CHAPTER 6
Necessary Basics
The Rainmaker is written to help current and prospective businesses to increase their potential to become profitable in the global market. Once a profitable status has been attained, productivity and efficiency must be raised before expansion is undertaken.
My primary goal is thus to present a way of thinking that will help you plan, launch, and successfully operate your business. Shortcuts are never recommended and should not even be considered.
You should always be in a position to evaluate various business decisions yourself, so that if you decide to pursue an idea or market opportunity, you can then develop a thorough feasibility and business plan. Preliminary work should put you well ahead of your competitors with an effective structure for your business.
Entrepreneurship Defined
The concept of entrepreneurship was first established in the 1700s, and the meaning of the word “entrepreneur” has evolved today into a more complex term than simply meaning someone who runs a business. To some economists, an entrepreneur is a person willing to bear the risk of starting a new venture after having assessed the possibility of making a profit—whether the project be a short- or a long-term one.
Another definition states that entrepreneurs are people who are willing to develop new goods or processes that they have identified as what the market needs but are not currently being supplied. Regardless of the definition, experts across the globe accept the undeniable truth that entrepreneurship is the leading activator stimulating economic growth and employment opportunities in all spheres of society. In emerging nations, successful small businesses are the main driving forces of job creation, income growth, and massive poverty alleviation. Therefore, government and private support for entrepreneurship is crucial for the well-being of any society. More importantly, entrepreneurship empowers people to change current thinking and innovate for the future.
The current trend is toward knowledge-based economies, which will increasingly impact on how entrepreneurs conduct business. Essentially, the many complex functions and regulations required to run a successful enterprise have resulted in many companies outsourcing specific functions to consultants, who still do the same work for the company but carry out these functions from their own offices.
What are the implications of this setting? How will these factors influence your business? Will the cost of outsourcing increase or decrease your market share? Is your product or service globally marketable if consultants are in control of such decisions? If so, who are your competitors now?
Basic Business Principles
The more difficult and complex the global world of business becomes, the more intricate the entrepreneur’s corporate structures, in turn, become. While there are many sound and focused business principles, which entrepreneurs may successfully follow, the next 10 principles form the basis of sound and ethical business practices.
Step 1: Top 10 Business Theories
1. Never lose focus on what your core product or service is.
2. Continually assess what your target market is and whether this has changed.
3. Ask yourself what your competitive strength is.
4. Set realistic corporate goals and objectives.
5. Ensure that you have (and adhere to) strict cash flow management policies.
6. Manage employees, key personnel, and directors.
7. Manage stakeholder expectations.
8. Continually market and promote your business.
9. Be innovative, especially through tough economic times.
10. Always be ethical.
The question is, however, how to establish a set of guidelines to determine answers to the foregoing business principles. What must an entrepreneur analyze to achieve a viable and ultimately profitable set of entrepreneurial operational guidelines?
While there are a variety of corporate models that entrepreneurs can follow, there are some basic principles that form standard operating principles around the world. They are represented here in the form of a step-by-step guide for entrepreneurs to follow before launching their enterprises.
Step 2: Pre-start-up To-Do List
|
Steps |
Phase |
Questions |
|
1 |
Information |
The following questions must be answered at the outset to determine the core product to be targeted. • Identify a market opportunity. • Determine how this demand can be met. • Assess various business models available to achieve the above. • What is the target market? • Who will be the funders? • What is the business environment? |
|
2 |
Get organized |
Once a target market has been identified, assess the following: • Who will run the business? • Who will assist and in what capacity? • Where will your business be situated? • What is your communication strategy? • What legal form should your business take? |
|
3 |
Feasibility study |
To identify a target market efficiently, a feasibility study needs to be conducted, including the following: • Demographics • Competition • Start-up and operating costs • What sites are available and suitable, at what cost? • Feasibility can also be subdivided into macroenvironmental, social, financial, legal, and business. |
|
4 |
Review findings |
• Results from the feasibility study are assessed, and a decision on whether to proceed or abandon the project is made. When feasibility is neither positive nor negative, the entrepreneur needs to reassess the project and its viability. |
|
5 |
Funders |
• Determine how many employees you will require and the related costs. • Draft a profile and a business plan to attract potential investors. • The profile should contain information about management, product, and expected return on investment. • Set up solid and transparent record-keeping systems. |
|
6 |
Planning and financing |
• This step involves the use of the above information to finalize a business plan. Remember to refer to the feasibility report throughout the plan. • The business plan must include financial forecasts and how these are to be achieved and backed by research. |
|
7 |
Begin operations |
Once financing has been secured, the entrepreneur still has to decide whether the project should be launched. • Set up management structures. • Appoint project leaders. • Acquire the necessary equipment. • Develop operating policies. |
In summary, the preceding outline simply states that as a precursor to investing time and money in a new project, a macroenvironmental audit must be undertaken to scrutinize broad issues over which your company has no or little control. Ask: How would political, social, economic, and demographic factors such as the exchange rate, affirmative action, crime, and human resources affect your business?
A macroaudit is usually a three-part research and analysis process that includes Porter’s Five Forces analysis, PESTEL analysis, and SWOT analysis. These are set out in later chapters.
Step 3: Is There a Market Opportunity?
