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APPLIED ECONOMICS
Quarter 2 -Module VII
ANALYZING DIFFERENT PRINCIPLES, TOOLS,
AND TECHNIQUES IN CREATING A BUSINESS
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Applied Economics – SHS
Quarter 2 – Module 7: Analyzing Different Principles, Tools, and Techniques in
Creating a Business
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ANALYZING DIFFERENT PRINCIPLES, TOOLS,
AND TECHNIQUES IN CREATING A BUSINESS
A business is any legal activity undertaken by a person or group of persons with the
intention to gain profit. Business involves the production and exchange of goods and
services. For instance, production of shoes, bags, cloths, etc. On the other hand, industry
is different business activities which works for the same line of undertaking to produce
goods. For example, farms, factories, mines, etc. The Marikina Shoe Exchange, for
example, is a business firm which is part of shoe industry.
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Business - is any legal activity undertaken by a person or group of persons for
the intention to gain profit.
Industry – is a specific line of business undertaking engaged in by many firms in
the production of goods and provision of services.
Sole Proprietorship - is the simplest form of business undertaking. It is
owned and operated by a single person.
Partnership – It is business undertaking formed by two or more persons who
combine their resources either in cash, equipment or service.
Corporation – It is a business formed by at least 15 incorporators whose shares
of ownership are evidenced by stock certificates.
Cooperative – is a duly registered entity organized by a minimum of 15 persons
with similar interest who voluntarily joined, making equitable contributions to the
capital, and accepting a fair share of risks and benefits of the undertaking in
accordance with universally accepted cooperative principle.
SWOT Analysis - identifies the Strengths, Weaknesses, Opportunities
and Threats of a business enterprise.
PEST Analysis - assess the external environment factors such as Political,
Economic, Social and Technological that affect the business undertaking.
MOST Analysis - stands for Mission, Objectives, Strategies, and Tactics. This
tool can be used in analyzing the internal environment to ensures that business is
well-aligned to four (4) attributes.
Porter’s Five Forces - analyzes bargaining power of suppliers and buyers, the
threats to new entrants and products or service substitutes, and competitive
rivalry in the marketplace
Direction: Read carefully Case No.1. Use the blank template to help you analyze
the case and identify the Strengths, Weaknesses, Opportunities and Threats.
Strengths Weaknesses
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SWOT
Opportunities Threats
CASE NO. 1
A manager of a large pet food division of a multinational company needs to
create a SWOT analysis for his firm. He identifies the following analysis for the firm.
The purpose of the analysis is for the firm’s decision and to anticipate important
developments that can have an impact on the firm. The manager identifies the
following:
Because of improved economic conditions, pet ownership is increasing in
almost all segments of the population.
Market leader in the dry pet food market.
A large competitor has just announced that it will introduce a new premium
pet food line, backed by huge advertising and sales promotion blitz.
Access to the group's leading world position in food technology.
Low advertising and promotions budget.
European Union legislation will force manufacturers to disclose the content
of their pet food.
Excessive product range with several low-volume brands.
In terms of technology, new forms of pet food that are low in fat and
calories, yet highly nutritious and tasty, will soon emerge.
Do a self-check evaluation as we go on with
this module! Have fun while learning!
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There are four (4) main business organization categories, to wit:
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BUSINESS
TOTAL ASSETS
CLASSIFICATIONS
Micro Business Php 1,500,001.00 below
Small Business PhP1,500,001.00 to Php 15,000,000.00
Medium Business PhP15,000,001.00 to Php 60,000,000.00
Large-Scale Business In excess of Php 60,000,000.00
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There are many tools and techniques that can be used in business. The
challenge is that how to select the best approach, tools, and techniques in the
business. MOST, SWOT, PEST/PESTLE, and Porter’s Five Forces were some of
the common analysis, tools, and techniques that can be used in the business.
MOST
MOST stands for Mission, Objectives, Strategy, and Tactics This tool can be
used in analyzing the internal environment to ensures that business is well-aligned to
four (4) attributes:
Mission: Determines where your business intends to go, wants to do, what you can
do and what purpose it exists for.
Mission Examples
Suppose you have a coffee-roasting business in the city. In this case, you can
assume that the Mission is to become the best coffee roaster in the city and its
surroundings is much more tangible and specific. When most companies and
consumers come to your company for your roasted coffee, you know that the
mission has been achieved.
