Republic of the Philippines

Department of Education
REGION I
SCHOOLS DIVISION OF CANDON CITY
Candon City, Ilocos Sur

APPLIED ECONOMICS
Quarter 2 – Week 1 - Module 1
Refined by: Aniceto G. Bacoteng
Lesson Principles, Tools, and Techniques
1 in Creating a Business

I. Objective:
1. Identify and explain the different principles, tools, and techniques in creating a
business. (ABM_AE12-IIa-d-9)

II. Guide Questions:

1. What are the principles, tools, and techniques in creating a business?
2. How are these tools and techniques applied in creating a business?

III. Discussion
A business is an undertaking by a person or a group of persons who are partners or of
stockholders who own a juridical entity. Its main objective is to earn profit for the owners.
However, a business is just a small part of a bigger picture which is the industry. Industry
refers to the aggregation of the different businesses engaged in the same undertaking.

In putting up a business, it is important that an industry analysis first be made. SWOT

analysis is one of the most commonly used tools in conducting industry analysis. Businesses
are of different forms which include the following:
1. Sole Proprietorship
This is generally the simplest way to set up a business. A sole proprietorship is
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.

2. Partnership
A partnership is an agreement in which two or more persons put together their
resources in a business to make a profit. The profits to be earned will be divided
among the partners according to the terms of the agreement

3. Corporations

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 A corporation is a legal entity that is separate from its owners, which is called
the shareholders. No stockholder is personally liable for the obligations and
debts or acts of the corporation. The legal entity of the corporation gives it an
individual identity of its own. Corporations normally exist for a life of 50 years,
which is renewable for another 50 years. Owners have limited liabilities.
However, corporations are burdened by heavy taxes.

4. Cooperative
A cooperative is an entity organized by people with similar interests and needs
to provide themselves with services and goods or to jointly use available
resources to uplift their financial status. Cooperative members have the same
level of powers when it comes to the decision- making with one vote per
member regardless of the number of shares held, there is voluntary and open
membership and excess earning is returned to the members following the
amount of their patronage

Principles in creating a business

The principles of a business are the driving forces that make it successful. They are the
backbone of the organization.
1. Scalability. A business must be scalable for it to be successful. A system, network, or
process can handle a growing amount of work, or its potential to be enlarged to
accommodate that growth.

2. Big Ideas. A small business is no more effective than the idea upon which it is built.
The entrepreneur's vision is more important to the life of the business than anything
else.

3. Systems. You must recognize that a small business is a System in which all parts
contribute to the success or failure of the whole. In this system, everything must work
together: from employee to president; from equipment to resources.

4. Sustainability. A business must be dynamic--able to thrive through all economic

conditions, in all markets, providing meaningful, highly differentiated results to all of
its customers. Such differentiation is key to survival.

5. Growth. All businesses need internal growth. A small business is a School in which
its employees are students, with the intention, will, and determination to grow.

6. Vision. A small business must manifest the Higher Purpose upon which it was
seeded, the vision it was meant to exemplify, the mission it was intended to fulfill.

7. Purpose. A small business is the fruit of a Higher Aim in the mind of the person who
conceived it.

8. Autonomy. A business is not part of the owner's life, but is, in fact, its entity. A small
business possesses a life of its own, in the service of God, in whom it finds a reason.

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 9. Profitability. A small business is an economic entity, driving an economic reality,
creating an economic certainty for the communities in which it thrives.

10. Standards. A small business creates a Standard against which all small businesses
are measured as either successful or not. All small businesses should aim to thrive
beyond the standards that formerly existed.

Tools and Techniques in Creating a Business

1. The SWOT Analysis
The SWOT Analysis is useful in scanning the business environment which can
help in identifying economic opportunities.

SWOT, which stands for Strengths, Weaknesses, Opportunities, and Threats is

an analytical framework that can help a company meet its challenges and identify new
markets. The framework can help identify the business’s risks and rewards. It is also
associated with the internal and external forces that may affect the business. It is very
helpful in assessing new ventures. The initiators, Learned, and Christensen, Andrews,
and Book used a diagram as a guide for identifying the company’s strengths (S),
weaknesses (W), opportunities (O), and threats (T). S (strengths) and W (weaknesses)
refers to the internal factors, and these are the resources and experiences readily
available to the business proponent. Usually included as internal factors are:

a. Financial resources such as money and sources of funds for investment;

physical resources, such as facilities, the company’s location, materials,
machinery, and equipment.

b. Human resources consist of employees; access to natural resources,

trademarks, patents, and copyrights; and current processes, such as
department hierarchies, such as employees’ programs and software systems,
sales and distribution capabilities, marketing programs, etc.

On the other hand, when we refer to external forces, these are those that affect a
company, an organization, an individual, and those outside their control. These may
include:
a. Economic trends include local, national, and international financial trends,
developments in the country’s stock market, reforms in the banking system,
growth of the Gross Domestic Product (GDP).

b. Market trends, such as new products or technology or evolving buyers’

profiles, include changes in tastes and lifestyle behavior, National and local
laws as well as environmental, political, and economic regulations.

c. Demographic characteristics of the target market such as age, gender, the

culture of the customers; Relationships with suppliers and co-owners; and
Competitive threats
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 Figure I: The SWOT Analysis Template

2. Porter’s Five Forces of Competitive Position Analysis

a. Supplier power. It is essential to evaluate how much power the supplier is
capable of to drive up prices. A supplier benefits from this power if there are
few suppliers of an essential input, and they, therefore, control the supply of
that input. The more unique the product, the easier it is for the supplier to drive
up the price.

