Laurie and Joe want to open up a hairdressing salon. They have had previous experience running and managing a shop and now they want to run their own business. Write a report discussing the key personal features needed, suitable establishment options for Laurie and Joe and finance options they should take into account.
To ensure success when establishing a business, laurie and joe need have the three key personal qualities – entrepreneurship, personal qualities (motivation, experience, expectation) and other influences (cultural background, gender).
As an entrepreneur, the basic qualities required are to be:
Assertive, Determined, Very organised and responsible, Willing to take risks, Good with people, A good leader, Motivated, Dedicated, Confident, Realistic, Healthy, Resilient
Laurie and joe must have a desire to succeed and have drive and energy which relates to the personal qualities of a person. A person wanting to establish their own business needs to have motivation, experience and expectation.
Motivation refers to your personal drive, determination and desire to achieve a goal or objective, in this case setting up a business. There are several reasons for why people start up their own business but it is usually due to:
Having independence and being your own boss
Choosing the location and fellow employees
Gaining more control over own destiny and increasing personal wealth
Having something to leave to family
Accepting a challenge
An experienced person would have:
Knowledge of the product and service being entered
Skills in management such as communication, ER, accounting and finance, marketing and operations
Organizational and customer service skills.
It would be best if Laurie and Joe satisfied these requirements in order to have the best chance at a successful business.
Expectation relates to the person’s level of ambition and self confidence. Someone with high expectations will have a vision for the future of the business. Some expectations that Laurie and Joe should have include:
Role as the boss
Security of future employment
Opportunity to use skills
Other influences include cultural background and gender. For laurie and joe, cultural background would not be a big factor for the success of their business as they want to open a hairdressing business. With gender, Laurie and Joe would just have to consider if they will be open to both genders and if customers would allow the opposite gender cut their hair.
Suitable establishment options:
Before setting up their own business, laurie and joe must choose one of three establishment options – starting from scratch, buying an existing business or buying a franchise. There are advantages and disadvantages for all three options so Laurie and Joe must pick the one most suitable for a hairdressing business.
Starting from Scratch:
Starting a business from scratch usually only occurs when:
A new product is being introduced on to the market
Existing businesses aren’t meeting customer needs
There is a large demand and the market is growing.
If these circumstances don’t exist, it would be more difficult to start from scratch. However as Laurie wouldn’t be providing a new product, only the last two circumstances would need to be considered. Although it can be difficult to start a business from scratch, there are some advantages:
The owner has the freedom to set up the business the way they wish
If funds are limited you can start on a small scale
There is no goodwill to pay for
The owner can determine the growth of the business
The owner can choose the location
However, as noted above, there are some disadvantages when starting from scratch such as:
Time is needed to develop a customer base, employ staff and develop lines of credit from suppliers
Profit levels could be low at start up and the business could have liquidity problems
There is a high risk of failure and a measure of uncertainty
Finances could be hard to obtain
As Laurie and Joe want to establish a hairdressing business, it is recommended that they choose to start from scratch as it would be most suited for their needs.
Buying an existing business
An existing business may be purchased instead of starting from scratch as it may already be a successful business and would have an established customer base, employees, equipment and location. Although there are a few advantages, there are also disadvantages when it comes to buying an existing business.
Sales to existing customers will bring in automatic income
The inventory and supply networks are set up
Equipment is available for immediate use
Employees could be a good source of advice
Previous business owner could provide training and advice
If the business had been successful it could be easier to obtain finances
Some employees may resent any changes to the business operation
The existing business could have had a poor reputation within the community
The value of the goodwill could make the business overpriced
Assets could be old and overvalued
The location can’t be changed and the existing layout may be difficult to change
For Laurie and Joe, buying an existing business would be the most suitable….
Buying a franchise:
A franchise is license by a parent company to an individual to operate the parent company’s business on their behalf. The franchises make up a chain of businesses under the parent companies name. a franchisor is the large organization and a franchisee is the individual(s) that operates the business on behalf of the company.
Laurie and Joe have two options when it comes to how to finance the establishment of the business. The two options are owner’s equity and debt finance.
Critical issues in business success and failure:
When Laurie and Joe first start their business, there are five critical issues to be aware of. They are:
Having a business plan
Identifying and sustaining competitive advantage
Avoiding overextension of finance
Managing cash flow
While most small business fail in the first couple of years, careful attention to these critical issues will help the business to succeed.
Having a business plan
A business plan is the blueprint for future growth and development within a business. It sets out the desired goals and strategies to direct the business. A business plan is essential to long-term success and must be followed. It should also be modified when there are changes in:
The customer’s needs
When setting up a business plan, Laurie and Joe would need to consider the prime function of the business, the mission statement, plans and strategies and budgeting. Laurie and Joe should also include why they want to establish the business, the goals they wish to achieve, the steps necessary to achieve their goals and the time frame in which the steps and goals should be achieved.
Identifying and sustaining competitive advantage
Sustainable competitive advantage refers to the ability of a business to develop strategies that will ensure it has an ‘edge’ over its competitors for a long period of time. To have a sustainable competitive advantage Laurie and Joe would need to think about pricing (higher or lower than competitors, prestige pricing), quality, value (a good price for the quality of product/service) and the features of their product or service. Laurie and Joe would be best off charging the same price as competitors but provide a better quality service and hair products. Laurie and Joe could also think about using the differentiation strategy in which they would offer customers something that is not already offered by competitors.
Use of technology
Technology is having many effects on businesses and the advancements and changing technology are allowing business to advertise and communicate to customers in more convenient ways. As Laurie and Joe are setting up a hairdressing business, technology wouldn’t be a big factor. A hairdressing business wouldn’t rely on internet applications such as e-commerce and most likely wouldn’t even have a website. The only technologies a hairdressing business would require are EFTPOS machines so that customers don’t have to pay cash which therefore widens the customer base.
Avoiding overextension of financing and other resources
Overextension of financing and other resources refers to when business owners go over the budget and spending money on resources which are usually financed by external sources such as banks. To avoid overextension of financing and other resources, Laurie and Joe need to pay close attention to gearing, equipment/furniture/stock and budget.
Gearing refers to the proportion of debt and equity finance that a business uses to finance its activities. If a business is highly geared then there is a high level of debt resulting in a greater risk. Therefore it would be best for Laurie and Joe’s business to have low gearing, so more equity than debt.