LESSON 3.

1 PRINCIPLES, TOOLS AND TECHNIQUES

A business is just a small portion of an industry. It is an undertaking by a

person who are partners, or of stockholders who own a juridical entity known as a corporation.
Its main objective is to earn profit for the owners. An industry, on the other hand, is the
aggregation of the different business engaged in the same line of undertaking. For example,
Celine is a business firm that is part of a country’s shoe industry.

For a person to put up a business that an essential that an industry analysis

first be made. Commonly used is a system known as SWOT analysis, which lists the strength,
weaknesses, opportunities and threats that a business faces.

BUSINESS ORGANIZATION

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 obligation related to the business. The sole proprietorship enjoys
exclusive control and decision-making as well as gets all the profit earned but he also shoulders
all losses and has unlimited liability which means payment of his loans will extend to his
personal assets.

2. PARTNERSHIP

A partnership is an agreement in which two or more persons combine their

resources in a business with a view to making profit. A partnership agreement is drawn up and
profits are divided among the partners according to the terms of agreement. There are two types
of partnership.

A. The general partnership- All owners starts share own the management of the business and
each is personally responsible for and must assume the consequences of the actions of the other
partners.
All general partners have unlimited liability which means loans payments will extend to their
personal property.

B. The limited partnership- Some members are general partners who control and manage the
business and may be entitled to a greater share of the profit while other partners are limited and
contribute only capital, take no party in control and management, and are liable for debts to a
specific extent only.

3. CORPORATION
 A corporation is a legal entity that is separate from its owners, the shareholder.
No shareholder is personally liable for the debts, obligation, or acts of the corporation. Directors
and officers can bear liability for their involvement with the corporation. The legal entity of the
corporation gives it an individual identity of its own. Corporations normally can 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 needs to provide

themselves with good and services or to jointly use available resources to improve their income.
Cooperatives members have an equal say in decision-making with one vote per member
regardless of number of shares held, there is open and voluntary membership and surplus earning
is returned to the members according to the amount of their patronage.

SMALL, MEDIUM AND LARGE SCALE BUSINESS

It is also important to study the classification of businesses for micro business

is worth below ₱1,500,001. For the small business have total assets from ₱15,000,001 to
₱15,000,000. Medium business with assets from ₱60,000,000. Any business with assets in
excess of ₱60,000,000 is considered large scale.

For any form of business organization, the business must be registered with the
appropriate government agencies. In the case of sole proprietorship and partnership 100% must
be owned and capitalized by Filipinos. For corporations, at least 60% of the outstanding capital
stock must be owned by Filipino Citizens. Business activity conducted may be with major
sectors of industry, services, practice of profession or operation of tourism related businesses and
agri-business.

The choice of which form of business organization may be a personal

preference of the owner, based on his objectives, his available resources, and the scope of
operation.

LESSON 3.2 TOOLS IN EVALUATING A BUSINESS

According to a guide development by North Carolina’s Small business and

Technology Development Center, the Key factors that must be considered in analyzing the
industry are the following:

1. The geographic area which your business will cater to. Is it limited to local areas? Or will it
cover a region, the entire country, or even the international market?

2. The size of outlook of the industry. What needs can be identified?

3. Description of the product.

4. The buyers have to be identified. Who are your target customers?

5. The regulatory environment. Are there local, international, national laws that will restrict the
business? One needs to identify government regulations specific to the chosen industry.

6. The need to identify the leading business in the industry and to provide company information
on the most successful businesses that will be up against.

7. Factors that will affect the growth of the business.

THE SWOT ANALYSIS

The SWOT analysis was created in the 1960’s by Business gurus, Edmund P. Learned
C. Roland Christen, Kenneth Andrews, and William D. Book in their book, Business policy,
Text and cases (Irwin, 1969)

SWOT, which stands for Strength, Weaknesses, Opportunities and Threats, is analytical
frameworks that can help a company meet its challenge and identify new markets. The
framework can help identify the business risks and rewards. It is also a means of identifying the
internal and external forces that many affect the business. It is helpful assessing new ventures.
The initiators, Learned, Christensen, Andrews, and Book used a diagram as guide for identifying
the company’s strength(S), Weaknesses (w), Opportunities (O) and threats (T). SW refers to the
internal factors OT refers to the external factor.

1. Financial resources such as money, and sources of funds for investments.

2. Physical resources such the company’s location, facilities, machinery and equipment.

3. Human resources consisting of employees.

4. Access to natural resources, trademarks, patents and copyrights and;

5. Current processes, such as employee programs, department hierarchies and software systems,
sales and distribution, capabilities, marketing programs, etc.

On the other hand, when we speak of external forces, these are those that affect a company an
organization, an individual and those outside their control. These may include:

 Economic trends including local national and international financial trends, developments
in the country’s stock market, reforms in the banking system, growth of the Gross
Domestic
Product.
 National and international laws and statues as well as political, environmental and
economic regulations.
 Demographic characteristics of the target market such as the age, the gender, the culture
of the customers.
 Relationships with suppliers and co-owners; and
 Competitive threats.
Before an owner can plan for its business future, he/she must first evaluate the business
by identifying and analyzing internal and external resources and threats. The SWOT
analysis is a tool that can help a proponent by enabling him/her to identify and uses the
internal and external forces that can affect the business. When used properly said
regularly, this can serve as guide of the company to attain success. It is a guide to prepare
for a new venture, design business strategies, and identify areas of change and reform.
When used properly, the business owner can anticipate problems, including possible
solutions ad take advantage of identified opportunities. The owner can maximize its
strengths and attempts to cut out its weaknesses.
STRENGTH WEAKNESSES

OPPORTUNITY THREAT

When drafting a SWOT analysis, what is created is a table split up into four
columns to list each element side by side, for comparison. Most of the time, the business
strength and weaknesses will not match the listed opportunities and threats, and this is
where the owner should attempt to somehow make them meet.
Table 3.1 Presents a SWOT analysis template that can be used as a guide to identify the
strengths, weaknesses, opportunities and threats.
STRENGTHS WEAKNESSES
 Government incentives  Difficulty of organization
 Low capital requirements  Costly set-up
 Market Acceptance  Possible pollution problems
 Experience leaders  Lack of training of workers
OPORTUNITIES THREATS
 Project may replace imported goods  Entry of competitors
available in the market.  Time consuming production
 Will improve employee welfare processes
 Improved company reputation  Opposition from residents in the
community.
PORTER’S FIVE FORCES OF COMPETITIVE POSITION ANALYSIS

Another analytical tool that can be used to assess a business is Porter’s Five Forces of
Competitive strength and position of a business organization.
Under Porter’s theory, he identifies five forces that determine the competitiveness and
attractiveness of a market and which seek to locate the power in a business situation, its
current competitive position, and the strength of a position that an organization may enter
into. These five forces help in identifying if new products or services are potentially
profitable. Once the area where power lies is identified, the areas of strength can be
pinpointed and exploited, solutions to weaknesses may be proposed, and possible
mistakes avoided.
Threat of new

entrants

Bargaining Bargaining

power of power of
Rivalry among
suppliers buyers
Existing competitors

Threat of substitute

products or services

1. SUPPLIER POWER- It is important to assess how much power the supplier has in his
ability to drive up prices. A supplier enjoys this power if there are a few suppliers of an
essential input and they therefore control to supply of that input. Another source of power
is how unique the product or services id. The more unique the product, the easier it is for
supplier to drive ups the price. In the same manner, a supplier who has relatively bigger
size and strength in the market enjoys the power of driving up prices. The magnitude of
the cost of switching from one supplier to another is likewise a factor such that when cost
of switching is high, buyers of suppliers would prefer to stick it out with one supplier,
thus; giving the supplier the power of raising prices.

