Starting a Business
AS Business Unit One
- Created by: Mairead Platt
- Created on: 12-05-10 14:52
Enterprise and Entrepreneurs
Enterprise
- is the process by which new businesses are formed and new products and services are created and brought to the market
Entrepreneur
- an individual who is capable of turning an idea into a real business. They take the risk and the subsequent profits that come with succes or the losses that come with failure.
Characteristics
- creativity and innovation
- motivation and determination
- relevant skills and expertise
- willingness to take risks
- passion
Motives for Starting a New Business
Why do it?
- financial reward: you retain all the profits
- independance: becoming your own boss means you have control and make all decisions
- satisfaction: many people gain satisfaction from having built their own business
- long term interest rates: easier to borrow money to start a business
- increasing affluence: people wanting to fulfill their dreams and goals
Business ideas involve
- invention (scientific investigations)
- copying (most businesses get ideas from other successful businesses)
- personal idea's (innovation, offering something new)
Risks, Rewards and Opportunity Costs
Reasons for Failure
- lack of finance
- skills shortage
- poor infrastructure
Entrepreneurs have to take huge risks, and the idea of failure is a major factor that keeps them motivated and determined to succeed
Opportunity Cost
- the 'real cost' of taking a particular action or the next best alternative forgone
Government Support and Helping the Economy
Small Businesses help the ecomony
- for the simple reason that they are the origins of the large successful businesses of the future
Entrepreneurs help the economy
- by generating wealth through spending, providing jobs and providing products or services for customers
The Government help Small Businesses
- by giving grants or subsides, making free training available and creating legislation protection
Protecting a Business Idea
Businesses often protect their products, processes and images through:
Copyright: legal protection against copy for authors, composers and artists
Patent: an official document granting the holder the right to be the only user or producer of a newly invented product or process for a specified period
Trademark: signs, logo's or words displayed on a companies products or on its advertisement including sound and music which distinguishes its brands from competitors
Advantage: product stays original, have exclusivity so can charge a higher price
Disadvantage: over priced products for customers, lack of competition discourages further product development
Franchises
Franchise: when a business (the franchisor) gives another business (the franchisee) permission to supply its products or services and use its brand name and logo
Benefits of Franchise
- involves the least risk due to the fact that the business is already well established
- financing the business is easier because banks are more willing to lend money to someone who has good reputation
- franchisors may offer training to the franchisee
Drawbacks of Franchise
- franchisee doesn't own the business so they aren't totally independant
- costs may be higher than expected
- have to be approved by franchisor
- no room to innovate or make decisions because franchisee has to follow franchisor
Adding Value
Added Value: the difference in value between the price of the finished product and the cost of the materials used eg. Sales Revenue - Costs
Businesses can Add Value in the following ways
- advertising: creates interest in the product or service, makes the public aware, may convince a customer to pay higher price therefore adding value
- product features: usp allows a business to charge higher price because product is differentiated from its competitors
- location: may enable business to charge higher price if location is more desirable than competitors
Benefits of Adding Value
- differentiates the business from its competitors
- higher profit margins
Transforming Resources into Goods and Services
Inputs: the elements and resources that go into producing goods and services
Process: the production of goods and services where resources are converted into a form that is intended to satisfy the customers needs and wants
Outputs: the finished products that are ready to satisfy the needs and wants of the customer
Primary Sector: organisations involved in extracting raw materials (farming, mining)
Secondary Sector: organisations involved in processing/refining the raw materials into semi-finished products (manufacturers)
Tertiary Sector: organisations involved in providing services to customers (teacher, hairdresser)
Business Plan
Business Plan: a set of targets or tasks that a new business should set itself before starting up
A Business Plan should look at
- market research (primary and secondary)
- finance (sources of, business costs, cash flow forecasts)
- labour (skilled and unskilled labour that the business needs)
- production (location and cost)
- suppliers (quality, price, delivery service)
- objectives (targets set to help measure success and progress)
- SWOT analysis (strenghs, weaknesses, opportunities, threats)
Benefits of a Business Plan
- clear targets/objectives to help measure success and progress so reduces risk
- more likely to get loans from banks
- critical for efficient financial planning
- able to see demand, competitors etc from research
Business Plan
Problems of a Business Plan
- entrepreneurs may be new to them and may not be sure how to make one
- customer trends constantly change
- plans are often too optimistic
- finance is never planned accurately
Sources of help preparing a Business Plan
- friends and family may have business knowledge, talking to a wide variety of individuals will help generate ideas
- most major banks offer banking services to business start-ups
- accountants can give advice and help forecast finance
- small business advisors offer services to entrepreneurs
- local enterprise agencies give free advice to help new businesses
Market Research
Market Research: the systematic and objective collection, analysis and evaluation that is intended to assist the marketing process
Market Research helps a business to:
- achieve its objectives quicker /more accurately
- attempt to gain the opinion of consumers
- may gain information on competitors and may gain an advantage over them
Benefits of Market Research:
- actions of competitors can be judged and analysed
- market size can be judged
- customer trends can be analysed and forecasted
Drawbacks of Market Research:
- costly and time consuming
- smaller firms need to judge the cost against the possible benefits
Market Research
Primary Market Research: the collection of information first hand for a specific purpose. This can be done through...
