Industry and Environment Analysis:

Business Opportunities Identification

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Slides prepared by Leigh Lim
 Introduction
• There are 4 perspectives in the motivation of
businesses to earn a profit:
– Economic Analysis
– Porter’s Five Forces Analysis
– Environmental Scanning
– SWOT Analysis

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Economic Analysis of Profit Maximization

• Market Concentration
– Refers to the number of sellers and buyers in the
market
– The more concentrated the market means the
lesser producers are there in the industry
– Monopoly: one seller (most concentrated with
huge market power)
– Oligopoly: few sellers (lesser degree of market
concentration but with significant market power)
– Perfect Competition: many sellers (diluted market
concentration with no market power) 3
 Economic Analysis of Profit Maximization

• Barriers to Entry
– Refers to inherent features of the industry and
various means devised in the market to prevent the
entry of potential players and competitors
– Scale barriers: requirements for large production
plants for a feasible operation in the industry (huge
amounts of capital and resources)
– Legal Barriers: proprietary rights and their
corresponding legal protection extended to existing
market players in the production and distribution of
a product or service 4
 Economic Analysis of Profit Maximization

• Barriers to Entry (cont.)

– Monopoly: scale and legal barriers; government
barriers
– Oligopoly and Monopolistic Competition: some
scale barriers or contestable market
– Perfect competition: no barrier to entry

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 Economic Analysis of Profit Maximization

• Product Differentiation
– Refers to the ability of a business firm to create a
market niche through several means of varying its
products and services
– Monopoly: highly differentiated product
– Oligopoly and Monopolistic Competition: some
degree of product differentiation
– Perfect Competition: homogenous good

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Economic Analysis of Profit Maximization

• Limited Information
– Refers to the unevenness in the distribution of
information among actors in the market
– When market actors are not evenly informed, those
with more information can have market power
– Monopoly: very limited information
– Oligopoly and Monopolistic Competition: limited
information
– Perfect Competition: perfect information

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Economic Analysis of Profit Maximization

• Market Power
– Monopoly: high market power
– Oligopoly and Monopolistic Competition: limited
market power
– Perfect Competition: no market power
• See table 3.1 for a summary of what we
discussed

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Porter’s Five Forces of Competitive Position

• Developed by Michael Porter (1979) as an

alternative perspective on profitability analysis
and on the attractiveness of an industry for
business ventures
• The stronger the forces of competition bearing
on the industry, the lower its profitability and
the less attractive the industry for business
enterprises
• See figure 3.2
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Porter’s Five Forces of Competitive Position

• Competition Among Existing Firms in the

Industry
– Monopoly: absence of competition (high profit)
– Oligopoly: forces of competition depends on the
behavior and interactions of few firms in the
industry
• Cooperate: forces of competition are mitigated (high
profit)
• Independent actions: strong competition (low profit)

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Porter’s Five Forces of Competitive Position

• Competition Among Existing Firms in the

Industry (cont.)
– Monopolistic Competition: ability to differentiate
products can temper the forces of competition;
but there are many sellers, so heightened
competition (moderate/low profit)
– Perfect Competition: very intense competition
(very low profit)

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Porter’s Five Forces of Competitive Position

• Bargaining Power of Customers

– Utility maximizing buyers prefer lower price to
enhance their level of satisfaction
– Monopsony: sole buyer has huge bargaining power
on the sellers in the industry
– In order to free the dependence of a business
enterprise and the industry on a single or relatively
few buyers:
• Diversification: diversify the buyers of the product
• Differentiated Products: divide its product lines

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Porter’s Five Forces of Competitive Position

• Bargaining Power of Suppliers

– If an industry sources its raw materials from a
single or few suppliers, these suppliers can have
strong forces in the industry that may lower the
industry’s profitability
– In order to weaken the bargaining power of
suppliers, the industry can adjust by:
• Diversifying its sources of raw materials
• Form a subsidiary firm

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Porter’s Five Forces of Competitive Position

• Bargaining Power of Suppliers (cont.)

