1.5 Entrepreneurs and leaders

Role of an Entrepreneur, Entrepreneurial motives and characteristics, Business objectives, Forms of business, Business Choices

Entrepreneur

A person who sets up a business and takes risks in the hope of a profit, reward or for a social purpose e.g. to help the community

Setting up a business (steps 1-4)

Good idea + entrepreneur who wants to make it work

Step 1: Market research → what customers want

Step 2: Start small e.g. market stall

Step 3: Make a business plan

Step 4: Grow the business

Setting up an online only business

E.G. Amazon

Sites like EBay and Etsy mean that entrepreneurs dont even need to have their own website

Entrepreneur qualitites

• Takes initiative in trying to exploit a business opportunity

• Takes time to understand and calculate risks involved

• Makes an investment to set up the business

• Goes ahead, despite the risk that the business venture might fail

Starting a business as a sole trader

To become a sole trader - online or an entrepreneur will need to register as self-employed for tax

If the entrepreneur’s business is B2B → customers may ask to see evidence that they have registered with the UTR (unique tax reference) code

Running a business: day-to-day

Once a business is started → entrepreneur will need to turn their attention to the daily running of a business

• May include: completing finances, buying stock, listing stock for sale, contacting customers and chasing payments

Expanding a business - how?

• Open another location

• Offer the business as a franchise or business opportunity

• License the product

• Diversify

• Target other markets

• Merge with or acquire another business

Intrapreneurship

New concept

An employee within a larger business who thinks like an entrepreneur E.G.

• Takes risks

• Creative or innovative

• Solves problems

• Focuses on processes to improve productivity

• Drive innovation

• Understands trends

• Self-confident

• Proactive in adding value

Barriers to Entrepreneurship - 5

• Entrepreneurial capacity

• Access to finance

• Lack of training / knowhow

• Fear of failure

• Lack of confidence

Entrepreneurial capacity - BARRIER

Growing awareness that entrepreneurial skills, knowledge and attitudes can be learned → widespread development of entrepreneurial mind-sets and culture → benefits society as a whole

LACK of this can be a barrier to entrepreneurship

Access to finance - BARRIER

Entrepreneurs can’t start a business → lack of funding

Many banks not keen to lend to start-ups → lack of historical data of sales - risky investment

Might have to use crowdfunding, fam + friends, peer2peer, grant, business angels

Lack of training - BARRIER

Many entrepreneurs LACK training or knowledge of how to start a business > can put people off starting

Websites like EBay and Etsy have lots of info on how to start, and also government websites

Fear of failure - BARRIER

They don’t start → scared

Failure or cost of failure especially if they are giving up a job for it

Lack of confidence - BARRIER

Lack of confidence to embark on a new adventure with their start-up business

Can be overcome with training, information and marketing

Risk

The possibility that the business will have a lower than expected profit or a loss

Financial risks

Starting a business is a financial risk

Owner may put their own cash and other assets into the business

If business is sole trader or partnership then they have ‘unlimited liability’ → means they could lose personal assets to pay business debts

Lack of security - RISK

If entrepreneur quits regular job to start a business → HUGE RISK

May be an insecurity of sales due to falling customer incomes

Uncertainty

When businesses are unable to predict external shocks or future events

• Not objective and does not assume knowledge of alternatives

Uncertainty examples (6)

Tsunami, Health scares, Price shocks, Changes in exchange rates and interest rates, Scandals

Entrepreneurial characteristics

An Entrepreneurial characteristic is the skill, quality or trait of the person starting the business e.g. Creativity

Entrepreneurial motive

An Entrepreneurial motive is the factor that drives a person to start a business e.g. To be their own boss, independence, family + friends, money, life status

Entrepreneurial characteristics - 6

• Creativity

• Hard-working

• Resilience

• Initiative

• Self-confidence

• Risk-taking

Entrepreneurial characteristics - CREATIVITY

• Need to be creative → helps when designing or inventing new products or services

• Dynamic markets → need to stand out

• New products need to be more creative → add value and stand out

Entrepreneurial characteristics - HARD-WORK

• Hard work to start a business

• Can include working on website, social media, selling to customers, developing products etc…

Entrepreneurial characteristics - RESILIENCE

• May get knocked back before business is successful

Entrepreneurial characteristics - INITIATIVE

• Many entrepreneurs may start a business because they have a good idea and want to take it to market

Entrepreneurial characteristics - SELF-CONFIDENCE

• How an entrepreneur feels about their own abilities

• Easy for them to lack self-confidence in their products and services

Entrepreneurial characteristics - RISK TAKING

• There is a risk of leaving a secure job to start up a business not knowing it will be successful

