How important are entrepreneurs to the UK economy?
Small businesses are important to the UK economy for the simple reason that they are the large successful businesses of the future.
What are the motives for becoming an entrepreneur?
There are a number of reasons why people choose to start their own business
- To escape an uninteresting job
- to pursue an interest or hobby
- to exploit a gap in the market
- to market a new or innovative product
- to be innovative in terms of the process of making the product
- to be their own boss
- to work from home
- to have a a second career
- to provide a service or product not for profit
- to one day have a big business
Risk and reward and opportunity cost
Entrepreneurs take risks, often using their own money. In return they expect a reward. Opportunity cost is the cost of the next best alternative.
Government support for enterprise and entrepeneurs
Government grants come from a variety of sources, including central and local government, the European Union and organisations that specialise in encouraging business growth in particular areas of the country e.g. Regional Development Agencies in England. Grants are usually awarded for one of the following purposes:
- Innovation, Research and Development
- Economic regeneration
- Encouraging young people to start a business.
In addition entrepreneurs can get advice from a wide range of sources. Local Business Link websites provide lists of support for small business.
1) Enterprise is the ability to handle uncertainty and deal effectively with change.
2) An Entrepreneur is someone who starts and runs a business and has the responsibility for the risks involved. In order to do this, an entrepreneur has to be able to manage the 4 factors of production effectively:
- Land and natural resources
- Capital (any kind of equipment used in production)
3) Opportunity cost is the cost of an activity expressed in terms of the next best alternative, which has to be given up when making a choice. E.g. what could an entrepreneur do with their time, expertise and money if they didn't start a business?
4) Government grants are sums of money given to a business for a specific purpose or project. They often contribute to the costs of the project.
1.2 Generating and protecting business ideas
Sources of business ideas
An entrepreneur will often base the decision of deciding what product or service to provide on his/her own experience. Alternatively the decision might be generated by a realisation that there is an unmet need in the market. Both choices have advantages and disadvantages.
Knowing the Product or Service
- Entrepreneur will have a good knowledge of the features of the product
- Entrepreneur may have a passion or interest in the product
- Good contacts in an established market
- Entrepreneur may have a good reputation in the market that he/she can use
- Is there room for another competitor?
- The entrepreneur's passion for the product might not be shared by the public.
- The entrepreneur's passion may overestimate the size of the market.
- Knowledge of the product or service is not the only thing required, the person might not possess the other skills needed for successful entrepreneurship.
Spotting a gap in the market
- Entrepreneur is basing idea on customers needs rather than their own, may improve the chances of success.
- More likely to enjoy 'first mover advantage' (the benefits of being first in the market)
- Little or no competition
- Easier to market a new idea than to persuade people to buy an established idea.
- Entrepreneur will have little or no expertise in the product/service or market.
- Is the gap real? Has someone tried to exploit the idea before and discovered why it can't be done?
- Competition may enter quickly and capture market share.
A combination of the above approaches is often successful, where an entrepreneur starts a business in a market with which he/she is familiar, but in a unique way that hasn't been done before.
Whichever way an entrepreneur decides upon the initial idea, he/she will need to carry out some small budget research. The main ways to do this are:
- Use business directories e.g. Yellow Pages
- Use local maps to locate existing competition and identify gaps in provision
- Use local and national demographic data to establish potential market features
- Use small scale research
- Use market mapping to identify market segments.
Some entrepreneurs start a business by buying a franchisee. This is a business
structure in which the owner of a business idea (the franchisor) sells the right to use that idea to another person (the franchisee), usually in return for a fee and a share in any profit the franchisee makes.
Benefits to the franchisor
- Franchisor can expand quickly
- Earns revenue from the franchisees' turnover.
- Risk is shared
- Franchisee may have very good entrepreneurial skills.
Disadvantages to the franchisor
- Potential loss of control
- May be difficult to control quality
- Coordination and communication problems may increase
- Some franchisees become powerful as they acquire a number of franchises.
Benefits to the franchisee
- Able to sell an already recognised and successful product/service
- Can take advantage of central services such as marketing, purchasing, training, stock control and accounting systems and administration provided by the franchisor.
- Franchisor will have experience in the market that the franchisee can benefit from.
Disadvantages to the franchisee
- Proportion of revenue is paid to the franchisor
- Franchisee may not feel that business is his/her own, and may not benefit from the person rewards of entrepreneurship
- Right to operate the franchise could be withdrawn.