2. BUYER POWER- If a supplier can enjoy the power to drive prices up; it is also possible
for buyer to drive prices down. An assessment needs to be made on of how easy it is for
buyers to drive prices down, the smaller the number of buyers in the market, the greater
his power is. The buyer’s cost of switching from one supplier to another is also a
determinant of the extent of the buyer’s power to bring prices down. If cost is minimal,
then it will be easy for the buyer to switch to another supplier and bargain on lower prices
of the input.

3. NUMBER OF COMPETITORS- The number and capability of competitors in the market will
also impact on the attractiveness of the market. If competitors are numerous and offer
basically similar products or services, the market will be less attractive. Low capability of
competitors to meet the market’s current needs will serve as an attractive opportunity for
the firm.

4. POSSIBILTY OF SUBSTITUTION- When it is easy to substitute products in a market, it is

expected that buyers will switch to alternatives in case of price increases. The suppliers
will enjoy the less power to drive prices up and the market will be less attractive. 5.
POSSIBILITY OF NEW ENTRANTS- When investors see the market is profitable, they
will desire to join the bandwagon and get a share of profits, But when new investor enter
a market, the share of the participants in the market will be divided among more people
and will therefore decline, thus, eroding profits. However, if barriers to entry prevent new
participants from entering the market, profits will be maintained among the existing
participants.
IMPORTANCE OF PORTER’S FIVE ORCES ANALYSIS
The porter’s Five Forces Analysis is a significant tool for organizations to
understand the factors affecting profitability in a specific industry and can help to form
decisions on whether or not to enter a specific industry, whether or not increase capacity
in a specific industry, and also for developing competitive strategies.

Under this theory, a business becomes more attractive, the greater the
supplier’s power to drive prices up, the less the buyer’s power to drive prices down, the
less the number of competitors in the market, the more differentiated the product or
service is the less the substitutability of the products for similar goods, and the more
difficult it is for new entrants to participate in the market. (Chartered Global Management
Accountant 2015)
LESSON 3.3 INDUSTRY ANALYSES
In a book published by the Development Academy of the Philippines, how to
prepare Project Feasibility Studies, it includes an industry analysis of the following
important factors.
COMPETITION
Who are major businesses in the industry? Are there locations close to your
proposed business? Have they been long existing or still new entrants? What is the
market share of each of these businesses? It is very important that you know your
competitors and be ready for them. Your aim is to win their customers, convince them to
buy from you instead, and remain as loyal customers.
CUSTOMERS
Who will you sell your product to? The target market must be identified. Who
exactly will buy your products? What income groups? What age brackets? What gender?
What career groups? What type of people will you cater to, based on their preferences,
lifestyles, and buying habits?
SUPPLIERS
Every retail business needs suppliers from whom one can source raw materials,
intermediate products, or even the finished goods one intends to resell.
A business may need one or more suppliers. It is important to develop suppliers
who are reliable in terms of the quality of what they supply and their dependability in
coming up with the things you order from them. With modern technology, one can easily
go online and shop for suppliers, look at reviews made by other retailers to determine
who the reliable ones are. The yellow pages of the telephone directors are also a good
source of supplier’s stores and names. Thee person intending to put up a business must
ask around for prices in order to be more competitive with other sellers in the market.
A business owner can buy directly from the manufacturers; this will be the
cheapest source since there are no middlemen involved. However this is only
recommended if the supplier’s location is convenient and will involve expensive delivery
costs.
Another alternative is to buy from distributors. They are wholesalers or brokers
who buy in big quantities from manufacturers, add a mark-up to their purchase price, and
sell to retailers. Their prices are higher but they can sell in small quantities, which the
manufacturers would normally do.
A third source of goods is through imports. Some businessmen go to nearby
countries to buy their goods or raw materials there. This is advisable if the prices abroad
are relatively cheaper and no heavy import duties will raise the prices and make the
goods less competitive in the country and when transport costs are not excessive.
It is important to maintain good relationship with one’s supplier; they are key to
one’s continued access to goods and raw materials that will be needed for the business.
SUBSTITUTE
Substitutes are goods that can be used in place of another. These are goods that
may, even if partly, satisfy the same needs of a consumer such that the consumer may use
one instead of another. For example, margarine can be substitute for butter or wheat
bread for white bread. Some goods are close substitute for Coca cola, but not everybody
will be willing to switch brands because they have developed a taste for a particular cola.
This is why manufacturers try to differentiate their products from their competitors so
that the customers will develop product loyalty for their brand. We know that Safeguard
and Dove are both bath soaps, yet we can distinguish one brand from another, and we
have our own preferences.
The more differentiated a product is, the greater the edge of its manufacturer
because this can convince the customers to buy their product instead of that of the
competition.

A GUIDE TO INDUSTRY ANALYSIS

An industry analysis guide developed by North Carolina’s Small Business and
Technology Development Center (SBTDC) can help in making an analysis of one’s
business industry.
The key factors to be considered in analyzing your industry identified by the SBTDC are:
1. GEOGRAPHIC AREA- identify the area whether local, regional nationwide, or international.
2. INDUSTRY (as to size) - worth in pesos and number of firms, trends, and developments
and future outlook
3. PRODUCT- describes the product as to physical attributes and characteristics, and its
uses.
4. BUYERS- describe target customers as to age, income group, geographical location, and
occupations; include consumer demographic such as population/ household size, sex race,
ethnicity, family status, housing status, etc; may also include psychographic such as
lifestyle information, tastes, preferences and buying habits.
5.REGULATORY ENVIRONMENT- should include government laws and regulations that apply
to the business.
6. COMPANY INFORMATION- makes a list of the most successful businesses in the industry.
7. A BRIEF HISTORY OF THE INDUSTRY- when it started and how it developed
8. FACTORS THAT AFFECT GROWTH OF THE INDUSTRY- such as migration of population from
rural to urban areas.
9. TRENDS IN SALES OVER RECENT YEARS- show actual sales in the industry over the past 5
years.
10. CURRENT OPERATIONAL/ MANAGEMENT TRENDS WITHIN THE INDUSTRY, WHICH ARE
STANDARD PRACTICES PREVALENT AMONG THE FIRMS.
11. The type of marketing strategies prevalent within the industry.
12. COMPETITOR INFORMATION- include the location of competitors and how long have they
been in business and their market share.
 LESSON 3.4 ENVIRONMENTAL ANALYSIS
The other analysis that has to be done is an analysis of the environment in which
the business will operate. This means an evaluation of the possible or probable effects of
external forces and conditions on the survival and growth of the business.
An environmental analysis includes a thorough study of:

ECONOMIC FORCES

This involves a look at economic factors such as income of the people, specifically
the target market, economic conditions such as inflation, recession, prosperity, demand and
supply in the market

PHYSICAL ENVIRONMENT
This includes a look at the population size, the geography of the place where business
will be located, land distribution, climate, and in today’s global warming situation,
whether or not the area is prone to flood or earthquake.
POLITICAL FACTORS
The type of government, the stability and the strength of the government, and good
leadership are actors that can be an advantage to a business.
CULTURES AND LIFESTYLES
It is important to study cultural practices such as fiestas, celebration of the Christmas
season, trends in consumption patterns, as means to identify the goods and services that
will fit into these celebrations and spending behavior;
COMPETITION
This is something that needs to be studied. As already mentioned above, the degree of
competition in the market and the extent and strength of competition are all very vital in
determining the success or failure of a business.

