Characteristics Of Entrepreneurs
Entrepreneur - an individual who raises the resources and organises the activities needed to make a business idea happen.
Initiative - The ability to plan begin or follow through a business or enterprise idea.
Hardworking - Carrying out many business tasks, which involve many hours of work (including evenings and weekends)
Resilient - The ability to withstand and recover quickly from difficult business conditions or situations.
Creative - To come up with original ideas or spot unique business opportunities before others.
Self Confident - Confidence in your own judgment and abilities as an entrepreneur.
Take Calculated Risks - The ability of considering what could happen, and making a decision once having weighed up costs and benefits, despite the outcome being uncertain, because of the benefits it may bring.
Non-Profit Motivators - Non- financial motivators as to why become an entrepreneur.
- Control Over Working Life - work independently, flexible hours, work from home.
- Spotted an opportunity within a market - creativity, chasing a dream.
- Building on experience as an employee - improving and using skills built up from working under someone.
- Some individuals may set up a non-profit business. This is often existent in the public-sector, where services such as the NHS are without profit - no many is made as the services are not charged for - the tax system funds them. Charities are another example, where money is made from donations and is not retained as profit.
Profit Motivators - Financial motivators as to why become an entrepreneur.
- Made redundant - therefore saw an opportunity to work independently (also links back to non-profit motivators)
- To make money - Was not earning enough or anything in previous job/unemployment.
- Couldn't find a job - so decided to make one for themselves.
McGregor's Theory X- Individuals whom dislike work and will avoid it where possible, prefer to be directed and lack in ambition. Often found to need to be controlled and instructed.
McGregor's Theory Y- Individuals whom naturally put effort into their work, have large amounts of ambition and want responsibly within their jobs.
Autocratic Leader - A leader who tells their staff what to do - authoritarianism, gives instructions - doesn't want nor expect any feedback. Payment by results is often an attitude adopted by autocratic leaders, such as piece rates.
Democratic Leader - A leader whom wants involvement of their staff in decision making, allows and encourages contribution of staff - a two-way form of communication. Delegates their decision making power among staff.
Paternalistic Leader - A leader who acts as a motherly/fatherly figure to their staff, trying to do what is best for the. Frequent consultation to find out the views of employees, but lead by the leader. Provides care and support of the staff, may be interpreted as a micro-management technique.
A good leader will change their leadership style based on the situation, regarding to time/money constraints & abilities of staff. Generally however, Theory X employees need an autocratic/paternalistic style whereas Theory Y is much more democratic leadership.
Market - Environment where supply and demand meet - where consumer and supplier come together.
Cash - Money that is owned.
Credit - Money that is owed.
Supply - Quantity of a product/service that producers are able & willing to deliver within a given time constraint.
Rules of a market:
- Shortage of Supply- Prices rise through lack of product.
- Supply Surplus- Prices fall in order to sell the product.
- Weak Demand- Prices fall in firms attempt to sell products.
- High Demand- Prices rise in firms ability to maximise profits.
Factors Affecting Supply
- Operating Costs - Such as the cost of materials, cost operating machinery.
- The Market Price - Such as profit made per unit sold - as the market price (the price which the product/service is currently being sold at) rises, it becomes more profitable for the firm to increase their supply. If the market price decreases, the firm will cut their supply as to not be left with surplus - money tied up in stock.
- Physical Constraints - Such as limited machinery to produce items, limited amount of warehouse space to store items.
- Profit-focused firms will want to supply at the level which makes the profit of the business as high as possible. This is known as the profit maximising point.
Demand - Measures the want of a product, supported by the ability to pay for it.
Factors affecting demand -
- Price of product - to high and alienate customers, to low and sell out of products and no profit.
- Competitors Actions - consider me too products? substitute; their prices.
- Fashion, taste and trends of current market - such as organic foods, fashion trends.
- Economic Climate - recession decreases the demand of luxury goods.
- Seasonality- e.g. Christmas time- increase in toys, decrease in ice cream sales.
- Weather- hot weather will increase demand for sun-cream, ice creams, cold weather will increase demand of coats, hats, scarfs etc.
Interaction of Supply & Demand
A supply & demand graph.. Quantity of supply on x axis, price on y axis
- A supply curve - Positive correlation between between quantity and price.
- A demand curve - Negative correlation between quantity and price.
- A Surplus of goods is the points above equilibrium on the graph. Shortage is below.
Equilibrium is the point on the graph where supply and demand meet. This suggests the market price that a product should be sold for, provided the suggested quantity of goods are sold.
However, it is only useful as a guide. It is based on predictions of the managers and therefore should not be treated as fact. Firm should be careful to respond to the fluctuating levels of supply.
Market Orientated businesses - are sensitive to demand in their markets. They are consumer led.
