MODULE 2.2.

BASIC DEMAND & SUPPLY CONDITIONS

I. SUPPLY CONDITION

To have a better understanding of the industry, researchers need to consider the supply conditions
which will greatly affect the delivery of customer to the market. There are several components which
needs to be analyzed with regards to the basic supply conditions of the industry. These are the
Production Process, Major Investment Requirements, Raw Materials Sourcing, Sensitivity to Major
Supply Factors, Capacity Utilization, and the Determinants of the Bargaining Power of Suppliers.

A. Production Process

The first indicator of the supply of

an industry is its production process.
This shows the step-by-step process
which the industry undergoes before it
can delivery customer value to its
market. One way to present this is
through the industry’s value chain. The
value chain illustrates how the industry
gather its raw materials from its
suppliers, the processing of the raw
materials for convert it to its final
product, the linkage to the different downstream components or its distributors for it to reach their
target market/s. For a more thorough analysis, it is ideal that researchers understand the whole process
that happens in the conversion of the raw materials. This will provide an idea on what types of inputs
are necessary for the industry to continue with its operations.
The Production Process may be limited to the manufacturing sectors since this sector explicitly
presents processes of conversion. On the other hand, the service sector still has its own process which
may be related to the Service-Profit Chain. This shows an illustration of the different stages wherein
the service company receives its inputs from its suppliers and identifies the different stages before it
can deliver customer value to the market.

B. Major Investment Requirements

In line with the production process, the other supply factor which needs to be analyzed are the
Major Investment Requirements of the industry. From the term itself, the major investment
requirements are a list of the different assets and investments needed by the industry prior to the start
of its operations. Some of the necessary inputs needed by an industry are its Property, Plant, and
Equipment which are physical assets of the industry. In addition to the equipment, some industries
also require additional technologies and machineries which may be needed in their production. Aside
from that, the initial inventory of raw materials and other inputs are also needed before an industry
may proceed with its production process. Lastly, no industry will be able to function properly if there
will be no initial labor that will manage and utilize its major investments. Collectively, it is also ideal to
understand the initial capital outlay which is the monetary value of the major investments and initial
cash investment needed by the industry. The value of the initial capital outlay will contribute to the
degree of the barriers to entry and as well as the financial performance of the industry.
 C. Raw Materials Sourcing

Since this section of the industry paper deals with the industry’s supply, it is important for the
researchers to have an idea to where the inputs of the industry are coming from. Hence, this section
aims to provide a list of specific suppliers or supporting industries which aids the industry subject with
its inputs. The suppliers may be classified as local suppliers which are placed in the home country of
the industry, or international suppliers which are placed outside national boundaries. In addition,
recalling the discussion on the Porter’s Diamond Model, it is also ideal if the researchers have a grasp
of the specialized suppliers which provide unique inputs to the inputs.

D. Sensitivity to Major Supply Factors

Another component of the supply conditions is the industry’s sensitivity to major supply factors
which will have a great effect towards the supply of the industry. One of the supply factors is the cost
of production which is identified by the expense paid by the industry as it produces its outputs. Next
factor is the profitability of alternative goods which are the substitute of the inputs needed by the
industry. Its availability and profitability allow the industry to have more options when choosing the
inputs needed for its production. The natural environment also influences the supply of the industry
most especially if the inputs are heavily dependent on the natural environment. Certain environmental
calamities, typhoons, floods, and other phenomena will have a great effect on the inputs which may
be translated to the supply of the industry. The last supply factor is the expectations of future prices
which may be identified through inflation or the trends on the increase/decrease on the price of the
inputs of the industry.

E. Capacity Utilization

The Capacity Utilization of the industry is also an important supply factor when conducting an
industry. This may be computed through the formula presented below:

(𝐴𝑐𝑡𝑢𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡 − 𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡)

𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑈𝑡𝑖𝑙𝑖𝑧𝑎𝑡𝑖𝑜𝑛 = 𝑋100
𝑃𝑜𝑡𝑒𝑛𝑡𝑖𝑎𝑙 𝑂𝑢𝑡𝑝𝑢𝑡

The actual output is identified to the number of units produced by a machine, or an equipment
used by an industry. On the other hand, the potential output is identified by the maximum capacity of
the machine or equipment used by the industry. The higher the capacity utilization, the higher the
maximization of the industry’s machines/technologies. Some views on capacity utilization believes
that fully maximizing a machine/technology will have its negative effect when it comes to its
depreciation.

F. Bargaining Power of Suppliers

For a more thorough analysis on this force, a matrix is provided which must be assessed by the
researcher. In using the matrix, the researchers must identify the degree of attractiveness of each
determinant and then concluding the overall attractiveness of the industry based on this force. It must
be noted that the industry an industry may be considered unattractive if the suppliers will be able to
raise their prices, reduce the quality of the inputs they provide, and if they provide lesser service. In
addition, the researchers must also keep in mind the perspective they have chosen when analyzing
each of the determinants.

II. DEMAND CONDITIONS

Aside from the supply conditions it is also crucial for the researchers to assess the demand
conditions which affects the industry’s financial performance. The demand conditions may be
analyzed through the domestic and export markets, demand determinants, and the determinants of
the bargaining power of buyers.

A. Domestic & Export Markets

The customers, buyers, or users of the industry’s products/services may be classified based on
their geographical locations. The domestic market is identified as the group of actual and potential
buyers who are located within the national boundaries of the industry’s operations. On the other hand,
the buyers who are located outside national boundaries are considered as the export markets of the
industry. This set of markets deal with additional considerations such as tariff and customs regulations.
Aside from the geographic location of the markets, it is also ideal to consider the other characteristics
of the markets in terms of their demographic profile, behavioral and psychographic characteristics, to
have a deeper understanding of the industry’s customers.

B. Demand Determinants

The other factors which need to be studied in this industry paper are the demand determinants.
First is the population which identifies the total number of actual and potential buyers of the industry.
Having some knowledge in terms of the population will allow the industry to have a projection with
regards to the demand of their product/service. Second would be the tastes and fashions of the market
which may be related to the trends which must be addressed and satisfied by the industry. The buyer’s
income effect may also be considered as part of the demand determinants. This concept believes that
the higher the income of the buyer, the greater the volume of purchase done by the buyer. Also, the
buyer’s expectations of future price changes also affect the demand for the product. Like the price in
the supply factor, the price of the product is dependent on inflation. If the buyers believe that the
price of a product/service will increase in the future, they have the possibility to do the purchase now.
In contrast, if the buyers believe that the price of a product will decrease in the future, they will opt to
delay their purchase. Lastly, researchers must also consider the different related goods and assess these
in terms on its number and price. These related goods may be classified as the product’s substitutes
and complements. Substitute products are the other products available in the market which may serve
the same purpose as the main product. While complementary products are the products consumed
together with the original product which may also contribute to its demand.

C. Bargaining Power of Buyers

Below is the matrix which contains the different determinants of the Bargaining Power of Buyers.
Like the previous force, these determinants shall be analyzed using the perspective chosen by the
group. The researchers must also conclude the overall attractiveness of the industry based on this
force.