LESSON 3.5. THE CIRCULAR FLOW OF ECONOMIC ACTIVITY

To further guide the students on how the market works, this section describes
the various economic activities that take place in an economy. This is referred to as the
circular flow which is defined as the flow of activities of household and firms in a
circular direction. Let us start with the first illustration.

THE SIMPLE FLOW OF GOODS AND SERVICES

In figure 3.3, goods and services flow from the firms as producers, to thee
households as consumers, in a clockwise direction. On the other hand, household as
resource owner’s provide firm as producers with resource use such as labor rendered,
capital lent or invested, land rented to producers, and entrepreneurial skills. In figure 3.3,
these resources flow from the households to the firms also in clockwise direction. It is use
of these resources that enables the firms to produce the goods and services delivered to
the households. The flow of products and resources are the physical flows in the
economy.
The flipside to the physical flow is the money payment flow. Household pay
and firms earn revenues in exchange for the goods and services received and provided,
respectively. In Figure 3.3 Revenues flow counterclockwise from the household to the
firms as the payments for the goods and services received by the former. Likewise, firms
pay and household earns factor income for the use of resources provided to the former:
Factor income payments counter flow from the firms to the households for resources
provided by the latter:
For as long as households are willing to consume, producers continue to
produce goods and services for the household using resources provided by the latter. As
the physical flow continues, so is the money payment flow in exchange for products and
resources. In figure 3.3, the physical flow continues in a clockwise direction in exchange
for money payment flow in the counterclockwise direction.

BUSINESS REVENUE
GOODS AND SERVICES
RESOURCES
Land, labor, Capital

FACTOR INCOME PAYMENT

A CLOSER LOOK
Among the firms, there is also the product of flow up the production stages
that is from the raw material to the intermediate good and on to the final good stage
consumption (solid arrows, Figure 3.4). Opposite the product flow is the money payment
flow in exchange for product delivery down the production stages from the consumer,
that is to the final then to the intermediate and on to the raw material stage (broken
arrows, Figure 3.4)
Raw materials are unprocessed goods like raw minerals, logs, and wheat,
which are extracted from their sources and do not undergo any process of production.
Intermediate goods are semi-processed goods that are not ready for final use by the
consumer, such as leather; cloth, and steel, which have undergone some processing but
need to go through additional processing before they can be actually used. These are
supplied to final good firms for conversion into goods in their finished stage. Final goods
are goods that are ready for direct consumption such as refrigerators, dresses, or pants.
These final goods are then sold to customers for their use.
 Figure 3.4 magnifies the production side of the circular flow diagram in
Figure 3.3 Goods flow up the production stages to the consumers in return for payment
trickling down the production stages in return for the inter-stage product flow.

Raw Materials Firms

Consumers

Intermediate Product

Firms
Final Product Firms

PRODUCT FLOW

MONEY PAYMENTS

Another form of physical flow is the flow of resources from the households to
the business firms (solid arrows, Figure 3.5). The household is the source of resources used by
the raw material firm, the intermediate good firm, and the final good firm. In the flow, it can be
seen that the household provides resources to the raw material, intermediate good and the final
good firms for use in the production of goods.

Raw Materials

Household Firms

(resource, Owners)

Labor, Capital Intermediate

Resources
Entrepreneurship Product firms

Final Product Firm

RESOURCE FLOW
 MONEY PAYMENTS

In return for the use of the resources, the three types of producing units make money
payments to households (broken arrows). This is now a financial flow since it involves the
payment of money to the resource owners. Money is now paid by the various firms to the
households as payment for the resource they provide. Figure 3.5 magnifies the flows of resources
and payments in exchange between household and the producers in the circular flow diagram in
Figure 3.3.

THE GOVERNMENT SECTOR AND THE GLOBAL ECONOMY

There are two other relevant units in the flow: the government and foreign countries.
The government is important because it makes purchases of economic resources from the
household and makes money payment to the resource owners for the use of their resources. The
government also buys goods and services from the producing units for which it makes money
payments.

The significance of the global economy cannot be overemphasized in today’s times.

An economy buys goods from other countries; these are called imports. An economy sells goods
to other countries; these called exports. A country pays for the goods imported and earns income
from exports.

LESSON 3.6 THE ECONOMY’S PRODUCING SECTOR

The economy has three main producing sectors:

1. Agriculture, Fishery and Foresty

2. Industry

 Manufacturing
 Construction
 Electricity, Gas and Water
 Mining and Quarrying

3. Service

 Trade
 Transportation, Communication and Storage
 Banking and Finance
 Public Service (Government)
 Real Estate
 Private Services
AGRICULTURE, FISHERY AND FORESTRY

The Agriculture, fishery and forestry Sectors reaps the fruit of natural resources like the
soil, water and forests. However, these environmental resources are vulnerable to climate change
affecting production such as long dry spells and frequent devastating typhoons due to say, the El
Nino phenomenon. From this sector comes the food we cook at home and the raw materials
processed or used by other economic sectors. Agriculture accounts for most (84% NEDA) of
sectoral production fishery lags far behind despite the country’s big fishing grounds. Much less
does forestry contribute to output as it will take decades to vegetate our vastly denuded forests.

INDUSTRIAL SECTOR

The industrial Sector supposedly processes raw materials from agriculture, fishery
and forestry into intermediate products that are further processed into final products. For
example, local makers of wallets and bags produce the final product by processing the
intermediate product of leather which is manufactured from the animal hide extracted by
agriculture. Within the industrial sector itself, local cement manufacturers produce the product
by heating limestone mixed with clay from the quarrying industry for the use in the constructin
industry. The lead industries in resource use and output are manufacturing and construction as
they respectively account for 65% and 20% of sectoral production. (NSCB 2009).

LESSON 3.7. COMPETITIVE AND EFFICIENCY

The fair ranking of the Philippines in world competitiveness means that the
country’s industries are yet on their way from the factor-driven to the efficiency-driven stage. In
The Global Competitiveness Report 2013-2014 of The World Economic Forum (WE), the
country ranked number 58 among the 148 countries on its list. Factor allowing the free flow of
products and resources are already in place such as institutions, infrastructure, stability and basic
education and health. However, our industries have yet to attain the efficiency enabled by higher
education/ skills, technological readiness, and product/labor market competition. For example,
we have yet to design and produce the First Filipino car (includes engine, transmission)
following in the footsteps of countries like Malaysia and China. Much less are we even close to
the innovative stage driven by business sophistication and innovative ideas. This stage cuts
across standards to produced sophisticated products like the electric-powered cars of Japan and
the United States. Figure 3.6 outlines what makes a country’s industries globally competitive and
responsive to both local and global needs.
 Figure 3.6 Factors for Global Competitiveness Index

5000
Labor Efficiency Of ASEAN Countres in
4000 2009
3000
2000
1000
0

As the country’s industries struggle to attain efficiency toward the government’s vision
of sophisticated innovation, they do so with those in the rest of the world. Figure 3.7 shows that
the Philippines still lags behind her neighbors in East Asia in labor efficiency alone. Reflective
of her global competitiveness, much less is the country attractive to host foreign businesses
serving regional markets. According to said competitiveness report, prominent among the
problematic factors for doing business in the Philippines are inadequate infrastructure,
corruption, inefficient government bureaucracy, policy instability, crime rate, tax rate, and
restrictive labor regulations.

