3 books Bundle: Business start-up

Preparing for Business
In This Chapter Getting to grips with the basics of business strategy Working up to opening up Measuring your business’s viability

Growing for success
When you’re starting a business, particularly your first business, you need to carry out the same level of preparation as you would for crossing the Gobi Desert or exploring the
jungles of South America.

You’re entering hostile territory.
Your business idea may be good, it may even be great, but such ideas are two a penny.
The patent office is stuffed full of great inventions that have never returned tuppence to the inventors who spent so much time and money filing them.

It’s how you plan, how you prepare and how you implement your plan that makes the difference between success and failure.
And failure is pretty much a norm for business start-ups.

Tens of thousands of small firms fail, some disastrously, every year.
Most are perfectly ordinary enterprises – catastrophe isn’t confined to brash Internet whiz kids entering markets a decade or so ahead of the game.
This chapter sets the scene to make sure that you’re well prepared for the journey ahead.

Understanding the Enduring Rules of Business Strategy
When you’re engulfed by enthusiasm for an idea for a new business or engaged in the challenge of getting it off the ground you can easily miss out on the knowledge you can gain by lifting your eyes up and taking the big picture on board too.

There isn’t much point in taking aim at the wrong target from the outset !
Credit for devising the most succinct and usable way to get a handle on the big picture has to be given to Michael E. Porter, who trained as an economist at Princeton, taking his MBA at Harvard Business School where he’s now a professor.

Porter’s research led him to conclude that two factors above all influence a business’s chances of making superior profits – surely an absolute must if you’re going
to all the pain of working for yourself.

The attractiveness or otherwise of the industry in which it primarily operates.
That’s down to your research, a subject I cover in Chapters 2 and 4.

How the business positions itself within the industry in terms of an organisation’s sphere of influence. In that respect a business can only have a cost advantage if it can make products or deliver services for less than others.

Or the business may be different in a way that matters to consumers, so that its offers are unique, or at least relatively so.

Porter added a further twist to his prescription. Businesses can follow either a cost advantage path or a differentiation path industry wide, or they can take a third path – they can concentrate on a narrow specific segment either with cost advantage or differentiation.

This he termed focus strategy, which I discuss in the following sections. Focus, focus, focus Whoa up a minute.

Before you can get a handle on focus you need to understand exactly what the good professor means by cost leadership and differentiation, because the combination of those provides the most fruitful arena for a new business to compete.

Cost leadership Don’t confuse low cost with low price.
A business with low costs may or may not pass those savings on to customers.

Alternatively, the business could use low costs alongside tight cost controls and low margins to create an effective barrier to others considering either entering or extending their penetration of that market.

Businesses are most likely to achieve low cost strategies in large markets, requiring large-scale capital investment, where production or service volumes are high and businesses can achieve economies of scale from long runs.

If you have deep pockets, or can put together a proposition that convinces the money men to stump up the cash, this could be an avenue to pursue.
(I cover everything you need to put together a great business plan in Chapter 6.)

Ryanair and easyJet are examples of fairly recent business start-ups where analysing every component of the business made it possible to strip out major elements of cost – meals,
free baggage and allocated seating,
for example – while leaving the essential proposition – we will fly you from A to B – intact.

Enough of a strategy to give bigger, more established rivals such as British Airways a few sleepless nights.

Differentiation The key to differentiation (making sure your product or service has a unique element that makes it stand out from the rest) is a deep understanding of what customers really want and need and more importantly what they’re prepared to pay more for.

Apple’s opening strategy was based around a ‘fun’ operating system based on icons, rather than the dull MS-DOS.

This belief was based on Apple’s understanding that computer users were mostly young and wanted an intuitive command system and the ‘graphical user interface’ delivered just that.

Apple has continued its differentiation strategy, but added design and fashion to ease of control to the ways in which it delivers extra value.

Sony and BMW and are also examples of differentiators.
Both have distinctive and desirable differences in their products and neither they nor Apple offer the lowest price in their respective industries;
customers are willing to pay extra for the idiosyncratic and prized differences
embedded in their products.

Consumers can be a pretty fickle bunch. Just dangle something faster, brighter or just plain newer and you can usually grab their attention.

Your difference doesn’t have to be profound or even high-tech to capture a slice of the market. Book buyers rushed in droves to Waterstone’s for no more profound a reason than that its doors remained open in the evenings and on Sundays, when most other established bookshops were firmly closed.

Focus Your patience is about to be rewarded.

Now I can get to the strategy that Porter reckoned was the most fruitful for new business starters to plunge into.

Focused strategy involves concentrating on serving a particular market or a defined geographic region.

IKEA, for example, targets young, white collar workers as its prime customer segment,
selling through 235 stores in more than 30 countries.

Ingvar Kamprad, an entrepreneur from the Småland province in southern Sweden,
who founded the business in the late 1940s, offers home furnishing products of good function and design at prices young people can afford.

He achieves this by using simple cost-cutting solutions that don’t affect the
quality of products.

(You can read more about Kamprad in the nearby sidebar ‘Less is more’.)
Warren Buffett, the world’s richest man, knows a thing or two about focus.

His investment company combined with Mars to buy US chewing gum manufacturer Wrigley for $23 billion (£11.6 billion) in May 2008.

Chicago-based Wrigley, which launched its Spearmint and Juicy Fruit gums in the 1890s,
has specialised in chewing gum ever since and consistently outperformed
its more diversified competitors.

Wrigley is the only major consumer products company to grow comfortably faster than the population in its markets and above the rate of inflation.

Over the past decade or so, for example, other consumer products companies
have diversified.
Gillette moved into batteries used to drive many of its products by acquiring Duracell.

Nestlé bought Ralston Purina, Dreyer’s, Ice Cream Partners and Chef America.
Both have trailed Wrigley’s performance.

