Introduction to Business Economics
Lesson 1: Industrial sector
An industry is a group of incumbent (well established) businesses that face more or less the same set of
suppliers and buyers, offering similar goods or services to meet specific customer needs.
A business analyses the environment to determine the strategic decisions by studying the industry the
belong to and their competitors.
Industry analysis:
1. identify an industry’s profit potential.
2. derive implications for a firm’s strategic position within the industry. Once they have studied the
environment around them, they can organize the microenvironment.
Relationship between market and industry
The market is the place where buyers and sellers meet.
The industry is a set of firms which manufacture a particular product or offer similar services. An industry is
the set of firms which refer to the same market.
An industry takes raw materials and turns them in end-user products which are then sold on the market.
Industry boundaries
The definition of the boundaries is influenced by the scope of the analyst and helps the managers and the
executives to determine their competitors, helps to determine the key elements of success and gives
executives another basis on which evaluate their firm’s goals.
To set the boundaries firstly you must decide what products to include and pay attention to the
geographical boundaries, even though not every industry has them, depending on the product, for example
Netflix.
The boundaries of an industry are set on the demand and supply substitutability principle, which means
that if product A can substitute product B in the market and still satisfy both the demand and supply needs,
their prices are likely to equilibrate which means that they are part of the same market. For two products
to be substitutes they must have homogeneity in technology and production process.
Ex. Product A (11.000$) and product B (120$) are two bikes. Even though they technically have the same
name, the fist one is going to be more professional, technologically advanced and competition focused,
whereas the second one is going to be a leisure product. Both the supply and the demand for this two bikes
are completely different, so they are not substitutable (if bike A wasn’t available a customer wouldn’t buy
bike B for the same purpose) and the products are not even competitors.
The boundaries of an industrial sector change over time due to many factors like the changes in the
macroenvironment, in the technology (which underlying for design development and production), in the
interdependencies (mutually dependent relationship) between products and the relationship among firms.
Ex. 1 music player industry: Sony Walkman, Sony CD ROM, iPod, Spotify. The industry evolved from
hardware changing their technologies becoming more and more compact to today’s Spotify which is a
software that doesn’t need anything else to play music except our phone.
,Ex.2 film industry: cinemas, DVDs (blockbuster’s rentals), Netflix and prime video.
Innovations that modify the sectorial dynamic can have different origins:
1. endogenous: within the sector
2. exogeneous: outside the sector
3. many modifications are manly dynamic
innovations modify competitive opportunities and possibility of profit for firms.
Fluid boundaries
Opportunities started rising across boundaries and not within them so some companies started to operate
in different industries like amazon for example, which sells a great variety of products. Amazon is a
conglomerate company which operates in different sectors, so t has different competitors. The companies
which belong to different industries must make different strategies and different environment analysis in
order to adapt to the different sectors.
Industry classification
The are many different industry classification taxonomies, the industry standard classification system used
in the EU is the NACE: the statistical classification of economic activities.
NACE uses 4 hierarchical levels:
-Level 1: 21 sections
-Level 2: 88 divisions
-Level 3: 272 groups
Level 4: 615 classes
This are the main two classification, the first one for the US and the second one for the EU:
• https://www.msci.com/documents/1296102/1118 5224/GICS+Methodology+2020.pdf
• https://en.wikipedia.org/wiki/Statistical_Classificat
ion_of_Economic_Activities_in_the_European_Comm unity
the image below provides an example of the hierarchical classification of industrial sectors by the NACE:
,Lesson 2: External environment and PESTEL analysis
A business organization is an entity that transforms inputs in more valuable outputs. The firms do not live
on an island though and are influenced by the external environment. The most important characteristic of a
business it that it has to be sustainable for both the present world and the next generations as stated by
the World Commission on Environment and Development in 1987 “to meet the needs of the present
without compromising the ability of future generations to meet their own needs”
A firm has to be sustainable in 3 main categories:
1. Economic (higher revenue than costs and job creation to reach the breakeven point)
2. Environmental (natural resources and climate change)
3. Social (equity and human rights)
The Sustainable Social Index (SSI) indicates the different sustainability levels under different categories
of countries or businesses.
Business environment
A business is an entity that operates through transformations processes to turn inputs in more valuable
outputs, but the business is an open system which means that the environment around it can interfere with
, this transformation process making it a dynamic process because it must change to make sure that the
output is always more valuable than the input. The transformation process is also not a static operation
because not everything that happens in the environment and that influences the company is identifiable.
The external environment
The firm’s environment is composed by all the variables that might influence the firm’s decisions and
results. The variables can be classified in two different ways:
1. According to the degree of proximity (macro, micro and internal environment)
2. According to the origin (technology, demographics, ...)
There are many different levels of environmental analysis based on the intensity of the interaction:
1. Macro-environment: variables that are beyond the company’s control but that might still influence
their strategic decisions indirectly and their relationship with the markets (i.e., economic growth,
ecological environment, political stability and legislations, social and demographic environment,
technology, …)
2. Micro-environment: all the individuals and organizations that are directly linked with the company
and that influence it directly, but which are still not totally under the business’s control (e.g.,
customers, suppliers, intermediates, competitors, …)
3. Internal environment: structure and politics of the organization that affect the manner in which it
reacts to environmental changes (organizational culture: social and behavioural manifestation of a
whole set of values that are shared by members of the organization)
Lesson 1: Industrial sector
An industry is a group of incumbent (well established) businesses that face more or less the same set of
suppliers and buyers, offering similar goods or services to meet specific customer needs.
