Business Counselor Manual 2006

FOREWORD
PKII Engineers, a consulting group, conducted a study of the SME Center in the
country. One of the recommendations made by PKII consultants in their final report
was to equip Business Counselors with the right skills to enable them to meet “the
general business advisory needs of SMEs in the areas of marketing, technology,
organizational development, and finance.”
To partly address this concern, the Bureau of Small and Medium Enterprise
Development (BSMED) decided to come up with a guidebook that will satisfy the
basic information needs of Business Counselors.
The Business Counselor’s Manual was prepared to effectively carryout the task of
counseling. Apart from providing counselors with a working knowledge of the
business counseling cycle, it represents an overview of the current status of the SME
sector and over 30 diagnostic tools that can aid a counselor in his work.
The Manual will be useful not only to DTI counselors but also to the growing number
of full-time professional business counselors, whose counseling services have been
valued and appreciated by the client entrepreneurs of micro, small, and medium
enterprises (MSMEs).
We acknowledge the University of the Philippines Institute for Small-Scale Industries

for their assistance in the development of the Business Counselor’s Manual and the
Bangko Sentral ng Pilipinas for their generous support.
iv
CONTENTS
Chapter
The Business Counselor 1
1
The Counseling Profession 1
The Role and Scope of Work of a Business Counselor 1
The Demand for Business Counselors 3
Desirable Skills and Traits of a Business Counselor 3
Understanding the Client 6
The Engagement Period 7
The Business Counseling Process 7
Phase One: Making the First Contact 8
Phase Two: Studying the Client 10
Phase Three: Diagnosing 14
Phase Four: Working the Plan 18
Writing a Report 21
Professionalism and Code of Ethics 21
Chapter
The Philippine SME Sector Today 25
2
Philippine SMEs: An Overview 25
The Philippine SME Sector Defined 25
Distribution of SMEs per Industry and Category 26
Geographical Concentration of SMEs 29
Employment in SMEs 30
Key Issues Facing SMEs 31
Low Competitiveness 31
Productivity and Structural Limitations 31
Limited Access to Fund Sources 32
Issues on Access to Markets 32
Other Concerns 33
Law, Policies, and Regulations in Support of SMEs 34
The BMBE Act of 2002: For the Promotion of Microenterprises 34
The Magna Carta for Small Enterprises 35
General Banking Law 36
Rural Bank Act of 1992 36
Sulong Program 37
Labor Training: The Dual Training System & TESDA Acts of 1994 37
Others 37
Chapter
Initiating Changes
3
Problem Solving and Decision Making 39
Define the Problem 40
Gather Information 40
Develop Alternatives 41
Weigh Alternatives 41
Develop a Plan for Implementation and Monitor the Solution 42
i
Introducing Change 42
Any Change Should Add Value 42
Managing Change Depends on Its Complexity 43
System Must Be Ready 44
Remove Barriers to Change 45
The “AIDA” Prescription 47
Overcoming Resistance to Change 48
Chapter
The Basics of Starting A Business 51
4
Identifying Business Ideas 51
The Entrepreneur’s Persona 51
The World Around Him 52
Screening Business Ideas 54
Appraising Business Projects 56
Why Appraise a Project? 56
Registering a Business 65
Where to Register 66
The BMBE Law 70
Chapter
Business Counselor’s Tools 71
5
Chapter Classic Diagnostic Tools 77

6 Cause and Effect Diagram 77
Charts and Graphs 80
Cost Benefit Analysis 84
Decision Tree 86
Flowchart 89
Force Field Analysis 92
Gantt Chart 95
Linear Responsibility Chart 97
Pareto Analysis 99
PERT/CPM 102
Procedure Chart 105
Relations Diagram 108
Scatter Diagram 110
Stakeholder Analysis 112
SWOT Analysis 115
ii
Chapter
Marketing Tools and Strategies 119
7
Channels of Distribution Chart 119
Five Forces Analysis 122
Positioning Map 124
Pricing Strategies 126
Product Life Cycle Strategies 134
Product Strategies 136
Promotion Strategies 138
Sales Forecasting Techniques 140
Value Chain Analysis 148
Chapter
Production Enhancement Tools 151
8
Control Charts 151
Economic Order Quantity 155
Flow Process Chart 157
Just in Time 161
Routing Diagram 163
Run Charts 165
Simplified Layout Planning 167
Value Analysis and Value Engineering 170
Chapter
Financial Tools 173
9
Break-even Analysis 173
Common Size Financial Statements 178
Financial Ratio Analysis 180
Internal Rate of Return 184
Make or Buy Decision 188
Net Present Value 190
Payback Period 193
References 195
iii
Chapter
THE BUSINESS COUNSELOR
THE COUNSELING PROFESSION
Counseling as a profession traces its foundations to guidance counseling in schools and social
work with juvenile delinquents. The history of counseling, therefore, is a history of helping
other people. It helps others through advice, assistance or support on the way towards
achieving a goal, and providing some form of intervention to alleviate the status or condition
of a person or persons, provide some remedy, or correct certain practices.
Two parties are essentially involved in counseling. One party is the counselor. He is the one
who gives the advice using his expert or specialized knowledge. The other party is the client.
In business counseling, the counselor has expert knowledge and skills in business
management. He may be a business administration/management professor in a university,
lecturer and trainor on the same topics, or manager, supervisor, president or chief operating
officer (COO) of a company. The client is the entrepreneur, firm, association, or group.
The counselor attends to the client’s needs giving some advice and recommending possible
courses of action. The counselor may deliver his services in various modes: through
individual personal counseling, or through group counseling, and/or via some crisis
intervention. He may conduct his advisory services with the client through interpersonal face-
to-face communication, the telephone, cellphone, the internet, or some combination of
interpersonal, mass, and electronic media.
THE ROLE AND SCOPE OF WORK OF A COUNSELOR
Counselors may work either as a development worker or as professional counselors. A

counselor functioning as a development worker usually works for an agency engaged in the
promotion of entrepreneurship and business creation. Many of the development worker type
of counselors are employed in government institutions and non-government development
agencies or organizations supported by Overseas Development Assistance (ODA). If you are
a government employee, you are considered a development worker who seeks clients in line
with a national program or else you are a front liner assigned in a government-run business
development service (BDS) office.
Professional counselors, on the other hand, are organized to do business by rendering

consultancy service for a fee. Professional counselors usually come from the ranks of
development worker counselors. They can be development workers full-time or most of the
2 BUSINESS COUNSELOR’S MANUAL
time in the day as they work with the government agency they are connected with, but for
certain hours they become professional counselors as they move on to a part-time job where
their work is precisely business counseling. On the other hand, there are now people who are
full-time professional business counselors – and their ranks are increasing as the profession of
business counseling gets to be valued and appreciated by the client entrepreneurs of micro,
small, and medium enterprises (MSMEs) and as more stakeholders in government and in the
private sector realize the need for business counseling services.
As a business counselor, you take on diverse roles: whether as change agent, coach, or
educator. You are a change agent because you bring about a positive change in the business,
measured in concrete outcomes of productivity and profitability for the client. The more
important thing is to be able to bring about behavioral change in your client.
Inevitably, you are also a coach who influences the way the client should carry out the
business operations. The coach is tasked to bring a higher quality of life for the client.
Probing questions that you ask encourage the client to think of new ways or new insights and
perspectives. As coach, you give feedback to every discussion point so as to gauge how well
(or poorly) the client is doing. When positive feedback is earned, the role of a coach is to
support the client in taking on new challenges for sustainability and growth for his business.
You are also an educator because you are an advocate for development by passing on to a
client data and information on development out of which new perspectives are shaped.
Recognizing the enthusiasm and behavioral change in the client, you facilitate the acquisition
of more information for the business to be competitive by providing sources of information.
If the client does not know how to get the data, you assist him for the first time while teaching
him how to do it by himself the next time.
Counseling should be distinguished from activities which are akin to it such as information
dissemination. The following are not considered counseling activities:
¾ When information or data is simply handed/provided, more accurately called selective

information service;
¾ When a client is referred to another person/expert/agency without the benefit of
interacting with the expert who may supply the solution to the need; and
¾ When a client is given formats or model documents as reference.
CHAPTER 1: THE BUSINESS COUNSELOR 3
THE DEMAND FOR COUNSELORS
Business counselors are in demand or are engaged by MSME clients for many
reasons.
The more progressive businesses would like to have an impartial opinion to

assess the existing situation, determine critical areas of operations, and obtain
recommendations for improvement. Clients know that they have limitations
and constraints that can be better analyzed by counselors who have the
knowledge, expertise, and skills. Instead of employing specialists on a full-
time basis, counselors are engaged on a short-term or temporary basis. Many times an
entrepreneur would like to know the soundness of a major decision, hence he wants someone
who can agree/disagree or even challenge a course of action. Or he needs somebody to render
professional advice for the adaptation of new technologies and approaches.
On the other hand, engaging a counselor at the entrepreneur’s volition is not a general
practice. The services of a counselor are usually sought only when the business is in trouble
or when a government program is launched.
What business counselors find baffling is the fact that those who need assistance most are the
ones that shy away. In fact, experts observe that the more successful businesses are the ones
who employ counselors. A good number of counselors working in government institutions
possess the expertise and are motivated to assist small and medium entrepreneurs, and yet
MSMEs particularly the smaller ones, do not seek their assistance when the latter can render
services for a minimum fee or even for free.
DESIRABLE SKILLS AND TRAITS OF A COUNSELOR
Not everyone can be a business counselor. To be a business counselor you must have special
skills and traits that make you a cut above the rest.
¾ Skills
• Intellectual and technical competence in at least one business function. You may be a
generalist but you must have an in-depth know-how in either marketing, production,
trading, finance, or law. You must continuously seek knowledge and hone your
skills. Intellectual competence enables you to know why the problem arose, applying
the right diagnostic tools so that the advice on what to do, when, by whom and how
can it be done are accurate. You must continuously seek knowledge and hone your
skills.
• Good oral and written communication skills. These skills will enable you to
articulate your wide knowledge in entrepreneurship and business improvement. The
knowledge stems from the acquisition and processing of data/information and
readings. The belief in life-long education makes you a perennial student not only of
the academic type but as practitioner. You participate in conferences, fora, and the
like. Your skills are honed through the continuous study of concepts and practices.
• Objective and impartial. Practice good judgment, be objective or impartial and

unemotional to be able to give unbiased advice to clients. Detach yourself from
personal matters to be objective in dealing with business problems.
• Professional in delivering your commitments. Be timely in submission of reports,
studies, and in attendance in meetings.
• Interpersonal skills. Be skillful in interpersonal relations as dealings will not only be
with the client but also with his employees and at times with investors/funders.
• Creativity. Your wide knowledge and purposeful thinking lead you to creative
solutions.
• Analytical and problem-solving ability. Necessarily, you must have an analytical
mind and possess problem-solving abilities, for how else can you help a client if the
diagnosis is erroneous.
• Ability to synthesize. This refers to the ability to look ahead, relaying to your client,
and developing your client’s skill to plan.
• Confidentiality. Confidentiality forms the core of professional traits. “What the
company owns must be the company’s.” Learn from experiences but never identify
the client when using a particular experience to teach a client. Business counseling is
a type of service where professional ethics demands discretion about client’s affairs.
Once a cordial relationship is forged between the counselor and client there is no
room for apprehension because motives are made clear. It is a win-win relationship.
With this relationship it is fairly easy to gather data and information to better analyze
the business situation.
• Skill of limiting engagements. An effective counselor does not count the number of
clients nor the fees earned but rather the number of clients with whom relationships
are forged that result in the improvement of the business.
• Special skills are needed at different stages of the engagement.
At the beginning of the engagement:

o Listen and understand your client’s needs.
o Understand the situation and isolate the causes and effects.
o Self-disclosure is important so that the client will understand where you
are coming from.
During counseling work:

o Engage in active listening. That is, listening with a questioning mind,
asking yourself questions like: Why did it happen? Why did he act the
way he did? Can the situation be reversed?
o Think analytically, to determine/isolate factors that led to the problems
and be able to formulate alternatives.
o Make the most of your interpersonal skills. You must know how to deal
with the client and his employees so that you can extract information
from which a good alternative can be developed.
o Communicate well. Communication skills require oral proficiency so
that questions are understood by the client and his employees and right
answers are given. Written communication skills are equally important
because the SME client may not have the time to read long reports.
Concise reports, with bottom line figures, are better appreciated.
o Manage time well. Time management is manifested in approximating
timelines prepared in the beginning of the contract.
Towards the end of the engagement:

o Use professional skills in conveying the message to the client and
employees in such manner that they see clearly the cause(s) of the
problem(s) and the concomitant factors that will affect operations.
o Leave a client with an increased capacity to handle pressing issues of a
similar nature. When he is doing well, a “pat in the shoulder” will work
wonders. When he is doing poorly, a “slap in the back” done in jest will
convey the message. Be sure the slap is accompanied with a smile then
correct him by giving him alternatives.
o Provide feedback without making the client feel inferior. It is also
making sure that what is acceptable (to both counselor and client) and
what is not are properly accepted.
¾ Traits
• You are motivated towards service and want to share knowledge and skills with
others. You may have little or no experience in managing a business and have no
desire to enter into business because counseling is your business.
• Be honest or truthful. Where you have doubts or do not know the response to a
situation be honest to say so. But search/look for the information/data that will allow
you to address the issues at hand.
• Positive criticism is a trait that distinguishes a good counselor from one who is not.
When the client is obviously wrong and his actions are leading to a disaster, you are
obliged to call his attention, explain the consequences, and let the client make the
decision.
• Good physical and mental health. A client will not want to interact with one who is
sick or cannot focus on discussion items. The rigors of work require physical and
mental exertions. A sound mind and a healthy body augur well for stability of
behavior and action. This is manifested in consistency of behavior with the desire to
help the client do better.
• Etiquette and courtesy. You should
know how to act and respect a client.
Actions like slouching, arms akimbo,
finger-pointing, and holding head high
are no no’s. The intonation and voice
decibels also manifest the character of
the counselor.
• Self-confidence. Believing that one has the knowledge and skill to help a client in
solving his problems is a must for all counselors.
• Integrity. You are expected to deliver on your commitments. Excuses, pretensions,
and negligence have no place in counseling.
• Independence of mind is necessary but do not be obstinate if you know that you are
not accurate or incorrect.
• Psychological maturity. You should know when you have the competency to help a
client. As a counselor you must be honest to acknowledge your limitations by taking
in another person/expert in the team or not entering into a counseling engagement.
UNDERSTANDING THE CLIENT
Before you accept an engagement, you must have an accurate reading of your potential client.
Understanding your client is a skill that is developed through experience. The more clients or
interactions you encounter, the better you will gain insights in assessing clients, his
personality, and aspirations. Your major concern is that at the end of the contract, your client
is in a better position and can do better. You have to leave him exhibiting attributes of a
successful entrepreneur. How can you tell if a client can be successful? He must have
exhibited good business sense, which requires one to have the drive for growth.
A good client is one who is highly motivated and possesses some knowledge and/or skills
needed in the business, be it in manufacturing, trade or service.
With micro enterprises comprising 90.6% of the registered businesses in the Philippines
(Source: SME Development Plan), clients will most likely be micro entrepreneurs.
Studies of the University of the Philippines Institute for Small-Scale Industries in the 80s
reveal that majority of the entrepreneurs completed their secondary course. A similar study
conducted in the 90s shows that many entrepreneurs are college graduates. This proves that
more and more entrepreneurs see formal education as an important factor in entrepreneurship.
Knowledge acquisition provides the necessary analytical and strategic skills in marketing,
production, and finance.
The small entrepreneur is a doer and action-oriented. He may be averse to lengthy academic
discourses and thick reading materials but if given reading materials coupled with
instructions, s/he will not stop reading and do as instructed until the work is completed.
Below is a parallel analysis of client’s personal and entrepreneurial traits which are indicative
of his business sense.
PERSONAL BUSINESS SENSE ENTREPRENEURIAL

• Achievement • Growth motivation
drive • Intuition
• Adaptability • Opportunity - seeking
• Independence • Perseverance
• Decisiveness • Risk tolerance
• Energy • Entrepreneurial
• Social skills management
Fig. 1.1 Personal and Entrepreneurial Traits of Clients Indicative of a Business Sense
1. The client’s motivation for growth is usually accompanied with the drive to make
things happen.
2. The client’s alertness of potential product/service innovations and markets and ability
to seize opportunities, convert them to sales, and ensure repeat orders. His “gut feel”
could be traced to his knowledge of the industry.
3. The entrepreneur knows that his products/services have distinctive
features/characteristics that make them different from those in the market. His goal is
the satisfaction of the customer and so he perseveres to improve his products and
services by exploiting every opportunity to do so.
4. The client makes hard decisions to the point of self-sacrifice because he is determined
to correct a situation and do better.
5. Running a business is a round-the-clock operation so that there is no room for

infirmities. He delegates some authority to his employees firstly because he is not
everywhere. Secondly, decision-making should be at all levels. Thirdly, he is not
forever in the pink of health. A successful entrepreneur recognizes that there are risks
for every decision. He must be able to tolerate minor mistakes (committed once) and
be able to point these things to the decision-maker(s).
6. The client must possess interpersonal skills to make things happen without sacrificing
innovation and adaptation. He must be able to correct and/or introduce change in
spite of resistance.
THE ENGAGEMENT PERIOD
Counseling contracts have no hard and fast rules about how long the engagement period lasts.
But there is such a thing as an effective counseling contract. You must work out your exit
from the beginning. The idea is for you to help clients help themselves. As a counselor, you
should never manage the business of a client. You job is to merely guide. Leave the decision-
making to the client.
For purposes of determining fees, one must keep track of the time spent or invested in a
client. Preparatory time (time spent to gather information to prepare the proposal) must be
considered separately from time spent for counseling but attributed toward counseling time in
reporting. Travel time should not be included in counseling time but should be tracked
separately. Hence,
TIME (spent per client) = Preparatory time + Counseling session + Travel time
THE BUSINESS COUNSELING PROCESS
Understanding the process enables you to render counseling services by using a step-by-step
approach. Others may argue that there is no need for such an approach. Experience shows
that a planned work, regardless of the size of firm, will be very helpful in carrying out the job.
This part of the manual will deal only with the process not the substance of the counseling
service.
PHASE ONE: MAKING THE FIRST CONTACT
This is the period when you meet the client for the first time for a possible engagement.
When a prospective client approaches you, the first meeting is usually a “getting to know
you” session. You normally would like to know more about your client-to-be. When a client
wants to confirm the soundness of his major decision or needs somebody to render
professional advice for the adaptation of new technologies or approaches, you must be
prepared for a longer counseling session. In this case, the client recognizes that he has
limitations in time and skills which can be better provided by one who has the relevant
knowledge and expertise/skills.
The scenario is different in the case of government-employed counselors. When it is the

counselor and not the client that makes the first move, things can be misconstrued differently.
The assistance of the counselor may be perceived as motivated by other considerations
instead. Suspicion or fear pervades in the first meeting.
Development workers are trapped by the desire to help MSMEs. The motivation to change on
the part of the client is often unintentionally overlooked in the desire of the development
worker-counselor to improve the operations of the business. A development worker who
visits an entrepreneur who does not value his counseling services as worthwhile should end
the visit and look for other clients. Experience shows that some MSMEs who shun
government-employed counselors only realize their value when the firm is in trouble. The
entrepreneur will then seek counseling service. He will only approach you when he is able to
confirm that you were able to bail out another entrepreneur in trouble.
In the first meeting you forge a relationship built on trust and credibility. Especially in
counselor-initiated engagements, never hint to a prospective client that a problem exists in the
business. This can be misinterpreted as forcing through and a ploy to try to make money.
The prospective client is likely to think: How can he identify a problem without even going
through the firm’s operations?
The first visit will not end with a contract. It is just establishing rapport with the client. What
is important is that you are able to determine if the potential client is motivated to change.
Prior to the counseling contract, there could be at most two more visits.
Counseling a group is more challenging because it is not often clear who has what kind of
problem. When faced with this challenge, at the first encounter, explore the reason for the
engagement, determine willingness of members to be assisted, and identify who among them
can be potential clients.
Preparing the counseling proposal. If there is no previous working relationship but some
chance of a counseling relationship is possible, the next step is the proposal preparation.
Then you need to have a deeper knowledge of the business situation. In this regard, a
preliminary fact-finding is imperative. Both parties must agree on the scope of work. The
estimated time should not exceed three work days for small enterprises. On his part, the client
must make available some base documents and authorize the interview with key persons in
the company.
Familiarize yourself with the operations to get an overall assessment of how the company is
faring in terms of efficiency of operation and net revenues.
How fast diagnostics are carried out will depend upon your experience and size of the firm.
When you are able to isolate the cause of the problem, list the possible areas for investigation.
Enumerate the approach you will most likely take indicating possible deviations as more data
come in.
The proposal consists of four parts. The technical proposal details the intended work and
general approach. For big complex development projects, this is called the Inception Report.
The second part is identifying the counseling team and their respective areas of responsibility.
The hierarchy of command should be made clear, delineating the role of the senior from the
junior counselors. The third part is the resume of the team wherein the team’s counseling
experiences in similar businesses are enumerated. This section should highlight the relevant
experiences of the team members. It is a practice to include the terms of reference (TOR).
The financial proposal may be a separate document where details on the cost of doing the
work and the timetable are presented.
Formalizing the Relationship. No matter how small and simple the CONTRACT
operations of a potential client, an engagement agreement should be
prepared. It can be in the form of a letter of agreement where the client
will affix his signature in a space labeled as “conforme” or an “I accept”
line to signify acceptance of terms. A formal contract or memorandum of
agreement (MOA) is another form. The third kind is a verbal agreement
which is a result of a previous relationship where mutual respect and trust
for each other has been established.
Contract writing is sometimes considered an awkward step for the client and government-
employed counselors but it should be done.
The contract binds the counselor and the client by the mutually agreed TOR which spells out
the work that will be carried out. Before signatures are affixed to the document, each item in
the contract must be discussed and stipulations mutually understood by both parties.
“Formulating the agreement or the contract can be looked upon as a negotiation between
buyer and seller in which there is an exchange of service for fees. The counselor’s fees are
often a function of hours worked and reputation, experience, skill and knowledge. The
counselor’s product is often advice, guidance, and direction, sometimes in written form,
sometimes not. This makes for a very nebulous exchange in which it is easy for one or both
parties to feel like they win or lose. As in any negotiation that results in a continuing
relationship, both parties must win. It is essential that the client feel that s/he is getting good
value for the time, effort and money in the relationship. It is also essential that the counselor
feels adequately rewarded for the contribution. An imbalance in the exchange can lead to
feelings of guilt or victimization, and either is conducive to an effective counseling.”
- Unpublished training material “Effective Business Counseling”

- Manitoba Institute of Management
The contract usually contains details on the following:
• Areas for investigation. These are the specific matters that require attention and/or
improvement.
• Process. This refers to the chronological steps to be undertaken in data gathering and
analysis leading to causes of problems or critical areas for decision-making. It is the
step-by-step procedure of agreeing who will do what part of the plan. Can the process
be terminated any time? What are the possible signals or factors for termination?
There must be mutual agreement as to who will decide the termination.
• Expected outcome details the expectations and deliverables. It is the result of the
investigation, the implementation of recommendations and/or the change of policies
supporting the recommendations. Others may consider these as the impact of the
counseling services. Some of these outcomes are manifested in terms of increase in
profitability, productivity improvement, raised employees’ moral, etc. The question
that should be answered is “What will make the client happy and what will make the
counselor satisfied?”
• Delineation of responsibilities identifies who will do what part of the counseling
contract. In the case of manufacturing firms, the operation may have to be simulated
so that data can be gathered without disturbing the operations.
• Present an activity chart, which is a graphical presentation of the planned activities. It
indicates how much time will be spent for each activity and milestones. For accurate
timing and logical sequence of activities, the Gantt or the precedence charts are very
convenient.
• Financial aspect. This includes cost of the counseling service (i.e., billing schedules,
payment procedures, and expenses to be incurred).
PHASE TWO: STUDYING THE CLIENT
In this phase, you have to know your client far better than in Phase One. In this case, it is
useful to think of the four development levels of a client, classified according to ability and
willingness to change. A client at Level One, for example, has low skills and low in getting
the task done.
LEVEL ABILITY (CAN) WILLINGNESS (WILL)

One Low skill Low interest in the task
Two Building skills Has interest in the task
Three Adequate skills Lacks confidence to perform the task
Four High skill Motivated to do the task independently
The style of counseling matters particularly in this phase. Counseling style is nothing else but
the behavioral pattern when interacting with a client. There are two major types of counseling
behavior: facilitative counseling and directive counseling.
A counselor exhibits facilitative behaviour when there is two-way communication and the
client’s inputs and participation are encouraged in the process. Directive behavior is observed
when one-way communication prevails with the counselor controlling the actuations and
influences the actions of the client. A seasoned counselor uses a combination of facilitative
and directive behaviors. The idea is to reduce tension between him and the client as
counseling progresses. As time lapses, tension is lowered as both parties become comfortable
with each other and the work is completed with no disagreements/friction. You and your
client will have a win-win feeling towards each other.
The improvement on the client’s development level

client is the result of your counseling style. If you adopt T
E Task
a directive behavior, you may never lower the tension N
S
between the two of you. The results will either be: I
O
Client will simply rely on you, thus remaining at Level N
One, or he will not be able to help himself without you Relationship
by his side But given the proper motivation and
posturing, in a facilitative behavior, you will be able to
raise his willingness to perform (WILL) because he has TIME
the ability (CAN) to acquire adequate skill. Thus,

counselors must develop the skill to combine both Fig. 1.2: Facilitative and Directive
facilitative and directive behaviours suited to their Behavior.
clients’ development levels.
Planning the work. Details of activities have to be laid out systematically. For a realistic work
plan, the SMART formula is commonly used as a standard, that is, the plan must be:
Specific
Measurable
Achievable
Realistic and
Time-bound
Major factors to be considered in preparing for the work plan are as follows:
Organization
1. The owner/investors of the business must spend time for meetings and interviews.
2. Top/key persons should participate because they will be the sources of information and
the work requires interaction at all levels of the organization. Also, the key officers
should act as channels of communication among employees and/or investors.
3. Employees are informed of the presence of the counselor/counseling team.
4. The culture and biases of the firm must be looked into.
Resource materials
1. Determine what facts are required for the investigation. The reason for the need for data
must be discussed with the client.
2. Express the details of the required data as to criteria, content, depth, and time period.
3. Request access to basic documents.
Data-Gathering
1. The interview is asking the right persons the right questions or records. A well-planned
work recognizes the value of the time of the interviewee. Time and place of interviews
must be arranged before the actual interview. The counselor prepares his questions to
ensure accurate responses and optimize time. After the interview, the notes are read to the
interviewee to confirm responses.
2. Observe meetings, operations, and any interaction considering interpersonal and intra
group relationships.
Meetings must be observed according to the following:

• Is there or is there no agenda?
• How was the discussion conducted? Two-way? Moderated?
• Any dominant personality respected? Abrasive? Etc.
If a visit to the firm is part of the counselor’s observation, you need to request
management to see to it that employees at the workplace are informed beforehand that an
observer will be around. The presence of an observer should not distract them and that
they should carry on with their activities at normal pace. You observe employees’ attitude
and behaviour towards their work, how instructions were given and accepted, and how
work is done.
In all interactions, especially in a face-to-face situation, make mental notes because

clients are distracted as you write notes and consider this as a sign of disrespect.
However, if there is too much to be absorbed inform the person to allow writing of
important notes. It is important that at the beginning, the person is informed that
important data will be written. You must develop the skill to synthesize and write out
your mental notes just as the interview is completed.
3. A survey may be needed to get primary data or to confirm findings, the purpose of which
must be made clear to the client. The survey instrument must be approved by the client.
The survey must be short and conducted at a time that will not interfere with the
production or operations of the firm.
4. Records analysis is resorted to when gathering data from files, reports, and documents.
You must develop the skill to determine what basic documents and records will give
accurate data.
Other factors
1. Accountability: When preparing the work plan, responsible persons and level of authority
are written.
2. Limitations and potential constraints are factors that might affect the quality of
counseling. There are distractions that are inevitable as there are interferences that must
be tucked into the schedule of the counseling engagement. Some of these are:
• Quality time of the client due to family affairs, participation in organizations, etc.
• Potential constraints like holidays, personal trips of key persons, absence of data,
access to confidential files/information, client’s personal views which may run
counter to the counseling team, personal problems
3. The work plan must answer the following questions: WHAT is to be done? HOW will it
be done? WHERE will it be done? WHEN will it be done? and WHO will do WHAT,
WHEN, WHERE and HOW?
The work plan should contain the goals that the counseling engagement is to achieve.
Such goals must be as “SMART” as the work plan is and should be consistent with the
vision and mission of the company.
“WHAT is to be done” is an enumeration of areas for study and activities to be

undertaken, in both chronological and simultaneous order, to complete a task. The work
must be divided into tasks for easy monitoring and measure.
• Vision-mission, goals
• Organizational aspects
• Decision makers
• Records
• Manpower Utilization • Financial records maintained

• Machinery Utilization MAJOR • Financial Statements
• Technology AREAS OF • Flow of documents
• Space Utilization STUDY • Investment flows
• Plant Layout • Financial analysis
• Production cost
• Sales performance
• Customer feedback
• Marketing mix
Fig. 1.3: Major Areas of Study
“HOW will it be done” is selecting and using the appropriate tool to examine/study a
situation to accomplish the tasks. For example, solving the problem of productivity can be
studied by observing the work force using work sampling to record their direct and
indirect work.
“WHERE will it be done” specifies the place/location of the study. It could be within the
organization, building or business function (marketing, production, finance, or general
management). It could also be outside of the firm.
“WHEN will it be done” can be best presented in graphical form using either a Gantt
chart or precedence chart. The presentation should show the series of activities and their
relationship. Establish milestones and celebrate when the tasks are completed
satisfactorily.
“WHO will do WHAT, WHEN, WHERE and HOW” identifies the person who will be
responsible in carrying the task to completion. Decision-makers are also identified at all
levels so that there is participation in problem-solving and improvement formulation.
The secret of successful engagement depends on the attitude of the implementers. If there
is participation in the process, there is ownership of the improvement which will yield
better outcomes.
Among the activities that must be observed and considered when preparing the timetable
is the conduct of meetings and/or feedback sessions. Since the business has to move on,
you must have meetings and feedback sessions, the schedules (and place) of which are
either pre-determined or mutually agreed upon between you and the top person. It is at
these meetings that you prepare reports and discuss causes and possible course(s) of
action.
4. After using confidential files/information, you must return the same to the owner and/or
top management only to avoid leakage.
PHASE THREE: DIAGNOSING
This is the first step in operationalizing the counseling contract. A good diagnosis will lead to
effective solutions. The counselor identifies the forces causing the problem by using tools
and techniques that s/he is adept at to get good data. These are analyzed in the context of the
vision, mission and goals of the business.
At this stage, the counselor is guided by the big question - Is there still a chance to do better? -
broken down into the following task questions:
¾ Where is the firm now? What seem to be the problem(s)?

¾ What are causing the problems?
¾ Where does the firm want to go?
¾ What is the nature of the gap between the current situation and the desired state?
¾ What are the forces that block the progress towards the desired situation?
¾ What is the client’s ability to solve the problem?
According to the International Labour Organization (ILO), there are five principal
characteristics of a problem:
1. Substance or identity is a statement of a situation like increasing manufacturing cost,

low morale, decreasing sales. The fact is these are the manifestations of a problem.
There is a root cause.
2. Organizational and physical location refers to the unit in the organization where the
problem exists, which areas are affected and how widespread the problem within the
organization.
3. Problem “ownership” refers to the people who are affected by the problem and are
willing to solve it. They may be the supervisors, administrative staff or managers or
even the rank and file.
4. Absolute and relative magnitude ranks the importance of the problem in terms of
working hours, money lost, and people who own the problem. If problems are traced
at the higher echelon of management then damages or adverse effects can pervade
throughout the firm.
5. Time perspective is the frequency of the occurrence of the problem and whether it is
increasing or decreasing. If occurrence is intermittent and at long intervals these
could be operational dislocations not necessarily problems. But if the effect is
decreasing productivity and sales performance, even if recurrence is infrequent, then
the problem must be dealt with it.
At the beginning of the diagnosis, hypothetical cause(s) may be assumed. As data and
information are gathered, these hypotheses will either be negated or confirmed. Set it aside
for the meantime but be on the look out for symptoms. At the beginning of this stage, avoid
giving solutions because usually there are other considerations which are interwoven that
may require further study and/or more facts. The importance of fact finding and selection of
diagnostic tools is imperative at this stage.
During diagnosis, assess your client’s problem-solving and decision-making abilities. Early in
the counseling work, the time that will be spent by the client in the work is a major factor. On
the other hand, you must be able to present not only problems but also identify strengths of
the firm. Counseling process includes changing client’s behaviors/apprehensions towards
problems. Explain the push and the blocking factors which are actually the support and
challenges a business has to face in its pursuit for improvement
PUSH PRESENT BLOCKING DESIRED

FACTORS SITUATION FACTORS SITUATION
GAP
Fig. 1.4: Push and Blocking Factors
You need to discuss with your client the present situation of the company based on your
preliminary findings. Direct your client to express the desirable situation by helping her/him
express it. To aid your client in understanding his present situation, a practical approach is to
start with financial matters assuming that you have access to official financial statements.
Lead the analysis of the financial situation by computing the ratios. The basic ratios are
clustered into working capital ratios, productivity and debt ratio, and profitability ratio.
Explain the implication of the figures to the operation then draw him to enumerate the push
and the blocking factors. Using the above diagram, draw the client to identify the push and the
blocking factors (force-field analysis). When identifying the negative or blocking factors,
guard against the client putting the blame on events, government, external factors which s/he
has no control of. An experienced counselor knows what questions to ask and how to ask the
questions without embarrassing the client. Ultimately your task is to affirm your client’s self-
confidence and SMART actions.
Fact-finding involves data gathering, interviewing, observing, analyzing of

records, interpreting data, etc. You must know how to use analytical tools
and techniques to examine relations, procedures, and relate causes and
effects. Your reservoir of diagnostic tools must be polished for ready
application. You should know what kind of facts to look for. Too many
facts may dilute the analyses. Do not be a problem-oriented counselor.
Fact-finding requires a step-by-step and logical action leading towards the
development of a better functioning organization. It requires that the output of an action is an
input to the next one. For example, findings that retail outlets are refusing a product is a
manifestation of a problem. Upon investigation, records showed high frequency of “returns of
products.” Findings reveal that returns are above the industry rate. This is symptomatic of a
production problem. Analyses of production operation then ensues. Study of the situation may
end in quality assurance procedures or organizational issues on skills of workers, machine
maintenance, utility requirement and so on.
The time required to study the client’s operation depends on the type of data needed and its
availability. You must determine what data/information is needed to address root problems.
Often the magnitude of data required becomes a function of experience. Having worked in
similar industry sector and knowledge of global information, you can readily identify critical
facts that should be retrieved in the fact-finding step. In a firm where the client stated that the
problem is increasing production cost, you can initially use the flow process analysis by
tracking the operation for a given work segment. Having observed that there seems to be a
smooth flow and that the time lapsed for each work segment cannot significantly contribute to
the increase in cost, you review the production tickets noting material usage. It may turn out
that the preliminary work on materials prior to transport to the shop floor was not properly
done or handling was inappropriate, thus, the high occurrence of defects during operation.
Fact-finding also requires observing indirect work before and after main activities. In
manufacturing operations there are many sections which can affect productivity and cost.
Remember that in an enterprise all these are interrelated. You must be able to analyze
workers/employees, place (working condition) of operation, and relationship of process and
workers. Ask yourself the question: How were finished products affected? Correlate your
findings with marketing, general management, other production subsystems, and financial
implications.
When gathering information and data, critical elements like depth and contents are important.
Learn to pick the vital few from the many.
The final step in fact-finding is data classification. There are various ways of classifying data.
It can be done by business functions, whether it is a marketing, production, general
management/human resource management, and financial. Classification can also be done
according to work place, top management, supervisors, the stores and material preparation,
shop floor, warehouse/stores/traffic, welfare facilities, and premises. Other classifications
include chronology of events, introduction of new/alternative raw materials, product
development, R&D work, etc. The idea in classifying information and facts is to build a
“story line” on it.
The organized data and information are next presented to the client. This is a learning process
for both the counselor and client. Confirm your suppositions and eliminate some hypotheses
which you established at the beginning of the counseling process. Classify results whether
these are push or blocking factors. At this point, allow/encourage your client to make
decisions for improvement by explaining to you how to eliminate/avoid the problems. When
the client is jumping to conclusions slow him down. Ask him to look at the financial
implications of the action to be taken. Advice him against drastic moves unless the
recommendations have been tested and results were positive. An effective counselor is able to
share his diagnostic tools with the client. When you see that the client can solve problems by
himself, celebrate.
Goal-setting and decision-making are the next steps after analyses. Goal-setting is describing
the desired situation the firm should be aiming for after the counseling engagement. This is a
clear picture of what the firm should be. Business situations do not lend themselves to simple
solutions. Several courses of action are needed to alleviate smaller problems attached to the
root cause.
Goal-setting requires experience and creative thinking to get good results. Experience is
accumulated through years of counseling work. Every counseling contract is a lesson in
progress. On the other hand, creative thinking is the discovery of new things through idea
generation and idea analysis.
According to a group of Canadian counselors, the goal should be:

• Results-oriented;
• Specific as to accountability;
• Specific to time;
• Measurable in terms of quality and quantity factors;