Businesses often lose their focus over time and periodically have to rediscover
their core strategic purpose.

Procter & Gamble is an example of a business that had to refocus to cure weak growth.
In 2000 the company was losing share in seven of its top nine categories, and had lowered earnings expectations four times in two quarters.

This prompted the company to restructure and refocus on its core business: big brands,
big customers and big countries.

Procter & Gamble sold off non-core businesses, establishing five global business
units with a closely focused product portfolio.

Appreciating the forces at work in your sector
Aside from articulating the generic approach to business strategy, Porter’s other major contribution to the field was what has become known as the Five Forces
Theory of Industry Structure.

Porter postulated that you have to understand the five forces that drive competition in an industry as part of process of choosing which of the three generic strategies
(cost leadership, differentiation or focus) to pursue.

The forces he identified are:
Threat of substitution:
Can customers buy something else instead of your product ?
For example, Apple and to a lesser extent Sony have laptop computers that are distinctive enough to make substitution difficult.

Dell, on the other hand, faces intense competition from dozens of other suppliers with near identical products competing mostly on price alone.

Threat of new entrants: If it’s easy to enter your market, start-up costs are low and no barriers to entry, such as intellectual property protection, exist then the threat is high.

Supplier power: Usually, the fewer the suppliers, the more powerful they are.
Oil is a classic example where less than a dozen countries supply the whole market and consequently can set prices.

Buyer power: In the food market, for example, just a few, powerful supermarket buyers are supplied by thousands of much smaller businesses, so the buyers are often able to dictate terms. Industry competition:
The number and capability of competitors is one determinant of a business’s power.

Few competitors with relatively less attractive products or services lower the intensity
of rivalry in a sector.

Often these sectors slip into oligopolistic behaviour,
preferring to collude rather than compete

You can see a video clip of Professor Porter discussing the five force model on the Harvard Business School website

Recognising the first-to-market fallacy
People use the words ‘first mover advantage’ like a mantra to justify a headlong rush into starting a business without doing enough basic research.

That won’t happen to you – after all, you’re reading this book and by the end of this section you’ll be glad you paused for thought.

The idea that you have the best chance of being successful if you get in first is one of the most enduring in business theory and practice.
Entrepreneurs and established giants are always in a race to be first.

Research from the 1980s claimed to show that market pioneers have enduring advantages in distribution, product-line breadth, product quality and, especially, market share.

Less is more Furniture company IKEA was founded by Ingvar Kamprad when he was just 17, having cut his teeth on selling matches to his nearby neighbours at the age of 5, followed by spells selling flower seeds, greeting cards,

Christmas decorations and eventually furniture. Worth £16 billion, Kamprad is the world’s seventh richest man, but lives frugally, in keeping with the functional nature of the IKEA brand.

He lives in a bungalow, flies easyJet and drives an 18-year-old Volvo. When he arrived at a gala dinner recently to collect a business award, the security guard turned him away because he saw Kamprad getting off a bus.

He and his wife Margaretha are often seen dining in cheap restaurants.
He does his food shopping in the afternoon when prices are lower and even then haggles prices down.

Beguiling though the theory of first mover advantage is, it’s probably wrong.

Gerard Tellis, of the University of Southern California, and Peter Golder, of New York University’s Stern Business School, argue in their research that previous studies on the subject were deeply flawed.
take care of your beauty

In the first instance earlier studies were based on surveys of surviving companies
and brands, excluding all the pioneers that failed.

This helps some companies to look as though they were first to market even
when they weren’t.

Procter & Gamble boasts that it created America’s disposable-nappy (diaper) business.
In fact a company called Chux launched its product a quarter of a century
before Procter & Gamble entered the market in 1961.

Also, the questions used to gather much of the data in earlier research were at best ambiguous and perhaps dangerously so.

For example, researchers had used the term ‘one of the pioneers in first developing such products or services’ as a proxy for ‘first to market’.

The authors emphasise their point by listing popular misconceptions of who the real pioneers were across the 66 markets they analysed:
Online book sales: Amazon (wrong);
Books.com (right). Copiers: Xerox (wrong); IBM (right).

PCs: IBM/Apple (both wrong); Micro Instrumentation Telemetry Systems (right) – it introduced its PC, the Altair, a $400 kit, in 1974 followed by Tandy Corporation
(Radio Shack) in 1977.

In fact the most compelling evidence from all the research is that nearly half of all firms pursuing a first to market strategy are fated to fail, but those following fairly
close behind are three times as likely to succeed.

Tellis and Golder claim the best strategy is to enter the market a few years after pioneers, learn from their mistakes, benefit from their product and market development and be more certain about customer preferences.

Getting in Shape to Start Up You need to be in great shape to start a business.
You don’t have to diet or exercise, at least not in the conventional sense of those words,

but you do have to be sure that you have the skills and knowledge you need for the business you have in mind, or know how to tap into sources of such expertise.

The following sections help you through a pre-opening check-up so that you can be absolutely certain that your abilities and interests are closely aligned to those that the business you have in mind requires.

The sections also help you to check that a profitable market exists for your products
or services.

You can use these sections as a vehicle for sifting through your business ideas to see whether they’re worth the devotion of time and energy that you need to start up a business. You may well not have all the expertise you need to do everything yourself.

Chapter 7 introduces you to the zillions of agencies and advisers who can fill in
the gaps in your expertise.

Assessing your abilities
Business lore claims that for every ten people who want to start their own business,
only one finally does.

It follows that an awful lot of dreamers exist who, while liking the idea of starting their own business, never get around to taking action.

Chapter 3 looks in detail at how you can assess whether you’re a dreamer or a doer when it comes to entrepreneurship.

