Rural entrepreneurship in Wales

Introduction

This course considers the issues that are important when starting up or running a small business in a rural environment.

Traditional business models apply to running a business in any location. This course will introduce you to some concepts that will help you work out what you want to do with your business idea. It will also ask you to consider the impact of living in a rural location on your business and to consider what is important to you.

Here are some characters who will be with us throughout the course. Each has a different proposal for which the rural context poses particular challenges.

Euan works on his family’s farm and wants to develop more income by diversifying outside of traditional farming activities.

Gwyneth is a keen cook and has had her hours reduced at the café where she works in town. To supplement her family income, she wants to sell her homemade jams, chutneys and preserves at farmers’ markets and food fairs.

Julia, a Further Education student, lives with her family in a remote area where the Post Office and village store are threatened with closure. She needs to engage in a team enterprise activity as part of her Welsh Baccalaureate qualification and has been inspired by enterprise events and lectures attended at college. With the support of staff at the Post Office, she wants to lead local residents in a bid to take over the Post Office and store and run them as a community shop.

Dafydd is a sheep farmer who, together with his wife Ffion, works off farm to supplement the farming income. He wants to diversify into the holiday let business by turning three redundant barns into eco-friendly self-catering accommodation.

Gwenllian is a language teacher living in a fairly remote area of mid-Wales where access to learning is difficult (long distances, poor public transport and inflexible timetables). She has identified a need for language-based CPD and translation services among local businesses involved in exporting their products to mainland Europe.

Whatever your motivation for tackling this course of study, it will take you on a journey looking at the challenges posed when you live in a rural environment and start you thinking about how you can use this knowledge to run a successful business of your choice.

This OpenLearn course is an adapted extract from the Open University course Q91 Business Management.

Learning outcomes

After studying this course, you should be able to:

• understand the importance of how living rurally influences your business or social enterprise objectives

• explore the feasibility of a business idea

• plan a strategy for the development of your company

• state the likely resources and capabilities required for your new business and understand where the gaps are likely to occur.

Unit structure

This course should take approximately 30 hours to study, but it has been carefully designed so you can choose your own pace of learning. The materials are designed for study at your computer screen (but sections can be printed out to read elsewhere) in short periods – half-an-hour now and then wherever you are.

While it has been designed so that you can study it on your own, as an Open Educational Resource (OER), you can also download content and reuse, revise, or remix it for use in other contexts. We have tried to ensure that the content is as flexible and adaptable as possible. This means it should be easy to use in face-to-face contexts with, for example, a group of other entrepreneurs or community members (community enterprise) as well as by yourself, alone, online. The Resources section at the end of the course contains templates used in the course to download.

We have set up a Twitter account, @RuralEntWales. You can use this to find up to date information about the changes in the rural entrepreneurial landscape.

The course map below indicates the sections of the course together with guidance on how long each section might take, enabling you to plan your study time. The learning outcomes describe what you can expect to have learned at the end of your study.

Figure 1 Structure of the course

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Introduction; 1 Setting the scene for rural business, 1 hour; 2 Exploring the business idea, 7 hours; 3 Customers, markets, competition and pricing, 7 hours; 4 Capabilities and resources, 7 hours; 5 Finance and information, 7 hours.

Figure 1 Structure of the course

As you progress through this course you will start to complete a plan, by filling in the Business Plan Progress Review (BPPR). Although the BPPR is too brief to be considered a full business plan, it will help you review the key elements of your business idea and will be extremely helpful as a summary document. The BPPR is available to download in the Resources section.

As you launch your new business idea – and if you intend to secure finance for your business – you will need a business plan with more detail than this course provides, so it is a good idea to work on two versions of the plan as you progress through the course.

1 Setting the scene for rural business

1.1 What does rural mean?

How do we define what is rural? Before we move on to any official definitions or statistics, it might be worth looking at what we think is meant by the term ‘rurality’. Often when we think of ‘rural’ we tend to perhaps equate it with ‘the countryside’, or ‘landscape’, or ‘nature’, or other similar general terms. Perhaps we might think about ‘quality of life’, a slower pace, stronger communities. We might think about some things that relate to descriptions of the physical world around us and some that relate to social or cultural aspects. Sometimes they might be positive (as above), but others might be negative: everybody knowing your business; difficult to access services like education or health care; poor roads and transport links, and lack of employment opportunities. Defining ‘rurality’ is by no means straightforward, but it is important to understand and recognise the benefits and costs of living in a rural area.

It is worth recognising that not all rural areas are the same, and that the rural context and rural challenges within each of the four nations in the United Kingdom (Wales, Scotland, Northern Ireland and England), and regionally within these nations, will be very different. Within Wales, the rural challenges of Pembrokeshire, for example, will be very different to those experienced in Conwy, andeven within Pembrokeshire, between Narberth and St. Dogmaels.

New findings, released by the ONS, show that Wales continues to have many of the most empty areas in the United Kingdom. Powys, with only 26 people per square km, is the second most empty part of the UK. For comparison Cardiff has 2,482 people per square km. The average weekly earnings of those living in rural areas such as Powys is lower than the Welsh national average. Anglesey and Conwy have the highest number of economically inactive, retired residents in Wales.

The Rural Development Plan (RDP) for Wales 2009–2013 outlines four axes that provide strategic direction to regional and local rural development initiatives:

• Axis 1: Making rural Wales more competitive
• Axis 2: Protecting our countryside
• Axis 3: Improving people’s lives and encouraging diversification
• Axis 4: Supporting local projects and initiatives

Each region in Wales, as part of the Wales Rural Network, has its own Local Action Group which then applies the RDP strategy according to its own situational needs.

This kind of information is useful as background when thinking about your business and your community.

Note: A link to the 2014–2020 version of the RDP for Wales will be made available via the Twitter hashtag #RDPWalesRuralEnt.

The affordability of housing in rural areas has long been an issue across the UK, and particularly in Welsh communities, where the price of local houses is out of step with the level of local incomes. This situation is exacerbated by the extent of second home ownership in many rural areas, as well as the influx of city dwellers looking for ‘a mixture of clean air, friendly people and community spirit’, according to the NFU Mutual study (2010). The study claims that nearly seven in ten of rural residents have exchanged towns and cities for the Welsh countryside, and that around 45 per cent have moved from urban areas in the last five years. While this has helped local services to survive, it has also pushed up house prices according to The Campaign for the Protection of Rural Wales (CPRW).

Research conducted by The Wales Rural Observatory (2009) for the ‘One Wales’ coalition government in 2010, found that other challenging issues for those living in rural areas include the relatively high cost of goods (including fuel), transport difficulties and poor access to broadband. Nevertheless, more than 90 per cent of those surveyed said they were satisfied with their local area as a place to live, and 94 per cent rated their quality of life as either ‘very good’ or ‘fairly quiet’.

The public sector is a major employer in Wales, and in rural Wales it accounts for 28 per cent of the workforce. There is considerable regional variation, however. Therefore, almost a third of the workforce in Gwynedd and Carmarthenshire work in the public sector whereas less than a quarter of the working population do so in Pembrokeshire, Powys, Conwy and Monmouthshire. As the size of the public sector shrinks, its impact will be felt keenly in rural Wales.

In 2006, small and medium-sized enterprises made up over 99 per cent of the 190,000 businesses in Wales but accounted for less than 60 per cent of employment (Stats Wales, 2009).

Rural areas have the highest density (per head of population) of private business small employers (Powys, Ceredigion and Pembrokeshire ranking 1st, 2nd and 3rd, Wales.gov, 2011), 17 per cent of whose employees are aged under 25. In addition, under 40 per cent of those who work in the private sector speak Welsh with under a half using the language ‘mostly’ or ‘sometimes’ at work (Wales Rural Observatory, 2006).

CO₂ emissions are higher in rural areas, transport use tends to be higher, and rural properties tend to be less well insulated. However, rural communities have the greatest potential to benefit from renewable energy.

What these kinds of ‘facts’ tell us is that rural areas experience different sets of issues. Knowing those issues, and reflecting on and understanding how they might affect your business and your choices will help you to develop your business, and give potential funders confidence that you have done your research. For the latest information look for #RDPWalesRuralEnt on Twitter.

Local Authorities (LA) also gather data about your area; it is worth exploring these either by going directly to your Local Authority’s website or by going to the Business Wales website where you will find links to all of the 22 LAs as well as additional information and support.

At the end of this section we suggest some possible sources of information and support.

1.2 Why start a business?

For some, living rurally has special benefits, and for others it is about making a difficult life more manageable.

Before you examine the feasibility of your business idea, take some time to think through who your stakeholders are and what your strategies are for taking the business forward. This is useful to understand the basis on which you are building the business. This is about you, what is important to you and how this will be reflected in your business.

Every organisation, large or small, has a ‘pyramid of purpose’.

Figure 2 Pyramid of purpose

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Three headings spaced evenly down page: Why? [arrow to] What? [arrow to] How?. Four boxes, arrows between them, boxes increase in width: Mission and values [arrow to] aims or goals [arrows to] objectives [arrows to] Targets. Two headings: Broad purpose (level with 'missions and values') [arrow down to] specific and immediate purposes (level with 'Targets).

Figure 2 Pyramid of purpose

As we progress through the course, your aims, objectives and so on will become clearer. This diagram shows how they all need to align, to build upon and support each other.

1.3 Values

All businesses have values, which are influenced by the world around them. The acronym SOGI helps us to think about them.

• Society: Every organisation operates within societal norms: they might relate to faith, environmental aspects, historical traditions, geographic or cultural practices. These will vary. Earlier, we explored our own perceptions of rurality, and discovered that rural areas vary and that our position in rural society (young/old/less able/employed) changes how we experience rural life.
• Organisational: A founder of an organisation imparts their own beliefs and values into the way the company is run. Some of these will relate to the aspects above and be unconscious, others may be a wish to resist or move away from established ways of doing things. These are then taken on by the staff and become embedded into the way they are expected to behave. We may do the same ourselves.
• Group: Within an organisation a group can develop their own set of values, ways of communicating and behaving with each other.
• Individual: Our personal values and beliefs will ‘fit’ or not with those of society, the organisation and the groups in which we find ourselves. People usually give their best when the ‘fit’ is good.

1.4 The rural entrepreneur

Originally, the term ‘entrepreneur’, which derives from the French words entre (between) and prendre (to take), referred to someone who acted as an intermediary in undertaking to do something. The term was first used to describe the activities of what today we might call an impresario, a promoter or a deal-developing, entrepreneurial ideas maker.

Ask people to name an entrepreneur and many will say Richard Branson. He is indeed an entrepreneur, but to think that his high-profile celebrity status is necessary to entrepreneurship does a great disservice to all those who work creating new products or services or delivering them to market in a different or more efficient way.

It is also worth noting that entrepreneurship is not something that is confined to the ‘for profit’ sector. We also find social entrepreneurs, and in many rural locales policy entrepreneurs (people in public office like a local authority) can be just as important in laying the foundations for entrepreneurship.

Within a 20 mile range of any rural location there will be many examples of entrepreneurial businesses.

Austrian economist Joseph Schumpeter (1934) defined the entrepreneur simply as someone who acts as an agent of change by bringing into existence a ‘new combination of the means of production’. The essence of Schumpeter’s approach is that entrepreneurs are competitive and always strive to gain an edge over their competitors, or the best facility for their clients in the case of a social enterprise. In general, he suggests entrepreneurs are also adept at getting investors and providers of capital (such as banks, relatives or grant schemes) to bear the main part of the financial risk.

