AQA Business Studies Unit 1 & 2Watch
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Developing New Business Ideas
The Development of new business ideas has evolved during years from person to person and with this regard, business to business. Thus it becomes necessary to identify the most suitable strategies that can be adopted and those that need to be eliminated when starting a new business.
An entrepreneur is a person who organizes factors of production such as people, finance, land and equipment in a business. In doing this, he/she demonstrates initiative, flare and skill combined with an element of risk. This becomes necessary in order to set up in business. In doing so, an entrepreneur will be able to analyse the potential risks and rewards. The reward for risk taking is profit. This is the difference between revenues generated and total costs of running the business.
Starting up a new business involves commitment of time, effort and money. This is because the risk involved is high. Common examples could be seen such as Richard Branson, Alan sugar, Akiyo Toyoda, Akito Morita,Michael Dell, Bill Gates, Donald Trump, Anita Roddick, Mark Zuckerberg, Simon Cowell ETC. These are all successful entrepreneurs who have demonstrated great skill in running their own business.
Characteristics of a Successful Entrepreneur
1. Calculated Risk Takers – (Not risk averse) the willingness to take risks in search for rewards and at the same time weighing up the risks and rewards carefully.
2. Initiative – Showing the spark to seize the opportunity without being intimidated by the thought “why isn’t anyone else doing this already?” This requires self-confidence and ability to cope up with risks.
3. Innovative – Coming up with an idea, a product or service that is different.
4. Resilience and Determination – To see things through when the going gets tough.
5. Passion – Not just to make monkey but to achieve something.
6. Persuasive Abilities – Entrepreneurs need to persuade others to do things
7. Hard Working – Has a willingness to work hard and has the energy and drive.
8. Systematic – Thinking through ideas, planning moves to help minimize risks and paying attention to detail.
9. High level of personal motivation – A willingness to succeed.
10. A high level of organization and leadership skills.
11. A high level of motivation and ability to motivate/persuade others.
12. Self confident.
Sources of Business Ideas
Entrepreneurs identify business opportunities where the idea will be linked to an entrepreneurs own experience or expertise. Sources of ideas do not just come about by accident. However, they can be developed through the following methods.
1. Brainstorming – This is a way of coming up with ideas by suggesting anything that seems possible and relevant however ridiculous it may be. Once ideas have been generated the process then develops in breaking down those ideas that might have some possible prospects for further analysis and those that are not going to work.
2. Personal Experience – There have been instances where business ideas have been generated through personal experience. For example, James Dyson and his development of the bag less vacuum cleaner. He was frustrated by the limitation of the vacuum cleaner he was using and thought he could’ve helped designed this better by himself. In many cases, ideas will develop by the individual concerned experiencing the situation and then asking “what if?” or “Why not?” This may be the start of a journey that takes the individual to success or it may be the start of many frustrations before the idea becomes a commercial reality.
3. Business experience- Having worked in business and made lots of contracts many people spot a business opportunity and decide on starting their own business.
Analysing a business Idea
Issues to bear in mind when assessing a business idea.
Ø Objectives of the owners
Ø Which products or services to provide
Ø Customer needs and wants
Ø Which market segment to aim
Ø The level of competition
Ø Pricing and selling strategy
Ø Whether a profit can be made
Ø Finance (short-term and long-term)
Ø The risk involved
Ø The time scales before start-up and before break-even
They use their business skills to start an organization with the goal of making the world a slightly better place.
These are defined as businesses with primarily social objectives whose surpluses are principally social objectives whose surpluses are principally reinvested for that purpose in the business or community rather than being driven by the need to maximize profits for shareholders and owners.
Ø Social enterprise is a proper business that makes its money in a socially responsible way.
Ø These ventures are not necessarily formed to reinvest all profits into the communities. Social entrepreneurs can also make a good profit for themselves. However, their business model is also designed to benefit.
Ø Social enterprises compete alongside other businesses in the same market place, but use business principles to achieve social aims.