A business analyses the environment to determine the strategic decisions by studying the industry the
belong to and their competitors.
Industry analysis:
1. identify an industry’s profit potential.
2. derive implications for a firm’s strategic position within the industry. Once they have studied the
environment around them, they can organize the microenvironment.
Relationship between market and industry
The market is the place where buyers and sellers meet.
The industry is a set of firms which manufacture a particular product or offer similar services. An industry is
the set of firms which refer to the same market.
An industry takes raw materials and turns them in end-user products which are then sold on the market.
Industry boundaries
The definition of the boundaries is influenced by the scope of the analyst and helps the managers and the
executives to determine their competitors, helps to determine the key elements of success and gives
executives another basis on which evaluate their firm’s goals.
To set the boundaries firstly you must decide what products to include and pay attention to the
geographical boundaries, even though not every industry has them, depending on the product, for example
Netflix.
The boundaries of an industry are set on the demand and supply substitutability principle, which means
that if product A can substitute product B in the market and still satisfy both the demand and supply needs,
their prices are likely to equilibrate which means that they are part of the same market. For two products
to be substitutes they must have homogeneity in technology and production process.
Ex. Product A (11.000$) and product B (120$) are two bikes. Even though they technically have the same
name, the fist one is going to be more professional, technologically advanced and competition focused,
whereas the second one is going to be a leisure product. Both the supply and the demand for this two bikes
are completely different, so they are not substitutable (if bike A wasn’t available a customer wouldn’t buy
bike B for the same purpose) and the products are not even competitors.
The boundaries of an industrial sector change over time due to many factors like the changes in the
macroenvironment, in the technology (which underlying for design development and production), in the
interdependencies (mutually dependent relationship) between products and the relationship among firms.
Ex. 1 music player industry: Sony Walkman, Sony CD ROM, iPod, Spotify. The industry evolved from
hardware changing their technologies becoming more and more compact to today’s Spotify which is a
software that doesn’t need anything else to play music except our phone.
,Ex.2 film industry: cinemas, DVDs (blockbuster’s rentals), Netflix and prime video.
Innovations that modify the sectorial dynamic can have different origins:
1. endogenous: within the sector
2. exogeneous: outside the sector
3. many modifications are manly dynamic
innovations modify competitive opportunities and possibility of profit for firms.
Fluid boundaries
Opportunities started rising across boundaries and not within them so some companies started to operate
in different industries like amazon for example, which sells a great variety of products. Amazon is a
conglomerate company which operates in different sectors, so t has different competitors. The companies
which belong to different industries must make different strategies and different environment analysis in
order to adapt to the different sectors.
Industry classification
The are many different industry classification taxonomies, the industry standard classification system used
in the EU is the NACE: the statistical classification of economic activities.
NACE uses 4 hierarchical levels:
-Level 1: 21 sections
-Level 2: 88 divisions
-Level 3: 272 groups
Level 4: 615 classes
This are the main two classification, the first one for the US and the second one for the EU:
• https://www.msci.com/documents/1296102/1118 5224/GICS+Methodology+2020.pdf
• https://en.wikipedia.org/wiki/Statistical_Classificat
ion_of_Economic_Activities_in_the_European_Comm unity
the image below provides an example of the hierarchical classification of industrial sectors by the NACE:
,Lesson 2: External environment and PESTEL analysis
A business organization is an entity that transforms inputs in more valuable outputs. The firms do not live
on an island though and are influenced by the external environment. The most important characteristic of a
business it that it has to be sustainable for both the present world and the next generations as stated by
the World Commission on Environment and Development in 1987 “to meet the needs of the present
without compromising the ability of future generations to meet their own needs”
A firm has to be sustainable in 3 main categories:
1. Economic (higher revenue than costs and job creation to reach the breakeven point)
2. Environmental (natural resources and climate change)
3. Social (equity and human rights)
The Sustainable Social Index (SSI) indicates the different sustainability levels under different categories
of countries or businesses.
Business environment
A business is an entity that operates through transformations processes to turn inputs in more valuable
outputs, but the business is an open system which means that the environment around it can interfere with
, this transformation process making it a dynamic process because it must change to make sure that the
output is always more valuable than the input. The transformation process is also not a static operation
because not everything that happens in the environment and that influences the company is identifiable.
The external environment
The firm’s environment is composed by all the variables that might influence the firm’s decisions and
results. The variables can be classified in two different ways:
1. According to the degree of proximity (macro, micro and internal environment)
2. According to the origin (technology, demographics, ...)
There are many different levels of environmental analysis based on the intensity of the interaction:
1. Macro-environment: variables that are beyond the company’s control but that might still influence
their strategic decisions indirectly and their relationship with the markets (i.e., economic growth,
ecological environment, political stability and legislations, social and demographic environment,
technology, …)
2. Micro-environment: all the individuals and organizations that are directly linked with the company
and that influence it directly, but which are still not totally under the business’s control (e.g.,
customers, suppliers, intermediates, competitors, …)
3. Internal environment: structure and politics of the organization that affect the manner in which it
reacts to environmental changes (organizational culture: social and behavioural manifestation of a
whole set of values that are shared by members of the organization)