For now, see whether you fit into one of the following entrepreneurial categories:
Nature: If one of your parents or siblings runs their own business, successfully or otherwise, you’re highly likely to start up your own business.

No big surprise here, as the rules and experiences of business are being discussed every day and some of it’s bound to rub off.

It also helps if you’re a risk taker who’s comfortable with uncertainty.
Nurture: For every entrepreneur whose parents or siblings have a business
there are two who don’t.

If you can find a business idea that excites you and has the prospect of providing personal satisfaction and wealth, then you can assemble all the skills and resources needed to succeed in your own business.

You need to acquire good planning and organisational skills
(Chapter 6 covers all aspects of writing a business plan) and either develop a well-rounded knowledge of basic finance, people management, operational systems, business law, marketing and selling, or get help and advice from people who have that knowledge.

Risk taker: If you crave certainty in everything you do, then running your own business
may be something of a culture shock.

By the time the demand for a product or service is an absolutely sure-fire thing, there may already be too many other businesses in the market to leave much room for you.
Don’t confuse risk taking with a pure gamble.

You need to be able to weigh matters up and make your risk a calculated one.
Jack-of-all-trades: You need to be prepared to do any business task at any time.

The buck definitely stops with you when you run your own business.

You can’t tell a customer that his delivery is late just because a driver fails to show up.
You just have to put in a few more hours and do the job yourself.

Discovering a real need You may be a great potential entrepreneur, but you still need to spell out exactly what it is you plan to do, who needs it and how it can make money.

A good starting point is to look around and see whether anyone is dissatisfied with their present suppliers. Unhappy customers are fertile ground for new businesses to work in.

One dissatisfied customer isn’t enough to start a business for.
Make sure that unhappiness is reasonably widespread, because that gives you a feel for how many customers may be prepared to defect.

After you have an idea of the size of the potential market, you can quickly see whether your business idea is a money-making proposition.

Aside from asking around, one way to get a handle on dissatisfaction levels is to check out websites that allow consumers to register their feelings, such as

www.grumbletext.co.uk and

Then scour blogs (short for weblogs), where irate people can complain their hearts out. Check out websites such as

and www.bloghub.com, which all operate blog-indexing services that can help you filter through the 70 million plus blogs and reach the few dozen that serve the sector you’re interested in.

The easiest way to fill a need that people are going to pay to have satisfied is to tap
into one or more of these triggers:
Cost reduction and economy:
Anything that saves customers money is always an attractive proposition.

Lastminute.com’s appeal is that it acts as a ‘warehouse’ for unsold hotel rooms and airline tickets that you can have at a heavy discount.

Fear and security: Products that protect customers from any danger, however obscure,
are enduringly appealing.

When Long-Term Capital Management (LTCM), one of America’s largest hedge funds, collapsed and had to be rescued by the Federal Reserve at a cost of $2 billion, it nearly brought down the American financial system single-handedly.

Two months later Ian and Susan Jenkins launched the first issue of their magazine, EuroHedge.

At the time 35 hedge funds existed in Europe, but investors knew little about them and were rightly fearful for their investments.

EuroHedge provided information and protection to a nervous market and five years after its launch the Jenkinses sold the magazine for £16.5 million.

Greed: Anything that offers the prospect of making exceptional returns is always a winner. Competitors’ Companion, a magazine aimed at helping anyone become a regular competition winner, was an immediate success.

The proposition was simple: subscribe and you get your money back if you don’t win a competition prize worth at least your subscription.

The magazine provided details of every competition being run that week,
details of how to enter,
the factual answers to all the questions and pointers on how to answer any tie breakers.

It also provided the inspiration to ensure success with this sentence:
you have to enter competitions in order to have a chance of winning them.

Niche markets:
Big markets are usually the habitat of big business – encroach on their territory at your peril.

New businesses thrive in markets that are too small even to be an appetite whetter to established firms.

These market niches are often easy prey to new entrants because businesses have usually neglected, ignored or served them badly in the past.

Checking the fit of the business Having a great business idea and possessing the attributes and skills you require to start your own business successfully are two vital elements to get right before you launch.

The final ingredient is to be sure that the business you plan to start is right for you.
Before you go too far, make an inventory of the key things that you’re looking
for in a business.

These may include working hours that suit your lifestyle; the opportunity to meet new people; minimal paperwork; a chance to travel.

Then match those up with the proposition you’re considering.
(Chapter 3 talks more about finding a good business fit.)
Confirming Viability An idea, however exciting, unique, revolutionary and necessary,
isn’t a business.

It’s a great starting point, and an essential one, but you have to do a good deal more work before you can sidle up to your boss and tell him exactly what you think of him.

The following sections explore the steps you need to take so that you don’t have to go back to your boss in six months and plead for your old job back (and possibly eat a large piece of humble pie at the same time).

Researching the market However passionate you are about your business idea,
you’re unlikely already to have the answers to all the important questions
concerning your marketplace.

Before you can develop a successful business strategy, you have to understand as much as possible about your market and the competitors you’re likely to face.

Inflated numbers on the Internet If you plan to advertise on an Internet site it makes sense to check out the different sites you’re considering.

Be aware that some sites publish a fair amount of gobbledygook about the high number of ‘hits’ (often millions) they receive.
Millions of hits don’t mean that the site has millions of visitors.

Some Internet sites increase their hit rate by the simple expedient of leading each viewer through a number of pages, each of which adds to the number of hits.

Another mildly meaningless measure of the advertising value of a site is the notion of a subscriber. In Internet parlance anyone visiting a website and giving over their email address becomes part of that company’s share price !

Compare that to the suggestion that anyone passing a shop and glancing in the window
turns into hard cash the following day.

Any real analysis of website use starts with page impression, which is a measure of how many times an individual page has been viewed.