Ø A few characteristics that all social enterprises have in common are;
· Directly involved in producing goods or providing a service
· They have social aims and ethical values
· They’re self-sustaining and do not rely on donations to survive (i.e. They’re not charities)
Ø Social enterprises are the most common form of not-for-profit enterprises. It is important to appreciate that a social enterprise is not a Charity.
This is the process of influencing people so that they will perform a variety of tasks in an effective manner. It is therefore crucial to have a strong leader who can motivate and inspire the employees.
Characteristics of good leaders (traits)
Ø An expert in at least one part of their job
Ø Possess a vision and ability to solve problems
Ø A willingness to act decisively and respond to changes quickly
Ø Ability to motivate others
1. Autocratic leadership – This is where the people at the top the organization make all the decisions. Leaders using this style usually shows the following features;
Ø They like to retain control over the organization and little freedom is given to other employees in taking any action.
Ø They tend to pass down instructions to junior employees and offer few opportunities to subordinates to discuss ideas and issues.
Ø Autocratic leaders set objectives and allocate tasks.
Ø Commands obedience from subordinates
Ø Employees in an autocratically led organization often become very dependent upon their leader as they do not have the necessary information to act on their own initiative.
Autocratic leadership is appropriate for the following circumstance
· When a rapid decision is needed – perhaps in a crisis
· When it is important that activities should be standardized throughout the organisation
· When managers are responsible for a large number of unskilled workers
· Any situation where a leader has an outstanding vision and understanding of how to achieve goals-one individual can drive the success of the whole organisation
Problems with Autocratic leadership
· Mistakes made by subordinates can result in criticism and sometimes disciplinary action. Hence workers may be demotivated to make decisions on their own.
· Some workers find it difficult to work in a n environment where they’re only expected to carry out orders and there is not participation in decision making
· Workers become too dependent on the leader
· If the leader lacks leadership skills, then the entire business will be in chaos.
2. Paternalistic Leadership –
This is an autocratic approach but leaders take decisions in what they consider to be for the best interest of the workforce. Paternal means father-like. Thus the leader;
· Thinks and acts like a father
· Tries to do what is best for the staff
· There may be consultation about views, but decisions made by the leader – the head of the family
· They’re considered to be “kind autocratic” (“I Know best”)
· There is some form of consultation before final decisions are made.
· These leaders explain why certain decisions are being made. However, paternalistic leaders are unlikely to delegate extensively or empower their workforce
· The paternal leader treats his workforce as family, and places great emphasis on meeting the social and leisure needs of his staff
· Paternalistic leaders do gain the loyalty of their subordinates and these businesses often have a lower rate of labour turnover
· Low rate of labour turnover may not always be an advantage since it restricts new ideas and energy coming in, damaging its performance and competitiveness
· Paternalistic leaders do not encourage their employees to use their creative and imaginary skills, nor do they encourage the use of initiative
· Workers may become too dependant on their leaders
3. Democratic or participative leadership
This leadership occurs when a business’ decisions are based on the majority view. Their main features include;
Ø Involve their workers in decisions
Ø They tend to listen to employee ideas
Ø Communication tends to be two-way
Ø Decisions are participative – Employees are involved in decision making but the leader still holds responsibility
Ø Certain Degree of delegation can be seen
Ø Subordinates are given set objectives and are allowed to Devise their own strategies to achieve these objectives
Ø Participation of workers increases motivation
Ø Organisation pursues a Culture of openness.
Ø Leader acts upon advice and explains the reason for decisions
Ø Team work is encouraged when decisions are made collectively
Ø Two-way communication can be seen
Ø If employees are unskilled the quality of decisions made may be affected
Ø The leader might lose control of the subordinates if he’s not strong and does not possess strong leadership qualities
Ø Decision making can be slow due to long hours of consultation
4. Laissez – faire
This means “let it be”. This style of management is one in which management leave employees to get on with their own work with little or no interference. Broad aims and guidelines may be established but the day-to-day role of the manager/leader will be limited.