– Suppliers of factor inputs can exert bargaining power
on the business enterprise and on the industry (labor
unions)
– In order to weaken the bargaining power of labor
unions, the industry can adjust by:
• Subcontracting through a number of manpower services
firms
– In weakening the market power of the suppliers of
capital, many large companies integrate banks in their
conglomerate, thus bargaining power is diminished
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Porter’s Five Forces of Competitive Position

• Threats of Potential Entrants

– Scale and legal barriers can reduce the
competitive forces, but what if potential entrants
have resources to overcome barriers
– How to deal with these potential entrants:
• Engage in research and development to improve their
products and to segment the market through product
differentiation
• For firms with excess capacity, allow the potential
competitors to enter then expand production and
lower the price
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Porter’s Five Forces of Competitive Position

• Threats of Substitute Goods

– Usually industries that exhibit high rate of
profitability are the ones challenged by the
emergence of substitute goods
– Cross elasticity of demand: responsiveness of the
demand for a substitute good due to a change in
the price of the product produced in 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 16
Environmental Scanning in Industry Analysis

• There is a need to also consider the indirect

impacts of factors and forces that were not
considered in the previous two analyses
• See figure 3.3

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Environmental Scanning in Industry Analysis

• National Economy
– A rapidly growing economy will have positive
effects
– A lethargic economy will have negative effects
• Global Economy
– Crises in other countries can affect the national
economy in a bad way

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Environmental Scanning in Industry Analysis

• Government Policies and Regulation

– Can be beneficial to businesses when it promotes
economic growth and employment
– But can be unfavorable to businesses when dealing
with regulations and taxes
• Technological Developments
– Have intensified competition within the industry
– Companies that are slow to adapt or fail to adapt to
these rapid developments are bound to exit from the
industry
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Environmental Scanning in Industry Analysis

• Demographic Changes
– Population is the market base for industries and
changes in the structure of the population has an
impact on businesses
– People are also the source of firms’ laborers,
professional and technical expertise, savers,
investors and entrpreneurs

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Environmental Scanning in Industry Analysis

• Social Changes
– Modifications in family structure and other social
changes have an impact on consumer behavior
and tastes
• Changes in the Natural Environment
– Extreme fluctuations in the natural environment
can have adverse effects on the production of
certain sectors and may even temporarily impair
the purchasing power of some consumers

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 SWOT Analysis
• Strengths, Weaknesses, Opportunities and Threats
• Focuses on strengths and opportunities that can
enhance the profitability of an industry as a
measure of benefit
• Identifies the weaknesses and threats that may
contribute in increasing the costs of the industry
that make it less attractive for business ventures
• See figure 3.4

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 SWOT Analysis
• Strengths
– Internal characteristics of firms or industry that
can contribute directly to the profitability of firms
and the industry
• Weaknesses
– Internal characteristics of firms or industry that
mitigate the profitability of firms and the industry

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 SWOT Analysis
• Opportunities
– Positive impacts of various external environments on
the profitability of an industry
– Unlike strengths, these are only potential, indirect
and prospective (firms have no direct control)
• Threats
– Undesirable impacts of external factors on the
profitability of the industry
– Unlike weaknesses, these are only potential, indirect
and prospective (firms have no direct control)
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 SWOT Analysis
• SWOT Analysis and the Business Climate
– The business climate is shaped by the interactions
between various sets of internal factors and external
factors manifesting as SWOT
– Macroeconomic policies are government actions
meant to stabilize and promote economic growth
– Government regulations are a set of rules meant to
address market distortions to promote public welfare
– Institutional support refers to government assistance
that can make a favorable business climate
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 SWOT Analysis
• Business Opportunities in Various Economic
Sectors:
• Agricultural Sector and Agribusiness
– See pages 113 to 117
• Industrial Sector and Manufacturing Industries
– See pages 117 to 121
• Services Sector and Retail Services
– See pages 121 to 124

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 Synthesis
• There are several perspectives that can be used in
analyzing the firm’s profitability and identifying business
opportunities (profit maximization, Porter’s five
competitive forces, environmental scanning and SWOT
analysis)
• There are limitations in each perspective
• There are three major sectors of the Philippine economy:
agriculture, industry and services
• There are numerous industries in each economic sector
that potential entrepreneurs can pursue
• The perspectives discussed can give insights on what
business opportunities have promise for implementation27