When entrepreneurs begin to consolidate and slow down they revert to being ordinary managers and, in Schumpeter’s terms, are no longer entrepreneurial. Thus, a certain set of skills, approaches and attitude may be required to set up a business and a different set required to run and maintain it.

McClelland (1968) takes a more psychological perspective. His preferred entrepreneurial motivator is the ‘need for achievement’ (‘nAch’, as it is usually abbreviated) – ‘a desire to do well, not so much for the sake of social recognition or prestige, but to attain an inner feeling of personal accomplishment’. McClelland was quite critical of the profit motive as the mainspring of entrepreneurial activity.

Slee (2008) purports that once a relatively low level of wealth is achieved, further increases do not mirror increases in happiness. Thus, the desire for constant growth in a small company may not enhance the ‘well being’ noted as being a key motivation for many rural businesses.

He argues that many things should happen locally, be it work, energy or food production or, indeed, leisure time. Curry (2008) suggests:

1.5 Behavioural characteristics of entrepreneurs

Many, but not all, rural businesses are driven by the desire to provide a local service, to succeed and build the community around them. Some of those are private ‘for profit’ and some exist in the ‘not-for-profit’ sector – voluntary organisations, community interest companies, charities, or social enterprises. Of course the ‘not-for-profit’ organisations still need to make money, but that is not their principal goal and any excess profits are typically invested back into the organisation.

One idea of entrepreneurship may sit more comfortably with you than others, and indeed, you may never (until now) have considered yourself to be an entrepreneur at all. Whatever your motivation there are some key characteristics that support entrepreneurial success that were identified by Jeffrey Timmons from Massachusetts Institute of Technology. These are:

• drive and energy
• self-confidence
• high initiative and personal responsibility
• internal locus of control
• high tolerance for ambiguity
• low fear of failure
• moderate risk taking
• long-term involvement
• money as a measure not merely an end
• use of feedback
• continuous pragmatic problem solving
• use of resources
• self-imposed standards.

1.5.1 Further information

Listen to Why study entrepreneurship? This is part of a series of recordings tracking entrepreneurs’ journeys that we will visit throughout the module. 

If you have found this section useful you may also want to explore this resource on Entrepreneurial impressions. It includes a video from young Scottish entrepreneur Fraser Docherty about his SuperJam business. Or try the OpenLearn unit Entrepreneurial behaviour. 

1.6 Summary

In this section you have:

• examined the definition of ‘rural’
• written your personal objectives for starting a business
• considered the pyramid of purpose, looking at the alignment of your life and business values.

Now open the BPPR  and reflect on the activities completed in this section. Review the output from each activity and complete the two questions raised in the introductory section of the BPPR. This requires you to pull out the most important aspects of your thinking to date.

• Big Ideas Wales
• Business Wales
• CADARN Skills Centre
• Dragon Innovation Partnership Higher Education support in South West Wales
• Rural Development Plan for Wales
• Social Enterprise Networks Wales
• Wales.com
• Wales Rural Observatory

2 Exploring the business idea

2.1 The business idea

In this section you will begin to look at your idea in detail, to consider its feasibility and the perspectives of some of the others who will be interested in the viability of your idea, including any rural perspectives.

To have the power to attract, convince and motivate people with wildly divergent interests – such as customers, consumers, investors, employees, suppliers, distributors and so on – the idea must be innovative, legitimate and viable. It must offer something new, something of value to some or all of these interested parties (often called stakeholders), and its first essential step is that it must attract someone, or some team, committed to making it happen. The person who is committed to undertaking the idea we can call the entrepreneur.

However, commitment is not enough. To become reality, ideas need resources – physical, financial and intangible (such as experience, knowledge and, sometimes, legal rights to use processes and products). A key part of the entrepreneur’s job is to obtain the capital to acquire those resources.

When developing a business we draw on a range of complex capital inputs. For example, our own skills and those of anyone we employ is called ‘human capital’, our networks and connections are ‘social capital’, and the effect on the community in which we operate will be around ‘cultural capital’. Social and cultural capital might be particularly important when considering a social enterprise such as promoting inclusion for vulnerable adults, or promoting the local culture.

Many small rural businesses start with just one person, the business owner, perhaps working part-time alongside another job at the beginning. It is certainly possible (although hard work) to continue like this, even when your enterprise becomes ‘full time’. However, even if it’s just you in your business, it does not exist in isolation, it is still part of a network, where often businesses depend on each other.

Most businesses grow sufficiently so that they need to employ another person or even a group of people. It is the actions of these people that will translate the idea into a product or service. However, they do not all need to work for you. You might make a product, but you do not have to market it, or distribute it: you can employ others to do this for you. In the end you might not even end up making it yourself either but instead decide to outsource the production to someone else.

Finally, the products developed from the idea need customers and consumers who want them and are prepared to exchange their hard earned cash for them. Often you can make an enterprise succeed by meeting a local need or you may be targeting a wider market. Whatever your scale, it is likely that your business idea will have to be strong enough to secure the finance, skills and other business support to help your idea develop through to fruition. That does sound daunting, but often what is distinctive about your product or idea might be the values that lie behind it or even the location. Thus, a community owned or local shop might be expensive or stock a small range of products, but for rural residents that cost may be set against travel costs they might incur by having to travel elsewhere to shop, and they might also place a social value on supporting their local shop.

2.1.1 Case studies – business ideas

Having met our case studies in the introduction, we will now find out more about their individual business ideas.

Euan

Figure 3

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Image of Donald, white male, aged 35, farmer, with tractor.

Figure 3

‘I want to make my family’s farming business more resilient and bring in more income by making use of the unused sheds and land we have. There are lots of microbreweries setting up and I think having one on the farm would be unusual and a great way to modernise what we do. It’d be unique and we could use lots of the resources we already have but it could take a long time to set up, purchase equipment and learn the ropes – that is something I am more than willing to do.’

Gwyneth

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Image of white woman, aged 30, sitting in a café.

Figure 4

‘I love cooking and I’ve worked for others in hospitality and catering for ten years. I currently work part-time in a café but I don’t feel I could go back to full-time hours as I need some flexibility around my family. I want to make products at home that I can sell to delis and cafés in the area and at weekends at farmers’ markets and food fairs a little further afield.’

Julia

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Image of female student, young.

Figure 5

‘I live with my parents in an area where our local shop and Post Office are threatened with closure. This would mean my family and other local residents having to make a long and difficult journey to reach the next nearest Post Office branch or to buy daily supplies as public transport is so infrequent. I think that local residents could come together and run them as a community shop and I would like to be the person to lead on seeing if it is possible.’

Dafydd

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45 year old man walking in the hills.

Figure 6

‘My wife, Ffion, and I live on our family-run 140 acre sheep farm with our two children. We have three lovely traditional stone buildings on the farm which are surplus to requirements within our modern farming business. I would like to bring additional income into the business by restoring them to their former glory and letting them out as holiday lets.’

Gwenllian

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40 year old woman working in an office.

Figure 7

‘I teach part-time. I have recently established a link with a local international corporation and realise that instead of the traditional type of language course, what they really seem to need is very tailored, ‘quick fix’. Basic language skill training and cultural briefings to prepare them for their business trips abroad. There is a lack of this kind of linguistic service in mid-Wales so my business idea is to develop a bespoke language service offering a range of different types of language support – from industry-based updateable, multi-platform, on-site translation and interpretation services.’

David

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Image of white man in his 50s, plaining some wood.

Figure 8

‘My business idea is to use my previous experience of making staircases for property developers and use it to establish my own company, designing and building bespoke staircases. I would use locally sourced, sustainably produced timber and work from a workshop located away from my home. I’ve worked self-employed before but this time it’ll be through choice, not necessity.’

If you are still a bit unclear about your business idea, it may help you to consider the seven sources of innovation identified by Peter Drucker (1985), whose writings have influenced the theory and practice of business, entrepreneurship, innovation and management for more than half a century.

2.2 Sources of innovative business ideas

Innovative ideas grow out of ordinary experiences and situations. Consider the suggestions below. Perhaps your business idea has developed from such a situation:

• past and present work and experience
• hobbies and leisure interests
• qualifications and studies
• new markets/uses for existing products
• solving a persistent problem
• research and development (R&D)
• patents, licences and research institutes
• invention
• opportunities from new technologies
• opportunities from economic/market changes
• changes in consumer behaviour
• complaints and irritations expressed by potential customers
• changes in rules and regulations
• imitating an idea from a different locality
• imitating an idea from a different industry
• improving an existing product
• films, TV and radio
• books, magazines and the press
• trade shows, exhibitions and conferences
• business and social networks
• family and friends.

To have any chance of making it as a successful product or service in its chosen market, an entrepreneurial business idea has to find the right balance between two potentially conflicting forces:

1. the need to be innovative (have something sufficiently new about it so that it is both attractive and competitive)
2. the need to be viable (have sufficient resources, capabilities and potential customers to bring the product to market and achieve your financial objectives).

2.2.1 Generating innovation

2.2.2 Further information

If you found this useful you might also want to:

• read Have you got a good idea?
• read Managing innovation
• or listen to Developing a new idea

2.3 Steps to success

The entrepreneur or business owner needs to have a defining belief that the idea will work and sufficient energy to drive it to be ready to launch on the defined market. Sometimes the finance required comes from personal funds, sometimes from grants and sometimes from banks, venture capitalists or other sources of funding.

Figure 9 Flow chart of steps to success

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Flow chart describing the journey from idea to market. Idea attracts entrepreneur who seeks capital which enables the team/firm to compete in the market.

Figure 9 Flow chart of steps to success

Wherever the capital is coming from it is important to be clear what the goals are in the short and longer term. If the funds are coming from personal or family sources you may not require a formal business plan, more a convincing conversation. However, it is best practice, wherever the finance comes from, to have some form of business plan – a plan that has clear goals that map out your route to success.

Your goals need to be SMART to be helpful.

• Specific
• Measurable
• Achievable
• Resource-related
• Timed.

For example, ‘I want to have a business that provides me with a good source of income’ sounds fine initially, but what is ‘good’? For some, an income of £10,000 would be fine, while others may require £50,000 or £100,000.

A SMART goal might be: ‘In two years time (timed) I will have a turnover of £500,000 (measurable and specific) with a 20 per cent profit margin (measurable)’.

It can be a matter of judgement whether the goal is achievable, which will depend on your market and starting position. Ensuring that the goal is ‘achievable’ does not mean it has to be soft or easy to achieve; it needs to be challenging, too.

When you work for someone else, the goal needs to be agreed with your manager; when you are the company owner the resources required need to be specified and need to be agreed with your board of directors, the bank manager, your family, and your staff where appropriate.

2.4 Company structure

One of the decisions you will be faced with is how to structure your business. This means the legal structure not the organisation structure.

If you are planning a commercial company, there are the following legal forms to choose from:

• sole trader
• partnership
• limited liability partnership
• limited company
• franchise
• social enterprise.

An overview of legal structures is available at Business Wales. It clearly explains the different legal forms. For further advice on this please contact your accountant or adviser.

The Welsh Government agenda has focused on ‘communities’ in recent times, with funding to support the establishment of a range of ‘non profit’ enterprises, community companies, social enterprises, charities, or community interest companies. We alluded to the growing importance of these organisations at the start of the course and also pointed you towards a range of support and advice services.