• Realistic and achievable;
• Challenging and stretching;
• Inclusive of constraints or conditions imposed by manpower, money, material, time &
other forces; and
• Within the control of the person who is accountable for its achievement.
An experienced counselor will always go for creative thinking as clients are drawn
to discuss possibilities of solving the problems. The ILO describes several
creative thinking techniques. These are:
1. Brainstorming. This involves getting a large number of ideas from a group of

people in a short time. Typically a group of 8-12 people take a problem and
produce ideas in a free-wheeling atmosphere. Judgment is suspended in all
ideas. The wild ideas are particularly encouraged. The wildest ideas can often be
stepping-stones to new and practical ones. Its main disadvantage is that it takes time to
evaluate all the ideas.
2. Synectics is similar to brainstorming but with less people (maximum of 9) involved. The
client explains the problem and the participants put
forward suggestions for solving it. The client analyzes the
Creative thinking guidelines:
solutions, gives the drawbacks and what he likes in the
• Suspend judgment: rule out
solution. New ideas are put forward until a solution is
premature criticism of ideas
found.
• Free-wheel: the wilder the
3. Attribute listing is normally used on tangible rather than ideas the better the results
intangible things. Main attributes of the idea or object are • Quantity: the more ideas the
listed and examined to see how it can be changed. Each better
attribute is questioned and changes are suggested. • Cross-fertilize: combine and
improve on the ideas of others
4. Forced relationships take objects or ideas and asks the
question “In how many ways can these be combined to
give a new objector idea?”
5. Morphological analysis sets down all variables in a matrix and tries to combine them in
new ways. Although the matrix does not give all possible alternatives, the various
combinations of the variables listed give an impression of the possibilities that may exist.
Some will be discarded, but some are worth considering, thus paving the way for new,
practical, useful and feasible solutions.
6. Checklists are used as pointers to ideas. List may be particular to an area (e.g., marketing,
design) or general.
Decision-making is formulating an action plan to solve a problem. Problem-solving research

shows that the quality and acceptance of a decision improves with the number of legitimate
alternatives considered. Thus, it is best that at least three alternative ways of achieving a goal
are presented.
At this stage, present to your client decision-making techniques, reiterate the desired situation
or goal, and then allow her/him to make choices. Usual techniques used are the means-end
chain, arrow diagram, and the decision tree. Building the means-end chain is to trace the
connection to the objective. The objective becomes the end. Alternatives are means to
produce the end. The arrow diagram links alternatives to the goal graphically. The depiction is
very visual, less reading on the part of the client. Decision trees are composed of sets of arrow
diagrams and are used where problems are intertwined. For clients with good computer skills,
encourage the use of software to facilitate decision-making.
Evaluation of alternatives can be pursued through matrices analysis using as factors for
comparison the following:
• Costs,
• Benefits,
• Process changes,
• Persons affected,
• Time needed to install change, and
• Degree of disturbance for the installation of the improvement.
PHASE FOUR: WORKING THE PLAN
This involves implementing the plan. A simple way of implementing the improvement or
solution to a problem is to break the activities into smaller tasks that answer the following
questions:
WHAT is to be done, HOW will it be done
WHERE will it be done WHEN will it be done
WHO will do WHAT, WHEN, WHERE and HOW
At this stage, you slowly withdraw from the action but see to it that prerequisites to
implementation are in place. Depending on the complexity of the problem you may still have
to participate to ensure that set goals are attained. Your participation in the implementation is
not encouraged but you may mentor your client and/or his employees
During the implementation of recommendations, the client must be consulted on any change,
addition or deletion of an area for study and the decision left to him. By so doing, the client
will feel more comfortable and not regard change(s) as a form of intrusion or escape from a
hard job or complex situation.
It is possible that deviations may arise during implementation because of external and internal
factors impinging on the firm’s operations. You must be able to anticipate such deviations.
When a deviation occurs, you should:
• Inform the client right away or warn him/her, but never blame him/her;
• Describe the situation: what was suppose to happen, what happened, where and when
the deviation was noticed, who was involved;
• Be ready to answer such questions as: what did not occur, why a task was not
undertaken, who should have carried out the task;
• Determine who has the information or where to get the information needed to get
back on track
• Get the information and fit it into the plan; and
• Correct the deviation.
When a deviation occurs, the client must be engaged to do more because he will have to learn
how to solve problems. Observe how the client reacts and corrects the deviation. If the client
is able to proceed without much help from you, then it means that the client’s development
level is a notch higher.
When milestones or targets are met, there is reason to celebrate. A pat on the
shoulder of key players implies recognition of leadership and/or successful
participation in solving the company’s problem.
As problems are solved, make the client feel like a winner. It will make him
feel good and will have more confidence in solving his problems. Where
there were difficulties, point out learnings and how controls were applied.
Evaluation. Evaluation involves taking stock of the progress made and the phasing out or
termination of contract. There are two kinds of evaluation. The first is formative evaluation
which is designed to improve implementation as work is in progress. For example, it is
critical to know the implication of taxes on production cost and price determination. Hence,
the evaluation process will indicate what factor will reduce material usage to avoid price
differentials.
Summative evaluation, on the other hand, occurs at the end of the engagement. Essentially, it
will lead the client to asking:
• Where are we now?
• How does this compare to the desired situation?
• Is there a gap?
• If so, is it worth working on?
Evaluation includes a review and an assessment of relationships. Be open and honest about
the way the counseling contract was implemented. Explain why you exhibited direct
behavior at times and on some occasions, facilitative behavior. Discuss what led to the
successes and what contributed to the slowing down of the process. Never put the blame on
any one. The client on the other hand must be encouraged to give feedback on the
relationship. What were the things he disliked, resented, and felt bad about?
Raise the client’s development level when interest and motivation is evident in the
conversation. When there is negative feedback, know how to accept and discover the real
score without being defensive. It is possible that you came in too strong or was not assertive
as the client expected. The more important thing to do is learn from the experience. What did
you do or not do? How did you behave in client’s presence?
Termination. The termination phase is the proclamation of winners: the client is satisfied
with the outcome and relationship while you are able to raise the development level of the
client to an independent rational thinker who knows how to solve problems.
This stage starts with the counselor suggesting the end of the engagement because the
agreement has been fulfilled and goals have been met. During the counseling process be on
the lookout for indications of withdrawal, meaning instances that will indicate that your client
can solve problem by himself and be successful. It should end in a win-win relationship, you
are happy the client feels good about the engagement contact. A satisfied client ends the
engagement only to engage you again for another matter. Or else, the client ends the contract
only to request you to make himself available in case another problem arises.
A meeting with the client must be scheduled long before the actual termination. Prepare for
the meeting and have the following on hand:
• Contract of engagement ,
• Schedules of meetings held, and
• Accomplishments and deviations resources utilized.
During the termination meeting, review with the client the activities and outcomes. Discuss
the evaluation results and reiterate key factors that led to the success (or failure) of the
engagement. Both must confirm the benefits that stemmed from the relationship: new
benefits, new systems, and new behaviors. Indicate critical areas and identify outstanding
assets including employees and officers and why. End the terminal meeting with
acknowledgment and statement of gratitude.
WRITING A REPORT
During the engagement period, major tasks are concluded with short
reports containing the areas for investigation and the corresponding
recommendations. This is different from the counseling report.
The counseling report is the summation of completed and uncompleted

activities during the engagement. Uncompleted tasks should be
explained, avoid excuses. It must be written briefly and factually.
The purpose of a counseling report is to document the engagement. No

professional counselor should miss preparing the completion report. It records the impact of
the work and benefits to the client. The final report should not repeat the information and
data which were already presented or used for implementation and/or decision-making. Facts
in the terminal report should be new, things that can impact on the client’s operation and can
be useful to the client in the future.
PARTS OF THE REPORT
The final report contains, first, the executive summary, and then the body of the report.
Executive summary consists of major outcomes of the counseling engagement based on the
objectives. It should include the visible effects, the intermediate outcomes, and the long-term
impact of the changes. Necessarily, the financial implications particularly the minimization of
cost and the increase of profits are good inputs.
The body of the report must be carefully planned both in substance and style. Write to express
not to impress. Writing style must be simple and in short sentences. The use of jargon should
be avoided. The reports structure must induce easy reading.
The main reports content should have a logical sequence usually based on how the counselor
approached the problem. The executive summary’s content are amplified in the main body of
the report. Where there are major milestones include charts that will show agreed scheduled
vis-à-vis actual activities or as implemented.
A client, specially an MSME entrepreneur, will not read a voluminous report. Tabulations,
matrices, and graphical presentations are encouraged. Writing style can also mean the use of
bullets and numbers.
PROFESSIONALISM AND CODE OF ETHICS
Professional conduct and the observance of the Code of Ethics build your image while
effective performance builds your reputation. You must be able to delineate commercial
interest from personal interest when dealing with clients.
The Asia Pacific Economic Cooperation – Training and Certification Program (APEC
TRACE) Principles of Professional Conduct provides the fundamental principles that should
guide the professional small business counselors. Professional conduct includes the following
components.
¾ Public interest
The interest of clients must be paramount except where there is conflict with the law
and the duties and responsibilities owed to the community/public.
¾ Integrity
Acting at all times with honesty and integrity in dealing with clients.
¾ Objectivity
Fairness and impartiality should govern the counselors’ activities. They should not
be influenced by prejudice, bias or conflict of interest in the performance of their
duty.
¾ Independence
Counselors must be independent and free of any interest that is incompatible with
their duty. Counselors performing professional services in commercial, industry or
public service must recognize the potential problems created by personal relationships
or financial involvements. Depending on the nature or degree of such relationships or
involvements, the objectivity of the small business counselor may be threatened.
¾ Confidentiality
Counselors must respect the confidential nature of information obtained from their
clients in the provision of professional services. This information should not be
disclosed to a third party without specific authority or criteria required by law.
¾ Technical and professional standards

Counselors are expected to meet the technical and professional standards of a
professional small business counselor.
¾ Competence and due care

Counselors must perform professional services with due care, competence, and
diligence. The small business counselor has a continuing duty to maintain
professional knowledge and skills.
¾ Ethical behavior
Counselors must conduct themselves at all times in an ethical manner to maintain the
good reputation of the small business counseling profession.
Ethics refers to how the morals of an individual impact on the way you act and make
decisions. According to Anne Langden and Patricia Marshall in their book,
Organizational Behavior, ethics is “a branch of philosophy providing some rules or
principles to help us decide right and wrong conduct.” This definition describes the
basis on which individuals and businesses must decide to conduct their business
affairs. Most professionals operate based on their moral principles. Therefore, there
is a need for you as counselor to have a sound ethical practice based on good moral
practice.
The APEC Certified Business Counselors are bound by a Code of Conduct as follows:
Credibility
The small business counselor must be acknowledged as a credible professional. The small
business client must be able to rely on the credibility of the small business counselor.
Professionalism
The small business counselor must be qualified to provide the counseling services required by
the small business client and to be in position to recommend the appropriate professional
advice. The counselor must be recognized by the client, other counselors and the business
community as a professional in the small business counseling sector.
Quality of Services
The Code of Ethics and Professional Conduct charter governing small business counselors
gives an assurance to the small business sector that the services provided by the small
business counselor will be of the highest professional standards.
Confidence
Users of the services of professional small business counselors must feel confident that the
counselors relate with them within the framework of professional ethics which govern the
provision of these services.
The Professional Conduct of the Asia Pacific Economic Cooperation (APEC) Certified
Business Counselors is a good ethical guide in counselor-client encounters.
Professional Conduct
of
APEC Certified Business Counselors
Certified counselors must strive to provide professional services to their clients and are
expected to deliver the highest professional standards in their counseling.
All certified counselors shall:
• not act recklessly or maliciously, injure or attempt to injure, whether directly or

indirectly, the professional reputation of another person.
• take all reasonable steps to ensure that the person overruling or neglecting the advice is
aware of any danger which the certified counselor believes may result from such
overruling or neglect, where advice based on his skill and judgment is not accepted.
• recognize his limitations, maintain a network of professional resources and refer clients
where and when appropriate.
Code of Ethics of
APEC Certified Business Counselors
Small business counselors are dedicated to providing competent and ethical service in the field of
small business counseling. They strive to provide professional counseling to their clients and are
dedicated to the delivery of the highest professional standard in their activities as counselors.
They have the responsibility to:
• Hold the affairs of the clients in the strictest confidence;

• Strive continuously to improve their professional skills;
• Advance the professional standards of APEC International Network of Institutes of Small
Business Counselors (IBIZ);
• Abide by the principles laid out in the Code of Ethics with all by-laws, regulations,
resolutions and rules as promulgated by the International Advisory Group of Experts
(INAGE), Professional Standards Committee, and the Coordinating Council; and
• Maintain the highest standards of professional conduct.
Certified counselors shall uphold the Code of Ethics and the profession’s common body of
knowledge. Violations of the Code and Professional Conduct shall be reported to the
Professional Standards Committee of the Coordinating Council.
Objectivity
A certified counselor will act in the best interests of the client, providing professional services
with integrity.
Confidentiality
A certified counselor is duty bound to keep in confidence the affairs of any colleague, client or
organization and shall not disclose confidential information obtained in the course of professional
activities. Nor shall a certified counselor in any way exploit information obtained in the course of
their duties to their personal advantage.
Integrity in Conflicts of Interest

A certified counselor shall inform a client of any interest, relationships or circumstances, which
may impair or be seen to impair his/her professional judgment of objectivity. In cases where
impartiality is seen not to exist, the certified counselor will refer the client to another small
business counselor.
A certified counselor will not provide any appropriate information learned from previous clients
without first obtaining their consent nor knowingly, without permission, use the copyright
material and proprietary data, procedures, materials, or techniques that others have developed but
not released for public use.
Chapter
THE PHILIPPINE SME SECTOR TODAY
PHILIPPINE SMES: AN OVERVIEW
The small and medium enterprises (SMEs) comprise an exceedingly large portion of business
establishments in the Philippines. In 2002, the SME sector employed 70.4% of the total local
workforce.
THE PHILIPPINE SME SECTOR DEFINED
Two basic criteria are used in defining and classifying enterprises: number of employees and
asset size. The former is usually used in economic literature while the latter is far more
common among financial institutions. In January 2003, the Small and Medium Enterprise
Development (SMED) Council defined the SME sector as follows:
Table 2.1: SME Categories by Asset Size and Number of Employees 1
Category Total Assets 2 No. of Employees

Micro enterprises P 3,000,000 or less 1-9
Small enterprises P 3,000,001 – P 15,000,000 10 - 99
Medium enterprises P 15,000,001 – P 100,000,000 100 - 199
Enterprises with assets of more than one hundred million pesos or employees numbering
more than 199 are classified as large enterprises, which comprise around 0.3% of business
establishments in the Philippines.
1
The Bangko Sentral ng Pilipinas (BSP), through Monetary Board Resolution 328 dated March 2003,
approved the use of the SMED Council definition to apply to SME programs of financial institutions.
2
Excluding the value of land.
DISTRIBUTION OF SMEs PER INDUSTRY AND CATEGORY
SMEs operate in various industries nationwide. Table 2.2 reveals that majority (53.82%) of
SMEs are engaged in commerce, with the manufacturing industry (15.11%) coming in
second. SMEs are involved least in mining (0.04%), utilities (0.14%), and construction
(0.32%). According to size, 92.14% of the SMEs are categorized as micro-enterprises, 7.51%
are small enterprises, and 0.36% are medium enterprises.
Table 2.2: Number of Establishments, by Industry and by Size (2002)
MICRO SMALL MEDIUM LARGE TOTAL

INDUSTRY
% % % %
Agri, Hunting &
Forestry 1,467 47.0 1,431 45.9 101 3.2 121 3.9 3,120
Fishing 517 45.2 570 49.8 30 2.6 28 2.4 1,145
Mining &
Quarrying 198 60.6 105 32.1 12 3.7 12 3.7 327
Manufacturing 108,847 88.5 12,128 9.9 1,020 0.8 982 0.8 122,977
Electricity, Gas
& Water Supply 483 39.7 530 43.6 107 8.8 96 7.9 1,216
Construction 1,484 56.0 958 36.2 101 3.8 106 4.0 2,649
Wholesales &
Retail Trade,
Repair Motor
Vehicles,
Motorcycles &
Personal &
Household
Goods 415,670 95.7 18,164 4.2 394 0.1 247 0.1 434,475
Hotels &
Restaurants 81,561 92.0 6,846 7.7 142 0.2 59 0.1 88,608
Transport
Storage and
Communications 10,748 75.4 3,184 22.3 181 1.3 150 1.1 14,263
Financial
Intermediation 18,438 76.6 5,456 22.7 74 0.3 92 0.4 24,060
Real Estate,
Renting and
Business
Activities 34,412 88.5 3,857 9.9 273 0.7 320 0.8 38,862
Education 4,922 53.0 3,862 41.6 273 2.9 225 2.4 9,282
Health and
Social Work 26,689 94.7 1,282 4.5 109 0.4 103 0.4 28,183
Other
Community,
Social &
Personal Service
Activities 37,990 94.3 2,193 5.4 57 0.1 53 0.1 40,293
All Industries 743,426 91.8 60,566 7.5 2,874 0.4 2,594 0.3 809,460
Source: National Statistics Office
CHAPTER 2: THE PHILIPPINE SME SECTOR TODAY 27
Of the 122,977 establishments engaged in manufacturing, 99.20% are SMEs. The

manufacturing sector is dominated by microenterprises at 88.5% and small enterprises at
9.9%. Most (42.3%) of the SME manufacturers are engaged in the manufacture of food
products and beverages, followed by wearing apparel (15.5%), fabricated metal products
except machinery and equipment (11.9%), furniture (6.2%), and non-metallic mineral
products (4.7%).
Table 2.3: Number of Establishments, by Manufacturing Sub-industries (2002)

INDUSTRY
% % % %
Food Products &
Beverages 48,347 92.9 3,333 6.4 179 0.3 187 0.4 52,046
Tobacco Products 4 16.7 10 41.7 0 0.0 10 41.7 24
Textiles 1,109 68.8 383 23.8 63 3.9 57 3.5 1,612
Wearing Apparel 17,328 91.0 1,448 7.6 119 0.6 142 0.7 19,037
Tanning &
Leather Goods,
Luggage,
Handbags &
Footwear 2,141 82.9 390 15.1 33 1.3 18 0.7 2,582
Wood, Wood
Products & Cork,
except Furniture;
Articles of
Bamboo Cane,
Rattan Plaiting
Material 3,218 86.5 455 12.2 27 0.7 22 0.6 3,722
Integrated Paper
and Paper
Products 291 48.7 245 41.0 33 5.5 29 4.8 598
Publishing,
Printing &
Reproduction of
Media 3,318 77.5 916 21.4 31 0.7 18 0.4 4,283
Refined
Petroleum &
Other Fuel
Products 10 35.7 14 50.0 0 0.0 4 14.3 28
Chemicals &
Chemical
Products 400 37.5 540 50.6 76 7.1 51 4.8 1,067
Rubber & Plastic
Products 826 52.3 623 39.5 74 4.7 55 4.8 1,578
Other Non-
Metallic Mineral
Products 5,168 88.3 594 10.1 42 0.7 51 0.9 5,855
Basic Metals 792 62.6 394 31.1 49 3.9 31 2.4 1,266
Fabricated Metal
Products Except
Machinery &
Equipment 13,734 94.0 798 5.5 49 0.3 28 0.2 14,609
Table 2.3: (continuation)

INDUSTRY
% % %
Machinery &
Equipment Not
Elsewhere
Classified 2,704 79.2 661 19.4 33 1.0 18 0.5 3,416
Office,
Accounting &
Computing
Machinery 12 23.1 14 26.9 5 9.6 21 40.4 52
Electrical
Machinery &
Apparatus, Not
Elsewhere
Classified 54 22.8 119 50.2 35 14.8 29 12.2 237
Radio,
Television &
Communication
Equipment and
Apparatus 30 11.7 83 32.4 28 10.9 115 44.9 256
Medical
Precision &
Optical
Instruments,
Watches &
Clocks 39 34.2 35 30.7 18 15.8 22 19.3 114
Motor Vehicles,
Trailers and
Semi-Trailers 640 74.9 174 20.4 22 2.6 18 2.1 854
Other Transport
Equipment 321 72.5 99 22.3 11 2.5 12 2.7 443
Manufacture &
Repair of
Furniture 6,940 91.5 566 7.5 53 0.7 28 0.4 7,587
Recycling 32 59.3 22 40.7 0 0.0 0 0.0 54
Manufacture
Not Elsewhere
Classified 1,389 83.8 216 13.0 36 2.2 16 1.0 1,657
TOTAL 108,847 88.5 12,132 9.9 1,016 0.8 982 0.8 122,977
GEOGRAPHICAL CONCENTRATION OF SMEs
Outside the National Capital Region (NCR), large concentrations of SMEs are located in five
regions: Southern Tagalog (Region 4), Central Luzon (Region 3), Central Visayas (Region
7), Ilocos Region (Region 1), and Western Visayas (Region 6). The geographical
concentration of SMEs can be seen from Table 2.4.
Table 2.4: Number of Establishments, by Region and by Size of Firm (2002)

REGION
% % % %
National Capital Region 166,757 85.5 25,708 13.2 1,350 0.7 1,214 0.6 195,029
I (Ilocos Region) 45,945 95.5 2,064 4.3 58 0.1 36 0.1 48,103
II (Cagayan Valley) 23,977 96.2 900 3.6 23 0.1 20 0.1 24,920
III (Central Luzon) 83,356 93.8 5,110 5.7 193 0.2 163 0.2 88,822
IV (Southern Tagalog) 134,116 93.9 7,868 5.5 423 0.3 456 0.3 142,863
V (Bicol Region) 29,307 94.9 1,482 4.8 54 0.2 36 0.1 30,879
VI (Western Visayas) 42,456 92.8 3,036 6.6 151 0.3 102 0.2 45,745
VII (Central Visayas) 44,492 90.5 4,204 8.5 223 0.5 229 0.5 49,148
VIII (Eastern Visayas) 19,951 94.5 1,085 5.1 40 0.2 26 0.1 21,102
IX (Western
Mindanao)/
Zamboanga
Peninsula 26,067 95.0 1,286 4.7 47 0.2 30 0.1 27,430
X (Northern
Mindanao) 30,791 93.2 2,108 6.4 86 0.3 60 0.2 33,045
XI (Southern
Mindanao)/
SOCCSKSARGEN 26,935 95.1 1,287 4.5 46 0.2 45 0.2 28,313
XII (Central
Mindanao)/
Davao Region 32,813 91.7 2,742 7.7 121 0.3 121 0.3 35,797
CAR 13,470 94.8 687 4.8 26 0.2 18 0.1 14,201
ARMM 7,892 96.7 244 3.0 12 0.2 14 0.2 8,162
CARAGA 15,101 95.0 755 4.7 21 0.1 24 .02 15,901
TOTAL IN
PHILIPPINES 743,426 91.8 60,566 7.5 2,874 0.4 2,594 0.3 809,460
EMPLOYMENT IN SMEs
The SME sector absorbed 70.4% of the workers in the formal sector. Microenterprises
employed the largest number of workers at 39.2%, followed by small enterprises (23.9%), and
medium enterprises (7.2%).
Table 2.5: Total Employment, by Region and by Size of firm (2002)

REGION
% % % %
National Capital
Region 544,621 25.8 586,790 27.8 185,144 8.8 795,983 37.7 2,112,538
I (Ilocos Region) 119,517 66.2 39,567 21.9 7,856 4.4 13,481 7.5 180,421
II (Cagayan Valley) 66,954 71.0 17,539 18.6 3,192 3.4 6,654 7.1 94,339
III (Central Luzon) 236,099 51.2 103,215 22.4 26,400 5.7 95,120 20.6 460,834
IV (Southern
Tagalog) 365,135 39.9 167,465 18.3 59,795 6.5 322,179 35.2 914,574
V (Bicol Region) 82,703 63.1 29,929 22.8 7,118 5.4 11,381 8.7 131,131
VI (Western
Visayas) 123,309 48.0 65,435 25.5 21,064 8.2 46,939 18.3 256,747
VII (Central Visayas) 128,684 32.4 94,119 23.7 31,081 7.8 142,972 36.0 396,856
VIII (Eastern
Visayas) 58,467 61.3 21,352 22.4 5,434 5.7 10,063 10.6 95,316
IX (Western
Mindanao)/
Zamboanga
Peninsula 68,092 60.0 26,756 23.6 6,616 5.8 11,932 10.5 113,396
X (Northern
Mindanao) 86,795 49.0 42,663 24.1 12,129 6.8 35,538 20.1 177,125
XI (Southern
Mindanao)/
SOCCSKSARGEN 76,392 55.1 27,457 19.8 6,460 4.7 28,302 20.4 138,611
XII (Central
Mindanao)/
Davao Region 94,829 39.6 58,687 24.5 16,712 7.0 69,416 29.0 239,644
CAR 35,225 53.9 13,727 21.0 3,595 5.5 12,836 19.6 65,383
ARMM 23,143 59.2 4,999 12.8 1,457 3.7 9,473 24.2 39,072
CARAGA 41,297 60.0 14,809 21.5 3,060 4.4 9,637 14.0 68,803
TOTAL IN
PHILIPPINES 2,151,262 39.2 1,314,509 24.0 397,113 7.2 1,621,906 29.6 5,484,790
KEY ISSUES FACING SMEs
Since the 1970s, Philippine SMEs have lagged behind its East Asian neighbors in terms of
generating employment and value added as shown in Table 2.6 below.
Table 2.6: SME Contributions of Selected Asian Economies (%)
South
Philippines Japan China Malaysia Thailand Indonesia
Korea
No. of
Establishments 99.7 99 99 99 94 98 99.99
Employment 69.1 78.7 88.6 75 40 55.8 99.4
Value Added 32 47 56.7 68 26 N.A 63.11
Source: SME Development Plan 2004-2010, page 13.
The lackluster performance of Philippine SMEs has been attributed to factors such as
competition, productivity, and financing, among others.
LOW COMPETITIVENESS
Philippine SMEs have been observed to fare below average in terms of competitiveness.
Local SMEs have failed to meet head-on the vicious competition in export markets as well as
the influx of cheaper priced products that find their way into the local market.
Other factors that contribute to the inferior competitiveness of Philippine SMEs include the:
• Relatively small domestic market;
• Need for imported parts and materials;
• Barriers to business such as lack of funding and research and development
support;
and
• Limited economic activities at the local level.
PRODUCTIVITY AND STRUCTURAL LIMITATIONS
Most of the challenges facing SMEs relate to productivity and structural limitations of
services and the business environment. These include:
• Outdated or less productive operational assets and systems;
• Limited production capacity;
• Low investment in product development;
• Inadequate use of technology;
• Limited management and professional skills as well as unappreciated and
inadequate professional service;
• Lack of incentives and inability to meet international product standards; and
• Insufficient access to information.
LIMITED ACCESS TO FUND SOURCES
It is important to stress that one of the most severe constraints facing local SMEs is the
limited access to financing, and not necessarily the supply of funds available for SME
lending.
When it comes to financing, many start-up enterprises have limited access to fund sources.
Most entrepreneurs rely on their savings or borrow from relatives and friends for initial
capital. They are unable to access loans from formal credit sources because of three main
constraints: 1) they do not know where and how to access such services; 2) they fear they
may not be able to meet loan obligations; and 3) they do not have the collateral. The situation
is aggravated by the lack of access to suppliers willing to provide materials on credit. The
extended repayment terms extended by supermarkets, malls, and other establishments add to
the funding pressure.
If and when start-up costs have been met, many entrepreneurs face another set of problems –
low-grade fixed assets, low level of technology, production inefficiencies, lack of sufficient
working capital, and limited production capacity – all because of their inability to access
external funding.
Other challenges and problems SMEs face in the area of financing include: lack of
information on the different loans/financing programs available; high interest rates; stringent
collateral, equity and documentary requirements; low collateral valuation; and the tedious
loan application process.
ISSUES ON ACCESS TO MARKETS
Inadequate knowledge of market opportunities and how to penetrate bigger markets have
constrained entrepreneurs to limit their activities to selling locally, more specifically direct to
final consumers. Only a few entrepreneurs are able to set foot in national or foreign markets.
Selling to supermarkets, groceries, and department stores is not easy for many entrepreneurs
because of the volume requirements and the unfavorable terms (e.g., 90 – 120 days credit)
imposed by these volume buyers.
Not many entrepreneurs realize the benefits of subcontracting. Instead of entering into a
subcontracting arrangement with a qualified firm, some entrepreneurs would rather produce
the same product on their own. Consequently, competition is heightened, resources wasted,
and production inefficiencies encouraged.
Many entrepreneurs face other challenges and problems SMEs in the area of marketing.
These include among others:
• Lack of appropriate channel to obtain market information, other than through
participation in trade fairs;
• Lack of up-to-date market information;
• Lack of good business networks;
• Inadequate market linkage; and
• The need to understand and meet internationally recognized technical regulations.
OTHER CONCERNS
The Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, in its review of
policies on SMEs 3 , identified issues facing SMEs according to the SME type, whether one is
a low-growth domestic SME, an entrepreneurial fast-growth SME, an internationalized
subcontracting or supply industry SME, or a trading SME.
¾ Low-growth domestic SMEs. These enterprises are characterized by their static

contribution to the economy, the lack of international orientation, a relatively short life
expectancy, and presence in a generally “at risk” or “insulated” category. Their main
challenge lies in adapting to increased competition as a result of regionalism, through
better access to information and markets; avoidance of systemic biases of financial
markets; better business environment unhampered by unnecessary regulations; and
capability-building and human resource development for increased competitiveness.
¾ Entrepreneurial fast growth SMEs. The main challenge for these SMEs is how to
overcome blocks to international entrepreneurship, such as outdated regulations,
inaccessible markets, incompetent or unsuitable managers, and lack of financing.
Entrepreneurs are especially interested in securing start-up assistance, having viable exit
and bankruptcy arrangements, as well as accessing reliable telecommunications facilities
at reasonable rates.
¾ Internationalized subcontracting or supply industry SMEs. These SMEs have links with
larger foreign firms or an exporting domestic firm, tend to be larger on average, employ
more workers, and use more up-to-date technology than other SMEs. They are very
important as they contribute to technology and skill transfer and industrial development.
The challenge to them is to remain up-to-date and competitive, through Electronic Data
Interchange (EDI) standardization, quality improvement and accreditation, more efficient
and effective technology transfer, access to foreign contractor firms, skilled local staff,
and databases for matching with contractors.
¾ Trading SMEs. Such SMEs engage in international trade, exporting their products
directly or through trading companies or other intermediaries, making significant
contributions to the Gross Domestic Product (GDP). The main issue they face relate to
identifying and taking advantage of opportunities with least costs and quick results. As
with the other SMEs, access to markets is a major concern, and such is affected by
cultural differences, variations in business practices, and international trade policies.
These SMEs seek simplified and standardized customs procedures, better management
skills, quick dispute settlement, finance and credit guarantees, experienced and helpful
trade facilitators, and assistance for exports.
3
Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH, Review of Existing Policies
Affecting Micro, Small, and Medium Enterprises (MSMEs) in the Philippines, December 2004.
LAWS, POLICIES, AND REGULATIONS IN SUPPORT OF SMEs
No less than the 1987 Constitution declares support for the establishment and development of
business, including SMEs: “The State recognizes the indispensable role of the private sector,
encourages private enterprise, and provides incentives to needed investment”. 4 Subsequent
laws were enacted giving effect to this state policy.
THE BMBE ACT OF 2002: FOR THE PROMOTION OF MICROENTERPRISES
Republic Act 9178, the BMBE Act of 2002 (An Act to Promote the Establishment of
Barangay Micro Business Enterprises (BMBEs), Providing Incentives and Benefits therefore,
and for other Purposes) was enacted in accordance with the State’s policy “to hasten the
country’s economic development by encouraging the formation and growth of barangay
micro business enterprises” and the integration of “those in the informal sector with the
mainstream economy.”
This piece of legislation provides many benefits/incentives for BMBEs, to wit: income tax
exemptions from enterprise operations; reductions/exemptions from local taxes and charges;
one-stop business registration centers for faster registration and processing of licenses;
exemption from Minimum Wage Law coverage; opening of special credit windows, including
guarantee windows, for BMBEs in government banks and financial institutions; technology
transfer, production and management training, and marketing assistance to be done by
government agencies; as well as trade and investment promotion in cooperation with
development organizations and those from private sector.
In September 2004, the SMED Council requested the Department of Finance (DOF) to ease
these requirements for registrants with asset size of P500,000 and below to encourage more
microenterprises to register as BMBEs. Under the old DOF guidelines, BMBE registrants are
required to submit nine documents. These are: 1) registration of business entity; 2) Taxpayer
Identification Number (TIN); 3) BIR Certificate; 4) municipal business permit; 5) sworn
affidavit that the enterprise is barangay-based and micro-business in nature; 6) sworn
statement of assets and liabilities; 7) pictures of the place of business; 8) copy of duly
notarized loan contracts; and 9) Income Tax Return (ITR).
On December 16, 2005, the DOF issued Department Order No. 31-05, “Simplifying the
Documentation Requirement for the Registration of BMBEs with Assets of P300,000 or Less,
Amending for the Purpose Section 3, Rule 2 of Department Order No. 17-04 Governing the
Guidelines to Implement the Registration of BMBEs and the Availment of Tax Incentives
Under R.A. 9178.” Details of Section 3 under the new DOF guidelines are shown in Table
2.7.
4
Section 20, Article II.
Table 2.7. Documents required under DOF DO No. 31-05
Documents Required
Asset Size
For a new applicant For renewal of registration
P300,000 1) Registration as a business entity from Same as Nos. 1and 2

and below appropriate government agency (e.g., requirements for new applicant,
Securities and Exchange Commission (SEC) and:
for corporation, partnership or association; 3) Annual Information Return
Cooperatives Development Authority (CDA) (for the year immediately
for cooperatives; and Department of Trade and preceding the renewal of
Industry (DTI) for sole proprietorship); and registration) duly filed with
2) Municipal business permit. BIR, together with its
attachments.
More than Same as Nos. 1 and 2 requirements for enterprises Same as Nos. 1 to 9
P300,000 with asset size of P300,000 and below, plus: requirements for new applicant,
up to P3 M 3) Taxpayer Identification Number (TIN); and:
4) Certificate of Registration from the Bureau of 10) Annual Information Return
Internal Revenue (BIR); (for the year immediately
5) Sworn affidavit executed by the sole proprietor preceding the renewal of
or the President of the enterprise, as the case registration) duly filed with
may be, that the enterprise is barangay-based BIR, together with its
and micro-business in nature and scope; attachments.
6) Sworn Statement of Assets and Liabilities
showing the values of assets owned and to be
used in the conduct of business, which shall be
supported by pertinent information such as the
date of acquisition, acquisition cost, and
depreciation cost. In case of asset acquired
during the year of registration, it shall be
supported by either invoice, official receipt or
contract document or deed;
7) Pictures of the place of business and its assets,
other than cash, receivables, and intangibles;
8) Copy of Loan Contracts, if any, and Duly-
Notarized Certification of Amortization
Payments on the Loan; and
9) Income Tax Return (ITR) with proof that it has
been duly filed with the BIR, including
attachments, if any (for existing business only)
THE MAGNA CARTA FOR SMALL ENTERPRISES
Republic Act 6977, 5 the Magna Carta for Small Enterprises (An Act to Promote, Develop
and Assist Small and Medium Scale Enterprises Through the Creation of a Small and
Medium Enterprise Development (SMED) Council, and the Rationalization of Government
Assistance Programs and Agencies Concerned with the Development of Small and Medium
Enterprises, and for Other Purposes), is a unified framework for government’s promotion and
development of SMEs. The law was enacted in response to the general view that there was an
5
As amended by RA 8289: An Act to Strengthen the Promotion/Development of, and Assistance to
Small and Medium Scale Enterprises, Amending for that Purpose Republic Act 6977, Otherwise
Known as the “Magna Carta for Small Enterprises” and for Other Purposes (May 1997).
unfavorable climate for SMEs in the Philippines due to the absence of a special law tailored to
their needs and the generally uncoordinated programs for their development.
The Magna Carta addresses two important concerns of SMEs: the lack of a body and/or
office to integrate and look out for the implementation of incentives for SMEs; and the
inadequacy of credit available to SMEs.
The first issue was addressed through the creation of the SMED Council, tasked to promote
SMEs by “facilitating and closely coordinating national efforts to promote the viability and
growth of SMEs, including assisting relevant agencies in the tapping of local and foreign
funds… as well as promoting the use of existing guarantee programs.” The SMED Council
was attached to the DTI, with the Bureau of Small and Medium Enterprise Development
(BSMED) designated as the Secretariat.
To address the second issue of inadequate financing, the Small Business Guarantee and
Finance Corporation (SBGFC) was created to “provide, promote, develop and widen in both
scope and service reach various alternative modes of financing for small enterprises…” The
law allows SBGFC to guarantee loans of qualified small enterprises, up to one hundred
percent (100%). It also requires all lending institutions to allocate a portion of their total loan
portfolio for small enterprises. The amendatory law, RA 8289, allocated to small enterprises
ten percent (10%) of the total procurement value of government goods and services. SBGFC
is now known as Small Business Corporation (SB Corporation).
GENERAL BANKING LAW
Republic Act 8791, the General Banking Law (An Act Providing for the Regulation of the
Organization and Operations of Banks, Quasi-Banks, Trust Entities and for Other Purposes)
has specific provisions recognizing the peculiar characteristics and addressing specific needs
of microenterprises. For instance, while the law sets down documentary evidence and
information required for proper evaluation of credit applications, it also mandates the
Monetary Board to “recognize the particular characteristics of micro-financing, such as cash-
flow-based lending to the basic sectors that are not covered by traditional collateral.” The law
also mandates the regulation of interest imposed by investors and lenders to micro-finance
borrowers and the adaptation of amortization schedules of bank loans to the projected cash
flows of enterprises—a procedure beneficial to micro enterprises.
RURAL BANK ACT OF 1992
Republic Act 7353, Rural Bank Act of 1992 (An Act Providing for the Creation,
Organization, and Operation of Rural Banks, and for Other Purposes), was enacted “to
promote comprehensive rural development” through the setting up of a rural banking system
which will make credit available and easily accessible under reasonable terms for those in the
rural areas. These rural banks, ideally suited to provide loans to micro enterprises, are tasked
to give preference to farmers and businesspeople with small cash requirements.
SULONG PROGRAM
The SB Corporation initiated the SME Unified Lending Opportunities for National Growth
(SULONG) Program to increase credit access of SMEs by:
• Simplifying and standardizing the lending procedures of government financing
institutions (GFIs);
• Decreasing the documentary requirements needed; and
• Creating a wider, borderless financing system, and lowering the effective cost of
borrowing of SMEs.
Participating GFIs include the Development Bank of the Philippines, the Land Bank of the
Philippines, the SB Corporation, the Social Security System, the National Livelihood Support
Fund, the Philippines Export-Import Credit Agency, the Quedan and Rural Credit Guarantee
Corporation, and the People’s Credit and Finance Corporation.
LABOR TRAINING: THE DUAL TRAINING SYSTEM AND TESDA ACTS OF 1994
Republic Act No. 766, the Dual Training System Act of 1994, provides for technical and
vocational training of special skills usually needed by workers in SMEs. To centralize these
vocational and technical training programs, and policymaking in these areas, Republic Act
No. 7796, the TESDA Act of 1994, was enacted. These two laws in effect support the skill
and manpower requirements of SMEs for increased productivity and better services.
OTHERS
Other laws, policies, and regulations in support of SMEs include:

• Exemption from corporate income taxes (4-8 years), national and local taxes,
duties and taxes on machineries, spare parts, materials and supplies, tax credit for
imports and import substitution of capital equipment and for breeding stock and
genetic materials (RA 7916 and RA 7227, Special Economic Zones Act, and
Clark and Subic Special Economic and Freeport Zone);
• Exemption from value-added tax for certain exporting industries, excise taxes on
locally produced products, and lowered taxes on spirits made from indigenous
materials (RA 8424, Tax Reform Act);
• Incentives under the preferred areas of investment in the Investment Priorities
Plan (Executive Order 226, Omnibus Investment Code); and
• Incentives for specified locations such as the Registered Economic Zones (RA
7916), Less Developed Areas (RA 7844), and those granted by local government
units (LGUs) under the Local Government Code.
Chapter
INITIATING CHANGES
As a business counselor, clients will seek you out for advice when confronted with business
problems. In general, an entrepreneur faces a problem when there is a gap between the
present situation and a desired goal. The process of eliminating the gap or obstacles that block
the attainment of the desired goal is called problem-solving. In contrast, decision-making
involves selecting from one of two or more possible solutions the path to take to reach a
desired goal. The steps in both problem-solving and decision-making are quite similar. In fact,
the terms are sometimes used interchangeably.
All people have problem-solving and decision-making skills, but at varying degrees. As a
small business counselor you need to develop your problem-solving and decision-making
skills to enable you to spot problems correctly and arrive at the right decision. Once a
decision is made, changes inevitably have to be introduced to close in on the gap (problem).
In many instances, changes that drastically alter the status quo attract serious resistance.
Hence, care must be taken when initiating changes.
PROBLEM-SOLVING AND DECISION-MAKING
Some problems are easy to resolve: what to wear for a dinner date, where to spend a long-
weekend vacation, etc. There are a host of everyday problems that require little thinking.
Other problems, especially those related to business, are however more difficult and
challenging. They require a lot of serious thought, research, and consultation.
Small business owners usually run under pressure to make decisions quickly and leave
inadequate time to the decision-making process. Hastily-made decisions are often poor
decisions and at times, worse than no decision at all.
A simple guide designed to help you make sound business decisions is presented. The steps
laid down overlap and you may have to return to the previous step or work with all of them
simultaneously as you try to find the best solution.
DEFINE THE PROBLEM
Defining the problem may sound elementary but this first step is often
overlooked. Problems may concern personnel, equipment, products or
services, suppliers, customers, etc. Whatever the nature of the problem, it
must be defined accurately.
It is also important that you detect the problem singly and not in
combination or in part of other related problems. The question to ask is:
What prevents your client from reaching the desired goal?
The main reason why defining the problem at the outset is important is to avoid confusing its
possible causes with its symptoms. A symptom is the effect of a problem and not the cause of
it. But often the former is mistaken for the latter and this only creates new problems, leaving
the real problem unresolved.
At first, you may need to state the problem in broad terms, as the exact problem may not be
obvious. To do this you may have to consider the following questions:
• What is the problem?

