small
entrepreneurs can also undertake these commercial activities as backyard and
livelihood ventures that can provide income and employment opportunities to poor
households.

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For forestry resources the main source of income is logging. But because of the
environmental implications of this type of agribusiness the commercial opportunities are
becoming limited with the implementation of the log ban.

In agricultural support and agricultural processing, the opportunities are huge and
expanding although the current share of this type of agribusiness is still small. The sale of
agricultural inputs and farm implements can improve the productivity of agriculture aside
from enhancing the non-crop production of those in the agricultural sector. Besides the
production and sale of agricultural equipment, there are business opportunities in leasing
or renting expensive capital equipment to small farmers. Provision of agricultural credit
and extension services can also be part of the business services offered by agricultural
cooperatives. In addition, some farm produce can be processed in cottage industries
located near the farm. Pork can be processed into ham and sausages. Fish can be
canned into sardines. Vegetables can be picked while fruits can be sweetened or dried
and duck eggs can be salted.

Beyond food processing, there are business opportunities in packing these agricultural
farm produce. Improvement in packing these farm commodities can make our dried
fruits, sardines, fish sauce, sausages and pickled vegetables attractive not only to the
buyers in the local market but also in the global market. We can learn from the way the
Thai and Japanese businessmen packaged their agricultural produce that command
international patronage.

Having identified a number of business opportunities in agriculture specifically

agribusiness, let us make a simple SWOT analysis of the sector by outlining some of its
strengths, weaknesses, opportunities and threats.

Strengths
 Vast tracts of the land for agriculture
 Large coastlines and municipal water resources for commercial fishing
 Competitive edge in the production of commercial crops and tropical fruits
 Use of modern technology in large scale farm production
 Competitive edge in niche products from organic farming

Weaknesses
 High cost of fertilizers and farm inputs
 Low productivity of farmers
 High cost in rice production
 High cost due to post-harvest wastage
 Inadequate irrigation facilities

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WEEK 5 Lesson 3

 Limited extension services

 Narrow investments in research and development

Opportunities
 Shifting demand for organic produce
 Increasing income of consumers
 Increasing population
 Government support in agriculture
 Changing tastes of consumers
 Further processing of farm produce
 Farm implements can be rented or shared
 ASEAN economic integration

Threats
 Low cost rice producers in the region
 Agricultural produce as inputs for biofuel
 ASEAN economic integration and the liberalization of rice imports
 Utilization of less productive marginal uploads
 Rapid population growth
 Climate change
 Overfishing
 Conversion of agricultural lands into residential, commercial and industrial
purposes

Industrial Sector and Manufacturing Industries

In the history of modern economies like Japan, United States, Germany and other
countries in Europe the marked expansion of the industrial sector was observed as their
agricultural sector slide in importance. Although the share of the agricultural sector in
Philippine GDP has declined over the past several decades, the production shift dis not
automatically go to the industrial sector as the share of the industrial sector has remained
steady at one third of GDP of the country. The shift in production went to the services
sector.

However, the development of the industrial sector particularly manufacturing is crucial in

the economic transformation of any country. The sector can provide employment to the
additional labor force that cannot be absorbed by the agricultural sector because of
the limitation of farm lands. In the transformation of an economy changes in the structure
of production over time follow the changes in the structure of the overall demand. The
industrial sector can create new products through processing that can address the

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changing demand and tastes of the consumers and increasing population. As national
income increases, the tastes and preferences of the people are inclined toward products
made by the industrial sector which are processed, differentiated, considered to have
high quality and at the same time, have high prices.

The industrial sector is composed of manufacturing, construction, mining and utilities,

which includes electricity, gas and water. Because more than 70% of production of the
sector comes from manufacturing industries, the industrial sector is often referred to as
the manufacturing sector. As mentioned earlier, it constitutes almost one third of the
national income but only absorbs 15 to 17% of the labor force in recent years.