In setting up one of these you (and your community) will need to consider exactly the same things as any private or for profit enterprise; demand, financial viability, skills and capacity, and how to secure funding. However, as these are often publicly regulated bodies they have complex legal structure and you should contact one of the organisations listed in Links to get appropriate advice.

2.5 Environmental scan

The environment around you and how it is changing will influence the chances of your business succeeding. It is important to consider what factors are important and to understand how they influence your chances of success. The period since World War Two has seen unprecedented change and advances throughout the world in five key areas – societies, technologies, economic development, the environment and political systems and regulations. We refer to these areas as STEEP factors, and the pace of change in them has intensified in most parts of the world in recent years. Find out how an entrepreneur used STEEP in an audio track, Entrepreneurial Opportunities. This draws on a suite of resources exploring entrepreneurial opportunities which are featured throughout the course.

2.5.1 Case study: STEEP factors

2.5.2 Further information

Something that might help you think things through as you explore those wider factors and their influences is this series of audio resources on Understanding Social Change.

2.6 Stakeholders

There are many different stakeholders in a business. The first people who often spring to mind are the financial stakeholders and they are indeed important, but ‘stakeholders’ can be defined much more broadly as the range of people who have an interest in the company.

Freeman (1984) defines stakeholders as ‘any group or individual who can affect or is affected by the achievement of the firm’s objectives’; Hill and Jones (1992) prefer to define stakeholders as ‘constituents who have a legitimate claim on the firm’.

Stakeholders are not just external agents. Your family can be key stakeholders, they might rely on the business, and you may want to ask them how the time you spend on your business affects them.

In the case of Gwenllian, her husband – who is a music producer – will help her in the production of her language materials. Using the home as the cooking premises means that Gwyneth’s family life will have to accommodate manufacturing processes. Without the backing of his family who own the farm buildings he wants to use and the farm he currently works on, Euan will not be able to get his microbrewery up and running.

Stakeholders could include banks, funding agencies (like grant awarding authorities), employees, customers, suppliers, shareholders (if appropriate), the local community, the state and those who share the environment.

2.6.1 Case study: Stakeholder analysis

Let’s see how Gwyneth approached her stakeholder analysis:

Case study: Gwyneth

I used the basic diagram and tweaked it to fit my situation. I changed ‘shareholders’, which I won’t have initially as I plan to start up as a sole trader, to ‘family’, as they will have a big influence on the business and also their needs are my priority.

Figure 10 Gwyneth’s stakeholder analysis

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Centre box: Grub from Gwyneth. Surrounding boxes: Box: Local suppliers of bread, flour, meet and dairy products; Box: Local people to make sandwiches and cakes; Box: local workers and manager for meeting; Box: that's me!; Box: Family – partner and children, parents etc.; Box: Bank and my parents have lent me money to start up.; Box: Local cafes and other food companies, e.g. XYZ catering; Box: Environmental and food hygiene regulation plus taxes etc.

Figure 10 Gwyneth’s stakeholder analysis

I could have included many more boxes, but I decided to concentrate on the stakeholders I felt were most important to me as I start up. I am sure the influence of each stakeholder will be different in 12 months’ time.

I found it quite daunting at first to think that all these people had an interest in and an influence on my new company. I started to work out what each stakeholder wanted from me and this meant that it became clearer what the impact of each stakeholder might be.

I decided to include myself as a stakeholder so that I could look at my needs alongside everyone else’s, to see if they were compatible.

Table 3

Stakeholder	Demands/needs	Power/influence – strong/weak?
Family	Children need to be dropped off and picked up from school Monday to Friday. They need my time in the evenings and weekends. Need to make up the drop in income from reducing my hours in the café – approx £250 per month.	Very strong
Me	To make a success of the company, earn some money and gain a sense of satisfaction while being close to my family, with the potential of giving up my café job completely.	Strong
Local companies	Good quality products that offer good value for money for them and for customers leading to return custom. Need to present my region well as a producer of high quality local products.	Strong
Suppliers	If my business works, I will start to place regular orders, and I will need to ensure I have the right amounts and have cash flow to make prompt payment.	Medium
Environmental health/food hygiene and government	Food is produced in clean and hygienic surroundings that are safe for me to work in, my family to be around and for customers. I need to keep accurate records of sales and turnover.	Strong
XYZ condiments	I will have competition – from major retailers but also from other local producers – we can help each other out sometimes maybe?	Medium
Bank	I will need to borrow money to cover the cost of industrial catering supplies and a stall for the markets and fairs. The bank expects a reasonable rate of return on their investment and for me to make regular payments.	Medium
My parents	They have given me some money towards my first set of jars and labels. While there is no current pressure, I would like to give them their money back at some stage – they want me to succeed. They also provide childcare at weekends and during school holidays.	Medium

I marked how strong the demands of each stakeholder are on me, which helped me see which to prioritise.

I wasn’t sure about the power of my parents as they are very reasonable, but should they stop helping with the kids they would be very powerful indeed! I will need to think about how my business and family life can adapt to each other over time, should my business become successful. I can’t always guarantee my parents will have the good health or time to help with childcare – while it is a little stronger than ‘goodwill,’ I don’t think relying on goodwill is a way to operate a professional business!

That made me realise that demands change and the power of each stakeholder can change over time. I guess I need to keep an eye on that as my business develops…

Your business plan must recognise the needs of each of these stakeholders. You can see that often their needs are conflicting, for example, the needs of workers to have a good rate of pay and the needs of local firms to have sandwiches at as low a price as possible. Running a business is about balancing these conflicting interests to achieve a compromise that is acceptable to as many stakeholders as possible.

2.7 Competitive advantage

Michael Porter (1998) has an international reputation for his work around creating competitive advantage. His analysis of the impact of external competitive pressures or forces provides a useful framework to consider the types of forces and relationships between companies that influence local competition (and the sort of pressures that a new entrant company can face).

Porter sees the competitive pressures on a given industry in terms of ‘five forces’ – in addition to the central struggle with existing competitors, there are new competitors entering the market, arguments with suppliers over the costs of inputs and persistent downward pressures on selling prices from customers. All these, except sometimes new entrant competitors from outside, are visible. Less obvious are the competitive forces that come directly and indirectly from consumers and customers when they turn to alternative or substitute ways of meeting their needs, for example internet-based travel services versus high street travel agents.

The five forces also represent areas where entrepreneurs can spot opportunities for innovation that offer a decisive competitive advantage. Looking at the competitive environment in this way can help us understand how the STEEP factors are affecting our customers.

Figure 11 Porter’s five forces

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Centre box: Existing competitors, Rivalry among existing firms; Box above: Suppliers; arrow to centre: Bargaining power of suppliers; Box right: Substitute products; arrow to centre: Threat of substitute products or services; Box below: Customers; arrow to centre: Bargaining power of customers; Box to left: Threat of new entrants; arrow to centre: threat of new entrants.

Figure 11 Porter’s five forces

Task 12: Competitive advantage analysis

Complete a five force analysis for your proposed business using the Five force analysis template.

Indicate if you think the bargaining power is low, medium or high in each case.

Discussion

Figure 12 Gwenllian analysis

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Boxes 1–4, with arrow pointing to box 5 in the centre. box 1: (Suppliers), LOW – MEDIUM. Dependent on a local/regional pool of suitably trained and experienced linguists. box 2: (Substitute products). HIGH. Rapid development and keen marketing of commercial online language courses. box 3: (Customers) HIGH. Businesses could decide to forego individualised instruction and choose the cheaper option of self-directed online learning Low chances of repeat business. Box 4: (Threat of new entrants) MEDIUM–HIGH. Others, including current employees, could set up similar businesses. Box 5: (Existing competitors) MEDIUM. Rivalry from other language-service businesses, but also the possibility for collaboration.

Figure 12 Gwenllian analysis

From this analysis it is clear that while Gwenllian’s business idea is reasonably unique, she is entering a potentially competitive area. She will need to pay particular attention to how her company builds a niche and customer base in order to protect her business idea and succeed.

2.8 What is a strategy?

There are many definitions of strategy:

• Chandler (1962) ‘The determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for those goals.’
• Andrews (1971) ‘Every business organisation, every sub-unit of an organisation and even every individual (ought to) have a clearly defined set of purposes or goals that keep it moving in a deliberately chosen direction and prevent it drifting in an undesired direction.’
• Porter (1985) ‘A process of analysis that is designed to achieve the competitive advantage of one organisation over another in the long term.’
• Henderson (1984) ‘To enable an organisation to identify, build and deploy resources most effectively towards the attainment of its objectives.’

Whichever definition strikes a chord with you, they all emphasise that strategy is about the long term:

• clear vision through goals
• understanding your external environment to ensure the goals are realistic
• appropriate allocation of resources to the tasks that will most likely help the company achieve its strategy implementation.

As the owner of a small business, it is inevitable that you will get involved in all aspects of the business, particularly at start up.

It is important to distinguish between operational and strategic thinking. Operational thinking relates to those tasks or activities that characterise the day-to-day working of the company. This could be anything from making practical, stylish staircases (David), producing some delicious and unique sandwich relish (Gwyneth), drafting a marketing email (Dafydd), designing a language course (Gwenllian), or monitoring the purity of the water obtained from the farm well (Euan). The more efficiently these are completed the better it is, as the costs will be kept to a minimum and output of the company will be enhanced.

Strategic thinking looks at the business more holistically. It connects all the activities and considers how they relate to each other in achieving the overall objectives of the company. Strategic thinking questions how the tasks can be aligned, combined or performed differently to deliver something better. For a not-for-profit organisation ‘the fit’ between these aspects also needs to account for the ethos or wider goals of the organisation. Find more information about creating an ethical organisation.

Many small business owners are guilty of ‘working in the business not working on it’. It is easy to become so engrossed with meeting operational day-to-day requirements that there is no time left for any strategic, longer term thinking.

2.8.1 Case study: Operational versus strategic thinking

Read this short case study and think about the main issues facing Fiona.

You can see that Fiona is focused on operational tasks. She is busy operating and sorting the stock control software and designing, removing and sticking labels. She is thinking operationally and not strategically. She is working ‘in’ the business rather than ‘on’ it. Strategic thinking would enable her to look at the complete picture and decide which activities lead to delivery of the company’s strategy. She would be able to see which processes could be combined or even abandoned. She would be able to allocate resources more effectively (more about resources in 4 Capabilities and resources), which would improve the chances of success for the company.

Setting some regular time aside to take a step back and reflect on your business will be very difficult at times but also very important to ensure you allow yourself time for some strategic thinking. Working with a mentor or advisor can help you do this. Often it is the business owners who feel they have the least time and the least need to have a mentor, who most need time and a mentor!

There are many times when there are just not enough hours in the day, particularly at the start of a new business when you seem to be doing everything yourself. Time spent with an external experienced advisor or mentor can be likened to having a non-executive director for a larger company. They can see issues with fresh eyes and can help you consider the longer term view to get through the short-term operational pressures. They can also be a listening ear, a support and trusted friend.

2.9 Formulating strategy

You have now examined the external environment and looked more deeply into how the STEEP factors have an impact upon your local market and how you can expect to relate to your suppliers and customers with knowledge of substitute products and new entrants. You have also completed some analysis.

You now need to think about your longer term options and select the best way to work in order to meet your objectives. You have to determine your strategy and then implement it.

Figure 13 The strategy process

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Three overlapping circles: Analysing – resources and capabilities, environmental analysis, assessing stakeholder expectations; Choosing – identifying options, evaluating options, selecting a strategy; Implementing.

