Business Basics
There are only a few elements that make a business what it is. Fundamentally, at it’s core, any business is a combination of two things:
Customers (how you earn money) & Operations (what you do to earn that money)
In turn, these are a combination of three factors: Competition (what is everyone else doing and how do you fit in?), Value (the benefit or attractiveness of the thing or service you are providing) and Cost (the money side of things)
To understand a business more fully, it’s worth going one level further and exploring the contributing factors to each of these as well. Competition can be thought of as having 3 factors: Fight (who are you in competition with?), Flight (how will you escape from them?) and Follow (what or who should you copy and emulate?).
The five F’s of human response are a great fit for business too… Fight, Flight, Follow, Freeze or Fck It"… With the first three decisions to compete, escape or copy the competition being critical strategic decisions. More information on how to think about these (and why you should always try to escape) can be found here. Whilst Freeze, not knowing what to do so doing nothing or F*ck it, the complete giving up of a situation can be seen as strategic failures and corporate defeat.
Pains and Gains are quite straight forward concepts, what is a source of pain, suffering or inconvenience for users and what do they want, what benefits them? But “jobs” is a complicated topic and I have a whole page of info on it here.
The Idea of Business is Simple
No talent is required. Everyone, anyone, can succeed in business. If there is something you don’t know how to do, you can hire someone to do it for you. But an understanding of the basics are important. If I was going to summarise how business works in a single diagram this would be it:
You start with something (a thing, an idea, a product, a service etc…) and it costs a certain amount. An amount to have, an amount to look after, to keep going etc… whatever it is it has a cost.
Your aim is to sell this something for more than its cost you. The difference is the profit.
From this profit you need to pay an amount of tax, and then what you have left you keep. Very simple.
So the aim of any business venture is to reduce some things, maximise some things and reduce risk, the future chance of something going wrong which may negatively affect this balance.
Try to reduce the cost of the thing you have to sell, or look for new things or new alternatives in case what currently have isn’t needed in the future.
Hope to increase your profit margin, find customers who will pay you more for it.
Hope to reduce your tax bills by investing the profit you make in new business growth and development.
Finally end up with a more valuable business and more retained profits to spend however you wish.
It’s not complicated and all business advice can fit into one of these things. But there are many risks that can spring up from each of these sections…
The cost of the thing you have may rise (either in obtaining it or in keeping it), or holding on to it for too long may cause it to expire or no longer be needed.
You profit margins may disappear, maybe a cheaper competitor / alternative has appeared, or maybe your customers value you or your thing less.
The rules may change, perhaps the government imposes a new tax or a new duty or a new legislation that all costs money or takes more money away from your profit.
Finally, maybe everything has changed so much that now, not only are you not making any take home profit but you’re also owing money to others. Everything has ended up costing so much that now you have to borrow money just to keep functioning.
It’s a simple game with a simple format, but if it goes wrong the consequences can be serious.
Basic Structures
Legal Structures:
There are three different ways in which a business can exist and an important difference between the two most popular types is how their legal status and how they complete annual tax returns:
Sole-Traders - 60% of all UK companies - Unregistered with Companies House the UK Government’s record keepers of companies and thus do not legally exist separately from the founder. As a result the business accounts (and tax payable) is completed through the founder’s personal tax returns. There is no need to submit formal accounts each year to the record keepers. Despite this, they can still employ people and operate like any other company. The simplicity is why they are the most popular method of starting a company, with half the sole-traders in the UK being builders.
Limited Companies - 34% - A separate legal entity in its own right, separate to the founder. To most people when they think of a company they think of a limited one. A limited company can issue shares and be traded (although of the roughly 6million companies in the UK only a few thousand are traded publicly on stock markets). Because it’s separate it needs its own tax accounts and paperwork. Depending on your industry, some suppliers and customers may only deal with other limited companies.