Table 3.3
Gross Value Added of the Industrial Sector
(In million pesos at current prices)
Industrial 1960 1970 1980 1991 2000 2005 2010 2012*
Sector
Proportion to 28% 30% 37% 34% 32% 32% 33% 31%
GDP
Proportion of 20% 23% 25% 25% 22% 23% 21% 21%
Manufacturing
to GDP
*Data are as of May 2013
Note: The revised three-year series (2000-2002) incorporated updates and revisions from
data sources and refinements in methodology for some sectors. Hence, the users are
cautioned not to compare the three-year series with the PSNA Link Series (1946-1999).
The linking of the National Accounts series starts September 2003 as part of the overall
revision and rebasing of the Accounts and its targeted for completion by 2004.
SOURCE: 2013 Philippine Statistical Yearbook, National Statistical Coordination Board

Table 3.4
Employed Persons in the Industry Sector (In thousand)
Sector 1960 1970 1980 1991 2000 2005 2010 2012*
Total
Laborers
in the 1,316 1,876 2,554 3,386 4,682 5,025 5,399 5,530
Industrial
Sector

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WEEK 5 Lesson 3

Proportion
to the
Total 15% 17% 16% 15% 16% 16% 15% 15%
Labor
Force
SOURCE: 2013 Philippine Statistical Yearbook, National Statistical Coordination Board

Because of the prominence of the manufacturing sector, there are numerous subsectors
within manufacturing that can offer business opportunities to building entrepreneurs.
These industries are food manufacturing, beverages, tobacco, textile, footwear and
wearing apparel, wood and cork products, furniture and fixture, paper and paper
products, publishing and printing, leather and leather products, rubber products,
chemical and chemical products, petroleum products and coal, non metallic mineral
products, basic metal, metal industries, machinery, electrical machinery and transport
equipment.

These industries may use varying technologies. Large scale factory plants like cement
and steel utilize capital-intensive technology. However, there are many industries that
accommodate small entrepreneurs like food manufacturing, footwear, paper products,
leather products which are usually labor-intensive in the use of technology.

Aside from the categories of manufactured commodities, the classification of

manufacturing sector can be made according to the type of physical plant and
processing procedure. According to the Annual Survey of Philippine Business and Industry
for 2008 (ASPBI) (NSO, 2008) manufacturing establishment can be classified as
shop/factory, bakery, food establishments, millwork, distillery, cannery, abattoir, brewery,
foundry and tannery.

A flow shop uses a high volume specialized equipment that produces one or two similar
products like an assembly shop. On the other hand, a job shop produces commodities in
smaller batches like a machine shop.

Breads, pastries, cakes, pies, pan de sal and other flour-based products are processed in
bakeries. Meanwhile, meat processing, fish processing, preservation of fish, fruits and
vegetables, manufactures of vegetable and animal oils and fats, dairy products, food
grain mill production, starch and starch products are all products processed in food
establishments. In addition, beverages and mineral water are also considered part of
food establishments.

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WEEK 5 Lesson 3

Establishments engaged in millwork produce woodwork including doors, window casings

and baseboards. Distilled spirits, whiskies, brandy, gin, rum, vodka, tequila, cocktails,
herbal and sweet wine are produced in distillery establishments. Refinery establishments
are engaged in the process of purifying crude substances such as crude oil using
mechanical and chemical means to convert it into final products. Sugar cane, mineral
ores and metals are also primary products that undergo refinery.

Cannery establishments are factories where meat, fish, fruits and vegetables are canned
and preserved. Abattoirs or slaughter houses are establishments that pertain to the
slaughter, dressing or packing meat of cattle, hogs, sheep, goats, horses and poultry. It
also covers the production of by-products such as raw hides and skins; production of
pulled wool and production of feathers and down.

Meanwhile a brewery entails the manufacture of malt liquors such as beer ale through
the process of fermentation. While a foundry refers to an establishment that melts and
mold metals into various forms. Tannery establishments are concerned with the tanning
of animal skins and/or hides the cater mostly to the leather industry.