• Financial risk → losing money that is invested

Entrepreneurial skills - 6

• Communication

• Team working

• Problem solving

• Organisation

• Numeracy

• IT

Entrepreneurial skills - COMMUNICATION

• Need to be good communicators

• May have to talk to customers or clients face to face or online

• May need to negotiate a deal with suppliers

Entrepreneurial skills - TEAM WORKING

• May decide to work in a pair or team

• Working with others has advantages and disadvantages

• ADV: more ideas + more capital in the business

• DIS: can be conflict

Entrepreneurial skills - PROBLEM SOLVING

• Will come across many problems when setting up and running a business → will need to be good at working out cost effective solutions that help move the business forward

Entrepreneurial skills - ORGANISATION

• Need to be organised

• When first starting business they will have to develop a range off systems for dealing with enquiries, suppliers and orders from customers

• May need to buy stock, sell to customers, make products all in the same day

Entrepreneurial skills - NUMERACY

• Will need to be numerate

• Will need to complete their own tax returns when they first start → will have to keep balance sales books, keep records of good and services purchased

• Will have to complete cash flow forecasts → attract more funding from lenders

Entrepreneurial skills - IT

• Need to be IT literate

• To make business online, to communicate, marketing

Financial motives for setting up a business - 2

Profit Maximisation

Profit satisficing

Financial motives for setting up a business - PROFIT MAXIMISATION

• Aiming to make as much profit as possible

• Difference between revenue and costs → will seek to minimise costs and maximise revenue

• ADV to a sole trader → larger wages can be drawn from the profit

• ADV for Ltd company + PLC → dividends will be larger on shares → may attract more investors

Financial motives for setting up a business - PROFIT SATISFICING

• An entrepreneur may aim to make just enough profit to keep the business moving plus another aim at the same time

• E.G. business may want to make a profit and…

  • Reward employees with higher wages

  • Invest in environmental project

  • Serve the community in some way

Non-financial motives - 5

• Independence

• Flexibility

• Ethical reasons

• Social purpose

• Personal challenge

Non-financial motives for setting up a business - INDEPENDENCE

• Entrepreneurs can work for themselves and no longer have to commute to work for someone else

• E.G. dragons den show lots of entrepreneurs keen to launch a product

Non-financial motives for setting up a business - FLEXIBILITY

• Start a business to gain flexibility in their life

• Can be hard to balance needs of a family with work requirements

• Work-life balance can be better achieved if the entrepreneur can WFH or themselves

Non-financial motives for setting up a business - ETHICAL REASONS

• Some businesses may decide to trade in a more ethical way

• E.G. Animal rights - body shop, Fair wages for African workers - fair trade products

Non-financial motives for setting up a business - SOCIAL PURPOSE

• Social enterprises are businesses trading for social and environmental purposes

• Many commercial businesses would consider themselves to have social objectives, but social enterprises are distinctive because their social and/or environmental purpose is absolutely central to what they do → their profits are reinvested to sustain and further their mission from +VE change

Social enterprises

Social enterprises are businesses trading for social and environmental purposes

Non-financial motives for setting up a business - PERSONAL CHALLENGE

• Some entrepreneurs may find working for another business as boring and unchallenging → set up their own

• This should give them the daily challenge and excitement that they seek

• Wish to keep challenging themselves

Profit reasons for starting a business

• Wants to make more money than at current job

• Wants to earn more than minimum wage

• Wants to be self employed

• Wants earnings to be unlimited

Non-profit reasons for staring a business

• Wants to start a business as a legacy for children to take over

• Wants flexibility and work life balance

• Wants control in their life, to be independent and more creative

• Wants to be their own boss

Ethnical reasons for starting a business

• Wants to help others e.g. fair trade/ethical trading

• Wants to make a difference to the planet - eco-friendly

• Wants to start a business for the benefit of others e.g. community cafe

• Wants to give something back to society

Motivations

• To be own boss

• For social reasons (help community)

• To make a profit

• To have more control over working life

• To turn a hobby into a revenue generator

• Increase income

• Become independent

• Driven by personal passion

• To sell something new

Characteristics

• Resilient

• Hard-working

• Determined

• Creative

• Self confident

• Lots of self initiative

• Risk taker

Business objectives

A goal or aim that a business wants to achieve. The best objectives are SMART and not vague, so that everyone in the business knows what direction the business is going

SMART target

Specific

Measurable

Achievable

Realistic

Timely

Survival as a business objective

• Survival is a short-term objective of a business and is usually applied to a new business or start-up

• Having an objective helps the employees to focus on shared aims of the business

• Different businesses have different objectives → can depend on product, service or industry and even on the goals of the entrepreneur starting a business

Survival in first year of business

• First year → builds customer base and establishes itself in the market

• Objective is to reach a sustainable level of sales that allows business to reach its break-even point

