Part I
Getting Started
In this part . . .
Before you can think seriously about starting your own business, you need to make sure you are ready for such a big step. This part lets you check out your skills and aptitude and see how they compare to the business idea you have in mind. You can see if your idea looks able to make the kind of money youāre expecting. Then check if you should start up on your own or perhaps find others to help you.
Once youāve done the groundwork you can start investigating the market in more detail and lay the groundwork for opening your doors for business either at home or in dedicated premises. With this work done you are ready to take your business forward!
Chapter 1
Preparing for Business
In This Chapter
Getting to grips with the basics of business strategy Measuring your businessās viability When youāre 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. Youāre 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. Itās 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 ā catastrophe isnāt 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 youāre well prepared for the journey ahead.
Understanding the Enduring Rules of Business Strategy
When youāre 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 isnāt 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 heās now a professor. Porterās research led him to conclude that two factors above all influence a businessās chances of making superior profits ā surely an absolute must if youāre going to all the pain of working for yourself.
The attractiveness or otherwise of the industry in which it primarily operates. Thatās 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 organisationās 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 ā 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
Donāt 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 ā meals, free baggage and allocated seating, for example ā while leaving the essential proposition ā we will fly you from A to B ā 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 theyāre prepared to pay more for. Appleās opening strategy was based around a āfunā operating system based on icons, rather than the dull MS-DOS. This belief was based on Appleās understanding that computer users were mostly young and wanted an intuitive command system and the āgraphical user interfaceā 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 doesnāt have to be profound or even high-tech to capture a slice of the market. Book buyers rushed in droves to Waterstoneās for no more profound a reason than that its doors rema...