The Audit Bureau of Circulations, which started its life measuring newspaper response, has now turned its attention to auditing websites (www.abc.org.uk).

Also check out the World Internet Usage website (www.internetworldstats.com/stats.htm)
for the latest statistics on Internet penetration by continent and country.

That gives you a realistic measure of the maximum traffic and relative importance of each market you’re interested in.

The main way to get to understand new business areas, or areas that are new to you at any rate, is to conduct market research.

The purpose of that research is to ensure that you have sufficient information on customers, competitors and markets so that your market entry strategy or expansion plan is at least on target, if not on the bull’s-eye itself.

In other words, you need to explore whether enough people are attracted to buy what you want to sell at a price that gives you a viable business.

If you miss the target altogether, which you may well do without research, you may not have the necessary resources for a second shot.

The areas to research include:
Your customers:
Who may buy more of your existing goods and services and who may buy your new goods and services?

How many such customers exist ?
What particular customer needs do you meet ?
Your competitors:
Who are you competing with in your product/market areas ?
What are those firms’ strengths and weaknesses ?
Your product or service:
How can you tailor your product or service to meet customer needs and give you an edge in the market?

The price: What do customers see as giving value for money, so encouraging both
loyalty and referral ?
The advertising and promotional material:

What newspapers, journals and so forth do your potential customers read
and what websites do they visit?

Unglamorous as it is, analysing data on what messages actually influence people to buy, rather than just to click, holds the key to identifying where and how to promote
your products and service.

Channels of distribution:
How can you get to your customers and who do you need to distribute
your products or services ?

You may need to use retailers, wholesalers, mail order or the Internet.
These methods all have different costs and if you use one or more,
each wants a slice of your margin.

Your location:
Where do you need to be to reach your customers most easily
at minimum cost ?
Sometimes you don’t actually need to be anywhere near your market, particularly if you anticipate most of your sales coming from the Internet.

If this is the case you need to have a strategy to make sure that potential customers
can find your website.
Try to spend your advertising money wisely.

Nationwide advertisements or blanketing the market with free CD-ROMs may create huge short-term growth, but little evidence exists that indiscriminate blunderbuss advertising works well in retaining customers.

Certainly, few people using such techniques make any money.
Doing the numbers Your big idea looks as though it has a market.

You’ve evaluated your skills and inclinations and you believe that you can run this business. The next crucial question is – can it make you money ?
You absolutely must establish the financial viability of your idea before you invest money
in it or approach outsiders for backing.

You need to carry out a thorough appraisal of the business’s financial requirements.
If the numbers come out as unworkable, you can then rethink your business proposition without losing anything.

If the figures look good, then you can go ahead and prepare cash flow projections, a profit and loss account and a balance sheet, and put together the all-important business plan. (Chapters 6 and 13 cover these procedures.)

You need to establish for your business:
Day-to-day operating costs How long it will take to reach break-even How much start-up capital you need
The likely sales volume
The profit level you require for the business not just to survive, but also to thrive
The selling price of your product or service
Many businesses have difficulty raising start-up capital.

To compound this, one of the main reasons small businesses fail in the early stages is that they use too much start-up capital to buy fixed assets.

Although some equipment is clearly essential at the start, you can postpone other purchases. You may be better off borrowing or hiring ‘desirable’ and labour-saving devices
for a specific period.

This obviously isn’t as nice as having them to hand all the time, but remember that you have to maintain and perhaps update every photocopier, printer, computer and delivery van you buy and they become part of your fixed costs.

The higher your fixed costs, the longer it usually takes to reach break-even point and profitability. And time isn’t usually on the side of the small, new business: it has to become profitable relatively quickly or it simply runs out of money and dies.

Raising the money
Two fundamentally different types of money that a business can tap into are debt and equity.

Debt is money borrowed, usually from a bank, and that you have to repay.
While you’re making use of borrowed money you also have to pay interest on the loan.

Equity is the money that shareholders, including the proprietor, put in and money left in the business by way of retained profit.

You don’t have to give the shareholders their money back, but shareholders do expect the directors to increase the value of their shares, and if you go public they’ll probably expect a stream of dividends too.

If you don’t meet the shareholders’ expectations, they won’t be there when you need more money – or, if they’re powerful enough,
they’ll take steps to change the membership of the board.

Alternative financing methods include raising money from family and friends,
applying for grants and awards, and entering business competitions.
Check out Chapter 8 for a review of all these sources of financing.

The Financial Services Authority, a City watchdog, ordered all banks to publish statistics on complaints on their website from 31 August 2010.

Lloyds had received 288,717 complaints in the first six months of the year, Santander 244,978, Barclays 195,956 and HSBC had just 65,236.

If your bank is high on this name and shame list get straight on to Chapter 8 where I cover all aspects of raising money.

Writing up the business plan A business plan is a selling document that conveys the excitement and promise of your business to potential backers and stakeholders.

These potential backers can include bankers, venture capital firms, family, friends and others who may help you launch your business if they only know what you want to do.

(Chapter 8 considers how to find and approach sources of finance.) Getting money is expensive, time consuming and hard work.

Having said that, you can get a quick decision.
One recent start-up succeeded in raising £3 million in eight days,
after the founder turned down an earlier offer of £1 million made just 40 minutes after he presented his business plan.

Your business plan should cover what you expect to achieve over the next three years. (Chapter 6 gives full details on how to write a winning business plan.)

Most business plans are dull, badly written and frequently read only by the most junior of people in the financing organisations they’re presented to.

One venture capital firm in the United States went on record to say that in one year it received 25,000 business plans asking for finance and invested in only 40.

Follow these tips to make your business plan stand out from the crowd: Hit them with the benefits: You need to spell out exactly what you do, for whom and why that matters.

One such statement that has the ring of practical authority is:
‘Our website makes ordering gardening products simple.

