Understanding Enterprise

Entrepreneurship and Small Business, fourth edition

by Simon Bridge and Ken O'Neill

Case study: chapter 8

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The following case study examines a recent graduate who takes the decision to start up his own enterprise after a chance meeting with his father's contacts. Students should consider both the hierarchy of needs model and the different sources of capital that were required by the entrepreneur on the journey to establishing his enterprise.

John has recently graduated with a first in Accounting and had begun to apply to the graduate programmes of the big four accounting firms in Belfast. Competition was stiff and unfortunately John was unsuccessful and so decided to widen the scope of his search in order to be more successful. John's father, Mr Chan, had immigrated to Belfast during the 1960s and had established a successful Chinese restaurant in Donegall Pass where John had worked part-time during his studies and continued to work while his job search continued. John's uncle was also a successful entrepreneur running a freight company that operated on a global basis although much of his income comes from importing and exporting goods to and from China.

Both Mr Chan and his brother are members of a local network of Chinese businessmen who meet on a regular basis in order to socialize and discuss potential business opportunities among one another. John decides to accompany his father to the latest meeting in order to learn more about the family business while also attempting to find any employment opportunities that may be available within the local community. As the evening progresses more and more of the restaurant owners in Belfast complain about the increasing costs of important specialised ingredients from China and how the only supplier was taking advantage of the fact that there were simply no alternatives in the marketplace. Having listened with interest John asked his uncle what was stopping the restaurant owners from shopping around and securing a better price to which his uncle responded that there simply were no other local companies that had the connection in China to import the ingredients in the necessary quantities.

Having seen an advert in the local paper for a business start-up programme run by a local enterprise agency, John decided to attend an introductory course to further investigate the possibility of exploiting the gap in the market. During his time on the course he learnt a number of useful skills and was told about the importance of putting together a solid business plan that would include a more formal type of market research and that would properly identify the potential future opportunities and threats for the business. There were also a number of workshops that concentrated on the financing of the enterprise which would involve preparing statements of cash flows for both the bank and any potential investors he may wish to approach.

Due to the relatively specialised nature of John's proposed enterprise he knew it was going to be important to be aware of the relevant legal and tax implications of operating an enterprise that was going to span international borders. In order to receive the relevant advice his uncle suggested he contact a local solicitor who had helped him ensure that his freight business was compliant with all necessary rules and regulations relating to importing into the Northern Ireland. This was perhaps John's first major decision. While using his father's networks and contacting the local enterprise agency had all been free of charge, the appointment with the solicitor was not and as a result the budding entrepreneur had to dip into his savings in order to cover the cost. Having thought the decision through, John made the appointment and over the days that followed, started to construct a business plan taking into consideration all the advice that had been gathered over the past few months.

With a business plan for JC Imports complete John was able to secure funds from both the bank and a number of external investors who he had met through his father's connections. Now the young entrepreneur was now ready to start sourcing the equipment and premises necessary in order to start trading. The requirements for the business were going to be an office and a warehouse that could be converted to store all the imported goods. Aware of the significant capital outlay that might be required in order to secure suitable premises of his own he looked for alternatives and turned to his uncle who already had the necessary infrastructure in place for his freight company. Due to a downturn in business caused by many of his customers going out of business, it was agreed that John could use one of the empty warehouses in exchange for his uncle gaining a share in the business. The refrigeration equipment was going to have to be sourced separately although having been made aware of a grant available, through an EU scheme, for businesses seeking to source green technology, John applied and successful secured funding to lease the equipment he needed.

While feeling comfortable with running the day-to-day operations of the business and having some previous experience preparing monthly managerial accounts, he was not so sure of himself when it came to the marketing side of things. For this he knew he would have to employ someone with the necessary skill-set that would help not only launch the business in the local market but also to assist in growing and developing the brand longer-term. Fortunately John had met Tim at one of the local enterprise programme events. Tim had been recently made redundant as a result of his PR firm downsizing and had contemplated self-employment but in the end decided against it. As JC Imports was still in its infancy and in order to keep costs to a minimum, Tim agreed to a commission-based contract for which he would receive a percentage of the contracts he managed to secure with the local restaurants.

One it had been established in the market for several years JC Imports became interested in attempting to expand the business to supply restaurants on an island wide basis rather than just the local Belfast market. This has however not been possible due to fact that John, like most entrepreneurs, typically finds himself heavily involved in the day-to-day operating activities of the business and so has had little or no time to dedicate to the strategic growth and development of the firm. John's cousin, Jim, has expressed an interest into buying into the business in order to help with the growth. However his offer has yet to be accepted.

