Why Businesses Start

Why Businesses Start

Every business begins with an idea and somebody willing to take a risk on it. Some make their founders rich. Most do not. Markets never stand still, so new ideas keep appearing, and they come from three places: - Changes in technology, which make products possible that were not possible before. - Changes in what consumers want, as tastes, incomes and priorities shift. - Products becoming obsolete, leaving a gap where something used to be. An idea can be original, or it can come from adapting something that already exists and doing it better. Adapting is far commoner, and it is not a lesser answer in an exam. The person who turns the idea into a business is the entrepreneur: they organise the resources, make the decisions and carry the risk.

What sparked it?

A company launches an app that summons a mechanic to your driveway. It became possible once nearly everyone carried a phone that knows where it is. Which driver best explains this new idea?

• A change in technology
• A change in what consumers want
• An existing product becoming obsolete
• Adapting an existing product

Where ideas come from

New business ideas appear because markets do not stand still. Changes in _____ make new products possible; changes in what _____ want open gaps in the market; and products becoming _____ leave gaps behind them. An idea does not have to be original: most come from _____ something that already exists and doing it better.

Risk against reward

Starting a business means accepting one column in order to reach for the other. Both are on the specification, and an answer that gives only one of them has not answered the question:

What is Aisha risking?

Aisha is leaving a salaried job to build a food-delivery app, funding the first year from her savings. Select ALL THREE statements that describe RISKS she is taking.

• She will have no income at all until the app starts earning
• Her savings are going into development costs before anyone has paid her anything
• If not enough people download it, the money and the year are both gone
• She can set her own working hours
• She keeps any profit the app makes
• She answers to no manager

Aisha takes the plunge

Aisha has an idea for a food-delivery app. Reason it through with her.

• A friend tells her the idea is not original, because delivery apps already exist. Is that a reason not to proceed?
• She works out that if it fails she loses her savings, and if it succeeds she could earn several times her old salary. What does that tell her?
• Her cousin offers to lend her the start-up money at interest, but wants no say in the business. Who is carrying the enterprise risk?
• Aisha hires a developer on a salary. What is she now doing that the developer is not?

Adding value

A business exists to produce goods or services that meet customer needs, and to add value, meaning to make the finished thing worth more than the parts and time that went into it. Five methods are named on the specification, and naming the method rather than the term is what earns the mark:

How is value being added?

The station sandwich

A sandwich shop inside a railway station charges half as much again as the supermarket across the road, and sells out every weekday by nine. Which method of adding value is doing most of the work?

• Convenience: the customers have a train to catch and cannot cross the road
• Quality: the sandwiches must be better than the supermarket's
• Branding: customers trust the shop's name
• Design: the packaging is more attractive

Two habits that move the grade

Two things separate a middling business answer from a strong one, and both are habits rather than knowledge. Name the method, not the term. "The business adds value" is worth almost nothing, because every business adds value. "The business adds value through convenience, because commuters cannot cross the road for a cheaper sandwich" is worth the mark, because it can only be said about this case. Weigh, do not list. Setting a risk beside a reward is not an evaluation. An evaluation says which one matters more for this business, and why. Two well-judged sentences beat six listed points every time. The word to reach for is "because", and then keep going.

Build the judgement

Put the parts of a properly weighed answer into the order they should appear.

• State the main risk, specific to this business
• State the main reward, again specific to this business
• Judge how likely each one is, using something from the case
• Say which matters more for this particular business, and why
• Conclude with a recommendation that follows from what you have just said

One judgement, done properly

Should Aisha go ahead? Here is the shape, with every sentence doing a job. The risk: she is committing a year of savings before a single customer has paid, and if the downloads do not come the money and the year are both gone. The reward: if it works she keeps the profit rather than a salary, and the upside is not capped the way employment is. How likely: delivery apps are a crowded market, which lowers the chance of success, but she is targeting one city where no competitor has a foothold, which raises it. The judgement: the risk is survivable because she is spending savings rather than borrowing, and the reward depends on a gap that will close if she waits. So she should proceed, quickly, and with a limit set in advance on what she is prepared to lose. Notice the last sentence. A conclusion that recommends nothing is not a conclusion.

Weigh it up

Exam practice. In about 60 words, evaluate whether a school leaver should start a mobile dog-grooming business rather than take a salaried job. Include:

• one specific risk and one specific reward, both tied to this business rather than to business in general
• a judgement about how likely each one is
• a conclusion that recommends something, and says why

Enterprise summary

New business ideas come from changes in technology, changes in consumer wants, and products becoming _____. Starting one carries the risk of failure but the reward of profit and _____. The _____ is the person who organises the resources, makes the decisions and carries that risk. A business adds _____ through a named method such as convenience, branding, quality, design or a unique selling point, and naming the method is what earns the mark.