It saves the average customer two hours a week browsing catalogues and £250 a year through discounts not otherwise available from garden centres.

We have surveyed 200 home gardeners, who rate efficient purchasing as a key priority.
’ Make your projections believable.

Sales projections always look like a hockey stick – a straight line curving rapidly upwards towards the end. You have to explain exactly what drives growth, how you capture sales and what the link between activity and results is.

The profit margins are key numbers in your projections, alongside sales forecasts.
Financiers tend to probe these figures in depth, so show the build-up in detail. Say how big the market is. Financiers feel safer backing people in big markets.

Capturing a fraction of a percentage of a massive market may be hard to achieve – but if you get it at least the effort is worth it.

Going for 10 per cent of a market measured in millions rather than billions may come to the same number, but the result isn’t as interesting. Introduce yourself and your team.

You need to sound like winners with a track record of great accomplishments.
Include non-executive directors.
Sometimes a heavyweight outsider can lend extra credibility to a business proposition.

If you know or have access to someone with a successful track record in your area of business who has time on his hands, you can invite him to help.

If you plan to trade as a limited company (Chapter 5 has details on legal structures) you can ask him to be a director, without specific executive responsibilities
beyond being on hand to offer advice.

But non-executive directors do need to have relevant experience or be able to open doors and do deals. Check out organisations such as Venture Investment Partners
(www.ventureip.co.uk) and First Flight Placement’s non-exec search site
for information on tracking down the right non-executive director for your business.

Provide financial forecasts.
You need projected cash flows, profit and loss accounts and balance sheets for at least three years ahead. No one believes them after Year 1, but the thinking behind them is what’s important.

Demonstrate the product or service.
Financiers need to see what the customer is going to get.
A mock-up is okay or, failing that, a picture or diagram. For a service, show how customers can gain from using it – that it can help with improved production scheduling and so reduce stock holding, for example.
Spell out the benefits to your potential investors.

Tell them that you can repay their money within x years,
even on your most cautious projections.

Or if you’re speaking to an equity investor, tell him what return he may get on his investment when you sell the business in three or five years’ time.

Going for Growth Growth is as natural a feature of business life as it is of biological life. People, animals and plants all grow to a set size range and then stop.

A few very small and very large specimens come to fruition, but the vast majority fit within a fairly narrow size band.

Businesses follow a similar formula: most successful new businesses, those that survive that is, reach a plateau within five to seven years.

At that stage the business employs 5 to 20 people and has annual sales
of between £250,000 and £1 million.

Of the 4.4 million private businesses operating in the United Kingdom, fewer than 120,000 have a turnover in excess of £1 million a year.

That doesn’t represent a bad result.
Viewed from the position of a one-man-band start-up, having a couple of hundred thousand pounds in sales each year is an admirable (and unusual) success.

The following sections demonstrate the great benefits of growth
(Chapters 15, 16, 17 and 18 contain more advice on how to make your business grow).

Gaining economies of scale After a business starts to grow, you can spread overhead costs over a wider base. You can buy materials and services in larger quantities, which usually means better terms and lower costs.

The combination of these factors generally leads to a higher profit margin, which in turn provides funds to improve the business, which in turn can lead to even lower costs.

This virtuous circle can make a growing firm more cost competitive than one that’s
cautiously marking time.

Securing a competitive advantage
A new business can steal a march on its competitors by doing something vital that established businesses can’t easily imitate.

For example, a new hairdressing shop can locate where customers are, but an existing shop has to content itself with its current location, at least until its lease expires.

A growing firm can gain advantages over its slower competitors.
For example, launching new products or services gives a firm more goods to sell to its existing customer base.

This puts smaller competitors at a disadvantage, because they’re perceived as having less to offer than the existing supplier.

This type of growth strategy can, if coupled with high quality standards, lead to improved customer retention and this too can lead to higher profits – a further push on the momentum of the virtuous circle.

Retaining key staff  
The surest way to ensure that a business fails is to have a continual churn of employees coming and going.

You have to invest valuable time and money in every new employee before he becomes productive, so the more staff you lose the more growth you sacrifice.
Most employers believe that their staff work for money and their key staff work
for more money.

The facts don’t really support this hypothesis.
All the evidence is that employees want to have an interesting job and recognition and praise for their achievements.

In Chapter 18 you can find out how to get the best out of your staff.
By growing the business you can let key managers realise their potential.

In a bigger business you can train and promote your staff, moving them up the ladder into more challenging jobs, earning higher salaries on merit, while they stay with you rather than leaving for pastures new.

And if employees are good at their jobs, the longer they stay with you,
the more valuable they become.

You save time and money on recruitment and you don’t have to finance new managers’ mistakes while they learn how to work in your business.

Gaining critical business mass
Bigger isn’t always better, but a growing business has a greater presence in its market, and that’s rarely a bad strategy.

Large businesses are also more stable, tending to survive better in turbulent times.
Bigger businesses can and do sometimes go bust, but smaller, ‘doing nicely’ businesses are far more likely to go bump.

A small company often relies on a handful of customers and just one or two products or services for most or all of its profits.

If its main product or service comes under competitive pressure, or if a principal customer goes bust, changes supplier, or spreads orders around more thinly,
then the small company is in trouble.

Expanding the number of customers so that you break out of the 80/20 cycle – in which 80 per cent of the business comes from just 20 per cent of customers – is a sensible way to make your business safer and more predictable.

One-product businesses are the natural medium of the inventor, but they’re extremely vulnerable to competition, changes in fashion and technological obsolescence.

Having only one product can limit the growth potential of the enterprise.
A question mark must inevitably hang over such ventures until they can broaden
their product base.

Adding successful new products or services helps a business to grow and become a safer and more secure venture.