Objectives: Decides what goals will help to attain the mission. It should be SMART
(being specific, measurable, attainable, realistic, and timely).
Objective Examples
Carrying on from the previous example as the business owner of a coffee
roaster, you should emphasize objectives that indicate how you can become the best
coffee roaster of the city and its surroundings. An objective could be to receive a
certain portion of the orders online, to increase revenue by 5% a month, or to attract
200 number of customers before the end of the year.
Strategy Examples
With the coffee-roasting business example, the business would need to attract
customers away from the competition. For example, the business could offer a sales
promotion by giving a discount coupon to purchase the product within a specified
period. New investments in marketing, such as online advertisements or radio
commercials, could also be a strategy for growing your company’s reach.
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As for which strategy will work best depends solely on the market and the
group of people the business intends to sell its products and services. Make a list of
strategies that can be used to achieve goals. Strategies should be specific, helpful,
and most of all, achievable.
Tactics: Actions of company on how the strategies will be implemented. These are
methods used within the organization to achieve objectives, strategically completing
tasks to realize the overall (SMART) business goals.
Tactics Examples
With the coffee roaster, a marketing tactic could mean, writing the script
for commercials, hiring a marketing specialist, etc. The goal of any company’s
tactics is to direct the daily activities for its employees to ensure that the
organization is led down the proper path towards the general Mission.
SWOT
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Strengths:
Cathy’s Canteen is a home-cooked style restaurant with affordable prices.
It caters to the small and medium catering needs of different colleges.
Cathy has already established goodwill with different customers inside and
outside the university.
Cathy bought a place outside the school and turned it into an events
venue that serves as an extension of the canteen for private gatherings
like birthdays and other events.
Weaknesses:
The number of potential customers will decrease in a few years with
the onset of the K-12 Curriculum.
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Expensive fixed cost
Opportunities:
Develop marketing strategies to maintain customers
Open complementary businesses that will have synergy
Threats:
School regulation on rent deposit, end of contract, and bidding
IV. Assumptions
The financial strength of the business is good because most of the
transactions are paid within 30 days. Cathy’s Canteen has loyal customers despite
the increase in the number of competitors.
The number of potential buyers will decline over the next 4 years, and its
environment remains uncertain.
V. Areas of Consideration
Course of Action 1 – Expand the business inside the university.
Course of Action 2 – Diversify products offered.
Course of Action 3 – Expand the business outside the university.
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This will give existing customers new options and may attract new
potential customers.
Diversification will create “Loyal Customers”, thus having leverage over
other competitors.
Disadvantages:
Diversification of products might be costly.
Diversifying into new products can confuse your customers or might be
difficult to convince to buy your products.
VII. Conclusion
A decision matrix is a table used to evaluate various options according to
certain criteria to make the best possible choice. Use the table as your decision
matrix to evaluate various options according to a certain criterion in order to make
the best possible choice. In the following decision matrix, grade the courses of
action on a scale of 1 to 3, with 3 being the highest according to their profitability,
regulations/restrictions, competitive advantages, and cost efficiency.
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Course of action no. 2 (diversification of products) seems to be the most
economical and logical choice in this situation, where future unforeseen problems
outweigh present results. Based on this decision matrix of profitability,
regulations/restrictions, competitive advantage, and cost efficiency, competitive
advantage, and cost efficiency post best for course of action 2.
PEST
Political: This factor studies the current political situation. It also includes the
potential political influences, government stability, corruption levels, trade
controls, import and export restrictions.
Economic: This factor is about the national and global impact on the economy.
Exchange rates, interest rates, income levels of population, wealth distribution
affects the business.
Sociological: This external factor focuses on the ways a society can affect
your company. It also includes education levels, religious harmony, attitude
towards health, social welfare programs, etc.
Technological: This factor discusses the effect of emerging technology such
as internet penetration, access to basic infrastructure, software piracy, and
technology competency of workforce.
Strengths Political
Weaknesses Economics
Opportunities Social
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Threats Technological
Some additional external factors that can affects the business are the legal
and environmental factors.
Legal – Tax laws and regulations, labor laws and firing policies, copyright and
anti-piracy laws
Environmental – Weather patterns, attitude towards recycling, attitude
towards organic and green products
Obviously, not all the factors apply to every business. For instance, if the
company is selling computers, then weather patterns might not include in the
evaluation/analysis but if the business are selling raincoats, the business might have
an interest on weather patterns.