• Is it the problem of my client?
• Can I solve it? Is it worth solving?
• Is this the real problem, or merely a symptom of a larger one?
• If this is an old problem, what’s wrong with the previous solution?
• Does it need an immediate solution, or can it wait?
• Is it likely to go away by itself?
• Can I risk ignoring it?
• Does the problem have ethical dimensions?
• What conditions must the solution satisfy?
• Will the solution affect something that must remain unchanged?
A number of techniques like the Pareto chart, run chart, process flow chart, and routing
diagram can help you identify problems. These and many more analytical tools and
techniques are discussed in detail in the subsequent chapters.
GATHER INFORMATION
You will need to gather information before you can arrive at an educated decision. Vital
sources of information include:
¾ Stakeholders
These are the people, groups or organizations that are affected by the problem or
those that will inevitably be affected once your proposed solution is implemented.
Their ideas about the problem matter, and you must elicit their opinions through
personal interviews or casual conversations.
The number of people you may have to sit down with depends on the type of business
your client is operating. It could be as few as the number of owners and workers in
case of a sole proprietorship or partnership. Or it could be as many as the number of
board members, stockholders and employees in case of a cooperative or corporation.
You do not have to interview all of them, just be sure you gather information from all
sides to avoid biases and prejudices.
CHAPTER 3: INITIATING CHANGES 41
¾ Facts and data
After your first meeting with the client, you may already have an idea on how to
solve his problem. You may have encountered a similar problem in the past or you
have read about it before. In any case, verify what you know about the problem
through research and results from experimentation and studies; interview experts and
trusted sources about the problem; or review related events, whether past or present,
either personally observed or reported.
¾ Opinions and assumptions
Opinions of key decision makers, committees or groups or other influential factions

in the organization will be important to the success of your decision. However, it is
equally important to distinguish the truth from mere bias or prejudice.
In some cases, assumptions can save time and work since it is not always possible to
get all the facts. Admit that some things are accepted on mere common belief.
Assumptions, however, also entail a risk: they must be accepted in the absence of
proof to the contrary but must be discarded once proven wrong.
DEVELOP ALTERNATIVES
Look at the problem in different ways; find a new perspective that you have not thought of
before. Brainstorming is a good discovery process. Once you have listed or mapped out the
alternatives, be open to their possibilities. Take note of those that—
¾ Need more information;

¾ Are new solutions;
¾ Can be combined or eliminated;
¾ Will meet opposition; and
¾ Seem promising or exciting.
WEIGH ALTERNATIVES
After listing all the possible alternatives, evaluate them without

prejudice no matter how appealing or distasteful one is to the other.
Here you may need to consider all the criteria. While a suitable
solution may indeed solve the problem, you may find out later that in
the long run it will not work since the resources needed are not
available, the people will not accept it or it will only cause new
problems.
There are a number of techniques in weighing alternatives. Some of these techniques are
discussed in the latter part of this manual.
If you have weighed all the alternatives and arrived at one solution, you must still present to
your client the other alternatives you disregarded. Your client might go back to these for
verification in the future.
DEVELOP A PLAN FOR IMPLEMENTATION AND MONITOR THE SOLUTION
The resolution of a problem will necessarily elicit a decision to do or not do a certain action.
Without implementation, a proposed solution is not worth much. Although the task of
implementation is the job of your client, it is ideal that your client gets the value of your
advice by knowing how to implement the proposed solution. Thus, you need to develop a
step-by-step process or action plan on how to solve the problem.
Finally, advise your client to monitor outcomes by checking on effects on the resources and
stakeholders, the timeline of its implementation, and its progress. If the results deviated
significantly from what are expected, advise your client to review the other options and
alternatives.
INTRODUCING CHANGE
A business counselor is a change agent. You are expected to introduce positive change to the
small business in such areas as technology, markets, methods, values, etc., to enhance the
business’ viability and gear it up for expansion and growth. You must also institute planned
change, as your intentions can easily be misunderstood no matter how good they are if you
initiate change tactlessly.
The first thing that should come to your mind before initiating change is, “What kind of
change should be instituted?”
ANY CHANGE SHOULD ADD VALUE
This seems obvious. Yet, there are many instances when changes are introduced because they
are thought to be the latest fad, because an influential person is using them, or because they
simply appear to be technically brilliant or attractive. Change should never be initiated for
these types of reasons. A business counselor should ask several questions to test the real value
of a change:
¾ Will the change make the company more successful in its environment?
If the environment does not require and will not support new directions, then making
any core changes (in strategy, core competencies and such) are likely to fail. Time
and again, there has been news of businesses that shut down because their markets
were not ready to adapt to the changes the environment was introducing. This does
not mean, however, that these bankrupt businesses will be successful in the future.
Perhaps, their ideas were way ahead of their time. But their failure does mean that a
severe mismatch with the environment is a recipe for disaster; a match is a formula
for success.
¾ Will the change make work more successful while reducing the effort required? Will
it provide truly better customer service or product quality? Will it have a positive
impact on people at work—their status, the meaning of their work, the ease of work,
the elimination of barriers to success?
It is not enough that on the surface the change is a good technical, financial or
political idea. If the change complicates things for customers or for people at work,
reject it unless the management is willing to spend extra resources supporting and
getting compliance with the change.
¾ Will this change really improve performance for the overall organization?
A change that is positive for a part of the organization may not be positive for the
entire organization. There may be an improvement in the redesigned process in terms
of cost savings, for example, but the improvement does not translate into improved
employee morale. For a change to be efficient, it must satisfy not only certain
factions in the organization but the entire organization as well.
MANAGING CHANGE DEPENDS ON ITS COMPLEXITY
Some changes are complex and unpredictable, such as computerizing operations or shifting
markets from regional to nationwide. Other changes are relatively simple, such as shifting
from one brand to another. More complex changes generally call for new roles and power
relationships, as well as changes in a variety of systems and processes. Simpler changes leave
roles and relationships intact and just call for a few changes in behavior, knowledge, and skill.
Another dimension of change is whether there are role models, precedents, and tested
guidelines to follow, and whether there is expertise the management can turn to for support
and coaching.
Complex and unpredictable changes require more resources for trial and error and for
learning. They call for multiple changes in systems and processes, and for lasting and visible
commitment from leaders who must provide vision and optimism until results occur and the
change is sustainable. These more difficult changes also require increased attention to
communication and the human side of change. Simple and predictable changes seldom need
extra attention.
The nature of a change dictates the best method. Some changes can be done in incremental
pieces, but those involving changes to tightly intertwined structures associated with strong
power bases and deep systems of beliefs often require a forceful intervention and
discontinuous replacement. In other words, if the change is complex and does not match the
current culture, your client must be ready for a tough road ahead. Some industry changes, for
example, are revolutionary and require a large amount of experimentation and resources, a
loose structure, and broad involvement in planning. Other changes, on the other hand, are
evolutionary and can be efficiently managed traditionally, using standard project management
methods.
Transactional changes (such as switching software) require only a few minor interventions—
for example, training or changing the incentive system.
Transitional changes are complex and shake up roles, power bases, relationships, and systems
but have expertise and guidelines; an example would be opening an additional retail outlet in
another city. Transitional changes require a much higher investment in change management
than transactional changes. You therefore have to convince your client to set up detailed
project plans, phase in innovation, address the emotional side of change, and take all of the
other actions described in this chapter.
Transformational changes require a redesign of virtually everything in the organization—

especially the fundamental beliefs and norms that guide decisions and actions. Organizations
everywhere face transformational change as they adapt to information technology and
globalization. In transformational change, usually there are no guidelines so there are a lot of
trials and errors and costs. Your client can set up projects to help guide progress but the
major effort must go into making the organization more adaptable and flexible so that it can
learn as it goes along.
All of these require asking—
¾ How complex is the change in terms of the number, breadth, and depth of pieces and
actions it contains?
¾ For the change, are there obvious and clear solutions and precedents? (Is it
relatively predictable?)
¾ Is the change transactional (simple and predictable); transitional (simple but

unpredictable, or complex but predictable); or transformational (complex and
unpredictable)?
¾ What level of investment will your client have to make to ensure success (low for
transactional, moderate to high for transitional, or very high for transformational)?
SYSTEM MUST BE READY
Once the kind of change is determined, it is now time to set the system in place.
Management has the tough job of guiding change. Some changes (the more predictable ones)
thrive on more structure, traditional controls, and management nurturing. Others (the less
predictable ones) require more decentralization and involvement in planning and
implementing. Designing and guiding an organization for ongoing change is another matter
that requires transformation—not only of the organization but of the leaders.
Transformational leadership demands a blend of focus, determination, and empowerment that
few leaders exhibit these days.
It is important to adjust the various aspects of the organization so that the change can take
root and thrive. A change may require minor or radical shifts in processes, technology, tools,
information flows, skills, structures, facilities, and so on. Your client can prepare the
organization for change by advising him/her to follow these guidelines:
¾ Be sure work processes are supportive
One common change failure is the lack of coordination of process changes between
departments. For local changes to succeed, the larger processes they are part of have
to be changed. Often, successful reengineering changes do not focus on functions
and departments but look at all activities and events involved in the delivering a
product or service, regardless of whose responsibility they are.
The questions that need to be looked into are what, if any, work processes will be
directly or indirectly affected by this change and how to align them.
¾ Create change-enabling managers
Be sure the supervisors actively support the change. This is obvious but seldom
adhered to. When supervisors personally use the change practices communicated to
them, employees are likely to follow. The supervisor is a key factor in the success of
any change effort. It makes sense, therefore, to focus on the supervisors. They help
make up the glue that keeps an organization together. They can also keep people’s
feet stuck in the past. The lesson? Ask what supervisors need to do to support the
change and how your client (the owner) can support them in their roles and actions.
¾ Align the human resource (HR) system
HR practices such as selection, promotion, performance evaluation, and pay and

reward are critical success factors in change. HR practices must support the change,
otherwise long-term success is unlikely.
HR practices have more impact on a firm’s performance than improvements in the

quality of its business strategy. When changes in HR practices accompany technical
changes, a significantly greater performance improvement occurs over technical
changes alone. Success requires asking how HR practices support or impede the
change and what management can do to get the HR system alignment needed for
success.
REMOVE BARRIERS TO CHANGE
Finally, before change can be implemented, barriers to it must be

removed. Ask your client to determine what organizational barriers can
defeat the change and assess how confident is the organization in
making enough supportive changes to give birth to and grow the
change successfully. Further, ask your client to—
¾ Help people align
Focusing on the technical aspects of change may be enough for transactional (simple
and predictable) changes. But for any other kind of change, the human side may
make or break success.
¾ Be scrupulously fair and trustworthy
People can accept changes that affect them adversely if they believe the change is
right and necessary. Decision makers must work hard to be objective and fair to all
affected parties, and they must communicate the change and the details of the
decision process. Regardless of how people feel about a change, they expect to know
the rationale for such a change, how it is to be implemented and why some people
will be more affected than others.
¾ Find the positives
The first lesson in introducing change (any change should add value) tells how
important it is to pick changes that will make a difference. Here the emphasis is on
communicating the value of the change. People will support changes that make
sense—that make work easier and more effective, that make customers happier, that
improve product quality. People also have to believe that the change is achievable.
Often, people commit to change in order to comply, to be similar to others they

admire, and to support a change they intrinsically believe in. The last motivation
produces a more lasting commitment. The key question is: What are the critical
short- and long-term positives of this change for the organization and its people?
¾ Involve opinion leaders
Some people have more influence on what employees do than others. Successful
change efforts draw on the expertise and energy of opinion leaders, who often are not
the formal leaders in the organization. Success with change may hinge on the answer
to asking: “Who are the opinion leaders that people listen to? How can the owner or
manager involve them?”
¾ Communicate effectively and over the long term
Sadly, by the time executives approve a change project they have often lost interest in
it. They may have spent months looking at the pros and cons and making the
decision. Now, they are ready to move on to something new at the very time when
they should be showing their support for the change visibly and continuously. The
decision to make a change is only the beginning of an intense and ongoing
communication process that may last for years. It is therefore important for you to
advise your client to find the mental and emotional stamina to keep talking about the
same message over and over. This is especially true in organizations where people’s
trust is low.
¾ Involve people appropriately
When people are involved they are more committed. It is also clear that decisions in
the current complex business world require broad involvement and input. But
involvement will not save a change that does not add value or is implemented
unfairly. Involvement must have a purpose. If it is just a way to manipulate people
and has no potential impact on decisions, the owner or manager should not go
through the motions as it will only breed unrest.
People do not have to participate to be committed. But they do need to trust the
people setting the goals, believe that goals will lead to greater performance, have
access to feedback, and have control and ownership of the steps and actions for
achieving the goals. In other words, there needs to be participation at the level of
getting things done. Successful changes always involve the people affected because
they have important contributions to its definition and implementation.
It is important that people have the skills they need for implementing and sustaining
the change. It is also crucial to align incentive and pay systems, especially if the
change is not naturally rewarding and motivation is low. Your client knows the skills
people need to implement and sustain the change, how to help develop those skills
and what desired or undesirable behavior will or will not happen with or without
offering incentives.
It might not be possible to manage change, but it can be influenced.
Implementing and sustaining change require more than a dream and a goal. Although these
are important, when your client approaches you and consults you on a major organizational
change, be sure it will matter and be worth the effort. Ask your client to put the resources and
time into making it happen.
Your client must also pay attention to the systems and people issues. If your client is not
ready to put the energy into making a change successful, it might be better not to initiate the
change at all. Certainly, most organizations can dramatically reduce the number of change
initiatives and thus find the resources to do a few things well. Of course, your client must
always weigh the number of initiatives against demands of the environment and market. If
the environment requires lots of change, that is your client’s challenge. Just be sure that what
your client will decide to do lies in the organization’s best interests and that your client is
ready to answer the questions and take the actions that are key to success.
THE “AIDA” PRESCRIPTION
Once the barriers have been removed, change may now be implemented.
One model in implementing change in the organization that is helpful to a small business
counselor is called the “AIDA” prescription. This means getting your client’s Attention,
Interest, Desire and Action to change for the better. Specifically it means—
¾ Calling the attention of the entrepreneur and his or her workers to the need for change
either by—
• Introducing anxiety to the entrepreneur and his or her workers. A particularly

successful approach is to use anxiety to turn attention to the specific needs of the
business and to follow up by providing a solution.
• Achieving acceptance and effective introduction of change as a multiplier effect

in the flow of information by convincing first the technically oriented people and
then the opinion leaders.
¾ Creating interest in change by making available adequate information on the benefits

to be gained by the entrepreneur and the workers if the change is adopted.
(Remember, there is a direct relationship between how much those involved in
change understand about it, with all its implications, and their resistance to it.)
¾ Develop the entrepreneur’s desire for change by presenting the advantages and
disadvantages of several alternatives with the best one showing economic and
technical superiority.
¾ Get the commitment of the entrepreneur and the workers concerned to action by
involving them in the change process, such as brainstorming, so that the identification
with and the internalization of the change can take place. (Remember, the greater the
extent of personal involvement of the entrepreneur and the workers concerned in
making some of the decisions about a change, the lesser their resistance and the more
committed they will become to change.)
OVERCOMING RESISTANCE TO CHANGE
People and the organizations they create and work in seldom welcome change. For the most
part, they are resistant and reluctant, believing there is great comfort in the familiar and
greater security in the status quo. As a result they tend to resist new ideas and new ways to
think about old ideas.
Unfortunately, the present and certainly the future are all about change. In fact, there is an old
adage that describes the issue succinctly: The only thing constant is change. At its most
basic, business counseling is about managing change. It is about anticipating it, framing it in
ways the small business organization will understand and finding a path through it. In many
ways, the hallmark of a good business counselor is how well he or she manages change.
You as the small business counselor will likely encounter resistance to change from either the
entrepreneur or the workers and sometimes even both. Resistance is particularly severe if you
are trying to introduce a very radical change in the organization. You must therefore be
skillful in minimizing resistance to change and in handling objections.
The following strategies will help you overcome your client’s resistance to change:
¾ Clarify the change event
Always clarify the change event. Unless you clarify the specific threat or opportunity
in real, concrete terms, you can’t advance. What’s more, the change event must be
identifiable not only to the opinion leaders but also to the rank and file.
¾ Create a sense of urgency
Next, you must create a sense of urgency to get people to act. Your client’s business
may have been suffering from increasing uncollected accounts for a long time now
but the owner does not seem to be bothered. Showing this trend will affect the
business cash flow and will generate a sense of awareness that something must be
done.
To stir people to action, those to be affected by the change event must understand
how exactly it will affect them. Either show them how their lives will be affected if
the problem is not resolved or how their lives will be improved if the proposed
change is adopted.
¾ Develop a course of action
Once you have identified a threat or opportunity, you must develop a course of action
that is clear and simple. If it is not clear, people won’t understand how they will deal
with the issue. If it is not simple, people will get bogged down.
As you think about your course of action, however, keep in mind two important
fundamentals: First, a good response created and acted upon quickly is much better
than a perfect response that takes forever to formulate. Second, don’t get too focused
on a need for consensus. Get enough people on board, especially the right people.
Don’t worry about the vocal 10 percent who seem to oppose. Let their peers work on
them. In the meantime, work with the others who are willing to be led.
¾ Establish a guiding coalition
While the vision for a change may originate with one person, the actual change
process must be accomplished through a coalition of believers, who in response to a
threat or opportunity developed a unified response. This guiding coalition must be
large enough to have an impact on the organization, but small enough to act in a truly
coordinated fashion.
Further, this coalition must include major and minor players and be as cross
functional as possible, drawing from all segments of the organization. A coalition
that includes people from manufacturing, marketing, finance and administration will
likely be more credible than a team comprising people only from administration.
¾ Communicate your course of action widely
With the key elements in place, you must communicate your course of action widely
and continually. Not only must people understand in general the organizational
response, but they must understand specifically their role in the change process.
What is the role that the people in maintenance or security have in the change
process? If they don’t understand their role, they will not be committed to the change
event. Further, they might unintentionally undermine what you are trying to
accomplish.
¾ Generate and celebrate near-term wins
While significant change is typically a long-term undertaking, people

need to know immediately that their efforts are having some impact.
This is much like the overweight person who decides to lose 50 pounds
over the next year. After a week of struggling with diet and exercise,
she wants to know she’s dropped a few pounds. Without that near-
term win, she’ll become discouraged and give up altogether.
So, celebrate your near-term wins. If you decide to advise your client to reduce
overtime work to save on operating costs, the workers need to be aware that the
scheme is successful and that the company is indeed saving money from it. And if
you are smart, you can advise your client on how to tell the workers that the new
scheme is going to help them in their day-to-day activities.
¾ Anchor change in the organization
Change begins with people but it is institutionalized through artfully developed

policies and procedures, realistic budgets, measures of success and ongoing training.
You simply cannot ask people to change without giving them the tools to change.
This support must be real, obvious and given freely. At the same time, people who
opt not to change must be dealt with or their recalcitrance will spread. One of the
quickest ways to undermine change is to ignore people who will not embrace—and
even sabotage—the change initiative.
Chapter
THE BASICS OF STARTING A BUSINESS
Where do business ideas come from? Studies on entrepreneurship suggest two ways of
triggering the mind of an entrepreneur into creating business ideas. One, by letting him/her
study his own persona and two, by letting him examine his environment. It will greatly help
if one is to use the scale of human needs, which are broken down into Maslow’s five
categories: psychological needs, safety needs, social needs, esteem needs, and the need for
self-actualization. The entrepreneur can get business ideas by associating each kind of need
with a product or service that he thinks he can provide. The bottom line is that a business idea
should offer a product or service that provides a solution to a problem.
THE ENTREPRENEUR’S OWN PERSONA
From one’s understanding of his own self, the client may be able to draw out business ideas.
¾ Who am I? Such self-analysis may begin by making him list down what he enjoys
doing, how he spends his free time, where he goes; what and where he imagines
himself to be in a couple of years; what his tastes are and the things he goes strongly
for or looks forward to.
For example, he is a regular 8-hour employee, working five days a week. What
occupies him after-office hours and on weekends? Does he have any culinary
inclinations? Does he know how to prepare food and cook? If so, an opportunity may
open for him to start a food service business such as providing lunch for his
officemates.
If he is a passionate teacher, he can entertain the idea of accommodating tutoring

sessions at home or at the residence of the students during his free time. When the
number of students who need his services increase, he may consider putting up a
formal tutorial center either at home or probably in another location.
Or as a book lover, a housewife could have a sizeable collection of (and collecting)

books of different genre, be they documentaries, devotional, fiction, inspirational,
adventure, classics, and biographies. There could be an opportunity for her to set up a
book rental service and earn from her investment (yes, books are an investment).
¾ What does she know? This consists of the academic knowledge, technical skills, and
professional, as well as trade experience of your client. How can she be productive
by using her skills or hobbies? Help her draw up her occupational history, specifying
the nature and activities incumbent in the jobs and positions she has held. Refreshing
her memory will remind her of the responsibilities that she excelled in the past and
identify one or two ideas from which she can start a business with.
For example, as a public relations staff, your client has been exposed to contract
signings, endless product launches, and company-client get-togethers until
motherhood beckoned. Now that her children are grown up and can manage with a
little help from her, she might be encouraged to take off from where she left and find
an opportunity to be an event planner not only for corporate affairs but also for
special occasions like weddings, reunions, etc. This is a business opportunity that will
not take much of her time away from home.
¾ What does he have? This refers to the resources that he can use to start a business. It
includes his family, property, money, and personal belongings. He can carry on the
family business or build a new one that speaks of a family tradition. Do the other
family members have some expertise that will complement what he is good at? How
can he make more productive use of his assets?
What business idea would come to his mind when he realizes that some family
members are very adept with matters pertaining to computers and their peripherals?
Perhaps your client can think of starting a computer service shop business or even an
internet café.
What use can he find for that extra freezer space at home? He can be a dealer of meat
and poultry products. What about his parents? After decades of making quality fine
jewelry, they have decided to go on semi-retirement and accepted orders only as they
pleased. Your client could consider coming into the picture and continue the business.
THE WORLD AROUND HIM
The environment is another rich source of business ideas. As a

counselor, encourage him to be updated with the development of
environmental trends in his community or area. This will enable
him to identify latent needs that are unsatisfied and new trends
that are taking shape to which he can respond with appropriate
products or services. Your client needs only to be attentive,
observant, analytical, and curious. Guide him how to use the
following techniques:
¾ Be attentive to what is happening to the immediate environment. He can get ideas by

listening to the needs and desires expressed by those around him. In most cases, such
needs and desires are also shared by a great number of other people.
For example, his car has been stalled several times while driving daily through a
rough road from his residence to the town proper. The other residents in the
community have been similarly inconvenienced. The idea of putting up a service shop
along the way may be an opportunity to look into.
CHAPTER 4: THE BASICS OF STARTING A BUSINESS 53
¾ Monitor the development of demographic, economic, technological, ecological, and

socio-cultural trends. This will help him identify new trends in consumer needs.
Most of the residents in the subdivision where he lives are young families. Business
ideas could include a day care center, a pre-school, party needs rental service, and a
school bus service.
¾ Find new applications or uses of existing products and services. He can make
something new from something old.
Make him list 10 potential applications of his business idea.
¾ Analyze the reasons for abandoning certain products or services. It is possible that
these products and services no longer meet the needs of the present market but may
be right for other areas or regions. Or he can “import” a new business concept that
boomed in the city and bring it to the province.
As the cities in the regions are getting highly attuned to their counterparts in the
metropolis, your client could think of introducing a business that is fast gaining
popularity in the metro.
¾ Examine the structure of imports. He may find opportunities for substituting the
imported items with ones that can be produced locally.
¾ Look for businesses for sale. Buying an established business can be quite expensive
but it provides him with an established clientele, stock, and equipment. It may also
include established premises. It is easier to continue a business (and get a loan) with a
good history and with systems already in place rather than start a new one.
¾ If he has the money, he could also look at getting a franchise. He may need a lawyer
to help him with the documents. Franchising allows him to sell an established product
or service and use existing operating methods from the franchiser. In many cases,
these products or services are well known in the market.
¾ Look for companies that need a distributor for their products in his area.
Manufacturing companies who are downsizing often advice affected employees to
become distributors of their products.
¾ Be on the lookout for ideas when visiting friends and kin from other towns and cities.
Talk to customers and suppliers. Visit tiangges, bazaars, and trade fairs. Observe
what people are selling and buying.
¾ Get the most out of available resources. These resources can take the form of raw
materials, skills, information or technology. Ask him to think about the following:
• Raw materials. Help him make a list of materials that abound an area in great
quantities. These can be in a natural form (twigs, grass, flowers, bark of trees,
clay, bamboo, and other agricultural and marine products) or semi-processed
(discards of certain companies, say, wooden, cloth, or metal trimmings). He could
turn someone’s junk into a treasure.
• Skills. Let him look around for specialized skills predominant in the area that can
be used to set up an industry. The pottery industry in Pagbornayan in Vigan
Ilocos Sur, woodcarving and papier mache industry in Paete, Laguna, and the
embroidery industry in San Juan, Batangas are places that gained prominence due
to the abundance of local skills.
• Information and technology. Advise him to read newspapers and specialized

magazines. This will help him identify market switches or growth trends. Check
out trade and industry associations for subcontracting opportunities.
He could start his research by talking with his family and friends to generate the maximum
number of ideas. In your discussions, take care not to shoot down ideas, even those that you
may find really far-fetched.
SCREENING BUSINESS IDEAS
After your client has created the maximum number of ideas for
possible small business projects, help him sift through the list, focusing
only on those that can be turned into business opportunities. Bear in
mind that a good business opportunity must meet his own expectations
and satisfy the needs of his consumers.
One way of screening business ideas is to come up with some criteria

that are based, once more, on the personal circumstances of the
entrepreneur and the nature and characteristics of the business environment where he will
operate. Discuss this over with him. Try doing the following exercise together. It will guide
him into narrowing down his ideas into a more manageable list.
You can agree on a rating scale that is acceptable to both of you, for example, 0 to 5 with 5 as
the highest. The following items should be part of the criteria:
¾ His knowledge of the business. This will measure how much he knows about the
business idea. Some guide questions to ask include:
• Will the idea require some time and money for him to know more about the
business?
• Would he rather take on a partner to fill in his lack of knowledge of the business?
Let us say he thinks of putting up that service center but he does not have a good
grasp of auto mechanics. The rating will be based on his willingness and readiness to
acquire the necessary skills or to ask a skilled person to join him.
The rating can range from having no knowledge at all about the business, some
indirect knowledge, limited knowledge, practical knowledge, and working
knowledge.
¾ His experience in the field. He may know a lot about the business but lacks enough
experience. The rating will depend upon his answers to these questions:
• Has he ever owned or worked in this type of business in the past?
• To what extent is hands-on experience critical to this type of business?
Your client may have worked as a helper in an auto repair shop for a couple of years.
The rating will depend on how both of you will assess the importance of actual
experience on the nature of jobs that he will be offering.
The rating can range from having no experience at all, indirect experience, limited
experience, and familiarity with the business.
¾ His skills. Focus on the skills unique to the particular business idea. This will
measure the extent of his skills that are useful to the business and how hard or easy it
will be for him to learn and acquire such skills.
He is thinking of distributing processed meat and poultry products in the

neighborhood and maximize the use of his freezer. How good is he at taking bulk
orders, calculating costs and expenses, setting prices, and collecting payments?
The rating can range from no skills at all, limited skills, some skills, and extensive
skills.
¾ Ease of entry. This item refers to the costs of entering the business and the
hindrances that might exist.
He thinks it would not cost him much to run a car wash from his own home. Seeing
how busy the car wash businesses in his area were, he thought opening a similar
service would not hurt them much.
Rating will range from being a crowded field - very difficult to enter, limited entry
available - mix of large and small competitors, and unrestricted entry for any business
size.
¾ Uniqueness. This refers to his competitive edge. What aspect of his product or service
will set it apart from the competition. It could include any of the following: product
quality, after sales service, craftsmanship, price, image, features, terms of payment,
method of distribution, customer service, customer awareness, nature of use,
availability, customer accessibility, and product range. As a counselor, you may have
to advise him that a competitive edge is only temporary. When someone else sees
something is working, he will attempt to copy.
Rating can range from no product or service widely available, a few or several others
offering the product or service, about one or two others, or no other one is providing
the product or service.
After he has made a shortlist, make him trim down the list further by doing together a SWOT
Analysis of the ideas in the shortlist. SWOT stands for Strengths, Weaknesses, Opportunities,
and Threats. This exercise will help him assess his current competitive position. It determines
what the business opportunity is good at and what may need attention.
Strengths refer to the positive aspects. They may include a dedicated staff, a good network of
contacts, personal image, business location, financial resources, cheap and readily available
raw materials, little competition, use of existing knowledge and skills, relatively short time
needed to make the product or service, and ability to respond to market needs.
Weaknesses point out the negative aspects. They may include the lack of management skills,
the size of the premises, absence of a track record in business, market slowdown, lack of
awareness of the benefits of the product or service among customers, easy for other producers
or service providers to duplicate, and the need for more research.
Opportunities refer to the conditions in the environment that can influence the business to
grow. These include a rapidly growing market, new customer groups to cater for, alternative
resources, good infrastructure, and new technologies.
Threats are the conditions in the environment that can have a negative impact on the business.
These may consist of an economic downturn, frequent changes in government policy, a
geographically dispersed market, increasing cost of electricity, flight of skilled labor, and
strong competition.
APPRAISING BUSINESS PROJECTS
Whatever business idea your client will decide to pursue, be it a new one, a franchise, or an
existing business, the next thing for him to do is prepare a feasibility study or a business plan.
This business plan charts the future direction of the business. It is a written document
describing relevant internal and external elements and strategies for starting and running the
new venture. 6 As a small business counselor, you can only guide him prepare the business
plan. Your client will gather all the data he needs and come out with the necessary figures.
Your more important role is to evaluate his business project through the business plan.
WHY APPRAISE A PROJECT?
The only true method of evaluating the worth of a business opportunity is to estimate its
future profit potential. Appraisal will ensure your client that his business will not cost him
more than the returns that will come. There are four areas that you will look into when
appraising a business project. These are the marketing, technical, financial, and management
considerations.
1. Market Appraisal
The proposed product or service must have the potential for success in the marketplace. This
generally concerns the presence or absence of buyers of the product or users of the service
and how much income your client can expect to derive from it.
Use the following scheme to guide you in appraising the market of the proposed business:
¾ Analyze the primary demand. Primary demand may be defined as the total demand
for a class of a product or service, and it is usefully expressed in terms of per capita
consumption. Consider your client’s ability in knowing the direction of the shifts in
primary demand and in understanding the circumstances in the environment that are
causing these shifts. Recognizing and understanding these changes that are at work
will enable him to anticipate and forecast how the primary demand will look like in
the future.
6
DTI. BSMED. Glossary of Key Terms and Concepts for Micro, Small, and Medium Enterprises, July
2005, p.6
You can ask yourself these questions:

• Is primary demand increasing, static, or decreasing?
• Why? What environmental forces are affecting primary demand? What changes
are occurring in Gross National Product (GNP) and purchasing power, the
general social climate, consumer behavior, distribution channels, competitive
activities, technological developments and their applications, government
activities, etc.?
¾ Examine the marketing strategy. This essentially refers to the 4Ps and the marketing
mix that your client has chosen. Be guided by these questions:
• Does he have a well-defined marketing strategy?
• What is the product or service? Are there brand policies that will be followed?
• What distribution channels will he use? What method of physical distribution will
he apply?
• What margins and prices is he after?
• What sales promotional tools will he employ?
¾ Analyze the implementation plan for the marketing mix. Look into what needs to be
done, how it should be done, who is going to do it, and when should it be done. Look
also into the use(s) of the marketing plan. Some guide questions:
• What functions will have to be performed to achieve the strategic objectives?
• What kind of marketing organization is necessary to perform such functions?
• What marketing and control information does the business need?
2. Technical Appraisal
The technical analysis serves to establish that the project is technically feasible (that is, there
are no technical considerations that would prevent its success) and that it provides a basis for
estimating costs, particularly: investment costs, operating costs (consisting of manufacturing,
selling and distribution, general and administrative costs), start-up costs, and venture
initiation costs.
The major considerations you need to look into when conducting a technical appraisal include
the following: plant location, the proposed products or services, production process,
machinery and equipment, production schedule, raw materials and supplies, building and
other structures, utilities and services, project scale and timing, start-up preparation for
production, technical infrastructure, and maintenance and repairs.
¾ Plant location. Whether your client will choose to locate in a broad geographical
area or in various locations within a specific area, as in an industrial park, certain
factors will affect his choice. Consider the following factors:
• Raw materials supply – their availability, use of substitute materials, price, terms
of sale, transportation costs, and the distance.
• Markets – demand versus distance, growth or decline, present and future
competition.
• Power and fuel supply – availability of electricity and various types of fuel, costs,
level of power intensiveness of business, availability of supply lines to the plant.
• Water supply – quality (temperature, mineral content, bacteriological content),
which is considered critical for a food processing business, quantity,
dependability, costs.
• Climate – investment required for construction, humidity and temperature
conditions, history of typhoons, floods, and earthquake.
• Transportation – availability of various services and projected rates: rail

(dependable for light and heavy shipping distances), highway (regularly used
short distance and generally small quantities), water (cheaper, but may be slow
and irregular), pipeline (for gases and liquids, particularly for petroleum
products), right of way.
• Waste disposal / recovery – regulation laws, air pollution possibilities, disposal,
recycling possibilities.
• Labor – availability of skills, labor relations (history and stability in the area),
stability of labor rates, adequacy of basic services for workers.
• Regulatory laws – building codes, zoning ordinances, highway restrictions, waste
disposal codes.
• Taxes – income, franchise, property.
• Site characteristics and topography – contour of site (favorable topography –
minimum tilling, excavation, drainage, etc.), soil structure and weight bearing
characteristics, access to rail, highway, and water, room for expansion, costs of
site.
• Community – rural or urban, cultural (churches, libraries, theaters), school
system, recreation facilities, medical facilities (hospitals, doctors).
• Security – political climate and general industry concentration.
• Flood and fire control – fire hazards in surrounding areas, flood history and
control.
¾ Proposed product or service. Assess the technical feasibility of the proposed business
as it relates to these particulars:
• Principal, secondary, and by-products (whether they are finished products ready
to be used or semi-products for further processing by other companies).
• Type, category, specification, and characteristics (including size, shape, physical
properties).
• Packaging method and means of transportation.
• Possible diversification in the future.
¾ Production process. Confirm your assessment of the product or service using the
following indicators:
• Brief description of the process showing the process flow from raw materials to
finished product or completion of the service.
• Whether it has fulfilled or not the requirements for a batch or continuous process.
• Process flow chart indicating:
o If a processing plant – unit process, unit operations, and/or major processing
equipment
o If a manufacturing plant – process sections, sub-assembly, and/or major
machinery and equipment
• Material balance summary and/or detailed material balance chart showing raw
material input, product, by-product, losses (indicating at what stage the input,
output, or losses occur).
• Energy balance summary around fuel-burning or heat transfer equipment (e.g.
water cooler, boiler, furnace, etc.).
• Name of other available or substitute process.
• Justification for selecting the process, indicating the following:
o Suitability to the type of available raw materials and the proposed end-
product
o Acceptability as confirmed by similar plants using the same process
o With minimum possibility for obsolescence
o Proof of study done on alternative plant sizes before deciding on the process
to use
o Consideration given to plant design for future possible expansion of facilities
and flexibility to allow introduction of new technologies
o Strike a balance between the cost of technology (neither too high nor too
advanced) and the ability of the enterprise to tap idle resources.
• Names of companies presently using the same process, their location, rated
capacity, date of commission and actual capacity upon commission, their
experience on the use of the selected process.
¾ Machinery and equipment. Look into the equipment and tools specified by your client
for each operation. Use the following as your guide:
• List of major process equipment and/or machinery supported by quotations and
catalogues.
• List of all auxiliary equipment and/or machinery supported by quotations and
catalogs. These items include power equipment, motors, pumps, tooling, spares,
etc.)
• Layout of machinery and equipment in the floor plan.
• Separate list for locally fabricated equipment or equipment component indicating
local supplier or contractor.
• Economic life of machinery and equipment.
Check out output capacity and quality, labor requirements in terms of number and
skills, power, air, water, gas, or other support requirement, reliability, noxious by-
products of operation, convenience, and simplicity of use.
¾ Production schedule. Validate the schedule using the following information:

• Rated capacities of all major process equipment and machinery as against
economic sizes.
• Overall plant rated output capacity versus expected actual production output for
the first five years of operation.
• The number of 8-hour shift of the various process sections.
• Expected increases in the number of shifts for at least the first five years of
operations of the various processing sections, if any.
• Number of days per year of operations; number of days for maintenance and
repairs.
• Process cycle time (time required from raw material to end-product).
• Estimated material in-process inventory.
• Estimated start-up time and/or build-up for material in-process inventory.
• The extent of expanding capacity without adding another line, the specific
machinery requirements and their cost.
¾ Raw materials and supplies. Look into the following:

• Major specifications to be met by each raw material.
• Report of acceptability of raw material.
• Basis of quantity requirement of each raw material per unit production.
• Possible substitutes.
• Distance of local source from site of plant.
• Storage facilities for each raw material; sufficiency for meeting inventory
requirements.
• Need for securing and availability of contracts for raw materials, copy of
contracts, length of contracts.
• Assurances for adequate supply; alternative sources.
• Handling of raw materials.

• Hazards posed by raw materials (flammability, acidity, etc.)
• Existence of allocation, restriction, or distribution controls that imported raw
materials are subject to (e.g. possibility of strike).
¾ Building and other structures. Determine the need for a building. The size and type of
structure should be appropriate and enough to house all activities. Other points to
look into include:
• Vicinity plan showing plant location with respect to existing infrastructure, such
as highway, pier, etc.
• Architectural drawings showing building arrangements and layout of plant,
workstations, warehouse, store, administration, and other service areas.
• Layout plans indicating electrical installations, drainage system, internal roads,
and parking spaces.
• Detailed building plans and specifications.
• Soil bearing capacity
• Building permit.
• Quantity estimates on buildings and installations pertaining to site preparation
and roadwork, structural steel (supply and erection), general building works,
drainage and sanitary systems, electrical installation and communication system,
water supply system (deep wells and water storage), machinery
foundation/installations, transfer costs, insurance and other costs.
• Construction schedule, particularly timetable showing starting and finishing times
of major items of work and estimate final completion and date of trial runs.
¾ Utilities and services.