Ø Groups of individuals work independently of the leader
Ø Leaders let the group get on with it and may only be called upon if resources are needed
Ø Workers are allowed to contribute to decisions
Ø May be motivating due to the level of freedom
Ø Allows input of people with skills and knowledge
Ø Sometimes there can be no sense of direction or decision making
Ø Employees may be unclear about what to do
Ø The leader may lose control of subordinates and employees may take the opportunity to slack
There has been a move towards democratic leadership in much business over recent years (though there are still many autocratically – led businesses around). This may be because leadership has become more complex businesses are larger the environment which they operate is dynamic and changes rapidly
Factors that determine the style of leadership
Ø Personal characteristics of the leader – the leader may be a person who likes to be in control, leading to an autocratic style.
Ø History of the business – A family business may well become autocratic although it could take a paternalistic approach towards management
Ø The task that needs to be performed – The more complicated the task, the greater direction it requires
Ø Attitude of the workforce – Some employees may not be interested in participative decision making
Ø Markets within which they operate – Dynamic markets require quick decisions to be made whereas a highly technical market may need shared experience to develop new ideas.
Douglas McGregor – Theory X and Theory Y
In his book “the Human side of enterprise”, Douglas McGregor describes two extreme views managers can take of employees and how these views can shape the style of leadership
This is based on a negative or pessimistic view of the workforce. These managers believe that workers:
· Dislike work and are naturally lazy
· Motivated by money
· Need to be controlled and directed
· Lacks ambition and avoids responsibility
· Is not ambitious
· Has little creativity, except when it comes to avoiding rules
Response of theory x managers
Managers taking a theory X view of workforce will adopt an authorization view and;
· Gives instructions and direction rather than consultation
· Threats to ensure people follow instructions
· Little in the way of giving freedom to making their own decisions
· Tight control
· Stress on pay and punishment (Piece rate wages)
This is based on a far more optimistic view of the workforce which results in a more people centered management style. These managers believe that workers;
Ø Enjoy work
Ø Motivated by a range of needs
Ø Prefer the independence of taking their own decisions
Ø Ambitious to advance and develop (career path)
Ø Likes to take responsibility
Response of theory Y managers
These managers will adopt strategies that challenge workers and promote personal growth thereby improving work performance. These strategies include;
Ø Giving responsibility
Ø Empowerment of the workforce
Ø Development of two way communication
Ø More democratic leadership
Ø Searching appropriate ways of motivating (Recognition, career growth, advancement, status etc.)
This is where the firm focuses on the needs of the consumer and then develops the product which fits these needs.
Decisions about product design, pricing, promotion and distribution will be based on market analysis to ensure that what the business offers is what the consumer wants. Therefore, once an entrepreneur finds a great business idea, it is important to convert this into a sellable product by identifying customer requirements. Strong customer focus is the distinguishing characteristic of all firms that are market orientated.
Characteristics of firms in market orientation
Ø Determine what customers want and then sets about providing it
Ø Make extensive use of market research
Ø Monitor and responds to changing fashion
Ø Realise the importance of customer satisfaction
Ø Place the customer at the heart of the business
Ø Stress on customer service
Product orientation – opposite of market orientation
Before marketing was used to achieve greater heights, firms used a product oriented approach. This is where a firm focuses all their attention on the product (such as features, quality, performance, cost, efficiency etc.) hoping it would fit in with customer expectations. Product orientated businesses thus place their emphasis on developing a technically sound product, producing it and then selling it. Contact with the customer comes largely at the final stage. It is possible that technically excellent products developed may not meet customer needs. Meeting customer needs would rather be a “hit or miss situation”
· Concentrates on the products quality, performance and features. “The product will sell itself”.
· “trust us we know best”
· “we will sell what we produce” (Push concept)
· Emphasis on product improvement
· Profitability through competitive product quality
Advantages and Disadvantages of market orientation
· Firms will be more confident in the launch of a new product. However, insufficient focus on the product itself may undermine long-term success.