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Threat of New Entrants. Entry of a new firm in a certain industry brings
threats, new capacity, and desire to gain market share. The higher the
barriers to entry, the smaller the threat for existing players. The need
for economies of scale, high customer loyalty for existing brands, large capital
requirements (e.g. large investments in marketing or R&D), the need for
cumulative experience, government policies, and limited access to distribution
channels are some examples of barriers to entry.
Bargaining Power of Suppliers. The bargaining power of suppliers is also
known as the market of inputs. This force assesses how much power the
supplier has potential to raise its prices or to reduce the quality of purchased
goods or services that would lower a firm’s profitability potential. Important
factors in determining supplier power are the concentration of suppliers and
the availability of substitute suppliers. The fewer the suppliers, the more
power to control the supply. Another source of power is the uniqueness or
differentiation of the product or service, switching costs of one supplier to
another, the existence of available substitutes, and the strength of their
distribution channels. If there are many suppliers, businesses are in a better
position.
Bargaining power of buyers also known as market of outputs. This force
assesses how buyers can drive prices down. If a supplier has a power to
raise its prices, it is also possible that buyers can drive prices down to put a
company under pressure. When buyers have many alternatives to buy from,
the buyers have a lot of power and it should be easy for them to switch from
one supplier to another. Nowadays, buyers become more informed and
therefore more empowered because of the internet. They can easily compare
prices online, get information of the variety of products and get access to
offers from the suppliers instantly.
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Rivalry among existing competitors. This force assesses the extreme
current competition as to the number and capability of existing competitors in
the marketplace. Competition is considered high when there are numerous
competitors offering similar products and services and buyers can easily
switch to one offering a lesser price. The concentration ratio of an industry is
a sound indicator of competitive rivalry. A low ratio indicates increase rivalry.
When this happens, competitors tend to actively resort to advertising and
price wars, which consequently hurt a business’s bottom line. Moreover,
rivalry becomes more intense when barriers to exit are high, giving
competitors/companies no option but to stay put or remain in the industry
even if profit margins may be declining.
Porter’s Five Forces Analysis is an important tool for identifying and analyzing the
industry’s strengths and weaknesses. It also helps to form decision especially when
starting a new business, whether to enter in a new industry sector.
The best way to examine the external factors is the use of PEST/PESTEL
analysis which looks at the political, economic, social, technological, environmental,
and legal trends in the macro-environment. On the other hand, Porter’s Five Forces
assesses the industry dynamic specifically at the current competition, suppliers’
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powers, buyers’ power, potential new entrants and substitutes products or services.
Combining make up SWOT analysis.
Identify what type of tools and techniques can a business use in the
following situations:
What are the factors that should be considered in opening a business? How
do factors affect the business?
From the different tools and techniques discussed, which is the best
tool/technique that will help you assessing the most important factors that may affect
your business? Justify your answer.
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Read and analyze the CNN News article below. In a matrix form, identify
Clarisonic’s strengths, weaknesses, opportunities, and threats.
New York (CNN) – Clarisonic, the brand that invented vibrating skin cleansing
devices, stunned fans earlier this month when it announced that it was shutting down
for good.
The news came via an Instagram post on July 14 in which Clarisonic, owned
by L’Oreal (LRLCF), said the brand will shutter its operations on September 30 after
“more than a decade of game-changing innovation.”
Clarisonic fans responded with a mix of shock, denial and fear about how this
could forever upend their daily skin cleansing rituals.
One Twitter user even asked investors from the television show “Shark Tank”
to step in tweeting, “@ABCSharkTank can’t help out @Clarisonic??? We don’t want
this to be the end.”
Lawyer Jessica McElfresh tweeted at @LOrealParisUSA: “Do not do this!
Everyone knows Clarisonic is the best. You are making a massive mistake.”
McElfresh has used a Clarisonic device since college. She said the news
“just came out of nowhere” and confused her because she didn’t think there was any
problem with the device or any valid reason to discontinue the brand.
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“Every aesthetician I’ve ever visited uses one,” she said. “The market has
more facial cleansing devices all the time, but I truly don’t believe any as good.”
Clarisonic said the decision to close the brand was made in an effort to help
L’Oreal “focus its attention on its other core business offerings.” L’Oreal did not
respond to requests for comment.
In recent years Clarisonic has been grappling with competition in an
increasingly crowded marketplace where other lower-priced alternatives have been
winning over consumers.