• Is your proposed business based on a thoroughly assessed opportunity in the marketplace?
• Is your idea a response to personally identified need(s) in the marketplace that you found had not been met? Ask specific questions:
What research and analysis have you conducted to confirm that the demand really exists?
Is this opportunity available now, in both the short and the long term? The question really looks at the viability of this project over time (e.g., what is the ratio of costs to potential profits?)
Could this business idea lead to additional market opportunities in future? If you believe that it could, conduct further research on global and regional trends to identify what these opportunities may be.
Step 4: Do You Plan to Exploit a Niche Market?
• Start with an analysis of potential customers in that new target market.
How do you plan to research and get information about these potential customers?
Are these customers similar or the same as those whom you are already targeting?
If so, will you be selling new services directly to these customers?
If not, what will your marketing strategy be?
Do you aim to target on-sellers, such as distribution companies or wholesalers?
Once the preceding issues have been assessed and resolved, undertake the following:
Categorize these potential customers into groups and describe your marketing strategy.
What market distribution channels will you use to reach these different groups of customers? Will these include cold calling, mailshots, and general broader advertising and promotional campaigns?
Have you calculated the industry’s market size and value?
How did you calculate the market size, in number of customers and in value?
What is your market penetration strategy?
Step 5: Are There Substitutes for Your Idea?
• Now brainstorm what potential risks there may be to launch your new product.
• Assess potential alternatives to your planned strategy. Are there better products on the market? Are there cheaper products on the market? Should you rethink your strategy?
• Review your list of alternatives and select the best strategy to respond to customers’ demands.
• Answer the following questions for each of your business ideas:
|
Issues |
Questions |
|
Competition |
• Is your concept unique? • What makes it unique? • Can your concept be copied? • Can you get the product to market before competitors do? • What is the time frame before competition sets in? |
|
Time frames |
• How much time is needed for the pre-start-up phase of this business? • How long is your window of opportunity? • What milestones must be achieved before you launch this product? Can the time frames be shortened? • What are the business, market, and industry risks associated with the product? |
|
Risk |
• Has anyone tried this or a similar concept before? • What were their results? • How long did it take for them to get started? • What can you learn from their experience? |
|
Other considerations |
• What other macroeconomic variables could affect the launch and running of the product? |
Step 6: Market Analysis and Research
Many businesses will require some external research to accurately forecast demand for products or services. There are two basic methods to obtain such data:
Secondary Data:
• Public and Internet libraries.
• Available market studies and industry information, especially from the major accounting houses.
• Analysis of listed companies in similar sectors.
• Market, industry, and economic forecasts.
• Trade unions and industry associations.
• Electronic search engines, with specific focus on doctoral theses.
Primary Data:
• Talking to people in the industry.
• Observing and interviewing similar businesses.
• Suppliers, vendors, and bankers.
• Conducting market surveys.
Step 7: The Five Stages of Business Life Cycles
The life cycle of any organization affects economies as companies grow, mature, and then decline. To sustain the life of any business, you will need to innovate and continually improve your efficiency and production and the time it takes you to get your product to market. Adding new products and services that are contracyclical to your current offering should always be considered.
This is an ongoing process. The following is a basic overview of business cycles, namely, launch, growth, shake-out, maturity, and decline:
Stage 1: Launching the Company Or New Products or Services
Notable trends during this phase are as follows:
• Your company’s sales are low as you enter new markets.
• Your revenue is low, and initial start-up costs are high.
• Businesses are prone to incur losses in this phase. The norm is to achieve breakeven after 18 months.
• In fact, throughout the entire business life cycle, profits lag behind the sales cycle and create a time lag between sales growth and profit growth.
• Cash flow during this phase is under strain owing to start-up costs and additional capitalization.
Notable trends during this phase are as follows:
• As sales increase, businesses start seeing profit once they pass the break-even point.
• However, as the profit cycle still lags the sales cycle, the profit level is not as high as sales.
• Assuming that there are no extraneous and unexpected expenses, cash flow during the growth phase should become positive.
Stage 3: Shake-Out
Notable trends during this phase are as follows:
• This phase is really the start of the maturity phase.
• Sales growth starts to slow.
• This is due mainly to market saturation or new competitors entering the market.
• Focus shifts toward expense reduction, and consolidation starts.
• Sales peak during the shake-out phase.
• Profits start to slow during this phase.
• This slower growth in sales and decline in profit cause a strain on cash flow.
Stage 4: Flattening of the Cycle or Maturity
Notable trends during this phase are as follows:
• Sales decrease.
• Profit margins get weaker.
• Cash flow remains virtually unchanged.
As firms approach maturity, capital spending should have been completed, and cash flow should be higher than the profit stated on the income statement.
It is important to note that many businesses extend this phase by introducing new products or technologies to further the growth of existing products and services.
Stage 5: Down Cycle or Decline
Notable trends during this phase are as follows:
• Sales, cash flow, and profits decline.
• Companies that haven’t managed the process via the introduction of new products or technologies during the shake-out phase tend to lose competitive edge.
Rainmaker Observation: The Rainmaker is often called in during the maturity or decline phases to assess why product sales and hence profits have declined. The assessment is simple: No entrepreneurial activity during these stages of a life cycle equals lost market share, which often cannot be regained.