Economic Research

Overview

Systematic analysis of economic viability, cost structures, and comparative advantage

Steps

Step 1: Framework selection

Choose appropriate analytical frameworks for the question:

FOR INDUSTRY ANALYSIS:

Porter’s Five Forces: Competitive dynamics assessment
- Supplier power, buyer power, threat of entry, substitutes, rivalry
Value chain analysis: Where value is created/captured
- Primary activities, support activities, margin analysis
Comparative advantage: Why here vs. elsewhere
- Factor conditions, demand conditions, related industries, strategy

FOR VIABILITY ASSESSMENT:

Cost-benefit analysis: Total costs vs. total benefits
Break-even analysis: Volume/price needed for profitability
Sensitivity analysis: How outcomes change with key variables
Total cost of ownership: Full lifecycle costs

FOR POLICY ANALYSIS:

Economic impact assessment: Jobs, GDP, tax revenue
Multiplier effects: Direct, indirect, induced impacts
Distributional analysis: Who benefits, who bears costs

Select 2-3 frameworks most relevant to the question.

Step 2: Data collection

Gather relevant economic data systematically:

GOVERNMENT STATISTICS:

Bureau of Labor Statistics (BLS): Wages, employment, productivity
Census Bureau: Industry statistics, trade data
Bureau of Economic Analysis (BEA): GDP, input-output tables
International: OECD, World Bank, IMF databases

INDUSTRY SOURCES:

IBISWorld, Statista: Industry reports and market data
Trade associations: Industry-specific statistics
Company filings: Public company financials (10-K, earnings)

ACADEMIC/RESEARCH:

NBER working papers: Economic research
Federal Reserve: Regional economic data
Think tanks: Policy research and analysis

KEY DATA TYPES TO COLLECT:

Cost structures: Labor, materials, energy, capital, logistics
Market data: Size, growth, segments, pricing
Trade flows: Imports, exports, tariffs
Productivity: Output per worker, efficiency metrics
Comparative data: Across geographies, time periods, competitors

Document data sources, dates, and any quality concerns.

Step 3: Cost structure analysis

Break down and compare cost components:

DIRECT COSTS:

Labor: Wages, benefits, payroll taxes
- Include productivity adjustments (output per hour)
Materials: Raw materials, components, packaging
- Include quality differences and waste rates
Energy: Electricity, fuel, utilities
- Include reliability and price volatility

INDIRECT COSTS:

Capital: Equipment, facilities, depreciation
- Include financing costs and utilization rates
Logistics: Transportation, warehousing, inventory
- Include lead times and supply chain risks
Regulatory: Compliance, permits, environmental
- Include uncertainty and change risk
Overhead: Management, support functions, IT

HIDDEN/OFTEN-MISSED COSTS:

Quality costs: Defects, rework, warranty
Coordination costs: Managing distant operations
IP protection: Risks and mitigation costs
Currency risk: Exchange rate exposure
Inventory carrying: Working capital tied up

Compare across:

Geographies (domestic vs. foreign alternatives)
Time periods (historical trends, future projections)
Competitors (relative cost position)

Step 4: Market dynamics analysis

Analyze supply and demand factors:

DEMAND SIDE:

Market size: Current and projected (units, dollars)
Growth drivers: What’s driving demand up/down
Customer segments: Who buys, different needs/willingness to pay
Price sensitivity: Elasticity, value vs. price competition
Demand stability: Cyclicality, seasonality, volatility

SUPPLY SIDE:

Current capacity: Existing production capacity utilization
Competitor landscape: Major players, market shares, strategies
Barriers to entry: Capital, technology, regulation, relationships
Supply chain: Key suppliers, concentration, dependencies
Capacity trends: New entrants, expansions, exits

MARKET DYNAMICS:

Competitive intensity: How fierce is competition
Pricing power: Can you set prices or are you price-taker
Technology disruption: Emerging technologies that could change market
Regulatory changes: Policy shifts affecting market
Substitution risk: Alternative products/solutions

Apply Porter’s Five Forces if selected in Step 1.