CHAPTER 3.7 Labor Efficiency of ASEAN Countries in 2009

The country’s producing sectors also struggle with one another as they compete for the use of
local resources (e.g., labor). The least efficient is Agriculture, Fishery and Forestry combined
employs one third of Local labor for production; it
only contributes one tenth to the country’s total
SECTORAL
output (figure 3.8 and 3.9). In contrast, industry
has almost twice as much share in output (27%) as
SHARES
INDUSTRI
AL, 16%

it has in employment (16%), In between is service SERVICE, EMPLOYMENT…

53% AGRICULT
URAL,
31%
which has a slightly greater share in output (63%) than in employment (53%), Figure 3.10 shows
the comparative efficiencies of the country’s main producing sectors.

SECTORAL
SHARES
OUTPUT(2013)
INDUSTRI
AL, 27%
SERVICE,
63%

AGRICUL
TURAL,
10%
Figure 3.8 Sectoral Shares Output (2013) Figure 3.9 Sectoral Shares
Employment (2013)

SECTORAL
PRODUCTIVITY(2008)
100,000 Figure 3.10 Sectoral Productivity
80,000
AGRICULTURE AND
60,000 FISHERY
40,000 In global setting, these
20,000 industries are the least

0 competitive despite the country’s

AGRICULTURE INDUSTRY SERVICE natural resources mainly due to
human factors affecting efficiency. The uncontrollable nature (typhoons, drought) occasionally
disrupts production and causes damage to crops. But socio-economic and governance factors
explain more why the country’s agriculture
lacks the technology, skills, market
competition, and even credit enabling
SECTORAL
efficiency to be at least self-sufficient in PRODUCTIVITY(2008)
food. Figure 3.11 shows that rice 100,000
production- the leading crop of agriculture-
is even short of consumption. Unlike
80,000
fishery and livestock, agriculture is more 60,000
exposed to both natural and human factors
40,000
20,000
0
AGRICULTURE INDUSTRY SERVICE
with its longer production cycle involving land cultivation and nurturing what nature grows.

3.11 Contibution of Local Production to local Consumption (2008) (in percent)

In particular, inadequate socio economic and public infrastructure coupled with liberalized trade
smother agricultural efficiency of the know-how, resources, and competitive environment to at
least meet local consumption. Small- scale farming-the foundation of agriculture- is limited to
take advantage of size and access the technology, skills, credit and marketing networks. Most
farms (63%) are micro in scale with an average size of 2.2 hectares. Also continuous conversion
of agricultural lands for industrial use and settlement even threatens to decimate the number of
farmlands left. Let alone that almost one-half of irrigable lands (44%) is not irrigated yet ( World
Developmet Indicators, World Bank 2006).On top of the limitations of size, inadequate
infrasturectures (roads, transport and storage) and hamper the free flow of products and input
between farms and markets. On the other hand, trade liberalization
([tariffs) has overwhelmed local production that is yet too weak to stand up to foreign
competition as of rice from china, Thailand, and Vietnam. Figure 3.12 and 3.13 respectively
show that we have the lowest yield per hectare of rice land and per person among ASEAN
countries. Thus, we import cheaper rice to supplemental local production although the latter has
been accelerating to decrease the former.

6
5
4
3
2
1
0
Vietnam Indonesia Malaysia Philippines Thailand Laos Myanmar Cambodia

Figure 3.12 Average Palay Field Among ASEAN Countries (in metric tons per hectare

600
500
400
300
200
100
0
Cambodia Laos Thailand Vietnam Myanmar Indonesia Philippines Malaysia

Figure 3.13 Average Palay production Per Person among ASEAN Countries, Average for 2008-2010
(in kilogram per person)
The same socio-economic and governance factors limit efficiency in the fishery sector that it can
hardly produce surplus for export. Like in agriculture, fishing activities are micro scale confined
to municipal fishing and aquaculture. Municipal fishing is fishing by small shore crafts while
aquaculture is culturing and growing fish in the controlled environment of mostly small
fishponds. These industries jointly and equally account for the bulk (71%) of fishery production
(Bureau of Agricultural Statistics, Department of Agriculture 2013). In contrast, commercial
fishing accounts for a little over one-third of mostly exportable fishery production (39%) by big
corporations using big vessels that are instrument navigated in deep sea. On top of size
limitations is an inadequacy of road, transport, and storage facilities to preserve and market the
perishable product in order to fetch more competitive prices. Likewise, industrial and trade
policies have even made fuel- a critical input- more costly especially for the motorized bancas of
small municipal fishermen. Going back to Figure 3.16, fish supply, mostly from the municipal
and aquaculture industries, is just enough to meet local consumption needs (100%). The
weakness of these industries deprives the small fishermen of the income opportunity to produce a
surplus of high-valued species for export.

AGRICULTURE

Agriculture is the process of producing food, feed, fiber and many other desired
products by the cultivation of certain plants and the raising of domesticated animals (livestock).

PARTS OF AGRICUTURE

-FARMING

-FORESTRY

-ANIMAL INDUSTRY

-FISHERY

FISHERY

-A fishery (plural: fisheries) is an organized effort by humans to catch fish or other aquatic
species, an activity known as fishing.

FISHING IS GROUP INTO THREE

o MUNICIPAL FISHING

o AQUACULTURE

o COMMERCIAL FISHING
MANUFACTURING

In spite of the liberalization of foreign investment and trade of manufacturing industry is hardly
competitive even in the ASEAN region due to limitations of size and structural support.
Likewise, these limitations smother manufacturing efficiency especially of the technology and
skills to grow and compete in a global context. Almost all (89%) manufacturing establishments
are micro in scale with limited access to competitive opportunities similar to agriculture and
fishery (NSOO 2008). These light enterprises produce consumer goods-mostly (86%) food
manufacturers-contributing the bulk (55%) of manufacturing output using low technology and
skills (NSCB 2012). Lacking government support to deepen technology and production, the
fewer enterprises of much larger scale are into the final production stages of electronics,
machineries, chemicals, petroleum and garments. In the absence of intermediate (middle)
product industries they are the most that we can have- import- dependent and without much need
for technology and skills. Thus, they do not contribute much to the economy in terms of output
and jobs. The same lack of government support fails to challenge micro enterprises to grow
toward higher technology and creativity levels. As in agriculture, even local enterprises of larger
scale are still to stand up to foreign investment and trade competition induced by liberalization
policies.

RETAIL AND SERVICE

It Is the sale of goods to end users, not for resale, but for use and consumption by the purchaser.

TYPES OF RETAIL AND SERVICES

 Food Products
 Hard goods or Durable Goods
 Soft Goods or Consumables
 Arts
ADVANTGAES AS A RETAILER
 Your always find someone for backup in case you are out of stock for a product.
 You will always be motivated to improve you shop and provide Better customers service.
DISAVANTAGES OF A RETAILER
 Absence of good relation
 Feel of uneasyness whenever you find your competitor is selling some what more than
yours

SERVICE

Types of Services

• 1] Business Services
 • 2] Personal Services

• 3] Social Services

What Are the Advantages and Disadvantages of a Service Business?