Figure 13 The strategy process

Many strategies are decided as the result of a thorough analysis, perhaps some research, and clear decision making. Many others emerge as a company grows or gets started. Neither route is wrong.

It is important to keep reviewing your strategy against results to check if it is working. Many things can change in the STEEP factors, which may give rise to the need to review the strategy, but it is important to give it time to work. Remember, a strategy is a long term plan – you cannot change it every week!

Developing and reviewing your strategy is an area where a mentor can be especially valuable. They can help you see the wood for the trees and ask the questions that can sometimes be hard to see when you are immersed in the day-to-day grind.

2.10 Summary

In this section you have:

• articulated your business idea and how it fits with your rural lifestyle
• set your SMART business goals for the next three to five years
• considered the most suitable company structure
• completed a mini-STEEP
• identified the stakeholders for your business and their strength of influence
• gained an understanding of your competitive environment through Porter’s five forces model
• reviewed the process of strategy formation and outlined the strategic options for your business.

Now open your BPPR (or download the template) and reflect on the activities completed in this section. Review the output from each activity and complete the three questions raised in Section 1 of the BPPR, which require you to pull out the most important aspects of your thinking to date.

3 Customers, markets, competition and pricing

3.1 What is a customer?

Whatever your business, product or service, you will need customers. It can feel like there are so many things to do when you start a company. Very often a great deal of time is spent perfecting the product, be it a beer or a pot of jam, and no time is left really to understand your customers and potential customers.

There are a number of different types of customers:

• customers who are also consumers – for example, a restaurant or café
• customers who buy for others (consumers) – for example, local government buying-in services from a social enterprise
• customers who buy for others (businesses) – for example, utility warehouses that buy energy for other companies
• other businesses – for example, a company that develops a service for other companies to use.

3.1.1 Customer needs

The basic process that a buyer travels through is the same, irrespective of the product or service being purchased. However, it may be prolonged and completed more rigorously if the product is of high value. There is a basic exchange process between customer and organisation.

Figure 14 Basic exchange process between customer and organisation

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Boxes linked in a circle with arrows: What the organisation wants; Organisation; What the customer wants; Customer.

Figure 14 Basic exchange process between customer and organisation

3.2 The purchasing pathway

Figure 15 Purchasing pathway

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Heading 'Marketing plus promotional messages'. Underneath box 'Company press', arrow to 'Perceived need', arrow to 'Readiness', arrow to 'Info gather', arrow to 'Choice', arrow to 'Purchase', arrow to 'Post-purchase'. Arrow from 'Post-purchase' arching over to 'Info gather' and 'Choice'. This arching arrow is called 'Feedback'.

Figure 15 Purchasing pathway

This diagram shows the pathway purchasers travel when making a decision about what to buy.

When making a purchase there are competitive pressures that influence us all. They may be overt, like advertising or direct promotion, or less obvious, like comments from friends and family. A ‘need’ is thus perceived and grows until the customer is ready to consider a purchase more seriously. Information is collected before a choice can be made and eventually a purchase completed. The diagram shows that the process is not complete until feedback is processed as information that can affect future choice of purchase. This feedback loop will happen each time a purchase is made.

The pathway allows for all sorts of influences – like colleagues, friends, family, previous experience and so on. Some businesses may be more susceptible to the competitive pressures and social influences than others. All of these are external to the company selling the goods or services and illustrate the need for a good up-to-date environmental scan (see Environmental scan) so that you can understand which influences are likely to affect your customers.

Larger-value buying decisions follow the same path but typically more time is spent in researching the competition and gathering data than for a low-value purchase.

3.2.1 Stages of adopting innovation

Some potential customers will be cautious and stay with their current supplier for as long as possible. Others are excited by the chance to try something new. Everett Rogers (1962) illustrates that there is a five-stage process of innovation adoption.

• Awareness: the customer (either a consumer or another organisation) becomes aware of the existence of the innovation and has a general perception of what it entails
• Persuasion: the owner becomes progressively interested by the innovation (usually through peer or social networks but also through advertising and promotion)
• Trial: the firm, consumer or trade associations, or local networks test the innovation on a small scale
• Adoption: actual decision to adopt – OU Business School research indicates that this is related to a clear business or personal use for the application (Zappala and Gray, 2006)
• Consolidation: the agent seeks reinforcement on the decision or rejects it (in most cases, this will relate to market feedback in the form of increased sales).

3.3 Market research – segmentation

We can divide customers into market ‘segments’ in order to understand their needs and wants and allow us to target them. The aim of segmentation is to identify a group of people who have similar needs that can be met by a single product or service. This process will enable a new venture to concentrate its marketing efforts in an efficient and cost-effective manner. Segmentation also helps to channel feedback into the product or service design process.

Targeting is concerned with choosing which segments to aim for in order to achieve success. By implication, targeted segments are the focus of your resource spending at the expense of non-target segments. Thus, the two concepts of segmenting and targeting are almost inextricably linked.

This raises the question of how new enterprises might go about identifying which groups or market sectors will buy their products or services and what improvements, replacements or new related products may be desirable. This requires some research into the markets.

Sometimes it is hard to justify this kind of investment when faced with the challenge of conducting market research, especially if you lack technical knowledge and skills and/or a lack of resources – namely, time and money. The time taken to conduct research must be viewed positively as a resource investment since it is critical to the successful launch of a new product or service.

As you consider the questions in Task 17 it is likely that you will discover that you do not have enough detailed information to answer fully.

Having identified a need for more information you now need to consider what that information is, and how to access it. Some may be publicly available through web searches, business or trade directories, and libraries. A local business advisor will also be able to help. However, identifying your future customers’ common needs and characteristics to group them as segments may well depend on you conducting specific research and often comes down to personal judgement. It will be hard to be confident and precise in your responses until you deal with real customers. The benefit in starting the questioning process right now, however, is that you will get a clearer idea about what customer information is going to be relevant and helpful in your decision making.

Also, you can begin to work out whether and how a potential segment is measurable and how easy it is to define members of the segment. This will enable you to decide how substantial the segment is and whether there are likely to be enough potential customers to enable you to achieve your proposed objectives. You can begin to see to what extent the target customers will be accessible and how you might be able to communicate with them. You may even begin to have an informed opinion on whether certain groups of customers have similar product service requirements and whether the segment is likely to be stable or to disappear in the face of changing fads or fashion trends.

3.3.1 Stages in the market research process

The stages in the market research process are:

1. Describe the target customer segment: the description of the customer group under investigation needs to be as precise as possible to avoid wasting resources due to the gathering of unnecessary data (e.g. geographic, demographic and socio-economic).
2. Define the research objectives: what will the information be used for? What questions need to be asked in order to meet the aims of the research?
3. Check the existing knowledge and data: what do you already know about the target customer segment?
4. Define the information required: what segments are most attractive? What customer needs and wants are currently not well satisfied? How likely is it that the customers will buy the proposed product or service on offer? How much will they be willing to pay?
5. Decide on the methods to be used to gather the data: there are two critical questions that a researcher must ask at this stage – should data be gathered from primary or secondary sources, and is qualitative or quantitative research needed to meet the research objectives, or both?
6. Collect the data: the most important consideration at this stage is avoiding errors and therefore creating inaccurate or corrupt data.
7. Analyse the data: this usually involves raw information that needs collating and turning into intelligent information that has been interpreted and summarised.
8. Evaluate and review: this may involve a rethink of the customer segment under investigation. For example, does the information support the targeting of the original segment and, if so, how can this be pursued? Should the entrepreneur’s efforts be concentrated on a different segment and what research needs to be undertaken to determine which one?

Primary research is conducted yourself. It is often expensive and thus beyond the means of small start ups. Sometimes the major cost can be time, so collecting your own information should be carefully considered. For example, if you were planning to set up a community shop, then asking the local inhabitants if they want a shop and what they might use it for is likely to be a condition of any funding – just like any business. There are some free or cheap survey tools available, for example SurveyMonkey. This enables you to conduct your own online research very economically.

Secondary research is data that has been gathered by someone else. Your job is to find relevant data and search through it and draw conclusions that are relevant to your business. The internet has made this easier in that lots of information is available online. In other ways it has made the task more difficult – there is so much information there it can be difficult to see which is the most relevant or which has integrity. We alluded to the value of secondary sources earlier when we talked about broader data that might be available from organisations like Business Wales or from your local authority, see 1 Setting the scene for rural business.

3.3.2 Secondary sources of research data

Let’s look at the secondary sources of research data in more detail.

• Internal sources: the entrepreneur’s or the firm’s existing internal records are an obvious place to start. The data is low cost, readily available and usually reliable.
• Personal contact networks: these consist of the personal contacts, relationships and alliances that entrepreneurs develop over time, and they can provide a rich source of informal information. Networks include suppliers, customers, local businesses, contacts in the trade, professional advisors (bank managers, accountants and solicitors), former colleagues, friends and acquaintances.
• Trade associations: these can be specific to a particular industry (e.g. the National Federation of Builders).
• Chambers of commerce: these are organised locally but often have links and services that extend beyond the local economy.
• Competitor sources: most businesses publish information that is actually intended for customers. However, this can also be obtained by small firms wishing to investigate a competitor’s activities. For example, accessible published information includes websites, product and service information leaflets, reports and accounts.
• Trade shows and exhibitions: these can also be good sources of competitive information – the exhibitors catalogue will provide a good summary of the existing companies in the field and the literature can be easily collected from one place. Franchisors will also give information to prospective franchisees on the prospects for their particular market, which can be obtained by new entrants who are not actually interested in taking up a franchise.
• External secondary sources: external information sources are available quickly and easily online. Entrepreneurs and small businesses can research the macro and micro-environments in considerable depth before making strategic decisions. However, do not underestimate the time and effort it takes to source secondary data that is relevant to your business.
• Other external sources: this includes central and local government, directories, published statistics and reports, and national trade and press articles. Government statistics and those published by other official bodies can have the disadvantage of being out of date and not meeting specific requirements.

Most sources of data can be accessed free of charge on the internet (or in a library) or purchased at a relatively low cost (e.g. through a subscription).

Trade associations, chambers of commerce, banks, universities and research institutions are also good sources of information for specific fields. Newspapers and periodicals, however, tend to provide more general data but can be useful for background information.

3.3.3 Case study: Market research

Conducting market research does not have to be a huge exercise. It is basically asking the right people the right questions so that you can deliver the best product or service. How much you invest in market research will often be based on the investment or risk associated with the business. Dafydd and Ffion recognised that their business required external market research investment in order to give them a fuller and professional perspective and so they decided on getting professional help. This will not apply to all enterprises.

3.3.4 Further information

You may find this audio track Competitor and market research helpful. It starts with Porter's five forces and then looks at market research. This is part of a series of podcasts that we have linked to throughout the course.

3.4 Marketing mix

There are many definitions of marketing. The one we shall use works for not-for-profit and commercial organisations, puts customer satisfaction at the heart of marketing and gives appropriate emphasis to distribution – that is, making sure the customer actually receives what you provide.

The ‘marketing mix’ was one of the key concepts born in the post-war boom in the 1950s and 1960s. Early marketer Philip Kotler (2003) defines it as ‘the set of tools that the firm uses to pursue its marketing objectives in its target market’.

There are four aspects to the original marketing mix (McCarthy, 1987):

• product
• price
• place
• promotion

The model has been criticised as being rather outdated and difficult to use in industrial and service companies. As western markets have become more service-orientated, the ‘product’ variable has been adapted to incorporate products and services. The ‘place’ variable is also difficult to apply to a service environment where sales are often made directly to the consumer without any intermediary involvement (e.g. the digital downloading of music and films).