This process is much like buying a unit trust rather than investing in a couple of shares.
The individual shares are inevitably more volatile, but the spread over dozens of shares smoothes the growth path and reduces the chances of disaster significantly.

Doing the Groundwork
In This Chapter Understanding what a small business is:
Checking whether you’re the business type
Running towards great ideas and avoiding bad ones
Appreciating the impact of the broader economy
Recognising success characteristics

If you’ve worked in a big organisation, you know that a small and medium enterprise
(SME) is a very different kind of animal from a big business.

SMEs are more vulnerable to the vagaries of the economy, but are vital to its vigour.
In this chapter you can find out how to come up with a great business
idea and avoid the lemons.

You can also look at the most common mistakes that businesses starting up make and how you can avoid them.

Understanding the Small Business Environment
During one of the all too many periods in recent history when the business climate was particularly frigid, the recent global credit crunch being a good example,
some bright spark claimed that the only sure-fire way to get a small business safely down the slipway was to start out with a big one and shrink it down to size.

There’s no denying that’s one way to get started, but even as a joke the statement completely misses the point. Small businesses have almost nothing in common with big ones.

Just because someone, you perhaps, has worked in a big business, however successfully, that’s no guarantee of success in the small business world.

Big businesses usually have deep pockets and even if those pockets aren’t actually stuffed full of cash, after years of trading under their belt they can in all but the most extraordinary of circumstances get the ear of their bank manager.

Even if unsuccessful at the bank big firms can generally extract credit from suppliers, especially if the suppliers are smaller and susceptible to being lent on in order
to retain them as a customer.

If all else fails big businesses may have the option to tap their shareholders or go out to the stock market for more boodle – options a small business owner can only dream about.

And of course if the business is very big, in times of extreme hardship it can expect a sympathetic hearing from the government.

The UK Government shrank from letting Northern Rock fold, the US Government threw General Motors a lifeline and France’s Nicholas Sarkozy used public cash to keep Renault and Peugeot Citroën in business so long as they kept their French factories open.

The boss of a big firm has legions of staff to carry out research, or to do all those hundred and one boring but essential jobs like writing up the books,
essential preludes to tapping into credit. In contrast, small business founders have to stay up late burning the midnight oil, poring over those figures themselves.

To cap it all, they may even have to get up at dawn and make special deliveries to customers in order to ensure that they meet deadlines.

Big business bosses have chauffeurs and travel business class; after all,
they don’t own a large proportion of the business’s shares,
so however frugal they are they won’t be much richer.

Small firm founders, in contrast, are personally poorer every time an employee makes a phone call at work, books a business trip or takes a client out to lunch, unless that call, trip or lunch generates extra business.

The question that separates owners from employees – which is, after all, what bosses of big businesses really are, however powerful they look from below – is: if it was your money would you spend it on that call, business trip or lunch ?
Seven times out of ten the answer is no way, not with my dosh.

Defining Small Business Small business defies easy definition.

Typically, people apply the term small business to one-man bands such as shops, garages and restaurants, and apply the term big business to such giants as IBM,
General Motors, Shell and Microsoft.

But between these two extremes fall businesses that you may looked upon as big or small, depending on the yardstick and cut-off point you use to measure size.
No single definition exists of a small firm, mainly because of the wide diversity of businesses.

One wit claimed that a business was small if it felt it was, and a grain of truth exists
in that point of view.

In practical terms the only reason to be concerned about a business’s size, age or business sector is the support and constraints imposed by virtue of those factors.

The government, for example, may offer grant aid,
support or even constraints based on such factors.

For instance, a business with a very small annual sales turnover, less than £15,000, can file a much simpler set of accounts than a larger business can.

Looking at the Types of People
Who Start Businesses At one level statistics on small firms are very precise.

Government collects and analyses the basic data on how many businesses start (and close) in each geographic area and what type of activity those businesses undertake.

Periodic studies give further insights into how new and small firms are financed or how much of their business comes from overseas markets.

Beyond that the ‘facts’ become a little more hazy and information comes most often from informal studies by banks, academics and others who may have a particular axe to grind.

The first fact about the UK small business sector is how big it is.
Over 4.7 million people now run their own business,
up from 1.9 million some three decades ago.

The desire to start a business isn’t evenly distributed across the population as a whole. Certain factors such as geographic area and age group seem to influence
the number of start-ups at any one time.

The following sections explore some of these factors.
Making your age an asset Research by the Global Entrepreneurship Monitor
and the UK Office for National Statistics
reveals a number of interesting facts about small business starters.

First, people aged between 25 and 44 are more likely than those in other age groups
to be planning to start a business.

Over 5 per cent of people in the 25–44 age group are starting a business
on their own or with others.
Around 3 per cent of those under 24 or between 45 and 54 also have
business start-up plans.

Those over 55 are the least likely to want to start up,
with only 1.5 per cent heading for self-employment.

But those percentages are only showing those planning a start-up.
Around three times those proportions are already running small or medium-sized businesses.

Considering location More than three times as many people in London start a business as do those in the North East of England.

At the very least you’re more likely to feel lonelier as an entrepreneur in that area,
or in Wales and Scotland, than in, say, London or the South East.

According to the UK Office for National Statistics the chances of your business surviving are best in Northern Ireland, where just over 70 per cent are still going after three years, and worst in London, where around 60 per cent of businesses remain after three years.

Select Database, a direct marketing firm, has a nifty database that can tell you how many businesses have been set up recently in any postal district in the UK

Winning with women Women in Europe currently own less than a third of small businesses, but women start about 35 per cent of new businesses in the UK.

Businesses started by women tend to be concentrated in the labour-intensive retail
industries, where management skills are particularly valuable.

The British Association of Women Entrepreneurs (www.bawe-uk.org) and Everywoman
(www.everywoman.co.uk) are useful starting points to find out more about targeted help and advice for women starting up a business.