• Power: External power, consider the following:
o Cost per KWH received at the plant connected load
o Schedule of power requirements of each machine and average working hours
per day
Internal power: plant generator (type: diesel, gasoline or boiler, and capacity
to be utilized). Check the following:
o Cost of the power plant and auxiliaries
o Fuel consumption at average plant load
o Fuel tank capacity and fuel rates
• Water: Sources – deep well/ shallow well, commercial piped-in tap

Type – mineral content, hardness
Processing of conditioning – softening of water, purification, distillation,
annual cost for processing and conditioning
Pump – type, brand, horse power, hours utilized, size of storage tank, size of
casing, type of drilling made.
¾ Project scale and timing. This includes selection of optimum plant size, how projects
should be phased or selection of right time to enter the market with a certain capacity
under conditions of growing demand. Things to consider:
• Size of prospective domestic as well as foreign markets and its expected growth.
• Production and investment costs with alternative plants of different capacities.
• Price of competitive products and imports.
• Distribution cost of locally manufactured product.
• Economics of adding units in the future to increase capacity.
¾ Start-up and preparation for production. Evaluate the required management,

technical, and labor skills. Items to be assessed: manning table of the proposed
enterprise, organizational plan, availability of skilled personnel, arrangements for
training (if necessary), and cost of training.
Other things to examine: availability of all essential inputs, such as raw materials,
utilities and services, spares, etc., availability of detailed operating instructions
covering the enter start-up process, availability of alternate plans of action in cases of
emergencies that might arise, availability of repair service in case of need, and
preparedness in regard to waste disposal.
¾ Maintenance and repairs. Determine the degree of self-sufficiency and dependence on

external services.
3. Financial Appraisal
The financial appraisal will help you determine the profitability of the proposed enterprise.
You will need to ensure that the cost estimates are as close to the actual costs and are neither
under- nor over stated. The specific estimates that you will look into are: the project cost,
degree of financing, statement of cost of goods manufactured, projected income statement,
projected balance sheet, and projected cash flow statement.
You may also need to conduct a risk analysis, cash flow analysis, commercial profitability,
and social cost benefit analysis.
¾ Estimate project cost. This refers to the total investment necessary to set up the
enterprise. It is made up of fixed investment, working capital, and pre-operating or
start-up costs.
• Fixed investment – is the cost of land and improvements, buildings and site
facilities, machinery and equipment that the enterprise requires. Make sure that
this cost is not underestimated with the exclusion of necessary non-production
facilities (such as canteen, locker room) and installation costs in the costs of
machinery and equipment.
• Working capital – use gross working capital, not net working capital. Gross
working capital is defined as current assets required. The current assets required
for a new enterprise include: minimum cash balance, materials inventory,
expendable supplies and parts good for one cycle, and prepaid expenses. Let your
client realize the importance of having extra cash at the beginning to meet
expenses, such as payroll, utilities, telephone, interest, etc., that must be paid
before the enterprise will receive its initial cash inflow from sales. The most
common source of error in project cost estimating and a common cause of
business failure is inadequate working capital.
• Pre-operating costs – are incurred while making initial investigations and forming
the company. These will likely be considered as capital costs to be amortized
over a certain period of time.
¾ Projected income statement. The market analysis provides data for estimating sales
revenue while the technical analysis provides estimates of cost elements. These are
the information that will provide you the bases for coming out with the income
projections.
This statement will help you gauge whether the enterprise will be profitable at the
volume of production that is likely saleable. It should show how much margin your
client can expect for repaying debts, for plowing back into the business, for
expansion, and for payment of dividends to the owners, if applicable.
Look for these components in the projected income statement:

• Sales – data taken from the market analysis. Get estimates of returns and
allowances and discounts from those experienced in the industry.
• Cost of goods sold – refers to the statement of cost of goods sold. Net sales less
cost of goods sold will give you an estimate of gross margin (gross profit) for the
period.
• Operating expenses – estimates of selling expenses and general and

administrative expenses as provided by figures in the technical analysis.
Subtracting operating expenses from gross margin will give you an estimate of
operating profit for the period.
• Other revenue and expenses – it is unlikely for a new enterprise to have revenue
other than product or service sales. If such is the case, omit the line, “other
revenue earned” and subtract interest expense on borrowed funds from operating
profit to arrive at an estimate of Profit Before Tax.
• Net profit after tax – this figure is the all-important “bottom line.” As mentioned
earlier, it provides an estimate of funds that will be available to repay lenders,
expand the business, and reward your client.
¾ Projected balance sheet. For a new enterprise, this statement seeks to project “where
the enterprise will be” after a specific period of operation. It lists all resources of the
business together with the interests of creditors and owners in those resources. The
data in the statement are culled from the projected income statement and projected
cash flow statement.
To properly assess the profitability of the proposed enterprise, you will have to look
at balance sheet projections for the first five years of operation. Examine the monthly
projections made by your client for the first year.
• Assets – The resources of the business, grouped into several categories according
to liquidity. Current assets consist of cash and other resources, which, under
normal operations are converted into cash within the operating cycle. The cash
portion represents that which is on hand and on deposit that is available for
general business purposes. Receivables represent money, which, otherwise might
be available in cash. Inventories consist of finished goods available for immediate
sales, goods in various stages of manufacture or services in various degrees of
completion, and materials, which will be used to create the products or complete
the service. Prepaid expenses represents payment for services, which will be
received in the near future, such as insurance premiums, interest, and rent. These
are not converted into cash and will have to be paid eventually.
The total value of current assets is an indicator of funds available to the business
in normal operation.
• Liabilities and owner’s equity – These are all claims against the assets of the
business. Current liabilities refer to those that arise from normal current
operations of the business and which will require within approximately one year,
cash or replacement by another liability.
Current liabilities frequently consist of the following: accounts payable, notes

payable, accrued wages and expenses, and estimated income taxes payable.
A long-term liability is an obligation that normally will not be paid within

one year from the date of the balance sheet. These may include mortgage
notes payable and term loans.
¾ Projected cash flow statement. This shows the movement of cash into and out of the
business. Check if the statement will: help your client determine the amount of cash
he needs to start his enterprise, plan the timing of loan funds, assure that cash will be
available for payments as they are due if the projected cash flows are met.
This is made up of cash receipts and cash disbursements. The cash receipts section
lists all sources of cash (e.g., loan, collection of receivables, and estimated beginning
balance). Cash disbursements section lists all uses of cash (e.g. purchase of raw
materials, payments for the month, etc.).
4. Organizational Appraisal
Evaluating this aspect of a new enterprise aims to determine whether your client is capable of
implementing the activities, realizing the sales forecasts and production levels, and meeting
the costs associated with setting up and running the business. Organizational appraisal is
about looking at the legal form of the business and the people who will run and implement the
planned activities.
¾ Legal form
This concerns the type of ownership that the new enterprise will adopt. There are
several options for your client to choose from – sole proprietorship, partnership,
corporation, or cooperative. Your task will be to see if the form he chooses is
appropriate to the size, nature, and operations of the business.
¾ The people
Many small enterprises start with the owner assuming all the major functions, from
manager, treasurer, sales person, and technical operations, with the help of the spouse
and one or two others. The important things you will look at include the following –
organization chart that shows the delineation of responsibilities in the four functional
areas of the business, namely, marketing, technical, financial, and human resource.
The chart will also identify the positions and number of people under the four areas.
On the basis of the business plan (which defined the requirements of the positions and
qualifications of the people), you will assess the capability of the entrepreneur to
discharge the responsibilities of the role he has chosen to assume. Do the same for the
people chosen or assigned to occupy the other key positions.
¾ Systems and procedures
These include a statement of the enterprise’s vision, mission, goals, and objectives
(VMGOs), documented policies, rules and regulations, procedures, etc. that govern
the administration and operation of the enterprise.
However favorable the marks may be on the organizational appraisal of an enterprise, this
does not guarantee its success. An organization is essentially made up of human beings.
Organizational appraisal is concerned with men and not with machines. Unlike the other
inputs that can be reasonably quantified and projected, organizational competence is much
more difficult to measure or predict throughout the life of a business. Much still depends
solely on the entrepreneurs capability to plan, organize, direct, and control the activities of the
business.
One way of appraising your client’s entrepreneurial aptitude and readiness to start an
enterprise is by using the ‘Entrepreneurial Self-Assessment’ tool. This instrument measures
the personal entrepreneurial characteristics of a person who wants to go into business. You
can seek the assistance of the UP Institute for Small-Scale Industries for the particulars of
administering and this instrument and processing the result.
When appraising your client, be also on the lookout for certain characteristics that could
reveal more about his character. Some of these indicators are:
• Having an owner mentality (being proprietary and autocratic);

• Financial indiscipline;
• Overly ambitious (expanding even before being stable);
• Lack of concentration due to some other interests – business and social;
• Limited financial resources;
• Rigidity, inflexibility, resistance to change;
• Lack of expertise;
• Inexperienced;
• Imbalanced organization;
• Fraud and bad faith.
There are still other ways of assessing your client’s management competence. You’ll think of
other ways as you gain field experience.
REGISTERING A BUSINESS
After organizing the business, the next step is for your client to legalize his operations.
Basically, business registration means enlisting the enterprise with the proper government
agencies and securing a permit or a license to do business.
S Many entrepreneurs, particularly those with unregistered

U S IN E S businesses, perceive business registration as an unnecessary
B N SE
LI CE additional expense. Being in government, you can discuss very
well with your client the benefits of operating legally and the
hazards of being underground.
WHERE TO REGISTER
The legal personality chosen by your client will determine which among the first three
government agencies to register the business.
Table 4.1 Government Agencies Where an Entrepreneur Registers His Business
NO. AGENCY WHAT

Department of A single proprietorship applies for a business name. DTI will issue a
1 Trade and certificate of registration of business name. For list of requirements refer to
Industry (DTI) http://www.bnrs.dti.gov.ph
Securities and This is where a partnership or a corporation registers. SEC will issue a
2 Exchange certificate of registration. For list of requirements refer to
Commission http://www.sec.gov.ph
(SEC)
Cooperative This is where a cooperative registers. The CDA will issue a certificate of
3 Development registration. For list of requirements refer to http://www.cda.gov.ph
Authority (CDA)
Local A business is also required to register with the municipality or city where
4 Government Unit the business will be set up. This office will issue the business permit.
(LGU)
Barangay Hall This office issues the barangay clearance, one of the requirements for
5 getting a business permit.
Bureau of This is where the business applies for a taxpayer identification number
Internal Revenue (TIN), registration of books of accounts, authority to print receipts, permit
6 (BIR) to use a cash register machine or point of sales (POS) machine, and permit
to adopt a computerized accounting system. All employees of the business
are also required to register and apply for their own TIN. For list of
requirements refer to http://www.bir.gov.ph
Social Security The business also registers as an employer, your client as a self-employed
7 System (SSS) or as an employee, and the employees. The BIR will issue an SSS number
for the business, for your client, as well as for the employees. For list of
requirements refer to http://www.sss.gov.ph
Department of If the business employs five workers or more, it needs to register with
8 Labor and DOLE. The DOLE is tasked to promote gainful employment opportunities,
Employment protect workers and promote their welfare, develop human resources, and
(DOLE) maintain industrial peace. For list of requirements refer to
http://www.dole.gov.ph
Home RA 7742 requires all SSS members earning at least P4,000 a month to
9 Development register with this agency. HDMF administers the Pag-Ibig Fund. For list of
Mutual Fund requirements refer to http://www.pagibigfund.gov.ph
(HDMF)
Philippine Health The New National Health Insurance Act (RA 7875) as amended by RA
10 Insurance Corp. 9241 requires all employers of the government and private sectors and their
(PhilHealth) employees to register with this agency. PhilHealth manages and administers
the government health care system. For list of requirements refer to
http://www.philhealth.gov.ph
The chart on the next page presents the flow of the business registration process. For the list
of registration requirements, refer to the websites of the different agencies listed above.
SINGLE PARTNERSHIP OR
COOPERATIVE
PROPRIETORSHIP CORPORATION
Register business name with the Register company with the Register cooperative with the
1
DTI SEC CDA
2 Secure a Barangay Clearance from the barangay where business will be set up.
3 Secure a Mayor’s Permit / business license from the LGU where business will operate.
4 Register business with the BIR to obtain a Certification of Registration (COR) & a Taxpayer Identification Number (TIN).
5 Register employees with the BIR.
6 Secure authority to print receipts (ATP) and invoices from the BIR.
7 Secure permit to use cash register and/or point of sales(POS) machines from the BIR.
8 Register business with the SSS.
9 Register employees with the SSS.
10 Register business with the DOLE if business will hire five or more employees.
11 Register business with PhilHealth
12 Register employees with PhilHealth.
13 Register with the HDMF.
Fig 4.1 Business Registration Flow

Below are the steps for getting a business permit in the City of Manila. While you can use the
flow to illustrate to your client what to expect in applying for a business permit, it would be
better for you to draw the steps being followed in your own town or city.
Get a business transaction form together with a list of requirements

1 from the Business Promotions and Development Office (BPDO).
Accomplish the form, comply with the requirements, and submit them
2 to the BPDO.
The BPDO personnel will:

- encode the business transaction form
- assess the completeness and correctness of the
documents submitted
- compute the corresponding fee
- issue a computer-generated business identification number
(BIN) slip
Present BIN to a licensing officer at the License Division of the City

3 Treasurer’s Office for verification of the computation and assessment
of business tax and regulatory fees.
Pay the fees at the cashier’s office. A License & Regulatory Fees (LRF)
4
form will be issued as official receipt.
5 Present the LRF to the BPDO for verification of payment. Wait for the
issuance of business permit.
Fig. 4.2 How to Get a Business Permit in the City of Manila
Depending on the nature of the business, your client might need to secure some other permits
or licenses from other government entities. Refer to the listing on the next page to guide your
client.
Table 4.2 Government Agencies That Issue Special Permits or Licenses
TYPE OF BUSINESS WHAT AND WHERE

Animals and animal products, registration of veterinary Registration certificate - Dept. of Agriculture -
drugs and animal facilities Bureau of Animal Industry (DA-BAI)
Aquatic animals, importation Permit - Permit – Bureau of Fisheries and Aquatic
Fishpond lease agreement Resources (DA-BFAR)
Fertilizer products and registration of pesticide products Registration certificate - Fertilizer and Pesticide
Products Authority (DA-FPPA)
Fiber and fiber products processing and trading Registration certificate; commodity clearance - Fiber
Development Authority (DA-FIDA)
Film and television production, export and import, Registration certificate - Movie & Television Review
booking, etc. and Classification Board (MTRCB)
Food, chemicals, health related business Registration certificate – Dept. of Health - Bureau of
Food and Drugs (DoH-BFAD)
Flour processing, grains wholesaling & retailing, milling, License – National Food Authority (DA-NFA)
warehousing, exporting, importing, indenting,
packaging, threshing, corn shelling, mechanical drying
Meat plant accreditation for meat & meat products, Accreditation certificate, Registration certificate –
slaughterhouse operations National Meat Inspection Commission (DA-NMIC)
Pawnshop & lending investor Registration certificate – Dept. of Finance - Bangko
Sentral ng Pilipinas (DoF-BSP)
Plants & plant products: nursery accreditation Permit - Bureau of Plant Industry (DA-BPI)
Seed certification and phytosanitary certificate Registration certificate – DA-BPI
Recruitment or placement agency for foreign Registration certificate - Dept. of Labor and
employment Employment - Phil. Overseas Employment
Administration (DOLE-POEA)
Recruitment or placement agency for local employment Registration certificate – Bureau of Local
Employment (DOLE-BLE)
Schools & educational institutions:
Educational institution Permit - Dept. of Education (DepEd)
Technical-vocational education, training program Registration and accreditation certificate -Technical
registration and accreditation Education Skills Development Authority (DOLE-
TESDA)
Security agency business Permit – Dept. of Interior & Local Government -
Philippine National Police (DILG-PNP)
Service and repair shops for: Accreditation license: Bureau of Trade Regulation
Motor vehicles; automotive & heavy equipment; and Consumer Protection (DTI-BTRCP)
engine & engineering works, & machine shops;
electronics, electrical, air conditioning & refrigeration;
office & data processing equipment; medical &
industrial equipment; appliances or devices; and
private emission centers
Sugar trading, muscovado converting & trading, Registration certificate – Sugar Regulatory
processing or manufacturing sugar-based products for Administration (DA-SRA)
export
Telecom business License – Dept. of Transportation & Communication
- National Telecommunication Commission,
(DOTC-NTC)
Tourism-related projects Registration and accreditation certificate – Dept. of
Tourism (DOT)
Transportation: Land transport service Land Transport Franchise & Regulatory Board
(DOTC-LTFRB)
Sea transport service Maritime Industry Authority (DOTC-MARINA)
Video production, sales and rental Optical Media Board (OMB), Office of the President
The BMBE LAW
The BMBE Law was promulgated for the benefit of micro and small business entrepreneurs
like your client. Therefore, it is very important to inform him about the benefits the business
can avail and how these can be availed. Being with the DTI, your client will expect to get a
good briefing about this Law from you. You might need to gain a mastery of this Law and to
have a ready source of information by your side all the time.
THE BUSINESS COUNSELOR’S
TOOLS
Chapter
BUSINESS COUNSELOR’S TOOLS
You have tools to aid you in your counseling job. However, unlike a doctor, mechanic, or
carpenter, your tools are intangible. Some of the analytical tools that will be useful in your
job as a counselor are identified in this chapter. In the next four chapters, these tools are
described further. Each one is provided with a description, simplified procedures, examples,
applications, and limitations.
The tools and strategies presented in this manual are grouped using four functional aspects of
management. Some tools may have several applications, while others may have only one.
Table 5.1 lists the tools and strategies discussed in this manual alphabetically. It is designed
to facilitate your identification of tools and strategies appropriate for a given set of conditions.
Table 5.1: Tools and Strategies
Page Functional
Tool/Strategy Purpose Some Applications
Ref. Classification
Determines the level of Marketing

• Determine BE point
Break-even (BE) sales where a firm Production
173 • Determine variable costs
analysis neither makes profit nor General Mgmt.
incurs a loss • Calculate fixed costs ; Finance
• Quality control ; Marketing

Cause and effect Traces the causes and • Productivity improvement ; Production
77
diagram effects of a problem • Maintenance ; General Mgmt.
• Other problems ; Finance
• Analysis of distribution
costs
Analyzes the market ; Marketing
Channels of • Analysis of channel
intermediaries for Production
distribution 119 efficiency
efficiency and General Mgmt.
chart • New channel strategy
effectiveness Finance
• Analysis of market
penetration strategies
Page Functional
Ref. Classification
• Productivity
improvement ; Marketing
Facilitates understanding
Charts and • Quality control ; Production
80 of facts and numbers
graphs • Sales projections ; General Mgmt.
presented in visual form
• Project management ; Finance
Evaluates the performance • Analysis of financial Marketing

Common size
of different companies or performance Production
financial 178
of the same firm over • Comparative analysis of General Mgmt.
statements
different periods different firms ; Finance
• Productivity Marketing
Indicates the range of improvement ; Production
Control charts 151
variability of a system • Quality control General Mgmt.
Finance
• Project management
; Marketing
Determines whether a • Mechanization
Cost benefit ; Production
analysis
84 proposed action is justified • Productivity ; General Mgmt.
or not improvement ; Finance
Marketing
Examines possible • Productivity
Production
Decision tree 86 outcomes of choosing a improvement
; General Mgmt.
particular option • Project management
Finance
Marketing
Economic order Determines re-order point • Inventory management ; Production
155
quantity for inventory stock and control General Mgmt.
Finance
• Liquidity analysis Marketing

Financial ratio Analyzes the financial • Leverage analysis Production
180
analysis performance of a firm • Activity analysis General Mgmt.
• Profitability analysis ; Finance
• Product development ; Marketing

Assesses the competitive
Five forces • Market analysis Production
122 strength and position of a
analysis • Opportunity General Mgmt.
business
identification Finance
CHAPTER 5 : BUSINESS COUNSELOR’S TOOLS 73
Page Functional
Ref. Classification
• Process improvement
Marketing
Traces and examines the • Cost reduction
; Production
Flowchart 89 manufacturing process for • Materials handling
General Mgmt.
efficiency • Productivity Finance
improvement
• Methods improvement
• Plant and workplace
layout Marketing
Flow process Details and examines the • Productivity ; Production
157
chart manufacturing sequence improvement General Mgmt.
• Cost reduction Finance
• Elimination of
bottlenecks
• Materials handling
Marketing
Builds an understanding of • Process improvement
Force field ; Production
92 the forces for or against a • Productivity
analysis ; General Mgmt.
change, plan or decision improvement
Finance
Charts the sequence of • Production planning ; Marketing
activities of a given project • Production scheduling ; Production
Gantt chart 95
and the time required to • Project management ; General Mgmt.
complete each activity ; Finance
Marketing
• Capital budgeting
Internal rate of Evaluates the financial Production
184
return of investments • Investment decision- General Mgmt.
return
making
; Finance
Suggests manufacturing Marketing

practices that can lead to • Production planning ; Production
Just in time 161
the reduction of • Production scheduling General Mgmt.
unnecessary costs Finance
• Management audit
• Identification of
organizational
Defines management weaknesses ; Marketing
Linear
97
responsibilities for • Design of organizational ; Production
responsibility
different operating changes ; General Mgmt.
charts
functions • Analysis of management ; Finance
procedures and
functional relationships
Page Functional
Ref. Classification
Marketing
• Capital budgeting
Evaluates the financial Production
Net present value 190 • Investment decision-
return of investments General Mgmt.
making
; Finance
Marketing
Analyzes the costs • Capital budgeting
Make or buy ; Production
188 associated with making • Investment decision-
decision General Mgmt.
and buying options making
Finance
• Inventory control
; Marketing
Sorts the critical and vital • Quality control
; Production
Pareto analysis 99 few from a set of many • Product profitability
; General Mgmt.
elements analysis ; Finance
• Cost analysis
Marketing
Estimates the length of • Capital budgeting
Production
Payback period 193 time it takes to recover an • Investment decision-
General Mgmt.
investment making
; Finance
Analyzes the duration of Marketing

• Production planning
processes required to ; Production
PERT/CPM 102 • Production scheduling
complete a complex task or ; General Mgmt.
project • Project management Finance
; Marketing
Determines a product’s • Product development Production
Position mapping 124
position in the market • Market analysis General Mgmt.
Finance
; Marketing
• Pricing goods and
Presents different pricing Production
Pricing strategies 126 services
methods General Mgmt.
Finance
• Forms analysis Marketing

Analyzes forms and
• Forms design ; Production
Procedure chart 105 develops effective
administrative procedures • Analysis of systems and ; General Mgmt.
procedures Finance
CHAPTER 5 : BUSINESS COUNSELOR’S TOOLS 75
Page Functional
Ref. Classification
• Product strategies
Presents the distinct stages ; Marketing
• Pricing strategies
Product life cycle in the life of a product and Production
134 • Distribution strategies
strategies suggested strategies at each General Mgmt.
stage • Advertising and Finance
promotion
; Marketing
Product Presents different product • Selling goods and Production
136
strategies marketing strategies services General Mgmt.
Finance
; Marketing
Encourages target market
Promotion • Selling goods and Production
138 to use or purchase a
strategies services General Mgmt.
product or service
Finance
• Quality control ; Marketing

Maps out all the factors in
Relations • Productivity ; Production
108 a complicated problem,
diagram improvement ; General Mgmt.
system or situation
• Maintenance ; Finance
Marketing
Details the flow of • Plant layout ; Production
Routing diagram 163
materials in a factory • Materials handling General Mgmt.
Finance
Marketing
Reveals trends, patterns or • Quality control
; Production
Run charts 165 shifts in a process over • Productivity
General Mgmt.
time improvement
Finance
; Marketing
Presents techniques on
Sales forecasting Production
140 how to come up with sales • Sales projections
techniques General Mgmt.
projections
Finance
• Quality control
• Productivity ; Marketing
Identifies the relationship improvement ; Production
Scatter diagram 110
between two variables • Marketing strategies ; General Mgmt.
• Cost analysis ; Finance
Page Functional
Ref. Classification
Improves plant layout by

• Plant layout Marketing
considering the product,
Simplified layout • Productivity ; Production
167 quantity, and relationships
planning improvement General Mgmt.
between processes and
• Cost reduction Finance
time
Determines whose interests

• Project design and Marketing
should be taken into
Stakeholder implementation Production
112 account when developing
analysis • Project management ; General Mgmt.
and/or implementing a
Finance
policy or project
• Opportunity
Identifies the firm’s identification Marketing
strengths and weaknesses • Project management Production
SWOT analysis 115
as well as the opportunities • Identification of ; General Mgmt.
and threats the firm faces organizational Finance
weaknesses
; Marketing
Identifies ways on how to
Value chain Production
148 create value for products or • Competitive advantage
analysis General Mgmt.
services
Finance
Examines a product’s ; Marketing

Value
material, labor cost, etc. • Product development ; Production
engineering and 170
components to improve • Cost reduction General Mgmt.
analysis
functional utility Finance
Chapter
CLASSIC DIAGNOSTIC TOOLS

USES AND APPLICATIONS
There are many analytical tools you can use in your counseling job. The 15 tools discussed in
this chapter are categorized as “classic” as they find applicability in many of the functional
areas of management. Many of these tools will help you organize your thoughts, analyze, and
evaluate a wide range of problem situations.
The cause and effect (C&E) diagram is also known by

CAUSE AND two other names. It is sometimes called the fishbone
EFFECT DIAGRAM diagram as it resembles the skeleton of a fish and at
times referred to as the Ishikawa diagram after its
Japanese founder Dr. Kaoru Ishikawa.
The C&E diagram is a problem analysis tool that provides a systematic way of looking at
effects and the causes that create or contribute to those effects. This tool can be used to
diagnose any type of problem as it is designed to identify all contributing root causes likely to
be causing a problem.
HOW TO DRAW A C&E DIAGRAM
Step 1 Define a specific problem. As

shown on the right, write the
problem on the far right side of PROBLEM
your diagram and draw a long
horizontal arrow pointing towards
it.
Step 2 From the horizontal arrow, branch

off major causes of this problem
using lines connected to the central
spine (horizontal line).
Category 2 Category 1
Determine cause categories that

contribute to the problem.
Categories are meant to help you PROBLEM
organize your ideas. Decide on the
categories that best suit the
situation. For example, for
Category 4 Category 3
manufacturing industries you can
use manpower, machine, methods,
materials, measurements, and
environment. For service industries,
you can group causes using policies,
procedures, people, and technology
as categories.
Step 3 Begin brainstorming and identify the factors within each category that may be
causing the problem at hand. Attach possible causes to the appropriate branches.
For each cause identified, continue to ask 'why does that happen?' and attach that
information as another bone of the category branch. This will help get you to the
true root causes of a problem.
Step 4 Repeat step 3 with each factor under the category to produce sub-factors. Continue
asking, “Why is this happening?” until you no longer get useful information.
When the fishbone is complete, you will have more or less a complete picture of all the
possibilities of what could be the root cause for the given problem.
MANPOWER MARKET MATERIALS

Poor working Unbranded One-man
conditions High products sales force
Dependent
executive on one
salaries Limited market supplier
Low
penetration
productiivity
90%
Limited client imported
Old Unskilled base
machines workers
FINANCIAL
Absence of strict cost monitoring LOSSES
Old machines Personal
expenses
charged to
Operating at Limited company
40% capacity contribution
No margin Poor
maintenance collection
program
Frequent machine Sizeable number of
breakdowns Inflexible pricing policy non-performing assets
MACHINES MONEY
CHAPTER 6: CLASSIC DIAGNOSTIC TOOLS 79
METHODS MACHINE
No proper Impatient
Not properly
training Underinflated tires
tuned
Drive too fast
No record of right
Use wrong gears Always late tire pressure
Radio too loud
Wrong tire pressure
Poor
Can't hear engine maintenance
POOR GAS
Wrong oil Lost
MILEAGE
Poor driving
habits Lost owner's owner's
manual manual
No proper training
Improper lubrication Don't know
recommended octane
Poor Additional
maintenance expense Low octane gas
Oil change
not regular High octane is expensive
PEOPLE MATERIALS
Fig. 6.1: Sample Cause and Effect Diagrams
Analyzing a C&E diagram will help you identify causes that need further investigation. A
thick cluster of items in one area usually indicates a need for further study. A main category
with only a few specific causes may indicate the need for further identification of causes.
Look for causes that appear repeatedly. These usually represent root causes. Identify causes
that need immediate corrective action.
TIPS ON DRAWING A C&E DIAGRAM
Clearly identify and define the problem. State the problem in the form of a question, such as
“Why is the company losing money?” Framing it as a why question will help in
brainstorming, as each root cause idea should answer the question. Use the 5-Why analysis
method to move past symptoms and understand the true root cause of a problem. It is said that
only by asking Why? five times successively can you delve into a problem deeply enough to
understand the ultimate root cause. By the time you get to the 4th or 5th why, you will likely
be looking squarely at management practices.
APPLICATIONS AND LIMITATIONS
Whether you are dealing with a marketing, production, finance or general management
problem, you will find the cause and effect diagram very useful. It broadens your thinking
about potential or real causes of a problem and facilitates further analysis and examination of
these causes.
The C&E diagram, like other problem-solving techniques, is a heuristic tool. It is a common
sense rule (or set of rules) intended to increase the probability of solving some problem. As
such, it helps users organize their thoughts.
A chart or graph is used to present facts in visual form.

CHARTS AND They show the relationship between changing things
GRAPHS or display the relative sizes of numerical quantities. A
graph is one of the easiest ways to compare numbers.
Common graphs use bars, lines, or parts of a circle to
display data.
There are several types of charts and graphs. The more commonly used charts and graphs are
listed below.
Pie chart Pie charts are used to show percentages of a whole but do not show
changes over time.
Bar graph Bar graphs are used to show how an item or variable changes over
time. It can also be used to compare items or show data frequency
(Histogram).
Line graph Line graphs are used to show general trends as well as peaks (ups)
and valleys (downs).
Tally chart A tally chart provides a quick method of recording data as events
happen. Data is recorded using vertical strokes.
Organizational This type of chart is used to show the chain of command in an

chart organization.
Flowchart A flowchart shows the sequence of activities of a process. It can be

customized to fit any need or purpose.
Samples of the first four types of graphs listed above are illustrated below using the following
data set: brown – 31%; red – 26%; blue –17%; green – 8%; yellow – 11%; orange – 7%.
The numbers indicate the quantity of chocolate candies inside an M&M bag, grouped
according to color.
HISTOGRAM
PIE CHART
25
Or ang e 20
7%
Y el lo w 15
B ro wn
11% 3 1%
10
G r een
8% 5
0
B r o wn R ed B l ue Gr een Y ello w Or ang e
B lue
17%
R ed
26%
LINE GRAPH TALLY CHART

Brown
25 Red
20
No. of Candies
Blue
15
Green
10
Yellow
5
Orange
0
Brown Red Blue Green Yellow Orange
By using spreadsheets like Excel and Lotus 123, you can create a wide variety of graphs. For
instance, in Excel, you can create these types of bar graphs: cluster bar (compares values
across categories), stack bar (compares the contribution of each value to a total across
categories), and 100% stacked column (compares the percentage each value contributes to a
total across categories). In addition, you can enhance the appearance of your bar charts using
3-D effects.
There are other types of charts and graphs like the cosmograph which depicts parts of a whole
but is less numerical than a pie chart and the pictograph which uses cartoons or simple
drawings to depict quantities.
Fig. 6.2: Sample of Cosmograph

Source: http://www.ais.msstate.edu/AEE/Tutorial/pdfs/cosmo.pdf
Fig. 6.3: Sample of Pictograph

Source: http://users.vol.net/edwintam/tips/1/TIP1.HTM
Organizational charts and flowcharts, on the other hand, differ from the first four charts
discussed above in that they are not used to represent numbers.
Organizational charts are a graphical representation of the arrangement of positions in an

organization. It shows the chain of command and hierarchy of responsibility, authority, and
accountability in the organization.
There are several different types of

organizational structures. The simplest is often Owner/Manager
used in microenterprises, which is basically
made of two hierarchic levels: the managing
Employee I Employee 2 Employee 3
owner and the employees. In this case, the
manager holds most of the managing
responsibilities, and there is no clear definition Fig. 6.4: Flat Structure
of the tasks of the remaining employees.
President
Another type of structure often used in small-
sized companies or in companies with a
limited range of products or services is the so- Marketing Production Personnel Finance
called "functional structure." It consists of
dividing the work and allocating authority and
responsibility according to the classical
management areas of marketing, production,
human resource management (personnel), and
finance. Fig. 6.5: Functional Structure
Bigger companies have more complicated

organizational structures. Some choose to organize according to geographical market
coverage while others according to the goods and services it produces or sells.
Flowcharts map out the different activities of a process. Details on flowcharting are presented
in a separate section of this chapter.
Charts and graphs provide a compact and interesting way of conveying information. Your
client will be able to quickly visualize what you are saying if you present data graphically
instead of rows and columns of numbers.
You can drive home your point more convincingly with the aid of a chart. But to be effective,
you have to know what type of chart to use. Use Table 6.1 as guide in choosing the right
chart.
Table 6.1 Types of Charts
Bar Pie Line Organizational Flow

Cosmograph Pictograph
Graph Chart Graph Chart Chart
Whole and In some
Yes Yes No Yes Yes Yes
its parts cases
Simple In some
Yes Yes Yes Yes No No
Comparisons cases
Multiple In some
Yes No Yes No No No
Comparisons cases
In some
Trends Yes No Yes No No No
cases
Frequencies Yes Yes Yes No Yes No No
In some In some
Sequences No No No Yes Yes
cases cases
For details on how to draw charts and graphs using PowerPoint or Excel, visit the following
websites:
http://www.marshall.usc.edu/computing/PDF_Files/PowerPoint/PowerPoint_97_Charts.pdf
and
http://www.marshall.usc.edu/computing/PDF_Files/Excel/Excel_XP_Charts.pdf
Today, there is hardly any limitation to the use of charts and graphs. Software programs have
made the task of creating charts and graphs simple. Moreover, with the aid of multi-media
these days, one need not spend hours making presentation materials on kraft paper as
computer generated charts and graphs can readily be flashed on screen with the aid of an LCD
panel.
Cost benefit analysis is a tool wherein all relevant

COST BENEFIT considerations are translated into monetary terms.
Briefly, the technique involves adding up the value of
ANALYSIS
the benefits of a course of action and subtracting the
costs associated with it.
In its simplest form, cost benefit analysis is carried out

using only financial costs and financial benefit. Just like other financial tools (net present
value, internal rate of return, and the payback period) the initial expense is compared to
expected returns. For example, the decision on whether or not to introduce a new product in
the market may be arrived at by comparing total manufacturing and marketing expenses to
projected sales for the new product and deciding to proceed with the production of the new
product only if the expected revenues eventually recoup the costs.
The more sophisticated approach to cost benefit analysis involves assigning financial value on
intangible costs and benefits, which in most cases brings an element of subjectivity in the
process.
HOW TO DO A COST BENEFIT ANALYSIS
Step 1 What is the proposed action? Determine how much will it cost to implement.
Step 2 Determine what are the benefits – both tangible and intangible – that can be derived
from the proposed action. How much are these benefits worth?
Step 3 Where costs or benefits are paid or received over time, determine how long it will
take for the benefits to recover the costs.
Here are two examples on cost benefit analysis. The first example involves an entrepreneur
who is contemplating on whether or not to acquire a computer-based sales processing system.
He only has a few computers and his employees are not computer literate. He knows that
computerized sales forces are able to contact more customers and give a higher quality of
reliability and service to customers. Should he invest in the new computer system? His
financial cost benefit analysis is shown below.
Cost Benefit
New computer equipment
10 network-ready PCs 300,000
1 server 150,000
3 printers 165,000
Cabling and installation 25,000
Software 30,000
Training costs
Computer basics 40,000
Other costs
Lost time due to training (5 days x 10 people x 500/day) 25,000
Lost sales due to disruption (5 days x 2,000/day x 10 people) 100,000
Lost sales due to inefficiency during first month 25,000
TOTAL COST 860,000
Additional sales (1,000 x 22 days x 12 months x 10 people) 2,640,000

Improved customer service 50,000
TOTAL BENEFIT 2,690,000
Payback period: 860,000 ÷ 2,690,000 = approximately 4 months
In the example above, the estimates of the benefits that the new system will bring are quite
subjective. Despite this, the entrepreneur is very likely to introduce it, given the very short
payback time.
Let’s take another example. This time the production manager of DEFG Company is
recommending the purchase of a stamping machine that can increase output by 75 more units
per hour. Acquiring a stamping machine will mean replacing three workers who are presently
doing the job manually. Aside from the increase in output, the machine is expected to
produce higher quality units and result in less wastage (rejects) as the units will be cut in
uniform sizes. In addition, a 5% savings in raw materials can be realized when large rolls of
material are used instead of the individual sheets needed when the work is done by hand. The
machine can be acquired at P2.5M (inclusive of taxes and interest). Estimates show that
power consumption will increase by P15,000 per month with the use of this machine.
The attendant costs and benefits in acquiring a stamping machine are shown below.
Cost Benefit
Stamping machine 2,500,000

Installation cost 55,000
Salary of machine operator (550/day x 22 days x 12 mos.) 145,200
Increase in power consumption (15,000/mo x 12 mos.) 180,000
TOTAL COST 2,880,200
Increase in revenues
20/unit x 75 units/hr x 8 hrs/day x 22 days/mo x 12 mo) 3,168,000
Less wastage/rejection (3,000/month x 12 months) 36,000
Reduced material costs (0.10/unit x 158,400 units/yr) 15,840
Reduce labor cost (500/day x 3 employees x 22 days/mo x 12 mo) 396,000
TOTAL BENEFIT 3,615,840
The above analysis shows that the purchase of the stamping machine is justified given that the
total benefit exceeds total cost.
A cost benefit analysis is done to determine how well, or how poorly, a planned action will
turn out. When using this tool, be sure you include all the costs and all the benefits and
properly quantify them.
You can also assign monetary values to less tangible effects such as risk, competitive
advantage, damage to environment, etc. Since the assignment of values can be the subject of
argument, be sure that you are ready to justify your position.
Decision trees are very useful in choosing the best

DECISION alternative course of action in situations where one
faces uncertainty. They provide a very effective way
TREE
of laying out options and examining the possible
outcomes of choosing a particular option. With the aid
of this tool, you will be able to picture the risks and
rewards associated with each possible course of action.
HOW TO CONSTRUCT A DECISION TREE
Although no one ever knows beforehand what the outcome will be, one generally has some
knowledge about what the possible outcomes are and how likely each will occur. This
information can be used to select the option that is most likely to yield the most favorable
results. Here are the steps in constructing a decision tree:
Step 1 On the left side, middle section of a large sheet of paper draw a small square to
represent the decision that needs to be made. From this box, draw lines extending to
the right for each possible solution, and write the solution along the line.
To minimize the complexity of the final decision tree, limit your options to a
maximum of four actions.
Step 2 At the end of each line, consider the results. If the result of taking that option is
uncertain, draw a small circle. If the result is another decision that has to be made,
draw another square.
Starting from the new decision squares on the diagram branch out lines representing
the alternatives that you can select from. From the circles draw lines representing
possible outcomes. Keep on doing this until you have exhausted all the possible
outcomes and decisions.
Step 3 If necessary redraw your decision tree if parts of it are too crowded or untidy.
Step 4 Evaluate your decision tree. Start assigning a cash value and probability to each
possible outcome. If you use percentages, be sure that the total at each circle adds up
to 100%.
Step 5 Calculate the value of outcomes by multiplying the cash value of each outcome by its
probability. The total for a particular node of the tree is the sum of all the products in
that node.
Step 6 Evaluate each decision node. Write down the cost associated with each option along
each decision line. Subtract the cost from the calculated outcome value. The result
gives the value that represents the benefit of that decision. The option that has the
largest benefit is the best decision.
To illustrate how a decision tree is done, let us suppose a small-scale manufacturer of snack
foods must decide on whether to expand now or wait another year. He is told that if he
expands now and economic conditions remain good, he will make additional profits of P1.5
M; if he expands now and there is a recession, he will incur losses of P500,000; if he delays
his expansion and economic conditions remain good, he is likely to realize profits of P1.0M;
and if he waits another year and there is a recession, there will be a small profit of P100,000.
c
After completing Steps 1-6, it seems that mi Php 1.5M
no
there is not much difference if the e co n s
od itio
manufacturer expanded now or postponed G o c o nd
55% .55 x P 1.5M = P 825,000
his plans. But wait, there is still the last .45 x P 0.5M = (P 225,000) P 600,000
step. 45%
no w
n o
ssi
00 0
a nd
ce
75,
Re
(Php 0.5M)
P4
Ex p
Let’s assume further that the manufacturer
st =
will have to acquire a machine to expand
Co
his capacity. A supplier informs the
manufacturer that the going price of an
0
,00
c
15
mi
on
extruder is P475,000 but will go up by
P5
no Php 1.0M
ns i
co n s
=
e
a
another P40,000 next year. Should the od itio
ost
e xp
G o c o nd
C
la y
manufacturer expand now or not? 55% .55 x P 1.0M = P 550,000 P 595,000
De
.45 x P 0.1M = P 45,000
45%
n
s io
ce s
Re
Php 0.1M
Fig. 6.6: Decision Tree Sample 1
Here is another example (downloaded from the internet) 7 :
The basic decision tree, as shown on the left,

details the options of a hypothetical firm
deciding on what strategy to pursue to sustain
its position in the market: should it develop a
new product or should it just consolidate?
The firm can choose to develop a new product

in either one of two ways: through thorough
development or through rapid development. In
either case, the market is perceived to react
differently. If the firm chooses to consolidate,
it can do so by strengthening its current
product line or else start reaping its products.
Again, the market is perceived to react
differently.
Next, numeric (probabilities) and cash values

are assigned to each option to determine which
alternative will yield the greatest benefits.
Fig. 6.7: Decision Tree Sample 2 These are shown in Fig. 6.8.
7
http:www.psychwww.commtsite/dectree.html
Analyze the decision tree

on the left. What course
000 of action should the firm
75,
st =
Co take? Work on the figures
and determine the best
Co
alternative. Which option
st =
40, gives the highest benefit?
000
From the diagram, the

best option is for the firm
to take its time in
thoroughly developing a
new product rather than
rushing a new product
(rapid development) into
00 the market.
5,0
st =1
Co
It is interesting to note
=0 that the benefits that can
st
Co be derived from
improving on the
company’s existing lines
are far greater than the
benefits that can be
realized if a new product
is rushed into the market.
Fig. 6.8: Decision Tree Sample 3
APPLICATIONS and LIMITATIONS
The decision tree is a good decision making tool as it allows you to clearly lay out a problem,
consider all possible alternatives, weigh the pros and cons, and evaluate likely outcomes of
choosing those options. Typically decision trees are used in making decisions involving
maximizing something desirable (such as profit, sales, productivity or satisfaction) or
reducing something undesirable (such as defects, time taken, or scrap).
A flowchart is a graphical representation of the

sequence of operations, movements, inspections,
FLOWCHART delays, decisions, and storage activities of a process.
It can be customized to fit any need or purpose. For
this reason, flowcharts have been recognized as a very
unique quality improvement method.
There are two types of flowcharts: general and detailed. While the former sketches the
relationships between processes, the later provides greater detail by classifying the other steps
into operation, delay, storage, inspection, or transport, using a symbolic language.
LABEL/
LEMON GRASS WATER CHEMICAL BOTTLES BOX
PLANT MATERIALS
Weighing
Moisture
WEIGHING content
checking
Loading to
LOADING IN TRAYS trays
Transporting of
LOADING IN EXTRACTOR RM to extractor
WATER
Loading to
extractor
CONDENSING
Extraction
process
OIL WATER Collection of

oil
Cooling of
COLLECTING COLLECTING extracted oil
Transport to
laboratory
TREATING
Treatment with
chemicals and
BOTTLING quality control
Bottling and
STORING sealing
Refrigeration
Transport to
packaging
Labelling of bottles
and packaging in
boxes
Finished good for

storage
Fig. 6.9: General Flowchart of Essential Oil Fig. 6.10: Detailed Flowchart of Essential Oil
Extraction Extraction

FLOWCHART SYMBOLS
Flowcharting symbols are used to represent types of operations and processes. The use of a
standardized set of symbols makes flowcharts easier to interpret. Only the most useful basic
symbols used in industrial engineering are shown below. The wide variety of templates
offered by software packages, like VISIO, makes flowcharting simple, fun, and easy.
This symbol shows

A circle denotes an operation. A continuation of the flowchart
An operation occurs when an from one page to another or
Operation object (e.g., a product or Connector from a decision diamond to
document) is intentionally another page or process.
changed in any of its physical When you reach the bottom of
or chemical characteristics or a page, draw a flowchart
staged for another operation, connector symbol and connect
transportation, inspection or it to the last item in the chart.
storage. Operations also occur Label the symbol with a letter.
when information is Draw another flowchart
transmitted, or received or connector and label it with the
when planning or calculations same letter at the page and
take place. point where the process
continues.
An inspection, verification or This symbol is used when two

measurement happens when an operations are performed in
object is examined for the same work station or
Inspection identification or verified for Operation concurrently.
quantity or quality for any of and
its characteristics. Inspection
The diamond symbol A temporary delay is usually

represents a decision or denoted with a capital letter D.
approval point. Typically, if A delay occurs to an object
Decision the answer to a decision Delay when the conditions do not
question is “yes” the task require immediate
sequence flows to the right, if performance of the next
“no” it flows to the left. planned step.
An arrow is used to denote a Triangles are used to denote

transfer or movement of an storage. The upright triangle
object or material. denotes storage of finished
goods. The inverted triangle
Transport Storage represents materials storage.
Fig. 6.11: Basic Flowchart Symbols
HOW TO CONSTRUCT A FLOWCHART
Flowcharting is not really complicated. If you are new or have had very little experience at it,
let this section guide you and help you hone your skills in flowcharting. The steps as
enumerated and described below are very simple and easy to follow.
Step 1 Determine the boundaries at the outset. Establish where the process begins and where
the process ends.
Step 2 Write down the steps. Use a verb to start each task description. It is advisable to use
post-it paper so you can move and rearrange tasks easily.
Step 3 Once you have the different tasks and activities in sequence, draw the appropriate
symbols. Start with the basic symbols:
1. Boxes or rectangles show task or activity performed in the process.

