Leaving Certificate Business Study Guide: Units 5 and 6

SOURCES OF BUSINESS IDEAS

Internal Sources of Business Ideas

Internal sources refer to getting ideas from an entrepreneur's own strengths, weaknesses, or the internal operations of an existing business.

• Skills and Hobbies: New entrepreneurs can turn personal talents, aptitudes, or interests into local or global businesses.

  • Example: $Bill Gates$ began programming at $13$ years old; his interest in software led to the creation of Microsoft.

  • Example: Brian Lee's interest in health and fitness resulted in the founding of Freshly Chopped.

• Experiences: Personal encounters or frustrations often provide gaps in the market.

  • Example: Marissa Carter developed the world’s first one-hour tan (Cocoa Brown) after spray tan transferred onto her son’s skin; she identified a need for a tan that didn't require overnight development.

  • Example: Kylie Jenner used her influence and experience with cosmetics to found a business promoted via social media.

• Research and Development (R&D): Established businesses use dedicated departments to innovate, discover, or improve products.

  • Example: Apple uses R&D to develop devices more appealing than competitors'.

  • Example: Coca-Cola continually develops new flavors to maintain market share relative to soft drink and juice competitors.

• Employee Suggestions: Businesses leverage employee initiative via formal suggestion schemes or cultures of intrapreneurship.

  • Example: Art Fry, a 3M worker, used a colleague's "repositionable glue" to create the Post-it note after his bookmarks kept falling out of his hymnal.

  • Example: Microsoft employees proposed developing a games console after seeing the Sony PlayStation's success, leading to the Xbox.

• Brainstorming: A technique involving a group of creative people generating ideas in a non-judgmental environment where one person's thought sparks another's.

  • Example: Jack Dorsey conceived the idea for Twitter during a brainstorming session about using SMS to tell groups what an individual was doing.

External Sources of Business Ideas

External sources involve identifying opportunities and threats in the outside market.

• Family and Friends: Inspiration comes from hearing complaints about unavailable products or services.

  • Example: Jack Odell created Matchbox toys because his daughter's school only allowed toys small enough to fit in a matchbox.

  • Example: Bisto was formulated after friends of local salt merchants requested an easier way to make smooth gravy.

• Customer Feedback: Surveying consumers reveals desires for new features or improvements.

  • Example: McDonald’s launched "Salads Plus" after discovering that young women avoided the restaurant due to perceptions of unhealthy food.

• Media and Social Media: Monitoring newspapers, TV, and social trends identifies new niche markets.

  • Example: Trends in male grooming habits reported in media led to the opening of "The Grooming Rooms" in Dublin.

• Import Substitution: Replacing imported products with domestically produced Irish versions.

  • Example: Geoff Read founded Ballygowan after noticing all mineral water in Ireland was imported.

  • Example: Joe Murphy set up Tayto in $1954$ because most crisps sold in Ireland were made in the UK.

• State Agencies: Organizations like Enterprise Ireland provide market research reports, trends, and global forecasts.

• Competitors: Copying or adapting successful rival products (while avoiding patent infringement).

  • Example: Coca-Cola Energy was launched to compete with Red Bull and Monster.

  • Example: Disney and Apple launched streaming services to rival Netflix.

THE PRODUCT DEVELOPMENT PROCESS

Creating a product involves seven distinct stages that must occur in the correct sequence:

1. Idea Generation: Coming up with massive numbers of ideas (ratio of $50:1$ success) through internal/external research and brainstorming.

2. Product/Service Screening: Critically evaluating ideas using a SWOT Analysis (Strengths, Weaknesses, Opportunities, Threats) to eliminate unfeasible or expensive failures.

3. Concept Development: Turning an idea into a concrete objective. Includes defining the Unique Selling Point (USP)—the specific feature that sets a product apart from the competition.

4. Feasibility Study: An investigation to determine if the product is technically possible to make and commercially viable (profitable). Uses cash flow forecasts and breakeven charts.

5. Prototype Development: Building the first working model (sample) to facilitate experimentation, identifying design flaws, and testing raw material sourcing.

6. Test Marketing: Launching the product to a small market segment to evaluate consumer response and refine marketing/pricing before a full launch.

7. Product Launch: Full-scale production and marketing to make the product available for entire market sale.

BREAKEVEN ANALYSIS

Fundamental Concepts

• Breakeven Point (BEP): The point where Total Revenue equals Total Costs ($TR = TC$). The business makes neither a profit nor a loss.

• Fixed Costs (FC): Costs that remain constant regardless of the number of units produced (e.g., Rent).

