Starting a Business

AS Business Unit One

HideShow resource information

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
1 of 24

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)
2 of 24

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
3 of 24

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
4 of 24

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

5 of 24

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
6 of 24

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
7 of 24

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)

8 of 24

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
9 of 24

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
10 of 24

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
11 of 24

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
12 of 24

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
13 of 24

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
14 of 24

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
15 of 24

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

16 of 24

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'

17 of 24

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
18 of 24

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
19 of 24

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
20 of 24

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
21 of 24

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
22 of 24

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

23 of 24

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?
24 of 24

Comments

No comments have yet been made

Similar Business Studies resources:

See all Business Studies resources »See all resources »