2. Arrows show process direction flow.
3. Diamonds show points in the process where yes/no questions are asked or a
decision is required.
4. Usually there is only one arrow out of an activity box. If there is more than one
arrow, you will need a decision diamond.
5. If there are feedback arrows, make sure the feedback loop is closed: it should
take you back to the input box.
Step 4 Include pertinent chart information, like title and date, for easy reference.
Step 5 Have someone who is familiar with the process review the chart and check for its
accuracy and completeness.
You will find great use for flowcharts as a small business counselor. Learning a new
production process can be simplified using a flowchart. Flowcharts are a good form of
documenting a process, and quite often are useful when examining how various steps in a
process fit together.
The flowchart is the simplest tool you can use when investigating manufacturing processes.
By tracing the manufacturing sequence, you should be able to identify bottlenecks and
pinpoint actions that can be eliminated, combined or rearranged to achieve greater efficiency.
There are no limitations on the use of flowcharts.

The force field diagram is derived from the work of

FORCE FIELD social psychologist Kurt Lewin. He theorized that
ANALYSIS forces – persons, habits, customs, and attitudes – both
drive or restrain change. These forces can be positive,
driving one to accept the proposed change, or
negative, restraining one to accept the proposed
change.
Force field analysis is a simple but powerful technique for building an understanding of the
forces for or against a change, plan or decision. It provides a framework for looking at various
factors that influence a decision. By carrying out the analysis you can plan on how to
strengthen the forces supporting a decision and reduce the impact of opposing it.
In the context of process improvement, driving forces can be seen as pushing for change
while restraining forces stand in the way of change. A force field diagram can be used to
analyze these opposing forces and set the stage for making change possible. Logically, change
will not occur when both the driving forces and restraining forces are equal, or when the
restraining forces are stronger than the driving forces. For change to take place, the driving
forces must overcome the restraining forces.
HOW TO DO FORCE FIELD ANALYSIS
Step 1 Create two columns, with one header running

across both columns. Write the planned
changed in the header area. Label the left
column “Driving Forces” and label the right DRIVING RESTRAINING
FORCES FORCES
column as “Restraining Forces”.
Step 2 List down in the left column all the forces that
are for a proposed change or plan and in the
right column, the forces that are against the
proposed change or plan.
Step 3 When all the forces are listed down, rate each force using a numerical scale. For
instance you can use a scale of “1” (weak) to “5” (strong).
Step 4 Analyze each force. Are they valid? Can they be changed? What are the critical
forces? Determine which of the driving forces can be strengthened and which of the
restraining forces can be removed or weakened.
For example, your client cannot decide if he should buy a P1.0 M piece of production
equipment. He shares with you the pros and cons of acquiring the new equipment. Among
others, the machine will enable your client to manufacture new products, increase volume of
output, increase efficiency, and in the long run, reduce production cost. Apart from huge
capital outlay, he expects to meet resistance from his employees because of the reduction in
overtime and the refusal to adopt new technology. If you were to draw a force field diagram
of the situation, it may resemble Fig. 6.12.
Plan:
Upgrade Operations By Purchasing New Equipment
DRIVING FORCES RESTRAINING FORCES
4 Customers want new products Loss of staff overtime 4

Improvement in production
3 Cost 3
efficiency
Employees' apprehension on
3 Increase volume of output 2
adopting a new technology
1 Lower maintenance cost Environmental impact of new

technology
2
Temporary disruption of operations 1
TOTAL 11 TOTAL 12
Fig. 6.12: Force Field Analysis Diagram
Given the above situation what would you advise your client? How can you reduce the
strength of the forces opposing the purchase of the equipment? Based on the diagram, you
can suggest to your client the adoption of the following measures:
¾ By training staff (increase cost by 1) you could eliminate fear of technology (reduce
fear by 1)
¾ It would be useful to show staff that change is necessary for business survival (new
force in favor, +3)
¾ You could raise wages to reflect new productivity (cost +1, loss of overtime -2)
¾ Slightly different machines with filters to eliminate pollution could be installed
(environmental impact –2, cost +1)
The foregoing suggestions would swing the balance from 11:12 (against the plan), to 14:10
(in favor of the plan) as shown below.
Revised Plan:
Upgrade Operations By Purchasing New Equipment
DRIVING FORCES RESTRAINING FORCES
4 Customers want new products Loss of staff overtime 2

Improvement in production
3 Cost 6
efficiency
Employees' apprehension on
3 Increase volume of output 1
adopting a new technology
1 Lower maintenance cost Environmental impact of new

technology
0
3 Necessary for business survival Temporary disruption of operations 1
TOTAL 14 TOTAL 10
Fig. 6.13: Revised Force Field Analysis Diagram

Force field analysis enables you to look at all the forces for and against a plan. It helps you to
weigh the importance of these factors and decide whether a plan is worth implementing. You
can also use a force field diagram to list and analyze pros and cons, actions and reactions, and
strengths and weaknesses. It can also be useful when comparing ideal situations with reality
as well as perceptions of opposing parties.
Henry Laurence Gantt, an American mechanical

engineer, management consultant, and industry
GANTT CHART advisor, developed the Gantt chart as a production
control tool in 1917. Today, the usefulness of Gantt
charts is no longer limited to production planning and
control. It is useful for planning and scheduling all
types of projects. With this tool, the scheduling of
specific project tasks can be planned and a project’s actual progress monitored, coordinated,
and tracked down with relative ease.
More specifically, Gantt charts allow you to:

¾ Assess how long a project should take;
¾ Lay out the order in which tasks need to be carried out;
¾ Communicate the project plan to others;
¾ Mark milestones in the project sequence;
¾ Manage the dependencies between tasks; and
¾ Monitor the progress of a project.
DRAWING A GANTT CHART
The Gantt chart looks like a table with a horizontal and a vertical axis. The graph area
contains horizontal bars which indicate when a particular activity or task starts and when it
ends. The horizontal axis of the Gantt chart represents the total time span of the project that is
expressed either in absolute time (i.e., specific dates or months) or in relative time referenced
to the beginning of the project (e.g., Week 1… Week 5 or Month 1…Month 5). The vertical
axis of the Gantt chart is where the different project activities that need to be undertaken are
listed in sequence. Varying lengths of horizontal bars, lines, brackets, shading and other
devices are drawn opposite each activity to mark the sequencing, timing, and duration of each
activity.
Time
Month 1 Month 2 Month 3 Month 4 Month 5

Activities
Activity 1
Activity 2
Activity 3
Activity 4
Activity 5
To make a Gantt chart, follow these steps:
Step 1 Break the project into its component activities or tasks.
Step 2 Draw your horizontal and vertical axis.
Step 3 List down in sequential order the component activities on the vertical axis of your
chart.
Step 4 Divide your horizontal axis into sections and indicate appropriate time periods.
Step 5 Draw a horizontal bar opposite each activity to indicate when an activity is supposed
to start and end. Some activities are dependent on other activities being completed
first. These dependent activities need to be completed in a sequence, with each stage
being more-or-less completed before the next activity can begin. These dependent
activities are called sequential activities.
Other activities are not dependent on completion of any other tasks. These may be
done at any time before or after a particular stage is reached. These are non-
dependent or 'parallel' tasks. In such cases, the horizontal bars overlap.
There are variations that can be made with the simple Gantt chart to communicate more
information. A column can be added where the initials of the person responsible for a given
task or resources to be allocated can be written down. Or, as the project progresses, secondary
bars, arrowheads, or darkened bars may be added to indicate completed tasks. You too, can
choose to put milestones or important checkpoints or interim goals of the project in the chart.
2005 2006
Activities
Oct. Nov. Dec. Jan
1 2 3 4 1 2 3 4 1 2 3 4 1 2
Develop program design
Recruit
Train
Evaluate
Prepare report
Submit report
Person Jan Jan Feb Feb Mar Mar Apr May May
Activities
Assigned 10 25 1 15 9 25 25 3 20
Develop questionnaire JPA
Mail questionnaire MRQ
Receive responses MRQ
Data entry DPO
Data analysis JPA
Write draft report JPA, FBC
Solicit comments ARP
Finalize report JPA, FBC
Fig. 6.14: Simple Gantt Charts
The Gantt chart’s most important application is in planning, scheduling, and controlling of
project implementation. It is an effective tool for presenting a project and the status of each
activity with all the pertinent information captured in a single page. It singles out the
activities that are either behind or ahead of schedule so that additional resources can be
committed to the completion of a delayed task. Although Gantt charts give a clear illustration
of project status, they, however, do not indicate task dependencies. That is, you cannot tell
how one task falling behind schedule affects other tasks.
There are quite a number of software programs that make the preparation of complicated
Gantt charts easy. These include KIDASA Software’s Milestones Professional, Milestones
Project Companion, and Milestones Simplicity. For more ideas on how you can use a Gantt
chart in scheduling and planning activities, visit http://www.ganttchart.com/Examples.html.
LINEAR The linear responsibility chart was first introduced in

RESPONSIBILITY 1954 by the Serge A. Birn Company of Louisville,
CHART Kentucky. It is a two-dimensional matrix designed to
clarify roles and responsibilities within an organization
or project. Unlike the traditional line and block
organizational charts, the linear responsibility chart
captures the essence of roles and responsibilities of people on a single page.
Listed on the top row of the matrix are the names of people in the organization or project and
on the leftmost column the different responsibilities. Codes in each cell of the matrix indicate
the precise nature of each person’s responsibility. This chart is very useful when doing a
management audit. You can easily spot organizational shortcomings and analyze and
improve procedures.
HOW TO DO A LINEAR RESPONSIBILITY CHART
Step 1 Create a matrix. On the first column, list down the activities in the organization or
project and on the top row write down the positions or names of personnel.
Step 2 On a separate sheet of paper, list down and describe responsibilities of people. Assign
a code for each type of responsibility. An example of a chart of responsibilities,
which covers practically any activity, is shown below. 8
CODE DESCRIPTION
A Work is done – The activity or function is actually performed by the designated

individual.
B General supervision – This covers supervision and control of the function involved
where close direction is not called for.
C Direct supervision – This requires close supervision of a subordinate’s work.
D Supervision with coordination – This covers a committee chairman’s type of

supervision where coordination of the activities of two or more persons is more
important than supervision as such.
E Decision on points specifically submitted – This applies when an individual either

delegates decisions only on specific points to designated subordinates, or in reverse,
delegates all decisions to a subordinate, with the exception of decisions on specific
points he keeps for himself.
F Person must be consulted – The person indicated must be heard, although his advice
need not necessarily be followed.
G Person must be notified – The person must be advised of a decision or action, since this
knowledge will assist him in carrying out his work.
H Person may be called in for an exchange of views – The emphasis here is on “may.”
There is no obligation to consult or right of consultation.
It is important that your list of activities is complete and that all personnel involved
agree with the list of activities and the description of responsibilities.
8
Technonet Asia. Industrial Extension Manual for Small and Medium Industries in Developing
Countries. Singapore, 1985, p. 176.
Step 3 Going back to your matrix, for each activity listed, write in the appropriate cell
(intersection of column and row) the code that best describes the nature of the
person’s responsibility listed in the column heading. If the activity has nothing to do
with the function, leave the cell blank. A sample linear responsibility chart is shown
below.
With a linear responsibility chart, you can easily spot organizational errors like overlapping of
responsibilities, responsibility not specifically assigned, authority not commensurate with
responsibility, etc.
This tool simplifies and facilitates the conduct of a management audit. Instead of taking
extensive notes on interviews with personnel, you can simply mark a blank chart using codes.
The linear responsibility chart finds very limited use for micro and small enterprises, where
all decisions and responsibilities are vested in only one or two people.
Table 6.2: Sample Linear Responsibility Chart
Production R&D HRD Marketing Finance

Activities Manager Manager Manager Manager Manager
Product Development G A F
Sales Planning A
Advertising & Promotion A F
Price Lists A F
Special Pricing A G
Sales Training A A
Customer Complaints F F A F
Technical Service A
Wage & Salary Administration A F F
Selecting & Hiring A A F
Personnel Counseling A
Production Planning A H H
Product Formulation B A
Quality Control F A
Inventory Control A H H
Purchase Contracts G
Packaging Design A F
Investments H A
Office Procedures A
Budgets F F F F A
Credit Management G A
Product Coding G
Financial Statements A
Pareto analysis is a simple diagnostic tool developed

PARETO by Italian economist Vilfredo Pareto who theorized
ANALYSIS that 80% of problems usually stem from 20% of the
causes. It is a special form of a bar graph used to
display the relative importance of items, problems,
events, and conditions. This tool provides answers to
questions such as: “From among 100 items being
sold, which products generate 80% of total profit?” or “Which of the 10 identified factors
cause 80% of product defects?” or “Has the initiation of a quality improvement program
reduced the number of defects?”
A Pareto Chart can be used to:

1. Zero in on critical issues by ranking them in terms of importance and frequency;
2. Prioritize problems or causes to efficiently initiate problem solving;
3. Analyze problems or causes by different groupings; and
4. Analyze the before and after impact of changes made in a process.
Generally, data is arranged such that the few vital factors reveal themselves. In most cases,
two or three categories will dominate the others. These few categories that account for the
bulk will be the high-impact points where one needs to focus. Thus, concentrating efforts on
these few items will bring about a greater impact and be more cost-effective than undirected
efforts.
STEPS IN CONSTRUCTING A PARETO CHART
To construct a Pareto Chart, follow these steps:
Step 1 List down the categories to be compared.
Step 2 Choose a standard unit of measurement and the time period to be studied. For
example, it can be a measure of how something occurs (defects, errors, expenses,
etc.); frequencies of reasons cited in a survey as the cause of a particular problem or a
specific measurement of volume or size. Be sure that the time period to be studied is
of a reasonable length of time to enable the collection of sufficient data.
Step 3 Gather pertinent data for each category and summarize these in a three-column table.
Use the following column headings: “Category”, “Frequency”, and “Percent to
Total”. In the first column, list the specific items or categories. Under the
“Frequency” column write corresponding frequencies for each category. To get the
percentage to total for each category divide each number in the second column by the
total of the frequency column.
Step 4 Arrange the order of categories in descending order using the figures in the “Percent
to Total” column as basis.
Step 5 Create the frame for your Pareto Chart. Indicate the different categories on the
horizontal axis. Your Pareto Chart has two vertical axes: one on the far left and the
other on the far right of the graph. The vertical axis on the left will indicate the
frequency of each category while the right vertical axis will represent the percentage
scale. The scale on the right vertical axis should be scaled so that the point for the
number of occurrences (frequency) matches the corresponding percentage frequency
on the right.
Step 6 With the bar graph format plot the frequencies for each category using the left vertical
axis of your chart. Be sure to scale your left axis up to the total number of
frequencies (i.e., the total of column 2).
Step 7 Plot the cumulative percentage line by placing a dot above each bar at the height
corresponding to the scale on the right vertical axis. Connect the dots from left to
right, ending with 100% point.
Step 8 Identify the categories or elements corresponding to 80%, 90%, and 100%.
For the sake of simplicity here is an example that involves only nine elements or categories.
A stuffed toy manufacturer wants to know which of her product lines are responsible for 80%
of her sales. Culling from her 2005 sales records, she draws up a summary of her sales as
shown in the table below.
Frequency
Category Percent to Total
(in thousand pesos)
Doll 5 550 27.50
Bear 495 24.75
Doll 2 350 17.50
Doll 1 200 10.00
Doll 3 105 5.25
Dalmatian 100 5.00
Doll 4 85 4.25
Poodle 64 3.20
Pig 51 2.55
TOTAL 2,000 100.00
A Pareto Chart drawn using the above information is shown below.
2000 100%
97.45%
94.25%
90.00%
85.00%
79.75%
Frequency (Sales in Thousand Pesos)
1500 75%
69.75%
Percentage to Total
1000
52.25%
50%
What can you infer from the chart
on the left? What product lines
contribute to at least 80% of the
27.5%
500 25% stuffed toy manufacturer’s sales?
0 0
Doll 5 Bear Doll 2 Doll 1 Doll 3 Dalmatian Doll 4 Poodle Pig
Product Line Categories
Fig. 6.15: Sample Pareto Chart

You can use the Pareto analysis in many situations involving sorting, classifying, and
prioritizing a large number of categories. Some applications include identifying categories or
factors that contribute to 80% of sales, overall profit, inventory cost, rejects, and total
expenses.
1. Sales and profit. As shown above, the Pareto analysis can be used to determine which of
the product lines bring in 80% of the revenues. If figures on profit margins are available
the same procedure can be done to determine which product lines contribute 80% to the
overall profits of a firm. Similarly, for a firm that employs several salesmen, Pareto
analysis can be used to determine who brings in 80% of total sales.
2. Inventory control. Pareto analysis is known as the ABC classification system in

inventory management. It can be used to group inventory items into: “A” items – high
usage or fast moving items; “B” items – medium usage or average moving items; or “C”
items – low usage or slow moving items.
A retailer who finds the cost of carrying too much items in inventory a financial burden
can do a Pareto analysis to classify inventory stocks. If it turns out that only a few items
account for 80% of his total inventory and that these few items are “C” items, then it is
advisable that he limit the number of such items in stock.
3. Quality control. Pareto analysis can help identify the vital few which cause 80% of
complaints or rejects. For instance, following complaints from customers, a department
store returns 50 ladies’ bags to its manufacturer. The manufacturer discovers that 80% of
the complaints were traceable to four defective parts against a total of 15.
4. Finance. Pareto analysis is a good way of examining and classifying the different cost
elements according to priority. It is useful in determining which costs can be reduced
when a firm has to cut down on some expenses.
When interpreting a Pareto Chart, let your common sense dominate. The most frequent or
most costly events are not always the most important, e.g., two fatal accidents deserve more
attention than 25 cut fingers. Investigate further to solve problems. Ask yourself: “What
makes the biggest difference? What will it cost to correct the problems? What will happen if
the problem is not corrected?”
The Program Evaluation and Review Technique

(PERT) is a project management tool used to schedule,
PERT/CPM organize, and coordinate tasks within a project. It was
developed by the U.S. Navy in 1958 to manage the
Polaris submarine missile program. A similar
methodology, the Critical Path Method (CPM), which
was developed for project management in the private
sector at around the same time, has become synonymous with PERT. While CPM is easy to
understand and use, it fails to consider the time variations that can have a great impact on the
completion time of a complex project.
The PERT/CPM is used by managers in planning, scheduling, and controlling resources and
costs. It can be used to answer questions such as: How long will it take to complete the
entire project? What are the risks involved? Is the project on schedule, behind schedule, or
ahead of schedule? What are the critical activities in the project which can delay the entire
project if they are not completed on time?
HOW TO DO PERT/CPM
The six steps listed below are common to both techniques.
Step 1 Define the project and all its activities and milestones. A project, which is made up
of several tasks, should have only a single start activity and a single finish activity.
Activities are the tasks required to complete a project while the milestones are the
events that mark the beginning and the end of one or more activities.
Step 2 Determine the sequence of activities.
Step 3 Construct the network diagram to connect all the activities. Use an arrowed line to
represent an activity and a circle or node to represent an event or milestone.
Milestones are numbered sequentially.
Step 4 Assign time estimates for each activity. Any unit of time can be assigned but only one
unit of time should be used consistently in a diagram.
A unique feature of PERT is its ability to deal with uncertainty in activity completion
times. For each activity, PERT usually includes three time estimates:
Optimistic time – This is generally the shortest time in which the activity can be
completed
Most likely time – This is the completion time having the highest probability. This
is different from the expected time.
Pessimistic time – This is the longest time that an activity may require.
PERT assumes a beta distribution for time estimates. For a beta distribution, the
expected time for each activity can be approximated using the following weighted
average:
Expected time = (Optimistic time + 4 x most likely time + pessimistic time)

6
4
The expected time and t = 1 week
sequence of activities of a F t = 3 weeks
C
hypothetical project is
t = 3 weeks t = 2 weeks
displayed on the network 1 2 5
A D
diagram as shown on the
right. The sequence of
B E
activities is denoted by the
t = 4 weeks t = 2 weeks
letters A to E while the
milestones are numbered 1 3
to 5.
In some cases, the cost
involved for each activity is Fig. 6.16: Simple PERT Network
also shown in the diagram.
Step 5 Compute for the longest time path through the network. This is called the critical
path which represents the total amount of time required for the project. It is
determined by adding the times for the activities in each sequence and determining
the longest path of the project. If activities outside the critical path speed up or slow
down, the total project time does not change. The amount of time that a non-critical
path activity can be delayed without delaying the outcome of the entire project is
referred to as slack time.
Step 6 Use the PERT chart to monitor and control the project as it progresses. As the project
comes on stream, the estimated times can be replace with actual times. In case, there
are delays, additional resources may be needed to stay on schedule and the PERT
chart may be modified to reflect the new situation.
For purposes of illustration let’s take the following example. A large trading firm is intending
to buy a new computer system. The activities involved are as follows:
Activity Expected Time

Activity
Designation (in days)
Create schedule 1–2 10
Buy hardware 1–3 5
Installation 3–5 5
Programming 2–4 20
Test code 4–8 20
Write manual 5–7 15
Conversion 5–6 5
Test system 8 – 10 10
Training 7–9 5
User test 9 – 11 10
The following PERT chart is drawn based on the above information.
2 4 8 10
20 days 20 days 10 days
10 days
1
7 9 11
5 days 10 days
5 days 15 days
3 5
5 days
5 days
6
Fig. 6.17: Sample PERT chart
The direction of the arrows indicates the sequence of the tasks. In the diagram, the tasks
between 1, 2, 4, 8, and 10 must be completed in sequence. These are called dependent or
serial tasks. In contrast, the tasks between 1 and 2 and tasks 1 and 3 are not dependent on the
completion of one to start the other and can be done simultaneously. These tasks are called
parallel tasks or concurrent tasks.
Tasks that must be completed in sequence but that don’t require resources or completion time
are considered event dependent. These are represented by dotted lines and are called dummy
activities. In the above example, the dashed arrow linking tasks 6 and 9 indicates that the
system files must be converted before the user test can take place, but that the resources and
time required to prepare for the user test (writing the user manual and user training) are on
another path.
The critical path runs through activities 1-2-4-8-10-9-11.
APPLICATION AND LIMITATIONS
The PERT/CPM chart is often preferred over the Gantt chart, another popular project
management charting method, because it clearly illustrates task dependencies. However, the
PERT/CPM chart is more difficult to interpret, especially on complex projects.
This tool provides the following information: expected project completion time, probability
of completion before a specified date, activity start and end dates, the critical path activities
that directly impact on the completion time, and the activities that have slack time and that
can lend resources to critical path activities.
PERT/CPM has its weaknesses too. Time estimates can be subjective or mere guesses
especially if these are set by people with little experience in performing the activity. In some
cases, if the person or group performing the activity sets the time, there may be a bias in the
estimate.
This tool is used to trace the complete flow of a

PROCEDURE particular document and the operating steps required to
CHART process it. It is made of several columns. A separate
column is created for each department or section the
document passes through.
STEPS IN CONSTRUCTING A PROCEDURE CHART
Step 1 Decide on the procedure you wish to chart.
Step 2 Gather pertinent information on the procedure.
Step 3 On a large sheet of paper draw several columns. The number of columns will depend
on how many departments or sections a document will pass through.
Step 4 Chart the procedural steps and the flow of documents using the basic standards 9
appearing on the next page.
You can use this tool to analyze the existing flow of documents in a company. On Fig. 6.19,
a sample procedure chart involving the processing of a non-stock requisition is shown. If
warranted, you can redesign a new procedural flow to simplify paperwork procedures. The
same tool can be used to detail procedures for proposed systems.
9
Technonet Asia, Industrial Extension Manual for Small and Medium Industries in Developing
Country, Volume One, April 1985, page 112.
DOCUMENTS THE NAMES OF SECTIONS OR DEPARTMENTS ARE DESIGNATED

IN THESE COLUMNS
Documents are listed in the
order of their use in the 1 1 Indicate
procedure with the name and where sent
form number shown. or how
disposed of
1. This illustrates that the
document originated in the Indicate
This symbol procedure at this step. from
2. Procedural steps where 3
2
explaining action taken are 1
represents the document and numbered consecutively. 1
the number of copies and 3. The arrow shows the
appears on the chart movement of the
opposite its title shown in this document.
column. 4. This illustrates the 5. Shows disposition of a
receipt of the document (e.g., file
(Note: Form numbers used document from a and routing within the
are for illustration only and do source not chart)
not refer to actual number of indicated in the
forms in use.) Indicate where columnar headings
sent or how and shows the
disposed of combined
movement of both
documents to a
1 third section.
Same as origin Indicates destroy Indicates file
3 3
2 2
1 1
9. Broken line indicates 6. Indicates a multiple 7. Explain action taken

when actual number of copy document and and routing or original
documents is variable distribution of same. and duplicate.
or undetermined.
Indicate 8. Broken line indicates
disposition that action is
10. Dotted line indicates an suspended until further
alternate flow steps are taken.
1
The illustrations above show basic standards

to follow in the flowcharting of procedures
and related paper.
Indicate
Key:
Normal movement of form disposition
Alternate movement of forms
Second alternate movement
Form is originated
Into or out of pending file 11. Indicates alternate
File or destroy action and
disposition of
document.
Fig. 6.18: Standards for Procedure Charting
Department Secretary Purchasing Department Accounting Department
Non-Stock Requisition Requisition Requisition

Form Form Form
1. Receives request for non-stock 4. Canvasses items from

materials. suppliers.
2. Prepares non-stock requisition 5. Purchases items on credit.
form in duplicate.
6. Hands over materials to
3. Forwards forms to head for
department secretary.
approval.
Requisition
Form
File
7. Acknowledges receipt of
materials by signing bottom
portion of requisition form. From Requisition
supplier Form
Invoice Invoice
8. Attaches invoice to requisition

Voucher and check File
form. Voucher
Check
To supplier
9. Prepares voucher and check.

10. Attaches requisition form to voucher.
11. Informs supplier payment is ready for pick-up.
12. Has supplier sign voucher to acknowledge receipt
of payment.
13. Files voucher.
Fig. 6.19: A Procedure Chart Sample

The relations diagram is a graphical representation of

RELATIONS all the factors or elements in a complicated problem,
DIAGRAM system, or situation. It is also called the
interrelationship digraph or network diagram.
This tool is used to identify the key issue, the root

cause of existing problems, and the area of greatest impact for improvement. Instead of one
element following another in a logical sequence, each element is connected to many other
factors to show that they have impact on each other.
DRAWING A RELATIONS DIAGRAM
Step 1 Define the issue or problem you wish to explore. Write the issue or problem on a
card and stick it on the board.
Step 2 Brainstorm ideas about the issue and write each element or factor related to the issue
on a separate card.
Step 3 Position cards on the board. Place one card at a time and ask yourself: “Is this
element related to the others?” Leave space between cards to allow for drawing
arrows later.
Step 4 Compare each element to all the others. For each element ask: “Does this cause or
influence any other element?” Draw arrows to connect related elements. The arrows
should be drawn from the element that influences to the one that is influenced (i.e.,
from the “cause” card to the “effect” card). If two elements influence each other, the
arrow should be drawn to reflect the stronger influence. Repeat this step until you
have completely considered all elements.
Step 5 Count the arrows in and out of each element. Write the counts at the bottom of each
card. Identify the root causes (many arrows out, few arrows in) and the root effects
(many arrows in, few arrows out).
Example 10 : A computer support group is planning a major project: replacing the mainframe
computer. The group drew up a relations diagram to sort out a confusing set of
elements involved in this project.
10
http://www.asq.org/lern-about-quality/new-management-planning-tools/overview/relations-
diagram.html
Issues around computer replacement project
Train operators
Train users Staff increases
2/0
1/0 1/1
New software Upgrade support Telecommuni-

1/6 equipment cations changes
1/2 1/1 Increased
Install new processing cost
mainframe Service
3/0
1/4 interruptions
3/0
COMPUTER Negotiate new Expand computer
REPLACEMENT maintenance room
PROJECT contracts
2/0 1/1
In/Out
Growth and higher More utilities
profit potential (heat, air electricity)
2/0 1/1
Higher level of
customer service
1/0
Fig. 6.20: Relations Diagram Example
“Computer replacement project” is the card identifying the issue. The ideas that were
brainstormed were a mixture of action steps, problems, desired results and less-desirable
effects to be handled. All these ideas went onto the diagram together. As the questions were
asked about relationships and causes, the mixture of ideas began to sort itself out.
After all the arrows were drawn, key issues became clear. They are outlined with bold lines.
“New software” has one arrow in and six arrows out. “Install new mainframe” has one arrow
in and four out. Both ideas are basic causes. “Service interruptions” and “Increased
processing cost” both have three arrows in, and the group identified them as key effects to
avoid.
The relations diagram can be used in any situation that calls for distinguishing between causes
and effects and getting to the root cause(s) and effect(s) of a problem. A word of caution: the
number of arrows is only an indicator and not an absolute rule.
A scatter diagram (also referred to as scatter plot) is

used to study the possible relationship between two
SCATTER variables, i.e., what happens to one variable when the
DIAGRAM other variable is changed. It is composed of a
horizontal axis containing the values of independent
variable and a vertical axis representing the
measurements of the dependent variable. Although
these diagrams cannot prove that one variable causes the other, they do indicate however, the
existence of a relationship, as well as the strength of that relationship.
The slope of the diagram indicates the type of relationship that exists between variables.
There are several different patterns (meanings) that scatter diagrams can have. The wider the
pattern of scattering, the lower the degree of association between the independent and
dependent variable. Generally, a scatter diagram may take one of three patterns:
250
The figure on the left shows the existence of a

No. of Jeans Sold (in thousands)
200
positive correlation between two variables:
150
Advertising budget and number of pairs of
jeans sold. That is, as the advertising budget
100
increases, the number of pairs of jeans sold
50
increases. It is not always right to conclude,
however, that this is a cause and effect
0 relationship because correlation does not
0 500 1000 1500 2000 2500
Advertising Budget (in thousand pesos)

necessarily mean causality. The relationship
may be caused by a third variable like number
Positive correlation:
of outlets or store location.
y increases as x increases
120
100
This time, the figure on the left shows a

Selling Price(in pesos)
80
negative correlation between two variables:
60 demand for a good and selling price. That is,
an increase in selling prices will cause a
40
decrease in quantity demanded. It is possible
20
that other than price, the decline in demand
may be caused by a third variable like
0
0 50 100 150
reduced income or inferior product quality.
Quantity Demanded (in thousands)
Negative Correlation:
As y increases, x decreases
120
100
Quantity Sold
80 There is also the no correlation category. The
60 points on the diagram on the left are so
40
random that there is no apparent correlation
20
between the two variables: quantity of
0
greeting cards sold and the age of customers.
15 20 25 30 35 40 45
Age
No Correlation
Draw a straight line or curve running through the data so that it “fits” as well as possible. The
more points cluster around the line of best fit, the stronger the relationship that exists between
the two variables. However, if the points show no significant clustering, there is likely to be
no correlation.
250 120
120
100 100
200
No. of Jeans Sold (in thousands)
Selling Price(in pesos)
Quantity Demanded
80 80
150
60
60
100
40
40
50 20
20
0
0 15 25 35 45
0
0 500 1000 1500 2000 2500
0 50 100 150 Age
Advertising Budget (in thousand pesos)
Quantity Demanded (in thousands)
Positive Correlation Negative Correlation No Correlation
Correlation does not imply causality. Your scatter plot may show that a relationship exists,
but it does not and cannot prove that one variable is causing the other. There could be a third
factor involved which is causing both, some other systemic cause, or the apparent relationship
could just be a coincidence. Nonetheless, the scatter plot is a very useful tool. It can give you
a clue that two things might be related, and if so, how they move together.
Stakeholders are the groups (e.g., legal and political

entities, public at large, suppliers, consumers,
STAKEHOLDER customers, operators, employees, etc.) that have
ANALYSIS interest in the project, program, policy or system under
analysis. They may either be positively (beneficiaries)
or negatively affected by the implementation of the
project, program, policy or system and may either be
involved or excluded from the decision-making process.
Stakeholder analysis is a technique that involves identifying, gathering, and analyzing

qualitative information on stakeholders, an assessment of their interests, and the ways in
which these interests affect the implementation of a project, program, policy or system (from
hereon collectively referred to as project). By identifying the stakeholders and their interests,
you can predict who will support or block project implementation efforts. The information
gathered can likewise be used to provide input for other analyses (e.g., strategic planning and
institutional assessment); to develop action plans to increase support for a project; and as a
guide to participatory consensus-building process.
HOW TO DO A STAKEHOLDER ANALYSIS
Step 1 Select and define the specific project to be analyzed.
Step 2 Identify who stakeholders are and draw up a stakeholder table. You can design your
own table to suit your particular needs. The next table is a modified version of
stakeholder table taken from the internet. 11
What does the Resources

Position Leader
project expect Ability to
Stakeholder (S, MS, N, Interests Quantity Power (Yes/
the stakeholder mobilize
MO, O) (3,2,1) No)
to provide? (3,2,1)
Primary
Secondary
Step 3 Fill in the stakeholder table.
Stakeholder. List down people and entities that may be affected, have interest in, or
can affect the implementation of the project under analysis. Categorize stakeholders
into primary and secondary stakeholders. Primary stakeholders are those people and
groups that are ultimately affected – whether positively or negatively – by the project.
Secondary stakeholders are the intermediaries (like the funding organization,
advocacy group, private sector organizations, and government agencies) involved in
the implementation process.
Position. Indicate in this column whether the stakeholder supports, opposes or is

neutral about the project. This will serve as the key to establishing whether or not the
stakeholder will block the implementation of the project. Stakeholders who agree
with the implementation of the project are supporters (S); those who disagree with the
11
http://www.lachsr.org/docuents/policytoolkitforstrengtheninghealthsectorreformpartii-EN.pdf
implementation are oppositionists (O); those with no clear opinion are considered
neutral (N); those who express some, but not in total agreement with the project are
classified as moderate supporters (MS); and those who express some, but not in total
opposition to the project are classified as moderate opponents (MO).
Interests. Determining a stakeholder’s vested interest will help in understanding his

position. What are the stakeholder’s interests in the project, or the advantages and
disadvantages that implementation of the project may bring to his organization or
department? Find out the answers to these questions: What financial or emotional
interest does a stakeholder have in the outcome of the project? What are the
stakeholder’s expectations? What benefits are there likely for the stakeholder? Does
the stakeholder have other interests which may conflict with the project under
analysis?
Resources. How many resources can the stakeholder mobilize? Classify the quantity
of resources stakeholder can mobilize as follows: 3 = many, 2 = some, and 1 = few.
Does the stakeholder have the ability to mobilize resources? Quantify the stakeholder
ability to mobilize resources in terms of: 1 = stakeholder can make decisions
regarding the use of resources in his organization; 2 = the stakeholder is one of
several persons that make decisions regarding the use of resources; and 3 = the
stakeholder cannot make decisions regarding the use of resources.
Power. This is defined as the combined measurement of the amount of resources a

stakeholder has and his capacity to mobilize them. The two resource scores are
averaged. The resulting score is interpreted as follows: 3 = high power, 2 =
medium power, and 1 = little power.
Leader. This is defined as the willingness to initiate or block the implementation of

the project. The stakeholder either possesses this trait (yes) or lacks it (no).
Step 4 Once the stakeholder table is completed, analyze the information. Organize the
information from the stakeholder table in a Power/Interest Grid. (See Fig. 6.21)
HIGH
POWER
LOW HIGH
INTEREST
Fig. 6.21: Power/Interest Grid

One’s position on the grid signals the
type of action that needs to be taken to win them over.
The people in the high power, high interest category must be fully engaged and completely
satisfied.
Efforts must be exerted to keep those in the high power, low interest quadrant pleased and
content.
Keep the people in the low power, high interest group adequately informed and assure them
that no major issues are arising.
Although they may belong to the low power, low interest group, be sure you monitor them
but do not bore them with excessive communication.
Step 5 Develop strategies on how to:
1) Sustain the support of stakeholders who are currently supporters;

2) Increase the power and leadership of the supporters;
3) Convert oppositionists to supporters;
4) Weaken the power and leadership of oppositionists; and
5) Convert the neutral stakeholders into active supporters.
This tool helps decision makers to assess a project environment. It is used to identify the key
actors and to assess their knowledge, interest, positions, alliances, and importance to the
project on hand. More specifically, a stakeholder analysis can: 1) draw out interests of
stakeholders in relation to the problems which the project is seeking to address; 2) identify
conflicts of interests between stakeholders; 3) help identify relations between stakeholders;
and 4) help assess the right type of participation by different stakeholders.
When a stakeholder analysis is done prior to the implementation of a system, policy or

program, policymakers and managers can detect and act to prevent potential
misunderstandings. As a result, implementation is more likely to proceed smoothly.
The letters SWOT stand for strengths, weaknesses,

SWOT opportunities, and threats. SWOT analysis is a
ANALYSIS practical tool for analyzing an organization and its
environment. It is commonly used in strategic
planning activities.
Strengths refer to the firm’s resources and capabilities. In contrast to strengths, weaknesses
are the shortcomings, problems, or difficulties encountered by a company. Since both
strengths and weaknesses are conditions internal in nature, they can be controlled and made to
work in favor of the organization. Thus, strengths can be honed further and weaknesses
surmounted.
Opportunities are conditions in the external environment that pose prospects for profit and
growth of a firm. Threats, on the other hand, are conditions outside the organization that may
in one way or another negatively affect the entity’s future. Unlike strengths and weaknesses,
opportunities and threats are beyond organization control.
Possible strengths include: a new, innovative product or service; doing business in a strategic
business location; having quality processes and procedures; a strong brand name; enjoying
good reputation among customers; and the favorable access to a distribution network.
Weaknesses may include: lack of marketing expertise, undifferentiated products or services;

poor business location; weak brand name; high cost structure; no access to credit; lack of
access to key distribution channels; and limited production capacity.
The environment may bring in opportunities such as: an unfulfilled customer need; new
technologies; removal of international trade barriers; mergers, joint ventures or strategic
alliances; and the opening of new international markets.
In contrast, the following can pose as threats: a new competitor, shift in consumer taste from
the firm’s products; increased trade barriers; emergence of substitute products; recession; new
government regulations; price wars from competitors; and inflation.
DOING A SWOT ANALYSIS
Doing a SWOT analysis requires an extensive examination of a business and the industry
affecting it. Basically it involves identifying where the business is now and what is likely to
happen to it in the future.
It is worth mentioning that this tool helps thresh out opportunities your client may not have
thought of before. It also highlights threats and internal resources which were not evident
during the setting of long-term goals. From these, courses of action and strategies can be
developed to enable your client to achieve desired goals.
The items that normally should be examined are listed in the SWOT chart that follows.
Familiarize yourself with the chart and suggest to your client which critical areas to look out
for.
SWOT ANALYSIS CHART
STRENGTHS and WEAKNESSES OPPORTUNITIES and THREATS