• Variable Costs (VC): Costs that change according to the level of production (e.g., Raw Materials).

• Contribution per Unit: The Selling Price minus the Variable Cost ($SP - VC$).

• Margin of Safety: The difference between the Forecast Sales and the Breakeven Point. It indicates how much sales can drop before a loss is incurred ($Margin\ of\ Safety = Forecast\ Sales - BEP$).

Calculations

• $BEP\ (in\ units) = \frac{Fixed\ Costs}{Selling\ Price - Variable\ Cost}$

• BEP\ (in\ \text{\euro}) = BEP\ (units) \times Selling\ Price

• $Total\ Revenue = Units \times Selling\ Price$

• $Total\ Costs = Fixed\ Costs + (Units \times Variable\ Cost\ per\ Unit)$

• $Profit = Total\ Revenue - Total\ Costs$

Strengths and Limitations

• Strengths: Helps determine the time to reach profitability, assesses financial viability, and emphasizes the need to control fixed costs.

• Limitations: Assumes Selling Price never changes (ignores bulk discounts); ignores that Variable Costs may drop due to economies of scale; assumes the business sells everything it produces; difficult for multi-product businesses.

MARKETING MIX AND STRATEGY

Definition of Marketing

The management process of identifying, anticipating, and satisfying customer requirements profitably.

Market Research

• Field (Primary) Research: Gathering direct information from consumers. Techniques include observation, focus groups, and surveys.

  • Advantage: Specifically tailored and up-to-date.

  • Disadvantage: Expensive and time-consuming.

• Desk (Secondary) Research: Analyzing data already collected (Internal reports, CSO publications, Internet searches).

  • Advantage: Fast and cheap.

  • Disadvantage: May be outdated or inaccurate.

Market Segmentation and Niche Markets

• Market Segmentation: Dividing the market into groups with similar characteristics (Geographic - location; Demographic - age/gender).

• Niche Market: A small, specialized group within a larger segment (e.g., bridal shoes within the female shoe market).

The 4Ps of the Marketing Mix

1. Product: Focuses on brand name, packaging, and design.

   • Product Life Cycle: Five stages: Introduction, Growth, Maturity, Saturation, and Decline.

2. Price: Factors include cost, competition, consumer income, and legal regulations. Strategies include:

   • Price Skimming: High initial price to recoup costs.

   • Penetration Pricing: Low price to gain market share.

   • Premium Pricing: Consistently high price for status/luxury.

3. Promotion: Communication through Advertising (Reminder, Informative, Persuasive, Generic, Comparative), Sales Promotion (vouchers, gifts), Public Relations (sponsorship, press releases), and Personal Selling.

4. Place: Channels of distribution (e.g., Manufacturer to Wholesaler to Retailer to Consumer, or Direct-to-Consumer via E-commerce).

STARTING AND EXPANDING A BUSINESS

Ownership Structures

• Sole Trader: Owned by one person. Features Unlimited Liability (total personal responsibility for debts).

• Partnership: $2$ to $20$ people. Shared responsibility and shared profits.

• Private Limited Company (LTD/DAC): Owned by shareholders ($1$ to $149$). Features Limited Liability (investors only lose what they invest).

Production Options

1. Job Production: Unique, one-off items made to order (e.g., wedding dress).

2. Batch Production: Limited quantities produced in groups (e.g., newspapers).

3. Mass (Flow) Production: Continuous production of standardized units (e.g., toilet paper).

Methods of Expansion

• Organic Growth: Natural expansion using profits (e.g., Franchising—Supermacs, McDonalds).

• Inorganic Growth: Rapid expansion through Mergers (joining companies), Takeovers (buying >50\% of a company), or Strategic Alliances (co-operation on a project).

SOCIAL, ETHICAL, AND ENVIRONMENTAL RESPONSIBILITIES

Corporate Social Responsibility (CSR)

Businesses have duties to Stakeholders:

• Investors: Providing ROI and honest financial info.

• Employees: Fair wages and safe conditions.

• Customers: Quality products and honest advertising.

• Government: Complying with law and paying taxes.

• Environment: Sustainable development (meeting current needs without compromising future generations).

Environmental Management

Characteristics of environmentally conscious firms include:

• Reduce, Reuse, Recycle: Minimizing waste.

• Polluter Pays Principle: Dealing with the costs of waste management.

• Sustainability: Replacing consumed resources (e.g., planting $3$ trees for every $1$ cut).

Business Ethics

Guided by a Code of Ethics (written rules for behavior). Ethical business practice ensures honesty/fairness even if it reduces profit margins.