• Advantages

• No Inventory

• Your an expert

• Disadvantages

• Difficult Valuation

• Demand Cutback

TRADE AND TRANSPORT

In spite of being the top grosser (34%) of the biggest sector that is service, the trade
industry supported by the transport industry is also handicapped by the limited size of its
establishments. Almost all (92%) are micro in scale engaged in retail trade that contributes
almost one half (46%) to total trade (Census of Philippine Business and Industry, NSO 2012).
However, the transport industry has fair majority (73%) of micro businesses mostly engaged in
land transport and transport support services (maintenance). Land transport account for almost
one-half (46%) of all transport services while transport support services accounts for bulk (52%)
of industry output. On top of the limitations of size, thirty percent (30%) of trade establishments
crowd in Metro Manila serving only one-thirteen percent (13%) of the country’s population. But
crowding more in the same National Capital Region are more than one-half (56%) of transport
establishments in the country. On the other hand, less crowded re thirteen percent (13%) of trade
and eight percent (8%) of transport establishments in nearby CALABARZON (Cavite, Laguna,
Batangas, Quezon) industrial zone serving fourteen percent (14%) of the country’s population.
At any rate, even businesses in this industrial zone are near support industries in the Metro
Manila where almost one-third (30%) of manufacturing establishments are also based.

INTERNATIONAL TRADE

Assembled electronics products top the country’s export s (40%) dominated by manufacturers
reflective of the country’s waning agricultural sector (Philippines Statistics Authority, Foreign
Trade Statistics 2013). The assembled parts are imports from subsidiaries in the global networks
of the same multinational corporations (Intel, Texas Instrument). These electronics parts are also
the country’s leading imports (22%) followed by minerals, fuels, machineries and equipment and
the like. Almost all imports are semi-final and final manufacturers in the absence of intermediate
product industries. As already mentioned, electronics products hardly contribute to local output
and employment being import-dependent and without much need for technology. Unlike their
counterparts in other sectors, their assembly plants are mostly found in the CALABARZON
industrial zone where support industries in manufacturing and trade are also moving into.

TOURISM

Tourism is an emerging industry expenditures of foreign tourists on related services such as

hotels and restaurant, transport and entertainment grew by twenty-nine percent (29%) in 2012.
Gaining importance as an industry, it contributed six percent (6%) to the gross output of the
economy. It also figured as the third leading export of the country after electronics and
miscellaneous services, which include business process outsourcing (26.9). Most tourists prefer
hotels for accommodation (80%) and cars for transport facilities (42%). Most also prefer
restaurants (68%) and avail of internet access (51%) in accommodating establishments
concentrate operation in Metro Manila, Western, and eastern visaya as most preferred tourists
destination. However, the industry mostly composed of micro enterprises (90%) is yet to grow to
its fullest potential. The country lags behind even in the ASEAN region as a tourist destination
with a minimal share (5%) in total arrivals in contrast to Singapore (16%), Malaysia (30%), and
Thailand (24%). Thus in figure 3.14 it also lags behind in tourist arrivals per 100 populations
even in the ASEAN region.

SMALL BUSINESS OPPORTUNITIES

Small farmers and fishermen can tap urban consumer markets and distribution centers with
cooperative efforts to minimize the limitations of size and inadequate farm-to-market facilities.
They can engage in the cooperatives activities not only for sharing/collectively owning resources
to preserve freshness or delay perishability of goods at lower cost. Collectively, they can also
gain direct and faster access to market networks to command higher product prices as well as
cheaper production input. Let alone that they can access credit for expansion on collective
credibility. However, more government provisions of farm-to-market infrastructure of
cooperative even of farmers and fishermen in the hinterland.

The country’s growing population also affords cooperating micro enterprises in the
manufacturing, trade and transport of new consumers markets for growth and expansion. More
micro manufacturers of light consumer’s products can find new market in growing industrial and
urban areas like CALABARZON, away from overcrowded Metro Manila. Complementary and
support industries are already gravitating toward these growing centers, let alone the
concentration of the government infrastructure and services promoting market efficiency. Thus,
new micro trade and transport enterprises can complement or support the growing number even
of light manufacturers moving to theses growth career. To minimize the limitation of size,
microenterprises can form associations for inter industry coordination and timely availability of
services. In addition, manufacturer’s association can improve market access in competitive
terms. But more government inter-industry coordination and market access.

In the tourism industry, micro business can help to minimize tourists arrivals and destinations
with timely support and substitute services for big establishments strengthened by cooperative
efforts. Car transport services can support hotel accommodations while s houses with restaurant
can serve as substitute in the latter’s absence. Micro enterprises can also form associations
among themselves. For the meantime, tourism and related services as Metro Manila and Western
and Eastern Visayas. However better road networks can pave way for the development of other
tourist destinations and services, which include transport.

CHAPTER 4: SOCIO-ECONOMIC IMPACT STUDY

LEARNING OBJECTIVES

At the end of this chapter, the students should be able to:

1. Identify and explain the various determinants of business and industry;

2. Figure out how these determinants can impact on concerned sectors such as the consumers,
suppliers and investors, the government, households and on international trade;

3. Discuss consumer behavior and relate it to the benefit of business on consumers;

4. Discuss production theory as basis for coming up with a viable and profitable business;

5. Draft a business proposal using the lesson studied in previous chapters;

6. Analyze and evaluate the viability of a business and its impact on the community;
7. Come up with recommendations and strategies on how to minimize a business negative impact
on society;

8. Come up with recommendations and strategies on how to minimize a business positive impact
on society;

9. Describe the role of government in the economy; and

10. Describe the Philippines household as to age and income as a basis of choosing the target
market of a business/product/service.

Terms to remember

 Consumption Output
 Consumer Theory Fixed Input
 Utility Variable Input
 Utility Function Production Function
 Total Utility Total Product (TP)
 Marginal Utility Marginal Product (MP)
 The Law Of diminishing marginal utility Average Product (AP)
 Production The Law Of Marginal Utility Returns
 input The Herfindahl-Hirschman Index (HHI)

Lesson 4.1 The Theory of Consumer Behavior

Consumer theory describes how consumers make decisions on what to buy.

Consumption refers to the use of goods and services to satisfy human wants directly.

THE UTILITY FUNCTION

A consumer aims to maximize the satisfaction he/she derives from the use of a good or a
service. Utility is the used for satisfaction. Utility is the tem used for satisfaction. Utility is
something intangible. As such, it is not easy to measure. Quantifiable goods are subject to
measurement; they can be expressed in numerical values. In order to make it easy to understand
the concept of utility, we shall assume that it is measurable in units, which we shall call utils. A
util is one unit of satisfaction.

The utility function shows the relationship between utility and consumption. In equation
form, it is U=f(C), which simply stated is: utility is a function of consumption. Also, to be more
specific, utility for the consumption of goods X and Y can be expressed as: U= f(X,Y).

Important measures of utility are: Total utility and Marginal utility. Total Utility refers to
the combined utility derived from consuming certain units of a good. Marginal Utility refers to
the additional utility derived from consuming an additional unit of the good.

Let us study the following utility schedule of consumer Marvin.