Self-employment, a term used interchangeably with starting a business, tends to be a mid-life choice for women, with the majority starting up businesses after the age of 35.

Self-employed women usually have children at home (kudos to these super-mums), and many go the self-employment route because they have family commitments.

In most cases, self-employment grants greater schedule flexibility than the rigours
of a nine to five job.

The types of businesses that women run reflect the pattern of their occupations

The public administration, education and health fields account for around a quarter
of self-employed women, and distribution, hotels and restaurants another fifth.

In financing a new business, women tend to prefer using personal credit cards or remortgaging their home, and men prefer bank loan finance and government and local authority grants.

Being educated about education
A popular myth states that undereducated self-made men dominate the field of entrepreneurship.

Anecdotal evidence seems to throw up enough examples of school or university drop-outs to support the theory that education is unnecessary, perhaps even a hindrance,
to getting a business started.

After all, if Sir Richard Branson (Virgin) could drop out of full time education at 16,
and Lord Sugar (Amstrad),
Sir Philip Green (BHS and Arcadia, the group that includes Topshop and Miss Selfridge),

Sir Bernie Ecclestone (Formula One – Britain’s tenth richest man) and Charles Dunstone (Carphone Warehouse) could all give higher education a miss, education can’t be that vital.

However, the facts, such as they are, show a rather different picture.
Research shows that the more educated the population,
the more entrepreneurship takes place.

Educated individuals are more likely to identify gaps in the market or understand
new technologies.

After all, Stelios Haji-Iannou, founder of easyJet, has six degrees to his name,
albeit four are honorary.

Tony Wheeler, who together with his wife Maureen founded Lonely Planet Publications,
has degrees from Warwick University and the London Business School.

Jeff Bezos (Amazon) is an alumnus of Princeton and Google’s founders,
Sergey Brin and Larry Page, graduated from Stanford.
So if you’re in education now, stay the course.

After all, a key characteristic of successful business starters is persistence and the ability to see things through to completion.

Chapter 3 outlines more entrepreneurial attributes.
Coming Up with a Winning Idea Every business starts with the germ of an idea.
The idea may stem from nothing more profound than a feeling that customers are getting
a raw deal from their present suppliers.

In this section you can find out some tried-and-tested ways to help you come up with a great idea for a new business.

Ranking popular start-up ideas
The government’s statistics service produces periodic statistics on the types of businesses operating in the UK.

In terms of the sheer number of business enterprises, the United Kingdom is more a nation of estate agents than of small shopkeepers,

as demonstrated in Table 2-1 that shows the types of businesses being operated in Britain in 2010, according to government statistics

You can take one of two views on entering a particularly popular business sector.
Either it represents a great idea you’re mad to resist, or the business is already awash with competition.

In practice, the best view to take is that if others are starting up at least a market
opportunity exists.

Your task is to research the market thoroughly, using Chapter 4 as your guide.
Going with fast growth Entrepreneur.com produces an annual list of hot business sectors to enter (www.entrepreneur.com/trends).

The 2010 list includes: Buy local: The buy local ethos has its roots in the farmers’ markets movement but the big supermarket chains are getting in on the act, devoting sections of shelf space to local wares.

Discount retailing: Pound and second-hand businesses are booming on
both sides of the Atlantic.

The Americans even have a trade association for the sector, the National Association of Resale Professionals.

Education: The lack of jobs has sent millions around the globe back to college to train or retrain. Universities in the UK are full to bursting point.

Unsurprisingly, a boom is occurring in online learning,
tutoring and other private learning facilities.

Green energy and renewable: A growing sector because governments the world over are chucking what little money they have at this.

Senior market: With the population of over 64s exploding, this is a no-brainer sector to serve. Academics, always quick to latch on to opportunities,

have singled out gerontology (the study of social, psychological and biological aspects of aging with the view of extending active life whilst enhancing its quality) as one of the
hottest areas,

with a university scheduled to debut a new master’s degree in aging-services management to meet the growing interest in the field.

You can use this information to help pick a fast-growing business area to start your business in. Beginning with the current flowing strongly in the direction you want to travel makes things easier from the start.

Spotting a gap in the market
The classic way to identify a great opportunity is to see something that people would
buy if only they knew about it.

The demand is latent, lying beneath the surface, waiting for someone – you, hopefully – to recognise that the market is crying out for something no one is yet supplying.

These are some of the ways to go about identifying a market gap:
Adapting: Can you take an idea that’s already working in another part of the country or abroad and bring it to your own market ?

Locating: Do customers have to travel too far to reach their present source of supply ?
This is a classic route to market for shops, hairdressers and other retail-based businesses, including those that can benefit from online fulfilment.

Size: If you made things a different size, would that appeal to a new market ?
Anita Roddick of The Body Shop found that she could only buy the beauty products
she wanted in huge quantities.

By breaking down the quantities and sizes of those products and selling them,
she unleashed a huge new demand.

Timing: Are customers happy with current opening hours ?
If you opened later, earlier or longer, would you tap into a new market ?

Revamping an old idea
A good starting point is to look for products or services that used to work really well,
but have stopped selling.
Ask yourself why they seem to have died out and then try to establish whether, and how,
that problem can be overcome.

Or you can search overseas or in other markets for products and services that have
worked well for years in their home markets but have so far failed to penetrate into your area.

Sometimes with little more than a slight adjustment you can give an old idea a whole new lease of life.

For example, the Monopoly game, with its emphasis on the universal appeal of
London street names, has been launched in France with Parisian rues and in
Cornwall using towns rather than streets.

Using the Internet Many of the first generation of Internet start-ups had nothing unique about their offer, the mere fact that the business was ‘on the net’ was thought to be enough.

