A Good Time to Start A Business?

Are recessions a good time to start a business? This is an interesting question that was raised by a recent article in the Economist (economist.com). Many of the world’s best known companies were founded during recessions – General Motors, Disney and MTV. And for many people - no longer in paid employment, a business start-up might be the only obvious option. A few points are worth bearing in mind.

Recessions swell the ranks of potential entrepreneurs so if you are thinking about business ideas, the chances are others are as well. Prepare yourself for a competitive environment and pay attention to how you are going to be different and better. Add to this the fact that consumers have less money to spend and will be more discerning on how they spend it. Again this means that your customer value proposition will have to be compelling. And as we have seen over the past few years, finance and credit becomes very scarce during recessions adding further to the start-up challenge.

On the plus side, getting traction during the hard times augers well for the future of your business. One of the persistent research findings is the different attitudes and management styles of firms formed during recessions or run by people who have experienced recessions. These businesses tend to be more risk averse, they take on less debt and tend to be more conservative. These can be good habits but of course as business cycles change, management attitudes need to be flexible as well.

Create Value, But Capture It Too!

In the world of manufacturing if you are to listen to all the media hype, you would be likely to come to the view that China is where all the action happens these days. To some extent that is true, but it is not the full story. This was brought home by an article published in Forbes (forbes.com) at the back end of last year, which gives a breakdown of who makes what from two of the world’s powerhouse brands, the iPhone and the iPad.

 

Both are made in China from locally sourced components but are Chinese companies and employees getting rich on the back of their global success? Not so it would seem. Chinese labour accounts for a mere 1.8 per cent of the final price of an iPhone while a further 22 per cent is accounted for by the cost of inputs and materials. But contrast these numbers with Apple's profits which reach 30 per cent for the iPad and soar to almost double that for the iPhone.

These numbers demonstrate the very important distinction between value creation and value capture. Through the use of good, reliable materials which are well put together, Apple's products are functionally strong and do the jobs that they are supposed to do. High levels of performance value are being created but the companies that are creating it are making relatively little money. Apple controls product design, software development, marketing and retailing and this is where the money is! The lesson in this is clear. Always examine the full supply chain and figure out where the value is being added and where the costs are being incurred. If you are operating in a high cost, low value part of the industry life is not going to be easy!