Table 4.1 Hypothetical Utility Schedule of Marvin for Chocolate Candy

Quantity of Consumption Total Utility Marginal Utility

1 8 8

2 15 7

3 21 6

4 26 5

5 30 4

6 33 3

7 35 2

8 36 1

9 36 0

10 35 -1
 Let us study Marvin's utility schedule for chocolate candy. When he eats the first bar, he gets
utility of 8. The second bar gives him a utility of only 7. We see that while his total utility
increases with each additional chocolate bar, the additional utility becomes less and less. The
satisfaction he derives from each additional units starts to diminish. Notice that upon eating his
ninth bar, his total utility does not change at all, which means that there is no additional utility
derived from the ninth unit. That is why marginal utility at 9 units of consumption is equal to
zero. Look at what happens as he consumes the tenth bar. Instead of increasing, the total utility
declines and marginal utilty is even negative. Are there physical manifestations of a marginal
utility? Physical discomforts such as an upset stomach, dizziness, and indigestion are signs that
instead of adding to one's utility, the consumption of the additional unit of the good has resulted
in the decrease of total utility derived.

The above situation illustrates the Law of Diminishing Marginal Utility. The law states that
as additional units of good are consumed, The additional utility derived from each additional unit
tends to diminish. The reason for this behavior is the satiation of human wants. Man's wants can
be fully satiated at a given time. That is why owners of Vikings, Dad's, or Buffet 101, do not lose
money even if people are free to eat all they can. At some point, they will simply give up eating
because their wants have been satisfied.

SIGNIFICANCE OF CONSUMER BEHAVIOR IN BUSINESS

The consumer is the person who buys the product business offers for sale. It is therefore
imperative that we got to please the consumer, so he/she will buy from us instead of from our
competitors and also that once he buys form us he will be loyal to us and not to buy from other
sellers of the same product. Knowing how consumer satisfaction is maximized will help a business
in always keeping the consumer's welfare the topmost priority.

Lesson 4.2 The Production Theory

Production refers to the use of economic resources to create goods and services that will
be used to satisfy human wants. In this chapter, we will focus on the behavior of the producer in
an attempt to maximize output. The theory of production is an analysis of the input-output
relationship. This term input refers to the resources used to produced goods and services. Output
refers to the product created as a result of the combination of input in the production process.
 Production Function is an equation showing the maximum output of a commodity that a
firm can produce per period of time with each set of input. Input and output are measured in
physical rather that monetary unit:

Output= f (Input)

The production Function is represented in the equation:

O= f (I)

Where O stands for output and I stands for input. To be more specific, output depends on
the quantity of land, labor, and capital available, Thus;

O= f (Ld, Lb, C)

The production function contains the functional relationship between output and the
basic factors of land, labor and capital. These basic factors complement each other as they are
used in the production of goods and services,

Output produced is measured in three forms:

Total Product (TP) is the combined production of several units of a given input.

Marginal Product (MP) is the additional output produced by an additional unit of the
input and is equal to Change in TP over input.

Average Product (AP) refers to the average combination per unit of input and is equal to
TP/i.

Let us illustrate the values of the three forms of output by studying the following table.
Let us assume that the variable input is labor measured in man hours and is combined with fixed
units of capital and land.

Table 4.2 Production schedule for Output-X with Variable Labor input.

Quantity of Labor Input Total Product Marginal Product Average Product

1 10 10 10

2 22 12 11
 3 37 15 12.3

4 55 18 13.8

5 69 14 13.8

6 77 8 12.8

7 80 3 11.4

8 81 1 10.1

9 91 0 9

10 80 -1 8

Let us study the behavior of the different product values as the quantity of labor input
increases. Initially, we see that the addition of additional labor input leads to a proportionately
greater increase in total product or output (TP). This results in increasing values of MP and AP
and corresponds to labor input from 1 to 4. As more input of labor are added, Total Product
continues to increase but already at a decreasing rate. This happens from the 5th to the 9th input
of labor. Here, the Marginal Product and Average Product already show decreasing values. Upon
the 10th input of labor; the Marginal Product is now negative.

The stage where Total Product is increasing at a fast rate is the stage of increasing
returns. Here, Marginal Product and Average Product are both increasing.

When Total product is increasing at a slower rate and Marginal Product and Average
Product are both decreasing, we have the stage of diminishing returns.

When Total Product decreases and as a result Marginal Product is negative, we enter the
stage of negative returns.

The production behavior above leads us to the Law of Diminishing Marginal Returns. It
is in reference to the diminishing value of MP. The law states that additional output starts to
diminish at a certain point as additional units of a variable input are combined with one or more
fixed input. The reason for this behavior can be traced to the constraints faced because of the
fixed resources that are used in complement with the variable input, which in this case, is labor.

SIGNIFICANCE OF PRODUCTION THEORY IN BUSINESS

 As we already learned, a business is engaged in providing goods and services to customers
with the goal of making profits. Although some businesses are engaged in retailing goods that they
bought from producers, many businesses proprietor to be aware of the production behavior that will
help maximize profits for the enterprise.

Lesson 4.3 Socio-Economic Impact of a Business

Today putting up a business is just not all about profits. It is also concerned with consumer
welfare, job creation, environmental issues, uplifting the quality of life, and contributing to the
economy. Let us now look at how a business can impact the consumer, the suppliers and the
investors, the government, the households.

IMPACT ON THE CONSUMER

A new business, especially one that is innovative and focused on bringing some new
product or service to the market, is always welcome to the consumer who is looking value for his
money. If t new business is selling a product that has close substitutes in the market, then the
owner of business will try his best to win the consumers away from the existing sellers by
offering something that will benefit the buyers.

How can the new business accomplish this? One good way is to innovate the products;
come up with new features that are not found in the existing competing goods. This can be in the
form of a better appearance, a new feature or ingredient or a new convenient way of making the
product available. A new business therefore means new products or services available to the
buyers, giving them more choices.

Since the new seller will try to attract buyers, another strategy that could be adopted is
to improve the quality of the good making it a notch higher than those already being sold in the
market. Although this may mean high prices for better quality goods, this could cater to a market
that is more after quality than low price.

Initially, a business starts, the seller may make the product available at introductory
prices lower than the other substitutes in the market. This will definitely be an advantage to the
price conscious buyers who have limited budgets.

As long as new business can provide new good and service, better quality of goods are
more options, the consumer can benefit from it. But if a business comes up with a low quality
good and does not provide the consumer value for his money, then this business will have a
negative impact on the market

IMPACT ON THE SUPPPLIERS AND INVESTORS

 A new business will also provide opportunities for suppliers and investors. If a new
construction company is set up, then this opens up opportunities for the other businesses that will
supply them their needs, tools, woods, cement, steel, paints, nails, screw, and decorators. Many
suppliers will now get a chance to the newly established business, which means income for them.

Demand for the goods provided by the suppliers will increase. These suppliers will now
need to produce more of them and they will need to hire more workers who will earn wages from
being employed. More capital will be needed to invest in the production of these tools and
materials, generating again income for the economy. Investors get to earn returns on their
investments, with capital plowed back investments and generating more income for the
economy, thus, leading to economic growth.

IMPACT ON THE GOVERNMENT

The government will also benefit from the establishment of new businesses, through
revenues earned on fees collected from and on taxes imposed on the incomes of the businesses.

Before a business can be set up, it has to meet requirements to start operating. First, the
business owner has to apply to start its business. Licenses have to be obtained. Organizational
fees have to be paid. On the municipal level, the local government earns revenue from these fees
and licenses. This means money added to their local budget to provide social services to the
community, for the development of the company, to pay salaries of local officials and workers,
to maintain peace and other and to subsidize public schools.

On the national level, the government gets to impose taxes on the incomes earned by the
businesses. Employees hired by these businesses also have to pay personal income taxes to the
Bureau on International Revenue (BIR). For employed workers, these taxes are regularly
withheld by their employers and remitted to the BIR.