Booms and Bitner noticed the move from product to service marketing and introduced the seven Ps concept. This recognised the importance of three additional variables in marketing, namely: people, process and physical evidence (Booms and Bitner, 1981). We will return to this extended model later in the section.

However, the four Ps model is still a useful and simple tool to use when embarking on the early stages of planning a marketing strategy, and we will work primarily with the four Ps. These four tools (product, price, place and promotion) are interdependent and the trick is to find the right ‘mix’ to satisfy customers.

3.4.1 Product (or service)

The product or service relates to what is being marketed, including range, sizes, colours and functions. This is now taken to cover services as well and is referred to as the product or service package.

To attract customers from existing products, and to develop completely new consumers and customers, the product or service should be innovative in some way. It should be distinctive in having its own unique selling proposition (USP). In addition, if the product or service is to sell successfully in reasonable volumes it must also provide tangible and intangible customer benefits. Traditionally, marketers have always defined a product as being a bundle of benefits. According to Dibb et al. (1998), the customer is obtaining three levels of benefit from the product:

• the core product benefits
• the actual product benefits
• the augmented product benefits.

Figure 16 Three levels of benefit from the product, Dibb et al. (1998)

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Three concentric circles labelled: Core product (centre); Actual (middle); Augmented (outer).

Figure 16 Three levels of benefit from the product, Dibb et al. (1998)

The core product benefits are the same for all competitors. The actual and augmented benefits include those additional benefits associated with the innovative product or service you are bringing to market. This may be customer service, product design, etc.

It is important to recognise the difference between a product, which can be returned if faulty, and a service, which is usually consumed as it is produced and cannot be stored.

3.4.2 Price

This is the only part of the marketing mix that generates any money! In the commercial sector the price for the product or service has to be high enough for the supplier to make money but low enough for the customers to believe they are getting value for their money in exchange. In non-commercial organisations the relevance of price is less clear, although there is clearly an exchange going on and there is an expectation of the service or product that is provided.

Providing good value does not always mean being the cheapest. As a small business, never consider competing on price with larger organisations that have more resources. In fact, most customers are prepared to pay a little more for a product that is of a high enough quality, provided it is not prohibitively expensive.

In a typical transaction, a potential customer will assess the product or service and then measure this against the price asked. In rural areas they may also have to account for other costs like time, travel expenses and delivery costs. This leaves the business owner with the problem of trying to determine what price potential customers will regard as good value for money while still allowing the firm a sufficient margin to cover its costs and make a profit.

The main methods of pricing that are used by firms are:

• cost-based
• customer-based
• competition-based.

3.4.3 Cost-based pricing

Cost-based pricing is the least customer-orientated and includes cost-plus and mark-up pricing methods.

Cost-plus pricing is commonly advocated by accountants and engineers because it is simple to use and guarantees that the company meets a predetermined profit target. The method works by calculating the total production costs and then adding on a fixed percentage profit in order to arrive at the price.

Unfortunately, this approach does not take account of how the customers will react to the quoted price. If, in the eyes of the customer, the price does not represent value for money this will have a negative impact on sales.

Conversely, if the customers see the price as representing very good value for money then the company may not have sufficient stocks to meet demand, therefore allowing new competitors to enter the market.

Mark-up pricing is similar to cost-plus pricing and is the method used by most service retailers. For example, a retailer will buy in stock and add on a fixed percentage to the bought-in price (a mark-up) in order to arrive at the shelf price.

This method is identical to the cost-plus method except for two factors. First, the entrepreneurial retailer will be in close contact with the customers and can therefore develop an intuitive idea of what they are prepared to pay and, second, they can dispose of unsold stock by discounting it back to cost and selling it in the sales.

3.4.4 Customer-based pricing

Customer-based pricing methods do not mean that products and services are offered at the lowest possible price, although they do take into account customer needs and wants.

Demand pricing is the most market-orientated method of pricing. The entrepreneur who uses this method needs to start by assessing what the demand will be for the product at different price levels.

This can be done by asking potential customers what they might expect to pay for the product or service and then calculating how many choose each price level. As the price rises, fewer customers are prepared to buy the product since fewer will still see the product as being good value for money.

It is also worth mentioning that, because of the nature of the market or their own skill and capability constraints, many entrepreneurs will not be able to do formal market research to ascertain this information. Instead, they will rely on judgement, intuition and experience – either their own or of people they trust. This is a key reason for choosing to start a business in a sector that you already know and understand.

In any case, this kind of calculation can be used to determine the stages of a skimming policy (where you start high as a first entrant to the market and then reduce over time as others enter the market) or it can be used to calculate the appropriate launch price of the product.

The next stage is to calculate the costs of producing the product in different quantities. Usually, the cost of producing each item falls as more units are made (e.g. if we make 25,000 units, each unit will cost less than if we produce 5,000 units). The table below demonstrates this.

The next table illustrates the importance of economies of scale and the impact of price on demand. The price that would generate the highest profit per unit would be £6.50, but at this price they would only sell 5,000 units and make a total profit of £19,650. On the other hand, the price that would generate the highest sales would be £3.50 although this would mean a lower profit per unit.

The price at which the product is sold will therefore depend on the entrepreneur’s overall strategic objectives – in this case whether to maximise profit per unit or to increase sales and market share.

3.4.5 Competition-based pricing

Competitor-based pricing acknowledges the influence of competition in the marketplace. The entrepreneur must decide how close the competition is in meeting consumers’ needs. If they are close then the entrepreneur will need to set prices similar to the competition. This is known as a meet-the-competition strategy, which avoids damaging price wars (which an SME can ill-afford), thus maintaining profitability.

On the other hand, an undercut-the-competition strategy has become very common among retailers who have little control over product features and benefits or the promotion of products. However, there is a risk of starting price wars when using an undercutting strategy, which is not a recommended approach for a small firm with limited market share and financial resources. For more information see Pricing strategies. 

Whichever pricing strategy is best for you, it is important to understand your cost base and ensure that you cover the basic costs of producing the product or delivering the service. Attention should also be given to the impact pricing has on the image of the product or service and the importance of complementing competitor offerings rather than trying to compete head-on (e.g. competing upon the basis of personalised service and superior delivery might be more effective than reducing prices).

Finally, if the new venture competes solely on price it may never be able to grow because the margin will be too small to allow for re-investment in the firm’s infrastructure.

3.4.6 Place

Where you are located may be a key factor in developing a rural business. For example, Wales is renowned for its high quality artisan ingredients. Getting the products physically to market can be very challenging though, and expensive, hence the premium we often find on these types of Welsh products.

For a tourism business, location is fundamental and is often central to any marketing message. Place matters. For example many tourism businesses do not just rely on natural beauty but create a local package emphasising their localness through the use of local ingredients or traditional products. That place-based value can also be used to sell those local products into global markets, for example, Welsh hillside lamb.

For a knowledge-based business, like Gwenllian’s, place may be less relevant. If you are dependent on infrastructure, like digital connectivity, you may feel that location is immaterial. However, knowledge businesses can also emphasise location. For example, if you were a web designer you might emphasise to local customers that you are nearby, and emphasise to potential customers in other rural areas that you understand the needs of rural businesses.

3.4.7 Distribution

Place, in general, refers to the distribution system that supplies goods or services to customers. This includes shops and mail order. The concept of place also covers types of transport employed, storage and warehousing, and the use of wholesalers.

The number of middle men will vary from industry to industry, but the more intermediaries there are, the higher the final price to the customer. This can result in added cost to the rural business as frequently there is more work and there may be more people involved before the product reaches its customer destination.

Very often the problem for new small firms is gaining access to the distribution channels (think back to Porter’s five forces model). Their lack of economies of scale and related bargaining power, plus the absence of a recognisable brand, are factors that seriously limit their supply chain power.

3.4.8 Local

Consider the renewed interest in ‘local’ food we have experienced in recent years. This has not happened spontaneously. The re-connection of people, products and places was a key recommendation of the Policy Commission on the Future of Farming and Food in 2002 (see Hein, Ilbery and Kneafsey, 2006).

Not every place is going to develop a vibrant local food economy. Hein et al. looked at various factors that might influence the strength of the local food market in any area, such as the number of food directories and the number of local food producers advertising in them. They also examined the number of licenced organic farmers and growers, number of farm shops and farmers’ markets.

They highlight the difference between having good local food products and access to markets. Is there a strong local market, or does it need to be exported? If the latter, is the ‘value’ of that product dependent on freshness which may not translate well to an export led approach, or is it unique to a particular locale and a ‘value’ that people outside the locale might want to buy into. For a discussion on this in relation to Wales, read the Guardian article Local food: have you had your fill?

Wales, for example, has both a strong local food market, based on local raw ingredients, and a strong brand awareness through its erstwhile Taste of Wales, and its newer VisitWales brand. Essential to this is the trust that comes from the quality-assured branding of a product from a range of producers – from meat to cheese, and beers to whisky. Of course, this is dependent on having good quality ingredients, a level of existing brand awareness, and a set of images and values associated with that brand awareness that complements the products you wish to sell. Famous for its food festivals celebrating all that is good and local, none is better known as a brand than the annual Abergavenny food festival. Started in 1999 by two local farmers in the aftermath of the BSE crisis, it has now spread its reach, celebrating good produce from Wales, the Marches and further afield.

3.4.9 Supply chain

Marsden, Banks and Bristow (2000) look more specifically at the changing nature of the supply chain, which they credit with the increasing interest in local, high quality food. They see the development of quality associated with a specific locality creating new associational networks that involve very different types of supply chains. They argue:

Thus the supply chain becomes much shorter. Marsden et al. define three different types of ‘short food supply chains’ (SFSC). The defining characteristic of an SFSC is that the product reaches the consumer accompanied by information about the product’s origin, be it in person or on the packaging. It is this information that enables the connection between producer and consumer – it can go as far as forming an association with the values of the producer and the methods used.

Producers use one, two or all three of these SFSCs:

1. Face-to-face: the consumer makes a purchase directly from the producer (perhaps at a farmers’ market). This personal interaction facilitates authenticity and trust. Online trading may be seen as a variation on this through highly personal web pages.
2. Special proximity: products are produced and retailed in the specific region of production. Information at the point of sale makes consumers aware of the provenance.
3. Spatially extended: the product is sold in all locations but value-laden information about the place of production and the people involved is given to consumers, who may have no connection with the region itself.

Engaging with these organisations or groups can help your business develop and manage its SFCSs. The Llyn Beef producer cooperative in North Wales is an excellent example of a response to new demands for quality assured, fully traceable, mature, lean beef of consistent quality. It recognises and responds to wider society needs around animal welfare and the maintenance of biodiversity on the land. The co-op was established believing that the promotion of branded Welsh beef would be successful in achieving retailer and customer loyalty and a price premium. It illustrates how new networks and supply chains have developed to support rurally-based businesses.

3.4.10 Effects of the internet

The internet has changed the way marketers view the marketing mix since the promotional and place functions can now be carried out at the same time through a company website (e.g. the internet portal acting as a promotional and distribution channel). Digital downloading of music and films is also a good example of extreme disintermediation, i.e. the conjoining of promotion and distribution channels.

It is true that use of the internet and advances in access to broadband have made a difference to rural businesses (although difficulties with broadband are by no means totally solved). Larger markets have been opened up to all businesses: just as you can use the internet to reach beyond your local market, so rural customers may now purchase easily from any location in the UK and internationally. It is a double-edged sword.