- experiments: a firm experiments with a particular approach in certain areas for a specified time. +ve, relatively cheap. -ve, could delay introduction of potentially successful product
- observations: stores watch customers while they shop and gather information on customers reactions, habits and processes. +ve, examines actual customer behaviour in detail. -ve, expensive to employ specialist psychologists
- focus groups: group of consumers are encouraged to discuss their feelings about a product or market. +ve, groups may help uncover new ideas. -ve, sometimes an element of bias within groups
- surveys: consumers are questioned about a product or market. this can be done through telephone/personal interviews or postal/internet surveys
- test marketing: launch a product in a limited part of a market and discover success, customer opinions. +ve, relatively accurate. -ve, markets and trends constantly change
Market Research
Secondary Market Research: the use of information that has already been collected for a different company or purpose
Benefits of Secondary Market Research
- data is easy to collect
- much cheaper than primary
- less time consuming than primary
Drawbacks of Secondary Market Research
- not specific to the business
- competitors have access to the same information and may have already used it
Market Research
Qualitative Market Research: the collection of information about the market based on subjective factors such as opinions and reasons
Advantages
- this research can highlight issues that the business may not have been aware of
- it can give detailed insights into customers habits and processes when shopping
- by having more detailed research, the business may gain an advantage over competitors
Disadvantages
- it is costly, as skilled personell are needed to interpret and gather the information
- it is difficult to compare with other data and research as the information is often unstructured and can be ambiguous
Market Research
Quantitative Market Research: the collection of information about the market presented numerically
Advantages
- the use of numerical data makes it easier to compare results
- numerical data can be used to identify trends and predict future trends and forecasts
Disadvantages
- it only shows "what" rather than "why", therefore the data is less useful than qualitative in helping businesses understand trends
- it can lack reliability and validity if the sample used is biased or too small
Market Research
Sampling
Sample: a group of respondants or factors who's views or behaviour should be representitive of the target market as a whole (done through primary research)
Random Sampling: a group of respondants in which each member of the target population has an equal chance of being chosen. +ve, very cheap. -ve, quality is poor
Quota Sampling: this is not random as not everyone has an equal chance of being chosen. a group of respondants comprising of several different segments, each sharing a common feature (eg. gender). Number of people being interviewed in each group depends upon the market segment they cover for your product. +ve, results are more specified to the businesses product or service. -ve, takes more care, time and money than random
Stratified Sampling: a group of respondants selected according to particular features (eg. age) but unlike quota sampling where the final selection is left to an interviewer, the sub-groups and their sizes are chosen specifically. +ve, very accurate. -ve, costly and time consuming
Understanding Markets
Types of Markets
Local Markets: customers are only a short distance away, like town markets or car boot sales. they're common with personal services like hairdressing or plumbing. majority of goods purchased by a consumer are from local businesses. +ve, reputation will spread quickly and easily to potential customers. -ve, less chance of expanding regionally or globally
National Markets: a geographically dispersed market where customer are spread over a large area. +ve, larger potential market. -ve, slower communication
(both types of markets above a 'physical locations')
Electronic Markets: does not have a physical presence, but exists in terms of virtual presence via the internet. many businesses have gone from 'brick to click'. +ve, easier to expand and turn global, and cheaper costs. -ve, some customers enjoy the 'shopping experience'
Understanding Markets
Market Segmentation: classification of customers/potential customers into groups, each which respond differently to different products or marketing approaches.