Protecting business ideas
An entrepreneur will want to protect an idea in order to recover the costs of bringing that idea to the market. Businesses often protect their products, process and images through copyrights, patents and trademarks. If a business has spent time building a brand, or money researching a product, then the entrepreneur will want to make sure there is a return on that investment
1) A franchise is where the owner of a business idea sells the right to used that idea to another person, usually in return for a fee and a share in any turnover the franchisee gets.
2) Copyright is protection given to books, plays, films and music
3) A patent is an exclusive right to use a process of produce a product, usually for a fixed period of time, up to 20 years.
4) A trademark is a word, image, sound or smell that enables a business to differentiate itself from its competitors.
1.3 Transforming resources into goods and services
Primary production is an extraction of resources at the first stage of production, involving resources such as land and raw materials. Farming is the obvious example.
Secondary production is the transformation of resources to produce finished goods and components.
Tertiary production is the transformation of resources to provide a service.
Quaternary production is the name given to industries whose main purpose is the transformation of information
Added value is the value of the process of transformation of inputs into outputs. It is measure by the difference in value between the price of the finished product or service and the cost of the raw materials.
Businesses add value in a number of ways:
- Product features
- Personal service.
There are a number of benefits to businesses of adding value:
- Differentiation from the competition
- Charging a higher price
- Reducing elasticity of demand
- Higher profit margins
- Targeting product or service at a different market segment.
1) Input is something that contributes to the production of a product or service.
2) Output is something that occurs as a result of the transformation of business inputs.
3) Added value is the difference in value between the price of the finished product and the cost of the materials used.
1.4 Developing business plans
What is a business plan?
A business plan is a document designed to allow a business to plan for the future, allocate resources, identify key decisions and prepare for problems and opportunities. It is particularly useful for business start ups and for apply for finance and planning for growth.
A business plan has a number of purposes. It helps plan for the future because it requires the entrepreneur to think carefully about the business, and commit all the main information and ideas to paper. The entrepreneur will therefore understand the business better and the market in which it operates. It will enable the entrepreneur to identify the main courses of action needed to start and run the business, and set objectives against which the performance of the business can be measured.
A business plan allows an entrepreneur to present a request for extra funding. A business plan will provide all the information a potential investor or lender will need to decide whether the wish to invest. Banks, venture capitalists, business angels e.t.c all required details information.
Even when the business is up and running the business plan continues to be an
essential planning tool. It will provide a regular check on progress regarding things such as cash flow, objectives and financial forecasts.
The contents of a business plan
Executive summary: This is a summary of the main features of the business. It is often the most important part of a business plan. It should include highlights from each section of the rest of the plan and it is intended to explain the basics of the business.
Business description: This is a description of the history of the business, its start up plans, the type of business structure it has. It will tend to include:
- How long the business has been trading,
- The type of business and sector of the market
- legal structure
- entrepreneurs vision for the company
Product or service: This is a description of the product or service being sold, its key features and how the customer will benefit include:
- What makes it different from the competition
- What benefits the customers will gain
- plans for further development of the product/service
- information on any copyrights, designs or trademarks.
Market analysis: This is an analysis for the market and competition. It will also include an analysis of the customers' needs and where they are, how to reach them and how the product or service meets their needs. This section will include:
- the market, data about size and growth of market
- the customer, the key features including who they are and where they are
- the competition, who they and their strengths and weaknesses
- the future
Strategy and implementation: This is an analysis of the key decisions and strategies that need to be carried out, together with who is responsible for carrying them out, when they have to do it by, and the money they have to do it with. The most important element here will be the marketing and sales strategies, which will include information on:
- promotion (location, production, systems)
- sales strategies
Management team: This is a description of the key members of the business, together with their skills and experience. This section is also likely to include data in the number of employees and how the business is structured.
Financial plan: This will include a number of key financial documents such as profit and loss account, cash flow forecast, balance sheet, break even analysis.
Sources of help and guidance for business planning
- Small business advisors, e.g. Business Link
- Accountants and bank managers
- Government agencies
Problems for small business planning
- Time consuming
- Costs money
- Entrepreneur's lack of expertise
- Opportunity cost
1.5 Conducting market research
Market research is done for three main reasons
- To spot opportunities (consumer buying patterns)
- Helps them work out what to do next.
- Helps them to see if their marketing strategy has the right effect.