JC Imports now finds itself supplying the majority of the restaurants in Northern Ireland and has continued to develop stronger relationships with their suppliers in the Far East. There has been a recent boost in demand for Asian cuisine caused in part by numerous celebrity chefs citing its contribution towards weight loss. This has led to an increase in orders for John despite the fact that a number of his customers are beginning to close their restaurants and return to China. This has been for a number of reasons including the growing standard of living back home and the fact that it is getting harder to employ the necessary staff. New government regulations aimed at reducing immigration have meant that workers now looking to obtain a visa must meet a number of stringent requirements including a certain level of education and a minimum level of savings in the bank. This has made the task of employing chefs and waiters all the more difficult for many restaurants as the skill sets of the local population do not meet their needs.
  1. Discuss the hierarchy of business needs model in relation to the above case study.
  2. Highlight the different sources of capital used in the starting up of the business and what future sources may be required.

Suggested solutions

  1. Seeing the enterprise as a possibility. - There are a number of factors that may have contributed to John seeing starting his own business as a possibility. For example, the fact that both his father and uncle are successful entrepreneurs may have made John more open to the suggestion than would an individual coming from a background with little or no entrepreneurial spirit. Aside from being a purely inspirational factor, he would also have seen many of the practical steps and requirements that go into owning and running your own business which in turn will have removed much of the mystery, making the prospect much less overwhelming. Also the fact that there where little to no other jobs available at the time could mean that he was motivated out of necessity.

    An idea for an enterprise. - Through his father's networks, John discovered a gap in the market that upon further investigation proved to have little or no barriers to entry. The fact that he had heard first hand that there was a potential opportunity in the market combined with his own experience in the industry and that of his family could only have made the thought of starting a business all the more appealing.

    Resources for advancing the enterprise. - John was fortunate in that his family connections made it possible for him to secure premises without a hefty capital outlay. The leasing of refrigeration equipment funded by the EU green technology scheme also provided him with the infrastructure required to get the business off the ground.

    The skills needed to advance the enterprise. - Having completed his initial degree in Accountancy, and with the assistance offered though the enterprise agency workshops, John was equipped to prepare the statement of cash flows for the bank and his prospective investors. Realising his limitations John employed his friend Tim who had experience working in PR to help launch and grow the brand.

    Expert advice and personal support. - It is clear that John used a number of different sources in order to gain the necessary advice and support he required. The advice from the lawyers and accountants would have required an outlay of financial capital although his initial consultation with the local enterprise agency as well as the advice from Invest NI would have been free. John was also smart about using the social capital available to him through the networks of local businesses when he was initially exploring the proposed gap in the market.

    An environment which can sustain a well-run enterprise. - There are a number of encouraging signs for the business. Having established a healthy market share and enjoying increased revenues due to the increased demand for Asian cuisine the immediate to short-term future of the business is looking bright. This said, the trend of restaurant owners returning home and the increasingly difficult conditions for Chinese wishing to immigrate to the North means that the both the market for his customers, and ultimately his own market, are potentially shrinking.
  2. Social capital. -Through his father, John had a well-developed network to tap into which helped him realise the initial gap in the market for the business as well as providing contacts for his first customers. As indicated in the answer above, it is clear that John used a number of different sources in order to gain the necessary advice and support he required. While the advice from the lawyers and accountants required an outlay of financial capital, his initial consultation with the local enterprise agency were free. John was also smart about using the social capital available to him through the networks of local businesses when he was initially exploring the proposed gap in the market. A further example of using social capital was the way John used the contacts he made while on the business start programme to identify Tim as a possible source of marketing expertise.

    Human capital. - Realising his limitations our entrepreneur recognised his proposed business needs for an individual with the necessary experience and expertise in marketing. As a result he used his time on the business start programme as an opportunity to build his own networks independent of his father and as a result was able to identify Tim as a possible source of the marketing expertise needed and offer him a job.

    Natural capital. - The natural capital in this instance are the raw materials that were being imported to the local market and offered at a more competitive price.

    Physical capital. - The warehouse offered by his uncle in return for equity in the business in addition to the refrigeration equipment that was leased with the help of the successful grant application.

    Financial capital. - John invested his own savings to pay for legal advice and, in effect, obtained finance form his uncle by agreeing to give him a share in the business in exchange for using one of his empty warehouses. Also, with the aid of a business plan, John was able to secure bank finance, grant aid for equipment leasing and investment from other external contacts.