Partnerships (and limited partnerships) - 6% - The odd one out, a type of limited company but all the shares are owned by partners. To become a shareholder you must become a partner and if you wish to no longer work in this business you will have to sell your partnership. GP surgeries are all partnerships, when doctors qualify as GPs they typically try to find an opportunity to buy into a partnership where they will then work.
The complexities of partnerships is one reason why they are not common. For anyone starting in business, you can probably do most of what you want to do as a sole-trader to keep things simple. If the business is wanting to attract investments then you’ll likely need to register as a limited company (not always, but that depends on your relationship and arrangement with the investor).
Organisation Structures:
You can organise a business however you want, there can be one boss, or two or more. There can be clear lines of organisation and command, or not. It’s up to you. At the end of the day a business is built on human relationships.
“There are leaders and there are those who lead” - Simon Sinek
So however a business or organisation is structured, success can hide a multitude of sins, but if it’s not achieving its aim maybe the structure needs to change. A few typical methods of organising a business are:
Hierarchical, the classic military structure, a single leader at the top, then an expanding pyramid of middle managers beneath them, finally with the bulk of the workers at the bottom. Many small organisations take this basic approach but as they get larger start to subdivide it into functions, so each department will have an internal hierarchy, known as a Functional Structure. An extension to this for even larger organisations is the Divisional Structure where each part is treated like a mini business, separate from each other.
Flat (or Horizontal), the natural opposite to a hierarchical structure, as few middle managers as possible. A system where the aim is to give as many as possible equal power in decision making.
Matrix - A form of both hierarchical and flat, where people report to multiple people in different roles or departments. Essentially you may have more than one boss, but for different things. For example I might report to the engineering manager but also to different project leads for different projects I’m working on.
Classic Business Approaches
On top of the basic ways of organising a business, businesses also tend to follow one of four classic approaches. Think of them like flavours or smells, it shouldn’t take you long spending time with a business to get a sense what approach they might be taking. It’s often not a conscious choice are are not universal, often more visible in hindsight than a clear strategic move, but being aware of the divisions is a helpful frame of reference for describing the way a business operates.
Product
The product sells itself… it’s that desirable, niche or important that it doesn’t matter how well you sell it, hopefully enough people will want it without you needing to focus on things other than making the product better.
The Morgan 3-Wheeler is, I believe, a great example of a product led approach. The car is whacky, eye-catching and just that little bit eccentric. I love it. It doesn’t bother me that it’s expensive, or that I’d have to wait months or years to buy one, or even if the sales person was a little rude. The design just does something for me that makes me think, yes, I’d love to have one of those.
Production
The market is competitive, lots of people have similar offerings so by focusing on your production capabilities and systems you can make it cheaper and therefore more profitably than anyone else.
Henry Ford’s great innovation was not his car, but his production system which mean he could sell his car at a much lower cost than anyone else. As a result he dominated the global car market for years until his remaining competitors caught up.
Sales
When everyone is selling the same thing, the best salesperson will win.
Let's think about the insurance or domestic electricity markets or even selling chocolate bars in a store… they are all the same thing. Different companies fighting for the same customers to sell them the same thing that they have bought from someone else (an underwriter, a wholesale energy producer or a food distributor). They ‘win’ the customer by having the simplest purchasing process, the friendliest customer service agents, the most TV adverts or by being in the most convenient locations. There’s nothing particularly clever about the product, it’s pure sales strategy innovation.
Marketing
Understanding your customers so well that you can predict what they want before they do.
Apple is the famous example here that everyone loves to quote, but many companies try this approach. It’s all about your market research, not your ‘marketing’ in the derogatory sense of just being heavy sales and advertising. True marketing is the whole subject of understanding your customer so well that you can see what they want before they even do so themselves.
The iPod is an often cited example where no one thought they needed it until it was released (“1,000 songs in your pocket” in a world of cassettes and Walkmans) or the idea of iTunes selling individuals songs at 99p a song, rather than the age old method of albums and singles.
