📖[PDF] Starting a Business For Dummies by Colin Barrow | Perlego (2024)

Part I

For Dummies can help get you started with lots of subjects. Visit www.dummies.com to learn more and do more with For Dummies.

In this part …

• Use your knowledge of business cycles to get your business off to the best possible start, and appreciate the effect that the state of the wider economy will have on your business.
• Lay the groundwork for opening your doors for business either at home or in dedicated premises.
• Check out your skills and aptitudes and see how they compare to the business idea you have in mind.
• Investigate your idea and its market in detail.

Chapter 1

In This Chapter

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. A stroll down any high street in the land shows you just how tough it is out there. Since the last edition of this book, Comet, JJB Sports, Clinton Cards, Game, Borders, Barratts, Jane Norman, Habitat, Oddbins, Adams Childrenswear, Principles, Sofa Workshop, Allied Carpets, Viyella, Dewhursts, Woolworths, MFI and Zavvi/Virgin Megastore have hit the rocks. Some 53 retailers have closed 4,000 stores.

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. And failure is pretty much a norm for business start-ups. Over the past three years, nearly half a million small firms have shut up shop in the UK alone. As if that wasn’t bad enough, the small-business population has actually grown by over a quarter of a million, at a time when the economy has shrunk by around 6 per cent. That means thousands more businesses are chasing a shrinking pot of customer spending power.

How you plan, how you prepare and how you implement your plan makes the difference between success and failure. 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. You won’t gain much from 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. Alternatively, 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 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 with cost advantage or differentiation. This path he termed focus strategy, which I discuss in the following sections.

Focusing on focus – and a bit more besides

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 can use low costs alongside tight cost controls and low margins to create an effective barrier to others considering 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’ve deep pockets, or can put together a proposition that convinces the money men to stump up the cash, this avenue may be one 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 fly you from A to B – intact. This plan proved enough of a strategy to give bigger, more established rivals such as British Airways a few sleepless nights.

Differentiation

The key to differentiation (ensuring that 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. Sony and BMW are also examples of differentiators. Both have distinctive and desirable differences in their products. 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. 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 Waterstones 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 quality and price by using simple cost-cutting solutions that don’t affect the quality of products. (You can read more about Kamprad in the sidebar ‘Less is more’.)

Warren Buffett, one of the world’s richest men, 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. Chigago-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 situation 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.