From the list of products in various industries in manufacturing, these products can be
processed mechanically, manually and chemically by cooking, heating, baking,
fermenting, bending and refining. Through these process of transformation newer
products are products are produced that can serve as intermediate inputs for the other
firms and industries and as a final product for local consumers and exports. Thus, the huge
business opportunities in the manufacturing sector are anchored on the variety of
commodities that can be produced and in terms of the numerous processes of
transformation.

Having cited the importance of the industrial sector particularly manufacturing in the
process of economic transformation, let us identify some of the strengths, weaknesses,
opportunities and threats in the sector as a means of the undertaking a simple SWOT
analysis for the manufacturing industries.

Strengths
 Variety of commodities that can be manufactured
 Variety of processes that can be undertaken
 Industries can be scaled into micro, small, medium and large enterprises
 Availability of skilled laborers
 Some industries are participants in global production networks
 Small enterprises are opening doors to inclusive growth
 Availability of raw materials

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Weaknesses
 Low productivity in labor-intensive manufacturing
 Insufficient investment in equipment and physical capital
 High cost of electricity and power
 Poor infrastructure
 Limited research and development
 Slow adoption of modern techniques of production

Opportunities
 ASEAN economic integration
 Favorable investment climate in the country
 Liberalization measures
 Increasing population changing tastes for manufactures and niche products
 Increasing inflow of foreign investment

Threats
 Climate change
 ASEAN economic integration
 Increasing labor cost
 Weak demand internationally
 High cost of electricity
 Weak infrastructure
 Cheap manufactures from China
 Migration of skilled workers

Services Sector and Retail Services

Services are products that are consumed when they are produced. This simultaneous
duration of production and consumption make them difficult to store unlike tangible
commodities. Because of this intangibility and the need for proximity between producers
and consumers, it was difficult to trade services outside the country in the past. However,
with the rapid improvements in information and communication technology, services are
increasingly traded internationally through various modes of supply including cross border
transactions (business process outsourcing), consumption abroad (tourism), commercial
presence (global branching of commercial banks) and movement of natural persons
(visiting professorship abroad).

Services cover a host of industries including wholesale and retail industries, transportation,
communication and storage including warehousing, hotels and restaurants, financial

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intermediation, real estate and business activities, education and other social services,
private services and government services. Other industries in services are publishing,
animation firms and cartoon production, computer programming and consultancy,
insurance, accounting, bookkeeping and auditing services, architectural and
engineering services, travel agency, call center services, medical transcription and many
others.

We have seen in the previous sections the roles played by the agricultural and industrial
sectors in the economy. Agriculture is primarily for food production and the supply of raw
materials. Meanwhile, the industrial sector particularly manufacturing is intended for the
creation of new commodities beyond primary agricultural produce. This is done through
the processing of raw materials into new products made by a combination of factor
inputs. The role of service, on the other hand, is to link various economic sectors as well
as suppliers and consumers. Thus, an efficient transport system can transfer agricultural
products from the farm to the various economic sectors and to their final consumers.
Similarly, products of agriculture and industry can be stored for a while before they are
retailed to the final consumers through trade services. The financing needs of these
various sectors can be facilitated by various banks and financial intermediation sector.
The training of workers and the provision of health and medical care to workers and
citizen can be provided by education and health services respectively.

Thus, an integrated economy relies heavily on the capacity of the services sector to link
various economic sectors. Because of this importance, the services sector has accounted
for more than half of the gross domestic product of the country in recent years. In
addition, it has given employment t almost half of the labor force. The biggest industry in
the services sector in terms of employment is wholesale and retail trade industry which
absorbs almost 20% of the labor force.