- Quantitative research produces numerical statistics, facts and figures.
- Qualitative research looks into the feelings and motivations of customers.
Primary research is where a business gathers new data
- gathered with questionnaires, interviews surveys, focus groups et.c. and by observation. Test marketing
- Uses sampling to make predictions
- needed to find out what consumers think
- exclusive to the business who commissioned the research
- always up to date
- but it's labour intensive, expensive and time consuming.
Secondary research is done by analysing data that is already available
- Internal sources of data include, loyalty cards, feedback from company staff, analysing company reports
- external sources like government publications monitoring consumer trends
- easy, quick and cheap
- it may be unsuitable, not gathered specifically for the business, can be out of date only gives an initial understanding of the market.
- The whole market can't be selected so a sample is required.
- The sample should try to represent the market
- The bigger the sample the more representative it is of the market.
There are three main types of sample
- Random sample, names are picked randomly from a list.
- Stratified sample, the population is divided into groups and people are randomly selected from each group. The number picked from each group is proportional to the size of the group in the population.
- Quota sample, people are selected if the belong in a selected group.
1) Primary market research data is data collected by the entrepreneur, or paid to be collected.
2) Secondary market research data is data already in existence that has not been collected specifically for the purposes of the entrepreneur.
3) A random sample is one in which each potential member of a group has an equal chance of being in the sample.
4) A quota sample is not random, as not everyone has an equal chance of being selected, results can't be used to predict the behaviour of everyone
5) Stratified sample, benefits of being random, not as expensive as a full random sample.
6) Quantitative data is data in numerical form. It's usually collected on a larger scale to generate more statistically reliable results.
7) Qualitative data is data about opinions and feelings.
1.6 Understanding markets
The market is where the buyer and seller meet. It also describes the type of product or service being bought or sold.
- Industrial markets, where businesses sell to other businesses B2B
- Consumer markets, where firms sell to individual customers B2C
- Local where firms sell to customers who live near by
- Electronic markets are virtual markets, e.g. website. Can be either B2B or B2C
Market analysis lets businesses spot opportunities in a market by looking at market condition. The most important conditions are market size, growth in the market and market share.
Market size, by volume and by value.
Businesses estimate the size of the market by the total number of sales (volume of the sales) in the whole market or by the value in pounds of all sales in the market. Market size is calculated by adding together all the sales made by different firms operating in a particular market.
Market share, sales as a percentage of total market size.
Businesses like to know what share of the market they have.
Market share = (Sales / Total Market size) x100
Businesses need to know if there market is growing or shrinking. Competition is fierce in a shrinking market.
Market growth = ((Size of new market - size of old market) / size of old market) x100
Demand affects market size, share and growth.Each can be increased when demand increases. The main affects affecting demand are:
- price of the product/service
- consumer income
- competitors actions
Segmentation can be done by:
- Consumer income
- Socio-economic class
- Amount of use
- Ethnic grouping
- Family size
All these methods focus on the characteristic of the customer. Businesses can also segment markets according to the reason for buying a product. Market segmentation.
- It can cause a firm to ignore the needs of other consumers
- It can be difficult to break the market into obvious segments
- it might not know how to target its marketing to reach the chosen segment.
Marketing is a continual process.
- Firms start by deciding their marketing objectives
- Firms plan marketing strategies to achieve these objects.
- They put their strategies into action
- They monitor sales
- They change and improve marketing strategies.
1) Local market, where customers are only a short distance away
2) National market, a geographically dispersed market where customers are spread over a large area
3) Electronic market, does not have physical presence but exists in terms of virtual presence via the internet.
4) Market segmentation, the technique where the market is broken down into smaller sections with similar characteristics.
5) Market share is the proportion of the total market accounted for by one product or company
6) Market growth is the measurement of the change in market size, usually expressed as a percentage.
7) Market size is the measurement of the size of total sales for a whole market, either expressed in terms of the value in sales or the volume of sales.
1.7 Choosing the right legal structure
The businesses legal structure affects a number of things:
- How much tax and national insurance the business pays
- The records and accounts that have to be kept
- The liability faced by the owner if the business fails
- The sources of finance available to a business
- The way decisions are made
It is the most common and simplest form of business organisation.
- Simple and quick to set up
- Inexpensive to set up
- Any profit made by the business is the owners to keep
- The owner has complete control
- Close relationship between business and customer
- hours of work can be tailored to suit the entrepreneur