(Controllable factors) (Uncontrollable factors)
MARKETING • Product (features/lines/life COMPETITION • Who are the main

cycle/quality) competitors? What are
• Store location they doing to gain a bigger
• Public image market share?
• Pricing • What are their pricing and
• Promotion and advertising promotion strategies?
activities
• Distribution network POLITICAL • What is the political
scenario in the country?
• What are the present
PERSONNEL • Labor force (size, skills, administration’s policies
productivity, morale, on taxation, imports, labor,
relations with consumer protection, etc?
management) • What is the agenda of the
• Management (skills, current administration?
network, expertise)
SOCIAL • Population trends –
PRODUCTION demographics
• Plant capacity, equipment, • Values, preferences, and
machinery attitudes of consumers
• Production methods
• Quality control ECONOMIC • Inflation trends
• Research and development • Interest rates
• Purchasing and supply of • Unemployment
raw materials • Demand
• Foreign currency rates
FINANCE
• Cash flow
• Leverage TECHNOLOGY • New products, new
• Capital for expansion and processes
reinvestment • Obsolescence
• Assets
• Profitability CUSTOMER • Changes in consumer taste
• Cost structure and preferences
• Level of disposable
income
• Identification of target
market
SUPPLIERS
• Price movements
• Source and location
• Mergers/monopolies
Fig. 6.22: SWOT Analysis Chart
An organization need not necessarily focus its efforts in achieving the most lucrative
opportunity. In some cases, a firm may have a better chance of success if it develops a
competitive advantage by identifying a fit between the firm’s strengths and the opportunities
in the offing.
To develop strategies that take into account the SWOT profile, a combination of these factors
can be taken into account.
S-O strategies pursue opportunities that fit well with

the organization’s strengths.
W-O strategies require that organizational weaknesses Strengths Weaknesses
are overcome before it pursues opportunities.
S-T strategies imply capitalizing on the S-O W-O
organization’s strengths to reduce its Opportunities
Strategies Strategies
vulnerability to external threats.
W-T strategies call for a defensive plan which will S-T W-T
Threats
prevent the organization’s weaknesses from Strategies Strategies
making it highly vulnerable to external threats.
APPLICATION AND LIMITATIONS
SWOT analysis is a very popular tool because it is quick and easy to learn. However, a word
of caution, SWOT analysis can be very subjective. Be realistic when identifying the strengths
and weaknesses of your client. Always use competition as bases for analysis, i.e., is your
client better than or worse than his competitors?
Don’t rely on SWOT analysis too much. Once you’ve identified key issues, use other tools to
audit and analyze an organization.
Chapter
MARKETING TOOLS AND STRATEGIES

GETTING THE LION’S SHARE OF THE MARKET
To stay in business, entrepreneurs, at the very least, need to maintain the demand for their
products and services. In many instances this is far from easy. For new entrepreneurs,
penetrating and getting a share of a market can be even more difficult.
The tools and strategies presented in this chapter are intended to reinforce your knowledge in
the strategies associated with the 4Ps of marketing and sales forecasting techniques.
Putting up a branch, plant or factory site in every place

CHANNELS OF where one has customers is not a wise decision as this
DISTRIBUTION move is likely to result in an immense capital outlay,
inefficient operations, higher operating costs, excess
CHART
capacity, and poor resource management. It is
important that distribution channels are properly
identified as each step in the distribution process adds
to the cost of the product, which in turns affects prices and the product’s marketability.
DISTRIBUTION CONSIDERATIONS
Different products require different distribution channels. The decision of whether it is best
to sell directly to end-users or to use middlemen depends on factors such as those summarized
in the next page.
Preferable to use middlemen Preferable to sell directly

Type of Product Simple Sophisticated
Durable Highly perishable
Convenience goods 12 Unsought consumer products 13
Bulky Small, compact
Price Low High
Volume Large Minimal
Frequency of purchase Frequent Seldom or rarely
After sales service Few Critical
Geographical location of
customers Wide and extensive Limited
Company resources Weak Strong
What is the most practical and ideal marketing channel to use? When one is constrained by
capital, naturally the most practical channel would be one wherein there are a few sales
agents, a couple of wholesalers, several retailers, a few trucking companies and warehouses.
When the product is highly perishable, it is a must to employ direct marketing to avoid delays
and too much handling.
Keep in mind that each distribution channel alternative will produce a different level of cost
and sales volume. Encourage your client to do a periodic review and analyze his different
channels of distribution. This is especially useful when he wants to create “new” markets or
expand “old” markets. The channels of distribution chart can ease such review and analysis.
HOW TO DO A CHANNELS OF DISTRIBUTION CHART
Step 1 Specify the various distribution channels that link your client to his end users.
Step 2 Determine the volume of products handled by each channel.
Step 3 Estimate the cost of maintaining the channels over a specified period. These costs
include commissions, discounts, wholesalers’ margin, and retailers’ margin that your
client pays for use of the channels’ services.
Step 4 Analyze and interpret the results.
12
Refer to consumer products that are purchased frequently with little comparison or shopping effort
on the part of consumer. Examples include: toothpaste, magazines, laundry soap, and detergent.
13
Refer to consumers goods where there is little consumer awareness, or if awareness exists,
consumers exhibit little interest or negative interest. Examples include: encyclopedias, memorial
plan, and life insurance.
CHAPTER 7: MARKETING TOOLS AND STRATEGIES 121
VIRGIN COCONUT OIL

COMPANY
Let’s assume that Mrs. Del Rosario,

owner and manager of Virgin Coconut Oil XYZ Network
Company, is going over her marketing
operations. A review of her distribution
channels reveals that she has four active Retailers Other Jobbers
channels: direct to end-users, through

XYZ Network, XYZ Network to three
END-USERS
small retailers, and other jobbers.
Fig. 7.1: Sample of Channels of Distribution Chart
Based on last year’s operations, the volume sold per channel and discounts paid are as
follows:
Total Volume Handled Monthly Channel Cost

Monthly Ave.
Peso Discount Discount Percentage
Channel Volume Price Per %
Value (%) Value to Total
(in boxes) Box
Direct 50 2,500 125,000 4.00 15 18,750 5.98
XYZ 500 2,200 1,100,000 35.20 5 55,000 17.53
Retailers 700 2,000 1,400,000 44.80 10 140,000 44.62
Jobbers 200 2,500 500,000 16.00 20 100,000 31.87
Total 1,450 3,125,000 100.00 313,750 100.00
The above information shows the efficiency of each channel. The following conclusions can
be drawn from the table:
1. The three retailers account for the biggest monthly volume, followed by XYZ Network
and the other jobbers.
2. Despite the smaller volume contribution of jobbers, the cost of maintaining them is
almost twice the cost of maintaining XYZ Network.
3. Giving ample discounts to jobbers, retailers, and XYZ Network, these channels are able
to “push” the product to the market.
4. It takes more effort and a bigger discount to entice directly end-users to buy the product.
If Mrs. Del Rosario pursues her plans to penetrate new markets, what channel would be the
most effective one to use?
The choice of distribution channels will vary for each type of product and intended market.
There are reasons for having or not having multi-level distribution channels. Before deciding
or suggesting which distribution channels to use, it is wise to assess each channel’s economic
value.
The five forces model developed by Michael Porter

FIVE FORCES will guide you in the analysis of an organization’s
ANALYSIS environment and the attractiveness of the industry to
which it belongs. It provides a simple perspective for
assessing and analyzing the competitive strength and
position of a business entity.
This tool assumes that there are five important forces that determine one’s competitive power
in a situation:
1. Supplier power. This is the power of suppliers to drive up the prices of inputs. Thus,
the fewer the number of suppliers present, the more suppliers can dictate prices.
2. Buyer power. Relates to the power of customers to drive down prices. If your client
deals with only a handful of buyers, he may have to give in to the prices dictated by
them.
3. Competitive rivalry. This refers to the relative strength of competition in the

industry. What is important here is the number and capability of competitors in the
market. If there are many competitors, each offering equally attractive products and
services, then each competitor is not likely to have much power. On the other hand,
if your client has something unique to offer, then he has tremendous strength.
4. Threat of substitution. This relates to the extent to which different products and
services can be used in place of another. If your client is in an industry where
substitution is easy and inexpensive, then his competitive power is weak.
5. Threat of new entry. Power is affected by the ability of people to enter the market. If
barriers to entry are low, new competitors are bound to enter the market if they see
that people are making good profits. New competitors can easily weaken your
client’s position in the market.
Porter’s Five Forces are brought together in a diagram like the one below.
THREAT OF NEW ENTRY COMPETITIVE RIVALRY

• Time and cost of entry • Number of competitors
• Specialist knowledge • Quality differences
• Economies of scale • Other differences
• Cost advantages THREAT OF • Switching costs
• Technology protection NEW ENTRY • Customer loyalty
• Low barriers to entry • Costs of leaving the
• Etc. market
• Etc.
SUPPLIER COMPETITIVE BUYER

SUPPLIER
POWER RIVALRY POWER
POWER
SUPPLIER POWER BUYER POWER

• Number of suppliers • Number of customers
• Size of suppliers • Size of each order
• Uniqueness of service • Differences between
• Ability to substitute competitors
• Costs of changing THREAT OF • Price sensitivity
• Etc. SUBSTITUTION • Ability to substitute
• Costs of changing
• Etc.
THREAT OF SUBSTITUTION
• Substitute performance
• Cost of change
Fig. 7.2: Porter’s Five Forces
HOW TO USE THIS TOOL
Step 1 Brainstorm the relevant factors taking place in your client’s business.
Step 2 Using Fig. 7.2 as framework, assess your client’s situation. Opposite each factor
indicate a “+” sign if the force works in favor of your client and a “-” sign if the force
goes against your client.
Step 3 Analyze the situation. Think through what can be done to increase your client’s
power with respect to each force.
Conventionally, this tool is used to identify whether new products, services or businesses
have the potential to be profitable. However, it can be very enlightening when used to
understand the balance of power in other situations.
By thinking through how each of the five forces affects your client, and by identifying the
strength and direction of each force, you can quickly assess the strength of your client’s
position and his chances of making profits in the business. With careful planning, you can
swing the balance of power in favor of your client.
This tool is an aid in market and competition analysis.

POSITIONING Basically, position mapping classifies a set of products
MAP according to a set of dichotomous criteria (i.e.,
opposites of a characteristic). The map clearly shows
where a firm’s product is in relation to competing
products. With this simple tool, you can help your
client decide whether to keep the product in the same
market or reposition it in other markets.
HOW TO CREATE A POSITIONING MAP
Step 1 Identify the dichotomous criteria. At least two criteria can be operated.
Step 2 Draw four quadrants. Write your criteria.
Step 3 Using the selected criteria as basis, position the products in the appropriate quadrants.
Step 4 Decide on how to compete.
Let’s suppose a wannabe entrepreneur with P 5,000,000 is considering going into the food
business and locating in Katipunan Avenue, Quezon City. She is targeting the students,
residents and young professionals in the area. As she is not sure what type of food to
specialize in, she goes to you for advice. How can you help her? A good starting point is to
draw a positioning map of the food businesses in the area like the one shown below.
EXPENSIVE
* Bon Appetit, Le Coeur de France

*Starbucks/Seattle Coffee
Yellow Cab*
Shakey’s, Pizza Hut *
Mocha Blends *
* Cravings * Old Spaghetti House
* Angelinos, Seiki
* Sweet Inspiration * Chicken Bacolod House
* Max’s, Pancake House
FINE FAST FOOD
Greenwich TYPE
DINING Cabalen, Katips * *
* Red Ribbon
Kenny Rogers, KFC
*
Pansit ng Taga Malabon *
Jollibee, McDonalds *
Fruit Magic *
* Queen Grill
Mini-Stop*
Dunkin Donuts/Mister Donut *
INEXPENSIVE
Fig. 7.3: Sample of Positioning Map
Given the above information, what type of business do you advise your client get into? Why?
The positioning map is ideal for gauging the extent of competition, determining appropriate
product positions, and identifying new markets.
Care must be taken when creating a positioning map. Be sure you select a good set of criteria.
Misreading market trends can result in the wrong choice of product criteria.
How should your client set his prices? The task of

PRICING setting prices is not easy, as several pricing
STRATEGIES considerations need to be taken into account before the
right price is determined. The price of a product or
service is not dictated by internal factors alone.
External factors influence pricing too.
INTERNAL FACTORS AFFECTING PRICING DECISIONS
Company costs. The costs incurred in the course of producing, distributing, and selling a
product is an important element in the pricing decision of a company. Since your client
expects a fair return on his investment, the minimum selling price he sets must cover total
costs incurred plus the desired return.
Marketing objectives. Aside from costs, pricing is largely influenced by decisions on

market positioning. If your client is targeting the lower income groups then necessarily prices
have to be low.
Other marketing objectives include profit maximization, survival, market-share leadership,

and product-quality leadership. If your client is after profit maximization, then he will have to
estimate demands and costs for his products at different prices and then settle for the price
that will yield the highest profit or return on investment.
A client that is beset with problems like overcapacity, intense competition, and changing
consumer wants should set his main objective as survival. Making profits is not the primary
goal but rather how to keep the business going. Thus, even if prices are low, so long as they
are able to cover variable costs and a portion of fixed costs, then that should suffice to tide
operations temporarily. Such an arrangement should not be considered permanent. Your
client should work fast to improve his product so as to induce more sales and thus, ensure the
continued business operation in the long run.
If your client wants to maintain market-share leadership, prices have to be kept low to prevent
competition from taking a bite off his share of the pie.
In case your client is trying to establish himself as a leader in quality products, then
necessarily he will have to charge high prices to cover R&D expenses and high product
quality.
Marketing-mix strategies. All the other Ps of marketing (product, place, and promotion)
entail costs and thus need to be coordinated as they are likely to affect the pricing decision of
a firm. For instance, your client may decide to use several distribution channels to get a new
product from the plant to the end users. He may also decide to do some hard selling and
promotional activities to get a new product off the ground. These decisions necessarily mean
having to price the product higher to recover the costs of distribution and promotion.
Organizational considerations. The fourth internal factor that affects pricing decision is the
question of who sets the price. Management must decide who in the organization should set
the price. Will it be the owner? the board? the head of production? the marketing manager?
the cost accountant or the financial manager?
EXTERNAL FACTORS AFFECTING PRICING DECISIONS
External factors that affect pricing decisions are not within the control of management and as
such are difficult to control.
Perceptions on price and value. In setting prices, your client must take into consideration
the market's perceptions of price and value as these affect buying decisions. When buyers
pay for a product they let go of their money in exchange for something they perceive as
having value (the benefits that can be derived from the use of the product). If customers
perceive that the price is greater than the product's value, they are not likely to buy the
product. Conversely, if customers perceive that the price is below the product's value, they
will not hesitate to buy it, but your client stands to lose profit opportunities.
Advise your client that pricing decisions, like other marketing mix decisions, must be buyer-
oriented. He needs to know how much value consumers place on the benefits they will derive
from his products and the price that fits this value. It is not easy to price value perceptions.
But nonetheless, consumers do use these values to evaluate a product's price.
The nature of the market. There are four types of markets: monopoly, oligopoly,
monopolistic competition, and pure competition. If you are to give advice to a client on how
to price his products, it is important that you know the nature of the market to which his
business belongs.
Type of Market No. of Sellers Characteristics
Pure monopoly One In the case of pure monopoly one firm is the lone
producer of a good or service that has no close
substitutes. The lone seller usually sets the selling
price at the level the market can bear.
Oligopoly Few The distinctive characteristic of an oligopoly market is

that the number of firms is small enough such that
actions of an individual firm in the industry on price,
output, product style or quality, introduction of new
models, and the terms of sale have a perceptible
impact on the sales of other firms in the industry.
Sellers in the market are sensitive to each other's

pricing and marketing strategies.
Monopolistic Many Many buyers and sellers trade over a range of prices
competition rather than a single market price. Prices range
because sellers are able to differentiate their products.
Buyers see differences in products and are willing to
pay for these different product features.
Pure Many No single buyer or seller controls the market. No

competition product differentiation exists from firm to firm, firms
are free to enter and exit from the industry (i.e., there
are low barriers to entry and exit), and there is no
collusion in the industry. In this type of market,
market research, product development, pricing,
advertising, promotion have little or no effect. The
individual firm in a purely competitive industry is
effectively a price taker since the products of every
producer are perfect substitutes for the products of
every other producer.
The nature of demand. The quantity people buy varies at different price levels. Generally,
people buy more if the price is low and relatively much less when the price is high. This is
why the demand curve is downward slopping. However, the drop in quantity vis-à-vis an
increase in price is not the same for all products. Some products are more sensitive (i.e.
quantity demanded will drop at a faster rate) to a price increase than others. Such sensitivity
is called price elasticity -- the change in demand following a change in price.
The term elasticity expresses the relationship between changes in price and quantity
demanded. The measurement of price elasticity allows companies to evaluate how price
changes will affect total revenue.
PRICE If elasticity >1 (i.e., the % change in quantity Q > %

change in price P) then the product is said to have an
elastic demand.
D1
P1 D2
P2 Consumers are relatively more responsive to price
changes when demand is elastic. Demand is elastic when
comparable substitute products are available in the
0 market. Since there are cheaper product substitutes
Q1 Q2 QUANTITY available consumers will not hesitate to switch products
when the price of their current brand increases.
Elastic Demand
PRICE
If elasticity <1 (i.e., the % change in quantity Q < %
P1 D1
change in price P) then the product is said have an
inelastic demand.
P2 D2
Buyers are less price sensitive to price changes when
demand is inelastic. This is usually the case when the
0 product is unique, the quality is high, or when
Q1 Q2 QUANTITY comparable product substitutes are not available.
Inelastic Demand
PRICE
D1
If elasticity =1 (i.e., the % change in quantity Q = %
P1 change in price P) then the product is said to have a unit
D2 elastic demand.
P2
A price decrease is compensated by an increase in
0 quantity demanded. Thus, within a narrow range, total
Q1 Q2 QUANTITY revenue remains unchanged.
Unit Elastic Demand
PRICE
Elasticity is infinite when the product has a perfectly

D1 D2 elastic demand.
P
People are willing to buy different quantities at the given

price.
0
QUANTITY
Q1 Q2
Perfectly Elastic Demand
PRICE
In cases where elasticity = 0 (i.e., quantity is unaffected

P1 D1 by price changes) the product is said to have a perfectly
inelastic demand.
P2 D2
People are willing to buy the same amount of product
0
regardless of how much it costs.
Q1 QUANTITY
Perfectly Inelastic Demand
Competition. Consumers have a tendency to compare prices whenever product substitutes

are available. If a cheaper product substitute can perform the same job why purchase a more
expensive brand? A good example is matches. A matchstick can only be used once after
which it is discarded. Consequently, manufacturers of matches watch each other’s pricing
moves because given the limited purpose of their product consumers tend to pick out the
cheapest brand of matches.
The same is also true for many consumer goods like detergent, shampoo, bath soap, coffee,
etc. Consumers will choose the cheaper brand if a comparable product substitute is available.
Appliance manufacturers keep a close watch over their competitors' pricing, innovations, and
promotional strategies. They know that with the presence of competition, product
substitution is possible and losing a customer to a competitor can easily be done if a customer
is offered a comparable low-price product substitute.
A high-price, high margin business is likely to attract new entrants to the industry. A low-
price, low margin business is likely to face lesser competition.
Other external factors. The country's economic condition is one external factor that can
have a strong influence on the pricing decisions of a firm. Recession, inflation, taxes, and
prevailing interest rates affect the purchasing power of customers and their perceptions of a
product's value and price. Given the same conditions, your client is likely to experience
higher production costs and possibly, a reduction in sales volume.
Government is another external influence that can affect the pricing decisions of your client.
To ease inflation, government may enforce the regulation of prices of some commodities.
Under such conditions, your client will be compelled to keep prices at a certain level.
Social and environmental concerns can likewise affect your client’s pricing decision. With the
growing clamor to reduce the use of non-biodegradable materials, firms may have to seek
alternative solutions to reduce/recycle materials.
Since your client has no control over external factors, he will have to take into account such
considerations, review his sales targets, temper profit goals, and more importantly, adapt
pricing decisions accordingly.
PRICING METHODS
Product costs and consumer perceptions of the product's value set the extreme points at which
your client should set his prices. When he sets prices below product cost, he should not
expect to earn profits no matter how many units he sells. On the other hand, if he sets prices
too high, customers will hesitate to buy because they perceive the product to be overvalued.
Advise your client to set his price between these extreme points with due consideration given
to the internal and external factors discussed in the foregoing sections. There are three basic
pricing methods: cost-based pricing, value-based pricing, and competition-based pricing.
Cost-based pricing. Most businesses set their prices on the basis of how much went into the
cost of producing the product. There are two kinds of cost-based pricing techniques: cost-plus
pricing and break-even pricing.
● Cost-plus pricing. This is the simplest pricing method. In this method, all costs are
added up and then divided by the number of units produced. To this unit cost figure,
a certain percentage (commonly known as the mark-up), which represents the desired
return on sales, is added to arrive at the selling price.
This method may be the easiest but it fails to take into consideration factors such as
demand and competitors' prices.
● Break-even pricing. Under the break-even technique, the minimum price is

determined at the level where total sales equal total cost. The break-even selling
price, volume, and sales can be determined using the general equation: Total Sales =
Total Costs
with
Total Sales = Unit Selling Price (USP) x Volume (Y) (Equation 1)
and
Total Costs = Total Fixed Cost (TFC) + [Unit Variable Cost (UVC) x Volume (Y)] (Equation 2)
Substituting equations 1 and 2 to the general equation will yield

USP x Y = TFC + [(UVC) x (Y)] (Equation 3)
By simplifying equation 3, you can compute for unit selling price with equation 4:
USP = TFC + UVC
(Equation 4)
Y
USP is the selling price that will yield zero profits. Selling below this break-even
price will mean definite losses for the business. It is only when the business sells
above the break-even price that profits will start coming in.
Value-based pricing. Value-based pricing uses buyers' perceptions of value and not the
seller's costs, as the key to pricing. If your client decides to use this method he needs to find
out first what value buyers assign to different competitive offers. This method of pricing is
not easy, as the task of measuring and establishing the perceived value of a product is
difficult. Customers should be asked how much they are willing to pay for a basic product
and for each benefit added to the product.
Competition-based pricing. Under this method, prices are set in relation to the price of
competitors. This does not necessarily mean that your client will charge exactly the same
price as his competitors do. He may opt to keep his prices slightly higher or lower than
competition.
PRICING STRATEGIES
There are different pricing strategies to suit the different stages of a product's life cycle.
New product pricing strategies. If your client is introducing an imitative new product, he
can make use of any one of the four price-quality strategies. The choice will depend largely
on the price-quality product positioning move your client wishes to establish vis-à-vis his
competitors.
PRICE
Higher Lower
Premium Good-value
Higher
Strategy Strategy
QUALITY
Overcharging Economy
Lower
Strategy Strategy
On the other hand, if your client is introducing an innovative, patent protected product he is
faced with the task of setting prices for the first time. He can then choose from either one of
two pricing strategies: market skimming pricing and market penetration pricing.
● Market skimming pricing. Prices initially set are high to skim maximum revenues
from the segments willing to pay the high price. This is used specially for innovative
products without competition. As sales slow down and competitors come up with
their own version of a similar product, prices are lowered to draw in the next price-
sensitive layer of customers.
● Market penetration pricing. Prices are set low for a new product in order to attract a
many buyers and get a larger chunk of the market. For this strategy to be effective,
the product must be highly sensitive so that a low price produces more market
growth. Advise your client to be careful when opting to offer a new product at a low
introductory price as it may create a permanent price image that may be difficult to
change over time.
Product mix pricing strategies. Pricing a product may be difficult if it is part of a product
mix because each of the products in the mix has its own demand, costs, and competition.
There are five product-mix strategies, to wit:
● Product line pricing. Some companies manufacture more than one brand of a
particular product. Procter and Gamble manufactures not one but two brands of
deodorants -- Secret and Sure; not two but three bath soaps -- Safeguard, Camay, and
Ivory. Kimberly-Clark Philippines carries three brands of bathroom tissue -- Scott,
Joy, and Kleenex. 3D has more than five models of stand fans. In product line
pricing, management must decide on the price differentials between the various
products in a line by taking into consideration customer evaluations of their different
features and competitors' prices. If the price difference between two brands is small,
buyers will buy the more advanced product. If the price difference is large, customers
will generally settle for the cheaper product.
● Optional product pricing. When companies choose to sell optional or accessory

products along with their main product then they are employing optional product
pricing. Car dealers commonly use this pricing strategy. They have stripped-down,
semi-loaded, and fully loaded car models all priced at varying levels to meet different
budgets.
● Captive product pricing. There are some firms that make products that must be used
along with a main product. A few examples of captive product pricing include camera
and film (Kodak), cars and spare parts, pens and refills (Parker), laser printers and
toners (Hewlett Packard), and razors and blades (Gillette). Under this strategy,
companies try to price the main product low to attract buyers and then recover from
the bigger volume of sale of accessories or consumables.
● By-product pricing. Many businesses often have by-products (e.g., meat processing,
oil refinery, sawmills, furniture making, etc.). If by-products are of no further use to
the business, these establishments look for a market for these by-products to dispose
of them. By-products are priced at a level where the business can recover storage
costs.
● Product-bundle pricing. This strategy involves combining several products and

offering the bundle at a reduced price. Examples of product-bundle pricing include
Eat All You Can extravaganzas and value meals of fast food restaurants. Some travel
agencies offer airfares inclusive of accommodations. Wedding receptions at five-star
hotels are priced for a package with wedding cake, doves, bridal car, flower
arrangements, overnight stay at the honeymoon suite, welcome drinks, and other
amenities. The reasoning behind product bundle pricing is that the whole is cheaper
than the parts taken separately.
Product adjustment pricing strategies. Prices are never fixed. Companies usually have to
adjust their prices to stay attuned to changes in customer differences and changing market
situations. There are seven price-adjustment strategies. These are:
● Discount and allowance pricing. Discounts are given to customers who pay their
bills before due date, buy in volume, or else buy during off-seasons. Allowances are
another form of discount. Trade-in allowances are price reductions given for turning
in an old item when buying a new one. Promotional allowances, on the other hand,
are price reductions given to reward dealers for participating in advertising and sales-
support programs.
● Segmented pricing. With segmented pricing, a company sells a product at two or

more prices, even though the difference in prices is not based on product costs.
Senior citizens enjoy a 20% discount on their medicines and the food they eat in
restaurants. At French Baker and Triple V Express, customers enjoy a 40% off on
food items if purchases are made 30 minutes before closing time.
● Psychological pricing. In using psychological pricing, sellers consider the

psychology of prices and not simply economics. Some consumers equate price to
quality -- i.e., the higher the price, the higher the perceived quality.
● Promotional pricing. Under promotional pricing strategy, products are temporarily

marked down below the list price to increase short-run sales. Supermarkets and
department stores usually price some items below the normal list price in the hope
that more customers will come in and buy other items at normal mark-ups.
● Value pricing. Marketers who adopt the value pricing strategy are out to offer the
right combination of quality and good services at a fair price.
● Geographical pricing. There are times when the client base of a firm spans the entire
country. In such cases, the firm must decide how to price its products for customers
located in different parts of the country. It is not unusual for a company to charge
customers in far places higher prices to cover shipping costs.
The life span of products differs from one another --

PRODUCT LIFE some are short-lived, while others span generations.
CYCLE STRATEGIES Nonetheless, every product goes through four distinct
stages in its life: introduction, growth, maturity, and
decline.
If we were to graph the life cycle of a typical product

it would look like Fig. 7.3. It is difficult to pinpoint with certainty where each stage begins
and ends. However, the passing from one stage to another is usually marked by shifts in
growth or decline in sales and profits.
SALES
SALES
PROFIT
TIME
Introduction Growth Maturity Decline
Period of slow Characterized A period of The period

sales growth as by rapid slowdown in when sales
product is being market sales growth. growth shows
introduced in the acceptance Profits either a strong
market. Profits are and stabilize or downward
non -existent substantial decline. drift and
because of heavy profit profits erode.
expenses of improvement.
product
introduction.
Fig. 7.4: Product Life Cycle
Different stages call for different strategies. Thus, it is important that you know at what stage
your client’s product is currently in. Philip Kotler developed the table of strategies in his
book Marketing Management: Analysis, Planning and Control. 14 He cautions that not all
would agree with all suggested strategies in the table. Nonetheless, they represent a
consensus of what a number of marketers would advise. According to him, "the best
marketing strategy to follow in a given stage of the product life cycle is not necessarily the
one prescribed in the table. Every company needs to develop a distinctive strategy at each
stage, not the one everyone else is using."
Table 7.1: Summary of Product Life Cycle Characteristics, Objectives, and Strategies
14
Kotler, Philip and Armstrong, Gary, Principles of Marketing, 7th Edition., Prentice-Hall, 1996, p.
332.
SALES
SALES
TIME
INTRODUCTION GROWTH MATURITY DECLINE
CHARACTERISTICS
SALES Low sales Rapidly rising Peak sales Declining sales

sales
COSTS High cost per Average cost per Low cost per Low cost per
customer customer customer customer
PROFITS Negative Rising profits High profits Declining profits
CUSTOMERS Innovators Early adopters Middle majority Laggards
COMPETITORS Few Growing number Stable number Declining number
beginning to
decline
Maximize profit Reduce

MARKETING Create product Maximize market
while defending expenditures and
OBJECTIVES awareness and trial share
market share milk the brand
STRATEGIES
PRODUCT Offer a basic Offer product Diversify brands Phase out weak
product extensions, and models items
service, warranty
PRICE Use cost-plus Price to penetrate Price to match or Cut price
the market beat competitors
DISTRIBUTION Build selective Build intensive Build more Go selective --
distribution distribution intensive phase out
distribution unprofitable outlets
ADVERTISING Build product Build awareness Stress brand Reduce to level
awareness among and interest in the differences and needed to retain
early adopters and mass market benefits hardcore loyalists
dealers
SALES PROMOTION Use heavy sales Reduce to take Increase to Reduce to minimal
promotion to entice advantage of encourage brand level
trial heavy consumer switching
demand
Customers view a product as a bundle of physical

PRODUCT attributes and features. Your client can use product
STRATEGIES features as a competitive tool for differentiating his
products from those of his competitors. Constant
innovation and adding new valued product features
will keep your client one step ahead of competition.
The following list of product features indicates the range of options your client can use to
enhance customers' interest.
Color Upgrading ability Sizes Smell

Packaging Style and design Durability Formulation
Labels Brand name Consistency Weight
Accessories Product image Flavors Length
Quality Ingredients Scent Width
Options Freshness Taste Additional uses
In addition, your client can opt to offer service features that will enhance a product. Since
good customer service is an essential component of total customer satisfaction and a satisfied
customer will continuously patronize and/or endorse a product(s)/service(s), it will be to your
client’s advantage to put in free additional services like: 24-hour service, free pick-up and
delivery, and warranty.
There are four general types of product marketing strategies and these are shown below:
CURRENT NEW
PRODUCTS PRODUCTS
Ð Ð
Market Product
CURRENT MARKETS Î Penetration Development
Strategy Strategy
Market
Diversification
NEW MARKETS Î Development
Strategy
Strategy
Market penetration strategy. The idea here is to look for ways to increase the current
market share of your client without having to change his present product lines. Some market
penetration strategies include:
1) Encouraging customers to use the product more often.
2) Increasing the number of sales outlets, dealers, and distributors to make the product
more accessible to customers.
3) Obtaining more shelf spaces for display of product in present store outlets for greater
visibility.
4) Intensifying advertising and promotion activities to attract users of another brand to

switch brands and convince non-users to start using the product.
5) If the product is a convenient product (i.e., a consumer good that is purchased

frequently and with a minimum of comparison), reduce price to encourage more
sales.
6) Encouraging store personnel to endorse or recommend a product.
Market development strategy. In this case, the idea is to look for new markets whose needs
might be met by your client’s existing products. Strategies under this category emphasize on
expansion of distribution channels and looking for new market segments with a different set
of demographic profile.
Product development strategy. Under this strategy, your client should try to consider new-
product development possibilities for his present markets. For instance, in the beginning, all
toothpaste manufacturers promised the same thing: clean teeth. It was years later when they
came up with improved toothpaste products for whiter teeth, fresher breath, fluoride
protection against cavities, and calcium for stronger teeth. In the same way shampoo
manufacturers have come up with different product variants through the years. Shampoo
manufacturers have developed dandruff-free shampoo, shampoo and conditioner in one,
dandruff control and conditioner in one, and shampoo for oily, dry, and normal hair.
Another familiar example is the yellow box of crayons. Crayola crayons were developed in
the U.S. in 1903. Over the years, the Crayola line has grown to include many new sizes and
colors (box of crayons in 8s, 16s, 24s, 48s, 96s, and 120s), shapes (standard three-inch crayon
sticks, jumbo, and "So Big"), and new products (erasable crayons, washable crayons, colored
pencils, markers, paint, and modeling compounds).
All these are the outcome of what is called product development strategy. It’s basically the
same product but with new product attributes.
Diversification strategy. Diversification calls for new products in completely new

markets/businesses. Diversification strategy makes sense when good opportunities can be
found outside the present business. A shampoo and conditioner manufacturer may have made
a name for itself in the industry and may like to explore the possibility of engaging in the
manufacture of other hair grooming products like gels, spray nets, and hair dyes.
Diversification, however, does not need to be limited to the same line of business or related
industry. San Miguel Corporation (SMC) is not just in the business of manufacturing beer.
SMC is a highly diversified business conglomerate that is into the manufacture of beer (e.g.,
San Miguel, Miller, Cerveza Negra, Red Horse, Blue Ice, Gold Eagle etc.), non-alcoholic malt
beverages (e.g., Cali, San Miguel NAB etc.), wines and spirits (e.g., Ginebra San Miguel,
Añejo Rum, Tondeña Manila Rum, etc.), juice drinks (e.g., Zip Juice, Magnolia Fruit Drinks
etc.), bottled water (e.g., Viva!, First Distilled Drinking Water, Wilkins), butter, cheese and
margarine (e.g., Anchor, Dari Crème, Buttercup, Star, Primex, Baker's Best, etc.), processed
meat (e.g., Moby, CampoCarne, Valiente, Great Bite, Bonanza), value-added meat products
(e.g., Monterey), basic meat products (Magnolia Chicken), packaging (glass, metal, plastic,
paper and composite materials), coconut oil and commercial feeds products (e.g., B-Meg),
and real estate (e.g., The Legacy, Maravilla, Greenwoods, etc.).
Marketing involves more than just developing a

PROMOTION product that satisfies a need, pricing it attractively, and
STRATEGIES then making it available to the target market.
Necessarily, your client needs to communicate with
his target market to encourage the use/purchase of his
product or service. Generally there are four ways of
promoting a product: advertising, personal selling,
sales promotion, and public relations. The choice of medium depends to a great extent on
desired reach (the number of people in the target market exposed to an ad campaign during a
given period), impact, frequency, habits of target consumers, and cost. Each of these four
activities has its unique characteristics and these are summarized below.
Table 7.2: Characteristics of Promotional Activities
PERSONAL SALES PUBLIC

ADVERTISING SELLING PROMOTION RELATIONS
Reach Very extensive; can Limited Wide but not as Many but not as
reach geographically extensive as extensive or wide as
dispersed buyers; advertising advertising and sales
message can be repeated promotion
many times over
Tools Print, radio, and Telemarketing, Sampling, coupons, News stories, press
television ads, sales presentations, price packs, exhibits, releases, speeches,
billboards, direct mail, salesmen samples giveaways, contests, special events, annual
posters, leaflets, display games, discounts, reports, brochures,
signs, packaging, fairs trade shows company newsletters
catalogs
Cost Expensive but Most expensive Expensive Economical
comparatively low cost promotional tool
per exposure because it because of the need
can be repeated several to maintain a sales
times over force
Form With the use of visuals, Personal interaction Any form of Effective means of
print, sound and color, between 2 or more inducement that gives informing the public
ads are a very expressive people consumers added about what is
form of promotion value for their happening in the
purchase company
Impact Impersonal; not as Very personal and Provides strong Seldom used to
persuasive as using persuasive; very incentive to purchase generate sales but an
company sales people; effective when "now" effective tool in
very effective in drawing nearing the point of drawing awareness
customer awareness closing a sale
Before you advise your client what form of promotion to take, be sure you have adequate
information on your client’s type of product/market, buyer readiness stage, product’s lifecycle
stage, and whether or not the push or pull strategy is employed.
Type of product or market. When it comes to the use of the different promotional
activities, manufacturers of consumer goods and industrial goods differ in preference.
Consumer good manufacturers put a larger chunk of their funds in advertising followed by
sales promotion, personal selling, and then public relations. On the other hand, manufacturers
of industrial goods put more emphasis on personal selling, followed by sales promotion,
advertising, and then public relations. The reason for the difference lies in the fact that
industrial goods, being more expensive and difficult to move vis-à-vis consumer goods, entail
more persuasion, effort, and personal interaction to sell.
Buyer’s readiness stage. Before your client can expect his target clients to buy his product,
he must first build awareness and knowledge about his product. Once consumers are aware
and know more about a new product, it is important to create the positive feelings of liking
(the desire to have), preference (wanting a brand over another), and conviction (believing a
particular brand is the best one to own) in the minds of target clients. This mind-set will
ultimately bring target clients to buy the product.
Advertising and public relations play major roles in the awareness and knowledge stages.
Creating customer liking, preference, and conviction are best achieved by personal selling and
advertising. Finally, closing a sale is best done with sales calls and sales promotion.
Stage of product’s life cycle. The choice of which promotional tool to use also depends
upon the product’s lifecycle. During the introductory stage, any of the four promotional tools
will be useful. With the product still relatively new, building awareness and interest in the
product can be achieved through advertising and public relations. Heavy use of sales
promotion gimmicks is suggested to entice trial and encourage usage. The company’s sales
force is deployed to engage in personal selling.
As the product moves on to the growth stage, advertising and public relations continue to be
powerful tools. At this stage, sales promotion activities can be reduced to take advantage of
the prevailing heavy consumer demand. Thus, fewer incentives are needed to encourage the
target market to buy the product.
In the mature stage, sales promotion activities are increased to give sales a further boost.
Moreover, promotional gimmicks are set off to encourage brand switching. Advertising
campaigns designed to stress brand differences and benefits are resorted to keep the product
in the minds of buyers.
During the decline stage, companies reduce advertising activities to just about the level
needed to retain hardcore loyalists. However, public relations activities are dropped and the
company’s sales force puts little attention in pushing the “old” product. Sales promotional
activities can still be pursued but these are normally kept at a minimum level.
Push or pull strategy. The promotional mix is influenced by the decision of whether the
producer wishes to employ a push or a pull strategy. A push strategy is a form of promotion
strategy where the producer promotes his product to wholesalers who in turn promote to
retailers and finally the retailers promote to consumers. In this case, the producer makes use
of personal selling, trade promotion, etc. to induce his channel members to carry his product
and promote it to final consumers.
On the other hand, the pull strategy has the producer directing his marketing activities
towards the end users encouraging them to buy the product. In this case, the marketing
activities are primarily advertising and consumer sales promotion.
For many small entrepreneurs, determining the size of

