Creating, running and expanding a business

An entrepreneur spots an opportunity, organises the factors of production and bears the risk in the hope of a reward.

• Creating and setting up: researching the market, writing a business plan, raising finance, choosing a legal form, sourcing suppliers and premises.
• Running and expanding: managing cash flow, staff and quality; deciding whether and how to grow.
• Innovation within a business — intrapreneurship: employees behaving entrepreneurially inside an established firm (Google's 20% time, 3M's Post-it). It keeps a large firm innovative, but needs a culture that tolerates failure.
• Barriers to entrepreneurship: lack of finance, lack of a track record or collateral, fear of failure, legal and regulatory burden, dominant incumbents and high barriers to entry, lack of skills or business knowledge.
• Anticipating risk and uncertainty: risk can be quantified and insured; uncertainty cannot — the entrepreneur responds with flexibility, low fixed costs and contingency planning.

Why people start businesses

Characteristics and skills: initiative, risk tolerance, resilience, self-confidence, determination, creativity, financial and organisational skill, and the ability to sell.

Financial motives:

• Profit maximisation — pursuing the highest possible profit (produce where marginal revenue equals marginal cost).
• Profit satisficing — earning enough profit for a comfortable living, then stopping. Common in family and lifestyle businesses that trade off extra profit against time, control and stress.

Non-financial motives: an ethical stance, social entrepreneurship (surpluses reinvested into a social mission), independence (being your own boss) and home working/flexibility around family.

Satisficing or maximising?

Objectives beyond profit

• Survival — the priority for a start-up and during a recession. Cash, not profit, is what keeps a firm alive.
• Profit maximisation — the classic economic assumption.
• Sales maximisation — often pursued to gain scale and market power, sometimes at the expense of margin.
• Market share — buying share with low prices sacrifices short-run profit for long-run pricing power.
• Cost efficiency — vital where the firm competes on price (cost leadership).
• Employee welfare, customer satisfaction and social objectives — these may reduce short-run profit but build loyalty, retention and brand strength.

Objectives change over time. A start-up prioritises survival; a growing firm prioritises share and sales; a mature firm prioritises profit and efficiency; a firm under pressure returns to survival. Never assume every business is maximising profit.

Your turn — profit and opportunity cost

Opportunity cost

Unlimited and limited liability

Unlimited liability (sole traders, ordinary partnerships): there is no legal distinction between owner and business. The owner's personal assets — house, savings — can be seized to pay business debts.

Limited liability (Ltd, plc): the company is a separate legal person. Shareholders can lose only the money they invested. In exchange, the company must file accounts publicly at Companies House and follow company law.

• Sole trader: easy and cheap to set up, total control, all profit retained — but unlimited liability, limited finance and no continuity.
• Partnership: shared skills and capital — but shared profit, unlimited liability and each partner is bound by the others' decisions.
• Private limited company (Ltd): limited liability, shares sold privately to people the owners choose; shares cannot be traded on the stock market.
• Public limited company (plc): shares traded on a stock exchange; can raise very large sums through a flotation — but faces dilution of control, a possible hostile takeover and intense short-term pressure from shareholders.
• Franchising: the franchisee buys a proven format and brand, reducing risk, but pays fees and royalties and has little freedom. Social enterprises, lifestyle businesses and online businesses are also on the specification.

Your turn — unlimited liability

Your turn — franchise royalties

Which form of business?

Tap a feature, then tap the legal form it belongs to.

Evaluating a flotation

Opportunity cost and trade-offs

Typical trade-offs at A-level:

• Paying a dividend versus retaining profit to reinvest.
• Short-term profit versus long-term growth (cutting R&D or training flatters this year's profit and weakens the future).
• Price versus quality; speed of growth versus control and cash; ethics versus cost.

Use it in evaluation: whenever a case study firm spends money, ask what else that money could have done. The strongest answers judge a decision against its best alternative, not against doing nothing.

Match the motive

Tap a description on the left, then the motive or objective it illustrates.

The difficulties of moving from entrepreneur to leader

The skills that build a start-up are not the skills that run a 200-person firm:

• Letting go: the founder is used to doing everything and finds delegation hard — becoming a bottleneck as the firm grows.
• From doing to leading: the job shifts from operations to setting direction, building structure and managing managers.
• Structure and systems: informal, personal control must be replaced by hierarchies, budgets, appraisal and reporting — which the founder may resist as bureaucracy.
• Skills gap: founders often lack experience in finance, HR and strategy; many bring in professional managers, which can dilute their control and change the culture.
• Culture change: as staff numbers rise, the close, informal culture is diluted and must be actively managed (Greiner's crisis of leadership).

Evaluation: some founders make the transition (they become chief executives); many step back to a technical or creative role and appoint a professional CEO. Recognising which is the right choice is itself a leadership skill.

The founder's bottleneck

Objectives and stage of life

The big ideas to know

You have covered the entrepreneur, motives, objectives, legal forms and the shift to leadership. Press Finish to see your score.