Starting up a Business (DP IB Business Management)

Revision Note

Flashcards

Reasons for Starting up a Business

  • People set up businesses for a variety of financial and non-financial reasons

Reasons for setting up a business

Financial Reasons

Explanation

Example

Necessity

  • Following redundancy or changes in personal circumstances an individual may decide to start their own business to provide stability or flexibility and income

  • Following the sudden death of her entrepreneur husband, Sandra Chandler took over the running of his sport coaching business RuggerEds and has led the business to significant growth

Profit maximisation

  • People want to create a profitable business that generates substantial revenue and profit for themselves and their shareholders

  • Amancio Ortega, the founder of Zara,  built a fast-fashion empire that has become one of the most profitable clothing retailers in the world

Profit satisficing

  • Occurs when the entrepreneur is not solely focused on maximising profits but rather achieving a satisfactory level of profit 

  • This is common among small businesses, where the owner may prioritise their work-life balance

  • Yvon Chouinard, the founder of Patagonia, created a successful outdoor clothing and gear company that was initially built to help finance his climbing expeditions

Non-financial Reasons

Explanation

Example

 Gap in the market

  • Some entrepreneurs start a business because they have identified a customer need that is not yet being fulfilled

  • In many cases starting a business provides an opportunity to pursue an interest or passion

  • Professional dancer Miriam Drechsler was keen to open her Balance 1 Dance Academy in Berlin in 1996 because she had identified that there were very few opportunities in Germany to study dance on a professional basis

 Ethical stance

  • Some entrepreneurs may have a particular ethical stance (e.g. environmental sustainability or social justice) that they want to build their business around

  • Anita Roddick, started The Body Shop, as she wanted to create a company that would promote environmental sustainability, fair trade and human rights

 Social entrepreneurship

  • These entrepreneurs aim to create a business that seeks to address a social or environmental problem while also earning a living

  • Blake Mycoskie, the founder of TOMS Shoes, created a business model that donates a pair of shoes to a child in need for every pair sold

 Independence & personal challenge

  • Many people want to be their boss and have control over their work

  • They may be dissatisfied with traditional employment structures or desire the freedom and flexibility that comes with running their own business

  • Starting and running a business can be a fulfilling experience as it requires a entrepreneur to put to use a wide range of practical, problem-solving and interpersonal skills

  • Travis Kalanick and Garrett Camp, the co-founders of Uber, started their business with a desire for independence and the ability to work from anywhere

 Home working

  • With the advent of technology, many people have started businesses from their homes and this offers them more flexibility and a better work-life balance

  • Sara Sutton, the founder of FlexJobs, had a desire for independence and the ability to work from home and this led her to create a successful online job board that specialised in remote and flexible work opportunities

The Process Involved in Starting a Business

  • All businesses start with an idea that fundamentally identifies a product or service that the entrepreneur intends to offer

  • Ideas can be generated from a range of sources

Diagram: sources of business ideas

Business ideas are generated from personal experience, business experience and observation
Sources of business ideas
  • Once a suitable idea has been identified, the entrepreneur is likely to take a series of steps to reduce risk and improve the chances of success
     

    When launching a business these are the seven steps to take to ensure success
    Steps in launching a business

Step

Explanation

1. Identify essential elements

  • Essential elements that need to be decided include

    • Business and product name

    • The location of the business

    • The form of ownership the business will take

    • Equipment required

    • Operational format and infrastructure

2. Conduct market research

  • Market research should be carried out to determine the needs of customers

    • Price, design and quality expectations

    • Desirable product features and benefits

    • Suitable promotional activity

    • Preferred distribution options

  • As well as this research into the nature of the intended market should be conducted

    • Competitors, their products and prices and level of threat

    • Rate of market growth

    • Potential market niches

    • Relevant external factors that may impact on success 

      • economic conditions

      • legal factors

      • demographic structure

3. Construct a business plan

  • A business plan sets out how the entrepreneur intends to realise their objectives and run the business

  • Without a business plan, it may be difficult to raise money from financial institutions or investors and fulfils a range of internal purposes 

    • It encourages the entrepreneur to think through the business in a logical and structured way and to set out the stages in the achievement of the business objectives

    • It enables the entrepreneur to plot business progress against the plan

    • It identifies both the resources needed and the time when they are required

    • It is a way to make all stakeholders aware of the businesses direction 

4. Check legal constraints

  • Before starting the business the entrepreneur should ensure that all legal requirements have been met and that legislation related to the product or market in which it is to operate have been reviewed

  • The package of laws to which a business must adhere will depend upon the country in which it operates though there are several areas where legislation commonly exists around the world, including

    • Employment, pay and conditions

    • Health & Safety

    • Consumer protection

    • The provision of financial products

    • Company formation

5. Raise finance

  • The entrepreneur is likely to invest some of their own capital into the business

  • Other sources of funds commonly used by start-up businesses include

    • Banks

    • Friends and family

    • Investors

      • Business angels

      • Crowdfunding

      • Peer-to-peer lending

6. Test the market

  • Initially launching the business on a small scale or selling a limited range of products is a sensible option, especially for first-time entrepreneurs

  • The entrepreneur can establish whether the business idea will be well-received and can identify at an early stage the relative popularity of products

Problems that a new Business may face

  • Starting a new business can be exciting but it also comes with its own set of challenges

  • Overcoming these issues requires effective strategic planning, hard work and a willingness to adapt and learn as the business evolves

  • Some of the common problems that new businesses may face include

1. Lack of funding

  • One of the biggest challenges for new businesses is securing enough funding to get started and sustain operations until they become profitable

2. Lack of market demand

  • A business idea may seem great on paper, but if there is no market demand for the product or service, it may not be viable

3. Competition

  • New businesses may face competition from established players in the industry, making it difficult to attract customers and establish a foothold in the market

4. Hiring and retaining talent

  • Finding and retaining skilled employees can be challenging, especially for new businesses that may not have the resources to offer competitive salaries and benefits

5. Legal issues

  • New businesses may need to follow to a range of laws, which can be complex and time-consuming to navigate

6. Operational issues

  • Running a business requires a range of operational skills such as managing finances, marketing and sales

  • New business owners may struggle to manage all of these responsibilities

7. Scaling

  • As a business grows, it faces new challenges, such as managing increased demand and expanding into new markets

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