Geographical Segmentation: based on geographical area targeted
Demographic Segmentation: based on age, gender and social class
Benefits of Market Segmentation
- advertising can be targeted at specific market segments so that advertising costs are more effective
- the most profitable and least profitable customers can be identified
- least profitable markets can be avoided
- easier to identify new products
- assists new product development
Drawbacks of Market Segmentation
- harder to meet the needs of customer who aren't in market segmentation
- difficult to identify the most important segments for a product
Understanding Markets
Demand: the amount of a product or service that comsumers are willing and able to buy at any given price over a period of time
Factors affecting Demand
- price or competitors actions
- success of business marketing
- seasonal factors
- the state of the economy
- whether the product is a necessity or luxery
Market Size, Growth and Shares
- Market Size is the total value or volume of sales in the market, measured in money terms. Market Size = No. of Units Sold X Price
- Market Growth is the percentage change in sales over a period of time. Market Growth = Change in Size of Market / Original Size X 100
- Market Share is the percentage of total sales of a product achieved by a business. Market Share = Company Sales / Market Sales X 100
Legal Structures
Limited Liability: a situation of which the liability of the owners of a business is limited to the fully paid up value of the share capital
Unlimited Liability: businesses are liable for all the debt they may get into
Types of Legal Structures
- Sole Trader: business owned by one person. +ve; easy, cheap, independence, privacy. -ve; unlimited liability, limited skills, more risks
- Partnership: businesses with two or more people to operate. +ve; greater access to capital, shared responsibility, easy to set up. -ve; unlimited liability, all partners liable for debts of others, potential conflict
- Private Limited Company: small to medium sized business that is usually run by family or small group of individuals, shares sold privatley (ltd). +ve; limited liability, higher business status than sole trader. -ve; expensive and stime consuming to set up
- Public Limited Company: a business with limited liability, a share capital of over £50,000, atleast two shareholders. +ve; no limit to the no of share holders, funds raised quickly, limited liability. -ve; very expensive, risk of hostile takeover
Sources of Finance
Ordinary Share Capital
- money given to a company by shareholders in return for a share of the company, entitling them to a share of the profits
- most common type of share but most riskiest, no guaranteed dividend
- all ordinary shareholders have voting rights
Loan Capital
- money received by an organisation in return for the organisations agreement to pay interest during the period of the loan and to repay the loan within an agreed time
- loans have a fixed amount for a fixed term, regular fixed payments, interest on loan is lower than an overdraft
- overdraft is short term funding, provided when businesses make payments from their current account exceeding the available balance
Sources of Finance
Venture Capital
- finance that is provided to small of medium sized firms that seek growth but which maybe considered risky by typical share buyers or lenders
Personal Sources
- money that is provided by the owners of the business from their own savings or personal wealth
- for sole traders or partnerships
- cheaper as there are no repayments or interest
- more control and profit kept
- however, unlimited liability
- dependent on yourself to raise the finance
Location
Infrastructure: transport, communication links, what systems are in place and are available in the area
Footloose Business: a business that is not tied to a particular location
Qualitative Factors: factors that are based on opinion, not statistics; could affect your decision
Teleworking: using communications, telephones, internet rather than everyone being in the office
Location
Factors that influence start-up location decisions
- Technology: is a virtual working environment or teleworking feasable?
- Land Costs: how much space is required? city centre or countryside? does the business need to be near customers or suppliers
- Labour Costs: are there regional differences? what skills are required? is relocation overseas possible?
- Transport Costs: is the industry 'bulk reducing' or 'bulk increasing'? is it important to be near suppliers? primary industries tend to be near natural resources
- Infrastructure: are there good transport links? are there adequate communication links?
- The Market: does the location provide access to potential customers? should the business locate near to competitors?
- Qualitative Factors: convenience (family life) quality of life?
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