Step 5: Comparative advantage assessment

Evaluate competitive positioning using Diamond Model:

FACTOR CONDITIONS:

Natural resources: Raw material availability and cost
Human resources: Skilled labor availability, education, training
Knowledge resources: R&D capabilities, innovation infrastructure
Capital resources: Access to financing, investment
Infrastructure: Transportation, communications, utilities

DEMAND CONDITIONS:

Domestic market: Size, sophistication, growth
Customer expectations: Quality standards, innovation demands
Early adopter presence: Lead users driving innovation

RELATED/SUPPORTING INDUSTRIES:

Supplier ecosystem: Proximity and capability of suppliers
Complementary industries: Supporting services and products
Cluster effects: Agglomeration benefits

FIRM STRATEGY AND RIVALRY:

Competitive intensity: Local competition driving improvement
Management practices: Quality of business leadership
Investment orientation: Long-term vs. short-term focus

GOVERNMENT AND CHANCE:

Policy environment: Supportive vs. restrictive policies
Trade policy: Tariffs, agreements, barriers
Stability: Political and economic predictability

Compare positioning across alternatives.

Step 6: Scenario modeling

Model outcomes under different assumptions:

BASE CASE:

Most likely assumptions
Expected values for key variables
Probability-weighted expectations
Result: Expected outcome

OPTIMISTIC CASE:

Favorable conditions (top 10-20% outcomes)
What would have to go right
Assumptions: Strong demand, lower costs, supportive policy
Result: Upside potential

PESSIMISTIC CASE:

Unfavorable conditions (bottom 10-20% outcomes)
What could go wrong
Assumptions: Weak demand, cost overruns, adverse policy
Result: Downside risk

SENSITIVITY ANALYSIS:

Which variables matter most?
How much does outcome change with each?
What are the break-even points?
Which assumptions are most uncertain?

KEY VARIABLES TO TEST:

Demand growth rate
Key input costs (labor, materials, energy)
Exchange rates (if international)
Capacity utilization
Pricing/margin assumptions
Policy/regulatory changes

Build simple financial model if appropriate.

Step 7: Synthesis and recommendation

Integrate findings into actionable conclusions:

KEY FINDINGS SUMMARY
- What did each analysis reveal?
- What are the most important data points?
- What surprised us or challenged assumptions?
VIABILITY ASSESSMENT
- Viable: Positive economics under realistic assumptions
- Marginal: Viable only with specific conditions or investments
- Not viable: Negative economics unlikely to be overcome
CRITICAL SUCCESS FACTORS
- What must be true for success?
- What investments or changes are required?
- What external conditions are needed?
KEY RISKS
- Biggest threats to viability
- Probability and impact of each
- Mitigation strategies available
RECOMMENDATIONS
- Proceed: Move forward with identified investments/conditions
- Modify: Adjust scope, timing, or approach
- Abandon: Do not pursue, economics unfavorable
- Investigate: Need more information before deciding
CONFIDENCE ASSESSMENT
- How confident are we in the analysis?
- What would change the conclusion?
- What additional research would help?

Document all assumptions explicitly.

When to Use

Evaluating manufacturing reshoring or offshoring decisions
Analyzing industry competitiveness and market positioning
Policy analysis for economic development initiatives
Large-scale capital investment decisions
Market entry feasibility assessment
Supply chain restructuring analysis
Comparative advantage assessment between locations
Cost-benefit analysis for major projects

Verification

Analysis uses credible, documented data sources
Cost components are comprehensive (direct, indirect, hidden)
Both demand and supply factors analyzed
Multiple scenarios considered with sensitivity
Key assumptions explicitly documented
Conclusion follows logically from evidence
Recommendation is actionable with clear conditions

Input: $ARGUMENTS

Apply this procedure to the input provided.