b. Buyer power. An evaluation of how easy it is for buyers to direct prices

down. This is directed by: the number of customers in the market; the worth of
each buyer to the organization; and the cost of the interchange from one
supplier to another. If a business has just a few powerful buyers, they are
usually able to dictate terms.

c. Competitive rivalry. The major driver is the number and competitor’s

capability in the market. A lot of competitors, offering common products and
services, will reduce market attractiveness.

d. Threat of substitution. Where common products are available in a market, it

improves the livelihood of customers switching to alternatives in response to
price increases. This lessens both the power of suppliers and the attractiveness
of the market.

e. Threat of new entrants. Profitable markets attract new entrants, which

destroy profitability. Unless current have strong and long-lasting barriers to
entry, for example, capital requirements or government policies and
regulations, then profitability will slow down to a competitive rate

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IV. EXAMPLES:

ExampleTheofstrengths
a SWOTof Analysis for a Restaurant
your restaurant lie in what you do best, whether it’s serving tasty
(Source:
food, https://smallbusiness.chron.com/sample-swot-analysis-restaurant-73526.html)
offering quality service at the table, or providing decor that makes the fun of eating at
your restaurant a memorable experience. Other strengths may consist of your pricing
structure, such as offering a lower-priced menu than similar restaurants in your area.
Weaknesses give you an idea of things to improve in your restaurant. For instance,
your wait staff may create a weakness for your restaurant, since you’re dependent on them
for the personal service they provide to each table. Another weakness may exist if you do not
provide adequate employee training, such as showing wait staff how they should attend to
tables or explaining to culinary personnel how you want food prepared and presented.
Look for opportunities that help your restaurant increase its profits, such as
expanding or providing different types of food and beverages. Taking advantage of trends
related to eating healthier may mean featuring more organic dishes or salads on your menu.
Finding ways to generate more traffic during slow times, such as in the afternoon, may
represent an opportunity for growth.
Competing restaurants located nearby represent a threat to your business, especially
if you sell similar types of food or have similar dining experiences. New restaurants opening
up in your area also represent a threat, since area diners have more options on where to spend
their dining dollars.

Porter’s Five Forces of Competitive Position Analysis

Porter’s Five Forces analysis is a framework that helps analyze the level of
competition within a certain industry. It is especially useful when starting a new business or
when entering a new industry sector. According to this framework, competitiveness does not
only come from competitors. Rather, the state of competition in an industry depends on five
basic forces: the threat of new entrants, the bargaining power of suppliers, the
bargaining power of buyers, the threat of substitute products or services, and existing
industry rivalry. The collective strength of these forces determines the profit potential of an
industry and thus its attractiveness. If the five forces are intense (e.g., airline industry), almost
no company in the industry earns attractive returns on investments. If the forces are mild,
however (e.g., soft drink industry), there is room for higher returns. Each force will be
elaborated on below with the aid of examples from the airline industry to illustrate the usage.

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 Figure 2: The Porter’s Five Forces of Competitive Position Analysis
(Source: https://www.business-to-you.com/porters-five-forces/)

V. GENERALIZATION
Decision-making is one of the crucial factors in any aspect of our lives. In business,
these principles, tools, and techniques will help you decide what form of business
organization you will be able to venture with. You can also make use of these tools for
decision-making in other aspects such as career choices, academic, and governmental
planning, and management.

VI.

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EXERCISES
A. Directions: Identify the Porter’s Force in each statement below:

1. This force studies how easy it is for consumers to switch from a business’s
product or service to that of a competitor.
2. This force examines how easy or difficult it is for the competition to join
the marketplace in the industry being examined.
3. This force looks at the power of the consumer to affect pricing and quality.
4. This force analyzes how much power a business’ suppliers have.
5. This force examines how intense the competition currently is in the market.

B. Directions: Match the descriptions in Column A with their corresponding terms or

concepts in Column B. Write only the letter of your answer on the space
provided before the items.

Column A Column B

An assessment needs to be made on how easy it is A. Buyer Power

1. for buyers to drive prices down.
2. An assessment of how easy it is for the supplier B. Number of Competitors
to increase the prices.
3. Buyers will switch to alternatives in case of price C. Porter's Five Forces
Increases.
4. The number and capability of competitors in the D. Possibility of Substitution
market will also impact the attractiveness of the
market.
5. Is an analytical framework that can help a E. Supplier Power
company meet its challenges and identify
new markets.
F. SWOT Analysis

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PERFORMANCE TASK 1
Directions:
1. Determine if each of the following forces below is under Suppliers, Buyers, New
Entrants, Substitute Products, or Intensity of Rivalry. Write the letter of the
corresponding market force in each box.
a. Industry growth f. Customer’s information
b. Government Policy g. Capital requirements
c. Differentiation of inputs h. Diversity of competitors
d. The relative price performance i. Exit barriers
of the other products j. Buyer propensity to switch to other
e. Price sensitivity products
2. Write a brief interpretation of the figure below. Please be guided by the following
Rubric.

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Rubric for the Interpretation of the Figure

Indicator 10 points 8 points 6 points 4 points

Content Explains all the Explains the figure Explains the figure Only one of the
forces in the with clarity and with clarity and forces in the
figure with clarity conciseness except conciseness except figure is
and conciseness one of the forces for the other two explained
forces
Organization Grammatically Grammatically Most of the ideas The idea is not
of ideas correct, ideas and correct, some of the are not relevant and organized and
thoughts are ideas are not organized relevant
relevant and relevant and
organized organized

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