SALES the target market is nothing more than a "guess-
FORECASTING estimate."
TECHNIQUES
To be able to assist your client determine the size of
his target market, you need to gather, process, and
analyze relevant information relating to each intended
market segment. The collection of primary market
data can be done with the use of mail questionnaire or personal interview. However, owing to
budget constraints, manpower requirements and time limitations, heavy reliance is normally
placed on secondary data. Secondary data sources include published materials in libraries,
government agencies, academic institutions, trade and professional agencies, etc.
Assuming that sufficient data is on hand, there are several techniques in estimating the size of
the potential market given existing economic conditions and competition.
TIPS ON FORECASTING
When estimating the sales potential of selected market segments, keep the following points in
mind:
1. If your client intends to sell more than one type of product or service, it is advisable to
prepare a separate sales estimate for each service or product group.
2. Estimates are only good if the assumptions used are realistic. Get information from
someone familiar with the line of business so that you avoid biased assumptions and
ensure that estimates are realistic.
3. Don’t rely solely on secondary data. Interview people and gather first hand information
whenever possible.
4. Trend analysis treats the past and future demand for a particular product as a function of
time alone without considering other factors that may influence past or future demand
fluctuations.
5. At best, results of analysis of historical trends present only prospects. Keep in mind that
business conditions are continuously changing and thus caution should be taken when
presuming that the past will always reflect the future.
SALES FORECASTING TECHNIQUES
Sales estimates can be calculated in many ways. These include:

1. Percentage share of total market
2. Executive poll method
3. Derived demand method
4. Market indicators method
5. Arithmetical straight line method
6. Arithmetical geometric curve method
7. Time-series analysis
Method 1: Percentage share of total market
This is the simplest of all methods. The total market for the product or service is first
quantified using the following equation:
Q=n x q x p
where Q = represents total market demand

n = number of buyers in the market
q = quantity purchased by an average buyer in a given period
p = price per unit.
Once you have established the total market, evaluate your client’s share. For an existing firm
in the industry, determining its share of the market is no problem. Simply divide the firm's
current sales figure by the total market to get the firm’s percentage share of the total market.
Consequently, the firm's future sales can be estimated by forecasting the total market and then
applying the computed percentage share.
When your client is new in the business, you will need to get data on the different firms in the
industry and their respective shares of the market. How much of the market does your client
expect to take? Is this a reasonable estimate? How does his estimate compare with other
firms of the same size?
Method 2: Executive opinion poll
This non-mathematical sales forecasting approach is commonly used by those who have been
in business for some time. Companies that have a sizeable sales force use this method. The
procedure begins with the company’s salesmen submitting their individual estimates of future
sales in their respective areas. The submitted estimates are reviewed and adjusted (if
necessary) by the immediate sales managers. These are then forwarded to a committee
(usually composed of the president, treasurer, secretary, marketing head, and the production
head) for review. The committee, prior to finalizing the sales forecasts for a given period,
reviews the sales managers’ estimates giving due consideration to the following factors:
1. Changes in employment, income distribution, and other economic indicators:

2. Expected changes in product design;
3. Possible increase in marketing efforts;
4. Probable adjustments in selling price;
5. Improvements in product quality; and
6. Revision in marketing strategies.
Once revisions and adjustments are made, the revised figure then represents the final sales
forecast for a particular period.
Method 3: Derived demand method
This method is highly applicable to businesses that are dependent on the orders of another
company. The forecast is totally based on the sales projections of the other company.
A good example would be a small company manufacturing jute sacks for the rice millers of
Nueva Ecija. This small company can base its sales forecast figures on the aggregate sales
projections of the rice millers in the province.
Method 4: Market indicators method
Another practical approach to sales forecasting is through the use of “market indicators.”
These are economic factors that influence the demand for the product. The main idea is to
obtain the rate of increase/decrease of a particular market indicator for a product and use this
information as a possible increase/decrease rate of sales volume. This method is applicable
only to products that behave according to a specific market indicator. It is difficult to use this
method when a product is directly affected by more than one market indicators.
Demographic changes are the most commonly used market indicators. These include changes
in population growth rate, birth, marriage and mortality rates, migration movement, and age
distribution.
For instance, an entrepreneur intending to go into casket manufacturing can project its sales
by using the mortality rate as basis just as an entrepreneur wanting to engage in the
production of children’s books will necessarily look into the age profile of the population.
Method 5: Arithmetical straight-line method
A company that has been in business for several years can use its past sales figures and apply
quantitative methods to forecast sales. Through the use of simple mathematical models or
formulas, past sales figures are used to project future sales performance.
The arithmetical straight-line method is the simplest quantitative approach to sales

forecasting. Under this method, the incremental average increase or decrease for a certain
forecast period is computed. The most commonly used period forecast would be in terms of
simple average annual increase (SAAI). Let’s make use of some hypothetical figures to
illustrate this method. Assume that a company registered the following sales from 2000 to
2005:
Sales
YEAR (in million pesos)
2000 16.7
2001 17.9
2002 19.2
2003 18.5
2004 19.9
2005 20.2
To get the SAAI, compute for the difference in sales totals of the first year and the last year.
In this case, our make-believe company realized an incremental increase of P 3.2 million over
the last 4 years. Divide the incremental increase by the number of years under review. Our
SAAI is P 0.70 per annum (P3.5/5).
To project sales for the subsequent years, simply add the SAAI to the previous year’s sales
figure. Thus, sales forecast for 2006 to year 2008 would be as follows:
Actual Sales Plus: Projected Sales

YEAR (in ‘000 pesos) SAAI (in ‘000 pesos)
2005 20.2 .70
2006 20.9 (20.2 + .70)
2007 21.6 (20.9 + .70)
2008 22.3 (21.6 + .70)
Method 6: Arithmetical geometric curve method
A second quantitative method for projecting sales figures is called the arithmetical geometric
curve method. Just like the arithmetical straight-line method, this technique uses historical
data. This method, however, is a little bit more complicated.
Step 1 Calculate the annual rate of increase or decrease for a particular forecast period.
Step 2 Compare the increase or decrease of the current year’s sales with the previous year’s
sales total and then express the difference in terms of percentage.
Using this method on our hypothetical example, you will get the following:
Comparative This was computed

Actual Sales Year to Year as follows:
Year Inc./(Dec.)
(in million pesos) Increase/(Decrease) 17.9 – 16.7
(in %)
16.7
2000 16.7 - -
2001 17.9 1.2 7.18
2002 19.2 1.3 7.26
2003 18.5 (.7) (3.65)
2004 19.9 1.4 7.57
2005 20.2 0.3 1.51
Step 3 Compute for the algebraic sum of the last column. To do this, sum up all the positive
figures and the negative figures separately and then subtract the negative value from
the sum of positive values. The algebraic sum for the above example is equal to
19.87.
Step 4 Divide the algebraic sum by the number of years covered to get the yearly percentage
increase. In our example the yearly percentage increase is 3.97%.
Step 5 Use the yearly percentage increase figure to forecast sales of the subsequent years.
Thus, for 2006 sales are projected to be P 21.0M (P 20.2 + [P 20.2 x 0.0397]).
Method 8: Time series analysis
This is the third quantitative approach to projecting sales using historical figures. Compared
to the two preceding ones, the time series analysis is more sophisticated and complicated.
The term “time series” refers to statistical data that are collected, observed, or recorded
regularly.
Although in forecasting one's concern is with the future, time series begins by looking
backward. This method involves looking for observable regularities and patterns (or trends)
in historical series. The trend is projected into the future, and the result is used as the basis
for the forecast.
Let’s take another hypothetical example, Fragrant Blooms (a flower shop). Its sales for the
last 10 years are tabulated and graphed on below.
FRAGRANT BLOOMS
SALES
YEAR
(in pesos) 1150000
1996 989,977
1100000
1997 983,894
1998 979,807 1050000
In Pesos
1999 1,039,843
1000000
2000 1,053,025
2001 1,098,922 950000
2002 1,082,850
900000
2003 1,087,287
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
2004 1,097,420
2005 1,107,286
To forecast future sales, fit a trend line passing near these points by using the following linear
equations:
First, let’s deal with the variables y, x, n, a, and b. Assign these letters to mean the following:
Let y = sales
X = year number
N = number of observations
a and b = sales parameter constants
“Σ” is the summation sign

.
To draw a trend line, you need the basic linear equation:
ÿ = a + bx (Equation 1)
The numerical constants a and b are estimated from the sample data using equations 2 and 3
below. Once the values of a and b have been determined, substitute a given value for x into
equation 1 and calculate the predicted value of ÿ.
Σ y = na + b(Σ x) (Equation 2)
Σ xy = a(Σ x) + b(Σ x2) (Equation 3)
You can simplify the work of fitting a trend line by performing a change of scale, or coding
the x values, such that in the new scale the sum of the x values is zero.
Here is how to re-scale or code x values:

1. If the series of data has an odd number of years, assign the middle year the value x = 0
and 1, 2, 3…. to the years that follow it and -1, -2, -3…. to the years that precede it.
2. If your series of data has an even number of years then you have 2 middle years instead of
one. Assign x = -1 to the first of the 2 middle years. To the years immediately preceding
it assign x = -3, x = -5 and so on. To the second of the 2 middle years, assign x = 1. To
the year following it, assign the succeeding years as x = 3, x = 5 and so on.
Below are 2 tables. The table on the left has 7 x values (referring to the number of years)
while the table on the right has 8 x values. See how re-scaling of x values is done.
x= Re-scaled x= Re-scaled
Years x Years x
values values
1980 -3 1980 -7
1981 -2 1981 -5
1982 -1 1982 -3
1983 0 1983 -1
1984 1 1984 1
1985 2 1985 3
1986 3 1986 5
1987 7
The advantage of this kind of coding is evident. Whether you are working on an even or an
odd number of years in the series, the sum of x (i.e., Σ x) will always be equal to zero. And
substituting this to equations 2 and 3, you can easily solve for a and b using the following
equations:
a=Σy
(Equation 4)
n
b = Σ xy (Equation 5)
Σ x2
Now, use these equations for Fragrant Blooms. The sales data of Fragrant Blooms are shown
on the third column of the next table. Coding the years, you get x values on the second
column. For the fourth column, the x values were multiplied with the corresponding y values.
Finally, for the last column, the x values were multiplied by itself to get x2.
SALES
YEAR (in ‘000)
x y xy x2
1996 -9 989,977 -8,909,793 81
1997 -7 983,894 -6,887,258 49
1998 -5 979,807 -4,899,035 25
1999 -3 1,039,843 -3,119,529 9
2000 -1 1,053,025 -1,053,025 1
2001 1 1,098,922 1,098,922 1
2002 3 1,082,850 3,248,550 9
2003 5 1,087,287 5,436,435 25
2004 7 1,097,420 7,681,940 49
2005 9 1,107,286 9,965,574 81
Σ 0 10,520,311 2,562,781 330
Now, you have your figures ready. To solve for a and b, simply substitute the figures above
to equations 4 and 5 as shown below:
a = Σ y = 10,520,311 = 1,052,031.1
n 10
b = Σ xy = 2,562,781 = 7,766
Σ x2 330
Thus, the trend line for Fragran Blooms Company is as follows:
ÿ = 1,052,031.1 + 7,766 x
Having calculated the trend equation, you can now determine the trend value for any year
simply by substituting into the equation the value of x corresponding to that year.
Forecasting is difficult. When you are forecasting sales you are trying to determine future
demand by anticipating how much buyers are likely to purchase under a given set of future
conditions. The result will always be a "guess-estimate." But nonetheless, using a
forecasting technique is far better than just picking out a sales figure from thin air.
Business conditions are always changing. Changes in pricing policies,

advertising/promotional activities, competition, seasonal variations, production capacity, and
economic conditions can have adverse repercussions on firm’s sales performance. Keep in
mind the following:
¾ On pricing policies: Increase the price of a product and you may find fewer people
buying it. Decrease the price and you might just find people clamoring for more. Any
increase or decrease in the price of product will definitely affect the projected sales
volume. This is especially true when projections are made in terms of peso values instead
of unit values.
¾ On advertising/promotional activities: Companies invest considerable amounts on

advertising and promotional gimmicks because of one reason. And that is, advertising and
promotional activities greatly affect the product’s salability. Thus, if an increase in
advertising/promotional activities is in the offing, forecasts should be correspondingly
adjusted to reflect extent of advertising efforts.
¾ On competition: Admittedly, firms in the same industry are competing for the same
market. Thus, if a firm wishes to maintain its market share, management should
anticipate all the possible moves and strategies of its competitors.
¾ On seasonal variations: Some products follow a seasonal trend (that is, for certain months
of the year there is a big demand for the product and then tapers off for the rest of the
year). Fluctuations should be taken into consideration so that inventories do not build up
unnecessarily.
¾ On production capacity: Sales projections are of course limited by the firm's production
capacity. Therefore, it does not make sense to estimate sales that is beyond the firm's
ability to produce.
¾ On economic conditions: Recession is marked by a decline in business activity. When

such condition occurs, sales projections should be reviewed and corrected accordingly.
It is important that your small entrepreneur client has

something beneficial to offer in his products. In most
VALUE CHAIN cases, customers are prepared to pay a good price for a
ANALYSIS product or service they find value in. The more value
there is in a product or service, the more people will
continue to buy.
So how do you create value for your client’s products?

With this next tool you will be able to work out ways on how you can create services or
products of real value for your client’s customers.
HOW TO DO A VALUE CHAIN ANALYSIS
Value chain analysis was developed by Michael Porter, the same creator of Five Forces tool.
It involves a three-step process.
Step 1 Identify the activities undertaken to deliver a product or service.
Brainstorm the activities that contribute to the customer’s experience. These

activities refer to different business processes used to serve a customer. These
include marketing activities, sales and order-taking, operational processes, delivery,
support services, etc.
Once you’ve come up with the activities which add value for the company, list them
down. A useful way of doing this is to list them down as a simplified flowchart
running down the page.
Step 2 For each activity, identifying the things that customers value in the way each activity
is conducted. These are called Value Factors.
Here are some examples. If your client is an optometrist running an optical shop, his
customer will value a polite, knowledgeable, and easy to understand answer to his
queries and an efficient and quick resolution to his problem. A customer that calls for
pizza delivery service expects a quick and polite answer to his call, efficient taking of
order details, and fast delivery. Buyers in a wet market value fresh produce,
cleanliness, getting the right weight of the goods they pay for, and added services like
scaling/cleaning of fish and deboning.
Opposite each value factor, write down what needs to be done or changed to provide
great value for each factor identified.
Step 3 Evaluate whether such activity is work undertaking and then formulate plan for
action.
By this time you must have come up with several ideas for increasing the value your
client can deliver to his customers. Go over your list of ideas and pick out the quick,
easy ,and cheap to implement. Screen the more difficult ones. Some may be
impractical as they may require a great cost to deliver and yet bring in only marginal
improvements. It is best to drop these ideas. Prioritize the best ideas and plan how to
implement them.
Here is a good example of value chain analysis. 15
Example:
Lakshmi is a software development manager for a software house. She and her team handle
short software enhancements for many clients. They use value chain analysis to think about
how they can deliver excellent service to their clients. They have identified the following
activities that create value for their clients: order taking, enhancement specification,
scheduling, software development, programmer testing, secondary testing, delivery, and
support. (The first three are shown in Fig. 7.5.) Lakshmi also identified the following
support activities as important: recruitment (choosing the people who will work well with the
team) and training (learning about new software, techniques, and technologies as they are
developed).
Next Lakshmi and her team focus on the order taking process, and identify the factors that
will give the greatest value to customers. They identified the following value factors: giving
a quick answer to incoming calls; having a good knowledge of the customer’s business,
situation and system, so they do not waste the customer’s time with unnecessary explanation;
asking all the right questions, and getting a full and accurate understanding of the customer’s
needs; and explaining the development process to the customer and managing his
expectations as to the likely timetable for delivery. (See “Value Factors” column of Fig. 7.5.)
They then look at what they need to do to deliver the maximum value to the customer. These
things are listed in Fig. 7.5 under the “Changes Needed” column.
They do the same for the next two processes.
VALUE CHAIN VALUE FACTORS CHANGES NEEDED

• 3 Rings Rule then all ring
• Fast answer to phone calls
• Team updates on clients
ORDER TAKING • Knowledge of customer’s
situation and system • Team training on systems
• Understand needs accurately • Training on client industry
• Manage expectations • Client briefing at end of call
• Detailed description of
changes to software
SPECIFICATION • Accurate, comprehensive • Training in writing and
description of modifications proofing
• Easily understandable • Internal review for clarity
• Lists all activities • Use aide memoire to ensure
• Explains basis of price all points considered
• Description of all activities
• Accurate time estimation

• Set expectations clearly needed
SCHEDULING • Clear statement • Scheduling system needed
• Meet commitments • Need contingency time in
• Timely job start schedule
• Need sufficient capacity
Fig. 7.5: Value Chain Analysis Example
15
http://www.mindtools.com/page/article/newTMC_10.htm
Once the brainstorming is complete, Lakshmi and her team identify the best options, reject
low yield or high cost options, and agree their priorities for implementation.
You can use the value chain analysis to develop your client’s competitive advantage. If you
can, present your conclusions to your client’s customers to get their feedback. This is one
way of either confirming that you’re right or of getting a better understanding of what the
customers really want.
Chapter
PRODUCTION ENHANCEMENT TOOLS

SPOTTING BOTTLENECKS
At the heart of any manufacturing enterprise is the production operation. Any drawback in the
manufacturing process causes not only delay in deliveries but also gives rise to unnecessary
expenses. It is important that manufacturing problems are identified at the outset and
resolved immediately to minimize expenses and ensure the smooth flow of production
operations.
If your client is into manufacturing, it is important that

CONTROL he monitors the extent to which his products meet
CHARTS specifications. The general approach to quality control
is clear-cut: random samples are taken from the on-
going production process and line charts of the
variability from the samples are drawn to see their
closeness to target specifications. If samples fall outside the pre-specified limits, then the
process is said to be out of control and action must be taken to find and correct the cause of
the problem. These line charts are referred to as Shewhart control charts named after Walter
A. Shewhart, a statistician who is generally credited for setting the foundation of what is now
commonly referred to as statistical process control (SPC).
SPC is anchored on the concept of process variability. There are two types of variation:
natural process variation and special cause variation. The former, also referred to as common
cause or system variation, occurs naturally and is inherent in all processes. The latter, on
the other hand, is caused by some problem or extraordinary occurrence in the system.
With SPC, a manufacturing process is monitored through sampling. From the results of the
sample, the process is investigated to determine the root cause, and subsequently adjustments
made to correct the process.
All control charts have three basic components: 1) a centerline, usually the mathematical
average of all the samples plotted; 2) upper (UCL) and lower (LCL) statistical control limits
that define the constraints of common cause variations; and 3) data points, recorded from
random samples taken from the production process over time.
UCL UCL
CL
CL
LCL
LCL
Time
Time
Process in Statistical Control Process Out of Statistical Control
Fig. 8.1: Statistical Control Charts
The chart on the left shows a process in statistical control. Note that all the points lie within
the UCL and LCL. The fluctuations indicate common cause variation. The chart on the right
shows a process out of control. Two points can be found outside the control limits, indicating
the presence of a special cause variation. A point outside the control limits is the most easily
detectable out of control condition.
HOW TO MAKE A CONTROL CHART
Step 1 Get a sample of a certain size from the ongoing production process.
Step 2 Decide on the characteristic to be controlled and determine the upper and lower
control limits. (This requires knowledge and application of principles of statistics.)
The following control charts are used for controlling variables:

X-bar chart: In this chart the sample means are plotted to control mean value (e.g.,
diameter of rings, strength of materials, etc.)
R chart: In this chart, the sample ranges are plotted to control a variable’s
inconsistency.
S chart: In this chart, the sample standard deviations are plotted to control a
variable’s variability.
S**2 chart: In this chart, the sample variances are plotted to control variable’s
irregularity.
For controlling quality characteristics that represent attributes (e.g., defects), the
following charts are constructed:
C chart: This chart assumes that the defects of the quality attribute are rare
and the control limits in this chart are computed based on Poisson
distribution (distribution of rare events).
Np chart: The control limits of this chart are based on binomial distribution.
This chart is used if the attribute’s occurrence is not rare (i.e., it
occurs in more than 5% of the units inspected).
P chart: This chart shows the fraction of nonconforming or defective products
produced by a manufacturing process. It is also called the control
chart for fraction nonconforming.
Step 3 Plot the data

CHAPTER 8: PRODUCTION ENHANCEMENT TOOLS 153
The control chart is the most useful tool in detecting “special causes of variation” and changes
in performance. Abnormal points on the graph, such as those shown below, signal the
presence of special causes of variation.
Seven or more
One or more points are consecutive points on
outside the control limits one side of the
centerline
Six points in a row Fourteen points

steadily increasing or alternating up and down
decreasing
Two out of three Fifteen points in a row

consecutive points in within the center third of
the outer third of the the control group
control region
Eight points on both

sides of the
centerline with none
in the center third of
the control region
Fig. 8.2: Abnormal Points in a Control Chart

The control chart simplest interpretation is to use only the first test listed. The others may
indeed be useful (and there are more not listed here), but be mindful that, as you apply more
tests, your chances of making Type I errors, i.e., getting false positives, go up significantly.
Out of Control In Control Process Improvement

(reduced variation)
UCL
UCL
CL
LCL
LCL
Time
Fig. 8.3: Control Charts: Out of Control, In Control, and Process Improvement
When selecting a sample for control chart purposes be sure that it is small enough to be
economically and practically feasible but large enough to have a normal distribution (The
central limit theorem states that the larger the sample size, the more likely it is that the
distribution of sample means will follow a normal distribution.). Moreover, samples must be
collected frequently enough to be useful in identifying and solving problems. The spacing
between samples should not be exactly uniform. Chart samples from each machine
separately. Control charts are applicable to one and only one process at a time.
“To many small business owners, inventory is simply

ECONOMIC ORDER the stuff they keep on the shelves to generate sales.
QUANTITY Despite the investment required to maintain
appropriate levels of inventory, they put little effort
into monitoring it.” 16 These two statements best
describe local entrepreneurs and their inventory
management practices.
Inventory is usually a company’s largest current asset. It is important that your client knows
how to manage and control her inventory so that she does not run out of stocks nor have too
much than what is needed in stock. Neither of these two situations is desirable. When your
client runs out of goods to sell, she loses the opportunity to make more sales, while not having
raw materials in stock means she will have to put her production to a stop. On the other hand,
overstocking means she is tying up capital in unproductive assets, not to mention running the
risk of deteriorating stocks.
HOW TO COMPUTE FOR EOQ
Inventory control is concerned with minimizing the total cost of inventory. The Economic
Order Quantity (EOQ) is an inventory model originally developed by F.W. Harris in 1915,
although R. H. Wilson is credited for his early in-depth analysis of the model. The model
defines the optimal order quantity that minimizes total variable costs required to order and
hold inventory. It basically answers two questions: how much should be ordered and how
often should an order be placed.
The important costs that need to be considered are the ordering cost (the cost of placing an
order) and the carrying cost (cost of holding a unit of inventory in stock).
The ordering cost refers to all the costs incurred each time an item is ordered. Such costs are
not associated with the quantity ordered but rather the physical activities required to process
the order.
Carrying cost, also called holding cost, is the cost associated with having inventory on hand.
It is primarily made up of the costs associated with storage and inventory investment.
Hence, using the following variables:

Q = optimal order quantity C = cost per order
R = monthly demand for the product P = purchase cost per unit
F = holding cost factor H = holding cost per unit per
month
the optimal order quantity is computed in the following manner:
Total Inventory Cost = Purchase Cost + Ordering Cost + Holding Cost
which corresponds to:

TC (Q) = PR + CR + PFQ
Q 2
Taking the derivative of both sides and equating it to zero, you get:
16
J. Tol Broome, Jr., The Benefits of Smart Inventory Management, June 1999. The article is found
in http://calbears.findarticles.com/p/articles/mi_m1154/is_6_87/ai_54695720
dTC(Q) = d PR + CR + PFQ = 0
dQ Q 2
The result of this differentiation is:
PF - CR = 0
2 Q2
Solving for Q will give you:
Q2 = 2CR
PF
or
Q* = 2CR = 2CR
PF H
Here is an example. JKL Company is trying to minimize total inventory cost. The cost of
each unit is P25.00. The cost of capital is 20% and the physical cost of maintaining this
inventory is currently at 7%. The purchasing officer can place an order in 30 minutes with
materials and overhead cost at P35.00 per order. The purchase officer is currently paid P50
per hour. Records show average weekly sales to be 1,000 units. How many units should JKL
Company order? How often should JKL Company order?
Solution: Annual demand = 52,000 units (i.e., 1,000 units x 52 weeks in a year)
Ordering cost = 25.00 + 35.00 = 60.00
Holding cost = 6.75 (i.e., [20% + 7%] x 25.00)
Plugging in the above values into the equation will result in the optimal order
quantity
Q* = 961.48 units or 962 units per order
Dividing the total annual demand of 52,000 by Q* means that if JKL Company wants to
minimize on its inventory cost, it will place 54 orders (52,000/962) during the year or every
week.
A Flow Process Chart (FPC) is an expansion of the

FLOW PROCESS flow chart’s usefulness in documenting operations. It
CHART is a valuable tool for uncovering hidden costs,
unnecessary steps, delays, and other vital information
that lead to the identification of bottlenecks and causes
of low productivity. There are three types of FPCs:
worker, material, and machine.
The American Society of Mechanical Engineers came out with a set of process chart symbols.
These five symbols, known as the ASME symbols and similarly used in flowcharting, are:
Operation Transport Delay or Inspection Holding and

temporary Storage
storage
A main step, Movement of A delay in the A check for Controlled

where the part, workers, process, or an quality and storage where
material or materials or object is set quantity material is
product is equipment aside until received into or
usually modified required issued from a
or changed storage, or an
item is retained
for reference
purposes
Many processes consist of a series of simple actions, such as moving, waiting or inspecting. If
these individual actions are identified and closely examined, then it becomes easier to find
ways of improving the process.
The FPC can be used to streamline activities involving even a simple office procedure. The
example on the next page shows the step-by-step activities involved in purchasing supplies in
a company. After examining the process, a more simplified and efficient method can be
adopted (Fig. 8.5).
The summary table on the bottom right-hand corner of Fig. 8.5 reveals that the proposed
method is a lot more efficient than the existing method of requisitioning and purchasing of
supplies.
PROCESS CHART
Existing Method: Date: January 3, 2006

Proposed Method: Chart Prepared by: Juan de la Cruz
Subject Charted: Requisition and purchase for supplies Chart No.: R24
Branch: Makati Laboratory Sheet No.: 1 of 1
DISTANCE TIME IN
CHART SYMBOLS PROCESS DESCRIPTION
IN FEET MINUTES
Requisition written by supervisor (one copy)
On supervisor's desk (awaiting messenger)
65 By messenger to superintendent's secretary
On secretary's desk (awaiting typing)
Requisition typed (original requisition copied)
15 By secretary to superintendent
On superintendent's desk (awaiting approval)
Examined and approved by superintendent
On superintendent's desk (awaiting messenger)
20 To purchasing department
On purchasing agent's desk (awaiting approval)
Examined and approved
On purchasing agent’s desk (awaiting messenger)
5 To typist’s desk
On typist’s desk (awaiting typing of Purchase Order)
Purchase Order typed
On typist’s desk (awaiting transfer to main office)
105 3 4 2 8 TOTAL
Fig. 8.4: Flow Process Chart 1
PROCESS CHART
Existing Method: Date: January 23, 2006

Proposed Method: Chart Prepared by: Juan de la Cruz
Subject Charted: Requisition and purchase for supplies Chart No.: R34
Branch: Makati Laboratory Sheet No.: 1 of 1
DISTANCE TIME IN
CHART SYMBOLS PROCESS DESCRIPTION
IN FEET MINUTES
Purchase Order written in triplicate by supervisor
On supervisor's desk (awaiting messenger)
75 By messenger to purchasing agent’s desk
On purchasing agent’s desk (awaiting approval)
Examined and approved by purchasing agent
On purchasing agent’s desk (awaiting transfer to main
office)
SUMMARY
Present Proposed
Difference
Method Method
Operations 3 1 2
Transportation 4 1 3
Inspections 2 1 1
Delays 8 3 5
Distance Traveled
105 75 30
in Feet
75 1 1 1 3 TOTAL
Fig. 8.5: Flow Process Chart 2
HOW TO DO A FLOW PROCESS CHART
Step 1 Determine the process boundaries: where does the process start and where does it
end?
Step 2 List each activity or step on an FPC similar to the one illustrated above. To
understand what each activity entails, consult with and observe the person doing the
job.
Step 3 Using a line, join the appropriate symbols to show the present flow of the process.
Determine and check the sequence with the people involved.
Step 4 Calculate the distance traveled and/or the time it takes to complete each of the steps.
To determine time, ask the people involved to provide a best estimate, take a sample
or apply a standard time measurement. Add these up to determine the overall physical
length of the process and its cycle (elapsed) time.
Step 5 Add up the number of steps recorded against each symbol.
Step 6 Analyze the FPC and find out where you can improve on the process. Determine non-
value adding activities which can be eliminated.
Step 7 Draw improved method. Do not mix present and proposed methods on one chart.
FPCs contain more information than a flow chart as it provides a micro view of the process
and describes the work activity and tasks in detail. As a result, value-adding and non-value-
adding activities within processes can be identified. By eliminating the non-value-adding
activities, improvements in the system can be expected.
FPCs are used as well in documenting the workflow in procedures and instructions within the
Management Systems (ISO 9000/ ISO 14000/ OH&S) and in the preparation of Process
Control Plans for QS-9000.
This tool is also used in business process management and re-engineering, productivity and
work methods analysis, and benchmarking studies.
The charting of work flows, working processes, systems, and procedures is a useful way of
recording the essential features of a work situation for subsequent analysis. To maintain the
chart’s value for future reference, it is best to include the following information in your FPCs:
1) product, material or worker charted; 2) activity analyzed; 3) location of the activity; 4)
reference number, sheet number, and total number of sheets; 5) name of person who did the
chart; 6) date charted; 7) summary of distance, time, labor and material costs.
Since this tool requires a lot of details, do not attempt to chart from memory. Neither should
you critically analyze with incomplete information.
Just In Time (JIT) is a Japanese management

JUST IN TIME philosophy that strives to eliminate sources of
manufacturing waste by producing the right part in the
right place at the right time. This method allows
companies to reduce unnecessary costs associated with
both inventory and the entire production chain.
SOME KEY ELEMENTS OF JIT
There are no step-by-step procedures in implementing the JIT philosophy. However, an

internet article 17 recommends the following JIT techniques which you can suggest to your
client to cut down on unnecessary costs.
1. Reduce or eliminate setup times. Aim for single digit setup times (less than 10 minutes)
or "one touch" setup. This can be done through better planning, process redesign, and
product redesign.
2. Reduce lot sizes (manufacturing and purchase). Reducing setup times allows economical
production of smaller lots. Close cooperation with suppliers is necessary to achieve
reductions in order lot sizes for purchased items, since this will require more frequent
deliveries.
3. Reduce lead times (production and delivery). Production lead times can be reduced by
moving work stations closer together, applying group technology and cellular
manufacturing concepts, reducing queue length (reducing the number of jobs waiting to
be processed at a given machine), and improving the coordination and cooperation
between successive processes; delivery lead times can be reduced through close
cooperation with suppliers, possibly by inducing suppliers to locate closer to the factory.
4. Encourage preventive maintenance. Use machine and workers’ idle time to maintain
equipment and prevent breakdowns.
5. Develop a flexible work force. Workers should be trained to operate several machines, to
perform maintenance tasks, and to perform quality inspections.
6. Require supplier quality assurance and implement a zero defects quality program. Errors
leading to defective items must be eliminated, since there are no buffers of excess parts.
A quality at the source (jidoka) program must be implemented to give workers the
personal responsibility for the quality of the work they do, and the authority to stop
production when something goes wrong. Use techniques such as "JIT lights" (to indicate
line slowdowns or stoppages) and "tally boards" (to record and analyze causes of
production stoppages and slowdowns to facilitate correcting them later).
17
http://personal.ashland.edu/~rjacobs/m503jit.html
7. Use a kanban (card) system (or other signaling system) to convey parts between work
stations in small quantities (ideally, one unit at a time). In its largest sense, JIT is not the
same thing as a kanban system, and a kanban system is not required to implement JIT
(some companies have instituted a JIT program along with a Materials Requirement
Planning or MRP system), although JIT is required to implement a kanban system and the
two concepts are frequently equated with one another.
A kanban is a card that is attached to a storage and transport container. It identifies the
part number and container capacity, along with other information. There are two main
types of kanban (some other variations are also used): the Production Kanban (P-kanban)
signals the need to produce more parts and the Conveyance Kanban (C-kanban) signals
the need to deliver more parts to the next work center (also called a "move kanban" or a
"withdrawal kanban").
A kanban system is a pull system, in which the kanban is used to pull parts to the next
production stage when they are needed; an MRP system or any schedule based system is a
push system, in which a detailed production schedule for each part is used to push parts to
the next production stage when scheduled. The weakness of a push system (MRP) is that
customer demand must be forecast and production lead times, estimated. Bad guesses
(forecasts or estimates) result in excess inventory, and the longer the lead time, the more
room for error. The weakness of kanban is that following the JIT production philosophy
is essential, especially concerning the elements of short setup times and small lot sizes.
The routing diagram is a scaled factory plant layout

ROUTING that shows the location of machines, work stations,
DIAGRAM and auxiliary service facilities such as tool bins,
temporary storage areas, doors, posts, windows, etc.
By tracing and examining the movement of materials,
parts or sub-assemblies as they go through your
client’s plant, you can considerably improve plant layout and efficiency of operations.
One technique for recording routing diagram is done with the use of a string. A string or
thread is used to trace and measure the path of workers, materials, and sub-assemblies as
products going through the manufacturing process.
HOW TO DO A ROUTING DIAGRAM
Step 1 Get a scaled and detailed plant layout. It should show where doors, posts, windows,
electrical outlets and other building service units are situated. Disregard moveable
items like work table, equipment and tools, etc.
Step 2 With the use of cardboard or pieces of paper, make templates of the plant’s
machinery and equipment.
Step 3 Pin the templates to the scale layout approximating the existing condition. Provide
spare pins in doors where materials will pass through.
Step 4 Using thread, trace the materials or personnel flow, from beginning of the
manufacturing process to the end.
Step 5 Record observations and note what changes are needed, unnecessary movements that
can be eliminated, etc.
Step 6 Remove the strings and measure their individual lengths.
Step 7 Using the observations generated in Step 5, rearrange the position of the machinery,
work tables, etc., to shorten the distance traveled by workers, materials, etc.
Step 8 Repeat Steps 3 to 7 until an acceptable solution (usually the shortest thread length) is
attained.
The string method of routing diagram is used to create or improve plant layouts. Use the
string diagram to explain plant layout changes to entrepreneurs, supervisors, and workers. If
the original and improved layouts are compared, the difference is often remarkable.
In many cases, materials and people follow more than one path. Selecting the path most
frequently used can be time consuming.
EXISTING SITUATION
INSPECTION
CASTING SECTION
STOCKROOM
A A A A
B B B B
INSPECTION
IMPROVED SITUATION
CASTING SECTION
A A A A
INSPECTION INSPECTION STOCKROOM
B B B B
Fig. 8.6: Routing Diagram Sample

RUN A run chart is a line graph that shows data plotted in

CHARTS the order in which they occur. By collecting and
charting data over time, you can find trends, patterns,
shifts or variations in a process over time.
HOW TO CONSTRUCT A RUN CHART
Step 1 Draw and label the vertical axis using the measurement unit you are tracking (e.g.,
units sold, number of defectives, percent defective, diameter, etc.).
Step 2 Draw and label the horizontal axis to reflect the sequence in which the data points are
collected (e.g., week 1, week 2, week 3…. or 1999, 2000….2005)
Step 3 Plot the data points on the chart and connect the points.
Step 4 Calculate the average from the data and draw a horizontal line across the charts at the
level of the average.
Step 5 Interpret the chart and decide what action to take. Is there any trend?
Example: Company XYZ, a distributor of farm machineries, has maintained 10-man sales
force through the years. The average sales (in units) in the last 22 years are as follows:
Average Sales Average Sales

Year Year
(in units) (in units)
1984 139 1995 77

1985 130 1996 38
1986 61 1997 53
1987 164 1998 50
1988 129 1999 81
1989 100 2000 105
1990 108 2001 65
1991 110 2002 97
1992 68 2003 62
1993 78 2004 96
1994 57 2005 93
If you were to plot the data above in a run chart, your chart would look like the one below.
Run Chart - Average Sales
180
160
What can you deduce from the
140 chart on the left? It is obvious
120
from the chart that the average
sales in the late eighties
Average Sales (in Units)
100
continued to drop, rebounded
80 in 1997 but still lower than the
60
1986-1991 levels.
40
20
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Run charts focus more on time patterns while a control chart focuses more on acceptable
limits of the process.
Plant layout is important for the following reasons:

SIMPLIFIED PLANT 1) materials handling costs comprise a big chunk of
LAYOUT total manufacturing costs; 2) modifications and
rearrangements are usually costly in terms of both time
and money; and 3) allows for the efficient handling of
materials, elimination of congestion, and better
process flow.
How does one go about designing a good plant layout? Designing a plant layout is far from
easy. You need to take into account every phase of the company’s operations plus diverse
considerations such as ventilation, comfort rooms, locker rooms for employees, reception
area, storage, and materials handling.
A systematic approach to designing the “best” layout is documented in Richard Muther’s

Simplified Systematic Layout Planning (1994). This method is broken down into six basic
steps.
HOW TO DO A PLANT LAYOUT 18
Step 1 Chart the relationships
Identify the different departments, activities, and work centers. Limit the number to a
maximum of 20. Create a Relationship Chart to document the desired “closeness”
between work centers. Indicate the closeness between each pair of activities or work
centers using the following table as guide:
CODE Level of Closeness

A Absolutely necessary
E Especially important
I Important
O Ordinary
U Unimportant
X Not desirable
If relationships for a certain work center or activity are similar to those another work
center, consider consolidating or combining work centers in a common area.
Step 2 Establish space requirements
Prepare an Activities Area & Feature

Sheet. It is at this point where you have to
determine the area required for each
activity, work center, or department. You
also need to document other physical
features that may be required, such as:
overhead clearance, maximum overhead
supported load, maximum floor loading,
18
Portions, including illustrations, of this section were taken from:
http://www.ciras.iastate.edu/publications/management/SimplifiedSystematicPlantLayout(1999Fall)
.pdf
minimum column spacing, drainage, ventilation, water and electrical connections.
Step 3 Diagram activity relationships
Construct a node diagram showing the

different activities and their closeness
relationships. Each node represents an
activity.
Starting with the code “A” relationships, draw

in nodes for the activities that share “A”
relationships. Then, connect the nodes with
four parallel lines. These four lines represent
an “A” relationship. When you’ve drawn all
the “A” relationships along with the
relationship lines, rearrange and redraw as
necessary to achieve the best arrangement.
Do the same for the other relationships and activities using three lines for code “E”
relationships, two lines for code “I,” and one line for “O” relationships. Do not use
any lines for code “U” relationships. For code “X” relationships, use a zigzag or
wiggly line. Again, after adding each set of relationships and the necessary activities,
rearrange or redraw as necessary to get the best arrangement.
Step 4 Draw space relationship layouts
Combine the relationships diagram with

the space requirements for each activity.
Use graphing paper and set the scale so
that the entire drawing will fit into one
sheet. Draw each activity on the
graphing paper according to its area
requirements. Adjust drawing to fit the
actual wall configurations. Make sure
that any major physical features such as
columns, doors, walls, etc. are included
in your drawing.
Step 5 Evaluate alternative arrangements
The first step in evaluating different

arrangements is to decide on the criteria
by which the layout is to be evaluated.
You may choose to evaluate according to
ease of supervision, flexibility in
expansion, cost, material flow,
convenience of service, etc. Prioritize
your criteria and assign a weight value
with the highest priority factor being “10”.
Evaluate and rate each alternative layout

by these factors using the same A, E, I, O, U ratings. After rating each alternative,
convert the letters to numbers (A=4, E=3, I=2, O=1, U=0) and multiply by their
respective weight values. Sum up all the weighted rate values for each layout option.
The layout with the highest score is the best alternative.
Step 6 Detail the selected plant layout
Up until now, your layout is made up of blocks of various shapes and sizes
representing the different departments and areas. You will now develop the final plan
that will be used as guide to show precisely where everything goes.
Reproduce the selected layout plan, preferably to

a scale of 1/8- or ¼- inch equals a foot. Identify
and draw in the activities and major features,
equipment, and primary services not yet
included. Then begin to draw in the details of
individual equipment, machinery, utilities, or
auxiliary services, and label them.
You may find yourself re-evaluating the fit of

these details and making minor adjustments for
such things as adequate aisle spacing or space
for maintenance or service. One of the best
ways to do this is to get the opinion of
employees who will work in these areas.
Finally, indicate in your layout drawing the type

of scale used.
This tool is very useful in designing job shops or process layouts for small-scale operations.
Where there is no consistent process flow, the development of a relationship chart may be the
best data you have to determine relative placement of separate work areas.
Muther cautions that this simplified method should be limited to layout projects that include
individual office areas less than 3,000 square feet, individual shop areas no bigger than 5,000
square feet, and individual storage areas of up to 10,000 square feet. When designing a layout
manually, increasing the size and number of work areas drastically increases the difficulty in
creating alternatives and evaluating them.
Value analysis and value engineering (VAVE) is