These tax revenues fuel development because they are used by the government for
national activities and for budget allocations for its program. The national government has
revenues to finance its projects, t pay government officials, to build schools, to improve the
military, to promote peace and order all over the country, to build housing for the poor, and to
provide health services and improved welfare programs for the people.

A more detailed study of the government will follow in the succeeding sections of this
chapter.

IMPACT ON HOUSEHOLDS
 New businesses mean employment opportunities for the Filipinos. Those who have jobs
but are earning low-wages may find better paying jobs with the new companies. Unemployed
workers looking for work may have the chance of being employed by these companies. The pool
of unemployed workers will definitely decrease. Being employed will enable them to buy their
basic needs and even some luxuries. This means that their quality of life and their standard of
living will improve.

Acquisition of wealth and assets can now follow both for the business owners and the
employees they hire. Profits earned by the owners can be invested back into the business for
expansion, or some can be withdrawn by the owners which they can use to buy new cars or new
houses. Success stories on television shows feature rags-to-riches stories of entrepreneurs who
used to be very poor, but with hard work and persistence, were able to make their businesses
succeed, enabling them to send their children to good expensive schools, building big houses,
and buying two or more cars housed In their garage. The owners, because of their success,
manage to acquire wealth and buy assets which are fruits of their hard work.

With the growing focus on preserving the environment for future generations, businesses
also get to contribute their share. So-called green structures for buildings are means used to
prevent further damage to the environment. Instilling the value of recycling and reusing of
resources among employees and family members may also become the advocacy of these
businesses. Spreading information on the dangers of global warming may be promoted by the
business owners. Thus, businesses become instruments for society to have a better place to live
in.

IMPACT ON THE COMMUNITY

Corporate Social Responsibility (CSR) has become a growing trend among businesses
today. As a result of this, corporations and even small businesses have increased theft focus on
projects that provide scholarships to poor but deserving students, allocating budgets for housing
for low-income families such as participation in programs like the Gawad Kalinga,
environmental protection including tree planting, elimination of pollution, and other environment
related programs. Communities benefit from business-sponsored activities that include sports
Pests and wellness programs, livelihood protects micro financing, and even medical and dental
missions.

Lesson 4.4 Socio-Economic and Government Impact on Business

GOVERNMENT IMPACT ON BUSINESS

 While the government increasingly spends on socio-economic services to imp oat business
condition (Figure 4.1), size and inadequate infrastructure and support service-limit the growth
opportunities of micro enterprises. Declining debt payments to local and international debtors
have given way to more spending on services like road development and education. On the other
hand, size limits business access to technology, credit ant market networks in the absence of
government support services (Chapter 3). On top of the limitation of size, poor road conditions
and inadequate support industries further limit production and marketing by adding cost to doing
business. Poor road condition increases transport cost and the risk of perishability especially of
agricultural and fisher products. High costs of electricity and real estate acquisition increase
production cost especially of manufacturers. Other difficulties in doing business in the country
arc high taxes, costly registration, and bureaucratic corruption. Foreigners and foreign companies
face the same obstacles in developing local operation and marketing. The Philippines, as well as
Indonesia, has the highest costs of electricity and real estate acquisition in the ASEAN region
(Figures 4.2 and 4.3). It also has the highest tax rate on additional income (Figure 4.4) negating
investment incentives and further increasing cost of registration from bureaucratic red tape or
delay (figure 4.4). Thus, local enterprises especially those of micro scale are yet weak to face
competition from imports and foreign investment from the liberalization policies of the 1990s.

70

60

50

40

30

20

10

0
China Indonesia Malaysia Philippines Thailand Vietnam
 70
60
50
40
30
20
10
0
PR China Indonesia Malaysia Philippines Thailand

Figure 4.3. Real Estate Acquisition Cost (USS per Square Meter) (2004)

50
40
30
20
10
0
Philippines Thailand Singapore Malaysia

Figure4.4. Tax rate (96) on Additional Income (1999)

HOUSEHOLDS IMPACT ON BUSINESS

Although the country's population is still young with a majority (68%) aged below 29
years old, it is gradually becoming older with declining fertility and mortality rates (Figure 4.5).
More than one-third (35%) aged 15 to 34 years old are given to sophisticated consumption. One-
third (33%) aged up to 14 years old are children needing growing up care and only seven percent
(7%) aged 60 years old and above need elderly support. But as fertility rate (children per woman)
is declining, so is the proportion of children needing growing up care (below 15 years old). For
example, fertility dropped from six (6) in 2000 to three and one-half (3.5) in 2010 while the
percentage of children up to age 15 years old correspondingly dropped from thirty seven percent
(37%) to just thirty-three percent (33%). Also as mortality rates of all ages dropped from 2000 to
2010, life expectancy correspondingly increase from 67 to 71 years old with one-half of the
population not younger than 23 from 21 years old in 2000. Fat forward, the National Statistics
Office (NSO) forecasts elderly population to increase to almost ten percent (10%) in 2023 from
just seven percent (7%) in 2010.

However, the declining power of wage has marginalized the consumption of said age groups
in at least forty percent (40%) of families (Figure 4.6). Coupled with inadequate wage,
unemployment has also trapped more than one-fourth (26%) of families in poverty (figure 4.7).
A typical family hardly saves and spends most income on food (43%) and housing, utilities, and
fuel (21%). Figure 4.8 also shows that only a pittance (8%) is spent on education and health.
Thus, the Philippines has the lowest rate (9% of income) of saving mostly of corporations even
in the ASEAN region (Chapter 2). Due to limited purchasing power of income, many Filipino
consumers have become price sensitive and are only able to afford cheap but shoddy items. Low
quality characterizes local products especially manufactures that are largely food items. Low-
quality consumption can mean inadequate care for the young (Below 15 years old) and the
elderly. Also, as non-essentials are crowded out of the budget, so is sophisticated consumption
especially of the youth (15 to 34 years old). In the end, some micro businesses may be crowded
out of the market in view of limited consumer demand due to inadequate income.

Figure 4.5 Population in 2010 (by age group) Figure 4.6. Real Wages Index

Sales
5% 2% 120
13-14 100
13%
15-29
12% 80
30-44
60
45-59
20% 28% 60-74 40

75- over 20

0
2007 2008 2009 2010 2011 2012 2013

Sales
8% Food
10%
Others

Transportation &
43%
18% Communication
Education &
Health

Figure 4.8 Annual Family Expenditure (2012)

Trade and Capital movements

The external sector shapes the foreign exchange market (foreign currency inflow outflow)
through its trade capital movements, and financial flows. Trade includes factor payments such as
remittances from overseas contract workers and profit remittances of foreign companies to their
home countries. Capital movements include both short and long term foreign investments in
country and Filipino investments abroad. Financial flows involve international debts and loans
and their repayments.
 Foreign currency (largely in dollars) inflows less outflows payments define the balance of
payment (BPO) of the economy. Foreign currency receipts from abroad! (Inflows) eventually
sell for pesos while foreign currencies for payments to other countries (outflow) are bought
pesos. From the viewpoint of the economy a BPO surplus means that more foreign currencies
are being sold for pesos than those being bought with pesos. Likewise a BPO deficit means that
less foreign currencies are being sold for pesos than those being bought with pesos (figure 4.9)

Circular Flow System

Household Firms

Foreign Foreign Currency Inflows (+)

Currency Outflows (-)

SYSTEM NET FLOW

Surplus (+)

Deficit (-)