So, some aspects of ‘place’ have become easier when living in a rural environment. You can run a website from just about anywhere. The growth of home delivery couriers is considerable. However, the cost of accessing these services can still be greater when living far from urban centres, and it is important to account for these costs fully.

There are many products – for example food products – that do require physical movement around the country. Small companies are frequently challenged by needing to send small quantities to customers when the cost of shipping can be prohibitive. Many ‘piggyback’ on large organisations but have to fit in around their delivery schedules and demands. Some combine to work together cooperatively to move their goods around the country – whatever solution is found, distribution can be a significant challenge to many rural businesses.

3.4.11 Promotion

Promotion is about communicating with actual or potential customers. This covers the whole area of how customers know what is available and the benefits and value of the product or service.

Promotion includes advertising in the electronic and print media, together with other activities such as customer and sales promotion and public relations.

Many business owners also act as their own sales representatives, developing important network contacts with key stakeholders. The use of social networking sites cannot be ignored.

We highlighted the role of Llyn Beef as a support network but there are looser, even more regionally specific, networks emerging, for example the Taste of Powys network in mid-Wales, or the Wales-wide ‘Fforch-i-Fforc/Fork2Fork’ which has its own Facebook page.

For some service companies, sites such as LinkedIn form a key part of their promotion strategy.

Small companies, particularly at start up, are often unable to finance large promotional budgets, which means that some promotion tools are not available to them. Advertising is usually prohibitively expensive other than on a small and local scale. Therefore, advertising may be through word of mouth, via existing networks, or through local groups and networks.

3.4.12 Networking

Networking can be a hugely important element of promotion for a small business. There are many networking groups operating all over the country – some meet for breakfast, some have restrictive membership, some are lunch clubs, and others meet socially in the evening. The networks people prefer will be different depending on where they are coming from in relation to their work background.

Many small business owners invest a huge amount of time in ‘networking’, for example on Facebook and Twitter. Some of this is essential, but it is important that you are clear about what you hope to gain from networking and what each network you attend delivers for you.

Many rural businesses involve meeting with people, virtually or in person, which can alleviate feelings of isolation. Some, particularly those based at home, can increase feelings of rural isolation. It is important to recognise that connecting with other people, either formally or informally, is important.

Networking does not have to be stuffy and entirely business-focused. Great friendships are frequently formed through networking. Recognise your need and plan your networks to meet it. You may need to go to a few networking meetings to discover what style suits you best.

So while networking has been included as an element of promotion, it serves much broader needs than that. This is illustrated with an example from South West England, The Cheese Gig.

3.4.13 Network audit model

The network audit model is very practical. It starts from where you are. It is designed to help business owners look at the networks they use and how they fulfil the needs of their business. This analysis can result in more focused networking with a clear purpose in mind and/or looking for new networks that meet your needs more effectively. You can enter the model at any point.

Figure 17 Diagram of network audit model

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Circular relationship of 'Business or personal needs', What do you or your business need? Can networks assist?; 'Current networks', Which networks do you use? Which others could you use?; 'Match needs and networks', What need does each network support?

Figure 17 Diagram of network audit model

The outcome of this analysis is recorded in a network audit table. This enables you to see where there are gaps in the business or personal needs that can be met through networks. It enables you to identify whether you attend several networks all with the same purpose. You can then prioritise them in order to improve the effective and efficient use of your time.

3.4.14 Seven Ps

The four Ps model has been extended to seven Ps in recent years. If you feel they add value to your analysis then use the seven P model.

The additional three Ps are:

• people
• physical evidence, and
• process.

Figure 18 Seven Ps

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Boxes with arrows into the centre box. Centre box: Target market. Boxes around: Physical evidence; place; people; promotion; price; process; product.

Figure 18 Seven Ps

The people element acknowledges that service delivery (unlike manufacturing) involves a personal interaction between the supplier and the customer. Careful attention must therefore be given to the attitudes, demeanour and personality of those responsible for the service delivery. This characteristic is particularly relevant to small businesses that are predominantly service companies and are in regular contact with their customers (usually at an owner-manager/entrepreneur level).

Most offerings to customers now consist of a combination of product and service. This means that there are both tangible and intangible characteristics involved. Although most services are based on an intangible, emotional experience (e.g. the atmosphere and ambience in a restaurant) there are also important physical aspects (e.g. the appearance of the food, the quality of the decor and the appearance of the waiters). The area in which the restaurant is located will also provide physical evidence of the level of quality being offered.

Since services are usually carried out with the consumer present, the process by which the service is delivered is also an integral part of what the customer is paying for. For example, there is a significant difference between a silver-service meal in an upmarket restaurant and a hamburger bought from a fast-food outlet. A consumer seeking a fast process will prefer the fast-food outlet, whereas the consumer seeking an evening out might prefer the slower process of the restaurant.

3.5 Social marketing

These kinds of marketing techniques and approaches noted above are just as applicable for social enterprises. We can see this clearly in relation to a community, but they also apply to enterprises whose principle aim is to influence or change peoples’ behaviour. Read more about Social marketing.

3.6 Summary

In this section you have:

• looked at who your customers might be
• examined the path customers take on their way to purchasing a product or service
• considered the importance of market research and the stages involved
• unpacked the marketing mix for your new business in a rural environment.

Now open your BPPR (or download the template) and reflect on the activities completed in this section. Review the output from each activity and complete the two questions raised in Section 2 of the BPPR, which require you to summarise the most important aspects of your thinking to date.

4 Capabilities and resources

4.1 Transformation model

Any organisation takes inputs and applies some sort of transformation process that results in a significantly different output.

Figure 19 Transformation process

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Linear process. Arrow: Inputs; Box: Transformation process; Arrow: Outputs. Arrow from front to back: Feedback.

Figure 19 Transformation process

4.2 Transformation process

It is easy to see the transformation when a physical product is involved, but when it concerns information or people it can be more difficult.

Transformation processes include:

• changes in physical characteristics of materials or customers (e.g. fruit into jam)
• changes in the location of materials, information or customers (e.g. taxi, distribution services)
• changes in the ownership of materials or information (e.g. retailing)
• storage or accommodation of materials, information or customers (e.g. warehousing services)
• changes in the purpose or form of information (e.g. offering an online timetable)
• changes in the physiological or psychological state of customers (e.g. a beautician, hairdresser, hospital or doctor).

Frequently, all three types of input (materials, information and customers) are transformed by one organisation. For example, withdrawing money from a bank involves information about the customer’s account, materials such as cheques and currency, and the customer.

The type of transformation may be categorised as follows:

• manufacture – the physical creation of products
• transport – the movement of materials or customers
• supply – change in ownership of goods
• service – the treatment of customers or the storage of materials.

Several different transformation processes are usually required to produce a good or service. The overall transformation process can be described as the macro operation, and the detailed transformations within it as micro operations.

4.3 Resources

We will take a resource-based perspective and look at the interaction between a company’s resources and its environment.

Resources refer to company-specific assets that are difficult to imitate (e.g. because of tacit or unspoken knowledge that exists but is not always paramount) unlike undifferentiated inputs such as unskilled labour and capital. How management sees the interaction between the resource and the environment shapes the strategies that the company chooses. Thus, sustainable competitive advantage is built by the company as a whole, learning about processes that translate into knowledge and skills that are difficult to imitate and that can be applied to various types of markets and products.

The resources of a firm are the tangible and intangible assets it owns or has access to, e.g. plant and equipment, workers, machines, the amount of money tied up in fixed capital, stocks and savings accounts.

A tangible asset is something you can touch, like a building or a machine. An intangible asset is something that is less physical, like staff knowledge and expertise (human capital). However, these assets or resources on their own do not give the complete picture. It is how they are used that makes the difference, and this is known as the capability of the company.

So, if resources are the physical, financial and human inputs that are required for your idea to be realised, then your capabilities are the skills, knowledge and ability to coordinate and make effective use of your resources. Analysing your idea in terms of operations, tasks, capabilities and resources not only provides more clarity but is also an essential step in its transformation into a real product.

This is not to say that all the necessary resources must be within your organisation. You may prefer to operate by yourself from home, or with a loosely organised team of colleagues, or as a virtual organisation linked by the internet, or, indeed, you may wish to start your own firm that employs others or even to sell the idea of your innovation to an existing firm.

Whatever form you think is right for the implementation of your idea, business is a social activity and you will need resources in addition to your own knowledge and skills.

It is common for rural businesses to support one another in this way. Indeed, many operate a bartering system where they exchange goods or services in a cost-effective way. These companies find one another through local networks; they build trust and do business together (social capital).

Let us start by looking at the crucial resources you already have – yourself and the people you know.

4.3.1 People skills

Clearly, it is important for your future success to work with the right people, who have the right capabilities and skills. The focus here, however, moves out from the central role of the new business owner to the needs of the company as a whole. People, and the skills they develop, are essential to the success of any organisation (no matter how small).

As well as understanding the skills and capabilities required for producing, launching and sustaining your product profitably, you may need to develop your understanding of your own strengths and weaknesses further in relation to technical skills, organisational ability, management style and business acumen.

If and when you create a new company you will need to address your own development needs – by studying this course you have recognised that you need to do this. You will also need to review the skills of your staff/volunteers, or the network of people/businesses you rely on, against the goals you set for them to achieve in your plans. However, for now, we will just focus on your skills and associated needs that relate to your idea as it now stands.

To turn a business idea into a reality you will need to deploy a range of skills and resources. Some of the skills you need you will have already, in your knowledge of the world and of your field. Others can be acquired or further developed, either by your own learning or by hiring the right people, temporarily or permanently.

The combination of the knowledge, skills and often ‘personality’ of you and your staff/volunteers or network is unique and can form part of your competitive advantage.

The key considerations that have to be taken into account when analysing your human resource needs are:

Do not fall into the trap of failing to analyse all the work you expect to do yourself. Firstly, you could quickly be in a situation where if the job you actually do was advertised by another company you would reject it out of hand! There are inevitable trade-offs required in the short term but be clear what they are and how long you are prepared to let them continue.

Secondly, if you fail to account for all the work that you and your family do in the business, you risk missing out essential components of your business.

4.3.2 Job analysis

In firms based on physical production and distribution, it is often easier to identify key resources (people, equipment, premises and so on). However, most services have a physical aspect to them too, and many have a basic production process (processing of orders, client’s specifications; allocating staff to client’s jobs, appointments; producing reports, invoices and so on).

If you are at a more advanced stage where you are beginning to plan, bear in mind that an increasing number of small firms are doing away with support employees, turning instead to more creative uses of technology internally or making more use of outsourcing.

For example, one successful small firm comprising an architect and a surveyor used to employ three support staff. They now employ none and believe that they work more effectively for it. Good employees were hard to find and retain, so they invested heavily in ICT. Letters and reports are dictated using voice-recognition software, design drawings are done using a computer-aided design (CAD) package and jobs are costed and controlled through a complex spreadsheet and database suite that they set up themselves. They now feel far more in control, with everything at their fingertips.

Outsourcing might be as simple as relying on a particular courier firm to collect and deliver goods. However, not all industries offer the same scope for outsourcing or using ICT in precisely this way (and not all localities have the same access to outsourced services or ICT services such as broadband, after-sales service, help lines and so on). You need to take into account the presence or absence of such services and your own capabilities for making effective use of them.