· As they have close contact with customers and their needs, firms are able to respond more quickly to changes in the market. However, giving customers all what they want won’t be cheap.
Researching demand for a business idea
One way of identifying a business opportunity and gathering business ideas is through market research. By gathering information through market research an entrepreneur could reduce the risk of failure. Information about the potential market can come from a variety of resources;
1. Primary – Qualitative and Quantitative
2. Secondary – Internal and external
Market research involves identifying, gathering, analysing and presenting raw data into information so that a variety of customer wants and needs could be identified
The aim of market research is to gather information that may be useful to the firm when marketing its product. Marketers gather information to back up vital decisions specially those where large sums of money are at stake as in new product launches. They need to know when, where, how and why consumers purchase goods and services.
New and existing businesses use market research to investigate the following;
· Number of customers whether their spending is growing
· Actual and potential customers
· The needs, habits and lifestyles of different groups of consumers and customer preferences.
· What customers want from the product and what price they’re willing to pay
· How customers wish to buy the product and what methods of promotion will be most effective
2. The product
Research in this area may be concerned with monitoring the progress of existing products and people’s reaction to them. Rapid technological change and the resulting shorter lifespan of the products makes careful monitoring essential if the business is not to make expensive mistakes. It may be concerned with testing the reaction to the product in a new market (test marketing).
3. The Price
· How appropriate the prices are
· How sensitive are the customers to a change in price
4. Promotional Techniques
Promotional activities are costly. Therefore the business would want to make sure that it is getting value for money. It will want to know the reaction of the market to advertising campaigns, sponsorships, sales promotions etc.
Market research is also done to decide on the most appropriate media for promotion.
5. Place or distribution of product
Research is done to identify appropriate retail outlets
· Price at which they are selling the product
· Identifying how well competitors’ products are fairing in the market
· Identifying their strengths and weaknesses
Problems of a lack of research
Ø Electrolux, the Scandinavian vacuum cleaner manufacturer goes down in history as devising one of the biggest business blunders with its slogan “nothing sucks like an Electrolux”
Ø KFC’s Slogan “we do chicken right” in Chinese translates to literally as “it is right to be a prostitute” not quite the image that a family restaurant wants to portray in the world’s largest consumer market.
Ø Gerber, a global manufacturer of baby products used pictures of a baby in its packaging in Africa but did not realise that in many African states they put the picture of what is inside on the packaging because the literacy rate is low
Ø These companies would find it difficult to market their products worldwide
· PIPI (Yugoslavian orange Drink)
· Pocari Sweat (Japanese sports drink)
Ø The brand name Nova although successful in England translates as “it won’t go” in Spanish. A rather unfortunate name for a car
Importance of Market research
ü Market research is seen as a risk reducing activity. Risk cannot be eliminated completely. However, by gathering, analysing and evaluating data gathered from market research, it is possible to increase the probability of success.
ü Market research will aid the development of new products and most effective way to market them. According to statistics, almost every 7 of 10 products fail. Therefore, a business cannot afford to question the expenditure on market research.
ü Money spent on market research may prevent a new product from failing thereby creating a lot of money in the long run.
ü Market research will provide evidence as to how the product or service would be perceived by the consumer.
ü Market research is also important in assessing the effectiveness of packaging, promotion, distribution etc. Businesses undertake research prior to, during and after the launch of a new advertising campaign, changing packaging etc
ü Market research helps respond fast to changes in the market and take appropriate decisions. This can be done to identify new trends, tastes and fashions.