They listen to what their consumers want and need, and understand and therefore respond to the constant fluctuating levels of demand. They do this by anticipating and varying supply levels based on the flucuations in demand.
Benefits of market orientated firms -
- Chances of newly developed products/services failing are much reduced, due to the ongoing market research that comes as a result of constantly listening to feedback of customers.
- Chances of making higher revenue, and therefore profits are increased due to the fast responses of what consumers want and need.
Primary and Secondary Research
Primary Market Research - Researching information first hand.
- Pros: Allows firm to tailor questions directly at their research objectives, allows firms the latest information from the market place, also allows researchers to asses the psychology of the customer.
- Cons: Expensive and time consuming to carry out, creates a risk of researcher bias, also needs consideration that the findings may only be useful if data exists to compare the new data too.
e.g. Customer satisfaction survey, focus groups, observations, questionnaires.
Secondary Market Research - Using information that has already been gathered, as data for another firm to use.
- Pros: Often obtained without cost and quickly, is usually based on actual sales data from research on large samples, also provides a good overview of the market.
- Cons: Likely to be old sales data, data will not be tailored to meet specific companies needs, information is also available to competitors.
e.g. Internet, trade press, government produced data- national census.
Primary and secondary research can help to quantify demand and gain insight into consumer behavior, however;
- Sample Size; is the number of people used in the research, This should be large enough to give confidence that the findings are representative of the whole population.
- Sampling Method; Random Sampling (everyone in target population has an equal chance of being picked), Quota Sampling (selecting interviewees in proportion to consumer profile within target market), Stratified Sample (interviewing only those with a key characteristic required for a sample).
- Bias; researcher bias in leading questions, swaying consumers torwards specific results. Bias in the sample - e.g. stratified means identifying those available at a specific time & place.
- Quantitative Data - numerical, statistical - easy to analyse and compare however often lacks depth and detail into psychology of consumer.
- Qualitative Data - Rich in detail - psychology, thoughts and feelings of customer however harder to analyse & compare.
Market for a Business Idea
Market Size - Measurement of all the sales by all the companies within a market place. Measured by volume or value.
Average Unit Price X Total Sales Volumes
Market size is the basis of calculating market share,which is useful for individual firms and is also useful in predicting trends within a market - e.g. growth/decline.
Market Share- Proportion of total market held by one company/product. Being a market leader allows the highest distribution level, means the firm is able to offer lower discount terms than competitors and newer products under the same brand will be easy to distribute.
(Total Company Sales/Total Industry Sales) X 100
Potential Market Growth - A growing market is likely to provide opportunities for initiatives to be successful. A shrinking market would often prevent initiatives to begin, as the chance of failure is higher.
Market Growth/Decline = (Original Sales - New Sales)/Original Sales X 100
Market for a Business Idea 2
Market Segmentation - The acknowledgement by companies that customers are not all the same. The market can be broken down into smaller sections in which customers show similar characteristics, such as age, gender etc.
In order to achieve market segmentation the firm will need to complete market research into the different types of customers within a market place and within their target market. As a result of this they will then need to devise a product/service designed for a particular segment of a whole market.
If market segmentation is completed successfully by the firm, it can increase customer satisfaction, which will lead to consumer loyalty to the firm and repeat customers. It can also increase the chance that consumers will pay higher prices for a product they love.
Market Niches - Tailor a product to a specific type of customer; it aims at a small segment of a much larger market.
Goods are sold in low volumes, but at higher prices as buyers tend to be less price sensitive.
Analysing a Market
POINTS TO CONSIDER WHEN ANALYSING A MARKET:
- WHAT IS THE SIZE OF THE MARKET?
- IS IT A GROWTH MARKET, OR A SHRINKING MARKET? WHAT ARE THE IMPLICATIONS OF THIS?
- WHAT IS THE FIRMS MARKET SHARE?
- WHAT IS THE DEGREE OF MARKET SEGMENTATION?
- WHAT TYPE OF MARKET IS IT? LOCAL/NATIONAL?
- IS IT A NICHE OR MASS MARKET?
- WHAT FACTORS ARE AFFECTING SUPPLY AND DEMAND FOR THE FIRM?
Positioning the Business Idea
Competitive Advantage - Features of a product/service that make it stronger than competitors - achieved by; differentiation, a unique idea, better product/service, lower price, protection in patent/copyright,
U.S.P. - Unique Selling Point. The feature of differentiation that makes the product different.
Differentiation - How consumers perceive that your product/service is different from its competitors.
- Actual differentiation - Unique; design, function, feel, taste, location, easier to use- ergonomic factors, superior performance.