VALUE ANALYSIS & anchored on the philosophy that there is always a
VALUE ENGINEERING better way of doing things. Briefly, VAVE involves
finding ways to deliver a product or service at the best
price by incorporating value characteristics (benefits)
deemed most important by the customer.
The term “value” has different meanings for the customer and the manufacturer. To the
customer, value is “suitability” of a product divided its price. The more suitable a product is
to a customer and the cheaper the price, the higher the value. In contrast, to a manufacturer,
value is the “function(s)” of the product divided by the cost. Thus, the lower the cost of a
product and the more functions derived from it, the higher the value. There are two ways to
increase value: 1) by reducing costs and keeping on increasing the benefit; and 2) increasing
the benefit by maintaining or reducing the cost.
VAVE involves a team of people following a structured process. The process helps team
members communicate across boundaries, understand different perspectives, innovate, and
analyze.
Before using this tool, be sure that the needs and motivations of customers are completely
understood to get a good grasp of the relative importance of product functions.
HOW TO DO VALUE ENGINEERING AND ANALYSIS
Step 1 Identify components of the product. For example, a lamp shade is made up of the
main body, shade, plug, cord, bulb base, bulb, and switch.
Step 2 Describe the product’s primary functions. To describe a function, use an active verb
and a noun. Here are a few examples. The function of a website is to “inform
reader”; shampoo, “clean hair”; car, “transport people”; water, “quench thirst”;
detergent, “remove dirt”; shoes, “protect feet”; and bulb, “produce light”.
Step 3 Estimate component costs and calculate these as a percentage of total cost.
Step 4 Spread component costs appropriately among the product functions to which these
contribute.
Step 5 Calculate the cost of each function.
Step 6 Identify high cost/low value and low cost/high value parts. Using a lamp shade for an
example, the following cost-function matrix was developed:
Step 3 Step 2
Total % to Functions
Step 1 Cost Cost Provide light Decorate table
Step 4
Main body 750.00 55.35 50.00 700.00
Shade 450.00 33.21 25.00 425.00
Plug 10.00 0.74 10.00
Cord 5.00 0.37 5.00
Bulb base 5.00 0.37 5.00
Bulb 125.00 9.22 125.00
Switch 10.00 0.74 10.00 Step 5
1,355.00 100.00 230.00 1,125.00
16.97 83.03
Low High
Step 6
Step 7 Brainstorm to generate ideas on how to deliver the function in a better and less
expensive way. How can the product be modified? Which of the high cost parts can
be removed or reduced without sacrificing quality, reliability or customer acceptance?
Can the process be simplified? Which of the product components do not contribute to
the primary function? How else, other than the way it is now, can the product deliver
this function?
Step 8 Analyze and weigh all ideas speculated in the previous step with respect to cost
implications, functions, and feasibility.
Step 9 Rank promising ideas according to ease of implementation. Ask your client to choose
from the ideas and formulate a plan of action.
The terms value analysis/value engineering originated in the early days of development of the
techniques. The first approach was to be able to increase values rather than to reduce costs.
VAVE can be applied with equal success to any other cost generating-areas.
It can improve your ability to manage projects, solve problems, innovate, and communicate.
A VAVE program in an organization can provide it with a definitive tool to improve value in
any product, project or process.
Chapter
FINANCIAL TOOLS
GETTING TO THE BOTTOM OF THINGS
Analyzing financial data is not an easy task. The tools described in this section will help you
evaluate the performance of a business entity. As a business counselor, it is important that
you develop your skills in financial analysis and are able to interpret and explain financial
information in a manner that can be understood by your client.
BREAK-EVEN Break-even analysis involves finding the level of sales

ANALYSIS where total costs equal total revenues. It is at this level
where a business does not make nor lose money. The
basic mathematical formula for computing break-even
is:
Total Expenses = Gross Sales
You will find all the figures you need to do a break-even analysis from the income statement.
If your client is just starting his business and hence has no income statement yet, you need to
come up with projections to compute for his break-even.
Before you start computing for the break-even point, it is important that you have a clear
understanding of the next four terms:
¾ Selling price (SP): This is the price at which each unit is sold.
¾ Fixed costs (FC): These are expense items which generally do not change in the short
run, regardless of how much is produced or sold. Examples of fixed costs include but
are not limited to rent, depreciation, utilities, telephone charges, advertising, real
estate tax, insurance, repair and maintenance, administrative salaries, general office
supplies, and interest charges. All these expense items are fixed costs whether the
business is into manufacturing, trading, or service.
¾ Variable costs (VC): These are the expense items that change with the level of either
production or sales. Generally, these costs increase with increased production or
sales because they are directly involved in either making the product or making the
sale. Examples of variable costs for manufacturing firms include direct materials and
direct labor. For trading companies, variable costs include the cost of goods,
packaging, and sales commissions. For service companies, variable costs include,
among others, supplies consumed and sales commissions.
At times you may find yourself in a quandary as some items seem to have both fixed
and variable characteristics. If so, try to determine what portion of the cost is fixed
and what portion is variable. For example, if your client is in the call center business,
you can split telephone costs into 75% variable and 25% fixed. This will involve a
good deal of judgment on your part. Just see to it that you have good reasons for your
classifications.
¾ Contribution margin (CM): This is the difference between the selling price and
variable cost per unit.
THE BREAKEVEN CHART
The easiest way to understand the break-even concept is through the use of a break-even
chart.
In its simplest form, the break-even chart is a graphical representation of costs at various
levels of activity shown on the same chart along with the corresponding levels of sales
revenue. The point at which neither profit nor loss is made is known as the "break-even
point" and is represented in the chart by the intersection of two lines --- the sales line and the
total cost line --- as shown below.
Profit Area Total Sales Line

SALES/COST (in Pesos)
Breakeven Point
Total Cost Line
Loss Area
Fixed Cost Line

Variable Cost Line
VOLUME (in Units)
Fig. 9.1: Break-even Chart

CHAPTER 9 : FINANCIAL TOOLS 175
A break-even chart is helpful in understanding the concept of the break-even point. To

construct a break-even chart follow these steps:
Step 1 Classify all expenses into either fixed or variable cost.
Step 2 Create a graph with the vertical axis representing sales/cost, scaled in monetary terms
and the horizontal axis representing volume, scaled in units.
Step 3 Plot total sales, total fixed cost, and total variable cost lines.
For illustrative purposes, let’s assume you have the following data set:
Quantity
Total Sales Total Fixed Cost Total Variable Cost
(in thousands)
0 0 10,000.00 0
1 7,000 10,000.00 5,000
2 14,000 10,000.00 10,000
3 21,000 10,000.00 15,000
4 28,000 10,000.00 20,000
5 35,000 10,000.00 25,000
6 42,000 10,000.00 30,000
7 49,000 10,000.00 35,000
8 56,000 10,000.00 40,000
9 63,000 10,000.00 45,000
10 70,000 10,000.00 50,000
Plotting the foregoing figures, the resulting break-even chart would look like the one shown
below:
70
SALES/COST (in thousand Pesos)
Break-even Point
60
50
40
30
20
10
0
0 1 2 3 4 5 6 7 8 9 10
QUANT IT Y (in thousands)
Sales Fixed Cost Variable Cost T otal Cost
Reading from the chart above, total fixed cost is at P10,000.00 and to break-even the firm
must sell 5,000 units, the point where the total cost line intersects the total sales line. The total
fixed cost line, as shown in the graph above, is a horizontal line which means that within a
given range, it does not change regardless of the level of production. Variable costs, on the
other hand, change in direct relation to volume of output. The total variable cost line is
upward sloping, which illustrates that total variable cost increases as production increases.
For those who find graphing tedious, do not worry as there is another way of determining the
break-even point.
SOLVING FOR BREAK-EVEN
The following steps are involved in calculating the break-even point for a business.
1. At break-even, total sales (or revenues) equal total costs (fixed + variable). Thus,
Total Sales = Variable Cost + Fixed Cost (Equation 1)
2. Expand Equation 1 to get the following:
(Selling Price x Quantity) = (Variable Cost/unit x Quantity) + Fixed

Costs (Equation 2)
or (SP x Q) = (VC x Q) + FC
3. Rearrange Equation 2 to get break-even point Q:
Q = FC
SP- VC (Equation 3)
4. Multiply Q by the selling price to get break-even sales in pesos.
Occasionally, the selling price and variable costs are not identified separately; instead, a
contribution margin (CM) is given. The CM can still be used in the break-even calculation by
replacing the denominator in Equation 3 with the CM.
Using the data given above, let’s compute for break-even mathematically. We have fixed
cost at P10,000, unit selling price at P7.00, and unit variable cost at P5.00. Plugging these
figures into Equation 3, you get break-even volume (Q) as follows:
Q = FC = 10,000 = 5,000 units

SP – VC 7.00 – 5.00
To get the break-even sales, simply multiply break-even volume by the selling price. Thus, in
our example, it is:
Q x Selling Price = Break-even sales
5,000 x P7.00/unit = P35,000.00
Break-even analysis is used primarily to determine the lowest amount of sales that is
necessary to prevent losses.
Break-even analysis can also solve other managerial problems like setting price levels,
targeting optimal variable and fixed cost combinations, and determining the feasibility of
different strategic options.
Despite the simplicity of this tool, break-even analysis has its limitations. First, since not all
items have the same profitability level, a product-by-product break-even is more meaningful
than using a storewide or company-wide break-even. Thus, if your client is a trader or a
manufacturer of several product lines, computing for break-even on a product-by-product
basis can be tedious.
Second, some costs do not behave linearly. As costs tend to change over a period of time, the
break-even point is only correct for a certain period.
Third, break-even analysis is useful only over a limited sales volume range. Moving way
beyond that range will require additional capital expenditures for more floor space, more
machines, or more labor, which will distort the estimates for fixed and variable costs.
Finally, break-even analysis assumes that the cost-revenue relationship is linear. But this is
not always the case.
You should guide your client to make profit and not just break-even. By knowing where your
client breaks-even, you can direct your client to:
1. Allocate sales and marketing efforts that will enable him/her to get pass break-even point;
and
2. Minimize expenses during months when projected sales volume is below break-even.
Advise your client to try bringing down break-even volume. You can suggest any of the
following:
1. Lower direct costs to increase gross margin. This can be done by being more
conscientious when it comes to purchasing materials, controlling inventory, and
increasing productivity of the labor force thru effective scheduling and improving on
technology.
2. Control fixed expenses. Cut down on unnecessary costs.
3. Raise prices. Most entrepreneurs are reluctant to raise prices because they think that sales
might decline. Usually this doesn’t happen unless your client is in a very price-sensitive
market.
Common size ratios are used to evaluate the performance

COMMON SIZE of different companies or of the same firm over different
FINANCIAL
STATEMENTS
periods. By expressing each balance sheet and income
statement account in proportion to a specific reference
account, like total assets or total revenues, standardized
financial statements can be used to reveal trends and
give insight as to how different firms compare.
HOW TO CREATE COMMON-SIZE FINANCIAL STATEMENTS
A practical tool in analyzing financial statements is the common-size financial statements. For
the untrained, it is not easy to analyze what is happening to a firm simply by looking at the
rows and columns of numbers that appear in the financial statements. At best, one can spot
increasing and decreasing trends. But whether such trends are an indication of better
performance cannot easily be discerned unless financial information is transformed into
common-size financial statements. Only then will important changes in the firm’s operations
be revealed.
To create common size financial statements simply express each balance sheet account as a
percentage of total assets and each income statement account as a percentage of total
revenues.
The common size ratio for each income statement account is calculated as follows:
Account item
Common size ratio =
Total Revenues
For the balance sheet, common size ratios are computed as:
Account item
Common size ratio =
Total Assets
The following example shows the income statements of ABC Enterprises expressed in pesos
and the common size ratios.
ABC ENTERPRISES
Income Statement Common Size Income Statement
(in Pesos) (in Percentages)
2003 2004 2005 2003 2004 2005
Gross Revenues 161,669 199,763 205,734 100.00 100.00 100.00
Less: Cost of Goods Sold 53,786 56,523 51,434 33.27 28.30 25.00
Gross Profit 107,883 143,240 154,301 66.73 71.70 75.00
Less: General and Administrative Expenses 28,470 35,588 46,342 17.61 17.81 22.53
Operating Income 79,413 107,653 107,959 49.12 53.89 52.47
Less: Interest Expense 42 42 42 0.03 0.02 0.02
Income Before Taxes 79,371 107,611 107,917 49.09 53.87 52.45
Less: Provision of Income Taxes 31,748 43,044 43,167 0.20 0.22 0.21
Net Income 47,622 64,566 64,750 29.46 32.32 31.47

At a glance, the peso values above do not reveal much about the operations of ABC
Enterprise other than the fact that gross revenues, net income, and general and administrative
expenses have been increasing from 2003 to 2005. As a small business counselor, you should
not be content with merely spotting increasing and decreasing trends. More importantly, you
should be able to infer what factors brought about such changes.
The common-size income statements of ABC Enterprise are prepared in vertical analysis,
with each line item referenced against the gross revenues for the given period. What can you
conclude from the figures in the last three columns? Why has gross profit increased? Has the
firm raised prices, sourced from a new supplier (hence a lower cost of goods sold), changed
product mix to higher margin products, or adopted some other strategy? What brought about
the increase in general and administrative expenses?
Common-size financial statements can be used to compare different companies at the same
point in time. It is especially useful when comparing a firm to the best performing firm in the
industry (benchmarking). With this tool, a firm can also be compared to the industry as a
whole. To compare to the industry, ratios are calculated for each firm in the industry and the
industry average is calculated. Comparative statements may then be constructed with the
firm’s ratios in one column and the industry averages in the next column. This will give a
quick view of how the firm fares in the industry.
The limitations on the use of common-size statements stem from the accounting data used to
construct them. For instance, different firms adopt different accounting policies and
practices. Also, different firms may use different accounting calendars. Adjustments should
be made to ensure that information is comparable.
A firms performance is best evaluated using financial

FINANCIAL RATIO
ratios. It is a vital tool used by financial institutions in
ANALYSIS
determining a firm’s viability, profit potential, and
capability to pay a new debt. Referencing ratios of
one firm with those of another allows for comparison
between firms.
Most ratios can be computed using data provided by financial statements. A ratio is a number
that shows the relationship between figures. For a ratio to be meaningful, there must exist a
significant connection between the figures.
Four classifications of financial ratios have gained widespread use in evaluating a firm’s
financial position and performance. These are: profitability ratios, activity ratios, liquidity
ratios, and leverage ratios.
PROFITABILITY RATIOS
This group of ratios shows the company’s ability to generate surplus
and recover operating expenses.
Sales – Cost of Goods Sold

Gross Profit Margin =
Sales
This ratio measures the gross profit earned on sales. The difference between sales and the cost of
sales figures is the amount left to pay off operating expenses and yield a profit. The smaller the
difference, the lower the gross profit margin. A negative gross profit margin implies that the firm
has been selling at a level way below the cost of its manufactured or purchase cost of merchandise.
Changes in gross profit over time should be analyzed to determine the cause. Changes may be due
to factors such as change in inventory valuation methods, level of capacity utilization, change in
prices, the introduction of a new product line with a different margin of profit than the firm’s other
products, government price controls, etc.
A decreasing gross profit margin may be a result of the management’s decision to decrease prices
to increase sales volume and capture a larger market share. On the other hand, a decreasing gross
profit margin may also be a result of the firm’s failure to pass on price increases to customers.
Net income
Net Profit Margin =
Sales
The net profit margin indicates the firm’s ability to generate profits. The higher the net profit
margin, the better as this implies more profits for every peso of sales.
Net Income
Return on Equity =
Ave. Equity
The return on equity reveals how much the owner(s) get on his/their investment. The higher the
ratio the better as this means more returns for every peso invested.
Operating Income
Return on Assets =
Total Assets
This ratio indicates how effective total assets are used to generate profit. The ratio can be increased
by increasing profits and reducing total assets. Profits can be improved by increasing prices or
volume of sales, lowering cost of sales, lowering selling and administrative expenses, a better
product mix, higher production efficiency, etc. Total assets can be reduced through effective use of
idle assets, reducing inventories to a minimum, etc.
TURNOVER RATIOS
Turnover ratios indicate the efficiency in the utilization of the firm’s assets.
Sales
Total Asset Turnover =
Ave. Total Assets
This ratio reflects the aggregate, company-wide efficiency in the utilization of its assets. A high
ratio usually indicates the efficient use of assets.
Sales
Fixed Asset Turnover =
Ave. Fixed Assets
The fixed asset turnover measures the efficiency with which the firm has been using its fixed assets
to generate sales. Generally, higher fixed asset turnovers are preferred since they reflect greater
efficiency of fixed asset utilization.
Credit Sales
Receivable Turnover =
Ave. Receivables
This ratio indicates effectiveness of credit collection. A high ratio, which corresponds to a shorter
average collection period, may suggest efficient collection but at the same time may mean a lot of
lost sales due to strict credit terms.
Average Collection Period = 365

Receivable Turnover
The receivable turnover is often reported in terms of the number of days that credit sales remain as
receivables before they are collected. This number, known as the collection period, is only
meaningful when compared to the firm’s credit terms. If the computed collection period is higher
than the prescribed credit terms, then the firm is having problems collecting its receivables.
365
Average Collection Period =
Receivable Turnover
This ratio shows the number of times the same volume of goods is sold during the period. A low
turnover is definitely not good as this means the firm’s resources are tied down unproductively in a
huge volume of inventory of stocks and slow-moving goods.
365
Days Inventory =
Inventory Turnover
The days inventory figure is a rough estimate of the firm’s replenishment cycle.
LIQUIDITY RATIOS
Liquidity ratios measure a firm’s capacity to meet short-term financial obligations from its
current assets.
Current Assets
Current Ratio =
Current Liabilities
This is the simplest measure of a firm’s ability to raise funds to meet short-term obligations. If the ratio
is too low, the firm may experience difficulty meeting short-run commitments. When a firm has a high
current ratio, it normally faces a lower risk of defaulting on its short-term liabilities. A high current
ratio, however, does not provide much buffer if the bulk of current assets are slow-moving inventories.
Thus, a detailed analysis of the composition of current assets and maturities of current liabilities should
be undertaken.
Current Assets - Inventory

Quick Ratio =
Current Liabilities
The quick ratio (also known as acid test ratio) measures the firm’s ability to pay short-term debts
without having to sell inventories. The current assets used in the quick ratio are cash, marketable
securities, accounts receivable, and notes receivable.
LEVERAGE RATIOS
The ratios under this group reflect the extent of a firm’s dependence on external financing
vis-à-vis internal financing.
Long-Term Debt
Long-Term Debt Equity Ratio =
Equity
The debt equity ratio has come to be associated with financial leverage, i.e., the use of long-term
debts to fund firm’s financial requirements. A high debt equity ratio is not desirable.
Total Debt
Debt to Total Asset Ratio =
Total Assets
In this ratio, all debt – regardless of whether current or long-term – are compared with total assets.
This ratio simply indicates the proportion of total assets financed by creditors.
Financial ratios have been in wide use because of their relative ease of computation and
interpretation. It allows easy comparison across firms of different sizes.
First and foremost, analysis and interpretation of various ratios gives a better understanding of
the financial condition and performance of a firm than the mere analysis of financial data
alone. When financial ratios covering a period of several years are arrayed on a spreadsheet,
one can study the composition of change and determine whether there has been an
improvement or deterioration in the firm’s financial condition and performance over time.
You can use any one of the following as “yardstick” when evaluating and comparing the
performance of your client’s business: preceding period’s financial ratios, a competitor’s
financial ratios, and industry averages.
Not all industries are alike. Financial ratios are useful in drawing up a description of the
inherent financial characteristics of industries. Thus, you should avoid using “rule of thumb”
indiscriminately for all industries.
Financial ratios have also found application in contracts. The most familiar are the
restrictions imposed on loan contracts such as minimum current ratio or a maximum debt
equity ratio of 80:20.
Since year-end values may not be representative, as certain accounts may increase or decrease
at the end of the accounting period because of seasonal factors and thus distort the value of
the ratio, it is advisable to use average values. 19 Keep in mind too, that ratios are subject to
the limitations of accounting methods. Different accounting methods may result in
significantly different ratio values thus making the comparison of firms erroneous.
19
Average = Beginning value + Ending value
2
One way to decide whether an investment or project

INTERNAL RATE OF should be undertaken is to calculate the investment or
RETURN project’s internal rate of return (IRR).
The IRR is the discount rate that makes the net present
value (NPV) equal to zero. Expressed in another way,
the IRR is the discount rate that makes the present
value of a project’s expected cash inflows equal to the present value of the expected cash
outflows.
The IRR, denoted by k, is the rate that satisfies the following equation:
CF0 + CF1 + CF2 + CF3 + …. + CFn =0

(1 + k)1 2
(1 + k) (1 + k) 3
(1 + k)n
where CFn refers to cash flow in period n, n is the number of periods, and k is the rate that
discounts the periodic future cash flows to equal the investment cost.
If the initial cast outlay is the only investment cost involved, the above equation can be
expressed as follows:
n
CF0 = Σ CFt
t=1
(1+k)t
The general rule is: if IRR ≥ r Accept (because the project meets the required rate of return)
if IRR ≤ r Reject (because the project fails to meet required rate of
return)
HOW TO COMPUTE FOR IRR
For illustrative purposes let’s use the following example. Mr. dela Cruz is reviewing a
proposal that will bring him annual cash flows of P118,000 after investing P500,000 in a
piece of equipment. Getting the IRR is simply finding the discount factor (k) which when
applied to the annual cash flow of P118,000 will equal P500,000.
Step 1 Prepare a diagram of relevant expected cash inflows and outflows. Although a sketch
is not actually essential, it serves to clarify things. Indicate outflows in parenthesis.
Position the outflow at time zero, the date of acquisition.
0 1 2 3 4 5
(500,000) 118,000 118,000 118,000 118,000 118,000
Step 2 Compute for IRR. You can compute for IRR in many ways.
1. Solving manually. To solve for the discount factor, first denote the right side of
the following equation as y (k,n).
n
CF0 = Σ CFt
t=1
(1+k)t
Thus, given the values in the example, you have:
P500,000 = P118,000 y (k,n)
Computing for y (k,n), you get:
P500,000 = y (k,n)
118,000
4.2373 = y (k,n)
Next, search the Present Value of an Annuity Table for the value 4.2373 given
n=5. Since the value 4.23729 is not in the table, you need to interpolate to get a
more accurate figure. To interpolate, get the two present value factors nearest
4.2373.
K Present Value Factors

5% 4.3295 4.3295
Approximate rate 4.2373
6% 4.2124
Difference 0.1171 0.0922
Approximate rate = 5% + 0.0922 (1%) = 5.7874%

0.1171
Thus, the IRR in Mr. de la Cruz’ case is 5.7874%.
Manual computations become more complicated if the cash inflows are not
uniform.
2. To eliminate the need for trial and error procedures, many finance managers use
computer programs and spreadsheets to facilitate computations.
Excel uses the following syntax in computing for IRR:
=IRR(values, guess)
Values refer to a group of cells that contain numbers for which you want to
calculate the internal rate of return. Values must contain at least one positive
value and one negative value to calculate the internal rate of return. Be sure to
enter your payment and income values in the sequence you want.
Guess is any number that you think is close to the result of IRR. In most cases
you do not need to provide guess for the IRR calculation. If guess is omitted, it is
assumed to be 0.1 (10 percent).
Microsoft Excel uses an iterative technique for calculating IRR. Starting with
guess, IRR cycles through the calculation until the result is accurate within
0.00001 percent. If the IRR function can't find a result that works after 20 tries,
the #NUM! error value is returned.
If the IRR function gives the #NUM! error value, or if the result is not close to
what you expected, try again with a different value for guess.
Using Excel to get the IRR for our example:
Step 1 Type in values in a column as shown below.
A B C D
1 -500000
2 118000
3 118000
4 118000
5 118000
6 118000
7
8
Step 2 Type =IRR( in any row next to your column of values in the spreadsheet
and then with the cursor range the column of values. Type ) to end
function.
A B C D
1 -500000
2 118000
3 118000 =IRR(A1:A6)
4 118000
5 118000
6 118000
7
8
Step 3 Press the Enter key to get the IRR value
A B C D
1 -500000
2 118000
3 118000 5.78%
4 118000
5 118000
6 118000
7
8
Just like the NPV, the IRR is used in capital budgeting, the process by which firms determine
whether an investment or project proposal is worth undertaking. The usefulness of the IRR
measurement lies in its ability to represent any investment opportunity's return and to
compare it with other possible investments.
The IRR is a true indication of a project’s annual return on investment only when the project
does not generate interim cash flows or when does interim cash flows can be invested at the
actual IRR. 20
20
http://www.valuebasedmanagement.net/methods_irr.html
There will be instances when clients will come to you

MAKE OR BUY and ask whether it is better to buy or make a
DECISION component which is used in their products or
operations. Just because your client has been
manufacturing the item does not mean that the practice
has to continue. New processes and suppliers may
make it more economical to buy rather than to make
There are a lot of considerations that go into make or buy decisions. These include among
others: cost, availability of skilled manpower, tools, facilities, and equipment.
HOW TO DECIDE MAKE OR BUY PROBLEMS
Step 1 Determine the lowest effective cost of buying the component. Include incidental
expenses like transportation cost, delivery charges, etc.
Step 2 Calculate the total cost of making the component. The total cost should include direct
costs (like raw materials, labor, and direct overhead) and indirect costs (like salary of
supervisors and maintenance).
Step 3 Determine the existing fixed costs. (These are the costs your client will be incurring
whether the component is manufactured or not.)
Step 4 Compute for the difference between the results in Steps 1 and 3. The difference will
give you an indication which of the two options is better.
Step 5 Identify the qualitative factors that will affect the decision to make or buy a
component. These may include: expertise in making the component, quality, and
plant capacity.
Here is an example. Mr. Capistrano, owner of Dress Me Dolls, manufactures and sells dolls
locally. At present, his company buys the hair pieces, clothes, and accessories that dress up
the dolls his company produces. His production supervisor thinks that they can cut costs by
producing the accessories currently being purchased at P 40.00 per doll. Other pertinent
information are as follows:
Cost to buy accessories P40.00/doll
Total unit cost to make accessories 32.00/doll
Direct Costs Unit Cost Indirect Costs Unit Cost

Material 15.00 Additional fixed cost 2.00
Labor 5.00 Variable manufacturing cost 2.00
Additional overhead 8.00
Total 28.00 Total 4.00
Given the above, should Mr. Capistrano agree to make the accessories in-house instead of
purchasing them? If Mr. Capistrano’s firm has the available capacity, technology, and
equipment and his people have the expertise and know-how, then the company stands to
benefit manufacturing the accessories in-house. Otherwise, there is more to consider aside
from the eight pesos per unit savings that can be realized. It is likewise important to take into
account other factors such as: who will come up with the designs, who will make the molds,
the cost of molds, availability of funds, interest charges in case funds have to be borrowed,
etc.
In many instances, a make or buy decision is seldom clear-cut and easy. A number of factors
must be weighed and balanced against each other.
The make or buy decision tool is very useful in explaining to your client the cost effectiveness
of making an item in-house or sourcing (either buying or subcontracting) it from outside. In
general, the more complicated and technical a component is, the more likely it is that the
decision will be to purchase. This is especially true where technology is changing rapidly and
a small entrepreneur has difficulty keeping up with the latest developments.
So, when using this tool, be sure you consider all relevant factors such as cost of money,
availability of funds, availability of capacity, technology requirement, skill of workforce,
quality, complexity of the process, etc. Failure to consider such factors may lead to the wrong
decision.
A peso today is worth more than a peso in the future.

NET PRESENT This is because inflation erodes the buying power of
VALUE the future money, while money available today can be
invested and grow.
Net Present Value (NPV) is a basic tool in analyzing

the profitability of an investment or project. Simply
defined, NPV is the difference between the present value of cash inflows and the present
value of cash outflows.
The mathematical formula for computing NPV is:
NPV = CF0 + CF1 + CF2 + CF3 + …. + CFn

(1 + r)1 (1 + r)2 (1 + r)3 (1 + r)n
where CFn refers to cash flow in period n, n is the number of periods, and r is the required rate
of return, and 1 is the discount factor at period n.
(1 + r)n
The general rule is: if NPV ≥ 0 Accept (because the project meets the required rate of
return)
if NPV ≤ 0 Reject (because the project fails to meet required rate of
return)
Another way of to express the acceptance criterion is to say that a project will be accepted if
the present value is positive, i.e., the cash inflows exceeds the present value of cash outflows.
If by chance, the NPV is exactly zero, a decision maker would be indifferent between
accepting and rejecting the project.
HOW TO COMPUTE FOR NPV
For illustrative purposes let’s use the following example. Your client is considering buying a
piece of equipment having a five-year life. It is going to cost your client P200,000 to acquire
the machine. If he buys the equipment this year, he will realize additional profits of P60,000
per year for the next five years. Assume further that your client is presently short of cash and
will have to get a loan at 20% per annum interest to purchase the equipment.
Step 1 Prepare a diagram of relevant expected cash inflows and outflows. Although a sketch
is not actually essential, it serves to clarify things. Indicate outflows in parenthesis.
Position the outflow at time zero, the date of acquisition.
0 1 2 3 4 5
(200,000) 60,000 60,000 60,000 60,000 60,000
Step 2 Compute for NPV. You can compute for NPV in many ways.
1. By long hand.
NPV = - 200,000 + 60,000 + 60,000 + 60,000 + 60,000 + 60,000

(1.20) (1.20)2 (1.20)3 (1.20)4 (1.20)5
= - 200,000 + 50,000 + 41,666 + 34,722 + 28,935 + 24,113
= - 20,564
2. By using the Present Value Table found in many finance books you no longer
have to go through the tedious process of computing for discount factors. How
do you locate the discount factor for a particular period given the many rows and
columns of numbers in the table? The discount factor for a particular period and
a given a rate is the number found at the intersection of the specified period (row)
and rate (column). The discount factor is multiplied by the future inflows.
In our example, the present values of cash inflows are as follows:
Expected Inflows and Discount Factor at

Present Value
Outflows 20%
(200,000) (200,000)
60,000 0.8333 49,998
60,000 0.6944 41,663
60,000 0.5787 34,722
60,000 0.4823 28,938
60,000 0.4019 24,114
To get the NPV, simply sum up the present values (last column). In our example
the NPV is – 20,564.
3. By using the Present Value of An Annuity table. If the periodic cash inflows are
identical and expected to be received in equal intervals, you need not compute
individually the present value of each year’s inflow. The Annuity Table provides
a shortcut to reduce calculations.
Be sure you are using the right table. If you are computing for the present value
of a series of equal amounts, get the discount factor from the Present Value
Annuity Table. In our example, with n = 5 and r = 20%, the discount factor is
2.9906. Hence, the present value of cash inflows of P60,000 for the next five
years equals P179,436 (i.e., 60,000 x 2.9906). Subtract from this, the P200,000
cost of the machine will give you a negative NPV of P20,564.
4. Use a financial calculator. If you have a financial calculator you need not
compute the NPV manually.
5. Use the NPV function of Excel software.
Excel uses the following syntax in computing for NPV:
NPV(Rate,Value1,Value2, ...)
where Rate is the rate of discount over the length of one period; and
Value1, Value2, ... represent cash outflows and cash inflows
Keep in mind that when using Excel’s NPV function:
• Value1, Value2, ... must be equally spaced in time and occur at the end of
each period.
• NPV uses the order of Value1, Value2, ... to interpret the order of cash flows.
Thus, it is imperative that you enter your cash flow values in the correct
sequence.
• The timing of the first cash outflow is critical when using Excel’s NPV. If the
initial cost of the investment is paid out at the end of the first period, include
it as Value 1.
However, if the initial cost of investment is paid at the beginning of the first
period, don’t assign it as Value 1. Instead, deduct it from the result of the NPV
function. Thus, in our example your NPV function is:
NPV = (20%, 60000, 60000, 60000, 60000, 60000) – 200000
= P 20,564
Although the NPV is considered a better technique over IRR, it does not account for
flexibility and uncertainty after the project decision 21 nor does it take into consideration
intangible benefits. 22
21
http://www.valuebasedmanagement.net/methods_npv.html
22
http://www.12manage.com/methods_npv.html
The payback period is perhaps the simplest method of

PAYBACK comparing one or more investment projects. It focuses
PERIOD on recovering the cost of investments. By definition,
the payback period is the number of years it will take
to recover the original total cash investments on a
project.
Under the payback method of analysis, projects or purchases with shorter payback periods are
preferred over those with longer paybacks. The idea behind this is that projects with shorter
paybacks are more liquid, and thus less risky — they allow early recovery of investment and
so money can be reinvested elsewhere. Moreover, with any project there are a lot of variables
that grow increasingly uncertain as it extends out into the future. With a shorter payback
period, there's less of a chance that market conditions, interest rates, the economy, or other
factors that can affect a project will drastically change.
HOW TO COMPUTE FOR PAYBACK PERIOD
If the annual net cash flows are equal, simply divide the initial investment by the annual net
cash flow to get the payback period. However, if the annual net cash flows are not equal, the
task of calculation is not as straightforward.
Step 1 Determine the total initial investment.
Step 2 Prepare a three-column table. The first column is the year column. Start with the
year when the investment began to generate net cash inflow.
The second column shows the net cash inflow, the difference between cash receipts
and disbursements.
The last column shows the cumulative total. This is derived by adding together all
cash inflows of the present and previous years.
Step 3 From the last column determine the approximate number of years it takes to recover
the original investment. The difference between the original investment and the
cumulative total can then be extrapolated. In extrapolating, divide the difference by
the cash inflow of that year which coincides with the number of year to recover the
investment and multiply by 12 to get the number of months.
If the calculated payback period is less than some acceptable payback period, the
investment is deemed acceptable; if not, it is rejected.
For example, investing in a P1M machine, with an estimated life of five years, is projected to
yield the following results:
Year
1 2 3 4 5
Revenue 1,200,000 1,000,000 900,000 750,000 700,000

Cash Expenses 600,000 500,000 475,000 450,000 400,000
Net Cash Flow 600,000 500,000 425,000 300,000 300,000

Depreciation 200,000 200,000 200,000 200,000 200,000
Income before taxes 400,000 300,000 225,000 100,000 100,000
Following Step 2, the three-column table for our example will be consolidated as follows:
Year Annual Net Cash Inflow Cumulative Total

1 600,000 600,000
2 500,000 1,100,000
3 425,000 1,525,000
4 300,000 1,825,000
5 300,000 2,125,000
From the above table, the cost of the P1M machine is recovered from the cash inflows of the
first two years. More specifically,
Payback Period = 1 year + [(1,000,000 – 600,000)/500,000] x 12

= 1 year + (0.8 x 12)
= 1 year and 9 months
The method is easy to compute and understand. It is the simplest way of looking at one or
more project ideas. But its simplicity carries weaknesses with it.
For one, it fails to take into consideration the income generated after the payback period. For
instance, two machines costing P60,000 each and generating the P30,000 for the first three
years will have the same payback period. However, it can happen that one machine is no
longer useful after the third year, while the other machine is still expected to generate
additional income for the next two years. The additional income after the third year is
disregarded in the analysis. Thus, the payback period can be very deceptive as a yardstick of
profitability.
This method fails to consider too, the time value of money (that is, the timing of cash inflows)
during the payback period; it only considers the recovery period as a whole.
Nonetheless, the payback method continues to be in use because of its easy calculation and
the fact that it provides some insight on the risk and liquidity of a project. The payback
period is not a reliable criterion for investment decisions, but to some extent, it is a useful
supplement to other, more sophisticated methods like net present value and the internal rate of
return.
195
REFERENCES
Department of Trade and Industry. BSMED. Glossary of Key Terms and Concepts for Micro, Small, and
Medium Enterprises, July 2005.
Department of Trade and Industry. SME Development Plan 2004-2010.
Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ) GmbH. Review of Existing Policies
Affecting Micro, Small, and Medium Enterprises (MSMEs) in the Philippines. December 2004.
Kotler, Philip and Armstrong, Gary. Principles of Marketing. 7th Edition. Prentice-Hall, 1996.
Technonet Asia. Industrial Extension Manual for Small and Medium Industries in Developing Countries.
Singapore. 1985.
Internet references:
http://calbears.findarticles.com/p/articles/mi_m1154/is_6_87/ai_54695720
http://chiron.valdosta.edu/whuitt/papers/prbsmbti.html
http://en.wikipedia.org/wiki/Just_in_time
http://en.wikipedia.org/wiki/Cost-benefit_analysis
http://hadm.sph.sc.edu/COURSES/ECON/irr/irr.html
http://home.ubalt.edu/ntsbarsh/Business-stat/otherapplets/Inventory.htm
http://management.about.com/cs/money/a/CostBenefit.htm
http://personal.ashland.edu/~rjacobs/m503jit.html
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FOREWORD

We acknowledge the University of the Philippines Institute for Small-Scale Industries

Chapter Classic Diagnostic Tools 77

THE BUSINESS COUNSELOR

THE COUNSELING PROFESSION

THE ROLE AND SCOPE OF WORK OF A COUNSELOR

Counselors may work either as a development worker or as professional counselors. A

Professional counselors, on the other hand, are organized to do business by rendering

¾ When information or data is simply handed/provided, more accurately called selective

THE DEMAND FOR COUNSELORS

The more progressive businesses would like to have an impartial opinion to

DESIRABLE SKILLS AND TRAITS OF A COUNSELOR

• Objective and impartial. Practice good judgment, be objective or impartial and

At the beginning of the engagement:

During counseling work:

Towards the end of the engagement:

UNDERSTANDING THE CLIENT

PERSONAL BUSINESS SENSE ENTREPRENEURIAL

5. Running a business is a round-the-clock operation so that there is no room for

THE ENGAGEMENT PERIOD

THE BUSINESS COUNSELING PROCESS

PHASE ONE: MAKING THE FIRST CONTACT

The scenario is different in the case of government-employed counselors. When it is the

- Unpublished training material “Effective Business Counseling”

The contract usually contains details on the following:

PHASE TWO: STUDYING THE CLIENT

LEVEL ABILITY (CAN) WILLINGNESS (WILL)

The improvement on the client’s development level

the ability (CAN) to acquire adequate skill. Thus,

Meetings must be observed according to the following:

• Any dominant personality respected? Abrasive? Etc.

In all interactions, especially in a face-to-face situation, make mental notes because

“WHAT is to be done” is an enumeration of areas for study and activities to be

• Manpower Utilization • Financial records maintained

Fig. 1.3: Major Areas of Study

PHASE THREE: DIAGNOSING

¾ Where is the firm now? What seem to be the problem(s)?

1. Substance or identity is a statement of a situation like increasing manufacturing cost,

PUSH PRESENT BLOCKING DESIRED

Fact-finding involves data gathering, interviewing, observing, analyzing of

According to a group of Canadian counselors, the goal should be:

• Measurable in terms of quality and quantity factors;

1. Brainstorming. This involves getting a large number of ideas from a group of

Decision-making is formulating an action plan to solve a problem. Problem-solving research

PHASE FOUR: WORKING THE PLAN

WHAT is to be done, HOW will it be done

WHERE will it be done WHEN will it be done

WHO will do WHAT, WHEN, WHERE and HOW

The counseling report is the summation of completed and uncompleted

The purpose of a counseling report is to document the engagement. No

PARTS OF THE REPORT

PROFESSIONALISM AND CODE OF ETHICS

¾ Technical and professional standards

¾ Competence and due care

All certified counselors shall:

• not act recklessly or maliciously, injure or attempt to injure, whether directly or

• Hold the affairs of the clients in the strictest confidence;

Integrity in Conflicts of Interest

THE PHILIPPINE SME SECTOR TODAY

PHILIPPINE SMES: AN OVERVIEW

THE PHILIPPINE SME SECTOR DEFINED

Table 2.1: SME Categories by Asset Size and Number of Employees 1

Category Total Assets 2 No. of Employees

DISTRIBUTION OF SMEs PER INDUSTRY AND CATEGORY