• May involve penetration pricing of products or services at the outset to establish the business

• May mean not as much profit at the start → but when business grows it will be able to comfortably raise prices

Profit maximisation - OBJECTIVE

The aim of the business is to make as high profits as possible in their time frame from a given amount of resources

• Important → helps a business to recoup any research and development costs

• Needs to maintain high levels of product development and innovation

Shrinkflation

Where a manufacturer keeps the price the same but makes the product smaller

Other business objectives (apart from survival or profit maximisation)

• Sales maximisation

• Market share

• Cost efficiency

• Employee welfare

• Customer satisfaction

• Social objectives

Business objective - SALES MAXIMISATION

Some businesses may set their objective as sales maximisation

• Profit figures tend to be annually → sales figures can be examined on a daily, weekly or monthly basis

• Managers find sales figures more satisfying as targets → profits go to owners and salaries are often linked to sales levels

• Often found in a sales driven environment E.G. estate agents or car dealership

Business objective - MARKET SHARE

Market share is the % of a market that a business has, either in revenue or in units sold

• May be an objective in a very competitive market where consumers switch between suppliers (supermarkets)

• Very important for investors to judge how a business is doing against competitors → loss in market share can be an indicator of long term financial problems

Business objective - COST EFFICIENCY

Most common objective in transport and construction industries where goods + services make up 70% of the cost of a project is to achieve cost efficiency

Cost efficiency can be achieved by:

• Paying minimum wage to unskilled workers

• Subcontracting where economically viable

• Lean production or construction where material, time and process waste is eliminated to save costs

• Increase the perceived value of the product through strong branding

• Lower the quality + price of the product

Lowering the average costs means EOS

Business objective - EMPLOYEE WELFARE

Some businesses seek the harmonious relations with their workforce as an objective, and they aim to achieve this through employee welfare

External examples: Medical insurance, Housing, Education for family

Internal examples: Canteen, Toilets, Uniform

Employees that are satisfied are loyal and hard-working, Have increased morale, Motivation and productivity

The Business also benefit from an enhanced public image as a good place to work - which makes recruitment easier

Business objective - CUSTOMER SATISFACTION

This objective is common in service industry and the coffee shop competitive market

• Businesses who follow this objective will monitor customers service levels through surveys and will focus on quality

• They will attempt to identify and understand what the customer wants, and then provide this

• They also aim to reduce the number of complaints

• A customer centred approach will:

  • Ensure repeat sales

  • Create brand loyalty to prevent customers from switching to similar brands

• Satisfied customers will tell others which will benefit the reputation of the business → cheap ways of highly effective marketing to improve sales

Business objective - SOCIAL OBJECTIVES

Social objectives are also known as corporate social responsibility or CSR objectives

This may involve:

• Reducing impact on the environment

• Fair wages in developing countries

• Helping society

• Compliance with laws to minimise externalities, like operating sensible hours → less noise pollution

Business forms

The legal structure that it takes (in the UK).

Could be a sole trader, partnership, private limited company LTD, public limited company PLC

• Most (not all) businesses in the UK are an LTD → can sell shares to friends and family to raise money to expand + they get the benefit of limited liability

Limited liability

Means that then owner of the business has no personal liability for business debts

• Owner has a separate legal identity from the business and is NOT liable for payment of debts from their own personal funds

Unlimited liability

The owners of a business are personally responsible for all the business’s debts

• If there is no money in the business then the owner would need to pay using their own finances and assets

Growth of a business (2 possibilities)

Sole trader → Partnership

Sole trader → Limited company (LTD) → Public Limited company (PLC)

Sole trader

Business owned by one owner, but they can take on staff (Also know as a sole proprietor)

• Can employ people but they will not be involved in the control of the business

• Tends to be a small business

• Has limited liability

• E.G. small shops, accountants that work from home, online traders, plumbers

ADVANTAGES of being a sole trader

• Easy to set up - no complicated forms

• Make decisions quickly

• Less capital needed

• All profits kept by owner

• Can offer personal attention to customers

• Don’t have to make any information about the company public

• Their own boss

DISADVANTAGES of being a sole trader

• Unlimited liability → could lose their own assets if fails

• Difficult to raise money → a risk

• Don’t have EOS benefit

• No one to take over for ill-health or holidays

Partnerships

2 or more people → shares the risks, costs and responsibilities of business

• The profits + gains of partnership are shared amongst the partners unless agreed otherwise

• Each partner is personally responsible for paying tax on their share of the profits/gains + for NI contributions

• Partners raise money for the business out of their own assets and/or with loans

• Usually manage business although they can delegate responsibilities to employees