Table 3.5
Share of the Service Sector in the Gross Domestic Product
(In Million Pesos: At Constant 2000 Prices
Year
1998 Contribution as % of GDP 51.41%
2001 Contribution as % of GDP 53.47%
2004 Contribution as % of GDP 53.47%
2007 Contribution as % of GDP 54.49%
2010 Contribution as % of GDP 55.76%
2012 Contribution as % of GDP 56.88%
SOURCE: 2013 Philippine Statistical Yearbook, National Statistical Coordination Board

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Table 3.6
Employed Persons in the Service Sector (In thousands)
Sector Group 2006 2007 2008 2009 2010 2011
Total Labor Force Employed
in Service Sector 13,999 14,553 14,914 15,674 16,354 17,009
Percentage of the Labor
Force in the Service Sector 38.70% 39.08% 43.75% 44.70% 45.70% 45.73%
to Total
SOURCE: 2013 Philippine Statistical Yearbook, National Statistical Coordination Board

Since wholesale and retail trade constitutes the biggest component of the service sector,
there are numerous business opportunities that entrepreneurs can consider to pursue.
There is a division in this sector that pertains to the sale, maintenance and repair of motor
vehicles and motorcycles and retail sale of automotive fuel. Another division pertains to
wholesale trade and commission trade. And another division to retail trade. Almost 20%
of the country’s labor force is absorbed by the wholesale and retail industry. This covers
the millions of sari-sari store, grocery stores, ambulant vendors all over the country and
the more sophisticated shopping malls in selected urban areas in the country.

The second important industry in the services sector in terms of labor absorption is
transport, storage and communication. This industry includes land transport, transport via
buses, water transport and air transport. Because of the lack of mass transit system in the
country, this sector absorbs almost 8% of the labor force. The drivers and operators of
ubiquitous pedicabs, tricycles and jeepneys in urban and rural areas constitute a sizable
portion of this employment. Although the country has sophisticated air transport services,
a segment of the water transport services as well as land transport is in the informal sector
that is hardly regulated. Thus, in terms of quality of services and productivity some portion
of land transport is weak providing services below par while air transport services is
comparable with global players because of international compliance. Although shipping
services is improving it is still not comparable standards.

The third major employer is public administration and national defense. Since this is the
part of government, there are limited private sector business opportunities here except
in supplying their supplies and equipment. The fourth which constitute 3% of the labor
force is the real estate, renting and business activities.

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After outlining the importance of services in linking the various economic sectors and in
providing income and employment opportunities, let us outline the key strengths,
weaknesses, opportunities and threats faced by the services sector.

Strengths
 Biggest sector of the economy
 Provides the biggest employment in the economy
 Services are embedded in agricultural and industrial production
 Major source of economic growth
 Internationally competitive BPO
 Variety of modes of supply

Weaknesses
 Weak infrastructure
 Low productivity
 Huge informal sector
 Variability of quality services

Opportunities
 Liberalization and expansion of trade in service
 Government program in expanding and improving infrastructure
 Public-private partnership
 Liberalization in trade in service
 ASEAN economic integration
 Educational reform including K to 12
 Addressing the weaknesses
 Serves as the link of economic sectors

Threats
 Liberalization in trade in service
 ASEAN economic integration
 Migration of skilled workers
 Increasing competitiveness of services in the region

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WORDS TO REMEMBER

Agribusiness Monopoly
SWOT Analysis Oligopoly

Demographic Changes Profitability

Environmental Scanning Barriers to Entry
Marginal Cost Perfect Competition

ENGAGEMENT

The learner will be able determine different industry and environmental analysis.

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ASSIMILATION/ASSESMENT

I. Using to environment scanning, rank the importance of the factors that can
affect the profitability of our electronics exports?
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REFLECTION
The things I learned from the lesson:
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Questions I want to ask from the lesson:

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Things I realized from the lesson:

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REFERENCES:
For additional information, refer to the following website:

Economics for A Progressive Philippines

Tereso S. Tullao Jr., PhD
Phoenix Publishing House, Inc.
927 Quezon City

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