Even if you feel your idea does not lend itself to support from clusters and networking, there is clearly a trend towards these more collaborative forms of work, particularly in innovation, and therefore it needs to be reflected in most STEEP analyses. You should seriously consider outsourcing as a source of capabilities not just during the launch phase of your business cycle, but longer term through the growth phase.

Outsourcing firms often possess specialist knowledge and provide services to clients on a local or global basis. They are able to employ economies of scale and use of new technologies that as a result, will keep prices low without affecting quality. In other words, if you identify skills or gaps within your business you might be prudent to look outside the business for those skills rather than develop them in-house.

4.3.3 Your capital base

The people you work with are essential, but they have to have somewhere to work, equipment to work with, material to use and a system to manage the flow of work and its sale and delivery to customers in the market.

The physical assets and the contracts for services, as well as the human resource of the firm, are the sum of resources that enable the firm to carry on its business – the capital of the business. It consists of elements that can be valued in money terms, but actual money accounts and cash form only a part of it (albeit, in the case of cash, an incredibly vital part of it).

You will need a clear idea of not only the people you need but also a good understanding of your capital requirements. You need to make sure that your revenues more than cover your running costs, contribute to your capital costs, pay reasonable returns to any investors and afford you a reasonable living. Indeed, in considering these issues you test the viability of your idea.

4.3.4 What resources?

External resources are much the same: you may have accumulated some money and acquired some of the necessary equipment already.

The first step lies in identifying what you need. The second step is to identify the gaps between what you need and what you have, and to understand why it is important that they are covered.

Obviously, if you are still clarifying your idea and have not yet begun to plan or take concrete steps towards implementing your idea, it will be difficult to be precise about this. However, trying to identify the tasks needed and gaining some idea of the skills needed for your idea to become a successful, innovative product or service is an excellent way of achieving the clarity you are seeking.

Include the things that you need because of where you live as well. Do you need people who can complement your need to look after your family? Are there concerns about travel safety, etc.? Make a note of any issues like this, not necessarily in the table but just to ensure you deal with them as you develop your plan.

4.4 Capabilities

Capabilities refer to the particular ways that your resources are used, that is, how production and distribution are organised. Resources are not productive on their own, but in the way they are utilised and in their interaction with other resources.

Capabilities define how this interaction or coordination takes place. Hence, firms can differ both in terms of the resources they own as well as in the way they make use of them. Competitive advantage comes from both.

Capabilities refer to the ability of organisations to manage specific types of general processes, such as distribution or manufacturing processes.

4.4.1 Extended enterprise value cycle

We began with a simple box with a transformation written in it (in Figure 19). Now we can start to bring some components we have explored so far together into an extended value enterprise cycle.

Figure 20 Extended enterprise value cycles

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Heading: Parts: Inputs labour, land, capital raw material, job spec. Product knowledge, resource knowledge, experience, supply goals. Heading: Process: transformant, cap and labour, technology know-how. Heading: Design: outputs, goods and services, design and customer needs. quality. Heading: promotion: Marketing, promotion, deliver, logistics. Know why, cut price, competition. Heading: Distribution: performance, sales, market share, revenue, growth, Customer, consumer, competitor. Arrow between each heading to the next one. Arrow labelled 'Feedback' from 'Distribution' to 'Parts'.

Figure 20 Extended enterprise value cycles

The parts or inputs that start the enterprise value cycle can be tangible, e.g. raw materials, buildings, etc., or intangible, e.g. knowledge or experience about something physical, like a product, or of a process.

The process uses specified or planned, and unspecified or tacit routines in changing the form of the inputs. Tacit routines can be particularly relevant and important in a small family business where each family member has their own job, that they do without thinking about it and certainly not writing it down.

The design element of the process is concerned with the goods and services that form the outputs of the transformation. They reflect the needs of the customer, the quality required and so on.

Promotion includes the presentation of the output. This could be the packaging of a product or the presentation of a service. It includes an awareness of competitor activity, including price and distribution channels.

The physical distribution is the last piece in the chain and results in the sale of the product or service. That is not all, though; it also includes an awareness of market position, growth trends and an understanding of both customers and consumers in their approach to purchase. This model builds on the inputs–outputs transformation model we looked at earlier in this section.

Value is added at each stage of this cycle but is only realised at the end. It is dependent on having the appropriate resources for your business and the capabilities that turn them into a product or service that can be delivered to the market in a sustainably competitive way.

The way in which you acquire your capabilities and skills – whether full-time, part-time, temporary or freelance staff or outsourcing to another firm – are determined by when and for how long you need particular capabilities and skills.

For example, if you were to decide that skills in financial planning and raising finance are needed for the launch period, but only for a few hours a week, it would be pointless to employ a full-time accountant. Equally, one with the range of skills required is unlikely to be in the market for a part-time job. In such a case, you would almost certainly be better off using an accountant in professional practice. It is also important to review the timing, quantity, level and frequency of need for each of the skills you have identified, and determine how each is to be introduced.

As you determine what you need, keep in mind the value that is added to your product or service at each stage of this process. This will serve to keep you focused on the costs associated with each step and also on the overall value of the knowledge you acquire, as well as the product or service you produce.

4.5 SWOT analysis

Now that you have spent some time analysing your potential business, it is a good time to pull together your strengths, weaknesses, opportunities and threats (SWOT).

You will find that strengths and weaknesses come predominantly from the internal environment, i.e. things to do with the internal workings of the company. Opportunities and threats frequently arise from what is happening outside the company. Pulling together everything you know about your company both internally and externally is very useful. It informs strategy and guides day-to-day operations too.

A SWOT analysis usually comprises a series of points under each heading and behind each point you write will be a great deal of analysis that has informed your view. Include only the most important points – that is, those that will have the greatest impact on strategies and programmes of activities that are developed. Clearly the internal points, the strengths and weaknesses, are easier to influence and control as they occur within the business.

Consider the value cycle in the last subsection as you complete your analysis. Examine the process for strengths and weaknesses. Look at opportunities and threats in the context of such a process as well.

Opportunities and threats generally occur outside the business. They cannot necessarily be changed or influenced by the business or the business owner – certainly not in the short term.

It is better to have a few well-informed and pertinent points than a long, superficial list in your SWOT analysis. It is also important to consider all the points together, as they may be interlinked and interactive.

Figure 21 SWOT analysis categories 

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Strengths: are things that you do particularly well. Weaknesses: are areas that you know need some work to improve – things that you do not do well! Opportunities: occur when circumstances present themselves, giving you the chance to capitalise and improve the business. Threats: occur when circumstances are likely to arise that could hurt your business.

Figure 21 SWOT analysis categories 

4.5.1 Completing SWOT analysis

Anyone reading your SWOT analysis will be able to gather a good picture of the position of your company at a particular point in time.

If we go one step further and look at how all the statements work together, we can see that Euan has identified one of his major strengths (family owning the farm buildings) with a weakness (need to change the official use of some of the buildings). Similarly he has a family who are supportive but who may need training to work on the new income strand, in addition to their current workload. He will also be looking at the lifestyle he and his family want to live as well as the business. (Remember how we saw in the introduction that rural companies have a healthy outlook on work/life balance!) This is frequently an issue for family firms, and the business owner has to balance the economics of hiring staff against the risk of heavy dependence on the family. This is, however, a risk for any company with small numbers of staff. The business owner might consider writing down the processes followed in the business such that:

• they can be examined and improved
• it is easier for someone new to follow the processes and thus do the job.

It is vital to keep referring to the SWOT analysis when you develop your strategies and plans. When completed thoroughly it will help inform you of resource constraints (and surpluses) and help you to see issues that must be dealt with before embarking on the next part of your strategy.

Broadly speaking look to your strengths to defend you against a threat.

Use your strengths to capitalise on the opportunities as they give you a real advantage.

Your weaknesses must be dealt with swiftly to protect you from any specific threats, as otherwise you will have a serious disadvantage.

Avoid being tempted to go for opportunities when you are exposed by weaknesses. Sort them out first.

Remember, the purpose is to seek a competitive advantage for your company that will be sustainable over time.

Bruce Henderson (founder of the Boston Consulting Group) has said. ‘Your most dangerous competitors are those that are most like you. The differences between you and your competitors are the basis for your advantage.’ In reality, most successful competitive advantages come from a mix of things. How they all work together makes the total unique and very hard for a competitor to copy.

4.5.2 Further information

You might find it useful to listen to an audio track on SWOT analysis.

4.6 Summary

In this section you have:

• examined the transformation model of inputs into outputs and the extended enterprise value cycle
• considered the resources required in your new business
• understood that a capability is about how you use resources
• started to think about the core competence of your new venture
• conducted your own SWOT analysis
• looked beyond the SWOT to see advantages, disadvantages, temptations and defences.

Now open the BPPR (or download the template) and reflect on the activities completed in this section. Review the output from each activity and complete the questions raised in Section 3 of the BPPR, which require you to synthesise your activity and thinking to date.

5 Finance and information

5.1 Financing your business

Every business needs financial resources to operate. However, entrepreneurs also need more than money; their business models depend on access to networks, knowledge and people.

HSBC research ‘The business of recovery’ (2009) indicated that the entrepreneurial and small business sectors had found new flexible ways of working and will not return to more rigid, arguably more expensive, forms of business in the future. These sectors are using technology and advisers to build social networks and human capital, as well as finance.

At the time of writing (Summer 2013) there is a pressure on the private sector and in particular the entrepreneurial and small business sector – as the ‘backbone’ of UK industry – to lead the economy out of recession. Alongside this we also see the ‘shrinking of the state’, often a significant part of the rural economy, and the emergence of alternative enterprise models such as third sector and social enterprises.

However, funding is tight. The recession and a credit crunch mean that these are potentially difficult times to secure finance from the private sector. Government cuts mean there is increasing competition for public sector funding or contracts. If you are to realise expectations then you need the right support, finance and advice.

Access to finance is often a barrier for business. For example the Scottish Federation of Small Businesses’ figures for the first quarter of 2013 show that while credit became cheaper at the start of 2013 the 12 month trend for the number of successful credit application was down.

The Bank of England’s regular credit conditions survey covers household and small business lending. A visit to your local bank, or asking other local business people where they have sourced finance may be just as useful. 

5.1.1 Types of finance

Small companies obtain finance from a wide variety of different sources.

The per cent of respondents seeking finance through these alternatives varied considerably as you can see from the table. Small and young businesses are more likely to be thinking short term, but this research suggests that thinking with the longer term in view is the differentiator that will lead to business survival. As one expert is quoted: ‘It’s like learning to ski, if you keep your eyes on the mountain, you get down there safely. But if you look at the bumps along the way, you’ve had it.’

Young firms are more likely to look at a range of options when raising funds. Bank loans and overdrafts are still very common, but grants and venture capitalists also feature. A significant number of business owners have put money in themselves.

5.1.2 Non-bank finance

One response to the difficulties in accessing finance from the mainstream banking sector is the growth in non-bank finance options. Crowd funding is an emerging alternative source of funding for business ideas, where funding is obtained from a large number of individuals who each provide a small amount via a web-based funding platform. See a UK directory of crowd funding platforms CrowdingIn where you will also find a quick guide to how crowd funding works.

When raising funds it is important to keep the long term in view. Many businesses fail because they do not have sufficient funds to finance cash-flow issues and to invest in growth.

In 4 Capabilities and resources, we looked at the capital requirements of your new company. The information above outlines a number of possible places to go to find the money to support your startup and beyond.