Figure 4.9 Foreign Currency Flows and the Economy

As part of its regulatory function. The government through the central bank competitively
buys and sells foreign currencies in the foreign exchange market of balance supply and demand
and stabilizes the exchange rate. The bank buys foreign currency surpluses with pesos and sells
for pesos to fill the shortfalls in time of deficit-in order to stabilize the foreign exchange market
in figure 4.10 from point A, the central bank buys (demand shift D1 to D2) the excess supply of
foreign currency (F1- F2 from supply shift S1 to S2) thus buying this excess supply maintains
exchange rate E1 and foreign currencies bought and sold (supply= demand) F1 at point A.
Conversely the central bank can cell foreign currency reserves (supply shifts S0 to S1) to fill the
shortage. (F1 to F0 to supply shift to S1 to S0) to likewise restore equilibrium at point A.
 The economy’s production is yet to go deeper to more technology based stages that is
imports the capital goods even including consumer items that it could otherwise produce (figure
10.11) but it only exports raw materials and some consumer using items low technology (e.g.
garments) (figure 4.12). Local manufacturing which largely produces lights manufactures (low
technology) of food and other consumer items can hardly stand up to imported competitive
products. Machineries and electronics export are simply products from their imported
components assembles locally by transitional corporation. As mentioned in chapter 3 electronic
exports hardly contribute to local output and employment being important dependent and without

much need for technology.

 As the country exports little but imports much, it spends more but hardly earns
foreign currencies (largely dollars). What busy the foreign currency market are net capital
inflows (foreign investment, loans) that offset trade deficits (imports exceed exports) resulting in
mostly BOP surpluses (Figure 4.13). Nonetheless, foreign exchange rate (peso to foreign
currency) is relatively high making peso imports costly while exports are becoming more
competitive with more peso profit margin for the same dollar price. Unfortunately, local
production can hardly fill in for costly import as handicapped by limited scale, access to
technology and government incentives against the backdrop of stiff import competition. On the
other hand, they have to contend with higher cost of doing business to costly capital and material
imports. Thus, local businesses engage in low technology production and trade that includes
cheap and shoddy imports of consumer items.

Further stifling the foreign currency market is the decline of its exchange rate against rising local
prices (inflation) that makes the peso overvalued against the dollar in recent years. The
increasing value of the peso together with the other Asian Currencies against the weakening
dollar stems from capital flows avoiding the recession in the U.S and Europe and finding
opportunities in Asia. The resulting decline of the real exchange rate (Exchange rate divided by
price index) has to (2) implications (figure 4.13). Imports are becoming cheaper relative to local
goods while exports are becoming less competitive with less peso profit margin for the same
dollar price. Much less are exports competitive as our neighbors and rivals (Malaysia, Thailand,
and Indonesia) have successfully reversed their exchange rate conditions to make their exports
more competitive (figure 4.14). In turn, cheapening import with less competitive exports further
fans foreign currency demand relative to supply to keep the exchange rate high. Despite Central
Bank's intervention to minimize fluctuations by buying and selling dollars, the peso-dollar
exchange rates is still above forty (40) pesos. Thus, imports for an import dependent economy is
still costly while exports continue to lose price competitiveness.

HERFINDAHL-HIRSCHMAN INDEX (HHI)

As a final note to help guide the proponents of a business proposal in choosing what type
of industry to enter, the use of the Herfindahl-Hirschman Index - HHI would be useful since it
helps the proponent identify markets are highly competitive and saturated and those markets with

high market concentration.

The HHI is commonly accepted measure of market concentration. It is calculated by squaring

the market share of each firm competing in a market, and the summing the resulting numbers.
Market share is equal to the Revenue of the Firm/Revenue of the Industry and is actually a
percentage. However, the whole numbers of the market share are used to computing the HHI.

The HHI number can range from close to zero to 10,000. The HHI is expressed as:

HHI=MS squared of Firm 1 + MS squared of Firm 3…+MS squared of

Firm n.

The closer a market is to being a monopoly, the higher the market’s concentration
(and the lower its competition). If, for example, there was only one firm in an industry that firm
would have 100% market share, and the HHI would equal 10,000 (100^2), nearly 0% market
share, and the HHI would be close the zero, indicating nearly perfect competition. This means
the market is highly competitive and is characterized by the existence of numerous competitors.

Results of the HHI would indicate the following:

• HHI below 100 indicates a highly competitive market.

• HHI below 1000 indicates an unconcentrated market.

• HHI between 1000 to 1800 indicates moderate market concentration

 • HHI greater than 1800 indicates high market concentration

The business proponent should therefore seek to enter an industry where HHI is
greater than 1800 since the market is not characterize by too many firms. (Investopedia, LLC
2015)

Business Icons

Philippine Business Icon: Manuel V. Pangilinan

In 2008, he was the 39th richest man in the Philippines with a net worth of US$ 39
million. Now 68 years old, Pangilinan was not born with the literal golden spoon in his mouth,
but he worked his way to what he is today. Graduating from the ateneo de Manila with a degree
of bachelor of arts in Economics, cum laude, he proceed to earn an MBA degree in 1968 from
the Wharton school of finance and commerce at the university of Pennsylvania, as a Procter %
Gamble fellow, he subsequently worked with the PINMA group, bancom International Limited,
American express Bank, and the first Pacific Company.

Among his notable accomplishment are the first Pacific group which he himself
put up, the chairmanship of the PLDT as well as of the Metro Pacific Investments Corporation
and the Smart communication, Inc.

MVP, as he lovingly called wears many other hats, he is active in the support of
sports, medicine and health, vocational, social and cultural activities, crime prevention and the
rehabilitation of the Pasig river.

Mr. pangilinan has been recognize in various fields, by the TOYM, the Officer of
the President of the Philippines, and by school such as the San Beda College and the Xavier
University.

His contributors to Philippines business and Industry is outstanding (Excerpts

from Http:// ateneansusa.camp8.org/

Global Business Icon: Bill Gates

Born in 1955, relative’s young entrepreneur Bill Gates founded the world’s largest
software business, Microsoft, with Paul Allen, and subsequently became one of the richest man
in the world.

An early bloomer, he began to show an interest in computer programming at age

13. In 19170, at the age of 15, Bill Gates went into business with Paul Allen. They developed
“Traf-o-Data” a computer program that monitored pattern in settle, and netted $20,000 for their
efforts, Gates and Allen wanted to start their own company, but Gates’ Parents wanted him to
finished school an go on to college where they hoped he work to become a lawyer. Gate’s
acumen for not only software development but also business operation put him in the position of
leading the company and working as its spokesperson. He personally reviewed every line of code
the company shipped, often rewriting code when he saw it necessary. As the computer industry
began to grow with companies like apple, intel, and IBM developing hardware and components,
bill was continuously out on the road touting the merits of Microsoft software application. He
often took his mother with him. Mary was highly respected and well connected with her
membership on several corporate boards including IBM. It was through Mary that bill Gates met
the CEO of IBM.

IN November 1985, Bill gates and Microsoft launched windows. Bill Gates
Intelligence allowed him to be able to see all sides of the software industry – product
development and corporate strategy. Giving back to the community set of Gate’s Philanthropic
activities. 1994, Gates and his wife established the William H. Gates foundation which was
dedicated to supporting education, would health, and investment in low-income communities. In
2000, the couple combined several family foundations to form the Bill and Melinda Gates
foundation. They started out by making a $28 billion contributor to set up the foundation.