4M BG

For a business to be successful it needs to develop a revenue stream by
providing a product or service that customers will buy. The criteria for
this customer proposition are to:
_ have a product or service that meets a specifi c need for a customer
such that they will want to buy it;
_ provide the product or service better than a competitor so the
business will be chosen in preference to others;
_ charge a price that offers value to the customer yet enables the
business to earn a profi t.
These criteria are diffi cult to combine in practice. A product or service
that is better than a competitor’s is, because of its differentiating factors,
likely to cost more to provide. However, the additional cost may not be
able to be passed on to the customer in the price, and this will reduce
the profi t. Many fi rms in the same line of business seek to prosper by
exploiting the criteria in different ways; for example, a scheduled airline
providing a high-quality service at a relatively high price and a low-cost
carrier relying on low fares and no frills.
The business model
Building businesses that can generate a revenue stream requires investment
to pay for infrastructure, equipment and staff. Figure 2.1 illustrates
how a business is structured to provide a customer proposition.
The model is built on fi ve activities:
1 Starting on the left, the investors provide the capital for the business.
The cash received will be held in a bank account.
2 The cash in the business can be:
_ converted into another type of asset that will be used in the
business such as equipment or goods for sale (inventory); or
_ spent on running costs such as staff and utilities.
3 The combination of the business resources (assets and staff) provides
the basis for producing the products or services that are available for
customers to buy.
BUSINESS STRUCTURES
4 The sale of a product or service to a customer generates what is called
a receivable which, once collected, will produce more cash for the
business.
5 This new cash is used to provide any debt providers with interest on
their loans. The rest can be sent round the cycle again by being converted
into further assets or spent on running costs (back to stage 2).
Providing the whole process earns more money than it consumes, a
profi t will be generated on which tax will have to be paid. Any surplus
after tax can continue to be reinvested in the cycle or paid out to the
shareholders as a “return” on their investment.
The model illustrates the way money fl ows around a business and
provides the basis of accounting, which is the collecting, recording, analysing
and communicating of all the fi nancial activity in the business.
To manage a business effectively it is important to know how the
cash has been spent and how profi table the products or services have
been to the business. The availability of this historic information helps
management to make judgments on how to improve the performance
of business.
Crucial elements
To make a business successful requires three crucial elements:
_ Cash. The money that it is used in the cycle described above.
The fundamental business model 2.1
Without suffi cient cash it is diffi cult for any business to start the
cycle.
_ People. The means of creating the products, providing the service
and running the business. The quality of the skills of the people in
the business is crucial in achieving success.
_ Customers. A business cannot survive without customers.
Attracting customers is where the process begins, but retaining
customers by continuing to satisfy their needs is just as important.
Existing and satisfi ed customers not only provide revenue but may
also become advocates for the business.
Types of business
Although the fundamental business model does not vary, there are
infi nite ways of applying it to provide the range of products and services
that make up the business world. However, the range of products and
services can be summarised in seven broad categories.
All these activities are a combination of a product and a service
proposition to a customer. The raw material producer is primarily a
product-based business, but the service element emerges in the way
the materials are sold, the speed of response to orders and the manner
with which customer relationships are built. At the other end of the
spectrum is a service provider which is primarily a people business,
but the way this type of business can develop effi ciencies is by using
products such as, in the case of an accountant, a software package to
process tax returns.
The mix of product and service elements in the customer proposition
will defi ne the need for acquiring assets and hiring staff.
Structuring a business for fl exibility
The investment of cash in assets and staff will defi ne the fl exibility that
a business will have in responding to a changing business environment.
A rapid increase in the need for assets and staff can be diffi cult to meet,
particularly if they are specialist in nature. The assets may need to be
built by a manufacturer and the staff may need to be trained.
A business with substantial non-cash assets will fi nd it diffi cult to
adjust to a decrease in sales volume; for example, in the aftermath of
terrorist events airlines have found themselves owning assets they could
neither fi ll with passengers nor sell. A business with high staff costs may
be able to respond more quickly to a downturn by laying off people,
particularly if it has employed staff on short-term contracts (for example,
the software industry where programmers are often hired on short-term
contracts), but labour laws can make this costly.
In seeking greater fl exibility to cope with changing circumstances,
businesses may choose to outsource parts of their operations, particularly
non-core activities. This is the process of letting another business
acquire and operate the assets, and provide services or products on a
contractual basis. For example, businesses may fi nd that outsourcing their
cleaning and catering provides much greater fl exibility than recruiting and
managing their own staff. As there are many businesses supplying such
services the prices are likely to be competitive and service quality forced
upwards.
Management of any business needs to identify the optimum structure
that will enable long-term success to be achieved. This may be done by
combining owned resources with outsourced resources to provide the
products and services.
Because of constraints on how quickly a business can respond to
signifi cant changes, careful planning is essential. This involves making
projections about demand and making sure an appropriate business infrastructure
is in place. As events unfold, the judgments made need to be
refi ned in the light of new information and opportunities.
Causes of failure
The high proportion of businesses that fail never seems to deter entrepreneurs.
Failure is often a result of one of the following three events:
_ Insuffi cient revenue. Producing products or services that
customers do not buy in suffi cient quantities. This is often caused
by entrepreneurs not really understanding the needs of customers.
An example is what marketers call “a musical ash tray”, a product
that meets no specifi c need and relies wholly on customers
making whimsical purchases.
_ Excess fi xed cost. A high cost base in a business that does not
enable a profi t to be made; or a cost base that is not fl exible
enough to adapt to changing volumes if sales decline. Many
airlines struggle to survive because of the way that demand for air
travel can suddenly slump.
_ Poor quality and service. The inability of managers and staff
to plan, control and operate the business effectively. This affects
the quality and reliability of the business, ultimately leading to a
decline in its revenue. Many have experienced examples of this
in poorly run restaurants and have left saying “never again”. The
word spreads and that business continues its downward spiral.