Entry and Exit Barriers

In the previous steps we highlighted the most important factors in setting up a business and also got familiar with the most important economic principals. By now, you should have a business idea, so you can easily work with it. For the sake of simplicity, I will use one of the most popular unit, a restaurant as an example (and hopefully convince you about how risky the catering industry is).

Entry barriers

It sounds childish, but to start a business, we must enter the market, which is (theoretically) in almost every case possible if we have the necessary resources. However, even if you have a rock start idea, plenty of factors can make it sweaty to have access to the market and convince customers to buy your goods or service.

By definition:

Barriers to entry are the existence of obstacles that prevent new competitors from easily entering an industry or area of business. 

The established corporations benefit from it, but for us, it's quite a bad news. The most important entry barriers you should consider are the following (remember, our example is a restaurant):

1. capital requirement (how much you need to invest)
2. degree of competition (number of restaurants in the neighborhood)
3. absolute advantage of competitors (cost advantage, smooth supply network, best chef in the city...)
4. customer loyalty (they might won't switch brand)
5. brand identity, product differentiation (Can we emphasize our brands, differences from competitors?)
6. access to resources (labor, such as skilled waiters, fresh ingredients, place to rent...)
7. government regulation (licenses, permissions, limitation of companies, such as cable companies)

Exit barriers

Entering a market is a significant achievement, but we shouldn't forget about the so-called exit barriers. Let's say our restaurant can't capture market share and make huge losses, and as experienced chiefs we make a decision on liquidation and leave the market, but it can be tough, can take time, which means additional losses.

By definition:

Barriers to exit are obstacles or impediments that prevent a company from exiting a market it is considering a cessation of operations in or wishes to separate from.

The most important factors, which you should keep in mind are to following:

1. exit cost (asset write-offs, clean up costs in case of heavy industries)
2. highly specialized assets (e.g. a special oven used in the restaurant)
3. loss of customer goodwill (if you have several stores, you might lose your customers)
4. government regulation (e.g. pay back tax-benefits)

Check the step by step guide

Business Economic Features

Business Economics is one of the few areas I consider amazing and believe. It is what it's seems to be: the combination of business and economics. Most people consider Economics (on its own) boring. I cannot agree with them, but I need to accept it and this is why I promise I will keep it as brief and simple as possible. However, I must run through some parts of this beautiful Science, because it DOES have impact on the production of business ideas.

Running after profit

Of course, you won't open up a business unless you can earn a decent profit. To achieve it, you need to keep in mind the following accounting principle:

Prudence concept: assets and incomes are not overstated, and liabilities and expenses are not understated.

In other words: never overestimate the amount of money, which inflows to your company and never underestimate the amount of money, which outflows. It's quite rational, but many people make this mistake, which leads to bankruptcy. I told you: brief and simple.

What moves the market?

You might have heard about the two basic "pillars" of the market, which are supply and demand. 

The supply of a good or service is defined as quantities that people are ready to sell at various prices within some given time period. It's determined by the price level itself, costs and government regulations. Simply: you will sell more if price is high, costs are low and there is no regulation, which would prevent it (e.g. price limits). 

Demand for a good or service is defined as quantities that people are ready (willing and able) to buy at various prices within some given time period. It's influenced by several factors, such as price level, taste of customers, information on the product, substitutes, income level end so on. What is important: if you increase your price, you will sell less (in quantity). If the price of a substitute (e.g. Pepsi) decreases, people will adjust with time and change from Coca Cola and will consume Pepsi. If the income decreases, or customers change their preference, the demand for your product will decrease. Of course, higher income and preference means higher demand.

And if supply and demand meets, we say that we are in equilibrium (see bellow) at the market price and quantity.

But what happens, if you enter the market? Supply will increase, which will lead to lower prices and higher quantity. It results in a new equilibrium (E1).

Of course it's more complicated in real life, but for our purpose it's far enough. Let's have a story: In a small town, only one guy sells apples, and since people want to be healthy and this is the only way to get apple, this guy will make a fortune. If somebody joins him, the total supply of apple is increased, there's a competition, so price goes down, the first guy will earn less, but still, both of them have a decent profit. It will continue if the third, fourth person joins the market until the profit of apple dealers will be so small, the smallest players will get bankrupt.

The lesson: if you're looking for a business idea and want to have a decent profit, not necessarily follow others, just because they earn money in now. Make long-term plan and join the market only you have some competitive advantage (we will discuss later).

Check the step by step guide

How to start a business - a step by step guide

A have always been keen on starting my own business, but couldn't even imagine how to start and operate a business before I had started my studies at a business school. The business sphere still enjoys my attention, but this time I decided to share my theoretical knowledge and experience with you, hoping it will be useful and I will be able to contribute to YOUR success.

I decided to create a step by step guide and touch every crucial part of opening a business. I am going to include every important peace of information, such as how to find a business idea, how to create a business plan, raise funds, do marketing and so on. I will write continuously and update the points bellow.

Let's see what we have so far:

Forming your business idea

How to find a business idea: brainstorming, start it with yourself!

Business Economics: it's worth knowing some economic principles
Entry and Exit barriers: it can be difficult to overcome obstacles, which might prevent you entering or leaving the market
Lean Canvas: the best way to start a real business plan

Setting up your business

Legal tasks to do

Rise funds

Cash flow

Structure

Reaching out to your audience

Target customers

Promotion

Expansion, business development