Hardly surprisingly, most of them went belly-up in no time at all.
All the basic rules of business apply to Internet businesses.

You need a competitive edge – something better and different about your product or service that makes you stand out from the crowd.

However, you also need something about the way you use the Internet to add extra value over and above the traditional ways in which your product or service is sold.

Online employment agencies, for example, can add value to their websites by offering clients and applicants useful information such as interview tips, prevailing wage rates and employment law updates.

But using the Internet to take an old idea and turn it into a new and more cost-efficient business can be a winner.

Check out the example in the nearby ‘Winning on the net’ sidebar.
Chapter 15 is devoted exclusively to the subject of making a success of getting online and making money.

Solving customer problems
Sometimes existing suppliers just aren’t meeting customers’ needs.

Big firms very often don’t have the time to pay attention to all their customers properly because doing so just isn’t economic.

Recognising that enough people exist with needs and expectations that aren’t being met can constitute an opportunity for a new small firm to start up.

Winning on the net Harold had worked in a car salvage business for five years when he decided he wanted to be his own boss.

The salvage business consists largely of broken-down cars, rusty puddles of water and lots of used notes changing hands – an unlikely e-business environment.

His employer had two sites situated strategically at motorway junctions to cover as much of the country as possible.

When recovered from an accident, the insurance company assesses the vehicle – those that are beyond repair are sold for scrap after the spare parts have been salvaged.

Harold’s employer, or one of his competitors, sold the rest at auction.

Historically, all vehicles were held and sold at the company’s premises, which effectively acts as a car showroom.

Prospective purchasers visited, viewed and bought vehicles in the traditional way, much like a second-hand car dealership.

This meant that traders who were located in prime positions had access to both the best buys and the best customers.

Some customers from out of the area visited occasionally, but not often because it was too time consuming to take a day out browsing on the off chance of finding a good deal.

But for Harold, having a prime site was too expensive a proposition.

He’d read about e-business and felt that it offered the possibilities of opening up the market to entice more buyers into an auction.

Also, if the auctions were conducted online, Harold could use a less expensive site to store the vehicles, because access was less important to buyers, who could have their purchases delivered to them.

Harold bought an off-the-shelf software package that enabled him to come up with
a no-mess, no-fuss website.

He had all the features of an online auction up and working within six weeks and ran a promotional campaign including advertising in local and trade publications.

He emailed his network of business contacts to start spreading the news by word of mouth. Over 100 serious buyers attend Harold’s online auctions, which compares with a comparable physical auction that is lucky to attract 50.

Having a wider and larger audience ensures better prices too.
Harold started small with just a dozen cars for sale, but quickly built up his stock.

He was able to do this because all his vehicles were sold and paid for in a matter of days.
His previous employer took up to three months to get his money back after buying in stock.

Start by recalling the occasions when you’ve had reason to complain
about a product or service.

You can extend that by canvassing the experiences of friends, relatives and colleagues.
If you spot a recurring complaint, that may be a valuable clue about a problem
just waiting to be solved.

Next you can go back over the times when firms you’ve tried to deal with have put restrictions or barriers in the way of your purchase.

If those restrictions seem easy to overcome, and others share your experience,
then you may well be on the trail of a new business idea.

Giving readers what they like
For Tim Waterstone, the basic concept of his bookshop chain,
Waterstone’s, came from wandering around Manhattan bookshops on his frequent
trips to the US.

They were brilliant places: lively and consumer led with huge stocks,
accessible staff and long opening hours.

He felt that book buyers in Britain were frustrated at not being able to browse
outside normal working hours,
because bookshops in the UK stuck pretty much to regular shop opening times.

Also, shop assistants who knew about merchandising but little or nothing about
books staffed the shops.

This meant that unless a customer knew exactly what book she was looking for,
she was unlikely to get much help to find it.

Although Waterstone felt he was on to a winning idea, at the time he did nothing about it because he had a job.

But after he was made redundant, a trip to the dole office acted as a catalyst.
It was the most horrific experience of his life.

Not waiting for his turn, he rushed out and sat in his car.
Instead of trying to get a new job, he formulated the Waterstone’s concept.
High-street banks turned him down.
He then went to a finance house and struck lucky.

He pledged his house and committed £6,000 savings and £10,000 borrowed from
his father-in-law, and raised the rest through the government’s
Small Firms Loan Guarantee Scheme (SFLG).

Three months later, the first Waterstone’s opened.

Based on a simple store plan that an art student sketched out for £25, Waterstone filled the shop with the type of books that appeal to book lovers, not bestseller buyers.

Late hours, Sunday trading (where possible) and bonus schemes for his highly literate staff led to dazzling sales.

Within eight years, Waterstone’s had some 40 shops employing 500 people,
with a turnover of £35 million plus.

Tim Waterstone sold the business to stationery chain WH Smith for nearly £60 million and was invited to stay on and run it less than a decade after his dole queue experience.
Now part of HMV Group,

Waterstone’s currently trades from more than 300 stores and its flagship branch on Piccadilly in London is the biggest bookshop in Europe.

Creating inventions and innovations Inventions and innovations are all too often almost the opposite of either identifying a gap in the market or solving an unsolved problem.
Inventors usually start by looking through the other end of the telescope.

They find an interesting problem and solve it.
There may or may not be a great need for whatever it is they invent.
The Post-it note is a good example of inventors going out on a limb to satisfy themselves rather than to meet a particular need or even solve a burning problem.

The story goes that scientists at 3M, a giant American company, came across an adhesive that failed most of their tests.

It had poor adhesion qualities because it could be separated from anything it was stuck to.
No obvious market existed, but they persevered and pushed the product on their marketing department, saying that the new product had unique properties in that it stuck ‘
permanently, but temporarily’.
The rest, as they say, is history.


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