- Imagined differentiation - Creating differences that only exist in the mind of the consumer, such as brand image. Achieved through; persuasive advertising, celebrity endorsements etc. Often allows premium prices to be charged.
When Identifying a Unique Idea consider; NATIONAL: changes in society, changes in economy. LOCAL: house market, local area - competitors.
A firm should also consider the competitive advantage and the differentiation etc of its competitors, in order to know what it is they are up against.
Market Mapping & Adding Value
A Market Map is a set of axis, with two varying factors upon each, such as quality and price. Products of the specific market are placed in their corresponding places on the grid, and it will allow a business to identify whether or not it will have a market niche to itself, or identify where there are gaps in the market.
It will then be up to the entrepreneur to use the information that has been found to investigate further, and decide whether it would be worth launching a product within that specific market. e.g. a niche may be present, but too small to be profitable.
Adding Value - Is providing a product or service with an increment, to provide consumers with more for their money. It is the increase in the value that a business creates by undertaking the production process.
Sales Revenue - Costs of Materials
Value can be added by; building a brand with a reputation - for value or for quality, for example, delivering excellent service, product features/benefits, and offering convenience.
Key benefits of added value is; charging a higher price for the product/service, creating a point of differentiation, creating customer loyalty and focusing a business closely on its target market.
Product Trial - test marketing of a product to asses likely demand levels and avoid expensive costs into a new product/service which is likely to fail.
A product trial allows firm to respond to the feedback that is likely to be as a result of consumers trialing the product, and choose whether to adapt the product/service, leave it as it is or leave the product all together before it goes into full production.
This reduces the risk of an entrepreneur because it saves costs if the product is going to fail, and helps them to assess the demand for the product which will allow them to successfully manage the supply that is ordered, which will prevent money tied up in stock, surplus etc.
Opportunity Cost - The cost of missing out on the next best alternative when making a decision.
- Personal opportunity costs of entrepreneurs: regular pay cheque, disposable income, holidays, free time- family/friends, sick pay.
- Business opportunity costs - rejected ideas, loss of potential sales, loss of revenue and profits, collateral.
Trade Off - The factor that is given up in order to do what is wanted most.
Stakeholders- anybody that is affected by the business;
- internal - employees, owners of the company.
- external - customers, suppliers, creditors, local community, government
In context: consider the effect on stakeholders of a decision.
Economic Climate - Interest Rates
Interest Rates - is the reward offered to savers and the cost of borrowing money.
- Higher Interest Rates mean less disposable income, as most people borrow the money to pay for things by credit, rather than using savings. Because people have less to spend, demand falls. When interest rates are high, the cost of borrowing money is high, therefore savings become more attractive which continues to reduce demand, as people are saving, and not inputting money back into the economy through spending. Additionally, because it costs businesses more to borrow money, businesses suffer with the rising costs and unemployment rises, through redundancies.
- Lower Interest Rates mean more disposable income, borrowing is cheaper and saving is less attractive. People can borrow money to spend, so demand rises and businesses prosper.
The Bank of England controls the interest rates, and lowers them when demand is low to cut mortgage payments, and increase disposable income.
However, the effect that interest rates have on demand depends on the elasticity of the particular product. An inelastic price product will hardly be impacted by higher interest rates- these are often neccesity products, such as petrol where the demand will not change as a result of the price.
Economic Climate - The Governments Impact
Government Spending - includes spending on benefits, infastructure, law order etc. It helps businesses, by giving people higher welfare benefits means more will be spent in the economy. e.g. building a motorway creates jobs for civil engineers and construction workers.
If demand in the economy is low, the Government will cut taxes so people have more to spend, and increase their spending in the economy; by raising benefits, building new roads etc and vias versa if the demand is too high.
Taxation - Can be direct taxes (income tax on individual earnings or corporation tax on businesses) or indirect taxes (VAT- Value Added Tax - taxes on spending.)
Unemployment - is a measure of the amount of people looking for work. - High unemployment rates decrease the sales of luxury goods as people have less disposable income, however it is easier for businesses to employ staff, and will not have to pay high wages.
Economic Climate - Inflation & Exchange Rates
Inflation - The measure of annual price rise.
- An increase in inflation can causes spending to temporarily increase as people rush to buy more before prices increase further. However, if wages do not increase in line with inflation spending will be cut as people have less disposable income.
- Inflation causes uncertainty and makes it difficult for businesses to accurately plan ahead. Therefore businesses invest less.
- Inflation is good for borrowing money as loans are worth more when you get them than when you repay them- provided it is fixed repayments.
- Inflation within the UK makes UK exports expensive abroad, so UK businesses become less competitive.
Exchange Rates - The price of one currency in terms of another. (Demand for £'s is the demand to buy £ with other currencies. Supply of £ depends upon desire to change £ into another currency.)