It’s possible to have ‘sleeping’ partners who contribute capital investment to the business but are not involved in running the business

ADVANTAGES of partnership

• Easier than a sole trader to raise extra capital → partners all have their own sources of finance e.g. savings

• Profits go to partners → motivating

• Smaller business → good working relationships

• No need to make any information public

• Partners contribute with range of skills

• Shared problems and decisions

DISADVANTAGES of partnership

• Unlimited liability

• Partners may have disagreements about:

  • Control of business

  • Sharing of profits

  • Withdrawal from the partnership

  • Inviting new partners into the business

Private limited company (Ltd)

LTDs can expand and grow by selling more shares, giving the business more capital

• Friends and family can buy shares in the business, this will make them part owners

• Shares cannot be bought by the public

• LTDs owners have full control of who buys the shares

• LTDs have the benefit of limited liability, those that own or buy shares in the business can only lose their original investment → their private assets remain safe

Opportunity cost

Opportunity cost can be measured as the cost of foregoing the next best alternative (missing out)

• In other words → if there is another alternative and it isn’t chosen → also cost to the business

DISADVANTAGES of Ltd

• Accounts of company cannot be kept private

• More difficult and expensive to set up - more administration

• Cannot sell shares on stock exchange → limits the amount of capital that it can raise

Franchise

The right given by one business to allow another to sell goods using its name

Franchisee

The business owner who is buying the rights

Franchisor

The business that is selling the rights

ADVANTAGES of franchising

• The franchisor chooses the franchisees carefully - knows the characteristics that makes a successful franchisee

• The franchisor decides how much money the franchisee must invest in the business

• The franchisor provides support - helps solve franchisee’s problems

DISADVANTAGES of franchising

• Franchisees do not have freedom of running their own business: bound by rules e.g. cant vary product or price

• Franchisee pays percentage of profits in royalties

• Franchisee will never own the business outright

Social enterprise

A social enterprise is a business that trades for a social and/or environmental purpose

• The objective is to help society or the planet in some way - they are not charities, which rely on donations

Lifestyle business

The aim of a lifestyle business is to provide great quality of life for the owner

• Owners start a business, hoping to sustain a certain level of income

• It allows an entrepreneur to live how they won and still run a business

Online business

An online business is easy to set up

• It’s available to customers 24/7

• Can be managed from anywhere - owner does not need to be sat in an office

Growth to PLC

• Once a limited company has grown in size and needs further investment, which it cannot get from its current pool of owners → may consider becoming a PLC

• Going public is expensive:

  • Lawyers to draw up legal paperwork

  • Publications

  • Advertising and admin

  • Company must have $50,000 in share capital

Trade-off

A trade-off is when less of one is exchanged for more of another.

• Also known as a compromise

Opportunity cost - the problem with it

Land, labour, capital and enterprise are limited resources → causes scarcity

As business people → need to decide how best to use those scarce resources

When making important decisions → the cost of not selecting an alternative is an opportunity cost

Trade-off explained

• Only so much capital and only so much resources → May mean that the business has to complete less of one thing e.g. new machinery for production

• When there are choices, a compromise must be made (trade-off)

Leader

The action of leading a group or an organisation, or the ability to do this

Learning to delegate - difficulties in developing from entrepreneur to leader

• Delegation means giving authority to others to carry out tasks (like permission)

• When business grows an entrepreneur will need to learn to delegate tasks out to others → can focus on the more strategic areas of the business e.g. developing new product

Trusting others - difficulties in developing from entrepreneur to leader

• Hiring employees or having a new business partner - will have to learn to trust

• Often this will mean letting go of an idea that they have been nurturing or delegating tasks out to new employees

• Trust is important to retain good relationships with customers

Listen to others - difficulties in developing from entrepreneur to leader

• A good entrepreneur when moving to leader will need to discuss bigger decisions with other stakeholders in the business

• E.G. entrepreneur may need to listen to an employee, customer, investor, joint owner

• Good leaders take the opinions of others into account and allow them to help with the business

Be less reactive - difficulties in developing from entrepreneur to leader

• An entrepreneur will be less REACTIVE to dynamic markets and more PROACTIVE

• This means setting trends, being able to see a gap in the market, moving forward with a business idea ahead of the competition

• First to market always has competitive advantage

Developing emotional intelligence - difficulties in developing from entrepreneur to leader

Self-awareness : ability to accurately perceive your emotions and stay aware of them as they happen

Self-management: ability to use awareness of your emotions to stay flexible and positively direct your behaviour

Social awareness: ability to accurately pick up on emotions from others + understand what is really going on

Relationship management: ability to use awareness of your emotions and others emotions to manage interactions successfully

Emotional intelligence

To be able to understand and manage emotions in a positive way to reduce stress