5.2 Essential accounts

You might be very comfortable with figures and have the skills to complete the monthly accounts yourself. But you may well not be so comfortable with this side of the business. It is important, however, not to shy away from the numbers. They tell a story about how your business is faring. They tell you which initiatives or actions are working and which are not.

It is a good idea to be personally involved in the production of the cash-flow forecast and profit-and-loss statement. You may choose to employ a bookkeeper or accountant to prepare the accounts for you, but it is imperative that you understand them. This responsibility cannot be delegated.

The purpose of this section is not to teach you to be an accountant or how to keep your books. The focus is on developing an understanding of how to track and use financial information in the management of your business.

We will look at four statements that you will need to be familiar with and understand when running your business. These are:

• cash-flow accounts
• profit-and-loss accounts
• the balance sheet
• budget statements.

Each one of these financial statements is needed by any company. They each serve a different purpose.

So, we know what each statement is designed to do for us and we will explore them further through the use of a case study example, Catterline, which is a fictional firm based on a real business.

This section relies heavily on the use of spreadsheets. (If this is a skill you do not yet possess, it may be worth investing in a short course as use of spreadsheets is a very useful skill in running any business.) We talk about Excel here which is a common spreadsheet programme. However, free alternatives like Open Office are just as good. Take each section slowly, take a break and come back to it afterwards, but it is really important that you do complete this section if you are to launch your company.

5.2.1 Cash flow

It is essential to produce rolling projected cash flows and profit-and-loss accounts – ideally using estimates to look forward at least six months. These are the measurements for your management control – without them you will not know your future, and you will find it very difficult to make plans. By understanding your cash flow and profit-and-loss accounts, you will have a competitive advantage by being able to plan to maximise cash availability and profit generation in order to provide for future expansion and selling price reductions.

We are going to look at a cash flow and profit-and-loss account in detail to understand their importance. The terms used are not accounting terms, and it is assumed that most organisations will use an accountant to produce the balance sheet and annual accounts. The focus here is on learning how to use cash flow and profit and loss as management tools – not on developing the skills of a bookkeeper or accountant.

We will discuss the construction of cash flow and profit-and-loss tables referring to a case study based on the fictional company Catterline. We will also explore how the information in these tables is invaluable to effective business decision-making and provide the means for monitoring the health of your new venture. The first step that Hannah, the managing director of Catterline, had to take in order to satisfy her bank manager was to construct a simple spreadsheet to see where the money goes (produced in March of Year 1).

5.2.2 Profit-and-loss account

To determine whether a profit has been made, we need to produce a profit-and-loss account. In a cash flow account, monies in and out are entered in the month when the money leaves or arrives.

A profit-and-loss account has a crucial difference. Monies in and out are entered when they are invoiced, not when the cash comes in (in other words, when a credit or a debt is incurred). If you have a sale that will be delivered in April with payment in May, the profit-and-loss account shows the sale in April, whereas the cash flow shows the money arriving in May. Similarly, a purchase for February delivery with payment due in March will be shown in the profit-and-loss account as February, and in the cash-flow as March.

5.2.3 Profit-and-loss estimate

Take some time to practise ‘what if’ calculations on the cash-flow and profit-and-loss spreadsheets. Familiarity with this process is essential to your success in the pre-start and launch phases. You might also want to look at some solutions of your own. If you haven’t already done so you may find it advantageous to invest in a simple spreadsheet package.

Keeping accurate monthly accounts not only helps you know the health of your business but is also essential when trying to raise finance and build confidence in the capability of your business.

The accounts do not have to be complicated for a small business start up. Some businesses devise their own spreadsheet; some buy a simple spreadsheet from their accountant, which can link to an invoicing system, although many start with a simple manual procedure. Sometimes, after completing simple accounts for a few months, you realise that there are other things that would be useful to collect as well.

If completing the profit-and-loss statement for Catterline is more than you want to do at this stage, then try working out what the lines could be for Gwyneth’s food business.

5.3 Financial management tools

We have looked at the construction and amendment of the cash flow and profit-and-loss accounts. These are more powerful than they seem at first viewing. They can provide:

• Bank credit limit forecast: the cash flow enables the likely bank credit limit to be calculated. This enables us to forecast where we may have problems, and work out a solution.
• Profit: we will not survive if we do not make a profit. The profit-and-loss enables us to test our business model for profitability – and adjust.
• Budget forecast: the figures we put into the two spreadsheets for future months are, in reality, a budget. The spreadsheets enable us to flex these budgets and ask ‘what if’ questions. We will also be able to identify variances from the budget.
• Risk calculation: the ‘what if’ ability of spreadsheets enables us to consider the greatest risks and see what effect they might have. In the case of Catterline, one risk would be currency fluctuations. The bank might advise Hannah that it is prudent to consider the risk of a 10 per cent devaluation of our currency. The spreadsheet would quickly enable Hannah to see what the increased price of components would mean to cash flow and profit.
• Investment: the spreadsheets enable us to identify future investment needs and potential gaps in funding. Catterline might benefit from a £100,000 investment, but the profit-and-loss will show what profits could be generated if the bank credit limit was reduced by the investment. The spreadsheets would also show potential investors how the company was expected to perform in the future. Some organisations produce cash-flow and profit-and-loss forecasts for three years to do this.

It should also be clear from the above analysis that a new start up business’s room for manoeuvre can be strongly affected by the lines of credit it is able to negotiate (usually with its bank). On the whole, banks are usually very helpful if they are told well in advance about a cash flow problem that requires reconsideration of credit limit levels. They see this advance warning as an indication that management has the proper controls in place. On the other hand, they are very unimpressed with an organisation that finds out that they have just gone over their agreed credit limit.

The cash flow for the next 18 months – updated each month – will give Hannah advance warning of any cash flow problems and enable her to either deal with the problem or contact the bank to discuss credit arrangements.

‘What if’ questions are essential to minimise risks at start-up. When producing a business plan it is very difficult to forecast all the changes that could take place in the external environment, particularly changes in sales of your product or service. Using a spreadsheet to see the results of possible changes will enable you to minimise risk and have a contingency plan for a sudden drop or rise in sales.

5.3.1 Profit, costs and break-even

Any profit-making organisation should, by definition, make a profit. A not-for-profit organisation should not run up a deficit, and may well be required to produce a surplus (‘profit’ in commercial terms). A crucial function of the profit-and-loss account (which could be a surplus and deficit account in non-commercial terms) is to forecast in advance the likely profit or loss at any stage in the future. This will indicate whether the operation is viable. Costs are split into two basic types: those that are related to the level of product or service being produced, and those that exist whatever level of a product or service is being produced.

Those that exist irrespective of the level of product or service production are called fixed costs (or overheads). They include items such as office and administration expenses, owners’ and directors’ salaries, management salaries, rent and rates. These must obviously be paid or the company cannot continue. The level of fixed costs stays static for a range of production or service provision. Of course, if there is a vast increase in production or service provision then larger offices and more managers may be needed, raising fixed costs.

Those costs that are directly related to the level of production of goods or delivery of services are called variable costs and include cost of materials and services, cost of utilities directly related to production or service provision, wages of employees only concerned with production or service provision, and other items directly concerned with production or service provision. These variable costs will rise as production or service provision increases, and decrease as production or service provision decreases. The increase and decrease can be smooth and directly related to volume – so in the case of Catterline, an increase in production would lead to a similar increase in the variable cost represented by the circuit boards. It can also be ‘stepped’ so the labour costs of the assemblers would remain static until the volume required another assembler when the variable costs would jump by the wages for an extra assembler.

These two types of cost are used to estimate break-even sales. As sales increase, the contribution (the difference between sales or service value and variable costs) will also increase. When the level of income from sales exactly covers the fixed costs is the break-even. Sales above break-even will contribute to the net profit of the business; they will not necessarily mean that a business has the necessary cash to pay its debts. That must be determined by the cash flow.

5.3.2 Risk calculation

Very few operations are entirely without risk! To be successful, an organisation must assess future risks and either prepare for them or work out how to avoid them. Once identified, the financial effect of a risk can be quantified by using a ‘what if’ calculation. In Task 37, you calculated what would happen if the currency devalued, causing components to cost 10 per cent more. This has quantified the risk of currency devaluation. Hannah can now look at this cost and work out whether she should buy currency to ensure her component costs. The bank will help her with the calculation, and quote the cost of currency.

5.3.3 Budget statements

A budget provides a check on past performance against intended past performance and an estimate of future performance that can be monitored. A budget is usually detailed on a monthly basis – usually for at least a year forward, with the past year for comparison.

A budget is used to answer two questions.

• How have we performed compared to our expected performance?
• How do we expect to perform in the future?

A budget can take many formats, but where (as in Hannah’s case) a cash flow is projected forwards for 12 months, this can become the basis for the budget.

As well as the financial figures in the budget, other statistics, such as output in units and staff turnover, can be included as a forecast and a measure of past performance. The difference between what was intended and what is actually achieved is called a variance and an examination of variances together with identification of their causes is an essential management tool. Variances point the way to corrections by management that can keep the organisation on course for success.

5.3.4 Balance sheet

Although we are not going to deal with balance sheets here in detail – that is considered to be something that should be dealt with by an accountant – a short description will be helpful.

A balance sheet matches (or balances) sources of finance to the resources funded by these sources of finance, at a particular point in time. It is customary to prepare one balance sheet at the start of a financial period and another at the end. If the net worth of an organisation increases or decreases during that period, the difference will be explained by what the profit-and-loss and cash flow statements tell us about operations and finances during the year. The balance sheet, profit and loss and cash flow are thus all interlinked.

5.4 Conclusion

In this section you have:

• looked at the key financial challenges facing entrepreneurs today
• examined many different ways of raising finance and considered the most appropriate for your business
• understood the difference in each of the key financial statements required by any business, the cash flow statement, the profit-and-loss account, the balance sheet and budget statements
• looked at a break-even analysis based on fixed and variable costs
• seen how these statements can help manage business risk.

Now open the BPPR (or the template) and reflect on the activities completed in this section. Review the output from each activity and complete the questions raised in Section 4 of the BPPR. While these activities will take you some time to complete, they are essential when planning the first year of your business. A bank or any formal source of funds for your business will require this information and probably much more besides.

Resources

Business Plan Progress Review

1 Setting the scene for rural business

• Task 2: Visioning – life and business table
• Task 4: Values questions

2 Exploring the business idea

• 2.2 Common sources of innovative business ideas
• 2.5 Sources of change arising from STEEP factors
• Task 10: STEEP factors
• Task 11: Stakeholder template
• Task 11: Stakeholder demands template
• Task 12: Five forces analysis

3 Customers, markets, competition and pricing

• Task 15: Customer needs
• Task 21: Network audit table template
• 3.3.1 Stages in the market research process
• 3.4.2 Pricing strategies

4 Capabilities and resources

• Task 24: Transformation process table
• 4.3 Job needs analysis
• Task 26: Resource requirement
• Task 28: SWOT analysis

5 Finance and information

• Task 33: Cash flow spreadsheet
• 5.2.1 Cash flow spreadsheet filled in
• 5.2.1 Profit and loss spreadsheet
• 5.2.1 Profit and loss estimate
• 5.2.1 Profit and loss budget
• Task 36: Profit and loss recording

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Links

Business Wales

CADARN Skills Centre

Dragon Innovation Partnership (Higher Education support in South West Wales)

Rural Development Plan for Wales

Social Enterprise Networks Wales

Startup Wales

Wales.com

Wales Rural Observatory

References

Acknowledgements

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