It is universally known that profitability is a key cog for the continuity of an entrepreneurial business. As it feeds into the working capital that improves the financial position of a business for viability.
No wonder why different schools of thought have tried to solidify the dotted lines by distinguishing economic/real from simple profits. For many of our operators there is no difference but here we seek to enlighten on the thin line between these critical elements.
It became a real cause of concern as our home-grown operators mainly focus on simple summation of their revenues and costs to go home happily squandering the illusive positive outcome as real profits. Just to remind; profits feeds back into the operations of a business as an ongoing investment.
Also real profits go beyond these simple calculations so as to be determined by the industry structure of where the entrepreneurial business belongs.
That is the same reason why in the last edition we talked about the types of competition surrounding our entrepreneurial businesses. Here we go deeper into how these business/market structures influence profitability in a particular industry. Every business belongs to a certain structure through its whole life cycle.
That is the same reason why aspiring entrepreneurs should do a thorough research of the industry structure where they are to launch their business idea. In such a way early and future profits will then be approximated using some detailed interlinking variables rather than mere revenue projections against costs.
Some of the key matters that will be established in this comprehensive structural analysis include level of demand responsiveness (elasticity of demand), operational capacity, average not total costs (variable and fixed cost against a unit produced), barriers for establishment and growth opportunities. All these matters are vital as measurements for real entrepreneurial profits that define sustainable business viability.
To start with, there are two main possibilities as immediate financial outcomes of running a business that is by either making supernormal profits or having a deficit. In the sense that a totally unique business idea that had not existed any time before has more chances of enjoying supernormal profits.
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The reason being that there is no competition from the onset and customers will keep on demanding relatively the same quantities even if the entrepreneur is to increase prices in the short-run. The market knows no one else besides your business as the provider of their needs. Most of our entrepreneurs are temporary in this phase because they relax to innovate and even put barriers for any other player to intrude/overtake their market.
As said in the previous edition, there is always someone to know the profits you are making and with the ability to produce similar products/services to the ones you are offering. On the other hand, an entrepreneur can be misled such that the business starts with a deficit if proper inception research is not carried out. This is when the industry enters a perfect competition where similar products have flooded the market and there is no room for further growth/innovation. In both cases it is clear that profitability for entrepreneurial businesses is structurally determined.
It is then difficult for most of our entrepreneurial business to be single players in a huge market at any time. The capital requirement for such a market position as a monopoly is expensive for a start-up business since one is supposed to come up with a whole new idea through wider research, have to protect the idea and even invest more in creating other barriers to entry for any other who is likely to come.
Of course, there can be a period of business idea protection through Intellectual Property Rights (IPR) but eventually a related substitute will be on the market at any point in time. There is a need then to go beyond a business idea into understanding/building a specific market that can be purely yours even with the available competition.
Niche marketing is one critical strategy that can be done by our entrepreneurial businesses to achieve this type of dominance. This is by targeting a smaller group of the market that has its special needs to be satisfied by your offerings only. It becomes a specialised business structuring where the entrepreneur can make all efforts, develop and serve supreme quality customised offerings.
Even to an extent that the customers will be prepared to pay a much higher price. In this way the entrepreneur can make more profits in the form of a low volume high value structure. Also as aforementioned creativity is vital in a highly flooded market structure.
This is when the entrepreneurial business becomes an innovation hub through carrying out continuous experiments that keeps on developing new business ideas that add-on to the current production at a pace that no other player will copy or try to imitate at any point in time. This is a real committed approach to innovation capital, search time and upgrading. Sure it is achievable by our home-grown entrepreneurs.
Lastly there is a structure that an entrepreneur can hardly plan for but will end up into due to unforeseen business forces. Where an industry gang just develops in order to control/determine products/services offered and the price to be charged. Profitability in this type of entrepreneurial business structure is determined by few powerful giants. They determine the one who is supposed to join that industry.
If your proposed business does not match their requirements then you are booted out in the form of a cartel. Some of our aspiring entrepreneurs spend their hard earned capital investing in a business that is cartel dominated. Think about it!!!! We continue with our discussion on the effects of such a move in the coming edition. Till then I leave you to introspect on our possibilities to run profitable business structures in this age of entrepreneurship.
*Dr Farai Chigora is a businessman and academic. He is the head of Management and Entrepreneurship at the Africa University’s College of Business, Peace, Leadership and Governance. His doctoral research focused on business administration (destination marketing and branding major, Ukzn, SA). He is into agribusiness and consults for many companies in Zimbabwe and Africa. He writes in his personal capacity and can be contacted for feedback and business at [email protected], www.fachip.co.zw, WhatsApp mobile: +263772886871.