Methods of carrying out market research
1. Primary Research / Field research
2. Secondary Research / Desk research
This involves researching information that is gathered first hand by the entrepreneur or the business. It is unique in that it did not exist previously. This can be carried out through observations, experiments, surveys and interviews.
o It helps to gather firsthand information. It could therefore be used to gain a competitive advantage over rival firms.
o It may lead to the development of new products.
o It helps firms to respond to changes in market conditions quickly.
o Time consuming
Methods of conducting primary research
Ø Surveys – Postal surveys, Personal interviews, Telephone interviews
Ø Consumer panels
Ø Focus groups
Ø Test Marketing
There are three main ways of gathering information through surveys. They include telephone interviews, postal surveys and face-to-face interviews. They involve the use of questionnaires
Questionnaire – Design
It is important to design the questionnaires appropriately as it can influence customer responses. An ideal questionnaire should have Open ended and closed ended questions
Closed ended questions – Result in limited responses although they’re easy to understand
Eg: - Do you buy Levis jeans? Yes/ No
Open ended questions – allow for a free style of response. It reveals more information
Eg:- Why do you purchase Levi’s products
§ The meaning of each question must be clear
§ the way the question is worded must not lead the respondent towards a particular answer
§ A Balance must be struck between open and closed ended questions
§ The questions in general must be clear and unambiguous so that they do not confuse or mislead the interviewee
§ Technical jargon should be avoided
Use of Questionnaires
Ø They’re commonly used in primary research and are an essential element of secondary research.
Ø These are used as a checklist to ensure that all relevant questions are asked.
Ø They’re used to a obtain a wide range of information from detailed profiles of consumers, lifestyles, expenditure, patterns likes and dislikes to simply reaction to a meal.
This involves among other things, watching consumers as they shop, measuring consumer flows to and from shops or observing how rival products are packed and displayed. This information can be used to improve store and shelf layout or point of scale promotions. However, this method cannot be used to identify “why” CONSUMERS ACT IN A PARTICULAR MANNER.
This method of collecting data involves a trained observer (or a hidden camera – CCTV) (CLOSED Circuit Television) being used to watch consumer behavior unobtrusively.
v This method measures what people actually do rather than what they say they do.
v It enables marketing research agencies to perform observations on consumers without influencing their common perception that “questionnaires and interviews are a waste of time”
v It is a considerably cheaper method of conducting primary research as opposed to the other commonly used method.
v It merely records what people do, observers cannot accurately explain why consumers behave in a predetermined particular manner.
v Results can be distorted if the person being observed is aware of it.
This is an approach to market research whereby a small number of carefully selected people are interviewed in depth. The small number is carefully selected to ensure that the typical consumer the business is aiming to target is represented. They are conducted by highly trained interviewers. The interviewer encourages free and easy discussions. The discussion is usually recorded through note taking, audio tape or video tape and participants are usually paid a small sum for their involvement. Consumer good organizations have been using focus groups for many years such as newspapers, law firms and hospitals. With the development of the World Wide Web, many organizations are now conducting online focus groups.
Examples include the usage of chat rooms.
v It is a useful way of developing qualitative opinions regarding products it reveals consumer psychology such as consumer views on the importance of the image.
v Can obtain high quality detailed responses
v May reveal a problem or an opportunity the company had not anticipated
v Views of a fairly small number of customers may not be appropriate
v It may be costly and time consuming
v The interviewer requires a high level of interviewing skills
Consumer panels involve a group of consumers being consulted over a period of time about a range of products. This type is often used to assess the reactions of a consumer to a product that is yet to be launched
Before any new product is launched, it is wise to identify the opinions of potential customers. They will be able to give their overall impression of the product and may be able to suggest specific improvements.
v It can be used to consider how consumer reactions change over time
v Members in the consumer panel are co-operative. They are a group who has volunteered for such a research. Panel members know the procedure and therefore time is saved.
v It is difficult to choose a panel available for research over a long period of time
v It is a costly method of collecting data. The panel may have to compensate
v There is a risk of bias in selecting individuals
Test marketing (Product Trials)
This is where a business tests the market of a new product before a full launch. Test marketing is usually carried out in a relatively small population of consumers often restricted to a geographical area. The company puts on a full advertising and promotional campaign in the area similar to the one it would use in its national marketing. Having seen the results in a test market, the firm can estimate how the product might sell elsewhere. Customer reactions to the product can be seen before a national launch.Eg: - Many film companies show their films to test a small group of audience before it is nationally launched.