A more immediate problem for all Clarisonic users now, is how to get
replacement brushes since the device requires users to buy a new cleansing brush
even three months.
In a FAQ section on its website, Clarisonic said it won’t sell devices, brushes
or other attachments after September 30, and all of its subscription services for
replacement brushes will be inactive after July 31.
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Strengths Weaknesses
SWOT
Opportunities Threats
2. Using the SWOT analysis for Clarisonic that you have prepared, would you
still shut it down if you were the owner? Why or Why not?
VII – ASSIGNMENTS
A. Pick a business in your barangay that has existed for 5 years now. Ask from
the owner and get the following information:
1. How did they come to choose to establish this kind of business or sell this kind
of product?
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2. How did they choose the location?
3. What are some of the challenges they have faced over the years of their
business’ existence?
B. Make a SWOT analysis of the business using the template below:
BUSINESS NAME:
Strengths:
Weaknesses:
Opportunities:
Threats:
Areas of Consideration:
Course of Action 1: (Identify and describe the Internal Environment of what is
happening in the business)
Course of Action 2: (Identify and describe the External Environment of what is
happening in the business)
Course of Action 3: (Detailed description of the business’s strengths,
weaknesses, opportunities, and threats)
Conclusion: Use the table as your decision matrix to evaluate various options
according to certain criteria in order to make the best possible choice. In the
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following decision matrix, grade the courses of action on a scale of 1 to 3, with 3
being the highest according to their profitability, regulations/restrictions,
competitive advantages, and cost efficiency.
Profitability
Regulations/Restrictions
Competitive Advantage
Cos Efficiency
Total
Describe a specific issue related to your chosen topic, outline related problems
and issues, and discuss the government actions taken to address these. Make a
report detailing the results of your research.
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KEY TO CORRECTION
Try This
Strengths Weaknesses
Low advertising and
Market leader in promotions budget.
the dry pet food
Excessive product
market.
range with several
Access to the low-volume brands.
group's leading
world position in
food technology.
SWOT
Opportunities Threats
You Can Do it #1
MOST (Mission, Objective, Strategy, & Tactics)
PEST Analysis
SWOT Analysis
Porter’s Five Forces
You Can Do it #2
You Can Do it #3
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Some tools and techniques that were discussed have different uses. For the
business to identify and assess the internal and external environment, the best
tool/technique that can help businesses to assess the most important factors is the
SWOT analysis. SWOT can be used to assess places, competitors, businesses to
help in decision making.
Strengths Weaknesses
Invented vibrating skin Mother company (L’Otreal”
cleansing devices. has other core business
Created the market for offerings.
sonic skin changing Higher price.
devices.
Bright, popsicle-like colors
of its product
A cult-like following
14% share of the US
market for skin cleansing
devices
SWOT
Opportunities Threats
A ready market for product Market has facial
. diversification. cleansing devices.
Competition in an
increasingly crowded
marketplace where other-
lower priced alternatives
have been winning over
consumers.
Why not?
If I were the owner of Clarisonic, I will not shutdown the brand. If I cannot
lower the price of my product, since a higher price is usually equated with better
quality, a established “name” or goodwill in the market, maybe I can offer a certain
percentage discount on the product’s replacement brushes, or maybe a “freebie” that
is consistent with company policy, as a marketing strategy to win back customers who
were lured by lower-priced alternative products, and still stay competitive.
Why so?
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If I were the owner of Clarisonic, I will shutdown the brand. If staying in an
overcrowded market is not financially-rewarding anymore, I can resort to other
product diversification where there is a ready-market or a potential market. The
mother company L’Oreal other core offerings, anyway, and tastes in beauty vary and
change fast. Also, having invented the sonic technology, Clarisonic is bound to hold
its patent and receive royalties for that, so it is still in that partiscular field of business.
Better be the first to leave and make a headstart somewhere else and be its leader
for a long time running.
REFERENCES
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Manapat, C.L. 2018. Applied Economics for Senior High School. Quezon City:
C&E Publishing Incorporated
Pagoso, C. M., Dinio, R.P., & Villasis, G.A. 2008. Principles of Economics. Quezon
City: Rex Book Store
Zarate, C. A., 2017., Principles of Marketing for Senior High School. Quezon City:
C&E Publishing Incorporated
Kotler, Philip, et.al., 1999. Principles of Marketing. New Jersey, USA: Prentice Hall
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