- An appreciation in the exchange rate means an increase in the value of the pound - cost to import falls, cost to export rises therefore demand of UK goods & services is likely to fall.
Internal Sources of Finance:
- Retained Profit - Profit generated from the business which is then reinvested into the business.
- no extra charges to manager, in interest charges or repayments however, may be limited and results in the company having no profit to profit share, for example.
- Sale of Assets - The sale of items the business owns to generate cash.
- provides finance without extra borrowing, however the business loses the asset which may later become useful.
- (Family & Friends) - Borrowing of family/friends
- a form or borrowing where there will be no interest and flexible repayment terms, however likely for family/friends to want to have a say in business decisions, for example.
External Sources of Finance
- Loans - An agreed amount of money borrowed from the bank for a set period of time, which must be paid back in installments, with interest.
- allows larger amounts of money to be borrowed and allows for planning of cash flow forecasts with regular repayments however can be very difficult to gain, especially for smaller businesses and the banks will demand collateral from business owner if unlimited liability company.
- Debentures - A long term loan, which carries a fixed rate of interest over the course of the loan.
- debenture holders have no share of the company, whilst allowing large sums of money to be borrowed however does require interest payments to be paid.
- Venture Capital - High- risk capital invested into the business in a combination of loans and shares, in return for a substantial part of ownership of the company.
- Brings in new knowledge and experience of an individual outside the company, useful particularly with a start up however owner divorces some ownership of the company, and is difficult to obtain for non-dynamic small businesses.
External Sources of Finance 2
Share Capital - Money provided from private investors in Ltd. companies, in return for shares of the company. --- Can raise large sums of money to help fund growth of a company however owner will face losing ownership of the company, and a proportion of the profits will be paid to shareholders as dividends.
Overdrafts - A short term negative bank balance, up to a level agreed by the bank. --- Allows a short term solution for cash flow problems, however bank can demand the money back within 24 hours and manipulate interest rates etc at any point.
Leasing -The sale of an asset belonging to the company which is then leased (rented) back to the firm for a monthly fee. ---- Helps to decrease start up costs by not paying for all new equipment however does mean the equipment is never fully yours.
Trade Credit - Business obtains goods/services from another business but does not pay it back straight away - has an average credit period of two months, ---- A good way of boosting day-today- working capital, however business may end up being reluctant to trade with you in the future if you a late to pay them.
Types of Company
Sole Trader - One owner of the business - the only person who benefits from the success, but the one that is burdened with any failure.
Unlimited liability for any debts - if the bills cannot be paid personal assets can be seized by creditors, and if insufficient funds cant be raised this way, owner declared bankrupt.
Partnership - Usually between 2 and 20 owners; all have unlimited liability if the bills of the business cannot paid.
Private Limited Company - Shareholders of the business are owners or close friends/family of the owners. Have limited liability, where the owners can only lose what they put into the business. The issued share capital is <£50,000.
Public Limited Company - Shareholders are public, sold and traded on a stock exchange. Limited liability of the company and issued share value must be >£50,000.
- All share holders in private and public limited companies are paid dividends; a share of the profits at the end of the year. Capital gain is when a share is sold for a profit. Enough shares in the company mean contributing to the way it is run.
Sales Levels, Costs & Profit
Sales Revenue = Value of total sales made by a business within a year - income.
volume of goods sold X average selling price
Profit = Difference that arises when firms revenue exceeds total costs.
total revenue - total costs
Gross Profit = Measure of difference between income and costs of manufacturing goods.
Revenue - Costs of goods sold
Gross Profit Margin = (gross profit/sales) x 100
Net Profit = Measure of difference between gross profit and expenses/overheads.
Revenue - (overheads + expenses)
Net Profit Margins = (net profit/sales) x 100
Contribution = selling price - variable cost p/unit
Break-even = (fixed costs/(selling price-variable costs)
The point of calculating break-even is to see whether or not it will be achievable bearing in mind potential demand.
Margin of Safety - Difference between current output level and break-even output level.
current output - break- even output
Business Plan - a document that states what the owners of the business want to do and how they want to do it. They may wish to do this because;
- Encourage financial investors to invest
- Provides an opportunity for an entrepreneur to asses the businesses strengths and weaknesses.
- Can be used as a management tool - gives the business objectives and sets targets and aims which the managers can compare to later in the year to see if they have been achieved.
- Executive Summary - general overview
- Business Summary - the type of business
- Production Plan - quantity of products to be produced
- Marketing Plan - defines the market, identifies competitors
- Human Resources Plan - qualifications and experience of entrepreneur & others involved
- Operations Plan - location of business, machinery - own or rent, etc
- Financial Plan - cash-flow forecasts, profit and lost sheets, balance sheets, breakeven