v Test marketing reduces the risk of failure when products are tried on a small group of consumers before a national launch.
v This method helps to identify the effectiveness of the marketing strategy used by the marketing department
v Companies with new products, where the chances of failure are high, find this highly useful.
v Results from test marketing can be used to fine tune marketing activities and forecast sales when the product is launched on a wider scale.
v It’s entirely time consuming and costly
v Test marketing gives an opportunity to potential competitors to analyse and view the product before it is launched nationally by the firm thus stealing their idea.
v A test market may also give misleading results (wrong sample selected)
v Test marketing is not always appropriate for new products
Market Research Information
Qualitative Data Quantitative Data
This is information acquired from a large group of respondents showing numbers, proportions or trends within a market such as “how many people buy a particular product?” This is particularly useful since the quantity of data makes it accurate and representative of the whole market. However, on its own quantitative data is unlikely to help explain why the market is as it is. To understand why qualitative data is used
This is information gathered from a small group of people using in-depth discussions and interviews to explore their attitudes. This gives detailed information about the reason why consumers act as they do, why they buy what they do, when they buy and in some cases why they do not buy a particular product.
The information provides an opportunity to respond fully to customers ideas. However, the few who are interviewed may not be representative of the whole market. Further, it may be costly in addition to time consuming.
A started business might be in the position where it decides to carry out some primary research. Having chosen an appropriate method it then has to decide on a sample size and the type of sampling technique to use.
Random Sampling Non Random Sampling
This technique involves selecting individuals in such a way that anyone in the total population has an equal and chance of being chosen
Ø Simple random sampling
Ø Stratified random sampling
Ø Systematic sampling
Ø Cluster sampling
Random sampling requires a sampling frame this is a means of identifying sampling units. It is a list of the population from which a sample is chosen. It should be comprehensive, complete, accurate and up-to-date.
Simple random sampling
This sampling technique ensures that every member of the population has an equal chance of being chosen. The sample is randomly drawn from a list. This is known as a sampling frame. Once a population list is compiled, a sample is selected at random, like picking numbers out of a hat. It is used where the target group is large.
v Simple to design and interpret
v Bias cannot be introduced when choosing the sample
v Accurate if sample is large enough
v The sampling frame must be accurate and complete
v May not be practical if the sample requires a lot of small visits all over the country
v Requires a homogeneous population and is not appropriate if the population consists of distinct strata
Stratified random sampling
This is used when there is a need to survey only a specific group of people with specific characteristics. This method involves dividing the population into different segments and sampling only on those segments that are likely to be interested in the product in question. The main objective here is accuracy.
EG: - If a new magazine is aimed at 12-16 year old girls, only that segment will be chosen and a random sample is selected.
v Includes the target consumers only
v As it is random, it does not involve bias (every consumer in that category has an equal chance of being selected)
v May not be practical if the sample requires lots of small visits all over the country
v Need a complete and accurate population listing – accuracy of the sampling frame.
To avoid the problem of selecting a totally random sample, a systematic method can be used. This technique selects every nth person from a list of people in the target population.EG: - Every 5th consecutive person will be chosen in a group.
v Sample is randomly chosen. Therefore, it avoids bias.
v Ensure a certain degree of accuracy when the sample is selected systematically.
v Costly and time consuming
v Not sure if the person selected systematically will be of any use to the organisation.
v Not practical if the sample requires lots of small visits all over the country.
This involves dividing the population into clusters that share similar characteristics and then performing a random sample from each cluster. Main objective of cluster sampling is to reduce costs by increasing sampling efficiency.
This is a method of sampling which attempts to select the individual in relation to the characteristics of the overall market or population.
According to this method the population is divided by important variables such as age, income, gender location etc.
Market researchers are required to interview people in each group up to the quota